01/04/2011 A Project Report Submitted By GAURAV S. GODWANI In partial fulfillment for the award of the degree of BACHELOR IN COMMERCE (HONOURS) Under Dr. P. P. Ghosh of ST. XAVIER’S COLLEGE (AUTONOMOUS) Under University of Calcutta ROLL NO: 3-01-08-0573 Comparative Analysis of Non Performing Assets of Public Sector Banks, Private Sector Banks & Foreign Banks
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Comparative Analysis of Non Performing Assets of Public Sector, Private Sector & Foreign Banks
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01/04/2011
A Project Report Submitted By
GAURAV S. GODWANI
In partial fulfillment for the award of the degree of
BACHELOR IN COMMERCE (HONOURS)
Under Dr. P. P. Ghosh of
ST. XAVIER’S COLLEGE (AUTONOMOUS)
Under University of Calcutta
ROLL NO: 3-01-08-0573
Comparative Analysis of Non Performing Assets of
Public Sector Banks, Private Sector Banks & Foreign Banks
PREFACE Granting of credit facilities for economic activities is the primary task of banking.
Apart from raising resources through fresh deposits, borrowings, etc. recycling of
funds received back from borrowers constitutes a major part of funding credit
dispensation activities. Non-recovery of installments as also interest on the loan
portfolio negates the effectiveness of this process of the credit cycle. Non-recovery
also affects the profitability of banks besides being required to maintain more
owned funds by way of capital and creation of reserves and provisions to act as
cushion for the loan losses. Avoidance of loan losses is one of the pre-occupations
of management of banks. While complete elimination of such losses is not possible,
bank managements aim to keep the losses at a low level. In fact, it is the level of
non-performing advances, which, to a great extent, differentiates between a good
and a bad bank. Mounting NPAs may also have more widespread repercussions. To
avoid shock waves affecting the system, the salvaging exercise is done by the
Government or by the industry on t he behest of Government/ central bank of the
country putting pressure on the exchequer.
In India, the NPAs, which are considered to be at higher levels than those in other
countries, have, of late, attracted the attention of public as also of international
financial institutions. This has gained further prominence in the wake of
transparency and disclosure measures initiated by the RBI during recent years.
This project aims at providing an o ov erall view on t he existence of NPAs, their
treatment, the ways at resolving this issue and also a f ew reports on the recent
developments in this field.
ACKNOWLEDGEMENT
First of all I would like to take this opportunity to thank my College for having
projects as a part of the B.Com Curriculum.
I wish to express my heartfelt gratitude to the following individuals who have played
a crucial role in the research for this project. Without their active cooperation the
preparation of this project could not have been completed within the specified time
limit.
The first person I would like to acknowledge is my guide Dr. P. P. Ghosh, of
St. Xavier’s College Kolkata, who supported me throughout this project with
utmost co-operation and patience. I am very much thankful to you sir, for sparing
your precious and valuable time for me and for helping me in doing this project. I am
also thankful to the Vice Principal and Dean of Commerce, who gave us an
opportunity to make this project in our final year.
Finally, to all my friends who helped me in making this project. I want to thank
them for all their help, support, interest and valuable hints.
TABLE OF CONTENTS
Sr. No.
TOPICS Pg. No.
1. Introduction to NPA’s
Meaning of NPA
Asset Classification
Types of NPA
Reasons for an Account becoming an NPA
Impact of NPA
Early Symptoms
Preventive Measurement of NPA
Procedure of NPA Identification &
Resolutions in India
1-27
1
3
7
8
10
11
13
16
2. Objectives & Beneficiaries
28
3. Research Methodology
29
4. Analysis
31-58
5. Hypothesis Testing
59-64
6. Overall Findings
65
7. Conclusion
66
8. Suggestion
67
9. Bibliography
68
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 1
INTRODUCTION TO NPA
MEANING OF NPA: Non Performing Asset means an asset or account of borrower, which has been classified by a
bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it has not been paid
within 30 days from the due date. Due to the improvement in the payment and settlement
systems, recovery climate, up gradation of technology in the banking system, etc., it was
decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly,
as from that date, a Non performing asset (NPA) shell be an advance where
i. Interest and /or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit(OD/CC),
iii. The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
iv. Interest and/ or installment 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 purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt 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) shell be a loan or an advance where;
i. Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC),
1
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 2
iii. The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
iv. Interest and/ or installment 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 purpose, and
v. Any amount to be received remains overdue for a period of more than 90 days in
9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, delaying settlement of payments\ subsidiaries by government bodies etc.,
External factors:
1) Sluggish legal system –
Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
5) Failures, nonpayment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc. 6) Government policies like excise duty changes, Import duty changes etc.,
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 9
The RBI has summarized the finer factors contributing to higher level of NPAs in the
Indian banking sector as: Diversion of funds, which is for expansion, diversification, modernization,
undertaking new projects and for helping associate concerns. This is also coupled
with recessionary trends and failures to tap funds in capital and debt markets. Business failures (such as product, marketing etc.), which are due to inefficient
management system, strained labour relations, inappropriate technology/ technical
problems, product obsolescence etc. Recession, which is due to input/ power shortage, price variation, accidents, natural
calamities etc. The externalization problems in other countries also lead to growth of
NPAs in Indian banking sector. Time/ cost overrun during project implementation stage.
Governmental policies such as changes in excise duties, pollution control orders etc.
Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation,
promoters/ directors disputes etc. Deficiency on the part of banks, viz, delays in release of limits and payments/
subsidies by the Government of India.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 10
IMPACT OF NPA:
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 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.
LLiiqquuiiddiittyy::
Money is getting blocked, decreased profit lead to lack of enough cash at hand which
lead to borrowing money for shortest 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
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.
FFooccuuss oonn CCaasshh FFlloowwss::
While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading picture.
Appraisal for fresh credit requirements may be done by analyzing funds flow in
conjunction with the Cash Flow rather than only on the basis of Funds Flow.
MMaannaaggeemmeenntt EEffffeeccttiivveenneessss::
The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in
tackling adverse business conditions is a very important aspect that affects a borrowing
unit‟s fortunes. A bank may commit additional finance to an aling unit only after basic
viability of the enterprise also in the context of quality of management is examined and
confirmed. Where the default is due to deeper malady, viability study or investigative
audit should be done – it will be useful to have consultant appointed as early as possible
to examine this aspect. A proper techno- economic viability study must thus become the
basis on which any future action can be considered.
MMuullttiippllee FFiinnaanncciinngg:: During the exercise for assessment of viability and restructuring, a Pragmatic and
unified approach by all the lending banks/ FIs as also sharing of all relevant
information on the borrower would go a long way toward overall success of
rehabilitation exercise, given the probability of success/failure.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 15
In some default cases, where the unit is still working, the bank should make sure that
it captures the cash flows (there is a tendency on part of the borrowers to switch
bankers once they default, for fear of getting their cash flows forfeited), and ensure
that such cash flows are used for working capital purposes. Toward this end, there
should be regular flow of information among consortium members. A bank, which is
not part of the consortium, may not be allowed to offer credit facilities to such
defaulting clients. Current account facilities may also be denied at non-consortium
banks to such clients and violation may attract penal action. The Credit Information
Bureau of India Ltd.(CIBIL) may be very useful for meaningful information
exchange on defaulting borrowers once the setup becomes fully operational. In a forum of lenders, the priority of each lender will be different. While one set of
lenders may be willing to wait for a longer time to recover its dues, another lender
may have a much shorter timeframe in mind. So it is possible that the letter categories
of lenders may be willing to exit, even a t a cost – by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into
account. Corporate Debt Restructuring mechanism has been institutionalized in 2001 t o
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.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 16
PROCEDURES FOR NPA IDENTIFICATION AND
RESOLUTION IN INDIA: 1. Internal Checks and Control
Since high level of NPAs dampens the performance of the banks identification of
potential problem accounts and their close monitoring assumes importance. Though most
banks have Early Warning Systems (EWS) for identification of potential NPAs, the
actual processes followed, however, differ from bank to bank. The EWS enable a bank to
identify the borrower accounts which show signs of credit deterioration and initiate
remedial action. Many banks have evolved and adopted an elaborate EWS, which allows
them to identify potential distress signals and plan their options beforehand, accordingly.
The early warning signals, indicative of potential problems in the accounts, viz. persistent
irregularity in accounts, delays in servicing of interest, frequent devolvement of L/Cs,
units' financial problems, market related problems, etc. are captured by the system. In
addition, some of these banks are reviewing their exposure to borrower accounts every
quarter based on published data which also serves as an important additional warning
system. These early warning signals used by banks are generally independent of risk
rating systems and asset classification norms prescribed by RBI.
The major components/processes of a EWS followed by banks in India as brought out by
a study conducted by Reserve Bank of India at the instance of the Board of Financial
Supervision are as follows:
Designating Relationship Manager/ Credit Officer for monitoring account/s
Preparation of `know your client' profile
Credit rating system
Identification of watch-list/special mention category accounts
Monitoring of early warning signals
Relationship Manager/Credit Officer
The Relationship Manager/Credit Officer is an official who is expected to have complete
knowledge of borrower, his business, his future plans, etc. The Relationship Manager has
to keep in constant touch with the borrower and report all developments impacting the
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 17
borrowable account. As a part of this contact he is also expected to conduct scrutiny and
activity inspections. In the credit monitoring process, the responsibility of monitoring a
corporate account is vested with Relationship Manager/Credit Officer.
Know your client' profile (KYC)
Most banks in India have a system of preparing `know your client' (KYC) profile/credit
report. As a part of `KYC' system, visits are made on clients and their places of
business/units. The frequency of such visits depends on the nature and needs of
relationship.
Credit Rating System
The credit rating system is essentially one point indicator of an individual credit exposure
and is used to identify measure and monitor the credit risk of individual proposal. At the
whole bank level, credit rating system enables tracking the health of banks entire credit
portfolio. Most banks in India have put in place the system of internal credit rating. While
most of the banks have developed their own models, a few banks have adopted credit
rating models designed by rating agencies. Credit rating models take into account various
types of risks viz. financial, industry and management, etc. associated with a borrowable
unit. The exercise is generally done at the time of sanction of new borrowable account
and at the time of review renewal of existing credit facilities.
Watch-list/Special Mention Category
The grading of the bank's risk assets is an important internal control tool. It serves the
need of the Management to identify and monitor potential risks of a loan asset. The
purpose of identification of potential NPAs is to ensure that appropriate preventive /
corrective steps could be initiated by the bank to protect against the loan asset becoming
non-performing. Most of the banks have a system to put certain borrowable accounts
under watch list or special mention category if performing advances operating under
adverse business or economic conditions are exhibiting certain distress signals. These
accounts generally exhibit weaknesses which are correctable but warrant banks' closer
attention. The categorization of such accounts in watch list or special mention category
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 18
provides early warning signals enabling Relationship Manager or Credit Officer to
anticipate credit deterioration and take necessary preventive steps to avoid their slippage
into non performing advances. Early Warning Signals It is important in any early warning
system, to be sensitive to signals of credit deterioration. A host of early warning signals
are used by different banks for identification of potential NPAs. Most banks in India have
laid down a series of operational, financial, transactional indicators that could serve to
identify emerging problems in credit exposures at an early stage. Further, it is revealed
that the indicators which may trigger early warning system depend not only on default in
payment of installment and interest but also other factors such as deterioration in
operating and financial performance of the borrower, weakening industry characteristics,
regulatory changes, general economic conditions, etc. Early warning signals can be
classified into five broad categories viz.
a) Financial
b) Operational
c) Banking
d) Management and
e) External factors.
Financial related warning signals generally emanate from the borrowers' balance sheet,
income expenditure statement, statement of cash flows, statement of receivables etc.
Following common warning signals are captured by some of the banks having relatively
developed EWS.
Financial warning signals
Persistent irregularity in the account
Default in repayment obligation
Devolvement of LC/invocation of guarantees
Deterioration in liquidity/working capital position
Substantial increase in long term debts in relation to equity
Declining sales
Operating losses/net losses
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 19
Rising sales and falling profits
Disproportionate increase in overheads relative to sales
Rising level of bad debt losses Operational warning signals
Low activity level in plant
Disorderly diversification/frequent changes in plan
Nonpayment of wages/power bills
Loss of critical customer/s
Frequent labor problems
Evidence of aged inventory/large level of inventory
Management related warning signals
Lack of co-operation from key personnel
Change in management, ownership, or key personnel
Desire to take undue risks
Family disputes
Poor financial controls
Fudging of financial statements
Diversion of funds
Banking related signals
Declining bank balances/declining operations in the account
Opening of account with other bank
Return of outward bills/dishonored cheques
Sales transactions not routed through the account
Frequent requests for loan
Frequent delays in submitting stock statements, financial data, etc.
Signals relating to external factors
Economic recession
Emergence of new competition
Emergence of new technology
Changes in government / regulatory policies
Natural calamities
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 20
2. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system indicates a
significant improvement in management of NPAs. This is also on account of various
resolution mechanisms introduced in the recent past which include the SRFAESI Act,
one time settlement schemes, setting up of the CDR mechanism, strengthening of DRTs.
From the data available of Public Sector Banks as on March 31, 2003, there were 1,522
numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50
million in all the public sector banks in India. The total gross value of these NPAs
amounted to Rs. 215 billion. The total number of resolution approaches (including cases
where action is to be initiated) is greater than the number of NPAs, indicating some
double counting. As can be seen, suit filed and BIFR are the two most common
approaches to resolution of NPAs in public sector banks. Rehabilitation has been
considered/ adopted in only about 13% of the cases. Settlement has been considered only
in 9% of the cases. It is likely to have been adopted in even fewer cases. Data available
on resolution strategies adopted by public sector banks suggest that Compromise
settlement schemes with borrowers are found to be more effective than legal measures.
Many banks have come out with their own restructuring schemes for settlement of NPA
accounts. State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information
Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of
information between banks and FIs for curbing the growth of NPAs incorporated credit
Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of
CIB Regulation Bill, the RBI constituted a working group to examine the role of CIBs.
As per the recommendations of the working group, Banks and FIs are now required to
submit the list of suit-filed cases of Rs. 10 million and above and suit filed cases of
willful defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share
this information with commercial banks and FIs so as to help them minimize adverse
selection at appraisal stage. The CIBIL is in the process of getting operationalised.
3. Willful Defaulters
RBI has issued revised guidelines in respect of detection of willful default and diversion
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 21
and siphoning of funds. As per these guidelines a willful default occurs when a borrower
defaults in meeting its obligations to the lender when it has capacity to honor the
obligations or whenfunds have been utilized for purposes other than those for which
finance was granted. The list of willful defaulters is required to be submitted to SEBI and
RBI to prevent their access to capital markets. Sharing of information of this nature helps
banks in their due diligence exercise and helps in avoiding financing unscrupulous
elements. RBI has advised lenders to initiate legal measures including criminal actions,
wherever required, and undertake a proactive approach in change in management, where
appropriate. 4. Legal and Regulatory Regime
Debt Recovery Tribunals
DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions
Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal
(DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with
competence to entertain cases referred to them, by the banks and FIs for recovery of debts
due to the same. The order passed by a DRT is appealable to the Appellate Tribunal but
no appeal shall be entertained by the DRAT unless the applicant deposits 75% of the
amount due from him as determined by it. However, the Affiliate Tribunal may, for
reasons to be received in writing, waive or reduce the amount of such deposit. Advances
of Rs. 1 million and above can be settled through DRT process. An important power
conferred on the Tribunal is that of making an interim order (whether by way of
injunction or stay) against the defendant to debar him from transferring, alienating or
otherwise dealing with or disposing of any property and the assets belonging to him
within prior permission of the Tribunal. This order can be passed even while the claim is
pending. DRTs are criticized in respect of recovery made considering the size of NPAs in
the Country. In general, it is observed that the defendants approach the High Country
challenging the verdict of the Appellate Tribunal which leads to further delays in
recovery. Validity of the Act is often challenged in the court which hinders the progress
of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of
infrastructure.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 22
Lokadalats
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987
helps in resolving disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counseling between the
parties and to reduce burden on the court, especially for small loans. Cases involving suit
claims up to Rs. l million can be brought before the Lokadalat and every award of the
Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any
court against the award made by the Lokadalat. Several people of particular localities
various social organizations are approaching Lokadalats which are generally presided
over by two or three senior persons including retired senior civil servants, defense
personnel and judicial officers. They take up cases which are suitable for settlement of
debt for certain consideration. Parties are heard and they explain their legal position.
They are advised to reach to some settlement due to social pressure of senior bureaucrats
or judicial officers or social workers. If the compromise is arrived at, the parties to the
litigation sign a statement in presence of Lokadalats which is expected to be filed in court
to obtain a consent decree. Normally, if such settlement contains a clause that if the
compromise is not adhered to by the parties, the suits pending in the court will proceed in
accordance with the law and parties will have a right to get the decree from the court. In
general, it is observed that banks do not get the full advantage of the Lokadalats. It is
difficult to collect the concerned borrowers willing to go in for compromise on the day
when the Lokadalat meets. In any case, we should continue our efforts to seek the help of
the Lokadalat.
Enactment of SRFAESI Act
The "The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory
framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition
to asset reconstruction and ARCs, the Act deals with the following largely aspects,
Securitization and Securitization Companies
Enforcement of Security Interest
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 23
Creation of a central registry in which all securitization and asset reconstruction
transactions as well as any creation of security interests has to be filed.
The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has
issued Directions, Guidance Notes, Application Form and Guidelines to Banks in April
2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance
Notes cover various aspects relating to registration, operations and funding of ARCS and
resolution of NPAs by ARCS. The RBI has also issued guidelines to banks and financial
institutions on issues relating to transfer of assets to ARCS, consideration for the same
and valuation of instruments issued by the ARCS. Additionally, the Central Government
has issued the security enforcement rules ("Enforcement Rules"), which lays down the
procedure to be followed by a secured creditor while enforcing its security interest
pursuant to the Act. The Act permits the secured creditors (if 75% of the secured
creditors agree) to enforce their security interest in relation to the underlying security
without reference to the Court after giving a 60 day notice to the defaulting borrower
upon classification of the corresponding financial assistance as a non-performing asset.
The Act permits the secured creditors to take any of the following measures:
Take over possession of the secured assets of the borrower including right to
transfer by way of lease, assignment or sale;
Take over the management of the secured assets including the right to transfer by
way of lease, assignment or sale;
Appoint any person as a manager of the secured asset (such person could be the
ARC if they do not accept any pecuniary liability); and
Recover receivables of the borrower in respect of any secured asset which has
been transferred. After taking over possession of the secured assets, the secured
creditors are required to obtain valuation of the assets. These secured assets may
be sold by using any of the following routes to obtain maximum value.
By obtaining quotations from persons dealing in such assets or otherwise
interested in buying the assets;
By inviting tenders from the public; By holding public auctions; or
By private treaty.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 24
Lenders have seized collateral in some cases and while it has not yet been possible to
recover value from most such seizures due to certain legal hurdles, lenders are now
clearly in a much better bargaining position vis-a-vis defaulting borrowers than they were
before the enactment of SRFAESI Act. When the legal hurdles are removed, the
bargaining power of lenders is likely to improve further and one would expect to see a
large number of NPAs being resolved in quick time, either through security enforcement
or through settlements. Under the SRFAESI Act ARCS can be set up under the
Companies Act, 1956. The Act designates any person holding not less than 10% of the
paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a
controlling interest in, being the holding company of or being in control of the ARC. The
SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned
fund of not less than Rs. 20,000,000. Further, the Directions require that an ARC should
maintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of its risk
weighted assets. ARCS have been granted a maximum realization time frame of five
years from the date of acquisition of the assets. The Act stipulates several measures that
can be undertaken by ARCs for asset reconstruction. These include:
Enforcement of security interest;
Taking over or changing the management of the business of the borrower;
The sale or lease of the business of the borrower;
Settlement of the borrowers' dues; and
Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over by t he lenders
under security enforcement rights available to them or as a recovery agent for any bank
or financial institution and to receive a fee for the discharge of these functions. They can
also be appointed to act as a receiver, if appointed by any Court or DRT.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 25
Source: http://www.rbi.org.in
Institution of CDR Mechanism
The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for
resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism
instituted in India is broadly along the lines of similar systems in the UK, Thailand,
Korea and Malaysia. The objective of the CDR mechanism has been to ensure timely and
transparent restructuring of corporate debt outside the purview of the Board for Industrial
and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is
intended to preserve viable corporate affected by certain internal/external factors and
minimize losses to creditors/other stakeholders through an orderly and coordinated
restructuring programme. RBI has issued revised guidelines in February 2003 with
respect to the CDR mechanism. Corporate borrowers with borrowings from the banking
system of Rs. 20crores and above under multiple banking arrangement are eligible under
the CDR mechanism. Accounts falling under standard, sub-standard or doubtful
categories can be considered for restructuring. CDR is a nonstatutory mechanism based
on debtor-creditor agreement and inter-creditor agreement. Restructuring helps in
aligning repayment obligations for bankers with the cash flow projections as reassessed at
the time of restructuring. Therefore it is critical to prepare a restructuring plan on the
lines of the expected business plan along with projected cash flows.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 26
The CDR process is being stabilized. Certain revisions are envisaged with respect to the
eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign
banks are not members of the CDR forum, and it is expected that they would be signing
the agreements shortly. However they attend meetings. The first ARC to be operational in
India- Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum.
Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in
multiple lender arrangements and to increase transparency in the process. While in the
RBI guidelines it has been recommended to involve independent consultants, banks are
so far resorting to their internal teams for recommending restructuring programs.
Compromise Settlement Schemes
1) One Time Settlement Schemes
NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The
scheme also covers NPAs classified as sub-standard as on 31st March 2000, which
have subsequently become doubtful or loss. All cases on which the banks have
initiated action under the SRFAESI Act and also cases pending before
Courts/DRTs/BIFR, subject to consent decree being obtained from the
Courts/DRTs/BIFR are covered. However cases of willful default, fraud and
malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores,
the minimum amount that should be recovered should be 100% of the outstanding
balance in the account.
2) Negotiated Settlement Schemes
The RBI/Government has been encouraging banks to design and implement policies
for negotiated settlements, particularly for old and unresolved NPAs. The broad
framework for such settlements was put in place in July 1995. Specific guidelines
were issued in May 1999to public sector banks for one-time settlements of NPAs of
small scale sector. This scheme was valid until September 2000 and enabled banks to
recover Rs 6.7 billion from various accounts. Revised guidelines were issued in July
2000 for recovery of NPAs of Rs. 50 millionand less. These guidelines were effective
until June 2001 and helped banks recover Rs. 26 billion.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 27
Increased Powers to NCLTs and the Proposed Repeal of BIFR
In India, companies whose net worth has been wiped out on account of accumulated
losses come under the purview of the Sick Industrial Companies Act (SICA) and need to
be referred to BIFR. Once a company is referred to the BIFR (and even if an enquiry is
pending as to whether it should be admitted to BIFR), it is afforded protection against
recovery proceedings from its creditors. BIFR is widely regarded as a stumbling block in
recovering value for NPAs. Promoters systematically take refuge in SICA - often there is
a scramble to file a reference in BIFR so as to obtain protection from debt recovery
proceedings. The recent amendments to the Companies Act vest powers for revival and
rehabilitation of companies with the National Company Law Tribunal (NCLT), in place
of BIFR, with modifications to address weaknesses experienced under the SICA
provisions. The NCLT would prepare a scheme for reconstruction of any sick company
and there is no bar on the lending institution of legal proceedings against such company
whilst the scheme is being prepared by the NCLT. Therefore, proceedings initiated by
any creditor seeking to recover monies from a sick company would not be suspended by
a reference to the NCLT and, therefore, the above provision of the Act may not have
much relevance any longer and probably does not extend to the tribunal for this reason.
However, there is a possibility of conflict between the activities that may be undertaken
by the ARC, e.g. change in management, and the role of the NCLT in restructuring sick
companies. The Bill to repeal SICA is currently pending in Parliament and the process of
staffing of NCLTs has been initiated
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 28
OBJECTIVES I. Problem statement/Objective of the research
To study of the concept of Non Performing Asset in Indian perspective.
To study NPA standard of RBI
To study the Reasons for & Impact of NPAs
To evaluate the efficiency in managing Non Performing Asset of different types of banks
(Public, Private & Foreign banks) using NPA ratios & comparing NPA with profits.
To check the proportion of NPA of different types of banks in different categories. II. Beneficiaries of the study
The outcomes analyzed from this study would be beneficial to various sections such as:
Banks: This study would definitely benefit the banks in a way that directs them as to which sector should be given priority for lending money.
Further Researchers: The major beneficiaries from the project would be the researchers themselves as this study would enhance their knowledge about the topic. They get an insight of the present scenario of this industry as this is the emerging industry in the financial sector of the economy.
Student: To get the understanding of NPA concept as a whole.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 29
RESEARCH METHODOLOGY
I. Research Design
The research design that will be use is Descriptive Research.
Involves gathering data that describe events and then organizes, tabulates, depicts,
and describes the data.
Uses description as a tool to organize data into patterns that emerge during analysis.
Often uses visual aids such as graphs and charts to aid the reader.
Using of hypothesis testing.
Test of Correlation:
a) H0: There is no significant correlation between profits & NPAs of Public Sector
Banks for last 9 years
H1: There is correlation between profits & NPAs of Public Sector Banks for last 9
years
b) H0: There is no significant correlation between profits & NPAs of Private Sector
Banks for last 9 years
H1: There is correlation between profits & NPAs of Private Sector Banks for last
9 years
c) H0: There is no significant correlation between profits & NPAs of Foreign Banks
for last 9 years
H1: There is correlation between profits & NPAs of Foreign Banks for last 9 years
II. Data Collection Sources
Secondary Data
Secondary data refers to the data which has already been generated and is available for
use. The data about NPAs & its composition, classification of loan assets, profits (net &
gross) & advances of different banks is taken from Reserve Bank of India website and
indiastat.com.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 30
III. Scope of the study
To understand the concept of NPA in Indian Banking industry.
To understand the causes & effects of NPA
To analyze the past trends of NPA of Public, Private & Foreign banks in different
sector. IV. Expected contribution of the study
The analysis made as a part of this study may contribute in a way analysis of strength
and weakness of the banking sector as whole with regard to Non Performing Asset of
banks. Various banks from different categories together may make efforts to overcome
limitations for lending money to different sectors like agricultural, SSI, Priority sector,
non-priority sector, public sector & others.
V. Limitation There are some data which are available for just 3 years while the same data for
its counterparts were available for 9 years. So exact comparison was not possible.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 31
ANALYSIS OVERALL ANALYSIS:
Scheduled Commercial banks (SCBs) in India remained robust against the backdrop of
global financial crisis. It is noteworthy that contrary to the trend in some advanced countries,
the leverage ratio (Tier I capital to total assets ratio) in India has remained high reflecting the
strength of the Indian banking system. However, the Indian banking sector was not
completely insulated from the effects of the slowdown of the India economy. The consolidated balance sheets of SCBs, expanded by 21.2 per cent as at end-March 2010
as compared with 25.0 per cent in the previous year. While the balance sheet of public sector
banks maintained their growth momentum, the private sector banks and foreign banks
registered a deceleration in growth rate. During 2009-10, the growth rate of banks‟ lending to industries, personal loans and services
sector witnessed a deceleration, while growth rate of banks‟ lending to agriculture and allied
activities increased substantially. Overall, the incremental Credit–Deposit (C-D) ratio
declined sharply reflecting the slowdown in credit growth, as corporates deferred their
investments against the backdrop of widespread uncertainty. It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio in
India has remained high reflecting the strength of the Indian banking system. For instance, as
observed by the World Bank , the leverage ratio of banks in the UK witnessed a decline
throughout 1990s, which was accentuated after 2000 to reach a level of about 3 per cent by
2009 from around 5 per cent in the 1990s. On the other hand, the leverage ratio for Indian
banks has risen from about 4.1 per cent in March 2002 to reach a level of 6.3 per cent by
March 2010.
The balance sheets of public sector banks maintained their growth momentum, the private
sector banks and foreign banks registered a deceleration in growth rate. Furthermore, the old
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 32
private sector banks, which had been registering a significantly lower growth rate than their
newer counterparts in the recent past, managed a better performance this year. NET NPAs OF BANKS: 2001-02 to 2009-10
Graph: 1 Source: http://www.rbi.org.in
Interpretation:
From the above it is observed that net NPA of public sector banks has a declining
trend up to year 2006-07 and after that it has a rising trend till 2009-10. The same
trend has been observed in both Private and Foreign Sector Banks. The declining
trend from 2004 to 2007 of NPA was due to the implementation of Securitization Act
COMPOSITION OF NPAs OF PRIVATE SECTOR BANKS - 2002 TO 2010
14000
12000
10000
8000
6000
4000
2000
0 Graph: 4.2 Source: http://www.indiastat.com/
Interpretation:
From the above graph it is observed that public sector contributes very negligible
towards the overall NPA of foreign banks. The major reason for this is that on an
average only 3.5% of total advance is made towards public sector category. Priority sector category on an average constitutes almost 34% of the total advances
made by the private sector banks. While average NPA of priority sector constitutes of
25% of total NPA. In later years from 2008 to 2010 there is increase in NPA of
priority sector. In these years more advances was given to agriculture & housing
sector. In the year 2007-08, the real estate market was on boom, which encouraged people to
take more loans. But after the subprime crisis there was sudden fall in real estate
market & people became default to pay the loan.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 42
In case of non-priority sector, the average advances made are 60.5% of total advance
made by private sector banks. But the average NPA of non-priority sector is almost
74% which is highest amongst the entire category. We can see the declining trend in
NPA of non-priority sector from 2004 to 2007. This as a result of securitization Act,
2002.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 43
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 57
The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2005-06 & lowest in 2007-08. In 2005-06 provisions & unrecognized interest income
was highest compare to other years while it was lowest in 2007-08. The line graph clearly states that the ratio of gross NPA to gross advances & net NPA
to net advances is decreasing over the years. In all the public sector bank has
succeeded to reduce the non performing assets against the advances made over the
years. Thus in foreign banks gross NPA to gross advances ratio & net NPA to net advances
ratio are not having parallel movement throughout the period. The change in net NPA
to net advances is quite higher than gross NPA to gross advances.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 58
Graph: 9.4 Source: http://www.rbi.org.in Interpretation: From the above chart it is clearly observed that old private sector banks are constantly
improving in terms of net NPA to net advances ratio which is represented by
declining trend from 2001-02 to 2009-10. While on the other hand for new private
sector banks net NPA to net advances ratio is fluctuating over the years.
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 59
HYPOTHESIS TESTING
TEST OF CO-RELATION
The test of co-relation is used to identify the co-relation between two
variables. The variable in our study is Net NPA and Net profit. This test
researcher has applied to identify the co-relation between two variables i.e.
Net NPA and Net profit of Public, Private and Foreign Sector Banks. Public Sector Banks: H0: There is no significant correlation between NPA and Profit of Public
Sector Banks for last 9 years
H1: There is correlation between NPA and Profit of Public Sector Banks
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 65
OVERALL FINDINGS NPAs were more noticeable in respect of new private sector and foreign banks, which have
been more active in the real estate and housing loans segments. It shows a upward trends
over the years as compared to others The old private sector banks, which had been registering a significantly lower growth rate
than their newer counterparts in the recent past, managed a better performance this year. Among all three sectors, public sector banks have managed to reduce NPAs over the years.
NPA profile in the < 2% category of public sector banks was reached to 100% in 2009-10 as
compared to Private and Foreign sector banks which was around 80% Net NPA against net advances increased more in Foreign and Private sector banks in 2009-10
while Public sector banks have succeeded in reducing net NPA against net advances made
over the period of time Public sector banks have managed to increase the standard assets over the years. The
proportion of standard assets in Private sector banks reduced in 2009 and 2010 which was
compensated by increase in sub-standard and doubtful assets. In Foreign sectors banks the
proportion of sub-standard asset has increased tremendously by 3.5% of loan assets in 2010
which was 1.2% of loan assets in 2009. The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio
over the years states that public sector banks makes more provisions in gross NPA & gross
advances as compared to private and foreign banks. Public sector banks almost 75% of income comes from Interest/Discount on advances/bill.
Whereas it is just 55% & 43% for private sector banks & foreign banks. 106
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 66
CONCLUSION The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper
management of the NPAs is not undertaken it would hamper the business of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.
The NPAs would destroy the current profit, interest income due to large provisions of t he
NPAs, and would affect the smooth functioning of the recycling of the funds Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which hampers
economic growth. Public sector banks are more efficient than private sector & foreign banks with regard to the
management of nonperforming assets. Even among private sector bank, old private sector
banks are more efficient than new private sector banks. But efficient management of NPA is
not the sole factor that determines the overall efficiency of banks
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 67
SUGGESTIONS New body like Debt Recovery Tribunal should be established & capacity of DRTs should
be enhanced. All banks should keep stringent check on advance being made to real estate &
housing segment as these segment contributed highly towards the NPA in 2009 & 2010. Uneven scale of repayment schedule with higher repayment in the initial years
normally should be preferred. Private sector & Foreign banks should focus more on recovery of sub-standard &
doubtful assets.
Public sector banks should increase their non-interest income, as rise in NPA due to
default in interest income may affect the profits drastically. .
ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 68
BIBLIOGRAPHY
I. Books
Management Of Non-Performing Assets In Banks by Sugan C Jain
Managing Non-performing Assets in Banks S. N. Bidani
II. Magazines
Investor
Business India
III. e-Newspapers
The Economic Times
The Business Standard
I V. Published Material
RBI Guidelines Circulars on Income Recognition and Asset Classification
Report on Trend and Progress of Banking in India 2009-10