Term Paper of Banking and Insurance

8/8/2019 Term Paper of Banking and Insurance

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TERM PAPER

OF

BANKING AND INSURANCE

Topic: - Comparative analysis of NPA & its management techniques of a Private sector Bank with a

Public sector Bank .

Submitted to: - Submitted by

Miss Razia shadev Biswajit Singh (Q1809A15)

Prince Lawrence (Q1809A16)

Nitish Arora (Q1809A )



This is to Certify that Mr. Nitish

Arora ,Biswajeet,Prince

Has submitted their term paper

of Banking and Insurance. They

have completed it wonderfully

under the guidance of his

teacher.



Signatory:-

(Razia Shadev)

Acknowledgeme

nt

We are very grateful that we

have completed our Term Paper

on banking and Insurance. We



offer our appreciation to my

teacher for guiding me on thetopic related to my term paper,

which we are able to finish with

satisfaction.

(Nitish Arora)

(Vishvajeet)

(Prince Lawrence)

Student of

BBA (H),

Lovely Professional

University



Comparative analysis of NPA & its management

techniques of a Private sector Bank with a Public

sector Bank .

INTRODUCTION

Abstract

The Indian commercial banking sector is characterised by both a high average non-performing share in

total bank advances and a high dispersion between banks. This paper presents the findings of a formal

attempt to explain inter-bank variations in NPAs for the year 1996-97. The specification tests for the

impact of region of operation on domestically-owned banks, as measured by percentage branches in each

of a set of state clusters. One cluster of three eastern and seven north-eastern states carries a robust and

statistically significant positive coefficient; another cluster of the southern and some of the northern states

carries a significantly negative coefficient. These findings bear out those of Demirguc-Kunt and Huizinga

on the significance of the operating environment for bank efficiency. No sustainable improvement in the

performing efficiency of domestic banks is possible without prior improvement in the enforcement

environment in difficult regions of the country. Another finding of some importance is that it is not

foreign ownership in and of itself so much as the banking efficiency and technology correlates of the

country of origin of the foreign bank which determine NPA performance in the Indian environment.

Private sector banks’ average return on assets (RoA) is higher compared to that of nationalised banks and

SBI & associated banks during 2009-10.

The net non performing assets (NPA) ratio is higher for SBI & associated banks compared to nationalised

and private sector banks said a RBI study on the RoA of private sector banks, nationalised banks and SBI

& associated banks during 2009-10.

ROA is an indicator of how profitable a bank is relative to its total assets.



RoA of nationalised banks decreased from 1.03% in 2008-09 to 1.00% in 2009-10, but the net NPA ratio

increased from 0.68% to 0.91% in the same period. For SBI and associate group, RoA also decreased from

1.02% to 0.91% during 2009-10 while the net NPA ratio of the SBI group increased from 1.45% to 1.50%

The highest decrease in the RoA was in the case of Bank Of India, it decreased from 1.49% in 2008-09 to

0.70% in 2009-10. This decline is due to lower profit performance of bank. During 2009-10, Bank Of

India posted net profit of Rs 1,741 crore compared to Rs 3,007 crore during 2008-09. Decline in profit was

due to pressure on margin on account of high cost of deposits and slow growth in other income.

For Dena Bank, the RoA decrease from 1.02% in 2008-09 to 1.01% in 2009-10. In SBI & Associates

group, SBI had a ROA of 1.04% in 2008-09 which declined to 0.88% by 2009-10.

But the net NPA ratio of SBI decreased from 1.79% in 2008-09to 1.72% in 2009-10 .

On the other hand, average RoA of private banks increased from 1.12% in 2008-09 to 1.28% during 2009-

10. Highest increase in RoA was seen in the case of IndusInd Bank followed by ICICI Bank during 2009-

10. The RoA of ICICI Bank increased from 0.98% in 2008-09 to 1.13% in 2009-10. The net NPA ratio of

private banks decreased from 1.30% in 2008-09 to 1.03% in 2009-10. And the net NPA ratio of ICICI

Bank marginally increased from 2.09% to 2.12%.

In 2008-09, Axis Bank had a RoA of 1.44% while Dhanlaxmi Bank and ING Vysya Bank have RoA of

1.21% and 0.70%, respectively. But in 2009-10, Axis Bank had the highest RoA of 1.67% while ING

Vysya Bank and Dhanlaxmi Bank have RoA of 0.80% and 0.35%, respectively

NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR



BANKS

OBJECTIVES OF THE STUDY

Primary Objectives:

•To evaluate Gross NPA and Net NPA in different banks.

•To study the past trends of NPA.

Secondary Objectives:

•To calculate the weighted of NPA in risk management in Banking

•To analyze financial performance of banks at different level of

RESEARCH METHODOLOGY

•In this project Descriptive research methodologies were use.

•At the first stage theoretical study is attempted.

•At the second stage Historical study is attempted.

•At the Third stage Comparative study of NPA is undertaken.

Sampling Methods



•To prepare this Project we have taken five banks from public sector as well as

five banks from private sector.

Limitations of the study

•Since the Indian banking sector is so wide so it was not possible for me to

cover all the banks of the Indian banking sector.

CATEGORIES OF NPAs

•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?

•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.

Provisional norms:



Asset

Classification

Provision requirements

Standard assets (a) direct advances to agricultural & SME sectors at 0.25

per cent;

(b) residential housing loans beyond Rs. 20 lakh at 1 per

cent;

(c) advances to specific sectors, i.e., personal loans

(including credit card

receivables), loans and advances qualifying as Capital

Market exposures,

Commercial Real Estate loans etc. at 2 per cent

(d) all other advances not included in (a), (b) and (c) above,

at 0.40 percent

Substandardassets

10 per cent of the total out standings for substandard assets.

Doubtful assets 20% - 50% of the secured portion depending on the age of

NPA, and 100% of the unsecured portion.

Loss assets It may be either written off or fully provided by the bank.

The entire asset should be written off.

FACTORS FOR RISE IN NPAs

EXTERNAL FACTORS:-



–Ineffective recovery tribunal

–Natural calamities

–Industrial sickness

INTERNAL FACTORS

–Inappropriate technology

–Poor credit appraisal system

–Absence of regular industrial visit

Types of NPA

[A] Gross NPA:-

•Gross NPA reflects the quality of the loans made by banks.

It consists of all the non-standard assets like as sub-standard,

doubtful, and loss assets. It can be calculated with the help of

following ratio:

•Gross NPAs Ratio = Gross NPAs / Gross Advances

[B] Net NPA:-



•Net NPAs are those type of NPAs in which the bank has deducted

the provision regarding NPAs. It can be calculated by following

•Net NPAs = Gross NPAs – Provisions

Gross Advances - Provisions

Impact of NPA

•Profitability

•Liquidity

•Involvement of management

•Credit loss

ANALYSIS DATA ANALYSIS AND

INTERPRETATION



Gross NPA and Net NPA Of different Public Sector banks in the year 2007-08

BANKS Gross NPA Net NPABANK OF BRODA 1.10 0.27

BANK OF INDIA 1.08 0.33

DENA 1.48 0.56

PUNJAB NATIONAL BANK 1.67 0.38

UBI 1.34 0.10

Gross NPA and Net NPA Of different Private Sector banks in the year 2007-08

BANKS GROSS NPA NET NPA

AXIS 0.45 0.23

HDFC 0.65 0.22

ICICI 1.90 0.87

KOTAK 1.55 0.98

INDUSIND 1.69 1.25

Comparison of GROSS NPA with Public and Private sectors banks for the year

2007-08

Comparison of GROSS NPA with all banks for the year 2007-08. The growing NPAs affect the health of

banks, profitability and efficiency. In the long run, it eats up the net worth of the banks. We can say that



NPA is not a healthy sign for financial institutions. Here we take all the ten banks gross NPA together for

better understanding. Average of these ten banks gross NPAs is 1.29 as percentage of total assets. So if

we compare in private sector banks AXIS and HDFC Bank are below average of all banks and in public

sector BOB and BOI. Average of these five private sector banks gross NPA is 1.25 and average of public

sector banks is 1.33. Which is higher in compare of private sector banks.

COMPARISON OF NET NPA WITH PUBLIC AND PRIVATE SECTORS BANKS FOR

THE YEAR 2007-08

Comparison of NET NPA with all banks for the year 2007-08. Average of these ten bank’s net NPA is

0.56. And in the public sector banks all these five banks are below this. But in private sector banks there

are three banks are above average. The difference between private and public banks average is also vast.

Private sector banks net NPA average is 0.71 and in public sector banks it is 0.41 as percentage of total

assets. As we know that net NPA shows actual burden of banks. IndusInd bank has highest net NPA

figure and HDFC Bank has lowest in comparison.

Performance measurement of Banks -NPA analysis & credentials of

Parameters

Over the last few years Indian Banking, in its attempt to integrate itself with the global banking has been

facing lots of hurdles in its way due to its inherent weaknesses, despite its high sounding claims and lofty

achievements. In a developing country like ours, banking is seen as an important instrument of

development, while with the strenuous NPAs, banks have become helpless burden on the economy.

Looking to the changing scenario at the world level, the problem becomes more ironical because Indian

banking, cannot afford to remain unresponsive to the global requirements. The banks are, however, aware

of the grim situation and are trying their level best to reduce the NPAs ever since the regulatory authorities



i.e., Reserve Bank of India and the Government of India are seriously chasing up the issue. Banks are

exposed to credit risk, liquidity risk, interest risk, market risk, operational risk and management/ownership

risk. It is the credit risk which stands out as the most dreaded one. Though often associated with lending,

credit risk arises whenever a party enters into an obligation to make payment or deliver value to the bank.

The nature and extent of credit risk, therefore, depend on the quality of loan assets and soundness of

investments. Based on the income, expenditure, net interest income, NPAs and capital adequacy one can

comment on the profitability and the long run sustenance of the bank. Further, a comparative study on the

performance of various banks can be done using a ratio analysis of these parameters. There are a number

of ratios that can be used to comment on the different aspects :

The essential ratios that can be used for assessing the banks' profitability and sustenance are

Profitability

Intermediation Costs/Total Assets

Assets

Net Interest Income/Total Assets

Other Income/Total Assets

Asset Quality

NPAs/Total Assets

NPAs/Advances

Staff Productivity

Net Profit/ Total Number of Employee

Sustenance

Capital/RWAs



For commenting on the Bank's performance, a comparison to the total assets of the bank will give a true

picture.

Controlled Expenses

The intermediation costs of a bank refer to the operating cost of the bank and include all the

administration and operational costs incurred while offering its services. The ratio of the intermediation

costs of the bank to the total assets should be kept low to ensure greater profitability. As mentioned

earlier, a technology savvy bank will always be in a better position to reduce its operating costs. Consider

the operating expenses of the various banking sectors and the industry average for the year 1999-2000.

The costs for the entire SCBs rose by 9.1 percent. The maximum rise of 25.1 percent has been witnessed

in the new private sector banks while the foreign banks experienced a decline in the operating costs by 3.3

percent. The ratio of the intermediation costs to the total assets indicates a decline. The maximum decline

was in the case of new private sector banks and the foreign banks.

Margins - Lowered by Subdued Interest Rates

The ratio of the net interest income (Spread) to the total assets gives the net interest margin of the bank.

This ratio is the actual measure of the bank's performance as an intermediary, as it examines the bank's

ability in mobilizing lower cost funds and investing them at a reasonably higher interest. By borrowing

short and lending long, banks can earn higher spreads nevertheless by doing so they will be exposed to

greater risks. Hence banks need to be cautious and should not accept risks beyond their ability to

control/manage them. Product innovation using the right technology is one approach, which can be

followed by the banks to mobilize cheaper funds.

Asset Quality - NPA burden lowering

The asset quality of the banks can be examined by considering the NPAs. These NPAs should be

considered against not just total assets but also against the advances, cause the NPAs primarily arise.

When NPAs arise, banks have to make provision for the same as per the regulatory prescriptions. When

the provisions are adjusted against the Gross NPAs it gives rise to the net NPAs. Provisions reduce the

risk exposure arising due to the NPAs to a reasonable extent as they ensure that the banks sustain the

possible loss arising from these assets.



Capital Adequacy Ratio-Strengthening Further

The one important parameter that essentially relates to the bank's ability to sustain the losses due to risk

exposures is the bank's capital. The intermediation activity exposes the bank to a variety of risks. Cases of

big banks collapsing due to their bank's inability to sustain the risk exposures is readily available.

Considering this, it is highly essential to examine the capital vis-à-vis the risk weighted assets. This is the

Capital to Risk Weighted Assets Ratio (CRAR) as given by the Basle Committee. The statutory

prescription for CRAR is 9 percent, which has been well surpassed by most banks.

LIST of Ratios for Analysis of Performance of Banks

1. Profitability Ratios

• Interest Expenses/Total Income

• Non-Interest Expenses/Total Income

• Non-Interest Income/ Non-Interest Expenses

• Interest Income/ Total Assets

• Interest Expenses/ Total Assets

• Net Interest Margin (NIM) = NII/ Total Assets

• Profit Margin = Net Profit/ Total Income

• Asset Utilization = Total Income/Total Assets

• Equity Multiplier = Total Assets/ Equity

• Return on Assets = Net Profit/ Total Assets

• Return on Equity = Net Profit/ Equity

Sustenance:

• Capital to Risk Weighted Assets (CRAR) = Total Capital/ (RWAs)

• Core CRAR = Tier I Capital / RWAs



• Adjusted CRAR = (Total Capital - Net NPAs)/(RWAs - Net NPAs)

Staff Productivity

• Net Total Income/ Number of Employees

• Profit per Employee = Net Profit/Number of Employees

• Business per Employee = (Advances + Deposits)/Number of Employees

• Break-even Volume of Incremental Cost per Employee = Cost per Employee/ NIM

1. Asset Quality

• Gross NPAs/ Gross Advances

• Gross NPAs/Total Assets

• Net NPAs/ Net Advances

• Net NPAs/ Total Assets

• Provisions for loan losses/Gross Advances

• Incremental RWAs/ Incremental Total Assets

1. Total Assets

• Provisions for loans and investments/Total Assets

(RWA = Risk Weighted Assets)

Concepts used in the ratios are as follows:

1. Cash in cash-deposit ratio includes cash in hand and balances with RBI.

2. Investments in investment-deposit ratio represent total investments including investments in non-

SLR Securities.



3. Net interest margin is defined as the total interest earned less total interest paid.

4. Intermediation cost is defined as total operating expenses.

5. Wage bills is defined as payments to and provisions for employees (PPE).

6. Operating profit is defined as total earnings less total expenses, excluding provisions and

Contingencies.

7. Burden is defined as the total non-interest expenses less total non-interest income.

Definitions of the ratios are as follows:

1. Cash-Deposit ratio = (Cash in hand + Balances with RBI) / Deposits

2. Ratio of secured advances to total advances = (Advances secured by tangible assets + Advances

Covered by bank or Govt. guarantees) / Advances

3. Ratio of interest income to total assets = Interest earned / Total assets

4. Ratio of net interest margin to total assets = (Interest earned - Interest paid) / Total assets

5. Ratio of non-interest income to total assets = other income / Total assets

6. Ratio of intermediation cost to total assets = Operating expenses / Total assets

7. Ratio of wage bill to intermediation costs (Operating Expenses) = PPE / Operating Expenses

8. Ratio of wage bill to total expenses = PPE / Total expenses

9. Ratio of wage bill to total income = PPE / Total income

10. Ratio of burden to total assets = (Operating expenses - Other income) / Total assets.

11. Ratio of burden to interest income = (Operating expenses - Other income) / Interest income

12. Ratio of operating profits to total assets = Operating profit / Total assets



13. Return on assets = Net Profit / Total Assets

14. Return on Equity = Net Profit / (Capital + Reserves and Surplus)

15. Cost of Deposits = IPD / Deposits

16. Cost of Borrowings = IPB / Borrowings

17. Cost of Funds = (IPD + IPB) / (Deposits + Borrowings)

18. Return on Advances = IEA / Advances

19. Return on Investments = IEI / Investments

20. Return on Advances adjusted to Cost of Funds = Return on Advances – Cost of Funds

21. Return on Investment adjusted to Cost of Funds = Return on Investments – Cost of Funds

On the basis of these parameters try to compile a comparative assessment as under:

1. All Commercial Banks (or the Banking system)

2. Public Sector Banks

3. Old Private Sector Banks

4. New Private Sector Banks

5. Foreign Banks

This will indicate the comparative performance of your bank in relation to each group and the banking

system as a whole. But if one prepare the comparative statistics for the bank for the last three years, it

will also indicate the direction in which the bank is progressing.



Compare the Performance of the Three Major Public and

Private Sector Banks.

QPAC is a 360-degree analysis i.e. economy, business and financial analysis of a sector following the E-I-

C framework. It provides the major highlights of the industry in the quarter and also provides the global

and Indian scenario of the banking industry analyzing industry trends in the quarter and against the quarter

of the previous year. It presents the outlook of the industry. QPAC makes a comparative analysis of the

three major public sector banks and three major private sector banks separately. Private sector banks have

been analysed on the parameters like operational performance (operating profit margin, Net NPA),

financial performance (profit after tax PAT, net interest margin, capital adequacy ratio CAR) and stock

performance while the Public sector banks have been analysed on the parameters like operational

performance (operational profit vs OPM, segmented income, provisioning vs net income) , financial

performance (net profit vs net profit margin, CAR) and the stock performance. QPAC provides the

company analysis of the major players in question along with the projections for the coming quarters, year

as a whole and the next year with the Industry aggregate.

Early symptoms by which one can

recognize a performing asset turning in

to Non-performing asset

Four categories of early symptoms:-

---------------------------------------------------

( 1 ) Financial:



• Non-payment of the very first installment in case of term loan.

• Bouncing of cheque due to insufficient balance in the accounts.

• Irregularity in installment.

•

Irregularity of operations in the accounts.• Unpaid over due bills.

• Declining Current Ratio.

• Payment which does not cover the interest and principal amount of\that installment.

While monitoring the accounts it is found that partial amount isdiverted to sister concern or parent

company.

( 2 ) Operational and Physical:• If information is received that the borrower has either initiated theprocess of winding up or are not

doing the business.

• Overdue receivables.

• Stock statement not submitted on time.

• External non-controllable factor like natural calamities in the citywhere borrower conduct his

business.

•Frequent changes in plan.

• Non payment of wages.

( 3 ) Attitudinal Changes:

Use for personal comfort, stocks and shares by borrower.

Avoidance of contact with bank.

Problem between partners.

(4 ) Others:

• Changes in Government policies.

• Death of borrower.

• Competition in the market.



Suggestions

Availability of historical data:-

Availability of historical data is paramount of important in

preparation of a credit proposal. So banks should have historical

data base to extract past records as and when required.

Market Intelligence system:-

MIS information should be available for various reasons when taking credit decisions. Ex: To rate a

customer, to extract performance ratios

Speedy legal actions:-

When all possible attempts for recovery is failed only option is to proceed with legal action and this

should be speedy otherwise this will be costly.

Rewarding staff



Introducing a staff rewarding/incentive scheme will also support in reducing NPAs. It should be noted

rewarding staff will be less costly rather than sending

Risk management skills: The existence of bad loans is not a problem in itself as bad loans are inevitable

when banks provide firms with credit. The main issue here is whether Japanese financial institutions have

practiced adequate risk management. It cannot be denied that banks have been slow to develop adequate

risk management policies. Not all loans to Japanese industries or companies have become non-

performing; only some companies in certain industries, notably construction, real estate, retail and service,

are seriously in debt. If the market mechanisms already in place had functioned effectively, those

companies would have been eliminated at the microeconomic level and the industrial structure would have

changed at the macroeconomic level. Thus, the financial intermediary system would have accelerated the

changes in industry structure by transferring money from low productivity to high productivity sectors.

The fact that loans continue to go \bad today seems to indicate that financial institutions practice

insufficient risk management and that their market discipline is weak.

2) Corporate governance is weak.

Loans continue to go bad, and this would suggest that in the area of risk management Japanese financial

institutions, which rely on official “Financial Inspection Manuals” issued by the Financial Services

Agency (FSA), still follow the “me-too strategy” that was prevalent in the convoy system era. In the past,

weak corporate governance has caused the market to distrust financial institutions. To rebuild market

confidence, banks must demonstrate their total commitment to the elimination of bad loans in their

management statements and disclose information accordingly.

3) Information on real estate prices, which is needed to evaluate the financial risks involved in lending

when real estate is used as collateral, is insufficient.

As the bad loan problem was in part caused by the sharp decline in land prices resulting from the bursting

of the bubble economy,



- ii - financial institutions should reexamine their evaluation scheme for real estate collateral and try to

evaluate it even more rigorously than prescribed by the FSA manuals. Also, the government must

facilitate the appropriate disclosure of information on real estate transaction

prices, so that financial institutions can address the risks that may arise from the sale of real estate used as

collateral.

.. Government as a market enhancer: The government should enhance the market when the financial

system is moving from bilateral to market-based finance. Not only should it deal with the final resolution

of bad loans, but after examining the overall financial and structural adjustment implications, it should

also develop a transition program and implement it appropriately and responsibly. The government’s role

as a market enhancer requires it to create a system that will mobilize the related branches of government,

and reinforce research.

Following the collapse of the bubble economy, many stakeholders, including banks, corporations, and the

government, made efforts to reconstruct companies, industries and the economy as a whole. It could be

argued, however, that these efforts were “backward-looking” and did nothing to remedy the current

situation. What is needed now is to push forward and implement change through structural reform while

enhancing growth prospects. Government policy should support “forward-looking” initiatives and win

back both market confidence and the nation’s trust.

NPA write-off by new private banks up four-fold

New private banks' bad loans write-off grew four-fold in the last three years.

On the other hand, old private banks' bad loans write-off had tripled in the last three financial years, data

available with the Finance Ministry showed.In absolute terms, new private banks' bad loans write-off for

2009-10 stood at Rs 6,696 crore, a more than four-fold increase over Rs 1,581 crore in 2007-08.

In the case of old private banks, the bad loan write-off in 2009-10 stood at Rs 1,331 crore, nearly a three-

fold increase over Rs 453 crore in 2007-08.



Even as private banks' bad loan write-offs saw significant rise over the last three years, the same does not

hold true for public sector banks (PSBs).

PSBs' bad loan write-offs grew 37 per cent to Rs 10,040 crore in 2009-10 from a level of Rs 7,347 crore in

2007-08, official data showed.

More NPAs

Finance Ministry expects the gross NPA levels of PSBs to go up substantially in the current fiscal because

many restructured accounts of previous years may turn into NPAs this fiscal.

Meanwhile, the gross NPA level of new private sector banks increased to Rs 13,772 crore in end March

2010 from a level of Rs 10,419 crore in end March 2008. The gross NPAs of old private sector banksstood at Rs 3,612 crore in end March 2010, higher than the level of Rs 2,557 crore in end March 2008.

The gross NPA level of PSBs stood at Rs 57,301 crore as of end March 2010, much higher than the level

of Rs 39,749 crore in end March 2008.

CONCLUSION

comparison between private sector and public sector banks, we take five-five banks in both sector to

compare the non performing assets of banks. For understanding we further bifurcate the non performing

assets in priority sector and non priority sector, gross NPA and net NPA in percentage as well as in rupees

deposit – investment– advances. Deposit – Investment – Advances is the first in the analysis because due

to these we can understand the where the bank stands in the competitive market. As at end of march 2008,

in private sector ICICI Bank is the highest deposit-investment-advances figures in rupees crore, second is

HDFC Bank and KOTAK Bank has least figures. In public sector banks Punjab National Bank has highest

deposit investment-advances but when we look at graph first three means Bank of Baroda and Bank of

India are almost the similar in numbers and Dena



Bank is stands for last in public sector bank. When we compare the private sector banks with public sector

banks among these banks, we can understand the more number of people prefer to choose public secto r

banks for deposit-investment. But when we compare the private sector bank ICICI Bank with the public

sector banks ICICI Bank is more deposit-investment figures and first in the all banks.

REFRENCES:

www.wikipedia/npa.com

www. npaprivatebanks/docs.com

www.icici.cm

http://www.wikipedia/npa.com

http://www.google/npaprivatebanks/docs.com

http://www.icici.cm/

http://www.wikipedia/npa.com

http://www.google/npaprivatebanks/docs.com

http://www.icici.cm/

Term Paper of Banking and Insurance

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