Project report on Non Performing Assets of banks

(SUBMITTED TO PUNJAB TECHNICAL UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR MASTERS DEGREE IN BUSINES ADMINISTRATION

Supervise !"# $ ISHA MEHRA MAM

Su!%i&&e !"#$ Simerjit kaur C'(ss ) MBA *&+ R,'' -,# $ ./010/2/123

S4(%i S(&"(-(- C,''e5e ,6 M(-(5e%e-& (- Te7+-,',5"

Contents
Chapters Chapter no. 1 Introduction to the bank HDFC Chapter no. 2 Introduction to the topic.NPA Types of NPA Causes for NPA. Factors responsible for rise in NPA I pact of NPA Inco e reco!nition Pre"enti"e #easure ent for NPA #ana!e ent of NPA $arly sy pto s %teps or Initiati"es Taken &y '&I to curtail NPA(% %teps to follo) up and a"oid slippa!e fro PA(% to NPA(% Chapter no. * 'e"ie) of literature Chapter no. + 'esearch ethodolo!y Chapter no. , Data Analysis and interpretation Chapter no. Conclusion and 'eco &iblio!raphy endations Page no.

CHAPTER: 1 Introd ction

Cp 1 INTRODUCTION
Non.perfor in! assets/ also called non.perfor in! loans/ are loans/ ade by a bank or finance co pany/ on )hich repay ents or interest pay ents are not bein! ade on ti e. A loan is an asset for a bank as the interest pay ents and the repay ent of the principal create a strea of cash flo)s. It is fro the interest pay ents than a bank akes its profits. &anks usually treat assets as non.perfor in! if they are not ser"iced for so e ti e. If pay ents are late for a short ti e a loan is classified as past due. 0nce a pay ent beco es really late 1usually 23 days4 the loan classified as non.perfor in!. A hi!h le"el of non.perfor in! assets co pared to si ilar lenders ay be a si!n of proble s/ as ay an sudden increase. Ho)e"er this needs to be looked at in the conte5t of the type of lendin! bein! done. %o e banks lend to hi!her risk custo ers than others and therefore tend to ha"e a hi!her proportion of non.perfor in! debt/ but )ill ake up for this by char!in! borro)ers hi!her interest rates/ increasin! spreads. A ort!a!e lender )ill al ost certainly ha"e lo)er non.perfor in! assets than a credit card specialist/ but the latter )ill ha"e hi!her spreads and ay )ell ake a bi!!er profit on the sa e assets/ e"en if it e"entually has to )rite off the non. perfor in! loans. 0ne of the a6or proble s Indian banks facin! today is the si7e of non. perfor in! assets o"er )hich the top ana!e ent of all banks are spendin! si!nificant a ount of their ti e and ener!y. The proble s beco e all the ore crucial for the Indian banks because in the chan!in! scenario at the )orld le"el/ they cannot afford to re ain unresponsi"e to the !lobal re8uire ents. Ho)e"er/ banks are )ell a)are of the !ri situations and they ha"e tried their le"el best in the last decade to reduce their NPA portfolio thereby brin!in! it closer to the international le"el. 'eali7in! the proble s faced by

the banks/ 'eser"e &ank of India in the capacity of a re!ulator has co e out )ith appropriate !uidelines for NPA portfolio. The co ercial banks ha"e )elco ed these announce ents )hich are seen as life lines to aintain their financial help in an increasin! lea!ue co petiti"e and dere!ulated en"iron ent. The three letters 9NPA: %trike terror in bankin! sector and business circle today. NPA is short for of 9Non Perfor in! Asset:. The dreaded NPA rule says si ply this; )hen interest or other due to a bank re ains unpaid for ore than 23 days/ the entire bank loan auto atically turns a non perfor in! asset. The reco"ery of loan has al)ays been proble for banks and financial institution. To co e out of these first )e need to think is it possible to a"oid NPA/ no cannot be then left is to look after the factor responsible for it and ana!in! those factors.

INTR!"#CTI!N
N0N P$'F0'#IN< A%%$T% 1NPA4 =HAT I% A NPA 1N0N P$'F0'#IN< A%%$T4 Action for enforce ent of security interest can be initiated only if the secured asset is classified as Nonperfor in! asset. Non perfor in! asset eans an asset or account of borro)er /)hich has been classified

by bank or financial institution as sub >standard / doubtful or loss asset/ in accordance )ith the direction or !uidelines relatin! to assets classification issued by '&I .

An a ount due under any credit facility is treated as 9past due 9)hen it is not been paid )ithin *3 days fro the due date. Due to the i pro"e ent in the pay ent and #arch *1/ 2331. settle ent syste / reco"ery cli ate/ up !radation of technolo!y in the bankin! syste etc/ it )as decided to dispense )ith 9past due 9concept/ )ith effect fro Accordin!ly as fro that date/ a Non perfor in! asset shell be an ad"ance )here ore than 1@3 days

Interest and?or instal ent of principal re ain o"erdue for a period of in respect of a ter loan/

The account re ains Aout of order Afor a period of o"erdraft?cash credit 10D?CC4 The bill re ains o"erdue for a period of discounted.

ore than 1@3 days/ in respect of an

ore than 1@3 days in case of bill purchased or

Interest and?or principal re ains o"erdue for t)o har"est season but for a period not e5ceedin! t)o half years in case of an ad"ance !ranted for a!ricultural purpose/ and Any a ount to be recei"ed re ains o"erdue for a period of of other accounts. =ith a "ie) to Naps/ fro o"in! to)ards international best practices and to ensure !reater ore than 1@3 days in respect

transparency/ it has been decided to adopt (23 days o"erdue Anor s for identification of the year endin! #arch *1/ 233+/ a non perfor in! asset shell be a loan or an ad"ance )hereB Interest and?or instal ent of principal re ain o"erdue for a period of in respect of a ter loan/ ore than 23 days/ in respect of an ore than 23 days

The account re ains Aout of order Afor a period of o"erdraft?cash credit 10D?CC4 The bill re ains o"erdue for a period of discounted.

ore than 23 days in case of bill purchased or

Interest and?or principal re ains o"erdue for t)o har"est season but for a period not e5ceedin! t)o half years in case of an ad"ance !ranted for a!ricultural purpose/ and Any a ount to be recei"ed re ains o"erdue for a period of of other accounts Ou& ,6 ,r er An account should be treated as out of order if the outstandin! balance re ains continuously in e5cess of sanctioned li it ?dra)in! po)er. in case )here the out standin! balance in the principal operatin! account is less than the sanctioned a ount ?dra)in! po)er/ but there are no credits continuously for si5 account should be treated as Aout of order(. Over ue#$Any a ount due to the bank under any credit facility is Ao"erdue( if it is not paid on due date fi5ed by the bank. onths as on the date of balance sheet or credit are not enou!h to co"er the interest debited durin! the sa e period /these ore than 23 days in respect

T$pes of NPA
A8 Gr,ss NPA B8 Ne& NPA A8 Gr,ss NPA# <ross NPA(% are the su total of all loan assets that are classified as NPA(% as per '&I

!uidelines as on &alance %heet 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 )ith the help of follo)in! ratio;

Gr,ss NPA9S R(&i,

Gr,ss NPA9S Gr,ss A v(-7es

!" Net NPA# Net NPA(% are those type of NPA(% in )hich the bank has deducted the pro"ision re!ardin! NPA(%. Net NPA sho$s the actual burden of banks %ince in India/ bank ake a!ainst the balance sheets contain a hu!e a ount of NPA(% and the process of reco"ery and )rite off of loans is "ery ti e consu in!/ the pro"isions the banks ha"e to difference bet)een !ross and net NPA is 8uite hi!h. It can be calculated by follo)in!C Ne& NPA9S Gr,ss NPA9S ) Pr,visi,-s <ross Ad"ances > Pro"isions NPA(% accordin! to the central bank !uidelines/ are 8uite si!nificant. That is )hy the

Ca ses for NPA.

Failure to brin! in re8uired capital. Too a bitious pro6ect. Don!er !estation period.
Un wanted expenses

0"er tradin! I balances of in"entories. Dack of proper plannin!. Dependence on sin!le custo er

Dack of e5pertise. I proper )orkin! capital #is ana!e ent. Di"ersion of funds Poor 8uality ana!e ent ana!e ent.

Hea"y borro)in!s. Poor credit collection. Dack of 8uality control. =ron! selection of borro)ers. Poor credit appraisal. Enhelpful in super"ision. Tou!h stand on issue. Too in fle5ible attitude. %yste o"erloaded.

Non inception of units. Dack of oti"ation.

Delay in sanction.

Dack of trained staff. Dack of dele!ation of )ork. Dack of co it ent of reco"ery.

Dack of technical/ personnel and 7eal to/ Dack of infrastructure. Fast chan!in! technolo!y. Enhelpful attitude of !o"ern ent. Chan!es in custo er perception. Increase in aterial cost.

<o"ern ent policies. Credit policies. Ta5ation la)s. Ci"il co otion.

Political hostility %lu!!ish le!al syste . Chan!es related to bankin! a end ent act

%actors responsib&e for rise in NPA

The bankin! sector has been facin! the serious proble s of the risin! NPA(%. &ut the proble of NPA(% is ore in public sector banks )hen co pared to pri"ate sector banks and forei!n banks. The NPA(% in P%& are !ro)in! due to e5ternal as )ell as internal factors. E:TERNAL FACTORS I-e66e7&ive re7,ver" &ri!u-(' The <o"t. Has set of nu bers of reco"ery tribunals/ )hich )orks for reco"ery of loans and ad"ances. Due to their ne!li!ence and ineffecti"eness in their )ork the bank suffers the conse8uence of non.reco"er/ their by reducin! their profitability and li8uidity. ;i'6u' De6(u'&s There are borro)ers )ho are able to payback loans but are intentionally )ithdra)in! it. These !roups of people should be identified and proper to !et back the oney e5tended to the easures should be taken in order as ad"ances and loans.

N(&ur(' 7('(%i&ies This is the easure factor/ )hich is creatin! alar in! rise in NPA(% of the P%&(%. e"ery a6or natural cala ities thus akin! the borro)ers unable to ake lar!e a ount of pro"isions in order to

no) and then India is hit by

pay back there loans. Thus the bank has to

co pensate those loans/ hence end up the fiscal )ith a reduced profit. #ainly ours fra ers depends on rain fall for croppin!. Due to irre!ularities of rain fall the fra ers are not to achie"e the production le"el thus they are not repayin! the loans. I- us&ri(' si7<-ess I proper pro6ect handlin! / ineffecti"e ana!e ent / lack of ade8uate resources / lack of

ad"ance technolo!y / day to day chan!in! !o"t. Policies !i"e birth to industrial sickness.

Hence the banks that finance those industries ulti ately end up )ith a lo) reco"ery of their loans reducin! their profit and li8uidity. L(7< ,6 e%($ntrepreneurs in India could not foresee their product de and and starts production )hich ulti ately piles up their product thus assets/ )hich co"ers a NPAB % and has to ini u akin! the unable to pay back the oney they borro) to operate these acti"ities. The banks reco"er the a ount by sellin! of their label. Thus the banks record the no reco"ered part as ake pro"ision for it.

C+(-5e ,- G,v&= p,'i7ies =ith e"ery ne) !o"t. bankin! sector !ets ne) policies for its operation. Thus it has to cope )ith the chan!in! principles and policies for the re!ulation of the risin! of NPA(%. The fallout of handloo sector is continuin! as ost of the )ea"ers Co.operati"e sector has not

societies ha"e beco e defunct lar!ely due to )ithdra)al of state patrona!e. The rehabilitation plan )orked out by the Central !o"t to re"i"e the handloo yet been i ple ented. %o the o"er dues due to the handloo NPA(%. INTERNAL FACTORS De6e7&ive Le- i-5 pr,7ess There are three cardinal principles of bank lendin! that ha"e been follo)ed by the co ercial banks since lon!. sectors are beco in!

Principles of safety Principle of li8uidity Principles of profitability

Principles of safety &y safety it eans that the borro)er is in a position to repay the loan both principal and

interest. The repay ent of loan depends upon the borro)ers; Capacity to pay =illin!ness to pay Capacity to pay depends upon; 1. Tan!ible assets 2. %uccess in business =illin!ness to pay depends on; 1. Character 2. Honest *. 'eputation of borro)er

The banker should/ there fore take ut ost care in ensurin! that the enterprise or business for )hich a loan is sou!ht is a sound one and the borro)er is capable of carryin! it out successfully .he should be a person of inte!rity and !ood character. I-(ppr,pri(&e &e7+-,',5" Due to inappropriate technolo!y and syste ana!e ent infor ation syste / arket dri"en

decisions on real ti e basis can not be taken. Proper #I% and financial accountin! is not i ple ented in the banks/ )hich leads to poor credit collection/ thus NPA. All the branches of the bank should be co puterised. The i proper stren!th/ )eakness/ opportunity and threat analysis is another reason for rise in NPA(%. =hile pro"idin! unsecured ad"ances the banks depend ore on the honesty/ inte!rity/ and financial soundness and credit )orthiness of the borro)er. &anks should consider the borro)ers o)n capital in"est ent. It should collect credit infor ation of the borro)ers fro Fro bankers arket?se! ent of trade/ industry/ business.

$n8uiry fro

Fro

e5ternal credit ratin! a!encies.

Analyse the balance sheet True picture of business )ill be re"ealed on analysis of profit?loss a?c and balance sheet. Purpose of the loan =hen bankers !i"e loan/ he should analyse the purpose of the loan. To ensure safety and li8uidity/ banks should !rant loan for producti"e purpose only. &ank should analyse the profitability/ "iability/ lon! ter P,,r 7re i& (ppr(is(' s"s&e% Poor credit appraisal is another factor for the rise in NPA(%. Due to poor credit appraisal the bank !i"es ad"ances to those )ho are not able to repay it back. They should use !ood credit appraisal to decrease the NPAB%. M(-(5eri(' e6i7ie-7ies The banker should al)ays select the borro)er "ery carefully and should take tan!ible assets as security to safe !uard its interests. =hen acceptin! securities banks should consider the 1. #arketability 2. Acceptability *. %afety +. Transferability. acceptability of the pro6ect )hile financin!.

The banker should follo) the principle of di"ersification of risk based on the fa ous a5i 9do not keep all the e!!s in one basket:B it eans that the banker should in fe) industries or in a not !rant ad"ances to a fe) bi! far s only or to concentrate the

fe) cities. If a ne) bi! custo er

eets

isfortune or certain traders or industries affected

ad"ersely/ the o"erall position of the bank )ill not be affected. Dike OSCB su66ere (33>=>>'(<+s?/ and the handloo loss due to the 0T# Cuttack/ and 0rissa hand loo &+e OTM sector 0rissa +(- ',,% ;CS '& (1*0.=2@'(<+s?=

industries. The bi!!est defaulters of 0%C& are

A!se-7e ,6 re5u'(r i- us&ri(' visi& The irre!ularities in spot "isit also increase the NPA(%. Absence of re!ularly "isit of

bank officials to the custo er point decreases the collection of interest and principals on the loan. The NPA(% due to )ilful defaulters can be collected by re!ular "isits. Re ',(-i-5 pr,7ess Non re ittance of reco"eries to hi!her financin! a!encies and re loanin! of the sa e ha"e already affected the s ooth operation of the credit cycle= Due to re loanin! to the defaulters and CC&(% and PAC(% the NPA(% of 0%C& is increasin! day by day.

Impact of NPA
Pr,6i&(!i'i&"#$ NPA eans bookin! of oney in ter s of bad asset/ )hich occurred due to oney !ettin! blocked the prodi!ality of bank

)ron! choice of client. &ecause of the uch of profit in"ested in

decreases not only by the a ount of NPA but NPA lead to opportunity cost also as that so e return earnin! pro6ect?asset. %o NPA doesn(t affect of profit/ )hich ay lead to loss of so e lon!.ter current profit but also future strea

beneficial opportunity. Another i pact of reduction in profitability is lo) '0I 1return on in"est ent4/ )hich ad"ersely affect current earnin! of bank. LiAui i&"#$

#oney is !ettin! blocked/ decreased profit lead to lack of enou!h cash at hand )hich lead to borro)in! lack of oney for shotFrtes period of ti e )hich lead to additional cost to the co pany. Difficulty in operatin! the functions of bank is another cause of NPA due to oney. 'outine pay ents and dues.

I-v,'ve%e-& ,6 %(-(5e%e-&#$ Ti e and efforts of ana!e ent is another indirect cost )hich bank has to bear due to ana!e ent in handlin! and ana!in! NPA )ould ha"e

NPA. Ti e and efforts of

di"erted to so e fruitful acti"ities/ )hich )ould ha"e !i"en !ood returns. No) day(s banks ha"e special e ployees to deal and handle NPA(%/ )hich is additional cost to the bank. Cre i& ',ss#$&ank is facin! proble ter s of of NPA then it ad"ersely affect the "alue of bank in oney in the banks.

arket credit. It )ill lose its !ood)ill and brand i a!e and credit )hich ha"e

ne!ati"e i pact to the people )ho are puttin! their IN%&ME RE%&GNI'I&N Income reco(nition ) Policy

The policy of inco e reco!nition has to be ob6ecti"e and based on the record of non.perfor in! assets 1NPA4 is not reco!nised on

reco"ery. Internationally inco e fro

accrual basis but is booked as inco e only )hen it is actually recei"ed. Therefore/ the banks should not char!e and take to inco e account interest on any NPA. Ho)e"er/ interest on ad"ances a!ainst ter policies a"ailable in the accounts. Fees and co issions earned by the banks as a result of re.ne!otiations or reschedulin! deposits/ N%C(%/ IGP(%/ HGP(% and Dife ar!in is

ay be taken to inco e account on the due date/ pro"ided ade8uate

of outstandin! debts should be reco!nised on an accrual basis o"er the period of ti e co"ered by the re.ne!otiated or rescheduled e5tension of credit.

 If <o"ern ent !uaranteed ad"ances beco e NPA/ the interest on such ad"ances should -,& be taken to inco e account unless the interest has been realised. Re*ersal of income# If any ad"ance/ includin! bills purchased and discounted/ beco es NPA as at the close of any year/ interest accrued and credited to inco e account in the correspondin! pre"ious year/ should be re"ersed or pro"ided for if the sa e is not realised. T+is 4i'' (pp'" &, G,ver-%e-& 5u(r(-&ee (77,u-&s ('s,. In respect of NPA(%/ fees/ co to past periods/ if uncollected. ission and si ilar inco e that ha"e accrued should

cease to accrue in the current period and should be re"ersed or pro"ided for )ith respect

+eased Assets
The net lease rentals 1finance char!e4 on the leased asset accrued and credited to inco e account before the asset beca e non.perfor in!/ and re ainin! unrealised/ should be re"ersed or pro"ided for in the current accountin! period. The ter Inet lease rentalsI )ould ean the a ount of finance char!e taken to the credit

of Profit J Doss Account and )ould be )orked out as !ross lease rentals ad6usted by a ount of statutory depreciation and lease e8ualisation account. As per the BGui (-7e N,&e ,- A77,u-&i-5 6,r Le(sesB issued by the Council of the Institute of Chartered Accountants of India 1ICAI4/ a separate Dease $8ualisation Account should be opened by the banks )ith a correspondin! debit or credit to Dease Ad6ust ent Account/ as the case ay be. Further/ Dease $8ualisation Account should be transferred e"ery year to the Profit J Doss Account and disclosed separately as a deduction fro ?addition to !ross "alue of lease rentals sho)n under the head I<ross Inco eI. A,,ro,riation of reco*ery in NPAs

 Interest realised on NPA(% borro)er concerned.

ay be taken to inco e account pro"ided the credits in the

accounts to)ards interest are not out of fresh? additional credit facilities sanctioned to the

In the absence of a clear a!ree ent bet)een the bank and the borro)er for the purpose of appropriation of reco"eries in NPA(% 1i.e. to)ards principal or interest due4/ banks should adopt an accountin! principle and e5ercise the ri!ht of appropriation of reco"eries in a unifor and consistent anner.

Interest A,,lication# There is no ob6ection to the banks usin! their o)n discretion in debitin! interest to an NPA account takin! the sa e to Interest %uspense Account or aintainin! only a record of such interest in Perfor a accounts. Re,ortin( of NPAs &anks are re8uired to furnish a 'eport on NPA(% as on *1 st #arch each year after co pletion of audit. The NPA(% )ould relate to the banks( !lobal portfolio/ includin! the ad"ances at the forei!n branches. The 'eport should be furnished as per the prescribed for at !i"en in the Anne5ure I. =hile reportin! NPA fi!ures to '&I/ the a ount held in interest suspense account/ should be sho)n as a deduction fro !ross NPA(% as )ell as !ross ad"ances )hile aintain Interest %uspense account for ay furnish the a ount of arri"in! at the net NPA(%. &anks )hich do not

parkin! interest due on non.perfor in! ad"ance accounts/ interest recei"able on NPA(% as a foot note to the 'eport.

=hene"er NPA(% are reported to '&I/ the a ount of technical )rite off/ if any/ should be reduced fro the outstandin! !ross ad"ances and !ross NPA(% to eli inate any of NPA(% bein! reported. distortion in the 8uantu

Asset %lassification

%ate(ories of NPA-S Standard Assets# %tandard assets are the ones in )hich the bank is recei"in! interest as )ell as the principal a ount of the loan re!ularly fro the custo er. Here it is also "ery i portant that in this case the arrears of interest and the principal a ount of loan do not e5ceed 23 days at the end of financial year. If asset fails to be in cate!ory of standard asset that is a ount due classify in sub cate!ories. &anks are re8uired to classify non.perfor in! assets further into the follo)in! three cate!ories based on the period for )hich the asset has re ained non. perfor in! and the reliability of the dues; a. Sub)standard Assets b. /oubtful Assets c. +oss Assets Sub)standard Assets# A sub.standard asset )as one/ )hich )as classified as NPA for a period not e5ceedin! t)o years. =ith effect fro *1 #arch 2331/ a sub.standard arket "alue asset is one/ )hich has re ained NPA 6,r ( peri, 'ess &+(- ,r eAu(' &, 3C %,-&+s . In such cases/ the current net )orth of the borro)er? !uarantor or the current of the security char!ed is not enou!h to ensure reco"ery of the dues to the banks in full. In other )ords/ such an asset )ill ha"e )ell defined credit )eaknesses that 6eopardise the li8uidation of the debt and are characterised by the distinct possibility that the banks )ill sustain so e loss/ if deficiencies are not corrected= /oubtful Assets# ore than 23 days then it is NPA and NPA(% are further need to

A doubtful asset )as one/ )hich re ained NPA for a period e5ceedin! t)o years. =ith effect fro *1 #arch 2331/ an asset is to be classified as doubtful/ if it has re ained NPA 6,r ( peri, eD7ee i-5 3C %,-&+s. A loan classified as doubtful has all the )eaknesses inherent in assets that )ere classified as sub.standard/ )ith the added characteristic that the )eaknesses i probable. =ith effect fro #arch *1/ 233,/ an asset )ould be classified as doubtful if it re ained onths. ake collection or li8uidation in full/ > on the basis of currently kno)n facts/ conditions and "alues > hi!hly 8uestionable and

in the sub.standard cate!ory for 12 +oss Assets#

A loss asset is one )here the bank or internal or e5ternal auditors ha"e identified loss or the '&I inspection but the a ount has not been )ritten off )holly. In other )ords/ such an asset is considered uncollectible and of such little "alue that its continuance as a bankable asset is not )arranted althou!h there reco"ery "alue. ay be so e sal"a!e or

Pro*isionin( Norms
General In order to narro) do)n the di"er!ences and ensure ade8uate pro"isionin! by banks/ it )as su!!ested that a bankIs statutory auditors/ if they so desire/ could ha"e a dialo!ue )ith '&II% 'e!ional 0ffice? inspectors )ho carried out the bankIs inspection durin! the pre"ious year )ith re!ard to the accounts contributin! to the difference. Pursuant to this/ re!ional offices )ere ad"ised to for)ard a list of indi"idual ad"ances/ )here the "ariance in the pro"isionin! re8uire ents bet)een the '&I and the bank is abo"e certain cut off le"els so that the bank and the statutory auditors take into account the assess ent of the '&I )hile akin! pro"isions for loan loss/ etc.

 The pri ary responsibility for statutory auditors. The assess ent to the bank to assist the bank in re!ard to

akin! ade8uate pro"isions for any di inution in the ana!e ents and the ade by the inspectin! officer of the '&I is furnished

"alue of loan assets/ in"est ent or other assets is that of the bank

ana!e ent and the statutory auditors in takin! a decision

akin! ade8uate and necessary pro"isions in ter s of prudential !uidelines. ade on the non.

In confor ity )ith the prudential nor s/ pro"isions should be

perfor in! assets on the basis of classification of assets into prescribed cate!ories as detailed in para!raphs + supra. Takin! into account the ti e la! bet)een an account beco in! doubtful of reco"ery/ its reco!nition as such/ the realisation of the security and the erosion o"er ti e in the "alue of security char!ed to the bank/ the banks should pro"ision a!ainst sub.standard assets/ doubtful assets and loss assets as belo); +oss assets# The entire asset should be )ritten off. If the assets are per itted to re ain in the books for any reason/ 133 percent of the outstandin! should be pro"ided for. /oubtful assets# 133 percent of the e5tent to )hich the ad"ance is not co"ered by the realisable "alue of the security to )hich the bank has a "alid recourse and the realisable "alue is esti ated on a realistic basis. In re!ard to the secured portion/ pro"ision rates ran!in! fro ay be ade on the follo)in! basis/ at the ake

23 percent to ,3 percent of the secured portion dependin! upon the

period for )hich the asset has re ained doubtful;

Peri,

6,r 4+i7+ &+e ( v(-7e +(s !ee- Pr,visi,reAuire%e-& (E? 23

7,-si ere (s ,u!&6u' Ep to one year

0ne to three years #ore than three years

*3 ,3

Additional pro"isionin! conse8uent upon the chan!e in the definition of doubtful assets effecti"e fro #arch *1/ 2331 has to be ade in phases as under;

As ,- 03=@0=1@@3/ ,3 percent of the additional pro"isionin! re8uire ent on the assets )hich beca e doubtful on account of ne) nor standard asset to doubtful cate!ory. As on 03=@0=1@@1/ balance of the pro"isions not addition to the pro"isions needed/ as on 03=@0=1@@1. &anks are per itted to phase the additional pro"isionin! conse8uent upon the reduction in the transition period fro four year period co 23 K each year. N,&e# V('u(&i,- ,6 Se7uri&" 6,r pr,visi,-i-5 purp,ses =ith a "ie) to brin!in! do)n di"er!ence arisin! out of difference in assess ent of the "alue of security/ in cases of NPAs )ith balance of 's. , crore and abo"e stock audit at annual inter"als by e5ternal a!encies appointed as per the !uidelines appro"ed by the &oard )ould be such as i andatory in order to enhance the reliability on stock "aluation. Galues appointed as per the !uidelines appro"ed by the &oard of Directors should !et collaterals o"able properties char!ed in fa"our of the bank "alued once in three years. substandard to doubtful asset fro 1@ to 12 onths o"er a ini u of encin! fro the year endin! #arch *1/ 233,/ )ith a ade durin! the pre"ious year/ in of 1@ onths for transition fro sub.

Sub)standard assets# A !eneral pro"ision of 13 percent on total outstandin! should be ade )ithout akin! any allo)ance for DIC<C?$C<C !uarantee co"er and securities a"ailable.

Standard assets# Fro ini u the year endin! 03=@0=1@@@/ the banks should ake a !eneral pro"ision of a

of 3.2, percent on standard assets on 5',!(' ',(- p,r&6,'i, basis.

The pro"isions on standard assets should not be reckoned for arri"in! at net NPAs. The pro"isions to)ards %tandard Assets need not be netted fro Diabilities and Pro"isions . 0thersI in %chedule , of the balance sheet. !ross ad"ances but

sho)n separately as IContin!ent Pro"isions a!ainst %tandard AssetsI under I0ther

Pre'enti'e (eas rement for NPA

Early Reco(nition of the Problem#) In"ariably/ by the ti e banks start their efforts to !et in"ol"ed in a re"i"al process/ it(s too late to retrie"e the situation. both in ter s of rehabilitation of the pro6ect and reco"ery of bank(s dues. Identification of )eakness in the "ery be!innin! that is ; =hen the account starts sho)in! first si!ns of )eakness re!ardless of the fact that it ha"e beco e NPA/ is i perati"e. Assess ent of the potential of re"i"al ay not ay be done on

the basis of a techno.econo ic "iability study. 'estructurin! should be atte pted )here/ after an ob6ecti"e assess ent of the pro oter(s intention/ banks are con"inced of a turnaround )ithin a scheduled ti efra e. In respect of totally un"iable units as decided by the bank/ it is better to facilitate )indin! up? sellin! of the unit earlier/ so as to reco"er )hate"er is possible throu!h le!al eans before the security position beco es )orse.

Identifyin( !orro$ers $ith Genuine Intent#) Identifyin! borro)ers )ith !enuine intent fro those )ho are non. serious )ith no co it ent or stake in re"i"al is a challen!e confrontin! bankers. Here the role of frontline officials at the branch le"el is para ount as they are the ones )ho has intelli!ent inputs )ith re!ard to pro oters( sincerity/ and capability to achie"e turnaround. &ase don this ob6ecti"e

assess ent/ banks should decide as 8uickly as possible )hether it )ould be )orth)hile to co it additional finance. ay consider ha"in! FSpe7i(' I-ves&i5(&i,-G of all financial ay ha"e penal of technical e5perts )ith

In this re!ard banks

transaction or business transaction/ books of account in order to ascertain real factors that contributed to sickness of the borro)er. &anks

pro"en e5pertise and track record of preparin! techno.econo ic study of the pro6ect of the borro)ers. &orro)ers ha"in! !enuine proble s due to te porary sudden re8uire ent of additional fund is atch in fund flo) or

ay be entertained at branch le"el/ and for this

purpose a special li it to such type of cases should be decided. This )ill ob"iate the need to route the additional fundin! throu!h the controllin! offices in deser"in! cases/ and help a"ert any accounts slippin! into NPA cate!ory.

'imeliness and Adequacy of res,onse#) Don!er the delay in response/ !rater the in6ury to the account and the asset. Ti e is a crucial ele ent in any restructurin! or rehabilitation acti"ity. The response decided on the basis of techno.econo ic study and pro oter(s co e5ercise. The packa!e of assistance 0ocus on %ash 0lo$s#) =hile financin!/ at the ti e of restructurin! the banks Appraisal for fresh credit re8uire ents ay not be !uided by the isleadin! picture. it ent/ has to be ade8uate in ay look at the e5it option. ter s of e5tend of additional fundin! and rela5ations etc. under the restructurin! ay be fle5ible and bank

con"entional fund flo) analysis only/ )hich could yield a potentially

ay be done by analy7in! funds flo) in

con6unction )ith the Cash Flo) rather than only on the basis of Funds Flo). Mana(ement Effecti*eness#)

The !eneral perception a on! borro)er is that it is lack of finance that leads to sickness and NPA(%. &ut this unit(s fortunes. A bank ay not be the case all the ti e. #ana!e ent effecti"eness in ay co it additional finance to an ali!n unit only after basic ana!e ent is e5a ined and alady/ "iability study or in"esti!ati"e ust thus beco e the tacklin! ad"erse business conditions is a "ery i portant aspect that affects a borro)in! "iability of the enterprise also in the conte5t of 8uality of confir ed. =here the default is due to deeper

audit should be done > it )ill be useful to ha"e consultant appointed as early as possible to e5a ine this aspect. A proper techno. econo ic "iability study basis on )hich any future action can be considered. Multi,le 0inancin(#) Durin! the e5ercise for assess ent of "iability and restructurin!/ a Pr(5%(&i7 (u-i6ie (ppr,(7+ by all the lendin! banks? FIs as also sharin! of all rele"ant infor ation on the borro)er )ould !o a lon! )ay to)ard o"erall success of rehabilitation e5ercise/ !i"en the probability of success?failure. In so e default cases/ )here the unit is still )orkin!/ the bank should ake sure that i&

7(p&ures &+e 7(s+ 6',4s 1there is a tendency on part of the borro)ers to s)itch bankers once they default/ for fear of !ettin! their cash flo)s forfeited4/ and ensure that such cash flo)s are used for )orkin! capital purposes. To)ard this end/ there should be re!ular flo) of infor ation a on! consortiu consortiu / "iolation (CIBIL? Current account facilities e bers. A bank/ )hich is not part of the banks to such clients and ay not be allo)ed to offer credit facilities to such defaultin! clients. ay also be denied at non.consortiu ay attract penal action. The Cre i& I-6,r%(&i,- Bure(u ,6 I- i( L& = ay be "ery useful for eanin!ful infor ation e5chan!e on defaultin!

borro)ers once the setup beco es fully operational. In a foru lenders ha"e a lenders of lenders/ the priority of each lender )ill be different. =hile one set of ay be )illin! to )ait for a lon!er ti e to reco"er its dues/ another lender uch shorter ti efra e in ay ind. %o it is possible that the letter cate!ories of

ay be )illin! to e5it/ e"en a t a cost > by a discounted settle ent of the

e5posure. Therefore/ any plan for restructurin!?rehabilitation account. C,rp,r(&e De!& Res&ru7&uri-5 a ti ely and transparent syste Ender this syste / banks bankin! arran!e ents. echanis

ay take this aspect into

has been institutionali7ed in 2331 to pro"ide

for restructurin! of the corporate debt of 's. 23 crore and

abo"e )ith the banks and FI(% on a "oluntary basis and outside the le!al fra e)ork. ay !reatly benefit in ter s of restructurin! of lar!e standard accounts 1potential NPA(%4 and "iable sub.standard accounts )ith consortiu ? ultiple

Too&s for reco'er$ of NPA)*

Cre i& De6(u'&

Inability to Pay

Willful default

Unviable

Viable

Lok Adalat Debt Recovery Tribunals

Co !ro ise

Re"abilitation

Securitization Act

#res" Issue of Conversion Consortiu Cor!orate #inance Debt Restructurin% Ter Loan into WCTL

Sole $anker #res" WC Li it

Asset Re!lace Reconstruction ent of Re!ay ent Period

0nce NPA occurred/ one anner. De!al )ays and into each one of it. 1ilful /efault#)

ust co e out of it or it should be eans are there to o"er co e and

ana!ed in

ost efficient

ana!e NPAs. =e )ill look

AL Dok Adalat and Debt 'eco"ery Tribunal &L %ecuriti7ation Act CL Asset 'econstruction +ok Ada&at: Dok Adalat institutions help banks to settle disputes in"ol"in! account in 9doubtful: and 9loss: cate!ory/ )ith outstandin! balance of 's. , lakh for co pro ise settle ent under Dok Adalat. Debt reco"ery tribunals ha"e been e po)ered to or!ani7e Dok Adalat to decide on cases of NPAs of 's. 13 lakh and abo"e. This throu!h this channel is e5pected to pick up in the co in! years. "ebt Reco'er$ Trib na&s ,"RT-: The reco"ery of debts due to banks and financial institution passed in #arch 2333 has helped in stren!thenin! the function of D'Ts. Pro"ision for place ent of ore than one reco"ery officer/ po)er to attach defendant(s property?assets before 6ud! ent/ penal pro"ision for disobedience of tribunal(s order or for breach of any ter s of order and appoint ent of recei"er )ith po)er of reali7ation/ ana!e ent/ protection and preser"ation of property are e5pected to pro"ide necessary teeth to the D'Ts and speed up the reco"ery of NPAs in the ti es to co e. D'Ts )hich ha"e been set up by the <o"ern ent to facilitate speedy reco"ery by banks?DFIs/ ha"e not been able ake uch i pact on loan reco"ery due to "ariety of reasons like inade8uate nu ber/ lack of infrastructure/ under staffin! and fre8uent ad6ourn ent of echanis has pro"ed to be 8uite effecti"e for speedy 6ustice and reco"ery of s all loans. The pro!ress

cases. It is essential that D'T enforce ent echanis

echanis

is stren!thened and "ested )ith a proper

to enforce their orders. Non obser"ation of any order passed by

the tribunal should a ount to conte pt of court/ the D'T should ha"e ri!ht to initiate conte pt proceedin!s. The D'T should e po)ered to sell asset of the debtor co panies and for)ard the proceed to the )indin! > up court for distribution a on! the lenders Inability to Pay C,-s,r&iu% (rr(-5e%e-&s# Asset classification of accounts under consortiu should be based on the re7,r ,6 re7,ver" ,6 &+e i- ivi u(' %e%!er !(-<s lendin! arran!e ents are pooled )ith one and other aspects ha"in! a bearin! on the reco"erability of the ad"ances = =here the re ittances by the borro)er under consortiu bank and?or )here the bank recei"in! re ittances is not partin! )ith the share of other e ber banks/ the account )ill be treated as not ser"iced in the books of the other e ber banks and therefore/ be treated as NPA. The banks participatin! in the consortiu should/ therefore/ arran!e to !et their share of reco"ery transferred fro the lead bank or !et an e5press consent fro the lead bank for the transfer of their share of

reco"ery/ to ensure proper asset classification in their respecti"e books. 2%or,orate debt restructurin( 3%/R.# !ack(round In spite of their best efforts and intentions/ so eti es corporate find the sel"es in financial difficulty because of factors beyond their control and also due to certain internal reasons. For the re"i"al of the corporate as )ell as for the safety of the oney lent by the banks and FIs/ ti ely support throu!h restructurin! in !enuine cases is called for. Ho)e"er/ delay in a!ree ent a on!st different lendin! institutions often co es in the )ay of such endea"ours. &ased on the e5perience in other countries like the E.H./ Thailand/ Horea/ etc. of puttin! in place institutional corporate debt and need for a si ilar %yste has been e"ol"ed/ as under echanis echanis for restructurin! of in India/ a Corporate Debt 'estructurin!

(ANA.E (ENT !% NPA

%ince NPA ha"e been ad"erse effects o"er return on assets and capital ade8uacy ratio of banks/ each public sector bank has for ulated its o)n NPA si!nificant i pro"e ent in the ana!e ent policy and is to ethods of dealin! reco"er NPA in its o)n )ay. A reduction in the !ross and net NPA As indicates a ana!e ent of NPA(s .The present )ith NPA(s includes both le!al re edies but since the bank e5periences a considerable deal in !ettin! the results .0n le!al re edies of late non le!al re edies are also !ainin! popular )ith the bankers. The easures adopted by the Indian banks are as follo)s;. ost co on

'esolution strate!y fra e)ork suits filled and &IF' are the t)o

approaches to resolution of NPA in public sector banks.'ehabiliation and settle ent ha"e been considered in fe) cases. Data a"ailable on resolution strate!ies adopted by public sector banks su!!est that co pro ise settle ent sche es )ith in the borro)er are found to be ore effecti"e than le!al easures /

14 Debt reco"ery tribunals; . Debt reco"ery tribunals )ere set up in 1222. These tribunals can entertain the cases for reco"ery of debts. 24 Dok Adalats; . The lok adalat helps to resol"e disputes bet)een parties by conciliation/ editation/ co pro ise/ settle ent sche es.

*4 Credit Infor ation &ureau;. It )as incorporated in Manuary 233+ by %&I India .Association )ith * ore institutions no) banks and financial institutions are re8uired to illions CI&ID. easures are instituted for the sub it the list of suit filed cases of 's.13

+4 De!al #easures;.The follo)in! le!al and re!ulatory settle ent of NPA(s.

A4 %A'FA$%I ACT;. The securiti7ation and reconstruction of financial assets and enforce ent of security interest act per its the secured creditors 1if N,K of the secured creditors a!ree4 in enforce security interest in relation to the under lyin! security )ith out reference to the court after !i"in! -3 days notice to the defaultin! borro)ers .The act

!i"es the s)eepin! po)ers to secured creditors such as takin! o"er the possession of secured assets of the borro)ers includin! the ri!ht to transfer by )ay of lease /assi!n ent or sale/ take o"er the ana!e ent of secured assets. ay be

&4 Assets 'econstruction co.;.The settin! of assets 'econstruction Co pany

another channel to discount the NPA(s of the bank of such an a!ency and to de"elopin! the process of such an a!ency and to de"elopin! the process of securiti7ation on of banks loans assets for pro"idin! li8uidity. %econdary arket of deri"ates based on securiti7ed assets could also be de"eloped as in indi"idual(s country. C4 'e"enue reco"ery Act;. In so e states re"enue reco"ery act has been ay be noticed to co"er the act by %tate. ade

applicable to banks . %ince this is also e5penditure process of ad6udicatin! clai s/ banks

Ear&$ s$mptoms b$ /hich one can recogni0e a performing asset t rning in to Non1performing asset
%o r categories of ear&$ s$mptoms:1 , 1 - %inancia&: Non.pay ent of the "ery first instal ents in case of ter loan.

&ouncin! of che8ue due to insufficient balance in the accounts. Irre!ularity in instal ents. Irre!ularity of operations in the accounts. Enpaid o"er due bills. Declinin! Current 'atio. Pay ent )hich does not co"er the interest and principal a ount of that instal ent.

=hile

onitorin! the accounts it is found that partial a ount is di"erted to sister concern

or parent co pany. (1? Oper(&i,-(' (- P+"si7('# If infor ation is recei"ed that the borro)er has either initiated the process of )indin! up or are not doin! the business. 0"erdue recei"ables. %tock state ent not sub itted on ti e. $5ternal non.controllable factor like natural cala ities in the city )here borro)er conduct his business. Fre8uent chan!es in plan. Non pay ent of )a!es. (0? A&&i&u i-(' C+(-5es# Ese for personal co fort/ stocks and shares by borro)er. A"oidance of contact )ith bank. Proble (*? O&+ers# Chan!es in <o"ern ent policies. Death of borro)er. Co petition in the arket. bet)een partners.

*teps to fo&&o/ p and a'oid s&ippage from PA)* to NPA)*

The sanction of loan should )ith in the stipulated ti e as per head office !uidelines all infor ation should be collected about the borro)er at the ti e of sanctionin! the loan. At the ti e of fi5ation of repay ent period/ !eneration of inco e/ surplus repayin! capacity and !estation period allo)ed should be taken into consideration. The a ount should be disbursed accordin! to the borro)er he should neither be under financed nor o"er financed. All necessary re8uire ent in the loan sanctioned should be co plied )ith before reali7in! the loan li it. The business pre ises of the borro)er should be "isited re!ularly .Any short co in!s if found should be infor ed hi!her officials of banks. $nd use of funds is to be "erified it been purchased or not. 'eco"ery re inders should be sent re!ularly to the borro)er and that too )ell in ti e i.e. before the date )hen his instal ents beco e due. Doans and li its should be re"ie)ed and rene)ed ti ely. A co plete and proper set of security docu ents duly filled and si!ned by all borro)ers should be obtained. In case of natural the repay ent should be rescheduled The safety/ security/ docu entation/ proper sta pin! etc.should be ensured )ill before the disburse ent of loans. eans that the banker should al)ays ensure that the

purpose for )hich the loan )as disbursed has been ser"ed or not that is sa e thin!s has

LITERATURE REVIEW

Magazine name CAPITAL MARKET Dec. 2009 issue The article taken for reference from this magazine and the article is named Short term pains, long term gain! on "g# $# It disc%sses a&o%t the rising N"'s, increase in pro(ision co(erage, sl%ggish credit off take and d)indling treas%r* income# It states that these meas%res are going to set )a*s for &etter (al%ations# It tells a&o%t ho) the +S, +anke- has o%tperformed the +S, Sense- &* recording ro&%st ret%rns of 1.$/# It disc%sses a&o%t (ario%s &anks namel* +ank of India, Union +ank of India, State +ank of India, +ank of +aroda, "%n0a& National +ank and Ind%sInd +ank ha(e reached their all time high d%ring Oct# 1 No(# 2334 period# It disc%sses a&o%t the preparedness of (ario%s &anks for red%cing N"'s i#e# &* impro(ing capital ade5%ac* ratio, increasing the minim%m pro(ision co(erage ratio, introd%cing ne) policies for &roader interest rate regime, creating more transparent s*stem and e-tending &anking reach# It also disc%sses a&o%t the &enchmark prime lending rate 6+"7R8 concept of R+I )hich helps to ens%re appropriate pricing of loans# Magazine name BU I!E T"DA# Dec. 2009 issue

The magazine gi(es %s the data a&o%t the (ario%s commercial &anks operating in India and Ranks them according to fo%r gro%p9s namel* large &anks, :id1size &anks, Small &anks and ;er* Small &anks# <rom the data gi(en in the magazine done &* +T =":> st%d* is clear that despite the glo&al credit crisis contin%es to take its toll last month the 133th US &ank collapsed since 7ehman +rothers the Indian +anks contin%e to do &%siness as %s%al and the res%lt is gi(en in n%m&ers thro%gh this s%r(e*# Resea$c% Pa&e$ 'A c(m&a$a)i*e s)u+, (- !(n Pe$-($mance Asse)s in In+ia. /, P$as%an)% K Re++,0 IIM1 A%ma+a/a+ This article disc%sses a&o%t the financial sector reform in India )hich has progressed rapidl* on aspects like interest rate dereg%lation, red%ction in reser(e re5%irements, &arriers to entr*, pr%dential norms and risk &ased s%per(ision &%t the progress on the str%ct%ral instit%tional aspects has &een m%ch slo)er and is a ca%se for concern# It tells a&o%t )hat changes are re5%ired to tackle the N"' pro&lem# This paper also deals )ith the e-periences of other 'sian co%ntries in

handling of N"'s# It also s%ggests mechanisms to handle the pro&lem &* dra)ing on e-periences from other co%ntries

Re&($) (n 'Ma2imizing Va3ue (- !(n1Pe$-($ming Asse)s. /, "$ganiza)i(n -($ C(1"&e$a)i(n an+ De*e3(&men) 4"ECD5 This report deals )ith the changing d*namics in 'sian Non "erforming 7oans and the sociological reflections on Insol(enc* reforms in ,ast 'sia# +%t more importantl* it mentions different co%ntr* reports of 'sian region# In case of India S%mant +atra! disc%sses the de(elopments in India# It tells %s a&o%t )hat is N"' and gi(es an o(er(ie) of non performing assets in India# It also disc%sses a&o%t the factors contri&%ting to N"'s and its impact on the )orking of commercial &anks# The legal reforms and the R+I g%idelines for N"'s are disc%ssed# Research "aper on Rooting O%t Non "erforming 'ssets! &* Nachiket :or, ICICI research centre The paper attempts to highlight some ma0or micro le(el iss%es that are at the root of )h* %ns%staina&le performance le(els are &eing o&ser(ed )ithin +anks# The a%thors arg%e that %nless the micro le(el iss%es are dealt )ith, e(en after the s*stemic iss%es are resol(ed, the pro&lem of N"'s or other fail%res of the intermediation process ma* res%rface )ith greater intensit*# The manner in )hich &anks manage the three phases in the life c*cle of an asset 6creation, monitoring and reco(er*8 determines the 5%alit* of the intermediation process )ithin a &ank# In this paper, the need for internall* consistent &%siness models to g%ide the &eha(ior of a &ank in each of these three phases is disc%ssed

Re'ie/ of &iterat re
1.4 Hu ar %.& 1122@4;.IN liberali7in! econo y bankin! and financial sector !et hi!h priority. Indian bankin! sector of ha"in! a serious proble due to non perfor in! assets. The financial refor s ha"e helped lar!ely to clean NPA )as around '%. ,2333 cores. In the year 233+. The earnin! capacity and profitability of the bank are hi!hly affected due to this. NPA is defined as an ad"ance for )hich interest or repay ent of principal or both re ain out standin! for a period of ore than t)o 8uarters. The le"el of NPA act as an indicator sho)in! the bankers credit risks and efficiency of allocation of resources.

2.4 'eddy '.& 123324;. banks and financial institutes ha"e

ade si!nificant contributions

to al ost all the sectors of the Indian econo y like a!riculture/ industry/ trade/ e ploy ent and infrastructure. The e"er increasin! trends in deposits and credit speak "olu es for the perfor ance of Indian banks and FI%. Ho)e"er/ the NPA in the credit portfolios ha"e beco e a thorn in the flesh durin! a last one decade or so. NPA not only affect the producti"ity but also sully the i a!e of Indian bankin!. The 8uality of loan assets is the ost i portant factor for the basic "iability of the bankin! syste . NPA not only eat into profitability and ha per their ability to recycle funds but also shake the public confidence )hich is crucial for e5istence of any financial institution. The present trends of NPA are alar in! and calls for ri!orous and concerted efforts by banks and financial institutes as )ell as !o"ern ent. *.4.HENDE %.1233+4;. Non perfor in! loans epito i7e bad in"ested .they credit fro ent ends up in bankin! syste iss allocate

!ood pro6ects /)hich do not recei"e fundin! to failed pro6ects .&ad in"est isallocation of capital and by e5tension /labour and natural resources . ay spill o"er the and control the oney stock/ )hich ay lead to econo ic contraction.

The econo y perfor s belo) its production potential. NPA loans This spill o"er effect cans channels throu!h li8uidity or bank insol"ency A .)hen any borro)ers fail to pay interest banks pay ents across the country.

ay e5perience li8uidity shorta!e.

These shorta!es can 6a

&. Di8uidity constraints bank in payin! deposits e.!. cashin! their pay check. &ankin! panic follo)s a run on banks by depositor as part of the national and econo ic contraction follo)s. C. undercapitali7ed banks e5ceed the banks capital base. There are * )ays of sol"in! this proble of NPA .They are oney stock. Contracts

1. 'ecapitali7ation of banks )ith !o"ern ent aid 2/ disposal and )rite off NPA.

*. Increased re!ulations. +.4 %ha6ahan #.H 1233,4;. NPA reflect the health of the bankin! syste . %o it is a atter

of so e si!nificance )hen the reser"e bank discloses as it does in its latest report on trend and pro!ress of bankin! in India that bet)een ends #arch 122- and 122N. NPA of public sector banks )ere brou!ht do)n by al ost one half. Closely connected )ith the a!nitude of NPA is the proportion of NPA attributable to the priority sector. Ha"e accordin! to '&I al ost one half of all NPA of public sector banks are accounted for by the priority sector. ,.4 #ishra %. 1233N4;.The NPA is considered as an i portant para eter to 6ud!e the perfor ance and financial health of banks. The le"el of NPA is one of the dri"ers of financial stability and !ro)th of the bankin! sector. -.4 Ah ed G.M 1233@4;. The !ro)th co petition and slu!!ish !ro)th in econo y coupled )ith poor credit deposit ratio. The lar!e "olu e of non perfor in! assets in the balance sheet and lack of auto ation and professionalis in operations ha"e been flarin! up the country. The le"el of non perfor in! loan is reco!ni7ed as an indicator for assessin! banks credit risk/ assets 8uality and efficiency in allocation of resources to production sector.

Research methodo&og$
'esearch is defined as a scientific and syste atic search for pertinent infor ation on a specific topic. It is a syste atic collection/ recordin!/ analysis/ and interpretation and reportin! of infor ation about "arious facts of a pheno enon .Ender study se"eral steps !o to!ether into akin! of research pro6ect. To be precise it in"ol"e follo)in! steps;.

For ulatin! and classifyin! the topic. Critically re"ie)in! the literature. De"elop ent of hypothesis.

 Preparin! the research desi!n. Data collection. Analy7in! data. =ritin!/ presentin! sub ittin! the pro6ect reports. Data Collection Pri ary data;. Pri ary data is first hand infor ation )hich is collected a fresh and thus happens to be ori!inal in character. The pri ary data )as collected by the )ay of )ell fra ed 8uestionnaire .Ouestionnaire )as ad inistered to!ether the infor ation relation to NPA.0n the basis of 8uestion arisesB I ha"e is ,3. %econdary Data;. %econdary data are those )hich ha"e already been passed throu!h the statistical process. The data )hich pre essential for this study relatin! to /annual reports/ ana!e ent reports / ana!e ent of NPA )as bared on aterials pro"ided by bank secondary source of data /This data )as collected fro essential books on bankin! )as referred. ade the tables and pie charts. %a ple %i7e

a!a7ines / 6ournals/ '&I circulars and so e

0b6ecti"es of the study 14 To kno) its eanin!.

24 To study causes responsible. *4 To kno) nor s !i"en by '&I.

+4 To kno) the

easure taken at "arious le"els for

ana!e ent of NPA.

,4 To kno) the i pact of NPA on banks. *cope of st d$:1 The study ainly co"ers eanin! of NPA/ then classification and pro"isionin!/ factor easures

responsible for the e er!ence of NPA/ i pact of NPA in banks and #ana!e ent of NPA throu!h resolution. %trate!y fra e)ork credit infor ation bureau/ le!al branch. and co pro ise settle ent sche es. The study has been conducted at HDFC Tarn Taran

Chapter 2. "ata Ana&$sis and interpretation

Ques&i,- -,= 3 %ince ho) lon! is the HDFC branch is functionin!P 14 .2 years 2.4 2.* years *4 *., years

+.4 , year Q

Rear 2 year 2.* year *., year , year Q Total

No. of respondents 2 1+ 2@ ,3

Percenta!e K + 12 2@ ,133

2 year 2-3 year 3-5 year 5 year+

Interpretation:1)e can obser"e that ,-K of branches for functionin! since , years and all other branches are functionin! fro a ini u period of *., years.

Ouestion no 2 %ince ho) lon! the presence of NPA is obser"ed in your HDFC branchP Rear 3.1 1.2

2.* *.+ , Q abo"e

Rear 3.1 1.2 2.* *.+ , and abo"e Total

No. of respondents * , @ 1+ 23 ,3

Percenta!e K 13 12N +3 133

0-1 1-2 years 2-3 years 3-4 years 5 +years

Interpretation:-From the above it can be interpreted that in nearly 40% of branches NP !" and present since 5 years and above# nd in 2$% of branches NP !" are present bet%een 3-4 years and in rest of branches NP !" are present from 3 years#

&'estion no# 3

=hat is the appoint ent "alue of NPA in your branchP A ount 1.13 13.23 23.*3 *3.,3 ,3 and abo"e A ount 3.13 13.23 23.*3 *3.,3 ,3 and abo"e Total No. of respondents 2 , @ 1* 22 ,3 Percenta!e K + 13 12++ 133

0-10 10-20# 20-30 30-50 50 and above

Interpretation;.Fro

the abo"e table it can be interpreted that in nearly ++K branches

NPA(% are abo"e ,3 lacs. Another 2-K of branches ha"e NPA(% of about *3.,3 lacs in rest of branches NPA(% up to *3 lacs are found. Ques&i,- -,=* =hich is the ain cause responsible for the presence of NPAP 14 Proper selection of borro)ers 24 Deficiency in processin! *4 I proper appraisal of assets +4 Dack of super"ision and follo) up ,4 Natural cala ities -4 =ill full default of borro)er

Causes I proper borro)ers. Deficiency in processin!. I proper appraisal of assets selection

No. of respondents of -

Percenta!e 12

+ +

@ @ 1-

Dack of super"ision and @ follo) up Natural cala ities =ilful default of borro)er Total . 2@ ,3

. ,133

(mproper selection of borro%ers# )eficiency in processin* (mproper appraisal of assets +ac, of s'pervision and follo% 'p Nat'ral calamities -illf'l defa'lt of borro%er

Interpretation;.Fro )ilful is the and follo) up is the

the abo"e table it can be interpreted that in ,-K off the branches ain cause of NPA(%. Then it is follo)ed by any causes

ain cause of the e er!ence of NPA(% .In 1-K branches lack of super"ision

Ouestion no., Do you think that NPA can be controlledP 1. Definitely yes 2. Res *. Can(t say +. No ,. Definitely no

'esult Definitely yes yes Cant say No Definitely no Total

No. of respondents 2, 12 3 3 ,3

Percenta!e K ,3 *@ 12 3 3 133

)efinitely yes yes .ant say No )efinitely no

Interpretation; . Fro

the abo"e table/ it can be interpreted that really ,3K of respondents ake any decision .

ha"e told that definitely NPA can be controlled and another *@K respondents say that NPA(% can be controlled / )hile 12K of respondents could not Ques&i,- -,= 2

To )hat e5tent NPA has been con"erted into !ood assetsP 14 1 24 2 *4 * +4 , ,4 S,

'esult 1 2 * + , S, Total

No. of respondents 3 + , 2 2 2* ,3

Percenta!e K 3 @ 13 1@ 1@ +133

1 2 3 4 5 above than 5

Interpretation; . Fro

the abo"e table/ It can be interpreted that +-K of NPA ha"e been ore.

con"erted into !ood assets to the e5tent of ,K or Ques&i,- -,= >

=hich is the ost appropriate easure to reduce the le"el of NPA(%P 14 Constant dialo!ue )ith borro)ers 24 %elf in"ol"e ent *4 Dok adalat +4 Debt reco"ery ,4 Tribunals #easures No. of respondents Percenta!e K 12

14 4 Constant dialo!ue )ith borro)ers 24 %elf in"ol"e ent *4 Dok adalat +4 Debt reco"ery ,4 Tribunals Total N 13 12 1, ,3

1+ 23 2+ *3 133

.onstant dialo*'e %ith borro%ers / "elf involvement / +o, adalat )ebt recovery 0rib'nals

Interpretation

1- Fro

the abo"e it can be interpreted that *3K branches debt reco"ery ost appropriate easure for reducin! the le"el of NPA(% . In 2+K ost appropriate easure

tribunals are the

branches lok adalat in 23K branches %A'FA$%I ACT is the for reducin! the level of NP ! "# Ques&i,- -,=C To )hat e5tent the profitability has been affected by NPA(%P Ka!e profit affected by NPA 3., ,.13 13.23 23 and abo"e K profit affected by NPA 1 .3., 2. ,.13 *. 13.23 +. 23 and abo"e Total No. of respondent 23 1, 13 , ,3

Percenta!e K +3 *3 23 13 133

0-5 5-10# 10-20# 20 and above

Interpretation:.)e can obser"e that +3K of respondents ha"e told that profitability is affected to the e5tent of 3., K due to NPA(% and other *3K respondents think that profitability is affected to the e5tent of ,.13K )hile other 23K of respondents think that profitability is affected to the e5tent of 13.23K and the re ainin! 13K of respondents think that profitability is affected to the e5tent of ore than 23K.

Ouestion no.2 Has the profitability i pro"ed after adoptin! NPA reduction techni8uesP 'esult Definitely i pro"ed I pro"ed Can(t say Not i pro"ed Definitely not i pro"ed 'esult 14 definitely i pro"ed 24 I pro"ed *4 cant say +4 not i pro"ed No. of respondent 2, 1, , , Percenta!e K ,3 *3 13 13

,4 definitely not i pro"ed Total

3 ,3

3 133

definitely improved (mproved / cant say not improved definitely not improved

Interpretation ;.In the abo"e table /it can be interpreted that ,3K of respondents say that profitability has been i pro"ed after adoptin! NPA reducin! techni8ues and 13K of respondents say that profitability has been i pro"ed )hile the re ainin! 13K of respondents could not ake any decisions.

CHAPTER 3
Conc& sion
The proble of non perfor in! assets has been a a6or issue for the bankin! industry. etc. The proble There are "arious reasons for the e er!ence of non perfor in! assets like )ill full default lack of de and/ industrial sickness/ i proper appraisal syste of NPA(% not only affects the profitability of the bank but also affects its i a!e in the arket. The banks are takin! "arious steps for controllin! the le"el of NPA(%. The '&I

)hich is the ape5 body for controllin! the le"el of NPA has been !i"in! !uidelines and !ettin! nor s for the bank in order to control the incidents of defaults.

Recommendations
It is the reco endation that the proper docu entation and "erification to be ade before sanctionin! the loan. 'e!ular "isits should be $ po)erin! staff to ade in the business pre ises of the borro)er.

ake decisions related to sanctionin! of loans. aintained )ith the custo er to keep track of

Constant interactions ha"e to be their loan pay ents.

%trict easures ha"e to be taken )hile issuin! or sanctionin! the loan . The easures can includes "erification of 6ob and salary slips/ "erification of securities and the like. All the banks are tryin! to reduce NPA throu!h "arious techni8ues and it is su!!ested that there easures ha"e to be continue.

4ib&iograph$
Garshnay P.N &ankin! la) and practice publishers. %ultan Chand and %ons. 12th edition. %har a '.H/ %in!h Mas)ant/ <upta H %hashi(/ &ankin! Insurance of forei!n trade la)s and procedures. Published by Halyani publishers. Chandra Prassana Financial #ana!e ent Published by Tata #C <ra) hill Publishers. A!!ar)al #onica 9&ankin! theory and Practice/ Published by Halyani Publishers. '&I &ulletins. =ebsites. ===.'&I.0'<.IN

===.&ANHIN<.C0#

AB TRACT

Strong &anking s*stem of India helped a lot to s%r(i(e in slo)do)ns and economic meltdo)ns# 's India is a de(eloping nation it needs more reso%rces and infrastr%ct%re to speed %p its gro)th in all sectors# +anking sector is an emerging sector no) a da*s, pro(iding lot of 0o&s, helping in de(elopment &* accepting deposits, e-tending credits, and also offering (ario%s other important financial ser(ices# ?hile making lot of profits, the acc%m%lation of h%ge non performing assets on the other hand in &anks has ass%med great importance# The depth of the pro&lem of &ad de&ts )as first realized onl* in earl* 1443s# The magnit%de of N"'s in &anks and financial instit%tions is o(er Rs#1, @3,333 crore# ?hile gross N"' reflects the 5%alit* of the loans made &* &anks, net N"' sho)s the act%al &%rden of &anks# No) it is increasingl* e(ident that the ma0or defa%lters are the &ig &orro)ers coming from the non priorit* sector# The &anks and financial instit%tions ha(e to take the initiati(e to red%ce N"'s in a time &o%nd strategic approach# "%&lic sector &anks fig%re prominentl* in the de&ate not onl* &eca%se the* dominate the &anking ind%stries, &%t also since the* ha(e m%ch larger N"'s compared )ith the pri(ate sector &anks# This raises a concern in the ind%str* and academia &eca%se it is generall* felt that N"'s red%ce the profita&ilit* of a &ank, )eaken its financial health and erode its sol(enc*# <or the reco(er* of N"'s a &road frame)ork has e(ol(ed for the management of N"'s %nder )hich se(eral options are pro(ided for de&t reco(er* and restr%ct%ring# +anks and <Is ha(e the freedom to design and implement their o)n policies for reco(er* and )rite off incorporating compromise and negotiated settlements#

Si(nificance of the study

The main aim of an$ person is ti&i0ation mone$ in the best manner since the India is co ntr$ /ere more than ha&f of the pop &ation has prob&em of r nning the fami&$ in the most efficient manner. Ho/e'er Indian peop&e faced &arge n mber of prob&em ti&& the de'e&opment of the f &&1f&edged banking sector. The Indian banking sector came into the de'e&oping nat re most&$ after the 1551 go'ernment po&ic$. The banking sector has rea&&$ he&ped the Indian peop&e to ti&i0e the sing&e mone$ in the best manner as the$ /ant. Peop&e no/ ha'e started in'esting their mone$ in the banks and banks a&so pro'ide good ret rns on the deposited amo nt. The peop&e no/ ha'e at the most nderstood that banks pro'ide them good sec rit$ to their deposits and so e6cess amo nt are in'ested in the banks. Th s7 banks ha'e he&ped the peop&e $o achie'e their socio economic objecti'es. The banks not on&$ accept the deposits of the peop&e b t a&so pro'ide them credit %aci&it$ for their de'e&opment. Indian banking sector has the nation in de'e&oping the b siness and ser'ice sectors. 4 t recent&$ the banks are facing the prob&em of credit risk.It is fo nd that man$ genera& peop&e and b siness peop&e borro/ from the banks b t d e to some gen ine or other reasons are not ab&e to repa$ back the amo nt dra/n to the banks. The amo nt /hich is not gi'en back to the banks is kno/n as non1 performing assets /hich hamper the b siness of the banks. " e to NPAs the income of the bank is red ced and the banks ha'e to make &arge n mber of the pro'isions that /o &d c rtai& the profit of the bank and debtor that the financia& performance of the banks not sho/s good res &ts. The ain ai behind akin! this report is to kno) ho) public sector &anks are operatin! their business and ho) NPAs play its role to the operations of the public sector &anks. The report NPAs are classified accordin! to the sector/ industry/ and state )ise. The present study also focuses on the e5istin! syste in India to sol"e the proble of NPAs and co parati"e analysis to understand )hich bank is playin! )hat role )ith concerned to NPAs.Thus/ the study )ould help the decision akers to understand the financial perfor ance and !ro)th of public sectors banks are co pared to the NPAs. Rese(r7+ %e&+, ,',5"

The research ethodolo!y eans the )ay in )hich )e )ould co plete our prospected task. &efore undertakin! any task. &efore undertakin! any task it beco es "ery essential for anyone to deter ine the proble of study. I ha"e adopted the follo)in! procedure in co pletin! y report study. 114 124 1*4 1+4 1,4 1-4 For ulatin! the proble 'esearch desi!n Deter ine the data sources Analy7in! the data Interpretation Preparin! research report 114 For ulatin! the proble I a interested in the bankin! sector and I )ant to y future in bankin! sector so decided to ake y research study on bankin! sector. I analy7ed first the factors that are i portant for the bankin! sector and I ca e to kno) that pro"idin! credit facility to the borro)er is one of the i portant factors as far as the bankin! sector is concerned. 0n the basis of the analy7ed factor/ I felt that the i portant issue ri!ht no) as far as the credit facilities are pro"ided by the bank is non perfor in! assets. I started kno)in! about the basics of the NPAs and decide to the study on the NPAs. %o/ I chose the topic 9N0N perfor in! Assets the !reat challen!e before the public sector banks:. 124 'esearch Desi!n The research desi!n tells about the ode )ith )hich the entire pro6ect is prepared. #y research desi!n for the study is basically analytical. &ecause I ha"e utili7ed the lar!e nu ber of data of the public sector banks. 1*4 Deter inin! the data source The data source can be pri ary or secondary. The pri ary data are those data )hich are used for the first ti e in the

study. Ho)e"er such data take place uch ti e and are also e5pensi"e. =hereas the secondary data are those data )hich are already a"ailable in the arket. These data are easy to search and are not e5pensi"e too for y study I ha"e utili7ed totally the secondary data. 1+4 Analy7in! the data The pri ary data )ould not be useful until and unless they are )ell edited and tabulated. =hen the person recei"es the pri ary data any unuseful data )ould also be there. %o/ I analy7ed the data and edited the and turned the in the unuseful data )ould also be there. %o/ I analy7ed the data and edited the and turned the in the useful tabulations. %o/ that can beco e useful in y report study. 1,4 Interpretation of the data =ith use of analy7ed data I ana!ed to prepare y pro6ect report. &ut the analy7in! of data )ould not help the study to reach to)ards its ob6ecti"es. The interpretation of the data is re8uired so that the others can understand the cru5 of the study in ore si ple )ay )ithout any proble so I ha"e added the chapter of analysis That )ould e5plain others to understand y study in si ple )ay. 1-4 Pro6ect )ritin! This is the last step in preparin! the pro6ect report. The ob6ecti"e of the report )ritin! )as to report the findin!s of the study to the concerned authorities. T,,'s (- Te7+-iAues As no study could be successfully co pleted )ithout proper tools and techni8ues/ sa e )ith y pro6ect. For the better presentation and ri!ht e5planation I used tools of statistics and co puter "ery fre8uently. And I a "ery thankful to all

those tools for helpin! e a lot. &asic tools )hich I used for pro6ect fro statistics are. B(r C+(r&s Pie 7+(r&s T(!'es &ar charts and pie charts are really useful tools for e"ery research to sho) the result in a )ell clear/ ease and si ple )ay. &ecause I used bar charts and pie charts in pro6ect for sho)in! data in a syste atic )ay/ so it need not necessary for any obser"er to read all the theoretical detail/ si ple on seein! the charts anybody could kno) that )hat is bein! said. Applied Principles and concepts =hile I started to do the pro6ect the ain thin! )hich )as the atter of concern )as that around )hat principles I ha"e to re"ol"e y pro6ect. &ecause )ithout ha"in! any hypothesis and ob6ecti"e )e cannot deter ine that )hat output or result )e are e5pectin! fro the pro6ect. And second thin! is that ha"in! only tools and techni8ues for the purpose of pro6ect is not rele"ant until unless )e ha"e the principals for )hich )e ha"e to use those tools and techni8ues. C,-7'usi,- &, &+e pr,!'e% A report is not said to be co pleted unless and until the conclusion is !i"en to the reports. A conclusion re"eals the e5planations about )hat the report has co"ered and )hat is the essence of the study. =hat y pro6ect report co"er is concluded belo). The proble on )hich I focused y study is NPAs the bi! challen!e before the public sector banks .The Indian &ankin! sector is the i portant ser"ice sector that helps the people of the India to achie"e the socio econo ic ob6ecti"e. The Indian bankin! sector is de"elopin! )ith !ood appreciate as co pared to the !lobal bench ark banks. The Indian bankin!

syste is classified into schedule and non schedule banks. The public sector banks play "ery i portant role in de"elopin! the nation in ter s of pro"idin! !ood financial ser"ice. The public sector banks ha"e also sho)n !ood perfor ance in the last fe) years. The only proble is that the public sector banks are facin! today is the proble of nonperfor in! assets. The non perfor in! assets eans those assets )hich are classified as bad assets )hich are not possibly by return back to the banks by the borro)ers. If the proper ana!e ent of the NPAs is not undertaken it )ould be ha pers the business of the banks. The NPAs )ould as try the current profit/ interest inco e due to lar!e pro"isions of the NPAs and )ould affect the s ooth functionin! of the recyclin! of the funds. If )e analy7e the past years data/ )e ay co e to kno) that the NPAs ha"e increased "ery drastically after 2331/ in 122N the !ross NPAs of the Indian bankin! sector )as+N/*33 crore )here as in 2331 the fi! )as-*/@@* and )hich increase at faster rate in 233* )ith 2+/23, crore. The public sector banks in"ol"e its nearly ,3K of share in the NPAs .The '&I has been tryin! to take nu ber of easures but the ratio of NPAs is not decreasin! of the banks. The banks ust find out the easures to reduce the e"ol"in! proble of the NPAs. If the concept of NPAs is taken "ery li!htly it )ould be dan!erous for the Indian bankin! sector. The reduction of the NPAs )ould help the banks to boost up their profits/ s ooth recyclin! of funds in the nation. This )ould help the nation to de"elop ore bankin! branches and de"elopin! the econo y by pro"idin! the better financial ser"ices to the nation Allahabad &ank has set a tar!et to brin! do)n its net non. perfor in! asset 1NPA4 to belo) 1K by the end of current fiscal and e5pects its balance sheet si7e to double durin! the ne5t t)o.three years if it ana!ed to aintain the e5istin! !ro)th rate of *3.*,K. The bank is also plannin! to put in place the centrali7ed bankin! solution 1C&%4 by Dece ber this year. Accordin! to 0N %in!h/ chair an and ana!in! director/ Allahabad &ank; 9=e are !oin! to be one of the best in the industry in ter s of NPA ana!e ent. =e are tar!etin! !ross NPA of ,K and net npa of less than 1K by #arch/ 233,.: Incidentally/ the net NPA of the bank has already co e do)n to 1.NK or 's 222.@ crore as in %epte ber fro a hi!h of ,.2K or 's -@*.+ crore as in %epte ber/ 233*. #r. %in!h said the bank )as focusin! on NPA pro"ision

co"era!e/ the ratio of )hich )ent up to N-.-K as in %epte ber fro as in #arch and -3K as in %epte ber/ 233*.

N*.@K

The bank has already crossed the 's ,,/333 crore business ark at 's ,,/**3 crore durin! the second 8uarter of the current financial year and is confident of crossin! 's -1/333 crore arks by the end of the fiscal. In #arch 233@ !ross npa declined to 1.@K fro 2.33K .