Tabarsum NON PERFORMING ASSETS AXIS BANK - Copy.doc

8/9/2019 Tabarsum NON PERFORMING ASSETS AXIS BANK - Copy.doc

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NON PERFORMING ASSETS IN

AXIS BANK

PROJECT REPORT

In Partial fulfillment for the award of

Requirements for the award of the degree of

Master of Business Administration

Project submitted by:-Project submitted by:-

P.K. OMKAR SAROOP

RO!!" #$$#%$'(##%)(##*+

,i-eananda S/0oo1 of 2ost 3raduate studies'Affi1iated to Osmania 4ni-ersit5+

Pan6a3utta7 85dera9ad.

(##%)(##*


2/73

:EC!ARATION

I here by declare that the project report titled ;NON PERFORMING

ASSETS IN AXIS BANK< prepared under the guidance Mr.,.RA84NAT8

(finance department) of ,I,EKANAN:A SC8OO! OF POST GRA:4ATE

ST4:IES towards partial fulfillment for the requirement of award of M.B.A.

The Project report has not been submitted to any other ni!ersity for the

"ward of any #egree or #iploma$

P.K. OMKAR SAROOP

C8APTERISATION


3/73

%&"PT'R I ITR*#%TI*

%&"PT'R II +RI', PR*,I' *, ".I/ +"0

%&"PT'R III *P'R"TI*" #',IITI*/

%&"PT'R I1 P"s " ""2TI%" /T#2

3 4'"I5 "# "TR'

6 %"/'/ ,*R P"s

7 4"5IT#' *, P"s I

".I/ +"0

%&"PT'R 1 I4P"%T *, P"s

3 I4P"%T *, P"s I

".I/ +"0

6 R'%*1'R2 *, P"s I

".I/ +"0

%&"PT'R 1I 4""5'4'T *, P"s

7 4""5' P"s

8 %*44ITT''/

%&"PT'R 1II ,I#I5/ "# *+/'R1"TI*/

%&"PT'R 1III %*%/I* "# *+/'R1"TI*/

%&"PT'R I. PR*9'%TI* *, P"s


4/73

C8APTER = I

INTRO:4CTION

INTRO:4CTION TO T8E TOPIC"


5/73

The Indian baning sector underwent a major transformation in 3; which were cutting into the

bans bottom lines in two ways-

3 +ans were not able to boo interest accrued on such assets

6 They had to mae pro!isions for these P"s

*!er the years> much has been taled about P"s> which has also become

*ne of the parameters to decide partial autonomy to be gi!en to select bans$

&ow e!er> the emphasis so far has been only on identification and quantification of

P"s rather than on ways to reduce and upgrade them$

Though> the term P" can notes a financial asset of a commercial ban

which has stopped earning an e?pected reasonable return> it is also a reflection of

the producti!ity of the unit> firm> concern> industry and nation

where that asset is idling$


6/73

1iewed with this broad perspecti!e> the P" is a result of an en!ironment

which pre!ents it from performing up to e?pected le!els$

&ow e!er> the global slow down and the fall of bans world wide gi!e

IndiaBs financial system some breathing space to catch up$ The problem of P"s is

two fold-

3 Tacling the e?isting P"s

6 Pre!enting a build up for additional P"s

The P" le!el has to be brought down to at least CD to Indian

bans need to set up e!aluation of !arious credit riss> to de!elop ad!ance sills in

ris management and a need to set up speedy reco!ery mechanism$

The P"s in ban balance sheet reflects the health the economy$ If the

economy is doing well and if all its sectors are doing well> ban P"s will also

show an impro!ement$ &ence> it is a joint responsibility of policy- maers>

judiciary> entrepreneurs and baners to collecti!ely fight this problem$

The baning system in India remains handicapped in the absence of an

adequate legal framewor to ensure e?peditious reco!ery of loans as also

enforcement of security$

" %omprehensi!e baning legislation and enforcement machinery be put in

place not only to reduce the quantum of P"s but also to ensure that such a

framewor ser!es as a deterrent for future defaulters$

@+ans are yet another sector where the rot has already set inEA

It is high time to tae stringent measures to curb P"s and see to it that the

@*-P'R,*R4I5 "//'T/A may not turn bans into

@*-P'R,*R4I5 +"0/A> instead> steps should be taen to con!ert

@*-P'R,*R4I5 "//'T/A into @*F-P'R,*R4I5 "//'T/A$

@It is now or ne!erA$


7/73


8/73

R+I has therefore ad!ised that bans should ha!e a well-laid reco!ery

management policy appro!ed by the board and the same should be put in place for

meticulous compliance so that the le!el of P" can be brought down$

4anagement of on-performing ad!ances co!ers both reco!ery of P" as

also regulars re!iew monitoring of P" accounts> write off etc in terms of

prudential norms issued by R+I$

"part from up gradation and cash reco!ery> the ban has introduced se!eral

*T/ modules aiming at !arious types of borrowers to ensure reco!ery through

compromise settlement$ ,urther> !arious modifications are also made for

operational aspects of the said *T/ modules based on infield e?periencesGre!ised

norms issued by R+I from time to time and changed baning scenario to mae the

modulesGschemes more effecti!e and fruitful$

"part from reco!ery of P"s> !arious other important issues lie re!iew of P"

accounts> monitoring of suitified accounts$ #ecreed debts> wai!er of legal action in

deser!ing cases> write off of bad debts> delegated authority> appropriation of

reco!ery in P" accounts> estimation of sacrifice> disclose of information>

guidelines in respect of implementation of the securiti=ation "ct-6HH8 and sale of

financial asset etc> are also important in day to day functioning of the

branchesGoffices$

AIM OF T8E PROJECT "

To assess the impact of role of the non-performing assets (P"Bs) on the

profitability of the ban$

OBJECTI,ES"


9/73

3 To study the nature and cause of P"s

6 To assess the growth and magnitude of P"s in ".I/ +"0$

7 To study the measures taen by ".I/ +"0 to reduce P"s$

MET8O:O!OG>"

3 Personal inter!iews and discussions are conducted with the officials of the

ban$

6 '?pertBs opinions soughted on !arious aspects dealing with P"s$

7 "nalysis of annual report> profit and loss account and balance sheet of ".I/

+"0$

SCOPE OF T8E ST4:>"

The study is laid on macro le!el and to find the impact of P"s in ".I/ +"0$ It

also analyses the efficiency of reco!ery measures undertaen by ".I/ +"0$

PERIO: OF ST4:>"

/tudy is undertaen regarding the P"s in ".I/ +"0 for period of 7 years$

!IMITATIONS"

3 /tudy is entirely based on data willingly pro!ided by the ban officials$

6 /tudy is confidential in nature> so the !iews e?pressed by the officials may


10/73


11/73

ORGANISATION PROFI!E

A BRIEF PROFI!E OF AXIS BANK"

Company Profile

Axis Bank is the third largest private sector bank in India. Axis Bank offers the

entire spectrum of financial services to customer segments covering Large and

Mid-Corporates, MM!, Agriculture and "etail Businesses.


12/73


13/73

Axis Asset Management Compan+ Ltd.

Axis Mutual 1und #rustee Ltd.

Axis Bank 3/ Ltd.

Axis ecurities Ltd.

Axis 1inance Ltd.

>romoters

Axis Bank Ltd. has been promoted b+ the largest 1inancial Institutions of the countr+,

3#I, LIC, 5IC and its subsidiaries. #he Bank as set up in )** ith a capital of "s.

))< crore, ith 3#I contributing "s. )&& crore, LIC - "s. @.< crore and 5IC and its four

subsidiaries contributing "s. ).< crore each.

Capital 'tructure

#he Bank has authori:ed share capital of "s. ;


14/73

Core alues

• Customer Centricit+

• !thics

• #ransparenc+

•

#eamork• 7nership

Board of +irectors

•

+r/ 'an0i1 !isra

Chairman

•

'hiha 'harma

M0 C!7

•

/ / Prith1ira0

0irector

•

/ 3/ aundinya

0irector

•

Prasad !enon

0irector

•

Prof/ 'amir Barua

0irector

http://www.axisbank.com/media-center/board-of-directors/samir-k-barua.aspxhttp://www.axisbank.com/media-center/board-of-directors/prasad-menon.aspxhttp://www.axisbank.com/media-center/board-of-directors/v-r-kaundinya.aspxhttp://www.axisbank.com/media-center/board-of-directors/k-n-prithviraj.aspxhttp://www.axisbank.com/media-center/board-of-directors/shikha-sharma.aspxhttp://www.axisbank.com/media-center/board-of-directors/sanjiv-mishra.aspx


15/73

•

'om !ittal

0irector

• I

reena ittal

0irector

•

3ohit Bhagat

0irector

•

4sha 'ang)an

0irector

http://www.axisbank.com/media-center/board-of-directors/usha-sangwan.aspxhttp://www.axisbank.com/media-center/board-of-directors/rohit-bhagat.aspxhttp://www.axisbank.com/media-center/board-of-directors/ireena-vittal.aspxhttp://www.axisbank.com/media-center/board-of-directors/som-mittal.aspx


16/73

• 'rini1asan

!0, Corporate Banking

2%.2

). Bank of the Dear - Mone+ #oda+ 1>CIL Aards $&)$-)

$. Best Bank - C6BC-#E); India2s Best Bank and 1inancial Institution

Aards $&)$

. Best Bank - "unner 3p - 7utlook Mone+ Aards $&)$

%. Consistent >erformer - India2s Best Banks F $&)$ urve+ b+ Business

#oda+ />M5

olaris 1inancial

#echnolog+ Banking Aards $&)$

. 1astest 5roing Large Bank - Businessorld Best Banks urve+ $&)$

@. Best 0omestic Bond ouse - #he Asset #riple A Countr+ Aards $&)$ -

7ur Bank has been honored ith this aard for the third +ear in a ro.

;. India Bond ouse of the +ear - I1" AIA - Countr+ Aards $&)$

*. 0eal Maker of the Dear in "upee Bonds - Businessorld Magna Aards

- IndiaGs Best 0eal Makers $&)$

)&. #he Best !merging Bullion 0ealing Bank - *th India International 5old

Convention-$&))-)$

)). Best Ac8uiring Institution in outh Asia - Eisa L!A0!" Aard at Eisa2s

$&)$ A>C!M!A ecurit+ ummit, Bali

)$. 5old hield for !xcellence in 1inancial "eporting in the >rivate Banks

categor+ - $&))-)$ - ICAI 'Institute of Chartered Accountants of India(

2%.5

). Axis Bank voted for Most #rusted >rivate ector Bank in the countr+ in

the Most #rusted Brands surve+ $&) b+ Brand !8uit+.

$. Axis Bank ranked no. ) bank in I60IA in both >rimar+ econdar+

market of corporate bonds -#he Asset Benchmark "esearch

http://www.axisbank.com/media-center/board-of-directors/v-srinivasan.aspx


17/73

. Best 0ebt ouse in India - !uromone+ Aards for !xcellence $&)

%. Axis Bank ranked 6o ) compan+ to ork for in the B1I sector - G#he

Best Companies to 9ork forG surve+ b+ Business #oda+

erformer - India2s Best Banks F $&) urve+ b+ Business

#oda+ />M5

. "unner up for Best Bank categor+- 7utlook Mone+ Aards $&)@. 1astest 5roing Large Bank - Business 9orld F >9C urve+ of India2s

best banks $&)

;. Banking frontiers 1innoviti $&) Aards for ?1xConnect2

*. "anked 6o ) in the I# Bi: Aard - large enterprises categor+ b+

!xpress I# Aards

)&. Innovation for $&) for Ladies 1irst card under ?the Most Innovative

Broad Based >roduct 7ffering2 categor+- IBA Innovations Aard

)). Axis Bank featured in AsiaGs 1abrivate ector Banks- IBA Banking #echnolog+ Aards $&)

)%. econd "unners 3p for Best #echnolog+ Bank of the Dear amongst

>rivate ector Banks- IBA Banking #echnolog+ Aards $&)

)rivate ector Banks- IBA Banking #echnolog+ Aards $&)

). econd "unners 3p for Best Internet Bank amongst >rivate ector

Banks- IBA Banking #echnolog+ Aards $&)

2%.$

). Axis Bank has been "anked as the 6!ost (rusted Pri1ate 'ector

Ban6 second +ear in a ro - GMost #rusted Brand urve+G, conducted b+

Brand !8uit+, !conomic #imes

$. Best Investment Manager for "eal !state in India- !uromone+ "eal

!state Aards $&)%

. Best 0omestic Bank in India- Asiamone+ Best Banks $&)%

%. Best Bank Aard among Large Banks for I# 1or Business Innovation-I0"B# Banking #echnolog+ !xcellence Aards $&)%

olaris 1inancial #echnolog+ Banking Aards $&)%


18/73

@. Best "etail 5roth >erformance in the >rivate ector categor+- 0un

Bradstreet->olaris 1inancial #echnolog+ Banking Aards $&)%

;. 1astest 5roing Large Bank- B9 Businessorld Magna Aards $&)%

*. Axis Bank ins ?7old A)ard for 8inancial Inclusion2 amongst the pvt.

sector banks at the 'och 8inancial Inclusion 9 +eepening A)ard

2%.$.)&. Axis Bank ins the Best 8inancial Ad1isor :Pri1ate Ban; at the 3#I

M1 C6BC #E ); 1inancial Advisor Aards $&) - )%.

)). Best Bank for !merging Market Currencies #rading, pot1orard-

!uromone+ 1H urve+ $&)%

)$. Best Bank for !merging Market 7ptions, #rading trategies Ideas-

!uromone+ 1H urve+ $&)%

). Best Bank for Asian Currencies-!uromone+ 1H urve+ $&)%


19/73

C8APTER = III

OPERATIONA! :EFINITIONS


20/73

OPERATIONA! :EFINITIONS"

$. BANK RATE"

It is the rate at which the R+I lends to other commercial bans$ It is the rate

at which the R+I re-discounts the bill of e?change$ It acts as a signal to the

economy on the monetary policy$

(. BANK CRE:IT"

The credit e?tended by bans to its customers$

?. NON)PERFORMING ASSETS"

P" is a loan (whether term loan> cash credit> o!erdraft or bills discounted)

which is in default for more than three months$ In case of such assets> the

income should be shown on receipt basis in banBs boos and not on due

basis$

&. GROSS NON)PERFORMING ASSETS"

+an e!en after maing pro!isions for the ad!ances considered

irreco!erable> continued to hold such ad!ances in their boos is termed as

5P"$

@. NET NON)PERFORMING ASSETS"

et non-performing assets are gross P"s less pro!ision made in the

accounts> balance in interest suspense account> claims recei!ed from

#I%5%> and amounts recei!ed in compromise settlements$


21/73

%. CAS8 RESER,E RATIO 'CRR+"

'!ery commercial ban is required to eep a certain percentage of its

demand and time liabilities (deposits) with R+I (either as cash or boo

balance)$ R+I is empowered to fi? the %RR between 7D and CD$

. STAT4TOR> !I4I:IT> RATIO 'S!R+"

%ommercial bans are also required to eep (in addition to %RR)liquid

assets in the shape of cash> gold or appro!ed securities as a certain

percentage of their net demand and time liabilities(#T)$

*. CAPITA! A:E4AC> RATIO 'CAR+"

+ans are required to maintain a minimum capital to ris assets ratio> which

helps the ban to sur!i!e e!en during sub stainable losses$ (To ensure good

performance> R+I has specified minimum adequate capital for bans)$

. CAME!S"

"s per the recommendation of woring groups set up by R+I on

super!ision of bansB a new approach has been adopted in the annualfinancial inspection of bans$

It e!aluates bans

%"PIT" "#'J"%2

"//'T J"IT2

4""5'4'T

'"RI5/

IJI#IT2

/2/T'4 "# %*TR*$


22/73

$#. ,RS"

1oluntary retirement scheme> which is issued as a tool to remo!e the surplus

staff in a ban organi=ation$ (&owe!er> 1R/ for bans had been cleared by

4inistry of ,inance in o!ember 6HH6)$

$$. RE)CAPITA!ISATION"

It is a means through which the go!ernment infuses fresh additional capital

in to the wea bans to restructure their business$ This is also a budgetary

support for wea bans$

$(. RISK EIG8TE: ASSETS 'RA+"

"ccording to the ris in!ol!ed in the assets of a ban> they are gi!en some

weightage$ R+I from time to time has been changing the weightage gi!en to

!arious classes of assets$

$?. RET4RN ON ASSETS 'RAO+"

This is profit after ta? as percentage of a!erage total assets of a!erage total

assets of current and pre!ious year$ Total assets are taen net of re!aluation>ad!ance ta?> and miscellaneous e?penditure to the e?tent not written off$

$&. RET4RN ON IN,ESTMENTS 'ROI+"

This is ratio of interest and di!idend income earned as percentage of a!erage

instruments of current and pre!ious year$ Interest earned considered here

e?cludes interest earned on ad!ances$

$@. OPERATIONA! EXPENSES"

'?penses incurred by bans other than interest and ta?$


23/73

$%. CAPITA! STR4CT4RE"

TI'R- 3> TI'R- 6

+ans and ,Is should ha!e the capital structure as defined by R+I$

TI'R- 3 %apital is the most permanent and readily a!ailable support against

une?pected losses$

It consists of

3$ paid up capital

6$ statutory reser!es

7$ capital reser!es

8$ *ther disclosed free reser!es$

ess: 3$ 'quity in!estments in subsidiaries

6$ Intangible assets

7$ %urrent and accumulated losses> If any$

Tier- 6 %apital is not permanent or> is not readily a!ailable$

It consists of-

3$ ndisclosed reser!es and cumulati!e preference shares

6$ Re!aluation reser!es

7$ general pro!ision and loss reser!es

8$ &ybrid debt capital in!estments

C$ /ubordinate debt$

*T': Tier- 6 %apital should not be more than Tier- 3 %apital$


24/73

$. :EBT RECO,ER> TRIB4NA! ':RT+"

It is a reco!ery mechanism which was set up 4inistry of ,inance in

3;;7 under a separate act$ The defaulter can apply to the #RT for the

settlement of the debt suggesting the terms on which he wants to settle$ The

tribunal will hear both the parties and pass the final which will bind both the

parties$

$*. SETT!EMENT A:,ISOR> COMMITTEE 'SAC+"

This committee has also been set up by 4inistry of ,inance to suggest

measures for the quic reco!ery of loans and settle the accounts

permanently$

$. ASSET RECONSTR4CTION COMPAN>DF4N: 'ARC+"

The principal objecti!e of "R% is to tae up the bad and doubtful

assets of the bans> which are in the reco!ery process> at a discounted price

in the form of P">swap bonds$( These bans would qualify for the /R

in!estments)$


25/73

C8APTER = I,

NPAS ANA!>TICA! ST4:>


26/73

NPAs = AN ANA!>TICA! ST4:>"

MEANING AN: NAT4RE OF NPAs.

5ranting of credit facilities for economic acti!ities is the main reason

of baning$ " part from raising resources through fresh deposits> borrowings

and recycling of funds recei!ed bac from borrowers constitutes a major part

of funding credit dispensation acti!ity$ on-reco!ery of installments as also

interest on the loan portfolio negates the effecti!eness of this process of the

credit cycle$ on reco!ery also affects the profitability of bans besides

being required to maintain more owned funds by way of capital and creation

of reser!es and pro!isions to act as cushion for the loan losses$ "!oidance of

loan losses is one of the pre occupations of the managements of bans$

Fhile complete elimination of such losses is not possible> ban management

aims to eep the losses at a low le!el$

To begin with> it seems appropriate to define on-performing ad!ance>

popularly called @P"A$

" on performing ad!ance is defined as

“ An advance where payment of interest or repayment of

installment of principal ( in case of term loans) or both remainsunpaid for a period of two quarters or more. An amount under any

of the credit facilities is to be treated as ‘past due’ when it is

remains unpaid for 30 days beyond due date.


27/73

"s per recommendation of arasimham committee> it has been decided that

credit facilities granted by bans will be classified in to PerformingB and

on performing assetB$

“ !"A is a loan ( whether term loan# cash credit# overdraft#

or bills discounted) which is in default for more than three

months. $n case of such assets# the income should be shown only

on receipt and not shown in the ban%s boo% on a due basis.

The ratio of on-performing assets to ad!ances reflects the quality of a

banBs loan portfolio$

" distinction is often made between 5ross P"B and 'T P"B$

'T P"> which is obtained by deducting from gross P" items lie

interest due but not reco!ered> part payment recei!ed and ept in suspense

account> etc$> is internationally accepted as the more rele!ant indicator of

financial health of the bans$

It is the le!el of non-performing assets which> to a grant e?tent>

differentiates between a good and bad ban$ The subject of high P" le!els

in bans has also been frequently raised in !arious area$

IMPORTANCE OF NON PERFORMING ASSETS"

The one major cause for the current weaened state of baning sector

is the le!el and !olume of P"s$ The problem has not been looed at in its


28/73

proper perspecti!e$ #escriptions such as decreased portfolio and figures

running into thousands of crores ha!e all led to treating the problem as a

major one-time aberration requiring emergency treatment$ The casual

e?planations political interference> willful defaults> targeted lending and

e!en fraudulent beha!ior by bans allowed them sel!es to be pressuri=ed

into lowering their guard in the one area of business that is their bread and

butter of e?istence ris assessment$

ending to priority sectors or medium and small companies is

liely to be the banBs main acti!ity in time to come$ The bigger> established

corporations would ha!e the wide world to choose from and to meet their

requirements$ The shift to medium-si=ed borrowers and slightly risier

lending will form the prime acti!ity of all bans$ The problem will then> be

to ensure that such lending is justifiable on a commercial criterion$

The high le!el of P"s in Indian baning sector is the result of

application of prudential norms of accounting from 3;;6 onwards$ The

introduction of %"% is subject to the P" le!el being brought down to lessthan CD from the present le!el of around 3 recognition> asset

classification and pro!isioning during 3;;6-;7 and other steps initiated apart

from bringing in transparency in the loan portfolio of baning industry ha!e

significantly contributed towards impro!ement of the pre-sanction appraisal

and post sanction super!ision which is reflected in lowering of the le!els of

fresh accretion of P"s of bans after 3;;6$


29/73

NAT4RE OF NPAs "

There is no gain saying the fact that Indian baning has been the

go!ernmentBs step child as far as economic policy is concerned$ The two

rounds of ban nationali=ation in 3; indifferent and anachronistic$

*n the one hand a protected en!ironment ensured that banBs ne!er

needed to de!elop sophisticated treasury operations and asset liability

management sills$ *n the other hand a combination of directed lending and

social baning relegated profitability and competiti!eness to the

bacground$ The net result was unsustainable P"s and consequently a

higher effecti!e cost of baning ser!ices$

The crucial factor that decides the performance of bans now-a-days is

the recogni=ing P"s in their ad!ances at the earliest$

P"s are those loans gi!en by a ban or financial institutions where

the borrower defaults or financial institution delays interest or principal

payment$ +ans are now required to recogni=e such loans faster and then

classify them as problem assets and tae measures to reco!er them$

%lose to 3LD of loan made by Indian bans are P"s !ery high

compared to say CD in baning systems in ad!anced countries$ The burden

of P"s is a millstone round the necs of the bans$ The P"s are posing a

major threat not only to the baning sector but for the economy as a whole$


30/73

CA4SES FOR NON)PERFORMING ASSETS"

" strong baning sector is important for a flourishing economy$ The

failure of the baning sector may ha!e an ad!erse impact on all other

sectors$ The Indian baning system> which was operating in a closed

economy> now faces the challenges of an open economy$ +ans started

getting concerned about non-performing assets consequent to the

introduction of prudential accounting norms$

P"s reflect the performance of bans$ " high le!el of P"s suggests

high probability of a large number of credit defaults that affects cash flows$

"ccording to the R+I> the gross P"s of scheduled commercial bans rose

from 68$8D in 4arch 6HH< to 68$;D in 4arch 6HHL$

Thus> increasing P"s are a matter of concern for bans$ In India> the

baning sector is still not strong on the sol!ency front$ &a!ing adhered to

stipulated capital adequacy norms does not suggest that a ban is strong

enough$ It is important to impro!e the quality of assets and ensure timely

reco!ery of loans$

IMPACT OF PRIORIT> SECTOR A:,ANCES OF NPAs"

There is a general perception that the prescription of 8HD of net ban

credit to priority sector ha!e led to higher le!el of P"s> due to credit to

these sectors becoming sticy$

The information obtained with regard to the P"s in the priority

sector ad!ances> their proportion to total P"s of bans> the P"s in non-

priority sector ad!ances> their proportion to total P"s of the ".I/ +"0

as on 73st march 6HHC>6HH< and 6HHL re!ealed that the proportion of P"s


31/73


32/73

There are se!eral reasons for an account becoming P"$ These include :

3$ /luggish legal system

3 ong legal tangles

6 %hanges that had taen place in labour laws

7 ac of sincere effort

6$ ,unds borrowed for a particular purpose but not used for the said purpose

7$ Project not completed in time$

8$ /carcity of raw materials> power and other resources$

C$ Poor reco!ery of recei!able$

raw materialM input price

escalation> power shortage> industrial recession> e?cess capacity> natural

calamities lie floods> accidents$

36$ ,ailure> non paymentMo!erdue in other countries> e?ternali=ation

problems> ad!erse e?change rate etc$


33/73


34/73

etc> and lastly> deficiencies on the part of bans delay in release of

limits in settlement of payments by go!t$ bodies$

CA4SES FOR AN ACCO4NTS BECOMING NPA"

%"/'/ "TTRI+T"+' T* +*RR*F'R

3$ ,ailure to bring in required capital

6$ Too ambitious project

7$ onger gestation period

8$ nwanted e?penses

C$ *!er trading


35/73

%"/'/ "TTRI+T"+' T* +"0/

3$ Frong selection of borrowers

6$ Poor credit appraisal

7$ ac of super!ision

8$ Tough stand on issues

C$ Too fle?ible on attitude


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I$ *T&'R %"/'/

3$ ac of infrastructure

6$ ,ast changing technology

7$ nhelpful attitude of the go!t$

8$ %hanges in consumer preferences

C$ Increase in material cost


37/73

weaer bans in order to mae them operati!e> howe!er this alone will not

impro!e the performance of the bans$

MAGNIT4:E OF NON)PERFORMING ASSETS IN AXIS

BANK"

In India> the P"s which are considered to be at higher le!els than

those in other countries ha!e of late> attracted the attention of public$ The

subject of high P" le!els in bans has also been frequently raised in

!arious forces$

The percentage of P"s when compared to international standards is

definitely high for Indian bans$ The problem of P"s is not only affecting

the bans but also the whole economy$ In fact high le!el of P"s in Indian

bans is nothing but a reflection of the state of health of the industry and

trade$ It has also been possible to combat the menace of P"s by bringing

down net P"s from the le!el of L$HKD as on 73$H7$6HHC to 6$7LD as on

73$H7$6HH in a single year net P"s declined by 8$L3D$ This

compares fa!orably with the industry$ 5ross P"s of the +an declined to

Rs$ 3>83K$8< crore as on 73$H7$6HH< from Rs$ 3>K83$CH crore as on

73$H7$6HHC while net P"s reduced to Rs$ 7


38/73


39/73

Private

sector

.37 9.64 .07 5.4

!orei"n bank 6.4 5.3 5.25 4.62

C8APTER = ,

IMPACT OF NPAs


40/73

IMPACT OF NPAs IN AXIS BANK"

This chapter focuses on e?amining the impact of

P"s in ".I/ +"0$ "s the P" from year to year eep on increasing> It

is a difficult tas for the bans> especially public sector bans to tacle the

high le!el of P"s$

+ut o!er the years the position of net P"s of ".I/

+"0 has impro!ed as can be seen from the sharp decline of L$HKD to

6$7LD to 3$6KD in 6HHL$ This is due to time bound implementation of

prudential accounting norms and liberal infusion of capital by the

go!ernment to meet the capital adequacy requirements besides strenuous

reco!ery efforts by bans$ If other netting items lie reco!eries and pending

adjustments> interest charged to the borrower accounts but not taen to

income accounts etc$> for which data are not a!ailable> are taen in to

account of the net P" position> perhaps may further come down below to

3$CD mar$


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5R*// "# 'T P"s *, ".I/ +"0 P'RI*# (6HH8-6HHL)

'nd-

4arch

5ross

P"s

D To

5ross

ad!ances

D To

total

assets

et

P"s

D To net

ad!ances

DTo total

assets

6HHC 3>K83$CH 37$36C L$HK 7$77

6HH< 3>83K$8< K$6K8$6L C$KH 3$66 CHK$88 3$6K 7$HH

#rastic measures should be taen for reducing the mounting le!el of

P"s in terms of both grossB and netB$ Though there are problems ineffecting reco!eries and write off and in compromise settlements for maing

reco!ery process more smooth and less time consuming and also create other

alternati!e channelsGagencies for reco!ery of debtGreduction of P"s$

5o!ernment and other authorities should de!ise policies ha!ing a bearing on

the industrial sector> agriculture and trade with a long term perspecti!e to

a!oid sicness in the industry and ad!erse impact on borrowers because of

sudden shift in the policy$

"rresting of non-performing assets is fast turning out to be a myth$

#espite an aggressi!e reco!ery dri!e> the ".I/ +"0 has failed to arrest

the growth in P"s$ "s shown in the table the gross and net P"s went on


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benches etc> long time is taen for the settlement of the cases$ #ifficulties

are also faced and delay is occurring in the e?ecution of decree$

" part from the suit filing and legal measures the go!t$ and R+I has

suggested other !ehicles to address the problem of P"s reco!ery$

"mong these are

i$ #ebt reco!ery tribunals

ii$ #ebt settlement tribunals

iii$ +I,RG/I%"

i!$ o adalats

!$ "sset Reconstruction company!i$ Re!enue reco!ery act

!ii$ /ettlement ad!isory committee

!iii$ *ne time settlement scheme

i?$ "nd other means for the reco!ery of P"s in ".I/

+"0$

+ut at the end> data suggests that the woring of all these other !ehiclesB

had fallen short of the e?pectations by not creating a fast trac system for

reco!ery of ban dues$

In a bid to speed up reco!ery efforts of the bans> debt reco!ery tribunals

(#RT) were set up in 3;;7 by an act of parliament$ This was welcomed by

both bans and borrowers alie$ ,inally> it was hoped there would be a non-

confrontationist middle path where both bans and borrowers could meet$

/e!en years on both sides agree that a lot still needs to be done to mae the

#RTs an effecti!e reco!ery tool for the Indian baning sector$

"t the end of 9une 6HHL> out of the total numbers of 33>LHH cases filed and

transferred to debt reco!ery tribunal (#RT) in!ol!ing Rs$ K>K


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3H8C cases ha!e been decided and meager amount of Rs$ 3LK$HK crs was

reco!ered$

ORKING GRO4P"

Taing a serious note of this situation> the central board of R+I in

6HHL re!iewed the effecti!eness of #RTs$ R+I therefore decided to set up a

woring group under the chairman ship of $1$ #eshpande> former legal

ad!isor to R+I> comprising officials from the go!t$ baning di!isions> some

baners and R+I officials to loo into the !arious issues and to suggest

measures for their effecti!e functioning$

The terms of reference of the woring group were mainly

3 To loo into !arious issues and problems confronting the functions of

#RTs and to suggest measures to mae them more effecti!e$

6 The group was also to e?amine the e?isting statutory pro!isions and

suggest necessary amendments to the 3;;7 act with a !iew to

impro!ing the efficiency of the legal machinery$

+y august 6HHL the woring group submitted its final suggestions

3 ,irst it was noticed that once an application had been made to #RT>

the branch managers and staff of the bans did not tae any interest in

the proceedings

6 In many cases> ban officials themsel!es were unaware of e!en the

e?ecution of loan documents and names of the borrowers$

7 The woring group suggested that the bans and ,Is should impress

upon their officers and staff to tae a een interest in the proceeding$


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C8APTER = ,I

MANAGEMENT OF NPAs


48/73

MANAGEMENT OF NON PEFROMING ASSETS"

The new concepts of income recognition> asset classification

and pro!isioning ha!e been introduced in phases with effect from 3;;6-;7$

The impact of implementation of these prudential guidelines on the

commercial bans has been so strong that out of 6H nationali=ed bans> one

had to be merged and out of the remaining 3; bans e?cepting all others

were in red> showing net losses aggregating to a staggering le!el of 7CL7$37

crores$ In march 3;;7 and still a higher le!el of Rs$8LHC$H3 crores in march

3;;8$ ,urther> due to staggering net loss re!ealed by the Indian ban> the

aggregate net loss of the 3; nationali=ed bans e!en in march 3;;< was rs$33C7$;< crores$ &owe!er the aggregate net profit of 3; nationali=ed bans>

as on 73st march 3;;L was Rs$388C$8K crores$

This drastic change of profitability scenario of bans in India since

6HHC-HC was mainly due to recognition of income based on record of

reco!ery rather than on accrual basis> due to implementation of new

prudential norms$

The message is now !ery loud and clear$ If a ban wants to sur!i!e

and grow> it has no option but to actually reco!er the interest and principal in

accordance with the terms of sanction$ If it fails to reco!er> the ban branch

can not recogni=e the interest debited to the account as income$ In case


49/73

income is not recei!ed as per prudential norms> the loan will become a P"

with all its necessary consequences$

The P" effects ad!ersely the health of the ban in se!eral ways as follows:

I$Potential interests income is derecogni=ed since it can not be booed

as income> profit of the ban depletes$

II$ #epending up on the categori=ation of P"> that

is sub-standard> doubtful (#3>#6>#7) or loss assets ban will ha!e to

mae pro!ision against such loan ranging from 3HD to CHD or e!en

3HHD in case of some of assets$ +ans profitability is thus doubly

hurt$ ,irst income accruing on P" is not recogni=ed and secondly

ban has to mae pro!ision for it$

III$ In case ban fails to upgrade the P"s into the performing assets> it may be forced to incur legal e?penses by going

to court or reco!ery tribunals$

I1$ "s a consequence profit and profitability of the

ban is depleted and it may face problem in maintaining the required

capital adequacy norm of KD or more$

1$ Inadequate capital adequacy may downgrade

bans rating and effect its growth and sur!i!al$

4anagement of P"s would ha!e the following objecti!es: -

3$ Impro!ing the quality of P"s to the performing status so that income


50/73

of such assets could be recogni=ed$

6$ pgrading the status of the asset so as to reduce the pro!isioning

requirement$

7$ %leansing the balance sheet of ban of loss assets and also of

unsecured portion of doubtuful assets> ultimately leading to

impro!ement in the capital adequacy ratio of the ban$

The abo!e objecti!es can be achie!ed by adopting the following

strategies as a measure of reduction in the le!el out standing on performing

assets(P"s)$

1arious steps for reducing P"s

3 /tudying the problem of P"s branch wise> amount wise and age

wise$

6 Preparation of a loan reco!ery policy and strategies for reducing

P"s$

7 %reation of special reco!ery calls at headGregional le!el

8 Identifying critical branches for reco!ery

C ,i?ing targets of reco!ery and draw the time bound action program

< /electing proper techniques for sol!ing the problem of each P"

L 4onitoring implementation of the time bound action plan

K Taing correcti!e steps when e!er found necessary while monitoring

the action plan mae changes in the original plan if necessary$

STRATEGIES FOR MANAGING NPAs"


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3 1ery careful selection of new borrowers based on their credit

worthiness and ris analysis$ /imilarly> for high credit rated e?isting

borrowers> need based credit requirement should be promptly met$

6 Post-sanction follow-up must be done meticulously at all le!els> ie$>

branches> regional offices> =onal offices and head offices$ "ll

prescribed operational information system such as annual

re!iewsGrenewal> quarterly information system$ Juarterly re!iew

sheets> monthly stoc statements> etc$> must be recei!ed and

meaningfully analy=ed and required follow-up action taen on time$

7 "ll big borrower accounts (Rs$CH lahs and abo!e) falling in the

category of @standard assetsA must be re!iewed on quarterly basis and

prompt action taen if any ad!erse feature is noted> with a !iew to

ensure that they do not slip bac to a lower category i$e$> sub standard$

8 Those borrower accounts which are at the lower-end of the list of

@standard assetsA deser!e special attention and the moment they show

any sign of weaness to @slip-bacA> immediate pro-acti!e steps> for

lower end of list of sub-standard assets should be taen to pre!ent this

happening$

ACTION POINTS IN REGAR: TO EXISTING NPA

ACCO4NTS"

4ain action points in regard to e?isting P"s may be summed up as under:

I$ The borrowal accounts lying at the top-end of the list of @sub standard

assetsA are liely to be P" of less than 3-year i$e$> they must ha!e

slipped bac to this category only recently$ "ll-out efforts should be


52/73

made to upgrade these accounts and mae them performing (standard

assets) by reco!ering the derecogni=ed interest of all four quarters of

last year and at least three quarters of the current year or taing other

rele!ant measures which are necessary to mae their performing assets$

II$ Top priority should be gi!en to upgrade progressi!ely the quality of

all P"s to ne?t higher category of better-quality loan assets e$g$> #7

may progressi!ely upgraded to #6 and #3 then to @sub-standardA and

ultimately to @standardA category o!er a period through persuasion>

nursing and rehabilitation based on major contribution from the

promoters$ O&ere #3 upto 3year> #6 3year to 7 years> #7 more than

7 years$

I$ "ll the securities charged to the ban should be @re-!aluedA on realistic

basis through appro!ed !alues and pro!isions should be made strictly on

this basis$

II$ In case upgradation on P" appears difficult and !alue of security is

adequate to co!er banBs loan and charge on the same is !alidly created in

banBs fa!or> serious efforts at senior le!el should be made through a @high

powerA compromise committee to enter into one-time settlement with the

party in a manner that results into ma?imum reco!ery and lease write-off in

conformity with the a!ailable security le!el as far as possible$ This may

in!ol!e some sacrifice in the form of @write-offA on the part of ban also$

I$ In case where steps (ii) and(i!) do not succeed> ban has no option but to resort to legal action within the limitations period either by going

to debt reco!ery tribunals (or) judicial courts$ In case of agricultural and

other smaller loans bans may file reco!ery certificates under state acts

or approach lo adalats> if necessary for amicable settlement$


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54/73

%lassification of assets and #3 up to 3 year

Juarterly re!iew #6 3 year to 7 years

#7 U 7 years

Proacti!e steps for lower le!el

*f sub-standard assets Re!alue of collateral securities for

such ad!ances and mae pro!isions

1alue of securities is adequate to gi!en loan

If difficult *ne Time /ettlement

,orm compromise committees

/pecial reco!ery branches follow

up

/ubmission of monthly progress report

%lose monitoring of +I,R cases

PRE,ENTING OCC4RANCE OF NE NPAs"


55/73

4anagers of rural and semi-urban branches generally sanction these

loans$ In the changed conte?t of new prudential norms and emphasis on

quality lending and profitability> managers should mae it amply clear to

quality lending and profitability> managers should mae it amply clear to

potential borrowers that bans resources are scarce and these are meant to

finance !iable !entures so that these are repaid on time and relent to other

needy borrowers for impro!ing the economic lot of ma?imum number of

households$

&ence> selection of right borrowers> !iable economic acti!ity>

adequate finance> and timely disbursement> correct endues of funds and

timely reco!ery of loans is absolutely necessary preconditions for pre!enting

or minimi=ing the incidence of new P"s$ +esides functioning as baners>

they ha!e to wor as a friend> philosopher and guide of borrowers> de!elop

mutual trust so as to ma?imi=e reco!ery in case of new loans$

ACTION P!AN IN REGAR: TO EXISTING NPAs"

These are as follows:

3 ,requent reco!ery camps should be organi=ed on periodicities

synchroni=ing with har!esting seasons in case of agricultural loans

and at monthlyGbimonthly inter!als in other cases> so as to reco!er

the ban dues from the sale proceeds on due dates$

6 %ash reco!ery of some minimum installments (6CD) of smaller

loans has now become a pre-condition for lodging claims with the #I

and %5%$ &ence> branches must build genuine pressure on

borrowers to repay the installments whene!er due> without


56/73

e?ception$ ,or this purpose e!en clerical and subordinate staff

member may also be in!ol!ed for effecting reco!ery through

personnel contacts$ To moti!ate the staffV managers may issue

appreciation letters to good performers$

7 #isposal of reco!ery certificates (R%s) cases> whene!er pending in

large numbers should be taen up suitably by the regionalG=onal

managers with the district magistrate> who is laso chairman of the

district consultati!e committee (#%%)$

8 /uitable colored printed post card in local languages may be

supplied for issuing notices of reco!ery camps and such camps may

be attended by regional managers or other senior officers of the

regional office$

C +an may also try reco!ery peons (in ban uniforms) who may !isit

borrowers before ; am or after Cpm for meeting the borrowers for

reco!ery of ban dues$

< @o default certificateA or @+est borrower certificateA should be

gi!en to such borrowers in a borrowers meeting specially organi=ed

for the purpose> in the presence of gram pradhan$ This is liely to

encourage others to repay ban dues in time and create healthy

reco!ery climate in the area$

L Fhere reco!ery is not forthcoming despite due efforts> compromise

proposals should be mobili=ed by concerned region committee and

sent to =onal officer for necessary action$

K &ead office and =onal offices should also tae ad!antage of lo

adalats$ Fhere a!ailable> for striing instant compromise judgements


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59/73

Issuing notices of reco!ery camps

Reco!ery peons may !isit borrowers

#efault certificateG best borrower certificate should be gi!en

%ompromise proposals should be mobili=ed

&ead office and =onal office tae ad!antage of lo adalats

odgment of claims with #T and %5%

"fter settlement reduce the amount of loss assets from ban boos

*pt for legal action

%lose follow up with bans lawyers ha!ing large number of un disposed

cases

COMMITTEES AN: RECOMMEN:ATIONS

I. NARASIM8AM COMMITTEE REPORT IDIIH.


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as P"s$

K$ "sset reconstruction fund ("R,) should be constituted to tae

o!er the P"s of public sector bans at a discount$

;$ ,or bans with a high P" portfolio> two alternati!e

approaches could be adopted$ *ne approach can be that all loan

assets in the doubtful and loss categories> should be identified

and their reali=able !alue should be determined$ These assets

could be transferred to asset Reconstruction %ompany which

would issue P" swap bonds$

3H$Introduction of general pro!ision of 3D on standard assets in a

phased manner be considered by R+I$

33$"n incenti!e to mae specific pro!ision> they may be made ta?

deductible$

36$"doption of income recognition of asset classification and

pro!isioning norms to be compulsory$

37$/pecial tribunals should be set up for speedy reco!ery of the

ban loan dues$

38$There should be an independent loan re!iew mechanism

especially for large borrowal accounts and systems to identify

potential P"s$

3C$The minimum share of go!ernment holdingGR+I holding in the

equity of nationali=ed bans should be brought down to 77D$

II. ,ERMA PANNE! REPORT


62/73

The committee which was headed by 4r$ 4$/$ 1erma> ,ormer

chairman of /+I> identified the specific ailments pre!ailing in the baning

sector and come out with a panacea prescription$

The following are the recommendations of 1erma panel :

The panel identified 7 wea P/+s and recommended a conditional

bail out pacage of CHHHcrs$> out of which 7HHHcrs$> will be used for the

recapitali=ation of wea bans$

The most significant suggestion> howe!er is the formation of a pri!ate

sector asset management company presided o!er by some of the most

talented professionals of the business$ It will do away with the bureaucratic

hurdles lie delayed decision maing in disposing off the assets grabbed by

asset reconstruction fund$

The report also said about setting up of financial reconstruction

authority of statutory status will mar the beginning of a serious effort to

bring bac the baning sector into a healthy state$

RBI MEAS4RES TO C4RB NPAs"

In !iew of the time factor in!ol!ed in reco!ering P"s by legal

means> the R+I has come out with simplified non-discretionary guidelines

for compromise settlement of bad debts upto C crs for uniform

implementation by them$

NON = :ISCRETIONAR> AN: NON = :ISCRIMINATOR>

NORMS"


63/73


64/73


65/73

FIN:INGS AN: OBSER,ATIONS"

3$ The D of P"s of pri!ate sector bans is less as compared to the

public sector bans lie ".I/ +"0$

6$ The D of net P"s to net ad!ances of ".I/ +"0 is less than the D

of gross P"s to total ad!ances (4ore pro!isioning)$

7$ @5rossA SAetA terms e?ist only in India$

8$ ".I/ +"0 P"s are increasing when compared to that of other

nationali=ed bans$

C$ et P"s of ".I/ +"0 are liely to reduce o!er ne?t 7 years than

the 5ross P"s$

P"s are more in

".I/ +"0$

K$ The reco!ery of non performing assets is slow due to the sluggish

legal system pre!ailing in India$


66/73

;$ Recognition of an account becoming an P" is not done in time$

3H$o proper credit appraisal$

33$#ue to high le!el of P"s in ".I/ +"0> operationg profits ept on

decreasing$

36$#ue to high pro!isioning> the R*" in ".I/ +"0 was in negati!e

terms$

37$'!en after pro!iding Re-%apitali=ation facility by the go!ernment to

the wea bans> not much change has been obser!ed in the

performance of the bans$

C8APTER = ,III

S4GESSTIONS

AN: RECOMEN:ATIONS


67/73

S4GGESTIONS AN: RECOMMEN:ATIONS"

Tacling the high le!el P"s is certainly a major concern for the

Indian baning industry$ Raising le!el of P"s is becoming a concern for

the bans$

The report on P"s in ".I/ +"0 con!eys its concern about

management of P"s in the Indian baning system$

The suggestion and recommendations are listed below :

3$ ".I/ +"0 must employGadopt scientific approach for appraisal

before the loan is distributed and monitor it closely in real time$

6$ It must pro!ide need based micro-credit for needy entrepreneur with

good proposals and implement a system for selecting a good

borrower$

7$ It must build a credit information bureau to restrict the errant

borrower> from switching bans$

8$ +ans should always follow basic lending norms and tae quic credit

decisions$

C$ It must brea up reco!ery to branch le!el networ$


68/73

future findings from an economic point$

K$ *pt for out of court settlements$

;$ Remo!e the 5rossB and etB terms while distinguishing the P"s$

3H$5o!ernment should set up asset reconstruction company as proposed

by the arasimham committee> to tae o!er the bad loans of

commercial bans and sal!age what they can$

33$+ans should de!elop ad!anced sills in ris management and

e!aluation of !arious credit riss$

36$The regulatory authority should strengthen the debt reco!ery tribunal

by appointing more judge and adequate number of reco!ery officers to

dispose off the case$

37$Periodically a list of defaulters may be published to enable the bans

to tae necessary action against the defaulters$

38$"mend the rele!ant laws lie %P%> imitations act> /tamp act>

'!idence act etc> to ensure that the ban default cases are dealt with

an altogether different basis with limited number of adjournments$

3C$R+I could lower the banBs e?posure to indi!idual borrowers> to bring

economic prosperity equally around the country$

3 as it may effect the performance of the

strong ban$

3L$The bans should cut down the operational e?penses to bring ban the

bac on the trac of profitability$ 1R/ is one such measure to reduce

the e?penses$

3K$5o!ernment should not pro!ide any re-capitali=ation facility from

here after> as infusion of new capital may not restructure or lift the

bans performanceV hence the wea bans should be closed down$


69/73

ANNEX4RES

#isclosure in terms of R+I guidelines:

a+ Si3nifi/ant 2erforman/e indi/ators

(##$)#( (##()#? (##?)#& (##&)#@ (##@)#%I$Percentage of shareholding

*f the go!t$ of India 3HHD 3HHD L3$3


70/73


71/73

ii$ "dditions during the year 8LH$C8 C7H$


72/73

i!$ %losing balance 3H8$83 3HK$67 3H8$73 8C$6L 38H$C;

!endin3 to 2ri/e sensiti-e se/tor

(##$)#( (##()#? (##?)#& (##&)#@ (##%)#@

i$ "d!ances to capital maret

/ector H$K;


73/73

R','R'%'/

ews papers

+an maga=ines

Rewiew of literature

II+ maga=ines

Internet

"nnual reports of ".I/ +"0

Documents

Tabarsum NON PERFORMING ASSETS AXIS BANK - Copy.doc