Upload
ajay-pathade
View
215
Download
0
Embed Size (px)
Citation preview
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
1/98
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
2/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 2
GURU NANAK COLLEGE OF ARTS, SCIENCE AND
COMMERCE
GURU TEGH BAHADUR NAGAR, MUMBAI-400037
COMPARATIVE ANALYSIS ON
NON PERFORMING ASSETS
OF PRIVATE AND PUBLIC SECTOR BANKS
BACHELOR OF COMMERCEBANKING AND INSURANCE
SEMESTER V
(2010-2011)
SUBMITTED
In Partial Fulfillment of the requirements
For the Award of the Degree of
Bachelor of Management
BY
ANIL KUMAR PANDEY
ROLL NO: 14
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
3/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 3
GURU NANAK COLLEGE OF ARTS, SCIENCE AND
COMMERCE
GURU TEGH BAHADUR NAGAR, MUMBAI-400037
DDEECCLLAARRAATTIIOONN
I _________________________ THE STUDENT OF B.COM
BANKING AND INSURANCE SEMESTER V (2010-2011)
HEREBY DECLARE THAT I HAVE COMPLETED THE
PROJECT ON ______________________________________.
THE INFORMATION SUBMITTED IS TRUE AND
ORIGINAL TO THE BEST OF MY KNOWLEDGE.
SIGNATURE OF STUDENT
ANIL KUMAR PANDEY
ROLL NO: 14
GURU NANAK COLLEGE OF ARTS, SCIENCE &
COMMERCE
GURU TEGH BAHADUR NAGAR, MUMBAI400037
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
4/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 4
C E R T I F I C A T E
THIS IS TO CERTIFY THATSHRI/MISS_____________________________OF B.COM.
BANKING AND INSURANCE SEMESTER V (2010-2011)
HAS SUCCESSFULLY COMPLETED THE PROJECT
ON_____________________________________ UNDER THE
GUIDANCE OF ________________________________
COURSE CO-ORDINATOR PRINCIPAL
PROJECT GUIDE
EXTERNAL EXAMINER
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
5/98
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
6/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 6
(((((( CCOONNTTEENNTTSS ))))))
CCHHAAPPTTEERR
NNOO..
SSUUBBJJEECCTT CCOOVVEERREEDD PPAAGGEE
NNOO..
11 IInnttrroodduuccttiioonn ttoo BBaannkkiinngg
22 IInnttrroodduuccttiioonn ttoo TTooppiicc
DDeeffiinniittiioonnNNoonn PPeerrffoorrmmiinngg AAsssseettss FFaaccttoorrffoorrrriissee iinn NNPPAAss
PPrroobblleemm dduuee ttoo NNPPAAss TTyyppeess ooffNNPPAAssIInnccoommee RReeccooggnniittiioonnRReeppoorrttiinngg ooffNNPPAAss
44 PPrroovviissiioonniinngg NNoorrmmss
GGeenneerraall FFllooaattiinngg pprroovviissiioonnss LLeeaasseedd AAsssseettss GGuuiiddeelliinnee uunnddeerr ssppeecciiaall cciirrccuummssttaanncceess
55 IImmppaacctt,, RReeaassoonnss aanndd SSyymmppttoommss ooffNNPPAAss
IInntteerrnnaall && EExxtteerrnnaall FFaaccttoorr EEaarrllyy SSyymmppttoommss
66 PPrreevveennttiivvee MMeeaassuurreemmeenntt
EEaarrllyy RReeccooggnniittiioonn ooffPPrroobblleemm IIddeennttiiffyyiinngg BBoorrrroowweerrss wwiitthh ggeennuuiinnee
IInntteenntt
TTiimmeelliinneessss
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
7/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 7
FFooccuuss oonn CCaasshh ffllooww MMaannaaggeemmeenntt EEffffeeccttiivveenneessss MMuullttiippllee FFiinnaanncciinngg
77 TToooollss ffoorr RReeccoovveerryy
WWiillllffuull ddeeffaauulltt IInnaabbiilliittyy ttoo PPaayy SSppeecciiaall CCaasseess RRoollee ooffAARRCCIILL
88 AAnnaallyyssiiss
DDeeppoossiitt--IInnvveessttmmeenntt--AAddvvaanncceess
GGrroossss NNPPAAss aanndd NNeett NNPPAAss PPrriioorriittyy aanndd NNoonn--PPrriioorriittyy SSeeccttoorr
99 FFiinnddiinngg,, SSuuggggeessttiioonnss aanndd CCoonncclluussiioonnss
1100 BBiibblliiooggrraapphhyy
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
8/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 8
HISTORY OF INDIAN BANKING
Abankis a financial institution that provides banking and other financial services.
By the term bank is generally understood an institution that holds a Banking
Licenses. Banking licenses are granted by financial supervision authorities and
provide rights to conduct the most fundamental banking services such as accepting
deposits and making loans. There are also financial institutions that provide certain
banking services without meeting the legal definition of a bank, a so-called Non-
bank. Banks are a subset of the financial services industry.
The word bank is derived from the Italian banca, which is derived from German
and means bench. The terms bankrupt and "broke" are similarly derived from
banca rotta, which refers to an out of business bank, having its bench physically
broken. Moneylenders in Northern Italy originally did business in open areas, or
big open rooms, with each lender working from his own bench or table.
Typically, a bank generates profits from transaction fees on financial services or
the interest spread on resources it holds in trust for clients while paying them
interest on the asset. Development of banking industry in India followed below
stated steps.
Banking in India has its origin as early as the Vedic period. It is believedthat the transition from money lending to banking must have occurred even
before Manu, the great Hindu Jurist, who has devoted a section of his work
to deposits and advances and laid down rules relating to rates of interest.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
9/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 9
Banking in India has an early origin where the indigenous bankers played avery important role in lending money and financing foreign trade and
commerce. During the days of the East India Company, was the turn of the
agency houses to carry on the banking business. The General Bank of India
was first Joint Stock Bank to be established in the year 1786. The others
which followed were the Bank Hindustan and the Bengal Bank.
In the first half of the 19th century the East India Company established threebanks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the
Bank of Madras in 1843. These three banks also known as Presidency banks
were amalgamated in 1920 and a new bank, the Imperial Bank of India was
established in 1921. With the passing of the State Bank of India Act in 1955
the undertaking of the Imperial Bank of India was taken by the newly
constituted State Bank of India.
The Reserve Bank of India which is the Central Bank was created in 1935by passing Reserve Bank of India Act, 1934 which was followed up with the
Banking Regulations in 1949. These acts bestowed Reserve Bank of India
(RBI) with wide ranging powers for licensing, supervision and control of
banks. Considering the proliferation of weak banks, RBI compulsorily
merged many of them with stronger banks in 1969.
The three decades after nationalization saw a phenomenal expansion in thegeographical coverage and financial spread of the banking system in the
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
10/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 10
country. As certain rigidities and weaknesses were found to have developed
in the system, during the late eighties the Government of India felt that these
had to be addressed to enable the financial system to play its role in ushering
in a more efficient and competitive economy. Accordingly, a high-level
committee was set up on 14 August 1991 to examine all aspects relating to
the structure, organization, functions and procedures of the financial system.
Based on the recommendations of the Committee (Chairman: Shri M.
Narasimham), a comprehensive reform of the banking system was
introduced in 1992-93. The objective of the reform measures was to ensure
that the balance sheets of banks reflected their actual financial health. One of
the important measures related to income recognition, asset classification
and provisioning by banks, on the basis of objective criteria was laid down
by the Reserve Bank. The introduction of capital adequacy norms in line
with international standards has been another important measure of the
reforms process.
1. Comprises balance of expired loans, compensation and other bonds such
as National Rural Development Bonds and Capital Investment Bonds.
Annuity certificates are excluded.
2. These represent mainly non- negotiable non- interest bearing securities
issued to International Financial Institutions like International Monetary
Fund, International Bank for Reconstruction and Development and Asian
Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident Funds,
Special Deposits of Non- Government
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
11/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 11
In the post-nationalization era, no new private sector banks were allowed tobe set up. However, in 1993, in recognition of the need to introduce greater
competition which could lead to higher productivity and efficiency of the
banking system, new private sector banks were allowed to be set up in the
Indian banking system. These new banks had to satisfy among others, the
following minimum requirements:
(i) It should be registered as a public limited company;(ii) The minimum paid-up capital should be Rs 100 crore;(iii) The shares should be listed on the stock exchange;(iv) The headquarters of the bank should be preferably located in a centre
which does not have the headquarters of any other bank; and
(v) The bank will be subject to prudential norms in respect of bankingoperations, accounting and other policies as laid down by the RBI. It
will have to achieve capital adequacy of eight per cent from the very
beginning.
A high level Committee, under the Chairmanship of Shri M. Narasimham,was constituted by the Government of India in December 1997 to review the
record of implementation of financial system reforms recommended by the
CFS in 1991 and chart the reforms necessary in the years ahead to make the
banking system stronger and better equipped to compete effectively in
international economic environment. The Committee has submitted its report
to the Government in April 1998. Some of the recommendations of the
Committee, on prudential accounting norms, particularly in the areas of
Capital Adequacy Ratio, Classification of Government guaranteed advances,
provisioning requirements on standard advances and more disclosures in the
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
12/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 12
Balance Sheets of banks have been accepted and implemented. The other
recommendations are under consideration.
The banking industry in India is in a midst of transformation, thanks to theeconomic liberalization of the country, which has changed business
environment in the country. During the pre-liberalization period, the industry
was merely focusing on deposit mobilization and branch expansion. But
with liberalization, it found many of its advances under the non-performing
assets (NPA) list. More importantly, the sector has become very competitive
with the entry of many foreign and private sector banks. The face of banking
is changing rapidly. There is no doubt that banking sector reforms have
improved the profitability, productivity and efficiency of banks, but in the
days ahead banks will have to prepare themselves to face new challenges.
Indian Banking: Key Developments
1969 Government acquires ownership in major banks Almost all banking operations in manual mode Some banks had Unit record Machines of IBM for IBR
& Pay roll
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
13/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 13
1970- 1980 Unprecedented expansion in geographical coverage,staff, business & transaction volumes and directed
lending to agriculture, SSI & SB sector
Manual systems struggle to handle exponential rise intransaction volumes --
Outsourcing of data processing to service bureau begins Back office systems only in Multinational (MNC) banks'
offices
1981- 1990 Regulator (read RBI) led IT introduction in Banks Product level automation on stand alone PCs at branches
(ALPMs)
In-house EDP infrastructure with Unix boxes, batchprocessing in Cobol for MIS.
Mainframes in corporate office
1991-1995 Expansion slows down Banking sector reforms resulting in progressive de-
regulation of banking, introduction of prudential
banking norms entry of new private sector banks
Total Branch Automation (TBA) in Govt. owned andold private banks begins
New private banks are set up with CBS/TBA form thestart
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
14/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 14
1996-2000 New delivery channels like ATM, Phone banking andInternet banking and convenience of any branch banking
and auto sweep products introduced by new private and
MNC banks
Retail banking in focus, proliferation of credit cards Communication infrastructure improves and becomes
cheap. IDRBT sets up VSAT network for Banks
Govt. owned banks feel the heat and attempt to respondusing intermediary technology, TBA implementation
surges ahead under fiat from Central Vigilance
Commission (CVC), Y2K threat consumes last twoyears
2000-2003 Alternate delivery channels find wide consumeracceptance
IT Bill passed lending legal validity to electronictransactions
Govt. owned banks and old private banks startimplementing CBSs, but initial attempts face problems
Banks enter insurance business launch debit cards
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
15/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 15
IInnttrroodduuccttiioonn ttoo tthhee ttooppiicc
The three letters NPA 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 can not be then left is to
look after the factor responsible for it and managing those factors.
DDeeffiinniittiioonnss::
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.With a view to moving towards international best practices and to
ensure greater transparency, it has been decided to adopt the 90 days overdue
norm for identification of 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 ofmore than 90 days in respect of a term loan,
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
16/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 16
The account remains out of order for a period of more than 90 days, inrespect of an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the caseof bills purchased and discounted,
Interest and/or instalment of principal remains overdue for two harvestseasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes, and
Any amount to be received remains overdue for a period of more than90 days in respect of other accounts.
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.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
17/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 17
NON PERFORMING ASSETS (NPA)
WHAT IS A NPA (NON PERFORMING ASSETS) ?
Action for enforcement of security interest can be initiated only if the secured asset
is classified as Nonperforming asset.
Non performing asset means an asset or account of borrower ,which has been
classified by bank or financial institution as substandard , doubtful or loss asset,in accordance with the direction or guidelines relating to assets classification
issued by RBI .
An amount due under any credit facility is treated as past due when it is not
been paid within 30 days from the due date. Due to the improvement in thepayment and settlement system, recovery climate, up gradation of technology in
the banking system etc, it was decided to dispense with past due concept, witheffect from March 31, 2001. Accordingly as from that date, a Non performing asset
shell be an advance where
i. Interest and/or installment of principal remain overdue for a period of morethan 180 days in respect of a term loan,
ii.
The account remains out of order for a period of more than 180 days ,inrespect of an overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 180 days in case of billpurchased or discounted.
iv. Interest and/or principal remains overdue for two harvest season but for aperiod not exceeding two half years in case of an advance granted for
agricultural purpose ,and
v. Any amount to be received remains overdue for a period of more than 180days in respect of other accounts
With a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt 90 days overdue norms for
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
18/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 18
identification of NPAs ,from the year ending March 31,2004,a non performing asset shell be
a loan or an advance where;
i. Interest and/or installment of principal remain overdue for a period of more than90 days in respect of a term loan,
ii. The account remains out of order fora period of more than 90 days ,in respectof an overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 90 days in case of billpurchased or discounted.
iv. Interest and/or principal remains overdue for two harvest season but for a periodnot exceeding two half years in case of an advance granted for agricultural
purpose ,and
v. Any amount to be received remains overdue for a period of more than 90 days inrespect of other accounts
Out of order
An account should be treated as out of order if the outstanding balance remains
continuously in excess of sanctioned limit /drawing power. in case where the out standing
balance in the principal operating account is less than the sanctioned amount /drawing power,
but there are no credits continuously for six months as on the date of balance sheet or credit arenot enough to cover the interest debited during the same period ,these account should be
treated as out of order.
Overdue
Any amount due to the bank under any credit facil ity is overdue if it is not paid on duedate fixed by the bank.
FACTORS FOR RISE IN NPAs
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
19/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 19
The banking sector has been facing the serious problems of the rising NPAs. But theproblem 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.
EXTERNAL FACTORS :-----------------------------------
Ineffective recovery tribunalThe Govt. has set of numbers of recovery tribunals, which works for recovery of
loans and advances. Due to their negligence and ineffectiveness in their work the bank
suffers the consequence of non-recover, their by reducing their profitability and liquidity.
Willful DefaultsThere are borrowers who are able to payback 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 calamitiesThis 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.
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 sicknessImproper project handling , ineffective management , lack of adequate resources ,
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 of demandEntrepreneurs in India could not foresee their product demand and starts production
which ultimately piles up their product thus making them unable to pay back the money
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
20/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 20
they borrow to operate these activities. The banks recover the amount by selling of their
assets, which covers a minimum label. Thus the banks record the non recovered part as
NPAs and has to make provision for it.
Change on Govt. policiesWith every new govt. banking sector gets new policies for its operation. Thus it
has to cope with the changing principles and policies for the regulation of the rising of
NPAs.
The fallout of handloom sector is continuing as most of the weavers Co-operative
societies have become defunct largely due to withdrawal of state patronage. The
rehabilitation plan worked out by the Central government to revive the handloom sector
has not yet been implemented. So the over dues due to the handloom sectors are
becoming NPAs.
INTERNAL FACTORS :----------------------------------
Defective Lending processThere are three cardinal principles of bank lending that have been followed by the
commercial banks since long.
i. Principles of safetyii. Principle of liquidityiii. Principles of profitability
i. Principles of safety :-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 payb. Willingness to pay
Capacity to pay depends upon:
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
21/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 21
1. Tangible assets
2. Success in business
Willingness to pay depends on:1. Character
2. Honest3. Reputation of borrower
The banker should, there fore take utmost care in ensuring that the enterprise or businessfor 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.
Inappropriate technologyDue to inappropriate technology and management information system, market driven
decisions on real time basis can not 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 analysisThe improper strength, weakness, opportunity and threat analysis is another reason for
rise in NPAs. While providing unsecured advances the banks depend more on thehonesty, integrity, and financial soundness and credit worthiness of the borrower.
Banks should consider the borrowers own capital investment. 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.
Analyze the balance sheet.True picture of business will be revealed on analysis of profit/loss a/c
and balance sheet.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
22/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 22
Purpose of the loanWhen bankers give loan, he should analyze the purpose of the loan.
To ensure safety and liquidity, banks should grant loan for productivepurpose only. Bank should analyze the profitability, viability, long
term acceptability of the project while financing.
Poor credit appraisal systemPoor 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 deficienciesThe banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting
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 farms only 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.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
23/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 23
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 of regular industrial visitThe 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 processNon 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.
PROBLEMS DUE TO NPA
1. Owners do not receive a market return on there capital .in the worst case, ifthe banks fails, owners loose 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 thebank fails, depositors loose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interestrates, lower deposit rates and higher lending rates repress saving and
financial market, which hamper economic growth.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
24/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 24
4. Non performing 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, labour and
natural resources.
Non performing asset may spill over the banking system and contract the money
stock, which may lead to economic contraction. This spill over effect can
channelize through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can jam payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the banks capital base.
The three letters Strike terror in banking sector and business circle today. NPA is
short form of Non Performing Asset. The dreaded NPA rule says simply this :
when interest or other due to a bank remains unpaid for more than 90 days, the
entire bank loan automatically turns a non performing asset. The recovery of loan
has always been problem for banks and financial institution. To come out of thesefirst we need to think is it possible to avoid NPA, no can not be then left is to look
after the factor responsible for it and managing those factors.
Interest and/or instalment of principal remains overdue for two harvestseasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes, and
Any amount to be received remains overdue for a period of more than 90days in respect of other accounts.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
25/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 25
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.
''OOuutt ooffOOrrddeerr'' ssttaattuuss::
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.
TTyyppeess ooffNNPPAA
AA]] GGrroossss NNPPAA
BB]] NNeett NNPPAA
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
26/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 26
AA]] GGrroossss NNPPAA::
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:
Gross NPAs Ratio Gross NPAsGross Advances
BB]] NNeett NNPPAA::
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 guidelines, are quite
significant. That is why the difference between gross and net NPA is quite high.
It can be calculated by following_
Net NPAs Gross NPAsProvisionsGross Advances - Provisions
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
27/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 27
IINNCCOOMMEE RREECCOOGGNNIITTIIOONN
IInnccoommee rreeccooggnniittiioonnPPoolliiccyy
The policy of income recognition has to be objective and based on the recordof recovery. Internationally income from non-performing assets (NPA) is
not recognised on accrual basis but is booked as income only when it is
actually received. Therefore, the banks should not charge and take to income
account interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs, KVPsand Life policies may be taken to income 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 orrescheduling 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 suchadvances should not be taken to income account unless the interest has been
realised.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
28/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 28
RReevveerrssaall ooffiinnccoommee::
If any advance, including bills purchased and discounted, becomes NPA asat the close of any year, interest accrued and credited to income account in
the corresponding previous year, should be reversed or provided for if the
same is not realised. This will apply to Government guaranteed accounts
also.
In respect of NPAs, fees, commission and similar income that have accruedshould cease to accrue in the current period and should be reversed or
provided for with respect to past periods, if uncollected.
Leased Assets
The net lease rentals (finance charge) on the leased asset accrued andcredited 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 takento 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 'Guidance Note on Accounting for Leases' issued by theCouncil of the Institute of Chartered Accountants of India (ICAI), a separate
Lease Equalisation Account should be opened by the banks with a
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
29/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 29
corresponding debit or credit to Lease Adjustment Account, as the case may
be. Further, Lease Equalisation Account should be transferred every year 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 ooffrreeccoovveerryy iinn NNPPAAss
Interest realised on NPAs may be taken to income account provided thecredits in the accounts towards interest are not out of fresh/ additional creditfacilities sanctioned to the borrower concerned.
In the absence of a clear agreement between the bank and the borrower forthe 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.
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.
RReeppoorrttiinngg ooffNNPPAAss
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
30/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 30
Banks are required to furnish a Report on NPAs as on 31 st March each yearafter 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 suspenseaccount, 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, ifany, 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 NPAGROSS AND NET NPA
Name of the Bank:
Position as on
PARTICULARS
1) Gross Advanced *2) Gross NPA *3) Gross NPA as %age of Gross Advanced4) Total deduction( a+b+c+d )
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
31/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 31
( a ) Balance in interest suspense a/c **
( b ) DICGC/ECGC claims received and held
pending
adjustment
( c ) part payment received and kept in suspense a/c
( d ) Total provision held ***
5) Net advanced ( 1-4 )6) Net NPA ( 2-4 )7) Net NPA as a %age of Net Advance
*excluding Technical write-off of Rs.________crore.
**Banks which do not maintain an interest suspense a/c to park the accrued interest
on NPAs may furnish the amount of interest receivable on NPAs.
***Excluding amount of Technical write-off (Rs.______crore) and provision on
standard assets. (Rs._____crore).
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
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
32/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 32
does 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 then it 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 realisability of the dues:
(( 11 )) SSuubb--ssttaannddaarrdd AAsssseettss
((
22
))
DD
oo
uu
bb
ttffuu
ll
AA
sssseettss
(( 33 )) LLoossss AAsssseettss
(( 11 )) SSuubb--ssttaannddaarrdd AAsssseettss::----
With effect from 31 March 2005, a sub standard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following features
are exhibited by sub standard 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 valueshighly questionable and improbable.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
33/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 33
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::----
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 provisioningby 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 inspection during the previous year with regard to the
accounts contributing to the difference.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
34/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 34
Pursuant to this, regional offices were advised to forward a list of individualadvances, 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 anydiminution in the value of loan assets, investment or other assets is that of
the bank managements and the statutory auditors. The assessment made by
the inspecting officer of the RBI is furnished to the bank to assist the bank
management and the statutory auditors in taking a decision in regard to
making adequate and necessary provisions in terms of prudential guidelines.
In conformity with the prudential norms, provisions should be made on thenon-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 the erosion 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::
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::
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
35/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 35
100 percent of the extent to which the advance is not covered by therealisable 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 followingbasis, 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 the advance has
been considered as doubtful
Provision
requirement (%)
Up to one year 20
One to three years 30
More than three years:
(1)Outstanding stock of NPAs ason March 31, 2004.
(2)Advances classified asdoubtful more than three years
60% with effect from
March 31,2005.
75% effect from March
31, 2006.
100% with effect from
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
36/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 36
on or after April 1, 2004. March 31, 2007.
Additional provisioning consequent upon the change in the definition ofdoubtful 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 onthe 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.
Banks are permitted to phase the additional provisioning consequent uponthe 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
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
37/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 37
Directors should get collaterals such as immovable properties charged in favour of
the bank valued once in three years.
SSuubb--ssttaannddaarrdd aasssseettss::
A general provision of 10 percent on total outstanding should be made without
making any allowance for DICGC/ECGC guarantee cover and securities available.
SS
ttaa
nn
dd
aa
rrdd
aa
sssseettss::
From the year ending 31.03.2000, the banks should make a generalprovision 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 netNPAs.
The provisions towards Standard Assets need not be netted from grossadvances 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 required to be made as per
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
38/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 38
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 as 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 ooff tthhee
oowwnneerr eevveenn tthhoouugghh tthhee pphhyyssiiccaall eexxiisstteennccee ooff tthhee aasssseett iiss wwiitthh tthhee uusseerr ((lleesssseeee))..
__
__
((AA
SS
11
99
IICC
AA
II))
Sub-standard assets : -
10 percent of the 'net book value'.
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 book value'.
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.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
39/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 39
Doubtful assets :-100 percent of the extent to which the finance is not secured by the realisable value
of the leased asset. Realisable value to be estimated on a realistic basis. In
addition to the above provision, the following provision on the net book value of
the secured portion should be made, depending upon the period for which asset
has been doubtful:
Period %age of provision
Up to one year 20
One to three years 30
More than three years 50
Loss assets :-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. ('net book value')
GGuuiiddeelliinneess ffoorr PPrroovviissiioonnss uunnddeerr SSppeecciiaall CCiirrccuummssttaanncceess
GGoovveerrnnmmeenntt gguuaarraanntteeeedd aaddvvaanncceess
With effect from 31 March 2000, in respect of advances sanctioned againstState Government guarantee, if the guarantee is invoked and remains in default for
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
40/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 40
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 whichguarantee stood invoked as on 31.03.2000, necessary provision was allowed to be
made, in a phased manner, during the financial years ending 31.03.2000 to
31.03.2003 with a minimum of 25 percent each year.
AAddvvaanncceess ggrraanntteedd uunnddeerr rreehhaabbiilliittaattiioonn ppaacckkaaggeess aapppprroovveedd bbyy BBIIFFRR//tteerrmm lleennddiinngg
iinn
ssttiittuu
ttiioo
nn
ss::
In respect of advances under rehabilitation package approved by BIFR/termlending institutions, the provision should continue to be made in respect of dues to
the bankon the existing credit facilities as per their classification as sub-standard
or doubtful asset.
As regards the additional facilities sanctioned as per package finalised by BIFRand/or term lending institutions, provision on additional facilities sanctioned need
not be made for a period ofone year from the date of disbursement.
In respect of additional credit facilities granted to SSI units which areidentified as sick [as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-
2002 dated 16 January 2002] and where rehabilitation packages/nursing
programmes have been drawn by the banks themselves or under consortium
arrangements, no provision need be made for a period of one year.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
41/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 41
AAddvvaanncceess aaggaaiinnsstt tteerrmm ddeeppoossiittss,, NNSSCCss eelliiggiibbllee ffoorr ssuurrrreennddeerr,, IIVVPPss,, KKVVPPss,, aanndd
lliiffee ppoolliicciieess aarree eexxeemmpptteedd ffrroomm pprroovviissiioonniinngg rreeqquuiirreemmeennttss..
HHoowweevveerr,, aaddvvaanncceess aaggaaiinnsstt ggoolldd oorrnnaammeennttss,, ggoovveerrnnmmeenntt sseeccuurriittiieess aanndd aallll
ootthheerr kkiinnddss ooffsseeccuurriittiieess aarree nnoott eexxeemmpptteedd ffrroomm pprroovviissiioonniinngg rreeqquuiirreemmeennttss..
TTrreeaattmmeenntt ooffiinntteerreesstt ssuussppeennssee aaccccoouunntt::
Amounts held in Interest Suspense Account should not be reckoned as part of
provisions. Amounts lying in the Interest Suspense Account should be deducted
from the relative advances and thereafter, provisioning as per the norms, should be
made on the balances after such deduction.
AAddvvaanncceess ccoovveerreedd bbyy EECCGGCC//DDIICCGGCC gguuaarraanntteeee
In the case of advances guaranteed by DICGC/ECGC, provision should be made
only for the balance in excess of the amount guaranteed by these Corporations.
Further, while arriving at the provision required to be made for doubtful assets,
realisable value of the securities should first be deducted from the outstanding
balance in respect of the amount guaranteed by these Corporations and then
provision made as illustrated hereunder:
Example
Outstanding Balance Rs. 4 lakhs
DICGC Cover 50 percent
Period for which the advance has remained More than 3 years
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
42/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 42
doubtful remained doubtful
Value of security held
(excludes worth of Rs.)
Rs. 1.50 lakhs
Provision required to be made
Outstanding balance Rs. 4.00 lakhs
Less: Value of security held Rs. 1.50 lakhs
Unrealised balance Rs. 2.50 lakhs
Less: DICGC Cover
(50% of unrealisable balance)
Rs. 1.25 lakhs
Net unsecured balance Rs. 1.25 lakhs
Provision for unsecured portion of
advance
Rs. 1.25 lakhs (@ 100 percent
of unsecured portion)
Provision for secured portion of
advance
Rs. 0.75 lakhs (@ 50 percent of
secured portion)
Total provision required to be made Rs. 2.00 lakhs
AAddvvaannccee ccoovveerreedd bbyy CCGGTTSSII gguuaarraanntteeee
In case the advance covered by CGTSI guarantee becomes non-performing, no
provision need be made towards the guaranteed portion. The amount outstanding
in excess of the guaranteed portion should be provided for as per the extant
guidelines on provisioning for non-performing advances. Two illustrative
examples are given below:
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
43/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 43
Example I
Asset classification status: DoubtfulMore than 3 years;
CGTSI Cover 75% of the amount
outstanding or 75% of the
unsecured amount or Rs.18.75
lakh, whichever is the least
Realisable value of
Security
Rs.1.50 lakh
Balance outstanding Rs.10.00 lakh
Less Realisable value of
security
Rs. 1.50 lakh
Unsecured amount Rs. 8.50 lakh
Less CGTSI cover (75%) Rs. 6.38 lakh
Net unsecured and
uncovered portion:
Rs. 2.12 lakh
Provision Required
Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@
50%)
Unsecured & uncovered
portion
Rs.2.12 lakh Rs. 2.12 lakh ( 100%)
Total provision required Rs. 2.87 lakh
Example II
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
44/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 44
Asset classification status DoubtfulMore than 3 years;
CGTSI Cover 75% of the amount
outstanding or75% of the
unsecured amount or Rs.18.75
lakh, whichever is the least
Realisable value of
Security
Rs.10.00 lakh
Balance outstanding Rs.40.00 lakh
Less Realisable value ofsecurity
Rs. 10.00 lakh
Unsecured amount Rs. 30.00 lakh
Less CGTSI cover (75%) Rs. 18.75 lakh
Net unsecured and
uncovered portion:
Rs. 11.25 lakh
Provision Required
Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@
50%)
Unsecured & uncovered
portion
Rs.11.25 lakh Rs.11.25 lakh (100%)
Total provision required Rs. 16.25 lakh
TTaakkee--oouutt ffiinnaannccee
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
45/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 45
The lending institution should make provisions against a 'take-out finance' turning
into NPA pending its take-over by the taking-over institution. As and when the
asset is taken-over by the taking-over institution, the corresponding provisions
could be reversed.
RReesseerrvvee ffoorr EExxcchhaannggee RRaattee FFlluuccttuuaattiioonnss AAccccoouunntt ((RREERRFFAA))
When exchange rate movements of Indian rupee turn adverse, the outstanding
amount of foreign currency denominated a loan (where actual disbursement was
made in Indian Rupee) which becomes overdue goes up correspondingly, with its
attendant implications of provisioning requirements. Such assets should not
normally be revalued. In case such assets need to be revalued as per requirement of
accounting practices or for any other requirement, the following procedure may be
adopted:
The loss on revaluation of assets has to be booked in the bank's Profit & LossAccount.
Besides the provisioning requirement as per Asset Classification, banks should
treat the full amount of the Revaluation Gain relating to the corresponding assets,
if any, on account of Foreign Exchange Fluctuation as provision against the
particular assets.
IImmppaacctt ooffNNPPAA
PPrrooffiittaabbiilliittyy::--
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
46/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 46
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.
LL
iiqq
uu
iidd
iittyy
::--
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 which have
negative impact to the people who are putting their money in the banks .
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
47/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 47
RREEAASSOONNSS FFOORR NNPPAA::
Reasons can be divided in to two broad categories:-
A] Internal Factor
B] External Factor
[[
AA
]]
IInn
tt
eerrnn
aa
ll
FF
aa
ccttoo
rrss
::--
Internal Factors are those, which are internal to the bank and are controllable by
banks.
Poor lending decision:
Non-Compliance to lending norms:
Lack of post credit supervision:
Failure to appreciate good payers:
Excessive overdraft lending:
NonTransparent accounting policy:
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
48/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 48
[[BB ]] EExxtteerrnnaallFFaaccttoorrss::--
External factors are those, which are external to banks they are not controllable by
banks.
Socio political pressure:
Chang in industry environment:
Endangers macroeconomic disturbances:
Natural calamities
Industrial sickness
Diversion of funds and willful defaults
Time/ cost overrun in project implementation
Labour problems of borrowed firm
Business failure
Inefficient management
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
49/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 49
Obsolete technology
Product obsolete
EEaarrllyy ssyymmppttoommss bbyy wwhhiicchh oonnee ccaann rreeccooggnniizzee aa ppeerrffoorrmmiinngg aasssseett ttuurrnniinngg iinn ttoo
NNoonn--ppeerrffoorrmmiinngg aasssseett
FFoouurr ccaatteeggoorriieess ooffeeaarrllyy ssyymmppttoommss::--
------------------------------------------------------------------------------------------------------
(( 11 )) FFiinnaanncciiaall::
Non-payment of the very first installment in case of term loan. Bouncing of cheque due to insufficient balance in the accounts. Irregularity in installment. Irregularity of operations in the accounts. Unpaid over due bills. Declining Current Ratio. Payment which does not cover the interest and principal amount of that
installment.
While monitoring the accounts it is found that partial amount is diverted tosister concern or parent company.
( 2 ) Operational and Physical:
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
50/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 50
If information is received that the borrower has either initiated the processof 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:
Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners.
( 4 ) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
PPrreevveennttiivvee MMeeaassuurreemmeenntt FFoorr NNPPAA
EEaarrllyy RReeccooggnniittiioonn oofftthhee PPrroobblleemm::--
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
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
51/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 51
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.
IIddeennttiiffyyiinngg BBoorrrroowweerrss wwiitthh GGeennuuiinnee IInntteenntt::--
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. Base don this objective assessment, banks should decide as quickly as
possible whether it would be worthwhile to commit additional finance.
In this regard banks may consider having Special Investigation of all financial
transaction or business transaction, books of account in order to ascertain real
factors that contributed to sickness of the borrower. Banks may have penal of
technical experts with proven expertise and track record of preparing techno-
economic study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund
flow or sudden requirement of additional fund may be entertained at branch level,
and for this purpose a special limit to such type of cases should be decided. This
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
52/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 52
will obviate the need to route the additional funding through the controlling offices
in deserving cases, and help avert many accounts slipping into NPA category.
TTiimmeelliinneessss aannddAAddeeqquuaaccyy ooffrreessppoonnssee::--
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 maylook at the exit option.
FFooccuuss oonn CCaasshh FFlloowwss::--
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 analyzing funds
flow in conjunction with the Cash Flow rather than only on the basis of Funds
Flow.
MMaannaaggeemmeenntt EEffffeeccttiivveenneessss::--
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
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
53/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 53
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.
MMuullttiippllee FFiinnaanncciinngg::--
A.During the exercise for assessment of viability and restructuring, aPragmatic and unified approach by all the lending banks/ FIs as alsosharing of all relevant information on the borrower would go a long way
toward overall success of rehabilitation exercise, given the probability of
success/failure.
B. In some default cases, where the unit is still working, the bank should makesure that it captures the cash flows (there is a tendency on part of the
borrowers to switch bankers once they default, for fear of getting their cash
flows forfeited), and ensure that such cash flows are used for working
capital purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not part of the
consortium, may not be allowed to offer credit facilities to such defaulting
clients. Current account facilities may also be denied at non-consortium
banks to such clients and violation may attract penal action. The Credit
Information Bureau of India Ltd.(CIBIL) may be very useful for
meaningful information exchange on defaulting borrowers once the setup
becomes fully operational.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
54/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 54
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 to recover its dues,
another lender may have a much shorter timeframe in mind. So it is possible
that the letter categories of lenders may be willing to exit, even a t a cost
by a discounted settlement of the exposure. Therefore, any plan for
restructuring/rehabilitation may take this aspect into account.
D.Corporate Debt Restructuring mechanism has been institutionalized in2001 to provide a timely and transparent system for restructuring of the
corporate debt of Rs. 20 crore and above with the banks and FIs on a
voluntary basis and outside the legal framework. Under this system, banks
may greatly benefit in terms of restructuring of large standard accounts
(potential NPAs) and viable sub-standard accounts with
consortium/multiple banking arrangements.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
55/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 55
TToooollss ffoorr rreeccoovveerryy ooffNNPPAAss
CCrreeddiittDDeeffaauulltt
IInnaabbiilliittyyttooPPaayy WWiillllffuullddeeffaauulltt
UUnnvviiaabbllee VViiaabbllee
LLookkAAddaallaatt
DDeebbttRReeccoovveerryy
TTrriibbuunnaallss
Securitization
Act
AAsssseett
RReeccoonnssttrruuccttiioonn
mmpprroommiisseeRReehhaabbiilliittaattiioonn
CCoonnssoorrttiiuummFFiinnaanncceeSSoolleeBBaannkkeerr
CCoorrppoorraatteeDDeebbttRReessttrruuccttuurriinngg
IIssssuueeooff CCoonnvveerrssiioonn FFrreesshhWWCCLLiimmiittRReepphhaasseemmeennttooff
RReeppaayymmeennttPPeerriioodd
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
56/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 56
Once NPA occurred, one must come out of it or it should be managed in most
efficient manner. Legal ways and means are there to over come and manage NPAs.
We will look into each one of it.
WWiillllffuullDDeeffaauulltt ::--A] Lok Adalat and Debt Recovery Tribunal
B] Securitization Act
C] Asset Reconstruction
LLookkAAddaallaatt::
Lok Adalat institutions help banks to settle disputes involving account in
doubtful and loss category, with outstanding balance of Rs. 5 lakh for
compromise settlement under Lok Adalat. Debt recovery tribunals have been
empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and
above. This mechanism has proved to be quite effective for speedy justice and
recovery of small loans. The progress through this channel is expected to pick up
in the coming years.
DDeebbttRReeccoovveerryy TTrriibbuunnaallss((DDRRTT))::
The recovery of debts due to banks and
financial institution passed in March 2000 has helped in strengthening the function
of DRTs. Provision for placement of more than one recovery officer, power to
attach defendants property/assets before judgment, penal provision for
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
57/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 57
disobedience of tribunals order or for breach of any terms of order and
appointment of receiver with power of realization, management, protection and
preservation of property are expected to provide necessary teeth to the DRTs and
speed up the recovery of NPAs in the times to come. DRTs which have been set
up by the Government to facilitate speedy recovery by banks/DFIs, have not been
able make much impact on loan recovery due to variety of reasons like inadequate
number, lack of infrastructure, under staffing and frequent adjournment of cases. It
is essential that DRT mechanism is strengthened and vested with a proper
enforcement mechanism to enforce their orders. Non observation of any order
passed by the tribunal should amount to contempt of court, the DRT should have
right to initiate contempt proceedings. The DRT should empowered to sell asset of
the debtor companies and forward the proceed to the winding up court for
distribution among the lenders
IInnaabbiilliittyy ttoo PPaayy
CCoonnssoorrttiiuumm aarrrraannggeemmeennttss::
Asset classification of accounts under
consortium should be based on the record of recovery of the individual member
banks and other aspects having a bearing on the recoverability of the advances.
Where the remittances by the borrower under consortium lending arrangements are
pooled with one bank and/or where the bank receiving remittances is not parting
with the share of other member banks, the account will be treated as not serviced in
the books of the other member banks and therefore, be treated as NPA. The banks
participating in the consortium should, therefore, arrange to get their share of
recovery transferred from the lead bank or get an express consent from the lead
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
58/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 58
bank for the transfer of their share of recovery, to ensure proper asset classification
in their respective books.
CCoorrppoorraattee ddeebbtt RReessttrruuccttuurriinngg ((CCDDRR))::
BBaacckkggrroouunndd
In spite of their best efforts and intentions, sometimes corporate find themselves in
financial difficulty because of factors beyond their control and also due to certain
internal reasons. For the revival of the corporate as well as for the safety of the
money lent by the banks and FIs, timely support through restructuring in genuine
cases is called for. However, delay in agreement amongst different lending
institutions often comes in the way of such endeavours.
Based on the experience in other countries like the U.K., Thailand, Korea,
etc. of putting in place institutional mechanism for restructuring of corporate debt
and need for a similar mechanism in India, a Corporate Debt Restructuring System
has been evolved, as under :
OObbjjeeccttiivvee
The objective of the Corporate Debt Restructuring (CDR) framework is to
ensure timely and transparent mechanism for restructuring of the corporate debts of
viable entities facing problems, outside the purview of BIFR, DRT and other
legal proceedings, for the benefit of all concerned. In particular, the framework
will aim at preserving viable corporate that are affected by certain internal and
external factors and minimize the losses to the creditors and other stakeholders
through an orderly and coordinated restructuring programme.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
59/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 59
SSttrruuccttuurree::
CDR system in the country will have a three-tier structure:
(A) CDR Standing Forum
(B) CDR Empowered Group
(C) CDR Cell
((AA)) CCDDRR SSttaannddiinngg FFoorruumm ::
The CDR Standing Forum would be the representative general body of all
financial institutions and banks participating in CDR system. All financial
institutions and banks should participate in the system in their own interest. CDR
Standing Forum will be a self-empowered body, which will lay down policies and
guidelines, guide and monitor the progress of corporate debt restructuring.
The Forum will also provide an official platform for both the creditors and
borrowers (by consultation) to amicably and collectively evolve policies and
guidelines for working out debt restructuring plans in the interests of all concerned.
The CDR Standing Forum shall comprise Chairman & Managing Director,
Industrial Development Bank of India; Managing Director, Industrial Credit &
Investment Corporation of India Limited; Chairman, State Bank of India;
Chairman, Indian Banks Association and Executive Director, Reserve Bank of
India as well as Chairmen and Managing Directors of all banks and financial
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
60/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 60
institutions participating as permanent members in the system. The Forum will
elect its Chairman for a period of one year and the principle of rotation will be
followed in the subsequent years. However, the Forum may decide to have a
Working Chairman as a whole-time officer to guide and carry out the decisions of
the CDR Standing Forum.
A CDR Core Group will be carved out of the CDR Standing Forum to assist
the Standing Forum in convening the meetings and taking decisions relating to
policy, on behalf of the Standing Forum. The Core Group will consist of Chief
Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank of India, Punjab National
Bank, Indian Banks Association and a representative of Reserve Bank of India.
The CDR Standing Forum shall meet at least once every six months and
would review and monitor the progress of corporate debt restructuring system. The
Forum would also lay down the policies and guidelines to be followed by the CDR
Empowered Group and CDR Cell for debt restructuring and would ensure their
smooth functioning and adherence to the prescribed time schedules for debt
restructuring. It can also review any individual decisions of the CDR Empowered
Group and CDR Cell.
The CDR Standing Forum, the CDR Empowered Group and CDR Cell
(described in following paragraphs) shall be housed in IDBI. All financial
institutions and banks shall share the administrative and other costs. The sharing
pattern shall be as determined by the Standing Forum.
CCDDRR EEmmppoowweerreeddGGrroouupp aannddCCDDRR CCeellll::
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
61/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 61
The individual cases of corporate debt restructuring shall be decided by the
CDR Empowered Group, consisting of ED level representatives of IDBI, ICICI
Limited and SBI as standing members, in addition to ED level representatives of
financial institutions and banks who have an exposure to the concerned company.
In order to make the CDR Empowered Group effective and broad based and
operate efficiently and smoothly, it would have to be ensured that each financial
institution and bank, as participants of the CDR system, nominates a panel of two
or three EDs, one of whom will participate in a specific meeting of the Empowered
Group dealing with individual restructuring cases. Where, however, a bank /
financial institution has only one Executive Director, the panel may consist of
senior officials, duly authorized by its Board. The level of representation of banks/
financial institutions on the CDR Empowered Group should be at a sufficiently
senior level to ensure that concerned bank / FI abides by the necessary
commitments including sacrifices, made towards debt restructuring.
The Empowered Group will consider the preliminary report of all cases of
requests of restructuring, submitted to it by the CDR Cell. After the Empowered
Group decides that restructuring of the company is prima-facie feasible and the
enterprise is potentially viable in terms of the policies and guidelines evolved by
Standing Forum, the detailed restructuring package will be worked out by the CDR
Cell in conjunction with the Lead Institution.
The CDR Empowered Group would be mandated to look into each case of
debt restructuring, examine the viability and rehabilitation potential of the
Company and approve the restructuring package within a specified time frame of
90 days, or at best 180 days of reference to the Empowered Group.
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
62/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 62
There should be a general authorisation by the respective Boards of the
participating institutions / banks in favour of their representatives on the CDR
Empowered Group, authorising them to take decisions on behalf of their
organization, regarding restructuring of debts of individual corporate.
The decisions of the CDR Empowered Group shall be final and action-
reference point. If restructuring of debt is found viable and feasible and accepted
by the Empowered Group, the company would be put on the restructuring mode.
If, however, restructuring is not found viable, the creditors would then be free to
take necessary steps for immediate recovery of dues and / or liquidation or winding
up of the company, collectively or individually.
CCDDRR CCeellll::
The CDR Standing Forum and the CDR Empowered Group will be assisted
by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of
the proposals received from borrowers / lenders, by calling for proposed
rehabilitation plan and other information and put up the matter before the CDR
Empowered Group, within one month to decide whether rehabilitation is prima
facie feasible, if so, the CDR Cell will proceed to prepare detailed Rehabilitation
Plan with the help of lenders and if necessary, experts to be engaged from outside.
If not found prima facie feasible, the lenders may start action for recovery of their
dues.
To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate
members of staff for the Cell will be deputed from banks and financial institutions.
The CDR Cell may also take outside professional help. The initial cost in operating
the CDR mechanism including CDR Cell will be met by IDBI initially for one year
8/3/2019 37921541 FINAL Non Performing Assets of Banks Repaired)
63/98
[Comparative analysis on NPA of Private & Public sector Banks] Page 63
and then from contribution from the financial institutions and banks in the Core
Group at the rate of Rs.50 lakh each and contribution from other institutions and
banks at the rate of Rs.5 lakh each.
All references for corporate debt restructuring by lenders or borrowers will
be made to the CDR Cell. It shall be the responsibility of the lead institution /
major stakeholder to the corporate, to work out a preliminary restructuring plan in
consultation with other stakeholders and submit to the CDR Cell within one month.
The CDR Cell will prepare the restructuring plan in terms of the general policies
and guidelines approved by the CDR Standing Forum and place for the
consideration of the Empowered Group within 30 days for decision. The
Empowered Group can approve or suggest modifications, so, however, that a final
decision must be taken within a total period of 90 days. However, for sufficient
reasons the period can be extended maximum upto 180 days from the date of
reference to the CDR Cell.
OOtthheerr ffeeaattuurreess::
CDR will be a Non-statutory mechanism.
CDR mechanism will be a voluntary system based on debtor-creditor
agreement and inter-creditor agreement.
The scheme will not apply to accounts involving only one financial
institution or one bank. The CDR mechanism will cover only multiple banking
accounts / syndication / consortium accounts with outstanding exposure of Rs.20
crore and above by banks and institutions.
8/