29173590 27172638 Management Research Project on NPA

8/8/2019 29173590 27172638 Management Research Project on NPA

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COMPARATIVE ANALYSIS ONNON PERFORMING ASSETS OF PRIVATE ANDPUBLIC SECTOR BANKS

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COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND

PUBLIC SECTOR BANKS.

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FACULTY GUIDEProf.RajasreeNandy


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ICFAIBusiness School

KOCHI

SUBMITTED BY$1,1'


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Place: Kochi

Anindya Sankar Kundu

08bs0000328

Acknowledgements

If words are considered to be signs of gratitude then let these words convey the

very same.

I thankProf. RajasreeNandi, ICFAI Business School, Kochi, who has sincerely

supported me with the valuable insights into the completion of this project.

I am grateful to all faculty members of ICFAI Business School, Kochi and my

friends who have helped me in the successful completion of this Management

Research Project.


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TABLE OF CONTENTS

Declaration

3

Acknowledgments

. 4Abstract

. 7

1. Project Details

1.1 Objective of the project

9

1.2 Research

Methodology

. 9

1.3Scope of the project

9

1.4 Sampling Methods

10


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1.5 Limitations of the

project

10

2. Introduction

2.1 Definition of NPA

... 12 2.2 NPAs: An issue for banks and FIs in

India 13

2.3 Indian economy and NPAs

. 13

2.4 Global developments and NPAs

.. 14

2.5 Factors for rise in

NPAs.

15

2.6 Problems due to NPA

.

19

2.7 Types of NPA

. 20

33.. IInnccoommee RReeccooggnniittiioonn

33..11 IInnccoommee RReeccooggnniittiioonn PPoolliiccyy

.................................................................................................................................. 2222

33..22 RReevveerrssaall ooff iinnccoommee

.............................................................................................................................................................. 2222

33..33 Leased Assets

......................................................................................... 2333..44 IInntteerreessttAApppplliiccaattiioonn

.......................................................................................................................................................... 2233

33..55 RReeppoorrttiinngg ooff NNPPAAss

.............................................................................................................................................................. 2244

44.. AAsssseettss CCllaassssiiffiiccaattiioonnss


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44..11 SSuubb--ssttaannddaarrdd AAsssseettss

.......................................................................................................................................................... 2266

44..22 DDoouubbttffuull AAsssseettss

.......................................................................................................................................................................... 3300

44..33 LLoossss AAsssseettss

............................................................................................................................................................................................ 3311

55.. IImmppaacctt ooffNNPPAA &&Preventive Measurement for NPA

5.1 Impact of

NPA........................................................................................ 33

5.2 Early symptoms

..................................................................................... 34

5.3 Preventive Measurement for NPA

.................................................. 35

6. Tools for recovery of NPA

6.1 Willful Default

39

6.2 Inability to Pay

. 40

6.3 Restructuring / Rescheduling of Loans

.. 41

6.4 Treatment of Restructured Standard Accounts

.. 41

6.5 Treatment of restructured sub-standard accounts

. 42

6.6 Up gradation of restructured accounts

. 426.7 General

.. 43

6.8 Income recognition

. 43


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6.9 Funded Interest

.. 43

6.9.1 Conversion into equity, debentures or any other instrument

44

6.9.2 Provisioning

44

7. Special Cases7.1.1 Accounts with temporary deficiencies

46

7.1.2 Accounts regularized near about the balance sheet date

.. 46

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

wise 7.1.4 Accounts where there is erosion in the value ofsecurity 47

7.1.5 Advances to PACS/FSS ceded to Commercial Banks

.. 47

7.1.6 Advances against Term Deposits, NSCs, KVP/IVP

. 48

7.1.7 Loans with moratorium for payment of interest

. 48

7.1.8 Agricultural advances

48

7.1.9 Government guaranteed

advances. 49

7.2.1 Take-out Finance

49

7.2.2 Post-shipment Supplier's Credit

50

7.2.3 Export Project Finance.. 50

7.2.4 Advances under rehabilitation approved by BIFR/ TLI

.. 50

7.2.5 Role of ARCIL

.. 51


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8. Data Analysis and interpretation.. 52

9. Annexure

.. 64

10. Bibliography

65

ABSTRACT

The accumulation of huge non-performing assets in banks hasassumed greatimportance. The depth of the problem of bad debts wasfirst realized only in

early 1990s. The magnitude of NPAs in banks andfinancial institutions is over

Rs.1, 50,000 crore.

While gross NPA reflects the quality of the loans made bybanks, net NPA

shows the actual burden of banks. Now it is increasinglyevident that the major

defaulters are the big borrowers coming from thenon-priority sector. The

banks and financial institutions have to take theinitiative to reduce NPAs in a

time bound strategic approach.

Public sector banks figure prominently in the debate not onlybecause they

dominate the banking industries, but also since they havemuch larger NPAs

compared with the private sector banks. This raises aconcern in the industry


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and academia because it is generally felt thatNPAs reduce the profitability of a

bank, weaken its financial health anderode its solvency.

For the recovery of NPAs a broad framework has evolved forthe management

of NPAs under which several options are provided fordebt recovery and

restructuring. Banks and FIs have the freedom todesign and implement theirown policies for recovery and write-offincorporating compromise and

negotiated settlements.

CHAPTER-1


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Project Details

1.1OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA was to:

To evaluate NPAs (Gross and Net) in different banks.

To study the past trends of NPA.

To calculate the weighted of NPA in risk management in Banking

To analyze financial performance of banks at different level of NPA

1.2RESEARCH METHODOLOGY

Theresearch methodology adopted forcarrying outthestudy 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.


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1.3Scope ofthe Study

Concept of Non-Performing Asset

Guidelines

Impact of NPAs

Reasons for NPAs

Preventive Measures

Tools to manage NPAs

1.4Sampling Methods

To prepare this Project we took five banks from public sector as well as five

banks from private sector.

1.5Limitations ofthestudy

It was critical for me to gather the financial data of the every bank of the

Public Sector Banks so the better evaluations of the performance of the

banks are not possible.

Since my study is based on the secondary data, the practical operations

as related to the NPAs are adopted by the banks are not learned.


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Since the Indian banking sector is so wide so it was not possible for me

to cover all the banks of the Indian banking sector.

CHAPTER-2

INTRODUCTION


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22.. IInnttrroodduuccttiioonn

NPA. The three letters Strike terror in banking sector and business circle today.

NPA is short form of Non Performing Asset. The dreaded NPA rule says

simply this: when interest or other due to a bank remains unpaid for more

than 90 days, the entire bank loan automatically turns a non performing asset.

The recovery of loan has always been problem for banks and financial

institution. To come out of these first we need to think is it possible to avoid

NPA, no cannot be then left is to look after the factor responsible for it and

managing those factors.

22..11DDeeffiinniittiioonnss::

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.

BWith 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),


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The bill remains overdue for a period of more than 90 days in the case of

bills purchased and discounted,

Interest and/or instalment of principal remains overdue for two harvest

seasons but for a period not exceeding two half years in the case of an

advance granted for agricultural purposes.

As a facilitating measure for smooth transition to 90 days norm, banks have

been advised to move over to charging of interest at monthly rests, by April 1,

2002. However, the date of classification of an advance as NPA should not be

changed on account of charging of interest at monthly rests. Banks should,

therefore, continue to classify an account as NPA only if the interest charged

during any quarter is not serviced fully within 180 days from the end of the

quarter with effect from April 1, 2002 and 90 days from the end of the quarter

with effect from March 31, 2004.

2.2NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA

To start with, performance in terms of profitability is a benchmark for any

business enterprise including the banking industry. However, increasing NPAs

have a direct impact on banks profitability as legally banks are not allowed to

book income on such accounts and at the sometime are forced to make

provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also,

with increasing deposits made by the public in the banking system, the banking

industry cannot afford defaults by borrower s since NPAs affects the

repayment capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the

system through various rate cuts and banks fail to utilize this benefit to its

advantage due to the tear of burgeoning non -performing assets.

2.3INDIAN ECONOMY AND NPAs

Undoubtedly the world economy has slowed down, recession is at its peak,

globally stock markets have tumbled and business itself is getting hard to do.

The Indian economy has been much affected due to high fiscal deficit, poorinfrastructure facilities, sticky legal system, cutting of exposures to emerging

markets by FIs, etc.

Further, international rating agencies like, Standard & Poor have lowered

Indias credit rating to sub-investment grade. Such negative aspects have often

outweighed positives such as increasing forex reserves and a manageable

inflation rate.


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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 instit ution 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.

2.4GLOBAL DEVELOPMENTS AND NPAs

The core banking business is of mobi lizing the deposits and utilizing it for

lending to industry. Lending business is generally encouraged because it hasthe effect of funds being transferred from the system to productive purposes,

which results into economic growth.

However lending also carries credit risk, which arises from the failure of

borrower to fulfill its contractual obligations either during the course of a

transaction or on a future obligation.

A question that arises is how much risk can a bank afford to take? Recent

happenings in the business world -Enron, WorldCom, Xerox, Global Crossing do

not give much confidence to banks. In case after case, these giant corporatebecan1e bankrupt and failed to provide investors with clearer and more

complete information thereby introducing a degree of risk that many investors

could neither anticipate nor welcome. The history of financial institutions also

reveals the fact that the biggest banking failures were due to credit risk. Due to

this, banks are restricting their lending operations to secured avenues only

with adequate collateral on which to fall back upon in a situation of default.


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2.5FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs.

But the problem of NPAs is more in public sector banks when compared to

private sector banks and foreign banks. The NPAs in PSB are growing due to

external as well as internal factors .

2.5.1EXTERNAL FACTORS:-

Ineffectiverecovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for

recovery of loans and advances. Due to their negligence andineffectiveness in their work the bank suffers the consequence of non-

recover, thereby reducing their profitability and liquidity.

Willful Defaults

There are borrowers who are able to pay back loans but are intentionally

withdrawing it. These groups of people should be identified and proper

measures should be taken in order to get back the money extended to

them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the

PSBs. every now and then India is hit by major natural calamities thus

making the borrowers unable to pay back there loans. Thus the bank has

to make large amount of provisions in order to compensate those loans,

hence end up the fiscal with a reduced profit.


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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 adequateresources , 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 ofdemand

Entrepreneurs in India could not foresee their product demand and

starts production which ultimately piles up their product thus makingthem unable to pay back the money they borrow to operate these

activities. The banks recover the amount by selling of their assets,whichcovers a minimum label. Thus the banks record the non-recovered part asNPAs and has to make provision for it.

Change on Govt. policies

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

The fallout of handloom sector is continuing as most of the weaversCo-operative societies have become defunct largely due to withdrawal of statepatronage. The rehabilitation plan worked out by the Central government torevive the handloom sector has not yet been implemented. So the over duesdue to the handloom sectors are becoming NPAs.

2.5.2INTERNAL FACTORS:-

Defective Lending process

There are three cardinal principles of bank lending that have been

followed by the commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

i. Principles ofsafety :-


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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)Willingnessto pay

a) Capacity to pay depends upon:

1. Tangible assets

2. Success in business

b) Willingness to pay depends on:1. Character

2. Honest

3. Reputation of borrower

The banker should, therefore take utmost care in ensuring that the

enterprise or business for which a loan is sought is a sound one and the

borrower is capable of carrying it out successfully .He should be a person

of integrity and good character.

Inappropriatetechnology

Due to inappropriate technology and management information system,

market driven decisions on real time basis cannot be taken. Proper MIS

and financial accounting system is not implemented in the banks, which

leads to poor credit collection, thus NPA. All the branches of the bank

should be computerized.

Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is

another reason for rise in NPAs. While providing unsecured advances the

banks depend more on the honesty, integrity, and financial soundness

and credit worthiness of the borrower.

y Banks should consider the borrowers own capital investment.

y 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.

y Analyze the balance sheet.

True picture of business will be revealed on analysis of profit/loss

a/c and balance sheet.

y Purpose of the loan


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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.

Poorcreditappraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poorcredit 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. Whenaccepting 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 farmsonly 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 ofregularindustrial 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


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Non remittance of recoveries to higher financing agencies and re loaning

of the samehave already affected the smooth operation of the credit

cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs

of OSCB is increasing day by day.

2.6PROBLEMS DUE TO NPA

1. Owners do not receive a market return on their capital .in the worstcase, if the banks fails, owners lose their assets. In modern times this

may affect a broad pool of shareholders.

2. Depositors do not receive a market return on saving. In the worst case if

the bank fails, depositors lose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest

rates, lower deposit rates and higher lending rates repress saving and

financial market, which hamper economic growth.

4. Nonperforming loans epitomize bad investment. They misallocate creditfrom good projects, which do not receive funding, to failed projects. Bad

investment ends up in misallocation of capital, and by extension, labor

and natural resources.

Nonperforming asset may spill over the banking system and contract the

money stock, which may lead to economic contraction. This spillover effect can

channelize through liquidity or bank insolvency:

a) When many borrowers fail to pay interest, banks may experience liquidity

shortage. This can jam payment across the country.

b) Illiquidity constraints bank in paying dep ositors

c) Undercapitalized banks exceed the banks capital base.

''OOuutt ooffOOrrddeerr''ssttaattuuss::


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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'.

OOvveerrdduuee::

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.

22..77TTyyppeess ooffNNPPAA

AA]] GGrroossssNNPPAA

BB]] NNeettNNPPAA

AA]] GGrroossssNNPPAA::

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:

GrossNPAsRatio]GrossNPAs

Gross Advances

BB]] NNeettNNPPAA::

Net NPAs are those type of NPAs in which the bank has deducted the provision

regarding NPAs. Net NPA shows the actual burdenof banks. Since in India,

bank balance sheets 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 guidel ines,

are quite significant. That is why the difference between gross and net NPA is

quite high.

It can be calculated by following

NetNPAs] GrossNPAs Provisions


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Gross Advances - Provisions

CCHHAAPPTTEERR--33

IINNCCOOMMEE RREECCOOGGNNIITTIIOONN


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33.. IINNCCOOMMEE RREECCOOGGNNIITTIIOONN

33..11.. IInnccoommee rreeccooggnniittiioonn PPoolliiccyy

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 onlywhen 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 incom e 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.

33..22.. RReevveerrssaall ooffiinnccoommee::

If any advance, including bills purchased and discounted, becomes NPA

as at the close of any year, interest accrued and credited to income

account in the corresponding previous year, should bereversed or

provided for if the same is not realised. This will apply to Government

guaranteedaccountsalso.


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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.

3.3Leased Assets

The net lease rentals (finance charge) on the leased asset accrued and

credited to income account before the asset became non-performing, and

remaining unrealised, should be reversed or provided for in the current

accounting period.

The term 'net lease rentals' would mean the amount of finance charge

taken to the credit of Profit & Loss Account and would be worked out as

gross lease rentals adjusted by amount of statutory depreciation and lease

equalisation account.

As per the 'GuidanceNote 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 everyyear 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'.

AApppprroopprriiaattiioonn ooffrreeccoovveerryyiinnNNPPAAss

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.


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33..44 IInntteerreesstt AApppplliiccaattiioonn::

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.

33..55 RReeppoorrttiinngg ooffNNPPAAss

Banks are required to furnish a Report on NPAs as on 31st 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

Annexure-I (Page no-64)


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CCHHAAPPTTEERR--44

--AAsssseett CCllaassssiiffiiccaattiioonn

-- PPrroovviissiioonniinngg NNoorrmmss


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44..AAsssseett CCllaassssiiffiiccaattiioonn

CCaatteeggoorriieess ooffNNPPAAss

SSttaannddaarrdd AAsssseettss::

Standard assets are the ones in which the bank is receiving interest as well as

the principal amount of the loan regularly from the customer. Here it is also

very important that in this case the arrears of interest and the principal

amount of loan do not exceed 90 days at the end of financial year. If asset fails

to be in category of standard asset that is amount due more than 90 days thenit 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 reliabilityof the dues:

((11 )) SSuubb--ssttaannddaarrddAAsssseettss

((22 )) DDoouubbttffuullAAsssseettss

((33 )) LLoossss AAsssseettss

(( 11)) SSuubb--ssttaannddaarrdd AAsssseettss::----

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.

(( 22)) DDoouubbttffuull AAsssseettss::----

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 ) LLoossss AAsssseettss::----


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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.

PPrroovviissiioonniinngg NNoorrmmss

GGeenneerraall

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 inspectio n during the previous

year with regard to the accounts contributing to the difference.

Pursuant to this, regional offices were advised to forward a list ofindividual 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 toassist 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 theerosion 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:

LLoossss aasssseettss::


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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.

DDoouubbttffuull aasssseettss::

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 theadvance has

beenconsideredasdoubtful

Provision

requirement(%)

Up to one year 20

One to three years 30

More than three years:

(1)Outstanding stock of NPAs as

on March 31, 2004.

(2)Advances classified as

doubtful more than three

years on or after April 1, 2004.

60% with effect from

March 31,2005.

75% effect from March

31, 2006.

100% with effect from

March 31, 2007.

Additional provisioning consequent upon the change in the definition of

doubtful assets effective from March 31, 2003 has to be made in phases

as under:

As on31.03.2003, 50 percent of the additional provisioning requirement

on the assets which became doubtful on account of new norm of 18

months for transition from 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.


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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.

SSuubb--ssttaannddaarrddaasssseettss::

A general provision of 10 percent on total outstanding should be made

without making any allowance for DICGC/ECGC guarantee cover and securities

available.

SSttaannddaarrddaasssseettss::

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.

FFllooaattiinngg pprroovviissiioonnss::

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


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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 a s a desirable

practice.

PPrroovviissiioonnss oonn LLeeaasseedd AAsssseettss::

LLeeaasseess aarree ppeeccuulliiaarr ttrraannssaaccttiioonnss wwhheerree tthhee aasssseettss aarree nnoott rreeccoorrddeedd iinn tthhee

bbooookkss ooff tthhee uusseerr ooff ssuucchh aasssseettss aass AAsssseettss,, wwhheerreeaass tthheeyy aarree rreeccoorrddeedd iinn tthhee

bbooookkss oofftthhee oowwnneerr eevveenn tthhoouugghh tthhee pphhyyssiiccaall eexxiisstteennccee oofftthhee aasssseett iiss wwiitthh tthhee

uusseerr ((lleesssseeee)).. ____((AASS1199 IICCAAII))

Sub-standardassets: -

10 percent of the 'netbookvalue'.

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

bookvalue'.

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 realisablevalue of the leased asset.Realisable value to be estimated on a realistic basis. In

additionto theabove provision, the following provision on the netbookvalue

of the secured portion should be made, depending upon the period for which

asset has been doubtful:

Period %age of provision


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Up to one year 20

One to three years 30

More than three years 50

Lossassets:-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. (Netbookvalue')

GGuuiiddeelliinneess ffoorrPPrroovviissiioonnss uunnddeerr SSppeecciiaall CCiirrccuummssttaanncceess

GGoovveerrnnmmeenntt gguuaarraanntteeeeddaaddvvaanncceess

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 tobe made, in a phased manner, during the financial years ending 31.03.2000 to

31.03.2003 with a minimum of25 percent each year.


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CCHHAAPPTTEERR--55

--IImmppaacctt ooff NNPPAA

-Preventive Measurement for NPA


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55.. IImmppaacctt ooffNNPPAA

PPrrooffiittaabbiilliittyy::--

NPA means booking of money in terms of bad asset, which occurred due to

wrong choice of client. Because of the money getting blocked the prodigality of

bank decreases not only by the amount of NPA but NPA lead to opportunity

cost also as that much of profit invested in some return earning project/asset.

So NPA doesnt affect current profit but also future stream of profit, which

may lead to loss of some long-term beneficial opportunity. Another impact of

reduction in profitability is low ROI (return on investment), which adversely

affect current earning of bank.

LLiiqquuiiddiittyy::--

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.

IInnvvoollvveemmeenntt ooffmmaannaaggeemmeenntt::--

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 days banks have special employees to deal and handle

NPAs, which is additional cost to the bank.

CCrreeddiitt lloossss::--

Bank is facing problem of NPA then it adversely affect the value of bank in

terms of market credit. It will lose its goodwill and brand image and credit


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which have negative impact to the people who are putting their money in the

banks.

5.2 Early symptomsby which onecanrecognizea

performing assetturning into Non-performing asset:-

Fourcategories ofearly 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 andPhysical:

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:

Avoidance of contact with bank.

Problem between partners.

(4) Others:

Changes in Government policies.


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Death of borrower.

Competition in the market.

5.3 Preventive Measurement forNPA

Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival

process, its too late to retrieve the situation- both in terms of rehabilitation of

the project and recovery of banks dues. Identification of weakness in the very

beginning that is: When the account starts showing first signs of weakness

regardless of the fact that it may not have become NPA, is imperative.

Assessment of the potential of revival may be done on the basis of a techno-

economic viability study. Restructuring should be attempted where, after an

objective assessment of the promoters intention, banks are convinced of a

turnaround within a scheduled timeframe. In respect of totally unviable units

as decided by the bank, it is better to facilitate winding up/ selling of the unit

earlier, so as to recover whatever is possible through legal means before the

security position becomes worse.

Identifying Borrowers with Genuine Intent:-

Identifying borrowers with genuine intent from those who are non- serious

with no commitment or stake in revival is a challenge confronting bankers.

Here the role of frontline officials at the branch level is paramount as they are

the ones who has intelligent inputs with regard to promoters sincerity, and

capability to achieve turnaround. Based on this objective assessment, banks

should decide as quickly as possible whether it would be worthwhile to commit

additional finance.

In this regard banks may consider having Special Investigationof 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 casess hould be decided. This

will obviate the need to route the additional funding through the controlling


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offices in deserving cases, and help avert many accounts slipping into NPA

category.

Timeliness and Adequacy of response:-

Longer the delay in response, grater the injury to the account and the asset.

Time is a crucial element in any restructuring or rehabilitation activity. The

response decided on the basis of techno-economic study and promoters

commitment, has to be adequate in terms of extend of additional funding and

relaxations etc. under the restructuring exercise. The package of assistance

may be flexible and bank may look at the exit option.

Focus on Cash Flows:-

While financing, at the time of restructuring the banks may not be guided by

the conventional fund flow analysis only, which could yield a potentially

misleading picture. Appraisal for fresh credit requirements may be done by

analysing funds flow in conjunction with the Cash Flow rather than only on the

basis of Funds Flow.

Management Effectiveness:-

The general perception among borrower is that it is lack of finance that leads

to sickness and NPAs. But this may not be the case all the time. Management

effectiveness in tackling adverse business conditions is a very important aspect

that affects a borrowing units fortunes. A bank may commit additional finance

to an aling unit only after basic viability of the enterprise also in the context of

quality of management is examined and confirmed. Where the default is due

to deeper malady, viability study or investigative audit should be done it will

be useful to have consultant appointed as early as possible to examine this

aspect. A proper techno economic viability study must thus become the basis

on which any future action can be considered.

Multiple Financing:-

A. During the exercise for assessment of viability and restructuring, a

Pragmaticand unifiedapproach 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.


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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 amongconsortium 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 oneset of lenders may be willing to wait for a longer time torecover its dues,

another lender may have a much shortertimeframe in mind. So it is possible

that the letter categories oflenders may be willing to exit, even a t a cost by a

discountedsettlement of the exposure. Therefore, any plan

forrestructuring/rehabilitation may take this aspect into account.

D. Corporate DebtRestructuring mechanism has beeninstitutionalized in 2001

to provide a timely and transparent systemfor restructuring of the corporate

debt of Rs. 20 crore and abovewith the banks and FIs on a voluntary basis and

outside the legalframework. Under this system, banks may greatly benefit intermsof restructuring of large standard accounts (potential NPAs) andviable

sub-standard accounts with consortium/multiple bankingarrangements.


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CCHHAAPPTTEERR--66

Tools 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.

6.1Willful Default:-

A] Lok Adalat and Debt Recovery Tribunal

B] Securitization Act

C] Asset Reconstruction


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Lok Adalat:

Lok Adalat institutions help banks to settle disputes involvingaccount in

doubtful and loss category, with outstanding balance of Rs.5 lakh for

compromise settlement under Lok Adalat. Debt recoverytribunals have been

empowered to organize Lok Adalat to decide oncases of NPAs of Rs. 10 lakh

and above. This mechanism has proved tobe quite effective for speedy justiceand recovery of small loans. Theprogress through this channel is expected to

pick up in the coming years.

Debt Recovery Tribunals (DRT):

The recovery of debts due tobanks and financial institution passed in March

2000 has helped instrengthening the function of DRTs. Provision for placement

of more thanone recovery officer, power to attach defendants

property/assetsbefore judgment, penal provision for disobedience of tribunals

order or for breachof any terms of order and appointment of receiver withpower ofrealization, management, protection and preservation of property are

expected to provide necessary teeth to the DRTs and speed up therecovery of

NPAs in the times to come. DRTs which have been set up by

the Government to facilitate speedy recovery by banks/DFIs, have notbeen

able make much impact on loan recovery due to variety of reasonslike

inadequate number, lack of infrastructure, under staffing and

frequentadjournment of cases. It is essential that DRT mechanism is

strengthenedand vested with a proper enforcement mechanism to enforce

their orders.Non observation of any order passed by the tribunal shouldamount tocontempt of court, the DRT should have right to initiate

contemptproceedings. The DRT should empowered to sell asset of the

debtorcompanies and forward the proceed to the winding up court

fordistribution among the lenders.

6.2Inability to Pay

Consortium arrangements:

Asset classification of accounts under consortium should be based on the

record ofrecovery oftheindividual memberbanksand other aspects having abearing on therecoverability of the advances . Where the remittances by the

borrowerunder consortium lending arrangements are pooled with one bank

and/orwhere the bank receiving remittances is not parting with the share of

othermember banks, the account will be treated as not serviced in the books

ofthe other member banks and therefore, be treated as NPA. The

banksparticipating in the consortium should, therefore, arrange to get their

shareof recovery transferred from the lead bank or get an express consent


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fromthe lead bank for the transfer of their share of recovery, to ensure

properasset classification in their respective books.

6.3Restructuring / Rescheduling of Loans

A standard asset where the terms of the loan agreement regarding Interest

and principal have been renegotiated or rescheduled after commencement of

production should be classified as sub-standard andshould remain in such

category for at least one year of satisfactoryperformance under therenegotiated or rescheduled terms. In the case ofsub-standard and doubtful

assets also, rescheduling does not entitle abank to upgrade the quality of

advance automatically unless there issatisfactory performance under the

rescheduled / renegotiated terms.Following representations from banks that

the foregoing stipulations deterthe banks from restructuring ofstandardand

sub-standard loanassets even though the modification of terms might not

jeopardize theassurance of repayment of dues from the borrower, the norms

relating torestructuring of standard and sub-standard assets were reviewed in

March2001. In the context of restructuring of the accounts, the following

stagesat which the restructuring / rescheduling / renegotiation of the terms of

loan agreement could take place, can be identified:

1) Before commencement of commercial production;

2) After commencement of commercial production but before the asset has

been classified as substandard,

3) After commencement of commercial production and after the asset has

been classified as substandard.

In each of the foregoing three stages, the rescheduling, etc., of principaland/or

of interest could take place, with or without sacrifice, as part of

therestructuring package evolved.

6.4 Treatment of Restructured Standard Accounts:

A rescheduling of the installments of principal alone, at any of theaforesaid

first two stages would not cause a standard asset to be classified in the

substandard category provided the loan/credit facility isfully secured.

A rescheduling of interest element at any of the foregoing first twostageswould not cause an asset to be downgraded to substandardcategory subject to

the condition that the amount of sacrifice, if any, in theelement of interest,

measured in presentvalueterms, is either writtenoff or provision is made to

the extent of the sacrifice involved. For thepurpose, the future interest due as

per the original loan agreement inrespect of an account should be discounted

to the present value at a rateappropriate to the risk category of the borrower

(i.e., current PLR+ theappropriate credit risk premium for the borrower-


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category) and comparedwith the present value of the dues expected to be

received under therestructuring package, discounted on the same basis.

In case there is a sacrifice involved in the amount of interest inpresent value

terms, as at (b) above, the amount of sacrifice should eitherbe written off or

provision madeto the extent of the sacrifice involved.

6.5 Treatment of restructured sub-standard accounts:

A rescheduling of the installments of principal alone would render asub-

standard asset eligible to be continued in the sub-standard categoryfor the

specified period, providedthe loan/credit facility is fully secured.

A rescheduling of interest element would render a sub-standardasset eligible

to be continued to be classified in substandard categoryfor the specified

period subject to the condition that the amount ofsacrifice, if any, in the

element of interest, measuredin presentvalueterms, is either written off or

provision is made to the extent of thesacrifice involved. For the purpose, the

future interest due as per theoriginal loan agreement in respect of an accountshould be discounted tothe present value at a rate appropriate to the risk

category of the borrower(i.e., current PLR + the appropriate credit risk

premium for the borrower category)and compared with the present value of

the dues expected to bereceived under the restructuring package, discounted

on the same basis.

In case there is a sacrifice involved in the amount of interest inpresent value

terms, as at (b) above, the amount of sacrifice should eitherbe written off or

provision made to the extent of the sacrifice involved.Even in cases where the

sacrifice is by way of write off of the past interestdues, the asset shouldcontinue to be treated as sub-standard.

6.6Up gradation of restructured accounts:The sub-standard accounts which have been subjected to restructuring etc.,

whether in respect of principal installment or interest amount, bywhatever

modality, would be eligible to be upgraded to the standardcategory only after

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

of interest or of principal, whichever is earlier, fallsdue, subject to satisfactory

performance during the period. The amount ofprovision made earlier, net ofthe amount provided for the sacrifice in theinterest amount in present value

terms as aforesaid, could also bereversed after the one year period. During this

one-year period, the substandardasset will not deteriorate in its classification if

satisfactoryperformance of the account is demonstrated during the period. In

case,however, the satisfactory performance during the one-year period is

notevidenced, the asset classification of the restructured account would

begoverned as per the applicable prudential norms with reference to the

prerestructuringpayment schedule.


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words, any funding of interest inrespect of NPAs, if recognised as income,

should be fully provided for.

6.9.1. Conversion into equity, debentures or any other instrument:The amount outstanding converted into other instrumentswould normally

comprise principal and the interest components. If theamount of interest dues

is converted into equity orany other instrument,and income is recognised in

consequence, full provision should be madefor the amount of income so

recognised to offset the effect of such incomerecognition. Such provision

would be in addition to the amount of provision that may be necessary for the

depreciation in the value of the equity orother instruments, a s per the

investment valuation norms. However, if theconversion of interest is into

equity, which is quoted, interest income canbe recognised at market value of

equity, as on the date of conversion, not exceeding the amount of interest

converted to equity. Such equity must thereafter be classified in the "available

for sale" category and valued atlower of cost or market value. In case ofconversion of principal and /orinterest in respect of NPAs into debentures,

such debentures should betreated as NPA, ab initio, in the same asset

classification as wasapplicable to loan just before conversion and provision

made as pernorms. This norm would also apply to zero coupon bonds or other

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

income should be recognised only on realisation basis. Theincome in respect of

unrealised interest, which is converted intodebentures or any other fixed

maturity instrument, should be recognisedonly on redemption of such

instrument. Subject to the above, the equityshares or other instruments arising

from conversion of the principalamount of loan would also be subject to the

usual prudential valuationnorms as applicable to such instruments.

6.9.2. Provisioning

While there will be no change in the extant norms on provisioningfor NPAs,

banks which are already holding provisions against some of theaccounts, which

may now be classified as standard, shall continue tohold the provisions and

shall not reverse the same.


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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 therecord of recovery.

Bank should not classify an advance account as NPAmerely due to the

existence of some deficiencies which are temporary innature such as non -

availability of adequate drawing power based on thelatest available stock

statement, balance outstanding exceeding the limittemporarily, non-

submission of stock statements and non-renewal of thelimits on the due date,

etc. In the matter of classification of accounts withsuch deficiencies banks may

follow the following guidelines:

Banks should ensure that drawings in the working capitalaccounts are covered

by the adequacy of current assets, since currentassets are first appropriated in

times of distress. Drawing power isrequired to be arrived at based on the stock

statement which is current.However, considering the difficulties of large

borrowers, stock statements relied upon by the banks for determining drawing

power should not beolder than three months. The outstanding in the account

based on drawingpower calculated from stock statements older than three

months, would bedeemed as irregular. A working capital borrower account will

become NPAif such irregular drawings are permitted in the account for a

continuousperiod of 180 days even though the unit may be working or the

borrower'sfinancial position is satisfactory.

Regular and ad hoc credit limits need to be reviewed/ regularizednot later than

three months from the due date/date of ad hoc sanction. Incase of constraintssuch as non-availability of financial statements andother data from the

borrowers, the branch should furnish evidence to showthat renewal/ review of

credit limits is already on and would be completedsoon. In any case, delay

beyond six months is not considered desirable asa general discipline. Hence, an

account where the regular/ ad hoc creditlimits have not been reviewed/

renewed within 180 days from the duedate/ date of ad hoc sanction will be

treated as NPA.

7.1.2. Accounts regularized near about the balance sheet date:

The asset classification of borrower accounts where a solitary or a fewcredits

are recorded before the balance sheet date should be handled withcare and

without scope for subjectivity. Where the account indicatesinherent weakness

on the basis of the data available, the account shouldbe deemed as a NPA. In

other genuine cases, the banks must furnishsatisfactory evidence to the

Statutory Auditors/Inspecting Officers aboutthe manner of regularization of

the account to eliminate doubts on theirperforming status.


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7.1.3Asset Classification to be borrower-wise and not facility-wise

It is difficult to envisage a situation when only one facility to a

borrowerbecomes a problem credit and not others. Therefore, all the

facilitiesgranted by a bank to a borrower will have to be treated as NPA and

notthe particular facility or part thereof which has become irregular. If thedebits arising out of devolvement of letters of credit or invokedg uarantees are

parked in a separate account, the balance outstanding inthat account also

should be treated as a part of the borrowers principaloperating account for

the purpose of application of prudential norms onincome recognition, asset

classification and provisioning.

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

A NPA need not go through the various stages of classification incases of

serious credit impairment and such assets should bestraightaway classified as

doubtful or loss asset as appropriate. Erosion inthe value of security can bereckoned as significant when the realizablevalue of the security is less than 50

per cent of the value assessed by thebank or accepted by RBI at the time of last

inspection, as the case maybe. Such NPAs may be straightaway classified under

doubtful category and provisioning should be made as applicable to doubtful

assets.

If the realizable value of the security, as assessed by the bank/approved

values/ RBI is less than 10 per cent of the outstanding in theborrower

accounts, the existence of security should be ignored and theasset should be

straightaway classified as loss asset. It may be eitherwritten off or fully

provided for by the bank.

7.1.5.Advances to PACS/FSS ceded to Commercial Banks:

In respect of agricultural advances as well as advances for other purposes

granted by banks to ceded PACS/ FSS under the on-lending system, only that

particular credit facility granted to PACS/ FSS which is indefault for a period of

two harvest seasons (not exceeding two halfyears)/two quarters, as the case

may be, after it has become due will beclassified as NPA and not all the credit

facilities sanctioned to a PACS/FSS. The other direct loans & advances, if any,granted by the bank to the member borrower of a PACS/ FSS outside the on-

lending arrangementwill become NPA even if one of the credit facilities

granted to the sameborrower becomes NPA.


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

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPsand life

policies need not be treated as NPAs. Advances against goldornaments,

government securities and all other securities are not coveredby this

exemption.

7.1.7 Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or foragricultural

plantations etc. where moratorium is available for payment ofinterest,

payment of interest becomes 'due' only after the moratorium orgestation

period is over. Therefore, such amounts of interest do notbecome overdue and

hence NPA, with reference to the date of debit of interest. They become

overdue after due date for payment of interest, ifuncollected.

In the case of housing loan or similar advances granted to staff

members where interest is payable after recovery of principal, interestneed

not be considered as overdue from the first quarter onwards.

Suchloans/advances should be classified as NPA only when there is a defaultin

repayment of installment of principal or payment of interest on therespective

due dates.

7.1.8 Agricultural advances

In respect of advances granted for agricultural purpose whereinterest and/or

installment of principal remains unpaid after it has becomepast due for twoharvest seasons but for a period not exceeding two half years,such an advance

should be treated as NPA. The above normsshould be made applicable to all

direct agricultural advances as listed atitems 1.1, 1.1.2 (i) to (vii), 1.1.2

(viii)(a)(1) and 1.1.2 (viii)(b)(1) of MasterCircular on lending to priority sector

No. RPCD.PLAN. BC. 12/04.09.01/2001- 2002 dated 1 August 2001. An extract

of the list of these items isfurnished in the Annexure II. In respect of

agricultural loans, other thanthose specified above, identification of NPAs

would be done on the samebasis as non-agricultural advances which, at

present, are the 180 daysdelinquency norm.

Where natural calamities impair the repaying capacity ofagricultural

borrowers, banks may decide on their own as a relief measure conversion of

the short-term production loan into a term loan or re -schedulementof the

repayment period; and the sanctioning of fresh short -termloan, subject to

various guidelines contained in RBI

circularsRPCD.No.PLFS.BC.1 28/05.04.02/97-98 dated 20.06.98

andRPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.


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

fresh short-term loan may be treated as current dues and need notbe classified

as NPA. The asset classification of these loans wouldthereafter be governed by

the revised terms & conditions and would betreated as NPA if interest and/or

installment of principal remains unpaid, fortwo harvest seasons but for a

period not exceeding two half years.

7.1.9.Government guaranteed advances:

The credit facilities backed by guarantee of the CentralGovernment though

overdue may be treated as NPA only when theGovernment repudiates its

guarantee when invoked. This exemption fromclassification of Government

guaranteed advances as NPA is not for thepurpose of recognition of income.

With effect from 1st April 2000,advances sanctioned against State Government

guarantees should beclassified as NPA in the normal course, if the guarantee is

invoked andremains in default for more than two quarters. With effect from

March 31,2001 the period of default is revised as more than 180 days.

7.2.1.Take-out Finance:

Takeout finance is the product emerging in the context of thefunding of long -

term infrastructure projects. Under this arrangement, theinstitution/the bank

financing infrastructure projects will have an arrangement with any financial

institution for transferring to the latter theoutstanding in respect of such

financing in their books on a predeterminedbasis. In view of the time-lag

involved in taking-over, thepossibility of a default in the meantime cannot be

ruled out. The norms ofasset classification will have to be followed by theconcernedbank/financial institution in whose books the account stands as

balancesheet item as on the relevant date. If the lending institution observes

thatthe asset has turned NPA on the basis of the record of recovery, it should

be classified accordingly. The lending institution should not recognizeincome

on accrual basis and account for the same only when it is paid bythe borrower/

taking over institution (if the arrangement so provides). Thelending institution

should also make provisions against any asset turninginto NPA pending its

takeover by taking over institution. As and when theasset is taken over by the

taking over institution, the correspondingprovisions could be reversed.

However, the taking over institution, ontaking over such assets, should make

provisions treating the account asNPA from the actual date of it becoming NPA

even though the accountwas not in its books as on that date.


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7.2.2. Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the banks covering

export of goods to countries for which the ECGCs cover is available,EXIM Bank

has introduced a guarantee-cum-refinance programmewhereby, in the event

of default, EXIM Bank will pay the guaranteedamount to the bank within a

period of 30 days from the day the bankinvokes the guarantee after theexporter has filed claim with ECGC.

Accordingly, to the extent payment has been received from theEXIM 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 wherethe actual

importer has paid the dues to the bank abroad but the bank inturn is unable to

remit the amount due to political developments such aswar, strife, UN

embargo, etc.

In such cases, where the lending bank is able to establish

throughdocumentary evidence that the importer has cleared the dues in full

bydepositing the amount in the bank abroad before it turned into NPA in

theBooks of the bank, but the importer's country is not allowing the funds tobe

remitted due to political or other reasons, the asset classification maybe made

after a period of one year from the date the amount wasdeposited by the

importer in the bank abroad.

7.2.4. Advances under rehabilitation approved by BIFR/ TLI:

Banks are not permitted to upgrade the classification of any advance inrespect

of which the terms have been re-negotiated unless the package ofre-

negotiated terms has worked satisfactorily for a period of one year.While the

existing credit facilities sanctioned to a unit under rehabilitationpackages

approved by BIFR/term lending institutions will continue to beclassified as sub -

standard or doubtful as the case may be, in respect ofadditional facilities

sanctioned under the rehabilitation packages, theIncome Recognition, Asset

Classification norms will become applicableafter a period of one year from thedate of disbursement.


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7.2.5. ROLE OF ARCIL:-

This empowerment encouraged the three major players in Indian

bankingsystem, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI)

andIDBI Bank Limited (IDBI) to come together to set-up the first ARC. Arcilwas

incorporated as a public limited company on February 11, 2002 andobtained

its certificate of commencement of business on May 7, 2003. Inpursuance of

Section 3 of the Securitization Act 2002, it holds a certificateof registrationdated August 29, 2003, issued by the Reserve Bank of India(RBI) and operates

under powers conferred under the Securitization Act,2002. Arcil is also a

"financial institution" within the meaning of Section 2(h) (ia) of the Recovery of

Debts due to Banks and Financial InstitutionsAct, 1993 (the "DRT Act").

Arcil is the first ARC in the country to commence business of resolution

ofnon-performing assets (NPAs) upon acquisition from Indian banks

andfinancial institutions. As the first ARC, Arcil has played a pioneering role

insetting standards for the industry in India.

Unlocking capital for the banking system and the economy

The primary objective of Arcil is to expedite recovery of theamounts locked in

NPAs of lenders and thereby recycling capital.Arcil thus, provides relief to the

banking system by managing NPAsand help them concentrate on core banking

activities therebyenhancing shareholders value.

Creating a vibrant market for distressed debt assets /securities in India

offering a trading platform for Lenders

Arcil has made successful efforts in funneling investment from bothfrom

domestic and international players for funding theseacquisitions of distressed

assets, followed by showcasing them toprospective buyers. This has initiated

creation of a secondarymarket of distressed assets in the country besides

hastening theirresolution. The efforts of Arcil would lead the countrys

distresseddebt market to international standards.

To evolve and create significant capacity in the system forquickerresolution of NPAs by deploying the assets optimally

With a view to achieving high delivery capabilities for resolution,Arcil has put in

place a structure aimed at outsourcing the varioussub-functions of resolution

to specialized agencies, whereverapplicable under the provision of the

Securitization Act, 2002. Arcilhas also encourage, groomed and developed

many such agenciesto enhance its capacity in line with the growth of its

activity.


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CHAPTER-8

Data analysis and interpretation

8.ANALYSIS


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For the purpose of analysis and comparison between Public and private sector

banks, We have taken fivebanks from both sectorsto compare thenon-

performing assets of banks. For understanding we further bifurcate the non-

performing assets in priority sector and non-priority sector, grossNPA and net

NPA in percentage as well as in rupees, deposit investment advances.

Further we also analysis on the basis of Deposit Investment Advances to

get the clear view where the bank stands in the competitivemarket. At the endof March 2008, in private sector ICICI Bank is thehighest deposit-investment-

advances figure in rupees crore, second isHDFC Bank and KOTAK Bank has least

figure.

In public sector banks Punjab National Bank has the highest deposit

investment-advances but when we look at the graph we can see that the Bank

ofBaroda and Bank of India are almost the similar in numbers and Dena Bank is

stands last in public sector bank. When we compare theprivate sector banks

with public sector banks, we canunderstand the more number of people preferto choose public sectorbanks for deposit-investment.

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

comparison among them, year 2008-09.


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P i S B

i

B

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$ !

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l i :- F & ' ( the above figure we can see that the ICICI Bank de ) osit-

investment-advances are quite high than other banks like

HDFC,AXIS,INDUSIND,KOTAK

P li S B

0

50000

100000

150000

200000

250000

ICICI HDFC AXIS INDUSIND KOTAK

DEPOSIT

INVESTMENT

ADVANCES


57/67


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BR

S K DEP T SIU

I S VESU

V E SU

R

DVR

S WES

IW

IW

I BR

SK

X Y Y Y

` a

a a a

Y

b

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X X

b c a c

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b 7b

d d X

a a

d

b e

X

Analf

sis: -Here we havecompared et een I I I BA K A D PU JAB A IO AL

BA K in termofdeposit-investment-advances. From the above figure wecan see

that ICICI bank deposit and advances are quite higher than Punjab National

Bank. But in case of Investment ICICI Bank investment amount is doubled than

Punjab National Bank amount.

GrossNPAandNg

tNPA:-

There are two concepts related to non-performing assets a) gross and b) net.

Gross refers to all NPAs on a banks balancesheet irrespective of the provisions

0

50000

100000

150000

200000

250000

ICICI PNB

DEPOSIT

INVESTMENT

ADVANCES


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59

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 ofloans 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 grossNPA reflects thequality of the loans madeby banks,netNPA

showstheactual burden ofbanks. The requirements for provisions are:

100% for loss assets

100% of the unsecured portion plus 20-50% of the secured portion,

depending on the period for which the account has remained in the

doubtful category

10% general provision on the outstanding balance under the

substandard category.

Here, there are gross and net NPA data for 2007-08 and 2008-09 we taken for

comparison among banks. These data are NPA AS PERCENTAGE OF TOTAL

ASSETS. As we discuss earlier that gross NPA reflects the quality of the loans

made by banks. Among all the ten banks Dena Banks has highest gross NPA as

a percentage of total assets in the year 2007-08 and also net NPA. Punjab

National Bank shows huge difference between gross and net NPA. There is analmost same figure between BOI and BOB.

GrossNPA andNetNPA OfdifferentPublic Sectorbanksinthe year 2007-08


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GrossNPAandN

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GrossNPAandNetNPA Ofdifferent Pri

ate Sectorban sinthe year2007-08

0

0 5

1

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DENA UBI PNB BOI BOB

GROSS NPA

NET NPA

0

0 2

0

0 60

8

1

1 2

1j k

1 6

1 8

DENA PNB BOI BOB UBI

GROSS NPA

NET NPA


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GrossNPAandNetNPA Ofdifferent Pri}

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29173590 27172638 Management Research Project on NPA

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