Npa bhavika

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  • 1. N. L. DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCHSRISHTI, SECTOR 1, MIRA ROAD (E), MUMBAI 401 104NPA Management Submitted By:Bhavika Thakker PGDBM FINANCE2007-09 Submitted ToProf. Jyotsna Arya

2. NPA MANAGEMENT CERTIFICATEThis is to certify that Ms.Bhavika Thakker student of Post Graduate Diploma in Management Studies(Finance) batch of N. L. Dalmia Institute of Management Studies and Research has satisfactorilycompleted final project on NPA MANAGEMENT under my supervision and guidance as partialfulfillment of requirement of PGDBM course, approved by AICTE for the year 2007-09.Signature: Signature:Prof. Jyotsna Arya Prof. P. L. Arya(Project Guide)DirectorPlace: MumbaiDate: 31/03/2009 N.L.Dalmia Institute of Management and Research [ 2] 3. NPA MANAGEMENT ACKNOWLEDGEMENTNo endeavor achieves success without the cooperation of others which goes a long way in shapingand formulating a project.I take this opportunity to extend my heartfelt gratitude to Prof. P. L. Arya and my project guide Prof.Jyotsna Arya who has guided me through the duration of the project with patience and helpedwherever I faltered.Last but not the least I would like to thank my parents, all my friends and staff members of N. L.Dalmia Institute of Management Studies and Research who have constantly supported me in all myendeavors.Ms. Bhavika Thakker N.L.Dalmia Institute of Management and Research [ 3] 4. NPA MANAGEMENTPGDBM (Finance) 2007-09N. L. Dalmia Institute Of Management Studies and Research, Mumbai.PREFACEThis project report titled NPA Management describes the Non-performingAssets (NPAs) in the banking sector & the various policies laid down by the RBIas well as public sector banks for their effective management & control. Itcovers the SARFAESI Act, 2002 in detail.It does not contain a trend analysis of NPAs in banks, although a few tables &statistics are provided to emphasise their importance on the performance &profit margins of bankN.L.Dalmia Institute of Management and Research [ 4] 5. NPA MANAGEMENTTable of ContentsIntroduction.................................................................................................................. 5 Factors contributing to NPAs ............................................................................................ 9Asset classification & Provision Requirement ................................................................... 13Monitoring & Follow up Measures ......................................................................................... 19Non-Legal Remedies (Compromise Settlement) .............................................................. 21SARFAESI Act, 2002 ..................................................................................................................... 25 Procedures under the SARFAESI Act ................................................................................ 27 Movable assets ........................................................................................................................... 31 Immovable properties ........................................................................................................... 36 Appropriation of sale proceeds ...........................................................................................42Recovery / Enforcement Agents .......................................................................................46Write off Policy ........................................................................................................................... 48Bid Policy ...................................................................................................................................... 51ASCs / ARCs .................................................................................................................................. 52Board for Industrial & Financial Reconstruction (BIFR) ............................................. 53Conclusion .................................................................................................................................... 55References .................................................................................................................................... 57 N.L.Dalmia Institute of Management and Research [ 5] 6. NPA MANAGEMENT INTRODUCTIONN on-performing assets & retail banking are closely related. Greater the demand for credit,more is the risk of default, & hence NPAs. So, before looking at NPAs in detail, let us see whatconstitutes retail banking.Retail banking is quite broad in nature - it refers to the dealing of commercial banks with individualcustomers, both on liabilities and assets sides of the balance sheet. Fixed, current / savings accountson the liabilities side; and mortgages, loans (e.g., personal, housing, auto, and educational) on theassets side, are the more important of the products offered by banks. Related ancillary servicesinclude credit cards, or depository services. Todays retail banking sector is characterized by threebasic characteristics: multiple products (deposits, credit cards, insurance, investments and securities); multiple channels of distribution (call centre, branch, Internet and kiosk); and multiple customer groups (consumer, small business, and corporate)Drivers of retail business in India First, Economic prosperity and the consequent increase in purchasing power has given a fillip to a consumer boom. Note that during the 10 years after 1992, Indias economy grew at an average rate of 6.8 percent and continues to grow at the almost the same rate not many countries in the world match this performance. Second, changing consumer demographics indicate vast potential for growth in consumption both qualitatively and quantitatively. India is one of the countries having highest proportion (70%) of the population below 35 years of age (young population). The BRIC report of the Goldman-Sachs, which predicted a bright future for Brazil, Russia, India and China, mentioned Indian demographic advantage as an important positive factor for India. N.L.Dalmia Institute of Management and Research [ 6] 7. NPA MANAGEMENT Third, technological factors played a major role. Convenience banking in the form of debit cards, internet and phone-banking, anywhere and anytime banking has attracted many new customers into the banking field. Technological innovations relating to increasing use of credit / debit cards, ATMs, direct debits and phone banking has contributed to the growth of retail banking in India. Fourth, the Treasury income of the banks, which had strengthened the bottom lines of banks for the past few years, has been on the decline during the last two years. In such a scenario, retail business provides a good vehicle of profit maximisation. Considering the fact that retails share in impaired assets is far lower than the overall bank loans and advances, retail loans have put comparatively less provisioning burden on banks apart from diversifying their income streams. Fifth, decline in interest rates have also contributed to the growth of retail credit by generating the demand for such credit.Credit Risks & NPAs: However, lending is a business associated with risks. One of the risks being risk of default. Banks being commercial organisations have to continue lending activity to earn profits. Profitability very much depends on how Banks are able to roll over their advances portfolio. Rolling over of advances would be possible only if there is a timely recovery of money lent. Prompt recovery of Loans and Advances by Banks not only increases liquidity and profitability but it also keeps funds cycle moving by continuous lending for the development of the economy.Following the introduction of Income Recognition and Asset Classification (IRAC norms) and CapitalAdequacy norms, Banks have become increasingly sensitive to credit risks and there is a growingawareness of the need to keep Non Performing Assets (NPAs) at a low level. With all Banks havinginternational exposure required to move towards Basel II recommendations, stricter risk assessmentN.L.Dalmia Institute of Management and Research [ 7] 8. NPA MANAGEMENTnorms and provision requirement leading to improved capital adequacy will be the order of the day inthe times ahead.With the recent modifications in IRAC norms and provision requirement announced by the ReserveBank of India in July 2004, it is implied that an asset will require 100% provision after 48 months fromthe date of the account becoming NPA, irrespective of availability of any security or not. The 100%provision to be made on an account which does not yield any income to the organisation is a severestrain on the bottom line of the Bank. In this context the management of NPA portfolio assumesparamount importance.What is an NPA ?An asset becomes non-performing when it ceases to generate income to the Bank.Thus, a non-performing asset (NPA) is defined as a credit facility in respect of which the interest and /or instalments of principal has remained overdue for a specified period of time. N.L.Dalmia Institute of Management and Research [ 8] 9. NPA MANAGEMENTThe concept of specified period is reduced in a phased manner. The shortening of the period is from4 quarters in 1993 when the concept of IRAC norms was first introduced in India to the present levelof 90 days .Thus from 31.3.2004 an advance or loan (other than direct agricultural advance) shall be classified asan NPA where -a. Interest and / or instalment of principal remain overdue for a period of more than 90days in respect of a term loan.b. The account remains out of order in respect of an overdraft / cash credit for more than 90 days.c. The bills remain overdue for a period of more than 90 days in the case of bills purchased and discounted.d. Any amount to be received remains overdue for a period more than 90 days in respect of any