a study on non performing assets

8/18/2019 A Study on Non Performing Assets

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A Study on Non-Performing Assets

CHAPTER – I

INTRODUCTION

INTRODUCTION:

A strong banking sector is important for flourishing economy. One of the most

important and major role played by banking sector is that of lending business. It is generally

encouraged because it has the effect of funds being transferred from the system to productive

purposes, which also results into economic growth. As there are pros and cons of everything,

the same is with lending business that carries credit risk, which arises from the failure of

borrower to fulfil its contractual obligations either during the course of a transaction or on a

future obligation. The failure of the banking sector may have an advance impact on other

sectors. Nonperforming assets are one of the major concerns for banks in India. N!As reflect

the performance of banks. A high level of N!As suggests high profitability of a large number

of credit defaults that affect the profitability and networth of banks and also erodes the value

of the asset. The N!A growth involves the necessity of provisions, which reduces the overall

profits and shareholders" value. The issue of Non!erforming Assets has been discussed at

length for financial system all over the world. The problem of N!A is not only affecting the

banks but also the whole economy. In fact high level of N!As in Indian banks is nothing but a

reflection of the state of health of the industry and trade. This project deals with

understanding the concept of N!As, its magnitude and major causes for an account becoming

nonperforming, projection of N!As over ne#t years in banks and concluding remarks.

The magnitude of N!As have a direct impact on $anks profitability legally they are

not allowed to book income on such accounts and at the same time banks are forced to make

provisions on such assets as per %$I guidelines. The %$I has advised all &tate 'Ooperative

$anks as well as the 'entral 'ooperative $anks in the country to adopt prudential norms

from the year ending ()*+(*)-. These have been amended number of times since )-. As

per their guidelines the meaning of N!As, the norms regarding assets classification problem

of amplification of nonperforming assets N!As/ and the issue is becoming more and more

unmanageable. In order to bring the situation under control, various steps have been taken.

Among all other steps most important one was the introduction of &ecuriti0ation and

%econstruction of 1inancial Assets and 2nforcement of &ecurity Interest Act, 3++3 by

!arliament, which was an important step towards elimination or reduction of N!As.

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NON-PERFORMING ASSETS:

After )+ years of Non !erforming Assets terror in the banking industry, 4Now the

$anks 5ave Teeth6, a new law lightens the burden of bad loans for Indian $anks. The law

that has been the catalyst for the bad loan cleanup passed India"s parliament in November

3++3. It allows lenders more easily to foreclose on debtor"s assets or even demand a change

in management. 7ithin weeks of the law"s passage, banks saw a flood of loans once

unrecoverable being repaid in double time.

The act is The &ecuriti0ation and %econstruction of 1inancial Assets and 2nforcement

of &ecurity Interest Act, 3++3 also known as the &ecuriti0ation Act/. This Act enables the

setting up of assets management companies for addressing the problem of Non !erforming

Assets of $anks and 1inancial Institutions.

MEANING:

An asset is classified as Non !erforming Assets N!A/ if dues in the form of

instalment and the interest due are not paid by the borrower before + days of due. If any

advance or credit facility is granted by the bank to a borrower who become nonperforming,

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 e#ist certain

advances*credit facilities having performing status.

An asset is treated as Non !erforming Asset N!A/ when it ceases to generate

income to the bank. &uch Non !erforming Assets shall have well defined credit weakness,

which may li8uidation of the debt and are characteri0ed by distinct possibility that the bank

would sustain some loss, if the deficiencies are not corrected.

DEFINITION:

According to Narasimham'ommittee , “The problem of N!As was first brought into

focus by the Narasimham 'ommittee on financial system ))/, set up by with initiation of

liberali0ation process in the country. The committee stated that the genesis of the problemwas in the la#ity of the prudential norms relating to income recognition, asset classification

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and provisioning. The committee placed emphasis on identifying problem loans of banks and

making provision for such loans and so instituted proper definition of N!As. Apart from

identification of bad assets, the committee also suggested some ways to deal with them.

1urther, Narasimham 'ommittee clearly defined that an asset may be treated as Non

performing Asset N!As/, if interest or instalment of principal or both remain unpaid for a

period of more than )9+ days. 5owever, with effect from :arch 3++;, default status is given

to borrower account if dues are not paid for a period of + days6.

According to the prudential Norms, an asset, including a leased asset, becomes non

performing when it ceases to generate income for the bank. A nonperforming asset was

defined as a credit facility in respect of which interest remained It carries not more than the normal risk attached to the business and is not

an N!A. &tandard assets are the ones in which the bank is receiving interest as well as the

principal amount of the loan regularly from the customer. 5ere it is also very important that

in this case the arrears of interest and the principal amount of loan do not e#ceed + days at

the end of financial year. If asset fails to be in category of standard asset that is amount due

more than +days then it is N!A and N!As are further need to classify in sub categories.

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T#"r" r" $ t%&"! o' NPA:

I. S()-!tndrd A!!"t: A substandard asset ?is one which has remained N!A for a period

less than or e8ual to )3months from ().(.3++=. In such case the current net worth of the

borrower*guarantor or the current market value of the security charged is not enough to

ensure recovery of the dues to the banks in full. In other words, such an asset will have well

defined credit weaknesses that jeopardi0e the li8uidation of the debt and are characteri0ed by

the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

ii. Do()t'(* A!!"t!> 7ith effect from ().(.3++=, an asset is to be classified as doubtful, if it

has remained N!A for a period e#ceeding )3 months. A loan classified as doubtful has all the

weaknesses inherent in assets that were classified as substandard, with the added

characteristics that the weaknesses make collection or li8uidation in full, on the basis of

currently known facts, conditions and values highly 8uestionable and improbable. @nder this

category there are three stages>

I oubtful up to one year

II oubtful for further two years

III oubtful beyond three years.

iii. +o!! A!!"t!: An asset identified by the bank or internal* e#ternal auditors or %$I

inspection as loss asset, but the amount has not yet been written off wholly or partly. The

banking industry has significant market inefficiencies caused by the large amounts of Non

!erforming Assets N!A/ in bank portfolios, accumulated over several years. iscussions on

nonperforming assets have been going on for several years now. One of the earliest writings

on N!A defined them as 4assets which cannot be recycled or disposed off immediately, and

which do not yield returns to the bank, e#amples of which are> Overdue and stagnant

accounts, suit filed accounts, suspense accounts and miscellaneous assets, cash and bank

balances with other banks, and amounts locked up in fraudsB.

R"i" o' Non P"r'or.ing A!!"t!

Though, &yndicate $ank Collegal $ranch is industry leader in bringing down the level of N!A year on year. $ut still a huge amount is trapped as N!A"s which a burden for the bank.

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The origin of the problem of burgeoning N!A"s lies in the 8uality of managing credit risk by

the bank concerned what is needed is having ade8uate preventive measures in place namely,

fi#ing presanctioning appraisal responsibility and having a effective post disbursement

supervision.

NEED FOR THE STUDY:

The needs of the study are as follows>

). To study what kind of role N!As are playing upon the operations of the $ank 3. To know the variables available to control N!As

(. The need also has been felt to study the financial performance of particular branch;. To know the current position of bad debts in particular bank

O/0ECTI1ES OF THE STUDY:

The objectives of the study are as follows>

). To analy0e the N!A of the &yndicate $ank Collegal

3. To know the underlying reasons for the emergence of the N!As(. To understand the impacts of N!As on the operations of the $ank ;. To know what steps are being taken by the $ank to reduce the N!As

SCOPE OF THE STUDY:

After the II phase of financial reforms in the name of economic reforms Indian !ublic

&ector $anks and %egional %ural $anks has facing a stiff competition from private banks.

The sustenance and growth of %egional %ural $anks is in a dilemma by the end of ( rd

financial reforms that will more focus on $A&2D II and III.

:y project work on Non!erforming Assets a study on &yndicate $ank Collegal

branch was focused the trends in N!A, deposit and advances, profitability and sectorwise

recovery management in &yndicate $ank Collegal branch.

RESEARCH METHODO+OGY:

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%esearch is defined as 4a scientific and systematic search for pertinent information on

a specific topic6. %esearch is an art of scientific investigation. %esearch is a systemi0ed

effort to gain knowledge. It is a careful en8uiry especially through search for new facts in

any branch of knowledge. The search for knowledge through objective and systematic

method of finding solution to a problem is a research.

The project work is based on primary and secondary data. An effort made actual data

about the N!A A study in &yndicate $ank Collegal $ranch.

R"!"rc# d"!ign:

%esearch design is a statement or specification of procedures for collecting and

analy0ing the information re8uired for the solution of specific problem. It provides a specific

framework for conducting some research investigation.

Pri.r% dt:The information is collect through interaction with managers, non

managerial staff and prime customers.

S"condr% dt: The information is collect through literature reports, statistical figures

and such other collected from books, research thesis, published reports and other unpublished

of &yndicate $ank Collegal $ranch.

The collected data and observed facts are subjected to statistical and mathematical analysis,

the data is also interpreted and help of line chart and bar chart.

+IMITATIONS:

Dike any other project work in the field of social science, the present project on N!As E

A study on &yndicate $ank Collegal branch is also not free from limitations. The major

limitations are,

). Nonperforming advances*assets is a generic in financial sector but, the project is

confined to &yndicate $ank Collegal branch.3. The analysis and interpretation based on the interaction of :anager and the data

collected from the &yndicate $ank Collegal branch will not reflecting the responses and

interpretation of the universe as a whole.

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(. The statistical figures collected from the &yndicate $ank Collegal $ranch for the

purpose of project work may slightly variation in the analysis and interpretation.

;. The study is based only on N!A section of the bank.

CHAPTER – II

RE1IE2 OF +ITERATURE

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INTRODUCTION:

The banking system in the country has undergone a sea change with the introduction

of prudential norms on income recognition, asset classification, and their provisioning.

5owever, the system re8uires a combination of new technologies, wellguarded risk and

credit appraisal, treasury management, product diversification, internal control, e#ternal

regulations reduction of mounting N!As and professional as well as skilled human resource

to achieve the heights of the international e#cellence to play its role critically in meeting the

global challenges.

5owever, the problem of Non !erforming Assets is also found even in advancedeconomies like Fapan. According to international rating agency the level of N!As of 'hina is

more than =+G and in case India it is more than 3+G. The problem of N!As is not only the

problem of the lenders but also the borrowers. The high level of N!As in the banks and

financial institutions is a very important problem because bank credit is a catalyst to

economic growth of the country. If there is any bottleneck in the smooth flow of credit then it

is due to the increasing level of N!As. This will have an adverse effect on the economy.

$anking business is mainly that of borrowing from the public and lending to theneedy persons and business. Dending involves credit risk. 7hen the loans and advances made

by a bank of financial institution turnout nonproductive and nonrewarding they become

Nonperforming Assets N!As/. Apart from the magnitude of growth in deposits credit

e#pansion, profit etc. the level of N!As also is an important, measure for judging the

performance of banks, as it reflects the 8uality of loan portfolio.

In India, an asset is classified as Non performing Assets N!As/ if interests are

instalment of principal due remains unpaid for more than )9+ days. 5owever, with effect

from :arch 3++;, default status would be given to a borrower if dues were not paid for +

days. If any advances or credit facilities granted by a bank to borrower become Non

performing, then the bank will have to treat all the advances*credits facilities granted to that

borrower as Nonperforming without having any regard to the fact that there may still e#ist

certain advances*credit facilities having performing status

2HAT IS NPA3

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Accordingly as from that date, a Non performing asset shall be an advance where. Interest

and * or installment of principal remain overdue for a period of more than + days in respect

of a term loan,

ii. The account remains Hout of order H for a period of more than + days, in respect of an

overdraft * cash credit O*''/

iii. The bill remains overdue for a period of more than + days in case of bill purchased or

discounted.

iv. Interest and * or principal remains overdue for two harvest season but for a period not

e#ceeding two half years in case of an advance granted for agricultural purpose, and

v. Any amount to be received remains overdue for a period of more than )9+ days in respect

of other accounts 7ith a view to moving towards international best practices and to ensure

greater transparency, it has been decided to adopt + days overdue Hnorms for identification‟

of N!As, from the year ending :arch (), 3++;, a non performing asset shall be a loan or an

advance where

I. Interest and * or installment of principal remain overdue for a period of more than + days

in respect of a term loan,

ii. The account remains Hout of order H for a period of more than + days ,in respect of an

Overdraft*cash credit O*''/

iii. The bill remains overdue for a period of more than + days in case of bill purchased or

discounted.

iv. Interest and*or principal remains overdue for two harvest season but for a period not

e#ceeding two half years in case of an advance granted for agricultural purpose, and

v. Any amount to be received remains overdue for a period of more than + days in respect

of other accounts.

O(t o' ord"r

An account should be treated as out of order if the outstanding balance remainscontinuously in e#cess of sanctioned limit * drawing power. In case where the outstanding

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balance in the principal operating account is less than the sanctioned amount *drawing power,

but there are no credits continuously for si# months as on the date of balance sheet or credit

are not enough to cover the interest debited during the same period, these account should be

treated as 4out of order6.

O"rd("

Any amount due to the bank under any credit facility is Hoverdue if it is not paid on‟

due date fi#ed by the bank.

In !#ort

A N!A is a loan or an advance where

Interest and* or installment of principal remain overdue for a period of more than +

days in respect of a term loan. The account remains 4out of order6 in respect of an overdraft* cash credit.

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

purchased and discounted. The installment or interest remains overdue for two crop seasons in case of short

duration crops and for one crop season in case of long duration crops.

G+O/A+ NPA:

The history of financial institutions also reveals the fact that the biggest banking

failures were due to credit risk. ue to this banks are restricting their lending operations to

secure avenues only with ade8uate collateral on which to fall back upon in a situation of

default. It needs to be recogni0ed that prudential norms in respect of loan classification vary

widely across the countries. A country follows varied approaches, from the subjective to the

prescriptive. Illustratively, in the @nited Cingdom, supervisors do not need banks to adopt

any particular form of loan classification and either is there any recommendation on the

number of classification categories that bank should employ. Other countries, such as, @nited

&tates follow up a more prescriptive approach, where in loans are classified into several

categories based on a set of criteria ranging from payment e#perience to the environment in

which the debtor evolves. The adoption of such a system points to the usefulness of a

structured approach those facilities the supervisor"s ability to analyse and compare bank"s

loan portfolios.

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C&it* Ad"7(c% Rtio 'A%/>

The %$I prescribed the 'A% as per the $asel norms gave banks time to raise the

capital level in a phased manner. 7ith effect from April ), +++ all banks are re8uired

to maintain percent 'A%. Apart from the overall level of 'A%, the %$I has also

introduced certain structural adjustments in the assignment of risk weights on the

various categories of assets. These are> The banksJ foreign e#change open position limit as well as the open position limit in

gold has been assigned a )++ percent risk weight with effect from :arch (), ). Investment in government and other approved securities re8uire to be assigned a risk

weight of 3.= percent since April ), 3+++. 1resh investment in government guaranteed securities of !ublic &ector @nits that do

not form part of market borrowings are subject to an additional risk weight of 3+

percent from April ), 3++). Advances guaranteed state governments that have defaulted as of :arch (), 3+)3 is

to be assigned a risk weight of 3+ percent in case the guarantee has been invoked. The

risk weight will increase to )++ percent if they continue to be in default after :arch

(), 3+)3

Di8uidity 'ash %eserve %atio '%%/ and &tatutory Di8uidity %atio &D%/. A major

reform measure was the gradual reduction of the '%% and &D%. In )+s '%% and

&D% aggregated together =(.= percent of deposits. The '%% refers to the minimum

proportion of the net demand and time liabilities NTD/ that the bank must maintain

in cash with the %$I. The '%% percentage is reviewed every si# months and the %$I

has the power to modify the '%% between ( percent and 3+ percent. 'ommercial

banks are currently re8uired to maintain a '%% of-.= percent of NTD.

The e#isting policy is to reduce the '%% to the minimum ( percent in line with

international norms. The &D% e#presses the 8uantity of certain specified assets as mentioned

in the banking act/ as a percentage of the total demand and time liabilities.

The &D% is set at 3= percent of NTD. The %$I has the power to modify the &D% between

3= percent and ;+ percent.

Cr"dit Contro*! nd D"*i"r% S%!t".!:

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!rior to the reforms initiated in )3, there were detailed regulations regarding the

calculation of the :a#imum !ermissible $ank 1inance :!$1/ with norms for receivables

and inventory holding for various industries. In a phased manner from )( to )-, all

instructions relating to :!$1 were withdrawn with a view to providing freedom to banks.

The %$I now only provides broad guidelines e#cept for smallscale industries/ emphasi0ing

the need to clearly lay down the loan policy for each industry. $anks are free to sanction term

loans for projects as long as the e#posure and concentration norms are maintained.

Int"r"!t Rt"!:

Interest rate on deposits has been completely deregulated. The only administered

interest rate is that on savings bank deposits. On current account balances, no interest is

payable. 1or foreign currency denominated deposits from nonresident Indians N%Is/, there

is a ceiling on the interest rate offered. On the lending side banks are re8uired to announce

the !rime Dending %ate !D%/ and the ma#imum spread charged over the !D%. Interest rates

are currently prescribed for only three categories of loans loans below 3++,+++, lending rates

for e#ports, and advances in foreign currency.

Dending Dimits for &ingle $orrower>

!rudential e#posure norms have been prescribed both in respects of operations of

foreign branches and for domestic banks, lending to individual group borrowers at 3= to =+

percent of the bankJs capital funds. To encourage low of funds to the infrastructure sector, the

borrower norm is fi#ed at higher level of K+ percent for companies engaged in infrastructure

industry. A 8uarterly reporting to the %$I on the e#posure ceilings for offsite monitoring is

in place. The banks are re8uired to report top 3+ borrowers with balances outstanding.

!riority &ector Dending> Norms> omestic commercial banks both public and private sector/

• Total priority sector advances> ;+ percent of net bank credit

• Total agricultural advances> )9 percent of net bank credit

• Advances to weaker sections> )+ percent of net bank credit

1oreign banks operating in India

• Total priority sector advances> (3 percent of net bank credit

• Advances to smallscale industries> )+ percent of net bank credit

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• 2#port credit> )3 percent of net bank credit

The definition of the priority sector has been broadened to include>

• Doans to traditional plantation crops like tea, coffee, and rubber

• Doans for housing up to %s. =++,+++ @& L )+,-=3/

• Doans to transport operators with )+ vehicles or less

• Advances to dealers of certain types of irrigation systems and agricultural machinery

• Investments made by banks in special bonds of &I$I, NA$A%, N5$, N&I',

5@'O, &I's, %ural 2lectrification 'orporation %2'/ and contributions to %ural

Infrastructure evelopment 1und %I1/ and advances up to %s. )+ million @&

L+.3) million/ to the software industry.

In"!t."nt:

The market risks in the investment portfolio of banks are controlled through 8uantitative

restrictions on the e#tent of e#posure that the banks can have in capital market. Investments

comprise nearly (= percent of the total assets of the banking system.

INDIAN /AN8ING AND NPA:

The origin of the problem of burgeoning N!A"s lies in the 8uality of managing credit

risk by the concerned banks. 7hat is need is having ade8uate preventive measures in placenamely, fi#ing presanctioning appraisal responsibility and having an effective post

disbursement supervision.

The core banking business is of mobili0ing the deposits and utili0ing it for lending to

industry. Dending business is generally encouraged because it has the effects of funds being

transferred from the system to productive purposes which results into economic growth.

5owever lending also carries credit risk, which arises from the failure of borrower to fulfil its

contractual obligation either during the course of a transaction or on a failure obligation. The

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history of financial institutions also reveals the fact that the biggest banking failures were due

to credit risk. ue to this, banks are restricting their lending operations to secured avenues

only with ade8uate collateral on which to fall back upon a situation of default.

$anking sector plays an indispensable role in economic development of a country

through mobili0ation of savings and deployment of funds to the productive sectors. $ank

lending is very crucial for it makes it possible, the financing of agricultural, industrial and

commercial activities of the country. It is an established fact that a fragile banking system

can, not only hamper the development of a particular economy but also it can deepen the real

economic crisis and impose heavy social costs. &o the health of the banking system should be

one of the primary concerns of the government of each country. 'urrently the Indian banking

sector is not in a good health. The symptoms of the disease are vastly apparent vi0. rising

N!As, high labour costs, competition from mutual funds, bureaucratic hurdle and red tapism

to name a few. The e#isting weak banks only compound the problem.

:ost of these symptoms have been present in the Indian banking system since

independence but it is only in the post reform era that they have became more ostensible.

The problem of N!A became apparent following the introduction of internationally

accepted prudential accounting norms. !rudential norms were adopted with regard to incomerecognition, asset classification, provisioning norms and capital ade8uacy. Till the adoption of

prudential norms twentysi# out of twentyseven public sector banks !&$s/ were reporting

profits. In the first postreform year, i.e., )3(, the profitability of the !&$s as a group

turned negative with as many as twelve nationali0ed banks reporting losses. $y :arch )K,

the outer time limit prescribed for attaining capital ade8uacy of 9 per cent, eight public sector

banks were still short of the prescribed level. The emphasis on maintenance of capital

ade8uacy and compliance with the re8uirement of asset classification and provisioning norms

put severe pressure on the profitability of !&$s. $anks have so far been able to meet their

re8uirements of additional capital by infusion of funds by the government or by accessing the

markets. 5owever, a stage has been reached where further efforts at restructuring some of

these banks cannot be confined merely to infusion of capital and giving certain targets for

improvement in performance. $ut major restructuring has to be done to improve the asset

8uality of the banks.

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INDIAN SCENARIO

@ndoubtedly 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 e#posures to emerging markets by 1IIs, etc. 1urther, international rating

agencies like, &tandard M !oor have lowered IndiaJs credit rating to subinvestment grade.

&uch negative aspects have often outweighed positives such as increasing fore# reserves and

a manageable inflation rate. @nder such a situation, it goes without saying that banks are no

e#ception 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 nonperforming assets worth %s.

), )+, +++ crores. $ankers have reali0ed that unless the level of N!As is reduced drastically,

they will find it difficult to survive.

The whole Indian banking industry consists of commercial banks, all India financial

institutions, regional rural banks and cooperative banks. This report focuses on commercial

banks, which have three categories of banks !&$s government owned banks/, private sector

banks old and new/, and foreign banks.

The banking sector in India functions under the purview of the %eserve $ank of India%$I/ the central bank of the country. The $anking %egulation Act passed in ); provides

%$I with wide range of powers for supervision and regulation of banks, licensing power and

authority to conduct inspection. Today there are 3- !&$s, 3; old private banks, 9 new private

banks and ;3 foreign banks. As of march (), 3+++ these )+) banks with a branch network of

=+,9== had a total asset base of rs.)), )+; billion @& L 3( billion/, making them the most

active and predominant financial intermediaries in the country.

/n9ing S"ctor R"'or.!:

In the )-+s and )9+s the banking industry was marked by a high degree of

regulation. The banks functioned in a heavily regulated and controlled environment, with an

administered interest structure, 8uantitative restrictions on credit flows, high reserve

re8uirements , and preemption of a significant proportion of lend able resources towards the

4 priority6 the definition of the priority sector include loans to traditional plantation cropslike tea, coffee, and rubber > housing up to a limit of %s =++,+++ @& L )+,-=3 / loans to

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transport operators with )+ vehicles or less> advances to dealers of certain types of irrigation

systems and agricultural machinery rural development / and the government sectors. These

regulations resulted insignificant reduction in the bank managements" autonomy in asset

deployment, credit rationing, low asset 8uality, and low levels of investment and growth.

Although the business volumes improved in recent years, productivity and efficiency

declined with profitability remaining sluggish. In )), the government of India established a

ninemember committee on financial systems, under the chairmanship of :r. Narasimhan to

evaluate the systematic banking problem. The Narasimhan committee report published

towards the end of )), containing farreaching recommendations for the banking sector.

This report forms the basis for the sector"s reforms, which were undertaken in parallel

with the overall economic reforms of the )s.

The salient features of these reforms were>

• Introduction of stricter income recognition and assets classification norms.

• Introduction of higher capital ade8uacy re8uirements.

• Introduction of higher disclosure standards in financial reporting.

• Introduction of phased deregulation of interest rates.

• Dowering of statutory li8uidity ratio and credit reserve ratio re8uirements.

:ajor regulatory reforms are discussed in the section on market access. Other changes

include entry of Indian private sector in banking, liberali0ation of the entry and e#pansion of

foreign banks, removal of restriction on automated teller machines, increased number of

activities and products, a reduction of government ownership in !&$s.

The funds raised by banks in Indian are deployed under two major categories loans M

advances, and investments. The assets financed by banks are linked to the liabilities through

statutory regulation, principal among which are the statutory li8uidity ratio and the credit

reserve ratio that mandate banks to maintain a specified minimum proportion of their deposits

in certain designated li8uid assets.

Advances by Indian banks are cash credit, overdrafts, and loans. 'ash credit is the

most popular mode of borrowing by India companies. The advantage of this mode is that the

borrower can withdraw only the amount needed and not the entire amount sanctioned and can

return any surplus funds. $anks in India generally hold government securities far in e#cess of their &D% re8uirements. Although the return is low, the investments are virtually riskaverse

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and there is no danger of generating nonperforming assets N!A/. &uch riskaverse

behaviour can be attributed to the implementation of strict provisioning norms, capital

ade8uacy re8uirements, and the system of managerial compensation that is not performance

driven6

2#% NPA #" )"co." n i!!(" 'or )n9! nd 'innci* in!tit(tion! in Indi

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

enterprise including the banking industry. 5owever, increasing N!A have a direct impact on

banks profitability as legally banks are not allowed to book income on such accounts and at

the same time banks are forced to make provision on such assets as per the %eserve $ank of

India%$I/ guidelines. Also, with increasing deposits made by the public in the banking

system, the banking industry cannot afford defaults by borrowers since N!A affects the

repayment capacity of banks. 1urther, %eserve $ank of India %$I/ successfully creates

e#cess li8uidity in the system through various rate cuts and banks fail to utili0e this benefit to

its advantage due to the fear of burgeoning nonperforming assets

T#" 'o**oing r" t#" &ri.r% c(!"! 'or t(rning t#" cco(nt! into NPA:

• iversion of funds, mostly for the e#pansion * diversification of business or for

promoting associate concern.

• 1actors internal to business like product * marketing failure, inefficient management,

inappropriate technology, labor unrest.

• 'hanges in the :acroenvironment like recession in the economy, infrastructural

bottlenecks

• Inade8uate control * supervision, leading to time * cost overruns during project.

• 'hanges in overnment policies e.g. Import duties.

• eficiencies like delay in the release of limits* funds by banks * 1Is

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S"condr% c(!"! r" ! 'o**o!:-

• &election of the project.

• Implementation of the project time overrun, cost overrun, underfinancing

technology involved.• Intention of the borrower.

• Industrial * 2conomic trend.

• Absence of the up gradation of the unit * ploughing back of the profit.

ASSET C+ASSIFICATION AND NPA NORMS

'lassification of Assets> 7hile new private banks are careful about their asset 8uality

and conse8uently have low nonperforming assets N!As/, public sector banks have large

N!As due to wrong lending policies followed earlier and also due to government regulations

that re8uire them to lend to sectors where potential of default is high. Allaying the fears that

bulk of the Non!erforming Assets N!A/ was from priority sector, N!A from priority sector

constituted was lower at ;K percent than that of the corporate sector at ;9 per cent. Doans and

advances account for around ;+ per cent of the assets of &'$s. 5owever, delay*default in

payment of interest and*or repayment of principal has rendered a significant proportion of the

loan assets non performing. As per %$I s prudential norms, a Non!erforming Asset N!A/‟

is a credit facility in respect of which interest*installment has remained unpaid for more than

two 8uarters after it has become past due. 4!ast due6 denotes grace period of one month after

it has become due for payment by the borrower.

R"g(*tion! 'or !!"t c*!!i'iction

Assets are classified into four classes &tandard, &ubstandard, oubtful, and Doss

assets. N!A consist of assets fewer than three categories> substandard, doubtful and loss.

%$I for these classes of assets should evolve clear, uniform, and consistent definitions. The

banks should classify their assets based on weaknesses and dependency on collateral

securities into four categories>

I. Stndrd A!!"t!> It carries not more than the normal risk attached to the business and is

not an N!A. &tandard assets are the ones in which the bank is receiving interest as well as the

principal amount of the loan regularly from the customer. 5ere it is also very important that

in this case the arrears of interest and the principal amount of loan do not e#ceed + days at

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the end of financial year. If asset fails to be in category of standard asset that is amount due

more than +days then it is N!A and N!As are further need to classify in sub categories.

ii. S()-!tndrd A!!"t: A substandard asset is one which has remained N!A for a period

less than or e8ual to )3months from ().(.3++=. In such case the current net worth of the

borrower*guarantor or the current market value of the security charged is not enough to

ensure recovery of the dues to the banks in full. In other words, such an asset will have well

defined credit weaknesses that jeopardi0e the li8uidation of the debt and are characteri0ed by

the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

iii. Do()t'(* A!!"t!> 7ith effect from ().(.3++=, an asset is to be classified as doubtful, if it

has remained N!A for a period e#ceeding )3 months. A loan classified as doubtful has all the

weaknesses inherent in assets that were classified as substandard, with the added

characteristics that the weaknesses make collection or li8uidation in full, on the basis of

currently known facts, conditions and values highly 8uestionable and improbable.

@nder this category there are three stages>

I oubtful up to one year

II oubtful for further two years

III oubtful beyond three years.

iv. +o!! A!!"t!: An asset identified by the bank or internal* e#ternal auditors or %$I

inspection as loss asset, but the amount has not yet been written off wholly or partly. The

banking industry has significant market inefficiencies caused by the large amounts of Non

!erforming Assets N!A/ in bank portfolios, accumulated over several years. iscussions on

nonperforming assets have been going on for several years now. One of the earliest writings

on N!A defined them as 4assets which cannot be recycled or disposed off immediately, and

which do not yield returns to the bank, e#amples of which are> Overdue and stagnant

accounts, suit filed accounts, suspense accounts and miscellaneous assets, cash and bank

balances with other banks, and amounts locked up in fraudsB.

G(id"*in"! 'or t#" c*!!i'iction o' !!"t!

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'lassification of assets into above categories should be done taking into account the

degree of well defined credit weaknesses and the e#tent of dependencies on collateral

security for the reali0ation of dues.

$anks should establish appropriate internal systems to eliminate the tendency to delay

or postpone the identification of N!As especially in respect of high value of accounts.

Acco(nt it# t".&orr% D"'ici"nci"!:

The classification of an asset as N!A should be based on the record of recovery. $ank

should not classify an advance account as N!A merely due to the e#istence of some

deficiencies, which are temporary in nature as such as nonE availability of ade8uate drawing

power based on latest stock.

A!!"t c*!!i'iction to )" )orro"r–i!" nd not 'ci*it%-i!":

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

problem credit and not others. Therefore, all the facilities granted by a bank to a borrower

will have to be treated as N!A and not the particular facility or a part thereof, which has

become irregular.

Adnc"! (nd"r con!orti(. rrng"."nt!:

Asset classified of accounts under consortium should be based on the record of

recovery of the individual member banks and other aspects having bearing on the

recoverability of the advances. Accounts where there is erosion in the value of security can be

reckoned as significant when the reali0able value of the security is less than =+ percent of the

value assessed by the bank or accepted by %$I at the time of last inspection, as the case may

be. &uch N!As may best right way classified under doubtful category and provisioning

should be made as applicable to doubtful assets.

Agric(*t(r* Adnc"!

In respect of advances granted for agricultural purpose where interest and * or

installment of principal remains unpaid after it has become past due for two harvest seasons

but for a period not e#ceeding two half years , such an advance should be treated as N!A.

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7here the natural calamities impair the repaying capacity of agricultural borrowers,

banks may decide on their own as a relief measureconversion of the shortE term production

loan into a term or reschedule of the repayment period.

In such cases of conversation or reschedule, the term loan as well as fresh shortterm

loan may be treated as current dues and need not be classified as N!A.

R"!tr(ct(ring r"!c#"d(*ing o' *on!:

A standard asset where the terms of the loan arrangement regarding interest and

principal have been renegotiated or rescheduled after the commencement of production

should be as substandard and should remain in such category for at least one year of

satisfactory performance under the renegotiated or restructured terms. In case of substandard

and doubtful assets also, rescheduling does not entitle a bank to upgrade the 8uality of

advances automatically unless there is satisfactory performance under the

rescheduledE renegotiated terms.

E;c"&tion!: As trading involves only buying and selling of commodities and the problems

associated with manufacturing units such as bottleneck in commercial production, time and

cost escalation etc. are not applicable to them.

NPA Nor.!

!rovisional Norms> $anks will be re8uired to make provisions for bad and doubtful debts on

a uniform and consistent basis so that the balance sheets reflect a true picture of the financial

status of the bank. The Narsimham 'ommittee has recommended the following provisioning

norms

4i5 )++ per cent of loss assets or )++ per cent of out standings for loss assets

4Ii5 )++ per cent of security shortfall for doubtful assets and 3+ percent to =+ per cent of the

secured portion and

4iii5 )+ per cent of the total out standings for substandard assets. A provision of )G on

standard assets is re8uired as suggested by Narsimham 'ommittee II, )9. $anks need to

have better credit appraisal systems so as to prevent N!A from occurring. The most importantrela#ation is that the banks have been allowed to make provisions for only(+ per cent of the

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Bprovisioning re8uirementsB as calculated using the Narsimham 'ommittee recommendations

on provisioning. The encouraging profits recently declared by several banks have to be seen

in the light of provisions made by them. To the e#tent that provisions have not been made, the

profits would be fictitious.

Di!c*o!(r" Nor.!:

$anks should disclose in balance sheets maturity pattern of advances, deposits, and

investments and borrowings. Apart from this, banks are also re8uired to give details of their

e#posure to foreign currency assets and liabilities and movement of bad loans. These

disclosures were to be made for the year ending :arch 3+++. In fact, the banks must be

forced to make public the nature of N!A being written off.

This should be done to ensure that the ta# payer"s money given to the banks, as capital

is not used to write off private loans without ade8uate efforts and punishment of defaulters.

NARASIMHAM COMMITTEE-SECOND REPORTHIGH+IGHTS:

4/!"* II5

'apital ade8uacy to be increased from 9 G to )+ G in stages

Asset %econstruction 'ompanies to be set up to issue bonds which would form part of

Tier II capital. Introduction of income recognition norms of + days in a phased manner.

!rovision to be made for standard asset and the period for sub &tandard asset to be

reduced to ))*3 years. $anks should adopt strategic risk management techni8ues like Palueatrisk in respect

of balance sheet items. Actions to be under taken on reducing e#penditure through value atrisk in respect of

balance sheet items. The major parameters for the banks that seek to become International players could be

return on e8uity, return on assets and employees, productivity measured not in terms

of business volume but net profit.

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Investment decisions should be taken by committee at various levels within the policy

framed by the bank. Accurate and timely information for strategic decisionsidentify and provide

profitable products to customers.

3 or ( larger banks with international orientation, 9)+ national banks and large

number of local banks proposed. :inimum shareholding of government should be brought down to ((G.

Training systems to address newer areas like product development, marketing skills,

modern credit management skills and new internal audit skills. Need for network of regional data warehouse and credit information bureau.

Transfer of priority sector portfolio between high level and lower level banks.

&ingle integrated system of regulation and supervision covering banks, 1Is and

N$1's.

/!"* III

$asel III is a global, voluntary regulatory standard on bank capital ade8uacy, stress

testing and market li8uidity risk. It was agreed upon by the members of the $asel 'ommittee

on $anking &upervision in 3+)+E)), and was scheduled to be introduced from 3+)( until

3+)= changes from Fanuary -, 3+)( e#tended implementation until 3+) however.The third

installment of the $asel Accords was developed in response to the deficiencies in financial

regulation revealed by the late3+++s financial crisis. $asel III was supposed to strengthen

bank capital re8uirements by increasing bank li8uidity and bank leverage.

$asel III has been critici0ed by banks, organi0ed in the Institute of International

1inance in 7ashington .'. large American and 2uropean banks, including oldman &achs,

:organ &tanley, eutsche $ank/ with the argument it would hurt them and economic growth.

O2' estimated that implementation of $asel III would decrease annual ! growth by

+.+=E+.)=G blaming regulation as responsible for slow recovery from the late3+++s

financial crisis.

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$asel III was also critici0ed to negatively affect the stability of the financial system by

increasing incentives of banks to game the regulatory framework. The American $ankers

Association, the community banks, organi0ed in the Independent 'ommunity $ankers of

America, and some of the most liberal emocrats in the @.&. 'ongress. including the entire

:aryland congressional delegation with emocratic &ens. 'ardin and :ikulski and %eps.

Pan 5ollen and 'ummings voiced opposition to $asel III in their comments submitted to

1I' as hurting small banks, by increasing Btheir capital holdings dramatically on mortgage

and small business loans.B, a theme repeated at 5.%. hearings on ))*3*)3.Others have argued

that $asel III did not go far enough to regulate banks as inade8uate regulation was a cause of

the financial crisis.

On Fanuary K, 3+)( the global banking sector won a significant easing of $asel III

%ules,when the $asel 'ommittee on $anking &upervision e#tended not only the

implementation schedule to 3+), but broadened the definition of li8uid assets.

/!"* $ ."!(r"! i. to:

Q improve the banking sectorJs ability to absorb shocks arising from financial and economic

stress, whatever the source

Q improve risk management and governance

Q strengthen banksJ transparency and disclosures.

A!!"t C*!!i'iction

Types of Assets !rovision %e8uirement G/

&tandard Assets +.;+G of the outstanding balance for

A% M &:2 it is +.3=G/?!rovision made at the 5.O DevelR

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&ub&tandard>

&ecured>

@nsecured>

)+G of the outstanding balance

3+G of the outstanding balance

oubtful Assets>

A)@p to ) year/>

A3) to ( years/>

A(S ( years/>

1or @nsecured portion )++G

1or &ecured portion>

3+G of the outstanding balance

(+G of the outstanding balance

)++G of the outstanding balance

Doss Asset )++G of the outstanding balance

Proi!ion r"7(ir"."nt!

&tandard assets ? of the o*s dues in all &tandard Assets under &:2 and Agricultural

sector

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• CisanPikas!atra

Interest debited to the advances against the above whether recovered or not can be taken to

income account provided ade8uate margin is available.

THE REASON AND CAUSES FOR INCREASING IN NPAS

T#" r"!on! 'or NPA! .% )" )rod*% c*!!i'i"d into:

). Advances made in !riority &ector.

3. Advances made in Non!riority &ector.

REASONS FOR NPA!:

In Priorit% S"ctor Adnc"!:

). irected and preapproved natures of loans sanctioned under sponsored programmes.

3. :is@tili0ation of loans and subsidies.

(. iversion of funds.;. Absence of security.

=. Dack of effective followup post sanction supervision and control/.

K. Absence of $ankruptcy and foreclosure loans.

-. ecrepit legal system.

9. 'ost ineffective legal recovery measures.

. ifficulty in e#ecution of decrees obtained.

In Non-Priorit% S"ctor Adnc"!:

). Inade8uate credit appraisal

3. emand recession

(. Industrial sickness and labour problems

;. &low Degal &ystem.

=. iversion of funds.

K. 7ilful default.

-. Technology Obsolescence.

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9. :anagerial inefficiency.

. !olitical compulsion and corruption.

FACTORS FOR RISE IN NPA!

The banking sector has been facing the serious problems of the rising N!As. $ut the problem

of N!As is more in public sector banks when compared to private sector banks and foreign

banks. The N!As in !&$ are growing due to ";t"rn* as well as int"rn* factors.

EBTERNA+ FACTORS

In"''"cti" r"co"r% tri)(n*

The ovt. has set of numbers of recovery tribunals, which works for recovery of loans and

advances. ue to their negligence and ineffectiveness in their work the bank suffers the

conse8uence of nonrecover, their by reducing their profitability and li8uidity.

2i**'(* D"'(*t!

There are borrowers who are able to pay back loans but are intentionally withdrawing it.

These groups of people should be identified and proper measures should be taken in order to

get back the money e#tended to them as advances and loans.

Nt(r* c*.iti"!

This is the measure factor, which is creating alarming rise in N!As of the !&$s. 2very now

and then India is hit by major natural calamities thus making the borrowers unable to pay

back there loans. Thus the bank has to make large amount of provisions in order to

compensate those loans, hence end up the fiscal with a reduced profit. :ainly ours framers

depends on rain fall for cropping. ue to irregularities of rain fall the framers are not to

achieve the production level thus they are not repaying the loans.

Ind(!tri* !ic9n"!!

Improper project handling, ineffective management, lack of ade8uate resources, lack

of advance technology, day to day changing govt. !olicies give birth to industrial sickness.

5ence the banks that finance those industries ultimately end up with a low recovery of their

loans reducing their profit and li8uidity.

+c9 o' d".nd

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2ntrepreneurs in India could not foresee their product demand and starts production which

ultimately piles up their product thus making them unable to pay back the money they borrow

to operate these activities. The banks recover the amount by selling of their assets, which

covers a minimum label. Thus the banks record the none recovered part as N!As and has to

make provision for it.

C#ng" on Got6 &o*ici"!

7ith every new govt. banking sector gets new policies for its operation. Thus it has to cope

with the changing principles and policies for the regulation of the rising of N!As. The fallout

of handloom sector is continuing as most of the weavers 'ooperative societies have become

defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by

the 'entral govt to revive the handloom sector has not yet been implemented. &o the over

dues due to the handloom sectors are becoming N!As.

INTERNA+ FACTORS

D"'"cti" +"nding &roc"!!

There are three cardinal principles of bank lending that have been followed by the

commercial banks since long.

I. !rinciples of safety

ii. !rinciple of li8uidity

iii. !rinciples of profitability

I6 Princi&*"! o' !'"t%

$y safety it means that the borrower is in a position to repay the loan both principal

and interest. The repayment of loan depends upon the borrowers>

A. 'apacity to pay

$. 7illingness to pay

C&cit% to &% d"&"nd! (&on:

). Tangible assets

3. &uccess in business

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2i**ingn"!! to &% d"&"nd! on:

). Integrity

3. 5onest

(. %eputation of borrower

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

for which a loan is sought is a sound one and the borrower is capable of carrying it out

successfully he should be a person of integrity and good character.

In&&ro&rit" t"c#no*og%

ue to inappropriate technology and management information system, market driven

decisions on real time basis cannot be taken. !roper :I& and financial accounting system is

not implemented in the banks, which leads to poor credit collection, thus N!A. All the

branches of the bank should be computeri0ed.

I.&ro&"r S2OT n*%!i!

The improper strength, weakness, opportunity and threat analysis is another reason for rise in

N!As. 7hile providing unsecured advances the banks depend more on the honesty, integrity,

and financial soundness and credit worthiness of the borrower.

• $anks should consider the borrowers own capital investment.

• It should collect credit information of the borrower"s from bankers 2n8uiry from

market*segment of trade, industry, business. 1rom e#ternal credit rating agencies.

• Analy0e the balance sheet.

• True picture of business will be revealed on analysis of profit*loss a*c and balance

sheet.

• !urpose of the loan when bankers give loan, he should analyses the purpose of the

loan. To ensure safety and li8uidity, banks should grant loan for productive purpose

only. $ank should analyses the profitability, viability, long term acceptability of the

project while financing.

Poor cr"dit &&ri!* !%!t".

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!oor credit appraisal is another factor for the rise in N!As. ue to poor credit appraisal the

bank gives advances to those who are not able to repay it back. They should use good credit

appraisal to decrease the N!As.

Mng"ri* d"'ici"nci"!

The banker should always select the borrower very carefully and should take tangible assets

as security to safe guard its interests. 7hen accepting securities banks should consider the

). :arketability

3. Acceptability

(. &afety

;. Transferability.

The banker should follow the principle of diversification of risk based on the famous

ma#im 4do not keep all the eggs in one basket6 it means that the banker should not grant

advances to a few big farms only or to concentrate them in few industries or in a few cities. If

anew big customer meets misfortune or certain traders or industries affected adversely, the

overall position of the bank will not be affected.

A)!"nc" o' r"g(*r ind(!tri* i!it

The irregularities in spot visit also increases the N!As. Absence of regularly visit of

bank officials to the customer point decreases the collection of interest and principals on the

loan. The N!As due to willful defaulters can be collected by regular visits.

R" *oning &roc"!!

Non remittance of recoveries to higher financing agencies and re loaning of the same have

already affected the smooth operation of the credit cycle6 ue to re loaning to the defaulters

and ''$s and !A's, the N!As of O&'$ is increasing day by day.

IMPACT OF NPA:

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At the :icro level, N!As have choked off the supply line of credit of the potential

lenders thereby having a deleterious effect on capital formation and arresting the economic

activity in the country.

At the :icro level, unsustainable level of N!As has eroded current profits of banks

and 1Is. They have led to reduction of interest income and increase in provisions and have

restricted and recycling of funds leading to various Asset Diability mismatches. $esides this,

it has led to erosion in their capital base and reduction in competitiveness.

The problem of N!A is not a matter of concern to banks and 1Is alone. It is the matter

of grave concern to the country and any bottleneck in the smooth flow of credit is bound to

create adverse repercussions in the economy. The mounting menace of N!As has raised the

cost of credit, made Indian business man uncompetitive as compared to their counterparts in

other countries.

It has made banks more adverse to risks and s8uee0ed genuine &mall and :edium

2nterprises &:2s/ from accessing competitive credit and has throttled their enterprising

spirits as well, to a great e#tent.

ue to their crippling effect on the operation of the banks, Assets 8uality has been

considered as one of the most important parameters in the measurement of bank"s

performance under the 'A:2D& &upervisory %ating &ystem of %$I.

CAUSES FOR INCREASE IN NPA!:

The magnitude of N!A"s in the nation is an alarming predicament. The main causes of

increase in N!A"s are as follows>

C(!"! ttri)(t)*" to t#" )orro"r:

• 1ailure to bring in re8uired capital.

• Over ambitious project.

• Donger gestation period.

• @nwanted e#penses.

•Over trading.

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• Imbalance of inventories.

• Dack of proper planning.

• ependence on single customers.

• Dack of e#pertise.

• Improper working capital management.

• :ismanagement.

• iversion of funds.

• !oor 8uality management.

• 5eavy borrowings.

•

!oor credit collection.• Dack of 8uality control.

C(!"! ttri)(t)*" to t#" )n9!>

• 7rong selection of borrower.

• !oor credit appraisal.

• @nhelpful in supervision.

• Tough stand on issues.

• Too infle#ible attitude.

• &ystems overloaded.

• Non inspection of units.

• Dack of motivation.

• elay in sanction.

• Dack of trained staff.

• Dack of delegation of work.

• &udden credit s8uee0e by banks.

Ot#"r C(!"!:

• Dack of infrastructure.

• 1ast changing technology.

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• @nhelpful attitude of government.

• 'hanges in consumer preferences.

• Increase in material cost.

• overnment policies.

• 'redit policies.

• Ta#ation laws.

• 'ivil commotion.

• !olitical hostility.

MANAGING NPA:

The primary aim of any business is to make profits. Therefore, any asset created in the

course of the conduct of business should generate income for the business.

This applies e8ually to the business of banking. The banks the worlds over deal in

money, by accepting deposits liabilities/ and out of such deposits liabilities/

lend*create loans assets/.If for any reason such assets created do not generate income

or become sticky and difficult of recovery, then the very position of the banks in

repaying the deposits liabilities/ on the due dates would be at stake and in jeopardy.

$anks with such assets portfolio would become weak and naturally such weak banks

will lose the faith and confidence of the investors.

7ith the introduction of prudential norms for income recognition, assets classification

and provisioning, banks have become 8uite sensitive and are taking all possible steps

to strengthen their assets ac8uisition and monitoring systems.

There is also a growing awareness to bring down nonperforming assets as these are

having adverse impact on their profitability due to derecognition of interests as well

as re8uirement of heavy loan loss provisions on such assets. Therefore it would be

prudent for banks to manage either asset in such a manner that they always remain

healthy, generate sufficient income and capable of repayment*recovery on the due

dates.

:anagement of performing*nonperforming assets in banks has become an art and

scienceJ and virtually a battle of witsJ between the banker and the borrower with the

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latter demanding write off or at least a major sacrifice from the bankers side

irrespective of whether he is in a position to pay or not.

:anagement of nonperforming assets of the financial sector was put on fast track

recently with the @nion 'abinet approving the promulgation of an ordinance tofacilitate securiti0ation and reconstruction of financial assets.

$esides enabling banks and financial institutions to create a market for the securiti0ed

assets and improve their asset liability management, the &ecuriti0ation and

%econstruction of 1inancial Assets and 2nforcement of &ecurity Interest Ordinance

would also assist in setting up Asset %econstruction 'ompanies. Though this is a

welcome development, the bankers have to do their basic homework and to utili0e this

opportunity to clean up and recover their dues at an early date

MEASURES TO RECO1ER NPA!

Over the last few years Indian banking in its attempt to integrate itself with the global

banking has been facing lots of hurdles in its way due to its inherent weaknesses, despite its

high sounding claims and lofty achievements. One of the major hurdles, the Indian banking is

facing today, is its evergrowing si0e of nonperforming assets over which the top

management of almost each bank is baffled. On account of the intricacies involved inhandling the N!A the ticklish task of assets management of the bank has become a tight rope

walk affair for the controlling heads, because a little wavering Hthis or that side may land the‟

concern bank in trouble. The growing N!A is a potent source of worry for the finance

minister as well, because in a developing country like ours, banking is seen as an important

instrument of development, while with the backbreaking N!A banks have become helpless

burden on the economy.

NPA it# o(t!tnding (& to > cror":

In case of doubtful and loss assets, through the modified schemes, the banks have

been directed to follow up a settlement formula under which the minimum amount to be

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recovered, amounts to be entire outstanding running ledger balances as on the date the

account was identified as N!A i.e. the date from which the interest was not charged to the

running ledger, an analysis of the given formula shows that %$I has been very much

generous in granting huge rela#ation to the borrowers who were not coming forward for

setting their overdue loans due to one or other reason.

The scheme is of high practical value as it protects the borrowers who were having

genuine problems in clearing their dues because the interest component constituted a

multiplied amount of principal outstanding. On the other hand, the concerned banks were also

finding in difficult to sacrifice the entire interest component, but outstanding in the dummy

ledger.

Now as per the provision to the scheme, they will be ready to grant such rela#ation in

favor of the borrowers. These guidelines have come as a windfall for borrowers who after a

lot of negotiations were almost ready to repay back their principal as well as part of the

interest component to settle their accounts, as under the modified scheme, they would be able

to save the interest component. To that e#tent the concerned bank stands to lose.

In the case of sub standard assets, the settlement formula as given in the modified

scheme states that the minimum sum to be recovered must contain the entire running ledgeoutstanding balance as on the date of the account was identified as N!A i.e. the date from the

which interest was not charged to the running ledger plus interest at the e#isting prime

lending rate of the bank. As per the modified scheme, the terms suggested for the payment of

settlement amount N!A are simple and pragmatic. As per the terms of the scheme, the

settlement amount should be paid in lump sum by the borrower.

5owever in case of the borrower is unable to repay back in a lump sum, the scheme

allows sufficient breathing period to enable him to arrange the funds and clear at least 3=

percent of the settlement amount to be paid upfront and the remaining amount to be

recovered in installments spread over a period of one year along with interest at the e#isting

!D% from the date of settlement up to the date of final payment.

NPA it# o(t!tnding o"r R!6 > cror"!:

1or recovery of N!A over %s. = crore, %$I has left the matter to the concerned banks

and advised that the concerned banks may formulate policy guidelines regarding their

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settlement and recovery. The freedom, in such cases, is given to the banks, because the

attending circumstances in each case may vary from the other. Therefore it was in the right

direction that adopting a generali0ed approach was not thought appropriate.

In cases, where the amount involved is above %s. = crore, %$I e#pects ': of each

bank to supervise the N!A personally. The ':s of the concerned banks are advised to

review all such cases within a given timeframe and decide the course of action in terms of

rehabilitation*restructuring.

%$I also desires the submission of a 8uarterly report of all N!A above %s. = crore

from !&@ banks. Thus by putting up the cutoff dates for the implementing of the scheme,

%$I desires the banks to reali0e the seriousness of the issue and gear up to sweep away the

N!A in one go. 1or commercial banks, it is a golden opportunity to clear the mess,

consolidate and come out on a track leading the path of global banking. The time given for

weeding out the disastrous N!A is neither too long nor too short and the banks, with proper

planning and follow up can drastically reduce their N!As, if they firmly resolve to do so. %$I

e#pects the commercial banks to follow the guidelines in letter and spirit without any

discrimination or discretion as a slight dilution may jeopardi0e their interest.

A proper monitoring system is also desired to be evolved for monitoring the progressof the scheme. As this is a rare opportunity given to the defaulting borrowers so that they can

avail the chance given for the settlement of their loans. 7ithout ade8uate publicity of the

scheme the response from the defaulting borrowers may not be there to the e#pected level.

+"g* nd R"g(*tor% R"gi."

A6 D")t R"co"r% Tri)(n*!

%Ts were set up under the %ecovery of ebts due to $anks and 1inancial

Institutions Act, )(. @nder the Act, two types of Tribunals were set up i.e. ebt %ecovery

Tribunal %T/ and ebt %ecovery Appellate Tribunal %AT/. The %Ts are vested with

competence to entertain cases referred to them, by the banks and 1Is for recovery of debts

due to the same. The order passed by a %T is appeal able to the Appellate Tribunal but no

appeal shall be entertained by the %AT unless the applicant deposits -=G of the amount due

from him as determined by it. 5owever, the Appellate Tribunal may, for reasons to be

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/6+o9d*t!

The institution of Dokadalat constituted under the Degal &ervices Authorities Act,

)9-helps in resolving disputes between the parties by conciliation, mediation, compromise

or amicable settlement. It is known for effecting mediation and counseling between the

parties and to reduce burden on the court, especially for small loans.

'ases involving suit claims up to %s. ) million can be brought before the Dokadalat

and every award of the Dokadalat shall be deemed to be a decree of a 'ivil 'ourt and no

appeal can lie to any court against the award made by the Dokadalat. &everal people of

particular localities* various social organi0ations are approaching Dokadalats 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.

!arties are heard and they e#plain 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

Dokadalats which is e#pected to be filed in court to obtain a consent decree. Normally, if suchsettlement 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 Dokadalats. It

is difficult to collect the concerned borrowers willing to go in for compromise on the day

when the Dokadalats meets. In any case, we should continue our efforts to seek the help of the

Dokadalat.

C6 Enct."nt o' SARFAESI Act

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The BThe &ecuriti0ation and %econstruction of 1inancial Assets and 2nforcement of

&ecurity Interest ActB &%1A2&I/ provides the formal legal basis and regulatory framework

for setting up Asset %econstruction 'ompanies A%'s/ in India. In addition to asset

reconstruction and A%'s, the Act deals with the following largely aspects,

&ecuriti0ation and &ecuriti0ation 'ompanies

2nforcement of &ecurity Interest

'reation of a central registry in which all securiti0ation and asset reconstruction

transactions as well as any creation of security interests has to be filed.

The %eserve $ank of India %$I/, the designated regulatory authority for A%'& has

issued irections, uidance Notes, Application 1orm and uidelines to $anks in April 3++(

for regulating functioning of the proposed A%'& and these irections* uidance Notes cover

various aspects relating to registration, operations and funding of A%'& and resolution of

N!As by A%'&. The %$I has also issued guidelines to banks and financial institutions on

issues relating to transfer of assets to A%'&, consideration for the same and valuation of

instruments issued by the A%'&. Additionally, the 'entral overnment has issued the

security enforcement rules B2nforcement %ulesB/, 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 -=G of the secured creditors agree/ to enforce

their security interest in relation to the underlying security without reference to the 'ourt

after giving a K+ day notice to the defaulting borrower upon classification of the

corresponding financial assistance as a nonperforming 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 A%'

if they do not accept any pecuniary liability/ and

%ecover 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

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are re8uired to obtain valuation of the assets. These secured assets may be sold by

using any of the following routes to obtain ma#imum value.

$y obtaining 8uotations from persons dealing in such assets or otherwise interested in

buying the assets $y inviting tenders from the public

$y holding public auctions or

$y private treaty.

Denders have sei0ed*take possession collateral in some cases and while it has not yet

been possible to recover value from most such sei0ures due to certain legal hurdles, lenders

are now clearly in a much better bargaining position visUvis defaulting borrowers than theywere before the enactment of &A%1A2&I Act.

7hen the legal hurdles are removed, the bargaining power of lenders is likely to

improve further and one would e#pect to see a large number of N!As being resolved in

8uick time, either through security enforcement or through settlements. @nder the &%1A2&I

Act A%'& can be set up under the 'ompanies Act, )=K. The Act designates any person

holding not less than )+G of the paidup e8uity capital of the A%' as a sponsor and prohibits

any sponsor from holding a controlling interest in, being the holding company of or being in

control of the A%'.

The &A%1A2&I and &%1A2&I %ules* uidelines re8uire A%'& to have a minimum

netowned fund of not less than %s. 3+,+++,+++. 1urther, the irections re8uire that an A%'

should maintain, on an ongoing basis, a minimum capital ade8uacy ratio of )=G of its risk

weighted assets. A%'& have been granted a ma#imum reali0ation time frame of five years

from the date of ac8uisition of the assets. The Act stipulates several measures that can be

undertaken by A%'s for asset reconstruction. These include>

2nforcement of security interest

Taking over or changing the management of the business of the borrower

The sale or lease of the business of the borrower

&ettlement of the borrowersJ dues and

%estructuring or rescheduling of debt.

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A%'& 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 'ourt or %T.

D6 In!tit(tion o' CDR M"c#ni!.

The %$I has instituted the 'orporate ebt %estructuring '%/ mechanism for

resolution of N!As of viable entities facing financial difficulties. The '% mechanism

instituted in India is broadly along the lines of similar systems in the @C, Thailand, Corea

and :alaysia.

The objective of the '% mechanism has been to ensure timely and transparent

restructuring of corporate debt outside the purview of the $oard for Industrial and 1inancial

%econstruction $I1%/, %Ts or other legal proceedings. The framework is intended to

preserve viable corporate affected by certain internal*e#ternal factors and minimi0e losses to

creditors*other stakeholders through an orderly and coordinated restructuring

programme. %$I has issued revised guidelines in 1ebruary 3++( with respect to the '%

mechanism. 'orporate borrowers with borrowings from the banking system of %s. 3+crores

and above under multiple bank in arrangement are eligible under the '% mechanism.

Accounts falling under standard, substandard or doubtful categories can be

considered for restructuring. '% is a nonstatutory mechanism based on debtorcreditor

agreement and intercreditor agreement. %estructuring 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 e#pected business plan along with projected cash flows. The '% process is being stabili0ed. 'ertain

revisions are envisaged with respect to the eligibility criteria amount of borrowings/ and

time frame for restructuring.

1oreign banks are not members of the '% forum, and it is e#pected that they would be

signing the agreements shortly. 5owever they attend meetings. The first A%' to be

operational in India Asset %econstruction 'ompany of India A%ID/ is a member of the

'% forum. Denders in India prefer to resort to '% mechanism to avoid unnecessary delays

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in multiple lender arrangement sand to increase transparency in the process. 7hile in the %$I

guidelines it has been recommended to involve independent consultants, banks are so far

resorting to their internal teams for recommending restructuring programs.

E6 Co.&ro.i!" S"tt*"."nt Sc#"."! On" Ti." S"tt*"."nt Sc#"."!

N!As in all sectors, which have become doubtful or loss as on ()st :arch 3+++. The

scheme also covers N!As classified as substandard as on ()st :arch 3+++, which have

subse8uently become doubtful or loss. All cases on which the banks have initiated action

under the &%1A2&I Act and also cases pending before 'ourts*%Ts*$I1%, subject to consent

being obtained from the 'ourts*%Ts*$I1% are covered. 5owever cases of willful default,

fraud and malfeasance are not covered. As per the OT& scheme, for N!As up to %s. )+crores,the minimum amount that should be recovered should be )++G of the outstanding balance in

the account.

N"gotit"dCo.&ro.i!" S"tt*"."nt Sc#"."!

The %$I*overnment has been encouraging banks to design and implement policies

for negotiated settlements, particularly for old and unresolved N!As. The broad framework

for such settlements was put in place in Fuly )=. &pecific guidelines were issued in :ay

) to public sector banks for onetime settlements of N!As of small scale sector. This

scheme was valid until &eptember 3+++ and enabled banks to recover %s K.- billion from

various accounts. %evised guidelines were issued in Fuly 3+++ for recovery of N!As of %s. =+

million and less. These guidelines were effective until Fune 3++) and helped banks recover

%s. 3K billion.

ASSET UA+ITY MANAGEMENT OF NPAS IN SYNDICATE /AN8

The $ank accorded top most priority to management ofNon !erforming Assets

N!As/. N!A level management wasgiven priority with focus on reducing N!A level at least

by)=G in absolute terms over :arch 3+)3 level, ma#imi0ingcash recovery of N!As and

upgrading the e#isting N!As.

$ank"s %ecovery !olicy is oriented towards addressing theentire gamut of N!A

management and enables the fieldfunctionaries in resolving any category of non

performingaccounts.

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$ank has introduced*e#tended special OT& schemes forconsidering proposals of

farmers eligible under AgriculturalTractor loans, small N!A accounts under doubtful andloss

assets category with book balance of 3,++,+++* Mbelow as at :arch 3+)3 and of :icro and

&mall 2nterprisesborrowers. A special OT& scheme for settling &yndFaikisanN!A loans of

1armers was introduced during 3+)3)( forthe benefit of majority of N!A farmers.

$ank continued to reduce large number of smaller N!Aaccounts by settling the dues

at 4&yndAdalats6 at allbranches throughout the year by meet, talk and settleapproach. 1our

$ruhat&yndAdalat were conductedat regional*cluster level on 3=.+.3+)3, 3-.)).3+)3,

)3.+3.3+)( M ))th to )Kth :arch 3+)( and ;K=K) OT&cases were settled, by recovering a

sum of )(.;- crore with an offer amount of =(=.;; crore.

$ank was able to register a recovery of =().99 croreduring the year 3+)3)( by

issuing notices and takingpossession*auctioning of properties under &A%1A2&I Act3++3. The

efforts at branch level were supplemented byempanelling more enforcement agencies and

approved

a study on non performing assets

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