14245136 Non Performing Assets of Banks (1)

8/4/2019 14245136 Non Performing Assets of Banks (1)

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A PROJECT

REPORT ON

COMPARATIVE ANA LYSIS

ON NON PERF ORMING

ASSETS

OF PRIVATE AND PUBLIC SECTOR

BANKS

SUBMI TTED IN PARTIAL FULFILLMENT OF

REQUIRMENT OF PGPROGRAME

Inst itute of business management and

research

Ahm adaba d

SUBMITTED BY:

JIGARJ. SONI ( 5 )

2009

Session: 20 07-

[Comparative analysis on NPA of Private & Public sector Ban ks]

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A PROJECT

REPORT ON

COMPARATIVE ANA LYSIS

ON NON PERF ORMING

ASSETSOF PRIVATE AND PUBLIC SECTOR

BANKS

SUBMI TTED IN PARTIAL FULFILLMENT OF

REQUIRMENT OF PGPROGRAME

Inst itute of business management and

research

Ahm adaba d

SUBMITTED BY:

JIGARJ. SONI ( 5 )


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2009

Session: 20 07-


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ANNEXUREA(COVERPAGE)

IBMR- INSTITUTE OF BUSINESS MANAGEMNT &

RESEARCH

Code: -29 11

Project title:

COMPARATIVE ANALYSIS ON

NON PERFORMING ASSETS

OF PRIVATE AND PUBLIC SECTOR BANKS

B y:

Jigar J. Soni

Nirav N. Gusai

Aproject report submi tted in par tial fulfillment of the

requirement forthe degree of MASTER OF BUSINESS

ADMINISTRATION of SIKKIM MANIPAL UNIVERSITY,

INDIA.

Sikkim Manipal university of Health, Medical and tech nological

Sciences

Distance education wing

Syn dica te house


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Manipa l-576 104


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ANNEX UREB(STUDENT DECLARATION)

We here by decla re that the project report entitled

COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF

PRIVATE AND PUBLIC SECTOR BANKS submitted in partial

fulfillment of the requ irements for the deg ree of masters of

busine ss Admi nistration to Sikkim -Manipal University, India, are

our original work and not submitted for the award of any other

degree,

diploma, fellowship,or any other similar title orprizes.

Reg.No: Na me

520781709 JIGAR J. SONI

Date:

Place:


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A N N E XURE C (EXAMINERS

CERTIFICATE)

The project report by Jigar Soni & Nirav Gusai on

COMPARATIVE ANALYSIS ON NON PERFORMING

ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS

is approved and is acceptable inquality and form.

Inte rnal examiner Ext ernal

examin er

Name:- Name:-

Qualification: - Qua lification: -

Designation: - Desi gnatio n:-


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ANNUXERE D (UNIVERS ITY STUDY CENTR E

CERTIFICATE)

This is to certi fy that the project report entitled COMPARATIVE

ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND

PUBLIC SECTORS BANKS Sub mitted in partial fulfillment of the

requirement for the deg ree of MASTER OF BUSINESS

ADMINISTRATION of SIKKIM MANIPAL UNIVERSITY of Health,

Medical and Techno logical science.

Jigar Soni and Nirav Gusai has worked under mysupervision and that no part of this report has been submitted for

the award of any other degree, Dip loma , fellowship or other

similar titles or prizes and that the work has been pub lished in

any journal or Magazine.

Na me Reg. no

Jigar Soni 520781709

Cert ified

(Guides Name and

Qual ification)


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AACKNOWLEDCKNOWLED GGEMENTEMENT

With a deep sense of gratitude I express we thanks to all those who havebeen instrumental in the development of the project report.

I am also grateful to Institute of Business Management And Research,

Ahmedabad who gave me a valuable opportunity of involving me in real

live business project. I am thankful to all the professors whose positive

attitude, guidance and faith in my ability spurred me to perform well.

I am also indebted to all lecturers, friends and associates for their valuable

advice, stimulated suggestions and overwhelming support without which

the project would not have been a success.


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INTINTRROODDUCUCTTIONION

TheThe aaccuccummuullationation ofofhhugeuge nnon-perforon-performminging assetsassets inin banksbanks hashasassassuummeedd ggreatreat iimportanmportancce.e. TheThe depthdepth ofof thethe pproblemroblem ofof bbaadd ddebtsebts waswas

firstfirst realizedrealized oonnllyy iinn eeararllyy 11990s.990s. TThhee mmaaggnnitudeitude ofof NNPPAsAs inin banksbanks aandnd

financialfinancial institutionsinstitutions isis ooverRs.1,50,0verRs.1,50,00000 ccrrores.ores.

WWhihilele grossgross NNPPAA reflectsreflects thethe qqualiualittyy ofof thethe llooansans mamaddee bbyy

banks,banks, nnetet NNPPAA showsshows thethe actuactuaall buburrdenden ofofbbanks.anks. NNooww itit isis iincreasingncreasingllyy

eevviidentdent thatthat thethe mamajjororddefaultersefaulters aarree thethe bbigig bborrorroowerswers ccoommiingng fromfrom thethe

non-prionon-priorriittyy ssectoectorr.. TThhee bbaanksnks andand financialfinancial iinstitutionsnstitutions havehave toto taketake thethe

iinnitiatitiatiiveve toto rreduceeduce NNPPAsAs inin aa ttiimeme bbooundund strategicstrategic aappproach.proach.

PPuublicblic ssectorectorbanksbanks figurefigure prproommiinentnentllyy iinn thethe ddebateebate nnotot oonnllyy

becausebecause ththeeyy ddoommiinnateate thethe bbankinganking iindustries,ndustries, bbutut alalssoo ssinceince ththeeyy havehave

mmuuchch lalarrgergerNNPPAsAs ccoommparedpared wwiithth thethe pprivrivaatete sectorsectorbanks.banks. ThisThis raisesraises aa

concernconcern inin thethe iinndustdustrryy aanndd acacaadedemmiaia bbecauseecause itit isis generalgeneralllyy feltfelt thatthat

NNPPAsAs reducereduce thethe pprrofitabiliofitabilittyy ofof aa banks,banks, wweakeneaken itsits ffiinancialnancial hheealthalth aandnd

erodeerode itsits ssoollvenvenccyy..

ForForthethe recoverecoverryy ofofNNPPAsAs aa brobroaadd frfraameworkmework hashas evoevollvedved forfor

thethe mmaanagenagemmentent ofof NNPPAsAs uunnderder wwhichhich sseeververaall ooptionsptions areare pprroovidvideedd forfor

debtdebt recoverecoverryy aandnd restructuring.restructuring. BanksBanks andand FIsFIs hhaaveve thethe frfreeedomedom toto

dedessignign aandnd iimmpplleemmeentnt tthheireir ownown ppoliciesolicies forfor rereccooveverryy aandnd wwrite-orite-offff

inin

ccorporatingorporating

ccoo

mm

prpr

oo

mimi

ssee

aa

ndnd

negotiatednegotiated

settlesettle

mm

ents.ents.


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RRESEARCHESEARCH METMETHHODOLOGYODOLOGY

Type of Research

The resea rch met hodo log yadopt ed for carrying out the

study we re

In this project Descriptive research methodologies were use.

Atthefirst stage theoretical study is attempted.

Atthesecond stage Histori cal study is attempted.

AttheThi rd stage Com parative study of NPA is und er taken.

ScopeScope ofoftthhee StuStuddyy

Concept of Non Performing Asset

Guidelines

Impact of NPAs

Reasons for NPAs

Preventive Measures

Tools to manage NPAs

Sampling plan

To prepare this Project we took five banks from public sector as well

as five banks from private sector.

OBJECTIVES OF THE STUDYThe basic idea behi nd undertaking the Grand Project on NPA was

to:

To evaluate NPAs (Gross and Net) in different banks.


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To study the past trends of NPA

To calculate the weighted of NPA in risk management in Banking

To analyze financial performance of banks at different level of NPA

To evaluate profitability positions of banks

To evaluate NPA level in different economic situation.

To Know the Concept of Non Performing Asset

To Know the Impact of NPAs

To Know the Reasons for NPAs

To learn Preventive Measures

Source of data collection

The data collected for the study was secondary data in Nature.


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(((((( CCOONNTTEENNTSTS ))))))

CHAPTERCHAPTER

NNOO..

SUSUBBJJEECTCT CCOOVEREDVERED PPAAGEGE

NNOO..

11 IntroductionIntroduction toto NNPPAAss22 RResearchesearch MMeeththoodolodologgyy

ScScoopepe ofofRResearchesearch

TTyypepe ofofRResearchesearch

SSoourcesurces ofofDDataata CCoolllectionlection

ObObjjectectiiveve ofofStuStuddyy

DDataata CCoolllectionlection33 IntroductionIntroduction toto TTooppicic

DDefinitionefinition

HHistoryistoryofofInInddianian BankingBanking

NNonon PerfoPerforrmiminnggAssetsAssets

FactorFactorforforrriseise inin NNPPAsAs

PrProoblemblem dduuee toto NNPPAsAs

TTypesypes ofofNNPPAsAs

IncomeIncome

RR

ecognitionecognition

RRe ortine ortin ofofNNPPAsAs44 PPrroovviissioningioning NoNorrmsms

GeGenneraleral

FlFlooatingating provisionsprovisions

LLeasedeased AssetsAssets

GuGuiidelinedeline underundersspecialpecial circumstancescircumstances55 Impact,Impact, RReeasonsasons andand SSyymptomsmptoms ofofNNPPAAss

InterInternnalal && ExterExternnalal FactorFactor

EaEarrllyy SSymptomsymptoms

66 PPrreevveentntiivvee MeasuMeasurrementement

EaEarrllyy RRececoognitiongnition ofofProProbblemlem

IdIdeentintiffyyiingng BorrowersBorrowers wwithith ggeenuinenuine IntInteentnt


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TTiimmeellinessiness

FocusFocus oonn CCashash flflooww

ManagManageemmeentnt EEfffectivenessfectiveness

MultipMultipllee FFiinancingnancing77 TToooolsls forforRRececoovveerryy

WWiillllfulful defaultdefault

InInaabilibilittyy toto PPaayy

SSppecialecial CCasesases

RRoleole ofofAARCILRCIL88 AAnnaallyysissis

DDepositeposit--InvestmInvestmeentnt--AdvancesAdvances

GrossGross NNPPAsAs andand NetNet NNPPAsAs

PPrrioriiorittyy aandnd Non-PrioriNon-Priorittyy SectorSector

99 Finding,Finding, SuggestionsSuggestions andand ConclusionsConclusions

1100 BibliograpBibliographhyy


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IInntroductiontroduction toto thethe topictopic

The three letters NPA Strike terror in banking sector and business circle

today. NPA is short form of Non Performing Asset. The dreaded NPA

rule says simply this: when interest or other due to a bank remains

unpaid for more than 90 days, the entire bank loan automatically

turns a non performing asset. The recovery of loan has always been

problem for banks and financial institution. To come out of these first we

need to think is it possible to avoid NPA, no can not be then left is to lookafter the factor responsible for it and managing those factors.

DefDefiinitions:nitions:

An asset, including a leased asset, becomes non-performing when it

ceases to generate income for the bank.

A non-performing asset (NPA) was defined as a credit facility in respect

of which the interest and/ or instalment of principal has remained past

due for a specified period of time.

With a view to moving towards international best practices and to ensure

greater transparency, it has been decided to adopt the 90 days

ov e r d ue norm for identification of NPAs, from the year ending March

31, 2004. Accordingly, with effect from March 31, 2004, a non-

performing asset (NPA) shall be a loan or an advance where;


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Interest and/ or instalment of principal remain overdue for a

period of more than 90 days in respect of a term loan,

The account remains out of order for a period of more than 90

days, in respect of an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in

the case of bills purchased and discounted,

Interest and/or instalment of principal remains overdue for two

harvest seasons but for a period not exceeding two half years

in the case of an advance granted for agricultural purposes,

and

Any amount to be received remains overdue for a period of

more than 90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm,

banks have been advised to move over to charging of interest at monthly

rests, by April 1, 2002. However, the date of classification of an advance

as NPA should not be changed on account of charging of interest at

monthly rests. Banks should, therefore, continue to classify an account as

NPA only if the interest charged during any quarter is not serviced fully

within 180 days from the end of the quarter with effect from April 1, 2002

and 90 days from the end of the quarter with effect from March 31, 2004.


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HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial

services. By the term bank is generally understood an institution that

holds a Banking Licenses. Banking licenses are granted by financial

supervision authorities and provide rights to conduct the most fundamental

banking services such as accepting deposits and making loans. There are

also financial institutions that provide certain banking services without

meeting the legal definition of a bank, a so-called Non-bank. Banks are a

subset of the financial services industry.

The word bank is derived from the Italian banca, which is derived from

German and means bench. The terms bankrupt and "broke" are similarly

derived from banca rotta, which refers to an out of business bank, having

its bench physically broken. Moneylenders in Northern Italy originally did

business in open areas, or big open rooms, with each lender working from

his own bench or table.

Typically, a bank generates profits from transaction fees on

financial services or the interest spread on resources it holds in trust

for clients while paying them interest on the asset. Development of

banking industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It isbelieved that the transition from money lending to banking must

have occurred even before Manu, the great Hindu Jurist, who has

devoted a section of his work to deposits and advances and laid

down rules relating to rates of interest.


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Banking in India has an early origin where the indigenous bankers

played a very important role in lending money and financing foreign

trade and commerce. During the days of the East India

Company, was the turn of the agency houses to carry on

the banking business. The General Bank of India was first Joint

Stock Bank to be established in the year 1786. The others which

followed were the Bank Hindustan and the Bengal Bank.

In the first half of the 19th century the East India Company

established three banks; the Bank of Bengal in 1809, the Bank of

Bombay in 1840 and the Bank of Madras in 1843. These three

banks also known as Presidency banks were amalgamated in 1920

and a new bank, the Imperial Bank of India was established in

1921. With the passing of the State Bank of India Act in 1955 the

undertaking of the Imperial Bank of India was taken by the newly

constituted State Bank of India.

The Reserve Bank of India which is the Central Bank was created

in 1935 by passing Reserve Bank of India Act, 1934 which was

followed up with the Banking Regulations in 1949. These acts

bestowed Reserve Bank of India (RBI) with wide ranging powers for

licensing, supervision and control of banks. Considering the

proliferation of weak banks, RBI compulsorily merged many of themwith stronger banks in 1969.

The three decades after nationalization saw a phenomenal

expansion in the geographical coverage and financial spread of the


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banking system in the country. As certain rigidities and

weaknesses were found to have developed in the system,

during the late eighties the Government of India felt that

these had to be addressed to enable the financial system to play

its role in ushering in a more efficient and competitive economy.

Accordingly, a high- level committee was set up on 14 August

1991 to examine all aspects relating to the structure,

organization, functions and procedures of the financial system.

Based on the recommendations of the Committee

(Chairman: Shri M. Narasimham), a

comprehensive reform of the banking system was introduced in

1992-93. The objective of the reform measures was to ensure that

the balance sheets of banks reflected their actual financial health.

One of the important measures related to income recognition, asset

classification and provisioning by banks, on the basis of objective

criteria was laid down by the Reserve Bank. The introduction of

capital adequacy norms in line with international standards has

been another important measure of the reforms process.

1. Comprises balance of expired loans, compensation and other

bonds such as National Rural Development Bonds and Capital

Investment Bonds. Annuity certificates are excluded.

2. These represent mainly non- negotiable non- interest bearing

securities issued to International Financial Institutions like

International Monetary Fund, International Bank forReconstruction and Development and Asian Development Bank.

3. At book value.

4. Comprises accruals under Small Savings Scheme, Provident

Funds, Special Deposits of Non- Government

In the post-nationalization era, no new private sector banks were

allowed to be set up. However, in 1993, in recognition of the need


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to introduce greater competition which could lead to higher

productivity and efficiency of the banking system, new private

sector banks were allowed to be set up in the Indian banking

system. These new banks had to satisfy among others, the

following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;

(iii) The shares should be listed on the stock exchange;

(iv) The headquarters of the bank should be preferably located

in a centre which does not have the headquarters of any

other bank; and

(v) The bank will be subject to prudential norms in respect of

banking operations, accounting and other policies as laid

down by the RBI. It will have to achieve capital adequacy

of eight per cent from the very beginning.

A high level Committee, under the Chairmanship of Shri M.

Narasimham, was constituted by the Government of India inDecember 1997 to review the record of implementation of financial

system reforms recommended by the CFS in 1991 and chart the

reforms necessary in the years ahead to make the banking system

stronger and better equipped to compete effectively in international

economic environment. The Committee has submitted its report to

the Government in April 1998. Some of the recommendations of the

Committee, on prudential accounting norms, particularly in the

areas of Capital Adequacy Ratio, Classification of Government

guaranteed advances, provisioning requirements on standard

advances and more disclosures in the Balance Sheets of banks

have been accepted and implemented. The other recommendations are under consideration.


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The banking industry in India is in a midst of transformation, thanks

to the economic liberalization of the country, which has changed

business environment in the country. During the pre-liberalizationperiod, the industry was merely focusing on deposit mobilization

and branch expansion. But with liberalization, it found many of its

advances under the non-performing assets (NPA) list. More

importantly, the sector has become very competitive with the entry

of many foreign and private sector banks. The face of banking is

changing rapidly. There is no doubt that banking sector reforms

have improved the profitability, productivity and efficiency of

banks, but in the days ahead banks will have to prepare

themselves to face new challenges.

Indian Banking: Key Developments

1969 Government acquires ownership in major banks

Almost all banking operations in manual mode

Some banks had Unit record Machines of IBM for IBR &

Pay roll1970- 1980 Unprecedented expansion in geographical coverage, staff

business & transaction volumes and directed lending to

agriculture, SSI & SB sector

Manual systems struggle to handle exponential rise in

transaction volumes --

Outsourcing of data processing to service bureau begins Back office systems only in Multinational (MNC) banks

offices


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1981- 1990 Regulator (read RBI) led IT introduction in Banks

Product level automation on stand alone PCs at branches

(ALPMs)

In-house EDP infrastructure with Unix boxes, batch

processing in Cobol for MIS.

Mainframes in corporate office

1991-1995 Expansion slows down

Banking sector reforms resulting in progressive de-

regulation of banking, introduction of prudential banking

norms entry of new private sector banks

Total Branch Automation (TBA) in Govt. owned and old

private banks begins

New private banks are set up with CBS/TBA form the start

1996-2000 New delivery channels like ATM, Phone banking and

Internet banking and convenience of any branch banking

and auto sweep products introduced by new private and

MNC banks

Retail banking in focus, proliferation of credit cards

Communication infrastructure improves and becomes

cheap. IDRBT sets up VSAT network for Banks

Govt. owned banks feel the heat and attempt to respond

using intermediary technology, TBA implementation surge

ahead under fiat from Central Vigilance

Commission (CVC), Y2K threat consumes last two years


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2000-2003 Alternate delivery channels find wide consumer acceptance

IT Bill passed lending legal validity to electronic transactions

Govt. owned banks and old private banks start

implementing CBSs, but initial attempts face problems

Banks enter insurance business launch debit cards

(Source: M.Y.KHAN, INDIAN FINANCIAL SYSYEM,3rd

edition

Publication by TATA McGraw hill)


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NON PERFORMING ASSETS (NPA)

WHAT IS A NPA (NON PERFORMINGASSETS) ?

Action for enforcement of security interest can be initiated only if thesecured asset is classified as Nonperforming asset.

Non performing asset means an asset or account of borrower ,which hasbeen classified by bank or financial institution as sub standard , doubtfulor loss asset, in accordance with the direction or guidelines relating toassets classification issued by RBI .

An amount due under any credit facility is treated as past due when it

is not been paid within 30 days from the due date. Due to theimprovement in the payment and settlement system, recovery climate, upgradation of technology in the banking system etc, it was decided todispense with past due concept, with effect from March 31, 2001.Accordingly as from that date, a Non performing asset shell be anadvance where

i. Interest and/or installment of principal remain overdue for a period

of more than 180 days in respect of a term loan,

ii. The account remains out of order for a period of more than 180

days ,in respect of an overdraft/cash credit (OD/CC)

iii. The bill remains overdue for a period of more than 180 days in case

of bill purchased or discounted.

iv. Interest and/or principal remains overdue for two harvest season

but for a period not exceeding two half years in case of an advance

granted for agricultural purpose ,and

v. Any amount to be received remains overdue for a period of more

than 180 days in respect of other accounts

With a view to moving towards international best practices and toensure greater transparency, it has been decided to adopt 90 daysoverdue norms for identification of NPAs ,from the year ending March31,2004,a non performing asset shell be a loan or an advance where;


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i. Interest and/or installment of principal remain overdue for a

period of more than 90 days in respect of a term loan,

ii. The account remains out of order for a period of more than

90 days ,in respect of an overdraft/cash credit (OD/CC)

iii. The bill remains overdue for a period of more than 90 days

in case of bill purchased or discounted.

iv. Interest and/or principal remains overdue for two harvest

season but for a period not exceeding two half years in case

of an advance granted for agricultural purpose ,and

v. Any amount to be received remains overdue for a period of

more than 90 days in respect of other accounts

Out of order

An account should be treated as out of order if the outstandingbalance remains continuously in excess of sanctioned limit /drawingpower. in case where the out standing balance in the principal operatingaccount is less than the sanctioned amount /drawing power, but there areno credits continuously for six months as on the date of balance sheet orcredit are not enough to cover the interest debited during the same

period ,these account should be treated as out of order.

Overdue

Any amount due to the bank under any credit facility is overdue if itis not paid on due date fixed by the bank.

FAC TORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of therising NPAs. But the problem of NPAs is more in public sector bankswhen compared to private sector banks and foreign banks. The NPAs inPSB are growing due to external as well as internal factors.


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EXTERNAL FACTORS :-----------------------------------

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which

works for recovery of loans and advances. Due to their negligence

and ineffectiveness in their work the bank suffers the consequence

of non-recover, their by reducing their profitability and liquidity.

Willful Defaults

There are borrowers who are able to payback loans but areintentionally withdrawing it. These groups of people should beidentified and proper measures should be taken in order to get backthe money extended to them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in

NPAs of the PSBs. every now and then India is hit by major natural

calamities thus making the borrowers unable to pay back there

loans. Thus the bank has to make large amount of provisions in

order to compensate those loans, hence end up the fiscal with a

reduced profit.

Mainly ours farmers depends on rain fall for cropping. Due

to irregularities of rain fall the farmers are not to achieve the

production level thus they are not repaying the loans.

Industrial sickness


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Improper project handling , ineffective management , lack of

adequate resources , lack of advance technology , day to day

changing govt. Policies give birth to industrial sickness. Hence the

banks that finance those industries ultimately end up with a low

recovery of their loans reducing their profit and liquidity.

Lack of demand

Entrepreneurs in India could not foresee their product demand and

starts production which ultimately piles up their product thus making

them unable to pay back the money they borrow to operate these

activities. The banks recover the amount by selling of their assets,

which covers a minimum label. Thus the banks record the non

recovered part as NPAs and has to make provision for it.

Change on Govt. policies

With every new govt. banking sector gets new policies for its

operation. Thus it has to cope with the changing principles and

policies for the regulation of the rising of NPAs.

The fallout of handloom sector is continuing as most of the

weavers Co-operative societies have become defunct largely due

to withdrawal of state patronage. The rehabilitation plan worked out

by the Central government to revive the handloom sector has not

yet been implemented. So the over dues due to the handloom

sectors are becoming NPAs.

INTERNAL FACTORS :-

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


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Defective Lending process

There are three cardinal principles of bank lending that have been

followed by the commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

i. Principles of safety :-

By safety it means that the borrower is in a position to repay the

loan both principal and interest. The repayment of loan depends

upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon:

1. Tangible assets2. Success in business

Willingness to pay depends on:1. Character2. Honest3. Reputation of borrower


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The banker should, there fore take utmost care in ensuring that theenterprise or business for which a loan is sought is a sound oneand the borrower is capable of carrying it out successfully .heshould be a person of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management informationsystem, market driven decisions on real time basis can not be

taken. Proper MIS and financial accounting system is not

implemented in the banks, which leads to poor credit collection,

thus NPA. All the branches of the bank should be computerized.

Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis

is another reason for rise in NPAs. While providing unsecured

advances the banks depend more on the honesty, integrity, and

financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital

investment.

it should collect credit information of the borrowers from_

a. From bankers.


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b. Enquiry from market/segment of trade, industry,

business.

c. From external credit rating agencies.

Analyze the balance sheet.

True picture of business will be revealed on analysis of

profit/loss a/c and balance sheet.

Purpose of the loan

When bankers give loan, he should analyze the purpose ofthe loan. To ensure safety and liquidity, banks should

grant loan for productive purpose only. Bank should

analyze the profitability, viability, long term acceptability

of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to

poor credit appraisal the bank gives advances to those who are not

able to repay it back. They should use good credit appraisal to

decrease the NPAs.

Managerial deficiencies


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The banker should always select the borrower very carefully and

should take tangible assets as security to safe guard its interests.

When accepting securities banks should consider the_

1. Marketability

2. Acceptability

3. Safety

4.Transferability.

The banker should follow the principle of diversification ofrisk based on the famous maxim do not keep all the eggs in one

basket; it means that the banker should not grant advances to a

few big farms only or to concentrate them in few industries or in a

few cities. If a new big customer meets misfortune or certain traders

or industries affected adversely, the overall position of the bank

will not be affected.

Like OSCB suffered loss due to the OTM Cuttack, and

Orissa hand loom industries. The biggest defaulters of OSCB are

the OTM (117.77lakhs), and the handloom sector Orissa hand loom

WCS ltd (2439.60lakhs).

Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence

of regularly visit of bank officials to the customer point decreases

the collection of interest and principals on the loan. The NPAs due

to willful defaulters can be collected by regular visits.

Re loaning process


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Non remittance of recoveries to higher financing agencies and re

loaning of the same have already affected the smooth operation of

the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the

NPAs of OSCB is increasing day by day.

PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst

case, if the banks fails, owners loose their assets. In modern times

this may affect a broad pool of shareholders.

2. Depositors do not receive a market return on saving. In the worst

case if the bank fails, depositors loose their assets or uninsured

balance.

3. Banks redistribute losses to other borrowers by charging higher

interest rates, lower deposit rates and higher lending rates repress

saving and financial market, which hamper economic growth.

4. Non performing loans epitomize bad investment. They misallocate

credit from good projects, which do not receive funding, to failed

projects. Bad investment ends up in misallocation of capital, and by

extension, labour and natural resources.

Non performing asset may spill over the banking system and contract the

money stock, which may lead to economic contraction. This spill over

effect can channelize through liquidity or bank insolvency:

a) When many borrowers fail to pay interest, banks may experience

liquidity shortage. This can jam payment across the country,

b) Illiquidity constraints bank in paying depositors


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.c) Undercapitalized banks exceeds the banks capital base.

The three letters Strike terror in banking sector and business circle today.

NPA is short form of Non Performing Asset. The dreaded NPA rule

says simply this: when interest or other due to a bank remains unpaid for

more than 90 days, the entire bank loan automatically turns a non

performing asset. The recovery of loan has always been problem for

banks and financial institution. To come out of these first we need

to think is it possible to avoid NPA, no can not be then left is to look

after the factor responsible for it and managing those factors.

Interest and/or instalment of principal remains overdue for two

harvest seasons but for a period not exceeding two half years

in the case of an advance granted for agricultural purposes,

and

Any amount to be received remains overdue for a period of

more than 90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks

have been advised to move over to charging of interest at monthly rests,

by April 1, 2002. However, the date of classification of an advance as

NPA should not be changed on account of charging of interest at monthly

rests. Banks should, therefore, continue to classify an account as NPA

only if the interest charged during any quarter is not serviced fully within

180 days from the end of the quarter with effect from April 1, 2002 and 90

days from the end of the quarter with effect from March 31, 2004.

'Out'Out ofofOrder'Order' statustatuss::


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An account should be treated as 'ou t of orde r ' if the

outstanding balance remains continuously in excess of the sanctioned

limit/drawing power. In cases where the outstanding balance in the

principal operating account is less than the sanctioned limit/drawing

power, but there are no credits continuously for six months as on the date

of Balance Sheet or credits are not enough to cover the interest debited

during the same period, these accounts should be treated as 'out of

order'.

OOvveerdue:rdue:

Any amount due to the bank under any credit facility is

overdue if it is not paid on the due date fixed by the bank.

TTyyppeses ofofNNPPAA

AA]] GrossGross NNPPAA

B]B] NetNet NNPPAA

AA]] GrossGross NNPPAA::


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Gross NPAs are the sum total of all loan assets that are classified as

NPAs as per RBI guidelines as on Balance Sheet date. 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

BB]] NetNetNNPPA:A:

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

provision regarding NPAs. Net NPA shows the actual burden of

banks. Since in India, bank balance sheets contain a huge amount of

NPAs and the process of recovery and write off of loans is very time

consuming, the provisions the banks have to make against the NPAs

according to the central bank guidelines, are quite significant. That is

why the difference between gross and net NPA is quite high.

It can be calculated by following_

Net NPAs Gross NPAs Provisions

Gross Advances - Provisions

INCOMEINCOME RECOGNRECOGNIITIONTION

IncomeIncome recorecoggnniitiontion PPoolliiccyy


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The policy of income recognition has to be objective and based on

the record of recovery. Internationally income from non-performing

assets (NPA) is not recognised on accrual basis but is booked as

income only when it is actually received. Therefore, the banks

should not charge and take to income account interest on any NPA.

However, interest on advances against term deposits, NSCs, IVPs,

KVPs and Life policies may be taken to income account on the due

date, provided adequate margin is available in the accounts.

Fees and commissions earned by the banks as a result of re-

negotiations or rescheduling of outstanding debts should be

recognised on an accrual basis over the period of time covered by

the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on

such advances should not be taken to income account unless the

interest has been realised.

RReevveersalrsal ofofininccome:ome:

If any advance, including bills purchased and discounted, becomes

NPA as at the close of any year, interest accrued and credited to

income account in the corresponding previous year, should be

reversed or provided for if the same is not realised. This will apply

to Government guaranteed accounts also.


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In respect of NPAs, fees, commission and similar income that have

accrued should cease to accrue in the current period and should be

reversed or provided for with respect to past periods, if uncollected.

Leased Assets

The net lease rentals (finance charge) on the leased asset accrued

and credited to income account before the asset became non-

performing, and remaining unrealised, should be reversed or provided

for in the current accounting period.

The term 'net lease rentals' would mean the amount of finance

charge taken to the credit of Profit & Loss Account and would be

worked out as gross lease rentals adjusted by amount of statutory

depreciation and lease equalisation account.

As per the 'Guidance Note on Accounting for Leases' issued

by the Council of the Institute of Chartered Accountants of India (ICAI),

a separate Lease Equalisation Account should be opened by the

banks with a corresponding debit or credit to Lease Adjustment

Account, as the case may be. Further, Lease Equalisation Account

should be transferred every year to the Profit & Loss Account and

disclosed separately as a deduction from/addition to gross value of

lease rentals shown under the head 'Gross Income'.

AApppprropriopriaationtion ofofrecrecoovveerryy inin NNPPAAss


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Interest realised on NPAs may be taken to income account

provided the credits in the accounts towards interest are not out of

fresh/ additional credit facilities sanctioned to the borrower

concerned.

In the absence of a clear agreement between the bank and the

borrower for the purpose of appropriation of recoveries in NPAs (i.e.

towards principal or interest due), banks should adopt an

accounting principle and exercise the right of appropriation of

recoveries in a u n iform and c o nsistent manner.

IntereInteresstt AAppplicatioplicationn::

There is no objection to the banks using their own discretion in debiting

interest to an NPA account taking the same to Interest Suspense Account

or maintaining only a record of such interest in proforma accounts.

ReReppororttinging ofofNNPPAsAs

Banks are required to furnish a Report on NPAs as on 31st

March each year after completion of audit. The NPAs would relate

to the banks global portfolio, including the advances at the

foreign branches. The Report should be furnished as per the

prescribed format given in the Annexure I.

While reporting NPA figures to RBI, the amount held in interest

suspense account, should be shown as a deduction from gross

NPAs as well as gross advances while arriving at the net NPAs.


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Banks which do not maintain Interest Suspense account for parking

interest due on non-performing advance accounts, may furnish the

amount of interest receivable on NPAs as a foot note to the Report.

Whenever NPAs are reported to RBI, the amount of technical write

off, if any, should be reduced from the outstanding gross

advances and gross NPAs to eliminate any distortion in the

quantum of NPAs being reported.

REPORTING FORMAT FOR NPA GROSS AND NET

NPA Name of the Bank:

Position as on

PARTICULARS

1) Gross Advanced *

2) Gross NPA *

3) Gross NPA as %age of Gross Advanced

4) Total deduction( a+b+c+d )

( a ) Balance in interest suspense a/c **( b ) DICGC/ECGC claims received and held pending

Adjustment( c ) part payment received and kept in suspense a/c

( d ) Total provision held ***

5) Net advanced ( 1-4 )

6) Net NPA ( 2-4 )

7) Net NPA as a %age of Net Advance*excluding Technical write-off of Rs. crore.

**Banks which do not maintain an interest suspense a/c to park the

accrued interest on NPAs may furnish the amount of interest receivable on

NPAs.


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***Excluding amount of Technical write-off (Rs. crore) and provision

on standard assets. (Rs. crore).

AAssetsset ClassificaClassificattionion

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

CategoriesCategories ofofNNPPAsAs


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StandardStandard AAssetssetss::

Standard assets are the ones in which the bank is receiving interest as

well as the principal amount of the loan regularly from the customer. Here

it is also very important that in this case the arrears of interest and the

principal amount of loan does not exceed 90 days at the end of financial

year. If asset fails to be in category of standard asset that is amount due

more than 90 days then it is NPA and NPAs are further need to classify

in sub categories.

Banks are required to classify non-performing assetsfurther into the following three categories based on the period for which

the asset has remained non-performingand the realisabilityof the dues:

((11)) Sub-standSub-standaardrdAssetsAssets

((22)) DoubtfulDoubtfulAssetsAssets

((33)) LossLossAssetsAssets

(( 11 )) Sub-standardSub-standard AAssetssetss::----

With effect from 31 March 2005, a sub standard asset would be one,

which has remained NPA for a period less than or equal to 12 month. The

following features are exhibited by sub standard assets: the current net

worth of the borrowers / guarantor or the current market value of the

security charged is not enough to ensure recovery of the dues to the

banks in full; and the asset has well-defined credit weaknesses that

jeopardise the liquidation of the debt and are characterised by the distinct

possibility that the banks will sustain some loss, if deficiencies are not

corrected.


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(( 22 )) DoDouubtfulbtful AAsssets:--sets:--

A loan classified as doubtful has all the weaknesses inherent in assets

that were classified as sub-standard, with the added characteristic that the

weaknesses make collection or liquidation in full, on the basis of

currently known facts, conditions and values highly questionable and

improbable.

With effect from March 31, 2005, an asset would be classified as doubtful

if it remained in the sub-standard category for 12 months.

( 3 ) LossLoss AssetAssetss:--:--

A loss asset is one which considered uncollectible and of such little value

that its continuance as a bankable asset is not warranted- although there

may be some salvage or recovery value. Also, these assets would have

been identified as loss assets by the bank or internal or external auditors

or the RBI inspection but the amount would not have been written-off

wholly.

ProvisioningProvisioning NormsNorms

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


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GenerGeneraall

In order to narrow down the divergences and ensure adequate

provisioning by banks, it was suggested that a bank's statutory

auditors, if they so desire, could have a dialogue with RBI's

Regional Office/ inspectors who carried out the bank's inspection

during the previous year with regard to the accounts contributing to

the difference.

Pursuant to this, regional offices were advised to forward a list of

individual advances, where the variance in the provisioning

requirements between the RBI and the bank is above certain cut off

levels so that the bank and the statutory auditors take into account

the assessment of the RBI while making provisions for loan loss,

etc.

The primary responsibility for making adequate provisions for any

diminution in the value of loan assets, investment or other assets is

that of the bank managements and the statutory auditors. The

assessment made by the inspecting officer of the RBI is furnished

to the bank to assist the bank management and the statutory

auditors in taking a decision in regard to making adequate and

necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made

on the non-performing assets on the basis of classification of

assets into prescribed categories as detailed in paragraphs 4

supra. Taking into account the time lag between an account

becoming doubtful of recovery, its recognition as such, the


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realisation of the security and the erosion over time in the value of

security charged to the bank, the banks should make provision

against sub-standard assets, doubtful assets and loss assets as

below:

LossLoss assets:assets:

The entire asset 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.

DDooubtfulubtful assets:assets:

100 percent of the extent to which the advance is not covered by

the realisable value of the security to which the bank has a valid

recourse and the realisable value is estimated on a realistic basis.

In regard to the secured portion, provision may be made on the

following basis, at the rates ranging from 20 percent to 50 percentof the secured portion depending upon the period for which the

asset has remained doubtful:

Period for which the advance has

been considered as doubtful

Provision

requirement (%)


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Up to one year 20

One to three years 30

More than three years:

(1) Outstanding stock of NPAs as on

March 31, 2004.

(2) Advances classified as doubtful

more than three years on or after

April 1, 2004.

60% with effect from March

31,2005.

75% effect from March 31,

2006.

100% with effect from

March 31, 2007.

Additional provisioning consequent upon the change in the

definition of doubtful assets effective from March 31, 2003 has to

be made in phases as under:

As on 31.03.2003, 50 percent of the additional provisioning

requirement on the assets which became doubtful on account of new

norm of 18 months for transition from sub-standard asset to doubtful

category.

As on 31.03.2002, balance of the provisions not made during the

previous year, in addition to the provisions needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning

consequent upon the reduction in the transition period from

substandard to doubtful asset from 18 to 12 months over a four

year period commencing from the year ending March 31, 2005, with

a minimum of 20 % each year.

Note: Val uation of Securit y for pro visi oning purposes


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With a view to bringing down divergence arising out of difference in

assessment of the value of security, in cases of NPAs with balance of

Rs.

5 crore and above stock audit at annual intervals by external agencies

appointed as per the guidelines approved by the Board would be

mandatory in order to enhance the reliability on stock valuation. Valuers

appointed as per the guidelines approved by the Board of Directors should

get collaterals such as immovable properties charged in favour of the bank

valued once in three years.

Sub-standardSub-standard assets:assets:

A general provision of 10 percent on total outstanding should be made

without making any allowance for DICGC/ECGC guarantee cover and

securities available.

StandardStandard assets:assets:

From the year ending 31.03.2000, the banks should make a

general provision of a minimum of 0.40 percent on standard assets

on global loan portfolio basis.

The provisions on standard assets should not be reckoned for

arriving at net NPAs.

The provisions towards Standard Assets need not be netted from

gross advances but shown separately as 'Contingent Provisions


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against Standard Assets' under 'Other Liabilities and Provisions -

Others' in Schedule 5 of the balance sheet.

FloatingFloating prproovviisions:sions:

Some of the banks make a 'floating provision' over

and above the specific provisions made in respect of accounts identified

as NPAs. The floating provisions, wherever available, could be set-off

against provisions required to be made as per above stated provisioning

guidelines. Considering that higher loan loss provisioning adds to the

overall financial strength of the banks and the stability of the financial

sector, banks are urged to voluntarily set apart provisions much above the

minimum prudential levels as a desirable practice.

PrProovviissionsions oonn LeasLeaseedd AAsssets:sets:

LeasesLeases areare peculiarpeculiar trtraansactionsnsactions wherewhere thethe asasssetsets aarere nnotot rrecordedecorded inin thethe

booksbooks ofofthethe uussererofofsuchsuch aassetsssets asas Assets,Assets, wwhereashereas ththeeyy aarere rereccordedorded inin

thethe booksbooks ofofthethe ownerownereveneven thouthougghh thethe pphhyyssicalical existenceexistence ofoftthhee asasssetet isis

wwithith thethe useruser((llessee).essee). (A(ASS1919 ICAI)ICAI)

Sub-standard assets : -


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10 percent of the 'net book value'.

As per the 'Guidance Note on Accounting for Leases' issued by the

ICAI, 'Gross book value' of a fixed asset is its historical cost or other

amount substituted for historical cost in the books of account or financial

statements. Statutory depreciation should be shown separately in the

Profit & Loss Account. Accumulated depreciation should be deducted from

the Gross Book Value of the leased asset in the balance sheet of the

lesser to arrive at the 'net book value'.

Also, balance standing in 'Lease Adjustment Account' should be

adjusted in the 'net book value' of the leased assets. The amount of

adjustment in respect of each class of fixed assets may be shown either in

the main balance sheet or in the Fixed Assets Schedule as a separate

column in the section related to leased assets.

Doubtful assets :-

100 percent of the extent to which the finance is not secured by the

realisable value of the leased asset. Realisable value to be estimated on a

realistic basis. In addition to the above provision, the following provision

on the net book value of the secured portion should be made,

depending upon the period for which asset has been doubtful:

Period %age of provision

Up to one year 20

One to three years 30

More than three years 50

Loss assets :-


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The entire asset should be written-off. If for any reason, an asset is

allowed to remain in books, 100 percent of the sum of the net investment

in the lease and the unrealised portion of finance income net of finance

charge component should be provided for. ('net book value')

GuideGuidellinesines forforProvisionsProvisions underunderSpSpeecialcial

CircumstanCircumstancceses

GGoovvernmenternment guaranteedguaranteed aaddvvancesances

With effect from 31 March 2000, in respect of advances sanctioned

against State Government guarantee, if the guarantee is invoked and

remains in default for more than two quarters (180 days at present), the

banks should make normal provisions as prescribed in paragraph 4.1.2

above.

As regards advances guaranteed by State Governments, in respect of

which guarantee stood invoked as on 31.03.2000, necessary provision

was allowed to be made, in a phased manner, during the financial years

ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year.

AdAdvvancesances grantedgranted underunder rehabrehabiilitationlitation packagespackages

approvedapproved byby BIFR/termBIFR/term llendingending institutions:institutions:


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In respect of advances under rehabilitation package approved by

BIFR/term lending institutions, the provision should continue to be made in

respect of dues to the bank on the existing credit facilities as per their

classification as sub-standard or doubtful asset.

As regards the additional facilities sanctioned as per package finalised

by BIFR and/or term lending institutions, provision on additional facilities

sanctioned need not be made for a period of one year from the date of

disbursement.

In respect of additional credit facilities granted to SSI units which are

identified as sick [as defined in RPCD circular No.PLNFS.BC.57

/06.04.01/2001-2002 dated 16 January 2002] and where rehabilitation

packages/nursing programmes have been drawn by the banks themselves

or under consortium arrangements, no provision need be made for a

period of one year.

AAddvvancesances againstagainst termterm dedeppososiits,ts, NNSSCsCs eelligibleigible forfor

surrendesurrenderr,, IVPs,IVPs, KKVVPs,Ps, andand lifelife ppoolliciesicies areare

exemptedexempted fromfrom pprroovviissioningioning requirementrequirementss..

HHoowweevveerr,, aaddvvancesances aagainstgainst ggoldold ornaments,ornaments,ggoovverernnmentment securisecurittiesies andand allall otherother kindskinds ofof

securisecurittiesies areare notnot exemptedexempted fromfrom prproovviissioningioning

requirementrequirementss..


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TTreatmentreatment ofofinterestinterest suspensesuspense account:account:

Amounts held in Interest Suspense Account should not be reckoned as

part of provisions. Amounts lying in the Interest Suspense Account should

be deducted from the relative advances and thereafter, provisioning as per

the norms, should be made on the balances after such deduction.

AdAdvvancesances coveredcovered byby EECGC/DICGCCGC/DICGC guaranteeguarantee

In the case of advances guaranteed by DICGC/ECGC, provision should

be made only for the balance in excess of the amount guaranteed by

these Corporations. Further, while arriving at the provision required to be

made for doubtful assets, realisable value of the securities should first be

deducted from the outstanding balance in respect of the amount

guaranteed by these Corporations and then provision made as illustrated

hereunder:

Examp le

Outstanding Balance Rs. 4 lakhs

DICGC Cover 50 percent

Period for which the advance has remained

Doubtful

More than 3 years

remained doubtful

Value of security held

(excludes worth of Rs.)

Rs. 1.50 lakhs

Provision required to be made

Outstanding balance Rs. 4.00 lakhs


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Less: Value of security held Rs. 1.50 lakhs

Unrealised balance Rs. 2.50 lakhs

Less: DICGC Cover

(50% of unrealisable balance)

Rs. 1.25 lakhs

Net unsecured balance Rs. 1.25 lakhs

Provision for unsecured portion of

Advance

Rs. 1.25 lakhs (@ 100 percent of

unsecured portion)

Provision for secured portion of

Advance

Rs. 0.75 lakhs (@ 50 percent of

secured portion)

Total provision required to be made Rs. 2.00 lakhs

AAddvvanceance ccoovveerreded bbyy CGTSICGTSI gguaranteeuarantee

In case the advance covered by CGTSI guarantee becomes non-

performing, no provision need be made towards the guaranteed portion.

The amount outstanding in excess of the guaranteed portion should be

provided for as per the extant guidelines on provisioning for non-

performing advances. Two illustrative examples are given below:

Examp le I

Asset classification status: Doubtful More than 3 years;

CGTSI Cover 75% of the amount outstanding

or 75% of the unsecured amount

or Rs.18.75 lakh, whichever is

the least


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Realisable value of Security Rs.1.50 lakh

Balance outstanding Rs.10.00 lakh

L ess Realisable value of

security

Rs. 1.50 lakh

Unsecured amount Rs. 8.50 lakh

L ess CGTSI cover (75%) Rs. 6 .38 lakh

Net unsecured and

uncovered portion:

Rs. 2.12 lakh

Pr o v isio n R equired

Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)

Unsecured & uncovered

portion

Rs.2.12 lakh Rs. 2 .12 lakh ( 100%)

Total provision required Rs. 2.87 lakh

Examp le II

Asset classification status Doubtful More than 3 years;

CGTSI Cover 75% of the amount outstanding

or75% of the unsecured amount

or Rs.18.75 lakh, whichever isthe least

Realisable value of Security Rs.10.00 lakh

Balance outstanding Rs.40.00 lakh

L ess Realisable value of Rs. 10.00 lakh


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security

Unsecured amount Rs. 30.00 lakh

L ess CGTSI cover (75%) Rs. 1 8.75 lakh

Net unsecured and

uncovered portion:

Rs. 11.25 lakh

Pr o v isio n R equired

Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%)

Unsecured & uncovered

portion

Rs.11.25 lakh Rs.1 1.25 lakh (100%)

Total provision required Rs. 16.25 lakh

TTakeake--ooutut financefinance

The lending institution should make provisions against a 'take-out finance'

turning into NPA pending its take-over by the taking-over institution. As

and when the asset is taken-over by the taking-over institution, the

corresponding provisions could be reversed.

ReseReserrvvee forfor ExchangeExchange RateRate FluctuationsFluctuations AAccccountount

(R(REERRFFA)A)

When exchange rate movements of Indian rupee turn adverse, the

outstanding amount of foreign currency denominated a loan (where actual

disbursement was made in Indian Rupee) which becomes overdue goes

up correspondingly, with its attendant implications of provisioning

requirements. Such assets should not normally be revalued. In case such


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assets need to be revalued as per requirement of accounting practices or

for any other requirement, the following procedure may be adopted:

The loss on revaluation of assets has to be booked in the bank's Profit

& Loss Account.

Besides the provisioning requirement as per Asset Classification, banks

should treat the full amount of the Revaluation Gain relating to the

corresponding assets, if any, on account of Foreign Exchange Fluctuation

as provision against the particular assets.

ImpactImpact ofofNNPPAA

PPrrooffitabiitabilliittyy::--

NPA means booking of money in terms of bad

asset, which occurred due to wrong choice of client. Because of the

money getting blocked the prodigality of bank decreases not only

by the amount of NPA but NPA lead to opportunity cost also as

that


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much of profit invested in some return earning project/asset. So

NPA doesnt affect current profit but also future stream of profit,

which may lead to loss of some long-term beneficial opportunity.

Another impact of reduction in profitability is low ROI (return on

investment), which adversely affect current earning of bank.

LiLiqquiduiditityy:-:-

Money is getting blocked, decreased profit lead to lack of enough cash at

hand which lead to borrowing money for shot\rtes period of time which

lead to additional cost to the company. Difficulty in operating the

functions of bank is another cause of NPA due to lack of money. Routine

payments and dues.

IInnvvoollvveementment ofofmanagement:-management:-

Time and efforts of management is another indirect cost which bank has to

bear due to NPA. Time and efforts of management in handling

and managing NPA would have diverted to some fruitful activities, which

would have given good returns. Now days banks have specialemployees to deal and handle NPAs, which is additional cost to the bank.

CrCreeditdit loss:-loss:-

Bank is facing problem of NPA then it adversely affect the value of bank

in terms of market credit. It will lose its goodwill and brand image and

credit which have negative impact to the people who are putting their

money in the banks .


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RREASONSEASONS FORFOR NNPPAA::

Reasons can be divided in to two broad categories:-

A] Internal Factor


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B] External Factor

[[AA]] IInternalnternalFactors:-Factors:-

Internal Factors are those, which are internal to the bank and are

controllable by banks.

Poor lending decision:

Non-Compliance to lending norms:

Lack of post credit supervision:

Failure to appreciate good payers:

Excessive overdraft lending:

Non Transparent accounting policy:

[[BB]] ExternalExternalFFaacctors:-tors:-

External factors are those, which are external to banks they are not

controllable by banks.

Socio political pressure:


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Chang in industry environment:

Endangers macroeconomic disturbances:

Natural calamities

Industrial sickness

Diversion of funds and willful defaults

Time/ cost overrun in project implementation

Labour problems of borrowed firm

Business failure

Inefficient management

Obsolete technology

Product obsolete

EarEarllyy ssyymptomsmptoms bbyy wwhhichich oonnee cancanrecorecoggnizenize aa performingperforming assetasset tturningurning inin

toto Non-performingNon-performing asasssetet

[Comparative analysis on NPA of Private & Public sector Ban ks]Page 59


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FourFourcategoriescategories ofofearearllyy ssyymptoms:-mptoms:-

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

(( 11 )) Financial: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 is

diverted to sister concern or parent company.

( 2 ) Operational and Physical:

If information is received that the borrower has either initiated the

process 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 city

where borrower conduct his business.

Frequent changes in plan.Non payment of wages.

( 3 ) Attitudinal Changes:

Use for personal comfort, stocks and shares by borrower.


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Avoidance of contact with bank.

Problem between partners.

( 4 ) Others:

Changes in Government policies.

Death of borrower.

Competition in the market.


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PrPreeventiveventive MeasurementMeasurement ForForNNPPAA

EarlyEarlyReReccognitionognition ooffthethe Problem:-Problem:-

Invariably, by the time banks start their efforts to get involved in a

revival process, its too late to retrieve the situation- both in terms of

rehabilitation of the project and recovery of banks dues. Identification of

weakness in the very beginning that is : When the account starts

showing first signs of weakness regardless of the fact that it may not

have become NPA, is imperative. Assessment of the potential of revival

may be done on the basis of a techno-economic viability study.

Restructuring should be attempted where, after an objective

assessment of the promoters intention, banks are convinced of a

turnaround within a scheduled timeframe. In respect of totally unviable

units as decided by the bank, it is better to facilitate winding up/ selling

of the unit earlier, so as to recover whatever is possible through legalmeans before the security position becomes worse.

IIdentifyidentifyinnggBorrowersBorrowers wiwitthh GenuineGenuine IInntteent:-nt:-

Identifyi

ng borrowers with genuine intent from those who are non- serious with no

commitment or stake in revival is a challenge confronting bankers. Here

the role of frontline officials at the branch level is paramount as they are

the ones who has intelligent inputs with regard to promoters sincerity,

and capability to achieve turnaround. Base don this objective

assessment, banks should decide as quickly as possible whether it would

be worthwhile to commit additional finance.


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In this regard banks may consider having Special Investigation of all

financial transaction or business transaction, books of account in order to

ascertain real factors that contributed to sickness of the borrower. Banks

may have penal of technical experts with proven expertise and track

record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch

in fund flow or sudden requirement of additional fund may be entertained

at branch level, and for this purpose a special limit to such type of cases

should be decided. This will obviate the need to route the additional

funding through the controlling offices in deserving cases, and help avert

many accounts slipping into NPA category.

TTimelineimelinessss andandAAdequacydequacyooffreressponse:-ponse:-

Longer the delay in response, grater the injury to the account and the

asset. Time is a crucial element in any restructuring or rehabilitation

activity. The response decided on the basis of techno-economic study and

promoters commitment, has to be adequate in terms of extend of

additional funding and relaxations etc. under the restructuring exercise.

The package of assistance may be flexible and bank may look at the exit

option.

FFooccusus oonn CashCash FFlows:-lows:-

While financing, at the time of restructuring the banks may not be guided

by the conventional fund flow analysis only, which could yield a

potentially misleading picture. Appraisal for fresh credit requirements may

be done by


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analyzing funds flow in conjunction with the Cash Flow rather than only on

the basis of Funds Flow.

ManagementManagementEEfffefecctiveness:-tiveness:-

The general perception among borrower is that it is lack of finance that

leads to sickness and NPAs. But this may not be the case all the time.

Management effectiveness in tackling adverse business conditions is a

very important aspect that affects a borrowing units fortunes. A bank may

commit additional finance to an aling unit only after basic viability of the

enterprise also in the context of quality of management is examined andconfirmed. Where the default is due to deeper malady, viability study or

investigative audit should be done it will be useful to have consultant

appointed as early as possible to examine this aspect. A proper techno-

economic viability study must thus become the basis on which any future

action can be considered.

MulMulttipleiple FFiinnancing:-ancing:-

A. During the exercise for assessment of viability and restructuring, a

Pragmatic and unified approach by all the lending banks/ FIs as

also sharing of all relevant information on the borrower would go a

long way toward overall success of rehabilitation exercise, given

the probability of success/failure.

B. In some default cases, where the unit is still working, the bank

should make sure that it captures the cash flows (there is a

tendency on part of the borrowers to switch bankers once they

default, for fear of getting their cash flows forfeited), and ensure


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that such cash flows are used for working capital purposes. Toward

this end, there should be regular flow of information among

consortium members. A bank, which is not part of the consortium,

may not be allowed to offer credit facilities to such defaulting

clients. Current account facilities may also be denied at non-

consortium banks to such clients and violation may attract penal

action. The Credit Information Bureau of India Ltd.(CIBIL) may

be very useful for meaningful information exchange on defaulting

borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different.

While one set of lenders may be willing to wait for a longer time to

recover its dues, another lender may have a much shorter

timeframe in mind. So it is possible that the letter categories of

lenders may be willing to exit, even a t a cost by a discounted

settlement of the exposure. Therefore, any plan for

restructuring/rehabilitation may take this aspect into account.

D. Corporate Debt Restructuring mechanism has beeninstitutionalized in 2001 to provide a timely and transparent system

for restructuring of the corporate debt of Rs. 20 crore and above

with the banks and FIs on a voluntary basis and outside the legal

framework. Under this system, banks may greatly benefit in terms

of restructuring of large standard accounts (potential NPAs) and

viable sub-standard accounts with consortium/multiple banking

arrangements.


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TToolsools forforrecrecooveverryy ofofNNPPAsAs

CCrreditedit DefaultDefault

IInnaabbiilitylity toto PPayay WWiillfulllful ddeefaufau

UnviUnviaabbllee VViiaabbllee

CompromiseCompromise

RehabilRehabiliitatitatioo

nn

LokLok AAdalatdalat

DDeebtbt RecoveryRecovery

TTribunalsribunals Securitization

Act

CoConnssoorrtiumtium

FiFinnanceance

SoleSole BaBannkkerer AsAsssetet

RReeccoonnsstructitructioo

CCorporateorporate DebtDebt RReesstructtructuurringing

FFrreshesh IssueIssue ofof

TermTerm LoanLoanCoConnversiversioonn

iintonto WCWCTTLL

FreshFresh WWCC LimitLimit RReepphashaseemmeentnt ofof

RReeppaayymmeentnt PPeerriodiod


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Once NPA occurred, one must come out of it or it should be managed in

most efficient manner. Legal ways and means are there to over come

and manage NPAs. We will look into each one of it.

WWillillffululDefaultDefault:-:-

A] Lok Adalat and Debt Recovery Tribunal

B] Securitization Act

C] Asset Reconstruction

LokLokAdalaAdalatt::

Lok Adalat institutions help banks to settle disputes involving

account in doubtful and loss category, with outstanding balance of Rs.

5 lakh for compromise settlement under Lok Adalat. Debt recovery

tribunals have been empowered to organize Lok Adalat to decide on

cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to

be quite effective for speedy justice and recovery of small loans. The

progress through this channel is expected to pick up in the coming years.

DeDebbttRecoveryRecoveryTTrribunalibunalss(D(DRRT):T):

The recovery of debts due to

banks and financial institution passed in March 2000 has helped in

strengthening the function of DRTs. Provision for placement of more than

one recovery officer, power to attach defendants property/assets before

judgment, penal provision for disobedience of tribunals order or for breach

of any terms of order and appointment of receiver with power of

realization, management, protection and preservation of property are


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expected to provide necessary teeth to the DRTs and speed up

the recovery of NPAs in the times to come. DRTs which have been set

up by the Government to facilitate speedy recovery by banks/DFIs,

have not been able make much impact on loan recovery due to variety

of reasons like inadequate number, lack of infrastructure, under staffing

and frequent adjournment of cases. It is essential that DRT mechanism is

strengthened and vested with a proper enforcement mechanism to

enforce their orders. Non observation of any order passed by the

tribunal should amount to contempt of court, the DRT should have

right to initiate contempt proceedings. The DRT should empowered

to sell asset of the debtor companies and forward the proceed to

the winding up court for

distribution among the lenders

InInaabilitybilitytoto PayPay

CConsortiumonsortium aarrrangementrangementss::Asset classification of accounts

under consortium should be based on the r ecord of r e c o v e r y of the

in d i v id ual m ember banks and other aspects having a bearing on the

recoverability of the advances. Where the remittances by the borrower

under consortium lending arrangements are pooled with one bank and/or

where the bank receiving remittances is not parting with the share of other

member banks, the account will be treated as not serviced in the books of

the other member banks and therefore, be treated as NPA. The banks

participating in the consortium should, therefore, arrange to get their share

of recovery transferred from the lead bank or get an express consent from

the lead bank for the transfer of their share of recovery, to ensure proper

asset classification in their respective books.


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CorCorpporateorate ddeebtbtRestructuringRestructuring(CDR):(CDR):

BacBackkgroundground

In spite of their best efforts and intentions, sometimes corporate find

themselves in financial difficulty because of factors beyond their control

and also due to certain internal reasons. For the revival of the corporate

as well as for the safety of the money lent by the banks and FIs, timely

support through restructuring in genuine cases is called for. However,

delay in agreement amongst different lending institutions often comes inthe way of such endeavours.

Based on the experience in other countries like the U.K., Thailand,

Korea, etc. of putting in place institutional mechanism for restructuring of

corporate debt and need for a similar mechan

Documents

14245136 Non Performing Assets of Banks (1)