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A
PROJECT REPORT
ON
COMPARATIVE ANALYSIS ON
NON PERFORMING ASSETS
OF PRIVATE AND PUBLIC SECTOR
BANKS
K.V.PENDHARKAR COLLEGE OF ARTS
SCIENCE &COMMERCE
DOMBIVLI
SUBMITTED BY:
AVINASH ANDY (116302 )
T.Y (BANKING & INSURANCE)
Session: 2011-20
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ACKNOWLEDGEMENTACKNOWLEDGEMENT
I, WOULD LIKE TO ACKNOWLEDGE THE FOLLOWING ASI, WOULD LIKE TO ACKNOWLEDGE THE FOLLOWING AS
BEING AN IDEALIST CHANNEL AND A FRESH DIMENSIONBEING AN IDEALIST CHANNEL AND A FRESH DIMENSION
IN THE COMPLETION OF THIS PROJECT.IN THE COMPLETION OF THIS PROJECT.
FIRST AND THE FOREMOST I WOULD LIKE TO THANK MYFIRST AND THE FOREMOST I WOULD LIKE TO THANK MY
GUIDE, MR.OMKAR SIR WHOS IN VALUABLE SUPPORTGUIDE, MR.OMKAR SIR WHOS IN VALUABLE SUPPORT
AND GUIDANCE HELPED ME IN EVERY ASPECT OF THISAND GUIDANCE HELPED ME IN EVERY ASPECT OF THIS
PROJECT.PROJECT.
SECONDLY, I WOULD LIKE TO AGAIN EXPRESS MY DEEPSECONDLY, I WOULD LIKE TO AGAIN EXPRESS MY DEEP
SENSE OF GRATITUDE TOWARDS OUR BANKING ANDSENSE OF GRATITUDE TOWARDS OUR BANKING AND
INSURANCE CO-ORDINATOR FOR THE VALUABLEINSURANCE CO-ORDINATOR FOR THE VALUABLE
GUIDANCE AND SUPPORT WITHOUT THIS PROJECT WOULDGUIDANCE AND SUPPORT WITHOUT THIS PROJECT WOULD
HAVE NOT BEEN POSSIBLE.HAVE NOT BEEN POSSIBLE.
LAST BUT NOT THE LEAST I WOULD TO THANKLAST BUT NOT THE LEAST I WOULD TO THANK
ALL THE RESPONDENTS FOR THEIR SUPPORT AND ALLALL THE RESPONDENTS FOR THEIR SUPPORT AND ALL
THOSE PEOPLE WHO DIRECTLY AND INDIRECTLY HELPEDTHOSE PEOPLE WHO DIRECTLY AND INDIRECTLY HELPED
ME IN COMPLETING THIS PROJECT SATISFACTORME IN COMPLETING THIS PROJECT SATISFACTOR
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(((((( CONTENTSCONTENTS ))))))
CHAPTERCHAPTER
NO.NO.
SUBJECT COVEREDSUBJECT COVERED PAGEPAGE
NO.NO.
11 Indian Banking IndustryIndian Banking Industry
22 Introduction To NPAIntroduction To NPA
33 Types of NPATypes of NPA
44 Income RocognitionIncome Rocognition
55 Aseet Classification of NPAAseet Classification of NPA
66 GuidelinesGuidelines
77 ImpactImpact
88 Tools for Recovery of NPATools for Recovery of NPA
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Ch.1 HISTORY OF INDIAN BANKING
A bank is a financial institution that provides banking and other financial
services. By the term bank is generally understood an institution that
holds a Banking Licenses. Banking licenses are granted by financial
supervision authorities and provide rights to conduct the most fundamental
banking services such as accepting deposits and making loans. There are
also financial institutions that provide certain banking services without
meeting the legal definition of a bank, a so-called Non-bank. Banks are a
subset of the financial services industry.
The word bank is derived from the Italian banca, which is derived from
German and means bench. The terms bankrupt and "broke" are similarly
derived from banca rotta, which refers to an out of business bank, having
its bench physically broken. Moneylenders in Northern Italy originally did
business in open areas, or big open rooms, with each lender working from
his own bench or table.
Typically, a bank generates profits from transaction fees on financial
services or the interest spread on resources it holds in trust for clients
while paying them interest on the asset. Development of banking industry
in India followed below stated steps.
Banking in India has its origin as early as the Vedic period. It is
believed that the transition from money lending to banking must
have occurred even before Manu, the great Hindu Jurist, who has
devoted a section of his work to deposits and advances and laid
down rules relating to rates of interest.
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Banking in India has an early origin where the indigenous bankers
played a very important role in lending money and financing foreign
trade and commerce. During the days of the East India Company,
was the turn of the agency houses to carry on the banking
business. The General Bank of India was first Joint Stock Bank to
be established in the year 1786. The others which followed were
the Bank Hindustan and the Bengal Bank.
In the first half of the 19th century the East India Company
established three banks; the Bank of Bengal in 1809, the Bank of
Bombay in 1840 and the Bank of Madras in 1843. These three
banks also known as Presidency banks were amalgamated in 1920
and a new bank, the Imperial Bank of India was established in
1921. With the passing of the State Bank of India Act in 1955 the
undertaking of the Imperial Bank of India was taken by the newly
constituted State Bank of India.
The Reserve Bank of India which is the Central Bank was created
in 1935 by passing Reserve Bank of India Act, 1934 which was
followed up with the Banking Regulations in 1949. These acts
bestowed Reserve Bank of India (RBI) with wide ranging powers for
licensing, supervision and control of banks. Considering the
proliferation of weak banks, RBI compulsorily merged many of themwith stronger banks in 1969.
The three decades after nationalization saw a phenomenal
expansion in the geographical coverage and financial spread of the
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banking system in the country. As certain rigidities and weaknesses
were found to have developed in the system, during the late
eighties the Government of India felt that these had to be
addressed to enable the financial system to play its role in ushering
in a more efficient and competitive economy. Accordingly, a high-
level committee was set up on 14 August 1991 to examine all
aspects relating to the structure, organization, functions and
procedures of the financial system. Based on the recommendations
of the Committee (Chairman: Shri M. Narasimham), a
comprehensive reform of the banking system was introduced in
1992-93. The objective of the reform measures was to ensure that
the balance sheets of banks reflected their actual financial health.
One of the important measures related to income recognition, asset
classification and provisioning by banks, on the basis of objective
criteria was laid down by the Reserve Bank. The introduction of
capital adequacy norms in line with international standards has
been another important measure of the reforms process.
1. Comprises balance of expired loans, compensation and otherbonds such as National Rural Development Bonds and Capital
Investment Bonds. Annuity certificates are excluded.
2. These represent mainly non- negotiable non- interest bearing
securities issued to International Financial Institutions like
International Monetary Fund, International Bank for
Reconstruction and Development and Asian Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident
Funds, Special Deposits of Non- Government
In the post-nationalization era, no new private sector banks were
allowed to be set up. However, in 1993, in recognition of the need
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to introduce greater competition which could lead to higher
productivity and efficiency of the banking system, new private
sector banks were allowed to be set up in the Indian banking
system. These new banks had to satisfy among others, the
following minimum requirements:
(i) It should be registered as a public limited company;
(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv)The headquarters of the bank should be preferably
located in a centre which does not have the headquarters
of any other bank; and
(v) The bank will be subject to prudential norms in respect
of banking operations, accounting and other policies as laid
down by the RBI. It will have to achieve capital adequacy
of eight per cent from the very beginning.
A high level Committee, under the Chairmanship of Shri M.
Narasimham, was constituted by the Government of India inDecember 1997 to review the record of implementation of financial
system reforms recommended by the CFS in 1991 and chart the
reforms necessary in the years ahead to make the banking system
stronger and better equipped to compete effectively in international
economic environment. The Committee has submitted its report to
the Government in April 1998. Some of the recommendations of the
Committee, on prudential accounting norms, particularly in the
areas of Capital Adequacy Ratio, Classification of Government
guaranteed advances, provisioning requirements on standard
advances and more disclosures in the Balance Sheets of banks
have been accepted and implemented. The other
recommendations are under consideration.
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The banking industry in India is in a midst of transformation,
thanks to the economic liberalization of the country, which has
changed business environment in the country. During the pre-liberalization period, the industry was merely focusing on deposit
mobilization and branch expansion. But with liberalization, it found
many of its advances under the non-performing assets (NPA) list.
More importantly, the sector has become very competitive with the
entry of many foreign and private sector banks. The face of banking
is changing rapidly. There is no doubt that banking sector reforms
have improved the profitability, productivity and efficiency of banks,
but in the days ahead banks will have to prepare themselves to
face new challenges.
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Indian Banking: Key Developments
1969 Government acquires ownership in major banks
Almost all banking operations in manual mode
Some banks had Unit record Machines of IBM for IBR &
Pay roll1970- 1980 Unprecedented expansion in geographical coverage, staff
business & transaction volumes and directed lending to
agriculture, SSI & SB sector
Manual systems struggle to handle exponential rise in
transaction volumes --
Outsourcing of data processing to service bureau begins
Back office systems only in Multinational (MNC) banks
offices1981- 1990 Regulator (read RBI) led IT introduction in Banks
Product level automation on stand alone PCs at branches
(ALPMs)
In-house EDP infrastructure with Unix boxes, batch
processing in Cobol for MIS.
Mainframes in corporate office
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1991-1995 Expansion slows down
Banking sector reforms resulting in progressive de-
regulation of banking, introduction of prudential banking
norms entry of new private sector banks
Total Branch Automation (TBA) in Govt. owned and old
private banks begins
New private banks are set up with CBS/TBA form the start
1996-2000 New delivery channels like ATM, Phone banking and
Internet banking and convenience of any branch banking
and auto sweep products introduced by new private and
MNC banks
Retail banking in focus, proliferation of credit cards
Communication infrastructure improves and becomes
cheap. IDRBT sets up VSAT network for Banks
Govt. owned banks feel the heat and attempt to respond
using intermediary technology, TBA implementation surges
ahead under fiat from Central Vigilance
Commission (CVC), Y2K threat consumes last two years
2000-2003 Alternate delivery channels find wide consumer acceptance
IT Bill passed lending legal validity to electronic transactions
Govt. owned banks and old private banks star
implementing CBSs, but initial attempts face problems
Banks enter insurance business launch debit cards
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NON PERFORMING ASSETS (NPA)
NPA (NON PERFORMING ASSETS) ?
Action for enforcement of security interest can be initiated only if thesecured asset is classified as Nonperforming asset.
Non performing asset means an asset or account of borrower ,which hasbeen classified by bank or financial institution as sub standard , doubtfulor loss asset, in accordance with the direction or guidelines relating toassets classification issued by RBI .
An amount due under any credit facility is treated as past due when itis not been paid within 30 days from the due date. Due to the
improvement in the payment and settlement system, recovery climate, upgradation of technology in the banking system etc, it was decided todispense with past due concept, with effect from March 31, 2001.
Accordingly as from that date, a Non performing asset shell be anadvance where
i. Interest and/or installment of principal remain overdue for a period
of more than 180 days in respect of a term loan,
ii. The account remains out of order for a period of more than 180
days ,in respect of an overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 180 days in case
of bill purchased or discounted.
iv. Interest and/or principal remains overdue for two harvest season
but for a period not exceeding two half years in case of an advance
granted for agricultural purpose ,and
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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 daysoverdue norms for identification of NPAs ,from the year ending March31,2004,a non performing asset shell 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)
iii. The bill remains overdue for a period of more than 90 days
in case of bill purchased or discounted.
iv. Interest and/or principal remains overdue for two harvest
season but for a period not exceeding two half years in case
of an advance granted for agricultural purpose ,and
v. Any amount to be received remains overdue for a period of
more than 90 days in respect of other accounts
Out of order
An account should be treated as out of order if the outstandingbalance remains continuously in excess of sanctioned limit /drawingpower. in case where the out standing balance in the principal operatingaccount is less than the sanctioned amount /drawing power, but there areno credits continuously for six months as on the date of balance sheet orcredit are not enough to cover the interest debited during the sameperiod ,these account should be treated as out of order.
Overdue
Any amount due to the bank under any credit facility is overdue if itis not paid on due date fixed by the bank.
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FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of therising NPAs. But the problem of NPAs is more in public sector bankswhen compared to private sector banks and foreign banks. The NPAs inPSB are growing due to external as well as internal factors.
EXTERNAL FACTORS :-----------------------------------
Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which
works for recovery of loans and advances. Due to their negligence
and ineffectiveness in their work the bank suffers the consequence
of non-recover, their by reducing their profitability and liquidity.
Willful Defaults
There are borrowers who are able to payback loans but areintentionally withdrawing it. These groups of people should beidentified and proper measures should be taken in order to get backthe money extended to them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in
NPAs of the PSBs. every now and then India is hit by major natural
calamities thus making the borrowers unable to pay back there
loans. Thus the bank has to make large amount of provisions in
order to compensate those loans, hence end up the fiscal with a
reduced profit.
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Mainly ours farmers depends on rain fall for cropping. Due
to irregularities of rain fall the farmers are not to achieve the
production level thus they are not repaying the loans.
Industrial sickness
Improper project handling , ineffective management , lack of
adequate resources , lack of advance technology , day to day
changing govt. Policies give birth to industrial sickness. Hence the
banks that finance those industries ultimately end up with a low
recovery of their loans reducing their profit and liquidity.
Lack of demand
Entrepreneurs in India could not foresee their product demand and
starts production which ultimately piles up their product thus making
them unable to pay back the money they borrow to operate these
activities. The banks recover the amount by selling of their assets,
which covers a minimum label. Thus the banks record the non
recovered part as NPAs and has to make provision for it.
Change on Govt. policies
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With every new govt. banking sector gets new policies for its
operation. Thus it has to cope with the changing principles and
policies for the regulation of the rising of NPAs.
The fallout of handloom sector is continuing as most of the
weavers Co-operative societies have become defunct largely due
to withdrawal of state patronage. The rehabilitation plan worked out
by the Central government to revive the handloom sector has not
yet been implemented. So the over dues due to the handloom
sectors are becoming NPAs.
INTERNAL FACTORS :-
---------------------------------
Defective Lending process
There are three cardinal principles of bank lending that have been
followed by the commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability
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By safety it means that the borrower is in a position to repay the
loan both principal and interest. The repayment of loan depends
upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon:1. Tangible assets2. Success in business
Willingness to pay depends on:1. Character2. Honest3. Reputation of borrower
The banker should, there fore take utmost care in ensuring that theenterprise or business for which a loan is sought is a sound oneand the borrower is capable of carrying it out successfully .heshould be a person of integrity and good character.
Inappropriate technology
Due to inappropriate technology and management information
system, market driven decisions on real time basis can not be
taken. Proper MIS and financial accounting system is not
implemented in the banks, which leads to poor credit collection,
thus NPA. All the branches of the bank should be computerized.
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Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis
is another reason for rise in NPAs. While providing unsecuredadvances the banks depend more on the honesty, integrity, and
financial soundness and credit worthiness of the borrower.
Banks should consider the borrowers own capital
investment.
it should collect credit information of the borrowers from_
a. From bankers.
b. Enquiry from market/segment of trade, industry,
business.
c. From external credit rating agencies.
Analyze the balance sheet.
True picture of business will be revealed on analysis of
profit/loss a/c and balance sheet.
Purpose of the loan
When bankers give loan, he should analyze the purpose of
the loan. To ensure safety and liquidity, banks should grant
loan for productive purpose only. Bank should analyze the
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profitability, viability, long term acceptability of the project
while financing.
Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to
poor credit appraisal the bank gives advances to those who are not
able to repay it back. They should use good credit appraisal to
decrease the NPAs.
Managerial deficiencies
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
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or industries affected adversely, the overall position of the bank will
not be affected.
Like OSCB suffered loss due to the OTM Cuttack, andOrissa hand loom industries. The biggest defaulters of OSCB are
the OTM (117.77lakhs), and the handloom sector Orissa hand loom
WCS ltd (2439.60lakhs).
Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence
of regularly visit of bank officials to the customer point decreases
the collection of interest and principals on the loan. The NPAs due
to willful defaulters can be collected by regular visits.
Re loaning process
Non remittance of recoveries to higher financing agencies and re
loaning of the samehave 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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PROBLEMS DUE TO NPA
1. Owners do not receive a market return on there capital .in the worst
case, if the banks fails, owners loose their assets. In modern times
this may affect a broad pool of shareholders.
2. Depositors do not receive a market return on saving. In the worst
case if the bank fails, depositors loose their assets or uninsured
balance.
3. Banks redistribute losses to other borrowers by charging higherinterest rates, lower deposit rates and higher lending rates repress
saving and financial market, which hamper economic growth.
4. Non performing loans epitomize bad investment. They misallocate
credit from good projects, which do not receive funding, to failed
projects. Bad investment ends up in misallocation of capital, and by
extension, labour and natural resources.
Non performing asset may spill over the banking system and contract the
money stock, which may lead to economic contraction. This spill overeffect can channelize through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience
liquidity shortage. This can jam payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the banks capital base.
The three letters Strike terror in banking sector and business circle today.
NPA is short form of Non Performing Asset. The dreaded NPA rule says
simply this: when interest or other due to a bank remains unpaid for more
than 90 days, the entire bank loan automatically turns a non performing
asset. The recovery of loan has always been problem for banks and
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financial institution. To come out of these first we need to think is it
possible to avoid NPA, no can not be then left is to look after the factor
responsible for it and managing those factors.
Interest and/or instalment of principal remains overdue for two
harvest seasons but for a period not exceeding two half years
in the case of an advance granted for agricultural purposes,
and
Any amount to be received remains overdue for a period of
more than 90 days in respect of other accounts.
As a facilitating measure for smooth transition to 90 days norm, banks
have been advised to move over to charging of interest at monthly rests,
by April 1, 2002. However, the date of classification of an advance as NPA
should not be changed on account of charging of interest at monthly rests.
Banks should, therefore, continue to classify an account as NPA only if the
interest charged during any quarter is not serviced fully within 180 days
from the end of the quarter with effect from April 1, 2002 and 90 days from
the end of the quarter with effect from March 31, 2004.
'Out of Order' status'Out of Order' status::
An account should be treated as 'out of order' if the
outstanding balance remains continuously in excess of the sanctioned
limit/drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit/drawing
power, but there are no credits continuously for six months as on the date
of Balance Sheet or credits are not enough to cover the interest debited
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during the same period, these accounts should be treated as 'out of
order'.
Overdue:Overdue:
Any amount due to the bank under any credit facility isoverdue if it is not paid on the due date fixed by the bank
Ch.2 Introduction to the topicCh.2 Introduction to the topic
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 unpaidfor more than 90 days, the entire bank loan automatically turns a non
performing asset. The recovery of loan has always been problem for
banks and financial institution. To come out of these first we need to think
is it possible to avoid NPA, no can not be then left is to look after the factor
responsible for it and managing those factors.
Definitions:Definitions:
An asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank.
A non-performing asset (NPA) was defined as a credit facility in respect
of which the interest and/ or instalment of principal has remained past
due for a specified period of time.
With a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt the 90 days overdue
norm for identification of NPAs, from the year ending March 31, 2004.
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Accordingly, with effect from March 31, 2004, a non-performing asset
(NPA) shall be a loan or an advance where;
Interest and/ or instalment of principal remain overdue for a
period of more than 90 days in respect of a term loan,
The account remains out of order for a period of more than 90
days, in respect of an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in
the case of bills purchased and discounted,
Interest and/or instalment of principal remains overdue for two
harvest seasons but for a period not exceeding two half years
in the case of an advance granted for agricultural purposes,
and
Any amount to be received remains overdue for a period of
more than 90 days in respect of other accounts.
As a facilitating measure for smooth transition to 90 days norm,
banks have been advised to move over to charging of interest at monthly
rests, by April 1, 2002. However, the date of classification of an advance
as NPA should not be changed on account of charging of interest at
monthly rests. Banks should, therefore, continue to classify an account as
NPA only if the interest charged during any quarter is not serviced fullywithin 180 days from the end of the quarter with effect from April 1, 2002
and 90 days from the end of the quarter with effect from March 31, 2004.
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Ch.3 Types of NPACh.3 Types of NPA
A] Gross NPAA] Gross NPA
B] Net NPAB] Net NPA
A] Gross NPA:A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as
NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA
reflects the quality of the loans made by banks. It consists of all the
non standard assets like as sub-standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio Gross NPAsGross Advances
B] Net NPA:B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the
provision regarding NPAs. Net NPA shows the actual burdenof banks.
Since in India, bank balance sheets contain a huge amount of NPAs and
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the process of recovery and write off of loans is very time consuming, the
provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference
between gross and net NPA is quite high.
It can be calculated by following_
Net NPAs Gross NPAs ProvisionsGross Advances - Provisions
Ch.4 INCOME RECOGNITIONCh.4 INCOME RECOGNITION
Income recognition PolicyIncome recognition Policy
The policy of income recognition has to be objective and based on
the record of recovery. Internationally income from non-performing
assets (NPA) is not recognised on accrual basis but is booked as
income only when it is actually received. Therefore, the banks
should not charge and take to income account interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs,
KVPs and Life policies may be taken to income account on the due
date, provided adequate margin is available in the accounts.
Fees and commissions earned by the banks as a result of re-
negotiations or rescheduling of outstanding debts should be
recognised on an accrual basis over the period of time covered by
the re-negotiated or rescheduled extension of credit.
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If Government guaranteed advances become NPA, the interest on
such advances should not be taken to income account unless the
interest has been realised.
Reversal of income:Reversal of income:
If any advance, including bills purchased and discounted, becomes
NPA as at the close of any year, interest accrued and credited to
income account in the corresponding previous year, should be
reversed or provided for if the same is not realised. This will apply
to Government guaranteed accounts also.
In respect of NPAs, fees, commission and similar income that have
accrued should cease to accrue in the current period and should be
reversed or provided for with respect to past periods, if uncollected.
Leased Assets
The net lease rentals (finance charge) on the leased assetaccrued and credited to income account before the asset became
non-performing, and remaining unrealised, should be reversed or
provided for in the current accounting period.
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The term 'net lease rentals' would mean the amount of financecharge taken to the credit of Profit & Loss Account and would be
worked out as gross lease rentals adjusted by amount of statutorydepreciation and lease equalisation account.
As per the 'Guidance Note on Accounting for Leases' issuedby the Council of the Institute of Chartered Accountants of India
(ICAI), a separate Lease Equalisation Account should be opened by
the banks with a corresponding debit or credit to Lease Adjustment
Account, as the case may be. Further, Lease Equalisation Account
should be transferred every year to the Profit & Loss Account and
disclosed separately as a deduction from/addition to gross value of
lease rentals shown under the head 'Gross Income'.
Appropriation of recovery in NPAsAppropriation of recovery in NPAs
Interest realised on NPAs may be taken to income account
provided the credits in the accounts towards interest are not out of
fresh/ additional credit facilities sanctioned to the borrower
concerned.
In the absence of a clear agreement between the bank and the
borrower for the purpose of appropriation of recoveries in NPAs
(i.e. towards principal or interest due), banks should adopt an
accounting principle and exercise the right of appropriation of
recoveries in a uniform and consistent manner.
Interest Application:Interest Application:
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There is no objection to the banks using their own discretion in debiting
interest to an NPA account taking the same to Interest Suspense Account
or maintaining only a record of such interest in proforma accounts.
Reporting of NPAsReporting of NPAs
Banks are required to furnish a Report on NPAs as on 31st March
each year after completion of audit. The NPAs would relate to the
banks global portfolio, including the advances at the foreign
branches. The Report should be furnished as per the prescribed
format given in the Annexure I.
While reporting NPA figures to RBI, the amount held in interest
suspense account, should be shown as a deduction from gross
NPAs as well as gross advances while arriving at the net NPAs.
Banks which do not maintain Interest Suspense account for parking
interest due on non-performing advance accounts, may furnish the
amount of interest receivable on NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write
off, if any, should be reduced from the outstanding gross advances
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and gross NPAs to eliminate any distortion in the quantum of NPAs
being reported.
REPORTING FORMAT FOR NPA GROSS AND NET NPA
Name of the Bank:
Position as on
PARTICULARS
1) Gross Advanced *
2) Gross NPA *
3) Gross NPA as %age of Gross Advanced
4) Total deduction( a+b+c+d )( a ) Balance in interest suspense a/c **
( b ) DICGC/ECGC claims received and held pending
adjustment
( c ) part payment received and kept in suspense a/c
( d ) Total provision held ***
5) Net advanced ( 1-4 )
6) Net NPA ( 2-4 )
7) Net NPA as a %age of Net Advance
*excluding Technical write-off of Rs.________crore.
**Banks which do not maintain an interest suspense a/c to park the
accrued interest on NPAs may furnish the amount of interest receivable on
NPAs.
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***Excluding amount of Technical write-off (Rs.______crore) and provision
on standard assets. (Rs._____crore).
Ch.5 Asset Classification of NPACh.5 Asset Classification of NPA
--------------------------------------------------------------Categories of NPAsCategories of NPAs
Standard Assets:Standard Assets:
Standard assets are the ones in which the bank is receiving interest as
well as the principal amount of the loan regularly from the customer. Here
it is also very important that in this case the arrears of interest and the
principal amount of loan does not exceed 90 days at the end of financial
year. If asset fails to be in category of standard asset that is amount due
more than 90 days then it is NPA and NPAs are further need to classify in
sub categories.
Banks are required to classify non-performing assets
further into the following three categories based on the period for which
the asset has remained non-performingand the realisabilityof the dues:
( 1 ) Sub-standard Assets( 1 ) Sub-standard Assets
( 2 ) Doubtful Assets( 2 ) Doubtful Assets
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( 3 ) Loss Assets( 3 ) Loss Assets
( 1 ) Sub-standard Assets:--( 1 ) Sub-standard Assets:--
With effect from 31 March 2005, a sub standard asset would be one,
which has remained NPA for a period less than or equal to 12 month. The
following features are exhibited by sub standard assets: the current net
worth of the borrowers / guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the
banks in full; and the asset has well-defined credit weaknesses that
jeopardise the liquidation of the debt and are characterised by the distinct
possibility that the banks will sustain some loss, if deficiencies are notcorrected.
( 2 ) Doubtful Assets:--( 2 ) Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in assets
that were classified as sub-standard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of
currently known facts, conditions and values highly questionable and
improbable.
With effect from March 31, 2005, an asset would be classified as doubtful
if it remained in the sub-standard category for 12 months.
( 3 ) Loss Assets:--Loss Assets:--
A loss asset is one which considered uncollectible and of such little value
that its continuance as a bankable asset is not warranted- although there
may be some salvage or recovery value. Also, these assets would have
been identified as loss assets by the bank or internal or external auditors
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or the RBI inspection but the amount would not have been written-off
wholly.
Provisioning NormsProvisioning Norms------------------------------------------------------------------------------------
GeneralGeneral
In order to narrow down the divergences and ensure adequate
provisioning by banks, it was suggested that a bank's statutory
auditors, if they so desire, could have a dialogue with RBI's
Regional Office/ inspectors who carried out the bank's inspection
during the previous year with regard to the accounts contributing to
the difference.
Pursuant to this, regional offices were advised to forward a list of
individual advances, where the variance in the provisioning
requirements between the RBI and the bank is above certain cut off
levels so that the bank and the statutory auditors take into account
the assessment of the RBI while making provisions for loan loss,
etc.
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The primary responsibility for making adequate provisions for any
diminution in the value of loan assets, investment or other assets is
that of the bank managements and the statutory auditors. Theassessment made by the inspecting officer of the RBI is furnished
to the bank to assist the bank management and the statutory
auditors in taking a decision in regard to making adequate and
necessary provisions in terms of prudential guidelines.
In conformity with the prudential norms, provisions should be made
on the non-performing assets on the basis of classification ofassets into prescribed categories as detailed in paragraphs 4
supra. Taking into account the time lag between an account
becoming doubtful of recovery, its recognition as such, the
realisation of the security and the erosion over time in the value of
security charged to the bank, the banks should make provision
against sub-standard assets, doubtful assets and loss assets as
below:
Loss assets:Loss assets:
The entire asset should be written off. If the assets are permitted to
remain in the books for any reason, 100 percent of the outstanding should
be provided for.
Doubtful assets:Doubtful assets:
100 percent of the extent to which the advance is not covered by
the realisable value of the security to which the bank has a valid
recourse and the realisable value is estimated on a realistic basis.
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In regard to the secured portion, provision may be made on the
following basis, at the rates ranging from 20 percent to 50 percent
of the secured portion depending upon the period for which theasset has remained doubtful:
Period for which the advance has
been considered as doubtful
Provision
requirement (%)
Up to one year 20
One to three years 30
More than three years:
(1) Outstanding stock of NPAs as on
March 31, 2004.
(2) Advances classified as doubtful
more than three years on or after
April 1, 2004.
60% with effect from March
31,2005.
75% effect from March 31,
2006.
100% with effect from
March 31, 2007.
Additional provisioning consequent upon the change in thedefinition of doubtful assets effective from March 31, 2003 has to
be made in phases as under:
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As on 31.03.2003, 50 percent of the additional provisioningrequirement on the assets which became doubtful on account of new
norm of 18 months for transition from sub-standard asset to doubtful
category.
As on 31.03.2002, balance of the provisions not made during the
previous year, in addition to the provisions needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning
consequent upon the reduction in the transition period from
substandard to doubtful asset from 18 to 12 months over a four
year period commencing from the year ending March 31, 2005, with
a minimum of 20 % each year.
Note: Valuation of Security for provisioning purposes
With a view to bringing down divergence arising out of difference in
assessment of the value of security, in cases of NPAs with balance of Rs.
5 crore and above stock audit at annual intervals by external agencies
appointed as per the guidelines approved by the Board would be
mandatory in order to enhance the reliability on stock valuation. Valuers
appointed as per the guidelines approved by the Board of Directors should
get collaterals such as immovable properties charged in favour of the bank
valued once in three years.
Sub-standard assets:Sub-standard assets:
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A general provision of 10 percent on total outstanding should be made
without making any allowance for DICGC/ECGC guarantee cover and
securities available.
Standard assets:Standard assets:
From the year ending 31.03.2000, the banks should make a
general provision of a minimum of 0.40 percent on standard assets
on global loan portfolio basis.
The provisions on standard assets should not be reckoned for
arriving at net NPAs.
The provisions towards Standard Assets need not be netted from
gross advances but shown separately as 'Contingent Provisions
against Standard Assets' under 'Other Liabilities and Provisions -
Others' in Schedule 5 of the balance sheet.
Floating provisions:Floating provisions:
Some of the banks make a 'floating provision' over
and above the specific provisions made in respect of accounts identified
as NPAs. The floating provisions, wherever available, could be set-offagainst provisions required to be made as per above stated provisioning
guidelines. Considering that higher loan loss provisioning adds to the
overall financial strength of the banks and the stability of the financial
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sector, banks are urged to voluntarily set apart provisions much above the
minimum prudential levels as a desirable practice.
Provisions on Leased Assets:Provisions on Leased Assets:Leases are peculiar transactions where the assets are not recorded in theLeases are peculiar transactions where the assets are not recorded in the
books of the user of such assets as Assets, whereas they are recorded inbooks of the user of such assets as Assets, whereas they are recorded in
the books of the owner even though the physical existence of the asset isthe books of the owner even though the physical existence of the asset is
with the user (lessee). __(AS19 ICAI)with the user (lessee). __(AS19 ICAI)
Sub-standard assets : -
10 percent of the 'net book value'.
As per the 'Guidance Note on Accounting for Leases' issued by theICAI, 'Gross book value' of a fixed asset is its historical cost or other
amount substituted for historical cost in the books of account or financial
statements. Statutory depreciation should be shown separately in the
Profit & Loss Account. Accumulated depreciation should be deducted from
the Gross Book Value of the leased asset in the balance sheet of the
lesser to arrive at the 'net book value'.
Also, balance standing in 'Lease Adjustment Account' should beadjusted in the 'net book value' of the leased assets. The amount of
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adjustment in respect of each class of fixed assets may be shown either in
the main balance sheet or in the Fixed Assets Schedule as a separate
column in the section related to leased assets.
Doubtful assets :-
100 percent of the extent to which the finance is not secured by the
realisable value of the leased asset. Realisable value to be estimated on a
realistic basis. In addition to the above provision, the following provision
on the net book value of the secured portion should be made,
depending upon the period for which asset has been doubtful:
Period %age of provisionUp to one year 20
One to three years 30
More than three years 50
Ch.6 Guidelines for Provisions underCh.6 Guidelines for Provisions under
Special CircumstancesSpecial Circumstances
Government guaranteed advancesGovernment guaranteed advances
With effect from 31 March 2000, in respect of advances sanctionedagainst State Government guarantee, if the guarantee is invoked and
remains in default for more than two quarters (180 days at present), the
banks should make normal provisions as prescribed in paragraph 4.1.2
above.
As regards advances guaranteed by State Governments, in respect ofwhich guarantee stood invoked as on 31.03.2000, necessary provision
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was allowed to be made, in a phased manner, during the financial years
ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year.
Advances granted under rehabilitation packages Advances granted under rehabilitation packages
approved by BIFR/term lending institutions:approved by BIFR/term lending institutions:
In respect of advances under rehabilitation package approved byBIFR/term lending institutions, the provision should continue to be made in
respect of dues to the bank on the existing credit facilities as per their
classification as sub-standard or doubtful asset.
As regards the additional facilities sanctioned as per packagefinalised by BIFR and/or term lending institutions, provision on additional
facilities sanctioned need not be made for a period ofone yearfrom the
date of disbursement.
In respect of additional credit facilities granted to SSI units which areidentified as sick [as defined in RPCD circular No.PLNFS.BC.57 /
06.04.01/2001-2002 dated 16 January 2002] and where rehabilitation
packages/nursing programmes have been drawn by the banks themselves
or under consortium arrangements, no provision need be made for a
period of one year.
Advances against term deposits, NSCs eligible forAdvances against term deposits, NSCs eligible for
surrender, IVPs, KVPs, and life policies aresurrender, IVPs, KVPs, and life policies are
exempted from provisioning requirements.exempted from provisioning requirements.
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However, advances against gold ornaments,However, advances against gold ornaments,
government securities and all other kinds ofgovernment securities and all other kinds of
securities are not exempted from provisioningsecurities are not exempted from provisioning
requirements.requirements.
Treatment of interest suspense account:Treatment of interest suspense account:
Amounts held in Interest Suspense Account should not be reckoned aspart of provisions. Amounts lying in the Interest Suspense Account should
be deducted from the relative advances and thereafter, provisioning as per
the norms, should be made on the balances after such deduction.
Advances covered by ECGC/DICGC guaranteeAdvances covered by ECGC/DICGC guarantee
In the case of advances guaranteed by DICGC/ECGC, provision should
be made only for the balance in excess of the amount guaranteed by
these Corporations. Further, while arriving at the provision required to be
made for doubtful assets, realisable value of the securities should first be
deducted from the outstanding balance in respect of the amount
guaranteed by these Corporations and then provision made as illustrated
hereunder:
Example
Outstanding Balance Rs. 4 lakhs
DICGC Cover 50 percent
Period for which the advance has remained More than 3 years
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doubtful remained doubtful
Value of security held
(excludes worth of Rs.)
Rs. 1.50 lakhs
Provision required to be made
Outstanding balance Rs. 4.00 lakhs
Less: Value of security held Rs. 1.50 lakhs
Unrealised balance Rs. 2.50 lakhs
Less: DICGC Cover
(50% of unrealisable balance)
Rs. 1.25 lakhs
Net unsecured balance Rs. 1.25 lakhs
Provision for unsecured portion of
advance
Rs. 1.25 lakhs (@ 100 percent of
unsecured portion)Provision for secured portion of
advance
Rs. 0.75 lakhs (@ 50 percent of
secured portion)
Total provision required to be made Rs. 2.00 lakhs
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Advance covered by CGTSI guaranteeAdvance covered by CGTSI guarantee
In case the advance covered by CGTSI guarantee becomes non-
performing, no provision need be made towards the guaranteed portion.
The amount outstanding in excess of the guaranteed portion should be
provided for as per the extant guidelines on provisioning for non-
performing advances. Two illustrative examples are given below:
Example I
Asset classification status: Doubtful More than 3 years;
CGTSI Cover 75% of the amount outstanding
or 75% of the unsecured amount
or Rs.18.75 lakh, whichever is
the least
Realisable value of Security Rs.1.50 lakh
Balance outstanding Rs.10.00 lakh
Less Realisable value of
security
Rs. 1.50 lakh
Unsecured amount Rs. 8.50 lakh
Less CGTSI cover (75%) Rs. 6.38 lakh
Net unsecured and
uncovered portion:
Rs. 2.12 lakh
Provision Required
Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)
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Unsecured & uncovered
portion
Rs.2.12 lakh Rs. 2.12 lakh ( 100%)
Total provision required Rs. 2.87 lakh
Example II
Asset classification status Doubtful More than 3 years;
CGTSI Cover 75% of the amount outstanding
or75% of the unsecured amount
or Rs.18.75 lakh, whichever is
the least
Realisable value of Security Rs.10.00 lakh
Balance outstanding Rs.40.00 lakh
Less Realisable value of
security
Rs. 10.00 lakh
Unsecured amount Rs. 30.00 lakh
Less CGTSI cover (75%) Rs. 18.75 lakh
Net unsecured and
uncovered portion:
Rs. 11.25 lakh
Provision Required
Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%)
Unsecured & uncovered
portion
Rs.11.25 lakh Rs.11.25 lakh (100%)
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Total provision required Rs. 16.25 lakh
Take-out financeTake-out finance
The lending institution should make provisions against a 'take-out finance'
turning into NPA pending its take-over by the taking-over institution. As
and when the asset is taken-over by the taking-over institution, the
corresponding provisions could be reversed.
Reserve for Exchange Rate Fluctuations AccountReserve for Exchange Rate Fluctuations Account
(RERFA)(RERFA)
When exchange rate movements of Indian rupee turn adverse, the
outstanding amount of foreign currency denominated a loan (where actual
disbursement was made in Indian Rupee) which becomes overdue goes
up correspondingly, with its attendant implications of provisioningrequirements. Such assets should not normally be revalued. In case such
assets need to be revalued as per requirement of accounting practices or
for any other requirement, the following procedure may be adopted:
The loss on revaluation of assets has to be booked in the bank'sProfit & Loss Account.
Besides the provisioning requirement as per Asset Classification, banks
should treat the full amount of the Revaluation Gain relating to the
corresponding assets, if any, on account of Foreign Exchange Fluctuation
as provision against the particular assets.
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Ch.7 Impact of NPACh.7 Impact of NPA
Profitability:-Profitability:-
NPA means booking of money in terms of bad asset, which
occurred due to wrong choice of client. Because of the money
getting blocked the prodigality of bank decreases not only by the
amount of NPA but NPA lead to opportunity cost also as that much
of profit invested in some return earning project/asset. So NPA
doesnt affect current profit but also future stream of profit, which
may lead to loss of some long-term beneficial opportunity. Another
impact of reduction in profitability is low ROI (return on investment),
which adversely affect current earning of bank.
Liquidity:-Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at
hand which lead to borrowing money for shot\rtes period of time which
lead to additional cost to the company. Difficulty in operating the functions
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of bank is another cause of NPA due to lack of money.Routine payments
and dues.
Involvement of management:-Involvement of management:-Time and efforts of management is another indirect cost which bank has
to bear due to NPA. Time and efforts of management in handling and
managing NPA would have diverted to some fruitful activities, which would
have given good returns. Now days banks have special employees to
deal and handle NPAs, which is additional cost to the bank.
Credit loss:-Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in
terms of market credit. It will lose its goodwill and brand image and credit
which have negative impact to the people who are putting their money in
the banks .
Early symptoms by which one canEarly symptoms by which one canrecognize a performing asset turning inrecognize a performing asset turning into Non-performing assetto Non-performing asset
Four categories of early symptoms:-Four categories of early symptoms:-
------------------------------------------------------------------------------------------------------
( 1 ) Financial:( 1 ) Financial:
Non-payment of the very first installment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
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( 4 ) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
Ch.9Ch.9 Tools for recovery of NPAsTools for recovery of NPAs
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Credit DefaultCredit Default
Inability to PayInability to Pay Willful defaulWillful defaul
UnviableUnviable ViableViable
Lok AdalatLok Adalat
Debt RecoveryDebt Recovery
TribunalsTribunals Securitization
ActCompromiseCompromise
RehabilitationRehabilitation
Consortium FinanceConsortium FinanceCorporate Debt RestructuringCorporate Debt Restructuring
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AssetAsset
ReconstructioReconstructioSole BankerSole Banker
Fresh Issue ofFresh Issue of
Term LoanTerm Loan
ConversionConversion
into WCTLinto WCTL
Fresh WC LimitFresh WC Limit
Rephasement ofRephasement of
Repayment PeriodRepayment Period
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