Summer Tranning Report (NPA)

ASummer Training Project ReportOnNET PERFORMING ASSETSConducted atPunjab National Bank(Session2013-15) In partial fulfillment of the requirement for the degree of MASTER OF BUSINESS ADMINISTRATION(Session 2013 2015) Scholar Mr.Rajesh Kumar Pahwa Vandna VermaIncharge of ladder section Department of Business AdministrationPUNJAB NATIONAL BANK OFFICE NATIONAL INSTITUTE OF TECHONOLOGY KurukshetraAugust 2014ACKNOWLEDGEMENT

First of all I would like to thank the management at Punjab National Bank for giving me the opportunity to do my summer training in their esteemed organization. I am highly obliged to Mr. R.K. GUPTA(C.M) for granting me an opportunity to undertake training in circle office, Kurukshetra.I express my thanks to all managers under whose able guidance and direction, I was able to give shape to my training. Their constant review and excellent suggestions throughout the project highly commendable.My sincere thanks to all executives who helped me gain knowledge about the actual working and process involved in various departments.

VANDNA VERMA

DECLARATION

I, Vandna Verma, as a student of MBA (Master of Business Administration), National Institute of Technology, Kurukshetra solemnly declare that this project report entitled NON-PERFORMING ASSETS is a bonafide record of work done independently by me during the course of summer project and it has not previously formed the basis of for the award to me for any degree/diploma, assosiateship, fellowships or any other similar title of any other institute or society.

VANDNA VERMA

Ch. No.

Name of the TopicPage no.

1.Preface 4

2.Executive summary5

3.Industry profile6-7

4.Project profile8-20

5.Study of the topic22-53

6.Objective of the study54

7.Research methodology 55

8.Limitation of the study56

9.Analysis and interpretation57-62

10.Conclusion63

11.Suggestions64-65

13.Bibliography66

14.Annexure67

INDEXPREFACEFor quite sometimes now, there is a growing awareness in banks to bring down the level of non-performing assets. NPAs are loans given to borrowers who do not pay the interest of principal for a period of more than 90 days as on the balance sheet of a bank. NPAs are having an adverse affect on profitability of banks. This is mainly on two counts:1. De-recognition of interest on such assets. In other words, the bank cannot book interest on such assets to their income on accrual basis. 2. And the requirement of heavy loan loss on such assets.To bring the level of NPAs, the numerous strategies have been initiated in the past and are being initiated at present by the government and banks. These strategies include not only account specific actions but also framing policy guidelines, which help in effecting recoveries in such accounts.In this Endeavour for reducing the level of NPAs, the banks have achieved quite encouraging progress. Every year for the past few years, it has been observed that the percentage of NPAs for previous banks in getting reduced considerably, but simultaneously, there has been fresh slippage of accounts from the standard category to NPA category. However, the banks have realized that the only way to check the standard assets to NPA category is to strengthen their pre-sanction appraisal systems and their-up systems of loans and taking timely corrective action in the accounts where some deterioration are observed.The importance of the topic of NPA can be judged from a recent development in the Indian economy in the form of enactment of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFEASI) act which came into effect on 26th of November, 2002.the act seeks to empower the banks to recover their dues from defaulting customer in an effective manner. This new act is discussed in report.It hoped that this report will prove to be of great help to develop a sense of understanding of the topic and enhance the awareness of the topic. August 2014KURUKSHETRA Vandna Verma EXECUTIVE SUMMARY Punjab National Bank was registered on 19th may 1894 under the Indian companies act with its office in Anarkali Bazaar, Lahore. The bank is second largest government owned commercial bank in India with about 6543 branches across the 3404 cities. It serves million of customers the banks has ranked 248th biggest bank in the world by Bankers Almanac, London. PNB has banking subsidiary in the UK, as well as branches in Hongkong and Kabul, and representative of offices in Almaty, Shanghai, and Dubai.The Circle Office, Kurukshetra was started on 20th January 1986, 3 districts were covered under circle office, Kurukshetra which were Kurukshetra, Kaithal, Jind and 40 branches were covered and but afterwards districts Yamunanagar was also included in the circle office, Kurukshetra and now 105 branches are covered under circle office, Kurukshetra.The circle head DGM A. K. MISHRA and AGM - A. K. GOYAL and Chief Managers - B. S. GUPTA & R. K .GUPTA.The topic under study is non performing assets an asset is classified as non-performing assets(NPAs) if the borrower does not pay dues in the form of principal and interest for a period of 180 days.however with effects from march 2004, default status would be given to a borrower if dues were not paid for 90 day. If any advance or credit facilities granted by bank to a borrower become non-performing ,then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances/credit facilities having performing status

INDIAN BANKING SECTOR

Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mogul period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; 1. Bank of Bengal in 18092. Bank of Bombay in 1840, and 3. Bank of Madras in 1843. These three banks also known as Presidency Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank The Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act, 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely:Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, Bank of Baroda Ltd, The Central Bank of India Ltd. On July 19, 1969, 14 major banks of the country were nationalised and in 15th April 1980 six more Commercial Private Sector Banks were also taken over by the government.

THE INDIAN BANKING INDUSTRY

The origin of the Indian banking industry may be traced to the establishment of the Bank of Bengal in Calcutta (now Kolkata) in 1786. Since then, the industry has witnessed substantial growth and radical changes. As of March 2002, the Indian banking industry consisted of 97 Commercial Banks, 196 Regional Rural Banks, 52 Scheduled Urban Co-operative Banks, and 16 Scheduled State Co-operative Banks.

The growth of the banking industry in India may be studied in terms of two broad phases: Pre Independence (1786-1947), and Post Independence (1947 till date). The post independence phase may be further divided into three sub-phases:Pre-Nationalisation Period (1947-1969)Post-Nationalisation Period (1969-1991)Post-Liberalisation Period (1991- till date)

The two watershed events in the post independence phase are the nationalisation of banks (1969) and the initiation of the economic reforms (1991). This section focuses on the evolution of the banking industry in India post-liberalisation.

Banking Sector Reforms - Post- Liberalisation

In 1991, the Government of India (GOI) set up a committee under the chairmanship of Mr. Narasimaham to make an assessment of the banking sector. The report of this committee contained recommendations that formed the basis of the reforms initiated in 1991.The banking sector reforms had the following objectives:1. Improving the macroeconomic policy framework within which banks operate;2. Introducing prudential norms;3. Improving the financial health and competitive position of banks;4. Building the financial infrastructure relating to supervision, audit technology and legal framework; and4. Improving the level of managerial competence and quality of human resources.BANK PROFILEBank opened for business on 12 April, 1895 in the building opposite the Arya Samaj Mandir in Anarkali in Lahore. Authorised capital Rs. 2 lakhs, working capital was Rs. 20000. Total staff strength of 9 and the total monthly salary amounted to Rs. 320.Sardar Dayal Singh Majithia - founder of Dayal Singh College and the Tribune; as First chairman.

THE FOUNDERLALA LAJPATRAI ((1865-1928)

ORIGIN

VISION

To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo- Gangetic Plains, providing entire range of financial products and services under one roof.

MISSION

Banking for the unbankedThe first Board of 7 Directors comprised:-

Lala Lalchand one of the founders of DAV College and President of its Management Society;1. Kali Prosanna Roy, eminent Bengali pleader & Chairman of the Reception committee of the INC at its Lahore session in 1900; 2. Lala Harkishan Lal -first industrialist of Punjab; 3. EC Jessawala, a Parsi merchant and partner of Jamshedji & Co. of Lahore; 4. Lala Prabhu Dayal, a leading Rais of Multan; 5. Bakshi Jaishi Ram, an eminent Civil Lawyer of Lahore; Lala Harkishan Lal, the first secretary to the Board and Shri Bulaki Ram Shastri Barrister at Lahore, was appointed Manager.

Performance ab-initio : Lala Lajpat Rai was the first to open an account with the bank . A Maiden Dividend of 4% was declared after only 7 months of operation. The first branch outside Lahore was opened in Rawalpindi in 1900. In 1913, the banking industry in India was hit by a severe crisis. Failure of the Peoples Bank of India As many as 78 banks failed during this crisis but Punjab National Bank survived. Mr. JH Maynard, the then Financial Commissioner, Punjab, remarked ...."Your Bank survived...no doubt due to good management".

The Journey Jalianwala Bagh Committee account was opened in the Bank, which in the decade that followed, was operated by Mahatma Gandhi and Pandit Jawaharlal Nehru. On March 31, 1947 - decided to transfer the registered office to Delhi. PNB was then housed in the precincts of Sreeniwas in the salubrious Civil Lines, Delhi The Bank was forced to close 92 offices in West Pakistan constituting 33 percent of the total number and having 40% of the total deposits.The SWADESHI BANK : Since inception in 1895, PNB has always been a "People's bank" serving millions of people throughout the country and also had the proud distinction of serving great national leaders like Sarvshri Jawahar Lal Nehru, Gobind Ballabh Pant, Lal Bahadur Shastri, Rafi Ahmed Kidwai, Smt. Indira Gandhi etc. amongst other who banked with us.

YATRA THE JOURNEY : Registered on 19 May 1894 under the Indian Companies Act , with its office inAnarkali Bazaar,Lahore. Started Business from BAISAKHI , the 13th April ,1895 1900: PNB established its first branch outside Lahore inRawalpindi. 1904: PNB established branches in Karachi and Peshawar. 1940.absorbed Bhagwan Dass Bank, a scheduled bank located inDelhiCircle 1947: at thePartition of India forced PNB to close 92 offices in West Pakistan, 33% of the total number, and which held 40% of the total deposits. 1951: acquired the 39 branches of Bharat Bank (est. 1942); 1960: PNB amalgamated 1961: PNB acquired Universal Bank of India. Indo Commercial Bank (est. 1933) in a rescue 1963: The Government ofBurma nationalized PNB's branch inRangoon(Yangon). 1965: After the Indo-Pak war the government of Pakistan seized all the offices in Pakistan of Indian banks, including PNB's head office, which may have moved to Karachi.PNB also had one or more branches in East Pakistan (Bangladesh). 1969: PNB Nationalised, on 19 July 1969. 1978: PNB opened a branch in London. 1986 TheReserve Bank of Indiarequired PNB to transfer its London branch toState Bank of India 1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. 142 branches . 1993: Acquired New Bank of India. 1998: PNB set up a representative office inAlmaty, Kazakhstan. 2003, PNB took overNedungadi Bank 2004: PNB established a branch inKabul, Afghanistan and a representative office in Shanghai. Established an alliance withEverest Bankin Nepal( PNB owns 20% of Everest Bank.) 2004: PNB opened a representative office inDubai. 2006: Established PNBIL Punjab National Bank (International) in the UK, PNB also opened a branch in Hong Kong. 2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with two offices, one in London, and one in South Hall, Middlesex. Since then it has opened a third branch in Leicester, and is planning a fourth in Birmingham. 2008: PNB opened a branch in Hong Kong. 2009: Established a representative office in Oslo, Norway. 2010, PNB purchased JSC Dena Bank in Kazakhstan. and now PNB owns 84% of what has become JSC (SB) PNB. In 2010, PNB established a subsidiary inBhutan. PNB owns 51% of Druk PNB Bank, 1 May, PNB opened its branch in Dubai's financial center. September 2011: PNB opened a representative office inSydney, Australia. December 2012: PNB acquired 30% stake in US based life Insurance companyMetlife, renamed PNB MetLife India Limited

Subsidiaries

A.Domestic: Sr No.Name of the Entity Country of Incorporation Proportion of ownership% i)PNB Gilts Ltd. India 74.07ii)PNB Housing Finance Ltd.India51.01iii)PNB Investment Services Ltd.India100iv)PNB Insurance Broking Pvt. Ltd.#India81 PNB Insurance Broking Company is non-functional. The Broking licence has been surrendered and steps are being initiated for winding-up of the Company.Domestic Joint Ventures :1. Principal PNB Asset Management Company Pvt. Ltd2. Principal Trustee Company Pvt. Ltd3. Assets Care & Reconstruction Enterprise Ltd.4. PNB Metlife India Insurance Company Ltd

B. International: Sr. No Name of the Entity Country of incorporation Proportion ofownership 1PNB (International) Ltd. United Kingdom 100% 2Druk PNB Bank Ltd Bhutan 51% 3 JSC SB PNB Kazakhstan Kazakhstan 84.375%

Associates: (Bank having 20% or more stake)A. Domestic:Sr. No.Name of Regional Rural Banks / Other Associates Proportion of ownership

1Madhya Bihar Gramin Bank, Patna35%

2 Sarva Haryana Gramin Bank, Rohtak35%

3Himachal Gramin Bank, Mandi35%

4Punjab Gramin Bank, Kapurthala35%

5Sarva UP Gramin Bank, Meerut35%

6Principal PNB Asset Management Co. Pvt. Ltd.30%

7Principal Trustee Co. Pvt. Ltd.30%

8Assets Care & Reconstruction Enterprise Ltd.30%

9 PNB Metlife India Insurance Company Ltd30%

B. Outside India:Sr. NoName of the Entity Country ofincorporation Proportion ofownership1Everest Bank Ltd Nepal 20%

Name of Regional Rural Banks : Sponsored by PNB ( Having 35% stake )1. Madhya Bihar Gramin Bank, Patna2. Haryana Gramin Bank, Rohtak3. Himachal Gramin Bank, Mandi4. Punjab Gramin Bank, Kapurthala5. Sarva UP Gramin Bank, Meerut

Corporate Social Responsibility

PNB Centenary Rural Dev. Trust :- Assist rural youth in gainful employment. PNB Farmers Welfare Trust:- ( Detail in Next Slide ) PNB Rural Self Empl. Trg. Institutes ( PNBRSETIs ):- 30 in total distt. FLCC in all 67 lead distt. PNB Vikas ( Village Adoption Scheme) :- 117 villages in 60 lead + 50 non lead distt. Health & Social Initiatives :- Education, Health, Wind Energy, Sports etc. ASHA Project :- rehabilitation of Slum area in Delhi. Janmitra Rickshaw Project, Vegetable Producers Project , Women weavers etc. PNB Prerna PNB Farmers Welfare Trust

Established 10 FTCs :- Sachakhera ( Har.), Vidisha (M.P.), Neemrana (Raj.), Shamsernagar (Pb), Saifai (UP), Labhandi ( Chhattisgarh), Mehraj ( Pb.), Pillayarpatti ( T.N.), Karapalli (Orissa). 2 more under progress :- Jhalrapatan ( Raj.) and at Suti ( WB).- Trained more than 4 lac farmers & 1 lac women. Scholarship to meritorious children :- For passing Matic, Inter, Grad. With at least 60% marks ) Scholarship Rs. 5000, 8000, 10000 respectively + addl. 1000 to Girl student. Village adoption,Financial Inclusion.AWARDS WON DURING THE YEAR 2013-14 Golden Peacock award for innovative Product/Servicefor the year 2014 Vigilance Excellence Award 2013-14 ABP News Global CSR Excellence and Leadership Award forOrganisations with Best CSR Practices Conferred with Appreciation Certificate in 6th Global CSR Summit - cum Excellence Awards

BOARD OF DIRECTORS

Shri. K.R.Kamath ,Chairman & Managing Director Executive Directors 1. Shri Gauri Shankar, Executive Director2. Shri K Veera Brahmaji Rao, Executive Director3. Dr. Ram S. Sane, Executive Director

Other Members of Board of Directors : 1. Shri. Anurag Jain, IAS, Govt. of India Nominee Director2. Shri. B P Kanungo, Reserve Bank of India Nominee Director3. Shri. B B Chaudhry,Part-time non-official Director4. Shri. G P Khandelwal, Part-time non-official Director5. Shri. Devinder Kumar Singla, Shareholder Director6. Dr.Sunil Gupta, Shareholder Director7. Shri M. N. Gopinath,Shareholder Director8. Shri. Dilip Kumar Saha, Officer Employee Director9. Shri. Tara Chand Jhalani, Workmen Employee Director

ORGANISATION SET UP

HEAD OFFICE

BUSINESS DIVISIONS Corporate Marketing Division Credit Division CCD- Credit Card Financial Inclusion Gov. Business IBD Marketing Division Marketing Services Division Merchant Bkg. MSME PSLB Retail Assets Division Resource Mobi. Division Recovery Division(SAMD) Treasury New Initiatives Division SUPPORT DIVISIONS Board & Coordination Division General Admin Services. GAD - Branch Expansion Human Resource Dev IT Division Law MASD Mgmt. Inf. Sys. Pension & PF Personnel Administration Division Print & Stat. PR & Publicity. Rajbhasha Security Strategic Planning & Business Process Training Dept. Transaction Banking Division

CONTROL DIVISIONS Compliance Division Credit Audit & Review Finance Financial Products Fraud Prevention Inspection & Audit Insurance Cell IRMD - ALM IRMD Integ. Risk Mgmt. IRMD - Loans & Adv. MARD Share Vigilance Operations

Organisational Set up - FGMOs

No. of FGMOs :- 13 (Shall be controlling following circles) 1. Patna :- for all 7 COs of Bihar & Jharkhand.2. Kolkata :- all 6 COs of West Bengal, North East and Orissa.3. Lucknow :- 5 COs. Gorakhpur, Varanasi, Lucknow , Kanpur ,Faizabad.4. Meerut :- 2 COs of UP viz. Meerut, Muz.ngr and 3 COs of 5. Agra :- 5 COs of West UP and Central UP.6. Delhi :- COs viz. North, Central, South Delhi and Noida.7. Chandigarh :- all 5 COs of Haryana and Chandigarh.8. Ludhiana :- all 7 COs of Punjab. 9. Jaipur :- all 5 COs of Rajasthan.10. Mumbai :- all 5 COs of Maharashtra & Gujarat.11. Chennai :- all 6 COs of Kerala, AP, Karnataka, TN states.12. Shimla :- 5 COs of J & K and Himachal Pradesh13. Bhopal :- 4 COs of Madhya Pradesh and Chattisgarh.

Organisational set up : ZAOs

ZAOs are looking after the inspection of Branches and to ensure that compliance of guidelines is being adhered to. One ZAO is aligned one FGMO Accordingly total No. of ZAOs : 13 Headed by Dy. General

CIRCLE OFFICE FUNCATIONAL STRUCTURE

Security

Inspection HRD

Circle Office

GAD Credit

ITMarketing

PRD

NON-PERFORMING ASSETS

The world is going faster in terms of services and physical products. However it has been researched that physical products are available because of the service industries. In the nation economy also service industry plays vital role in the boosting up of the economy. The nations like U.S, U.K, and Japan have service industries more than 55%. The banking sector is one of appreciated service industries. The banking sector plays larger role in mobilizing money from one end to other end. It helps almost every person in utilizing the money at their best. The banking sector accepts the deposits of the people and provides fruitful return to people on the invested money. But for providing the better returns plus principal amounts to the clients; it becomes important for the banks to earn. The main sources of income for banks are the interest that they earn on the loans that have been disbursed to general person, businessman, or any industry for its development. Thus, we may find the input-output system in the banking sector. Banks first, accepts the deposits from the people and secondly they lend this money to people who are in the need of it. By the way of mobilizing money from one end to another end, Banks earn their profits.

However, Indian banking sector has recently faced the serious problem of Non Performing Assets. This problem has been emerged largely in Indian banking sector since three decade. Due to this problem many Public Sector Banks have been adversely affected to their performance and operations. In simple words Non Performing Assets problem is one where banks are not able to recollect their landed money from the clients or clients have been in such a condition that they are not in the position to provide the borrowed money to the banks.The problem of NPAs is danger to the banks because it destroys the healthy financial conditions of them.

The trust of the people would not be any more if the banks have higher NPAs. So the problem of NPAs must be tackled out in such a way that would not destroy the operational, financial conditions and would not affect the image of the banks. Recently, RBI has taken number steps to reduce NPAs of the Indian banks. And it is also found that the many banks have shown positive figures in reducing NPAs as compared to the past years.MEANING OF NPAs

An asset is classified as non-performing assets (NPAs) if the borrower does not pay dues in the form of principal and interest for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues were not paid for 90 days. If any advance or credit facilities granted by bank to a borrower become non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status.

DEFINITIONS OF NPA

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset is a loan or advance where:- Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a term loan. The account remains out of order for a period of 90 days, in respect of an Overdraft/ Cash Credit (OD/CC). The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. Any amount to be received remains overdue for a period of more than 90 days in respect of any other accounts. The installment of principal or interest thereon remains overdue for two crops season for the long duration crops. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of guidelines on securitization dated February 1,2006. In respect of derivative transactions,the overdue receivables representing positive mark to-market value of a derivative contract ,if these remain unpaid for a period of 90 days from the specified due date for payment.CLASSIFICATION OF LOANS

In India the bank loans are classified on the following basis.

Performing Assets:

Loans where the interest and/or principal are not overdue beyond 180 days at the end of the financial year.

Non-Performing Assets:

Any loan repayment, which is overdue beyond 180 days or two quarters, is considered as NPA. According to the securitisation and reconstruction of financial assets and enforcement of security interest ordinance, 2002 non-performing asset(NPA) means an asset or account of a 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 classifications issued by the Reserve Bank

Internationally, income from non-performing assets is not recognized on accrual basis, but is taken into account as income only when it is actually received. It has been decided to adopt similar practice in our country also. Banks have been advised that they should not charge and take to income account the interest on all Non-performing assets. An asset becomes non-performing for a bank when it ceases to generate income.

ASSET CLASSIFITION

ASSETS

PERFORMING ASSETS NON-PERFORMING OR ASSETS STANDERED ASSETS

SUB-STANDERED DOUBTFUL LOSS ASSETS ASSETS ASSETS

LESS THAN1 TO 3 ABOVE1 YEAR YEARS 3 YEARS

Reserve Bank of India (RBI) has issued guidelines on provisioning requirement with respect to bank advances. In terms of these guidelines, bank advances are mainly classified in to following categories:STANDARD ASSETS:Standard assets are one which does not carry any problems and which does not carry more than normal risk attached to the business. Such assets should not be an NPA.SUB-STANDARD ASSETS:These assets involved the two types of view as follows In respect to the norms of March 31, 2005 an asset would be classified as Sub standard if it remained NPA for a period less than or equal to 12 months.An assets where the terms of the loan agreement regarding interest & principal have been regenerated or rescheduled after commencement of production, should be classified as sub-standard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated terms.DOUBTFUL ASSETS:In respect to the norms of March 31, 2005 an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months.A loan which is classified as doubtful has all the weaknesses inherent as that classified as Sub-standard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently known facts, conditions and values, highly questionable and improbable.Some types of these assets areLess than 1 year1 to 3 year3 year and aboveLOSS ASSETSA loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation department or by the RBI inspection but the amount has not been written of, wholly or partly.Guidelines for Classification of Assets

1. BASIC CONSIDERATION: In simple terms the classification of assets should be done by considering the well defined credit weaknesses & extent of dependence on collateral security for realization of dues.In accounts where there is a potential threat to recovery on account and existence of other factor such as fraud committed by borrowers it will not be prudent for bank to classify that account first as sub-standard and then as doubtful. Such account should be straight away classified as doubtful asset or loss asset, as appropriate, irrespective of the period for which it has remained as NPA.2. ADVANCES GRANTED UNDER REHABILITATION PACKAGES:Banks are not permitted to do classification of any advances in respect of which the term have been re-negotiated unless the package of re-negotiated terms has worked satisfactory for a period of one year. A similar relaxation is also made in respect of SSI units which are identified as sick by banks themselves and where rehabilitation packages programs have been drawn by the banks themselves or under consortium arrangements.3. INTERNAL SYSTEM FOR CLASSIFICATION OF ASSETS AS NPA: Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut-off point to decide what would constitute a high value account depending upon their respective business levels. The cut-off point should be valid for the entire accounting year.Responsibility and validation level for proper assets classification may be fixed by bank. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels with in one month from the date on which the account would have been classified as NPA as per extant guidelines.PROVISION NORMSGeneral: The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessments made by the inspecting officers of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision regard to making adequate and necessary provisions in terms of prudential guidelines. In conformity with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets in to prescribed categories as detailed in paragraphs 4 supra. taking into account the time lag between an account becoming doubtful of recovery , its recognition as such, the realization of the security and the erosion over time in the value of security charged to the bank , the banks should make provision against substandard assets ,doubtful assets ,loss assets as below:Loss assets:Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 % of the outstanding should be provided for.Doubtful asset100% of the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid resources and realizable value is estimated on a realistic basis.In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 % to 100 % of the secured portion depending upon the period for which the asset has remained doubtful:-Period for which the advanced has remained in doubtful categories Provision requirement (%)

Up to one year20

One to three years 30

More than three years100

Substandard assets1) A general provision of 10 % on total outstanding should be made without making an allowance for ECGC guarantee cover and securities available.2) The unsecured exposures which are identified as substandard would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance. However, in view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20 percent instead of the aforesaid prescription of 25 per cent. To avail of this benefit of lower provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows and also have clear a legal first claim on the cash flow. Provisioning requirement for unsecured doubtful assets is 100 percent. Unsecured exposure is defined as an exposure where the realizable value of the security, as assessed by the bank/approved values/Reserve Banks inspection officers is not more than 10 percent, abinitio, of the outstanding exposure. Exposure shall include all funded and non funded exposure. Security will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc.3) In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks balance sheet, it is advised that the following would be applicable from the financial year 2009-10 onwards:-a) For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorization, etc., charged to the bann respeks as collateral in respect of projects (including infrastructure projects) financed by them should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured.b) However, banks may treat annuities under build-operate-transfer (BOT) model in respect of road-highway projects and tool collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks right to receive annuities and tool collection rights is legally enforceable and irrecoverable.c) It is noticed that most of the infrastructure projects, especially road/ highway projects are user-charged based, for which the planning commission has published model concession agreements (MCAs). These have been adopted by various ministers and state governments for their respective public-private partnership (PPP) projects and they provide adequate comfort to the lenders regarding security of their debts. In view of the above features , in case of PPP projects ,the debts due to lenders may be considered as secured to extend assured by the project authority in terms of the concessions agreement , subject to the following conditions:- User charges/toll/tariff payments are in an escrow account where senior lender have priority over withdraws by the concessionaire ; There is sufficient risk mitigation, search such as pre-determined increase in user charges or increase in concession period, in case project revenue are lower than anticipated; The lenders have right of substitution on case of concessionaire default; The lenders have a right to trigger termination in case of default in debt service; Upon termination, project authority has obligation of Compulsory buy-out and Repayment of debt due to pre-determined manner.d) In all such cases, banks must satisfy themselves about the legal enforceability of the provision of the tripartite agreement and factor in their past experience in such contracts.Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority etc has been taken as also the estimated value of such intangible collateral. The disclosure may be made under a separate head in notes to accounts. This would differentiate such loans from other entirely unsecured loans.

Standard assets1) The provisioning requirements for all types of types of standard assets stand as below. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis:a. Direct advances to agriculture and small and micro enterprises (SMEs). Sectors at 0.25 %.b. Advances to commercial real Estate (CRE) sector at 1.00 %.c. Advances to commercial real-Estate-residential housing sector (CRE-RH) at 0.75 %.d. Housing loans extended as teaser rates and restructured advances as indicated in Para 5.9.13 and 12.4 respectively.e. All other loans and advances not included in (a) (b) and (c) above at .40 %2. The provisions on standard assets should not be reckoned for arriving at net NPAs.3. The provisions towards standard assets need not be netted from gross advances but shown separately as contingent provision against standard assets under other liabilities and provisions others in schedule 5 of the balance sheet.4. It is clarified that the medium enterprises will attract .40% standard asset provisioning. The definition of the terms micro enterprises, small enterprises and medium enterprises shall be in terms of master circular RPCD SME & NFS. BC.11 /06.02.31/2012-13 dated July 2, 2012 on lending to micro, small & medium enterprises (MSME) sector.

INDIAN ECONOMY AND NPAs

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FIIs, etc.

Further, international rating agencies like, Standard & Poor have lowered India's credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate.

Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. One would be surprised to know that the banks and financial institutions in India hold non-performing assets worth Rs. 1,10,000 crores. Bankers have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive.

The actual level of Non Performing Assets in India is around $40 billion much higher than governments estimation of $16 billion. This difference is largely due to the discrepancy in accounting the NPAs followed by India and rest of the world. The Accounting norms of the India are less stringent than those of the developed economies. the Indian banks also have the tendency to extend the past dues. Considering the GDP of India nearly $470 billion, the NPAs are 8% of total GDP, which was better than the many Asian countries. the NPA of china was 45%of the GDP, while Japan had NPAs of 25% of the GDP and Malaysia had 42%.

The aggregate level of the NPAs in Asia has increased from $1.5 billion in 2000 to $2 billion in 2002.looking to such overall picture of the market, we can say that India is performing well and the steps taken are looking favorable.

UNDERLYING REASONS FOR NPAs IN INDIA

An internal study conducted by RBI shows that in the order of prominence, the following factors contribute to NPAs.

Internal Factors

Diversion of funds fora)Expansion/diversification/modernizationb) Taking up new projectsc) Helping / promoting associate concerns time/cost overrun during the project implementation stage

Business (product, marketing, etc.) failure Inefficiency in management Slackness in credit management and monitoring Inappropriate technology/technical problems Lack of co-ordination among lenders

External Factors

RecessionInput/power shortagePrice escalationExchange rate fluctuationAccidents and natural calamities, etc.Changes in Government policies in excise/ import duties, pollution control orders, etc.

As mentioned earlier, we held discussions with lenders and financial sector experts on the causes of NPAs in India and whilst the above-mentioned causes were reaffirmed, some others were also mentioned. A brief discussion is provided below.

Liberalization of economy/removal of restrictions/reduction of tariffsA large number of NPA borrowers were unable to compete in a competitive market in which lower prices and greater choices were available to consumers. Further, borrowers operating in specific industries have suffered due to political, fiscal and social.compulsions, compounding pressures from liberalization (e.g., sugar and fertilizer industries)

Lax monitoring of credits and failure to recognize Early Warning SignalsIt has been stated that approval of loan proposals is generally thorough and each proposal passes through many levels before approval is granted. However, the monitoring of sometimes-complex credit files has not received the attention it needed, which meant that early warning signals were not recognised and standard assets slipped to NPA category without banks being able to take proactive measures to prevent this. Partly due to this reason, adverse trends in borrowers' performance were not noted and the position further deteriorated before action was taken.

Over optimistic promotersPromoters were often optimistic in setting up large projects and in some cases were not fully above board in their intentions. Screening procedures did not always highlight these issues. Often projects were set up with the expectation that part of the funding would be arranged from the capital markets, which were booming at the time of the project appraisal. When the capital markets subsequently crashed, the requisite funds could never be raised, promoters often lost interest and lenders were left stranded with incomplete/unviable projects.Directed lendingLoans to some segments were dictated by Government's policies rather than commercial imperatives.

Highly leveraged borrowersSome borrowers were under capitalized and over burdened with debt to absorb the changing economic situation in the country. Operating within a protected market resulted in low appreciation of commercial/market risk.

Funding mismatchThere are said to be many cases where loans granted for short terms were used to fund long term transactions.

High Cost of FundsInterest rates as high as 20% were not uncommon. Coupled with high leveraging and falling demand, borrowers could not continue to service high cost debt.

EXISTING SYSTEMS/PROCEDURES FOR NPAIDENTIFICATION AND RESOLUTION IN INDIA

Internal Checks & ControlSince 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:i)Designating Relationship Manager/ Credit Officer for monitoring account/s ii)Preparation of `know your client' profileiii)Credit rating systemiv)Identification of watch-list/special mention category accounts v)Monitoring of early warning signals

1

Relationship Manager/Credit OfficerThe 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 borrowal 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 SystemThe 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 borrowal unit. The exercise is generally done at the time of sanction of new borrowal account and at the time of review / renewal of existing credit facilities.

Watch-list/Special Mention CategoryThe 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 borrowal 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 categorisation of such accounts in watch list or special mention category 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 SignalsIt 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.

Management related warning signals Evidence of aged inventory/large level of inventory Lack of co-operation from key personnel Change in management, ownership, or key personnel Desire to take undue risks Family disputes Poor financial controls 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

2. Management/Resolution of NPAsA 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 were1,522 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.

3.Credit Information BureauState 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 suitfiled 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.

4. Willful DefaultersRBI has issued revised guidelines in respect of detection of willful default and diversion 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 when funds 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.

5. Legal and Regulatory Regime

A. Debt Recovery TribunalsDRTs 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 mn 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 criticised 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.

B. LokadalatsThe 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 counselling between the parties and to reduce burden on the court, especially for small loans. Cases involving suit claims upto 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 socialorganisationsare 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.C.Enactment of SRFAESI ActThe "The Securitisation 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, viz.Securitisation and Securitisation CompaniesEnforcement of Security InterestCreation 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); andRecover 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; orBy private treaty.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.

Asset Reconstruction CompaniesUnder 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 notless 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 realisation 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:a)Enforcement of security interest;b)Taking over or changing the management of the business of the borrower;c)The sale or lease of the business of the borrower;d)Settlement of the borrowers' dues; and e)Restructuring or rescheduling of debt.

ARCS are also permitted to act as a manager of collateral assets taken over by the 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.

D. Institution of CDR MechanismThe 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 corporates affected by certain internal/external factors and minimise 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. 20 crores 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 non-statutory 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 alongwith projected cash flows.

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.As of March 31, 2003, 60 cases worth Rs. 44,369 crores had been referred to theCDR, of which 29 cases worth Rs. 29,167 crores have been approved for restructuring.

E. Compromise Settlement SchemesOne Time Settlement SchemeRBI has issued guidelines under the one time settlement scheme which will cover all 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 upto Rs. 10 crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account. For NPAs above Rs. 10 crores the CMDs of the respective banks should personally supervise the settlement of NPAs on a case to case basis, and the Board of Directors may evolve policy guidelines regarding one time settlement of NPAs as a part of their loan recovery policy. As on March 31, 2003 under the OTS scheme for NPAs upto Rs. 10 crores a total of52,669 applications amounting to Rs. 519 crores were received. Of these recoveries affected were for 30,888 cases amounting to Rs. 168 crores. For OTS under banks' own scheme the corresponding recoveries were for 1.62 lakh accounts amounting to Rs. 1,583 crores.

Negotiated Settlement SchemesThe 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 1999 to 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 million and less. These guidelines were effective until June2001 and helped banks recover Rs. 26 billion.

F. Increased Powers to NCLTs and the Proposed Repeal of BIFRIn 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 fromNPAs. 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. This is expected to make recovery proceedings faster.

APPROPRIATENESS OF THE EXISTING SYSTEMS

Most of the participant lenders have special NPA management cells at Head Offices for dealing with NPAs. The participants were generally of the view that though time and resources were adequate for dealing with NPAs, skills needed to be improved upon.

Within the constraints of the existing legal and regulatory environment banks in India have done a commendable job in bringing down the levels of NPAs in recent years. However, with the tightening of NPA recognition norms, which would mean early recognition and faster provisioning of NPAs, banks now need to evolve systems that help them identify potential NPAs and take quick action to:Prevent the potential NPA from actually becoming non-performing, andAvoid increasing their exposure to such potential NPAs.

INTERNATIONAL PRACTICES ON NPA MANAGEMENT

Subsequent to the Asian currency crisis which severely crippled the financial system in most In addition to the above, some of the more recent and aggressive steps to resolve NPAs have been taken by Taiwan. Taiwanese financial institutions have been encouraged to merge (though with limited success) and form bank based AMCs through the recent introduction of Financial Holding Company Act and Financial Institution

Asian countries, the magnitude of NPAs in Asian financial institutions was brought to light. Driven by the need to proactively tackle the soaring NPA levels the respective Governments embarked upon a program of substantial reform.This involved setting up processes for early identification and resolution of NPAs. The table below provides a cross country comparison of approaches used for NPA resolution.

Mergers Act. Alongside the Ministry of Finance has followed a carrot and stick policy of specifying the required NPA ratios for banks (5% by end 2003), while also providing flexibility in modes of NPA asset resolution and a conducive regulatory and tax environment. Deferred loss write-off provisions have been instituted to provide breathing space for lenders to absorb NPA write-offs. While it is too early to comment on'lhe success of the NPA resolution process in Taiwan, the early signs are encouraging. Detailed below are the some key NPA management approaches adopted by banks in South East Asian countries.

1. Credit Risk MitigationAs part of the overall credit function of the bank, early recognition of loans showing signs of distress is a key component. Credit risk management focuses on assessing credit risk and matching it with capital or provisions to cover expected losses from default.

2. Early Warning SystemsLoan monitoring is a continuous process and Early Warning Systems are in place for staff to continuously be alert for warning signs.

3.Asset Management CompaniesTo resolve NPA problems and help restore the health and confidence of the financial sector, the countries in South East Asia have used one broad uniform approach, i.e. they set up specialised Asset Management Companies (AMCs) to tackle NPAs and put in place Debt Restructuring mechanism to bring creditors and debtors together, often working along with independent advisors. This broad approach was locally adapted and used with a varying degree of efficacy across the region. For example, while in some countries a centralised government sponsored AMC model has been used, in others a more decentralized approach has been used involving the creation of several "bank- based" AMCs. Further different countries have allowed/used different approaches (in- house restructuring versus NPA Sale) to resolve their NPAs. Additionally, the efficacy of bankruptcy and foreclosure laws has varied in various countries. A number of factors influenced the successful resolution of NPAs through sale to AMCs and some of these key factors are discussed below

Increasing willingness to sell NPAs to AMCsBottlenecks often persist on account of reluctance of lenders to transfer assets to the AMCs at values lower than the book value to prevent a hit to their financials. Banks in Malaysia were encouraged to transfer their assets to Danaharta - AMC in Malaysia by providing them with upside sharing arrangements and the facility to defer the write-off of financial loss on transfer for 5 years. These incentives coupled with the directive of the Central Bank to make adjustments in the book values of the assets not transferred to Danaharta (after Danaharta identifies them) were sufficient to ensure effective sale to the AMC. In Taiwan, there is a regulatory requirement to reduce for banks to reduce NPAs to5% by the end of 2003. Consequently there is an increasing number of NPA auctions by the banks.

Effective resolution strategyA significant dimension influencing NPA resolution and investor participation is the ease of implementation of recovery strategies. AMCs like Danaharta have been provided with a strong platform to affect the resolution of NPAs with clearly laid down creditor's rights. Danaharta has been allowed to foreclose property without reference to the Court and thus has been able to dispose collateral swiftly by using the tender route. Special resolution mechanisms that have involved minimal intervention of the Court have also served to entice investor interest in the NPA market in certain countries like Taiwan. On the other hand the operations of Thailand Asset Management Corporation, the Government owned AMC, have been hindered by deficiencies in the Bankruptcy Law provisions.

Appointment of Special AdministratorsIn Malaysia, it has been able to exercise considerable influence over the restructuring process through the appointment of special administrators that have prepared workout plans and have exercised management control over the assets of the borrower during plan preparation and implementation stages. The restructuring process affected by the automatic moratorium that comes into place at the time of the administrators appointment.

4. out of court restructuringMost Asian countries adopted out of court restructuring mechanism to minimize courtinterventionandspeeduprestructuringofpotentiallyviableentities. Internationally, restructuring of NPAs often involves significant operational restructuring in addition to financial restructuring. The operational restructuring measures typically include the following areas:Revenue enhancementCost reductionProcess improvementWorking capital managementSale of redundant/surplus asstsOnce the restructuring measures have been agreed by stakeholders, a complete restructuring plan is prepared which takes into account all the agreed restructuring measures. This includes establishment of a timetable and assignment of responsibilities. Usually, lenders will also establish a protocol for monitoring of progress on the operational restructuring measures. This would typically involve the appointment of an independent monitoring agency.As seen from the Asian experience, in general, NPA resolution has been most successful whenFlexibility in modes of asset resolution (restructuring, third party sales)has been provided to lenders.Conducive and transparent regulatory and tax environment, particularly pertainingtodeferredlosswriteoffs,ForeignDirectInvestmentand bankruptcy/foreclosure processes has been put in place.Performance targets set for banks to get them to resolve NPAs by a certain deadline.

Objective of the study

The objective of the making report is:

To know why NPAs are the great challenge to the Public Sector bank.

To know what steps are being taken by the Indian banking sector to reduce the NPAs?

To evaluate the comparative ratios of the Public Sector Banks with concerned to the NPAs.

RESEARCH METHODOLOGY

TYPE OF STUDYDESCRIPTIVE

SAMPLEPUNJAB NATIONAL BANK

DATA COLLECTIONSECONDARY DATA

SAMPLING UNIT5 YEARS DATA FROM ANNUAL

REPORT OF PANJAB NATIONAL BANK

Limitations of the study

The limitations that I felt in my study are:

It was critical for me to gather the financial data of the every bank of the Public Sector Banks so the better evaluations of the performance of the banks are not possible.

Since my study is based on the secondary data, the practical operations as related to the NPAs are adopted by the banks are not learned.

Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector.

RATIO ANALYSIS

The relationship between two related items of financial statements is known as ratio. A ratio is just one number expressed in terms of another. The Ratio is customarily expressed in three different ways. It may be expressed as a proportion between the two figures. Second it may be expressed in terms of percentage. Third, it may be expressed in terms of rates.

The use of ratio has become increasingly popular during the last few years only. Originally, the bankers used the current ratio to judge the capacity of the borrowing business enterprises to repay the loan and make regular interest payments. Today it has assumed to be important tool that anybody connected with the business turns to ratio for measuring the financial strength and the earning capacity of the business.

RATIOS CALCULATED IN REPORT:-

1. Gross NPA Ratio.2. Net NPA Ratio.3. Provision Ratio.4. Capital Adequacy Ratio.

GROSS NPA RATIO

Gross NPA ratio is the ratio of gross NPA to gross advances of the bank.Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI guidelines .the ratio is to be counted in terms of % and formula for GNPA is as follows:

GROSS NPA RATIO100 GROSS NPAGROSS ADVANCES

INTERPRETATIONThe table above indicates the quality of credit portfolio of the banks. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa. `NET NPA RATIOThe net NPA % is the ratio of net NPA to net advances ,in which the provision is to be deducted from the gross advance. The provision is to be made for NPA account. The formula for that is:

NET NPA NET ADVANCE PROVISION

100 NET NPA RATIO

INTERPRITATIONThe ratio indicates the degree of risk in the portfolio of the banks. High NPA ratio indicates the high quantity of risky assets in the banks for which no provision are made.from the table it becomes clear that the NPA ratio of almost all the banks have been improved quite well as compared to the previous year.PROVISION RATIO

Provisions are to be made for to keep safety against NPA , and it directly affect on the gross profit of the banks. The provision ratio is nothing but total provision held for NPA to gross NPA of the banks .the formula for that is

TOTAL PROVISION GROSS NPAs PROVISION RATIO

100

INTERPRETATIONThis ratio indicates the degree of safety majors adopted by the banks. It has direct bearing on theprofitability, dividend and safety of shareholders fund. If the provision ratio is less , it indicates that the banks has made under provision.CAPITAL ADEQUACY RATIO

Capital adequacy ratio can be defined as ratio of the capital of the bank, to its assets ,which are weighted/ adjusted according to risk attached to them.

CAPITAL RISK WEIGHTED ASSETS

100 CAPITAL ADEQUACY RATIO

INTERPRETATION

As per prudential norms banks were required to achieve 14.16% CAR increased to 9% by march 2010.for the purpose of capital adequacy achievement , the capital base i.e. Tire1+Tire2 should not be less than the prescribed % of total risk weighted assets of the bank.Tire-I:Paid up capital, Statutory Reserve, Revenue capital reserves (excluding revolution reserve) and other undisclosed reserves LESS accumulated losses till the current year, investment in subsidiaries, other intangible assets.

Tire-II: Property Revaluation discounted by 55%, Subordinate Loans, Privately placed Bonds, Hybrid capital, Investment Fluctuation Reserve, provisions on standard assets. & Capital should not exceed Tire-I

CONCLUSION

A report is not said to be completed unless and until the conclusion is given to the report. A conclusion reveals the explanations about what the report has covered and what is the essence of the study. What my project report covers is concluded below.

The problem statement on which I focused my study is NPAs the big challenge before the Public Sector Banks. The Indian banking sector is the important service sector that helps the people of the India to achieve the socio economic objective. The Indian banking sector has helped the business and service sector to develop by providing them credit facilities and other finance related facilities. The Indian banking sector is developing with good appreciate as compared to the global benchmark banks. The Indian banking system is classified into scheduled and non scheduled banks. The Public Sector Banks play very important role in developing the nation in terms of providing good financial services. The Public Sector Banks have also shown good performance in the last few years. The only problem that the Public Sector Banks are facing today is the problem of non performing assets. The non performing assets means those assets which are classified as bad assets which are not possibly be returned back to the banks by the borrowers. If the proper management of the NPAs is not undertaken it would hamper the business of the banks. The NPAs would destroy the current profit, interest income due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of the funds. If we analyse the past years data, we may come to know that the NPAs have increased very drastically after 2001. in 1997 the gross NPAs of the Indian banking sector was 47,300crore where as in 2001 the figure was 63,883 and which increased at faster rate in 2003 with 94,905crore. The Public Sector Banks involve its nearly 50% of share in the NPAs.Thus we can imagine how Public Sector Banks are functioning. The RBI has also been trying to take number of measures but the ratio of NPAs is not decreasing of the banks. The banks must find out the measures to reduce the evolving problem of the NPAs. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.

SUGGESTION

Through RBI has introduced number of measures to reduce the problem of increasing NPAs of the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act, etc. A lot of measures are desired in terms of effectiveness of these measures. What I would like to suggest for reducing the evolutions of the NPAs of Public Sector Banks are as under.

(1)Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility.

(2)The credit rating agency should regularly evaluate the financial condition of the clients.

(3)Special accounts should be made of the clients where monthly loan concentration reports should be made.

(4)It is also wise for the banks to carryout special investigative audit of all financial and business transactions and books of accounts of the borrower company when there is possibility of the diversion of the funds and mismanagement.

(5)The banks before providing the credit facilities to the borrower company should analyse the major heads of the income and expenditure based on the financial performance of the comparable companies in the industry to identify significant variances and seek explanation for the same from the company management. They should also analyse the current financial position of the major assets and liabilities.

(6)Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they would face the environmental threats and opportunities with the use of their strength and weakness, and what will be their possible future growth in concerned to financial and operational performance.

(7)Independent settlement procedure should be more strict and faster and the decision made by the settlement committee should be binding both borrowers and lenders and any one of them failing to follow the decision of the settlement committee should be punished severely.

(8)There should be proper monitoring of the restructured accounts because there is every possibility of the loans slipping into NPAs category again.

(9)Proper training is important to the staff of the banks at the appropriate level with on going process. That how they should deal the problem of NPAs, and what continues steps they should take to reduce the NPAs.

(10)Willful Default of Bank loans should be made a Criminal Offence.

(11)No loan is to be given to a Group whose one or the other undertaking has become a Defaulter.

BIBLIOGRAPHY

M Y Khan and Public Sector Banks K Jain management Accounting Tata McGraw-Hill Publishing Company Limited, new Delhi 1999.Banking Finance (February 2003)Banking Finance (April 2003)IBA Bulletin (January 2004), (February 2003), Monthly journal published by Indian Banks Associations.Banking Annual (October 2003) published by Business Standard.www.rbi.org.comwww.google.com

Search:o Indian Banking Sectoro Nonperforming assets and banking sectorso Impact of NPAs on the working of the Public Sector Bankso Steps taken by govt. to reduce the NPAs of the banks

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