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PROBLEM FORMULATION
A study on the NPA (Non-Performing Assets) in Banks with particular reference to South
Indian Bank Ltd.
PROBLEM STATEMENT
The project ― “A study on the NPA (Non-Performing Assets) in Banks with particular
reference to South Indian Bank” focuses on the increasing Non- Performing Assets in banks.
It identifies the growing NPA for Public and Private Sector Banks, for Priority and non-Priority
sectors, on the basis of asset classification and analyses the percentage of variation over the
past few years for the banking industry as a whole and particularly for South Indian Bank. The
study also focuses on the management of NPA through proper monitoring and recovery
measures adopted by banks and attempts to determine effective methods to reduce the Non-
Performing Asset levels of banks.
The banking system plays a vital role in the development of its sound economy. The role of
banking in promoting development and growth cannot be overestimated, especially for a
developing nation like India. But the rising NPAs in banks has impacted the performance of
banks and is affecting its profitability, liquidity and causing additional costs.
The problem of NPA is not limited to only Indian public sector banks, but it prevails in the
entire banking industry. The major portion of bad debts in Indian banks arose out of lending to
the priority sector. There have been a number of cases of wilful default and fraudulent activities
that contributed to the rising NPAs like the Nirav Modi case involving a $2 billion fraud case
at Punjab National Bank (PNB) and the Vijay Mallya case involving a money laundering probe
against him in an alleged 900 crore Rupees loan default case.
Managing these Non-performing assets is vital in order to protect the interest of shareholders,
depositors as well as increase the credit worthiness of banks. NPA should be reduced for
sustaining the economic growth, to increase the welfare of employees, to maintain reputation
of the banks as well as to create job opportunities for future generation.
CHAPTER II
RESEARCH PROCESS
To study the performance of the Indian banking industry in terms of NPA over five
years.
To analyse the percentage share of NPA of Public and Private sector banks
To study the level and percentage of various loan asset categories of banks over five
years.
To study the magnitude and percentage of NPA in Priority and non-Priority sector
lending.
To study the performance of South Indian Bank in terms of NPA over five years.
To study the magnitude and percentage of NPA in Priority and non-Priority sector
lending of South Indian Bank.
To make appropriate suggestions to prevent and manage existing NPAs in Banks.
The Non- Performing Asset levels in the banking industry is undergoing a surge and is one
among the prime factors to hamper the performance of banks. Thus this study attempts to
analyse the profile and pattern of Non-Performing Assets in the banking industry, particularly
South Indian Bank. The study will help to understand how banks manage Non-Performing
Assets and suggest measures for to prevent and reduce existing NPAs. The study is confined
to the data of Scheduled Commercial Banks excluding Foreign Banks and is based on the
financial data of years 2013 to 2017.
RESEARCH METHODOLOGY
For the study, the Non-Performing Assets in domestic Scheduled Commercial Banks which
includes public sector banks, private sector banks have been taken into consideration. The data
collected is mainly secondary in nature. The sources of data for this project include the official
records and annual reports of South Indian Bank and various publications by the Reserve Bank
of India
interest and/ or instalment of principal remain overdue for a period of more than 90
days in respect of a term loan.
the account remains ‘out of order’ in respect of an Overdraft/Cash Credit.
the bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted.
the instalment of principal or interest thereon remains overdue for two crop seasons for
short duration crops.
the instalment of principal or interest thereon remains overdue for one crop season for
long duration crops.
the amount of liquidity facility remains outstanding for more than 90 days, in respect
of a securitisation transaction.
in respect of derivative transactions, the overdue receivables representing positive
mark-to-market value of a derivative contract, if these remain unpaid for a period of 90
days from the specified due date for payment.
OVERDUE
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due
date fixed by the bank.
INCOME RECOGNITION
While evaluating the Non-Performing Assets (NPA), the interests accrued are treated based on
the Income recognition policy. The policy of income recognition has to be objective and based
on the record of recovery. Internationally income from non-performing assets (NPA) is not
recognised on accrual basis but is booked as income only when it is actually received.
Therefore, the banks should not charge and take to income account interest on any NPA. This
will apply to Government guaranteed accounts also.
REVERSAL OF INCOME
If any advance, including bills purchased and discounted, becomes NPA, the entire interest
accrued and credited to income account in the past periods, should be reversed if the same is
not realised. This will apply to Government guaranteed accounts also.
In respect of NPAs, fees, commission and similar income that have accrued should cease to
accrue in the current period and should be reversed with respect to past periods, if uncollected.
Leased Assets
The finance charge component of finance income on the leased asset which has accrued and
was credited to income account before the asset became non performing, and remaining
unrealised, should be reversed or provided for in the current accounting period.
INTEREST APPLICATION
On an account turning NPA, banks should reverse the interest already charged and not collected
by debiting Profit and Loss account, and stop further application of interest. However, banks
may continue to record such accrued interest in a Memorandum account in their books. For the
purpose of computing Gross Advances, interest recorded in the Memorandum account should
not be taken into account.
ASSET CLASSIFICATION
Assets are classified into following four categories:
1) Standard Assets
2) Sub-standard Assets
3) Doubtful Assets
4) Loss Assets
CATEGORIES OF NPAS
Banks are required to classify non-performing assets further into the following three categories
based on the period for which the asset has remained non performing and the realisability of
the dues:
Substandard Assets
Doubtful Assets
Loss Assets
Substandard Assets
A substandard asset would be one, which has remained NPA for a period less than or equal to
12 months. Such an asset will have well defined credit weaknesses that jeopardise the
liquidation of the debt and are characterised by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
Doubtful Assets
An asset would be classified as doubtful if it has remained in the substandard category for a
period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that
were classified as sub-standard, with the added characteristic that the weaknesses make
collection or liquidation in full, – on the basis of currently known facts, conditions and values
– highly questionable and improbable.
Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors
or the RBI inspection but the amount has not been written off wholly. In other words, such an
asset is considered uncollectible and of such little value that its continuance as a bankable asset
is not warranted although there may be some salvage or recovery value.
8. Agricultural advances
a) In respect of advances granted for agricultural purpose where interest and/ or
instalment of the principal remains unpaid after it has become past due for two
harvest seasons but for a period not exceeding two half years, such an advance
should be treated as Non-Performing Assets (NPA).
b) Where the natural calamities impair the repaying capacity of agricultural
borrowers, Banks may decide on their own as a relief measure – conversion of
the short – term production loan into a term loan or re – scheduling of the
repayment period.
c) In such cases of conversion or re scheduling, the term loan as well as fresh
short– term loan may be treated as current dues and need not be classified as
Non- Performing Assets (NPA).
9. A Non-Performing Asset where the term of the sanction has been renegotiated or
rescheduled/restructured shall remain in the existing asset classification and can be
upgraded on satisfactory performance under the renegotiation or restructured terms for
at least one year.
PROVISIONING NORMS
It is mandatory for all banks in India to make adequate provision for loan loss. RBI prescribes
different rates for making provision in respect of Non-Performing Assets (NPA).
The primary responsibility for making adequate provisions for any diminution in the value of
loan assets, investment or other assets is that of the bank managements and the statutory
auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to
assist the bank management and the statutory auditors in taking a decision in regard to making
adequate and necessary provisions in terms of prudential guidelines.
In conformity with the prudential norms, provisions should be made on the non-performing
assets on the basis of classification. Taking into account the time lag between an account
becoming doubtful of recovery, its recognition as such, the realisation of the security and the
erosion over time in the value of security charged to the bank, the banks should make provision
against substandard assets, doubtful assets and loss assets as below:
Loss assets
Loss assets should be written off. If loss assets are permitted to remain in the books for any
reason, 100 percent of the outstanding should be provided for.
Doubtful assets
100 percent of the extent to which the advance is not covered by the realisable value of the
security to which the bank has a valid recourse and the realisable value is estimated on a
realistic basis.
In regard to the secured portion, provision may be made on the following basis, at the rates
ranging from 25 percent to 100 percent of the secured portion depending upon the period for
which the asset has remained doubtful:
Period for which the advance has remained in Provision requirement (%)
‘doubtful category
Up to one year 25
One to three years 40
More than three years 100
Substandard assets
A general provision of 15 percent on total outstanding should be made without making any
allowance for ECGC guarantee cover and securities available.
Standard assets
The provisioning requirements for all types of standard assets stands as below. Banks should
make general provision for standard assets at the following rates for the funded outstanding on
global loan portfolio basis:
(a) Farm Credit to agricultural activities and Small and Micro Enterprises (SMEs) sectors at
0.25 per cent;
(b) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;
(c) advances to Commercial Real Estate – Residential Housing Sector
(CRE - RH) at 0.75 per cent1
(d) housing loans extended at teaser rates and restructured advances
(e) all other loans and advances not included in (a) (b) and (c) above at 0.40 per cent.
The banking sector has been facing the serious problems of the rising NPAs. But the problem
of NPAs is more in public sector banks when compared to private sector banks and foreign
banks. There are many reasons as to why a loan goes bad. These causes may be attributed to
the borrower or the staff of the bank itself.
Internal
External
1. Regulatory reasons
E.g.: Changes in legal regulations
2. Industrial recession.
3. Government policies like tax changes etc.
REASONS FOR STAFF ACCOUNTABILITY
The biggest ever challenge that the banking industry today faces is management of the NPAs.
According to the Reserve Bank of India’s Financial Stability Report of December 2017, they
currently stand at 10.2 per cent of all assets for Public Sector Banks. The NPAs in PSBs are
growing not only due to external factors like ineffective recovery tribunals, wilful defaults,
natural calamities, industrial sickness, lack of demands, labour problems, changes in the
government policies etc. but also internal factors like managerial deficiencies, inappropriate
technologies, poor credit appraisal systems, absence of regular industrial visits etc. Lack of
proper supervision, monitoring and follow-up is one of the responsible for increasing ration of
NPA in Banks. The overdue advances of banks in India are mounting and in consequence the
NPAs in their portfolio are on the rise. In order to prevent the build-up of NPA, pre-sanction
and post sanction monitoring or follow up of advances should be ensured. Banks can also resort
to recovery tools in order to recover advances that has already turned into NPA and incurs cost
to the bank.
MONITORING OF ADVANCES
Sound appraisal and assessment is necessary to ensure the borrower’s capacity and intention to
repay. Past record of good performance and integrity are no guarantee for future performance.
Even a loan granted on the basis of sound appraisal may go bad if the borrower fails to maintain
his payments. Therefore, proper supervision and follow up of the advance is essential. Pre-
sanction appraisal and post-sanction monitoring are two sides of the same coin and both are
essential for the timely repayment.
Monitoring is to start soon after the disbursement of advance and continue till it is liquidated.
Some of the important general procedures to be followed in the monitoring are outlined below:
Monitoring can be broadly divided into legal, financial and physical follow-up.
LEGAL FOLLOW-UP
Documentation:
Proper documentation should be done in the correct format and adequately stamped
Documents should be renewed timely such as Encumbrance Certificates and Tax paid
receipts
Verification and approval of documentation by the bank’s Legal Officers
Ensuring compliance with all terms and conditions of the sanction.
It should be ensured that necessary monitoring mechanism is adopted to ensure that the funds
lent are used only for the purpose for which it is sanctioned and that all the terms and conditions
are complied with on an on-going basis.
Unit visits
Unit visits and periodical inspection of securities under hypothecation / pledge to the bank play
a vital role in effective credit monitoring especially on the following fronts:
Bank can satisfy that the unit is functioning well, that there is adequate
merchandise/inventory to cover the advance.
Satisfy that the fixed assets for which the bank financed the units are still in the custody
of the parties and are in good working condition.
Bank can inter-act with the borrowers and find out whether they are experiencing any
difficulties and if so, take remedial steps
All the units of account having outstanding balance of more than Rs.10 lakhs should be visited
frequently.
Units of all NPA and border line accounts should be visited by the Manager frequently and
followed up. By regular unit visits of the borrowers, signs of sickness of borrower
accounts can be identified in the very beginning itself and bank will be able to initiate corrective
steps immediately. Unit visit is the most important monitoring tool to prevent the incidence of
NPA.
Credit Officers:
Assistance of trained Credit Officers should be ensured at least in medium and large branches.
All loan/advance accounts will have to be followed up scrupulously to avert accounts slipping
into Non performing accounts (NPA) category. In the present economic scenario there is
possibility of delayed cash realization for business enterprises impacting prompt repayment of
loans and servicing of interest. Hence, ideally, the follow up of loans and advances must start
from the date of disbursal.
The initial signals for concern start after an overdue position of 30 days in an account. Watch
category accounts is a prelude to NPA. Loan/Limit accounts are classified as “Standard Watch
accounts” where either principal or interest is overdue for 30 days or more. Monitoring efforts
should be intensified when the account turn Standard Watch. Advances which have already
classified as NPA should not be reported as Standard Watch accounts. Fresh advances extended
can be avoided from slippage, by close monitoring from the initial stage itself.
There may be some cases where accounts become sticky at the initial stage due to delay in
project implementation, delay in getting power connection, cost escalation and other
unforeseen circumstances. Such cases should be carefully studied by banks and remedial
measures should be suggested well in advance. In case where re-phasing or rescheduling is
essential for various reasons, such proposals should be taken up sufficiently in advance before
the account turns NPA.
Standard watch accounts and NPA accounts with high balance outstanding greater
should be reviewed by a committee of Executives.
RECOVERY OF NPA
Once an account becomes non-performing, every bank looks into strategies of recovery,
rescheduling or restructuring of the bad loans. Recovery procedures are a set of tactics resorted
to by the bank in order to recover the over dues. Recovery measures are initiated if the account
cannot be upgraded by way of restructuring or rescheduling.
Recovery measures should be initiated at the right time as a delay in taking up these measures
can lead to a failure in recoverability.
To improve the health of financial sector, to reduce the NPAs, to improve asset quality of
banks and to prevent slippages, Reserve Bank of India (RBI) has issued instructions that
each bank is required to have a loan recovery policy which sets down the manner of recovery
of dues, targeted level of reduction (period-wise), norms for permitted waiver and
monitoring of write-off/waiver cases. In order to effectively recover the dues, every bank will
have in place a Loan Recovery Policy. The basic objective of this policy is to maximise the
recovery of dues from non-performing assets. It is yearly reviewed and modified to maximise
profit from NPA using recovery tools expeditiously to bring down NPA.
The debt recovery policy of banks is to be built around dignity and respect to defaulters. Bank
are supposed to follow ethical practices and not resort to unduly coercive practices recovery of
dues from borrowers. The policy is built on courtesy, fair treatment and persuasion. Recovery
should be based on good means. The Recovery measures should only be initiated after due
notice. Repossession, revaluation and utilisation of security should be carried out in a fair and
transparent manner.
1. INDUSTRY ANALYSIS
7,000.00
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
0.00
2013 2014 2015 2016 2017
GNPA
Interpretation
As evident from the table and bar chart above, the Gross Non-Performing Assets
(GNPA) in the Indian Banking industry is on the rise. It has increased from 1759 billion
Rupees in 2013 to 7148.98 billion Rupees in 2017.
The percentage of GNPA to Gross Advances has also increased from 3.44% to 9.8%
over the five years.
GNPA FOR PUBLIC AND PRIVATE SECTOR BANKS (Excluding Foreign Banks)
6,000.00
5,000.00
4,000.00
3,000.00
2,000.00
1,000.00
0.00
2013 2014 2015 2016 2017
10%
90%
GNPA for Public Sector Banks (PSB) have increased from 1559 billion Rupees in 2013
to 6410.56 billion Rupees. While that of Private Sector Banks has increased from 200
billion Rupees in 2013 to 738.42 billion Rupees in 2017.
The percentage of GNPA to total advances has increased from 3.84% to 12.86 for
Public Sector Banks and from 1.91% to 3.5% for Private Sector Banks over the five
years.
The percentage share of GNPA of Private Sector banks of the Total Advances is only
10.33% while about 89.67% of the GNPA is attributable to Public Sector Banks for the
financial year 2016-17 as seen from the pie chart.
Bank Group
Both Public and Private Sector Banks have a higher percentage of doubtful assets in
comparison to other Non-Preforming Assets (Substandard and Loss assets)
5000
4000
3000
2000
1000
0
2013 2014 2015 2016 2017
Priority Sector Non Priority Sector
23%
77%
GNPA for the Priority Sector has increased from 721.00 billion Rupees in 2013 to
1,675.69 billion Rupees in 2017 and that of Non Priority Sector has increased from
1,038.00 billion Rupees in 2013 to 5,473.29 billion Rupees in 2017.
The share of GNPA from Priority sector account for a percentage share of about 23%
and GNPA from Non Priority Sector account for 77% of Total Advances as seen from
the Pie Chart.
COMPANY ANALYSIS
16
14
12
10
0
2013 2014 2015 2016 2017
GNPA
GNPA Ratio
12
10
0
2013 2014 2015 2016 2017
Interpretation
The Gross Non-Performing Asset (GNPA) of South Indian Bank has increased from
4.339 billion Rupees in 2013 to 15.624 billion Rupees in 2016 and decreased to 11.490
billion Rupees in 2017.
The percentage of GNPA to Total Advances has also increased from 1.36% to 3.77%
over the initial four years and decreased to 2.45% in 2017.
As evident from the above bar chart on GNPA ratio for South Indian Bank, Private
Sector Banks and Scheduled Commercial Banks, it is clear that South Indian Bank has
a lower GNPA ratio for all the years except 2016, in comparison with that of all Private
Sector banks.
GNPA FOR PRIORITY AND NON PRIORITY SECTORS
Years
As percentage of As percentage of
(Financial year GNPA GNPA
Total Advances Total Advances
ending)
12
10
0
2014 2015 2016 2017
The GNPA for the priority Sector has increased from 1.2 billion Rupees to 4.7 billion
Rupees from 2014 to 2017 and that of Non Priority Sector has increased from 3.12 to
6.78 billion Rupees
Percentage of GNPA to Total Advances has also increased from 1.05% to 2.47% for
Priority Sector and from 1.25% to 2.44% over the four years.
CONCLUSION
As understood from the data analysis, Non-Performing Assets (NPA) is rising in the banking
industry, both private and public sector. Thus NPA are an area of concern, as they adversely
affect the financial health of the bank. The timely recognition of, and provision for, stressed
assets promote safe and sound banking systems and play an important role in bank supervision.
Management of NPA is need of the hour. This requires the interference and involvement of the
bank, the borrower and the government. Considering the challenges ahead, banks has to
strengthen its front in managing NPA. Sound pre-sanction appraisal, viability of the scheme,
creditability of the borrower are all essential ingredients for successful credit management.
CHAPTER V
Extension of the Right to Privacy Act by providing Banks more transparency into
borrower’s information.
Strengthening the Legal Framework like The Insolvency and Bankruptcy Code, 2016:
The bankruptcy code which is a solution for resolving insolvencies. The Banking
Regulation (Amendment) Ordinance, 2017 empowers the RBI to issue directions to
banking companies to initiate an insolvency resolution process in respect of a default,
under the provisions of the IBC. Government should have in place stronger acts for
recovery such as Revenue Recovery Act by which the State Government gives target
for recovery to official of revenue department and simultaneously gives incentive for
recovery also.
More effective data banks providing credit information of borrowers to track all the
data instead of multiple agencies providing part information and documents such a
CIBIL and CRISIL.
Increase the dependence on the recovery measures like SARFAESI Act, One Time
Settlement etc. so that much of the cost involved in the legal proceedings may be
avoided.
Timely review of accounts and renewal of documents
Introducing professionalism in credit appraisal which can be done by recruiting the
trained professionals at the divisional or regional or head offices.
Educating and spreading awareness among customers regarding non-performing assets
and its impact on banks profitability which could improve cases of wilful defaults.
Appointment of Credit Officers at all branches so that the manager can effectively
control the advance portfolio and also monitor the accounts carefully.
Strengthening the credit appraisal process at the time of sanction of loans and
monitoring of advances after disbursal.
The increasing trend in NPA can be brought down through better selection of
borrowers.
Adoption and compliance to International Financial Reporting Standard 9 –Financial
Instruments (IFRS 9) the IASB issued, which introduced an “expected credit loss”
(ECL) framework for the recognition of impairment. Under IFRS 9’s ECL impairment
framework, banks are required to recognise ECLs at all times, taking into account past
events, current conditions and forecast information, and to update the amount of ECLs
recognised at each reporting date to reflect changes in an asset’s credit risk
Appointment of Customer Relationship Managers to maintain constant interactions
with the customers to keep track of their loan payment.
Establishment of new courts and DRTS to carry out Recovery proceedings. Corruption,
delay and pendency in such courts should be avoided.
Improving existing strategies by analysing new strategies taken up by other banks and
adopting the same if found more effective.
Stronger regulatory measures by Reserve Bank of India to check if banks breach proper
credit appraisal of borrowers and monitoring of advances like the establishment of the
system of ‘Prompt Corrective Action’ (PCA). This ensures timely supervisory action
in case of problem banks following a rule based approach.
Borrower information should be made traceable with the help of Aadhaar for tracing
the assets of the borrower and GPS for mapping property coordinates.