AN OVERVIEW OF INDIAN ECONOMY

India, which has joined the “trillion dollar economy hub”, has seen remarkable economic
growth over the past couple of years. Post the economic liberalization, which began in
1991, the economy has grown at an average rate of 5.5 % and accelerated to an average
of 8 % in past few years. This has made it the second fastest growing economy after
China.

Positive indicators such as consistent 8-9 % annual growth, rise in foreign exchange
reserves of close to USD 200 billion, booming capital market, increasing FDI inflows of
USD 12 billion in this fiscal and over 30 % surge in exports, makes India a leading
destination for foreign investments.

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OVERVIEW OF BANKING INDUSTRY AS A WHOLE
The Indian Banking industry, which is governed by the Banking Regulation Act of India,
1949 can be broadly classified into two major categories, non-scheduled banks and
scheduled banks. Scheduled banks comprise commercial banks and the co-operative
banks. In terms of ownership, commercial banks can be further grouped into nationalized
banks, the State Bank of India and its group banks, regional rural banks and private sector
banks (the old/ new domestic and foreign). These banks have over 67,000 branches
spread across the country.

The first phase of financial reforms resulted in the nationalization of 14 major banks in
1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in
a significant growth in the geographical coverage of banks. Every bank had to earmark a
minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The
manufacturing sector also grew during the 1970s in protected environs and the banking
sector was a critical source. The next wave of reforms saw the nationalization of 6 more
commercial banks in 1980. Since then the number of scheduled commercial banks
increased four-fold and the number of bank branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the
early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete
with the new private sector banks and the foreign banks. The new private sector banks
first made their appearance after the guidelines permitting them were issued in January
1993. Eight new private sector banks are presently in operation. These banks due to their
late start have access to state-of-the-art technology, which in turn helps them to save on
manpower costs and provide better services.

During the year 2000, the State Bank Of India (SBI) and its 7 associates accounted for a
25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks
accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same
period. The share of foreign banks (numbering 42), regional rural banks and other
scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent

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respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in
credit during the year 2000.

Current Scenario

The industry is currently in a transition phase. On the one hand, the PSBs, which are the
mainstay of the Indian Banking system are in the process of shedding their flab in terms
of excessive manpower, excessive non Performing Assets (Npas) and excessive
governmental equity, while on the other hand the private sector banks are consolidating
themselves through mergers and acquisitions.

PSBs, which currently account for more than 78 percent of total banking industry assets
are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from
traditional sources, lack of modern technology and a massive workforce while the new
private sector banks are forging ahead and rewriting the traditional banking business
model by way of their sheer innovation and service. The PSBs are of course currently
working out challenging strategies even as 20 percent of their massive employee strength
has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS)
schemes.

The private players however cannot match the PSB’s great reach, great size and access to
low cost deposits. Therefore one of the means for them to combat the PSBs has been
through the merger and acquisition (M& A) route. Over the last two years, the industry
has witnessed several such instances. For instance, Hdfc Bank’s merger with Times Bank
Icici Bank’s acquisition of ITC Classic, Anagram Finance and Bank of Madura.
Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the
lookout. The UTI bank- Global Trust Bank merger however opened a pandora’s box and
brought about the realization that all was not well in the functioning of many of the
private sector banks.

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Private sector Banks have pioneered internet banking, phone banking, anywhere banking,
mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various
other services and integrated them into the mainstream banking arena, while the PSBs are
still grappling with disgruntled employees in the aftermath of successful VRS schemes.
Also, following India’s commitment to the W To agreement in respect of the services
sector, foreign banks, including both new and the existing ones, have been permitted to
open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation
of 8 branches.

Talks of government diluting their equity from 51 percent to 33 percent in November

2000 has also opened up a new opportunity for the takeover of even the PSBs. The FDI
rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking
the M& A route to acquire willing Indian partners.

Meanwhile the economic and corporate sector slowdown has led to an increasing number
of banks focusing on the retail segment. Many of them are also entering the new vistas of
Insurance. Banks with their phenomenal reach and a regular interface with the retail
investor are the best placed to enter into the insurance sector. Banks in India have been
allowed to provide fee-based insurance services without risk participation, invest in an
insurance company for providing infrastructure and services support and set up of a
separate joint-venture insurance company with risk participation

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Aggregate Performance of the Banking Industry

Aggregate deposits of scheduled commercial banks increased at a compounded annual

average growth rate (Cagr) of 17.8 percent during 1969-99, while bank credit expanded
at a Cagr of 16.3 percent per annum. Banks’ investments in government and other
approved securities recorded a Cagr of 18.8 percent per annum during the same period.

In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP) growth of
only 6.0 percent as against the previous year’s 6.4 percent. The WPI Index (a measure of
inflation) increased by 7.1 percent as against 3.3 percent in FY00. Similarly, money
supply (M3) grew by around 16.2 percent as against 14.6 percent a year ago.

The growth in aggregate deposits of the scheduled commercial banks at 15.4 percent in
FY01 percent was lower than that of 19.3 percent in the previous year, while the growth
in credit by SCBs slowed down to 15.6 percent in FY01 against 23 percent a year ago.

The industrial slowdown also affected the earnings of listed banks. The net profits of 20
listed banks dropped by 34.43 percent in the quarter ended March 2001. Net profits grew
by 40.75 percent in the first quarter of 2000-2001, but dropped to 4.56 percent in the
fourth quarter of 2000-2001.

On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the
norms, it was a feat achieved with its own share of difficulties. The CAR, which at
present is 9.0 percent, is likely to be hiked to 12.0 percent by the year 2004 based on the
Basle Committee recommendations. Any bank that wishes to grow its assets needs to also
shore up its capital at the same time so that its capital as a percentage of the risk-weighted
assets is maintained at the stipulated rate. While the IPO route was a much-fancied one in
the early ‘90s, the current scenario doesn’t look too attractive for bank majors.

Consequently, banks have been forced to explore other avenues to shore up their capital
base. While some are wooing foreign partners to add to the capital others are employing

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the M& A route. Many are also going in for right issues at prices considerably lower than
the market prices to woo the investors.

Interest Rate Scene

The two years, post the East Asian crises in 1997-98 saw a climb in the global interest
rates. It was only in the later half of FY01 that the US Fed cut interest rates. India has
however remained more or less insulated. The past 2 years in our country was
characterized by a mounting intention of the Reserve Bank Of India (RBI) to steadily
reduce interest rates resulting in a narrowing differential between global and domestic
rates.

The RBI has been affecting bank rate and CRR cuts at regular intervals to improve
liquidity and reduce rates. The only exception was in July 2000 when the RBI increased
the Cash Reserve Ratio (CRR) to stem the fall in the rupee against the dollar. The steady
fall in the interest rates resulted in squeezed margins for the banks in general.

Governmental Policy

After the first phase and second phase of financial reforms, in the 1980s commercial
banks began to function in a highly regulated environment, with administered interest
rate structure, quantitative restrictions on credit flows, high reserve requirements and
reservation of a significant proportion of lendable resources for the priority and the
government sectors. The restrictive regulatory norms led to the credit rationing for the
private sector and the interest rate controls led to the unproductive use of credit and low
levels of investment and growth. The resultant ‘financial repression’ led to decline in
productivity and efficiency and erosion of profitability of the banking sector in general.

This was when the need to develop a sound commercial banking system was felt. This
was worked out mainly with the help of the recommendations of the Committee on the
Financial System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector
reforms called for interest rate flexibility for banks, reduction in reserve requirements,

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and a number of structural measures. Interest rates have thus been steadily deregulated in
the past few years with banks being free to fix their Prime Lending Rates(PLRs) and
deposit rates for most banking products. Credit market reforms included introduction of
new instruments of credit, changes in the credit delivery system and integration of
functional roles of diverse players, such as, banks, financial institutions and non-banking
financial companies (Nbfcs). Domestic Private Sector Banks were allowed to be set up,
PSBs were allowed to access the markets to shore up their Cars.

Implications Of Some Recent Policy Measures

The allowing of PSBs to shed manpower and dilution of equity are moves that will lend
greater autonomy to the industry. In order to lend more depth to the capital markets the
RBI had in November 2000 also changed the capital market exposure norms from 5
percent of bank’s incremental deposits of the previous year to 5 percent of the bank’s
total domestic credit in the previous year. But this move did not have the desired effect,
as in, while most banks kept away almost completely from the capital markets, a few
private sector banks went overboard and exceeded limits and indulged in dubious stock
market deals. The chances of seeing banks making a comeback to the stock markets are
therefore quite unlikely in the near future.

The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent
during the first quarter of this fiscal came as a welcome announcement to foreign players
wanting to get a foot hold in the Indian Markets by investing in willing Indian partners
who are starved of networth to meet CAR norms. Ceiling for FII investment in
companies was also increased from 24.0 percent to 49.0 percent and have been included
within the ambit of FDI investment.

The abolishment of interest tax of 2.0 percent in budget 2001-02 will help banks pass on
the benefit to the borrowers on new loans leading to reduced costs and easier lending
rates. Banks will also benefit on the existing loans wherever the interest tax cost element

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has already been built into the terms of the loan. The reduction of interest rates on various
small savings schemes from 11 percent to 9.5 percent in Budget 2001-02 was a much
awaited move for the banking industry and in keeping with the reducing interest rate
scenario, however the small investor is not very happy with the move.

Some of the not so good measures however like reducing the limit for tax deducted at
source (TDS) on interest income from deposits to Rs 2,500 from the earlier level of Rs
10,000, in Budget 2001-02, had met with disapproval from the banking fraternity who
feared that the move would prove counterproductive and lead to increased fragmentation
of deposits, increased volumes and transaction costs. The limit was thankfully partially
restored to Rs 5000 at the time of passing the Finance Bill in the Parliament.

April 2001-Credit Policy Implications

The rationalization of export credit norms in will bestow greater operational flexibility on
banks, and also reduce the borrowing costs for exporters. Thus this move could trigger
exports growth in the future. Banks can also hope to earn increased revenue with the
interest paid by RBI on CRR balances being increased from 4.0 percent to 6.0 percent.

The stock market scam brought out the unholy nexus between the Cooperative banks and
stockbrokers. In order to usher in greater prudence in their operations, the RBI has barred
Urban Cooperative Banks from financing the stock market operations and is also in the
process of setting up of a new apex supervisory body for them. Meanwhile the foreign
banks have a bone to pick with the RBI. The RBI had announced that forex loans are not
to be calculated as a part of Tier-1 Capital for drawing up exposure limits to companies
effective 1 April 2002. This will force foreign banks either to infuse fresh capital to
maintain the capital adequacy ratio (CAR) or pare their asset base. Further, the RBI has
also sought to keep foreign competition away from the nascent net banking segment in
India by allowing only Indian banks with a local physical presence, to offer Internet
banking

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Crystal Gazing
On the macro economic front, GDP is expected to grow by 6.0 to 6.5 percent while the
projected expansion in broad money (M3) for 2001-02 is about 14.5 percent. Credit and
deposits are both expected to grow by 15-16 percent in FY02. India's foreign exchange
reserves should reach US$50.0 billion in FY02 and the Indian rupee should hold steady.

The interest rates are likely to remain stable this fiscal based on an expected downward
trend in inflation rate, sluggish pace of non-oil imports and likelihood of declining global
interest rates. The domestic banking industry is forecasted to witness a higher degree of
mergers and acquisitions in the future. Banks are likely to opt for the universal banking
approach with a stronger retail approach. Technology and superior customer service will
continue to be the imperatives for success in this industry.

Public Sector banks that imbibe new concepts in banking, turn tech savvy, leaner and
meaner post VRS and obtain more autonomy by keeping governmental stake to the
minimum can succeed in effectively taking on the private sector banks by virtue of their
sheer size. Weaker PSU banks are unlikely to survive in the long run. Consequently, they
are likely to be either acquired by stronger players or will be forced to look out for other
strategies to infuse greater capital and optimize their operations.

Foreign banks are likely to succeed in their niche markets and be the innovators in terms
of technology introduction in the domestic scenario. The outlook for the private sector
banks indeed looks to be more promising vis-à-vis other banks. While their focused
operations, lower but more productive employee force etc will stand them good, possible
acquisitions of PSU banks will definitely give them the much needed scale of operations
and access to lower cost of funds. These banks will continue to be the early technology
adopters in the industry, thus increasing their efficiencies. Also, they have been amongst
the first movers in the lucrative insurance segment. Already, banks such as ICICI Bank
and HDFC Bank have forged alliances with Prudential Life and Standard Life
respectively. This is one segment that is likely to witness a greater deal of action in the
future. In the near term, the low interest rate scenario is likely to affect the spreads of

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majors. This is likely to result in a greater focus on better asset-liability management
procedures. Consequently, only banks that strive hard to increase their share of fee-based
revenues are likely to do better in the future.

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 JUSTIFICATION

In the present scenario as its very easy to file for a loan and getting it in a very short span
of time. Due to this many people or most of the society today is keenly interested in
taking loan. As again tax on the loans are laid off due to which again the society is highly
interested in loan, as a result of it the fraud in the loan departments of the banks are
increasing. And due to this the Non Performing Assets are increasing. This again results
in the huge problems as in the case of recovery or managing the NPA.

No doubt RBI has made various Norms and guidelines to control and minimize this like
SARFAESI Act and OTS system but still as the advances are increasing at the higher
rate, therefore it is becoming now a days a difficult task to control NPAs.

I in the report using the SARFAESI act and OTS tries to justify my project and using
various tables and financial statements showed the trends of NPAs in HDFC and other
banks.

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 LITERATURE REVIEW

1. Economic an political weekly, October 16, 2004, CARLTON PEREIRA,

Pg 4602-4604 “INVESTING IN NPAs”.

2. THE TREASURY MANAGEMENT,DECEMBER 2004,vinay kumar,

Pg 62-66”securitisation:issues and perspectives”

At The Global Level, SECURITISATION is becoming more popular among FIs.

It is meant to avoid disparity between assets and liabilities of banks/Fis. In order to
promote securitisation in India RBI has constituted a working group on assets
securitisation. Though securitisation is in a nascent stage, it holds great promise in
areas like infrastructure, power and housing.

3. Chartered Secretary, February 2003, V.S.Datey, Pg. 128-135 “THE SARFAESI

ACT”

The securities and reconstruction of financial assets and enforcement of security

interest act, 2002 made effective on 21.6.2002 is a step to reduce NPAs of Banks. The act
also makes provision for asset reconstruction and securitisation.

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 COMPANY PROFILE

HISTORY OF HDFC BANK LTD.

The Housing Development Finance Corporation Limited (HDFC) was amongst the first
to receive an ‘in principle’ approval from the Reserve Bank of India (RBI) to set up a
Bank in the private sector, as part of the RBI’s liberalization of the Indian Banking
Industry in 1994. The Bank was incorporated in August 1994 in the name of ‘HDFC
Bank Limited’, with its registered office in Mumbai, India. HDFC Bank commenced
operations as a Scheduled Commercial Bank in January 1995.

Headquarters : Mumbai, India

Industry : Banking, Insurance, Capital Markets and allied industries.

Products : Financial Services

Website : www.hdfcbank.com

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PROMOTER

HDFC is India’s premier housing finance company and enjoys an impeccable track
record in India as well as in international markets. Since its inception in 1977, the
Corporation has maintained a consistent and healthy growth in its operations to remain
the market leader in mortgages. Its outstanding loan portfolio covers well over a million
dwelling units. HDFC has developed significant expertise in retail mortgage loans to
different market segments and also has a large corporate client base for its housing
related credit facilities. With its experience in the financial markets, a strong market
reputation, large shareholder base and unique consumer franchise, HDFC was ideally
positioned to promote a Bank in the Indian environment.

BUSINESS FOCUS

HDFC Bank’s mission is to be a World- Class Indian Bank. The objective is to build
sound customer franchises across distinct business so as to be the preferred provider of
Banking services for target retail and wholesale customer segments and to achieve
healthy growth in profitability, consistent with the Bank’s risk appetite. The bank is
committed to maintain the highest level of ethical standards, professional integrity,
corporate governance and regulatory compliance. HDFC Bank’s business philosophy is
based on four core values – Operational Excellence, Customer Focus, Product Leadership
and People.

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OBJECTIVES OF THE BANK

• Follow good, fair and transparent business practices by setting reasonable

standards;

• Relate to the customer in such a manner so as to promote a fair and cordial

relationship;

• To be applicable to all persons using the Products and Services of the company in
any manner by any mode.

• The code is based on ethical principles of integrity and transparency and all
actions and dealings shall follow the spirit of the Code.

DISTRIBUTION NETWORK

HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network
of over 1412 branches spread over 528 cities across India. All branches are linked on an
online real-time basis. The Bank’s expansion plans take into account the need to have a
presence in all major industrial and commercial centers where its corporate customers are
located as well as the need to build a strong retail customer base for both deposits and
loan products. Being a clearing/settlement Bank to various stock exchanges, the Bank has
branches in the centers where the NSE/BSE has a strong and active member base.

The Bank also has a network of about over 3295 networked ATMs across the
cities. Moreover, HDFC Bank’s ATM network can be accessed by al domestic and
international Visa/Master Card, Visa Electron/ Maestro, Plus/Cirrus and American
Express Credit/ Charge cardholders.

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MANAGEMENT

Mr. Jagdish Capoor took over as the Bank’s Chairman in July 2001. Prior to this, Mr.
Capoor was a deputy Governor of the Reserve Bank of India.

The Managing Director, Mr. Aditya Puri has been a professional Banker for over 25
years and before joining HDFC Bank in 1994 was heading Citi Bank’s operations in
Malaysia.

The Bank’s Board of Directors is composed of eminent individuals with a wealth of

experience in public policy, administration, industry and commercial Banking. Senior
executives representing HDFC are also on the board.

Senior Banking professionals with substantial experience in India and abroad head
various businesses and functions and report to the Managing Director. Given the
professional expertise of the Management Team and the overall focus on recruiting and
retaining the best talent in the industry, the Bank believes that its people are a significant
competitive strength.

The composition of the board of Directors of the Bank is governed by the Companies Act
1956, the Banking Regulation Act 1949 and the listing requirements of the Indian Stock
Exchanges where securities issued by the Bank are listed. The Board has strength of 12
Directors as on March 31, 2008. All Directors other than Mr. Aditya Puri, Mr. Harish
Engineer and Mr. Paresh Sukthankar are non-executives directors. The Bank consists of
eminent persons with considerable professional expertise and experience in Banking,
Finance, Agriculture, Small-scale industries and other related fields.

None of the Directors on the Board is a Member of more than 10 Committees and
Chairman of more than 5 committees across all the companies in which he/she is a
director. All the Directors have made necessary disclosures regarding committee
positions occupied by them in other companies.

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TECHNOLOGY

HDFC Bank operates in a highly automated environment in terms of information

technology and communication systems. All the Bank’s branches have online
connectivity, which enables the Bank to offer speedy funds transfer facilities to its
customers. Multi-branch access is also provided to retail customers through the branch
network and Automated Teller Machines (ATMs).

The Bank has made substantial efforts and investments in acquiring the best technology
available internationally, to build the infrastructure for a world class Bank. The Bank’s
business is supported by scalable and robust systems, which ensure that our clients
always get the finest services we offer.

The Bank has prioritized its engagement in technology and the Internet as one of its key
goals and has already made significant progress in web-enabling its core businesses. In
each of its businesses, the Bank has succeeded in leveraging its market position, expertise
and technology to create a competitive advantage and build market share.

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BUSINESSES

Wholesale Banking Services

The Bank’s target market ranges from large, blue-chip manufacturing companies in the
Indian corporate to small & mid-sized corporate and agri-based businesses. For these
customers, the Bank provides a wide range of commercial and transactional Banking
services, including working capital finance, trade services, transactional services, cash
management etc. The Bank is also a leading provider of structured solutions, which
combine cash management services with vendor and distributor finance for facilitating
superior supply chain management services with vendor and distributor finance for
facilitating superior supply chain management for its corporate customers. Based on its
superior product delivery / service levels and strong customer orientation, the Bank has
made significant inroads into the Banking consortia of a number of leading Indian
corporate including multinationals, companies from the domestic business houses and
prime public sector companies. It is recognized as a leading provider of cash management
and transactional Banking solutions to corporate customers, mutual funds, stock
exchange members and Banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range of
financial products and Banking services, giving the customer a one-stop window for all
his/her Banking requirements. The products are backed by world-class service and
delivered to customers through the growing branch network, as well as through
alternative delivery channels like ATMs, Phone Banking, Net Banking and Mobile
Banking.

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank Plus
and the Investment Advisory Services programs have been designed keeping in mind
needs of customers who seek distinct financial solutions, information and advice on
various investment avenues. The bank also has a wide array of retail loan products

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including Auto Loans, Loans against marketable securities, Personal Loans and Loans for
Two-wheelers. It is also a leading provider of Depository Participant (DP) services for
retail customers, providing customers the facility to hold their investments in electronic
form.

HDFC Bank was the first Bank in India to launch an International Debit Card in
association with VISA (VISA Electron) and issues the Master Card Maestro debit card as
well. The bank lunched its credit card business in late 2001. By March 2009, the bank
had a total card base (debit and credit cards) of over 13 million. The bank is also one of
the leading players in the “merchant acquiring” business with over 70000 Point-of-scale
(POS) terminals for debit / credit cards acceptance at merchant establishments. The bank
is well positioned as a leader in various net based B2C opportunities including a wide
range of internet banking services for Fixed Deposits, Loans, Bill Payments etc.

Treasury

Within this business, the bank has three main product areas – Foreign Exchange and
Derivatives, Local Currency Money Market & Debt Securities and Equities. With the
liberalization of the financial markets in India, corporate need more sophisticated risk
management information, advice and product structures. These and fine pricing on
various treasury products are provided through the Bank’s Treasury team. To comply
with statutory reserve requirements, the bank is required to hold 25% of its deposits in
govt. securities. The treasury business is responsible for managing the returns and market
risk on this investment portfolio.

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 OBJECTIVE OF THE STUDY

• To study how the Non-Performing Assets (NPA) are being managed in HDFC
Bank on the basis of various guidelines.
• To know the share of NPA with respect to the Advances.
• To find out the trends of NPAs in HDFC Bank.

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 RESEARCH METHODOLOGY

In the recent years the financial system especially the banks have undergone numerous
changes in the form of reforms, regulations & norms. The attempt here is to see how
various ratios have been used and interpreted to reveal a bank’s performance and how
this particular model encompasses a wide range of parameters making it a widely used
and accepted model in today’s scenario.

Here, we are under going to have descriptive research of how the NPA
Management is done in HDFC Bank and to know the trends of NPAs with the help of
financial statements to know the financial position.

Here, we will be using financial statements of the bank in order to know the different
ratios related to NPA.

We have taken secondary data. Secondary data on the subject was collected from
bank’s prospectus, annual reports and other websites.

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ASSETS CLASSIFICATION

Advances are classified under two broad categories :

• Performing (Standard)
• Non Performing (Sub-standard, Doubtful and Loss).

The criteria for classifying the accounts under various asset categories based on the
period for which the asset has remained non-performing and the reliability of the dues:

5.1 PERFORMING

Standard Asset : Standard Asset is one which does not disclose any problem and does
not carry more than normal risk attached to the business. These are performing assets.

5.2 NON PERFORMING (Sub-standard, Doubtful & Loss)

5.2.1 Sub-Standard

A sub-standard asset is one, which has remained NPA for a period less than or
equal to 12 months.

In such cases, the current net worth of the borrower/guarantor or the current market value
of the security charged is not enough to ensure recovery of the dues to the bank in
full. Such an asset will have well defined credit weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the bank will
sustain some loss, if deficiencies are not corrected.

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5.2.2 Doubtful

An asset is classified as doubtful if it has remained in the sub- standard category for
12 months.

A loan classified as doubtful has all the weaknesses inherent in that 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.

5.2.3 Loss Assets

5.2.3.1 A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI Inspectors but the amount has not been written off, wholly
or partly. If the realizable value of the security as assessed by the bank/ approved valuer/
RBI is less than 10% of the outstanding in the borrowable accounts, the existence of
security should be ignored and the asset should be straightaway classified as loss asset.
The unsecured exposure identified as sub standard is the only exception.

5.3.3.2 In respect of accounts where there are potential threats to recovery on account of
erosion in the value of security or non availability of security and existence of other
factors such as frauds committed by borrowers, it will not be prudent to classify them
first as sub-standard and then as doubtful after expiry of 12months from the date the
account has become NPA. In such cases, the account should be straightaway
classified as doubtful asset or loss asset as appropriate irrespective of the period for
which it has remained as NPA.

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MANAGEMENT OF NON-PERFORMING ASSETS

1. Non-Performing Assets (NPA) act as drag on bank's profitability and need urgent
attention at all levels.
Branches do not charge and take interest on non-performing assets (NPAs) to income
account, till it is actually realized. An asset will become non-performing when it ceases
to generate income for the bank. In other words, it should not be recognized on accrual
basis but is booked as income only when it is actually received.

3. IDENTIFICATION OF NPAs

The basis for treating a credit facility as NPA is given below:

3.1 Term Loan

Term loan account will be treated as NPA if interest and/or installment of principal
remain overdue for a period of more than 90 days.

3.2. Cash Credits and Overdrafts

3.2.1 A cash credit or overdraft account will be treated as NPA if the account remains out
of order for a period of more than 90 days. An account is treated as “out of order” if any
of the following conditions is satisfied:

a. The outstanding balance remains continuously in excess of the sanctioned

limit/drawing power.

b. Though the outstanding balance is less than the sanctioned limit/drawing power but
there are no credits continuously for 90 days as on the date of balance sheet or credits are
not enough to cover the interest debited during the same period.

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3.2.2 Branches should ensure that drawings in the working capital accounts are covered
by the adequacy of current assets, since current assets are first appropriated in times of
distress. Considering the practical difficulties of large borrowers, stock statements relied
upon by the banks for determining drawing power should not be older than three months.
The outstanding in the account based on drawing power calculated from stock statements
older than three months, would be deemed as irregular. A working capital borrowal
account will become NPA if such irregular drawings are permitted in the account for a
continuous period of 90 days even though the unit may be working or the borrower’s
financial position is satisfactory.

3.2.3 Regular and adhoc credit limits need to be reviewed / regularised not later than
three months from the due date/date of adhoc sanction. In case of constraints such as
non-availability of financial statements and other data from the borrowers, the branch
should furnish evidence to show that renewal/ review of credit limits is already on and
would be completed soon. In any case, delay beyond six months is not considered
desirable as a general discipline. Hence, an account where the regular/ adhoc credit
limits have not been reviewed/renewed within 180 days from the due date/date of adhoc
sanction will be treated as NPA.

3.3 Bills Purchased and Discounted

The bills purchased/discounted account should be treated as NPA if the bill remains
overdue for a period of more than 90 days.
Note : Branches classify an account as NPA only if the interest charged during any
quarter is not serviced fully within 90 days from the end of the quarter.

Overdue : Amount due to the bank under any credit facility is overdue, if it is not paid on
the due date fixed by the Bank.

4. General Guidelines

25
4.1 Reversal of Interest

a. When a credit facility is classified NPA the entire interest charged & credited to the
income account in the past periods, should be reversed by debiting Profit and Loss
Account and crediting to respective accounts, if the same is not realized. Such interest be
recorded in the Memoranda Account. Necessary accounting entries are passed at the
close of the Quarter at the branch level in all the newly identified NPA accounts.

b. Fees and commission earned by Bank as a result of renegotiations or re-scheduling of

outstanding debts should be recognized on accrual basis over the period of time
covered by the re-negotiated or rescheduling extensions of credit.

4.2 Advances against FDR/NSCs/KVP/IVP/LIP

Advances against Term Deposits, NSCs eligible for surrender, Indira Vikas Patras,
Kisan Vikas Patras and Life Insurance Policies, need not be treated as NPAs although
interest thereon has not been paid for 90days provided adequate margin is available in
the accounts.

4.3 Advances guaranteed by Central Government & State Government

4.3.1 Advances guaranteed by Central Government

The credit facility backed by the Central Government Guarantee though overdue may be
treated as NPA only when the Government repudiates its guarantee when invoked.
This exemption from classification of Government guaranteed advances as NPA is not
for the purpose of recognition of income.

4.3.2 Advances guaranteed by State Government:

A state Government guaranteed advance, where interest and/or installment of
principal/or any other amount due to the bank remains overdue for a period more than 90
days shall become a non performing advance.

26
4.4 Agriculture Advances
A loan granted for short duration crops is treated as NPA, if the installment of principal
or interest thereon remains overdue for two crop seasons. A loan granted for long
duration crops is treated as NPA, if the installment of principal or interest thereon
remains overdue for one crop season. For the purpose of these guidelines, “long duration”
crops with crop season longer than one year and crops, which are not “long duration”
crops treated as “short duration” crops. The crop season for each crop, which means the
period up to harvesting of the crops raised, would be as determined by the State Level
Bankers’ Committee in each State. Depending upon the duration of crops raised by an
agriculturist, the above NPA norms would also be made applicable to agricultural term
loans availed of by him. The above norms should be made applicable to all direct
agricultural advances as listed in SAMD Circular on Income Recognition Asset
Classification & Provisioning norms.

4.8 Project Finance –Moratorium for interest payment

In case of bank finance given for industrial projects or for agricultural plantations,
etc. where moratorium is available for payment of interest, payment of interest
becomes `due' only after the moratorium or gestation period is over. Therefore, such
amounts of interest do not become `overdue' and hence NPA with reference to the
date of debit of interest. They become overdue after due date for payment of interest, if
uncollected. Similarly in case of housing loans or similar advances granted to staff
members where interest is payable after recovery of principal, interest need not be
considered as overdue . Such loans/ advances should be classified as NPA only when
there is default in payment of interest ( 90days’ overdue from due date of
payment.).

4.9 Consortium Advances

In respect of consortium advances, each bank may classify the borrowal accounts
according to its own record of recovery and other aspects having a bearing on the
recoverability of the advances, as in the case of multiple banking arrangement. Where
the remittances by the borrower under consortium lending arrangements are pooled with

27
one bank and /or where the bank receiving remittances is not parting with the share of
other member banks, the account will be treated as not serviced in the books of the other
member banks and therefore, be treated as NPA. The banks participating in the
consortium should, therefore, arrange to get their share of recovery transferred from the
lead bank or get an express consent from the bank for the transfer of their share of
recovery, to ensure proper asset classification in their respective books.

4.10 Classification of NPA straightaway as a doubtful in case of serious credit

impairment :
The extant instructions provides that a NPA need not go through the various stages of
classification in case of serious credit impairment and such assets should be straightaway
classified as a doubtful/loss as appropriate. Erosion in the value of security can be
reckoned as significant when the realisable value of the security is less than 50 percent of
the value assessed by the bank or accepted by RBI at the time of last inspection, as the
case may be. Such NPAs may be straightaway classified under doubtful category and
provisioning should be made as applicable to doubtful assets.

4.13 Export Project Finance:

In respect of export project finance, there could be instances where the actual importer
has paid the dues to the bank abroad but the bank in turn is unable to remit the amount
due to political developments such as, war, strife, UN embargo, etc. In such cases, where
the lending bank is able to establish through documentary evidence that the importer has
cleared the dues in full by depositing the amount in the bank abroad before it turned into
NPA in the books of the bank, but the importer’s country is not allowing the funds to be
remitted due to political or other reasons, the asset classification may be made after a
period of one year from the date the amount was deposited by the importer in the bank
abroad.

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4.14 LEASED ASSETS
In respect of leased assets the "Guidance Note on Accounting for Leases" issued by the
Institute of Chartered Accountants of India (ICAI) should be followed. Instructions
regarding Income Recognition Asset Classification & Provisioning on Leased assets
issued by HO (SAMD) are to be followed.

29
10. PROVISIONING

10.1 Loss Assets

In case of Loss Assets 100% of the outstanding should be provided for regardless of
security.

10.2 Doubtful Assets

10.2.1 100% 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.

10.2.2 Over and above the provision against shortfall as mentioned above, depending
upon the period for which the asset has remained doubtful, 20%, 30% & 100% of the
secured portion (i.e. estimated realisable value of the outstandings) on the following
basis:-
Period for which the advance has been
considered as doubtful %age of provision

- Upto one year 20

- One to three years 30
- More than three years 100

10.3 Sub-standard

10.3.1 A general provision of 10% of total outstandings. While calculating provisions,

DICGC/ECGC /CGTSI cover is not to be deducted from the outstanding balance.

30
10.3.2 The ‘Unsecured Exposure’ which are identified as substandard would attract
additional provision of 10% i.e. total of 20% on the outstanding balance. Unsecured
exposure is defined as an exposure where the realisable value of the security, as assessed
by the bank/ approved valuers/ Reserve Bank’s Inspecting Officers, is not more than
10%, abinitio, of the outstanding exposure. Exposure shall include all funded and non-
funded exposures (including underwriting and similar commitments). Security will mean
tangible security properly discharged to the bank and will not include intangible
securities like guarantees, comfort letters etc.

10.4 Standard Assets

A general Provision @ 0.25% of the direct advances to Agricultural & SME sectors, 1%
of Commercial Real Estate Sector and 0.40% for all other advances (to be made at HO).

10.5 Provisioning norms for Sale of Financial Assets to Securitisation Company &
Reconstruction Company:

10.5.1 In case any sale of NPAs has been made to Asset Reconstruction Companies
(ARCs) in terms of the extant policy of the bank, following guidelines should be
strictly complied with:

• If the sale to Securitisation Company/Reconstruction Company is at a price below the

net book value (NBV) (i.e., book value less provisions held), the shortfall should be
debited to the profit and loss account of that year

• If the sale is for a value higher than the NBV, the excess provision will not be reversed
but will be utilized to meet the shortfall / loss on account of sale of other financial assets
to Securitisation Company/Reconstruction Company.”

10.5.2 With a view to bring down divergence arising out of difference in assessment of
the value of security in cases of high value NPAs, following instructions be strictly
followed:

31
a) The current assets and their valuation are looked into at the time of Statutory Audit.
However, in order to enhance the reliability on stock valuations, stock audit at annual
intervals by external agencies appointed as per bank’s extant guideline, be got done.
b) Collateral such as immovable properties charged in favour of the bank should be got
valued once in three years by valuers appointed in terms of guidelines conveyed through
extant L & A Circulars .

10.5.3 The branches while getting the valuation of IPs charged / mortgaged to the bank,
from approved valuer must take the Market and Realisable Value of the property
separately. While getting the value of securities assessed by approved valuers,
valuation report should clearly specify the assumptions/ circumstances for having
arrived at the given realisable value. In case there is substantial variation in the realizable
value of charged security(ies) now being reported and as reported at the last time/ last
sanction or renewal , reasons for the same should be clearly spelt out . preferably the
earlier valuations may also be co-related / commented in the latest valuation report. In
case of Plant & Machinery, the valuation report should only mention the
realisable value.

11. In order to ensure proper asset classification & provisioning and to settle the
doubts in asset classification due to any reason, promptly, within a specified time
period, the following system/ channel is to be followed by the field functionaries:

32
FUNCTIONARIES RESPONSIBLE FOR PROPER ASSET CLASSIFICATION
/PROVISIONING IN LOAN ACCOUNTS

Category of Loan Accounts Responsibility & validation level for

proper asset classification

Loan Accounts of Rs.10 lac & above Circle Head (under intimation to HO)

Incumbents of LCBs/MCBs jointly with

the Concurrent Auditor wherever posted
(under intimation to Circle Head)

Loan Accounts of below Rs.10 Lakhs Incumbents of Branches jointly with

the Concurrent auditor wherever posted.

In other branches Incumbent Incharge

jointly with the Incharge of Loan
department

12. ACCOUNTING PROCEEDURE

12.1 In all accounts identified as NPAs including Govt. guaranteed accounts under
standard assets, future interest is to be recorded only. It should be calculated,
checked and recorded under authentication of the concerned official. Further, in NPA
accounts (except where operations are allowed under tagging arrangement & accounts
covered under Credit Guarantee scheme) including A/Cs under P.A category, expenses
like Insurance Premium, Stamp Duty, Legal Expenses, Emoluments paid to the Godown
Keeper or such other expenses incurred for safeguarding the interest of the bank should

33
not be debited to the concerned NPA account. Instead, such expenses should be charged
to revenue and recorded in the NPA/PA Memoranda Account. The same may be claimed
by the branch from the borrower at the time of filing the suit or entering into Negotiated
Settlement. If recovered, the same may be taken to revenue at the time of recovery’.

12.2 In NPA Accounts where operations are allowed as per the tagging arrangement
by the competent authority, such charges be debited to respective NPA accounts. In
other words such charges debited to the account may be recovered in addition to tagging.

12.3 All NPA accounts, other than Protested Advances category should be transferred to
a separate ledger to be called "NPA ledger" by passing necessary transfer vouchers.

12.4 In order to keep a proper control on NPA accounts and unrealised interest
reversed, branches have to maintain a CONTROL REGISTER which should contain
the details of interest unrealized (year-wise) & follow the instructions given below:

a) Separate accounts shall be opened for each facility of NPA accounts.

b) Depending upon the number of NPA accounts at each branch, as far as possible,
separate registers may be started for each year with separate openings facility-wise.

c) The registers called as NPA registers shall be duly entered in the current record
register of the Branch Office.

d) The registers shall be kept under the custody of the Incumbent Incharge.

12.5 NPA Ledgers are to be maintained facility-wise. Thus for CC there will be a
separate ledger to be called CC - NPA Ledger, for Term Loan, a separate ledger to be
called TL-NPA Ledger and so on.

34
12.6 The outstanding balance in the account as on date of transfer shall be the opening
debit entry in the Ledger Section. Thereafter all debits and credits are to be entered
and no entry in respect of recorded interest is to be entered in this section.

12.7 The outstanding balance in the account as on date of transfer shall be the
opening debit entry in the Memoranda Records Section. Thereafter, the interest on
quarterly/half-yearly rests, as the case may be, shall be calculated and posted. All other
debit and credit vouchers as are entered in the Ledger Section shall also be entered in the
Memoranda Record Section.

12.8 Ledger Section of NPA Ledger shall reflect balance outstanding without interest
element; and the Memoranda Record Section of NPA Ledger shall reflect balance
outstanding inclusive of recorded interest.

12.9 In case any transaction has taken place in terms of bank’s extant policy for transfer/
sale of financial assets to Securitisation Companies/ Reconstruction Companies under the
SARFAESI ACT2002, RBI’s mandatory requirements of disclosure in the Notes on
Accounts in Balance sheet should be complied with. Circle Office should compile the
statement of such account where transaction taken place during the review period and
send to SAMD, HO duly authenticated/ audited by Statutory Auditors for incorporating
in the Note on accounts of the balance sheet .

13. RECORDING OF INTEREST

13.1 In NPA/PA accounts no interest is to be debited in the account. However, the

interest should be calculated/checked as usual and recorded separately as Memoranda.
No voucher is to be passed for interest so calculated/recorded.

13.2 Interest should be recorded strictly as per applicable rate in terms of sanction/Loans
& Advances circulars issued from time to time.

35
13.3 Penal Interest Is Not To Be Charged/Recorded In Protested Advance Accounts

13.4 Interest mechanism for NPA accounts in CBS as informed by ITD is as under:
“There are 3 parameters which are required to be set in the CBS for interest application in
loan accounts. They are :

Interest Accrual: Calculation of interest without passing any vouchers.

Interest Booking: Passing of revenue related vouchers (i.e. Debiting Interest Accrued
Accounts and crediting Revenue Head)

Interest Collection: Collection of interest amount by debiting the loan account and
crediting the concerned Interest Accrued Account.

36
14. LIMITATION

14.1 Care must be taken that the Bank's right to sue the borrowers/obligants for recovery
of bank’s dues in NPA/PA accounts do not become time-barred. In order to watch
limitation, the Incumbents Incharge should get the list of accounts on monthly basis from
CBS where limitation is expiring within 6 months and ensure that limitation is kept alive
in all cases.

14.2 The Incumbent Incharge should ensure that the suits are filed well within the
limitation. Reference in this regard may be made to the instructions contained in the
chapters on Documentation and Limitation.

14.3 The period/limitation for which a reference is pending before BIFR/AAIFR has to
be excluded from the computation of period of limitation. Further, during such pendency
before BIFR/AAIFR, suit/legal proceedings can only be filed with consent of BIFR/
AAIFR. Hence in BIFR/AAIFR related matters, these aspects should be kept in view.

14.4 In terms of Section 36 of the SARFAESI Act 2002, the claim in respect of the
financial assistance shall be made within the period of limitation. Only then, the secured
creditor shall be entitled to take all or any of the measures under Section 13(4). As such,
the claim made as per notice under Section 13(2) of SARFAESI ACT shall be made
before expiry of limitation.

14.5 Where the securities qualifies for being enforced under SARFAESI Act, suit shall be
filed only for the short fall remaining after selling the securities. However, where
limitation is likely to expire before effecting sale, suit may be simultaneously filed in
view of the ruling in TRANSCORE given by Supreme Court.

14.6 Even, in suit filed/decreed cases, SARFAESI can be initiated and securities sold.

37
SARFAESI ACT

THE SECURITISATION & RECONSTRUCTION OF FINANCIAL ASSETS AND

ENFORCEMENT OF SECURITY INTEREST ACT, 2002

The Act came into force w.e.f. 21st June 2002. The constitutional validity of the Act was
upheld by Supreme Court in the case of Mardia Chemicals. A Manual on SARFAESI Act
has already been issued by SAMD/Law Division wherein the detailed guidelines for
enforcement of security interest has been laid down. The Manual, read with Circulars
issued from time to time, must be referred to while taking action under the Act. For the
sake of brevity, important provisions of the Act are given below for ready reference.

1. In terms of section 13(1), any security interest created in favour of any secured creditor
may be enforced by the secured creditor without intervention of Court or Tribunal, in
accordance with provisions of the Act.

(Explanation: Being a quasi-judicial proceedings, the Authorised Officer must ensure

that all actions taken by him are strictly as per the provisions of the Act and the
SARFAESI rules.)

2. Issuance of 60 days notice under section S.13(2): Where any borrower, who is under
liability to a secured creditor under a security agreement, makes any default in
repayment of secured debt or any installment thereof, and his account in respect of such
debt is classified by the secured creditor as non performing asset, then the secured
creditor may require the borrower by notice in writing to discharge in full his liabilities
to the secured creditor within sixty days from the date of notice failing which the secured
creditor shall be entitled to exercise all or any of the rights under sub section 13(4).

38
(Explanation: 60 days notice can be issued only in NPA accounts. In terms of section
13(3), notice to be issued u/s 13(2) must give the amount payable by the borrower and the
secured assets intended to be enforced by the secured creditor in the event of nonpayment
by the borrower. The details of all charged assets must be carefully mentioned in the
demand notice ensuring that the assets exempted u/s 31 are not included in such notice ).

(Sixty days notice runs from the date of notice. Therefore, it must be ensured that the
notice is dispatched on the same date of preparation.

Where the notice is returned undelivered, it must be got published in two leading
newspapers, one of which should be in vernacular language. The notice should also be
pasted on the conspicuous part of the house or building in which borrower or his agents
ordinarily resides or carries out business.)

3. Section 13(3A): In terms of section 13(3A), if, on receipt of the notice under sub
section (2), the borrower makes any representation or raises any objection, the secured
creditor shall consider such representation or objection and if the secured creditor comes
to the conclusion that such representation or objection is not acceptable or tenable, he
shall communicate within one week of receipt of such representation or objection the
reasons for non acceptance of the representation or objection to the borrower.

(Explanation: It must be ensured that the representation is replied within one week of
receipt of objection or representation under the signature of the Authorised Officer).

4. Section 13(4): This section provides that in case the borrower fails to discharge his
liability in full within the period specified in sub- section (2), the secured creditor may
take recourse to, amongst others, take possession of secured assets of the borrower
including right to transfer by way of lease, assignment or sale for realizing the secured
asset.

39
(Explanation: According to the manual, a letter is required to be issued to the borrower
after expiry of 60 days notice for handing over possession of the secured assets failing
which the authorised officer shall take steps for taking over the possession of the secured
assets. However, there is no provision in the Act to issue such a letter/notice. Therefore,
the Authorised Officer may take possession of the secured assets after expiry of 60 days
notice period. If a letter has been issued advising the borrower for handing over the
possession, it should be for a very short period, say one week, asking for delivery of
possession. Further the possession notice is required to be published in two leading
newspapers – one of which should be vernacular language, within 7 days from the date of
taking possession.) The possession notice is also to be fixed on the conspicuous part of
the property and delivered to the borrower.

5. Section 13(8): If the dues of the secured creditor together with all costs, charges and
expenses incurred by him are tendered to the secured creditor at any time before the date
fixed for sale or transfer, the secured asset shall not be sold or transferred by the secured
creditor and no further step shall be taken by him for transfer or sale of that secured asset.

(Explanation: If the borrower pays the entire recoverable dues alongwith the all costs,
charges and expenses before the date fixed for sale or transfer, the asset shall not be sold).

6. Section 13(13): No borrower shall, after receipt of notice referred to in sub section (2)
transfer by way of sale, lease or otherwise (other than in the ordinary course of his
business) any of his secured assets referred to in the notice, without prior written consent
of the secured creditor.

(Explanation:To guard against any unauthorized removal or sale of the assets,

simultaneously on issue of demand notice u/s 13(2), if borrower cooperates, an inventory
of all charged assets should be made and independently witnessed. Otherwise also, the
position of inventory/secured assets be properly watched. Any contravention of this
section, shall be deemed as an offence u/s 29 and shall be punishable with imprisonment.
Where any contravention is noticed, a complaint is lodged with the concerned Court).

40
7. Section 14(1): In terms of this section, the secured creditor may make an application to
the Chief Metropolitan Magistrate or District Magistrate for taking possession of the
secured asset and the CMM/DM, on such an application shall (a) take possession of such
asset and documents relating thereto and (b) forward such assets and documents to the
secured creditor.

(Explanation: No proforma of this application has been prescribed under this section.
However, while making the application, it should be ensured that the following
documens are submitted –

i) Copy of demand notice.

ii) Proof of sending the notice including copy of paper cutting of returned notice.
iii) Copy of title deeds of mortgaged properties or documents supporting creation of
charge on such properties. In case of moveable assets, copy of hypothecation deed be
filed.
iv) Declaration that the asset sought to be enforced is not exempted u/s 31 of the Act.
v) Declaration that the asset sought to be enforced is situated within the jurisdiction of the
concerned DM/CMM.).

8. Section 17(1) - Right to Appeal: Any person (including borrower) aggrieved by

any of the measures referred to in sub section (4) of section 13 taken by the secured
creditor or his authorized officer may make an application to the Debt Recovery Tribunal
within forty five days from the date on which such measures had been taken.
(Explanation: This remedy is available only after an action is taken by the secured
creditor u/s 13(4). There are cases where the action is stayed by DRT even before 13(4)
action is taken. Such an action must be vehemently opposed. Further the limitation for
filing appeal by aggrieved person u/s 17(1) is forty five days with the prescribed court
fee. The application/appeal filed by the borrower or third party must be opposed and
appeal be got dismissed. Further u/s 17(5), any application made unde sub section (1)
shall be dealt with by the DRT as expeditiously as possible and disposed of within sixty

41
days from the date of such application. DRT may however, extend the said period for
reasons to be recorded in wrting so that the total period of pendency of such application
shall not exceed four months from the date of making such application.

In terms of s.17(6), if the application is not disposed of by the DRT within the period of
fourth months as specified in sub section (5), any party to the application may make an
application, to the DRAT for expeditious disposal of the application.)

9. Section 18(1) - Appeal to the Appellate Tribunal: Any person aggrieved by any
order made by the DRT u/s 17, may prefer an appeal along with the prescribed fee within
30 days from the date of receipt of the order of DRT . Such appeal shall not be
entertained unless the borrower has deposited with the Appellate tribunal fifty percent of
the amount of debt due from him . The Appellate tribunal may, for the reasons to be
recorded in writing, reduce the amount to not less than twenty five percent of debt.

10. Section 31: The Indicative list of the cases where the provisions of the Act are not
applicable.

a) A lien on any goods, money or security given by or under the Indian Contract Act or
Sale of Goods Act.
b) A pledge of movable within the meaning of Section 172 of Indian Contract Act.
c) Any conditional sale, hire purchase or lease or any other contract in which no security
interest has been created.
d) Any property not liable to attachment or sale under the first provision to sub-section(1)
of section 60 of the Code of Civil Procedure.
e) Any security interest for securing repayment of any financial assets not exceeding
one lakh rupees.
f) Any security intesrest created in Agricultural Land.
g) Any case in which amount due is less than twenty per cent of the principal amount and
inteerest thereon.

42
11. Section 36 – Limitation: The claim in respect of the financial asset has to be made
within the period of limitation prescribed under the Limitation Act 1963.

OTHER IMPORTANT POINTS TO BE NOTED

1. Authorised officer means an officer not less than Chief Manager. All action under the
Act shall be taken by the Chief Manager or above. Notices sent to the borrowers shall
indicate the name of the Authorised Officer and his designation.

2. Sale of immoveable property: Before effecting sale, the authorized Officer shall
obtain valuation of the property from an approved valuer and in consultation with the
secured creditor fix the reserve price.

(Explanation: Valuer for this purpose would mean a Valuer having registration u/s
34AB of the Wealth Tax Act, approved by the Board of Directors. Sale shall not be
effected below the reserve price).

3. Sale by inviting tender or holding public auction: If the sale is effected through
these modes, sale notice shall be issued in two leading newspapers one in vernacular
language having sufficient circulation in the locality. (Explanation : The publication must
be made in two leading newspapers having sufficient circulation. In order that the sale
attracts maximum attention of the prospective buyers at large, the selection of newspaper
must be made having regard to its circulation and reach. Further to save costs, publication
of sale notices of different properties can be synchronized in such a way that publication
is done in one lot.

4. In terms of rule 8(6) of SARFAESI, the authorized officer shall serve to the borrower a
notice of thirty days for sale of the immoveable secured assets . (Explanation : This is a
mandatory notice and no sale shall be effected before expiry of 30 days notice).

43
5. In terms of rule 8 of SARFAESI, sale by any method other than public auction or
public tender shall be on such terms as may be settled between the parties i.e. the bank
and the buyer, in writing.

(Explanation: The parties for the purpose of this section would mean the secured
creditor and buyer).

6. In terms of rule 9(9) of SARFAESI, the authorized officer shall deliver the property to
the purchaser free from encumbrances known to the secured creditor .

(Explanation: In order to comply with this section, the authorized officer must make
every effort to see the encumbrances on the assets ).

GENERAL

1. Proper pre-enforcement appraisal must be done as mentioned in the Bank’s

SARFAESI Manual.
2. Recall notice is not required to be issued prior to issue of demand notice u/s 13(2).
The recall can be made in the notice u/s 13(2) itself.
3. All actions under SARFAESI Act should be properly diarized to avoid any undue
delay between two actions.
4. On repayment of entire dues of the Bank by the borrower, possession of assets will be
returned to borrower immediately, maximum within 10 days.

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NPA MANAGEMENT THROUGH ONE TIME SETTLEMENT (OTS)

1. Resolution of Non Performing Assets through one-time settlement (OTS) has been
recognized as an effective non-legal remedy by the Bank due to twin advantages of faster
recovery of dues and income generation by recycling of funds otherwise likely to be
blocked for a long time. One time settlement of dues refers to a negotiated settlement
under which the bank endeavors to recover maximum amount within least possible
time, with least possible expenses.

As per RBI guidelines approach for considering waiver/ sacrifice/ loss on OTS can be in
the following order based on merits and attendant circumstance of each individual case:

a. Waiver of penal interest only.

b. Waiver of the effect of compounding the interest if it facilitates recovery of dues fully
by application of interest in the account at documented rate on simple basis from a
determined date, say filing of suit; transfer of dues to the Protested Advances/ NPA
category; the Unit being affected by some natural calamity and/or other external factor(s)
beyond control or closure of the Unit etc.

c. Waiver of a part or whole of simple interest can also be considered.

d. In exceptional cases, waiver of part of principal dues outstanding in the Bank's books
can also be considered wherever it is so justified.

Negotiation process shall not hover around book outstanding. Dues as per
memoranda account shall be advised to the obligants and negotiation will start from
such total/gross dues owed by the borrower. Efforts should be made to recover the
maximum amount and to minimize the sacrifice. However, sacrifice in OTS
Proposal shall be calculated taking the Recoverable Dues.

45
2. Definition of Net Present Value of OTS amount and Net Present Realisable Value
of Securities:

Reserve Bank of India vide its communication

No.DBOD.No.BP.BC.34/21.04.048/2007-08 dated 4.10.2007 has
advised as under :
“As the payment of the compromise amount may be in installments, the net present value
of the settlement amount should be calculated and this amount should generally not be
less than the net present realisable value of securities.”
In view of the above definition of Net Present Value of the OTS amount and Net Present
realisable value of securities is as under:

Net Present Value of the OTS amount: Where OTS amount is to be paid alongwith
interest @ BPLR from the date of conveying OTS, net present value of the total amount
recovered (OTS amount + Interest) from the obligants would be OTS amount itself. If
OTS amount is to be recovered without interest or at a rate lower than BPLR net present
value shall be calculated by adjusting difference in BPLR and charged rate of interest in
the OTS sanction.

3. Minimum Recoverable Dues:

3.1 In order to ensure that NPAs must also give some return on the funds involved,
concept of RRI (Rate of Return on Investment) has been used for calculation of minimum
recoverable dues. Minimum Recoverable dues, so calculated, shall be the guiding factor
for arriving at the sacrifice involved in the OTS/Write off/Waiver of legal action and to
decide the authority competent to sanction the waiver.

3.2 Minimum recoverable amount/recoverable dues shall be calculated, as at the close of

the quarter preceding the date of the proposal and shall include recorded legal/other
expenses also.

46
4. Base Amount:
Book outstanding as on the relevant/ material date (date of transfer to NPA or PA
whichever is earlier) shall be treated as Relevant Amount. The Relevant Amount is to be
duly adjusted for recoveries/further debits in the account (except interest if any credited /
debited to the account subsequent to the relevant date). This will be done in all cases
irrespective of the fact whether recovery was appropriated towards income or reduction
in outstanding. The so adjusted relevant amount will be the Base Amount.

5. Indicative OTS Amount:

Indicative OTS Amount is the amount which serves as a yardstick to accept the OTS
offer by the Bank in the negotiation process. However, it is never intended to be a
substitute of a realistic OTS amount and the OTS amount may be higher or lower of the
Indicative OTS Amount depending upon the strengths and weaknesses of the respective
NPA. Indicative OTS amount shall be calculated as per the OTS policy in vogue.

8. Proposals under SARFAESI Act:

Accounts, where after serving notice under Section 13(2) of SARFAESI Act, the
obligants approach the bank with an OTS offer and such OTS proposals are considered
favourably by the competent authority, supplementary agreement with the borrower and
letter of consent from the guarantor shall be obtained.

9. Decreed Accounts:
An opportunity to explore a reasonable OTS offer, looking to expected realisation out of
the decree execution vis-a-vis the Net Present Value of the OTS in hand, may also be
weighed. The competent authorities, as per their delegation of powers to approve the
sacrifice involved in the account, may consider OTS in such decreed cases, on merits.

47
On entering into OTS in decreed accounts, following guidelines are to be adhered to :

a. Decree Issued by Civil Court not under execution: Where decree passed by civil
court is not under execution, no information is required to be submitted to the court.

b. Where decree passed by civil court is under execution: In such cases Bank is
required to certify payments or adjustments received to the Executing Court, which shall
record the same accordingly.

c. Where Recovery Certificate (RC) has been issued by Debt Recovery Tribunal
(DRT): While entering into OTS in the RC issued account the Bank is to move an
application before the Presiding Officer for stay of the proceedings under RC for the
period, which has been given for payment of the OTS amount. Further, payment as and
when received be got recorded to the Presiding Officer as well as Recovery Officer.

10. Debt-Asset swaps as part of OTS:

In some of the OTS proposals, the obligants offer some immoveable property in part or
full satisfaction of the OTS amount. There are cases where bank’s dues are collaterally
secured by mortgage of properties and the properties are located in prime areas and are
saleable, especially residential/ commercial flats. The party, though having sufficient
properties, yet due to liquidity crunch or depressed real estate market, is unable to
immediately repay the bank’s dues in full. Even they are unable to arrange funds for OTS
and they offer IPs in part or in full consideration of OTS amount. If the bank deems it fit
to go in for the offer looking to utility of the concerned property for bank’s use or
otherwise, then the proposal can be considered.

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11. Acquisition through Self-Bidding:
In the process of execution of decrees through auction of land and properties or auction
under SARFAESI Act, at times bidder do not come forward with offers or bid amount is
very low in comparison to market value due to various reasons including vested interests
and in such situations, at times it is felt that bank should offer bid in the auction.

12. Assignment of Debt as part of OTS:

There may be certain cases where borrowers/guarantors want to settle the dues with
Bank through OTS but have no liquidity for making payment. In such a situation, they
arrange funds from their friends/relatives/third party who is ready to lend him the money
for making payment to the Bank. In lieu of this the said lender wants to secure himself
and requests the Bank to transfer all its rights to recover the dues from the borrowers
(right of subrogation) to him to which the borrowers have also agreed. This arrangement
is known as OTS through Assignment of Debt.
In such cases, Memorandum of Assignment of Debt be got approved from Law Division
HO.

13. Down Payment/Upfront Payment:

The upfront amount may be kept in an ‘Escrow’ / ‘No Lien Account’ with a mandate to
appropriate the proceeds towards adjustment of the dues in the event of acceptance of the
OTS proposal.

14. Rejection/Monitoring of OTS Proposals:

Any proposal submitted by the branch can be rejected by an authority one step higher
than the authority competent to approve the proposal. Accordingly, competent authority
should refer the case for rejection to his next higher authority, giving reasons thereof.
However, proposals falling under the powers of Chairman & Managing Director and
above may be rejected at the level of Chairman & Managing Director .

49
15. Acceptance of OTS:
Immediately on receipt of sanction at branch, it shall be conveyed to borrower and his
acceptance to the terms & conditions obtained and kept on record. No OTS approval shall
be kept open for acceptance by the borrowers generally beyond 15 days. In case, any
amendment is sought by the borrowers, the same may be considered/referred to the
competent authority immediately or a decision to cancel the OTS be taken without further
delay.

16. Failure of OTS:

In case of obligants’ failure to pay the OTS amount as per schedule of payment the
failure should be notified to the party maximum within one month after giving due
notice. After declaring the OTS failed legal recourse be taken immediately for recovery
of bank’s dues.

18. Decision Level/ Committee System:

18.1 All proposals for write off of dues/ waiver of legal proceedings/ OTS shall be
considered by the respective authorities duly recommended by the Committees
constituted at various levels.

18.2 Powers delegated to various functionaries in respect of sacrifice at the time of OTS
(including OTS in written off accounts)/Write Off/Waiver of Legal action/Waiver of
appeal etc are revised by the Board from time to time.

19. Communicating the OTS approval to the borrowers:

On receipt of sanction of OTS or other relaxations or concessions or part release of
securities/obligants, from the competent authority, the branch should immediately send a
communication to the borrower/obligants conveying detailed terms and conditions of
OTS/approval of such relaxations/concessions/part release of securities/obligants
including the terms relating to payment of interest. Policy guidelines for giving extension
in time schedule for payment of OTS amount by borrowers shall be kept privy to Bank
and shall not be communicated to them.

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 20. Lok Adalat:
The institution of Lok Adalat constituted under Legal Services Authorities Act 1987
helps in resolving the disputes between the parties by conciliation, mediation, OTS or by
amicable settlement. Every award of the Lok Adalat shall be deemed to be a decree of a
Civil Court and no appeal shall lie to any Court against the award made by the Lok
Adalat.

21. Consent Decree/ OTS agreement:

21.1 In case of suit filed accounts, whenever OTS proposals are approved, the parties
shall consent for a decree as prayed for in the plaint/ DRT application with provision to
pay as per OTS terms subject to a default clause that in the event of borrower’s failure to
pay OTS amount as per terms approved, all relief / concessions shall be treated as
withdrawn. The Consent Decree shall be obtained for the full amount of the claim subject
to the condition that in case of payment of the amount as per OTS terms, the decree will
stand satisfied.
Under no circumstances the consent decree for OTS amount only shall be obtained.

21.2 In case of non-suit filed accounts suitable OTS Agreements/ Memoranda of

Settlement shall be got executed from borrowers, where payments are proposed in
instalments.

21.3 In case the payment of OTS amount is proposed in lump sum, a receipt in full and
final settlement of the Bank’s claim can be issued / suit be withdrawn/ satisfaction of
decree may be recorded without entering into any OTS agreement and/or consent decree
etc.

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21.4 Where payment of OTS amount is proposed to be received in installments over a
period of time, OTS agreement should be executed/joint application for consent decree be
filed immediately. On receipt of the payments in terms of the settlement, the satisfaction
of the consent decree be recorded.

21.5 In any case recovery of OTS amount should not be delayed for obtaining consent
decree/OTS agreement and the securities charged to the Bank are to be released only after
receipt of full OTS amount.

22. Write off:

22.1 Writing off exercise is purely an internal and confidential exercise towards cleansing
the Balance Sheet. Therefore, field functionaries are required to continue to pursue
recoveries even after writing off the accounts. Particularly in High Value written off
accounts proper monitoring shall be ensured at all levels.
While considering write off, it shall be ensured that:
• avenues available for the recovery of Bank’s dues have been explored, and
• accounts involving ledger outstanding of Rs. 20 lac and above, where write off is
considered should be backed by the report of Detective Agency/ Investigating
agency w.r.t. the traceability of the obligants/ ascertaining the attachable assets of
the borrowers/ guarantors.
• The staff accountability has been finalized.

22.2 While exercising powers to write off, the Sanctioning Authority should ensure that:
The sanctioning authority at the time of sanctioning the advance(s) had exercised the
powers judiciously and adhered to the guidelines issued by the Bank in the matter of
granting such advances and that normal terms and conditions were stipulated; there was
no laxity in the conduct of the account(s) and post- disbursement supervision / control on
the advance(s) and all possible measures to recover the dues have been taken; there was
no act of commission or omission on the part of the staff leading to the debt proving
irrecoverable.

52
22.3 Write off may be considered in respect of the:

Borrowal accounts which are classified as Loss Assets. Borrowal accounts, where no
security is available but the same have been classified as Doubtful Assets merely because
DICGC/ ECGC claim is available.

22.4 The accounts where write off is approved by the competentauthority, notional
balance of Rs.100/- shall be left in the account to pursue likely recovery over a period of
time. The prospects of recovery through litigation need to be evaluated carefully
depending upon the merits and attendant circumstances of each case, the sanctioning
authority may take a view for waivement of legal action. However, even after waivement
of legal action, limitation shall be kept alive, if the borrower is available.

22.5 Final view to write off the residual amount of Rs.100/- may be taken as per policy in
vogue.

26. Management Information System

26.1 Disposal of OTS Proposals: To monitor the Receipt and Disposal of OTS
proposals/applications register shall be maintained at the branches/ CO/HO giving therein
the date of receipt of proposal, name of the party, Book Outstanding, OTS Amount etc.
and date of its disposal. Decision on OTS proposal should be taken expeditiously as per
policy. The same shall be monitored by respective authorities at CO/HO.

26.2 Reporting of approvals: Information about OTSs/ negotiated settlements/write off

proposals for bad debts / losses / sacrifice etc. approved by any functionary shall be
promptly reported to the next higher authority for post-facto scrutiny on monthly basis as
at the end of every month. However, for proposals approved by ED/CMD, post facto is to
be placed on quarterly basis as prescribed in RBI’s Calendar of Reviews.

53
26.3 Rejection of proposals: Information about the OTS/ negotiated settlement
proposals rejected at various levels is also required to be reported to the next higher
authority giving reasons for rejection.

26.4 Pending Proposals: Information about OTS proposals pending for more than a
month should be placed to Circle Head at CO level and to General Manager (SAMD) at
HO level on monthly basis.

26.5 Monitoring of approved OTS Proposals: Payments received in approved OTS

cases, should be closely monitored at all levels. Account- wise information of the
payments received in OTS proposals approved at HO level, shall be placed to Chairman
& Managing Director. Account- wise information (irrespective of the level at which the
case has been approved) about the payments received in OTS approved cases shall be
placed before the Circle Head. Intervals at which the information is to be placed to
authorities shall be as per OTS Policy in vogue.

Data in respect of the OTS proposals approved at BO/CO/HO levels and the payments
received in all OTS/ Negotiated Settlement proposals approved at various levels, shall be
placed to Chairman & Managing Director at the intervals prescribed in the OTS Policy.

54
15. WRITING OFF OF DUES

15.1 Cases, where dues have not been recovered in part or in full even after exhausting all
recovery avenues and where further chances of their recovery are remote, may be
considered for write off by the competent authority as per Recovery of Loans and NPA
Management Policy of the Bank .

15.2 On receipt of approval for writing off of dues, necessary entries shall be recorded in
the books in red ink under personal supervision of the Branch Manager. The debtor under
no circumstances shall be advised for such credit in our books either by letter or
otherwise and no entry should be made in the pass book or statement of account supplied
to the debtor. Efforts for recovery should continue in written off accounts and recoveries
made should be credited in Income Head-"Realisation in written off accounts".

16. BIDDING ON BEHALF OF THE BANK

16.1 In certain cases, where decree has been awarded in bank's favour or where auction
has been fixed under SARFAESI Act, if no bidder comes forward to purchase the
property(ies) of judgment debtor(s)/obligants in auction due to deliberate pooling
amongst the local people or otherwise, bank may acquire the property through self
bidding after seeking prior permission of the competent authority and also after obtaining
the leave of Court. Self bidding as decree holder/ mortgagee with the leave of the court/
under SARFAESI Act, have to be carefully undertaken by ensuring fixation of proper
purchase/reserve price.

16.2 After acquiring the `non-banking assets' through a bid, the concerned PA/NPA
Account will be credited with the amount of bid to the debit of `Non-Banking Assets
acquired in settlement of claim'. If the bid amount is more than total recoverable dues as
per memoranda account/decree, the concerned NPA/PA account will stand adjusted and
the surplus will be payable to mortgagors/owners of secured assets. If the bid amount is

55
lower than memoranda dues/decreetal dues, it should be ensured that a nominal balance
of Rs.1/- or Rs.100/- is left in the account to pursue recovery for the balance dues. If bid
amount is even lower than the ledger outstanding, remaining balance after credit of
amount of bid will appear in the ledger and action for recovery of remaining dues will
continue. A view may also be taken to write off the balance in concerned NPA/PA
account by the appropriate authority.

16.3 On sale of the acquired `non-banking assets', if the sale proceeds thereof are less
than the bid amount the shortfall will be booked as ‘Loss on sale of Assets (Non Banking
Assets acquired in settlement of Bank’s claim). In case the sale proceeds are more than
the bid amount, the surplus amount will be credited to bank's revenue `Profit on sale of
Assets’ (Non-Banking Assets acquired in settlement of Bank’s claim).

16.4 Transactions relating to acquisition and sale of such acquired `Non-Banking Assets'
will be done with prior approval of General Services Administration Division at Head
Office.

16.5 Regarding subrogation right of DICGC in these cases, the amount of consideration
for which the purchase is made should be treated as amount recovered from the
borrowers and available for adjustment in the account. Share of DICGC in this amount be
kept in Sundry Account as in case of other accounts.

17. LODGEMENT OF CLAIMS

17.1 Export Advances carry guarantee cover under the Schemes envisaged by Export
Credit Guarantee Corporation. The claim in respect of such advances should be lodged
with the Corporation promptly well in time to save guarantee fee and limitation.

17.2 Prior to 01.04.1997 advances granted to SSI and Small Loans were covered under
the schemes of DICGC1. In case of claim paid accounts if any recoveries are made, the
same are to be shared with the Corporation as per provisions of the Schemes after

56
adjusting the expenses incurred by the Bank towards recovery. However, recoveries are
not to be shared with DICGC and are to be kept in Sundry Account till further
instructions.

18. APPROPRIATION OF RECOVERY

18.1 Appropriation of recovery in various accounts will be as under:
Category of NPA Mode of appropriation

(a) Suit filed & Decreed A/Cs Principal amount/suit claim, Interest, cost of
suit
(b) OTS/ compromise cases Principal, Interest or as per the terms of settlement
(c) NPAs where recovery is Principal/Arrears of Installments, Payment of cost
under SARFAESI ACT (actual incurred expenses incidental there to), then
interest (Recorded).
(d) Other NPAs Recorded Interest , Arrears of installments (current
& previous year) / principal irregularity.
(e) NPAs where tagging The proceeds received through tagging arrangement
arrangement is being would be utilized for reduction of
implemented overdues/recognition of interest as under:

(i) Principal outstanding balance in Working Capital

Facility till it is brought within the DP/limit
(whichever is lower) along with Expenses
(insurance/valuation etc.) as and when incurred.
(ii) Installments in arrear in TL a/c
(iii) Recognition of recorded interest.

Interest in such cases will continue to be recorded till

outstanding balance is brought within the DP/limit
(whichever is lower) and overdues in TL are
recovered.

57
18.2 When costs are recovered, the law charges account or the concerned Protested
Advances Account (depending upon whether the account was covered under DICGC) be
given credit.

18.3 The account appearing in the NPAs should not be closed before the full recovery of
recorded interest. A nominal balance of Re.100/- should be kept in the Account.

18.4 The recovery of recorded interest in Memoranda Record of NPA/PA ledger should
be routed through the party's account in the concerned ledger by crediting the interest to
the extent of recovery to income with a corresponding debit to the party's account in the
Protested Advances ledger.

18.5 It should be ensured that recovery in the borrowal accounts towards interest taken to
income should not result in increase in exposure and should not be out of fresh/
additional credit facilities sanctioned to the borrower.

19. FUNCTIONING OF ARMBs/ARCs:

19.1 To give focused attention to recovery and reduction of Non Performing Assets,
especially the DRT cases, the concept of Asset Recovery Management Branches
(ARMBs) was evolved. Under this system, certain impaired assets of various branches
are transferred to these specialized branches which function as independent units, with
their own distinctive numbers. These branches are primarily responsible for recovery of
NPAs by taking all available measures for resolution of NPAs as are incidental to and
necessary for safeguarding the interest of the bank in terms of guidelines issued by the
bank in such matters from time to time.

19.2 The ARMBs/SARCs will submit progress on prescribed format to their controlling
Circles. The progress will be reviewed by Circles on monthly basis and by HO on
quarterly basis.

58
19.3 Other guidelines relating to functioning of ARMBs/ARCs issued from time to time
be followed/complied with meticulously.

20. MONITORING, REVIEW & FOLLOW UP OF NPAs

20.1 As soon as an account is classified NPA with outstanding above Rs.1 lac, branch
shall submit status note to Controlling Office.

20.2 Status Note will be sent on quarterly basis to C.O. for NPAs of above Rs.10 lac.

20.3 The progress of reduction in NPAs is monitored regularly on weekly basis by

obtaining data on the prescribed format. Statement covers reduction during the reporting
week, and cumulative reduction as at the end of reporting week, in gross NPAs (out of
NPA at the beginning of the year & out of fresh slippages as at the previous quarter/
reviewing period) as well as recovery of Derecognised/ Recorded Interest. The progress
achieved is to be reviewed every week in comparison to the reduction budget allotted, on
pro-rata basis and remedial actions are initiated where the reduction is low.

20.4 Under the scheme of off-site surveillance of banks, RBI monitors the quality of asset
on quarterly basis. Out of the twelve Returns introduced by RBI for surveillance of
banks, the Return IV pertains to quality of asset (NPAs) which is having following seven
sections pertains to loan assets :

⇒ SECTION 1 - Portfolio analysis is bifurcated into two sub-sections i.e. Part A - Loan
& Advances including bill credit & Part B - Other interest bearing assets (Investment
Portfolio).

⇒ SECTION 2 - Classification of assets which is bifurcated into two parts viz. Part A -
Loans & Advances including bill credit and Part B - Other risk assets and exposures
(investment portfolio and off balance sheet items like guarantees, letter of credits and
other contingent credit).

59
⇒ SECTION 3 - Change in asset quality profile during the quarter (loan assets) on
notional basis.

⇒ SECTION 4 - Quality of loan assets sectoral analysis i.e. under Priority sector
(Agriculture, SSI, Other priority sectors) and Other sectors (Export trade, Banks, Non-
Banking Financial Institutions/ Companies, Governments, Food credit, Other PSUs etc.).

⇒ SECTION 5 - Top Impaired credits (NPAs) under which top NPA accounts as at the
end of quarter (NPA accounts with balance outstanding of Rs. 3 crore & above).

Correct compilation and timely submission of the statement is necessary keeping in view
the high priority attached by RBI to this statement as delayed and incorrect submission of
the return attracts penal action under section 46(a) under RBI Act. Further, Office copy of
the returns has to be maintained by Branches/Circles for follow up and these are subject
to scrutiny during the inspection by RBI officials.

21. OTHER OPERATIVE INSTRUCTIONS:

21.1 In respect of NPA accounts which get categorized as Substandard and Doubtful,
Incumbent Incharge should immediately serve a formal notice on the borrower for
immediate regularisation of the account.

21.2 All eligible accounts under Securitisation and Asset Reconstruction and
Enforcement of Secured Interest (SARFAESI ACT- 2002), immediate decision should
be taken to initiate action. Accordingly, actions should be initiated as per the
Securitisation Manual and as per the extant guidelines of the bank.

21.3 Circle Head should ensure that additional accounts, if any, identified by
Statutory Auditors as NPA are intimated to the branches for further necessary action.

60
21.4 In case an account having allocated limits at other branches becomes NPA, all the
facilities including the allocated limits of the borrowers should be treated as NPA and
further there should be no increase in bank’s exposure/irregularity. In the absence of
close liaison/communication between parent branch and branch having allocated limits,
even after an account is identified as NPA, the later may allow operation thereby
resulting in increase in exposure in account.

Keeping in view of the above it is advised as under:-

- In case of NPA accounts which are under rehabilitation and operations are being
allowed or under the process of rehabilitation, such accounts should not be shifted from
branch office having allocated limits to parent branch for operational convenience.

- When an account becomes NPA and considered non-viable & action for recovery is
contemplated category, the branch having allocated limit should transfer the account to
the parent branch for better control/monitoring. However, branch which was having
allocated limits should continue checking/verification of stocks/securities as per the
instructions of the parent branch.

21.6 All other existing instructions as applicable for Irregular/sticky accounts shall
continue to be operative for NPA Accounts also.

21.7 The instructions with regard to income recognition, classification and provisioning
norms of NPAs are conveyed in detail through H.O circulars issued from time to time,
which should be meticulously followed.

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22. VARIOUS STRATEGIES/ACTION POINTS FOR REDUCTION IN NPAs
ARE AS UNDER:

♦ A strong data base/ NPA Profile covering the following is to be developed. The same
should be updated regularly:

o Account-wise position of NPAs containing all statistics relating to sanction, detailed

information on securities, latest exposure & loan loss provision held, status of the
account with regard to BIFR reference/ Notice under SARFAESI / Other legal action
initiated etc., Course of action decided to resolve the account and further development in
the account.
o Amount -segment-wise bifurcation of total NPAs.
o Asset classification of NPAs under Standard, Sub-standard , Sub-standard-unsecured,
Doubtful I, Doubtful II, Doubtful III and Loss Asset category.
o Facility-wise break-up, Age-wise break up of NPAs portfolio.
o Security-wise break up of NPAs i.e. NPAs fully secured, partially secured and
unsecured.
o Sector-wise, Industry-wise Position of NPAs, %age to advances in each segment.
o Break up of Suit filed/Decreed accounts age-wise and amount wise.
o Retail-segment-wise NPAs, advances and fresh slippages etc.
o NPAs under Corporate and Non-corporate i.e. Govt Undertakings, State PSUs,
Central PSUs, Public Ltd Co., Pvt Ltd Co., Partnership firms, protectorship concern ,
Societies, Professionals, Retail segment etc
o Geographical segment-wise like Rural, Semi-urban, Urban and
Metro .
o Comparative position of year-wise Reduction with break up like Up gradation, Cash
Recovery, OTS, Write off and fresh additions till the current fiscal.
o Derecognised Interest/ Suspended Interest/ Recorded Interest with the year-wise details
of Reduction and Additions .

62
♦ A detailed profile (as per prescribed status note format) of all high value NPA accounts
be maintained. Special emphasis be given in high value NPAs of Rs.50 lac & above.
Utmost priority should be given to update this MIS in case any material change takes
place in any of these accounts at any point of time and the matter be communicated to the
appropriate higher authority(ies) immediately.

♦ Each Circle should identify top 50 NPA accounts and prepare their history sheets for
close monitoring and initiating account-specific action plan for recovery of bank’s dues.
Similarly top 10 NPA Branches in each Circle should be maintained on regular basis.

♦ Senior Officers at Circle Offices should be entrusted with the responsibility for
effective monitoring and bringing about substantial reduction in NPAs.

♦ All the newly added (fresh slippage) accounts to NPA category are to be targeted to be
resolved during the current fiscal.

♦ On classifying an account as NPA it should be analysed for deciding course of action

within the shortest span and necessary action should be initiated immediately. In all
eligible cases, actions under the SARFAESI ACT be initiated and taken to its logical
conclusion on a time bound basis.

♦ Shifting of non-viable NPAs which are marked for resolution may be considered to
ARMB/SARC as the case may be.

♦ The surveillance system be also strengthened as it can help in detecting warning signals
in big borrowal accounts where bank has sanctioned limits of Rs.3 crore and above, for
timely corrective action. The Preventive Monitoring System (PMS) be implemented and
preventive measures be initiated in all such accounts.

63
♦ NPA A/Cs eligible for sale to Asset Reconstruction Companies (ARCs) should be
examined and action be initiated as per the extant guidelines of the bank in this regard.
Being the fastest mode to resolve, this strategy should be given utmost importance..

♦ Accounts where Restructuring/ Re-negotiation/ Re-schedulement of payment schedule/

CDR & Relief measures required to be considered, be given top priority to finalise
necessary action.

♦ Weak accounts/ Borderline cases which are running irregular and are likely to slip to
NPA category be timely identified by the Circles for effective/close monitoring and
initiating immediate corrective actions. The potential NPA statement available in the
LADDER system be utilised.

♦ Focussed attention to be given to regularise all the irregular accounts in order to check
their slippage to NPA category keeping in view stringent NPA norms of 90days
delinquency. All such irregular accounts should be subjected for discussion in the
meeting held periodically.

♦ To have frequent meetings with the borrowers whose accounts are NPAs or
Weak/Irregular for understanding the problems faced by them and initiating necessary
account specific remedial measures. Discussions of such meetings should be properly
minuted and decision taken be closely followed up for their implementation.

♦ Possibility of recovery in NPAs through compromises/ negotiated settlements should be

also explored depending upon merits of individual cases in terms of Bank’s policy
guidelines issued from time to time which should be strictly followed. Further, the
compromise cases approved should be closely monitored for their implementation.

♦ NPA accounts with outstanding of Rs.10 lacs and above where the chances of recovery
and their revival are bleak and not eligible to take action under SARFAESI Act, coming
under the purview of DRTs should be referred to them for recovery of the dues. All high

64
value cases should be pursued with DRT Presiding Officers for disposal with in
maximum 6 months.

♦ Recovery Camps should be held to resolve NPAs under Small and Medium segment.
Adequate spade work in terms of following should be done before conducting each
recovery camp so that maximum number of borrowers should be brought into the fold:

- Dates of Recovery Camps be fixed in consultation with controlling office.

- Notices be issued to all borrowers informing the date of camp.
- Proper publicity by displaying banner at the branch/ nearby area, news coverage in local
newspaper, distribution of pamphlets etc. Be ensured before the camp.
- Incumbent Incharge and other staff members to contact each and every borrower
through personal visits.
- Help of Amins, Gram Pradhan and other reputed persons of the area be taken to
persuade the borrowers to attend the recovery camp.
- Services of Recovery Agents as per bank guidelines be utilized.
- Proper data base in respect of written off accounts be prepared and accounts be
identified where recovery can be effected through constant follow up.
- Senior Officials from controlling office may attend the camp for on the spot decision on
the OTS offer.

♦ NPA accounts upto Rs.20 lac can be resolved through Lok Adalat. Necessary
coordination with the appropriate legal forum/ High Court who supervise such adalat
should be made for conducting such adalat periodically.

♦ Obtaining the services of Recovery Agencies be explored to resolve Eligible NPAs.

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LEGAL ACTION

1. No legal proceedings be instituted without the prior permission of the competent

authority, except in an emergency where the Circle Head must be immediately apprised
of the action taken. In any case a notice of demand either in English or in Vernacular
language should be sent by registered post with acknowledgement due, to the borrower(s)
as well as guarantor(s) before initiating legal action. It may vary as per requirements of
the case.

The charged securities and other attachable assets of the borrower/ obligants be verified
and placed on record. While filing the suit, simultaneously prayer be made for
‘Attachment Before Judgment’ and ‘declaration of assets on oath by the obligants’ so that
the available securities are not alienated. In case, sufficient assets are not available for
recovery and still filing of suit is recommended/ sanctioned, full justifications for such a
step must be recorded. Waivement of legal action be got approved within limitation
available if the Incumbent feels that no fruitful purpose shall be served by filing of a suit.

1.1 Before initiating legal action for recovery, efforts should be made to recover dues
through compromise/negotiated settlement where the party has genuine difficulties or
otherwise and is willing to liquidate the dues provided certain reliefs are given to the
party. Bank may consider compromise with the party in terms of bank's compromise
policy only on merits of each case.

2. CERTIFICATE PROCEEDINGS

States where Agricultural Credit Recovery Act/Public Moneys (Recovery of Dues)

Act/Public Debt Recovery Act are in force, the provisions of such Acts must be invoked
in consultation with higher authorities wherever the Incumbent In charge considers it
necessary and the proceedings should be followed up closely with the concerned
authorities. In case, dues are not recovered in full, through Recovery Certificates under

66
these Acts, if need be, and if permissible, further steps for recovery of the balance amount
should be taken well within limitation. It is not compulsory to transfer the accounts to
Protested Category before filing certificates under these Acts.

3. LOK ADALATS

3.1 Based on Legal Services Authorities Act, various Legal Services Authorities have
been set up by different States to determine and facilitate compromise and settlement
between the parties under a simple procedure of an application which may be filed by any
of the parties in any case which is either pending before the Court or the matter falls
within the jurisdiction of the court. Branches can make references to the Lok Adalat
involving suits claims upto Rs.20 lac after seeking permission from the Controlling
Office. As such maximum benefit is to be derived from the legal, simple and acceptable
procedure under the Act.

3.2 On the same pattern, DRTs also organize Lok Adalats. However, such Lok Adalats
are not in terms of the Legal Services Authorities Act. These only provide a platform to
arrive at a settlement. If settlement is arrived at, it shall be ensured that a memo of
compromise be filed before DRT and consent adjudication order be obtained.

4. CRIMINAL PROCEEDINGS

In certain cases, it may be necessary to file criminal proceedings against the concerned
parties after examining the facts and circumstances of the individual account and
obtaining necessary permission from the competent authority.

67
5. LITIGATION

5.1 In matter of litigation, compliance of legal provisions, exercise of vigilance in

obtaining interim reliefs, follow-up of the matter to avoid any default and prompt action
for expeditious results are of importance.

5.2 Apart from taking certificate proceedings under Agricultural Credit Recovery
Acts/Public Moneys (Recovery of dues) Act/Public Debt Recovery Act prevalent/in force
in the respective States in respect of agricultural loans or other eligible loans, bank has to
file suit in the court of competent jurisdiction or application before Debt Recovery
Tribunal of competent jurisdiction to recover the dues to the bank from the borrowers and
all other liable parties.

5.3 After coming into force of SARFAESI Act, 2002 action for enforcement of Security
Interest in eligible accounts as against secured assets be taken. The action for recovery
in Civil Court/DRT can be simultaneously taken or after enforcement of Security Interest
can be taken for recovery of balance amount within limitation. Detailed guidelines have
been issued by bank through Manual on Enforcement of Security Interest and various
circulars.

5.4 At the time of filing suit/application all steps to safeguard the securities/assets
available with the defendants should be taken so that securities/assets are not frittered
away during the pendency of the suit. For this purpose interim reliefs should be obtained
from the court/DRT by way of injunction/restraint order, attachment before judgment,
appointment of Receiver etc.

6. ESTABLISHMENT OF DEBT RECOVERY TRIBUNAL (DRT)

6.1 The Recovery of Debts due to Banks and Financial Institutions Act, 1993 came into
force w.e.f. 24.06.1993. In exercise of the powers given under the Act, Central Govt. has
established Debt Recovery Tribunals with jurisdiction area-wise as per respective
notifications.

68
6.2 The Tribunal exercises, on and from the date on which such tribunal is established,
the jurisdiction powers and authority to entertain and decide applications from banks for
recovery of debts (amounting to Rs.10 lakh and above) due to the bank.

6.3 Debt means any liability (inclusive of interest) which is claimed as due from any
person by a bank or a financial institution or by a consortium of banks or financial
institutions during the course of any business activity undertaken by the bank or the
financial institution or the consortium under any law for the time being in force, in cash
or otherwise, whether secured or unsecured, or assigned, or whether payable under a
decree or order of any Civil Court or any arbitration award or otherwise or under a
mortgage and subsisting on, and legally recoverable on, the date of application.

6.4 The Bank may make application to the tribunal within the local limits of whose
jurisdiction:

a) the defendant, or each of the defendants where there are more than one, at the time of
making the application, actually and voluntarily resides, or carries on business or
personally works for gain; or

b) any of the defendants, where there are more than one, at the time of making the
application, actually and voluntarily resides or carries on business, or personally works
for gain; or

c) the cause of action, wholly or in part, arises.

In matters where tribunal has jurisdiction, no suit or certificate proceeding shall be filed.
Every application shall be in the prescribed form and be accompanied by documents or
other evidence and the fee prescribed.

6.5 The tribunal issues summons and after hearing of the parties, passes such orders as it
deems fit.

69
6.6 After adjudication of the matter, the presiding officer issues a certificate to the
recovery officer for recovery of the amount of the debt specified in the certificate.

6.7 It is ordained under the Act that the application shall be dealt with by the tribunal as
expeditiously as possible and endeavour shall be made to dispose of application finally
within 6 months from the date of the receipt of the application.

6.8 The Debt Recovery Tribunal (procedure) Rules, 1993 prescribes amount of fee as
follows:
Amount of Debt Due Amount of Fee Payable

Rs.10 lakhs Rs.12,000/-

Above Rs.10 lakhs Rs.12,000/- +Rs.1,000/-for every

1 lakh of debt due or part thereof
in excess of Rs.10 lakhs, subject to a
maximum of Rs.1,50,000/-.

The fee has to be remitted by demand draft payable at the station

where tribunal is located.

6.9 As per rules, every application shall be accompanied by a paper book containing:

i) Statement showing details of debt due and circumstances under which such a debt has
become due;

ii) All documents relied upon including those mentioned in the application;

iii) Index of documents.

Tribunals also require furnishing a list of securities. It should be ensured that the list of
securities is also provided while filing the application.

70
6.10 Debt Recovery Tribunals have been established for the purpose of recovery of dues
to banks and financial institutions. Hence, all the procedural formalities required are to
be complied with as required by the tribunals and as prescribed under the Act and Rules
in order to facilitate expeditious adjudication and to take advantage of the remedy.

7. FILING OF SUIT

7.1 In respect of debts amounting to less than Rs.10 lakhs or in places where Debt
Recovery Tribunals are not established/have no jurisdiction, to recover the amount due,
the bank has to necessarily file suit in the court of competent jurisdiction.

7.2 In case of mortgage, suit should be a mortgage suit and accordingly provisions
contained in order 34 Civil Procedure Code (CPC) should be kept in view and followed.

7.3 If there is mortgage security to be enforced, the suit shall be filed in the court in
whose jurisdiction the property is situated.

7.4 In mortgage suits, application for final decree should be moved/ made at the proper
time.

8. SUMMARY SUIT

8.1 The Civil Procedure Code also provides a procedure for summary suit.

8.2 The essence of summary suit is that the defendant is not, as in any ordinary suit,
entitled as of right to defend the suit. He must apply for leave to defend within 10 days
from the date of service of summons for judgment upon him, and such leave will only be
granted by the court if the Affidavit filed by the defendant discloses such facts as the
court may deem sufficient for granting leave to the defendant to defend the suit. If no
leave to defend is granted, the plaintiff is entitled to a decree immediately.

71
8.3 The procedure applies to the following classes of suits, namely: (Order 37 Rule 1
Sub-Rule 2 CPC)

a) Suits upon bills of exchange, hundies and promissory notes;

b) Suits in which plaintiff seeks only to recover the debt or liquidated damages in money
payable by defendant, with or without interest, arising:

i) On a written contract or;

ii) On an enactment where the sum sought to be recovered is a fixed sum of money or in
the nature of a debt other than a penalty; or
iii) On a guarantee, where the claim against the principal is in respect of a debt or
liquidated damages only.

8.4 While presenting the plaint for suit under summary procedure, the plaintiff/Bank
should ensure that the plaint contains:

a) A specific averment to the effect that the suit is filed under Order XXXVII of Civil
Procedure Code, 1908;

b) That no relief, which does not fall within the ambit of the above noted rule, has been
claimed in the plaint, and;

c) The following inscription, immediately below the title of the suit, namely;

"Under Order XXXVII of the Code of Civil Procedure, 1908."

8.5 Banks can avail of the provision of summary procedure only in the applicable cases
mentioned above. In case of secured advances i.e. the advances where the bank has
obtained security, summary procedure is not advisable as security held by the Bank is not
enforceable under Order 37 CPC. In such a situation, only the normal procedure for

72
money recovery suit, enforcing the securities will be in the interest of the Bank. In cases,
where no securities are available to be enforced, summary procedure can be availed of.

9.6 Preliminary steps before filing suit/application (DRT)/ issuance of notice

9.6.1 Before filing a suit/application, matters concerning limitation, arbitration,

notice/statutory notice, clearance of Cabinet committee wherever required, and leave of
court should be carefully considered.

9.6.2 The limitation position in the account should be checked up before hand and steps
for filing of suit/application should be taken up well before availability of limitation.

9.6.3 It should be seen whether it is necessary to refer the matter to Arbitration as per the
terms of the agreement. If so, steps should be taken to refer the matter to Arbitration
instead of filing suit/application.

9.6.4 Whenever the dispute is between the Bank and Government Deptt./ Public
Enterprise (State or Central), efforts have to be made to settle the dispute through
arbitration. For this purpose, an agreement to refer the dispute to arbitration has to be
entered into.

9.6.5 A notice of demand to the borrower and the guarantor/other liable parties be issued.
If statutory notice e.g. under Civil Procedure Code (S.80 CPC prescribed notice to
Government), Co-operative Societies Act or any other local law, is required, the same
should be served. Issue of notice/demand may be essential to make the debt/liability due
and payable and will have a bearing on the commencement of limitation. Lack of notice
will, at times, make a suit premature and raise a question as to maintainability of
litigation. Notice before litigation will give an opportunity to the other party to remedy
the default.

73
9.6.6 Notice should be issued against all liable parties and shall state facts correctly.
Notice shall be checked up as to facts and figures by the Branch Manager/ concerned
officer, before issue. Notice shall be sent to correct address/es.

10. STEPS FOR CONDUCT OF SUIT/APPLICATION

10.1 All the original loan documents, security documents, original book of account,
entries in the title deed register and all the correspondence should be shown to the
counsel and he be furnished with all the information he calls for, for preparation of the
notice/plaint/application and filing suit/application.

10.2 The Branch Manager should check up that the documents are in order and are
complete. Whenever original documents are filed in the Court/Tribunal, it shall be
ensured that the photocopies of the same be kept in the branch record for reference.

10.3 It should also be ascertained whether any of the defendants is dead. If so, his legal
representatives, will have to be impleaded/ sued.

10.4 The plaint prepared by the counsel be checked up thoroughly as to the correctness
of facts and figures and in particular:

a) Whether all parties, borrowers and guarantors/other liable parties (if it is a firm, the
firm as well as the partners) are sued. All the parties concerned should be sued, unless
there are special reasons for not suing any of them. If one of the defendants is a minor,
he/she can be sued through his/her guardian.

b) Whether the names and addresses of defendants are given correctly and described
properly.

c) Whether securities are stated and described correctly. Where there are securities, the
same must be enforced.

74
d) Particulars regarding dates of execution of documents, balance confirmation letters,
rate of interest etc. should be correctly mentioned.

e) (a) The statement of accounts filed is to bear a certificate in the proper form as
required under Bankers' Books Evidence Act, 1891. The certificate is to be written at the
foot of the statement of account that it is a true copy of the entry/ entries in the books of
the Bank and was/were made in the usual and ordinary course of business and that such
book is still in the custody of the Bank. The certificate be dated and subscribed by the
Officer/Asstt. Manager or Manager of the Bank with his name and official title.

13. CLAIM FOR INTEREST

13.1 In respect of commercial transactions, the courts can award future interest up to
agreed rate of interest in terms of loaning documents.

13.2 The grant of interest after the filing of the suit is at the discretion of the court, and
the agreed rate of interest is the upper ceiling fixed by the law. Though the award of
future interest is the discretion of the court, yet it is to be exercised judiciously, based on
principles of justice and equity.

Keeping this legal position in view, a good case should be made on bank's behalf in
courts for the award of future interest at the agreed rate. The branches should ensure that
the plaint/application should contain a prayer for the grant of future interest at the agreed
rate and further, our advocates should be fully briefed to make a strong argument for the
award of future interest at the agreed rate as well. It may, inter-alia, be argued to the
court that bank is a nationalised bank with social responsibility cast upon it which enjoins
it to give advances to the weaker sections of society at concessional rates of interest.
Hence, Bank should be suitably compensated in the other area of lending with the grant
of agreed rate of interest till the realisation of dues.

75
13.3 In terms of Section 21-A of the Banking Regulation Act, 1949 notwithstanding
anything contained in Usurious Loans Act, 1918 or any other law relating to indebtedness
in force in any state, the transaction between the banking company and its debtor shall
not be opened by any court on the ground that rate of interest charged by the Banking
company in respect of such transaction is excessive. This section applies to nationalized
banks as well.

14. IMPLEADING LEGAL HEIRS

If the borrower is an individual and he dies during the pendency of the suit, his legal
representative will have to be brought on record within the time prescribed.

15. GENERAL

i) The counsel shall be assisted in all respects and the matter be followed with him
regularly. He shall also be requested to give reports of progress of the suits from time to
time.

ii) Fees for the counsel should be settled in advance and he shall be paid as per the
instructions contained in the circulars that are in force and issued from time to time.
Other bills e.g. for expenses, incurred or to be incurred be settled without delay.

iii) The Manager should see that the counsel files the fee certificate/ memo of costs as per
the rules/requirements of the court/tribunal and the cost is also included in the
decree/recovery certificate.

iv) Only counsels who are on the approved panel should be entrusted with the Bank's
cases. Where there is no approved counsel or the circumstances warrant otherwise, prior
permission of the appropriate authorities should be sought for engaging the counsel not
included in the approved panel.

76
v) It is desirable that material dates of hearing are attended by the Manager or someone
acquainted with the facts of the case to assist the counsel.

vi) At times, suits/application are filed long after the decision for filing suit in the account
is taken by the competent authorities. Such delay is likely to affect the bank's interest.
Further, courts/ DRTs also take a serious view of the matter of such delays by denying
awarding of interest for the period of delay. Hence, unless there is good reason for
deferment, the suit/application be filed as early as possible.

vii) Non-pursuit of the case or absence of the bank official or advocate on the date of
hearing is viewed seriously by the courts and DRT who, in such cases either dismiss the
suits/applications or award heavy costs. Such like predicaments should be avoided.

17. EXECUTION

17.1 If the judgement debtor does not pay in terms of the decree/ order, further steps for
execution of the decree/recovery certificate by attachment and sale of the properties, by
arrest of the judgement debtor etc. as may be deemed fit be taken appropriately. If the
case involves sale of property, necessary non-encumbrance certificate be obtained so that
the case can be proceeded without any delay.

17.2 If the property is situated outside the jurisdiction of the court which passed the
decree, the decree should be got transferred to the court in whose jurisdiction the property
is situated and the matter should be further pursued without delay. All the litigations
should be followed up vigorously.

18. WAIVEMENT OF LEGAL ACTION

18.1 Each individual case should be examined as per its merits and attendant
circumstances and further recourse be taken. Accounts, where the Zones are of the
opinion that the merits of the case do not permit continuing the suit with the Court/DRT

77
or following up execution of decrees/ RCs, then the proposal for waiver of legal action
should be placed before the competent authority for consideration.

18.2 If the waivement of legal action is approved, then an appropriate statement may be
made before the Court/ Recovery Officer that the bank is not interested in further pursuit
of Suit/ Decree/ Recovery Certificate.

18.3 It is for the Court/ Recovery Officer to record the statement and pass further orders.

78
FINANCIAL STATEMENTS
Balance Sheet
As at March 31, 2010
Rs in 'ooo
As at 31-Mar-10 As at 31-Mar-09
CAPITAL AND LIABILITIES
Capital 4,577,433 4,253,841
Equity Share Warrants - 4,009,158
Reserves & Surplus 210,618,369 142,209,460
Employees' Stock Options (Grants) Outstanding 29,135 54,870
Deposits 1,674,044,394 1,428,115,800
Borrowings 129,156,925 91,636,374
Other Liabilities & Provisions 206,159,441 162,428,707,732
Total 2,224,585,697 1,832,707,732

ASSETS
Cash & Balance with RBI 154,832,841 135,272,112
Balances with Banks & Money at Call & Short
Notice 144,591,147 39,794,055
Investments 586,076,161 588,175,488
Advances 1,258,305,939 988,830,473
Fixed Assets 21,228,114 17,067,290
Other Assets 59,551,495 63,568,314
Total 2,224,585,697 1,832,707,732

Contingent Liabilities 4,790,515,044 4,059,816,885

Bills for Collection 81,248,646 85,522,390

79
 Profit and Loss Account
(For the year ended March 31, 2010)

Rs. in ‘000
Year Ended Year Ended
31-Mar-10 31-Mar-09
I. INCOME
Interest earned 161,729,000 163,322,611
Other income 38,076,106 32,906,035
Total 199,805,106 196,228,646

II. EXPENDITURE
Interest expended 77,862,988 89,111,044
Operating expenses 57,644,827 55,328,058
Provisions and contingencies 34,810,282 29,340,152
Total 170,318,097 173,779,254

III. PROFIT
Net Profit for the year 29,487,009 22,449,392
Profit brought forward 34,555,658 25,746,345
Total 64,042,667 48,195,737

IV. APPROPRIATIONS
Transfer to Statutory Reserve 7,371,752 5,612,349
Proposed dividend 5,492,919 4,253,841
Tax on dividend 912,305 722,940
Dividend pertaining to
previous year paid during the year 9,343 5,900
Transfer to General Reserve 2,948,701 2,244,939
Transfer to Capital Reserve 1,994,599 938,660
Transfer to / (from) Investment Reserve
Account (14900) (138550)
Balance carried over to Balance Sheet 45,327,948 34,555,658
Total 64,042,667 48,195,737

V. EARNINGS PER EQUITY SHARE

(Face value Rs. 10 per share)

Basic 67.56 52.85

Diluted 66.87 52.59

80
ASSET QUALITY
Movement in NPAs (funded)

Particulars 31-Mar-10 31-Mar-09

(i) Net NPAs to Net Advances (%) 0.31% 0.63%
(ii) Movement of NPAs (Gross)*
(a) Opening balance 1,951,52 906,97
(b) Additions during the year 2,610,88 3,413,30
(c) Reductions during the year : 2,745,64 2,332,20
Upgradations 66,21
Recoveries 430,76 144,83
Write-offs 2,248,67 2,187,37
(d) Closing balance 1,816,76 1,988,07
(iii) Movement of Net NPAs
(a) Opening balance 627,62 298,52
(b) Additions during the year 400,42
(c) Reductions during the year 235,57 71,32
(d) Closing balance 392,05 627,62
(iv) Movement of provisions for NPAs
(a) Opening balance 1,323,90 608,45
(b) Additions 2,651,26 3,012,87
(c) Reductions 2,550,45 2,260,87
(d) Closing balance 1,424,71 1,360,45

NPAs include all assets that are classified as non-performing by the Bank. Movements in
retail NPAs have been computed at a portfolio level.

• In accordance with RBI guidelines dated September 24, 2009, gross NPAs and
provision for NPA as of April 1, 2009 and as of March 31, 2010 exclude interest held in
suspense in respect of NPA accounts. Previous year’s figures are not recomputed.

81
BUSINESS RATIOS
For the Year Ended
Particulars 31-Mar-10 31-Mar-09
Interest income as a percentage of working funds(1) 8.39% 9.28%
Net interest income as a percentage of working funds 4.35% 4.22%
Non-interest income as a percentage of working funds 1.97% 1.87%
Operating profit(2) as a percentage of working funds 3.33% 2.94%
Return on assets (average) 1.53% 1.28%
Business(3) per employee (Rs. lacs) 5,90 4,46
Profit per employee(4) (Rs. lacs) 5.98 4.18
Percentage of NPAs(5) to customer assets(6) 0.31% 0.62%
Percentage of NPAs to net advances(7) 0.31% 0.63%
Gross NPAs to gross advances 1.43% 1.98%
Provision Coverage Ratio(8) 78.42% 68.43%

Definitions :
1. Working funds is the daily average of total assets during the year.
2. Operating profit is net profit for the year before provisions and contingencies.
3. “Business” is the total of net advances and deposits (net of inter-bank deposits).
4. Productivity ratios are based on average employee numbers.
5. Net NPAs are non-performing assets net of interest in suspense, specific provisions,
floating provisions, ECGC claims received and provisions in lieu of diminution in the fair
value of restructured assets (as on March 31, 2010).
6. Customer assets include gross advances (but net of interest in suspense (as on March
31, 2010), specific and floating provisions), credit substitutes like debentures,
commercial paper and loans and investments in securitised assets bought in.
7. Net advances are equivalent to gross advances net of bills rediscounted, specific loan
loss provisions, floating provisions, interest in suspense, ECGC claims received and
provisions in lieu of diminution in the fair value of restructured assets (as on March 31,
2010).
8. Provision coverage ratio is based on specific loan loss provisions and floating
provisions does not include assets written off.

82
 TRENDS OF NPA IN HDFC BANK AND VARIOUS OTHER BANKS

SECTOR-WISE NPAs

Percentage of NPAs to Total Advances in sector (%)

Particulars HDFC BANK AXIS BANK
Agriculture and allied 0.91% 2.31%
activities
Industry (Micro & Small, 1.46% 0.95%
Medium and Large)
Services 3.86% 0.69%
Personal Loans 1.11% 1.86%

INTERPRETATION
As we can interpret from the above table that:
• In various sectors, HDFC Bank is having less NPAs as compared to another private
bank i.e. Axis Bank in Agricultural sector.
• In case of Industrial sector, HDFC Bank is not performing well resulting in more
losses.
• In the Services sector, HDFC Bank is having very high percentage of NPA as
compared to the Axis Bank.

83
SECTOR-WISE NPAs

Percentage of NPAs to Total Advances in sector (%)

Particulars HDFC BANK PNB BANK
Agriculture and allied 0.91 3.65%
activities
Industry (Micro & Small, 1.46 0.92%
Medium and Large)
Services 3.86 1.93%
Personal Loans 1.11 2.18%

INTERPRETATION
• Here in case of comparison with a Public sector bank i.e. PNB Bank, the
performance is same as with the case of Private Bank.
• In the Personal Loans sector also, HDFC Bank is having less NPA as compared to
PNB Bank.

84
YEARLY COMPARISON OF PUBLIC SECTOR BANK
SBI BANK
Rs. In Crore
Particulars 2007-08 2008-09 2009-10
Gross NPA Ratio 3.04% 2.86% 3.05%
Net NPA Ratio 1.78% 1.79% 1.72%
Gross NPAs 12837 15714 19535
Net NPAs 7424 9677 10870
Gross Advances 422308 548540 641480
Net Advances 416895 542144 631914

INTERPRETATION
• Analysing the records of NPAs of a Public Sector Bank i.e. SBI Bank of three preceding
years, we can say that the Banks are not able to reduce it.
• This is mainly due to the loan policies implemented by the Govt.

% of NPA to Customer Assets

YEAR HDFC ICICI

March 31, 2009 0.62% 1.96%
March 31, 2010 0.31% 1.87%

NPA RATIOES OF HDFC BANK & AXIS BANK

Particulars HDFC AXIS

Percentage of Net NPAs to Net Advances 0.31% 0.40%
Percentage of Gross NPAs to Gross Advances 1.43% 1.25%

85
 FINDINGS

1. The reduction in loan installment to 90 days may raise the NPA levels in the short
run. But in turn will improve the asset quality of the banks.

2. The lenders cannot take undue advantage of the new act. Provisions for lenders
liquidity have been added to protect the borrowers against irresponsible claims by
lenders.

3. Private Banks have more efficient management of NPAs as compared to PSBs.

4. Due to the introduction of securitisation, public sector banks have been able to
reduce their NPAs to a considerable event.

5. Securitization Act is remarkable legislation in the Indian Banking history, certain

issues are yet to be resolved for effective, implementation of the Act.

6. NPA art can help reset lending rates.

86
 CONCLUSION

• There has been a continuous decrease in the time period considered to declare a
loan as non-performing. The continuous decrease in the time period is to bring
the Indian banking norms at par with international norms. This move will
certainly reduce the NPAs and in turn improve the asset quality of the banks.

• Till recent past, corporate borrowers even after defaulting continuously never had
the fear of bank taking action to recover their dues. This is because there was no
legal framework to safeguard the real interest of banks.

• However with the introduction of SARFAECI ACT banks can issue notices to
defaulters to repay their loans. Also, the Supreme Court has recently given the
banks the freedom to sell mortgage assets of the borrowers, if they do not respond
to the legal proceedings initiated by lender. This enables banks to get rid of sticky
loans thereby improving their bottom lines.

87
 SUGGESTIONS

• There surely is a need to distinguish between willful and unwilling defaulters. In case
of the latter category of defaulters the law should not be as harsh as in case of willful
defaulters.

• The act should be judiciously and selectively applied so that NPAs could be
converted into performing assets.

• Compromise wherever possible and desirable should be resorted to as per bank’s

extent terms and conditions.

• Creation of additional benches and enhancing the capacity of DRT (debt recovery
tribunal) can be rationalized and delays could be avoided.

• Segregation of the benches should be done in order to ensure that a flood of small
cases do not retard the disposal of larger cases.

In order to reduce the balance of NPAs, Bank should constantly review and monitor the
accounts and the progress of the project for which the loan has been sanctioned.

88
 BIBLIOGRAPHY

Journals and magazines

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

• Chartered Financial Analyst, August 2004, B P Dhaka, Page 58-62; “SARFAESI

ACT: THE DIAGNOSIS”.

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

• Treasury Management, December 2004, MPM Vinay Kumar, Page 62-65;

“SECURITISATION : ISSUES AND PERSPECTIVES”.

• Chartered Secretary, Feburary 2003, V S Datey, Page 128-135; “SECURITISATION,

RECONSTRUCTION AND ENFORCEMENT OF SECURITY INTEREST”.

WEBSITES:

• www.statebankofindia.com
• www.reservebankofindia.org
• www.indianbanksassociation.org
• www.hdfcbank.com
• www.axisbank.com

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