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Final Project on NPA Management 2010

Text of npa management




SAHIL B MULLA NCRDSSTERLING INSTITUTE OF MANAGEMENT STUDIESSector - 19, Near Seawoods Dara ve Petrol Pump, Nerul (E), Navi Mumbai - 400 706

NCRDs Sterling Institute of Management Studies



Date :5th APRIL 2010

CERTIFICATEThis is to certify that Mr. SAHIL B MULLA, Roll No. 91 is a bonafide student studying for MMS Course of the University of Mumbai in this institute for the year 2009-10. As a part of the University curriculum he has completed a Final Project titled A study of NPA Management under the guidance of Prof. Sonali Athawale.

Prof. Sonali Athawale Faculty Guide

Prof. Anjan Kumar Maiti Director

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NPA MANAGEMENT 2010 ACKNOWLEDGEMENT This is to express my earnest gratitude and extreme joy at being bestowed with an opportunity to get an opportunity to get an interesting and informative project. It is impossible to thank all the people who have helped me in completion of project, but I would avail this opportunity to express my profound gratitude and indebtness to the following people for all the help they have given me.

I am extremely grateful to my project guide and co-coordinator Prof. Sonali Athawale who has given an opportunity to work on such an interesting project. She proved to be a constant source of inspiration to me and provided constructive comments on how to make this project better. Credit also goes to my friends whose constant encouragement let me in good stead. Lastly, I would thank our Director Mr. Anjan Maiti and all my faculties for providing all explicit and implicit support to me during the course of my project. I would also like to thank the staff of Bank of India for providing me few but very valuable details about my project.

Name: Sahil B Mulla MMS (FINANCE)

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After liberalization the Indian banking sector developed very appreciate. The RBI also nationalized good amount of commercial banks proving socio economic services to the people of the nation. The public Sector banks have shown very good performance as far as the financial operations are concerned. The total income of the public sector banks has also shown good performance since the last few years. The public sector Banks have also shown comparatively good result. The gross profits and the net profits of the Public Sector banks have been on a high from past few years. The private sector banks are also showing good results in case of profits. However, the only problem of the Scheduled Commercial Banks these days are the increasing level of the non performing assets. The Non-Performing Assets (NPAs) problem is one of the foremost and the most formidable problems that have shaken the entire banking industry in India like an earthquake. Like a canker worm, it has been eating the banking system from within, since long. It has grown like a cancer and has infected every limb of the banking system.

At macro level, NPAs have choked off the supply line of credit to the potential borrowers, thereby having a deleterious effect on capital formation and arresting the economic activity in the country. At the micro level, the unsustainable level of NPAs has eroded the profitability of banks through reduced interest income and provisioning requirements, besides restricting the recycling of funds leading to serious asset liability mismatches. The problem of NPAs is not a matter of concern for the lenders alone. It is a matter of grave concern to the public as well, as bank credit is the catalyst to the economic growth of the country and any bottleneck in the smooth flow of credit, one cause for which is mounting NPAs, is bound to create adverse repercussions in the economy. Mounting menace of NPA has raised the cost of credit, made banks more adverse to risk and squeezed genuine small and medium enterprise from accessing competitive credit and has throttled their enterprising spirits as well.

The spiraling and the devastating effect of NPA on the economy have made the problem of NPA as issue of public debate and of national priority. Therefore, any measure or reform on this front would be inadequate and incomprehensive, if it fails to make a dent in NPA reduction and stall their growth in future, as well. NCRDs Sterling Institute of Management Studies 4

NPA MANAGEMENT 2010 NPAs have deleterious effect on the return on assets in several ways: --(1) They erode current profits through provisioning requirements (2) They result in reduced interest income (3) They require higher providing requirements affecting profits and accretion to Capital funds recycling of funds, set in asset-liability mismatches, etc.

The RBI has also tried to develop many schemes and tools to reduce the non Performing assets the results are not up to the expectations. To improve NPAs each bank should be motivated to introduce their own precautionary steps. Before lending the banks must evaluate the feasible financial and operational prospective results of the borrowing companies by keeping in Considerations the overall impacts all the factors that influence the business.

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IndexSr.No.1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.


Page No.07 09 12 14 15 16 18 42 56 67 69 71 72

Profile of the organization Literature Review Objectives of the Study Hypotheses Methodology Conceptual Framework NPA Management Policy of Bank of India Data Collection and Analysis Conclusion Suggestions and Recommendations Bibliography Annexure

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INTRODUCTION In human life, sickness, bankruptcy and death are not welcome, but they do occur. So is the case with advances, which fall sick, go into liquidation and die much against the wishes of all concerned. Realities cannot be escaped. It is necessary to face them. In the context of non-performing assets the situation is no different. The frequent references to non-performing assets primarily concern sick industrial units and mounting over dues in all other sectors of advances, particularly in agriculture. Financial assets become non-performing primarily because of the failure of the units financed by banks. The costs of managing non-performing assets are exorbitant. Bankers are compelled to get bogged down with these matters thereby neglecting their role as a developing catalyst.

NATURE OF NON-PERFORMING ASSETS The term non-performing assets can be defined both in the wider and in the narrower sense. While in the narrow sense it includes only non-performing credit portfolio, in the wider sense it may also include the volume of unutilized cash balances, unutilized or underutilized physical assets like buildings and premises in the still wider sense, it may also include nonperforming human resources a large volume of workforce not effectively unutilized. A non-performing asset in the banking sector also is termed as an asset not contributing to the income of the Bank. In other words they are the zero yielding assets that are considered. The non-performing assets, interalia, includes surplus cash and bankers balances hold over the optimal levels, amounts lying in the suspense account, investments in shares or debentures and other securities not yielding any dividend or interest, advances where interest is not forthcoming and even the principal amount is difficult to recover. In terms of Health code basis, we may say that advances classified under the Health Code Numbers 6,7,8 and those advances under the Health Code Numbers 4,5 on which no interest is being charged, may be classified among nonperforming assets.

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NPA MANAGEMENT 2010 REASONS FOR ACCUMULATION OF NON-PERFORMING ASSETS: There may be various internal and external factors behind the transformation of an asset from a performing one to a non-performing one. Some of the reasons for accumulation of the non-performing assets are: The fast and rapid geographical expansion of the banking sector during a short span, throughout the country, and our inability to cope with the voluminous work in an orderly manner. Lack of adequate care while appraising the various proposals in the initial stage. Inadequacy of the technical staff equipped with the latest market information and the technological developments is also an important factor in faulty appraisal of proposals. In case of most of the large and medium scale industries, the main reason for sickness has been found to be mismanagement. Power shortages, outdated machinery, fluctuations in supply of raw materials due to various causes, non-release of subsidy in time and deficiency in demand are also important reasons. Small scale industries are prone to sickness mainly due to lack of managerial experience, technical incompetence and decline in demand for their products and overall demand recession. Further cases are not unknown where deliberate efforts are made by a certain category of borrowers to declare their units sick, or weak to avail of benefits from different sources.

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Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it wa