FINAL Non Performing Assets of Banks

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COMPARATIVE ANALYSIS ON

NON PERFORMING ASSETSOF PRIVATE AND PUBLIC SECTOR BANKS

BACHELOR OF COMMERCE

BANKING AND INSURANCE

SEMESTER V

(2010-2011)

SUBMITTED BY

ANIL KUMAR PANDEY

ROLL NO: 14

[Comparative analysis on NPA of Private & Public sector Banks]



GURU NANAK COLLEGE OF ARTS, SCIENCE AND

COMMERCE

GURU TEGH BAHADUR NAGAR, MUMBAI-400037

COMPARATIVE ANALYSIS ON

NON PERFORMING ASSETS

OF PRIVATE AND PUBLIC SECTOR BANKS

BACHELOR OF COMMERCEBANKING AND INSURANCE

SEMESTER V

(2010-2011)

SUBMITTED

In Partial Fulfillment of the requirements

For the Award of the Degree of

Bachelor of Management

BY

ANIL KUMAR PANDEY

ROLL NO: 14




GURU NANAK COLLEGE OF ARTS, SCIENCE AND

COMMERCE

GURU TEGH BAHADUR NAGAR, MUMBAI-400037

DECLARATIONDECLARATION

I _________________________ THE STUDENT OF B.COM

BANKING AND INSURANCE SEMESTER V (2010-2011)

HEREBY DECLARE THAT I HAVE COMPLETED THE

PROJECT ON ______________________________________.

THE INFORMATION SUBMITTED IS TRUE AND

ORIGINAL TO THE BEST OF MY KNOWLEDGE.

SIGNATURE OF STUDENT

ANIL KUMAR PANDEY

ROLL NO: 14

GURU NANAK COLLEGE OF ARTS, SCIENCE &

COMMERCE

GURU TEGH BAHADUR NAGAR, MUMBAI – 400037




C E R T I F I C A T E

THIS IS TO CERTIFY THATSHRI/MISS_____________________________OF B.COM.

BANKING AND INSURANCE SEMESTER V (2010-2011)

HAS SUCCESSFULLY COMPLETED THE PROJECT

ON_____________________________________ UNDER THE

GUIDANCE OF ________________________________

COURSE CO-ORDINATOR PRINCIPAL

PROJECT GUIDE

EXTERNAL EXAMINER




INTRODUCTIONINTRODUCTION

The accumulation of huge non-performing assets in banks has assumedThe accumulation of huge non-performing assets in banks has assumed

great importance. The depth of the problem of bad debts was first realized only ingreat importance. The depth of the problem of bad debts was first realized only in

early 1990s. The magnitude of NPAs in banks and financial institutions is over early 1990s. The magnitude of NPAs in banks and financial institutions is over

Rs.1,50,000 crores.Rs.1,50,000 crores.

While gross NPA reflects the quality of the loans made by banks, netWhile gross NPA reflects the quality of the loans made by banks, net

NPA shows the actual burden of banks. Now it is increasingly evident that the NPA shows the actual burden of banks. Now it is increasingly evident that the

major defaulters are the big borrowers coming from the non-priority sector. Themajor defaulters are the big borrowers coming from the non-priority sector. The

banks and financial institutions have to take the initiative to reduce NPAs in a time banks and financial institutions have to take the initiative to reduce NPAs in a time

bound strategic approach. bound strategic approach.

Public sector banks figure prominently in the debate not only becausePublic sector banks figure prominently in the debate not only because

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

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

academia because it is generally felt that NPAs reduce the profitability of a banks,academia because it is generally felt that NPAs reduce the profitability of a banks,

weaken its financial health and erode its solvency.weaken its financial health and erode its solvency.

For the recovery of NPAs a broad framework has evolved for theFor the recovery of NPAs a broad framework has evolved for the

management of NPAs under which several options are provided for debt recoverymanagement of NPAs under which several options are provided for debt recovery

and restructuring. Banks and FIs have the freedom to design and implement their and restructuring. Banks and FIs have the freedom to design and implement their

own policies for recovery and write-off incorporating compromise and negotiatedown policies for recovery and write-off incorporating compromise and negotiated

settlements.settlements.




(((((( CONTENTS )))CONTENTS )))

CHAPTER CHAPTER

NO.NO.

SUBJECT COVEREDSUBJECT COVERED PAGEPAGE

NO.NO.

11 Introduction to BankingIntroduction to Banking

22 Introduction to TopicIntroduction to Topic

Definition Definition

Non Performing Assets Non Performing Assets

Factor for rise in NPAs Factor for rise in NPAs

Problem due to NPAs Problem due to NPAs

Types of NPAsTypes of NPAs

Income Recognition Income Recognition

Reporting of NPAs Reporting of NPAs

44 Provisioning NormsProvisioning Norms

GeneralGeneral

Floating provisionsFloating provisions

Leased AssetsLeased Assets

Guideline under special circumstancesGuideline under special circumstances

55 Impact, Reasons and Symptoms of NPAsImpact, Reasons and Symptoms of NPAs

Internal & External Factor Internal & External Factor

Early SymptomsEarly Symptoms

66 Preventive MeasurementPreventive Measurement

Early Recognition of ProblemEarly Recognition of Problem

Identifying Borrowers with genuineIdentifying Borrowers with genuine

IntentIntent

TimelinessTimeliness

Focus on Cash flowFocus on Cash flow




Management EffectivenessManagement Effectiveness

Multiple FinancingMultiple Financing

77 Tools for RecoveryTools for Recovery

Willful defaultWillful default

Inability to PayInability to Pay

Special CasesSpecial Cases

Role of ARCILRole of ARCIL

88 AnalysisAnalysis

Deposit-Investment-AdvancesDeposit-Investment-Advances

Gross NPAs and Net NPAsGross NPAs and Net NPAs

Priority and Non-Priority Sector Priority and Non-Priority Sector

99 Finding, Suggestions and ConclusionsFinding, Suggestions and Conclusions

1010 BibliographyBibliography




HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial

services. By the term bank is generally understood an institution that holds a

Banking Licenses. Banking licenses are granted by financial supervision

authorities and provide rights to conduct the most fundamental banking services

such as accepting deposits and making loans. There are also financial institutions

that provide certain banking services without meeting the legal definition of a

bank, a so-called Non-bank. Banks are a subset of the financial services industry.

The word bank is derived from the Italian banca, which is derived from German

and means bench. The terms bankrupt and "broke" are similarly derived from

banca rotta, which refers to an out of business bank, having its bench physically

broken. Moneylenders in Northern Italy originally did business in open areas, or

big open rooms, with each lender working from his own bench or table.

Typically, a bank generates profits from transaction fees on financial services or

the interest spread on resources it holds in trust for clients while paying them

interest on the asset. Development of banking industry in India followed below

stated steps.

Banking in India has its origin as early as the Vedic period. It is believedthat the transition from money lending to banking must have occurred even

before Manu, the great Hindu Jurist, who has devoted a section of his work

to deposits and advances and laid down rules relating to rates of interest.




Banking in India has an early origin where the indigenous bankers played a

very important role in lending money and financing foreign trade and

commerce. During the days of the East India Company, was the turn of the

agency houses to carry on the banking business. The General Bank of India

was first Joint Stock Bank to be established in the year 1786. The others

which followed were the Bank Hindustan and the Bengal Bank.

In the first half of the 19th century the East India Company established three

banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the

Bank of Madras in 1843. These three banks also known as Presidency banks

were amalgamated in 1920 and a new bank, the Imperial Bank of India was

established in 1921. With the passing of the State Bank of India Act in 1955

the undertaking of the Imperial Bank of India was taken by the newly

constituted State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935

by passing Reserve Bank of India Act, 1934 which was followed up with the

Banking Regulations in 1949. These acts bestowed Reserve Bank of India

(RBI) with wide ranging powers for licensing, supervision and control of

banks. Considering the proliferation of weak banks, RBI compulsorily

merged many of them with stronger banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the

geographical coverage and financial spread of the banking system in the




country. As certain rigidities and weaknesses were found to have developed

in the system, during the late eighties the Government of India felt that these

had to be addressed to enable the financial system to play its role in ushering

in a more efficient and competitive economy. Accordingly, a high-level

committee was set up on 14 August 1991 to examine all aspects relating to

the structure, organization, functions and procedures of the financial system.

Based on the recommendations of the Committee (Chairman: Shri M.

Narasimham), a comprehensive reform of the banking system was

introduced in 1992-93. The objective of the reform measures was to ensure

that the balance sheets of banks reflected their actual financial health. One of

the important measures related to income recognition, asset classification

and provisioning by banks, on the basis of objective criteria was laid down

by the Reserve Bank. The introduction of capital adequacy norms in line

with international standards has been another important measure of the

reforms process.

1. Comprises balance of expired loans, compensation and other bonds such

as National Rural Development Bonds and Capital Investment Bonds.

Annuity certificates are excluded.

2. These represent mainly non- negotiable non- interest bearing securities

issued to International Financial Institutions like International Monetary

Fund, International Bank for Reconstruction and Development and Asian

Development Bank.

3. At book value.

4. Comprises accruals under Small Savings Scheme, Provident Funds,

Special Deposits of Non- Government




In the post-nationalization era, no new private sector banks were allowed to

be set up. However, in 1993, in recognition of the need to introduce greater

competition which could lead to higher productivity and efficiency of the

banking system, new private sector banks were allowed to be set up in the

Indian banking system. These new banks had to satisfy among others, the

following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;

(iii) The shares should be listed on the stock exchange;

(iv)The headquarters of the bank should be preferably located in a

centre which does not have the headquarters of any other bank; and

(v)The bank will be subject to prudential norms in respect of

banking operations, accounting and other policies as laid down by

the RBI. It will have to achieve capital adequacy of eight per cent

from the very beginning.

A high level Committee, under the Chairmanship of Shri M.

Narasimham, was constituted by the Government of India in December 1997

to review the record of implementation of financial system reforms

recommended by the CFS in 1991 and chart the reforms necessary in the

years ahead to make the banking system stronger and better equipped to

compete effectively in international economic environment. The Committee

has submitted its report to the Government in April 1998. Some of the

recommendations of the Committee, on prudential accounting norms,

particularly in the areas of Capital Adequacy Ratio, Classification of

Government guaranteed advances, provisioning requirements on standard




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

accepted and implemented. The other recommendations are under

consideration.

The banking industry in India is in a midst of transformation, thanks to

the economic liberalization of the country, which has changed business

environment in the country. During the pre-liberalization period, the industry

was merely focusing on deposit mobilization and branch expansion. But

with liberalization, it found many of its advances under the non-performing

assets (NPA) list. More importantly, the sector has become very competitive

with the entry of many foreign and private sector banks. The face of banking

is changing rapidly. There is no doubt that banking sector reforms have

improved the profitability, productivity and efficiency of banks, but in the

days ahead banks will have to prepare themselves to face new challenges.

Indian Banking: Key Developments

1969 Government acquires ownership in major banks

Almost all banking operations in manual mode

Some banks had Unit record Machines of IBM for IBR

& Pay roll




1970- 1980 Unprecedented expansion in geographical coverage,

staff, business & transaction volumes and directed

lending to agriculture, SSI & SB sector

Manual systems struggle to handle exponential rise in

transaction volumes --

Outsourcing of data processing to service bureau begins

Back office systems only in Multinational (MNC) banks'

offices

1981- 1990 Regulator (read RBI) led IT introduction in Banks

Product level automation on stand alone PCs at branches(ALPMs)

In-house EDP infrastructure with Unix boxes, batch

processing in Cobol for MIS.

Mainframes in corporate office

1991-1995 Expansion slows down

Banking sector reforms resulting in progressive de-

regulation of banking, introduction of prudential

banking norms entry of new private sector banks

Total Branch Automation (TBA) in Govt. owned and

old private banks begins

New private banks are set up with CBS/TBA form the

start




1996-2000 New delivery channels like ATM, Phone banking and

Internet banking and convenience of any branch banking

and auto sweep products introduced by new private and

MNC banks

Retail banking in focus, proliferation of credit cards

Communication infrastructure improves and becomes

cheap. IDRBT sets up VSAT network for Banks

Govt. owned banks feel the heat and attempt to respond

using intermediary technology, TBA implementation

surges ahead under fiat from Central Vigilance

Commission (CVC), Y2K threat consumes last two

years

2000-2003 Alternate delivery channels find wide consumer

acceptance

IT Bill passed lending legal validity to electronic

transactions

Govt. owned banks and old private banks start

implementing CBSs, but initial attempts face problems

Banks enter insurance business launch debit cards




Introduction to the topicIntroduction to the topic

The three letters “NPA” Strike terror in banking sector and business circle today.

NPA is short form of “Non Performing Asset”. The dreaded NPA rule says simply

this: when interest or other due to a bank remains unpaid for more than 90 days,

the entire bank loan automatically turns a non performing asset. The recovery of

loan has always been problem for banks and financial institution. To come out of

these first we need to think is it possible to avoid NPA, no can not be then left is to

look after the factor responsible for it and managing those factors.

Definitions:Definitions:

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

generate income for the bank.

A ‘non-performing asset’ (NPA) was defined as a credit facility in

respect of which the interest and/ or instalment of principal has remained ‘past due’

for a specified period of time.With a view to moving towards international best practices and to

ensure greater transparency, it has been decided to adopt the ‘90 days’ overdue’

norm for identification of NPAs, from the year ending March 31, 2004.

Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall

be a loan or an advance where;

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

more than 90 days in respect of a term loan,




The account remains ‘out of order’ for a period of more than 90 days, in

respect of an Overdraft/Cash Credit (OD/CC),

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

of bills purchased and discounted,

Interest and/or instalment of principal remains overdue for two harvest

seasons but for a period not exceeding two half years in the case of an

advance granted for agricultural purposes, and

Any amount to be received remains overdue for a period of more than

90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have

been advised to move over to charging of interest at monthly rests, by April 1,

2002. However, the date of classification of an advance as NPA should not be

changed on account of charging of interest at monthly rests. Banks should,

therefore, continue to classify an account as NPA only if the interest charged

during any quarter is not serviced fully within 180 days from the end of the quarter

with effect from April 1, 2002 and 90 days from the end of the quarter with effect

from March 31, 2004.

NON PERFORMING ASSETS (NPA)

WHAT IS A NPA (NON PERFORMING ASSETS) ?

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

is classified as Nonperforming 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 shell 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 remains overdue for two harvest season but

for a period not exceeding two half years in case of an advancegranted 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 out standing 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.

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 external as

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 farmers depends on rain fall for cropping. Due to

irregularities of rain fall the farmers are not to achieve the production level

thus they are not repaying the loans.

Industrial sickness




INTERNAL FACTORS :-

---------------------------------

Defective Lending process

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

by the commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

i. Principles of safety :-

By safety it means that the borrower is in a position to repay the loan

both principal and interest. The repayment of loan depends upon the

borrowers:

a. Capacity to pay

b. Willingness to pay




Capacity to pay depends upon:

1. Tangible assets

2. Success in business

Willingness to pay depends on:

1. Character

2. Honest

3. Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise

or 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 can not be taken. Proper MIS and

financial accounting system is not implemented in the banks, which leads to

poor credit collection, thus NPA. All the branches of the bank should be

computerized.

Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another

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

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

worthiness of the borrower.




• Banks should consider the borrowers own capital investment.

• it should collect credit information of the borrowers from_

a. From bankers.

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

c. From external credit rating agencies.

• Analyze the balance sheet.

True picture of business will be revealed on analysis of profit/loss a/c

and balance sheet.

• Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan.

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

purpose only. Bank should analyze the profitability, viability, long

term acceptability of the project while financing.

Poor credit appraisal system




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

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

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

Managerial deficiencies

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

the banker should not grant advances to a few big farms only or to

concentrate them in few industries or in a few cities. If a new big customer

meets misfortune or certain traders or industries affected adversely, the

overall position of the bank will not be affected.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand

loom industries. The biggest defaulters of OSCB are the OTM

(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd

(2439.60lakhs).




Absence of regular industrial visit

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

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

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

be collected by regular visits.

Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of

the same have already affected the smooth operation of the credit cycle.

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

is increasing day by day.

PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst case, if

the banks fails, owners loose their assets. In modern times this may affect a

broad pool of shareholders.

2. Depositors do not receive a market return on saving. In the worst case if the

bank fails, depositors loose their assets or uninsured balance.




3. Banks redistribute losses to other borrowers by charging higher interest

rates, lower deposit rates and higher lending rates repress saving and

financial market, which hamper economic growth.

4. Non performing loans epitomize bad investment. They misallocate creditfrom good projects, which do not receive funding, to failed projects. Bad

investment ends up in misallocation of capital, and by extension, labour and

natural resources.

Non performing asset may spill over the banking system and contract the money

stock, which may lead to economic contraction. This spill over effect can

channelize through liquidity or bank insolvency:

a) When many borrowers fail to pay interest, banks may experience liquidityshortage. This can jam payment across the country,

b) Illiquidity constraints bank in paying depositors

.c) Undercapitalized banks exceeds the banks capital base.

The three letters Strike terror in banking sector and business circle today. NPA is

short form of “Non Performing Asset”. The dreaded NPA rule says simply this:

when interest or other due to a bank remains unpaid for more than 90 days, the

entire bank loan automatically turns a non performing asset. The recovery of loan

has always been problem for banks and financial institution. To come out of these

first we need to think is it possible to avoid NPA, no can not be then left is to look

after the factor responsible for it and managing those factors.

Interest and/or instalment of principal remains overdue for two harvest

seasons but for a period not exceeding two half years in the case of an

advance granted for agricultural purposes, and




Any amount to be received remains overdue for a period of more than 90

days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been

advised to move over to charging of interest at monthly rests, by April 1, 2002.

However, the date of classification of an advance as NPA should not be changed

on account of charging of interest at monthly rests. Banks should, therefore,

continue to classify an account as NPA only if the interest charged during any

quarter is not serviced fully within 180 days from the end of the quarter with effect

from April 1, 2002 and 90 days from the end of the quarter with effect from March31, 2004.

'Out of Order' status'Out of Order' status ::

An account should be treated as 'out of order' if the outstanding

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

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

the sanctioned limit/drawing power, but there are no credits continuously for six

months as on the date of Balance Sheet or credits are not enough to cover the

interest debited during the same period, these accounts should be treated as 'out of

order'.

‘ ‘ Overdue’:Overdue’:

Any amount due to the bank under any credit facility is ‘overdue’ if it

is not paid on the due date fixed by the bank.

Types of NPATypes of NPA




A] Gross NPAA] Gross NPA

B] Net NPAB] Net NPA

A] Gross NPA: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:

Gross NPAs Ratio Gross NPAs

Gross Advances

B] Net NPA: 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_

Net NPAs Gross NPAs – Provisions




Gross Advances - Provisions

INCOME RECOGNITIONINCOME RECOGNITION

Income recognition – PolicyIncome recognition – Policy

The policy of income recognition has to be objective and based on the record

of recovery. Internationally income from non-performing assets (NPA) is

not recognised on accrual basis but is booked as income only when it is

actually received. Therefore, the banks should not charge and take to income

account interest on any NPA.

However, interest on advances against term deposits, NSCs, IVPs, KVPs

and Life policies may be taken to income account on the due date, provided

adequate margin is available in the accounts.

Fees and commissions earned by the banks as a result of re-negotiations or

rescheduling of outstanding debts should be recognised on an accrual basisover the period of time covered by the re-negotiated or rescheduled

extension of credit.




If Government guaranteed advances become NPA, the interest on such

advances should not be taken to income account unless the interest has been

realised.

Reversal of income:Reversal of income:

If any advance, including bills purchased and discounted, becomes NPA as

at the close of any year, interest accrued and credited to income account in

the corresponding previous year, should be reversed or provided for if the

same is not realised. This will apply to Government guaranteed accounts

also.

In respect of NPAs, fees, commission and similar income that have accrued

should cease to accrue in the current period and should be reversed or

provided for with respect to past periods, if uncollected.

Leased Assets

The net lease rentals (finance charge) on the leased asset accrued and

credited to income account before the asset became non-performing, and

remaining unrealised, should be reversed or provided for in the current

accounting period.

The term 'net lease rentals' would mean the amount of finance charge

taken to the credit of Profit & Loss Account and would be worked out as gross




lease rentals adjusted by amount of statutory depreciation and lease

equalisation account.

As per the 'Guidance Note on Accounting for Leases' issued by the

Council of the Institute of Chartered Accountants of India (ICAI), a separate

Lease Equalisation Account should be opened by the banks with a

corresponding debit or credit to Lease Adjustment Account, as the case may

be. Further, Lease Equalisation Account should be transferred every year to the

Profit & Loss Account and disclosed separately as a deduction from/addition to

gross value of lease rentals shown under the head 'Gross Income'.

Appropriation of recovery in NPAsAppropriation of recovery in NPAs

Interest realised on NPAs may be taken to income account provided the

credits in the accounts towards interest are not out of fresh/ additional credit

facilities sanctioned to the borrower concerned.

In the absence of a clear agreement between the bank and the borrower for

the purpose of appropriation of recoveries in NPAs (i.e. towards principal or

interest due), banks should adopt an accounting principle and exercise the

right of appropriation of recoveries in a uniform and consistent manner.

Interest Application:Interest Application:




There is no objection to the banks using their own discretion in debiting interest to

an NPA account taking the same to Interest Suspense Account or maintaining only

a record of such interest in proforma accounts.

Reporting of NPAsReporting of NPAs

Banks are required to furnish a Report on NPAs as on 31 st March each year

after completion of audit. The NPAs would relate to the banks’ global

portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure I.

While reporting NPA figures to RBI, the amount held in interest suspense

account, should be shown as a deduction from gross NPAs as well as gross

advances while arriving at the net NPAs. Banks which do not maintain

Interest Suspense account for parking interest due on non-performing

advance accounts, may furnish the amount of interest receivable on NPAs as

a foot note to the Report.

Whenever NPAs are reported to RBI, the amount of technical write off, if

any, should be reduced from the outstanding gross advances and gross NPAs

to eliminate any distortion in the quantum of NPAs being reported.

REPORTING FORMAT FOR NPA – GROSS AND NET NPA




Name of the Bank:

Position as on………

PARTICULARS

1) Gross Advanced *2) Gross NPA *

3) Gross NPA as %age of Gross Advanced

4) Total deduction( a+b+c+d )

( a ) Balance in interest suspense a/c **

( b ) DICGC/ECGC claims received and held

pending

adjustment

( c ) part payment received and kept in suspense a/c

( d ) Total provision held ***

5) Net advanced ( 1-4 )

6) Net NPA ( 2-4 )

7) Net NPA as a %age of Net Advance

*excluding Technical write-off of Rs.________crore.

**Banks which do not maintain an interest suspense a/c to park the accrued interest

on NPAs may furnish the amount of interest receivable on NPAs.

***Excluding amount of Technical write-off (Rs.______crore) and provision on

standard assets. (Rs._____crore).

Asset ClassificationAsset Classification

Categories of NPAsCategories of NPAs

Standard Assets:Standard Assets:




Standard assets are the ones in which the bank is receiving interest as well as the

principal amount of the loan regularly from the customer. Here it is also very

important that in this case the arrears of interest and the principal amount of loan

does not exceed 90 days at the end of financial year. If asset fails to be in category

of standard asset that is amount due more than 90 days then it is NPA and NPAs

are further need to classify in sub categories.

Banks are required to classify non-performing assets further into

the following three categories based on the period for which the asset has remained

non-performing and the realisability of the dues:

( 1 ) Sub-standard Assets( 1 ) Sub-standard Assets

( 2 ) Doubtful Assets( 2 ) Doubtful Assets

( 3 ) Loss Assets( 3 ) Loss Assets

( 1 ) Sub-standard Assets:--( 1 ) Sub-standard Assets:--

With effect from 31 March 2005, a sub standard asset would be one, which has

remained NPA for a period less than or equal to 12 month. The following features

are exhibited by sub standard assets: the current net worth of the borrowers /

guarantor or the current market value of the security charged is not enough to

ensure recovery of the dues to the banks in full; and the asset has well-defined

credit weaknesses that jeopardise the liquidation of the debt and are characterised

by the distinct possibility that the banks will sustain some loss, if deficiencies are

not corrected.

( 2 ) Doubtful Assets:--( 2 ) Doubtful Assets:--




A loan classified as doubtful has all the weaknesses inherent in assets that were

classified as sub-standard, with the added characteristic that the weaknesses make

collection or liquidation in full, – on the basis of currently known facts, conditions

and values – highly questionable and improbable.

With effect from March 31, 2005, an asset would be classified as doubtful if it

remained in the sub-standard category for 12 months.

( 3 ) Loss Assets:--Loss Assets:--

A loss asset is one which considered uncollectible and of such little value that its

continuance as a bankable asset is not warranted- although there may be some

salvage or recovery value. Also, these assets would have been identified as ‘loss

assets’ by the bank or internal or external auditors or the RBI inspection but the

amount would not have been written-off wholly.

Provisioning NormsProvisioning Norms

GeneralGeneral

In order to narrow down the divergences and ensure adequate provisioning

by banks, it was suggested that a bank's statutory auditors, if they so desire,

could have a dialogue with RBI's Regional Office/ inspectors who carried




out the bank's inspection during the previous year with regard to the

accounts contributing to the difference.

Pursuant to this, regional offices were advised to forward a list of individual

advances, where the variance in the provisioning requirements between the

RBI and the bank is above certain cut off levels so that the bank and the

statutory auditors take into account the assessment of the RBI while making

provisions for loan loss, etc.

The primary responsibility for making adequate provisions for anydiminution in the value of loan assets, investment or other assets is that of

the bank managements and the statutory auditors. The assessment made by

the inspecting officer of the RBI is furnished to the bank to assist the bank

management and the statutory auditors in taking a decision in regard to

making adequate and necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on the

non-performing assets on the basis of classification of assets into prescribed

categories as detailed in paragraphs 4 supra. Taking into account the time lag

between an account becoming doubtful of recovery, its recognition as such,

the realisation of the security and the erosion over time in the value of

security charged to the bank, the banks should make provision against sub-

standard assets, doubtful assets and loss assets as below:

Loss assets:Loss assets:




The entire asset should be written off. If the assets are permitted to remain in the

books for any reason, 100 percent of the outstanding should be provided for.

Doubtful assets:Doubtful assets:

100 percent of the extent to which the advance is not covered by the

realisable value of the security to which the bank has a valid recourse and

the realisable value is estimated on a realistic basis.

In regard to the secured portion, provision may be made on the following

basis, at the rates ranging from 20 percent to 50 percent of the secured

portion depending upon the period for which the asset has remained

doubtful:

Period for which the advance has

been considered as doubtful

Provision

requirement (%)

Up to one year 20

One to three years 30

More than three years:

(1)Outstanding stock of NPAs as

on March 31, 2004.

60% with effect from

March 31,2005.

75% effect from March




stock valuation. Valuers appointed as per the guidelines approved by the Board of

Directors should get collaterals such as immovable properties charged in favour of

the bank valued once in three years.

Sub-standard assets:Sub-standard assets:

A general provision of 10 percent on total outstanding should be made without

making any allowance for DICGC/ECGC guarantee cover and securities available.

Standard assets:Standard assets:

From the year ending 31.03.2000, the banks should make a general

provision of a minimum of 0.40 percent on standard assets on global loan

portfolio basis.

The provisions on standard assets should not be reckoned for arriving at net

NPAs.

The provisions towards Standard Assets need not be netted from gross

advances but shown separately as 'Contingent Provisions against Standard

Assets' under 'Other Liabilities and Provisions - Others' in Schedule 5 of the

balance sheet.

Floating provisions:Floating provisions:

Some of the banks make a 'floating provision' over and above the specific

provisions made in respect of accounts identified as NPAs. The floating provisions,




wherever available, could be set-off against provisions required to be made as per

above stated provisioning guidelines. Considering that higher loan loss

provisioning adds to the overall financial strength of the banks and the stability of

the financial sector, banks are urged to voluntarily set apart provisions much above

the minimum prudential levels as a desirable practice.

Provisions on Leased Assets:Provisions on Leased Assets:

Leases are peculiar transactions where the assets are not recorded in the books of Leases are peculiar transactions where the assets are not recorded in the books of

the user of such assets as Assets, whereas they are recorded in the books of thethe user of such assets as Assets, whereas they are recorded in the books of the

owner even though the physical existence of the asset is with the user (lessee).owner even though the physical existence of the asset is with the user (lessee).

__(AS19 ICAI) __(AS19 ICAI)

Sub-standard assets : -

10 percent of the 'net book value'.

As per the 'Guidance Note on Accounting for Leases' issued by the ICAI,

'Gross book value' of a fixed asset is its historical cost or other amount substituted

for historical cost in the books of account or financial statements. Statutory

depreciation should be shown separately in the Profit & Loss Account.

Accumulated depreciation should be deducted from the Gross Book Value of the

leased asset in the balance sheet of the lesser to arrive at the 'net book value'.

Also, balance standing in 'Lease Adjustment Account' should be adjusted in the

'net book value' of the leased assets. The amount of adjustment in respect of each




class of fixed assets may be shown either in the main balance sheet or in the Fixed

Assets Schedule as a separate column in the section related to leased assets.

Doubtful assets :-

100 percent of the extent to which the finance is not secured by the realisable value

of the leased asset. Realisable value to be estimated on a realistic basis. In

addition to the above provision, the following provision on the net book value of

the secured portion should be made, depending upon the period for which asset

has been doubtful:

Period %age of provisionUp to one year 20

One to three years 30

More than three years 50

Loss assets :-

The entire asset should be written-off. If for any reason, an asset is allowed to

remain in books, 100 percent of the sum of the net investment in the lease and the

unrealised portion of finance income net of finance charge component should be

provided for. ('net book value')

Guidelines for Provisions under Special CircumstancesGuidelines for Provisions under Special Circumstances

Government guaranteed advancesGovernment guaranteed advances




With effect from 31 March 2000, in respect of advances sanctioned against

State Government guarantee, if the guarantee is invoked and remains in default for

more than two quarters (180 days at present), the banks should make normal

provisions as prescribed in paragraph 4.1.2 above.

As regards advances guaranteed by State Governments, in respect of which

guarantee stood invoked as on 31.03.2000, necessary provision was allowed to be

made, in a phased manner, during the financial years ending 31.03.2000 to

31.03.2003 with a minimum of 25 percent each year.

Advances granted under rehabilitation packages approved by BIFR/term lendingAdvances granted under rehabilitation packages approved by BIFR/term lending

institutions:institutions:

In respect of advances under rehabilitation package approved by BIFR/term

lending institutions, the provision should continue to be made in respect of dues to

the bank on the existing credit facilities as per their classification as sub-standard

or doubtful asset.

As regards the additional facilities sanctioned as per package finalised by BIFR

and/or term lending institutions, provision on additional facilities sanctioned need

not be made for a period of one year from the date of disbursement.

In respect of additional credit facilities granted to SSI units which are

identified as sick [as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-

2002 dated 16 January 2002] and where rehabilitation packages/nursing




programmes have been drawn by the banks themselves or under consortium

arrangements, no provision need be made for a period of one year.

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, andAdvances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and

life policies are exempted from provisioning requirements.life policies are exempted from provisioning requirements.

However, advances against gold ornaments, government securities and allHowever, advances against gold ornaments, government securities and all

other kinds of securities are not exempted from provisioning requirements.other kinds of securities are not exempted from provisioning requirements.

Treatment of interest suspense account:Treatment of interest suspense account:

Amounts held in Interest Suspense Account should not be reckoned as part of

provisions. Amounts lying in the Interest Suspense Account should be deducted

from the relative advances and thereafter, provisioning as per the norms, should be

made on the balances after such deduction.

Advances covered by ECGC/DICGC guaranteeAdvances covered by ECGC/DICGC guarantee

In the case of advances guaranteed by DICGC/ECGC, provision should be made

only for the balance in excess of the amount guaranteed by these Corporations.

Further, while arriving at the provision required to be made for doubtful assets,

realisable value of the securities should first be deducted from the outstanding

balance in respect of the amount guaranteed by these Corporations and then

provision made as illustrated hereunder:

Example




Outstanding Balance Rs. 4 lakhs

DICGC Cover 50 percent

Period for which the advance has remained

doubtful

More than 3 years

remained doubtful

Value of security held

(excludes worth of Rs.)

Rs. 1.50 lakhs

Provision required to be made

Outstanding balance Rs. 4.00 lakhs

Less: Value of security held Rs. 1.50 lakhsUnrealised balance Rs. 2.50 lakhs

Less: DICGC Cover

(50% of unrealisable balance)

Rs. 1.25 lakhs

Net unsecured balance Rs. 1.25 lakhs

Provision for unsecured portion of

advance

Rs. 1.25 lakhs (@ 100 percent

of unsecured portion)

Provision for secured portion of

advance

Rs. 0.75 lakhs (@ 50 percent of

secured portion)

Total provision required to be made Rs. 2.00 lakhs

Advance covered by CGTSI guaranteeAdvance covered by CGTSI guarantee

In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be made towards the guaranteed portion. The amount outstanding

in excess of the guaranteed portion should be provided for as per the extant

guidelines on provisioning for non-performing advances. Two illustrative

examples are given below:




made in Indian Rupee) which becomes overdue goes up correspondingly, with its

attendant implications of provisioning requirements. Such assets should not

normally be revalued. In case such assets need to be revalued as per requirement of

accounting practices or for any other requirement, the following procedure may be

adopted:

The loss on revaluation of assets has to be booked in the bank's Profit & Loss

Account.

Besides the provisioning requirement as per Asset Classification, banks should

treat the full amount of the Revaluation Gain relating to the corresponding assets,

if any, on account of Foreign Exchange Fluctuation as provision against the

particular assets.

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 bank 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 bank.

Liquidity:-Liquidity:-




Money is getting blocked, decreased profit lead to lack of enough cash at hand

which lead to borrowing money for shot\rtes period of time which lead to

additional cost to the company. Difficulty in operating the functions of bank is

another cause of NPA due to lack of money. Routine payments and dues.

Involvement of management:-Involvement of management:-

Time and efforts of management is another indirect cost which bank has to bear

due to NPA. Time and efforts of management in handling and managing NPA

would have diverted to some fruitful activities, which would have given good

returns. Now day’s banks have special employees to deal and handle NPAs, which

is additional cost to the bank.

Credit loss:-Credit loss:-

Bank is facing problem of NPA then it adversely affect the value of bank in terms

of market credit. It will lose it’s goodwill and brand image and credit which have

negative impact to the people who are putting their money in the banks .

REASONS FOR NPA:REASONS FOR NPA:

Reasons can be divided in to two broad categories:-

A] Internal Factor

B] External Factor

[ A ] Internal Factors:- [ A ] Internal Factors:-




Internal Factors are those, which are internal to the bank and are controllable by

banks.

• Poor lending decision:

• Non-Compliance to lending norms:

• Lack of post credit supervision:

• Failure to appreciate good payers:

• Excessive overdraft lending:

• Non – Transparent accounting policy:

[ B ] External Factors:- [ B ] External Factors:-

External factors are those, which are external to banks they are not controllable by

banks.

• Socio political pressure:

• Chang in industry environment:




• Endangers macroeconomic disturbances:

• Natural calamities

• Industrial sickness

• Diversion of funds and willful defaults

• Time/ cost overrun in project implementation

• Labour problems of borrowed firm

• Business failure

•Inefficient management

• Obsolete technology

• Product obsolete

Early symptoms by which one can recognize a performing asset turning in toEarly symptoms by which one can recognize a performing asset turning in to

Non-performing assetNon-performing asset




Four categories of early symptoms:-Four categories of early symptoms:-

------------------------------------------------------------------------------------------------------

( 1 ) Financial:( 1 ) Financial:

Non-payment of the very first installment in case of term loan.

Bouncing of cheque due to insufficient balance in the accounts.

Irregularity in installment.

Irregularity of operations in the accounts.

Unpaid over due bills.

Declining Current Ratio.

Payment which does not cover the interest and principal amount of that

installment.

While monitoring the accounts it is found that partial amount is diverted to

sister concern or parent company.

( 2 ) Operational and Physical:

If information is received that the borrower has either initiated the process

of winding up or are not doing the business.

Overdue receivables.

Stock statement not submitted on time.

External non-controllable factor like natural calamities in the city where

borrower conduct his business. Frequent changes in plan.

Non payment of wages.

( 3 ) Attitudinal Changes:




Use for personal comfort, stocks and shares by borrower.

Avoidance of contact with bank.

Problem between partners.

( 4 ) Others:

Changes in Government policies.

Death of borrower.

Competition in the market.

Preventive Measurement For NPAPreventive Measurement For NPA

Early Recognition of the Problem:- Early Recognition of the Problem:-

Invariably, by the time banks 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 bank’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, banks are convinced of a turnaround within a scheduled

timeframe. In respect of totally unviable units as decided by the bank, it is better tofacilitate 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 Intent:- Identifying Borrowers with Genuine Intent:-




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, banks

may greatly benefit in terms of restructuring of large standard accounts

(potential NPAs) and viable sub-standard accounts with

consortium/multiple banking arrangements.




Once NPA occurred, one must come out of it or it should be managed in most

efficient manner. Legal ways and means are there to over come and manage NPAs.

We will look into each one of it.

Willful Default :-Willful Default :-

A] Lok Adalat and Debt Recovery Tribunal

B] Securitization Act

C] Asset Reconstruction

Lok Adalat: Lok Adalat:

Lok Adalat institutions help banks to settle disputes involving account in

“doubtful” and “loss” category, with outstanding balance of Rs. 5 lakh for

compromise settlement under Lok Adalat. Debt recovery tribunals have been

empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and

above. This mechanism has proved to be quite effective for speedy justice and

recovery of small loans. The progress through this channel is expected to pick up

in the coming years.

Debt Recovery Tribunals(DRT): Debt Recovery Tribunals(DRT):

The recovery of debts due to banks and

financial institution passed in March 2000 has helped in strengthening the function

of DRTs. Provision for placement of more than one recovery officer, power to

attach defendant’s property/assets before judgment, penal provision for




disobedience of tribunal’s order or for breach of any terms of order and

appointment of receiver with power of realization, management, protection and

preservation of property are expected to provide necessary teeth to the DRTs and

speed up the recovery of NPAs in the times to come. DRTs which have been set

up by the Government to facilitate speedy recovery by banks/DFIs, have not been

able make much impact on loan recovery due to variety of reasons like inadequate

number, lack of infrastructure, under staffing and frequent adjournment of cases. It

is essential that DRT mechanism is strengthened and vested with a proper

enforcement mechanism to enforce their orders. Non observation of any order

passed by the tribunal should amount to contempt of court, the DRT should have

right to initiate contempt proceedings. The DRT should empowered to sell asset of

the debtor companies and forward the proceed to the winding – up court for

distribution among the lenders

Inability to Pay Inability to Pay

Consortium arrangements:Consortium arrangements:

Asset classification of accounts under

consortium should be based on the record of recovery of the individual member

banks and other aspects having a bearing on the recoverability of the advances.

Where the remittances by the borrower under consortium lending arrangements are

pooled with one bank and/or where the bank receiving remittances is not parting

with the share of other member banks, the account will be treated as not serviced inthe books of the other member banks and therefore, be treated as NPA. The banks

participating in the consortium should, therefore, arrange to get their share of

recovery transferred from the lead bank or get an express consent from the lead




bank for the transfer of their share of recovery, to ensure proper asset classification

in their respective books.

Corporate debt Restructuring (CDR):Corporate debt Restructuring (CDR):

Background Backgr ound

In spite of their best efforts and intentions, sometimes corporate find themselves in

financial difficulty because of factors beyond their control and also due to certain

internal reasons. For the revival of the corporate as well as for the safety of the

money lent by the banks and FIs, timely support through restructuring in genuine

cases is called for. However, delay in agreement amongst different lending

institutions often comes in the way of such endeavours.

Based on the experience in other countries like the U.K., Thailand, Korea,

etc. of putting in place institutional mechanism for restructuring of corporate debt

and need for a similar mechanism in India, a Corporate Debt Restructuring System

has been evolved, as under :

ObjectiveObj ective

The objective of the Corporate Debt Restructuring (CDR) framework is to

ensure timely and transparent mechanism for restructuring of the corporate debts of

viable entities facing problems, outside the purview of BIFR, DRT and other

legal proceedings, for the benefit of all concerned. In particular, the framework

will aim at preserving viable corporate that are affected by certain internal and

external factors and minimize the losses to the creditors and other stakeholders

through an orderly and coordinated restructuring programme.




Structure: Structure:

CDR system in the country will have a three-tier structure:

(A) CDR Standing Forum

(B) CDR Empowered Group

(C) CDR Cell

(A) CDR Standing Forum :(A) CDR Standing Forum :

The CDR Standing Forum would be the representative general body of all

financial institutions and banks participating in CDR system. All financial

institutions and banks should participate in the system in their own interest. CDR

Standing Forum will be a self-empowered body, which will lay down policies and

guidelines, guide and monitor the progress of corporate debt restructuring.

The Forum will also provide an official platform for both the creditors and

borrowers (by consultation) to amicably and collectively evolve policies and

guidelines for working out debt restructuring plans in the interests of all concerned.

The CDR Standing Forum shall comprise Chairman & Managing Director,

Industrial Development Bank of India; Managing Director, Industrial Credit &

Investment Corporation of India Limited; Chairman, State Bank of India;

Chairman, Indian Banks Association and Executive Director, Reserve Bank of

India as well as Chairmen and Managing Directors of all banks and financial




institutions participating as permanent members in the system. The Forum will

elect its Chairman for a period of one year and the principle of rotation will be

followed in the subsequent years. However, the Forum may decide to have a

Working Chairman as a whole-time officer to guide and carry out the decisions of

the CDR Standing Forum.

A CDR Core Group will be carved out of the CDR Standing Forum to assist

the Standing Forum in convening the meetings and taking decisions relating to

policy, on behalf of the Standing Forum. The Core Group will consist of Chief

Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank of India, Punjab National

Bank, Indian Banks Association and a representative of Reserve Bank of India.

The CDR Standing Forum shall meet at least once every six months and

would review and monitor the progress of corporate debt restructuring system. The

Forum would also lay down the policies and guidelines to be followed by the CDR

Empowered Group and CDR Cell for debt restructuring and would ensure their

smooth functioning and adherence to the prescribed time schedules for debt

restructuring. It can also review any individual decisions of the CDR Empowered

Group and CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell

(described in following paragraphs) shall be housed in IDBI. All financial

institutions and banks shall share the administrative and other costs. The sharing

pattern shall be as determined by the Standing Forum.

CDR Empowered Group and CDR Cell:CDR Empow ered Group and CDR Cell:




The individual cases of corporate debt restructuring shall be decided by the

CDR Empowered Group, consisting of ED level representatives of IDBI, ICICI

Limited and SBI as standing members, in addition to ED level representatives of

financial institutions and banks who have an exposure to the concerned company.

In order to make the CDR Empowered Group effective and broad based and

operate efficiently and smoothly, it would have to be ensured that each financial

institution and bank, as participants of the CDR system, nominates a panel of two

or three EDs, one of whom will participate in a specific meeting of the Empowered

Group dealing with individual restructuring cases. Where, however, a bank /

financial institution has only one Executive Director, the panel may consist of

senior officials, duly authorized by its Board. The level of representation of banks/

financial institutions on the CDR Empowered Group should be at a sufficiently

senior level to ensure that concerned bank / FI abides by the necessary

commitments including sacrifices, made towards debt restructuring.

The Empowered Group will consider the preliminary report of all cases of

requests of restructuring, submitted to it by the CDR Cell. After the Empowered

Group decides that restructuring of the company is prima-facie feasible and the

enterprise is potentially viable in terms of the policies and guidelines evolved by

Standing Forum, the detailed restructuring package will be worked out by the CDR

Cell in conjunction with the Lead Institution.

The CDR Empowered Group would be mandated to look into each case of

debt restructuring, examine the viability and rehabilitation potential of the

Company and approve the restructuring package within a specified time frame of

90 days, or at best 180 days of reference to the Empowered Group.




There should be a general authorisation by the respective Boards of the

participating institutions / banks in favour of their representatives on the CDR

Empowered Group, authorising them to take decisions on behalf of their

organization, regarding restructuring of debts of individual corporate.

The decisions of the CDR Empowered Group shall be final and action-

reference point. If restructuring of debt is found viable and feasible and accepted

by the Empowered Group, the company would be put on the restructuring mode.

If, however, restructuring is not found viable, the creditors would then be free to

take necessary steps for immediate recovery of dues and / or liquidation or winding

up of the company, collectively or individually.

CDR Cell:CDR Cell:

The CDR Standing Forum and the CDR Empowered Group will be assisted

by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of

the proposals received from borrowers / lenders, by calling for proposed

rehabilitation plan and other information and put up the matter before the CDR

Empowered Group, within one month to decide whether rehabilitation is prima

facie feasible, if so, the CDR Cell will proceed to prepare detailed Rehabilitation

Plan with the help of lenders and if necessary, experts to be engaged from outside.

If not found prima facie feasible, the lenders may start action for recovery of their

dues.

To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate

members of staff for the Cell will be deputed from banks and financial institutions.

The CDR Cell may also take outside professional help. The initial cost in operating

the CDR mechanism including CDR Cell will be met by IDBI initially for one year




and then from contribution from the financial institutions and banks in the Core

Group at the rate of Rs.50 lakh each and contribution from other institutions and

banks at the rate of Rs.5 lakh each.

All references for corporate debt restructuring by lenders or borrowers will

be made to the CDR Cell. It shall be the responsibility of the lead institution /

major stakeholder to the corporate, to work out a preliminary restructuring plan in

consultation with other stakeholders and submit to the CDR Cell within one month.

The CDR Cell will prepare the restructuring plan in terms of the general policies

and guidelines approved by the CDR Standing Forum and place for the

consideration of the Empowered Group within 30 days for decision. The

Empowered Group can approve or suggest modifications, so, however, that a final

decision must be taken within a total period of 90 days. However, for sufficient

reasons the period can be extended maximum upto 180 days from the date of

reference to the CDR Cell.

Other features:Other f eatures:

CDR will be a Non-statutory mechanism.

CDR mechanism will be a voluntary system based on debtor-creditor

agreement and inter-creditor agreement.

The scheme will not apply to accounts involving only one financial

institution or one bank. The CDR mechanism will cover only multiple banking

accounts / syndication / consortium accounts with outstanding exposure of Rs.20

crore and above by banks and institutions.




Similarly, all participants in the CDR mechanism through their membership of the

Standing Forum shall have to enter into a legally binding agreement, with

necessary enforcement and penal clauses, to operate the System through laid-down

policies and guidelines.

Stand-Still Clause: Stand-Still Clause:

One of the most important elements of Debtor-Creditor

Agreement would be 'stand still' agreement binding for 90 days, or 180 days by

both sides. Under this clause, both the debtor and creditor(s) shall agree to a

legally binding 'stand-still' whereby both the parties commit themselves not to

taking recourse to any other legal action during the 'stand-still' period, this

would be necessary for enabling the CDR System to undertake the necessary debt

restructuring exercise without any outside intervention judicial or otherwise.

The Inter-Creditors Agreement would be a legally binding agreement

amongst the secured creditors, with necessary enforcement and penal clauses,

wherein the creditors would commit themselves to abide by the various elements

of CDR system. Further , the creditors shall agree that if 75% of secured

creditors by value, agree to a debt restructuring package, the same would be

binding on the remaining secured creditors.

Accounting treatment for restructured accounts Accounting t reatment for restructured accounts

The accounting treatment of accounts restructured under CDR would be governed

by the prudential norms indicated in circular DBOD. BP. BC. 98 / 21.04.048 /




2000-01 dated March 30, 2001. Restructuring of corporate debts under CDR could

take place in the following stages:

Before commencement of commercial production;

After commencement of commercial production but before the asset has

been classified as sub-standard;

After commencement of commercial production and the asset has been

classified as sub-standard.

The prudential treatment of the accounts, subjected to restructuring under CDR,would be governed by the following norms:

Treatment of standard accounts restructured under CDR:Treatment of standard accounts restructured under CDR:

A rescheduling of the instalments of principal alone, at any of the aforesaid

first two stages [paragraph 5(a) and (b) above] would not cause a standard

asset to be classified in the sub-standard category, provided the loan / credit

facility is fully secured.

A rescheduling of interest element at any of the foregoing first two stages

would not cause an asset to be downgraded to sub-standard category subject

to the condition that the amount of sacrifice, if any, in the element of

interest, measured in present value terms, is either written off or provision is

made to the extent of the sacrifice involved. For the purpose, the future

interest due as per the original loan agreement in respect of an account

should be discounted to the present value at a rate appropriate to the risk




category of the borrower (i.e. current PLR + the appropriate credit risk

premium for the borrower-category) and compared with the present value of

the dues expected to be received under the restructuring package, discounted

on the same basis.

In case there is a sacrifice involved in the amount of interest in present value

terms, as at (b) above, the amount of sacrifice should either be written off or

provision made to the extent of the sacrifice involved.

Treatment of sub-standard accounts restructured under CDRTreatment of sub-standard accounts restructured under CDR

A rescheduling of the instalments of principal alone, would render a sub-

standard asset eligible to be continued in the sub-standard category for the

specified period, provided the loan / credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible

to be continued to be classified in sub-standard category for the specified period

subject to the condition that the amount of sacrifice, if any, in the element of

interest, measured in present value terms, is either written off or provision is made

to the extent of the sacrifice involved. For the purpose, the future interest due as

per the original loan agreement in respect of an account should be discounted to

the present value at a rate appropriate to the risk category of the borrower (i.e.,

current PLR + the appropriate credit risk premium for the borrower-category) and

compared with the present value of the dues expected to be received under the

restructuring package, discounted on the same basis.






provision made to the extent of the sacrifice involved. Even in cases where the

sacrifice is by way of write off of the past interest dues, the asset should continue

to be treated as sub-standard.

The sub-standard accounts at (ii) (a), (b) and (c) above, which have been

subjected to restructuring, etc. whether in respect of principal instalment or interest

amount, by whatever modality, would be eligible to be upgraded to the standard

category only after the specified period, i.e., a period of one year after the date

when first payment of interest or of principal, whichever is earlier, falls due,

subject to satisfactory performance during the period. The amount of provision

made earlier, net of the amount provided for the sacrifice in the interest amount in

present value terms as aforesaid, could also be reversed after the one-year period.

During this one-year period, the sub-standard asset will not deteriorate in its

classification if satisfactory performance of the account is demonstrated during the

period. In case, however, the satisfactory performance during the one year period is

not evidenced, the asset classification of the restructured account would be

governed as per the applicable prudential norms with reference to the pre-

restructuring payment schedule.

The asset classification under CDR would continue to be bank-specific

based on record of recovery of each bank, as per the existing prudential norms

applicable to banks.

Restructuring / Rescheduling of Loans Restructuring / Rescheduling of Loans




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

and principal have been renegotiated or rescheduled after commencement of

production should be classified as sub-standard and should remain in such category

for at least one year of satisfactory performance under the renegotiated or

rescheduled terms. In the case of sub-standard and doubtful assets also,

rescheduling does not entitle a bank to upgrade the quality of advance

automatically unless there is satisfactory performance under the rescheduled /

renegotiated terms. Following representations from banks that the foregoing

stipulations deter the banks from restructuring of standard and sub-standard

loan assets even though the modification of terms might not jeopardise the

assurance of repayment of dues from the borrower, the norms relating to

restructuring of standard and sub-standard assets were reviewed in March 2001. In

the context of restructuring of the accounts, the following stages at which the

restructuring / rescheduling / renegotiation of the terms of loan agreement could

take place, can be identified:

Before commencement of commercial production;

After commencement of commercial production but before the asset

has been classified as sub standard,

After commencement of commercial production and after the asset has

been classified as sub standard.

In each of the foregoing three stages, the rescheduling, etc., of principal and/or of

interest could take place, with or without sacrifice, as part of the restructuring

package evolved.




Treatment of Restructured Standard Accounts:Treatment of Restructured Standard Accounts:

A rescheduling of the instalments of principal alone, at any of the aforesaid first

two stages would not cause a standard asset to be classified in the sub standard

category provided the loan/credit facility is fully secured.

A rescheduling of interest element at any of the foregoing first two stages

would not cause an asset to be downgraded to sub standard category subject to the

condition that the amount of sacrifice, if any, in the element of interest, measured

in present value terms, is either written off or provision is made to the extent of

the sacrifice involved. For the purpose, the future interest due as per the original

loan agreement in respect of an account should be discounted to the present value

at a rate appropriate to the risk category of the borrower (i.e., current PLR+ the

appropriate credit risk premium for the borrower-category) and compared with the

present value of the dues expected to be received under the restructuring package,

discounted on the same basis.



provision made to the extent of the sacrifice involved.

Treatment of restructured sub-standard accounts:Treatment of restructured sub-standard accounts:

A rescheduling of the instalments of principal alone, would render a sub-

standard asset eligible to be continued in the sub-standard category for the

specified period, provided the loan/credit facility is fully secured.




A rescheduling of interest element would render a sub-standard asset eligible

to be continued to be classified in sub standard category for the specified period

subject to the condition that the amount of sacrifice, if any, in the element of

interest, measured in present value terms, is either written off or provision is

made to the extent of the sacrifice involved. For the purpose, the future interest due

as per the original loan agreement in respect of an account should be discounted to

the present value at a rate appropriate to the risk category of the borrower (i.e.,

current PLR + the appropriate credit risk premium for the borrower-category) and

compared with the present value of the dues expected to be received under the

restructuring package, discounted on the same basis.



provision made to the extent of the sacrifice involved. Even in cases where the

sacrifice is by way of write off of the past interest dues, the asset should continue

to be treated as sub-standard.

Up gradation of restructured accounts:Up gr adation of restructured accounts:

The sub-standard accounts which have been subjected to restructuring etc.,

whether in respect of principal instalment or interest amount, by whatever

modality, would be eligible to be upgraded to the standard category only after the

specified period i.e., a period of one year after the date when first payment of

interest or of principal, whichever is earlier, falls due, subject to satisfactory

performance during the period. The amount of provision made earlier, net of the

amount provided for the sacrifice in the interest amount in present value terms as

aforesaid, could also be reversed after the one year period. During this one-year

period, the sub-standard asset will not deteriorate in its classification if satisfactory




performance of the account is demonstrated during the period. In case, however,

the satisfactory performance during the one-year period is not evidenced, the asset

classification of the restructured account would be governed as per the applicable

prudential norms with reference to the pre-restructuring payment schedule.

General:General:

These instructions would be applicable to all type of credit facilities

including working capital limits, extended to industrial units, provided they are

fully covered by tangible securities.

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, these

guidelines should not be applied to restructuring/ rescheduling of credit facilities

extended to traders.

While assessing the extent of security cover available to the credit facilities,

which are being restructured/ rescheduled, collateral security would also be

reckoned, provided such collateral is a tangible security properly charged to the

bank and is not in the intangible form like guarantee etc. of the promoter/ others.

Income recognition Income recognition

There will be no change in the existing instructions on income recognition.

Consequently, banks should not recognise income on accrual basis in respect of the




projects even though the asset is classified as a standard asset if the asset is a "non

performing asset" in terms of the extant instructions. In other words, while the

accounts of the project may be classified as a standard asset, banks shall recognise

income in such accounts only on realisation on cash basis if the asset has otherwise

become ‘non performing’ as per the extant delinquency norm of 180 days. The

delinquency norm would become 90 days with effect from 31 March 2004.

Consequently, banks, which have wrongly recognised income in the past,

should reverse the interest if it was recognised as income during the current year or

make a provision for an equivalent amount if it was recognised as income in the

previous year(s). As regards the regulatory treatment of income recognised as

‘funded interest’ and ‘conversion into equity, debentures or any other instrument’

banks should adopt the following:

Funded Interest:Funded Interest: Income recognition in respect of the NPAs, regardless of

whether these are or are not subjected to restructuring/ rescheduling/ renegotiation

of terms of the loan agreement, should be done strictly on cash basis, only on

realisation and not if the amount of interest overdue has been funded. If, however,

the amount of funded interest is recognised as income, a provision for an equal

amount should also be made simultaneously. In other words, any funding of

interest in respect of NPAs, if recognised as income, should be fully provided for.

Conversion into equity, debentures or any other Conversion into equity, debentures or any other instrument:instrument: The amount

outstanding converted into other instruments would normally comprise principal

and the interest components. If the amount of interest dues is converted into equity

or any other instrument, and income is recognised in consequence, full provision

should be made for the amount of income so recognised to offset the effect of such




income recognition. Such provision would be in addition to the amount of

provision that may be necessary for the depreciation in the value of the equity or

other instruments, as per the investment valuation norms. However, if the

conversion of interest is into equity, which is quoted, interest income can be

recognised at market value of equity, as on the date of conversion, not exceeding

the amount of interest converted to equity. Such equity must thereafter be

classified in the "available for sale" category and valued at lower of cost or market

value. In case of conversion of principal and /or interest in respect of NPAs into

debentures, such debentures should be treated as NPA, ab initio, in the same asset

classification as was applicable to loan just before conversion and provision made

as per norms. This norm would also apply to zero coupon bonds or other

instruments which seek to defer the liability of the issuer. On such debentures,

income should be recognised only on realisation basis. The income in respect of

unrealised interest, which is converted into debentures or any other fixed maturity

instrument, should be recognised only on redemption of such instrument. Subject

to the above, the equity shares or other instruments arising from conversion of the

principal amount of loan would also be subject to the usual prudential valuation

norms as applicable to such instruments.

Provisioning Provisioning

While there will be no change in the extant norms on provisioning for NPAs,

banks which are already holding provisions against some of the accounts, which

may now be classified as ‘standard’, shall continue to hold the provisions and shall

not reverse the same.

Special Cases Special Cases




Accounts with temporary deficiencies: Accounts 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 such as non-

availability of adequate drawing power based on the latest available stock

statement, balance outstanding exceeding the limit temporarily, non-submission of

stock statements and non-renewal of the limits on the due date, etc. In the matter of

classification of accounts with such deficiencies banks may follow the following

guidelines:

Banks should ensure that drawings in the working capital accounts are

covered by the adequacy of current assets, since current assets are first

appropriated in times of distress. Drawing power is required to be arrived at based

on the stock statement which is current. However, considering the difficulties of

large borrowers, stock statements relied upon by the banks for determining

drawing power should not be older than three months. The outstanding in the

account based on drawing power calculated from stock statements older than three

months, would be deemed as irregular. A working capital borrower account will

become NPA if such irregular drawings are permitted in the account for a

continuous period of 180 days even though the unit may be working or the

borrower's financial position is satisfactory.

Regular and ad hoc credit limits need to be reviewed/ regularised not

later than three months from the due date/date of ad hoc sanction. In case of

constraints such as non-availability of financial statements and other data from the




borrowers, the branch should furnish evidence to show that renewal/ review of

credit limits is already on and would be completed soon. In any case, delay beyond

six months is not considered desirable as a general discipline. Hence, an account

where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180

days from the due date/ date of ad hoc sanction will be treated as NPA.

Accounts regularised near about the balance sheet date: Accounts regul arised near about the balance sheet date:

The asset

classification of borrower accounts where a solitary or a few credits are recorded

before the balance sheet date should be handled with care and without scope for

subjectivity. Where the account indicates inherent weakness on the basis of the

data available, the account should be deemed as a NPA. In other genuine cases, the

banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting

Officers about the manner of regularisation of the account to eliminate doubts on

their performing status.

Asset Classification to be borrower-wise and not facility-wise Asset Classif ication 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 part

thereof which has become irregular.

If the debits arising out of devolvement of letters of credit or invoked

guarantees are parked in a separate account, the balance outstanding in that account

also should be treated as a part of the borrower’s principal operating account for




Agricultural advances Agr icultural advances

In respect of advances granted for agricultural purpose where interest and/or

instalment 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. The above norms should be made applicable to all direct

agricultural advances as listed at items 1.1, 1.1.2 (i) to (vii), 1.1.2 (viii)(a)(1) and

1.1.2 (viii)(b)(1) of Master Circular on lending to priority sector No. RPCD.

PLAN. BC. 12/04.09.01/ 2001- 2002 dated 1 August 2001. An extract of the list of

these items is furnished in the Annexure II. In respect of agricultural loans, other

than those specified above, identification of NPAs would be done on the same

basis as non agricultural advances which, at present, is the 180 days delinquency

norm.

Where 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 loan or re-schedulement of the repayment

period; and the sanctioning of fresh short-term loan, subject to various guidelines

contained in RBI circulars RPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98

and RPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.

In such cases of conversion 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. The asset classification of these loans would thereafter be governed by the

revised terms & conditions and would be treated as NPA if interest and/or

instalment of principal remains unpaid, for two harvest seasons but for a period not

exceeding two half years.




against any asset turning into NPA pending its take over by taking over institution.

As and when the asset is taken over by the taking over institution, the

corresponding provisions could be reversed. However, the taking over institution,

on taking over such assets, should make provisions treating the account as NPA

from the actual date of it becoming NPA even though the account was not in its

books as on that date.

Post-shipment Supplier's Credit Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the banks covering export of

goods to countries for which the ECGC’s cover is available, EXIM Bank has

introduced a guarantee-cum-refinance programme whereby, in the event of default,

EXIM Bank will pay the guaranteed amount to the bank within a period of 30 days

from the day the bank invokes the guarantee after the exporter has filed claim with

ECGC.

Accordingly, to the extent payment has been received from the EXIM Bank,

the advance may not be treated as a non-performing asset for asset classification

and provisioning purposes.

Export Project Finance: Export Project Finance:

In respect of export project finance, there could be instances where the

actual importer has paid the dues to the bank abroad but the bank in turn is unableto remit the amount due to political developments such as war, strife, UN embargo,

etc.




In such cases, where the lending bank is able to establish through

documentary evidence that the importer has cleared the dues in full by depositing

the amount in the bank abroad before it turned into NPA in the books of the bank,

but the importer's country is not allowing the funds to be remitted due to political

or other reasons, the asset classification may be made after a period of one year

from the date the amount was deposited by the importer in the bank abroad.

Advances under rehabilitation approved by BIFR/ TLI: Advances under rehabilitation approved by BIFR/ TLI:

Banks are

not permitted to upgrade the classification of any advance in respect of which the

terms have been re-negotiated unless the package of re-negotiated terms has

worked satisfactorily for a period of one year. While the existing credit facilities

sanctioned to a unit under rehabilitation packages approved by BIFR/term lending

institutions will continue to be classified as sub-standard or doubtful as the case

may be, in respect of additional facilities sanctioned under the rehabilitation

packages, the Income Recognition, Asset Classification norms will become

applicable after a period of one year from the date of disbursement.

ROLE OF ARCIL :-

This empowerment encouraged the three major players in Indian banking system,

namely, State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank

Limited (IDBI) to come together to set-up the first ARC. Arcil was incorporated as

a public limited company on February 11, 2002 and obtained its certificate of

commencement of business on May 7, 2003. In pursuance of Section 3 of the

Securitization Act 2002, it holds a certificate of registration dated August 29, 2003,

issued by the Reserve Bank of India (RBI) and operates under powers conferred




under the Securitization Act, 2002. Arcil is also a "financial institution" within the

meaning of Section 2 (h) (ia) of the Recovery of Debts due to Banks and Financial

Institutions Act, 1993 (the "DRT Act").

Arcil is the first ARC in the country to commence business of resolution of non-

performing assets (NPAs) upon acquisition from Indian banks and financial

institutions. As the first ARC, Arcil has played a pioneering role in setting

standards for the industry in India.

• Unlocking capital for the banking system and the economy

The primary objective of Arcil is to expedite recovery of the amounts locked

in NPAs of lenders and thereby recycling capital. Arcil thus, provides relief

to the banking system by managing NPAs and help them concentrate on core

banking activities thereby enhancing shareholders value.

• Creating a vibrant market for distressed debt assets / securities in India

offering a trading platform for Lenders

Arcil has made successful efforts in funneling investment from both from

domestic and international players for funding these acquisitions of

distressed assets, followed by showcasing them to prospective buyers. This

has initiated creation of a secondary market of distressed assets in the

country besides hastening their resolution. The efforts of Arcil would lead

the country’s distressed debt market to international standards.

• To evolve and create significant capacity in the system for quicker

resolution of NPAs by deploying the assets optimally




With a view to achieving high delivery capabilities for resolution, Arcil has

put in place a structure aimed at outsourcing the various sub-functions of

resolution to specialized agencies, wherever applicable under the provision

of the Securitisation Act, 2002. Arcil has also encourage, groomed and

developed many such agencies to enhance its capacity in line with the

growth of its activity.

ANALYSIS

For the purpose of analysis and comparison between private sector and public

sector banks, we take five-five banks in both sector to compare the non performing

assets of banks. For understanding we further bifurcate the non performing assets

in priority sector and non priority sector, gross NPA and net NPA in percentage as

well as in rupees, deposit – investment – advances.

Deposit – Investment – Advances is the first in the analysis because due to these

we can understand the where the bank stands in the competitive market. As at end

of march 2008, in private sector ICICI Bank is the highest deposit-investment-

advances figures in rupees crore, second is HDFC Bank and KOTAK Bank has

least figures.

In public sector banks Punjab National Bank has highest deposit-investment-

advances but when we look at graph first three means Bank of Baroda and Bank of

India are almost the similar in numbers and Dena Bank is stands for last in public

sector bank. When we compare the private sector banks with public sector banks

among these banks, we can understand the more number of people prefer to choose

public sector banks for deposit-investment.




is very time consuming, the provisions the banks have to make against the NPA

according to the central bank guidelines, are quite significant.

Here, we can see that there are huge difference between gross and net NPA. While

gross NPA reflects the quality of the loans made by banks, net NPA shows the

actual burden of banks. The requirements for provisions are :

100% for loss assets

100% of the unsecured portion plus 20-50% of the secured portion,

depending on the period for which the account has remained in the doubtful

category 10% general provision on the outstanding balance under the sub standard

category.

Here, there are gross and net NPA data for 2006-07 and 2007-08 we taken for

comparison among banks. These data are NPA AS PERCENTAGE OF TOTAL

ASSETS. As we discuss earlier that gross NPA reflects the quality of the loans

made by banks. Among all the ten banks Dena Banks has highest gross NPA as a

percentage of total assets in the year 2006-07 and also net NPA. Punjab National

Bank shows vast difference between gross and net NPA. There is almost same

figures between BOI and BOB.




YEAR 2006-07

BANK GROSS NPA NET NPA

BOB 1.46 0.35

BOI 1.48 0.45

DENA 2.37 1.16

PNB 2.09 0.45

UBI 1.82 0.59

0

0.5

1

1.5

2

2.5

DENA UBI PNB BOI BOB

GROSS

NET NP

2007-08





BOB 1.10 0.27

BOI 1.08 0.33

DENA 1.48 0.56

PNB 1.67 0.38UBI 1.34 0.10

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

DENA PNB BOI BOB UBI

GROSS N

NET NPA

2006-07


AXIS 0.57 0.36HDFC 0.72 0.22

ICICI 1.20 0.58

KOTAK 1.39 1.09

INDUSIND 1.64 1.31




COMPARISON OF GROSS NPA WITH ALL BANKS FOR THE YEAR

2007-08. The growing NPAs affects the health of banks, profitability and

efficiency. In the long run, it eats up the net worth of the banks. We can say

that NPA is not a healthy sign for financial institutions. Here we take all the

ten banks gross NPA together for better understanding. Average of these ten

banks gross NPAs is 1.29 as percentage of total assets. So if we compare in

private sector banks AXIS and HDFC Bank are below average of all banks

and in public sector BOB and BOI. Average of these five private sector

banks gross NPA is 1.25 and average of public sector banks is 1.33. Which

is higher in compare of private sector banks.

GROSS NPA :-

0

0.5

1

1.5

2

ICICI KOTAK AXIS BOB DENA

COMPARISON OF NET NPA WITH ALL BANKS FOR THE YEAR

2007-08. Average of these ten bank’s net NPA is 0.56. And in the public

sector banks all these five banks are below this. But in private sector banks

there are three banks are above average. The difference between private and

public banks average is also vast. Private sector banks net NPA average is

0.71 and in public sector banks it is 0.41 as percentage of total assets. As

we know that net NPA shows actual burden of banks. IndusInd bank has

highest net NPA figure and HDFC Bank has lowest in comparison.




NET NPA of banks:-

0

0.2

0.4

0.6

0.8

1

1.2

1.4

ICICI INDUSIND KOTAK HDFC AXIS BOI BOB UBI DENA PNB

PRIORITY –NON PRIORITY SECTOR

When we further bifurcate NPA in priority sector and Non priority sector.

Agriculture + small + others are priority sector. In private sector banks ICICI

Bank has the highest NPA in both sector in compare to other private sector banks.

Around 72% of NPA is with ICICI Bank with Rs.1359 crore in priority sector and

around 78% in non priority sector. We can see that in private sector banks , banks

has more NPA in non priority sector than priority sector.

BANK AGRI

( 1 )

SMALL

( 2 )

OTHERS

( 3 )

PRIORITY

SECTOR

( 1+2+3 )

NON-

PRIORITY

AXIS 109.12 14.76 86.71 210.59 275.06

HDFC 36.12 110.56 47.70 194.41 709.23

ICICI 981.85 23.35 354.13 1359.34 6211.12

KOTAK 10.00 33.84 4.04 47.87 405.20

INDUSIND 30.44 3.18 30.02 63.64 328.67

TOTAL 1167.53 185.69 522.60 1875.85 7929.28




0

1000

2000

3000

4000

5000

6000

7000

AXIS HDFC ICICI KOTAK INDUSIND

PRIORITY

NON-PRIORITY

BANK PRIORITY SECTOR

(ADVANCED

RS.CRORE )

NPA

BOB 5469 350

BOI 3269 325

DENA 1160 106

PNB 3772 443

UBI 1924 197

0

1000

2000

3000

4000

5000

6000

BOB BOI DENA PNB UBI

PRIO

NPA




When we talk about public sector banks they are more in priority sector and they

given advanced to weaker sector or industries. Public sector banks give more

loans to Agriculture , small scale and others units and as a result we see that there

are more number of NPA in public sector banks than in private sector banks. BOB

given more advanced to priority sector in 2007-08 than other four banks and Dena

Bank is in least.

But when there are comparison between private bank and public sector bank still

ICICI Bank has more NPA in both priority and non priority sector with the

comparison of public sector banks. Large NPA in ICICI Bank because the strategy

of bank that risk-reward attitude and initiative in each sector. Above we also

discuss that ICICI Bank has highest deposit-investment-advance than other banks.

Now, when we compare the all public sector banks and public sector banks on

priority and non-priority sector than the figures are really shocking. Because in

compare of private sector banks, public sector banks numbers are very large.

SECTOR

PUBLIC SECTOR NEW PRIVATE

2006-07 2007-08 2006-07 2007-08

PRIORITY 22954 25287 1468 2080

PUBLIC 490 299 3 0

NON PRT 15158 14163 4800 8339TOTAL 38602 39749 6271 10419

Here, there are huge difference between private and public sector banks NPA.

There is increase in new private sector banks NPA of Rs.4148 cr in 2007-08 which




is almost 66% rise than previous year. In public sector banks the numbers are not

increased like private sector banks.

RECOMMENDATIONS:

It is recommended that the proper documentation and verification to be

made before sanctioning the loan.

Empowering staff to make decisions related to sanctioning of loans.

Constant interactions have to be maintained with the customers to keep

track of their loan payment.




Strict measures have to be taken while issuing or sanctioning the loan. The

measures can include verification of job and salary slips, verification of

securities and the like.

CONCLUSION

The Indian banking sector is facing a serious problem of NPA. The extent of NPA is

ti l hi h i bli t b k T i th ffi i d

FINAL Non Performing Assets of Banks

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