Docstoc

Non-Performing Assets

Document Sample
Non-Performing Assets Powered By Docstoc
					                   Arayabhatta Institute of
                  Management & Technology
            Seminar Submission for internal assessment requirement of
                      „Seminar on Project Presentation‟
                                      for
                     Master of Business Administration
                   Punjab Technical University Jalandhar


                  Topic: Non-Performing Assets

       Submitted to:                                       Submitted by:
    Mr. Pardeep Kumar                                     Name: Parneet Kaur
(Class In-charge & Lect. Of FM)                           Roll No.:95202239175
Introduction of SBOP
An Associate Bank of the State Bank of India, State Bank
of Patiala (SBP) was established in 1917 by Late
Bhupinder Singh, the Maharaja of Patiala state. SBP
started its operations from one branch called 'Chowk
Fort', in Patiala. During the time of the establishment, the
state owned Bank was known as Patiala State Bank.
            Patiala State Bank was renamed State Bank of
Patiala on 1 April 1960, when it became a wholly owned
undertaking of the Government of Punjab. There are as
many as 750 branches of SBP, spread across the major
cities of India.

                                                               2
Introduction Of OBC
  Established on 19th Feb' 1943 in Lahore, Oriental Bank
 of Commerce (OBC) is one of the public sector banks in
 India. Its modest beginning is creditable to its founder
 Late Rai Bahadur Lala Sohan Lal, the first Chairman of
 the OBC. Within four years of coming into existence, the
 country partitioned, the Bank shifted its Registered Office
 from Lahore to Amritsar. The Oriental Bank of Commerce
 was nationalized on 15th April 1980. The bank has 1,508
 branches.




                                                               3
         Classification of
              Assets




Performing              Non-Performing
  Assets                    Assets


                                         4
DEFINITION OF NPAS
A NPA is a loan or an advance where;
 Interest and/ or installment of principal remain overdue
  for a period of more than 90 days in respect of a term
  loan,
 The account remains “out of order” in respect of an
  overdraft/ cash credit
 The bill remains overdue for a period of more than 90
  days in the case of bills purchased and discounted
 The installment or interest remains overdue for two crop
  seasons in case of short duration crops and for one crop
  season in case of long duration crops



                                                         5
 CATEGORIES OF NPA
Substandard Assets – Which has remained NPA for a
 period less than or equal to 12 months.
Doubtful Assets – Which has remained in the sub-standard
 category for a period of 12 months (mainly up to 3 years).
Loss Assets – where loss has been identified by the bank or
 internal or external auditors or the RBI inspection but the
 amount has not been written off wholly.




                                                           6
 PROVISIONING NORMS
Standard Assets – general provision of a minimum of
 0.25%
Substandard Assets – 10% on total outstanding balance,
 10 % on unsecured exposures identified as sub-standard.
Doubtful Assets – 100% to the extent advance not covered
 by realizable value of security. In case of secured portion,
 provision may be made in the range of 20% to 100%
 depending on the period of asset remaining sub-standard
Loss Assets – 100% of the outstanding



                                                            7
Impact of NPAs upon Banks
 They erode current profits through provisioning requirements.
 They result in reduced interest income.
 They require higher provisioning requirements affecting profits
  and accretion to capital.
 They limit recycling of funds, set in assets-liability
  mismatches, etc.
 Adverse impact on Capital Adequacy Ratio.
 ROE and ROA goes down because NPAs do not earn.
 Bank’s rating gets affected.
 Bank’s cost of raising funds goes up.
 RBI’s approval required for declaration of dividend if Net NPA
  ratio is above 3%.
 Bad effect on Goodwill & equity value.
                                                                    8
Underlying Reasons for NPAs in India
 Internal Factors

 Inefficiency in management
  Slackness in credit management and monitoring
 Lack of co-ordination among lenders.
 Problem of bad credit appraisal.
 Inappropriate Technology/technical problems
  Funds borrowed for a particular purpose but not use for
  the said purpose.
  Project not completed in time.
 Poor recovery of receivables.
                                                             9
Underlying Reasons for NPAs in India
Contd.
 Excess capacities created on non-economic costs.
 In-ability of the corporate to raise capital through the issue of
  equity or other debt instrument from capital markets.
 Business failures.
 Diversion of funds for expansion\modernization\setting up
  new projects\ helping or promoting sister concerns.
 Willful defaults, siphoning of funds, fraud, disputes,
  management disputes, Mis-appropriation etc.,
 Deficiencies on the part of the banks viz. in credit appraisal,
  monitoring and follow-ups, delay in settlement of payments\
  subsidiaries by government bodies etc.,


                                                                      10
Underlying Reasons for NPAs in India
 External Factors
  Recession.
 Input / power shortage
 Price escalation.
 Exchange rate fluctuation
 Accidents and natural calamities,
 Liberalization of Economy/ removal of
  restrictions/reduction of tariffs.
 Sluggish legal system.
  Long legal tangles.
  Changes that had taken place in labour laws

                                                 11
Underlying Reasons for NPAs in India
Contd.
Lack of sincere effort & Industrial recession.
 Scarcity of raw material, labour and other resources.
Shortage of raw material, raw material\input price
 escalation, power shortage, industrial recession, excess
 capacity, natural calamities like floods, accidents.
 Failures, nonpayment\ over dues in other countries,
 recession in other countries, externalization problems,
 adverse exchange rates etc.
Government policies like excise duty changes, Import
 duty changes etc.,
                                                            12
Preventive Measurements for NPA

Early Recognition of the Problem
Identifying Borrowers with Genuine Intent
Timeliness and Adequacy of response
Focus on Cash Flows
Management Effectiveness
Multiple Financing


                                             13
Early Symptoms
Four categories of early symptoms:

Financial.
 Operational and Physical.
Attitudinal Changes.
Others ( death of person , competition in the market etc.)




                                                              14
Sale of NPAs to other Banks
 A NPA is eligible for sale to other banks only if it has remained a
  NPA for at least two years in the books of the selling bank
 The NPA must be held by the purchasing bank at least for a period
  of 15 months before it is sold to other banks but not to bank,
  which originally sold the NPA.
 The NPA may be classified as standard in the books of the
  purchasing bank for a period of 90 days from date of purchase and
  thereafter it would depend on the record of recovery with
  reference to cash flows estimated while purchasing.
 The bank may purchase/ sell NPA only on without recourse basis.
 If the sale is conducted below the net book value, the short fall
  should be debited to P&L account and if it is higher, the excess
  provision will be utilized to meet the loss on account of sale of
  other NPA.

                                                                    15
Measures Initiated by RBI & Govt.
 Compromise Settlement Schemes
 Restructuring / Reschedulement
 Lok Adalat
 Corporate Debt Restructuring Cell
 Debt Recovery Tribunal (DRT)
 Proceedings under the Code of Civil Procedure
 Board for Industrial & Financial Reconstruction (BIFR)/
  AAIFR
 National Company Law Tribunal (NCLT)
 Sale of NPA to other banks
 Sale of NPA to ARC/ SC under Securitization and
  Reconstruction of Financial Assets and Enforcement of
  Security Interest Act 2002 (SRFAESI)
 Liquidation

                                                            16
INTERNATIONAL PRACTICES
Credit Risk Mitigation
Early Warning Systems
Asset Management Companies
out of court restructuring




                              17
  RESEARCH OPERATIONS
Significance of the study
   The main aim behind making this report is to know how SBP is operating its
  business and how NPAs play its role to the operations of the SBP bank. My
  study is also focusing upon existing system in India to solve the problem of
  NPAs and comparative analysis to understand which bank is playing what
  role with concerned to NPAs. Thus, the study would help the decision maker
  to understand the financial performance and growth of the concerned banks
  as compared to the NPAs.

Objective of the study
 To know which is better in terms of NPAs from both the banks
  SBP and OBC banks.
 To understand what is Non Performing Assets and what are the
  underlying reasons for the emergence of the NPAs.
 To understand the impacts of NPAs on the operations of the
  Banks.
                                                                             18
Objectives of the study
To know what steps are being taken by the Indian banking
 sector to reduce the NPAs?
To evaluate the comparative ratios of the SBP & OBC
 banks.
To know why NPAs are the great challenge to Banks.
To understand the meaning & nature of NPAs.
To study the general reasons for assets become NPAs.
What are the methods adopted by the bank to look after
 NPA management

                                                            19
Need For Study
Following Type of need arises for this study:

To study what kind of role NPAs are playing upon the
 operations of the Bank.
To know the variables available to control NPAs.
The need also has been felt to study the financial
 performance of SBP bank.



                                                        20
Scope of the Study
Banks can improve their financial position or can increase
 their income from credits with the help of this project.
This project can be used for comparing the performance of
 the bank with others.
This can also be applicable to know the reasons of
 increase in NPAs.
This project also gives light upon Impact of NPAs.
Concept of NPAs can be made clear.
 To present a picture of movement of NPA in The SBOP
 Bank.

                                                              21
Limitations of the study
The data collected by me was not sufficient for report
 studying.
I haven’t got enough time to study my report so that
 becomes the cause of limitation in the study.
Since my study is based upon Secondary data, the
 practical operations as related to NPAs are adopted by
 the banks are not learned.
The solutions are not applicable to every bank.




                                                          22
Research Methodology
 Research Problem
  As my training is at bank I have got the project upon “Non Performing
  Assets” the great challenge before the banks. This is my problem to be
  studied.

 Research Design
   The research design tells about the mode with which the entire project is
  prepared. My research design for this study is basically analytical. Because I
  have utilized the large number of data of the banking sector. In this project
  theoretical study is also attempted.

 Determining the data source
  The data source can be primary or secondary. The primary data are those
 data which are used for the first time in the study. However such data take
 place much time and are also expensive.

                                                                      Contd.
                                                                               23
Contd.
    Whereas the secondary data are those data which are already available in the
    market these data are easy to search and are not expensive too. For my study
    I have utilized almost totally the secondary data .But somehow I have also
    used primary data in shape of interviews.
    Tools used for analysis of data
    The data collected were analyzed with the help of statistical tools like Ratio
    analysis, and trend analysis. Tables are used to represent the consolidated
    data. Graphical representation is also used for better comprehension &
    presentation
 Analyzing the Data
     The Primary or secondary data both would never be useful until they are
    edited and studied or analyzed. When the person receives the data many
    unuseful data would also be there. So, I analyzed the data and edited it and
    turned it in the useful manner So, that it can become useful in my report
    study.


                                                                                     24
Contd.
Interpretation of the data
  With the use of analyzed data I managed to prepare my project
 report. But analyzing of the data would not help my study to
 reach towards its objectives. The interpretation of the data is
 required so that the others can understand the Crux of the study
 in more simple way without any problem so I have added the
 chapter of analysis that would explain others to understand my
 study in simpler way.


Project Writing
  This is the last step in preparing the project report. The objective of
 the report writing was to report the findings of the study to the
 concerned authorities. And to attach all the requirements with your
 report.


                                                                            25
 Analysis
 Gross NPA Ratio:
                                   Gross NPA
       Gross NPA Ratio =                              *100
                                 Gross Advances

                                   As on March 31, 2009
       Banks                     Gross     Gross Gross NPA
                                 NPAs Advances Ratio (%)
                                   (1)        (2)       (3)
       State Bank of Patiala    57390    4396081
                                                       1.31
       Oriental Bank of
                               105812    6906472
       Commerce                                        1.53


                                                              26
Gross NPA Ratio (Graphic presentation)
                                 Gross NPA Ratio (%)

  1.55

   1.5

  1.45

   1.4                                                 State Bank of Patiala
                              1.53
  1.35
                                                       Oriental Bank of
   1.3                                                 Commerce
  1.25
              1.31
   1.2

                        Oriental Bank of
     State Bank of Patiala
                           Commerce




                                                                               27
Interpretation
Findings

The table above indicates the quality of credit portfolio of
 the banks. High gross NPA ratio indicates the low credit
 portfolio of bank and vice-a-versa.
We can see from the above Chart that the Oriental Bank of
 Commerce has the higher gross NPA ratio of 1.53 % as
 compared to the State Bank of Patiala with 1.31%.




                                                            28
Net NPA Ratio
 Net NPA Ratio :
                                Gross NPA-Provision
            Net NPA Ratio =                           * 100
                           Gross Advances- Provisions


                                       As on March 31, 2009
        Banks                      Net            Net     Net NPA
                                  NPAs      Advances Ratio (%)
                                   (1)        (2)          (3)
        State Bank of Patiala
                                 26363    435872070       0.6
        Oriental Bank of
        Commerce                 44243    63204285        0.7


                                                                    29
Net NPA Ratio (Graphic presentation)
                                  Net NPA Ratio (%)


0.72
 0.7
0.68
0.66
                                                      State Bank of Patiala
0.64
                                       0.7
0.62                                                  Oriental Bank of
 0.6                                                  Commerce
0.58              0.6
0.56
0.54
       State Bank of Patiala   Oriental Bank of
                                 Commerce



                                                                              30
Interpretation

Findings

High NPA ratio indicates the high quantity of risky assets
 in the Banks for which no provision are made.
The OBC bank has the highest NPA ratio of 0.7 % as
 compared to the State Bank of Patiala with 0.6% However
 there is not too much difference.




                                                              31
Provisioning Ratio
 Provision Ratio:
                                   Total Provision
             Provision Ratio =                          * 100
                                    Gross NPAs


           Name of the Bank       Provision Ratio (%)




          State Bank of Patiala         58.34

          Oriental Bank of
          Commerce                      57.90
                                                                32
Provisioning Ratio(Graphic presentation)
                                  Provision Ratio (%)
   58.4   58.34
   58.3

   58.2

   58.1
                                                                   State Bank of
    58                                                            Patiala
                                          57.9
   57.9                                                            Oriental Bank of
                                                                  Commerce
   57.8

   57.7

   57.6
                  State Bank of Patiala      Oriental Bank of Commerce



                                                                                      33
Interpretation
Findings
This Ratio indicates the degree of safety measures adopted
  by the Banks.
It has direct bearing on the profitability, Dividend and
  safety of shareholders’ fund.
If the provision ratio is less, it indicates that the Banks has
  made under provision.
The highest provision ratio is showed by State Bank of
  Patiala with58.34% as compared to OBC with 57.90%.

                                                               34
Problem Asset Ratio
 Problem Asset Ratio:
                                          Gross NPAs
          Problem Asset Ratio =                              * 100
                                          Total Assets
                                          As on March 31, 2009
      Banks                       Gross                      Problem
                                             Total Assets
                                  NPAs                      Asset Ratio
                                   (1)           (2)             (3)
      State Bank of Patiala
                                  57390        69665              0.82

      Oriental Bank of Commerce
                                  105812       112539             0.94

                                                                          35
Problem Asset Ratio(Graphic presentation)

                            Problem Asset Ratio

           100%
            90%
            80%
            70%
            60%
                                                    State Bank of Patiala
            50%      0.82      0.94
            40%
                                                    Oriental Bank of
            30%                                    Commerce
            20%
            10%
             0%
    State Bank of Patiala       Oriental Bank of
                                  Commerce

                                                                            36
Interpretation
Findings

We determine the percentage of assets out of total assets /
 advances that are likely to become the Non- performing
 Assets as problematic assets.
From the above table it becomes clear that Oriental Bank
 of Commerce have high problem Asset Ratio with 0.94%
 as compare to SBOP.
That Ratio implies that the both above banks have the
 highest probability of creating NPA’s in the near future.
 However OBC have more chances of increasing future
 NPAs.
                                                               37
Capital Adequacy Ratio
 Capital Adequacy Ratio:
                                        Capital
        Capital Adequacy Ratio =                          * 100
                                   Risk Weighted Assets


               Name of the Bank   Capital Adequacy
                                  Ratio (%)

              State Bank of             0.60
              Patiala

              Oriental Bank of          0.99
              Commerce
                                                                  38
Capital Adequacy Ratio
              (Graphic presentation)
                           Capital Adequacy Ratio (%)

               1
             0.9
             0.8
             0.7
             0.6                                        State Bank of Patiala
             0.5
             0.4
                                                       Oriental Bank of
             0.3
                                                      Commerce
             0.2
             0.1
               0
   State Bank of Patiala           Oriental Bank of
                                     Commerce

                                                                                39
Interpretation
Findings
The capital adequacy ratio is important for them to
  maintain as per the banking regulations.
Each bank needs to create the capital Reserve to
  compensate the Non Performing Assets.
Each Asset has been given a risk weight age as per RBI
  guidelines
          Risk weighted Asset = Asset * Risk Weight age
  So, More the Risk weighted Assets are, Bank has to
  maintain more capital.
 As far as this ratio is concerned OBC is better than SBOP.

                                                           40
Solutions
Don’t Eliminate – Manage
Effectiveness of ARCs
Well Developed Capital Markets
Contextual Decision Making
Securitization




                                  41
Findings
OBC Bank shows high NPAs Ratio as compare to SBOP
 Bank.
High NPAs Ratio shows low credit portfolio of OBC
 Bank.
In analysis SBOP low risk profile as compare to OBC in
 terms of NPAs.
Study also indicates that major NPA increases because of
 govt. recommended priority sectors.
SBOP has better provisioning as compare to OBC
 however OBC have better capital adequacy ratio than
 SBOP.

                                                            42
Recommendations
 Both the Banks should give stress upon credit appraisal.
 The credit should be backed up by securitization.
 Banks should create effectiveness in Management.
 Credit officer should focus upon cash flow.
 Timely check out should be adopted.
 Both Banks should make good provisioning policy.
 Banks should try their best to recover NPAs.
 The problem should be identified very early so that companies can try their best to
  stop an asset or A/C becoming NPA.
 Banks should evaluate the SWOT analysis of the borrowing companies i.e. how
  they would face the environmental threats and opportunities with the use of their
  strength and weakness, and what will be their possible future growth in concerned to
  financial and operational performance.
 Each bank should have its own independent credit rating agency which should
  evaluate the financial capacity of the borrower before than credit facility.
 The credit rating agency should regularly evaluate the financial condition of the
  clients.
                                                                                        43
Conclusion

Both the bank shows very much high NPA ratios.
NPAs represent high level of risk & low level of credit
 appraisal.
There are so many preventive measures available those
 can be adopted to stop an Asset or A/C becoming NPA.
There are some certain guidelines made by RBI for NPAs
 which are adopted by banks.
SBOP is better in all terms than OBC instead of capital
 Adequacy.

                                                           44
45
46

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:463
posted:4/8/2011
language:English
pages:46