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  • 1. A STUDY ON NON PERFORMING ASSETS <br /> OF<br /> <br /> <br /> HARYANA STATE INDUSTRIAL & INFRASTRUCTURE <br /> DEVELOPMENT CORPORATION LIMITED <br /> (An ISO 9002 certified Institution)<br /> PROJECT REPORT<br />Submitted in partial fulfillment of the requirement for the award of <br />Two year full time, Masters in Business Administration.<br />By<br /> Bhavna Agrawal<br /> <br /> DEPARTMENT OF MANAGEMENT<br /> LOVELY PROFESSIONAL UNIVERSITY<br /> PHAGWARA (2009-2011)<br />ACKNOWLEDGEMENT<br />I owe my gratitude to the entire staff of finance, personnel &administration department for their co-operation, without which not have possible to carry out my training successfully.<br />I feel highly obliged to Mr. Vijay Godara, manager (P&A) for making arrangements and for their extreme support.<br />I wish to express my sincere thanks Mr. Mahaveer Singh, DGM (finance) for encouraging me.<br />I am also indebted to Mr. Satish Bansal, AGM (finance) and my mentor for their extreme support and guidance given during the project study.<br />I would like to thanks Mr. Satyanarayan and Mr. Naresh for their co-operation extended during the project studied.<br />I acknowledge my gratitude to Mr. Amarjeet Saini (Lovely Professional University), for his extended guidance, encouragement, support and reviews without his guidance this project would not have been a success.<br />BHAVNA AGRAWAL<br /> <br />TABLE OF CONTENTS<br />
    • Executive summary
    • 2. Corporate profile- HSIIDC
    • 3. introduction
    • 4. objective
    • 5. quality policy
    • 6. financial services offered by HSIIDC
    • 7. objective of the study
    • 8. literature review
    • 9. research methodology
    • 10. study of NPA accounts
    • 11. introduction
    • 12. definition
    • 13. settlement formula
    • 14. one time settlement scheme
    • 15. definition of doubtful accounts as per the policy
    • 16. factors for rise in NPAs
    • 17. impact of NPA
    • 18. early symptoms by which one can recognize a performing assets turning into NPA
    • 19. preventive measures of NPAs
    • 20. provisioning norms
    • 21. analysis of study
    • 22. NPAs in HSIIDC
    • 23. HSIIDC v/s other banks
    • 24. Recovery process
    • 25. Case study on NPA- M/S JYOTI OIL INDUSTRIES LTD.
    • 26. Findings
    • 27. Suggestions
    • 28. Bibliography
    EXECUTIVE SUMMARY:<br />The project on Non Performing Assets has been a very good experience. Every financial institution and bank faces the problem of Non Performing assets in their day-to-day processes. An organization’s cost reduced and the profits increase if it is able to manage its Non Performing Assets.<br />Project finance is one of the core functions of the financial institutional. It is highly specialized function which requires utmost care at every stage of sanction, disbursement, recovery and follow-up, with a view to improve the quality of the portfolio, appropriate steps are required to be initiated to identity the incipient sickness and ultimately to keep this level of non-performing assets within the accepted norms.<br />This report is an attempt to study in detail the system of financial analysis followed in HSIIDC and the apparent factor leading to potential NPAs.<br />Thus the report deals with organization details of HSIIDC, guidelines of RBI regarding NPAs with a case study of JYOTI OIL INDUSTRIES.<br />corporate profile- hsiidc<br />Introduction- HSIIDC <br />Haryana state industrial development corporation is one of the leading contributors to the well being and progress of the Haryana state. It has been instrumental in bringing about a major change in the lives of the people of Haryana over the years. The pioneering zeal of HSIIDC has facilitated the transformation of Haryana from a primarily agrarian society to one of the most highly industrialized state of modern India.<br /> HSIIDC was established in 1967. It is a public limited company wholly owned by the government of Haryana and set up as a catalyst for promoting and accelerating the pace of industrialization in the state. The corporation provides a wide spectrum of financial services under one roof- the concept being “total financial support” for its clientele. The corporation provides many services like term loans, equipment financing, industrial development, etc.<br />Being an intrinsically customer-oriented organization, HSIIDC has often gone beyond the call of duty in helping to give concrete shape to the destiny and vision of thousands of entrepreneurs. It has generally taken on the role of a trusted friend and guide, providing crucial support and most important of all, creating an environment where nascent projects are able to attain their fruition and become vibrant industries.<br />As a result Haryana produces the largest number of tractors, motorcycles, refrigerators and G.I. pipes in the country. Above 25% of India’s total sanitary ware is manufactured here. And one out of every four bicycles bears the stamp of Haryana’s factories. Haryana’s index of industrial production is far above the all Indian average. Many large units like National Fertilizers, Hindustan Machine Tools, Bharat Electronics and others have a stake in the state. In addition, well-known private sectors such as Escorts, Hero Honda, Maruti and Kelvinator, among others, have a very noticeable presence.<br /> HSIIDC is the first financial institution in the country that has obtained ISO-9002 quality systems certificate for its services.<br />Corporation successfully completed many projects in the public, joint, and assisted sectors. It has developed many self sufficient and fully developed industrial estates in the state of Haryana. The Japanese JICA (Japanese international corporation agency) have selected Haryana for the first Industrial Model Township in India.<br />HSIIDC OBJECTIVES<br />
    • Identification and promotion of large and medium sector projects.
    • 29. Providing financial assistant by the way of term loans/direct participation in equity.
    • 30. Financial infrastructural development
    • 31. Performing agency functions on behalf of the state government/IDBI/SIDBI.
    • 32. Providing financial services to entrepreneurs and established industries foe enhancement of capacity/modernization.
    HSIIDC QUALITY POLICY<br />Accepting Quality as a major competitive factor and striving for customer satisfaction is the ever evolving guiding philosophy of HSIIDC which spells: <br />High Productivity<br />Success<br />Innovation<br />Dynamism<br />Commitment <br />This is achieved by overcoming resistance to winds of charge and working as a team as per transparent systems designed for prompt delivery of our services and observing financial discipline. <br />ISO 9001:2000 Certification <br />In keeping with the Quality Policy of HSIIDC, the organization has become the first State Level Financial Institution in India to be certified as an ISO-9001:2000 company. <br />Trail of Achievements<br />"Corporation has constituted its high growth for the fourth year and made a trajectory of consistent record by posting gross income of Rs. 14682 lakh. The net profit before dividend is Rs. 5365 lakh against the previous record of Rs. 4128 lakh during the previous year and thereby registered an increase of 29.97/%. The Corporation during the year 2008-09 has declared a dividend of Rs. 750 lakh out of profit to its equity shareholders i.e. State Government. The net worth of the Corporation has increased many folds i.e. Rs. 9794 lakh in 1998-99 to Rs. 85767 lakh in 2008-09.."<br />64 projects have been successfully set up in the Public/Joint/Assisted sectors, with an equity participation of Rs.38.88 crore, catalyzing an investment of Rs. 795.25 crore, in the State of Haryana. Many industrial estates have been developed epitomizing HSIIDC's commitment to galvanize industrialization. 77360 jobs have been created through HSIIDC-assisted projects. The State Government has declared HSIIDC as the Nodal Agency for development of Industrial Infrastructure in the State of Haryana.<br /> HSIIDC has also been declared by the Haryana Government as the implementing agency for the development of Kundli-Manesar-Palwal Expressway in the State of Haryana. <br />People - The Prime Asset<br />HSIIDC is an organization with a difference - "service oriented" and progressive in outlook, where the emphasis is on people - both outside - the customers - and inside the organization - the staff members. HSIIDC recognizes the importance of its cardinal assets---- “the Human Resources." Today, HSIIDC is a well-knit team of highly experienced financial experts, engineers, professionals, administrators and technicians, HSIIDC comprises of very dedicated personnel, all of whom thrive on teamwork and a cohesive work spirit.  HSIIDC has evolved into a unique service organization where the top management supports the entire structure, which is very much in touch with grass-root level operations. The middle management is supported by the top management who in-turn support and guide the entire front line staff.  HSIIDC's corporate headquarters are situated in Panchkula with branch offices in New Delhi, Manesar, Hisar, Gurgaon and Faridabad. It has field offices at Gurgaon, Faridabad, Kundli, Kalka, Ambala, Saha, Bawal, Manakpur, Karnal, Jind, Tohana, Murthal, Sonepat, Barwala, Manesar and Sirsa. <br />Financial services offered by HSIIDC<br />The scope of financial services provided by HSIIDC has been enlarged over the years keeping in view the ever-growing needs of industrial sector. The services now being provided include-<br />
    • Term loans-
    The unit should envisage setting up manufacturing facilities in the state of Haryana. The service sector entities like Hotels, Hospitals, warehousing etc. are also considered eligible for financing.<br /> Maximum loan per proposal- Rs. 2500 lakh<br /> Minimum security margin- 25%<br />Promoter’s contribution- 30%<br />Debt equity ratio- 1.5:1(May change according to the requirement of the project)<br /> Repayment period5 to 8 years depending upon the repayment capacity with initial moratorium of 1-2 years on repayment of the principal amount.<br />Rate of interest  <br />The rate of interest applicable (floating) as on date is 13% with rebate of 1% on timely payment for general term loan. However, for specific scheme, the interest rate has been indicated under the respective heads of specific schemes. <br />SERVICE TAX & PROCESSING CHARGE ON TERM LOAN <br />Processing Fee:    0.20% of the loan application amount (non refundable)<br />The processing fee for term loan cases of more than Rs.5.00 Crores, the applicants can deposit 50% of the processing fee at the time of submission of application and balance 50% of the processing fee is required to be deposited before issue of sanction letter <br />Service Tax:    10.00% of the processing fee and Education Cess on Service Tax is 3%.<br />After the case has been accepted and appraisal initiated, the processing charges are not refundable. However, if the application is withdrawn after the acceptance of case but before starting the appraisal, the processing charges are refundable after retaining service tax & lump-sum fee of Rs. 5000/-. <br />SECURITY <br />Primary security: land (if it is of HSIIDC), building, plant and machinery<br />Collateral security: The Term Loans extended by the Corporation are secured by way of mortgage of primary security. However, the Collateral Security is obtained to further secure the loan and its quantum depends on the risk perception.<br />TERM LOAN PROCEDURE<br />The term loan procedure associate with a term loan involves the following principal steps:<br />Interaction with the 'Client' starts with the receipt of Application Form (both printed and on floppy) which is available on payment of Rs.100/- at Head Office and/ or Branch Offices of the Corporation. <br />The applicants may download the application form from the website which is available under download section on homepage. However, the applicants are required to pay demand draft of Rs.100/- in favour of HSIIDC Ltd. payable at Panchkula/Chandigarh at the time of submission of application along with processing fee <br />Following basic information is required at this stage:  <br />Processing charges & Service tax in the name of HSIIDC Limited; <br />Certificate of Incorporation of the company along with a copy of Memorandum and Articles of Association; <br />Background of Promoters including details of their assets and liabilities; <br />In case of existing units, background of the unit, financial statements for the last three years; <br />Financial statements of sister units for the last three years;  <br />Details of existing assistance availed outstanding, default etc.; <br />Brief particulars of the proposed project including project cost and means of finance; <br />Details of existing and proposed capacity; <br />Location where project is proposed to be set up with complete details of land along with copies of letter of allotment/ sale deed/ conveyance deed;  <br />Details of proposed building along with site and building plan; <br />Main machinery with details of suppliers. In case of second-hand machinery, the justification for such option, residual life of the machinery, year of its make/ manufacture, cost of similar new machinery etc.; <br />Availability of raw material, its sources, price behavior etc.; <br />Requirement of power, steam, water, pollution control; <br />Technical tie up, if any; <br />Marketing tie up, if any; and <br />Copies of other Govt. approvals like permission from Pollution Control Board, SSI/SIA approval, permission for change of land use, approval for power load sanction etc. (However, these approvals can also be submitted at the time of appraisal) <br />The Application Form, duly filled in along with a copy on floppy and complete with above information, may be submitted at Head Office or any Branch Office of the Corporation. The Application Form may also be submitted at Business Meets organised by the Corporation from time to time.  <br />ACCEPTANCE OF PROPOSAL FOR APPRAISAL <br />After receipt of application, the proposal is placed before the Screening Committee, which consists of senior officers of the Corporation. The promoters are also required to be present in this meeting. The objective of this meeting is to interact with the promoters and also to examine as to whether the proposal can be accepted for detailed appraisal. This stage takes about a week’s time. <br />ACCEPTANCE OF PROPOSAL FOR APPRAISAL DURING BUSINESS MEET <br />The Corporation organises Business Meets at different locations throughout the year. The event is generally notified through press in advance. Basic information as per the prescribed format is required for scrutiny of proposals during the Business Meets. The proposals accepted at Business Meets are straightway allotted for appraisal after approval of the Managing Director. <br />DETAILED APPRAISAL OF THE PROPOSAL <br />After a proposal is accepted for appraisal, the detailed appraisal is carried out by the officer(s) of the Corporation to assess the technical feasibility and financial viability of the proposal. Among other things, the Appraising Officer(s) focus on the following points: <br />Types of APPRAISALS<br />MARKET APPRAISAL<br />Importance of the potential market and the need to develop a suitable marketing strategy cannot be over- emphasised. Hence, efforts are made to:<br />Examine the reasonableness of the demand projections by utilising the findings of the available survey, industry association projections, planning commission and independent market survey (which may sometimes be commissioned).<br />Assess the adequacy of the marketing infrastructure in terms of potential efforts, distribution network, transport facilities, stock level etc.<br />Judge the knowledge, experience and competence of the key marketing personnel.<br />TECHNICAL APPRAISAL<br />The technical review done by the financial institutions focuses mainly on the following aspects.<br />Product mix<br />Capacity<br />Process of manufacturing<br />Engineering know-how and technical collaboration<br />Raw material and consumable location and site<br />Building<br />Plant and equipment<br />Manpower requirements<br />Break-even point.<br />Qualified and experienced personnel available in the institutions and/or outside experts (particularly where large and technologically sophisticated projects are involved) do the technical review.<br />FINANCIAL APPRASIAL<br />The financial appraisal seeks to access the following:<br />Reasonableness of the estimate of the capital cost<br />Reasonableness of the estimate of working result<br />Adequacy of the rate of return, and<br />Appropriateness of the financing pattern<br />Reasonableness of the estimate capital cost: while assessing the capital cost estimates, efforts are made to ensure that:<br />Padding or under estimation of costs is avoided<br />Specification of machinery is proper<br />Proper quotations are obtained from potential supplier<br />Contingencies are provided<br />Inflation factors are considered<br /> Reasonableness of estimate of working result: the estimate of working results is sought to be based on<br />A realistic market demand forecast<br />Price computation for inputs and outputs that are based on current quotation and inflationary factors.<br />Cost projections that distinguish between fixed and variable costs.<br />Adequacy of rate of return: the general norms for financial desirability are as follow:<br />internal rate of return 15%<br />return on investment 20-25%<br />debt- service coverage ratio 1.5-2<br /> In applying these norms, however, a certain degree of flexibility is shown on the basis of the nature of the project, the risk inherent in the project, and the status of the promoter.<br />Appropriateness of the financial pattern: the institutions assess the following in assessing the finance pattern:<br />a general debt-equity ratio 1.5:1<br />a requirement that promoters should contribute 12.5% to 22.5% of the project cost<br />The means of the promoters and his capacity to contribute a reasonable share of the project finance.<br />Economic appraisal<br />The economic review looks at the project from the larger social point of view. The methodology adapted by the financial institutes for the purpose of economic evaluation (also referred to as social cost benefit analysis) is labelled as ‘partial little mirrless’ approach. In addition to the calculation of the economic rate of return as per this approach, they also look at two other economic indicators:<br />Effective rate of return<br />Domestic resource cost<br />Managerial appraisal<br />In order to judge the managerial capabilities, following points are considered:<br />Resourcefulness: this is judged in terms of the prior experience of the promoters, the progress achieved in organising various aspects of the projects, and the skill with which the project is presented.<br />Understanding: this is assessed in terms of the credibility of the project plan including, inter-alia, the organisation structure the estimate cost, the financial pattern, the assessment of the various inputs and the marketing program, and the details furnishing to the financial institutes.<br />Commitment: this is gauged by the resources (financial, managerial and others) applied to the project and the zeal with which the objectives of the project, short term, are pursued. Managerial review also involves an assessment of the calibre of the key technical and managerial personnel working on the project, the schedule for training them, and the remuneration structure for rewarding and motivating them.<br /> Key financial indicators<br /> The following are the key financial indicators:<br />Internal rate of return<br />Debt- services coverage ratio<br />Break- even point<br />Profit margin on sales<br />Return on owners equity<br />Fixed assets coverage ratio<br />Debt-coverage ratio<br />Current ratio<br />ROI after taxes<br />ROI before taxes<br />Other important factors are:<br />
    • Background of promoters, relevant experience, their resource position;
    • 33. Performance of the unit, if existing;
    • 34. Performance of sister units;
    • 35. Suitability and adequacy of land, location etc.;
    • 36. Adequacy of proposed building;
    • 37. Suitability and adequacy of proposed machinery;
    • 38. Background and reputation of the machinery suppliers;
    • 39. In case of second hand machinery, year of manufacture, residual life, cost of similar new machinery;
    • 40. Sources and availability of raw material, price data for the last 1- 2 years;
    • 41. Adequacy of utilities like water, steam, skilled manpower etc.
    • 42. Technical /Financial tie-ups;
    • 43. Adequacy of equipments for pollution control;
    • 44. Opinion of the banker on the promoters and conduct with them; and
    • 45. Marketing tie-ups, market overview with emphasis on demand and supply, other existing players, extent of competition and emerging competition, product price etc.
    After the appraisal, the proposal is placed before the Advisory Committee which consists of members from within the organisation as well as outside experts. This Committee looks into various aspects of the appraised project, and its strengths & weaknesses to assess and determine the technical feasibility and financial viability of the proposal. <br />SANCTION OF LOAN <br />Once the proposal is cleared by the Advisory Committee, it is placed before the authority competent to sanction the loan. <br />The time taken from the receipt of application till sanction of loan is about two months subject to expeditious and timely receipt of complete information from the applicant. <br />DISBURSEMENT OF SANCTIONED ASSISTANCE-<br /> The process of disbursement of term loan starts with the acceptance of terms & conditions of sanction by the borrower as conveyed in the Sanction Letter and deposit of Imprest Money and Up-front Fee. The imprest Money is kept as an advance and its objective is to meet out the expenses the Corporation may have to incur during Monitoring and Follow-up. Presently, the Imprest money is charged Rs. 25000/- in loan cases up to Rs. 150 Lakh and Rs. 35000 in loan cases above Rs. 150 lakh.  The objective of charging Up-front Fee is to meet the commitment cost of funds during disbursement stage. The rates at which up-front fee are charged are: @ 0.5% of the loan amount. Other requirements for first disbursement are as under: <br />Legal Documentation: Legal Documentation precedes any disbursement. The details of Legal Documents required to be executed is supplied immediately after sanction. However, legal documents/resolutions required before disbursement are briefly explained hereunder: <br />Resolutions <br />Subject to section 292 of the Act, the board of directors shall have the right to delegate any of their powers to such managers, agents or other persons as they may deem fit and may at their own discretion revoke such powers.<br />General body resolutions under section 293(1) (a) to mortgage the assets of the company and under section 293(1) (d) regarding borrowing powers.<br />Board resolutions to approve loan application to HSIIDC, to accept terms and conditions of loan and authorising Directors to sign loan agreement, hypothecation deed, to open special current account , resolution to execute Tripartite Agreement with other joint lenders for creating pari-passu charge on fixed assets of the company, if applicable, and other documents under the common seal of the company.<br />ii           Other documents <br />Letter of acceptance duly signed by the Director as per BOD resolution. <br />Up-to-date certified copy of the Memorandum & Articles of Association. <br />Particulars of immovable property with copies of Mutation, Jambandi, sale-deed, and search report etc. both in respect of Company's property as well as collateral security. <br />Site plan (Aks-shajra) on tracing cloth indicating the total area and surroundings on all sides. <br />Statement of share capital certified by the Statutory Auditors. <br />Copy of the latest audited Balance Sheet. <br />Copy of the Returns of allotment filed with the Registrar of Companies. <br />Copy of the Resolutions filed and registered with the Registrar of Companies under section 192 of the Companies Act. <br />Search report by Statutory Auditor regarding charges filed with the Registrar of Companies. <br />Full particulars of guarantors along with details of immovable & movable assets, PAN/GIR No. and two passport size photographs. <br />No objection certificate under section 281 of the Income Tax Act for creation of charge.<br />Permission for conversion of land usage, if applicable, from the competent authority. <br />Details of shareholding of guarantors i.e. number of shares, Folio No., Certificate Nos., and Distinctive Nos. <br />No lien letter from the bank in respect of special current account.<br />LOAN UNDER EQUIPMENT FINANCE SCHEME (EFS)<br />Eligibility Criteria <br />The financial assistance under this scheme is available to the existing profit-making companies for acquiring machinery & equipment for expansion/ modernisation/ balancing. The company should satisfy the following eligibility norms to be covered under the scheme. <br />The unit should be in operation for last four years and should be in profits and/ or declared dividend in the preceding two financial years; <br />The current ratio should preferably be 1.33:1 or above; <br />The cost of proposed equipment normally should not be more than 50% of the existing gross block; <br />The applicant company should not be in default with the Institutions/ Banks; and <br />The proposed equipment should be separately identifiable<br />Financing Parameters<br />Maximum assistantRs. 500 lacs per proposalRepayment period2 to 5 yearsRate of interest12% p.a. floatingProcessing fees0.20% of loan amountUpfront fees0.50% of loan amount<br />Service Tax & Processing Charges <br />Procedure is same as applicable under General term loan <br />Penalties: <br />In case of any default, the rate of interest applicable to general term loan is chargeable for the balance loan amount and it becomes the documented rate of interest for all intents and purposes. In addition, penal interest is charged @ 3% p.a. over and above this revised documented rate on the defaulted amount for the period of default.<br />Letter of Credit <br />The Corporation has made arrangements with some Commercial banks for opening Letter of Credits for the purchase of machinery from India or abroad against term loan. This scheme aims at reducing the efforts of the client to approach the bank to open the Letter of Credit, which is a de-novo process, after the sanction of loan from HSIIDC. <br />Service Charges <br />The Corporation levies service charges which are shared with the Commercial Banks through whom the Letter of Credit is opened. The HSIIDC’s charges are comparable with those of the Commercial Banks in case the Letter of Credit is directly opened through them. The details of charges are as under:<br />Letter of Credit up to Rs 100.00 lac1% of the amount of Letter of CreditLetter of Credit above Rs 100.00 lac@ Double the FEDAI* rates<br />*stands for Foreign Exchange Dealers Association of India, which is a Confederation of Foreign Exchange Dealers for deciding various charges on services provided by the members.<br />Letter of Comfort <br />The Corporation also issues Letter of Comfort in favour of Commercial Banks to facilitate opening of the Letter of Credit by the latter, in case the client so wishes. Since it amounts to commitment of funds by the Corporation, service charges @ 0.5% of the amount of Letter of Comfort are charged. The Letter of Comfort is issued on the request of the client and the amount is restricted to the extent of disbursement eligibility. <br />Working Capital Term Loan <br />As the very title suggests, the loan under this category is provided for meeting the working capital requirements including shortfall in margin money for working capital. It is a medium term maturity loan. <br />Eligibility: Only those units which have been sanctioned/ disbursed term loan by the Corporation. <br />Limit for Loan: <br />SSIRs. 125.00 lakhNon SSIRs.200.00 lakh<br />Financing Parameters:<br />Repayment period5-1/2 years including six months moratoriumMaximum assistance (SSI)                                 (Non SSI)Rs.125 lacsRs.200 lacsRate of Interest12.00% p.a. floating (applicable both for SSI/Non-SSI units)(before 1% timely payment rebate)Processing fee0.20% of loan amountUpfront fee0.50% of loan amount<br /> Objective of study<br />To study the project appraisal and its results, that is used, for deciding about acceptance/rejection of the project. <br />To know about provisioning practice being followed by HSIIDC.<br />To study how HSIIDC deals with NPAs. <br />To evaluate the position of HSIIDC in comparison with PNB and SBI.<br /> <br />REVIEW OF LITERATURE:<br />
    • Shawn Thomas (1999) in their study titled ‘Bank loan loss provisions’ describes that the 1990 change in capital adequacy regulations to construct more powerful tests of capital and earnings management effects on bank loan loss provisions. We find strong support for the hypothesis that loan loss provisions are used for capital management. We do not find evidence of earnings management via loan loss provisions. We also document the reasons for the conflicting results on these effects observed in prior studies. Additionally, we find that loan loss provisions are negatively related to both future earnings changes and contemporaneous stock returns contrary to the signaling results documented in prior work.
    • 46. Vincent Bouvatier (2000) in their study titled ‘Provisioning Rules and Bank Lending: A Theoretical Model’ describes that this paper develops a partial equilibrium model of a banking firm to analyze how provisioning rules influence loan market fluctuations. We show that a backward-looking provisioning system amplifies the pro-cyclicality of loan market fluctuations. We demonstrate that, in a forward-looking provisioning system where statistical provisions are used to smooth the evolution of total loan loss provisions, the issue of pro-cyclicality of loan market fluctuations does not exist. Our findings support the call for the implementation of a dynamic provisioning system.
    • 47. Larry G. Meeker and Laura Gray (2002) in their study titled ‘A note on non-performing loans as an indicator of asset quality’ used the tool of regression analysis and described that, the public was given its first opportunity to review bank asset quality in the form of non-performing asset information. The purpose of this study is to evaluate that information. A regression analysis comparing the non-performing asset statistics with examiner classifications of assets suggests that the non-performing asset information can be useful aid in analyzing the asset quality of banks, particularly when the information is timely.
    • 48. Milind Sathye (2003) in their study titled ‘Efficiency of banks in a developing economy: The case of India’, says that the objective of this paper is to measure the productive efficiency of banks in a developing country, that is, India. The measurement of efficiency is done using data envelopment analysis. Two models have been constructed to show how efficiency scores vary with change in inputs and outputs. The efficiency scores, for three groups of banks, that are, publicly owned, privately owned and foreign owned, are measured. The study shows that the mean efficiency score of Indian banks compares well with the world mean efficiency score and the efficiency of private sector commercial banks as a group is, paradoxically lower than that of public sector banks and foreign banks in India. The study recommends that the existing policy of reducing non-performing assets and rationalization of staff and branches may be continued to obtain efficiency gains and make the Indian banks internationally competitive which is a declared objective of the Government of India.
    • 49. Rituparna Das (2003) in their study titled ‘Managing the Risk of Non Performing Assets in the Small Scale Industries in India’ tries to seek a solution to the problem of NPA in the small scale industries under the present circumstances of banking and insurance working together under the same roof. What is stressed in this article is the pressing need of the small-scale entrepreneur for becoming aware and educated in modern business management holding a professional attitude toward rational decision-making and banks have to facilitate that process as a part of the credit policy sold by them.
    • 50. Peng Hui Li Yong (2004) in their study titled ‘An Analysis on the Return and Risk Management during Securitization of Non-Performing Assets-the Effect of Securitization on
    • 51. Originator’ and his paper expounded the calculation method of gain on sale and revenue on retained interest during non-performing assets securitization, analyze the relationship between return of securitization and expected cash flow of asset pool, circulation volume of asset-backed security, funding cost, upfront cost. For the first time, this paper showed
    • 52. that the total benefit of asset securitization could be divided into three parts: excess spread, excess loss provision and value-added cash flow. Securitization of NPL could increase recovery rate and revenue, provide further loss protection and increase return on equity. Nevertheless, originating banks should carefully establish efficient risk evaluating system and strengthen internal management to control retained risk and new risk exposure generated during securitization.
    • 53. John Wiley (2005) in their study titled ‘Banking reform in India’ describes that the important process about financial reform in the area of bank illiquidity in low-income emerging markets. This process is taking place within the context of a debate as to whether or not governments should try to rehabilitate existing state-owned banks or allow a new or parallel banking system to emerge in order to reduce non-performing assets from state-owned commercial banks. A comparison of institutional development in China and India suggests that new entry rather than the rehabilitation approach may work more favorably to reduce non-performing assets. The paper offers an explanation as to why governments choose rehabilitation over new entry.
    • 54. Prashanth K. Reddy (2005) in their study titled ‘A comparative study of Non Performing Assets in India in the Global context - similarities and dissimilarities, remedial measures’ analyzed that Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences of other Asian countries in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on experiences from other countries.
    • 55. Jean Dermine (2005) in their study titled‘Provisioning practices’ describes that A fair level of provisions on bad and doubtful loans is an essential input in mark-to-market accounting, and in the calculation of bank capital and solvency. Few academic studies have analyzed the adequacy of loan-loss provisioning because, due to the private nature of bank loan transactions, few micro data are readily available. Access to data on recovery over time on bad and doubtful bank loans allows developing and applying two methodologies to calculate a fair level of loan-loss provisions. Empirical estimates are then compared to a regulatory provisioning schedule imposed by a central bank.
    • 56. LI Peng-yan (2007) in their study titled ‘A risk evaluation of non-performing assets securitization on the basis of analytic hierarchy process’ says that aiming at the securitization risk of non-performing assets in commercial banks in China, an analytic hierarchy process was employed to evaluate the problem. The analysis result showed that when securitizing non-performing assets, credit risk became the most important risk that commercial banks faced. Moreover, this paper pointed out that improving the credit environment and perfecting the credit system were the focus and direction to avoid the securitization risk of non-performing assets of commercial banks in China.
    Research methodology<br />The term research refers to the systematic method consisting of enunciating the problem , formulating a hypothesis collecting the data , analyzing the facts and reaching the certain conclusions either in the form of solution towards the concern problem or in certain generalization for some theoretical formulation . <br />Research Methodology is a way to solve systematically the research problem .It may be understood as a science of studying how research is done scientifically.<br />Time Period of the study:<br />The present study was undertaken during Six weeks from 25th June - 9th August.<br />Research Design:<br />Descriptive research procedure is used for describing the resent situations in the organization and analytical research to analyze the results by using research tools.<br />Descriptive research: <br />Descriptive research is also called Statistical Research. The main goal of this type of research is to describe the data and characteristics about what is being studied. The idea behind this type of research is to study frequencies, averages, and other statistical calculations. Although this research is highly accurate, it does not gather the causes behind a situation. Descriptive research is mainly done when a researcher wants to gain a better understanding of a topic.<br />Data collection:<br />I have used 2 techniques in collecting data-<br />
    • Primary data
    • 57. Secondary data
    Primary data: Primary research entails the use of immediate data in determining the survival of the market. The popular ways to collect primary data consist of surveys, interviews and focus groups.<br />For collecting data I have done discussions with my mentor that how a project becomes NPA, and what mistakes are there in appraisal.<br />Secondary data: Secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. The Secondary data consist of reality available compendices already complied statistical statements. Secondary data consists of not only published records and reports but also unpublished records.<br />Here we done the analysis on basis of secondary data, which included-<br />Balance sheet of the company<br />Provisioning norms of the company<br />Record of NPA of the company<br /> <br /> <br /> A<br /> STUDY ON NPA <br /> ACCOUNTS<br /> <br />Introduction<br />A project or capital expenditure is a scheme of investment resources that can be analyzed and appraised reasonably independently. It can be a gigantic scheme like a multipurpose river valley or a small investment in pocket calculator.<br />Basic definition of capital expenditure or project is that it generally involves a current outlay of funds outlay of land, building, machinery, research & development, training programmes etc.<br />To implement any project, funds are required to meet its cost. The cost of project that represents the total of all items of outlay associate with a project is generally supported by long-term funds. So there arises a need to finance the cost of project. There are a number of sources for financing like share capital, term loans, debenture capital, deferred credit, etc. a project can also be financed by combination of sources like share capital and term loans. A large number of industrial units apply for term loans to various financial institutes. In order to avail the term loans, units prepare the appraisal report and apply to financial institutes.<br />Financial institutes sanction term loans after evaluating the project and the report. They evaluate future cash flows, risk involves in financing the industrial concerns and the ease of repayment of installments and interest if they sanction loan. But sometimes the evaluation in actual circumstances or projection about the company goes wrong and company fails to perform. As a result default starts in repaying principal installments and interest.<br />All financial institutes follow guidelines by RBI for income recognition, assets classification, and provisioning, so institutes disclose the total loan assets with the classification in their annual reports and also provide require provisioning for each asset class under non-performing assets viz. sub- standard assets, doubtful assets and loss assets.<br /> <br />Definition of Non Performing assets:<br />A loan or a lease that is not meeting its stated principal and interest payments. Financial institutes usually classify as nonperforming assets any commercial loan which is more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an assets which is not producing income.<br />In other words, a debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments.<br />So any account where the age of default in installment of principal and/or interest is more than 90 days, the account would be treated as NPA which could be either a sub-standard/doubtful/loss account in terms of classification guidelines of RBI as prevailing on 31.3.2006, which is as under:<br />Category of asset Default period <br />Standard assets Regular accounts<br />Nonperforming assets Default exceeding 90 days<br />Sub- standard asset Classified as NPA for a period not <br /> exceeding 18 months<br />Doubtful assets Classified as NPA for a period <br /> exceeding 18 months<br /> Loss assets No security available <br /> <br />Sub-standard Assets: A sub-standard asset is one, which has remained NPA for a period of less than or equal to 18 months. In such cases, the current net worth of the borrower / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. A general provision @ of 10% on total outstanding is made without making any allowance for DICGC/ECGC/CGTMSE guarantee cover and securities available for advances secured by way of tangible assets. <br />Doubtful Assets: An asset is classified as doubtful if it has remained in the sub-standard category for a period of 18 months.<br />Loss Assets: A loss asset is one where realizable value of security assessed by bank/auditor is less than 10 % of outstanding in the a/c. In other words, such an asset is considered uncollectible and of such little value that its continuance as the asset of HSIIDC which is not warranted although there may be some salvage or recovery value.<br />SETTLEMENT FORMULA- amount and cut off rate<br />
    • NPAs classified as Doubtful or Loss as on March 31, 2006
    • 58. The minimum amount that should be recovered under the policy in respect of compromise settlement of NPAs classified as doubtful or loss as on March 31, 2006 would be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPA.
    • 59. NPAs classified as sub-standard as on March 31, 2006 which became doubtful or loss subsequently.
    • 60. The minimum amount that should be recovered in respect of NPAs classified as substandard as on March 31, 2006 which became doubtful or loss subsequently would be 100% of amount outstanding as on the date on which the account was categorized as doubtful NPA plus at 13% p.a. from the cut- off date till date of final payment.
    ONE TIME SETTELEMENT (OTS) POLICY OF HSIIDC<br />One time settlement will be done in all loan (term loan/ working capital term loan) cases which are categorized either Doubtful/loss on the terms and conditions detailed hereunder-<br />
    • Wilful defaulters as detailed subsequently shall not be entertained under these guidelines for the settlement of loan account.
    • 61. The categories of loan accounts under the guidelines are defined as under and basis of status of loan account would be taken on the date as and when the party approaches for settlement of loan accounts.
    DEFINITION OF DOUBTFUL ACCOUNT AS PER THIS POLICY<br />
    • Doubtful loan account is one, where the principal remained overdue for a period exceeding two years.
    • 62. Category Benefits permissible
    1.(a) Doubtful loan account(Category-A)<br />
    • Where the loan account has remained Accounts may be settled by waiving
    • 63. doubtful for less than three years. off entire penal interest plus 25% of
    • 64. component of compounded interest.
    • 65. However, the waiver shall not exceed
    • 66. 25% of total outstanding.
    (b) Doubtful loan account (Category-B) <br />
    • Where the loan account has remained Accounts may be settled by waiving off
    • 67. doubtful for more than three years but entire penal interest plus 50% of
    • 68. less than five years. component of compounded interest
    • 69. but waiver should not be more than 50%
    • 70. of total outstanding.
    • 71.
    • 72. (c) Doubtful loan account ( Category- C)
    • 73. Where the loan account has remained Accounts may be settled by waving of
    • 74. doubtful for more than five years. entire penal 100% component of
    • 75. compounded interest.
    • 76.
    • 77. However, the amount recoverable shall not be less than 90% of realisable value of primary and collateral security available with the corporation in all the above categories. The assessment shall not be more than six months old on the date of submission of settlement proposal.
    (d) Doubtful/loss loan account<br />
    • (Category-D)
    Under this category, those cases will fall Accounts may be settled by waiving of<br /> where the primary and collateral securities entire penal plus 100% component of<br /> have already been disposed off by the Compounded interest and 50% of <br /> corporation. There will be no verification simple interest. However, the waiver<br /> of assets and the eligibility under the should not exceed the interest <br /> scheme will not be linked with personal outstanding.<br /> assets of borrower/guarantor.<br /> The amount of waiver under the scheme shall be restricted to the amount payable by <br /> the party and would be applicable to category ‘A’, ‘B’, ‘C’ and ‘D’ of the onetime<br /> settlement scheme only. <br /> 2. Units in possession of the corporation Accounts may be settled by charging<br /> for over three years but could not be principal and misc. along with normal <br /> disposed off inspite of four attempts and refinanced rate or equivalent thereto<br /> no other security is available. prevailing at the time of loan advance.<br /> 3. (a) Where the units have been affected by the The units falling in either of the three <br /> affected by the natural calamities such as categories approaches for settlement,<br /> fire, riots, strikes, and are lying closed and the accounts may be settled by <br /> the borrower is interested to adjust their allowing the benefits of waiver of<br /> account. penal interest provided the entire<br /> (b) where the primary securities has been outstanding is liquidated within a <br /> disposed off but the collateral security is period of six months from the date of<br /> available and the borrower is interested to settlement . such benefit, is however, <br /> adjust the account within disposal off to be restricted to the extent of interest<br /> collateral security irrespective of its outstanding and no portion of principal<br /> assessed value. amount shall be waived off.<br /> (c) where the unit is lying closed for 1 year or <br /> more and the party wants to adjust its loan <br /> account. <br /> 4. LOSS PORTFOLIO/R.C. /R.C. STAYED CASES<br /> (a) Where the primary security and collateral Principal plus misc. And 1/3rd of the<br /> security stands disposed off by the simple interest in terms of Mortgage <br /> corporation. Deed on the amount outstanding to<br /> (b) Those cases may be considered for the recoverable and no verification of <br /> settlement where the Revenues Authorities personal assets may be insisted upon.<br /> have declared the means of the borrower An affidavit about the present means <br /> and guarantors in the case as irrecoverable of the promoters is to be given by <br /> and have furnished certificate/statement promoters/ guarantors.<br /> related to the same <br /> Non-applicability of OTS to wilful defaulters <br />
    • As per the guidelines of the RBI the following cases will fall under the definition
    • 78. of wilful defaulters.
    a) Deliberate non-payment of the dues despite cash flows and good net worth.<br /> b) Siphoning off of funds to the detriment of the defaulting unit.<br /> c) Assets financed have either not been purchased or have been sold and proceeds<br /> have been misutilised.<br /> d) Misrepresentation/falsification of records.<br /> e) Disposal/ removal of securities without bank’s knowledge.<br /> f) Fraudulent transitions by the borrower.<br />
    • The RBI guidelines further state that the identification of the wilful defaulters should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transitions/ incidents. The default to be categorized as wilful must be intentional deliberate and calculate.
    FACTORS FOR RISE IN NPAs<br />
    • Ineffective recovery tribunal
    • 79. The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank and financial institutes suffers the consequence of non-recover, their by reducing their profitability and liquidity.
    • 80. Willful Defaults
    • 81. There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.
    • 82. Natural calamities
    • 83. This is the major factor, which is creating alarming rise in NPAs of the PSBs and financial institutes. India usually faces major natural calamities thus making the borrowers unable to pay back there loans. Thus the financial institutes have to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit.
    • 84. 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.
    • 85. Lack of demand
    • 86. Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The financial institute recovers the amount by selling of their assets, which covers a minimum label. Thus the financial institute records the non recovered part as NPAs and has to make provision for it.
    • 87. Change on Govt. policies
    • 88. With every new govt. financial sector and banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.
    • 89. Improper SWOT analysis
    • 90. The improper strength, weakness, opportunity and threat analysis while project appraisal is another reason for rise in NPAs. While providing unsecured advances the financial institutes depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower.
    • 91. Financial institutes should consider the borrowers own capital investment.
    • 92. It should collect credit information of the borrowers from-
    • 93. From bankers.
    • 94. Enquiry from market/segment of trade, industry, business.
    • 95. From external credit rating agencies.
    • 96. Analyze the balance sheet-True picture of business will be revealed on analysis of profit/loss a/c and balance sheet.
    • 97. Purpose of the loan-
    • 98. When financial institute give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, financial institute should grant loan for productive purpose only. Financial institute should analyze the profitability, viability, long term acceptability of the project while financing.
    • 99. Poor credit appraisal system
    • 100. Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the financial institutes gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs.
    • 101. Absence of regular industrial visit
    • 102. The irregularities in spot visit also increases the NPAs. Absence of regularly visit of officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits.
    Impact of NPA<br />Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of financial institute decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesn’t affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of financial institutes.<br />Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. Difficulty in operating the functions of financial institute is another cause of NPA due to lack of money.<br />Involvement of management: Time and efforts of management is another indirect cost which financial institute has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now day’s financial institutes have special employees to deal and handle NPAs, which is additional cost to the financial institutes.<br />Credit loss: if financial institute is facing problem of NPA then it adversely affect the value of financial institutes in terms of market credit. It will lose it’s goodwill and brand image.<br />Early symptoms by which one can recognize a performing asset turning in to Non-performing asset<br />Four categories of early symptoms:-<br />(1) Financial:<br />Non-payment of the very first installment in case of term loan.<br />Bouncing of cheque due to insufficient balance in the accounts.<br />Irregularity in installment.<br />Irregularity of operations in the accounts.<br />Unpaid overdue bills.<br />Declining Current Ratio.<br />Payment which does not cover the interest and principal amount of that installment.<br />While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.<br />(2) Operational and Physical:<br />
    • If information is received that the borrower has either initiated the process of winding up or are not doing the business.
    Overdue receivables.<br />Stock statement not submitted on time.<br />External non-controllable factor like natural calamities in the city where borrower conduct his business.<br />Frequent changes in plan.<br />Nonpayment of wages.<br /> <br /> (3) Attitudinal Changes:<br />
    • Use for personal comfort, stocks and shares by borrower.
    • 103. Avoidance of contact with bank.
    • 104. Problem between partners.
    (4) Others:<br />
    • Changes in Government policies.
    • 105. Death of borrower.
    • 106. Competition in the market.
    Preventive Measurement for NPA <br />
    • Early Recognition of the Problem:-
    • 107. Invariably, by the time financial institutes start their efforts to get involved in a revival process, it’s too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of financial institute’s dues. Identification of weakness in the very beginning that is: When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Restructuring should be attempted where, after an objective assessment of the promoter’s intention, financial institutes are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the financial institutes, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse.
    Identifying Borrowers with Genuine:-<br />Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting the officers of financial institutes. Here the role of frontline officials at the branch level is paramount as they are the ones who have intelligent inputs with regard to promoters’ sincerity, and capability to achieve turnaround. Based on this objective assessment, financial institutes should decide as quickly as possible whether it would be worthwhile to commit additional finance.<br />In this regard financial institutes may consider having “Special Investigation” of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Financial institutes may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.<br />Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.<br />Timeliness and Adequacy of response:-<br />Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoter’s commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and financial institutes may look at the exit option.<br />Focus on Cash Flows:-<br />While financing, at the time of restructuring the financial institutes may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.<br />Management Effectiveness:-<br />The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit’s fortunes. A financial institute may commit additional finance to an ailing unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done – it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered.<br />Multiple Financing:-<br />During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure. <br />In some default cases, where the unit is still working, the financial institute should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch officers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. <br />In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even at a cost – by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account.<br />Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, financial institute may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple financial arrangements.<br />Provisioning norms applicable from 31.3.2000<br /> <br /> Particulars Provisioning <br /> Standard Assets Nil<br /> Sub-Standard Assets A general provision of 10% of total<br /> Outstanding loans in the category.<br /> Doubtful assets (a) 20% provision in respect of outstanding <br /> loan amount doubtful of recovery <br /> for period upto 1 year. <br /> <br /> (b) 30% provision in respect of outstanding<br /> loan amount doubtful of recovery <br /> for period upto 3 years.<br /> (c) 50% provision in respect of outstanding <br /> loan amount doubtful of recovery for<br /> above three years and 100% on <br /> un-recovered portion.<br /> Loss Assets The entire assets should be written off. <br /> If the assets are permitted to remain in the <br /> books for any reason, 100% of the <br /> outstanding should be provided for. <br />Provisioning norms after 01.02.2004<br /> <br /> Particulars Provisioning <br /> Standard Assets 0.25%<br /> <br /> Sub-Standard Assets A general provision of 10% of total<br /> Outstanding loans in the category.<br /> <br /> Doubtful assets (a) NPA in sub-standard category will be <br /> Classified as Doubtful category, if <br /> remained in Sub standard category, for<br /> more than 18 months.<br /> <br /> (b) 20% provision in respect of outstanding<br /> loan amount doubtful of recovery for<br /> period upto 1 year. <br /> <br /> (c) 30% provision in respect of outstanding<br /> loan amount doubtful of recovery for<br /> period upto 3 year. <br /> <br /> (d) 100% provision in respect of outstanding<br /> loan amount doubtful of recovery for period<br /> exceeding 3 years. <br /> <br /> Loss Assets The entire assets should be written off. <br /> If the assets are permitted to remain in the <br /> books for any reason, 100% of the <br /> outstanding should be provided for. <br />New guidelines on provisioning of loans <br />Category of assets sub- category provisioning requirements<br />Standard assets - 0 .25%<br />Sub-standard assets - A general provision of 10% of total outstanding loans in the category.<br /> <br />Doubtful assets secured portion unsecured portion <br /> DA-1 <br /> (Doubtful Assets up to 1 20% 100%<br /> Year old)<br /> <br /> DA-2<br /> (Doubtful assets more 30% 100%<br /> Than 1 year old and up to<br /> 3 year old)<br /> DA-3<br /> (Doubtful Assets more 100% 100%<br /> than 3 year old)<br /> Loss assets the entire assets should be written off. If <br /> the assets are permitted to remain in the<br /> books for any reason, 100% of the <br /> outstanding should be provided for. <br /> <br /> NPA’S in HSIIDC<br />2010*20092008200720062005200420031.Standard1780516955.4714183.0413211.3613719.5815386.5417324.2420724.382.NPAs2.1Sub standard0057.15467.821509.171245.132757.572039.222.2Doubtful4912.005941.046987.437493.857895.348335.696332.336384.792.3Loss953.73953.73739.45759.40771.57707.58547.8498.183.SubTotal NPAs5865.736894.777784.038721.0723895.6625674.9426961.9829246.57G.total(1+3)23670.7323850.2421967.0721932.4323895.6625674.9426962.9829246.57Gross NPA%**24.7828.9135.4339.7642.5940.0735.7529.14<br />*of 3 months<br />**subtotal NPAs*100/ G. total<br /> Sub standard assets<br /> <br /> <br /> <br /> It is clear from the chart that the sub standard NPAs in HSIIDC are reducing year by year <br /> So this is also indicating the growth of the company.<br /> <br /> Doubtful assets<br /> <br />Doubtful NPAs are also decreasing in HSIIDC but not as sub standard but still the company is doing good.<br /> <br /> Loss assets<br /> <br />As we can see from the chart that the loss assets are not decreasing in last two years as sub standard and doubtful assets. But company was doing well before 2009. <br /> Gross NPA percentage <br /> <br /> Now if we talk about the overall NPA it is reducing constantly that symbolizes that company is using good tactics to recover its NPAs.<br />HSIIDC V/S OTHER BANKS<br />Other banks are:<br />
    • Punjab national bank
    • 108. State bank of India
    Ratio analysis <br />Gross NPA ratio: Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank. Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI guidelines. The ratio is counted in terms of percentage and the formula for GNPA is as follows:<br />Gross NPA ratio = (Gross NPA / Gross advances)*100<br />Name of the bank/ financial institute 2006 2007 2008 2009<br /> Punjab national bank 4.1 3.5 2.7 2.5<br /> State bank of India 3.9 2.9 3.0 3.2 <br /> HSIIDC 4.0 3.4 2.7 2.3<br /> <br /> <br /> <br /> Gross NPA ratio <br /> <br />Analysis from above table and chart<br />
    • The table above indicates the quality of credit portfolio.
    • 109. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa.
    • 110. As we can see from the chart that HSIIDC and PNB is doing good, as their gross NPAs has reduced but in the case of SBI position of NPA is not good.
    • 111. In year 2006 and 2007, HSIIDC was at 2nd position but in after that it become at 1st position.
    • 112. So, we can say that HSIIDC is doing well with respect to other banks, but PNB bank is giving challenge to it.
    Net NPA Ratio: The net NPA percentage is the ratio of net NPA to net advances, in which the provision is to be deducted from the gross advance. The provision is to be made for NPA account. The formula for this is:<br />Net NPA Ratio = (Gross NPA-Provision /Gross Advances-Provisions) * 100<br />Name of the bank/ financial institute 2006 2007 2008 2009<br /> Punjab national bank .29 .76 .64 .59<br /> State bank of India 1.88 1.56 1.78 1.70 <br /> HSIIDC 1.22 1.1 .75 .50<br /> Net NPA ratio<br /> <br />Analysis from above table and chart<br />
    • High NPA ratio indicates the high quantity of risky assets in the Banks for which no provision are made.
    • 113. From the table it becomes clear that the NPA ratio of PNB and HSIIDC has improved as compared to SBI.
    • 114. HSIIDC has shown considerable improvements in reducing its Net NPAs as compared to its performance in last year.
    • 115. Provision Ratio: Provisions are to be made to keep safety against the NPA, & it directly affects the gross profit of the Banks and financial institutes. The provision Ratio is nothing but total provision held for NPA to gross NPA of the Banks. The formula for PR is,
    (i) Provision Ratio = (Total Provision/Gross NPA)*100<br />(ii) [Additional Formulae: Net NPA = Gross NPA – Provision]<br />Therefore, Provision = Gross NPA – Net NPA <br />Name of the bank/ financial institute 2006 2007 2008 2009<br /> Punjab national bank 93.3 78.56 77.29 75<br /> State bank of India 48.98 47.41 42.16 40.35 <br /> HSIIDC 90.08 92.16 93.8 95<br /> Provision ratio <br /> <br />FINDINGS FROM ABOVE TABLE:<br />
    • This Ratio indicates the degree of safety measures adopted by the Banks.
    • 116. It has direct bearing on the Profitability, Dividend and Safety of shareholders’ fund.
    • 117. If the provision ratio is less, it indicates that the Banks has made under provision.
    • 118. Here, the NPA percentage has increased of HSIIDC only.
    • 119. By increasing tax, HSIIDC can prevent itself from future problems.
    • 120. But PNB and SBI are reducing their provisions which can create problems in future because provisioning is very important.
    • 121.
    <br />
    • Problem Asset Ratio: It is the ratio of gross NPA to total asset of the bank. The formula for PAR is:
    Problem Asset Ratio = (Gross NPAs/Total Assets) * 100<br />Name of the bank/ financial institute 2006 2007 2008 2009<br /> Punjab national bank 4.94 2.08 1.67 1.5<br /> State bank of India 1.95 1.76 1.78 2.5 <br /> HSIIDC 4.80 5.00 3.00 1.25<br /> <br /> Problem asset ratio<br /> <br /> FINDINGS FROM ABOVE TABLE AND GRAPH:<br />
    • We determine the percentage of assets out of total assets / advances that are likely to become the Non-performing Assets.
    • 122. If PAR is high, it implies that the concerned bank or financial institute has the highest probability of creating NPAs in the near future.
    • 123. It is clear from the graph that in previous years HSIIDC was having the highest probability of creating NPAs but later on it has improved a lot.
    • 124. Now the PAR ratio of every bank and financial institute is good.
    • 125. Capital Adequacy Ratio: Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets, which are weighted/adjusted according to risk attached to them i.e.
    Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100<br />Name of the bank/ financial institute 2006 2007 2008 2009<br /> Punjab national bank 11.95 0.76 0.64 .70<br /> State bank of India 11.88 1.56 1.78 3.00 <br /> HSIIDC 9.00 4.23 6.58 3.24<br /> <br />FINDINGS FROM ABOVE TABLE:<br />
    • The capital adequacy ratio is important for them to maintain as per the banking regulations.
    • 126. Each bank needs to create the capital Reserve to compensate the Non Performing Assets.
    • 127. Each Asset has given a risk weightage as per RBI guidelines
    • 128. Risk weighted Asset = Asset * Risk Weightage
    • 129. So, More the Risk weighted Assets are, Bank has to maintain more capital.
    • 130. As far as this ratio is concerned the HSIIDC’s ratio has decreased and it has increased in 2008 but again it has reduced that is a negative sign for the company.
    <br /> Recovery processSale of primary securitiesApply to BIFR*/AAIFR*Inability to pay/ project failure Recovery process Willful default Credit default <br />Is DRS accepted Sale of collateral securitiesIs loan fully recovered<br /> No No<br /> <br />Is loan fully recovered <br /> Yes <br /> <br /> Yes <br />Revival of sick unit No <br />Loss assetsCase closed<br /> <br /> *Board for industrial and financial reconstruction<br />* Appellate Authority for Industrial and Financial Reconstruction<br /> Case study<br /> On <br /> NPA<br />M/S JYOTI OIL INDUSTRIES LTD.<br />Introduction<br />M/s jyoti oil industries Pvt. Ltd. was incorporated on 25th September, 1991 vide certification No. 55-45801 with the Registrar of Companies, Delhi and Haryana. The Company was promoted by Shri Brij Mohan Gupta and Shri Vijay Kumar Aggarwal, who are real brothers and the first director of the company. On 1.4.1992, the company took over the entire assets and liabilities of an existing partnership concern M/s. jyoi oil Industries.<br /> The company had proposed the corporation for financial assistance for setting up batch type oil refinery with an installed capacity of manufacturing 7500 TPA oil. The company had already purchased land measuring 19K- 8M at 5KM stone, Bahalgarh Road, Sonepat which is adjoining land of the earlier existing firm M/s Jyoti Oil Industries. The company had proposed to purchase the oil refining plant from M/s Mechtech Process Engineers (P) Ltd, New Delhi who is reputed supplier in the line. The company had already obtained this approval of SIA for medium scale status of the company. <br />Brief particulars<br />Name of the unit: M/s Jyoti Oil Industries (P) Ltd<br />Location of the unit: Village Sultanpur, Bahalgarh Road, Distt. Sonepat<br />Registered office: 40, Transport Centre, Rohtak Road, New Delhi<br />Size of the unit: Medium Scale<br />Date of Incorporation: 25th September, 1991<br />Date of receipt of application: 10.3.1992<br /> Type of industries: Refining of oils<br />Debt Equity Ratio: 1.33: 1<br />Cost of the project: Rs. 244.71 lacs<br />Turnover at optimum capacity utilization: 2087 lacs<br />Employment generation: 66<br />Breakeven point at installed capacity: 34.55%<br />Amount of loan applied for: Rs. 135.00 lacs<br />Amount of loan recommended: Rs. 90.00 lacs<br /> (HSIIDC- Rs. 49.90 lacs)<br /> Time Schedule:<br />Land: Already acquired<br />Building: 4 months from the date of sanction<br />Plant & Machinery: 8 months of sanctioning of loan<br />Cost of the project:<br />The total cost of the project has been estimated at Rs. 244.71 lacs as per following details:<br />Particulars Amount (Rs. In lacs)<br />Land: 3.27<br />Building 25.19<br />Plant & machinery 132.29<br />Preliminary Exp. 9.97<br />Other assets 6.69<br />Contingencies: 16.00<br />Margin money for working capital: 51.30<br />Means of finance<br />The total cost of the project was proposed to be financed as under:<br />Sources of finance Amount (Rs. In lacs)<br />Share capital 70.00<br />Term Loan from HFC 90.00<br />Term Loan from HSIIDC 49.90<br />G.Set subsidy 2.50<br />Unsecured loan 32.31<br /> ____________<br /> 244.71<br />Later on company also took loan of Rs.170.00 lacs from HFC and Rs. 100.00 lacs from HSIIDC for its working capital requirements in 1998.<br />Loan account position<br />Term loanWCTL HFC HSIIDCHFC HSIIDCSanctioned Disbursed Outstanding/default -principal -interest 90.00 88.68 41.60252.66 49.90 44.90 15.20 67.31 170.00 100.00 100.00 808.29 100.00 73.28 64.18 349.49<br /> The company started defaulting with the corporation due to severe recession in the market and then HSIIDC sold its collateral securities.<br />Reasons for NPA<br />
    • First and the most important reason for the NPA was recession and due to recession the company was not able to fetch high sales.
    • 131. Availability of Raw material was not so high in the market so it leads to long processing cycle.
    • 132. The Machinery used by the company becomes obsolete that results in higher cost and low profits and that leads it to NPA.
    • 133. Market availability
    • 134. Selling arrangements of the company was not that good. So it leads to lesser profits of the company.
    <br /> In the mean time the company proposed HSIIDC for the OTS i.e. one time settlement and HSIIDC agreed upon that. The company has approached the corporation for setting its account at Rs. 70.00 lacs against principal amount.<br />Findings<br />
    • By studying some cases it was found out that sometimes HSIIDC does not consider some negative aspects of a project which turns it into an NPA like authenticity of documents, improper site investigations.
    • 135. As per the guidelines of RBI, provisioning of loans is increasing day by day and this increment is resulting in a positive way for HSIIDC as through provisioning ultimate loss of the company reduces.
    • 136. Proper analysis of NPA is essential for financial institutes because increase in NPAs lead to an institute’s degradation in goodwill and funds.
    • 137. The reduction of NPAs would help the HSIIDC to boost up the profits, smooth recycling of funds and this would ultimately help the nation to develop its economy by providing better financial services to the nation.
    • 138. When many borrowers fail to pay interest, financial institutes experience liquidity shortages. These shortages jam payments across the country and as a result Non-performing loans spill over the financial system and contract the money stock, which leads to economic contraction.
    • 139. Once a project becomes NPA, it is necessary to keep an eye on the recovery process by selling the collateral securities of that particular company to regain the funds rather than focussing on NPS.
    • 140. It was found out after comparing HSIIDC with SBI and PNB, that PNB has minimum NPAs and also reducing it day by day.
    • 141. It was also observed that in terms of giving unsecured loan HSIIDC is doing much better than PNB and SBI.
    • 142. Suggestions
    • 143. Since it is comparably difficult to make non-performing assets back to performing assets. So, it is advisable to take corrective measures in order to protect those assets falling under the non-performing category.
    • 144. It was suggested that there should not be flat repayments schedule for instalments. It is seen that in number of projects appraised, the default in the initial period arises because the combined burden of interest and instalments in the initial period is higher. Repayments schedule for the loan is generally of flat instalments over the years, and interest on outstanding amount goes on decreasing. As a result burden initially is higher but then it decreases to a significant level. But, if we reverse it i.e. make such an arrangement that the burden on the borrower in the initial period is less and then increase or make repayment of equal amount over the years, there is high probability that it will lead to decrease in the default in the initial period.
    • 145. Proper training is important to the staff of the financial institute at the appropriate level with ongoing process to teach them the technique of dealing with cases of NPAs.
    • 146. To prevent any financial institute from NPA, it is essential to focus on project appraisal. So same is the case with HSIIDC, it should check all the aspects of project, its viability and chances of failure, so that it can prevent itself from NPAs.
    • 147. Sometimes HSIIDC neglect the negative points of a project as they see profits out of it in the near future, so company should avoid doing this.
    • 148. Most of the time cash flows are over-estimated. It was observed that actual cash flows differ from projected inflows by large amounts. So, careful evaluation of those cash flows should be done at the time of appraisal.
    • 149. Bibliography
    • 150. Meeker Larry, (2002): ‘Predicting Corporate Sickness in India’, A note on non-performing loans as an indicator of asset quality’
    • 151. Sathye Milind, (2003): ‘Efficiency of banks in a developing economy: The case of India’, Paper presented at the Conference on Money, Risk and Investment held at Nottingham Trent University, November 2003.
    • 152. Peng-yan, LI, (2007): ‘A risk evaluation of non-performing assets securitization on the basis of analytic hierarchy process’, Oxford University Press, New Delhi.
    • 153. Yong Peng, (2004): ‘an Analysis on the Return and Risk Management during Securitization of Non-Performing Assets-the Effect of Securitization on Originator Oxford University Press, New Delhi.
    • 154. Thomas Shawn, (1999): Bank loan loss provisions’ –An Economics Approach’, AITBS
    • 155. Publishers and Distributors, New Delhi.
    • 156. Wiley John, (2005): ‘Banking reform in India’ RBI Bulletin, March
    • 157. Dermine jean, (2005): ‘Provisioning practices’ economic & Political Weekly,Vol.XLII
    • 158. Rajaraman, I & Vashistha, G (2002): ‘Non-Performing Loans of Indian Public Sector Banks – Some Panel Results’, Economic & Political Weekly
    • 159. Bouvatier Vincent, (2002): ‘Provisioning Rules and Bank Lending: A Theoretical Model’ Studies in Banking & Finance
    • 160. Das rituparna (2003): ‘Managing the Risk of Non Performing Assets in the Small Scale Industries in India’
    • 161. http://www.rbi.org.in
    • 162. http://hsiidc.org/abouthsidc.htm
    • 163. http://www.sidbi.com/