1

SEMINAR ON Contemporary issues

Topic

Non Performing Assets with special reference to Public Sector

Banks

Submitted To: Submitted by:

Mr. Manish Rajput Touseef Ahmad Shagoo

Reg. No: 10906175

Roll No: RS1904B32

Section: S1904

CONTENTS

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Executive Summary……………………………………………………………….. 03

Non- Performing Assets Introduction……………………………………………. 04

Emergence of the Word Non-Performing Asset………………………………... 06

Definition Given By The Narasimhan Committee………………………………. 06

RBI Regulation……………………………………………………………………. 08

Non Performing Assets In Public Sector Banks………………………………… 12

Factors For Rise In NPA…………………………………………………………. 14

Problems Due To NPA…………………………………………………………….18

Symptoms Of NPAs………………………………………………………………. 21

Preventive Measurement For NPA……………………………………………… 22

Tools For Recovering NPA ……………………………………………………… 25

Recommendations ……………………………………………………………….. 28

Conclusion………………………………………………………………………… 30

References………………………………………………………………………… 32

EXECUTIVE SUMMARY:

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The future of Indian Banking represents a unique mixture of unlimited opportunities amidst

insurmountable challenges. On the one hand we see the scenario represented by the rapid process

of globalization presently taking shape bringing the community of nations in the world together,

transcending geographical boundaries, in the sphere of trade and commerce, and even

employment opportunities of individuals. All these indicate newly emerging opportunities for

Indian Banking. But on the darker side we see the accumulated morass, brought out by three

decades of controlled and regimented management of the banks in the past. It has siphoned

profitability of the Government owned banks, accumulated bloated NPA and threatens Capital

Adequacy of the Banks and their continued stability. Nationalized banks are heavily over-staffed.

The recruitment, training, placement and promotion policies of the banks leave much to be

desired. In the nutshell the problem is how to shed the legacies of the past and adapt to the

demands of the new age. PSB‟s in India can solve their problems only if they assert a spirit of

self-initiative and self-reliance through developing their in-house expertise. They have to imbibe

the banking philosophy inherent in de-regulation NPA is a problem created by the Banks and

they have to find the cause and the solution - how it was created and how the Banks are to

overcome it.

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 the 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.

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NON- PERFORMING ASSET:

INTRODUCTION:

It’s a known fact that the banks and financial institutions in India face the problem of swelling

non-performing assets (NPA’s) and the issue is becoming more and more unmanageable. In

order to bring the situation under control, some steps have been taken recently. The

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002 was passed by parliament, which is an important step towards elimination or reduction of

NPA’s.

MEANING OF NPA’s:

An asset is classified as non-performing asset (NPA’s) if the borrower does not pay dues in the

form of principal and interest for a period of 90 days. However with effect from March 2004,

default status would be given to a borrower if dues are 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. In simple words, an asset which ceases to yield is a non-performing asset.

Thirty days past due

An amount due under any credit facility is treated as "past due" when it has not been paid within

30 days from the due date. Due to the improvement in the payment and settlement systems,

recovery climate, up gradation of technology in the banking system, etc., it was decided to

dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that

date, a Non performing asset (NPA) shall be an advance where:

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1. interest and /or installment of principal remain overdue for a period of more than 180

days in respect of a Term Loan,

2. the account remains 'out of order' for a period of more than 180 days, in respect of an

overdraft/ cash Credit(OD/CC),

3. the bill remains overdue for a period of more than 180 days in the case of bills purchased

and discounted,

4. interest and/ or installment of principal remains overdue for two harvest seasons but for a

period not exceeding two half years in the case of an advance granted for agricultural

purpose, and

5. Any amount to be received remains overdue for a period of more than 180 days in respect

of other accounts.

Many institutions now try to sell their non-performing assets through companies like KIM-LAR,

INC. which helps facilitate the sale of these bundled portfolios. The non-performing assets often

include mortgage loans, car loans, credit card debt and installment loans.

Ninety days overdue

With a view to moving towards international best practices and to ensure greater transparency, it

has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year

ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset

(NPA) shell be a loan or an advance where:

1. interest and /or installment of principal remain overdue for a period of more than 90 days

in respect of a Term Loan,

2. the account remains 'out of order' for a period of more than 90 days, inrespect of an

overdraft/ cash Credit(OD/CC),

3. the bill remains overdue for a period of more than 90 days in the case of bills purchased

and discounted,

4. interest and/ or installment of principal remains overdue for two harvest seasons but for a

period not exceeding two half years in the case of an advance granted for agricultural

purpose, and

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EMERGENCE OF THE WORD NON-PERFORMING ASSET:

The issues relating to definition, management or the mismanagement and recommendations

calling for spectacular solutions to the problem of non-performing advances of banks are being

deliberated at frequent intervals during last decade or so.

In late 80s the concept of classification of bank advances in several health code categories took

place though the terminology non-performing advances did not exist at that time. This is

followed by early 90s Anglo-American model of categorization of bank lending portfolio in

several blocks of nomenclature in that included the non-performing advances.

The rapid popularity of the phenomenon can be ascribed to the opening up of the Indian

economy and consequent pressure from western powers to influence our banking system in the

name of international standards of accounting, congruence of banking supervision by Basle

committee, and so on.

The sudden shock of guidelines relating to non-performing advances and simultaneous of income

recognition made the Indian banking system totter and a number of public sector banks started

incurring losses from the mid-nineties. Then came the recommendations of the Narasimham

committee with the proposition of creating asset-reconstruction fund for cleaning the balance

sheets of the banks of non-performing advances as a one-time measure.

DEFINITION GIVEN BY THE NARASIMHAN COMMITTEE:

The committee has defined non-performing assets as advances here, as on the date of balance

sheet,

1. In respect of term loans, interest remains past due for a period of more than 90 days.

2. Overdrafts and cash credits accounts remain out of order for more than 90 days.

3. Bills purchased and discounted remain over due and unpaid for a period of more than 90

days.

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An amount is considered past due when it remains outstanding for 30 days beyond the due

date.

As per latest guidelines issued by Reserve Bank of India the Non Performing Asset

is an advance where;

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

90 days in respect of term Loans.

The account remains out of order for more than 90 days in respect of an Overdraft

and Cash credit accounts.

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

Purchased and Discounted.

The loan asset has not been renewed within 90 days from its due date of renewal.

The stock statements have not been obtained within a period of 90 days from the

due date.

The interest and or installment of principal remain un-paid for one crop season

beyond the due date in case of long-term agriculture crop loans.

(Long-term crop loan would be the crops with crop season longer than one year

and crops, which are not longer duration crops, would be treated as short duration

crops.

Any amount to be received remains overdue for a period of more than 90 days in

respect of other account.

RBI REGULATION REGARDING INCOME RECOGNITION, ASSETS

CLASSIFICATION AND PROVISIONING:

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INCOME RECOGNITION:

RBI has notified regulations concerning the income recognition of banks while accepting the

recommendations of the Narsimham committee report. The following is the regulations

regarding income recognition of banks:

Interest income should not be recognized until it is realized. A non-performing

asset is one when it is overdue for two quarters or more.

In respect of non-performing assets, interest is not to be recognized on accrual

basis but it is to be treated as income only when it is actually received. NPA’s

banks should not charge or take into account the interest.

In overdue bill, interest should not be charged or taken as income unless realized.

Interest accrued and credited to prior accounting period in respect of non-

performing assets should be reversed or provided for in the current account if

such interest still remains uncollected.

CLASSIFICATION OF ASSETS FOR MAKING PROVISION:

For the purpose of making provisions for bad and doubtful loans and advances, banks need

to classify them into the following broad categories:

Performing assets

Non-performing asset

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I) PERFORMING ASSETS:

Performing assets is also known as standard assets/loans, where the interest or principal are

not overdue beyond 180 days at the end of the financial year. Such loans don’t carry more

than the normal business risk.

II) NON-PERFORMING ASSETS:

Any loan the repayment of which is overdue beyond 180 days or two quarters is considered

as NPA. It is further classified into:

a. Standard.

b. Sub-standard assets

c. Doubtful assets

d. Loss assets

Standard Assets: are those assets, which do not disclose any problem and generate income for

the Bank, requires to be provided @0.25% on aggregate balance as on the balance sheet date.

Sub-Standard Assets: If the interest and or installment of principal remains over due for a

period of more than 90 days, the assets are to be classified as Sub-Standard assets and are to be

provided @10% of aggregate balance as on balance sheet date. With effect from March, 2005

percentage of provision has been increased from 10% to 20%.

Doubtful Assets: The assets which have remained in Sub-standard category for a period of 18

months, are to be classified as Doubtful assets. With effect from March 2005,the periodicity of

18 months has been reduced to 12 months for classifying as Doubtful assets. The assets are to be

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provided @20%. 30%, 50% for secured portion depending upon the age in Doubtful category as

mentioned below and 100% in respect of un-secured portion i.e short fall in value of security:

a) Up to one year 20%

b) One year to three years 30%

c) Three years and above 50%

With effect from March, 2005 the provision rates in respect of doubtful assets with three years

ago in doubtful category has been increased for the secured portion to the extent of 100%.

However, the provision in respect of assets which have already completed three years in doubtful

category as on 31.03.2004 are to be provided @ 60%,.75% and 100% as on 31.03.2005,

31.03.2006 and 31.03.2007 respectively.

Loss Assets: are those assets, which have no security in terms of mortgage or hypothecation and

a provision @100% is required as per prudential norms.

Loan assets classified as non-performing can be upgraded as performing assets as soon as the

borrower pays in full the arrears of interest and installment of principal. However, in case of re-

scheduled/ re-structured loan assets, an asset can be up graded only if the interest and or

installment of principal have been serviced regularly as per terms and conditions of re-negotiated

re-scheduled terms for the period of one year.

Gross NPA:

Sum of Gross balances of Sub-standard, Doubtful and Loss assets.

Gross NPA percentage:

Gross NPA divided by Gross advances multiply by 100.An increasing trend implies gradual

increase in bad credit portfolio.

Net NPA:

Sum of Net balances of Sub-standard, doubtful and loss assets.

(Gross balance- Provision=Net balance)

Net NPA percentage:

Net NPA divided by Net advances multiply by 100. Net advances means Gross advance minus

Provisions for NPA’s.

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After classifying assets into above categories, banks are required to make provision against these

assets for the interest not collected by them. In terms of exact prudential regulations, the

provisioning norms are as under:

Asset Classification Provision requirements

Standard assets 0.25%

Substandard assets 10%

Doubtful assets 20% - 50% of the secured portion depending on the

age of NPA, and 100% of the unsecured portion.

Loss assets It may be either written off or fully provided by the bank.

The increasing levels of bad quality loans marred the prospects of nationalized banks in the past

few years. As a result banks shifted their focus from the industrial segment to the corporate

lending. This has curtailed the incremental NPAs to a certain extent. In FY01, gross NPAs of

public sector banks (PSBs) increased by 3% compared to 9% jump in NPA levels of new private

sector banks. The RBI has tightened the prudential norms regarding classifying assets as non-

performing in line with the international standards. Accordingly, with effect from FY04, an asset

will be classified as NPA if the interest is overdue for 90 days (instead of 180 days currently).

These norms are likely to strengthen the balance sheet of banks, notwithstanding the fact that in

the near term the higher provisions could trim the profit growth.

The norms are tightened even for financial institutions (FIs). They are worst affected by the NPA

wave thanks to lending to the commodity and economy sensitive sectors, not to mention that

loans to steel, chemicals and textile sector played a key role in dragging down performance of

FIs. So far they have been enjoying the privilege of recognizing a loan as NPA only if principal

is overdue for more than 365 days and interest is outstanding for over 180 days. With a view to

bring greater transparency, the RBI has proposed to reduce the time limit to 180 days (for

principal). On the one hand imposition of stricter norms could lead to a difficult time for FIs;

permitting them an option of restructuring their loans could give them some leeway.

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.Non Performing Assets in Public Sector Banks

According to the past and recent studies regarding Non performing Assets in Indian Banking

Sector the Non performing Assets in Public sector banks are much higher than the Private sector

banks. One of the major reasons behind this is that Public banks face excessive pressure from

RBI while dealing with the bank defaulters as RBI remains much lenient towards the bank

customers which also include bank defaulters. The other reasons are that Public sector banks

have lent a huge amount of advances as compared to private sector banks.

COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS- (2001 to 2010)

Years

(Amount in Rs crore)As on March 31

Priority Sector Non-Priority Sector Public Sector Total Amount Percent Share Amount Percent Share Amount Percent Share

2001 24156 45.43 27854 52.38 1163 2.19 531742002 25150 46.21 28371 52.13 902 1.66 544232003 24938 47.23 26781 50.72 1087 2.06 52807

2004 23840 47.54 25698 51.24 610 1.22 50148

2005 23397 49.05 23849 50 450 0.94 47696

2006 22374 54.07 18664 45.11 341 0.82 41378

2007 22954 59.46 15158 39.27 490 1.27 38602

2008 25287 63.62 14163 35.63 299 0.75 39749

2009 24318 55.21 19251 43.71 474 1.08 44042

2010 30848 53.83 25929 45.25 524 0.91 57301

The above table indicates the composition of NPAs of Public sector banks from the year 2001-

2010, this table simply shows that the percentage of NPAs in different sectors as in the last

couple of years there has been huge increase in the NPAs.

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2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

5000

10000

15000

20000

25000

30000

35000

NPA

NPA

The above trend chart has been made on the basis of total NPAs from public sector banks

towards different sectors, and the trend in the current situation i.e., recent previous years has

shown tremendous increase especially in 2009 and 2010.

Net NPA to Net Advance Ratio

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According to the above ratios of Net NPAs to Net Advance ratio it that maximum number of

public sector banks have adverse ratio as the ratio is much higher than the expected ratio that is

1%. Hence it clearly reveals that the Asset quality of such banks much adverse and the amount of

advances very huge.

FACTORS FOR RISE IN NPAs

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

NPAs is more in public sector banks when compared to private sector banks and foreign banks.

The NPAs in PSB are growing due to external as well as internal factors.

EXTERNAL FACTORS:-

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Ineffective recovery tribunal

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

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

consequence of non-recover, their by reducing their profitability and liquidity.

Willful Defaults

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

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

the money extended to them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and

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

loans. Thus the bank has to make large amount of provisions in order to compensate those loans,

hence end up the fiscal with a reduced profit.

Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the

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

Lack of demand

Entrepreneurs 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 non recovered part as NPAs and has to make

provision for it.

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Change on Govt. policies

With 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 NPAs. The fallout of

handloom sector is continuing as most of the weavers Co-operative societies have become

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

Central government to revive the handloom sector has not yet been implemented. So the over

dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS:-

Defective Lending process

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

banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

Principles of safety:-

By safety it means that the borrower is in a position to repay the loan both principal and interest.

The repayment of loan depends upon the borrowers:

Capacity to pay depends upon:

Tangible assets

Success in business

Willingness to pay depends on:

Character

Honest

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Reputation of borrower

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

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

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

Inappropriate technology

Due to inappropriate technology and management information system, market driven decisions

on real time basis cannot be taken. Proper MIS and financial accounting system is not

implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of

the bank should be computerized.

Improper SWOT analysis

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

NPAs. While providing unsecured advances the banks depend more on the honesty, integrity,

and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from:-

a. From bankers.

b. Enquiry from market/segment of trade, industry, business.

c. From external credit rating agencies.

Analyze the balance sheet. True picture of business will be revealed on analysis of

profit/loss a/c and balance sheet.

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When bankers give loan, he should analyze the purpose of the loan. To ensure safety and

liquidity, banks should grant loan for productive purpose only. Bank should analyze the

profitability, viability, long term acceptability of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due 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 NPAs.

Managerial deficiencies

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

security to safe guard its interests. When accepting securities banks should consider the:-

1. Marketability

2. Acceptability

3. Safety

4. Transferability.

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

not keep all the eggs in one basket”; it means that the banker should not grant advances to a few

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

meets misfortune or certain traders or industries affected adversely, the overall position of the

bank will not be affected.

Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank

officials to the customer point decreases the collection of interest and principals on the loan. The

NPAs due to willful defaulters can be collected by regular visits.

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Re loaning process

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

already affected the smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by

day.

PROBLEMS DUE TO NPA

Profitability:-Profitability:-

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

client. Because of the money getting blocked the prodigality of bank decreases not only by the

amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some

return earning project/asset. So NPA doesn’t affect current profit but also future stream of profit,

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

profitability is low ROI (return on investment), which adversely affect current earning of bank.

Liquidity:-Liquidity:-

Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to

borrowing money for shot\rtes period of time which lead to additional cost to the company.

Difficulty in operating the functions of bank is another cause of NPA due to lack of money.

Involvement of management:-Involvement of management:-

Time and efforts of management is another indirect cost which bank has to bear due to NPA.

Time and efforts of management in handling and managing NPA would have diverted to some

fruitful activities, which would have given good returns. Now day’s banks have special

employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss:-Credit loss:-

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

credit. It will lose it’s goodwill and brand image and credit which have negative impact to the

people who are putting their money in the banks.

Other Problems

1. Owners do not receive a market return on their capital .in the worst case, if the banks

fails, owners lose their assets. In modern times this may affect a broad pool of

shareholders.

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

depositors loose their assets or uninsured balance.

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

deposit rates and higher lending rates repress saving and financial market, which hamper

economic growth.

4. Non performing loans epitomize bad investment. They misallocate credit from good

projects, which do not receive funding, to failed projects. Bad investment ends up in

misallocation of capital, and by extension, labor and natural resources.

Non performing asset may spill over the banking system and contract the money stock, which

may lead to economic contraction. This spill over effect can channelize through liquidity or bank

insolvency:

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

can jam payment across the country,

b) Illiquidity constraints bank in paying depositors

.c) Undercapitalized banks exceeds the banks capital base.

The three letters Strike terror in banking sector and business circle today. NPA is short form of

“Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other due to a

bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non

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

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institution. To come out of these first we need to think is it possible to avoid NPA, no can not be

then left is to look after the factor responsible for it and managing those factors.

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

for a period not exceeding two half years in the case of an advance granted for

agricultural purposes, and

Any amount to be received remains overdue for a period of more than 90 days in

respect of other accounts.

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

move over to charging of interest at monthly rests, by April 1, 2002. However, the date of

classification of an advance as NPA should not be changed on account of charging of interest at

monthly rests. Banks should, therefore, continue to classify an account as NPA only if the

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

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

March 31, 2004.

SYMPTOMS OF NPAs

Four categories of early symptoms:-

( 1 ) Financial:

Non-payment of the very first installment in case of term loan.

Bouncing of cheque due to insufficient balance in the accounts.

Irregularity in installment.

Irregularity of operations in the accounts.

Unpaid over due bills.

Declining Current Ratio.

Payment which does not cover the interest and principal amount of that installment.

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While monitoring the accounts it is found that partial amount is diverted to sister

concern or parent company.

( 2 ) Operational and Physical:

If information is received that the borrower has either initiated the process of winding up

or are not doing the business.

Overdue receivables.

Stock statement not submitted on time.

External non-controllable factor like natural calamities in the city where borrower

conduct his business.

Frequent changes in plan.

Non payment of wages.

( 3 ) Attitudinal Changes:

Use for personal comfort, stocks and shares by borrower.

Avoidance of contact with bank.

Problem between partners.

( 4 ) Others:

Changes in Government policies.

Death of borrower.

Competition in the market.

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Preventive Measurement For NPA

Early Recognition of the Problem:-Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, it’s too late to

retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues.

Identification of weakness in the very beginning that is : When the account starts showing first

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

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

study. Restructuring should be attempted where, after an objective assessment of the promoter’s

intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of

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

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

becomes worse.

Identifying Borrowers with Genuine Intent:-Identifying Borrowers with Genuine Intent:-

Identifying borrowers with genuine intent from those who are non- serious with no commitment

or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the

branch level is paramount as they are the ones who has intelligent inputs with regard to

promoters’ sincerity, and capability to achieve turnaround. Base don this objective assessment,

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

finance.

In this regard banks may consider having “Special Investigation” of all financial transaction or

business transaction, books of account in order to ascertain real factors that contributed to

sickness of the borrower. Banks may have penal of technical experts with proven expertise and

track record of preparing techno-economic study of the project of the borrowers.

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Borrowers having genuine problems due to temporary mismatch in fund flow or sudden

requirement of additional fund may be entertained at branch level, and for this purpose a special

limit to such type of cases should be decided. This will obviate the need to route the additional

funding through the controlling offices in deserving cases, and help avert many accounts slipping

into NPA category.

Timeliness and Adequacy of response:-Timeliness and Adequacy of response:-

Longer is the delay in response, greater the injury to the account and the asset. Time is a crucial

element in any restructuring or rehabilitation activity. The response decided on the basis of

techno-economic study and promoter’s commitment, has to be adequate in terms of extend of

additional funding and relaxations etc. under the restructuring exercise. The package of

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

Focus on Cash Flows:-Focus on Cash Flows:-

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

fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh

credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow

rather than only on the basis of Funds Flow.

Management Effectiveness:-Management Effectiveness:-

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

NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse

business conditions is a very important aspect that affects a borrowing unit’s fortunes. A bank

may commit additional finance to an aling unit only after basic viability of the enterprise also in

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

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

consultant appointed as early as possible to examine this aspect. A proper techno- economic

viability study must thus become the basis on which any future action can be considered.

Multiple Financing:-Multiple Financing:-

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

unified approach by all the lending banks/ FIs as also sharing of all relevant information on the

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borrower would go a long way toward overall success of rehabilitation exercise, given the

probability of success/failure.

B. In some default cases, where the unit is still working, the bank should make sure that it

captures the cash flows (there is a tendency on part of the borrowers to switch bankers once

they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are

used for working capital purposes. Toward this end, there should be regular flow of information

among consortium members. A bank, which is not part of the consortium, may not be allowed to

offer credit facilities to such defaulting clients. Current account facilities may also be denied at

non-consortium banks to such clients and violation may attract penal action. The Credit

Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information

exchange on defaulting borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one set of

lenders may be willing to wait for a longer time to recover its dues, another lender may have a

much shorter timeframe in mind. So it is possible that the letter categories of lenders may be

willing to exit, even a t a cost – by a discounted settlement of the exposure. Therefore, any plan

for restructuring/rehabilitation may take this aspect into account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide

a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above

with the banks and FIs on a voluntary basis and outside the legal framework. Under this system,

banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs)

and viable sub-standard accounts with consortium/multiple banking arrangements.

TOOLS FOR RECOVERING NPA

For recovery of NPA there are different tools are available. The important purpose of these tools

is to recover the loan amount from borrower. These tools can be use according to Loan amount.

Following are the different recovery tools.

• LOK ADALATS

• DEBT RECOVERY TRIBUNALS (DRT)

• SARFAESI ACT, 2002

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• ASSET RECOVERY CONSTRUCTION INDUSTRY LIMITED(ARCIL)

• CORPORATE DEBT RESTRUCTURING (CDR)

• ASSET MANAGEMENT COMPANY (AMC)

Lok Adalats :

Lok Adalats is a mechanism to settle matters relating to recovery of dues, out of

court. These are convened by Debt Recovery Tribunals / Debt Recovery Appellate

Tribunals. Lok Adalats have no judicial powers. It is a mutual forum for the bank and the

borrower to meet and arrive at a mutual settlement. Once the settlement is signed by both

the parties, the same is placed before the court. The court would then pass a suitable

decrees / orders as per the terms of settlement. Such decrees cannot be challenged in the

next higher courts. At present, accounts in ‘doubtful’ and ‘loss’ category with outstanding

above Rs. 5.00 lacs can be referred to this forum. Lok Adalats Proved to be quite

effective for speedy justice and recovery of small loans.

DEBT RECOVERY TRIBUNALS (DRT)

To recover their bad Debt quickly and efficiently.

33 Debt Recovery Tribunal and 5 Debt Recovery Appellate Tribunal

It is the special court established by central government for the purpose of bank or any

financial institutions recovery.

The judges of this court are the retired judges of high court.

In this court only the recovery cases of Rs.10 lakhs and above can be filed.

SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002 empowers Banks / Financial Institutions to recover their non-

performing assets without the intervention of the Court.

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The Act provides three alternative methods for recovery of non-performing assets,

namely: -

Securitisation

Asset Reconstruction 

Enforcement of Security without the intervention of the Court.

NPA loans with outstanding above Rs. 1.00 lac.

NPA loan accounts where the amount is less than 20% of the principal and interest are

not eligible to be dealt with under this Act

This Act empowers the Bank:

To issue demand notice to the defaulting borrower and guarantor, calling upon them to

discharge their dues in full within 60 days from the date of the notice. 

 

To give notice to any person who has acquired any of the secured assets from the

borrower to surrender the same to the Bank. 

To ask any debtor of the borrower to pay any sum due or becoming due to the borrower. 

 

Any Security Interest created over Agricultural Land cannot be proceeded with.

ARCIL

A company which is set up with the objective of taking over distressed assets (NPA)

from banks or financial institutions and to reconstruct or re-pack these assets to make

those assets saleable.

To buy out troubled loans from banks and make special efforts at recovering value from

the assets, if necessary by special legislation, with special powers for recovery.

Restructuring of weak banks to divest the bad loan portfolio.

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India’s first ARC with an initial equity of Rs.10 crore with State Bank of India, IDBI and

SBI to pick up 24.5% stake each(and remaining to be acquired by HDFC and UTI Bank).

Incorporated as a public limited company on February 11, 2002

OBJECTIVES

Unlocking capital for the banking system and the economy

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

platform for Lenders

To evolve and create significant capacity in the system for quicker resolution of NPAs by

deploying the assets optimally

CORPORATE DEBT RESTRUCTURING (CDR)

For the revival of the corporate as well as for the safety of the money lent by the banks

and FI.

Based on the experience in other countries like the U.K., Thailand,Korea, etc.

Objective was to ensure timely and transparent mechanism for restructuring of the

corporate debts

CDR mechanism will be a voluntary system based on debtor creditor agreement and

inter-creditor agreement.

CDR mechanism will cover only multiple banking accounts / syndication / consortium

accounts .

An outstanding exposure of Rs.20 crore and above by banks and institutions.

RECOMMENDATIONS:

29

Though 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. Public sector

banks are majorly facing the problems of NPAs as compared to Private sector banks. Some of

the recommendation on the basis of figures and findings;

1. Each bank should have its own independent credit rating department which should

evaluate the financial capacity of the borrower before than credit facility.

2. The credit rating department 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 should analyze 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 analyze 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.

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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 ongoing

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.

Conclusion:

31

The problem statement on which is focused is “NPA – with special reference to 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 problem is that the Indian Banks are facing 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. There are many reasons for the rising of NPA like

willful default, Natural calamities, Industrial sickness, Lack of demand and etc. On the other

hand RBI has taken the many steps to reduce the NPA like KYC, Credit rating system, Debt

recovery tribunals etc. Even the NPA is rising in Indian Banking Sector. 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 10 years

data according to above data, we may come to know that the NPAs have increased very

drastically in Public sector banks. NPAs of Public sector banks are huge as compared to Private

Sector banks because of the huge advances provided by the Public sector banks and RBI being

more lenient towards the defaulters. The trend on the other hand has shown decrease in case of

Public sector banks over the period of last eight years but there has been a huge increase on

NPAs in last two years.

The banks must find out the measures to reduce the evolving problem of the NPAs especially in

case of Public sector banks. If the concept of NPAs is taken very lightly it would be dangerous

for the Indian banking sector. The reduction of the NPAs would help the banks to boost up their

profits, smooth recycling of funds in the nation. This would help the nation to develop more

banking branches and developing the economy by providing the better financial services to the

nation.

References

32

Ahmed J.U “Asset Quality & Non-Performing Assets of Commercial Banks” MD

Publications PVT, December 2008

Arpita “ Are non performing assets glooming from Indian prospective, Business Line

14th Feb 2009

Chakrabarti , Rajesh “Banking in India - Reforms and Reorganization” Indian School of

Business,17th jan 2005

Das, Rituparna “Managing the Risk of Non Performing Assets in The Small Scale

Industries in India” NLU Working Paper, June 2002

Dey PK, “Private Banks rein in NPAs, PSBs continue to bleed.”Financial Express,

Money & Funds – Story, 12th Aug 2010

Gopalakrishnan T.V “Banks need to discipline borrowers to contain NPAs” business line,

7th June 2010

“Indian Institute of Finance Business School” Finance India, Sep 2005

Joshi, Amitabh “Analysis of Non-Performing Assets of IFCI Ltd” Prestige Institute of

Management Dewas, 2003

K Mallick, Soumitra “Dynamics of emerging India's banking sector assets: A simple

model”. Journal of Asset Management (2010) 11, 62–70

Karunakar M, Vasuki K, Saravanan S “Are non - Performing Assets Gloomy or Greedy

from Indian Perspective?” Chennai, 4th Dec 2008

Kundu Subhashis ”A report on non performing assets- challenge to the public sector

banks”

Kumar. Santosh (May 02, 2009 “NPAs of pvt banks rise, public sector banks witness

decline” Mudra, 2nd May 2009

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study channel, 26th may 2010

“NPAs of Pvt Banks rise, public sector banks witness decline.”Siffy finance, 2nd may

2009

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