Professional Documents
Culture Documents
INTRODUCTION
The accumulation of huge non-performing assets in banks has assumed great importance. The depth of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,50,000 crores. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This raises a concern in the industry and academia because it is generally felt that NPAs reduce the profitability of a banks, weaken its financial health and erode its solvency. For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements.
The word bank is derived from the Italian banca, which is derived from German and means bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Moneylenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.
The three letters NPA Strike terror in banking sector and business circle today. NPA is short form of Non Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to avoid NPA, no cannot be then left is to look after the factor responsible for it and managing those factors.
Definition An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained past due for a specified period of time.
Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
The account remains out of order for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
Non Performing Assets in Banking Sector
As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004. WHAT IS A NPA (NON PERFORMING ASSETS) ? Action for enforcement of security interest can be initiated only if the secured asset is classified as Nonperforming asset. Non performing asset means an asset or account of borrower
,which has been classified by bank or financial institution as sub standard , doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI . is treated as past due
when it is not been paid within 30 days from the due date. Due to
period of more than 180 days in respect of a term loan, ii. The account remains out of order for a period of more than 180 days ,in respect of an overdraft/cash credit (OD/CC) iii. The bill remains overdue for a period of more than 180 days in case of bill purchased or discounted. iv. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and v. 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 90 days overdue norms for identification of NPAs ,from the year ending March 31,2004,a non performing asset shell be a loan or an advance where;
Non Performing Assets in Banking Sector
season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts
Out of order
An account should be treated as out of order if the outstanding balance remains continuously in excess of sanctioned limit /drawing power. in case where the outstanding balance in the principal operating account is less than the sanctioned amount /drawing the power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover treated as out of order. Overdue interest debited during the same period ,these account should be
EXTERNAL FACTORS :--------------------------------- Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity. Willful Defaults There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.
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Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character.
Inappropriate technology
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Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the_
1. Marketability 2. Acceptability
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Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs). Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits. Re loaning process
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Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.
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b) Illiquidity constraints bank in paying depositors .c) Undercapitalized banks exceeds the banks capital base.
The three letters Strike terror in banking sector and business circle today. NPA is short form of Non Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to avoid NPA, no can not be then left is to look after the factor responsible for it and managing those factors.
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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, and
Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.
As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004.
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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.
Types of NPA
A] Gross NPA B] Net NPA
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reflects the quality of the loans made by banks. It consists of all the
non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:
B ] Ne t NP A :
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to
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INCOME RECOGNITION
Income recognition Policy
The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-
performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the
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However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.
If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.
Reversal of income:
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In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.
Leased Assets
The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became nonperforming, and remaining unrealised, should be reversed or provided for in the current accounting period.
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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.
by the Council of the Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account, as the case may be. Further, Lease Equalisation Account 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'.
In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.
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.
Reporting of NPAs
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While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances
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Name of the Bank: position as on PARTICULARS 1) Gross Advanced * 2) Gross NPA * 3) Gross NPA as %age of Gross Advanced 4) Total deduction( a+b+c+d ) ( a ) Balance in interest suspense a/c ** ( b ) DICGC/ECGC claims received and held pending adjustment ( c ) part payment received and kept in suspense a/c ( d ) Total provision held ***
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**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 write-off (Rs.______crore) and provision on standard assets. (Rs._____crore).
Asset Classification
Categories of NPAs
Standard Assets:
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Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:
( 1 ) Sub-standard Assets:--
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( 2 ) Doubtful Assets:-A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values highly questionable and improbable.
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( 3 ) Loss Assets:-A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warrantedalthough there may be some salvage or recovery value. Also, these
assets would have been identified as loss assets by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly.
Provisioning Norms
General
In order to narrow down the divergences and ensure adequate provisioning by banks, it was suggested that a bank's statutory auditors, if they so desire, could have a dialogue with RBI's Regional Office/ inspectors who carried out the bank's inspection
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Pursuant to this, regional offices were advised to forward a list of individual advances, where the variance in the provisioning requirements between the RBI and the bank is above certain cut off levels so that the bank and the statutory auditors take into account the assessment of the RBI while making provisions for loan loss, etc.
The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.
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Loss assets: The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.
Doubtful assets:
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In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful:
Period for which the advance has been considered as doubtful Up to one year One to three years More than three years:
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Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31, 2003 has to be made in phases as under: As on 31.03.2003, 50 percent of the additional provisioning
requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful category. As on 31.03.2002, balance of the provisions not made during the
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consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.
With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Valuers appointed as per the guidelines approved by the Board of Directors should get collaterals such as immovable properties charged in favour of the bank valued once in three years. Sub-standard assets:
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Standard assets:
From the year ending 31.03.2000, the banks should make a general provision of a minimum of 0.40 percent on standard assets on global loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at net NPAs.
The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet. Floating provisions:
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provisions required to be made as per above stated provisioning guidelines. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice.
Provisions on Leased Assets: Leases are peculiar transactions where the assets are not recorded in the books of the user of such assets as Assets, whereas they are recorded in the books of the owner even though the physical existence of the asset is __(AS19 ICAI) with the user (lessee).
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Doubtful assets :100 percent of the extent to which the finance is not secured by the realisable value of the leased asset. Realisable value to be estimated on a realistic basis. In addition to the above provision, the following provision on the net book value of the secured portion should be made, depending upon the period for which asset has been doubtful: Period %age of provision
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three 50
Loss assets :The entire asset should be written-off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component should be provided for. ('net book value')
With effect from 31 March 2000, in respect of advances sanctioned against State Government guarantee, if the guarantee is invoked and
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As regards advances guaranteed by State Governments, in respect of which guarantee stood invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner, during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year.
BIFR/term lending institutions, the provision should continue to be made in respect of dues to the bank on the existing credit facilities as per their classification as sub-standard or doubtful asset.
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finalised by BIFR and/or term lending institutions, provision on additional facilities sanctioned need not be made for a period of one year from the date of disbursement.
are identified as sick [as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002] and where rehabilitation packages/nursing programmes have been drawn by the banks
themselves or under consortium arrangements, no provision need be made for a period of one year.
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policies are exempted from provisioning requirements. However, advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements. Treatment of interest suspense account:
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In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the balance in excess of the amount guaranteed by these Corporations. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provision made as illustrated hereunder:
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Period for which the advance has More than 3 years remained doubtful Value of security remained doubtful held Rs. 1.50 lakhs
Provision required to be made Outstanding balance Less: Value of security held Unrealised balance Less: DICGC Rs. 4.00 lakhs Rs. 1.50 lakhs Rs. 2.50 lakhs Cover Rs. 1.25 lakhs
(50% of unrealisable balance) Net unsecured balance Rs. 1.25 lakhs 1.25 lakhs of (@ 100
percent portion)
unsecured
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In case the advance covered by CGTSI guarantee becomes nonperforming, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for non-performing advances. Two illustrative examples are given below: Example I Asset status: CGTSI Cover classification Doubtful More than 3 years; 75% of the amount
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Rs.18.75 lakh, whichever is the least Realisable Security Balance outstanding Rs.10.00 lakh value of Rs.1.50 lakh
Less Realisable value of Rs. 1.50 lakh security Unsecured amount Rs. 8.50 lakh
Less CGTSI cover (75%) Rs. 6.38 lakh Net unsecured and Rs. 2.12 lakh
uncovered portion: Provision Required Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)
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Example II Asset status CGTSI Cover classification Doubtful More than 3 years; 75% of the amount
Rs.18.75 lakh, whichever is the least Realisable Security Balance outstanding Rs.40.00 lakh value of Rs.10.00 lakh
Less CGTSI cover (75%) Rs. 18.75 lakh Net unsecured and Rs. 11.25 lakh
uncovered portion: Provision Required Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%) Unsecured & uncovered Rs.11.25 lakh portion Total provision required Rs.11.25 (100%) Rs. 16.25 lakh lakh
Take-out finance
The lending institution should make provisions against a 'take-out finance' turning into NPA pending its take-over by the taking-over institution. As and when the asset is taken-over by the taking-over institution, the corresponding provisions could be reversed.
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When exchange rate movements of Indian rupee turn adverse, the outstanding amount of foreign currency denominated a loan (where actual disbursement was made in Indian Rupee) which becomes overdue goes up correspondingly, with its attendant implications of provisioning requirements. Such assets should not normally be revalued. In case such assets need to be revalued as per requirement of accounting practices or for any other requirement, the following procedure may be adopted: The loss on revaluation of assets has to be booked in the bank's & Loss Account.
Profit
Besides the provisioning requirement as per Asset Classification, banks should treat the full amount of the Revaluation Gain relating to the corresponding assets, if any, on account of Foreign Exchange Fluctuation as provision against the particular assets.
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Impact of NPA
Profitability:NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning
project/asset. So NPA doesnt affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank.
Liquidity:Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes period of time which lead to additional cost to the company. Difficulty in operating the
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Involvement of management:Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank.
Credit loss:Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks .
Reasons can be divided in to two broad categories:A] Internal Factor B] External Factor
[ A ] Internal Factors:Internal Factors are those, which are internal to the bank and are controllable by banks.
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[ B ] External Factors:External factors are those, which are external to banks they are not controllable by banks.
Natural calamities
Industrial sickness
Business failure
Inefficient management
Obsolete technology
Product obsolete 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 installment in case of term loan. Bouncing of cheque due to insufficient balance in the accounts.
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If information is received that the borrower has either initiated the process of winding up or are not doing the business. Overdue receivables. Stock statement not submitted on time. External non-controllable factor like natural calamities in the city where borrower conduct his business. Frequent changes in plan.
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Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank. Problem between partners.
( 4 ) Others:
Identifying borrowers with genuine intent from those who are nonserious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who has intelligent inputs with regard to promoters sincerity, and capability to achieve turnaround.
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In this regard banks may consider having Special Investigation of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.
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Focus on Cash Flows:While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.
Management Effectiveness:The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time.
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Multiple Financing:A. During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.
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C. In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of
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D. Corporate
Debt
Restructuring
mechanism
has
been
institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts banking arrangements. with consortium/multiple
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Credit Default
Inability to Pay
Willful default
Unviable
Compromise
Securitization Act
Asset Reconstruction
Fresh WC Limit
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B] Securitization Act
C] Asset Reconstruction
Lok Adalat:
Lok Adalat institutions help banks to settle disputes involving account in doubtful and loss category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has
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The recovery of debts due to banks and financial institution passed in March 2000 has helped in strengthening the function of DRTs. Provision for placement of more than one recovery officer, power to attach defendants property/assets before judgment, penal provision for disobedience of tribunals order or for breach of any terms of order and appointment of receiver with power of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. DRTs which have been set up by the Government to facilitate speedy recovery by banks/DFIs, have not been able make much impact on loan recovery due to variety of reasons like inadequate number, lack of infrastructure, under staffing
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of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be
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Background In spite of their best efforts and intentions, sometimes corporate find themselves in financial difficulty because of factors beyond their control and also due to certain internal reasons. For the revival of the corporate as well as for the safety of the money lent by the banks and FIs, timely support through restructuring in genuine cases is called for. However, delay in agreement amongst different lending institutions often comes in the way of such endeavours.
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framework is to ensure
restructuring of the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework will aim at preserving viable corporate that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders programme. through an orderly and coordinated restructuring
Structure:
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(A) CDR Standing Forum (B) CDR Empowered Group (C) CDR Cell (A) CDR Standing Forum : The CDR Standing Forum would be the representative general body of all financial institutions and banks participating in CDR system. All financial institutions and banks should participate in the system in their own interest. CDR Standing Forum will be a self-empowered body, which will lay down policies and guidelines, guide and monitor the progress of corporate debt restructuring.
The Forum will also provide an official platform for both the creditors and borrowers (by consultation) to amicably and collectively evolve policies and guidelines for working out debt restructuring plans in the interests of all concerned.
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A CDR Core Group will be carved out of the CDR Standing Forum to assist the Standing Forum in convening the meetings and taking decisions relating to policy, on behalf of the Standing Forum. The Core Group will consist of Chief Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks Association and a representative of Reserve Bank of India.
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The CDR Standing Forum shall meet at least once every six months and would review and monitor the progress of corporate debt restructuring system. The Forum would also lay down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring and would ensure their smooth functioning and adherence to the prescribed time schedules for debt restructuring. It can also review any individual decisions of the CDR Empowered Group and CDR Cell.
The CDR Standing Forum, the CDR Empowered Group and CDR Cell (described in following paragraphs) shall be housed in IDBI. All financial institutions and banks shall share the administrative and other costs. The sharing pattern shall be as determined by the Standing Forum.
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The CDR Empowered Group would be mandated to look into each case of debt restructuring, examine the viability and rehabilitation potential of the Company and approve the restructuring package within a specified time frame of 90 days, or at best 180 days of reference to the Empowered Group.
There should be a general authorisation by the respective Boards of the participating institutions / banks in favour of their representatives on the CDR Empowered Group, authorising them to take decisions on
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The decisions of the CDR Empowered Group shall be final and action-reference point. If restructuring of debt is found viable and feasible and accepted by the Empowered Group, the company would be put on the restructuring mode. If, however, restructuring is not found viable, the creditors would then be free to take necessary steps for immediate recovery of dues and / or liquidation or winding up of the company, collectively or individually.
CDR Cell: The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of the proposals received from borrowers / lenders, by calling for proposed rehabilitation plan and other information and put up the matter before the CDR Empowered Group, within one month to decide whether rehabilitation is prima facie feasible, if so, the CDR Cell
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To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate members of staff for the Cell will be deputed from banks and financial institutions. The CDR Cell may also take outside professional help. The initial cost in operating the CDR mechanism including CDR Cell will be met by IDBI initially for one year and then from contribution from the financial institutions and banks in the Core Group at the rate of Rs.50 lakh each and contribution from other institutions and banks at the rate of Rs.5 lakh each. All references for corporate debt restructuring by lenders or borrowers will be made to the CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to the corporate, to work out a preliminary restructuring plan in consultation with other stakeholders and submit to the CDR Cell within one month. The CDR Cell will prepare
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CDR mechanism will be a voluntary system based on debtorcreditor agreement and inter-creditor agreement.
The scheme will not apply to accounts involving only one financial institution or one bank. The CDR mechanism will cover only multiple
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The CDR system will be applicable only to standard and substandard accounts. However, as an interim measure, permission for corporate debt restructuring will be made available by RBI on the basis of specific recommendation of CDR "Core-Group", if a minimum of 75 per cent (by value) of the lenders constituting banks and FIs consent for CDR, irrespective of differences in asset classification status in banks/ financial institutions. There would be no requirement of the account / company being sick, NPA or being in default for a specified period before reference to the CDR Group. However, potentially viable cases of NPAs will get priority. This approach would provide the necessary flexibility and facilitate timely intervention for debt restructuring. Prescribing any milestone(s) may not be necessary, since the debt restructuring exercise is being triggered by banks and financial institutions or with their consent. In no case, the requests of any
77
Reference to Corporate Debt Restructuring System could be triggered by (i) any or more of the secured creditor who have minimum 20% share in either working capital or term finance, or (ii) by the concerned corporate, if supported by a bank or financial institution having stake as in (i) above.
Legal Basis The legal basis to the CDR mechanism shall be provided by the Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement. The debtors shall have to accede to the DCA, either at the time of original loan documentation (for future cases) or at the time of reference to Corporate Debt Restructuring Cell. Similarly, all participants in the CDR mechanism through their membership of the Standing Forum shall have to enter into a legally binding agreement, with
78
Stand-Still Clause:
One of the most important elements of Debtor-Creditor Agreement would be 'stand still' agreement binding for 90 days, or 180 days by both sides. Under this clause, both the debtor and creditor(s) shall agree to a legally binding 'stand-still' whereby both the parties commit themselves not to taking recourse to any other legal action during the 'stand-still' period, this would be necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention judicial or otherwise.
The Inter-Creditors Agreement would be a legally binding agreement amongst the secured creditors, with necessary enforcement and penal clauses, wherein the creditors would commit themselves to
79
The accounting treatment of accounts restructured under CDR would be governed by the prudential norms indicated in circular DBOD. BP. BC. 98 / 21.04.048 / 2000-01 dated March 30, 2001. Restructuring of corporate debts under CDR could take place in the following stages:
Before commencement of commercial production; After commencement of commercial production but before the asset has been classified as sub-standard; After commencement of commercial production and the asset has been classified as sub-standard.
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A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages [paragraph 5(a) and (b) above] would not cause a standard asset to be classified in the sub-standard category, provided the loan / credit facility is fully secured.
A rescheduling of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to substandard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk
81
In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. Treatment of sub-standard accounts restructured under CDR
A rescheduling of the instalments of principal alone, would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period, provided the loan / credit facility is fully secured.
A rescheduling of interest element would render a sub-standard asset eligible to be continued to be classified in sub-standard category
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In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. Even in cases where the sacrifice is by way of write off of the past interest dues, the asset should continue to be treated as substandard.
83
During this one-year period, the sub-standard asset will not deteriorate in its classification if satisfactory performance of the account is demonstrated during the period. In case, however, the satisfactory performance during the one year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.
Non Performing Assets in Banking Sector 84
The asset classification under CDR would continue to be bankspecific based on record of recovery of each bank, as per the existing prudential norms applicable to banks.
85
renegotiation of the terms of loan agreement could take place, can be identified:
Before commencement of commercial production; After commencement of commercial production but before the asset has been classified as sub standard, After commencement of commercial production and after the asset has been classified as sub standard.
In each of the foregoing three stages, the rescheduling, etc., of principal and/or of interest could take place, with or without sacrifice, as part of the restructuring package evolved.
A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages would not cause a standard asset to be classified in the sub standard category provided the loan/credit facility is fully secured.
A rescheduling of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to sub standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e., current PLR+ the appropriate credit risk premium for the borrowercategory) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis.
Non Performing Assets in Banking Sector 87
In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved.
A rescheduling of the instalments of principal alone, would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period, provided the loan/credit facility is fully secured.
A rescheduling of interest element would render a sub-standard asset eligible to be continued to be classified in sub standard category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the
Non Performing Assets in Banking Sector 88
The sub-standard accounts which have been subjected to restructuring etc., whether in respect of principal instalment or interest amount, by whatever modality, would be eligible to be upgraded to the standard
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General: These instructions would be applicable to all type of credit facilities including working capital limits, extended to industrial units, provided they are fully covered by tangible securities.
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While assessing the extent of security cover available to the credit facilities, which are being restructured/ rescheduled, collateral security would also be reckoned, provided such collateral is a tangible security properly charged to the bank and is not in the intangible form like guarantee etc. of the promoter/ others.
Income recognition
There will be no change in the existing instructions on income recognition. Consequently, banks should not recognise income on
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Consequently, banks, which have wrongly recognised income in the past, should reverse the interest if it was recognised as income during the current year or make a provision for an equivalent amount if it was recognised as income in the previous year(s). As regards the regulatory treatment of income recognised as funded interest and conversion into equity, debentures or any other instrument banks should adopt the following:
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Conversion into equity, debentures or any other instrument: The amount outstanding converted into other instruments would normally comprise principal and the interest components. If the amount of interest dues is converted into equity or any other instrument, and income is recognised in consequence, full provision should be made for the amount of income so recognised to offset the effect of such income recognition. Such provision would be in addition to the amount of provision that may be necessary for the depreciation in the value of the equity or other instruments, as per the investment valuation norms.
Non Performing Assets in Banking Sector 93
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While there will be no change in the extant norms on provisioning for NPAs, banks which are already holding provisions against some of the accounts, which may now be classified as standard, shall continue to hold the provisions and shall not reverse the same.
Special Cases
Accounts with temporary deficiencies: The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non-submission of stock statements and non-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines:
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Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock
statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. A working capital borrower account will become NPA if such irregular drawings are permitted in the account for a continuous period of 180 days even though the unit may be working or the borrower's financial position is satisfactory.
Regular and ad hoc credit limits need to be reviewed/ regularised not later than three months from the due date/date of ad hoc sanction. In case of constraints such as non-availability of financial statements and other data from the borrowers, the branch should
Non Performing Assets in Banking Sector 96
The asset classification of borrower accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularisation of the account to eliminate doubts on their performing status.
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It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or part thereof which has become irregular.
If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrowers principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning.
A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightaway classified as doubtful or loss asset as appropriate. Erosion
Non Performing Assets in Banking Sector 98
If the realisable value of the security, as assessed by the bank/ approved values/ RBI is less than 10 per cent of the outstanding in the borrower accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank.
In respect of agricultural advances as well as advances for other purposes granted by banks to ceded PACS/ FSS under the on-lending system, only that particular credit facility granted to PACS/ FSS which is
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Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.
Loans with moratorium for payment of interest In the case of bank finance given for industrial projects or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes 'due' only after the moratorium
Non Performing Assets in Banking Sector 100
In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates
Agricultural advances In respect of advances granted for agricultural purpose where interest and/or instalment of principal remains unpaid after it has become past due for two harvest seasons but for a period not exceeding two half-years, such an advance should be treated as NPA. The above norms should be made applicable to all direct agricultural
Non Performing Assets in Banking Sector 101
Where
natural
calamities
impair
the
repaying
capacity
of
agricultural borrowers, banks may decide on their own as a relief measure - conversion of the short-term production loan into a term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to various guidelines contained in RBI circulars RPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98 and
In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need
Non Performing Assets in Banking Sector 102
The
credit
facilities
backed
by
guarantee
of
the
Central
Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income. With effect from 1st April 2000, advances sanctioned against State Government guarantees should be classified as NPA in the normal course, if the guarantee is invoked and remains in default for more than two quarters. With effect from March 31, 2001 the period of default is revised as more than 180 days.
Take-out Finance:
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Post-shipment Supplier's Credit In respect of post-shipment credit extended by the banks covering export of goods to countries for which the ECGCs cover is available, EXIM Bank has introduced a guarantee-cum-refinance programme whereby, in the event of default, EXIM Bank will pay the guaranteed amount to the bank within a period of 30 days from the day the bank invokes the guarantee after the exporter has filed claim with ECGC. Accordingly, to the extent payment has been received from the EXIM Bank, the advance may not be treated as a non-performing asset for asset classification and provisioning purposes. Export Project Finance:
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In such cases, where the lending bank is able to establish through documentary evidence that the importer has cleared the dues in full by depositing the amount in the bank abroad before it turned into NPA in the books of the bank, but the importer's country is not allowing the funds to be remitted due to political or other reasons, the asset classification may be made after a period of one year from the date the amount was deposited by the importer in the bank abroad.
Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been re-negotiated unless the package of re-negotiated terms has worked satisfactorily for a period of one year. While the existing credit facilities sanctioned to a unit under
Non Performing Assets in Banking Sector 106
ROLE OF ARCIL :-
This empowerment encouraged the three major players in Indian banking system, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come together to set-up the first ARC. Arcil was incorporated as a public limited company on February 11, 2002 and obtained its certificate of commencement of business on May 7, 2003. In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of registration dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates under powers conferred under the Securitization Act, 2002. Arcil is also a "financial institution" within
Non Performing Assets in Banking Sector 107
The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by managing NPAs and help them concentrate on core banking activities thereby enhancing shareholders value.
Creating a vibrant market for distressed debt assets / securities in India offering a trading platform for Lenders
To evolve and create significant capacity in the system for quicker resolution of NPAs by deploying the assets optimally
With a view to achieving high delivery capabilities for resolution, Arcil has put in place a structure aimed at outsourcing the various sub-functions of resolution to specialized agencies, wherever applicable under the provision of the Securitisation Act, 2002. Arcil has also encourage, groomed and developed many such agencies to enhance its capacity in line with the growth of its activity.
ANALYSIS
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bifurcate the non performing assets in priority sector and non priority sector, gross NPA and net NPA in percentage as well as in rupees, deposit investment advances.
Deposit Investment Advances is the first in the analysis because due to these we can understand the where the bank stands in the competitive market. As at end of march 2008, in private sector ICICI
Bank is the highest deposit-investment-advances figures in rupees crore, second is HDFC Bank and KOTAK Bank has least figures. In public sector banks Punjab National Bank has highest depositinvestment-advances but when we look at graph first three means Bank of Baroda and Bank of India are almost the similar in numbers and Dena Bank is stands for last in public sector bank. When we compare the
private sector banks with public sector banks among these banks, we
110
HD
111
200000 150000
DEPOSIT
INVESTMENT ADVANCES
112
ICICI BANK AND PUNJAB NATIONAL BANK :BANK ICICI BANK PNB DEPOSIT 244431 166457 INVESTMENT 111454 53992 ADVANCES 225616 119502
250000
200000
150000 100000 50000
DEPOSIT INVESTMENT ADVANCES
0
ICICI PNB
There are two concepts related to non-performing assets_ gross and net. Gross refers to all NPAs on a banks balance sheet irrespective of the provisions made. It consists of all the non standard assets, viz. sub
waiting period, where the dues are considered not collectible or marginally collectible. Net NPA is gross NPA less provisions. Since in India, bank balance
sheets contains a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPA according to the central bank guidelines, are quite significant.
Here, we can see that there are huge difference between gross and net NPA. While gross NPA reflects the quality of the loans made by
banks, net NPA shows the actual burden of banks. The requirements for provisions are : 100% for loss assets 100% of the unsecured portion plus 20-50% of the secured portion, depending on the period for which the account has
Here, there are gross and net NPA data for 2006-07 and 2007-08 we taken for comparison among banks. These data are NPA AS
PERCENTAGE OF TOTAL ASSETS. As we discuss earlier that gross NPA reflects the quality of the loans made by banks. Among all the ten
banks Dena Banks has highest gross NPA as a percentage of total assets in the year 2006-07 and also net NPA. Punjab National Bank shows vast difference between gross and net NPA. between BOI and BOB. There is almost same figures
YEAR 2006-07
115
2.5 2 1.5
GROSS NPA
NET NPA
2007-08
116
2 1.5 1 0.5 0
GROSS NPA NET NPA
DENA
PNB
BOI
BOB
UBI
2006-07
117
2007-08
BANK
GROSS NPA
NET NPA
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COMPARISON OF GROSS NPA WITH ALL BANKS FOR THE YEAR 2007-08. The growing NPAs affects the health of banks, In the long run, it eats up the net
worth of the banks. We can say that NPA is not a healthy sign for financial institutions. Here we take all the ten banks gross NPA Average of these ten banks
gross NPAs is 1.29 as percentage of total assets. So if we compare in private sector banks AXIS and HDFC Bank are below average of all banks and in public sector BOB and BOI. Average of these five private sector banks gross NPA is 1.25 and average of public sector banks is 1.33. Which is higher in compare of private sector banks.
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2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 ICICI INDUSIND KOTAK HDFC AXIS BOI BOB UBI DENA PNB
COMPARISON OF NET NPA WITH ALL BANKS FOR THE YEAR 2007-08. Average of these ten banks net NPA is 0.56. And in the public sector banks all these five banks are below this. But in private sector banks there are three banks are above average. The difference between private and public banks average is also vast. Private sector banks net NPA average is 0.71 and in public sector banks it is 0.41 as percentage of total assets. As we know that net NPA shows actual burden of banks. IndusInd bank has highest net NPA figure and HDFC Bank has lowest in comparison.
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PRIORITY NON PRIORITY SECTOR When we further bifurcate NPA in priority sector and Non priority sector. Agriculture + small + others are priority sector. In private sector banks ICICI Bank has the highest NPA in both sector in compare to other private sector banks. Around 72% of NPA is with ICICI Bank with Rs.1359 crore in priority sector and around 78% in non priority sector. We can see that in private sector banks , banks has more NPA in non priority sector than priority sector.
BANK
AGRI (1)
SMALL (2)
OTHERS (3)
NONPRIORITY
121
1167.53 185.69
7000 6000 5000 4000 3000 2000 1000 0 AXIS HDFC ICICI KOTAK INDUSIND
PRIORITY NON-PRIORITY
BANK
NPA
122
When we talk about public sector banks they are more in priority sector and they given advanced to weaker sector or industries. Public sector banks give more loans to Agriculture , small scale and others units and as a result we see that there are more number of NPA in public sector banks than in private sector banks. BOB given more advanced to
priority sector in 2007-08 than other four banks and Dena Bank is in least.
But when there are comparison between private bank and public sector bank still ICICI Bank has more NPA in both priority and non priority sector with the comparison of public sector banks. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and
123
Now, when we compare the all public sector banks and public sector banks on priority and non-priority sector than the figures are really shocking. Because in compare of private sector banks, public sector
PUBLIC SECTOR SECTOR PRIORITY PUBLIC NON PRT TOTAL 2006-07 22954 490 15158 38602 2007-08 25287 299 14163 39749
NEW PRIVATE 2006-07 1468 3 4800 6271 2007-08 2080 0 8339 10419
Here, there are huge difference between private and public sector banks NPA. There is increase in new private sector banks NPA of Rs.4148 cr in
124
RECOMMENDATIONS
125
[Type the document title] It is recommended that the proper documentation and verification to be made before sanctioning the loan.
Empowering
staff
to
make
decisions
related
to
sanctioning of loans.
Constant interactions have to be maintained with the customers to keep track of their loan payment.
Strict measures have to be taken while issuing or sanctioning the loan. The measures can include
verification of job and salary slips, verification of securities and the like.
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CONCLUSION
The Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively higher in public sectors banks.To improve the efficiency and profitability, the NPA has to be scheduled. Various steps have been taken by government to reduce the NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard.
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