Non Performing Asset means an asset or account of borrower, which has been classified by a

bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by The Reserve Bank of India.
Ninety days overdue
With a view to moving towards international best practices and to ensure greater transparency, it
has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year
ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset
(NPA) shell be a loan or an advance where:
1. interest and /or installment of principal remain overdue for a period of more than 90 days
in respect of a Term Loan,
2. the account remains 'out of order' for a period of more than 90 days, inrespect of an
overdraft/ cash Credit(OD/CC),
3. the bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,
4. interest and/ or installment 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
purpose, and
5. any amount to be received remains overdue for a period of more than 90 days in respect
of other
Out of order
An account should be treated as 'out of order' if the outstanding balance remains continuously in
excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the
principal operating account is less than the sanctioned limit/ drawing power, but there are no
credits continuously for six months as on the date of balance sheet or credits are not enough to
cover the interest debited during the same period, these account should be treated as 'out of
order'.
FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs. But the problem of
NPAs is more in public sector banks when compared to private sector banks and foreign banks.
The NPAs in PSB are growing due to external as well as internal factors.
EXTERNAL FACTORS:
Ineffective recovery tribunal: The Govt. has set of numbers of recovery tribunals, which works
for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the
bank suffers the consequence of non-recover, their by reducing their profitability and liquidity.
Willful Defaults: There are borrowers who are able to payback loans but 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 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: 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, therefore 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.
Inappropriate technology: Due to inappropriate technology and management information
system, market driven decisions on real time basis cannot 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.
· 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 projectwhile financing.
Poor credit appraisal system: Poor credit appraisal is another factor for the rise in NPAs. Due
to poor credit appraisal the bank gives advances to those who are not able to repay it back. They
should use good credit appraisal to decrease the NPAs.
Managerial deficiencies: The banker should always select the borrower very carefully and
should take tangible assets as security to safe guard its interests.
When accepting securities banks should consider the:
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
The banker should follow the principle of diversification of risk based on the famous maxim “do
not keep all the eggs in one basket”; it means that the banker should not grant advances to a few
big farms only or to concentrate them in few industries or in a few cities. If a new big customer
meets misfortune or certain traders 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. Due to re loaning to the
defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.
Impact of NPAs on Banking Operations
The efficiency of a bank is not reflected only by the size of its balance sheet but also the level of
return on its assets. The NPAs do not generate interest income for banks but at the same time
banks are required to provide provisions for NPAs from their current profits. The NPAs have
deleterious impact on the return on assets in the following ways.
• The interest income of banks will fall and it is to be accounted only on receipt basis.
• Banks profitability is affected adversely because of the providing of doubtful debts and
consequent to writing it off as bad debts.
• Return on investments (ROI) is reduced.
• The capital adequacy ratio is disturbed as NPAs are entering into its calculation.
• The cost of capital will go up.
• The assets and liability mismatch will widen.
• The economic value addition (EVA) by banks gets upset because EVA is equal to the net
operating profit minus cost of capital and C It limits recycling of the funds.
It is due to above factors the public sector banks are faced with bulging NPAs which results in
lower income and higher provisioning for doubtful debts and it will make a dent in their profit
margin. In this context of crippling effect on banks operation the slew asset quality is placed as
one of the most important parameters in the measurement of banks performance under the
Camel’s supervisory rating system of RBI.
Credit Risks of NPAs: The most of the public sector banks are incapable of visualizing the risk
they are going to face in the emerging global economic scenario. The risk management
machinery adopted requires a comprehensive overhaul of the system by the banks in this
changing condition. The second consultative document on the New Basle capital accord on
banking supervision has given a stress on the risk management aspect of the banks by
introducing a more risk sensitive standardized approach towards capital adequacy. In spite of the
stringent recommendations and RBIs apprehensions of the adequate preparedness of the banking
sector in adopting instructions, it is quite clear about the willingness of the banks to vigorously
pursue effective credit risk management mechanism by visualizing the magnitude of credit risk
management to curtail the growth of mounting NPAs. The concept of recovering debts through
Debt Recovery Tribunals has become a grand failure. The concept of establishing Asset
Reconstruction Company (ARC) has greatly benefited the banks in containing the NPAs at a
manageable level. The ARC is to take over the bad debts of the public sector banks. These banks
have the option of either liquidating the assets of defaulting companies or writing off these bad
debts altogether. The viable solution available to the public sector banks is to go for a better
credit risk management scheme, which may be considered as difficult preposition. However a
clear understanding of the concept of risk, availability of instruments to curtail risk and the
strategies required to be adopted for implementing a risk management system are considered to
be the call of the hour.
Measures to Control NPAs Menace
It is proved beyond doubt that NPAs in bank ought to be kept at the lowest level. Two pronged
approaches viz.,
1. Preventive management
2. Curative management
Preventive Management:
Credit Assessment and Risk Management Mechanism: A lasting solution to the problem of
NPAs can be achieved only with proper credit assessment and risk management mechanism. The
documentation of credit policy and credit audit immediately after the sanction is necessary to
upgrade the quality of credit appraisal in banks. In a situation of liquidity overhang the
enthusiasm of the banking system is to increase lending with compromise on asset quality,
raising concern about adverse selection and potential danger of addition to the NPAs stock. It is
necessary that the banking system is equipped with prudential norms to minimize if not
completely avoid the problem of credit risk.
Organisational Restructuring: With regard to internal factors leading to NPAs the onus for
containing the same rest with the bank themselves. These will necessities organizational
restructuring improvement in the managerial efficiency, skill up gradation for proper
assessment of credit worthiness and a change in the attitude of the banks towards legal action,
which is traditionally viewed as a measure of the last resort.
Reduce Dependence on Interest: The Indian banks are largely depending upon lending and
investments. The banks in the developed countries do not depend upon this income whereas 86
percent of income of Indian banks is accounted from interest and the rest of the income is fee
based. The banker can earn sufficient net margin by investing in safer securities though not
at high rate of interest. It facilitates for limiting of high level of NPAs gradually. It is possible
that average yield on loans and advances net default provisions and services costs do not exceed
the average yield on safety securities because of the absence of risk and service cost.
Potential and Borderline NPAs under Check: The potential and borderline accounts require
quick diagnosis and remedial measures so that they do not step into NPAs categories. The
auditors of the banking companies must monitor all outstanding accounts in respect of accounts
enjoying credit limits beyond cutoff points, so that new sub-standard assets can be kept under
check.
Curative Management: The curative measures are designed to maximize recoveries so that
banks funds locked up in NPAs are released for recycling. The Central government and RBI
have taken steps for arresting incidence of fresh NPAs and creating legal and regulatory
environment to facilitate the recovery of existing NPAs of banks. They are:
Debt Recovery Tribunals (DRT): In order to expedite speedy disposal of high value claims of
banks Debt Recovery Tribunals were setup. The Central Government has amended the recovery
of debts due to banks and financial institutions Act in January 2000 for enhancing the
effectiveness of DRTs. The provisions for placement of more than one recovery officer, power
to attach dependents property before judgment, penal provision for disobedience of Tribunals
order and appointment of receiver with powers of realization, management, protection and
preservation of property are expected to provide necessary teeth to the DRTs and speed up the
recovery of NPAs in times to come.
Lok Adalats: The Lok adalats institutions help banks to settle disputes involving accounts in
doubtful and loss categories. These are proved to be an effective institution for settlement of dues
in respect of smaller loans. The Lok adalats and Debt Recovery Tribunals have been empowered
to organize Lok adalats to decide for NPAs of Rs. 10 lakhs and above.
Asset Reconstruction Company (ARC): The Narasimham Committee on financial system
(1991) has recommended for setting up of Asset Reconstruction Funds (ARF). The following
concerns were expressed by the committee.
It was felt that centralized all India fund will severely handicap in its recovery efforts by lack of
widespread geographical reach which individual bank posses and given the large fiscal deficits,
there will be a problem of financing the ARF. Subsequently, the Narasimham committee on
banking sector reforms has recommended for transfer of sticky assets of banks to the ARC.
Thereafter the Varma committee on restructuring weak public sector banks has also viewed the
separation of NPAs and its transfer thereafter to the ARF is an important element in a
comprehensive restructuring strategy for weak banks. In recognition of the same ARC Bill was
passed to regulate Securitization and Reconstruction of financial assets and enforcement of
security interest. The ICICI BANK, State Bank of India and IDBI have promoted the country’s
first Asset Reconstruction Company. The company is specialized in recovery and liquidation of
assets. The NPAs can be assigned to ARC by banks at a discounted price. The objective of ARC
is floating of bonds and making necessary steps for recovery of NPAs from the borrowers
directly. This enables a one time clearing of balance sheet of banks by sticky loans.
Corporate Debt Restructuring (CDR): The corporate debt restructuring is one of the methods
suggested for the reduction of NPAs. Its objective is to ensure a timely and transparent
mechanism for restructure of corporate debts of viable corporate entities affected by
the contributing factors outside the purview of BIFR, DRT and other legal proceedings for the
benefit of concerned. The CDR has three tier structure viz.,
a. CDR standing forum b. CDR empowered group and c. CDR cell.
Circulation of Information of Defaulters: The RBI has put in place a system for periodical
circulation of details of willful defaulters of banks and financial institutions. The RBI also
publishes a list of borrowers (with outstanding aggregate rupees one crore and above) against
whom banks and financial institutions in recovery of funds have filed suits as on 31 March every
year. It will serve as a caution list while considering a request for new or additional credit limits
from defaulting borrowing units and also from the directors, proprietors and partners of these
entities.
Recovery Action Against Large NPAs: The RBI has directed the PSBs to examine all cases of
willful default of Rs. One crore and above and file criminal cases against willful defaulters. The
board of directors are requested to review NPAs accounts of one crore and above with special
reference to fix staff accountability in individually. It is observed from the above table that the
gross NPAs of the banks is gradually declining from Rs. 68717 crores in 2002 - 03 to Rs. 50552
crores in 2006 – 07 whereas the net recovery of NPAs is increasing from Rs. 23183 crores in
2002 - 03 to Rs. 27176 crores in 2006 – 07. It shows that the banks have taken strenuous efforts
to contain the NPAs. Moreover the percentage of recovery to gross NPAs is also in the
increasing trend.
Credit Information Bureau: The institutionalization of information sharing arrangement is now
possible through the newly formed Credit Information Bureau of India Limited (CIBIL) It was
set up in January 2001, by SBI, HDFC, and two foreign technology partners. This will prevent
those who take advantage of lack of system of information sharing amongst leading institutions
to borrow large amount against same assets and property, which has in no measures contributed
to the incremental of NPAs of banks.
Types of NPA
A] Gross NPA
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines
as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It
consists of all the non standard assets like as sub-standard, doubtful, and loss assets. It can be
calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAs / Gross Advances
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.
Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge
amount of NPAs and the process of recovery and write off of loans is very time consuming, the
provisions the banks have to make against the NPAs according to the central bank guidelines, are
quite significant. That is why the difference between gross and net NPA is quite high.
It can be calculated by following:
Net NPAs Gross = NPAs – Provisions / Gross Advances - Provisions
Asset Classification
Categories of NPAs
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this case
the arrears of interest and the principal amount of loan does not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is amount due more than 90
days then it is NPA and NPAs are further need to classify in sub categories. Banks are required
to classify non-performing assets further into the following three categories based on the period
for which the asset has remained non-performing and the realisability of the dues:
( 1 ) Sub-standard Assets:--
With effect from 31 March 2005, a sub standard asset would be one, which has remained NPA
for a period less than or equal to 12 month. The following features are exhibited by sub standard
assets: the current net worth of the borrowers / guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the banks in full; and the asset
has well-defined credit weaknesses that jeopardise the liquidation of the debt and are
characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are
not corrected.
( 2 ) Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-
standard, with the added characteristic that the weaknesses make collection or liquidation in full,
– on the basis of currently known facts, conditions and values – highly questionable and
improbable. With effect from March 31, 2005, an asset would be classified as doubtful if it
remained in the sub-standard category for 12 months.
( 3 ) Loss Assets:--
A loss asset is one which considered uncollectible and of such little value that its continuance as
a bankable asset is not warranted- although there may be some salvage or recovery value. Also,
these assets would have been identified as ‘loss assets’ by the bank or internal or external
auditors or the RBI inspection but the amount would not have been written-off wholly.

ROLE OF ARCIL :-
This empowerment encouraged the three major players in Indian banking system, namely, State
Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come
together to set-up the first ARC. Arcil was incorporated as a public limited company on February
11, 2002 andobtained its certificate of commencement of business on May 7, 2003. In
pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of registration dated
August 29, 2003, issued by the Reserve Bank of India (RBI) and operates under powers
conferred under the Securitization Act, 2002. Arcil is also a "financial institution" within the
meaning of Section 2(h)(ia) of the Recovery of Debts due to Banks and Financial Institutions
Act, 1993 (the "DRT Act"). Arcil is the first ARC in the country to commence business of
resolution of non-performing assets (NPAs) upon acquisition from Indian banks and financial
institutions. As the first ARC, Arcil has played a pioneering role in setting standards for the
industry in India.
Unlocking capital for the banking system and the economy
The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of lenders
and thereby recycling capital. Arcil thus, provides relief to the banking system by managing
NPAs and help them concentrate on core banking activities thereby enhancing shareholders
value.
Creating a vibrant market for distressed debt assets / securities in India offering a trading
platform for Lenders
Arcil has made successful efforts in funneling investment from both from domestic and
international players for funding these acquisitions of distressed assets, followed by showcasing
them to prospective buyers. This has initiated creation of a secondary market of distressed assets
in the country besides hastening their resolution. The efforts of Arcil would lead the country’s
distressed debt market to international standards.
To evolve and create significant capacity in the system for quicker resolution of NPAs by
deploying the assets optimally
With a view to achieving high delivery capabilities for resolution, Arcil has put in place a
structure aimed at outsourcing the various sub-functions of resolution to specialized agencies,
wherever applicable under the provision of the Securitisation Act, 2002. Arcil has also
encourage, groomed and developed many such agencies to enhance its capacity in line with the
growth of its activity.
GLOBAL FINANCIAL CRISIS AND NON PERFORMING ASSETS
MEASURES TAKEN BY RBI VIS-À-VIS BANK’S FINANCIAL HEALTH AND ITS
INSULATION
RBI took a series of measures in addition to providing liquidity and special refinance. While the
impact of global recession on India cannot be wished away, Indian Banks, encouraged by the
government and RBI, rose to the occasion to implement various stimulus packages and
restructured facilities to tide over the crisis. In the middle of the previous financial year, the
volatility in the global financial markets and closure of many big Banks in the western world has
given a shock to the Banking system in India. However, the strong fundamentals of Banks as
well as support and guidance by regulators helped mitigate the severity of these trans-national
developments. Having withstood the testing times, things are looking bright, as signs of recovery
of Indian economy are visible. It gives us some hope that we can expect robust growth of the
Indian Banking industry in the medium term.
PRIVATE BANKS AND NPA- Keeping in view the financial year 2009 second quarterly
results of the Indian Banking sector, the industry body, The Associated Chambers of Commerce
and Industry (Assocham) holds that although the Indian Banking sector has remained insulated
from the global financial crisis, the emerging trends do not give positive signals. This analysis of
the Indian Banking sector is based on the quarterly results posted by 25 Indian Banks on Bombay
Stock Exchange (BSE) from 20th - 29th October 2008. For a macro analysis, the total 25 Banks
included an aggregation of 15 public sector Banks (PSBs) and 10 private sector Banks.
Assocham has revealed that on an average 24% rise in net non performing assets (NPAs) have
been registered by 25 public sector and commercial Banks during the second quarter of the
FY’09 as against Q2-FY’08. However, the average capital adequacy ratio (CAR) of the Banks
slipped to 12.68 per cent in Q2-FY ‘09 from 13.41% in the previous year. As per Assocham
study, the aggregate net non-performing assets (NPA) of 25 Banks increased by 24.36% to Rs
17,522.82 crore in second quarter of 2008-09 from Rs 15,462.84 crore in the same period of
FY’08. Karur Vysya Bank recorded maximum rise of 275.36 per cent in net NPAs in Q2-FY’09
with Rs. 50.03 crore as against Rs 13.33 crore in Q2-07. It was followed by HDFC bank with an
increase by 139%, Vijaya Bank (132%), State Bank of Hyderabad (81.42%) and IDBI (57%).
Among the private Banks, Yes Bank has shown highest growth in NNPA, followed by South Ind
Bank. The NNPA of ICICI Bank has increased to Rs 4554 crore during FY2008-09. This trend
suggests that the NNPA and such contagion have started creeping in, though in low intensity
with less magnitude due the reasons explained above.
NPA AND PUBLIC SECTOR BANKS- On the contrast, seven major PSBs recorded a
significant decrease in net NPAs, including Central Bank of India (-87.39%), Oriental bank of
Commerce (-82.18%), Union Bank of India (-73.38%), Dena Bank (-17.24%), Bank of India (-
14.80 crore), Bank of Maharashtra (-7.75 crore) and Indian Bank (-1.54%) have shown
improvement in net NPA levels. Whereas, among the private sector Banks only South Indian
Bank registered an improvement in net NPAs by -29.82%.
The trend of improvement in the asset quality of banks continued during the year. Indian banks
recovered a higher amount of NPAs during 2007-08 than that during the previous year. Though
the total amount recovered and written-off at Rs.28,283 crore in 2007-08 was higher than
Rs.26,243 crore in the previous year, it was lower than fresh addition of NPAs (Rs.34,420 crore)
during the year. As a result, the gross NPAs of SCBs increased by Rs.6,136 crore in 2007-08.
This is the first time since 2001-02 that gross NPAs increased in absolute terms (Table III.26). In
this context, it may be noted that banks had registered rapid credit growth during the previous
three years. Some slippage in NPAs, therefore, could be expected. Besides, some other
developments such as hardening of interest rates might have also resulted in increased NPAs.
Banks had extended housing loans at floating interest rates. The hardening of interest rates might
have made the repayment of loans difficult for some borrowers, resulting in some increase in
NPAs in this sector. It may be noted that the increase in gross NPAs was more noticeable in
respect of new private sector and foreign banks, which have been more active in the real estate
and housing loans segments. Gross NPAs (in absolute terms) of nationalised banks and old
private sector banks continued to decline during the year. Gross NPAs of State Bank group
showed an increase. Notwithstanding increase in gross NPAs of the banking sector, gross NPAs
as percentage of gross advances declined further to 2.3 per cent at end-March 2008 from 2.5 per
cent a year ago. The NPAs ratio (gross NPAs to gross advances) of new private sector banks
increased significantly during the year, while that of foreign banks increased marginally. The
NPAs ratio of all other bank groups declined.

Among the various channels of recovery available to banks for dealing with bad loans, the
SARFAESI Act and the debt recovery tribunals (DRTs) have been the most effective in terms of
amount recovered. The amount recovered as percentage of amount involved was the highest
under the SARFAESI Act, followed by DRTs.
The sector-wise analysis of NPAs of public and private sector banks indicates that the NPAs in
the priority sector increased by 11.1 per cent during 2007-08 (4.8 per cent in the previous year)
mainly due to increase in NPAs in the agriculture sector (32.1 per cent) and in the non-priority
sector (10.3 per cent).

At the aggregate level, the share of priority sector NPAs in total NPAs at 54.4 per cent was
broadly same as in the previous year (54.0 per cent).

The net NPAs to net advances ratio at end-March 2008 of 75 banks (76 last year) out of 79 (82
last year) was less than 2 per cent. The net NPAs ratio of only one foreign bank was higher than
5 per cent (Table III.32). During 2007-08, the net NPA ratio of six banks each in the public
sector and private sector improved.
In absolute terms, net NPAs of EXIM Bank and NABARD declined during 2007-08, while that
of SIDBI increased sharply (Table VI.10). In terms of net NPA to net loans ratio, the asset
quality of EXIM Bank improved sharply, while that of NABARD improved marginally.
Although the net NPAs to net loans ratio increased in respect of SIDBI at end-March 2008 as
compared with end- March 2007, the ratio was quite low otherwise. Significantly, in
continuation of the trend witnessed during last few years, NHB did not have any NPAs.
Apart from decline in the NPA ratios, the improvement in asset quality of SCBs during 2007-08
was also reflected in the different loan asset categories. The share of ‘sub-standard’ loans
showed a marginal increase to 1.1 per cent from 1.0 per cent in the previous year. However, the
shares of loans in ‘doubtful’ and ‘loss’ categories, which represent lower quality of assets than
sub-standard assets, continued to decline during 2007-08. Among these two categories (‘loss’
and ‘doubtful’), while NPAs in ‘loss’ category continued to show decline in absolute terms,
NPAs in ‘doubtful’ category showed a marginal increase in 2007-08. More or less a similar trend
was observed across all bank groups, barring new private sector banks in whose case the NPAs
in all the three categories, viz., sub-standard, doubtful and loss increased during the year (Table
III.33).
AgriBanking
Role of Banking in Agriculture
In a changing environment, banks are diversifying their role in the agriculture sector in order to
get revenue from their significant contribution to agriculture. Some of the new roles that banks
have adopted are: Marketing, training and consultancy, insurance and financing for infrastructure
via private-public participation.

The Credit requirements of agriculture are of three types viz.

1. Short –Term (<15 months)
2. Medium – Term (15 months to 5 yrs)
3. Long- Term (LT) (>5 yrs)
Long Term Credit:
The period of long-term credit is generally 5 to 20 years or even more in some special cases. In
any industry, long-term investment is necessary, to create permanent assets which give returns
over a period of time. The permanent investment is not only necessary for a particular industry
but even for the country. Because for continuity of production and progress of the country. This
applies to agriculture also. In Agriculture, long-term investment comprises of sinking well, land
levelling, fencing and permanent improvements on land purchase of big machinery like tractor
with its attachments including trolleys, establishment of fruit orchard of mango, cashew,
coconut, sapota (chiku), orange, pomogranate, fig, guava, etc. There are many other items of
long-term capital investment. Investment once made in the beginning continuous to give returns
over a long period. Fruit orchards particularly do not give any income in the first 4 - 5 years as in
case of other seasonal crops. So the expenditure incurred in the first 4-5 years becomes a capital
cost.
All the long-term investments mentioned above require large amounts of funds. Although they
have good potential to give returns in future, individual farmers have no financial capacity to
make such costly investments from their own funds because they have no savings or very little
savings. Therefore, they have to resort to bank borrowing to meet such needs. The financial
criteria terms and conditions procedures of granting L.T. loans are altogether different from
short-term loans. Even the bank or agency providing LT loans is separate due to its particular
mode or system of raising capital.
Land Development Banks:
The special banks providing LT Loans are called Land Development Banks (LDA). The history
of LDB’s is quite old. The first LDB was started at Jhang in Punjab in 1920. But the real impetus
to these banks was received after passing the Land Mortgage Banks Act in 1930’s (LDB’s were
originally called Land Mortgage Banks). After passing this Act LDB’s were started in different
states of India.
Crop loan is a short term credit and is generally obtained from primary credit co-op. Society of a
village or also from commercial bank. The period of loan is about one year except for sugarcane
for which the period is 18 months. There are two criteria for granting crop loan.
1. One third of gross value
2. Cost of cultivation.
1. One third of gross value approach takes into account the yield and price of the crop, its cost of
cultivation and family expenditure. If the gross value is more, more amount of loan becomes
available. For e.g. Rice.
I II
Yield (Q.) 20 25
Price (Rs/Q) 400 400
Gross value (Rs.) 8000 10,000
One third (Rs.) 2700 3330
2. Thus in second situation farmer is entitled for Rs.3330 per hectare which is higher than in the
first situation. Thus this method takes into account the productive aspect of a crop.
3. In cost of cultivation, direct paid-out costs are only considered. They include items, like seeds,
manures, fertilizers, pesticides, diesel/electricity, hired labour etc. In this approach, it is expected
that all direct costs to be incurred by the farmer should be covered and accordingly he should get
adequate credit. If the cost of all these items of input is Rs.3500/-. If the loan is granted
according to first approach, then the amount which is short, is spent by the farmer from his own
funds. Since crop loan is for one season, its recovery is made in one installment after the harvest
of the crop. Crop loan is an annual requirement and farmer has to borrow fresh loan for new crop
season every time. Therefore, he has to repay the earlier loan with interest within stipulated time.
Since this loan is required every season/every year, the procedure of getting this loan is simple
and convenient and it is made available by the District Central Co-op.Banks through the village
Co-op. Credit Society. So the farmer gets his loan in the village itself. If the loan is to be taken
from commercial bank, it is available from the nearby branch of the commercial bank. As for
security, the farmer has to offer his land as a security. There is a three tier structure providing
crop-loans through co-operative institutions.
Agricultural loans

Agricultural loans are available for a multitude of farming purposes. Farmers may apply for
loans to buy inputs for the cultivation of food grain crops as well as for horticulture, aquaculture,
animal husbandry, floriculture and sericulture businesses. There are also special loans to finance
the purchase of agricultural machinery such as tractors, harvesters and trucks. Construction of
biogas plants and irrigation systems as well as the purchase of agricultural land may also be
financed through special types of agricultural finance.
Schemes for Agri Finance

1. Kisan credit card sheme

2. Homestead farming
3. Financing farmers for purchase of land for agri purposes
4. Scheme for cultivation of medicinal plants
5. Scheme for cultivation of vanilla
6. Rain water harvesting scheme
7. Produce marketing loans
8. Agri loans to NRI
9. Minor irrigation
10. Farm mechanization
11. Construction renovation and expansion of godowns.

Agricultural Banks
National Bank for Agriculture and Rural Development or NABARD – is responsible for
refinance disbursement to commercial banks, State cooperative banks, State cooperatives, rural
development banks, Regional Rural Banks (RRBs) and other eligible financial institutions. It
also sanctions money through its Rural Infrastructure Development Fund for projects covering
irrigation, rural roads and bridges, health and education, soil conservation and drinking water
schemes. NABARD also offers a Kisan Credit Card Scheme and crop loans under the Rashtriya
Krishi Bima Yojana. Banks and RRB's introduced the Kisan Credit Card Scheme of NABARD
in their areas of operation. In this scheme eligible farmers are provided with a Kisan Credit Card
and a passbook or card-cum-pass book. The revolving cash credit facility allows any number of
withdrawals and repayments within the limit. This limit is fixed on the basis of operational land
holding, cropping pattern and the scale of finance. Sub-limits may be fixed at the discretion of
banks. This Kisan Credit Card is valid for 3 years subject to annual review. As incentive for
good performance, credit limits may be enhanced to take care of increase in costs, change in
cropping pattern, etc. Each drawl should be repaid within a maximum period of 12 months.
Conversion or rescheduling of loans is allowed in case of damage to crops due to natural
calamities. Security, margin, rate of interest and other details are fixed according to RBI norms.
Flow of Credit: A comprehensive credit policy was announced by the Government of India on
18 June 2004, containing measures for doubling agriculture credit flow in the next three years
and providing debt relief to farmers affected by natural calamities. The following are the
highlights of this announcement:
• Credit flow to agriculture sector to increase at the rate of 30 per cent per year.
• Debt restructuring in respect of farmers in distress and farmers in arrears providing for
rescheduling of outstanding loans over a period of five years including moratorium of
two years, thereby making all farmers eligible for fresh credit.
• Special One-Time Settlement scheme for old and chronic loan accounts of small and
marginal farmers.
• Banks allowed to extend financial assistance for redeeming the loans taken by farmers
from private moneylenders.
• Commercial Banks (CBs) to finance at the rate of 100 farmers/ branch; 50 lakh new
farmers to be financed by the banks in a year.
• New investments in agriculture and allied activities at the rate of two to three projects per
branch.
• Refinements in Kisan Credit Cards (KCCs) and fixation of scale of finance.
Increasing the Credit Flow to farmers
Multiple financing: In majority of the cases, the landowners are availing the crop production
finance from the Banks showing the land records as if they are cultivating lands. In such cases,
financing tenant farmers for cultivation of same piece of land amounts to multiple financing.
Some remedy is required to tackle such situation and help tenant farmers. The suggested
remedies are:
• Record the name of the actual cultivator in the land records. Noting the name of the
Tenant in the Record of Rights along with the name of the cultivator would provide comfort
level to the Branch Manager besides avoiding cases of double financing.
• In cases where landlords already availed crop production limits and are providing inputs
to the tenants, a provision may be made to extend a limit to cover remaining cost of production
and consumption needs.
Financial literacy :
The lack of financial advise is one of the barriers for economic independence through
appropriate savings / credit / other financial services and investment decisions. The high
illiteracy of the disadvantaged is one reason for low-level transfer of farm technology. The
Bank’s voluntarism can focus on opening Knowledge/Credit counselling centers for education
on financial services of the Bank, credit and repayment planning and facilitate interface between
the poorer sections of the farmers and the Research /Agricultural Institutes. In short, Credit
intervention alone would not bring about a change in growth of Tenant farmers but access to all
logistical linkages and market and treatment on par with big farmers is critical. It is
recommended that the following specific areas need to be explored in greater degree:
• Training Centers for Tenant farmers, Oral lessees etc.
• Financial Literacy vehicles–Publicity vans of the Bank that can visit interior areas with
literature on financial services available and Audio Visual Equipments. Suitable visuals and
messages can be prepared in the vernacular and packaged as an appealing programme (like a
short movie)
IT Kiosks/Choupals–Private sector partnership
• Involving sanchalaks in financial literacy
• Financial literacy centers at Block level
Extending finance to corporates / companies for onward financing to farmers under
agriculture :
Financing corporate involved in procurement of agricultural produce either for processing or
processing and exports so that the financial requirements of the companies for supplying inputs
like seeds, fertilizers, extension services, etc., can be met by the companies effectively.
Similarly, there is scope for financing well run sugar mills for similar activities for onward
lending to farmers. The Banks will be encouraged in meeting these requirements if such loans
extended to companies can be included under Direct agricultural credit. In the backdrop of
manifold increase required under inclusive finance and the successful supply chain model of the
Corporate engaged in contract farming, such of those corporates can also effectively play the role
as Business Correspondents.
Income generating activity : Banks can expand the flow of farm credit significantly if they
were to consider total credit needs of cultivators. There is, therefore, a need to integrate
investment and production credit. In addition to crop production activity, the tenant farmers are
to be encouraged to take up alternative income generating activities like allied activities and
non-farm activities. Family approach to meet credit requirement of all family members will
facilitate them to earn additional income to meet day-to-day family expenses and improve
financial status.
Targeting small & marginal farmers and agricultural labourers :
The focus should be on group Collateral loans and Joint liability groups for all small and
marginal farmers on the lines of Tenant farmer groups needs to be encouraged. The flow of
credit to these segments should be more in terms of numbers assisted.
Identifying Areas of focus :
Private investment in linkage provider avenues like quality seeds, micronutrients.
Cold chains and establishment of large and sophisticated controlled atmosphere cold storages in
strategic locations for long storage of fruits and vegetables.
Construction of market yards, platforms for loading, assembling and auctioning, weighing and
mechanical handling equipments etc. Mobile infrastructure for post harvest operations such as
grading, packaging, quality testing, etc.
Encouraging Agro/food processing units and financing end to end activities of Agriculture
production under Agriculture finance. Ready to operate Green houses and other latest technology
for floriculture and vegetable cultivation projects suiting to small holdings Development of
Commercial Horticulture through production and post- Harvest management
Coordination and Participation in all Venture Capital Schemes :
The Agri Business development ventures promoted by various development organizations like
National Horticultural Board, Small Farmers Agri business Consortium, APEDA and other
departments promoting various Central / State sector plans - wherein projects that provide the
linkages need to be encouraged. Coordinated efforts of the above development agencies along
with those of NABARD and Banks would facilitate enhanced Credit Flow to areas of high and
inclusive growth potential.
Extension Services and Technology Transfer : The network of Agri Clinics and Agri-Business
Centres / KVKs /Farmers Clubs to provide better services related to technology transfer, setting
up information kiosks in villages for providing latest information relating to prices of agriculture
inputs, outputs, markets etc, encouraging corporate houses to provide extension services to the
farmers and educating the farmers regarding suitability of land, water and soil conditions for
high yielding and high value crops, etc.
Enhancing the limit under General Credit Card Scheme(GCC): The present cap of Rs.
25,000/- may be increased to Rs. 50,000/- which can facilitate financial deepening without
collateral. To assess the higher requirement based to classify the entire balance outstanding under
GCC as Indirect Finance to Agriculture.