200 9

Seminar On

Contemporary Issues In Management

NON PERFORMING ASSETS

SUBMITTED TO: Rajasthan Technical University , Kota

Submitted By: Of: AMIT GHAWARI TYAGI MBA II Sem

Under Guidance MISS. SHOBHIKA (FACULTY)

Vision School Of Management Affiliated to Rajasthan Technical University Kota AICTE Approved E-Mail : vision_mgmt@yahoo.com Website : visionmanagement.org

TABLE OF CONTENTS
1.Introduction..................................................................................................... 1 2. What is NPA...................................................................................................2 3.AssetsClassification......................................................................................... 3 3.1 General Reasons for Assets Becoming NPA.......................................3 3.2 Classification of assets of scheduled commercial bank..............4 3.3 Gross and net NPA of different sector of bank............................4 4. Management of NPA....................................................................................5 4.1 Provisioning Requirement for Loans or Advances............................5 5. General Method of Management of NPA...............................................6- 7 6. Difficulties with the Non-performing Assets...............................................8 7. Comparison with other Asian Economies...................................................9 8. Bank-Wise (NPAs) of Scheduled Commercial Bank 2008..................1012 9. Some Facts Regarding NPA of Major 25 Banks of India........................13 10. The Changing Dynamics in Asian Non- Performing Loans.............14-16 11. Developing the Asian Markets for Non-Performing Assets...................17 12. Developing the Indian Markets for Non-Performing Assets............18-19 13. Conclusion..................................................................................................20 14. Suggestion to Overcome the Problem of NPA........................................21 15. Bibliography & References.......................................................................22

ACKNOWLEDGEMENT

In preparation of this report by me, I feel great pleasure because it gives me extensive practical knowledge. I get idea about Non Performing Assets by this report. I express my deep sense of gratitude to Dr. A.L. Jain (Director of vision school of Management, Chittorgarh) for his valuable guidance during my report work. I also grateful to all Faculty members Dr. Snehal Maheshkar, Mr.Vibhor Paliwal, Mrs.Pratibha Pagaria, Miss. Shobhika Tyagi, Mr. Rahul Jain and Staff members Mr. Purshottam Dashora, Mr. Rastraverdhan who guided me in my report. I am thankful to my friends Latika Surana, Ranu Shetiya, Preeti Paul, Bharti Sharma for valuable inspiration and guidance provided me through out this report work. I would like to take opportunity to express my gratitude towards all of them who have contributed directly or indirectly in my project work.

AMIT GHAWARI

PREFACE
This Project is done for the partial fulfillment of the two year MBA program. This Research project is a compulsory part of the academics. This research is done in the second semester of the MBA program. The topic of the study is “study ot non performing assets i india”. The reason for selecting this topic the NPA is a problem facing by the Indian banks. Banking industry plays an important sector to the overall economic development of India is ever inreasing. • The other objective of the topic were to analyse the trands in NPA of Indian banking sector. • A comperative analysis of NPA in various banking sector like public sector,SBI & its associates, Nationalise bank etc. The report is devided in to Fifteen Chepter. • The First topic is the introduction of the NPA. In this chapter there are detail about History of NPA. • In the Second topic the Mening of NPA is given. • The Third topic is about Assets classification in which General Reasons for Assets Becoming NPA,Classification of assets of scheduled commercial bank, Gross and net NPA of different sector of bank are coverd. • The Fourth & Fifth topics are about Management of NPA, General Method of Management of NPA. • The Sixth & Seventh topics are deeply discribe Difficulties with the Non-performing Assets, Comparison with other Asian Economies. • Next Eighth & Nineth topics are Bank-Wise (NPAs) of Scheduled Commercial Bank,Some Facts Regarding NPA of Major 25 Banks of India. • The Tenth & Eleventh topics are about Changing Dynamics in Asian Non- Performing Loans with Developing the Asian Markets for NonPerforming Assets. • The Twelth topic is all about Developing the Indian Markets for NonPerforming Assets. • The last Thirteen, Fourteen & Fifteen topics are about Conclusion, Suggestion & Bibliography & References.

This report is a honest work towards the topic. There can be many short comings in it bceause ot the lack of the time, un availability of data and other constraints.

INTRODUCTION
Banking sector reforms in India has progressed promptly on aspects like interest rate deregulation, reduction in statutory reserve requirements, prudential norms for interest rates, asset classification, income recognition and provisioning. But it could not match the pace with which it was expected to do. The accomplishment of these norms at the execution stages without restructuring the banking sector as such is creating havoc. This research paper deals with the problem of having non-performing assets, the reasons for mounting of non-performing assets and the practices present in other countries for dealing with non-performing assets. During pre-nationalization period and after independence, the banking sector remained in private hands Large industries who had their control in the management of the banks were utilizing major portion of financial resources of the banking system and as a result low priority was accorded to priority sectors. Government of India nationalized the banks to make them as an instrument of economic and social change and the mandate given to the banks was to expand their networks in rural areas and to give loans to priority sectors such as small scale industries, self-employed groups, agriculture and schemes involving women. To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the banking system to expand its network in a planned way and make available banking series to the large number of population and touch every strata of society by extending credit to their productive Endeavour’s. This is evident from the fact that population per office of commercial bank has come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of advances of public sector banks to priority sector increased form 14.6% in 1969 to 44% of the net bank credit. The number of deposit accounts of the banking system increased from over 3 crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to over 2.68 crores.

WHAT IS A NPA (NON PERFORMING ASSET)
Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset. 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 RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance whereinterest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, the account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; interest and /or installment 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 installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

ASSESTS CLASSIFICATION

The RBI has issued guidelines to banks for classification of assets into four categories.

1. Standard ASSESTS:
These are loans which do not have any problem are less risk.

2. Substandard ASSESTS:
Non-performing loans or advances past due 90(ninety) days or more but less than 180(one-hundred- eighty days) days shall, at a minimum, is classified sub standard. Without prejudice to the classification criteria used for the sub standard category set out above, the following non-performing loans and advances shall be categorized as substandard

3. Doubtful ASSESTS:
Non-performing loans or advances past due 180 days or more, but less than 360 days shall be classified, at a minimum, as doubtful.

4. Loss ASSESTS:
Non-performing loans or advances past due 360 days or more shall be classified as Loss.

GENERAL REASONS FOR ASSETS BECOMING NPAs
A multiplicity of factor is responsible forever increasing size of NPAs in banks. A few prominent reasons for assets becoming NPAs are as under. 4Poor credit appraisal system 4Lack of proper monitoring 4Reckless advances to achieve the budgetary targets. 4There is no or lack of corporate culture in the Banking adequate legal provisions on foreclosure and bankruptcy. 4Change in economic policies/ environment. 4No transparent accounting policy and poor auditing practices. 4Lack of coordination between banks. 4Directed lending to certain sectors. 4Failure on the part of the promoters to bring their portion of equity from their own source or public issue due to market turning lukewarm.

The classification of assets of scheduled commercial bank
Table1 Assets Standard assets Sub standard assets Doubtful assets Loss assets Total NPA 2001 494716 (88.6) 18206 (3.3) 37756 (6.8) 8001 (1.4) 63963 (11.4) 2002 609972 (89.6) 21382 (3.1) 41201 (6.1) 8370 (1.2) 70953 (10.4) 2003 709260 (91.2) 20078 (2.6) 39731 (5.1) 8971 (1.2) 68780 (8.8) (Amount Rs. crores) 2004 837130 (92.8) 21026 (2.3) 36247 (4.36) 7625 (0.8) 902027 (100)

Income recognition and provisioning
Income from NPA is not recognized on accrued basic but is booked as income only when, it is actually received. RBI has also tightened red the provisions norms against asset classification. It ranges from 0.25% to 100% from standard asset to loss asset respectively.

Gross and net NPA of different sector of bank
Table 2 (end of March 31) (in %)

category Public sector bank Private sector Foreign bank
Table 3

Gross NPA/ Gross Advance 2001 12.37 8.37 6.84 2002 11.09 9.64 5.38 2003 9.36 8.07 5.25 2004 7.79 5.84 4.62
(end of March 31) (in %)

category Public sector bank Private sector Foreign bank

Net NPA / Net Advance 2001 6.74 2.27 1.82 2002 5.82 2.49 1.89 2003 4.53 2.32 1.76 2004 2.98 1.32 1.49

The table II and III shows that the percentage of gross NPA/ gross advance and net NPA/ net advance are in a decreasing trend. This shows the sign of efficiency in public and private sector banks. but still if compared to foreign banks Indian private sector and public sector banks have a higher NPA.

MANAGEMENT OF NPA
The table II&III shows that during initial sage the percentage of NPA was higher. This was due to show ineffective recovery of bank credit, lacuna in credit recovery system, inadequate legal provision etc. 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

Provisioning Requirement for Loans or Advances
All Banks shall maintain a Provision for Loans Losses Account which shall be created by charges to provision expense in the income statement and shall be maintained at a level adequate to absorb potential losses in the loans or advances portfolio. In determining the adequacy of the Provisions for Loan Losses Account, provisions may be attributed to individual loans or advances or groups of loans or advances. The provisions for Loan Losses Account shall always have a credit balance. Additions to or reductions of the Provisions for Loan Losses Account shall be made only through charges to provisions in the income statement. Based on the asset classification, the banks are required to make a provision against the Loans or advances. Bank shall maintain the minimum provision percentages against the outstanding provision and of each loan or advances.

GENERAL METHODS OF MANAGEMENT OF NPAS
The management of NPA is the difficult task in practice. Management of NPAs means, how to settle the NPAs account in the books. In simple it focuses on the methods of settlement of NPAs account. The methods are differs from bank to bank. The following paragraph explains some general methods of Management of NPAs by the banks. The same information is given in the chart 1.1.

Compromise Legal remedies Regular Training Program Recovery Camps Write offs Spot Visit Rehabilitation of potentially viable units Other Methods General Methods of Management of NPAs

Compromise:
The dictionary meaning of the term compromise is “settlement of dispute reached by mutual concessions. The following are the detailed guidelines for compromise/negotiated settlements of NPAs. * The compromise should be a negotiated settlement under which the bank should ensure recovery of its dues to the maximum extent possible of minimum expenses. * Proper distinction should be made between willful defaulters and borrowers defaulting in repayments due to circumstances beyond their control.

* Where security is available for assessing the realizable value, proper weight age should be given to the location, condition and marketable title and possession of sub security. * An advantage in settlement cases is that banks can promptly recycle the funds instead of resorting to expensive recovery proceedings spread over a long period. * All compromise proposals approved by any functionary should be promptly reported to the next higher authority for post facto scrutiny. * Proposal for write off/ compromise should be first by a committee of senior executives of the bank. * Special recovery cells should be set up at all regional levels.

Legal remedies:
The legal remedies are one of the methods of management of NPAs. The banks observed that the borrower is making willful default; no more time should be lost instituting appropriate recovery proceedings. The legal remedies are filling of civil suits.

Regular Training Program:
The all levels of executives are compelling to undergrowth the regular training program on credit and NPA management. It is very useful and helpful to the executives for dealing the NPAs properly.

Recovery Camps:
The banks should conduct the regular or periodical recovery camps in the bank premises or some other common places; such type of recovery camps reduces the level of NPAs in the Banks.

Write offs:
Write offs is also one of the common management techniques of NPAs. The assets are treated as loss assets, when the bank writes off the balances. The ultimate aim of the write off is to cleaning the Balance sheet.

Spot Visit:
The bank officials should visit to the borrowers’ business place or borrowers field regularly or periodically. It is also help full to the bank to control or reduce the NPAs limit.

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 (c) 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. Most of the depositor’s money has been frittered away by the banks at the instance of politicians, while the same depositors are being made to pay through taxes to cover the losses of the bank.

Comparison with other Asian Economies
Comparison of Problems and Solutions Across 5 countries
Country Mechanisms used to solve the problem India 1. Legal impediments and time 1. Strengthening of Legal Norms consuming nature of asset disposal process. 2. Manipulation by the debtors using 2. Aligning of prudential norms with political influence has been a cause for international standards industrial bad debt being so high. 3.Political tool - Directed Credit to SSI 3. Legal mechanisms including and Rural sectors creation of ARCs and partial disbanding of the BIFR China 1. Moral Hazard - SOE's belief that 1. Creation of Asset Management bailout will happen in a crisis situation Companies for the big four banks 2. Bankruptcy laws favour borrowers 2. Foreign equity participation in the NPA disposal process 3. Inefficient legal enforcement 3. Raising of disclosure standards mechanisms 4. Political & social implications 4.Laws enabling Asset backed compulsions force the government to securitisation. keep them afloat. Japan 1. Real estate boom and bust 1. Strict action (including closure) for non compliance of capital norms 2. Time consuming legal mechanisms 2. Securitisation of Real estate loans 3. Crony capitalism 3. Extensive public funding for bailouts 4. 'The no-bankruptcy doctrine' Korea 1.Directed credit: Interest rate control 1 Swift action in containing systemic risk 2.The “compressed growth” policy 2. Use of Corporate Restructuring Vehicles (CRVs) and Debt/Equity Swaps 3. Lack of effective monitoring 3. Creation of Korea Asset Management Corporation (KAMCO) in 1997 4.Contagion Effects from South East 4. Extensive use of securitization Asia Thailand 1. legal system that favoured debtors 1. Privatisation of government entities 4. Steep interest rate increase turned 4. Government takeover of banks loans bad and FIs 3. Real estate speculation - Spike in 3. Creation of AMCs prices andgrowth rate projections were wrong Causes of Problem

BANK-WISE NON-PERFORMING ASSETS (NPAs) OF SCHEDULED COMMERCIAL BANK - 2008

Bank Name State Bank of India & its Associates State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of India State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Nationalised Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank IDBI Bank Ltd Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank

(Amount in Rs. Crore) As on March 31 Gross Gross Gross NPA NPAsAdvance Ratio % 437 25304 1.7 0.9 3.0 1.4 1.7 1.4 1.5 2.0

312 35901 12837 422181 265 18356 359 21305 521 36724 179 12309 571 28440

1011 372 1981 1931 766 1416 2350 584 573 1565 487 997 1280 136 3319 1769 1652 1657 761 512

50312 34556 107672 114793 29798 107655 74287 39664 23381 83608 40228 61058 55327 18409 120932 65197 55627 75879 28152 32019

2.0 1.1 1.8 1.7 2.6 1.3 3.2 1.5 2.4 1.9 1.2 1.6 2.3 0.7 2.7 2.7 3.0 2.2 2.7 1.6

Foreign Banks

AB Bank ABN AMRO Bank Abu Dhabi Commercial Bank Antwerp Diamond Bank BNP Paribas Bank of America Bank of Bahrain & Kuwait Bank of Ceylon Bank of Nova Scotia Barclays Bank

3 294 19 34 1 25 17 2 61

26 20502 182 476 3805 3453 301 56 4776 7664

10.2 1.4 10.7 0.0 0.9 0.0 8.4 29.6 0.0 0.8

BANK-WISE NON-PERFORMING ASSETS (NPAs) OF SCHEDULED COMMERCIAL BANK - 2008 (Concld.) (Amount in Rs. Crore) Bank Name As on March 31 Gross Gross Gross NPA NPAsAdvance Ratio % Calyon Bank 2 1815 0.1 China Trust Commercial Bank 1 129 1.0 Citibank 1011 38915 2.6 Deutsche Bank 60 9000 0.7 Development Bank of Singapore 5 2368 0.2 Hongkong & Shanghai Banking Corporation 697 30467 2.3 JP Morgan Chase Bank 121 1158 10.5 Krung Thai Bank 9 0.0 Mashreq Bank 41 0.0 Mizuho Corporate Bank 7 863 0.8 Oman International Bank 1 0.0 Shinhan Bank 314 0.0 Societe Generale 385 0.0 Sonali Bank Ltd 1 9 10.0 Standard Chartered Bank 723 33729 2.1 State Bank of Mauritius 214 0.0 The Bank of Tokyo - Mitsubishi UFJ 2307 0.0

Other Scheduled Commercial Banks Axis Bank 486 59899 0.8

Bank of Rajasthan Catholic Syrian Bank Centurion Bank of Punjab City Union Bank Development Credit Bank Dhanalakshmi Bank Federal Bank HDFC Bank ICICI Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank Lakshmi Vilas Bank Nainital Bank Ratnakar Bank SBI Commercial & International Bank South Indian Bank Tamilnad Mercantile Bank Yes Bank

126 7529 131 3387 540 16455 83 4575 63 4105 63 2146 469 19327 904 64032 7580 229892 392 12897 116 14663 485 19164 380 11102 194 9569 453 15729 138 3931 19 1002 37 617 5 364 188 10597 122 5431 11 9432

1.7 3.9 3.3 1.8 1.5 2.9 2.4 1.4 3.3 3.0 0.8 2.5 3.4 2.0 2.9 3.5 1.8 6.0 1.4 1.8 2.2 0.1 2.3

All Scheduled Commercial Banks 56668 2507885 Note : Data are Provisional. Figures are rounded off. Data pertain to the balance sheets of banks. Source : Department of Banking Supervision, RBI

Some facts regarding NPA of major 25 banks of India are:

● Net non-performing assets (NPAs) of 25 banks have risen by an average 21.75 per cent in Q2

● FY ’09 as against Q2 FY’08.The aggregate net non-performing assets (NPA) of 25 banks increased to Rs 17,992.82 crore in second quarter of 2008-09 from Rs 15,462.84 crore in the same period of FY’08 ● The average capital adequacy ratio (CAR) of 25 banks slipped to 12.68 per cent in Q2-FY ’09 from 13.41 per cent in the previous year. ● Karur Vysya Bank recorded maximum rise of 275.36 per cent in net NPAs in Q2-FY’09 with Rs. 50.03 crore as against Rs 13.33 crore in Q2-07. ● Seven major PSBs recorded a significant decrease in net NPAs. ● Among the private sector banks only South Indian Bank registered an improvement in net NPAs by -29.82 per cent. ● 16 banks witnessed a fall in their CAR from the previous fiscal, but they still managed to remain above the prescribed limit of nine per cent posed by the Basel II accord. ● Axis bank registered the maximum decline in CAR from 17.59 per cent in Q2 FY’08 to 12.2 per cent in Q2 FY’09. ● Federal Bank had the maximum rise in CAR unto 20.81 per cent in Q2 FY 2008-09 from 13.08 per cent a year earlier.

The Changing Dynamics in Asian Non Performing Loans
The changing dynamics

In the last year, many of the dynamics underpinning the approach in Asia to resolving and maximizing value from non-performing loans (NPLs) have changed. The author’s regional review for the second Forum for Asian Insolvency Reform (held in Bangkok, Thailand in December 2003) highlighted a number of areas of progress and some of the pitfalls in Asian corporate debt restructuring as well as providing a country-by-country summary of developments. This paper builds on that review and focuses on some of the evolving aspects of NPL resolution techniques and on shifts in approach to resolving Asia’s estimated 2 trillion US dollars in NPLs.

Reworking the fictional rescheduling – the strategic double defaulters
The author has often described the many so-called restructurings taking place in some of the Asian countries as fictional rescheduling, which have taken place without there being a realistic expectation that the debtor will be able to comply in full with the rescheduled timetable for repayment and without any serious attempts at operational restructuring or other real restructuring techniques. As defaults take place under these fictional rescheduling, reworking the workouts has already begun in many countries, with debtors commonly able to achieve a better deal the second time around. This odd phenomenon is partly due to the fact that the first round of fictional rescheduling rarely included a “haircut” of debt, as the banks’ balance sheets could not, at that time, sustain the loss, and often ramped up interest rates after a few years of reduced rates or interest holidays. As time has passed since the 1997-2002 period when many of these deals were done, the economies in some of the so-called crisis economies such as Korea, Malaysia, Thailand, and, to a more limited extent, Indonesia have improved. As the economies have rebounded, often without any real change in fundamentals or in overall competitiveness of enterprises on a comparative basis, interest rates have fallen. Banks have been recapitalized and can now sustain the losses from writing off portions of debt which the bank really has almost no prospect of recovering, and are therefore now processing losses that really should have been processed in 1997. In these changing environments, “strategic debtors” have again appeared. Strategic debtors is a term which was used in the period between 1997-1999 to describe debtors who were able to pay their debts but choose to use the Asian financial crisis as an excuse not to pay their financiers and commence restructuring negotiations in the hope of receiving some accommodation from their bankers. This tactic was very successful. As interest rates have fallen, and with banks’ balance sheets now far better placed to take a hit, strategic double defaulters have sprung up. Requests for reduced interest rates and for haircuts are common requests and, commonly, the requests are agreed. The dynamic is also odd as (commonly) the debtor would have complied with its first restructuring plan for many years and then a default occurs (or a cynic would say is engineered) and the debtor is suddenly able to again achieve

accommodations from its bankers. Some debtors, whilst acting cleverly and perhaps a little disingenuously, are not entirely to blame for this situation. If their bankers had, in the first round of restructuring, been less concerned with their own balance sheets and instead focused on realistic financial restructuring and operational restructuring of the debtor, assessing the viability of the debtor’s business and leaving it with a sustainable level of debt, the debtor may well have become more profitable and competitive in the interim period if it had not had to operate under the shadow of an overhang of unsustainable debt. In truth, the debtor’s bankers never hoped to recover this unsustainable debt, but delayed writing it off. The author has often quoted one banker as saying “we will do the rescheduling now and then do the restructuring next time they default”. In reality, as things have turned out, the second round has involved either another rescheduling or a haircut and a reduction of interest rates. In other words, the second round of restructuring has resulted in a better result for the debtor. From the debtor’s perspective “re-working the workouts works.”

The new wave of realistic restructurings
There has also been a wave of new restructurings, which have generally been conducted in a realistic manner. Some of these cases have involved essentially good businesses or projects, often involving multinational sponsors. In many cases, these restructurings did not occur in the immediate aftermath of the 1997 crisis. These restructurings were delayed because the debtor often enjoyed a lengthy moratorium, either formal or informal, over the last six years, as its creditors realized that they really have no attractive legal recourse and have sat still, despite continuing to threaten the debtor in an unconvincing manner. As these cases have involved viable businesses with strong sponsors (who have often through relationships with the banks insulated or provided protection to the debtor from its bankers) it is not surprising that these deals have become the first bright spark as the Asian economies have started to rebound.

The new markets – India at the head
India is perhaps the largest new market, with new laws enabling the establishment of asset reconstruction companies (ARCs). ARCIL, one of the first ARCs, is acquiring loans from many of the major banks including ICIC

Bank and SBI. Legal challenges have, however, delayed the implementation of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance (SRFAESI) under which ARCs are established. The proposed National Company Law Tribunal (NCLT), which replaces the existing Board for Industrial and Financial Reconstruction (BIFR), which handled cases under the sick industrial companies’ legislation, has also been delayed. It is hoped that the NLCT will speed the process of referring companies to rehabilitation although there are concerns as to whether it will be fully staffed with an adequate number of competent judges. There is also great need in India to develop a private profession of liquidators. Whilst debtors abused the moratorium on legal actions under the sick industrial company’s legislation, the removal of the stay in its entirety in the second amendment to the company’s code is somewhat reactionary. A better solution would have been to provide for a clearly time bound stay on legal actions during the period of rehabilitation. Stamp duty and taxation incentives are also required if the ARCs are going to become drivers of restructuring in India.

Developing the Asian Markets for Non-Performing Assets: Developments in India
Non-performing assets in India: An overview

India has acquired an alarming number of Non-Performing Assets .As at 31 March 2003, the banks and financial institutions in India held NPAs worth approximately Rs. 1 100 000 crore as against an aggregate gross NPAs of all scheduled commercial banks amounting to Rs. 63 883 crore at 31 March 2001. A review of the figures of gross and net NPAs for the last four years shows an increase of Rs. 13 068 crore (more than 25%) The apparent reduction of gross NPAs from 14.4% to 11.4% between 1998 and 2001 provides little comfort since this accomplishment is because of credit growth, which was higher than the growth of gross NPAs and not through any appreciable recovery of NPAs. There is neither a reduction nor even containment of the threat. The gross NPAs and net NPAs for public sector banks (PSBs) as at 31 March 2001 of 12.39% and 6.74% respectively, are higher than the figures for scheduled commercial banks (SCB’s) at 11.4% and 6.2%

Impacts of NPAs on the working of commercial banks
NPAs affected the profitability, liquidity and competitive functioning of public and private sector banks, and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion.

Impact on profitability
Commercial banks incurred a total amount of Rs. 31 251 crore towards provisioning NPAs from 1 April 1993 to 31 March 2001. This has brought net NPAs to Rs.32 632 crore or 6.2% of net advances. The enormous provisioning of NPAs together with the holding cost of such non-productive assets over the years has acted as a severe drain on the profitability of the PSBs. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market. This has alternatively forced PSBs to borrow heavily from the debt market to build Tier II capital to meet capital adequacy norms, thus putting severe pressure on their profit margins. It is worthwhile to compare the aggregate figures of the 19 nationalized banks for the year ended March 2001, as published by RBI in its Report on Trends and Progress of Banking in India

Developing the Indian Markets for Non-Performing Assets
1) The emerging Indian market

The process of resolution of NPLs has only just been initiated in countries like India. Banks and financial institutions in India are faced with the task of dealing with NPLs, which are reportedly worth around 20 billion US dollars as on 31 March 2002. While the NPL situation in India may not be as grim as some other Asian countries at the height of the Asian crisis,2 it is significant enough to warrant urgent attention. The total distressed assets are considerably higher than the reported NPL numbers, and it is widely believed that NPLs could be double the reported figure if more stringent international classification norms are applied in India. Creditor rights have historically been difficult to enforce in India, often involving long-winded court procedures. Furthermore, in India defaulting borrower companies have often misused the shelter provided by the mechanism of the Board for Industrial and Financial Reconstruction (BIFR). A company entering the purview of BIFR was protected through a moratorium on lender actions during the course of its proceedings. Proceedings often took very long to complete on account of systemic deficiencies in the workings of the BIFR.

a) Steps taken by the government of India
Over the past year or so, the government of India has taken several steps to help create an enabling environment for NPL resolution. Notable among these are: i) The enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI) in December 2002, which lays down the legal basis for the formation of asset reconstruction companies (ARCs) and provides lenders and ARCs with the powers to enforce security interest (if 75% by value of the secured creditors agree) and sell the assets of the borrower without court intervention. Furthermore, SRFAESI empowers lenders to remove a company from the purview of the BIFR. ARCs are also allowed various measures for asset reconstruction, including change of management of the borrower’s business though guidelines for implementing this are still awaited. ii) An out-of-court restructuring mechanism called Corporate Debt Restructuring (CDR) has been set up, which provides a platform for resolution of inter-creditor and debtor-creditor issues. iii) A National Company Law Tribunal (NCLT) is being set up to replace the BIFR. NCLT is, inter alia, envisaged to perform BIFR’s functions more effectively. b) Development of the Indian NPL market

Pursuant to the SRFAESI Act, a number of ARCs have applied to the Reserve Bank of India for setting up operations. Asset Reconstruction Company (India) Limited (ARCIL) and Asset Care Enterprises Ltd. have been promoted by groups of Indian lenders and are among the first ARCs in India. The process of acquisition by ARCIL of the first lot of assets is currently underway. A number of issues could however hamper effective development of the Indian NPL market:

i) Legal challenges
A tremendous outcry has been raised against the provisions of the SRFAESI Act by borrowers who have termed it as being against the principles of “natural justice”. A number of petitions are currently pending before the Supreme Court that challenge the right of lenders to take over and sell the borrower assets with limited opportunity of borrowers to challenge the action in a court of law. The Supreme Court judgment on this issue could profoundly affect the efficacy of this act.

ii) Tax and regulatory issues
The high level of transaction costs in the form of the stamp duty, payable on the transfer of financial assets by way of assignment, is a significant deterrent to the acquisition process except in the case of some progressive states. While the government appears keen to encourage both foreign and domestic investors, the need for specific policy, regulations and tax provisions responsive to their requirements has still to be addressed.

Conclusion
The paper stresses the importance of a sound understanding of the macro economic variables and systemic issues pertaining to banks and the economy for solving the NPA problem along with the criticality of a strong legal framework and legislative framework. Foreign experiences must be utilized

along with a clear understanding of the local conditions to create a tailor made solution which is transparent and fair to all stakeholders. 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. NPA is a double-edged weapon, which affects bank profitability due to interest income not being recognized on NPA accounts and loan loss previously to be created from profit earned. The bank must adopt structured NPAs management policy for elimination or reducing the NPAs in the Bank. In general the trend of NPAs in CBE are increasing trend, on the same time the CBE has been adopted a very good techniques to control over the NPAs.

SUGGESTIONS TO OVERCOME THE PROBLEM OF NPAs
General suggestions:
The Bank should adopt the following General strategies for control of NPAs. The suggestions are as follows:

· Projects with old technology should not be considered for finance · Large exposure on big corporate or single project should be avoided. · Operating staffs’ credit skills should be up graduation. · There is need to shift banks approach from collateral security to viability of the project and intrinsic strength of promoters. · Timely sanction and or release of loans by the bank is to avoid time and cost overruns. Pre-sanction suggestions: · Analysis should therefore be based on trends of capacity utilization, profitability etc. Assumptions not account for ground realities. · Better taking up any fresh/exciting proposals for assessment, sources for margin money should be thoroughly examined. · Uneven scale of repayment schedule with higher repayment in the initial years normally is preferred. · As for as possible, repayment of term loans should be fixed on monthly basis rather than on quarterly or semi annual basis. · Personal guarantees of the promoter directors/major shareholders should normally be insisted upon.

Post sanctions suggestions:
· Bank should prevent diversion of funds by the promoters. · Operating staff should scrutinize the level of inventories/receivables at the time of assessment of working capital. · The Credit section should carefully watch the warning signals viz. nonpayment of quarterly interest, dishonor of check etc. · Effective inspection system should be implemented.

BIBLIOGRAPHY & REFERENCES
Websites
ASAF (1998) “Countermeasures to Overcome Asian Economic Crises-I” www.icfaipress.org/archives/Analyst/1998/Nov/ASAF-counterMeasurescrises1.htm ICRA “Rating of Structured Obligations” Indian Credit Rating Agency

http://www.icraindia.com/services/rating/structur.htm Lahiri, Ashok K. “Rising NPAs: Where has all the money gone?” http://www.rediff.com/money/2002/aug/01spec.htm

News paper, journal and magazine Articles
Kohli, Renu (2002) “The informational quality of financial systems” Financial Express January 19 2002 Muniappan, G. P (2002a) “Indian Banking: Paradigm Shift – A regulatory point of view” Address at the Bank Economist Conference, Kolkata January 14, 2002 RBI (2001a) “Prudential Norms on Income Recognition, Asset Classification and Provisioning - Pertaining to Advances” Reserve Bank of India Mumbai. Sept 2001 RBI (2002b) “Selected Ratios of Scheduled Commercial Banks: 2000 and 2001” www.rbi.org.in, 2002 RBI (2002c) “Financial Institutions” www.rbi.org.in, 2002

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