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FINAL PROJECT REPORT ON

“NON PERFORMING ASSETS”
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UNDER THE GUIDANCE OF

MR. HARWINDER SINGH

SUBMITTED BY

AMRIK SINGH POTHIWAL

ROLL NO: 42

MASTER IN MANAGEMENT STUDIES 2009-2011

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NPA MANAGEMENT

TO THE UNIVERSITY OF MUMBAI IN PARTIAL FULFILMENT OF TWO YEAR FULL TIME DEGREE / DIPLOMA OF ( MASTER OF MANAGEMENT STUDIES )

GURU NANAK INSTITUTE OF MANAGEMENT STUDIES MATUNGA, MUMBAI 400 019.

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CERTIFICATE

This is to certify that the study presented by “Amrik singh pothiwal” to the University of Mumbai in part completion of the two year full time degree/diploma of Masters of management studies under the title of Non Performing Assets has been done under my guidance. To the best of my knowledge this project is in the nature of original work that has not been submitted for any degree of this University or any other University.

Signature of the Candidate _____________________ (Amrik singh pothiwal)

Forwarded through the Research Guide

Signature of the Guide

(Prof.Harwinder singh)

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ACKNOWLEDGEMENT

I take this opportunity to sincerely thanks and express my gratitude to my project guide Prof.Harwinder singh for guiding me throughout my entire project.

The experience and the knowledge acquired over the interactions with the guide have been invaluable to say the least and will help me a great deal in my future education and career.

My project was completed in a very supportive and interactive environment and has been great learning experience. Last but not the least I would like to thanks my family and friends for all the support they have provided me.

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This has however. Credit risk is the oldest and biggest risk that bank. by virtue of its very nature of business. therefore. should manage the risk efficiently to survive in this highly uncertain world. 5 . Financial Institutions..” Risk is the fundamental element that drives financial behavior. “Banks are in the business of managing risk. the financial system would be vastly simplified.NPA MANAGEMENT ABSTRACT This report deals with the problem of having non-performing assets. Only those banks that have efficient risk management system will survive in the market in the long run. the reasons for mounting of non-performing assets and the practices present in country for dealing with nonperforming assets. acquired a greater significance in the recent past for various reasons. not avoiding it……………………. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. risk is omnipresent in the real world. “……………………A bank’s success lies in its ability to assume and aggregate risk within tolerable and manageable limits”. However. inherits. Better credit portfolio diversification enhances the prospects of the reduced concentration credit risk as empirically evidenced by direct relationship between concentration credit risk profile and NPAs of banks. Without risk. India is no exception to this swing towards market driven economy. The future of banking will undoubtedly rest on risk management dynamics. Foremost among them is the wind of economic liberalization that is blowing across the globe.

For my study I have utilized totally the secondary data. Type of the data Primary data takes much time and are also expensive whereas the secondary data are easy to search and are not expensive too. On the basis of the analyzed factor. I started knowing about the basics of the NPAs and decided to study on the NPAs.NPA MANAGEMENT METHODOLOGY Formulating the problem Providing credit facility to the borrower is one of the important factors as far as the banking sector is concerned. Data Source Bank of India 6 . I felt that the important issue right now as far as the credit facilities are provided by bank is non performing assets. Research Design The research design for this study is basically analytical because it utilizes the large number of data of the Public Sector Banks.

Secondary objectives:  To understand what is Non Performing Assets and what are the underlying reasons for the emergence of the NPAs.NPA MANAGEMENT OBJECTIVE OF THE STUDY Primary objective: The primary objective of the making report is:  To know why NPAs are the great challenge to the Public Sector Banks.  To know what steps are being taken by the Indian banking sector to reduce the NPAs 7 .  To understand the impacts of NPAs on the operations of the Public Sector Banks.

NPA MANAGEMENT INDEX Sr. No. The word bank is derived from the Italian banca.Introductory What Is NPA? Provisioning Norms & Asset Classification Guidelines for Asset Classification Write of Policy Difficulties with NPA Factors responsible for NPA Reasons for NPA Managing NPA Measures to recover an NPA Legal Resolutions for NPA Findings and Recommendations Conclusion Limitations Bibliography Topics Page No. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 History of Indian Banking Scheduled banking structure in India Bank of India. By the term bank is generally understood an institution that holds a Banking Licenses. Moneylenders in 8 . 9 13 16 22 34 37 39 41 42 44 47 48 62 73 80 84 85 HISTORY OF INDIAN BANKING A bank is a financial institution that provides banking and ther financial services. a so-called Non-bank. Banks are a subset of the financial services industry. The terms bankrupt and "broke" are similarly derived from banca rotta. which refers to an out of business bank. having its bench physically broken. which is derived from German and means bench. Banking licenses are granted by financial supervision authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans.

These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for licensing . 3) In the first half of the 19th century the East India Company established three banks. was the turn of the agency houses to carry on the banking business. who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. supervision and control of banks. It is believed that the transition from money lending to banking must have occurred even before Manu. 5) The three decades after nationalization saw phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system. or big open rooms. 2) Banking in India has an early origin where the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. The others which followed were the Bank Hindustan and the Bengal Bank. Considering the proliferation of weak banks. with each lender working from his own bench or table. RBI compulsorily merged many of them with stronger banks in 1969. During the days of the East India Company. the Bank of Bengal in 1809.NPA MANAGEMENT Northern Italy originally did business in open areas.1934 which was followed up with the Banking Regulations in 1949. a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken by the newly constituted State Bank of India. 1) Banking in India has its origin as early as the Vedic period. during 9 . 4) The Reserve Bank of India which is the Central Bank was created in 1935 by passing Reserve Bank of India Act. Typically. The General Bank of India was first Joint Stock Bank to be established in the year 1786. Development of banking industry in India followed below stated steps. the Bank of Bombay in 1840 and the Bank of Madras in 1843. the great Hindu Jurist. the Imperial Bank of India was established in 1921. These three banks also known as Presidency banks were amalgamated in 1920 and a new bank.

a high-level committee was set up on 14 August 1991 to examine all aspects relating organization. Narasimham). Accordingly. new private sector banks were allowed to be set up in the Indian banking system. a and procedures of the financial system. • • At book value. Annuity certificates are excluded. Special Deposits of Non. non. Provident Funds. compensation and other bonds such as National Rural Development Bonds and Capital Investment Bonds. The introduction of capital adequacy norms in line with international standards has been another important measure of the reforms process . Comprises accruals under Small Savings Scheme. the following minimum requirements: 10 . in 1993. However. asset classification and provisioning by banks. Based on the (Chairman: Shri M. One of the important measures related to income recognition. no new private sector banks were allowed to be set up. satisfy others. functions the recommendations of Committee to the structure. • Comprises balance of expired loans. in recognition of the need [Comparative analysis on NPA of Private & Public sector Banks] to introduce greater competition which could lead to higher productivity These new banks had to and efficiency among of the banking system.NPA MANAGEMENT the late eighties the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. • These represent mainly non – negotiable. International Bank for Reconstruction and Development and Asian Development Bank. on the basis of objective criteria was laid down by the Reserve Bank. the banking system was introduced in 1992-93.Government 6) In the post-nationalization era.interest bearing securities issued to International Financial Institutions like International Monetary Fund. The comprehensive reform of objective of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health.

the sector has become very competitive with the entry of many foreign and private sector banks . The shares should be listed on the stock exchange. 8) The banking industry in India is in a midst of transformation. which has changed business environment in the country. on prudential accounting norms. There is no doubt that banking sector reforms have improved the profitability. The Committee has submitted its report to the Government in April 1998.NPA MANAGEMENT • • • • • It should be registered as a public limited company. The minimum paid-up capital should be Rs 100 crore. It will have to achieve capital adequacy of eight per cent from the very beginning. and The bank will be subject to prudential norms in respect of banking operations. the industry was merely focusing on deposit mobilization and branch expansion. particularly in the areas of Capital Adequacy Ratio. it found many of its advances under the non-performing assets (NPA) list.The face of banking is changing rapidly.During the pre-liberalization period. Some of the recommendations of the Committee. under the Chairmanship of Shri M. 7) A high level Committee. accounting and other policies as laid down by the RBI. But with liberalization. thanks to the economic liberalization of the country. The other recommendations are under consideration. Narasimham. was constituted by the Government of India in December 1997 to review the record of implementation of financial system reforms recommended by the CFS in 1991 and chart the reforms necessary in the years ahead to make the banking system stronger and better equipped to compete effectively in international economic environment. More importantly. Classification of Government guaranteed advances. productivity and efficiency 11 . provisioning requirements on standard been advances and more disclosures in the Balance Sheets of banks have accepted and implemented. The headquarters of the bank should be preferably located in a centre which does not have the headquarters of any other bank.

but in the days ahead banks will have to prepare themselves to face new challenges .NPA MANAGEMENT of banks. Scheduled banking structure in India 12 .

The Bank has 3021 branches in India spread over all states/ union territories including 136 specialized branches. The Bank has been the first among the nationalized banks to establish a fully computerised branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. 1906 by a group of eminent businessmen from Mumbai. called the BOI Shareholding Ltd. There are 28 branches/ offices (including three representative offices) abroad. Total number of shareholders as on 31/03/2009 is 2. for evaluating/ rating its credit portfolio. . Paris in 1974. The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. the Bank occupies a premier position among the nationalised banks. In business volume. 35589. at London. the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations.NPA MANAGEMENT HISTORY Bank of India was founded on 7th September. Bank of India was the first Indian Bank to open a branch outside the country. with a paid-up capital of Rs. and also the first to open a branch in Europe. These branches are controlled through 48 Zonal Offices. The Bank has sizable presence 13 . The Bank came out with its maiden public issue in 1997 and follow on Qualified Institutions Placement in February 2008. the Bank has been in the forefront of introducing various innovative services and systems. Beginning with one office in Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalized along with 13 other banks. It pioneered the introduction of the Health Code System in 1982. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure.50 lakh and 50 employees. in 1946. It is an association that has blossomed into a joint venture with BSE. to extend depository services to the stock broking community. While firmly adhering to a policy of prudence and caution.

82% of Bank's total business. 14 .NPA MANAGEMENT abroad. with a network of 28 branches the international business accounts for around 17.

and in so doing. stakehoder Vision "to become the bank of choice for corporates. medium businesses and upmarket retail customers and to provide cost effective developmental banking for small business.NPA MANAGEMENT Mission & Vision Mission "to provide superior. meet the requirements of our . responsive services to others in our role as a development bank. proactive banking services to niche markets globally. while providing cost-effective. mass market and rural markets" 15 .

D.As) problem is one of the foremost and the most formidable problems that have shaken the entire banking industry in India like an earthquake. Pathak Miss. Jayaraman Shri M G. General Manager Chief Manager Manager Officer Officer Officer EXECUTIVE SUMMARY: The Non-Performing Assets (N. 16 .S. Tirmare Shri S. Special Asset Recovery Management Mumbai (Main) Branch Shri L.NPA MANAGEMENT BOARD MEMBERS OF BOI S.M.Lohani Shri K.C. Ugrani Shri S. Vidya Deshpande Asst.P.R.A.

As.P.As reduction and stall their growth in future. thereby having a deleterious effect on capital formation and arresting the economic activity in the country. since long.As is not a matter of concern for the lenders alone. is bound to create adverse repercussions in the economy.P.As has eroded the profitability of banks through reduced interest income and provisioning requirements. The problem of N. made banks more adverse to risk and squeezed genuine small and medium enterprise from accessing competitive credit and has throttled their enterprising spirits as well. as bank credit is the catalyst to the economic growth of the country and any bottleneck in the smooth flow of credit.P. one cause for which is mounting N. It has grown like a cancer and has infected every limb of the banking system. besides restricting the recycling of funds leading to serious asset liability mismatches.P. 17 . The spiraling and the devastating affect of N.NPA MANAGEMENT Like a canker worm.P.As as issue of public debate and of national priority.P.As has raised the cost of credit. N. as well. it has been eating the banking system from within. At macro level. It is a matter of grave concern to the public as well. if it fails to make a dent in N. Therefore.As have chocked off the supply line of credit to the potential borrowers. banks have not been able to find a reliable cure for this malady.As on the economy have made the problem of N. the unsustainable level of N.P. any measure or reform on this front would be inadequate and incomprehensive. And like the dreaded AIDS.P. At the micro level. Mounting menace of N.

there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made. followed by the SBI group. while estimating NPAs of the Indian banking sector between 35% to 70% of its total outstanding credit.NPA MANAGEMENT THE EMERGENCE OF NPA IN INDIAN BANKING & FINANCIAL INSTITUTIONS AND ITS DIMENSIONS Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. up to 35% of the total banking assets. classifying a `doubtful' asset as a `sub-standard' asset. Driven to desperation and impelled by the desire not to accept defeat. Classifying an account of a credit customer as `substandard' and other accounts of the same credit customer as `standard'. • • Essentially arising from the wrong classification of NPAs. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. Much of this. The international rating agency Standard & Poor (S & P) conveys the gloomiest picture. whenever adequate current earnings were not available to meet provisioning obligations. without actually providing. • Failure to identify an NPA as per stipulated guidelines: There were instances of `substandard' assets being classified as `standard'. as per the rating agency would be accounted as NPA if rescheduling and restructuring of loans to make them 18 . Despite various correctional steps administered to solve and end this problem. This only shows that the problem has swelled to graver dimensions. throwing prudential norms to the winds. concrete results are eluding. and the all India Financial Institutions. NPA statistics is executed through the following ways. This practice can be logically explained as a desperate attempt on the part of the bankers. Wrong classification of an NPA: classifying a `loss' asset as a `doubtful' or `substandard' asset. they have chosen to mislead and claim compliance with the provisioning norms. The severity of the problem is however acutely suffered by Nationalised Banks. The positive results of the chain of measures effected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralised by the ill effects of this surging threat.

This artificially conveyed picture of 'all is well' with PSBs suddenly came to an end when the lid was open with the introduction of the prudential norms of banking in the year 1992-93. but keeping the balance sheets opaque. However RBI has contested this dismal assessment. This invests an urgency to tackle this virus as a fire fighting exercise. It is not wrong to have pursued social goals. But despite this extravagance the malaise remained invisible to the public eyes due to the practice of not following transparent accounting standards. But the fact remains that the infection if left unchecked will eventually lead to what has been forecast by the rating agency. but this does not justify relegating banking goals and fiscal discipline to the background.NPA MANAGEMENT good assets in the book are not taken into account. when prudent norms of banking were forsaken basking by the halo of security provided by government ownership. 19 . Emergence of NPA as an Alarming Threat to Nationalised Banks NPA is a brought forward legacy accumulated over the past three decades. bringing total transparency in disclosure norms and 'cleansing' the balance sheets of commercial banks for the first time in the country.

20 . All this enables double-digit returns on most asset classes which is not so in a majority of other countries. Foreign banks in India achieving a return on assets (ROA) of 3%. Bank credit is growing at 30% per annum and there is an everexpanding middle class of between 250 and 300 million people (larger than the population of the US) in need of financial services.89. India has become one of the most preferred banking destinations in the world. the retail credit is expected to cross Rs 5. The reasons are numerous: the economy is growing at a rate of 8%. Some of the high growth potential areas to be looked at are: the market for consumer finance stands at about 2%-3% of GDP.70. the real estate market in India is growing at 30% annually and is projected to touch $ 50 billion by 2008. Indian markets provide growth opportunities. their keen interest in expanding their businesses is understandable – even more so when compared with the measly 1% average ROA for the Top 1000 banks in the world.000 crore by 2010 from the current level of Rs 1. which are unlikely to be matched by the mature banking markets around the world.NPA MANAGEMENT The Indian Banking System India’s banking sector is growing at a fast pace.000 crore in 2004-05 and huge SME sector which contributes significantly to India’s GDP. compared with 25% in some European markets.

In order to bring the situation under control. which is an important step towards elimination or reduction of N.P. doubtful or loss asset.As: An asset is classified as non-performing asset (N. 21 .P. 2002 was passed by Parliament. Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset.NPA MANAGEMENT NON-PERFORMING ASSET BACKGROUND: Introduction: It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (N.As) and the issue is becoming more and more unmanageable. If any advance or credit facility granted by bank to a borrower becomes non-performing.P. Meaning of N. in accordance with the directions or guidelines relating to asset classification issued by RBI. some steps have been taken recently. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. However with effect from March 2004. which has been classified by a bank or financial institution as sub-standard. default status would be given to a borrower if dues are not paid for 90 days.As. Non Performing Asset means an asset or account of borrower.P.As) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. then the bank will have to treat all the advances/credit facilities granted to that borrower as nonperforming without having any regard to the fact that there may still exist certain advances / credit facilities having performing status.

The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. international rating agencies like. these giant corporates became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither neither anticipate nor welcome. Under such a situation. sticky legal system. Global Developments and N. WorldCom.NPA MANAGEMENT Indian economy and N. it goes without saying that banks are no exception and are bound to face the heat of a global downturn. Global Crossing do not give much confidence to banks.As is reduced drastically.P. banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. Standard & Poor have lowered India's credit rating to sub-investment grade. Further. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate. which results into economic growth. Xerox. A question that arises is how much risk can a bank afford to take? Recent happenings in the business world . Bankers have realized that unless the level of N. which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation.Enron. However lending also carries credit risk. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. In case after case.As: The core banking business is of mobilizing the deposits and utilizing it for lending to industry. globally stock markets have tumbled and business itself is getting hard to do.P. Due to this. The Indian economy has been much affected due to high fiscal deficit. 22 . etc.P. they will find it difficult to survive.As: Undoubtedly the world economy has slowed down. poor infrastructure facilities. recession is at its peak. cutting of exposures to emerging markets by FIIs.

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. performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However. 23 .P. The following are the primary causes for turning the accounts into NPA:  Diversion of funds. mostly for the expansion/ diversification of business or for promoting associate concern.As 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.g. with increasing deposits made by the public in the banking system. Import duties.  Deficiencies like delay in the release of limits/ funds by banks/FIs Secondary causes are as follows: Selection of the project. inefficient management.NPA MANAGEMENT Why N.P.  Factors internal to business like product/ marketing failure. increasing N. infrastructural bottlenecks etc. leading to time/cost over-runs during project  Implementation. inappropriate technology. Further.  Changes in Government policies e. Also. labour unrest  Changes in the Macro-environment like recession in the economy.As affects the repayment capacity of banks. the banking industry cannot afford defaults by borrower s since N.As have become an issue for banks and financial institutions in India? To start with.  Inadequate control/ supervision.P.

 Industrial/ Economic trend. cost over-run.NPA MANAGEMENT  Implementation of the project.  Absence of the up gradation of the unit/ ploughing back of the profit. 24 . under-financing technology involved  Intention of the borrower.time over-run.

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THE PROBLEM OF NON-PERFORMING ASSETS
Liberlization and Globalization ushered in by the government in the early 90s have thrown open many challenges to the Indian financial sector. Banks, amongst other things, were set on a path to align their accounting standards with the International standards and by global players. They had to have a fresh look into their balance sheet and analyze them critically in the light of the prudential norms of income recognition and provisioning that were stipulated by the regulator, based on Narasimhan Committee recommendations. Loans and Advances as assets of the bank play an important part in gross earnings and net profits of banks. The share of advances in the total assets of the banks forms more than 60 percent7 and as such it is the backbone of banking structure. Bank lending is very crucial for it make possible the financing of agricultural, industrial and commercial activities of the country. The strength and soundness of the banking system primarily depends upon health of the advances. In other words, improvement in assets quality is fundamental to strengthening working of banks and improving their financial viability. Most domestic public sector banks in the country are expected to completely wipeout their outstanding NPAs between 2006 and 2008. NPAs are an inevitable burden on the banking industry. Hence the success of a bank depends upon methods of managing NPAs and keeping them within tolerance level, of late, several institutional mechanisms have been developed in India to deal with NPAs and there has also been tightening of legal provisions. Perhaps more importantly, effective management of NPAs requires an appropriate internal check and balances system in a bank. In this background, this chapter is designed to give an outline of trends in NPAs in Indian banking industry vis-à-vis other countries and highlight the importance of NPAs management. NPA is an advance where payment of interest or repayment of installment of principal (in case of Term loans) or both remains unpaid for a period of 90 days10 The issue of Non-Performing Assets (NPAs) in the financial sector has been an area of concern for all economies and reduction in NPAs has become synonymous to functional efficiency of financial intermediaries. From the early nineties till date, the regulators in India,
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under the general recommendations of the Narasimhan Committee Reports (1 & 2), Verma Committee Report, Basle 1 & 2 and insights and findings of scholars, have continuously provided guidelines and directives addressed at reducing NPAs. A perusal of the Reserve Bank of India (RBI) circulars in this regard will give the reader a comprehensive idea about the extent of detail in which norms and guidelines have been formulated to arrest the growth in NPAs. It started off with introduction of prudential norms and has delved into adoption of a risk based management system. The Indian financial sector has responded well and adopted the directives given, and the overall health has shown considerable improvement. Although NPAs are a balance sheet issue of individual banks and financial institutions, it has wider macroeconomic implications and the literature, while discussing financial sector reforms, has gone into a discussion on NPAs also. The reasons can be observed from the following flow diagram.

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Presence of NPAs indicates asset quality of the balance sheet and hence future income generating prospects. This also requires provisioning which has implications with respect to capital adequacy. Declining capital adequacy adversely affects shareholder value and restricts the ability of the bank/institution to access the capital market for additional equity to enhance capital adequacy. If this happens for a large number of financial intermediaries, then, given that there are large inter bank transactions, there could be a domino kind of effect. Low capital adequacy will also severely affect the growth prospects of banks and institutions. With weak growth outlook and low functional efficiency, the sector as a whole will not be able to perform its role and will adversely affect the savings investment process. Once we realize this, it is evident that a micro problem of a bank translates into a macro problem. With weak growth outlook and low functional efficiency, the sector as a whole will not be able to perform its role and will adversely affect the savings investment process. Once we realize this, it is evident that a micro problem of a bank translates into a macro problem of the economy. Capital market development takes a back seat and GDP growth rate weakens. The adverse effects of fiscal deficit loom large and a balance of payments crisis also cannot be ruled out. Banking crisis and foreign exchange crisis get interlinked.

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EVOLUTION OF NPAs
In the early Nineties PSBs were suffering from acute capital inadequacy and many of them were depicting negative profitability. This is because the parameters set for their functioning were deficient and they did not project the paramount need for these corporate goals. • • Incorrect goal perception and identification led them to wrong destination Since the 70s, the SCBs of India functioned totally as captive capsule units cut off from international banking and unable to participate in the structural transformations, the sweeping changes, and the new type of lending products emerging in the global banking Institutions. • The personnel lacked desired training and knowledge resources required to compete with international players. Such and other chaotic conditions in parts of the Indian Banking industry had resulted in the accumulation of assets, which were termed as non-productive in an unprecedented level • "Audit and Inspections" remained as functions under the control of the executive officers, which were not independent and were thus unable to correct the effect of serious flaws in policies and directions of the higher ups. • The quantum of credit extended by the PSBs increased by about 160 times in the three decades after nationalization (from around Rs. 3000 crore in 1970 to Rs. 475113 Crore in 2004). The Banks were not developed in terms of skills and expertise to regulate such stupendous growth in the volume and manage the diverse risks that emerged in the process. • The need for organizing an effective mechanism to gather and disseminate credit information amongst the commercial banks was never felt or implemented. The archaic laws of secrecy of customers-information that was binding Bankers in India, disabled banks to publish names of defaulters for common knowledge of the other Banks in the system. • Lack of effective corporate management
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• Functional inefficiency was also caused due to over-staffing. This eventually led to the failure of the project financed leaving idle assets. while recovery of installments of Term Loans was not out of profits and surplus generated but through recourse to the corpus of working capital of the borrowing concerns. when elsewhere throughout the world the system was to switch over to computerization of operations.NPA MANAGEMENT • Credit management on the part of the lenders to the borrowers to secure their genuine and bonafide interests was not based on pragmatically calculated anticipated cash flows of the borrower concern. 29 . manual processing of over expanded operations and failure to computerize Banks in India.

. Various steps have been taken by the government to recover and reduce NPAs. Securitization and reconstruction of financial assets and enforcement of . Debt Recovery Tribunals Interest Act 2002 5.Corporate Reconstruction Companies . 3. Some of them are. 6 credit information on defaulters and role of credit information bureaus 30 . .NPA MANAGEMENT Management of NPA The table II&III shows that during initial sage the percentage of NPA was higher. . Lok adalats. This was due to show ineffective recovery of bank credit. inadequate legal provision etc. 1 One time settlement/ Compromised Scheme. lacuna in credit recovery system. 2. Security 4.

interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan. Due to the improvement in the payment and settlement systems. a Non performing asset (NPA) shell be an advance where i. iv. doubtful or loss asset. iii. ii. interest and/ or installment 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 purpose.. in accordance with the directions or guidelines relating to asset classification issued by RBI. as from that date. upgradation of technology in the banking system. which has been classified by a bank or financial institution as sub-standard.NPA MANAGEMENT NPA MANAGEMENT POLICY Definition of an NPA:An asset becomes non-performing when it cease to generate income to the bank. the account remains 'out of order' for a period of more than 180 days. 2001. Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset. Accordingly. the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted. Non Performing Asset means an asset or account of borrower. recovery climate. and 31 . A non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or instalments of principal has remained ‘overdue’ for a ‘specified period’ of time. with effect from March 31. The shortening of the period is from 4 quarters in 1993 when the concept of IRAC norms was first introduced in India to present level of 90 days. it was decided to dispense with 'past due' concept. in respect of an overdraft/ cash Credit(OD/CC). etc. The concept of specified period is reduced in a phased manner. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date.

inrespect of an overdraft/ cash Credit(OD/CC). 2004. with effect form March 31.NPA MANAGEMENT v. With a view to moving towards international best practices and to ensure greater transparency. and v. iii. interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan. '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. iv. any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. 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. i. it has been decided to adopt the '90 days overdue' norm for identification of NPAs. the account remains 'out of order' for a period of more than 90 days. but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period. a non-performing asset (NPA) shell be a loan or an advance where. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power. ii. interest and/ or installment 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 purpose. these account should be treated as 'out of order'. 32 . the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. Accordingly. form the year ending March 31. 2004. any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

NPA MANAGEMENT Provisional Norms: Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent basis so that the balance sheets reflect a true picture of the financial status of the bank. The most important relaxation is that the banks have been allowed to make provisions for only 30 per cent of the "provisioning requirements" as calculated using the Narsimham Committee recommendations on provisioning (but with the diluted asset classification).P. and (iii) 10 per cent of the total out standings for substandard assets. investments and borrowings.As being written off. Disclosure Norms: Banks should disclose in balance sheets maturity pattern of advances. the banks must be forced to make public the nature of N. 33 . A provision of 1% on standard assets is required as suggested by Narsimham Committee II 1998. The encouraging profits recently declared by several banks have to be seen in the light of provisions made by them. as capital is not used to write off private loans without adequate efforts and punishment of defaulters. To the extent that provisions have not been made. deposits.As from occurring. The Narsimham Committee has recommended the following provisioning norms (i) 100 per cent of loss assets or 100 per cent of out standings for loss assets. Banks need to have better credit appraisal systems so as to prevent N. Apart from this.P. These disclosures were to be made for the year ending March 2000 In fact. This should be done to ensure that the taxpayer’s money given to the banks. banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. the profits would be fictitious. (ii) 100 per cent of security shortfall for doubtful assets and 20 per cent to 50 per cent of the secured portion.

N.As) was from priority sector.As due to wrong lending policies followed earlier and also due to government regulations that require them to lend to sectors where potential of default is high. delay/default in payment of interest and/or repayment of principal has rendered a significant proportion of the loan assets non-performing. doubtful and loss. Sub-standard.P.Standard.As).NPA MANAGEMENT ASSET CLASSIFICATION Classification of Assets: While new private banks are careful about their asset quality and consequently have low non-performing assets (N. 34 . As per RBI’s prudential norms. NPA from priority sector constituted was lower at 46 per cent than that of the corporate sector at 48 per cent. The health code system earlier in use would have to be replaced. Loans and advances account for around 40 per cent of the assets of SCBs. uniform. RBI for these classes of assets should evolve clear.P. “Past due” denotes grace period of one month after it has become due for payment by the borrower. However. and consistent definitions. Doubtful. N. public sector banks have large N. Allaying the fears that bulk of the NonPerforming Assets (N.As consist of assets fewer than three categories: sub-standard. a NonPerforming Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for more than two quarters after it has become past due.P. and Loss assets. Regulations for asset classification Assets should be classified into four classes . The banks should classify their assets based on weaknesses and dependency on collateral securities into four categories: Standard Assets: It carries not more than the normal risk attached to the business and is not an NPA.As is loans on which the dues are not received for two quarters.P.P.

As) in bank portfolios. suit filed accounts. which continued to be so for a period exceeding two years (18 months. suspense accounts and miscellaneous assets. where the current net worth of the borrower. examples of which are: Overdue and stagnant accounts. The banking industry has significant market inefficiencies caused by the large amounts of Non Performing Assets (N. but the amount has not yet been written off wholly or partly. and 100% of the unsecured portion. Asset Classification Standard assets Substandard assets Doubtful assets Loss assets Provision requirements 0.25% 20%(irrespective of value of security) 20% . as recommended by Narsimham Committee II. and amounts locked up in frauds".As defined them as "assets which cannot be recycled or disposed off immediately.P. accumulated over several years.NPA MANAGEMENT Sub-standard Asset: An asset which remains as NPA for a period exceeding 24 months. 1998). and which do not yield returns to the bank. guarantor or the current market value of the security charged to the bank is not enough to ensure recovery of the debt due to the bank in full.P. One of the earliest writings on N. with effect from March. 100% Guidelines for the classification of assets 35 . cash and bank balances with other banks. Doubtful Assets: An NPA. Discussions on non-performing assets have been going on for several years now.50% of the secured portion depending on the age of NPA. Loss Assets: An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset. 2001.

) Account with temporary Deficiencies: The classification of an asset as NPA should be based on the record of recovery .) Accounts where there is erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50percent of the value assessed by the bank or accepted by RBI at the time of last inspection. 5. 36 . 7.Bank should not classify an advance account as NPA merely due to the existence of some deficiencies.) Agricultural Advances (a. 3.) Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPA’s especially in respect of high value of accounts . as the case may be. 6. 4. Such NPAs may be straightway classified under doubtful category and provisioning should be made as applicable to doubtful assets. all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or a part thereof. such an advance should be treated as NPA.) In respect of advances granted for agricultural purpose purpose where interest and / or installment of principal remains unpaid after it has become past due for two harvest seasons but for a period not exceeding two half years . which are temporary in nature as such as non – availability of adequate drawing power based on latest stock.) Advances under consortium arrangements: Asset classified of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having bearing on the recoverability of the advances.NPA MANAGEMENT 1) Classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and the extent of dependencies on collateral security for the realization of dues. Therefore.) Asset classification to be borrower – wise and not facility-wise: It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. 2. which has become irregular.

8.) Where the natural calamities impair the repaying capacity of agricultural borrowers. Write Off Policy 37 . (c.) In such cases of conversation or re-schedulement. 9.NPA MANAGEMENT (b. the term loan as well as fresh shortterm loan may be treated as current dues and need not be classified as NPA. rescheduling does not entitle a bank to upgrade the quality of advances automatically unless there is satisfactory performance under the rescheduled –renegotiated terms.) Restructuring /Rescheduling of loans: A standard asset where the terms of the loan arrangement regarding interest and principal have been renegotiated or rescheduled after the commencement of production should be as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or restructured terms.) Exceptions :As trading involves only buying and selling of commodities and the problems associated with manufacturing units. banks may decide on their own as a relief measure-conversion of the short –term production loan into a term or re-schedulement of the repayment period. In case of substandard and doubtful assets also.

Prior approval for waiver of legal action including where account is already time barred/termination of suit proceedings/waiver of appeal. 6. 7.  Regular Write off General conditions:A Regular write off will be considered on the happening of 1 and 2 and any of the 3 to 4 below:1. all possible avenues of recovery and there are no more chances for effecting the recovery. All efforts for recovery have been taken to their conclusion. and there is no security which can be realized. Account is classified as loss Asset. Cases where all efforts of recovery have been adopted and the remaining balance and circumstances are such that any further effort is considered cost-ineffective. The basic difference between prudential and Regular write off is that in prudential write off there is possibility of recovery at a distant future even after write off while in Regular write off is no/little possibility of recovery. In exceptional cases. and there is absolutely no prospect for any further recovery 5. 2. 4. No specific approval is required for this since the write off is part of compromise settlement duly approved by competent authority. Write Off is of two kinds. etc.Prudential write off and Regular Write of. legal action.NPA MANAGEMENT Write Off is resorted to in the borrowal accounts when the bank has exhausted. etc. As a result of a negotiated settlement in any account. execution of decree. 38 . where the borrower has or have expired or their whereabouts can not be traced in spite of all efforts. where any proportion of the outstanding balance. as per terms of OTS approved . this write off shall be effected after receipt of full compromise amount plus interest if any. unrealized interest and/or uncharged interest/ charges is agreed to be written off or waived. by means of action under SRFEASI Act. 100% provision is held in such accounts as at the end of previous accounting year. 3.

39 . if the bank fails. In modern times.NPA MANAGEMENT Difficulties with the Non performing Assets 1.) Owners do not receive a market return on their capital. owners lose their assets. this may affect a broad pool of shareholders. In the worst case.

lack of demand. the cause of NPA has been due to internal factors (to the bank) such as weak appraisal or follow up of loans but more often than not. In the worst case if the bank fails. In a few cases. Bad investment ends up in misallocation of capital and.Lower deposit rates and higher lending rates repress savings and financial markets.) Non performing loans may spill over the banking system and contract the money stock .P. (a) When many borrowers fail to pay interest.) Depositors do not receive a market return on savings. obsolescence.These shortages can jam payments across the country. it is due to the factors such as management inefficiency of borrowing funds. to failed projects.NPA MANAGEMENT 2. environmental factors. 4. labour and natural resources.which may lead to economic contraction . (c) Undercapitalized banks exceeds the bank’s capital base. non availability if inputs. etc. The economy performs below its production potential. banks may experience liquidity shortages . Factors Responsible for N.As: The dues of the banking sector are generally related to the performance of the unit/industrial segment. by extension. NPA misallocate credit from good projects. 40 . which hampers economic growth. depositors lose their assets or uninsured balance. Banks also redistribute losses to other borrowers by charging higher interest rates .) Non performing loans represent bad investments. 3. which do not receive funding. This spillover effect can channelize through illiquidity or bank insolvency.

Government policies like excise. in February 2000 drawn up certain ground 41 . modernization.As on account of deficiencies on the part of banks such as delay in sanction and disbursement of funds whereby borrowing units are starved of funds when in need. Contribution to N. recession in other countries. RBI had. delay in release of limits. Business failure like product failing to capture market. excess capacity.As are as under: Internal Factors: Diversion of Funds – For expansion. External factors like raw material shortage. delay in settlements payments/subsidies by government bodies. non-payment/overdue. and promoter/management disputes. Lack of effective co-ordination between banks and financial institution in respect of large value projects does contribute to the emergence of N. etc. power shortage. import duty changes. technical problems. deregulation. externalization problems. adverse exchange rate. monitoring and follow up. Incidence of N. viz.As by factors like siphoning off funds through fraud/misappropriation was less significant in comparison with other factors.P.Time/Cost overruns while implementing the projects. raw material/input price escalation. in credit appraisal. etc. siphoning of funds.P. wrong technology. External factors: Failure. setting up of new projects. pollution control orders. and delay in settlement of payments/subsidies by the government bodies was on the low side in proportion to other factors. accidents. Willful default. strike/strained labour relations.As even at the implementation stage. misappropriation. etc. etc. etc. Deficiencies on the part of the bank.NPA MANAGEMENT The main reasons for sickness and the factors leading to N. inefficient management. product obsolescence. helping or promoting sister concerns. natural calamities like floods. industrial recession. etc. fraud.P.P.

behind an asset turning NPA can be classified as follows  Reasons from the economy side 42 .NPA MANAGEMENT rules in this regard in consultation with the banks. failings of CEOs and the ineffectiveness of the board to check his ways also contributed in no small measures to the unusual build up of N. One of the most prominent causes for N. as often observed by RBI Inspectors. FII and IBA and circulated the same among banks and financial institution for implementation.As.P. Susceptibility of the sanctioning authorities to external pressure. is the slackness on the part of the credit management staff in their follow up to detect and prevent diversion of funds in the post disbursement stage. REASONS FOR AN ASSET TURNING NPA The various reasons.P.As in some of the banks. either singly or jointly.

 Reasons from the economy side A) Political – mindset regarding paradigm. directed programs of lending can be counterproductive. distribution. systemic faults can also adversely affect the profitability of financial intermediaries.NPA MANAGEMENT  Reasons from the industry side  Reasons from the borrower’s side  Reasons from the banking system side  Reasons from the loan structuring side  Reasons from the security side – collateral vs cash flow  Reasons from the regulatory side From the above. it may be surprising to many that only the borrower is not always at fault. Lack of adaptation of IT will make data processing difficult and information dissemination will be impossible. The following discussion will clarify our position. At times. Similarly. Objective analysis of risk would be difficult and appraisal would remain a subjective matter.  Reasons from the industry side 43 . efficient allocation of resources Social – acceptability. mobility. Opening up of the economy can render companies uncompetitive. fiscally responsible (national income accounts) b) Economic – growth. Technological – advances in use of IT e) Legal – Enforceability of loan contracts f) Environmental – liberalization & globalization If loan contracts are not easily enforceable. there will naturally be a tendency to default. education 0 1 2 c) d). proactive.

Directed banking and lack of freedom to choose products and pricing c. Poor governance c. Parameters set for their functioning were deficient: incorrect goal identification – lazy banking 1 2 3 4 b. Frequent changes in regulatory norms a. Dormant capital market g. Diversion of funds f.NPA MANAGEMENT a. Product failure d. Global competition b. Cyclical downswing 1 2 3  Reasons from the borrower’s side c. Lack of systems and procedures – audit and inspections 44 perception and training and knowledge resources Directors . Sunset industry d. Inefficient management e. people lacked d. Regulatory changes  Reasons from the banking system side a. Being unexposed to international marketing methods and products. Ownership and management were not distinguished – composition of Board of e. Misconceived project b.

Lack of a mechanism of credit information dissemination h. Banks lacked the ability to handle enormous growth in liabilities and assets g.NPA MANAGEMENT 5 6 7 8 9 10 11 f. Distance between two sugar mills could be a third. Accounting reason like reduction in income recognition norms from 180 days to 90 days could be one such reason. Lack of binding penal clauses and performance guarantees  Reasons from the security side – collateral vs cash flow There is a tendency among banks and institutions to depend excessively on collateral for advancing of loans.  Reasons from the regulatory side Frequent regulatory changes can turn assets non-performing. Pollution related issues could be the other reason. While this is important. Inconsistency between revenue generation and the loan repayment schedule e. Lack of an effective judicial system for recovery from defaulters i. Timing of raising equity c. Clearly. 45 . Lack of an effective IT system and MIS  Reasons from the loan structuring side a. Fixing of price and quantum of loans k. Emphasis should then be on cash generation and a charge on this should be built into the loan contract through some escrow mechanism. this logic is unacceptable. Collateral based lending leading to idle assets j. High debt equity ratio b. it presumes from the very beginning that the borrower would default and the security would need to be encashed for recovery of the loan. Discrepancy between the rate of interest charged and the realistic rate of return d.

generate sufficient income and capable of repayment/recovery on the due dates. With the introduction of prudential norms for income recognition. any asset created in the course of the conduct of business should generate income for the business. then the very position of the banks in repaying the deposits (liabilities) on the due dates would be at stake and in jeopardy. Therefore it would be prudent for banks to manage their assets in such a manner that they always remain healthy. banks have become quite sensitive and are taking all possible steps to strengthen their assets acquisition and monitoring systems.P. Therefore.As The primary aim of any business is to make profits. If for any reason such assets created do not generate income or become sticky and difficult of recovery. Management of performing/non-performing assets in banks has become an `art and science' and virtually `a battle of wits' between the banker and the borrower with the latter demanding write off or at least a major sacrifice from the bankers side irrespective of whether he is in a position to pay or not. The banks the world over deal in money. Management of non-performing assets of the financial sector was put on fast track recently with the Union Cabinet approving the promulgation of an ordinance to facilitate securitisation and reconstruction of financial assets. Banks with such assets portfolio would become weak and naturally such weak banks will lose the faith and confidence of the investors. 46 . assets classification and provisioning. by accepting deposits (liabilities) and out of such deposits (liabilities) lend/create loans (assets).NPA MANAGEMENT Managing N. There is also a growing awareness to bring down non-performing assets as these are having adverse impact on their profitability due to de-recognition of interests as well as requirement of heavy loan loss provisions on such assets. This applies equally to the business of banking.

As the ticklish task of assets management of the bank has become a tight rope walk affair for the controlling heads. On account of the intricacies involved in handling the N. One of the major hurdles.NPA MANAGEMENT Measures to Recover N.P. the banks have been directed to follow up a settlement formula under which the minimum amount to be recovered.e. the concerned banks were also finding in difficult to sacrifice the entire interest component. because in a developing country like ours. The growing N. because a little wavering ‘this or that side’ may land the concern bank in trouble.P.As is a potent source of worry for the finance minister as well.As Over the last few years Indian banking in its attempt to integrate itself with the global banking has been facing lots of hurdles in its way due to its inherent weaknesses.P.P. banking is seen as an important instrument of development. the Indian banking is facing today. On the other hand.As with outstanding up to 5 crore: In case of doubtful and loss assets. These guidelines have come as a windfall for borrowers who after a lot of negotiations were almost ready to repay 47 . the date from which the interest was not charged to the running ledger.P. through the modified schemes. N. The scheme is of high practical value as it protects the borrowers who were having genuine problems in clearing their dues because the interest component constituted a multiplied amount of principal outstanding.As banks have become helpless burden on the economy. an analysis of the given formula shows that RBI has been very much generous in granting huge relaxation to the borrowers who were not coming forward for setting their overdue loans due to one or other reason. amounts to be entire outstanding running ledger balances as on the date the account was identified as NPA i. while with the backbreaking N. they will be ready to grant such relaxation in favour of the borrowers. is its ever-growing size of non-performing assets over which the top management of almost each bank is baffled. but outstanding in the dummy ledger. Now as per the provision to the scheme. despite its high sounding claims and lofty achievements.

The CMDs of the concerned banks are advised to review all such cases within a given timeframe and decide the course of action in terms of rehabilitation/restructuring.As over Rs.As with outstanding over Rs. the settlement formula as given in the modified scheme states that the minimum sum to be recovered must contain the entire running ledge outstanding balance as on the date of the account was identified as NPA i. as under the modified scheme. is given to the banks. it is a golden opportunity to clear the mess. Therefore it was in the right direction that adopting a generalized approach was not thought appropriate. with proper planning and 48 .P. As per the modified sac scheme. because the attending circumstances in each case may vary from the other. In cases. N.P. The time given for weeding out the disastrous N. where the amount involved is above Rs.P.As above Rs.As is neither too long nor too short and the banks. RBI has left the matter to the concerned banks and advised that the concerned banks may formulate policy guidelines regarding their settlement and recovery. The freedom. RBI expects CMD of each bank to supervise the NPA personally. For commercial banks. 5 crore from PSU banks. 5 crore.P.e. Thus by putting up the cut-off dates for the implementing of the scheme.As in one go. the scheme allows sufficient breathing period to enable him to arrange the funds and clear at least 25 percent of the settlement amount to be paid upfront and the remaining amount to be recovered in installments spread over a period of one year along with interest at the existing PLR from the date of settlement up to the date of final payment. 5 crore. consolidate and come out on a track leading t the path of global banking.P.NPA MANAGEMENT back their principal as well as part of the interest component to settle their accounts. the date from the which interest was not charged to the running ledger + interest at the existing prime lending rate of the bank. RBI desires the banks to realize the seriousness of the issue and gear up to sweep away the N. 5 crores: For recovery of N. in such cases. To that extent the concerned bank stands to lose. However in case of the borrower is unable to repay back in a lump sum. As per the terms of the scheme. the terms suggested for the payment of settlement amount NPA are simple and pragmatic. the settlement amount should be paid in lump sum by the borrower. RBI also desires the submission of a quarterly report of all N. they would be able to save the interest component. In the case of sub standard assets.

NPA MANAGEMENT follow up can drastically reduce their N.P. A proper monitoring system is also desired to be evolved for monitoring the progress of the scheme. Without adequate publicity of the scheme the response from the defaulting borrowers may not be there to the expected level. 49 . RBI expects the commercial banks to follow the guidelines in letter and spirit without any discrimination or discretion as a slight dilution may jeopardize their interest. if they firmly resolve to do so.As. As this is a rare opportunity given to the defaulting borrowers so that they can avail the chance given for the settlement of their loans.

inability to offer competitive market rates adds to the disadvantage of marketing and building new business. In other words it is gap between the return on funds deployed(Interest earned on credit and investments) and cost of funds employed(Interest paid on deposits). When the interest rates were directed by RBI. This is the margin between the cost of resources employed and the return therefrom. the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. there was no option for banks. else they are to seek the bounty of the Central Government for repeated Recapitalisation. Theoretically even if the bank keeps 0% spread. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation. In the face of the deregulated banking industry. In turn PSBs are seen as poor performers and unable to approach the market for raising additional capital. NPA is not merely non-remunerative. 50 . In the context of severe competition in the banking industry. This has alternatively forced PSBs to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins. "The spread is the bread for the banks". Other banks hesitate to approach the market to raise new issues. an ideal competitive working is reached. Equity issues of nationalised banks that have already tapped the market are now quoted at a discount in the secondary market. as heretofore. it will still break even in terms of operating profit and not return an operating loss. a positive burden. It is also cost absorbing and profit eroding. the difference between the gross interest income and interest cost will constitute its operating profits.NPA MANAGEMENT IMPACT ON PROFITABILITY The enormous provisioning of NPA together with the holding cost of such nonproductive assets over the years has acted as a severe drain on the profitability of the PSBs. In that event the spread factor i.e. But today in the deregulated market the banks decide their lending rates and borrowing rates. The options for these banks are lost.e. In the competitive money and capital Markets. when the banks are able to earn adequate amount of non-interest income to cover their entire operating expenses i.

NPA MANAGEMENT Impact of NPAs on Development Financial Institutions Health: The efficiency of any Development Financial Institutions is not always reflected only by the size of its balance sheet but by the level of return on its assets.liability mismatches. etc. Following are the deleterious effect on the return on assets in several ways: 1 They erode current profits through provisioning requirements 2 They result in reduced interest income 3 They require high provisioning requirements affecting profits 4 They limit recycling of funds. set in asset. 51 . NPAs do not generate any income for DFIs but at the same time DFIs are required to make provisions for such NPAs from their current profits.

Competition has been introduced in a controlled manner and today we have nine new private sector banks and 36 foreign banks in India competing with the public sector banks both in retail and corporate banking • Functional autonomy . • Capital adequacy .All lending rates except for lending to small borrowers and a part of export finance has been de-regulated. transparent.50% to 5.CAR of 9 % prescribed with effect from March 31.The minimum prescribed Government equity was brought to 51%. credit delivery and recruitment of staff.2855 crores from the market during 1994-2001.9 new private sector banks have been set up with a view to induce greater competition and for improving operational efficiency of the banking system. asset classification and provisioning norms has been made applicable. Comprehensive amendment in the Act have been made to make the provisions for adjudication. 2000. (Presently 4.5%) • Deregulation of interest rates . • Debt Recovery Tribunals .Income recognition. 52 .75%.5% to 25% and CRR requirement from 7.NPA MANAGEMENT KEY STRUCTURAL CHANGES Phasing out of statutory pre-emption . and uniform and designed to avoid subjectivity.22 DRTs and 5 DRATs have already been set up and 7 more DRTs will be set up during the current financial year. The provisioning norms are more prudent. • Entry of new private sector banks . • Other prudential norms .The SLR requirement have been brought down from 38. objective. Banks Boards have been given more powers in operational matters such as rationalization of branches. Nine nationalised banks raised Rs. enforcement and recovery more effective. Interest on all deposits is determined by banks except on savings deposits.

Return on Assets. 53 . profit per employee and interest income as percentage to working funds. net value of investment.Banks have been advised to disclose certain key parameters such as CAR. provisions for NPAs. percentage of NPAs.NPA MANAGEMENT • Transparency in financial statements .

NPA MANAGEMENT REPORTING FORMAT FOR NPAs CHART FOR ASSESSING CORRECTIVE STEPS IN DIFFERENT CIRCUMSTANCES: 54 .

NPA MANAGEMENT 55 .

are considered when determining the value of the company or its debt. balanced against the applicable risk profile and market lending margins. For larger loans.As: N. The broad objectives of the valuation framework are essentially:  To set a sound basis for the selling bank/institution to finalize the sale of assets. Typically. The matrix shows the risk profile of the NPA based on its cash flows and collateral. lower the risk profile of the asset.  To promote transparency of the valuation processes and. Valuation techniques should present the situation. or a combination of these.  The valuation framework should allow for valuation of specific assets as well as a portfolio of assets (i. As shown. cash flows.) In most cases.P. The valuation of an asset or the pool of assets is a precursor to any restructuring exercise. portfolio of loans to be acquired from a bank.As is an indicator of the health of the financial system of an economy.e. an element of risk/return sharing with the selling bank may be considered. stronger the cash flows and collateral. Some of the widely used approaches towards valuation of an NPA by the valuation firms are detailed as under: 56 .As are by-product of most financial systems and the level of N. however. There are various methodologies used to value the companies or their debt.P.  To provide a basis for the fair market value of the assets. Any valuation exercise shall attempt to address the following issues:  The fair market value of the asset should represent the price at which market participants would undertake a restructuring.  To comply with internationally accepted practices. a single value will apply to each loan required. which maximize the overall interest of all the concerned parties.NPA MANAGEMENT Different Approaches to Valuation of N. assets or replacement values.P.  The transaction value should reflect the potential for income generation and return of principal.

primarily out of the internal cash flow generation from underlying business activities.As. In this case. Normally. The cash flow stream will represent the interest and principal payments expected to be received by the lender. If such assets are sold individually. inability to meet the debt obligations and high debt equity ratio. Essentially the decision on the project’s financial viability will be determined by using an incremental cash flow analysis. as there is a strong possibility of bankruptcy. The estimation of the assets becomes quite complicated when the assets of the company cannot be easily separated like in a steel. If certain lenders decide to fund through extended facility. For such companies. majority of the asset may not fetch a price closer to their books value. this will be taken into account I the asset’s cash flow stream. the credit analysts need to evaluate the possibility and timing of positive financial performance of the company of infusion of additional funds and the overall macro economic environment. If the company is expected to improve its financial position in the future. the value of a healthy asset is computed as the discounted value of the expected future cash flows. the cash flow stream will have to take onto account whether the project will be completed and if so how it will be financed. the cash flow from liquidation of the asset and collateral will be the primary approach rather than net present value of the cash flow.NPA MANAGEMENT  Discounted Cash Flows – One of the commonly used methods for estimating the value of the company’s debt is the anticipated cash flow. Further.P. the following discounted cash flow model may be used for the distress companies/ N. textile or petrochemical plant. However. The liquidation value of the company is the aggregate of the value of the assets of the company if solid at the market rates.  Liquidation Value Approach – If the loan is in default with no or low expectations of its being services. the estimation of future cash flows is not so easy. when such sale is to take place at a quick 57 . the take out of the lender is primarily by way of exercise of their rights on the assets and attached collateral. Under such a scenario the asset valuation is also based on subjective parameters. a company is distress or an NPA may have negative earnings and may be likely to incur operating losses for the next few years. net of transactions and legal costs. Where the asset is a partly completed project. A company under financial distress has some or all of the following characteristics: operating loss. When dealing with such cases.

Segmentation into buckets: For a huge portfolio of small loans.As. I shall discuss here one of such models to provide an insight as to how provide varied models can be from the conventional approaches. as it is more or less equal to forced sale of the assets.P. the cash earning per share of the company and cash P/E ratio of the similar companies may be used to arrive at a market value of the NPA debt. Post currency crisis of late 1990’s in Thailand. the price of real estate had declined to abysmally low levels and majority of the property-linked loans had become N. the P/E ration of the industry or other similar companies may be used as a tool for determining the market value of the assets of company. they had followed the following methodology: 58 . The above approach.  Case Specific Valuation Model – Depending on case to case. the value of the assets further fall down. the seller has to accept a discount on the fair market value of such assets. In such cases. various models have been evolved and used for specific requirements. as they would have negative EPS.As in the books of the local banks.NPA MANAGEMENT place. In most cases.P. different kind of approach may be used for arriving at the realistic valuation. As a result of this forced sale. If the debt of the company is more than its assets.  Earning Model In performing companies. then a proportionate discount may be applied to the debt. One of them is categorizing the loans in various buckets and then analyzing a sample picked from various buckets. such a realization is not able to cover even the secured debt fully and hence the valuation of the debt would be limited by this realized value. however. For arriving at the appropriate valuation. cannot be used for most of the N. This approach has been widely used in countries like Thailand where a significant number of loans were secured by real estate and other marketable securities of various kinds.

P. Basis of Non – Performing Assets: The basis of treating a credit facility as N. Arriving at the final range of the valuation of the portfolio.As is as detailed below: 59 . Selection of a sample out of each bucket.NPA MANAGEMENT      Segmentation of the assets in various buckets. Statistical extrapolation of the sample to the entire bucket. Detailed analysis of each sample.

which remains overdue for a period of six months. TERM LOAN – Inclusive of unpaid interest.NPA MANAGEMENT ASSET.A DEBT RECOVERY TRIBUNAL 60 . OTHER CURRENT ASSETS – The interest in respect of a debt/income on a receivable in the nature of short-term loans/advances. when the installments is overdue for more than six months/on which interest amount remained past due for six months.In respect of which interest has remained past due for six months. SALE OF ASSETS/SERVICE RENDERED – Any dues on account of these/reimbursement of expenses rendered.P. BILL – Which remains overdue for six months. LEASE RENTAL/HIRE PURCHASE INSTALMETS – The installments. OTHER CREDIT FACILITES – The balance outstanding including interest accrued made available to the borrower/beneficiary in the same capacity when any of the credit facilities become N. which has become overdue for a period of more than twelve months. which remained overdue for a period of six months.

is taken by the creditor. The amount is not required to be deposited at the time of filing appeal. The borrower while filing the appeal should also file an application requesting the Debt Recovery Tribunal to admit the appeal without deposit of any amount. It the DRT orders partial deposit of the amount and the same is not deposited. within 45 days from date on which such measure was taken. If the DRT or Appellate Tribunal holds that possession of assets by the secured creditor was wrongful and directs the secured creditor to return asset to concerned borrower. The earning capacity and profitability of the bank are highly affected due to this NPA is defined as an advance for 61 . takeover of management of business of borrower. In liberalizing economy banking and financial sector get high priority. i. appeal can be dismissed.e. shareholder) files it the deposit is not required. if the secured creditor had already sold or transferred the asset to a third party. it can file an appeal to the Appellate Tribunal within 30 days from date of receipt of the DRT order. DEBT RECOVERY APPELATE TRIBUNAL If a person is aggrieved by the order of the DRT. appointing person to manage secured asset etc. The DRT can waive or reduce the amount required to be deposited. The 75% deposit is only required if the appeal is filed by the borrower. The Tribunal can also direct return of asset. Indian banking sector of having a serious problem due non performing. the borrower deposits 75% of the amount claimed in the notice by secured creditor.g.NPA MANAGEMENT Any person aggrieved by any measure taken by secured creditor or his authorised officer may file an appeal to Debts Recovery Tribunal. action of taking possession of asset. When a borrower files an appeal. guarantor. but appeal will not be heard till the amount is deposited. the appeal cannot be entertained unless. the borrower shall be entitled to compensation and costs as may be determined by DRT or Appellate tribunal. If some other aggrieved person (e.

Indian banking sector of having a serious problem due non performing. The reasons may be widely classified in two. terms of credit etc. . 62 . 52. : (1) Over hang component (2) Incremental component . Reasons: Various studies have been conducted to analysis the reasons for NPA. credit policy. The financial reforms have helped largely to clean NPA was around Rs. The earning capacity and profitability of the bank are highly affected due to this NPA is defined as an advance for which interest or repayment of principal or both remain out standing for a period of more than two quarters. business cycle etc.000 crores in the year 2004. What ever may be complete elimination of NPA is impossible. In liberalizing economy banking and financial sector get high priority. The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of resource. Over hang component is due to the environment reasons.NPA MANAGEMENT which interest or repayment of principal or both remain outstanding for a period of more than two quarters. The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of resource. Incremental component may be due to internal bank management.

in order to carry out functions relating to general administration of the tribunal or appellate tribunal. issues summons to borrowers/guarantors called defendants. DRT gives a serial number.  Branch/Zone should supply the Asset details within one month of the issuance of the RC. (b) Procedure while filing the case in DRT:-  Recovery application should contain description of all relevant documents and securities charged to the bank. 63 . Designation of Registrar:Government of Nepal has to designate one officer level employee of the gazette third class of Nepal Judicial Service to act as the Registrar of the tribunal or appellate tribunal.  Original documents should be retained with the Branch till DRT requires the same. (d) Execution of Recovery Certificates:-  Recovery Officer of DRT executes Recovery Certificates (RCs) issued by Presiding Officer of DRT.NPA MANAGEMENT Steps to be taken under DRT route :(a) Procedure Before Filing the case before DRT:-  Sell pledge goods after sending reasonable notice to the borrower. subject to general direction and control of such tribunal and appellate tribunal.  Ensure that documents/securities are enforceable against borrowers/guarantors. (c) After filing the case before DRT: If the recovery application filed is complete in all respects.

 To examine and verify documents including petitions. notes of defense and memoranda of appeals to be filed with the tribunal or appellate tribunal and register them if they meet requirements or endorse them with reasons if they cannot be registered. to mention such defects and get the concerned party to sign to that effect.  To issue summons and get it served.  To safely retain orders and directions in a serial order. and if the originals appear to have some defects. What is the power of Debt Recovery Officer? The order issued by the Debt Recovery Officer shall deemed to be the order issued by the Tribunal.  To maintain. memoranda of appeal and notes of defense are correct or not.  To maintain personal records of employees.  To appoint days for appearance in cases.  To promptly execute.  To verify whether documents submitted along with petitions.  To have security or guarantee as per the order made by the Bench. duties and powers mentioned elsewhere in this regulation. updated records including registration books. the Debt Recovery Officer. duties and powers of the Registrar shall be as follows.  To obtain power of attorney and get a case assumed pursuant to prevailing law. or cause to be maintained. the Tribunal may institute contempt proceedings against that person under the provision of the Act. indicating reasonable reasons pursuant to law. actions as referred to in the order made by the Bench.  To verify duplicate copies submitted in a case with the originals and certify them if they appear in order. or cause to be executed.NPA MANAGEMENT Functions. may follow the following procedures: 64 . In recovering the principal and interest of a loan. If any person disobeys any order given by the Debt Recovery Officer. duties and powers of Registrar:In addition to the functions. the functions.

subject to the prevailing law. or auction.NPA MANAGEMENT In consistent with the decision of the Tribunal the Debt Recovery Officer may follow the following procedures. He has judicial power to execute the case.  To take possession of. to arrest such individual and detain him pursuant to the prevailing law.  To take possession of. especially for small loans. Cases involving suit claims up to Rs. 1987 helps in resolving disputes between the parties by conciliation. the guarantor's movable or immovable property. It is known for effecting mediation and counseling between the parties and to reduce burden on the court. or auction. l million can be brought before the Lokadalat and every award of the 65 .  Where any individual is a borrower or guarantor. LOKADALATS The institution of Lokadalat constituted under the Legal Services Authorities Act. the borrower's other movable or immovable property whether furnished as security or not. compromise or amicable settlement. Presiding officer:  He is the Head of the department. mediation.

if such settlement contains a clause that if the compromise is not adhered to by the parties. If the compromise is arrived at. it is observed that banks do not get the full advantage of the Lokadalats. It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the Lokadalat meets. defense personnel and judicial officers. the parties to the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to obtain a consent decree. ENACTMENT OF SRFAESI ACT 66 . the suits pending in the court will proceed in accordance with the law and parties will have a right to get the decree from the court. Several people of particular localities/ various social organizations are approaching Lokadalats which are generally presided over by two or three senior persons including retired senior civil servants. Normally. In any case. In general. we should continue our efforts to seek the help of the Lokadalat. They are advised to reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social workers. They take up cases which are suitable for settlement of debt for certain consideration. Parties are heard and they explain their legal position.NPA MANAGEMENT Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any court against the award made by the Lokadalat.

Application Form and Guidelines to Banks in April 2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover various aspects relating to registration. 67 . Guidance Notes. The RBI has also issued guidelines to banks and financial institutions on issues relating to transfer of assets to ARCS. consideration for the same and valuation of instruments issued by the ARCS. Additionally. assignment or sale. In addition to asset reconstruction and ARCs. The Reserve Bank of India (RBI).  Securitization and Securitization Companies  Enforcement of Security Interest  Creation of a central registry in which all securitization and asset reconstruction transactions as well as any creation of security interests has to be filed. the Central Government has issued the security enforcement rules ("Enforcement Rules"). which lays down the procedure to be followed by a secured creditor while enforcing its security interest pursuant to the Act. operations and funding of ARCS and resolution of NPAs by ARCS. The Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to the underlying security without reference to the Court after giving a 60 day notice to the defaulting borrower upon classification of the corresponding financial assistance as a non-performing asset. assignment or sale. the designated regulatory authority for ARCS has issued Directions.NPA MANAGEMENT The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory framework for setting up Asset Reconstruction Companies (ARCs) in India. the Act deals with the following largely aspects.  Take over the management of the secured assets including the right to transfer by way of lease. The Act permits the secured creditors to take any of the following measures:  Take over possession of the secured assets of the borrower including right to transfer by way of lease.

either through security enforcement or through settlements. the bargaining power of lenders is likely to improve further and one would expect to see a large number of NPAs being resolved in quick time. After taking over possession of the secured assets. on an ongoing basis. When the legal hurdles are removed. the secured creditors are required to obtain valuation of the assets. Further. 20.  By obtaining quotations from persons dealing in such assets or otherwise interested in buying the assets. The SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less than Rs.000. The Act designates any person holding not less than 10% of the paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a controlling interest in.000.  Lenders have seized collateral in some cases and while it has not yet been possible to recover value from most such seizures due to certain legal hurdles. ARCS have been 68 . a minimum capital adequacy ratio of 15% of its risk weighted assets. being the holding company of or being in control of the ARC.  By inviting tenders from the public.NPA MANAGEMENT  Appoint any person as a manager of the secured asset (such person could be the ARC if they do not accept any pecuniary liability). 1956. Under the SRFAESI Act ARCS can be set up under the Companies Act. and  Recover receivables of the borrower in respect of any secured asset which has been transferred. the Directions require that an ARC should maintain. or  By private treaty. lenders are now clearly in a much better bargaining position vis-a-vis defaulting borrowers than they were before the enactment of SRFAESI Act. These secured assets may be sold by using any of the following routes to obtain maximum value.  By holding public auctions.

The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction. and Restructuring or rescheduling of debt. These include:   Enforcement of security interest. borrower.    ARCS are also permitted to act as a manager of collateral assets taken over by the lenders under security enforcement rights available to them or as a recovery agent for any bank or financial institution and to receive a fee for the discharge of these functions. They can also be appointed to act as a receiver. Settlement of the borrowers' dues. if appointed by any Court or DRT. 69 .NPA MANAGEMENT granted a maximum realization time frame of five years from the date of acquisition of the assets. Taking over or changing the management of the business of the The sale or lease of the business of the borrower.

NPA MANAGEMENT INSTITUTION OF CDR MECHANISM The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in 70 .

The framework is intended to preserve viable corporate affected by certain internal/external factors and minimize losses to creditors/other stakeholders through an orderly and coordinated restructuring programme. Thailand. Accounts falling under standard. Restructuring helps in aligning repayment obligations for bankers with the cash flow projections as reassessed at the time of restructuring. DRTs or other legal proceedings.Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum. The objective of the CDR mechanism has been to ensure timely and transparent restructuring of corporate debt outside the purview of the Board for Industrial and Financial Reconstruction (BIFR). The first ARC to be operational in India. Corporate borrowers with borrowings from the banking system of Rs.NPA MANAGEMENT India is broadly along the lines of similar systems in the UK. and it is expected that they would be signing the agreements shortly. Foreign banks are not members of the CDR forum. RBI has issued revised guidelines in February 2003 with respect to the CDR mechanism. Therefore it is critical to prepare a restructuring plan on the lines of the expected business plan along with projected cash flows. CDR is a non-statutory mechanism based on debtor-creditor agreement and inter-creditor agreement. The CDR process is being stabilized. Certain revisions are envisaged with respect to the eligibility criteria (amount of borrowings) and time frame for restructuring. 71 . 20crores and above under multiple banking arrangement are eligible under the CDR mechanism. sub-standard or doubtful categories can be considered for restructuring. While in the RBI guidelines it has been recommended to involve independent consultants. Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender arrangements and to increase transparency in the process. Korea and Malaysia. banks are so far resorting to their internal teams for recommending restructuring programs. However they attend meetings.

As per the OTS scheme. The scheme also covers NPAs classified as sub-standard as on 31st March 2000. subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. 72 .NPA MANAGEMENT Compromise Settlement Schemes  One Time Settlement Schemes:NPAs in all sectors. the minimum amount that should be recovered should be 100% of the outstanding balance in the account. which have become doubtful or loss as on 31st March 2000. The broad framework for such settlements was put in place in July 1995.7 billion from various accounts. Specific guidelines were issued in May 1999 to public sector banks for one-time settlements of NPAs of small scale sector. 10crores. These guidelines were effective until June 2001 and helped banks recover Rs. which have subsequently become doubtful or loss. for NPAs up to Rs. 50 million and less. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs. However cases of willful default. fraud and malfeasance are not covered. This scheme was valid until September 2000 and enabled banks to recover Rs 6. 26 billion.  Negotiated Settlement Schemes The RBI/Government has been encouraging banks to design and implement policies for negotiated settlements. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR. particularly for old and unresolved NPAs.

Regulations must incorporate a contextual perspective (like temporary cash flow problems) and clients should be handled in a manner. India’s growth rate and bank spreads are higher than western nations. Moving N. Actions and measures have to be taken to build investors confidence.P. there is a need for private sector and foreign participation in the ARC. As a result we can support a non-zero levels of N. which balances the risk vis-à-vis return appropriate to the Indian context. Indian debt markets is relatively under developed and attention should be focused on building liquidity and volumes.As of the PSBs are in the priority sectors. Private parties will look for active resolution of the problem and not merely regard it as a book transaction.  Numerous papers have stressed the criticality of a well-developed capital market in the restructuring process. Without this a bank may postpone the NPA problem for fear pf capital adequacy problems and resort to tactics like ever greening.As. A capital market brings liquidity and mechanism for write off loans.As rather than elimination is prudent. Further.P. which reflects true value of their assets and future 73 .As to an Arc doesn’t get rid of the problem.P. Loans in rural areas are difficult to collect and banks by virtue of their sheet reach are better placed to recover these loans.  Concerns have been raised about the relevance to India.NPA MANAGEMENT RECOMMENDATIONS  Studies have shown that management of N. In china. ARCs should focus on borrowers. Further the banks can manage credit risk better as it is easier to sell or securities loans and negotiate credit derivatives. potential investors are still worried about the risks of non-enforcement of ownership rights of the assets they purchase from the ARCs.P. Lok Adalats and debt recovery tribunals are other effective mechanism to handle this risk. A significant percentage of the N. Monitoring by bondholders is better as they have no motive to sustain uneconomic activity.

Japan. regulatory framework. The various resolution strategies for recovery from NPAs include financial restructuring. sale to an asset reconstruction company. This has been extensive in China. The top management should delegate authority and back decision of this kind taken by middle level managers. Macro level issues will have to be addressed in order to root out the problem. Under each option there are options.  There have been instances of banks extending credit to doubtful debtors (who willfully default on debt) and getting kickbacks for the same. merger. quality of disclosure and incentive structure produce an inconsistent framework. 74 . Firstly. Further. an adjustments mechanism can be created by which the capital gains and future profits that will result from the disposal of N.P. which leads to an unsustainable performance level for a bank. Securitisation in India is still in a nascent stage but the potential in the areas of Mortgage Backed Securities. all the mechanism suggested above may prove to be ineffective. one time settlement. it helps restore credibility in the financial systems.NPA MANAGEMENT potential to pay.As during the Great Depression in the middle of a severe current helped restore the credibility of the financial system. Without this. and Korea and has attracted international participants due to lower liquidity risks. Its highly standardized products appeal a broad investor base. Processes at every stage of an assets life impact the overall quality of the intermediation process and so a consistent set of procedures are necessary to handle the problem. The swift disposal of N.As will pass back to the creditors as the tax payers who incurred the losses today.P.  There is a fear that disposal through the provision of excessive reserves may result in a deflationary spiral.  Some experts argues that the current organizational competencies. Ineffective legal mechanism and inadequate internal control mechanism have made this problem grow quick actions has to be taken on both counts so that both the defaulters and the authorizing officer are punished heavily. securitisation of receivables and filing of legal suit. change in management. The resolution trust corporation has helped develop the securitisation market in Asia and has taken over around $ 460 bn as bad debts from 750 failed banks. A through provision of reserves will have no negative impact on the long-term dividends paid to the shareholders.

NPA MANAGEMENT which can be exercised either singly or jointly. Banks should be convinced of a turnaround within a scheduled timeframe  Timeliness and adequacy of response  Focus on Cash flows  Management Effectiveness  Consortium / Multiple Financing 75 . The details under each strategy are given in the following.  Early recognition of the problem  Early Alert System – determine threshold for proactive intervention before account becomes a NPA  Identify borrowers with genuine intent  Restructuring should be attempted only after an objective assessment of the viability and the promoter’s intent.

the company is in operation. compound interest or liquidated damages  Conversion of loan into equity or quasi-equity  Reduction in equity  Debt write-off  Funds infusion by way of equity or debt for project completion  Funds infusion for working capital purposes  Escrowing of receivables – Trust & Retention Account  Under this strategy.NPA MANAGEMENT FINANCIAL RESTRUCTURING  Reschedulement of the principal repayment  Reduction in the rate of interest  Funding of past due interest into loan or instruments (debt or equity or quasi equity)  Funding of future interest  Waiver of past simple interest. along with reliefs. CHANGE IN MANAGEMENT  Change in the promoters  Induction of professionals ONE TIME SETTLEMENT (OTS) 76 . However. some additional fund infusion by the promoter should be a must. but requires some relief.

NPA MANAGEMENT  Full principal with all past interest and future interest with prepayment premium  Full principal with all past interest  Full principal with part interest  Full principal with full or part interest converted to equity or quasi equity instrument  Part principal with the remaining part converted to some equity or quasi equity instrument  Part principal and remaining part written off MERGER WITH ANOTHER COMPANY  Nature of the industry – sunrise or sunset  Synergy issues  Valuation  Share swap ratio  Tax implications 77 .

enactment of SRFAESI act. A lot of measures are desired in terms of effectiveness of these measures. (3) Special accounts should be made of the clients where monthly loan concentration reports should be made. What we would like to suggest for reducing the evolutions of the NPAs of Public Sector Banks are as under. One time settlement schemes. etc. (5) The banks before providing the credit facilities to the borrower company should analyze the major heads of the income and expenditure based on the financial performance of the comparable companies in the industry to identify significant variances and seek explanation for the same from the company management. (2) The credit rating agency should regularly evaluate the financial condition of the clients. 78 .NPA MANAGEMENT RECOMMENDATIONS OF THE STUDY Through RBI has introduced number of measures to reduce the problem of increasing NPAs of the banks such as CDR mechanism. (4) It is also wise for the banks to carryout special investigative audit of all financial and business transactions and books of accounts of the borrower company when there is possibility of the diversion of the funds and mismanagement. They should also analyze the current financial position of the major assets and liabilities. (1) Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility.

how they would face the environmental threats and opportunities with the use of their strength and weakness.e. (11) No loan is to be given to a Group whose one or the other undertaking has become a Defaulter. That how they should deal the problem of NPAs. and what continues steps they should take to reduce the NPAs.NPA MANAGEMENT (6) Banks should evaluate the SWOT analysis of the borrowing companies i. 79 . (10) Willful Default of Bank loans should be made a Criminal Offence. (9) Proper training is important to the staff of the banks at the appropriate level with ongoing process. and what will be their possible future growth in concerned to financial and operational performance. (7) Independent settlement procedure should be more strict and faster and the decision made by the settlement committee should be binding both borrowers and lenders and any one of them failing to follow the decision of the settlement committee should be punished severely (8) There should be proper monitoring of the restructured accounts because there is every possibility of the loans slipping into NPAs category again.

As against this. Basel-II is known for complicated risk management models and complex data requirements. Indian banks do not perceive any immediate value in the new norms as they are globally insignificant players with simple and straight forward balance-sheet structures. in the form of lower regulatory capital. internal checks & systems for early indication of NPAs etc The response to Basel Accord II reforms world over is not uniform and spontaneous. However.NPA MANAGEMENT CONCLUSION OF THE STUDY Asset quality is one of the important parameters based on which the performance of a bank is assessed by the regulation and the public. Some of the areas where the Indian banks identified to for better NPA management like credit risk management. special investigative audit. particularly in respect of investment cost and the complexity of proposed internal rating system. putting Basel II in place is going to be far more challenging than Basel I. as those in the US. The adoption of Basel II will boost good Risk Management practices and good corporate 80 . This is clearly vindicated by the sample study according to which 57 per cent of the executives of public sector banks are sceptical about Basel Accord II norms. the private sector banks with supposedly more investment in technology related infrastructure are in favour of the proposals under New Basel Capital Accord as vindicated by the sample study according to which 67 percent of executives of private sector banks are in-favour for New Basel Capital Accord. Big international banks. negotiated settlement. as they perceive that their superior technology and systems would make them Basel compliant and provide an edge in the competitive environment. prefer this new version.

It is realized that if a resolution strategy for recovery of dues from NPAs is not put in place quickly and efficiently. It is important to note that it is difficult to get data from banks and institutions regarding the decision process that leads to a specific resolution strategy for a particular NPA. But to arrive a specific figure for a one time settlement or sale of a second hand asset or financial restructuring involves subjective elements in bargaining. mainly the public sector banks. This is why. the cost of putting in place robust system today is viewed in an increasingly number of countries as a price worth paying to prevent such crisis. went it for settlement for 50% of the principal amount waiving all other dues. 81 . Assuming that the banks can get over the technological and operational hurdles. however. these assets would deteriorate in value over time and little value would be realized at the end. asset classification as per prudential norms. The literature. for a particular company. However. financial strength of the incumbent promoter etc.NPA MANAGEMENT governance in banks. in which situation which strategy should be adopted. except may be its scrap value. the nature of the industry etc. more efficient and competitive globally. will help strengthen the financial sector to undertake further reforms including capital account convertibility more confidently. has not specifically discussed about the various resolution strategies that could be put in place for recovery from NPAs. in turn. it has left it to the discretion of the Board of Directors of a bank/institution to take decisions outside the guidelines of RBI. For example it is difficult to substantiate as to why a bank. extent of provisioning in the books of the lender. The purpose of this paper is to indicate the various considerations that one has to bear in mind before zeroing on a resolution strategy. That is why. the extent to which the borrower is conscious of his/her social status. Broad parametric guidelines can be given like vintage of plant and machinery and current market value. Two NPAs of the same vintage in the same industry may be resolved in two ways. asset securitisation has gained popularity among financial sector players. and in particular. switching over to Basel II norms can no doubt turn the Indian banks. This is so as there is no fixed formula on the basis of which a recovery strategy for a NPA is undertaken. This. The details of the strategy would follow after that. future revenue generating potential of the assets. although Reserve Bank of India (RBI) has given some guidelines in this regard.

3. exports and auto sectors. The RBI has also been trying to take number of measures but the ratio of NPAs is not decreasing of the banks. has seen an increase in the net NPAs by a whopping 41 percent in 2007-08. 2002 banks can now issue notices to their defaulters to repay their dues or else make defaulters face hard and tough actions under the aforementioned Act. Also a hallmark of a good business is approaching it with a fresh. bankers feel that in more loans are going to turn bad in the coming quarters and therefore they want RBI to relax the deadline for loan reconstruction. 2. As the global slowdown has crept into the economy. 2002 came as a bonanza for investors in banking sector stocks that in turn resulted into an improvement in their share prices. However with the introduction of Securitisation Act. SBI. the last year it saw a 17 percent rise in the sticky assets. real estate.NPA MANAGEMENT To conclude with. 1. Due to Recession & slowdown in the Indian economy would result in emerging NPA‘s for the public sector banks from textiles. The NPA is one of the biggest problems that the Public Sector Banks are facing today is the problem of nonperforming assets. 5. the passing of the Securitisation Act. till recent past. new perspective and requires management that is fully awake. the last three years have seen an increase in the net NPAs of 25 public sector banks by 24 per cent. The largest public sector lender. Also. In absolute terms. retail. 82 . 6. According to the numbers. This enables banks to get rid of sticky loans thereby improving their bottom lines. corporate borrowers even after defaulting continuously never had any real fear of bank taking any action to recover their dues despite the fact that their entire assets were hypothecated to the banks. This is because there was no legal Act framed to safeguard the real interest of banks. The banks must find out the measures to reduce the evolving problem of the NPAs. fully alive and of course fully focused on making things better. 4. If the proper management of the NPAs is not undertaken it would hamper the business of the banks.

The main challenge facing the commercial banks is the disbursement of funds in quality assets (Loans and Advances) or otherwise it leads to Non-performing assets. The reduction of the NPAs would help the banks to boost up their profits. 8. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. In general there are several challenges confronting the commercial banks in its day to day operations.NPA MANAGEMENT 7. 9. the Rumanian proverb insists the importance of the money.” 83 . The NPAs would destroy the current profit.These shortages can jam payments across the country and as a result non performing loans may spill over the banking system and contract the money stock. which deals with money. and would affect the smooth functioning of the recycling of the funds. 12. When many borrowers fail to pay interest. if the bank fails. This would help the nation to develop more banking branches and developing the economy by providing the better financial services to the nation. which hampers economic growth. 13. smooth recycling of funds in the nation. 10. “A Man without money is like a bird without wings”. A bank is an establishment. banks may experience liquidity shortages . Banks need to create capital reserve to write off the mounting NPA’s burden. owners lose their assets & this may affect a broad pool of shareholders & act as a rain on Profitability. Banks also redistribute losses to other borrowers by charging higher interest rates . 14. interest income due to large provisions of the NPAs. The basic functions of Commercial banks are the accepting of all kinds of deposits and lending of money. In the worst case. which may lead to economic contraction.Lower deposit rates and higher lending rates repress savings and financial markets. As a result of the NPA’s owners do not receive a market return on their capital.

84 . of branches are so wide Even Bank of India is having more than 3000 branches so it was not possible for us to cover all the banks of the Indian banking sector. Agriculture and SSI etc. Comprehensive statement a) Sharing recovery in suit filed A/c b) Age wise classification of A/c c) Sector wise i. Quarterly RBI format 2. the practical operations as related to the NPAs are adopted by the banks are not exercised. Every bank submitting suit file /NPA Data to RBI under: 1.NPA MANAGEMENT LIMITATIONS OF THE STUDY The limitations that we felt in our study are:  It was critical for us to gather the financial data of the every bank of the Public Sector Banks so the better evaluations of the performance of the banks are not possible.e. C&IC.  Since there is mass banking as far as amount as well as no.  Since our study is based on the secondary data.

e.html    .com http//:www.money.rupeetimes.com/experts/joseph_samson_5.co.NPA MANAGEMENT  Provision for the classification of the Assets / NPA’s are differs as per guidelines of controlling banks i. RBI within each public sector bank & this information is not available publicly.htm k_rbi_to_relax_npa_norms_for_real_estate_sector_1919.indiatimes.radiff.com 85 www.indiatimes.org. BIBLIOGRAPHY Websites:    http://www.asp http://moneyterms.123eng.rbi.com/stockquotes/mystocks.rupeetimes.com/news/personal_loan/banks_as http//:www.  The RBI norms for the classification of assets / NPA’s are available on a pay site & not publicly available through any source.equitymaster.uk/interest_spread/ http://economictimes.com http://www.com http//:www.com/Features/The_Sunda y_ET/Economy/Private_banks_struggle_to_manage_their_nonperforming_assets/articleshow/3049718.economictimes.cms#write   l  http://www.

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