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MRP FINALPROJECT REPORT

ON

COMPARATIVE ANALYSIS ONNON PERFORMING ASSETS OF PRIVATE AND


PUBLIC SECTOR BANKS

BY
ANINDYA SANKAR KUNDU
(08BS0000328)

Management Research Project


(Batch of 2010)

PROJECT TITLE

COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND


PUBLIC SECTOR BANKS.

A report submitted in partial


fulfillment of the requirements of
MBA program

FACULTY GUIDE
Prof. RajasreeNandy
ICFAIBusiness School
KOCHI

SUBMITTED BY

ANINDYA SANKAR KUNDU


2

(08BS0000328)

Declaration

I hereby declare that this MRP report on COMPARATIVE


PERFORMING ASSETS OF PRIVATE AND

ANALYSIS ON NON

PUBLIC SECTOR BANKS.

has been

written and prepared by me during the academic year 2009-2010.This project


was

done

under

the

able

guidance

and

supervision

of

Prof.

RajasreeNandi,Finance Faculty, IBS Kochi in partial fulfillment of the


requirement for the Master Of Business Administration Degree course of the
ICFAI Business School.

I also declare that this project is the result of my own effort and has not been
submitted to any other institution for the award of any Degree or Diploma.

Place: Kochi
Anindya Sankar Kundu
08bs0000328

Acknowledgements

If words are considered to be signs of gratitude then let these words convey the
very same.
I thank Prof. RajasreeNandi, ICFAI Business School, Kochi, who has
sincerely supported me with the valuable insights into the completion of this
project.
I am grateful to all faculty members of ICFAI Business School, Kochi and my
friends who have helped me in the successful completion of this Management
Research Project.

TABLE OF CONTENTS

Declaration

3
Acknowledgments
.
4
Abstract
.
7
1. Project Details
1.1Objective of the project
9
1.2 Research Methodology.
9
1.3Scope of the project
9
1.4 Sampling Methods
10
1.5 Limitations of the project 10
2. Introduction
2.1
12
2.3
2.4
2.5
2.6

Definition of NPA ...


2.2 NPAs: An issue for banks and FIs in India
13
Indian economy and NPAs . 13
Global developments and NPAs ..14
Factors for rise in NPAs. 15
Problems due to NPA .
19
2.7 Types of NPA .
20
3. Income Recognition
3.1 Income Recognition Policy ................................................................. 22
3.2 Reversal of income ...............................................................................
3.3 Leased Assets .........................................................................................
3.4 InterestApplication .............................................................................
3.5 Reporting of NPAs ...............................................................................

22
23
23
24

4. Assets Classifications
4.1 Sub-standard Assets .............................................................................
26
4.2 Doubtful Assets .....................................................................................
30
4.3 Loss Assets ..............................................................................................
31
5. Impact of NPA &Preventive
Measurement for NPA
&

5.1 Impact of NPA........................................................................................


5.2 Early symptoms .....................................................................................
5.3 Preventive Measurement for NPA .................................................. 35

33
34

6. Tools for recovery of NPA


6.1 Willful Default
39
6.2 Inability to Pay .
40
6.3 Restructuring / Rescheduling of Loans ..
41
6.4 Treatment of Restructured Standard Accounts ..
41
6.5 Treatment of restructured sub-standard accounts .
42
6.6 Up gradation of restructured accounts .
42
6.7
General
.. 43
6.8 Income recognition .
43
6.9 Funded Interest ..
43
6.9.1 Conversion into equity, debentures or any other instrument
44
6.9.2 Provisioning
44
7. Special Cases
7.1.1 Accounts with temporary deficiencies
46
7.1.2 Accounts regularized near about the balance sheet date ..
46
7.1.3 Asset Classification to be borrower-wise and not facility-wise 7.1.4 Accounts
where there is erosion in the value of security
47
7.1.5 Advances to PACS/FSS ceded to Commercial Banks ..
47
7.1.6 Advances against Term Deposits, NSCs, KVP/IVP .
48
7.1.7 Loans with moratorium for payment of interest .
48
7.1.8 Agricultural advances
48
7.1.9 Government guaranteed advances.
49
7.2.1 Take-out Finance
49
7.2.2 Post-shipment Supplier's Credit
50
7.2.3 Export Project Finance .. 50
7.2.4 Advances under rehabilitation approved by BIFR/ TLI .. 50
7.2.5 Role of ARCIL ..
51
8. Data Analysis and interpretation ..
52
9.
Annexure
..
64
10.
Bibliography

65

ABSTRACT
The accumulation of huge non-performing assets in banks
hasassumed great importance. The depth of the problem of bad
debts wasfirst realized only in early 1990s. The magnitude of
NPAs in banks andfinancial institutions is over Rs.1, 50,000
crore.

While gross NPA reflects the quality of the loans made bybanks,
net NPA shows the actual burden of banks. Now it is
increasinglyevident that the major defaulters are the big
borrowers coming from thenon-priority sector. The banks and
financial institutions have to take theinitiative to reduce NPAs in
a time bound strategic approach.

Public sector banks figure prominently in the debate not


onlybecause they dominate the banking industries, but also
since they havemuch larger NPAs compared with the private
sector banks. This raises aconcern in the industry and
academia because it is generally felt thatNPAs reduce the
profitability of a bank, weaken its financial health anderode its
solvency.

For the recovery of NPAs a broad framework has evolved forthe


management of NPAs under which several options are provided
fordebt recovery and restructuring. Banks and FIs have the
freedom todesign and implement their own policies for
recovery and write-offincorporating compromise and negotiated
settlements.

CHAPTER-1
Project Details

1.1OBJECTIVES 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

1.2RESEARCH METHODOLOGY
The research methodology adopted for carrying out the study
were

In this project Descriptive research methodologies were


use.
At the first stage theoretical study is attempted.
At the second stage Historical study is attempted.
At the Third stage Comparative study of NPA is
undertaken.

1.3Scope of the Study

Concept of Non-Performing Asset


Guidelines
Impact of NPAs
Reasons for NPAs
Preventive Measures
Tools to manage NPAs

1.4Sampling Methods
To prepare this Project we took five banks from public sector as
well as five banks from private sector.

1.5Limitations of the study


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 banks are 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 to cover all the banks of the Indian
banking sector.

10

CHAPTER-2

INTRODUCTIO
N

11

2. Introduction
NPA. The three letters Strike terror in banking sector and
business circle today. NPA is short form of Non Performing
Asset. The dreaded NPA rule says simply this: when interest or
other due to a bank remains unpaid for more than 90 days, the
entire bank loan automatically turns a non performing asset.
The recovery of loan has always been problem for banks and
financial institution. To come out of these first we need to think
is it possible to avoid NPA, no cannot be then left is to look after
the factor responsible for it and managing those factors.
2.1Definitions:
An asset, including a leased asset, becomes non-performing
when it ceases to generate income for the bank.
A non-performing asset (NPA) was defined as a credit facility
in respect of which the interest and/ or instalment of principal
has remained past due for a specified period of time.
With a view to moving towards international best practices
and to ensure greater transparency, it has been decided to
adopt the 90 days overdue norm for identification of NPAs,
from the year ending March 31, 2004. Accordingly, with effect
from March 31, 2004, a non-performing asset (NPA) shall be a
loan or an advance where;
Interest and/ or instalment of principal remain overdue for
a period of
more than 90 days in respect of a term loan,
The account remains out of order for a period of more
than 90 days, in respect of an Overdraft/Cash Credit
(OD/CC),
The bill remains overdue for a period of more than 90 days
in the case of bills purchased and discounted,
Interest and/or instalment of principal remains overdue for
two harvest seasons but for a period not exceeding two half
years in the case of an advance granted for agricultural
purposes.
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
12

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.
2.2NPAs: 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.
2.3INDIAN 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 infrastructure facilities,
sticky legal system, cutting of exposures to emerging markets
by FIs, etc.
Further, international rating agencies like, Standard & Poor
have lowered Indias 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.

13

2.4GLOBAL 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 of borrower 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 that
many 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.

14

2.5FACTORS FOR RISE IN NPAs


The banking sector has been facing the serious problems of the
rising NPAs. But the problem of NPAs is more in public sector
banks when compared to private sector banks and foreign
banks. The NPAs in PSB are growing due to external as well as
internal factors.
2.5.1EXTERNAL FACTORS:-

Ineffective recovery tribunal


The Govt. has set of numbers of recovery tribunals, which
works for recovery of loans and advances. Due to their
negligence and ineffectiveness in their work the bank
suffers the consequence of non-recover, thereby reducing
their profitability and liquidity.
Willful Defaults
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.
15

Industrial sickness
Improper project handling , ineffective management , lack
of adequate resources , lack of advance technology , day
to day changing govt. Policies give birth to industrial
sickness. Hence the banks that finance those industries
ultimately end up with a low recovery of their loans
reducing their profit and liquidity.
Lack of demand
Entrepreneurs in India could not foresee their product
demand and starts production which ultimately piles up
their product thus making them unable to pay back the
money they borrow to operate these activities. The banks
recover the amount by selling of their assets, which covers a
minimum label. Thus the banks record the non-recovered part as NPAs and
has to make provision for it.
Change on Govt. policies
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.

2.5.2INTERNAL 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
i.

Principles of safety :By safety it means that the borrower is in a position to


repay the loan both principal and interest. The
repayment of loan depends upon the borrowers:
a)
Capacity to pay
b) Willingness to pay
16

a) Capacity to pay depends upon:


1. Tangible assets
2. Success in business
b) Willingness to pay depends on:
1. Character
2. Honest
3. Reputation of borrower
The banker should, therefore take utmost care in ensuring
that the enterprise or business for which a loan is sought
is a sound one and the borrower is capable of carrying it
out successfully .He should be a person of integrity and
good character.
Inappropriate technology
Due to inappropriate technology and management
information system, market driven decisions on real time
basis cannot be taken. Proper MIS and financial accounting
system is not implemented in the banks, which leads to
poor credit collection, thus NPA. All the branches of the
bank should be 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 capital
investment.
it should collect credit information of the borrowers
from_
a. From bankers.
b. Enquiry from market/segment of trade, industry,
business.
c. From external credit rating agencies.
Analyze the balance sheet.
True picture of business will be revealed on analysis
of profit/loss a/c and balance sheet.
Purpose of the loan
17

When bankers give loan, he should analyze the


purpose of the loan. To ensure safety and liquidity,
banks should grant loan for productive purpose only.
Bank should analyze the 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.
2.
3.
4.

Marketability
Acceptability
Safety
Transferability.

The banker should follow the principle of


diversification of risk based on the famous maxim do not
keep all the eggs in one basket; it means that the banker
should not grant advances to a few big farms only or to
concentrate them in few industries or in a few cities. If a
new big customer meets misfortune or certain traders or
industries affected adversely, the overall position of the
bank will not be affected.
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).
Absence of regular industrial visit
The
irregularities in spot visit also increases the NPAs.
Absence of regularly visit of bank officials to the customer
point decreases the collection of interest and principals on
the loan. The NPAs due to willful defaulters can be
collected by regular visits.
18

Re loaning process
Non remittance of recoveries to higher financing agencies
and re loaning of the samehave already affected the
smooth operation of the credit cycle. Due to re loaning to
the defaulters and CCBs and PACs, the NPAs of OSCB is
increasing day by day.

2.6PROBLEMS DUE TO NPA


1. 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.
2. Depositors do not receive a market return on saving. In
the worst case if the bank fails, depositors lose their
assets or uninsured balance.
3. 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.
4. 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 and
natural resources.
Nonperforming asset may spill over the banking system and
contract the money stock, which may lead to economic
contraction. This spillover effect can channelize through
liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may
experience
liquidity shortage. This can jam payment across
the country.
19

b) Illiquidity constraints bank in paying depositors


c) Undercapitalized banks exceed the banks capital base.
'Out of Order' status:
An account should be treated as 'out of order' if
the outstanding balance remains continuously in excess of the
sanctioned limit/drawing power. In cases where the outstanding
balance in the principal operating account is less than the
sanctioned limit/drawing power, but there are no credits
continuously for six months as on the date of Balance Sheet or
credits are not enough to cover the interest debited 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.

2.7Types 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 reflects the quality of the loans made by
banks. It consists of all the non-standard assets like as substandard, 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 shows the
actual burdenof banks. Since in India, bank balance sheets
20

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 the central
bank guidelines, are quite significant.
That is why the
difference between gross and net NPA is quite high.
It can be calculated by following
Net NPAs Gross NPAs Provisions
Gross Advances - Provisions

CHAPTER-3
21

INCOME
RECOGNITION

3. INCOME RECOGNITION
3.1. 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 recognised on
accrual basis but is booked as income only when it is
actually received. Therefore, the banks should not charge
and take to income account interest on any NPA.
However, interest on advances against term deposits,
NSCs, IVPs, KVPs and Life policies may be taken to income
account on the due date, provided adequate margin is
available in the accounts.
Fees and commissions earned by the banks as a result of
re-negotiations or rescheduling of outstanding debts
22

should be recognised on an accrual basis over the period


of time covered by the re-negotiated or rescheduled
extension 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 realised.

3.2. 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 the
same is not realised. This will apply to Government
guaranteed accounts also.
In respect of NPAs, fees, commission and similar income
that have accrued should cease to accrue in the current
period and should be reversed or provided for with respect
to past periods, if uncollected.

3.3Leased Assets
The net lease rentals (finance charge) on the leased asset
accrued and credited to income account before the asset
became non-performing, and remaining unrealised, should
be reversed or provided for in the current accounting period.
The term 'net lease rentals' would mean the amount of
finance charge taken to the credit of Profit & Loss Account
and would be worked out as gross lease rentals adjusted by
amount of statutory depreciation and lease equalisation
account.
As per the 'Guidance Note on Accounting for Leases'
issued by the Council of the Institute of Chartered
Accountants of India (ICAI), a separate Lease Equalisation
23

Account should be opened by the banks with a


corresponding debit or credit to Lease Adjustment Account,
as the case may be. Further, Lease Equalisation Account
should be transferred every year to the Profit & Loss Account
and disclosed separately as a deduction from/addition to
gross value of lease rentals shown under the head 'Gross
Income'.
Appropriation of recovery in NPAs
Interest realised on NPAs may be taken to income account
provided the credits in the accounts towards interest are
not out of fresh/ additional credit facilities sanctioned to
the borrower concerned.

In the absence of a clear agreement between the bank


and the borrower for the purpose of appropriation of
recoveries in NPAs (i.e. towards principal or interest due),
banks should adopt an accounting principle and exercise
the right of appropriation of recoveries in a uniform and
consistent manner.

3.4 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 proforma accounts.

3.5 Reporting of NPAs


Banks are required to furnish a Report on NPAs as on 31 st
March each year after completion of audit. The NPAs would
relate to the banks global portfolio, including the
advances at the foreign branches. The Report should be
furnished as per the prescribed format given in the
Annexure I.
While reporting NPA figures to RBI, the amount held in
interest suspense account, should be shown as a
24

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 being reported.
REPORTING FORMAT FOR NPA GROSS AND NET NPA
Annexure-I (Page no-64)

25

CHAPTER-4
-Asset Classification

- Provisioning Norms

4. 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 than
26

90 days then it is NPA and NPAs are further need to classify in


sub categories.
Banks are required to classify non-performing assets further
into the following three categories based on the period for
which the asset has remained non-performing 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:-A loan classified as doubtful has all the weaknesses inherent in
assets that were classified as sub-standard, with the added
characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently known facts,
conditions and values highly questionable and improbable.
With effect from March 31, 2005, an asset would be classified
as doubtful if it remained in the sub-standard category for 12
months.
( 3 ) Loss Assets:-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

27

In order to narrow down the divergences and ensure


adequate provisioning by banks, it was suggested that a
bank's statutory auditors, if they so desire, could have a
dialogue with RBI's Regional Office/ inspectors who carried
out the bank's inspection during the previous year with
regard to the accounts contributing to the difference.
Pursuant to this, regional offices were advised to forward a
list of individual advances, where the variance in the
provisioning requirements between the RBI and the bank
is above certain cut off levels so that the bank and the
statutory auditors take into account the assessment of the
RBI while making provisions for loan loss, etc.
The primary responsibility for making adequate provisions
for any diminution in the value of loan assets, investment
or other assets is that of the bank managements and the
statutory auditors. The assessment made by the
inspecting officer of the RBI is furnished to the bank to
assist the bank management and the statutory auditors in
taking a decision in regard to making adequate and
necessary provisions in terms of prudential guidelines.
In conformity with the prudential norms, provisions should
be made on the non-performing assets on the basis of
classification 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, doubtful assets 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:

28

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:

Period for which the


advance has been
considered as doubtful

Provision
requirement (%)

Up to one year

20

One to three years

30

More than three years:

60% with effect


from March
31,2005.

(1)

(2)

Outstanding stock of
NPAs as on March 31,
2004.
Advances classified
as doubtful more than
three years on or after
April 1, 2004.

75% effect from


March 31, 2006.
100% with effect
from March 31,
2007.

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:
As on31.03.2003, 50 percent of the additional provisioning
requirement on the assets which became doubtful on
account of new norm of 18 months for transition from substandard asset to doubtful category.

As on 31.03.2002, balance of the provisions not made


during the previous year, in addition to the provisions
needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning
consequent upon the reduction in the transition period
from substandard to doubtful asset from 18 to 12 months
29

over a four year period commencing from the year ending


March 31, 2005, with a minimum of 20 % each year.
Note: Valuation of Security for provisioning purposes

With a view to bringing down divergence arising out of


difference in assessment of the value of security, in cases of
NPAs with balance of Rs. 5 crore and above stock audit at
annual intervals by external agencies appointed as per the
guidelines approved by the Board would be mandatory in order
to enhance the reliability on stock valuation. Valuers appointed
as per the guidelines approved by the Board of Directors should
get collaterals such as immovable properties charged in favour
of the bank valued once in three years.
Sub-standard assets:
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.
The provisions on standard assets should not be reckoned
for arriving at net NPAs.
The provisions towards Standard Assets need not be
netted from gross advances but shown separately as
'Contingent Provisions against Standard Assets' under
'Other Liabilities and Provisions - Others' in Schedule 5 of
the balance sheet.
Floating provisions:
Some of the banks make a 'floating
provision' over and above the specific provisions made in
respect of accounts identified as NPAs. The floating provisions,
wherever available, could be set-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
30

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 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:

31

Period

%age
provision

Up to one year

20

One to three years

30

More
years

than

of

three 50

Loss assets

: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 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.

32

CHAPTER-5
-

Impact of NPA
Preventive Measurement for

NPA

33

5. Impact of NPA

Profitability:-

NPA means booking of money in terms of bad asset, which


occurred due to wrong choice of client. Because of the money
getting blocked the prodigality of bank decreases not only by
the amount of NPA but NPA lead to opportunity cost also as that
much of profit invested in some return earning project/asset.
So NPA doesnt affect current profit but also future stream of
profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low
ROI (return on investment), which adversely affect current
earning of bank.

Liquidity:-

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
34

days 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 its goodwill and
brand image and credit which have negative impact to the
people who are putting their money in the banks.

5.2 Early symptoms by which one can


recognize a performing asset turning in
to Non-performing asset: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.
35

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:
Avoidance of contact with bank.
Problem between partners.
(4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.

5.3 Preventive Measurement for NPA


Early Recognition of the Problem:Invariably, by the time banks start their efforts to get involved
in a revival process, its too late to retrieve the situation- both
in terms of rehabilitation of the project and recovery of banks
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 promoters intention, banks are convinced 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.
Identifying Borrowers with Genuine 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
36

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.
In this regard banks may consider having Special
Investigation 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 casesshould 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.

Timeliness and Adequacy of 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 promoters 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 on 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 Effectiveness:-

37

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 units fortunes. A bank may commit
additional finance to an aling unit only after basic viability of
the enterprise also 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.
Multiple Financing:A. During the exercise for assessment of viability and
restructuring, a Pragmatic and unified approach by all the
lending banks/ FIs as also sharing of all relevant information on
the borrower would go a long way toward overall success of
rehabilitation exercise, given
the probability of success/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 torecover its dues, another lender may have a
much shortertimeframe in mind. So it is possible that the letter
categories oflenders may be willing to exit, even a t a cost by
a discountedsettlement of the exposure. Therefore, any plan
38

forrestructuring/rehabilitation
account.

may

take

this

aspect

into

D. Corporate Debt Restructuring mechanism has


beeninstitutionalized in 2001 to provide a timely and
transparent systemfor restructuring of the corporate debt of Rs.
20 crore and abovewith the banks and FIs on a voluntary basis
and outside the legalframework. Under this system, banks may
greatly benefit in termsof restructuring of large standard
accounts (potential NPAs) andviable sub-standard accounts
with consortium/multiple bankingarrangements.

39

CHAPTER-6
Tools For recovery of npa

40

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.

6.1Willful Default:A] Lok Adalat and Debt Recovery Tribunal


B] Securitization Act
C] Asset Reconstruction

41

Lok Adalat:
Lok Adalat institutions help banks to settle disputes
involvingaccount in doubtful and loss category, with
outstanding balance of Rs.5 lakh for compromise settlement
under Lok Adalat. Debt recoverytribunals have been
empowered to organize Lok Adalat to decide oncases of NPAs of
Rs. 10 lakh and above. This mechanism has proved tobe quite
effective for speedy justice and recovery of small loans.
Theprogress through this channel is expected to pick up in the
coming years.

Debt Recovery Tribunals (DRT):


The recovery of debts due tobanks and financial institution
passed in March 2000 has helped instrengthening the function
of DRTs. Provision for placement of more thanone recovery
officer, power to attach defendants property/assetsbefore
judgment, penal provision for disobedience of tribunals order
or for breachof any terms of order and appointment of receiver
with power ofrealization, management, protection and
preservation of property are expected to provide necessary
teeth to the DRTs and speed up therecovery of NPAs in the
times to come. DRTs which have been set up by
the Government to facilitate speedy recovery by banks/DFIs,
have notbeen able make much impact on loan recovery due to
variety
of
reasonslike
inadequate
number,
lack
of
infrastructure, under staffing and frequentadjournment of
cases. It is essential that DRT mechanism is strengthenedand
vested with a proper enforcement mechanism to enforce their
orders.Non observation of any order passed by the tribunal
should amount tocontempt of court, the DRT should have right
to initiate contemptproceedings. The DRT should empowered to
sell asset of the debtorcompanies and forward the proceed to
the winding up court fordistribution among the lenders.

6.2Inability to Pay
Consortium arrangements:
Asset classification of accounts under consortium should be
based on the record of recovery of the individual member
banks and other aspects having a bearing on therecoverability
of the advances. Where the remittances by the borrowerunder
consortium lending arrangements are pooled with one bank
and/orwhere the bank receiving remittances is not parting with
the share of othermember banks, the account will be treated as
not serviced in the books ofthe other member banks and
42

therefore, be treated as NPA. The banksparticipating in the


consortium should, therefore, arrange to get their shareof
recovery transferred from the lead bank or get an express
consent fromthe lead bank for the transfer of their share of
recovery, to ensure properasset classification in their respective
books.

6.3Restructuring / 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 andshould remain in such category
for at least one year of satisfactoryperformance under the
renegotiated or rescheduled terms. In the case ofsub-standard
and doubtful assets also, rescheduling does not entitle abank to
upgrade the quality of advance automatically unless there
issatisfactory
performance
under
the
rescheduled
/
renegotiated terms.Following representations from banks that
the foregoing stipulations deterthe banks from restructuring
of standard and sub-standard loanassets even though the
modification of terms might not jeopardize theassurance of
repayment of dues from the borrower, the norms relating
torestructuring of standard and sub-standard assets were
reviewed in March2001. In the context of restructuring of the
accounts, the following stagesat 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
principaland/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
theaforesaid first two stages would not cause a standard asset
to be classified in the substandard category provided the
loan/credit facility isfully secured.
A rescheduling of interest element at any of the foregoing
first twostages would not cause an asset to be downgraded to
substandardcategory subject to the condition that the amount
43

of sacrifice, if any, in theelement of interest, measured in


present value terms, is either writtenoff or provision is made
to the extent of the sacrifice involved. For thepurpose, the
future interest due as per the original loan agreement inrespect
of an account should be discounted to the present value at a
rateappropriate to the risk category of the borrower (i.e.,
current PLR+ theappropriate credit risk premium for the
borrower-category) and comparedwith the present value of the
dues expected to be received under therestructuring package,
discounted on the same basis.
In case there is a sacrifice involved in the amount of interest
inpresent value terms, as at (b) above, the amount of sacrifice
should eitherbe written off or provision made to the extent
of the sacrifice involved.

6.5 Treatment of restructured sub-standard accounts:


A rescheduling of the installments of principal alone would
render asub-standard asset eligible to be continued in the
sub-standard categoryfor the specified period, provided the
loan/credit facility is fully secured.
A rescheduling of interest element would render a substandardasset eligible to be continued to be classified in
substandard categoryfor the specified period subject to the
condition that the amount ofsacrifice, if any, in the element of
interest, measured in present value terms, is either written
off or provision is made to the extent of thesacrifice involved.
For the purpose, the future interest due as per theoriginal loan
agreement in respect of an account should be discounted tothe
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 bereceived under the restructuring
package, discounted on the same basis.
In case there is a sacrifice involved in the amount of interest
inpresent value terms, as at (b) above, the amount of sacrifice
should eitherbe written off or provision made to the extent of
the sacrifice involved.Even in cases where the sacrifice is by
way of write off of the past interestdues, the asset should
continue to be treated as sub-standard.

6.6Up gradation of restructured accounts:


The sub-standard accounts which have been subjected to
restructuring etc., whether in respect of principal installment or
interest amount, bywhatever modality, would be eligible to be
upgraded to the standardcategory only after the specified
44

period i.e., a period of one year after thedate when first


payment of interest or of principal, whichever is earlier,
fallsdue, subject to satisfactory performance during the period.
The amount ofprovision made earlier, net of the amount
provided for the sacrifice in theinterest amount in present value
terms as aforesaid, could also bereversed after the one year
period. During this one-year period, the substandardasset will
not deteriorate in its classification if satisfactoryperformance of
the account is demonstrated during the period. In
case,however, the satisfactory performance during the oneyear period is notevidenced, the asset classification of the
restructured account would begoverned as per the applicable
prudential
norms
with
reference
to
the
prerestructuringpayment schedule.

6.7General:
These instructions would be applicable to all type of credit
facilitiesincluding working capital limits, extended to industrial
units, provided theyare fully covered by tangible securities.
As trading involves only buying and selling of commodities and
theproblems associated with manufacturing units such as
bottleneck incommercial production, time and cost escalation
etc. are not applicable tothem, these guidelines should not be
applied to restructuring/ reschedulingof credit facilities
extended to traders.
While assessing the extent of security cover available to the
creditfacilities, which are being restructured/ rescheduled,
collateral securitywould also be reckoned, provided such
collateral is a tangible securityproperly charged to the bank and
is not in the intangible form likeguarantee etc. of the promoter/
others.

6.8 Income recognition


There will be no change in the existing instructions on
incomerecognition. Consequently, banks should not recognise
income on accrualbasis in respect of the projects even though
the asset is classified as astandard asset if the asset is a "non
performing asset" in terms of theextant instructions. In other
words, while the accounts of the project maybe classified as a
standard asset, banks shall recognise income in such accounts
only on realisation on cash basis if the asset has
otherwisebecome non performing as per the extant
45

delinquency norm of 180 days.The delinquency norm would


become 90 days with effect from 31 March2004.
Consequently, banks, which have wrongly recognised income in
thepast, should reverse the interest if it was recognised as
income during thecurrent year or make a provision for an
equivalent amount if it wasrecognised as income in the
previous year(s). As regards the regulatorytreatment of income
recognised as funded interest and conversion intoequity,
debentures or any other instrument banks should adopt
thefollowing:

6.9 Funded Interest: Income recognition in respect of the


NPAs,regardless of whether these are or are not subjected to
restructuring/rescheduling/ renegotiation of terms of the loan
agreement, should bedone strictly on cash basis, only on
realisation and not if the amount ofinterest overdue has been
funded. If, however, the amount of fundedinterest is recognised
as income, a provision for an equal amount shouldalso be made
simultaneously. In other words, any funding of interest
inrespect of NPAs, if recognised as income, should be fully
provided for.

6.9.1. Conversion into equity, debentures or any other


instrument: The amount outstanding converted into other
instrumentswould normally comprise principal and the interest
components. If theamount of interest dues is converted into
equity or any other instrument,and income is recognised in
consequence, full provision should be madefor the amount of
income so recognised to offset the effect of such
incomerecognition. Such provision would be in addition to the
amount of provision that may be necessary for the depreciation
in the value of the equity orother instruments, as per the
investment valuation norms. However, if theconversion of
interest is into equity, which is quoted, interest income canbe
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 atlower of cost or
market value. In case of conversion of principal and /orinterest
in respect of NPAs into debentures, such debentures should
betreated as NPA, ab initio, in the same asset classification as
wasapplicable to loan just before conversion and provision
made as pernorms. This norm would also apply to zero coupon
bonds or other
46

Instruments which seek to defer the liability of the issuer. On


suchdebentures, income should be recognised only on
realisation basis. Theincome in respect of unrealised interest,
which is converted intodebentures or any other fixed maturity
instrument, should be recognisedonly on redemption of such
instrument. Subject to the above, the equityshares or other
instruments arising from conversion of the principalamount of
loan would also be subject to the usual prudential
valuationnorms as applicable to such instruments.

6.9.2. Provisioning
While there will be no change in the extant norms on
provisioningfor NPAs, banks which are already holding
provisions against some of theaccounts, which may now be
classified as standard, shall continue tohold the provisions and
shall not reverse the same.

47

CHAPTER-7
Special Cases

7.Special Cases
7.1.1.Accounts with temporary deficiencies:
The classification of an asset as NPA should be based on
therecord of recovery. Bank should not classify an advance
account as NPAmerely due to the existence of some
deficiencies which are temporary innature such as nonavailability of adequate drawing power based on thelatest
available stock statement, balance outstanding exceeding the
limittemporarily, non-submission of stock statements and nonrenewal of thelimits on the due date, etc. In the matter of
classification of accounts withsuch deficiencies banks may
follow the following guidelines:
Banks should ensure that drawings in the working
capitalaccounts are covered by the adequacy of current assets,
since currentassets are first appropriated in times of distress.
Drawing power isrequired 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 beolder than three
48

months. The outstanding in the account based on


drawingpower calculated from stock statements older than
three months, would bedeemed as irregular. A working capital
borrower account will become NPAif such irregular drawings are
permitted in the account for a continuousperiod of 180 days
even though the unit may be working or the borrower'sfinancial
position is satisfactory.
Regular and ad hoc credit limits need to be reviewed/
regularizednot later than three months from the due date/date
of ad hoc sanction. Incase of constraints such as nonavailability of financial statements andother data from the
borrowers, the branch should furnish evidence to showthat
renewal/ review of credit limits is already on and would be
completedsoon. In any case, delay beyond six months is not
considered desirable asa general discipline. Hence, an account
where the regular/ ad hoc creditlimits have not been reviewed/
renewed within 180 days from the duedate/ date of ad hoc
sanction will be treated as NPA.
7.1.2.

Accounts regularized near about the balance sheet date:

The asset classification of borrower accounts where a solitary or


a fewcredits are recorded before the balance sheet date should
be handled withcare and without scope for subjectivity. Where
the account indicatesinherent weakness on the basis of the
data available, the account shouldbe deemed as a NPA. In other
genuine cases, the banks must furnishsatisfactory evidence to
the Statutory Auditors/Inspecting Officers aboutthe manner of
regularization of the account to eliminate doubts on
theirperforming 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
borrowerbecomes a problem credit and not others. Therefore,
all the facilitiesgranted by a bank to a borrower will have to be
treated as NPA and notthe particular facility or part thereof
which has become irregular. If the debits arising out of
devolvement of letters of credit or invokedguarantees are
parked in a separate account, the balance outstanding inthat
account also should be treated as a part of the borrowers
principaloperating account for the purpose of application of
prudential norms onincome recognition, asset classification and
provisioning.

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


49

A NPA need not go through the various stages of classification


incases of serious credit impairment and such assets should
bestraightaway classified as doubtful or loss asset as
appropriate. Erosion inthe value of security can be reckoned as
significant when the realizablevalue of the security is less than
50 per cent of the value assessed by thebank or accepted by
RBI at the time of last inspection, as the case maybe. Such
NPAs may be straightaway classified under doubtful category
and provisioning should be 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 per cent of the
outstanding in theborrower accounts, the existence of security
should be ignored and theasset should be straightaway
classified as loss asset. It may be eitherwritten 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 facility granted to
PACS/ FSS which is indefault for a period of two harvest seasons
(not exceeding two halfyears)/two quarters, as the case may
be, after it has become due will beclassified 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 on-lending arrangementwill
become NPA even if one of the credit facilities granted to the
sameborrower 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 goldornaments, government securities and
all other securities are not coveredby this exemption.

7.1.7 Loans with moratorium for payment of interest


In the case of bank finance given for industrial projects or
foragricultural plantations etc. where moratorium is available
for payment ofinterest, payment of interest becomes 'due' only
50

after the moratorium orgestation period is over. Therefore, such


amounts of interest do notbecome overdue and hence NPA,
with reference to the date of debit of interest. They become
overdue after due date for payment of interest, ifuncollected.
In the case of housing loan or similar advances
granted to staff
members where interest is payable after recovery of principal,
interestneed not be considered as overdue from the first
quarter onwards. Suchloans/advances should be classified as
NPA only when there is a defaultin repayment of installment of
principal or payment of interest on therespective due dates.

7.1.8 Agricultural advances


In respect of advances granted for agricultural purpose
whereinterest and/or installment of principal remains unpaid
after it has becomepast due for two harvest seasons but for a
period not exceeding two half years,such an advance should be
treated as NPA. The above normsshould be made applicable to
all direct agricultural advances as listed atitems 1.1, 1.1.2 (i) to
(vii), 1.1.2 (viii)(a)(1) and 1.1.2 (viii)(b)(1) of MasterCircular on
lending
to
priority
sector
No.
RPCD.PLAN.
BC.
12/04.09.01/2001- 2002 dated 1 August 2001. An extract of the
list of these items isfurnished in the Annexure II. In respect of
agricultural
loans,
other
thanthose
specified
above,
identification of NPAs would be done on the samebasis as nonagricultural advances which, at present, are the 180
daysdelinquency norm.
Where natural calamities impair the repaying capacity
ofagricultural borrowers, banks may decide on their own as a
relief measure conversion of the short-term production loan into
a term loan or re-schedulementof the repayment period; and
the sanctioning of fresh short-termloan, subject to various
guidelines
contained
in
RBI
circularsRPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98
andRPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.

In such cases of conversion or re-schedulement, the term


loan aswell as fresh short-term loan may be treated as current
dues and need notbe classified as NPA. The asset classification
of these loans wouldthereafter be governed by the revised
terms & conditions and would betreated as NPA if interest
and/or installment of principal remains unpaid, fortwo harvest
seasons but for a period not exceeding two half years.
51

7.1.9.Government guaranteed advances:


The
credit
facilities
backed
by
guarantee
of
the
CentralGovernment though overdue may be treated as NPA
only when theGovernment repudiates its guarantee when
invoked. This exemption fromclassification of Government
guaranteed advances as NPA is not for thepurpose of
recognition of income. With effect from 1st April 2000,advances
sanctioned against State Government guarantees should
beclassified as NPA in the normal course, if the guarantee is
invoked andremains 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
thefunding of long-term infrastructure projects. Under this
arrangement, theinstitution/the bank financing infrastructure
projects will have an arrangement with any financial institution
for transferring to the latter theoutstanding in respect of such
financing in their books on a predeterminedbasis. In view of the
time-lag involved in taking-over, thepossibility of a default in
the meantime cannot be ruled out. The norms ofasset
classification
will
have
to
be
followed
by
the
concernedbank/financial institution in whose books the account
stands as balancesheet item as on the relevant date. If the
lending institution observes thatthe asset has turned NPA on
the basis of the record of recovery, it should
be classified accordingly. The lending institution should not
recognizeincome on accrual basis and account for the same
only when it is paid bythe borrower/ taking over institution (if
the arrangement so provides). Thelending institution should
also make provisions against any asset turninginto NPA pending
its takeover by taking over institution. As and when theasset is
taken
over
by
the
taking
over
institution,
the
correspondingprovisions could be reversed. However, the
taking over institution, ontaking over such assets, should make
provisions treating the account asNPA from the actual date of it
becoming NPA even though the accountwas not in its books as
on that date.

52

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 ECGCs cover is
available,EXIM Bank has introduced a guarantee-cum-refinance
programmewhereby, in the event of default, EXIM Bank will pay
the guaranteedamount to the bank within a period of 30 days
from the day the bankinvokes the guarantee after the exporter
has filed claim with ECGC.
Accordingly, to the extent payment has been received from
theEXIM Bank, the advance may not be treated as a nonperforming asset for asset classification and provisioning
purposes.

7.2.3 Export Project Finance:


In respect of export project finance, there could be instances
wherethe actual importer has paid the dues to the bank abroad
but the bank inturn is unable to remit the amount due to
political developments such aswar, strife, UN embargo, etc.
In such cases, where the lending bank is able to establish
throughdocumentary evidence that the importer has cleared
the dues in full bydepositing the amount in the bank abroad
before it turned into NPA in theBooks of the bank, but the
importer's country is not allowing the funds tobe remitted due
to political or other reasons, the asset classification maybe
made after a period of one year from the date the amount
wasdeposited 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 ofre-negotiated terms has worked
satisfactorily for a period of one year.While the existing credit
facilities sanctioned to a unit under rehabilitationpackages
approved by BIFR/term lending institutions will continue to
beclassified as sub-standard or doubtful as the case may be, in
respect
ofadditional
facilities
sanctioned
under
the
rehabilitation
packages,
theIncome
Recognition,
Asset
Classification norms will become applicableafter a period of one
year from the date of disbursement.

53

7.2.5. ROLE OF ARCIL:This empowerment encouraged the three major players in


Indian bankingsystem, namely, State Bank of India (SBI), ICICI
Bank Limited (ICICI) andIDBI Bank Limited (IDBI) to come
together to set-up the first ARC. Arcilwas incorporated as a
public limited company on February 11, 2002 andobtained its
certificate of commencement of business on May 7, 2003.
Inpursuance of Section 3 of the Securitization Act 2002, it holds
a certificateof registration dated August 29, 2003, issued by the
Reserve Bank of India(RBI) and operates 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
InstitutionsAct, 1993 (the "DRT Act").
Arcil is the first ARC in the country to commence business
of resolution ofnon-performing assets (NPAs) upon acquisition
from Indian banks andfinancial institutions. As the first ARC,
Arcil has played a pioneering role insetting standards for the
industry in India.

Unlocking capital for the banking system and the


economy

The primary objective of Arcil is to expedite recovery of


theamounts locked in NPAs of lenders and thereby recycling
capital.Arcil thus, provides relief to the banking system by
managing NPAsand help them concentrate on core banking
activities therebyenhancing shareholders value.

Creating a vibrant market for distressed debt


assets /securities in India offering a trading platform
for Lenders

Arcil has made successful efforts in funneling investment from


bothfrom domestic and international players for funding
theseacquisitions of distressed assets, followed by showcasing
them toprospective buyers. This has initiated creation of a
secondarymarket of distressed assets in the country besides
hastening theirresolution. The efforts of Arcil would lead the
countrys distresseddebt market to international standards.

54

To evolve and create significant capacity in the


system forquicker resolution of NPAs by deploying
the assets optimally

With a view to achieving high delivery capabilities for


resolution,Arcil has put in place a structure aimed at
outsourcing the varioussub-functions of resolution to
specialized agencies, whereverapplicable under the provision of
the Securitization Act, 2002. Arcilhas also encourage, groomed
and developed many such agenciesto enhance its capacity in
line with the growth of its activity.

CHAPTER-8
Data analysis and
interpretation

55

8.

ANALYSIS

For the purpose of analysis and comparison between Public and


private sector banks, We have taken fivebanks from both
sectorsto compare thenon-performing assets of banks. For
understanding we further bifurcate the non-performing assets
in priority sector and non-priority sector, grossNPA 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
competitivemarket. At the end of March 2008, in private sector
ICICI Bank is thehighest deposit-investment-advances figure in
rupees crore, second isHDFC 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 graph we
can see that the Bank ofBaroda and Bank of India are almost
the similar in numbers and DenaBank is stands last in public
sector bank. When we compare theprivate sector banks with
public sector banks, we canunderstand the more number of
people prefer to choose public sectorbanks for depositinvestment.

56

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


comparison among them, year 2008-09.

Private Sector Banks:(Rs in crore)

BANK
AXIS
HDFC
ICICI
KOTAK
INDUSIND

DEPOSIT
87626
100769
244431
16424
19037

INVESTMENT
33705
49394
111454
9142
6630

ADVANCES
59661
63427
225616
15552
12795

TOTAL

468287

210325

377051

57

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:-

BANK
BOB
BOI
DENA
PNB
UBI
TOTAL

DEPOSIT
152034
150012
33943
166457
103859
606305

INVESTMENT
43870
41803
10282
53992
33823
183770

Analysis:-

ADVANCES
106701
113476
23024
119502
74348
437051

In public sector Punjab National Bank depositinvestment-advances


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

58

Comparison between ICICI BANK AND PUNJAB NATIONAL BANK in term of

deposit-investment-advances:BANK

DEPOSIT

INVESTMENT

ADVANCES

ICICI BANK

244431

111454

225616

PNB

166457

53992

119502

Analysis: -Here we

havecompared between ICICI BANK AND PUNJAB

deposit-investment-advances. From the


above figure we can see that ICICI bank deposit and advances
are quite higher than Punjab National Bank. But in case of
Investment ICICI Bank investment amount is doubled than
Punjab National Bank amount.
NATIONAL BANK in term of

59

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 banks 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 quality of the
loans made by banks, net NPA shows the actual burden
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.
Here, there are gross and net NPA data for 2007-08 and 200809 we taken for comparison among banks. These data are NPA
AS PERCENTAGE OF TOTAL 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 highest gross NPA as
a percentage of total assets in the year 2007-08 and also net
NPA. Punjab National Bank shows huge difference between
gross and net NPA. There is an almost same figure between
BOI and BOB.

60

Gross NPA and Net NPA Of different Public Sector banks


in the year 2007-08
BANK

GROSS NPA

NET NPA

BOB

1.46

0.35

BOI

1.48

0.45

DENA

2.37

1.16

PNB

2.09

0.45

UBI

1.82

0.59

Gross NPA and Net NPA Of different Public Sector banks


in the year 2008-09
BANK

GROSS NPA

NET NPA

BOB

1.10

0.27

BOI

1.08

0.33

DENA

1.48

0.56

PNB

1.67

0.38

UBI

1.34

0.10

61

Gross NPA and Net NPA Of different Private Sector banks


in the year 2007-08
BANK

GROSS NPA

NET NPA

AXIS

0.57

0.36

HDFC

0.72

0.22

ICICI

1.20

0.58

KOTAK

1.39

1.09

INDUSIND

1.64

1.31

Gross NPA and Net NPA Of different Private Sector banks


in the year 2008-09
BANK

GROSS NPA

NET NPA

AXIS

0.45

0.23

HDFC

0.68

0.22

ICICI

1.90

0.87

KOTAK

1.55

0.98

62

INDUSIND

1.69

1.25

Comparison of GROSS NPA with Public and Private


sectors banks for the year 2007-08
Comparison ofGROSS NPAwith 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 a healthy 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 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


PRIVATE SECTORS BANKS FOR THE YEAR 2007-08
Comparison ofNET NPAwith all banks for the year2007-08.
Average of these ten banks 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
63

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 sector
than priority sector.
BANK

AGRI

SMALL

OTHERS

PRIORITY

(1)

(2)

(3)

SECTOR

109.12

14.76

86.71

( 1+2+3 )
210.59

HDFC

36.12

110.56

47.70

194.41

709.23

ICICI

981.85

23.35

354.13

1359.34

6211.12

KOTAK

10.00

33.84

4.04

47.87

405.20

INDUSIND

30.44

3.18

30.02

63.64

328.67

TOTAL

1167.53

185.69

522.60

1875.85

7929.28

AXIS

64

NON-PRIORITY

275.06

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
2008-09 than other four banks .
BANK

PRIORITY SECTOR

NPA

BOB

(ADVANCED RS.CRORE )
5469

350

BOI

3269

325

DENA

1160

106

PNB

3772

443

UBI

1924

197

65

But when there are comparison between private bank and


public sector bank still ICICI Bank has more NPA in both priority
and non-priority sector with the comparison of public sector
banks. Large NPA in ICICI Bank because the strategy of bank
that risk-reward attitude and initiative in each sector. Above we
also discuss that ICICI Bank has highest deposit-investmentadvance 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.

SECTOR
PRIORITY
PUBLIC
NON PRT
TOTAL

PUBLIC SECTOR
2007-08
2008-09
22954
490
15158
38602

25287
299
14163
39749

NEW PRIVATE
2007-08
2008-09
1468
3
4800
6271

2080
0
8339
10419

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.

66

ANNEXURE-I
REPORTING FORMAT FOR NPA GROSS AND NET NPA

Name of the Bank:


Position as on
PARTICULARS
1) Gross Advanced *
2) Gross NPA *
3) Gross NPA as %age of Gross Advanced
4) Total deduction( a+b+c+d )
( a ) Balance in interest suspense a/c **
( b ) DICGC/ECGC claims received and held pending
adjustment
67

( c ) part payment received and kept in suspense a/c


( d ) Total provision held ***
5) Net advanced ( 1-4 )
6) Net NPA ( 2-4 )
7) Net NPA as a %age of Net Advance
8) Net NPA as a %age of Net Advance

*excluding Technical write-off of Rs.________crore.


**Banks which do not maintain an interest suspense a/c to park the accrued interest on
NPAs may furnish the amount of interest receivable on NPAs.
***Excluding amount of Technical write-off (Rs.______crore) and provision on standard
assets. (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 128135;


SECURITISATION,
RECONSTRUCTION
AND
ENFORCEMENT OF SECURITY INTEREST.

Websites:68

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

http://www.bankcapitalgroup.net/services-non-performingassets.php

http://rituparnodas.blogspot.com/2009/01/npa-management.html
http://www.finanssivalvonta.fi/en/Statistics/Credit_market/Nonperf
orming_assets/Pages/Default.aspx
http://findarticles.com/p/articles/mi_hb5562/is_200905/ai_n3189646
1/

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