You are on page 1of 82

A PROJECT REPORT ON

“Comparative Analysis Of Non Performing Assets Of Private Sector Banks”

Submitted in the partial fulfillment of requirement of the degree of Master in Business Administration at university school of management , kurukshetra university , kurukshetra.

Under the guidence of: DR. B.S. BODLA (professor in u.s.m) MR. RAJIT VERMA asst. professor in u.s.m)

SUBMITTED BY: NITIN VERMA ROLL NO

1

Declaration

I here by declare that the project report entitled COMPARATIVE ANALYSIS OF NON PERFORMING ASSETS OF PRIVATE SECTOR BANKS submitted in partial fulfillment of the requirements for the degree of masters of business Administration to University SCHOOL OF MANAGEMENT KURUKSHETRA UNIVERSITY , KURUKSHETRA, is my original work and not submitted for the award of any other degree, diploma, fellowship, or any other similar title or prizes.

NITIN VERMA

2

Acknwoledgement

With a deep sense of gratitude I express thanks to all those who have been instrumental in the development of the project report. I am also grateful to the faculty of university school of management kurukshetra university, who gave me a valuable opportunity of involving me in real live business project. I am thankful to all the professors whose positive attitude, guidance and faith in my ability spurred me to perform well. I am also indebted to all lecturers, friends and associates for their valuable advice, stimulated suggestions and overwhelming support without which the project would not have been a success.

INDEX
3

CHAPTER NO:
1. 2.

PARTICULARS
INTRODUCTION RESEARCH METHODOLOOGY  SCOPE OF RESEARCH  SOURCES OF DATA COLLECTION  OBJECTIVE OF STUDY  DATA COOLECTIONS

PAGE NO

3.

INTRODUCTION TO TOPIC  INTRODUCTION TO NPAs  INTRODUCTION TO PRIVATE BANKS

4.

PROVISIONING NORMS  GENERAL  FLOATING PROVISION  LEASED ASSESTS  SPECIAL GUIDELINES

5.

ANALYSIS & INTERPRETATION  DEPOSITS-INVESTMENT-ADVANCES  GROSS & NET NPA  PREVENTIVE MEASURE  TOOLS FOR RECOVERY  IMPACT, REASONS,FACTOR & SYMPOTMS OF NPA

6. 7.

FINDINGS,SUGGESTIONS,CONCLUSION,LIMITATIONS BIBLIOGRAPHY

4

Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. net NPA shows the actual burden of banks. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach.1.Introduction The accumulation of huge non-performing assets in banks has assumed great importance. Public sector banks figure prominently in the debate not only because they dominate the banking industries.The magnitude of NPAs in banks and financial institutions is over Rs. While gross NPA reflects the quality of the loans made by banks. 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. This raises a concern in the industry and academia because it is generally felt that NPAs reduce the profitability of a banks. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements. weaken its financial health and erode its solvency. 5 .50.000 crores. but also since they have much larger NPAs compared with the private sector banks. The depth of the problem of bad debts was first realized only in early 1990s.

 To analyze financial performance of banks at different level of NPA  To evaluate NPAs (GROSS & NET) of different private banks  To Know the Impact of NPAs  To Know the Reasons for NPAs  To learn Preventive Measures 6 . axis. icici . induslnd.. OBJECTIVES OF THE STUDY The basic idea behind undertaking the Grand Project on NPA was to:  To know the concept of NPA. hdfc .  I have used secondary data  I have taken seven years data for my report (2004-2011). Scope of the Study  Concept of Non Performing Asset  Impact of NPAs  Reasons for NPAs  Preventive Measures  Tools to manage NPAs Sampling plan For the project undertaken data of seven years has been considered for private sector banks namely.yes bank.RESEARCH METHODOLOGY The research methodology adopted for carrying out the study were:  In this project analytical research were used.

2004. With a view to moving towards international best practices and to ensure greater transparency. The recovery of loan has always been problem for banks and financial institution.  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.  Interest and/ or instalment of principal remain overdue for a period of days in respect of a term loan. 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. NPA is short form of “Non Performing Asset”. Accordingly. with effect from March 31. and 7 more than 90 . 2004. The dreaded NPA rule says simply this:. Definitions: An asset. the entire bank loan automatically turns a non performing asset. becomes non-performing when it ceases to generate income for the bank. from the year ending March 31.  The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. including a leased asset. a non-performing asset (NPA) shall be a loan or an advance where.Introduction to the topic The three letters “NPA” Strike terror in banking sector and business circle today. 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. in respect of an Overdraft/Cash Credit (OD/CC).  The account remains ‘out of order’ for a period of more than 90 days. when interest or other due to a bank remains unpaid for more than 90 days. it has been decided to adopt the ‘90 days’ overdue’ norm for identification of NPAs.

 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.

HISTORY OF INDIAN PRIVATE BANKING

PRIVATE banking is banking, investment and other financial services provided by banks to private individuals who invest sizable assets. The term "private" refers to customer service rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. It does not refer to a private bank, which is a non-incorporated banking institution. Private banking forms an important, more exclusive, subset of wealth management. At least until recently, it largely consisted of banking services (deposit taking and payments), discretionary asset management, brokerage, limited tax advisory services and some basic concierge-type services, offered by a single designated relationship manager. On the whole, many clients trusted their private banking relationship manager to ‘get on with it’, and took a largely passive approach to financial decision making. Historically, private banking has been viewed as a very exclusive niche that only caters to high net worth individuals with liquidity over $2 million, though it is now possible to open private banking accounts with as little as $250,000 for private investors. An institution's private banking division provides services such as wealth management, savings, inheritance, and tax planning for their clients. A high-level form of private banking (for the especially affluent) is often referred to as wealth management. For private banking services clients pay either based on the number of transactions, the annual portfolio performance or a "flat-fee", usually calculated as a yearly percentage of the total investment amount.
8

"Private" also alludes to bank secrecy and minimizing taxes through careful allocation of assets, or by hiding assets from the taxing authorities. Swiss and certain offshore banks have been criticized for such cooperation with individuals practicing tax evasion. Although tax fraud is a criminal offense in Switzerland, tax evasion is only a civil offence, not requiring banks to notify taxing authorities. Historically, private banking has developed in Europe. Some banks in Europe are known for managing assets of some royal families. The assets of Princely Family of Liechtenstein is managed by LGT Bank (founded in 1920). The assets of Dutch royal family is managed by MeesPierson (founded in 1720). The assets of British Royal Family is managed by Coutts(founded in 1692). UNDER THIS STUDY I HAVE TAKEN FIVE BANKS I.E. HDFC, INDUSLND BANK, ICICI BANK, YES BANK, AXIS BANK.

NON PERFORMING ASSETS (NPA)

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. No 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 . An amount due under any credit facility is treated as “past due” when it is not been paid within 30 days from the due date. Due to the improvement in the payment and settlement system, recovery climate, up gradation of technology in the banking system etc, it was decided to dispense with “past due “concept, with effect from March 31, 2001. Accordingly as from that date, a Non performing asset shell be an advance where

9

i.

Interest and/or installment of principal remain overdue for a 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 a. 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; i. Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, ii. The account remains ‘out of order ‘ for a period of more than 90 days ,in respect of an overdraft/cash credit (OD/CC) iii. The bill remains overdue for a period of more than 90 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 90 days in respect of other accounts

10

1. 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 out standing balance in the principal operating account is less than the sanctioned amount /drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period ,these account should be treated as ‘out of order’. 2. Overdue

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on due date fixed by the bank.

Types of NPA A] Gross NPA B] Net NPA

A] Gross NPA:Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:
11

the banks should not charge and take to income account interest on any NPA. It can be calculated by following: Net NPAs = Gross NPAs – Provisions Gross Advances .Gross NPAs Ratio = B] Net NPA : - Gross NPAs Gross Advances Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. KVPs and Life policies may be taken to income account on the due date. Since in India. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received.  However. the provisions the banks have to make against the NPAs according to the central bank guidelines. NSCs. are quite significant. 12 . That is why the difference between gross and net NPA is quite high.Provisions INCOME RECOGNITION Income recognition – Policy  The policy of income recognition has to be objective and based on the record of recovery. Net NPA shows the actual burden of banks. Therefore. interest on advances against term deposits. provided adequate margin is available in the accounts. bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming. IVPs.

Further. should be reversed or provided for if the same is not realised.  As per the 'Guidance Note on Accounting for Leases' issued by the Council of the Institute of Chartered Accountants of India (ICAI). including bills purchased and discounted. a separate Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account. should be reversed or provided for in the current accounting period. as the case may be. interest accrued and credited to income account in the corresponding previous year. This will apply to Government guaranteed accounts also. and remaining unrealised.  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. if uncollected. 13 . 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. Reversal of income:  If any advance. Leased Assets:The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became non-performing. 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 respect of NPAs. Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.  If Government guaranteed advances become NPA. becomes NPA as at the close of any year. the interest on such advances should not be taken to income account unless the interest has been realised. fees.

the amount held in interest suspense account. including the advances at the foreign branches.  While reporting NPA figures to RBI.  Whenever NPAs are reported to RBI.Appropriation of recovery in NPAs: Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned. towards principal or interest due).  14 . 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. banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported. The Report should be furnished as per the prescribed format given in the Annexure I.e. the amount of technical write off. 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.  In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i. Reporting of NPAs Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. may furnish the amount of interest receivable on NPAs as a foot note to the Report. if any. The NPAs would relate to the banks’ global portfolio.

15 .________crore.REPORTING FORMAT FOR NPA – GROSS AND NET NPA Name of the Bank: Position as on……… PARTICULARS 1) Gross Advanced * 2) Gross NPA * 3) Gross NPA as %age of Gross Advanced 4) Total deduction( a+b+c+d ) ( a ) Balance in interest suspense a/c ** ( b ) DICGC/ECGC claims received and held pending Adjustment ( c ) part payment received and kept in suspense a/c ( d ) Total provision held *** 5) Net advanced ( 1-4 ) 6) Net NPA ( 2-4 ) 7) Net NPA as a %age of Net Advance *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 Asset Classification Categories of NPAs: 1) Standard 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. if deficiencies are not corrected. Here it is also very important that in this case the arrears of interest and the principal amount of loan does not exceed 90 days at the end of financial year. and the asset has welldefined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss. which has remained NPA for a period less than or equal to 12 month. ( 2 ) Doubtful Assets:-16 . a sub standard asset would be one. 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. The following features are exhibited by sub standard 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. 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 ( 2 ) Doubtful Assets ( 3 ) Loss Assets ( 1 ) Sub-standard Assets:-With effect from 31 March 2005.

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. Also. 17 . with the added characteristic that the weaknesses make collection or liquidation in full. an asset would be classified as doubtful if it remained in the substandard category for 12 months. – on the basis of currently known facts. 2005.A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard. ( 3 ) Loss Assets:-A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted.although there may be some salvage or recovery value. conditions and values – highly questionable and improbable. With effect from March 31.

its recognition as such. 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. if they so desire. the realisation of the security and the erosion over time in the value of security charged to the bank.  In conformity with the prudential norms. regional offices were advised to forward a list of individual advances. the banks should make provision against sub-standard assets. it was suggested that a bank's statutory auditors. Taking into account the time lag between an account becoming doubtful of recovery. etc.  The primary responsibility for making adequate provisions for any diminution in the value of loan assets. doubtful assets and loss assets as below: 18 .  Pursuant to this.Provisioning Norms General  In order to narrow down the divergences and ensure adequate provisioning by banks. 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. 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. investment or other assets is that of the bank managements and the statutory auditors. could have a dialogue with RBI's Regional Office/ inspectors who carried out the bank's inspection during the previous year with regard to the accounts contributing to the difference.

2005. 100 percent of the outstanding should be provided for.  In regard to the secured portion. Provision requirement (%) 20 30 60% with effect from March 31. 2004. Doubtful 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. 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. If the assets are permitted to remain in the books for any reason. (2) Advances classified as ‘doubtful’ more than three years on or after April 1. 2006. 100% with effect from March 31. provision may be made on the following basis. 2004. 2007. 19 . 75% effect from March 31.Loss assets: The entire asset should be written off.

03. 2003 has to be made in phases as under:  As on 31. as on 31.40 percent on standard assets on global loan portfolio basis.03. 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. 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. Standard assets:  From the year ending 31.  The provisions on standard assets should not be reckoned for arriving at net NPAs. balance of the provisions not made during the previous year. 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.  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 31.2000. Additional provisioning consequent upon the change in the definition of doubtful assets effective 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.2002. the banks should make a general provision of a minimum of 0.03. in addition to the provisions needed. 2005.2003. in cases of NPAs with balance of Rs.2002. 20 .  As on 31.03. with a minimum of 20 % each year. 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.

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. 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\ 21 . balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book value' of the leased assets. Statutory depreciation should be shown separately in the Profit & Loss Account. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector.Others' in Schedule 5 of the balance sheet.  As per the 'Guidance Note on Accounting for Leases' issued by the ICAI. 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'. wherever available.  Also. banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice. could be setoff against provisions required to be made as per above stated provisioning guidelines. The floating provisions. 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 . whereas they are recorded in the books of the owner even though the physical existence of the asset is with the user (lessee)  Sub-standard assets :  10 percent of the 'net book value'. '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. Floating provisions: Some of the banks make a 'floating provision' over and above the specific provisions made in respect of accounts identified as NPAs.

('net book value') Guidelines for Provisions under Special Circumstances Government guaranteed advances  With effect from 31 March 2000. As regards the additional facilities sanctioned as per package finalised by BIFR and/or term lending institutions.2003 with a minimum of 25 percent each year. the banks should make normal provisions as prescribed in paragraph 4. If for any reason. necessary provision was allowed to be made. depending upon the period for which asset has been doubtful: Period Up to one year One to three years More than three years  Loss assets :The entire asset should be written-off. 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). Doubtful assets :100 percent of the extent to which the finance is not secured by the realisable value of the leased asset.03. 22 %age of provision 20 30 50 . during the financial years ending 31.03.2000 to 31. Advances granted under rehabilitation packages approved by BIFR/term lending institutions:  In respect of advances under rehabilitation package approved by BIFR/term lending institutions. the following provision on the net book value of the secured portion should be made. provision on additional facilities sanctioned need not be made for a period of one year from the date of disbursement.1. an asset is allowed to remain in books. Realisable value to be estimated on a realistic basis. in a phased manner. 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. in respect of which guarantee stood invoked as on 31.2 above.03. In addition to the above provision. in respect of advances sanctioned against State Government guarantee.2000.  As regards advances guaranteed by State Governments.

should be made on the balances after such deduction.04. provisioning as per the norms. KVPs. NSCs eligible for surrender. Further. 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: \ Example Outstanding Balance DICGC Cover Rs. However. and life policies are exempted from provisioning requirements.01/2001-2002 dated 16 January 2002] and where rehabilitation packages/nursing programmes have been drawn by the banks themselves or under consortium arrangements.PLNFS. no provision need be made for a period of one year. Amounts lying in the Interest Suspense Account should be deducted from the relative advances and thereafter. Advances against term deposits.57 /06. In respect of additional credit facilities granted to SSI units which are identified as sick [as defined in RPCD circular No.BC. government securities and all other kinds of securities are not exempted from provisioning requirements. advances against gold ornaments. provision should be made only for the balance in excess of the amount guaranteed by these Corporations. Treatment of interest suspense account: Amounts held in Interest Suspense Account should not be reckoned as part of provisions. Advances covered by ECGC/DICGC guarantee In the case of advances guaranteed by DICGC/ECGC. while arriving at the provision required to be made for doubtful assets. 4 lakhs 50 percent 23 . IVPs.

2. 2. 1.75 lakhs (@ 50 percent of secured portion) Rs.25 lakhs Rs.00 lakhs Rs.50 lakhs Cover Rs.25 lakhs Advance covered by CGTSI guarantee In case the advance covered by CGTSI guarantee becomes non-performing. 1.25 lakhs (@ 100 percent of unsecured portion) Rs.Period for which the advance has remained doubtful More than 3 years remained doubtful Value of security held Rs.50 lakhs Rs. 0.) Provision required to be made Outstanding balance Less: Value of security held Unrealised balance Less: DICGC (50% of unrealisable balance) Net unsecured balance Provision for unsecured portion of advance Provision for secured portion of advance Total provision required to be made Rs. no provision need be made towards the guaranteed portion. 4. Two illustrative examples are given below: Example I 24 . 1.00 lakhs Rs. 1. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for non-performing advances.50 lakhs (excludes worth of Rs. 1.

10. 10.40. 1.00 lakh Less Realisable value of security Rs. 0.18.10.1.50 lakh Rs.00 lakh 25 .1. whichever is the least Realisable value of Security Balance outstanding Rs. 8. 75% of the amount outstanding or 75% of the unsecured amount or Rs.00 lakh Less Realisable value of security Rs. 6.Asset classification status: CGTSI Cover Doubtful – More than 3 years. 2.00 lakh Rs.75 lakh (@ 50%) Rs.50 lakh Rs.12 lakh ( 100%) Rs. 2.18. 2.12 lakh Example II Asset classification status CGTSI Cover Doubtful – More than 3 years. 75% of the amount outstanding or75% of the unsecured amount or Rs.75 lakh.75 lakh.12 lakh portion: Provision Required Secured portion Total provision required Rs.50 lakh Rs.50 lakh Unsecured amount Less CGTSI cover (75%) Rs.38 lakh Net unsecured and uncovered Rs. whichever is the least Realisable value of Security Balance outstanding Rs.2.87 lakh Unsecured & uncovered portion Rs.

5. Reserve for Exchange Rate Fluctuations Account (RERFA) When exchange rate movements of Indian rupee turn adverse. 30.00 lakh Rs.00 lakh (@ 50%) Rs.25 lakh portion: Provision Required Secured portion Total provision required Rs. In case such assets need to be revalued as per requirement of accounting practices or for any other requirement.10. the outstanding amount of foreign currency denominated a loan (where actual disbursement was made in Indian Rupee) which becomes overdue goes up correspondingly. 18.11. with its attendant implications of provisioning requirements.75 lakh Net unsecured and uncovered Rs. the corresponding provisions could be reversed. the following procedure may be adopted: 26 .Unsecured amount Less CGTSI cover (75%) Rs.25 lakh (100%) Rs.25 lakh Unsecured & uncovered portion Rs.00 lakh Rs. 16. 11. As and when the asset is taken-over by the taking-over institution.25 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. Such assets should not normally be revalued.11.

data of five private banks were collected to compare the non performing assets of banks . In crores…… Bank Axis bank terms DEPOSITS 200405 31712 05-06 40113 06-07 07-08 08-09 117374 09-10 141300 10-11 189237 58785 87626 INVESTMENT 15048 21527 26897 33705 46330 55974 77991 27 . banks should treat the full amount of the Revaluation Gain relating to the corresponding assets. on account of Foreign Exchange Fluctuation as provision against the particular assets.For understanding the non performing assets in gross NPA and net NPA were further bifurcated in percentage & deposit – investment – advances. Besides the provisioning requirement as per Asset Classification. ANALYSIS For the purpose of analysis and comparison between private sector banks . As on 31st of march 2010-11. if any. The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account. Deposit – Investment – Advances in rupees is the first in the analysis because due to these we can understand where the bank stands in the competitive market.

ADVANCES 15602 22314 36876 59661 81556 104340 142407 AX B IS ANK 200 000 100 500 100 000 500 00 0 2 0 -0 0 5 62 0 -0 0 7 82 0 -0 0 9 02 1 -1 0 4 52 0 -0 0 6 72 0 -0 0 8 92 0 -1 0 0 1 deposits investm ent a nces dva 28 .

On the same paralance investment has also grown in same fashion from FY 2004-11. it seems that bank has performed well and gathering deposits during this period.YES BANK DEPOSITES 6630 29104 82204 132732 161694 267986 459389 3949 INVESTMENT 7610 ADVANCES 13501 30731 50937 71170 102099 188288 24071 62897 94303 124031 221931 343636 This is performance graph of axis bank of deposits-investment –advances of seven consecutive financial years.there is continuous growth of deposits of axis bank (2004-11).from advances of FY 20004-05 ( 15602 crores) .As far as advances is concerned it has also grown in financial year 2010-11 (142407 crore)..increase of these factor shows that axis bank has well performing assets 29 .it is inferred from the above analysis table of the axis bank that .

increses of these factor shows that YES bank increases its assets 30 .YE BANK S 50000 0 40000 0 30000 0 20000 0 10000 0 0 20 04. It is inferred from the above analysis table of yes bank that there is a continuous growth of deposits of YES bank (2004-11) it seems bank performing well and gathering deposits during this period.As far as advances is concerned it has also grown in financial year 2010-11 (343636 crore).200 2009 2 8.2006 2 5 .200 .007.from advances of FY 20004-05 (7610 crores).0100 5 06 07 0 8 09 10 1 1 D epos its Inves ents tm Advances This is the performance graph of YES bank of deposits-investment–advances of seven consecutive financial years. On the same paralance investment is also has grown in same fashion from FY 2004-11.

In crores….. ICICI DEPOSITES 99818 165083 230510 244431 218347 202016 225602 INVESTMENT 50487 71547 91257 111454 103058 120892 134685 ADVANCES 91405 146163 195865 225616 218310 181205 216365 IC I B IC ANK 2 50000 2 00000 1 50000 1 00000 50000 0 2004 200 -05 5-06 20 06-07 2 007-0 2 8 008-0 2009 201 9 -10 0-11 depos its inves ent tm advances 31 .

This is performance graph of ICICI bank of deposits-investment–advances of seven consecutive financial years. it is inferred from the ever analysis table of ICICI bank.2009.. As far as advances is concerned it has also fluctuations in financial year 2010-11 ( 216365 crore). HDFC DEPOSITES 36354 55797 68298 100769 142812 167404 245950 INVESTMENT 19350 28394 30565 49394 58818 58607 60992 ADVANCES 25566 35061 46945 63427 98883 125831 145561 HF B D C ANK 250000 200000 150000 100000 50000 0 2004.from advances of FY 20004-05 (91405crores).2007.2006.201005 06 07 08 09 10 11 deposits investm ent a nces dva 32 .increses of these factor shows that ICICI bank increases its assets In crores…. There is ups and down in the deposits of icici bank (2004-11) it seems bank performing well and gathering deposits during this period.2008. On the same paralance investment is also fluctuating in same fashion from FY 200411.2005.

This is performance graph of HDFC bank of deposits-investment–advances of seven consecutive financial years.2005. There is nice growth in the deposits of hdfc bank (2004-11) it seems bank performing well and gathering deposits in this period. As far as advances is concerned it has also grown in financial year 2010-11 (145561 crore).increse of these factor shows that HDFC bank increases its assets. In crores…….from advances of FY 20004-05 ( 25566 crores) .201005 06 07 08 09 10 11 This is performance graph of INDUSLND bank of deposits-investment–advances of seven 33 . Induslnd DEPOSITES 13114 15006 17645 19037 22110 26710 34365 INVESTMENT 4069 5410 5892 6630 8084 10402 13551 ADVANCES 9000 9310 11084 15771 17645 20551 26166 IND L BANK US ND 35000 30000 25000 20000 15000 10000 5000 0 D P IT E OS S investm ent a nces dva 2004. On the same paralance investment is little fluctuation from FY 2004-11.2006.2007.2009.2008. it is inferred from the ever analysis table of HDFC bank.

50 0.31 0.61 2007-08 0.47 2.consecutive financial years. As far as advances is concerned it has also grown in financial year 2010-11 ( 26166crore).94 2.19 0 0 0 0.63 0.27 1.49 1.06 0.87 0.44 0.47 0. it is inferred from the ever analysis table of INDUSLND bank.71 BANK ICICI BANK YES BANK0 HDFC BANK 0.35 2009-10 0.09 0.03 0.33 0.26 In the graph below measurement of net npa of five banks have been tabulated in bar graph 34 .36 2008-09 0.96 1.75 2006-07 0.09 2.07 2005-06 0.36 2010-11 0.28 1.71 0. There is regular growth in the deposits of induslnd bank (2004-11) it seems bank performing well and gathering deposits in this period.43 0.14 0. On the same paralance investment has grown from FY 2004-11.03 2.from advances of FY2004-05 (9000crores) increse of these factor shows that INDUSLND bank increases its assets NET NPA IN % 2004-05 AXIS BANK INDUSLND 2.98 1.24 0.

5 2 1.5 1 0.2008. 2009-10 & 2010-11.007. axis & Induslnd bank has shown great efficiency in the FY.5 0 ICICI AX IS Y ES HDF C INDUS ND L 200 2005.NET NPA ( %) 3 2.200 201 9005 06 07 08 0 9 10 11 it is inferred from the above graph that. But icici bank still requires improvement in this. yes bank is having the least value of net npa it is followed by hdfc. 35 .20 2 406. showing also a great efficiency of reimbursement of their loans.

97 1.98 0. But again icici bank struggling to collect their funs .75 1.17 1.10 1.51 2006-07 0.01 5. axis bank now following the yes bank.05 1. Induslnd bank showing its efficiency in it.80 INDUSLND 2. 36 .in this yes bank is dominating all the banks .50 BANK ICICI BANK 4.75 2.but hdfc is slightly week under this part .68 1.13 1.30 2008-09 0.03 3.showing its efficiency .having high percentage of gross npa in comparison of other bank.08 2007-08 0.96 1.52 2010-11 0..97 2.GROSS NPA % 2004-05 YES BANK HDFC BANK AXIS BANK 0.27 g rossnpa% 7 6 5 4 3 2 1 0 20 4-05 200 0 5-06 2006 -07 2 007-0 20 8 08-09 2 -10 2010-11 009 yes icici ax is hdfc indus lnd Under this gross npa of banks being shown . under this there is similar kind of pattern going on which was in net npa .23 1.90 1.01 1.20 2005-06 1.43 1.50 3.83 2.20 0.00 1..32 2009-10 0.47 1.61 4.23 6.30 0.27 1.

 Willful Defaults : There are borrowers who are able to payback loans but are intentionally withdrawing it. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover.FACTORS FOR RISE IN NPAs:The banking sector has been facing the serious problems of the rising NPAs.  EXTERNAL FACTORS :--------------------------------- Ineffective recovery tribunal : The Govt. 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. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks.  Natural calamities : 37 . has set of numbers of recovery tribunals. their by reducing their profitability and liquidity. The NPAs in PSB are growing due to external as well as internal factors. which works for recovery of loans and advances.

 Change on Govt. day to day changing govt. Mainly ours farmers depends on rain fall for cropping. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans. policies : 38 . which covers a minimum label.This is the measure factor. lack of advance technology . which is creating alarming rise in NPAs of the PSBs. Thus the banks record the non recovered part as NPAs and has to make provision for it.  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. hence end up the fiscal with a reduced profit.  Industrial sickness : - Improper project handling . Thus the bank has to make large amount of provisions in order to compensate those loans. ineffective management . lack of adequate resources . every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. The banks recover the amount by selling of their assets.

Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs. iii.With every new govt. i.  INTERNAL FACTORS :---------------------------------  Defective Lending process : There are three cardinal principles of bank lending that have been followed by the commercial banks since long. Principles of safety :- 39 . Principles of safety Principle of liquidity Principles of profitability i. ii. banking sector gets new policies for its operation. 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.

All the branches of the bank should be computerized. Willingness to pay depends on: 1. which leads to poor credit collection. Honest 3. Capacity to pay b. Reputation of borrower The banker should. The repayment of loan depends upon the borrowers: a. Capacity to pay depends upon: 1. Proper MIS and financial accounting system is not implemented in the banks. market driven decisions on real time basis can not be taken.By safety it means that the borrower is in a position to repay the loan both principal and interest. Character 2.he should be a person of integrity and good character. Success in business b. thus NPA. 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 . 40 . Tangible assets 2.  Inappropriate technology : Due to inappropriate technology and management information system. Willingness to pay a.

From external credit rating agencies. Bank should analyze the profitability. he should analyze the purpose of the loan. viability. it should collect credit information of the borrowers from a. c. banks should grant loan for productive purpose only. Improper SWOT analysis : The improper strength. To ensure safety and liquidity. From bankers. opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty. 41 . Enquiry from market/segment of trade. • Purpose of the loan When bankers give loan. • • Banks should consider the borrowers own capital investment. weakness. business. • Analyze the balance sheet. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. industry. long term acceptability of the project while financing. and financial soundness and credit worthiness of the borrower. b. integrity.

Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. Safety 4. Transferability. Acceptability 3. If a new big customer meets misfortune or certain traders or industries affected adversely. Marketability 2. the overall position of the bank will not be affected. Poor credit appraisal system : Poor credit appraisal is another factor for the rise in NPAs.  Managerial deficiencies : The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the_ 1. 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. 42 . They should use good credit appraisal to decrease the NPAs. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”.

60lakhs). So NPA doesn’t affect current profit but also future stream of profit. The NPAs due to willful defaulters can be collected by regular visits. Impact of NPA  Profitability:NPA means booking of money in terms of bad asset. Another impact of reduction in profitability is low ROI (return on investment).77lakhs). The biggest defaulters of OSCB are the OTM (117. which may lead to loss of some long-term beneficial opportunity. which adversely affect current earning of bank. which occurred due to wrong choice of client.Like OSCB suffered loss due to the OTM Cuttack. 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.  Liquidity:43 . Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. and Orissa hand loom industries. and the handloom sector Orissa hand loom WCS ltd (2439.  Absence of regular industrial visit : - The irregularities in spot visit also increases the NPAs.

REASONS FOR NPA: Reasons can be divided in to two broad categories:A] Internal Factor B] External Factor [ A ] Internal Factors:Internal Factors are those.Money is getting blocked. which are internal to the bank and are controllable by banks. which would have given good returns. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities. • Poor lending decision: • Non-Compliance to lending norms: 44 . which is additional cost to the bank. It will lose it’s goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks . Credit loss:Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. Routine payments and dues.  Involvement of management:Time and efforts of management is another indirect cost which bank has to bear due to NPA. Now day’s banks have special employees to deal and handle NPAs. decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money.

• • • • • • • • • • • • Socio political pressure: Chang in industry environment: Endangers macroeconomic disturbances: Natural calamities Industrial sickness Diversion of funds and willful defaults Time/ cost overrun in project implementation Labour problems of borrowed firm Business failure Inefficient management Obsolete technology Product obsolete Early symptoms by which one can recognize a performing asset turning in to Nonperforming asset Four categories of early symptoms:--------------------------------------------------- ( 1 ) Financial: 45 .• Lack of post credit supervision: • Failure to appreciate good payers: • Excessive overdraft lending: • Non – Transparent accounting policy: [ B ] External Factors:External factors are those. which are external to banks they are not controllable by banks.

 External non-controllable factor like natural calamities in the city where borrower conduct his business.  Death of borrower. ( 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.  Irregularity of operations in the accounts.  Irregularity in installment.  Declining Current Ratio.  Non payment of wages.  Overdue receivables.  Stock statement not submitted on time. ( 4 ) Others:  Changes in Government policies.  Problem between partners.  Unpaid over due bills.  Frequent changes in plan.  Bouncing of cheque due to insufficient balance in the accounts. Non-payment of the very first installment in case of term loan. ( 3 ) Attitudinal Changes:  Use for personal comfort. 46 .  Avoidance of contact with bank.  While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company. stocks and shares by borrower.  Payment which does not cover the interest and principal amount of that installment.

In respect of totally 47 . by the time banks start their efforts to get involved in a revival process. is imperative. banks are convinced of a turnaround within a scheduled timeframe. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Preventive Measurement For NPA  Early Recognition of the Problem:Invariably. it’s too late to retrieve the situation. Competition in the market. Restructuring should be attempted where. after an objective assessment of the promoter’s intention. 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.both in terms of rehabilitation of the project and recovery of bank’s dues.

and help avert many accounts slipping into NPA category. has to be adequate in terms of extend of additional funding and relaxations etc. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.serious with no commitment or stake in revival is a challenge confronting bankers. so as to recover whatever is possible through legal means before the security position becomes worse. Base don 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. Timeliness and Adequacy of response:Timeliness Longer the delay in response. it is better to facilitate winding up/ selling of the unit earlier. The package of assistance may be flexible and bank may look at the exit option. books of account in order to ascertain real factors that contributed to sickness of the borrower. Time is a crucial element in any restructuring or rehabilitation activity. grater the injury to the account and the asset. and capability to achieve turnaround.Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level.  Identifying Borrowers with Genuine Intent:Identifying borrowers with genuine intent from those who are non. under the restructuring exercise.unviable units as decided by the bank. This will obviate the need to route the additional funding through the controlling offices in deserving cases. In this regard banks may consider having “Special Investigation” of all financial transaction or business transaction. The response decided on the basis of technoeconomic study and promoter’s commitment. banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. 48 . and for this purpose a special limit to such type of cases should be decided.

 Focus on Cash Flows:While financing.  Multiple Financing:- A. A proper techno.economic viability study must thus become the basis on which any future action can be considered. at the time of restructuring the banks may not be guided by the conventional fund flow analysis only. But this may not be the case all the time. During the exercise for assessment of viability and restructuring. where the unit is still working. 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. given the probability of success/failure. viability study or investigative audit should be done – it will be useful to have consultant appointed as early as possible to examine this aspect. the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers 49 .  Management Effectiveness:The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. which could yield a potentially misleading picture. In some default cases. 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. 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. 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. B.

for fear of getting their cash flows forfeited). So it is possible that the letter categories of lenders may be willing to exit.once they default. which is not part of the consortium. even a t a cost – by a discounted settlement of the exposure. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. and ensure that such cash flows are used for working capital purposes. any plan for restructuring/rehabilitation may take this aspect into account. In a forum of lenders. Under this system. 50 . the priority of each lender will be different. The Credit Information Bureau of India Ltd. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. Toward this end. Therefore. D. C. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. A bank. While one set of lenders may be willing to wait for a longer time to recover its dues. there should be regular flow of information among consortium members. banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements. another lender may have a much shorter timeframe in mind. may not be allowed to offer credit facilities to such defaulting clients.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.

51 .

Tools for recovery of NPAs Credit Default Inability to Pay Rephasement of Repayment Period Willful default Unviable Viable Rehabilitation Compromise Lok Adalat Debt Recovery Tribunals Consortium Finance Sole Banker Asset Reconstruction Securitization Act Corporate Debt Restructuring Fresh Issue of Term Loan 52 .

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. with outstanding balance of Rs. The progress through this channel is expected to pick up in the coming years. Legal ways and means are there to over come and manage NPAs. We will look into each one of it. 53 . one must come out of it or it should be managed in most efficient manner.Conversion into WCTL Fresh WC Limit Once NPA occurred.  Willful Default :A] Lok Adalat and Debt Recovery Tribunal B] Securitization Act C] Asset Reconstruction Lok Adalat: Lok Adalat institutions help banks to settle disputes involving account in “doubtful” and “loss” category. This mechanism has proved to be quite effective for speedy justice and recovery of small loans. 10 lakh and above.

therefore. to ensure proper asset classification in their respective books. The banks participating in the consortium should. 54 . management. The DRT should empowered to sell asset of the debtor companies and forward the proceed to the winding – up court for distribution among the lenders Inability to Pay Consortium arrangements: arrangements: Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Non observation of any order passed by the tribunal should amount to contempt of court. have not been able make much impact on loan recovery due to variety of reasons like inadequate number. the account will be treated as not serviced in the books of the other member banks and therefore. Debt Recovery Tribunals(DRT): The recovery of debts due to banks and financial institution passed in March 2000 has helped in strengthening the function of DRTs. the DRT should have right to initiate contempt proceedings. DRTs which have been set up by the Government to facilitate speedy recovery by banks/DFIs. 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. penal provision for disobedience of tribunal’s order or for breach of any terms of order and appointment of receiver with power of realization. Provision for placement of more than one recovery officer. arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery. 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. lack of infrastructure. be treated as NPA. under staffing and frequent adjournment of cases. power to attach defendant’s property/assets before judgment. It is essential that DRT mechanism is strengthened and vested with a proper enforcement mechanism to enforce their orders.

of putting in place institutional mechanism for restructuring of corporate debt and need for a similar mechanism in India. delay in agreement amongst different lending institutions often comes in the way of such endeavours. Thailand. sometimes corporate find themselves in financial difficulty because of factors beyond their control and also due to certain internal reasons. 55 . a Corporate Debt Restructuring System has been evolved. timely support through restructuring in genuine cases is called for. Korea. DRT and other legal proceedings. 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 through an orderly and coordinated restructuring programme. Based on the experience in other countries like the U. In particular.. For the revival of the corporate as well as for the safety of the money lent by the banks and FIs.Corporate debt Restructuring (CDR): Background In spite of their best efforts and intentions. outside the purview of BIFR. for the benefit of all concerned. etc. However. as under : Objective The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring of the corporate debts of viable entities facing problems.K.

Punjab National Bank. Chairman. on behalf of the Standing Forum.Structure: CDR system in the country will have a three-tier structure: (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. Reserve Bank of India as well as Chairmen and Managing Directors of all banks and financial institutions participating as permanent members in the system. All financial institutions and banks should participate in the system in their own interest. which will lay down policies and guidelines. 56 . ICICI. However. Industrial Credit & Investment Corporation of India Limited. State Bank of India. The Forum will elect its Chairman for a period of one year and the principle of rotation will be followed in the subsequent years. The CDR Standing Forum shall comprise Chairman & Managing Director. SBI. Indian Banks Association and a representative of Reserve Bank of India. Bank of India. the Forum may decide to have a Working Chairman as a whole-time officer to guide and carry out the decisions of the CDR Standing Forum. The Core Group will consist of Chief Executives of IDBI. guide and monitor the progress of corporate debt restructuring. Chairman. 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. CDR Standing Forum will be a self-empowered body. Managing Director. Industrial Development Bank of India. Indian Banks Association and Executive Director. Bank of Baroda. 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.

nominates a panel of two or three EDs. After the Empowered Group decides that 57 . duly authorized by its Board. Where. ICICI Limited and SBI as standing members. the CDR Empowered Group and CDR Cell (described in following paragraphs) shall be housed in IDBI. however. In order to make the CDR Empowered Group effective and broad based and operate efficiently and smoothly. The sharing pattern shall be as determined by the Standing Forum. 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.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 Empowered Group will consider the preliminary report of all cases of requests of restructuring. submitted to it by the CDR Cell. in addition to ED level representatives of financial institutions and banks who have an exposure to the concerned company. All financial institutions and banks shall share the administrative and other costs. a bank / financial institution has only one Executive Director. The CDR Standing Forum. it would have to be ensured that each financial institution and bank. as participants of the CDR system. CDR Empowered Group and CDR Cell: The individual cases of corporate debt restructuring shall be decided by the CDR Empowered Group. made towards debt restructuring. consisting of ED level representatives of IDBI. It can also review any individual decisions of the CDR Empowered Group and CDR Cell. The level of representation of banks/ financial institutions on the CDR Empowered Group should be at a sufficiently senior level to ensure that concerned bank / FI abides by the necessary commitments including sacrifices. one of whom will participate in a specific meeting of the Empowered Group dealing with individual restructuring cases. the panel may consist of senior officials.

experts to be engaged from outside. The decisions of the CDR Empowered Group shall be final and action-reference point. the creditors would then be free to take necessary steps for immediate recovery of dues and / or liquidation or winding up of the company. restructuring is not found viable. collectively or individually. by calling for proposed rehabilitation plan and other information and put up the matter before the CDR Empowered Group. the detailed restructuring package will be worked out by the CDR Cell in conjunction with the Lead Institution. if so. The CDR Empowered Group would be mandated to look into each case of debt restructuring. CDR Cell will be constituted in IDBI. Mumbai and adequate members of staff for the Cell will be deputed from banks and financial institutions. within one month to decide whether rehabilitation is prima facie feasible. If. CDR Cell: The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all their functions. examine the viability and rehabilitation potential of the Company and approve the restructuring package within a specified time frame of 90 days. authorising them to take decisions on behalf of their organization. the CDR Cell will proceed to prepare detailed Rehabilitation Plan with the help of lenders and if necessary.restructuring of the company is prima-facie feasible and the enterprise is potentially viable in terms of the policies and guidelines evolved by Standing Forum. If restructuring of debt is found viable and feasible and accepted by the Empowered Group. however. regarding restructuring of debts of individual corporate. The CDR Cell will make the initial scrutiny of the proposals received from borrowers / lenders. the lenders may start action for recovery of their dues. To begin with. 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. the company would be put on the restructuring mode. The CDR Cell may also 58 . or at best 180 days of reference to the Empowered Group. If not found prima facie feasible.

The Empowered Group can approve or suggest modifications. to work out a preliminary restructuring plan in consultation with other stakeholders and submit to the CDR Cell within one month. The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs.50 lakh each and contribution from other institutions and banks at the rate of Rs. NPA or being in default for a specified period before reference to the CDR Group. as an interim measure.The scheme will not apply to accounts involving only one financial institution or one bank. All references for corporate debt restructuring by lenders or borrowers will be made to the CDR Cell.5 lakh each. In no case. that a final decision must be taken within a total period of 90 days. It shall be the responsibility of the lead institution / major stakeholder to the corporate. This approach would provide the necessary flexibility and facilitate timely intervention for debt restructuring. so. The CDR system will be applicable only to standard and sub-standard accounts. Prescribing any milestone(s) may not be necessary. CDR mechanism will be a voluntary system based on debtor-creditor agreement and inter-creditor agreement. permission for corporate debt restructuring will be made available by RBI on the basis of specific recommendation of CDR "Core-Group". There would be no requirement of the account / company being sick. however. if a minimum of 75 per cent (by value) of the lenders constituting banks and FIs consent for CDR. However. potentially viable cases of NPAs will get priority. However. the requests of any 59 .20 crore and above by banks and institutions. 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. for sufficient reasons the period can be extended maximum upto 180 days from the date of reference to the CDR Cell.take outside professional help. The CDR Cell will prepare the restructuring plan in terms of the general policies and guidelines approved by the CDR Standing Forum and place for the consideration of the Empowered Group within 30 days for decision. irrespective of differences in asset classification status in banks/ financial institutions. since the debt restructuring exercise is being triggered by banks and financial institutions or with their consent. However. Other features: CDR will be a Non-statutory mechanism.

the creditors shall agree that 60 . or 180 days by both sides. or (ii) by the concerned corporate.corporate indulging in wilful default or misfeasance will be considered for restructuring under CDR. this would be necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention judicial or otherwise. 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. with necessary enforcement and penal clauses. Stand-Still Clause One of the most important elements of Debtor-Creditor Agreement would be 'stand still' agreement binding for 90 days. The debtors shall have to accede to the DCA. 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. either at the time of original loan documentation (for future cases) or at the time of reference to Corporate Debt Restructuring Cell. to operate the System through laid-down policies and guidelines. The Inter-Creditors Agreement would be a legally binding agreement amongst the secured creditors. wherein the creditors would commit themselves to abide by the various elements of CDR system. Similarly. 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. all participants in the CDR mechanism through their membership of the Standing Forum shall have to enter into a legally binding agreement. Further . with necessary enforcement and penal clauses. Under this clause.

 After commencement of commercial production but before the asset has been classified as sub-standard. BC. subjected to restructuring under CDR.  After commencement of commercial production and the asset has been classified as substandard. Restructuring of corporate debts under CDR could take place in the following stages:  Before commencement of commercial production.if 75% of secured creditors by value. 98 / 21.048 / 2000-01 dated March 30. agree to a debt restructuring package. the same would be binding on the remaining secured creditors.04. would be governed by the following norms: Treatment of standard accounts restructured under CDR: 61 . BP. The prudential treatment of the accounts. Accounting treatment for restructured accounts The accounting treatment of accounts restructured under CDR would be governed by the prudential norms indicated in circular DBOD. 2001.

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.  In case there is a sacrifice involved in the amount of interest in present value terms. current PLR + the appropriate credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package. is either written off or provision is made to the extent of the sacrifice involved. discounted on the same basis. Treatment of sub-standard accounts restructured under CDR A rescheduling of the instalments of principal alone. current PLR + the appropriate credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package. For the purpose.. For the purpose. measured in present value terms.e. if any. in the element of interest. 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. 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. 62 .  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. measured in present value terms. A rescheduling of the instalments of principal alone. provided the loan / credit facility is fully secured. would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period. is either written off or provision is made to the extent of the sacrifice involved. the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. provided the loan / credit facility is fully secured. if any. 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 substandard category.e. in the element of interest. as at (b) above. discounted on the same basis.

etc. The sub-standard accounts at (ii) (a).e. i. the sub-standard asset will not deteriorate in its classification if satisfactory performance of the account is demonstrated during the period. During this one-year period. would be eligible to be upgraded to the standard category only after the specified period. a period of one year after the date when first payment of interest or of principal. The asset classification under CDR would continue to be bank-specific based on record of recovery of each bank. net of the amount provided for the sacrifice in the interest amount in present value terms as aforesaid. the satisfactory performance during the one year period is not evidenced. The amount of provision made earlier.In case there is a sacrifice involved in the amount of interest in present value terms. as at (b) above. the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. however. which have been subjected to restructuring. In case. the asset should continue to be treated as sub-standard. falls due.. whether in respect of principal instalment or interest amount. Restructuring / Rescheduling of Loans 63 . as per the existing prudential norms applicable to banks. whichever is earlier. could also be reversed after the one-year period. by whatever modality. Even in cases where the sacrifice is by way of write off of the past interest dues. subject to satisfactory performance during the period. (b) and (c) above. the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved.

with or without sacrifice..A standard asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production should be classified as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. Following representations from banks that the foregoing stipulations deter the banks from restructuring of standard and sub-standard loan assets even though the modification of terms might not jeopardise the assurance of repayment of dues from the borrower. rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms. In the context of restructuring of the accounts. In the case of sub-standard and doubtful assets also. the norms relating to restructuring of standard and sub-standard assets were reviewed in March 2001. as part of the restructuring package evolved. asset has been Treatment of Restructured Standard Accounts: 64 .  After commencement of commercial production but before the classified as sub standard. of principal and/or of interest could take place.  After commencement of commercial production and after the asset has been classified as sub standard. In each of the foregoing three stages. can be identified:  Before commencement of commercial production. the rescheduling. etc. the following stages at which the restructuring / rescheduling / renegotiation of the terms of loan agreement could take place.

would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period. 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. if any. is either written off or provision is made to the extent of the sacrifice involved.. if any. as at (b) above. In case there is a sacrifice involved in the amount of interest in present value terms. measured in present value terms. 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.e. For the purpose. measured in present value terms. current PLR + the appropriate credit risk premium for the borrower-category) and compared 65 .e. in the element of interest. discounted on the same basis. current PLR+ the appropriate credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package. provided the loan/credit facility is fully secured. is either written off or provision is made to the extent of the sacrifice involved.. For the purpose. Treatment of restructured sub-standard accounts: A rescheduling of the instalments of principal alone. 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. 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. 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. 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. in the element of interest.

would be eligible to be upgraded to the standard category only after the specified period i. could also be reversed after the one year period. falls due. whichever is earlier. During this one-year period. Up gradation of restructured accounts: The sub-standard accounts which have been subjected to restructuring etc. In case. subject to satisfactory performance during the period.with the present value of the dues expected to be received under the restructuring package. however.. as at (b) above. In case there is a sacrifice involved in the amount of interest in present value terms. The amount of provision made earlier. a period of one year after the date when first payment of interest or of principal. discounted on the same basis. whether in respect of principal instalment or interest amount. net of the amount provided for the sacrifice in the interest amount in present value terms as aforesaid. by whatever modality. the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule. the sub-standard asset will not deteriorate in its classification if satisfactory performance of the account is demonstrated during the period. Even in cases where the sacrifice is by way of write off of the past interest dues. the satisfactory performance during the one-year period is not evidenced. the asset should continue to be treated as sub-standard. General: 66 . the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved..e.

regardless of whether these are or are not subjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement. the amount of funded interest is recognised as income. of the promoter/ others. time and cost escalation etc. any funding of interest in respect of NPAs. which are being restructured/ rescheduled. while the accounts of the project may be classified as a standard asset. a provision for an equal amount should also be made simultaneously. In other words.These instructions would be applicable to all type of credit facilities including working capital limits. As trading involves only buying and selling of commodities and the problems associated with manufacturing units such as bottleneck in commercial production. Consequently. While assessing the extent of security cover available to the credit facilities. The delinquency norm would become 90 days with effect from 31 March 2004. provided they are fully covered by tangible securities. should be done strictly on cash basis. banks. are not applicable to them. if recognised as income. these guidelines should not be applied to restructuring/ rescheduling of credit facilities extended to traders. Consequently. As regards the regulatory treatment of income recognised as ‘funded interest’ and ‘conversion into equity. only on realisation and not if the amount of interest overdue has been funded. In other words. banks shall recognise income in such accounts only on realisation on cash basis if the asset has otherwise become ‘non performing’ as per the extant delinquency norm of 180 days. Income recognition There will be no change in the existing instructions on income recognition. extended to industrial units. collateral security would also be reckoned. debentures or any other instrument’ banks should adopt the following:  Funded Interest: Income recognition in respect of the NPAs. If. 67 . should be fully provided for. banks should not recognise income on accrual basis in respect of the projects even though the asset is classified as a standard asset if the asset is a "non performing asset" in terms of the extant instructions. however. provided such collateral is a tangible security properly charged to the bank and is not in the intangible form like guarantee etc. 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). which have wrongly recognised income in the past.

In case of conversion of principal and /or interest in respect of NPAs into debentures. ab initio. Subject to the above. interest income can be recognised at market value of equity. If the amount of interest dues is converted into equity or any other instrument. Such equity must thereafter be classified in the "available for sale" category and valued at lower of cost or market value. Provisioning 68 . if the conversion of interest is into equity. This norm would also apply to zero coupon bonds or other instruments which seek to defer the liability of the issuer. which is converted into debentures or any other fixed maturity instrument. full provision should be made for the amount of income so recognised to offset the effect of such income recognition. not exceeding the amount of interest converted to equity. Conversion into equity. the equity shares or other instruments arising from conversion of the principal amount of loan would also be subject to the usual prudential valuation norms as applicable to such instruments. and income is recognised in consequence. as on the date of conversion. which is quoted. On such debentures. The income in respect of unrealised interest. such debentures should be treated as NPA. should be recognised only on redemption of such instrument. debentures or any other instrument: The amount outstanding converted into other instruments would normally comprise principal and the interest components. However. income should be recognised only on realisation basis. 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. in the same asset classification as was applicable to loan just before conversion and provision made as per norms. as per the investment valuation norms.

the branch should furnish evidence to show that renewal/ review of credit limits is already on and would be completed soon. The outstanding in the account based on drawing power calculated from stock statements older than three months. delay beyond six months is not considered desirable as a general discipline. However.While there will be no change in the extant norms on provisioning for NPAs. 69 . Hence. banks which are already holding provisions against some of the accounts. an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA. etc. would be deemed as irregular. non-submission of stock statements and non-renewal of the limits on the due date. In any case. Drawing power is required to be arrived at based on the stock statement which is current. since current assets are first appropriated in times of distress.  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. 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. shall continue to hold the provisions and shall not reverse the same. 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. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines:  Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets. Special Cases Accounts with temporary deficiencies: The classification of an asset as NPA should be based on the record of recovery. balance outstanding exceeding the limit temporarily. considering the difficulties of large borrowers. which may now be classified as ‘standard’. stock statements relied upon by the banks for determining drawing power should not be older than three months. In case of constraints such as non-availability of financial statements and other data from the borrowers.

Accounts regularised near about the balance sheet date: The asset classification of borrower accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. the existence of security should be 70 . asset classification and provisioning. Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection. 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. If the realisable value of the security. Accounts where there is erosion in the value of security A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightaway classified as doubtful or loss asset as appropriate. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. Therefore. If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account. the account should be deemed as a NPA. as the case may be. Where the account indicates inherent weakness on the basis of the data available. as assessed by the bank/ approved values/ RBI is less than 10 per cent of the outstanding in the borrower accounts. the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition. Asset Classification to be borrower-wise and not facility-wise It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. 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. In other genuine cases.

In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal. NSCs. IVPs. NSCs eligible for surrender. 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. The other direct loans & advances. They become overdue after due date for payment of interest. granted by the bank to the member borrower of a PACS/ FSS outside the on-lending arrangement will become NPA even if one of the credit facilities granted to the same borrower becomes NPA. KVP/IVP. if any. as the case may be. It may be either written off or fully provided for by the bank. KVPs and life policies need not be treated as NPAs.ignored and the asset should be straightaway classified as loss asset. 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 71 . payment of interest becomes 'due' only after the moratorium or gestation period is over. government securities and all other securities are not covered by this exemption. Advances against Term Deposits. interest need not be considered as overdue from the first quarter onwards. after it has become due will be classified as NPA and not all the credit facilities sanctioned to a PACS/ FSS. with reference to the date of debit of interest. only that particular credit facility granted to PACS/ FSS which is in default for a period of two harvest seasons (not exceeding two half years)/two quarters. if uncollected. such amounts of interest do not become overdue and hence NPA. Advances against gold ornaments. Therefore. etc: Advances against term deposits. 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.

PLFS. Where natural calamities impair the repaying capacity of agricultural borrowers.01/ 2001. In respect of agricultural loans. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income.01.98 and RPCD.128/05.2 (viii)(b)(1) of Master Circular on lending to priority sector No.1.BC.98. 1.02/97-98 dated 20. is the 180 days delinquency norm.04. An extract of the list of these items is furnished in the Annexure II. With effect from 1st April 2000. 12/04. PLAN. Government guaranteed advances: The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked.BC.1.PLFS. banks may decide on their own as a relief measure . In such cases of conversion or re-schedulement. The above norms should be made applicable to all direct agricultural advances as listed at items 1.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. and the sanctioning of fresh short-term loan.No. RPCD.09.conversion of the short-term production loan into a term loan or re-schedulement of the repayment period.2 (viii)(a)(1) and 1.1. BC. 1. the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. such an advance should be treated as NPA. other than those specified above. advances sanctioned against State 72 .07.9/05.1.06.2 (i) to (vii). The asset classification of these loans would thereafter be governed by the revised terms & conditions and would be treated as NPA if interest and/or instalment of principal remains unpaid.04/98-99 dated 21.2002 dated 1 August 2001. subject to various guidelines contained in RBI circulars RPCD. for two harvest seasons but for a period not exceeding two half years. identification of NPAs would be done on the same basis as non agricultural advances which. at present.No.

The norms of asset classification will have to be followed by the concerned bank/financial institution in whose books the account stands as balance sheet item as on the relevant date. it should be classified accordingly. The lending institution should not recognise income on accrual basis and account for the same only when it is paid by the borrower/ taking over institution (if the arrangement so provides). As and when the asset is taken over by the taking over institution. the taking over institution. EXIM Bank will pay the guaranteed 73 .Government guarantees should be classified as NPA in the normal course. on taking over such assets. 2001 the period of default is revised as more than 180 days. EXIM Bank has introduced a guarantee-cumrefinance programme whereby. the possibility of a default in the meantime cannot be ruled out. in the event of default. 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. The lending institution should also make provisions against any asset turning into NPA pending its take over by taking over institution. Take-out Finance: Takeout finance is the product emerging in the context of the funding of long-term infrastructure projects. If the lending institution observes that the asset has turned NPA on the basis of the record of recovery. the institution/the bank financing infrastructure projects will have an arrangement with any financial institution for transferring to the latter the outstanding in respect of such financing in their books on a pre-determined basis. Under this arrangement. the corresponding provisions could be reversed. In view of the time-lag involved in taking-over. should make provisions treating the account as NPA from the actual date of it becoming NPA even though the account was not in its books as on that date. However. if the guarantee is invoked and remains in default for more than two quarters. With effect from March 31.

While the existing credit facilities sanctioned to a unit under rehabilitation packages approved by BIFR/term lending institutions will continue to be classified as sub-standard or doubtful as the case may be. Arcil was incorporated as a public limited company on February 11. In such cases. ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come together to set-up the first ARC. 2002 74 . 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. in respect of additional facilities sanctioned under the rehabilitation packages.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. the advance may not be treated as a non-performing asset for asset classification and provisioning purposes. State Bank of India (SBI). namely. 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. UN embargo. Accordingly. etc. strife. Export Project Finance: In respect of export project finance. Advances under rehabilitation approved by BIFR/ TLI: Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been re-negotiated unless the package of re-negotiated terms has worked satisfactorily for a period of one year. there could be instances where the actual importer has paid the dues to the bank abroad but the bank in turn is unable to remit the amount due to political developments such as war. the Income Recognition. to the extent payment has been received from the EXIM Bank. ROLE OF ARCIL :This empowerment encouraged the three major players in Indian banking system. but the importer's country is not allowing the funds to be remitted due to political or other reasons. Asset Classification norms will become applicable after a period of one year from the date of disbursement.

In pursuance of Section 3 of the Securitization Act 2002. 2003. provides relief to the banking system by managing NPAs and help them concentrate on core banking activities thereby enhancing shareholders value. 2003. • Unlocking capital for the banking system and the economy The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of lenders and thereby recycling capital. • 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 is also a "financial institution" within the meaning of Section 2 (h) (ia) of the Recovery of Debts due to Banks and Financial Institutions Act. wherever applicable under the provision of the Securitisation Act. Arcil is the first ARC in the country to commence business of resolution of non-performing assets (NPAs) upon acquisition from Indian banks and financial institutions. This has initiated creation of a secondary market of distressed assets in the country besides hastening their resolution. Arcil thus.and obtained its certificate of commencement of business on May 7. As the first ARC. 2002. followed by showcasing them to prospective buyers. it holds a certificate of registration dated August 29. Arcil has played a pioneering role in setting standards for the industry in India. 1993 (the "DRT Act"). Arcil has 75 . • Creating a vibrant market for distressed debt assets / securities in India offer ingatrading platform for Lenders Arcil has made successful efforts in funneling investment from both from domestic and international players for funding these acquisitions of distressed assets. issued by the Reserve Bank of India (RBI) and operates under powers conferred under the Securitization Act. Arcil has put in place a structure aimed at outsourcing the various sub-functions of resolution to specialized agencies. 2002. The efforts of Arcil would lead the country’s distressed debt market to international standards.

b) Illiquidity constraints bank in paying depositors . Bad investment ends up in misallocation of capital. Early symptoms by which one can recognize a performing asset turning in to Non-performing asset Four categories of early symptoms:- 76 . This spill over effect can channelize through liquidity or bank insolvency: a) When many borrowers fail to pay interest. labour and natural resources. and by extension.also encourage. This can jam payment across the country. Non performing asset may spill over the banking system and contract the money stock. which hamper economic growth. Owners do not receive a market return on their capital . Depositors do not receive a market return on saving. 3. Non performing loans epitomize bad investment. to failed projects. which may lead to economic contraction. depositors loose their assets or uninsured balance. They misallocate credit from good projects. PROBLEMS DUE TO NPA 1. if the banks fails. lower deposit rates and higher lending rates repress saving and financial market. banks may experience liquidity shortage. 4. In modern times this may affect a broad pool of shareholders. 2.c) Undercapitalized banks exceeds the banks capital base. groomed and developed many such agencies to enhance its capacity in line with the growth of its activity.in the worst case. Banks redistribute losses to other borrowers by charging higher interest rates. owners loose their assets. which do not receive funding. In the worst case if the bank fails.

 Declining Current Ratio.  External non-controllable factor like natural calamities in the city where borrower conduct his business. ( 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.  Non payment of wages.--------------------------------------------------- ( 1 ) Financial:  Non-payment of the very first installment in case of term loan.  While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company. ( 3 ) Attitudinal Changes:  Use for personal comfort.  Avoidance of contact with bank.  Stock statement not submitted on time.  Bouncing of cheque due to insufficient balance in the accounts.  Irregularity of operations in the accounts.  Frequent changes in plan. stocks and shares by borrower.  Unpaid over due bills.  Irregularity in installment. 77 .  Overdue receivables.  Payment which does not cover the interest and principal amount of that installment.

( 4 ) Others:  Changes in Government policies. Findings 78 .  Competition in the market. Problem between partners.  Death of borrower.

Net NPA : induslnd bank has highest net NPA figure and YES Bank has lowest in comparison Conclusions 79 . second is icici Bank and induslnd Bank has least figures. in private sector yes bank is the highest deposit-investment-advances figures in rupees crore.As at end of march 2010-11. Gross And Net NPA : In private sector banks yes bank having the least value and icici Bank is having the maximum value of npa.

 There are so many preventive measures available those can be adopted to stop an Asset or A/C becoming NPA. 80 . the practical operations as related to NPAs are adopted by the banks are not learned.  ICICI is better in all terms than others instead of capital Adequacy.  There are some certain guidelines made by RBI for NPAs which are adopted by banks. Limitations of the study  The data collected by me was not sufficient for report studying.  I haven’t got enough time to study my report so that becomes the cause of limitation in the study.  Since my study is based upon Secondary data. NPAs represent high level of risk & low level of credit appraisal.  The solutions are not applicable to every bank.

 Banks should try their best to recover NPAs.e.  All Banks should make good provisioning policy.  The problem should be identified very early so that companies can try their best to stop an asset or A/C becoming NPA. 81 .Suggestions  The credit should be backed up by securitization. and what will be their possible future growth in concerned to financial and operational performance.  Banks should evaluate the SWOT analysis of the borrowing companies i.  The credit rating agency should regularly evaluate the financial condition of the clients.  Timely check out should be adopted.  Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility. how they would face the environmental threats and opportunities with the use of their strength and weakness.  Credit officer should focus upon cash flow.  Banks should create effectiveness in Management.

in/ -www.rtiindia./management-of-non-performingassets-in-banking-system -www.htm -bankreport..org/stable/44065 82 ...123eng..com/3329/nonperforming_asset www.banknetindia.com/non-performing-assets.org/wiki/Non-performing_asset -www.com/.BIBLIOGRAPHY Websites -wikipedia..jstor. -Annual reports of private banks from 2004-05 to 2010-11.com › .org.org/. › CAT / MBA INDIA Forum -www. -www./49877-information-non-performing-assetsbanks.allbankingsolutions.rbi.com/banking/0448. www.investorwords.skylinecollege..