Management of Non-Performing Assets NPAs

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Management of Non-Performing Assets (NPAs): A Comparative Study of

Public and Private Sector Banks in India

A dissertation submitted in partial fulfillment of the requirements for the award of the degree

Master of Commerce under Assam University, Silchar, India

(SESSION 2012-2014), M.COM 4th

SEMESTER, ASSAM UNIVERSITY

Under the Supervision of:

Dr. Joyeeta Deb

Assistant Professor

Department of Commerce

Assam University, Silchar


Mahatma Gandhi School of Economics & Commerce

Dargakona, Silchar-788011

Assam

Subm itted By:

Biswajit Roy

Email ID: [email protected]; [email protected] ( pleasesend your valuable feedback)


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CONTENTS

Serial

No.

Title Page No.

1 Declaration i

2 Certificate ii

3 Acknowledgement iii

4 Preface iv

5 List of Charts v

6 List of Tables v

7 List of Figures v

8 Chapter: - 1 Conceptual Framework 1-26

Introduction 1-2

Meaning of Non-Performing Assets 2-3

Income Recognition of NPAs 3

NPA Classifications 3-4

Types of NPA 4-5

Asset Classification 5-7

RBI’s Guidelines for Provisioning Norms of NPAs 7

Non-Performing Assets as a Major Issue And Challenge For Banking

Industry 8

Impact of NPA on the Operations of Banks 8-9

High Cost of Funds Due to NPAs 9

Reasons of Non-Performing Assets 10-15

Measures to Control NPAs 15-18

Tools available to Banks to Manage their NPAs 18-25


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Management/Resolution of NPAs 25-26

9 Chapter: - 2 Literature Review and Methodology 27-33

2.1 Review of Literature 27-32

2.2 Methodology 32-33

10 Chapter: - 3 Analysis of Non-Performing Assets 34-54

11 Chapter: - 4 Findings and Conclusion 55-58

Findings 55-56

Conclusion 57-58

12 Chapter: - 5 Bibliography 59-61

13 Appendix a-d


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DECL R TION

I do hereby declare that the dissertation work entitled “Management of Non-PerformingAssets (NPAs): A Comparative Study of Public and Private Sector Banks in India”

submitted to Assam University, Silchar is a record of an independent research work done

by me and is conducted in the partial fulfillment of the requirement of 4th semester,

M.Com. degree as per course curriculum offered by the Department of Commerce,

Assam University, Silchar.

This dissertation report or any part of it has not been previously submitted to this

University or any other institution for the award of any degree or diploma.

Date:

Place: Silchar

Biswajit Roy

M.Com. 4th

Semester,



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DEPARTMENT OF COMMERCE

ASSAM UNIVERSITY, SILCHAR

PIN: 788011, ASSAM, INDIA

Dr. Joyeeta Deb,

Assistant Professor,


CERTIFIC TE

This is to certify that the Dissertation entitled “Management of Non-Performing Assets

(NPAs): A Comparative Study of Public and Private Sector Banks in India” is the research

work carried out by BISWAJIT ROY bearing Roll: 041412, No. 23200246 of M.Com and

Registration No. 10202790 of 2008-2009 of Assam University, Silchar, India under my

supervision towards the partial fulfillment of the requirements for the award of the Degree

of Master of Commerce in 2014 and that the dissertation has not found a basis for theaward previously of any degree, diploma, fellowship or any other similar title.

Signature

(Joyeeta Deb)


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CKNOWLEDGEMENT

At the very outset, I would like to take the golden opportunity of thanking those

persons without whose guidance, motivations, inspirations and suggestions, it was

hardly possible for me to accomplish the project successfully.

First and foremost, I would like to express my humble gratitude to my guide Dr. Joyeeta

Deb for her guidance, constant supervision and support in completing the project.

I would like to express my special thanks and gratitude to Prof. Nikhil Bhusan Dey,

Dean, Mahatma Gandhi School of Economics and Commerce and Dr. Pranay Jyoti

Goswami, Head of the Department, Department of Commerce, Assam University for

providing me necessary help and advice as and when required.

I would like to extent my sincere thanks and gratitude to all the faculty members of the

Department of Commerce, Assam University, who co-operated directly or indirectly to fulfill

the requirements of the project.


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PREF CE

Non-Performing Assets are the most vexed problem for the Indian banking industry. The

Government and Reserve Bank of India has promulgated a stringent regulatory framework in

order to contain NPAs of the banks.

In the liberalized economy, Banking and Financial sector get high priority. The banks in

India are facing the problem of Non-Performing Assets (NPAs). The earning capacity and

profitability of the banks are highly affected because of the existence of NPAs. Moreover, the

non-performance or non-receipt of interest and principal blocked banks money in the form of

funds and is not available for further use of banking business and thus the profit margin of the

banks goes down. In this connection, bank must be aware of the problems and recovery

legislations of NPAs. Compared to Private Sector Banks, Public Sector Banks are highly

affected by this three letter virus NPA, because whose objectives have been more social than

economic.

This present study analyzes the classification of loan assets in Scheduled, Public and

Private Sector Banks, composition of NPAs in different sectors and NPAs position in

different sectors.

It is also aimed to analyse the differences in the amount of NPAs and the trend of NPAs

in the Scheduled, Public, Old Private and New Private Sector Banks, it has tried to find

reasons for the differences. Resolutions and suggestions for controlling the mounting level of

NPAs in India are also provided therewith.


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List of Charts

1. Chart 1: NPA Classification

2. Chart 2 : Provisioning Norms of NPAs

List of Tables

1. Table 1: Bank Group-Wise Classification of Loan Assets of Commercial Banks

2. Table 2: Percentage Growth Rate of Total Gross NPAs of All Public and Private

Sector Banks

3.

Table 3: Non-Performing Assets of all Banks-Sector Wise

4. Table 4: Gross and Net NPAs of Commercial Banks (Bank Group-Wise)

List of Figures

1. Figure 1: Gross NPAs as Percentage Share of Total Gross Advances

2. Figure 2: Average Gross NPAs as Percentage of Total Gross Advances

3. Figure 3: Percentage Growth Rate of Average Gross NPAs

4. Figure 4: Priority Sector NPAs as Percentage Share on Total NPAs

5. Figure 5: Non- Priority Sector NPAs as Percentage Share on Total NPAs

6. Figure 6: Public Sector NPAs as Percentage Share of Total NPAs

7.

Figure 7: Gross NPAs as Percentage of Gross Advances

8. Figure 8: Gross NPAs as Percentage of Total Assets

9. Figure 9: Net NPAs as Percentage of Net Advances

10. Figure 10: Net NPAs as Percentage of Total Assets


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Chapter 1:-

Conceptual Framework


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INTRODUCTION

Banking system plays a very significant position in the economic life of a country. The

strength of the economy is closely related to the soundness of its banking system and a well- built banking sector is significant for a prosperous economy. Indian banking industry has

undergone several changes during the liberalization process. However, one troublesome crisis

affecting the banking sector is that of Non- performing assets. Non-performing assets does

not generate any new income to banks and also affect the profitability and effectiveness of

banks. At present, for all the public sector banks and for the Reserve Bank of India, these

NPAs became trouble assets. It is believed that the Indian banking sector had not been in its

best state of health for quite some time. One of the major reasons cited for this state of health

has been the persistence of „Non- performing Assets‟ (NPAs) in the books of banks. In the

pre-liberalization period the dominant segment in the banking industry was the public sector

banks. During this period, non-performing assets were treated as an exclusive problem of the

public sector banks. With liberalization, banking industry – particularly commercial banking

has been facing a new environment. This is both in terms of the new policy framework

proposed by the Narasimham Committee in 1991 and the market conditions in banking

industry that have become more competitive.

The quality of assets held by banks and financial institutions is a critical indicator of the

health of the financial system. A high quality of assets reflects the level of bank‟s credit risk

and efficiency in allocation of resources to productive sectors. The quality assets have been

deteriorating in case of both banks and financial institutions which has become an area of

great concern. While credit growth is one of the drivers of economic growth, NPAs are value

destroyers of the economy. The total distressed asset stock in India as on March 2005

excluding state financial corporations, mutual funds and the insurance sector is around Rs.

2,55,000 crore and this works out to 9.8 percent of the GDP at constant prices. With a high

credit growth of around 30 percent, there may be an increase of fresh flow of non-performing

assets as these assets are a natural product of credit. The large amount of NPAs

predominantly originates from the industrial sector. But retail loans accounted for bulk of the

addition to NPAs in 2005-06.


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The Narasimham Committee R eport notes, “No other single indicator reflects the quality of

assets and their impact on banks‟ viability than the NPA figure in relation to advances”.

MEANING OF NON-PERFORMING ASSETS

A non-performing asset is an asset, including a leased asset, which ceases to generate income

for a bank whether in the form of interest or principal repayment. It can also be defined as an

advance, where payment of interest or repayment of instalment of principal (in case of term

loans) or both remains unpaid for a certain period. In India, the definition of NPAs has

changed over time.

According to the Narasimham Committee Report (1991), those assets (advances, bills

discounted, overdrafts, cash credit etc.) for which the interest remains due for a period of two

quarters (180 days) should be considered as NPAs. Subsequently, this period was reduced,

and from March 1995 onwards, the assets for which the interest has remained unpaid for 90

days were considered as NPAs.

The Securitization Reconstruction of Financial Assets and Enforcement of Security Interest

(SRFAESI) Act, 2002 defines NPA as “an asset or account of a borrower, which has been

classified by a bank or financial institution as sub-standard, doubtful or loss asset in

accordance with the direction or guidelines relating to asset classification issued by the RBI”

Non-performing assets (NPAs) are loans given by a bank or a financial institution wherein

the borrower defaults or delays interest or principal payments. According to the RBI norms,

any interest or loan repayment delayed beyond 90 days has to be identified as a non-

performing asset. Non-performing assets are categorized into sub-standard, doubtful and loss

assets for which provisions have to be made in the lender‟s books. Under the prudential

norms laid down by RBI, income should not be recognised on NPAs on an accrual basis but

should be recorded in the books of accounts only when it is actually received in respect of

such accounts.

Any NPA would migrate from sub-standard to doubtful category after 12 months. It would

get classified as a loss asset if it is irrecoverable or marginally collectible. The banks should


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make full provision for loss assets, 100 percent of the unsecured portion of the doubtful assets

and 20 percent to 100 percent of the secured portion depending upon the period for which the

asset has remained doubtful. If the asset has remained doubtful for one year, the provisioning

requirement is 20 percent; if doubtful up to three years, the provisioning requirement is 30

percent and for more than three years, it is 100 per cent with effect from 31 March 2005.

INCOME RECOGNITION OF NPAs

Income should not be recognised on non-performing assets on accrual basis but should be

booked only when it is actually realised in respect of such accounts.

NPA CLASSIFICATIONS

With a view to moving towards international best practices and to ensure greater

transparency, „90 days‟ overdue norms for identification of NPAs have been made applicable

from the year ended March 31, 2004. As such, with effect from March 31, 2004, a non-

performing asset shall be a loan or an advance where:

(i) interest and/or instalment of principal remains 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 the case of bills

purchased and discounted;

(iv) the instalment of principal or interest thereon remains overdue for two crop

seasons for short duration crops in respect of advances granted for agricultural

purpose;

(v) the instalment of principal or interest thereon remains overdue for one crop season

for long duration crops in respect of advances granted for agricultural

purpose;

(vi) the amount of liquidity facility remains outstanding for more than 90 days, in

respect of a securitization transaction undertaken in terms of guidelines on

securitization dated February 1, 2006;


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(vii) in respect of derivative transactions, the overdue receivables representing

positive mark to market value of a derivative contract, if these remain unpaid for a

period of 90 days from the specified due date for payment.

“An account should be treated as „out of order‟ if the outstanding balances remain

continuously in excess of the sanctioned limit/drawing power, but there are no credits

continuously for 90 days or credits are not enough to cover the interest debited during the

same period, these accounts should be treated as „out of order”.

TYPES OF NPA

Gross NPA:

Gross NPAs are the advances which is considered irrecoverable, for bank has made

provisions, and which is still held in banks' books of account. 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 formulas:

Gross NPAs= Sub-standard Assets + Doubtful Assets + Loss Assets

Gross NPAs Ratio = Gross NPA / Gross Advances

Net NPA:

Net NPA is obtained by deducting items like interest due but not recovered, part payment

received and kept in suspense account from Gross NPA. In other words, 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 ways:

Net NPAs = Gross NPAs – Provisions / Gross Advances – Provisions


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Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims

received and held pending adjustment + Part payment received and kept in suspense account

+ Total provisions held)

ASSET CLASSIFICATION

Assets are classified into following four categories:

Standard Assets;

Sub-standard Assets;

Doubtful Assets;

Loss Assets

Chart 1:

NPA CLASSIFICATION

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 do not exceed 90 days

at the end of financial year. If asset fails to be in category of standard asset that is amount duemore than 90 days then it is NPA and NPAs are further need to classify in sub categories.

Doubtful Assets

ASSETS

Loss Assets

Sub-Standard Assets

Non-Performing AssetsPerforming/Standard

Assets


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Provisioning Norms:

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.

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

reasonability of the dues, they are mentioned as follows:

1.

Sub-standard Assets;

2. Doubtful Assets;

3. Loss Assets

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 months. 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 jeopardize the

liquidation of the debt and are characterized by the distinct possibility that the banks will

sustain some loss, if deficiencies are not corrected.

Provisioning Norms:

For urban co-operative banks, a general provision of 10 percent on total outstanding should

be made without making any allowance for DICGC / ECGC guarantee cover and securities

available.

For commercial banks, a general provision of 15 percent on total outstanding should be

made without making any allowance for ECGC guarantee cover and securities available. The

„unsecured exposures‟ which are identified as „substandard‟ would attract additional

provision of 10 percent, i.e., a total of 25 percent on the outstanding balance. However, in

view of certain safeguards such as escrow accounts available in respect of infrastructure

lending, infrastructure loan accounts which are classified as sub-standard will attract a

provisioning of 20 percent instead of the aforesaid prescription of 25 percent.


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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.

Loss Assets: A loss asset is one which is 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 Norms for 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.

RBI’s Guidelines for Provisioning Norms of NPAs

In order to ensure that banks are not affected due to defaults, RBI has directed the banks to

make provisions or set aside money when an account turns bad.

Chart 2:

Asset Classification Provisioning Requirements

Standard Asset 0.40% of the loan amount normally (some

exceptions are there)

Sub-Standard Asset Secured: 15% on outstanding amount.

Unsecured: 25% on outstanding amount. In

some cases it is 20%.

Doubtful Asset:

3a. Up to 1 year Secured: 25% of the outstanding amount.

Unsecured: 100% of the outstanding

amount.

3b. 1 to 3 years Secured: 40% of the outstanding amount.

Unsecured: 100% of the outstandingamount.


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NON-PERFORMING ASSETS AS A MAJOR ISSUE AND CHALLENGE FOR

BANKING INDUSTRY:

Non-performing Assets are threatening the stability and demolishing bank‟s profitability

through a loss of interest income, write-off of the principal loan amount itself. RBI issuedguidelines in 1993 based on recommendations of the Narasimham Committee that mandated

identification and reduction of NPAs be treated as a national priority because the level of

NPA act as an indicator showing the bankers credit risks and efficiency of allocation of

resource. The financial reforms in Indian banking industry have helped largely to clean NPA

which was around Rs. 52,000 crores in the year 2004. The earning capacity and profitability

of the bank are highly affected due to this NPA.

IMPACT OF NPA ON THE OPERATIONS OF BANKS

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 does not 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

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

borrowing money for shortest period of time leading to additional cost to the company.

Difficulty in operating the functions of bank is another cause of NPA due to lack of money.

3c. More than 3 years Secured: 100% of the outstanding amount.

Unsecured: 100% of the outstanding

amount.

Loss Asset 100% for the outstanding amount.


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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 a day, banks have special

employees to deal and handle NPAs, which is additional cost to the bank.

Credit Loss

If a bank is facing problem of NPA, then it adversely affects the value of bank in terms of

market for credit. It will lose its goodwill and brand image and credit which have negative

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

HIGH COST OF FUNDS DUE TO NPAs

Quite often genuine borrowers face the difficulties in raising funds from banks due to

mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine

borrowers or if the funds are provided, they come at a very high cost to compensate the

lender‟s losses caused due to high level of NPAs. Therefore, quite often the corporate prefer

to raise funds through commercial papers (CPs), where the interest rate on working capital

charged by banks is higher. The enactment of the Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002, banks can issue notices to

the defaulters to pay up the dues and the borrowers will have to clear their dues within 60

days. Once the borrower receives a notice from the concerned bank and the financial

institution, the secured assets mentioned in the notice cannot be sold or transferred without

the consent of the lenders. The main purpose of this notice is to inform the borrower that

either the sum due to the bank or financial institution is paid by the borrower or else the

former will take action by way of taking over the possession of assets. Besides assets, banks

can also take over the management of the company. Thus, the bankers under the

aforementioned Act will have the much needed authority to either sell the assets of the

defaulting companies or change their management. But the protection under the said Act only

provides a partial solution. What banks should ensure is that they should move with speed

and charged with momentum in disposing off the assets. This is because as uncertainty

increases with the passage of time, there is all possibility that the recoverable value of asset

also reduces and it cannot fetch good price. If faced with such a situation than the vary


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purpose of getting protection under the Securitisation Act, 2002 would be defeated and the

hope of seeing a „must have growing banking sector‟ can easily vanish.

REASONS OF NON-PERFORMING ASSETS

Following are the reasons for emergence of NPAs:

Political Causes: Political interference in the lending process of banking is leading to the

neglect of proper credit appraisal, need-based credit, follow up and supervision, has been

projected as one of the major reasons for increasing non-performing advances. Political

connections are widely perceived but, as is the case with wilful defaulters, difficult to prove.

Almost certainly the public sector character of banks and their vulnerability to outside

influence has been a dampener even in loan recovery. Directed lending, loan melas (fare),

credit to various segments under political influence have caused neglect of appraisal, scrutiny

and basic principles of lending, resulting lethargy in repayments or non-payments and

difficulty in recoveries of loans since there is always an air of expectancy that small loans and

agricultural loans in particular may be waived or totally written off en-masse under political

patronage.

Economic causes: These causes can be external or internal.

External factor: Several studies have gone into the causes of Non-Performing Advances and

come to the conclusion that macro-economic environment like recessions, infrastructure

bottlenecks, changes in government policies, etc. result in some lending of banks becoming

unproductive and borrowers turning defaulters, changes in economic policy, i.e. fiscal and

monetary, effected in response to economic and political needs from time to time in the

context of domestic and international scenario, have a bearing on the performance of banks

and business, as also on loans going bad. Changes in Industrial and Agricultural policies,

Export Import policy, Credit policy, Exchange Rate policy, Labour policy are also stated to

have partially contributed to the failure of some borrowers in the repayment of loans, as the

borrowed funds could not be used fruitfully due to some of the unfavourable impact and

effects of policy measures. Both banks and borrowers have been caught unaware by the fast

changing policies and find themselves trapped with funds locked up in units producing

nothing.


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Internal factor: While banks and borrowers have not much of control over external factors,

lack of co-ordination between banks and other agencies involved particularly to have a tie up

for funding requirements etc. adds to the woes of the borrowers making them difficult to

perform. Factors like diversion of funds for business expansion/ diversification of associate

concerns, business/ market failure, time/ cost over run in the implementation of projects,

inefficient management on the part of borrowers, etc. have resulted in poor utilisation of

credit and consequent repayment problems. Wilful default by some of the borrowers taking

advantage of weak legal system is cited as another major cause of NPAs. On banks‟ side,

delay in the sanctioning of loans, grant of inadequate credit deficiency in the credit appraisal

standards, lack of supervision and follow-up, general level of inefficiency in containing the

cost of funds due to very high overheads, poor productivity, high intermediation costs, low

level of technological and high rate of interest charged to borrowers to cover up the loss on

account of Non-Performing Advances have been emphasised as important causes for

mounting NPAs.

Social Reasons: On the social side, lack of education and enlightenment among the

borrowers buttressed with poor legal infrastructure generally stated to be supportive of the

borrowers rather than lenders and corruption have been observed to be major stumbling

blocks in the recovery of loans. Lack of integrity on the part of both bankers and borrowers

has also influenced formation of NPAs. Erosion in social, values, ethics and accountability

have been highlighted as some of the reasons for formation of huge NPAs. Awareness that

banks lend public money which is required to be returned, is unfortunately found missing,

aggravating the problem of recovery of loans.

Indiscipline in Utilising Funds: The other causes aggravating the problem of NPAs can be

found in the inability of borrowers to tie up the required funds as promoters‟ contribution,

and in general financial indiscipline in the utilisation of funds for the purpose for which loans

are availed, inordinate delay in realisation of their own dues from debtors, poor capital

market support, lack of competitive spirit in the conduct of business and ability to cope with

the competition observed in product market, capital market, money market and foreign

exchange market witnessed in the area of efficiency, quality, cost, etc. resulting in the

inability to compete in the open market which in turn has resulted in the units turning

sick/getting closed without having funds to clear the banks‟ dues. Lack o f accountability on


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the part of borrowers, lenders, auditors, accountants, lawyers, values and all connected

professionals have also been accelerating NPA formation.

Debtor Friendly Government’s Actions: Non-Performing Advances were the result of

lending directed by government, on contact considerations, and a debtor-friendly definition of

Non-Performing Advances. When NPAs were redefined, many „good‟ loans suddenly

become bad or Non-Performing. There was no bringing of defaulters to book, because they

had ways to hold up action. The fetish for secrecy resulted in information regarding

defaulters not being shared between lenders, and to their names not being published.

Borrowers influenced this penchant for secrecy. The inexplicable delays in setting up of

adequate Debt Recovery Tribunals also points to the malign influence of corporate

borrowers. Chambers of Commerce is vocal about the need for lower interest rates or for

Indian lenders to be more sympathetic towards borrowers which have never taken action

against many of their defaulting members, some of them are even honoured with important

positions.

Lack of Technological Advancement: Lack of technological advancement which can help

in increasing the cost of funds, slower movement of funds, leading to inefficient and

ineffective payment and settlement system, is also stated to be one of the reasons for growing

NPAs.

Wilful Defaulters: The major culprits behind high NPAs are intentional defaults,

mismanagement and lack of planning. Public money obtained from banks has been

systematically siphoned away from our industries. The problem of NPAs has degenerated to

such an extent where in an effort to assign the blame, even Trade Unions have ventured in

recent times to publish lists of defaulters because of whom, they consider that some of the

banks are in dire financial straits. These lists are over and above the official lists published by

RBI of bank-wise defaulters of Rs. one crore and above in the banking system.

Better Creditworthy Companies moved away from banks: With the introduction of

varieties of debt instrument like Commercial paper, Corporate bonds, Debentures, etc. in the

credit market and linking of interest rates to the market forces and credit worthiness of the

borrowers, many of the better rated corporate concerns have moved away from banks,


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leaving the latter with only second and third grade borrowers. This adds to the problem of

NPAs of banks.

Poor Appraisal Quality: The history of NPAs is complex. Poor appraisal quality and lack of

appreciation and understanding of broader economic, financial and market forces impacting

project and corporate viability are major reasons. External pressures in credit decisions have

played their part. Lack of integrity on the part of some appraising officials and bank

managements is another proximate cause. One more significant factor is the log-jam in

accessing collaterals and recovery of its market value because of legal hurdles.

Long Drawn-out Legal Procedures: The RBI Bulletin argues that India‟s high level of

NPAs is a historical legacy. This is a rather dubious claim. It is far better to focus on the

systematic failures such as lacunae in the credit recovery system, arising from adequate legal

provisions on foreclosure and bankruptcy, long drawn-out legal procedures, and difficulties

in the execution of the decree awarded by the court. These continue to be a feature of the

present financial situation. Banks may themselves play an important role in raising NPAs

levels through sheer delay in offering adequate credit limits to working capital and thus lead

to poor operating results.

Priority Sector Lending Regulations: Other causative factors responsible for NPAs relate

to cyclical weaknesses, structural weaknesses and miscellaneous reasons. The weak capital

position of Indian Banking System is largely a reflection of growing assets-quality problems

stemming from weak underwriting and credit management systems and vulnerabilities of the

Indian Banking Sector to the impact of globalisation on the country‟s key industrial sectors.

The asset-quality position has also suffered from regulations with respect to lending to

priority sectors.

Weak Credit Risk Management: Banks are derivative institutions. The health of the real

sector is reflected in the banking system‟s health. If the credit discipline is weak and state

intervention in the financial sector is pronounced, there is every possibility that the banking

system will be weak and often unsound. Experiences from and around the world indicates

that poor credit quality coupled with weak credit risk management practices continues to be a

dominant factor in bank failures and banking crises. Severe credit losses in a banking system


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reflect simultaneous problems in several areas such as credit concentrations; credit processes

issues, and market and liquidity sensitive credit exposures.

Misusage of Funds: The borrowers‟ misuse the amount given as loan by the banks. They do

not utilize the money for the purpose for which they have applied, rather they use it for some

other purposes. For instance, a farmer has taken loan for installing a tube well but has utilized

the money in the construction of house. Then under such circumstances, it becomes difficult

for that farmer to pay back the money and from the point of view of loan it becomes non-

performing.

No Proper Follow-up Action: The bank authorities fail to adopt proper follow-up action for

the advances which they have given. The bank authorities, while distributing loans do the

paper work formalities, they get the certificate from the borrower which gives the assurance

that the amount will be rightly used in the project, for which they have taken the loan. But the

authorities never bother to verify the validity of the certificate. Thus, due to no proper follow-

up action, it becomes rather very difficult to recover the amount and thus the amount

becomes NPAs.

Natural Causes and Calamities: Sometimes natural causes and calamities are also

responsible for the emergence of NPAs. For example, a farmer borrowed the money for the

purchase of seeds or fertilizers, but due to drought there has been no crop throughout the

year, as it happened in Rajasthan in the year 2002, or there have been excessive rains thus

destroying the whole crop. Similarly, a factory owner taken a loan for the improvement of the

factory, but due to short-circuit, the whole is engulfed in flames, or because of flood, the

factory has been demolished or due to earthquake whole of the region has been destroyed.

Such natural calamities are also one of the reasons for emergence of NPA.

Pressure of Seniors on the Operating Managers: Sometimes excessive pressure of the

seniors on their operating staff/managers, forces them to advance credit. These managers

know it fully that it will be very difficult to recover the amount of debt. But force

circumstances compel them to obey the order and grant loans. This also leads to the

emergence of NPAs. In this type of cases, seniors may have good personal relations with the

borrowers or they want to advance those loans to their family members/relatives.


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Under/Over Financing: Sometimes it has been noticed that the firms/individuals who

require higher amount of debt are given less amount and who are needed less amount are

given higher amount. In both the cases, the amount of debt is trapped. The person/firm,

getting inadequate amount, is not in a position to run his business smoothly and is also

incapable of paying back the same. On the other hand, the person, who gets excess loan, uses

the same in an uneconomic way and in unproductive activities. In both the cases, there is

delay in paying back the amount. Thus, it leads to emergence of NPAs.

Competition in Marketing of the Product: A businessman/producer borrows money for the

production of a product, but sometimes any other producer starts producing the similar

product. If it happens to be superior to the former, then this product fails in the market due to

competition. It becomes difficult for the former businessperson or the producer to return the

money back. Sometimes due to lack of transport facility, the product does not reach the

market in time for sale and thus, there is a delay in paying back the debt. Both these causes

are also responsible for emergence of NPAs.

Non-Availability of Proper Security against Funds: Some loans are given without

adequate mortgage/security. The non-availability of proper security against these funds

makes them insecure to recover.

Large Branch Expansion: In recent years, there has been a vast expansion of branches of

the banks, especially of public sector banks. The main motive behind this branch expansion

was to provide adequate banking facilities in rural, backward and remote-far off areas and

small towns. For the expansion of these branches, land was purchased, building was

constructed, banking infrastructure was purchased, employees were sent there, and new

employees were recruited as per the requirement. A lot of expenditure was incurred in all this

process. But many of these branch expansions proved to be uneconomic, and the recurring

expenditure without any yield is still going on. Some branches opened by the banks in rural

areas failed to generate return, hence turned out to be NPAs.

MEASURES TO CONTROL NPAs

In present scenario, NPAs are at the core of financial problem of the banks. Concrete efforts

have to be made to improve recovery performance. Measures required to be undertaken are


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mainly two fold. Banks should make efforts first to avoid fresh addition on NPAs by their

effective presentation appraisal and secondly to recover the amount from accounts which

have already turned bad.

Preventive Measures: Most of the bankers feel that genuine viability problem of the

borrowing units, weakness in credit appraisal system, absence of effective monitoring and

supervision of loan account, absence of credit information sharing among the banks etc. are

some of the significant causative factors of high level of NPAs internal to the banks.

So for preventing the fresh inflow of funds into the non-performing category, banks should

reformulate their credit appraisal techniques.

Proper evaluation of the loan application may help in detecting the unviable projects at the

first instance.

Full information about unit , industry, its financial stake, management etc. should be

collected.

Industrial cell should be established at the bank level , which would have complete

information about the industry and its prospects in future.

Proper credit monitoring should be equally emphasized. There should be proper flow of

information from the units regarding their financial area, annual accounts, stock reports etc.,

which would enable the banker to know the need based credit requirement of borrower and

warning signals for taking quick remedial action.

Banks should inspect the progress of the project or the business. Separate monitoring

department should be established in large branches for periodical review of accounts,

comparative risk analysis and compliance of terms and conditions of sanction. Equal

emphasis should be given for monitoring of standard assets also.

Banks should be equipped with latest credit risk management techniques to protect the bank

funds and minimize insolvency risks. Banks should develop credit derivatives markets to

avoid these risks. There should be regular outflow of senior bank officers from all public


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sector banks for specialized training in training institute to equip them with latest procedures

and practices.

Curative Measures:

Besides making efforts to stop the fresh additions of NPAs, banks have to take steps to

recover the amount from assets, which have already slipped into NPAs category. Significant

causative factors highlighted were slow recovery of legal cases, wilful default induced by

officially announced loan waiver schemes etc. the Indian legal system is sympathetic towards

the borrowers and works against the banks interest.

Despite most of their loans being backed by security, banks are unable to enforce their claims

on the collateral , when the loans turn non-performing and therefore loan recoveries have

been insignificant.

The Narasimham Committee on financial system (1991) has recommended the establishment

of Debt Recovery Tribunals (DRT) for the speedy recovery of the assets from NPAs category.

On the basis of recommendations 22 DRTs were established by passing the bill on Recovery

of Debt due to Banks and Financial Institutions Act 1993. But the performance of DTRs for

the past years has not been found satisfactory or up to the mark.

The Act has some limitations, which must be removed to make its effective implementation.

At present, one presiding officer is handling at least 80-90 cases per day. It is suggested that

DRT Act may be amended to enable the central government to appoint additional presiding

officers for speedy disposal of recovery cases.

One of the major factors accounting for delay in disposing of application by DRT is the delay

caused due to refusal by defendants to accept the summons, and at times due to change in

address too.

DRT may be empowered to order service of summons by hand , registered post and by

publications simultaneously. Attachment of immovable property of borrower is not admitted

due to service of summons.


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Enforcement of security and obtaining court decree take unduly long time, it encourages

wilful default and ultimately the banks may be compelled to write off loans. Wilful default

should be declared a criminal offence.

Government should not go for mass waiver of interest/instalments as it sends unhealthy

signals to the borrower. During 1990-91, there was a massive waiver of rural debt amounting

to over Rs. 15000 crore and Rs. 65000 crore in 2008. These types of activities put a premium

on wilful default and dishonesty. It lowers the repayment ethics.

In case of government sponsored schemes, government should assist in recovery. It may be

noted that suggestions enumerated will go a long way in reducing the NPAs. This will not

only considerably improve the profitability of the banks and the quality of assets, but also

make the Indian “Banking system stringent, resilient and geared to meet the challenges of

globalisation” (Mohan Kumar & Govind Singh, 2012).

TOOLS AVAILABLE TO BANKS TO MANAGE THEIR NPAs

The provisions of Indian laws do not facilitate speedy and effective enforcement of securities.

The Sick Industries Companies (Special Provisions) Act, 1985 was enacted to provide a

framework for the rehabilitation and revival of sick industrial companies through the board

for industrial and financial reconstruction so as to enable inter alia release of public funds that

are locked up in such companies. This act was not only unable to provide a speedy and

efficient mechanism for rehabilitation and revival of the sick companies, but also provided

companies with a „safe haven‟ for defaulting.

Now, banks and financial institutions saddled with bad loans have multiple options like direct

settlement across the table, legal recourse in the form of approaching the high court or debt

recovery tribunals, enforcement of the new securitization law (where securities pledged with

them could be attached and subsequently sold), and lastly selling it to Asset Reconstruction

Companies (ARCs).


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Debt Recovery Tribunals (DRTs):

They were setup under the Recovery of Debts due to Banks and Financial Institutions Act,

1993. This act provides for the establishment of tribunals for expeditious adjudication and

recovery of debts due to banks and FIs and for matters connected therewith and incidental

thereto. Under the act, two types of tribunals are set up: (i) Debt Recovery Tribunals (DRTs)

and (ii) Debt Recovery Appellate Tribunals (DRATs). The order passed by a DRT is

appealable to a DRAT but no appeal shall be entertained by the DRAT unless the applicant

deposits 75 percent of the amount due from him. However, the DRAT may waive or reduce

the amount of such deposit. DRTs have been empowered to decide on cases of advances of

Rs. 10 lakh and above.

The central government sets up the tribunals and provides them with a presiding officer,

recovery officers and other employees. Every bank and financial institutions can initiate the

procedure of recovery by making an application under Section 19 of the Recovery of Debts

due to Banks and financial Institutions Act, 1993, to the tribunal, within the local limits of

whose jurisdictions the defaulter company is located. If there is other banks whose loan to the

same company has become bad, the latter can join the recovery suit. After receiving a valid

application, the DRT takes up the cases and listens to arguments from the contesting parties.

The parties to suit or proceedings can be represented by an agent, including a lawyer, in

which case the application must be accompanied by a duly executed Vakalatnama.

DRTs have become more active as they have been vested with new powers such as power

to attach defendant‟s property/assets before judgement, penal provisions for disobedient of

the tribunal‟s order or breach of any terms of the order and appointment of receiver with

powers of realisation, management, protection and preservation of property. At present, there

are 25 DRTs and 9 DRATs but they have hardly made a dent on the recovery process.

Defendants challenge the validity of the act in the high court which hinders the functioning of

the DRTs.

One Time Settlement/Compromise Scheme

Banks have been advised to devise one-time compromise settlement schemes for resolution

of NPAs. The RBI issued guidelines for this scheme in March 2000. This scheme covers

NPAs classified as doubtful and NPAs classified as sub-standard, which have subsequently

become doubtful or less. This scheme covers actions under the SARFAESI Act and also


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cases pending before courts/DRTs/BIFR, subject to consent decree being obtained from them

but does not cover cases of wilful default, fraud and malfeasance. As per this scheme, for

NPAs up to Rs. 10 crore, the minimum amount that should be recovered should be 100 per

cent of the outstanding balance in the account. For NPAs above Rs. 10 crore, the CMDs of

the respective banks should personally supervise the settlement of NPAs on a case-to-case

basis. The RBI has allowed the board of directors to evolve policy guidelines regarding one-

time settlement of NPAs as a part of their loan recovery policy. The amount recovered under

compromise settlement up to March 2004 was Rs. 1,095 crore. The number of cases referred

for one-time settlement/compromise was10,262 and the amount recovered was Rs. 608 crore

during 2005-06.

The Reserve Bank issued a new set of guidelines for all public sector banks to go in for

one-time settlements of chronic NPAs of Rs. 10 crore and less in the small and medium

enterprises (SME) on March 2004. The revised guidelines cover all NPAs in the SME sector

which have become doubtful or loss or sub-standard as on March 31,2004 with outstanding

balance of Rs. 10 crore and below on the date on which the account was classified as

doubtful.

According to the settlement formula, the minimum amount to be covered for one time

settlement of doubtful NPAs is 100 percent of the outstanding balance in the account as on

that date. In the case of NPAs classified as sub-standard, as on 31 March,2004 which became

doubtful or loss subsequently, it is 100 percent of the outstanding balance plus interest at the

existing Prime Lending Rate (PLR) till the date of final payment. The amount arrived for

settlement is to be paid in lump sum. If not, borrowers should pay at least 25 percent upfront

and the balance within one year with interest at the PLR. These guidelines cover areas on

which the banks have initiated action under the SARFAESI Act and also cases pending

before courts/DRT/Board for Industrial and Financial Reconstruction (BIFR) subject to

consent decree being obtained from those defaults. Cases of Wilful default, fraud and

malfeasance will not cover.

SARFAESI Act 2002:

Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest

Act 2002 are popularly known as Securitisation Act. This act enables the banks to issue

notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the


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borrower cannot sell or dispose the assets without the consent of the lender. The

Securitisation Act further empowers the banks to take over the possession of the assets and

management of the company. The lenders can recover the dues by selling the assets or

changing the management of the firm. The Act also enables the establishment of Asset

Reconstruction Companies for acquiring NPAs. According to the provisions of the Act, Asset

Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10

crores has been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank,

SBI, ICICI, Federal Bank and South Indian Bank.

Lok Adalats:

They are constituted under the Legal Services Authority Act, 1987. They have been setup to

help banks to settle disputes involving accounts in „doubtful‟ and „loss‟ category. Lok

Adalats have been found suitable for the recovery of small loans. According to RBI

guidelines issued in 2001, they cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed

are covered. Lok Adalats avoid the legal process.

Lok Adalats help in resolving disputes between the parties by conciliation, mediation,

compromise or amicable settlement and thereby reduce burden on courts. They were

conferred adjudicatory status and every award of the Lok Adalat shall be deemed to be a

decree of a civil court and no appeal can be made to any court against the award made by the

Lok Adalat. They are generally presided over by two or three senior persons including retired

senior civil servants, defence personnel and judicial officers.

The government in 2004 revised the monetary ceiling of cases to be referred to Lok

Adalats organized by civil courts from Rs. 5 lakh to Rs. 20 lakh. Debt recovery tribunals

(DRTs) have now been empowered to organise Lok Adalats to decide on cases of NPAs of

Rs. 10 lakh and above. Banks were advised to participate in the Lok Adalats convened by

various DRTs/Debt Recovery Appellate Tribunals (DRATs) for resolving cases involving Rs.

10 lakh and above to reduce the stock of NPAs. The Public Sector Banks had recovered Rs.

40 crores by September 2001. Despite being a popular method, banks find difficulty in

bringing the parties together when the Lok Adalat meets.


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Corporate Debt Restructuring (CDR):

The scheme of CDR was institutionalised in 2001-02 to provide a timely and transparent

system for restructuring of corporate debts of Rs.20 crore and above with the banks and

financial institutions. The corporate debt should be outside the purview of the Board for

Industrial and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The

objective of the scheme is to enable corporate affected by certain internal/external factors to

restructure their debt through an orderly and co-ordinated debtor-creditor agreement and

inter-creditor agreement which results in preserving their viability and minimising losses to

creditor/other stakeholders.

The RBI revised the guidelines with respect to the CDR mechanism in February 2003. The

revised guidelines allow account categorised as standard, sub-standard or doubtful for

restructuring and independent consultants to help in preparing the restructuring plan. The

main features of the revised guidelines are the introduction of two types of restructuring

under the CDR System. Accounts which are classified as „standard‟ and „sub-standard‟ would

be restructured under the first category (Category I) whereas accounts classified as „doubtful‟

would be restructured under the second category (Category II). CDR will have a three-tier

structure consisting of the CDR Standing Forum and the core Group (the policy-making

body), CDR Empowered Group (the functional group deciding on the restructuring of cases

referred to CDR mechanism) and the CDR Cell (the secretariat to the CDR system). Other

notable changes in the scheme relate to broadening of eligibility criteria to include suit-filed

cases provided the proposal to restructuring is supported by 75 percent of the lenders by

value; eligibility of large erstwhile BIFR cases to be decided by CDR Core Group,

composition and enhancement of the scope of the core group, additional functions to the

CDR Empowered Group, flexibility in sanction of additional assistance as part of

restructuring package, availability of exit option out of the package, restructuring of „doubtful

assets‟ cases under Category II scheme, discretion to join the CDR System on a case-by-case

basis to institutions like UTI, LIC, GIC, and foreign lenders who have financed from outside

the country.

CDR is a popular mechanism among lenders as it avoids delays in multiple lender

arrangements and increases transparency in the process. Financial restructuring includes

extension of loan maturity, reduction of interest rates, write-off principal or debt to equity

/convertible bond swap. Business restructuring comprises of sale of assets or business units,


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spin-off business division or mergers and amalgamations. Operational restructuring includes

changes in company management, assets sales, special audits and divestiture and/or

liquidation of non-viable and non-core assets.

Wilful Defaulters:

A large number of defaulters strategically defaulted on their repayment obligations on

realising that the legal machinery was ineffective in taking any steps against them. As per the

RBI guidelines on detection of wilful defaults, a wilful default occurs when a borrower

defaults in meeting its obligations to the lender when it has a capacity to honour the

obligations or when funds have been utilised for purposes other than those for which finance

was granted.

The RBI publishes a list of borrowers with outstanding aggregating Rs. one crore and

above and against whom suits have been filed by banks and financial institutions for recovery

of their funds as on 31 March every year. The banks have to submit a list of wilful defaulters

to the SEBI also so as to prevent their access to capital markets. The RBI has also advised

public sector banks to examine all cases of wilful default of Rs. one crore and above and file

criminal suits in such cases. A wilful defaulter does not get any new loan from FIs. Also,

promoters are not allowed to raise resources for floating new ventures for five years from the

date of the Reserve Bank publishing their names in the list of wilful defaulters.

Banks and financial institutions are required to form a committee of higher functionaries

headed by the executive director for classification of borrowed accounts as wilful defaulters,

and create a redressal mechanism in the form of a committee headed by the chairman and the

managing director to be carried out through two distinct processes, namely, (i) identification

of default as „wilful‟ based on the pr escribed norms through a committee approach, and (ii)

suitably advising the borrower about the proposal to classify him as wilful defaulter, along

with the reasons thereof. The concerned borrower would be provided reasonable time for

making representation against such decision to the committee members. A final declaration

as „wilful defaulter‟ would be made only after a view is taken by the committee on a specific

representation.


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Asset Reconstruction Companies:

The SARFAESI Act, 2002 paved the way for setting up Assets Reconstruction Companies

(ARCs) under Section 30 of the act. ARC is setup to help the banks and financial institutions

to clean up their balance sheets. Asset Reconstruction Company is also known as

Securitisation Company (SC) or Reconstruction Company (RC).

ARC is an important constituent of the financial system because of the following reasons:

Isolates non-performing loans from the balance sheets of banking and financial institutions

and thereby enable them to focus on their core activities.

Facilitates development of market for distressed assets.

An ARC is registered under the Companies Act and regulated by the RBI as a non-banking

financial company [u/s. 451 (f) (iii) of RBI Act, 1934].

The functions of an ARC are specified in RBI Notification dated 23 April 2003, which may

be as follows: -

Acquisition of financial assets (as defined u/s.2 (L) of the SARFAESI Act.

Change or takeover of management/sale or lease of business of the borrower (as per the

guidelines to be issued by the RBI in this behalf).

Rescheduling of debts.

Enforcement of security interest as per Section 13 (4) of the SARFAESI Act, 2002.

Settlement of dues payable by the borrower.

Benefits of sale of NPAs to ARCs:

Enables banks/FIs to remove NPAs from the loan books;

Enable banks/FIs to focus on their core activities;

Faster implementation of resolution strategy by ARCs;

Reduces expenditure of banks/FIs on NPA maintenance.

Methods available to ARCs for asset reconstruction and recoveries:

Restructuring of assets;

Settlement of debts;

Sale of assets through enforcement of security rights under SARFAESI Act;


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Sale/lease of management and business of the borrower.

Settlement of Cases with Deposit Insurance and Credit Guarantee Corporation

(DICGC):If DICGC cover is available, the bank may try to complete all necessary formalities for

DICGC claim and make proper follow-up with the corporation in order to get the claim

settled at earliest so that NPAs are reduced to some extent. The terms of guarantee cover of

DICGC are as under: (a) an account should be written of first and only afterwards claim

should be lodged with DICGC, the time limit for preferring the claim is one year after the

date of write-off; (b) Claim will be entertained by DICGC only if recovery in the account is

not less than 25% of the total debts in the account at the date of write-off; (c) Guarantee cover

is available only on the principle amount sanctioned by the bank, not on interest applied,

charges incurred like inspection charges, insurance etc.; (d) For term loans, cover is based on

the principle amount outstanding as at the date of write-off; (e) For cash credit and overdrafts,

the guarantee cover is based on the amount outstanding within the regular limit.

MANAGEMENT/RESOLUTION OF NPAs

A reduction in the total gross and net NPAs in the Indian financial system indicates a

significant improvement in management of NPAs. This is also on account of various

resolution mechanisms introduced in the recent past which include the SARFAESI

(Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest)

Act, one time settlement schemes, setting up of the Corporate Debt Restructuring (CDR)

mechanism, strengthening of Debt Recovery Tribunals (DRTs). From the data available of

Public Sector Banks as on March 31, 2003, there were 1,522 numbers of NPAs as on March

31, 2003 which had gross value greater than Rs. 50 million in all the public sector banks in

India. The total gross value of these NPAs amounted to Rs. 215 billion. The total number of

resolution approaches (including cases where action is to be initiated) is greater than the

number of NPAs, indicating some double counting. As can be seen, suit filed and Bureau of

Industrial Finance & Reconstruction (BIFR) is the two most common approaches to

resolution of NPAs in public sector banks. Rehabilitation has been considered/adopted in

only about 13% of the cases. Settlement has been considered only in 9% of the cases. It is

likely to have been adopted in even fewer cases. Data available on resolution strategies

adopted by public sector banks suggest that Compromise settlement schemes with borrowers


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are found to be more effective than legal measures. Many banks have come out with their

own restructuring schemes for settlement of NPA accounts. State Bank of India, HDFC Bank

Limited, M/s. Dun and Bradstreet Information Services (India) Private Ltd. and M/s. Trans

Union to serve as a mechanism for exchange of information between banks and FIs for

curbing the growth of NPAs incorporated Credit Information Bureau (India) Limited (CIBIL)

in January 2001. Pending the enactment of CIB Regulation Bill, the RBI constituted a

working group to examine the role of CIBs. As per the recommendations of the working

group, Banks and FIs are now required to submit the list of suit-filed cases of Rs. 10 million

and above and suit filed cases of wilful defaulters of Rs. 2.5 million and above to RBI as well

as CIBIL. CIBIL will share this information with commercial banks and FIs so as to help

them minimize adverse selection at appraisal stage. CDR is a non-statutory mechanism based

on debtor-creditor agreement and inter-creditor agreement. Restructuring helps in aligning

repayment obligations for bankers with the cash flow projections as reassessed at the time of

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

expected business plan along with projected cash flows. The CDR process is being stabilized.

Certain revisions are envisaged with respect to the eligibility criteria (amount of borrowings)

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

expected that they would be signing the agreements shortly. However, they attend meetings.

The first ARC to be operational in India- Asset Reconstruction Company of India (ARCIL) is

a member of the CDR forum. Lenders in India prefer to resort to CDR mechanism to avoid

unnecessary delays in multiple lender arrangements and to increase transparency in the

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

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

programs.


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Chapter: - 2

Literature Review and

Methodology


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2.1 REVIEW OF LITERATURE

This section provides an overview of some of the existing literature with regard to the NPA.

In purview of preventing assets from slipping down to NPAs for effective running of banks,maintaining the financial liquidity and health of banks, enhance the performance and to

overcome/manage the problem of existing NPAs of banks many empirical research studies

have been made in this area from time to time. A synoptic study will help us to understand

the concept, types, reasons, trend, position of NPAs in Indian banking sector, and thereby can

find out resolutions to NPAs management. This literature review will help us to better

understand both research topics and the existing gap:

Dey, Bhusan, N. and Biswas, M. (2010) conducted research study on “Management of NPAs-

A non-legal approach (with special reference to State Bank of India)” to examine the existing

NPAs management system of SBI operating in the districts of Barak Valley of Assam, it has

also made attempt to construct an index of effective management of NPAs. It relied on

primary data for examining the existing NPA management. Thirty-five officials of SBI

working in various branches have been interviewed through a well devised questionnaire. No

statistical analysis has been done because of it was based on interviews with a few bank

employees having knowledge about the NPA management and being based on crude scoring

system. It found out that NPA management policy of SBI seeks to lay down on some basic

tenets like stop slippage of performing assets to non-performing assets through early

identification on the basis of early warning signals and initiation of corrective action. Once

the assets are classified as NPAs, the branch/bank should redouble its efforts to reduce the

quantum of NPAs. By pre-sanction appraisal technique, bank appraises the feasibility of the

project. The technical feasibility of the project is also given prior importance in the NPA

management policy of SBI but a few bank officials of selected branches sanctions loans on

the basis of borrowers‟ reputation. On the other hand, bankers argue that due to shortage of

staff etc., it is not possible to monitor each account. Because of that, they follow-up only the

high value advances. Relative seriousness for preventing NPA slippage is indicated by some

selected branches as compared to all branches in this region. Monitoring of small advances,

individual case analysis of problem loan needs serious attention. Lecture method is applied of

imparting training for handling bad loans. One of the prime reasons for NPAs of SBI is


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overstressed focus on tackling NPAs i.e. managing loans after slipped into non-performing

category.

Balasubramaniam, C.S. (2011) has conducted a study on “Non-Performing Assets and

Profitability of Commercial Banks in India during 2001-2010” to analyse the trend of NPAs

of Public Sector Banks, Private Sector banks and Foreign Banks and also raising concerns

about financial performance and operations of the borrowers. It also focuses on the issues and

challenges on the performance of banking sector and financial stability of the economy. It

uses simple statistical tool. It has observed that Indian banks have overall demonstrated a

trend of continued good performance and profitability despite rising interest rates, increase in

operating costs and the spillover effects of recent global financial crisis. The level of NPAs is

high with all banks. This can be brought down by good credit appraisal procedures, effective

internal control systems along with their efforts to improve asset quality in their balance

sheets.

Narula, S. and Singla, M. (2014) conducted a study named “Empirical Study on Non-

Performing Assets of Banks” for the period of 6 years i.e. 2006-07 to 2011-12 to compare the

total advances, net profit, gross NPA and net NPA of Punjab National Bank so as to study the

impact of NPA on banks; to access the performance of Punjab National Bank; to study the

relationship between net Profit and net NPA of the bank. The data relating to annual reports

of the PNB is collected, then analysed by using tables and co-efficient of correlation. It

founded that there is a positive relation between net profit and NPA i.e. with the increase in

profit, NPA also increases and this is because of mismanagement, gross NPAs and net NPAs

are increasing every year, there is adverse effect on the liquidity of bank, bank is unable to

give new loans to customers due to lack of funds which arises due to NPA. Banks

performance is shaking due to varieties of customers.

Rajeev, M. and Mahesh, H. P (2010) conducted a study “On Banking Sector Reforms and

NPA: A Study of Indian Commercial Banks” for the period of 2002-2009 to provide an

overview of the NPA problem in India concentrating on the various dimensions involved. For

analysis, Percentage Method is used. It compares India with few other countries across the

globe. They observed that NPA is the root cause of the global financial crisis. The problem of

NPA has received considerable attention after the Liberalization of the financial sector in

India. To reduce NPAs, various measures are taken by government of India like Asset


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India, by analyzing the financial performance of the banks and management of the non-

performing assets under the purview of new policy actions and regulatory compliance of the

Reserve Bank of India. It uses simple statistical tool for analysis. From the study, it is

observed that the Indian public sector banks have been able to manage high level of capital

adequacy ratio to provide cushion for any unexpected losses. The quality of advances in

Indian public sector banks has deteriorated over the years due to aggressive lending policies

undertaken by the banks. Quality of lending and recovery in non-priority sector has been

improving over the years. Public sector banks in India over the years have been able to

control non-performing assets because of stringent regulatory norms of RBI. Though the

banks have been able to strengthen its capital adequacy requirements, enhancement in

monitoring and recovery procedures is required to improve the overall management of non-

performing assets. Use of Core Banking Solution (CBS) by public sector banks in India to

monitor regularly the movement of non-performing assets is definitely a step in the right

direction.

Malhotra, M. and Laveena (2014) conducted a study named “Empirical Analysis of NPAs

Related to Private Banks in India” for 8 years i.e. 2004-2012 to investigate the movement of

non-performing assets; to relate the effects of non-performing assets on the profitability

position of private sector banks; effect of priority sector lending on the total NPAs of Public

sector banks. It used secondary data as a basis. Data collected has been analysed and

interpreted by various statistical tools like ratios, averages, percentages, co-efficient of

variation, correlation and regression test. It finds that the trends of gross advances as

compared to non-performing assets are in continuing increase form which indicates the

performance of these private banks goes in better way. The private banks have great

opportunity to manifest themselves. The rise of standard assets over the years is

compensating the fall of other assets. Also founds that there is a high degree of correlation

between profitability and non-performing assets of private sector banks which badly affect

the growth of the economy.

Sikdar, P. and Makkad, M. (2013) conducted study on “Role of NPAs in the Risk Framework

of Commercial Banks” to provide an insight into the concept of NPA as a standard criterion

for assessing commercial bank credit risk globally, the means of interpreting credit risk from

existing level of bank NPAs, step taken and procedures implemented by major Indian

commercial banks towards recovery of NPAs. The study is based on extensive study of


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annual publications on performance of commercial banks including both public and private

sector provided by the Indian Banks Association (IBA). It has founded that SBI has taken

certain measures to prevent NPA slippage such as tighten the appraisal norms/loan eligibility

criteria, risk scoring models have been developed; account tracking models have been

operationalized in all circles; towards giving focussed attention to high value NPAs in SMEs

and corporate sectors, Stressed Assets Management Group (SAMG) was created. In spite of

the challenging phase of Indian Economy, Punjab and Sind Bank group continued its efforts

in maintaining the asset quality by accelerating recovery of NPAs. Identification,

measurement, monitoring and management of risks remain a key focus area for HDFC Bank.

Significant improvements in terms of asset quality and performance have been observed over

the years with respect to Indian commercial banks. From 2009 to 2012, commercial banks

have seen a high level of NPAs in share with total advances which may be due to recession.

Gurumoorthy, T.R. and Sudha, B. (2012) has conducted a study on “Non-Performing Assets

(A study with reference to Public Sector Banks)” for 2005-2011. The objective was to

analyse the classification of loan assets in Public sector banks and to analyse the composition

of NPAs in different sectors. For this study, secondary data have been collected and shown in

tables like classification of loan assets, composition of NPAs, non-performing assets as a

percentage to total assets and as percentage to advances and then analysed. It founded that the

amount of standard assets showed an increasing trend; the ratio of sub-standard, doubtful and

loss assets to total advances showed a decreasing trend which shows a clear indication of the

effectiveness of follow-up actions of PSBs in monitoring NPAs. Then, the share of NPAs in

priority sector to total NPAs has increased marginally however the share in non-priority

sector has declined. There is significant improvement in NPAs recovery. At the end of the

study period gross NPAs to total assets ratio shows increasing trend, and in case of gross

NPAs to gross advances ratio, in the initial years it shows decreasing trend then at the end of

period of study it showed increasing trend.

Patidar, S. and Kataria, A. (2012) conducted a study on “An Analysis of NPA in Priority

Sector Lending: A Comparative Study between Public Sector Banks and Private Sector

Banks of India” for the period of five years from 2005-2010. The objective of the study is to

analyse whether there is significant difference between NPA of SBI & Associates, Old

Private Banks and New Private Banks with the NPA of Nationalized Banks and to find out

the significant impact of Priority Sector Lending on the Total NPA of Banks using tools like


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regression analysis and ratio analysis. From the study, it has showed that priority sector

lending has significant impact on total NPA of public sector banks wherein private sector

banks, priority sector lending has no significant impact on total NPA of Banks. It had also

shown that there is significant difference between NPA of Nationalized Banks with that of

SBI & Associates, New Private Banks and Old Private Banks. The reasons for growing

advances in Priority Sector are the regulations given by RBI, where banks need to

compulsorily invest in these sectors. NPA is an important factor, which affects the

performance of the banks. So, it is very important to check it from time to time and try to

minimize it in order to get increasing returns.

2.2 METHODOLOGY

Sample:

The present study includes all the Indian public and private sector banks.

Year of study:

For the present study, 10 years data from 2002 to 2011 is collected.

Methodology of Analysis:

The present study makes use of tables, graphs, charts and figures. It also makes use of

statistical measures e.g. Compound Annual Growth Rate (CAGR), Mean etc. to make the

analysis more clear and simple.

Sources of Data: Secondary sources of data have been used for the study. These sources

include bank‟s annual reports, data given in the authentic websites, RBI‟s annual reports,

articles, data given in the journals etc.

Scope of the study:

This study may be helpful to the banks in making their policy regarding the management of

NPAs and thereby can reduce their cost structure, improve financial health of the business. It

can also help banks to appraise their creditworthiness, the quantum of advances they are able

to provide at the present time as well as in the future. It can also help out banks to know their

liquidity position at various time periods and thereby they will be able to forecast the need for


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tightening the credit appraisal procedures when advancing loans, by this way standard assets

will be more and more amount of standard assets indicates increased profit as well as

increased wealth will be generated by the banks by repeating the cycle of advancing loans

from the amount earned through the interest on earlier advances.

Objective of the study:

To make a comparative analysis of the amount of Gross NPAs and Net NPAs of Public and

Private Sector Banks over the ten years of study.

To know about the trend of percentage growth rates of Gross NPAs in both Public and

Private Sector Banks over the years.

To make a comparative analysis of Standard Assets with that of Sub-standard, Doubtful and

Loss Assets in Scheduled, Public and Private Sector Banks over the years.

To know the amount of NPAs in the priority sector as well as in the non-priority sector out of

the total NPAs in different banks.

Limitations of the study:

The financial data obtained for the study is confined to ten years only which cannot be

considered as an in-depth study of the financial performance.

Some confidential data may be there within the bank apart from the data provided by them in

their annual reports which had not been disclosed to us i.e. the real picture of performance

may be different.

The secondary data collected may have its own inherent limitations.


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Chapter: - 3

Analysis of Non-Performing

Assets


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This chapter deals with management and analysis of NPAs at various banking sectors in

India. Analysis takes place between Scheduled Commercial Banks, Public Sector Banks and

Private Sector Banks in India for ten years which is from 2002 to 2011 to know the level and

trend of NPAs. The analysis is illustrated by tables, graphs, charts etc.

Table 1:

Bank Group-Wise Classification of Loan Assets of Commercial Banks (As on 31st March)

Amounts in Rs.‟crores

YEAR STANDARD ASSETS SUB-STANDARDASSETS

DOUBTFULASSETS

LOSS ASSETS GROSS NPAs TOTALGROSS

ADVANCES

AMOUNT %SHARE

AMOUNT % SHARE AMOUNT %SHARE

AMOUNT %SHARE

AMOUNT % SHARE

AMOUNT

All Scheduled Commercial Banks

2002 609,972 89.6 21,382 3.1 41,201 6.1 8,370 1.2 70,953 10.4 680,925

2003 709,260 91.2 20,078 2.6 39,731 5.1 8,971 1.2 68,780 8.8 778,040

2004 837,130 92.8 21,026 2.3 36,247 4 7,625 0.8 64,898 9.2 902,027

2005 1,066,903 94.84 14,073 1.25 36,955 3.29 6,996 0.62 58,023 5.16 1,124,926

2006 1,422,285 96.52 14,737 1 29,940 2.03 6,565 0.45 51,242 3.48 1,473,527

2007 1,843,397 97.4 19,680 1 24,531 1.3 5,905 0.3 50,116 2.6 1,893,513

2008 2,276,054 97.61 26,089 1.12 24,304 1.04 5,302 0.23 55,695 2.39 2,331,750

2009 2,720,208 97.55 35,922 1.29 26,730 0.96 5,564 0.2 68,216 2.45 2,788,424

2010 3,183,181

Management of Non-Performing Assets NPAs

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