recover of npa

7/27/2019 Recover of NPA

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Recovery of NPAs

Public sector banks figure prominently in the debate not only because

they dominate the banking industries, but also since they have much larger NPAs

compared with the private sector banks. This raises a concern in the industry and

academia because it is generally felt that NPAs reduce the profitability of a banks,weaken its financial health and erode its solvency.

For the a broad framework has evolved for the management of NPAs

under which several options are provided for debt recovery and restructuring.

Banks and FIs have the freedom to design and implement their own policies for

recovery and write-off incorporating compromise and negotiated settlements.

RESEARCH METHODOLOGY

Type of Research

The research methodology adopted for carrying out the study were

In this project Descriptive research methodologies were use.

At the first stage theoretical study is attempted.

At the second stage Historical study is attempted.

At the Third stage Comparative study of NPA is undertaken.

Scope of the Study

Concept of Non Performing Asset

Guidelines

Impact of NPAs

Reasons for NPAs

Preventive Measures

Tools to manage NPAs


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Sampling plan

To prepare this Project we took five banks from public sector as well as five banks

from private sector.

OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA was to:

To evaluate NPAs (Gross and Net) in different banks.

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.

((( CONTENTS )))

CHAPTER

NO. SUBJECT COVERED PAGE NO.

1 Introduction to NPAs

2 Research Methodology

Scope of Research

Type of Research


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Sources of Data Collection

Objective of Study

Data Collection

3 Introduction to Topic

Definition

History of Indian Banking

Non Performing Assets

Factor for rise in NPAs

Problem due to NPAs

Types of NPAs

Income Recognition

Reporting of NPAs

4 Provisioning Norms

General

Floating provisions

Leased Assets

Guideline under special circumstances

5 Impact, Reasons and Symptoms of NPAs

Internal & External Factor

Early Symptoms

6 Preventive Measurement

Early Recognition of Problem

Identifying Borrowers with genuine Intent

Timeliness

Focus on Cash flow

Management Effectiveness


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Multiple Financing

7 Tools for Recovery

Willful default

Inability to Pay

Special Cases

Role of ARCIL

8 Analysis

Deposit-Investment-Advances

Gross NPAs and Net NPAs

Priority and Non-Priority Sector

9 Finding, Suggestions and Conclusions

10 Bibliography

Introduction to the topic

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 look

after the factor responsible for it and managing those factors.

Definitions:

An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank.


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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 overdue 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;

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 harvestseasons 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 is believed that

the transition from money lending to banking must have occurred even before

Manu, the great Hindu Jurist, who has devoted a section of his work to deposits andadvances and laid down rules relating to rates of interest.

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.


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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 them with stronger

banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the

geographical coverage and financial spread of the 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 withinternational standards has been another important measure of the reforms

process.


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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, InternationalBank for Reconstruction 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 to introduce greater

competition which could lead to higher productivity and efficiency of the bankingsystem, 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 in December 1997 to review the record ofimplementation 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


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advances and more disclosures in the Balance Sheets of banks have been accepted

and implemented. The other recommendations are under consideration.

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-liberalization period, 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.

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