NPA of Banks Final Fm

8/10/2019 NPA of Banks Final Fm

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PERFORMING ASSETS OF BANKS

Any amount to be recei!ed remains o!erdue for a period of more than 1-

days in respect of other accounts.

As a facilitating measure for smooth transition to 1- days norm banks ha!e

been ad!ised to mo!e o!er to charging of interest at monthly rests by April + ,--,.

6owe!er the date of classification of an ad!ance as NPA should not be changed on

account of charging of interest at monthly rests. 7anks should therefore continue to

classify an account as NPA only if the interest charged during any 8uarter is not

ser!iced fully within +9- days from the end of the 8uarter with effect from April +

,--, and 1- days from the end of the 8uarter with effect from )arch *+ ,--.

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CHAPTER - #CHAPTER - #

HISTOR$ OF INDIAN BANKING

A %a&' is a financial institution that pro!ides banking and other financial ser!ices.

7y the term bank is generally understood an institution that holds a 7anking icenses.

7anking licenses are granted by financial super!ision authorities and pro!ide rights to

conduct the most fundamental banking ser!ices such as accepting deposits and

making loans. There are also financial institutions that pro!ide certain banking

ser!ices without meeting the legal definition of a bank a so"called Non"bank. 7anks

are a subset of the financial ser!ices industry.

The word bank is deri!ed from the 0talian %a&(a , which is deri!ed from ;erman and

means bench. The terms bankrupt and <broke< are similarly deri!ed from %a&(a

!o))a , which refers to an out of business bank ha!ing its bench physically broken.

)oneylenders in Northern 0taly 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 ser!ices or theinterest spread on resources it holds in trust for clients while paying them interest on

the asset. 4e!elopment of banking industry in 0ndia followed below stated steps.

7anking in 0ndia has its origin as early as the =edic period. 0t is belie!ed that

the transition from money lending to banking must ha!e occurred e!en before

)anu the great 6indu >urist who has de!oted a section of his work to

deposits and ad!ances and laid down rules relating to rates of interest.

7anking in 0ndia has an early origin where the indigenous bankers played a

!ery important role in lending money and financing foreign trade and

commerce. 4uring the days of the ?ast 0ndia 3ompany was the turn of the

agency houses to carry on the banking business. The ;eneral 7ank of 0ndia

was first >oint Stock 7ank to be established in the year +@9. The others which

followed were the 7ank 6industan and the 7engal 7ank.

0n the first half of the +1th century the ?ast 0ndia 3ompany established three

banks/ the 7ank of 7engal in +9-1 the 7ank of 7ombay in +9- and the 7ank

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of )adras in +9*. These three banks also known as Presidency banks were

amalgamated in +1,- and a new bank the 0mperial 7ank of 0ndia was

established in +1,+. (ith the passing of the State 7ank of 0ndia Act in +1BB

the undertaking of the 0mperial 7ank of 0ndia was taken by the newly

constituted State 7ank of 0ndia.

The Ceser!e 7ank of 0ndia which is the 3entral 7ank was created in +1*B by

passing Ceser!e 7ank of 0ndia Act +1* which was followed up with the

7anking Cegulations in +11. These acts bestowed Ceser!e 7ank of 0ndia

%C70& with wide ranging powers for licensing super!ision and control of

banks. 3onsidering the proliferation of weak banks C70 compulsorily merged

many of them with stronger banks in +11.

The three decades after nationaliDation saw a phenomenal e5pansion in the

geographical co!erage and financial spread of the banking system in the

country. As certain rigidities and weaknesses were found to ha!e de!eloped in

the system during the late eighties the ;o!ernment of 0ndia felt that these had

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

more efficient and competiti!e economy. Accordingly a high"le!el committee

was set up on + August +11+ to e5amine all aspects relating to the structure

organiDation functions and procedures of the financial system. 7ased on the

recommendations of the 3ommittee %3hairman: Shri ). Narasimham& a

comprehensi!e reform of the banking system was introduced in +11,"1*. The

obEecti!e of the reform measures was to ensure that the balance sheets of

banks reflected their actual financial health. 2ne of the important measures

related to income recognition asset classification and pro!isioning by banks

on the basis of obEecti!e criteria was laid down by the Ceser!e 7ank. The

introduction of capital ade8uacy norms in line with international standards has

been another important measure of the reforms process.

+. 3omprises balance of e5pired loans compensation and other bonds such as

National Cural 4e!elopment 7onds and 3apital 0n!estment 7onds. Annuity

certificates are e5cluded.

,. These represent mainly non" negotiable non" interest bearing securities

issued to 0nternational Financial 0nstitutions like 0nternational )onetary

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Fund 0nternational 7ank for Ceconstruction and 4e!elopment and Asian

4e!elopment 7ank at book !alue.

. 3omprises accruals under Small Sa!ings Scheme Pro!ident Funds Special

4eposits of Non" ;o!ernment

0n the post"nationaliDation era no new pri!ate sector banks were allowed to

be set up. 6owe!er in +11* in recognition of the need to introduce greater

competition which could lead to higher producti!ity and efficiency of the

banking system new pri!ate sector banks were allowed to be set up in the

0ndian banking system. These new banks had to satisfy among others the

following minimum re8uirements:

%i& 0t should be registered as a public limited company/%ii& The minimum paid"up capital should be Cs +-- crore/

%iii& The shares should be listed on the stock e5change/

%i!& The head8uarters of the bank should be preferably located in a centre

which does not ha!e the head8uarters of any other bank/ and

%!& The bank will be subEect to prudential norms in respect of banking

operations accounting and other policies as laid down by the C70. 0t

will ha!e to achie!e capital ade8uacy of eight per cent from the !ery

beginning

A high le!el 3ommittee under the 3hairmanship of Shri ). Narasimham was

constituted by the ;o!ernment of 0ndia in 4ecember +11@ to re!iew the

record of implementation of financial system reforms recommended by the

3FS in +11+ and chart the reforms necessary in the years ahead to make the

banking system stronger and better e8uipped to compete effecti!ely in

international economic en!ironment. The 3ommittee has submitted its report

to the ;o!ernment in April +119. Some of the recommendations of the

3ommittee on prudential accounting norms particularly in the areas of

3apital Ade8uacy Catio 3lassification of ;o!ernment guaranteed ad!ances

pro!isioning re8uirements on standard ad!ances and more disclosures in the

7alance Sheets of banks ha!e been accepted and implemented. The other

recommendations are under consideration.

The banking industry in 0ndia is in a midst of transformation thanks to the

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economic liberaliDation of the country which has changed business

en!ironment in the country. 4uring the pre"liberaliDation period the industry

was merely focusing on deposit mobiliDation and branch e5pansion. 7ut with

liberaliDation it found many of its ad!ances under the non"performing assets

%NPA& list. )ore importantly the sector has become !ery competiti!e with the

entry of many foreign and pri!ate sector banks. The face of banking is

changing rapidly. There is no doubt that banking sector reforms ha!e

impro!ed the profitability producti!ity and efficiency of banks but in the days

ahead banks will ha!e to prepare themsel!es to face new challenges.

0ndian 7anking: Gey 4e!elopments

+11 ;o!ernment ac8uires ownership in maEor banks

Almost all banking operations in manual mode

Some banks had Hnit record )achines of 07) for 07C I Pay roll

+1@-" +19- Hnprecedented e5pansion in geographical co!erage staff

business I transaction !olumes and directed lending to

agriculture SS0 I S7 sector

)anual systems struggle to handle e5ponential rise in transaction

!olumes "" 2utsourcing of data processing to ser!ice bureau begins

7ack office systems only in )ultinational %)N3& banksJ offices

+19+" +11- Cegulator %read C70& led 0T introduction in 7anks

Product le!el automation on stand alone P3s at branches

%AP)s&

0n"house ?4P infrastructure with Hni5 bo5es batch processing in

3obol for )0S.

)ainframes in corporate office

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+11+"+11B ?5pansion slows down

7anking sector reforms resulting in progressi!e de"regulation of

banking introduction of prudential banking norms entry of new

pri!ate sector banks

Total 7ranch Automation %T7A& in ;o!t. owned and old pri!ate

banks begins

New pri!ate banks are set up with 37S'T7A form the start

+11",--- New deli!ery channels like AT) Phone banking and 0nternet

banking and con!enience of any branch banking and auto sweep

products introduced by new pri!ate and )N3 banks Cetail banking in focus proliferation of credit cards

3ommunication infrastructure impro!es and becomes cheap.

04C7T sets up =SAT network for 7anks

;o!t. owned banks feel the heat and attempt to respond using

intermediary technology T7A implementation surges ahead under

fiat from 3entral =igilance

3ommission %3=3& K,G threat consumes last two years

,---",--* Alternate deli!ery channels find wide consumer acceptance

0T 7ill passed lending legal !alidity to electronic transactions

;o!t. owned banks and old pri!ate banks start implementing

37Ss but initial attempts face problems

7anks enter insurance business launch debit cards

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CHAPTER - *CHAPTER - *

NON PERFORMING ASSETS /NPA

DEFINITION OF NPA

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

classified as Nonperforming asset.

Non performing asset means an asset or account of borrower which has been

classified by bank or financial institution as sub Lstandard doubtful or loss asset in

accordance with the direction or guidelines relating to assets classification issued

by C70 .

An amount due under any credit facility is treated as “past due” when it is not been

paid within *- days from the due date. 4ue to the impro!ement in the payment and

settlement system reco!ery climate up gradation of technology in the banking

system etc it was decided to dispense with “past due “concept with effect from

)arch *+ ,--+. Accordingly as from that date a Non performing asset shell be an

ad!ance where

i. 0nterest and'or installment of principal remain o!erdue for a period of more

than +9- days in respect of a term loan

ii. The account remains #out of order # for a period of more than +9- days in

respect of an o!erdraft'cash credit %24'33&

iii. The bill remains o!erdue for a period of more than +9- days in case of bill

purchased or discounted.

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i!. 0nterest and'or principal remains o!erdue for two har!est season but for a

period not e5ceeding two half years in case of an ad!ance granted for

agricultural purpose and

!. Any amount to be recei!ed remains o!erdue for a period of more than +9-

days in respect of other accounts

(ith a !iew to mo!ing towards international best practices and to ensure greater

transparency it has been decided to adopt $1- days o!erdue #norms for identification

of NPAs from the year ending )arch *+,--a non performing asset shell be a loan

or an ad!ance where/

i. 0nterest and'or installment of principal remain o!erdue for a period of morethan 1- days in respect of a term loan.

ii. The account remains #out of order # for a period of more than 1- days in

respect of an o!erdraft'cash credit %24'33&

iii. The bill remains o!erdue for a period of more than 1- days in case of bill

purchased or discounted.

i!. 0nterest and'or principal remains o!erdue for two har!est season but for a

period not e5ceeding two half years in case of an ad!ance granted for

agricultural purpose and

!. Any amount to be recei!ed remains o!erdue for a period of more than 1- days

in respect of other accounts.

O") o2 o!d!

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

remains continuously in e5cess of sanctioned limit 'drawing power. in case where the

out standing balance in the principal operating account is less than the sanctioned

amount 'drawing power but there are no credits continuously for si5 months as on

the date of balance sheet or credit are not enough to co!er the interest debited during

the same period these account should be treated as #out of order$.

Ov!d"

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Any amount due to the bank under any credit facility is #o!erdue$ if it is not

paid on due date fi5ed by the bank.

FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs.

7ut the problem of NPAs is more in public sector banks when compared to pri!ate

sector banks and foreign banks. The NPAs in PS7 are growing due to e5ternal as well

as internal factors.

E3TERNA4 FACTORS:-

I&22()5v !(ov!y )!5%"&a6

The ;o!t. has set of numbers of reco!ery tribunals which works for reco!ery of loansand ad!ances. 4ue to their negligence and ineffecti!eness in their work the bank

suffers the conse8uence of non"reco!er their by reducing their profitability and

li8uidity.

75662"6 D2a"6)s There are borrowers who are able to payback loans but are intentionally

withdrawing it. These groups of people should be identied and proper

measures should be taken in order to get back the money extended to

them as advances and loans. Na)"!a6 (a6a85)5sThis is the measure factor which is creating alarming rise in NPAs of the PS7s. e!ery

now and then 0ndia is hit by maEor natural calamities thus making the borrowers

unable to pay back there loans. Thus the bank has to make large amount of pro!isions

in order to compensate those loans hence end up the fiscal with a reduced profit.

)ainly ours farmers depends on rain fall for cropping. 4ue to irregularities of rain fall

the farmers are not to achie!e the production le!el thus they are not repaying the

loans. I&d"s)!5a6 s5('&ss

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0mproper proEect handling ineffecti!e management lack of ade8uate resources

lack of ad!ance technology day to day changing go!t. Policies gi!e birth to

industrial sickness. 6ence the banks that finance those industries ultimately end up

with a low reco!ery of their loans reducing their profit and li8uidity. 4a(' o2 d8a&d?ntrepreneurs in 0ndia 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 acti!ities. The banks reco!er the amount by

selling of their assets which co!ers a minimum label. Thus the banks record the non

reco!ered part as NPAs and has to make pro!ision for it.

Ca& o& Gov); <o65(5s

(ith e!ery new go!t. banking sector gets new policies for its operation. Thus it has tocope 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 wea!ers 3o"operati!e

societies ha!e become defunct largely due to withdrawal of state patronage. The

rehabilitation plan worked out by the 3entral go!ernment to re!i!e the handloom

sector has not yet been implemented. So the o!er dues due to the handloom sectors

are becoming NPAs.

INTERNA4 FACTORS:-

D2()5v 4&d5& <!o(ssThere are three cardinal principles of bank lending that ha!e been followed by the

commercial banks since long.

i. Principles of safety

ii. Principle of li8uidity

iii. Principles of profitability

i. Principles of safety :"

7y 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. 3apacity to pay

b. (illingness to pay

Ca<a(5)y )o <ay d<&ds "<o&:

Tangible assets

Success in business

75665&&ss )o <ay d<&ds o&:

+. 3haracter

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,. 6onest

*. Ceputation of borrower

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

business for which a loan is sought is a sound one and the borrower is capable of

carrying it out successfully .he should be a person of integrity and good character.

I&a<<!o<!5a) )(&o6oy4ue to inappropriate technology and management information system market dri!en

decisions on real time basis can not be taken. Proper )0S 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 computeriDed.

I8<!o<! S7OT a&a6ys5sThe improper strength weakness opportunity and threat analysis is another reason for

rise in NPAs. (hile pro!iding unsecured ad!ances the banks depend more on the

honesty integrity and financial soundness and credit worthiness of the borrower.

• 7anks should consider the borrowers own capital in!estment.

• 0t should collect credit information of the borrowers from

a. From bankers.

b. ?n8uiry from market'segment of trade industry business.

c. From e5ternal credit rating agencies.

• AnalyDe the balance sheet.

True picture of business will be re!ealed on analysis of profit'loss a'c and

balance sheet.

• Purpose of the loan

(hen bankers gi!e loan he should analyDe the purpose of the loan. To ensure safety

and li8uidity banks should grant loan for producti!e purpose only. 7ank should

analyDe the profitability !iability long term acceptability of the proEect while

financing.

Poo! (!d5) a<<!a5sa6 sys)8Poor credit appraisal is another factor for the rise in NPAs. 4ue to poor credit

appraisal the bank gi!es ad!ances to those who are not able to repay it back. They

should use good credit appraisal to decrease the NPAs.

Ma&a!5a6 d25(5&(5sThe banker should always select the borrower !ery carefully and should take tangible

assets as security to safe guard its interests. (hen accepting securities banks should

consider the following:

+. )arketability

,. Acceptability

*. Safety

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. Transferability.

The banker should follow the principle of di!ersification of risk based on the famous

ma5im “do not keep all the eggs in one basket”/ it means that the banker should not

grant ad!ances to a few big farms only or to concentrate them in few industries or in a

few cities. 0f a new big customer meets misfortune or certain traders or industries

affected ad!ersely the o!erall position of the bank will not be affected.

ike 2S37 suffered loss due to the 2T) 3uttack and 2rissa hand loom industries.

The biggest defaulters of 2S37 are the 2T) %++@.@@lakhs& and the handloom sector

2rissa hand loom (3S ltd %,*1.-lakhs&

A%s&( o2 !"6a! 5&d"s)!5a6 v5s5)The irregularities in spot !isit also increases the NPAs. Absence of regularly !isit 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 !isits.

R 6oa&5& <!o(ss Non remittance of reco!eries to higher financing agencies and re loaning of the same

ha!e already affected the smooth operation of the credit cycle ;

4ue to re loaning to the defaulters and 337s and PA3s the NPAs of 2S37 is

increasing day by day.

PROB4EMS DUE TO NPA

+. 2wners do not recei!e a market return on there capital .in the worst case if the

banks fails owners loose their assets. 0n modern times this may affect a broad

pool of shareholders.

,. 4epositors do not recei!e a market return on sa!ing. 0n the worst case if the

bank fails depositors loose their assets or uninsured balance.

*. 7anks redistribute losses to other borrowers by charging higher interest rates

lower deposit rates and higher lending rates repress sa!ing and financial

market which hamper economic growth.

. Non performing loans epitomiDe bad in!estment. They misallocate credit from

good proEects which do not recei!e funding to failed proEects. 7ad in!estment

ends up in misallocation of capital and by e5tension labour and natural

resources.

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Non performing asset may spill o!er the banking system and contract the money

stock which may lead to economic contraction. This spill o!er effect can channeliDe

through li8uidity or bank insol!ency:

a& (hen many borrowers fail to pay interest banks may e5perience li8uidity

shortage.This can Eam payment across the country

b& 0lli8uidity constraints bank in paying depositors.

c& HndercapitaliDed banks e5ceeds 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 reco!ery 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 a!oid NPA no can not be then left is to look after the factor

responsible for it and managing those factors.

0nterest and'or instalment of principal remains o!erdue for two har!est seasons

but for a period not e5ceeding two half years in the case of an ad!ance granted for

agricultural purposes and

Any amount to be recei!ed remains o!erdue for a period of more than 1- days in

respect of other accounts.

As a facilitating measure for smooth transition to 1- days norm banks ha!e been

ad!ised to mo!e o!er to charging of interest at monthly rests by April + ,--,.

6owe!er the date of classification of an ad!ance as NPA should not be changed on

account of charging of interest at monthly rests. 7anks should therefore continue to

classify an account as NPA only if the interest charged during any 8uarter is not

ser!iced fully within +9- days from the end of the 8uarter with effect from April +

,--, and 1- days from the end of the 8uarter with effect from )arch *+ ,--.

O") o2 O!d! s)a)"s:O") o2 O!d! s)a)"s:

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

continuously in e5cess of the sanctioned limit'drawing power. 0n cases where the

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

limit'drawing power but there are no credits continuously for si5 months as on the

date of 7alance Sheet or credits are not enough to co!er the interest debited during the

same period these accounts should be treated as =o") o2 o!d!=.

Ov!d":Ov!d":

Any amount due to the bank under any credit facility is #o!erdue$ if it is not paid on

the due date fi5ed by the bank.

CHAPTER - +CHAPTER - +

T$PES OF NPAT$PES OF NPA

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A> G!oss NPA:A> G!oss NPA:

;ross NPAs are the sum total of all loan assets that are classified as NPAs as per C70

guidelines as on 7alance Sheet date. G!oss NPA !26()s ) ?"a65)y o2 ) 6oa&s

8ad %y %a&'s; 0t consists of all the non standard assets like as sub"standard

doubtful and loss assets.

0t can be calculated with the help of following ratio:

G!oss NPAs Ra)5o @ G!oss NPAs

G!oss Adva&(s

B> N) NPA:B> N) NPA:

Net NPAs are those type of NPAs in which the bank has deducted the pro!ision

regarding NPAs. Net NPA shows the actual burden of banks. Since in 0ndia bank

balance sheets contain a huge amount of NPAs and the process of reco!ery and write

off of loans is !ery time consuming the pro!isions the banks ha!e to make against the

NPAs according to the central bank guidelines are 8uite significant. That is why the

difference between gross and net NPA is 8uite high.

0t can be calculated by following:

N) NPAs @ G!oss NPAs P!ov5s5o&s

G!oss Adva&(s - P!ov5s5o&s

INCOME RECOGNITIONINCOME RECOGNITION

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I&(o8 !(o&5)5o& Po65(yI&(o8 !(o&5)5o& Po65(y

The policy of income recognition has to be obEecti!e and based on the record

of reco!ery. 0nternationally income from non"performing assets %NPA& is not

recognised on accrual basis but is booked as income only when it is actually

recei!ed. Therefore the banks should not charge and take to income account

interest on any NPA.

6owe!er interest on ad!ances against term deposits NS3s 0=Ps G=Ps and

ife policies may be taken to income account on the due date pro!ided

ade8uate margin is a!ailable 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

o!er the period of time co!ered by the re"negotiated or rescheduled e5tension

of credit.

0f ;o!ernment guaranteed ad!ances become NPA the interest on such

ad!ances should &o) be taken to income account unless the interest has been

realised.

Rv!sa6 o2 5&(o8:Rv!sa6 o2 5&(o8:

0f any ad!ance including bills purchased and discounted becomes NPA as at

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

corresponding pre!ious year should be re!ersed or pro!ided for if the same is

not realised. T5s 566 a<<6y )o Gov!&8&) "a!a&)d a((o"&)s a6so.

0n respect of NPAs fees commission and similar income that ha!e accrued

should cease to accrue in the current period and should be re!ersed or

pro!ided for with respect to past periods if uncollected.

4asd Ass)s

The net lease rentals %finance charge& on the leased asset accrued and credited

to income account before the asset became non"performing and remaining

unrealised should be re!ersed or pro!ided for in the current accounting

period.

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The term Jnet lease rentalsJ would mean the amount of finance charge taken to

the credit of Profit I oss Account and would be worked out as gross lease

rentals adEusted by amount of statutory depreciation and lease e8ualisation

account.

As per the =G"5da&( No) o& A((o"&)5& 2o! 4ass= issued by the 3ouncil

of the 0nstitute of 3hartered Accountants of 0ndia %03A0& a separate ease

?8ualisation Account should be opened by the banks with a corresponding

debit or credit to ease AdEustment Account as the case may be. Further

ease ?8ualisation Account should be transferred e!ery year to the Profit I

oss Account and disclosed separately as a deduction from'addition to gross

!alue of lease rentals shown under the head J;ross 0ncomeJ.

A<<!o<!5a)5o& o2 !(ov!y 5& NPAsA<<!o<!5a)5o& o2 !(ov!y 5& NPAs

0nterest realised on NPAs may be taken to income account pro!ided the credits

in the accounts towards interest are not out of fresh' additional credit facilities

sanctioned to the borrower concerned.

0n the absence of a clear agreement between the bank and the borrower for the

purpose of appropriation of reco!eries in NPAs %i.e. towards principal or

interest due& banks should adopt an accounting principle and e5ercise the

right of appropriation of reco!eries in a uniform and consistent manner.

I&)!s) A<<65(a)5o&:I&)!s) A<<65(a)5o&:

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

NPA account taking the same to 0nterest Suspense Account or maintaining only a

record of such interest in proforma accounts.

R<o!)5& o2 NPAsR<o!)5& o2 NPAs

7anks are re8uired to furnish a Ceport on NPAs as on *+ st )arch each year

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

portfolio including the ad!ances at the foreign branches. The Ceport should

be furnished as per the prescribed format gi!en in the Anne5ure 0.

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CATEGORIES OF NPA’SCATEGORIES OF NPA’S

S)a&da!d Ass)s:S)a&da!d Ass)s:

Standard assets are the ones in which the bank is recei!ing interest as well as the

principal amount of the loan regularly from the customer. 6ere it is also !ery

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

not e5ceed 1- days at the end of financial year. 0f asset fails to be in category of

standard asset that is amount due more than 1- days then it is NPA and NPAs are

further need to classify in sub categories.

7anks are re8uired to classify non"performing assets further into the following three

categories based on the period for which the asset has remained non"performing and

the realisability of the dues:

%+& Sub"standard Assets%+& Sub"standard Assets

%,& 4oubtful Assets%,& 4oubtful Assets

%*& oss Assets%*& oss Assets

/1 S"%-s)a&da!d Ass)s:--/1 S"%-s)a&da!d Ass)s:--

(ith effect from *+ )arch ,--B a sub standard asset would be one which has

remained NPA for a period less than or e8ual to +, month. The following features are

e5hibited by sub standard assets: the current net worth of the borrowers ' guarantor or

the current market !alue of the security charged is not enough to ensure reco!ery of

the dues to the banks in full/ and the asset has well"defined credit weaknesses that

Eeopardise the li8uidation of the debt and are characterised by the distinct possibility

that the banks will sustain some loss if deficiencies are not corrected.

/# Do"%)2"6 Ass)s:--/# Do"%)2"6 Ass)s:--

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 li8uidation in full L on the basis of currently known facts conditions

and !alues L highly 8uestionable and improbable.

(ith effect from )arch *+ ,--B an asset would be classified as doubtful if it

remained in the sub"standard category for +, months.

/* 4oss Ass)s:--4oss Ass)s:--

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

continuance as a bankable asset is not warranted" although there may be some sal!age

or reco!ery !alue. Also these assets would ha!e been identified as #loss assets$ by the

bank or internal or e5ternal auditors or the C70 inspection but the amount would not

ha!e been written"off wholly.

PROISIONING NORMSPROISIONING NORMS

G&!a6G&!a6

0n order to narrow down the di!ergences and ensure ade8uate pro!isioning by

banks it was suggested that a bankJs statutory auditors if they so desire could

ha!e a dialogue with C70Js Cegional 2ffice' inspectors who carried out the

bankJs inspection during the pre!ious year with regard to the accounts

contributing to the difference.

Pursuant to this regional offices were ad!ised to forward a list of indi!idual

ad!ances where the !ariance in the pro!isioning re8uirements between the

C70 and the bank is abo!e certain cut off le!els so that the bank and the

statutory auditors take into account the assessment of the C70 while making

pro!isions for loan loss etc.

The primary responsibility for making ade8uate pro!isions for any diminution

in the !alue of loan assets in!estment or other assets is that of the bank

managements and the statutory auditors. The assessment made by the

inspecting officer of the C70 is furnished to the bank to assist the bank

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

making ade8uate and necessary pro!isions in terms of prudential guidelines.

0n conformity with the prudential norms pro!isions should be made on the

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

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

between an account becoming doubtful of reco!ery its recognition as such

the realisation of the security and the erosion o!er time in the !alue of security

charged to the bank the banks should make pro!ision against sub"standard

assets doubtful assets and loss assets as below:

4oss Ass)s:4oss Ass)s:

PAGE #1



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The entire asset should be written off. 0f the assets are permitted to remain in the

books for any reason +-- percent of the outstanding should be pro!ided for.

Do"%)2"6 Ass)s:Do"%)2"6 Ass)s:

+-- percent of the e5tent to which the ad!ance is not co!ered by the realisable

!alue of the security to which the bank has a !alid recourse and the realisable

!alue is estimated on a realistic basis.

0n regard to the secured portion pro!ision may be made on the following

basis at the rates ranging from ,- percent to B- percent of the secured portion

depending upon the period for which the asset has remained doubtful:

P!5od 2o! 5( ) adva&( as %&

(o&s5d!d as do"%)2"6

P!ov5s5o&

!?"5!8&) /

Hp to one year ,-

2ne to three years *-

)ore than three years:

%+& 2utstanding stock of NPAs as on

)arch *+ ,--.

%,& Ad!ances classified as #doubtful$

more than three years on or after April

+ ,--.

- with effect from )arch*+,--B.

@B effect from )arch *+

,--.

+-- with effect from )arch

*+ ,--@.

Additional pro!isioning conse8uent upon the change in the definition of

doubtful assets effecti!e from )arch *+ ,--* has to be made in phases as

under:

As on *+.-*.,--* B- percent of the additional pro!isioning re8uirement on

the assets which became doubtful on account of new norm of +9 months for

transition from sub"standard asset to doubtful category.

PAGE ##



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As on *+.-*.,--, balance of the pro!isions not made during the pre!ious

year in addition to the pro!isions needed as on *+.-*.,--,.

7anks are permitted to phase the additional pro!isioning conse8uent upon the

reduction in the transition period from substandard to doubtful asset from +9

to +, months o!er a four year period commencing from the year ending )arch

*+ ,--B with a minimum of ,- each year.

No): a6"a)5o& o2 S("!5)y 2o! <!ov5s5o&5& <"!<oss

(ith a !iew to bringing down di!ergence arising out of difference in assessment of

the !alue of security in cases of NPAs with balance of Cs. B crore and abo!e stock

audit at annual inter!als by e5ternal agencies appointed as per the guidelines appro!ed

by the 7oard would be mandatory in order to enhance the reliability on stock

!aluation. =alue$s appointed as per the guidelines appro!ed by the 7oard of 4irectors

should get collaterals such as immo!able properties charged in fa!our of the bank

!alued once in three years.

S"%-S)a&da!d Ass)s:S"%-S)a&da!d Ass)s:

A general pro!ision of +- percent on total outstanding should be made without

making any allowance for 403;3'?3;3 guarantee co!er and securities a!ailable.

S)a&da!d Ass)s:S)a&da!d Ass)s:

From the year ending *+.-*.,--- the banks should make a general pro!ision

of a minimum of -.- percent on standard assets on global loan portfolio

basis.

The pro!isions on standard assets should not be reckoned for arri!ing at net

NPAs.

The pro!isions towards Standard Assets need not be netted from gross

ad!ances but shown separately as J3ontingent Pro!isions against Standard

AssetsJ under J2ther iabilities and Pro!isions " 2thersJ in Schedule B of the

balance sheet.

F6oa)5& <!ov5s5o&s:F6oa)5& <!ov5s5o&s:

PAGE #*



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Some of the banks make a Jfloating pro!isionJ o!er and abo!e the specific pro!isions

made in respect of accounts identified as NPAs. The floating pro!isions where!er

a!ailable could be set"off against pro!isions re8uired to be made as per abo!e stated

pro!isioning guidelines. 3onsidering that higher loan loss pro!isioning adds to the

o!erall financial strength of the banks and the stability of the financial sector banks

are urged to !oluntarily set apart pro!isions much abo!e the minimum prudential

le!els as a desirable practice.

P!ov5s5o&s o& 4asd Ass)s:P!ov5s5o&s o& 4asd Ass)s:

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

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

e!en though the physical e5istence of the asset is with the user %lessee&.

%AS+1 03A0&

S"%-s)a&da!d ass)s : -

+- percent of the =&) %oo' va6"=.

As per the J;uidance Note on Accounting for easesJ issued by the 03A0

=G!oss %oo' va6"= of a fi5ed 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 I oss

Account. Accumulated depreciation should be deducted from the ;ross 7ook

=alue of the leased asset in the balance sheet of the lesser to arri!e at the =&)

%oo' va6"=.

Also balance standing in Jease AdEustment AccountJ should be adEusted in

the Jnet book !alueJ of the leased assets. The amount of adEustment in respect

of each class of fi5ed assets may be shown either in the main balance sheet or

in the Fi5ed Assets Schedule as a separate column in the section related to

leased assets.

Do"%)2"6 Ass)s :-

PAGE #+



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+-- percent of the e5tent to which the finance is not secured by the realisable !alue of

the leased asset. Cealisable !alue to be estimated on a realistic basis. I& add5)5o& )o

) a%ov pro!ision the following pro!ision on the &) %oo' va6" of the s("!d

<o!)5o& should be made depending upon the period for which asset has been

doubtful:

P!5od a o2 <!ov5s5o&

Hp to one year ,-

2ne to three years *-

)ore than three years B-

4oss Ass)s :-

The entire asset should be written"off. 0f for any reason an asset is allowed to remain

in books +-- percent of the sum of the net in!estment in the lease and the unrealised

portion of finance income net of finance charge component should be pro!ided for.%=&) %oo' va6"=

G"5d65&s 2o! P!ov5s5o&s "&d! S<(5a6 C5!("8s)a&(sG"5d65&s 2o! P!ov5s5o&s "&d! S<(5a6 C5!("8s)a&(s

Gov!&8&) "a!a&)d adva&(sGov!&8&) "a!a&)d adva&(s

(ith effect from *+ )arch ,--- in respect of ad!ances sanctioned against

State ;o!ernment guarantee if the guarantee is in!oked and remains in

default for more than two 8uarters %+9- days at present& the banks should

make normal pro!isions as prescribed in paragraph .+., abo!e.

As regards ad!ances guaranteed by State ;o!ernments in respect of which

guarantee stood in!oked as on *+.-*.,--- necessary pro!ision was allowed to

be made in a phased manner during the financial years ending *+.-*.,--- to

*+.-*.,--* with a minimum of ,B percent each year. Ad!ances granted under Ad!ances granted under

rehabilitation packages appro!ed by 70FC'term lending institutions:rehabilitation packages appro!ed by 70FC'term lending institutions:

0n respect of ad!ances under rehabilitation package appro!ed by 70FC'term

lending institutions the pro!ision should continue to be made in respect of

PAGE #,



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dues to the bank o& ) 5s)5& (!d5) 2a(565)5s as per their classification as

sub"standard or doubtful asset.

As regards the additional facilities sanctioned as per package finalised by

70FC and'or term lending institutions pro!ision on additional facilities

sanctioned need not be made for a period of o& ya! from the date of

disbursement.

0n respect of additional credit facilities granted to SS0 units which are

identified as sick Qas defined in CP34 circular No.PNFS.73.B@ '

-.-.-+',--+",--, dated + >anuary ,--,R and where rehabilitation

packages'nursing programmes ha!e been drawn by the banks themsel!es or

under consortium arrangements no pro!ision need be made for a period of

one year.

Ad!ances against term deposits NS3s eligible for surrender 0=Ps G=Ps and lifeAd!ances against term deposits NS3s eligible for surrender 0=Ps G=Ps and life

policies are e5empted from pro!isioning re8uirements. policies are e5empted from pro!isioning re8uirements.

6owe!er ad!ances against gold ornaments go!ernment securities and all other kinds6owe!er ad!ances against gold ornaments go!ernment securities and all other kinds

of securities are not e5empted from pro!isioning re8uirements.of securities are not e5empted from pro!isioning re8uirements.

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

Amounts held in 0nterest Suspense Account should not be reckoned as part of pro!isions. Amounts lying in the 0nterest Suspense Account should be deducted from

the relati!e ad!ances and thereafter pro!isioning as per the norms should be made on

the balances after such deduction.

Ad!ances co!ered by ?3;3'403;3 guaranteeAd!ances co!ered by ?3;3'403;3 guarantee

0n the case of ad!ances guaranteed by 403;3'?3;3 pro!ision should be made only

for the %a6a&( 5& (ss o2 the amount guaranteed by these 3orporations. Further

while arri!ing at the pro!ision re8uired to be made for doubtful assets realisable

!alue of the securities should first be deducted from the outstanding balance in respect

of the amount guaranteed by these 3orporations and then pro!ision made as

illustrated hereunder:

PAGE #



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Ea8<6

2utstanding 7alance Cs. lakhs

403;3 3o!er B- percent

Period for which the ad!ance has remained

doubtful

)ore than * years remained

doubtful

=alue of security held

%e5cludes worth of Cs.&

Cs. +.B- lakhs

P!ov5s5o& !?"5!d )o % 8ad

2utstanding balance Cs. .-- lakhs

ess: =alue of security held Cs. +.B- lakhs

Hnrealised balance Cs. ,.B- lakhs

ess: 403;3 3o!er

%B- of unrealisable balance&

Cs. +.,B lakhs

Net unsecured balance Cs. +.,B lakhs

Pro!ision for unsecured portion of ad!ance Cs. +.,B lakhs % +-- percent of unsecured portion&

Pro!ision for secured portion of ad!ance Cs. -.@B lakhs % B- percent of

secured portion&

Total pro!ision re8uired to be made Cs. ,.-- lakhs

Adva&( (ov!d %y CGTSI "a!a&)Adva&( (ov!d %y CGTSI "a!a&)

PAGE #.



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0n case the ad!ance co!ered by 3;TS0 guarantee becomes non"performing no

pro!ision need be made towards the guaranteed portion. The amount outstanding in

e5cess of the guaranteed portion should be pro!ided for as per the e5tant guidelines

on pro!isioning for non"performing ad!ances. Two illustrati!e e5amples are gi!en

below:

Ea8<6 I

Asset classification status: 4oubtful L )ore than * years/

3;TS0 3o!er @B of the amount outstanding or

@B of the unsecured amount or

Cs.+9.@B lakh whiche!er is the least

Cealisable !alue of Security Cs.+.B- lakh

7alance outstanding Cs.+-.-- lakh

ess Cealisable !alue of

security

Cs. +.B- lakh

Hnsecured amount Cs. 9.B- lakh

ess 3;TS0 co!er %@B& Cs. .*9 lakh

Net unsecured and

unco!ered portion:

Cs. ,.+, lakh

P!ov5s5o& R?"5!d

Secured portion Cs.+.B- lakh Cs. -.@B lakh % B-&

Hnsecured I unco!ered

portion

Cs.,.+, lakh Cs. ,.+, lakh % +--&

PAGE #



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unco!ered portion:

P!ov5s5o& R?"5!d

Secured portion Cs.+-.-- lakh Cs. B.-- lakh % B-&

Hnsecured I unco!ered

portion

Cs.++.,B lakh Cs.++.,B lakh %+--&

Total pro!ision re8uired

Cs. +.,B lakh

Ta'-o") 25&a&(Ta'-o") 25&a&(

The lending institution should make pro!isions against a Jtake"out financeJ turning

into NPA pending its take"o!er by the taking"o!er institution. As and when the asset is

taken"o!er by the taking"o!er institution the corresponding pro!isions could be

re!ersed.

Rs!v 2o! E(a& Ra) F6"()"a)5o&s A((o"&) /RERFARs!v 2o! E(a& Ra) F6"()"a)5o&s A((o"&) /RERFA

(hen e5change rate mo!ements of 0ndian rupee turn ad!erse the outstanding amount

of foreign currency denominated a loan %where actual disbursement was made in

0ndian Cupee& which becomes o!erdue goes up correspondingly with its attendant

implications of pro!isioning re8uirements. Such assets should not normally be

re!alued. 0n case such assets need to be re!alued as per re8uirement of accounting

practices or for any other re8uirement the following procedure may be adopted:

The loss on re!aluation of assets has to be booked in the bankJs Profit I oss

Account.

7esides the pro!isioning re8uirement as per Asset 3lassification banks should treat

the full amount of the Ce!aluation ;ain relating to the corresponding assets if any on

account of Foreign ?5change Fluctuation as pro!ision against the particular assets.

PAGE *0



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CHAPTER CHAPTER

IMPACT AND REASONS FOR NPAIMPACT AND REASONS FOR NPA

P!o25)a%565)y:-P!o25)a%565)y:-

NPA means booking of money in terms of bad asset which occurred due to wrong

choice of client. 7ecause 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 in!ested in some return earning proEect'asset. So NPA doesn$t affect

current profit but also future stream of profit which may lead to loss of some long"

PAGE *1



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term beneficial opportunity. Another impact of reduction in profitability is low C20

%return on in!estment& which ad!ersely affect current earning of bank.

45?"5d5)y:-45?"5d5)y:-

)oney is getting blocked decreased profit lead to lack of enough cash at hand which

lead to borrowing money for shotrtes period of time which lead to additional cost to

the company. 4ifficulty in operating the functions of bank is another cause of NPA

due to lack of money. Coutine payments and dues.

I&vo6v8&) o2 8a&a8&):-I&vo6v8&) o2 8a&a8&):-

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 ha!e

di!erted to some fruitful acti!ities which would ha!e gi!en good returns. Now day$s

banks ha!e special employees to deal and handle NPAs which is additional cost to the

bank.

C!d5) 6oss:-C!d5) 6oss:-

7ank is facing problem of NPA then it ad!ersely affect the !alue of bank in terms of

market credit. 0t will lose it$s goodwill and brand image and credit which ha!e

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

REASONS FOR NPA:REASONS FOR NPA:

Raso&s (a& % d5v5dd 5& )o )o %!oad (a)o!5s:-

A> I&)!&a6 Fa()o!

B> E)!&a6 Fa()o!

A> I&)!&a6 Fa()o!s:-A> I&)!&a6 Fa()o!s:-

0nternal Factors are those which are internal to the bank and are controllable by

banks.

PAGE *#



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• Poor lending decision:

• Non"3ompliance to lending norms:

•ack of post credit super!ision:

• Failure to appreciate good payers:

• ?5cessi!e o!erdraft lending:

• Non L Transparent accounting policy:

B>B> E)!&a6 Fa()o!sE)!&a6 Fa()o!s:-:-

?5ternal factors are those which are e5ternal to banks they are not controllable by banks.

• Socio political pressure:

• 3hang in industry en!ironment:

• ?ndangers macroeconomic disturbances:

• Natural calamities

• 0ndustrial sickness

• 4i!ersion of funds and willful defaults

• Time' cost o!errun in proEect implementation

• abour problems of borrowed firm

• 7usiness failure

• 0nefficient management

• 2bsolete technology

• Product obsolete

Ea!6y sy8<)o8s %y 5( o& (a& !(o&5 a <!2o!85& ass)Ea!6y sy8<)o8s %y 5( o& (a& !(o&5 a <!2o!85& ass)

)"!&5& 5& )o No&-<!2o!85& ass) :)"!&5& 5& )o No&-<!2o!85& ass) :

Fo"! (a)o!5s o2 a!6y sy8<)o8s:-Fo"! (a)o!5s o2 a!6y sy8<)o8s:-

PAGE **



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/1 F5&a&(5a6:/1 F5&a&(5a6:

Non"payment of the !ery first installment in case of term loan.

7ouncing of che8ue due to insufficient balance in the accounts.

0rregularity in installment.

0rregularity of operations in the accounts.

Hnpaid o!er due bills.

4eclining 3urrent Catio.

Payment which does not co!er the interest and principal amount of that

installment.

(hile monitoring the accounts it is found that partial amount is di!erted to

sister concern or parent company.

/# O<!a)5o&a6 a&d Pys5(a6:

0f information is recei!ed that the borrower has either initiated the process of

winding up or are not doing the business.

2!erdue recei!ables.

Stock statement not submitted on time.

?5ternal non"controllable factor like natural calamities in the city where

borrower conduct his business.

Fre8uent changes in plan.

Non payment of wages.

/* A))5)"d5&a6 Ca&s:

Hse for personal comfort stocks and shares by borrower.

A!oidance of contact with bank.

Problem between partners.

/+ O)!s:

3hanges in ;o!ernment policies.

4eath of borrower.

PAGE *+



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3ompetition in the market.

CHAPTER - .CHAPTER - .

MEASURES TO PREENT NPAMEASURES TO PREENT NPA

Ea!6y R(o&5)5o& o2 ) P!o%68:-Ea!6y R(o&5)5o& o2 ) P!o%68:-

0n!ariably by the time banks start their efforts to get in!ol!ed in a re!i!al process it$stoo late to retrie!e the situation" both in terms of rehabilitation of the proEect and

PAGE *,



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reco!ery of bank$s dues. 0dentification of weakness in the !ery beginning that is :

(hen the account starts showing first signs of weakness regardless of the fact that it

may not ha!e become NPA is imperati!e. Assessment of the potential of re!i!al may

be done on the basis of a techno"economic !iability study. Cestructuring should be

attempted where after an obEecti!e assessment of the promoter$s intention banks are

con!inced of a turnaround within a scheduled timeframe. 0n respect of totally

un!iable units as decided by the bank it is better to facilitate winding up' selling of

the unit earlier so as to reco!er whate!er is possible through legal means before the

security position becomes worse.

Id&)52y5& Bo!!o!s 5) G&"5& I&)&):-Id&)52y5& Bo!!o!s 5) G&"5& I&)&):-

0dentifying borrowers with genuine intent from those who are non" serious with no

commitment or stake in re!i!al is a challenge confronting bankers. 6ere the role of

frontline officials at the branch le!el is paramount as they are the ones who has

intelligent inputs with regard to promoters$ sincerity and capability to achie!e

turnaround. 7ase don this obEecti!e assessment banks should decide as 8uickly as

possible whether it would be worthwhile to commit additional finance.

0n this regard banks may consider ha!ing S<(5a6 I&vs)5a)5o&J of all financialtransaction or business transaction books of account in order to ascertain real factors

that contributed to sickness of the borrower. 7anks may ha!e penal of technical

e5perts with pro!en e5pertise and track record of preparing techno"economic study of

the proEect of the borrowers.

7orrowers ha!ing genuine problems due to temporary mismatch in fund flow

or sudden re8uirement of additional fund may be entertained at branch le!el and for

this purpose a special limit to such type of cases should be decided. This will ob!iatethe need to route the additional funding through the controlling offices in deser!ing

cases and help a!ert many accounts slipping into NPA category.

T5865&ss a&d Ad?"a(y o2 !s<o&s:-T5865&ss a&d Ad?"a(y o2 !s<o&s:-

onger the delay in response grater the inEury to the account and the asset. Time is a

crucial element in any restructuring or rehabilitation acti!ity. The response decided on

the basis of techno"economic study and promoter$s commitment has to be ade8uate in

terms of e5tend of additional funding and rela5ations etc. under the restructuring

PAGE *



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e5ercise. The package of assistance may be fle5ible and bank may look at the e5it

option.

Fo("s o& Cas F6os:-Fo("s o& Cas F6os:-

(hile financing at the time of restructuring the banks may not be guided by the

con!entional fund flow analysis only which could yield a potentially misleading

picture. Appraisal for fresh credit re8uirements may be done by analyDing funds flow

in conEunction with the 3ash Flow rather than only on the basis of Funds Flow.

Ma&a8&) E22()5v&ss:-Ma&a8&) E22()5v&ss:-

The general perception among borrower is that it is lack of finance that leads to

sickness and NPAs. 7ut this may not be the case all the time. )anagement

effecti!eness in tackling ad!erse business conditions is a !ery important aspect that

affects a borrowing unit$s fortunes. A bank may commit additional finance to an aling

unit only after basic !iability of the enterprise also in the conte5t of 8uality of

management is e5amined and confirmed. (here the default is due to deeper malady

!iability study or in!estigati!e audit should be done L it will be useful to ha!e

consultant appointed as early as possible to e5amine this aspect. A proper techno"

economic !iability study must thus become the basis on which any future action can

be considered.

M"6)5<6 F5&a&(5&:-M"6)5<6 F5&a&(5&:-

A; 4uring the e5ercise for assessment of !iability and restructuring a P!a8a)5(

a&d "&525d a<<!oa( by all the lending banks' F0s as also sharing of all

rele!ant information on the borrower would go a long way toward o!erall

success of rehabilitation e5ercise gi!en the probability of success'failure.

B; 0n some default cases where the unit is still working the bank should make

sure that 5) (a<)"!s ) (as 26os %there is a tendency on part of the

borrowers to switch bankers once they default for fear of getting their cash

flows forfeited& and ensure that such cash flows are used for working capital

purposes. Toward this end there should be regular flow of information among

PAGE *.



NON


consortium members. A bank which is not part of the consortium may not be

allowed to offer credit facilities to such defaulting clients. 3urrent account

facilities may also be denied at non"consortium banks to such clients and

!iolation may attract penal action. The C!d5) I&2o!8a)5o& B"!a" o2 I&d5a

4)d;/CIBI4 may be !ery useful for meaningful information e5change on

defaulting borrowers once the setup becomes fully operational.

C; 0n a forum of lenders the priority of each lender will be different. (hile one

set of lenders may be willing to wait for a longer time to reco!er its dues

another lender may ha!e a much shorter timeframe in mind. So it is possible

that the letter categories of lenders may be willing to e5it e!en a t a cost L by

a discounted settlement of the e5posure. Therefore any plan for

restructuring'rehabilitation may take this aspect into account.

D; Co!<o!a) D%) Rs)!"()"!5& mechanism has been institutionaliDed in ,--+

to pro!ide a timely and transparent system for restructuring of the corporate

debt of Cs. ,- crore and abo!e with the banks and F0s on a !oluntary basis and

outside the legal framework. Hnder this system banks may greatly benefit in

terms of restructuring of large standard accounts %potential NPAs& and !iable

sub"standard accounts with consortium'multiple banking arrangements.

TOO4S FOR RECOER$ OF NPASTOO4S FOR RECOER$ OF NPAS

2nce NPA occurred one must come out of it or it should be managed in most efficient

manner. egal ways and means are there to o!er come and manage NPAs. (e will

look into each one of it.

75662"6 D2a"6) :-75662"6 D2a"6) :-

AR ok Adalat and 4ebt Ceco!ery Tribunal

7R SecuritiDation Act

3R Asset Ceconstruction

4o' Ada6a):4o' Ada6a):

ok Adalat institutions help banks to settle disputes in!ol!ing account in

“doubtful” and “loss” category with outstanding balance of Cs. B lakh for

compromise settlement under ok Adalat. 4ebt reco!ery tribunals ha!e been

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empowered to organiDe ok Adalat to decide on cases of NPAs of Cs. +- lakh and

abo!e. This mechanism has pro!ed to be 8uite effecti!e for speedy Eustice and

reco!ery of small loans. The progress through this channel is e5pected to pick up in

the coming years.

D%) R(ov!y T!5%"&a6s/DRT:D%) R(ov!y T!5%"&a6s/DRT:

The reco!ery of debts due to banks and financial institution passed in )arch ,--- has

helped in strengthening the function of 4CTs. Pro!ision for placement of more than

one reco!ery officer power to attach defendant$s property'assets before Eudgment

penal pro!ision for disobedience of tribunal$s order or for breach of any terms of

order and appointment of recei!er with power of realiDation management protectionand preser!ation of property are e5pected to pro!ide necessary teeth to the 4CTs and

speed up the reco!ery of NPAs in the times to come. 4CTs which ha!e been set up by

the ;o!ernment to facilitate speedy reco!ery by banks'4F0s ha!e not been able make

much impact on loan reco!ery due to !ariety of reasons like inade8uate number lack

of infrastructure under staffing and fre8uent adEournment of cases. 0t is essential that

4CT mechanism is strengthened and !ested with a proper enforcement mechanism to

enforce their orders. Non obser!ation of any order passed by the tribunal should

amount to contempt of court the 4CT should ha!e right to initiate contempt

proceedings. The 4CT should empowered to sell asset of the debtor companies and

forward the proceed to the winding L up court for distribution among the lenders

I&a%565)y )o PayI&a%565)y )o Pay

Co&so!)5"8 a!!a&8&)s:Co&so!)5"8 a!!a&8&)s:

Asset classification of accounts under consortium should be based on the record of reco!ery of the indi!idual member banks and other aspects ha!ing a bearing on the

reco!erability of the ad!ances. (here the remittances by the borrower under

consortium lending arrangements are pooled with one bank and'or where the bank

recei!ing remittances is not parting with the share of other member banks the account

will be treated as not ser!iced in the books of the other member banks and therefore

be treated as NPA. The banks participating in the consortium should therefore

arrange to get their share of reco!ery transferred from the lead bank or get an e5press

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consent from the lead bank for the transfer of their share of reco!ery to ensure proper

asset classification in their respecti!e books.

Co!<o!a) d%) Rs)!"()"!5& /CDR:Co!<o!a) d%) Rs)!"()"!5& /CDR:

0n spite of their best efforts and intentions sometimes corporate find themsel!es in

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

internal reasons. For the re!i!al of the corporate as well as for the safety of the money

lent by the banks and F0s timely support through restructuring in genuine cases is

called for. 6owe!er delay in agreement amongst different lending institutions often

comes in the way of such endea!ours.

7ased on the e5perience in other countries like the H.G. Thailand Gorea etc.of putting in place institutional mechanism for restructuring of corporate debt and

need for a similar mechanism in 0ndia a 3orporate 4ebt Cestructuring System has

been e!ol!ed as under :

O%()5v:O%()5v:

The obEecti!e of the 3orporate 4ebt Cestructuring %34C& framework is to

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

!iable entities facing problems outside the pur!iew of 70FC 4CT and other legal

proceedings for the benefit of all concerned. 0n particular the framework will aim at

preser!ing !iable corporate that are affected by certain internal and e5ternal factors

and minimiDe the losses to the creditors and other stakeholders through an orderly and

coordinated restructuring programme.

S)!"()"!:S)!"()"!:

34C system in the country will ha!e a three"tier structure:

/A CDR S)a&d5& Fo!"8

/B CDR E8<o!d G!o"<

/C CDR C66

/A CDR S)a&d5& Fo!"8:/A CDR S)a&d5& Fo!"8:

The 34C Standing Forum would be the representati!e general body of all

financial institutions and banks participating in 34C system. All financial institutions

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and banks should participate in the system in their own interest. 34C Standing Forum

will be a self"empowered body which will lay down policies and guidelines guide

and monitor the progress of corporate debt restructuring.

CDR E8<o!d G!o"< a&d CDR C66:CDR E8<o!d G!o"< a&d CDR C66:

The indi!idual cases of corporate debt restructuring shall be decided by the

34C ?mpowered ;roup consisting of ?4 le!el representati!es of 0470 03030

imited and S70 as standing members in addition to ?4 le!el representati!es of

financial institutions and banks who ha!e an e5posure to the concerned company. 0n

order to make the 34C ?mpowered ;roup effecti!e and broad based and operate

efficiently and smoothly it would ha!e to be ensured that each financial institution

and bank as participants of the 34C system nominates a panel of two or three ?4sone of whom will participate in a specific meeting of the ?mpowered ;roup dealing

with indi!idual restructuring cases. (here howe!er a bank ' financial institution has

only one ?5ecuti!e 4irector the panel may consist of senior officials duly authoriDed

by its 7oard. The le!el of representation of banks' financial institutions on the 34C

?mpowered ;roup should be at a sufficiently senior le!el to ensure that concerned

bank ' F0 abides by the necessary commitments including sacrifices made towards

debt restructuring.

CDR C66:CDR C66:

The 34C Standing Forum and the 34C ?mpowered ;roup will be assisted by

a 34C 3ell in all their functions. The 34C 3ell will make the initial scrutiny of the

proposals recei!ed from borrowers ' lenders by calling for proposed rehabilitation

plan and other information and put up the matter before the 34C ?mpowered ;roup

within one month to decide whether rehabilitation is prima facie feasible if so the

34C 3ell will proceed to prepare detailed Cehabilitation Plan with the help of lenders

and if necessary e5perts to be engaged from outside. 0f not found prima facie feasible

the lenders may start action for reco!ery of their dues.

CHAPTER -

CASE STUD$

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CASE STUD$ ON NPA IN LHARKHAND

Raso&s o2 NPAs 5& La!'a&d

Among the !arious parameters chosen for this purpose it is obser!ed from the figure

in Figure 1 that there are 8uite contradictory !iews among all the responders. This is

not unusual because the bankers and borrowers cannot ha!e the same opinion about

the reasons. (hat is true for the banker may not hold true for the borrower. 0n all the

districts e5cept that of 6aDaribagh and ;umla bankers in the remaining districts feel

that #lack of entrepreneurship$ is the most important reason for the generation of

NPAs. This response is more prominent in 7okaro district. 6owe!er bankers in the

districts of 6aDaribagh and ;umla hold #willful defaults$ as one of the important

reasons. 0t is worthwhile to be mentioned here that when that bankers were asked that

what factors they look into for terming a borrower as a willful defaulter there was

unanimity in their responses though a maEority of them consider the fact that despite

their good financial health a borrower still defaults or delay the payment of loan

installments. As e5pected the borrowers hold #market failure$ as the reason for the

inability to ser!ice their loans in time. 0t is further obser!ed that a maEority of the

bankers %about *,& consider #lack of entrepreneurship$ as the most important reason

for NPAs closely followed by #willful defaults$ %at about ,1.B& as the reason while

about *B of the borrowers consider #market failure$ as the reason for their inability

to ser!ice their loans. 0t is howe!er interesting to note that either bankers or others do

not consider poor follow"up and super!ision leads to higher le!el of NPAs. This is

against most theories suggested on this line where poor credit appraisal or follow"up

leads to generation of NPAs in banks.

R(o88&da)5o&s 2o! !d"(5& NPAs

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+. ?ffecti!e and regular follow"up of the end use of the funds sanctioned is re8uired

to ascertain any embeDDlement or di!ersion of funds. This process can be undertaken

e!ery 8uarter so that any account con!erting to NPA can be properly accounted for.

,. 3ombining traditional wisdom with modern statistical tools like =alue"at"risk

analysis and )arko! 3hain Analysis should be employed to assess the borrowers.

This is to be supplemented by information sharing among the bankers about the credit

history of the borrower. 0n case of new borrowers especially corporate borrowers

proper analysis of the cash flow statement of last fi!e years is to be done carefully.

*. A healthy 7anker"7orrower relationship should be de!eloped. )any instances ha!e

been reported about forceful reco!ery by the banks which is against corporate ethics.

4ebt reco!ery will be much easier in a congenial en!ironment.

. Assisting the borrowers in de!eloping his entrepreneurial skills will not only

establish a good relation between the borrowers but also help the bankers to keep a

track of their funds.

B. 3ountries such as Gorea 3hina >apan Taiwan ha!e a well functioning Asset

Ceconstruction' Ceco!ery mechanism wherein the bad assets are sold to an Asset

Ceconstruction 3ompany %AC3& at an agreed upon price. 0n 0ndia there is an

absence of such mechanism and whate!er e5ists it is still in nascent stage. 2ne

problem that can be accorded is the pricing of such loans. Therefore there is a need to

de!elop a common prescription for pricing of distressed assets so that they can be

easily and 8uickly disposed. The AC3s should ha!e clear #financial ac8uisition

policy$ and guidelines relating to proper diligence and !aluation of NPA portfolio.

. Some ta5 incenti!es like capital gain ta5 e5emption carry forward the losses to set

off the samewith other income of the Uualified 0nstitutional 7orrowers %U07s& should

be granted so as to ensure their acti!e participation by way of in!esting siDeable

amount in distressed assets of banks and financial institutions.

@. So far the Public Sector 7anks ha!e done well as far as lending to the priority

sector is concerned. 6owe!er it is not enough to make lending to this sector

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mandatory/ it must be made profitable by sharply reducing the transaction costs. This

entails faster embracing of technology and minimiDing documentation.

9. 3ommercial 7anks should be allowed to come up with their own measures to

address the problem of NPAs. This may include wai!ing and reducing the principal

and interest on such loans or e5tending the loans or settling the loan accounts. They

should be fully authoriDed and they should be able to apply all the preferential policies

granted to the asset management companies.

1. Another way to manage the NPAs by the banks is 3ompromise Settlement Schemes

or 2ne Time Settlement Schemes. 6owe!er under such schemes the banks keep theactual amount reco!ered secret. Hnder these circumstances it is necessary to bring

more transparency in such deals so that any flaw could be remo!ed.

CHAPTER - 9

CONC4USION

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The accumulation of huge non"performing assets in banks has assumed great

importance. The depth of the problem of bad debts was first realiDed only in

early +11-s. The magnitude of NPAs in banks and financial institutions is o!er

Cs.+ B---- crores.

(hile gross NPA reflects the 8uality of the loans made by banks net NPA shows the

actual burden of banks. Now it is increasingly e!ident that the maEor defaulters

are the big borrowers coming from the non"priority sector. The banks and

financial institutions ha!e to take the initiati!e to reduce NPAs in a time bound

strategic approach.

Public sector banks figure prominently in the debate not only because they dominatethe banking industries but also since they ha!e much larger NPAs compared with

the pri!ate sector banks. This raises a concern in the industry and academia

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

its financial health and erode its sol!ency.

For the reco!ery of NPAs a broad framework has e!ol!ed for the management of

NPAs under which se!eral options are pro!ided for debt reco!ery and

restructuring. 7anks and F0s ha!e the freedom to design and implement their

own policies for reco!ery and write"off incorporating compromise and negotiated

settlements.

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BIB4IOGRAPH$

7EBSITES: en.wikipedia.org

www.in!estopedia.com

www.rbi.org.in

timesofindia.indiatimes.com

www.thehindu.com

BOOKS:

Non Performing Assets L 4r. =ibha >ain

Non Performing Assets in 0ndian banks " AmbuE ;upta

)anagement of Non Performing Assets " T. =. ;opalakrishnan

http://www.investopedia.com/

http://www.rbi.org.in/

http://www.investopedia.com/

http://www.rbi.org.in/

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