LOVELY PROFESSIONAL UNIVERSITY

DEPARTMENT OF MANAGEMENT

NON PERFORMING ASSETS OF

BANKS
Submitted To:- MRS.Deepika Dhall
(Lovely Professional Univerity)

Submitted By:- ISHA SOOD

M.B.A 4TH SEM
Reg. No. 1O81O608

Index

Sr.
No.
1.

2.

Particulars
Introduction
Non Performing Assets Concept
Types of N.P.A
Difficulties with N.P.A
Review Of Literature

Page No.
3-14

15-17

3.

Profile of the Bank

History
Obejectives of the bank

18-21

4.

Research Methodology
Obejectives of the study
Scope of the study
Sources of data

22-24

Findings And Recmmendations

Causes of Non Performing Assets in bank
Causes of an Account becoming N.P.A
Treatment of account as N.P.A
6

7.

Suggestions to reduce N.P.A

Reasons Behind N.P.A
Conclusion
Bibliography

25-31

32-38

39

CHAPTER 1

Introduction
A strong banking sector is important for flourishing economy. One of the
most important and major roles played by banking sector is that of lending
business. It is generally encouraged because it has the effect of funds being
transferred from the system to productive purposes, which also results into
economic growth. As there are pros and cons of everything, the same is with
lending business that 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. The failure of the banking sector may
have an adverse impact on other sectors.
Non- performing assets are one of the major concerns for banks in India.
NPAs reflect the performance of banks. A high level of NPAs suggests high
probability of a large number of credit defaults that affect the profitability
and net-worth of banks and also erodes the value of the asset. The NPA
growth involves the necessity of provisions, which reduces the over all profits
and shareholders value. The issue of Non Performing Assets has been
discussed at length for financial system all over the world. The problem of
NPAs is not only affecting the banks but also the whole economy. In fact high
level of NPAs in Indian banks is nothing but a reflection of the state of health
of the industry and trade.This project deals with understanding the concept
of NPAs, its magnitude and major causes for an account becoming nonperforming, projection of NPAs over next years in banks and concluding
remarks.
The magnitude of NPAs have a direct impact on Banks profitability legally
they are not allowed to book income on such accounts and at the same time
banks are forced to make provisions on such assets as per RBI guidelines The
RBI has advised all State Co-operative Banks as well as the Central Cooperative Banks in the country to adopt prudential norms from the year
ending 31-03-1997. These have been amended a number of times since
1997. As per their guidelines the meaning of NPAs, the norms regarding
assets classification and provisioningIts now very known that the banks and
financial institutions in India face the problem of amplification of nonperforming assets (NPAs) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, various steps
have been taken. Among all other steps most important one was the
introduction of Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 by Parliament, which was an
important step towards elimination or reduction of NPAs.

An asset is classified as non-performing asset (NPAs) if

dues in the form of principal and interest are not paid by the borrower for a
period of 180 days, However with effect from March 2004, default status
would be given to a borrower if dues are not paid for 90 days. If any advance
or credit facility granted by bank to a borrower becomes non-performing,
then the bank will have to treat all the advances/credit facilities granted to
that borrower as non-performing without having any regard to the fact that
there may still exist certain advances / credit facilities having performing
status.
The NPA level of our banks is way high than
international standards. One cannot ignore the fact that a part of the
reduction in NPAs is due to the writing off bad loans by banks. Indian banks
should take care to ensure that they give loans to credit worthy customers.
In this context the dictum prevention is always better than cure acts as the
golden rule to reduce NPAs.

Non Performing assets (nPA) - Concept

Non Performing Asset means an asset or account of borrower, which has

been classified by a bank or financial institution as sub-standard, doubtful or
loss asset, in accordance with the directions or guidelines relating to asset
classification issued by The Reserve Bank of India. An asset, including a
leased asset, becomes nonperforming when it ceases to generate income for
the bank. A NPA is a loan or an advance where Interest and/ or installment
of principal remain overdue for a period of more than 90 days in respect of a
term loan. Earlier assets were declared as NPA after completion of the period
for the payment of total amount of loan and 30 days grace. In present
scenario assets are declared as NPA if none of the installment is paid till 180
days i.e six monts in respect of term loan. With effect from march,30, 2004,
a non performing asset(NPA) shall be a loan or an advance where : Interest
and/or installments 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/cd).
The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted, interest and or installments of principal
remains overdue for two harvest seasons but for a period not exceeding two
half years in the case of advance granted for agricultural purpose, and any
amount to be received remains overdue for a period of more than 90 days
in respect of other accounts.
RBI introduced, in 1992, the prudential norms for income
recognition, asset classification & provisioning IRAC norms in short in
respect of the loan portfolio of the Co operative Banks. The objective was to
bring out the true picture of a banks loan portfolio. The fallout of this
momentous regulatory measure for the management of the CBs was to
divert its focus to profitability, which till then used to be a low priority area
for it. Asset quality assumed greater importance for the CBs when
Maintenance of high quality credit portfolio continues to be a major
challenge for the CBs, especially with RBI gradually moving towards
convergence with more stringent global norms for impaired assets.The
quality of a banks loan portfolio can impact its profitability, capital and
liquidity. Asset quality problems are at the root of other financial problems
for banks, leading to reduced net interest income and higher provisioning
costs. If loan losses exceed the Bad and Doubtful Debt Reserve, capital
strength is reduced. Reduced income means less cash, which can potentially
strain liquidity. Market knowledge that the bank is having asset quality
problems and associated financial conditions may cause outflow of deposits.
Thus, the performance of a bank is inextricably linked with its asset quality.
Managing the loan portfolio to minimise bad loans is, therefore,
fundamentally important for a financial institution in todays extremely
competitive and market driven business environment. This is all the more
important for the CBs, which are at a disadvantage of the commercial banks
in terms of professionalised management, skill levels, technology adoption
and effective risk management systems and procedures. Management of

NPAs begins with the consciousness of a good portfolio, which warrants a

better understanding of risks in lending. The Board has to decide a strategy
keeping in view the regulatory norms, the business environment, its market
share, the risk profile, the available resources etc. The strategy should be
reflected in Board approved policies and procedures to monitor
implementation. The essential components of sound NPA management are
i)
ii)
iii)

quick identification of NPAs,

their containment at a minimum level,
ensuring minimum impact of NPAs on the financials.

Types Of NPA:
The RBI has issued the guidelines to banks for classification of assets in to
following categories.

Standard assets:- Standard Asset is one which does not disclose any
problems and which does not carry more than normal risk attached to the
business/banks. These are loans which do not have any problem are less
risk. Such an asset is not a non-performing asset. In other words, it carries
not more than normal risk attached to the business.
Sub Standard Assets:-

: It is classified as non-performing for a period

not exceeding 12 months. The account holder comes in this category
when they dont pay three installment continuously after 90 days and
upto 1 year. For this category bank has made 10% provision of funds
from their profit to meet the losses generated from NPA. With effect from
March 31, 2005 an asset would be classified as sub-standard if it remained
NPA for a period less than or equal to 12 months. In such cases, the current
net worth of the borrowers/ guarantors or the current market value of the
security charged is not enough to ensure recovery of the dues to the banks
in full. In other words, such assets will have 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.
(ii) An asset where the terms of the loan agreement regarding interest and
principal have been re-negotiated or rescheduled after commencement of
production, should be classified as sub-standard and should remain in such
category for at least 12 months of satisfactory performance under the renegotiated or rescheduled terms. In other words, the classification of an
asset should not be upgraded merely as a result of rescheduling, unless
there is satisfactory compliance of this condition

Doubtful NPA : An asset that has remained an NPA for a period

exceeding 12 months is a doubtful asset. These are NPA exceeding 12
months.
Under doubtful NPA there are three sub categories:

D1 i.e upto 1 year: 20% provision is made by banks.

D2 i.e upto 2 year: 30% provision is made by bank
D3 i.e upto 3 year: 100% provision made by bank.

With effect from March 31, 2005, an asset is required to be classified as

doubtful, if it has remained NPA for more than 12 months. The 12-month
period of classification of a substandard asset in doubtful category is
effective from April 1, 2009. A loan classified as doubtful has all the
weaknesses inherent as that classified as sub-standard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently
known facts, conditions and values, highly
questionable and improbable.

Loss Assets:-

A loss asset is one where loss has been identified by the

bank or internal or external auditors or by the Co-operation Department or
by the Reserve Bank of India inspection but the amount has not been written
off, wholly or partly. In other words, such an asset is considered un-collectible
and of such little value that its continuance as a bankable asset is not
warranted although there may be some salvage or recovery value. Here loss
is identified by the banks concerned, by internal auditors, by external
auditors, or by the Reserve Bank India upon inspection. These NPA which are
identified unreliable by internal inpector of bank or auditors or by RBI. Under
this 100% provision is made.

Effects of NPA on Bank:

1. Restriction on flow of cash done by bank due to the provisions of
fund made against NPA.
2. Drain of profit.
3. Bad effect on Goodwill.
4. Bad effect on equity value.

Difficulties with the non-performing

assets:
1. Owners do not receive a market return on their capital. In the worst case,
if the bank 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 savings. In the worst case if
the bank fails, depositors lose their assets or uninsured balance. Banks also
redistribute losses to other borrowers by charging higher interest rates.
Lower deposit rates and higher lending rates repress savings and financial
markets, which hampers economic growth.
3. Non performing loans epitomize bad investment. They misallocate credit
from good projects, which do not receive funding, to failed projects. Bad
investment ends up in misallocation of capital and, by extension, labour and
natural resources. The economy performs below its production potential.
4. Non performing loans may spill over the banking system and contract the
money stock, which may lead to economic contraction. This spillover effect
can channelize through illiquidity or bank insolvency;
(a) when many borrowers fail to pay interest, banks may experience
liquidity shortages. These shortages can jam payments across the
country,
(b)illiquidity constraints bank in paying depositors e.g. cashing their
paychecks. Banking panic follows. A run on banks by depositors as part
of the national money stock become inoperative. The money stock
contracts and economic contraction follows undercapitalized banks
exceeds the banks capital base.
Lending by banks has been highly politicized. It is
common knowledge that loans are given to various industrial houses not on
commercial considerations and viability of project but on political
considerations; some politician would ask the bank to extend the loan to a
particular corporate and the bank would oblige. In normal circumstances
banks, before extending any loan, would make a thorough study of the
actual need of the party concerned, the prospects of the business in which it
is engaged, its track record, the quality of management and so on. Since this
is not looked into, many of the loans become NPAs. The loans for the weaker

sections of the society and the waiving of the loans to farmers are another
dimension of the politicization of bank lending.

CHAPTER 2
Review of literature
A number of studies related to performance and overdues of banking sector
have been conducted by many researchers and institutions in India. An
analytical attempt is being made to review some related works done to
organize them in a presentable form.
I.

Studies Prior to Financial Sector Reforms (1991):

The Maclegan Committee (1914), which is the historical document in the

annals of cooperative movement, has examined the performance of credit
cooperatives. It stated that when the funds are kept rotating, any loaning
function of the bank can gear up successfully and serve very useful purpose.
Unless the loans are repaid punctually, cooperation is both financially and
educationally an illusion.
Kalyani (1970) emphasized on a longer period for the repayment of long
term loans in India. He added that the total burden of interest would be
relatively higher in the long period than in the shorter period, but then this
burden would be spread over quite a long period, making it easier for the
borrower to repay his loan in easy instalments, thereby resulting in lesser
overdues.
The All India Rural Credit Review Committee (1972) strongly stated that
there is an utter lack of administrative supervision, staff of right type and the
requisite scale of and, therefore, a full check on the utilization of loans is
rather difficult. Further it pointed out that the cooperative system had
remained stagnant both in respect of coverage of credit as well as borrowing
members as proportion to the total number of members. Cooperative credit
was short of standards of timeliness, adequacy and dependability. Generally
the overdues were heavy and were rising from year to year.

Datey, the Chairman of the Report of the study team on overdues in

cooperative credit institutions (1974) studied the problem of overdues in
cooperative banks and remarked. About three fourths of overdues arose due
to willful default besides internal reasons. And he suggested that stern
action on recalcitrant borrowers should be taken up.
Economic Survey (2005-2006), Monetary and Banking Developments:
According to this survey, the target for institutional credit for agriculture by
all the agencies was fixed at Rs.105,000 crores for the year 200405,ensuring 30% growth over previous years achievement. The overall
achievement by all agencies during 2004-05 was 1,15,243 crores, equivalent
to 32% growth over the previous years achievement. It further highlighted
that while the Commercial Banks and Regional Rural Banks over performed
vis--vis their target of Rs 57000 crores and 8500 crores, there was a
shortfall of over Rs.8000 crores by Cooperative Banks vis--vis their target of
39,000 crores, attributing the same to low resource base and inefficient
recovery system, thereby leading to excessive Overdues. The position of
NPAs has significantly improved in Scheduled Commercial Banks due to
wider options available to these for recovery of their dues on one hand and
sale of their NPAs to Asset Reconstruction Co(India) limited (ARCIL) on the
other hand. This resulted in NPAs declining by 6487 crores between March
2004 and end March 2005.
Bagchi, (2006). made an attempt to analyze the performance of Cooperative
Credit Institutions especially Primary Agriculture Credit Societies, and
observed that PACS could not match up to the increasing requirements of
growth dimensions in the Agri /Rural developments in the Post Independence
Period, although till the late 50s, they were the only available source of
institutional rural finance. According to the RBI Report on Trend and Progress
of Banking in India 2004-05, released on 24-11-05, the Cooperative Credit
Institutions had extended an amount of Rs.39, 638 crores to Agri-Allied
sectors i.e., about half of credit advanced by Commercial Banks (72,886
crores) and double the amount advanced by RRBs (11,718 crores). The
dismal performance of Cooperative Banks was due to unnecessary State
Government intervention and above all the inefficient loan recovery system
leading to NPAs.

CHAPTER 3

Profile of the jalandhar central co

operative bank
Cooperatives - An Introduction
Cooperatives have played a vital role in improving the economic conditions
of farmers and accelerating the pace of development in Punjab.
Development through Cooperatives was a dream cherished by freedom
fighters of India ever since Independence. Cooperative principles ensure
harmonious development, through democratic management and
governance. Cooperatives have brought both the services and resources at
the doorsteps of villagers in Punjab. These have been enthusiastically
serving the people of Punjab in area such as agriculture, housing, spinning,
sugar production, weaving and dairy etc.The performance of Cooperative
Movement in Punjab, is very impressive. Cooperatives constitute the major
source of institutional credit for agriculture. Cooperatives are playing a
pivotal role in socio-economic development of the State. These are key
instruments of the State to develop and sustain its rural economy, which is
primarily agrarian. The Department of Cooperation has accelerated
Cooperative movement in Punjab during the last three years.

Values & Principles:"Cooperatives"

A cooperative is an system voluntarily to meet their common economic,

social and cultural needs and aspirations through a jointly-owned and
democratically controlled enterprise.

Principles:

Voluntary and open membership

Democratic member Control
Members Economic Participation
Autonomy and Independence
Education, Training and Information
Cooperation among Cooperatives
Concern for Community

HISTORY
The Jalandhar Central Co-operative Bank ltd., Jalandhar is a premier bank in
the Punjab State. The bank was registered in 1909 under the co-operative
societies Act. Among others Rai Bhahadur Dass and Khan Bahadur Khan
Ahmad Shah were the promoters of this. Khan Bahadur Khan Ahmad Shah
was the first president of the bank. This Bank was started with very small
share contribution Rs.2.00 Lacs in a rented building. In 1924, the present
building situated on G.T Road, JalandharCity was constructed and
commissioner Jalandhar inaugrated this building. Initially, the membership of
the bank comprised individuals as well as co-operative institutions but after
1969 the individual share holders were retire.

MISSION
Promotion and sustainance of economic interest & providing easy finance,
cost effective and quality banking services ot customer & PACs.

AREA OF OPERATION:
In the area of this bank, there were five unions that were functioning as
credit institutions for co-operative societies. In 1956, all these unions were
absorbed in the bank. The area of the operation of the bank is jalandhar
district that comprises three Tehsils i.e Nakodar, Phillaur and Jalandhar. In
1956, the total number of branches of the bank were two in number this

number stands at 72 now out of these branches, 7 are in Urban areas, 22 in

semi- urban areas and 43 in rural areas.

OBEJECTIVES

OF THE BANK:

The main objectives of the bank as mentioned in its byelaws is to facilitate

the operation of the affiliated co-operative societies in pursuance of this
object, the bank has laid down in its byelaws to undertake the following
activities:

To carry on banking and credit business.

To promote economic interest of the members of the bank and publicin accordance with co-operative principles.
To provide credit facilities to its members on as convenient and
suitable facilities.

Chapter 4

RESEARCH METHODOLOGY
For accomplishing the objectives of the study, both secondary and
primary data will be analyzed.

1. Secondary Data:
The Secondary Data for three years from 2006 to 2008 will be used for
the purpose of this study. The data will be collected from:
(1) The Annual Accounts, Audit Reports, and Inspection Reports of the
selected DCCBs.
(2) Publications of Reserve Bank Of India.
(3) Publications of NABARD.
(4) Economic Surveys
(5) Existing literature and other scholarly works.

2. Observation:

Some information will be gathered through

personal observation and interaction with the officials of NABARD and

State Cooperative Banks.

POPULATION AND SAMPLE OF THE STUDY

Punjab has twenty (20) District Central Cooperative Banks (refer annexure
1). The Proposed study will be primarily based on the Secondary Data of
preceding three years from 2006-07 to 2008-09.The main source of the

secondary data will be the published Annual Reports, Circulars and Policy
letters of the Jalandhar Central Cooperative Banks of Punjab.

Tools of Analysis:
Consistent with the objectives of the study, different accounting
techniques such as Ratio analysis, etc., will be utilized. In addition to these,
simple statistical techniques like averages, graphs, percentages may be used
aiming at the achievement of study objectives and findings of the existing
studies.

Objectives of the study

To understand the meaning & nature of NPAs.

To examine the causes for NPAs in Jalandhar Central Co-operative
bank.
To project the NPAs in bank over next three years.
To analyze the NPA and its relation with operating profit of the bank.
To study the general reasons for assets become NPAs.
To point out the amount of NPAs in different central banks.
What is the criteria to recover the advances from the bank.
What are the methods adopted by the bank to look after NPA
management.

Scope of this study:

To present a picture of movement of NPA in The Jalandhar Central

Co- Operative Bank.
To know how NPA level will affect the profit of the banks.

Chapter 5
Findings & recommendation
Causes of NPAs in banks
Non-performing Assets (NPAs) are the smoking gun threatening the very
stability of Indian banks. NPAs wreck a bank's profitability both through a loss
of interest income and write-off of the principal loan amount itself. In a bid to
stem the lurking rot, RBI issued in 1993 guidelines based on
recommendations of the Narasimham Committee that mandated
identification and reduction of NPAs. Their implementation immediately
pushed many banks into the red. So serious is the problem that an RBI report
suggested that reducing NPAs be treated as a 'national priority'
Dealing with NPAs involves two sets of policies
1. Relating to existing NPAs
2. To reduce fresh NPA generation.
As far as old NPAs are concerned, a bank can remove it on its
own or sell the
assets to AMCs to clean up its balance sheet. For preventing fresh NPAs, the
bank itself should adopt proper policies.
A strong banking sector is important for a flourishing economy. The failure of
the banking sector may have an adverse impact on other sectors. The Indian
banking system, which was operating in a closed economy, now faces the
challenges of an open economy. On one hand a protected environment
ensured that banks never needed to develop sophisticated treasury
operations and Asset Liability Management skills. On the other hand a
combination of directed lending and social banking relegated profitability
and competitiveness to the background. The net result was unsustainable
NPAs and consequently a higher effective cost of banking services. One of
the main causes of NPAs into banking sector is the directed loans system
under which central co operative banks are required a prescribed percentage
of their credit (40%) to priority sectors. As of today nearly 7 percent of Gross
NPAs are locked up in 'hard-core' doubtful and loss assets, accumulated over
the years.
The problem India Faces is not lack of strict prudential norms but
i. The legal impediments and time consuming nature of asset disposal
proposal.

ii. Postponement of problem in order to show higher earnings.

iii. Manipulation of debtors using political influence.

Causes for an Account becoming NPA

There are several reasons for an account becoming NPA.
* Internal factors
* External factors

Internal factors:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or
other
debt instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansion\modernization\setting up new projects\
helping or promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,
mis-appropriation etc.
9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring
and
follow-ups, delay in settlement of payments\ subsidiaries by government
bodies etc

External factors:
1. Sluggish legal system

Long legal tangles

Changes that had taken place in labour laws
Lack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power
shortage, industrial recession, excess capacity, natural hazards like floods,
accidents.
5. Failures, non payment\ over dues in other countries, recession in other

countries, externalization problems, adverse exchange rates etc.

6. Government policies like excise duty changes, Import duty changes etc.
Some Other Reasons:
Failure to bring in Required capital
Too ambitious project
Mis management
Unwanted Expenses
Over trading
Imbalances of inventories
Lack of proper planning
Dependence on single customers
Lack of expertise
Improper working Capital Mgmt.

Treatment of Accounts as NPAs

Record of Recovery

The treatment of an asset as NPA should be based on the record of recovery.

Banks should not treat an advance as NPA merely due to existence of some
deficiencies which are of temporary in nature such as non-availability of
adequate drawing power, balance outstanding exceeding the limit. A credit
facility should be treated as NPA.

Treatment of NPAs Borrower-wise and not

Facility-wise
I.

In respect of a borrower having more than one facility with a bank, all
the facilities granted by the bank will have to be treated as NPA and
not the particular facility or part thereof which has become irregular.

II.

However, in respect of consortium advances or financing under

multiple banking arrangements, each bank may classify the borrowal
accounts according to its own record of recovery and other aspects
having a bearing on the recoverability of the advances.

Recognition of Income on Investment Treated

as NPAs

The investments are also subject to the prudential norms on income

recognition. Banks should not book income on accrual basis in respect of
any security irrespective of the category in which it is included, where the
interest/principal is in arrears for more than 90 days .

NPA Reporting to Reserve Bank

Banks should report the figures of NPAs to the Regional Office of the Reserve
Bank at the end of each year within two months from the close of the year.

Chapter 6
Suggestions to reduce n.p.a
At the pre-disbursement stage, appraisal techniques of bank need to be
sharpened. All technical, economic, commercial, organizational and financial
aspects of the project need to be assessed realistically. Bankers should

satisfy themselves that the project is technically feasible with reference to

technical know how, scale of production etc. The project should be
commercially feasible in that all background linkages by way of availability of
raw materials at competitive rates and that all forward linkages by way of
assured market are available. It should be ensured assumptions on which the
project report is based are realistic. Some projects are born sick because of
unrealistic planning, inadequate appraisal and faulty implementation. As the
initiative to sanction or reject the project proposal lies with the banker, he
can exercise his judgment judiciously. The banker should at the pre-sanction
stage not only appraise the project but also the promoter his character and
his capacity. It is said that it is more prudent to sanction a 'B' class project
with an 'A' class entrepreneur than vice-versa. He has to ensure that the
borrower complies with all the terms of sanction before disbursement.
A major cause for NPA is fixation of unrealistic repayment schedule.
Repayment schedule may be fixed taking into account gestation or
moratorium period, harvesting season, income generation, surplus available
etc. If the repayment schedule is defective both with reference to quantum
of instalment and period of recovery, assets have a tendency to become
NPA. At the post-disbursement stage, bankers should ensure that the
advance does not become and NPA by proper follow-up and supervision to
ensure both assets creation and asset utilisation. Bankers can do either offsite surveillance or on site inspection to detect whether the unit / project is
likely to become NPA. Instead of waiting for the mandatory period before
classifying an asset as NPA, the banker should look for early warning signals
of NPA.
The following are the sources from which the banker can detect signals,
which need quick remedial action:
Scrutiny of accounts and ledger cards During a scrutiny of these,
banker can be on alert if there is persistent regularity in the account,
or if there is any default in payment of interest and instalment or when
there is a downward trend in credit summations and frequent return of
cheques or bills,
Scrutiny of statements If the scrutiny of the statements submitted
by the borrower reveal a sharp decline in production and sales, rising
level of inventories, diversion of funds, the banker should realise that
all is not well with the unit.
External sources The banker may know the state of the unit
through external sources. Recession in the industry, unsatisfactory
market reports, unfavourable changes in government policy and
complaints from suppliers of raw material, may indicate that the unit is
not working as per schedule.
Computerisation of loan monitoring In computerised branches, it
is possible to computerise the loan monitoring system so that
accounts, which show signs of sickness or weakness can be monitored
more closely than other accounts.Personal visit and face-to-face

discussion By inspecting the unit the banker is able to see for himself
where the problem lies - either production bottlenecks or income
leakage or whether it is a case of willful default. During discussion with
the borrower, the banker may come to know details relating to
breakdown in plant and machinery, labour strike, change in
management, death of a key person, reconstitution of the firm, dispute
among the partners etc. All these factors have a bearing on the
functioning of the unit and on its financial status.

Strategy for reducing provision The extent of provision for doubtful

asset is with reference to secured and unsecured portion. Cent percent
provision needs to be made for the unsecured portion. If banks can ensure
that the loan outstanding is fully secured by realisable security, the quantum
of provision to be made would be less. It takes one year for a sub standard
asset to slip into doubtful category. Therefore, as soon as an account is
classified as substandard, the banker must keep strict vigil over the security
during the next one year because in the event of the account being classified
as doubtful, the lack of security would be too costly for the bank.
Cash recovery Banks, instead of organising a recovery drive based on
overdues, must short list those accounts, the recovery of which would
provide impetus to the system in reducing the pressure on profitability by
reduced provisioning burden. Vigorous efforts need to be made for recovery
of critical amount (overdue interest and instalment) that can save an
account from NPA classification:
a) In case of a term loan, the banker gets 90 days after the date of
default to take appropriate action and to persuade the borrower to pay
interest or instalment whichever is due.
b) In case of a cash credit account, the banker gets 90 days for ensuring
that the irregularity in the account is rectified.
c) In case of direct agricultural loans, the account is classified NPA only
after two crop seasons (from sowing to harvesting) from the due date
in case of short duration loans and one crop season from the due date
in case of long duration loans.

Up gradation of assets Once accounts become NPA, then bankers

should take steps to up grade them by recovering the entire overdues. Close
follow-up will generally ensure success.

Compromise settlements Wherever feasible, in case of chronic NPAs,

banks can consider entering into compromise settlements with the
borrowers.

Reasons Behind NPA:1. Lack of proper pre enquiry by the bank for sanctioning a loan to a customer.
2. Non- performance of the business or the purpose for which the customer has taken the
loan.
3. Willful defaulter.
4. Loans sanctioned for the agriculture purposes.
5. Chage in govt. policies leads to NPA.

CONCLUSION
The Indian banking sector is facing a serious problem of NPA. The extent of NPA is
comparatively higher in public sectors banks. To improve the efficiency and profitability, the
NPA has to be scheduled. Various steps have been taken by government to reduce the NPA. It is
highly impossible to have zero percentage NPA. But at least Indian banks can try competing
with foreign banks to maintain international standard. I would suggest 3 ways of solving this
problem of NPAs. They are

recapitalization of banks with Government aid,

disposal and write off of NPAs,
increased regulation.

Various steps have been taken by the government to recover and reduce NPAs. Some of them
are.
1. One time settlement / compromise scheme
2. Lok adalats
3. Debt Recovery Tribunals
4. Securitization and reconstruction of financial assets and enforcement of Security Interest Act
2002.
5. Corporate Reconstruction Companies
6. Credit information on defaulters and role of credit information bureaus

Chapter7

BiBliography
Data from the bank and internet from following links.
http://pbcooperatives.gov.in/DCCB.htm
http://www.thehindubusinessline.com/2005/07/09/stories/2005070902430600.htm
http://www.newkerala.com/nkfullnews-1-88540.html
http://www.scribd.com/doc/17156683/NPA-Management-project-in-state-bank-of-mysore
http://www.rbi.org.in/scripts/bs_viewmastercirculars.aspx
http://www.taxmann.net/FEMAOnlineweb/FEMA_Online/FemaRBImasterCircular.aspx?
pId=80502