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8/2/2019 NPA Mgmtt.by Suchet Bangera
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"NPA Management"
In Partial Fulfillment of the Requirement For Master of
Management Studies For The
Academic Year
2002-2003
From The University Of Mumbai.
Submitted by:
Suchet D Bangera
MMS FINANCE
N.L.Dalmia Institute Of Management Studies And Research.
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CERTIFICATE
N.L.Dalmia Institute of Management Studies and Research
This is to certify that the project entitled
“NPA Management”
is successfully completed by Mr.Suchet Bangera
during the second year of his course in
Partial fulfillment of the Master of Management Studies
under the University of Mumbai through
N.L.Dalmia Institute of Management Studies and Research, Mumbai.
This project represents the work done by
Mr.Suchet Bangera under my guidance.
Guided By-
Mr. Sunil Mahajan
(Faculty Finance)
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ACKNOWLEDGEMENT
I express my heart- felt indebtness and gratitude to Prof P.L.Arya , Director,
N.L.Dalmia Institute of Management Studies and Research for his
encouragement and support.
I sincerely wish to acknowledge Prof Sunil Mahajan for his keen interest
and valuable guidance on this program.
I would also like to express my deep sense of gratitude to Mr.Mehernosh
Nogamawalla, Assistant Manager, ICICI Bank for his noteworthy
suggestions, constant inspiration and unstinted guidance in carrying out this
venture.
Place: Signature
Date:
(Suchet Bangera)
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ABSTRACT
The aim of the project is to study NPA from 2 perspective, Firstly ,an indepth analysis of
the NPAs in the three major financial institution in India and Secondly on the basis of acomparative study of NPAs in India in the Global context.
Financial sector reforms in India has progressed rapidly on aspects like Interest rate
deregulation, prudential norms, reduction in reserve requirement and barriers to entry. But
progress on the structural- institutional aspects has been much slower and is a cause of
concern. The sheltering of weak institution while liberalizing operational rules of the game
is making implementation of operational changes difficult and ineffective. To be truly
effective, there requires to be changes to be done to tackle the NPA problem spanning the
entire gamut of judiciary, political and the bureaucracy.
This project deals with the experience of the 3 major financial institution in India and the
experience of other Asian countries in handling of NPAs.It further looks into the effect of
the reforms on the level of NPAs and suggests mechanisms to handle the problem by
drawing on experiences from other countries.
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CONTENTS
CHAPTER SUBJECT PAGE NO.
Chapter-1 Introduction 1
Chapter -2 Research Methodology (2-3)
2-1 Objectives 2
2-2 Scope 2
2-3 Limitation 3
2-4 Research Design 3
2-5 Sources of Data 3
SECTION –A
NPA Management
Chapter -3 Introduction to NPAs (5-10)
3-1 Non-Performance of Assets 5
3-2 Definition of NPAs 5
3-3 Asset Classification 6
3-4 Partial recoveries of NPA 6
3-5 Provisioning & Write- offs 7
3-6 Charging of Interest on NPAs 8
Chapter-4 Over view of the Three Indian Fls (10-11)
4-1 About the Institution -ICICI 10
4-2 IDBI 11
4-3 IFCI 11
Chapter-5 Analysis on NPA management level of FIs (12-
14)
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5-1 Comparative Analysis of FIs 13
5-2 Comments 13
Chapter-6 Coping Strategies of Fls (15-19)
6-1 ICICI Ltd. 15
6-2 IFCI Ltd. 17
6-3 IDBI Ltd. 18
SECTION -B
A comparative study of Non Performing Assets in India in the Global context
- Similarities and dissimilarities, remedial measures.
Chapter-7 Overview of performance
(21-24)
7-1 Based on Gross and Net NPAs
22
7-2 Based on Loan loss provisioning
22
7-3 Sector wise split up
23
Chapter-10 Solutions
(34-37)
Conclusion
37
Annexure RBI Guidelines
38-40
Bibliography
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CHAPTER-1
INTRODUCTION
The Indian Financial institution and Banks are facing a very grim situation today, due to
rising level of non-perfoming assets (NPAs) . This factors adversely hits the bottom line,
thus yielding low profits for the organization It calls for Planning and executing clear, exit
strategies on the part of these Fls and NPAs being a cause for serious concern,I have
decided to draw attention on this aspect in the present project.
To deal with this topic, I have adopted a two-pronged strategy.
Firstly I made an in depth analysis of the existing level of NPAs of country's three leading
financial 'institutions, namely -ICICI, IDBI and IFCI. Then, analysis of the strategies
adapted by them to cope with this problem has been carried out.
Secondly, to obtain further insight in this matter, I have also focussed on the levels of
NPAs in other Asian countries and try to bring out measures responsible for their reduction
in NPAs .
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I hope this project will enable in throwing light on key areas of finance and also assist in
addressing the current situation of NPAs to some extent.
CHAPTER-II
RESEARCH METHODOLOGY
2.1 OBJECTIVES
• The purpose of doing this project is mainly to make a thorough study on
NPA
• To study the level of NPA in the leading- Indian Fls, and how they are
coping with this problem.
• To make a comparative study on the three Fls and gauging their efficiency
on this ground.
• The objective also includes exploring the situation of other Asian Countries
in dealing with NPAs.
• To suggest few financial restructuring measures,by giving solutions.
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2.2 SCOPE
The predicted scope for the first half of the study, is as follows:
• To study all the financial statements.
• To make a comparative analysis on the level of NPAs .
• Bringing out the results of financial statements through ratio analysis.
• Charting out the strategies adopted by these Fls to cope with this problem
in future.
The scope for the second half of the study, can be outlined as follows:
• To study overview of performance in the global arena
• To make a comparative analysis on the level of NPAs in the Asian
countries .
• The similarities and Dissimilarities.
• Charting out the strategies adopted to cope with this problem in future.
2.3 LIMITATIONS
Every project and its results possess their own limitations. So also does this project. These
limitations are in terms of:
• Time constraint- Due to lack of sufficient time, the study could not be made very
comprehensive.
• The inferences drawn are true only keeping in mind the assumptions taken.
2.4 RESEARCH DESIGN
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The first half of the study dealt with NPAs and their management by the three leading
financial institutions. The research design used was descriptive in nature. The second half
comprised of an in depth analysis of NPAs in other Asian countries. The research design
used was analytical and exploratory in nature.
2.5 SOURCES OF DATA
Secondary sources:
Information from Published Material, for example, Annual reports of the
companies, organizations, RBI guidelines circulars, Case papers on NPAs and also, from
Internet websites.
SECTION -A NPA MANAGEMENT
IN INDIAN FIs.
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CHAPTER-III
INTRODUCTION OF NPAs
3.1 NON- PERFORMING ASSETS
In the year 1994, the Committee on the Financial System under the Chairmanship
of Shri. M. Narasimham had considered the existing system prevailing in banks and
financial institutions (FIs) for income recognition, classification of assets and provisioning
for bad debts and recommended that the policy of income recognition should be objective
and based on record of recovery, rather than on any subjective considerations. Keeping
this in view, the Committee issued several guidelines to these institutions, which were
modified from time to time. But, before we examine the RBI guidelines on income.
Recognition, asset classification, provisioning and other related matters, we should
understand the basic terms referred in these guidelines.
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3.2 DEFINITION OF NON-PERFORMING ASSETS (NPAs)
The Committee has defined a NPA as an advance where, as on the date of the
balance Sheet of the FI,
(a) In respect of term loans, interest remains ‘past due' for a period of more than 180
days,
(b) In respect of bills purchased/discounted, the bills remain overdue and unpaid for a
period of more than, 180 days and
(c) In respect of other advances, any amount to be received remains 'past due' for a
period of more than 180 days. In other words, an asset becomes non-performing
when it ceases to generate income for a Fl.
In this context, an amount is considered 'past due' when it remains outstanding for
30 days beyond the due date. Thus, while interest may become 'due' on, say 31 March
1993, it becomes 'Past due' on 30 April 1993. Furthermore, NPA was to be defined as a
credit/loan facility in respect of which interest has remained 'past -due') for a period of four
quarters during the year ending 31 March 1994, three quarters during the year ending 31
March 1995 and two quarters during the year ending 31 March 1996 and onwards.
3.3 ASSET CLASSIFICATION
As from the end of the accounting year, 1993-94, all Fls had to classify their
loans/advances into four broad groups, viz.
(i) Standard assets,
(ii) Sub-standard assets,
(iii)Doubtful assets and
(iv)Loss assets.
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Broadly speaking, classification of assets into the above categories should be done
taking into account the degree of well-defined credit weaknesses and extent of dependence
on collateral security for realization of dues.
(i) Standard asset:
These are Assets that do not disclose any problems or which do not carry any risk other
than normal business risk.
(ii) Sub-standard assets:
Assets (i) that are non performing for a period not exceeding two years or (ii) that have
been renegotiated or rescheduled after the project to which they relate has commenced
production are classified as sub-standard assets.
Eg) A term loan should be treated as substandard, if the installments of principal are
Overdue for two quarters but not exceeding two years.
(iii) Doubtful assets:
Assets (1) that are non-performing for more than two years or where there are
potential threats to recoveries on account of erosion in the value of security and other
factors such as fraud are classified as doubtful assets.
(iv) Loss assets:
Assets (i) the losses on which are crystallized or (ii) that are considered
uncollectible are classified as loss assets. Payments on renegotiated or rescheduled
loans should have no past due amounts for one year after renegotiations or
rescheduling, as the case may be, in order for the loan to be upgraded. Further, if
interest or installments of principal is in arrears for any two quarters out of four
quarters during the year, the credit facility should be treated as NPAs, although the
default may not be continuously for two quarters during the year.
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3.4 PARTLAL RECOVERIES OF NPAS
Interest partly recovered on NPAs may be credited to income account but it
should be ensured that the credits in the accounts towards interest are not out of fresh/
additional credit facility sanctioned to the borrowers concerned.
3.5 PROVISIONING AND WRITE-OFFS
Standard assets: A 0.25% general provision.
Sub-standard assets: A 10% provision.
Doubtful assets: A 1OO% write-off is made for the unsecured portion of the doubtful asset
and charged against income. The value assigned to the collateral securing a loan is that
reflected on the borrowers books or that determined by third party appraisers to be
Realizable. In those cases where there is a secured portion of the asset, provision of 20% to
50% is made depending upon the period for which the asset remains doubtful.
Provisions on such secured assets are made as follows upto 1 year-20%, 1 to 3 years-30%
and more than 3 years 50%.
Loss assets: The entire asset is written off/provided for.
3.6 CHARGING OF INTEREST ON NPAs.
(a) As per the RBI guidelines, none of the Fls were to charge and take to income
account, interest on any NPA. So far as bills purchased/ discounted/ rediscounted
are concerned, overdue interest should not be charged and taken to income account
unless it is realized. In respect of all NPAs, interest accrued and other charges like
fees and commission credited to income account during the previous accounting
years but which have not been actually realized should be reversed or provided for
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in the current accounting period. From the year 1999-2000, the unrealised income
booked in loan ledger on NPAs, if any need to be reversed in the year the asset
becomes NPA.
(b) In case of new projects, where moratorium period is available for payment of
interest becomes 'due' only after the moratorium period is over.
(c) In case of housing loans or other advances granted to staff members, where interest
is payable after recovery of principal, interest need not be considered as 'past
due' from the first quarter onwards. They should be classified, as NPA only
when there is default in payment of 'interest on the due of payment.
(d) In case of borrowers who have been granted more than one loan or credit facility,
all the dues from them will have to be treated as NPA when an individual loan or
facility or part thereof has become irregular.
(e) The availability of security or net worth of borrower/guarantor should not be taken
into account for the purpose of treating an advance as NPA or otherwise, as income
recognition is based on record of recovery.
(f) In case of loans /credit facilities extended to a unit by more than one Fl under
formal consortium arrangement, those loans/ facilities which have been classified as 'sub-
standard', 'doubtful' or ‘loss' by the concerned leader, should be so classified by the other
members of the consortium and requisite provision, in accordance with the prescribed
norms, will have to be made thereof.
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CHAPTER-IV
OVERVIEW OF THREE LEADING INDIAN
FINANCIAL INSTITUTIONS (FIs)
1 ICICI Ltd.
2 IFCI Ltd.
3 IDBI
4.1 ABOUT THE INSTITUTIONS:
1 INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA
LTD. ( ICICI LTD.)
ICICI Ltd. was founded by the World Bank, the Government of India and
representatives of private industry on January 5, 1955 to encourage and assist industrial
development and investment in India. Over the years, ICICI has evolved into a
diversified financial institution. ICICI's principal business activities include medium-term and long-term project financing for the infrastructure and manufacturing sectors,
corporate finance to meet the treasury requirements of Indian companies, lease finance as
well as a comprehensive range of financial and advisory services. For regulatory and
strategic reasons, ICICI set up specialised subsidiaries in the areas of commercial
banking, investment banking, non-banking finance, investor servicing, broking, venture
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capital financing and state-level infrastructure financing. Also, on 22nd September 1999,
it became the first Indian Company to get listed in NYSE, marking the successful
completion of a US $ 500 million capital-raising programme. ICICI has therefore created
a virtual Universal Banking Group that offers a comprehensive range of financial
products and services.
2 INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)
IFCI, the first Development Finance Institution in India, Was set 1948, as a Statutory
Corporation, to pioneer institutional credit to Medium and large industries. IFCI was also
the first institution in financial sector to be converted from a Statutory Corporation into a
public limited company. It also has two wholly owned subsidiaries; namely, IFCI
Financial services Ltd. and IFCI Venture Capital Funds
3 INDUSTRIAL DEVELOPMENT BANKOF INDIA (IDBI)
IDBI is also considered as one of the premier financial institutions of India. It offers a
range of financial services, like in the form of Direct Finance (project finance and non-
project finance). It also pays due emphasis to Infrastructure finance; Venture Capital
and Fee based services. They comprise activities such as issue management, corporate
advisory services, credit syndication and debenture/mortgage trusteeship. IDBI opens
Letters of Credit and effects foreign currency remittances on behalf of its assisted units
for import of capital goods/ services. IDBI has a few wholly owned subsidiaries too
engaged in specific sectors. These were mainly established to cater to the needs of the
developing economy as well as to equip it to face the challenges thrown by the global
economy. Prime amongst its subsidiaries are Small Industries Development Bank of
India (SIDBI); IDBI Bank Ltd.; IDBI Capital Market Services Ltd. (ICMS) and IDBI
Investment Management Company Ltd. (IIMCO).
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CHAPTER-V
ANALYSIS ON NPA MANAGEMENT
LEVEL OF THE THREE Fls.
Over the past few years, the rapid reduction in trade barriers and integration with
global markets, along with the downtrend in global commodity markets, has caused
difficulty in the Indian economy to those commercial enterprises with cost inefficiencies,
high debt burden, poor technology and fragmented capacities. As a result, while the Indian
economy has continued to grow, although at a slower rate than in past periods, certain
corporate and commercial enterprises have had to adopt certain measures to restructure
their operations to deal with the financial stress they have encountered. Against this
backdrop, we are going to analyse the strategies adopted by the earlier mentioned Fls tocope up with this serious problem. Before this, let us take a look on the current level of
NPAs of these institutions.
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5. 1 COMPARATIVE ANALYSIS OF THE FINANCLAL INSTITUTIONS'
STRENGTH & FEATURES:
(As on March 3lst 2001)
Particulars ICICI IFCI IDBI
Ratings AAA AA+ AAA
PLRs 12.5% 13% 13 %
RATIOS-
-ROA (%) 2.25 18.8 2.37
- R 0 E (%) 21.1 7.6 17.2
cap.ad.ratio 11.9 11.4 13.4
EPS 21.3 3.1 2.3
Net N P L/N.Worth 69.5 214.1 64.5
Div.payout ratio 25.8 21.6 14.9
% Net NPA to
Total Assets- 7.8 21.5 12
NPA classification
- L o s s 0 0 0
-Doubtful 3.1 8.6 4.3
-Substandard 4.7 12.9 7.7
5.2 COMMENTS
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From the above cited figures, we can see! That currently, of the (Fls) ICICI, is the
Market Outperformed; IDBI is the Market Performer, whereas IFCI is the Market
Underperforrner.
ICICI has been successful to a great extent in curbing its level of NPAs in
comparison to the other Institutions where it is still quite high but after its subsequent
merger with its subsidiary ICICI Bank, its NPA levels have come down drastically.
IDBI appears extensively affected by the economic slow down. It is losing its
premier position to ICICI, though only in incremental loan disbursals, and both profitability
and asset quality are under significant strain. On the other hand, ICICI is demonstrating a
high degree of resilience amidst currently adverse conditions. It is continuing business
growth while designing new initiatives to tackle non-performing loans.
IFCI is believed to have had far worse asset quality than other FIs and banks. As its
fee income is relatively quite less than ICICI and IDBI, it implies that its profit drivers are
weak. Also, it appears that IFCI is less vigorous in exploiting opportunities for fee 'income
unlike the other two Fls.
From the above figure it is evidently observed that ICICI has a favorable Return on
Assets ratio (ROA), capital adequacy ratio; Return on Equity and EPS. Also, while on one
hand it has an attractive dividend payout -ratio, on the other hand, it has low level of NPA,
which compliments or favours the bottomline. This however is not the case with IDBI and
more importantly with IFCI. Here, the case is just the reverse for the latter and this ruins
the bottomline of the Organisation.
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CHAPTER-VI
COPING STRATEGIES OF THE THREE FIs
MEASURES UNDER TAKEN BY THE FIs TO REDUCE NPA LEVEL IN THEIR RESPECTIVE ORGANISATIONS
6.1 ICICI Ltd.
During the year 1998-99, ICICI continually focused on proactive management of
problem loans. It set in place a process involving a detailed and periodic analysis of its
performing assets portfolio, to determine on an on-going basis, the health of every
borrower account in the loan portfolio.One major step taken by ICICI
• ICICI used the interest cover approach to determine stress levels in the
performing assets portfolio. Conceptually, this approach involves
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assessing the underlying cash flows of the borrower and then determining
adequacy of interest cover after allowing for all expenses required to
maintain the corporate as a going concern.
• For projections, typically a worst-case scenario is used for product and
input prices and capacity utilisation levels.
• ICICI has followed a two-pronged approach towards non-performing loans
depending on whether these are viable or unviable companies.
> In respect of viable companies, which have economically sized plants,
strong sponsors and modern technology, ICICI has focused on restructuring
to minimise losses, enhancing security mechanisms, and pledging of
additional collateral or injection of additional sponsor equity.
> In respect of unviable companies, which are essentially uneconomical
projects, ICICI adopts an aggressive approach
Aimed at out-of-court settlements, enforcing collateral and driving
consolidation.
• Its efforts in tackling non-performing loans have been spearheaded by the
Special Asset Management Group, which was created to focus exclusively
on large non-performing loans and problem loans.
• Further, it is also taking measures to enhance the security structures in
accounts under stress. This is being done through the pledge of promoter’s
shareholding, the right to convert debt into equity at par so as to transfer
control to ICICI and escrow mechanisms to capture cash flows.
• The institution is also striving to facilitate the integration of fragmented
capacities, catalyse the merger of weak and unviable units through
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technology upgradation, enable financial restructuring and take early steps
for legal action where deemed necessary.
ICICI firmly believes that all these measures will enable the industry and the
economy to emerge stronger once the restructuring process is complete.
6.2 IFCI Ltd
IFCI is making continual efforts to reduce the level of NPAs by playing a proactive
role on the restructuring of borrower concerns, since it has become necessary to restructure
their viability in the rapidly changing business environment.
• A new division named the Corporate Restructuring Division has been set up
at the Corporate Office of IFCI to strengthen restructuring activities
amongst borrower concerns.
• Sustained efforts in this direction are also being made through the timely
grant of reliefs and concessions, encouragement to mergers and
amalgamations with healthy companies, and one-time settlement of dues.
• In addition, a continuous monitoring of large exposures is also being
undertaken, in order to prevent new cases from slipping into the NPA
category.
• IFCI has also adopted a host of measures, against this backdrop, which
include restructuring the asset portfolio, restricting exposure to chronic
industries and individual companies and invoking the state government
guarantees which have failed to make payments.
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• The institution also sought one-time settlement in respect to government
-guaranteed cases.
All these measures were incorporated by IFCI with the view that it will ensure
recovery of atleast 50 to 60 per cent of the NPAs within a period of 3-4 years.
6.3 IDBI
IDBI has also drawn major plans to restructure its non-performing assets and high
interest costs. They can be elucidated in the following:
• Astringent reworking of the non-performing loans is done, involving
extending of maturity in cases, which are deemed viable.
•Further, the (FI) is also in the process of lowering its interest rates for some
of its borrowers who were finding it difficult to repay due to high rates.
But this was to be done only on the condition that they pay 50 per cent pre
payment premium. This approach was selective and would apply only to
those companies whose accounts were good and whom the Fl would want
to retain as customers.
• IDBI also set up Close Monitoring Cells (CMCS) for constantly monitoring
performance of assisted companies to improve recovery
And initiate timely remedial action.
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• Restructuring Committees (RCs) have also been set up in various zones to
tackle NPAS. The RCs look into the long-term viability of projects and
recommend restructuring schemes to various delegated authorities.
• For expeditious decision-making, Empowered Committee (EMC) and High
Powered Committee (HPC) have been set up. These Committees consider
OTS and restructuring proposals involving waivers.
• In order to improve credit quality, credit appraisal and delivery systems have
been further strengthened. It has also taken steps to monitor cash flows
through proper mechanisms-.
• IDBI has also resorting to additional security by way of pledge of promoters
equity, additional collateral, conversion of loan into equity, etc.
With improvement in the economic scenario and restructuring measures initiated by
the Bank, it is expected that some of the NPAs of this institution would become performing
within a few years.
Apart from incorporating individual strategies to cope with the rising NPA level,
the three Fls had approached the banking division with a proposal to form a common asset
reconstruction company (ARC) to clean up their balance sheets. The plan envisages
transfer of only large accounts that are common to the institutions. If all the lenders free
their rights on a debtor and give it to one entity, it can fight with the debtor and recover
whatever money can come. Though it is still in the conceptual stage, it is yet to be seen
how far thing improves if the plan materialises.
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NPA MANAGEMENT
SECTION -B
NPA MANAGEMENT –
GLOBAL CONTEXT.
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NPA MANAGEMENT
Introduction
After nationalization, the initial mandate that banks were given was to expand their
branch network increase the savings rate & extend credit to the rural & SSI sectors. This
mandate has been achieved admirably. Since the early 90’s the focus has shifted towards
improving quality of assets & better risk management.
The Narsimhan Committee has recommended prudential norms on income recognition,
asset classification & provisioning. In a change from the past, Income recognition is
now not on an accrual basis but when it is actually received. Past problems faced by
banks were to a great extent attributable to this.
Classification of what an NPA is has changed with tightening of prudential norms.
Currently an asset is “non-performing” if interest or installments of principal due
remains unpaid for more than 180 days.
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CHAPTER-VII
1. Overview of Performance
There has been noticeable improvement in the financial health of banks in terms of
asset quality. Further, pre and post reform NPA levels are not strictly comparable as
there has been a significant tightening of accounting norms.
7.1 Basis on Gross & Net NPAs
Gross NPA’s Net NPA’s
Year Amount
(Rs Crore)
As a percentage
of total
advances
Amount
(Rs Crore)
As a percentage
of total
advances
1992-1993 39253.14 23.18 No data
1993-1994 41041.33 24.78 19690.74 14.46
1994-1995 38385.18 19.45 17566.64 10.67
1995-1996 41660.94 18.01 18297.49 8.9
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1996-1997 43577.09 17.84 20284.73 9.18
1997-1998 45652.64 16.02 21232.13 8.15
1998-1999 51710.5 15.89 24211.49 8.13
1999-2000 53294.02 14.02 26187.6 7.422000-2001 54773.16 12.4 27968.11 6.74
Exhibit 1
7.2 Based on loan loss provisioning
The net NPAs have continually declined from 14.46% in 1993-1994 to 2000-2001.
RBI regulations require that banks build provisions upto at least 50% of their gross
NPAs. The current provisioning is 35% gross NPAs.
7.3 Sector wise split-up
As can be seen the main culprits are not the priority sectors or PSU’s but are the
large industries. If government sops to agriculture & SSI’s are excluded, the NPA in
the priority sectors is even lower.
Borrowing segment wise
distribution of Gross NPA’s
Gross NPA on March 31, 201
Amount
(Rs crore)Percentage of total NPA
Public sector units 1334.05 2.44
Large industries 11498.1 20.99
Medium industries 8658.69 15.81
Other non priority sectors 9516.62 17.37
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NPA MANAGEMENT
Agriculture 7311.4 13.35
Small sector industries 10284.97 18.78
Other priority sectors 6169.33 11.72
Exhibit 2
The problem India faces is not lack of strict prudential norms but
1. The legal impediments and the time consuming nature of asset disposal process.
2. ‘Postponement’ of the problems in order to report higher earnings.
3. Manipulation by the debtors using political influence.
A perverse effect of the slow legal process is that banks are shying away from risks by
investing a greater than required proportion of the assets in the form of sovereign debt
paper.
The government recently enacted the Asset Reconstruction Ordinance to try and tackle
the problem. It gave wide-ranging powers for banks to dispose of assets & allowed
creation if Asset Reconstruction Companies for this purpose.
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NPA MANAGEMENT
CHAPTER-X
Solutions
• Don’t Eliminate –Manage!
Studies have shown that management of NPAs rather than elimination is prudent.
India’s growth rate and bank spreads are higher than western nations. As a result
we can support a non-zero level of NPAs which balances the risk vis-à-vis return
appropriate to the Indian context.
• Effectiveness of ARCs
Concerns have been raised about the relevance to India. A significant percentage of
the NPAs of the PSB’s are in the priority sector. Loans in rural areas are difficult to
collect and banks by virtue of their sheet reach are better placed to recover these
loans. Lok Adalats and debt Recovery Tribunals are other effective mechanism to
handle this task. ARCs should focus on borrowers. Further, there is a need for
private sector and foreign participation in the ARC. Private parties will look for
active resolution of the problem and not mearly regard it as a book transaction.
Moving NPAs to an ARC doesn’t get rid of the problem. In China, potential
investors are still worried about the risks of non-enforcement of ownership rights of
the assets they purchase from the ARCs.Actions and measures have to be taken to
build investor confidence.
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NPA MANAGEMENT
Well Developed Capital markets
Numerous papers have stressed the criticality of a well-developed capital market in
the restructuring process. A capital market brings liquidity and mechanism for write
off of loans. Without this a bank may postpone the NPA problem for fear of capital
adequacy problems and resort to tactics like evergreening. Monitoring by
bondholders is better as they have no motive to sustain uneconomic activity.
Further, the banks can manage credit risk better as it is easier to sell or securitize
loans and negotiate credit derivatives. Indian debt market is relatively under
developed and attention should be focused on building liquidity and volumes.
Contextual Decision-making
Regulations must incorporate a contextual perspective (like temporary cash flow
problems) and clients should be handled in a manner, which reflects true value of
their assets and future potential to pay. The top management should delegate
authority and back decisions of this kind taken by middle level managers.
Effects of Capital norm tightening
There is a fear that disposal through the provision of excessive reserves may result
in a deflationary spiral. A through provision of reserves will have no negative
impact on the long-term dividends paid to the shareholders. Firstly, it helps restore
credibility in the financial system. Further, an adjustment mechanism can be
created by which the capital gains and future profits that will result from the
disposal of NPAs will pass back to the creditors as the tax payers who incurred the
losses today. The swift disposal of NPAs during the Great Depression in the middle
of a severe deflationary current helped restore the credibility of the financial
system.
Realignment of performance matrix
Traditional performance measures like ROE and NPA Ratio are not really
indicative of performance-A high volume of bad lending today will impact
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positively on ROE, asset growth and NPA ratio and only show up 5 years later as
NPAs.The complexity of the balance sheet makes it impossible to disaggregate the
impact of these actions even if stricter disclosure norms are put in place.
Economic Value of Equity (EVE) (or Market value) and Economic value of Equity
at Risk (EVER) are useful mechanisms to handle this problem. EVE is the value of
the firm if its assets are instantaneously liquidated (assuming the availability of the
liquid markets). Books Values vis-a- vis EVE comparisons give an idea of whether
the ‘fair’ value is being reflected. EVER can be computed by using ‘what if’
scenarios like downgrading the ratings of assets or changing interest rates. Now, at
every stage banks can check if their actions are consistent with the goal of
maximizing EVE, subject to an acceptable level of EVER.
Consistency of Purpose!
Some experts argues that the current organizational competencies, regulatory
framework, quality of disclosure and incentive structure produce an inconsistent
framework, which leads to an unsustainable performance level for a bank. Macro
level issues will have to be addressed in order to root out the problem. Processes at
every stage of an assets life impact the overall quality of the intermediation process
and so a consistent set of procedures are necessary to handle the problem
Legal Issues
There have been instances of banks extending credit to doubtful debtors (who
willfully default on debt) and getting kickbacks for the same. Ineffective legal
mechanisms and inadequate internal control mechanisms have made this problem
grow-quick action has to be taken on both counts so that both the defaulters and the
authorizing officer are punished heavily. Without this, all the mechanisms
suggested above may prove to be ineffective.
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CONCLUSION
The project stresses the importance of a sound understanding of the macro
economic variables and systemic issues pertaining to banks and the economy for
solving the NPA problem along with the criticality of a strong legal framework.
Foreign experiences must be utilized along with a clear understanding of the localconditions to create a tailor made solution, which is transparent and fair to all
stakeholders.
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ANNEXURE
RBI GUIDELINES TO FIs (For rehabilitation of sick industrial units)
Characteristics of these guidelines are discussed below:
(i) Tackling incipient sickness:
There is need to gear up the organisational machinery in the banks and Fls for
taking effective measure to detect incipient sickness and safeguard their interests. In this
context the steps necessary to be taken include-
• Pre and post-sanction inspection.
• Stock verification and stock audit,
• Continuous supervision over large accounts,
• Proper documentation ,
• Proper training and guidance to the staff at operational level,
• Preparation and furnishing detailed checklist for scrutinising Quarterly
Information System(QIS), statements to the operating staff and taking
follow-up action,
• System of taking appropriate action by banks and FIS
• Concept of 'accountability' at branch level to be made more effective.
(i) Co-ordination between Financial Institutions and amongst
banks:
(ii) Participation in rehabilitation packages-
(iii) Group approach:
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• When units in an 'industrial group becomes sick, the 'institutions should
examine whether sickness has arisen on account of internal factors such as
mismanagement, diversion of funds, neglect, etc., or on account of
external factors and take adequate steps accordingly.
• Recall of advances: - There should be proper consultation among the banks
and FIs so that the decision to recall advances is taken jointly.
• Preparation of Packages:- While preparing packages, the overall objective
of the Operating Agency/Lead Institution should be the rehabilitation of
the unit, keeping in view the sacrifices that the participating agencies
would be prepared to make. The following factors can be taken 'into
consideration-
> Where management deficiency is found to be the reason for sickness, it should
be ensured that the dishonest and/or incompetent management is removed so
that the rehabilitation package can succeed. Where the management is weak, it
should be strengthened by inducting professional managers/nominees of banks/
Financial Institutions. Constitution of Management Committees may also be
considered where necessary.
> Considering the overall need to strengthen the equity base of sick industrial units,
FIs, Banks should insist on promoters' augmenting the capital base. Where necessary,
restructuring of the equity should also be considered.
> Expansion, diversification should be encouraged only where it is imperative.
> A definite time frame for compliance of the package by each of the agencies
should be clearly spelt out in consultation with the agencies concerned and should
be given to BEFR.
> A Nodal Agency should be designated for monitoring the implementation of the
rehabilitation package by all agencies.
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• Implementation of Packages-Fls and banks should ensure that there is sufficient
delegation of powers so that the time lag between sanction of the scheme by the
BIFR and formal approval by the Board/competent authority is minimised and
delay in implementation of the rehabilitation package does not arise on this
account.
• Monitoring the implementation of packages
• Furnishing of information to Board for Industrial and Financial Reconstruction
(BIFR).
• Training arrangements.
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NPA MANAGEMENT
BIBLIOGRAPHY
I Books
1. Chandra P.C., Financial Management Principles & Practice.
2. Khan & Jain, Finincial Management
3. Panday I.M., Financial Management4. Kothiri C.R., Research Methodology
11. Magazines
1. Investor
2. Business India
3. Business Today
111. Newspapers
1. The Economic Times
2. The Business Standard
3. The Financial Express
I V. Published Material
I. 2000-2001 Annual Report of IFCI
2. 2000-2001 Annual Report of ICICI
3 2000-2001 Annual Re-port of IDBI
4. RBI Guidelines Circulars on Income Recognition and Asset Classification
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