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200 9 Seminar On Contemporary Issues In Management NON PERFORMING ASSETS SUBMITTED TO: Rajasthan Technical University , Kota Submitted

By: Of: AMIT GHAWARI TYAGI MBA II Sem Under Guidance MISS. SHOBHIKA (FACULTY) Vision School Of Management Affiliated to Rajasthan Technical University Kota AI CTE Approved E-Mail : Website :

TABLE OF CONTENTS 1.Introduction.................................................................. ................................... 1 2. What is NPA............................ .......................................................................2 3.Asset sClassification................................................................. ........................ 3 3.1 General Reasons for Assets Becoming NPA.......... .............................3 3.2 Classification of assets of scheduled commerc ial bank..............4 3.3 Gross and net NPA of different sector of bank....... .....................4 4. Management of NPA..................................... ...............................................5 4.1 Provisioning Requirement fo r Loans or Advances............................5 5. General Method of Management of NPA...............................................6- 7 6. Difficulties with the Non-performing Assets...............................................8 7. Com parison with other Asian Economies.............................................. .....9 8. Bank-Wise (NPAs) of Scheduled Commercial Bank 2008..................10 12 9. Some Facts Regarding NPA of Major 25 Banks of India....................... .13 10. The Changing Dynamics in Asian Non- Performing Loans.............14-16 1 1. Developing the Asian Markets for Non-Performing Assets...................17 1 2. Developing the Indian Markets for Non-Performing Assets............18-19 13. Conclusion...................................................................... ............................20 14. Suggestion to Overcome the Problem of NPA.... ....................................21 15. Bibliography & References............ ...........................................................22

ACKNOWLEDGEMENT In preparation of this report by me, I feel great pleasure because it gives me e xtensive practical knowledge. I get idea about Non Performing Assets by this rep ort. I express my deep sense of gratitude to Dr. A.L. Jain (Director of vision s chool of Management, Chittorgarh) for his valuable guidance during my report wor k. I also grateful to all Faculty members Dr. Snehal Maheshkar, Mr.Vibhor Paliwa l, Mrs.Pratibha Pagaria, Miss. Shobhika Tyagi, Mr. Rahul Jain and Staff members Mr. Purshottam Dashora, Mr. Rastraverdhan who guided me in my report. I am thank ful to my friends Latika Surana, Ranu Shetiya, Preeti Paul, Bharti Sharma for va luable inspiration and guidance provided me through out this report work. I woul d like to take opportunity to express my gratitude towards all of them who have contributed directly or indirectly in my project work. AMIT GHAWARI

PREFACE This Project is done for the partial fulfillment of the two year MBA program. Th is Research project is a compulsory part of the academics. This research is done in the second semester of the MBA program. The topic of the study is study ot no n performing assets i india. The reason for selecting this topic the NPA is a pro blem facing by the Indian banks. Banking industry plays an important sector to t he overall economic development of India is ever inreasing. The other objective of the topic were to analyse the trands in NPA of Indian banking sector. A compe rative analysis of NPA in various banking sector like public sector,SBI & its as sociates, Nationalise bank etc. The report is devided in to Fifteen Chepter. The First topic is the introduction of the NPA. In this chapter there are detail ab out History of NPA. In the Second topic the Mening of NPA is given. The Third to pic is about Assets classification in which General Reasons for Assets Becoming NPA,Classification of assets of scheduled commercial bank, Gross and net NPA of different sector of bank are coverd. The Fourth & Fifth topics are about Managem ent of NPA, General Method of Management of NPA. The Sixth & Seventh topics are deeply discribe Difficulties with the Non-performing Assets, Comparison with oth er Asian Economies. Next Eighth & Nineth topics are Bank-Wise (NPAs) of Schedule d Commercial Bank,Some Facts Regarding NPA of Major 25 Banks of India. The Tenth & Eleventh topics are about Changing Dynamics in Asian Non- Performing Loans wi th Developing the Asian Markets for NonPerforming Assets. The Twelth topic is al l about Developing the Indian Markets for NonPerforming Assets. The last Thirtee n, Fourteen & Fifteen topics are about Conclusion, Suggestion & Bibliography & R eferences.

This report is a honest work towards the topic. There can be many short comings in it bceause ot the lack of the time, un availability of data and other constra ints. INTRODUCTION Banking sector reforms in India has progressed promptly on aspects like interest rate deregulation, reduction in statutory reserve requirements, prudential norm s for interest rates, asset classification, income recognition and provisioning. But it could not match the pace with which it was expected to do. The accomplis hment of these norms at the execution stages without restructuring the banking s ector as such is creating havoc. This research paper deals with the problem of h aving non-performing assets, the reasons for mounting of non-performing assets a nd the practices present in other countries for dealing with non-performing asse ts. During pre-nationalization period and after independence, the banking sector remained in private hands Large industries who had their control in the managem ent of the banks were utilizing major portion of financial resources of the bank ing system and as a result low priority was accorded to priority sectors. Govern ment of India nationalized the banks to make them as an instrument of economic a nd social change and the mandate given to the banks was to expand their networks in rural areas and to give loans to priority sectors such as small scale indust ries, self-employed groups, agriculture and schemes involving women. To a certai n extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the banking system to expand its network in a planned way and make available ban king series to the large number of population and touch every strata of society by extending credit to their productive Endeavours. This is evident from the fact that population per office of commercial bank has come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of advances of public sector banks to priority sector increased form 14.6% in 1969 to 44% of the net bank credit. The number of deposit accounts of the banking system increased from over 3 crore s in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to over 2.68 crores.

WHAT IS A NPA (NON PERFORMING ASSET) Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset. Non Performing Asset means an asse t or account of borrower, which has been classified by a bank or financial insti tution as sub-standard, doubtful or loss asset, in accordance with the direction s or guidelines relating to asset classification issued by RBI. An amount due un der any credit facility is treated as "past due" when it has not been paid withi n 30 days from the due date. Due to the improvement in the payment and settlemen t systems, recovery climate, up gradation of technology in the banking system, e tc., it was decided to dispense with past due concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance whereinterest and /or installment of principal remain overdue for a p eriod of more than 180 days in respect of a Term Loan, the account remains out of order for a period of more than 180 days, in respect of an overdraft/ cash C redit(OD/CC), the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, interest and/ or installment of princip al remains overdue for two harvest seasons but for a period not exceeding two ha lf years in the case of an advance granted for agricultural purpose, and any amo unt to be received remains overdue for a period of more than 180 days in respect of other accounts. With a view to moving towards international best practices a nd to ensure greater transparency, it has been decided to adopt the 90 days ove rdue norm for identification of NPAs, form the year ending March 31, 2004. Acco rdingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; interest and /or installment of principal remain ove rdue for a period of more than 90 days in respect of a Term Loan, the account re mains out of order for a period of more than 90 days, in respect of an overdra ft/ cash Credit(OD/CC), the bill remains overdue for a period of more than 90 da ys in the case of bills purchased and discounted, interest and/ or installment o f principal remains overdue for two harvest seasons but for a period not exceedi ng two half years in the case of an advance granted for agricultural purpose, an d any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

ASSESTS CLASSIFICATION The RBI has issued guidelines to banks for classification of assets into four ca tegories. 1. Standard ASSESTS: These are loans which do not have any problem are less risk. 2. Substandard ASSESTS: Non-performing loans or advances past due 90(ninety) days or more but less than 180(one-hundred- eighty days) days shall, at a minimum, is classified sub standa rd. Without prejudice to the classification criteria used for the sub standard c ategory set out above, the following non-performing loans and advances shall be categorized as substandard 3. Doubtful ASSESTS: Non-performing loans or advances past due 180 days or more, but less than 360 da ys shall be classified, at a minimum, as doubtful. 4. Loss ASSESTS: Non-performing loans or advances past due 360 days or more shall be classified a s Loss. GENERAL REASONS FOR ASSETS BECOMING NPAs A multiplicity of factor is responsible forever increasing size of NPAs in banks . A few prominent reasons for assets becoming NPAs are as under. 4Poor credit ap praisal system 4Lack of proper monitoring 4Reckless advances to achieve the budg etary targets. 4There is no or lack of corporate culture in the Banking adequate legal provisions on foreclosure and bankruptcy. 4Change in economic policies/ e nvironment. 4No transparent accounting policy and poor auditing practices. 4Lack of coordination between banks. 4Directed lending to certain sectors. 4Failure o n the part of the promoters to bring their portion of equity from their own sour ce or public issue due to market turning lukewarm.

The classification of assets of scheduled commercial bank Table1 Assets Standard assets Sub standard assets Doubtful assets Loss assets To tal NPA 2001 494716 (88.6) 18206 (3.3) 37756 (6.8) 8001 (1.4) 63963 (11.4) 2002 609972 (89.6) 21382 (3.1) 41201 (6.1) 8370 (1.2) 70953 (10.4) 2003 709260 (91.2) 20078 (2.6) 39731 (5.1) 8971 (1.2) 68780 (8.8) (Amount Rs. crores) 2004 837130 (92.8) 21026 (2.3) 36247 (4.36) 7625 (0.8) 902027 (100) Income recognition and provisioning Income from NPA is not recognized on accrued basic but is booked as income only when, it is actually received. RBI has also tightened red the provisions norms a gainst asset classification. It ranges from 0.25% to 100% from standard asset to loss asset respectively. Gross and net NPA of different sector of bank Table 2 (end of March 31) (in %) category Public sector bank Private sector Foreign bank Table 3 Gross NPA/ Gross Advance 2001 12.37 8.37 6.84 2002 11.09 9.64 5.38 2003 9.36 8.0 7 5.25 2004 7.79 5.84 4.62 (end of March 31) (in %) category Public sector bank Private sector Foreign bank Net NPA / Net Advance 2001 6.74 2.27 1.82 2002 5.82 2.49 1.89 2003 4.53 2.32 1.7 6 2004 2.98 1.32 1.49 The table II and III shows that the percentage et NPA/ net advance are in a decreasing trend. in public and private sector banks. but still an private sector and public sector banks have of gross NPA/ gross advance and n This shows the sign of efficiency if compared to foreign banks Indi a higher NPA.

MANAGEMENT OF NPA The table II&III shows that during initial sage the percentage of NPA was higher . This was due to show ineffective recovery of bank credit, lacuna in credit rec overy system, inadequate legal provision etc. Various steps have been taken by t he government to recover and reduce NPAs. Some of them are. 1.One time settlemen t / compromise scheme 2. Lok Adalats 3. Debt Recovery Tribunals 4. Securitizatio n and reconstruction of financial assets and enforcement of Security Interest Ac t 2002. 5. Corporate Reconstruction Companies 6. Credit information on defaulter s and role of credit information bureaus Provisioning Requirement for Loans or Advances All Banks shall maintain a Provision for Loans Losses Account which shall be cre ated by charges to provision expense in the income statement and shall be mainta ined at a level adequate to absorb potential losses in the loans or advances por tfolio. In determining the adequacy of the Provisions for Loan Losses Account, p rovisions may be attributed to individual loans or advances or groups of loans o r advances. The provisions for Loan Losses Account shall always have a credit ba lance. Additions to or reductions of the Provisions for Loan Losses Account shal l be made only through charges to provisions in the income statement. Based on t he asset classification, the banks are required to make a provision against the Loans or advances. Bank shall maintain the minimum provision percentages against the outstanding provision and of each loan or advances.

GENERAL METHODS OF MANAGEMENT OF NPAS The management of NPA is the difficult task in practice. Management of NPAs mean s, how to settle the NPAs account in the books. In simple it focuses on the meth ods of settlement of NPAs account. The methods are differs from bank to bank. Th e following paragraph explains some general methods of Management of NPAs by the banks. The same information is given in the chart 1.1. Compromise Legal remedies Regular Training Program Recovery Camps Write offs Spo t Visit Rehabilitation of potentially viable units Other Methods General Methods of Management of NPAs Compromise: The dictionary meaning of the term compromise is settlement of dispute reached by mutual concessions. The following are the detailed guidelines for compromise/ne gotiated settlements of NPAs. * The compromise should be a negotiated settlement under which the bank should ensure recovery of its dues to the maximum extent p ossible of minimum expenses. * Proper distinction should be made between willful defaulters and borrowers defaulting in repayments due to circumstances beyond t heir control.

* Where security is available for assessing the realizable value, proper weight age should be given to the location, condition and marketable title and possessi on of sub security. * An advantage in settlement cases is that banks can promptl y recycle the funds instead of resorting to expensive recovery proceedings sprea d over a long period. * All compromise proposals approved by any functionary sho uld be promptly reported to the next higher authority for post facto scrutiny. * Proposal for write off/ compromise should be first by a committee of senior exe cutives of the bank. * Special recovery cells should be set up at all regional l evels. Legal remedies: The legal remedies are one of the methods of management of NPAs. The banks obser ved that the borrower is making willful default; no more time should be lost ins tituting appropriate recovery proceedings. The legal remedies are filling of civ il suits. Regular Training Program: The all levels of executives are compelling to undergrowth the regular training program on credit and NPA management. It is very useful and helpful to the execu tives for dealing the NPAs properly. Recovery Camps: The banks should conduct the regular or periodical recovery camps in the bank pr emises or some other common places; such type of recovery camps reduces the leve l of NPAs in the Banks. Write offs: Write offs is also one of the common management techniques of NPAs. The assets a re treated as loss assets, when the bank writes off the balances. The ultimate a im of the write off is to cleaning the Balance sheet. Spot Visit: The bank officials should visit to the borrowers business place or borrowers fiel d regularly or periodically. It is also help full to the bank to control or redu ce the NPAs limit.

Difficulties with the non-performing assets 1. Owners do not receive a market return on their capital. In the worst case, if the bank fails, owners lose their assets. In modern times, this may affect a br oad pool of shareholders. 2. Depositors do not receive a market return on saving s. In the worst case if the bank fails, depositors lose their assets or uninsure d balance. Banks also redistribute losses to other borrowers by charging higher interest rates. Lower deposit rates and higher lending rates repress savings and financial markets, which hampers economic growth. 3. Non performing loans epito mize bad investment. They misallocate credit from good projects, which do not re ceive funding, to failed projects. Bad investment ends up in misallocation of ca pital and, by extension, labour and natural resources. The economy performs belo w its production potential. 4. Non performing loans may spill over the banking s ystem and contract the money stock, which may lead to economic contraction. This spillover effect can channelize through illiquidity or bank insolvency; (a) whe n many borrowers fail to pay interest, banks may experience liquidity shortages. These shortages can jam payments across the country, (b) illiquidity constraint s bank in paying depositors e.g. cashing their paychecks. Banking panic follows. A run on banks by depositors as part of the national money stock become inopera tive. The money stock contracts and economic contraction follows (c) undercapita lized banks exceeds the banks capital base. Lending by banks has been highly pol iticized. It is common knowledge that loans are given to various industrial hous es not on commercial considerations and viability of project but on political co nsiderations; some politician would ask the bank to extend the loan to a particu lar corporate and the bank would oblige. In normal circumstances banks, before e xtending any loan, would make a thorough study of the actual need of the party c oncerned, the prospects of the business in which it is engaged, its track record , the quality of management and so on. Since this is not looked into, many of th e loans become NPAs. The loans for the weaker sections of the society and the wa iving of the loans to farmers are another dimension of the politicization of ban k lending. Most of the depositors money has been frittered away by the banks at t he instance of politicians, while the same depositors are being made to pay thro ugh taxes to cover the losses of the bank.

Comparison with other Asian Economies Comparison of Problems and Solutions Across 5 countries Country Mechanisms used to solve the problem India 1. Legal impediments and time 1. Strengthening of Legal Norms consuming nature of asset disposal process. 2. Manipulation by the debtors using 2. Aligning of prudential norms with political influence has been a cause for international standards industrial bad debt bein g so high. 3.Political tool - Directed Credit to SSI 3. Legal mechanisms includi ng and Rural sectors creation of ARCs and partial disbanding of the BIFR China 1 . Moral Hazard - SOE s belief that 1. Creation of Asset Management bailout will happen in a crisis situation Companies for the big four banks 2. Bankruptcy laws favour borrowers 2. Foreign equity participation in the NPA disposal process 3. Inefficient legal enforcement 3. Raising of disclosure standards mechanisms 4. Political & social implications 4.Laws enabling Asset backed compulsions force t he government to securitisation. keep them afloat. Japan 1. Real estate boom and bust 1. Strict action (including closure) for non compliance of capital norms 2 . Time consuming legal mechanisms 2. Securitisation of Real estate loans 3. Cron y capitalism 3. Extensive public funding for bailouts 4. The no-bankruptcy doct rine Korea 1.Directed credit: Interest rate control 1 Swift action in containin g systemic risk 2.The compressed growth policy 2. Use of Corporate Restructuring V ehicles (CRVs) and Debt/Equity Swaps 3. Lack of effective monitoring 3. Creation of Korea Asset Management Corporation (KAMCO) in 1997 4.Contagion Effects from South East 4. Extensive use of securitization Asia Thailand 1. legal system that favoured debtors 1. Privatisation of government entities 4. Steep interest rate increase turned 4. Government takeover of banks loans bad and FIs 3. Real estat e speculation - Spike in 3. Creation of AMCs prices andgrowth rate projections w ere wrong Causes of Problem

BANK-WISE NON-PERFORMING ASSETS (NPAs) OF SCHEDULED COMMERCIAL BANK - 2008 Bank Name State Bank of India & its Associates State Bank of Bikaner & Jaipur St ate Bank of Hyderabad State Bank of India State Bank of Indore State Bank of Mys ore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Nati onalised Banks Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of M aharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank IDBI Ban k Ltd Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind B ank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank (Amount in Rs. Crore) As on March 31 Gross Gross Gross NPA NPAsAdvance Ratio % 4 37 25304 1.7 0.9 3.0 1.4 1.7 1.4 1.5 2.0 312 35901 12837 422181 265 18356 359 21305 521 36724 179 12309 571 28440 1011 372 1981 1931 766 1416 2350 584 573 1565 487 997 1280 136 3319 1769 1652 16 57 761 512 50312 34556 107672 114793 29798 107655 74287 39664 23381 83608 40228 61058 55327 18409 120932 65197 55627 75879 28152 32019 2.0 1.1 1.8 1.7 2.6 1.3 3.2 1.5 2.4 1.9 1.2 1.6 2.3 0.7 2.7 2.7 3.0 2.2 2.7 1.6 Foreign Banks

AB Bank ABN AMRO Bank Abu Dhabi Commercial Bank Antwerp Diamond Bank BNP Paribas Bank of America Bank of Bahrain & Kuwait Bank of Ceylon Bank of Nova Scotia Bar clays Bank 3 294 19 34 1 25 17 2 61 26 20502 182 476 3805 3453 301 56 4776 7664 10.2 1.4 10.7 0.0 0.9 0.0 8.4 29.6 0.0 0.8 BANK-WISE NON-PERFORMING ASSETS (NPAs) OF SCHEDULED COMMERCIAL BANK - 2008 (Conc ld.) (Amount in Rs. Crore) Bank Name As on March 31 Gross Gross Gross NPA NPAsAd vance Ratio % Calyon Bank 2 1815 0.1 China Trust Commercial Bank 1 129 1.0 Citib ank 1011 38915 2.6 Deutsche Bank 60 9000 0.7 Development Bank of Singapore 5 236 8 0.2 Hongkong & Shanghai Banking Corporation 697 30467 2.3 JP Morgan Chase Bank 121 1158 10.5 Krung Thai Bank 9 0.0 Mashreq Bank 41 0.0 Mizuho Corporate Bank 7 863 0.8 Oman International Bank 1 0.0 Shinhan Bank 314 0.0 Societe Generale 385 0.0 Sonali Bank Ltd 1 9 10.0 Standard Chartered Bank 723 33729 2.1 State Bank o f Mauritius 214 0.0 The Bank of Tokyo - Mitsubishi UFJ 2307 0.0 Other Scheduled Commercial Banks Axis Bank 486 59899 0.8

Bank of Rajasthan Catholic Syrian Bank Centurion Bank of Punjab City Union Bank Development Credit Bank Dhanalakshmi Bank Federal Bank HDFC Bank ICICI Bank Indu sInd Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Ko tak Mahindra Bank Lakshmi Vilas Bank Nainital Bank Ratnakar Bank SBI Commercial & International Bank South Indian Bank Tamilnad Mercantile Bank Yes Bank 126 7529 131 3387 540 16455 83 4575 63 4105 63 2146 469 19327 904 64032 7580 229 892 392 12897 116 14663 485 19164 380 11102 194 9569 453 15729 138 3931 19 1002 37 617 5 364 188 10597 122 5431 11 9432 1.7 3.9 3.3 1.8 1.5 2.9 2.4 1.4 3.3 3.0 0.8 2.5 3.4 2.0 2.9 3.5 1.8 6.0 1.4 1.8 2.2 0.1 2.3 All Scheduled Commercial Banks 56668 2507885 Note : Data are Provisional. Figure s are rounded off. Data pertain to the balance sheets of banks. Source : Departm ent of Banking Supervision, RBI Some facts regarding NPA of major 25 banks of India are: Net non-performing assets (NPAs) of 25 banks have risen by an average 21.75 per cent in Q2

FY 09 as against Q2 FY08.The aggregate net non-performing assets (NPA) of 25 banks increased to Rs 17,992.82 crore in second quarter of 2008-09 from Rs 15,462.84 crore in the same period of FY08 The average capital adequacy ratio (CAR) of 25 b anks slipped to 12.68 per cent in Q2-FY 09 from 13.41 per cent in the previous ye ar. Karur Vysya Bank recorded maximum rise of 275.36 per cent in net NPAs in Q2FY09 with Rs. 50.03 crore as against Rs 13.33 crore in Q2-07. Seven major PSBs re corded a significant decrease in net NPAs. Among the private sector banks only S outh Indian Bank registered an improvement in net NPAs by -29.82 per cent. 16 ba nks witnessed a fall in their CAR from the previous fiscal, but they still manag ed to remain above the prescribed limit of nine per cent posed by the Basel II a ccord. Axis bank registered the maximum decline in CAR from 17.59 per cent in Q2 FY08 to 12.2 per cent in Q2 FY09. Federal Bank had the maximum rise in CAR unto 2 0.81 per cent in Q2 FY 2008-09 from 13.08 per cent a year earlier. The Changing Dynamics in Asian Non Performing Loans The changing dynamics

In the last year, many of the dynamics underpinning the approach in Asia to reso lving and maximizing value from non-performing loans (NPLs) have changed. The au thors regional review for the second Forum for Asian Insolvency Reform (held in B angkok, Thailand in December 2003) highlighted a number of areas of progress and some of the pitfalls in Asian corporate debt restructuring as well as providing a country-by-country summary of developments. This paper builds on that review and focuses on some of the evolving aspects of NPL resolution techniques and on shifts in approach to resolving Asias estimated 2 trillion US dollars in NPLs. Reworking the fictional rescheduling the strategic double defaulters The author has often described the many so-called restructurings taking place in some of the Asian countries as fictional rescheduling, which have taken place w ithout there being a realistic expectation that the debtor will be able to compl y in full with the rescheduled timetable for repayment and without any serious a ttempts at operational restructuring or other real restructuring techniques. As defaults take place under these fictional rescheduling, reworking the workouts h as already begun in many countries, with debtors commonly able to achieve a bett er deal the second time around. This odd phenomenon is partly due to the fact th at the first round of fictional rescheduling rarely included a haircut of debt, as the banks balance sheets could not, at that time, sustain the loss, and often ra mped up interest rates after a few years of reduced rates or interest holidays. As time has passed since the 1997-2002 period when many of these deals were done , the economies in some of the so-called crisis economies such as Korea, Malaysi a, Thailand, and, to a more limited extent, Indonesia have improved. As the econ omies have rebounded, often without any real change in fundamentals or in overal l competitiveness of enterprises on a comparative basis, interest rates have fal len. Banks have been recapitalized and can now sustain the losses from writing o ff portions of debt which the bank really has almost no prospect of recovering, and are therefore now processing losses that really should have been processed i n 1997. In these changing environments, strategic debtors have again appeared. Str ategic debtors is a term which was used in the period between 1997-1999 to descr ibe debtors who were able to pay their debts but choose to use the Asian financi al crisis as an excuse not to pay their financiers and commence restructuring ne gotiations in the hope of receiving some accommodation from their bankers. This tactic was very successful. As interest rates have fallen, and with banks balance sheets now far better placed to take a hit, strategic double defaulters have sp rung up. Requests for reduced interest rates and for haircuts are common request s and, commonly, the requests are agreed. The dynamic is also odd as (commonly) the debtor would have complied with its first restructuring plan for many years and then a default occurs (or a cynic would say is engineered) and the debtor is suddenly able to again achieve

accommodations from its bankers. Some debtors, whilst acting cleverly and perhap s a little disingenuously, are not entirely to blame for this situation. If thei r bankers had, in the first round of restructuring, been less concerned with the ir own balance sheets and instead focused on realistic financial restructuring a nd operational restructuring of the debtor, assessing the viability of the debto rs business and leaving it with a sustainable level of debt, the debtor may well have become more profitable and competitive in the interim period if it had not had to operate under the shadow of an overhang of unsustainable debt. In truth, the debtors bankers never hoped to recover this unsustainable debt, but delayed w riting it off. The author has often quoted one banker as saying we will do the re scheduling now and then do the restructuring next time they default. In reality, as things have turned out, the second round has involved either another reschedu ling or a haircut and a reduction of interest rates. In other words, the second round of restructuring has resulted in a better result for the debtor. From the debtors perspective re-working the workouts works. The new wave of realistic restructurings There has also been a wave of new restructurings, which have generally been cond ucted in a realistic manner. Some of these cases have involved essentially good businesses or projects, often involving multinational sponsors. In many cases, t hese restructurings did not occur in the immediate aftermath of the 1997 crisis. These restructurings were delayed because the debtor often enjoyed a lengthy mo ratorium, either formal or informal, over the last six years, as its creditors r ealized that they really have no attractive legal recourse and have sat still, d espite continuing to threaten the debtor in an unconvincing manner. As these cas es have involved viable businesses with strong sponsors (who have often through relationships with the banks insulated or provided protection to the debtor from its bankers) it is not surprising that these deals have become the first bright spark as the Asian economies have started to rebound. The new markets India at the head India is perhaps the largest new market, with new laws enabling the establishmen t of asset reconstruction companies (ARCs). ARCIL, one of the first ARCs, is acq uiring loans from many of the major banks including ICIC

Bank and SBI. Legal challenges have, however, delayed the implementation of the Securitization and Reconstruction of Financial Assets and Enforcement of Securit y Interest Ordinance (SRFAESI) under which ARCs are established. The proposed Na tional Company Law Tribunal (NCLT), which replaces the existing Board for Indust rial and Financial Reconstruction (BIFR), which handled cases under the sick ind ustrial companies legislation, has also been delayed. It is hoped that the NLCT w ill speed the process of referring companies to rehabilitation although there ar e concerns as to whether it will be fully staffed with an adequate number of com petent judges. There is also great need in India to develop a private profession of liquidators. Whilst debtors abused the moratorium on legal actions under the sick industrial companys legislation, the removal of the stay in its entirety in the second amendment to the companys code is somewhat reactionary. A better solu tion would have been to provide for a clearly time bound stay on legal actions d uring the period of rehabilitation. Stamp duty and taxation incentives are also required if the ARCs are going to become drivers of restructuring in India. Developing the Asian Markets for Non-Performing Assets: Developments in India Non-performing assets in India: An overview

India has acquired an alarming number of Non-Performing Assets .As at 31 March 2 003, the banks and financial institutions in India held NPAs worth approximately Rs. 1 100 000 crore as against an aggregate gross NPAs of all scheduled commerc ial banks amounting to Rs. 63 883 crore at 31 March 2001. A review of the figure s of gross and net NPAs for the last four years shows an increase of Rs. 13 068 crore (more than 25%) The apparent reduction of gross NPAs from 14.4% to 11.4% b etween 1998 and 2001 provides little comfort since this accomplishment is becaus e of credit growth, which was higher than the growth of gross NPAs and not throu gh any appreciable recovery of NPAs. There is neither a reduction nor even conta inment of the threat. The gross NPAs and net NPAs for public sector banks (PSBs) as at 31 March 2001 of 12.39% and 6.74% respectively, are higher than the figur es for scheduled commercial banks (SCBs) at 11.4% and 6.2% Impacts of NPAs on the working of commercial banks NPAs affected the profitability, liquidity and competitive functioning of public and private sector banks, and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. Impact on profitability Commercial banks incurred a total amount of Rs. 31 251 crore towards provisionin g NPAs from 1 April 1993 to 31 March 2001. This has brought net NPAs to Rs.32 63 2 crore or 6.2% of net advances. The enormous provisioning of NPAs together with the holding cost of such non-productive assets over the years has acted as a se vere drain on the profitability of the PSBs. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the seconda ry market. This has alternatively forced PSBs to borrow heavily from the debt ma rket to build Tier II capital to meet capital adequacy norms, thus putting sever e pressure on their profit margins. It is worthwhile to compare the aggregate fi gures of the 19 nationalized banks for the year ended March 2001, as published b y RBI in its Report on Trends and Progress of Banking in India Developing the Indian Markets for Non-Performing Assets 1) The emerging Indian market

The process of resolution of NPLs has only just been initiated in countries like India. Banks and financial institutions in India are faced with the task of dea ling with NPLs, which are reportedly worth around 20 billion US dollars as on 31 March 2002. While the NPL situation in India may not be as grim as some other A sian countries at the height of the Asian crisis,2 it is significant enough to w arrant urgent attention. The total distressed assets are considerably higher tha n the reported NPL numbers, and it is widely believed that NPLs could be double the reported figure if more stringent international classification norms are app lied in India. Creditor rights have historically been difficult to enforce in In dia, often involving long-winded court procedures. Furthermore, in India default ing borrower companies have often misused the shelter provided by the mechanism of the Board for Industrial and Financial Reconstruction (BIFR). A company enter ing the purview of BIFR was protected through a moratorium on lender actions dur ing the course of its proceedings. Proceedings often took very long to complete on account of systemic deficiencies in the workings of the BIFR. a) Steps taken by the government of India Over the past year or so, the government of India has taken several steps to hel p create an enabling environment for NPL resolution. Notable among these are: i) The enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SRFAESI) in December 2002, which lays down the legal basis for the formation of asset reconstruction companies (ARCs) and provides lenders and ARCs with the powers to enforce security interest (if 75% b y value of the secured creditors agree) and sell the assets of the borrower with out court intervention. Furthermore, SRFAESI empowers lenders to remove a compan y from the purview of the BIFR. ARCs are also allowed various measures for asset reconstruction, including change of management of the borrowers business though guidelines for implementing this are still awaited. ii) An out-of-court restruct uring mechanism called Corporate Debt Restructuring (CDR) has been set up, which provides a platform for resolution of inter-creditor and debtor-creditor issues . iii) A National Company Law Tribunal (NCLT) is being set up to replace the BIF R. NCLT is, inter alia, envisaged to perform BIFRs functions more effectively. b) Development of the Indian NPL market

Pursuant to the SRFAESI Act, a number of ARCs have applied to the Reserve Bank o f India for setting up operations. Asset Reconstruction Company (India) Limited (ARCIL) and Asset Care Enterprises Ltd. have been promoted by groups of Indian l enders and are among the first ARCs in India. The process of acquisition by ARCI L of the first lot of assets is currently underway. A number of issues could how ever hamper effective development of the Indian NPL market: i) Legal challenges A tremendous outcry has been raised against the provisions of the SRFAESI Act by borrowers who have termed it as being against the principles of natural justice. A number of petitions are currently pending before the Supreme Court that challe nge the right of lenders to take over and sell the borrower assets with limited opportunity of borrowers to challenge the action in a court of law. The Supreme Court judgment on this issue could profoundly affect the efficacy of this act. ii) Tax and regulatory issues The high level of transaction costs in the form of the stamp duty, payable on th e transfer of financial assets by way of assignment, is a significant deterrent to the acquisition process except in the case of some progressive states. While the government appears keen to encourage both foreign and domestic investors, th e need for specific policy, regulations and tax provisions responsive to their r equirements has still to be addressed. Conclusion The paper stresses the importance of a sound variables and systemic issues pertaining to he NPA problem along with the criticality of ative framework. Foreign experiences must be understanding of the macro economic banks and the economy for solving t a strong legal framework and legisl utilized

along with a clear understanding of the local conditions to create a tailor made solution which is transparent and fair to all stakeholders. The Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively hi gher in public sectors banks. To improve the efficiency and profitability, the N PA has to be scheduled. Various steps have been taken by government to reduce th e NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard. N PA is a double-edged weapon, which affects bank profitability due to interest in come not being recognized on NPA accounts and loan loss previously to be created from profit earned. The bank must adopt structured NPAs management policy for e limination or reducing the NPAs in the Bank. In general the trend of NPAs in CBE are increasing trend, on the same time the CBE has been adopted a very good tec hniques to control over the NPAs. SUGGESTIONS TO OVERCOME THE PROBLEM OF NPAs General suggestions: The Bank should adopt the following General strategies for control of NPAs. The suggestions are as follows:

Projects with old technology should not be considered for finance Large exposure on big corporate or single project should be avoided. Operating staffs credit sk ills should be up graduation. There is need to shift banks approach from collate ral security to viability of the project and intrinsic strength of promoters. Ti mely sanction and or release of loans by the bank is to avoid time and cost over runs. Pre-sanction suggestions: Analysis should therefore be based on trends of capacity utilization, profitability etc. Assumptions not account for ground real ities. Better taking up any fresh/exciting proposals for assessment, sources for margin money should be thoroughly examined. Uneven scale of repayment schedule with higher repayment in the initial years normally is preferred. As for as poss ible, repayment of term loans should be fixed on monthly basis rather than on qu arterly or semi annual basis. Personal guarantees of the promoter directors/majo r shareholders should normally be insisted upon. Post sanctions suggestions: Bank should prevent diversion of funds by the promoters. Operating staff should scrutinize the level of inventories/receivables at the time of assessment of wor king capital. The Credit section should carefully watch the warning signals viz. nonpayment of quarterly interest, dishonor of check etc. Effective inspection s ystem should be implemented. BIBLIOGRAPHY & REFERENCES Websites ASAF (1998) Countermeasures to Overcome Asian Economic Crises-I /archives/Analyst/1998/Nov/ASAF-counterMeasurescrises1.htm ICRA Rating of Structu red Obligations Indian Credit Rating Agency Lahiri, Ashok K. Rising NPA s: Where has all the money gone? News paper, journal and magazine Articles Kohli, Renu (2002) The informational quality of financial systems Financial Expres s January 19 2002 Muniappan, G. P (2002a) Indian Banking: Paradigm Shift A regula tory point of view Address at the Bank Economist Conference, Kolkata January 14, 2002 RBI (2001a) Prudential Norms on Income Recognition, Asset Classification and Provisioning - Pertaining to Advances Reserve Bank of India Mumbai. Sept 2001 RB I (2002b) Selected Ratios of Scheduled Commercial Banks: 2000 and 2001 .in, 2002 RBI (2002c) Financial Institutions, 2002