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COMPARATIVE ANALYSIS ONNON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS

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7/(   COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS.       352-(&77. $UHSRUWVXEPLWWHGLQSDUWLDOIXOILOOPHQWRIWKH UHTXLUHPHQWVRI0%$SURJUDP FACULTY GUIDE Prof. RajasreeNandy 2 .

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Finance Faculty.This project was done under the able guidance and supervision of Prof. Declaration I hereby declare that this MRP report on ³COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS. RajasreeNandi. 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. IBS Kochi in partial fulfillment of the requirement for the Master Of Business Administration Degree course of the ICFAI Business School.´ has been written and prepared by me during the academic year 2009-2010. 3 .

Place: Kochi Anindya Sankar Kundu 08bs0000328

Acknowledgements

If words are considered to be signs of gratitude then let t hese words convey the very same. I thank Prof. RajasreeNandi, 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.

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TABLE OF CONTENTS

Declaration «««««««««««««««««««««««««««« ««««««««««««« 3 Acknowledgments ««««««««««««««««««««««««««« «««««««««. 4 Abstract ««««««««««««««««««««««««««««« ««««««««««««««. 7 1. Project Details 1.1 Objective of the project «««««««««««««««««««««««««« 9 1.2 Research Methodology««««««««««««««««««««« ««««««. 9 1.3Scope of the project «««««««««««««««««««««««««« «« 9 1.4 Sampling Methods «««««««««««««««««««««««««« ««« 10
5

1.5 Limitations of the project««««««««««««««««««««««««« 10
2. Introduction

2.1 Definition of NPA

«««««««««««««««««««««««««««« «... 12 2.2 NPAs: An issue for banks and FI¶s 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 Polic y ................................................................. 22 3.2 Reversal of income ............................................................................... 22 3.3 Leased Assets ......................................................................................... 23 3.4 Interes tApplication ............................................................................. 23 3.5 Reporting of NPAs ............................................................................... 24

4. Assets Classifications
6

................................................2 Inability to Pay ««««««««««««««««««««««««« ««««««................. 40 6....................4 Treatment of Restructured Standard Accounts ««««««««....7 General ««««««««««««««««««««««««« «««««««««««...3 Restructuring / Rescheduling of Loans ««««««««««««««. Impact of NPA &Preventive Measurement for NPA 5............................................. 42 6..... 5.8 Income recognition ««««««««««««««««««««««««« «««....1 Impact of NPA......................................................... Tools for recovery of NPA 6.. 41 6.......................................2 Doubtful ..1 Sub-standard .......................................................3 Loss ............................ 41 6..3 Preventive Measurement for NPA ......5 Treatment of restructured sub-standard accounts ««««««....... 43 7 ........ 42 6... 4...... 35 34 6............ Assets Assets 30 Assets 31 5.........6 Up gradation of restructured accounts ««««««««««««««................ 33 5....... 26 4.............................1 Willful Default ««««««««««««««««««««««««« ««««««« 39 6.......2 Early symptoms ......................... 43 6..................4....................

43 6.4 Advances under rehabilitation approved by BIFR/ TLI ««.1..9 Government guaranteed advances««««««««««««««««.9. 49 7. debentures or any other instrument 44 6.. KVP/IVP ««««««.2 Provisioning ««««««««««««««««««««««««« ««««««« 44 7.4 Accounts where there is erosion in the value of security « 47 7..9 Funded Interest ««««««««««««««««««««««««« «««««.1.3 Export Project Finance ««««««««««««««««««««««««.3 Asset Classification to be borrower-wise and not facilitywise 7.2 Post-shipment Supplier's Credit «««««««««««««««««« 50 7.1.1 Take-out Finance ««««««««««««««««««««««««« «««« 49 7.1. 46 7. 48 7.2 Accounts regularized near about the balance sheet date «.6 Advances against Term Deposits.7 Loans with moratorium for payment of interest «««««««. 51 8 .2. 50 7.5 Role of ARCIL ««««««««««««««««««««««««« «««««.5 Advances to PACS/FSS ceded to Commercial Banks ««««. 48 7.2.2..2.1 Accounts with temporary deficiencies ««««««««««««««« 46 7.1.2. Special Cases 7. 50 7.6.1..1 Conversion into equity.. NSCs.8 Agricultural advances ««««««««««««««««««««««««« « 48 7.1.9.1. 47 7.1.

The depth of the problem of bad debts wasfirst realized only in early 1990s. The magnitude of NPAs in banks and financial institutions is over Rs... 50. While gross NPA reflects the quality of the loans made bybanks. Data Analysis and interpretation «««««««««««««««««««««.1. 64 10. The banks and financial institutions have to take theinitiative to reduce NPAs in a time bound strategic approach.000 crore. Public sector banks figure prominently in the debate not onlybecause they dominate the banking industries. Bibliography «««««««««««««««««««««««««««« ««««««««« 65 ABSTRACT The accumulation of huge non-performing assets in banks hasassumed great importance. 52 9.8. net NPA shows the actual burden of banks. but also since they havemuch larger NPAs compared with the private sector banks. Now it is increasinglyevident that the major defaulters are the big borrowers coming from thenon -priority sector. Annexure «««««««««««««««««««««««««««« «««««««««««. This raises aconcern in the industry 9 .

and academia because it is generally felt thatNPAs reduce the profitability of a bank. For the recovery of NPAs a broad framework has evolved forthe management of NPAs under which several options are provided fordebt recovery and restructuring. Banks and FIs have the freedom todesign and implement their own policies for recovery and write-offincorporating compromise and negotiated settlements. weaken its financial health anderode its solvency. CHAPTER-1 10 .

2RESEARCH METHODOLOGY The research methodology adopted for carrying out the study were  In this project Descriptive research methodologies were use.  At the first stage theoretical study is attempted.1OBJECTIVES OF THE STUDY The basic idea behind undertaking the Grand Project on NPA was to:  To evaluate NPAs (Gross and Net) in different banks.Project Details 1.  At the second stage Historical study is attempted. 11 .  At the Third stage Comparative study of NPA is undertaken.  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.

12 .5Limitations 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. the practical operations as related to the NPAs are adopted by the banks are not learned.  Since my study is based on the secondary data. 1.1.4Sampling Methods To prepare this Project we took five banks from public sector as well as five banks from private sector.3Scope of the Study  Concept of Non-Performing Asset  Guidelines  Impact of NPAs  Reasons for NPAs  Preventive Measures  Tools to manage NPAs 1.

 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 INTRODUCTION 13 .

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. with effect from March 31. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days. 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. in respect of an Overdraft/Cash Credit (OD/CC). from the year ending March 31. Ú Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan.2 . 14 . 2004. Ú The account remains out of order for a period of more than 90 days. the entire bank loan automatically turns a non performing asset. BWith a view to moving towards international best practices and to ensure greater transparency.1Definitions: An asset. a non-performing asset (NPA) shall be a loan or an advance wh ere. 2004. including a leased asset. becomes non-performing when it ceases to generate income for the bank. The three letters Strike terror in banking sector and business circle today. it has been decided to adopt the 90 days overdue norm for identification of NPAs. Accordingly. NPA is short form of Non Performing Asset . The recovery of loan has always been problem for banks and financial institution. I n t ro d u c t i o n NPA. 2.

2NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA To start with. The Indian economy has been much affected due to high fiscal deficit. banks have been advised to move over to charging of interest at monthly rests. therefore. However. sticky legal system. poor infrastructure facilities. 2002. 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. 2002 and 90 days from the end of the quarter with effect from March 31. with increasing deposits made by the public in the banking system. 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 make provision on such assets as per the Reserve Bank of India (RBI) guidelines. international rating agencies like. Further. globally stock markets have tumbled and business itself is getting hard to do.3INDIAN ECONOMY AND NPAs Undoubtedly the world economy has slowed down. the banking industry cannot afford defaults by borrower s since NPAs affects the repayment capacity of banks. the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. 2. As a facilitating measure for smooth transition to 90 days norm. 15 . 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. cutting of exposures to emerging markets by FIs. Further. Also. 2004. etc. Banks should. However. Ú 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. recession is at its peak. 2. by April 1. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate. performance in terms of profitability is a benchmark for any business enterprise including the banking industry.ÚThe bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. Standard & Poor have lowered India s credit rating to sub-investment grade.

16 . Due to this.4GLOBAL DEVELOPMENTS AND NPAs The core banking business is of mobi lizing the deposits and utilizing it for lending to industry. Xerox. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. 110000 crores Bankers have realized that unless the level of NPAs is reduced drastically. One would be surprised to know that the banks and financial instit ution in India hold nonperforming assets worth Rs. A question that arises is how much risk can a bank afford to take? Recent happenings in the business world -Enron. WorldCom. 2. which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. which results into economic growth. In case after case. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. it goes without saying that banks are no exception and are bound to face the heat of a global downturn. banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. 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.Under such a situation. they will find it difficult to survive. Global Crossing do not give much confidence to banks. However lending also carries credit risk.

hence end up the fiscal with a reduced profit.  Willful Defaults There are borrowers who are able to pay back loans but are intentionally withdrawing it.5FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. The NPAs in PSB are growing due to external as well as internal factors . which is creating alarming rise in NPAs of the PSBs. has set of numbers of recovery tribunals. 17 . But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks.  Natural calamities This is the measure factor. thereby reducing their profitability and liquidity. 2. 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.1EXTERNAL FACTORS:-  Ineffective recovery tribunal The Govt. Thus the bank has to make large amount of provisions in order to compensate those loans. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of nonrecover.2.5. which works for recovery of loans and advances. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans.

Principles of safety :18 . Principles of safety ii. lack of advance technology . policies With every new govt. which covers a minimum label. ineffective management .5. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. day to day changing govt. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans. Policies give birth to industrial sickness.2INTERNAL FACTORS: Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. So the over dues due to the handloom sectors are becoming NPAs. banking sector gets new policies for its operation. lack of adequate resources . 2. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. Thus the banks record the non-recovered part as NPAs and has to make provision for it. The banks recover the amount by selling of their assets.  Change on Govt. Principle of liquidity iii.  Industrial sickness Improper project handling .  Lack of demand 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.Mainly ours farmers depends on rain fall for cropping. Principles of profitability i. i. 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 pla n worked out by the Central government to revive the handloom sector has not yet been implemented.

Proper MIS and financial accounting system is not implemented in the banks. Reputation of borrower The banker should. From external credit rating agencies. Success in business b) Willingness to pay depends on: 1.  Inappropriate technology Due to inappropriate technology and management information system. y Banks should consider the borrowers own capital investment.He should be a person of integrity and good character. Honest 3. Enquiry from market/segment of trade. y it should collect credit information of the borrowers from_ a. thus NPA. business. While providing unsecured advances the banks depend more on the honesty. The repayment of loan depends upon the borrowers: a) Capacity to pay b) Willingness to pay a) Capacity to pay depends upon: 1. market driven decisions on real time basis cannot be taken. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. opportunity and threat analysis is another reason for rise in NPAs. All the branches of the bank should be computerized. y Analyze the balance sheet. b.  Improper SWOT analysis The improper strength. Tangible assets 2. Character 2. c. weakness. integrity. 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 . which leads to poor credit collection. y Purpose of the loan 19 . and financial soundness and credit worthiness of the borrower.By safety it means that the borrower is in a position to repay the loan both principal and interest. industry. From bankers.

77lakhs). and the handloom sector Orissa hand loom WCS ltd (2439. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. he should analyze the purpose of the loan. To ensure safety and liquidity.  Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Safety 4. Like OSCB suffered loss due to the OTM Cuttack.  Re loaning process 20 . The NPAs due to willful defaulters can be collected by regular visits. the overall position of the bank will not be affected. Bank should analyze the profitability.60lakhs).  Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. banks should grant loan for productive purpose only.  Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. If a new big customer meets misfortune or certain traders or industries affected adversely. 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. When accepting securities banks should consider the_ 1. They should use good credit appraisal to decrease the NPAs. long term acceptability of the project while financing. and Orissa hand loom industries. viability. The banker should follow the principle of diversification of risk based on the famous maxim do not keep all the eggs in one basket . Marketability 2. Acceptability 3. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back.When bankers give loan. The biggest defaulters of OSCB are the OTM (117. Transferability.

which may lead to economic contract ion. which do not receive funding. lower deposit rates and higher lending rates repress saving and financial market. b) Illiquidity constraints bank in paying dep ositors c) Undercapitalized banks exceed the bank s capital base. 2. owners lose their assets. Banks redistribute losses to other borrowers by charging higher interest rates. banks may experience shortage. if the banks fails. Due to re loaning to the defaulters and CCBs and PACs.6PROBLEMS DUE TO NPA 1. This spillover effect can channelize through liquidity or bank insolvency: a) When many borrowers fail to pay interest.in the worst case. They misallocate credit from good projects. 3. 'Out o f Order' status: liquidity 21 . the NPAs of OSCB is increasing day by day. Nonperforming loans epitomize bad investment. Nonperforming asset may spill over the banking system and contract the money stock.Non remittance of recoveries to higher financing agencies and re loaning of the samehave already affected the smooth operation of the credit cycle. depositors lose their assets or uninsured balance. In the worst case if the bank fails. and by extension. labor and natural resources. Owners do not receive a market return on their capital . This can jam payment across the country. Depositors do not receive a market return on saving. 4. which hamper economic growth. 2. to failed projects. Bad investment ends up in misallocation of capital. In modern times this may affect a broad pool of shareholders.

Since in India. 2. Gross NPA reflects the quality of the loans made by banks. doubtful. the provisions the banks have to make against the NPAs according to the central bank guidel ines. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power. It can be calculated by following Net NPAs ] Gross NPAs Provisions 22 .An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. and loss assets. 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. That is why the difference between gross and net NPA is quite high. are quite significant.7Types 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. these accounts should be treated as 'out of order'. bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming. It consists of all the non-standard assets like as substandard. Net NPA shows the actual burdenof banks. 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. 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.

Provisions CHAPTER-3 INCOME RECOGNITION 23 .Gross Advances .

INCOME RECOGNITION 3. should bereversed or provided for if the same is not realised.2. interest on advances against term deposits. IVPs. becomes NPA as at the close of any year. 24 . KVPs and Life policies may be taken to incom e account on the due date. Therefore. the interest on such advances should not be taken to income account unless the interest has been realised.3. NSCs. Internationally income from non -performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received.  If Government guaranteed advances become NPA.  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.  However. the banks should not charge and take to income account interest on any NPA. interest accrued and credited to income account in the corresponding previous year. 3.1. provided adequate margin is available in the accounts. Income recognition ± Policy  The policy of income recognition has to be objective and based on the record of recovery. Rever sal of income:  If any advance. including bills purchased and discounted. This will apply to Government guaranteed accounts also.

a separate Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account. Appropriation of recove ry 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 respect of NPAs. banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. 3. † As per the 'Guidance Note on Accounting for Leases' issued by the Council of the Institute of Chartered Accountants of India (ICAI). towards principal or interest due). fees. if uncollected. Further.e. 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. 25 . as the case may be.3Leased Assets †The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became non-performing.  In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i. †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. Lease Equalisation Account 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'. should be reversed or provided for in the current accounting period. and remaining unrealised.

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.  Whenever NPAs are reported to RBI. should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. The Report should be furnished as per the prescribed format given in the Annexure I. The NPAs would relate to the banks global portfolio.  While reporting NPA figures to RBI. REPORTING FORMAT FOR NPA ± GROSS AND NET NPA Annexure-I (Page no-64) 26 . the amount of technical write off. the amount held in interest suspense account. 3. if any.3.5 Reporting of NPAs  Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. Banks which do not maintain Interest Suspense account for parking interest due on non performing advance accounts. including the advances at the foreign branches. should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported. may furnish the amount of interest receivable on NPAs as a foot note to the Report.

CHAPTER-4 -Asset Classification .Provisioning Norms 27 .

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. 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. With effect from March 31. Asset Classification Categories of NPAs Standar d Assets: 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. conditions and values highly questionable and improbable. with the added characteristic that the weaknesses make collection or liquidation in full. if deficiencies are not corrected. an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. Here it is also very important that in this case the arrears of interest and t he principal amount of loan do not exceed 90 days at the end of financial year.4. ( 3 ) Loss Assets:-28 . a substandard asset would be one. 2005. which has remained NPA for a period less than or equal to 12 month. ( 2 ) Doub tful Assets:-A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard. on the basis of currently known facts. 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 non-performing 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.

investment or other assets is that of the bank managements and the statutory auditors. the banks should make provision against sub-standard assets. etc. 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.although there may be some salvage or recovery value. Also. if they so desire. regional offices were advised to forward a list of individual advances. 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. 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. Provisioning Norms General  In order to narrow down the divergences and ensure adequate provisioning by banks. the realisation of the security and the erosion over time in the value of security charged to the bank .A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. 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. doubtful assets and loss assets as below: Loss assets: 29 . its recognition as such. it was suggested that a bank's statutory auditors.  Pursuant to this. could have a dialogue with RBI's Regional Office/ inspectors who carried out the bank's inspectio n during the previous year with regard to the accounts contributing to the difference.  The primary responsibility for making adequate provisions for any diminution in the value of loan assets. Taking into account the time lag between an account becoming doubtful of recovery.  In conformity with the prudential norms.

2006. (2) Advances classified as doubtful more than three years on or after April 1.2005.2002. † As on 31.  Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31. balance of the provisions not made during the previous year.2002. 100% with effect from March 31. Provision requirement (%) 20 30 60% with effect from March 31. If the assets are permitted to remain in the books for any reason. 75% effect from March 31. 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. 100 percent of the outstanding should be provided for.The entire asset should be written off. Dou btful assets:  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.2003.03. as on 31. provision may be made on the following basis.03. 30 . 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 Up to one year One to three years More than three years: (1) Outstanding stock of NPAs as on March 31.03. 2004. 2004. in addition to the provisions needed. 2007. 2003 has to be made in phases as under: †As on31.  In regard to the secured portion.

2000. wherever available. 2005.  The provisions on standard assets should not be reckoned for arriving at net NPAs.40 percent on standard assets on global loan portfolio basis. in cases of NPAs with balance of Rs. Standard assets:  From the year ending 31. 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. 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. Floating provision s: Some of the banks make a 'floating provision' over and above the specific provisions made in respect of accounts identified as NPAs. 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. the banks should make a general provision of a minimum of 0. 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. 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. could be set -off against provisions 31 .  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 .03. with a minimum of 20 % each year.Others' in Schedule 5 of the balance sheet. The floating provisions.

In addition to the above provision. the following provision on the net book value of the secured portion should be made. whereas they are recorded in the books of the owner eve n though the physi cal exi stence of the asset is with the use r (lessee). †Also. __(AS19 ICAI)  Sub-standard assets : †10 percent of the 'net book value'. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector. Statutory depreciation should be shown separately in the Profit & Loss Account. †As per the 'Guidance Note on Accounting for Leases' issued by the ICAI. Provisions on Leased Assets: Lease s are pecul iar transactions where the assets are not recorded in the books of the user of such assets as Assets. 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'. balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book value' of the leased assets. depending upon the period for which asset has been doubtful: Period 32 %age of provision .required to be made as per above stated provisioning guidelines. '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. 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.  Doubtful assets :100 percent of the extent to which the finance is not secured by the realisable value of the leased asset. banks are urged to voluntarily set apart provisions much above the minimum prudential levels a s a desirable practice.Realisable value to be estimated on a realistic basis.

03. during the financial years ending 31. If for any reason. in respect of advances sanctioned against State Government guarantee.2003 with a minimum of 25 percent each year. 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. if the guarantee is invoked and remains in default for more than two quarters (180 days at present).Up to one year One to three years More than three years 20 30 50  Loss assets :The entire asset should be written-off.1. †As regards advances guaranteed by State Governments. ( Net book value') Guide lines for Provisions under Special Circumstances Government guaranteed advances †With effect from 31 March 2000. necessary provision was allowed to be made.2 above.2000. in respect of which guarantee stood invoked as on 31.2000 to 31.03. an asset is allowed to remain in books. in a phased manner. 33 .03. the banks should make normal provisions as prescribed in paragraph 4.

Impact of NPA .CHAPTER-5 .Preventive Measurement for NPA 34 .

So NPA doesn t affect current profit but also future stream of profit. Impact of NPA  Profitability:NPA means booking of money in terms of bad asset. Now day s banks have special employees to deal and handle NPAs.5.  Credit loss:Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. which is additional cost to the bank. which may lead to loss of some long-term beneficial opportunity. It will lose it s goodwill and brand image and credit 35 . 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. 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. which would have given good returns. which adversely affect current earning of bank. Routine payments and dues. which occurred due to wrong choice of client.  Liquidity:Money is getting blocked. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities. Difficulty in operating the functions of bank is another cause of NPA due to lack of money.  Involvement of management:Time and efforts of management is another indirect cost which bank has to bear due to NPA. Another impact of reduction in profitability is low ROI (return on investment).

(4) Others:  Changes in Government policies.  Stock statement not submitted on time. Bouncing of cheque due to insufficient balance in the accounts. (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. (3) Attitudinal Changes:  Avoidance of contact with bank. 36 . 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. Irregularity of operations in the accounts. Unpaid overdue bills. 5.which have negative impact to the people who are putting their money in the banks. Declining Current Ratio.  Problem between partners.  Frequent changes in plan.  Overdue receivables. Irregularity in instalment.  External non-controllable factor like natural calamities in the city where borrower conduct his business.  Non-payment of wages.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.

both in terms of rehabilitation of the project and recovery of bank s dues. Assessment of the potential of revival may be done on the basis of a technoeconomic viability study.  Competition in the market. it s too late to retrieve the situation. Based on this objective assessment. 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. 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. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level.serious with no commitment or stake in revival is a challenge confronting bankers. Identifying Borrowers with Genuine Intent:Identifying borrowers with genuine intent from those who are non. is imperative. 5. so as to recover whatever is possible through legal means before the security position becomes worse. Death of borrower. it is better to facilitate winding up/ selling of the unit earlier. after an objective assessment of the promoter s intention. and capability to achieve turnaround. Banks may have penal of technical experts with proven expertise and track record of preparing techno economic study of the project of the borrowers. banks are convinced of a turnaround within a scheduled timeframe. by the time banks start their efforts to get involved in a revival process.3 Preventive Measurement for NPA Early Recognition of the Problem:Invariably. In respect of totally unviable units as decided by the bank. 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. books of account in order to ascertain real factors that contributed to sickness of the borrower. Restructuring should be attempted where. This will obviate the need to route the additional funding through the controlling 37 . and for this purpose a special limit to such type of casess hould be decided.

The response decided on the basis of techno-economic study and promoter s commitment. Management Effectiveness:The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. at the time of restructuring the banks may not be guided by the conventional fund flow analysis only. viability study or investigative audit should be done it will be useful to have consultant appointed as early as possible to examine this aspect. grater the injury to the account and the asset.offices in deserving cases. under the restructuring exercise. given the probability of success/failure. A proper techno economic viability study must thus become the basis on which any future action can be considered. During the exercise for assessment of viability and restructuring. Focus on Cash Flows:While financing. which could yield a potentially misleading picture. Multiple Financing:A. The package of assistance may be flexible and bank may look at the exit option. 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. Where the default is due to deeper malady. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit s fortunes. 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. has to be adequate in terms of extend of additional funding and relaxations etc. Time is a crucial element in any restructuring or rehabilitation activity. and help avert many accounts slipping into NPA category. 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. Timeliness and Adequacy of response:Longer the delay in response. But this may not be the case all the time. 38 .

The Credit Information Bureau of India Ltd. where the unit is still working. 39 . D. there should be regular flow of i nformation among consortium members. In a forum of lenders. Toward this end. another lender may have a much shortertimeframe in mind. which is not part of the consortium. the priority of each lender will be different.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.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational. 20 crore and abovewith the banks and FIs on a voluntary basis and outside the legalframework. In some default cases. banks may greatly benefit in termsof restructuring of large standard accounts (potential NPAs) andviable sub-standard accounts with consortium/multiple bankingarrangements. even a t a cost by a discountedsettlement of the exposure. C.B. A bank. any plan forrestructuring/rehabilitation may take this aspect into account. Under this system. Therefore. and ensure that such cash flows are used for working capital purposes. 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).While one set of lenders may be willing to wait for a longer time torecover its dues. So it is possible that the letter categories oflenders may be willing to exit. Corporate Debt Restructuring mechanism has beeninstitutionalized in 2001 to provide a timely and transparent systemfor restructuring of the corporate debt of Rs.

CHAPTER-6 Tools For recovery of npa 40 .

Once NPA occurred.1Willful Default:A] Lok Adalat and Debt Recovery Tribunal B] Securitization Act C] Asset Reconstruction 41 . one must come out of it or it should be managed inmost efficient manner. We will look into each one of it. Legal ways and means are there to overcome andmanage NPAs. 6.

power to attach defendant s property/assetsbefore judgment. the DRT should have right to initiate contemptproceedings. The banksparticipating in the consortium should. protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up therecovery of NPAs in the times to come.2Inability 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 therecoverability of the advances . Debt recoverytribunals have been empowered to organize Lok Adalat to decide oncases of NPAs of Rs. This mechanism has proved tobe quite effective for speedy justice and recovery of small loans. have notbeen able make much impact on loan recovery due to variety of reasonslike inadequate number. under staffing and frequentadjournment of cases. with outstanding balance of Rs. lack of infrastructure. therefore. The DRT should empowered to sell asset of the debtorcompanies and forward the proceed to the winding up court fordistribution among the lenders. Provision for placement of more thanone recovery officer. be treated as NPA. Where the remittances by the borrowerunder consortium lending arrangements are pooled with one bank and/orwhere the bank receiving remittances is not parting with the share of othermember banks. arrange to get their shareof recovery transferred from the lead bank or get an express consent 42 . the account will be treated as not serviced in the books ofthe other member banks and therefore. DRTs which have be en set up by the Government to facilitate speedy recovery by banks/DFIs.5 lakh for compromise settlement under Lok Adalat. Theprogress through this channel is expected to pick up in the coming years. 6. It is essential that DRT mechanism is strengthenedand vested with a proper enforcement mechanism to enforce their orders.Lok Adalat: Lok Adalat institutions help banks to settle disputes involvingaccount in doubtful and loss category. Debt Recovery Tribunals (DRT): The recovery of debts due tobanks and financial institution passed in March 2000 has helped instrengthening the function of DRTs.Non observation of any order passed by the tribunal should amount tocontempt of court. penal provision for disobedience of tribunal s order or for breachof any terms of order and appointment of receiver with power ofrealization. 10 lakh and above. management.

measured in present value terms..4 Treatment of Restructured Standard Accounts: A rescheduling of the installments of principal alone. the future interest due as per the original loan agreement inrespect of an account should be discounted to the present value at a rateappropriate to the risk category of the borrower (i. to ensure properasset classification in their respective books.. 6. with or without sacrifice. 2) After commencement of commercial production but before the asset has been classified as substandard.Following representations from banks that the foregoing stipulations deterthe banks from restructuring of standard and sub-standard loanassets even though the modification of terms might not jeopardize theassurance of repayment of dues from the borrower. etc. 3) After commencement of commercial production and after the asset has been classified as substandard. as part of therestructuring package evolved. For thepurpose. at any of theaforesaid first two stages would not cause a standard asset to be classified in the substandard category provided the loan/credit facility isfully secured. the norms relating torestructuring of standard and sub-standard assets were reviewed in March2001. In the case ofsub-standard and doubtful assets also. In the context of restructuring of the accounts. in theelement of interest. can be identified: 1) Before commencement of commercial production.3Restructuring / 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 andshould remain in such category for at least one year of satisfactoryperformance under the renegotiated or rescheduled terms. current PLR+ theappropriate credit risk premium for the borrower43 . the following stagesat which the restructuring / rescheduling / renegotiation of the terms of loan agreement could take place. of principaland/or of interest could take place. A rescheduling of interest element at any of the foregoing first twostages would not cause an asset to be downgraded to substandardcategory subject to the condition that the amount of sacrifice. the rescheduling. 6.fromthe lead bank for the transfer of their share of recovery. In each of the foregoing three stages.e. is either writtenoff or provision is made to the extent of the sacrifice involved. if any. rescheduling does not entitle abank to upgrade the quality of advance automatically unless there issatisfactory performance under the rescheduled / renegotiated terms.

e. In case there is a sacrifice involved in the amount of interest inpresent value terms. the asset classification of the restructured account would begoverned as per the applicable prudential norms with reference to the prerestructuringpayment schedule.however.. discounted on the same basis. as at (b) above. the substandardasset will not deteriorate in its classification if satisfactoryperformance of the account is demonstrated during the period. is either written off or provision is made to the extent of thesacrifice involved.. measured in present value terms. the asset should continue to be treated as sub-standard. as at (b) above.Even in cases where the sacrifice is by way of write off of the past interestdues. could also bereversed after the one year period. would be eligible to be upgraded to the standardcategory only after the specified period i. in the element of interest.5 Treatment of restructured sub-standard accounts: A rescheduling of the installments of principal alone would render asubstandard asset eligible to be continued in the sub-standard categoryfor the specified period.6Up gradation of restructured accounts: The sub-standard accounts which have been subjected to restructuring etc.category) and comparedwith the present value of the dues exp ected to be received under therestructuring package. the satisfactory performance during the one-year period is notevidenced. For the purpose. In case there is a sacrifice involved in the amount of interest inpresent value terms. provided the loan/credit facility is fully secured. fallsdue. the amount of sacrifice should eitherbe written off or provision made to the extent of the sacrifice involved. the amount of sacrifice should eitherbe written off or provision made to the extent of the sacrifice involved.e. the future interest due as per theoriginal loan agreement in respect of an account should be discounted tothe present value at a rate appropriate to the risk category of the borrower(i. subject to satisfactory performance during the period. In case. bywhatever modality.. current PLR + the appropriate credit risk premium for the borrower category)and compared with the present value of the dues expected to bereceived under the restructuring package. net of the amount provided for the sacrifice in theinterest amount in present value terms as aforesaid. A rescheduling of interest element would render a sub-standardasset eligible to be continued to be classified in substandard categoryfor the specified period subject to the condition that the amount ofsacrifice. if any. a period of one year after thedate when first payment of interest or of principal. The amount ofprovision made earlier. 44 . whether in respect of principal installment or interest amount. 6. discounted on the same basis. whichever is earlier. 6. During this one-year period.

debentures or any other instrument banks should adopt thefollowing: 6. 6. banks shall recognise income in such accounts only on realisation on cash basis if the asset has otherwisebecome non performing as per the extant delinquency norm of 180 days.regardless of whether these are or are not subjected to restructuring/rescheduling/ renegotiation of terms of the loan agreement. provided theyare fully covered by tangible securities.6.9 Funded Interest: Income recognition in respect of the NPAs. of the promoter/ others. banks.7General: These instructions would be applicable to all type of credit facilitiesincluding working capital limits. In other 45 . however. which have wrongly recognised income in thepast. a provision for an equal amount shouldalso be made simultaneously. As regards the regulatorytreatment of income recognised as funded interest and conversion intoequity. banks should not recognise income on accrualbasis in respect of the projects even though the asset is classified as astandard asset if the asset is a "non performing asset" in terms of theextant instructions.8 Income recognition There will be no change in the existing instructions on incomerecognition.The delinquency norm would become 90 days with effect from 31 March2004. In other words. Consequently. If. collateral securitywould also be reckoned. are not applicable tothem. only on realisation and not if the amount ofinterest overdue has been funded. the amount of fundedinterest is recognised as i ncome. should bedone strictly on cash basis. extended to industrial units. which are being restructured/ rescheduled. while the accounts of the project maybe classified as a standard asset. time and cost escalation etc. While assessing the extent of security cover available to the creditfacilities. As trading involves only buying and selling of commodi ties and theproblems associated with manufacturing units such as bottleneck incommercial production. provided such collateral is a tangible securityproperly charged to the bank and is not in the intangible form likeguarantee etc. these guidelines should not be applied to restructuring/ reschedulingof credit facilities extended to traders. should reverse the interest if it was recognised as income during thecurrent year or make a provision for an equivalent amount if it wasrecognised as income in the previous year(s). Consequently.

Theincome in respect of unrealised interest. in the same asset classification as wasapplicable to loan just before conversion and provision made as pernorms. interest income canbe recognised at market value of equity. However. shall continue tohold the provisions and shall not reverse the same. On suchdebentures. not exceeding the amount of interest converted to equity. if theconversion of interest is into equity.1. 6. 46 . which may now be classified as standard . ab initio. Conversion into equity. banks which are already holding provisions against some of theaccounts. the equityshares or other instruments arising from conversion of the principalamount of loan would also be subject to the usual prudential valuationnorms as applicable to such instruments. which is converted intodebentures or any other fixed maturity instrument. This norm would also apply to zero coupon bonds or other Instruments which seek to defer the liability of the issuer.9. If theamount of interest dues is converted into equity or any other instrument.9. any funding of interest inrespect of NPAs. if recognised as income. which is quoted. as on the date of conversion.words. a s per the investment valuation norms. should be recognisedonly on redemption of such instrument. In case of conversion of principal and /orinterest in respect of NPAs into debentures. Subject to the above. should be fully provided for. debentures or any other instrument: The amount outstanding converted into other instrumentswould normally comprise principal and the interest components. Such provision would be in addition to the amount of provision that may be necessary for the depreciation in the value of the equity orother instruments. full provision should be madefor the amount of income so recognised to offset the effect of such incomerecognition. 6. Provisioning While there will be no change in the extant norms on provisioningfor NPAs. such debentures should betreated as NPA.and income is recognised in consequence.2. Such equity must thereafter be classified in the "available for sale" category and valued atlower of cost or market value. income should be recognised only on realisation basis.

CHAPTER-7 Special Cases 47 .

the banks must furnishsatisfactory evidence to the Statutory Auditors/Inspecting Officers aboutthe manner of regularization of the account to eliminate doubts on theirperforming status. Drawing power isrequired to be arrived at based on the stock statement which is current.1. Accounts regularized near about the balance sheet date: The asset classification of borrower accounts where a solitary or a fewcredits are recorded before the balance sheet date should be handled withcare and without scope for subjectivity. considering the difficulties of large borrowers. an account where the regular/ ad hoc creditlimits have not been reviewed/ renewed within 180 days from the duedate/ date of ad hoc sanction will be treated as NPA. Where the account indicatesinherent weakness on the basis of the data available.1. Incase of constraints such as non-availability of financial statements andother data from the borrowers. In any case. the branch should furnish evidence to showthat renewal/ review of credit limits is already on and would be completedsoon. 7. delay beyond six months is not considered desirable asa general discipline.7.Accounts with temporary deficiencies: The classification of an asset as NPA should be based on therecord of recovery. would bedeemed as irregular. Bank should not classify an advance account as NPAmerely due to the existence of some deficiencies which are temporary innature such as non availability of adequate drawing power based on thelatest available stock statement. Special Cases 7.However. Hence. the account shouldbe deemed as a NPA. The outstanding in the account based on drawingpower calculated from stock statements older than three months. In the matter of classification of accounts withsuch deficiencies banks may follow the following guidelines: Banks should ensure that drawings in the working capitalaccounts are covered by the adequacy of current assets. since currentassets are first appropriated in times of distress. etc. A working capital borrower account will become NPAif such irregular drawings are permitted in the account for a continuousperiod of 180 days even though the unit may be working or the borrower'sfinancial position is satisfactory. Regular and ad hoc credit limits need to be reviewed/ regularizednot later than three months from the due date/date of ad hoc sanction.2. balance outstanding exceeding the limittemporarily.1. non submission of stock statements and non-renewal of thelimits on the due date. stock statements relied upon by the banks for determining drawing power should not beolder than three months. 48 . In other genuine cases.

49 . If the debits arising out of devolvement of letters of credit or invokedg uarantees are parked in a separate account. as assessed by the bank/approved values/ RBI is less than 10 per cent of the outstanding in theborrower accounts.1.Accounts where there is erosion in the value of security A NPA need not go through the various stages of classification incases of serious credit impairment and such assets should bestraightaway classified as doubtful or loss asset as appropriate. as the case may be. all the facilitiesgranted by a bank to a borrower will have to be treated as NPA and notthe particular facility or part thereof which has become irregular.5. the existence of security should be ignored and theasset should be straightaway classified as loss asset. 7. The other direct loans & advances. granted by the bank to the member borrower of a PACS/ FSS outside the onlending arrangementwill become NPA even if one of the credit facilities granted to the sameborrower becomes NPA. if any. It may be eitherwritten off or fully provided for by the bank.4. asset classification and provisioning. 7.1. only that particular credit facility granted to PACS/ FSS which is indefault for a period of two harvest seasons (not exceeding two halfyears)/two quarters.3Asset Classification to be borrower-wise and not facility-wise It is difficult to envisage a situation when only one facility to a borrowerbecomes a problem credit and not others. Therefore. the balance outstanding inthat account also should be treated as a part of the borrower s principaloperating account for the purpose of application of prudential norms onincome recognition.1.7. after it has become due will beclassified as NPA and not all the credit facilities sanctioned to a PACS/FSS. as the case maybe.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. If the realizable value of the security. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. Erosion inthe value of security can be reckoned as significant when the realizablevalue of the security is less than 50 per cent of the value assessed by thebank or accepted by RBI at the time of last inspection.

interestneed not be considered as overdue from the first quarter onwards. The above normsshould be made applicable to all direct agricultural advances as listed atitems 1.128/05.PLAN. RPCD. In respect of agricultural loans. 50 .PLFS.PLFS. government securities and all other securities are not coveredby this exemption. NSCs eligible for surrender.1. subject to various guidelines contained in RBI circularsRPCD.04/98-99 dated 21.6 Advances against Term Deposits.01. KVP/IVP. BC. IVPs. Advances against goldornaments.1.2 (i) to (vii). identi fication of NPAs would be done on the samebasis as non-agricultural advances which.98. In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal.1. payment of interest becomes 'due' only after the moratorium orgestation period is over.09.No. ifuncollected.: Advances against term deposits. 1. Suchloans/advances should be classified as NPA only when there is a defaultin repayment of installment of principal or payment of interest on therespective due dates.BC.2 (viii)(a)(1) and 1.1.07.01/2001. 7. with reference to the date of debit of interest.8 Agricultural advances In respect of advances granted for agricultural purpose whereinterest and/or installment of principal remains unpaid after it has becomepast due for two harvest seasons but for a period not exceeding two half years. Therefore. banks may decide on their own as a relief mea sure conversion of the short-term production loan into a term loan or re -schedulementof the repayment period.1. other thanthose specified above. are the 180 daysdelinquency norm. 1.7. KVPsand life policies need not be treated as NPAs.such an advance should be treated as NPA.1. where moratorium is available for payment ofinterest. An extract of the list of these items isfurnished in the Annexure II.06.2 (viii)(b)(1) of MasterCircular on lending to priority sector No. etc. Where natural calamities impair the repaying capacity ofagricultural borrowers.7 Loans with moratorium for payment of interest In the case of bank finance given for industrial projects or foragricultural plantations etc. NSCs.9/05. such amounts of interest do no tbecome overdue and hence NPA.1.04. and the sanctioning of fresh short -termloan. at present. 7.02/97-98 dated 20.98 andRPCD.BC. 12/04. They become overdue after due date for payment of interest.2002 dated 1 August 2001.No.

if the guarantee is invoked andremains in default for more than two quarters. 7. In view of the time-lag involved in taking-over.1. the term loan aswell as fresh short-term loan may be treated as current dues and need notbe classified as NPA.Government guaranteed advances: The credit facilities backed by guarantee of the CentralGovernment though overdue may be treated as NPA only when theGovernment repudiates its guarantee when invoked. This exemption fromclassification of Government guaranteed advances as NPA is not for thepurpose of recognition of income. the correspondingprovisions could be reversed. The lending institution should not recognizeincome on accrual basis and account for the same only when it is paid bythe borrower/ taking over institution (if the arrangement so provides). With effect from 1st April 2000. thepossibility of a default in the meantime cannot be ruled out. ontaking over such assets. However.Take-out Finance: Takeout finance is the product emerging in the context of thefunding of long term infrastructure projects. it should be classified accordingly. Under this arrangement. theinstitution/the bank financing infrastructure projects will have an arrangement with any financial institution for transferring to the latter theoutstanding in respect of such financing in their books on a predeterminedbasis.2. 51 .advances sanctioned against State Government guarantees should beclassified as NPA in the normal course. Thelending institution should also make provisions against any asset turninginto NPA pending its takeover by taking over institution. should make provisions treating the account asNPA from the actual date of it becoming NPA even though the accountwas not in its books as on that date.2001 the period of default is revised as more than 180 days.9. If the lending institution observes thatthe asset has turned NPA on the basis of the record of recovery. 7. As and when theasset is taken over by the taking over institution. With effect from March 31.1. the taking over institution.In such cases of conversion or re-schedulement. The asset classification of these loans wouldthereafter be governed by the revised terms & conditions and would betreated as NPA if interest and/or installment of principal remains unpaid. The norms ofasset classification will have to be followed by the concernedbank/financial institution in whose books the account stands as balancesheet item as on the relevant date. fortwo harvest seasons but for a period not exceeding two half years.

but the importer's country is not allowing the funds tobe remitted due to political or other reasons.2.2. to the extent payment has been received from theEXIM Bank. the advance may not be treated as a non-performing asset for asset classification and provisioning purposes.2. 7. in the event of default.2. 7. Post-shipment Supplier's Credit In respect of post-shipment credit extended by the banks covering export of goods to countries for which the ECGC s cover is available.EXIM Bank has introduced a guarantee-cum-refinance programmewhereby. the asset classification maybe made after a period of one year from the date the amount wasdeposited by the importer in the bank abroad.7. theIncome Recognition. Accordingly. Asset Classification norms will become applicableafter a period of one year from the date of disbursement. In such cases. etc. in respect ofadditional facilities sanctioned under the rehabilitation packages. 52 . EXIM Bank will pay the guaranteedamount to the bank within a period of 30 days from the day the bankinvokes the guarantee after the exporter has filed claim with ECGC.While the existing credit facilities sanctioned to a unit under rehabilitationpac kages approved by BIFR/term lending institutions will continue to beclassified as sub standard or doubtful as the case may be. Advances under rehabilitation approved by BIFR/ TLI: Banks are not permitted to upgrade the classification of any advance inrespect of which the terms have been re-negotiated unless the package ofrenegotiated terms has worked satisfactorily for a period of one year.4.3 Export Project Finance: In respect of export project finance. where the lending bank is able to establish throughdocumentary evidence that the importer has cleared the dues in full bydepositing the amount in the bank abroad before it turned into NPA in theBooks of the bank. there could be instances wherethe actual importer has paid the dues to the bank abroad but the bank inturn is unable to remit the amount due to political developments such aswar. strife. UN embargo.

2002 andobtained its certificate of commencement of business on May 7.  To evolve and create significant capacity in the system forquicker resolution of NPAs by deploying the assets optimally With a view to achieving high delivery capabilities for resolution.7. Arcil is also a "financial institution" within the meaning of Section 2( h) (ia) of the Recovery of Debts due to Banks and Financial InstitutionsAct. namely.2.5. it holds a certificateof registration dated August 29.2002. 2002. Inpursuance of Section 3 of the Securitization Act 2002. followed by showcasing them toprospective buyers. 2003. 1993 (the "DRT Act"). whereverapplicable under the provision of the Securitization Act. 53 . Arcil has played a pioneering role insetting standards for the industry in India. provides relief to the banking system by managing NPAsand help them concentrate on core banking activities therebyenhancing shareholders value. Arcilhas also encourage.Arcil has put in place a structure aimed at outsourcing the varioussub-functions of resolution to specialized agencies. Arcilwas incorporated as a public limited company on February 11. The efforts of Arcil would lead the country s distresseddebt market to international standards. ICICI Bank Limited (ICICI) andIDBI Bank Limited (IDBI) to come together to set-up the first ARC. issued by the Reserve Bank of India(RBI) and operates under powers conferred under the Securitization Act.  Unlocking capital for the banking system and the economy The primary objective of Arcil is to expedite recovery of theamounts locked in NPAs of lenders and thereby recycling capital. groomed and developed many such agenciesto enhance its capacity in line with the growth of its activity.  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 bothfrom domestic and international players for funding theseacquisitions of distressed assets. State Bank of India (SBI). This has initiated creation of a secondarymarket of distressed assets in the country besides hastening theirresolution. ROLE OF ARCIL:This empowerment encouraged the three major players in Indian bankingsystem. As the first ARC.Arcil thus. Arcil is the first ARC in the country to commence business of resolution ofnon-performing assets (NPAs) upon acquisition from Indian banks andfinancial institutions. 2003.

CHAPTER-8 Data analysis and interpretation 8.ANALYSIS 54 .

We have taken fivebanks from both sectorsto compare thenonperforming assets of banks. deposit investment advances. 55 . 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 ofBaroda and Bank of India are almost the similar in numbers and Dena Bank is stands last in public sector bank. When we compare theprivate sector banks with public sector banks. DEPOSIT-INVESTMENT-ADVANCES (RS. At the end of March 2008. second isHDFC Bank and KOTAK Bank has least figure. For understanding we further bifurcate the nonperforming assets in priority sector and non-priority sector. Further we also analysis on the basis of Deposit Investment Advances to get the clear view where the bank stands in the competitive market. we canunderstand the more number of people prefer to choose public sectorbanks for deposit-investment.For the purpose of analysis and comparison between Public and private sector banks. grossNPA and net NPA in percentage as well as in rupees. in private sector ICICI Bank is thehighest deposit-investmentadvances figure in rupees crore.CRORE) of both sector banks and comparison among them. year 2008-09.

P i S B ¨§¥ ¦¥¤ £ ¢¡   i 250000 200000 150000 100000 ADVANCES DEPOSIT INVESTMENT 50000 0 ICICI HDFC AXIS INDUSIND KOTAK :.F the above figure we can see that the ICICI Bank de ositinvestment-advances are quite high than other banks like HDFC.INDUSIND.AXIS.KOTAK ) ( '& l i P li S B 56 "   " 7 "        " I DUSI D  % ©    7 7 77 !  " " " ! $  K K "  $ """ ! " I I I ©     $ $  $$  $$$ " # HD 7 " $ $!   !$ !    XIS 7 7  !       B K DEP SI I VES E DV © ©    © ES © 7 .

80000 0000 40000 20000 00000 80000 0000 40000 20000 0 I DEPOSIT INVESTMENT ADVANCES PNB BOB BOI UBI DENA :. l i m FG i F w G I I IB FH K D PU J B I B Ki m in stm nt-ad an s:57 F 679 @ 9 77 7 d posit- B @ A @ B@@ @B6 79@C9C 7B@96 UBI E 03 2 3 7 97 A A 66 8 @7 D 7 CC6 P B 1 7 8 9@ D 8DD B 96 @ A @@ 1 DE C A8 @66 8 @9B6 8 8 69976 B I 0 2 7 69 A C96 9 7 51 1 4 B@ A A 1 A 8 @9 AD 8 2 76 B K B B 1 2 DEP SI I VES E DV 0 0 3 3 3 0 ES 7 IP Q P P P . United bank of India and Dena Bank. Bank of India.In public sector Punjab National Bank deposit-investment-advances are comparatively quite high rather than Bank of Baroda.

Gross refers to all NPAs on a bank s balance sheet irrespective of the provisions 58 g eb aa `b b cca P B S 7 cacb X d b Xdd aaa a` Y S I I IB W W K WS XX S V Y Y S T YYYX R S B K DEP SI I VES E DV R R U U U R ES DEPOSIT INVESTMENT ADVANCES .250000 200000 150000 100000 50000 0 ICICI PNB Anal sis: -Here we havecompared et een I I I BA K A D PU JAB A IO AL BA K in term of 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. f Gross NPA and N t NPA:There are two concepts related to non-performing assets a) gross and b) net.

The requirements for provisions are:  100% for loss assets  100% of the unsecured portion plus 20 -50% of the secured portion. A loan asset is classified as substandard if it remains NPA up to a period of 18 months. and loss. where the dues are considered not collectible or marginally collectible . Here. These data are NPA AS PERCENTAGE OF TOTAL ASSETS. there are gross and net NPA data for 2007-08 and 2008-09 we taken for comparison among banks. Net NPA is gross NPA less provisions. doubtful if it remains NPA for more than 18 months.made. the provisions the banks have to make against the NPA according to the central bank guidelines. There is an almost same figure between BOI and BOB. bank balance sheets contains a huge amount of NPAs and the process of recovery and write off of loans is very time consuming. we can see that there are huge differences between gross and net NPA. It consists of all the non-standard assets. 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. As we discuss earlier that gross NPA reflects the quality of the loans made by banks. doubtful. without any waiting period. and loss assets. 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. are quite significant. Substandard. Here. Punjab National Bank shows huge difference between gross and net NPA. While gross NPA reflects the quality of the loans made by banks. viz. Gross NPA and Net NPA Of different Public Sector banks in the year 2007-08 59 . net NPA shows the actual burden of banks. Since in India.

u v u t B B r . vt t . 7 . y w € t B I h r . y ‚ w  w P B i . i i i u  rqp i † B K SS P E P h s h h GROSS NPA NET NPA . u ‚ x  ƒ i DE . . E P Gross NPA and Net NPA Of different Pri ate Sector ban s in the year 2007-08 60 e d kj ih 18 16 1 12 1 08 06 0 02 0 h h h h h h DENA PNB BOI BOB UBI “’ “ – ’ UBI . .25 f 2 15 g 1 05 f 0 DENA UBI PNB BOI BOB Gross NPA and N t NPA Of different Publi Sector ban s in the year 2008-09 ‡ ‡ ‡ ‰ˆ ‡ B K SS P . GROSS NPA NET NPA † y w ” ‘ … † „ — € t UBI . 7 ™˜ “ • ’ ‡ DE –– “ •“ ’ B I †  “ “’ ’ B B  . •– “ — ™ ’ P B ‡ . . 7 . yx w . . . . .

. . .7 ut r . . .  … . { r { y I I I lq w w . m m m pon m B K SS P E P GROSS NPA NET NPA l q l l  l ” GROSS NPA NET NPA . zs r . .  yt y ˆ „ ~  } u y I DUSI D m m . r x r wv HD . 7 . 7 ‰ ˆˆ … … XIS .  ˆ … ‡‡ Ž  ƒ K K . … Œ …  ‹Š HD .18 16 14 1 1 08 06 04 0 0 ‘ ‘      ’ INDUSIND KOTAK ICICI AXIS HDFC Gross NPA and Net NPA Of different Pri ate Sector ban s in the year 2008-09 € € € ƒ‚ € B K SS P ‡ E P 15 “ 1 05 “ 0 INDUSIND KOTAK ICICI HDFC AXIS 61 ‡ Ž Œ Ž I DUSI D € € .  … Ž I I I „ ‹ ‹ . xx x s r XIS . r y | t y †  p K K .

But in private sector banks there are three banks are above average.56. As we know that net NPA shows actual burden of banks.71 and in public sector banks it is 0.41 as percentage of total assets.29 as percentage of total assets. Here we take all the ten banks gross NPA together for better understanding. 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 ten bank s net NPA is 0. Average of these ten banks gross NPAs is 1. We can say that NPA is not a healthy sign for financial institutions. IndusInd bank has highest net NPA figure and HDFC Bank has lowest in comparison.Comparison of GROSS NPA with Public and Pri ate sectors ban s for the year 2007-08 Comparison ofGROSS NPAwith all banks for the year 2007-08. Average of these five private sector banks gross NPA is 1. Which is higher in compare of private sector banks. The difference between private and public banks average is also vast. The growing NPAs affect the health of banks. 2 15 ˜ – • 1 05 — 0 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 ofNET NPAwith all banks for the year2007-08. profitability and efficiency. Private sector banks net NPA average is 0. In the long run. 14 12 1 08 06 04 02 0 ™ ™ ™ ™ ™ ™ ICICI INDUSIND KOTAK HDFC AXIS BOI BOB UBI DENA PNB 62 .33.25 and average of public sector banks is 1. And in the public sector banks all these five banks are below this. it eats up the net worth of the banks.

Around 72 of NPA in priority sector and around 78 in non-priority sector. In private sector ICICI Bank has the highest NPA with compare to other private sector banks.00 33. ¤ § ª ¤ ¯   ¬ ¯   ¨® HD 36. ž¥ ž ©œ¥œ ž¥ ž ž ¥ ££ ¢ ž œ B K I S HE S ¡ P I SE   Ÿ ¤ I Y ¡ P I I Y 7000 6000 5000 4000 3000 2000 1000 0 AXIS HDFC ICICI KOTAK INDUSIND PRIORITY NON-PRIORITY 63 ° «° « °  1167. ¤ ¯ ­ § «§  I I I ›¦ ¨ ¨ 981.04 7. 7 . We can see that in private sector banks have more NPA in non-priority sector than priority sector. .53 185. ¦ š ž¥ ¦ ¯ ¯¬ ¦ ¤ ¨ § Ÿ ¦ š ¡ ¤ Ÿ › ¡   Ÿ › › › .PRIORITY NON PRIORITY SECTOR When we further bifurcate NPA in priority sector and Non priority sector.70 .76 86.44 3. 7 ­ª « ¤ ¬ « ª  XIS 109.56 47. ¤ ¬ § + + 7 .84 4. 7      .02 . . ª «ª ¤ ¯ ° ¥ K K 10.35 354.12 14.71 . Agriculture + small + others are priority sector. 7 ¤ ¬¤¬ ­ ° § ­ §­ I DUSI D œ £ ›¦ ¥ ¦ œ 30.85 23.13 .60 7 .12 110. .69 522.18 30.

Public sector banks give more loans to Agriculture. E ² ¸ ³´ ¶ ³´ ³ ± ± · ¹ ² B K P I I Y SE P 350 325 106 443 197 ± µ µ ± PRIORITY NPA . B B B I ² ± ´ ´ 5469 3269 1160 3772 1924 DE P B UBI ² 000 5000 4000 3000 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.When we talk about public sector banks they are more in priority sector and they give advanced to weaker sector or industries. BOB given more advanced to priority sector in 2008-09 than other four banks . Above we also discuss that ICICI Bank has highest deposit-investment-advance than other banks. 64 ³´³¶ ³ ¶² DV ED S. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and initiative in each sector. 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.

when we compare the all public sector and p rivate sector banks on priority and non-priority sector the figures are really shocking. »º P ¼ LIC SECTOR ¼ NEW PRIVATE 200 -08 1468 3 4800 62 1 ¼ SECTOR PRI RITY P B IC N N PRT T TA ½ ¿ ½ ¾ ¿ ½ 200 -08 22954 490 15158 38602 2008-09 ¼ 2008-09 2080 0 8339 10419 2528 299 14163 39 49 ¼ Here. 65 . there are huge differences between private and public sector banks NPA. In public sector banks the numbers are not increased like private sector banks.Now. Because in compare of private sector banks. There is increase in new private sector banks NPA of Rs.4148 cr in 2008-09 which is almost 66% rise than previous year. public sector banks numbers are very large.

) ) Net NPA ( . (Rs.) ) Net NPA as a %age of Net Advance ) Net NPA as a %age of Net Advance *excluding Technical write -off of Rs. **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. ***Excluding amount of Technical w rite-off (Rs. 66 ._____crore).________crore.______crore) and provision on standard assets.ANNEXURE-I REPORTING FORMAT FOR NPA ± GROSS AND NET NPA Name of the ank: Position as on««« PARTIC LARS ) Gross Advanced * ) Gross NPA * ) Gross NPA as %age of Gross Advanced ) Total deduction( a+b+c+d ) ( a ) Balance in interest suspense a/c ** ( b ) ICGC/ECGC claims received and held pending adjustment ( c ) part payment received and kept in suspense a/c ( d ) Total provision held *** ) Net advanced ( .

blogspot.Bibliography Journals and magazines y Economic and political weekly. December 2004. SECURITISATION : ISSUES AND PERSPECTIVES . Page 128-135. August 2004. MPM Vinay Kumar. RECONSTRUCTION AND ENFORCEMENT OF SECURITY INTEREST . 2004.net/services -non-performing-assets. SARFAESI ACT: THE DIAGNOSIS .bankcapitalgroup.php y http://rituparnodas. Websites:y http://www. Page 62-65. February 2005. 978-985. SECURITISATION AN OVERVIEW y Treasury Management.aspx y http://www. October 16. Page 58 -62.aspx http://findarticles. CARLTON PEREIRA. Page NO. V S Datey. y Chartered Financial Analyst. Feburary 2003.finanssivalvonta. B P Dhaka. SECURITISATION.indiastat.com/banksandfinancialinstitutions/ /performance/ /nonperformingassetsnpas/ /stats.com/p/articles/mi_hb /is_ /ai_n / / /npa -management. y Chartered Secretary. Raj Kumar S Adukia.html y http://www.com/ ssets/Pages/ efault. Page 4602-4604 INVESTING IN NPAs . y The chartered Accountant.fi/en/Statistics/Credit_market/Nonperforming_a 67 .

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