A CASE STUDY OF RECOVERY POSITION OF NON PERFORMING ASSETS OF PUNJAB NATIONAL BANK OF INDIA AND HDFC BANK LIMITED

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1 International Journal of Accounting and Financial Management Research (IJAFMR) ISSN Vol. 3, Issue 1, Mar 2013, TJPRC Pvt. Ltd. A CASE STUDY OF RECOVERY POSITION OF NON PERFORMING ASSETS OF PUNJAB NATIONAL BANK OF INDIA AND HDFC BANK LIMITED REKHA GUPTA 1 & NITIN S. SIKARWAR 2 1 Sr. Assistant Professor, Department of Management, Haryana College of Technology and Management, Kaithal, Haryana, India 2 Associate Professor, Department of Management, Haryana College of Technology and Management, Kaithal, Haryana, India ABSTRACT Banking system plays a vital role in the economic system of a country by mobilizing the nation s savings and directing them into high investment priorities for better utilization of available resources. Schumpeter, the first modern economist considered banks to be the most important of all the financial intermediaries in the financial system of a country. But in recent times the banks have become very cautious in providing loans, the reason behind is the non performing assets. Non Performing Assets are defined as the loans which have ceased to generate any income for a bank whether in the form of interest or principal amount. To bring down the level of NPAs, a number of strategies have been initiated in the past and are being initiated at present by the Government and the banks. In view of the vital role of non performing assets on the profitability, Punjab National Bank and HDFC Bank have been selected for the purpose of present research because both are the giant banks in public and private sector, so a comparative study is made. In the present study, the researcher proposes to make an analytical study in respect of Non Performing Assets and their recovery management, so that it may be useful at all banking levels regarding the efficient utilization of resources which may lead to better working of the banking sector. KEYWORDS: Bank, Non Performing Assets, Recovery INTRODUCTION Banking system plays a vital role in the economic system of a country by mobilizing the nation s savings and directing them into high investment priorities for better utilization of available resources. 1 Kapila Uma in her work Indian Economy (2008) has stated that the banking system has capacity to add to the total supply of money by means of credit creation. It is because of an ability to manipulate credit that banks are used extensively as a tool of monetary policy. But in recent times the banks have become very cautious in providing loans, the reason behind is the non performing assets. Non 1 Kapila Uma Indian Economy, performance and policies Academic Foundation New Delhi ed. Eighth, Bidani, S.N., Managing Non Performing Assets in Banks, Vision Books Pvt. Ltd., New Delhi, 3 Bhole, L. M., Financial Institution & Markets, Tata Mcgraw Hill Publications Ltd., New Delhi,

2 194 Rekha Gupta & Nitin S. Sikarwar Performing Assets are defined as the loans which have ceased to generate any income for a bank whether in the form of interest or principal amount. 2 Bidani, S.N. (2003) has found that the main causes of accumulation of NPAs in banks are diversion of working capital funds by promoters for taking up new projects, inadequate project planning, Non performing assets adversely affect the profitability of the banks. 3 Bhole L.M, (2005) in his book Financial Institutions and Markets discussed about the concept of liquidity and profitability with special reference to banks. He described that it is necessary for the efficient working of the banks to maintain balance between liquidity and profitability. In view of the vital role of non performing assets and their recovery, Punjab National Bank and HDFC Bank have been selected for the purpose of present research because both are the giant banks in public and private sector, so a comparative study is made. In the present study, the researcher proposes to make an analytical study in respect of Non Performing Assets, so that it may be useful at all banking levels regarding the efficient utilization of resources which may lead to better working of the banking sector. OBJECTIVES OF THE STUDY The main objectives of the study are to know; The level of NPAs in the banks under study; The Measures taken for recovering NPAs; The Recovery position of NPAs. RESEARCH METHODOLOGY The necessary information on the subject has been collected from the diverse sources. Necessary data and information have been mainly collected from the head offices of Punjab National Bank and HDFC Bank in the form of annual reports. The data so collected has been classified and analyzed and tabulated in such a manner that by using percentage and other appropriated techniques of statistical analysis, fruitful and scientific inferences regarding recovery position of Non Performing Assets in Punjab National Bank and HDFC Bank could be derived. Besides this, personal interviews and discussions with the various authorities of the banks has also been made so as to enrich the conclusions and make inferences useful to all the concerned be they, the management, the owners, the policy makers, customers or the employees. Mainly three techniques for financial analysis (i) Arithmetic technique, which consists of percentage change over a particular period, (ii) Accounting techniques, which consists of Ratio Analysis and (iii) Statistical techniques, such as Arithmetic Mean, are used for analyses. The study covers a period of eleven years i.e. from to CONCEPT OF NON-PERFORMING ASSETS 4 According to RBI an asset (loans) or (advance by a bank) becomes non-performing when it ceases to generate income for the bank. It means an asset should be treated as NPA if interest or installments of principal remains overdue and unpaid for a period of more than 90 days. The NPAs can be further divided into two categories; (i) and (ii) Net NPAs. GROSS NON PERFORMING ASSETS Gross Non Performing assets are the total outstanding of all the borrowers classified as substandard, doubtful and loss asset. As regards of Punjab National Bank and HDFC Banks, these have been worked out by taking the closing balances, i.e. on 31 st March and shown in Table1

3 A Case Study of Recovery Position of Non Performing Assets of Punjab National Bank of India and HDFC Bank Limited 195 Year Table 1: Gross Non Performing Assets Punjab National Bank Gross % of Gross NPAs NPAs to HDFC Bank % of Gross NPAs to (Source: Punjab National Bank and HDFC Bank; Annual Report- Various Issues) Table 1 reveals that the Percentage of Gross Non Performing Assets to of Punjab National Bank fluctuated between a range of 1.80 percent to percent whereas that of HDFC Bank fluctuated between a range of 1.06 percent to 3.17 percent over a period of eleven years under study. On the whole, the Percentage of Gross Non Performing Assets to of Punjab National Bank declines with a more rapid rate than that of HDFC Bank. The entire situation can be shown at a glance with the help of the Figure In Percentage PNB HDFC Years Figure 1: Gross Non Performing Assets NET NON PERFORMING ASSETS Net Non Performing assets are computed by deducting the provisions from Gross Non Performing Assets. Net NPAs are calculated as; Gross NPA-(Balance in interest suspense account+ claims received from DICGC/ECGC and pending for adjustment + Part payment received and kept in suspense account + provisions held). As regards NPAs of Punjab National Bank and HDFC Banks, these have been worked out and shown in Table 2

4 196 Rekha Gupta & Nitin S. Sikarwar Year Table 2: Net Non Performing Assets Punjab National Bank % Age of Net Net NPAs NPAs to Net NPAs HDFC Bank % Age of Net Npas to (Source: Punjab National Bank and HDFC Bank; Annual Report- Various Issues) Table 2 reveals that Net Non Performing Assets of Punjab National Bank shows a continuous decreasing trend from 6.67 percent in to 0.84 percent in , whereas that of HDFC Bank fluctuated between a range of 0.45 percent to 0.18 percent over a period of eleven years under study. On the whole the Net Non Performing Assets of Punjab National Bank registered more variability as compare to that of HDFC Bank. The entire situation can be shown at a glance with the help of the Figure In Percentage PNB HDFC Years Figure 2: Net NPAs to STANDARD ASSETS AND PROVISIONING NORMS Standard Asset is one which is not NPA. It means an asset on which interest is regularly received and it is not due for a period of more than 90 days is a standard asset. As regards provisions on standard assets, 5 A general provision of a minimum of 0.25% of total standard assets is made. The Reserve Bank of India has increased the rate of general provision on Standard Assets to 0.40 % per annum. As regards Standard Assets of Punjab National Bank and HDFC Bank, these have been worked out and shown in Table 3

5 A Case Study of Recovery Position of Non Performing Assets of Punjab National Bank of India and HDFC Bank Limited 197 Year Table 3: Standard Assets Punjab National Bank Standard % of Std. Assets Assets to adv. Standard Assets HDFC Bank % of Std. Assets to adv (Source: Punjab National Bank and HDFC Bank; Annual Report- Various Issues) Table 3.3 reveals that Standard Assets of Punjab National Bank is reflecting an increasing trend as it increased from 87.66% in to 98.19% in whereas that of HDFC Bank fluctuated between 96.83% in to 98.93% in over a period of eleven years under study. The entire situation can be shown at a glance with the help of the following Figure 3 In Percentage PNB HDFC Years Figure 3: Standard Assets SUB-STANDARD ASSET AND PROVISIONING NORMS With effect from March, an asset which has been classified as NPA for a period not more than 12 months is considered as sub standard asset. 6 As per the latest changes announced by RBI on 18 th May 2011 the new provisioning norms on sub standard assets will be 15% as against existing 10%.

6 198 Rekha Gupta & Nitin S. Sikarwar DOUBTFUL ASSETS AND PROVISIONING NORMS 7 With effect from March 31, 2005, an asset would be classified as doubtful if it has remained as an NPA for more than 12 months. As per new changes by RBI w.e.f. May 2011 for the advance considered as doubtful from one to three years the provisioning requirement is 40%; LOSS ASSETS AND PROVISIONING NORMS 8 Loss Asset is one where loss has been identified by the bank or its internal or external auditors, or by the RBI inspection, though the amount has not been written off wholly. As regards provisions on loss assets, the entire amount should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for Committee etc. Recovery of Non Performing Assets As regards Recovery of Non Performing Assets of Punjab National Bank and HDFC Banks, these have been worked out and compared with Gross Non Performing Assets which has been computed by taking opening balances of Gross Non Performing Assets + additions during the year and shown in Table 4 Year Punjab National Bank (during the Year) Recovery Table 4: Recovery of Assets % of Recovery to (during the Year) HDFC Bank Recovery % of Recovery to (Source: Punjab National Bank and HDFC Bank; Annual Report- Various Issues) Table 4 reveals that the recovery in NPAs of Punjab National Bank increased from 13.31% in and it was 47.25% in , however it reached to 39.86% in and in In case of HDFC Bank, there is a tremendous increase in the recovery of NPAs as it was just 9.08% in and it reached a level of 60.18% in but slightly reduced to 47.89% in It has increased almost 10 times whereas in case of Punjab National Bank it has increased 3 times so the situation of recovery of HDFC Bank is much better than Punjab National Bank. The situation can be better described with the help of a Figure - 4

7 A Case Study of Recovery Position of Non Performing Assets of Punjab National Bank of India and HDFC Bank Limited In Percentage PNB HDFC Years Figure 4: Recovery of Assets ANALYSIS AND FINDINGS Punjab National Bank has been able to reduce its Gross Non Performing Assets as well as Net Non Performing Assets when compared with total advances with a more rapid rate than HDFC Bank, as the % of Gross Non Performing Assets to total advances of Punjab National Bank was 12.34% in , which reduced to 1.80% in and in case of HDFC Bank it was 3.17% in which reduced to 1.06% in Standard Assets to of Punjab National Banks are reflecting an increasing trend as it increased from 87.66% in to 98.19% whereas that of HDFC Bank fluctuated between 96.83% to 98.93% over a period of eleven years under study. Recovery of NPAs reveals that Punjab National Bank recovered from 13.31% in to 42.00% in In case of HDFC Bank, there is a tremendous increase in the recovery of NPAs as it was just 9.08% in and it reached a level of 60.18% in but in it reduced to 47.89%. It has increased almost 10 times whereas in case of Punjab National Bank it has increased 3 times during eleven years. So the situation of recovery of HDFC Bank is much better than Punjab National Bank. SUGGESTIONS In order to avoid non-performing assets it is suggested that names of the defaulters should be sent inter banks. There should be complete exposure of defaulters in case of both the banks. Government should define and implement a strong legal structure regarding non-performing accounts. Willful defaulters should be treated very strongly in case of Punjab National Bank, as the position is worse here. Recovery of Nonperforming assets is a matter of concern for Punjab National Bank, as the recovery rate is very slow. It is suggested that more and more account should be sold to recovery agencies by Punjab National Bank.

8 200 Rekha Gupta & Nitin S. Sikarwar On the basis of study of Nonperforming assets and their recovery position it can be concluded very safely that the study of last eleven years i.e. from 2000 to 2011 HDFC Bank has performed much better than Punjab National Bank. Punjab National Bank and all other banking sector should refer the suggestions provided in the research paper in order to improve its working and compete to the global forces of competition. REFERENCES 1. Kapila Uma Indian Economy, performance and policies Academic Foundation New Delhi ed. Eighth, Bidani, S.N., Managing Non Performing Assets in Banks, Vision Books Pvt. Ltd., New Delhi, Bhole, L. M., Financial Institution & Markets, Tata Mcgraw Hill Publications Ltd., New Delhi, Report of Trend and Progress on Banking in India, RBI Bulletin; April 2011,p.6 6. Business News, June, Gupta, S.P., Statistical Methods (2000), S. Chand and Sons,New Delhi. 8. Gupta, Shashi K., Aggarwal, Nisha and Gupta, Neeti, Financial Institutions and Markets, Kalyani Publishers, New Delhi, Horne, James C. Van, Financial Management & Policy, Prentice Hall of India, New Delhi, Jain, T. R., Khanna, O. P., Indian Financial System, V. K. Publications, New Delhi, Kapila Uma Indian Economy, performance and policies Academic Foundation New Delhi ed. Eighth, Khan, M. Y., Indian Financial System, Tata McGraw-Hill Publishing Company Ltd., New Delhi, Kothari, C.R., Social Banking and Profitability, Arihant Publishers, Jaipur, Indian Financial system M.Y.Khan 5th edition Tata McGraw Gill Publishing Co. Limited New Delhi Page Advanced Auditing and Professional Ethics Vol.I Final New Course Board of Studies The Institute of Chartered Accountants of India p. 11.1