The business of banking essentially involves intermediation-acceptance of deposits

and channeling these deposits in to lending activities. Since the deposits received
from the depositors have to be repaid to them by the bank, they are known as
banks Liabilities and as the loan given to the borrowers are to be received back
from them, they are termed as banks Assets so assets are banks loans and
advances1 . In the traditional banking business of lending financed by deposits
from customers, Commercial Banks are faced with the risk of default by the
borrower in the payment of either principal or interest. This risk in banking
parlance is termed as Credit Risk and accounts where payment of interest and /or
repayment of principal is not forthcoming are treated as Non-Performing Assets2 ,
as per the Reserve Bank of India, an asset, including a leased asset, becomes nonPerforming when it ceases to generate income for the bank. Existence of NonPerforming Asset is an integral part of banking and every bank has some NonPerforming Assets in its advance portfolio. However, the high level of NPA is a
cause of worry to any financial institution.
IMPLICATIONS OF NPAs For an Economy : Developing of sound and healthy
financial institutions, especially banks, is an essential condition for maintaining
over all stability of the financial system of the country. The high level of NPAs in
banks and financial institutions has been a matter of grave concern to the public as
bank credit is the catalyst to the economic growth of the country and any
bottleneck in the smooth flow of credit, one cause for which is the mounting NPAs,
is bound to create adverse repercussions on the economy. When the loans taken are
not repaid, much of the funds go out of financial system and the cycle of lendingrepaying-borrowing is broken. The banks have also to repay their depositors and
others from whom the money had been borrowed. If the borrowers do not pay, the
banks have to borrow additional funds to repay the depositors and creditors. This
leads to a situation where banks are reluctant to lend fresh funds to new projects or
the on-going projects thus choking the system. Once the credit to various sectors of
the economy slows down, the economy is badly hurt. There is slow down in GDP
growth and industrial output and fall in the profit margins of the corporate which
resultantly cause depression in the market.
For Banking: The most important business implication of the NPAs is that it leads
to
credit risk management assuming priority over other aspects of banks
functioning. The banks whole machinery would thus be pre-occupied with

recovery procedures rather than concentrating on expanding business. A bank with

a high level of NPAs would be forced to incur carrying costs on non-income
yielding assets. Other consequences would be reduction in interest income, high
level of provisioning (as banks are required to keep aside a portion of their
operating profit as provisions, as NPAs increases banks have to increase the
amount kept aside as provisions which will reduce their net profits) stress on
profitability and capital adequacy, gradual decline in ability to meet steady increase
in cost, increased pressure on Net Interest Margin (NIM) thereby reducing
competitiveness, steady erosion of capital resources and increased difficulty in
augmenting capital resources. NPAs generate a vicious cycle of affects on the
sustainability and growth of the banking system, and if not managed properly
could lead to bank failure.
FACTORS RESPONSIBLE FOR NPAs The following factors confronting the
borrowers are responsible for incidence of NPAs in the banks:- (i) Diversion of
funds for expansion/modernization/setting up new projects/helping promoting
sister concerns. (ii) Time/cost overrun while implementing projects. (iii) External
factors like raw-material shortage, raw-material/Input price escalation, power
shortage, industrial recession, excess capacity, natural calamities like floods,
accident etc. 3 (iv) Business failure like product failing to capture market,
inefficient management, strike/strained labour relations, wrong technology,
technical problem, product obsolescence, etc. (v) Failure, non-payment/over dues
in other countries, recession in other countries, externalization problems, adverse
exchange rate, etc. (vi) Government policies like excise, import duty changes,
deregulation, pollution control orders, etc. (vii) Wilful default, siphoning of funds,
fraud, misappropriation, promoters/management disputes etc. Besides above,
factors such as deficiencies on the part of the banks viz. deficiencies in credit
appraisal, monitoring and follow-up; delay in release of limits; delay in settlement
of payments/subsidies by Government bodies, etc. are also attributed for the
incidence of NPAs3 . Indian Banking and NPA regulations: until mid eighties,
management of NPAs was left to the banks and the auditors. In 1985, the first ever
system of classification of assets for the Indian banking system was introduced on
the recommendations of A. Ghosh Committee on Final Accounts. This system,
called the Health Code System (HCS) involved classification of bank advances
into eight categories ranging from 1 (satisfactory) to 8 (bad and doubtful debt)4 . In

1991, the Narasimhan Committee on the financial system felt that the classification
of assets according to the HCS was not in accordance with international standards
and suggested that for the purpose of provision, banks should classify their
advances into four broad groups, viz. (i) standard assets; (ii) substandard assets;
(iii) doubtful assets; (iv) loss assets. Following this, prudential norms relating to
income recognition, asset classification and provisioning were introduced in 1992
in a phased manner. In 1998, the Narasimhan Committee on Banking Sector
Reforms recommended a further tightening of prudential standards in order to
strengthen the prevailing norms and bring them on par with evolving 3 India, Lok
Sabha (14th), Estimates Committee (2004-05), Sixth Report, presented on
25.4.2005,international best practices5 . With the introduction of 90-days norms
for classification of NPAs in 2001, the NPA guidelines were brought as par with
international standards6 . The NPAs can broadly be classified into (i) Gross NPAs,
(ii) Net NPAs. Gross NPAs are the sum total of all loan assets that are classified as
NPAs as per RBI guidelines as on balance sheet date. It reflects the quality of loans
made by banks. (Gross NPAs Ratio = Gross NPAs/Gross Advances). Net NPAs are
those type of NPAs in which the banks deduct the provisions regarding NPAs. It
shows the actual burden of banks (Net NPAs = Gross NPAs-Provision/Gross
Advances-Provisions).
.NPA IN INDIAN BANKING SYSTEM:
NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the
midst of turbulent structural changes overtaking the international banking
institutions ,and when the global financial markets were undergoing sweeping
changes. In fact after it had emerged the problem of NPA kept hidden and
gradually swelling unnoticed and unperceived, in the maze of defective accounting
standards that still continued with Indian Banks up to the Nineties and opaque
Balance sheets.
In a dynamic world, it is true that new ideas and new concepts that emerge
through such changes caused by social evolution bring beneficial effects, but only
after levying a heavy initial toll. existing set-up leads to an immediate disorder and
unsettled conditions. People are not accustomed to the new models. These new
formations take time to configure, and work smoothly. The old is cast away and the
new is found difficult to adjust. Marginal and sub-marginal operators are swept

away by these convulsions. Banks being sensitive institutions entrenched deeply in

traditional beliefs and conventions were unable to adjust themselves to the
changes. They suffered easy victims to this upheaval in the initial phase.

Consequently banks underwent this transition-syndrome and languished under

distress and banking crises surfaced in quick succession one following the other in
many countries. But when the banking industry in the global sphere came out of
this metamorphosis to re-adjust to the new order, they emerged revitalized and as
more vibrant and robust units. Deregulation in developed capitalist countries
particularly in Europe, witnessed a remarkable innovative growth in the banking
industry, whether measured in terms of deposit growth, credit growth, growth
intermediation instruments as well as in network.
During all these years the Indian Banking, whose environment was insulated from
the global context and was denominated by State controls of directed credit
delivery, regulated interest rates, and investment structure did not participate in this
vibrant banking revolution. Suffering the dearth of innovative spirit and choking
under undue regimentation, Indian banking was lacking objective and prudential
systems of business leading from early stagnation to eventual degeneration and
reduced or negative profitability. Continued political interference, the absence of
competition and total lack of scientific decision-making, led to consequences just
the opposite of what was happening in the western countries. Imperfect accounting
standards and opaque balance sheets served as tools for hiding the shortcomings
and failing to reveal the progressive deterioration and structural weakness of the
country banking institutions to public view .This enabled the nationalized banks to
continue to flourish in a deceptive manifestation and false glitter, though stray
symptoms of the brewing ailment were discern able here and there.
The government hastily introduced the first phase of reforms in the financial and
banking sectors after the economic crisis of 1991. This was an effort to quickly
resurrect the health of the banking system and bridge the gap between Indian and
global banking development. Indian Banking, in particular PSBs suddenly woke
up to the realities of the situation and to face the burden of the surfeit of their
woes. Simultaneously major revolutionary transitions were taking place in other

sectors of the economy on account the ongoing economic reforms intended

towards freeing the Indian economy from government controls and linking it to
market driven forces for a quick integration with the global economy. Import
restrictions were gradually freed. Tariffs were brought down and quantitative
controls were removed. The Indian market was opened for free competition to the
global players. The new economic policy in turn revolutionalized the environment
of the Indian industry and business and put them to similar problems of new
mixture Of opportunities and challenges. As a result we witness today a scenario of
banking, trade and industry in India, all undergoing the convulsions of total
reformation battling to kick off the decadence of the past and to gain a new
strength and vigor for effective links with the global economy. Many are still
languishing unable to get released from the old set-up, while a few progressive
corporate are making a niche for themselves in the global context. During this
decade the reforms have covered almost every segment of the financial sector. In
particular, it is the banking sector, which experienced major reforms. The reforms
have taken the Indian banking sector far away from the days of nationalization.
Increase in the number of banks due to the entry of new private and foreign banks;
increase in the transparency of the banks balance sheets through the introduction of
prudential norms and norms of disclosure; increase in the role of the market forces
due to the deregulated interest rates, together with rapid computerization and
application of the benefits of information technology to banking operations have
all significantly affected the operational environment of the Indian banking sector.
In the background of these complex changes when the problem of NPA was
belatedly recognized for the first time at its peak velocity during 1992-93, there
was resultant chaos and confusion. As the problem in large magnitude erupted
suddenly banks were unable to analyze and make a realistic or complete
assessment of the sur mounting situation. It was not realized that the root of the
problem of NPA was centered else wherein multiple layers, as much outside the
banking system, more particularly in the transient economy of the country, as
within. Banking is not a compartmentalized and isolated sector delinked from the
rest of the economy. As has happened elsewhere in the world, a distressed national
economy shifts a part of its negative results to the banking industry. In short, banks
are made ultimately to finance the losses incurred by constituent industries and
businesses. The unprepared ness and structural weakness of our banking system to

act to the emerging scenario and de-risk itself to the challenges thrown by the new
order, trying to switch over to globalization were only aggravating the crisis.
Partial perceptions and hasty judgments led to a policy of ad-hoc-ism, which
characterized the approach of the authorities during the last two-decades towards
finding solutions to banking ailments and dismantling recovery impediments.
Continuous concern was expressed. Repeated correctional efforts were executed,
but positive results were evading. The problem was defying a solution.
The threat of NPA was being surveyed and summarized by RBI and Government
of India from a remote perception looking at a birds-eye-view on the banking
industry as a whole delinked from the rest of the economy. RBI looks at the
banking industry average on a macro basis, consolidating and tabulating the data
submitted by different institutions. It has collected extensive statistics about NPA
in different financial sectors like commercial banks, financial institutions, urban
cooperatives, NBFC etc. But still it is a distant view of one outside the system and
not the felt view of a suffering participant. Individual banks inherit different
cultures and they finance diverse sectors of the economy that do not possess
identical attributes. There are distinct diversities as among the 29 public sector
banks themselves, between different geographical regions and between different
types of customers using bank credit. There are three weak nationalized banks that
have been identified. But there are also correspondingly two better performing
banks like Corporation and OBC. There are also banks that have successfully
contained NPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and
Andhra (Gross NPA 6.13%). The scenario is not so simple to be generalized for the
industry as a whole to prescribe a readymade package of a common solution for all
banks and for all times. Similarly NPA concerns of individual Banks summarized
as a whole and expressed as an average for the entire bank cannot convey a
dependable picture. It is being statistically stated that bank X or Y has 12% gross
NPA. But if we look down further within that Bank there are a few pockets
possessing bulk segments of NPA ranging 50% to 70% gross , which should
consequently convey that there should also be several other segments with 3 to 5%
or even NIL % NPA, averaging the banks whole performance to 12%. Much
criticism is made about the obligation of Nationalized Banks to extend priority
sector advances. But banks have neither fared better in non-prioritysector. The

comparative performance under priority and non-priority is only a difference of

degree and not that of kind.
The assessment of the mix-of contributing factors includes:
1. human factors (those pertaining to the bankers and the credit customers),
2. environmental imbalances in the economy on account of wholesale changes and
also
3. Inherited problems of Indian banking and industry.
Variable skill, efficiency and level integrity prevailing in different branches and
indifferent banks accounts for the sweeping disparities between inter-bank and
intra-bank performance. We may add that while the core or base-level NPA in the
industry is due to common contributory causes, the inter-se variations are on
account of the structural and operational disparities. The heavy concentrated
prevalence of NPA is definitely due to human factors contributing to the same.
No bank appears to have conducted studies involving a cross-section of its
operating field staff, including the audit and inspection functionaries for a candid
and comprehensive introspection based on a survey of the variables of NPA burden
under different categories of sectoral credit, different regions and in individual
Branches categorized as with high, medium and low incidence of NPA. We do not
hear the voice of the operating personnel in these banks candidly expressed and
explaining their failures. Ex-bankers, i.e. the professional bankers who have retired
from service, but possess a depth of inside knowledge do not out-pour candidly
their views. After three decades of nationalized banking, we must have some
hundreds of retired Bank executives in the country, who can boldly and
independently, but objectively voice their views. Everyone is satisfied in blaming
the others. Bank executives hold willful defaulters responsible for all the plague.
Industry and business blames the government policies.

Important fact-revealing information for each NPA account is the gap period
between the date, when the advance was originally made and the date of its
becoming NPA. If the gap is long, it is the case of a sunset industry. Things were

all right earlier, but economic variance in trade cycles or market sentiments have
created the NPA. Credit customers who are in NPA today, but for years were earlier
rated as good performers and creditworthy clients ranging within the top 50 or 100.
Significant part of the NPA is on account of clout banking or willfully given bad
loans. Infant mortality in credit is solely on account of human factors and absence
of human integrity.

Credit to different sectors given by the PSBs in fact represents different products.
Advance to weaker sections below Rs.25000/- represents the actual social banking.
NPA in this sector forms 8 TO 10% of the gross amount. Advance to agriculture,
SSI and big industries each calls for different strategies in terms of credit
assessment, credit delivery, project implementation, and post advance supervision.
NPA in different sector is not caused by the same resultant factors. programmed by
a sector-wise strategy involving a role of the actively engaged participants who can
tell where the boot pinches in each case. Business and industry has equal
responsibility to accept accountability for containment of NPA. Many of the
present defaulters were once trusted and valued customers of the banks. Why have
they become unreliable now, or have they?

The credit portfolio of a nationalized bank also includes a number of low-risk and
risk-free segments, which cannot create NPA. Small personal loans against banks
own deposits and other tangible and easily marketable securities pledged to the
bank and held in its custody are of this category. Such small loans are universally
given in almost all the branches and hence the aggregate constitutes a significant
figure. Then there is food credit given to FCI for food procurement and similar
credits given to major public Utilities and Public Sector Undertakings of the
Central Government. It is only the residual fragments of Bank credit that are
exposed to credit failures and reasons for NPA can be ascertained by scrutinizing
this segment.

Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all
pervasive national scourge swaying the entire Indian economy. NPA is a sore throat
of the Indian economy as a whole. The banks are only the ultimate victims, where
life cycle of the virus is terminated.
Now, how does the Government suffer? What about the recurring loss of revenue
by way of taxes, excise to the government on account of closure of several lakhs
of erstwhile vibrant industrial units and inefficient usage of costly industrial
infrastructure erected with considerable investment by the nation? As per statistics
collected three years back there are over two and half million small industrial units
representing over 90percent of the total number of industrial units. A majority of
the industrial work force finds employment here and the sectors contribution to
industrial output is substantial and is estimated at over 35 percent while its share of
exports is also valued to be around 40percent. Out of the 2.5 million, about 10% of
the small industries are reported to be sick involving a bank credit outstanding
around Rs.5000 to 6000 Crores, at that period. be even more now. These closed
units represent some thousands of displaced workers Previously enjoying gainful
employment. Each closed unit whether large, medium or small occupies costly
developed industrial land. Several items of machinery form security for the NPA
accounts should either be lying idle or junking out. In other words, large value of
land, machinery and money are locked up in industrial sickness. These are the
assets created that have turned unproductive and these represent the real physical
NPA, which indirectly are reflected in the financial statements of nationalized
banks, as the ultimate financiers of these assets. In the final analysis it represents
instability in industry.NPA represents the owes of the credit recipients, in turn
transferred and parked with the banks.

Recognizing NPA as a sore throat of the Indian economy, the field level
participants should first address themselves to find the solution. Why not
representatives of industries and commerce and that of the Indian Banks
Association come together and candidly analyze and find an everlasting solution
heralding the real spirit of deregulation and decentralization of management in
banking sector, and accepting self-discipline and self-reliance? What are the
deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check

misuse and abuse at source? How to deal with erring Corporate? In short, the
functional staff of the Bank along with the representatives of business and industry
has to accept a candid introspection and arrive at a code of discipline in any final
solution. And preventive action to be successful should start from the creditrecipient level and then extend to the bankers. RBI and Government of India can
positively facilitate the process by providing enabling measures. Do not try to set
right industry and banks, but help industry and banks to set right themselves. The
new tool of deregulated approach has to be accepted in solving NPA.
REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPAS IN THE
INDIAN BANKING SYSTEM (IBS): The origin of the problem of burgeoning
NPAs lies in the quality of managing credit risk by the banks concerned. What is
needed is having adequate preventive measures in place namely, fixing presanctioning appraisal responsibility and having an effective post-disbursement
supervision. Banks concerned should continuously monitor loans to identify
accounts that have potential to become non-performing. To start with, performance
in terms of profitability is a benchmark for any business enterprise including the
banking industry. However, increasing NPAs have a direct impact on banks
profitability as legally banks are not allowed to book income on such accounts and
at the same time banks are forced to make provision on such assets as per the
Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by
the public in the banking system, the banking industry cannot afford defaults by
borrowers since NPAs affects the repayment capacity of banks. Further, Reserve
Bank of India (RBI) successfully creates excess liquidity in the system through
various rate cuts and banks fail to utilize this benefit to its advantage due to the
fear of burgeoning non-performing assets.
Some of the other reasons were:
After the nationalization of banks sector wise allocation of credit disbursements
became compulsory.
Banks were compelled to give credit to even those sectors, which were not
considered to be very profitable, keeping in mind the federal policy.

 People in the agricultural sector were hardly interested in returning the loans as
they were confident that the loans with the interest would be written off by the
successive governments.
The small scale industries also availed credit even though they were not sure of
performing to the extent of returning the loans.
Banks were also not in the position to press enough securities to cover the loans
in calls of timings.
Even if the assets were provided they proved to be substandard assets as the
values that could be realized were very low.
Free distribution done during loan mails (congress regime) also contributed to
the heavy increase in NPAs.
The slackness in effort by the bank authorities to collect or recover loan
advances in time also contributes to the increase in NPAs
. Lack of accountability of the officers, who sanctioned the loans led to a caste
whole approach by the officers recovering the loans.
Loans sanctioned to under servicing candidates due to pressure from the ministers
and other politicians also led to the non recovery of debts.
Poor credit appraisal system, lack of vision while sanctioning credit limits.
Lack of proper monitoring.
Reckless advances to achieve the budgetary targets.
Lack of sincere corporate culture, inadequate legal provisions on foreclosure and
bankruptcy.
Change in economic policies/environment.
Lack of co-ordination between banks.
Some of the internal factors of the organization leading to NPAs are:

 Division of funds for expansion, diversification, modernization, undertaking new

projects and for helping associate concerns, this is coupled with recessionary
trends and failure to tap funds in the capital and debt markets.
Business failure( product, marketing etc.,),inefficient management, strained labor
relations, inappropriate technology, technical problems, product obsolescence etc.,
Recession , shortage of input, power shortage, price escalation, accidents, natural
calamities, besides externalization problem in other countries leading to non
payment of overdue.
Time/cost overrun during the project implementation stage.
Government policies like changes in the excise duties, pollution control orders.
Willful default, siphoning
promoters/directors disputes etc.,

off

of

funds,

fraud,

misappropriation,

Deficiencies on the part of the banks like delay in release of limits and delay in
release of payments/subsidies by the government.
OPERATIONAL DEFINITION
NPA : An asset is classified as a non performing assets (NPA) if dues in the form
of principal and interest are not paid by the borrower for a period of 90 days .
Standard Assets: Such an asset is not a non-performing asset. In other words, it
carries not more than normal risk attached to the business.
Sub-standard Assets: It is classified as non-performing asset for a period not
exceeding18 months .
Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is
a doubtful asset.
Loss Assets: Here loss is identified by the banks concerned or by internal auditors
or by external auditors or by Reserve Bank India (RBI) inspection
Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with
itself in the form of cash reserves or by way of current account with the Reserve
Bank of India(RBI), computed as a certain percentage of its demand and time

liabilities. The objectives to ensure the safety and liquidity of the deposits with the
banks.
Statutory Liquidity Ratio (SLR): It is the one which every banking company shall
maintain in India in the form of cash, gold or unencumbered approved securities,
an amount which shall not, at the close of business on any day be less than such
percentage of the total of its demand and time liabilities in India as on the last
Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may
specify from time to time.
RBI GUIDELINES ON INCOME RECOGNITION (INTEREST INCOME ON
NPAs)
Income Recognition: Income from Non Performing Assets should not recognize on
accrual basis but should be booked as income only when it is actually received.
Therefore interest should not be charged and taken into income account till the
account become standard asset.
Interest charged to be stopped
Provision to be made
Over Due: Any amount due to the Bank under any credit facility is
Over due if it is not paid on the due date fixed by the Bank.
Out of Order: An account should be treated as out of order
If the outstanding balance remains continuously in excess of the sanctioned
limit/ drawing power.
In cases where the outstanding balance in the principal operating account is less
than the sanctioned limit/ drawing power, but there are no credits continuously for
90 days as on the date of Banks Balance Sheet or Where are credits are not enough
to cover the interest debited during the same period.

A Non Performing Asset shall be an advance where:

Term Loan: Interest and/ or installment of principal remain over due for a period
of more than 90 days.
Cash Credit/ Over Draft: If the account remains out of order for a period more
than90 days.
Bills: Overdue for a period of more than 90 days.
Other accounts: Any amount to be received remains overdue for a period of more
than90 days.
Short duration crops: If the installment of principal or interest there on remains
overdue for two crop seasons.
Long duration crops: If installment of principal or interest there on remains
overdue for One Crop season.
An account would be classified as NPA only if the interest charged during any
quarter is not serviced fully within 90 days from the end of the quarter.
ASSET CLASSIFICATION
Standard Assets: Is one which does not disclose any problem and which does not
carry more than normal risks attached to the business.
Substandard Assets: Which has remained NPA for a period of less than or equal to
12 months.
Doubtful Assets: If it has remained NPA for a period exceeding 12 months
.Loss Assets: A loss asset is one where loss has been identified by the bank.

RBI GUIDELINES
ADVANCES:

ON PROVISIONING REQUIREMENT OF

BANK

Loss Assets: 100% of the outstanding amount.

Doubtful Assets: 100% of unsecured portion.
Secured portion

Up to one year
One to three years

20%
30%

More than 3 years

Outstanding stock of NPA as on 75% w.e.f 31st march ,06
31.3.2004
100% w.e.f 31st march,07
Advances classified as doubtful more 100% w.ef 31st march,05
100% w.e.f.31st March,05 than 3 years
on or after 31.3.2004
Substandard Assets: Secured portion 10% and unsecured portion 20% on total
outstanding.
Standard Assets: A general provision of 0.40% (For direct Agriculture & SME
Sector0.25%). Provisioning for standard assets will be done at corporate office
centrally

Company profile of SBI

The evolution of State Bank of India can be traced back to the first decade of the
19th century. It began with the establishment of the Bank of Calcutta in Calcutta,
on 2 June 1806. The bank was redesigned as the Bank of Bengal, three years later,
on 2 January 1809. It was the first ever joint-stock bank of the British India,
established under the sponsorship of the Government of Bengal. Subsequently, the
Bank of Bombay (established on 15 April 1840) and the Bank of
Madras(established on 1 July 1843) followed the Bank of Bengal. These three
banks dominated the modern banking scenario in India, until when they were
amalgamated to form the Imperial Bank of India, on 27 January 1921.
An important turning point in the history of State Bank of India is the launch of the
first Five Year Plan of independent India, in 1951. The Plan aimed at serving the
Indian economy in general and the rural sector of the country, in particular. Until
the Plan, the commercial banks of the country, including the Imperial Bank of
India, confined their services to the urban sector. Moreover, they were not
equipped to respond to the growing needs of the economic revival taking shape in
the rural areas of the country. Therefore, in order to serve the economy as a whole
and rural sector in particular, the All India Rural Credit Survey Committee
recommended the formation of a state-partnered and state-sponsored bank.
The All India Rural Credit Survey Committee proposed the take over of the
Imperial Bank of India, and integrating with it, the former state-owned or stateassociate banks. Subsequently, an Act was passed in the Parliament of India in May
1955. As a result, the State Bank of India (SBI)was established on 1 July 1955.
This resulted in making the State Bank of India more powerful, because as much as
a quarter of the resources of the Indian banking system were controlled directly by
the State. Later on, the State Bank of India (Subsidiary Banks) Act was passed
in1959. The Act enabled the State Bank of India to make the eight former Stateassociated banks as its subsidiaries.
The State Bank of India emerged as a pacesetter, with its operations carried out by
the 480offices comprising branches, sub offices and three Local Head Offices,
inherited from the Imperial Bank. Instead of serving as mere repositories of the

community savings and lending to creditworthy parties, the State Bank of India
catered to the needs of the customers, by banking purposefully. The bank served
the heterogeneous financial needs of the planned economic development.
Branches
The corporate center of SBI is located in Mumbai. In order to cater to different
functions, t here are several other establishments in and outside Mumbai, apart
from the corporate center. The bank boasts of having as many as 14 local head
offices and 57 Zonal Offices, located at major cities throughout India. It is
recorded that SBI has about 10000 branches, well networked to cater to its
customers throughout India.
ATM Services
SBI provides easy access to money to its customers through more than 8500 ATMs
in India. The Bank also facilitates the free transaction of money at the ATMs of
State Bank Group, which includes the ATMs of State Bank of India as well as the
Associate Banks State Bank of Bikaner & Jaipur , State Bank of Hyderabad,
State Bank of Indore, etc. You may also transact money through SBI Commercial
and International Bank Ltd by using the State Bank ATM-cum-Debit (Cash Plus)
card. State Bank Group includes a network of eight banking subsidiaries and
several non-banking subsidiaries. Through the establishments, it offers various
services including merchant banking services, fund management, factoring
services, primary dealership in government securities ,credit cards and insurance
The eight banking subsidiaries are:
State Bank of Bikaner and Jaipur (SBBJ)
State Bank of Hyderabad (SBH)
State Bank of India (SBI)
State Bank of Indore (SBIR)
State Bank of Mysore (SBM)
State Bank of Patiala (SBP)

 State Bank of Saurashtra (SBS)

State Bank of Travancore (SBT)
Products And Services
Personal Banking
SBI Term Deposits SBI Loan For Pensioners
SBI Recurring Deposits Loan Against Mortgage Of Property
SBI Housing Loan Against Shares & Debentures
SBI Car Loan Rent Plus Scheme
SBI Educational Loan Medi-Plus Scheme Other Services
Agriculture/Rural Banking
NRI Services
ATM Services
Demat Services
Corporate Banking
Internet Banking 16
Mobile Banking
International Banking
Safe Deposit Locker
E-Pay

NPA MANAGEMENT IDENTIFICATION OF POTENTIAL NPA /

STRESSED ASSETS
1. Reckoning of NPA : A NPA account to be identified based on its status /
position of the accounts erosion in security as on the date of balance sheet of
the bank. Nevertheless, the date of a NPA account would be the actual date
on which the slippage occurred. If an account is regularized before the
balance sheet date by repayment of overdue amount through genuine sources
(not by sanctioning of additional facilities or transfer of funds between
accounts), the account need not be treated as NPA.
It has, however, to be ensured that in the account remains in order
subsequently and a solitary or few credits made in the account on or before
the balance sheet date which extinguishes the overdue amount of interest or
installment of principal is not reckoned as the sole criterion for treating the
asset as standards one.
2. Identification and monitoring of potential NPA / stressed assets:
Indention of potential NPA account as its incipient stage of sickness and
initiating immediate corrective measures is the most important step for
preventing an asset from becoming NPA. The guidelines issued by Credit
Monitoring Cell (CMC) CAD, HO should be followed in this regard.
3.Constitution pf NPA Prevention Cell at the ROs.
It has been decided to constitute a NPA Prevention cell at the ROs to monitor
the Standard-B accounts and to ensure the prevention of their slippage to
NPA. The cell headed by Regional Manager would comprise Regional
Manager, Dy. Regional Manager and Credit Officer. It will conduct its
meeting every fortnight.

ITS FUNCTION WILL BE AS UNDER:

 To examine the information received from branches relating to Standard B

(based on 60 days norms), NPA accounts and identify the accounts for
restructuring. The entire process should be completed within a time frame of 30
days.
To review the performance of the existing restructured accounts including BIFR
and CDR cases.
The cell will send information on fortnightly basis to CMC, CAD Head Office.
Regional Manager to cell for the explanation from the Branch Managers whose
performance in recovery is far from satisfactory.
3. Review and reporting of potential NPA / Stressed assets
Following steps be taken for review and reporting of potential NPA /
Stressed Assets:
Step-1: Analysis of reason of deterioration of health, signs of sickness, problem
character of the Ac.
Step-2: Close interaction with the borrower, visit to the unit, close and frequent
monitoring of the account, drawing the attention of the borrower to the
irregularity / deterioration in he asset quality / signs of weakness in the account.
Step-3: Advice the borrower to correct the irregularity immediately in a time
bound manner and obtain his categorical assurance.
Step-4: Corrective measures for prevention of slippages:
Review the account and consider sanction of need based working capital limits
on merits, if the present limits are inadequate.
Identify Stressed Assets accounts and consider restructuring / realignment / reschedulement on merits.
Early warning signal, if any, to be watched and addressed to.

 Verification of (i) the documents for its correctness, enforceability, (ii)

correctness of ROD (iii) insurance covers (iv) value/marketability of
prime/collateral security eye.
Verification of existence of primary / collateral security of the borrower. Step-5:
Report to the next higher authority, the details on the above aspects and suggesting
specific corrective measures in time. Step-6: Implement the corrective action and
report to higher authority.
5.Maintaining the Assets Quality :
Post sanction monitoring, supervision, and follow up
Following measures should be put in place.
(i)
Terms and condition of the sanction: Terms and condition of sanction
have to be strictly complied with
(ii)
Verification: Verification of end use of the funds, stocks and assets
by Bank officials or through duly appointed concurrent auditors as
per norms for effective monitoring of the accounts.
(iii)
Legal Formalities: Formalities like obtaining / execution of
documents / search certificates, registration of charges, timely revival
of the documents, completion of equitable mortgage formalities etc.
as per norms are the most important steps.
(iv) Stock Statements: Branches should obtain stock statements at
monthly intervals regularly. As per RBI guidelines, the outstanding in
the A/C based on the drawing powers calculated from stock
statements older than 3 months would be deemed as irregular and if
such irregular drawings are permitted for 90 days continuously, the
A/C will be NPA.
6.Stock audit: Stock audit is to be conducted every year in every NPA account
with outstanding limit of Rs 1 crore and above. However, wherever current assets
are depleted or unit is closed, the stipulation may be exempted. 6. Management of
NPA: The RMs personally verify and ensure that all accounts, especially high
value advances are properly classified into standard, Sub-std. Doubtful or loss
categories strictly as per prudential norms. It will be their responsibility to finalize
and eliminate delay or postponed of identification of NPA. In case of doubts due to
any reason, RMs may seek guidance from HO and settle the matter within one

month from the date on which the account would have been classified as NPA as
per norms. It may be noted that if RBI observes any divergences in asset
classification, especially in high value accounts due to willful non-compliance of
RBI guidelines by any official responsible for classification then RBI may initiate
deterrent action including imposition of monetary penalty.
7. Appropriation of recovery in NPAs:
a) Non decreed accounts: In case of NPA accounts in all categories i.e. Sub
standard, Doubtful and Loss appropriated first against outstanding in the account
and the surplus available, if any, is to be taken to interest / income. The same norm
will be applicable to the compromised accounts also.
b) Decreed accounts: In case of decreed accounts where there is no compromise
settlement amount recovered should be appropriated as per the decretal terms.
However, if there is no specific term as regards appropriation of recovery in the
decrial terms, the recovery should be appropriated first towards Principal and the
balance towards interest.
(c) Appropriation of ECGC claim amount in NPA Accounts: As per the existing
procedure, Bank is expected to keep the claim amount received from the ECGC in
a separate memorandum account and pursue recovery efforts against the concerned
Exporter borrower for the full amount of dues inclusive of the claim amount settled

Effects of NPA upon banks

A strong banking sector is important for flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. Non-performing
assets are one of the major concerns for banks in India. The only problem that
hampers the possible financial performance of the public sector banks is the
increasing results of the Non- performing Assets. The Non-performing Assets
impacts drastically to the working of the banks. The efficiency of a bank is not
always reflected only by the size of its balance sheet but by the level of return on
its assets. NPAs do not generate interest income for the banks, but the same time
banks are required to make provisions for such NPAs from their current profits.
1.They erode current profits through provisioning requirements. They result in
reduced interest income.
2. They require higher provisioning requirements affecting profits and accretion to
capital.
3. They limit recycling of funds, set in assets-liability mismatches, etc.
4. Adverse impact on Capital Adequacy Ratio.
5.ROE and ROA goes down because NPAs do not earn.
6.Banks rating gets affected.
7.Banks cost of raising funds goes up.
8. RBIs approval required for declaration of dividend if Net NPA ratio is above
3%. Bad effect on Goodwill.
9.Bad effect on equity value.
The RBI has also develop many schemes and tools to reduce the NPA assets by
introducing internal checks and control scheme, relationship mangers as stated by
RBI who have complete knowledge of the borrowers, credit rating system , and
early warning system and so on. The RBI has also tried to improve the
securitization Act and SRFAESI Act and other acts related to the pattern of the
borrowings.

Though RBI has taken number of measures to reduce the level of the Non
performing Assets the result is not up to expectations. To improve NPAs each bank
should be motivated to introduce their own precautionary steps. Before lending the
banks must evaluate the feasible financial and operational prospective results of the
borrowing companies or customer. They must evaluate the borrowing companies
by keeping in considerations the overall impacts of all the factors that influence the
business. NPAs reflect the performance of banks. A high level of NPAs suggests
high probability of a large number of credit defaults that affect the profitability and
net-worth of banks and also erodes the value of the asset. The NPA growth
involves the necessity of provisions, which reduces the overall profits and
shareholders value.
Causes for an Account becoming NPA
Those Attributable to Borrower
a) Failure to bring in Required capital
b) Too ambitious project
c) Longer gestation period
d) Unwanted Expenses
e) Over trading
f) Imbalances of inventories
g) Lack of proper planning
h) Dependence on single customers
I) Lack of expertise
j) Improper working Capital Mgmt.
k) Mismanagement
l) Diversion of Funds
m) Poor Quality Management

n) Heavy borrowings
o) Poor Credit Collection
p) Lack of Quality Control Causes Attributable to Banks a) Wrong selection of
borrower b) Poor Credit appraisal c) Unhelpful in supervision d) Tough stand on
issues e) Too inflexible attitude f) Systems overloaded g) Non inspection of Units
h) Lack of motivation i) Delay in sanction j) Lack of trained staff k) Lack of
delegation of work l) Sudden credit squeeze by banks m) Lack of commitment to
recovery n) Lack of technical, personnel & zeal to work. 33
Other Causes a) Lack of Infrastructure b) Fast changing technology c) Un helpful
attitude of Government d) Changes in consumer preferences e) Increase in material
cost f) Government policies g) Credit policies h) Taxation laws I) Civil commotion
j) Political hostility k) Sluggish legal system l) Changes related to Banking
amendment Act 34.
Early symptoms by which one can recognize a performing asset turning in to Nonperforming asset Four categories of early symptoms
:Financial: Non-payment of the very first installment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts. Irregularity in
installment Irregularity of operations in the accounts. Unpaid overdue bills.
Declining Current Ratio Payment which does not cover the interest and principal
amount of that installment While monitoring the accounts it is found that partial
amount is diverted to sister concern or parent company.
Operational and Physical: If information is received that the borrower has either
initiated the process of winding up or are not doing the business. Overdue
receivables. Stock statement not submitted on time. External non-controllable
factor like natural calamities in the city where borrower conduct his business.
Frequent changes in plan Nonpayment of wages 35
Attitudinal Changes: Use for personal comfort, stocks and shares by borrower
Avoidance of contact with bank Problem between partnersOthers: Changes in
Government policies Death of borrower Competition in the market 36

38. SALE OF NPA TO OTHER BANKSA NPA is eligible for sale to other banks
only if it has remained a NPA for at least twoyears in the books of the selling
bankThe NPA must be held by the purchasing bank at least for a period of 15
months before itis sold to other banks but not to bank, which originally sold the
NPA.The NPA may be classified as standard in the books of the purchasing bank
for a periodof 90 days from date of purchase and thereafter it would depend on the
record of recoverywith reference to cash flows estimated while purchasing.The
bank may purchase/ sell NPA only on without recourse basis.If the sale is
conducted below the net book value, the short fall should be debited to
P&Laccount and if it is higher, the excess provision will be utilized to meet the
loss onaccount of sale of other NPA. 37
39. Preventive Measurement forNPANPA Management Practices inIndiaMeasures
Initiated by RBI forReduction of NPAsInternational Practices on
NPAManagementDifficulties with NPAs 38
40. Preventive Measurement for NPAEarly Recognition of the Problem: Invariably,
by the time banks start their efforts to get involved ina revival process, its too late
to retrieve the situation- both in terms of rehabilitation ofthe project and recovery
of banks dues. Identification of weakness in the very beginningthat is : When the
account starts showing first signs of weakness regardless of the factthat it may not
have become NPA, is imperative. Assessment of the potential of revivalmay be
done on the basis of a techno-economic viability study. Restructuring should
beattempted where, after an objective assessment of the promoters intention,
banks areconvinced of a turnaround within a scheduled timeframe. In respect of
totally unviableunits as decided by the bank, it is better to facilitate winding up/
selling of the unit earlier,so as to recover whatever is possible through legal means
before the security positionbecomes worse.Identifying Borrowers with Genuine
Intent: Identifying borrowers with genuine intent from those who arenon- serious
with no commitment or stake in revival is a challenge confronting bankers.Here the
role of frontline officials at the branch level is paramount as they are the oneswho
has intelligent inputs with regard to promoters sincerity, and capability to
achieveturnaround. Based on this objective assessment, banks should decide as
quickly aspossible whether it would be worthwhile to commit additional finance.
In this regard banks may consider having Special Investigationof all financial
transaction or business transaction, books of account in order to ascertain 39

41. real factors that contributed to sickness of the borrower. Banks may have penal
of technical experts with proven expertise and track record of preparing technoeconomic study of the project of the borrowers. Borrowers having genuine
problems due to temporary mismatch in fund flow or sudden requirement of
additional fund may be entertained at branch level, and for this purpose a special
limit to such type of cases should be decided. This will obviate the need to route
the additional funding through the controlling offices in deserving cases, and help
avert many accounts slipping into NPA category. Timeliness and Adequacy of
response: Longer the delay in response, grater the injury to the account andthe
asset. Time is a crucial element in any restructuring or rehabilitation activity. The
responsedecided on the basis of techno-economic study and promoters
commitment, has to be adequatein terms of extend of additional funding and
relaxations etc. under the restructuring exercise. Thepackage of assistance may be
flexible and bank may look at the exit option. Focus on Cash Flows: While
financing, at the time of restructuring the banks may not beguided by the
conventional fund flow analysis only, which could yield a potentially
misleadingpicture. Appraisal for fresh credit requirements may be done by
analyzing funds flow inconjunction with the Cash Flow rather than only on the
basis of Funds Flow. Management Effectiveness: The general perception among
borrower is that it is lack of financethat leads to sickness and NPAs. But this may
not be the case all the time. Management 40
42. effectiveness in tackling adverse business conditions is a very important aspect
that affects aborrowing units fortunes. A bank may commit additional finance to
an align unit only afterbasic viability of the enterprise also in the context of quality
of management is examined andconfirmed. Where the default is due to deeper
malady, viability study or investigative auditshould be done it will be useful to
have consultant appointed as early as possible to examinethis aspect. A proper
techno- economic viability study must thus become the basis on which anyfuture
action can be considered. Multiple Financing: A. During the exercise for
assessment of viability and restructuring, a Pragmatic and unified approach by all
the lending banks/ FIs as also sharing of all relevant information on the borrower
would go a long way toward overall success of rehabilitation exercise, given the
probability of success/failure. B. In some default cases, where the unit is still
working, the bank should make sure that it captures the cash flows (there is a

tendency on part of the borrowers to switch bankers once they default, for fear of
getting their cash flows forfeited), and ensure that such cash flows are used for
working capital purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not part of the
consortium, may not be allowed to offer credit facilities to such defaulting clients.
Current account facilities may also be denied at non-consortium banks to such
clients and violation may attract penal action. The Credit Information Bureau of
India Ltd. (CIBIL) may be very useful for meaningful information exchange on
defaulting borrowers once the setup becomes fully operational. C. In a forum of
lenders, the priority of each lender will be different. While one set of lenders may
be willing to wait for a longer time to recover its dues, another lender may have a
much shorter timeframe in mind. So it is possible that the letter categories of
lenders may be willing to exit, even a t a cost by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect
into account. 41
43. D. Corporate Debt Restructuring mechanism has been institutionalized in 2001
to provide a timely and transparent system for restructuring of the corporate debt of
Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the
legal framework. Under this system, banks may greatly benefit in terms of
restructuring of large standard accounts (potential NPAs) and viable sub-standard
accounts with consortium/multiple banking arrangements. 42
44. NPA MANAGEMENT PRACTICES IN INDIA Formation of the Credit
Information Bureau (India) Limited (CIBIL) Release of Willful Defaulters List.
RBI also releases a list of borrowers with aggregate outstanding of Rs.1 crore and
above against whom banks have filed suits for recovery of their funds Reporting of
Frauds to RBI Norms of Lenders Liability framing of Fair Practices Code with
regard to lenders liability to be followed by banks, which indirectly prevents
accounts turning into NPAs on account of banks own failure Risk assessment and
Risk management RBI has advised banks to examine all cases of willful default of
Rs.1 crore and above and file suits in such cases. Board of Directors are required to
review NPA accounts of Rs.1 crore and above with special reference to fixing of
staff accountability. Reporting quick mortality cases Special mention accounts for
early identification of bad debts. Loans and advances overdue for less than one and
two quarters would come under this category. However, these accounts do not need

provisioningNPA MANAGEMENT RESOLUTION Compromise Settlement

Schemes Restructuring / Reschedulement Lok Adalat Corporate Debt
Restructuring Cell Debt Recovery Tribunal (DRT) Proceedings under the Code of
Civil Procedure Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR
National Company Law Tribunal (NCLT) Sale of NPA to other banks Sale of NPA
to ARC/ SC under Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 (SRFAESI) Liquidation 43
45. MEASURES INITIATED BY RBI AND GOVERNMENT OF INDIA FOR
REDUCTION OF NPAs Compromise settlement schemes : The RBI / Government
of India have been constantly goading the banks to take steps for arresting the
incidence of fresh NPAs and have also been creating legal and regulatory
environment to facilitate the recovery of existing NPAs of banks. More significant
of them, I would like to recapitulate at this stage. The broad framework for
compromise or negotiated settlement of NPAs advised by RBI in July 1995
continues to be in place. Banks are free to design and implement their own policies
for recovery and write-off incorporating compromise and negotiated settlements
with the approval of their Boards, particularly for old and unresolved cases falling
under the NPA category. The policy framework suggested by RBI provides for
setting up of an independent Settlement Advisory Committees headed by a retired
Judge of the High Court to scrutinize and recommend compromise proposals.
Specific guidelines were issued in May 1999 to public sector banks for onetime
non-discretionary and non-discriminatory settlement of NPAs of small sector. The
scheme was operative up to September 30, 2000. [Public sector banks recovered
Rs. 668 crore through compromise settlement under this scheme.] Guidelines were
modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore and less as
on 31 March 1997. [The above guidelines which were valid up to June 30, 2001
helped the public sector banks to recover Rs. 2600 crore by September 2001] An
OTS Scheme covering advances of Rs.25000 and below continues to be in
operation and guidelines in pursuance to the budget announcement of the Honble
Finance Minister providing for OTS for advances up to Rs.50,000 in respect of
NPAs of small/marginal farmers are being drawn up. 44
46. Negotiating for compromise settlements;The first crucial step towards
meaningful NPA management is to accept that recoveries are onesown
responsibility. To keep the Banks operating cycle going smoothly, it is essential

that thisrealization of ones duties be transformed into deeds by resorting to various

methods of recovery.Of the various methods available for NPA Management,
Compromise Settlements are the mostattractive, if handled in a professional
manner.Advantagesi) Saves money, time and manpowerBanks are mainly
concerned with recovery of dues, to the maximum possible extent, at
minimumexpense. By entering into compromise settlements, the objective is
achieved. Also, a lot ofexecutive time is saved because most of the usual
problems / delays associated with court actionare avoided.ii) Projects a helpful
image of the BankA well-concluded compromise settlement, which results in a
WIN-WIN for the Bank as well asthe borrower, is a strong positive propaganda
for the Bank. The impression generated is that theBank is capable not only of
sympathy, but also empathy.iii) Expedites recycling of fundsCompromise
settlements aim at quick recovery. Recovery means funds becoming available
forrecycling and, additional interest generation.iv) Cleanses Balance SheetWith the
NPA level going down, and the additional funds becoming available for recycling
asfresh advances, the asset quality of the Bank is bound to go up. Improved asset
quality signifieshigher profits by reduced provisions and increased interest income.
With additions to thereserves, the capital position also improves, improving the
Capital Adequacy position.Besides the above, compromise offers the best option
when, i. The documents are defective and cannot be rectified, ii. security is not
enforceable, iii. forced sale is extremely difficult, or would result only in realizing
a paltry amount and iv. The borrowers become untraceable and recovery can be
only though guarantors.Disadvantages i. Compromise involves loss, since full
recovery is not possible. In fact, full recovery is not even envisaged, but sacrifice
is. ii. It may be viewed as a reward for default, especially if chronic default cases
are settled by negotiations. 45
47. iii. It may have a demonstrative effect, and so may vitiate the culture of
repayment iv. There is also the possibility of misuse or, even, malafides, since
assessment of situation is highly subjective. Practical aspects of compromise
settlements Every compromise proposal needs to be looked at individually,
evaluated strictly on merits, and negotiated properly for maximization of benefit to
the Bank. Hence, a straight jacket approach is not possible, neither is it desirable,
to give strict guidelines for compromise settlements. Restructuring and
RehabilitationA. Banks are free to design and implement their own policies for

restructuring/ rehabilitation of the NPA accountsB. Reschedulement of payment of

interest and principal after considering the Debt service coverage ratio,
contribution of the promoter and availability of security Lok Adalats Lok Adalat
institutions help banks to settle disputes involving accounts in doubtful and
loss category, with outstanding balance of Rs.5 lakh for compromise settlement
under Lok Adalats. Debt Recovery Tribunals have now been empowered to
organize Lok Adalats to decide on cases of NPAs of Rs.10 lakhs and above. The
public sector banks had recovered Rs.40.38 crore as on September 30, 2001,
through the forum of Lok Adalat. The progress through this channel is expected to
pick up in the coming years particularly looking at the recent initiatives taken by
some of the public sector banks and DRTs in Mumbai. Some of features are Small
NPAs up to Rs.20 Lacs Speedy Recovery Veil of Authority Soft Defaulters Less
expensive Easier way to resolve 46
48. Debt Recovery Tribunals The Recovery of Debts due to Banks and Financial
Institutions(amendment) Act, passed in March 2000 has helped in strengthening
the functioningof DRTs. Provisions for placement of more than one Recovery
Officer, power toattach defendants property/assets before judgment, penal
provisions for disobedienceof Tribunals order or for breach of any terms of the
order and appointment ofreceiver with powers of realization, management,
protection and preservation ofproperty are expected to provide necessary teeth to
the DRTs and speed up therecovery of NPAs in the times to come. Though there
are 22 DRTs set up at major centers in the country withAppellate Tribunals located
in five centers viz. Allahabad, Mumbai, Delhi, Calcuttaand Chennai, they could
decide only 9814 cases for Rs.6264.71 crore pertaining topublic sector banks since
inception of DRT mechanism and till September 30,2001.The amount recovered in
respect of these cases amounted to only Rs.1864.30crore. Looking at the huge task
on hand with as many as 33049 casesinvolving Rs.42988.84 crore pending before
them as on September 30, 2001, I wouldlike the banks to institute appropriate
documentation system and render all possibleassistance to the DRTs for speeding
up decisions and recovery of some of the wellcollateralized NPAs involving large
amounts. I may add that familiarizationprogrammes have been offered in NIBM at
periodical intervals to the presidingofficers of DRTs in understanding the
complexities of documentation and operationalfeatures and other legalities
applicable of Indian banking system. RBI on its part hassuggested to the

Government to consider enactment of appropriate penal provisionsagainst

obstruction by borrowers in possession of attached properties by DRTreceivers,
and notify borrowers who default to honour the decrees passed againstthem. 47
49. Circulation of information on defaulters The RBI has put in place a system for
periodical circulation of details of willful defaults of borrowers of banks and
financial institutions. This serves as a caution list while considering requests for
new or additional credit limits from defaulting borrowing units and also from the
directors /proprietors / partners of these entities. RBI also publishes a list of
borrowers (with outstanding aggregating Rs. 1 crore and above) against whom
suits have been filed by banks and FIs for recovery of their funds, as on 31st March
every year. It is our experience that these measures had not contributed to any
perceptible recoveries from the defaulting entities. However, they serve as negative
basket of steps shutting off fresh loans to these defaulters. I strongly believe that a
real breakthrough can come only if there is a change in the repayment psyche of
the Indian borrowers. Recovery action against large NPAs After a review of
pendency in regard to NPAs by the Honble Finance Minister, RBI had advised the
public sector banks to examine all cases of willful default of Rs 1 crore and above
and file suits in such cases, and file criminal cases in regard to willful defaults.
Board of Directors are required to review NPA accounts of Rs.1 crore and above
with special reference to fixing of staff accountability.On their part RBI and the
Government are contemplating several supporting measures Asset Reconstruction
Company: An Asset Reconstruction Company with an authorized capital of
Rs.2000 crore and initial paid up capital Rs.1400 crore is to be set up as a trust for
undertaking activities relating to asset reconstruction. It would negotiate with
banks and financial institutions for acquiring distressed assets and develop markets
for such assets. Government of India proposes to go in for legal reforms to
facilitate the functioning of ARC mechanism 48
50. Legal Reforms The Honorable Finance Minister in his recent budget speech
has alreadyannounced the proposal for a comprehensive legislation on asset
foreclosure andSecuritization. Since enacted by way of Ordinance in June 2002
and passed byParliament as an Act in December 2002.Corporate Debt
Restructuring (CDR) Corporate Debt Restructuring mechanism has been
institutionalized in2001 to provide a timely and transparent system for
restructuring of the corporatedebts of Rs.20 crore and above with the banks and

financial institutions. The CDRprocess would also enable viable corporate entities
to restructure their dues outsidethe existing legal framework and reduce the
incidence of fresh NPAs. The CDRstructure has been headquartered in IDBI,
Mumbai and a Standing Forum and CoreGroup for administering the mechanism
had already been put in place. Theexperiment however has not taken off at the
desired pace though more than sixmonths have lapsed since introduction. As
announced by the Honble FinanceMinister in the Union Budget 2002-03, RBI has
set up a high level Group under theChairmanship of Shri. Vepa Kamesam, Deputy
Governor, RBI to review theimplementation procedures of CDR mechanism and to
make it more effective. TheGroup will review the operation of the CDR Scheme,
identify the operationaldifficulties, if any, in the smooth implementation of the
scheme and suggest measuresto make the operation of the scheme more
efficient.Credit Information Bureau Institutionalization of information sharing
arrangements through thenewly formed Credit Information Bureau of India Ltd.
(CIBIL) is under way. RBI isconsidering the recommendations of the S.R.Iyer
Group (Chairman of CIBIL) tooperationalise the scheme of information
dissemination on defaults to the financial 49
51. system. The main recommendations of the Group include dissemination of
information relating to suit-filed accounts regardless of the amount claimed in the
suit or amount of credit granted by a credit institution as also such irregular
accounts where the borrower has given consent for disclosure. This, I hope, would
prevent those who take advantage of lack of system of information sharing
amongst lending institutions to borrow large amounts against same assets and
property, which had in no small measure contributed to the incremental NPAs of
banks. Proposed guidelines on willful defaults/diversion of funds RBI is examining
the recommendation of Kohli Group on willful defaulters. It is working out a
proper definition covering such classes of defaulters so that credit denials to this
group of borrowers can be made effective and criminal prosecution can be made
demonstrative against willful defaulters. Corporate Governance A Consultative
Group under the chairmanship of Dr. A.S. Ganguly was set up by the Reserve Bank
to review the supervisory role of Boards of banks and financial institutions and to
obtain feedback on the functioning of the Boards vis--vis compliance,
transparency, disclosures, audit committees etc. and make recommendations for
making the role of Board of Directors more effective with a view to minimizing

risks and over-exposure. The Group is finalizing its recommendations shortly and
may come out with guidelines for effective control and supervision by bank
boards over credit management and NPA prevention measures.[Dr. Bimal Jalan,
Governor, RBI, in a speech titled "Banking and Finance in the NewMillennium."
delivered at 22nd Bank Economists Conference, New Delhi, 5th February,2001] 50
52. INTERNATIONAL PRACTICES ON NPA MANAGEMENT Subsequent to
the Asian currency crisis which severely crippled the financial system in most
Inaddition to the above, some of the more recent and aggressive steps to resolve
NPAs have beentaken by Taiwan. Taiwanese financial institutions have been
encouraged to merge (though withlimited success) and form bank based AMCs
through the recent introduction of FinancialHolding Company Act and Financial
Institution Asian countries, the magnitude of NPAs inAsian financial institutions
was brought to light. Driven by the need to proactively tackle thesoaring NPA
levels the respective Governments embarked upon a program of substantial
reform.This involved setting up processes for early identification and resolution of
NPAs. The tablebelow provides a cross country comparison of approaches used for
NPA resolution. MergersAct. Alongside the Ministry of Finance has followed a
carrot and stick policy of specifying therequired NPA ratios for banks (5% by end
2003), while also providing flexibility in modes ofNPA asset resolution and a
conducive regulatory and tax environment. Deferred loss write-offprovisions have
been instituted to provide breathing space for lenders to absorb NPA writeoffs.While it is too early to comment on he success of the NPA resolution process
in Taiwan, theearly signs are encouraging. Detailed below are the some key NPA
management approachesadopted by banks in South East Asian countries.1. Credit
Risk MitigationAs part of the overall credit function of the bank, early recognition
of loans showing signs ofdistress is a key component. Credit risk management
focuses on assessing credit risk andmatching it with capital or provisions to cover
expected losses from default.2. Early Warning SystemsLoan monitoring is a
continuous process and Early Warning Systems are in place for staff
tocontinuously be alert for warning signs.3. Asset Management CompaniesTo
resolve NPA problems and help restore the health and confidence of the financial
sector, thecountries in South East Asia have used one broad uniform approach, i.e.
they set up specializedAsset Management Companies (AMCs) to tackle NPAs and
put in place Debt Restructuringmechanism to bring creditors and debtors together,

often working along with independentadvisors. This broad approach was locally
adapted and used with a varying degree of efficacyacross the region. For example,
while in some countries a centralized government sponsoredAMC model has been
used, in others a more decentralized approach has been used involving thecreation
of several "bank-based" AMCs. Further different countries have allowed/used
differentapproaches (in-house restructuring versus NPA Sale) to resolve their
NPAs. Additionally, theefficacy of bankruptcy and foreclosure laws has varied in
various countries. A number of factorsinfluenced the successful resolution of NPAs
through sale to AMCs and some of these keyfactors are discussed below 51