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A

PROJECT REPORT

ON

COMPARATIVE ANALYSIS ON

NON PERFORMING ASSETS

OF PRIVATE AND PUBLIC SECTOR

BANKS

K.V.PENDHARKAR COLLEGE OF ARTS

SCIENCE &COMMERCE

DOMBIVLI

SUBMITTED BY:

AVINASH ANDY (116302 )

T.Y (BANKING & INSURANCE)

Session: 2011-20

[Comparative analysis on NPA of Private & Public sector Banks]Page 1

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ACKNOWLEDGEMENTACKNOWLEDGEMENT

I, WOULD LIKE TO ACKNOWLEDGE THE FOLLOWING ASI, WOULD LIKE TO ACKNOWLEDGE THE FOLLOWING AS

BEING AN IDEALIST CHANNEL AND A FRESH DIMENSIONBEING AN IDEALIST CHANNEL AND A FRESH DIMENSION

IN THE COMPLETION OF THIS PROJECT.IN THE COMPLETION OF THIS PROJECT.

FIRST AND THE FOREMOST I WOULD LIKE TO THANK MYFIRST AND THE FOREMOST I WOULD LIKE TO THANK MY

GUIDE, MR.OMKAR SIR WHOS IN VALUABLE SUPPORTGUIDE, MR.OMKAR SIR WHOS IN VALUABLE SUPPORT

AND GUIDANCE HELPED ME IN EVERY ASPECT OF THISAND GUIDANCE HELPED ME IN EVERY ASPECT OF THIS

PROJECT.PROJECT.

SECONDLY, I WOULD LIKE TO AGAIN EXPRESS MY DEEPSECONDLY, I WOULD LIKE TO AGAIN EXPRESS MY DEEP

SENSE OF GRATITUDE TOWARDS OUR BANKING ANDSENSE OF GRATITUDE TOWARDS OUR BANKING AND

INSURANCE CO-ORDINATOR FOR THE VALUABLEINSURANCE CO-ORDINATOR FOR THE VALUABLE

GUIDANCE AND SUPPORT WITHOUT THIS PROJECT WOULDGUIDANCE AND SUPPORT WITHOUT THIS PROJECT WOULD

HAVE NOT BEEN POSSIBLE.HAVE NOT BEEN POSSIBLE.

LAST BUT NOT THE LEAST I WOULD TO THANKLAST BUT NOT THE LEAST I WOULD TO THANK

ALL THE RESPONDENTS FOR THEIR SUPPORT AND ALLALL THE RESPONDENTS FOR THEIR SUPPORT AND ALL

THOSE PEOPLE WHO DIRECTLY AND INDIRECTLY HELPEDTHOSE PEOPLE WHO DIRECTLY AND INDIRECTLY HELPED

ME IN COMPLETING THIS PROJECT SATISFACTORME IN COMPLETING THIS PROJECT SATISFACTOR


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(((((( CONTENTSCONTENTS ))))))

CHAPTERCHAPTER

NO.NO.

SUBJECT COVEREDSUBJECT COVERED PAGEPAGE

NO.NO.

11 Indian Banking IndustryIndian Banking Industry

22 Introduction To NPAIntroduction To NPA

33 Types of NPATypes of NPA

44 Income RocognitionIncome Rocognition

55 Aseet Classification of NPAAseet Classification of NPA

66 GuidelinesGuidelines

77 ImpactImpact

88 Tools for Recovery of NPATools for Recovery of NPA


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Ch.1 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

believed that 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.


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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 themwith stronger banks in 1969.

The three decades after nationalization saw a phenomenal

expansion in the geographical coverage and financial spread of the


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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 otherbonds 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


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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 inDecember 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.


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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.


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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 roll1970- 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

offices1981- 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


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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 star

implementing CBSs, but initial attempts face problems

Banks enter insurance business launch debit cards


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NON PERFORMING ASSETS (NPA)

NPA (NON PERFORMING ASSETS) ?

Action for enforcement of security interest can be initiated only if thesecured asset is classified as Nonperforming asset.

Non performing asset means an asset or account of borrower ,which hasbeen classified by bank or financial institution as sub standard , doubtfulor loss asset, in accordance with the direction or guidelines relating toassets classification issued by RBI .

An amount due under any credit facility is treated as past due when itis not been paid within 30 days from the due date. Due to the

improvement in the payment and settlement system, recovery climate, upgradation of technology in the banking system etc, it was decided todispense with past due concept, with effect from March 31, 2001.

Accordingly as from that date, a Non performing asset shell be anadvance 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


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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 daysoverdue norms for identification of NPAs ,from the year ending March31,2004,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 advance granted for agricultural purpose ,and

v. Any amount to be received remains overdue for a period of

more than 90 days in respect of other accounts

Out of order

An account should be treated as out of order if the outstandingbalance remains continuously in excess of sanctioned limit /drawingpower. in case where the out standing balance in the principal operatingaccount is less than the sanctioned amount /drawing power, but there areno credits continuously for six months as on the date of balance sheet orcredit are not enough to cover the interest debited during the sameperiod ,these account should be treated as out of order.

Overdue

Any amount due to the bank under any credit facility is overdue if itis not paid on due date fixed by the bank.


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FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of therising NPAs. But the problem of NPAs is more in public sector bankswhen compared to private sector banks and foreign banks. The NPAs inPSB 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 areintentionally withdrawing it. These groups of people should beidentified and proper measures should be taken in order to get backthe 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.


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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

Improper project handling , ineffective management , lack of

adequate resources , lack of advance technology , day to day

changing govt. Policies give birth to industrial sickness. Hence the

banks that finance those industries ultimately end up with a low

recovery of their loans reducing their profit and liquidity.

Lack of demand

Entrepreneurs in India could not foresee their product demand and

starts production which ultimately piles up their product thus making

them unable to pay back the money they borrow to operate these

activities. The banks recover the amount by selling of their assets,

which covers a minimum label. Thus the banks record the non

recovered part as NPAs and has to make provision for it.

Change on Govt. policies


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With every new govt. banking sector gets new policies for its

operation. Thus it has to cope with the changing principles and

policies for the regulation of the rising of NPAs.

The fallout of handloom sector is continuing as most of the

weavers Co-operative societies have become defunct largely due

to withdrawal of state patronage. The rehabilitation plan worked out

by the Central government to revive the handloom sector has not

yet been implemented. So the over dues due to the handloom

sectors are becoming NPAs.

INTERNAL FACTORS :-

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

Defective Lending process

There are three cardinal principles of bank lending that have been

followed by the commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability


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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 assets2. Success in business

Willingness to pay depends on:1. Character2. Honest3. Reputation of borrower

The banker should, there fore take utmost care in ensuring that theenterprise or business for which a loan is sought is a sound oneand the borrower is capable of carrying it out successfully .heshould 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.


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Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis

is another reason for rise in NPAs. While providing unsecuredadvances 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


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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


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or industries affected adversely, the overall position of the bank will

not be affected.

Like OSCB suffered loss due to the OTM Cuttack, andOrissa 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 samehave 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.


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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 higherinterest 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

credit from 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 overeffect can channelize through liquidity or bank insolvency:

a) When many borrowers fail to pay interest, banks may experience

liquidity shortage. 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


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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 March 31, 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


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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 isoverdue if it is not paid on the due date fixed by the bank

Ch.2 Introduction to the topicCh.2 Introduction 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 unpaidfor 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.


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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 fullywithin 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.


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Ch.3 Types of NPACh.3 Types 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 NPAsGross 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 burdenof banks.

Since in India, bank balance sheets contain a huge amount of NPAs and


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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 ProvisionsGross Advances - Provisions

Ch.4 INCOME RECOGNITIONCh.4 INCOME 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 basis over the period of time covered by

the re-negotiated or rescheduled extension of credit.


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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 assetaccrued 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.


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The term 'net lease rentals' would mean the amount of financecharge taken to the credit of Profit & Loss Account and would be

worked out as gross lease rentals adjusted by amount of statutorydepreciation and lease equalisation account.

As per the 'Guidance Note on Accounting for Leases' issuedby 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:


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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 31st 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


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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.


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

on standard assets. (Rs._____crore).

Ch.5 Asset Classification of NPACh.5 Asset Classification of NPA

--------------------------------------------------------------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-performingand the realisabilityof the dues:

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

( 2 ) Doubtful Assets( 2 ) Doubtful Assets


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( 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 notcorrected.

( 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


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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.


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The primary responsibility for making adequate provisions for any

diminution in the value of loan assets, investment or other assets is

that of the bank managements and the statutory auditors. Theassessment 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 ofassets 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.


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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 theasset 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.

(2) Advances classified as doubtful

more than three years on or after

April 1, 2004.

60% with effect from March

31,2005.

75% effect from March 31,

2006.

100% with effect from

March 31, 2007.

Additional provisioning consequent upon the change in thedefinition of doubtful assets effective from March 31, 2003 has to

be made in phases as under:


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As on 31.03.2003, 50 percent of the additional provisioningrequirement on the assets which became doubtful on account of new

norm of 18 months for transition from sub-standard asset to doubtful

category.

As on 31.03.2002, balance of the provisions not made during the

previous year, in addition to the provisions needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning

consequent upon the reduction in the transition period from

substandard to doubtful asset from 18 to 12 months over a four

year period commencing from the year ending March 31, 2005, with

a minimum of 20 % each year.

Note: Valuation of Security for provisioning purposes

With a view to bringing down divergence arising out of difference in

assessment of the value of security, in cases of NPAs with balance of Rs.

5 crore and above stock audit at annual intervals by external agencies

appointed as per the guidelines approved by the Board would be

mandatory in order to enhance the reliability on 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:


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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-offagainst 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


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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 theLeases are peculiar transactions where the assets are not recorded in the

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

the books of the owner even though the physical existence of the asset isthe books of the owner even though the physical existence of the asset is

with the user (lessee). __(AS19 ICAI)with the user (lessee). __(AS19 ICAI)

Sub-standard assets : -

10 percent of the 'net book value'.

As per the 'Guidance Note on Accounting for Leases' issued by theICAI, '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 beadjusted in the 'net book value' of the leased assets. The amount of


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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

Ch.6 Guidelines for Provisions underCh.6 Guidelines for Provisions under

Special CircumstancesSpecial Circumstances

Government guaranteed advancesGovernment guaranteed advances

With effect from 31 March 2000, in respect of advances sanctionedagainst 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 ofwhich guarantee stood invoked as on 31.03.2000, necessary provision


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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 Advances granted under rehabilitation packages

approved by BIFR/term lending institutions:approved by BIFR/term lending institutions:

In respect of advances under rehabilitation package approved byBIFR/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 packagefinalised by BIFR and/or term lending institutions, provision on additional

facilities sanctioned need not be made for a period ofone yearfrom the

date of disbursement.

In respect of additional credit facilities granted to SSI units which areidentified 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 forAdvances against term deposits, NSCs eligible for

surrender, IVPs, KVPs, and life policies aresurrender, IVPs, KVPs, and life policies are

exempted from provisioning requirements.exempted from provisioning requirements.


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However, advances against gold ornaments,However, advances against gold ornaments,

government securities and all other kinds ofgovernment securities and all other kinds of

securities are not exempted from provisioningsecurities are not exempted from provisioning

requirements.requirements.

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

Amounts held in Interest Suspense Account should not be reckoned aspart 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 More than 3 years


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doubtful 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 lakhs

Unrealised 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


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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:

Example I

Asset classification status: Doubtful More than 3 years;

CGTSI Cover 75% of the amount outstanding

or 75% of the unsecured amount

or Rs.18.75 lakh, whichever is

the least

Realisable value of Security Rs.1.50 lakh

Balance outstanding Rs.10.00 lakh

Less Realisable value of

security

Rs. 1.50 lakh

Unsecured amount Rs. 8.50 lakh

Less CGTSI cover (75%) Rs. 6.38 lakh

Net unsecured and

uncovered portion:

Rs. 2.12 lakh

Provision Required

Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)


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Unsecured & uncovered

portion

Rs.2.12 lakh Rs. 2.12 lakh ( 100%)

Total provision required Rs. 2.87 lakh

Example II

Asset classification status Doubtful More than 3 years;

CGTSI Cover 75% of the amount outstanding

or75% of the unsecured amount

or Rs.18.75 lakh, whichever is

the least

Realisable value of Security Rs.10.00 lakh

Balance outstanding Rs.40.00 lakh

Less Realisable value of

security

Rs. 10.00 lakh

Unsecured amount Rs. 30.00 lakh

Less CGTSI cover (75%) Rs. 18.75 lakh

Net unsecured and

uncovered portion:

Rs. 11.25 lakh

Provision Required

Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%)

Unsecured & uncovered

portion

Rs.11.25 lakh Rs.11.25 lakh (100%)


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Total provision required Rs. 16.25 lakh

Take-out financeTake-out finance

The lending institution should make provisions against a 'take-out finance'

turning into NPA pending its take-over by the taking-over institution. As

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

corresponding provisions could be reversed.

Reserve for Exchange Rate Fluctuations AccountReserve for Exchange Rate Fluctuations Account

(RERFA)(RERFA)

When exchange rate movements of Indian rupee turn adverse, the

outstanding amount of foreign currency denominated a loan (where actual

disbursement was made in Indian Rupee) which becomes overdue goes

up correspondingly, with its attendant implications of provisioningrequirements. 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'sProfit & 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.


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Ch.7 Impact of NPACh.7 Impact 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

doesnt 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


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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 days 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 its goodwill and brand image and credit

which have negative impact to the people who are putting their money in

the banks .

Early symptoms by which one canEarly symptoms by which one canrecognize a performing asset turning inrecognize a performing asset turning into Non-performing assetto Non-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.


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( 4 ) Others:

Changes in Government policies.

Death of borrower.

Competition in the market.

Ch.9Ch.9 Tools for recovery of NPAsTools for recovery of NPAs


Credit DefaultCredit Default

Inability to PayInability to Pay Willful defaulWillful defaul

UnviableUnviable ViableViable

Lok AdalatLok Adalat

Debt RecoveryDebt Recovery

TribunalsTribunals Securitization

ActCompromiseCompromise

RehabilitationRehabilitation

Consortium FinanceConsortium FinanceCorporate Debt RestructuringCorporate Debt Restructuring

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AssetAsset

ReconstructioReconstructioSole BankerSole Banker

Fresh Issue ofFresh Issue of

Term LoanTerm Loan

ConversionConversion

into WCTLinto WCTL

Fresh WC LimitFresh WC Limit

Rephasement ofRephasement of

Repayment PeriodRepayment Period

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