Professional Documents
Culture Documents
Non Performing Assets Project MBA
Non Performing Assets Project MBA
Dr .B.SAI SAILAJA
Associate Professor
Co-ordinator student affairs
Institute Of public enterprise
DECLARATION
MEDISHETTY KARTHIK
DATE:
ACKNOWLEDGEMENT
It’s a great privilege that I have done my Project in such a well-organized and
diversified
First of all I would sincerely like to thank Mr. P.MANOJ KUMAR (Regional Manager)
NON-
PERFORMING ASSETS, for their valuable guidance and kind co-operation during the
project. I
helping me in completing the project. Last but not least, I am also thankful to all
college staff and
1. CHAPTER-1 – INTRODUCTION 01
Research methodology 07
Asset Classification 32
NPA identification norms 33
Problems due to NPA 34
4. CHAPTER-4
Impact of NPA upon banks 38
Reasons for NPAs 39
Early symptoms of NPA 40
Sale of NPAs to other banks 41
5. CHAPTER-5
Preventive measures of NPA 43
International practices on NPA management 45
INTRODUCTION
1
A strong banking sector is important for flourishing economy. One of the
most important and
major roles played by banking sector is that of lending business. It is generally
encouraged because
it has the effect of funds being transferred from the system to productive
purposes, which also results
into economic growth. As there are pros and cons of everything, the same is with
lending business
that carries credit risk, which arises from the failure of borrower to fulfill its
contractual obligations
either during the course of a transaction or on a future obligation. 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. 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. The issue of Non-Performing
Assets has been
discussed at length for financial system all over the world. The problem of NPAs is
not only affecting
the banks but also the whole economy. In fact high level of NPAs in Indian banks is
nothing but a
reflection of the state of health of the industry and trade. This project deals
with understanding the
concept of NPAs, its magnitude and major causes for an account becoming non-
performing,
projection of NPAs over next years in banks and concluding remarks
The magnitude of NPAs have a direct impact on Banks profitability legally
they are not
allowed to book income on such accounts and at the same time banks are forced to
make provisions
on such assets as per RBI guidelines The RBI has advised all State Co-operative
Banks as well as
the Central Co-operative Banks in the country to adopt prudential norms from the
year ending 31-
03-1997. These have been amended a number of times since 1997. As per their
guidelines the
meaning of NPAs, the norms regarding assets classification and provisioning Its now
very known
that the banks and financial institutions in India face the problem of
amplification of non-performing
assets (NPAs) and the issue is becoming more and more unmanageable. In order to
bring the situation
under control, various steps have been taken. Among all other steps most important
one was the
introduction of Securitization and Reconstruction of Financial Assets and
Enforcement of Security
Interest Act, 2002 by Parliament, which was an important step towards elimination
or reduction of
NPAs.
An asset is classified as non-performing asset (NPAs) if dues in the form
of principal and
interest are not paid by the borrower for a period of 180 days, However with effect
from March 2004,
default status would be given to a borrower if dues are not paid for 90 days. If
any advance or credit
facility granted by bank to a borrower becomes nonperforming, then the bank will
have to treat all
the advances/credit facilities granted to that borrower as non-performing without
having any regard
to the fact that there may still exist certain advances / credit facilities having
performing status. The
NPA level of our banks is way high than international standards. One cannot ignore
the fact that a
part of the reduction in NPA’s is due to the writing off bad loans by banks. Indian
banks should take
care to ensure that they give loans to credit worthy customers. In this context the
dictum “prevention
is always better than cure” acts as the golden rule to reduce NPA’s.
With a view to moving towards international best practices and to ensure greater
transparency, it has
been decided to adopt the ‘90 days’ overdue’ norm for identification of NPA, from
the year ending
March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing
asset (NPA) is a
loan or an advance where;
2
Interest and/or instalment of principal remain overdue for a period of more
than 91 days in
respect of a term loan,
The account remains ‘out of order’ for a period of more than 90 days, in
respect of
an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of bills
purchased and
discounted,
Interest and/or instalment of principal remains overdue for two harvest seasons
but for a period
not exceeding two half years in the case of an advance granted for agricultural
purposes, and
Any amount to be received remains overdue for a period of more than 90 days in
respect of
other accounts.
Non submission of Stock Statements for 3 Continuous Quarters in case of Cash
Credit Facility.
No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for
more than
91days
Further classify non-performing assets further into the following three categories
based on the
period for which the asset has remained non-performing and the reliability of the
dues:
3
Introduction of Banking
Bank A financial institution that is licensed to deal with money and its
substitutes by accepting time
and demand deposits, making loans, and investing in securities. The bank generates
profits from the
difference in the interest rates charged and paid. The development of banking is an
inevitable
precondition for the healthy and rapid development of the national economic
structure. Banking
institutions have contributed much to the development of the developed countries of
the world.
Today we cannot imagine the business world without banking institutions. Banking is
as important
as blood in the human body. Due to the development of banking advances are
increased and business
activities developing so it is rightly said, the development of banking is not only
the root but also the
result of the development of the business world." After independence, the Indian
government also
has taken a series of steps to develop the banking sector. Due to considerable
efforts of the
government, today we have a number of banks such as Reserve Bank of India, State
Bank of India,
nationalized commercial banks, Industrial Banks and cooperative banks. Indian Banks
contribute a
lot to the development of agriculture, and trade and industrial sectors. Even today
the banking system
of India possess certain limitations, but one cannot doubt its important role in
the development of the
Indian economy.
Early history
Banking in India originated in the last decades of the 18th century. The first
banks were The General
Bank of India which started in 1786, and the Bank of Hindustan, both of which are
now defunct. The
oldest bank in existence in India is the State Bank of India, which originated in
the Bank of Calcutta
in June 1806, which almost immediately became the Bank of Bengal. This was one of
the three
presidency banks, the other two being the Bank of Bombay and the Bank of Madras,
all three of
which were established under charters from the British East India Company. For many
years the
Presidency banks acted as quasi-central banks, as did their successors. The three
banks merged in
1921 to form the Imperial Bank of India, which, upon India's independence, became
the State Bank
of India.
Banking in India
Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks
(that is with
the Government of India holding a stake), 31 private banks (these do not have
government stake;
they may be publicly listed and traded on stock exchanges) and 38 foreign banks.
They have a
combined network of over 53,000 branches and 49,000 ATMs. According to a report by
ICRA
Limited, a rating agency, the public sector banks hold over 75 percent of total
assets of the banking
industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
4
INDIAN BANKING SECTOR
Banking in India has its origin as early as the Vedic period. It is believed that
the transition from
money lending to banking must have occurred even before Manu, the great Hindu
Jurist, who has
devoted a section of his work to deposits and advances and laid down rules relating
to rates of interest.
During the Mogul period, the indigenous bankers played a very important role in
lending money and
financing foreign trade and commerce. During the days of the East India Company, it
was the turn
of the agency houses to carry on the banking business. The General Bank of India
was the first Joint
Stock Bank to be established in the year 1786. The others which followed were the
Bank of
Hindustan and the Bengal Bank.
The Bank of Hindustan is reported to have continued till 1906
while the other
two failed in the meantime. In the first half of the 19th century the East India
Company established
three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of
Madras in
1843. These three banks also known as Presidency Banks were independent units and
functioned
well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank
of India was
established on 27thJanuary 1921. With the passing of the State Bank of India Act in
1955 the
undertaking of the Imperial Bank of India was taken over by the newly constituted
State Bank of
India. The Reserve Bank which is the Central Bank was created in 1935 by passing
Reserve Bank of
India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian
management
were established in the country namely, Punjab National Bank Ltd, Bank of India
Ltd, Canara Bank
Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On
July 19, 1969, 14
major banks of the country were nationalized and in 15th April 1980 six more
commercial private
sector banks were also taken over by the government
.
5
Scheduled Banks
6
RESEARCH METHODOLOGY
TYPE OF RESEARCH
The research methodology adopted for carrying out the study were
7
SOURCE OF DATA COLLECTION
Survey method of research was adopted. The required data was collected from
primary and
secondary sources. The primary sources of data include focused group interviews and
depth
interviews that were administered on both the customers as well as the Employees to
determine the
factors responsible for NPA in APGVB. The secondary sources of data collection
include the
information gathered from various reliable sources such as RBI website, banking
journals, Articles
related to banking etc.
8
CHAPTER-2
9
About APGVB
Andhra Pradesh Grameena Vikas Bank is a regional rural bank in India. It was
established in
2006 as a Regional Rural Bank as per Regional Rural Banks Act of 1976 and is a 100%
government
bank promoted jointly by Gov. of India, Gov. of Telangana and AP, State Bank of
India.by
amalgamation, on 31 March 2006, of the following 5 banks, sponsored by SBI, to
participate more
energetically, with synergy, in the uplift and development of Rural Farm Sector and
Rural Non-Farm
Sector, with emphasis on the deprived, the Rural Poor, Rural ISB and Rural crafts
APGVB is
included under second schedule of RBI Act and is equal to any public sector /
Nationalized bank in
India in terms of statutory and regulatory provisions of banking regulation act.
Industry Banking
Regional Rural banks
Website www.apgvbank.in
In terms of adopting the technology in our banking operations our bank is far ahead
of others. All
our branches are functioning in core banking solutions (CBS) environment since
November 2009
our bank has also adopted latest repay technology. Interbank remittance through
NEFT/RTGTS has
10
also been enabled, through which our banks customers can transfer money to the
account of any
other commercial bank like SBI, CORPORATION Bank etc. The APGVB is also awarded
with the
following awards such as
Total number of districts covered under states of Telangana and Andhra Pradesh
Mahabubnagar (Population: 35.09 Lakhs)
11
no of branches
800
728
704
700 638
600 553 574
527 538
483 483
500
400
300
200
100
0
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
2014-15
Ownership
Government of India:
50%
Government of Telangana and A.P
15%
State Bank of India
35%
Table 1 ownership of APGVB
Vision
Mission
13
Values
Profit orientation
Commitment for rural development
Excellence in customer service
Respect to systems
Procedures Team Synergy.
The facility of Savings Bank Account is meant for cultivating the habit of saving
by the individuals
for their future needs. The transactions in the SB Account should be of non-
business and non-
commercial nature.
Product features:
The facility of Savings Bank Account is meant for cultivating the habit of saving
by the individuals
for their future needs. The transactions in the SB Account should be of non-
business and non-
commercial nature.
1. Current account
Convenient for business people, traders etc., to have Current Account. Withdrawals
and deposits can
be made in Current Account any number of times. Current Account is not for saving
or earning
14
Interest unlike Savings Bank. Convenience of the customer in parking his liquid
funds for any time
withdrawal, is the primary objective Product features. An individual who has
attained majority
(singly or jointly), HUL, all legal business entities and companies, other bodies
like Clubs, Trusts,
Government Departments etc. Rate of Interest – No interest (as per RBI directives)
Nomination
facility available cheque Book facility available (For minimum balance and service
charges for not
maintaining minimum balance, refer Service Charges) Standing instructions from the
customers -
executed.
Product features:
Term deposits
An amount up to Rs 1 lakh for a fixed period of 5 years invested under this Tax
Saving Fixed Deposit,
is eligible for deduction from income under Section 80 (C) of Income Tax Act. Fixed
Deposits (or
Term Deposits) are accepted for any period between 15 days to 10 years) with
attractive interest
rates.
Any number of Term Deposit Accounts can be opened with a minimum amount of Rs
100/- with
auto renewal facility.
15
Product features:
An exclusive product for women customers. The women customers who remit RD
instalments
regularly, can avail Demand Loan up to twice the outstanding in the RD account
after 12th RD
instalment. The loan would be partially clean and partially secured by the
outstanding amount in RD
Account. Clean portion of the amount would be repaid in 24 or 48 monthly
instalments with EMIs
commencing one month after availing the loan till maturity of RD Account. The
Demand Loan up
to a maximum of Rs 50,000/- can be availed (minimum is Rs 5,000/-)
Si No Segment
Interest Rates
1 Crop Loans including Agr. Gold Loans, KCC, RMGs
Crop Loans (Disbursed during the a). Up to Rs 3.00 lacs
7.00%
A
subvention period) b). Above Rs 3.00 Lacs
14.00%
a) Up to Rs.50,000/-
13.00%
2 Agricultural Term Loans
b) Above Rs.50,000/-
14.00%
a) Up to Rs.50,000/-
13.00%
3 Allied Agri. Term Loans
b) Above Rs.50,000/-
14.00%
16
ISB-Cash Credits, Term Loans and a) Up to Rs.2,00,000/-
14.00%
4 composite Term Loans including
Transport Operators b) Above Rs.2,00,000/-
15.00%
a) Direct to Groups
14.00%
5 Self Help Groups
b) Through MACS/VOs
15.00%
6 Gold Loans- Personal Purpose
15.00%
8 Mortgage Loans
15.50%
Housing Loans up to Rs.20 Lacs
11.25%
9 Housing Loans above Rs.20 Lacs
12.00%
For repairs and Up gradation (Max Rs.2 Lacs)
14.00%
a) Up to Rs.2,00,000/-
12.00%
b) Above Rs.2,00,000/- to Rs.
10 Education Loans
13.00%
4,00,000/-
c) Above Rs.4,00,000/-
14.00%
11 Demand Loans ( Loans against NSC/KVP/LIC Policies etc)
15.00%
SERVICES
FEE BASED SERVICES OFFERED BY THE BANK
S.no Services
1 All our branches provide Core Banking facility (CBS)
2 Lockers facility
Table 3
Highlights 2014-15
19
20
The Operating profit of the Bank stood at Rs 242.97 Crore as on 31.3.14 with a
marginal decline of
Rs 4.86 Crore over previous FY figure of Rs 247.83 Crore. The Net profit of the
Bank has,
however, been on the rise in the last six years, although not at the same rate as
in the initial years
Rs. In
Crores
9000
8000
7000
6000
5000
4000
3000
2000
1000
(Rs in Crores)
1200
1080
1000
879
800 698
600 539
419
400
311
221
200 152
0
21
Net worth of the Bank stood at Rs 1174.35 Crore with a growth of Rs 201.61 Crore (@
20.73%)
over previous FY's figure of Rs 972.74 Crore.
( Rs.
In Crores )
9000
8280
8000
7000
6791
6000
5869
5153
5000 4795
3805
4000 3394
2934
3000 2718
2188
2000
1000
This growth in deposits assumes greater importance. There has been a consistent
growth on month
to month basis except a marginal negative growth of Rs 24 Crore as on 30.4.14.
Retail deposits
constitute 88% of total deposits as on 31.3.2015. The Branches have been motivated
to mobilize
substantial retail deposits and discouraged offering premium rates on bulk
deposits.
2012-13
2013-14 2014-15
% of achievement 85 71
118.70
23
MANAGEMENT OF NPAS IN AP GRAMEENA VIKAS BANK
NPA management is important. NPAs are a drag and drain on the bank’s
resources and
profits. These are unearning assets. Provisioning, capital adequacy norms, made
them untenable.
Recovery improves profitability and helps recycling the blocked funds. Proper NPA-
recovery and
their effective management improves the image of the bank. Early identification
will help early and
sure care, by helping take prompt corrective and remedial measures. It needs no
emphasis, that NPAs
impose an additional burden on the performing assets (they bear the cost of NPAs).
As a ground level operating functionary, an officer has to keep constant watch over
the NPAs at the
branch. He has not only to supervise and ensure that the assets remain performing
but also see that
once they become non-performing, effective measures are initiated to get full
recovery and where
this is not possible, prompt action is initiated to get rid of the NPAs from the
Branch books.
Objective
ii) To contain/ control NPAs to less than 3% and maintain NPAs at par with
national average.
Strategies
v) Review mechanism.
ix) Write-off.
Branches and Regional Offices to organize timely recovery drives and camps.
At Branches
Systematic, concerted and intensive recovery efforts to keep NPAs under control,
by:
i) ABC analysis.
25
ix) Village-wise and segment-wise NPA position.
xii) Involving SHGs, RMGs, VOs, Farmers’ Clubs, etc., in recovery drives.
xv) Any other strategy suitable for making recovery drives/ camps more effective.
At Regional Office
iv) Compilation of data of existing NPAs (ENPAs) and likely NPAs (LNPAs).
26
ix) Submitting progress reports, at monthly intervals, to Head Office by the 5th
of the following
month.
Identification of NPAs
27
Review Mechanism
An appropriate action plan to be drawn up, to improve the status of the loans,
within a time frame.
The review, inter alia should envelope and analyze the factors, both internal
and external, which
led to the impairment of the asset (loan/advance), for taking any possible
action vis a vis the case
on hand and for taking preventive action vis a vis other accounts. A
representative list is
appended.
Internal External
- Appraisal defects. - Machine (break-
down/obsolescence)
- Faulty documentation. - Material (Raw material
quality, price,
- Security deterioration. adequacy)
- Follow-up lapses/inadequacy. - Power, water
- Absence of remedial action. - Competition
- Quality control/standard
- Government Polices
- Natural Calamities
- Marketing
- Price disadvantage
- Heavy borrowings
- Unplanned capital
expenditure
- Willful default
- Industrial relations
- Cost overrun
- Diversion to:
Consumption needs
Outside borrowings
Investments
- Lags in receipt of sale
proceeds
- Lack of knowledge, skill
and attitude
Branches/ Regional Offices will conduct review meeting, to consider and discuss:
28
Timely lending/ credit disbursals.
Obtaining realistic and time bound commitment from the borrowers and guarantors
for
repayment of loans.
Involving SHGs, RMGs, opinion leaders and Government functionaries for recovery
of loans.
Creation of NPA Management Cell: The Bank constituted a NPA Management Cell to
specially deal with such assets and aim for reducing levels of NPAs. All the
Regional Offices are
advised to constitute Non-Performing Asset Management Cell in their office,
attached to
Manager (Advances).
29
CHAPTER-3
30
Non-Performing Assets (NPA) - Concept
The three letters “NPA” strike terror in banking sector and business circle
today NPA is a
short form of “Non-Performing Assets”. In banking, NPA are loans given to doubtful
customers who
may or may not repay the loan on time. There are two types of assets viz.
performing and non-
performing. Performing loans are standard loans on which both the principle and
interest are secured
and their return is guaranteed.
Non-Performing assets means the debt which is given by the Bank is unable to
recover it is called
NPA .Non- Performing Asset [NPA] is a result of asset Liability mismatch, A NPA
account in the
books of accounts is an asset as it indicates the amount receivable from the
Defaulters. It means if
any bank gives loan to the customer if the interest for that loan is not paid by
the customer till 90
days then that account is called as NPA account.
A loan or lease that is not meeting its stated principal and interest
payments. Banks
usually classify as nonperforming assets any commercial loans which are more than
90 days overdue
and any consumer loans which are more than 180 days overdue. More generally, an
asset which is
not producing income.
Definitions:
An asset, including a leased asset, becomes Non-Performing when it ceases to
generate income for
the bank.
A’ non-performing asset’ (NPA) was defined as a credit facility in respect of which
the interest and/or
installment of principal has remained ‘past due’ for a specified period of time.
The specified period was reduced in a phased manner as under:
31
With the effect from March 31, 2004, NPA shall be a loan or an advance where:
1. Term loan: Interest and /or installment of principal remain over due for a
period of more than 90
days.
2. Cash credit/overdraft: The account remains ‘out of order’ for a period of more
than 90 days.
3. Bills: The bill remains overdue for a period of more than 90days from due date
of payment.
4. Other Loans: Any amount to be received remains overdue for a period of more than
90 days.
5. Agricultural Accounts: In the case of agriculture advances, where repayment is
based on income
from crop. An account will be classified as NPA as under:
a) If loan has been granted for short duration crop: interest and/or installment of
Principal remains
overdue for two crop seasons beyond the due date.
b) If loan has been granted for long duration crop: Interest and/or installment of
principal remains
overdue for one crop seasons beyond due date.
Asset classification
With effect from 31st March’2004, a loan or advance would become NPA where;
i)Interest and/ or installment of principal remain overdue for a period of more
than 90 days in respect
of a term loan,
ii) The account remains ‘out of order’ for a period of more than 90 days, in
respect of an
Overdraft/Cash Credit (OD/CC),
iii) The bill remains overdue for a period of more than 90 days in the case of
bills purchased and
discounted,
iv) With effect from September 2004, loans granted for short duration crops
will be treated as
NPA, if the installment of principal or interest thereon remains overdue for two
crop seasons and
loans granted for long duration crops will be treated as NPA, if installment of
principal or interest
thereon remains overdue for one crop season, and
v) Any amount to be received remains overdue for a period of more than 90 days
in respect
of other accounts.
Out of Order: An account should be treated as 'out of order' if the outstanding
balance remains
continuously in excess of 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
33
credits continuously for 90 days as on the date of Balance Sheet or credits are not
enough to cover
the interest debited during the same period, these accounts should be treated as
'out of order'.
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.
The date of NPA will be the actual date on which slippage occurred, as mentioned
below:-
For Term Loan/Demand Loan Accounts The date on which interest and/or
instalment of
principal have remained overdue for a period of more than 90 days. For
Overdraft/Cash Credit
Accounts The date on which the account completed a period of more than 90 days of
being
continuously out of order.
1. The Policy of income recognition has to be objective and based on the record of
recovery.
Internationally income from non-performing asset (NPA) is not recognized 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.
2. 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.
3. However, interest on advances against term deposits, NSCs, IVPs, KVPs, and Life
policies may
be taken to income account on the due date, provided adequate margin is available
in the accounts.
4. If government guaranteed advances become NPA, the interest on such advances
should not be
taken to income account unless the interest has been realized.
5. If any advance, including bills purchased and discounted, become s NPA as at the
close of any
year, the entire interest accrued and credited to income account in the past
periods, should be reversed
or provided for if the same is not realized. This will apply to government
guaranteed accounts also.
PROBLEMS DUE TO NPA
1. Owners do not receive a market return on their capital .in the worst case, if
the banks fails,
owners lose their assets. In modern times this may affect a broad pool of
shareholders.
34
2. Depositors do not receive a market return on saving. In the worst case if the
bank fails,
depositors lose their assets or uninsured balance.
Non-performing asset may spill over the banking system and contract the money
stock, which may
lead to economic contraction. This spillover effect can channelize through
liquidity or bank
insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can
jam payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the bank’s capital base.
The three letters Strike terror in banking sector and business circle today. NPA is
short form of “Non-
Performing Asset”. The dreaded NPA rule says simply this: when interest or other
due to a bank
remains unpaid for more than 90 days, the entire bank loan automatically turns a
non performing
asset. The recovery of loan has always been problem for banks and financial
institution. To come out
of these first we need to think is it possible to avoid NPA, no cannot be then left
is to look after the
factor responsible for it and managing those factors.
Any amount to be received remains overdue for a period of more than 90 days in
respect of
other accounts.
35
As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move
over to charging of interest at monthly rests, by April 1, 2002. However, the date
of classification of
an advance as NPA should not be changed on account of charging of interest at
monthly rests. Banks
should, therefore, continue to classify an account as NPA only if the interest
charged during any
quarter is not serviced fully within 180 days from the end of the quarter with
effect from April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004.
SARFAESI ACT
The policy makers and legislators realized the need for measures for the quick
recovery of NPAs,
and to empower Banks and Financial Institutions to recover the NPAs without
intervention of
judicial process. In that process guidance was found from Section 69A of Transfer
of Property Act
and State Finance Corporation Acts, where there is provision for the sale of
secured assets without
the intervention of Courts. In that process Securitization and Reconstruction of
Financial Assets
and Enforcement of Security Interest Act 2002 (SARFAESI) was enacted. The Preamble
of the Act
states that ”Narasimham Committee I and II and Andhyarujina Committee constituted
by the
Central Government for the purpose of examining banking sector reforms have
considered the need
for changes in the legal system in respect of these areas. These Committees have
suggested
enactment of a new legislation for securitization and empowering banks and
financial institutions
to take possession of these securities and to sell them without the intervention of
the Court. Acting
on these suggestions the SARFAESI Ordinance 2002 was promulgated on the 21st June
2002 to
regulate securitization and reconstruction of financial assets and enforcement of
security interest
and for matters connected therewith or incidental thereto. The provisions of the
Ordinance would
enable banks and financial institutions to realize long term assets, manage problem
of liquidity,
asset liabilities
36
CHAPTER-4
37
IMPACT OF NPA UPON BANKS
1. Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong
choice of client.
Because of the money getting blocked the prodigality of bank decreases not only by
the amount of
NPA but NPA lead to opportunity cost also as that much of profit invested in some
return earning
project/asset. So NPA doesn’t affect current profit but also future stream of
profit, which may lead
to loss of some long-term beneficial opportunity. Another impact of reduction in
profitability is low
ROI (return on investment), which adversely affect current earning of bank.
2. Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand
which lead to
borrowing money for shortest period of time which lead to additional cost to the
company. Difficulty
in operating the functions of bank is another cause of NPA due to lack of money.
Routine payments
and dues.
3. Involvement of management:-
Time and efforts of management is another indirect cost which bank has to bear due
to NPA. Time
and efforts of management in handling and managing NPA would have diverted to some
fruitful
activities, which would have given good returns. Now day’s banks have special
employees to deal
and handle NPAs, which is additional cost to the bank.
4. Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms
of market credit.
It will lose its goodwill and brand image and credit which have negative impact to
the people who
are putting their money in the banks.
38
REASONS FOR MANAGING NON – PERFORMING ASSETS.
NPAs have multifold effects on the performance of banks. It shows the weakness of
management of bank.
It is necessary to manage non – performing assets for following reasons:
3. For profitability:
Non – performing Assets means an asset, which cease to generate any income. Thus
more and more NPA
will reduce the income of banks as interest which is main component of bank’s
income thus it will
jeopardize the profitability or return on assets consequently it will be constraint
for bank’s growth.
4. High provision:
Higher NPA leads banks to compel higher provision for „Bad Debts Reserve‟ as per
the norms of RBI.
Provision will be done by realized profit and NPA will block the actual profit of
banks for current year
thus NPA has a dual effect i.e. not realization of interest income and separate
provision for NPA from
Profit & Loss account.
39
6. Expansion plan:
For instance banks want to start as its expansion plan and its NPA level is higher.
Then prescribed by RBI
that is 15% of advances, banks will not be able to get permission from the RBI for
starting a new branch.
Thus it is necessary to control NPA level within prescribed limit for future growth
of banks.
7. Welfare of employees:
If banks are having high NPA it will ruin the whole capital and past reserves,
which raises question for
existence of banks. Thus, many personnel will loss employment, but also banks
cannot make any provision
for welfare activities of the employee’s future benefits due to lack of
availability of free reserves.
Early symptoms by which one can recognize a performing asset turning in to Non-
performing asset
40
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
Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower
Avoidance of contact with bank
Problem between partners
Others:
Changes in Government policies
Death of borrower
Competition in the market
A NPA is eligible for sale to other banks only if it has remained a NPA for
at least two
years in the books of the selling bank
The NPA must be held by the purchasing bank at least for a period of 15
months before it is
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 period of 90
days from date of purchase and thereafter it would depend on the record of
recovery with
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&L
account and if it is higher, the excess provision will be utilized to meet
the loss on account of
sale of other NPA.
41
CHAPTER-5
42
Preventive Measurement for NPA
Early Recognition of the Problem :
Identifying borrowers with genuine intent from those who are non-
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 ones who has intelligent inputs
with regard to
promoters’ sincerity, and capability to achieve Turn around. Based on this
objective assessment, banks
should decide as quickly as possible whether it would be worthwhile to commit
additional finance.
In this regard banks may consider having “Special Investigation” of all financial
transaction or
business transaction, books of account in order to ascertain real factors that
contributed to sickness of
the borrower. Banks may have penal of technical experts with proven expertise and
track record of
preparing techno-economic study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of
additional fund may be entertained at branch level, and for this purpose a special
limit to such type of
cases should be decided. This will obviate the need to route the additional funding
through the
controlling offices in deserving cases, and help avert many accounts slipping into
NPA category.
Timeliness and adequacy of response :
Longer the delay in response, grater the injury to the account and the asset. Time
is a crucial element
in any restructuring or rehabilitation activity. The response decided on the basis
of techno-economic
study and promoter’s commitment, has to be adequate
in terms of extend of additional funding and relaxations etc. under the
restructuring exercise. The
package of assistance may be flexible and bank may look at the exit option.
While financing, at the time of restructuring the banks may not be guided
by the conventional
fund flow analysis only, which could yield a potentially misleading picture.
Appraisal for fresh credit
43
requirements may be done by analysing funds flow in conjunction with the Cash Flow
rather than only
on the basis of Funds Flow.
Management Effectiveness :
Multiple financing :
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.
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.
44
INTERNATIONAL PRACTICES ON NPA MANAGEMENT
45
incentives coupled with the directive of the Central Bank to make adjustments in
the book values of the
assets not transferred to Danaharta (after Danaharta identifies them) were
sufficient to ensure effective
sale to the AMC. In Taiwan, there is a regulatory requirement to reduce for banks
to reduce NPAs to 5%
by the end of 2003. Consequently there is an increasing number of NPA auctions by
the banks.
Revenue enhancement
Cost reduction
Process improvement
Working capital management
Sale of redundant/surplus assets
46
Conducive and transparent regulatory and tax environment, particularly
pertaining to
deferred loss write offs, Foreign Direct Investment and bankruptcy/foreclosure
processes has
been put in place.
Performance targets set for banks to get them to resolve NPAs by a certain
deadline.
47
CHAPTER-6
48
LITERATURE REVIEW
49
31, 1989. This proportion did not include the amounts locked up in sick industrial
units. Hence, the
proportion of problem loans indeed was higher.
However, the NPAs of Indian Banks declined to 17.44 percent as on March 31, 1997
after introduction of
prudential norms. In case of many of the banks, the decline in ratio of NPAs was
mainly due to
proportionately much higher rise in advances and a lower level of NPAs accretion
after 1992.
The study also revealed that the major factors contributing to loans becoming NPAs
include diversion of
funds for expansion, diversification, modernization, undertaking new projects and
for helping associate
concerns. This is coupled with recessionary trend and failure to tap funds in the
capital and debt markets,
business failure (product, marketing, etc.),inefficient management, strained labour
relations, inappropriate
technology/technical problems, product obsolescence, recession input/power
shortage, price escalation,
accidents, natural calamities, Government policies like changes in excise duties,
pollution control orders,
etc.
The RBI report concluded that reduction of NPAs in banking sector should be treated
as a national priority
issue to make the Indian banking system stronger, resilient and geared to meet the
challenges of
globalization (Parul Khanna, 2012)
Das and Ghosh (2003) empirically examined non-performing loans of India’s public
sector banks in terms
of various indicators such as asset size, credit growth and macroeconomic
condition, and operating
efficiency indicators. Sergio (1996) in a study of non-performing loans in Italy
found evidence that, an
increase in the riskiness of loan assets is rooted in a bank’s lending policy
adducing to relatively
unselective and inadequate assessment of sectorial prospects.
Vradi et.al (2006), his study on´ Measurement of efficiency of bank in India
concluded that in modern
world performance of banking is more important to stable the economy .in order to
see the efficiency of
Indian banks we have seen the fore indicators i.e. profitability, productivity,
assets, quality and financial
management for all banks includes public sector, private sector banks in India for
the period 2000 and
1999 to 2002-2003. For measuring efficiency of banks we have adopted development
envelopment
analysis and found that public sectors banks are more efficient than other banks in
India
Brijesh K. Saho et.al (2007), this paper attempts to examine, the performance
trends of the Indian
commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings
are indicative in many
ways. First, the increasing average annual trends in technical efficiency for all
ownership groups indicate
an affirmative gesture about the effect of the reform process on the performance of
the Indian banking
50
sector. Second, the higher cost efficiency accrual of private banks over
nationalized banks indicate that
nationalized banks, though old, do not reflect their learning experience in their
cost minimizing behavior
due to X-inefficiency factors arising from government ownership. This finding also
highlights the possible
stronger disciplining role played by the capital market indicating a strong link
between market for
corporate control and efficiency of private enterprise assumed by property right
hypothesis.
And, finally, concerning the scale elasticity behaviour, the technology and market-
based results differ
significantly supporting the empirical distinction between returns to scale and
economies of scale, often
used interchangeably in the literature.
.
B.Satish Kumar (2008), in his article on an evaluation of the financial performance
of Indian private
sector banks wrote Private sector banks play an important role in development of
Indian economy. After
liberalization the banking industry underwent major changes. The economic reforms
totally have changed
the banking sector. RBI permitted new banks to be started in the private sector as
per the recommendation
of Narashiman committee. The Indian banking industry was dominated by public sector
banks. But now
the situations have changed new generation banks with used of technology and
professional management
has gained a reasonable position in the banking industry.
Nelson M. Waweru et.al (2009), Study that many financial institutions that
collapsed in Kenya since 1986
failed due to non-performing loans, this study investigated the causes of non-
performing loans, the actions
that bank managers have taken to mitigate that problem and the level of success of
such actions. Using a
sample of 30 managers selected from the ten largest banks the study found that
national economic
downturn was perceived as the most important external factor. Customer failure to
disclose vital
information during the loan application process was considered to be the main
customer specific factor.
The study further found that Lack of an aggressive debt collection policy was
perceived as the main bank
specific factor, contributing to the non performing debt problem in Kenya.
51
CHAPTER-7
52
ANALYSIS
Assets Classification
(Rs in Crores)
Assets 2012-13
2013-14 2014-15
O/s % O/s
% O/s %
299.81
300 267.4
250
Rs in Cr
200
150
100
50
0
2012-13 2013-14
2014-2015
Series 1 267.4 349.81
299.81
Financial Year
From the above graph we can show the status of NPA for two
financial years i.e. 2012-13, 2013-14and 2014-15 the
X axis represents the financial year and the Y axis as the amount in crores. The
NPA value for the year 2012-13 is Rs 267.40 Cr
whereas the other value for 2013-14is of Rs 349.81 Cr and when it comes to the
present financial year it is around 299.81.
That means there is a gradual increase in NPA for 2012-13 and 2013-14 of Rs 82.41
Cr and when it comes to the financial
years of 2013-14 and 2014-15 the decrease of 50 Cr in NPA can be seen .Which shows
positive impact on the development
of the bank.
54
Overall representation of Loan and NPA last three years in the branches of (Amount
in ‘000)
55
Best performing branches are Chowdergudem, kadthal, telkapally because loan amount
which is
converting NPA is low. Poor performing branches are padra, peddakothapally,
thummanpet
because loan amount which is converting NPA is high
56
CHAPTER-8
57
FINDING AND SUGGESTIONS
Gross NPA & Net NPA of APGVB are not constant every year . It’s being
increasing and
decreasing.
Total advances given by APGVB and Net Profits are also not constant.
Because of mismanagement in bank there is a positive relation between Total
Advances, Net Profits
and NPA of bank which is not good.
Positive relation between NPA & profits are due to wrong choice of clients by
Banks.
There is an adverse effect on the Liquidity of Bank.
Bank is unable to give loans to the new customers due to lack of funds which
arises due to NPA.
Suggestions
Good management needed on the side of banks to decrease the level of NPA.
Proper selection of borrowers & follow ups required to get timely payment
In order to reduce the balance of NPAs, Bank should constantly review and
monitor the accounts
and the progress of the project for which the loan has been sanctioned.
58
CONCLUSION
59
CHAPTER-9
60
BIBILOGRAPHY
WEBSITE
o http://www.apgvbank.in/
o ww.yourarticlelibrary.com/banking/indian-banking-system-structure-and-other-
details-with-
diagrams/23495/
o https://www.rbi.org.in/
61