A Project Report on NPA's

8/6/2019 A Project Report on NPA's

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MANAGEMENT OF NON-PERFORMING ASSETS–

A BRIEF OVERVIEW:

INTRODUCTION

In human life, sickness, bankruptcy and death are not welcome, but

they do occur. So is the case with advances, which fall sick, go into

liquidation and die much against the wishes of all concerned. Realities

cannot be escaped. It is necessary to face them.

In the context of non-performing assets the situation is no different. The

frequent references to non-performing assets primarily concern sick

industrial units and mounting over dues in all other sectors of advances,

particularly in agriculture. Financial assets become non-performing

primarily because of the failure of the units financed by banks.

The costs of managing non-performing assets are exorbitant. Bankers are

compelled to get bogged down with these matters thereby neglecting their

role as a developing catalyst.

NATURE OF NON-PERFORMING ASSETS:

The term non-performing assets can be defined both in the wider and

in the narrower sense. While in the narrow sense it includes only non-

performing credit portfolio, in the wider sense it may also include the

volume of unutilized cash balances, unutilized or underutilized physical

assets like buildings and premises in the still wider sense, it may also include

non- performing human resources– a large volume of workforce not

effectively unutilized.

A non-performing asset in the banking sector also is termed as an

asset not contributing to the income of the Bank. In other words they are the



zero yielding assets that are considered. The non-performing assets,

interalia, includes surplus cash and bankers balances hold over the optimal

levels, amounts lying in the suspense account, investments in shares or

debentures and other securities not yielding any dividend or interest,

advances where interest is not forthcoming and even the principal amount is

difficult to recover. In terms of Health code basis, we may say that advances

classified under the Health Code Numbers 6,7,8 and those advances under

the Health Code Numbers 4,5 on which no interest is being charged, may be

classified among non- performing assets.

REASONS FOR ACCUMULATION OF NON-

PERFORMING ASSETS:

There may be various internal and external factors behind the

transformation of an asset from a performing one to a non-performing one.

Some of the reasons for accumulation of the non-performing assets are:

The fast and rapid geographical expansion of the banking sector during a

short span, throughout

The country and our inability to cope with the voluminous work in an

orderly manner.

Lack of adequate care while appraising the various proposals in the initial

stage. Inadequacy of the technical staff equipped with the latest market

information and the technological developments is also an important factor

in faulty appraisal of proposals.

In case of most of the large and medium scale industries, the main reason for

sickness has been found to be mismanagement.

Power shortages, outdated machinery, fluctuations in supply of raw

materials due to various causes, non-release of subsidy in time and



deficiency in demand are also important reasons. Small scale industries are

prone to sickness mainly due to lack of managerial experience, technical

incompetence and decline in demand for their products and overall demand

recession.

Further cases are not unknown where deliberate efforts are made by a certain

category of

Borrowers to declare their units sick, or weak to avail of benefits from

different sources.

OBJECTIVE OF THE STUDY:

To know Why NPAs have become an issue for banks and financial

institutions in India.

To understand what is Non Performing Assets and what are the

underlying reasons for the emergence of the NPAs.

To understand the criteria for identification of non-performing assets in

banks.

To understand what the factors for rise of NPAs are.

To know what steps are being taken by the Indian banking sector to

reduce the NPAs.

To study the NPA management policy of Public Sector Banks

To review Bank of India’s performance in non-performing assets for

the particular time period.



HYPOTHESIS:

Statement for Hypothesis:

H0: The problem of NPA is less acute in private sector banks as compared to

public sector banks.

H1: Over the years banks have started improving their NPA status.



The project is to determine how to manage the Non Performing

Assets in Banks and what is the trend of NPAs from the past years. To carry

out the study regarding NPAs which is of great concern in toady’s scenario,

a very simple approach is followed to draw a conclusion. The comparison is

done between the data of private sector banks and public sector banks. The

hypothesis testing will help us in formulating an outcome. Since this being a

descriptive research much emphasis will be given on comparison analysis of

various years’ secondary data to carry out an inference.

METHODOLOGY:

The research design used for carrying out this project is descriptive

research because the report deals with statistical data and the main cause of

the report is to describe the factors affecting the problem mentioned.

SOURCES OF DATA:

There are two types of data - Primary data or raw data and secondary

data or second hand data. The data which is collected on source which hasnot been subjected to processing or any other manipulation is primary data

whereas secondary data is the data collected by someone other than the user

through common sources like censuses, surveys, organizational records and

data collected through qualitative methodologies or qualitative research. The

data collected is mainly secondary in nature. The sources of data for this

Report include the literature published by the Bank of India and also the

Reserve Bank of India. Also the various magazines dealing with the current

banking scenario and research paper have also been a source of information.

The booklet on Recovery Policy published by the Asset Recovery

Department of Bank of

India has been of great help



Sampling Plan:

The target population of study included the Bank of India in particular and

all other Public sector banks and private sector banks in general.

Limitations of the study:

1. The study on management of non-performing assets is limited to the

Bank of India.

2. The basis for identifying non-performing assets is the one that has been

mentioned in the report but some minor changes may have been carried out

through the Reserve Bank of India circulars, which are received on a daily

basis by the bank.3. Since non-performing assets are a critical issue, bank officials are not

willing to part with all the information on them.

4. Non-performing assets is a vast topic and to do full justice to all the

aspects of non-

Performing assets is an impossible task for me.

Scope Of The Study:

The scope of the study is limited to the objectives as mentioned earlier.

The study ranges from understanding the significance of non-performing

assets to defining the criteria of identifying non-performing assets in the

banking sector, to review Bank of India’s performance in the management of

non-performing assets.



It also reviews the framework of Bank of India’s recovery policy with which

it hopes to bring down the percentage of net non-performing assets to the net

advances. The study also encompasses the recommendations, the adhering of

which will bring good results to the organization.

CONCEPTUAL FRAMEWORK:

Why NPA have become an issue for banks and financial institutions in

India?

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

any business enterprise including the banking industry. However, increasing NPA have a direct impact on banks profitability as legally banks are not

allowed to book income on such accounts and at the same time banks are

forced to make provision on such assets as per the Reserve Bank of India

(RBI) guidelines.

Also, with increasing deposits made by the public in the banking

system, the banking industry cannot afford defaults by borrowers since NPA

affects the repayment capacity of banks. Further, Reserve Bank of India

(RBI) successfully creates excess liquidity in the system through various rate

cuts and banks fail to utilize this benefit to its advantage due to the fear of

burgeoning non-performing assets.

REASONS FOR NPAs:

The Various Reasons for financial assets turned into Non-Performing

Assets. These are as follows:

1. Reason from Economy Side,

2. Reason from Industry Side.

3. Reason from borrowers side,

4. Reasons from the Security or Regulatory side



5. Reasons from the loan structuring side.

Or this may classified under internal factors and External Factors.

There are several reasons for an account becoming NPA.

* Internal factors

* External factors

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said

purpose.

2. Project not completed in time.

3. Poor recovery of receivables.4. Excess capacities created on non-economic costs.

5. In-ability of the corporate to raise capital through the issue of equity or

other debt instrument from capital markets.

6. Business failures.

7. Diversion of funds for expansion\modernization\setting up new

projects\ helping or promoting sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management

disputes, mis-appropriation etc.,

9. Deficiencies on the part of the banks viz. in credit appraisal etc.,

External factors:

1. Sluggish legal system - Long legal tangles Changes that had taken

place in labour laws Lack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.

4. Shortage of raw material, raw material\input price escalation, power

shortage, industrial recession, excess capacity, natural calamities like

floods, accidents.



5. Failures, non payment\ over dues in other countries, recession in other

countries, externalization problems, adverse exchange rates etc.

6. Government policies like excise duty changes, Import duty changes

etc.

NON PERFORMING ASSETS (BACKGROUND):

It's a known fact that the banks and financial institutions in India face

the problem of swelling non-performing assets (NPA) and the issue is

becoming more and more unmanageable. In order to bring the situation

under control, some steps have been taken recently. The Securitization andReconstruction of Financial Assets and Enforcement of Security Interest

Act, (SARFAESI) 2002 was passed by Parliament, which is an important

step towards elimination or reduction of NPA.

MEANING OF NPA:

An asset is classified as non-performing asset (NPA) if dues in the form of

principal and interest are not paid by the borrower for a period of 180 days.

However with effect from March 2004, default status would be given to a

borrower if dues are not paid for 90 days. If any advance or credit facility

granted by bank to a borrower becomes non-performing, then the bank will



have to treat all the advances/credit facilities granted to that borrower as

non-performing without having any regard to the fact that there may still

exist certain advances / credit facilities having performing status.

NPA MANAGEMENT POLICY:

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, then left is to look after the factor responsible for it

and managing those factors.

DEFINATION OF NPA - NON PERFORMING ASSET:

Action for enforcement of security interest can be initiated only if the

secured asset is classified as Non Performing Asset. Non Performing Asset

means an asset or account of borrower which has been classified by bank or

financial institution as sub–standard, doubtful or loss asset, in accordance

with the direction or guidelines relating to assets 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 the improvement in

the payment and settlement system, recovery climate, up gradation of

technology in the banking system etc, it was decided to dispense with “past

due “concept, with effect from March 31, 2001. Accordingly as from that

date, a Non performing asset shell be an advance 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 to ensure

greater transparency, it has been decided to adopt ‟90 days overdue „norms

for identification of NPAs, from the year ending March 31, 2004, a non

performing asset shall be a loan or an advance where;

i. Interest and / or installment of principal remain overdue for a period of

more than 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 remain overdue for two harvest seasons 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 outstanding balance

remains continuously in excess of sanctioned limit / drawing power. In case

where the outstanding balance in the principal operating account is less than

the sanctioned amount /drawing power, but there are no credits continuously

for six months as on the date of balance sheet or credit are not enough to

cover the interest debited during the same period, these account should be

treated as out of order .

Overdue

Any amount due to the bank under any credit facility is „overdue‟

if it is not paid on due

Date fixed by the bank.

In short A NPA is a loan or an advance where;

Interest and/ or installment of principal remain overdue for a period of

more than 90 days in respect of a term loan

The account remains “out of order” in respect of an overdraft/ cash credit

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

bills purchased and discounted

The installment or interest remains overdue for two crop seasons in case

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

crops

ASSET CLASSIFICATION AND NPA NORMS -

Classification of Assets:

While new private banks are careful about their asset quality and

consequently have low non-performing assets (NPAs), public sector banks

have large NPAs due to wrong lending policies followed earlier and also due

to government regulations that require them to lend to sectors where



potential of default is high. Allaying the fears that bulk of the Non-

Performing Assets (NPA) was from priority sector, NPA from priority sector

constituted was lower at 46 per cent than that of the corporate sector at 48

per cent.

Loans and advances account for around 40 per cent of the assets of

SCBs. However, delay/default in payment of interest and/or repayment of

principal has rendered a significant proportion of the loan assets non-

performing. As per RBI‟s prudential norms, a Non-Performing Asset (NPA)

is a credit facility in respect of which interest/installment has remained

unpaid for more than two quarters after it has become past due. “Past due”

denotes grace period of one month after it has become due for payment by

the borrower.

Regulations for asset classification

Assets are classified into four classes - Standard, Sub-standard,

Doubtful, and Loss assets. NPA consist of assets under three categories: sub-

standard, doubtful and loss. RBI for these classes of assets should evolve

clear, uniform, and consistent definitions. The banks should classify their

assets based on weaknesses and dependency on collateral securities into four

categories:

I. Standard Assets:

It carries not more than the normal risk attached to the business and is

not an NPA. 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 do 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.

ii. Sub-standard Asset:

A sub-standard asset is one which has remained NPA for a period

less than or equal to 12 months from 31.3.2005. In such case the current net

worth of the borrower/guarantor or the current market value of the security

charged is not enough to ensure recovery of the dues to the banks in full. In

other words, such an asset will have well defined credit weaknesses that

jeopardize the liquidation of the debt and are characterized by the distinct

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

corrected.

iii. Doubtful Assets:

With effect from 31.3.2005, an asset is to be classified as doubtful, if

it has remained NPA for a period exceeding 12 months. A loan classified as

doubtful has all the weaknesses inherent in assets that were classified as sub-

standard, with the added characteristics that the weaknesses make collection

or liquidation in full, - on the basis of currently known facts, conditions and

values- highly questionable and improbable. Under this category there are

three stages:

D-I Doubtful up to one year

D-II Doubtful for further two years

D-III Doubtful beyond three years.

iv. Loss Assets:

An asset identified by the bank or internal/ external auditors or RBI

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

partly. The banking industry has significant market inefficiencies caused by



the large amounts of Non Performing Assets (NPA) in bank portfolios,

accumulated over several years. Discussions on non-performing assets have

been going on for several years now. One of the earliest writings on NPA

defined them as "assets which cannot be recycled or disposed off

immediately, and which do not yield returns to the bank, examples of which

are: Overdue and stagnant accounts, suit filed accounts, suspense accounts

and miscellaneous assets, cash and bank balances with other banks, and

amounts locked up in frauds".

Guidelines for the classification of assets

Classification of assets into above categories should be done taking into

account the degree of well defined credit weaknesses and the extent of

dependencies on collateral security for the realization of dues.

Banks should establish appropriate internal systems to eliminate the

tendency to delay or postpone the identification of NPAs especially in

respect of high value of accounts.

Account with temporary Deficiencies:

The classification of an asset as NPA should be based on the record of

recovery. Bank should not classify an advance account as NPA merely due

to the existence of some deficiencies, which are temporary in nature as such

as non– availability of adequate drawing power based on latest stock.

Asset classification to be borrower– wise and not facility-wise:

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

becomes a problem credit and not others. Therefore, all the facilities granted

by a bank to a borrower will have to be treated as NPA and not the particular

facility or a part thereof, which has become irregular.



Advances under consortium arrangements:

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

of recovery of the individual member banks and other aspects having

bearing on the recoverability of the advances. Accounts where there is

erosion in the value of security can be reckoned as significant when the

realizable value of the security is less than 50 percent of the value assessed

by the bank or accepted by RBI at the time of last inspection, as the case

may be. Such NPAs may be straightway classified under doubtful category

and provisioning should be made as applicable to doubtful assets.

Agricultural Advances:In respect of advances granted for agricultural purpose where interest and

/ or installment of principal remains unpaid after it has become past due for

two harvest seasons but for a period not exceeding two half years , such an

advance should be treated as NPA.

Where the natural calamities impair the repaying capacity of agricultural

borrowers, banks may decide on their own as a relief measure-conversion of

the short–term production loan into a term or re-schedulement of the

repayment period.

In such cases of conversation or re-schedulement, the term loan as well as

fresh short-term loan may be treated as current dues and need not be

classified as NPA.

Restructuring /rescheduling of loans:

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

and principal have been renegotiated or rescheduled after the

commencement of production should be as substandard and should remain

in such category for at least one year of satisfactory performance under the

renegotiated or restructured terms. In case of substandard and doubtful assets



also, rescheduling does not entitle a bank to upgrade the quality of advances

automatically unless there is satisfactory performance under the

rescheduled–renegotiated terms.

Exceptions:

As trading involves only buying and selling of commodities and the

problems associated with manufacturing units such as bottleneck in

commercial production, time and cost escalation etc. are not applicable to

them.

NPA Norms - Provisional Norms:

Banks will be required to make provisions for bad and doubtful debts on a

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

of the financial status of the bank. The Narsimham Committee has

recommended the following provisioning norms

(i) 100 per cent of loss assets or 100 per cent of out- standings for loss

assets;(ii) 100 per cent of security shortfall for doubtful assets and 20 percent to 50

per cent of the secured portion; and

(iii) 10 per cent of the total out standings for substandard assets.

A provision of 1% on standard assets is required as suggested by Narsimham

Committee II, 1998. Banks need to have better credit appraisal systems so as

to prevent NPA from occurring. The most important relaxation is that the

banks have been allowed to make provisions for only 30 per cent of the

"provisioning requirements" as calculated using the Narasimhan Committee

recommendations on provisioning. The encouraging profits recently

declared by several banks have to be seen in the light of provisions made by

them. To the extent that provisions have not been made, the profits would be

fictitious.



Disclosure Norms:

Banks should disclose in balance sheets maturity pattern of advances,

deposits, investments and borrowings. Apart from this, banks are also

required to give details of their exposure to foreign currency assets and

liabilities and movement of bad loans. These disclosures were to be made for

the year ending March 2000. In fact, the banks must be forced to make

public the nature of NPA being written off. This should be done to ensure

that the taxpayer ’s money given to the banks, as capital is not used to write

off private loans without adequate efforts and punishment of defaulters

Asset

Classification

Provision requirements



Standard assets 0.25% of the o/s dues in all

Standard Assets under SME and

agriculture sector

1.00% of the o/s

dues in all Standard Assets of the

A/cs to Capital market exposure,

personal loan, commercial real

estate and residential HSG.

Beyond Rs. 20lakhs.

0.40% of the o/s dues in all

standard assets belonging to allother categories.

Substandard assets

10% of the sum of

the net investment in the lease

and the unrealized portion of finance income net of finance

charge component. The terms

„net investment in the lease‟,‟

finance income‟ and finance

charge are as defined in „AS19 –

Leases‟ issued by the ICAI

Doubtful assets 20% - 50% of the secured

portion depending on the age of

NPA, and 100% of theunsecured portion.

Loss assets

.



FACTORS FOR RISE IN NPAs:

The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when

compared to private sector banks and foreign banks. The NPAs in PSB are

growing due to externals well as internal factors.

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 are

intentionally withdrawing it. These groups of people should be identified

and proper measures should be taken in order to get back the money

extended to them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of

the PSBs. every now and then India is hit by major natural calamities thus



making the borrowers unable to pay back there loans. Thus the bank has to

make large amount of provisions in order to compensate those loans, hence

end up the fiscal with a reduced profit.

Mainly ours framers depends on rain fall for cropping. Due to irregularities

of rain fall the framers are not to achieve the production level thus they are

not repaying the loans.

→ Industrial sickness

Improper project handling, ineffective management, lack of adequateresources, 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 govt to revive the handloom sector has not yet

been implemented. So the over dues due to the handloom sectors are

becoming NPAs.

INTERNAL FACTORS

Defective Lending process

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

Commercial banks since long.

i. Principle 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 assets 2. Success in business

Willingness to pay depends on:



1. Character

2. Honest

3. Reputation of borrower

The banker should, therefore take utmost care in ensuring that the enterpriseor business for which a loan is sought is a sound one and the borrower is

capable of carrying it out successfully he should be a person of integrity and

good character .

Inappropriate technology

Due to inappropriate technology and management information

system, market driven decisions on real time basis cannot be taken. Proper

MIS and financial accounting system is not implemented in the banks, which

leads to poor credit collection, thus NPA. All the branches of the bank

should be computerized.

Improper swot analysis

The improper strength, weakness, opportunity and threat analysis is

another reason for rise in NPAs. While providing unsecured advances the

banks depend more on the honesty, integrity, and financial soundness and

credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.

It should collect credit information of the borrowers

From bankers

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

From external credit rating agencies.

Analyse 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 analyse the purpose of the loan. To

ensure safety and liquidity, banks should grant loan for productive purpose

only. Bank should analyse the profitability, viability, long term acceptability

of the project while financing.

Poor credit appraisal system

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

poor credit appraisal the bank gives advances to those who are not able to

repay it back. They should use good credit appraisal to decrease the NPAs.

Managerial deficiencies

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

tangible assets as security to safe guard its interests. When accepting

securities banks should consider the

1. Marketability

2. Acceptability

3. Safety

4. Transferability.

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

famous

maxims “do not keep all the eggs in one basket”; it means that the banker

should not grant

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

in a few cities. If a new big customer meets misfortune or certain traders or

industries affected adversely, the overall position of the bank will not be

affected.



Absence of regular industrial visit

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

regularly visit of bank officials to the customer point decreases the collection

of interest and principals on the loan. The NPAs due to willful defaulters can

be collected by regular visits.

Re loaning process

Non remittance of recoveries to higher financing agencies and re

loaning of the same have already affected the smooth operation of the credit

cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of

OSCB is increasing day by day.

MANAGING NPA:

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

created in the course of the conduct of business should generate income

for the business.

This applies equally to the business of banking. The banks the worldsover deal in money, by accepting deposits (liabilities) and out of such

deposits (liabilities) lend/create loans (assets). If for any reason such

assets created do not generate income or become sticky and difficult of

recovery, then the very position of the banks in repaying the deposits

(liabilities) on the due dates would be at stake and in jeopardy. Banks



with such assets portfolio would become weak and naturally such weak

banks will lose the faith and confidence of the investors.

With the introduction of prudential norms for income recognition, assets

classification and provisioning, banks have become quite sensitive and

are taking all possible steps to strengthen their assets acquisition and

monitoring systems.

There is also a growing awareness to bring down non-performing assets

as these are having adverse impact on their profitability due to de-

recognition of interests as well as requirement of heavy loan loss

provisions on such assets. Therefore it would be prudent for banks to

manage their assets in such a manner that they always remain healthy,

generate sufficient income and capable of repayment/recovery on the due

dates.

Management of performing/non-performing assets in banks has become

an `art and science' and virtually `a battle of wits' between the banker and

the borrower with the latter demanding write off or at least a major

sacrifice from the bankers side irrespective of whether he is in a position

to pay or not.

Management of non-performing assets of the financial sector

was put on fast track recently with the Union Cabinet approving the

promulgation of an ordinance to facilitate securitization and

reconstruction of financial assets.

→ Besides enabling banks and financial institutions to create a market for

the securitized assets and improve their asset liability management, the

Securitization and Reconstruction of Financial Assets and Enforcement of



Security Interest Ordinance would also assist in setting up Asset

Reconstruction Companies.

→ Though this is a welcome development, the bankers have to do their

basic homework and to utilize this opportunity to clean up and recover their

dues at an early date.

Measures to Recover NPA’s:

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

with the global banking has been facing lots of hurdles in its way due to its

inherent weaknesses, despite its high sounding claims and lofty

achievements. One of the major hurdles, the Indian banking is facing today,

is its ever-growing size of non-performing assets over which the top

management of almost each bank is baffled. On account of the intricacies

involved in handling the NPA the ticklish task of assets management of the

bank has become a tight rope walk affair for the controlling heads, because a

little wavering „this or that side‟ may land the concern bank in trouble. The

growing NPA is a potent source of worry for the finance minister as well,

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

instrument of development, while with the backbreaking NPA banks have

become helpless burden on the economy.

NPA with outstanding up to 5 crore:

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

have been directed to follow up a settlement formula under which the

minimum amount to be recovered, amounts to be entire outstanding running

ledger balances as on the date the account was identified as NPA i.e. the date

from which the interest was not charged to the running ledger, an analysis of



the given formula shows that RBI has been very much generous in granting

huge relaxation to the borrowers who were not coming forward for setting

their overdue loans due to one or other reason. The scheme is of high

practical value as it protects the borrowers who were having genuine

problems in clearing their dues because the interest component constituted a

multiplied amount of principal outstanding. On the other hand, the

concerned banks were also finding in difficult to sacrifice the entire interest

component, but outstanding in the dummy ledger. Now as per the provision

to the scheme, they will be ready to grant such relaxation in favour of the

borrowers. These guidelines have come as a windfall for borrowers who

after a lot of negotiations were almost ready to repay back their principal as

well as part of the interest component to settle their accounts, as under the

modified scheme, they would be able to save the interest component. To that

extent the concerned bank stands to lose.

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

the modified scheme states that the minimum sum to be recovered must

contain the entire running ledge outstanding balance as on the date of the

account was identified as NPA i.e. the date from the which interest

was not charged to the running ledger plus interest at the existing prime

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

for the payment of settlement amount NPA are simple and pragmatic. As per

the terms of the scheme, the settlement amount should be paid in lump sum

by the borrower. However in case of the borrower is unable to repay back in

a lump sum, the scheme allows sufficient breathing period to enable him to

arrange the funds and clear at least 25 percent of the settlement amount to be

paid upfront and the remaining amount to be recovered in installments

spread over a period of one year along with interest at the existing PLR from

the date of settlement up to the date of final payment.

NPA with outstanding over Rs. 5 crores:



For recovery of NPA over Rs. 5 crore, RBI has left the matter to the

concerned banks and advised that the concerned banks may formulate policy

guidelines regarding their settlement and recovery. The freedom, in such

cases, is given to the banks, because the attending circumstances in each

case may vary from the other. Therefore it was in the right direction that

adopting a generalized approach was not thought appropriate. In cases,

where the amount involved is above Rs. 5 crore, RBI expects CMD of each

bank to supervise the NPA personally. The CMDs of the concerned banks

are advised to review all such cases within a given timeframe and decide the

course of action in terms of rehabilitation/restructuring. RBI also desires the

submission of a quarterly report of all NPA above Rs. 5 crore from PSU

banks. Thus by putting up the cut-off dates for the implementing of the

scheme, RBI desires the banks to realize the seriousness of the issue and

gear up to sweep away the NPA in one go.

For commercial banks, it is a golden opportunity to clear the mess,

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

time given for weeding out the disastrous NPA is neither too long nor too

short and the banks, with proper planning and follow up can drastically

reduce their NPAs, if they firmly resolve to do so. RBI expects the

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

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

A proper monitoring system is also desired to be evolved for monitoring the

progress of the scheme. As this is a rare opportunity given to the defaulting

borrowers so that they can avail the chance given for the settlement of their

loans. Without adequate publicity of the scheme the response from the

defaulting borrowers may not be there to the expected level.

Legal and Regulatory Regime

A. DEBT RECOVERY TRIBUNALS (DRTs):



DRTs were set up under the Recovery of Debts due to Banks and

Financial Institutions Act, 1993. Under the Act, two types of Tribunals were

set up i.e. Debt Recovery Tribunal (DRT) and Debt Recovery Appellate

Tribunal (DRAT). The DRTs are vested with competence to entertain cases

referred to them, by the banks and FIs for recovery of debts due to the same.

The order passed by a DRT is appeal able to the Appellate Tribunal but no

appeal shall be entertained by the DRAT unless the applicant deposits 75%

of the amount due from him as determined by it. However, the Appellate

Tribunal may, for reasons to be received in writing, waive or reduce the

amount of such deposit. Advances of Rs. 1 million and above can be settled

through DRT process. An important power conferred on the Tribunal is that

of making an interim order (whether by way of injunction or stay) against

the defendant to debar him from transferring, alienating or otherwise dealing

with or disposing of any property and the assets belonging to him within

prior permission of the Tribunal. This order can be passed even while the

claim is pending. DRTs are criticized in respect of recovery made

considering the size of NPAs in the Country.

In general, it is observed that the defendants approach the High Court

challenging the verdict of the Appellate Tribunal which leads to further

delays in recovery. Validity of the Act is often challenged in the court,

which hinders the progress of the DRTs. Lastly, many needs to be done for

making the DRTs stronger in terms of infrastructure.

Registrar

Functions, duties and powers of Registrar:

To examine and verify documents including petitions, notes of

defense and memoranda of appeals to be filed with the tribunal or

appellate tribunal and register them if they meet requirements or

endorse them with reasons if they cannot be registered,



To verify duplicate copies submitted in a case with the

originals and certify them if they appear in order, and if the

originals appear to have some defects, to mention such defects and get

the concerned party to sign to that effect,

To verify whether documents submitted along with

petitions, memoranda of appeal and notes of defense are correct or

not,

To issue summons and get it served,

To appoint days for appearance in cases, indicating reasonable

reasons pursuant to law,

To obtain power of attorney and get a case assumed pursuant to

prevailing law,

To promptly execute, or cause to be executed, actions as

referred to in the order made by the Bench,

To have security or guarantee as per the order made by the

Bench,

To maintain, or cause to be maintained, updated records

including registration books,



To maintain personal records of employees,

To safely retain orders and directions in a serial order.

Debt Recovery Officer

The order issued by the Debt Recovery Officer shall deem to be the order

issued by the Tribunal. If any person disobeys any order given by the Debt

Recovery Officer, the Tribunal may institute contempt proceedings against

that person under the provision of the Act.

In recovering the principal and interest of a loan, the Debt Recovery Officer,

may follow the following procedures:

In consistent with the decision of the Tribunal the Debt Recovery Officer

may follow the

following procedures, subject to the prevailing law.

Power of Debt Recovery Officer

To take possession of, or auction, the borrower's other

movable or immovable property whether furnished as security or

not,

To take possession of, or auction, the guarantor's

movable or immovable property,



Where any individual is a borrower or guarantor, to arrest

such individual and detain him pursuant to the prevailing law.

Presiding officer:-

He is the Head of the department.

He has judicial power to execute the case.

B. LOKADALATS:

The institution of Lokadalat constituted under the Legal Services

Authorities Act, 1987 helps in resolving disputes between the parties by

conciliation, mediation, compromise or amicable settlement. It is known for

effecting mediation and counseling between the parties and to reduce burden

on the court, especially for small loans. Cases involving suit claims up to Rs.

l million can be brought before the Lokadalat and every award of the

Lokadalat shall be deemed to be a decree of a civil court and no appeal can

lie to any court against the award made by the Lokadalat. Several people of

particular localities/ various social organizations are approaching Lokadalats

which are generally presided over by two or three senior persons including

retired senior civil servants, defense personnel and judicial officers. They

take up cases which are suitable for settlement of debt for certain

consideration. Parties are heard and they explain their legal position. They



are advised to reach to some settlement due to social pressure of senior

bureaucrats or judicial officers or social workers. If the compromise is

arrived at, the parties to the litigation sign a statement in presence of

Lokadalats which is expected to be filed in court to obtain a consent decree.

Normally, if such settlement contains a clause that if the compromise is not

adhered to by the parties, the suits pending in the court will proceed in

accordance with the law and parties will have a right to get the decree from

the court. In general, it is observed that banks do not get the full advantage

of the Lokadalats. It is difficult to collect the concerned borrowers willing to

go in for compromise on the day when the Lokadalat meets. In any case, we

should continue our efforts to seek the help of the Lokadalat.

C. Enactment of SRFAESI Act

The "The Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act" (SRFAESI) provides the formal legal

basis and regulatory framework for setting up Asset Reconstruction

Companies (ARCs) in India. In addition to asset reconstruction and ARCs,

the Act deals with the following largely aspects,

Securitization and Securitization Companies

Enforcement of Security Interest

Creation of a central registry in which all securitization and asset

reconstruction transactions as well as any creation of security interest has to

be filed.



The Reserve Bank of India (RBI), the designated regulatory authority

for ARCS has issued Directions, Guidance Notes, Application Form and

Guidelines to Banks in April 2003 for regulating functioning of the proposed

ARCS and these Directions/ Guidance Notes cover various aspects relating

to registration, operations and funding of ARCS and resolution of NPAs by

ARCS. The RBI has also issued guidelines to banks and financial

institutions on issues relating to transfer of assets to ARCS, consideration for

the same and valuation of instruments issued by the ARCS. Additionally, the

Central Government has issued the security enforcement rules

("Enforcement Rules"), which lays down the procedure to be followed by a

secured creditor while enforcing its security interest pursuant to the Act. The

Act permits the secured creditors (if 75% of the secured creditors agree) to

enforce their security interest in relation to the underlying security without

reference to the Court after giving a 60 day notice to the defaulting borrower

upon classification of the corresponding financial assistance as a non-

performing asset.

The Act permits the secured creditors to take any of the following measures:

Take over possession of the secured assets of the borrower including

right to transfer by way of lease, assignment or sale;

Take over the management of the secured assets including the right to

transfer by way of lease, assignment or sale;

Appoint any person as a manager of the secured asset (such person

could be the ARC if they do not accept any pecuniary liability); and

Recover receivables of the borrower in respect of any secured asset

which has been

transferred. After taking over possession of the secured assets, the secured

creditors are required to obtain valuation of the assets.

These secured assets may be sold by using any of the following routes to

obtain maximum value.



By obtaining quotations from persons dealing in such assets or

otherwise interested in buying the assets;

By inviting tenders from the public;

By holding public auctions; or

By private treaty.

Lenders have seized collateral in some cases and while it has not yet

been possible to recover value from most such seizures due to certain legal

hurdles, lenders are now clearly in a much better bargaining position vis-à-

vis defaulting borrowers than they were before the enactment of SRFAESI

Act. When the legal hurdles are removed, the bargaining power of lenders is

likely to improve further and one would expect to see a large number of

NPAs being resolved in quick time, either through security enforcement or

through settlements.

Under the SRFAESI Act ARCS can be set up under the Companies Act,

1956. The Act designates any person holding not less than 10% of the paid-

up equity capital of the ARC as a sponsor and prohibits any sponsor from

holding a controlling interest in, being the holding company of or being in

control of the ARC. The SRFAESI and SRFAESI Rules/ Guidelines require

ARCS to have a minimum net-owned fund of not less than Rs. 20,000,000.

Further, the Directions require that an ARC should maintain, on an ongoing

basis, a minimum capital adequacy ratio of 15% of its risk weighted assets.

ARCS have been granted a maximum realization time frame of five years

from the date of acquisition of the assets.

The Act stipulates several measures that can be undertaken by ARCs for

asset reconstruction. These include:

Enforcement of security interest;

Taking over or changing the management of the business of the



borrower;

The sale or lease of the business of the borrower;

Settlement of the borrowers' dues; and

Restructuring or rescheduling of debt.

ARCS are also permitted to act as a manager of collateral assets taken over

by the lenders under security enforcement rights available to them or as a

recovery agent for any bank or financial institution and to receive a fee for

the discharge of these functions. They can also be appointed to act as a

receiver, if appointed by any Court or DRT.

D. INSTITUTE OF CDR MECHANISM

The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism

for resolution of NPAs of viable entities facing financial difficulties. The

CDR mechanism instituted in India is broadly along the lines of similar

systems in the UK, Thailand, Korea and Malaysia. The objective of the CDR

mechanism has been to ensure timely and transparent restructuring of

corporate debt outside the purview of the Board for Industrial and Financial

Reconstruction (BIFR), DRTs or other legal proceedings. The framework is

intended to preserve viable corporate affected by certain internal/external

factors and minimize losses to creditors/other stakeholders through an

orderly and coordinated restructuring programme. RBI has issued revised

guidelines in February 2003 with respect to the CDR mechanism. Corporate

borrowers with borrowings from the banking system of Rs. 20crores andabove under multiple banking arrangement are eligible under the CDR

mechanism. Accounts falling under standard, substandard or doubtful

categories can be considered for restructuring. CDR is a non-statutory

mechanism based on debtor-creditor agreement and inter-creditor

agreement. Restructuring helps in aligning repayment obligations for

bankers with the cash flow projections as reassessed at the time of



restructuring. Therefore it is critical to prepare a restructuring plan on the

lines of the expected business plan along with projected cash flows.

The CDR process is being stabilized. Certain revisions are envisaged

with respect to the eligibility criteria (amount of borrowings) and time frame

for restructuring. Foreign banks are not members of the CDR forum, and it is

expected that they would be signing the agreements shortly. However they

attend meetings. The first ARC to be operational in India- Asset

Reconstruction Company of India (ARCIL) is a member of the CDR forum.

Lenders in India prefer to resort to CDR mechanism to avoid unnecessary

delays in multiple lender arrangements and to increase transparency in the

process. While in the RBI guidelines it has been recommended to involve

independent consultants, banks are so far resorting to their internal teams for

recommending restructuring programs.

E. COMPRAMISE SETTLEMENT SCHEMES:

One Time Settlement Schemes:

NPAs in all sectors, which have become doubtful or loss as on 31st

March 2000. The scheme also covers NPAs classified as sub-standard as on

31st March 2000, which have subsequently become doubtful or loss. All

cases on which the banks have initiated action under the SRFAESI Act and

also cases pending before Courts/DRTs/BIFR, subject to consent decree

being obtained from the Courts/DRTs/BIFR are covered. However cases of

willful default, fraud and malfeasance are not covered. As per the OTS

scheme, for NPAs up to Rs. 10crores, the minimum amount that should be

recovered should be 100% of the outstanding balance in the account.

Negotiated Settlement Schemes:



The RBI/Government has been encouraging banks to design and

implement policies for negotiated settlements, particularly for old and

unresolved NPAs. The broad framework for such settlements was put in

place in July 1995. Specific guidelines were issued in May 1999 to public

sector banks for one-time settlements of NPAs of small scale sector. This

scheme was valid until September 2000 and enabled banks to recover Rs 6.7

billion from various accounts. Revised guidelines were issued in July 2000

for recovery of NPAs of Rs. 50 million and less. These guidelines were

effective until June 2001 and helped banks recover Rs. 26 billion

HYPOTHETICAL ANALYSIS:

H0 - The problem of NPAs is more in Private sector banks rather than Public

Sector banks as Public sector banks have shown a great decrease in their

NPA levels from past Five years. So, the hypothetical statement H0 doesn’t

hold true and the hypotheses is rejected.H0 rej ect ed. Hence the statement

should have” The problem of NPA is less acute in public sector banks as

compared to private sector banks.”

H1 - The secondary data shows that there is a decreasing trend in the NPA

status of most of the scheduled commercial banks because of various

stringent practices followed by Banks management and various policies by

government as even the global financial crisis had less effect on the working



of Indian banks and the banks have started to improve their NPA status. The

Hypothetical statements H1 is accepted.H1 accepted.

A] Gross NPA:

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:

B] Net NPA:

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:

PROVISION RATIO:

Provisions are to be made to keep safety against the NPA, & it directly affect

on the gross profit of the Banks. The provision Ratio is nothing but total

provision held for NPA to gross NPA of the Banks. The formula for that is,

Gross NPAs Ratio = Gross NPAs /Gross Advances

Net npa ratio=



(i) Provision Ratio = (Total Provision/Gross NPA)*100

(ii) [Additional Formulae: Net NPA = Gross NPA– Provision

Therefore, Provision = Gross NPA– Net NPA]

CAPITAL ADEQUACY RATIO:Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to

its assets, which are

Weighted/adjusted according to risk attached to them i.e.

General Conclusions :

Banks need to have better credit appraisal systems so as to prevent NPAs

from occurring. However, once NPAs do come into existence, the problem

can be solved only if there is enabling legal structure, since recovery of

NPAs often requires litigation and court orders to recover stock loans. With

long-winded litigations in India, debt recovery takes a very long time. Banksare now working on developing debt recovery tribunals to solve this

problem. The Govt. has also mooted the suggestion of an asset

reconstruction company for augmenting recovery measures.

1. The NPA is one of the biggest problems that the Banks are facing today is

the problem of Non Performing Assets. If the proper management of the

NPAs is not undertaken it would hamper the business of the banks.

Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100



2. As the global slowdown has crept into the economy, bankers feel that in

more loans are going to turn bad in the coming quarters and therefore they

want RBI to relax the deadline for loan reconstruction.

3. Due to Recession & slowdown in the Indian economy would result in

emerging NPAs for the public sector banks from textiles, real estate, retail,

exports and auto sectors.

4. The reduction of the NPAs would help the banks to boost up their profits,

smooth recycling of funds in the nation. This would help the nation to

develop more banking branches and developing the economy by providing

the better financial services to the nation.

5. If the concept of NPAs is taken very lightly it would be dangerous for the

Indian banking sector. The NPAs would destroy the current profit, interest

income due to large provisions of the NPAs, and would affect the smooth

functioning of the recycling of the funds.

6. As a result of the NPA‟s owners do not receive a market return on their

capital. In the worst case, if the bank fails, owners lose their assets & this

may affect a broad pool of shareholders & act as a rain on Profitability.

7. Banks also redistribute losses to other borrowers by charging higher

interest rates. Lower deposit rates and higher lending rates repress savings

and financial markets, which hampers economic growth.

8. When many borrowers fail to pay interest, banks may experience liquidity

shortages. These shortages can jam payments across the country and as a

result non performing loans may spill over the banking system and contract

the money stock, which may lead to economic contraction.

9. Banks need to create capital reserve to write off the mounting NPA’s

burden.

10. “A Man without money is like a bird without wings”, the Rumanian

proverb insists the importance of the money. A bank is an establishment,

which deals with money. The basic functions of Commercial banks are the

accepting of all kinds of deposits and lending of money. In general there are



several challenges confronting the commercial banks in its day to day

operations. The main challenge facing the commercial banks is the

disbursement of funds in quality assets (Loans and Advances) or otherwise it

leads to Non-performing assets.”

RECOMMENDATIONS:

Following Recommendations may be adopted to tackle the Problem of

NPAs:

Persuasion: It is very much an effective tool of recovery. It is very

much an effective tool of recovery. Continual follow- up will be very

effective in most cases.

Filing of Suits: The effectiveness of this tool depends on two major

factors:

o Whether other tools have been used;

o Whether there are adequate securities to be realized.

Compromise and Revival: It has been argued that a compromise,

whereby the Bank allows remission of principal and/or interest along with

rescheduling of the repayment of debt is a better way to deal with such

advances, especially when banks are drawn into long legal battles.

Involvement of other Agencies: Sometimes other agencies especially govt.

agencies are



involved in the recovery of dues and stagnant accounts in the priority sector.

Their

involvement in the recovery of loans is very much desirable.

Reference to B1FR: In case of large and medium units, when they are

registered for not less than seven years as companies, we can refer the case

of sickness to the Board for Industrial and Financial Reconstruction (BIFR)

for early liquidation or suggestion of rehabilitation packages.

Enforcement of Securities: Enforcement of Securities charged to bank

is equally

important aspect of the management of NPAs. Banks, wherever necessary,

have to move

courts not only to obtain decrees but also to get them executed.

Rehabilitation and Nursing: Rehabilitation and nursing of sick units,

as a matter of

policy should be given a fresh look. Only viable sick units with proven

capacity of the

management to run the units should be nursed.

Merger and Amalgamation of Units: Wherever feasible, efforts should be

made to

merge the sick units with healthy units.

Appointment of Special Tribunals: In view of ever mounting cases

involving bank

advances in the various courts of India, it is highly desirable that special

tribunals are

established all over India exclusively for bank's litigation.

Writing off of Bad debts: When no other course will bring positive

results it is always preferable to write off bad advances at the earliest to

A Project Report on NPA's

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