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  1. 1. A PROJECT REPORT ON COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKSSUBMITTED IN PARTIAL FULFILLMENT OF REQUIRMENT OF PG PROGRAME Institute of business management and research Ahmadabad SUBMITTED BY: JIGAR J. SONI ( 5 ) Session: 2007-2009[Comparative analysis on NPA of Private & Public sector Banks] Page 1
  2. 2. A PROJECT REPORT ON COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKSSUBMITTED IN PARTIAL FULFILLMENT OF REQUIRMENT OF PG PROGRAME Institute of business management and research Ahmadabad SUBMITTED BY: JIGAR J. SONI ( 5 ) Session: 2007-2009[Comparative analysis on NPA of Private & Public sector Banks] Page 2
  3. 3. ANNEXURE –A (COVER PAGE) IBMR- INSTITUTE OF BUSINESS MANAGEMNT & RESEARCH Code:-2911Project title: COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKSBy:Jigar J. SoniNirav N. GusaiA project report submitted in partial fulfillment of the requirement for thedegree of MASTER OF BUSINESS ADMINISTRATION of SIKKIM MANIPALUNIVERSITY, INDIA.Sikkim –Manipal university of Health, Medical and technological SciencesDistance education wingSyndicate houseManipal-576 104[Comparative analysis on NPA of Private & Public sector Banks] Page 3
  4. 4. ANNEXURE B (STUDENT DECLARATION)We here by declare that the project report entitled COMPARATIVE ANALYSISON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKSsubmitted in partial fulfillment of the requirements for the degree of masters ofbusiness Administration to Sikkim-Manipal University, India, are our originalwork and not submitted for the award of any other degree, diploma, fellowship,or any other similar title or prizes.Reg.No: Name520781709 JIGAR J. SONIDate:Place:[Comparative analysis on NPA of Private & Public sector Banks] Page 4
  5. 5. ANNEXURE –C (EXAMINER’S CERTIFICATE)The project report by Jigar Soni & Nirav Gusai on COMPARATIVEANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND PUBLICSECTOR BANKS is approved and is acceptable in quality and form.Internal examiner External examinerName:- Name:-Qualification: - Qualification:-Designation: - Designation:-[Comparative analysis on NPA of Private & Public sector Banks] Page 5
  6. 6. ANNUXERE – D (UNIVERSITY STUDY CENTRE CERTIFICATE)This is to certify that the project report entitled COMPARATIVE ANALYSIS ONNON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTORS BANKSSubmitted in partial fulfillment of the requirement for the degree of MASTER OFBUSINESS ADMINISTRATION of SIKKIM MANIPAL UNIVERSITY of Health, Medicaland Technological science. Jigar Soni and Nirav Gusai has worked under my supervision and that nopart of this report has been submitted for the award of any other degree,Diploma , fellowship or other similar titles or prizes and that the work has beenpublished in any journal or Magazine.Name Reg. noJigar Soni 520781709 Certified (Guide’s Name and Qualification)[Comparative analysis on NPA of Private & Public sector Banks] Page 6
  7. 7. ACKNOWLEDGEMENTWith a deep sense of gratitude I express we thanks to all those who havebeen instrumental in the development of the project report.I am also grateful to Institute of Business Management And Research,Ahmedabad who gave me a valuable opportunity of involving me in reallive business project. I am thankful to all the professors whose positiveattitude, guidance and faith in my ability spurred me to perform well.I am also indebted to all lecturers, friends and associates for their valuableadvice, stimulated suggestions and overwhelming support without whichthe project would not have been a success.[Comparative analysis on NPA of Private & Public sector Banks] Page 7
  8. 8. INTRODUCTION The accumulation of huge non-performing assets in banks hasassumed great importance. The depth of the problem of bad debts wasfirst realized only in early 1990s. The magnitude of NPAs in banks andfinancial institutions is over Rs.1,50,000 crores. While gross NPA reflects the quality of the loans made bybanks, net NPA shows the actual burden of banks. Now it is increasinglyevident that the major defaulters are the big borrowers coming from thenon-priority sector. The banks and financial institutions have to take theinitiative to reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in the debate not onlybecause they dominate the banking industries, but also since they havemuch larger NPAs compared with the private sector banks. This raises aconcern in the industry and academia because it is generally felt thatNPAs reduce the profitability of a banks, weaken its financial health anderode its solvency. For the recovery of NPAs a broad framework has evolvedfor the management of NPAs under which several options are provided fordebt recovery and restructuring. Banks and FIs have the freedom todesign and implement their own policies for recovery and write-offincorporating compromise and negotiated settlements.[Comparative analysis on NPA of Private & Public sector Banks] Page 8
  9. 9. RESEARCH METHODOLOGYType of Research The research methodology adopted for carrying out the study were  In this project Descriptive research methodologies were use.  At the first stage theoretical study is attempted.  At the second stage Historical study is attempted.  At the Third stage Comparative study of NPA is undertaken.Scope of the Study  Concept of Non Performing Asset  Guidelines  Impact of NPAs  Reasons for NPAs  Preventive Measures  Tools to manage NPAsSampling planTo prepare this Project we took five banks from public sector as well asfive banks from private sector.OBJECTIVES OF THE STUDYThe basic idea behind undertaking the Grand Project on NPA wasto:  To evaluate NPAs (Gross and Net) in different banks.  To study the past trends of NPA[Comparative analysis on NPA of Private & Public sector Banks] Page 9
  10. 10.  To calculate the weighted of NPA in risk management in Banking  To analyze financial performance of banks at different level of NPA  To evaluate profitability positions of banks  To evaluate NPA level in different economic situation.  To Know the Concept of Non Performing Asset  To Know the Impact of NPAs  To Know the Reasons for NPAs  To learn Preventive MeasuresSource of data collection The data collected for the study was secondary data in Nature.[Comparative analysis on NPA of Private & Public sector Banks] Page 10
  11. 11. ((( CONTENTS ))) CHAPTER SUBJECT COVERED PAGE NO. NO. 1 Introduction to NPAs 2 Research Methodology  Scope of Research  Type of Research  Sources of Data Collection  Objective of Study  Data Collection 3 Introduction to Topic  Definition  History of Indian Banking  Non Performing Assets  Factor for rise in NPAs  Problem due to NPAs  Types of NPAs  Income Recognition  Reporting of NPAs 4 Provisioning Norms  General  Floating provisions  Leased Assets  Guideline under special circumstances 5 Impact, Reasons and Symptoms of NPAs  Internal & External Factor  Early Symptoms 6 Preventive Measurement  Early Recognition of Problem  Identifying Borrowers with genuine Intent[Comparative analysis on NPA of Private & Public sector Banks] Page 11
  12. 12.  Timeliness  Focus on Cash flow  Management Effectiveness  Multiple Financing 7 Tools for Recovery  Willful default  Inability to Pay  Special Cases  Role of ARCIL 8 Analysis  Deposit-Investment-Advances  Gross NPAs and Net NPAs  Priority and Non-Priority Sector 9 Finding, Suggestions and Conclusions 10 Bibliography[Comparative analysis on NPA of Private & Public sector Banks] Page 12
  13. 13. Introduction to the topicThe three letters “NPA” Strike terror in banking sector and business circletoday. NPA is short form of “Non Performing Asset”. The dreaded NPArule says simply this: when interest or other due to a bank remains unpaidfor more than 90 days, the entire bank loan automatically turns a nonperforming asset. The recovery of loan has always been problem forbanks and financial institution. To come out of these first we need to thinkis it possible to avoid NPA, no can not be then left is to look after the factorresponsible for it and managing those factors.Definitions:An asset, including a leased asset, becomes non-performing when itceases to generate income for the bank.A ‘non-performing asset’ (NPA) was defined as a credit facility in respectof which the interest and/ or instalment of principal has remained ‘pastdue’ for a specified period of time.With a view to moving towards international best practices and to ensuregreater transparency, it has been decided to adopt the ‘90 days’overdue’ norm for identification of NPAs, from the year ending March 31,2004. Accordingly, with effect from March 31, 2004, a non-performingasset (NPA) shall be a loan or an advance where;  Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,[Comparative analysis on NPA of Private & Public sector Banks] Page 13
  14. 14.  The account remains ‘out of order’ for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),  The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,  Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and  Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. As a facilitating measure for smooth transition to 90 days norm,banks have been advised to move over to charging of interest at monthlyrests, by April 1, 2002. However, the date of classification of an advanceas NPA should not be changed on account of charging of interest atmonthly rests. Banks should, therefore, continue to classify an account asNPA only if the interest charged during any quarter is not serviced fullywithin 180 days from the end of the quarter with effect from April 1, 2002and 90 days from the end of the quarter with effect from March 31, 2004.[Comparative analysis on NPA of Private & Public sector Banks] Page 14
  15. 15. HISTORY OF INDIAN BANKINGA bank is a financial institution that provides banking and other financialservices. By the term bank is generally understood an institution thatholds a Banking Licenses. Banking licenses are granted by financialsupervision authorities and provide rights to conduct the most fundamentalbanking services such as accepting deposits and making loans. There arealso financial institutions that provide certain banking services withoutmeeting the legal definition of a bank, a so-called Non-bank. Banks are asubset of the financial services industry.The word bank is derived from the Italian banca, which is derived fromGerman and means bench. The terms bankrupt and "broke" are similarlyderived from banca rotta, which refers to an out of business bank, havingits bench physically broken. Moneylenders in Northern Italy originally didbusiness in open areas, or big open rooms, with each lender working fromhis own bench or table.Typically, a bank generates profits from transaction fees on financialservices or the interest spread on resources it holds in trust for clientswhile paying them interest on the asset. Development of banking industryin India followed below stated steps.  Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest.[Comparative analysis on NPA of Private & Public sector Banks] Page 15
  16. 16.  Banking in India has an early origin where the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, was the turn of the agency houses to carry on the banking business. The General Bank of India was first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank Hindustan and the Bengal Bank.  In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established in 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken by the newly constituted State Bank of India.  The Reserve Bank of India which is the Central Bank was created in 1935 by passing Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for licensing, supervision and control of banks. Considering the proliferation of weak banks, RBI compulsorily merged many of them with stronger banks in 1969.  The three decades after nationalization saw a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system, during the late eighties the Government of India felt that these had to be[Comparative analysis on NPA of Private & Public sector Banks] Page 16
  17. 17. addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. Accordingly, a high- level committee was set up on 14 August 1991 to examine all aspects relating to the structure, organization, functions and procedures of the financial system. Based on the recommendations of the Committee (Chairman: Shri M. Narasimham), a comprehensive reform of the banking system was introduced in 1992-93. The objective of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health. One of the important measures related to income recognition, asset classification and provisioning by banks, on the basis of objective criteria was laid down by the Reserve Bank. The introduction of capital adequacy norms in line with international standards has been another important measure of the reforms process. 1. Comprises balance of expired loans, compensation and other bonds such as National Rural Development Bonds and Capital Investment Bonds. Annuity certificates are excluded. 2. These represent mainly non- negotiable non- interest bearing securities issued to International Financial Institutions like International Monetary Fund, International Bank for Reconstruction and Development and Asian Development Bank. 3. At book value. 4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits of Non- Government  In the post-nationalization era, no new private sector banks were allowed to be set up. However, in 1993, in recognition of the need to introduce greater competition which could lead to higher productivity and efficiency of the banking system, new private sector banks were allowed to be set up in the Indian banking[Comparative analysis on NPA of Private & Public sector Banks] Page 17
  18. 18. system. These new banks had to satisfy among others, the following minimum requirements: (i) It should be registered as a public limited company; (ii) The minimum paid-up capital should be Rs 100 crore; (iii) The shares should be listed on the stock exchange; (iv) The headquarters of the bank should be preferably located in a centre which does not have the headquarters of any other bank; and (v) The bank will be subject to prudential norms in respect of banking operations, accounting and other policies as laid down by the RBI. It will have to achieve capital adequacy of eight per cent from the very beginning.  A high level Committee, under the Chairmanship of Shri M. Narasimham, was constituted by the Government of India in December 1997 to review the record of implementation of financial system reforms recommended by the CFS in 1991 and chart the reforms necessary in the years ahead to make the banking system stronger and better equipped to compete effectively in international economic environment. The Committee has submitted its report to the Government in April 1998. Some of the recommendations of the Committee, on prudential accounting norms, particularly in the areas of Capital Adequacy Ratio, Classification of Government guaranteed advances, provisioning requirements on standard advances and more disclosures in the Balance Sheets of banks have been accepted and implemented. The other recommendations are under consideration.  The banking industry in India is in a midst of transformation, thanks to the economic liberalization of the country, which has changed[Comparative analysis on NPA of Private & Public sector Banks] Page 18
  19. 19. business environment in the country. During the pre-liberalization period, the industry was merely focusing on deposit mobilization and branch expansion. But with liberalization, it found many of its advances under the non-performing assets (NPA) list. More importantly, the sector has become very competitive with the entry of many foreign and private sector banks. The face of banking is changing rapidly. There is no doubt that banking sector reforms have improved the profitability, productivity and efficiency of banks, but in the days ahead banks will have to prepare themselves to face new challenges.Indian Banking: Key Developments1969  Government acquires ownership in major banks  Almost all banking operations in manual mode  Some banks had Unit record Machines of IBM for IBR & Pay roll1970- 1980  Unprecedented expansion in geographical coverage, staff, business & transaction volumes and directed lending to agriculture, SSI & SB sector  Manual systems struggle to handle exponential rise in transaction volumes --  Outsourcing of data processing to service bureau begins  Back office systems only in Multinational (MNC) banks offices[Comparative analysis on NPA of Private & Public sector Banks] Page 19
  20. 20. 1981- 1990  Regulator (read RBI) led IT introduction in Banks  Product level automation on stand alone PCs at branches (ALPMs)  In-house EDP infrastructure with Unix boxes, batch processing in Cobol for MIS.  Mainframes in corporate office1991-1995  Expansion slows down  Banking sector reforms resulting in progressive de- regulation of banking, introduction of prudential banking norms entry of new private sector banks  Total Branch Automation (TBA) in Govt. owned and old private banks begins  New private banks are set up with CBS/TBA form the start1996-2000  New delivery channels like ATM, Phone banking and Internet banking and convenience of any branch banking and auto sweep products introduced by new private and MNC banks  Retail banking in focus, proliferation of credit cards  Communication infrastructure improves and becomes cheap. IDRBT sets up VSAT network for Banks  Govt. owned banks feel the heat and attempt to respond using intermediary technology, TBA implementation surges ahead under fiat from Central Vigilance  Commission (CVC), Y2K threat consumes last two years[Comparative analysis on NPA of Private & Public sector Banks] Page 20
  21. 21. 2000-2003  Alternate delivery channels find wide consumer acceptance  IT Bill passed lending legal validity to electronic transactions  Govt. owned banks and old private banks start implementing CBSs, but initial attempts face problems  Banks enter insurance business launch debit cards(Source: M.Y.KHAN, “INDIAN FINANCIAL SYSYEM”,3rd editionPublication by TATA McGraw hill)[Comparative analysis on NPA of Private & Public sector Banks] Page 21
  22. 22. NON PERFORMING ASSETS (NPA)WHAT IS A NPA (NON PERFORMING ASSETS) ?Action for enforcement of security interest can be initiated only if thesecured asset is classified as Nonperforming asset.Non performing asset means an asset or account of borrower ,which hasbeen classified by bank or financial institution as sub –standard , doubtfulor loss asset, in accordance with the direction or guidelines relating toassets classification issued by RBI . An amount due under any credit facility is treated as “past due” when itis not been paid within 30 days from the due date. Due to theimprovement in the payment and settlement system, recovery climate, upgradation of technology in the banking system etc, it was decided todispense with “past due “concept, with effect from March 31, 2001.Accordingly as from that date, a Non performing asset shell be anadvance wherei. Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan,ii. The account remains ‘out of order ‘ for a period of more than 180 days ,in respect of an overdraft/cash credit (OD/CC)iii. The bill remains overdue for a period of more than 180 days in case of bill purchased or discounted.iv. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,andv. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt ’90 days overdue ‘norms for identification of NPAs ,from the year ending March 31,2004,a non performing asset shell be a loan or an advance where; i. Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,[Comparative analysis on NPA of Private & Public sector Banks] Page 22
  23. 23. ii. The account remains ‘out of order ‘ for a period of more than 90 days ,in respect of an overdraft/cash credit (OD/CC) iii. The bill remains overdue for a period of more than 90 days in case of bill purchased or discounted. iv. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accountsOut of order An account should be treated as out of order if the outstandingbalance remains continuously in excess of sanctioned limit /drawingpower. in case where the out standing balance in the principal operatingaccount is less than the sanctioned amount /drawing power, but there areno credits continuously for six months as on the date of balance sheet orcredit are not enough to cover the interest debited during the sameperiod ,these account should be treated as ‘out of order’.Overdue Any amount due to the bank under any credit facility is ‘overdue’ if itis not paid on due date fixed by the bank.FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of therising NPAs. But the problem of NPAs is more in public sector bankswhen compared to private sector banks and foreign banks. The NPAs inPSB are growing due to external as well as internal factors.  EXTERNAL FACTORS :- ----------------------------------[Comparative analysis on NPA of Private & Public sector Banks] Page 23
  24. 24.  Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity.  Willful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.  Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans.  Industrial sickness Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the[Comparative analysis on NPA of Private & Public sector Banks] Page 24
  25. 25. banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.  Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it.  Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.  INTERNAL FACTORS :- ---------------------------------  Defective Lending process[Comparative analysis on NPA of Private & Public sector Banks] Page 25
  26. 26. There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of profitability i. Principles of safety :- By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers: a. Capacity to pay b. Willingness to pay Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character.[Comparative analysis on NPA of Private & Public sector Banks] Page 26
  27. 27.  Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis can not be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized.  Improper SWOT analysis The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. • Banks should consider the borrowers own capital investment. • it should collect credit information of the borrowers from_ a. From bankers. b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies.[Comparative analysis on NPA of Private & Public sector Banks] Page 27
  28. 28. • Analyze the balance sheet. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. • Purpose of the loan When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing.  Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs.  Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the_[Comparative analysis on NPA of Private & Public sector Banks] Page 28
  29. 29. 1. Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).  Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits.  Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle.[Comparative analysis on NPA of Private & Public sector Banks] Page 29
  30. 30. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.PROBLEMS DUE TO NPA 1. Owners do not receive a market return on there capital .in the worst case, if the banks fails, owners loose their assets. In modern times this may affect a broad pool of shareholders. 2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors loose their assets or uninsured balance. 3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and higher lending rates repress saving and financial market, which hamper economic growth. 4. Non performing loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in misallocation of capital, and by extension, labour and natural resources.Non performing asset may spill over the banking system and contract themoney stock, which may lead to economic contraction. This spill overeffect can channelize through liquidity or bank insolvency:a) When many borrowers fail to pay interest, banks may experienceliquidity shortage. This can jam payment across the country,b) Illiquidity constraints bank in paying depositors.c) Undercapitalized banks exceeds the banks capital base.The three letters Strike terror in banking sector and business circle today.NPA is short form of “Non Performing Asset”. The dreaded NPA rule says[Comparative analysis on NPA of Private & Public sector Banks] Page 30
  31. 31. simply this: when interest or other due to a bank remains unpaid for morethan 90 days, the entire bank loan automatically turns a non performingasset. The recovery of loan has always been problem for banks andfinancial institution. To come out of these first we need to think is itpossible to avoid NPA, no can not be then left is to look after the factorresponsible for it and managing those factors.  Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and  Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.As a facilitating measure for smooth transition to 90 days norm, bankshave been advised to move over to charging of interest at monthly rests,by April 1, 2002. However, the date of classification of an advance as NPAshould not be changed on account of charging of interest at monthly rests.Banks should, therefore, continue to classify an account as NPA only if theinterest charged during any quarter is not serviced fully within 180 daysfrom the end of the quarter with effect from April 1, 2002 and 90 days fromthe end of the quarter with effect from March 31, 2004.Out of Order status: An account should be treated as out of order if theoutstanding balance remains continuously in excess of the sanctionedlimit/drawing power. In cases where the outstanding balance in theprincipal operating account is less than the sanctioned limit/drawing[Comparative analysis on NPA of Private & Public sector Banks] Page 31
  32. 32. power, but there are no credits continuously for six months as on the dateof Balance Sheet or credits are not enough to cover the interest debitedduring the same period, these accounts should be treated as out oforder.‘Overdue’: Any amount due to the bank under any credit facility is‘overdue’ if it is not paid on the due date fixed by the bank. Types of NPAA] Gross NPAB] Net NPAA] Gross NPA: Gross NPAs are the sum total of all loan assets that are classified asNPAs as per RBI guidelines as on Balance Sheet date. Gross NPAreflects the quality of the loans made by banks. It consists of all thenon standard assets like as sub-standard, doubtful, and loss assets.It can be calculated with the help of following ratio:[Comparative analysis on NPA of Private & Public sector Banks] Page 32
  33. 33. Gross NPAs Ratio  Gross NPAs Gross AdvancesB] Net NPA:Net NPAs are those type of NPAs in which the bank has deducted theprovision regarding NPAs. Net NPA shows the actual burden of banks.Since in India, bank balance sheets contain a huge amount of NPAs andthe process of recovery and write off of loans is very time consuming, theprovisions the banks have to make against the NPAs according to thecentral bank guidelines, are quite significant. That is why the differencebetween gross and net NPA is quite high.It can be calculated by following_Net NPAs  Gross NPAs – Provisions Gross Advances - Provisions INCOME RECOGNITIONIncome recognition – Policy  The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA.[Comparative analysis on NPA of Private & Public sector Banks] Page 33
  34. 34.  However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.  Fees and commissions earned by the banks as a result of re- negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.  If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.Reversal of income:  If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.  In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.Leased Assets[Comparative analysis on NPA of Private & Public sector Banks] Page 34
  35. 35.  The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became non- performing, and remaining unrealised, should be reversed or provided for in the current accounting period.  The term net lease rentals would mean the amount of finance charge taken to the credit of Profit & Loss Account and would be worked out as gross lease rentals adjusted by amount of statutory depreciation and lease equalisation account.  As per the Guidance Note on Accounting for Leases issued by the Council of the Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account, as the case may be. Further, Lease Equalisation Account should be transferred every year to the Profit & Loss Account and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the head Gross Income.Appropriation of recovery in NPAs  Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.  In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an[Comparative analysis on NPA of Private & Public sector Banks] Page 35
  36. 36. accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.Interest Application:There is no objection to the banks using their own discretion in debitinginterest to an NPA account taking the same to Interest Suspense Accountor maintaining only a record of such interest in proforma accounts.Reporting of NPAs  Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks’ global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure I.  While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report.  Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.[Comparative analysis on NPA of Private & Public sector Banks] Page 36
  37. 37. REPORTING FORMAT FOR NPA – GROSS AND NET NPAName of the Bank:Position as on……… PARTICULARS 1) Gross Advanced * 2) Gross NPA * 3) Gross NPA as %age of Gross Advanced 4) Total deduction( a+b+c+d )( a ) Balance in interest suspense a/c **( b ) DICGC/ECGC claims received and held pending adjustment( c ) part payment received and kept in suspense a/c( d ) Total provision held *** 5) Net advanced ( 1-4 ) 6) Net NPA ( 2-4 ) 7) Net NPA as a %age of Net Advance*excluding Technical write-off of Rs.________crore.**Banks which do not maintain an interest suspense a/c to park theaccrued interest on NPAs may furnish the amount of interest receivable onNPAs.***Excluding amount of Technical write-off (Rs.______crore) and provisionon standard assets. (Rs._____crore).[Comparative analysis on NPA of Private & Public sector Banks] Page 37
  38. 38. Asset Classification -------------------------------Categories of NPAsStandard Assets:Standard assets are the ones in which the bank is receiving interest aswell as the principal amount of the loan regularly from the customer. Hereit is also very important that in this case the arrears of interest and theprincipal amount of loan does not exceed 90 days at the end of financialyear. If asset fails to be in category of standard asset that is amount duemore than 90 days then it is NPA and NPAs are further need to classify insub categories.[Comparative analysis on NPA of Private & Public sector Banks] Page 38
  39. 39. Banks are required to classify non-performing assetsfurther into the following three categories based on the period for whichthe asset has remained non-performing and the realisability of the dues: ( 1 ) Sub-standard Assets ( 2 ) Doubtful Assets ( 3 ) Loss Assets( 1 ) Sub-standard Assets:-- With effect from 31 March 2005, a sub standard asset would be one,which has remained NPA for a period less than or equal to 12 month. Thefollowing features are exhibited by sub standard assets: the current networth of the borrowers / guarantor or the current market value of thesecurity charged is not enough to ensure recovery of the dues to thebanks in full; and the asset has well-defined credit weaknesses thatjeopardise the liquidation of the debt and are characterised by the distinctpossibility that the banks will sustain some loss, if deficiencies are notcorrected.( 2 ) Doubtful Assets:--A loan classified as doubtful has all the weaknesses inherent in assetsthat were classified as sub-standard, with the added characteristic that theweaknesses make collection or liquidation in full, – on the basis ofcurrently known facts, conditions and values – highly questionable andimprobable.With effect from March 31, 2005, an asset would be classified as doubtfulif it remained in the sub-standard category for 12 months.[Comparative analysis on NPA of Private & Public sector Banks] Page 39
  40. 40. ( 3 ) Loss Assets:--A loss asset is one which considered uncollectible and of such little valuethat its continuance as a bankable asset is not warranted- although theremay be some salvage or recovery value. Also, these assets would havebeen identified as ‘loss assets’ by the bank or internal or external auditorsor the RBI inspection but the amount would not have been written-offwholly. Provisioning Norms ------------------------------------------General  In order to narrow down the divergences and ensure adequate provisioning by banks, it was suggested that a banks statutory auditors, if they so desire, could have a dialogue with RBIs Regional Office/ inspectors who carried out the banks inspection during the previous year with regard to the accounts contributing to the difference.  Pursuant to this, regional offices were advised to forward a list of individual advances, where the variance in the provisioning[Comparative analysis on NPA of Private & Public sector Banks] Page 40
  41. 41. requirements between the RBI and the bank is above certain cut off levels so that the bank and the statutory auditors take into account the assessment of the RBI while making provisions for loan loss, etc.  The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.  In conformity with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against sub-standard assets, doubtful assets and loss assets as below:Loss assets: The entire asset should be written off. If the assets are permitted toremain in the books for any reason, 100 percent of the outstanding shouldbe provided for.Doubtful assets:[Comparative analysis on NPA of Private & Public sector Banks] Page 41
  42. 42.  100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.  In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful: Period for which the advance has Provision been considered as doubtful requirement (%) Up to one year 20 One to three years 30 More than three years: 60% with effect from March 31,2005. (1) Outstanding stock of NPAs as on March 31, 2004. 75% effect from March 31, 2006. (2) Advances classified as ‘doubtful’ more than three years on or after 100% with effect from April 1, 2004. March 31, 2007.[Comparative analysis on NPA of Private & Public sector Banks] Page 42
  43. 43.  Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31, 2003 has to be made in phases as under:  As on 31.03.2003, 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful category.  As on 31.03.2002, balance of the provisions not made during the previous year, in addition to the provisions needed, as on 31.03.2002.  Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.Note: Valuation of Security for provisioning purposesWith a view to bringing down divergence arising out of difference inassessment of the value of security, in cases of NPAs with balance of Rs.5 crore and above stock audit at annual intervals by external agenciesappointed as per the guidelines approved by the Board would bemandatory in order to enhance the reliability on stock valuation. Valuersappointed as per the guidelines approved by the Board of Directors shouldget collaterals such as immovable properties charged in favour of the bankvalued once in three years.[Comparative analysis on NPA of Private & Public sector Banks] Page 43
  44. 44. Sub-standard assets: A general provision of 10 percent on total outstanding should be madewithout making any allowance for DICGC/ECGC guarantee cover andsecurities available.Standard assets:  From the year ending 31.03.2000, the banks should make a general provision of a minimum of 0.40 percent on standard assets on global loan portfolio basis.  The provisions on standard assets should not be reckoned for arriving at net NPAs.  The provisions towards Standard Assets need not be netted from gross advances but shown separately as Contingent Provisions against Standard Assets under Other Liabilities and Provisions - Others in Schedule 5 of the balance sheet.Floating provisions: Some of the banks make a floating provision overand above the specific provisions made in respect of accounts identifiedas NPAs. The floating provisions, wherever available, could be set-offagainst provisions required to be made as per above stated provisioningguidelines. Considering that higher loan loss provisioning adds to the[Comparative analysis on NPA of Private & Public sector Banks] Page 44
  45. 45. overall financial strength of the banks and the stability of the financialsector, banks are urged to voluntarily set apart provisions much above theminimum prudential levels as a desirable practice.Provisions on Leased Assets:Leases are peculiar transactions where the assets are not recorded in thebooks of the user of such assets as Assets, whereas they are recorded inthe books of the owner even though the physical existence of the asset iswith the user (lessee). __(AS19 ICAI)  Sub-standard assets : - 10 percent of the net book value. As per the Guidance Note on Accounting for Leases issued by theICAI, Gross book value of a fixed asset is its historical cost or otheramount substituted for historical cost in the books of account or financialstatements. Statutory depreciation should be shown separately in theProfit & Loss Account. Accumulated depreciation should be deducted fromthe Gross Book Value of the leased asset in the balance sheet of thelesser to arrive at the net book value. Also, balance standing in Lease Adjustment Account should beadjusted in the net book value of the leased assets. The amount of[Comparative analysis on NPA of Private & Public sector Banks] Page 45
  46. 46. adjustment in respect of each class of fixed assets may be shown either inthe main balance sheet or in the Fixed Assets Schedule as a separatecolumn in the section related to leased assets.  Doubtful assets :-100 percent of the extent to which the finance is not secured by therealisable value of the leased asset. Realisable value to be estimated on arealistic basis. In addition to the above provision, the following provisionon the net book value of the secured portion should be made,depending upon the period for which asset has been doubtful: Period %age of provision Up to one year 20 One to three years 30 More than three years 50  Loss assets :-The entire asset should be written-off. If for any reason, an asset isallowed to remain in books, 100 percent of the sum of the net investmentin the lease and the unrealised portion of finance income net of financecharge component should be provided for. (net book value) Guidelines for Provisions under Special Circumstances[Comparative analysis on NPA of Private & Public sector Banks] Page 46
  47. 47. Government guaranteed advances With effect from 31 March 2000, in respect of advances sanctionedagainst State Government guarantee, if the guarantee is invoked andremains in default for more than two quarters (180 days at present), thebanks should make normal provisions as prescribed in paragraph 4.1.2above. As regards advances guaranteed by State Governments, in respect ofwhich guarantee stood invoked as on 31.03.2000, necessary provisionwas allowed to be made, in a phased manner, during the financial yearsending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year.Advances granted under rehabilitation packagesapproved by BIFR/term lending institutions: In respect of advances under rehabilitation package approved byBIFR/term lending institutions, the provision should continue to be made inrespect of dues to the bank on the existing credit facilities as per theirclassification as sub-standard or doubtful asset. As regards the additional facilities sanctioned as per package finalisedby BIFR and/or term lending institutions, provision on additional facilitiessanctioned need not be made for a period of one year from the date ofdisbursement.[Comparative analysis on NPA of Private & Public sector Banks] Page 47
  48. 48.  In respect of additional credit facilities granted to SSI units which areidentified as sick [as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002] and where rehabilitationpackages/nursing programmes have been drawn by the banks themselvesor under consortium arrangements, no provision need be made for aperiod of one year.Advances against term deposits, NSCs eligible forsurrender, IVPs, KVPs, and life policies areexempted from provisioning requirements.However, advances against gold ornaments,government securities and all other kinds ofsecurities are not exempted from provisioningrequirements.Treatment of interest suspense account:Amounts held in Interest Suspense Account should not be reckoned aspart of provisions. Amounts lying in the Interest Suspense Account shouldbe deducted from the relative advances and thereafter, provisioning as perthe norms, should be made on the balances after such deduction.Advances covered by ECGC/DICGC guarantee[Comparative analysis on NPA of Private & Public sector Banks] Page 48
  49. 49. In the case of advances guaranteed by DICGC/ECGC, provision shouldbe made only for the balance in excess of the amount guaranteed bythese Corporations. Further, while arriving at the provision required to bemade for doubtful assets, realisable value of the securities should first bededucted from the outstanding balance in respect of the amountguaranteed by these Corporations and then provision made as illustratedhereunder:ExampleOutstanding Balance Rs. 4 lakhsDICGC Cover 50 percentPeriod for which the advance has remained More than 3 yearsdoubtful remained doubtfulValue of security held Rs. 1.50 lakhs(excludes worth of Rs.)Provision required to be madeOutstanding balance Rs. 4.00 lakhsLess: Value of security held Rs. 1.50 lakhsUnrealised balance Rs. 2.50 lakhsLess: DICGC Cover Rs. 1.25 lakhs(50% of unrealisable balance)[Comparative analysis on NPA of Private & Public sector Banks] Page 49
  50. 50. Net unsecured balance Rs. 1.25 lakhs Provision for unsecured portion of Rs. 1.25 lakhs (@ 100 percent of advance unsecured portion) Provision for secured portion of Rs. 0.75 lakhs (@ 50 percent of advance secured portion) Total provision required to be made Rs. 2.00 lakhs Advance covered by CGTSI guarantee In case the advance covered by CGTSI guarantee becomes non- performing, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for non- performing advances. Two illustrative examples are given below: Example IAsset classification status: Doubtful – More than 3 years;CGTSI Cover 75% of the amount outstanding or 75% of the unsecured amount or Rs.18.75 lakh, whichever is the least [Comparative analysis on NPA of Private & Public sector Banks] Page 50
  51. 51. Realisable value of Security Rs.1.50 lakhBalance outstanding Rs.10.00 lakhLess Realisable value of Rs. 1.50 lakhsecurityUnsecured amount Rs. 8.50 lakhLess CGTSI cover (75%) Rs. 6.38 lakhNet unsecured and Rs. 2.12 lakhuncovered portion: Provision RequiredSecured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)Unsecured & uncovered Rs.2.12 lakh Rs. 2.12 lakh ( 100%)portionTotal provision required Rs. 2.87 lakh Example IIAsset classification status Doubtful – More than 3 years; [Comparative analysis on NPA of Private & Public sector Banks] Page 51
  52. 52. CGTSI Cover 75% of the amount outstanding or75% of the unsecured amount or Rs.18.75 lakh, whichever is the leastRealisable value of Security Rs.10.00 lakhBalance outstanding Rs.40.00 lakhLess Realisable value of Rs. 10.00 lakhsecurityUnsecured amount Rs. 30.00 lakhLess CGTSI cover (75%) Rs. 18.75 lakhNet unsecured and Rs. 11.25 lakhuncovered portion: Provision RequiredSecured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%)Unsecured & uncovered Rs.11.25 lakh Rs.11.25 lakh (100%)portionTotal provision required Rs. 16.25 lakh Take-out finance [Comparative analysis on NPA of Private & Public sector Banks] Page 52
  53. 53. The lending institution should make provisions against a take-out financeturning into NPA pending its take-over by the taking-over institution. Asand when the asset is taken-over by the taking-over institution, thecorresponding provisions could be reversed.Reserve for Exchange Rate Fluctuations Account(RERFA)When exchange rate movements of Indian rupee turn adverse, theoutstanding amount of foreign currency denominated a loan (where actualdisbursement was made in Indian Rupee) which becomes overdue goesup correspondingly, with its attendant implications of provisioningrequirements. Such assets should not normally be revalued. In case suchassets need to be revalued as per requirement of accounting practices orfor any other requirement, the following procedure may be adopted: The loss on revaluation of assets has to be booked in the banks Profit& Loss Account.Besides the provisioning requirement as per Asset Classification, banksshould treat the full amount of the Revaluation Gain relating to thecorresponding assets, if any, on account of Foreign Exchange Fluctuationas provision against the particular assets.[Comparative analysis on NPA of Private & Public sector Banks] Page 53
  54. 54. Impact of NPA  Profitability:- NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesn’t affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank.  Liquidity:-Money is getting blocked, decreased profit lead to lack of enough cash athand which lead to borrowing money for shotrtes period of time whichlead to additional cost to the company. Difficulty in operating the functionsof bank is another cause of NPA due to lack of money. Routine paymentsand dues.  Involvement of management:-Time and efforts of management is another indirect cost which bank hasto bear due to NPA. Time and efforts of management in handling andmanaging NPA would have diverted to some fruitful activities, which would[Comparative analysis on NPA of Private & Public sector Banks] Page 54
  55. 55. have given good returns. Now day’s banks have special employees todeal and handle NPAs, which is additional cost to the bank.  Credit loss:-Bank is facing problem of NPA then it adversely affect the value of bank interms of market credit. It will lose it’s goodwill and brand image and creditwhich have negative impact to the people who are putting their money inthe banks .[Comparative analysis on NPA of Private & Public sector Banks] Page 55
  56. 56. REASONS FOR NPA:Reasons can be divided in to two broad categories:-A] Internal FactorB] External Factor[ A ] Internal Factors:-Internal Factors are those, which are internal to the bank and arecontrollable by banks. • Poor lending decision: • Non-Compliance to lending norms: • Lack of post credit supervision: • Failure to appreciate good payers: • Excessive overdraft lending:[Comparative analysis on NPA of Private & Public sector Banks] Page 56
  57. 57. • Non – Transparent accounting policy:[ B ] External Factors:-External factors are those, which are external to banks they are notcontrollable by banks. • Socio political pressure: • Chang in industry environment: • Endangers macroeconomic disturbances: • Natural calamities • Industrial sickness • Diversion of funds and willful defaults • Time/ cost overrun in project implementation • Labour problems of borrowed firm • Business failure • Inefficient management[Comparative analysis on NPA of Private & Public sector Banks] Page 57
  58. 58. • Obsolete technology • Product obsolete Early symptoms by which one can recognize a performing asset turning in to Non-performing assetFour categories of early symptoms:----------------------------------------------------( 1 ) Financial:  Non-payment of the very first installment in case of term loan.  Bouncing of cheque due to insufficient balance in the accounts.  Irregularity in installment.  Irregularity of operations in the accounts.  Unpaid over due bills.  Declining Current Ratio.  Payment which does not cover the interest and principal amount of that installment.  While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.(2) Operational and Physical:  If information is received that the borrower has either initiated the process of winding up or are not doing the business.[Comparative analysis on NPA of Private & Public sector Banks] Page 58
  59. 59.  Overdue receivables.  Stock statement not submitted on time.  External non-controllable factor like natural calamities in the city where borrower conduct his business.  Frequent changes in plan.  Non payment of wages.( 3 ) Attitudinal Changes:  Use for personal comfort, stocks and shares by borrower.  Avoidance of contact with bank.  Problem between partners.( 4 ) Others:  Changes in Government policies.  Death of borrower.  Competition in the market.[Comparative analysis on NPA of Private & Public sector Banks] Page 59
  60. 60. Preventive Measurement For NPA Early Recognition of the Problem:-Invariably, by the time banks start their efforts to get involved in a revivalprocess, it’s too late to retrieve the situation- both in terms of rehabilitationof the project and recovery of bank’s dues. Identification of weakness inthe very beginning that is : When the account starts showing first signs ofweakness regardless of the fact that it may not have become NPA, isimperative. Assessment of the potential of revival may be done on thebasis of a techno-economic viability study. Restructuring should beattempted where, after an objective assessment of the promoter’sintention, banks are convinced of a turnaround within a scheduledtimeframe. In respect of totally unviable units as decided by the bank, it isbetter to facilitate winding up/ selling of the unit earlier, so as to recoverwhatever is possible through legal means before the security positionbecomes worse. Identifying Borrowers with Genuine Intent:- Identifying borrowers with genuine intent from those who are non- serious with nocommitment or stake in revival is a challenge confronting bankers. Here[Comparative analysis on NPA of Private & Public sector Banks] Page 60
  61. 61. the role of frontline officials at the branch level is paramount as they arethe ones who has intelligent inputs with regard to promoters’ sincerity, andcapability to achieve turnaround. Base don this objective assessment,banks should decide as quickly as possible whether it would be worthwhileto commit additional finance.In this regard banks may consider having “Special Investigation” of allfinancial transaction or business transaction, books of account in order toascertain real factors that contributed to sickness of the borrower. Banksmay have penal of technical experts with proven expertise and trackrecord of preparing techno-economic study of the project of the borrowers. Borrowers having genuine problems due to temporary mismatchin fund flow or sudden requirement of additional fund may be entertainedat branch level, and for this purpose a special limit to such type of casesshould be decided. This will obviate the need to route the additionalfunding through the controlling offices in deserving cases, and help avertmany accounts slipping into NPA category.Timeliness and Adequacy of response:-Longer the delay in response, grater the injury to the account and theasset. Time is a crucial element in any restructuring or rehabilitationactivity. The response decided on the basis of techno-economic study andpromoter’s commitment, has to be adequate in terms of extend ofadditional funding and relaxations etc. under the restructuring exercise.The package of assistance may be flexible and bank may look at the exitoption. Focus on Cash Flows:-[Comparative analysis on NPA of Private & Public sector Banks] Page 61
  62. 62. While financing, at the time of restructuring the banks may not be guidedby the conventional fund flow analysis only, which could yield a potentiallymisleading picture. Appraisal for fresh credit requirements may be done byanalyzing funds flow in conjunction with the Cash Flow rather than only onthe basis of Funds Flow. Management Effectiveness:-The general perception among borrower is that it is lack of finance thatleads to sickness and NPAs. But this may not be the case all the time.Management effectiveness in tackling adverse business conditions is avery important aspect that affects a borrowing unit’s fortunes. A bank maycommit additional finance to an aling unit only after basic viability of theenterprise also in the context of quality of management is examined andconfirmed. Where the default is due to deeper malady, viability study orinvestigative audit should be done – it will be useful to have consultantappointed as early as possible to examine this aspect. A proper techno-economic viability study must thus become the basis on which any futureaction can be considered. Multiple Financing:- A. 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. B. In some default cases, where the unit is still working, the bank should make sure that it captures the cash flows (there is a[Comparative analysis on NPA of Private & Public sector Banks] Page 62
  63. 63. 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 consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non- consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational. C. 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 a t a cost – by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account. D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements.[Comparative analysis on NPA of Private & Public sector Banks] Page 63
  64. 64. [Comparative analysis on NPA of Private & Public sector Banks] Page 64
  65. 65. Tools for recovery of NPAs Credit Default Inability to Pay Willful default Unviable Viable Rehabilitation Lok Adalat Debt Recovery Compromise Securitization Tribunals Act Sole Banker Asset Consortium Finance Reconstruction Corporate Debt RestructuringFresh Issue of Conversion Fresh WC Limit Rephasement of Term Loan into WCTL Repayment Period [Comparative analysis on NPA of Private & Public sector Banks] Page 65
  66. 66. Once NPA occurred, one must come out of it or it should be managed inmost efficient manner. Legal ways and means are there to over come andmanage NPAs. We will look into each one of it.  Willful Default :- A] Lok Adalat and Debt Recovery Tribunal B] Securitization Act C] Asset ReconstructionLok Adalat: Lok Adalat institutions help banks to settle disputes involvingaccount in “doubtful” and “loss” category, with outstanding balance of Rs.5 lakh for compromise settlement under Lok Adalat. Debt recoverytribunals have been empowered to organize Lok Adalat to decide oncases of NPAs of Rs. 10 lakh and above. This mechanism has proved tobe quite effective for speedy justice and recovery of small loans. Theprogress through this channel is expected to pick up in the coming years. Debt Recovery Tribunals(DRT): The recovery of debts due tobanks and financial institution passed in March 2000 has helped instrengthening the function of DRTs. Provision for placement of more thanone recovery officer, power to attach defendant’s property/assets beforejudgment, penal provision for disobedience of tribunal’s order or for breachof any terms of order and appointment of receiver with power ofrealization, management, protection and preservation of property are[Comparative analysis on NPA of Private & Public sector Banks] Page 66
  67. 67. expected to provide necessary teeth to the DRTs and speed up therecovery of NPAs in the times to come. DRTs which have been set up bythe Government to facilitate speedy recovery by banks/DFIs, have notbeen able make much impact on loan recovery due to variety of reasonslike inadequate number, lack of infrastructure, under staffing and frequentadjournment of cases. It is essential that DRT mechanism is strengthenedand vested with a proper enforcement mechanism to enforce their orders.Non observation of any order passed by the tribunal should amount tocontempt of court, the DRT should have right to initiate contemptproceedings. The DRT should empowered to sell asset of the debtorcompanies and forward the proceed to the winding – up court fordistribution among the lenders  Inability to Pay Consortium arrangements: Asset classification ofaccounts under consortium should be based on the record of recovery ofthe individual member banks and other aspects having a bearing on therecoverability of the advances. Where the remittances by the borrowerunder consortium lending arrangements are pooled with one bank and/orwhere the bank receiving remittances is not parting with the share of othermember banks, the account will be treated as not serviced in the books ofthe other member banks and therefore, be treated as NPA. The banksparticipating in the consortium should, therefore, arrange to get their shareof recovery transferred from the lead bank or get an express consent fromthe lead bank for the transfer of their share of recovery, to ensure properasset classification in their respective books.[Comparative analysis on NPA of Private & Public sector Banks] Page 67
  68. 68. Corporate debt Restructuring (CDR):BackgroundIn spite of their best efforts and intentions, sometimes corporate findthemselves in financial difficulty because of factors beyond their controland also due to certain internal reasons. For the revival of the corporateas well as for the safety of the money lent by the banks and FIs, timelysupport through restructuring in genuine cases is called for. However,delay in agreement amongst different lending institutions often comes inthe way of such endeavours. Based on the experience in other countries like the U.K., Thailand,Korea, etc. of putting in place institutional mechanism for restructuring ofcorporate debt and need for a similar mechanism in India, a CorporateDebt Restructuring System has been evolved, as under :Objective The objective of the Corporate Debt Restructuring (CDR)framework is to ensure timely and transparent mechanism for restructuringof the corporate debts of viable entities facing problems, outside thepurview of BIFR, DRT and other legal proceedings, for the benefit ofall concerned. In particular, the framework will aim at preserving viablecorporate that are affected by certain internal and external factors andminimize the losses to the creditors and other stakeholders through anorderly and coordinated restructuring programme.[Comparative analysis on NPA of Private & Public sector Banks] Page 68
  69. 69. Structure:CDR system in the country will have a three-tier structure: (A) CDR Standing Forum (B) CDR Empowered Group (C) CDR Cell(A) CDR Standing Forum : The CDR Standing Forum would be the representative generalbody of all financial institutions and banks participating in CDR system. Allfinancial institutions and banks should participate in the system in theirown interest. CDR Standing Forum will be a self-empowered body, whichwill lay down policies and guidelines, guide and monitor the progress ofcorporate debt restructuring. The Forum will also provide an official platform for both thecreditors and borrowers (by consultation) to amicably and collectivelyevolve policies and guidelines for working out debt restructuring plans inthe interests of all concerned. The CDR Standing Forum shall comprise Chairman & ManagingDirector, Industrial Development Bank of India; Managing Director,Industrial Credit & Investment Corporation of India Limited; Chairman,State Bank of India; Chairman, Indian Banks Association and ExecutiveDirector, Reserve Bank of India as well as Chairmen and ManagingDirectors of all banks and financial institutions participating as permanentmembers in the system. The Forum will elect its Chairman for a period ofone year and the principle of rotation will be followed in the subsequent[Comparative analysis on NPA of Private & Public sector Banks] Page 69
  70. 70. years. However, the Forum may decide to have a Working Chairman as awhole-time officer to guide and carry out the decisions of the CDRStanding Forum. A CDR Core Group will be carved out of the CDR Standing Forumto assist the Standing Forum in convening the meetings and takingdecisions relating to policy, on behalf of the Standing Forum. The CoreGroup will consist of Chief Executives of IDBI, ICICI, SBI, Bank of Baroda,Bank of India, Punjab National Bank, Indian Banks Association and arepresentative of Reserve Bank of India. The CDR Standing Forum shall meet at least once every sixmonths and would review and monitor the progress of corporate debtrestructuring system. The Forum would also lay down the policies andguidelines to be followed by the CDR Empowered Group and CDR Cell fordebt restructuring and would ensure their smooth functioning andadherence to the prescribed time schedules for debt restructuring. It canalso review any individual decisions of the CDR Empowered Group andCDR Cell. The CDR Standing Forum, the CDR Empowered Group and CDRCell (described in following paragraphs) shall be housed in IDBI. Allfinancial institutions and banks shall share the administrative and othercosts. The sharing pattern shall be as determined by the Standing Forum.CDR Empowered Group and CDR Cell: The individual cases of corporate debt restructuring shall bedecided by the CDR Empowered Group, consisting of ED levelrepresentatives of IDBI, ICICI Limited and SBI as standing members, inaddition to ED level representatives of financial institutions and banks who[Comparative analysis on NPA of Private & Public sector Banks] Page 70
  71. 71. have an exposure to the concerned company. In order to make the CDREmpowered Group effective and broad based and operate efficiently andsmoothly, it would have to be ensured that each financial institution andbank, as participants of the CDR system, nominates a panel of two orthree EDs, one of whom will participate in a specific meeting of theEmpowered Group dealing with individual restructuring cases. Where,however, a bank / financial institution has only one Executive Director, thepanel may consist of senior officials, duly authorized by its Board. Thelevel of representation of banks/ financial institutions on the CDREmpowered Group should be at a sufficiently senior level to ensure thatconcerned bank / FI abides by the necessary commitments includingsacrifices, made towards debt restructuring. The Empowered Group will consider the preliminary report of allcases of requests of restructuring, submitted to it by the CDR Cell. Afterthe Empowered Group decides that restructuring of the company is prima-facie feasible and the enterprise is potentially viable in terms of thepolicies and guidelines evolved by Standing Forum, the detailedrestructuring package will be worked out by the CDR Cell in conjunctionwith the Lead Institution. The CDR Empowered Group would be mandated to look into eachcase of debt restructuring, examine the viability and rehabilitationpotential of the Company and approve the restructuring package withina specified time frame of 90 days, or at best 180 days of reference tothe Empowered Group. There should be a general authorisation by the respective Boardsof the participating institutions / banks in favour of their representatives onthe CDR Empowered Group, authorising them to take decisions on behalf[Comparative analysis on NPA of Private & Public sector Banks] Page 71
  72. 72. of their organization, regarding restructuring of debts of individualcorporate. The decisions of the CDR Empowered Group shall be final andaction-reference point. If restructuring of debt is found viable and feasibleand accepted by the Empowered Group, the company would be put on therestructuring mode. If, however, restructuring is not found viable, thecreditors would then be free to take necessary steps for immediaterecovery of dues and / or liquidation or winding up of the company,collectively or individually.CDR Cell: The CDR Standing Forum and the CDR Empowered Group will beassisted by a CDR Cell in all their functions. The CDR Cell will make theinitial scrutiny of the proposals received from borrowers / lenders, bycalling for proposed rehabilitation plan and other information and put upthe matter before the CDR Empowered Group, within one month to decidewhether rehabilitation is prima facie feasible, if so, the CDR Cell willproceed to prepare detailed Rehabilitation Plan with the help of lendersand if necessary, experts to be engaged from outside. If not found primafacie feasible, the lenders may start action for recovery of their dues. To begin with, CDR Cell will be constituted in IDBI, Mumbai andadequate members of staff for the Cell will be deputed from banks andfinancial institutions. The CDR Cell may also take outside professionalhelp. The initial cost in operating the CDR mechanism including CDR Cellwill be met by IDBI initially for one year and then from contribution fromthe financial institutions and banks in the Core Group at the rate of Rs.50lakh each and contribution from other institutions and banks at the rate ofRs.5 lakh each.[Comparative analysis on NPA of Private & Public sector Banks] Page 72
  73. 73. All references for corporate debt restructuring by lenders orborrowers will be made to the CDR Cell. It shall be the responsibility of thelead institution / major stakeholder to the corporate, to work out apreliminary restructuring plan in consultation with other stakeholders andsubmit to the CDR Cell within one month. The CDR Cell will prepare therestructuring plan in terms of the general policies and guidelines approvedby the CDR Standing Forum and place for the consideration of theEmpowered Group within 30 days for decision. The Empowered Groupcan approve or suggest modifications, so, however, that a final decisionmust be taken within a total period of 90 days. However, for sufficientreasons the period can be extended maximum upto 180 days from thedate of reference to the CDR Cell.Other features: CDR will be a Non-statutory mechanism. CDR mechanism will be a voluntary system based on debtor-creditor agreement and inter-creditor agreement. The scheme will not apply to accounts involving only one financialinstitution or one bank. The CDR mechanism will cover only multiplebanking accounts / syndication / consortium accounts with outstandingexposure of Rs.20 crore and above by banks and institutions. The CDR system will be applicable only to standard and sub-standard accounts. However, as an interim measure, permission forcorporate debt restructuring will be made available by RBI on the basis ofspecific recommendation of CDR "Core-Group", if a minimum of 75 percent (by value) of the lenders constituting banks and FIs consent for CDR,[Comparative analysis on NPA of Private & Public sector Banks] Page 73
  74. 74. irrespective of differences in asset classification status in banks/ financialinstitutions. There would be no requirement of the account / companybeing sick, NPA or being in default for a specified period beforereference to the CDR Group. However, potentially viable cases of NPAswill get priority. This approach would provide the necessary flexibility andfacilitate timely intervention for debt restructuring. Prescribing anymilestone(s) may not be necessary, since the debt restructuring exerciseis being triggered by banks and financial institutions or with their consent.In no case, the requests of any corporate indulging in wilful default ormisfeasance will be considered for restructuring under CDR. Reference to Corporate Debt Restructuring System could betriggered by (i) any or more of the secured creditor who have minimum20% share in either working capital or term finance, or (ii) by theconcerned corporate, if supported by a bank or financial institution havingstake as in (i) above.Legal Basis The legal basis to the CDR mechanism shall be provided by theDebtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement.The debtors shall have to accede to the DCA, either at the time of originalloan documentation (for future cases) or at the time of reference toCorporate Debt Restructuring Cell. Similarly, all participants in the CDRmechanism through their membership of the Standing Forum shall have toenter into a legally binding agreement, with necessary enforcement andpenal clauses, to operate the System through laid-down policies andguidelines.[Comparative analysis on NPA of Private & Public sector Banks] Page 74
  75. 75. Stand-Still Clause: One of the most important elements of Debtor-Creditor Agreement would be stand still agreement binding for 90days, or 180 days by both sides. Under this clause, both the debtor andcreditor(s) shall agree to a legally binding stand-still whereby boththe parties commit themselves not to taking recourse to any otherlegal action during the stand-still period, this would be necessary forenabling the CDR System to undertake the necessary debt restructuringexercise without any outside intervention judicial or otherwise. The Inter-Creditors Agreement would be a legally bindingagreement amongst the secured creditors, with necessary enforcementand penal clauses, wherein the creditors would commit themselves toabide by the various elements of CDR system. Further , the creditors shallagree that if 75% of secured creditors by value, agree to a debtrestructuring package, the same would be binding on the remainingsecured creditors.Accounting treatment for restructured accountsThe accounting treatment of accounts restructured under CDR would begoverned by the prudential norms indicated in circular DBOD. BP. BC. 98 /21.04.048 / 2000-01 dated March 30, 2001. Restructuring of corporatedebts under CDR could take place in the following stages:  Before commencement of commercial production;  After commencement of commercial production but before the asset has been classified as sub-standard;[Comparative analysis on NPA of Private & Public sector Banks] Page 75