14245136 non performing assets of banks (1)
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A PROJECT
REPORT ON
COMPARATIVE ANA LYSIS
ON NON PERF ORMING
ASSETS
OF PRIVATE AND PUBLIC SECTOR
BANKS
SUBMI TTED IN PARTIAL FULFILLMENT OF
REQUIRMENT OF PGPROGRAME
Inst itute of business management and
research
Ahm adaba d
SUBMITTED BY:
JIGARJ. SONI ( 5 )
2009
Session: 20 07-
[Comparative analysis on NPA of Private & Public sector Ban ks]
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A PROJECT
REPORT ON
COMPARATIVE ANA LYSIS
ON NON PERF ORMING
ASSETSOF PRIVATE AND PUBLIC SECTOR
BANKS
SUBMI TTED IN PARTIAL FULFILLMENT OF
REQUIRMENT OF PGPROGRAME
Inst itute of business management and
research
Ahm adaba d
SUBMITTED BY:
JIGARJ. SONI ( 5 )
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2009
Session: 20 07-
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ANNEXUREA(COVERPAGE)
IBMR- INSTITUTE OF BUSINESS MANAGEMNT &
RESEARCH
Code: -29 11
Project title:
COMPARATIVE ANALYSIS ON
NON PERFORMING ASSETS
OF PRIVATE AND PUBLIC SECTOR BANKS
B y:
Jigar J. Soni
Nirav N. Gusai
Aproject report submi tted in par tial fulfillment of the
requirement forthe degree of MASTER OF BUSINESS
ADMINISTRATION of SIKKIM MANIPAL UNIVERSITY,
INDIA.
Sikkim Manipal university of Health, Medical and tech nological
Sciences
Distance education wing
Syn dica te house
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Manipa l-576 104
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ANNEX UREB(STUDENT DECLARATION)
We here by decla re that the project report entitled
COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF
PRIVATE AND PUBLIC SECTOR BANKS submitted in partial
fulfillment of the requ irements for the deg ree of masters of
busine ss Admi nistration to Sikkim -Manipal University, India, are
our original work and not submitted for the award of any other
degree,
diploma, fellowship,or any other similar title orprizes.
Reg.No: Na me
520781709 JIGAR J. SONI
Date:
Place:
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A N N E XURE C (EXAMINERS
CERTIFICATE)
The project report by Jigar Soni & Nirav Gusai on
COMPARATIVE ANALYSIS ON NON PERFORMING
ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS
is approved and is acceptable inquality and form.
Inte rnal examiner Ext ernal
examin er
Name:- Name:-
Qualification: - Qua lification: -
Designation: - Desi gnatio n:-
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ANNUXERE D (UNIVERS ITY STUDY CENTR E
CERTIFICATE)
This is to certi fy that the project report entitled COMPARATIVE
ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND
PUBLIC SECTORS BANKS Sub mitted in partial fulfillment of the
requirement for the deg ree of MASTER OF BUSINESS
ADMINISTRATION of SIKKIM MANIPAL UNIVERSITY of Health,
Medical and Techno logical science.
Jigar Soni and Nirav Gusai has worked under mysupervision and that no part of this report has been submitted for
the award of any other degree, Dip loma , fellowship or other
similar titles or prizes and that the work has been pub lished in
any journal or Magazine.
Na me Reg. no
Jigar Soni 520781709
Cert ified
(Guides Name and
Qual ification)
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AACKNOWLEDCKNOWLED GGEMENTEMENT
With a deep sense of gratitude I express we thanks to all those who havebeen instrumental in the development of the project report.
I am also grateful to Institute of Business Management And Research,
Ahmedabad who gave me a valuable opportunity of involving me in real
live business project. I am thankful to all the professors whose positive
attitude, guidance and faith in my ability spurred me to perform well.
I am also indebted to all lecturers, friends and associates for their valuable
advice, stimulated suggestions and overwhelming support without which
the project would not have been a success.
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INTINTRROODDUCUCTTIONION
TheThe aaccuccummuullationation ofofhhugeuge nnon-perforon-performminging assetsassets inin banksbanks hashasassassuummeedd ggreatreat iimportanmportancce.e. TheThe depthdepth ofof thethe pproblemroblem ofof bbaadd ddebtsebts waswas
firstfirst realizedrealized oonnllyy iinn eeararllyy 11990s.990s. TThhee mmaaggnnitudeitude ofof NNPPAsAs inin banksbanks aandnd
financialfinancial institutionsinstitutions isis ooverRs.1,50,0verRs.1,50,00000 ccrrores.ores.
WWhihilele grossgross NNPPAA reflectsreflects thethe qqualiualittyy ofof thethe llooansans mamaddee bbyy
banks,banks, nnetet NNPPAA showsshows thethe actuactuaall buburrdenden ofofbbanks.anks. NNooww itit isis iincreasingncreasingllyy
eevviidentdent thatthat thethe mamajjororddefaultersefaulters aarree thethe bbigig bborrorroowerswers ccoommiingng fromfrom thethe
non-prionon-priorriittyy ssectoectorr.. TThhee bbaanksnks andand financialfinancial iinstitutionsnstitutions havehave toto taketake thethe
iinnitiatitiatiiveve toto rreduceeduce NNPPAsAs inin aa ttiimeme bbooundund strategicstrategic aappproach.proach.
PPuublicblic ssectorectorbanksbanks figurefigure prproommiinentnentllyy iinn thethe ddebateebate nnotot oonnllyy
becausebecause ththeeyy ddoommiinnateate thethe bbankinganking iindustries,ndustries, bbutut alalssoo ssinceince ththeeyy havehave
mmuuchch lalarrgergerNNPPAsAs ccoommparedpared wwiithth thethe pprivrivaatete sectorsectorbanks.banks. ThisThis raisesraises aa
concernconcern inin thethe iinndustdustrryy aanndd acacaadedemmiaia bbecauseecause itit isis generalgeneralllyy feltfelt thatthat
NNPPAsAs reducereduce thethe pprrofitabiliofitabilittyy ofof aa banks,banks, wweakeneaken itsits ffiinancialnancial hheealthalth aandnd
erodeerode itsits ssoollvenvenccyy..
ForForthethe recoverecoverryy ofofNNPPAsAs aa brobroaadd frfraameworkmework hashas evoevollvedved forfor
thethe mmaanagenagemmentent ofof NNPPAsAs uunnderder wwhichhich sseeververaall ooptionsptions areare pprroovidvideedd forfor
debtdebt recoverecoverryy aandnd restructuring.restructuring. BanksBanks andand FIsFIs hhaaveve thethe frfreeedomedom toto
dedessignign aandnd iimmpplleemmeentnt tthheireir ownown ppoliciesolicies forfor rereccooveverryy aandnd wwrite-orite-offff
inin
ccorporatingorporating
ccoo
mm
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oo
mimi
ssee
aa
ndnd
negotiatednegotiated
settlesettle
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ents.ents.
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RRESEARCHESEARCH METMETHHODOLOGYODOLOGY
Type of Research
The resea rch met hodo log yadopt ed for carrying out the
study we re
In this project Descriptive research methodologies were use.
Atthefirst stage theoretical study is attempted.
Atthesecond stage Histori cal study is attempted.
AttheThi rd stage Com parative study of NPA is und er taken.
ScopeScope ofoftthhee StuStuddyy
Concept of Non Performing Asset
Guidelines
Impact of NPAs
Reasons for NPAs
Preventive Measures
Tools to manage NPAs
Sampling plan
To prepare this Project we took five banks from public sector as well
as five banks from private sector.
OBJECTIVES OF THE STUDYThe basic idea behi nd undertaking the Grand Project on NPA was
to:
To evaluate NPAs (Gross and Net) in different banks.
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To study the past trends of NPA
To calculate the weighted of NPA in risk management in Banking
To analyze financial performance of banks at different level of NPA
To evaluate profitability positions of banks
To evaluate NPA level in different economic situation.
To Know the Concept of Non Performing Asset
To Know the Impact of NPAs
To Know the Reasons for NPAs
To learn Preventive Measures
Source of data collection
The data collected for the study was secondary data in Nature.
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(((((( CCOONNTTEENNTSTS ))))))
CHAPTERCHAPTER
NNOO..
SUSUBBJJEECTCT CCOOVEREDVERED PPAAGEGE
NNOO..
11 IntroductionIntroduction toto NNPPAAss22 RResearchesearch MMeeththoodolodologgyy
ScScoopepe ofofRResearchesearch
TTyypepe ofofRResearchesearch
SSoourcesurces ofofDDataata CCoolllectionlection
ObObjjectectiiveve ofofStuStuddyy
DDataata CCoolllectionlection33 IntroductionIntroduction toto TTooppicic
DDefinitionefinition
HHistoryistoryofofInInddianian BankingBanking
NNonon PerfoPerforrmiminnggAssetsAssets
FactorFactorforforrriseise inin NNPPAsAs
PrProoblemblem dduuee toto NNPPAsAs
TTypesypes ofofNNPPAsAs
IncomeIncome
RR
ecognitionecognition
RRe ortine ortin ofofNNPPAsAs44 PPrroovviissioningioning NoNorrmsms
GeGenneraleral
FlFlooatingating provisionsprovisions
LLeasedeased AssetsAssets
GuGuiidelinedeline underundersspecialpecial circumstancescircumstances55 Impact,Impact, RReeasonsasons andand SSyymptomsmptoms ofofNNPPAAss
InterInternnalal && ExterExternnalal FactorFactor
EaEarrllyy SSymptomsymptoms
66 PPrreevveentntiivvee MeasuMeasurrementement
EaEarrllyy RRececoognitiongnition ofofProProbblemlem
IdIdeentintiffyyiingng BorrowersBorrowers wwithith ggeenuinenuine IntInteentnt
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TTiimmeellinessiness
FocusFocus oonn CCashash flflooww
ManagManageemmeentnt EEfffectivenessfectiveness
MultipMultipllee FFiinancingnancing77 TToooolsls forforRRececoovveerryy
WWiillllfulful defaultdefault
InInaabilibilittyy toto PPaayy
SSppecialecial CCasesases
RRoleole ofofAARCILRCIL88 AAnnaallyysissis
DDepositeposit--InvestmInvestmeentnt--AdvancesAdvances
GrossGross NNPPAsAs andand NetNet NNPPAsAs
PPrrioriiorittyy aandnd Non-PrioriNon-Priorittyy SectorSector
99 Finding,Finding, SuggestionsSuggestions andand ConclusionsConclusions
1100 BibliograpBibliographhyy
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IInntroductiontroduction toto thethe topictopic
The three letters NPA 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 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 lookafter the factor responsible for it and managing those factors.
DefDefiinitions:nitions:
An asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank.
A non-performing asset (NPA) was defined as a credit facility in respect
of which the interest and/ or instalment of principal has remained past
due for a specified period of time.
With a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt the 90 days
ov e r d ue norm for identification of NPAs, from the year ending March
31, 2004. Accordingly, with effect from March 31, 2004, a non-
performing asset (NPA) shall be a loan or an advance where;
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Interest and/ or instalment of principal remain overdue for a
period of more than 90 days in respect of a term loan,
The account remains out of order for a period of more than 90
days, in respect of an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in
the case of bills purchased and discounted,
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.
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HISTORY OF INDIAN BANKING
A bank is a financial institution that provides banking and other financial
services. By the term bank is generally understood an institution that
holds a Banking Licenses. Banking licenses are granted by financial
supervision authorities and provide rights to conduct the most fundamental
banking services such as accepting deposits and making loans. There are
also financial institutions that provide certain banking services without
meeting the legal definition of a bank, a so-called Non-bank. Banks are a
subset of the financial services industry.
The word bank is derived from the Italian banca, which is derived from
German and means bench. The terms bankrupt and "broke" are similarly
derived from banca rotta, which refers to an out of business bank, having
its bench physically broken. Moneylenders in Northern Italy originally did
business in open areas, or big open rooms, with each lender working from
his own bench or table.
Typically, a bank generates profits from transaction fees on
financial services or the interest spread on resources it holds in trust
for clients while paying them interest on the asset. Development of
banking industry in India followed below stated steps.
Banking in India has its origin as early as the Vedic period. It isbelieved that the transition from money lending to banking must
have occurred even before Manu, the great Hindu Jurist, who has
devoted a section of his work to deposits and advances and laid
down rules relating to rates of interest.
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Banking in India has an early origin where the indigenous bankers
played a very important role in lending money and financing foreign
trade and commerce. During the days of the East India
Company, was the turn of the agency houses to carry on
the banking business. The General Bank of India was first Joint
Stock Bank to be established in the year 1786. The others which
followed were the Bank Hindustan and the Bengal Bank.
In the first half of the 19th century the East India Company
established three banks; the Bank of Bengal in 1809, the Bank of
Bombay in 1840 and the Bank of Madras in 1843. These three
banks also known as Presidency banks were amalgamated in 1920
and a new bank, the Imperial Bank of India was established in
1921. With the passing of the State Bank of India Act in 1955 the
undertaking of the Imperial Bank of India was taken by the newly
constituted State Bank of India.
The Reserve Bank of India which is the Central Bank was created
in 1935 by passing Reserve Bank of India Act, 1934 which was
followed up with the Banking Regulations in 1949. These acts
bestowed Reserve Bank of India (RBI) with wide ranging powers for
licensing, supervision and control of banks. Considering the
proliferation of weak banks, RBI compulsorily merged many of themwith stronger banks in 1969.
The three decades after nationalization saw a phenomenal
expansion in the geographical coverage and financial spread of the
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banking system in the country. As certain rigidities and
weaknesses were found to have developed in the system,
during the late eighties the Government of India felt that
these had to be addressed to enable the financial system to play
its role in ushering in a more efficient and competitive economy.
Accordingly, a high- level committee was set up on 14 August
1991 to examine all aspects relating to the structure,
organization, functions and procedures of the financial system.
Based on the recommendations of the Committee
(Chairman: Shri M. Narasimham), a
comprehensive reform of the banking system was introduced in
1992-93. The objective of the reform measures was to ensure that
the balance sheets of banks reflected their actual financial health.
One of the important measures related to income recognition, asset
classification and provisioning by banks, on the basis of objective
criteria was laid down by the Reserve Bank. The introduction of
capital adequacy norms in line with international standards has
been another important measure of the reforms process.
1. Comprises balance of expired loans, compensation and other
bonds such as National Rural Development Bonds and Capital
Investment Bonds. Annuity certificates are excluded.
2. These represent mainly non- negotiable non- interest bearing
securities issued to International Financial Institutions like
International Monetary Fund, International Bank forReconstruction and Development and Asian Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident
Funds, Special Deposits of Non- Government
In the post-nationalization era, no new private sector banks were
allowed to be set up. However, in 1993, in recognition of the need
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to introduce greater competition which could lead to higher
productivity and efficiency of the banking system, new private
sector banks were allowed to be set up in the Indian banking
system. These new banks had to satisfy among others, the
following minimum requirements:
(i) It should be registered as a public limited company;
(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located
in a centre which does not have the headquarters of any
other bank; and
(v) The bank will be subject to prudential norms in respect of
banking operations, accounting and other policies as laid
down by the RBI. It will have to achieve capital adequacy
of eight per cent from the very beginning.
A high level Committee, under the Chairmanship of Shri M.
Narasimham, was constituted by the Government of India inDecember 1997 to review the record of implementation of financial
system reforms recommended by the CFS in 1991 and chart the
reforms necessary in the years ahead to make the banking system
stronger and better equipped to compete effectively in international
economic environment. The Committee has submitted its report to
the Government in April 1998. Some of the recommendations of the
Committee, on prudential accounting norms, particularly in the
areas of Capital Adequacy Ratio, Classification of Government
guaranteed advances, provisioning requirements on standard
advances and more disclosures in the Balance Sheets of banks
have been accepted and implemented. The other recommendations are under consideration.
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The banking industry in India is in a midst of transformation, thanks
to the economic liberalization of the country, which has changed
business environment in the country. During the pre-liberalizationperiod, the industry was merely focusing on deposit mobilization
and branch expansion. But with liberalization, it found many of its
advances under the non-performing assets (NPA) list. More
importantly, the sector has become very competitive with the entry
of many foreign and private sector banks. The face of banking is
changing rapidly. There is no doubt that banking sector reforms
have improved the profitability, productivity and efficiency of
banks, but in the days ahead banks will have to prepare
themselves to face new challenges.
Indian Banking: Key Developments
1969 Government acquires ownership in major banks
Almost all banking operations in manual mode
Some banks had Unit record Machines of IBM for IBR &
Pay roll1970- 1980 Unprecedented expansion in geographical coverage, staff
business & transaction volumes and directed lending to
agriculture, SSI & SB sector
Manual systems struggle to handle exponential rise in
transaction volumes --
Outsourcing of data processing to service bureau begins Back office systems only in Multinational (MNC) banks
offices
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1981- 1990 Regulator (read RBI) led IT introduction in Banks
Product level automation on stand alone PCs at branches
(ALPMs)
In-house EDP infrastructure with Unix boxes, batch
processing in Cobol for MIS.
Mainframes in corporate office
1991-1995 Expansion slows down
Banking sector reforms resulting in progressive de-
regulation of banking, introduction of prudential banking
norms entry of new private sector banks
Total Branch Automation (TBA) in Govt. owned and old
private banks begins
New private banks are set up with CBS/TBA form the start
1996-2000 New delivery channels like ATM, Phone banking and
Internet banking and convenience of any branch banking
and auto sweep products introduced by new private and
MNC banks
Retail banking in focus, proliferation of credit cards
Communication infrastructure improves and becomes
cheap. IDRBT sets up VSAT network for Banks
Govt. owned banks feel the heat and attempt to respond
using intermediary technology, TBA implementation surge
ahead under fiat from Central Vigilance
Commission (CVC), Y2K threat consumes last two years
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2000-2003 Alternate delivery channels find wide consumer acceptance
IT Bill passed lending legal validity to electronic transactions
Govt. owned banks and old private banks start
implementing CBSs, but initial attempts face problems
Banks enter insurance business launch debit cards
(Source: M.Y.KHAN, INDIAN FINANCIAL SYSYEM,3rd
edition
Publication by TATA McGraw hill)
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NON PERFORMING ASSETS (NPA)
WHAT IS A NPA (NON PERFORMINGASSETS) ?
Action for enforcement of security interest can be initiated only if thesecured asset is classified as Nonperforming asset.
Non performing asset means an asset or account of borrower ,which hasbeen classified by bank or financial institution as sub standard , doubtfulor loss asset, in accordance with the direction or guidelines relating toassets classification issued by RBI .
An amount due under any credit facility is treated as past due when it
is not been paid within 30 days from the due date. Due to theimprovement in the payment and settlement system, recovery climate, upgradation of technology in the banking system etc, it was decided todispense with past due concept, with effect from March 31, 2001.Accordingly as from that date, a Non performing asset shell be anadvance where
i. Interest and/or installment of principal remain overdue for a period
of more than 180 days in respect of a term loan,
ii. The account remains out of order for a period of more than 180
days ,in respect of an overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 180 days in case
of bill purchased or discounted.
iv. Interest and/or principal remains overdue for two harvest season
but for a period not exceeding 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 180 days in respect of other accounts
With a view to moving towards international best practices and toensure greater transparency, it has been decided to adopt 90 daysoverdue norms for identification of NPAs ,from the year ending March31,2004,a non performing asset shell be a loan or an advance where;
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i. Interest and/or installment of principal remain overdue for a
period of more than 90 days in respect of a term loan,
ii. The account remains out of order for a period of more than
90 days ,in respect of an overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 90 days
in case of bill purchased or discounted.
iv. Interest and/or principal remains overdue for two harvest
season but for a period not exceeding 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 90 days in respect of other accounts
Out of order
An account should be treated as out of order if the outstandingbalance remains continuously in excess of sanctioned limit /drawingpower. in case where the out standing balance in the principal operatingaccount is less than the sanctioned amount /drawing power, but there areno credits continuously for six months as on the date of balance sheet orcredit are not enough to cover the interest debited during the same
period ,these account should be treated as out of order.
Overdue
Any amount due to the bank under any credit facility is overdue if itis not paid on due date fixed by the bank.
FAC TORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of therising NPAs. But the problem of NPAs is more in public sector bankswhen compared to private sector banks and foreign banks. The NPAs inPSB are growing due to external as well as internal factors.
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EXTERNAL FACTORS :-----------------------------------
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 payback loans but areintentionally withdrawing it. These groups of people should beidentified and proper measures should be taken in order to get backthe 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.
Industrial sickness
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Improper project handling , ineffective management , lack of
adequate resources , lack of advance technology , day to day
changing govt. Policies give birth to industrial sickness. Hence the
banks that finance those industries ultimately end up with a low
recovery of their loans reducing their profit and liquidity.
Lack of demand
Entrepreneurs in India could not foresee their product demand and
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.
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 :-
---------------------------------
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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
i. 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:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon:
1. Tangible assets2. Success in business
Willingness to pay depends on:1. Character2. Honest3. Reputation of borrower
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The banker should, there fore take utmost care in ensuring that theenterprise or business for which a loan is sought is a sound oneand the borrower is capable of carrying it out successfully .heshould be a person of integrity and good character.
Inappropriate technology
Due to inappropriate technology and management informationsystem, market driven decisions on real time basis can not 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.
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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.
Purpose of the loan
When bankers give loan, he should analyze the purpose ofthe 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
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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 ofrisk 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.
Like OSCB suffered loss due to the OTM Cuttack, and
Orissa hand loom industries. The biggest defaulters of OSCB are
the OTM (117.77lakhs), and the handloom sector Orissa hand loom
WCS ltd (2439.60lakhs).
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.
Re loaning process
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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
1. Owners do not receive a market return on there capital .in the worst
case, if the banks fails, owners loose 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, labour 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
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.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 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.
'Out'Out ofofOrder'Order' statustatuss::
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An account should be treated as 'ou t of orde r ' if the
outstanding balance remains continuously in excess of the sanctioned
limit/drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit/drawing
power, but there are no credits continuously for six months as on the date
of Balance Sheet or credits are not enough to cover the interest debited
during the same period, these accounts should be treated as 'out of
order'.
OOvveerdue:rdue:
Any amount due to the bank under any credit facility is
overdue if it is not paid on the due date fixed by the bank.
TTyyppeses ofofNNPPAA
AA]] GrossGross NNPPAA
B]B] NetNet NNPPAA
AA]] GrossGross NNPPAA::
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Gross NPAs are the sum total of all loan assets that are classified as
NPAs as per RBI guidelines as on Balance Sheet date. Gross
NPA reflects the quality of the loans made by banks. It consists of
all the non standard assets like as sub-standard, doubtful, and loss
assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio Gross NPAs
Gross Advances
BB]] NetNetNNPPA:A:
Net NPAs are those type of NPAs in which the bank has deducted the
provision regarding NPAs. Net NPA shows the actual burden of
banks. Since in India, bank balance sheets contain a huge amount of
NPAs and the process of recovery and write off of loans is very time
consuming, the provisions the banks have to make against the NPAs
according to the central bank guidelines, are quite significant. That is
why the difference between gross and net NPA is quite high.
It can be calculated by following_
Net NPAs Gross NPAs Provisions
Gross Advances - Provisions
INCOMEINCOME RECOGNRECOGNIITIONTION
IncomeIncome recorecoggnniitiontion PPoolliiccyy
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The policy of income recognition has to be objective and based on
the record of recovery. Internationally income from non-performing
assets (NPA) is not recognised on accrual basis but is booked as
income only when it is actually received. Therefore, the banks
should not charge and take to income account interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs,
KVPs and Life policies may be taken to income account on the due
date, provided adequate margin is available in the accounts.
Fees and commissions earned by the banks as a result of re-
negotiations or rescheduling of outstanding debts should be
recognised on an accrual basis over the period of time covered by
the re-negotiated or rescheduled extension of credit.
If Government guaranteed advances become NPA, the interest on
such advances should not be taken to income account unless the
interest has been realised.
RReevveersalrsal ofofininccome:ome:
If any advance, including bills purchased and discounted, becomes
NPA as at the close of any year, interest accrued and credited to
income account in the corresponding previous year, should be
reversed or provided for if the same is not realised. This will apply
to Government guaranteed accounts also.
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In respect of NPAs, fees, commission and similar income that have
accrued should cease to accrue in the current period and should be
reversed or provided for with respect to past periods, if uncollected.
Leased Assets
The net lease rentals (finance charge) on the leased asset accrued
and credited to income account before the asset became non-
performing, and remaining unrealised, should be reversed or provided
for in the current accounting period.
The term 'net lease rentals' would mean the amount of finance
charge taken to the credit of Profit & Loss Account and would be
worked out as gross lease rentals adjusted by amount of statutory
depreciation and lease equalisation account.
As per the 'Guidance Note on Accounting for Leases' issued
by the Council of the Institute of Chartered Accountants of India (ICAI),
a separate Lease Equalisation Account should be opened by the
banks with a corresponding debit or credit to Lease Adjustment
Account, as the case may be. Further, Lease Equalisation Account
should be transferred every year to the Profit & Loss Account and
disclosed separately as a deduction from/addition to gross value of
lease rentals shown under the head 'Gross Income'.
AApppprropriopriaationtion ofofrecrecoovveerryy inin NNPPAAss
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Interest realised on NPAs may be taken to income account
provided the credits in the accounts towards interest are not out of
fresh/ additional credit facilities sanctioned to the borrower
concerned.
In the absence of a clear agreement between the bank and the
borrower for the purpose of appropriation of recoveries in NPAs (i.e.
towards principal or interest due), banks should adopt an
accounting principle and exercise the right of appropriation of
recoveries in a u n iform and c o nsistent manner.
IntereInteresstt AAppplicatioplicationn::
There is no objection to the banks using their own discretion in debiting
interest to an NPA account taking the same to Interest Suspense Account
or maintaining only a record of such interest in proforma accounts.
ReReppororttinging ofofNNPPAsAs
Banks are required to furnish a Report on NPAs as on 31st
March each year after completion of audit. The NPAs would relate
to the banks global portfolio, including the advances at the
foreign branches. The Report should be furnished as per the
prescribed format given in the Annexure I.
While reporting NPA figures to RBI, the amount held in interest
suspense account, should be shown as a deduction from gross
NPAs as well as gross advances while arriving at the net NPAs.
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Banks which do not maintain Interest Suspense account for parking
interest due on non-performing advance accounts, may furnish the
amount of interest receivable on NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write
off, if any, should be reduced from the outstanding gross
advances and gross NPAs to eliminate any distortion in the
quantum of NPAs being reported.
REPORTING FORMAT FOR NPA GROSS AND NET
NPA Name of the Bank:
Position as on
PARTICULARS
1) Gross Advanced *
2) Gross NPA *
3) Gross NPA as %age of Gross Advanced
4) Total deduction( a+b+c+d )
( a ) Balance in interest suspense a/c **( b ) DICGC/ECGC claims received and held pending
Adjustment( c ) part payment received and kept in suspense a/c
( d ) Total provision held ***
5) Net advanced ( 1-4 )
6) Net NPA ( 2-4 )
7) Net NPA as a %age of Net Advance*excluding Technical write-off of Rs. crore.
**Banks which do not maintain an interest suspense a/c to park the
accrued interest on NPAs may furnish the amount of interest receivable on
NPAs.
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***Excluding amount of Technical write-off (Rs. crore) and provision
on standard assets. (Rs. crore).
AAssetsset ClassificaClassificattionion
--------------------------------------------------------------
CategoriesCategories ofofNNPPAsAs
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StandardStandard AAssetssetss::
Standard assets are the ones in which the bank is receiving interest as
well as the principal amount of the loan regularly from the customer. Here
it is also very important that in this case the arrears of interest and the
principal amount of loan does not exceed 90 days at the end of financial
year. If asset fails to be in category of standard asset that is amount due
more than 90 days then it is NPA and NPAs are further need to classify
in sub categories.
Banks are required to classify non-performing assetsfurther into the following three categories based on the period for which
the asset has remained non-performingand the realisabilityof the dues:
((11)) Sub-standSub-standaardrdAssetsAssets
((22)) DoubtfulDoubtfulAssetsAssets
((33)) LossLossAssetsAssets
(( 11 )) Sub-standardSub-standard AAssetssetss::----
With effect from 31 March 2005, a sub standard asset would be one,
which has remained NPA for a period less than or equal to 12 month. The
following features are exhibited by sub standard assets: the current net
worth of the borrowers / guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the
banks in full; and the asset has well-defined credit weaknesses that
jeopardise the liquidation of the debt and are characterised by the distinct
possibility that the banks will sustain some loss, if deficiencies are not
corrected.
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(( 22 )) DoDouubtfulbtful AAsssets:--sets:--
A loan classified as doubtful has all the weaknesses inherent in assets
that were classified as sub-standard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of
currently known facts, conditions and values highly questionable and
improbable.
With effect from March 31, 2005, an asset would be classified as doubtful
if it remained in the sub-standard category for 12 months.
( 3 ) LossLoss AssetAssetss:--:--
A loss asset is one which considered uncollectible and of such little value
that its continuance as a bankable asset is not warranted- although there
may be some salvage or recovery value. Also, these assets would have
been identified as loss assets by the bank or internal or external auditors
or the RBI inspection but the amount would not have been written-off
wholly.
ProvisioningProvisioning NormsNorms
------------------------------------------------------------------------------------
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GenerGeneraall
In order to narrow down the divergences and ensure adequate
provisioning by banks, it was suggested that a bank's statutory
auditors, if they so desire, could have a dialogue with RBI's
Regional Office/ inspectors who carried out the bank's inspection
during the previous year with regard to the accounts contributing to
the difference.
Pursuant to this, regional offices were advised to forward a list of
individual advances, where the variance in the provisioning
requirements between the RBI and the bank is above certain cut off
levels so that the bank and the statutory auditors take into account
the assessment of the RBI while making provisions for loan loss,
etc.
The primary responsibility for making adequate provisions for any
diminution in the value of loan assets, investment or other assets is
that of the bank managements and the statutory auditors. The
assessment made by the inspecting officer of the RBI is furnished
to the bank to assist the bank management and the statutory
auditors in taking a decision in regard to making adequate and
necessary provisions in terms of prudential guidelines.
In conformity with the prudential norms, provisions should be made
on the non-performing assets on the basis of classification of
assets into prescribed categories as detailed in paragraphs 4
supra. Taking into account the time lag between an account
becoming doubtful of recovery, its recognition as such, the
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realisation of the security and the erosion over time in the value of
security charged to the bank, the banks should make provision
against sub-standard assets, doubtful assets and loss assets as
below:
LossLoss assets:assets:
The entire asset should be written off. If the assets are permitted to
remain in the books for any reason, 100 percent of the outstanding should
be provided for.
DDooubtfulubtful assets:assets:
100 percent of the extent to which the advance is not covered by
the realisable value of the security to which the bank has a valid
recourse and the realisable value is estimated on a realistic basis.
In regard to the secured portion, provision may be made on the
following basis, at the rates ranging from 20 percent to 50 percentof the secured portion depending upon the period for which the
asset has remained doubtful:
Period for which the advance has
been considered as doubtful
Provision
requirement (%)
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Up to one year 20
One to three years 30
More than three years:
(1) Outstanding stock of NPAs as on
March 31, 2004.
(2) Advances classified as doubtful
more than three years on or after
April 1, 2004.
60% with effect from March
31,2005.
75% effect from March 31,
2006.
100% with effect from
March 31, 2007.
Additional provisioning consequent upon the change in the
definition of doubtful assets effective from March 31, 2003 has to
be made in phases as under:
As on 31.03.2003, 50 percent of the additional provisioning
requirement on the assets which became doubtful on account of new
norm of 18 months for transition from sub-standard asset to doubtful
category.
As on 31.03.2002, balance of the provisions not made during the
previous year, in addition to the provisions needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning
consequent upon the reduction in the transition period from
substandard to doubtful asset from 18 to 12 months over a four
year period commencing from the year ending March 31, 2005, with
a minimum of 20 % each year.
Note: Val uation of Securit y for pro visi oning purposes
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With a view to bringing down divergence arising out of difference in
assessment of the value of security, in cases of NPAs with balance of
Rs.
5 crore and above stock audit at annual intervals by external agencies
appointed as per the guidelines approved by the Board would be
mandatory in order to enhance the reliability on stock valuation. Valuers
appointed as per the guidelines approved by the Board of Directors should
get collaterals such as immovable properties charged in favour of the bank
valued once in three years.
Sub-standardSub-standard assets:assets:
A general provision of 10 percent on total outstanding should be made
without making any allowance for DICGC/ECGC guarantee cover and
securities available.
StandardStandard assets:assets:
From the year ending 31.03.2000, the banks should make a
general provision of a minimum of 0.40 percent on standard assets
on global loan portfolio basis.
The provisions on standard assets should not be reckoned for
arriving at net NPAs.
The provisions towards Standard Assets need not be netted from
gross advances but shown separately as 'Contingent Provisions
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against Standard Assets' under 'Other Liabilities and Provisions -
Others' in Schedule 5 of the balance sheet.
FloatingFloating prproovviisions:sions:
Some of the banks make a 'floating provision' over
and above the specific provisions made in respect of accounts identified
as NPAs. The floating provisions, wherever available, could be set-off
against provisions required to be made as per above stated provisioning
guidelines. Considering that higher loan loss provisioning adds to the
overall financial strength of the banks and the stability of the financial
sector, banks are urged to voluntarily set apart provisions much above the
minimum prudential levels as a desirable practice.
PrProovviissionsions oonn LeasLeaseedd AAsssets:sets:
LeasesLeases areare peculiarpeculiar trtraansactionsnsactions wherewhere thethe asasssetsets aarere nnotot rrecordedecorded inin thethe
booksbooks ofofthethe uussererofofsuchsuch aassetsssets asas Assets,Assets, wwhereashereas ththeeyy aarere rereccordedorded inin
thethe booksbooks ofofthethe ownerownereveneven thouthougghh thethe pphhyyssicalical existenceexistence ofoftthhee asasssetet isis
wwithith thethe useruser((llessee).essee). (A(ASS1919 ICAI)ICAI)
Sub-standard assets : -
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10 percent of the 'net book value'.
As per the 'Guidance Note on Accounting for Leases' issued by the
ICAI, 'Gross book value' of a fixed asset is its historical cost or other
amount substituted for historical cost in the books of account or financial
statements. Statutory depreciation should be shown separately in the
Profit & Loss Account. Accumulated depreciation should be deducted from
the Gross Book Value of the leased asset in the balance sheet of the
lesser to arrive at the 'net book value'.
Also, balance standing in 'Lease Adjustment Account' should be
adjusted in the 'net book value' of the leased assets. The amount of
adjustment in respect of each class of fixed assets may be shown either in
the main balance sheet or in the Fixed Assets Schedule as a separate
column in the section related to leased assets.
Doubtful assets :-
100 percent of the extent to which the finance is not secured by the
realisable value of the leased asset. Realisable value to be estimated on a
realistic basis. In addition to the above provision, the following provision
on the net book value of the secured portion should be made,
depending upon the period for which asset has been doubtful:
Period %age of provision
Up to one year 20
One to three years 30
More than three years 50
Loss assets :-
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The entire asset should be written-off. If for any reason, an asset is
allowed to remain in books, 100 percent of the sum of the net investment
in the lease and the unrealised portion of finance income net of finance
charge component should be provided for. ('net book value')
GuideGuidellinesines forforProvisionsProvisions underunderSpSpeecialcial
CircumstanCircumstancceses
GGoovvernmenternment guaranteedguaranteed aaddvvancesances
With effect from 31 March 2000, in respect of advances sanctioned
against State Government guarantee, if the guarantee is invoked and
remains in default for more than two quarters (180 days at present), the
banks should make normal provisions as prescribed in paragraph 4.1.2
above.
As regards advances guaranteed by State Governments, in respect of
which guarantee stood invoked as on 31.03.2000, necessary provision
was allowed to be made, in a phased manner, during the financial years
ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year.
AdAdvvancesances grantedgranted underunder rehabrehabiilitationlitation packagespackages
approvedapproved byby BIFR/termBIFR/term llendingending institutions:institutions:
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In respect of advances under rehabilitation package approved by
BIFR/term lending institutions, the provision should continue to be made in
respect of dues to the bank on the existing credit facilities as per their
classification as sub-standard or doubtful asset.
As regards the additional facilities sanctioned as per package finalised
by BIFR and/or term lending institutions, provision on additional facilities
sanctioned need not be made for a period of one year from the date of
disbursement.
In respect of additional credit facilities granted to SSI units which are
identified as sick [as defined in RPCD circular No.PLNFS.BC.57
/06.04.01/2001-2002 dated 16 January 2002] and where rehabilitation
packages/nursing programmes have been drawn by the banks themselves
or under consortium arrangements, no provision need be made for a
period of one year.
AAddvvancesances againstagainst termterm dedeppososiits,ts, NNSSCsCs eelligibleigible forfor
surrendesurrenderr,, IVPs,IVPs, KKVVPs,Ps, andand lifelife ppoolliciesicies areare
exemptedexempted fromfrom pprroovviissioningioning requirementrequirementss..
HHoowweevveerr,, aaddvvancesances aagainstgainst ggoldold ornaments,ornaments,ggoovverernnmentment securisecurittiesies andand allall otherother kindskinds ofof
securisecurittiesies areare notnot exemptedexempted fromfrom prproovviissioningioning
requirementrequirementss..
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TTreatmentreatment ofofinterestinterest suspensesuspense account:account:
Amounts held in Interest Suspense Account should not be reckoned as
part of provisions. Amounts lying in the Interest Suspense Account should
be deducted from the relative advances and thereafter, provisioning as per
the norms, should be made on the balances after such deduction.
AdAdvvancesances coveredcovered byby EECGC/DICGCCGC/DICGC guaranteeguarantee
In the case of advances guaranteed by DICGC/ECGC, provision should
be made only for the balance in excess of the amount guaranteed by
these Corporations. Further, while arriving at the provision required to be
made for doubtful assets, realisable value of the securities should first be
deducted from the outstanding balance in respect of the amount
guaranteed by these Corporations and then provision made as illustrated
hereunder:
Examp le
Outstanding Balance Rs. 4 lakhs
DICGC Cover 50 percent
Period for which the advance has remained
Doubtful
More than 3 years
remained doubtful
Value of security held
(excludes worth of Rs.)
Rs. 1.50 lakhs
Provision required to be made
Outstanding balance Rs. 4.00 lakhs
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Less: Value of security held Rs. 1.50 lakhs
Unrealised balance Rs. 2.50 lakhs
Less: DICGC Cover
(50% of unrealisable balance)
Rs. 1.25 lakhs
Net unsecured balance Rs. 1.25 lakhs
Provision for unsecured portion of
Advance
Rs. 1.25 lakhs (@ 100 percent of
unsecured portion)
Provision for secured portion of
Advance
Rs. 0.75 lakhs (@ 50 percent of
secured portion)
Total provision required to be made Rs. 2.00 lakhs
AAddvvanceance ccoovveerreded bbyy CGTSICGTSI gguaranteeuarantee
In case the advance covered by CGTSI guarantee becomes non-
performing, no provision need be made towards the guaranteed portion.
The amount outstanding in excess of the guaranteed portion should be
provided for as per the extant guidelines on provisioning for non-
performing advances. Two illustrative examples are given below:
Examp le I
Asset classification status: Doubtful More than 3 years;
CGTSI Cover 75% of the amount outstanding
or 75% of the unsecured amount
or Rs.18.75 lakh, whichever is
the least
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Realisable value of Security Rs.1.50 lakh
Balance outstanding Rs.10.00 lakh
L ess Realisable value of
security
Rs. 1.50 lakh
Unsecured amount Rs. 8.50 lakh
L ess CGTSI cover (75%) Rs. 6 .38 lakh
Net unsecured and
uncovered portion:
Rs. 2.12 lakh
Pr o v isio n R equired
Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)
Unsecured & uncovered
portion
Rs.2.12 lakh Rs. 2 .12 lakh ( 100%)
Total provision required Rs. 2.87 lakh
Examp le II
Asset classification status Doubtful More than 3 years;
CGTSI Cover 75% of the amount outstanding
or75% of the unsecured amount
or Rs.18.75 lakh, whichever isthe least
Realisable value of Security Rs.10.00 lakh
Balance outstanding Rs.40.00 lakh
L ess Realisable value of Rs. 10.00 lakh
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security
Unsecured amount Rs. 30.00 lakh
L ess CGTSI cover (75%) Rs. 1 8.75 lakh
Net unsecured and
uncovered portion:
Rs. 11.25 lakh
Pr o v isio n R equired
Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%)
Unsecured & uncovered
portion
Rs.11.25 lakh Rs.1 1.25 lakh (100%)
Total provision required Rs. 16.25 lakh
TTakeake--ooutut financefinance
The lending institution should make provisions against a 'take-out finance'
turning into NPA pending its take-over by the taking-over institution. As
and when the asset is taken-over by the taking-over institution, the
corresponding provisions could be reversed.
ReseReserrvvee forfor ExchangeExchange RateRate FluctuationsFluctuations AAccccountount
(R(REERRFFA)A)
When exchange rate movements of Indian rupee turn adverse, the
outstanding amount of foreign currency denominated a loan (where actual
disbursement was made in Indian Rupee) which becomes overdue goes
up correspondingly, with its attendant implications of provisioning
requirements. Such assets should not normally be revalued. In case such
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assets need to be revalued as per requirement of accounting practices or
for any other requirement, the following procedure may be adopted:
The loss on revaluation of assets has to be booked in the bank's Profit
& Loss Account.
Besides the provisioning requirement as per Asset Classification, banks
should treat the full amount of the Revaluation Gain relating to the
corresponding assets, if any, on account of Foreign Exchange Fluctuation
as provision against the particular assets.
ImpactImpact ofofNNPPAA
PPrrooffitabiitabilliittyy::--
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
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much of profit invested in some return earning project/asset. So
NPA doesnt 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.
LiLiqquiduiditityy:-:-
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. Routine
payments and dues.
IInnvvoollvveementment ofofmanagement:-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 days banks have specialemployees to deal and handle NPAs, which is additional cost to the bank.
CrCreeditdit loss:-loss:-
Bank is facing problem of NPA then it adversely affect the value of bank
in terms of market credit. It will lose its goodwill and brand image and
credit which have negative impact to the people who are putting their
money in the banks .
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RREASONSEASONS FORFOR NNPPAA::
Reasons can be divided in to two broad categories:-
A] Internal Factor
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B] External Factor
[[AA]] IInternalnternalFactors:-Factors:-
Internal Factors are those, which are internal to the bank and are
controllable by banks.
Poor lending decision:
Non-Compliance to lending norms:
Lack of post credit supervision:
Failure to appreciate good payers:
Excessive overdraft lending:
Non Transparent accounting policy:
[[BB]] ExternalExternalFFaacctors:-tors:-
External factors are those, which are external to banks they are not
controllable by banks.
Socio political pressure:
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Chang in industry environment:
Endangers macroeconomic disturbances:
Natural calamities
Industrial sickness
Diversion of funds and willful defaults
Time/ cost overrun in project implementation
Labour problems of borrowed firm
Business failure
Inefficient management
Obsolete technology
Product obsolete
EarEarllyy ssyymptomsmptoms bbyy wwhhichich oonnee cancanrecorecoggnizenize aa performingperforming assetasset tturningurning inin
toto Non-performingNon-performing asasssetet
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FourFourcategoriescategories ofofearearllyy ssyymptoms:-mptoms:-
------------------------------------------------------------------------------------------------------
(( 11 )) Financial: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.
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.
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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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PrPreeventiveventive MeasurementMeasurement ForForNNPPAA
EarlyEarlyReReccognitionognition ooffthethe Problem:-Problem:-
Invariably, by the time banks start their efforts to get involved in a
revival process, its too late to retrieve the situation- both in terms of
rehabilitation of the project and recovery of banks 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 promoters 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 legalmeans before the security position becomes worse.
IIdentifyidentifyinnggBorrowersBorrowers wiwitthh GenuineGenuine IInntteent:-nt:-
Identifyi
ng 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.
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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.
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.
TTimelineimelinessss andandAAdequacydequacyooffreressponse:-ponse:-
Longer the delay in response, grater the injury to the account and the
asset. Time is a crucial element in any restructuring or rehabilitation
activity. The response decided on the basis of techno-economic study and
promoters 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.
FFooccusus oonn CashCash FFlows:-lows:-
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
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analyzing funds flow in conjunction with the Cash Flow rather than only on
the basis of Funds Flow.
ManagementManagementEEfffefecctiveness:-tiveness:-
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 units 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 andconfirmed. 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.
MulMulttipleiple FFiinnancing:-ancing:-
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 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
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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 beeninstitutionalized 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.
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TToolsools forforrecrecooveverryy ofofNNPPAsAs
CCrreditedit DefaultDefault
IInnaabbiilitylity toto PPayay WWiillfulllful ddeefaufau
UnviUnviaabbllee VViiaabbllee
CompromiseCompromise
RehabilRehabiliitatitatioo
nn
LokLok AAdalatdalat
DDeebtbt RecoveryRecovery
TTribunalsribunals Securitization
Act
CoConnssoorrtiumtium
FiFinnanceance
SoleSole BaBannkkerer AsAsssetet
RReeccoonnsstructitructioo
CCorporateorporate DebtDebt RReesstructtructuurringing
FFrreshesh IssueIssue ofof
TermTerm LoanLoanCoConnversiversioonn
iintonto WCWCTTLL
FreshFresh WWCC LimitLimit RReepphashaseemmeentnt ofof
RReeppaayymmeentnt PPeerriodiod
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Once NPA occurred, one must come out of it or it should be managed in
most efficient manner. Legal ways and means are there to over come
and manage NPAs. We will look into each one of it.
WWillillffululDefaultDefault:-:-
A] Lok Adalat and Debt Recovery Tribunal
B] Securitization Act
C] Asset Reconstruction
LokLokAdalaAdalatt::
Lok Adalat institutions help banks to settle disputes involving
account in doubtful and loss category, with outstanding balance of Rs.
5 lakh for compromise settlement under Lok Adalat. Debt recovery
tribunals have been empowered to organize Lok Adalat to decide on
cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to
be quite effective for speedy justice and recovery of small loans. The
progress through this channel is expected to pick up in the coming years.
DeDebbttRecoveryRecoveryTTrribunalibunalss(D(DRRT):T):
The recovery of debts due to
banks and financial institution passed in March 2000 has helped in
strengthening the function of DRTs. Provision for placement of more than
one recovery officer, power to attach defendants property/assets before
judgment, penal provision for disobedience of tribunals order or for breach
of any terms of order and appointment of receiver with power of
realization, management, protection and preservation of property are
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expected to provide necessary teeth to the DRTs and speed up
the recovery of NPAs in the times to come. DRTs which have been set
up by the Government to facilitate speedy recovery by banks/DFIs,
have not been able make much impact on loan recovery due to variety
of reasons like inadequate number, lack of infrastructure, under staffing
and frequent adjournment of cases. It is essential that DRT mechanism is
strengthened and vested with a proper enforcement mechanism to
enforce their orders. Non observation of any order passed by the
tribunal should amount to contempt of court, the DRT should have
right to initiate contempt proceedings. The DRT should empowered
to sell asset of the debtor companies and forward the proceed to
the winding up court for
distribution among the lenders
InInaabilitybilitytoto PayPay
CConsortiumonsortium aarrrangementrangementss::Asset classification of accounts
under consortium should be based on the r ecord of r e c o v e r y of the
in d i v id ual m ember banks and other aspects having a bearing on the
recoverability of the advances. Where the remittances by the borrower
under consortium lending arrangements are pooled with one bank and/or
where the bank receiving remittances is not parting with the share of other
member banks, the account will be treated as not serviced in the books of
the other member banks and therefore, be treated as NPA. The banks
participating in the consortium should, therefore, arrange to get their share
of recovery transferred from the lead bank or get an express consent from
the lead bank for the transfer of their share of recovery, to ensure proper
asset classification in their respective books.
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CorCorpporateorate ddeebtbtRestructuringRestructuring(CDR):(CDR):
BacBackkgroundground
In spite of their best efforts and intentions, sometimes corporate find
themselves in financial difficulty because of factors beyond their control
and also due to certain internal reasons. For the revival of the corporate
as well as for the safety of the money lent by the banks and FIs, timely
support through restructuring in genuine cases is called for. However,
delay in agreement amongst different lending institutions often comes inthe way of such endeavours.
Based on the experience in other countries like the U.K., Thailand,
Korea, etc. of putting in place institutional mechanism for restructuring of
corporate debt and need for a similar mechan