8/7/2019 npa - Copy
1/59
INTRODUCTION OF TOPIC
The accumulation of huge non-performing assets in banks has assumed great
importance. The depth of the problem of bad debts was first realized only inearly 1990s. The magnitude of NPAs in banks and financial institutions is overRs.1,50,000 crores. While gross NPA reflects the quality of the loans made by
banks, net NPA shows the actual burden of banks. Now it is increasinglyevident that the major defaulters are the big borrowers coming from the non-
priority sector. The banks and financial institutions have to take the initiativeto reduce NPAs in a time bound strategic approach. Public sector banks figure
prominently in the debate not only because they dominate the bankingindustries, but also since they have much larger NPAs compared with the
private sector banks. This raises a concern in the industry and academia
because it is generally felt that NPAs reduce the profitability of a banks,weaken its financial health and erode its solvency. For the recovery of NPAs a
broad framework has evolved for the management of NPAs under whichseveral options are provided for debt recovery and restructuring. Banks and FIshave the freedom to design and implement their own policies for recovery andwrite-off incorporating compromise and negotiated settlements.
Source of data collection
The data collected for the study was secondary data in Nature.
Scope of the Study
Concept of Non Performing Asset
Reasons for NPAs
Preventive Measures
Tools to manage NPAs
1
8/7/2019 npa - Copy
2/59
CH-1 INTRODUCTION ABOUT BANKING
2
8/7/2019 npa - Copy
3/59
MEANING OF BANK:
Bank is one type of organization or institute which deals in money. it
means bank related with monitory activity. Bank received money from public
and gives the needy personas advance class of bank.
The bank is derived from the Latin word bonous or banca means
bench. A bank refers to the function of accepting deposits, lending, repaying the
deposit money of demand and functioning and agent whenever as
ked.
Banking Regulation Act of India, 1949 defined banking as Accepting
for the purpose of lending or investment of deposit of the money from public,
repayment of demand or otherwise & withdrawal by cheque, draft, and order.
Banking is establishment which makes to individual, such advances of
money as may be required & safely made to which individuals entrustedmoney when not needed by them for use.
-Walter leat
Most of the banking activities a bank performs are derived from the
above definition. In addition bank are allowed to perform certain activities
which are ancillary to This business of accepting deposits and lending a bank
relationship with the public therefore ,revolves around accepting deposit and
lending more both domestics & foreign from one place to another place.
The banking activities
3
8/7/2019 npa - Copy
4/59
8/7/2019 npa - Copy
5/59
HISTORY OF BANK IN INDIA:
Without a sound and effective banking system in India it cannot have
a healthy economy. The banking system of India should not only be hassle free
but it should be able to meet new challenges posed by the technology and other
external & internal factors.
For the past three decades Indias banking system has several
outstanding achievements to its extensive reach. It is no longer confined to only
metropolitans or cosmopolitans in the India. In fact Indian banking system has
reach even to the remote corners of the country. This is one of the main reasons
of Indias growth process.
The governments regular policy for Indian bank since 1969 has paid reach
dividend with the nationalization of 14 major private banks of India. not long
ago ,on account holder had to wait for hours at the bank counters for getting a
draft or for withdrawing his own money. Today, he has a choice gone are days
when the most efficient bank transferred money from one branch to another
branch in two days now it is simple as instant messaging or dial a pizza. Money
has become a order of the day. The first bank in India, though conservative was
established in 1786. From 1786 till today the journey of Indian banking system
can be segregated in to three distinct phases. They are as mention below:
PHASES
1. Early phase from 1786to 1969 of Indian banks.
2. Nationalization of Indian bank and up to 1991 prior to Indian banking
sector reforms.
5
8/7/2019 npa - Copy
6/59
8/7/2019 npa - Copy
7/59
PHASE-2
Government of India took major steps in this Indian banking sector
reform after independence in 1955 it nationalized imperial bank of India with
extensive banking facility on a large scale especially in rural and semi urban
areas. it formed state bank of India to act as the principle agent of RBI and to
handle banking transaction of the union and state governments allover country.
Seven bank forming subsidiary of state bank of India was nationalized in 1960
on 19th July, 1969, major process of nationalization was carried out it was the
effort of then prime minister of India, Mrs. Indira Gandhi. 14 major commercial
banks in country were nationalized.
Second phase of nationalization of Indian banking sector reform was
carried out in 1980 with seven more banks. This step bought 80% of the
banking segment in India under government ownership. The following are the
stapes taken by government of India to regulate banking institution in the
country.
1949: Enactment of banking regulation.
1955: Nationalization of SBI.
1959: nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit Guarantor Corporation.
1975: Creation of regional rural bank.
After nationalization of Banks, the branches of the public sector bank India
realized to approximately 800% in deposits and advances took a huge jump by
7
8/7/2019 npa - Copy
8/59
11000% banking in the sunshine of government ownership gave the public implicit
faith and immense confidence about the sustainability of this institution.
PHASE-3
This phase has introduced many more products and facilities in the
banking sector in its reforms measures in 1991 under the chairmanship of
M.narasimham, a committee was set up by this name which worked for the
liberalization of banking practices.
The country is flooded with the foreign banks and their ATM
stations efforts are being put to give a satisfactory service to customers. Phone
banking, net banking, is introduced the entire system becomes more convenient
and swift time is more important than money.
The financial system of India has Shawn great deal of resilience. It is
sheltered from any crisis triggered by any external macroeconomics shock as
other East Asian country suffered. This is all due to a flexible exchange rate
regime, the foreign reserves are high, the capital amount is not yet fully
convertible, and banks and their customers have limited foreign exchange
exposure.
8
8/7/2019 npa - Copy
9/59
CLASSIFICATION OF BANKS:
1. Commercial banks:
Commercial banks perform all the business transaction of a typical bank.
Commercial bank accepts three types of deposits.
The saving deposit
Fixed deposit
Current deposit
The commercial banks confines their activities to day to day functions of
trade & industry for short duration they provide funds only short term needs or
trade & commerce.
2.Industrial banks:
Industrial banks are those banks which provide funds on long term base for
industries. The banks have specialized in providing long term loans to
industries with a view to buy plant &Machinery and Obtain funds through share
capital, debenture& long term deposits from bank.
3.Exchange banks:
9
8/7/2019 npa - Copy
10/59
Exchange banks are known as foreign banks or foreign exchange banks
which provide foreign exchange for import trade their main functions are to
make international payment through the purchase &sell of exchange bill.
4. Co-operative banks:
Co-operative banks are promoted to meet the banking requirement of
customers not only in urban areas but also the rural areas. The co-operative
banks functions like commercial bank receiving deposits and lending money.
They provide short medium term loans. The co-operative bank performs several
functions connected with agriculture, industry trade, transport etc
5. Saving banks:
Saving banks are specified financial institution establish to mobilize
saving from the people generally they pool savings of the small incomes of the
community the banks are also offer interest on these deposits. The deposits are
allowed to withdrawal from their accounts as and when necessary.
10
8/7/2019 npa - Copy
11/59
11
8/7/2019 npa - Copy
12/59
CH-2 INTRODUCTION OF BANK OF INDIA
Bank of India was founded on 7th September, 1906 by a group
of eminent businessmen from Mumbai. The Bank was under
private ownership and control till July 1969 when it was
nationalised along with 13 other banks.
Beginning with one office in Mumbai, with a paid-up capital of
Rs.50 lakh and 50 employees, the Bank has made a rapid
growth over the years and blossomed into a mighty institution
with a strong national presence and sizable international
operations. In business volume, the Bank occupies a premier
12
8/7/2019 npa - Copy
13/59
position among the nationalised banks.
The Bank has 3101 branches in India spread over all states/
union territories including 141 specialised branches. These
branches are controlled through 48 Zonal Offices . There are 29
branches/ offices (including three representative offices)
abroad.
The Bank came out with its maiden public issue in 1997 and
follow on Qualified Institutions Placement in February 2008. .
Total number of shareholders as on 30/09/2009 is 2,15,790.
While firmly adhering to a policy of prudence and caution, the
Bank has been in the forefront of introducing various
innovative services and systems. Business has been conducted
with the successful blend of traditional values and ethics and
the most modern infrastructure. The Bank has been the first
among the nationalised banks to establish a fully computerised
branch and ATM facility at the Mahalaxmi Branch at Mumbai
way back in 1989. The Bank is also a Founder Member of SWIFT
in India. It pioneered the introduction of the Health Code
System in 1982, for evaluating/ rating its credit portfolio.
The Bank's association with the capital market goes back to
1921 when it entered into an agreement with the Bombay
Stock Exchange (BSE) to manage the BSE Clearing House. It is
an association that has blossomed into a joint venture with
13
8/7/2019 npa - Copy
14/59
BSE, called the BOI Shareholding Ltd. to extend depository
services to the stock broking community. Bank of India was the
first Indian Bank to open a branch outside the country, at
London, in 1946, and also the first to open a branch in Europe,
Paris in 1974. The Bank has sizable presence abroad, with a
network of 29 branches (including five representative office) at
key banking and financial centres viz. London, Newyork, Paris,
Tokyo, Hong-Kong and Singapore. The international business
accounts for around 17.82% of Bank's total business.
LOGO OF BANK OF INDIA
14
8/7/2019 npa - Copy
15/59
8/7/2019 npa - Copy
16/59
Our Mission
"to provide superior, proactive banking services to niche markets globally,while providing cost-effective, responsive services to others in our role as adevelopment bank, and in so doing, meet the requirements of our stakeholders".
Our Vision
"to become the bank of choice for corporates, medium businesses and upmarketretail customers and to provide cost effective developmental banking for small
business, mass market and rural markets"
16
8/7/2019 npa - Copy
17/59
AWARDS&ACCOLADES
17
8/7/2019 npa - Copy
18/59
The NDTV business leadership awards 2008-Indiasbest PSU bank
award.
Business world-PWC survey-no.1 public Sector bank.
Business today KPGM Survey ranked No.1 The best banks
2008.
Dun &Bradstreet study 2008- Best Public sector Bank and overall
best bank in the country.
Dun &Bradstreet-rolta corporate awards 2008-top Indian company
under banks.
Best performance in western zone under the rural employmentgeneration program of KVIC.
BRANCH NETWORK & EXPANSION
The Bank has a geographically well-spread branch network in
India and abroad. The Bank 3207 branches in India as at the
end of March 2010. In the foreign countries, 24 branches and 5
representative offi ces keep our presence felt in all time zones
and important fi nancial centres of the globe.
During the year 2009-10, Bank opened 186 new branches
including 13 Extension Counters converted into full-fl edged
branches. Distribution of these branches is Metropolitan 43,
Urban 39, Semi-Urban 77 and Rural 27.
18
8/7/2019 npa - Copy
19/59
MARKETING & PUBLICITY
Marketing has been an important focus in the Bank to induct
new customers and create a set of customer centric processes
for enhancing value for them. A team of over 1000 proactive
and well trained personnel for focused marketing and
relationship efforts has been placed in all the zones.
For automating the entire Sales Force process and consequently
better administration of marketing staff, Sales Force Automation
(SFA) Software Package has been launched and made LIVE
from 01.02.2010 in all the zones. The system will effectively
capture, monitor, track, close and analyze leads generated
during pre-sales process. This system will also be used for
administering the incentive schemes as well.
The Bank has with a view to enhance its corporate image and
identity, initiated media campaigns on the existing theme
"Relationships beyond Banking". Towards this end three TVCs
were produced in line with our Relationship theme viz. Old
Couple, Friends and Bus which were aired on both National as
well as Regional Channels.
Bank has also been advertising our products in newspapers,
magazines, television, hoardings, banners, bus panels, trains,
glow signs at railway stations, events and sponsorships, leafl ets
and brochures.
19
8/7/2019 npa - Copy
20/59
CH-3 INTRODUCTION OF NPA
20
8/7/2019 npa - Copy
21/59
PREAMBLE
Lending is a business associated with risks. One of the risks being risk of
default. Banks being commercial organisations have to continue lending
activity to earn profits. Profitability very much depends on how Banks are able
to roll over their advances portfolio. Rolling over of advances would be
possible only if there is a timely recovery of money lent. Prompt recovery of
Loans and Advances by Banks not only increases liquidity and profitability but
it also keeps funds cycle moving by continuous lending for the development of
the economy. Further, recoveries in written-off accounts/URI/UCI have direct
and significant bearing on the Banks bottom-line.
Income Recognition and Asset Classification (IRAC norms) and Capital
Adequacy norms, Banks have become increasingly sensitive to credit risks and
there is a growing awareness of the need to keep Non Performing Assets
(NPAs) at a low level. For all Banks having international exposure, required to
maintain Capital Adequacy Ratio as per Basel II recommendations, it is
imperative to abide by stricter risk assessment norms and provision
requirements.
With the last modifications in IRAC norms and provision requirement
announced by the Reserve Bank of India in July 2004, it is implied that an asset
will require 100% provision after 48 months from the date of the account
becoming NPA, irrespective of availability of any security or not. The 100%
provision to be made on an account which does not yield any income to the
organisation is a severe strain on the bottom line of any Bank. In this context,
the management of NPA portfolio assumes paramount importance.
For the focussed attention of NPA Management, we have established 15
specialised Asset Recovery branches in various main centres.
Asset Quality
21
8/7/2019 npa - Copy
22/59
Quality of borrower accounts assumes greater importance in the wake of stricter
Prudential Accounting Norms. The quality of borrowal accounts can be ensured
by :
i) Proper and careful evaluation of risks associated with the borrowers andtheir activities;
ii) Meticulous compliance of pre-sanction / post-sanction formalities;
iii) Regular follow-up of borrowal accounts to ascertain the efficiency of
operations and end use of credit;
iv) Timely recovery of interest and instalment;
v) Timely detection of symptoms of sickness;
vi) Timely initiation of corrective measures in respect of irregularities.
On account of changing market scenario, the monitoring system is required to
be changed by identifying the risks associated with the individual borrower.
In order to maintain the quality of assets, Branches may look into the cash flowof the borrowers so as to assess the payment of interest and instalments in time.
Quality of assets charged to the Bank like stocks, goods, properties mortgaged,
etc. assumes great significance for their marketability and realisation of the
values presumed. In order to have a clear picture of the realisable value of
securities, especially mortgaged immovable assets (land, building, plant and
machinery) it is advisable that a valuation of the same is done once in every two
years. Preferably the task may be assigned to a different panel value at each
time. If the present valuation shows substantial variation from the previous
valuation (other than on account of standard depreciation) by about 15%
downwards, we may analyse the case in detail and endeavour to impress upon
the borrower to provide additional securities.
Monitoring and Follow Up Measures
22
8/7/2019 npa - Copy
23/59
Zones / Branches / Offices are required to keep updating the master
circularswith the modifications that may be advised by RBI / our Bank
from time to time.
With the Income Recognition and Asset Classification Norms becoming
stricter, Branches are required to be more alert and proactive in monitoring the
accounts. For this purpose, monthly interest application has become a useful
tool to tackle potential delinquencies or defaults in standard accounts. To retain
the asset quality, Branches should promptly act and :-
a) Recover the overdues or at least the critical amount through active follow up
with borrowers;
b) Put the accounts under holding on operations in case of temporary cash flow
mismatches;
c) Reschedule the repayment terms as per expected cash flows;
d) Restructure the dues in keeping with the expected cash flows and gaps in
cash flows, if any as per guidelines given in the restructuring policy.
Any one or more of the above actions should be taken before the account
becomes NPA as per extant guidelines under Restructuring / Rehabilitation
Policies. These aspects have been dealt with in detail in the Credit Monitoring
Policy of the Bank.
The above measures can also be taken under the auspices of Corporate Debt
Restructuring mechanism (CDR) and/ or BIFR mechanism, as well as Banks
own Restructuring Policy which are dealt with separately in their policy
guidelines by the concerned departments and hence not detailed in this booklet.
23
8/7/2019 npa - Copy
24/59
8/7/2019 npa - Copy
25/59
viii) Filing suit in Court / DRT Execution of decree
ix) ECGC claim, if any, to be lodged after recalling the advance, reporting the
default and follow up for early settlement of the claim
x) Sale of financial assets to ARCs
xi) Sale of financial assets to Banks / FIs / NBFCs
xii) Lastly, after all the chances of recovery of dues are exhausted, we may
resort to writing off of the balance dues
All these means have to be effectively pursued for resolution of NPAs.
Appointment of Nominee Director:
As an effective measure for closely monitoring the NPA accounts where our
exposure is substantial or where we are the sole bankers (or in consortium
where we have substantial share), we may appoint Nominee Director in
consultation with the borrower company. Recommendations for appointing
Nominee Director shall be submitted by the Zonal Office for approval at Head
Office. A committee of 3 General Managers shall process the requirement and
after their clearance, the same shall be submitted to Executive Director andChairman & Managing Director for approval. The Nominee Director shall be an
official of the Bank, not below the rank of Assistant General Manager, who is
conversant with the affairs of the company. The appointments (and also
changes due to transfer/retirement of officials) shall be subject to annual
review.
25
8/7/2019 npa - Copy
26/59
Prudential norms of income recognition, asset classification & provisioning
pertaining to impaired assets
Standard Assets :-
The standard assets consists of assets which are totally regular, safe and
conducted as per norms of sanction. However, during the operations of such
accounts, some of them, at times, show signs of deviations, sickness, out of
order position wherein they became irregular. When such irregularities are
noticed, they are classified as Watch Category assets with Code No. 12 but
continues to be a part of Standard Asset. These accounts need higher level of
monitoring and have to be regularised before these irregularities continue for
more than 90 days. Provision requirement for a standard asset (including Watch
Category asset) is given below:
i) Amount receivable
from Govt. of India
under Agri-Debt
Waiver Scheme
0.00%
ii) Amount receivable
from Govt. of India
under Agri-Debt Relief
Scheme
0.25%
iii) Direct advances toagriculture and SME
Sector
0.25%
iv) All other loans and
advances
0.40%
26
8/7/2019 npa - Copy
27/59
Definition of an NPA :-
An asset becomes non-performing when it ceases to generate income to the
Bank. A non-performing asset (NPA) is defined as a credit facility in respect of
which the interest and / or instalments of principal has remained overdue for a
specified period of time.
The concept of specified period is reduced in a phased manner. The
shortening of the period is from 4 quarters in 1993 when the concept of IRAC
norms was first introduced in India to present level of 90 days. 7 8
Thus in the present context, 90 days overdue norms for identification of NPAs
has been adopted from 31.3.2004 onwards in all advances except direct
agricultural advances where the norms are different. Thus from 31.3.2004 an
advance or loan (other than direct agricultural advance) shall be classified as anNPA where -
a) Interest and / or instalment of principal remain overdue for a period of more
than 90 days in respect of a term loan.
b) The account remain out of order in respect of an overdraft / cash credit for
more than 90 days.
c) The bill remain overdue for a period of more than 90 days in the case of bills
purchased and discounted.
d) Any amount to be received remains overdue for a period more than 90 days
in respect of any other accounts.
In case of direct agricultural advances, w.e.f. 30.9.2004, a loan granted for short
duration crops will be treated as NPA, if the instalment of principal or interest
27
8/7/2019 npa - Copy
28/59
thereon remains overdue for 2 crops seasons. In case of long duration crops, the
loan will be treated as NPA if the instalment of principal or interest thereon
remains overdue for 1 crop season. All direct agricultural loans specified in the
annexure to our Branch Circular 98/100 dated 26.8.2004 (reproduced from
Annexure to RBI Circular No.DBOD.BP.BC.102:21.04.048:2003-04 dated
24.6.2004 RPCD.PLAN.BC.42A:04.09.01:2001-02 dated 11.11.2002) shall
also be governed by these norms. All other direct / indirect agricultural
advances including allied activities (not listed in the said annexure) shall be
governed by 90 days delinquency norms as applicable to other general
advances.
Asset Classification
Categories of NPAs
Banks are required to classify NPAs further into following categories, based on
the period for which asset has remained non-performing and realisability of
dues.
a) Sub-standard Asset
b) Doubtful Asset
c) Loss Asset
Substandard Asset
With effect from 31st March 2005, substandard asset is one which has remained
NPA for a period less than or equal to 12 months. Its Asset Code is 20. The
provision requirement in substandard asset was earlier flat 10% of the
outstanding dues, irrespective of the category of the advance (secured or clean).
Now RBI has removed the CAP on the unsecured exposures and individual
Bank Boards were given the freedom to formulate their own policy guidelines
for prudential norms on unsecured exposures. Simultaneous with this
liberalisation, RBI has made norms of provision requirement on unsecured
exposure of Banks more stringent. Unsecured exposure is defined as an
exposure where the realisable value of security as stipulated and ascertained by
the valuation is not more than 10% `ab initio. That means all clean / unsecured
28
8/7/2019 npa - Copy
29/59
8/7/2019 npa - Copy
30/59
III on or after 1.4.2004 shall require 100% provision as on 31.3.2005 and
thereafter (irrespective of RVS).
As an intermediate measure for smooth transition, RBI had implemented
a graded system of provision requirement at 60% and 75% of the RVS + 100%of shortfall for the year ending 31.03.05 and 31.03.06 for accounts which were
classified as Doubtful III category as on 31.03.04 (i.e. Stock Doubtful III A/cs).
However, these accounts also will require 100% provision from 31.03.07
onwards.
As per the existing provisioning norms, all accounts entering into or already
classified as Doubtful III will uniformly require 100% provision as on 31.3.07
and thereafter.
Loss Assets Code 40
A loss asset is one where loss has been identified by Bank or internal or
external creditors or RBI inspectors but the amount has not been fully written
off. Such an asset is considered uncollectible and of such little value that its
continuance is not warranted, even though there may be some small (less than
10%) salvage recovery value. The provision requirement is 100% of net
outstanding dues. These loss assets should be gradually written off from the
books. 10
Government guaranteed advances
The credit facilities backed by the guarantee of Central Government though
overdue may be treated as NPA only when the Government repudiates its
guarantee when invoked. As per recent RBI guidelines, w.e.f. 31.3.2005, all
State Government guaranteed advances will attract asset classification and
provisioning norms if interest and / or principal instalments or any other
amounts due to the bank remain over due. (i.e. despite the availability of State
Government guarantee, the accounts will become NPA if they are not
conducted as standard assets and will require normal NPA classification and
income recognition and provision norms as applicable to all other NPAs).
Presently (w.e.f. 31.3.2006), these State Govt. guaranteed accounts will also
become NPA with 90 days delinquency norms.
30
8/7/2019 npa - Copy
31/59
FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs. Butthe problem of NPAs is more in public sector banks when compared to privatesector banks and foreign banks. The NPAs in PSB are growing due to external aswell as internal factors.
EXTERNAL FACTORS :
Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works for recovery ofloans and advances. Due to their negligence and ineffectiveness in their work the
bank suffers the consequence of non-recover, their by reducing their profitabilityand liquidity.
Willful Defaults
There are borrowers who are able to payback loans but are intentionallywithdrawing it. These groups of people should be identified and proper measuresshould 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 largeamount of provisions in order to compensate those loans, hence end up the fiscalwith a reduced profit.
31
8/7/2019 npa - Copy
32/59
Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rainfall the farmers are not to achieve the production level thus they are not repayingthe loans.
Industrial sickness
32
8/7/2019 npa - Copy
33/59
Improper project handling , ineffective management , lack of adequate resources ,lack of advance technology , day to day changing govt. Policies give birth toindustrial sickness. Hence the banks that finance those industries ultimately endup with a low recovery of their loans reducing their profit and liquidity.
Lack of demand
Entrepreneurs in India could not foresee their product demand and startsproduction which ultimately piles up their product thus making them unable topay back the money they borrow to operate these activities. The banks recover theamount by selling of their assets, which covers a minimum label. Thus the banksrecord the non recovered part as NPAs and has to make provision for it.
Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thus ithas to cope with the changing principles and policies for the regulation of therising of NPAs.
The fallout of handloom sector is continuing as most of the weavers Co-operativesocieties have become defunct largely due to withdrawal of state patronage. Therehabilitation plan worked out by the Central government to revive the handloomsector has not yet been implemented. So the over dues due to the handloomsectors are becoming NPAs.
INTERNAL FACTORS :
Defective Lending process
There are three cardinal principles of bank lending that have been followed by thecommercial banks since long. i. ii. iii. Principles of safety Principle of liquidity
Principles of profitability
i.
Principles of safety :-
By safety it means that the borrower is in a position to repay the loan bothprincipal and interest. The repayment of loan depends upon the borrowers:
33
8/7/2019 npa - Copy
34/59
a. Capacity to payb. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business
Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower[Comparative analysis on NPA of Private & Public sector Banks] Page 28
The banker should, there fore take utmost care in ensuring that the enterprise orbusiness for which a loan is sought is a sound one and the borrower is capable ofcarrying it out successfully .he should be a person of integrity and good character.
Inappropriate technology
Due to inappropriate technology and management information system, market
driven decisions on real time basis can not be taken. Proper MIS and financialaccounting system is not implemented in the banks, which leads to poor creditcollection, thus NPA. All the branches of the bank should be computerized.
Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis is anotherreason for rise in NPAs. While providing unsecured advances the banks dependmore on the honesty, integrity, and financial soundness and credit worthiness ofthe borrower.
34
8/7/2019 npa - Copy
35/59
REASONS FOR NPA:
Reasons can be divided in to two broad categories:
A] Internal FactorB] External Factor
[A] Internal Factors:
Internal Factors are those, which are internal to the bank and are controllable bybanks.
Poor lending decision:
Non-Compliance to lending norms:
Lack of post credit supervision:
Failure to appreciate good payers:
Excessive overdraft lending:
non Transparent accounting policy:
[B] External Factors:
External factors are those, which are external to banks they are not controllableby banks.
Socio political pressure
Chang in industry environment
Endangers macroeconomic disturbances
Natural calamities
35
8/7/2019 npa - Copy
36/59
Industrial sickness
Diversion of funds and willful defaults
Time/ cost overrun in project implementation
Labour problems of borrowed firm
Business failure
Inefficient management
Obsolete technology
Product obsolete
36
8/7/2019 npa - Copy
37/59
Types of NPA
A] Gross NPAB] Net NPA
A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs asper 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 offollowing ratio:
Gross NPAs Ratio
Gross NPAs Gross Advances
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provisionregarding NPAs. Net NPA shows the actual burden of banks. Since in India,
bank balance sheets contain a huge amount of NPAs and the process ofrecovery and write off of loans is very time consuming, the provisions the
banks have to make against the NPAs according to the central bank guidelines,are quite significant. That is why the difference between gross and net NPA isquite high. It can be calculated by following_ Net NPAs Gross
NPAsProvisions Gross Advances - Provisions
37
8/7/2019 npa - Copy
38/59
Wilful defaulters :
Wilful Default is defined as follows :-
"A Wilful Default would be deemed to have occurred if any of the
following events is noted :-
The unit has defaulted in meeting its payment / repayment obligations to the
lender even when it has the capacity to honour the said obligations.
The unit has defaulted in meeting its payment / repayment obligations to the
lender and has not utilised the finance from the lender for the specific purposes
for which finance was availed of but has diverted the funds for other purposes.
The unit has defaulted in meeting its payment/repayment obligations to the
lender and has siphoned off the funds so that the funds have not been utilised
for the specific purpose for which finance was availed of, nor are the funds
available with the unit in the form of other assets.
38
8/7/2019 npa - Copy
39/59
SARFAESI Act 2002
The Securitisation & Reconstruction of the Financial Assets and Enforcement
of Security Interest Act 2002 (SARFAESI Act 2002)
The Securitisation and Reconstruction of Financial Assets and Enforcement ofSecurity Interest Act, 2002 is an effective tool in the hands of the Bank to
enforce the security interests and recover the dues thereby reducing NPAs. The
Act has three segments
a) Securitisation and Asset Reconstruction Companies
b) Central Registry
c) Enforcement of Security Interest
This Chapter confines itself to enforcement of Security Interest and gives
the gist of the salient features of the Act, Rules and important
instructions. The instructions contained below are to be read alongwith
the following:
i) The Securitisation and Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002;
ii) The Security Interest (Enforcement) Rules, 2002;
iii) The Enforcement of Security Interest and Recovery of Debts Laws
(Amendment) Act, 2004.
39
8/7/2019 npa - Copy
40/59
iv) The Security Interest (Enforcement) Amendment Rules, 2007 i.e.
02.02.2007.
v) Security Interest (Enforcement) (Amendment) Rules, 2007 w.e.f.
26.10.2007.
The SARFAESI Act enables the Bank wherever the Bank is a secured
creditor to enforce security interest for recovery of its dues without the
intervention of the Court or Debt Recovery Tribunal provided that
secured interest has been properly created in favour of the Bank.
The term Security Interest has been defined under the SARFAESI Act as
under:
Security Interest means right, title and interest of any kind whatsoever
upon property, created in favour of any secured creditor and includes
mortgage, charge, hypothecation and assignment
Criteria for invoking the provisions of the SARFAESI Act.Before enforcing security interest, branches should ensure that the
borrower accounts comply with the following criteria
The contractual dues in the account should be Rs.1.00 lakh and above
The default must have occurred i.e. the account should have become
NPA as per RBI norms.
The security charged to the Bank must be specific, clear and available to
the Bank. It must be duly and effectively charged to the Bank and
therefore, enforceable if the borrower fails to pay in response to the
Notice. The security documents in the advance account should be in full force on
the date of serving the 60 days notice. As an abundant caution, it should
be ensured that they are in force even at the time of the Action that will
follow for enforcement of security i.e. at least up to one year from the
date of serving the notice.
The security documents should be duly filled in and no column should
be kept blank.
40
8/7/2019 npa - Copy
41/59
8/7/2019 npa - Copy
42/59
a) Identification of accounts & Obtention of Approval for Action
the entire NPA portfolio of the Branch should be gone through and
accounts fulfilling the eligibility conditions as given above should be
identified.
Out of those identified accounts such account should be short-listed in
which charged security can be taken into possession for sale/lease for
recovery of Banks dues.
The Branch must put up the proposal before the Competent Authority for
approval for Action under the Act as per the prescribed format.
on objection of approval, 60 days notice(s) should be sent under the
signature of the Authorised Officer.
there is no waiting period for issuing notices under the Act. As soon as
the account becomes NPA, notices under the Act should be issued after
obtaining appropriate approval from Competent Authority.
b) Issue of notices.
Service of proper notice is a pre-requisite for enforcement of security interest.
Hence, it should be ensured that proper notices are served on the borrowers/
guarantors who have created the security interest.
The authority for approving proposal for issuing notice and taking Action
under the SARFAESI Act is as under :-
(Rs.in lakh)
42
8/7/2019 npa - Copy
43/59
Chairman and Managing
Director
Executive Director
General Manager/ Scale VII
Dy. Gen. Manager/ Scale VI
Asst. Gen. Mgr./ Scale V
Chief Manager / Scale IV
Senior Branch Manager (Large
Branch) Scale III
Full powers
2500.00
1000.00
750.00
250.00
50.00
10.00
Note:
i) The amounts represent suit claims/ contractual dues.
ii) The delegate approving issue of notice should not have sanctioned the credit
proposal. In such a case, it should be submitted to the next higher authority.
iii) The powers are to be exercised by the chief incumbent at the Branch. Inrespect of administrative/ controlling/ Zonal Offices, designated officers of the
rank of Chief Manager/ Scale IV and above may exercise the above delegation
within their functional area.
iv) At Head Office Level the powers will be exercised by Dy. General Manager
(Law/ARD) onwards as per the above delegation.
Other important instructions regarding issuing of notices:
a) Though approval for issuing notices can be given as above, notices are to be
signed by the officer duly authorised by the Zonal Manager as `Authorised
Officer.
b) The period of notice will be 60 days.
43
8/7/2019 npa - Copy
44/59
c) Notices can be issued not only to the principal borrower but also to the
guarantor if security interest is created by the guarantor. However, if no security
is created by the borrower but only by the guarantor then notice can be issued
ONLY to the guarantor who has created security and the borrower should be
issued usual RECALL NOTICE. Notices must be issued in the prescribed
format, specimen of which are given in Annexure I & II.
d) The service of the notice is to be made by Regd. Post / A.D., Speed Post,
Courier, E-mail, UPC, Fax etc. In case of non-delivery of service, the service is
to be affected by affixing the notice on the conspicuous part of the building
where the borrower / guarantor resides and / or carries on business and also on
the property in which the security interest is created. It may also be published in
two leading newspapers, one in vernacular language having sufficient
circulation in that locality and the other in English.
e) Where the borrower is a Body Corporate, the Demand Notice shall be served
on the Registered Office and also on any of the branches of such Body
Corporate as specified under Sub Rule (1) of Rule 3 of Security Interest
Enforcement Rules 2002.
f) When there is more than one borrower, the Demand Notice shall be served on
each borrower.
g) In case of Joint Financing/Multiple Lending, whenever it is decided to
proceed under the Act, all the Banks shall issue their notices separately for their
respective dues.
h) The Authorised Officers so issuing the notice as well as monitoring and
follow up of the action will have immunity granted for all Action done in good
faith and without negligence while exercising the right on the securities created.
C) Objection / Representation received from the borrower on receipt of
Notice:
After issuance of notice under Section 13(2) of the SARFAESI Act by
the Bank, if any borrower/guarantor makes any representation or raises
any objection, then the Bank, being a secured creditor, has to consider
44
8/7/2019 npa - Copy
45/59
8/7/2019 npa - Copy
46/59
Bank can issue notice and take possession and other measures under Section 13
(4) of the Act for recovery of the Banks dues {where there is no rehabilitation
scheme in operation} when our Bank is the sole Banker or our dues against the
borrowers constitute 75 % in value of the amount outstanding against financial
assistance disbursed to the borrower/s whose units have been referred to BIFR.
Where our Bank is neither the sole Banker nor Banks dues constitute 75% as
aforesaid, then for taking Action under the Act, the consent of secured creditors
representing not less than 75 % in value of the amount outstanding against such
borrower is required. Alternatively, in
such cases our Bank can give consent to other secured creditors / Lead
Bank for taking Action. However, our Bank must issue the Notice under
Section 13 (2) for our dues only, after taking permission from appropriate
authority. Once the Notice is issued and/or possession of a secured asset
is taken or any other measure under Section 13 (4) is taken by any of the
secured creditor then the reference before BIFR shall abate and further
Action for recovery of Banks dues can be initiated / continued before
other forums, DRTs etc.
h) Enforcement action in suit filed / DRT accounts:
Position prior to Supreme Court Judgement in M/s Transcore vs Union of
India: -
The Banks were taking simultaneous action for recovery under the
SARFAESI Act as well as DRT Act, prior to the following amendment.
The Government has promulgated an Ordinance on 11.11.04 named as
Enforcement of Security Interest and Recovery of Debts Laws
(Amendment) Ordinance, 2004. By the said Ordinance, Section 19 of the
DRT Act has been amended. The said Ordinance was repealed and the
Act was passed and notified in the Gazette on 31.12.04. The amendedSection 19 of the DRT Act prohibits the Banks and Financial Institutions
from taking simultaneous action under the SARFAESI Act as well as
DRT Act.
However, our Bank had taken a view that the said Amendment Act is not
having retrospective effect i.e. the said amendment became effective
prospectively from the date of the promulgation of the Ordinance on
46
8/7/2019 npa - Copy
47/59
11/11/2004. In case of suits pending before the amendment of Section 19
of the DRT Act i.e. suits filed prior to 11/11/04, Bank could always take
simultaneous action under the SARFAESI Act as also the DRT Act. As
regards the suit filed/decreed cases after 11/11/2004 where the Bank had
not taken any action under the SARFAESI Act and decided to take action
i.e. after the issuance of the said Ordinance, then it had been decided to
file a suitable application before the Honble DRT/Civil Court to keep
the Banks OA/Suit adjourned with liberty to the Bank to revive the same
after the completion of the proceedings initiated under the SARFAESI
Act. If the Honble DRT/Court did not entertain the Banks Application,
in that case it was decided to continue the proceedings before the
Honble DRT/Court as withdrawing the OA / Suit against the
borrowers/guarantors, the Bank may lose its legal right to file fresh OA /Suit as it will be hit by the provisions of the Limitation Act.
Position after Supreme Court Judgement in M/s Tran score vs. Union of
India:-
The issue relating to simultaneous action under the DRT Act and the
SARFAESI Act was examined by the Humble Supreme Court of India in
the Civil Appeal No. 3228 of 2006 between M/s.Transcore and Union of
India & Another and a detailed judgment has been given on 29.11.06. Inthe said Civil Appeal, the Honble Apex Court has interalia considered
the following points/issues and has given its findings:
(i) Whether the banks or financial institutions having elected to seek their
remedy in terms of DRT Act, 1993 can still invoke the SARFAESI Act, 2002
for realizing the secured assets without withdrawing or abandoning the O.A.
filed before the DRT under the DRT Act. 68
(ii) Whether recourse to take possession of the secured assets of the
borrower in terms of Section 13 (4) of the SARFAESI Act comprehends
the power to take actual possession of the immovable property.
The Honble Apex Court has answered the above questions in the affirmative
i.e. in favour of the Banks/Financial Institutions (FIs) and accordingly the
Appeal filed by the borrower was dismissed. Having regard to the fact that the
Honble Apex Court has decided the above issues in favour of the Banks/FIs,
47
8/7/2019 npa - Copy
48/59
8/7/2019 npa - Copy
49/59
Write off Policy
Write off is resorted to in the borrow accounts when the Bank has exhausted all
possible avenues of recovery and there are no more chances for effecting the
recovery.
Write off is of two kinds 1) prudential write off and 2) Regular write off.
The basic difference between prudential and regular write off is that in
Prudential write off there is possibility of recovery at a distant future even after
write off while in Regular write off there is no/ little possibility of recovery.
It is open to the Bank to resort to partial write off also. Partial write off would
be in the accounts classified as doubtful assets, to the extent of provision heldon the outstanding and not covered by any security.
49
8/7/2019 npa - Copy
50/59
Ch-4 ANALYSIS& INTERPRETATION
The following table show the management of NPA.
2010 2009 2008 2007
Gross npa 2471 1931 2101 2479
Less:cash recovery 622 752 814 676
up gradation 204 325 275 132
Write off 743 384 446 441
Agr.debt waiver/debt
relief scheme2008
0 175 0 0
Total reduction 1569 1560 1535 1325
Add:
slippages 4162 2100 1365 947
Gross npa(closing) 4883 2471 1931 2101
Recovery in write off 300 280 368 352
50
8/7/2019 npa - Copy
51/59
Net npa 2207 628 592 812
%of gross Npa to gross
advances
2.85 1.71 1.68 2.42
%of net Npa to net
advances
1.31 0.44 0.52 0.96
INTERPRETATION:
From the following table we show that the gross NPA of the bank is increasesin the year 2010 and it is 2471 carore .
Cash recovery is increases up to the year 2009 752carore inthen it is
decreases by 622 crore in the year 2010.
Write-off is also decreases up to 2009 then it is increases in 2010 i.e.
51%.
Slippages are also increases in the year 2010 it is by 51%. it is impact on
the profitability of the bank.
Net NPA of the bank are increases in the year 2010 i.e. 2207carore.
Recovery in write off increases by 9o% it is good sign for the bank.
Gross npa of the bank are increases by 2.85%.
51
8/7/2019 npa - Copy
52/59
Interpretation:
In the following graph we show that the percentage of the gross npa to
gross advances ratio is increases in the current year so bank has to
minimize this ratio
52
8/7/2019 npa - Copy
53/59
Interpretation:
In the second graph is of % of net npa to net advances. This ratio is also
increases in the year 2010. it is bad for the bank.
ANALYSIS OF BHARUCH BRANCH:
May1
0
Apr10 Mar1
0
Feb10 Jan10 Dec09 Nov0
9
Oct09
Npa outstanding 93327 92781 92804 91824 91824 90857 112315 112245
Cash
recovery
46 24 23235 23188 23188 23123 842 807
53
8/7/2019 npa - Copy
54/59
upgradatio
n
- - - - - - - -
slippages - - 11425
1
11180
4
11180
4
11180
4
110981 110876
Write-off - - 345 - - - - -
Recovery
in
UCI/URI
- - 4430 4430 120 75 75 75
Recovery
in write off
- 11 575 - - - - -
Total
advances
290235 28998
4
28660
1
59247
3
45815
8
40479
2
674715 298603
32.15 31.99 32.38 15.49 20.04 22.44 16.65 37.59
Interpretation:
The npa the of the bharuch branch is decreases every month so it is good
for the branch.
The cash recovery of the branch is increases up to the march then it is
decreases so bank is attention on the getting the cash recovery of npa
amount.
Recovery in UCI or URI is also increases up to march month
54
8/7/2019 npa - Copy
55/59
Findings
55
8/7/2019 npa - Copy
56/59
Recovery camps and participation in LOK ADALAT for speedy
Resolutions of small NPAs has been undertaken in a big way at the
Zones. The Bank has made recovery of Rs.28.64 Crores
Through LOK-ADALAT and Recovery Camps.
The Operating Profi t of the Bank for the year 2009-10 stood at
Rs.4705 crore as against Rs.5457 crore last year and the Net
Profi t stood at Rs.1741 crore as compared to Rs.3007 crore
for last year. The Banks Profit was impacted by drop in Net
Interest Margin mainly because of high cost deposits picked up
during the earlier part of the year and decline in the yields on
advances. The fall in Treasury income due to adverse market
conditions and higher NPA provisions also affected the profit
level.
Book Value per share Rs.236.84
(Rs.211.89 previous year)
profitability of the bank is affected because of one reason is the NPA the
banks NPA ratio is increases by
Gross NPA ratio at 2.85% as on 31.03.2010 and Net NPA ratio at 1.31%
as on 31.03.2010.
we also found that the profitability of the bharuch branch is also good
It has npa a/c is decrease day by day npa is not harm the banks
Profitability.
56
8/7/2019 npa - Copy
57/59
Total business (Deposit + Advances) reached at Rs. 401,079 crore
recording a growth of Rs. 66,639 crore (19.93%). Domestic business
grew by 20.72% to reach the level of Rs.331, 779 crore.
57
8/7/2019 npa - Copy
58/59
SUGGETION
58
8/7/2019 npa - Copy
59/59
BANK SHOULD MAKE CQNTRALERMAINTAIN ITS EXPENSES
TO IN GREASES ITS INCOME & PROFIT OF THE BANK.
BANK HAS CONSERNTRUTE ON NPA A/C.FOR THEIR
REDUCTION.
BANK HAS TO