46448595 30803638 Project Report on NPA AMIT GHAWARI Vision School of Mgmt Chittorgarh

8/2/2019 46448595 30803638 Project Report on NPA AMIT GHAWARI Vision School of Mgmt Chittorgarh

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2009SeminarOn

ContemporaryIssuesInManagement

NONPERFORMINGASSETS

SUBMITTEDTO:RajasthanTechnicalUniversity,Kota

SubmittedBy:Of:AMITGHAWARITYAGIMBAIISem

UnderGuidanceMISS.SHOBHIKA(FACULTY)

VisionSchoolOfManagementAffiliatedtoRajasthanTechnicalUniversityKotaAICTEApprovedE-Mail:[email protected]:visionmanagement.org


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TABLEOFCONTENTS1.Introduction.....................................................................................................12.WhatisNPA...................................................................................................23.AssetsClassification.........................................................................................33.1GeneralReasonsforAssetsBecomingNPA.......................................33.2Classificationofassetsofscheduledcommercialbank..............43.3GrossandnetNPAofdifferentsectorofbank............................44.ManagementofNPA....................................................................................54.1ProvisioningRequirementforLoansorAdvances............................55.GeneralMethodofManagementofNPA...............................................6-76.DifficultieswiththeNon-performingAssets...............................................87.ComparisonwithotherAsianEconomies...................................................98.Bank-Wise(NPAs)ofScheduledCommercialBank2008..................10129.SomeFactsRegardingNPAofMajor25BanksofIndia........................1310.TheChangingDynamicsinAsianNon-PerformingLoans.............14-1611.DevelopingtheAsianMarketsforNon-PerformingAssets...................1712.DevelopingtheIndianMarketsforNon-PerformingAssets............18-1913.Conclusion..................................................................................................2014.SuggestiontoOvercometheProblemofNPA........................................2115.Bibliography&References.......................................................................22


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ACKNOWLEDGEMENT

Inpreparationofthisreportbyme,Ifeelgreatpleasurebecauseitgivesmeextensivepracticalknowledge.IgetideaaboutNonPerformingAssetsbythisreport.IexpressmydeepsenseofgratitudetoDr.A.L.Jain(DirectorofvisionschoolofManagement,Chittorgarh)forhisvaluableguidanceduringmyreportwork.IalsogratefultoallFacultymembersDr.SnehalMaheshkar,Mr.VibhorPaliwal,Mrs.PratibhaPagaria,Miss.ShobhikaTyagi,Mr.RahulJainandStaffmembersMr.PurshottamDashora,Mr.Rastraverdhanwhoguidedmeinmyreport.IamthankfultomyfriendsLatikaSurana,RanuShetiya,PreetiPaul,BhartiSharmaforvaluableinspirationandguidanceprovidedmethroughoutthisreportwork.Iwouldliketotakeopportunitytoexpressmygratitudetowardsallofthemwhohavecontributeddirectlyorindirectlyinmyprojectwork.

AMITGHAWARI


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PREFACEThisProjectisdoneforthepartialfulfillmentofthetwoyearMBAprogram.ThisResearchprojectisacompulsorypartoftheacademics.ThisresearchisdoneinthesecondsemesteroftheMBAprogram.Thetopicofthestudyisstudyotnonperformingassetsiindia.ThereasonforselectingthistopictheNPAisaproblemfacingbytheIndianbanks.BankingindustryplaysanimportantsectortotheoveralleconomicdevelopmentofIndiaiseverinreasing.TheotherobjectiveofthetopicweretoanalysethetrandsinNPAofIndianbankingsector.AcomperativeanalysisofNPAinvariousbankingsectorlikepublicsector,SBI&itsassociates,Nationalisebanketc.ThereportisdevidedintoFifteenChepter.TheFirsttopicistheintroductionoftheNPA.InthischaptertherearedetailaboutHistoryofNPA.IntheSecondtopictheMeningofNPAisgiven.TheThirdtopicisaboutAssetsclassificationinwhichGeneralReasonsforAssetsBecomingNPA,Classificationofassetsofscheduledcommercialbank,GrossandnetNPAofdifferentsectorofbankarecoverd.TheFourth&FifthtopicsareaboutManagementofNPA,GeneralMethodofManagementofNPA.TheSixth&SeventhtopicsaredeeplydiscribeDifficultieswiththeNon-performingAssets,ComparisonwithotherAsianEconomies.NextEighth&NinethtopicsareBank-Wise(NPAs)ofScheduledCommercialBank,SomeFactsRegardingNPAofMajor25BanksofIndia.TheTenth&EleventhtopicsareaboutChangingDynamicsinAsianNon-PerformingLoanswithDevelopingtheAsianMarketsforNonPerformingAssets.TheTwelthtopicisallaboutDevelopingtheIndianMarketsforNonPerformingAssets.ThelastThirteen,Fourteen&FifteentopicsareaboutConclusion,Suggestion&Bibliography&References.


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Thisreportisahonestworktowardsthetopic.Therecanbemanyshortcomingsinitbceauseotthelackofthetime,unavailabilityofdataandotherconstraints.

INTRODUCTIONBankingsectorreformsinIndiahasprogressedpromptlyonaspectslikeinterestratederegulation,reductioninstatutoryreserverequirements,prudentialnormsforinterestrates,assetclassification,incomerecognitionandprovisioning.Butitcouldnotmatchthepacewithwhichitwasexpectedtodo.Theaccomplishmentofthesenormsattheexecutionstageswithoutrestructuringthebankingsectorassuchiscreatinghavoc.Thisresearchpaperdealswiththeproblemofhavingnon-performingassets,thereasonsformountingofnon-performingassetsandthepracticespresentinothercountriesfordealingwithnon-performingassets.Duringpre-nationalizationperiodandafterindependence,thebankingsectorremainedinprivatehandsLargeindustrieswhohadtheircontrolinthemanagementofthebankswereutilizingmajorportionoffinancialresourcesofthebankingsystemandasaresultlowprioritywasaccordedtoprioritysectors.GovernmentofIndianationalizedthebankstomakethemasaninstrumentofeconomicandsocialchangeandthemandategiventothebankswastoexpandtheirnetworksinruralareasandtogiveloanstoprioritysectorssuchassmallscaleindustries,self-employedgroups,agricultureandschemesinvolvingwomen.Toacertainextentthebankingsectorhasachievedthismandate.LeadBankSchemeenabledthebankingsystemtoexpanditsnetworkinaplannedwayandmakeavailablebankingseriestothelargenumberofpopulationandtoucheverystrataofsociety

byextendingcredittotheirproductiveEndeavours.Thisisevidentfromthefactthatpopulationperofficeofcommercialbankhascomedownfrom66,000intheyear1969to11,000in2004.Similarly,shareofadvancesofpublicsectorbankstoprioritysectorincreasedform14.6%in1969to44%ofthenetbankcredit.Thenumberofdepositaccountsofthebankingsystemincreasedfromover3croresin1969toover30crores.Borrowedaccountsincreasedfrom2.50lakhstoover2.68crores.


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WHATISANPA(NONPERFORMINGASSET)ActionforenforcementofsecurityinterestcanbeinitiatedonlyifthesecuredassetisclassifiedasNonPerformingAsset.NonPerformingAssetmeansanassetoraccountofborrower,whichhasbeenclassifiedbyabankorfinancialinstitutionassub-standard,doubtfulorlossasset,inaccordancewiththedirectionsorguidelinesrelatingtoassetclassificationissuedbyRBI.Anamountdueunderanycreditfacilityistreatedas"pastdue"whenithasnotbeenpaidwithin30daysfromtheduedate.Duetotheimprovementinthepaymentandsettlementsystems,recoveryclimate,upgradationoftechnologyinthebankingsystem,etc.,itwasdecidedtodispensewith

pastdue

concept,witheffectfromMarch31,2001.Accordingly,asfromthatdate,aNonperformingasset(NPA)shellbeanadvancewhereinterestand/orinstallmentofprincipalremainoverdueforaperiodofmorethan180daysinrespectofaTermLoan,theaccountremains outoforder

foraperiodofmorethan180days,inrespectofanoverdraft/cashCredit(OD/CC),thebillremainsoverdueforaperiodofmorethan180daysinthecaseofbillspurchasedanddiscounted,interestand/orinstallmentofprincipalremainsoverduefortwoharvestseasonsbutforaperiodnotexceedingtwohalfyearsinthecaseofanadvancegrantedforagriculturalpurpose,andanyamounttobereceivedremainsoverdueforaperiodofmorethan180daysinrespectofotheraccounts.Withaviewtomovingtowardsinternationalbestpracticesandtoensuregreatertransparency,ithasbeendecidedtoadoptthe 90daysoverdue normforidentificationofNPAs,formtheyearendingMarch31,2004.Accordingly,witheffectformMarch31,2004,anon-performingasset(NPA)shellbealoanoranadvancewhere;interestand/orinstallmentofprincipalremainove

rdueforaperiodofmorethan90daysinrespectofaTermLoan,theaccountremains outoforder foraperiodofmorethan90days,inrespectofanoverdraft/cashCredit(OD/CC),thebillremainsoverdueforaperiodofmorethan90daysinthecaseofbillspurchasedanddiscounted,interestand/orinstallmentofprincipalremainsoverduefortwoharvestseasonsbutforaperiodnotexceedingtwohalfyearsinthecaseofanadvancegrantedforagriculturalpurpose,andanyamounttobereceivedremainsoverdueforaperiodofmorethan90daysinrespectofotheraccounts.


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ASSESTSCLASSIFICATION

TheRBIhasissuedguidelinestobanksforclassificationofassetsintofourcategories.

1.StandardASSESTS:Theseareloanswhichdonothaveanyproblemarelessrisk.

2.SubstandardASSESTS:Non-performingloansoradvancespastdue90(ninety)daysormorebutlessthan180(one-hundred-eightydays)daysshall,ataminimum,isclassifiedsubstandard.Withoutprejudicetotheclassificationcriteriausedforthesubstandardcategorysetoutabove,thefollowingnon-performingloansandadvancesshallbecategorizedassubstandard

3.DoubtfulASSESTS:Non-performingloansoradvancespastdue180daysormore,butlessthan360daysshallbeclassified,ataminimum,asdoubtful.

4.LossASSESTS:Non-performingloansoradvancespastdue360daysormoreshallbeclassifiedasLoss.

GENERALREASONSFORASSETSBECOMINGNPAs

AmultiplicityoffactorisresponsibleforeverincreasingsizeofNPAsinbanks.AfewprominentreasonsforassetsbecomingNPAsareasunder.4Poorcreditappraisalsystem4Lackofpropermonitoring4Recklessadvancestoachievethebudgetarytargets.4ThereisnoorlackofcorporatecultureintheBankingadequatelegalprovisionsonforeclosureandbankruptcy.4Changeineconomicpolicies/environment.4Notransparentaccountingpolicyandpoorauditingpractices.4Lackofcoordinationbetweenbanks.4Directedlendingtocertainsectors.4Failureonthepartofthepromoterstobringtheirportionofequityfromtheirownsourceorpublicissueduetomarketturninglukewarm.


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TheclassificationofassetsofscheduledcommercialbankTable1AssetsStandardassetsSubstandardassetsDoubtfulassetsLossassetsTotalNPA2001494716(88.6)18206(3.3)37756(6.8)8001(1.4)63963(11.4)2002609972(89.6)21382(3.1)41201(6.1)8370(1.2)70953(10.4)2003709260(91.2)20078(2.6)39731(5.1)8971(1.2)68780(8.8)(AmountRs.crores)2004837130(92.8)21026(2.3)36247(4.36)7625(0.8)902027(100)

IncomerecognitionandprovisioningIncomefromNPAisnotrecognizedonaccruedbasicbutisbookedasincomeonlywhen,itisactuallyreceived.RBIhasalsotightenedredtheprovisionsnormsagainstassetclassification.Itrangesfrom0.25%to100%fromstandardassettolossassetrespectively.

GrossandnetNPAofdifferentsectorofbankTable2(endofMarch31)(in%)

categoryPublicsectorbankPrivatesectorForeignbankTable3

GrossNPA/GrossAdvance200112.378.376.84200211.099.645.3820039.368.075.2520047.795.844.62(endofMarch31)(in%)

categoryPublicsectorbankPrivatesectorForeignbank

NetNPA/NetAdvance20016.742.271.8220025.822.491.8920034.532.321.7620042.981.321.49

ThetableIIandIIIshowsthatthepercentageofgrossNPA/grossadvanceandnetNPA/netadvanceareinadecreasingtrend.Thisshowsthesignofefficiencyinpublicandprivatesectorbanks.butstillifcomparedtoforeignbanksIndianprivatesectorandpublicsectorbankshaveahigherNPA.


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MANAGEMENTOFNPAThetableII&IIIshowsthatduringinitialsagethepercentageofNPAwashigher.Thiswasduetoshowineffectiverecoveryofbankcredit,lacunaincreditrecoverysystem,inadequatelegalprovisionetc.VariousstepshavebeentakenbythegovernmenttorecoverandreduceNPAs.Someofthemare.1.Onetimesettlement/compromisescheme2.LokAdalats3.DebtRecoveryTribunals4.SecuritizationandreconstructionoffinancialassetsandenforcementofSecurityInterestAct2002.5.CorporateReconstructionCompanies6.Creditinformationondefaultersandroleofcreditinformationbureaus

ProvisioningRequirementforLoansorAdvancesAllBanksshallmaintainaProvisionforLoansLossesAccountwhichshallbecreatedbychargestoprovisionexpenseintheincomestatementandshallbemaintainedataleveladequatetoabsorbpotentiallossesintheloansoradvancesportfolio.IndeterminingtheadequacyoftheProvisionsforLoanLossesAccount,provisionsmaybeattributedtoindividualloansoradvancesorgroupsofloansoradvances.TheprovisionsforLoanLossesAccountshallalwayshaveacreditbalance.AdditionstoorreductionsoftheProvisionsforLoanLossesAccountshallbemadeonlythroughchargestoprovisionsintheincomestatement.Basedontheassetclassification,thebanksarerequiredtomakeaprovisionagainsttheLoansoradvances.Bankshallmaintaintheminimumprovisionpercentagesagainsttheoutstandingprovisionandofeachloanoradvances.


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GENERALMETHODSOFMANAGEMENTOFNPASThemanagementofNPAisthedifficulttaskinpractice.ManagementofNPAsmeans,howtosettletheNPAsaccountinthebooks.InsimpleitfocusesonthemethodsofsettlementofNPAsaccount.Themethodsarediffersfrombanktobank.ThefollowingparagraphexplainssomegeneralmethodsofManagementofNPAsbythebanks.Thesameinformationisgiveninthechart1.1.

CompromiseLegalremediesRegularTrainingProgramRecoveryCampsWriteoffsSpotVisitRehabilitationofpotentiallyviableunitsOtherMethodsGeneralMethodsofManagementofNPAs

Compromise:Thedictionarymeaningofthetermcompromiseissettlementofdisputereachedbymutualconcessions.Thefollowingarethedetailedguidelinesforcompromise/negotiatedsettlementsofNPAs.*Thecompromiseshouldbeanegotiatedsettlementunderwhichthebankshouldensurerecoveryofitsduestothemaximumextentpossibleofminimumexpenses.*Properdistinctionshouldbemadebetweenwillfuldefaultersandborrowersdefaultinginrepaymentsduetocircumstancesbeyondtheircontrol.


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*Wheresecurityisavailableforassessingtherealizablevalue,properweightageshouldbegiventothelocation,conditionandmarketabletitleandpossessionofsubsecurity.*Anadvantageinsettlementcasesisthatbankscanpromptlyrecyclethefundsinsteadofresortingtoexpensiverecoveryproceedingsspreadoveralongperiod.*Allcompromiseproposalsapprovedbyanyfunctionaryshouldbepromptlyreportedtothenexthigherauthorityforpostfactoscrutiny.*Proposalforwriteoff/compromiseshouldbefirstbyacommitteeofseniorexecutivesofthebank.*Specialrecoverycellsshouldbesetupatallregionallevels.

Legalremedies:ThelegalremediesareoneofthemethodsofmanagementofNPAs.Thebanksobservedthattheborrowerismakingwillfuldefault;nomoretimeshouldbelostinstitutingappropriaterecoveryproceedings.Thelegalremediesarefillingofcivilsuits.

RegularTrainingProgram:ThealllevelsofexecutivesarecompellingtoundergrowththeregulartrainingprogramoncreditandNPAmanagement.ItisveryusefulandhelpfultotheexecutivesfordealingtheNPAsproperly.

RecoveryCamps:Thebanksshouldconducttheregularorperiodicalrecoverycampsinthebankpremisesorsomeothercommonplaces;suchtypeofrecoverycampsreducestheleve

lofNPAsintheBanks.

Writeoffs:WriteoffsisalsooneofthecommonmanagementtechniquesofNPAs.Theassetsaretreatedaslossassets,whenthebankwritesoffthebalances.TheultimateaimofthewriteoffistocleaningtheBalancesheet.

SpotVisit:Thebankofficialsshouldvisittotheborrowersbusinessplaceorborrowersfieldregularlyorperiodically.ItisalsohelpfulltothebanktocontrolorreducetheNPAslimit.


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Difficultieswiththenon-performingassets1.Ownersdonotreceiveamarketreturnontheircapital.Intheworstcase,ifthebankfails,ownerslosetheirassets.Inmoderntimes,thismayaffectabroadpoolofshareholders.2.Depositorsdonotreceiveamarketreturnonsavings.Intheworstcaseifthebankfails,depositorslosetheirassetsoruninsuredbalance.Banksalsoredistributelossestootherborrowersbycharginghigherinterestrates.Lowerdepositratesandhigherlendingratesrepresssavingsandfinancialmarkets,whichhamperseconomicgrowth.3.Nonperformingloansepitomizebadinvestment.Theymisallocatecreditfromgoodprojects,whichdonotreceivefunding,tofailedprojects.Badinvestmentendsupinmisallocationofcapitaland,byextension,labourandnaturalresources.Theeconomyperformsbelowitsproductionpotential.4.Nonperformingloansmayspilloverthebankingsystemandcontractthemoneystock,whichmayleadtoeconomiccontraction.Thisspillovereffectcanchannelizethroughilliquidityorbankinsolvency;(a)whenmanyborrowersfailtopayinterest,banksmayexperienceliquidityshortages.Theseshortagescanjampaymentsacrossthecountry,(b)illiquidityconstraintsbankinpayingdepositorse.g.cashingtheirpaychecks.Bankingpanicfollows.Arunonbanksbydepositorsaspartofthenationalmoneystockbecomeinoperative.Themoneystockcontractsandeconomiccontractionfollows(c)undercapitalizedbanksexceedsthebankscapitalbase.Lendingbybankshasbeenhighlypoliticized.Itiscommonknowledgethatloansaregiventovariousindustrialhousesnotoncommercialconsiderationsandviabilityofprojectbutonpoliticalconsiderations;somepoliticianwouldaskthebanktoextendtheloantoaparticularcorporateandthebankwouldoblige.Innormalcircumstancesbanks,beforee

xtendinganyloan,wouldmakeathoroughstudyoftheactualneedofthepartyconcerned,theprospectsofthebusinessinwhichitisengaged,itstrackrecord,thequalityofmanagementandsoon.Sincethisisnotlookedinto,manyoftheloansbecomeNPAs.Theloansfortheweakersectionsofthesocietyandthewaivingoftheloanstofarmersareanotherdimensionofthepoliticizationofbanklending.Mostofthedepositorsmoneyhasbeenfritteredawaybythebanksattheinstanceofpoliticians,whilethesamedepositorsarebeingmadetopaythroughtaxestocoverthelossesofthebank.


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ComparisonwithotherAsianEconomiesComparisonofProblemsandSolutionsAcross5countriesCountryMechanismsusedtosolvetheproblemIndia1.Legalimpedimentsandtime1.StrengtheningofLegalNormsconsumingnatureofassetdisposalprocess.2.Manipulationbythedebtorsusing2.Aligningofprudentialnormswithpoliticalinfluencehasbeenacauseforinternationalstandardsindustrialbaddebtbeingsohigh.3.Politicaltool-DirectedCredittoSSI3.LegalmechanismsincludingandRuralsectorscreationofARCsandpartialdisbandingoftheBIFRChina1.MoralHazard-SOE sbeliefthat1.CreationofAssetManagementbailoutwillhappeninacrisissituationCompaniesforthebigfourbanks2.Bankruptcylawsfavourborrowers2.ForeignequityparticipationintheNPAdisposalprocess3.Inefficientlegalenforcement3.Raisingofdisclosurestandardsmechanisms4.Political&socialimplications4.LawsenablingAssetbackedcompulsionsforcethegovernmenttosecuritisation.keepthemafloat.Japan1.Realestateboomandbust1.Strictaction(includingclosure)fornoncomplianceofcapitalnorms2.Timeconsuminglegalmechanisms2.SecuritisationofRealestateloans3.Cronycapitalism3.Extensivepublicfundingforbailouts4. Theno-bankruptcydoctrine Korea1.Directedcredit:Interestratecontrol1Swiftactionincontainingsystemicrisk2.Thecompressedgrowthpolicy2.UseofCorporateRestructuringVehicles(CRVs)andDebt/EquitySwaps3.Lackofeffectivemonitoring3.CreationofKoreaAssetManagementCorporation(KAMCO)in19974.ContagionEffectsfromSouthEast4.ExtensiveuseofsecuritizationAsiaThailand1.legalsystemthatfavoureddebtors1.Privatisationofgovernmententities4.Steepinterestrateincreaseturned4.GovernmenttakeoverofbanksloansbadandFIs3.Realestat

especulation-Spikein3.CreationofAMCspricesandgrowthrateprojectionswerewrongCausesofProblem


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BANK-WISENON-PERFORMINGASSETS(NPAs)OFSCHEDULEDCOMMERCIALBANK-2008

BankNameStateBankofIndia&itsAssociatesStateBankofBikaner&JaipurStateBankofHyderabadStateBankofIndiaStateBankofIndoreStateBankofMysoreStateBankofPatialaStateBankofSaurashtraStateBankofTravancoreNationalisedBanksAllahabadBankAndhraBankBankofBarodaBankofIndiaBankofMaharashtraCanaraBankCentralBankofIndiaCorporationBankDenaBankIDBIBankLtdIndianBankIndianOverseasBankOrientalBankofCommercePunjab&SindBankPunjabNationalBankSyndicateBankUCOBankUnionBankofIndiaUnitedBankofIndiaVijayaBank

(AmountinRs.Crore)AsonMarch31GrossGrossGrossNPANPAsAdvanceRatio%437253041.70.93.01.41.71.41.52.0

31235901128374221812651835635921305521367241791230957128440

10113721981193176614162350584573156548799712801363319176916521657761512

50312345561076721147932979810765574287396642338183608402286105855327184091209326519755627758792815232019

2.01.11.81.72.61.33.21.52.41.91.21.62.30.72.72.73.02.22.71.6

ForeignBanks


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ABBankABNAMROBankAbuDhabiCommercialBankAntwerpDiamondBankBNPParibasBankofAmericaBankofBahrain&KuwaitBankofCeylonBankofNovaScotiaBarclaysBank

3294193412517261

2620502182476380534533015647767664

10.21.410.70.00.90.08.429.60.00.8

BANK-WISENON-PERFORMINGASSETS(NPAs)OFSCHEDULEDCOMMERCIALBANK-2008(Concld.)(AmountinRs.Crore)BankNameAsonMarch31GrossGrossGrossNPANPAsAdvanceRatio%CalyonBank218150.1ChinaTrustCommercialBank11291.0Citibank1011389152.6DeutscheBank6090000.7DevelopmentBankofSingapore523680.2Hongkong&ShanghaiBankingCorporation697304672.3JPMorganChaseBank121115810.5KrungThaiBank90.0MashreqBank410.0MizuhoCorporateBank78630.8OmanInternationalBank10.0ShinhanBank3140.0SocieteGenerale3850.0SonaliBankLtd1910.0StandardCharteredBank723337292.1StateBankofMauritius2140.0TheBankofTokyo-MitsubishiUFJ23070.0

OtherScheduledCommercialBanksAxisBank486598990.8


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BankofRajasthanCatholicSyrianBankCenturionBankofPunjabCityUnionBankDevelopmentCreditBankDhanalakshmiBankFederalBankHDFCBankICICIBankIndusIndBankINGVysyaBankJammu&KashmirBankKarnatakaBankKarurVysyaBankKotakMahindraBankLakshmiVilasBankNainitalBankRatnakarBankSBICommercial&InternationalBankSouthIndianBankTamilnadMercantileBankYesBank

126752913133875401645583457563410563214646919327904640327580229892392128971161466348519164380111021949569453157291383931191002376175364188105971225431119432

1.73.93.31.81.52.92.41.43.33.00.82.53.42.02.93.51.86.01.41.82.20.12.3

AllScheduledCommercialBanks566682507885Note:DataareProvisional.Figuresareroundedoff.Datapertaintothebalancesheetsofbanks.Source:DepartmentofBankingSupervision,RBI

SomefactsregardingNPAofmajor25banksofIndiaare:

Netnon-performingassets(NPAs)of25bankshaverisenbyanaverage21.75percentinQ2


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FY09asagainstQ2FY08.Theaggregatenetnon-performingassets(NPA)of25banksincreasedtoRs17,992.82croreinsecondquarterof2008-09fromRs15,462.84croreinthesameperiodofFY08Theaveragecapitaladequacyratio(CAR)of25banksslippedto12.68percentinQ2-FY09from13.41percentinthepreviousyear.KarurVysyaBankrecordedmaximumriseof275.36percentinnetNPAsinQ2-FY09withRs.50.03croreasagainstRs13.33croreinQ2-07.SevenmajorPSBsrecordedasignificantdecreaseinnetNPAs.AmongtheprivatesectorbanksonlySouthIndianBankregisteredanimprovementinnetNPAsby-29.82percent.16bankswitnessedafallintheirCARfromthepreviousfiscal,buttheystillmanagedtoremainabovetheprescribedlimitofninepercentposedbytheBaselIIaccord.AxisbankregisteredthemaximumdeclineinCARfrom17.59percentinQ2FY08to12.2percentinQ2FY09.FederalBankhadthemaximumriseinCARunto20.81percentinQ2FY2008-09from13.08percentayearearlier.

TheChangingDynamicsinAsianNonPerformingLoansThechangingdynamics


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Inthelastyear,manyofthedynamicsunderpinningtheapproachinAsiatoresolvingandmaximizingvaluefromnon-performingloans(NPLs)havechanged.TheauthorsregionalreviewforthesecondForumforAsianInsolvencyReform(heldinBangkok,ThailandinDecember2003)highlightedanumberofareasofprogressandsomeofthepitfallsinAsiancorporatedebtrestructuringaswellasprovidingacountry-by-countrysummaryofdevelopments.ThispaperbuildsonthatreviewandfocusesonsomeoftheevolvingaspectsofNPLresolutiontechniquesandonshiftsinapproachtoresolvingAsiasestimated2trillionUSdollarsinNPLs.

ReworkingthefictionalreschedulingthestrategicdoubledefaultersTheauthorhasoftendescribedthemanyso-calledrestructuringstakingplaceinsomeoftheAsiancountriesasfictionalrescheduling,whichhavetakenplacewithouttherebeingarealisticexpectationthatthedebtorwillbeabletocomplyinfullwiththerescheduledtimetableforrepaymentandwithoutanyseriousattemptsatoperationalrestructuringorotherrealrestructuringtechniques.Asdefaultstakeplaceunderthesefictionalrescheduling,reworkingtheworkoutshasalreadybeguninmanycountries,withdebtorscommonlyabletoachieveabetterdealthesecondtimearound.Thisoddphenomenonispartlyduetothefactthatthefirstroundoffictionalreschedulingrarelyincludedahaircutofdebt,asthebanksbalancesheetscouldnot,atthattime,sustaintheloss,andoftenrampedupinterestratesafterafewyearsofreducedratesorinterestholidays.Astimehaspassedsincethe1997-2002periodwhenmanyofthesedealsweredone,theeconomiesinsomeoftheso-calledcrisiseconomiessuchasKorea,Malaysia,Thailand,and,toamorelimitedextent,Indonesiahaveimproved.Astheecon

omieshaverebounded,oftenwithoutanyrealchangeinfundamentalsorinoverallcompetitivenessofenterprisesonacomparativebasis,interestrateshavefallen.Bankshavebeenrecapitalizedandcannowsustainthelossesfromwritingoffportionsofdebtwhichthebankreallyhasalmostnoprospectofrecovering,andarethereforenowprocessinglossesthatreallyshouldhavebeenprocessedin1997.Inthesechangingenvironments,strategicdebtorshaveagainappeared.Strategicdebtorsisatermwhichwasusedintheperiodbetween1997-1999todescribedebtorswhowereabletopaytheirdebtsbutchoosetousetheAsianfinancialcrisisasanexcusenottopaytheirfinanciersandcommencerestructuringnegotiationsinthehopeofreceivingsomeaccommodationfromtheirbankers.Thistacticwasverysuccessful.Asinterestrateshavefallen,andwithbanksbalancesheetsnowfarbetterplacedtotakeahit,strategicdoubledefaultershavesprungup.Requestsforreducedinterestratesandforhaircutsarecommonrequest

sand,commonly,therequestsareagreed.Thedynamicisalsooddas(commonly)thedebtorwouldhavecompliedwithitsfirstrestructuringplanformanyyearsandthenadefaultoccurs(oracynicwouldsayisengineered)andthedebtorissuddenlyabletoagainachieve


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accommodationsfromitsbankers.Somedebtors,whilstactingcleverlyandperhapsalittledisingenuously,arenotentirelytoblameforthissituation.Iftheirbankershad,inthefirstroundofrestructuring,beenlessconcernedwiththeirownbalancesheetsandinsteadfocusedonrealisticfinancialrestructuringandoperationalrestructuringofthedebtor,assessingtheviabilityofthedebtorsbusinessandleavingitwithasustainablelevelofdebt,thedebtormaywellhavebecomemoreprofitableandcompetitiveintheinterimperiodifithadnothadtooperateundertheshadowofanoverhangofunsustainabledebt.Intruth,thedebtorsbankersneverhopedtorecoverthisunsustainabledebt,butdelayedwritingitoff.Theauthorhasoftenquotedonebankerassayingwewilldothereschedulingnowandthendotherestructuringnexttimetheydefault.Inreality,asthingshaveturnedout,thesecondroundhasinvolvedeitheranotherreschedulingorahaircutandareductionofinterestrates.Inotherwords,thesecondroundofrestructuringhasresultedinabetterresultforthedebtor.Fromthedebtorsperspectivere-workingtheworkoutsworks.

ThenewwaveofrealisticrestructuringsTherehasalsobeenawaveofnewrestructurings,whichhavegenerallybeenconductedinarealisticmanner.Someofthesecaseshaveinvolvedessentiallygoodbusinessesorprojects,ofteninvolvingmultinationalsponsors.Inmanycases,theserestructuringsdidnotoccurintheimmediateaftermathofthe1997crisis.Theserestructuringsweredelayedbecausethedebtoroftenenjoyedalengthymoratorium,eitherformalorinformal,overthelastsixyears,asitscreditorsrealizedthattheyreallyhavenoattractivelegalrecourseandhavesatstill,d

espitecontinuingtothreatenthedebtorinanunconvincingmanner.Asthesecaseshaveinvolvedviablebusinesseswithstrongsponsors(whohaveoftenthroughrelationshipswiththebanksinsulatedorprovidedprotectiontothedebtorfromitsbankers)itisnotsurprisingthatthesedealshavebecomethefirstbrightsparkastheAsianeconomieshavestartedtorebound.

ThenewmarketsIndiaattheheadIndiaisperhapsthelargestnewmarket,withnewlawsenablingtheestablishmentofassetreconstructioncompanies(ARCs).ARCIL,oneofthefirstARCs,isacquiringloansfrommanyofthemajorbanksincludingICIC


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BankandSBI.Legalchallengeshave,however,delayedtheimplementationoftheSecuritizationandReconstructionofFinancialAssetsandEnforcementofSecurityInterestOrdinance(SRFAESI)underwhichARCsareestablished.TheproposedNationalCompanyLawTribunal(NCLT),whichreplacestheexistingBoardforIndustrialandFinancialReconstruction(BIFR),whichhandledcasesunderthesickindustrialcompanieslegislation,hasalsobeendelayed.ItishopedthattheNLCTwillspeedtheprocessofreferringcompaniestorehabilitationalthoughthereareconcernsastowhetheritwillbefullystaffedwithanadequatenumberofcompetentjudges.ThereisalsogreatneedinIndiatodevelopaprivateprofessionofliquidators.Whilstdebtorsabusedthemoratoriumonlegalactionsunderthesickindustrialcompanyslegislation,theremovalofthestayinitsentiretyinthesecondamendmenttothecompanyscodeissomewhatreactionary.Abettersolutionwouldhavebeentoprovideforaclearlytimeboundstayonlegalactionsduringtheperiodofrehabilitation.StampdutyandtaxationincentivesarealsorequirediftheARCsaregoingtobecomedriversofrestructuringinIndia.

DevelopingtheAsianMarketsforNon-PerformingAssets:DevelopmentsinIndiaNon-performingassetsinIndia:Anoverview


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IndiahasacquiredanalarmingnumberofNon-PerformingAssets.Asat31March2003,thebanksandfinancialinstitutionsinIndiaheldNPAsworthapproximatelyRs.1100000croreasagainstanaggregategrossNPAsofallscheduledcommercialbanksamountingtoRs.63883croreat31March2001.AreviewofthefiguresofgrossandnetNPAsforthelastfouryearsshowsanincreaseofRs.13068crore(morethan25%)TheapparentreductionofgrossNPAsfrom14.4%to11.4%between1998and2001provideslittlecomfortsincethisaccomplishmentisbecauseofcreditgrowth,whichwashigherthanthegrowthofgrossNPAsandnotthroughanyappreciablerecoveryofNPAs.Thereisneitherareductionnorevencontainmentofthethreat.ThegrossNPAsandnetNPAsforpublicsectorbanks(PSBs)asat31March2001of12.39%and6.74%respectively,arehigherthanthefiguresforscheduledcommercialbanks(SCBs)at11.4%and6.2%

ImpactsofNPAsontheworkingofcommercialbanksNPAsaffectedtheprofitability,liquidityandcompetitivefunctioningofpublicandprivatesectorbanks,andfinallythepsychologyofthebankersinrespectoftheirdispositiontowardscreditdeliveryandcreditexpansion.

ImpactonprofitabilityCommercialbanksincurredatotalamountofRs.31251croretowardsprovisioningNPAsfrom1April1993to31March2001.ThishasbroughtnetNPAstoRs.32632croreor6.2%ofnetadvances.TheenormousprovisioningofNPAstogetherwiththeholdingcostofsuchnon-productiveassetsovertheyearshasactedasaseveredrainontheprofitabilityofthePSBs.Equityissuesofnationalizedbanks

thathavealreadytappedthemarketarenowquotedatadiscountinthesecondarymarket.ThishasalternativelyforcedPSBstoborrowheavilyfromthedebtmarkettobuildTierIIcapitaltomeetcapitaladequacynorms,thusputtingseverepressureontheirprofitmargins.Itisworthwhiletocomparetheaggregatefiguresofthe19nationalizedbanksfortheyearendedMarch2001,aspublishedbyRBIinitsReportonTrendsandProgressofBankinginIndia

DevelopingtheIndianMarketsforNon-PerformingAssets1)TheemergingIndianmarket


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TheprocessofresolutionofNPLshasonlyjustbeeninitiatedincountrieslikeIndia.BanksandfinancialinstitutionsinIndiaarefacedwiththetaskofdealingwithNPLs,whicharereportedlywortharound20billionUSdollarsason31March2002.WhiletheNPLsituationinIndiamaynotbeasgrimassomeotherAsiancountriesattheheightoftheAsiancrisis,2itissignificantenoughtowarranturgentattention.ThetotaldistressedassetsareconsiderablyhigherthanthereportedNPLnumbers,anditiswidelybelievedthatNPLscouldbedoublethereportedfigureifmorestringentinternationalclassificationnormsareappliedinIndia.CreditorrightshavehistoricallybeendifficulttoenforceinIndia,ofteninvolvinglong-windedcourtprocedures.Furthermore,inIndiadefaultingborrowercompanieshaveoftenmisusedtheshelterprovidedbythemechanismoftheBoardforIndustrialandFinancialReconstruction(BIFR).AcompanyenteringthepurviewofBIFRwasprotectedthroughamoratoriumonlenderactionsduringthecourseofitsproceedings.ProceedingsoftentookverylongtocompleteonaccountofsystemicdeficienciesintheworkingsoftheBIFR.

a)StepstakenbythegovernmentofIndiaOverthepastyearorso,thegovernmentofIndiahastakenseveralstepstohelpcreateanenablingenvironmentforNPLresolution.Notableamongtheseare:i)TheenactmentoftheSecuritizationandReconstructionofFinancialAssetsandEnforcementofSecurityInterestAct(SRFAESI)inDecember2002,whichlaysdownthelegalbasisfortheformationofassetreconstructioncompanies(ARCs)andprovideslendersandARCswiththepowerstoenforcesecurityinterest(if75%byvalueofthesecuredcreditorsagree)andselltheassetsoftheborrowerwith

outcourtintervention.Furthermore,SRFAESIempowerslenderstoremoveacompanyfromthepurviewoftheBIFR.ARCsarealsoallowedvariousmeasuresforassetreconstruction,includingchangeofmanagementoftheborrowersbusinessthoughguidelinesforimplementingthisarestillawaited.ii)Anout-of-courtrestructuringmechanismcalledCorporateDebtRestructuring(CDR)hasbeensetup,whichprovidesaplatformforresolutionofinter-creditoranddebtor-creditorissues.iii)ANationalCompanyLawTribunal(NCLT)isbeingsetuptoreplacetheBIFR.NCLTis,interalia,envisagedtoperformBIFRsfunctionsmoreeffectively.b)DevelopmentoftheIndianNPLmarket


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PursuanttotheSRFAESIAct,anumberofARCshaveappliedtotheReserveBankofIndiaforsettingupoperations.AssetReconstructionCompany(India)Limited(ARCIL)andAssetCareEnterprisesLtd.havebeenpromotedbygroupsofIndianlendersandareamongthefirstARCsinIndia.TheprocessofacquisitionbyARCILofthefirstlotofassetsiscurrentlyunderway.AnumberofissuescouldhoweverhampereffectivedevelopmentoftheIndianNPLmarket:

i)LegalchallengesAtremendousoutcryhasbeenraisedagainsttheprovisionsoftheSRFAESIActbyborrowerswhohavetermeditasbeingagainsttheprinciplesofnaturaljustice.AnumberofpetitionsarecurrentlypendingbeforetheSupremeCourtthatchallengetherightoflenderstotakeoverandselltheborrowerassetswithlimitedopportunityofborrowerstochallengetheactioninacourtoflaw.TheSupremeCourtjudgmentonthisissuecouldprofoundlyaffecttheefficacyofthisact.

ii)TaxandregulatoryissuesThehighleveloftransactioncostsintheformofthestampduty,payableonthetransferoffinancialassetsbywayofassignment,isasignificantdeterrenttotheacquisitionprocessexceptinthecaseofsomeprogressivestates.Whilethegovernmentappearskeentoencouragebothforeignanddomesticinvestors,theneedforspecificpolicy,regulationsandtaxprovisionsresponsivetotheirrequirementshasstilltobeaddressed.

Conclusion

ThepaperstressestheimportanceofasoundunderstandingofthemacroeconomicvariablesandsystemicissuespertainingtobanksandtheeconomyforsolvingtheNPAproblemalongwiththecriticalityofastronglegalframeworkandlegislativeframework.Foreignexperiencesmustbeutilized


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alongwithaclearunderstandingofthelocalconditionstocreateatailormadesolutionwhichistransparentandfairtoallstakeholders.TheIndianbankingsectorisfacingaseriousproblemofNPA.TheextentofNPAiscomparativelyhigherinpublicsectorsbanks.Toimprovetheefficiencyandprofitability,theNPAhastobescheduled.VariousstepshavebeentakenbygovernmenttoreducetheNPA.ItishighlyimpossibletohavezeropercentageNPA.ButatleastIndianbankscantrycompetingwithforeignbankstomaintaininternationalstandard.NPAisadouble-edgedweapon,whichaffectsbankprofitabilityduetointerestincomenotbeingrecognizedonNPAaccountsandloanlosspreviouslytobecreatedfromprofitearned.ThebankmustadoptstructuredNPAsmanagementpolicyforeliminationorreducingtheNPAsintheBank.IngeneralthetrendofNPAsinCBEareincreasingtrend,onthesametimetheCBEhasbeenadoptedaverygoodtechniquestocontrolovertheNPAs.

SUGGESTIONSTOOVERCOMETHEPROBLEMOFNPAsGeneralsuggestions:TheBankshouldadoptthefollowingGeneralstrategiesforcontrolofNPAs.Thesuggestionsareasfollows:


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Projectswitholdtechnologyshouldnotbeconsideredforfinance Largeexposureonbigcorporateorsingleprojectshouldbeavoided.

Operatingstaffscreditskillsshouldbeupgraduation. Thereisneedtoshiftbanksapproachfromcollateralsecuritytoviabilityoftheprojectandintrinsicstrengthofpromoters. Timelysanctionandorreleaseofloansbythebankistoavoidtimeandcostoverruns.Pre-sanctionsuggestions:

Analysisshouldthereforebebasedontrendsofcapacityutilization,profitabilityetc.Assumptionsnotaccountforgroundrealities.

Bettertakingupanyfresh/excitingproposalsforassessment,sourcesformarginmoneyshouldbethoroughlyexamined. Unevenscaleofrepaymentschedulewithhigherrepaymentintheinitialyearsnormallyispreferred.

Asforaspossible,repaymentoftermloansshouldbefixedonmonthlybasisratherthanonquarterlyorsemiannualbasis.

Personalguaranteesofthepromoterdirectors/majorshareholdersshouldnormallybeinsistedupon.

Postsanctionssuggestions:

Bankshouldpreventdiversionoffundsbythepromoters.

Operatingstaffshouldscrutinizethelevelofinventories/receivablesatthetimeofassessmentofworkingcapital. TheCreditsectionshouldcarefullywatchthewarningsignalsviz.nonpaymentofquarterlyinterest,dishonorofchecketc. Effectiveinspectionsystemshouldbeimplemented.

BIBLIOGRAPHY&REFERENCESWebsitesASAF(1998)CountermeasurestoOvercomeAsianEconomicCrises-Iwww.icfaipress.org

/archives/Analyst/1998/Nov/ASAF-counterMeasurescrises1.htmICRARatingofStructuredObligationsIndianCreditRatingAgency


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http://www.icraindia.com/services/rating/structur.htmLahiri,AshokK.RisingNPAs:Wherehasallthemoneygone?http://www.rediff.com/money/2002/aug/01spec.htm

Newspaper,journalandmagazineArticlesKohli,Renu(2002)TheinformationalqualityoffinancialsystemsFinancialExpressJanuary192002Muniappan,G.P(2002a)IndianBanking:ParadigmShiftAregulatorypointofviewAddressattheBankEconomistConference,KolkataJanuary14,2002RBI(2001a)PrudentialNormsonIncomeRecognition,AssetClassificationandProvisioning-PertainingtoAdvancesReserveBankofIndiaMumbai.Sept2001RBI(2002b)SelectedRatiosofScheduledCommercialBanks:2000and2001www.rbi.org.in,2002RBI(2002c)FinancialInstitutionswww.rbi.org.in,2002


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46448595 30803638 Project Report on NPA AMIT GHAWARI Vision School of Mgmt Chittorgarh

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