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A
PROJECT REPORT
ON
“COMPERATIVE ANALAYSIS ON NON PERFORMING ASSETS OF INDIAN BANKING
INDUSTRY.”
Submitted to Mumbai university, Mumbai
For the partial fulfillment for the award of MMS degree
Faculty Supervisor Submittedby:
Prof.FarukhMistri Swapnil Jain
Roll No.-1033
Faculty of management, MMS-IVthSem
MIMR.
MUMBAI INSTITUTE OF MANAGEMENT & RESERCH
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2012
“COMPERATIVE ANALAYSIS ON NON PERFORMING ASSETS OF INDIAN BANKING
INDUSTRY.”
By
Swapniljain
MMS IV SEMESTER
SUBMMITED TO THE DEPARTMENT OF MANAGEMENT STUDIES IN THE
PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF MASTER
OF M ANAGEMENT STUDIES
AT THE
MUMBAI INSTITUTE OF MANAGEMENT &RESERCH, MUMBAI
2012
The author hereby grants MIMR permission to reproduce and distribute publicly, paper and
electronic copies of the project report in whole or in part.
Signature of Student ___________________________________________________________
MUMBAI INSTITUTE OF MANAGEMENT & RESERCH, MUMBAI
Certified by ___________________________________________________________________
Vishwanathan Sir
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Director
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BGPS’S
MUMBAI INSTITUTE OF MANAGEMENT & RESEARCH
Founder Chairman : J K JADHAV
Former Director Of Industries, Govt Of Maharashtra
Ref No.: MIMR/0/10-11 Date: 26/07/2011
TO WHOMSOEVER IT MAY CONCERN
This is to certify that Mr.SwapnilJain ,abonafide student of Mumbai Institute Of
Management and Research, Mumbai has completed the project with title
“COMPERATIVE ANALAYSIS ON NON PERFORMING ASSETS OF INDIAN BANKING
INDUSTRY”. The project was undertaken in the partial fulfillment of master degree in
management studies under “University of Mumbai” during the academic year 2011-
2012
He has carried out his project under my guidance and supervision. His work was to
be satisfactory in all respects. He has duly acknowledged the sources of informationand data used for the purpose of completion of project report. We wish him all the
best for his future endeavors. .
Prof. FARUKH MISTRIProf. VISHWANATHAN
(Project Guide) (Director)
“J. K. KNOWLEDGE CENTRE”, Near Mbpt Hospital, Wadala (E), Mumbai - 400037
Tel: 24110879, Fax: 2416513 Email: miomr@yahoo.com
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ACKNOWLEDGEMENT
An endeavor to transform itself into success needs efforts. These efforts are individual, standing in
isolation. Such individual efforts require three things for their further development. These three
things being – “ Reasons, Rationality and Self -Esteem”. The combination of these three basic traits
delivers Productivity. However, time and again this productivity requires encouragement and
guidance. This much requisite support comes in the form of individuals furthering the development
of individuals’ .Prof essionals furthering the development of Amateurs. This acknowledgement is
an effort to recognize these professionals who have made this project a combination of the three
fundamental traits.
I express my deep sense of gratitude to company guide who spared his precious time and gave me
advice whenever I needed. I am also indebted to all other corporate staffs that helped me in the
successful completion of this project.
I would also like to express my sincere gratitude towards the director of our institute
PROF.VISHWANATHAN SIR. This project would not have been a success without their
motivation.
In the end I would like to thank the Almighty God and my Parents, who blessed me and
supported me every time I required
(SWAPNIL JAIN}
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TABLE OF CONTENTS
Abstract………………………………………………………………………06
Project Details………………………………………………………………..07
Introduction………………………………………………………………….12
Income Recognition…………………………………………………………24
Assets classification & Provisional Norms…………………………………28
Impact of NPA & Preventive Measurement for NPA………………… …..38
Tools & Recovery Of NPA…………………………………………………...45
Special Cases………………………………………………………………….53
Data analysis & Interpretation…………………………………………….62
Annexure…………………………………………………………………… .70
Bibliography………………………………………………………………...71
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The accumulation of huge non-performing assets in banks has assumed great
importance. The depth of the problem of bad debts was first realized only in early
1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,
50,000 crore.
While gross NPA reflects the quality of the loans made by banks,
net NPA shows the actual burden of banks. Now it is increasingly evident that themajor defaulters are the big borrowers coming from the non-priority sector. The
banks and financial institutions have to take the initiative to reduce NPAs in a time
bound strategic approach.
Public sector banks figure prominently in the debate not only
because they dominate the banking industries, but also since they have much larger
NPAs compared with the private sector banks. This raises a concern in the industry
and academia because it is generally felt that NPAs reduce the profitability of a
bank, weaken its financial health and erode its solvency.
For the recovery of NPAs a broad framework has evolved for the
management of NPAs under which several options are provided for debt recovery
and restructuring. Banks and FIs have the freedom to design and implement their
own policies for recovery and write-off incorporating compromise and negotiated
settlements.
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CHAPTER-1
Project Details
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OBJECTIVES OF THE STUDY
The basic idea behind undertaking the Grand Project on NPA was to: To evaluate NPAs (Gross and Net) in different banks.
To study the past trends of NPA.
To calculate the weighted of NPA in risk management in Banking
To analyze financial performance of banks at different level of NPA
Primary objective:
The primary objective of the making report is:
To know why NPAs are the great challenge to the Public Sector Banks
Secondary objectives:
The secondary objectives of preparing this report are:
To understand what is Non Performing Assets and what are the underlying
reasons for the emergence of the NPAs.
To understand the impacts of NPAs on the operations of the Public
SectorBanks.
To know what steps are being taken by the Indian banking sector to reducethe
NPAs?
To evaluate the comparative ratios of the Public Sector Banks withconcernedto the NPAs.
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RESEARCH METHODOLOGY
The research methodology means the way in which we would complete our prospected task. Before undertaking any task it becomes very essential for any one
to determine the problem of study. I have adopted the following procedure incompleting my report study.
1. Formulating the problem
2. Research design
3. Determining the data sources
4. Analysing the data
5. Interpretation6. Preparing research report
(1) Formulating the problem
I am interested in the banking sector and I want to make my future in the banking
sector so decided to make my research study on the banking sector. I analyzed first
the factors that are important for the banking sector and I came to know that providing credit facility to the borrower is one of the important factors as far as the
banking sector is concerned. On the basis of the analyzed factor, I felt that theimportant issue right now as far as the credit facilities are provided by bank is non
performing assets. I started knowing about the basics of the NPAs and decided to
study on the NPAs. So, I chose the topic “Non Performing Assets the great
challenge before the Public Sector and Private Banks”.
(2) Research Design
The research design tells about the mode with which the entire project is prepared.
My research design for this study is basically analytical. Because I have utilized thelarge number of data of the Public Sector Banks.
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(3) Determining the data source
The data source can be primary or secondary. The primary data are those data whichare used for the first time in the study. However such data take place much time and
are also expensive. Whereas the secondary data are those data which are alreadyavailable in the market. These data are easy to search and are not expensive too.for
my study I have utilised totally the secondary data.
(4) Analysing the data
The primary data would not be useful until and unless they are well edited andtabulated. When the person receives the primary data many unuseful data would also
be there. So, I analysed the data and edited them and turned them in the usefultabulations. So, that can become useful in my report study.
(5) Interpretation of the data
With use of analyzed data I managed to prepare my project report. But the analyzing
of data would not help the study to reach towards its objectives. The interpretation of
the data is required so that the others can understand the crux of the study in more
simple way without any problem so I have added the chapter of analysis that would
explain others to understand my study in simpler way.
(6) Project writing
This is the last step in preparing the project report. The objective of the report
writing was to report the findings of the study to the concerned authorities.
Scope of the Study
Concept of Non-Performing Asset
Guidelines
Impact of NPAs
Reasons for NPAs
Preventive Measures
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Limitations of the study
The limitations that I felt in my study are:
It was critical for me to gather the financial data of the every bank of the
Public Sector Banks so the better evaluations of the performance of the banksare not possible.
Since my study is based on the secondary data, the practical operations as
related to the NPAs are adopted by the banks are not learned.
Since the Indian banking sector is so wide so it was not possible for me tocover all the banks of the Indian banking sector.
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CHAPTER-2
INTRODUCTION
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Introduction
NPA. The three letters Strike terror in banking sector and business circletoday. NPA is short form of “Non Performing Asset”. The dreaded NPA rulesays simply this: when interest or other due to a bank remains unpaid formore than 90 days, the entire bank loan automatically turns a nonperforming asset. The recovery of loan has always been problem for banksand financial institution. To come out of these first we need to think is itpossible to avoid NPA, no cannot be then left is to look after the factorresponsible for it and managing those factors.
Defini t ions :
An asset, including a leased asset, becomes nonperforming when it ceasesto generate income for the bank. A „non-performing asset‟ (NPA) wasdefined as a credit facility in respect of which the interest and/ or installmentof principal has remained „past due‟ for a specified period of time.
With a view to moving towards international best practices and to ensuregreater transparency, it has been decided to adopt the „90 days’overdue’ norm for identification of NPAs, from the year ending March 31,2004. Accordingly, with effect from March 31, 2004, a non-performing asset(NPA) shall be a loan or an advance where;
Interest and/ or installment of principal remain overdue for a period ofmore than 90 days in respect of a term loan,
The account remains „out of order‟ for a period of more than 90 days,
in respect of an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the caseof bills purchased and discounted,
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Interest and/or installment of principal remains overdue for two harvestseasons but for a period not exceeding two half years in the case of anadvance granted for agricultural purposes.
As a facilitating measure for smooth transition to 90 days norm, banks have
been advised to move over to charging of interest at monthly rests, by April
1, 2002. However, the date of classification of an advance as NPA should
not be changed on account of charging of interest at monthly rests. Banks
should, therefore, continue to classify an account as NPA only if the interest
charged during any quarter is not serviced fully within 180 days from the end
of the quarter with effect from April 1, 2002 and 90 days from the end of the
quarter with effect from March 31, 2004.
NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA
To start with, performance in terms of profitability is a benchmark for any
business enterprise including the banking industry. However, increasing
NPAs have a direct impact on banks profitability as legally banks are not
allowed to book income on such accounts and at the sometime are forced to
make provision on such assets as per the Reserve Bank of India (RBI)guidelines. Also, with increasing deposits made by the public in the banking
system, the banking industry cannot afford defaults by borrower s since
NPAs affects the repayment capacity of banks. Further, Reserve Bank of
India (RBI) successfully creates excess liquidity in the system through
various rate cuts and banks fail to utilize this benefit to its advantage due to
the tear of burgeoning non-performing assets.
INDIAN ECONOMY AND NPAs
Undoubtedly the world economy has slowed down, recession is at its peak,
globally stock markets have tumbled and business itself is getting hard to do.
The Indian economy has been much affected due to high fiscal deficit, poor
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infrastructure facilities, sticky legal system, cutting of exposures to emerging
markets by FIs, etc. Further, international rating agencies like, Standard &
Poor have lowered India‟s credit rating to sub-investment grade. Such
negative aspects have often outweighed positives such as increasing forex
reserves and a manageable inflation rate.
Under such a situation, it goes without saying that banks are no exception
and are bound to face the heat of a global downturn. One would be surprised
to know that the banks and financial institution in India hold nonperforming
assets worth Rs. 110000 crores Bankers have realized that unless the level
of NPAs is reduced drastically, they will find it difficult to survive.
GLOBAL DEVELOPMENTS AND NPAs
The core banking business is of mobilizing the deposits and utilizing it for
lending to industry. Lending business is generally encouraged because it
has the effect of funds being transferred from the system to productive
purposes, which results into economic growth.
However lending also carries credit risk, which arises from the failure ofborrower to fulfill its contractual obligations either during the course of a
transaction or on a future obligation.
A question that arises is how much risk can a bank afford to take? Recent
happenings in the business world -Enron, WorldCom, Xerox, Global
Crossing do not give much confidence to banks.In case after case, these
giant corporate becan1e bankrupt and failed to provide investors with clearer
and more complete information thereby introducing a degree of risk thatmany investors could neither anticipate nor welcome. The history of financial
institutions also reveals the fact that the biggest banking failures were due to
credit risk. Due to this, banks are restricting their lending operations to
secured avenues only with adequate collateral on which to fall back upon in
a situation of default.
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FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs.
But the problem of NPAs is more in public sector banks when compared toprivate sector banks and foreign banks. The NPAs in PSB are growing dueto external as well as internal factors.
EXTERNAL FACTORS:-
Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works forrecovery of loans and advances. Due to their negligence and ineffectiveness
in their work the bank suffers the consequence of non-recover, therebyreducing their profitability and liquidity.
Willful Defaul
There are borrowers who are able to pay back loans but are intentionally
withdrawing it. These groups of people should be identified and proper
measures should be taken in order to get back the money extended to them
as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the
PSBs. every now and then India is hit by major natural calamities thus
making the borrowers unable to pay back there loans. Thus the bank has to
make large amount of provisions in order to compensate those loans, hence
end up the fiscal with a reduced profit. Mainly ours farmers depends on rain
fall for cropping. Due to irregularities of rain fall the farmers are not to
achieve the production level thus they are not repaying the loans.
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Industrial sickness
Improper project handling , ineffective management , lack of adequate
resources , lack of advance technology , day to day changing govt. Policies
give birth to industrial sickness. Hence the banks that finance thoseindustries ultimately end up with a low recovery of their loans reducing their
profit and liquidity
Lack of demand
Entrepreneurs in India could not foresee their product demand and starts
production which ultimately piles up their product thus making them unable
to pay back the money they borrow to operate these activities. The banks
recover the amount by selling of their assets, which covers a minimum label.Thus the banks record the non-recovered part as NPAs and has to make
provision for it.
Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thus
it has to cope with the changing principles and policies for the regulation of
the rising of NPAs.
The fallout of handloom sector is continuing as most of the weavers Co-
operative societies have become defunct largely due to withdrawal of state
patronage. The rehabilitation plan worked out by the Central government to
revive the handloom sector has not yet been implemented. So the over dues
due to the handloom sectors are becoming NPAs.
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INTERNAL FACTORS:-
Defective Lending process
There are three cardinal principles of bank lending that have been followed
by the commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability
iPrinciples of safety:-
By safety it means that the borrower is in a position to repay the loan both
principal and interest. The repayment of loan depends upon the borrowers:
a)Capacity to pay b) Willingness to pay
a) Capaci ty to pay depends u pon:
1. Tangible assets2. Success in business
b) Wil l ingness to pay d epends on:
1. Character2. Honest3. Reputation of borrower
The banker should, therefore take utmost care in ensuring that the enterprise
or business for which a loan is sought is a sound one and the borrower is
capable of carrying it out successfully.He should be a person of integrity andgoodcharacter.
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Inappropriate technology
Due to inappropriate technology and management information system,
market driven decisions on real time basis cannot be taken. Proper MIS and
financial accounting system is not implemented in the banks, which leads topoor credit collection, thus NPA. All the branches of the bank should be
computerized.
Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis is another
reason for rise in NPAs. While providing unsecured advances the banks
depend more on the honesty, integrity, and financial soundness and credit
worthiness of the borrower.
Banks should consider the borrowers own capitainvestment.
it should collect credit information of the borrowers from_
a. From bankers.
b. Enquiry from market/segment of trade, industry, business.
c. From external credit rating agencies.
Analyze the balance sheet .
True picture of business will be revealed on analysis of profit/loss a/c and
balance sheet.
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Purpose of the loan
When bankers give loan, he should analyze the purpose of the loan. To
ensure safety and liquidity, banks should grant loan for productive purposeonly. Bank should analyze the profitability, viability, long term acceptability of
the project while financing.
Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are not able to repay it
back. They should use good credit appraisal to decrease the NPAs.
Managerial deficiencies
The banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting
securities banks should consider the_
1. Marketability2. Acceptability
3. Safety4. Transferability.
The banker should follow the principle of diversification of risk based on the
famous maxim “do notkeep all the eggs in one basket”; it means that the
banker should not grant advances to a few big farms only or to concentrate
them in few industries or in a few cities. If a new big customer meets
misfortune or certain traders or industries affected adversely, the overall
position of the bank will not be affected.Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and
the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).
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Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly
visit of bank officials to the customer point decreases the collection ofinterest and principals on the loan. The NPAs due to willful defaulters can be
collected by regular visits.
Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of
the same have already affected the smooth operation of the credit cycle.
Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB
is increasing day by day.
PROBLEMS DUE TO NPA
Owners do not receive a market return on their capital .in the worst
case, if the banks fails, owners lose their assets In modern times this
may affect a broad pool of shareholders.
Depositors do not receive a market return on saving. In the worst caseif the bank fails, depositors lose their assets or uninsured balance.
Banks redistribute losses to other borrowers by charging higher
interest rates, lower deposit rates and higher lending rates repress
saving and financial market, which hamper economic growth.
Nonperforming loans epitomize bad investment. They misallocate
credit from good projects, which do not receive funding, to failed
projects. Bad investment ends up in misallocation of capital, and by
extension, labor andnatural resources. Nonperforming asset may spill
over the banking system andcontract the money stock, which may lead
to economiccontraction. This spillover effect can channelize through
liquidity or bank insolvency:
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When many borrowers fail to pay interest, banks may experience
liquidity shortage. This can jam payment across the country.
Illiquidity constraints bank in paying depositors
Undercapitalized banks exceed the bank‟s capital base.
'Out of Order' status :
An account should be treated as 'out of ord er ' if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power. In
cases where the outstanding balance in the principal operating account is
less than the sanctioned limit/drawing power, but there are no credits
continuously for six months as on the date of Balance Sheet or credits are
not enough to cover the interest debited during the same period, these
accounts should be treated as 'out of order'.
‘ Overdue‟:
Any amount due to the bank under any credit facility is „overdue‟ if it is not
paid on the due date fixed by the bank.
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Types of NPA
A] Gross NPA
B] Net NPA
A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs
as per RBI guidelines as on Balance Sheet date. Gross NPA ref lects th e
qual i ty of the loans madeby banks. It consists of all the non-standard
assets like as sub-standard, doubtful, and loss assets. It can be calculated
with the help of following ratio:
Gross NPAs Ratio= Gross NPAs Gross Advances
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the
provision regarding NPAs. Net NPA show s theactual burden of banks.
Since in India, bank balance sheets contain a huge amount of NPAs and the
process of recovery and write off of loans is very time consuming, the
provisions the banks have to make against the NPAs according to thecentral bank guidelines, are quite significant. That is why the difference
between gross and net NPA is quite high. It can be calculated by following
Net NPAs =Gross NPAs – ProvisionsGross Advances - Provisions
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CHAPTER-3
INCOME RECOGNITION
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3. INCOME RECOGNITION
Income recognition – Policy
The policy of income recognition has to be objective and based on the
record of recovery. Internationally income from non-performing assets
(NPA) is not recognized on accrual basis but is booked as income only
when it is actually received. Therefore, the banks should not charge
and take to income account interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs,
KVPs and Life policies may be taken to income account on the due
date, provided adequate margin is available in the accounts.
Fees and commissions earned by the banks as a result of re-
negotiations or rescheduling of outstanding debts should be
recognized on an accrual basis over the period of time covered by the
re-negotiated or rescheduledextension of credit.
If Government guaranteed advances become NPA, the interest on
such advances should not be taken to income account unless the
interest has been realized..
Reversal of income:
If any advance, including bills purchased and discounted, becomes
NPA as at the close of any year, interest accrued and credited to
income account in the corresponding previous year, should bereversed or provided for if thesame is not realized. This will apply to
Government guaranteed accounts also.
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In respect of NPAs, fees, commission and similar income that have
accrued should cease to accrue in the current period and should be
reversed or provided for with respect to past periods, if uncollected.
Leased Assets
accounting period. The net lease rentals (finance charge) on the
leased asset accrued and credited to income account before the asset
became non-performing, and remaining unrealized, should be reversed
or provided for in the current
The term 'net lease rentals' would mean the amount of finance chargetaken to the credit of Profit & Loss Account and would be worked out
as gross lease rentals adjusted by amount of statutory depreciation
and lease equalization account.
As per the 'Guidance Note on Accounting for Leases' issued by the
Council of the Institute of CharteredAccountants of India (ICAI), a
separate Lease Equalization Account should be opened by the banks
with acorresponding debit or credit to Lease Adjustment Account,as
the case may be. Further, Lease Equalization Accountshould be
transferred every year to the Profit & LossAccount and disclosed
separately as a deductionfrom/addition to gross value of lease rentals
shown underthe head 'Gross Income'.
Appropriation of recovery in NPAs
Interest realised on NPAs may be taken to income account providedthe credits in the accounts towards interest are not out of fresh/
additional credit facilities sanctioned to the borrower concerned.
In the absence of a clear agreement between the bank and the
borrower for the purpose of appropriation of recoveries in NPAs (i.e.
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towards principal or interest due), banks should adopt an accounting
principle and exercise the right of appropriation of recoveries in a
uniform and consistent manner.
Interest Application:
There is no objection to the banks using their own discretion in debiting
interest to an NPA account taking the same to Interest Suspense Account or
maintaining only a record of such interest in Performa accounts.
Reporting of NPAs
Banks are required to furnish a Report on NPAs as on 31stMarch each
year after completion of audit. The NPAswould relate to the banks‟
global portfolio, including theadvances at the foreign branches. The
Report should befurnished as per the prescribed format given in
theAnnexure I.
While reporting NPA figures to RBI, the amount held in interest
suspense account, should be shown as a deduction from gross NPAs
as well as gross advances while arriving at the net NPAs. Banks which
do not maintain Interest Suspense account for parking interest due on
non-performing advance accounts, may furnish the amount of interest
receivable on NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write off,
if any, should be reduced from the outstanding gross advances and
gross NPAs to eliminate any distortion in the quantum of NPAs beingreported.
REPORTING FORMAT FOR NPA – GROSS AND NET NPA
Annexure-I (Page no-64)
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CHAPTER-4- Asset Classification
- Provisioning Norms
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Asset Classification
Categories of NPAs
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well
as the principal amount of the loan regularly from the customer. Here it is
also very important that in this case the arrears of interest and the principal
amount of loan do not exceed 90 days at the end of financial year. If asset
fails to be in category of standard asset that is amount due more than90days then it is NPA and NPAs are further need to classify in sub categories.
Banks are required to classify nonperforming assets further into the following
three categories based on the period for which the asset has remained
nonperforming and the reliability of the dues:
( 1 ) Sub-standard Assets( 2 ) Doubtful Assets( 3 ) Loss Assets
( 1 ) Sub-standard Assets:--
With effect from 31 March 2005, a substandard asset would be one, which
has remained NPA for a period less than or equal to 12 month. The following
features are exhibited by substandard assets: the current net worth of the
borrowers / guarantor or the current market value of the security charged is
not enough to ensure recovery of the dues to the banks in full; and the asset
has well-defined credit weaknesses that jeopardise the liquidation of the debt
and are characterised by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
( 2 ) Doubtful Assets:--
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A loan classified as doubtful has all the weaknesses inherent in assets that
were classified as sub-standard, with the added characteristic that the
weaknesses make collection or liquidation in full, – on the basis of currently
known facts, conditions and values – highly questionable and improbable.
With effect from March 31, 2005, an asset would be classified as doubtful if itremained in the sub-standard category for 12 months.
( 3 ) Loss Assets:--
A loss asset is one which considered uncollectible and of such little value
that its continuance as a bankable asset is not warranted- although there
may be some salvage or recovery value. Also, these assets would have
been identified as „loss assets‟ by the bank or internal or external auditors or
the RBI inspection but the amount would not have been written-off wholly.
Provisioning Norms
General
In order to narrow down the divergences and ensure adequateprovisioning by banks, it was suggested that a bank's statutory
auditors, if they so desire, could have a dialogue with RBI's Regional
Office/ inspectors who carried out the bank's inspection during the
previous year with regard to the accounts contributing to the difference.
Pursuant to this, regional offices were advised to forward a list of
individual advances, where the variance in the provisioning
requirements between the RBI and the bank is above certain cut off
levels so that the bank and thestatutory auditors take into account the
assessment of the RBI while making provisions for loan loss, etc.
The primary responsibility for making adequate provisions for any
diminution in the value of loan assets, investment or other assets is
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that of the bank managements and the statutory auditors. The
assessment made by theinspecting officer of the RBI is furnished to
the bank to assist the bank management and the statutory auditors in
taking a decision in regard to making adequate and necessary
provisions in terms of prudential guidelines.
In conformity with the prudential norms, provisions should be made on
the non-performing assets on the basis of classification of assets into
prescribed categories as detailed in paragraphs 4 supra. Taking into
account the time lag between an account becoming doubtful of
recovery, its recognition as such, the realisation of the security and the
erosion over time in the value of security charged to the bank, the
banks should make provision against sub-standard assets, doubtfulassets and loss assets as below:
Loss assets :
The entire asset should be written off. If the assets are permitted to remain in
the books for any reason, 100 percent of the outstanding should be provided
for.
Doubtful assets :
100 percent of the extent to which the advance is not covered by the
realisable value of the security to which the bank has a valid recourse
and the realisable value is estimated on a realistic basis.
In regard to the secured portion, provision may be made on the
following basis, at the rates ranging from 20 percent to 50 percent of
the secured portion depending upon the period for which the asset has
remained doubtful:
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Additional provisioning consequent upon the change in the definition of
doubtful assets effective from March 31, 2003 has to be made in
phases as under:
o As on 31.03.2003, 50 percent of the additionalprovisioning
requirement on the assets which becamedoubtful on account of
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new norm of 18 months for transitionfrom sub-standard asset to
doubtful category.
o As on 31.03.2002, balance of the provisions not made during the
previous year, in addition to the provisions needed, as on31.03.2002.
Banks are permitted to phase the additional provisioning consequent
upon the reduction in the transition period from substandard to doubtful
asset from 18 to 12 months over a four year period commencing from
the year endingMarch 31, 2005, with a minimum of 20 % each year.
Note: Valuation of Security for provisioning purposes
With a view to bringing down divergence arising out of difference in
assessment of the value of security, in cases of NPAs with balance of Rs.
5crore and above stock audit at annual intervals by external agencies
appointed as per the guidelines approved by the Board would be mandatory
in order to enhance the reliability on stock valuation. Valuers appointed as
per the guidelines approved by the Board of Directors should get collaterals
such as immovable properties charged in favour of the bank valued once in
three years.
Sub-standard assets:
A general provision of 10 percent on total outstanding should be made
without making any allowance for DICGC/ECGC guarantee cover and
securities available.
Standard assets:
From the year ending 31.03.2000, the banks should make a general
provision of a minimum of 0.40 percent on standard assets on global
loan portfolio basis.
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The provisions on standard assets should not be reckoned for arriving
at net NPAs.
The provisions towards Standard Assets need not be netted from
gross advances but shown separately as'Contingent Provisions against
Standard Assets' under 'Other Liabilities and Provisions - Others' in
Schedule 5 ofthe balance sheet.
Floating provisions:
Some of the banks make a 'floating provision' over and above the specific
provisions made in respect of accounts identified as NPAs. The floatingprovisions, wherever available, could be set-off against provisions required
to be made as per above stated provisioning guidelines. Considering that
higher loan loss provisioning adds to the overall financial strength of the
banks and the stability of the financial sector, banks are urged to voluntarily
set apart provisions much above the minimum prudential levels as a
desirable practice.
Provisions on Leased Assets:
Leases are peculiar transactions where the assets are not recorded in the
books of the user of such assets as Assets, whereas they are recorded in
the books of the owner even though the physical existence of the asset is
with the user
(lessee). __(AS19 ICAI)
Sub-standard assets : -
10 percent of the 'net book value'.
As per the 'Guidance Note on Accounting for Leases' issued by the
ICAI, 'Gross book value' of a fixed asset is its historical cost or other
amount substituted for historical cost in the books of account or
financial statements. Statutory depreciation should be shown
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separately in the Profit & Loss Account. Accumulated depreciation
should be deducted from the Gross Book Value of the leased asset in
the balance sheet of the lesser to arrive at the 'net book value'.
Also, balance standing in 'Lease Adjustment Account' should be
adjusted in the 'net book value' of the leased assets. The amount of
adjustment in respect of each class of fixed assets may be shown
either in the main balance sheet or in the Fixed Assets Schedule as a
separate column in the section related to leased assets.
Doubtful assets:-
100 percent of the extent to which the finance is not secured by the
realisable value of the leased asset.Realisable value to be estimated on a
realistic basis.In addition to the above provision, the following provision on
the net book value of the secured portion should be made, depending
upon the period for which asset has been doubtful:
Loss assets:-
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The entire asset should be written-off. If for any reason, an asset is allowed
to remain in books, 100 percent of the sum of the net investment in the lease
and the unrealised portion of finance income net of finance charge
component should be provided for. („Net book value')
Guidelines for Provisions under Special Guidelines for Provisionsunder Special Circumstances
Government guaranteed advances
With effect from 31 March 2000, in respect of advances sanctioned
against State Government guarantee, if the guarantee is invoked and
remains in default for more than two quarters (180 days at present),
the banks should make normal provisions as prescribed in paragraph
4.1.2 above.
As regards advances guaranteed by State Governments, in respect of
which guarantee stood invoked as on 31.03.2000, necessary provision
was allowed to be made, in a phased manner, during the financial
years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent
each year.
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CHAPTER-5-Impact of NPA
- Preventive Measurement for NPA
Impact of NPA
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Profitability:-
NPA means booking of money in terms of bad asset, which occurred due to
wrong choice of client. Because of the money getting blocked the prodigality
of bank decreases not only by the amount of NPA but NPA lead to
opportunity cost also as that much of profit invested in some return earning
project/asset. So NPA doesn‟t affect current profit but also future stream of
profit, which may lead to loss of some long-term beneficial opportunity.
Another impact of reduction in profitability is low ROI (return on investment),
which adversely affect current earning of bank.
Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at
hand which lead to borrowing money for shot\rtes period of time which lead
to additional cost to the company. Difficulty in operating the functions of bank
is another cause of NPA due to lack of money. Routine payments and dues.
Involvement of management:-
Time and efforts of management is another indirect cost which bank has to
bear due to NPA. Time and efforts of management in handling and
managing NPA would have diverted to some fruitful activities, which would
have given good returns. Now day‟s banks have special employees to deal
and handle NPAs, which is additional cost to the bank.
Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in
terms of market credit. It will lose it‟s goodwill and brand image and credit
which have negative impact to the people who are putting their money in the
banks.
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Early symptoms by which one can recognize a
performing asset turning in to Non-performingasset:-
Four categories of early symptoms:----------------------------------------------------
(1) Financial:
Non-payment of the very first instalment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in instalment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that
instalment.
While monitoring the accounts it is found that partial amount is diverted
to sister concern or parent company.
(2) Operational and Physical:
If information is received that the borrower has either initiated the
process of winding up or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where
borrower conduct his business.
Frequent changes in plan.
Non-payment of wages.
(3) Attitudinal Changes:
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Avoidance of contact with bank.
Problem between partners.
(4) Others:
Changes in Government policies. Death of borrower.
Competition in the market.
Preventive Measurement for NPA
Early Recogni t ion o f the Problem:-
Invariably, by the time banks start their efforts to get involved in a revival
process, it‟s too late to retrieve the situation- both in terms of rehabilitation of
the project and recovery of bank‟s dues. Identification of weakness in the
very beginning that is: When the account starts showing first signs of
weakness regardless of the fact that it may not have become NPA, is
imperative. Assessment of the potential of revival may be done on the basis
of a techno-economic viability study. Restructuring should be attempted
where, after an objective assessment of the promoter‟s intention, banks areconvinced of a turnaround within a scheduled timeframe. In respect of totally
unviable units as decided by the bank, it is better to facilitate winding up/
selling of the unit earlier, so as to recover whatever is possible through legal
means before the security position becomes worse.
Ident i fy ing B orrowers with Genu ine Intent : -
Identifying borrowers with genuine intent from those who are non- serious
with no commitment or stake in revival is a challenge confronting bankers.
Here the role of frontline officials at the branch level is paramount as they
are the ones who has intelligent inputs with regard to promoters‟ sincerity,
and capability to achieve turnaround. Based on this objective assessment,
banks should decide as quickly as possible whether it would be worthwhile
to commit additional finance.
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In this regard banks may consider having “SpecialInvestigation” of all
financial transaction or business transaction, books of account in order to
ascertain real factors that contributed to sickness of the borrower. Banks
may have penal of technical experts with proven expertise and track record
of preparing techno-economic study of the project of the borrowers.Borrowers having genuine problems due to temporary mismatch in fund flow
or sudden requirement of additional fund may be entertained at branch level,
and for this purpose a special limit to such type of cases should be decided.
This will obviate the need to route the additional funding through the,
controlling offices in deserving cases, and help avert many accounts slipping
into NPA category.
Timel iness and Adequacy o f response: -
Longer the delay in response, grater the injury to the account and the asset.
Time is a crucial element in any restructuring or rehabilitation activity. The
response decided on the basis of techno-economic study and promoter‟s
commitment, has to be adequate in terms of extend of additional funding and
relaxations etc. under the restructuring exercise. The package of assistance
may be flexible and bank may look at the exit option.
Focus o n Cash Flows:-
While financing, at the time of restructuring the banks may not be guided by
the conventional fund flow analysis only, which could yield a potentially
misleading picture. Appraisal for fresh credit requirements may be done by
analysing funds flow in conjunction with the Cash Flow rather than only on
the basis of Funds Flow.
Management Effect iveness :-
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The general perception among borrower is that it is lack of finance that leads
to sickness and NPAs. But this may not be the case all the time.
Management effectiveness in tackling adverse business conditions is a very
important aspect that affects a borrowing unit‟s fortunes. A bank may commit
additional finance to an align unit only after basic viability of the enterprisealso in the context of quality of management is examined and confirmed.
Where the default is due to deeper malady, viability study or investigative
audit should be done –
it will be useful to have consultant appointed as early as possible to examine
this aspect. A proper techno economic viability study must thus become the
basis on which any future action can be considered.
Mult iple Financing :-
A.During the exercise for assessment of viability and restructuring, aPragmatic and unified approach by all the lending banks/ FIs as alsosharing of all relevant information on the borrower would go a long waytoward overall success of rehabilitation exercise, given the probability ofsuccess/failure.
B. In some default cases, where the unit is still working, the bank should
make sure that it captures the cash flows (there is a tendency on part of
the borrowers to switch bankers once they default, for fear of getting their
cash flows forfeited), and ensure that such cash flows are used for working
capital purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not part of the
consortium, may not be allowed to offer credit facilities to such defaulting
clients. Current account facilities may also be denied at no consortium banks
to such clients and violation may attract penal action. The Credit
Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful
information exchange on defaulting borrowers once the setup becomes fully
operational.
C. In a forum of lenders, the priority of each lender will be different. While
one set of lenders may be willing to wait for a longer time to recover its dues,
another lender may have a much shorter timeframe in mind. So it is possible
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that the letter categories of lenders may be willing to exit, even a t a cost –
by a discounted settlement of the exposure. Therefore, any plan for
restructuring/rehabilitation may take this aspect into account.
D. Corporate Debt Restructuring mechanism has been institutionalized in2001 to provide a timely and transparent system for restructuring of the
corporate debt of Rs. 20 crore and above with the banks and FIs on a
voluntary basis and outside the legal framework. Under this system, banks
may greatly benefit in terms of restructuring of large standard accounts
(potential NPAs) and viable sub-standard accounts with consortium/multiple
banking arrangements.
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CHAPTER-6Tools For recovery of NPA
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Once NPA occurred, one must come out of it or it should be managed inmost efficient manner. Legal ways and means are there to overcome andmanage NPAs. We will look into each one of it.
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6.1 Willful Default:-
A] LokAdalat and Debt Recovery Tribunal
B] Securitization Act
C] Asset Reconstruction
LokAdalat:
LokAdalat institutions help banks to settle disputes involving account in
“doubtful” and “loss” category, with outstanding balance of Rs.5 lakh for
compromise settlement under LokAdalat. Debt recovery tribunals have beenempowered to organize LokAdalat to decide on cases of NPAs of Rs. 10
lakh and above. This mechanism has proved to be quite effective for speedy
justice and recovery of small loans. The progress through this channel is
expected to pick up in the coming years.
Debt Recovery Tribunals ( DRT):
The recovery of debts due to banks and financial institution passed in March
2000 has helped in strengthening the function of DRTs. Provision for
placement of more than one recovery officer, power to attach defendant‟s
property/assets before judgment, penal provision for disobedience of
tribunal‟s order or for breach of any terms of order and appointment of
receiver with power of realization, management, protection and preservation
of property are expected to provide necessary teeth to the DRTs and speed
up the recovery of NPAs in the times to come. DRTs which have been set up
by the Government to facilitate speedy recovery by banks/DFIs, have not
been able make much impact on loan recovery due to variety of reasons like
inadequate number, lack of infrastructure, under staffing and frequent
adjournment of cases. It is essential that DRT mechanism is strengthened
and vested with a proper enforcement mechanism to enforce their orders.
Non observation of any order passed by the tribunal should amount to
contempt of court, the DRT should have right to initiate contempt
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proceedings. The DRT should empowered to sell asset of the debtor
companies and forward the proceedto the winding – up court for distribution
among the lenders.
6.2 Inability to Pay
Consortium arrangements:
Asset classification of accounts under consortium should be based on the
record of recovery of the individual memberbanks and other aspects
having a bearing on the recoverability of the advances. Where the
remittances by the borrower under consortium lending arrangements are
pooled with one bank and/or where the bank receiving remittances is not
parting with the share of other member banks, the account will be treated as
not serviced in the books of the other member banks and therefore, be
treated as NPA. The banks participating in the consortium should, therefore,
arrange to get their share of recovery transferred from the lead bank or get
an express consent from the lead bank for the transfer of their share of
recovery, to ensure proper asset classification in their respective books.
6.3 Restructuring / Rescheduling of Loans
A standard asset where the terms of the loan agreement regarding Interest
and principal have been renegotiated or rescheduled after commencement
of production should be classified as sub-standard and should remain in
such category for at least one year of satisfactory performance under the
renegotiated or rescheduled terms. In the case of sub-standard and doubtful
assets also, rescheduling does not entitle a bank to upgrade the quality of
advance automatically unless there is satisfactory performance under therescheduled / renegotiated terms. Following representations from banks that
the foregoing stipulations deter the banks from restructuring of
standardand sub-standard loan assets even though the modification of
terms might not jeopardize the assurance of repayment of dues from the
borrower, the norms relating to restructuring of standard and sub-standard
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assets were reviewed in March 2001. In the context of restructuring of the
accounts, the following stages at which the restructuring / rescheduling /
renegotiation of the terms of loan agreement could take place, can be
identified:
1) Before commencement of commercial production;
2) After commencement of commercial production but before the asset has
been classified as substandard,
3) After commencement of commercial production and after the asset has
been classified as substandard.
In each of the foregoing three stages, the rescheduling, etc., of principal
and/or of interest could take place, with or without sacrifice, as part of therestructuring package evolved.
6.4 Treatment of Restructured Standard Accounts:
A rescheduling of the installments of principal alone, at any of the aforesaid
first two stages would not cause a standard asset to be classified in the
substandard category provided the loan/credit facility is fully secured.
A rescheduling of interest element at any of the foregoing first two stages
would not cause an asset to be downgraded to substandard category subject
to the condition that the amount of sacrifice, if any, in the element of interest,
measured in present value terms, is either written off or provision is made
to the extent of the sacrifice involved. For the purpose, the future interest
due as per the original loan agreement in respect of an account should be
discounted to the present value at a rate appropriate to the risk category of
the borrower (i.e., current PLR+ the appropriate credit risk premium for the
borrower-category) and compared with the present value of the dues
expected to be received under the restructuring package, discounted on the
same basis.
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In case there is a sacrifice involved in the amount of interest in present value
terms, as at (b) above, the amount of sacrifice should either be written off
or provisionmade to the extent of the sacrifice involved.sacrifice is by way
of write off of the past interest dues, the asset should continue to be treated
as sub-standard.
6.6 Up gradation of restructured accounts:
The sub-standard accounts which have been subjected to restructuring etc.,
whether in respect of principal installment or interest amount, by whatever
modality, would be eligible to be upgraded to the standard category only
after the specified period i.e., a period of one year after the date when first
payment of interest or of principal, whichever is earlier, falls due, subject tosatisfactory performance during the period. The amount of provision made
earlier, net of the amount provided for the sacrifice in the interest amount in
present value terms as aforesaid, could also be reversed after the one year
period. During this one-year period, the substandard asset will not
deteriorate in its classification if satisfactory performance of the account is
demonstrated during the period. In case, however, the satisfactory
performance during the one-year period is not evidenced, the asset
classification of the restructured account would be governed as per the
applicable prudential norms with reference to the pre restructuring
payment schedule.
6.7 General:
These instructions would be applicable to all type of credit facilities including
working capital limits, extended to industrial units, provided they are fullycovered by tangible securities.
As trading involves only buying and selling of
commodities and the problems associated with manufacturing units such as
bottleneck in commercial production, time and cost escalation etc. are not
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applicable to them, these guidelines should not be applied to restructuring/
rescheduling of credit facilities extended to traders.
While assessing the extent of security cover available to the credit facilities,
which are being restructured/ rescheduled, collateral security would also be
reckoned, provided such collateral is a tangible security properly charged tothe bank and is not in the intangible form like guarantee etc. of the promoter/
others.
6.8 Income recognition
There will be no change in the existing instructions on income recognition.
Consequently, banks should not recognise income on accrual basis in
respect of the projects even though the asset is classified as a standard
asset if the asset is a "non performing asset" in terms of the extant
instructions. In other words, while the accounts of the project may be
classified as a standard asset, banks shall recognize income in such
accounts only on realisation on cash basis if the asset has otherwise
become „non performing‟ as per the extant delinquency norm of 180 days.
The delinquency norm would become 90 days with effect from 31 March
2004.
Consequently, banks, which have wrongly recognised income in the past,should reverse the interest if it was recognised as income during the current
year or make a provision for an equivalent amount if it was recognised as
income in the previous year(s). As regards the regulatory
treatment of income recognised as „funded interest‟ and „conversion into
equity, debentures or any other instrument‟ banks should adopt the
following:
6.9 Funded Interest:
Income recognition in respect of the NPAs, regardless of whether these areor are not subjected to restructuring/ rescheduling/ renegotiation of terms ofthe loan agreement, should be done strictly on cash basis, only onrealisation and not if the amount of interest overdue has been funded. If,however, the amount of funded interest is recognised as income, a provision
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for an equal amount shouldalso be made simultaneously. In other words,any funding of interest in respect of NPAs, if recognised as income, shouldbe fully provided for.
6.9.1. Conversion into equity, debentures or any other instrument:
The amount outstanding converted into otherinstruments would normally
comprise principal and the interestcomponents. If the amount of interest
dues is converted intoequity or any other instrument, and income is
recognised inconsequence, full provision should be made for the amount
ofincome so recognised to offset the effect of such income recognition. Such
provision would be in addition to the amount of provision that may be
necessary for the depreciation in the value of the equity or other instruments,
as per the investment valuation norms. However, if the conversion of interest
is into equity, which is quoted, interest income can be recognised at market
value of equity, as on the date of conversion, not exceeding the amount of
interest converted to equity. Such equity must thereafter be classified in the
"available for sale" category and valued at lower of cost or market value. In
case of conversion of principal and /or interest in respect of NPAs into
debentures, such debentures should be treated as NPA, abinitio, in the
same asset classification as was applicable to loan just before conversion
and provision made as per norms. This norm would also apply to zero
coupon bonds or other Instruments which seek to defer the liability of the
issuer. On such debentures, income should be recognised only on
realisation basis. The income in respect of unrealised interest, which is
converted into debentures or any other fixed maturity instrument, should be
recognised only on redemption of such instrument. Subject to the above, theequity shares or other instruments arising from conversion of the principal
amount of loan would also be subject to the usual prudential valuation norms
as applicable to such instruments.
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6.9.2. Provisioning
While there will be no change in the extant norms on provisioning for NPAs,banks which are already holding provisions against some of the accounts,
which may now be classified as „standard‟, shall continue to hold the
provisions and shall not reverse the same.
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CHAPTER-7
Special Cases
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7 . Special Cases
7.1.1. Accounts with temporary deficiencies:
The classification of an asset as NPA should be based on the record of
recovery. Bank should not classify an advance account as NPA merely due
to the existence of some deficiencies which are temporary in nature such as
non availabilityof adequate drawing power based on the latest available
stock statement, balance outstanding exceeding the limit temporarily, non-
submission of stock statements and nonrenewal of the limits on the due
date, etc. In the matter of classification of accounts with such deficienciesbanks may follow the following guidelines:
Banks should ensure that drawings in the working capital accounts are
covered by the adequacy of current assets, since current assets are first
appropriated in times of distress. Drawing power is required to be arrived at
based on the stock statement which is current. However, considering the
difficulties of large borrowers, stock statements relied upon by the banks for
determining drawing power should not be older than three months. The
outstanding in the account based on drawing power calculated from stock
statements older than three months, would be deemed as irregular. A
working capital borrower account will become NPA if such irregular drawings
are permitted in the account for a continuous period of 180 days even
though the unit may be working or the borrower's financial position is
satisfactory.
Regular and ad hoc credit limits need to be
reviewed/ regularized not later than three months from the due date/date of
ad hoc sanction. In case of constraints such as non-availability of financial
statements and other data from the borrowers, the branch should furnish
evidence to show that renewal/ review of credit limits is already on and
would be completed soon. In any case, delay beyond six months is not
considered desirable as a general discipline. Hence, an account where the
regular/ ad hoc credit limits have not been reviewed/ renewed within 180
days from the due date/ date of ad hoc sanction will be treated as NPA.
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7.1.2. Accounts regularized near about the balance sheet date:
The asset classification of borrower accounts where a solitary or a few
credits are recorded before the balance sheet date should be handled with
care and without scope for subjectivity. Where the account indicates inherent
weakness on the basis of the data available, the account should be deemed
as a NPA. In other genuine cases, the banks must furnish satisfactory
evidence to the Statutory Auditors/Inspecting Officers about the manner of
regularization of the account to eliminate doubts on their performing status.
7.1.3Asset Classification to be borrower-wise and not facility-wise
It is difficult to envisage a situation when only one facility to a borrower
becomes a problem credit and not others. Therefore, all the facilities granted
by a bank to a borrower will have to be treated as NPA and not the particular
facility or part thereof which has become irregular. If the debits arising out of
devolvement of letters of credit or invoked guarantees are parked in a
separate account, the balance outstanding in that account also should be
treated as a part of the borrower‟s principal operating account for the
purpose of application of prudential norms on income recognition, asset
classification and provisioning.
7.1.4. Accounts where there is erosion in the value of security
A NPA need not go through the various stages of classification in cases of
serious credit impairment and such assets should be straightaway classifiedas doubtful or loss asset as appropriate. Erosion in the value of security can
be reckoned as significant when the realizable value of the security is less
than 50 per cent of the value assessed by the bank or accepted by RBI at
the time of last inspection, as the case may be. Such NPAs may be
straightaway classified under doubtful category and provisioning should be
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made as applicable to doubtful assets. If the realizable value of the security,
as assessed by the bank/ approved values/ RBI is less than 10 percent of
the outstanding in the borrower accounts, the existence of security should be
ignored and the asset should be straightaway classified as loss asset. It may
be either written off or fully provided for by the bank.
7.1.5. Advances to PACS/FSS ceded to Commercial Banks:
In respect of agricultural advances as well as advances for other purposes
granted by banks to ceded PACS/ FSS under the on-lending system, only
that particular credit facilitygranted to PACS/ FSS which is in default for a
period of two harvest seasons (not exceeding two half years)/two quarters,as
the case may be, after it has become due will be classified as NPA and not
all the credit facilities sanctioned to a PACS/ FSS. The other direct loans &
advances, if any, granted by the bank to the member borrower of a PACS/
FSS outside the onlendingarrangement will become NPA even if one of the
credit facilities granted to the same borrower becomes NPA.
7.1.6 Advances against Term Deposits, NSCs, KVP/IVP, etc. :
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPsand life policies need not be treated as NPAs. Advances against gold
ornaments, government securities and all other securities are not covered by
this exemption.
7.1.7 Loans with moratorium for payment of interest
In the case of bank finance given for industrial projects or for agricultural
plantations etc. where moratorium is available for payment of interest,payment of interest becomes 'due' only after the moratorium or gestation
period is over. Therefore, such amounts of interest do not become overdue
and hence NPA, with reference to the date of debit of interest. They become
overdue after due date for payment of interest, if uncollected. In the case of
housing loan or similar advances granted to staff members where interest is
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payable after recovery of principal, interest need not be considered as
overdue from the first quarter onwards. Such loans/advances should be
classified as NPA only when there is a default in repayment of installment of
principal or payment of interest on the respective due dates.
7.1.8 Agricultural advances
In respect of advances granted for agricultural purpose where interest and/or
installment of principal remains unpaid after it has become past due for two
harvest seasons but for a period not exceeding two half years, such an
advance should be treated as NPA. The above norms should be made
applicable to all direct agricultural advances as listed at items 1.1, 1.1.2 (i) to
(vii), 1.1.2 (viii)(a)(1) and 1.1.2 (viii)(b)(1) of Master Circular on lending topriority sector No. RPCD.PLAN. BC. 12/04.09.01/ 2001- 2002 dated 1
August 2001. An extract of the list of these items is furnished in the
Annexure II. In respect of agricultural loans, other than those specified
above, identification of NPAs would be done on the same basis as non-
agricultural advances which, at present, are the 180 days delinquency norm.
Where natural calamities impair the repaying capacity of
agricultural borrowers, banks may decide on their own as a relief measure
conversion of the short-term production loan into a term loan or re-
schedulement of the repayment period; and the sanctioning of fresh short-
term loan, subject to various guidelines contained in RBI circulars
RPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98 and
RPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.In such cases of
conversion or re-schedulement, the term loan as well as fresh short-term
loan may be treated as current dues and need not be classified as NPA. The
asset classification of these loans would thereafter be governed by the
revised terms & conditions and would be treated as NPA if interest and/or
installment of principal remains unpaid, for two harvest seasons but for aperiod not exceeding two half years.
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7.1.9. Government guaranteed advances:
The credit facilities backed by guarantee of the Central Government thoughoverdue may be treated as NPA only when the Government repudiates its
guarantee when invoked. This exemption from classification of Government
guaranteed advances as NPA is not for the purpose of recognition of
income. With effect from 1st April 2000, advances sanctioned against State
Government guarantees should be classified as NPA in the normal course, if
the guarantee is invoked and remains in default for more than two quarters.
With effect from March 31, 2001 the period of default is revised as more than
180 days.
7.2.1. Take -out Finance:
Takeout finance is the product emerging in the context of the funding of long-
term infrastructure projects. Under this arrangement, the institution/the bank
financing infrastructure projects will have an arrangement with any financial
institution for transferring to the latter the outstanding in respect of
suchfinancing in their books on a predetermined basis. In view of the time-
lag involved in taking-over, the possibility of a default in the meantime cannotbe ruled out. The norms of asset classification will have to be followed by the
concerned bank/financial institution in whose books the account stands as
balance sheet item as on the relevant date. If the lending institution observes
that the asset has turned NPA on the basis of the record of recovery, it
should be classified accordingly. The lending institution should not recognize
income on accrual basis and account for the same only when it is paid by the
borrower/ taking over institution (if the arrangement so provides). The
lending institution should also make provisions against any asset turning intoNPA pending its takeover by taking over institution. As and when
the asset is taken over by the taking over institution, the corresponding
provisions could be reversed. However, the taking over institution, on taking
over such assets, should make provisions treating the account as NPA from
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the actual date of it becoming NPA even though the account was not in its
books as on that date.
7.2.2. Post-shipment Supplier's Credit
In respect of post-shipment credit extended by the banks covering export of
goods to countries for which the ECGC‟s cover is available, EXIM Bank has
introduced a guarantee-cum refinance program whereby, in the event of
default, EXIM Bank will pay the guaranteed amount to the bank within a
period of 30 days from the day the bank invokes the guarantee after the
exporter has filed claim with ECGC. Accordingly, to the extent payment has
been received from the EXIM Bank, the advance may not be treated
as a non-performing asset for asset classification and provisioning purposes.
7.2.3 Export Project Finance:
In respect of export project finance, there could be instances where the
actual importer has paid the dues to the bank abroad but the bank in turn is
unable to remit the amount due to political developments such as war, strife,
UN embargo, etc. In such cases, where the lending bank is able to establish
through documentary evidence that the importer has cleared the dues in full
by depositing the amount in the bank abroad before it turned into NPA in the
Books of the bank, but the importer's country is not allowing the funds to be
remitted due to political or other reasons, the asset classification may be
made after a period of one year from the date the amount was deposited by
the importer in the bank abroad.
7.2.4. Advances under rehabilitation approved by BIFR/ TLI:
Banks are not permitted to upgrade the classification of any advance inrespect of which the terms have been re-negotiated unless the package of
re-negotiated terms has worked satisfactorily for a period of one year. While
the existing credit facilities sanctioned to a unit under rehabilitation packages
approved by BIFR/term lending institutions will continue to be classified as
sub-standard or doubtful as the case may be, in respect of additional
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facilities sanctioned under the rehabilitation packages, the Income
Recognition, Asset Classification norms will become applicable after a period
of one year from the date of disbursement.
7.2.5. ROLE OF ARCIL:-
This empowerment encouraged the three major players in Indian banking
system, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI) and
IDBI Bank Limited (IDBI) to come together to set-up the first ARC. Arcil was
incorporated as a public limited company on February 11, 2002 and obtained
its certificate of commencement of business on May 7, 2003. In pursuance of
Section 3 of the Securitization Act 2002, it holds a certificate of registration
dated August 29, 2003, issued by the Reserve Bank of India (RBI) andoperates under powers conferred under the Securitization Act, 2002. Arcil is
also a “financial institution" within the meaning of Section 2 (h) (ia) of the
Recovery of Debts due to Banks and Financial Institutions Act, 1993 (the
"DRT Act").
Arcil is the first ARC in the country to commence business of resolution of
non-performing assets (NPAs) upon acquisition from Indian banks and
financial institutions. As the first ARC, Arcil has played a pioneering role in
setting standards for the industry in India.
➢Unlocking capi ta l for the banking s ystem and the econom y
The primary objective of Arcil is to expedite recovery of the amounts locked
in NPAs of lenders and thereby recycling capital. Arcil thus, provides relief to
the banking system by managing NPAs and help them concentrate on core
banking activities thereby enhancing shareholders value.
➢Creat ing a vibrant m arket for distressed d ebt assets/ secur i t ies inInd ia offer ing a trading plat form for Lenders
Arcil has made successful efforts in funneling investment from both from
domestic and international players for funding these acquisitions of
distressed assets, followed by showcasing them to prospective buyers. This
has initiated creation of a secondary market of distressed assets in the
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country besides hastening their resolution. The efforts of Arcil would lead the
country‟s distressed debt market to international standards.
➢
To evolve and create signi f icant capaci ty in the system for q uick erresolut ion of NPAs by deploying the assets opt imal ly
With a view to achieving high delivery capabilities for resolution, Arcil has put
in place a structure aimed at outsourcing the various sub-functions of
resolution to specialized agencies, wherever applicable under the provision
of the Securitization Act, 2002. Arcil has also encourage, groomed and
developed many such agencies to enhance its capacity in line with the
growth of its activity.
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CHAPTER-8Data analysis and interpretation
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7. ANALYSIS
For the purpose of analysis and comparison between Public and private
sector banks, Wehave taken five banks from both sectors to compare the
non-performing assets of banks. For understanding we further bifurcate the
non-performing assets in priority sector and non-priority sector, gross NPA
and net NPA in percentage as well as in rupees, deposit – investment –
advances. Further we also analysis on the basis of Deposit – Investment – Advances to get the clear view where the bank stands in the competitive
market. At the end of March 2008, in private sector ICICI Bank is the highest
deposit investment-advances figure in rupees crore, second is HDFC Bank
and KOTAK Bank has least figure. In public sector banks Punjab National
Bank has the highest deposit investment- advances but when we look at the
graphwe can see that the Bank of Baroda and Bank of India are almost the
similar in numbers and Dena Bank is stands last in public sector bank. When
we compare the private sector banks with public sector banks, we canunderstand the more number of people prefer to choose public sector banks
for depositinvestment.
DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and
comparison among them, year 2008-09.
Private Sector Banks:-
(Rs in crore)
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Analysis:-From the above figure we can see that the ICICI Bank deposit-investment-
advances are quite high than other banks like
HDFC,AXIS,INDUSIND,KOTAK
Public Sector Banks:-
Analysis:-In public sector Punjab National Bank depositinvestment-
Advances are comparatively quite high rather than Bank of Baroda, Bank ofIndia, United bank of India and Dena Bank.
Comparison between ICICI BANK AND PUNJAB NATIONALBANK in term of deposit-investment-advances:-
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Analysis: -
Here we have compared between ICICI BANK AND PUNJAB NATIONAL
BANK in term of deposit-investment-advances. From theabove figure we can
see that ICICI bank deposit and advancesare quite higher than PunjabNational Bank. But in case ofInvestment ICICI Bank investment amount is
doubled thanPunjab National Bank amount.
Gross NPA and Net NPA:-
There are two concepts related to non-performing assets a) gross and b)
net. Gross refers to all NPAs on a bank‟s balance sheet irrespective of the
provisions made. It consists of all the non-standard assets, viz. Substandard,
doubtful, and loss assets. A loan asset is classified as „ substandard” if it
remains NPA up to a period of 18 months; “ doubtful” if it remains NPA for
more than 18 months; and loss, without any waiting period, where the dues
are considered not collectible or marginally collectible. Net NPA is gross
NPA less provisions. Since in India, bank balance sheets contains a huge
amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPA
according to the central bank guidelines, are quite significant.
Here, we can see that there are huge differences between gross and net
NPA. While gross NPA reflects the qualityof the loans made by banks,
net NPA shows the actualburden of banks. The requirements for
provisions are:
100% for loss assets
100% of the unsecured portion plus 20-50% of the secured portion,depending on the period for which the account has remained in the
doubtful category
10% general provision on the outstanding balance under the
substandard category.
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Here, there are gross and net NPA data for 2007-08 to 2010- 11 we takenfor comparison among banks. These data are NPA AS PERCENTAGE OFTOTAL ASSETS. As we discuss earlier that gross NPA reflects the quality of
the loans made by banks. Among all the ten banks Dena Banks has highestgross NPA as a percentage of total assets in the year 2007-08 and also netNPA. Punjab National Bank shows huge difference between gross and netNPA. There is an almost same figure between BOI and BOB.
Gross NPA and Net NPA Of different Public Sector banks in the year2007-08
Gross NPA and Net NPA Of different Public Sector banks in the year200 8 -09
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Gross NPA and Net NPA Of different Private Sector banks in the year2009-10
Gross NPA and Net NPA Of different Private Sector banks in the year2010 -11
Comparison of GROSS NPA with Public and Privatesectors banks forthe year 2009 -10
Comparison of GROSS NPA with all banks for the year 2007-08. The
growing NPAs affect the health of banks, profitability and efficiency. In the
long run, it eats up the net worth of the banks. We can say that NPA is not ahealthy sign for financial institutions. Here we take all the ten banks gross
NPA together for better understanding. Average of these ten banks gross
NPAs is 1.29 as percentage of total assets. So if we compare in private
sector banks AXIS and HDFC Bank are below average of all banks and in
public sector BOB and BOI. Average of these five private sector banks gross
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NPA is 1.25 and average of public sector banks is 1.33. Which is higher in
compare of private sector banks.
COMPARISON OF NET NPA WITH PUBLIC AND PRIVATESECTORS BANKS FOR THE YEAR 2010-11
Comparison of NET NPA with all banks for the year 2010-11. Average of
these ten bank‟s net NPA is 0.56. And in the public sector banks all these
five banks are below this. But in private sector banks there are three banks
are above average. The difference between private and public banks
average is also vast. Private sector banks net NPA average is 0.71 and in
public sector banks it is 0.41 as percentage of total assets. As we know that
net NPA shows actual burden of banks. IndusInd bank has highest net NPA
figure and HDFC Bank has lowest in comparison.
PRIORITY –NON PRIORITY SECTOR
When we further bifurcate NPA in priority sector and Non priority sector.
Agriculture + small + others are priority sector. In private sector ICICI Bank
has the highest NPA with compare to other private sector banks. Around
72% of NPA in priority sector and around 78% in non-priority sector. We can
see that in private sector banks have more NPA in non-priority sectorthan
priority sector.
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When we talk about public sector banks they are more in priority sector and
they give advanced to weaker sector or industries. Public sector banks give
more loans to Agriculture, small scale and others units and as a result we
see that there are more number of NPA in public sector banks than private
sector banks. BOB given more advanced to priority sector in 2010-11 than
other four banks .
But when there are comparison between private bank and public sector bankstill ICICI Bank has more NPA in both priority and non-priority sector with thecomparison of public sector banks. Large NPA in ICICI Bank because thestrategy of bank that risk-reward attitude and initiative in each sector.
Above,we also discuss that ICICI Bank has highest deposit investment-advance than other banks.
Now, when we compare the all public sector and private sector banks on
priority and non-priority sector the figures are really shocking. Because in
compare of private sector banks, public sector banks numbers are very
large.
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Here, there are huge differences between private and public sector banks
NPA. There is increase in new private sector banks NPA of Rs.4148 cr in
2008-09 which is almost 66% rise than previous year. In public sector banks
the numbers are not increased like private sector banks.
ANNEXURE-IREPORTING FORMAT FOR NPA – GROSS AND NET NPA
Name of the Bank:
Position as on………
*excluding Technical write-off of Rs.________crore.
**Banks which do not maintain an interest suspense a/c to park the accrued interest onNPAs may furnish the amount of interest receivable on NPAs.
***Excluding amount of Technical write-off (Rs.______crore) and provision on standardassets. (Rs._____crore).
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Bibliography
Journals and magazines
Economic and political weekly, October 16, 2004, CARLTON PEREIRA,Page 4602-4604 “INVESTING IN NPAs”.
Chartered Financial Analyst, August 2004, B P Dhaka, Page 58-62;“SARFAESI ACT: THE DIAGNOSIS”.
The chartered Accountant, February 2005, Raj Kumar S Adukia, Page NO.978-985; “SECURITISATION – AN OVERVIEW”
Treasury Management, December 2004, MPM Vinay Kumar, Page 62-65;“SECURITISATION : ISSUES AND PERSPECTIVES”.
Chartered Secretary, Feburary 2003, V S Datey, Page 128- 135;“SECURITISATION, RECONSTRUCTION AND ENFORCEMENT OFSECURITY INTEREST”.
Websites:-
http://www.indiastat.com/banksandfinancialinstitutions/3/performance/16063/nonperformingassetsnpas/377761/stats.aspx
http://www.bankcapitalgroup.net/services-non-performingassets.php http://rituparnodas.blogspot.com/2009/01/npa-management.htm l http://www.finanssivalvonta.fi/en/Statistics/Credit_market/Nonperforming_as
sets/Pages/Default.aspx http://findarticles com/p/articles/mi hb5562/is 200905/ai n3189646