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MRP Final Project Report: Comparative Analysis On Non Performing Assets of Private and Public Sector Banks
MRP Final Project Report: Comparative Analysis On Non Performing Assets of Private and Public Sector Banks
ON
BY
ANINDYA SANKAR KUNDU
(08BS0000328)
PROJECT TITLE
FACULTY GUIDE
Prof. Rajasree Nandy
ICFAI Business School
KOCHI
SUBMITTED BY
Declaration
ANALYSIS ON NON
has been
I also declare that this project is the result of my own effort and has not been
submitted to any other institution for the award of any Degree or Diploma.
Place: Kochi
Anindya Sankar Kundu
08bs0000328
3
Acknowledgements
If words are considered to be signs of gratitude then let these words convey the
very same.
I thank Prof. Rajasree Nandi, ICFAI Business School, Kochi, who has
sincerely supported me with the valuable insights into the completion of this
project.
I am grateful to all faculty members of ICFAI Business School, Kochi and my
friends who have helped me in the successful completion of this Management
Research Project.
TABLE OF CONTENTS
Declaration
3
Acknowledgments
.
4
Abstract
.
7
1. Project Details
1.1
Objective
of
the
project
9
1.2 Research
Methodology
.
9
1.3 Scope of the project
9
1.4 Sampling Methods
10
10
2. Introduction
13
2.3
Indian
economy
and
NPAs
. 13
2.4
Global
developments
and
NPAs
..
14
2.5
Factors
for
rise
in
NPAs.
15
2.6
Problems
due
to
NPA
.
19
2.7
Types
of
NPA
.
20
3. Income Recognition
3.1
Income
Recognition
Policy ................................................................. 22
3.2
Reversal
of
income ............................................................................
... 22
3.3
Leased
Assets .............................................................................
............ 23
6
3.4
Interest
Application ......................................................................
....... 23
3.5
Reporting
of
NPAs ...............................................................................
24
4. Assets Classifications
4.1
Sub-standard
Assets ......................................................................
....... 26
4.2
Doubtful
Assets ......................................................................
...............
30
4.3
Loss
Assets .............................................................................
.................
31
..............
34
5.3 Preventive Measurement for
NPA ..................................................
35
39
6.2
Inability
to
Pay
.
40
6.3 Restructuring / Rescheduling of Loans
..
41
6.4 Treatment of Restructured Standard Accounts
..
41
6.5 Treatment of restructured sub-standard
accounts .
42
6.6 Up gradation of restructured accounts
.
42
6.7
General
..
43
6.8
Income
recognition
.
43
6.9
Funded
Interest
..
43
6.9.1 Conversion into equity, debentures or any
other instrument
44
6.9.2
Provisioning
44
7. Special Cases
8
48
7.1.9
Government
guaranteed
advances
.
49
7.2.1
Take-out
Finance
49
7.2.2
Post-shipment
Supplier's
Credit
50
7.2.3
Export
Project
Finance
..
50
7.2.4 Advances under rehabilitation approved by
BIFR/ TLI ..
50
7.2.5
Role
of
ARCIL
..
51
8.
Data
Analysis
and
interpretation
..
52
9.
Annexure
..
64
10.
Bibliography
65
ABSTRACT
The accumulation of huge non-performing assets in banks has
assumed great importance. The depth of the problem of bad
debts was first realized only in early 1990s. The magnitude of
NPAs in banks and financial institutions is over Rs.1, 50,000
crore.
but also since they have much larger NPAs compared with the
private sector banks. This raises a concern in the industry and
academia because it is generally felt that NPAs reduce the
profitability of a bank, weaken its financial health and erode its
solvency.
11
CHAPTER-1
Project Details
13
CHAPTER-2
14
INTRODUCTIO
N
2. Introduction
NPA. The three letters Strike terror in banking sector and
business circle today. NPA is short form of Non Performing
Asset. The dreaded NPA rule says simply this: when interest or
other due to a bank remains unpaid for more than 90 days, the
entire bank loan automatically turns a non performing asset.
The recovery of loan has always been problem for banks and
financial institution. To come out of these first we need to think
is it possible to avoid NPA, no cannot be then left is to look after
the factor responsible for it and managing those factors.
2.1 Definitions:
An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank.
A non-performing asset (NPA) was defined as a credit facility
in respect of which the interest and/ or instalment of principal
has remained past due for a specified period of time.
15
However lending also carries credit risk, which arises from the
failure of borrower to fulfill its contractual obligations either
during the course of a transaction or on a future obligation.
A question that arises is how much risk can a bank afford to
take? Recent happenings in the business world -Enron,
WorldCom, Xerox, Global Crossing do not give much confidence
to banks. In case after case, these giant corporate becan1e
bankrupt and failed to provide investors with clearer and more
complete information thereby introducing a degree of risk that
many investors could neither anticipate nor welcome. The
history of financial institutions also reveals the fact that the
biggest banking failures were due to credit risk. Due to this,
banks are restricting their lending operations to secured
avenues only with adequate collateral on which to fall back
upon in a situation of default.
20
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.
2.
3.
4.
Marketability
Acceptability
Safety
Transferability.
22
23
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.
24
25
CHAPTER-3
INCOME
RECOGNITION
3. INCOME RECOGNITION
27
the leased
before the
unrealised,
accounting
29
30
CHAPTER-4
31
Asset Classification
- Provisioning Norms
4. Asset Classification
Categories of NPAs
Standard Assets:
32
( 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
33
Provisioning Norms
General
In order to narrow down the divergences and ensure
adequate provisioning by banks, it was suggested that a
bank's statutory auditors, if they so desire, could have a
dialogue with RBI's Regional Office/ inspectors who carried
out the bank's inspection during the previous year with
regard to the accounts contributing to the difference.
34
Loss assets:
The entire asset should be written off. If the assets are
permitted to remain in the books for any reason, 100 percent of
the outstanding should be provided for.
Doubtful assets:
35
Provision
requirement (%)
Up to one year
20
30
(1)
(2)
Outstanding stock of
NPAs as on March 31,
2004.
Advances classified
as doubtful more than
three years on or after
April 1, 2004.
As on 31.03.2003, 50 percent of the additional
provisioning requirement on the assets which became
doubtful on account of new norm of 18 months for transition
from sub-standard asset to doubtful category.
As on 31.03.2002, balance of the provisions not made
during the previous year, in addition to the provisions
needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning
consequent upon the reduction in the transition period
from substandard to doubtful asset from 18 to 12 months
over a four year period commencing from the year ending
March 31, 2005, with a minimum of 20 % each year.
Note: Valuation of Security for provisioning purposes
Sub-standard assets:
Standard assets:
Floating provisions:
38
Sub-standard assets : -
39
Doubtful assets
:-
Period
%age
provision
Up to one year
20
30
More
years
Loss assets
than
of
three 50
:-
40
41
CHAPTER-5
-
Impact of NPA
Preventive Measurement for
NPA
42
5. Impact of NPA
Profitability:-
Liquidity:-
Credit loss:Bank is facing problem of NPA then it adversely affect the value
of bank in terms of market credit. It will lose its goodwill and
brand image and credit which have negative impact to the
people who are putting their money in the banks.
43
Timeliness and Adequacy of response:Longer the delay in response, grater the injury to the account
and the asset. Time is a crucial element in any restructuring or
rehabilitation activity. The response decided on the basis of
techno-economic study and promoters commitment, has to be
adequate in terms of extend of additional funding and
relaxations etc. under the restructuring exercise. The package
of assistance may be flexible and bank may look at the exit
option.
Focus on Cash Flows:While financing, at the time of restructuring the banks may not
be guided by the conventional fund flow analysis only, which
could yield a potentially misleading picture. Appraisal for fresh
credit requirements may be done by analysing funds flow in
conjunction with the Cash Flow rather than only on the basis of
Funds Flow.
Management Effectiveness:The general perception among borrower is that it is lack of
finance that leads to sickness and NPAs. But this may not be
the case all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that
affects a borrowing units fortunes. A bank may commit
additional finance to an aling unit only after basic viability of
the enterprise also in the context of quality of management is
examined and confirmed. Where the default is due to deeper
malady, viability study or investigative audit should be done it
46
48
CHAPTER-6
Tools For recovery of npa
49
Lok Adalat:
Lok Adalat institutions help banks to settle disputes involving
account in doubtful and loss category, with outstanding
balance of Rs.5 lakh for compromise settlement under Lok
Adalat. Debt recovery tribunals have been empowered to
organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh
and above. This mechanism has proved to be quite effective for
speedy justice and recovery of small loans. The progress
through this channel is expected to pick up in the coming
years.
6.7 General:
These instructions would be applicable to all type of
credit facilities including working capital limits, extended to
industrial units, provided they are fully covered by tangible
securities.
As trading involves only buying and selling of
commodities and the problems associated with manufacturing
units such as bottleneck in commercial production, time and
cost escalation etc. are not applicable to them, these guidelines
should not be applied to restructuring/ rescheduling of credit
facilities extended to traders.
While assessing the extent of security cover available
to the credit facilities, which are being restructured/
rescheduled, collateral security would also be reckoned,
provided such collateral is a tangible security properly charged
to the bank and is not in the intangible form like guarantee etc.
of the promoter/ others.
6.9.2. Provisioning
While there will be no change in the extant norms on
provisioning for NPAs, banks which are already holding
provisions against some of the accounts, which may now be
classified as standard, shall continue to hold the provisions
and shall not reverse the same.
56
CHAPTER-7
Special Cases
7. Special Cases
7.1.1. Accounts with temporary deficiencies:
The classification of an asset as NPA should be
based on the record of recovery. Bank should not classify an
advance account as NPA merely due to the existence of some
deficiencies which are temporary in nature such as nonavailability of adequate drawing power based on the latest
available stock statement, balance outstanding exceeding the
limit temporarily, non-submission of stock statements and nonrenewal of the limits on the due date, etc. In the matter of
classification of accounts with such deficiencies banks may
follow the following guidelines:
Banks should ensure that drawings in the
working capital accounts are covered by the adequacy of
57
7.1.2.
7.2.1.Take-out Finance:
Takeout finance is the product emerging in the context of the
funding of long-term infrastructure projects. Under this
arrangement, the institution/the bank financing infrastructure
projects will have an arrangement with any financial institution
for transferring to the latter the outstanding in respect of such
financing in their books on a predetermined basis. In view of
the time-lag involved in taking-over, the possibility of a default
in the meantime cannot be ruled out. The norms of asset
classification will have to be followed by the concerned
bank/financial institution in whose books the account stands as
balance sheet item as on the relevant date. If the lending
institution observes that the asset has turned NPA on the basis
of the record of recovery, it should
be classified accordingly. The lending institution should not
recognize income on accrual basis and account for the same
only when it is paid by the borrower/ taking over institution (if
the arrangement so provides). The lending institution should
also make provisions against any asset turning into NPA
pending its takeover by taking over institution. As and when the
asset is taken over by the taking over institution, the
corresponding provisions could be reversed. However, the
taking over institution, on taking over such assets, should make
61
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.
63
CHAPTER-8
64
8.
ANALYSIS
BANK
AXIS
HDFC
ICICI
KOTAK
INDUSIND
DEPOSIT
87626
100769
244431
16424
19037
INVESTMENT
33705
49394
111454
9142
6630
ADVANCES
59661
63427
225616
15552
12795
TOTAL
468287
210325
377051
66
250000
200000
150000
100000
DEPO SIT
INVESTMENT
ADVANCES
50000
0
ICICI
HDFC
AXIS
INDUSIND
KOTAK
Analysis:-
From the above figure we can see that the ICICI Bank
deposit-investment-advances are quite high than other banks
like HDFC,AXIS,INDUSIND,KOTAK
BANK
BOB
BOI
DENA
PNB
UBI
TOTAL
DEPOSIT
152034
150012
33943
166457
103859
606305
INVESTMENT
43870
41803
10282
53992
33823
183770
67
ADVANCES
106701
113476
23024
119502
74348
437051
180000
160000
140000
120000
100000
80000 DEPOSIT
INVESTMENT
ADVANCES
60000
40000
20000
0
PNB
BOB
BOI
UBI
DENA
Analysis:-
deposit-investment-advances:BANK
DEPOSIT
INVESTMENT
ADVANCES
ICICI BANK
244431
111454
225616
PNB
166457
53992
119502
68
250000
200000
150000
DEPOSIT
INVESTMENT
ADVANCES
100000
50000
0
ICICI
Analysis: - Here we
PNB
Gross NPA and Net NPA:There are two concepts related to non-performing assets a)
gross and b) net. Gross refers to all NPAs on a banks balance
sheet irrespective of the provisions made. It consists of all the
non-standard assets, viz.
Substandard, doubtful, and loss
assets. A loan asset is classified as substandard if it remains
NPA up to a period of 18 months; doubtful if it remains NPA
for more than 18 months; and loss, without any waiting
period, where the dues are considered not collectible or
marginally collectible.
69
GROSS NPA
70
NET NPA
BOB
1.46
0.35
BOI
1.48
0.45
DENA
2.37
1.16
PNB
2.09
0.45
UBI
1.82
0.59
2.5
2
1.5
GROSS NPA
NET NPA
0.5
0
DENA
UBI
PNB
BOI
BOB
GROSS NPA
NET NPA
BOB
1.10
0.27
BOI
1.08
0.33
DENA
1.48
0.56
PNB
1.67
0.38
UBI
1.34
0.10
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
GROSS NPA
DENA
PNB
NET NPA
BOI
BOB
UBI
BANK
GROSS NPA
NET NPA
AXIS
0.57
0.36
HDFC
0.72
0.22
ICICI
1.20
0.58
KOTAK
1.39
1.09
INDUSIND
1.64
1.31
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
GROSS NPA
INDUSIND
KOTAK
NET NPA
ICICI
AXIS
HDFC
GROSS NPA
NET NPA
AXIS
0.45
0.23
HDFC
0.68
0.22
ICICI
1.90
0.87
KOTAK
1.55
0.98
INDUSIND
1.69
1.25
2
1.5
1
GRO SS NPA
NET NPA
0.5
0
INDUSIND
KOTAK
ICICI
72
HDFC
AXIS
ICICI
INDUSIND KOTAK
HDFC
AXIS
BOI
BOB
UBI
DENA
PNB
73
1.4
1.2
1
0.8
0.6
0.4
0.2
0
IC IC I INDUSIND KOTAK
HDFC
AXIS
BOI
BOB
UBI
DENA
PNB
AGRI
SMALL
OTHERS
PRIORITY
NON-PRIORITY
(1)
(2)
(3)
SECTOR
AXIS
109.12
14.76
86.71
( 1+2+3 )
210.59
275.06
HDFC
36.12
110.56
47.70
194.41
709.23
ICICI
981.85
23.35
354.13
1359.34
6211.12
KOTAK
10.00
33.84
4.04
47.87
405.20
INDUSIND
30.44
3.18
30.02
63.64
328.67
TOTAL
1167.53
185.69
522.60
1875.85
7929.28
7000
6000
5000
4000
PRIORITY
3000
NON-PRIORITY
2000
1000
0
AXIS
HDFC
ICICI
74
KOTAK
INDUSIND
PRIORITY SECTOR
NPA
BOB
(ADVANCED RS.CRORE )
5469
350
BOI
3269
325
DENA
1160
106
PNB
3772
443
UBI
1924
197
6000
5000
4000
3000
PRIORITY
NPA
2000
1000
0
BOB
BOI
DENA
PNB
UBI
Now, when we compare the all public sector and private sector
banks on priority and non-priority sector the figures are really
shocking. Because in compare of private sector banks, public
sector banks numbers are very large.
SECTOR
PRIORITY
PUBLIC
NON PRT
TOTAL
PUBLIC SECTOR
2007-08
2008-09
22954
490
15158
38602
25287
299
14163
39749
NEW PRIVATE
2007-08
2008-09
1468
3
4800
6271
2080
0
8339
10419
76
ANNEXURE-I
REPORTING FORMAT FOR NPA GROSS AND NET NPA
Bibliography
Journals and magazines
Economic and political weekly, October 16, 2004, CARLTON
PEREIRA, Page 4602-4604 INVESTING IN NPAs.
Chartered Financial Analyst, August 2004, B P Dhaka, Page
58-62; SARFAESI ACT: THE DIAGNOSIS.
The chartered Accountant, February 2005, Raj Kumar S
Adukia, Page NO. 978-985; SECURITISATION AN
OVERVIEW
Websites: http://www.indiastat.com/banksandfinancialinstitutions/3/perform
ance/16063/nonperformingassetsnpas/377761/stats.aspx
http://www.bankcapitalgroup.net/services-non-performingassets.php
http://rituparnodas.blogspot.com/2009/01/npa-management.html
http://www.finanssivalvonta.fi/en/Statistics/Credit_market/Nonperf
orming_assets/Pages/Default.aspx
http://findarticles.com/p/articles/mi_hb5562/is_200905/ai_n3189646
1/
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