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A

PROJECT REPORT

ON

“COMPERATIVE ANALAYSIS ON NON PERFORMING ASSETS OF INDIAN BANKING

INDUSTRY.”

Submitted to Mumbai university, Mumbai

For the partial fulfillment for the award of MMS degree

Faculty Supervisor Submittedby:

Prof.FarukhMistri Swapnil Jain

Roll No.-1033

Faculty of management, MMS-IVthSem

MIMR.

MUMBAI INSTITUTE OF MANAGEMENT & RESERCH



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2012


INDUSTRY.”

By

Swapniljain

MMS IV SEMESTER

SUBMMITED TO THE DEPARTMENT OF MANAGEMENT STUDIES IN THE

PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTER

OF M ANAGEMENT STUDIES

AT THE

MUMBAI INSTITUTE OF MANAGEMENT &RESERCH, MUMBAI

2012

The author hereby grants MIMR permission to reproduce and distribute publicly, paper and

electronic copies of the project report in whole or in part.

Signature of Student ___________________________________________________________

MUMBAI INSTITUTE OF MANAGEMENT & RESERCH, MUMBAI

Certified by ___________________________________________________________________

Vishwanathan Sir



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Director



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BGPS’S

MUMBAI INSTITUTE OF MANAGEMENT & RESEARCH

Founder Chairman : J K JADHAV

Former Director Of Industries, Govt Of Maharashtra

Ref No.: MIMR/0/10-11 Date: 26/07/2011

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Mr.SwapnilJain ,abonafide student of Mumbai Institute Of

Management and Research, Mumbai has completed the project with title


INDUSTRY”. The project was undertaken in the partial fulfillment of master degree in

management studies under “University of Mumbai” during the academic year 2011-

2012

He has carried out his project under my guidance and supervision. His work was to

be satisfactory in all respects. He has duly acknowledged the sources of informationand data used for the purpose of completion of project report. We wish him all the

best for his future endeavors. .

Prof. FARUKH MISTRIProf. VISHWANATHAN

(Project Guide) (Director)

“J. K. KNOWLEDGE CENTRE”, Near Mbpt Hospital, Wadala (E), Mumbai - 400037

Tel: 24110879, Fax: 2416513 Email: [email protected]

mailto:[email protected]






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ACKNOWLEDGEMENT

An endeavor to transform itself into success needs efforts. These efforts are individual, standing in

isolation. Such individual efforts require three things for their further development. These three

things being – “ Reasons, Rationality and Self -Esteem”. The combination of these three basic traits

delivers Productivity. However, time and again this productivity requires encouragement and

guidance. This much requisite support comes in the form of individuals furthering the development

of individuals’ .Prof essionals furthering the development of Amateurs. This acknowledgement is

an effort to recognize these professionals who have made this project a combination of the three

fundamental traits.

I express my deep sense of gratitude to company guide who spared his precious time and gave me

advice whenever I needed. I am also indebted to all other corporate staffs that helped me in the

successful completion of this project.

I would also like to express my sincere gratitude towards the director of our institute

PROF.VISHWANATHAN SIR. This project would not have been a success without their

motivation.

In the end I would like to thank the Almighty God and my Parents, who blessed me and

supported me every time I required

(SWAPNIL JAIN}



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TABLE OF CONTENTS

Abstract………………………………………………………………………06

Project Details………………………………………………………………..07

Introduction………………………………………………………………….12

Income Recognition…………………………………………………………24

Assets classification & Provisional Norms…………………………………28

Impact of NPA & Preventive Measurement for NPA………………… …..38

Tools & Recovery Of NPA…………………………………………………...45

Special Cases………………………………………………………………….53

Data analysis & Interpretation…………………………………………….62

Annexure…………………………………………………………………… .70

Bibliography………………………………………………………………...71



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The accumulation of huge non-performing assets in banks has assumed great

importance. The depth of the problem of bad debts was first realized only in early

1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,

50,000 crore.

While gross NPA reflects the quality of the loans made by banks,

net NPA shows the actual burden of banks. Now it is increasingly evident that themajor defaulters are the big borrowers coming from the non-priority sector. The

banks and financial institutions have to take the initiative to reduce NPAs in a time

bound strategic approach.

Public sector banks figure prominently in the debate not only

because they dominate the banking industries, but also since they have much larger

NPAs compared with the private sector banks. This raises a concern in the industry

and academia because it is generally felt that NPAs reduce the profitability of a

bank, weaken its financial health and erode its solvency.

For the recovery of NPAs a broad framework has evolved for the

management of NPAs under which several options are provided for debt recovery

and restructuring. Banks and FIs have the freedom to design and implement their

own policies for recovery and write-off incorporating compromise and negotiated

settlements.



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CHAPTER-1

Project Details



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OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA was to: To evaluate NPAs (Gross and Net) in different banks.

To study the past trends of NPA.

To calculate the weighted of NPA in risk management in Banking

To analyze financial performance of banks at different level of NPA

Primary objective:

The primary objective of the making report is:

To know why NPAs are the great challenge to the Public Sector Banks

Secondary objectives:

The secondary objectives of preparing this report are:

To understand what is Non Performing Assets and what are the underlying

reasons for the emergence of the NPAs.

To understand the impacts of NPAs on the operations of the Public

SectorBanks.

To know what steps are being taken by the Indian banking sector to reducethe

NPAs?

To evaluate the comparative ratios of the Public Sector Banks withconcernedto the NPAs.



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RESEARCH METHODOLOGY

The research methodology means the way in which we would complete our prospected task. Before undertaking any task it becomes very essential for any one

to determine the problem of study. I have adopted the following procedure incompleting my report study.

1. Formulating the problem

2. Research design

3. Determining the data sources

4. Analysing the data

5. Interpretation6. Preparing research report

(1) Formulating the problem

I am interested in the banking sector and I want to make my future in the banking

sector so decided to make my research study on the banking sector. I analyzed first

the factors that are important for the banking sector and I came to know that providing credit facility to the borrower is one of the important factors as far as the

banking sector is concerned. On the basis of the analyzed factor, I felt that theimportant issue right now as far as the credit facilities are provided by bank is non

performing assets. I started knowing about the basics of the NPAs and decided to

study on the NPAs. So, I chose the topic “Non Performing Assets the great

challenge before the Public Sector and Private Banks”.

(2) Research Design

The research design tells about the mode with which the entire project is prepared.

My research design for this study is basically analytical. Because I have utilized thelarge number of data of the Public Sector Banks.



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(3) Determining the data source

The data source can be primary or secondary. The primary data are those data whichare used for the first time in the study. However such data take place much time and

are also expensive. Whereas the secondary data are those data which are alreadyavailable in the market. These data are easy to search and are not expensive too.for

my study I have utilised totally the secondary data.

(4) Analysing the data

The primary data would not be useful until and unless they are well edited andtabulated. When the person receives the primary data many unuseful data would also

be there. So, I analysed the data and edited them and turned them in the usefultabulations. So, that can become useful in my report study.

(5) Interpretation of the data

With use of analyzed data I managed to prepare my project report. But the analyzing

of data would not help the study to reach towards its objectives. The interpretation of

the data is required so that the others can understand the crux of the study in more

simple way without any problem so I have added the chapter of analysis that would

explain others to understand my study in simpler way.

(6) Project writing

This is the last step in preparing the project report. The objective of the report

writing was to report the findings of the study to the concerned authorities.

Scope of the Study

Concept of Non-Performing Asset

Guidelines

Impact of NPAs

Reasons for NPAs

Preventive Measures



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Limitations of the study

The limitations that I felt in my study are:

It was critical for me to gather the financial data of the every bank of the

Public Sector Banks so the better evaluations of the performance of the banksare not possible.

Since my study is based on the secondary data, the practical operations as

related to the NPAs are adopted by the banks are not learned.

Since the Indian banking sector is so wide so it was not possible for me tocover all the banks of the Indian banking sector.



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CHAPTER-2

INTRODUCTION



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Introduction

NPA. The three letters Strike terror in banking sector and business circletoday. NPA is short form of “Non Performing Asset”. The dreaded NPA rulesays simply this: when interest or other due to a bank remains unpaid formore than 90 days, the entire bank loan automatically turns a nonperforming asset. The recovery of loan has always been problem for banksand financial institution. To come out of these first we need to think is itpossible to avoid NPA, no cannot be then left is to look after the factorresponsible for it and managing those factors.

Defini t ions :

An asset, including a leased asset, becomes nonperforming when it ceasesto generate income for the bank. A „non-performing asset‟ (NPA) wasdefined as a credit facility in respect of which the interest and/ or installmentof principal has remained „past due‟ for a specified period of time.

With a view to moving towards international best practices and to ensuregreater transparency, it has been decided to adopt the „90 days’overdue’ norm for identification of NPAs, from the year ending March 31,2004. Accordingly, with effect from March 31, 2004, a non-performing asset(NPA) shall be a loan or an advance where;

Interest and/ or installment of principal remain overdue for a period ofmore 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 caseof bills purchased and discounted,



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Interest and/or installment of principal remains overdue for two harvestseasons but for a period not exceeding two half years in the case of anadvance granted for agricultural purposes.

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.

NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA

To start with, performance in terms of profitability is a benchmark for any

business enterprise including the banking industry. However, increasing

NPAs have a direct impact on banks profitability as legally banks are not

allowed to book income on such accounts and at the sometime are forced to

make provision on such assets as per the Reserve Bank of India (RBI)guidelines. Also, with increasing deposits made by the public in the banking

system, the banking industry cannot afford defaults by borrower s since

NPAs affects the repayment capacity of banks. Further, Reserve Bank of

India (RBI) successfully creates excess liquidity in the system through

various rate cuts and banks fail to utilize this benefit to its advantage due to

the tear of burgeoning non-performing assets.

INDIAN ECONOMY AND NPAs

Undoubtedly the world economy has slowed down, recession is at its peak,

globally stock markets have tumbled and business itself is getting hard to do.

The Indian economy has been much affected due to high fiscal deficit, poor



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infrastructure facilities, sticky legal system, cutting of exposures to emerging

markets by FIs, etc. Further, international rating agencies like, Standard &

Poor have lowered India‟s credit rating to sub-investment grade. Such

negative aspects have often outweighed positives such as increasing forex

reserves and a manageable inflation rate.

Under such a situation, it goes without saying that banks are no exception

and are bound to face the heat of a global downturn. One would be surprised

to know that the banks and financial institution in India hold nonperforming

assets worth Rs. 110000 crores Bankers have realized that unless the level

of NPAs is reduced drastically, they will find it difficult to survive.

GLOBAL DEVELOPMENTS AND NPAs

The core banking business is of mobilizing the deposits and utilizing it for

lending to industry. Lending business is generally encouraged because it

has the effect of funds being transferred from the system to productive

purposes, which results into economic growth.

However lending also carries credit risk, which arises from the failure ofborrower to fulfill its contractual obligations either during the course of a

transaction or on a future obligation.

A question that arises is how much risk can a bank afford to take? Recent

happenings in the business world -Enron, WorldCom, Xerox, Global

Crossing do not give much confidence to banks.In case after case, these

giant corporate becan1e bankrupt and failed to provide investors with clearer

and more complete information thereby introducing a degree of risk thatmany investors could neither anticipate nor welcome. The history of financial

institutions also reveals the fact that the biggest banking failures were due to

credit risk. Due to this, banks are restricting their lending operations to

secured avenues only with adequate collateral on which to fall back upon in

a situation of default.



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FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs.

But the problem of NPAs is more in public sector banks when compared toprivate sector banks and foreign banks. The NPAs in PSB are growing dueto external as well as internal factors.

EXTERNAL FACTORS:-

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works forrecovery of loans and advances. Due to their negligence and ineffectiveness

in their work the bank suffers the consequence of non-recover, therebyreducing their profitability and liquidity.

Willful Defaul

There are borrowers who are able to pay back loans but are intentionally

withdrawing it. These groups of people should be identified and proper

measures should be taken in order to get back the money extended to them

as advances and loans.

Natural calamities

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

PSBs. every now and then India is hit by major natural calamities thus

making the borrowers unable to pay back there loans. Thus the bank has to

make large amount of provisions in order to compensate those loans, hence

end up the fiscal with a reduced profit. Mainly ours 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.



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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 thoseindustries ultimately end up with a low recovery of their loans reducing their

profit and liquidity

Lack of demand

Entrepreneurs in India could not foresee their product demand and starts

production which ultimately piles up their product thus making them unable

to pay back the money they borrow to operate these activities. The banks

recover the amount by selling of their assets, which covers a minimum label.Thus the banks record the non-recovered part as NPAs and has to make

provision for it.

Change on Govt. policies

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

it has to cope with the changing principles and policies for the regulation of

the rising of NPAs.

The fallout of handloom sector is continuing as most of the weavers Co-

operative societies have become defunct largely due to withdrawal of state

patronage. The rehabilitation plan worked out by the Central government to

revive the handloom sector has not yet been implemented. So the over dues

due to the handloom sectors are becoming NPAs.



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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

iPrinciples of safety:-

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

principal and interest. The repayment of loan depends upon the borrowers:

a)Capacity to pay b) Willingness to pay

a) Capaci ty to pay depends u pon:

1. Tangible assets2. Success in business

b) Wil l ingness to pay d epends on:

1. Character2. Honest3. Reputation of borrower

The banker should, therefore take utmost care in ensuring that the enterprise

or business for which a loan is sought is a sound one and the borrower is

capable of carrying it out successfully.He should be a person of integrity andgoodcharacter.



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Inappropriate technology

Due to inappropriate technology and management information system,

market driven decisions on real time basis cannot be taken. Proper MIS and

financial accounting system is not implemented in the banks, which leads topoor credit collection, thus NPA. All the branches of the bank should be

computerized.

Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another

reason for rise in NPAs. While providing unsecured advances the banks

depend more on the honesty, integrity, and financial soundness and credit

worthiness of the borrower.

Banks should consider the borrowers own capitainvestment.

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.



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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 purposeonly. Bank should analyze the profitability, viability, long term acceptability of

the project while financing.

Poor credit appraisal system

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

appraisal the bank gives advances to those who are not able to repay it

back. They should use good credit appraisal to decrease the NPAs.

Managerial deficiencies

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. Marketability2. Acceptability

3. Safety4. Transferability.

The banker should follow the principle of diversification of risk based on the

famous maxim “do notkeep all the eggs in one basket”; it means that the

banker should not grant advances to a few big farms only or to concentrate

them in few industries or in a few cities. If a new big customer meets

misfortune or certain traders or industries affected adversely, the overall

position of the bank will not be affected.Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom

industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and

the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).



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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 ofinterest 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 same have already affected the smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB

is increasing day by day.

PROBLEMS DUE TO NPA

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

case, if the banks fails, owners lose their assets In modern times this

may affect a broad pool of shareholders.

Depositors do not receive a market return on saving. In the worst caseif the bank fails, depositors lose their assets or uninsured balance.

Banks redistribute losses to other borrowers by charging higher

interest rates, lower deposit rates and higher lending rates repress

saving and financial market, which hamper economic growth.

Nonperforming 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, labor andnatural resources. Nonperforming asset may spill

over the banking system andcontract the money stock, which may lead

to economiccontraction. This spillover effect can channelize through

liquidity or bank insolvency:



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When many borrowers fail to pay interest, banks may experience

liquidity shortage. This can jam payment across the country.

Illiquidity constraints bank in paying depositors

Undercapitalized banks exceed the bank‟s capital base.

'Out of Order' status :

An account should be treated as 'out of ord er ' if the outstanding balance

remains continuously in excess of the sanctioned limit/drawing power. In

cases where the outstanding balance in the principal operating account is

less than the sanctioned limit/drawing power, but there are no credits

continuously for six months as on the date of Balance Sheet or credits are

not enough to cover the interest debited during the same period, these

accounts should be treated as 'out of order'.

‘ Overdue‟:

Any amount due to the bank under any credit facility is „overdue‟ if it is not

paid on the due date fixed by the bank.



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Types of NPA

A] Gross NPA

B] Net 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 ref lects th e

qual i ty of the loans madeby banks. It consists of all the non-standard

assets like as sub-standard, doubtful, and loss assets. It can be calculated

with the help of following ratio:

Gross NPAs Ratio= Gross NPAs Gross Advances

B] Net NPA:

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

provision regarding NPAs. Net NPA show s theactual burden of banks.

Since in India, bank balance sheets contain a huge amount of NPAs and the

process of recovery and write off of loans is very time consuming, the

provisions the banks have to make against the NPAs according to thecentral 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



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CHAPTER-3

INCOME RECOGNITION



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3. INCOME RECOGNITION

Income 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 recognized 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

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

re-negotiated or rescheduledextension of credit.

If Government guaranteed advances become NPA, the interest on

such advances should not be taken to income account unless the

interest has been realized..

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 bereversed or provided for if thesame is not realized. This will apply to

Government guaranteed accounts also.



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

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

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

Leased Assets

accounting period. The net lease rentals (finance charge) on the

leased asset accrued and credited to income account before the asset

became non-performing, and remaining unrealized, should be reversed

or provided for in the current

The term 'net lease rentals' would mean the amount of finance chargetaken to the credit of Profit & Loss Account and would be worked out

as gross lease rentals adjusted by amount of statutory depreciation

and lease equalization account.

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

Council of the Institute of CharteredAccountants of India (ICAI), a

separate Lease Equalization Account should be opened by the banks

with acorresponding debit or credit to Lease Adjustment Account,as

the case may be. Further, Lease Equalization Accountshould be

transferred every year to the Profit & LossAccount and disclosed

separately as a deductionfrom/addition to gross value of lease rentals

shown underthe head 'Gross Income'.

Appropriation of recovery in NPAs

Interest realised on NPAs may be taken to income account providedthe 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.



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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:

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 Performa accounts.

Reporting of NPAs

Banks are required to furnish a Report on NPAs as on 31stMarch each

year after completion of audit. The NPAswould relate to the banks‟

global portfolio, including theadvances at the foreign branches. The

Report should befurnished as per the prescribed format given in

theAnnexure 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 and

gross NPAs to eliminate any distortion in the quantum of NPAs beingreported.

REPORTING FORMAT FOR NPA – GROSS AND NET NPA

Annexure-I (Page no-64)



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CHAPTER-4- Asset Classification

- Provisioning Norms



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Asset Classification

Categories of NPAs

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 do not exceed 90 days at the end of financial year. If asset

fails to be in category of standard asset that is amount due more than90days then it is NPA and NPAs are further need to classify in sub categories.

Banks are required to classify nonperforming assets further into the following

three categories based on the period for which the asset has remained

nonperforming and the reliability of the dues:

( 1 ) Sub-standard Assets( 2 ) Doubtful Assets( 3 ) Loss Assets

( 1 ) Sub-standard Assets:--

With effect from 31 March 2005, a substandard asset would be one, which

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

features are exhibited by substandard assets: the current net worth of the

borrowers / guarantor or the current market value of the security charged is

not enough to ensure recovery of the dues to the banks in full; and the asset

has well-defined credit weaknesses that jeopardise the liquidation of the debt

and are characterised by the distinct possibility that the banks will sustain

some loss, if deficiencies are not corrected.

( 2 ) Doubtful Assets:--



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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 itremained in the sub-standard category for 12 months.

( 3 ) 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 or

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

Provisioning Norms

General

In order to narrow down the divergences and ensure adequateprovisioning 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 thestatutory auditors take into account the

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

The primary responsibility for making adequate provisions for any

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



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that of the bank managements and the statutory auditors. The

assessment made by theinspecting officer of the RBI is furnished to

the bank to assist the bank management and the statutory auditors in

taking a decision in regard to making adequate and necessary

provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on

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

prescribed categories as detailed in paragraphs 4 supra. Taking into

account the time lag between an account becoming doubtful of

recovery, its recognition as such, the 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, doubtfulassets and loss assets as below:

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 :

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

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

and the realisable value is estimated on a realistic basis.

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

following basis, at the rates ranging from 20 percent to 50 percent of

the secured portion depending upon the period for which the asset has

remained doubtful:



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Additional provisioning consequent upon the change in the definition of

doubtful assets effective from March 31, 2003 has to be made in

phases as under:

o As on 31.03.2003, 50 percent of the additionalprovisioning

requirement on the assets which becamedoubtful on account of



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new norm of 18 months for transitionfrom sub-standard asset to

doubtful category.

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

previous year, in addition to the provisions needed, as on31.03.2002.

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 endingMarch 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.

5crore 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:

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:

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.



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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 ofthe balance sheet.

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 floatingprovisions, wherever available, could be set-off against provisions required

to be made as per above stated provisioning guidelines. Considering that

higher loan loss provisioning adds to the overall financial strength of the

banks and the stability of the financial sector, banks are urged to voluntarily

set apart provisions much above the minimum prudential levels as a

desirable practice.

Provisions on Leased Assets:

Leases are peculiar transactions where the assets are not recorded in the

books 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 is

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 the

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

amount substituted for historical cost in the books of account or

financial statements. Statutory depreciation should be shown



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separately in the Profit & Loss Account. Accumulated depreciation

should be deducted from the Gross Book Value of the leased asset in

the balance sheet of the lesser to arrive at the 'net book value'.

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

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

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

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

separate column in the section related to leased assets.

Doubtful assets:-

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

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

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

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

upon the period for which asset has been doubtful:

Loss assets:-



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

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

and the unrealised portion of finance income net of finance charge

component should be provided for. („Net book value')

Guidelines for Provisions under Special Guidelines for Provisionsunder Special Circumstances

Government guaranteed advances

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

against State Government guarantee, if the guarantee is invoked and

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

the banks should make normal provisions as prescribed in paragraph

4.1.2 above.

As regards advances guaranteed by State Governments, in respect of

which guarantee stood invoked as on 31.03.2000, necessary provision

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

years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent

each year.



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CHAPTER-5-Impact of NPA

- Preventive Measurement for NPA

Impact of NPA



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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 doesn‟t 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:-

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

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

to additional cost to the company. Difficulty in operating the functions of bank

is another cause of NPA due to lack of money. Routine payments and dues.

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 day‟s banks have special employees to deal

and handle NPAs, which is additional cost to the bank.

Credit loss:-

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

terms of market credit. It will lose it‟s goodwill and brand image and credit

which have negative impact to the people who are putting their money in the

banks.



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Early symptoms by which one can recognize a

performing asset turning in to Non-performingasset:-

Four categories of early symptoms:----------------------------------------------------

(1) Financial:

Non-payment of the very first instalment in case of term loan.

Bouncing of cheque due to insufficient balance in the accounts.

Irregularity in instalment.

Irregularity of operations in the accounts.

Unpaid overdue bills.

Declining Current Ratio.

Payment which does not cover the interest and principal amount of that

instalment.

While monitoring the accounts it is found that partial amount is diverted

to sister concern or parent company.

(2) Operational and Physical:

If information is received that the borrower has either initiated the

process of winding up or are not doing the business.

Overdue receivables.

Stock statement not submitted on time.

External non-controllable factor like natural calamities in the city where

borrower conduct his business.

Frequent changes in plan.

Non-payment of wages.

(3) Attitudinal Changes:



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Avoidance of contact with bank.

Problem between partners.

(4) Others:

Changes in Government policies. Death of borrower.

Competition in the market.

Preventive Measurement for NPA

Early Recogni t ion o f the Problem:-

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

process, it‟s too late to retrieve the situation- both in terms of rehabilitation of

the project and recovery of bank‟s dues. Identification of weakness in the

very beginning that is: When the account starts showing first signs of

weakness regardless of the fact that it may not have become NPA, is

imperative. Assessment of the potential of revival may be done on the basis

of a techno-economic viability study. Restructuring should be attempted

where, after an objective assessment of the promoter‟s intention, banks areconvinced of a turnaround within a scheduled timeframe. In respect of totally

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

selling of the unit earlier, so as to recover whatever is possible through legal

means before the security position becomes worse.

Ident i fy ing B orrowers with Genu ine Intent : -

Identifying borrowers with genuine intent from those who are non- serious

with no commitment or stake in revival is a challenge confronting bankers.

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

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

and capability to achieve turnaround. Based on this objective assessment,

banks should decide as quickly as possible whether it would be worthwhile

to commit additional finance.



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In this regard banks may consider having “SpecialInvestigation” of all

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

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

may have penal of technical experts with proven expertise and track record

of preparing techno-economic study of the project of the borrowers.Borrowers having genuine problems due to temporary mismatch in fund flow

or sudden requirement of additional fund may be entertained at branch level,

and for this purpose a special limit to such type of cases should be decided.

This will obviate the need to route the additional funding through the,

controlling offices in deserving cases, and help avert many accounts slipping

into NPA category.

Timel iness and Adequacy o f response: -

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

Time is a crucial element in any restructuring or rehabilitation activity. The

response decided on the basis of techno-economic study and promoter‟s

commitment, has to be adequate in terms of extend of additional funding and

relaxations etc. under the restructuring exercise. The package of assistance

may be flexible and bank may look at the exit option.

Focus o n Cash Flows:-

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

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

misleading picture. Appraisal for fresh credit requirements may be done by

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

the basis of Funds Flow.

Management Effect iveness :-



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

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

Management effectiveness in tackling adverse business conditions is a very

important aspect that affects a borrowing unit‟s fortunes. A bank may commit

additional finance to an align unit only after basic viability of the enterprisealso in the context of quality of management is examined and confirmed.

Where the default is due to deeper malady, viability study or investigative

audit should be done –

it will be useful to have consultant appointed as early as possible to examine

this aspect. A proper techno economic viability study must thus become the

basis on which any future action can be considered.

Mult iple Financing :-

A.During the exercise for assessment of viability and restructuring, aPragmatic and unified approach by all the lending banks/ FIs as alsosharing of all relevant information on the borrower would go a long waytoward overall success of rehabilitation exercise, given the probability ofsuccess/failure.

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

make sure that it captures the cash flows (there is a tendency on part of

the borrowers to switch bankers once they default, for fear of getting their

cash flows forfeited), and ensure that such cash flows are used for working

capital purposes. Toward this end, there should be regular flow of

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

consortium, may not be allowed to offer credit facilities to such defaulting

clients. Current account facilities may also be denied at no consortium banks

to such clients and violation may attract penal action. The Credit

Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful

information exchange on defaulting borrowers once the setup becomes fully

operational.

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

one set of lenders may be willing to wait for a longer time to recover its dues,

another lender may have a much shorter timeframe in mind. So it is possible



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that the letter categories of lenders may be willing to exit, even a t a cost –

by a discounted settlement of the exposure. Therefore, any plan for

restructuring/rehabilitation may take this aspect into account.

D. Corporate Debt Restructuring mechanism has been institutionalized in2001 to provide a timely and transparent system for restructuring of the

corporate debt of Rs. 20 crore and above with the banks and FIs on a

voluntary basis and outside the legal framework. Under this system, banks

may greatly benefit in terms of restructuring of large standard accounts

(potential NPAs) and viable sub-standard accounts with consortium/multiple

banking arrangements.



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CHAPTER-6Tools For recovery of NPA



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Once NPA occurred, one must come out of it or it should be managed inmost efficient manner. Legal ways and means are there to overcome andmanage NPAs. We will look into each one of it.



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6.1 Willful Default:-

A] LokAdalat and Debt Recovery Tribunal

B] Securitization Act

C] Asset Reconstruction

LokAdalat:

LokAdalat institutions help banks to settle disputes involving account in

“doubtful” and “loss” category, with outstanding balance of Rs.5 lakh for

compromise settlement under LokAdalat. Debt recovery tribunals have beenempowered to organize LokAdalat to decide on cases of NPAs of Rs. 10

lakh and above. This mechanism has proved to be quite effective for speedy

justice and recovery of small loans. The progress through this channel is

expected to pick up in the coming years.

Debt Recovery Tribunals ( DRT):

The recovery of debts due to banks and financial institution passed in March

2000 has helped in strengthening the function of DRTs. Provision for

placement of more than one recovery officer, power to attach defendant‟s

property/assets before judgment, penal provision for disobedience of

tribunal‟s order or for breach of any terms of order and appointment of

receiver with power of realization, management, protection and preservation

of property are expected to provide necessary teeth to the DRTs and speed

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

by the Government to facilitate speedy recovery by banks/DFIs, have not

been able make much impact on loan recovery due to variety of reasons like

inadequate number, lack of infrastructure, under staffing and frequent

adjournment of cases. It is essential that DRT mechanism is strengthened

and vested with a proper enforcement mechanism to enforce their orders.

Non observation of any order passed by the tribunal should amount to

contempt of court, the DRT should have right to initiate contempt



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proceedings. The DRT should empowered to sell asset of the debtor

companies and forward the proceedto the winding – up court for distribution

among the lenders.

6.2 Inability to Pay

Consortium arrangements:

Asset classification of accounts under consortium should be based on the

record of recovery of the individual memberbanks and other aspects

having a bearing on the recoverability of the advances. Where the

remittances by the borrower under consortium lending arrangements are

pooled with one bank and/or where the bank receiving remittances is not

parting with the share of other member banks, the account will be treated as

not serviced in the books of the other member banks and therefore, be

treated as NPA. The banks participating in the consortium should, therefore,

arrange to get their share of recovery transferred from the lead bank or get

an express consent from the lead bank for the transfer of their share of

recovery, to ensure proper asset classification in their respective books.

6.3 Restructuring / Rescheduling of Loans

A standard asset where the terms of the loan agreement regarding Interest

and principal have been renegotiated or rescheduled after commencement

of production should be classified as sub-standard and should remain in

such category for at least one year of satisfactory performance under the

renegotiated or rescheduled terms. In the case of sub-standard and doubtful

assets also, rescheduling does not entitle a bank to upgrade the quality of

advance automatically unless there is satisfactory performance under therescheduled / renegotiated terms. Following representations from banks that

the foregoing stipulations deter the banks from restructuring of

standardand sub-standard loan assets even though the modification of

terms might not jeopardize the assurance of repayment of dues from the

borrower, the norms relating to restructuring of standard and sub-standard



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assets were reviewed in March 2001. In the context of restructuring of the

accounts, the following stages at which the restructuring / rescheduling /

renegotiation of the terms of loan agreement could take place, can be

identified:

1) Before commencement of commercial production;

2) After commencement of commercial production but before the asset has

been classified as substandard,

3) After commencement of commercial production and after the asset has

been classified as substandard.

In each of the foregoing three stages, the rescheduling, etc., of principal

and/or of interest could take place, with or without sacrifice, as part of therestructuring package evolved.

6.4 Treatment of Restructured Standard Accounts:

A rescheduling of the installments of principal alone, at any of the aforesaid

first two stages would not cause a standard asset to be classified in the

substandard category provided the loan/credit facility is fully secured.

A rescheduling of interest element at any of the foregoing first two stages

would not cause an asset to be downgraded to substandard category subject

to the condition that the amount of sacrifice, if any, in the element of interest,

measured in present value terms, is either written off or provision is made

to the extent of the sacrifice involved. For the purpose, the future interest

due as per the original loan agreement in respect of an account should be

discounted to the present value at a rate appropriate to the risk category of

the borrower (i.e., current PLR+ the appropriate credit risk premium for the

borrower-category) and compared with the present value of the dues

expected to be received under the restructuring package, discounted on the

same basis.



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In case there is a sacrifice involved in the amount of interest in present value

terms, as at (b) above, the amount of sacrifice should either be written off

or provisionmade to the extent of the sacrifice involved.sacrifice is by way

of write off of the past interest dues, the asset should continue to be treated

as sub-standard.

6.6 Up gradation of restructured accounts:

The sub-standard accounts which have been subjected to restructuring etc.,

whether in respect of principal installment or interest amount, by whatever

modality, would be eligible to be upgraded to the standard category only

after the specified period i.e., a period of one year after the date when first

payment of interest or of principal, whichever is earlier, falls due, subject tosatisfactory performance during the period. The amount of provision made

earlier, net of the amount provided for the sacrifice in the interest amount in

present value terms as aforesaid, could also be reversed after the one year

period. During this one-year period, the substandard asset will not

deteriorate in its classification if satisfactory performance of the account is

demonstrated during the period. In case, however, the satisfactory

performance during the one-year period is not evidenced, the asset

classification of the restructured account would be governed as per the

applicable prudential norms with reference to the pre restructuring

payment schedule.

6.7 General:

These instructions would be applicable to all type of credit facilities including

working capital limits, extended to industrial units, provided they are fullycovered by tangible securities.

As trading involves only buying and selling of

commodities and the problems associated with manufacturing units such as

bottleneck in commercial production, time and cost escalation etc. are not



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applicable to them, these guidelines should not be applied to restructuring/

rescheduling of credit facilities extended to traders.

While assessing the extent of security cover available to the credit facilities,

which are being restructured/ rescheduled, collateral security would also be

reckoned, provided such collateral is a tangible security properly charged tothe bank and is not in the intangible form like guarantee etc. of the promoter/

others.

6.8 Income recognition

There will be no change in the existing instructions on income recognition.

Consequently, banks should not recognise income on accrual basis in

respect of the projects even though the asset is classified as a standard

asset if the asset is a "non performing asset" in terms of the extant

instructions. In other words, while the accounts of the project may be

classified as a standard asset, banks shall recognize income in such

accounts only on realisation on cash basis if the asset has otherwise

become „non performing‟ as per the extant delinquency norm of 180 days.

The delinquency norm would become 90 days with effect from 31 March

2004.

Consequently, banks, which have wrongly recognised income in the past,should reverse the interest if it was recognised as income during the current

year or make a provision for an equivalent amount if it was recognised as

income in the previous year(s). As regards the regulatory

treatment of income recognised as „funded interest‟ and „conversion into

equity, debentures or any other instrument‟ banks should adopt the

following:

6.9 Funded Interest:

Income recognition in respect of the NPAs, regardless of whether these areor are not subjected to restructuring/ rescheduling/ renegotiation of terms ofthe loan agreement, should be done strictly on cash basis, only onrealisation and not if the amount of interest overdue has been funded. If,however, the amount of funded interest is recognised as income, a provision



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for an equal amount shouldalso be made simultaneously. In other words,any funding of interest in respect of NPAs, if recognised as income, shouldbe fully provided for.

6.9.1. Conversion into equity, debentures or any other instrument:

The amount outstanding converted into otherinstruments would normally

comprise principal and the interestcomponents. If the amount of interest

dues is converted intoequity or any other instrument, and income is

recognised inconsequence, full provision should be made for the amount

ofincome so recognised to offset the effect of such income recognition. Such

provision would be in addition to the amount of provision that may be

necessary for the depreciation in the value of the equity or other instruments,

as per the investment valuation norms. However, if the conversion of interest

is into equity, which is quoted, interest income can be recognised at market

value of equity, as on the date of conversion, not exceeding the amount of

interest converted to equity. Such equity must thereafter be classified in the

"available for sale" category and valued at lower of cost or market value. In

case of conversion of principal and /or interest in respect of NPAs into

debentures, such debentures should be treated as NPA, abinitio, in the

same asset classification as was applicable to loan just before conversion

and provision made as per norms. This norm would also apply to zero

coupon bonds or other Instruments which seek to defer the liability of the

issuer. On such debentures, income should be recognised only on

realisation basis. The income in respect of unrealised interest, which is

converted into debentures or any other fixed maturity instrument, should be

recognised only on redemption of such instrument. Subject to the above, theequity shares or other instruments arising from conversion of the principal

amount of loan would also be subject to the usual prudential valuation norms

as applicable to such instruments.



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6.9.2. Provisioning

While there will be no change in the extant norms on provisioning for NPAs,banks which are already holding provisions against some of the accounts,

which may now be classified as „standard‟, shall continue to hold the

provisions and shall not reverse the same.



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CHAPTER-7

Special Cases



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7 . Special Cases

7.1.1. Accounts with temporary deficiencies:

The classification of an asset as NPA should be based on the record of

recovery. Bank should not classify an advance account as NPA merely due

to the existence of some deficiencies which are temporary in nature such as

non availabilityof adequate drawing power based on the latest available

stock statement, balance outstanding exceeding the limit temporarily, non-

submission of stock statements and nonrenewal of the limits on the due

date, etc. In the matter of classification of accounts with such deficienciesbanks may follow the following guidelines:

Banks should ensure that drawings in the working capital accounts are

covered by the adequacy of current assets, since current assets are first

appropriated in times of distress. Drawing power is required to be arrived at

based on the stock statement which is current. However, considering the

difficulties of large borrowers, stock statements relied upon by the banks for

determining drawing power should not be older than three months. The

outstanding in the account based on drawing power calculated from stock

statements older than three months, would be deemed as irregular. A

working capital borrower account will become NPA if such irregular drawings

are permitted in the account for a continuous period of 180 days even

though the unit may be working or the borrower's financial position is

satisfactory.

Regular and ad hoc credit limits need to be

reviewed/ regularized not later than three months from the due date/date of

ad hoc sanction. In case of constraints such as non-availability of financial

statements and other data from the borrowers, the branch should furnish

evidence to show that renewal/ review of credit limits is already on and

would be completed soon. In any case, delay beyond six months is not

considered desirable as a general discipline. Hence, an account where the

regular/ ad hoc credit limits have not been reviewed/ renewed within 180

days from the due date/ date of ad hoc sanction will be treated as NPA.



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7.1.2. Accounts regularized near about the balance sheet date:

The asset classification of borrower accounts where a solitary or a few

credits are recorded before the balance sheet date should be handled with

care and without scope for subjectivity. Where the account indicates inherent

weakness on the basis of the data available, the account should be deemed

as a NPA. In other genuine cases, the banks must furnish satisfactory

evidence to the Statutory Auditors/Inspecting Officers about the manner of

regularization of the account to eliminate doubts on their performing status.

7.1.3Asset Classification to be borrower-wise and not facility-wise

It is difficult to envisage a situation when only one facility to a borrower

becomes a problem credit and not others. Therefore, all the facilities granted

by a bank to a borrower will have to be treated as NPA and not the particular

facility or part thereof which has become irregular. If the debits arising out of

devolvement of letters of credit or invoked guarantees are parked in a

separate account, the balance outstanding in that account also should be

treated as a part of the borrower‟s principal operating account for the

purpose of application of prudential norms on income recognition, asset

classification and provisioning.

7.1.4. Accounts where there is erosion in the value of security

A NPA need not go through the various stages of classification in cases of

serious credit impairment and such assets should be straightaway classifiedas doubtful or loss asset as appropriate. Erosion in the value of security can

be reckoned as significant when the realizable value of the security is less

than 50 per cent of the value assessed by the bank or accepted by RBI at

the time of last inspection, as the case may be. Such NPAs may be

straightaway classified under doubtful category and provisioning should be



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made as applicable to doubtful assets. If the realizable value of the security,

as assessed by the bank/ approved values/ RBI is less than 10 percent of

the outstanding in the borrower accounts, the existence of security should be

ignored and the asset should be straightaway classified as loss asset. It may

be either written off or fully provided for by the bank.

7.1.5. Advances to PACS/FSS ceded to Commercial Banks:

In respect of agricultural advances as well as advances for other purposes

granted by banks to ceded PACS/ FSS under the on-lending system, only

that particular credit facilitygranted to PACS/ FSS which is in default for a

period of two harvest seasons (not exceeding two half years)/two quarters,as

the case may be, after it has become due will be classified as NPA and not

all the credit facilities sanctioned to a PACS/ FSS. The other direct loans &

advances, if any, granted by the bank to the member borrower of a PACS/

FSS outside the onlendingarrangement will become NPA even if one of the

credit facilities granted to the same borrower becomes NPA.

7.1.6 Advances against Term Deposits, NSCs, KVP/IVP, etc. :

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPsand life policies need not be treated as NPAs. Advances against gold

ornaments, government securities and all other securities are not covered by

this exemption.

7.1.7 Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or for agricultural

plantations etc. where moratorium is available for payment of interest,payment of interest becomes 'due' only after the moratorium or gestation

period is over. Therefore, such amounts of interest do not become overdue

and hence NPA, with reference to the date of debit of interest. They become

overdue after due date for payment of interest, if uncollected. In the case of

housing loan or similar advances granted to staff members where interest is



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payable after recovery of principal, interest need not be considered as

overdue from the first quarter onwards. Such loans/advances should be

classified as NPA only when there is a default in repayment of installment of

principal or payment of interest on the respective due dates.

7.1.8 Agricultural advances

In respect of advances granted for agricultural purpose where interest and/or

installment of principal remains unpaid after it has become past due for two

harvest seasons but for a period not exceeding two half years, such an

advance should be treated as NPA. The above norms should be made

applicable to all direct agricultural advances as listed at items 1.1, 1.1.2 (i) to

(vii), 1.1.2 (viii)(a)(1) and 1.1.2 (viii)(b)(1) of Master Circular on lending topriority sector No. RPCD.PLAN. BC. 12/04.09.01/ 2001- 2002 dated 1

August 2001. An extract of the list of these items is furnished in the

Annexure II. In respect of agricultural loans, other than those specified

above, identification of NPAs would be done on the same basis as non-

agricultural advances which, at present, are the 180 days delinquency norm.

Where natural calamities impair the repaying capacity of

agricultural borrowers, banks may decide on their own as a relief measure

conversion of the short-term production loan into a term loan or re-

schedulement of the repayment period; and the sanctioning of fresh short-

term loan, subject to various guidelines contained in RBI circulars

RPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98 and

RPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.In such cases of

conversion or re-schedulement, the term loan as well as fresh short-term

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

asset classification of these loans would thereafter be governed by the

revised terms & conditions and would be treated as NPA if interest and/or

installment of principal remains unpaid, for two harvest seasons but for aperiod not exceeding two half years.



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7.1.9. Government guaranteed advances:

The credit facilities backed by guarantee of the Central Government thoughoverdue may be treated as NPA only when the Government repudiates its

guarantee when invoked. This exemption from classification of Government

guaranteed advances as NPA is not for the purpose of recognition of

income. With effect from 1st April 2000, advances sanctioned against State

Government guarantees should be classified as NPA in the normal course, if

the guarantee is invoked and remains in default for more than two quarters.

With effect from March 31, 2001 the period of default is revised as more than

180 days.

7.2.1. Take -out Finance:

Takeout finance is the product emerging in the context of the funding of long-

term infrastructure projects. Under this arrangement, the institution/the bank

financing infrastructure projects will have an arrangement with any financial

institution for transferring to the latter the outstanding in respect of

suchfinancing in their books on a predetermined basis. In view of the time-

lag involved in taking-over, the possibility of a default in the meantime cannotbe ruled out. The norms of asset classification will have to be followed by the

concerned bank/financial institution in whose books the account stands as

balance sheet item as on the relevant date. If the lending institution observes

that the asset has turned NPA on the basis of the record of recovery, it

should be classified accordingly. The lending institution should not recognize

income on accrual basis and account for the same only when it is paid by the

borrower/ taking over institution (if the arrangement so provides). The

lending institution should also make provisions against any asset turning intoNPA pending its takeover by taking over institution. As and when

the asset is taken over by the taking over institution, the corresponding

provisions could be reversed. However, the taking over institution, on taking

over such assets, should make provisions treating the account as NPA from



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the actual date of it becoming NPA even though the account was not in its

books as on that date.

7.2.2. Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the banks covering export of

goods to countries for which the ECGC‟s cover is available, EXIM Bank has

introduced a guarantee-cum refinance program whereby, in the event of

default, EXIM Bank will pay the guaranteed amount to the bank within a

period of 30 days from the day the bank invokes the guarantee after the

exporter has filed claim with ECGC. Accordingly, to the extent payment has

been received from the EXIM Bank, the advance may not be treated

as a non-performing asset for asset classification and provisioning purposes.

7.2.3 Export Project Finance:

In respect of export project finance, there could be instances where the

actual importer has paid the dues to the bank abroad but the bank in turn is

unable to remit the amount due to political developments such as war, strife,

UN embargo, etc. In such cases, where the lending bank is able to establish

through documentary evidence that the importer has cleared the dues in full

by depositing the amount in the bank abroad before it turned into NPA in the

Books of the bank, but the importer's country is not allowing the funds to be

remitted due to political or other reasons, the asset classification may be

made after a period of one year from the date the amount was deposited by

the importer in the bank abroad.

7.2.4. Advances under rehabilitation approved by BIFR/ TLI:

Banks are not permitted to upgrade the classification of any advance inrespect of which the terms have been re-negotiated unless the package of

re-negotiated terms has worked satisfactorily for a period of one year. While

the existing credit facilities sanctioned to a unit under rehabilitation packages

approved by BIFR/term lending institutions will continue to be classified as

sub-standard or doubtful as the case may be, in respect of additional



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facilities sanctioned under the rehabilitation packages, the Income

Recognition, Asset Classification norms will become applicable after a period

of one year from the date of disbursement.

7.2.5. ROLE OF ARCIL:-

This empowerment encouraged the three major players in Indian banking

system, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI) and

IDBI Bank Limited (IDBI) to come together to set-up the first ARC. Arcil was

incorporated as a public limited company on February 11, 2002 and obtained

its certificate of commencement of business on May 7, 2003. In pursuance of

Section 3 of the Securitization Act 2002, it holds a certificate of registration

dated August 29, 2003, issued by the Reserve Bank of India (RBI) andoperates under powers conferred under the Securitization Act, 2002. Arcil is

also a “financial institution" within the meaning of Section 2 (h) (ia) of the

Recovery of Debts due to Banks and Financial Institutions Act, 1993 (the

"DRT Act").

Arcil is the first ARC in the country to commence business of resolution of

non-performing assets (NPAs) upon acquisition from Indian banks and

financial institutions. As the first ARC, Arcil has played a pioneering role in

setting standards for the industry in India.

➢Unlocking capi ta l for the banking s ystem and the econom y

The primary objective of Arcil is to expedite recovery of the amounts locked

in NPAs of lenders and thereby recycling capital. Arcil thus, provides relief to

the banking system by managing NPAs and help them concentrate on core

banking activities thereby enhancing shareholders value.

➢Creat ing a vibrant m arket for distressed d ebt assets/ secur i t ies inInd ia offer ing a trading plat form for Lenders

Arcil has made successful efforts in funneling investment from both from

domestic and international players for funding these acquisitions of

distressed assets, followed by showcasing them to prospective buyers. This

has initiated creation of a secondary market of distressed assets in the



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country besides hastening their resolution. The efforts of Arcil would lead the

country‟s distressed debt market to international standards.

➢

To evolve and create signi f icant capaci ty in the system for q uick erresolut ion of NPAs by deploying the assets opt imal ly

With a view to achieving high delivery capabilities for resolution, Arcil has put

in place a structure aimed at outsourcing the various sub-functions of

resolution to specialized agencies, wherever applicable under the provision

of the Securitization Act, 2002. Arcil has also encourage, groomed and

developed many such agencies to enhance its capacity in line with the

growth of its activity.



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CHAPTER-8Data analysis and interpretation



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7. ANALYSIS

For the purpose of analysis and comparison between Public and private

sector banks, Wehave taken five banks from both sectors to compare the

non-performing assets of banks. For understanding we further bifurcate the

non-performing assets in priority sector and non-priority sector, gross NPA

and net NPA in percentage as well as in rupees, deposit – investment –

advances. Further we also analysis on the basis of Deposit – Investment – Advances to get the clear view where the bank stands in the competitive

market. At the end of March 2008, in private sector ICICI Bank is the highest

deposit investment-advances figure in rupees crore, second is HDFC Bank

and KOTAK Bank has least figure. In public sector banks Punjab National

Bank has the highest deposit investment- advances but when we look at the

graphwe can see that the Bank of Baroda and Bank of India are almost the

similar in numbers and Dena Bank is stands last in public sector bank. When

we compare the private sector banks with public sector banks, we canunderstand the more number of people prefer to choose public sector banks

for depositinvestment.

DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and

comparison among them, year 2008-09.

Private Sector Banks:-

(Rs in crore)



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Analysis:-From the above figure we can see that the ICICI Bank deposit-investment-

advances are quite high than other banks like

HDFC,AXIS,INDUSIND,KOTAK

Public Sector Banks:-

Analysis:-In public sector Punjab National Bank depositinvestment-

Advances are comparatively quite high rather than Bank of Baroda, Bank ofIndia, United bank of India and Dena Bank.

Comparison between ICICI BANK AND PUNJAB NATIONALBANK in term of deposit-investment-advances:-



Page | 66

Analysis: -

Here we have compared between ICICI BANK AND PUNJAB NATIONAL

BANK in term of deposit-investment-advances. From theabove figure we can

see that ICICI bank deposit and advancesare quite higher than PunjabNational Bank. But in case ofInvestment ICICI Bank investment amount is

doubled thanPunjab National Bank amount.

Gross NPA and Net NPA:-

There are two concepts related to non-performing assets a) gross and b)

net. Gross refers to all NPAs on a bank‟s balance sheet irrespective of the

provisions made. It consists of all the non-standard assets, viz. Substandard,

doubtful, and loss assets. A loan asset is classified as „ substandard” if it

remains NPA up to a period of 18 months; “ doubtful” if it remains NPA for

more than 18 months; and loss, without any waiting period, where the dues

are considered not collectible or marginally collectible. Net NPA is gross

NPA less provisions. Since in India, bank balance sheets contains a huge

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

time consuming, the provisions the banks have to make against the NPA

according to the central bank guidelines, are quite significant.

Here, we can see that there are huge differences between gross and net

NPA. While gross NPA reflects the qualityof the loans made by banks,

net NPA shows the actualburden of banks. The requirements for

provisions are:

100% for loss assets

100% of the unsecured portion plus 20-50% of the secured portion,depending on the period for which the account has remained in the

doubtful category

10% general provision on the outstanding balance under the

substandard category.



Page | 67

Here, there are gross and net NPA data for 2007-08 to 2010- 11 we takenfor comparison among banks. These data are NPA AS PERCENTAGE OFTOTAL ASSETS. As we discuss earlier that gross NPA reflects the quality of

the loans made by banks. Among all the ten banks Dena Banks has highestgross NPA as a percentage of total assets in the year 2007-08 and also netNPA. Punjab National Bank shows huge difference between gross and netNPA. There is an almost same figure between BOI and BOB.

Gross NPA and Net NPA Of different Public Sector banks in the year2007-08

Gross NPA and Net NPA Of different Public Sector banks in the year200 8 -09



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Gross NPA and Net NPA Of different Private Sector banks in the year2009-10

Gross NPA and Net NPA Of different Private Sector banks in the year2010 -11

Comparison of GROSS NPA with Public and Privatesectors banks forthe year 2009 -10

Comparison of GROSS NPA with all banks for the year 2007-08. The

growing NPAs affect the health of banks, profitability and efficiency. In the

long run, it eats up the net worth of the banks. We can say that NPA is not ahealthy sign for financial institutions. Here we take all the ten banks gross

NPA together for better understanding. Average of these ten banks gross

NPAs is 1.29 as percentage of total assets. So if we compare in private

sector banks AXIS and HDFC Bank are below average of all banks and in

public sector BOB and BOI. Average of these five private sector banks gross



Page | 69

NPA is 1.25 and average of public sector banks is 1.33. Which is higher in

compare of private sector banks.

COMPARISON OF NET NPA WITH PUBLIC AND PRIVATESECTORS BANKS FOR THE YEAR 2010-11

Comparison of NET NPA with all banks for the year 2010-11. Average of

these ten bank‟s net NPA is 0.56. And in the public sector banks all these

five banks are below this. But in private sector banks there are three banks

are above average. The difference between private and public banks

average is also vast. Private sector banks net NPA average is 0.71 and in

public sector banks it is 0.41 as percentage of total assets. As we know that

net NPA shows actual burden of banks. IndusInd bank has highest net NPA

figure and HDFC Bank has lowest in comparison.

PRIORITY –NON PRIORITY SECTOR

When we further bifurcate NPA in priority sector and Non priority sector.

Agriculture + small + others are priority sector. In private sector ICICI Bank

has the highest NPA with compare to other private sector banks. Around

72% of NPA in priority sector and around 78% in non-priority sector. We can

see that in private sector banks have more NPA in non-priority sectorthan

priority sector.



Page | 70

When we talk about public sector banks they are more in priority sector and

they give advanced to weaker sector or industries. Public sector banks give

more loans to Agriculture, small scale and others units and as a result we

see that there are more number of NPA in public sector banks than private

sector banks. BOB given more advanced to priority sector in 2010-11 than

other four banks .

But when there are comparison between private bank and public sector bankstill ICICI Bank has more NPA in both priority and non-priority sector with thecomparison of public sector banks. Large NPA in ICICI Bank because thestrategy of bank that risk-reward attitude and initiative in each sector.

Above,we also discuss that ICICI Bank has highest deposit investment-advance than other banks.

Now, when we compare the all public sector and private sector banks on

priority and non-priority sector the figures are really shocking. Because in

compare of private sector banks, public sector banks numbers are very

large.



Page | 71

Here, there are huge differences between private and public sector banks

NPA. There is increase in new private sector banks NPA of Rs.4148 cr in

2008-09 which is almost 66% rise than previous year. In public sector banks

the numbers are not increased like private sector banks.

ANNEXURE-IREPORTING FORMAT FOR NPA – GROSS AND NET NPA

Name of the Bank:

Position as on………

*excluding Technical write-off of Rs.________crore.

**Banks which do not maintain an interest suspense a/c to park the accrued interest onNPAs may furnish the amount of interest receivable on NPAs.

***Excluding amount of Technical write-off (Rs.______crore) and provision on standardassets. (Rs._____crore).



Bibliography

Journals and magazines

Economic and political weekly, October 16, 2004, CARLTON PEREIRA,Page 4602-4604 “INVESTING IN NPAs”.

Chartered Financial Analyst, August 2004, B P Dhaka, Page 58-62;“SARFAESI ACT: THE DIAGNOSIS”.

The chartered Accountant, February 2005, Raj Kumar S Adukia, Page NO.978-985; “SECURITISATION – AN OVERVIEW”

Treasury Management, December 2004, MPM Vinay Kumar, Page 62-65;“SECURITISATION : ISSUES AND PERSPECTIVES”.

Chartered Secretary, Feburary 2003, V S Datey, Page 128- 135;“SECURITISATION, RECONSTRUCTION AND ENFORCEMENT OFSECURITY INTEREST”.

Websites:-

http://www.indiastat.com/banksandfinancialinstitutions/3/performance/16063/nonperformingassetsnpas/377761/stats.aspx

http://www.bankcapitalgroup.net/services-non-performingassets.php http://rituparnodas.blogspot.com/2009/01/npa-management.htm l http://www.finanssivalvonta.fi/en/Statistics/Credit_market/Nonperforming_as

sets/Pages/Default.aspx http://findarticles com/p/articles/mi hb5562/is 200905/ai n3189646

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