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053),1$/352-(&75(3257
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COMPARATIVE ANALYSIS ONNON PERFORMING ASSETS OF PRIVATE ANDPUBLIC SECTOR BANKS
%
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352-(&77,7/(
COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND
PUBLIC SECTOR BANKS.
$UHSRUWVXEPLWWHGLQSDUWLDOIXOILOOPHQWRIWKH
UHTXLUHPHQWVRI0%$SURJUDP
FACULTY GUIDEProf.RajasreeNandy
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ICFAIBusiness School
KOCHI
SUBMITTED BY$1,1'
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Place: Kochi
Anindya Sankar Kundu
08bs0000328
Acknowledgements
If words are considered to be signs of gratitude then let these words convey the
very same.
I thankProf. RajasreeNandi, ICFAI Business School, Kochi, who has sincerely
supported me with the valuable insights into the completion of this project.
I am grateful to all faculty members of ICFAI Business School, Kochi and my
friends who have helped me in the successful completion of this Management
Research Project.
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TABLE OF CONTENTS
Declaration
3
Acknowledgments
. 4Abstract
. 7
1. Project Details
1.1 Objective of the project
9
1.2 Research
Methodology
. 9
1.3Scope of the project
9
1.4 Sampling Methods
10
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1.5 Limitations of the
project
10
2. Introduction
2.1 Definition of NPA
... 12 2.2 NPAs: An issue for banks and FIs in
India 13
2.3 Indian economy and NPAs
. 13
2.4 Global developments and NPAs
.. 14
2.5 Factors for rise in
NPAs.
15
2.6 Problems due to NPA
.
19
2.7 Types of NPA
. 20
33.. IInnccoommee RReeccooggnniittiioonn
33..11 IInnccoommee RReeccooggnniittiioonn PPoolliiccyy
.................................................................................................................................. 2222
33..22 RReevveerrssaall ooff iinnccoommee
.............................................................................................................................................................. 2222
33..33 Leased Assets
......................................................................................... 2333..44 IInntteerreessttAApppplliiccaattiioonn
.......................................................................................................................................................... 2233
33..55 RReeppoorrttiinngg ooff NNPPAAss
.............................................................................................................................................................. 2244
44.. AAsssseettss CCllaassssiiffiiccaattiioonnss
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44..11 SSuubb--ssttaannddaarrdd AAsssseettss
.......................................................................................................................................................... 2266
44..22 DDoouubbttffuull AAsssseettss
.......................................................................................................................................................................... 3300
44..33 LLoossss AAsssseettss
............................................................................................................................................................................................ 3311
55.. IImmppaacctt ooffNNPPAA &&Preventive Measurement for NPA
5.1 Impact of
NPA........................................................................................ 33
5.2 Early symptoms
..................................................................................... 34
5.3 Preventive Measurement for NPA
.................................................. 35
6. Tools for recovery of NPA
6.1 Willful Default
39
6.2 Inability to Pay
. 40
6.3 Restructuring / Rescheduling of Loans
.. 41
6.4 Treatment of Restructured Standard Accounts
.. 41
6.5 Treatment of restructured sub-standard accounts
. 42
6.6 Up gradation of restructured accounts
. 426.7 General
.. 43
6.8 Income recognition
. 43
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6.9 Funded Interest
.. 43
6.9.1 Conversion into equity, debentures or any other instrument
44
6.9.2 Provisioning
44
7. Special Cases7.1.1 Accounts with temporary deficiencies
46
7.1.2 Accounts regularized near about the balance sheet date
.. 46
7.1.3 Asset Classification to be borrower-wise and not facility-
wise 7.1.4 Accounts where there is erosion in the value ofsecurity 47
7.1.5 Advances to PACS/FSS ceded to Commercial Banks
.. 47
7.1.6 Advances against Term Deposits, NSCs, KVP/IVP
. 48
7.1.7 Loans with moratorium for payment of interest
. 48
7.1.8 Agricultural advances
48
7.1.9 Government guaranteed
advances. 49
7.2.1 Take-out Finance
49
7.2.2 Post-shipment Supplier's Credit
50
7.2.3 Export Project Finance.. 50
7.2.4 Advances under rehabilitation approved by BIFR/ TLI
.. 50
7.2.5 Role of ARCIL
.. 51
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8. Data Analysis and interpretation.. 52
9. Annexure
.. 64
10. Bibliography
65
ABSTRACT
The accumulation of huge non-performing assets in banks hasassumed greatimportance. The depth of the problem of bad debts wasfirst realized only in
early 1990s. The magnitude of NPAs in banks andfinancial institutions is over
Rs.1, 50,000 crore.
While gross NPA reflects the quality of the loans made bybanks, net NPA
shows the actual burden of banks. Now it is increasinglyevident that the major
defaulters are the big borrowers coming from thenon-priority sector. The
banks and financial institutions have to take theinitiative to reduce NPAs in a
time bound strategic approach.
Public sector banks figure prominently in the debate not onlybecause they
dominate the banking industries, but also since they havemuch larger NPAs
compared with the private sector banks. This raises aconcern in the industry
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and academia because it is generally felt thatNPAs reduce the profitability of a
bank, weaken its financial health anderode its solvency.
For the recovery of NPAs a broad framework has evolved forthe management
of NPAs under which several options are provided fordebt recovery and
restructuring. Banks and FIs have the freedom todesign and implement theirown policies for recovery and write-offincorporating compromise and
negotiated settlements.
CHAPTER-1
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Project Details
1.1OBJECTIVES OF THE STUDY
The basic idea behind undertaking the Grand Project on NPA was to:
To evaluate NPAs (Gross and Net) in different banks.
To study the past trends of NPA.
To calculate the weighted of NPA in risk management in Banking
To analyze financial performance of banks at different level of NPA
1.2RESEARCH METHODOLOGY
Theresearch methodology adopted forcarrying outthestudy were
In this project Descriptive research methodologies were use.
At the first stage theoretical study is attempted.
At the second stage Historical study is attempted.
At the Third stage Comparative study of NPA is undertaken.
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1.3Scope ofthe Study
Concept of Non-Performing Asset
Guidelines
Impact of NPAs
Reasons for NPAs
Preventive Measures
Tools to manage NPAs
1.4Sampling Methods
To prepare this Project we took five banks from public sector as well as five
banks from private sector.
1.5Limitations ofthestudy
It was critical for me 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.
Since my study is based on the secondary data, the practical operations
as related to the NPAs are adopted by the banks are not learned.
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Since the Indian banking sector is so wide so it was not possible for me
to cover all the banks of the Indian banking sector.
CHAPTER-2
INTRODUCTION
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22.. IInnttrroodduuccttiioonn
NPA. The three letters Strike terror in banking sector and business circle today.
NPA is short form of Non Performing Asset. The dreaded NPA rule says
simply this: when interest or other due to a bank remains unpaid for more
than 90 days, the entire bank loan automatically turns a non performing asset.
The recovery of loan has always been problem for banks and financial
institution. To come out of these first we need to think is it possible to avoid
NPA, no cannot be then left is to look after the factor responsible for it and
managing those factors.
22..11DDeeffiinniittiioonnss::
An asset, including a leased asset, becomes non-performing when it ceases to
generate income for the bank.
A non-performing asset (NPA) was defined as a credit facility in respect of
which the interest and/ or instalment of principal has remained past due for a
specified period of time.
BWith a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt the 90 days overdue
norm for identification of NPAs, from the year ending March 31, 2004.
Accordingly, with effect from March 31, 2004, a non-performing asset (NPA)
shall be a loan or an advance where;
Interest and/ or instalment of principal remain overdue for a period of
more than 90 days in respect of a term loan,
The account remains out of order for a period of more than 90 days, in
respect of an Overdraft/Cash Credit (OD/CC),
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The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,
Interest and/or instalment of principal remains overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes.
As a facilitating measure for smooth transition to 90 days norm, banks have
been advised to move over to charging of interest at monthly rests, by April 1,
2002. However, the date of classification of an advance as NPA should not be
changed on account of charging of interest at monthly rests. Banks should,
therefore, continue to classify an account as NPA only if the interest charged
during any quarter is not serviced fully within 180 days from the end of the
quarter with effect from April 1, 2002 and 90 days from the end of the quarter
with effect from March 31, 2004.
2.2NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA
To start with, performance in terms of profitability is a benchmark for any
business enterprise including the banking industry. However, increasing NPAs
have a direct impact on banks profitability as legally banks are not allowed to
book income on such accounts and at the sometime are forced to make
provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also,
with increasing deposits made by the public in the banking system, the banking
industry cannot afford defaults by borrower s since NPAs affects the
repayment capacity of banks.
Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the
system through various rate cuts and banks fail to utilize this benefit to its
advantage due to the tear of burgeoning non -performing assets.
2.3INDIAN ECONOMY AND NPAs
Undoubtedly the world economy has slowed down, recession is at its peak,
globally stock markets have tumbled and business itself is getting hard to do.
The Indian economy has been much affected due to high fiscal deficit, poorinfrastructure facilities, sticky legal system, cutting of exposures to emerging
markets by FIs, etc.
Further, international rating agencies like, Standard & Poor have lowered
Indias credit rating to sub-investment grade. Such negative aspects have often
outweighed positives such as increasing forex reserves and a manageable
inflation rate.
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Under such a situation, it goes without saying that banks are no exception and
are bound to face the heat of a global downturn. One would be surprised to
know that the banks and financial instit ution in India hold nonperforming
assets worth Rs. 110000 crores Bankers have realized that unless the level of
NPAs is reduced drastically, they will find it difficult to survive.
2.4GLOBAL DEVELOPMENTS AND NPAs
The core banking business is of mobi lizing the deposits and utilizing it for
lending to industry. Lending business is generally encouraged because it hasthe effect of funds being transferred from the system to productive purposes,
which results into economic growth.
However lending also carries credit risk, which arises from the failure of
borrower to fulfill its contractual obligations either during the course of a
transaction or on a future obligation.
A question that arises is how much risk can a bank afford to take? Recent
happenings in the business world -Enron, WorldCom, Xerox, Global Crossing do
not give much confidence to banks. In case after case, these giant corporatebecan1e bankrupt and failed to provide investors with clearer and more
complete information thereby introducing a degree of risk that many investors
could neither anticipate nor welcome. The history of financial institutions also
reveals the fact that the biggest banking failures were due to credit risk. Due to
this, banks are restricting their lending operations to secured avenues only
with adequate collateral on which to fall back upon in a situation of default.
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2.5FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs.
But the problem of NPAs is more in public sector banks when compared to
private sector banks and foreign banks. The NPAs in PSB are growing due to
external as well as internal factors .
2.5.1EXTERNAL FACTORS:-
Ineffectiverecovery tribunal
The Govt. has set of numbers of recovery tribunals, which works for
recovery of loans and advances. Due to their negligence andineffectiveness in their work the bank suffers the consequence of non-
recover, thereby reducing their profitability and liquidity.
Willful Defaults
There are borrowers who are able to pay back loans but are intentionally
withdrawing it. These groups of people should be identified and proper
measures should be taken in order to get back the money extended to
them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the
PSBs. every now and then India is hit by major natural calamities thus
making the borrowers unable to pay back there loans. Thus the bank has
to make large amount of provisions in order to compensate those loans,
hence end up the fiscal with a reduced profit.
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Mainly ours farmers depends on rain fall for cropping. Due to
irregularities of rain fall the farmers are not to achieve the production
level thus they are not repaying the loans.
Industrial sickness
Improper project handling , ineffective management , lack of adequateresources , lack of advance technology , day to day changing govt.
Policies give birth to industrial sickness. Hence the banks that finance
those industries ultimately end up with a low recovery of their loans
reducing their profit and liquidity.
Lack ofdemand
Entrepreneurs in India could not foresee their product demand and
starts production which ultimately piles up their product thus makingthem unable to pay back the money they borrow to operate these
activities. The banks recover the amount by selling of their assets,whichcovers a minimum label. Thus the banks record the non-recovered part asNPAs and has to make provision for it.
Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thusit has to cope with the changing principles and policies for the regulation ofthe rising of NPAs.
The fallout of handloom sector is continuing as most of the weaversCo-operative societies have become defunct largely due to withdrawal of statepatronage. The rehabilitation plan worked out by the Central government torevive the handloom sector has not yet been implemented. So the over duesdue to the handloom sectors are becoming NPAs.
2.5.2INTERNAL FACTORS:-
Defective Lending process
There are three cardinal principles of bank lending that have been
followed by the commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability
i. Principles ofsafety :-
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By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the
borrowers: a) Capacity to pay b)Willingnessto pay
a) Capacity to pay depends upon:
1. Tangible assets
2. Success in business
b) Willingness to pay depends on:1. Character
2. Honest
3. Reputation of borrower
The banker should, therefore take utmost care in ensuring that the
enterprise or business for which a loan is sought is a sound one and the
borrower is capable of carrying it out successfully .He should be a person
of integrity and good character.
Inappropriatetechnology
Due to inappropriate technology and management information system,
market driven decisions on real time basis cannot be taken. Proper MIS
and financial accounting system is not implemented in the banks, which
leads to poor credit collection, thus NPA. All the branches of the bank
should be computerized.
Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis is
another reason for rise in NPAs. While providing unsecured advances the
banks depend more on the honesty, integrity, and financial soundness
and credit worthiness of the borrower.
y Banks should consider the borrowers own capital investment.
y it should collect credit information of the borrowers from_
a. From bankers.
b. Enquiry from market/segment of trade, industry, business.
c. From external credit rating agencies.
y Analyze the balance sheet.
True picture of business will be revealed on analysis of profit/loss
a/c and balance sheet.
y Purpose of the loan
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When bankers give loan, he should analyze the purpose of the
loan. To ensure safety and liquidity, banks should grant loan for
productive purpose only. Bank should analyze the profitability,
viability, long term acceptability of the project while financing.
Poorcreditappraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poorcredit appraisal the bank gives advances to those who are not able to
repay it back. They should use good credit appraisal to decrease the
NPAs.
Managerial deficiencies
The banker should always select the borrower very carefully and should
take tangible assets as security to safe guard its interests. Whenaccepting securities banks should consider the_
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
The banker should follow the principle of diversification of risk
based on the famous maxim do not keep all the eggs in one basket; it
means that the banker should not grant advances to a few big farmsonly or to concentrate them in few industries or in a few cities. If a new
big customer meets misfortune or certain traders or industries affected
adversely, the overall position of the bank will not be affected.
Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM (117.77lakhs),
and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).
Absence ofregularindustrial visit
The irregularities in spot visit also increases the NPAs. Absence of
regularly visit of bank officials to the customer point decreases the
collection of interest and principals on the loan. The NPAs due to willful
defaulters can be collected by regular visits.
Re loaning process
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Non remittance of recoveries to higher financing agencies and re loaning
of the samehave already affected the smooth operation of the credit
cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs
of OSCB is increasing day by day.
2.6PROBLEMS DUE TO NPA
1. Owners do not receive a market return on their capital .in the worstcase, if the banks fails, owners lose their assets. In modern times this
may affect a broad pool of shareholders.
2. Depositors do not receive a market return on saving. In the worst case if
the bank fails, depositors lose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interest
rates, lower deposit rates and higher lending rates repress saving and
financial market, which hamper economic growth.
4. Nonperforming loans epitomize bad investment. They misallocate creditfrom good projects, which do not receive funding, to failed projects. Bad
investment ends up in misallocation of capital, and by extension, labor
and natural resources.
Nonperforming asset may spill over the banking system and contract the
money stock, which may lead to economic contraction. This spillover effect can
channelize through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can jam payment across the country.
b) Illiquidity constraints bank in paying dep ositors
c) Undercapitalized banks exceed the banks capital base.
''OOuutt ooffOOrrddeerr''ssttaattuuss::
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An account should be treated as 'out of order' if the outstanding
balance remains continuously in excess of the sanctioned limit/drawing power.
In cases where the outstanding balance in the principal operating account is
less than the sanctioned limit/drawing power, but there are no credits
continuously for six months as on the date of Balance Sheet or credits are not
enough to cover the interest debited during the same period, these accounts
should be treated as 'out of order'.
OOvveerrdduuee::
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.
22..77TTyyppeess ooffNNPPAA
AA]] GGrroossssNNPPAA
BB]] NNeettNNPPAA
AA]] GGrroossssNNPPAA::
Gross NPAs are the sum total of all loan assets that are classified as NPAs as
per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of
the loans made by banks. It consists of all the non-standard assets like as sub-
standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
GrossNPAsRatio]GrossNPAs
Gross Advances
BB]] NNeettNNPPAA::
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burdenof banks. Since in India,
bank balance sheets contain a huge amount of NPAs and the process of
recovery and write off of loans is very time consuming, the provisions the
banks have to make against the NPAs according to the central bank guidel ines,
are quite significant. That is why the difference between gross and net NPA is
quite high.
It can be calculated by following
NetNPAs] GrossNPAs Provisions
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Gross Advances - Provisions
CCHHAAPPTTEERR--33
IINNCCOOMMEE RREECCOOGGNNIITTIIOONN
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33.. IINNCCOOMMEE RREECCOOGGNNIITTIIOONN
33..11.. IInnccoommee rreeccooggnniittiioonn PPoolliiccyy
The policy of income recognition has to be objective and based on the
record of recovery. Internationally income from non-performing assets
(NPA) is not recognised on accrual basis but is booked as income onlywhen it is actually received. Therefore, the banks should not charge and
take to income account interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs, KVPs
and Life policies may be taken to incom e account on the due date,
provided adequate margin is available in the accounts.
Fees and commissions earned by the banks as a result of re-negotiations
or rescheduling of outstanding debts should be recognised on an accrual
basis over the period of time covered by the re-negotiated or
rescheduled extension of credit.
If Government guaranteed advances become NPA, the interest on such
advances should not be taken to income account unless the interest has
been realised.
33..22.. RReevveerrssaall ooffiinnccoommee::
If any advance, including bills purchased and discounted, becomes NPA
as at the close of any year, interest accrued and credited to income
account in the corresponding previous year, should bereversed or
provided for if the same is not realised. This will apply to Government
guaranteedaccountsalso.
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In respect of NPAs, fees, commission and similar income that have
accrued should cease to accrue in the current period and should be
reversed or provided for with respect to past periods, if uncollected.
3.3Leased Assets
The net lease rentals (finance charge) on the leased asset accrued and
credited to income account before the asset became non-performing, and
remaining unrealised, should be reversed or provided for in the current
accounting period.
The term 'net lease rentals' would mean the amount of finance charge
taken to the credit of Profit & Loss Account and would be worked out as
gross lease rentals adjusted by amount of statutory depreciation and lease
equalisation account.
As per the 'GuidanceNote on Accounting for Leases' issued by the
Council of the Institute of Chartered Accountants of India (ICAI), a separate
Lease Equalisation Account should be opened by the banks with a
corresponding debit or credit to Lease Adjustment Account, as the case
may be. Further, Lease Equalisation Account should be transferred everyyear to the Profit & Loss Account and disclosed separately as a deduction
from/addition to gross value of lease rentals shown under the head 'Gross
Income'.
AApppprroopprriiaattiioonn ooffrreeccoovveerryyiinnNNPPAAss
Interest realised on NPAs may be taken to income account provided the
credits in the accounts towards interest are not out of fresh/ additional
credit facilities sanctioned to the borrower concerned.
In the absence of a clear agreement between the bank and the borrower
for the purpose of appropriation of recoveries in NPAs (i.e. towards
principal or interest due), banks should adopt an accounting principle
and exercise the right of appropriation of recoveries in a uniform and
consistent manner.
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33..44 IInntteerreesstt AApppplliiccaattiioonn::
There is no objection to the banks using their own discretion in debiting
interest to an NPA account taking the same to Interest Suspense Account or
maintaining only a record of such interest in proforma accounts.
33..55 RReeppoorrttiinngg ooffNNPPAAss
Banks are required to furnish a Report on NPAs as on 31st March each
year after completion of audit. The NPAs would relate to the banks
global portfolio, including the advances at the foreign branches. The
Report should be furnished as per the prescribed format given in the
Annexure I.
While reporting NPA figures to RBI, the amount held in interest suspense
account, should be shown as a deduction from gross NPAs as well as
gross advances while arriving at the net NPAs. Banks which do not
maintain Interest Suspense account for parking interest due on non -
performing advance accounts, may furnish the amount of interest
receivable on NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write off, if
any, should be reduced from the outstanding gross advances and gross
NPAs to eliminate any distortion in the quantum of NPAs being reported.
REPORTING FORMAT FOR NPA GROSS AND NET NPA
Annexure-I (Page no-64)
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CCHHAAPPTTEERR--44
--AAsssseett CCllaassssiiffiiccaattiioonn
-- PPrroovviissiioonniinngg NNoorrmmss
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44..AAsssseett CCllaassssiiffiiccaattiioonn
CCaatteeggoorriieess ooffNNPPAAss
SSttaannddaarrdd AAsssseettss::
Standard assets are the ones in which the bank is receiving interest as well as
the principal amount of the loan regularly from the customer. Here it is also
very important that in this case the arrears of interest and the principal
amount of loan do not exceed 90 days at the end of financial year. If asset fails
to be in category of standard asset that is amount due more than 90 days thenit is NPA and NPAs are further need to classify in sub categories.
Banks are required to classify non-performing assets further into the following
three categories based on the period for which the asset has remained non-
performing and the reliabilityof the dues:
((11 )) SSuubb--ssttaannddaarrddAAsssseettss
((22 )) DDoouubbttffuullAAsssseettss
((33 )) LLoossss AAsssseettss
(( 11)) SSuubb--ssttaannddaarrdd AAsssseettss::----
With effect from 31 March 2005, a substandard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following
features are exhibited by substandard assets: the current net worth of the
borrowers / guarantor or the current market value of the security charged is
not enough to ensure recovery of the dues to the banks in full; and the asset
has well-defined credit weaknesses that jeopardise the liquidation of the debt
and are characterised by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
(( 22)) DDoouubbttffuull AAsssseettss::----
A loan classified as doubtful has all the weaknesses inherent in assets that
were classified as sub-standard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently
known facts, conditions and values highly questionable and improbable.
With effect from March 31, 2005, an asset would be classified as doubtful if it
remained in the sub-standard category for 12 months.
( 3 ) LLoossss AAsssseettss::----
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A loss asset is one which considered uncollectible and of such little value that
its continuance as a bankable asset is not warranted- although there may be
some salvage or recovery value. Also, these assets would have been identified
as loss assets by the bank or internal or external auditors or the RBI
inspection but the amount would not have been written -off wholly.
PPrroovviissiioonniinngg NNoorrmmss
GGeenneerraall
In order to narrow down the divergences and ensure adequate
provisioning by banks, it was suggested that a bank's statutory auditors,
if they so desire, could have a dialogue with RBI's Regional Office/
inspectors who carried out the bank's inspectio n during the previous
year with regard to the accounts contributing to the difference.
Pursuant to this, regional offices were advised to forward a list ofindividual advances, where the variance in the provisioning
requirements between the RBI and the bank is above certain cut off
levels so that the bank and the statutory auditors take into account the
assessment of the RBI while making provisions for loan loss, etc.
The primary responsibility for making adequate provisions for any
diminution in the value of loan assets, investment or other assets is that
of the bank managements and the statutory auditors. The assessment
made by the inspecting officer of the RBI is furnished to the bank toassist the bank management and the statutory auditors in taking a
decision in regard to making adequate and necessary provisions in terms
of prudential guidelines.
In conformity with the prudential norms, provisions should be made on
the non-performing assets on the basis of classification of assets into
prescribed categories as detailed in paragraphs 4 supra. Taking into
account the time lag between an account becoming doubtful of
recovery, its recognition as such, the realisation of the security and theerosion over time in the value of security charged to the bank , the banks
should make provision against sub-standard assets, doubtful assets and
loss assets as below:
LLoossss aasssseettss::
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The entire asset should be written off. If the assets are permitted to remain in
the books for any reason, 100 percent of the outstanding should be provided
for.
DDoouubbttffuull aasssseettss::
100 percent of the extent to which the advance is not covered by the
realisable value of the security to which the bank has a valid recourse
and the realisable value is estimated on a realistic basis.
In regard to the secured portion, provision may be made on the
following basis, at the rates ranging from 20 percent to 50 percent of the
secured portion depending upon the period for which the asset has
remained doubtful:
Period for which theadvance has
beenconsideredasdoubtful
Provision
requirement(%)
Up to one year 20
One to three years 30
More than three years:
(1)Outstanding stock of NPAs as
on March 31, 2004.
(2)Advances classified as
doubtful more than three
years on or after April 1, 2004.
60% with effect from
March 31,2005.
75% effect from March
31, 2006.
100% with effect from
March 31, 2007.
Additional provisioning consequent upon the change in the definition of
doubtful assets effective from March 31, 2003 has to be made in phases
as under:
As on31.03.2003, 50 percent of the additional provisioning requirement
on the assets which became doubtful on account of new norm of 18
months for transition from sub-standard asset to doubtful category.
As on 31.03.2002, balance of the provisions not made during the
previous year, in addition to the provisions needed, as on 31.03.2002.
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Banks are permitted to phase the additional provisioning consequent
upon the reduction in the transition period from substandard to
doubtful asset from 18 to 12 months over a four year period
commencing from the year ending March 31, 2005, with a minimum of
20% each year.
Note: Valuation of Security for provisioning purposes
With a view to bringing down divergence arising out of difference in
assessment of the value of security, in cases of NPAs with balance of Rs. 5
crore and above stock audit at annual intervals by external agencies appointed
as per the guidelines approved by the Board would be mandatory in order to
enhance the reliability on stock valuation. Valuers appointed as per the
guidelines approved by the Board of Directors should get collaterals such as
immovable properties charged in favour of the bank valued once in three
years.
SSuubb--ssttaannddaarrddaasssseettss::
A general provision of 10 percent on total outstanding should be made
without making any allowance for DICGC/ECGC guarantee cover and securities
available.
SSttaannddaarrddaasssseettss::
From the year ending 31.03.2000, the banks should make a general
provision of a minimum of 0.40 percent on standard assets on global
loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at
net NPAs.
The provisions towards Standard Assets need not be netted from gross
advances but shown separately as 'Contingent Provisions against
Standard Assets' under 'Other Liabilities and Provisions - Others' in
Schedule 5 of the balance sheet.
FFllooaattiinngg pprroovviissiioonnss::
Some of the banks make a 'floating provision' over and
above the specific provisions made in respect of accounts identified as NPAs.
The floating provisions, wherever available, could be set-off against provisions
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required to be made as per above stated provisioning guidelines. Considering
that higher loan loss provisioning adds to the overall financial strength of the
banks and the stability of the financial sector, banks are urged to voluntarily
set apart provisions much above the minimum prudential levels a s a desirable
practice.
PPrroovviissiioonnss oonn LLeeaasseedd AAsssseettss::
LLeeaasseess aarree ppeeccuulliiaarr ttrraannssaaccttiioonnss wwhheerree tthhee aasssseettss aarree nnoott rreeccoorrddeedd iinn tthhee
bbooookkss ooff tthhee uusseerr ooff ssuucchh aasssseettss aass AAsssseettss,, wwhheerreeaass tthheeyy aarree rreeccoorrddeedd iinn tthhee
bbooookkss oofftthhee oowwnneerr eevveenn tthhoouugghh tthhee pphhyyssiiccaall eexxiisstteennccee oofftthhee aasssseett iiss wwiitthh tthhee
uusseerr ((lleesssseeee)).. ____((AASS1199 IICCAAII))
Sub-standardassets: -
10 percent of the 'netbookvalue'.
As per the 'Guidance Note on Accounting for Leases' issued by the ICAI,
'Gross book value' of a fixed asset is its historical cost or other amount
substituted for historical cost in the books of account or financial statements.
Statutory depreciation should be shown separately in the Profit & Loss
Account. Accumulated depreciation should be deducted from the Gross Book
Value of the leased asset in the balance sheet of the lesser to arrive at the 'net
bookvalue'.
Also, balance standing in 'Lease Adjustment Account' should be adjusted in
the 'net book value' of the leased assets. The amount of adjustment in respect
of each class of fixed assets may be shown either in the main balance sheet or
in the Fixed Assets Schedule as a separate column in the section related to
leased assets.
Doubtful assets:-
100 percent of the extent to which the finance is not secured by the realisablevalue of the leased asset.Realisable value to be estimated on a realistic basis. In
additionto theabove provision, the following provision on the netbookvalue
of the secured portion should be made, depending upon the period for which
asset has been doubtful:
Period %age of provision
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Up to one year 20
One to three years 30
More than three years 50
Lossassets:-The entire asset should be written-off. If for any reason, an asset is allowed to
remain in books, 100 percent of the sum of the net investment in the lease and
the unrealised portion of finance income net of finance charge component
should be provided for. (Netbookvalue')
GGuuiiddeelliinneess ffoorrPPrroovviissiioonnss uunnddeerr SSppeecciiaall CCiirrccuummssttaanncceess
GGoovveerrnnmmeenntt gguuaarraanntteeeeddaaddvvaanncceess
With effect from 31 March 2000, in respect of advances sanctioned against
State Government guarantee, if the guarantee is invoked and remains in
default for more than two quarters (180 days at present), the banks should
make normal provisions as prescribed in paragraph 4.1.2 above.
As regards advances guaranteed by State Governments, in respect of which
guarantee stood invoked as on 31.03.2000, necessary provision was allowed tobe made, in a phased manner, during the financial years ending 31.03.2000 to
31.03.2003 with a minimum of25 percent each year.
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CCHHAAPPTTEERR--55
--IImmppaacctt ooff NNPPAA
-Preventive Measurement for NPA
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55.. IImmppaacctt ooffNNPPAA
PPrrooffiittaabbiilliittyy::--
NPA means booking of money in terms of bad asset, which occurred due to
wrong choice of client. Because of the money getting blocked the prodigality of
bank decreases not only by the amount of NPA but NPA lead to opportunity
cost also as that much of profit invested in some return earning project/asset.
So NPA doesnt affect current profit but also future stream of profit, which
may lead to loss of some long-term beneficial opportunity. Another impact of
reduction in profitability is low ROI (return on investment), which adversely
affect current earning of bank.
LLiiqquuiiddiittyy::--
Money is getting blocked, decreased profit lead to lack of enough cash at hand
which lead to borrowing money for shot\rtes period of time which lead to
additional cost to the company. Difficulty in operating the functions of bank is
another cause of NPA due to lack of money. Routine payments and dues.
IInnvvoollvveemmeenntt ooffmmaannaaggeemmeenntt::--
Time and efforts of management is another indirect cost which bank has to
bear due to NPA. Time and efforts of management in handling and managing
NPA would have diverted to some fruitful activities, which would have given
good returns. Now days banks have special employees to deal and handle
NPAs, which is additional cost to the bank.
CCrreeddiitt lloossss::--
Bank is facing problem of NPA then it adversely affect the value of bank in
terms of market credit. It will lose its goodwill and brand image and credit
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which have negative impact to the people who are putting their money in the
banks.
5.2 Early symptomsby which onecanrecognizea
performing assetturning into Non-performing asset:-
Fourcategories ofearly symptoms:-
---------------------------------------------------
(1) Financial:
Non-payment of the very first instalment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts. Irregularity in instalment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that
instalment.
While monitoring the accounts it is found that partial amount is diverted
to sister concern or parent company.
(2) Operational andPhysical:
If information is received that the borrower has either initiated the
process of winding up or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where
borrower conduct his business.
Frequent changes in plan.
Non-payment of wages.
(3) Attitudinal Changes:
Avoidance of contact with bank.
Problem between partners.
(4) Others:
Changes in Government policies.
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Death of borrower.
Competition in the market.
5.3 Preventive Measurement forNPA
Early Recognition of the Problem:-
Invariably, by the time banks start their efforts to get involved in a revival
process, its too late to retrieve the situation- both in terms of rehabilitation of
the project and recovery of banks dues. Identification of weakness in the very
beginning that is: When the account starts showing first signs of weakness
regardless of the fact that it may not have become NPA, is imperative.
Assessment of the potential of revival may be done on the basis of a techno-
economic viability study. Restructuring should be attempted where, after an
objective assessment of the promoters intention, banks are convinced of a
turnaround within a scheduled timeframe. In respect of totally unviable units
as decided by the bank, it is better to facilitate winding up/ selling of the unit
earlier, so as to recover whatever is possible through legal means before the
security position becomes worse.
Identifying Borrowers with Genuine Intent:-
Identifying borrowers with genuine intent from those who are non- serious
with no commitment or stake in revival is a challenge confronting bankers.
Here the role of frontline officials at the branch level is paramount as they are
the ones who has intelligent inputs with regard to promoters sincerity, and
capability to achieve turnaround. Based on this objective assessment, banks
should decide as quickly as possible whether it would be worthwhile to commit
additional finance.
In this regard banks may consider having Special Investigationof all financial
transaction or business transaction, books of account in order to ascertain real
factors that contributed to sickness of the borrower. Banks may have penal of
technical experts with proven expertise and track record of preparing techno-
economic study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow
or sudden requirement of additional fund may be entertained at branch level,
and for this purpose a special limit to such type of casess hould be decided. This
will obviate the need to route the additional funding through the controlling
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offices in deserving cases, and help avert many accounts slipping into NPA
category.
Timeliness and Adequacy of response:-
Longer the delay in response, grater the injury to the account and the asset.
Time is a crucial element in any restructuring or rehabilitation activity. The
response decided on the basis of techno-economic study and promoters
commitment, has to be adequate in terms of extend of additional funding and
relaxations etc. under the restructuring exercise. The package of assistance
may be flexible and bank may look at the exit option.
Focus on Cash Flows:-
While financing, at the time of restructuring the banks may not be guided by
the conventional fund flow analysis only, which could yield a potentially
misleading picture. Appraisal for fresh credit requirements may be done by
analysing funds flow in conjunction with the Cash Flow rather than only on the
basis of Funds Flow.
Management Effectiveness:-
The general perception among borrower is that it is lack of finance that leads
to sickness and NPAs. But this may not be the case all the time. Management
effectiveness in tackling adverse business conditions is a very important aspect
that affects a borrowing units fortunes. A bank may commit additional finance
to an aling unit only after basic viability of the enterprise also in the context of
quality of management is examined and confirmed. Where the default is due
to deeper malady, viability study or investigative audit should be done it will
be useful to have consultant appointed as early as possible to examine this
aspect. A proper techno economic viability study must thus become the basis
on which any future action can be considered.
Multiple Financing:-
A. During the exercise for assessment of viability and restructuring, a
Pragmaticand unifiedapproach by all the lending banks/ FIs as also sharing of
all relevant information on the borrower would go a long way toward overall
success of rehabilitation exercise, given
the probability of success/failure.
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B. In some default cases, where the unit is still working, the bank should make
sure that it captures the cash flows (there is a tendency on part of the
borrowers to switch bankers once they default, for fear of getting their cash
flows forfeited), and ensure that such cash flows are used for working capital
purposes. Toward this end, there should be regular flow of information amongconsortium members. A bank, which is not part of the consortium,may not be
allowed to offer credit facilities to such defaulting clients. Current account
facilities may also be denied at no consortium banks to such clients and
violation may attract penal action. The Credit Information Bureau of India
Ltd.(CIBIL) may be very useful for meaningful information exchange on
defaulting borrowers once the setup becomes fully operational.
C. In a forum of lenders, the priority of each lender will be different.While oneset of lenders may be willing to wait for a longer time torecover its dues,
another lender may have a much shortertimeframe in mind. So it is possible
that the letter categories oflenders may be willing to exit, even a t a cost by a
discountedsettlement of the exposure. Therefore, any plan
forrestructuring/rehabilitation may take this aspect into account.
D. Corporate DebtRestructuring mechanism has beeninstitutionalized in 2001
to provide a timely and transparent systemfor restructuring of the corporate
debt of Rs. 20 crore and abovewith the banks and FIs on a voluntary basis and
outside the legalframework. Under this system, banks may greatly benefit intermsof restructuring of large standard accounts (potential NPAs) andviable
sub-standard accounts with consortium/multiple bankingarrangements.
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CCHHAAPPTTEERR--66
Tools For recovery of npa
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Once NPA occurred, one must come out of it or it should be managed inmost
efficient manner. Legal ways and means are there to overcome andmanage
NPAs. We will look into each one of it.
6.1Willful Default:-
A] Lok Adalat and Debt Recovery Tribunal
B] Securitization Act
C] Asset Reconstruction
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Lok Adalat:
Lok Adalat institutions help banks to settle disputes involvingaccount in
doubtful and loss category, with outstanding balance of Rs.5 lakh for
compromise settlement under Lok Adalat. Debt recoverytribunals have been
empowered to organize Lok Adalat to decide oncases of NPAs of Rs. 10 lakh
and above. This mechanism has proved tobe quite effective for speedy justiceand recovery of small loans. Theprogress through this channel is expected to
pick up in the coming years.
Debt Recovery Tribunals (DRT):
The recovery of debts due tobanks and financial institution passed in March
2000 has helped instrengthening the function of DRTs. Provision for placement
of more thanone recovery officer, power to attach defendants
property/assetsbefore judgment, penal provision for disobedience of tribunals
order or for breachof any terms of order and appointment of receiver withpower ofrealization, management, protection and preservation of property are
expected to provide necessary teeth to the DRTs and speed up therecovery of
NPAs in the times to come. DRTs which have been set up by
the Government to facilitate speedy recovery by banks/DFIs, have notbeen
able make much impact on loan recovery due to variety of reasonslike
inadequate number, lack of infrastructure, under staffing and
frequentadjournment of cases. It is essential that DRT mechanism is
strengthenedand vested with a proper enforcement mechanism to enforce
their orders.Non observation of any order passed by the tribunal shouldamount tocontempt of court, the DRT should have right to initiate
contemptproceedings. The DRT should empowered to sell asset of the
debtorcompanies and forward the proceed to the winding up court
fordistribution among the lenders.
6.2Inability to Pay
Consortium arrangements:
Asset classification of accounts under consortium should be based on the
record ofrecovery oftheindividual memberbanksand other aspects having abearing on therecoverability of the advances . Where the remittances by the
borrowerunder consortium lending arrangements are pooled with one bank
and/orwhere the bank receiving remittances is not parting with the share of
othermember banks, the account will be treated as not serviced in the books
ofthe other member banks and therefore, be treated as NPA. The
banksparticipating in the consortium should, therefore, arrange to get their
shareof recovery transferred from the lead bank or get an express consent
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fromthe lead bank for the transfer of their share of recovery, to ensure
properasset classification in their respective books.
6.3Restructuring / Rescheduling of Loans
A standard asset where the terms of the loan agreement regarding Interest
and principal have been renegotiated or rescheduled after commencement of
production should be classified as sub-standard andshould remain in such
category for at least one year of satisfactoryperformance under therenegotiated or rescheduled terms. In the case ofsub-standard and doubtful
assets also, rescheduling does not entitle abank to upgrade the quality of
advance automatically unless there issatisfactory performance under the
rescheduled / renegotiated terms.Following representations from banks that
the foregoing stipulations deterthe banks from restructuring ofstandardand
sub-standard loanassets even though the modification of terms might not
jeopardize theassurance of repayment of dues from the borrower, the norms
relating torestructuring of standard and sub-standard assets were reviewed in
March2001. In the context of restructuring of the accounts, the following
stagesat which the restructuring / rescheduling / renegotiation of the terms of
loan agreement could take place, can be identified:
1) Before commencement of commercial production;
2) After commencement of commercial production but before the asset has
been classified as substandard,
3) After commencement of commercial production and after the asset has
been classified as substandard.
In each of the foregoing three stages, the rescheduling, etc., of principaland/or
of interest could take place, with or without sacrifice, as part of
therestructuring package evolved.
6.4 Treatment of Restructured Standard Accounts:
A rescheduling of the installments of principal alone, at any of theaforesaid
first two stages would not cause a standard asset to be classified in the
substandard category provided the loan/credit facility isfully secured.
A rescheduling of interest element at any of the foregoing first twostageswould not cause an asset to be downgraded to substandardcategory subject to
the condition that the amount of sacrifice, if any, in theelement of interest,
measured in presentvalueterms, is either writtenoff or provision is made to
the extent of the sacrifice involved. For thepurpose, the future interest due as
per the original loan agreement inrespect of an account should be discounted
to the present value at a rateappropriate to the risk category of the borrower
(i.e., current PLR+ theappropriate credit risk premium for the borrower-
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category) and comparedwith the present value of the dues expected to be
received under therestructuring package, discounted on the same basis.
In case there is a sacrifice involved in the amount of interest inpresent value
terms, as at (b) above, the amount of sacrifice should eitherbe written off or
provision madeto the extent of the sacrifice involved.
6.5 Treatment of restructured sub-standard accounts:
A rescheduling of the installments of principal alone would render asub-
standard asset eligible to be continued in the sub-standard categoryfor the
specified period, providedthe loan/credit facility is fully secured.
A rescheduling of interest element would render a sub-standardasset eligible
to be continued to be classified in substandard categoryfor the specified
period subject to the condition that the amount ofsacrifice, if any, in the
element of interest, measuredin presentvalueterms, is either written off or
provision is made to the extent of thesacrifice involved. For the purpose, the
future interest due as per theoriginal loan agreement in respect of an accountshould be discounted tothe present value at a rate appropriate to the risk
category of the borrower(i.e., current PLR + the appropriate credit risk
premium for the borrower category)and compared with the present value of
the dues expected to bereceived under the restructuring package, discounted
on the same basis.
In case there is a sacrifice involved in the amount of interest inpresent value
terms, as at (b) above, the amount of sacrifice should eitherbe written off or
provision made to the extent of the sacrifice involved.Even in cases where the
sacrifice is by way of write off of the past interestdues, the asset shouldcontinue to be treated as sub-standard.
6.6Up gradation of restructured accounts:The sub-standard accounts which have been subjected to restructuring etc.,
whether in respect of principal installment or interest amount, bywhatever
modality, would be eligible to be upgraded to the standardcategory only after
the specified period i.e., a period of one year after thedate when first payment
of interest or of principal, whichever is earlier, fallsdue, subject to satisfactory
performance during the period. The amount ofprovision made earlier, net ofthe amount provided for the sacrifice in theinterest amount in present value
terms as aforesaid, could also bereversed after the one year period. During this
one-year period, the substandardasset will not deteriorate in its classification if
satisfactoryperformance of the account is demonstrated during the period. In
case,however, the satisfactory performance during the one-year period is
notevidenced, the asset classification of the restructured account would
begoverned as per the applicable prudential norms with reference to the
prerestructuringpayment schedule.
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words, any funding of interest inrespect of NPAs, if recognised as income,
should be fully provided for.
6.9.1. Conversion into equity, debentures or any other instrument:The amount outstanding converted into other instrumentswould normally
comprise principal and the interest components. If theamount of interest dues
is converted into equity orany other instrument,and income is recognised in
consequence, full provision should be madefor the amount of income so
recognised to offset the effect of such incomerecognition. Such provision
would be in addition to the amount of provision that may be necessary for the
depreciation in the value of the equity orother instruments, a s per the
investment valuation norms. However, if theconversion of interest is into
equity, which is quoted, interest income canbe recognised at market value of
equity, as on the date of conversion, not exceeding the amount of interest
converted to equity. Such equity must thereafter be classified in the "available
for sale" category and valued atlower of cost or market value. In case ofconversion of principal and /orinterest in respect of NPAs into debentures,
such debentures should betreated as NPA, ab initio, in the same asset
classification as wasapplicable to loan just before conversion and provision
made as pernorms. This norm would also apply to zero coupon bonds or other
Instruments which seek to defer the liability of the issuer. On suchdebentures,
income should be recognised only on realisation basis. Theincome in respect of
unrealised interest, which is converted intodebentures or any other fixed
maturity instrument, should be recognisedonly on redemption of such
instrument. Subject to the above, the equityshares or other instruments arising
from conversion of the principalamount of loan would also be subject to the
usual prudential valuationnorms as applicable to such instruments.
6.9.2. Provisioning
While there will be no change in the extant norms on provisioningfor NPAs,
banks which are already holding provisions against some of theaccounts, which
may now be classified as standard, shall continue tohold the provisions and
shall not reverse the same.
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CHAPTER-7
Special Cases
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7.Special Cases
7.1.1.Accounts with temporary deficiencies:
The classification of an asset as NPA should be based on therecord of recovery.
Bank should not classify an advance account as NPAmerely due to the
existence of some deficiencies which are temporary innature such as non -
availability of adequate drawing power based on thelatest available stock
statement, balance outstanding exceeding the limittemporarily, non-
submission of stock statements and non-renewal of thelimits on the due date,
etc. In the matter of classification of accounts withsuch deficiencies banks may
follow the following guidelines:
Banks should ensure that drawings in the working capitalaccounts are covered
by the adequacy of current assets, since currentassets are first appropriated in
times of distress. Drawing power isrequired to be arrived at based on the stock
statement which is current.However, considering the difficulties of large
borrowers, stock statements relied upon by the banks for determining drawing
power should not beolder than three months. The outstanding in the account
based on drawingpower calculated from stock statements older than three
months, would bedeemed as irregular. A working capital borrower account will
become NPAif such irregular drawings are permitted in the account for a
continuousperiod of 180 days even though the unit may be working or the
borrower'sfinancial position is satisfactory.
Regular and ad hoc credit limits need to be reviewed/ regularizednot later than
three months from the due date/date of ad hoc sanction. Incase of constraintssuch as non-availability of financial statements andother data from the
borrowers, the branch should furnish evidence to showthat renewal/ review of
credit limits is already on and would be completedsoon. In any case, delay
beyond six months is not considered desirable asa general discipline. Hence, an
account where the regular/ ad hoc creditlimits have not been reviewed/
renewed within 180 days from the duedate/ date of ad hoc sanction will be
treated as NPA.
7.1.2. Accounts regularized near about the balance sheet date:
The asset classification of borrower accounts where a solitary or a fewcredits
are recorded before the balance sheet date should be handled withcare and
without scope for subjectivity. Where the account indicatesinherent weakness
on the basis of the data available, the account shouldbe deemed as a NPA. In
other genuine cases, the banks must furnishsatisfactory evidence to the
Statutory Auditors/Inspecting Officers aboutthe manner of regularization of
the account to eliminate doubts on theirperforming status.
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7.1.3Asset Classification to be borrower-wise and not facility-wise
It is difficult to envisage a situation when only one facility to a
borrowerbecomes a problem credit and not others. Therefore, all the
facilitiesgranted by a bank to a borrower will have to be treated as NPA and
notthe particular facility or part thereof which has become irregular. If thedebits arising out of devolvement of letters of credit or invokedg uarantees are
parked in a separate account, the balance outstanding inthat account also
should be treated as a part of the borrowers principaloperating account for
the purpose of application of prudential norms onincome recognition, asset
classification and provisioning.
7.1.4.Accounts where there is erosion in the value of security
A NPA need not go through the various stages of classification incases of
serious credit impairment and such assets should bestraightaway classified as
doubtful or loss asset as appropriate. Erosion inthe value of security can bereckoned as significant when the realizablevalue of the security is less than 50
per cent of the value assessed by thebank or accepted by RBI at the time of last
inspection, as the case maybe. Such NPAs may be straightaway classified under
doubtful category and provisioning should be made as applicable to doubtful
assets.
If the realizable value of the security, as assessed by the bank/approved
values/ RBI is less than 10 per cent of the outstanding in theborrower
accounts, the existence of security should be ignored and theasset should be
straightaway classified as loss asset. It may be eitherwritten off or fully
provided for by the bank.
7.1.5.Advances to PACS/FSS ceded to Commercial Banks:
In respect of agricultural advances as well as advances for other purposes
granted by banks to ceded PACS/ FSS under the on-lending system, only that
particular credit facility granted to PACS/ FSS which is indefault for a period of
two harvest seasons (not exceeding two halfyears)/two quarters, as the case
may be, after it has become due will beclassified as NPA and not all the credit
facilities sanctioned to a PACS/FSS. The other direct loans & advances, if any,granted by the bank to the member borrower of a PACS/ FSS outside the on-
lending arrangementwill become NPA even if one of the credit facilities
granted to the sameborrower becomes NPA.
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7.1.6 Advances against Term Deposits, NSCs, KVP/IVP, etc.:
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPsand life
policies need not be treated as NPAs. Advances against goldornaments,
government securities and all other securities are not coveredby this
exemption.
7.1.7 Loans with moratorium for payment of interest
In the case of bank finance given for industrial projects or foragricultural
plantations etc. where moratorium is available for payment ofinterest,
payment of interest becomes 'due' only after the moratorium orgestation
period is over. Therefore, such amounts of interest do notbecome overdue and
hence NPA, with reference to the date of debit of interest. They become
overdue after due date for payment of interest, ifuncollected.
In the case of housing loan or similar advances granted to staff
members where interest is payable after recovery of principal, interestneed
not be considered as overdue from the first quarter onwards.
Suchloans/advances should be classified as NPA only when there is a defaultin
repayment of installment of principal or payment of interest on therespective
due dates.
7.1.8 Agricultural advances
In respect of advances granted for agricultural purpose whereinterest and/or
installment of principal remains unpaid after it has becomepast due for twoharvest seasons but for a period not exceeding two half years,such an advance
should be treated as NPA. The above normsshould be made applicable to all
direct agricultural advances as listed atitems 1.1, 1.1.2 (i) to (vii), 1.1.2
(viii)(a)(1) and 1.1.2 (viii)(b)(1) of MasterCircular on lending to priority sector
No. RPCD.PLAN. BC. 12/04.09.01/2001- 2002 dated 1 August 2001. An extract
of the list of these items isfurnished in the Annexure II. In respect of
agricultural loans, other thanthose specified above, identification of NPAs
would be done on the samebasis as non-agricultural advances which, at
present, are the 180 daysdelinquency norm.
Where natural calamities impair the repaying capacity ofagricultural
borrowers, banks may decide on their own as a relief measure conversion of
the short-term production loan into a term loan or re -schedulementof the
repayment period; and the sanctioning of fresh short -termloan, subject to
various guidelines contained in RBI
circularsRPCD.No.PLFS.BC.1 28/05.04.02/97-98 dated 20.06.98
andRPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.
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In such cases of conversion or re-schedulement, the term loan aswell as
fresh short-term loan may be treated as current dues and need notbe classified
as NPA. The asset classification of these loans wouldthereafter be governed by
the revised terms & conditions and would betreated as NPA if interest and/or
installment of principal remains unpaid, fortwo harvest seasons but for a
period not exceeding two half years.
7.1.9.Government guaranteed advances:
The credit facilities backed by guarantee of the CentralGovernment though
overdue may be treated as NPA only when theGovernment repudiates its
guarantee when invoked. This exemption fromclassification of Government
guaranteed advances as NPA is not for thepurpose of recognition of income.
With effect from 1st April 2000,advances sanctioned against State Government
guarantees should beclassified as NPA in the normal course, if the guarantee is
invoked andremains in default for more than two quarters. With effect from
March 31,2001 the period of default is revised as more than 180 days.
7.2.1.Take-out Finance:
Takeout finance is the product emerging in the context of thefunding of long -
term infrastructure projects. Under this arrangement, theinstitution/the bank
financing infrastructure projects will have an arrangement with any financial
institution for transferring to the latter theoutstanding in respect of such
financing in their books on a predeterminedbasis. In view of the time-lag
involved in taking-over, thepossibility of a default in the meantime cannot be
ruled out. The norms ofasset classification will have to be followed by theconcernedbank/financial institution in whose books the account stands as
balancesheet item as on the relevant date. If the lending institution observes
thatthe asset has turned NPA on the basis of the record of recovery, it should
be classified accordingly. The lending institution should not recognizeincome
on accrual basis and account for the same only when it is paid bythe borrower/
taking over institution (if the arrangement so provides). Thelending institution
should also make provisions against any asset turninginto NPA pending its
takeover by taking over institution. As and when theasset is taken over by the
taking over institution, the correspondingprovisions could be reversed.
However, the taking over institution, ontaking over such assets, should make
provisions treating the account asNPA from the actual date of it becoming NPA
even though the accountwas not in its books as on that date.
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7.2.2. Post-shipment Supplier's Credit
In respect of post-shipment credit extended by the banks covering
export of goods to countries for which the ECGCs cover is available,EXIM Bank
has introduced a guarantee-cum-refinance programmewhereby, in the event
of default, EXIM Bank will pay the guaranteedamount to the bank within a
period of 30 days from the day the bankinvokes the guarantee after theexporter has filed claim with ECGC.
Accordingly, to the extent payment has been received from theEXIM Bank, the
advance may not be treated as a non-performing asset for asset classification
and provisioning purposes.
7.2.3 Export Project Finance:
In respect of export project finance, there could be instances wherethe actual
importer has paid the dues to the bank abroad but the bank inturn is unable to
remit the amount due to political developments such aswar, strife, UN
embargo, etc.
In such cases, where the lending bank is able to establish
throughdocumentary evidence that the importer has cleared the dues in full
bydepositing the amount in the bank abroad before it turned into NPA in
theBooks of the bank, but the importer's country is not allowing the funds tobe
remitted due to political or other reasons, the asset classification maybe made
after a period of one year from the date the amount wasdeposited by the
importer in the bank abroad.
7.2.4. Advances under rehabilitation approved by BIFR/ TLI:
Banks are not permitted to upgrade the classification of any advance inrespect
of which the terms have been re-negotiated unless the package ofre-
negotiated terms has worked satisfactorily for a period of one year.While the
existing credit facilities sanctioned to a unit under rehabilitationpackages
approved by BIFR/term lending institutions will continue to beclassified as sub -
standard or doubtful as the case may be, in respect ofadditional facilities
sanctioned under the rehabilitation packages, theIncome Recognition, Asset
Classification norms will become applicableafter a period of one year from thedate of disbursement.
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7.2.5. ROLE OF ARCIL:-
This empowerment encouraged the three major players in Indian
bankingsystem, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI)
andIDBI Bank Limited (IDBI) to come together to set-up the first ARC. Arcilwas
incorporated as a public limited company on February 11, 2002 andobtained
its certificate of commencement of business on May 7, 2003. Inpursuance of
Section 3 of the Securitization Act 2002, it holds a certificateof registrationdated August 29, 2003, issued by the Reserve Bank of India(RBI) and operates
under powers conferred under the Securitization Act,2002. Arcil is also a
"financial institution" within the meaning of Section 2(h) (ia) of the Recovery of
Debts due to Banks and Financial InstitutionsAct, 1993 (the "DRT Act").
Arcil is the first ARC in the country to commence business of resolution
ofnon-performing assets (NPAs) upon acquisition from Indian banks
andfinancial institutions. As the first ARC, Arcil has played a pioneering role
insetting standards for the industry in India.
Unlocking capital for the banking system and the economy
The primary objective of Arcil is to expedite recovery of theamounts locked in
NPAs of lenders and thereby recycling capital.Arcil thus, provides relief to the
banking system by managing NPAsand help them concentrate on core banking
activities therebyenhancing shareholders value.
Creating a vibrant market for distressed debt assets /securities in India
offering a trading platform for Lenders
Arcil has made successful efforts in funneling investment from bothfrom
domestic and international players for funding theseacquisitions of distressed
assets, followed by showcasing them toprospective buyers. This has initiated
creation of a secondarymarket of distressed assets in the country besides
hastening theirresolution. The efforts of Arcil would lead the countrys
distresseddebt market to international standards.
To evolve and create significant capacity in the system forquickerresolution of NPAs by deploying the assets optimally
With a view to achieving high delivery capabilities for resolution,Arcil has put in
place a structure aimed at outsourcing the varioussub-functions of resolution
to specialized agencies, whereverapplicable under the provision of the
Securitization Act, 2002. Arcilhas also encourage, groomed and developed
many such agenciesto enhance its capacity in line with the growth of its
activity.
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CHAPTER-8
Data analysis and interpretation
8.ANALYSIS
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For the purpose of analysis and comparison between Public and private sector
banks, We have taken fivebanks from both sectorsto compare thenon-
performing assets of banks. For understanding we further bifurcate the non-
performing assets in priority sector and non-priority sector, grossNPA and net
NPA in percentage as well as in rupees, deposit investment advances.
Further we also analysis on the basis of Deposit Investment Advances to
get the clear view where the bank stands in the competitivemarket. At the endof March 2008, in private sector ICICI Bank is thehighest deposit-investment-
advances figure in rupees crore, second isHDFC Bank and KOTAK Bank has least
figure.
In public sector banks Punjab National Bank has the highest deposit
investment-advances but when we look at the graph we can see that the Bank
ofBaroda and Bank of India are almost the similar in numbers and Dena Bank is
stands last in public sector bank. When we compare theprivate sector banks
with public sector banks, we canunderstand the more number of people preferto choose public sectorbanks for deposit-investment.
DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and
comparison among them, year 2008-09.
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P i S B
i
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l i :- F & ' ( the above figure we can see that the ICICI Bank de ) osit-
investment-advances are quite high than other banks like
HDFC,AXIS,INDUSIND,KOTAK
P li S B
0
50000
100000
150000
200000
250000
ICICI HDFC AXIS INDUSIND KOTAK
DEPOSIT
INVESTMENT
ADVANCES
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BR
S K DEP T SIU
I S VESU
V E SU
R
DVR
S WES
IW
IW
I BR
SK
X Y Y Y
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Analf
sis: -Here we havecompared et een I I I BA K A D PU JAB A IO AL
BA K in termofdeposit-investment-advances. From the above figure wecan see
that ICICI bank deposit and advances are quite higher than Punjab National
Bank. But in case of Investment ICICI Bank investment amount is doubled than
Punjab National Bank amount.
GrossNPAandNg
tNPA:-
There are two concepts related to non-performing assets a) gross and b) net.
Gross refers to all NPAs on a banks balancesheet irrespective of the provisions
0
50000
100000
150000
200000
250000
ICICI PNB
DEPOSIT
INVESTMENT
ADVANCES
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made. It consists of all the non-standard assets, viz. Substandard, doubtful,
and loss assets. A loan asset is classified as substandard if it remains NPA up
to a period of 18 months; doubtful if it remains NPA for more than 18
months; and loss, without any waiting period, where the dues are considered
not collectible or marginally collectible .
Net NPA is gross NPA less provisions. Since in India, bank balance sheets
contains a huge amount of NPAs and the process of recovery and write off ofloans is very time consuming, the provisions the banks have to make against
the NPA according to the central bank guidelines, are quite significant.
Here, we can see that there are huge differences between gross and net NPA.
While grossNPA reflects thequality of the loans madeby banks,netNPA
showstheactual burden ofbanks. The requirements for provisions are:
100% for loss assets
100% of the unsecured portion plus 20-50% of the secured portion,
depending on the period for which the account has remained in the
doubtful category
10% general provision on the outstanding balance under the
substandard category.
Here, there are gross and net NPA data for 2007-08 and 2008-09 we taken for
comparison among banks. These data are NPA AS PERCENTAGE OF TOTAL
ASSETS. As we discuss earlier that gross NPA reflects the quality of the loans
made by banks. Among all the ten banks Dena Banks has highest gross NPA as
a percentage of total assets in the year 2007-08 and also net NPA. Punjab
National Bank shows huge difference between gross and net NPA. There is analmost same figure between BOI and BOB.
GrossNPA andNetNPA OfdifferentPublic Sectorbanksinthe year 2007-08
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Bh
i Kp q r
SS i Ph
i Es
i Ph
B r B t .u
v w .x y
B r I t .u
w .u
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UBIt.
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GrossNPAandN
tNPA Ofdifferent Publi
Sectorban sinthe year2008-09
B
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GrossNPAandNetNPA Ofdifferent Pri
ate Sectorban sinthe year2007-08
0
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DENA UBI PNB BOI BOB
GROSS NPA
NET NPA
0
0 2
0
0 60
8
1
1 2
1j k
1 6
1 8
DENA PNB BOI BOB UBI
GROSS NPA
NET NPA
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Bl
m Kn o
SS m Pl
m E
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GrossNPAandNetNPA Ofdifferent Pri}
ate Sectorban ~ sinthe year2008-09
B
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