Bhavna
-
Upload
bhavna0789 -
Category
Business
-
view
2.220 -
download
7
description
Transcript of Bhavna
![Page 1: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/1.jpg)
A STUDY ON NON PERFORMING ASSETS OF
HARYANA STATE INDUSTRIAL & INFRASTRUCTURE DEVELOPMENT CORPORATION LIMITED
(An ISO 9002 certified Institution)
PROJECT REPORT
Submitted in partial fulfillment of the requirement for the award of Two year full time, Masters in Business Administration.
By Bhavna Agrawal
DEPARTMENT OF MANAGEMENT
LOVELY PROFESSIONAL UNIVERSITY
PHAGWARA (2009-2011)
Page 1
![Page 2: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/2.jpg)
ACKNOWLEDGEMENT
I owe my gratitude to the entire staff of finance, personnel &administration department for their
co-operation, without which not have possible to carry out my training successfully.
I feel highly obliged to Mr. Vijay Godara, manager (P&A) for making arrangements and for
their extreme support.
I wish to express my sincere thanks Mr. Mahaveer Singh, DGM (finance) for encouraging me.
I am also indebted to Mr. Satish Bansal, AGM (finance) and my mentor for their extreme
support and guidance given during the project study.
I would like to thanks Mr. Satyanarayan and Mr. Naresh for their co-operation extended during
the project studied.
I acknowledge my gratitude to Mr. Amarjeet Saini (Lovely Professional University), for his
extended guidance, encouragement, support and reviews without his guidance this project would
not have been a success.
BHAVNA AGRAWAL
Page 2
![Page 3: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/3.jpg)
TABLE OF CONTENTS
1. Executive summary2. Corporate profile- HSIIDC
a. introductionb. objectivec. quality policyd. financial services offered by HSIIDC
3. objective of the study4. literature review5. research methodology 6. study of NPA accounts
a. introductionb. definitionc. settlement formulad. one time settlement schemee. definition of doubtful accounts as per the policy
7. factors for rise in NPAs8. impact of NPA9. early symptoms by which one can recognize a performing assets turning into
NPA10.preventive measures of NPAs11.provisioning norms12.analysis of study
a. NPAs in HSIIDCb. HSIIDC v/s other banks
13.Recovery process14. Case study on NPA- M/S JYOTI OIL INDUSTRIES LTD.
15.Findings16.Suggestions17.Bibliography
Page 3
![Page 4: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/4.jpg)
EXECUTIVE SUMMARY:
The project on Non Performing Assets has been a very good experience. Every financial
institution and bank faces the problem of Non Performing assets in their day-to-day processes.
An organization’s cost reduced and the profits increase if it is able to manage its Non Performing
Assets.
Project finance is one of the core functions of the financial institutional. It is highly specialized
function which requires utmost care at every stage of sanction, disbursement, recovery and
follow-up, with a view to improve the quality of the portfolio, appropriate steps are required to
be initiated to identity the incipient sickness and ultimately to keep this level of non-performing
assets within the accepted norms.
This report is an attempt to study in detail the system of financial analysis followed in HSIIDC
and the apparent factor leading to potential NPAs.
Thus the report deals with organization details of HSIIDC, guidelines of RBI regarding NPAs
with a case study of JYOTI OIL INDUSTRIES.
Page 4
![Page 5: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/5.jpg)
CORPORATE PROFILE-
HSIIDC
Page 5
![Page 6: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/6.jpg)
INTRODUCTION- HSIIDC
Haryana state industrial development corporation is one of the leading contributors to the well
being and progress of the Haryana state. It has been instrumental in bringing about a major
change in the lives of the people of Haryana over the years. The pioneering zeal of HSIIDC has
facilitated the transformation of Haryana from a primarily agrarian society to one of the most
highly industrialized state of modern India.
HSIIDC was established in 1967. It is a public limited company wholly owned by the
government of Haryana and set up as a catalyst for promoting and accelerating the pace of
industrialization in the state. The corporation provides a wide spectrum of financial services
under one roof- the concept being “total financial support” for its clientele. The corporation
provides many services like term loans, equipment financing, industrial development, etc.
Being an intrinsically customer-oriented organization, HSIIDC has often gone beyond the call of
duty in helping to give concrete shape to the destiny and vision of thousands of entrepreneurs. It
has generally taken on the role of a trusted friend and guide, providing crucial support and most
important of all, creating an environment where nascent projects are able to attain their fruition
and become vibrant industries.
As a result Haryana produces the largest number of tractors, motorcycles, refrigerators and G.I.
pipes in the country. Above 25% of India’s total sanitary ware is manufactured here. And one out
of every four bicycles bears the stamp of Haryana’s factories. Haryana’s index of industrial
production is far above the all Indian average. Many large units like National Fertilizers,
Hindustan Machine Tools, Bharat Electronics and others have a stake in the state. In addition,
well-known private sectors such as Escorts, Hero Honda, Maruti and Kelvinator, among others,
have a very noticeable presence.
HSIIDC is the first financial institution in the country that has obtained ISO-9002 quality
systems certificate for its services.
Corporation successfully completed many projects in the public, joint, and assisted sectors. It has
developed many self sufficient and fully developed industrial estates in the state of Haryana. The
Page 6
![Page 7: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/7.jpg)
Japanese JICA (Japanese international corporation agency) have selected Haryana for the first
Industrial Model Township in India.
HSIIDC OBJECTIVES
Identification and promotion of large and medium sector projects.
Providing financial assistant by the way of term loans/direct participation in equity.
Financial infrastructural development
Performing agency functions on behalf of the state government/IDBI/SIDBI.
Providing financial services to entrepreneurs and established industries foe enhancement
of capacity/modernization.
HSIIDC QUALITY POLICY
Accepting Quality as a major competitive factor and striving for customer satisfaction is the ever
evolving guiding philosophy of HSIIDC which spells:
High Productivity
Success
Innovation
Dynamism
Commitment
This is achieved by overcoming resistance to winds of charge and working as a team as per
transparent systems designed for prompt delivery of our services and observing financial
discipline.
ISO 9001:2000 Certification
In keeping with the Quality Policy of HSIIDC, the organization has become the first State Level
Financial Institution in India to be certified as an ISO-9001:2000 company.
Page 7
![Page 8: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/8.jpg)
Trail of Achievements
"Corporation has constituted its high growth for the fourth year and made a trajectory of
consistent record by posting gross income of Rs. 14682 lakh. The net profit before dividend is
Rs. 5365 lakh against the previous record of Rs. 4128 lakh during the previous year and thereby
registered an increase of 29.97/%. The Corporation during the year 2008-09 has declared a
dividend of Rs. 750 lakh out of profit to its equity shareholders i.e. State Government. The net
worth of the Corporation has increased many folds i.e. Rs. 9794 lakh in 1998-99 to Rs. 85767
lakh in 2008-09.."
64 projects have been successfully set up in the Public/Joint/Assisted sectors, with an equity
participation of Rs.38.88 crore, catalyzing an investment of Rs. 795.25 crore, in the State of
Haryana. Many industrial estates have been developed epitomizing HSIIDC's commitment to
galvanize industrialization. 77360 jobs have been created through HSIIDC-assisted projects. The
State Government has declared HSIIDC as the Nodal Agency for development of Industrial
Infrastructure in the State of Haryana.
HSIIDC has also been declared by the Haryana Government as the implementing agency for the
development of Kundli-Manesar-Palwal Expressway in the State of Haryana.
People - The Prime Asset
HSIIDC is an organization with a difference - "service oriented" and progressive in outlook,
where the emphasis is on people - both outside - the customers - and inside the organization - the
staff members. HSIIDC recognizes the importance of its cardinal assets---- “the Human
Resources." Today, HSIIDC is a well-knit team of highly experienced financial experts,
engineers, professionals, administrators and technicians, HSIIDC comprises of very dedicated
personnel, all of whom thrive on teamwork and a cohesive work spirit. HSIIDC has evolved into
a unique service organization where the top management supports the entire structure, which is
very much in touch with grass-root level operations. The middle management is supported by the
top management who in-turn support and guide the entire front line staff. HSIIDC's corporate
headquarters are situated in Panchkula with branch offices in New Delhi, Manesar, Hisar,
Page 8
![Page 9: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/9.jpg)
Gurgaon and Faridabad. It has field offices at Gurgaon, Faridabad, Kundli, Kalka, Ambala, Saha,
Bawal, Manakpur, Karnal, Jind, Tohana, Murthal, Sonepat, Barwala, Manesar and Sirsa.
Financial services offered by HSIIDC
The scope of financial services provided by HSIIDC has been enlarged over the years keeping in
view the ever-growing needs of industrial sector. The services now being provided include-
1. Term loans-
The unit should envisage setting up manufacturing facilities in the state of Haryana. The service
sector entities like Hotels, Hospitals, warehousing etc. are also considered eligible for financing.
Maximum loan per proposal- Rs. 2500 lakh
Minimum security margin- 25%
Promoter’s contribution- 30%
Debt equity ratio- 1.5:1(May change according to the requirement of the project)
Repayment period 5 to 8 years depending upon the repayment capacity with
initial moratorium of 1-2 years on repayment of the principal
amount.
Page 9
![Page 10: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/10.jpg)
Rate of interest
The rate of interest applicable (floating) as on date is 13% with rebate of 1% on timely payment
for general term loan. However, for specific scheme, the interest rate has been indicated under
the respective heads of specific schemes.
SERVICE TAX & PROCESSING CHARGE ON TERM LOAN
Processing Fee: 0.20% of the loan application amount (non refundable)
The processing fee for term loan cases of more than Rs.5.00 Crores, the applicants can deposit
50% of the processing fee at the time of submission of application and balance 50% of the
processing fee is required to be deposited before issue of sanction letter
Service Tax: 10.00% of the processing fee and Education Cess on Service Tax is 3%.
After the case has been accepted and appraisal initiated, the processing charges are not
refundable. However, if the application is withdrawn after the acceptance of case but before
starting the appraisal, the processing charges are refundable after retaining service tax & lump-
sum fee of Rs. 5000/-.
SECURITY
Primary security: land (if it is of HSIIDC), building, plant and machinery
Collateral security: The Term Loans extended by the Corporation are secured by way of
mortgage of primary security. However, the Collateral Security is obtained to further secure the
loan and its quantum depends on the risk perception.
Page 10
![Page 11: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/11.jpg)
TERM LOAN PROCEDURE
The term loan procedure associate with a term loan involves the following principal steps:
Interaction with the 'Client' starts with the receipt of Application Form (both printed and on
floppy) which is available on payment of Rs.100/- at Head Office and/ or Branch Offices of the
Corporation.
The applicants may download the application form from the website which is available under
download section on homepage. However, the applicants are required to pay demand draft of
Rs.100/- in favour of HSIIDC Ltd. payable at Panchkula/Chandigarh at the time of submission of
application along with processing fee
Following basic information is required at this stage:
Processing charges & Service tax in the name of HSIIDC Limited;
Certificate of Incorporation of the company along with a copy of Memorandum and
Articles of Association;
Background of Promoters including details of their assets and liabilities;
In case of existing units, background of the unit, financial statements for the last three
years;
Financial statements of sister units for the last three years;
Details of existing assistance availed outstanding, default etc.;
Brief particulars of the proposed project including project cost and means of finance;
Details of existing and proposed capacity;
Location where project is proposed to be set up with complete details of land along with
copies of letter of allotment/ sale deed/ conveyance deed;
Details of proposed building along with site and building plan;
Main machinery with details of suppliers. In case of second-hand machinery, the
justification for such option, residual life of the machinery, year of its make/
manufacture, cost of similar new machinery etc.;
Availability of raw material, its sources, price behavior etc.;
Requirement of power, steam, water, pollution control;
Page 11
![Page 12: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/12.jpg)
Technical tie up, if any;
Marketing tie up, if any; and
Copies of other Govt. approvals like permission from Pollution Control Board, SSI/SIA
approval, permission for change of land use, approval for power load sanction etc.
(However, these approvals can also be submitted at the time of appraisal)
The Application Form, duly filled in along with a copy on floppy and complete with above
information, may be submitted at Head Office or any Branch Office of the Corporation. The
Application Form may also be submitted at Business Meets organised by the Corporation from
time to time.
ACCEPTANCE OF PROPOSAL FOR APPRAISAL
After receipt of application, the proposal is placed before the Screening Committee, which
consists of senior officers of the Corporation. The promoters are also required to be present in
this meeting. The objective of this meeting is to interact with the promoters and also to examine
as to whether the proposal can be accepted for detailed appraisal. This stage takes about a week’s
time.
ACCEPTANCE OF PROPOSAL FOR APPRAISAL DURING BUSINESS MEET
The Corporation organises Business Meets at different locations throughout the year. The event
is generally notified through press in advance. Basic information as per the prescribed format is
required for scrutiny of proposals during the Business Meets. The proposals accepted at Business
Meets are straightway allotted for appraisal after approval of the Managing Director.
DETAILED APPRAISAL OF THE PROPOSAL
After a proposal is accepted for appraisal, the detailed appraisal is carried out by the officer(s) of
the Corporation to assess the technical feasibility and financial viability of the proposal. Among
other things, the Appraising Officer(s) focus on the following points:
Page 12
![Page 13: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/13.jpg)
Types of APPRAISALS
MARKET APPRAISAL
Importance of the potential market and the need to develop a suitable marketing strategy cannot
be over- emphasised. Hence, efforts are made to:
Examine the reasonableness of the demand projections by utilising the findings of the available
survey, industry association projections, planning commission and independent market survey
(which may sometimes be commissioned).
Assess the adequacy of the marketing infrastructure in terms of potential efforts, distribution
network, transport facilities, stock level etc.
Judge the knowledge, experience and competence of the key marketing personnel.
TECHNICAL APPRAISAL
The technical review done by the financial institutions focuses mainly on the following aspects.
Product mix
Capacity
Process of manufacturing
Engineering know-how and technical collaboration
Raw material and consumable location and site
Building
Plant and equipment
Manpower requirements
Break-even point.
Qualified and experienced personnel available in the institutions and/or outside experts
(particularly where large and technologically sophisticated projects are involved) do the
technical review.
Page 13
![Page 14: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/14.jpg)
FINANCIAL APPRASIAL
The financial appraisal seeks to access the following:
Reasonableness of the estimate of the capital cost
Reasonableness of the estimate of working result
Adequacy of the rate of return, and
Appropriateness of the financing pattern
Reasonableness of the estimate capital cost: while assessing the capital cost estimates, efforts
are made to ensure that:
Padding or under estimation of costs is avoided
Specification of machinery is proper
Proper quotations are obtained from potential supplier
Contingencies are provided
Inflation factors are considered
Reasonableness of estimate of working result: the estimate of working results is sought to be
based on
A realistic market demand forecast
Price computation for inputs and outputs that are based on current quotation and
inflationary factors.
Cost projections that distinguish between fixed and variable costs.
Adequacy of rate of return: the general norms for financial desirability are as follow:
internal rate of return 15%
return on investment 20-25%
debt- service coverage ratio 1.5-2
In applying these norms, however, a certain degree of flexibility is shown on the basis of the
nature of the project, the risk inherent in the project, and the status of the promoter.
Page 14
![Page 15: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/15.jpg)
Appropriateness of the financial pattern: the institutions assess the following in assessing the
finance pattern:
a general debt-equity ratio 1.5:1
a requirement that promoters should contribute 12.5% to 22.5% of the project cost
The means of the promoters and his capacity to contribute a reasonable share of the
project finance.
Economic appraisal
The economic review looks at the project from the larger social point of view. The methodology
adapted by the financial institutes for the purpose of economic evaluation (also referred to as
social cost benefit analysis) is labelled as ‘partial little mirrless’ approach. In addition to the
calculation of the economic rate of return as per this approach, they also look at two other
economic indicators:
Effective rate of return
Domestic resource cost
Managerial appraisal
In order to judge the managerial capabilities, following points are considered:
Resourcefulness: this is judged in terms of the prior experience of the promoters, the
progress achieved in organising various aspects of the projects, and the skill with which
the project is presented.
Understanding: this is assessed in terms of the credibility of the project plan including,
inter-alia, the organisation structure the estimate cost, the financial pattern, the
assessment of the various inputs and the marketing program, and the details furnishing to
the financial institutes.
Commitment: this is gauged by the resources (financial, managerial and others) applied
to the project and the zeal with which the objectives of the project, short term, are
pursued. Managerial review also involves an assessment of the calibre of the key
Page 15
![Page 16: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/16.jpg)
technical and managerial personnel working on the project, the schedule for training
them, and the remuneration structure for rewarding and motivating them.
Key financial indicators
The following are the key financial indicators:
Internal rate of return
Debt- services coverage ratio
Break- even point
Profit margin on sales
Return on owners equity
Fixed assets coverage ratio
Debt-coverage ratio
Current ratio
ROI after taxes
ROI before taxes
Other important factors are:
Background of promoters, relevant experience, their resource position;
Performance of the unit, if existing;
Performance of sister units;
Suitability and adequacy of land, location etc.;
Adequacy of proposed building;
Suitability and adequacy of proposed machinery;
Background and reputation of the machinery suppliers;
In case of second hand machinery, year of manufacture, residual life, cost of similar new
machinery;
Sources and availability of raw material, price data for the last 1- 2 years;
Adequacy of utilities like water, steam, skilled manpower etc.
Technical /Financial tie-ups;
Adequacy of equipments for pollution control;
Page 16
![Page 17: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/17.jpg)
Opinion of the banker on the promoters and conduct with them; and
Marketing tie-ups, market overview with emphasis on demand and supply, other existing
players, extent of competition and emerging competition, product price etc.
After the appraisal, the proposal is placed before the Advisory Committee which consists of
members from within the organisation as well as outside experts. This Committee looks into
various aspects of the appraised project, and its strengths & weaknesses to assess and determine
the technical feasibility and financial viability of the proposal.
SANCTION OF LOAN
Once the proposal is cleared by the Advisory Committee, it is placed before the authority
competent to sanction the loan.
The time taken from the receipt of application till sanction of loan is about two months subject to
expeditious and timely receipt of complete information from the applicant.
DISBURSEMENT OF SANCTIONED ASSISTANCE-
The process of disbursement of term loan starts with the acceptance of terms & conditions of
sanction by the borrower as conveyed in the Sanction Letter and deposit of Imprest Money and
Up-front Fee. The imprest Money is kept as an advance and its objective is to meet out the
expenses the Corporation may have to incur during Monitoring and Follow-up. Presently, the
Imprest money is charged Rs. 25000/- in loan cases up to Rs. 150 Lakh and Rs. 35000 in loan
cases above Rs. 150 lakh. The objective of charging Up-front Fee is to meet the commitment
cost of funds during disbursement stage. The rates at which up-front fee are charged are: @ 0.5%
of the loan amount. Other requirements for first disbursement are as under:
Legal Documentation: Legal Documentation precedes any disbursement. The details of Legal
Documents required to be executed is supplied immediately after sanction. However, legal
documents/resolutions required before disbursement are briefly explained hereunder:
i. Resolutions
Page 17
![Page 18: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/18.jpg)
Subject to section 292 of the Act, the board of directors shall have the right to delegate
any of their powers to such managers, agents or other persons as they may deem fit and
may at their own discretion revoke such powers.
General body resolutions under section 293(1) (a) to mortgage the assets of the company
and under section 293(1) (d) regarding borrowing powers.
Board resolutions to approve loan application to HSIIDC, to accept terms and conditions
of loan and authorising Directors to sign loan agreement, hypothecation deed, to open
special current account , resolution to execute Tripartite Agreement with other joint
lenders for creating pari-passu charge on fixed assets of the company, if applicable, and
other documents under the common seal of the company.
ii Other documents
Letter of acceptance duly signed by the Director as per BOD resolution.
Up-to-date certified copy of the Memorandum & Articles of Association.
Particulars of immovable property with copies of Mutation, Jambandi, sale-deed, and
search report etc. both in respect of Company's property as well as collateral security.
Site plan (Aks-shajra) on tracing cloth indicating the total area and surroundings on all
sides.
Statement of share capital certified by the Statutory Auditors.
Copy of the latest audited Balance Sheet.
Copy of the Returns of allotment filed with the Registrar of Companies.
Copy of the Resolutions filed and registered with the Registrar of Companies under
section 192 of the Companies Act.
Search report by Statutory Auditor regarding charges filed with the Registrar of
Companies.
Full particulars of guarantors along with details of immovable & movable assets,
PAN/GIR No. and two passport size photographs.
No objection certificate under section 281 of the Income Tax Act for creation of charge.
Permission for conversion of land usage, if applicable, from the competent authority.
Page 18
![Page 19: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/19.jpg)
Details of shareholding of guarantors i.e. number of shares, Folio No., Certificate Nos.,
and Distinctive Nos.
No lien letter from the bank in respect of special current account.
2. LOAN UNDER EQUIPMENT FINANCE SCHEME (EFS)
Eligibility Criteria
The financial assistance under this scheme is available to the existing profit-making companies
for acquiring machinery & equipment for expansion/ modernisation/ balancing. The company
should satisfy the following eligibility norms to be covered under the scheme.
The unit should be in operation for last four years and should be in profits and/ or
declared dividend in the preceding two financial years;
The current ratio should preferably be 1.33:1 or above;
The cost of proposed equipment normally should not be more than 50% of the existing
gross block;
The applicant company should not be in default with the Institutions/ Banks; and
The proposed equipment should be separately identifiable
Financing Parameters
Maximum assistant Rs. 500 lacs per proposal
Repayment period 2 to 5 years
Rate of interest 12% p.a. floating
Page 19
![Page 20: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/20.jpg)
Processing fees 0.20% of loan amount
Upfront fees 0.50% of loan amount
Service Tax & Processing Charges
Procedure is same as applicable under General term loan
Penalties:
In case of any default, the rate of interest applicable to general term loan is chargeable for the
balance loan amount and it becomes the documented rate of interest for all intents and purposes.
In addition, penal interest is charged @ 3% p.a. over and above this revised documented rate on
the defaulted amount for the period of default.
3. Letter of Credit
The Corporation has made arrangements with some Commercial banks for opening Letter of
Credits for the purchase of machinery from India or abroad against term loan. This scheme aims
at reducing the efforts of the client to approach the bank to open the Letter of Credit, which is a
de-novo process, after the sanction of loan from HSIIDC.
Service Charges
The Corporation levies service charges which are shared with the Commercial Banks through
whom the Letter of Credit is opened. The HSIIDC’s charges are comparable with those of the
Commercial Banks in case the Letter of Credit is directly opened through them. The details of
charges are as under:
Letter of Credit up to Rs
100.00 lac
1% of the amount of
Letter of Credit
Page 20
![Page 21: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/21.jpg)
Letter of Credit above Rs
100.00 lac
@ Double the FEDAI*
rates
*stands for Foreign Exchange Dealers Association of India, which is a Confederation of Foreign
Exchange Dealers for deciding various charges on services provided by the members.
4. Letter of Comfort
The Corporation also issues Letter of Comfort in favour of Commercial Banks to facilitate
opening of the Letter of Credit by the latter, in case the client so wishes. Since it amounts to
commitment of funds by the Corporation, service charges @ 0.5% of the amount of Letter of
Comfort are charged. The Letter of Comfort is issued on the request of the client and the amount
is restricted to the extent of disbursement eligibility.
5. Working Capital Term Loan
As the very title suggests, the loan under this category is provided for meeting the working
capital requirements including shortfall in margin money for working capital. It is a medium
term maturity loan.
Eligibility: Only those units which have been sanctioned/ disbursed term loan by the
Corporation.
Limit for Loan:
Page 21
![Page 22: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/22.jpg)
SSI Rs. 125.00 lakh
Non SSI Rs.200.00 lakh
Financing Parameters:
Repayment period 5-1/2 years including six months moratorium
Maximum assistance (SSI)
(Non SSI)
Rs.125 lacs
Rs.200 lacs
Rate of Interest 12.00% p.a. floating (applicable both for
SSI/Non-SSI units)
(before 1% timely payment rebate)
Processing fee 0.20% of loan amount
Upfront fee 0.50% of loan amount
Objective of study
Page 22
![Page 23: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/23.jpg)
To study the project appraisal and its results, that is used, for deciding about
acceptance/rejection of the project.
To know about provisioning practice being followed by HSIIDC.
To study how HSIIDC deals with NPAs.
To evaluate the position of HSIIDC in comparison with PNB and SBI.
REVIEW OF LITERATURE:
Page 23
![Page 24: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/24.jpg)
Shawn Thomas (1999) in their study titled ‘Bank loan loss provisions’ describes that the
1990 change in capital adequacy regulations to construct more powerful tests of capital
and earnings management effects on bank loan loss provisions. We find strong support
for the hypothesis that loan loss provisions are used for capital management. We do not
find evidence of earnings management via loan loss provisions. We also document the
reasons for the conflicting results on these effects observed in prior studies. Additionally,
we find that loan loss provisions are negatively related to both future earnings changes
and contemporaneous stock returns contrary to the signaling results documented in prior
work.
Vincent Bouvatier (2000) in their study titled ‘Provisioning Rules and Bank Lending: A
Theoretical Model’ describes that this paper develops a partial equilibrium model of a
banking firm to analyze how provisioning rules influence loan market fluctuations. We
show that a backward-looking provisioning system amplifies the pro-cyclicality of loan
market fluctuations. We demonstrate that, in a forward-looking provisioning system
where statistical provisions are used to smooth the evolution of total loan loss provisions,
the issue of pro-cyclicality of loan market fluctuations does not exist. Our findings
support the call for the implementation of a dynamic provisioning system.
Larry G. Meeker and Laura Gray (2002) in their study titled ‘A note on non-
performing loans as an indicator of asset quality’ used the tool of regression analysis and
described that, the public was given its first opportunity to review bank asset quality in
the form of non-performing asset information. The purpose of this study is to evaluate
that information. A regression analysis comparing the non-performing asset statistics
with examiner classifications of assets suggests that the non-performing asset information
can be useful aid in analyzing the asset quality of banks, particularly when the
information is timely.
Page 24
![Page 25: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/25.jpg)
Milind Sathye (2003) in their study titled ‘Efficiency of banks in a developing economy:
The case of India’, says that the objective of this paper is to measure the productive
efficiency of banks in a developing country, that is, India. The measurement of efficiency
is done using data envelopment analysis. Two models have been constructed to show
how efficiency scores vary with change in inputs and outputs. The efficiency scores, for
three groups of banks, that are, publicly owned, privately owned and foreign owned, are
measured. The study shows that the mean efficiency score of Indian banks compares well
with the world mean efficiency score and the efficiency of private sector commercial
banks as a group is, paradoxically lower than that of public sector banks and foreign
banks in India. The study recommends that the existing policy of reducing non-
performing assets and rationalization of staff and branches may be continued to obtain
efficiency gains and make the Indian banks internationally competitive which is a
declared objective of the Government of India.
Rituparna Das (2003) in their study titled ‘Managing the Risk of Non Performing Assets
in the Small Scale Industries in India’ tries to seek a solution to the problem of NPA in
the small scale industries under the present circumstances of banking and insurance
working together under the same roof. What is stressed in this article is the pressing need
of the small-scale entrepreneur for becoming aware and educated in modern business
management holding a professional attitude toward rational decision-making and banks
have to facilitate that process as a part of the credit policy sold by them.
Peng Hui Li Yong (2004) in their study titled ‘An Analysis on the Return and Risk
Management during Securitization of Non-Performing Assets-the Effect of Securitization
on
Originator’ and his paper expounded the calculation method of gain on sale and revenue
on retained interest during non-performing assets securitization, analyze the relationship
between return of securitization and expected cash flow of asset pool, circulation volume
of asset-backed security, funding cost, upfront cost. For the first time, this paper showed
Page 25
![Page 26: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/26.jpg)
that the total benefit of asset securitization could be divided into three parts: excess
spread, excess loss provision and value-added cash flow. Securitization of NPL could
increase recovery rate and revenue, provide further loss protection and increase return on
equity. Nevertheless, originating banks should carefully establish efficient risk evaluating
system and strengthen internal management to control retained risk and new risk
exposure generated during securitization.
John Wiley (2005) in their study titled ‘Banking reform in India’ describes that the
important process about financial reform in the area of bank illiquidity in low-income
emerging markets. This process is taking place within the context of a debate as to
whether or not governments should try to rehabilitate existing state-owned banks or allow
a new or parallel banking system to emerge in order to reduce non-performing assets
from state-owned commercial banks. A comparison of institutional development in China
and India suggests that new entry rather than the rehabilitation approach may work more
favorably to reduce non-performing assets. The paper offers an explanation as to why
governments choose rehabilitation over new entry.
Prashanth K. Reddy (2005) in their study titled ‘A comparative study of Non
Performing Assets in India in the Global context - similarities and dissimilarities,
remedial measures’ analyzed that Financial sector reform in India has progressed rapidly
on aspects like interest rate deregulation, reduction in reserve requirements, barriers to
entry, prudential norms and risk-based supervision. But progress on the structural-
institutional aspects has been much slower and is a cause for concern. The sheltering of
weak institutions while liberalizing operational rules of the game is making
implementation of operational changes difficult and ineffective. Changes required to
tackle the NPA problem would have to span the entire gamut of judiciary, polity and the
bureaucracy to be truly effective. This paper deals with the experiences of other Asian
countries in handling of NPAs. It further looks into the effect of the reforms on the level
of NPAs and suggests mechanisms to handle the problem by drawing on experiences
from other countries.
Page 26
![Page 27: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/27.jpg)
Jean Dermine (2005) in their study titled‘Provisioning practices’ describes that A fair
level of provisions on bad and doubtful loans is an essential input in mark-to-market
accounting, and in the calculation of bank capital and solvency. Few academic studies
have analyzed the adequacy of loan-loss provisioning because, due to the private nature
of bank loan transactions, few micro data are readily available. Access to data on
recovery over time on bad and doubtful bank loans allows developing and applying two
methodologies to calculate a fair level of loan-loss provisions. Empirical estimates are
then compared to a regulatory provisioning schedule imposed by a central bank.
LI Peng-yan (2007) in their study titled ‘A risk evaluation of non-performing assets
securitization on the basis of analytic hierarchy process’ says that aiming at the
securitization risk of non-performing assets in commercial banks in China, an analytic
hierarchy process was employed to evaluate the problem. The analysis result showed that
when securitizing non-performing assets, credit risk became the most important risk that
commercial banks faced. Moreover, this paper pointed out that improving the credit
environment and perfecting the credit system were the focus and direction to avoid the
securitization risk of non-performing assets of commercial banks in China.
Page 27
![Page 28: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/28.jpg)
Research methodology
The term research refers to the systematic method consisting of enunciating the problem ,
formulating a hypothesis collecting the data , analyzing the facts and reaching the certain
conclusions either in the form of solution towards the concern problem or in certain
generalization for some theoretical formulation .
Research Methodology is a way to solve systematically the research problem .It may be
understood as a science of studying how research is done scientifically.
Time Period of the study:
The present study was undertaken during Six weeks from 25th June - 9th August.
Research Design:
Descriptive research procedure is used for describing the resent situations in the organization and
analytical research to analyze the results by using research tools.
Descriptive research:
Descriptive research is also called Statistical Research. The main goal of this type of research is
to describe the data and characteristics about what is being studied. The idea behind this type of
research is to study frequencies, averages, and other statistical calculations. Although this
research is highly accurate, it does not gather the causes behind a situation. Descriptive research
is mainly done when a researcher wants to gain a better understanding of a topic.
Data collection:
I have used 2 techniques in collecting data-
1. Primary data
2. Secondary data
Page 28
![Page 29: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/29.jpg)
Primary data: Primary research entails the use of immediate data in determining the survival of
the market. The popular ways to collect primary data consist of surveys, interviews and focus
groups.
For collecting data I have done discussions with my mentor that how a project becomes NPA,
and what mistakes are there in appraisal.
Secondary data: Secondary data are those which have already been collected by someone else
and which have already been passed through the statistical process. The Secondary data consist
of reality available compendices already complied statistical statements. Secondary data consists
of not only published records and reports but also unpublished records.
Here we done the analysis on basis of secondary data, which included-
Balance sheet of the company
Provisioning norms of the company
Record of NPA of the company
APage 29
![Page 30: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/30.jpg)
STUDY ON NPA
ACCOUNTS
Introduction
A project or capital expenditure is a scheme of investment resources that can be analyzed and
appraised reasonably independently. It can be a gigantic scheme like a multipurpose river valley
or a small investment in pocket calculator.
Basic definition of capital expenditure or project is that it generally involves a current outlay of
funds outlay of land, building, machinery, research & development, training programmes etc.
To implement any project, funds are required to meet its cost. The cost of project that represents
the total of all items of outlay associate with a project is generally supported by long-term
funds. So there arises a need to finance the cost of project. There are a number of sources for
Page 30
![Page 31: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/31.jpg)
financing like share capital, term loans, debenture capital, deferred credit, etc. a project can also
be financed by combination of sources like share capital and term loans. A large number of
industrial units apply for term loans to various financial institutes. In order to avail the term
loans, units prepare the appraisal report and apply to financial institutes.
Financial institutes sanction term loans after evaluating the project and the report. They evaluate
future cash flows, risk involves in financing the industrial concerns and the ease of repayment
of installments and interest if they sanction loan. But sometimes the evaluation in actual
circumstances or projection about the company goes wrong and company fails to perform. As a
result default starts in repaying principal installments and interest.
All financial institutes follow guidelines by RBI for income recognition, assets classification,
and provisioning, so institutes disclose the total loan assets with the classification in their annual
reports and also provide require provisioning for each asset class under non-performing assets
viz. sub- standard assets, doubtful assets and loss assets.
Definition of Non Performing assets:
A loan or a lease that is not meeting its stated principal and interest payments. Financial
institutes usually classify as nonperforming assets any commercial loan which is more than 90
days overdue and any consumer loans which are more than 180 days overdue. More generally,
an assets which is not producing income.
In other words, a debt obligation where the borrower has not paid any previously agreed upon
interest and principal repayments to the designated lender for an extended period of time. The
nonperforming asset is therefore not yielding any income to the lender in the form of principal
and interest payments.
Page 31
![Page 32: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/32.jpg)
So any account where the age of default in installment of principal and/or interest is more than
90 days, the account would be treated as NPA which could be either a
sub-standard/doubtful/loss account in terms of classification guidelines of RBI as prevailing on
31.3.2006, which is as under:
Category of asset Default period
Standard assets Regular accounts
Nonperforming assets Default exceeding 90 days
Sub- standard asset Classified as NPA for a period not
exceeding 18 months
Doubtful assets Classified as NPA for a period
exceeding 18 months
Loss assets No security available
Sub-standard Assets: A sub-standard asset is one, which has remained NPA for a period of
less than or equal to 18 months. In such cases, 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
jeopardise the liquidation of the debt and are characterised by the distinct possibility that the
banks will sustain some loss, if deficiencies are not corrected. A general provision @ of 10% on
total outstanding is made without making any allowance for DICGC/ECGC/CGTMSE guarantee
cover and securities available for advances secured by way of tangible assets.
Page 32
![Page 33: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/33.jpg)
Doubtful Assets: An asset is classified as doubtful if it has remained in the sub-standard
category for a period of 18 months.
Loss Assets: A loss asset is one where realizable value of security assessed by bank/auditor
is less than 10 % of outstanding in the a/c. In other words, such an asset is considered
uncollectible and of such little value that its continuance as the asset of HSIIDC which is not
warranted although there may be some salvage or recovery value.
SETTLEMENT FORMULA- amount and cut off rate
a. NPAs classified as Doubtful or Loss as on March 31, 2006
The minimum amount that should be recovered under the policy in respect of
compromise settlement of NPAs classified as doubtful or loss as on March 31, 2006
would be 100% of the outstanding balance in the account as on the date on which the
account was categorized as doubtful NPA.
b. NPAs classified as sub-standard as on March 31, 2006 which became doubtful or
loss subsequently.
The minimum amount that should be recovered in respect of NPAs classified as
substandard as on March 31, 2006 which became doubtful or loss subsequently would be
100% of amount outstanding as on the date on which the account was categorized as
doubtful NPA plus at 13% p.a. from the cut- off date till date of final payment.
ONE TIME SETTELEMENT (OTS) POLICY OF HSIIDC
Page 33
![Page 34: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/34.jpg)
One time settlement will be done in all loan (term loan/ working capital term loan) cases which
are categorized either Doubtful/loss on the terms and conditions detailed hereunder-
1. Wilful defaulters as detailed subsequently shall not be entertained under these guidelines
for the settlement of loan account.
2. The categories of loan accounts under the guidelines are defined as under and basis of
status of loan account would be taken on the date as and when the party approaches for
settlement of loan accounts.
DEFINITION OF DOUBTFUL ACCOUNT AS PER THIS POLICY
Doubtful loan account is one, where the principal remained overdue for a period
exceeding two years.
Category Benefits permissible
1.(a) Doubtful loan account(Category-A)
Where the loan account has remained Accounts may be settled by waiving
doubtful for less than three years. off entire penal interest plus 25% of
Page 34
![Page 35: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/35.jpg)
component of compounded interest.
However, the waiver shall not exceed
25% of total outstanding.
(b) Doubtful loan account (Category-B)
Where the loan account has remained Accounts may be settled by waiving off
doubtful for more than three years but entire penal interest plus 50% of
less than five years. component of compounded interest
but waiver should not be more than 50%
of total outstanding.
(c) Doubtful loan account ( Category- C)
Where the loan account has remained Accounts may be settled by waving of
doubtful for more than five years. entire penal 100% component of
compounded interest.
However, the amount recoverable shall not be less than 90% of realisable value of
primary and collateral security available with the corporation in all the above categories.
The assessment shall not be more than six months old on the date of submission of
settlement proposal.
(d) Doubtful/loss loan account
(Category-D)
Under this category, those cases will fall Accounts may be settled by waiving of
where the primary and collateral securities entire penal plus 100% component of
have already been disposed off by the Compounded interest and 50% of
corporation. There will be no verification simple interest. However, the waiver
of assets and the eligibility under the should not exceed the interest
scheme will not be linked with personal outstanding.
assets of borrower/guarantor.
The amount of waiver under the scheme shall be restricted to the amount payable by
the party and would be applicable to category ‘A’, ‘B’, ‘C’ and ‘D’ of the onetime
Page 35
![Page 36: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/36.jpg)
settlement scheme only.
2. Units in possession of the corporation Accounts may be settled by charging
for over three years but could not be principal and misc. along with normal
disposed off inspite of four attempts and refinanced rate or equivalent thereto
no other security is available. prevailing at the time of loan advance.
3. (a) Where the units have been affected by the The units falling in either of the three
affected by the natural calamities such as categories approaches for settlement,
fire, riots, strikes, and are lying closed and the accounts may be settled by
the borrower is interested to adjust their allowing the benefits of waiver of
account. penal interest provided the entire
(b) where the primary securities has been outstanding is liquidated within a
disposed off but the collateral security is period of six months from the date of
available and the borrower is interested to settlement . such benefit, is however,
adjust the account within disposal off to be restricted to the extent of interest
collateral security irrespective of its outstanding and no portion of principal
assessed value. amount shall be waived off.
(c) where the unit is lying closed for 1 year or
more and the party wants to adjust its loan
account.
4. LOSS PORTFOLIO/R.C. /R.C. STAYED CASES
(a) Where the primary security and collateral Principal plus misc. And 1/3rd of the
security stands disposed off by the simple interest in terms of Mortgage
corporation. Deed on the amount outstanding to
(b) Those cases may be considered for the recoverable and no verification of
settlement where the Revenues Authorities personal assets may be insisted upon.
have declared the means of the borrower An affidavit about the present means
and guarantors in the case as irrecoverable of the promoters is to be given by
and have furnished certificate/statement promoters/ guarantors.
related to the same
Page 36
![Page 37: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/37.jpg)
Non-applicability of OTS to wilful defaulters
1. As per the guidelines of the RBI the following cases will fall under the definition
of wilful defaulters.
a) Deliberate non-payment of the dues despite cash flows and good net worth.
b) Siphoning off of funds to the detriment of the defaulting unit.
c) Assets financed have either not been purchased or have been sold and proceeds
have been misutilised.
d) Misrepresentation/falsification of records.
e) Disposal/ removal of securities without bank’s knowledge.
f) Fraudulent transitions by the borrower.
The RBI guidelines further state that the identification of the wilful defaulters
should be made keeping in view the track record of the borrowers and should
not be decided on the basis of isolated transitions/ incidents. The default to be
categorized as wilful must be intentional deliberate and calculate.
FACTORS FOR RISE IN NPAs
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 and
financial institutes suffers the consequence of non-recover, their by reducing their
profitability and liquidity.
Willful Defaults
Page 37
![Page 38: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/38.jpg)
There are borrowers who are able to pay back loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order
to get back the money extended to them as advances and loans.
Natural calamities
This is the major factor, which is creating alarming rise in NPAs of the PSBs and
financial institutes. India usually faces major natural calamities thus making the
borrowers unable to pay back there loans. Thus the financial institutes have to make large
amount of provisions in order to compensate those loans, hence end up the fiscal with a
reduced profit.
Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall
the farmers are not to achieve the production level thus they are not repaying the loans.
Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production
which ultimately piles up their product thus making them unable to pay back the money
they borrow to operate these activities. The financial institute recovers the amount by
selling of their assets, which covers a minimum label. Thus the financial institute records
the non recovered part as NPAs and has to make provision for it.
Change on Govt. policies
With every new govt. financial sector and banking sector gets new policies for its
operation. Thus it has to cope with the changing principles and policies for the regulation
of the rising of NPAs. The fallout of handloom sector is continuing as most of the
weavers Co-operative societies have become defunct largely due to withdrawal of state
patronage. The rehabilitation plan worked out by the Central government to revive the
handloom sector has not yet been implemented. So the over dues due to the handloom
sectors are becoming NPAs.
Page 38
![Page 39: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/39.jpg)
Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis while project appraisal
is another reason for rise in NPAs. While providing unsecured advances the financial
institutes depend more on the honesty, integrity, and financial soundness and credit
worthiness of the borrower.
Financial institutes should consider the borrowers own capital investment.
It should collect credit information of the borrowers from-
a. From bankers.
b. Enquiry from market/segment of trade, industry, business.
c. From external credit rating agencies.
Analyze the balance sheet-True picture of business will be revealed on analysis of
profit/loss a/c and balance sheet.
Purpose of the loan-
When financial institute give loan, he should analyze the purpose of the loan. To
ensure safety and liquidity, financial institute should grant loan for productive
purpose only. Financial institute should analyze the profitability, viability, long
term acceptability of the project while financing.
Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal
the financial institutes gives advances to those who are not able to repay it back. They
should use good credit appraisal to decrease the NPAs.
Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of
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.
Page 39
![Page 40: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/40.jpg)
Impact of NPAImpact of NPA
Profitability:Profitability: NPA means booking of money in terms of bad asset, which occurred due
to wrong choice of client. Because of the money getting blocked the prodigality of
financial institute decreases not only by the amount of NPA but NPA lead to opportunity
cost also as that much of profit invested in some return earning project/asset. So NPA
doesn’t affect current profit but also future stream of profit, which may lead to loss of
some long-term beneficial opportunity. Another impact of reduction in profitability is low
ROI (return on investment), which adversely affect current earning of financial institutes.
Liquidity:Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at
hand which lead to borrowing money for shortest period of time which lead to additional
cost to the company. Difficulty in operating the functions of financial institute is another
cause of NPA due to lack of money.
Involvement of management:Involvement of management: Time and efforts of management is another indirect cost
which financial institute has to bear due to NPA. Time and efforts of management in
handling and managing NPA would have diverted to some fruitful activities, which
would have given good returns. Now day’s financial institutes have special employees to
deal and handle NPAs, which is additional cost to the financial institutes.
Credit loss:Credit loss: if financial institute is facing problem of NPA then it adversely affect the
value of financial institutes in terms of market credit. It will lose it’s goodwill and brand
image.
Early symptoms by which one can recognize a performing asset turning in to
Non-performing asset
Four categories of early symptoms:-
(1) Financial:
Page 40
![Page 41: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/41.jpg)
Non-payment of the very first installment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that installment.
While monitoring the accounts it is found that partial amount is diverted to sister
concern or parent company.
(2) Operational and Physical:
If information is received that the borrower has either initiated the process of winding up
or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where borrower
conduct his business.
Frequent changes in plan.
Nonpayment of wages.
(3) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners.
(4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
Page 41
![Page 42: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/42.jpg)
Preventive Measurement for NPA
Early Recognition of the Problem:-Early Recognition of the Problem:-
Invariably, by the time financial institutes start their efforts to get involved in a revival process,
it’s too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of
financial institute’s dues. Identification of weakness in the very beginning that is: When the
account starts showing first signs of weakness regardless of the fact that it may not have become
NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-
economic viability study. Restructuring should be attempted where, after an objective assessment
of the promoter’s intention, financial institutes are convinced of a turnaround within a scheduled
timeframe. In respect of totally unviable units as decided by the financial institutes, it is better to
facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through
legal means before the security position becomes worse.
Identifying Borrowers with Genuine:-Identifying Borrowers with Genuine:-
Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting the officers of financial
institutes. Here the role of frontline officials at the branch level is paramount as they are
the ones who have intelligent inputs with regard to promoters’ sincerity, and capability to
achieve turnaround. Based on this objective assessment, financial institutes should decide
as quickly as possible whether it would be worthwhile to commit additional finance.
In this regard financial institutes may consider having “Special Investigation” of all
financial transaction or business transaction, books of account in order to ascertain real
factors that contributed to sickness of the borrower. Financial institutes may have penal
of technical experts with proven expertise and track record of preparing techno-economic
study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will obviate the need to route
Page 42
![Page 43: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/43.jpg)
the additional funding through the controlling offices in deserving cases, and help avert
many accounts slipping into NPA category.
Timeliness and Adequacy of responseTimeliness and Adequacy of response:-:-
Longer the delay in response, grater the injury to the account and the asset. Time is a
crucial element in any restructuring or rehabilitation activity. The response decided on
the basis of techno-economic study and promoter’s commitment, has to be adequate in
terms of extend of additional funding and relaxations etc. under the restructuring
exercise. The package of assistance may be flexible and financial institutes may look at
the exit option.
Focus on Cash Flows:-Focus on Cash Flows:-
While financing, at the time of restructuring the financial institutes may not be guided by
the conventional fund flow analysis only, which could yield a potentially misleading
picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in
conjunction with the Cash Flow rather than only on the basis of Funds Flow.
Management Effectiveness:-Management Effectiveness:-
The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in
tackling adverse business conditions is a very important aspect that affects a borrowing
unit’s fortunes. A financial institute may commit additional finance to an ailing unit only
after basic viability of the enterprise also in the context of quality of management is
examined and confirmed. Where the default is due to deeper malady, viability study or
investigative audit should be done – it will be useful to have consultant appointed as early
as possible to examine this aspect. A proper techno- economic viability study must thus
become the basis on which any future action can be considered.
Multiple Financing:-Multiple Financing:-
Page 43
![Page 44: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/44.jpg)
A. During the exercise for assessment of viability and restructuring, a Pragmatic and
unified approach by all the lending banks/ FIs as also sharing of all relevant information
on the borrower would go a long way toward overall success of rehabilitation exercise,
given the probability of success/failure.
B. In some default cases, where the unit is still working, the financial institute should make
sure that it captures the cash flows (there is a tendency on part of the borrowers to
switch officers once they default, for fear of getting their cash flows forfeited), and
ensure that such cash flows are used for working capital purposes.
C. In a forum of lenders, the priority of each lender will be different. While one set of
lenders may be willing to wait for a longer time to recover its dues, another lender may
have a much shorter timeframe in mind. So it is possible that the letter categories of
lenders may be willing to exit, even at a cost – by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into
account.
D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide
a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and
above with the banks and FIs on a voluntary basis and outside the legal framework.
Under this system, financial institute may greatly benefit in terms of restructuring of
large standard accounts (potential NPAs) and viable sub-standard accounts with
consortium/multiple financial arrangements.
Page 44
![Page 45: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/45.jpg)
Provisioning norms applicable from 31.3.2000
Particulars Provisioning
Standard Assets Nil
Sub-Standard Assets A general provision of 10% of total
Outstanding loans in the category.
Doubtful assets (a) 20% provision in respect of outstanding
Page 45
![Page 46: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/46.jpg)
loan amount doubtful of recovery
for period upto 1 year.
(b) 30% provision in respect of outstanding
loan amount doubtful of recovery
for period upto 3 years.
(c) 50% provision in respect of outstanding
loan amount doubtful of recovery for
above three years and 100% on
un-recovered portion.
Loss Assets The entire assets should be written off.
If the assets are permitted to remain in the
books for any reason, 100% of the
outstanding should be provided for.
Provisioning norms after 01.02.2004
Particulars Provisioning
Standard Assets 0.25%
Sub-Standard Assets A general provision of 10% of total
Outstanding loans in the category.
Doubtful assets (a) NPA in sub-standard category will be
Classified as Doubtful category, if
remained in Sub standard category, for
Page 46
![Page 47: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/47.jpg)
more than 18 months.
(b) 20% provision in respect of outstanding
loan amount doubtful of recovery for
period upto 1 year.
(c) 30% provision in respect of outstanding
loan amount doubtful of recovery for
period upto 3 year.
(d) 100% provision in respect of outstanding
loan amount doubtful of recovery for period
exceeding 3 years.
Loss Assets The entire assets should be written off.
If the assets are permitted to remain in the
books for any reason, 100% of the
outstanding should be provided for.
New guidelines on provisioning of loans
Category of assets sub- category provisioning requirements
Standard assets - 0 .25%
Sub-standard assets - A general provision of 10% of total
outstanding loans in the category.
Doubtful assets secured portion unsecured portion
DA-1
(Doubtful Assets up to 1 20% 100%
Year old)
Page 47
![Page 48: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/48.jpg)
DA-2
(Doubtful assets more 30% 100%
Than 1 year old and up to
3 year old)
DA-3
(Doubtful Assets more 100% 100%
than 3 year old)
Loss assets the entire assets should be written off. If
the assets are permitted to remain in the
books for any reason, 100% of the
outstanding should be provided for.
NPA’S in HSIIDC
2010* 2009 2008 2007 2006 2005 2004 2003
1.Standard 17805 16955.47 14183.0
4
13211.36 13719.58 15386.54 17324.24 20724.38
2.NPAs
2.1Sub
standard
0 0 57.15 467.82 1509.17 1245.13 2757.57 2039.22
2.2Doubtful 4912.00 5941.04 6987.43 7493.85 7895.34 8335.69 6332.33 6384.79
2.3Loss 953.73 953.73 739.45 759.40 771.57 707.58 547.84 98.18
3.SubTotal 5865.73 6894.77 7784.03 8721.07 23895.66 25674.94 26961.98 29246.57
Page 48
![Page 49: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/49.jpg)
NPAs
G.total(1+3
)
23670.73 23850.24 21967.0
7
21932.43 23895.66 25674.94 26962.98 29246.57
Gross NPA
%**
24.78 28.91 35.43 39.76 42.59 40.07 35.75 29.14
*of 3 months
**subtotal NPAs*100/ G. total
Sub standard assets
Page 49
![Page 50: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/50.jpg)
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010
0
500
1000
1500
2000
2500
3000
2039.22
2757.57
1245.13
1509.17
467.82
57.15 0 0
It is clear from the chart that the sub standard NPAs in HSIIDC are reducing year by year
So this is also indicating the growth of the company.
Doubtful assets
Page 50
![Page 51: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/51.jpg)
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-20100
1000
2000
3000
4000
5000
6000
7000
8000
9000
6384.79 6332.33
8335.697895.34
7493.856987.43
5941.04
4912
Doubtful NPAs are also decreasing in HSIIDC but not as sub standard but still the company is
doing good.
Page 51
![Page 52: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/52.jpg)
Loss assets
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-20100
200
400
600
800
1000
1200
98.18
547.84
707.58771.57 759.4 739.45
953.73 953.73
As we can see from the chart that the loss assets are not decreasing in last two years as sub
standard and doubtful assets. But company was doing well before 2009.
Page 52
![Page 53: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/53.jpg)
Gross NPA percentage
2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-20100
5
10
15
20
25
30
35
40
45
29.14
35.75
40.0742.59
39.76
35.43
28.91
24.78
Now if we talk about the overall NPA it is reducing constantly that symbolizes that company
is using good tactics to recover its NPAs.
HSIIDC V/S OTHER BANKS
Page 53
![Page 54: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/54.jpg)
Other banks are:
Punjab national bank
State bank of India
Ratio analysis
Gross NPA ratio: Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank.
Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI guidelines. The
ratio is counted in terms of percentage and the formula for GNPA is as follows:
Gross NPA ratio = (Gross NPA / Gross advances)*100
Name of the bank/ financial institute 2006 2007 2008 2009
Punjab national bank 4.1 3.5 2.7 2.5
State bank of India 3.9 2.9 3.0 3.2
HSIIDC 4.0 3.4 2.7 2.3
Page 54
![Page 55: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/55.jpg)
Gross NPA ratio
PNB SBI HSIIDC0
0.5
1
1.5
2
2.5
3
3.5
4
4.54.1
3.9 4
3.5
2.9
3.4
2.73
2.72.5
3.2
2.3
Analysis from above table and chart
1. The table above indicates the quality of credit portfolio.
2. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa.
3. As we can see from the chart that HSIIDC and PNB is doing good, as their gross NPAs
has reduced but in the case of SBI position of NPA is not good.
4. In year 2006 and 2007, HSIIDC was at 2nd position but in after that it become at 1st
position.
5. So, we can say that HSIIDC is doing well with respect to other banks, but PNB bank is
giving challenge to it.
Page 55
![Page 56: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/56.jpg)
Net NPA Ratio: The net NPA percentage is the ratio of net NPA to net advances, in which the
provision is to be deducted from the gross advance. The provision is to be made for NPA
account. The formula for this is:
Net NPA Ratio = (Gross NPA-Provision /Gross Advances-Provisions) * 100
Name of the bank/ financial institute 2006 2007 2008 2009
Punjab national bank .29 .76 .64 .59
State bank of India 1.88 1.56 1.78 1.70
HSIIDC 1.22 1.1 .75 .50
Net NPA ratio
PNB SBI HSIIDC0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
0.29
1.88
1.22
0.760000000000004
1.56
1.1
0.640000000000004
1.78
0.750000000000004
0.59
1.7
0.5
Page 56
![Page 57: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/57.jpg)
Analysis from above table and chart
1. High NPA ratio indicates the high quantity of risky assets in the Banks for which no
provision are made.
2. From the table it becomes clear that the NPA ratio of PNB and HSIIDC has improved as
compared to SBI.
3. HSIIDC has shown considerable improvements in reducing its Net NPAs as compared to
its performance in last year.
Provision Ratio: Provisions are to be made to keep safety against the NPA, & it directly affects
the gross profit of the Banks and financial institutes. The provision Ratio is nothing but total
provision held for NPA to gross NPA of the Banks. The formula for PR is,
(i) Provision Ratio = (Total Provision/Gross NPA)*100
(ii) [Additional Formulae: Net NPA = Gross NPA – Provision]
Therefore, Provision = Gross NPA – Net NPA
Name of the bank/ financial institute 2006 2007 2008 2009
Punjab national bank 93.3 78.56 77.29 75
State bank of India 48.98 47.41 42.16 40.35
HSIIDC 90.08 92.16 93.8 95
Page 57
![Page 58: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/58.jpg)
Provision ratio
PNB SBI HSIIDC0
10
20
30
40
50
60
70
80
90
10093.3
48.98
90.08
78.56
47.41
92.16
77.29
42.16
93.8
75
40.35
95
FINDINGS FROM ABOVE TABLE:
1. This Ratio indicates the degree of safety measures adopted by the Banks.
2. It has direct bearing on the Profitability, Dividend and Safety of shareholders’ fund.
3. If the provision ratio is less, it indicates that the Banks has made under provision.
4. Here, the NPA percentage has increased of HSIIDC only.
5. By increasing tax, HSIIDC can prevent itself from future problems.
6. But PNB and SBI are reducing their provisions which can create problems in future
because provisioning is very important.
Page 58
![Page 59: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/59.jpg)
Problem Asset Ratio: It is the ratio of gross NPA to total asset of the bank. The formula for
PAR is:
Problem Asset Ratio = (Gross NPAs/Total Assets) * 100
Name of the bank/ financial institute 2006 2007 2008 2009
Punjab national bank 4.94 2.08 1.67 1.5
State bank of India 1.95 1.76 1.78 2.5
HSIIDC 4.80 5.00 3.00 1.25
Problem asset ratio
PNB SBI HSIIDC
0
1
2
3
4
5
6
4.94
1.95000000000001
4.8
2.081.76
5
1.67 1.78
3
1.5
2.5
1.25
Page 59
![Page 60: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/60.jpg)
FINDINGS FROM ABOVE TABLE AND GRAPH:
1. We determine the percentage of assets out of total assets / advances that are likely to
become the Non-performing Assets.
2. If PAR is high, it implies that the concerned bank or financial institute has the highest
probability of creating NPAs in the near future.
3. It is clear from the graph that in previous years HSIIDC was having the highest
probability of creating NPAs but later on it has improved a lot.
4. Now the PAR ratio of every bank and financial institute is good.
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.
Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100
Name of the bank/ financial institute 2006 2007 2008 2009
Punjab national bank 11.95 0.76 0.64 .70
State bank of India 11.88 1.56 1.78 3.00
HSIIDC 9.00 4.23 6.58 3.24
Page 60
![Page 61: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/61.jpg)
PNB SBI HSIIDc0
2
4
6
8
10
12
14
11.95 11.88
9
0.760000000000003
1.56
4.23
0.640000000000003
1.78
6.58
0.700000000000001
3 3.24
FINDINGS FROM ABOVE TABLE:
The capital adequacy ratio is important for them to maintain as per the banking regulations.
Each bank needs to create the capital Reserve to compensate the Non Performing Assets.
Each Asset has given a risk weightage as per RBI guidelines
Risk weighted Asset = Asset * Risk Weightage
So, More the Risk weighted Assets are, Bank has to maintain more capital.
As far as this ratio is concerned the HSIIDC’s ratio has decreased and it has increased in
2008 but again it has reduced that is a negative sign for the company.
Page 61
![Page 62: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/62.jpg)
Recovery process
No No
Yes
Yes
No
*Board for industrial and financial reconstruction
* Appellate Authority for Industrial and Financial Reconstruction
Credit default
Willful defaultInability to pay/ project failure
Recovery process
Sale of primary securitiesApply to BIFR*/AAIFR*
Sale of collateral securities
Case closed
Is loan fully recovered
Is loan fully recovered
Loss assets
Is DRS accepted
Revival of sick unit
Page 62
![Page 63: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/63.jpg)
Case study
On
NPA
Page 63
![Page 64: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/64.jpg)
M/S JYOTI OIL INDUSTRIES LTD.
Introduction
M/s jyoti oil industries Pvt. Ltd. was incorporated on 25 th September, 1991 vide certification No.
55-45801 with the Registrar of Companies, Delhi and Haryana. The Company was promoted by
Shri Brij Mohan Gupta and Shri Vijay Kumar Aggarwal, who are real brothers and the first
director of the company. On 1.4.1992, the company took over the entire assets and liabilities of
an existing partnership concern M/s. jyoi oil Industries.
The company had proposed the corporation for financial assistance for setting up batch type oil
refinery with an installed capacity of manufacturing 7500 TPA oil. The company had already
purchased land measuring 19K- 8M at 5KM stone, Bahalgarh Road, Sonepat which is adjoining
land of the earlier existing firm M/s Jyoti Oil Industries. The company had proposed to purchase
the oil refining plant from M/s Mechtech Process Engineers (P) Ltd, New Delhi who is reputed
supplier in the line. The company had already obtained this approval of SIA for medium scale
status of the company.
Brief particulars
Name of the unit: M/s Jyoti Oil Industries (P) Ltd
Location of the unit: Village Sultanpur, Bahalgarh Road, Distt. Sonepat
Registered office: 40, Transport Centre, Rohtak Road, New Delhi
Size of the unit: Medium Scale
Date of Incorporation: 25th September, 1991
Date of receipt of application: 10.3.1992
Type of industries: Refining of oils
Debt Equity Ratio: 1.33: 1
Cost of the project: Rs. 244.71 lacs
Page 64
![Page 65: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/65.jpg)
Turnover at optimum capacity utilization: 2087 lacs
Employment generation: 66
Breakeven point at installed capacity: 34.55%
Amount of loan applied for: Rs. 135.00 lacs
Amount of loan recommended: Rs. 90.00 lacs
(HSIIDC- Rs. 49.90 lacs)
Time Schedule:
Land: Already acquired
Building: 4 months from the date of sanction
Plant & Machinery: 8 months of sanctioning of loan
Cost of the project:
The total cost of the project has been estimated at Rs. 244.71 lacs as per following details:
Particulars Amount (Rs. In lacs)
Land: 3.27
Building 25.19
Plant & machinery 132.29
Preliminary Exp. 9.97
Other assets 6.69
Contingencies: 16.00
Margin money for working capital: 51.30
Page 65
![Page 66: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/66.jpg)
Means of finance
The total cost of the project was proposed to be financed as under:
Sources of finance Amount (Rs. In lacs)
Share capital 70.00
Term Loan from HFC 90.00
Term Loan from HSIIDC 49.90
G.Set subsidy 2.50
Unsecured loan 32.31
____________
244.71
Later on company also took loan of Rs.170.00 lacs from HFC and Rs. 100.00 lacs from HSIIDC
for its working capital requirements in 1998.
Loan account position
Term loan WCTL
HFC HSIIDC HFC HSIIDC
Sanctioned
Disbursed
Outstanding/default
-principal
-interest
90.00
88.68
41.60
252.66
49.90
44.90
15.20
67.31
170.00
100.00
100.00
808.29
100.00
73.28
64.18
349.49
Page 66
![Page 67: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/67.jpg)
The company started defaulting with the corporation due to severe recession in the market and
then HSIIDC sold its collateral securities.
Reasons for NPA
3. First and the most important reason for the NPA was recession and due to
recession the company was not able to fetch high sales.
4. Availability of Raw material was not so high in the market so it leads to long
processing cycle.
5. The Machinery used by the company becomes obsolete that results in higher cost
and low profits and that leads it to NPA.
6. Market availability
7. Selling arrangements of the company was not that good. So it leads to lesser
profits of the company.
In the mean time the company proposed HSIIDC for the OTS i.e. one time settlement and
HSIIDC agreed upon that. The company has approached the corporation for setting its account at
Rs. 70.00 lacs against principal amount.
Page 67
![Page 68: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/68.jpg)
Findings
By studying some cases it was found out that sometimes HSIIDC does not consider some
negative aspects of a project which turns it into an NPA like authenticity of documents, improper
site investigations.
As per the guidelines of RBI, provisioning of loans is increasing day by day and this increment is
resulting in a positive way for HSIIDC as through provisioning ultimate loss of the company
reduces.
Proper analysis of NPA is essential for financial institutes because increase in NPAs lead to an
institute’s degradation in goodwill and funds.
The reduction of NPAs would help the HSIIDC to boost up the profits, smooth recycling of
funds and this would ultimately help the nation to develop its economy by providing better
financial services to the nation.
When many borrowers fail to pay interest, financial institutes experience liquidity shortages.
These shortages jam payments across the country and as a result Non-performing loans spill over
the financial system and contract the money stock, which leads to economic contraction.
Once a project becomes NPA, it is necessary to keep an eye on the recovery process by selling
the collateral securities of that particular company to regain the funds rather than focussing on
NPS.
It was found out after comparing HSIIDC with SBI and PNB, that PNB has minimum NPAs and
also reducing it day by day.
It was also observed that in terms of giving unsecured loan HSIIDC is doing much better than
PNB and SBI.
Page 68
![Page 69: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/69.jpg)
Suggestions
Since it is comparably difficult to make non-performing assets back to performing assets. So, it
is advisable to take corrective measures in order to protect those assets falling under the non-
performing category.
It was suggested that there should not be flat repayments schedule for instalments. It is seen that
in number of projects appraised, the default in the initial period arises because the combined
burden of interest and instalments in the initial period is higher. Repayments schedule for the
loan is generally of flat instalments over the years, and interest on outstanding amount goes on
decreasing. As a result burden initially is higher but then it decreases to a significant level. But, if
we reverse it i.e. make such an arrangement that the burden on the borrower in the initial period
is less and then increase or make repayment of equal amount over the years, there is high
probability that it will lead to decrease in the default in the initial period.
Proper training is important to the staff of the financial institute at the appropriate level with
ongoing process to teach them the technique of dealing with cases of NPAs.
To prevent any financial institute from NPA, it is essential to focus on project appraisal. So same
is the case with HSIIDC, it should check all the aspects of project, its viability and chances of
failure, so that it can prevent itself from NPAs.
Sometimes HSIIDC neglect the negative points of a project as they see profits out of it in the
near future, so company should avoid doing this.
Most of the time cash flows are over-estimated. It was observed that actual cash flows differ
from projected inflows by large amounts. So, careful evaluation of those cash flows should be
done at the time of appraisal.
Page 69
![Page 70: Bhavna](https://reader036.fdocuments.net/reader036/viewer/2022062312/55491168b4c9056b458be9c0/html5/thumbnails/70.jpg)
Bibliography
Meeker Larry, (2002): ‘Predicting Corporate Sickness in India’, A note on non-performing loans as an indicator of asset quality’
Sathye Milind, (2003): ‘Efficiency of banks in a developing economy: The case of India’, Paper presented at the Conference on Money, Risk and Investment held at Nottingham Trent University, November 2003.
Peng-yan, LI, (2007): ‘A risk evaluation of non-performing assets securitization on the basis of analytic hierarchy process’, Oxford University Press, New Delhi.
Yong Peng, (2004): ‘an Analysis on the Return and Risk Management during
Securitization of Non-Performing Assets-the Effect of Securitization on Originator
Oxford University Press, New Delhi.
Thomas Shawn, (1999): Bank loan loss provisions’ –An Economics Approach’, AITBSPublishers and Distributors, New Delhi.
Wiley John, (2005): ‘Banking reform in India’ RBI Bulletin, March
Dermine jean, (2005): ‘Provisioning practices’ economic & Political Weekly,Vol.XLII
Rajaraman, I & Vashistha, G (2002): ‘Non-Performing Loans of Indian Public Sector Banks – Some Panel Results’, Economic & Political Weekly
Bouvatier Vincent, (2002): ‘Provisioning Rules and Bank Lending: A Theoretical Model’ Studies in Banking & Finance
Das rituparna (2003): ‘Managing the Risk of Non Performing Assets in the Small Scale Industries in India’
http://www.rbi.org.in http://hsiidc.org/abouthsidc.htm http://www.sidbi.com/
Page 70