A

PROJECT REPORT
ON

A Project Report
On
COMPARATIVE ANALYSIS ON
NON PERFORMING ASSETS
OF PRIVATE AND PUBLIC SECTOR BANKS

SUBMITTED IN PARTIAL FULFILLMENT OF REQUIRMENT OF

PGDBF PROGRAME

SYMBIOSIS
Centre For Distance Learning
Symbiosis Bhavan,1065B,Gokhale Cross Road,
Model Colony,Pune - 411016

SUBMITTED BY:
Submitted By:
Name: POOJA JAIN
Registeration No. : 201705948
Batch: 2017-19
Project title:
COMPARATIVE ANALYSIS ON
NON PERFORMING ASSETS
OF PRIVATE AND PUBLIC SECTOR BANKS

By:
POOJA JAIN

A project report submitted in partial fulfillment of the requirement for the degree of Post
Distance education wing
Syndicate house
Manipal-576 104
 ANNEXURE B (STUDENT DECLARATION)

This is to declare that I have carried out this project report entitled COMPARATIVE ANALYSIS
ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS submitted in
partial fulfillment of Post Graduate Diploma in Banking & Finance of SCDL.The work is original, has
not been copied from anywhere else and has not been submitted to any other University/Institute for an
award of any degree / diploma.

Date: Signature: POOJA JAIN

Place: New Delhi Name: Pooja Jain
 ANNUXERE – D (UNIVERSITY STUDY CENTRE CERTIFICATE)

This is to certify that the project report entitled COMPARATIVE ANALYSIS ON NON
PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTORS BANKS submitted by Pooja
Jain in her original work and completed under my supervision.
Material obtained from other sources has been duly acknowledged in the Project Report.

Date : Signature of Guide :

Place: Delhi Name: Anupam Thakur

(Manager)
9097681727
 ACKNOWLEDGEMENT
With a deep sense of gratitude I express we thanks to all those who have been instrumental
in the development of the project report.

I am also grateful to Symbiosis Centre For Distance Learning , Pune who gave me a valuable
opportunity of involving me in real live business project. I am thankful to all the professors
whose positive attitude, guidance and faith in my ability spurred me to perform well.

I am also indebted to all lecturers, friends and associates for their valuable advice, stimulated
suggestions and overwhelming support without which the project would not have been a
success.

INTRODUCTION

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

importance. The depth of the problem of bad debts was first realized only in early 1990s.
The magnitude of NPAs in banks and financial institutions is over Rs.1,50,000 crores.
 While gross NPA reflects the quality of the loans made by banks, net NPA shows
the actual burden of banks. Now it is increasingly evident that the major defaulters are the big
borrowers coming from the non-priority sector. The banks and financial institutions have to
take the initiative to reduce NPAs in a time bound strategic approach.

Public sector banks figure prominently in the debate not only because they
dominate the banking industries, but also since they have much larger NPAs compared with
the private sector banks. This raises a concern in the industry and academia because it is
generally felt that NPAs reduce the profitability of a banks, weaken its financial health and
erode its solvency.

For the recovery of NPAs a broad framework has evolved for the management
of NPAs under which several options are provided for debt recovery and restructuring. Banks
and FIs have the freedom to design and implement their own policies for recovery and write-
off incorporating compromise and negotiated settlements.
RESEARCH METHODOLOGY

Type of Research

The research methodology adopted for carrying out the study were

In this project Descriptive research methodologies were use .

At the first stage theoretical study is attempted.

At the second stage Historical study is attempted.

At the Third stage Comparative study of NPA is undertaken.

Scope of the Study

Concept of Non Performing Asset
Guidelines
Impact of NPAs
Reasons for NPAs
Preventive Measures
Tools to manage NPAs

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

OBJECTIVES OF THE STUDY

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

To study the past trends of NPA

To calculate the weighted of NPA in risk management in Banking

To analyze financial performance of banks at different level of NPA

To evaluate profitability positions of banks

To evaluate NPA level in different economic situation.

To Know the Concept of Non Performing Asset

To Know the Impact of NPAs

To Know the Reasons for NPAs

To learn Preventive Measures

Source of data collection

The data collected for the study was secondary data in Nature.
 ((( CONTENTS )))
CHAPTER SUBJECT PAGE NO.
NO. COVERED
1 Introduction to NPAs

2 Research Methodology
Scope of Research
Type of Research
Sources of Data Collection
Objective of Study
Data Collection

3 Introduction to Topic
Definition
History of Indian Banking
Non Performing Assets
Factor for rise in NPAs
Problem due to NPAs
Types of NPAs
Income Recognition
Reporting of NPAs

4 Provisioning Norms
General
Floating provisions
Leased Assets
Guideline under special
circumstances

5 Impact, Reasons and

Symptoms of NPAs
Internal & External Factor
Early Symptoms
6 Preventive Measurement
Early Recognition of
Problem
Identifying Borrowers with
genuine Intent
Timeliness
Focus on Cash flow
Management
Effectiveness
Multiple Financing

7 Tools for Recovery

Willful default
Inability to Pay
Special Cases
Role of ARCIL

8 Analysis
Deposit-Investment-
Advances
Gross NPAs and Net
NPAs
Priority and Non-Priority
Sector

9 Finding, Suggestions
and Conclusions

10 Bibliography
 Introduction to the topic

The three letters “NPA” Strike terror in banking sector and business circle today. NPA is short
form of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or
other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically
turns a non performing asset. The recovery of loan has always been problem for banks and
financial institution. To come out of these first we need to think is it possible to avoid NPA, no
can not be then left is to look after the factor responsible for it and managing those factors.

Definitions:

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank.

A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest
and/ or instalment of principal has remained ‘past due’ for a specified period of time.

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

Interest and/ or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,

The account remains ‘out of order’ for a period of more than 90 days, in respect of an
Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,

Interest and/or instalment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural
purposes, and
Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been advised to
move over to charging of interest at monthly rests, by April 1, 2002. However, the date of
classification of an advance as NPA should not be changed on account of charging of interest
at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the
interest charged during any quarter is not serviced fully within 180 days from the end of the
quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from
March 31, 2004.
 HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial services. By the
term bank is generally understood an institution that holds a Banking Licenses. Banking
licenses are granted by financial supervision authorities and provide rights to conduct the
most fundamental banking services such as accepting deposits and making loans. There are
also financial institutions that provide certain banking services without meeting the legal
definition of a bank, a so-called Non-bank. Banks are a subset of the financial services
industry.

The word bank is derived from the Italian banca, which is derived from German and means
bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to
an out of business bank, having its bench physically broken. Moneylenders in Northern Italy
originally did business in open areas, or big open rooms, with each lender working from his
own bench or table.

Typically, a bank generates profits from transaction fees on financial services or the interest
spread on resources it holds in trust for clients while paying them interest on the asset.
Development of banking industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed that the transition
from money lending to banking must have occurred even before Manu, the great Hindu Jurist,
who has devoted a section of his work to deposits and advances and laid down rules relating
to rates of interest.

Banking in India has an early origin where the indigenous bankers played a very important
role in lending money and financing foreign trade and commerce. During the days of the East
India Company, was the turn of the agency houses to carry on the banking business. The
General Bank of India was first Joint Stock Bank to be established in the year 1786. The
others which followed were the Bank Hindustan and the Bengal Bank.

In the first half of the 19th century the East India Company established three banks; the Bank
of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three
banks also known as Presidency banks were amalgamated in 1920 and a new bank, the
Imperial Bank of India was established in 1921. With the passing of the State Bank of India
Act in 1955 the undertaking of the Imperial Bank of India was taken by the newly constituted
State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935 by passing
Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in
1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for
licensing, supervision and control of banks. Considering the proliferation of weak banks, RBI
compulsorily merged many of them with stronger banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the geographical
coverage and financial spread of the banking system in the country. As certain rigidities and
weaknesses were found to have developed in the system, during the late eighties the
Government of India felt that these had to be addressed to enable the financial system to play
its role in ushering in a more efficient and competitive economy. Accordingly, a high-level
committee was set up on 14 August 1991 to examine all aspects relating to the structure,
organization, functions and procedures of the financial system. Based on the
recommendations of the Committee (Chairman: Shri M. Narasimham), a comprehensive
reform of the banking system was introduced in 1992-93. The objective of the reform
measures was to ensure that the balance sheets of banks reflected their actual financial
health. One of the important measures related to income recognition, asset classification and
provisioning by banks, on the basis of objective criteria was laid down by the Reserve Bank.
The introduction of capital adequacy norms in line with international standards has been
another important measure of the reforms process.

1. Comprises balance of expired loans, compensation and other bonds such as National
Rural Development Bonds and Capital Investment Bonds. Annuity certificates are excluded.
2. These represent mainly non- negotiable non- interest bearing securities issued to
International Financial Institutions like International Monetary Fund, International Bank for
Reconstruction and Development and Asian Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits of
Non- Government

In the post-nationalization era, no new private sector banks were allowed to be set up.
However, in 1993, in recognition of the need to introduce greater competition which could
lead to higher productivity and efficiency of the banking system, new private sector banks
were allowed to be set up in the Indian banking system. These new banks had to satisfy
among others, the following minimum requirements:

It should be registered as a public limited company;

The minimum paid-up capital should be Rs 100 crore;
The shares should be listed on the stock exchange;
The headquarters of the bank should be preferably located in a centre which does not have
the headquarters of any other bank; and
The bank will be subject to prudential norms in respect of banking operations, accounting and
other policies as laid down by the RBI. It will have to achieve capital adequacy of eight per
cent from the very beginning.
A high level Committee, under the Chairmanship of Shri M. Narasimham, was constituted by
the Government of India in December 1997 to review the record of implementation of financial
system reforms recommended by the CFS in 1991 and chart the reforms necessary in the
years ahead to make the banking system stronger and better equipped to compete effectively
in international economic environment. The Committee has submitted its report to the
Government in April 1998. Some of the recommendations of the Committee, on prudential
accounting norms, particularly in the areas of Capital Adequacy Ratio, Classification of
Government guaranteed advances, provisioning requirements on standard advances and
more disclosures in the Balance Sheets of banks have been accepted and implemented. The
other recommendations are under consideration.

The banking industry in India is in a midst of transformation, thanks to the economic

liberalization of the country, which has changed business environment in the country. During
the pre-liberalization period, the industry was merely focusing on deposit mobilization and
branch expansion. But with liberalization, it found many of its advances under the non-
performing assets (NPA) list. More importantly, the sector has become very competitive with
the entry of many foreign and private sector banks. The face of banking is changing rapidly.
There is no doubt that banking sector reforms have improved the profitability, productivity and
efficiency of banks, but in the days ahead banks will have to prepare themselves to face new
challenges.

Indian Banking: Key Developments

1969 Government acquires ownership in

major banks
Almost all banking operations in manual
mode
Some banks had Unit record Machines
 of IBM for IBR & Pay roll

1970- 1980 Unprecedented expansion in

geographical coverage, staff, business &
transaction volumes and directed
lending to agriculture, SSI & SB sector
Manual systems struggle to handle
exponential rise in transaction volumes
--
Outsourcing of data processing to
service bureau begins
Back office systems only in Multinational
(MNC) banks' offices

1981- 1990 Regulator (read RBI) led IT introduction

in Banks
Product level automation on stand alone
PCs at branches (ALPMs)
In-house EDP infrastructure with Unix
boxes, batch processing in Cobol for
MIS.
Mainframes in corporate office

1991-1995 Expansion slows down

Banking sector reforms resulting in
progressive de-regulation of banking,
introduction of prudential banking norms
entry of new private sector banks
Total Branch Automation (TBA) in Govt.
owned and old private banks begins
New private banks are set up with
 CBS/TBA form the start

1996-2000 New delivery channels like ATM, Phone

banking and Internet banking and
convenience of any branch banking and
auto sweep products introduced by new
private and MNC banks
Retail banking in focus, proliferation of
credit cards
Communication infrastructure improves
and becomes cheap. IDRBT sets up
VSAT network for Banks
Govt. owned banks feel the heat and
attempt to respond using intermediary
technology, TBA implementation surges
ahead under fiat from Central Vigilance
Commission (CVC), Y2K threat
consumes last two years

2000-2003 Alternate delivery channels find wide

consumer acceptance
IT Bill passed lending legal validity to
electronic transactions
Govt. owned banks and old private
banks start implementing CBSs, but
initial attempts face problems
Banks enter insurance business launch
debit cards
(Source: M.Y.KHAN, “INDIAN FINANCIAL SYSYEM”,3rd edition Publication by TATA McGraw
hill)

NON PERFORMING ASSETS (NPA)

WHAT IS A NPA (NON PERFORMING ASSETS) ?

Action for enforcement of security interest can be initiated only if the secured asset is
classified as Nonperforming asset.

Non performing asset means an asset or account of borrower ,which has been classified by
bank or financial institution as sub –standard , doubtful or loss asset, in accordance with the
direction or guidelines relating to assets classification issued by RBI .

An amount due under any credit facility is treated as “past due” when it is not been paid
within 30 days from the due date. Due to the improvement in the payment and settlement
system, recovery climate, up gradation of technology in the banking system etc, it was
decided to dispense with “past due “concept, with effect from March 31, 2001. Accordingly as
from that date, a Non performing asset shell be an advance where

Interest and/or installment of principal remain overdue for a period of more than 180 days in
respect of a term loan,

The account remains ‘out of order ‘ for a period of more than 180 days ,in respect of an
overdraft/cash credit (OD/CC)

The bill remains overdue for a period of more than 180 days in case of bill purchased or
discounted.

Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose ,and
Any amount to be received remains overdue for a period of more than 180 days in respect of
other accounts

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt ’90 days overdue ‘norms for identification of NPAs
,from the year ending March 31,2004,a non performing asset shell be a loan or an advance
where;

Interest and/or installment of principal remain overdue for a period of more than 90 days in
respect of a term loan,

The account remains ‘out of order ‘ for a period of more than 90 days ,in respect of an
overdraft/cash credit (OD/CC)

The bill remains overdue for a period of more than 90 days in case of bill purchased or
discounted.

Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose ,and

Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts

Out of order

An account should be treated as out of order if the outstanding balance remains

continuously in excess of sanctioned limit /drawing power. in case where the out standing
balance in the principal operating account is less than the sanctioned amount /drawing
power, but there are no credits continuously for six months as on the date of balance sheet
or credit are not enough to cover the interest debited during the same period ,these account
should be treated as ‘out of order’.

Overdue

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on due
date fixed by the bank.
FACTORS FOR RISE IN NPAs

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

EXTERNAL FACTORS :-

Ineffective recovery tribunal

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

Willful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing it. These
groups of people should be identified and proper measures should be taken in order to get
back the money extended to them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit.

Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the
farmers are not to achieve the production level thus they are not repaying the loans.

Industrial sickness

Improper project handling , ineffective management , lack of adequate resources , lack of

advance technology , day to day changing govt. Policies give birth to industrial sickness.
Hence the banks that finance those industries ultimately end up with a low recovery of their
loans reducing their profit and liquidity.

Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they borrow
to operate these activities. The banks recover the amount by selling of their assets, which
covers a minimum label. Thus the banks record the non recovered part as NPAs and has to
make provision for it.

Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to cope
with the changing principles and policies for the regulation of the rising of NPAs.

The fallout of handloom sector is continuing as most of the weavers Co-operative societies
have become defunct largely due to withdrawal of state patronage. The rehabilitation plan
worked out by the Central government to revive the handloom sector has not yet been
implemented. So the over dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS :-

Defective Lending process

There are three cardinal principles of bank lending that have been followed by the commercial
banks since long.

Principles of safety
Principle of liquidity

Principles of profitability

Principles of safety :-

By safety it means that the borrower is in a position to repay the loan both principal and
interest. The repayment of loan depends upon the borrowers:

Capacity to pay

Willingness to pay

Capacity to pay depends upon:

1. Tangible assets
2. Success in business

Willingness to pay depends on:

1. Character
2. Honest
3. Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise or business for
which a loan is sought is a sound one and the borrower is capable of carrying it out
successfully .he should be a person of integrity and good character.

Inappropriate technology
Due to inappropriate technology and management information system, market driven
decisions on real time basis can not be taken. Proper MIS and financial accounting system is
not implemented in the banks, which leads to poor credit collection, thus NPA. All the
branches of the bank should be computerized.

Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise in
NPAs. While providing unsecured advances the banks depend more on the honesty, integrity,
and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from_

From bankers.

Enquiry from market/segment of trade, industry, business.

From external credit rating agencies.

Analyze the balance sheet.

True picture of business will be revealed on analysis of profit/loss a/c and balance sheet.

Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To ensure safety and
liquidity, banks should grant loan for productive purpose only. Bank should analyze the
profitability, viability, long term acceptability of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good credit
appraisal to decrease the NPAs.

Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible assets
as security to safe guard its interests. When accepting securities banks should consider the_

1. Marketability

2. Acceptability

3. Safety

4. Transferability.

The banker should follow the principle of diversification of risk based on the famous
maxim “do not keep all the eggs in one basket”; it means that the banker should not grant
advances to a few big farms only or to concentrate them in few industries or in a few cities. If
a new big customer meets misfortune or certain traders or industries affected adversely, the
overall position of the bank will not be affected.
 Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries.
The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector
Orissa hand loom WCS ltd (2439.60lakhs).

Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to willful defaulters can be collected by regular visits.

Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day
by day.

PROBLEMS DUE TO NPA

Owners do not receive a market return on there capital .in the worst case, if the banks fails,
owners loose their assets. In modern times this may affect a broad pool of shareholders.

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

Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit
rates and higher lending rates repress saving and financial market, which hamper economic
growth.
Non performing loans epitomize bad investment. They misallocate credit from good projects,
which do not receive funding, to failed projects. Bad investment ends up in misallocation of
capital, and by extension, labour and natural resources.

Non performing asset may spill over the banking system and contract the money stock, which
may lead to economic contraction. This spill over effect can channelize through liquidity or
bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity shortage.
This can jam payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the banks capital base.

The three letters Strike terror in banking sector and business circle today. NPA is short form
of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other due
to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a
non performing asset. The recovery of loan has always been problem for banks and financial
institution. To come out of these first we need to think is it possible to avoid NPA, no can not
be then left is to look after the factor responsible for it and managing those factors.

Interest and/or instalment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural
purposes, and

Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been advised to
move over to charging of interest at monthly rests, by April 1, 2002. However, the date of
classification of an advance as NPA should not be changed on account of charging of interest
at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the
interest charged during any quarter is not serviced fully within 180 days from the end of the
quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from
March 31, 2004.

'Out of Order' status:

 An account should be treated as 'out of order' if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on the date of
Balance Sheet or credits are not enough to cover the interest debited during the same period,
these accounts should be treated as 'out of order'.
‘Overdue’:
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
on the due date fixed by the bank.
 Types of NPA

A] Gross NPA
B] Net NPA

A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by
banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss
assets.
It can be calculated with the help of following ratio:

Gross NPAs Ratio  Gross NPAs

Gross Advances

B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross and
net NPA is quite high.
It can be calculated by following_

Net NPAs  Gross NPAs – Provisions

Gross Advances - Provisions
 INCOME RECOGNITION

Income recognition – Policy

The policy of income recognition has to be objective and based on the record of recovery.
Internationally income from non-performing assets (NPA) is not recognised on accrual basis
but is booked as income only when it is actually received. Therefore, the banks should not
charge and take to income account interest on any NPA.

However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies
may be taken to income account on the due date, provided adequate margin is available in
the accounts.

Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of

outstanding debts should be recognised on an accrual basis over the period of time covered
by the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on such advances should not
be taken to income account unless the interest has been realised.

Reversal of income:

If any advance, including bills purchased and discounted, becomes NPA as at the close of
any year, interest accrued and credited to income account in the corresponding previous
year, should be reversed or provided for if the same is not realised. This will apply to
Government guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should cease to
accrue in the current period and should be reversed or provided for with respect to past
periods, if uncollected.

Leased Assets

 The net lease rentals (finance charge) on the leased asset accrued and credited to income
account before the asset became non-performing, and remaining unrealised, should be
reversed or provided for in the current accounting period.
 The term 'net lease rentals' would mean the amount of finance charge taken to the credit
of Profit & Loss Account and would be worked out as gross lease rentals adjusted by amount
of statutory depreciation and lease equalisation account.

 As per the 'Guidance Note on Accounting for Leases' issued by the Council of the
Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account
should be opened by the banks with a corresponding debit or credit to Lease Adjustment
Account, as the case may be. Further, Lease Equalisation Account should be transferred
every year to the Profit & Loss Account and disclosed separately as a deduction from/addition
to gross value of lease rentals shown under the head 'Gross Income'.

Appropriation of recovery in NPAs

Interest realised on NPAs may be taken to income account provided the credits in the
accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the
borrower concerned.

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

Interest Application:
There is no objection to the banks using their own discretion in debiting interest to an NPA
account taking the same to Interest Suspense Account or maintaining only a record of such
interest in proforma accounts.

Reporting of NPAs

Banks are required to furnish a Report on NPAs as on 31 st March each year after completion
of audit. The NPAs would relate to the banks’ global portfolio, including the advances at the
foreign branches. The Report should be furnished as per the prescribed format given in the
Annexure I.

While reporting NPA figures to RBI, the amount held in interest suspense account, should be
shown as a deduction from gross NPAs as well as gross advances while arriving at the net
NPAs. Banks which do not maintain Interest Suspense account for parking interest due on
non-performing advance accounts, may furnish the amount of interest receivable on NPAs as
a foot note to the Report.

Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be
reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in
the quantum of NPAs being reported.

REPORTING FORMAT FOR NPA – GROSS AND NET NPA

Name of the Bank:

Position as on………

PARTICULARS

Gross Advanced *

Gross NPA *

Gross NPA as %age of Gross Advanced

Total deduction( a+b+c+d )

( a ) Balance in interest suspense a/c **

( b ) DICGC/ECGC claims received and

held pending
adjustment

( c ) part payment received and kept in

suspense a/c

( d ) Total provision held ***

Net advanced ( 1-4 )

Net NPA ( 2-4 )

Net NPA as a %age of Net Advance

*excluding Technical write-off of Rs.________crore.

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

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

assets. (Rs._____crore).

Asset Classification
-------------------------------
Categories of NPAs

Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this case
the arrears of interest and the principal amount of loan does not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is amount due more than
90 days then it is NPA and NPAs are further need to classify in sub categories.

Banks are required to classify non-performing assets further into the

following three categories based on the period for which the asset has remained non-
performing and the realisability of the dues:

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

( 1 ) Sub-standard Assets:--
With effect from 31 March 2005, a sub standard asset would be one, which has remained
NPA for a period less than or equal to 12 month. The following features are exhibited by sub
standard assets: the current net worth of the borrowers / guarantor or the current market
value of the security charged is not enough to ensure recovery of the dues to the banks in full;
and the asset has well-defined credit weaknesses that jeopardise the liquidation of the debt
and are characterised by the distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.

( 2 ) Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as
sub-standard, with the added characteristic that the weaknesses make collection or
liquidation in full, – on the basis of currently known facts, conditions and values – highly
questionable and improbable.

With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the
sub-standard category for 12 months.

( 3 ) Loss Assets:--
A loss asset is one which considered uncollectible and of such little value that its continuance
as a bankable asset is not warranted- although there may be some salvage or recovery value.
Also, these assets would have been identified as ‘loss assets’ by the bank or internal or
external auditors or the RBI inspection but the amount would not have been written-off wholly.
 Provisioning Norms
------------------------------------------
General

In order to narrow down the divergences and ensure adequate provisioning by banks, it was
suggested that a bank's statutory auditors, if they so desire, could have a dialogue with RBI's
Regional Office/ inspectors who carried out the bank's inspection during the previous year
with regard to the accounts contributing to the difference.

Pursuant to this, regional offices were advised to forward a list of individual advances, where
the variance in the provisioning requirements between the RBI and the bank is above certain
cut off levels so that the bank and the statutory auditors take into account the assessment of
the RBI while making provisions for loan loss, etc.

The primary responsibility for making adequate provisions for any diminution in the value of
loan assets, investment or other assets is that of the bank managements and the statutory
auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to
assist the bank management and the statutory auditors in taking a decision in regard to
making adequate and necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on the non-performing
assets on the basis of classification of assets into prescribed categories as detailed in
paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful
of recovery, its recognition as such, the realisation of the security and the erosion over time in
the value of security charged to the bank, the banks should make provision against sub-
standard assets, doubtful assets and loss assets as below:

Loss assets:
The entire asset should be written off. If the assets are permitted to remain in the books for
any reason, 100 percent of the outstanding should be provided for.

Doubtful assets:

100 percent of the extent to which the advance is not covered by the realisable value of the
security to which the bank has a valid recourse and the realisable value is estimated on a
realistic basis.
In regard to the secured portion, provision may be made on the following basis, at the rates
ranging from 20 percent to 50 percent of the secured portion depending upon the period for
which the asset has remained doubtful:

Period for which the advance has Provision

been considered as doubtful requirement (%)

Up to one year 20

One to three years 30

More than three years: 60% with effect from March 31,2005.
Outstanding stock of NPAs as on March 75% effect from March 31, 2006.
31, 2004. 100% with effect from March 31, 2007.
Advances classified as ‘doubtful’ more
than three years on or after April 1,
2004.

Additional provisioning consequent upon the change in the definition of doubtful assets
effective from March 31, 2003 has to be made in phases as under:
 As on 31.03.2003, 50 percent of the additional provisioning requirement on the assets
which became doubtful on account of new norm of 18 months for transition from sub-standard
asset to doubtful category.

 As on 31.03.2002, balance of the provisions not made during the previous year, in addition
to the provisions needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning consequent upon the reduction in
the transition period from substandard to doubtful asset from 18 to 12 months over a four year
period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.

Note: Valuation of Security for provisioning purposes

With a view to bringing down divergence arising out of difference in assessment of the value
of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual
intervals by external agencies appointed as per the guidelines approved by the Board would
be mandatory in order to enhance the reliability on stock valuation. Valuers appointed as per
the guidelines approved by the Board of Directors should get collaterals such as immovable
properties charged in favour of the bank valued once in three years.

Sub-standard assets:

A general provision of 10 percent on total outstanding should be made without making any
allowance for DICGC/ECGC guarantee cover and securities available.

Standard assets:

From the year ending 31.03.2000, the banks should make a general provision of a minimum
of 0.40 percent on standard assets on global loan portfolio basis.

The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross advances but shown
separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and
Provisions - Others' in Schedule 5 of the balance sheet.

Floating provisions:

Some of the banks make a 'floating provision' over and above the
specific provisions made in respect of accounts identified as NPAs. The floating provisions,
wherever available, could be set-off against provisions required to be made as per above
stated provisioning guidelines. Considering that higher loan loss provisioning adds to the
overall financial strength of the banks and the stability of the financial sector, banks are urged
to voluntarily set apart provisions much above the minimum prudential levels as a desirable
practice.

Provisions on Leased Assets:

Leases are peculiar transactions where the assets are not recorded in the books of the user
of such assets as Assets, whereas they are recorded in the books of the owner even though
the physical existence of the asset is with the user (lessee).
__(AS19 ICAI)

Sub-standard assets : -

 10 percent of the 'net book value'.

 As per the 'Guidance Note on Accounting for Leases' issued by the ICAI, 'Gross book
value' of a fixed asset is its historical cost or other amount substituted for historical cost in the
books of account or financial statements. Statutory depreciation should be shown separately
in the Profit & Loss Account. Accumulated depreciation should be deducted from the Gross
Book Value of the leased asset in the balance sheet of the lesser to arrive at the 'net book
value'.

Also, balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book
value' of the leased assets. The amount of adjustment in respect of each class of fixed assets
may be shown either in the main balance sheet or in the Fixed Assets Schedule as a
separate column in the section related to leased assets.

Doubtful assets :-
100 percent of the extent to which the finance is not secured by the realisable value of the
leased asset. Realisable value to be estimated on a realistic basis. In addition to the above
provision, the following provision on the net book value of the secured portion should be
made, depending upon the period for which asset has been doubtful:
Period %age of provision

Up to one year 20

One to three years 30

More than three years 50

Loss assets :-
The entire asset should be written-off. If for any reason, an asset is allowed to remain in
books, 100 percent of the sum of the net investment in the lease and the unrealised portion of
finance income net of finance charge component should be provided for. ('net book value')

Guidelines for Provisions under Special

Circumstances
Government guaranteed advances

 With effect from 31 March 2000, in respect of advances sanctioned against State
Government guarantee, if the guarantee is invoked and remains in default for more than two
quarters (180 days at present), the banks should make normal provisions as prescribed in
paragraph 4.1.2 above.

 As regards advances guaranteed by State Governments, in respect of which guarantee

stood invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased
manner, during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25
percent each year.

Advances granted under rehabilitation packages approved by

BIFR/term lending institutions:

 In respect of advances under rehabilitation package approved by BIFR/term lending

institutions, the provision should continue to be made in respect of dues to the bank on the
existing credit facilities as per their classification as sub-standard or doubtful asset.

 As regards the additional facilities sanctioned as per package finalised by BIFR and/or term
lending institutions, provision on additional facilities sanctioned need not be made for a period
of one year from the date of disbursement.

 In respect of additional credit facilities granted to SSI units which are identified as sick [as
defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002] and
where rehabilitation packages/nursing programmes have been drawn by the banks
themselves or under consortium arrangements, no provision need be made for a period of
one year.

Advances against term deposits, NSCs eligible for surrender,

IVPs, KVPs, and life policies are exempted from provisioning
requirements.

However, advances against gold ornaments, government

securities and all other kinds of securities are not exempted from
provisioning requirements.

Treatment of interest suspense account:

Amounts held in Interest Suspense Account should not be reckoned as part of provisions.
Amounts lying in the Interest Suspense Account should be deducted from the relative
advances and thereafter, provisioning as per the norms, should be made on the balances
after such deduction.

Advances covered by ECGC/DICGC guarantee

In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the
balance in excess of the amount guaranteed by these Corporations. Further, while arriving
at the provision required to be made for doubtful assets, realisable value of the securities
should first be deducted from the outstanding balance in respect of the amount guaranteed by
these Corporations and then provision made as illustrated hereunder:

Example
Outstanding Balance Rs. 4 lakhs

DICGC Cover 50 percent

Period for which the advance hasMore than 3 years remained doubtful
remained doubtful

Value of security heldRs. 1.50 lakhs

(excludes worth of Rs.)
Provision required to be made
Outstanding balance Rs. 4.00 lakhs

Less: Value of security held Rs. 1.50 lakhs

Unrealised balance Rs. 2.50 lakhs

Less: DICGC CoverRs. 1.25 lakhs

(50% of unrealisable balance)

Net unsecured balance Rs. 1.25 lakhs

Provision for unsecured portion ofRs. 1.25 lakhs (@ 100 percent of

advance unsecured portion)

Provision for secured portion of advance Rs. 0.75 lakhs (@ 50 percent of secured
portion)

Total provision required to be made Rs. 2.00 lakhs

Advance covered by CGTSI guarantee

In case the advance covered by CGTSI guarantee becomes non-performing, no provision

need be made towards the guaranteed portion. The amount outstanding in excess of the
guaranteed portion should be provided for as per the extant guidelines on provisioning for
non-performing advances. Two illustrative examples are given below:

Example I
Asset classification status: Doubtful – More than 3 
years;

CGTSI Cover 75% of the amount 

outstanding or 75% of the
unsecured amount or
Rs.18.75 lakh, whichever
is the least
Realisable value ofRs.1.50 lakh  
Security

Balance outstanding Rs.10.00 lakh  

Less Realisable value ofRs. 1.50 lakh

security

Unsecured amount Rs. 8.50 lakh  

Less CGTSI cover (75%) Rs. 6.38 lakh  

Net unsecured andRs. 2.12 lakh  

uncovered portion:

    Provision Required

Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)

Unsecured & uncoveredRs.2.12 lakh Rs. 2.12 lakh ( 100%)

portion

Total provision required   Rs. 2.87 lakh

Example II
Asset classification status Doubtful – More than 3 
years;

CGTSI Cover 75% of the amount 

outstanding or75% of the
unsecured amount or
Rs.18.75 lakh, whichever
is the least

Realisable value ofRs.10.00 lakh  

Security

Balance outstanding Rs.40.00 lakh  

Less Realisable value ofRs. 10.00 lakh

security

Unsecured amount Rs. 30.00 lakh  

Less CGTSI cover (75%) Rs. 18.75 lakh  

Net unsecured andRs. 11.25 lakh  

uncovered portion:

    Provision Required

Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%)

Unsecured & uncoveredRs.11.25 lakh Rs.11.25 lakh (100%)

portion

Total provision required   Rs. 16.25 lakh

Take-out finance

The lending institution should make provisions against a 'take-out finance' turning into NPA
pending its take-over by the taking-over institution. As and when the asset is taken-over by
the taking-over institution, the corresponding provisions could be reversed.

Reserve for Exchange Rate Fluctuations Account (RERFA)

When exchange rate movements of Indian rupee turn adverse, the outstanding amount of
foreign currency denominated a loan (where actual disbursement was made in Indian Rupee)
which becomes overdue goes up correspondingly, with its attendant implications of
provisioning requirements. Such assets should not normally be revalued. In case such assets
need to be revalued as per requirement of accounting practices or for any other requirement,
the following procedure may be adopted:
 The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account.
Besides the provisioning requirement as per Asset Classification, banks should treat the full
amount of the Revaluation Gain relating to the corresponding assets, if any, on account of
Foreign Exchange Fluctuation as provision against the particular assets.

Impact of NPA

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

Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shot\rtes period of time which lead to additional cost to the company.
Difficulty in operating the functions of bank is another cause of NPA due to lack of money.
Routine payments and dues.

Involvement of management:-
Time and efforts of management is another indirect cost which bank has to bear due to NPA.
Time and efforts of management in handling and managing NPA would have diverted to some
fruitful activities, which would have given good returns. Now day’s banks have special
employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market
credit. It will lose it’s goodwill and brand image and credit which have negative impact to the
people who are putting their money in the banks .

REASONS FOR NPA:

Reasons can be divided in to two broad categories:-

A] Internal Factor
B] External Factor

[ A ] Internal Factors:-

Internal Factors are those, which are internal to the bank and are controllable by banks.
Poor lending decision:

Non-Compliance to lending norms:

Lack of post credit supervision:

Failure to appreciate good payers:

Excessive overdraft lending:

Non – Transparent accounting policy:

[ B ] External Factors:-
External factors are those, which are external to banks they are not controllable by banks.

Socio political pressure:

Chang in industry environment:

Endangers macroeconomic disturbances:

Natural calamities

Industrial sickness
Diversion of funds and willful defaults

Time/ cost overrun in project implementation

Labour problems of borrowed firm

Business failure

Inefficient management

Obsolete technology

Product obsolete

Early symptoms by which one can recognize a

performing asset turning in to Non-performing asset

Four categories of early symptoms:-

---------------------------------------------------

( 1 ) Financial:

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

Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid over due bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that installment.
While monitoring the accounts it is found that partial amount is diverted to sister concern or
parent company.

(2) Operational and Physical:

If information is received that the borrower has either initiated the process of winding up or
are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where borrower conduct his
business.
Frequent changes in plan.
Non payment of wages.
( 3 ) Attitudinal Changes:

 Use for personal comfort, stocks and shares by borrower.

 Avoidance of contact with bank.
 Problem between partners.

( 4 ) Others:

 Changes in Government policies.

 Death of borrower.
 Competition in the market.
 Preventive Measurement For NPA

 Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, it’s too late
to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s
dues. Identification of weakness in the very beginning that is : When the account starts
showing first signs of weakness regardless of the fact that it may not have become NPA, is
imperative. Assessment of the potential of revival may be done on the basis of a techno-
economic viability study. Restructuring should be attempted where, after an objective
assessment of the promoter’s intention, banks are convinced of a turnaround within a
scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to
facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through
legal means before the security position becomes worse.

 Identifying Borrowers with Genuine Intent:-

Identifying borrowers with
genuine intent from those who are non- serious with no commitment or stake in revival is a
challenge confronting bankers. Here the role of frontline officials at the branch level is
paramount as they are the ones who has intelligent inputs with regard to promoters’ sincerity,
and capability to achieve turnaround. Base don this objective assessment, banks should
decide as quickly as possible whether it would be worthwhile to commit additional finance.

In this regard banks may consider having “Special Investigation” of all financial transaction
or business transaction, books of account in order to ascertain real factors that contributed to
sickness of the borrower. Banks may have penal of technical experts with proven expertise
and track record of preparing techno-economic study of the project of the borrowers.
 Borrowers having genuine problems due to temporary mismatch in fund flow or
sudden requirement of additional fund may be entertained at branch level, and for this
purpose a special limit to such type of cases should be decided. This will obviate the need to
route the additional funding through the controlling offices in deserving cases, and help avert
many accounts slipping into NPA category.

Timeliness and Adequacy of response:-

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial
element in any restructuring or rehabilitation activity. The response decided on the basis of
techno-economic study and promoter’s commitment, has to be adequate in terms of extend of
additional funding and relaxations etc. under the restructuring exercise. The package of
assistance may be flexible and bank may look at the exit option.

 Focus on Cash Flows:-

While financing, at the time of restructuring the banks may not be guided by the conventional
fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh
credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow
rather than only on the basis of Funds Flow.

 Management Effectiveness:-

The general perception among borrower is that it is lack of finance that leads to sickness and
NPAs. But this may not be the case all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that affects a borrowing unit’s
fortunes. A bank may commit additional finance to an aling unit only after basic viability of the
enterprise also in the context of quality of management is examined and confirmed. Where
the default is due to deeper malady, viability study or investigative audit should be done – it
will be useful to have consultant appointed as early as possible to examine this aspect. A
proper techno- economic viability study must thus become the basis on which any future
action can be considered.

 Multiple Financing:-

During the exercise for assessment of viability and restructuring, a Pragmatic and unified
approach by all the lending banks/ FIs as also sharing of all relevant information on the
borrower would go a long way toward overall success of rehabilitation exercise, given the
probability of success/failure.

In some default cases, where the unit is still working, the bank should make sure that it
captures the cash flows (there is a tendency on part of the borrowers to switch bankers
once they default, for fear of getting their cash flows forfeited), and ensure that such cash
flows are used for working capital purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not part of the consortium, may not
be allowed to offer credit facilities to such defaulting clients. Current account facilities may
also be denied at non-consortium banks to such clients and violation may attract penal action.
The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful
information exchange on defaulting borrowers once the setup becomes fully operational.

In a forum of lenders, the priority of each lender will be different. While one set of lenders may
be willing to wait for a longer time to recover its dues, another lender may have a much
shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing
to exit, even a t a cost – by a discounted settlement of the exposure. Therefore, any plan for
restructuring/rehabilitation may take this aspect into account.

Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a

timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and
above with the banks and FIs on a voluntary basis and outside the legal framework. Under
this system, banks may greatly benefit in terms of restructuring of large standard accounts
(potential NPAs) and viable sub-standard accounts with consortium/multiple banking
arrangements.
Tools for recovery of NPAs
Once NPA occurred, one must come out of it or it should be managed in most efficient
manner. Legal ways and means are there to over come and manage NPAs. We will look into
each one of it.

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

B] Securitization Act

C] Asset Reconstruction

Lok Adalat:

Lok Adalat institutions help banks to settle disputes involving account in

“doubtful” and “loss” category, with outstanding balance of Rs. 5 lakh for compromise
settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok
Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to
be quite effective for speedy justice and recovery of small loans. The progress through this
channel is expected to pick up in the coming years.

 Debt Recovery Tribunals(DRT):

The recovery of debts due to banks and financial

institution passed in March 2000 has helped in strengthening the function of DRTs. Provision
for placement of more than one recovery officer, power to attach defendant’s property/assets
before judgment, penal provision for disobedience of tribunal’s order or for breach of any
terms of order and appointment of receiver with power of realization, management, protection
and preservation of property are expected to provide necessary teeth to the DRTs and speed
up the recovery of NPAs in the times to come. DRTs which have been set up by the
Government to facilitate speedy recovery by banks/DFIs, have not been able make much
impact on loan recovery due to variety of reasons like inadequate number, lack of
infrastructure, under staffing and frequent adjournment of cases. It is essential that DRT
mechanism is strengthened and vested with a proper enforcement mechanism to enforce
their orders. Non observation of any order passed by the tribunal should amount to contempt
of court, the DRT should have right to initiate contempt proceedings. The DRT should
empowered to sell asset of the debtor companies and forward the proceed to the winding –
up court for distribution among the lenders

Inability to Pay

Consortium arrangements:
Asset classification of accounts under consortium
should be based on the record of recovery of the individual member banks and other
aspects having a bearing on the recoverability of the advances. Where the remittances by the
borrower under consortium lending arrangements are pooled with one bank and/or where the
bank receiving remittances is not parting with the share of other member banks, the account
will be treated as not serviced in the books of the other member banks and therefore, be
treated as NPA. The banks participating in the consortium should, therefore, arrange to get
their share of recovery transferred from the lead bank or get an express consent from the lead
bank for the transfer of their share of recovery, to ensure proper asset classification in their
respective books.
Corporate debt Restructuring (CDR):

Background
In spite of their best efforts and intentions, sometimes corporate find themselves in financial
difficulty because of factors beyond their control and also due to certain internal reasons. For
the revival of the corporate as well as for the safety of the money lent by the banks and FIs,
timely support through restructuring in genuine cases is called for. However, delay in
agreement amongst different lending institutions often comes in the way of such endeavours.

Based on the experience in other countries like the U.K., Thailand, Korea, etc. of putting in
place institutional mechanism for restructuring of corporate debt and need for a similar
mechanism in India, a Corporate Debt Restructuring System has been evolved, as under :

Objective

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and
transparent mechanism for restructuring of the corporate debts of viable entities facing
problems, outside the purview of BIFR, DRT and other legal proceedings, for the
benefit of all concerned. In particular, the framework will aim at preserving viable corporate
that are affected by certain internal and external factors and minimize the losses to the
creditors and other stakeholders through an orderly and coordinated restructuring
programme.

Structure:

CDR system in the country will have a three-tier structure:

(A) CDR Standing Forum

(B) CDR Empowered Group
(C) CDR Cell

(A) CDR Standing Forum :

The CDR Standing Forum would be the representative general body of all financial institutions
and banks participating in CDR system. All financial institutions and banks should participate
in the system in their own interest. CDR Standing Forum will be a self-empowered body,
which will lay down policies and guidelines, guide and monitor the progress of corporate debt
restructuring.

The Forum will also provide an official platform for both the creditors and borrowers (by
consultation) to amicably and collectively evolve policies and guidelines for working out debt
restructuring plans in the interests of all concerned.

The CDR Standing Forum shall comprise Chairman & Managing Director, Industrial
Development Bank of India; Managing Director, Industrial Credit & Investment Corporation of
India Limited; Chairman, State Bank of India; Chairman, Indian Banks Association and
Executive Director, Reserve Bank of India as well as Chairmen and Managing Directors of all
banks and financial institutions participating as permanent members in the system. The
Forum will elect its Chairman for a period of one year and the principle of rotation will be
followed in the subsequent years. However, the Forum may decide to have a Working
Chairman as a whole-time officer to guide and carry out the decisions of the CDR Standing
Forum.

A CDR Core Group will be carved out of the CDR Standing Forum to assist the Standing
Forum in convening the meetings and taking decisions relating to policy, on behalf of the
Standing Forum. The Core Group will consist of Chief Executives of IDBI, ICICI, SBI, Bank of
Baroda, Bank of India, Punjab National Bank, Indian Banks Association and a representative
of Reserve Bank of India.

The CDR Standing Forum shall meet at least once every six months and would review and
monitor the progress of corporate debt restructuring system. The Forum would also lay down
the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for
debt restructuring and would ensure their smooth functioning and adherence to the prescribed
time schedules for debt restructuring. It can also review any individual decisions of the CDR
Empowered Group and CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell (described in following
paragraphs) shall be housed in IDBI. All financial institutions and banks shall share the
administrative and other costs. The sharing pattern shall be as determined by the Standing
Forum.
CDR Empowered Group and CDR Cell:

The individual cases of corporate debt restructuring shall be decided by the CDR Empowered
Group, consisting of ED level representatives of IDBI, ICICI Limited and SBI as standing
members, in addition to ED level representatives of financial institutions and banks who have
an exposure to the concerned company. In order to make the CDR Empowered Group
effective and broad based and operate efficiently and smoothly, it would have to be ensured
that each financial institution and bank, as participants of the CDR system, nominates a panel
of two or three EDs, one of whom will participate in a specific meeting of the Empowered
Group dealing with individual restructuring cases. Where, however, a bank / financial
institution has only one Executive Director, the panel may consist of senior officials, duly
authorized by its Board. The level of representation of banks/ financial institutions on the CDR
Empowered Group should be at a sufficiently senior level to ensure that concerned bank / FI
abides by the necessary commitments including sacrifices, made towards debt restructuring.

The Empowered Group will consider the preliminary report of all cases of requests of
restructuring, submitted to it by the CDR Cell. After the Empowered Group decides that
restructuring of the company is prima-facie feasible and the enterprise is potentially viable in
terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring
package will be worked out by the CDR Cell in conjunction with the Lead Institution.

The CDR Empowered Group would be mandated to look into each case of debt restructuring,
examine the viability and rehabilitation potential of the Company and approve the
restructuring package within a specified time frame of 90 days, or at best 180 days of
reference to the Empowered Group.

There should be a general authorisation by the respective Boards of the participating

institutions / banks in favour of their representatives on the CDR Empowered Group,
authorising them to take decisions on behalf of their organization, regarding restructuring of
debts of individual corporate.

The decisions of the CDR Empowered Group shall be final and action-reference point. If
restructuring of debt is found viable and feasible and accepted by the Empowered Group, the
company would be put on the restructuring mode. If, however, restructuring is not found
viable, the creditors would then be free to take necessary steps for immediate recovery of
dues and / or liquidation or winding up of the company, collectively or individually.
CDR Cell:
The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in
all their functions. The CDR Cell will make the initial scrutiny of the proposals received from
borrowers / lenders, by calling for proposed rehabilitation plan and other information and put
up the matter before the CDR Empowered Group, within one month to decide whether
rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to prepare detailed
Rehabilitation Plan with the help of lenders and if necessary, experts to be engaged from
outside. If not found prima facie feasible, the lenders may start action for recovery of their
dues.

To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate members of staff
for the Cell will be deputed from banks and financial institutions. The CDR Cell may also take
outside professional help. The initial cost in operating the CDR mechanism including CDR
Cell will be met by IDBI initially for one year and then from contribution from the financial
institutions and banks in the Core Group at the rate of Rs.50 lakh each and contribution from
other institutions and banks at the rate of Rs.5 lakh each.
All references for corporate debt restructuring by lenders or borrowers will be made to the
CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to the
corporate, to work out a preliminary restructuring plan in consultation with other stakeholders
and submit to the CDR Cell within one month. The CDR Cell will prepare the restructuring
plan in terms of the general policies and guidelines approved by the CDR Standing Forum
and place for the consideration of the Empowered Group within 30 days for decision. The
Empowered Group can approve or suggest modifications, so, however, that a final decision
must be taken within a total period of 90 days. However, for sufficient reasons the period can
be extended maximum upto 180 days from the date of reference to the CDR Cell.

Other features:
CDR will be a Non-statutory mechanism.

CDR mechanism will be a voluntary system based on debtor-creditor agreement and inter-
creditor agreement.
The scheme will not apply to accounts involving only one financial institution or one bank. The
CDR mechanism will cover only multiple banking accounts / syndication / consortium
accounts with outstanding exposure of Rs.20 crore and above by banks and institutions.

The CDR system will be applicable only to standard and sub-standard accounts. However, as
an interim measure, permission for corporate debt restructuring will be made available by RBI
on the basis of specific recommendation of CDR "Core-Group", if a minimum of 75 per cent
(by value) of the lenders constituting banks and FIs consent for CDR, irrespective of
differences in asset classification status in banks/ financial institutions. There would be no
requirement of the account / company being sick, NPA or being in default for a
specified period before reference to the CDR Group. However, potentially viable cases of
NPAs will get priority. This approach would provide the necessary flexibility and facilitate
timely intervention for debt restructuring. Prescribing any milestone(s) may not be necessary,
since the debt restructuring exercise is being triggered by banks and financial institutions or
with their consent. In no case, the requests of any corporate indulging in wilful default or
misfeasance will be considered for restructuring under CDR.

Reference to Corporate Debt Restructuring System could be triggered by (i) any or more of
the secured creditor who have minimum 20% share in either working capital or term finance,
or (ii) by the concerned corporate, if supported by a bank or financial institution having stake
as in (i) above.

Legal Basis

The legal basis to the CDR mechanism shall be provided by the Debtor-Creditor Agreement
(DCA) and the Inter-Creditor Agreement. The debtors shall have to accede to the DCA,
either at the time of original loan documentation (for future cases) or at the time of reference
to Corporate Debt Restructuring Cell. Similarly, all participants in the CDR mechanism
through their membership of the Standing Forum shall have to enter into a legally binding
agreement, with necessary enforcement and penal clauses, to operate the System through
laid-down policies and guidelines.

Stand-Still Clause:

One of the most important elements of Debtor-Creditor Agreement

would be 'stand still' agreement binding for 90 days, or 180 days by both sides. Under this
clause, both the debtor and creditor(s) shall agree to a legally binding 'stand-still' whereby
both the parties commit themselves not to taking recourse to any other legal action
during the 'stand-still' period, this would be necessary for enabling the CDR System to
undertake the necessary debt restructuring exercise without any outside intervention judicial
or otherwise.

The Inter-Creditors Agreement would be a legally binding agreement amongst the secured
creditors, with necessary enforcement and penal clauses, wherein the creditors would commit
themselves to abide by the various elements of CDR system. Further , the creditors shall
agree that if 75% of secured creditors by value, agree to a debt restructuring package, the
same would be binding on the remaining secured creditors.

Accounting treatment for restructured accounts

The accounting treatment of accounts restructured under CDR would be governed by the
prudential norms indicated in circular DBOD. BP. BC. 98 / 21.04.048 / 2000-01 dated March
30, 2001. Restructuring of corporate debts under CDR could take place in the following
stages:

Before commencement of commercial production;

After commencement of commercial production but before the asset has been classified as
sub-standard;
After commencement of commercial production and the asset has been classified as sub-
standard.

The prudential treatment of the accounts, subjected to restructuring under CDR, would be
governed by the following norms:

Treatment of standard accounts restructured under CDR:

A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages
[paragraph 5(a) and (b) above] would not cause a standard asset to be classified in the sub-
standard category, provided the loan / credit facility is fully secured.

A rescheduling of interest element at any of the foregoing first two stages would not cause an
asset to be downgraded to sub-standard category subject to the condition that the amount of
sacrifice, if any, in the element of interest, measured in present value terms, is either written
off or provision is made to the extent of the sacrifice involved. For the purpose, the future
interest due as per the original loan agreement in respect of an account should be discounted
to the present value at a rate appropriate to the risk category of the borrower (i.e. current PLR
+ the appropriate credit risk premium for the borrower-category) and compared with the
present value of the dues expected to be received under the restructuring package,
discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)
above, the amount of sacrifice should either be written off or provision made to the extent of
the sacrifice involved.
Treatment of sub-standard accounts restructured under CDR

A rescheduling of the instalments of principal alone, would render a sub-standard asset

eligible to be continued in the sub-standard category for the specified period, provided the
loan / credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to be continued

to be classified in sub-standard category for the specified period subject to the condition that
the amount of sacrifice, if any, in the element of interest, measured in present value terms, is
either written off or provision is made to the extent of the sacrifice involved. For the purpose,
the future interest due as per the original loan agreement in respect of an account should be
discounted to the present value at a rate appropriate to the risk category of the borrower (i.e.,
current PLR + the appropriate credit risk premium for the borrower-category) and compared
with the present value of the dues expected to be received under the restructuring package,
discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)
above, the amount of sacrifice should either be written off or provision made to the extent of
the sacrifice involved. Even in cases where the sacrifice is by way of write off of the past
interest dues, the asset should continue to be treated as sub-standard.

The sub-standard accounts at (ii) (a), (b) and (c) above, which have been subjected to
restructuring, etc. whether in respect of principal instalment or interest amount, by whatever
modality, would be eligible to be upgraded to the standard category only after the specified
period, i.e., a period of one year after the date when first payment of interest or of principal,
whichever is earlier, falls due, subject to satisfactory performance during the period. The
amount of provision made earlier, net of the amount provided for the sacrifice in the interest
amount in present value terms as aforesaid, could also be reversed after the one-year period.

During this one-year period, the sub-standard asset will not deteriorate in its classification if
satisfactory performance of the account is demonstrated during the period. In case, however,
the satisfactory performance during the one year period is not evidenced, the asset
classification of the restructured account would be governed as per the applicable prudential
norms with reference to the pre-restructuring payment schedule.

The asset classification under CDR would continue to be bank-specific based on record of
recovery of each bank, as per the existing prudential norms applicable to banks.

Restructuring / Rescheduling of Loans

A standard asset where the terms of the loan agreement regarding interest and principal have
been renegotiated or rescheduled after commencement of production should be classified as
sub-standard and should remain in such category for at least one year of satisfactory
performance under the renegotiated or rescheduled terms. In the case of sub-standard and
doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance
automatically unless there is satisfactory performance under the rescheduled / renegotiated
terms. Following representations from banks that the foregoing stipulations deter the banks
from restructuring of standard and sub-standard loan assets even though the modification
of terms might not jeopardise the assurance of repayment of dues from the borrower, the
norms relating to restructuring of standard and sub-standard assets were reviewed in March
2001. In the context of restructuring of the accounts, the following stages at which the
restructuring / rescheduling / renegotiation of the terms of loan agreement could take place,
can be identified:

 Before commencement of commercial production;

 After commencement of commercial production but before the asset has been
classified as sub standard,
 After commencement of commercial production and after the asset has been classified as
sub standard.

In each of the foregoing three stages, the rescheduling, etc., of principal and/or of interest
could take place, with or without sacrifice, as part of the restructuring package evolved.

Treatment of Restructured Standard Accounts:

A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages
would not cause a standard asset to be classified in the sub standard category provided the
loan/credit facility is fully secured.

A rescheduling of interest element at any of the foregoing first two stages would not cause
an asset to be downgraded to sub standard category subject to the condition that the amount
of sacrifice, if any, in the element of interest, measured in present value terms, is either
written off or provision is made to the extent of the sacrifice involved. For the purpose, the
future interest due as per the original loan agreement in respect of an account should be
discounted to the present value at a rate appropriate to the risk category of the borrower (i.e.,
current PLR+ the appropriate credit risk premium for the borrower-category) and compared
with the present value of the dues expected to be received under the restructuring package,
discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)
above, the amount of sacrifice should either be written off or provision made to the extent
of the sacrifice involved.

Treatment of restructured sub-standard accounts:

A rescheduling of the instalments of principal alone, would render a sub-standard asset

eligible to be continued in the sub-standard category for the specified period, provided the
loan/credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to be

continued to be classified in sub standard category for the specified period subject to the
condition that the amount of sacrifice, if any, in the element of interest, measured in present
value terms, is either written off or provision is made to the extent of the sacrifice involved.
For the purpose, the future interest due as per the original loan agreement in respect of an
account should be discounted to the present value at a rate appropriate to the risk category of
the borrower (i.e., current PLR + the appropriate credit risk premium for the borrower-
category) and compared with the present value of the dues expected to be received under the
restructuring package, discounted on the same basis.
In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)
above, the amount of sacrifice should either be written off or provision made to the extent of
the sacrifice involved. Even in cases where the sacrifice is by way of write off of the past
interest dues, the asset should continue to be treated as sub-standard.
Up gradation of restructured accounts:

The sub-standard accounts which have been subjected to restructuring etc., whether in
respect of principal instalment or interest amount, by whatever modality, would be eligible to
be upgraded to the standard category only after the specified period i.e., a period of one year
after the date when first payment of interest or of principal, whichever is earlier, falls due,
subject to satisfactory performance during the period. The amount of provision made earlier,
net of the amount provided for the sacrifice in the interest amount in present value terms as
aforesaid, could also be reversed after the one year period. During this one-year period, the
sub-standard asset will not deteriorate in its classification if satisfactory performance of the
account is demonstrated during the period. In case, however, the satisfactory performance
during the one-year period is not evidenced, the asset classification of the restructured
account would be governed as per the applicable prudential norms with reference to the pre-
restructuring payment schedule.

General:

These instructions would be applicable to all type of credit facilities including working capital
limits, extended to industrial units, provided they are fully covered by tangible securities.
As trading involves only buying and selling of commodities and the problems associated with
manufacturing units such as bottleneck in commercial production, time and cost escalation
etc. are not applicable to them, these guidelines should not be applied to restructuring/
rescheduling of credit facilities extended to traders.

While assessing the extent of security cover available to the credit facilities, which are being
restructured/ rescheduled, collateral security would also be reckoned, provided such collateral
is a tangible security properly charged to the bank and is not in the intangible form like
guarantee etc. of the promoter/ others.

Income recognition

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

banks should not recognise income on accrual basis in respect of the projects even though
the asset is classified as a standard asset if the asset is a "non performing asset" in terms of
the extant instructions. In other words, while the accounts of the project may be classified as
a standard asset, banks shall recognise income in such accounts only on realisation on cash
basis if the asset has otherwise become ‘non performing’ as per the extant delinquency norm
of 180 days. The delinquency norm would become 90 days with effect from 31 March 2004.

Consequently, banks, which have wrongly recognised income in the past, should reverse the
interest if it was recognised as income during the current year or make a provision for an
equivalent amount if it was recognised as income in the previous year(s). As regards the
regulatory treatment of income recognised as ‘funded interest’ and ‘conversion into equity,
debentures or any other instrument’ banks should adopt the following:

 Funded Interest: Income recognition in respect of the NPAs, regardless of whether

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

 Conversion into equity, debentures or any other instrument: The amount

outstanding converted into other instruments would normally comprise principal and the
interest components. If the amount of interest dues is converted into equity or any other
instrument, and income is recognised in consequence, full provision should be made for the
amount of income so recognised to offset the effect of such income recognition. Such
provision would be in addition to the amount of provision that may be necessary for the
depreciation in the value of the equity or other instruments, as per the investment valuation
norms. However, if the conversion of interest is into equity, which is quoted, interest income
can be recognised at market value of equity, as on the date of conversion, not exceeding the
amount of interest converted to equity. Such equity must thereafter be classified in the
"available for sale" category and valued at lower of cost or market value. In case of
conversion of principal and /or interest in respect of NPAs into debentures, such debentures
should be treated as NPA, ab initio, in the same asset classification as was applicable to loan
just before conversion and provision made as per norms. This norm would also apply to zero
coupon bonds or other instruments which seek to defer the liability of the issuer. On such
debentures, income should be recognised only on realisation basis. The income in respect of
unrealised interest, which is converted into debentures or any other fixed maturity instrument,
should be recognised only on redemption of such instrument. Subject to the above, the equity
shares or other instruments arising from conversion of the principal amount of loan would also
be subject to the usual prudential valuation norms as applicable to such instruments.
Provisioning

While there will be no change in the extant norms on provisioning for NPAs, banks which are
already holding provisions against some of the accounts, which may now be classified as
‘standard’, shall continue to hold the provisions and shall not reverse the same.

Special Cases
Accounts with temporary deficiencies:

The classification of an asset as NPA should be based on the record of recovery. Bank
should not classify an advance account as NPA merely due to the existence of some
deficiencies which are temporary in nature such as non-availability of adequate drawing
power based on the latest available stock statement, balance outstanding exceeding the limit
temporarily, non-submission of stock statements and non-renewal of the limits on the due
date, etc. In the matter of classification of accounts with such deficiencies banks may follow
the following guidelines:

Banks should ensure that drawings in the working capital accounts are covered by the
adequacy of current assets, since current assets are first appropriated in times of distress.
Drawing power is required to be arrived at based on the stock statement which is current.
However, considering the difficulties of large borrowers, stock statements relied upon by the
banks for determining drawing power should not be older than three months. The outstanding
in the account based on drawing power calculated from stock statements older than three
months, would be deemed as irregular. A working capital borrower account will become NPA
if such irregular drawings are permitted in the account for a continuous period of 180 days
even though the unit may be working or the borrower's financial position is satisfactory.

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

Accounts regularised near about the balance sheet date:

The asset
classification of borrower accounts where a solitary or a few credits are recorded before the
balance sheet date should be handled with care and without scope for subjectivity. Where the
account indicates inherent weakness on the basis of the data available, the account should
be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to
the Statutory Auditors/Inspecting Officers about the manner of regularisation of the account to
eliminate doubts on their performing status.

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

It is difficult to envisage a situation when only one facility to a borrower becomes a problem
credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to
be treated as NPA and not the particular facility or part thereof which has become irregular.

If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in
a separate account, the balance outstanding in that account also should be treated as a part
of the borrower’s principal operating account for the purpose of application of prudential
norms on income recognition, asset classification and provisioning.

Accounts where there is erosion in the value of security

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

If the realisable value of the security, as assessed by the bank/ approved values/ RBI is less
than 10 per cent of the outstanding in the borrower accounts, the existence of security should
be ignored and the asset should be straightaway classified as loss asset. It may be either
written off or fully provided for by the bank.

Advances to PACS/FSS ceded to Commercial Banks:

In respect of
agricultural advances as well as advances for other purposes granted by banks to ceded
PACS/ FSS under the on-lending system, only that particular credit facility granted to PACS/
FSS which is in default for a period of two harvest seasons (not exceeding two half years)/two
quarters, as the case may be, after it has become due will be classified as NPA and not all
the credit facilities sanctioned to a PACS/ FSS. The other direct loans & advances, if any,
granted by the bank to the member borrower of a PACS/ FSS outside the on-lending
arrangement will become NPA even if one of the credit facilities granted to the same borrower
becomes NPA.

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

Advances against
term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated
as NPAs. Advances against gold ornaments, government securities and all other securities
are not covered by this exemption.

Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or for agricultural plantations etc.
where moratorium is available for payment of interest, payment of interest becomes 'due' only
after the moratorium or gestation period is over. Therefore, such amounts of interest do not
become overdue and hence NPA, with reference to the date of debit of interest. They become
overdue after due date for payment of interest, if uncollected.

In the case of housing loan or similar advances granted to staff members where interest is
payable after recovery of principal, interest need not be considered as overdue from the first
quarter onwards. Such loans/advances should be classified as NPA only when there is a
default in repayment of instalment of principal or payment of interest on the respective due
dates

Agricultural advances

In respect of advances granted for agricultural purpose where interest and/or instalment of
principal remains unpaid after it has become past due for two harvest seasons but for a
period not exceeding two half-years, such an advance should be treated as NPA. The above
norms should be made applicable to all direct agricultural advances as listed at items 1.1,
1.1.2 (i) to (vii), 1.1.2 (viii)(a)(1) and 1.1.2 (viii)(b)(1) of Master Circular on lending to priority
sector No. RPCD. PLAN. BC. 12/04.09.01/ 2001- 2002 dated 1 August 2001. An extract of
the list of these items is furnished in the Annexure II. In respect of agricultural loans, other
than those specified above, identification of NPAs would be done on the same basis as non
agricultural advances which, at present, is the 180 days delinquency norm.

Where natural calamities impair the repaying capacity of agricultural borrowers, banks may
decide on their own as a relief measure - conversion of the short-term production loan into a
term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-
term loan, subject to various guidelines contained in RBI circulars
RPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98 and
RPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.

In such cases of conversion or re-schedulement, the term loan as well as fresh short-term
loan may be treated as current dues and need not be classified as NPA. The asset
classification of these loans would thereafter be governed by the revised terms & conditions
and would be treated as NPA if interest and/or instalment of principal remains unpaid, for two
harvest seasons but for a period not exceeding two half years.

Government guaranteed advances:

The credit facilities backed by guarantee of the Central Government 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. With effect from 1st April 2000, advances sanctioned
against State Government guarantees should be classified as NPA in the normal course, if
the guarantee is invoked and remains in default for more than two quarters. With effect from
March 31, 2001 the period of default is revised as more than 180 days.
Take-out Finance:

Takeout finance is the product emerging in the context of the funding of long-term
infrastructure projects. Under this arrangement, the institution/the bank financing
infrastructure projects will have an arrangement with any financial institution for transferring to
the latter the outstanding in respect of such financing in their books on a pre-determined
basis. In view of the time-lag involved in taking-over, the possibility of a default in the
meantime cannot be ruled out. The norms of asset classification will have to be followed by
the concerned bank/financial institution in whose books the account stands as balance sheet
item as on the relevant date. If the lending institution observes that the asset has turned NPA
on the basis of the record of recovery, it should be classified accordingly. The lending
institution should not recognise income on accrual basis and account for the same only when
it is paid by the borrower/ taking over institution (if the arrangement so provides). The lending
institution should also make provisions against any asset turning into NPA pending its take
over by taking over institution. As and when the asset is taken over by the taking over
institution, the corresponding provisions could be reversed. However, the taking over
institution, on taking over such assets, should make provisions treating the account as NPA
from the actual date of it becoming NPA even though the account was not in its books as on
that date.

Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the banks covering export of goods to
countries for which the ECGC’s cover is available, EXIM Bank has introduced a guarantee-
cum-refinance programme whereby, in the event of default, EXIM Bank will pay the
guaranteed amount to the bank within a period of 30 days from the day the bank invokes the
guarantee after the exporter has filed claim with ECGC.

Accordingly, to the extent payment has been received from the EXIM Bank, the advance may
not be treated as a non-performing asset for asset classification and provisioning purposes.
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.

Advances under rehabilitation approved by BIFR/ TLI:

Banks are not
permitted to upgrade the classification of any advance in respect of which the terms have
been re-negotiated unless the package of re-negotiated terms has worked satisfactorily for a
period of one year. While the existing credit facilities sanctioned to a unit under rehabilitation
packages approved by BIFR/term lending institutions will continue to be classified as sub-
standard or doubtful as the case may be, in respect of additional facilities sanctioned under
the rehabilitation packages, the Income Recognition, Asset Classification norms will become
applicable after a period of one year from the date of disbursement.

ROLE OF ARCIL :-

This empowerment encouraged the three major players in Indian banking system, namely,
State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come
together to set-up the first ARC. Arcil was incorporated as a public limited company on
February 11, 2002 and obtained its certificate of commencement of business on May 7, 2003.
In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of registration
dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates under
powers conferred under the Securitization Act, 2002. Arcil is also a "financial institution" within
the meaning of Section 2 (h) (ia) of the Recovery of Debts due to Banks and Financial
Institutions Act, 1993 (the "DRT Act").
Arcil is the first ARC in the country to commence business of resolution of non-performing
assets (NPAs) upon acquisition from Indian banks and financial institutions. As the first ARC,
Arcil has played a pioneering role in setting standards for the industry in India.

Unlocking capital for the banking system and the economy

The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of
lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by
managing NPAs and help them concentrate on core banking activities thereby enhancing
shareholders value.

Creating a vibrant market for distressed debt assets / securities in India offering a
trading platform for Lenders

Arcil has made successful efforts in funneling investment from both from domestic and
international players for funding these acquisitions of distressed assets, followed by
showcasing them to prospective buyers. This has initiated creation of a secondary market of
distressed assets in the country besides hastening their resolution. The efforts of Arcil would
lead the country’s distressed debt market to international standards.

To evolve and create significant capacity in the system for quicker resolution of NPAs
by deploying the assets optimally

With a view to achieving high delivery capabilities for resolution, Arcil has put in place a
structure aimed at outsourcing the various sub-functions of resolution to specialized agencies,
wherever applicable under the provision of the Securitisation Act, 2002. Arcil has also
encourage, groomed and developed many such agencies to enhance its capacity in line with
the growth of its activity.
 ANALYSIS

For the purpose of analysis and comparison between private sector and public sector banks,
we take five-five banks in both sector to compare the non performing assets of banks. For
understanding we further bifurcate the non performing assets in priority sector and non priority
sector, gross NPA and net NPA in percentage as well as in rupees, deposit – investment –
advances.

Deposit – Investment – Advances is the first in the analysis because due to these we can
understand the where the bank stands in the competitive market. As at end of march 2008, in
private sector ICICI Bank is the highest deposit-investment-advances figures in rupees crore,
second is HDFC Bank and KOTAK Bank has least figures.
In public sector banks Punjab National Bank has highest deposit-investment-advances but
when we look at graph first three means Bank of Baroda and Bank of India are almost the
similar in numbers and Dena Bank is stands for last in public sector bank. When we compare
the private sector banks with public sector banks among these banks, we can understand the
more number of people prefer to choose public sector banks for deposit-investment.

But when we compare the private sector bank ICICI Bank with the public sector banks ICICI
Bank is more deposit-investment figures and first in the all banks.
DEPOSIT-INVESTMENT-ADVANCES ( RS.CRORE) of both sector banks and
comparison among them, year 2007-08.

BANK DEPOSIT INVESTMENT ADVANCES

AXIS 87626 33705 59661

HDFC 100769 49394 63427

ICICI 244431 111454 225616

KOTAK 16424 9142 15552

INDUSIND 19037 6630 12795

TOTAL 468287 210325 377051

EMBED MSGraph.Chart.8 \s

BANK DEPOSIT INVESTMENT ADVANCES

BOB 152034 43870 106701

BOI 150012 41803 113476

DENA 33943 10282 23024

PNB 166457 53992 119502

UBI 103859 33823 74348

TOTAL 606305 183770 437051

EMBED MSGraph.Chart.8 \s
ICICI BANK AND PUNJAB NATIONAL BANK :-

BANK DEPOSIT INVESTMENT ADVANCES

ICICI BANK 244431 111454 225616

PNB 166457 53992 119502

EMBED MSGraph.Chart.8 \s

There are two concepts related to non-performing assets_ gross and net. Gross refers to all
NPAs on a bank’s balance sheet irrespective of the provisions made. It consists of all the non
standard assets, viz. sub standard, doubtful, and loss assets. A loan asset is classified as ‘
sub standard” if it remains NPA up to a period of 18 months; “ doubtful” if it remains NPA for
more than 18 months; and loss, without any waiting period, where the dues are considered
not collectible or marginally collectible.
Net NPA is gross NPA less provisions. Since in India, bank balance sheets contains a huge
amount of NPAs and the process of recovery and write off of loans is very time consuming,
the provisions the banks have to make against the NPA according to the central bank
guidelines, are quite significant.

Here, we can see that there are huge difference between gross and net NPA. While gross
NPA reflects the quality of the loans made by banks, net NPA shows the actual burden
of banks. The requirements for provisions are :
100% for loss assets
100% of the unsecured portion plus 20-50% of the secured portion, depending on the period
for which the account has remained in the doubtful category
10% general provision on the outstanding balance under the sub standard category.

Here, there are gross and net NPA data for 2006-07 and 2007-08 we taken for comparison
among banks. These data are NPA AS PERCENTAGE OF TOTAL ASSETS. As we discuss
earlier that gross NPA reflects the quality of the loans made by banks. Among all the ten
banks Dena Banks has highest gross NPA as a percentage of total assets in the year 2006-
07 and also net NPA. Punjab National Bank shows vast difference between gross and net
NPA. There is almost same figures between BOI and BOB.
YEAR 2006-07

BANK GROSS NPA NET NPA

BOB 1.46 0.35

BOI 1.48 0.45

DENA 2.37 1.16

PNB 2.09 0.45

UBI 1.82 0.59

EMBED MSGraph.Chart.8 \s
2007-08

BANK GROSS NPA NET NPA

BOB 1.10 0.27

 BOI 1.08 0.33

DENA 1.48 0.56

PNB 1.67 0.38

UBI 1.34 0.10

EMBED MSGraph.Chart.8 \s
2006-07

BANK GROSS NPA NET NPA

AXIS 0.57 0.36

HDFC 0.72 0.22

ICICI 1.20 0.58

KOTAK 1.39 1.09

INDUSIND 1.64 1.31

EMBED MSGraph.Chart.8 \s
2007-08

BANK GROSS NPA NET NPA

AXIS 0.45 0.23

HDFC 0.68 0.22

ICICI 1.90 0.87

KOTAK 1.55 0.98

INDUSIND 1.69 1.25

EMBED MSGraph.Chart.8 \s

COMPARISON OF GROSS NPA WITH ALL BANKS FOR THE YEAR 2007-08. The growing
NPAs affects the health of banks, profitability and efficiency. In the long run, it eats up the net
worth of the banks. We can say that NPA is not a healthy sign for financial institutions. Here
we take all the ten banks gross NPA together for better understanding. Average of these ten
banks gross NPAs is 1.29 as percentage of total assets. So if we compare in private sector
banks AXIS and HDFC Bank are below average of all banks and in public sector BOB and
BOI. Average of these five private sector banks gross NPA is 1.25 and average of public
sector banks is 1.33. Which is higher in compare of private sector banks.

GROSS NPA :-

EMBED MSGraph.Chart.8 \s
COMPARISON OF NET NPA WITH ALL BANKS FOR THE YEAR 2007-08. Average of
these ten bank’s net NPA is 0.56. And in the public sector banks all these five banks are
below this. But in private sector banks there are three banks are above average. The
difference between private and public banks average is also vast. Private sector banks net
NPA average is 0.71 and in public sector banks it is 0.41 as percentage of total assets. As
we know that net NPA shows actual burden of banks. IndusInd bank has highest net NPA
figure and HDFC Bank has lowest in comparison.

NET NPA of banks:-

EMBED MSGraph.Chart.8 \s

PRIORITY –NON PRIORITY SECTOR

When we further bifurcate NPA in priority sector and Non priority sector. Agriculture + small +
others are priority sector. In private sector banks ICICI Bank has the highest NPA in both
sector in compare to other private sector banks. Around 72% of NPA is with ICICI Bank with
Rs.1359 crore in priority sector and around 78% in non priority sector. We can see that in
private sector banks , banks has more NPA in non priority sector than priority sector.

BANK

AGRI

(1)

SMALL

(2)

OTHERS

(3)

PRIORITY

SECTOR

( 1+2+3 )

NON-PRIORITY

AXIS

109.12 14.76 86.71 210.59 275.06

HDFC 36.12 110.56 47.70 194.41 709.23

ICICI 981.85 23.35 354.13 1359.34 6211.12

KOTAK 10.00 33.84 4.04 47.87 405.20

INDUSIND 30.44 3.18 30.02 63.64 328.67

TOTAL

1167.53

185.69

522.60

1875.85
 7929.28

EMBED MSGraph.Chart.8 \s

BANK PRIORITY SECTOR NPA

(ADVANCED RS.CRORE )

BOB 5469 350

BOI 3269 325

DENA 1160 106

PNB 3772 443

UBI 1924 197

EMBED MSGraph.Chart.8 \s
When we talk about public sector banks they are more in priority sector and they given
advanced to weaker sector or industries. Public sector banks give more loans to Agriculture ,
small scale and others units and as a result we see that there are more number of NPA in
public sector banks than in private sector banks. BOB given more advanced to priority sector
in 2007-08 than other four banks and Dena Bank is in least.

But when there are comparison between private bank and public sector bank still ICICI Bank
has more NPA in both priority and non priority sector with the comparison of public sector
banks. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and
initiative in each sector. Above we also discuss that ICICI Bank has highest deposit-
investment-advance than other banks.

Now, when we compare the all public sector banks and public sector banks on priority and
non-priority sector than the figures are really shocking. Because in compare of private sector
banks, public sector banks numbers are very large.
 PUBLIC SECTOR NEW PRIVATE

SECTOR 2007-08 2006-07 2007-08

PRIORITY 22954 25287 1468 2080

PUBLIC 490 299 3 0

NON PRT 15158 14163 4800 8339

TOTAL 38602 39749 6271 10419

Here, there are huge difference between private and public sector banks NPA. There is
increase in new private sector banks NPA of Rs.4148 cr in 2007-08 which is almost 66% rise
than previous year. In public sector banks the numbers are not increased like private sector
banks.

Credit Default

Inability to Pay
 Willful default

Viable

Unviable

Consortium Finance

Corporate Debt Restructuring

Lok Adalat
Debt Recovery Tribunals

Rehabilitation

Securitization Act

Compromise

Asset Reconstruction

Sole Banker

Rephasement of Repayment Period

 Fresh WC Limit

Fresh Issue of Term Loan

Conversion into WCTL