Non performing assets (comparing SBOP with OBC)

1. 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

2. 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

3. 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

4. 4 Classification of Assets Performing Assets Non-Performing Assets

6. The account remains “out of order” in respect of an overdraft/ cash credit

7. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted

8. 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

10. Doubtful Assets – Which has remained in the sub-standard category for a period of 12 months (mainly up to 3 years).

11. 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

13. Substandard Assets – 10% on total outstanding balance, 10 % on unsecured exposures identified as sub-standard.

14. 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

15. Loss Assets – 100% of the outstanding7

17. They result in reduced interest income.

18. They require higher provisioning requirements affecting profits and accretion to capital.

19. They limit recycling of funds, set in assets-liability mismatches, etc.

20. Adverse impact on Capital Adequacy Ratio.

21. ROE and ROA goes down because NPAs do not earn.

22. Bank’s rating gets affected.

23. Bank’s cost of raising funds goes up.

24. RBI’s approval required for declaration of dividend if Net NPA ratio is above 3%.

25. Bad effect on Goodwill & equity value.8

27. Slackness in credit management and monitoring

28. Lack of co-ordination among lenders.

29. Problem of bad credit appraisal.

30. Inappropriate Technology/technical problems

31. Funds borrowed for a particular purpose but not use for the said purpose.

32. Project not completed in time.

33. Poor recovery of receivables. 9

35. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets.

36. Business failures.

37. Diversion of funds for expansionodernizationetting up new projectshelping or promoting sister concerns.

38. Willful defaults, siphoning of funds, fraud, disputes, management disputes, Mis-appropriation etc.,

39. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of paymentssubsidiaries by government bodies etc.,10

41. Input / power shortage

42. Price escalation.

43. Exchange rate fluctuation

44. Accidents and natural calamities,

45. Liberalization of Economy/ removal of restrictions/reduction of tariffs.

46. Sluggish legal system.

47. Long legal tangles.

48. Changes that had taken place in labour laws 11

50. Scarcity of raw material, labour and other resources.

51. Shortage of raw material, raw materialnput price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents.

52. Failures, nonpaymentover dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc.

53. Government policies like excise duty changes, Import duty changes etc.,12

55. Identifying Borrowers with Genuine Intent

56. Timeliness and Adequacy of response

57. Focus on Cash Flows

58. Management Effectiveness

59. Multiple Financing13

61. Operational and Physical.

62. Attitudinal Changes.

63. Others ( death of person , competition in the market etc.)14

65. 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.

66. 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.

67. The bank may purchase/ sell NPA only on without recourse basis.

68. 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

70. Restructuring / Reschedulement

71. Lok Adalat

72. Corporate Debt Restructuring Cell

73. Debt Recovery Tribunal (DRT)

74. Proceedings under the Code of Civil Procedure

75. Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR

76. National Company Law Tribunal (NCLT)

77. Sale of NPA to other banks

78. Sale of NPA to ARC/ SC under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SRFAESI)

79. Liquidation16

81. Early Warning Systems

82. Asset Management Companies

83. out of court restructuring 17

85. To understand the impacts of NPAs on the operations of the Banks.18

87. To evaluate the comparative ratios of the SBP & OBC banks.

88. To know why NPAs are the great challenge to Banks.

89. To understand the meaning & nature of NPAs.

90. To study the general reasons for assets become NPAs.

91. What are the methods adopted by the bank to look after NPA management19

93. To know the variables available to control NPAs.

94. The need also has been felt to study the financial performance of SBP bank. 20

96. This project can be used for comparing the performance of the bank with others.

97. This can also be applicable to know the reasons of increase in NPAs.

98. This project also gives light upon Impact of NPAs.

99. Concept of NPAs can be made clear.

100. To present a picture of movement of NPA in The SBOP Bank.21

102. I haven’t got enough time to study my report so that becomes the cause of limitation in the study.

103. Since my study is based upon Secondary data, the practical operations as related to NPAs are adopted by the banks are not learned.

104. The solutions are not applicable to every bank. 22

109. Gross NPA Ratio (Graphic presentation) 27

111. 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

113. Net NPA Ratio (Graphic presentation) 30

115. 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. Interpretation 31

117. Provisioning Ratio(Graphic presentation) 33

119. It has direct bearing on the profitability, Dividend and safety of shareholders’ fund.

120. If the provision ratio is less, it indicates that the Banks has made under provision.

121. The highest provision ratio is showed by State Bank of Patiala with58.34% as compared to OBC with 57.90%. Interpretation 34

123. Problem Asset Ratio(Graphic presentation) 36

125. From the above table it becomes clear that Oriental Bank of Commerce have high problem Asset Ratio with 0.94% as compare to SBOP.

126. 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

128. Capital Adequacy Ratio (Graphic presentation) 39

130. Each bank needs to create the capital Reserve to compensate the Non Performing Assets.

133. Effectiveness of ARCs

134. Well Developed Capital Markets

135. Contextual Decision Making

136. Securitization 41

138. High NPAs Ratio shows low credit portfolio of OBC Bank.

139. In analysis SBOP low risk profile as compare to OBC in terms of NPAs.

140. Study also indicates that major NPA increases because of govt. recommended priority sectors.

141. SBOP has better provisioning as compare to OBC however OBC have better capital adequacy ratio than SBOP.42

143. The credit should be backed up by securitization.

144. Banks should create effectiveness in Management.

145. Credit officer should focus upon cash flow.

146. Timely check out should be adopted.

147. Both Banks should make good provisioning policy.

148. Banks should try their best to recover NPAs.

149. The problem should be identified very early so that companies can try their best to stop an asset or A/C becoming NPA.

150. 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.

151. Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility.

152. The credit rating agency should regularly evaluate the financial condition of the clients. 43

154. NPAs represent high level of risk & low level of credit appraisal.

155. There are so many preventive measures available those can be adopted to stop an Asset or A/C becoming NPA.

156. There are some certain guidelines made by RBI for NPAs which are adopted by banks.

157. SBOP is better in all terms than OBC instead of capital Adequacy.44

158. 45

159. 46