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NON-PERFOMING ASSETS _ UTI BANK PROJECT REPORT MBA FINANCE

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					“Non Performing Assets and its impact on Profitability of
            New Private Sector Banks”




                           BABASAB PATIL                    -1-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”



                                  Executive Summery

       The future of 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 indicate newly emerging opportunities for Indian Banking. But on the darker side
we see the accumulated morass, brought out by three decades of controlled and
regimented management of the banks in the past. It has siphoned profitability of the many
banks, accumulated bloated NPA and threatens Capital Adequacy of the Banks and their
continued stability.

       New Private Sector Banks in India can solve their problems only if they assert a
spirit of self-initiative and self-reliance through developing their in-house expertise. They
have to imbibe the banking philosophy inherent in de-regulation NPA is a problem
created by the Banks and they have to find the cause and the solution - how it was created
and how the Banks are to overcome it. An attempt is made in this study the present
situation and to arrive at a solution to solve this problem.




                                  BABASAB PATIL                       -2-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

                                   Design of the study

Title of the project:

        “Non Performing Assets and its impact on Profitability of New Private Sector
Banks”.
Scope of study: Scope of my study restricted only to 7 New Private Sector Banks
NPA data’s and Advances, and for Comparison of Credit risk path 7 old selected Private
Banks is taken.

Need For Study:

         This study will help to know the recent norms of NPA.
         This study helps to know how NPA Causing Problems to Banking Sector and
          what might be the solution to overcome from this problem and also its impact on
          Profitability of New Profit Banks.


                         STATEMENT OF THE PROBLEM

         Profitability is considered as a benchmark for evaluating performance of any
business enterprise including the banking industry.          However, increasing Non-
Performing Assets, have a direct impact on profitability of banks and financial
institutions. Legally speaking banks and financial institutions are not allowed to book
income on such account and at the same times they are forced to make provision on such
assets. So This project is undertaken to now impact of NPA on Profitability of New
Private Sector Banks.




                                  BABASAB PATIL                    -3-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

                                    Objectives of Study

   1. To study the RBI norms on Non Performing Assets, and the various reasons for
       the existence of huge level of NPA in Indian banking.
   2. To know the performance comparison of New Private Banks Non performing
       asset for past 3 years.
   3. To know the impact of non performing assets on profitability of New Private
       Banks, and comparison of credit risk path of New Private Banks with 7 selected
       Old Private Banks.
   4. To study the various steps taken by the banks to bring down the NPA’s in
       respective bank branches.
   5. To recommend measures for Improving performance and reduction of Non
       Performing Assets.

                                     Methodology
Primary Data:
Views of the concerned officials were gathered by directly interacting with them, and
such data was found very useful while analyzing and drawing conclusions.
Secondary Data:
      Recent RBI norms of NPA.
      IBA Bulletin 0f 2005-06 is referred to collect data for Net NPA, and Advances.
      Web site of UTI Bank and other Web sites.

Plan of analysis:
In this study quadrant analysis is used on the calculated figures.
Limitations:

      The study is based mostly on secondary data.
      Data has been drawn from journals, so information may not be complete.
      For the analysis only the advances and NPA percentages of banks and operating
       profit, provisions and contingencies as a whole and net profit of New PSB’s are
       taken into consideration.


                                   BABASAB PATIL                     -4-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


                                      INTRODUCTION

        It's a known fact that the banks and financial institutions in India face the problem
of swelling non-performing assets (NPA’s) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, some steps have been taken
recently. The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 was passed by Parliament, which is an important step towards
elimination or reduction of NPA’s.

MEANING OF NPA’s:

        An asset is classified as non-performing asset (NPA’s) if dues in the form of
principal and interest are not paid by the borrower for a period of 180 days. However
with effect from March 2004, default status would be given to a borrower if dues are not
paid for 90 days. If any advance or credit facilities granted by bank to a borrower become
non-performing, then the bank will have to treat all the advances/credit facilities granted
to that borrower as non-performing without having any regard to the fact that there may
still exist certain advances / credit facility.

NPA IN INDIAN BANKING SYSTEM:

        NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the
midst of turbulent structural changes overtaking the international banking institutions,
and when the global financial markets were undergoing sweeping changes. In fact after it
had emerged the problem of NPA kept hidden and gradually swelling unnoticed and
unperceived, in the maze of defective accounting standards that still continued with
Indian Banks up to the Nineties and opaque Balance sheets.

        In a dynamic world, it is true that new ideas and new concepts that emerge
through such changes caused by social evolution bring beneficial effects, but only after
levying a heavy initial toll. The process of quickly integrating new innovations in the


                                    BABASAB PATIL                     -5-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

existing set-up leads to an immediate disorder and unsettled conditions. People are not
accustomed to the new models. These new formations take time to configure, and work
smoothly. The old is cast away and the new is found difficult to adjust. Marginal and sub-
marginal operators are swept away by these convulsions. Banks being sensitive
institutions entrenched deeply in traditional beliefs and conventions were unable to adjust
themselves to the changes. They suffered easy victims to this upheaval in the initial
phase.

         Consequently banks underwent this transition-syndrome and languished under
distress and banking crises surfaced in quick succession one following the other in many
countries. But when the banking industry in the global sphere came out of this
metamorphosis to re-adjust to the new order, they emerged revitalized and as more
vibrant and robust units. Deregulation in developed capitalist countries particularly in
Europe, witnessed a remarkable innovative growth in the banking industry, whether
measured in terms of deposit growth, credit growth, growth intermediation instruments as
well as in network.

         During all these years the Indian Banking, whose environment was insulated from
the global context and was denominated by State controls of directed credit delivery,
regulated interest rates, and investment structure did not participate in this vibrant
banking revolution. Suffering the dearth of innovative spirit and choking under undue
regimentation, Indian banking was lacking objective and prudential systems of business
leading from early stagnation to eventual degeneration and reduced or negative
profitability. Continued political interference, the absence of competition and total lack of
scientific decision-making, led to consequences just the opposite of what was happening
in the western countries. Imperfect accounting standards and opaque balance sheets
served as tools for hiding the shortcomings and failing to reveal the progressive
deterioration and structural weakness of the country's banking institutions to public view.
This enabled the nationalized banks to continue to flourish in a deceptive manifestation




                                 BABASAB PATIL                        -6-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

and false glitter, though stray symptoms of the brewing ailment were discernable here
and there.

       The government hastily introduced the first phase of reforms in the financial and
banking sectors after the economic crisis of 1991. This was an effort to quickly resurrect
the health of the banking system and bridge the gap between Indian and global banking
development. Indian Banking, in particular PSB’s suddenly woke up to the realities of the
situation and to face the burden of the surfeit of their woes. Simultaneously major
revolutionary transitions were taking place in other sectors of the economy on account
the ongoing economic reforms intended towards freeing the Indian economy from
government controls and linking it to market driven forces for a quick integration with
the global economy. Import restrictions were gradually freed. Tariffs were brought down
and quantitative controls were removed. The Indian market was opened for free
competition to the global players. The new economic policy in turn revolutionalised the
environment of the Indian industry and business and put them to similar problems of new
mixture Of opportunities and challenges. As a result we witness today a scenario of
banking, trade and industry in India, all undergoing the convulsions of total reformation
battling to kick off the decadence of the past and to gain a new strength and vigor for
effective links with the global economy. Many are still languishing unable to get released
from the old set-up, while a few progressive corporate are making a niche for themselves
in the global context.

       During this decade the reforms have covered almost every segment of the
financial sector. In particular, it is the banking sector, which experienced major reforms.
The reforms have taken the Indian banking sector far away from the days of
nationalization. Increase in the number of banks due to the entry of new private and
foreign banks; increase in the transparency of the banks' balance sheets through the
introduction of prudential norms and norms of disclosure; increase in the role of the
market forces due to the deregulated interest rates, together with rapid computerization




                                BABASAB PATIL                       -7-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

and application of the benefits of information technology to banking operations have all
significantly affected the operational environment of the Indian banking sector.

       In the background of these complex changes when the problem of NPA was
belatedly recognized for the first time at its peak velocity during 1992-93, there was
resultant chaos and confusion. As the problem in large magnitude erupted suddenly banks
were unable to analyze and make a realistic or complete assessment of the surmounting
situation. It was not realized that the root of the problem of NPA was centered elsewhere
in multiple layers, as much outside the banking system, more particularly in the transient
economy of the country, as within. Banking is not a compartmentalized and isolated
sector delinked from the rest of the economy. As has happened elsewhere in the world, a
distressed national economy shifts a part of its negative results to the banking industry. In
short, banks are made ultimately to finance the losses incurred by constituent industries
and businesses. The unprepared ness and structural weakness of our banking system to
act to the emerging scenario and de-risk itself to the challenges thrown by the new order,
trying to switch over to globalization were only aggravating the crisis. Partial perceptions
and hasty judgments led to a policy of ad-hoc-ism, which characterized the approach of
the authorities during the last two-decades towards finding solutions to banking ailments
and dismantling recovery impediments. Continuous concern was expressed. Repeated
correctional efforts were executed, but positive results were evading. The problem was
defying a solution.

       The threat of NPA was being surveyed and summarized by RBI and Government
of India from a remote perception looking at a bird's-eye-view on the banking industry as
a whole delinked from the rest of the economy. RBI looks at the banking industry's
average on a macro basis, consolidating and tabulating the data submitted by different
institutions. It has collected extensive statistics about NPA in different financial sectors
like commercial banks, financial institutions, urban cooperatives, NBFC etc. But still it is
a distant view of one outside the system and not the felt view of a suffering participant.
Individual banks inherit different cultures and they finance diverse sectors of the



                                 BABASAB PATIL                        -8-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

economy that do not possess identical attributes. There are distinct diversities as among
the 29 public sector banks themselves, between different geographical regions and
between different types of customers using bank credit. There are three weak nationalized
banks that have been identified. But there are also correspondingly two better performing
banks like Corporation and OBC. There are also banks that have successfully contained
NPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross
NPA 6.13%). The scenario is not so simple to be generalized for the industry as a whole
to prescribe a readymade package of a common solution for all banks and for all times.

       Similarly NPA concerns of individual Banks summarized as a whole and
expressed as an average for the entire bank cannot convey a dependable picture. It is
being statistically stated that bank X or Y has 12% gross NPA. But if we look down
further within that Bank there are a few pockets possessing bulk segments of NPA
ranging 50% to 70% gross , which should consequently convey that there should also be
several other segments with 3 to 5% or even NIL % NPA, averaging the bank's whole
performance to 12%. Much criticism is made about the obligation of Nationalized Banks
to extend priority sector advances. But banks have neither fared better in non-priority
sector. The comparative performance under priority and non-priority is only a difference
of degree and not that of kind.

The assessment of the mix-of contributing factors includes:

   1. human factors (those pertaining to the bankers and the credit customers),
   2. environmental imbalances in the economy on account of wholesale changes and
       also
   3. Inherited problems of Indian banking and industry.

   Variable skill, efficiency and level integrity prevailing in different branches and in
different banks accounts for the sweeping disparities between inter-bank and intra-bank
performance. We may add that while the core or base-level NPA in the industry is due to
common contributory causes, the inter-se variations are on account of the structural and



                                  BABASAB PATIL                    -9-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

operational disparities. The heavy concentrated prevalence of NPA is definitely due to
human factors contributing to the same.

   No bank appears to have conducted studies involving a cross-section of its operating
field staff, including the audit and inspection functionaries for a candid and
comprehensive introspection based on a survey of the variables of NPA burden under
different categories of sectoral credit, different regions and in individual Branches
categorized as with high, medium and low incidence of NPA. We do not hear the voice of
the operating personnel in these banks candidly expressed and explaining their failures.
Ex-bankers, i.e. the professional bankers who have retired from service, but possess a
depth of inside knowledge do not out-pour candidly their views. After three decades of
nationalized banking, we must have some hundreds of retired Bank executives in the
country, who can boldly and independently, but objectively voice their views. Everyone
is satisfied in blaming the others. Bank executives hold 'willful defaulters' responsible for
all the plague. Industry and business blames the government policies.

       Important fact-revealing information for each NPA account is the gap period
between the date, when the advance was originally made and the date of its becoming
NPA. If the gap is long, it is the case of a sunset industry. Things were all right earlier,
but economic variance in trade cycles or market sentiments have created the NPA. Credit
customers who are in NPA today, but for years were earlier rated as good performers and
creditworthy clients ranging within the top 50 or 100. Significant part of the NPA is on
account of clout banking or willfully given bad loans. Infant mortality in credit is solely
on account of human factors and absence of human integrity.

       Credit to different sectors given by the PSB’s in fact represents different products.
Advance to weaker sections below Rs.25000/- represents the actual social banking. NPA
in this sector forms 8 TO 10% of the gross amount. Advance to agriculture, SSI and big
industries each calls for different strategies in terms of credit assessment, credit delivery,
project implementation, and post advance supervision. NPA in different sector is not
caused by the same resultant factors. Containing quantum of NPA is therefore to be


                                 BABASAB PATIL                        -10-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

programmed by a sector-wise strategy involving a role of the actively engaged
participants who can tell where the boot pinches in each case. Business and industry has
equal responsibility to accept accountability for containment of NPA. Many of the
present defaulters were once trusted and valued customers of the banks. Why have they
become unreliable now, or have they?

       The credit portfolio of a nationalized bank also includes a number of low-risk and
risk-free segments, which cannot create NPA. Small personal loans against banks' own
deposits and other tangible and easily marketable securities pledged to the bank and held
in its custody are of this category. Such small loans are universally given in almost all the
branches and hence the aggregate constitutes a significant figure. Then there is food
credit given to FCI for food procurement and similar credits given to major public
Utilities and Public Sector Undertakings of the Central Government. It is only the
residual fragments of Bank credit that are exposed to credit failures and reasons for NPA
can be ascertained by scrutinizing this segment.

       Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all
pervasive national scourge swaying the entire Indian economy. NPA is a sore throat of
the Indian economy as a whole. The banks are only the ultimate victims, where life cycle
of the virus is terminated.

       Now, how does the Government suffer? What about the recurring loss of revenue
by way of taxes, excise to the government on account of closure of several lakhs of
erstwhile vibrant industrial units and inefficient usage of costly industrial infrastructure
erected with considerable investment by the nation? As per statistics collected three years
back there are over two and half million small industrial units representing over 90
percent of the total number of industrial units. A majority of the industrial work force
finds employment here and the sector's contribution to industrial output is substantial and
is estimated at over 35 percent while its share of exports is also valued to be around 40
percent. Out of the 2.5 million, about 10% of the small industries are reported to be sick
involving a bank credit outstanding around Rs.5000 to 6000 Crores, at that period. It may


                                BABASAB PATIL                        -11-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

be even more now. These closed units represent some thousands of displaced workers
Previously enjoying gainful employment. Each closed unit whether large, medium or
small occupies costly developed industrial land. Several items of machinery form security
for the NPA accounts should either be lying idle or junking out. In other words, large
value of land, machinery and money are locked up in industrial sickness. These are the
assets created that have turned unproductive and these represent the real physical NPA,
which indirectly are reflected in the financial statements of nationalized banks, as the
ultimate financiers of these assets. In the final analysis it represents instability in industry.
NPA represents the owes of the credit recipients, in turn transferred and parked with the
banks.

         Recognizing NPA as a sore throat of the Indian economy, the field level
participants should first address themselves to find the solution. Why not representatives
of industries and commerce and that of the Indian Banks' Association come together and
candidly analyze and find an everlasting solution heralding the real spirit of deregulation
and decentralization of management in banking sector, and accepting self-discipline and
self-reliance? What are the deficiencies in credit delivery that leads to its misuse, abuse
or loss? How to check misuse and abuse at source? How to deal with erring Corporate? In
short, the functional staff of the Bank along with the representatives of business and
industry has to accept a candid introspection and arrive at a code of discipline in any final
solution. And preventive action to be successful should start from the credit-recipient
level and then extend to the bankers. RBI and Government of India can positively
facilitate the process by providing enabling measures. Do not try to set right industry and
banks, but help industry and banks to set right themselves. The new tool of deregulated
approach has to be accepted in solving NPA.




                                  BABASAB PATIL                         -12-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPA’S IN THE
INDIAN BANKING SYSTEM (IBS):

       The origin of the problem of burgeoning NPA’s lies in the quality of managing
credit risk by the banks concerned. What is needed is having adequate preventive
measures 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.

       To start with, performance in terms of profitability is a benchmark for any
business enterprise including the banking industry. However, increasing NPA’s have a
direct impact on banks profitability as legally banks are not allowed to book income on
such accounts and at the same time banks are forced to make provision on such assets as
per the Reserve Bank of India (RBI) guidelines.

       Also, with increasing deposits made by the public in the banking system, the
banking industry cannot afford defaults by borrowers since NPA’s affects the repayment
capacity of banks.

       Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the
system through various rate cuts and banks fail to utilize this benefit to its advantage due
to the fear of burgeoning non-performing assets.




                                BABASAB PATIL                        -13-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

Some of the other reasons were:

      After the nationalization of banks sector wise allocation of credit disbursements
       became compulsory.
      Banks were compelled to give credit to even those sectors, which were not
       considered to be very profitable, keeping in mind the federal policy.
       People in the agricultural sector were hardly interested in returning the loans as
       they were confident that the loans with the interest would be written off by the
       successive governments.
      The small scale industries also availed credit even though they were not sure of
       performing to the extent of returning the loans.
      Banks were also not in the position to press enough securities to cover the loans in
       calls of timings.
      Even if the assets were provided they proved to be substandard assets as the
       values that could be realized were very low.
      Free distribution done during “loan mails” (congress regime) also contributed to
       the heavy increase in NPA’s.
      The slackness in effort by the bank authorities to collect or recover loan advances
       in time also contributes to the increase in NPA’s.
      Lack of accountability of the officers, who sanctioned the loans led to a caste
       whole approach by the officers recovering the loans.
      Loans sanctioned to under servicing candidates due to pressure from the
       ministers and other politicians also led to the non recovery of debts.
      Poor credit appraisal system, lack of vision while sanctioning credit limits.
      Lack of proper monitoring.
      Reckless advances to achieve the budgetary targets.




                                BABASAB PATIL                        -14-
“Non Performing Assets and its impact on Profitability of
            New Private Sector Banks”

    Lack of sincere corporate culture, inadequate legal provisions on foreclosure and
     bankruptcy.
    Change in economic policies/environment.
    Lack of co-ordination between banks.

 Some of the internal factors of the organization leading to NPA’s are:

        Division of funds for expansion, diversification, modernization, undertaking
         new projects and for helping associate concerns, this is coupled with
         recessionary trends and failure to tap funds in the capital and debt markets.
        Business failure( product, marketing etc.,),inefficient management, strained
         labor     relations,   inappropriate technology, technical problems, product
         obsolescence etc.,
        Recession , shortage of input, power shortage, price escalation, accidents,
         natural calamities, besides externalization problem in other countries leading
         to non payment of overdue.
        Time/cost overrun during the project implementation stage.
        Government policies like changes in the excise duties, pollution control
         orders.
        Willful    default,    siphoning   off   of   funds,   fraud,    misappropriation,
         promoters/directors disputes etc.,
        Deficiencies on the part of the banks like delay in release of limits and delay
         in release of payments/subsidies by the government.




                                BABASAB PATIL                      -15-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


Operational definitions:
NPA: An asset is classified as non-performing asset (NPA’s) if dues in the form of
principal and interest are not paid by the borrower for a period of 90 days.

Standard Assets: Such an asset is not a non-performing asset. In other words, it carries
not more than normal risk attached to the business.

Sub-standard Assets: It is classified as non-performing asset for a period not exceeding
18 months

Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a
doubtful asset.

Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by
external auditors or by Reserve Bank India (RBI) inspection

Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with itself
in the form of cash reserves or by way of current account with the Reserve Bank of India
(RBI), computed as a certain percentage of its demand and time liabilities. The objective
is to ensure the safety and liquidity of the deposits with the banks.

Statutory Liquidity Ratio (SLR): It is the one which every banking company shall
maintain in India in the form of cash, gold or unencumbered approved securities, an
amount which shall not, at the close of business on any day be less than such percentage
of the total of its demand and time liabilities in India as on the last Friday of the second
preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.




                                 BABASAB PATIL                          -16-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


RBI GUIDELINES ON INCOME RECOGNITION (INTEREST INCOME ON
NPA’s)

    Income Recognition: Income from Non Performing Assets should not recognize on
accrual basis but should be booked as income only when it is actually received. Therefore
interest should not be charged and taken into income account till the account become
standard asset.
       Interest charged to be stopped
       Provision to be made
Over Due: Any amount due to the Bank under any credit facility is
“Over due” if it is not paid on the due date fixed by the Bank.
Out of Order: An account should be treated as “out of order”
       If the outstanding balance remains continuously in excess of the sanctioned limit/
        drawing power.
       In cases where the outstanding balance in the principal operating account is less
        than the sanctioned limit/ drawing power, but there are no credits continuously
        for 90 days as on the date of Bank’s Balance Sheet or Where are credits are not
        enough to cover the interest debited during the same period.
A Non Performing Asset shall be an advance where:
Term Loan: Interest and/ or installment of principal remain “over due” for a period of
more than 90 days.
Cash Credit/ Over Draft: If the account remains out of order for a period more than
90 days.
Bills: Overdue for a period of more than 90 days.
Other accounts: Any amount to be received remains overdue for a period of more than
90 days.




                                BABASAB PATIL                          -17-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

Short duration crops: If the installment of principal or interest there on remains
overdue for two crop seasons.
Long duration crops: If installment of principal or interest there on remains overdue for
One Crop season.
       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.
                            ASSET CLASSIFICATION
Standard Assets:
Is one which does not disclose any problem and which does not carry more than normal
risks attached to the business.
Substandard Assets:
Which has remained NPA for a period of less than or equal to 12 months.
Doubtful Assets:
If it has remained NPA for a period exceeding 12 months.
Loss Assets:
A loss asset is one where loss has been identified by the bank.




                                  BABASAB PATIL                      -18-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


RBI    GUIDELINES         ON     PROVISIONING          REQUIREMENT            OF       BANK
ADVANCES:

Loss Assets: 100% of the outstanding amount.
Doubtful Assets: 100% of unsecured portion.
Secured portion
Up to one year                                 20%
One to three years                             30%
More than 3 years
1. Outstanding stock of NPA as on              75% w.e.f.31st March, 06
   31.3.2004                                   100% w.e.f.31st March,07


2. Advances classified as “doubtful more       100% w.e.f.31st March,05
   than 3 years” on or after 31.3.2004
Substandard Assets: Secured portion 10% and unsecured portion 20% on total
outstanding.


Standard Assets: A general provision of 0.40% (For direct Agriculture & SME Sector
0.25%). Provisioning for standard assets will be done at corporate office centrally.




                                BABASAB PATIL                       -19-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”


Calculation of Net NPA (Non Performing Asset)
Formula:
GROSS NPA
LESS: Balance in Interest Suspense Account
LESS: DICGC/ECGC Claims received but pending for adjustment
LESS: Part payment received and kept in suspense account


Illustration: (Based on annual reports of UTI bank 2005-06)


                      Particulars                              Amount
           Gross NPA of UTI for the year 2006                   37428
     LESS: Balance from interest suspense account               12704
LESS: DICGC/ECGC Claims received but pending for                     36
                      adjustment
LESS: Part payment received and kept in Suspense A/c             2928

           NET NON PERFORMING ASSETS                            21760

             NET NPA IN PERCENTAGE                              0.97%




                               BABASAB PATIL                  -20-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

THE NARASIMHAN COMMITTEE'S FIRST REPORT

The salient features of these reforms include:

      Phasing out of statutory pre-emption - The SLR requirement have been brought
       down from 38.5% to 25% and CRR requirement from 7.50% to 5.75%. (Presently
       4.5%)
      Deregulation of interest rates - All lending rates except for lending to small
       borrowers and a part of export finance have been de-regulated. Interest on all
       deposits are determined by banks except on savings deposits.
      Capital adequacy - CAR of 9 % prescribed with effect from March 31, 2000.
      Other prudential norms - Income recognition, asset classification and provisioning
       norms has been made applicable. The provisioning norms are more prudent,
       objective, transparent, and uniform and designed to avoid subjectivity.
      Debt Recovery Tribunals - 22 DRTs and 5 DRATs have already been set up and 7
       more DRTs will be set up during the current financial year. Comprehensive
       amendment in the Act have been made to make the provisions for adjudication,
       enforcement and recovery more effective.
      Transparency in financial statements - Banks have been advised to disclose
       certain key parameters such as CAR, percentage of NPA’s, provisions for NPA’s,
       net value of investment, Return on Assets, profit per employee and interest
       income as percentage to working funds.
      Entry of new private sector banks - 9 new private sector banks have been set up
       with a view to induce greater competition and for improving operational
       efficiency of the banking system. Competition has been introduced in a controlled
       manner and today we have nine new private sector banks and 36 foreign banks in
       India competing with the public sector banks both in retail and corporate banking
      Functional autonomy - The minimum prescribed Government equity was brought
       to 51%. Nine nationalized banks raised Rs.2855 crores from the market during




                                BABASAB PATIL                      -21-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

       1994-2001. Banks Boards have been given more powers in operational matters
       such as rationalization of branches, credit delivery and recruitment of staff.
      Hiving off of regulatory and supervisory control - Board for financial supervision
       was set up under the RBI in 1994 bifurcating the regulatory and supervisory
       functions.

NARASIMHAN COMMITTEE- SECOND REPORT

       The Narasimhan Committee on Banking Reforms, in its second report, has
combined drastic surgery with a strong dose of medicine to cure the ailing industry. On-
performing assets (NPA’s) have been the bane of the industry. The panel has identified
poor credit decisions by managements, cyclical changes in the economic environment,
directed credit and crude forms of behest-lending as the factors responsible for poor asset
quality. The panel points a finger at priority sector credit as having a high contamination
coefficient and suggests that quantitative targets have caused erosion of asset quality. It
laments the fact that infusion of recapitalization funds notwithstanding, NPA’s remain
uncomfortably high. Yet it recommends that advances covered by government guarantees
that have turned sticky should also be reckoned as net NPA’s.

       The Narasimhan Committee's solution for NPA’s is the creation of an Asset
Reconstruction Fund (ARF), which will take over the bad debts of banks from their
balance sheets to enable them to start on a clean slate. Recapitalization through budgetary
infusion, the panel correctly points out, is not a sustainable option. But bankers are
skeptical about the workability of the ARF. A senior banker asked, "At what price will
the ARF take over my NPA’s? How will the discount be worked out?" He said that the
ARF cannot bail out banks under the present legal system. Although every bad debt is
secured, banks cannot encash the security because of legal hurdles. The Urban Land
Ceiling Act is a major deterrent to debt recovery. Bankers say that the legal system has to
be revamped to facilitate recovery so that the ARF can pick up "NPA’s at a viable price".




                                BABASAB PATIL                        -22-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

       The committee has recommended that net NPA’s be brought down to less than 5
per cent by the year 2000 and 3 per cent by the year 2002. "Easier said than done," says a
top banker. "Already we do a lot of window-dressing. Outstanding accounts are shown as
priority lending to meet targets. We keep lending to defaulters to roll over the NPA’s.
Fixing unrealistic targets will be counterproductive."

       The committee has recommended that banks should not lend to defaulters, but
bankers say that this is unrealistic. They claim that in the absence of fresh loans, the
defaulting companies will close down, and leading to loss of jobs. "Will that be
acceptable?" asks a banker. Bankers also complain that they are forced by the Board for
Industrial and Financial Reconstruction (BIFR) to lend to sick companies, yet more often
than not there is no turnaround and the accounts turn bad.

Credit Risk and NPA’s:

       Quite often credit risk management (CRM) is confused with managing non-
performing assets (NPA’s). However there is an appreciable difference between the two.
NPA’s are a result of past action whose effects are realized in the present i.e. they
represent credit risk that has already materialized and default has already taken place.

       On the other hand managing credit risk is a much more forward-looking approach
and is mainly concerned with managing the quality of credit portfolio before default takes
place. In other words, an attempt is made to avoid possible default by properly managing
credit risk. Considering the current global recession and unreliable information in
financial statements, there is high credit risk in the banking and lending business. To
create a defense against such uncertainty, bankers are expected to develop an effective
internal credit risk models for the purpose of credit risk management.




                                BABASAB PATIL                        -23-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

Usage of financial statements in assessing the risk of default for lenders:

       For banks and financial institutions, both the balance sheet and income statement
have a key role to play by providing valuable information on a borrower’s viability.
However, the approach of scrutinizing financial statements is a backward looking
approach. This is because; the focus of accounting is on past performance and current
positions.

       The key accounting ratios generally used for the purpose of ascertaining the
creditworthiness of a business entity are that of debt-equity ratio and interest coverage
ratio. Highly rated companies generally have low leverage. This is because; high leverage
is followed by high fixed interest charges, non-payment of which results into a default.

Capital Adequacy Ratio (CAR) of RBI and Basel committee on banking supervision
(BCBS):

       Reserve Bank of India (RBI) has issued capital adequacy norms for the Indian
banks. The minimum CAR which the Indian Banks are required to meet at all times is set
at 9%. It should be taken into consideration that the bank's capital refers to the ability of
bank to withstand losses due to risk exposures.

       To be more precise, capital charge is a sort of regulatory cost of keeping loans
(perceived as risky) on the balance sheet of banks. The quality of assets of the bank and
its capital are often closely related. Quality of assets is reflected in the quantum of
NPA’s. By this, it implies that if the asset quality was poor, then higher would be the
quantum of non-performing assets and vice-versa.

       Market risk is the risk arising due to the fluctuations in value of a portfolio due to
the volatility of market prices.




                                   BABASAB PATIL                     -24-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

       Operational risk refers to losses arising due to complex system and processes. It is
important for a bank to have a good capital base to withstand unforeseen losses. It
indicates the capability of a bank to sustain losses arising out of risky assets.

       The Basel Committee on Banking Supervision (BCBS) has also laid down certain
minimum risk based capital standards that apply to all internationally active commercial
banks. That is, bank's capital should at least be 8% of their risk-weighted assets. This
infact helps bank to provide protection to the depositors and the creditors.

       The main objective here is to build a sort of support system to take care of
unexpected financial losses thereby ensuring healthy financial markets and protecting
depositors.

IMPACT OF EXCESS LIQUIDITY:

       One should also not forget that the banks are faced with the problem of increasing
liquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in
the system through various rate cuts. Banks can get rid of its excess liquidity by
increasing its lending but, often shy away from such an option due to the high risk of
default. In order to promote certain prudential norms for healthy banking practices, most
of the developed economies require all banks to maintain minimum liquid and cash
reserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory Liquidity
Ratio (SLR).

       Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with
itself in the form of cash reserves or by way of current account with the Reserve Bank of
India (RBI), computed as a certain percentage of its demand and time liabilities. The
objective is to ensure the safety and liquidity of the deposits with the banks.

       On the other hand, Statutory Liquidity Ratio (SLR) is the one which every
banking company shall maintain in India in the form of cash, gold or unencumbered
approved securities, an amount which shall not, at the close of business on any day be


                                 BABASAB PATIL                         -25-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

less than such percentage of the total of its demand and time liabilities in India as on the
last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may
specify from time to time.

       A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up
in RBI's vaults and further infuses greater funds into a system. However, almost all the
banks are facing the problem of bad loans, burgeoning non-performing assets, thinning
margins, etc. as a result of which, banks are little reluctant in granting loans to corporates.

       As such, though in its monetary policy RBI announces rate cut but, such news are
no longer warmly greeted by the bankers.

HIGH COST OF FUNDS DUE TO NPA’s:

       Quite often genuine borrowers face the difficulties in raising funds from banks
due to mounting NPA’s. Either the bank is reluctant in providing the requisite funds to
the genuine borrowers or if the funds are provided, they come at a very high cost to
compensate the lender’s losses caused due to high level of NPA’s.

       Therefore, quite often corporate prefer to raise funds through commercial papers
(CPs) where the interest rate on working capital charged by banks is higher.

       With the enactment of the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002, banks can issue notices to the defaulters
to pay up the dues and the borrowers will have to clear their dues within 60 days. Once
the borrower receives a notice from the concerned bank and the financial institution, the
secured assets mentioned in the notice cannot be sold or transferred without the consent
of the lenders.

       The main purpose of this notice is to inform the borrower that either the sum due
to the bank or financial institution be paid by the borrower or else the former will take
action by way of taking over the possession of assets. Besides assets, banks can also



                                 BABASAB PATIL                         -26-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

takeover the management of the company. Thus the bankers under the aforementioned
Act will have the much needed authority to either sell the assets of the defaulting
companies or change their management.

       But the protection under the said Act only provides a partial solution. What banks
should ensure is that they should move with speed and charged with momentum in
disposing off the assets. This is because as uncertainty increases with the passage of time,
there is all possibility that the recoverable value of asset also reduces and it cannot fetch
good price. If faced with such a situation than the very purpose of getting protection
under the Securitization Act, 2002 would be defeated and the hope of seeing a must have
growing banking sector can easily vanish.

Non Performing Assets of New Private Sector Banks-Sector wise (2006 data)

Centurion Bank of Panjab Ltd

           Sector                   Amount( in Crore)               Percentage to total
        Agriculture                         10.68                           3.39
   Small Scale Industries                   11.23                           3.57
           Others                           8.99                            2.85

HDFC Bank Ltd

           Sector                   Amount( in Crore)               Percentage to total
        Agriculture                         22.85                           3.92
   Small Scale Industries                   19.15                           3.28
           Others                         174.26                            29.88




                                BABASAB PATIL                        -27-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

ICICI Bank Ltd.

         Sector               Amount( in Crore)              Percentage to total
       Agriculture                   45.65                           2.05
  Small Scale Industries             35.58                           1.60
         Others                      13.06                           0.59

Indusind Bank Ltd

         Sector               Amount( in Crore)              Percentage to total
       Agriculture                   110.37                          41.06
  Small Scale Industries             12.92                           4.81
         Others                      24.80                           9.23

Kotak Mahindra Bank Ltd

         Sector               Amount( in Crore)              Percentage to total
       Agriculture                    3.26                           8.17
  Small Scale Industries               -                               -
         Others                      15.36                           38.49

UTI Bank Ltd

         Sector               Amount( in Crore)              Percentage to total
       Agriculture                   56.71                           15.17
  Small Scale Industries             13.84                           3.70
         Others                       0.30                           0.08




                            BABASAB PATIL                     -28-
    “Non Performing Assets and its impact on Profitability of
                New Private Sector Banks”

RECOVERY MEASURES:
s

        Broadly speaking, recovery measures could be classified into two categories,

namely, legal measures and non-legal measures.


Legal Measures
   1. Debt Recovery Tribunals(DRT)

        In the context of recovery from NPAs DRT are assuming great importance since

efforts are on to set up & more DRT during this year and also to strengthen them.

Though the recovery through DRT is at present less than two per cent of the claim

amount, banks and Fls have to depend heavily on them. Efforts are on to amend the

recovery act to assign more powers to DRTs. More importantly, the borrowers tendency

to challenge the verdict of the Appellate Tribunals in the High court to seek natural-

justice needs to be checked, Otherwise, early recovery efforts through DRTs would be

futile. Secondly, training of presiding officers of Tribunals about the intricacies of

banking practices is very essential. Further, the numbers of recovery officers have to be

enhanced in every DRT for effective recovery. Finally, banks and Fls have to come

forward to provide liberal help to DRTs to equip them in terms of infrastructure,

manpower, etc.




                               BABASAB PATIL                      -29-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


   2. National Company Law Tribunal :

       As per the announcement made in the Budget-2001-02, Sick Industrial Company

Act will be repealed and Board for Industrial Finance and Reconstruction will be wound-

up. As an alternative arrangement, it is proposed to set up NCLT by amending the

Companies Act 1956. In August 2001, the NCLT is expected to consolidate the powers

of BIFR, High court and Company Law Board to avoid multiplicity of forums. In

matters of rehabilitation of sick units, all concerned parties are supposed to abide by the

orders of NCLT.      There shall be 10 benches, which will deal with rehabilitation,

reconstruction and winding-up of companies. It is estimated to complete the entire

process during a period of 2-3 years as against 20-27 years presently taken. The Tribunal

will have, in addition, powers of contempt of court.

       A rehabilitation and revival fund will be constituted to make interim payment of

dues to workers of a company declared sick or is under liquidation, protection of assets of

sick company and rehabilitate sick companies. While NCLT will be acting on the lines of

BIFR in the matters of rehabilitation viability of the projects will be assessed on cash test

and not in the present test of net-time limit for completing each formality relating to

rehabilitation and winding-up.     Though the Bill is well drafted to ensure NCLT to

become time wise, and more effective than BIFR in respect of rehabilitation and winding-

up, doubts are raised about the implementation of the Bill taking into account the present

political economy. In any case, it is too early to comment.




                                 BABASAB PATIL                       -30-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

   3. Corporate Debt Restructuring Body

       A need was felt to special agency to facilitate debt restructuring because there has

been some hesitancy on the part of Bank and financial institution to implement RBI

guidelines on debt restructuring recently three-tire body, CDR has been set up to

coordinate corporate debt –restructuring program. It is yet to be operationalized CDR

consist of Forum Group and cell. While the forum evolves broad policy guidelines, the

group takes decisions on the proposals pecommended by the Cell. Initially, the borrower

approaches his Lead bank/FI with a request to restructure debt which in turn puts up the

proposal to the Cell. The CDR Covers only multiple banking accounts enjoying credit

facilities exceeding Rs.20crore. Cases of DRT, BIFR and willful defaults, doubtful and

loss accounts and suit-filed cased are outside the purview of the CDR. Thus standard and

sub-standard accounts are only eligible to seek CDR shelter. Decisions of the group are

based on the super majority principle. If 75 percent of the secured creditors agree to the

rehabilitation plan, it is binding on the other banks/Fis.

       The CDR is a voluntary system based on debtor- creditor agreement and inter-

creditors agreement. No banker/borrower can take recourse to any legal action during the

stand-still period of 90-180 days. Lastly, CDR will observe the RBI Guideline on Debt

Restructuring issued in March 2006. While the arrangements under CDR seem to be

feasible from the debt restructuring perspective, its success depends upon the cooperation

extended by borrowers and bankers, on the one hand, and understanding among banks

and Fis, on the other. Doubts are raised about the implementation of these agreements

taking into the present working of the loan consortium arrangements.




                                 BABASAB PATIL                      -31-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

   4. Asset Reconstruction Corporation.

       It is proposed to set up ARCs in the private sector to take over NPAs in the public

sector banks. The RBI will be the regulator of these ATCs. The ARC will buy NPAs of

the banks and financial institutions at the pre-determined discounted value and issue NPA

redemption bonds, which carry a fixed return. ARCs are expected to be managed by

professionals to effect maximum recovery of NPA, which will help in redemption of

bonds after some time. The Finance Ministry has finalized the draft Bill to set up ARCs.

Though the proposed scheme seems to be attractive, its success will depend upon the

efficiency of DRTs and courts. Further, if ARC is going to depend on the staff deputed

by weak banks, its recovery chances are doubtful.

   5. Company Mergers.

       Under the Companies Act, 1956, mergers are permitted. In 1977, Sec 72-A was

inserted in the Income Tax Act to offer tax incentives to healthy companies which take

over the sick companies and prepare revival plans. Response to this scheme formalities

as per the instructions of the High Court and Income Tax Department. Tax incentives are

found to be inadequate to motivate healthy companies to come forward and take

advantage of the scheme. Recovery of bank dues on company-mergers is not assured

since hardly 7.8 per cent of sick companies are successfully revived. Encouraged by the

success achieved in company mergers in developed countries, a review of the scheme

under section 72-A of IT Act is called for.




                                BABASAB PATIL                      -32-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


NON LEGAL MEASURES

   1. Reminder System

       The cheapest mode of recovery is by sending reminders to the borrowers before

the loan installment falls due. Generally, response to this arrangement particularly from

honest borrowers is encouraging. But efforts need to be strengthened in banks in

sending reminders on timely basis.

   2. Visit to Borrower’s Business Premise/Residence

       This is a more dependable measure of recovery. Visits need to be properly

planned. Involvement of staff at all levels in the bank branch is called for. Costs

involved in recovery need to be kept to the minimum. Frequent visits are called for in

case of hardcore borrowers. Over the years, it is observed that the number and quality of

visits are going down. Consequently, the recovery process is affected.

   3. Recovery Camps

       In respect of agricultural advances, recovery camps should be organized during

the harvest season. To ensure maximum advantage, recovery camps need to be properly

planned. It is also essential to take the help of outsiders, particularly, revenue officers in

the state government, local panchayat officials, regional        approach    to give a wide

publicity of the recovery camps to be organized in the local area, mobilize as many

farmers as possible and motivate the staff to get involved in the recovery drive.




                                 BABASAB PATIL                        -33-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

    4. Rephrasing Unpaid Loan Installments

        In respect of small advances, bankers need to be system pathetic in respect of

sincere and hardworking borrowers. If such borrowers fail to pay loan installments due

to natural calamities or for some other convincing reasons, unpaid loan installments may

be replased/rescheduled. Bankers efforts need to be strengthened in the regard.

    5. Rehabilitation of Sick Units

        Sick units both in SSI and non SSI sectors should be identified on timely basis

keeping in mind the official definitions. Causes of sickness should be genuine. If the

project is found viable in terms of Debt Service Coverage Ratio (DSCR), rehabilitation

package has to be prepared keeping in mind the broad parameters suggested by the RBI.

The package should be implemented at the earliest by the bank and the borrower. Close

monitoring of the progress of implementation is called for. There are several success

stories on rehabilitation of sick units. But in general, it is observed that the success rate

in revival of sickness is discouraging. Further, in the process of financial sector reforms,

banks and Fis are hesitant to rehabilitate due to the threat of failure in rehabilitation.

Recently, the RBI has permitted banks not to make provision for sick SSI units during the

first year of implementation. New guidelines on rehabilitation of sick SSI units will also

be issued soon by the RBI. For successful rehabilitation, it is essential to create a

sense of urgency on the part of both banks and borrowers. Efforts on the part of the

government in terms of concessions, relief’s etc. Should be made on timely basis.

Understanding between bank and SFCs should be strengthened. Above all, stern action

against willful defaulters is called for.



                                  BABASAB PATIL                      -34-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

    6. Loan Compromise

        This is the last resort of recovery. This should be voluntary. It calls for a

professional approach in preparing the compromise proposal for which each bank is

expected to introduce a scheme. Committee approach should be adopted to decide on the

loan compromise. Delays in taking decisions should be avoided. Recently, one Time

Settlement (OTS) scheme was introduced by the RBI. The overall response to the

scheme was limited. Hence, each bank is expected to come out with its own OTS

scheme. In addition, training of operating staff is essential to change their mindset. For

effective recovery, loan compromise should be taken up on priority basis.

    7. Appointment of Professional Agencies for Recovery

        Recently, IBA has worked out certain guidelines for banks on matters concerning

the appointment of outside professional agencies whose services can be utilized to

ascertain the whereabouts of the borrowers and enforcement of securities. There is some

hesitancy on the part of public sector banks in engaging them for recovery purposes due

to unpleasant experiences in certain cases. But during the post – VRS scenario, it is

suggested to seek such outsourcing. This should be done after examining the credentials

of the professionals. It is also essential to keep a constant vigil on their practice.




                                  BABASAB PATIL                         -35-
“Non Performing Assets and its impact on Profitability of
            New Private Sector Banks”




                           BABASAB PATIL                    -36-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

                              Unit Trust of India Bank
        UTI Bank was the first of the new private banks to have begun operations in
1994, after the Government of India allowed new private banks to be established. The
Bank was promoted jointly by the Administrator of the specified undertaking of the, Unit
Trust of India.
    Life Insurance Corporation of India (LIC)
    General Insurance Corporation Ltd.
    Other four PSU companies, i.e.
             National Insurance Company Ltd.,
             The New India Assurance Company,
             The Oriental Insurance Corporation and United Insurance Company Ltd.
        The Bank today is capitalized to the extent of Rs. 280.51 Crores with the public
holding           (other       than          promoters)            at          72.46   %.
The Bank's Registered Office is at Ahmedabad and its Central Office is located at
Mumbai. Presently the Bank has a very wide network of more than 469 branch offices
and Extension Counters. The Bank has a network of over 2016 ATMs providing 24hrs a
day banking convenience to its customers. This is one of the largest ATM networks in the
country.
       The Bank has strengths in both retail and corporate banking and is committed to
adopting the best industry practices internationally in order to achieve excellence.


Mission of UTI Bank:
       Customer Service and Product Innovation tuned to diverse needs of individual
        and corporate clientele.
       Continuous technology upgradation while maintaining human values.
       Progressive globalization and achieving international standards.
       Efficiency and effectiveness built on ethical practices.




                                   BABASAB PATIL                        -37-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

Core Values
          Customer Satisfaction through
       --Providing quality service effectively and efficiently
       --Smile, it enhances your face value" is a service quality stressed on
       --Periodic Customer Service Audits
          Maximization of Stakeholder value
          Success through Teamwork, Integrity and People
Promoters:
UTI Bank Ltd. has been promoted by the largest and the best Financial Institution of the
country, UTI. The Bank was set up with a capital of Rs. 115 crore, with
      UTI contributing Rs. 100 crore,
      LIC - Rs. 7.5 crore and
      GIC and its four subsidiaries contributing Rs. 1.5 crore each.
Board of Directors:
The Bank has 12 members on the Board. Dr. P. J. Nayak is the Chairman and
Managing Director of the Bank.
The members of the Board are :
  Dr. P. J. Nayak                            Chairman & Managing Director
  Shri Surendra Singh                        Director
  Shri N.C. Singhal                          Director
  Shri A.T. Pannir Selvam                    Director
  Shri J.R. Varma                            Director
  Dr. R. H. Patil                            Director
  Smt. Rama Bijapurkar                       Director
  Shri R B L Vaish
                                             Director

  Shri S. Chatterjee                         Executive Director (Whole Time Director)
  Shri S B Mathur                            Director
  Shri M V Subbiah                           Director
  Shri Ramesh Ramanathan                     Director




                                 BABASAB PATIL                      -38-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

History of UTI Bank
1993- The Bank was incorporated on 3rd December and Certificate of business on14th
December. The Bank transacts banking business of all description. UTI Bank Ltd. was
promoted by Unit Trust of India, Life Insurance Corporation of India, General
Insurance Corporation of India and its four subsidiaries.
- The bank was the first private sector bank to get a license under the new guidelines
issued by the RBI
1994 – First branch of UTI Bank inaugurated at Ahmedabad by Dr. Manmohan Singh,
Hon'ble Finance Minister, Government of India.
1995 – Completes first profitable year in operation
1996 – Crosses Rs.1000 crore deposit mark
1997 – The Bank obtained license to act as Depository Participant with NSDL and
         applied for registration with SEBI to act as `Trustee to Debenture Holders'.
       - Rupees 100 crores was contributed by UTI, the rest from LIC Rs 7.5 crores,
        GIC and its four subsidiaries Rs 1.5 crores each.
1998 – The Bank has 28 branches in urban and semi urban areas as on 31st July. All
         the branches are fully computerised and networked through VSAT. ATM
         services are available in 27 branches.
       - The Bank came out with a public issue of 1,50,00,000 No. of equity shares of
         Rs 10 each at a premium of Rs 11 per share aggregating to Rs 31.50 crores and
         Offer for sale of 2,00,00,000 No. of equity shares for cash at a price of Rs 21
         per share. Out of the public issue 2,20,000 shares were reserved for allotment
         on preferencial basis to employees of UTI Bank. Balance of 3,47,80,000
         shares were offered to the public.
       - The company offers ATM cards, using which account-holders can withdraw
         money from any of the bank's ATMs across the country which are inter-
         connected by VSAT.




                                BABASAB PATIL                      -39-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

     - UTI Bank has launched a new retail product with operational flexibility for its
       customers.
     - UTI Bank will sign a co-brand agreement with the market, leader, Citibank NA
       for entering into the highly promising credit card business.

      - UTI Bank promoted by India's pioneer mutual fund Unit Trust of India along
       with LIC, GIC and its four subsidiaries.
1999 - UTI Bank and Citibank have launched an international co-branded credit card.
      - UTI Bank and Citibank have come together to launch an international co
         branded credit card under the MasterCard umbrella.
      - UTI Bank Ltd has inaugurated an off site ATM at Ashok Nagar here, taking the
         total number of its off site ATMs to 13.m
2000 -The Bank has announced the launch of Tele-Depository Services for its
       depository clients.
      - UTI Bank has launch of `iConnect', its Internet banking Product.
       -UTI Bank has signed a memorandum of understanding with equitymaster.com
       for e-broking activities of the site.
       - Infinity.com financial Securities Ltd., an e-broking outfit is typing up with UTI
       Bank for a banking interface.
       - Geojit Securities Ltd, the first company to start online trading services, has
       signed a MoU with UTI Bank to enable investors to buy\sell demat stocks
       through the company's website.
      - Indiabulls has signed a memorandum of understanding with UTI Bank.
      - UTI Bank has entered into an agreement with Stock Holding Corporation of
         India for providing loans against shares to SCHCIL's customers and funding
         investors in public and rights issues.
      - UTI Bank has tied up with L&T Trade.com for providing customized online
       trading solution for brokers.




                                 BABASAB PATIL                        -40-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

2001 - UTI Bank launched a private placement of non-convertible debentures to rise up
       to Rs 75 crore. - UTI Bank has opened two offsite ATMs and one extension
       counter with an ATM in Mangalore, taking its total number of ATMs across the
       country to 355.
      - UTI Bank has recorded a 62 per cent rise in net profit for the quarter ended
       September 30, 2001, at Rs 30.95 crore. For the second quarter ended September
       30, 2000, the net profit was Rs 19.08 crore. The total income of the bank during
       the quarter was up 53 per cent at Rs 366.25 crore.
2002 - UTI Bank Ltd has informed BSE that Shri B R Barwale has resigned as a
       Director of the Bank w.e.f. January 02, 2002. A C Shah, former chairman of
       Bank of Baroda, also retired from the bank's board in the third quarter of last
       year. His place continues to be vacant. M Damodaran took over as the director
       of the board after taking in the reins of UTI. B S Pandit has also joined the
       bank's board subsequent to the retirement of K G Vassal.
     - UTI Bank Ltd has informed that Shri Paul Fletcher has been appointed as an
       Additional Director Nominee of CDC Financial Service (Mauritius) Ltd of the
       Bank.And Shri Donald Peck has been appointed as an Additional Director
       (nominee of South Asia Regional Fund) of the Bank.
     - UTI Bank Ltd has informed that on laying down the office of Chairman of LIC
       on being appointed as Chairman of SEBI, Shri G N Bajpai, Nominee Director of
       LIC has resigned as a Director of the Bank.
2002 - B Paranjpe & Abid Hussain cease to be the Directors of UTI Bank.
     - UTI Bank Ltd has informed that in the meeting of the Board of Directors
       following decisions were taken: Mr Yash Mahajan, Vice Chairman and
       Managing Director of Punjab Tractors Ltd was appointed as an Additional
       Director with immediate effect. Mr N C Singhal former Vice Chairman and
       Managing Director of SCICI was appointed as an Additional Director with
       immediate effect.




                               BABASAB PATIL                      -41-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

      - UTI Bank Ltd has informed BSE that a meeting of the Board of Directors of the
       Bank is scheduled to be held on October 24, 2002 to consider and take on record
       the unaudited half yearly/quarterly financial results of the Bank for the half
       year/Quarter ended September 30, 2002.
     -UTI Bank Ltd has informed that Shri J M Trivedi has been appointed as an
       alternate director to Shri Donald Peck with effect from November 2, 2002.
2003 -UTI Bank Ltd has informed BSE that at the meeting of the Board of Directors of
       the company held on January 16, 2003, Shri R N Bharadwaj, Managing Director
       of LIC has been appointed as an Additional Director of the Bank with
       immediate effect.
     - UTI Bank, the private sector bank has opeaned a branch at Nellore. The bank's
       Chairman and Managing Director, Dr P.J. Nayak, inaugurating the bank branch
       at GT Road on May 26. Speaking on the occasion, Dr Nayak said, "This marks
       another step towards the extensive customer banking focus that we are providing
       across the country and reinforces our commitment to bring superior banking
       services, marked by convenience and closeness to customers.
     -UTI has been authorised to launch 16 ATMs on the Western Railway Stations of
       Mumbai Division.
     -UTI filed suit against financial institutions IFCI Ltd in the debt recovery tribunal
       at Mumbai to recover Rs.85cr in dues.
     -UTI bank made an entry to the Food Credit Programme, it has made an entry
       into the 59 cluster which includes private sector, public sector, old private sector
       and co-operative banks.
     - Shri Ajeet Prasad, Nminee of UTI has resigned as the director of the bank.
     - Banks Chairman and MD Dr.P.J.Nayak inaugurated a new branch at Nellore.
     -UTI bank allots shares under Employee Stock Option Scheme to its employees.
    -UTI Bank ties up with UK govt fund for contract farming
    -Shri B S Pandit, nominee of the Administrator of the Specified Undertaking of the
     Unit Trust of India (UTI-I) has resigned as a director from the Bank w.e.f
     November 12, 2003.


                                 BABASAB PATIL                       -42-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”


2004 -Comes out with Rs. 500 mn Unsecured Redeemable Non-Convertible Debenture
       Issue, issue fully subscribed
      -UTI Bank Ltd has informed that Shri Ajeet Prasad, Nominee of the
       Administrator of the Specified Undertaking of the Unit Trust of India (UTI - I)
       has been appointed as an Additional Director of the Bank w.e.f. January 20,
       2004.
     -UTI Bank opens new branch in Udupi
     -UTI Bank ties up with Shriram Group Co’s
     -Unveils premium payment facility through ATMs applicable to LIC & UTI Bank
       customers
     -Metaljunction (MJ)- the online trading and procurement joint venture of Tata
       Steel and Steel Authority of India (SAIL)- has roped in UTI Bank to start off
       own equipment for Tata Steel.
     -DIEBOLD Systems Private Ltd, a wholly owned subsidiary of Diebold
       Incorporated, has secured a major contract for the supply of ATMs and services
       to UTI Bank
     -HSBC completes acquisition of 14.6% stake in UTI Bank for $67.6 m
     -UTI Bank installs ATM in Thiruvananthapuram
     -Launches `Remittance Card' in association with Remit2India, a Web site offering
       money-transfer services
2005: UTI Bank appointed by Government of Karnataka as the sole banker for the
       Bangalore One (B1) project.
     - UTI Bank launches a powerful version of Kisan Credit Card.
     - UTI Bank gets listed on the London Stock Exchange, raises US$ 239.30 million
       through Global Depositary Receipts (GDRs).
     - UTI Bank and Bajaj Allianz join hands to distribute general insurance products.
     - UTI Bank and Visa International launch Mobile Refill facility - Anytime,
     Anywhere Pre-Paid Mobile Refill for all Visa Cardholders in India.




                                 BABASAB PATIL                    -43-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

      - UTI Bank wins International Financing Review (IFR) Asia ‘India Bond House’
        award for the year 2005.
      - UTI Bank extends banking services to the rural milk producers in Anand and
        Kheda districts in Gujarat.
2006: UTI Bank and UTI Mutual Fund to launch a new service for sale and redemption
        of mutual fund schemes through the Bank’s ATMs across the country.
      - UTI Bank opens its first international branch in Singapore.
      - UTI Bank and LIC join hands to launch an Annuity Card for group
        pensioners of LIC.
      - UTI Bank ties up with Geojit Financial Services to offer Online Trading service
        to its customers.




                               BABASAB PATIL                          -44-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

SWOT Analysis
                Strength                                             Weakness
   UTI Bank has been in the banking                     Tedious procedures have to be
     industry     since         1994.     It     has       followed before advancing loans
     successfully completed 12 years in                    causing        inconvenience        to
     the Banking industry.                                 customers.
   The bank has a sound network i.e
     Anywhere Banking facility in 450
     Branches and 1891ATM's at strategic
     locations in India.
   UTI Bank stands one among the top
     ten banks in India and is ranked 1st
     in growth in business
   The      bank          is    having         well
     experienced, trained, most dedicated
     and committed staff.
   In has a strong customer base.


             Opportunities
                                                                        Threat
   Global      aspirations         of         Indian
                                                         Bank is facing competition from its
     consumers and growing integration
                                                           other Private Sector Banks and even
     with NRIs.
                                                           the foreign Banks
   The bank can optimize the growth
                                                         Changing economic policies of
     opportunities arising out of retail
                                                           Government      will   have    serious
     banking and small and medium
                                                           impact on interest rates and reserve
     enterprises (SMEs).
                                                           ratio maintained with RBI
   Further expansion of ATMs networks
     and possible arrangements of sharing
     networks of other banks by issuing
     mutual funds and insurance.



                                   BABASAB PATIL                          -45-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

                        Products and Services of UTI Bank
                                Consumer banking
   UTI Bank is providing in consumer banking the following products and services:-
    Savings Account
    Salary Power
    Power Salute
    Priority Banking
    Women Account
    Senior Privilege
    AZAADI"- No Frills Savings Account
    RFC (D) Account
    Fixed Deposits
    Recurring Deposits
    Lockers
    Debit Card
    Travel Currency Card
    Encash 24
    Remittance Card
    Visa Money Transfer
    Power Transfer


Current Account

    Normal Current Account
    Business Advantage Account
    Business Classic Account
    Business Privilege Account
    Channel One




                             BABASAB PATIL                      -46-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

Demand drafts at correspondent bank locations available at very nominal charges.

        Free Pay Order facility.
        Free Demand Drafts
        Intercity Cash Deposit
        Intercity Cash Withdrawal
        Home Branch Cash Withdrawal

Retail loans - UTI Bank is providing following loan facilities to the customers in retail
loan section.

       Power Drive

       Power Home

       Asset Power

       Personal Power

       Loans against Securities

       Consumer Power

       Study Power

Corporate banking - In corporate banking UTI Bank is providing following services.

    Cash Management Services
    Lending/Financing
    Trade Service
    Current Account
    Fixed Deposits
Lending/Financing
       Working capital finance
       Cash credit / working capital demand loan
       Loan against FCNR (B) deposit


                               BABASAB PATIL                      -47-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

       Term lending
       Project loan
       Bill finance supply / purchase bills
       Channel finance
       Asset securitization
       Line of credit
       Bank guarantees
Trade Service
Trade Finance

    Bills Discounting
    L/C Backed bill discounting
    Drawee Bill Discounting
    Drawer Bill Discounting

                               Financial advisory service

       It is bank’s endeavor to offer customer complete personal finance solutions.
Through bank’s financial Advisory Services bank understand customers investment
requirements and design tailor made financial solutions for them.

       Beyond merely advising customers, Bank will also help the customers to invest in
a variety of instruments including.

       Mutual Funds
       Bank assurance
       Equity
       Tax consultancy
       IPO Buzz
       Fixed Income Products
       Portfolio Tracker



                                BABASAB PATIL                       -48-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

                            NRI SERVICES

   In UTI Bank, realize that as an NRI, customer banking needs are special. And in
keeping with this philosophy, and offer valued NRI customers a plethora of services
customized to their needs, such as

    The entire bouquet of NRI Deposit Products & Services.
    International Debit Card with Accident Insurance cover
    Free Internet Banking facility
    Portfolio Investment scheme for capital market transactions.
    Correspondent Banking/Remittance arrangements in all major currencies
Capital markets
       Depository Services
       eDepository Services
       Debenture Trusteeship

       Clearing bank for NSE/BSE/OTECI
       Clearing Members for Derivatives Segment
       Broker Financing
       Issue Management
       M&A Advisory
       IPO Funding
       Online Trading




                               BABASAB PATIL                    -49-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

                               Government Business

       UTI Bank is the First Private Sector Bank to be authorised by the Reserve Bank
of India (RBI) and Government of India for collecting Taxes on behalf of a State
Government. The Bank is handling Collection of Commercial Taxes in the twin cities of
Hyderabad and Secunderabad for Govt. of Andhra Pradesh since July 2001.

   UTI Bank is now authorised by Reserve Bank of India and Govt. of India for
conducting all Central Government and State Government Business commencing with
October 1, 2003. The authorisation means the Bank can undertake the following
business on behalf of Central and State Governments:

                                      Treasury
    Foreign Exchange Desk
    International Banking
    Money Market Desk
    Constituent SGL Facility
    Retail G-sec
    Deposit Rate
    Newsletter
    Foreign Exchange




                              BABASAB PATIL                     -50-
“Non Performing Assets and its impact on Profitability of
            New Private Sector Banks”




                           BABASAB PATIL                    -51-
“Non Performing Assets and its impact on Profitability of
            New Private Sector Banks”




                   Findings
                             And
                   Analysis



                           BABASAB PATIL                    -52-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

                                   Design of the study

Title of the project:

        “Non Performing Assets and its impact on Profitability of New Private Sector
Banks”.
Scope of study: Scope of my study restricted only to 7 New Private Sector Banks
NPA data’s and Advances, and for Comparison of Credit risk path 7 old selected Private
Banks are taken.

Need For Study:

         This study will help to know the recent norms of NPA.
         This study helps to know how NPA Causing Problems to Banking Sector and
          what might be the solution to overcome from this problem and also its impact on
          Profitability of New Profit Banks.


                         STATEMENT OF THE PROBLEM

         Profitability is considered as a benchmark for evaluating performance of any
business enterprise including the banking industry.         However, increasing Non-
Performing Assets, have a direct impact on profitability of banks and financial
institutions. Legally speaking banks and financial institutions are not allowed to book
income on such account and at the same times they are forced to make provision on such
assets. So This project is undertaken to now impact of NPA on Profitability of New
Private Sector Banks.




                                 BABASAB PATIL                     -53-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

                                   Objectives of Study

   6. To study the RBI norms on Non Performing Assets, and the various reasons for
       the existence of huge level of NPA in Indian banking.
   7. To know the performance comparison of New Private Banks Non performing
       asset for past 3 years.
   8. To know the impact of non performing assets on profitability of New Private
       Banks, and comparison of credit risk path of New Private Banks with 7 selected
       Old Private Banks.
   9. To study the various steps taken by the banks to bring down the NPA’s in
       respective bank branches.
   10. To recommend measures for Improving performance and reduction of Non
       Performing Assets.

                                    Methodology
Primary Data:
Views of the concerned officials were gathered by directly interacting with them, and
such data was found very useful while analyzing and drawing conclusions.
Secondary Data:
      Recent RBI norms of NPA.
      IBA Bulletin 0f 2005-06 is referred to collect data for Net NPA, and Advances.
      Web site of UTI Bank and other Web sites.

Plan of analysis:
In this study quadrant analysis is used on the calculated figures.
Limitations:

      The study is based mostly on secondary data.
      Data has been drawn from journals, so information may not be complete.
      For the analysis only the advances and NPA percentages of banks and operating
       profit, provisions and contingencies as a whole and net profit of New PSB’s are
       taken into consideration.


                                 BABASAB PATIL                       -54-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

Impact of Provisions and Contingencies on Net Profit of New Private Banks.
Performance comparison of New Private Sector Banks Operating Profit of 3 years
S No                      Banks                   Operating Profit ( in Crore)
                                          2003-04         2004-05           2005-06
  1          Bank of Panjab Ltd*            103             19                 -


  2          Centurion Bank Ltd*             12             31                 148
  3            HDFC Bank Ltd                1008           1344               1979
  4            ICICI Bank Ltd               2481           2956               4691
  5             Indusind Bank Ltd.          445             401               225
  6       Kotak Mahindra Bank Ltd.          127             133               211

  7               UTI Bank Ltd              698             566               994
  8                  Yes Bank                 -             (4)                99


                 5000

                 4000

                 3000
                                                                         2003-04
                 2000                                                    2004-05

                 1000                                                    2005-06

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Interpretation: As we seen in graph ICICI Bank Ltd. Operating Profit is increasing year
by year followed by HDFC Bank Ltd.




                                  BABASAB PATIL                   -55-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

Performance       comparison      of   New   Private   Sector   Banks        Provisions   and
Contingencies of 3 years

S No                      Banks               Provisions and Contingencies ( in Crore)
                                             2003-04        2004-05          2005-06
  1           Bank of Panjab Ltd*              66             81                 -

  2         Centurion Bank Ltd*                 117               6                  60
  3           HDFC Bank Ltd                     498             678                1108
  4            ICICI Bank Ltd                   844             951                2151
  5          Indusind Bank Ltd.                 183             191                 188
  6       Kotak Mahindra Bank Ltd.               48              49                  92
  7             UTI Bank Ltd                    420             231                 509
  8               Yes Bank                        -               0                  44

                  2500
                  2000
                                                                               2003-04
                  1500
                                                                               2004-05
                  1000
                                                                               2005-06
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Interpretation:
ICICI Bank Ltd making large Provisions for losses compares to HDFC Bank Ltd and UTI
Bank Ltd may be because of their credit worthiness.




                                  BABASAB PATIL                       -56-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


Performance comparison of New Private Sector Banks Net Profit 3 years

S No                       Banks                        Net Profit (in Crore)
                                            2003-04         2004-05           2005-06
  1           Bank of Panjab Ltd*             37              (61)               -

  2         Centurion Bank Ltd*               (105)             25                88
  3           HDFC Bank Ltd                    510             666               871
  4            ICICI Bank Ltd                 1637            2005              2540
  5          Indusind Bank Ltd.                262             210                37
  6       Kotak Mahindra Bank Ltd.              79              85               118
  7             UTI Bank Ltd                   278             335               485
  8               Yes Bank                       -             (4)                55


                  3000
                  2500
                  2000
                                                                            2003-04
                  1500
                                                                            2004-05
                  1000
                                                                            2005-06
                   500
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Interpretation:
ICICI Bank Ltd and HDFC Bank LTD Net Profit is Increasing Even though lot of Money
has spent on Provision and Contingency. It may be because of their risk taking ability.




                                   BABASAB PATIL                     -57-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

Analysis of above data:
       As we see the above graphs, ICICI Bank Ltd Operating Profit is increasing year
by year followed by HDFC Bank Ltd. UTI Bank Ltd Operating Profit is decreased in
2004-05 but its suddenly increased to 994crore in 2005-2006. But Bank of Panjab Ltd
Operating Profit for 2003-04 is 103 crore but suddenly it decreases to 19 crore 1n 2004-
05, then it amalgamated with Centurian Bank Whose Operating Profit is Comparatively
Low in 2003-04 and 2004-05 after amalgamation it increases to 148crore. Even Indusind
Bank Ltd Operating Profit is go on Decreasing and as Yes Bank is very new so initially it
had made loss of 4crore but made 99crore operating profit in 2005-06.
       Provisions and Contingencies made by ICICI Bank Ltd and HDFC Bank Ltd is
Comparatively high it may be because of risk taking ability and have strong financial
background with more experience, And also these banks are able to provide adequate
finance to Different Sectors. As we seen UTI Bank Ltd Operating Profit in 2004-05
decreased and in 2005-06 increased so the Provisions made is low in 2004-05 but high in
2005-06 it may be because of large advances made by bank in 2005-06. But Bank of
Panjab Ltd Operating Profit gone down in 2004-05 to 19crore but it has incurred to make
81crore Provisions and Contingencies it may be because of wrong Strategy made by bank
to provide finance and to maintain operating Profit, same situation has faced by
Centurion      Bank      Ltd      in     the     year     2005-06.         So    only   Both
Bank of Panjab Ltd and Centurion Bank Ltd Amalgamated to make strong finance
Background. Indusind Bank Operating Profit coming down year by year. Kotak
Mahindra is performing better enough next to ICICI Bank, HDFC Bank, UTI Bank. As
Yes Bank is new so initially it incurred 4crore loss so no provisions were made but it
made Provisions in 2005-06.
       ICICI Bank Ltd, HDFC Bank Ltd and UTI Bank Ltd had comparatively high Net
Profit it may be because of risk taking ability and strong financial background with more
experience. As heavy Provisions were incurred by Bank of Panjab Ltd and Centurion
Bank Ltd till 2004-05 had amalgamated to make Positive Net profit and named
themselves as Centurion Bank of Panjab Ltd. Indusind Bank have to adopt different
strategy to increase net profit as it incurring loss from past 3 years.


                                 BABASAB PATIL                            -58-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


Analysis of Gross and Net NPA by taking 3 years Advances paid by New Private
Sector Bank.

Bank of Panjab Ltd
   Banks           Gross         Gross   Gross        Net         Net       Net
                  Advances       NPA     NPA(%)    Advances      NPA     NPA(%)
  2003-04           2709          168     6.20       2353         126      5.35
  2004-05           2520          126     5.00       2417         112      4.64
  2005-06            -             -        -          -           -         -


Centurion Bank Ltd
   Banks           Gross         Gross   Gross        Net         Net       Net
                  Advances       NPA     NPA(%)    Advances      NPA     NPA(%)
  2003-04           1705          221     12.96      1556         69       4.43
  2004-05           2291          156     6.81       2194         55       2.49
  2005-06           6848          315      4.6       6533         74       1.13

Intrepretation:
As Bank of Panjab Ltd and Centurion Bank has amalgamated in 2005 September, so we
can see a decrease in Gross NPA from 12.96% to 4.6% and Net NPA decreases to
1.13%. Of course it is a good sign to the company as it came below 5%, because if NPA
ratio of any Bank is more than 5% then it is said that the Banks need to adopt proper
strategy for recovery of debt.




                                 BABASAB PATIL                 -59-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”


HDFC Bank Ltd

  Banks            Gross      Gross       Gross        Net        Net        Net
                  Advances     NPA      NPA(%)      Advances      NPA      NPA(%)
  2003-04          18064       336        1.86       17745         28       0.16
  2004-05          25976       439        1.69       25566         61       0.24
  2005-06          36357       509        1.40       35061        155       0.44


Interpretation:
From the above table we can see that Gross NPA of HDFC Bank Ltd has decreasing from
1.86 to 1.40 from 2003-04 to 2005-06. This accomplishment is on account of credit
growth, which was higher than the growth of Gross NPA and not through appreciable
recovery of NPA. There is neither reduction nor even containment of the threat because
as we seen increase in Net NPA from Past 3 years.

ICICI Bank Ltd

  Banks            Gross      Gross       Gross        Net        Net        Net
                  Advances     NPA      NPA(%)      Advances      NPA      NPA(%)
  2003-04          65106       3060       4.70       64948        1423      2.19
  2004-05          91920       3925       4.27       91405        1505      1.65
  2005-06          148200      2223       1.50       146163       1053      0.72


Interpretation:
From above table we can see that Gross NPA of ICICI Bank Ltd has decreasing from
4.70 to 1.50 from 2003-04 to 2005-06. This accomplishment is on account of credit
growth, which was higher than the growth of Gross NPA and not through appreciable
recovery of NPA. There is neither reduction nor even containment of the threat. ICICI
Bank Ltd is providing high advances compare to other banks in 2005-2006.




                              BABASAB PATIL                     -60-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

Indusind Bank Ltd

   Banks           Gross      Gross      Gross         Net         Net       Net
                  Advances     NPA      NPA(%)      Advances      NPA      NPA(%)
  2003-04           7848       259         3.3         7301        212       2.90
  2004-05           9093       321        3.53         9000        244       2.71
  2005-06           9376       269        2.90         9310        195       2.09

Interpretation:
Indusind Bank need to adopt strategy in reducing NPA as its advances were more in
2004-05 and also Gross NPA has increased it may be because of their credit worth. And
again it decreases Gross NPA in 2005-06 this ups and down can affect credit worthiness
of the bank.

Kotak Mahindra Bank Ltd.

   Banks           Gross      Gross      Gross         Net         Net       Net
                  Advances     NPA      NPA(%)      Advances      NPA      NPA(%)
  2003-04           2105        20        0.95         2097         3        0.14
  2004-05           4058        28        0.69         4017         15       0.37
  2005-06           6353        38        0.60         6349         15       0.24

Interpretation:
Kotak Mahindra Bank Ltd Net NPA is Increasing from 2003-04 to 2004-05 and again it
decreases to 0.24 in 2005-06. it implied that NPA of Kotak Mahindra Bank are in ups and
down it may be because of any natural calamities or change in recovery measures etc.
but Gross NPA and Net NPA of Kotak Mahindra Bank is less than 1%. So its good sign
to Bank.




                              BABASAB PATIL                      -61-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


UTI Bank Ltd

   Banks          Gross        Gross       Gross         Net         Net          Net
                 Advances      NPA       NPA(%)      Advances       NPA      NPA(%)
  2003-04          9386         275        2.93         9363         112          1.20
  2004-05         15628         311        1.99        15603         217          1.39
  2005-06         22400         374        1.70        22314         218          0.98


Interpretation
UTI Bank Ltd Gross and Net NPA has decreases from 2.93 to 1.70 and 1.20 to 0.98
respectively from 2003-04 to 2005-06. This accomplishment is on account of credit
growth, which was higher than the growth of Gross NPA and not through appreciable
recovery of NPA. There is neither reduction nor even containment of the threat.




                               BABASAB PATIL                      -62-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

Performance Comparison of Net NPA of New Private Sector Banks

    New PSB’s            2003-04              2004-05                2005-06
                           4.69                 4.64                   0
Bank of Panjab Ltd*

  Centurion Bank           4.43                 2.49                  1.13
       Ltd*
 HDFC Bank Ltd             0.16                 0.24                  0.44
  ICICI Bank Ltd           2.21                 1.65                  0.72
Indusind Bank Ltd.         2.72                 2.71                  2.09
 Kotak Mahindra            0.17                 0.37                  0.24
   Bank Ltd.
                           1.29                 1.39                  0.98
   UTI Bank Ltd
     Yes Bank                0                    0                    0


                                                                    Bank of Panjab
      5
                                                                    Ltd*
    4.5
                                                                    Centurion Bank
      4
                                                                    Ltd*
    3.5
                                                                    HDFC Bank Ltd
      3
    2.5
                                                                    ICICI Bank Ltd
      2
    1.5
                                                                    Indusind Bank
      1
                                                                    Ltd.
    0.5
                                                                    Kotak Mahindra
      0
            2003-04        2004-05          2005-06                 Bank Ltd.
                                                                    UTI Bank Ltd

                                                                    Yes Bank




                            BABASAB PATIL                    -63-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


Interpretation:
       From above chart we can see that Bank of Panjab Ltd’s NPA increasing till it’s
amalgamated with Centurion Bank Ltd, and came nearer to 5%, after amalgamation both
Bank of Panjab Ltd and Centurion Bank Ltd named themselves as Centurion Bank of
Panjab Ltd. And in 2005-06 its NPA comes down 1.13% comparatively from previous
year NPA.
       We can say that HDFC Bank Ltd has strong financial background and credit
worthiness so it can provide more advances to people and also it is efficient enough to
recover those advances so its Net NPA has coming down and it is less than 1%. So
HDFC is performing well.
       In 2003-04 ICICI Bank Ltd Net NPA is more but its declining slowly and came to
0.72 from 2.21 in 2005-06. it may be because of its credit worthiness and strong recovery
measures. ICICI Bank Ltd is real risk taker so we cannot compare it with other small
banks because it providing high advances compare to other banks.
       Indusind Bank Ltd Net NPA almost same for 2003-04 to 2004-05 and declines to
2.09 in 2005-06.
       As Kotak Mahindra Bank Ltd providing comparatively low advances to avoid
credit risk so its NPA is low compare to other Banks.
       Even UTI Bank is performing well in recovering debts so its NPA came down
from previous year.




                               BABASAB PATIL                       -64-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


IMPACT OF NPA’S ON BANKS' PROFITS AND LENDING PROWESS:

       "The efficiency of a bank is not always reflected only by the size of its balance
sheet but by the level of return on its assets. NPA’s do not generate interest income for
the banks, but at the same time banks are required to make provisions for such NPA’s
from their current profits.

NPA’s have a deleterious effect on the return on assets in several ways -

      They erode current profits through provisioning requirements
      They result in reduced interest income
      They require higher provisioning requirements affecting profits and accretion to
       capital funds and capacity to increase good quality risk assets in future, and
      They limit recycling of funds, set in asset-liability mismatches, etc there is at
       times a tendency among some of the banks to understate the level of NPA’s in
       order to reduce the provisioning and boost up bottom lines. It would only
       postpone the In the context of crippling effect on a bank's operations in all
       spheres, asset quality has been placed as one of the most important parameters in
       the measurement of a bank's performance under the CAMELS supervisory rating
       system of RBI.




                                BABASAB PATIL                        -65-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”


Credit risk path of the New Private Bank’s by Comparing with selected 7 Old PSB’s
using Quadrant Analysis.

Credit risk path of the New Private Bank’s:


  New Private               NPA to Net          Advances(crores)       Quadrant
                             Advances                                   analysis
      Banks                       ( %)

                           2005          2006   2005          2006    2005    2006

  Bank of Panjab Ltd*
                           4.64           -     2417           -      HL           -


 Centurion Bank Ltd*       2.49          1.13   2194          6533    HL      HL


   HDFC Bank Ltd           0.24          0.44   25566        37661    LH      LH

    ICICI Bank Ltd         1.65          0.72   91405        146163   LH      LH

  Indusind Bank Ltd.       2.71          2.09   9000          9310    HL      HL

 Kotak Mahindra Bank       0.37          0.24   4017          6349    LL      LL
         Ltd.

     UTI Bank Ltd          1.39          0.98   15603        22314    LL      LL




                             BABASAB PATIL                     -66-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

Interpretation
Credit risk path of the New PSB’s: A Quadrant Analysis
       In the chart below an attempt is made to trace the relationship between NPA
proportion and the size of credit portfolio (advances) of New Private Bank’s. For this
purpose proportion of gross NPA’s representing credit risk inherent is taken on the X-
axis and gross credit levels are taken on the Y-axis. Since these two parameters are
assets, which are stock concept variables, they have been plotted on the basis of 2 years
2005 and 2006 for a comparative analysis.
                             QUADRANT TABLE- 2005


          LEVEL               LOW (BELOW AVG)                 HIGH (ABOVE AVG)
       CREDIT LEVEL
                                      (L)                                (H)
NPA




LOW                                         LL (2)                        LH (2)

HIGH                                        HL (3)                        HH (0)


                           QUADRANT TABLE- 2006


LEVEL                         LOW (BELOW AVG)                HIGH (ABOVE AVG)
    CREDIT LEVEL
                                     (L)                                 (H)
NPA



LOW                                         LL (2)                       LH (2)

HIGH                                        HL (2)                       HH (0)




                               BABASAB PATIL                      -67-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”

       As depicted in the tables, the banks are divided into 4 quadrants namely LL, LH,
HL and HH (the figures are arrived at by taking the averages). The average of NPA’s for
the year 2005 is 1.93% and this figure is measured against each bank, any percentage
above this figure falls in the H category and percentage below 1.93% falls in the L
category. The same applies with the advances. The average of advances for 2005 is
21,457 crores and 37,622 crores for 2006. The average of NPA for 2006 is 0.93%. ‘L’
represents low or below average of the New Private Bank’s and, ‘H’ represents high or
above average. E.g. while LL means low in credit size and low in NPA’s, LH implies low
in NPA and High in credit size. The following facts are visible from the quadrant table:

1).As depicted in the tables, most of the new private banks fall in the HL quadrant. In
2005 there were 3 banks, which was 2 in 2006. As seen in the quadrants, the NPA was
high compared to its credit size and the credit size is low in the New Sector Banks it
might be because these banks hesitate to take risk and improper recovery measures.

2).There was 2 banks in the LL quadrant in 2005 which remain same in 2006 also. It
means NPA Level and Credit size is low.

3). Bank of Panjab Ltd* is in HL quadrant, there is high level of NPA and Low Advances
in 2005 . So only Bank of Panjab Ltd. has merged with Centurion Bank in 2005
September and named as Centurion Bank of Panjab Ltd but still its in HL quadrant so still
this banks has to adopt proper strategy in providing advances and recovering debts.

5) The best performing bank in this sector was the ICICI Bank which was high in its
credit size compared to the rest of the banks and still maintained a low NPA level
followed by HDFC Bank Ltd..




                                BABASAB PATIL                       -68-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”


Credit risk path of the 7 selected Old PSB’s:



   Old Private               NPA to Net          Advances(crores)     Quadrant
                              Advances                                 analysis
       Banks                       ( %)

                           2005           2006   2005        2006    2005    2006

 City Union Bank Ltd        3.37          1.95   2013        2550    LL      LL

  Development Credit        6.34          4.50   2156        1867    HL      HL
       Bank Ltd


 ING Vysya Bank Ltd         2.13          1.76   9081        10232   LH      LH


Lord Krishna Bank Ltd       4.22          3.11   1387        1421    HL      HL


 Bank of Rajastan Ltd       2.50          0.99   2896        4065    LL      LL


  The United Western
                            5.83          5.66   3976        4006    HH      HL
       Bank Ltd.


The Karnatak Bank Ltd       2.29          1.18   6287        7792    LH      LH




                              BABASAB PATIL                   -69-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


Interpretation
Credit risk path of the 7 Private Sector Banks: A Quadrant Analysis
       In the chart below an attempt is made to trace the relationship between NPA
proportion and the size of credit portfolio (advances) of 7 old Private Bank’s. For this
purpose proportion of gross NPA’s representing credit risk inherent is taken on the X-
axis and gross credit levels are taken on the Y-axis. Since these two parameters are
assets, which are stock concept variables, they have been plotted on the basis of 2 years
2005 and 2006 for a comparative analysis.
                             QUADRANT TABLE- 2005


          LEVEL               LOW (BELOW AVG)                 HIGH (ABOVE AVG)
       CREDIT LEVEL
                                      (L)                                (H)
NPA




LOW                                         LL (2)                        LH (2)

HIGH                                        HL (2)                        HH (1)


                           QUADRANT TABLE- 2006


LEVEL                         LOW (BELOW AVG)                HIGH (ABOVE AVG)
    CREDIT LEVEL
                                     (L)                                 (H)
NPA



LOW                                         LL (2)                       LH (2)

HIGH                                        HL (3)                       HH (0)




                               BABASAB PATIL                      -70-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


       As depicted in the tables, the banks are divided into 4 quadrants namely LL, LH,
HL and HH (the figures are arrived at by taking the averages). The average of NPA’s for
the year 2005 is 3.81% and this figure is measured against each bank, any percentage
above this figure falls in the H category and percentage below 3.81% falls in the L
category. The same applies with the advances. The average of advances for 2005 is 3971
crores and 4562 crores for 2006. The average of NPA for 2006 is 2.74%. ‘L’ represents
low or below average of the PSB’s and, ‘H’ represents high or above average. E.g. while
LL means low in credit size and low in NPA’s, LH implies low in NPA and High in
credit size. The following facts are visible from the quadrant table:

1).As depicted in the table in 2005, out of 7 Private Sector Banks, 2 are fall under LL, i.e.
Low in NPA and Low in credit size, 2 fall under LH i.e. Low in NPA and High in credit
size. And remaining out of 3, 2 fall under HL i.e. High in NPA and Low in credit size.

2) As depicted in the table in 2006, out of 7 Private Sector Banks, 2 are fall under LL, i.e.
Low in NPA and Low in credit size, 2 falls under LH i.e. Low in NPA and High in credit
size. And 3 fall under HL i.e. High in NPA and Low in credit size.

3) There were 2 banks in the HL quadrant in 2005 which increased to 3 in 2006. It means
NPA Level is increasing year by year.

4). The United Western Bank Ltd moved from HH to HL , there is high level of NPA and
High Advances in 2005 which moved to High level of NPA and Low level of advances in
2006. Its not good sign to Bank because as in 2005 there is High NPA and Credit size so
Bank reduces its advances in 2006, but also its NPA increasing.

5) The best performing bank in this sector was the ING Vysya Bank which was high in
its credit size compared to the rest of the banks and still maintained a low NPA level.




                                BABASAB PATIL                           -71-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”


Comparison of New Private Bank’s credit path with Old selected Private Bank’s
credit path by using above Quadrant Analysis.
      When compare to Old PB’s, New PB’s are performing well from past 2 years.
      Old PB’s Net NPA on Advances are crossing 5% or nearer to 5 %, but almost all
       New PB’s Net NPA on Advances are below 3%. It is good sign to New PSB’s as
       it has strong credit path.
       New PB’s are taking high risk by Providing more and more advances when
       compare to Old PB’,
      Majority of Old PB’s provide advances to Priority sectors whose recovery are
       very difficult, because advances paid for agriculture are very difficult to recover,
       but New PB’s are able to provide advances to both priority and non priority
       sectors but it not expanded its services over villages. That’s why New PB’s
       recovering its advances very quickly.

Adverse Effects of NPA on the Working of New Private Banks:

       NPA has affected the profitability, liquidity and competitive functioning of New
Private Banks and finally the psychology of the bankers in respect of their disposition
towards credit delivery and credit expansion. Between 2004 and 2006 New Private Banks
incurred a total amount of Rs.4399 Crores towards provisioning NPA. This has brought
Net NPA to Rs.5780 Crores or 1.20% of net advances. To this extent the problem is
contained, but at what cost? This costly remedy is made at the sacrifice of building
healthy reserves for future capital adequacy. The enormous provisioning of NPA together
with the holding cost of such non-productive assets over the years has acted as a severe
drain on the profitability of the New Private Banks. In turn New Private Bank’s are seen
as poor performers and unable to approach the market for raising additional capital. This
has alternatively forced New Private Bank’s to borrow heavily from the debt market to
build Tier II Capital to meet capital adequacy norms putting severe pressure on their
profit margins, else they are to seek the bounty of the Central Government for repeated
Recapitalization.




                                    BABASAB PATIL                   -72-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”

Findings:
     The brightest spot in the Indian banking industry in 2005-2006 was the massive
      cleaning up of banks’ balance sheets by reducing non performing assets (NPA’s).
      The net NPA’s of 7 New Private Bank’s are reduced by (-) 18% while compare to
      previous year, i.e. from 2097 to 1709. Which was 6% higher Net NPA in 2004-05
      when compare to 2003-04.
     Net Profit of New Private Bank’s are increased by 28% from 2004-05 to 2005-06.
      It may be because of provisions made in 2006 is comparatively low.
     Most of the New Private Bank’s fall under LL quadrant i.e. Low in NPA and Low
      in credit path in 2005-06.
     All New Private Bank’s Net NPA on advances is less than 5% in 2005-06, its
      good sign for companies to increase profit.
     New Private Bank’s recorded a growth in advances of 50.3% in 2006 as compare
      to 42.5% of the previous year. When compare to total advances of Old Private
      Bank’s rose from 34.9% to 40.37%. we can say New PSB’s Credit capacity is
      more while compare to Old PSB’s.
     Most banks were able to take advantage of fat profits from treasury operations,
      brought about by the lower interest rates, to make higher provisions for bad debts.
      As a result, out of 7 new Private Bank’s, 2 New Private Bank’s- i.e. HDFC Bank
      Ltd and Kotak Mahindra Bank Ltd’ Net NPA on advances has become less than
      1%. Followed by ICICI Bank Ltd. And UTI Bank Ltd Net NPA on advances are
      less than 2%.
     ICICI is Best Performer in New Private Banks as it providing higher advances by
      taking risk compare to other banks, and is able to its NPA less than 2%.




                              BABASAB PATIL                       -73-
“Non Performing Assets and its impact on Profitability of
            New Private Sector Banks”



                                   Suggestions

 1. Fixing up the budget for profits and recovery rather than for advances. Budget
    oriented approach at times leads to release of credit facilities without ensuring
    compliance of covenants of sanction. A suitable mechanism could be drawn at
    each bank level to provide monetary benefits/ re-organization of the operating
    staff particularly for recovery in NPA’s write-off cases.
 2. Projects with old technology should not be considered for finance.
 3. Up gradation of credit skills of the operating staff working in advance to avoid
    over and under finance.
 4. Timely sanction/ release of loan to avoid time and cost overruns. and also proper
    checking of documents while sanctioning loan are recommended.
 5. It is suggested for possible restructuring of banks through mergers and
    acquisitions to keep themselves competitive in the high credit risk market in
    India.
 6. One of best solution to overcome NPA is OTS ( One Time Settlement), RBI has
    advised all banks to provide a simplified mechanism for one time settlement of
    loans where the principle amount is equal to or less than 25000/- and which have
    become doubtful and loss assets.




                              BABASAB PATIL                     -74-
  “Non Performing Assets and its impact on Profitability of
              New Private Sector Banks”



                                        Conclusion
       An attempt is made in this study to present a comprehensive picture of non-
performing advances of New Private banks in India, touching upon various quantitative
and qualitative trends in the post reform period, besides carrying out with some policy
and strategic implications. Undoubtedly India is one of the few countries where NPA
levels are very high as there is an increase in the percentage of gross advances eroding
their Profit by major basic points, after netting the provision.
       New Private Banks NPA has come down i.e. less than 1%. While compare to old
Private Bank’s whose NPA is more than 5%. It may be because of the proportion of
credit risk among the priority sector advances is double that of non-priority advances
implying the irrationality of (administered) price controls, which still exists in some form.
External factors outweigh the internal factors contributing to this high accumulation of
NPA’s. If the banks have to survive in the competitive and increasingly globalize market
conditions they should be helped both by the RBI and the government in the form of
faster recovery climate, especially for the legal processes of enforcement of contracts.
       The quadrant analysis of credit risk clearly identifies that 7 New Private banks are
comparatively performing well when compare to old selected PSB’s. It also offers scope
for mergers and acquisitions among the banks to be better prepared for high risk credit
marketing in India. And also quadrant analysis helps to identify profitability position of
New Private Banks by using advances provided and Non Performing Assets.
       Unless New Private Banks adopt proper Strategy to prevent huge level of NPA’s,
it go on affecting Profitability of Banks.




                                 BABASAB PATIL                       -75-
“Non Performing Assets and its impact on Profitability of
            New Private Sector Banks”




                           BABASAB PATIL                    -76-
 “Non Performing Assets and its impact on Profitability of
             New Private Sector Banks”




                                Abbreviation used:


IBA: Indian Banking Association
NPA: Non Performing Assets
PB’s: Private Banks
UTI Bank Ltd: Unit Trust of India Bank
ICICI Bank Ltd : Industrial Credit and Investment Corporation of India
HDFC Bank Ltd.: Housing Development Finance Corporation Bank Ltd




                               BABASAB PATIL                      -77-
“Non Performing Assets and its impact on Profitability of
            New Private Sector Banks”




                                Bibliography


    Indian Banking Association (IBA) Bulletin 2005-06
    Websites
        -   www.Indianbankingassociation.com
        -   www.utibank.com
        -   www.Google.com




                           BABASAB PATIL                    -78-

				
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