MRP FINAL PROJECT REPORT

ON

COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND

PUBLIC SECTOR BANKS

BY
ANINDYA SANKAR KUNDU
(08BS0000328)

Management Research Project

(Batch of 2010)

PROJECT TITLE

COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND

PUBLIC SECTOR BANKS.

A report submitted in partial

fulfillment of the requirements of
MBA program

FACULTY GUIDE
Prof. Rajasree Nandy
ICFAI Business School
KOCHI

SUBMITTED BY

ANINDYA SANKAR KUNDU

(08BS0000328)

Declaration

I hereby declare that this MRP report on COMPARATIVE

PERFORMING ASSETS OF PRIVATE AND

ANALYSIS ON NON

PUBLIC SECTOR BANKS.

has been

written and prepared by me during the academic year 2009-2010.This project

was done under the able guidance and supervision of Prof. Rajasree
Nandi, Finance Faculty, IBS Kochi in partial fulfillment of the requirement
for the Master Of Business Administration Degree course of the ICFAI Business
School.

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

1.5 Limitations of the

project

10
2. Introduction

2.1 Definition of NPA

... 12 2.2 NPAs: An issue for banks and FIs in India

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

5. Impact of NPA & Preventive Measurement for

NPA
5.1 Impact of
NPA .................................................................................
.......33
5.2 Early
symptoms .......................................................................
7

..............
34
5.3 Preventive Measurement for
NPA ..................................................

35

6. Tools for recovery of NPA

6.1
Willful
Default

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

7.1.1 Accounts with temporary deficiencies

46
7.1.2 Accounts regularized near about the balance
sheet date ..
46
7.1.3 Asset Classification to be borrower-wise and
not facility-wise 7.1.4 Accounts where there is
erosion in the value of security
47
7.1.5 Advances to PACS/FSS ceded to Commercial
Banks ..
47
7.1.6 Advances against Term Deposits, NSCs,
KVP/IVP . 48
7.1.7 Loans with moratorium for payment of
interest .
48
7.1.8
Agricultural
advances

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.

While gross NPA reflects the quality of the loans

made by banks, net NPA shows the actual burden of banks.
Now it is increasingly evident that the major defaulters are the
big borrowers coming from the non-priority sector. The banks
and financial institutions have to take the initiative to reduce
NPAs in a time bound strategic approach.

Public sector banks figure prominently in the

debate not only because they dominate the banking industries,
10

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.

For the recovery of NPAs a broad framework has

evolved for the management of NPAs under which several
options are provided for debt recovery and restructuring. Banks
and FIs have the freedom to design and implement their own
policies for recovery and write-off incorporating compromise
and negotiated settlements.

11

CHAPTER-1
Project Details

1.1 OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA
was to:
To evaluate NPAs (Gross and Net) in different banks.
To study the past trends of NPA.
To calculate the weighted of NPA in risk management in
Banking
To analyze financial performance of banks at different
level of NPA

1.2 RESEARCH METHODOLOGY

The research methodology adopted for carrying out the study
were
12

 In this project Descriptive research methodologies were

use.
At the first stage theoretical study is attempted.
At the second stage Historical study is attempted.
At the Third stage Comparative study of NPA is
undertaken.

1.3 Scope of the Study

Concept of Non-Performing Asset

Guidelines
Impact of NPAs
Reasons for NPAs
Preventive Measures
Tools to manage NPAs

1.4 Sampling Methods

To prepare this Project we took five banks from public sector as
well as five banks from private sector.

1.5 Limitations of the study

It was critical for me to gather the financial data of the
every bank of the Public Sector Banks so the better
evaluations of the performance of the banks are not
possible.

13

 Since my study is based on the secondary data, the

practical operations as related to the NPAs are adopted by
the banks are not learned.

Since the Indian banking sector is so wide so it was not

possible for me to cover all the banks of the Indian
banking sector.

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

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,
from the year ending March 31, 2004. Accordingly, with effect
from March 31, 2004, a non-performing asset (NPA) shall be a
loan or an advance where;
Interest and/ or instalment of principal remain overdue for
a period of
more than 90 days in respect of a term loan,
The account remains out of order for a period of more
than 90 days, in respect of an Overdraft/Cash Credit
(OD/CC),
The bill remains overdue for a period of more than 90 days
in the case of bills purchased and discounted,
Interest and/or instalment of principal remains overdue
for two harvest seasons but for a period not exceeding two
half years in the case of an advance granted for agricultural
purposes.
As a facilitating measure for smooth transition to 90 days norm,
banks have been advised to move over to charging of interest
at monthly rests, by April 1, 2002. However, the date of
classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should,
therefore, continue to classify an account as NPA only if the
interest charged during any quarter is not serviced fully within
180 days from the end of the quarter with effect from April 1,
2002 and 90 days from the end of the quarter with effect from
March 31, 2004.

2.2 NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA

To start with, performance in terms of profitability is a
benchmark for any business enterprise including the banking
industry. However, increasing NPAs have a direct impact on
banks profitability as legally banks are not allowed to book
income on such accounts and at the sometime are forced to
16

make provision on such assets as per the Reserve Bank of India

(RBI) guidelines. Also, with increasing deposits made by the
public in the banking system, the banking industry cannot
afford defaults by borrower s since NPAs affects the repayment
capacity of banks.
Further, Reserve Bank of India (RBI) successfully creates excess
liquidity in the system through various rate cuts and banks fail
to utilize this benefit to its advantage due to the tear of
burgeoning non-performing assets.
2.3 INDIAN ECONOMY AND NPAs
Undoubtedly the world economy has slowed down, recession is
at its peak, globally stock markets have tumbled and business
itself is getting hard to do. The Indian economy has been much
affected due to high fiscal deficit, poor infrastructure facilities,
sticky legal system, cutting of exposures to emerging markets
by FIs, etc.
Further, international rating agencies like, Standard & Poor
have lowered Indias credit rating to sub-investment grade.
Such negative aspects have often outweighed positives such as
increasing forex reserves and a manageable inflation rate.
Under such a situation, it goes without saying that banks are no
exception and are bound to face the heat of a global downturn.
One would be surprised to know that the banks and financial
institution in India hold nonperforming assets worth Rs. 110000
crores Bankers have realized that unless the level of NPAs is
reduced drastically, they will find it difficult to survive.

2.4 GLOBAL DEVELOPMENTS AND NPAs

The core banking business is of mobilizing the deposits and
utilizing it for lending to industry. Lending business is generally
encouraged because it has the effect of funds being transferred
from the system to productive purposes, which results into
economic growth.
17

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.

2.5 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
18

banks. The NPAs in PSB are growing due to external as well as

internal factors.
2.5.1 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, thereby reducing
their profitability and liquidity.
Willful Defaults
There are borrowers who are able to pay back loans but
are intentionally withdrawing it. These groups of people
should be identified and proper measures should be taken
in order to get back the money extended to them as
advances and loans.
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
19

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.

2.5.2 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
a) Capacity to pay depends upon:
1. Tangible assets
2. Success in business
b) Willingness to pay depends on:
1. Character
2. Honest
3. Reputation of borrower

20

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 project while financing.
Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs.
Due to poor credit appraisal the bank gives advances to
21

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.

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.

22

2.6 PROBLEMS DUE TO NPA

1. Owners do not receive a market return on their capital .in
the worst case, if the banks fails, owners lose their assets.
In modern times this may affect a broad pool of
shareholders.
2. Depositors do not receive a market return on saving. In
the worst case if the bank fails, depositors lose their
assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging
higher interest rates, lower deposit rates and higher
lending rates repress saving and financial market, which
hamper economic growth.
4. Nonperforming loans epitomize bad investment. They
misallocate credit from good projects, which do not
receive funding, to failed projects. Bad investment ends up
in misallocation of capital, and by extension, labor and
natural resources.
Nonperforming asset may spill over the banking system and
contract the money stock, which may lead to economic
contraction. This spillover effect can channelize through
liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may
experience
liquidity shortage. This can jam payment across
the country.
b) Illiquidity constraints bank in paying depositors
c) Undercapitalized banks exceed the banks capital base.

'Out of Order' status:

23

An account should be treated as 'out of order' if

the outstanding balance remains continuously in excess of the
sanctioned limit/drawing power. In cases 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 accounts should be treated as 'out of
order'.
Overdue:

Any amount due to the bank under any credit

facility is overdue if it is not paid on the due date fixed by the
bank.

2.7 Types of NPA

A] Gross NPA
B] Net 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 substandard, 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.
24

It can be calculated by following

Net NPAs Gross NPAs Provisions
Gross Advances - Provisions

25

CHAPTER-3
INCOME
RECOGNITION

3. INCOME RECOGNITION

3.1. Income recognition Policy

The policy of income recognition has to be objective and

based on the record of recovery. Internationally income
from non-performing assets (NPA) is not recognised on
26

accrual basis but is booked as income only when it is

actually received. Therefore, the banks should not charge
and take to income account interest on any NPA.

However, interest on advances against term deposits,

NSCs, IVPs, KVPs and Life policies may be taken to income
account on the due date, provided adequate margin is
available in the accounts.

Fees and commissions earned by the banks as a result of

re-negotiations or rescheduling of outstanding debts
should be recognised on an accrual basis over the period
of time covered by the re-negotiated or rescheduled
extension of credit.

If Government guaranteed advances become NPA, the

interest on such advances should not be taken to income
account unless the interest has been realised.

3.2. Reversal of income:

If any advance, including bills purchased and discounted,

becomes NPA as at the close of any year, interest accrued
and credited to income account in the corresponding
previous year, should be reversed or provided for if the
same is not realised. This will apply to Government
guaranteed accounts also.

27

 In respect of NPAs, fees, commission and similar income

that have accrued should cease to accrue in the current
period and should be reversed or provided for with respect
to past periods, if uncollected.

3.3 Leased Assets

The net lease rentals (finance charge) on

asset accrued and credited to income account
asset became non-performing, and remaining
should be reversed or provided for in the current
period.

the leased
before the
unrealised,
accounting

The term 'net lease rentals' would mean the amount of

finance charge taken to the credit of Profit & Loss Account
and would be worked out as gross lease rentals adjusted by
amount of statutory depreciation and lease equalisation
account.

As per the 'Guidance Note on Accounting for

Leases' issued by the Council of the Institute of Chartered
Accountants of India (ICAI), a separate Lease Equalisation
Account should be opened by the banks with a
corresponding debit or credit to Lease Adjustment Account,
as the case may be. Further, Lease Equalisation Account
28

should be transferred every year to the Profit & Loss Account

and disclosed separately as a deduction from/addition to
gross value of lease rentals shown under the head 'Gross
Income'.

Appropriation of recovery in NPAs

Interest realised on NPAs may be taken to income account

provided the credits in the accounts towards interest are
not out of fresh/ additional credit facilities sanctioned to
the borrower concerned.

In the absence of a clear agreement between the bank

and the borrower for the purpose of appropriation of
recoveries in NPAs (i.e. towards principal or interest due),
banks should adopt an accounting principle and exercise
the right of appropriation of recoveries in a uniform and
consistent manner.

3.4 Interest Application:

There is no objection to the banks using their own discretion in
debiting interest to an NPA account taking the same to Interest
Suspense Account or maintaining only a record of such interest
in proforma accounts.

3.5 Reporting of NPAs

29

 Banks are required to furnish a Report on NPAs as on 31 st

March each year after completion of audit. The NPAs would
relate to the banks global portfolio, including the
advances at the foreign branches. The Report should be
furnished as per the prescribed format given in the
Annexure I.
While reporting NPA figures to RBI, the amount held in
interest suspense account, should be shown as a
deduction from gross NPAs as well as gross advances
while arriving at the net NPAs. Banks which do not
maintain Interest Suspense account for parking interest
due on non-performing advance accounts, may furnish the
amount of interest receivable on NPAs as a foot note to
the Report.
Whenever NPAs are reported to RBI, the amount of
technical write off, if any, should be reduced from the
outstanding gross advances and gross NPAs to eliminate
any distortion in the quantum of NPAs being reported.

REPORTING FORMAT FOR NPA GROSS AND NET NPA

Annexure-I (Page no-64)

30

CHAPTER-4
31

Asset Classification

- Provisioning Norms

4. Asset Classification

Categories of NPAs
Standard Assets:
32

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 do
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 nonperforming assets further into the following three categories
based on the period for which the asset has remained nonperforming and the reliability of the dues:
( 1 ) Sub-standard Assets
( 2 ) Doubtful Assets
( 3 ) Loss Assets

( 1 ) Sub-standard Assets:-With effect from 31 March 2005, a substandard asset would be

one, which has remained NPA for a period less than or equal to
12 month. The following features are exhibited by substandard
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
33

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.

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.

Pursuant to this, regional offices were advised to forward a

list of individual advances, where the variance in the
provisioning requirements between the RBI and the bank
is above certain cut off levels so that the bank and the
statutory auditors take into account the assessment of the
RBI while making provisions for loan loss, etc.

34

 The primary responsibility for making adequate provisions

for any diminution in the value of loan assets, investment
or other assets is that of the bank managements and the
statutory auditors. The assessment made by the
inspecting officer of the RBI is furnished to the bank to
assist the bank management and the statutory auditors in
taking a decision in regard to making adequate and
necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should

be made on the non-performing assets on the basis of
classification of assets into prescribed categories as
detailed in paragraphs 4 supra. Taking into account the
time lag between an account becoming doubtful of
recovery, its recognition as such, the realisation of the
security and the erosion over time in the value of security
charged to the bank, the banks should make provision
against sub-standard assets, doubtful assets and loss
assets as below:

Loss assets:
The entire asset should be written off. If the assets are
permitted to remain in the books for any reason, 100 percent of
the outstanding should be provided for.

Doubtful assets:

35

 100 percent of the extent to which the advance is not

covered by the realisable value of the security to which
the bank has a valid recourse and the realisable value is
estimated on a realistic basis.

In regard to the secured portion, provision may be made

on the following basis, at the rates ranging from 20
percent to 50 percent of the secured portion depending
upon the period for which the asset has remained
doubtful:

Period for which the

advance has been
considered as doubtful

Provision
requirement (%)

Up to one year

20

One to three years

30

More than three years:

60% with effect

from March
31,2005.

(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.

75% effect from

March 31, 2006.
100% with effect
from March 31,
2007.

Additional provisioning consequent upon the change in the

definition of doubtful assets effective from March 31, 2003
has to be made in phases as under:
36


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

With a view to bringing down divergence arising out of

difference in assessment of the value of security, in cases of
NPAs with balance of Rs. 5 crore and above stock audit at
annual intervals by external agencies appointed as per the
guidelines approved by the Board would be mandatory in order
to enhance the reliability on stock valuation. Valuers appointed
as per the guidelines approved by the Board of Directors should
get collaterals such as immovable properties charged in favour
of the bank valued once in three years.

Sub-standard assets:

A general provision of 10 percent on total outstanding should

be made without making any allowance for DICGC/ECGC
guarantee cover and securities available.
37

Standard assets:

From the year ending 31.03.2000, the banks should make

a general provision of a minimum of 0.40 percent on
standard assets on global loan portfolio basis.

The provisions on standard assets should not be reckoned

for arriving at net NPAs.

The provisions towards Standard Assets need not be

netted from gross advances but shown separately as
'Contingent Provisions against Standard Assets' under
'Other Liabilities and Provisions - Others' in Schedule 5 of
the balance sheet.

Floating provisions:

Some of the banks make a 'floating

provision' over and above the specific provisions made in
respect of accounts identified as NPAs. The floating provisions,
wherever available, could be set-off against provisions required
to be made as per above stated provisioning guidelines.
Considering that higher loan loss provisioning adds to the
overall financial strength of the banks and the stability of the
financial sector, banks are urged to voluntarily set apart
provisions much above the minimum prudential levels as a
desirable practice.

38

Provisions on Leased Assets:

Leases are peculiar transactions where the assets are not
recorded in the books of the user of such assets as Assets,
whereas they are recorded in the books of the owner even
though the physical existence of the asset is with the user
(lessee).
__(AS19 ICAI)

Sub-standard assets : -

10 percent of the 'net book value'.

As per the 'Guidance Note on Accounting for Leases' issued

by the ICAI, 'Gross book value' of a fixed asset is its historical
cost or other amount substituted for historical cost in the books
of account or financial statements. Statutory depreciation
should be shown separately in the Profit & Loss Account.
Accumulated depreciation should be deducted from the Gross
Book Value of the leased asset in the balance sheet of the
lesser to arrive at the 'net book value'.

Also, balance standing in 'Lease Adjustment Account' should

be adjusted in the 'net book value' of the leased assets. The
amount of adjustment in respect of each class of fixed assets
may be shown either in the main balance sheet or in the Fixed
Assets Schedule as a separate column in the section related to
leased assets.

39

Doubtful assets

:-

100 percent of the extent to which the finance is not secured

by the realisable value of the leased asset. Realisable value to
be estimated on a realistic basis. In addition to the above
provision, the following provision on the net book value of the
secured portion should be made, depending upon the period
for which asset has been doubtful:

Period

%age
provision

Up to one year

20

One to three years

30

More
years

Loss assets

than

of

three 50

:-

The entire asset should be written-off. If for any reason, an

asset is allowed to remain in books, 100 percent of the sum of
the net investment in the lease and the unrealised portion of
finance income net of finance charge component should be
provided for. (Net book value')

40

Guidelines for Provisions under Special Circumstances

Government guaranteed advances

With effect from 31 March 2000, in respect of advances

sanctioned against State Government guarantee, if the
guarantee is invoked and remains in default for more than two
quarters (180 days at present), the banks should make normal
provisions as prescribed in paragraph 4.1.2 above.

As regards advances guaranteed by State Governments, in

respect of which guarantee stood invoked as on 31.03.2000,
necessary provision was allowed to be made, in a phased
manner, during the financial years ending 31.03.2000 to
31.03.2003 with a minimum of 25 percent each year.

41

CHAPTER-5
-

Impact of NPA
Preventive Measurement for

NPA

42

5. Impact of NPA

Profitability:-

NPA means booking of money in terms of bad

asset, which occurred due to wrong choice of client. Because of
the money getting blocked the prodigality of bank decreases
not only by the amount of NPA but NPA lead to opportunity cost
also as that much of profit invested in some return earning
project/asset. So NPA doesnt affect current profit but also
future stream of profit, which may lead to loss of some longterm beneficial opportunity. Another impact of reduction in
profitability is low ROI (return on investment), which adversely
affect current earning of bank.

Liquidity:-

Money is getting blocked, decreased profit lead to lack of

enough cash at hand which lead to borrowing money for
shot\rtes period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another
cause of NPA due to lack of money. Routine payments and
dues.

Involvement of management:Time and efforts of management is another indirect cost which

bank has to bear due to NPA. Time and efforts of management
in handling and managing NPA would have diverted to some
fruitful activities, which would have given good returns. Now
days banks have special employees to deal and handle NPAs,
which is additional cost to the bank.

Credit loss:Bank is facing problem of NPA then it adversely affect the value
of bank 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

5.2 Early symptoms by which one can

recognize a performing asset turning in
to Non-performing asset:Four categories of early symptoms:--------------------------------------------------(1) Financial:
Non-payment of the very first instalment in case of term
loan.
Bouncing of cheque due to insufficient balance in the
accounts.
Irregularity in instalment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal
amount of that instalment.
While monitoring the accounts it is found that partial
amount is diverted to sister concern or parent company.
(2) Operational and Physical:
If information is received that the borrower has either
initiated the process of winding up or are not doing the
business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in
the city where borrower conduct his business.
Frequent changes in plan.
Non-payment of wages.
(3) Attitudinal Changes:
Avoidance of contact with bank.
Problem between partners.
(4) Others:
44

 Changes in Government policies.

Death of borrower.
Competition in the market.

5.3 Preventive Measurement for NPA

Early Recognition of the Problem:Invariably, by the time banks start their efforts to get involved
in a revival process, its too late to retrieve the situation- both
in terms of rehabilitation of the project and recovery of banks
dues. Identification of weakness in the very beginning that is:
When the account starts showing first signs of weakness
regardless of the fact that it may not have become NPA, is
imperative. Assessment of the potential of revival may be done
on the basis of a techno-economic viability study. Restructuring
should be attempted where, after an objective assessment of
the promoters intention, banks are convinced of a turnaround
within a scheduled timeframe. In respect of totally unviable
units as decided by the bank, it is better to facilitate winding
up/ selling of the unit earlier, so as to recover whatever is
possible through legal means before the security position
becomes worse.
Identifying Borrowers with Genuine Intent:Identifying borrowers with genuine intent from those who are
non- serious with no commitment or stake in revival is a
challenge confronting bankers. Here the role of frontline
officials at the branch level is paramount as they are the ones
who has intelligent inputs with regard to promoters sincerity,
and capability to achieve turnaround. Based on this objective
assessment, banks should decide as quickly as possible
whether it would be worthwhile to commit additional finance.
In this regard banks may consider having Special
Investigation of all financial transaction or business
transaction, books of account in order to ascertain real factors
that contributed to sickness of the borrower. Banks may have
penal of technical experts with proven expertise and track
45

record of preparing techno-economic study of the project of the

borrowers.
Borrowers having genuine problems due to temporary
mismatch in fund flow or sudden requirement of additional fund
may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will
obviate the need to route the additional funding through the
controlling offices in deserving cases, and help avert many
accounts slipping into NPA category.

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

will be useful to have consultant appointed as early as possible

to examine this aspect. A proper techno economic viability
study must thus become the basis on which any future action
can be considered.
Multiple Financing:A. During the exercise for assessment of viability and
restructuring, a Pragmatic and unified approach by all the
lending banks/ FIs as also sharing of all relevant information on
the borrower would go a long way toward overall success of
rehabilitation exercise, given
the probability of success/failure.
B. In some default cases, where the unit is still working, the
bank should make sure that it captures the cash flows (there
is a tendency on part of the borrowers to switch bankers once
they default, for fear of getting their cash flows forfeited), and
ensure that such cash flows are used for working capital
purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not
part of the consortium, may not be
allowed to offer credit facilities to such defaulting clients.
Current account facilities may also be denied at no consortium
banks to such clients and violation may attract penal action.
The Credit Information Bureau of India Ltd.(CIBIL) may be
very useful for meaningful information exchange on defaulting
borrowers once the setup becomes fully operational.
C. In a forum of lenders, the priority of each lender will be
different. While one set of lenders may be willing to wait for a
longer time to recover its dues, another lender may have a
much shorter timeframe in mind. So it is possible that the letter
categories of lenders may be willing to exit, even a t a cost by
a discounted settlement of the exposure. Therefore, any plan
for restructuring/rehabilitation may take this aspect into
account.
D. Corporate Debt Restructuring mechanism has been
institutionalized in 2001 to provide a timely and transparent
system for restructuring of the corporate debt of Rs. 20 crore
and above with the banks and FIs on a voluntary basis and
outside the legal framework. Under this system, banks may
47

greatly benefit in terms of restructuring of large standard

accounts (potential NPAs) and viable sub-standard accounts
with consortium/multiple banking arrangements.

48

CHAPTER-6
Tools For recovery of npa

49

Once NPA occurred, one must come out of it or it should be

managed in most efficient manner. Legal ways and means are
there to overcome and manage NPAs. We will look into each
one of it.

6.1 Willful Default:A] Lok Adalat and Debt Recovery Tribunal

B] Securitization Act
C] Asset Reconstruction
50

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.

Debt Recovery Tribunals (DRT):

The recovery of debts due to banks and financial institution
passed in March 2000 has helped in strengthening the function
of DRTs. Provision for placement of more than one recovery
officer, power to attach defendants property/assets before
judgment, penal provision for disobedience of tribunals order
or for breach of any terms of order and appointment of receiver
with power 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 the
times to come. DRTs which have been set up by
the Government to facilitate speedy recovery by banks/DFIs,
have not been able make much impact on loan recovery due to
variety of reasons like inadequate number, lack of
infrastructure, under staffing and frequent adjournment of
cases. It is essential that DRT mechanism is strengthened and
vested with a proper enforcement mechanism to enforce their
orders. Non observation of any order passed by the tribunal
should amount to contempt of court, the DRT should have right
to initiate contempt proceedings. The DRT should empowered
to sell asset of the debtor companies and forward the proceed
to the winding up court for distribution among the lenders.

6.2 Inability to Pay

Consortium arrangements:
Asset classification of accounts under consortium should be
based on the record of recovery of the individual member
banks and other aspects having a bearing on the recoverability
of the advances. Where the remittances by the borrower under
consortium lending arrangements are pooled with one bank
and/or where the bank receiving remittances is not parting with
51

the share of other member banks, the account will be treated

as not serviced in the books of the other member banks and
therefore, be treated as NPA. The banks participating in the
consortium should, therefore, arrange to get their share of
recovery transferred from the lead bank or get an express
consent from the lead bank for the transfer of their share of
recovery, to ensure proper asset classification in their
respective books.

6.3 Restructuring / Rescheduling of Loans

A standard asset where the terms of the loan agreement
regarding Interest and principal have been renegotiated or
rescheduled after commencement of production should be
classified as sub-standard and should remain in such category
for at least one year of satisfactory performance under the
renegotiated or rescheduled terms. In the case of sub-standard
and doubtful assets also, rescheduling does not entitle a bank
to upgrade the quality of advance automatically unless there is
satisfactory performance under the rescheduled / renegotiated
terms. Following representations from banks that the foregoing
stipulations deter the banks from restructuring of standard
and sub-standard loan assets even though the modification
of terms might not jeopardize the assurance of repayment of
dues from the borrower, the norms relating to restructuring of
standard and sub-standard assets were reviewed in March
2001. In the context of restructuring of the accounts, the
following stages at which the restructuring / rescheduling /
renegotiation of the terms of
loan agreement could take place, can be identified:
1) Before commencement of commercial production;
2) After commencement of commercial production but before
the asset has been classified as substandard,
3) After commencement of commercial production and after the
asset has been classified as substandard.
In each of the foregoing three stages, the rescheduling, etc., of
principal and/or of interest could take place, with or without
sacrifice, as part of the restructuring package evolved.

6.4 Treatment of Restructured Standard Accounts:

A rescheduling of the installments of principal alone, at any of
the aforesaid first two stages would not cause a standard asset
to be classified in the substandard category provided the
loan/credit facility is fully secured.
52

A rescheduling of interest element at any of

the foregoing first two stages would not cause an asset to be
downgraded to substandard category subject to the condition
that the amount of sacrifice, if any, in the element of interest,
measured in present value terms, is either written off or
provision is made to the extent of the sacrifice involved. For the
purpose, the future interest due as per the original loan
agreement in respect of an account should be discounted to the
present value at a rate appropriate to the risk category of the
borrower (i.e., current PLR+ the appropriate credit risk premium
for the borrower-category) and compared with the present
value of the dues expected to be received under the
restructuring package, discounted on the same basis.
In case there is a sacrifice involved in the
amount of interest in present value terms, as at (b) above, the
amount of sacrifice should either be written off or provision
made to the extent of the sacrifice involved.

6.5 Treatment of restructured sub-standard accounts:

A rescheduling of the installments of principal
alone would render a sub-standard asset eligible to be
continued in the sub-standard category for the specified
period, provided the loan/credit facility is fully secured.
A rescheduling of interest element would render a
sub-standard asset eligible to be continued to be classified in
substandard category for the specified period subject to the
condition that the amount of sacrifice, if any, in the element of
interest, measured in present value terms, is either written
off or provision is made to the extent of the sacrifice involved.
For the purpose, the future interest due as per the original loan
agreement in respect of an account should be discounted to the
present value at a rate appropriate to the risk category of the
borrower (i.e., current PLR + the appropriate credit risk
premium for the borrower category) and compared with the
present value of the dues expected to be received under the
restructuring package, discounted on the same basis.
In case there is a sacrifice involved in the amount of
interest in present value terms, as at (b) above, the amount of
sacrifice should either be written off or provision made to the
extent of the sacrifice involved. Even in cases where the
sacrifice is by way of write off of the past interest dues, the
asset should continue to be treated as sub-standard.

6.6 Up gradation of restructured accounts:

53

The sub-standard accounts which have been subjected to

restructuring etc., whether in respect of principal installment or
interest amount, by whatever modality, would be eligible to be
upgraded to the standard category only after the specified
period i.e., a period of one year after the date when first
payment of interest or of principal, whichever is earlier, falls
due, subject to satisfactory performance during the period. The
amount of provision made earlier, net of the amount provided
for the sacrifice in the interest amount in present value terms
as aforesaid, could also be reversed after the one year period.
During this one-year period, the substandard asset will not
deteriorate in its classification if satisfactory performance of the
account is demonstrated during the period. In case, however,
the satisfactory performance during the one-year period is not
evidenced, the asset classification of the restructured account
would be governed as per the applicable prudential norms with
reference to the pre restructuring payment schedule.

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.

6.8 Income recognition

There will be no change in the existing instructions
on income recognition. Consequently, banks should not
recognise income on accrual basis in respect of the projects
even though the asset is classified as a standard asset if the
asset is a "non performing asset" in terms of the extant
54

instructions. In other words, while the accounts of the project

may be classified as a standard asset, banks shall recognise
income in such accounts only on realisation on cash basis if the
asset has otherwise become non performing as per the extant
delinquency norm of 180 days. The delinquency norm would
become 90 days with effect from 31 March 2004.
Consequently, banks, which have wrongly
recognised income in the past, should reverse the interest if it
was recognised as income during the current year or make a
provision for an equivalent amount if it was recognised as
income in the previous year(s). As regards the regulatory
treatment of income recognised as funded interest and
conversion into equity, debentures or any other instrument
banks should adopt the following:

6.9 Funded Interest: Income recognition in respect of the NPAs,

regardless of whether these are or are not subjected to
restructuring/ rescheduling/ renegotiation of terms of the loan
agreement, should be done strictly on cash basis, only on
realisation and not if the amount of interest overdue has been
funded. If, however, the amount of funded interest is
recognised as income, a provision for an equal amount should
also be made simultaneously. In other words, any funding of
interest in respect of NPAs, if recognised as income, should be
fully provided for.

6.9.1. Conversion into equity, debentures or any other

instrument: The amount outstanding converted into other
instruments would normally comprise principal and the interest
components. If the amount of interest dues is converted into
equity or any other instrument, and income is recognised in
consequence, full provision should be made for the amount of
income so recognised to offset the effect of such income
recognition. Such provision would be in addition to the amount
of provision that may be necessary for the depreciation in the
value of the equity or other instruments, as per the investment
valuation norms. However, if the conversion of interest is into
equity, which is quoted, interest income can be recognised at
market value of equity, as on the date of conversion, not
exceeding the amount of interest converted to equity. Such
equity must thereafter be classified in the "available for sale"
category and valued at lower of cost or market value. In case of
conversion of principal and /or interest in respect of NPAs into
debentures, such debentures should be treated as NPA, ab
55

initio, in the same asset classification as was applicable to loan

just before conversion and provision made as per norms. This
norm would also apply to zero coupon bonds or other
Instruments which seek to defer the liability of the issuer. On
such debentures, income should be recognised only on
realisation basis. The income in respect of unrealised interest,
which is converted into debentures or any other fixed maturity
instrument, should be recognised only on redemption of such
instrument. Subject to the above, the equity shares or other
instruments arising from conversion of the principal amount of
loan would also be subject to the usual prudential valuation
norms as applicable to such instruments.

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

current assets, since current assets are first appropriated in

times of distress. Drawing power is required to be arrived at
based on the stock statement which is current. However,
considering the difficulties of large borrowers, stock statements
relied upon by the banks for determining drawing power should
not be older than three months. The outstanding in the account
based on drawing power calculated from stock statements
older than three months, would be deemed as irregular. A
working capital borrower account will become NPA if such
irregular drawings are permitted in the account for a continuous
period of 180 days even though the unit may be working or the
borrower's financial position is satisfactory.
Regular and ad hoc credit limits need to be
reviewed/ regularized not later than three months from the due
date/date of ad hoc sanction. In case of constraints such as
non-availability of financial statements and other data from the
borrowers, the branch should furnish evidence to show that
renewal/ review of credit limits is already on and would be
completed soon. In any case, delay beyond six months is not
considered desirable as a general discipline. Hence, an account
where the regular/ ad hoc credit limits have not been reviewed/
renewed within 180 days from the due date/ date of ad hoc
sanction will be treated as NPA.

7.1.2.

Accounts regularized near about the balance sheet

date:

The asset classification of borrower accounts

where a solitary or a few credits are recorded before the
balance sheet date should be handled with care and without
scope for subjectivity. Where the account indicates inherent
weakness on the basis of the data available, the account should
be deemed as a NPA. In other genuine cases, the banks must
furnish
satisfactory
evidence
to
the
Statutory
Auditors/Inspecting Officers about the manner of regularization
of the account to eliminate doubts on their performing status.

7.1.3Asset Classification to be borrower-wise and not facility-wise

It is difficult to envisage a situation when only
one facility to a borrower becomes a problem credit and not
others. Therefore, all the facilities granted by a bank to a
borrower will have to be treated as NPA and not the particular
facility or part thereof which has become irregular. If the debits
58

arising out of devolvement of letters of credit or invoked

guarantees are parked in a separate account, the balance
outstanding in that account also should be treated as a part of
the borrowers principal operating account for the purpose of
application of prudential norms on income recognition, asset
classification and provisioning.

7.1.4. Accounts where there is erosion in the value of security

A NPA need not go through the various stages of classification
in cases of serious credit impairment and such assets should be
straightaway classified as doubtful or loss asset as appropriate.
Erosion in the value of security can be reckoned as significant
when the realizable value of the security is less than 50 per
cent of the value assessed by the bank or accepted by RBI at
the time of last inspection, as the case may be. Such NPAs may
be straightaway classified under doubtful category and
provisioning should be made as applicable to doubtful assets.
If the realizable value of the security, as
assessed by the bank/ approved values/ RBI is less than 10 per
cent of the outstanding in the borrower accounts, the existence
of security should be ignored and the asset should be
straightaway classified as loss asset. It may be either written
off or fully provided for by the bank.
7.1.5. Advances to PACS/FSS ceded to Commercial Banks:
In respect of agricultural advances as well as advances for
other purposes granted by banks to ceded PACS/ FSS under the
on-lending system, only that particular credit facility granted to
PACS/ FSS which is in default for a period of two harvest
seasons (not exceeding two half years)/two quarters, as the
case may be, after it has become due will be classified as NPA
and not all the credit facilities sanctioned to a PACS/ FSS. The
other direct loans & advances, if any, granted by the bank to
the member borrower of a PACS/ FSS outside the on-lending
arrangement will become NPA even if one of the credit facilities
granted to the same borrower becomes NPA.

7.1.6 Advances against Term Deposits, NSCs, KVP/IVP, etc.:

Advances against term deposits, NSCs eligible for surrender,
IVPs, KVPs and life policies need not be treated as NPAs.
59

Advances against gold ornaments, government securities and

all other securities are not covered by this exemption.

7.1.7 Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or for
agricultural plantations etc. where moratorium is available for
payment of interest, payment of interest becomes 'due' only
after the moratorium or gestation period is over. Therefore,
such amounts of interest do not become overdue and hence
NPA, with reference to the date of debit of interest. They
become overdue after due date for payment of interest, if
uncollected.
In the case of housing loan or similar advances
granted to staff
members where interest is payable after recovery of principal,
interest need not be considered as overdue from the first
quarter onwards. Such loans/advances should be classified as
NPA only when there is a default in repayment of installment of
principal or payment of interest on the respective due dates.

7.1.8 Agricultural advances

In respect of advances granted for agricultural purpose where
interest and/or installment of principal remains unpaid after it
has become past due for two harvest seasons but for a period
not exceeding two half years, such an advance should be
treated as NPA. The above norms should be made applicable to
all direct agricultural advances as listed at items 1.1, 1.1.2 (i) to
(vii), 1.1.2 (viii)(a)(1) and 1.1.2 (viii)(b)(1) of Master Circular on
lending to priority sector No. RPCD. PLAN. BC. 12/04.09.01/
2001- 2002 dated 1 August 2001. An extract of the list of these
items is furnished in the Annexure II. In respect of agricultural
loans, other than those specified above, identification of NPAs
would be done on the same basis as non-agricultural advances
which, at present, are the 180 days delinquency norm.
Where natural calamities impair the repaying
capacity of agricultural borrowers, banks may decide on their
own as a relief measure conversion of the short-term
production loan into a term loan or re-schedulement of the
repayment period; and the sanctioning of fresh short-term loan,
subject to various guidelines contained in RBI circulars
RPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98 and
RPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.
60

In such cases of conversion or re-schedulement, the

term loan as well as fresh short-term loan may be treated as
current dues and need not be classified as NPA. The asset
classification of these loans would thereafter be governed by
the revised terms & conditions and would be treated as NPA if
interest and/or installment of principal remains unpaid, for two
harvest seasons but for a period not exceeding two half years.

7.1.9.Government guaranteed advances:

The credit facilities backed by guarantee of the Central
Government though overdue may be treated as NPA only when
the Government repudiates its guarantee when invoked. This
exemption from classification of Government guaranteed
advances as NPA is not for the purpose of recognition of
income. With effect from 1st April 2000, advances sanctioned
against State Government guarantees should be classified as
NPA in the normal course, if the guarantee is invoked and
remains in default for more than two quarters. With effect from
March 31, 2001 the period of default is revised as more than
180 days.

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

provisions treating the account as NPA from the actual date of it

becoming NPA even though the account was not in its books as
on that date.

7.2.2. Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the
banks covering
export of goods to countries for which the ECGCs cover is
available, EXIM Bank has introduced a guarantee-cum-refinance
programme whereby, in the event of default, EXIM Bank will
pay the guaranteed amount to the bank within a period of 30
days from the day the bank invokes the guarantee after the
exporter has filed claim with ECGC.
Accordingly, to the extent payment has been
received from the EXIM Bank, the advance may not be treated
as a non-performing asset for asset classification and
provisioning purposes.

7.2.3 Export Project Finance:

In respect of export project finance, there could be instances
where the actual importer has paid the dues to the bank abroad
but the bank in turn is unable to remit the amount due to
political developments such as war, strife, UN embargo, etc.
In such cases, where the lending bank is able to
establish through documentary evidence that the importer has
cleared the dues in full by depositing the amount in the bank
abroad before it turned into NPA in the Books of the bank, but
the importer's country is not allowing the funds to be remitted
due to political or other reasons, the asset classification may be
made after a period of one year from the date the amount was
deposited by the importer in the bank abroad.

7.2.4. Advances under rehabilitation approved by BIFR/ TLI:

Banks are not permitted to upgrade the classification of any
advance in respect of which the terms have been re-negotiated
unless the package of re-negotiated terms has worked
satisfactorily for a period of one year. While the existing credit
facilities sanctioned to a unit under rehabilitation packages
62

approved by BIFR/term lending institutions will continue to be

classified as sub-standard or doubtful as the case may be, in
respect of additional facilities sanctioned under the
rehabilitation packages, the Income Recognition, Asset
Classification norms will become applicable after a period of
one year from the date of disbursement.

7.2.5. 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 and obtained 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.

63

 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 countrys
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 Securitization Act, 2002. Arcil has also encourage,
groomed and developed many such agencies to enhance its
capacity in line with the growth of its activity.

CHAPTER-8
64

Data analysis and

interpretation

8.

ANALYSIS

For the purpose of analysis and comparison between Public and

private sector banks, We have taken five banks from both
sectors to compare the non-performing assets of banks. For
understanding we further bifurcate the non-performing assets
in priority sector and non-priority sector, gross NPA and net NPA
in percentage as well as in rupees, deposit investment
advances.
Further we also analysis on the basis of Deposit Investment
Advances to get the clear view where the bank stands in the
competitive market. At the end of March 2008, in private sector
ICICI Bank is the highest deposit-investment-advances figure in
rupees crore, second is HDFC Bank and KOTAK Bank has least
figure.
In public sector banks Punjab National Bank has the highest
deposit investment- advances but when we look at the graph
we can see that the Bank of Baroda and Bank of India are
65

almost the similar in numbers and Dena Bank is stands last in

public sector bank. When we compare the private sector banks
with public sector banks, we can understand the more number
of people prefer to choose public sector banks for depositinvestment.

DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and

comparison among them, year 2008-09.

Private Sector Banks:(Rs in crore)

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

Public Sector Banks:-

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:-

In public sector Punjab National Bank depositinvestment-advances

are comparatively quite high rather than Bank of Baroda, Bank
of India, United bank of India and Dena Bank.

Comparison between ICICI BANK AND PUNJAB NATIONAL BANK in term of

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

have compared between ICICI BANK AND PUNJAB

deposit-investment-advances. From the

above figure we can see that ICICI bank deposit and advances
are quite higher than Punjab National Bank. But in case of
Investment ICICI Bank investment amount is doubled than
Punjab National Bank amount.
NATIONAL BANK in term of

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

Net NPA is gross NPA less provisions. Since in India, bank

balance sheets contains 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
NPA according to the central bank guidelines, are quite
significant.
Here, we can see that there are huge differences between gross
and net NPA. While gross NPA reflects the quality of the
loans made by banks, net NPA shows the actual burden
of banks. The requirements for provisions are:
100% for loss assets
100% of the unsecured portion plus 20-50% of the secured
portion, depending on the period for which the account
has remained in the doubtful category
10% general provision on the outstanding balance under
the substandard category.
Here, there are gross and net NPA data for 2007-08 and 200809 we taken for comparison among banks. These data are NPA
AS PERCENTAGE OF TOTAL ASSETS. As we discuss earlier that
gross NPA reflects the quality of the loans made by banks.
Among all the ten banks Dena Banks has highest gross NPA as
a percentage of total assets in the year 2007-08 and also net
NPA. Punjab National Bank shows huge difference between
gross and net NPA. There is an almost same figure between
BOI and BOB.

Gross NPA and Net NPA Of different Public Sector banks

in the year 2007-08
BANK

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 and Net NPA Of different Public Sector banks

in the year 2008-09
BANK

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

Gross NPA and Net NPA Of different Private Sector banks

in the year 2007-08
71

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 and Net NPA Of different Private Sector banks

in the year 2008-09
BANK

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

Comparison of GROSS NPA with Public and Private

sectors banks for the year 2007-08
Comparison of GROSS NPA with all banks for the year 200708. The growing NPAs affect the health of banks, profitability
and efficiency. In the long run, it eats up the net worth of the
banks. We can say that NPA is not a healthy sign for financial
institutions. Here we take all the ten banks gross NPA together
for better understanding. Average of these ten banks gross
NPAs is 1.29 as percentage of total assets. So if we compare in
private sector banks AXIS and HDFC Bank are below average of
all banks and in public sector BOB and BOI. Average of these
five private sector banks gross NPA is 1.25 and average of
public sector banks is 1.33. Which is higher in compare of
private sector banks.

ICICI

INDUSIND KOTAK

HDFC

AXIS

BOI

BOB

UBI

DENA

PNB

COMPARISON OF NET NPA WITH PUBLIC AND

PRIVATE SECTORS BANKS FOR THE YEAR 2007-08
Comparison of NET NPA with all banks for the year 2007-08.
Average of these ten banks net NPA is 0.56. And in the public
sector banks all these five banks are below this. But in private
sector banks there are three banks are above average. The
difference between private and public banks average is also
vast. Private sector banks net NPA average is 0.71 and in
public sector banks it is 0.41 as percentage of total assets. As
we know that net NPA shows actual burden of banks. IndusInd
bank has highest net NPA figure and HDFC Bank has lowest in
comparison.

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

PRIORITY NON PRIORITY SECTOR

When we further bifurcate NPA in priority sector and Non
priority sector. Agriculture + small + others are priority sector.
In private sector ICICI Bank has the highest NPA with compare
to other private sector banks. Around 72% of NPA in priority
sector and around 78% in non-priority sector. We can see that
in private sector banks have more NPA in non-priority sector
than priority sector.
BANK

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

When we talk about public sector banks they are more in

priority sector and they give advanced to weaker sector or
industries. Public sector banks give more loans to Agriculture,
small scale and others units and as a result we see that there
are more number of NPA in public sector banks than private
sector banks. BOB given more advanced to priority sector in
2008-09 than other four banks .
BANK

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

But when there are comparison between private bank and

public sector bank still ICICI Bank has more NPA in both priority
and non-priority sector with the comparison of public sector
banks. Large NPA in ICICI Bank because the strategy of bank
75

that risk-reward attitude and initiative in each sector. Above we

also discuss that ICICI Bank has highest deposit-investmentadvance than other banks.

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

Here, there are huge differences between private and public

sector banks NPA. There is increase in new private sector
banks NPA of Rs.4148 cr in 2008-09 which is almost 66% rise
than previous year. In public sector banks the numbers are not
increased like private sector banks.

76

ANNEXURE-I
REPORTING FORMAT FOR NPA GROSS AND NET NPA

Name of the Bank:

Position as on
PARTICULARS
1) Gross Advanced *
2) Gross NPA *
3) Gross NPA as %age of Gross Advanced
4) Total deduction( a+b+c+d )
( a ) Balance in interest suspense a/c **
( b ) DICGC/ECGC claims received and held pending
adjustment
( c ) part payment received and kept in suspense a/c
( d ) Total provision held ***
5) Net advanced ( 1-4 )
6) Net NPA ( 2-4 )
7) Net NPA as a %age of Net Advance
8) Net NPA as a %age of Net Advance

*excluding Technical write-off of Rs.________crore.

**Banks which do not maintain an interest suspense a/c to park the accrued interest on
NPAs may furnish the amount of interest receivable on NPAs.
77

***Excluding amount of Technical write-off (Rs.______crore) and provision on standard

assets. (Rs._____crore).

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

Treasury Management, December 2004, MPM Vinay Kumar,

Page 62-65; SECURITISATION : ISSUES AND PERSPECTIVES.

Chartered Secretary, Feburary 2003, V S Datey, Page 128135;

SECURITISATION,
RECONSTRUCTION
AND
ENFORCEMENT OF SECURITY INTEREST.

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/

78

79