npa management

NPA MANAGEMENT 2010

UNIVERSITY OF MUMBAIA PROJECT REPORT ON

A study of Non Performing Asset ManagementIN PARTIAL FULFILLMENT OF MASTER OF MANANGEMENT STUDIES (MMS) FINANCESUBMITTED BY

SAHIL B MULLA NCRDSSTERLING INSTITUTE OF MANAGEMENT STUDIESSector - 19, Near Seawoods Dara ve Petrol Pump, Nerul (E), Navi Mumbai - 400 706

NCRDs Sterling Institute of Management Studies

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NPA MANAGEMENT 2010

Date :5th APRIL 2010

CERTIFICATEThis is to certify that Mr. SAHIL B MULLA, Roll No. 91 is a bonafide student studying for MMS Course of the University of Mumbai in this institute for the year 2009-10. As a part of the University curriculum he has completed a Final Project titled A study of NPA Management under the guidance of Prof. Sonali Athawale.

Prof. Sonali Athawale Faculty Guide

Prof. Anjan Kumar Maiti Director


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NPA MANAGEMENT 2010 ACKNOWLEDGEMENT This is to express my earnest gratitude and extreme joy at being bestowed with an opportunity to get an opportunity to get an interesting and informative project. It is impossible to thank all the people who have helped me in completion of project, but I would avail this opportunity to express my profound gratitude and indebtness to the following people for all the help they have given me.

I am extremely grateful to my project guide and co-coordinator Prof. Sonali Athawale who has given an opportunity to work on such an interesting project. She proved to be a constant source of inspiration to me and provided constructive comments on how to make this project better. Credit also goes to my friends whose constant encouragement let me in good stead. Lastly, I would thank our Director Mr. Anjan Maiti and all my faculties for providing all explicit and implicit support to me during the course of my project. I would also like to thank the staff of Bank of India for providing me few but very valuable details about my project.

Name: Sahil B Mulla MMS (FINANCE)


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NPA MANAGEMENT 2010 EXECUTIVE SUMMARY

After liberalization the Indian banking sector developed very appreciate. The RBI also nationalized good amount of commercial banks proving socio economic services to the people of the nation. The public Sector banks have shown very good performance as far as the financial operations are concerned. The total income of the public sector banks has also shown good performance since the last few years. The public sector Banks have also shown comparatively good result. The gross profits and the net profits of the Public Sector banks have been on a high from past few years. The private sector banks are also showing good results in case of profits. However, the only problem of the Scheduled Commercial Banks these days are the increasing level of the non performing assets. The Non-Performing Assets (NPAs) problem is one of the foremost and the most formidable problems that have shaken the entire banking industry in India like an earthquake. Like a canker worm, it has been eating the banking system from within, since long. It has grown like a cancer and has infected every limb of the banking system.

At macro level, NPAs have choked off the supply line of credit to the potential borrowers, thereby having a deleterious effect on capital formation and arresting the economic activity in the country. At the micro level, the unsustainable level of NPAs has eroded the profitability of banks through reduced interest income and provisioning requirements, besides restricting the recycling of funds leading to serious asset liability mismatches. The problem of NPAs is not a matter of concern for the lenders alone. It is a matter of grave concern to the public as well, as bank credit is the catalyst to the economic growth of the country and any bottleneck in the smooth flow of credit, one cause for which is mounting NPAs, is bound to create adverse repercussions in the economy. Mounting menace of NPA has raised the cost of credit, made banks more adverse to risk and squeezed genuine small and medium enterprise from accessing competitive credit and has throttled their enterprising spirits as well.

The spiraling and the devastating effect of NPA on the economy have made the problem of NPA as issue of public debate and of national priority. Therefore, any measure or reform on this front would be inadequate and incomprehensive, if it fails to make a dent in NPA reduction and stall their growth in future, as well. NCRDs Sterling Institute of Management Studies 4

NPA MANAGEMENT 2010 NPAs have deleterious effect on the return on assets in several ways: --(1) They erode current profits through provisioning requirements (2) They result in reduced interest income (3) They require higher providing requirements affecting profits and accretion to Capital funds recycling of funds, set in asset-liability mismatches, etc.

The RBI has also tried to develop many schemes and tools to reduce the non Performing assets the results are not up to the expectations. To improve NPAs each bank should be motivated to introduce their own precautionary steps. Before lending the banks must evaluate the feasible financial and operational prospective results of the borrowing companies by keeping in Considerations the overall impacts all the factors that influence the business.


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NPA MANAGEMENT 2010

IndexSr.No.1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

ContentsIntroduction

Page No.07 09 12 14 15 16 18 42 56 67 69 71 72

Profile of the organization Literature Review Objectives of the Study Hypotheses Methodology Conceptual Framework NPA Management Policy of Bank of India Data Collection and Analysis Conclusion Suggestions and Recommendations Bibliography Annexure


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NPA MANAGEMENT 2010 MANAGEMENT OF NON-PERFORMING ASSETS A BRIEF OVERVIEW

INTRODUCTION In human life, sickness, bankruptcy and death are not welcome, but they do occur. So is the case with advances, which fall sick, go into liquidation and die much against the wishes of all concerned. Realities cannot be escaped. It is necessary to face them. In the context of non-performing assets the situation is no different. The frequent references to non-performing assets primarily concern sick industrial units and mounting over dues in all other sectors of advances, particularly in agriculture. Financial assets become non-performing primarily because of the failure of the units financed by banks. The costs of managing non-performing assets are exorbitant. Bankers are compelled to get bogged down with these matters thereby neglecting their role as a developing catalyst.

NATURE OF NON-PERFORMING ASSETS The term non-performing assets can be defined both in the wider and in the narrower sense. While in the narrow sense it includes only non-performing credit portfolio, in the wider sense it may also include the volume of unutilized cash balances, unutilized or underutilized physical assets like buildings and premises in the still wider sense, it may also include nonperforming human resources a large volume of workforce not effectively unutilized. A non-performing asset in the banking sector also is termed as an asset not contributing to the income of the Bank. In other words they are the zero yielding assets that are considered. The non-performing assets, interalia, includes surplus cash and bankers balances hold over the optimal levels, amounts lying in the suspense account, investments in shares or debentures and other securities not yielding any dividend or interest, advances where interest is not forthcoming and even the principal amount is difficult to recover. In terms of Health code basis, we may say that advances classified under the Health Code Numbers 6,7,8 and those advances under the Health Code Numbers 4,5 on which no interest is being charged, may be classified among nonperforming assets.


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NPA MANAGEMENT 2010 REASONS FOR ACCUMULATION OF NON-PERFORMING ASSETS: There may be various internal and external factors behind the transformation of an asset from a performing one to a non-performing one. Some of the reasons for accumulation of the non-performing assets are: The fast and rapid geographical expansion of the banking sector during a short span, throughout the country, and our inability to cope with the voluminous work in an orderly manner. Lack of adequate care while appraising the various proposals in the initial stage. Inadequacy of the technical staff equipped with the latest market information and the technological developments is also an important factor in faulty appraisal of proposals. In case of most of the large and medium scale industries, the main reason for sickness has been found to be mismanagement. Power shortages, outdated machinery, fluctuations in supply of raw materials due to various causes, non-release of subsidy in time and deficiency in demand are also important reasons. Small scale industries are prone to sickness mainly due to lack of managerial experience, technical incompetence and decline in demand for their products and overall demand recession. Further cases are not unknown where deliberate efforts are made by a certain category of borrowers to declare their units sick, or weak to avail of benefits from different sources.


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NPA MANAGEMENT 2010

PROFILE OF THE ORGANIZATION

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalised along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalised banks. The Bank has 3101 branches in India spread over all states/ union territories including 93 specialised branches. These branches are controlled through 48 zonal offices. There are 33 branches/offices (including three representative offices) abroad. The Bank came out with its maiden public issue in 1997. Total number of shareholders as on 31/12/2008 is 2,27,310. While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalised banks to establish a fully computerised branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating / rating its credit portfolio. The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian NCRDs Sterling Institute of Management Studies 9

NPA MANAGEMENT 2010 Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 33 branches (including three representative offices) at key banking and financial centres viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The Bank has a strong position in financing foreign trade. Over 270 branches provide export credit. The expertise in this area has enabled the Bank to achieve a leading position in providing export credit in certain areas like diamond export. To effectively meet the ever-growing challenges and competition, the Bank has made a good head-way in bringing about technological upgradation. MIS and critical functions of controlling offices have been computerized. At present, the operations at about 2562 branches are totally computerized. 70 branches operate in partially-computerized mode besides these 964 branches and 31 extension counters are migrated to Core Banking Solution. New facilities such as, Telebanking, ATM & Signature Retrieval Systems have been introduced in a progressing manner to add value to services. Telebanking facilities with Fax on Demand facility, Remote Access Terminals for Corporate Customers are now available at many branches. The Bank has installed ATMs in Mumbai and other centres in the country. The Bank is a member of the RBI's VSAT Network and has installed 39 VSATs linking strategic branches/offices. The Bank is making a paradigm shift from branch automation to bank automation and is in the process of implementing a Multi-Branch Banking Project, which facilitates City-wise Connectivity of Computerized Branches. The Bank is in the process of installing BOINET, a Wide Area Network for providing a inter- and intra-city connectivity, as a part of enhancing its decision support system. The Bank's corporate personality and philosophy are fully reflected in the emblem, which is a five-pronged Star -- a harmonious blend of traditional and the functional. The elongated prong pointing upwards conveys the Bank's drive to achieve ascending goals. The Star is a beacon and guide to those in need of direction.


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NPA MANAGEMENT 2010 Mission of Bank of India "To provide superior, proactive banking services to niche markets globally, while providing costeffective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders".

Vision of Bank of India "To become the bank of choice for corporates, medium businesses and upmarket retail customers and to provide cost effective developmental banking for small business, mass market and rural markets"


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NPA MANAGEMENT 2010 LITERATURE REVIEW Magazine name CAPITAL MARKET Dec. 2009 issue The article taken for reference from this magazine and the article is named Short term pains, long-term gain on Pg.-4. It discusses about the rising NPAs, increase in provision coverage, sluggish credit offtake and dwindling treasury income. It states that these measures are going to set ways for better valuations. It tells about how the BSE Bankex has outperformed the BSE Sensex by recording robust returns of 174%. It discusses about various banks namely

Bank of India, Union Bank of India, State Bank of India, Bank of Baroda, Punjab National Bank and IndusInd Bank have reached their all time high during Oct. Nov. 2009 period. It discusses about the preparedness of various banks for reducing NPAs i.e. by improving capital adequacy ratio, increasing the minimum provision coverage ratio, introducing new policies for broader interest rate regime, creating more transparent system and extending banking reach. It also

discusses about the benchmark prime lending rate (BPLR) concept of RBI which helps to ensure appropriate pricing of loans.

Magazine name BUSINESS TODAY Dec. 2009 issue The magazine gives us the data about the various commercial banks operating in India and Ranks them according to four groups namely Large banks, Midsize banks, Small banks and Very Small banks. From the data given in the magazine done by BT-KPMG study is clear that despite the global credit crisis continues to take its toll- last month the 100th US bank collapsed since Lehman Brothers the Indian Banks continue to do business as usual and the result is given in numbers through this survey.

Research Paper A comparative study of Non Performance Assets in India by Prashanth K Reddy, IIM- Ahmedabad This article discusses about the financial sector reform in India which has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to NCRDs Sterling Institute of Management Studies 12

NPA MANAGEMENT 2010 entry, prudential norms and risk based supervision but the progress on the structural-institutional aspects has been much slower and is a cause for concern. It tells about what changes are required to tackle the NPA problem. This paper also deals with the experiences of other Asian countries in handling of NPAs. It also suggests mechanisms to handle the problem by drawing on experiences from other countries

Report on Maximising Value of Non-Performing Assets by Organisation For Co-Operation and Development (OECD) This report deals with the changing dynamics in Asian Non Performing Loans and the sociological reflections on Insolvency reforms in East Asia. But more importantly it mentions different country reports of Asian region. In case of India Sumant Batra discusses the developments in India. It tells us about what is NPA and gives an overview of non performing assets in India. It also discusses about the factors contributing to NPAs and its impact on the working of commercial banks. The legal reforms and the RBI guidelines for NPAs are discussed.

Research Paper on Rooting Out Non-Performing Assets by Nachiket Mor, ICICI research centre The paper attempts to highlight some major micro-level issues that are at the root of why unsustainable performance levels are being observed within Banks. The authors argue that unless the micro level issues are dealt with, even after the systemic issues are resolved, the problem of NPAs or other failures of the intermediation process may resurface with greater intensity. The manner in which banks manage the three phases in the life cycle of an asset (creation, monitoring and recovery) determines the quality of the intermediation process within a bank. In this paper, the need for internally consistent business models to guide the behaviour of a bank in each of these three phases is discussed.


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NPA MANAGEMENT 2010

OBJECTIVE OF THE STUDY To know Why NPAs have become an issue for banks and financial institutions in India. To understand what is Non Performing Assets and what are the underlying reasons for the emergence of the NPAs. To understand the criteria for identification of non-performing assets in banks. To understand what are the factors for rise of NPAs. To know what steps are being taken by the Indian banking sector to reduce the NPAs. To study the NPA management policy of Bank of India.

To review Bank of Indias performance in non-performing assets for the time period of 2008-2009.


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NPA MANAGEMENT 2010 HYPOTHESIS OF STUDY: Statement for Hypothesis H0: The problem of NPA is less acute in private sector banks as compared to public sector banks. H1: Over the years banks have started improving their NPA status.

The project is to determine how to manage the Non Performing Assets in Banks and what is the trend of NPAs from the past years. To carry out the study regarding NPAs which is of great concern in todays scenario, a very simple approach is followed to draw a conclusion. The comparison is done between the data of private sector banks and public sector banks. The hypothesis testing will help us in formulating an outcome . Since this being a descriptive

research much emphasis will be given on comparison analysis of various years secondary data to carry out an inference.


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NPA MANAGEMENT 2010

METHODOLOGYThe research design used for carrying out this project is descriptive research because the report deals with statistical data and the main cause of the report is to describe the factors affecting the problem mentioned.

Sources of data: There are two types of data - Primary data or raw data and secondary data or second hand data. The data which is collected on source which has not been subjected to processing or any other manipulation is primary data whereas secondary data is the data collected by someone other than the user through common sources like censuses, surveys, organizational records and data collected through qualitative methodologies or qualitative research. The data collected is mainly secondary in nature. The sources of data for this Report include the literature published by the Bank of India and also the Reserve Bank of India. Also the various magazines dealing with the current banking scenario and research paper have also been a source of information. The booklet on Recovery Policy published by the Asset Recovery Department of Bank of India has been of great help.

Sampling Plan: The target population of study included the Bank of India in particular and all other public sector banks and private sector banks in general.

Limitations of the study: The study on management of non-performing assets is limited to the Bank of India. The basis for identifying non-performing assets is the one that has been mentioned in the report but some minor changes may have been carried out through the Reserve Bank of India circulars, which are received on a daily basis by the bank. Since non-performing assets are a critical issue, bank officials are not willing to part with all the information on them. Non-performing assets is a vast topic and to do full justice to all the aspects of nonperforming assets is an impossible task for me. NCRDs Sterling Institute of Management Studies 16

NPA MANAGEMENT 2010

Scope Of The Study: The scope of the study is limited to the objectives as mentioned earlier. The study ranges from understanding the significance of non-performing assets to defining the criteria of identifying non-performing assets in the banking sector, to review Bank of Indias performance in the management of non-performing assets. It also reviews the framework of Bank of Indias recovery policy with which it hopes to bring down the percentage of net non-performing assets to the net advances. The study also encompasses the recommendations, the adhering of which will bring good results to the organization.

Techniques used for analysis of data: Analytical tools are been used for data analysis. The analytical tools such as Pie charts, bar graphs, tables are used to compare the past data with current so as to get a particular inference from it on analysis.


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NPA MANAGEMENT 2010

CONCEPTUAL FRAMEWORKWhy NPA have become an issue for banks and financial institutions in India? To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPA have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPA affects the repayment capacity of banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-performing assets.

The following are the primary causes for turning the accounts into NPA: Diversion of funds, mostly for the expansion / diversification of business or for promoting associate concern. Factors internal to business like product / marketing failure, inefficient management, inappropriate technology, labour unrest. Changes in the Macro-environment like recession in the economy, infrastructural bottlenecks Inadequate control / supervision, leading to time / cost over-runs during project. Changes in Government policies e.g. Import duties. Deficiencies like delay in the release of limits/ funds by banks / FIs

Secondary causes are as follows: Selection of the project. Implementation of the project- time over-run, cost over-run, under-financing technology involved Intention of the borrower. Industrial / Economic trend. NCRDs Sterling Institute of Management Studies 18

NPA MANAGEMENT 2010 Absence of the up gradation of the unit / ploughing back of the profit

WHAT IS NPA? Non-Performing Assets - Background: It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (NPA) and the issue is becoming more and more unmanageable. In order to bring the situation under control, some steps have been taken recently. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (SARFAESI) 2002 was passed by Parliament, which is an important step towards elimination or reduction of NPA.

Meaning of NPA: An asset is classified as non-performing asset (NPA) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facility granted by bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status.

NPA MANAGEMENT POLICY 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, then left is to look after the factor responsible for it and managing those factors.


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NPA MANAGEMENT 2010 Definition of NPA NON PERFORMING ASSET (NPA) Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset. Non Performing Asset means an asset or account of borrower which has been classified by bank or financial institution as sub standard, doubtful or loss asset, in accordance with the direction or guidelines relating to assets 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 the improvement in the payment and settlement system, recovery climate, up gradation of technology in the banking system etc, it was decided to dispense with past due concept, with effect from March 31, 2001. Accordingly as from that date, a Non performing asset shell be an advance 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 to ensure greater transparency, it has been decided to adopt 90 days overdue norms for identification of NPAs, from the year ending March 31, 2004, a non performing asset shall be a loan or an advance where; 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)


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NPA MANAGEMENT 2010 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 outstanding balance remains continuously in excess of sanctioned limit / drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned amount /drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit 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 it is not paid on due date fixed by the bank.

In short A NPA is a loan or an advance where; Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan The account remains out of order in respect of an overdraft/ cash credit The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted The installment or interest remains overdue for two crop seasons in case of short duration crops and for one crop season in case of long duration crops


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NPA MANAGEMENT 2010

ASSET CLASSIFICATION AND NPA NORMSClassification of Assets: While new private banks are careful about their asset quality and consequently have low non-performing assets (NPAs), public sector banks have large NPAs due to wrong lending policies followed earlier and also due to government regulations that require them to lend to sectors where potential of default is high. Allaying the fears that bulk of the Non-Performing Assets (NPA) was from priority sector, NPA from priority sector constituted was lower at 46 per cent than that of the corporate sector at 48 per cent. Loans and advances account for around 40 per cent of the assets of SCBs. However, delay/default in payment of interest and/or repayment of principal has rendered a significant proportion of the loan assets non-performing. As per RBIs prudential norms, a Non-Performing Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for more than two quarters after it has become past due. Past due denotes grace period of one month after it has become due for payment by the borrower.

Regulations for asset classification Assets are classified into four classes - Standard, Sub-standard, Doubtful, and Loss assets. NPA consist of assets under three categories: sub-standard, doubtful and loss. RBI for these classes of assets should evolve clear, uniform, and consistent definitions. The banks should classify their assets based on weaknesses and dependency on collateral securities into four categories:

i.

Standard Assets: It carries not more than the normal risk attached to the business and is not an NPA.

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 do 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.


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NPA MANAGEMENT 2010 ii. Sub-standard Asset: A sub-standard asset is one which has remained NPA for a period less than or equal to 12 months from 31.3.2005. In such case the current net worth of the borrower/guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

iii. Doubtful Assets: With effect from 31.3.2005, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristics that the weaknesses make collection or liquidation in full, - on the basis of currently known facts, conditions and values- highly questionable and improbable. Under this category there are three stages: D-I Doubtful up to one year

D-II Doubtful for further two years D-III Doubtful beyond three years.

iv. Loss Assets: An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset, but the amount has not yet been written off wholly or partly. The banking industry has significant market inefficiencies caused by the large amounts of Non Performing Assets (NPA) in bank portfolios, accumulated over several years. Discussions on non-performing assets have been going on for several years now. One of the earliest writings on NPA defined them as "assets which cannot be recycled or disposed off immediately, and which do not yield returns to the bank, examples of which are: Overdue and stagnant accounts, suit filed accounts, suspense accounts and miscellaneous assets, cash and bank balances with other banks, and amounts locked up in frauds".


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NPA MANAGEMENT 2010 Guidelines for the classification of assets Classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and the extent of dependencies on collateral security for the realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs especially in respect of high value of accounts.

Account with temporary Deficiencies:

The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies, which are temporary in nature as such as non availability of adequate drawing power based on latest stock.

Asset classification to be borrower wise and not facility-wise:

It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or a part thereof, which has become irregular.

Advances under consortium arrangements:

Asset classified of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having bearing on the recoverability of the advances. Accounts where there is erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightway classified under doubtful category and provisioning should be made as applicable to doubtful assets.


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NPA MANAGEMENT 2010 Agricultural Advances In respect of advances granted for agricultural purpose where interest and / or installment of

principal remains unpaid after it has become past due for two harvest seasons but for a period not exceeding two half years , such an advance should be treated as NPA. Where the natural calamities impair the repaying capacity of agricultural borrowers, banks

may decide on their own as a relief measure-conversion of the short term production loan into a term or re-schedulement of the repayment period. In such cases of conversation or re-schedulement, the term loan as well as fresh short-term

loan may be treated as current dues and need not be classified as NPA.

Restructuring /rescheduling of loans:

A standard asset where the terms of the loan arrangement regarding interest and principal have been renegotiated or rescheduled after the commencement of production should be as substandard and should remain in such category for at least one year of satisfactory performance under the renegotiated or restructured terms. In case of substandard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advances automatically unless there is satisfactory performance under the rescheduled renegotiated terms.

Exceptions :

As trading involves only buying and selling of commodities and the problems associated with manufacturing units such as bottleneck in commercial production, time and cost escalation etc. are not applicable to them.


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NPA MANAGEMENT 2010 NPA Norms Provisional Norms: Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent basis so that the balance sheets reflect a true picture of the financial status of the bank. The Narsimham Committee has recommended the following provisioning norms (i) 100 per cent of loss assets or 100 per cent of out- standings for loss assets; (ii) 100 per cent of security shortfall for doubtful assets and 20 percent to 50 per cent of the secured portion; and (iii) 10 per cent of the total out standings for substandard assets. A provision of 1% on standard assets is required as suggested by Narsimham Committee II, 1998. Banks need to have better credit appraisal systems so as to prevent NPA from occurring. The most important relaxation is that the banks have been allowed to make provisions for only 30 per cent of the "provisioning requirements" as calculated using the Narsimham Committee recommendations on provisioning. The encouraging profits recently declared by several banks have to be seen in the light of provisions made by them. To the extent that provisions have not been made, the profits would be fictitious.

Disclosure Norms: Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and borrowings. Apart from this, banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. These disclosures were to be made for the year ending March 2000. In fact, the banks must be forced to make public the nature of NPA being written off. This should be done to ensure that the taxpayers money given to the banks, as capital is not used to write off private loans without adequate efforts and punishment of defaulters.


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NPA MANAGEMENT 2010 Asset Classification Standard assets 0.25% of the o/s dues in all Standard Assets under SME and Provision requirements

Agricultural sector 1.00% of the o/s dues in all Standard Assets of the A/cs to Capital

market exposure, personal loan, commercial real estate and residential HSG. Beyond Rs. 20lakhs. 0.40% of the o/s dues in all standard assets belonging to all other

categories. Substandard assets 10% of the sum of the net investment in the lease and the unrealised

portion of finance income net of finance charge component. The terms net investment in the lease, finance income and finance charge are as defined in AS19 Leases issued by the ICAI.

Doubtful assets

20% - 50% of the secured portion depending on the age of NPA, and

100% of the unsecured portion. Loss assets It may be either written off or fully provided by the bank. The entire

asset should be written off If the assets are permitted to remain in the books for any reason, 100 %

of the outstanding should be provided for.


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NPA MANAGEMENT 2010 FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors.

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. Wilful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the 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 framers depends on rain fall for cropping. Due to irregularities of rain fall the framers are not to achieve the production level thus they are not repaying the loans. Industrial sickness 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.


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NPA MANAGEMENT 2010 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 govt to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. ii. iii. Principles of safety Principle of liquidity 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. b. Capacity to pay Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business NCRDs Sterling Institute of Management Studies 29

NPA MANAGEMENT 2010 Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully he should be a person of integrity and good character.

Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis cannot 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 computerised. 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

From bankers Enquiry from market/segment of trade, industry, business. From external credit rating agencies. Analyse 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 analyse the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyse the profitability, viability, long term acceptability of the project while financing.


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NPA MANAGEMENT 2010 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 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 of risk 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.

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 wilful defaulters can be collected by regular visits.

Re loaning process 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.


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NPA MANAGEMENT 2010 MANAGING NPA: The primary aim of any business is to make profits. Therefore, any asset created in the

course of the conduct of business should generate income for the business. This applies equally to the business of banking. The banks the worlds over deal in money,

by accepting deposits (liabilities) and out of such deposits (liabilities) lend/create loans (assets). If for any reason such assets created do not generate income or become sticky and difficult of recovery, then the very position of the banks in repaying the deposits (liabilities) on the due dates would be at stake and in jeopardy. Banks with such assets portfolio would become weak and naturally such weak banks will lose the faith and confidence of the investors. With the introduction of prudential norms for income recognition, assets classification and

provisioning, banks have become quite sensitive and are taking all possible steps to strengthen their assets acquisition and monitoring systems. There is also a growing awareness to bring down non-performing assets as these are having

adverse impact on their profitability due to de-recognition of interests as well as requirement of heavy loan loss provisions on such assets. Therefore it would be prudent for banks to manage their assets in such a manner that they always remain healthy, generate sufficient income and capable of repayment/recovery on the due dates. Management of performing/non-performing assets in banks has become an `art and science'

and virtually `a battle of wits' between the banker and the borrower with the latter demanding write off or at least a major sacrifice from the bankers side irrespective of whether he is in a position to pay or not. Management of non-performing assets of the financial sector was put on fast track recently

with the Union Cabinet approving the promulgation of an ordinance to facilitate securitization and reconstruction of financial assets. Besides enabling banks and financial institutions to create a market for the securitized assets

and improve their asset liability management, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance would also assist in setting up Asset Reconstruction Companies. Though this is a welcome development, the bankers have to do their basic homework and to utilize this opportunity to clean up and recover their dues at an early date. NCRDs Sterling Institute of Management Studies 32

NPA MANAGEMENT 2010 MEASURES TO RECOVER NPAS Over the last few years Indian banking in its attempt to integrate itself with the global banking has been facing lots of hurdles in its way due to its inherent weaknesses, despite its high sounding claims and lofty achievements. One of the major hurdles, the Indian banking is facing today, is its ever-growing size of non-performing assets over which the top management of almost each bank is baffled. On account of the intricacies involved in handling the NPA the ticklish task of assets management of the bank has become a tight rope walk affair for the controlling heads, because a little wavering this or that side may land the concern bank in trouble. The growing NPA is a potent source of worry for the finance minister as well, because in a developing country like ours, banking is seen as an important instrument of development, while with the backbreaking NPA banks have become helpless burden on the economy.

NPA with outstanding up to 5 crore:

In case of doubtful and loss assets, through the modified schemes, the banks have been directed to follow up a settlement formula under which the minimum amount to be recovered, amounts to be entire outstanding running ledger balances as on the date the account was identified as NPA i.e. the date from which the interest was not charged to the running ledger, an analysis of the given formula shows that RBI has been very much generous in granting huge relaxation to the borrowers who were not coming forward for setting their overdue loans due to one or other reason. The scheme is of high practical value as it protects the borrowers who were having genuine problems in clearing their dues because the interest component constituted a multiplied amount of principal outstanding. On the other hand, the concerned banks were also finding in difficult to sacrifice the entire interest component, but outstanding in the dummy ledger. Now as per the provision to the scheme, they will be ready to grant such relaxation in favour of the borrowers. These guidelines have come as a windfall for borrowers who after a lot of negotiations were almost ready to repay back their principal as well as part of the interest component to settle their accounts, as under the modified scheme, they would be able to save the interest component. To that extent the concerned bank stands to lose. In the case of sub standard assets, the settlement formula as given in the modified scheme states that the minimum sum to be recovered must contain the entire running ledge outstanding balance as on the date of the account was identified as NPA i.e. the date from the which interest NCRDs Sterling Institute of Management Studies 33

NPA MANAGEMENT 2010 was not charged to the running ledger plus interest at the existing prime lending rate of the bank. As per the modified scheme, the terms suggested for the payment of settlement amount NPA are simple and pragmatic. As per the terms of the scheme, the settlement amount should be paid in lump sum by the borrower. However in case of the borrower is unable to repay back in a lump sum, the scheme allows sufficient breathing period to enable him to arrange the funds and clear at least 25 percent of the settlement amount to be paid upfront and the remaining amount to be recovered in installments spread over a period of one year along with interest at the existing PLR from the date of settlement up to the date of final payment.

NPA with outstanding over Rs. 5 crores:

For recovery of NPA over Rs. 5 crore, RBI has left the matter to the concerned banks and advised that the concerned banks may formulate policy guidelines regarding their settlement and recovery. The freedom, in such cases, is given to the banks, because the attending circumstances in each case may vary from the other. Therefore it was in the right direction that adopting a generalized approach was not thought appropriate. In cases, where the amount involved is above Rs. 5 crore, RBI expects CMD of each bank to supervise the NPA personally. The CMDs of the concerned banks are advised to review all such cases within a given timeframe and decide the course of action in terms of rehabilitation/restructuring. RBI also desires the submission of a quarterly report of all NPA above Rs. 5 crore from PSU banks. Thus by putting up the cut-off dates for the implementing of the scheme, RBI desires the banks to realize the seriousness of the issue and gear up to sweep away the NPA in one go. For commercial banks, it is a golden opportunity to clear the mess, consolidate and come out on a track leading the path of global banking. The time given for weeding out the disastrous NPA is neither too long nor too short and the banks, with proper planning and follow up can drastically reduce their NPAs, if they firmly resolve to do so. RBI expects the commercial banks to follow the guidelines in letter and spirit without any discrimination or discretion as a slight dilution may jeopardize their interest. A proper monitoring system is also desired to be evolved for monitoring the progress of the scheme. As this is a rare opportunity given to the defaulting borrowers so that they can avail the chance given for the settlement of their loans. Without adequate publicity of the scheme the response from the defaulting borrowers may not be there to the expected level. NCRDs Sterling Institute of Management Studies 34

NPA MANAGEMENT 2010

Legal and Regulatory Regime A. Debt Recovery Tribunals DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain cases referred to them, by the banks and FIs for recovery of debts due to the same. The order passed by a DRT is appeal able to the Appellate Tribunal but no appeal shall be entertained by the DRAT unless the applicant deposits 75% of the amount due from him as determined by it. However, the Appellate Tribunal may, for reasons to be received in writing, waive or reduce the amount of such deposit. Advances of Rs. 1 million and above can be settled through DRT process. An important power conferred on the Tribunal is that of making an interim order (whether by way of injunction or stay) against the defendant to debar him from transferring, alienating or otherwise dealing with or disposing of any property and the assets belonging to him within prior permission of the Tribunal. This order can be passed even while the claim is pending. DRTs are criticized in respect of recovery made considering the size of NPAs in the Country. In general, it is observed that the defendants approach the High Court challenging the verdict of the Appellate Tribunal which leads to further delays in recovery. Validity of the Act is often challenged in the court, which hinders the progress of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of infrastructure.

Registrar Functions, duties and powers of Registrar: To examine and verify documents including petitions, notes of defense and memoranda of appeals to be filed with the tribunal or appellate tribunal and register them if they meet requirements or endorse them with reasons if they cannot be registered, To verify duplicate copies submitted in a case with the originals and certify them if they appear in order, and if the originals appear to have some defects, to mention such defects and get the concerned party to sign to that effect, To verify whether documents submitted along with petitions, memoranda of appeal and notes of defense are correct or not, NCRDs Sterling Institute of Management Studies 35

NPA MANAGEMENT 2010 To issue summons and get it served, To appoint days for appearance in cases, indicating reasonable reasons pursuant to law, To obtain power of attorney and get a case assumed pursuant to prevailing law, To promptly execute, or cause to be executed, actions as referred to in the order made by the Bench, To have security or guarantee as per the order made by the Bench, To maintain, or cause to be maintained, updated records including registration books, To maintain personal records of employees, To safely retain orders and directions in a serial order.

Debt Recovery Officer The order issued by the Debt Recovery Officer shall deem to be the order issued by the Tribunal. If any person disobeys any order given by the Debt Recovery Officer, the Tribunal may institute contempt proceedings against that person under the provision of the Act. In recovering the principal and interest of a loan, the Debt Recovery Officer, may follow the following procedures: In consistent with the decision of the Tribunal the Debt Recovery Officer may follow the following procedures, subject to the prevailing law. Power of Debt Recovery Officer To take possession of, or auction, the borrower's other movable or immovable property whether furnished as security or not, To take possession of, or auction, the guarantor's movable or immovable property, Where any individual is a borrower or guarantor, to arrest such individual and detain him pursuant to the prevailing law.

Presiding officer: He is the Head of the department. He has judicial power to execute the case.


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NPA MANAGEMENT 2010 B. Lokadalats The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987 helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known for effecting mediation and counselling between the parties and to reduce burden on the court, especially for small loans. Cases involving suit claims up to Rs. l million can be brought before the Lokadalat and every award of the Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any court against the award made by the Lokadalat. Several people of particular localities/ various social organizations are approaching Lokadalats which are generally presided over by two or three senior persons including retired senior civil servants, defense personnel and judicial officers. They take up cases which are suitable for settlement of debt for certain consideration. Parties are heard and they explain their legal position. They are advised to reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social workers. If the compromise is arrived at, the parties to the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to obtain a consent decree. Normally, if such settlement contains a clause that if the compromise is not adhered to by the parties, the suits pending in the court will proceed in accordance with the law and parties will have a right to get the decree from the court. In general, it is observed that banks do not get the full advantage of the Lokadalats. It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the Lokadalat meets. In any case, we should continue our efforts to seek the help of the Lokadalat.

C. Enactment of SRFAESI Act The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition to asset reconstruction and ARCs, the Act deals with the following largely aspects, Securitization and Securitization Companies Enforcement of Security Interest Creation of a central registry in which all securitization and asset reconstruction transactions

as well as any creation of security interests has to be filed.


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NPA MANAGEMENT 2010 The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover various aspects relating to registration, operations and funding of ARCS and resolution of NPAs by ARCS. The RBI has also issued guidelines to banks and financial institutions on issues relating to transfer of assets to ARCS, consideration for the same and valuation of instruments issued by the ARCS. Additionally, the Central Government has issued the security enforcement rules ("Enforcement Rules"), which lays down the procedure to be followed by a secured creditor while enforcing its security interest pursuant to the Act. The Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to the underlying security without reference to the Court after giving a 60 day notice to the defaulting borrower upon classification of the corresponding financial assistance as a nonperforming asset. The Act permits the secured creditors to take any of the following measures: Take over possession of the secured assets of the borrower including right to transfer by way of lease, assignment or sale; Take over the management of the secured assets including the right to transfer by way of lease, assignment or sale; Appoint any person as a manager of the secured asset (such person could be the ARC if they do not accept any pecuniary liability); and Recover receivables of the borrower in respect of any secured asset which has been transferred. After taking over possession of the secured assets, the secured creditors are required to obtain valuation of the assets. These secured assets may be sold by using any of the following routes to obtain maximum value. By obtaining quotations from persons dealing in such assets or otherwise interested in

buying the assets; By inviting tenders from the public; By holding public auctions; or By private treaty.


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NPA MANAGEMENT 2010 Lenders have seized collateral in some cases and while it has not yet been possible to recover value from most such seizures due to certain legal hurdles, lenders are now clearly in a much better bargaining position vis--vis defaulting borrowers than they were before the enactment of SRFAESI Act. When the legal hurdles are removed, the bargaining power of lenders is likely to improve further and one would expect to see a large number of NPAs being resolved in quick time, either through security enforcement or through settlements. Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956. The Act designates any person holding not less than 10% of the paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a controlling interest in, being the holding company of or being in control of the ARC. The SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less than Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted assets. ARCS have been granted a maximum realization time frame of five years from the date of acquisition of the assets. The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction. These include: Enforcement of security interest; Taking over or changing the management of the business of the borrower; The sale or lease of the business of the borrower; Settlement of the borrowers' dues; and Restructuring or rescheduling of debt.

ARCS are also permitted to act as a manager of collateral assets taken over by the lenders under security enforcement rights available to them or as a recovery agent for any bank or financial institution and to receive a fee for the discharge of these functions. They can also be appointed to act as a receiver, if appointed by any Court or DRT.

D. Institution of CDR Mechanism The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in India is broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The objective of the CDR mechanism has been to ensure timely and transparent restructuring of NCRDs Sterling Institute of Management Studies 39

NPA MANAGEMENT 2010 corporate debt outside the purview of the Board for Industrial and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is intended to preserve viable corporate affected by certain internal/external factors and minimize losses to creditors/other stakeholders through an orderly and coordinated restructuring programme. RBI has issued revised guidelines in February 2003 with respect to the CDR mechanism. Corporate borrowers with borrowings from the banking system of Rs. 20crores and above under multiple banking arrangement are eligible under the CDR mechanism. Accounts falling under standard, substandard or doubtful categories can be considered for restructuring. CDR is a non-statutory mechanism based on debtor-creditor agreement and inter-creditor agreement. Restructuring helps in aligning repayment obligations for bankers with the cash flow projections as reassessed at the time of restructuring. Therefore it is critical to prepare a restructuring plan on the lines of the expected business plan along with projected cash flows. The CDR process is being stabilized. Certain revisions are envisaged with respect to the eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks are not members of the CDR forum, and it is expected that they would be signing the agreements shortly. However they attend meetings. The first ARC to be operational in India- Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum. Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender arrangements and to increase transparency in the process. While in the RBI guidelines it has been recommended to involve independent consultants, banks are so far resorting to their internal teams for recommending restructuring programs.

E. Compromise Settlement Schemes One Time Settlement Schemes NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The scheme also covers NPAs classified as sub-standard as on 31st March 2000, which have subsequently become doubtful or loss. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. However cases of wilful default, fraud and malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the


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NPA MANAGEMENT 2010 minimum amount that should be recovered should be 100% of the outstanding balance in the account.

Negotiated Settlement Schemes The RBI/Government has been encouraging banks to design and implement policies for negotiated settlements, particularly for old and unresolved NPAs. The broad framework for such settlements was put in place in July 1995. Specific guidelines were issued in May 1999 to public sector banks for one-time settlements of NPAs of small scale sector. This scheme was valid until September 2000 and enabled banks to recover Rs 6.7 billion from various accounts. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs. 50 million and less. These guidelines were effective until June 2001 and helped banks recover Rs. 26 billion


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NPA MANAGEMENT 2010

NPA MANAGEMENT POLICY OF BANK OF INDIAHEALTH CODE SYSTEM AND ASSET CLASSIFICATION Begin with June 1982; Bank of India introduced the system of classifying the credit portfolio in terms of various health codes. Subsequently, in the year 1985, when the Reserve Bank of India introduced the health code system in the entire banking industry. Branches are advised to grade the borrowal accounts on an ongoing basis into 12 health codes. Guidelines for classifying advances as per health code system: Code 1: satisfactory This category covers all borrowers where: Conduct of the account is satisfactory. All terms and conditions (like punctual submission of stock statements, balance sheets for annual review, execution of annual acknowledgement of debt and security etc) are complied with. Accounts of the borrower are in order. The safety of the accounts is not in doubt.

Code 2: Irregular This category covers those accounts where the safety of the advance is not suspected, though there may be occasional irregularities. The accounts are overdrawn beyond the drawing power or the sanctioned limit for a temporary period. Installments in respect of term loans overdue for less than 6 months or under deferred payment guarantee, if overdue for less than 3 months. Some of the bills (not exceeding 10%-15% of the total outstanding in the bills purchased or discounted, account of the borrower) are overdue for payment by less than 3 months and/or refund in respect of unpaid bills is not forthcoming immediately. Code 3: Sick: viable/ under nursing. Units in respect of which nursing revival programmes are taken up should be included under this category. NCRDs Sterling Institute of Management Studies 42

NPA MANAGEMENT 2010 Code 4: Sick: Non-viable/ sticky: Accounts of borrowers under this category are those where the irregularities mentioned above persist say for a period of six months and over and there are no immediate prospects or regularization. Apparent stagnation in the business as reflected by slow negligible turnover in the account. Frequent requests for overdrawing or issue of cheques without ensuring availability of funds in the account. Bills purchased or discounted drawn by the borrower remaining overdue for 3 months. In the case of term loans, 6 or more monthly installments or 2 or more quarterly installments are overdue. Unexpected delays in submission of stock statements/quarterly/half yearly operating statements or balance sheets and other information required by the Banks. Slow movement of stock observed during inspections. Low or negligible level of activity observed during inspections. Diversion of funds to sister units/ acquiring capital assets not relevant to the Business/ large personal withdrawals. Current liabilities exceeding current assets. Basic weaknesses revealed by the financial statements of the unit such as continued cash losses beyond one year. It should be noted that above indications are only indicative and not exhaustive and not all of them may be simultaneously observed.

Code 5: Advances Recalled This category consists of those accounts where the repayment is highly doubtful and nursing is not considered worthwhile. If a decision has been taken to recall the advance, such borrowers will be classified under this code.


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NPA MANAGEMENT 2010

Code 6: Suit-Filed Accounts This category consists of accounts where legal action or recovery proceedings under the Public Debt Recovery Act wherever applicable have been initiated. They may be classified as under: Amount of advances where suits are pending for more than 5 years. Advances where suits are pending for more than 2 and up to 5 years. Advances where suits are pending for 2 years or less.

Code 7: Decreed Debts The advances where suits have been filed and decree obtained will come under this category. This may be further classified into following: Amount of debts where decrees are pending execution for more than 5 years. Amount of advances where decrees are pending execution for more than 2 and upto 5 years. Amount of advances where decrees are pending for 1 to 2 years. Amount of advances where decrees are pending for less than 1 year.

Code 8: Debts Classified By the Bank as Bad/Doubtful All advances appearing under the health code Nos. 3 to 7 and where the recoverability of the bank's dues has become doubtful on account of shortfalls in value of security, difficulty in enforcing and realizing the securities, or inability/unwillingness of the borrowers to repay the bank's dues partly or wholly, would come under this code. Such advances which are classified under health code No.8 should be excluded from the categories under health code No.3 to7.


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NPA MANAGEMENT 2010 REHABILITATION POLICY Philosophy of Rehabilitation - a reorientation The emergence of prudential norms and transparency in Banking as an agenda in the financial sector reforms suggested by Narsimhan Committee made banks study their Balance Sheets critically. The result highlighted the alarming Non-Performing Assets in the Banking Industry - Bank of India was no exception. The compulsion for huge provisions has now made Management of NPA a very critical area of top priority in Banks. While the BOI did set on huge recovery programmes in 1996 and 1997, the fresh slippages in the quality of advances (health codes) due to internal as well external factors posed severe challenges in containing NPAs within budgeted levels. Higher NPAs not only stunt the growth of the Bank but the profitability also takes a beating, as such advances no more yield interest. Bank is also required to apportion a sizeable sum by way of provisioning, out of earned profits. With the disinvestments measures of the Government and with banks going public, every man keeps an eye on banks' profitability and any negative growth further spoils the Bank's image - particularly in the now highly competitive scenario. Revised policy: It is proposed to go beyond RBI norms, study the activity and adopt a "Holistic Approach" towards the borrower/unit right from the first signal of "aberrations" noticed, other words, a prerehabilitation stage is identified to provide proper guidance and support either by rescheduling or arresting the slippage at the earliest stage and lead to "revival" of the unit to sustain it as performing asset. The new policy of rehabilitation introduces a third stage in the process, which would actually precede rehabilitation/nursing and recovery. This stage is referred as Restructuring and Revival.

RESTRUCTURING AND REVIVAL This stage is identified as crucial and refers to holding on operations and minor corrections/deviations - permitted for the unit to limp back to normalcy - a stage where the unit is not as such sick but tends to slip with symptoms of strain on its operations and finance. A critical study of the malady at this juncture and arriving at a Restructuring Plan is very essential. Restructuring for revival at this stage is not expected to involve any additional financial outlay NCRDs Sterling Institute of Management Studies 45

NPA MANAGEMENT 2010 on a regular basis. This exercise is therefore expected to be handled at the Branch level itself. Branch Managers are to be delegated adequate powers as decisions are required on the spot on day -to-day basis and the issues cannot brook any delay. However, as restructuring measures will result in changes in terms of original sanction even if it is temporary, it is proposed that restructuring plans approved at the branch level be reported to the next higher authority (Regional Manager/Zonal Manager) on monthly basis for information/data base and guidance if any.

Symptoms of Imbalance and Need for Restructuring. Broadly the factors warranting restructuring are as follows: Technical problems in production/temporary break down of plant. Commercial compulsions caused by demand and supply position, pricing and market. Managerial inadequacies such as delay in appointing professional staff. Economic factors - external in nature caused by changes in Government policies. Financial factors such as cost overrun in project implementation resulting in liquidity crunch, unexpected payments, delay in release of Bank finance etc. If the above problems crop up, the account starts throwing one or more of the following symptoms: Request for frequent overdrawing. Bouncing of cheques issued by the company/unit. Non-submission of periodical statements. Inspection reveals slow or no activity. Large labour turnover. Pressing creditors and large block-up in receivables. Wages/statutory dues not paid on time. Non-payment of interest or installments


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NPA MANAGEMENT 2010 In the above situation instead of striking an alarm there is an urgent need to study problems by inspection of the unit and its records, take market reports and hold detailed discussions with borrowers and arrive at a restructuring plan for revival/ retrieval from the distress. Sudden rigidity, if imposed, will make the revival attempt very difficult as human factors (emotion and temper run high) are to be valued. The mechanism by which the unit is allowed to function without increasing the banks exposure is called a "holding-on-operation". This is to ensure that the borrower is not weaned away or tempted to open an account with another bank for his day to-day operations. Eligibility Eligibility norms for undertaking restructuring cannot be rigid but will include: Reasons for the request are genuine. Unit being sick for reasons beyond control of the unit. Owners stake in the project is adequate. Seriousness and concern of the borrower to come out of the muddle. Concrete steps are taken/ proposed by the borrower to improve the position. Prospects of correction of imbalances should be reasonably promising. All compliance of terms of sanction met. No diversion of funds outside the company/unit has taken place. Default / aberrations are not willful or deliberate.

Once satisfied on the above aspects, the restructuring exercise right should be taken up in right earnest and implemented.

Plan of Action/Reliefs Plan of Action and Reliefs proposed shall vary from case to case and there can be no general prescription. However, one or more of the following reliefs can be considered under Restructuring Plan: -


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NPA MANAGEMENT 2010 Extending the moratorium period for repayment of installment/interest in case of new units and deferral of their recovery (for period not exceeding 3 to 12 months) in existing units. Reduction in margin on various fund based and non -fund based limits - relief not more than 10% with minimum margin of 15%. Permitting need-based interchangeability of working capital limits sanctioned, or realignment of limits. Allowing over limits - up to certain level say 20% up to a maximum of 3 to 12 months. Purchasing fresh bills to pay off past due bills with interest. Permitting cheques/Demand Draft Purchase over and above the sanctioned limit for genuine transactions. Lowering of rate of interest according to cash flows need-based basis. Any other relief not involving financial outlay (additional funds).

Pre-conditions: Before granting any of the above reliefs it should be ensured that: All terms and conditions of original sanction are complied with/without any exception. Perfection of security is done. Aberrations are of temporary nature and expected to get corrected by reliefs in a short duration say 3 to 12 months - thereafter reliefs and concessions are expected to be withdrawn. No willful/deliberate default of diversion of funds about the unit operations. Sacrifice, if any, is quantified and the bank reserves right of recompense.

Control Mechanism and Monitoring The control mechanism shall include: Control over cheques issued by borrower. 48


NPA MANAGEMENT 2010 Monthly statement of borrower's performance. Monthly reporting on the results of restructuring by Branch Manager to next higher authority. Compulsory Monthly inspection in accounts with fund based limit of Rs.5 Lakhs and over and quarterly inspections in smaller accounts.

With the above measures constant monitoring of the "Restructuring Plan" and its progress can be done by Branch/Regional Office/zonal office.

A quarterly review of such accounts can be done in forums like Zonal Committee/NPA Management Meeting etc. for farther course of action. The steps outlined above are short-term in nature. These are to be adopted in the case of Aberrations of: Temporary nature, where the borrowal account will be restored to health in a relatively short period by adopting these measures, and Other accounts where a viability study has to be conducted, pending finalisation of the viability study, and approval of a rehabilitation programme, the short-term steps may be adopted.

Viability study should be undertaken in the case of accounts falling under category above as soon as possible, but not later than 2 months from the identification of the need for restructuring, and rehabilitation. After a viability study has been conducted, the Bank may reach a decision on either rehabilitating the unit, or recalling the advance. In case the rehabilitation route is adopted, the restructuring operations should stop within one month of the rehabilitation package being approved, and the rehabilitation package put into operation. This limit would not be applicable in cases under reference to BIFR.


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NPA MANAGEMENT 2010 REHABILITATION PROGRAMME Rehabilitation programme comes into picture when the unit is declared "sick". In view of Government guidelines/RBI norms, Banks/FIs are required to be in line with the norms as far as rehabilitation, reliefs/concessions etc. are concerned. Often the units being taken up under rehabilitation programmes are chronic cases having suffered losses, erosion in net worth etc. We are not allowed to deviate much from the norms because normally such programmes are drawn within the prescribed norms/ parameters of Govt./RBI. It is a welcome sign that by a recent directive, RBI has permitted Banks/agencies to extend reliefs/concessions beyond the broad parameters laid down by RBI, without its prior approval for potentially viable non SSI sick/weak industrial units only. The eligibility norms, extent of relief are discussed in the following chapter. What is pertinent is proper diagnosis of the causes of sickness and if so whether such rehabilitation programme can turn around the unit in a given time frame. If it can, no time should be lost in formulating the rehabilitation programme for speedy implementation. On the contrary, if it is believed that a rehabilitation programme will not be fruitful it is equally important to counsel the borrower and suggest ways and means of liquidating the dues. This aspect is discussed in Chapter on "Recovery Policy". Any rehabilitation programme is a conscious exercise for the revival of the unit to recover the debt. Hence these units require constant support, monitoring and review. We should be human in approach to the problems of the unit under rehabilitation. As rehabilitation may involve additional infusion of funds it is necessary that all efforts should be made to ensure success of the programme.


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NPA MANAGEMENT 2010 Eligibility

Eligibility for undertaking rehabilitation programmes centres round the following: a) The unit is falling within the definition of "sickness" as defined by RBI. b) The causes of sickness are such that there is hope of revival of the unit within a span of 5 to 10 years. The prospects of revival depend on technical feasibility and economic viability of the proposed scheme. c) There is no deliberate intention of the borrowers to make the unit sick and they are serious about revival plan. d) No serious staff accountability.

Having defined the eligibility norms, it will be prudent to look into definition of Sickness.

Sick SSI Unit: RBI Definition. A Sick SSI unit is one, which has at the end of any accounting year accumulated losses equal to or exceeding 50% of its peak net worth in the immediately preceding two accounting years, and any of its borrowal accounts has become a doubtful asset.

Sick Non-SSI Unit: BIFR definition. A sick non-SSI unit is defined as one which has been registered for a period of 5 years and whose net worth is fully eroded by accumulated losses

Weak Industrial Unit: These units are those whose net worth has been eroded by 50% by accumulated losses. Such companies should report to the BIFR.

Once a unit is Sick as per the norms and revival prospects are bright, the cases become eligible for rehabilitation programme.


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NPA MANAGEMENT 2010 Viability of sick units

As per RBI guidelines in regard to viability of sick units here are the prescribed norms For units in Corporate Sector under SICA. 1985 including units under non SSIU: After implementation of package of reliefs and concessions the company can be considered as potentially viable provided o After extending the reliefs and concessions for a period of 7 years the unit is in a position to service the debt and interest. o The restructured debts should be repaid within the following periods: FITL WCTL Other T/L For units under SSIU Sector After implementation of package of reliefs and concessions the unit can be considered as potentially viable provided o After extending the reliefs and concessions for a period of 5 years the unit is in a position to service the debt and interest. o The average DSCR over the rehabilitation plan should not be less than 1.33 o The restructured debts should be repaid within the following periods FITL WCTL Other T/L 3 years 5 years 7 years 3 to 5years 5 to 7 years 10 years (max)


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NPA MANAGEMENT 2010 Preconditions Pre-conditions for any rehabilitation programme are briefly as follows: The terms of the package are to be duly acceptable to the borrower. Any reservations and non-compliance of the terms of the package will render the exercise a non -starter. The promoters' contribution required for the programme should be fully tied up and satisfactory proof available of the same. Bank should not lose track of validity of documents. Any deficiencies in documentation, strengthening of security should be removed/ done before agreeing for rehabilitation. Necessary approvals from Bank's authority, BIFR (if applicable), consent from other FIs/agencies should be obtained. All terms of sanction of the rehabilitation programme are to be meticulously complied with including documentation, funding of debt, interest reliefs, submission of data etc. The financial issues are in place.

Schemes - Reliefs and Concessions

The Bank in case of SSI units may formulate rehabilitation scheme. In case of Sick Industrial Companies, BIFR appoints an Operating Agency to formulate the rehabilitation package on behalf of multiple Banks/Fl or consortium of lenders.

The scheme of rehabilitation inter ali

Documents

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