Project Fo Non Performing Asset

A PROJECT REPORT
ON
Comparative Analysis on Non Performing Assets of Private And Public Sector Ban s
SUBMITTED IN PARTIAL FULFILLMENT OF REQUIRMENT OF PG PROGRAMME
Session! "#$"%"#$&
Supervised by by Prof' Smriti Sood JatinC(aud(ary )niversity business sc(ool umar

[Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh]
Submitted
*ano+
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Pan+ab university umar c(andigar(
San+eev , as Sa(ota
ACKN !"#$%#&#N'
!ith a dee( sense o) gratitude *e e+(ress our than,s to all those *ho have been instru-ental in the develo(-ent o) the (roject re(ort. !e are also grate)ul to University Business School, Panjab University, Chandigarh *ho gave us a valuable o((ortunity o) involving us in real business (roject. !e are greatly than,)ul to Prof' Smriti Sood *hose (ositive attitude, guidance and )aith in our ability s(urred us to (er)or- *ell. !e are also indebted to all Ban, -anagers, )riends and associates )or their valuable )eedbac,, sti-ulated suggestions and over*hel-ing su((ort *ithout *hich the (roject *ould not have been a success.
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CERT-.-CATE
!e here by declare that the (roject re(ort entitled CO*PARAT-,E ANA/0S-S ON NON PER.OR*-N1 ASSETS O. PR-,ATE AN2 P)B/-C SECTOR BAN3S sub-itted in (artial )ul)ill-ent o) the re0uire-ents )or the degree o) &asters o) Business Ad-inistration to )niversity Business Sc(ool4 Pan+ab )niversity4C(andigar(4 -ndia4 are our original *or, and not sub-itted )or the a*ard o) any other degree, di(lo-a, )ello*shi(, or any other si-ilar title or (ri1es.
NA*E S-1NAT)RE Jatin C(aud(ary *ano+ umar San+eev umar , as Sa(ota

2ate! Place! [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 2
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Table of Contents
'able o) Contents.....................................................................................................................4 #+ecutive Su--ary.................................................................................................................5 bjectives6...........................................................................................................................5 7esults6................................................................................................................................8 Conclusion6..........................................................................................................................8 7eco--endations6..................................................................................................................8 7#S#A7C9 &#'9 $ " %:............................................................................................; 'y(e o) 7esearch.................................................................................................................; Sco(e o) the Study...............................................................................................................; Sa-(ling (lan......................................................................................................................; ur objectives......................................................................................................................; Source o) data collection.....................................................................................................< Preventive &easure-ent =or NPA ...................................................................................45 'ools )or recovery o) NPAs...........................................................................................5>
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E5ecutive Summary
'he accu-ulation o) huge non?(er)or-ing assets in ban,s has assu-ed great i-(ortance. 'he de(th o) the (roble- o) bad debts *as )irst reali1ed only in early 1<<>s. 'he -agnitude o) NPAs in ban,s and )inancial institutions is over 7s.1,4>,>>> crores. !hile gross NPA re)lects the 0uality o) the loans -ade by ban,s, net NPA sho*s the actual burden o) ban,s. No* it is increasingly evident that the -ajor de)aulters are the big borro*ers co-ing )ro- the non?(riority sector. 'he ban,s and )inancial institutions have to ta,e the initiative to reduce NPAs in a ti-e bound strategic a((roach. Public sector ban,s )igure (ro-inently in the debate not only because they do-inate the ban,ing industries, but also since they have -uch larger NPAs co-(ared *ith the (rivate sector ban,s. 'his raises a concern in the industry and acade-ia because it is generally )elt that NPAs reduce the (ro)itability o) a ban,s, *ea,en its )inancial health and erode its solvency. =or the recovery o) NPAs a broad )ra-e*or, has evolved )or the -anage-ent o) NPAs under *hich several o(tions are (rovided )or debt recovery and restructuring. Ban,s and =@s have the )reedo- to design and i-(le-ent their o*n (olicies )or recovery and *rite?o)) incor(orating co-(ro-ise and negotiated settle-ents.
Objectives:
'he basic idea behind underta,ing the %rand Project on NPA is to6 1. 'o ,no* the conce(t o) Non Per)or-ing Assets and various tools to -anage NPAs via theoretical analysis. /. 'o co-(are level o) NPAs in (ublic and (rivate sector ban,s and analy1e their )inancial (er)or-ance at di))erent level o) NPAs via co-(arative analysis. 2. 'o do a co-(arative analysis o) NPAs in (riority and non?(riority lending by (ublic and (rivate sector ban,s. 3. 'o do a ratio and trend analysis o) NPAs level in (ublic and (rivate sector ban,s. [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 5
Results: Co clusio : Recommendations!
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RESEARC6 *ET6O2O/O10
T!"e o# Rese$%c&
T(e researc( met(odology adopted for carrying out t(e study 7ere
@n this (roject 2escriptive researc( met(odologies *ere use. At the )irst stage theoretical study is atte-(ted. At the second stage 9istorical study is atte-(ted. At the 'hird stage Co-(arative study o) NPA is underta,en.
Sco"e o# t&e Stu'!

Conce(t o) Non Per)or-ing Asset %uidelines @-(act o) NPAs 7easons )or NPAs Preventive &easures 'ools to -anage NPAs
S$("li ) "l$
'o (re(are this Project *e too, )ive ban,s )ro- (ublic sector as *ell as )ive ban,s )ro- (rivate sector.
Ou% objectives
'he basic idea behind underta,ing the %rand Project on NPA is to6 1. 'o ,no* the conce(t o) Non Per)or-ing Assets and various tools to -anage NPAs via theoretical analysis. /. 'o co-(are level o) NPAs in (ublic and (rivate sector ban,s and analy1e their )inancial (er)or-ance at di))erent level o) NPAs via co-(arative analysis. 2. 'o do a co-(arative analysis o) NPAs in (riority and non?(riority lending by (ublic and (rivate sector ban,s. [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page ;
3. 'o do a ratio and trend analysis o) NPAs level in (ublic and (rivate sector ban,s.
Sou%ce o# '$t$ collectio

'he data collected )or the study *as secondary as *ell as (ri-ary data in Nature.
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AAA C
N'#N'S BBB
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-ntroduction to t(e topic

'he three letters CNPAD Stri,e terror in ban,ing sector and business circle today. NPA is short )or- o) CNon Per)or-ing AssetD. 'he dreaded NPA rule says si-(ly this6 *hen interest or other due to a ban, re-ains un(aid )or -ore than 8# days, the entire ban, loan auto-atically turns a non (er)or-ing asset. 'he recovery o) loan has al*ays been (roble)or ban,s and )inancial institution. 'o co-e out o) these )irst *e need to thin, is it (ossible to avoid NPA, no can not be then le)t is to loo, a)ter the )actor res(onsible )or it and -anaging those )actors.
2efinitions!
An asset, including a leased asset, beco-es non?(er)or-ing *hen it ceases to generate inco-e )or the ban,. A Enon?(er)or-ing assetF ANPAB *as de)ined as a credit )acility in res(ect o) *hich the interest andG or instal-ent o) (rinci(al has re-ained E(ast dueF )or a s(eci)ied (eriod o) ti-e.
!ith a vie* to -oving to*ards international best (ractices and to ensure greater trans(arency, it has been decided to ado(t the E*+ '$!s, ove%'ue, nor- )or identi)ication o) NPAs, )ro- the year ending &arch 21, />>3. Accordingly, *ith e))ect )ro- &arch 21, />>3, a non?(er)or-ing asset ANPAB shall be a loan or an advance *hereH @nterest andG or instal-ent o) (rinci(al re-ain overdue )or a (eriod o) than <> days in res(ect o) a ter- loan, -ore
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'he account re-ains Eout o) orderF )or a (eriod o) -ore than <> days, in res(ect o) an verdra)tGCash Credit A $GCCB, 'he bill re-ains overdue )or a (eriod o) -ore than <> days in the case o) bills (urchased and discounted, @nterest andGor instal-ent o) (rinci(al re-ains overdue )or t*o harvest seasons but )or a (eriod not e+ceeding t*o hal) years in the case o) an advance granted )or agricultural (ur(oses, and
Any a-ount to be received re-ains overdue )or a (eriod o) -ore than <> days in res(ect o) other accounts. As a )acilitating -easure )or s-ooth transition to <> days nor-, ban,s have been advised to -ove over to charging o) interest at -onthly rests, by A(ril 1, />>/. 9o*ever, the date o) classi)ication o) an advance as NPA should not be changed on account o) charging o) interest at -onthly rests. Ban,s should, there)ore, continue to classi)y an account as NPA only i) the interest charged during any 0uarter is not serviced )ully *ithin 1;> days )ro- the end o) the 0uarter *ith e))ect )ro- A(ril 1, />>/ and <> days )ro- the end o) the 0uarter *ith e))ect )ro- &arch 21, />>3.
6-STOR0 O. -N2-AN BAN3-N1

[Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 1/
A ban is a )inancial institution that (rovides ban,ing and other )inancial services. By the ter- b$ - is generally understood an institution that holds a Ban,ing "icenses. Ban,ing licenses are granted by )inancial su(ervision authorities and (rovide rights to conduct the -ost )unda-ental ban,ing services such as acce(ting de(osits and -a,ing loans. 'here are also )inancial institutions that (rovide certain ban,ing services *ithout -eeting the legal de)inition o) a ban,, a so?called Non?ban,. Ban,s are a subset o) the )inancial services industry. 'he *ord b$ - is derived )ro- the @talian b$ c$. *hich is derived )ro- %er-an and -eans bench. 'he ter-s ban,ru(t and Ibro,eI are si-ilarly derived )ro- b$ c$ %ott$, *hich re)ers to an out o) business ban,, having its bench (hysically bro,en. &oneylenders in Northern @taly originally did business in o(en areas, or big o(en roo-s, *ith each lender *or,ing )ro- his o*n bench or table. 'y(ically, a ban, generates (ro)its )ro- transaction )ees on )inancial services or the interest s(read on resources it holds in trust )or clients *hile (aying the- interest on the asset. $evelo(-ent o) ban,ing industry in @ndia )ollo*ed belo* stated ste(s.
Ban,ing in @ndia has its origin as early as the Jedic (eriod. @t is believed that the transition )ro- -oney lending to ban,ing -ust have occurred even be)ore &anu, the great 9indu Kurist, *ho has devoted a section o) his *or, to de(osits and advances and laid do*n rules relating to rates o) interest.
Ban,ing in @ndia has an early origin *here the indigenous ban,ers (layed a very i-(ortant role in lending -oney and )inancing )oreign trade and co--erce. $uring the days o) the #ast @ndia Co-(any, *as the turn o) the agency houses to carry on the ban,ing business. 'he %eneral Ban, o) @ndia *as )irst Koint Stoc, Ban, to be [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 12
established in the year 18;5. 'he others *hich )ollo*ed *ere the Ban, 9industan and the Bengal Ban,.
@n the )irst hal) o) the 1<th century the #ast @ndia Co-(any established three ban,sH the Ban, o) Bengal in 1;><, the Ban, o) Bo-bay in 1;3> and the Ban, o) &adras in 1;32. 'hese three ban,s also ,no*n as Presidency ban,s *ere a-alga-ated in 1</> and a ne* ban,, the @-(erial Ban, o) @ndia *as established in 1</1. !ith the (assing o) the State Ban, o) @ndia Act in 1<44 the underta,ing o) the @-(erial Ban, o) @ndia *as ta,en by the ne*ly constituted State Ban, o) @ndia.
'he 7eserve Ban, o) @ndia *hich is the Central Ban, *as created in 1<24 by (assing 7eserve Ban, o) @ndia Act, 1<23 *hich *as )ollo*ed u( *ith the Ban,ing 7egulations in 1<3<. 'hese acts besto*ed 7eserve Ban, o) @ndia A7B@B *ith *ide ranging (o*ers )or licensing, su(ervision and control o) ban,s. Considering the (roli)eration o) *ea, ban,s, 7B@ co-(ulsorily -erged -any o) the- *ith stronger ban,s in 1<5<.
'he three decades a)ter nationali1ation sa* a (heno-enal e+(ansion in the geogra(hical coverage and )inancial s(read o) the ban,ing syste- in the country. As certain rigidities and *ea,nesses *ere )ound to have develo(ed in the syste-, during the late eighties the %overn-ent o) @ndia )elt that these had to be addressed to enable the )inancial syste- to (lay its role in ushering in a -ore e))icient and co-(etitive econo-y. Accordingly, a high?level co--ittee *as set u( on 13 August 1<<1 to e+a-ine all as(ects relating to the structure, organi1ation, )unctions and (rocedures o) the )inancial syste-. Based on the reco--endations o) the Co--ittee AChair-an6 Shri &. Narasi-ha-B, a co-(rehensive re)or- o) the ban,ing syste- *as introduced in 1<</?<2. 'he objective o) the re)or- -easures *as to ensure that the balance sheets o) ban,s re)lected their actual )inancial health. ne o) the i-(ortant -easures related to inco-e recognition, asset classi)ication [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 13
and (rovisioning by ban,s, on the basis o) objective criteria *as laid do*n by the 7eserve Ban,. 'he introduction o) ca(ital ade0uacy nor-s in line *ith international standards has been another i-(ortant -easure o) the re)or-s (rocess. 1. Co-(rises balance o) e+(ired loans, co-(ensation and other bonds such as National 7ural $evelo(-ent Bonds and Ca(ital @nvest-ent Bonds. Annuity certi)icates are e+cluded. /. 'hese re(resent -ainly non? negotiable non? interest bearing securities issued to @nternational Ban,. 2. At boo, value. 3. Co-(rises accruals under S-all Savings Sche-e, Provident =unds, S(ecial $e(osits o) Non? %overn-ent @n the (ost?nationali1ation era, no ne* (rivate sector ban,s *ere allo*ed to be set u(. 9o*ever, in 1<<2, in recognition o) the need to introduce greater co-(etition *hich could lead to higher (roductivity and e))iciency o) the ban,ing syste-, ne* (rivate sector ban,s *ere allo*ed to be set u( in the @ndian ban,ing syste-. 'hese ne* ban,s had to satis)y a-ong others, the )ollo*ing -ini-u- re0uire-ents6 AiB AiiB @t should be registered as a (ublic li-ited co-(anyH 'he -ini-u- (aid?u( ca(ital should be 7s 1>> croreH =inancial @nstitutions li,e @nternational &onetary =und, @nternational Ban, )or 7econstruction and $evelo(-ent and Asian $evelo(-ent
AiiiB 'he shares should be listed on the stoc, e+changeH AivB 'he head0uarters o) the ban, should be (re)erably located in a centre *hich does not have the head0uarters o) any other ban,H and AvB 'he ban, *ill be subject to (rudential nor-s in res(ect o) ban,ing o(erations, accounting and other (olicies as laid do*n by the 7B@. @t *ill have to achieve ca(ital ade0uacy o) eight (er cent )ro- the very beginning.
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A high level Co--ittee, under the Chair-anshi( o) Shri &. Narasi-ha-, *as constituted by the %overn-ent o) @ndia in $ece-ber 1<<8 to revie* the record o) i-(le-entation o) )inancial syste- re)or-s reco--ended by the C=S in 1<<1 and chart the re)or-s necessary in the years ahead to -a,e the ban,ing syste- stronger and better e0ui((ed to co-(ete e))ectively in international econo-ic environ-ent. 'he Co--ittee has sub-itted its re(ort to the %overn-ent in A(ril 1<<;. So-e o) the reco--endations o) the Co--ittee, on (rudential accounting nor-s, (articularly in the areas o) Ca(ital Ade0uacy 7atio, Classi)ication o) %overn-ent guaranteed advances, (rovisioning re0uire-ents on standard advances and -ore disclosures in the Balance Sheets o) ban,s have been acce(ted and i-(le-ented. 'he other reco--endations are under consideration.
'he ban,ing industry in @ndia is in a -idst o) trans)or-ation, than,s to the econo-ic liberali1ation o) the country, *hich has changed business environ-ent in the country. $uring the (re?liberali1ation (eriod, the industry *as -erely )ocusing on de(osit -obili1ation and branch e+(ansion. But *ith liberali1ation, it )ound -any o) its advances under the non?(er)or-ing assets ANPAB list. &ore i-(ortantly, the sector has beco-e very co-(etitive *ith the entry o) -any )oreign and (rivate sector ban,s. 'he )ace o) ban,ing is changing ra(idly. 'here is no doubt that ban,ing sector re)or-s have i-(roved the (ro)itability, (roductivity and e))iciency o) ban,s, but in the days ahead ban,s *ill have to (re(are the-selves to )ace ne* challenges.
@ndian Ban,ing6 Key $evelo(-ents 1<5< %overn-ent ac0uires o*nershi( in -ajor ban,s Al-ost all ban,ing o(erations in -anual -ode So-e ban,s had Unit record &achines o) @B& )or @B7 L Pay roll
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1<8>? 1<;>
Un(recedented e+(ansion in geogra(hical coverage, sta)), business L transaction volu-es and directed lending to agriculture, SS@ L SB sector &anual syste-s struggle to handle e+(onential rise in transaction volu-es ?? utsourcing o) data (rocessing to service bureau begins
1<;1? 1<<>
Bac, o))ice syste-s only in &ultinational A&NCB ban,sM o))ices 7egulator Aread 7B@B led @' introduction in Ban,s Product level auto-ation on stand alone PCs at branches AA"P&sB @n?house #$P in)rastructure *ith Uni+ bo+es, batch (rocessing in Cobol )or &@S. &ain)ra-es in cor(orate o))ice
1<<1?1<<4
#+(ansion slo*s do*n Ban,ing sector re)or-s resulting in (rogressive de?regulation o) ban,ing, introduction o) (rudential ban,ing nor-s entry o) ne* (rivate sector ban,s 'otal Branch Auto-ation A'BAB in %ovt. o*ned and old (rivate ban,s begins Ne* (rivate ban,s are set u( *ith CBSG'BA )or- the start
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1<<5?/>>>
Ne* delivery channels li,e A'&, Phone ban,ing and @nternet ban,ing and convenience o) any branch ban,ing and auto s*ee( (roducts introduced by ne* (rivate and &NC ban,s 7etail ban,ing in )ocus, (roli)eration o) credit cards Co--unication in)rastructure i-(roves and beco-es chea(. @$7B' sets u( JSA' net*or, )or Ban,s %ovt. o*ned ban,s )eel the heat and atte-(t to res(ond using inter-ediary technology, 'BA i-(le-entation surges ahead under )iat )ro- Central Jigilance Co--ission ACJCB, :/K threat consu-es last t*o years
/>>>?/>>2
Alternate delivery channels )ind *ide consu-er acce(tance @' Bill (assed lending legal validity to electronic transactions %ovt. o*ned ban,s and old (rivate ban,s start i-(le-enting CBSs, but initial atte-(ts )ace (roble-s Ban,s enter insurance business launch debit cards
ASource6 &.:.K9AN, C@N$@AN =@NANC@A" S:S:#&D,2 rd edition Publication by 'A'A &c%ra* hillB
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NON PER.OR*-N1 ASSETS 9NPA:

;6AT -S A NPA 9NON PER.OR*-N1 ASSETS: < Action )or en)orce-ent o) security interest can be initiated only i) the secured asset is classi)ied as Non(er)or-ing asset. Non (er)or-ing asset -eans an asset or account o) borro*er ,*hich has been classi)ied by ban, or )inancial institution as sub Nstandard , doubt)ul or loss asset, in accordance *ith the direction or guidelines relating to assets classi)ication issued by 7B@ . An a-ount due under any credit )acility is treated as C(ast dueD *hen it is not been (aid *ithin 2> days )ro- the due date. $ue to the i-(rove-ent in the (ay-ent and settle-ent syste-, recovery cli-ate, u( gradation o) technology in the ban,ing syste- etc, it *as decided to dis(ense *ith C(ast due Cconce(t, *ith e))ect )ro- &arch 21, />>1. Accordingly as )ro- that date, a Non (er)or-ing asset shell be an advance *here i. ii. @nterest andGor install-ent o) (rinci(al re-ain overdue )or a (eriod o) -ore than 1;> days in res(ect o) a ter- loan, 'he account re-ains Eout o) order E )or a (eriod o) -ore than 1;> days ,in res(ect o) an overdra)tGcash credit A $GCCB
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iii. iv.
'he bill re-ains overdue )or a (eriod o) -ore than 1;> days in case o) bill (urchased or discounted. @nterest andGor (rinci(al re-ains overdue )or t*o harvest season but )or a (eriod not e+ceeding t*o hal) years in case o) an advance granted )or agricultural (ur(ose ,and Any a-ount to be received re-ains overdue )or a (eriod o) -ore than 1;> days in res(ect o) other accounts !ith a vie* to -oving to*ards international best (ractices and to ensure greater trans(arency, it has been decided to ado(t F<> days overdue Enor-s )or identi)ication o) NPAs ,)ro- the year ending &arch 21,/>>3,a non (er)or-ing asset shell be a loan or an advance *hereH i. ii. iii. iv. @nterest andGor install-ent o) (rinci(al re-ain overdue )or a (eriod o) -ore than <> days in res(ect o) a ter- loan, 'he account re-ains Eout o) order E )or a (eriod o) -ore than <> days ,in res(ect o) an overdra)tGcash credit A $GCCB 'he bill re-ains overdue )or a (eriod o) -ore than <> days in case o) bill (urchased or discounted. @nterest andGor (rinci(al re-ains overdue )or t*o harvest season but )or a (eriod not e+ceeding t*o hal) years in case o) an advance granted )or agricultural (ur(ose ,and Any a-ount to be received re-ains overdue )or a (eriod o) -ore than <> days in res(ect o) other accounts
v.
v.
Out of order An account should be treated as out o) order i) the outstanding balance re-ains continuously in e+cess o) sanctioned li-it Gdra*ing (o*er. in case *here the out standing balance in the (rinci(al o(erating account is less than the sanctioned a-ount Gdra*ing (o*er, but there are no credits continuously )or si+ -onths as on the date o) balance sheet or credit are not enough to cover the interest debited during the sa-e (eriod ,these account should be treated as Eout o) orderF.
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Overdue Any a-ount due to the ban, under any credit )acility is EoverdueF i) it is not (aid on due date )i+ed by the ban,.
.ACTORS .OR R-SE -N NPAs 'he ban,ing sector has been )acing the serious (roble-s o) the rising NPAs. But the (roble- o) NPAs is -ore in (ublic sector ban,s *hen co-(ared to (rivate sector ban,s and )oreign ban,s. 'he NPAs in PSB are gro*ing due to e+ternal as *ell as internal )actors. E=TERNA/ .ACTORS !% %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% -neffective recovery tribunal
'he %ovt. has set o) nu-bers o) recovery tribunals, *hich *or,s )or recovery o) loans and advances. $ue to their negligence and ine))ectiveness in their *or, the ban, su))ers the conse0uence o) non?recover, their by reducing their (ro)itability and li0uidity.
;illful 2efaults 'here are borro*ers *ho are able to (aybac, loans but are intentionally *ithdra*ing it. 'hese grou(s o) (eo(le should be identi)ied and (ro(er -easures should be ta,en in order to get bac, the -oney e+tended to the- as advances and loans. Natural calamities
'his is the -easure )actor, *hich is creating alar-ing rise in NPAs o) the PSBs. every no* and then @ndia is hit by -ajor natural cala-ities thus -a,ing the [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page /1
borro*ers unable to (ay bac, there loans. 'hus the ban, has to -a,e large a-ount o) (rovisions in order to co-(ensate those loans, hence end u( the )iscal *ith a reduced (ro)it.
&ainly ours )ar-ers de(ends on rain )all )or cro((ing. $ue to irregularities o) rain )all the )ar-ers are not to achieve the (roduction level thus they are not re(aying the loans.
-ndustrial sic ness
@-(ro(er (roject handling , ine))ective -anage-ent , lac, o) ade0uate resources , lac, o) advance technology , day to day changing govt. Policies give birth to industrial sic,ness. 9ence the ban,s that )inance those industries ulti-ately end u( *ith a lo* recovery o) their loans reducing their (ro)it and li0uidity.
/ac of demand
#ntre(reneurs in @ndia could not )oresee their (roduct de-and and starts (roduction *hich ulti-ately (iles u( their (roduct thus -a,ing the- unable to (ay bac, the -oney they borro* to o(erate these activities. 'he ban,s recover the a-ount by selling o) their assets, *hich covers a -ini-u- label. 'hus the ban,s record the non recovered (art as NPAs and has to -a,e (rovision )or it.
C(ange on 1ovt' policies
!ith every ne* govt. ban,ing sector gets ne* (olicies )or its o(eration. 'hus it has to co(e *ith the changing (rinci(les and (olicies )or the regulation o) the rising o) NPAs.
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'he )allout o) handloo- sector is continuing as -ost o) the *eavers Co? o(erative societies have beco-e de)unct largely due to *ithdra*al o) state (atronage. 'he rehabilitation (lan *or,ed out by the Central govern-ent to revive the handloo- sector has not yet been i-(le-ented. So the over dues due to the handloo- sectors are beco-ing NPAs.
-NTERNA/ .ACTORS !% %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%
2efective /ending process
'here are three cardinal (rinci(les o) ban, lending that have been )ollo*ed by the co--ercial ban,s since long. i. ii. iii. Princi(les o) sa)ety Princi(le o) li0uidity Princi(les o) (ro)itability
i.
Princi(les o) sa)ety 6?
By sa)ety it -eans that the borro*er is in a (osition to re(ay the loan both (rinci(al and interest. 'he re(ay-ent o) loan de(ends u(on the borro*ers6
a. Ca(acity to (ay [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page /2
b. !illingness to (ay
C$"$cit! to "$! 'e"e 's u"o : 1. 'angible assets /. Success in business /illi ) ess to "$! 'e"e 's o : 1. Character /. 9onest 2. 7e(utation o) borro*er 'he ban,er should, there )ore ta,e ut-ost care in ensuring that the enter(rise or business )or *hich a loan is sought is a sound one and the borro*er is ca(able o) carrying it out success)ully .he should be a (erson o) integrity and good character.
-nappropriate tec(nology
$ue to ina((ro(riate technology and -anage-ent in)or-ation syste-, -ar,et driven decisions on real ti-e basis can not be ta,en. Pro(er &@S and )inancial accounting syste- is not i-(le-ented in the ban,s, *hich leads to (oor credit collection, thus NPA. All the branches o) the ban, should be co-(uteri1ed.
-mproper S;OT analysis
'he i-(ro(er strength, *ea,ness, o((ortunity and threat analysis is another reason )or rise in NPAs. !hile (roviding unsecured advances the ban,s de(end -ore on the honesty, integrity, and )inancial soundness and credit *orthiness o) the borro*er. [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page /3
Ban,s should consider the borro*ers o*n ca(ital invest-ent.
it should collect credit in)or-ation o) the borro*ers )ro-O
a. =ro- ban,ers. b. #n0uiry )ro- -ar,etGseg-ent o) trade, industry, business. c. =ro- e+ternal credit rating agencies.
Analy1e the balance sheet.
'rue (icture o) business *ill be revealed on analysis o) (ro)itGloss aGc and balance sheet.
Pur(ose o) the loan
!hen ban,ers give loan, he should analy1e the (ur(ose o) the loan. 'o ensure sa)ety and li0uidity, ban,s should grant loan )or (roductive (ur(ose only. Ban, should analy1e the (ro)itability, viability, long ter- acce(tability o) the (roject *hile )inancing.
Poor credit appraisal system
Page /4
Poor credit a((raisal is another )actor )or the rise in NPAs. $ue to (oor credit a((raisal the ban, gives advances to those *ho are not able to re(ay it bac,. 'hey should use good credit a((raisal to decrease the NPAs.
*anagerial deficiencies
'he ban,er should al*ays select the borro*er very care)ully and should ta,e tangible assets as security to sa)e guard its interests. !hen acce(ting securities ban,s should consider theO
1. &ar,etability /. Acce(tability 2. Sa)ety 3. 'rans)erability.
'he ban,er should )ollo* the (rinci(le o) diversi)ication o) ris, based on the )a-ous -a+i- Cdo not keep all the eggs in one basket; it -eans that the ban,er should not grant advances to a )e* big )ar-s only or to concentrate the- in )e* industries or in a )e* cities. @) a ne* big custo-er -eets -is)ortune or certain traders or industries a))ected adversely, the overall (osition o) the ban, *ill not be a))ected.
"i,e SCB su))ered loss due to the '& Cuttac,, and rissa hand looindustries. 'he biggest de)aulters o) SCB are the '& A118.88la,hsB, and the handloo- sector rissa hand loo- !CS ltd A/32<.5>la,hsB.
Absence of regular industrial visit
Page /5
'he irregularities in s(ot visit also increases the NPAs. Absence o) regularly visit o) ban, o))icials to the custo-er (oint decreases the collection o) interest and (rinci(als on the loan. 'he NPAs due to *ill)ul de)aulters can be collected by regular visits.
Re loaning process
Non re-ittance o) recoveries to higher )inancing agencies and re loaning o) the sa-e have already a))ected the s-ooth o(eration o) the credit cycle'
$ue to re loaning to the de)aulters and CCBs and PACs, the NPAs o) increasing day by day.
SCB is
PROB/E*S 2)E TO NPA 1. *ners do not receive a -ar,et return on there ca(ital .in the *orst case, i) the ban,s )ails, o*ners loose their assets. @n -odern ti-es this -ay a))ect a broad (ool o) shareholders.
/. $e(ositors do not receive a -ar,et return on saving. @n the *orst case i) the ban, )ails, de(ositors loose their assets or uninsured balance. 2. Ban,s redistribute losses to other borro*ers by charging higher interest rates, lo*er de(osit rates and higher lending rates re(ress saving and )inancial -ar,et, *hich ha-(er econo-ic gro*th. 3. Non (er)or-ing loans e(ito-i1e bad invest-ent. 'hey -isallocate credit )ro- good (rojects, *hich do not receive )unding, to )ailed (rojects. Bad invest-ent ends u( in -isallocation o) ca(ital, and by e+tension, labour and natural resources.
Page /8
Non (er)or-ing asset -ay s(ill over the ban,ing syste- and contract the -oney stoc,, *hich -ay lead to econo-ic contraction. 'his s(ill over e))ect can channeli1e through li0uidity or ban, insolvency6 aB !hen -any borro*ers )ail to (ay interest, ban,s -ay e+(erience 'his can ja- (ay-ent across the country, bB @lli0uidity constraints ban, in (aying de(ositors .cB Underca(itali1ed ban,s e+ceeds the ban,s ca(ital base. li0uidity shortage.
'he three letters Stri,e terror in ban,ing sector and business circle today. NPA is short )oro) CNon Per)or-ing AssetD. 'he dreaded NPA rule says si-(ly this6 *hen interest or other due to a ban, re-ains un(aid )or -ore than 8# days, the entire ban, loan auto-atically turns a non (er)or-ing asset. 'he recovery o) loan has al*ays been (roble- )or ban,s and )inancial institution. 'o co-e out o) these )irst *e need to thin, is it (ossible to avoid NPA, no can not be then le)t is to loo, a)ter the )actor res(onsible )or it and -anaging those )actors.
@nterest andGor instal-ent o) (rinci(al re-ains overdue )or t*o harvest seasons but )or a (eriod not e+ceeding t*o hal) years in the case o) an advance granted )or agricultural (ur(oses, and Any a-ount to be received re-ains overdue )or a (eriod o) -ore than <> days in res(ect o) other accounts. As a )acilitating -easure )or s-ooth transition to <> days nor-, ban,s have been advised to -ove over to charging o) interest at -onthly rests, by A(ril 1, />>/. 9o*ever, the date o) classi)ication o) an advance as NPA should not be changed on account o) charging o) interest at -onthly rests. Ban,s should, there)ore, continue to classi)y an account as NPA only i) the interest charged during any 0uarter is not serviced )ully *ithin 1;> days )ro- the
Page /;
end o) the 0uarter *ith e))ect )ro- A(ril 1, />>/ and <> days )ro- the end o) the 0uarter *ith e))ect )ro- &arch 21, />>3.
>Out of Order> status:

An account should be treated as 0out o# o%'e%0 i) the outstanding balance re-ains continuously in e+cess o) the sanctioned li-itGdra*ing (o*er. @n cases *here the outstanding balance in the (rinci(al o(erating account is less than the sanctioned li-itGdra*ing (o*er, but there are no credits continuously )or si+ -onths as on the date o) Balance Sheet or credits are not enough to cover the interest debited during the sa-e (eriod, these accounts should be treated as >out of order>.
1Overdue?!
Any a-ount due to the ban, under any credit )acility is EoverdueF i) it is not (aid on the due date )i+ed by the ban,.
Types of NPA
A@ 1ross NPA B@ Net NPA
Page /<
A@ 1ross NPA!
%ross NPAs are the su- total o) all loan assets that are classi)ied as NPAs as (er 7B@ guidelines as on Balance Sheet date. G%oss NPA %e#lects t&e 2u$lit! o# t&e lo$ s ($'e b! b$ -s3 @t consists o) all the non standard assets li,e as sub?standard, doubt)ul, and loss assets. @t can be calculated *ith the hel( o) )ollo*ing ratio6
1ross NPAs Ratio
1ross NPAs 1ross Advances
B4 Net NPA:
Net NPAs are those ty(e o) NPAs in *hich the ban, has deducted the (rovision regarding NPAs. Net NPA s&o5s t&e $ctu$l bu%'e o# b$ -s3 Since in @ndia, ban, balance sheets contain a huge a-ount o) NPAs and the (rocess o) recovery and *rite o)) o) loans is very ti-e consu-ing, the (rovisions the ban,s have to -a,e against the NPAs according to the central ban, guidelines, are 0uite signi)icant. 'hat is *hy the di))erence bet*een gross and net NPA is 0uite high. @t can be calculated by )ollo*ingO Net NPAs 1ross NPAs A Provisions 1ross Advances % Provisions
-NCO*E RECO1N-T-ON
-ncome recognition A Policy
Page 2>
'he (olicy o) inco-e recognition has to be objective and based on the record o) recovery. @nternationally inco-e )ro- non?(er)or-ing assets ANPAB is not recognised on accrual basis but is boo,ed as inco-e only *hen it is actually received. 'here)ore, the ban,s should not charge and ta,e to inco-e account interest on any NPA. 9o*ever, interest on advances against ter- de(osits, NSCs, @JPs, KJPs and "i)e (olicies -ay be ta,en to inco-e account on the due date, (rovided ade0uate -argin is available in the accounts.
=ees and co--issions earned by the ban,s as a result o) re?negotiations or rescheduling o) outstanding debts should be recognised on an accrual basis over the (eriod o) ti-e covered by the re?negotiated or rescheduled e+tension o) credit.
@) %overn-ent guaranteed advances beco-e NPA, the interest on such advances should not be ta,en to inco-e account unless the interest has been realised.
Reversal of income!
@) any advance, including bills (urchased and discounted, beco-es NPA as at the close o) any year, interest accrued and credited to inco-e account in the corres(onding (revious year, should be reversed or (rovided )or i) the sa-e is not realised. T(is 7ill apply to 1overnment guaranteed accounts also. @n res(ect o) NPAs, )ees, co--ission and si-ilar inco-e that have accrued should cease to accrue in the current (eriod and should be reversed or (rovided )or *ith res(ect to (ast (eriods, i) uncollected.
Page 21
/eased Assets
'he net lease rentals A)inance chargeB on the leased asset accrued and credited to
inco-e account be)ore the asset beca-e non?(er)or-ing, and re-aining unrealised, should be reversed or (rovided )or in the current accounting (eriod.
'he ter- Mnet lease rentalsM *ould -ean the a-ount o) )inance charge ta,en to the
credit o) Pro)it L "oss Account and *ould be *or,ed out as gross lease rentals adjusted by a-ount o) statutory de(reciation and lease e0ualisation account.
As (er the >1uidance Note on Accounting for /eases> issued by the Council o)
the @nstitute o) Chartered Accountants o) @ndia A@CA@B, a se(arate "ease #0ualisation Account should be o(ened by the ban,s *ith a corres(onding debit or credit to "ease Adjust-ent Account, as the case -ay be. =urther, "ease #0ualisation Account should be trans)erred every year to the Pro)it L "oss Account and disclosed se(arately as a deduction )ro-Gaddition to gross value o) lease rentals sho*n under the head M%ross @nco-eM.
Appropriation of recovery in NPAs

@nterest realised on NPAs -ay be ta,en to inco-e account (rovided the credits in the accounts to*ards interest are not out o) )reshG additional credit )acilities sanctioned to the borro*er concerned.
@n the absence o) a clear agree-ent bet*een the ban, and the borro*er )or the (ur(ose o) a((ro(riation o) recoveries in NPAs Ai.e. to*ards (rinci(al or interest [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 2/
dueB, ban,s should ado(t an accounting (rinci(le and e+ercise the right o) a((ro(riation o) recoveries in a uni)or- and consistent -anner.
-nterest Application!
'here is no objection to the ban,s using their o*n discretion in debiting interest to an NPA account ta,ing the sa-e to @nterest Sus(ense Account or -aintaining only a record o) such interest in (ro)or-a accounts.
Reporting of NPAs
Ban,s are re0uired to )urnish a 7e(ort on NPAs as on 21 st &arch each year a)ter co-(letion o) audit. 'he NPAs *ould relate to the ban,sF global (ort)olio, including the advances at the )oreign branches. 'he 7e(ort should be )urnished as (er the (rescribed )or-at given in the Anne+ure @.
!hile re(orting NPA )igures to 7B@, the a-ount held in interest sus(ense account, should be sho*n as a deduction )ro- gross NPAs as *ell as gross advances *hile arriving at the net NPAs. Ban,s *hich do not -aintain @nterest Sus(ense account )or (ar,ing interest due on non?(er)or-ing advance accounts, -ay )urnish the a-ount o) interest receivable on NPAs as a )oot note to the 7e(ort.
!henever NPAs are re(orted to 7B@, the a-ount o) technical *rite o)), i) any, should be reduced )ro- the outstanding gross advances and gross NPAs to eli-inate any distortion in the 0uantu- o) NPAs being re(orted.
Page 22
REPORT-N1 .OR*AT .OR NPA A 1ROSS AN2 NET NPA Name of t(e Ban ! Position as onBBB PART-C)/ARS 1B %ross Advanced P /B %ross NPA P 2B %ross NPA as Qage o) %ross Advanced 3B 'otal deductionA aRbRcRd B A a B Balance in interest sus(ense aGc PP A b B $@C%CG#C%C clai-s received and held (ending adjust-ent A c B (art (ay-ent received and ,e(t in sus(ense aGc A d B 'otal (rovision held PPP 4B Net advanced A 1?3 B 5B Net NPA A /?3 B 8B Net NPA as a Qage o) Net Advance Pe+cluding 'echnical *rite?o)) o) 7s.OOOOOOOOcrore. PPBan,s *hich do not -aintain an interest sus(ense aGc to (ar, the accrued interest on NPAs -ay )urnish the a-ount o) interest receivable on NPAs. PPP#+cluding a-ount o) 'echnical *rite?o)) A7s.OOOOOOcroreB and (rovision on standard assets. A7s.OOOOOcroreB.
Page 23
Asset Classification %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

Categories of NPAs
Standard Assets!
Standard assets are the ones in *hich the ban, is receiving interest as *ell as the (rinci(al a-ount o) the loan regularly )ro- the custo-er. 9ere it is also very i-(ortant that in this case the arrears o) interest and the (rinci(al a-ount o) loan does not e+ceed <> days at the end o) )inancial year. @) asset )ails to be in category o) standard asset that is a-ount due -ore than <> days then it is NPA and NPAs are )urther need to classi)y in sub categories. Ban,s are re0uired to classi)y non?(er)or-ing assets )urther into the )ollo*ing three categories based on the (eriod )or *hich the asset has re-ained nonperforming and the realisability o) the dues6 [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 24
( 1 ) Sub-standard Assets ( 2 ) Doubtful Assets (3) oss Assets
9 $ : Sub%standard Assets!%%
!ith e))ect )ro- 21 &arch />>4, a sub standard asset *ould be one, *hich has re-ained NPA )or a (eriod less than or e0ual to 1/ -onth. 'he )ollo*ing )eatures are e+hibited by sub standard assets6 the current net *orth o) the borro*ers G guarantor or the current -ar,et value o) the security charged is not enough to ensure recovery o) the dues to the ban,s in )ullH and the asset has *ell?de)ined credit *ea,nesses that jeo(ardise the li0uidation o) the debt and are characterised by the distinct (ossibility that the ban,s *ill sustain so-e loss, i) de)iciencies are not corrected.
9 " : 2oubtful Assets!%%

A loan classi)ied as doubt)ul has all the *ea,nesses inherent in assets that *ere classi)ied as sub?standard, *ith the added characteristic that the *ea,nesses -a,e collection or li0uidation in )ull, N on the basis o) currently ,no*n )acts, conditions and values N highly 0uestionable and i-(robable. !ith e))ect )ro- &arch 21, />>4, an asset *ould be classi)ied as doubt)ul i) it re-ained in the sub?standard category )or 1/ -onths.
9 C : /oss Assets!%%
A loss asset is one *hich considered uncollectible and o) such little value that its continuance as a ban,able asset is not *arranted? although there -ay be so-e salvage or recovery value. Also, these assets *ould have been identi)ied as Eloss assetsF by the ban, or
Page 25
internal or e+ternal auditors or the 7B@ ins(ection but the a-ount *ould not have been *ritten?o)) *holly.
Provisioning Norms %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

1eneral
@n order to narro* do*n the divergences and ensure ade0uate (rovisioning by ban,s, it *as suggested that a ban,Ms statutory auditors, i) they so desire, could have a dialogue *ith 7B@Ms 7egional di))erence. ))iceG ins(ectors *ho carried out the ban,Ms ins(ection during the (revious year *ith regard to the accounts contributing to the
Pursuant to this, regional o))ices *ere advised to )or*ard a list o) individual advances, *here the variance in the (rovisioning re0uire-ents bet*een the 7B@ and the ban, is above certain cut o)) levels so that the ban, and the statutory auditors ta,e into account the assess-ent o) the 7B@ *hile -a,ing (rovisions )or loan loss, etc.
Page 28
'he (ri-ary res(onsibility )or -a,ing ade0uate (rovisions )or any di-inution in the value o) loan assets, invest-ent or other assets is that o) the ban, -anage-ents and the statutory auditors. 'he assess-ent -ade by the ins(ecting o))icer o) the 7B@ is )urnished to the ban, to assist the ban, -anage-ent and the statutory auditors in ta,ing a decision in regard to -a,ing ade0uate and necessary (rovisions in ter-s o) (rudential guidelines.
@n con)or-ity *ith the (rudential nor-s, (rovisions should be -ade on the non? (er)or-ing assets on the basis o) classi)ication o) assets into (rescribed categories as detailed in (aragra(hs 3 su(ra. 'a,ing into account the ti-e lag bet*een an account beco-ing doubt)ul o) recovery, its recognition as such, the realisation o) the security and the erosion over ti-e in the value o) security charged to the ban,, the ban,s should -a,e (rovision against sub?standard assets, doubt)ul assets and loss assets as belo*6
/oss assets!
'he entire asset should be *ritten o)). @) the assets are (er-itted to re-ain in the boo,s )or any reason, 1>> (ercent o) the outstanding should be (rovided )or.
2oubtful assets!
1>> (ercent o) the e+tent to *hich the advance is not covered by the realisable value o) the security to *hich the ban, has a valid recourse and the realisable value is esti-ated on a realistic basis.
@n regard to the secured (ortion, (rovision -ay be -ade on the )ollo*ing basis, at the rates ranging )ro- /> (ercent to 4> (ercent o) the secured (ortion de(ending u(on the (eriod )or *hich the asset has re-ained doubt)ul6 [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 2;
Period for 7(ic( t(e advance (as been considered as doubtful U( to one year ne to three years &ore than three years6 A1B utstanding stoc, o) NPAs as on &arch 21, />>3. A/B Advances classi)ied as Edoubt)ulF -ore than three years on or a)ter A(ril 1, />>3.
Provision reDuirement 9E: /> 2> 5>Q *ith e))ect )ro- &arch 21,/>>4. 84Q e))ect )ro- &arch 21, />>5. 1>>Q *ith e))ect )ro- &arch 21, />>8.
Additional (rovisioning conse0uent u(on the change in the de)inition o) doubt)ul assets e))ective )ro- &arch 21, />>2 has to be -ade in (hases as under6
As on 21.>2./>>2, 4> (ercent o) the additional (rovisioning re0uire-ent on the
assets *hich beca-e doubt)ul on account o) ne* nor- o) 1; -onths )or transition )rosub?standard asset to doubt)ul category.
Page 2<
As on 21.>2./>>/, balance o) the (rovisions not -ade during the (revious year, in
addition to the (rovisions needed, as on 21.>2./>>/. Ban,s are (er-itted to (hase the additional (rovisioning conse0uent u(on the reduction in the transition (eriod )ro- substandard to doubt)ul asset )ro- 1; to 1/ -onths over a )our year (eriod co--encing )ro- the year ending &arch 21, />>4, *ith a -ini-u- o) /> Q each year. Note! ,aluation of Security for provisioning purposes !ith a vie* to bringing do*n divergence arising out o) di))erence in assess-ent o) the value o) security, in cases o) NPAs *ith balance o) 7s. 4 crore and above stoc, audit at annual intervals by e+ternal agencies a((ointed as (er the guidelines a((roved by the Board *ould be -andatory in order to enhance the reliability on stoc, valuation. Jaluers a((ointed as (er the guidelines a((roved by the Board o) $irectors should get collaterals such as i--ovable (ro(erties charged in )avour o) the ban, valued once in three years.
Sub%standard assets!
A general (rovision o) 1> (ercent on total outstanding should be -ade *ithout -a,ing any allo*ance )or $@C%CG#C%C guarantee cover and securities available.
Standard assets!
=ro- the year ending 21.>2./>>>, the ban,s should -a,e a general (rovision o) a -ini-u- o) >.3> (ercent on standard assets on global loan (ort)olio basis.
Page 3>
'he (rovisions on standard assets should not be rec,oned )or arriving at net NPAs.
'he (rovisions to*ards Standard Assets need not be netted )ro- gross advances but sho*n se(arately as MContingent Provisions against Standard AssetsM under M ther "iabilities and Provisions ? thersM in Schedule 4 o) the balance sheet.
.loating provisions!
So-e o) the ban,s -a,e a M)loating (rovisionM over and above the s(eci)ic (rovisions -ade in res(ect o) accounts identi)ied as NPAs. 'he )loating (rovisions, *herever available, could be set?o)) against (rovisions re0uired to be -ade as (er above stated (rovisioning guidelines. Considering that higher loan loss (rovisioning adds to the overall )inancial strength o) the ban,s and the stability o) the )inancial sector, ban,s are urged to voluntarily set a(art (rovisions -uch above the -ini-u- (rudential levels as a desirable (ractice.
Provisions on /eased Assets!

"eases are (eculiar transactions *here the assets are not recorded in the boo,s o) the user o) such assets as Assets, *hereas they are recorded in the boo,s o) the o*ner even though the (hysical e+istence o) the asset is *ith the user AlesseeB. OOAAS1< @CA@B
Page 31
Sub%standard assets ! %
1> (ercent o) the >net boo
value>.
As (er the M%uidance Note on Accounting )or "easesM issued by the @CA@, >1ross boo
value> o) a )i+ed asset is its historical cost or other a-ount substituted )or historical cost in the boo,s o) account or )inancial state-ents. Statutory de(reciation should be sho*n se(arately in the Pro)it L "oss Account. Accu-ulated de(reciation should be deducted )ro- the %ross Boo, Jalue o) the leased asset in the balance sheet o) the lesser to arrive at the >net boo value>.
Also, balance standing in M"ease Adjust-ent AccountM should be adjusted in the Mnet boo,
valueM o) the leased assets. 'he a-ount o) adjust-ent in res(ect o) each class o) )i+ed assets -ay be sho*n either in the -ain balance sheet or in the =i+ed Assets Schedule as a se(arate colu-n in the section related to leased assets.
2oubtful assets !%
1>> (ercent o) the e+tent to *hich the )inance is not secured by the realisable value o) the leased asset. 7ealisable value to be esti-ated on a realistic basis. -n addition to t(e above (rovision, the )ollo*ing (rovision on the net boo value o) the secured portion should be -ade, de(ending u(on the (eriod )or *hich asset has been doubt)ul6 Period U( to one year ne to three years &ore than three years Eage of provision /> 2> 4> Page 3/
/oss assets !%
'he entire asset should be *ritten?o)). @) )or any reason, an asset is allo*ed to re-ain in boo,s, 1>> (ercent o) the su- o) the net invest-ent in the lease and the unrealised (ortion o) )inance inco-e net o) )inance charge co-(onent should be (rovided )or. A >net boo value>:
1uidelines for Provisions under Special Circumstances

1overnment guaranteed advances
!ith e))ect )ro- 21 &arch />>>, in res(ect o) advances sanctioned against State
%overn-ent guarantee, i) the guarantee is invo,ed and re-ains in de)ault )or -ore than t*o 0uarters A1;> days at (resentB, the ban,s should -a,e nor-al (rovisions as (rescribed in (aragra(h 3.1./ above.
As regards advances guaranteed by State %overn-ents, in res(ect o) *hich guarantee
stood invo,ed as on 21.>2./>>>, necessary (rovision *as allo*ed to be -ade, in a (hased -anner, during the )inancial years ending 21.>2./>>> to 21.>2./>>2 *ith a -ini-u- o) /4 (ercent each year.
Advances granted under rehabilitation (ac,ages a((roved by B@=7Gter- lending institutions6

[Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 32
@n res(ect o) advances under rehabilitation (ac,age a((roved by B@=7Gter- lending
institutions, the (rovision should continue to be -ade in res(ect o) dues to the ban, on t(e e5isting credit facilities as (er their classi)ication as sub?standard or doubt)ul asset.
As regards the additional )acilities sanctioned as (er (ac,age )inalised by B@=7 andGor
ter- lending institutions, (rovision on additional )acilities sanctioned need not be -ade )or a (eriod o) one year )ro- the date o) disburse-ent.
@n res(ect o) additional credit )acilities granted to SS@ units *hich are identi)ied as sic,
[as de)ined in 7PC$ circular No.P"N=S.BC.48 G>5.>3.>1G/>>1?/>>/ dated 15 Kanuary />>/] and *here rehabilitation (ac,agesGnursing (rogra--es have been dra*n by the ban,s the-selves or under consortiu- arrange-ents, no (rovision need be -ade )or a (eriod o) one year.
Advances against term deposits4 NSCs eligible for surrender4 -,Ps4 3,Ps4 and life policies are e5empted from provisioning reDuirements' 6o7ever4 advances against gold ornaments4 government securities and all ot(er inds of securities are not e5empted from provisioning reDuirements' 'reat-ent o) interest sus(ense account6
Page 33
A-ounts held in @nterest Sus(ense Account should not be rec,oned as (art o) (rovisions. A-ounts lying in the @nterest Sus(ense Account should be deducted )ro- the relative advances and therea)ter, (rovisioning as (er the nor-s, should be -ade on the balances a)ter such deduction.
Advances covered by #C%CG$@C%C guarantee

@n the case o) advances guaranteed by $@C%CG#C%C, (rovision should be -ade only )or the balance in e5cess of the a-ount guaranteed by these Cor(orations. =urther, *hile arriving at the (rovision re0uired to be -ade )or doubt)ul assets, realisable value o) the securities should )irst be deducted )ro- the outstanding balance in res(ect o) the a-ount guaranteed by these Cor(orations and then (rovision -ade as illustrated hereunder6 E6$("le utstanding Balance $@C%C Cover 7s. 3 la,hs 4> (ercent
Period )or *hich the advance has re-ained &ore than 2 years re-ained doubt)ul Jalue o) security doubt)ul held 7s. 1.4> la,hs
Ae+cludes *orth o) 7s.B
P%ovisio %e2ui%e' to be ($'e utstanding balance 7s. 3.>> la,hs Page 34
"ess6 Jalue o) security held Unrealised balance "ess6 $@C%C
7s. 1.4> la,hs 7s. /.4> la,hs Cover 7s. 1./4 la,hs
A4>Q o) unrealisable balanceB Net unsecured balance 7s. 1./4 la,hs
Provision )or unsecured (ortion o) advance 7s. 1./4 la,hs AS 1>> (ercent o) unsecured (ortionB Provision )or secured (ortion o) advance 7s. >.84 la,hs AS 4> (ercent o) secured (ortionB 'otal (rovision re0uired to be -ade 7s. /.>> la,hs
Advance covered by C1TS- guarantee

@n case the advance covered by C%'S@ guarantee beco-es non?(er)or-ing, no (rovision need be -ade to*ards the guaranteed (ortion. 'he a-ount outstanding in e+cess o) the guaranteed (ortion should be (rovided )or as (er the e+tant guidelines on (rovisioning )or non?(er)or-ing advances. '*o illustrative e+a-(les are given belo*6
E6$("le I [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 35
Asset classi)ication status6 C%'S@ Cover
$oubt)ul N &ore than 2 yearsH 84Q o) the a-ount outstanding or 84Q o) the unsecured a-ount or 7s.1;.84 la,h, *hichever is the least
7ealisable value o) Security Balance outstanding "ess security Unsecured a-ount "ess C%'S@ cover A84QB 7ealisable value
7s.1.4> la,h 7s.1>.>> la,h o) 7s. 1.4> la,h
7s. ;.4> la,h 7s. 5.2; la,h
Net unsecured and uncovered 7s. /.1/ la,h (ortion6 Provision ReDuired Secured (ortion 7s.1.4> la,h 7s. >.84 la,h AS 4>QB 7s. /.1/ la,h A 1>>QB 7s. /.;8 la,h
Unsecured L uncovered (ortion 7s./.1/ la,h 'otal (rovision re0uired
Page 38
E6$("le II Asset classi)ication status C%'S@ Cover $oubt)ul N &ore than 2 yearsH 84Q o) the a-ount outstanding or84Q o) the unsecured a-ount or 7s.1;.84 la,h, *hichever is the least 7ealisable value o) Security Balance outstanding "ess security Unsecured a-ount "ess C%'S@ cover A84QB 7s. 2>.>> la,h 7s. 1;.84 la,h 7ealisable value 7s.1>.>> la,h 7s.3>.>> la,h o) 7s. 1>.>> la,h
Net unsecured and uncovered 7s. 11./4 la,h (ortion6 Provision ReDuired Secured (ortion 7s.1>.>> la,h 7s. 4.>> la,h AS 4>QB 7s.11./4 la,h A1>>QB
Unsecured L uncovered (ortion 7s.11./4 la,h
Page 3;
'otal (rovision re0uired
7s. 15./4 la,h
Ta e%out finance
'he lending institution should -a,e (rovisions against a Mta,e?out )inanceM turning into NPA (ending its ta,e?over by the ta,ing?over institution. As and *hen the asset is ta,en?over by the ta,ing?over institution, the corres(onding (rovisions could be reversed.
Reserve for E5c(ange Rate .luctuations Account 9RER.A:

!hen e+change rate -ove-ents o) @ndian ru(ee turn adverse, the outstanding a-ount o) )oreign currency deno-inated a loan A*here actual disburse-ent *as -ade in @ndian 7u(eeB *hich beco-es overdue goes u( corres(ondingly, *ith its attendant i-(lications o) (rovisioning re0uire-ents. Such assets should not nor-ally be revalued. @n case such assets need to be revalued as (er re0uire-ent o) accounting (ractices or )or any other re0uire-ent, the )ollo*ing (rocedure -ay be ado(ted6
'he loss on revaluation o) assets has to be boo,ed in the ban,Ms Pro)it
L "oss Account.
Besides the (rovisioning re0uire-ent as (er Asset Classi)ication, ban,s should treat the )ull a-ount o) the 7evaluation %ain relating to the corres(onding assets, i) any, on account o) =oreign #+change =luctuation as (rovision against the (articular assets.
Page 3<
-mpact of NPA
Profitability!%
NPA -eans boo,ing o) -oney in ter-s o) bad asset, *hich occurred due to *rong choice o) client. Because o) the -oney getting bloc,ed the (rodigality o) ban, decreases not only by the a-ount o) NPA but NPA lead to o((ortunity cost also as that -uch o) (ro)it invested in so-e return earning (rojectGasset. So NPA doesnFt a))ect current (ro)it but also )uture strea- o) (ro)it, *hich -ay lead to loss o) so-e long?ter- bene)icial o((ortunity. Another i-(act o) reduction in (ro)itability is lo* 7 @ Areturn on invest-entB, *hich adversely a))ect current earning o) ban,.
/iDuidity!%
&oney is getting bloc,ed, decreased (ro)it lead to lac, o) enough cash at hand *hich lead to borro*ing -oney )or shotTrtes (eriod o) ti-e *hich lead to additional cost to the co-(any. $i))iculty in o(erating the )unctions o) ban, is another cause o) NPA due to lac, o) -oney. 7outine (ay-ents and dues.
-nvolvement of management!%
Page 4>
'i-e and e))orts o) -anage-ent is another indirect cost *hich ban, has to bear due to NPA. 'i-e and e))orts o) -anage-ent in handling and -anaging NPA *ould have diverted to so-e )ruit)ul activities, *hich *ould have given good returns. No* dayFs ban,s have s(ecial e-(loyees to deal and handle NPAs, *hich is additional cost to the ban,.
Credit loss!%
Ban, is )acing (roble- o) NPA then it adversely a))ect the value o) ban, in ter-s o) -ar,et credit. @t *ill lose itFs good*ill and brand i-age and credit *hich have negative i-(act to the (eo(le *ho are (utting their -oney in the ban,s .
Page 41
REASONS .OR NPA!

Reasons can be divided in to t7o broad categories!% A4 I te% $l F$cto% B4 E6te% $l F$cto%
7 A 4 I te% $l F$cto%s:8
@nternal =actors are those, *hich are internal to the ban, and are controllable by ban,s. Poor lending decision6
Non?Co-(liance to lending nor-s6
"ac, o) (ost credit su(ervision6
=ailure to a((reciate good (ayers6
Page 4/
#+cessive overdra)t lending6
Non N 'rans(arent accounting (olicy6
7 B 4 E6te% $l F$cto%s:8
#+ternal )actors are those, *hich are e+ternal to ban,s they are not controllable by ban,s. Socio (olitical (ressure6
Chang in industry environ-ent6
#ndangers -acroecono-ic disturbances6
Natural cala-ities
@ndustrial sic,ness
$iversion o) )unds and *ill)ul de)aults
'i-eG cost overrun in (roject i-(le-entation
"abour (roble-s o) borro*ed )ir-
Business )ailure
Page 42
@ne))icient -anage-ent
bsolete technology
Product obsolete
Early symptoms by 7(ic( one can recogniFe a performing asset turning in to Non%performing asset
.our categories of early symptoms!% %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%% 9 $ : .inancial!
Non?(ay-ent o) the very )irst install-ent in case o) ter- loan. Bouncing o) che0ue due to insu))icient balance in the accounts. @rregularity in install-ent. @rregularity o) o(erations in the accounts. Un(aid over due bills. $eclining Current 7atio. Pay-ent *hich does not cover the interest and (rinci(al a-ount o) that install-ent. !hile -onitoring the accounts it is )ound that (artial a-ount is diverted to sister concern or (arent co-(any.
9 " : Operational and P(ysical!

@) in)or-ation is received that the borro*er has either initiated the (rocess o) *inding u( or are not doing the business. verdue receivables. Stoc, state-ent not sub-itted on ti-e. #+ternal non?controllable )actor li,e natural cala-ities in the city *here borro*er conduct his business. =re0uent changes in (lan. Non (ay-ent o) *ages.
9 C : Attitudinal C(anges!
Use )or (ersonal co-)ort, stoc,s and shares by borro*er. Avoidance o) contact *ith ban,. Proble- bet*een (artners.
9 & : Ot(ers!
Changes in %overn-ent (olicies. $eath o) borro*er. Co-(etition in the -ar,et.
Page 44
Preventive *easurement .or NPA E$%l! Reco)

itio o# t&e P%oble(:8
@nvariably, by the ti-e ban,s start their e))orts to get involved in a revival (rocess, itFs too
late to retrieve the situation? both in ter-s o) rehabilitation o) the (roject and recovery o) ban,Fs dues. @denti)ication o) *ea,ness in the very beginning that is 6 !hen the account starts sho*ing )irst signs o) *ea,ness regardless o) the )act that it -ay not have beco-e NPA, is i-(erative. Assess-ent o) the (otential o) revival -ay be done on the basis o) a techno?econo-ic viability study. 7estructuring should be atte-(ted *here, a)ter an objective assess-ent o) the (ro-oterFs intention, ban,s are convinced o) a turnaround *ithin a scheduled ti-e)ra-e. @n res(ect o) totally unviable units as decided by the ban,, it is better to )acilitate *inding u(G selling o) the unit earlier, so as to recover *hatever is (ossible through legal -eans be)ore the security (osition beco-es *orse.
I'e
ti#!i ) Bo%%o5e%s 5it& Ge ui e I te t:8

Page 45
@denti)ying borro*ers *ith genuine intent )ro- those *ho are non? serious *ith no co--it-ent or sta,e in revival is a challenge con)ronting ban,ers. 9ere the role o) )rontline o))icials at the branch level is (ara-ount as they are the ones *ho has intelligent in(uts *ith regard to (ro-otersF sincerity, and ca(ability to achieve turnaround. Base don this objective assess-ent, ban,s should decide as 0uic,ly as (ossible *hether it *ould be *orth*hile to co--it additional )inance. @n this regard ban,s -ay consider having GSpecial -nvestigationH o) all )inancial transaction or business transaction, boo,s o) account in order to ascertain real )actors that contributed to sic,ness o) the borro*er. Ban,s -ay have (enal o) technical e+(erts *ith (roven e+(ertise and trac, record o) (re(aring techno?econo-ic study o) the (roject o) the borro*ers. Borro*ers having genuine (roble-s due to te-(orary -is-atch in )und )lo* or sudden re0uire-ent o) additional )und -ay be entertained at branch level, and )or this (ur(ose a s(ecial li-it to such ty(e o) cases should be decided. 'his *ill obviate the need to route the additional )unding through the controlling o))ices in deserving cases, and hel( avert -any accounts sli((ing into NPA category.
Ti(eli
ess $ ' A'e2u$c! o# %es"o se:8
"onger the delay in res(onse, grater the injury to the account and the asset. 'i-e is a crucial ele-ent in any restructuring or rehabilitation activity. 'he res(onse decided on the basis o) techno?econo-ic study and (ro-oterFs co--it-ent, has to be ade0uate in ter-s o) e+tend o) additional )unding and rela+ations etc. under the restructuring e+ercise. 'he (ac,age o) assistance -ay be )le+ible and ban, -ay loo, at the e+it o(tion.
Focus o
C$s& Flo5s:8
Page 48
!hile )inancing, at the ti-e o) restructuring the ban,s -ay not be guided by the conventional )und )lo* analysis only, *hich could yield a (otentially -isleading (icture. A((raisal )or )resh credit re0uire-ents -ay be done by analy1ing )unds )lo* in conjunction *ith the Cash =lo* rather than only on the basis o) =unds =lo*.
M$
$)e(e t E##ective ess:8
'he general (erce(tion a-ong borro*er is that it is lac, o) )inance that leads to sic,ness and NPAs. But this -ay not be the case all the ti-e. &anage-ent e))ectiveness in tac,ling adverse business conditions is a very i-(ortant as(ect that a))ects a borro*ing unitFs )ortunes. A ban, -ay co--it additional )inance to an aling unit only a)ter basic viability o) the enter(rise also in the conte+t o) 0uality o) -anage-ent is e+a-ined and con)ir-ed. !here the de)ault is due to dee(er -alady, viability study or investigative audit should be done N it *ill be use)ul to have consultant a((ointed as early as (ossible to e+a-ine this as(ect. A (ro(er techno? econo-ic viability study -ust thus beco-e the basis on *hich any )uture action can be considered.
Multi"le Fi
$ ci ):8
A' $uring the e+ercise )or assess-ent o) viability and restructuring, a Pragmatic and
unified approac( by all the lending ban,sG =@s as also sharing o) all relevant in)or-ation on the borro*er *ould go a long *ay to*ard overall success o) rehabilitation e+ercise, given the (robability o) successG)ailure.
B' @n so-e de)ault cases, *here the unit is still *or,ing, the ban, should -a,e sure
that it captures t(e cas( flo7s Athere is a tendency on (art o) the borro*ers to s*itch ban,ers once they de)ault, )or )ear o) getting their cash )lo*s )or)eitedB, and ensure that such cash )lo*s are used )or *or,ing ca(ital (ur(oses. 'o*ard this end, [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 4;
there should be regular )lo* o) in)or-ation a-ong consortiu- -e-bers. A ban,, *hich is not (art o) the consortiu-, -ay not be allo*ed to o))er credit )acilities to such de)aulting clients. Current account )acilities -ay also be denied at non? consortiu- ban,s to such clients and violation -ay attract (enal action. 'he Credit -nformation Bureau of -ndia /td'9C-B-/: -ay be very use)ul )or -eaning)ul in)or-ation e+change on de)aulting borro*ers once the setu( beco-es )ully o(erational.
C' @n a )oru- o) lenders, the (riority o) each lender *ill be di))erent. !hile one set o)
lenders -ay be *illing to *ait )or a longer ti-e to recover its dues, another lender -ay have a -uch shorter ti-e)ra-e in -ind. So it is (ossible that the letter categories o) lenders -ay be *illing to e+it, even a t a cost N by a discounted settle-ent o) the e+(osure. 'here)ore, any (lan )or restructuringGrehabilitation -ay ta,e this as(ect into account.
2' Corporate 2ebt Restructuring -echanis- has been institutionali1ed in />>1 to

(rovide a ti-ely and trans(arent syste- )or restructuring o) the cor(orate debt o) 7s. /> crore and above *ith the ban,s and =@s on a voluntary basis and outside the legal )ra-e*or,. Under this syste-, ban,s -ay greatly bene)it in ter-s o) restructuring o) large standard accounts A(otential NPAsB and viable sub?standard accounts *ith consortiu-G-ulti(le ban,ing arrange-ents.
Page 4<
Tools for recovery of NPAs

Credit Default
Inability to Pay
Willful default
Unviable
Viable
Re"abilitation Co !ro ise
Lok Adalat Debt Recovery Tribunals
Securitization Act
Consortiu
#inance
Sole $anker
Asset Reconstruction
Cor!orate Debt Restructurin%
#res" WC Li it Re!"ase ent of #res" Issue of Conversion Re!ay ent Period Ter Loan into WCTL [Comparative analysis on NPA of Private & Public sector Banks] Page 5>
[University Business School, Panjab University, Chandigarh]
nce NPA occurred, one -ust co-e out o) it or it should be -anaged in -ost e))icient -anner. "egal *ays and -eans are there to over co-e and -anage NPAs. !e *ill loo, into each one o) it.
/ill#ul De#$ult :8
A] "o, Adalat and $ebt 7ecovery 'ribunal B] Securiti1ation Act C] Asset 7econstruction
ok Adalat!
"o, Adalat institutions hel( ban,s to settle dis(utes involving account in Cdoubt)ulD and ClossD category, *ith outstanding balance o) 7s. 4 la,h )or co-(ro-ise settle-ent under "o, Adalat. $ebt recovery tribunals have been e-(o*ered to organi1e "o, Adalat to decide on cases o) NPAs o) 7s. 1> la,h and above. 'his -echanis- has (roved to be 0uite e))ective )or s(eedy justice and recovery o) s-all loans. 'he (rogress through this channel is e+(ected to (ic, u( in the co-ing years. Debt "e#o$ery %ribunals(D"%)! 'he recovery o) debts due to ban,s and )inancial institution (assed in &arch />>> has hel(ed in strengthening the )unction o) $7's. Provision )or (lace-ent o) -ore than one recovery o))icer, (o*er to attach de)endantFs (ro(ertyGassets be)ore judg-ent, (enal (rovision )or disobedience o) tribunalFs order or )or breach o) any ter-s o) order and a((oint-ent o) receiver *ith (o*er o) reali1ation, -anage-ent, (rotection and (reservation o) (ro(erty are e+(ected to (rovide necessary [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 51
teeth to the $7's and s(eed u( the recovery o) NPAs in the ti-es to co-e. $7's *hich have been set u( by the %overn-ent to )acilitate s(eedy recovery by ban,sG$=@s, have not been able -a,e -uch i-(act on loan recovery due to variety o) reasons li,e inade0uate nu-ber, lac, o) in)rastructure, under sta))ing and )re0uent adjourn-ent o) cases. @t is essential that $7' -echanis- is strengthened and vested *ith a (ro(er en)orce-ent -echanis- to en)orce their orders. Non observation o) any order (assed by the tribunal should a-ount to conte-(t o) court, the $7' should have right to initiate conte-(t (roceedings. 'he $7' should e-(o*ered to sell asset o) the debtor co-(anies and )or*ard the (roceed to the *inding N u( court )or distribution a-ong the lenders
I $bilit! to P$! &onsortium arrangements:

Asset classi)ication o) accounts under consortiu- should be based on the record of recovery of t(e individual member ban s and other as(ects having a bearing on the recoverability o) the advances ' !here the re-ittances by the borro*er under consortiu- lending arrange-ents are (ooled *ith one ban, andGor *here the ban, receiving re-ittances is not (arting *ith the share o) other -e-ber ban,s, the account *ill be treated as not serviced in the boo,s o) the other -e-ber ban,s and there)ore, be treated as NPA. 'he ban,s (artici(ating in the consortiu- should, there)ore, arrange to get their share o) recovery trans)erred )ro- the lead ban, or get an e+(ress consent )ro- the lead ban, )or the trans)er o) their share o) recovery, to ensure (ro(er asset classi)ication in their res(ective boo,s.
Co%"o%$te 'ebt Rest%uctu%i ) 9CDR::
Page 5/
B$c-)%ou '
@n s(ite o) their best e))orts and intentions, so-eti-es cor(orate )ind the-selves in )inancial di))iculty because o) )actors beyond their control and also due to certain internal reasons. =or the revival o) the cor(orate as *ell as )or the sa)ety o) the -oney lent by the ban,s and =@s, ti-ely su((ort through restructuring in genuine cases is called )or. 9o*ever, delay in agree-ent a-ongst di))erent lending institutions o)ten co-es in the *ay o) such endeavours.
Based on the e+(erience in other countries li,e the U.K., 'hailand, Korea, etc. o) (utting in (lace institutional -echanis- )or restructuring o) cor(orate debt and need )or a si-ilar -echanis- in @ndia, a Cor(orate $ebt 7estructuring Syste- has been evolved, as under 6
Objective
'he objective o) the Cor(orate $ebt 7estructuring AC$7B )ra-e*or, is to ensure ti-ely and trans(arent -echanis- )or restructuring o) the cor(orate debts o) viable entities facing problems4 outside t(e purvie7 of B-.R4 2RT and ot(er legal proceedings4 for t(e benefit of all concerned' @n (articular, the )ra-e*or, *ill ai- at (reserving viable cor(orate that are a))ected by certain internal and e+ternal )actors and -ini-i1e the losses to the creditors and other sta,eholders through an orderly and coordinated restructuring (rogra--e.
St%uctu%e:
C$7 syste- in the country *ill have a three?tier structure6
Page 52
9A: C2R Standing .orum 9B: C2R Empo7ered 1roup 9C: C2R Cell
9A: CDR St$ 'i ) Fo%u( :
'he C$7 Standing =oru- *ould be the re(resentative general body o) all )inancial institutions and ban,s (artici(ating in C$7 syste-. All )inancial institutions and ban,s should (artici(ate in the syste- in their o*n interest. C$7 Standing =oru- *ill be a sel)? e-(o*ered body, *hich *ill lay do*n (olicies and guidelines, guide and -onitor the (rogress o) cor(orate debt restructuring. 'he =oru- *ill also (rovide an o))icial (lat)or- )or both the creditors and borro*ers Aby consultationB to a-icably and collectively evolve (olicies and guidelines )or *or,ing out debt restructuring (lans in the interests o) all concerned. 'he C$7 Standing =oru- shall co-(rise Chair-an L &anaging $irector, @ndustrial $evelo(-ent Ban, o) @ndiaH &anaging $irector, @ndustrial Credit L @nvest-ent Cor(oration o) @ndia "i-itedH Chair-an, State Ban, o) @ndiaH Chair-an, @ndian Ban,s Association and #+ecutive $irector, 7eserve Ban, o) @ndia as *ell as Chair-en and &anaging $irectors o) all ban,s and )inancial institutions (artici(ating as (er-anent -e-bers in the syste-. 'he =oru- *ill elect its Chair-an )or a (eriod o) one year and the (rinci(le o) rotation *ill be )ollo*ed in the subse0uent years. 9o*ever, the =oru- -ay decide to have a !or,ing Chair-an as a *hole?ti-e o))icer to guide and carry out the decisions o) the C$7 Standing =oru-.
A C$7 Core %rou( *ill be carved out o) the C$7 Standing =oru- to assist the Standing =oru- in convening the -eetings and ta,ing decisions relating to (olicy, on behal) o) the Standing =oru-. 'he Core %rou( *ill consist o) Chie) #+ecutives o) @$B@, [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 53
@C@C@, SB@, Ban, o) Baroda, Ban, o) @ndia, Punjab National Ban,, @ndian Ban,s Association and a re(resentative o) 7eserve Ban, o) @ndia. 'he C$7 Standing =oru- shall -eet at least once every si+ -onths and *ould revie* and -onitor the (rogress o) cor(orate debt restructuring syste-. 'he =oru- *ould also lay do*n the (olicies and guidelines to be )ollo*ed by the C$7 #-(o*ered %rou( and C$7 Cell )or debt restructuring and *ould ensure their s-ooth )unctioning and adherence to the (rescribed ti-e schedules )or debt restructuring. @t can also revie* any individual decisions o) the C$7 #-(o*ered %rou( and C$7 Cell. 'he C$7 Standing =oru-, the C$7 #-(o*ered %rou( and C$7 Cell Adescribed in )ollo*ing (aragra(hsB shall be housed in @$B@. All )inancial institutions and ban,s shall share the ad-inistrative and other costs. 'he sharing (attern shall be as deter-ined by the Standing =oru-.
CDR E("o5e%e' G%ou" $ ' CDR Cell:

'he individual cases o) cor(orate debt restructuring shall be decided by the C$7 #-(o*ered %rou(, consisting o) #$ level re(resentatives o) @$B@, @C@C@ "i-ited and SB@ as standing -e-bers, in addition to #$ level re(resentatives o) )inancial institutions and ban,s *ho have an e+(osure to the concerned co-(any. @n order to -a,e the C$7 #-(o*ered %rou( e))ective and broad based and o(erate e))iciently and s-oothly, it *ould have to be ensured that each )inancial institution and ban,, as (artici(ants o) the C$7 syste-, no-inates a (anel o) t*o or three #$s, one o) *ho- *ill (artici(ate in a s(eci)ic -eeting o) the #-(o*ered %rou( dealing *ith individual restructuring cases. !here, ho*ever, a ban, G )inancial institution has only one #+ecutive $irector, the (anel -ay consist o) senior o))icials, duly authori1ed by its Board. 'he level o) re(resentation o) ban,sG )inancial institutions on the C$7 #-(o*ered %rou( should be at a su))iciently senior level to ensure that concerned ban, G =@ abides by the necessary co--it-ents including sacri)ices, -ade to*ards debt restructuring. [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 54
'he #-(o*ered %rou( *ill consider the (reli-inary re(ort o) all cases o) re0uests o) restructuring, sub-itted to it by the C$7 Cell. A)ter the #-(o*ered %rou( decides that restructuring o) the co-(any is (ri-a?)acie )easible and the enter(rise is (otentially viable in ter-s o) the (olicies and guidelines evolved by Standing =oru-, the detailed restructuring (ac,age *ill be *or,ed out by the C$7 Cell in conjunction *ith the "ead @nstitution. 'he C$7 #-(o*ered %rou( *ould be -andated to loo, into each case o) debt restructuring, e5amine t(e viability and re(abilitation potential of t(e Company and a((rove the restructuring (ac,age *ithin a specified time frame of 8# days4 or at best 1;> days o) re)erence to the #-(o*ered %rou(.
'here should be a general authorisation by the res(ective Boards o) the (artici(ating institutions G ban,s in )avour o) their re(resentatives on the C$7 #-(o*ered %rou(, authorising the- to ta,e decisions on behal) o) their organi1ation, regarding restructuring o) debts o) individual cor(orate.
'he decisions o) the C$7 #-(o*ered %rou( shall be )inal and action?re)erence (oint. @) restructuring o) debt is )ound viable and )easible and acce(ted by the #-(o*ered %rou(, the co-(any *ould be (ut on the restructuring -ode. @), ho*ever, restructuring is not )ound viable, the creditors *ould then be )ree to ta,e necessary ste(s )or i--ediate recovery o) dues and G or li0uidation or *inding u( o) the co-(any, collectively or individually.
CDR Cell:
'he C$7 Standing =oru- and the C$7 #-(o*ered %rou( *ill be assisted by a C$7 Cell in all their )unctions. 'he C$7 Cell *ill -a,e the initial scrutiny o) the (ro(osals received )ro- borro*ers G lenders, by calling )or (ro(osed rehabilitation (lan and [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 55
other in)or-ation and (ut u( the -atter be)ore the C$7 #-(o*ered %rou(, *ithin one -onth to decide *hether rehabilitation is (ri-a )acie )easible, i) so, the C$7 Cell *ill (roceed to (re(are detailed 7ehabilitation Plan *ith the hel( o) lenders and i) necessary, e+(erts to be engaged )ro- outside. @) not )ound (ri-a )acie )easible, the lenders -ay start action )or recovery o) their dues.
'o begin *ith, C$7 Cell *ill be constituted in @$B@, &u-bai and ade0uate -e-bers o) sta)) )or the Cell *ill be de(uted )ro- ban,s and )inancial institutions. 'he C$7 Cell -ay also ta,e outside (ro)essional hel(. 'he initial cost in o(erating the C$7 -echanis- including C$7 Cell *ill be -et by @$B@ initially )or one year and then )rocontribution )ro- the )inancial institutions and ban,s in the Core %rou( at the rate o) 7s.4> la,h each and contribution )ro- other institutions and ban,s at the rate o) 7s.4 la,h each. All re)erences )or cor(orate debt restructuring by lenders or borro*ers *ill be -ade to the C$7 Cell. @t shall be the res(onsibility o) the lead institution G -ajor sta,eholder to the cor(orate, to *or, out a (reli-inary restructuring (lan in consultation *ith other sta,eholders and sub-it to the C$7 Cell *ithin one -onth. 'he C$7 Cell *ill (re(are the restructuring (lan in ter-s o) the general (olicies and guidelines a((roved by the C$7 Standing =oru- and (lace )or the consideration o) the #-(o*ered %rou( *ithin 2> days )or decision. 'he #-(o*ered %rou( can a((rove or suggest -odi)ications, so, ho*ever, that a )inal decision -ust be ta,en *ithin a total (eriod o) <> days. 9o*ever, )or su))icient reasons the (eriod can be e+tended -a+i-u- u(to 1;> days )ro- the date o) re)erence to the C$7 Cell.
Ot&e% #e$tu%es:
C$7 *ill be a Non?statutory -echanis-. C$7 -echanis- *ill be a voluntary syste- based on debtor?creditor agree-ent and inter?creditor agree-ent. [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 58
'he sche-e *ill not a((ly to accounts involving only one )inancial institution or one ban,. 'he C$7 -echanis- *ill cover only -ulti(le ban,ing accounts G syndication G consortiu- accounts *ith outstanding e+(osure o) 7s./> crore and above by ban,s and institutions.
'he C$7 syste- *ill be a((licable only to standard and sub?standard accounts. 9o*ever, as an interi- -easure, (er-ission )or cor(orate debt restructuring *ill be -ade available by 7B@ on the basis o) s(eci)ic reco--endation o) C$7 ICore?%rou(I, i) a -ini-u- o) 84 (er cent Aby valueB o) the lenders constituting ban,s and =@s consent )or C$7, irres(ective o) di))erences in asset classi)ication status in ban,sG )inancial institutions. 'here *ould be no reDuirement of t(e account I company being sic 4 NPA or being in default for a specified (eriod be)ore re)erence to the C$7 %rou(. 9o*ever, potentially viable cases of NPAs 7ill get priority' 'his a((roach *ould (rovide the necessary )le+ibility and )acilitate ti-ely intervention )or debt restructuring. Prescribing any -ilestoneAsB -ay not be necessary, since the debt restructuring e+ercise is being triggered by ban,s and )inancial institutions or *ith their consent. @n no case, the re0uests o) any cor(orate indulging in *il)ul de)ault or -is)easance *ill be considered )or restructuring under C$7.
7e)erence to Cor(orate $ebt 7estructuring Syste- could be triggered by AiB any or -ore o) the secured creditor *ho have -ini-u- />Q share in either *or,ing ca(ital or ter- )inance, or AiiB by the concerned cor(orate, i) su((orted by a ban, or )inancial institution having sta,e as in AiB above.
Le)$l B$sis
'he legal basis to the C$7 -echanis- shall be (rovided by the 2ebtor%Creditor Agreement 92CA: and the -nter%Creditor Agreement' 'he debtors shall have to accede [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 5;
to the $CA, either at the ti-e o) original loan docu-entation A)or )uture casesB or at the ti-e o) re)erence to Cor(orate $ebt 7estructuring Cell. Si-ilarly, all (artici(ants in the C$7 -echanis- through their -e-bershi( o) the Standing =oru- shall have to enter into a legally binding agree-ent, *ith necessary en)orce-ent and (enal clauses, to o(erate the Syste- through laid?do*n (olicies and guidelines.
St$ '8Still Cl$use:

ne o) the -ost i-(ortant ele-ents o) $ebtor?Creditor Agree-ent *ould be >stand still> agreement binding for 8# days4 or 1;> days by both sides. Under this clause, both the debtor and creditorAsB shall agree to a legally binding >stand%still> 7(ereby bot( t(e parties commit t(emselves not to ta ing recourse to any ot(er legal action during the Mstand?stillM (eriod, this *ould be necessary )or enabling the C$7 Systeto underta,e the necessary debt restructuring e+ercise *ithout any outside intervention judicial or other*ise. 'he @nter?Creditors Agree-ent *ould be a legally binding agree-ent a-ongst the secured creditors, *ith necessary en)orce-ent and (enal clauses, *herein the creditors *ould co--it the-selves to abide by the various ele-ents o) C$7 syste-. =urther , the creditors shall agree that i) JKE of secured creditors by value4 agree to a debt restructuring (ac,age, the sa-e *ould be binding on the re-aining secured creditors.
Accou ti ) t%e$t(e t #o% %est%uctu%e' $ccou ts

'he accounting treat-ent o) accounts restructured under C$7 *ould be governed by the (rudential nor-s indicated in circular $B $. BP. BC. <; G /1.>3.>3; G />>>?>1 dated &arch 2>, />>1. 7estructuring o) cor(orate debts under C$7 could ta,e (lace in the )ollo*ing stages6 [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 5<
Be)ore co--ence-ent o) co--ercial (roductionH A)ter co--ence-ent o) co--ercial (roduction but be)ore the asset has been classi)ied as sub?standardH A)ter co--ence-ent o) co--ercial (roduction and the asset has been classi)ied as sub?standard. 'he (rudential treat-ent o) the accounts, subjected to restructuring under C$7, *ould be governed by the )ollo*ing nor-s6
T%e$t(e t o# st$ '$%' $ccou ts %est%uctu%e' u 'e% CDR:
A rescheduling o) the instal-ents o) (rinci(al alone, at any o) the a)oresaid )irst t*o stages [(aragra(h 4AaB and AbB above] *ould not cause a standard asset to be classi)ied in the sub?standard category, (rovided the loan G credit )acility is )ully secured.
A rescheduling o) interest ele-ent at any o) the )oregoing )irst t*o stages *ould not cause an asset to be do*ngraded to sub?standard category subject to the condition that the a-ount o) sacri)ice, i) any, in the ele-ent o) interest, -easured in (resent value ter-s, is either *ritten o)) or (rovision is -ade to the e+tent o) the sacri)ice involved. =or the (ur(ose, the )uture interest due as (er the original loan agree-ent in res(ect o) an account should be discounted to the (resent value at a rate a((ro(riate to the ris, category o) the borro*er Ai.e. current P"7 R the a((ro(riate credit ris, (re-iu- )or the borro*er?categoryB and co-(ared *ith the (resent value o) the dues e+(ected to be received under the restructuring (ac,age, discounted on the sa-e basis.
Page 8>
@n case there is a sacri)ice involved in the a-ount o) interest in (resent value ter-s, as at AbB above, the a-ount o) sacri)ice should either be *ritten o)) or (rovision -ade to the e+tent o) the sacri)ice involved.
T%e$t(e t o# sub8st$ '$%' $ccou ts %est%uctu%e' u 'e% CDR
A rescheduling o) the instal-ents o) (rinci(al alone, *ould render a sub?standard asset eligible to be continued in the sub?standard category )or the s(eci)ied (eriod, (rovided the loan G credit )acility is )ully secured.
A rescheduling o) interest ele-ent *ould render a sub?standard asset eligible to be continued to be classi)ied in sub?standard category )or the s(eci)ied (eriod subject to the condition that the a-ount o) sacri)ice, i) any, in the ele-ent o) interest, -easured in (resent value ter-s, is either *ritten o)) or (rovision is -ade to the e+tent o) the sacri)ice involved. =or the (ur(ose, the )uture interest due as (er the original loan agree-ent in res(ect o) an account should be discounted to the (resent value at a rate a((ro(riate to the ris, category o) the borro*er Ai.e., current P"7 R the a((ro(riate credit ris, (re-iu- )or the borro*er? categoryB and co-(ared *ith the (resent value o) the dues e+(ected to be received under the restructuring (ac,age, discounted on the sa-e basis.
@n case there is a sacri)ice involved in the a-ount o) interest in (resent value ter-s, as at AbB above, the a-ount o) sacri)ice should either be *ritten o)) or (rovision -ade to the e+tent o) the sacri)ice involved. #ven in cases *here the sacri)ice is by *ay o) *rite o)) o) the (ast interest dues, the asset should continue to be treated as sub?standard. 'he sub?standard accounts at AiiB AaB, AbB and AcB above, *hich have been subjected to restructuring, etc. *hether in res(ect o) (rinci(al instal-ent or interest a-ount, by *hatever -odality, *ould be eligible to be u(graded to the standard category only after t(e specified period4 i'e'4 a period of one year a)ter the date *hen )irst (ay-ent o) interest or o) (rinci(al, *hichever is earlier, )alls due, subject to satis)actory (er)or-ance during the [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 81
(eriod. 'he a-ount o) (rovision -ade earlier, net o) the a-ount (rovided )or the sacri)ice in the interest a-ount in (resent value ter-s as a)oresaid, could also be reversed a)ter the one?year (eriod. $uring this one?year (eriod, the sub?standard asset *ill not deteriorate in its classi)ication i) satis)actory (er)or-ance o) the account is de-onstrated during the (eriod. @n case, ho*ever, the satis)actory (er)or-ance during the one year (eriod is not evidenced, the asset classi)ication o) the restructured account *ould be governed as (er the a((licable (rudential nor-s *ith re)erence to the (re?restructuring (ay-ent schedule. 'he asset classi)ication under C$7 *ould continue to be ban,?s(eci)ic based on record o) recovery o) each ban,, as (er the e+isting (rudential nor-s a((licable to ban,s.
Rest%uctu%i ) ; Resc&e'uli ) o# Lo$ s

A standard asset *here the ter-s o) the loan agree-ent regarding interest and (rinci(al have been renegotiated or rescheduled a)ter co--ence-ent o) (roduction should be classi)ied as sub?standard and should re-ain in such category )or at least one year o) satis)actory (er)or-ance under the renegotiated or rescheduled ter-s. @n the case o) sub? standard and doubt)ul assets also, rescheduling does not entitle a ban, to u(grade the 0uality o) advance auto-atically unless there is satis)actory (er)or-ance under the rescheduled G renegotiated ter-s. =ollo*ing re(resentations )ro- ban,s that the )oregoing sti(ulations deter the ban,s )ro- restructuring of standard and sub%standard loan assets even though the -odi)ication o) ter-s -ight not jeo(ardise the assurance o) re(ay-ent o) dues )ro- the borro*er, the nor-s relating to restructuring o) standard and sub?standard assets *ere revie*ed in &arch />>1. @n the conte+t o) restructuring o) the accounts, the [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 8/
)ollo*ing stages at *hich the restructuring G rescheduling G renegotiation o) the ter-s o) loan agree-ent could ta,e (lace, can be identi)ied6
Be)ore co--ence-ent o) co--ercial (roductionH A)ter co--ence-ent o) co--ercial (roduction but be)ore the asset has
been classi)ied as sub standard, A)ter co--ence-ent o) co--ercial (roduction and a)ter the asset has been
classi)ied as sub standard. @n each o) the )oregoing three stages, the rescheduling, etc., o) (rinci(al andGor o) interest could ta,e (lace, *ith or *ithout sacri)ice, as (art o) the restructuring (ac,age evolved.
T%e$t(e t o# Rest%uctu%e' St$ '$%' Accou ts:

A rescheduling o) the instal-ents o) principal alone, at any o) the a)oresaid )irst t*o stages *ould not cause a standard asset to be classi)ied in the sub standard category (rovided the loanGcredit )acility is )ully secured.
A rescheduling o) interest element at any o) the )oregoing )irst t*o stages *ould not cause an asset to be do*ngraded to sub standard category subject to the condition that the a-ount o) sacri)ice, i) any, in the ele-ent o) interest, measured in present value terms, is either *ritten o)) or (rovision is -ade to the e+tent o) the sacri)ice involved. =or the (ur(ose, the )uture interest due as (er the original loan agree-ent in res(ect o) an account should be discounted to the (resent value at a rate a((ro(riate to the ris, category o) the borro*er Ai.e., current P"7R the a((ro(riate credit ris, (re-iu- )or the borro*er? categoryB and co-(ared *ith the (resent value o) the dues e+(ected to be received under the restructuring (ac,age, discounted on the sa-e basis.
Page 82
@n case there is a sacri)ice involved in the a-ount o) interest in (resent value ter-s, as at AbB above, the a-ount o) sacri)ice should either be 7ritten off or provision made to the e+tent o) the sacri)ice involved.
T%e$t(e t o# %est%uctu%e' sub8st$ '$%' $ccou ts:

A rescheduling o) the instal-ents o) (rinci(al alone, *ould render a sub?standard asset eligible to be continued in the sub?standard category )or the s(eci)ied (eriod, provided the loanGcredit )acility is fully secured.
A rescheduling o) interest ele-ent *ould render a sub?standard asset eligible to be continued to be classi)ied in sub standard category )or the s(eci)ied (eriod subject to the condition that the a-ount o) sacri)ice, i) any, in the ele-ent o) interest, measured in present value terms, is either *ritten o)) or (rovision is -ade to the e+tent o) the sacri)ice involved. =or the (ur(ose, the )uture interest due as (er the original loan agree-ent in res(ect o) an account should be discounted to the (resent value at a rate a((ro(riate to the ris, category o) the borro*er Ai.e., current P"7 R the a((ro(riate credit ris, (re-iu- )or the borro*er?categoryB and co-(ared *ith the (resent value o) the dues e+(ected to be received under the restructuring (ac,age, discounted on the sa-e basis. @n case there is a sacri)ice involved in the a-ount o) interest in (resent value ter-s, as at AbB above, the a-ount o) sacri)ice should either be *ritten o)) or (rovision -ade to the e+tent o) the sacri)ice involved. #ven in cases *here the sacri)ice is by *ay o) *rite o)) o) the past interest dues, the asset should continue to be treated as sub?standard.
U" )%$'$tio o# %est%uctu%e' $ccou ts:

'he sub?standard accounts *hich have been subjected to restructuring etc., *hether in res(ect o) (rinci(al instal-ent or interest a-ount, by *hatever -odality, *ould be eligible to be u(graded to the standard category only a)ter the s(eci)ied (eriod i.e., a (eriod o) one [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 83
year a)ter the date *hen )irst (ay-ent o) interest or o) (rinci(al, *hichever is earlier, )alls due, subject to satis)actory (er)or-ance during the (eriod. 'he a-ount o) (rovision -ade earlier, net o) the a-ount (rovided )or the sacri)ice in the interest a-ount in (resent value ter-s as a)oresaid, could also be reversed a)ter the one year (eriod. $uring this one?year (eriod, the sub?standard asset *ill not deteriorate in its classi)ication i) satis)actory (er)or-ance o) the account is de-onstrated during the (eriod. @n case, ho*ever, the satis)actory (er)or-ance during the one?year (eriod is not evidenced, the asset classi)ication o) the restructured account *ould be governed as (er the a((licable (rudential nor-s *ith re)erence to the (re?restructuring (ay-ent schedule.
Ge e%$l:
'hese instructions *ould be a((licable to all ty(e o) credit )acilities including *or,ing ca(ital li-its, e+tended to industrial units, (rovided they are )ully covered by tangible securities. As trading involves only buying and selling o) co--odities and the (roble-s associated *ith -anu)acturing units such as bottlenec, in co--ercial (roduction, ti-e and cost escalation etc. are not a((licable to the-, these guidelines should not be a((lied to restructuringG rescheduling o) credit )acilities e+tended to traders. !hile assessing the e+tent o) security cover available to the credit )acilities, *hich are being restructuredG rescheduled, collateral security *ould also be rec,oned, (rovided such collateral is a tangible security (ro(erly charged to the ban, and is not in the intangible )or- li,e guarantee etc. o) the (ro-oterG others.
I co(e %eco) itio

'here *ill be no change in the e+isting instructions on inco-e recognition. Conse0uently, ban,s should not recognise inco-e on accrual basis in res(ect o) the (rojects even though the asset is classi)ied as a standard asset i) the asset is a Inon (er)or-ing assetI in ter-s o) the e+tant instructions. @n other *ords, *hile the accounts o) the (roject -ay be classi)ied as a standard asset, ban,s shall recognise inco-e in such accounts only on realisation on cash basis i) the asset has other*ise beco-e Enon (er)or-ingF as (er the e+tant delin0uency nor- o) 1;> days. 'he delin0uency nor- *ould beco-e <> days *ith e))ect )ro- 21 &arch />>3. Conse0uently, ban,s, *hich have *rongly recognised inco-e in the (ast, should reverse the interest i) it *as recognised as inco-e during the current year or -a,e a (rovision )or an e0uivalent a-ount i) it *as recognised as inco-e in the (revious yearAsB. As regards the regulatory treat-ent o) inco-e recognised as E)unded interestF and Econversion into e0uity, debentures or any other instru-entF ban,s should ado(t the )ollo*ing6
Fu 'e' I te%est: @nco-e recognition in res(ect o) the NPAs, regardless o) *hether

these are or are not subjected to restructuringG reschedulingG renegotiation o) ter-s o) the loan agree-ent, should be done strictly on cash basis, only on realisation and not i) the a-ount o) interest overdue has been )unded. @), ho*ever, the a-ount o) )unded interest is recognised as inco-e, a (rovision )or an e0ual a-ount should also be -ade si-ultaneously. @n other *ords, any )unding o) interest in res(ect o) NPAs, i) recognised as inco-e, should be )ully (rovided )or.
Co ve%sio i to e2uit!. 'ebe tu%es o% $ ! ot&e% i st%u(e t:
'he a-ount
outstanding converted into other instru-ents *ould nor-ally co-(rise (rinci(al and the interest co-(onents. @) the a-ount o) interest dues is converted into e0uity or any ot(er [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 85
instrument, and inco-e is recognised in conse0uence, )ull (rovision should be -ade )or the a-ount o) inco-e so recognised to o))set the e))ect o) such inco-e recognition. Such (rovision *ould be in addition to the a-ount o) (rovision that -ay be necessary )or the de(reciation in the value o) the e0uity or other instru-ents, as (er the invest-ent valuation nor-s. 9o*ever, i) the conversion o) interest is into e0uity, *hich is 0uoted, interest inco-e can be recognised at -ar,et value o) e0uity, as on the date o) conversion, not e+ceeding the a-ount o) interest converted to e0uity. Such e0uity -ust therea)ter be classi)ied in the Iavailable )or saleI category and valued at lo*er o) cost or -ar,et value. @n case o) conversion o) (rinci(al and Gor interest in res(ect o) NPAs into debentures, such debentures should be treated as NPA, ab initio, in the sa-e asset classi)ication as *as a((licable to loan just be)ore conversion and (rovision -ade as (er nor-s. 'his nor*ould also a((ly to 1ero cou(on bonds or other instru-ents *hich see, to de)er the liability o) the issuer. n such debentures, inco-e should be recognised only on realisation basis. 'he inco-e in res(ect o) unrealised interest, *hich is converted into debentures or any other )i+ed -aturity instru-ent, should be recognised only on rede-(tion o) such instru-ent. Subject to the above, the e0uity shares or other instru-ents arising )roconversion o) the (rinci(al a-ount o) loan *ould also be subject to the usual (rudential valuation nor-s as a((licable to such instru-ents.
P%ovisio i )
!hile there *ill be no change in the e+tant nor-s on (rovisioning )or NPAs, ban,s *hich are already holding (rovisions against so-e o) the accounts, *hich -ay no* be classi)ied as EstandardF, shall continue to hold the (rovisions and shall not reverse the sa-e.
Page 88
S"eci$l C$ses
A##ounts 'ith temporary defi#ien#ies!
'he classi)ication o) an asset as NPA should be based on the record o) recovery. Ban, should not classi)y an advance account as NPA -erely due to the e+istence o) so-e de)iciencies *hich are te-(orary in nature such as non?availability o) ade0uate dra*ing (o*er based on the latest available stoc, state-ent, balance outstanding e+ceeding the li-it te-(orarily, non?sub-ission o) stoc, state-ents and non?rene*al o) the li-its on the due date, etc. @n the -atter o) classi)ication o) accounts *ith such de)iciencies ban,s -ay )ollo* the )ollo*ing guidelines6
Ban,s should ensure that dra*ings in the *or,ing ca(ital accounts are covered by
the ade0uacy o) current assets, since current assets are )irst a((ro(riated in ti-es o) distress. $ra*ing (o*er is re0uired to be arrived at based on the stoc, state-ent *hich is current. 9o*ever, considering the di))iculties o) large borro*ers, stoc, state-ents relied u(on by the ban,s )or deter-ining dra*ing (o*er should not be older than three -onths. 'he outstanding in the account based on dra*ing (o*er calculated )ro- stoc, state-ents older [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 8;
than three -onths, *ould be dee-ed as irregular. A *or,ing ca(ital borro*er account *ill beco-e NPA i) such irregular dra*ings are (er-itted in the account )or a continuous (eriod o) 1;> days even though the unit -ay be *or,ing or the borro*erMs )inancial (osition is satis)actory.
7egular and ad hoc credit li-its need to be revie*edG regularised not later than
three -onths )ro- the due dateGdate o) ad hoc sanction. @n case o) constraints such as non? availability o) )inancial state-ents and other data )ro- the borro*ers, the branch should )urnish evidence to sho* that rene*alG revie* o) credit li-its is already on and *ould be co-(leted soon. @n any case, delay beyond si+ -onths is not considered desirable as a general disci(line. 9ence, an account *here the regularG ad hoc credit li-its have not been revie*edG rene*ed *ithin 1;> days )ro- the due dateG date o) ad hoc sanction *ill be treated as NPA.
A##ounts regularised near about the balan#e sheet date!

'he asset classi)ication o) borro*er accounts *here a solitary or a )e* credits are recorded be)ore the balance sheet date should be handled *ith care and *ithout sco(e )or subjectivity. !here the account indicates inherent *ea,ness on the basis o) the data available, the account should be dee-ed as a NPA. @n other genuine cases, the ban,s -ust )urnish satis)actory evidence to the Statutory AuditorsG@ns(ecting ))icers about the -anner o) regularisation o) the account to eli-inate doubts on their (er)or-ing status.
Asset &lassifi#ation to be borro'er-'ise and not fa#ility-'ise

@t is di))icult to envisage a situation *hen only one )acility to a borro*er beco-es a (roble- credit and not others. 'here)ore, all the )acilities granted by a ban, to a borro*er *ill have to be treated as NPA and not the (articular )acility or (art thereo) *hich has beco-e irregular. [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page 8<
@) the debits arising out o) devolve-ent o) letters o) credit or invo,ed guarantees are (ar,ed in a se(arate account, the balance outstanding in that account also should be treated as a (art o) the borro*erFs (rinci(al o(erating account )or the (ur(ose o) a((lication o) (rudential nor-s on inco-e recognition, asset classi)ication and (rovisioning.
A##ounts 'here there is erosion in the $alue of se#urity
A NPA need not go through the various stages o) classi)ication in cases o) serious credit i-(air-ent and such assets should be straighta*ay classi)ied as doubt)ul or loss asset as a((ro(riate. #rosion in the value o) security can be rec,oned as signi)icant *hen the realisable value o) the security is less than 4> (er cent o) the value assessed by the ban, or acce(ted by 7B@ at the ti-e o) last ins(ection, as the case -ay be. Such NPAs -ay be straighta*ay classi)ied under doubt)ul category and (rovisioning should be -ade as a((licable to doubt)ul assets.
@) the realisable value o) the security, as assessed by the ban,G a((roved valuesG 7B@ is less than 1> (er cent o) the outstanding in the borro*er accounts, the e+istence o) security should be ignored and the asset should be straighta*ay classi)ied as loss asset. @t -ay be either *ritten o)) or )ully (rovided )or by the ban,.
Ad$an#es to (A&S)*SS #eded to &ommer#ial +anks!

@n res(ect o) agricultural advances as *ell as advances )or other (ur(oses granted by ban,s to ceded PACSG =SS under the on?lending syste-, only that (articular credit )acility granted to PACSG =SS *hich is in de)ault )or a (eriod o) t*o harvest seasons Anot e+ceeding t*o hal) yearsBGt*o 0uarters, as the case -ay be, a)ter it has beco-e due *ill be classi)ied as NPA and not all the credit )acilities sanctioned to a PACSG =SS. 'he other direct loans L [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page ;>
advances, i) any, granted by the ban, to the -e-ber borro*er o) a PACSG =SS outside the on?lending arrange-ent *ill beco-e NPA even i) one o) the credit )acilities granted to the sa-e borro*er beco-es NPA.
Ad$an#es against %erm Deposits, -S&s, ./()0/(, et#!

Advances against ter- de(osits, NSCs eligible )or surrender, @JPs, KJPs and li)e (olicies need not be treated as NPAs. Advances against gold orna-ents, govern-ent securities and all other securities are not covered by this e+e-(tion.
oans 'ith moratorium for payment of interest
@n the case o) ban, )inance given )or industrial (rojects or )or agricultural (lantations etc. *here -oratoriu- is available )or (ay-ent o) interest, (ay-ent o) interest beco-es MdueM only a)ter the -oratoriu- or gestation (eriod is over. 'here)ore, such a-ounts o) interest do not beco-e overdue and hence NPA, *ith re)erence to the date o) debit o) interest. 'hey beco-e overdue a)ter due date )or (ay-ent o) interest, i) uncollected.
@n the case o) housing loan or si-ilar advances granted to sta)) -e-bers *here interest is (ayable a)ter recovery o) (rinci(al, interest need not be considered as overdue )ro- the )irst 0uarter on*ards. Such loansGadvances should be classi)ied as NPA only *hen there is a de)ault in re(ay-ent o) instal-ent o) (rinci(al or (ay-ent o) interest on the res(ective due dates
A)%icultu%$l $'v$ ces
Page ;1
@n res(ect o) advances granted )or agricultural (ur(ose *here interest andGor instal-ent o) (rinci(al re-ains un(aid a)ter it has beco-e (ast due )or t*o harvest seasons but )or a (eriod not e+ceeding t*o hal)?years, such an advance should be treated as NPA. 'he above nor-s should be -ade a((licable to all direct agricultural advances as listed at ite-s 1.1, 1.1./ AiB to AviiB, 1.1./ AviiiBAaBA1B and 1.1./ AviiiBAbBA1B o) &aster Circular on lending to (riority sector No. 7PC$. P"AN. BC. 1/G>3.><.>1G />>1? />>/ dated 1 August />>1. An e+tract o) the list o) these ite-s is )urnished in the Anne+ure @@. @n res(ect o) agricultural loans, other than those s(eci)ied above, identi)ication o) NPAs *ould be done on the sa-e basis as non agricultural advances *hich, at (resent, is the 1;> days delin0uency nor-.
!here natural cala-ities i-(air the re(aying ca(acity o) agricultural borro*ers, ban,s -ay decide on their o*n as a relie) -easure ? conversion o) the short?ter(roduction loan into a ter- loan or re?schedule-ent o) the re(ay-ent (eriodH and the sanctioning o) )resh short?ter- loan, subject to various guidelines contained in 7B@ circulars 7PC$.No.P"=S.BC.1/;G>4.>3.>/G<8?<; dated />.>5.<; and 7PC$.No.P"=S.BC.<G>4.>1.>3G<;?<< dated /1.>8.<;.
@n such cases o) conversion or re?schedule-ent, the ter- loan as *ell as )resh short? ter- loan -ay be treated as current dues and need not be classi)ied as NPA. 'he asset classi)ication o) these loans *ould therea)ter be governed by the revised ter-s L conditions and *ould be treated as NPA i) interest andGor instal-ent o) (rinci(al re-ains un(aid, )or t*o harvest seasons but )or a (eriod not e+ceeding t*o hal) years.
Gove% (e t )u$%$ tee' $'v$ ces:

'he credit )acilities bac,ed by guarantee o) the Central %overn-ent though overdue -ay be treated as NPA only *hen the %overn-ent re(udiates its guarantee *hen invo,ed. 'his e+e-(tion )ro- classi)ication o) %overn-ent guaranteed advances as NPA is not )or [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page ;/
the (ur(ose o) recognition o) inco-e. !ith e))ect )ro- 1st A(ril />>>, advances sanctioned against State %overn-ent guarantees should be classi)ied as NPA in the nor-al course, i) the guarantee is invo,ed and re-ains in de)ault )or -ore than t*o 0uarters. !ith e))ect )ro- &arch 21, />>1 the (eriod o) de)ault is revised as -ore than 1;> days.
T$-e8out Fi $ ce:
'a,eout )inance is the (roduct e-erging in the conte+t o) the )unding o) long? ter- in)rastructure (rojects. Under this arrange-ent, the institutionGthe ban, )inancing in)rastructure (rojects *ill have an arrange-ent *ith any )inancial institution )or trans)erring to the latter the outstanding in res(ect o) such )inancing in their boo,s on a (re? deter-ined basis. @n vie* o) the ti-e?lag involved in ta,ing?over, the (ossibility o) a de)ault in the -eanti-e cannot be ruled out. 'he nor-s o) asset classi)ication *ill have to be )ollo*ed by the concerned ban,G)inancial institution in *hose boo,s the account stands as balance sheet ite- as on the relevant date. @) the lending institution observes that the asset has turned NPA on the basis o) the record o) recovery, it should be classi)ied accordingly. 'he lending institution should not recognise inco-e on accrual basis and account )or the sa-e only *hen it is (aid by the borro*erG ta,ing over institution Ai) the arrange-ent so (rovidesB. 'he lending institution should also -a,e (rovisions against any asset turning into NPA (ending its ta,e over by ta,ing over institution. As and *hen the asset is ta,en over by the ta,ing over institution, the corres(onding (rovisions could be reversed. 9o*ever, the ta,ing over institution, on ta,ing over such assets, should -a,e (rovisions treating the account as NPA )ro- the actual date o) it beco-ing NPA even though the account *as not in its boo,s as on that date.
Post8s&i"(e t Su""lie%0s C%e'it

@n res(ect o) (ost?shi(-ent credit e+tended by the ban,s covering e+(ort o) goods to countries )or *hich the #C%CFs cover is available, #U@& Ban, has introduced a guarantee? cu-?re)inance (rogra--e *hereby, in the event o) de)ault, #U@& Ban, *ill (ay the [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page ;2
guaranteed a-ount to the ban, *ithin a (eriod o) 2> days )ro- the day the ban, invo,es the guarantee a)ter the e+(orter has )iled clai- *ith #C%C. Accordingly, to the e+tent (ay-ent has been received )ro- the #U@& Ban,, the advance -ay not be treated as a non?(er)or-ing asset )or asset classi)ication and (rovisioning (ur(oses.
E6"o%t P%oject Fi $ ce:

@n res(ect o) e+(ort (roject )inance, there could be instances *here the actual i-(orter has (aid the dues to the ban, abroad but the ban, in turn is unable to re-it the a-ount due to (olitical develo(-ents such as *ar, stri)e, UN e-bargo, etc.
@n such cases, *here the lending ban, is able to establish through docu-entary evidence that the i-(orter has cleared the dues in )ull by de(ositing the a-ount in the ban, abroad be)ore it turned into NPA in the boo,s o) the ban,, but the i-(orterMs country is not allo*ing the )unds to be re-itted due to (olitical or other reasons, the asset classi)ication -ay be -ade a)ter a (eriod o) one year )ro- the date the a-ount *as de(osited by the i-(orter in the ban, abroad.
A'v$ ces u 'e% %e&$bilit$tio $""%ove' b! BIFR; TLI:

Ban,s are not (er-itted to u(grade the classi)ication o) any advance in res(ect o) *hich the ter-s have been re?negotiated unless the (ac,age o) re?negotiated ter-s has *or,ed satis)actorily )or a (eriod o) one year. !hile the e+isting credit )acilities sanctioned to a unit under rehabilitation (ac,ages a((roved by B@=7Gter- lending institutions *ill continue to be classi)ied as sub?standard or doubt)ul as the case -ay be, in res(ect o) additional )acilities sanctioned under the rehabilitation (ac,ages, the @nco-e 7ecognition, Asset Classi)ication nor-s *ill beco-e a((licable a)ter a (eriod o) one year )ro- the date o) disburse-ent.
Page ;3
ROLE OF ARCIL :8
'his e-(o*er-ent encouraged the three -ajor (layers in @ndian ban,ing syste-, na-ely, State Ban, o) @ndia ASB@B, @C@C@ Ban, "i-ited A@C@C@B and @$B@ Ban, "i-ited A@$B@B to co-e together to set?u( the )irst A7C. Arcil *as incor(orated as a (ublic li-ited co-(any on =ebruary 11, />>/ and obtained its certi)icate o) co--ence-ent o) business on &ay 8, />>2. @n (ursuance o) Section 2 o) the Securiti1ation Act />>/, it holds a certi)icate o) registration dated August /<, />>2, issued by the 7eserve Ban, o) @ndia A7B@B and o(erates under (o*ers con)erred under the Securiti1ation Act, />>/. Arcil is also a I)inancial institutionI *ithin the -eaning o) Section / AhB AiaB o) the 7ecovery o) $ebts due to Ban,s and =inancial @nstitutions Act, 1<<2 Athe I$7' ActIB. Arcil is the )irst A7C in the country to co--ence business o) resolution o) non?(er)or-ing assets ANPAsB u(on ac0uisition )ro- @ndian ban,s and )inancial institutions. As the )irst A7C, Arcil has (layed a (ioneering role in setting standards )or the industry in @ndia. [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page ;4
U loc-i )
c$"it$l
#o%
t&e
b$ -i )
s!ste(
$ '
t&e
eco o(!
'he (ri-ary objective o) Arcil is to e+(edite recovery o) the a-ounts loc,ed in NPAs o) lenders and thereby recycling ca(ital. Arcil thus, (rovides relie) to the ban,ing syste- by -anaging NPAs and hel( the- concentrate on core ban,ing activities thereby enhancing shareholders value.
C%e$ti ) $ vib%$ t ($%-et #o% 'ist%esse' 'ebt $ssets ; secu%ities i I 'i$ o##e%i ) $ t%$'i ) "l$t#o%( #o% Le 'e%s
Arcil has -ade success)ul e))orts in )unneling invest-ent )ro- both )ro- do-estic and international (layers )or )unding these ac0uisitions o) distressed assets, )ollo*ed by sho*casing the- to (ros(ective buyers. 'his has initiated creation o) a secondary -ar,et o) distressed assets in the country besides hastening their resolution. 'he e))orts o) Arcil *ould lead the countryFs distressed debt -ar,et to international standards.
To evolve $ ' c%e$te si) i#ic$ t c$"$cit! i t&e s!ste( #o% 2uic-e% %esolutio o# NPAs b! 'e"lo!i ) t&e $ssets o"ti($ll!
!ith a vie* to achieving high delivery ca(abilities )or resolution, Arcil has (ut in (lace a structure ai-ed at outsourcing the various sub?)unctions o) resolution to s(eciali1ed agencies, *herever a((licable under the (rovision o) the Securitisation Act, />>/. Arcil has also encourage, groo-ed and develo(ed -any such agencies to enhance its ca(acity in line *ith the gro*th o) its activity.
Page ;5
ANA/0S-S
=or the (ur(ose o) analysis and co-(arison bet*een (rivate sector and (ublic sector ban,s, *e ta,e )ive?)ive ban,s in both sector to co-(are the non (er)or-ing assets o) ban,s. =or understanding *e )urther bi)urcate the non (er)or-ing assets in (riority sector and non (riority sector, gross NPA and net NPA in (ercentage as *ell as in ru(ees, de(osit N invest-ent N advances. $e(osit N @nvest-ent N Advances is the )irst in the analysis because due to these *e can understand the *here the ban, stands in the co-(etitive -ar,et. As at end o) -arch />>;, in (rivate sector @C@C@ Ban, is the highest de(osit?invest-ent?advances )igures in ru(ees crore, second is 9$=C Ban, and K 'AK Ban, has least )igures. @n (ublic sector ban,s Punjab National Ban, has highest de(osit?invest-ent?advances but *hen *e loo, at gra(h )irst three -eans Ban, o) Baroda and Ban, o) @ndia are al-ost the si-ilar in nu-bers and $ena Ban, is stands )or last in (ublic sector ban,. !hen *e co-(are the (rivate sector ban,s *ith (ublic sector ban,s a-ong these ban,s, *e can [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page ;8
understand the -ore nu-ber o) (eo(le (re)er to choose (ublic sector ban,s )or de(osit? invest-ent. But *hen *e co-(are the (rivate sector ban, @C@C@ Ban, *ith the (ublic sector ban,s @C@C@ Ban, is -ore de(osit?invest-ent )igures and )irst in the all ban,s.
2EPOS-T%-N,EST*ENT%A2,ANCES 9 RS'CRORE: of bot( sector ban s and comparison among t(em4 year "##J%#L'
BAN3 A=-S 62.C -C-C3OTA3 -N2)S-N2 TOTA/
2EPOS-T LJM"M $##JM8 "&&&C$ $M&"& $8#CJ &ML"LJ
-N,EST*ENT CCJ#K &8C8& $$$&K& 8$&" MMC# "$#C"K
A2,ANCES K8MM$ MC&"J ""KM$M $KKK" $"J8K CJJ#K$
Page ;;
250000 200000 150000 100000 50000 0 ICICI HDFC AXIS INDUS IND KOTAK DE POS IT INVE S TME NT ADVANCE S
BAN3 BOB BO2ENA PNB )BTOTA/
2EPOS-T $K"#C& $K##$" CC8&C $MM&KJ $#CLK8 M#MC#K
-N,EST*ENT &CLJ# &$L#C $#"L" KC88" CCL"C $LCJJ#
A2,ANCES $#MJ#$ $$C&JM "C#"& $$8K#" J&C&L &CJ#K$
Page ;<
180000 160000 140000 120000 100000 80000 60000 40000 20000 0 PNB BOB BOI UBI DE NA
DEPOS IT INVESTMENT ADVANCES
-C-C- BAN3 AN2 P)NJAB NAT-ONA/ BAN3 !%

BAN3 -C-C- BAN3 PNB 2EPOS-T "&&&C$ $MM&KJ -N,EST*ENT $$$&K& KC88" A2,ANCES ""KM$M $$8K#"
250000 200000 150000 100000 50000 0 IC IC I PNB DEPOSIT INVESTMENT ADVANC ES
Page <>
'here are t*o conce(ts related to non?(er)or-ing assetsO gross and net. %ross re)ers to all NPAs on a ban,Fs balance sheet irres(ective o) the (rovisions -ade. @t consists o) all the non standard assets, vi1. sub standard, doubt)ul, and loss assets. A loan asset is classi)ied as E sub standardD i) it re-ains NPA u( to a (eriod o) 1; -onthsH C doubt)ulD i) it re-ains NPA )or -ore than 1; -onthsH and loss, *ithout any *aiting (eriod, *here the dues are considered not collectible or -arginally collectible. Net NPA is gross NPA less (rovisions. Since in @ndia, ban, balance sheets contains a huge a-ount o) NPAs and the (rocess o) recovery and *rite o)) o) loans is very ti-e consu-ing, the (rovisions the ban,s have to -a,e against the NPA according to the central ban, guidelines, are 0uite signi)icant. 9ere, *e can see that there are huge di))erence bet*een gross and net NPA. ;(ile gross NPA reflects t(e Duality of t(e loans made by ban s4 net NPA s(o7s t(e actual burden of ban s' 'he re0uire-ents )or (rovisions are 6 1>>Q )or loss assets 1>>Q o) the unsecured (ortion (lus />?4>Q o) the secured (ortion, de(ending on the (eriod )or *hich the account has re-ained in the doubt)ul category 1>Q general (rovision on the outstanding balance under the sub standard category.
9ere, there are gross and net NPA data )or />>5?>8 and />>8?>; *e ta,en )or co-(arison a-ong ban,s. 'hese data are NPA AS P#7C#N'A%# = ' 'A" ASS#'S. As *e discuss earlier that gross NPA re)lects the 0uality o) the loans -ade by ban,s. A-ong all the ten ban,s $ena Ban,s has highest gross NPA as a (ercentage o) total assets in the year [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page <1
/>>5?>8 and also net NPA. Punjab National Ban, sho*s vast di))erence bet*een gross and net NPA. 'here is al-ost sa-e )igures bet*een B @ and B B.
:#A7 />>5?>8
BAN3 BOB BO2ENA PNB )B1ROSS NPA $'&M $'&L "'CJ "'#8 $'L" NET NPA #'CK #'&K $'$M #'&K #'K8
Page </
2.5 2 1.5 1 0.5 0 DENA UBI PNB BOI BOB GROS SNPA NE T NPA
/>>8?>;
BAN3 BOB BO2ENA PNB )B1ROSS NPA $'$# $'#L $'&L $'MJ $'C& NET NPA #'"J #'CC #'KM #'CL #'$#
Page <2
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 DE NA PNB BOI BOB UBI
GROS SNPA NE T NPA
/>>5?>8
BAN3 A=-S 62.C -C-C3OTA3 -N2)S-N2 1ROSS NPA #'KJ #'J" $'"# $'C8 $'M& NET NPA #'CM #'"" #'KL $'#8 $'C$
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 INDUSIND KOTAK ICICI AXIS HDFC
GROSSNPA NET NPA
/>>8?>; [Comparative analysis on NPA of Private & Public sector Banks] [University Business School, Panjab University, Chandigarh] Page <3
BAN3 A=-S 62.C -C-C3OTA3 -N2)S-N2
1ROSS NPA #'&K #'ML $'8# $'KK $'M8
NET NPA #'"C #'"" #'LJ #'8L $'"K
2 1.5 1 0.5 0 GROSSNPA NE T NPA
INDUS IND
KOTAK
ICICI
HDFC
AXIS
C &PA7@S N = 1ROSS NPA !@'9 A"" BANKS = 7 '9# :#A7 />>8?>;. 'he gro*ing NPAs a))ects the health o) ban,s, (ro)itability and e))iciency. @n the long run, it eats u( the net *orth o) the ban,s. !e can say that NPA is not a healthy sign )or )inancial institutions. 9ere *e ta,e all the ten ban,s gross NPA together )or better understanding. Average o) these ten ban,s gross NPAs is 1./< as (ercentage o) total assets. So i) *e co-(are in (rivate sector ban,s AU@S and 9$=C Ban, are belo* average o) all ban,s and in (ublic sector B B and B @. Average o) these )ive (rivate sector ban,s gross NPA is 1./4 and average o) (ublic sector ban,s is 1.22. !hich is higher in co-(are o) (rivate sector ban,s. %7 SS NPA 6?
Page <4
2 1. 5 1 0.5 0 IC IC I IND U S IND K OT A K HD F C A XIS B OI B OB UB I D ENA P NB
C &PA7@S N
= NET NPA !@'9 A"" BANKS = 7 '9# :#A7 />>8?>;.
Average o) these ten ban,Fs net NPA is >.45. And in the (ublic sector ban,s all these )ive ban,s are belo* this. But in (rivate sector ban,s there are three ban,s are above average. 'he di))erence bet*een (rivate and (ublic ban,s average is also vast. Private sector ban,s net NPA average is >.81 and in (ublic sector ban,s it is >.31 as (ercentage o) total assets. As *e ,no* that net NPA sho*s actual burden o) ban,s. @ndus@nd ban, has highest net NPA )igure and 9$=C Ban, has lo*est in co-(arison.
N#' NPA o) ban,s6?

1.4 1.2 1 0.8 0.6 0.4 0.2 0 IC IC I INDUSIND K OTAK HDFC AXIS B OI B OB UB I DENA PNB
PRIORIT< =NON PRIORIT< SECTOR !hen *e )urther bi)urcate NPA in (riority sector and Non (riority sector. Agriculture R s-all R others are (riority sector. @n (rivate sector ban,s @C@C@ Ban, has the highest NPA in both sector in co-(are to other (rivate sector ban,s. Around 8/Q o) NPA is *ith @C@C@ Ban, *ith 7s.124< crore in (riority sector and around 8;Q in non (riority sector. !e can see that in (rivate sector ban,s , ban,s has -ore NPA in non (riority sector than (riority sector.
Page <5
BAN3
A1R9$:
S*A// 9": 13.85 11>.45 /2.24 22.;3 2.1; 1;4.5<
OT6ERS 9C: ;5.81 38.8> 243.12 3.>3 2>.>/ 4//.5>
PR-OR-T0 SECTOR 9 $N"NC : "$#'K8 $8&'&$ $CK8'C& &J'LJ MC'M& $LJK'LK
NON% PR-OR-T0 "JK'#M J#8'"C M"$$'$" &#K'"# C"L'MJ J8"8'"L
A=-S 62.C -C-C3OTA3 -N2)S-N2 TOTA/
1><.1/ 25.1/ <;1.;4 1>.>> 2>.33 1158.42
7000 6000 5000 4000 3000 2000 1000 0 AXIS HDFC IC IC I KOTAK INDUSIND PRIORIT NON!PRIORIT
BAN3 BOB BO2ENA PNB )B-
PR-OR-T0 SECTOR 9A2,ANCE2 RS'CRORE : 435< 2/5< 115> 288/ 1</3
NPA 24> 2/4 1>5 332 1<8
6000 5000 4000 3000 2000 1000 0 BOB BOI DE NA PNB UBI PRIORIT NPA
Page <8
!hen *e tal, about (ublic sector ban,s they are -ore in (riority sector and they given advanced to *ea,er sector or industries. Public sector ban,s give -ore loans to Agriculture , s-all scale and others units and as a result *e see that there are -ore nu-ber o) NPA in (ublic sector ban,s than in (rivate sector ban,s. B B given -ore advanced to (riority sector in />>8?>; than other )our ban,s and $ena Ban, is in least. But *hen there are co-(arison bet*een (rivate ban, and (ublic sector ban, still @C@C@ Ban, has -ore NPA in both (riority and non (riority sector *ith the co-(arison o) (ublic sector ban,s. "arge NPA in @C@C@ Ban, because the strategy o) ban, that ris,?re*ard attitude and initiative in each sector. Above *e also discuss that @C@C@ Ban, has highest de(osit?invest-ent?advance than other ban,s. No*, *hen *e co-(are the all (ublic sector ban,s and (ublic sector ban,s on (riority and non?(riority sector than the )igures are really shoc,ing. Because in co-(are o) (rivate sector ban,s, (ublic sector ban,s nu-bers are very large.
P)B/-C SECTOR "##M%#J "##J%#L ""8K& &8# $K$KL CLM#" "K"LJ "88 $&$MC C8J&8 NE; PR-,ATE "##M%#J "##J%#L $&ML C &L## M"J$ "#L# # LCC8 $#&$8
SECTOR P7@ 7@': PUB"@C N N P7' ' 'A"
9ere, there are huge di))erence bet*een (rivate and (ublic sector ban,s NPA. 'here is increase in ne* (rivate sector ban,s NPA o) 7s.313; cr in />>8?>; *hich is al-ost 55Q rise than (revious year. @n (ublic sector ban,s the nu-bers are not increased li,e (rivate sector ban,s.
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Project Fo Non Performing Asset

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Project Fo Non Performing Asset

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A PROJECT REPORT

Supervised by by Prof' Smriti Sood JatinC(aud(ary )niversity business sc(ool umar

Pan+ab university umar c(andigar(

NA*E S-1NAT)RE Jatin C(aud(ary *ano+ umar San+eev umar , as Sa(ota

Results: Co clusio : Recommendations!

Sco"e o# t&e Stu'!

Sou%ce o# '$t$ collectio

-ntroduction to t(e topic

6-STOR0 O. -N2-AN BAN3-N1

NON PER.OR*-N1 ASSETS 9NPA:

-ndustrial sic ness

C(ange on 1ovt' policies

-NTERNA/ .ACTORS !% %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

2efective /ending process

-mproper S;OT analysis

Ban,s should consider the borro*ers o*n ca(ital invest-ent.

it should collect credit in)or-ation o) the borro*ers )ro-O

Analy1e the balance sheet.

Pur(ose o) the loan

Poor credit appraisal system

1. &ar,etability /. Acce(tability 2. Sa)ety 3. 'rans)erability.

Absence of regular industrial visit

>Out of Order> status:

1ross NPAs Ratio

1ross NPAs 1ross Advances

Appropriation of recovery in NPAs

Asset Classification %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

( 1 ) Sub-standard Assets ( 2 ) Doubtful Assets (3) oss Assets

9 " : 2oubtful Assets!%%

Provisioning Norms %%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%%

As on 21.>2./>>2, 4> (ercent o) the additional (rovisioning re0uire-ent on the

Provisions on /eased Assets!

1> (ercent o) the >net boo

1uidelines for Provisions under Special Circumstances

As regards advances guaranteed by State %overn-ents, in res(ect o) *hich guarantee

Advances granted under rehabilitation (ac,ages a((roved by B@=7Gter- lending institutions6

@n res(ect o) advances under rehabilitation (ac,age a((roved by B@=7Gter- lending

Advances covered by #C%CG$@C%C guarantee

Ae+cludes *orth o) 7s.B

P%ovisio %e2ui%e' to be ($'e utstanding balance 7s. 3.>> la,hs Page 34

"ess6 Jalue o) security held Unrealised balance "ess6 $@C%C

A4>Q o) unrealisable balanceB Net unsecured balance 7s. 1./4 la,hs

Advance covered by C1TS- guarantee

Asset classi)ication status6 C%'S@ Cover

7s.1.4> la,h 7s.1>.>> la,h o) 7s. 1.4> la,h

7s. ;.4> la,h 7s. 5.2; la,h

Unsecured L uncovered (ortion 7s./.1/ la,h 'otal (rovision re0uired

Unsecured L uncovered (ortion 7s.11./4 la,h

'otal (rovision re0uired

7s. 15./4 la,h

Reserve for E5c(ange Rate .luctuations Account 9RER.A:

'he loss on revaluation o) assets has to be boo,ed in the ban,Ms Pro)it

REASONS .OR NPA!

Non?Co-(liance to lending nor-s6

"ac, o) (ost credit su(ervision6

=ailure to a((reciate good (ayers6

#+cessive overdra)t lending6

Non N 'rans(arent accounting (olicy6

Chang in industry environ-ent6

#ndangers -acroecono-ic disturbances6

$iversion o) )unds and *ill)ul de)aults

'i-eG cost overrun in (roject i-(le-entation

"abour (roble-s o) borro*ed )ir-

NAE S-1NAT)RE Jatin C(aud(ary ano+ umar San+eev umar , as Sa(ota

Ban,s should consider the borroers on ca(ital invest-ent.