Cp 1 INTRODUCTION

Non-performing assets, also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments than a bank makes its profits. Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as nonperforming. A high level of non-performing assets compared to similar lenders may be a sign of problems, as may an sudden increase. However this needs to be looked at in the context of the type of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of nonperforming debt, but will make up for this by charging borrowers higher interest rates, increasing spreads. A mortgage lender will almost certainly have lower non-performing assets than a credit card specialist, but the latter will have higher spreads and may well make a bigger profit on the same assets, even if it eventually has to write off the non-performing loans.

One of the major problems Indian banks facing today is the size of nonperforming assets over which the top management of all banks are spending significant amount of their time and energy. The problems become all the more crucial for the Indian banks because in the changing scenario at the world level, they cannot afford to remain unresponsive to the global requirements.
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However, banks are well aware of the grim situations and they have tried their level best in the last decade to reduce their NPA portfolio thereby bringing it closer to the international level. Realizing the problems faced by the banks, Reserve Bank of India in the capacity of a regulator has come out with appropriate guidelines for NPA portfolio. The commercial banks have welcomed these announcements which are seen as life lines to maintain their financial help in an increasing league competitive and deregulated environment. 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 cannot be then left is to look after the factor responsible for it and managing those factors.

Definitions:
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or 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
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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), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. 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.

(Chapter2 classification of asset and npa) Asset Classification

Categories of NPAs
Standard Assets:
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 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 nonperforming and the realisability of the dues:

( 1 ) Sub-standard Assets ( 2 ) Doubtful Assets ( 3 ) Loss Assets

( 1 ) Sub-standard Assets:-4

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 welldefined 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.

( 2 ) Doubtful Assets:-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 ) Loss Assets:-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.

Types of NPA
A] B] Gross NPA Net NPA

A]

Gross NPA:

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 substandard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs Gross Advances B] Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India,
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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 NPAs Provisions Gross Advances - Provisions

(Chapter 3) Provisioning Norms

General 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 inspection during the previous year with regard to the accounts contributing to the difference. Pursuant to this, regional offices were advised to forward a list of individual 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 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 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 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:

Loss assets: 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.

Doubtful assets: 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.
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 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 the advance has been considered as doubtful Up to one year One to three years 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.

Provision requirement (%) 20 30 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:
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 As on 31.03.2003, 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. 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. 5crore 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.

Sub-standard assets: A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available.

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Standard assets: 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.

Floating provisions: 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 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.

Provisions on Leased Assets:

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Leases are peculiar transactions where the assets are not recorded in the books of the user of such assets as Assets, whereas they are recorded in the books of the owner even though the physical existence of the asset is with the user (lessee).

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.

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 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 Up to one year One to three years More than three years

%age of provision 20 30 50

Loss assets :-

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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')

Guidelines for Provisions under Special Circumstances

Government guaranteed advances 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.

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 As regards advances guaranteed by State Governments, in respect of which guarantee 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.

Advances granted under rehabilitation packages approved by BIFR/term lending institutions: In respect of advances under rehabilitation package approved by

BIFR/term lending institutions, the provision should continue to be made in respect of dues to the bank on 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 BIFR and/or term lending institutions, provision on additional facilities sanctioned need not be made for a period of one year from the date of disbursement.

In respect of additional credit facilities granted to SSI units which are

identified as sick [as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/20012002 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.
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Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policies are exempted from provisioning requirements.

However, advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements.

Treatment of interest suspense account: 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.

Advances covered by ECGC/DICGC guarantee 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, realizable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provisions are made.

Advance covered by CGTSI guarantee 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.
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Take-out finance 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.

(Chapter 4- reason symptoms for identification of npa)

Underlying Reasons for NPA

Internal Factors: Diversion of funds for expansion or diversification or modernization is the major factor on non-repayments of bank dues. Even taking up new projects or promoting associate concern divert the funds thereby create sickness in the original unit. Secondly, time and cost over-run during the project implementation stage also affects the fund-flow plan, thereby turning the accounts into NPAs in the long-run. Needless to add that the business failure due to inefficiency in management is the major internal factor which is responsible for creation of NPAs in the corporate world. Similarly, slackness in credit management and
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monitoring compelled with lack of coordination among the leaders often lead to non-payment of dues in time. If these factors are further compounded with technical problems then recovery of NPAs become very difficult. External Factors: Recession in the market will genuinely affect the repayment capacity of a firm. If this factor is compounded with price escalation of inputs and exchange rate fluctuations, then the matter will become more serious. Accidents and natural calamities are the unexpected external factors upon which are not within anybodys control. Sometimes change in government policies in connection with excise duties, import duties, pollution control, etc. Along with power-shortage affect the paying capacity of the firm thereby leading to creation and increase of NPAs.

NPAs Identification: There is no doubt that high level of NPAs dampens the performance of the banks, hence identification of potential problem accounts and their close monitoring assumes importance. Though most banks have early warning system identification of potential NPAs, the actual process is followed differ from bank to bank. The early warning system enables a bank to identify the borrowal accounts which show signs of credit deterioration and thereby to initiate remedial action. Many banks already evolved and adopted an elaborate system which allows them to identify potential distress signal and plan their preventive options well ahead of time.
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First of all, warning signals such as president in regularities in accounts, delays in servicing of interest, frequent development of letter of credits, units financial problems etc., are captured by the system. Based on the intensity of the problems, certain effective systems are implemented for effective check and balances. Some of these processes are discussed below: Posting Relationship Manager: The Relationship Manager is the official who has to keep in constant touch with the borrower and report all developments in connection with the borrowers accounts. He is expected to have true knowledge about the personal situation of the borrower, his business developments and his future plans. As a part of his contact, he is also expected to conduct inspections and to monitor the account for possible financial malfeasance. Preparing Know your silent profile: As a part of this system, visits are planned to be made on salience and their place of business. However, the frequency of such visits depends on the nature of relationship and other incidental developments. Implementing Credit Rating System: Credit rating system is used to measure and monitor the credit risk of an individual proposal. At the whole bank level, this system enables tracking the health of the entire credit portfolio. Most banks have developed their own models to rate while a few take the help of credit rating agencies. Credit rating model take into account various associated with a borrowal unit. Usually, the rating
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exercise is carried out at the time of sensation of the proposal and at the time of review or renewal of the exciting credit facilities. Preparation of a watch-list: It serves the need of the management to identify and monitor potential risk of a loan asset. The purpose of identification of potential NPAs is to ensure that timely appropriate corrective steps could be initiated by the bank to protect against the loan-asset becoming non-performing. Most of the banks have system to put certain borrowal accounts under watch-list or special mention category if performing advances operating under adverse business coordination exhibiting certain distress signals. This accounts generally exhibit weaknesses which are amendable but warrant banks closer attention.

Sensitive to early warning signals: Several banks have laid down a series of operational, financial, transactional indicators that could serve to identify emerging problems in credit exposures at an early stage. These indicators which may trigger early warning system depend not only on default in payment of installment and interest but also other factors such as deterioration in operating and financial performance of the borrower, weakening industry characteristics, regulatory changes, general economic conditions, etc. a host of early warning signals in the categories of financial, operational, banking, management and external factors are used by different banks for identification of potential NPAs.

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Early symptoms by which one can recognize a performing asset turning in to Nonperforming asset
Four categories of early symptoms:21

(1) Financial:
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 to sister concern or parent company.

(2)

Operational and Physical: If information is received that the borrower has either initiated the process of winding up or are not doing the business. Overdue receivables. Stock statement not submitted on time. External non-controllable factor like natural calamities in the city where borrower conduct his business. Frequent changes in plan. Non-payment of wages.

(3) Attitudinal Changes: Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank.
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 Problem between partners.

(4) Others: Changes in Government policies. Death of borrower. Competition in the market.

(Chapter

impact

of

npa

and

its

preventive measres) IMPACT ON NON-PERFORMING ASSETS OF BANKS

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 Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA 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. Liquidity: 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. Involvement of management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss:
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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.

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Preventive Measurement For NPA

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 technoeconomic 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 have intelligent inputs with regard to promoters sincerity, and capability to
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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 Investigation of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category. Timeliness and Adequacy of response: Longer the delay in response greater is 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.

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 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 analyzing 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 Pragmatic and unified approach 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 among consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts
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(potential

NPAs)

and

viable

sub-standard

accounts

with

consortium/multiple banking arrangements.

Managing NPAs through legal measure

Debt recovery tribunals: The Debt Recover Tribunals are vested with competence to entertain cases referred to them by banks for recovery of debts. The order passed by a DRT is applicable to the appellate tribunal. An important power conferred on the tribunal is that of making an interim order against the defendant e.g. the defaulting borrower to debar him from transferring, alienating or otherwise dealing with or disposing of any property and the assets belonging to him without prior permission of the Tribunal. This order can be passed even while the claim is pending. Validity of the act is often challenged in the court which hinders and delays its effective implementation. Therefore, much needs to be done for making them stronger in terms of power and provisions of infrastructure.

Lokadalats: The Lokadalats helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known for effecting mediation and counseling between the parties and is designed to reduce burden on the courts, especially for small loans. Every award of the lokadalat
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shall be deemed to be a decree of the civil court and no appeal can be made to any court against the award made by the lokadalats. They take up cases which are suitable for settlement for debt for certain consideration. Parties are heard and explained of their legal position and are mostly advised to arrive at some settlement. In general, however, banks do not get full advantage of the lokadalats. It is difficult to gather the concerned borrowers willing to go in for compromise on the day when the lokadalats meet.

SERFAESI Act: The securitization and reconstruction of financial assets and enforcement of security interest act provide the formal legal basis and regularity framework for setting up asset reconstruction company (ARC) in India. In addition to asset reconstruction, the act deals with securitization, enforcement of security interest and creation of a central registry. The act permits the secured creditors like banks to enforce their security interest in relation to the underlying security without reference to the court after giving a 60 days notice to the defaulting borrowers upon classification of the corresponding financial asset as a non-performing asset. The act permits the secured creditors to take over position as well as take over of the management of the secured assets of the borrower including right to transfer by way of lease, assignment or sale. The act also permits to secured creditors to appoint in person as a manager of the secured asset and recover receivables in respect of any secured assets which have been transferred. Due to certain legal hurdles it has not been possible to recover full value from most of the seizures. Still lenders are now clearly in a much better bargaining position than before the enactment of this act. Moreover, when the legal hurdles will be removed in due course the bargaining power of the lenders is
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likely to improve further and one would expect to see a large number of NPA cases being resolved in shortest time either through security enforcement or through settlements. Under this act, asset reconstruction companies can be set up to enforce for security interest, takeover or change the management of the business of the borrower; sale or lease the borrowers business settle the borrowers due and can restructure or reschedule the debt. ARCs are also permitted to act as a manager of collateral assets taken over by lender under securities enforcement rights available to them or as a recovery agent for any bank and to receive a fees for the discharge of the functions. Corporate Debt restructuring Mechanism: The objectives of Corporate Debt Restructuring (CDR) mechanism has been to ensure timely and transparent restructuring of corporate debt outside the purview of the Board for Industrial Financial Reconstruction, Debt Recovery Tribunals or other legal proceeding. The framework is intended to preserve viable corporate affected by certain internal or external factors and minimize losses to creditors and other stake holders through an orderly and coordinated restructuring program. Corporate borrowers with borrowings from the banking system of Rs. 20 crores and above under multiple banking arrangement are eligible under the CDR mechanism. Accounts falling under standard, sub-standard and doubtful categories can only be considered for restructuring. CDR is a non-statutory mechanism based on debtors-creditor agreement. As restructuring helps in aligning repayment obligations for bankers, it is critical to prepare the restructuring plan on the lines of the expected business plan along with projected cash flows. Lenders prefer to resort to CDR mechanism to avoid unnecessary
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delays in multiple lender arrangements and to increase transparency in the processes. Compromises Settlement Scheme: All cases on which the banks have initiated legal action can be covered under the settlement scheme. Under the one time settlement (OTS), for NPAs up to upon Rs.10 crores, the minimum amount to be recovered should be 100% of the outstanding balance in the account. For NPAs above Rs10crores, the chairman of the respective banks should personally supervise the settlement on case to case bases. The reserve bank of India as well as the government of india has been encouraging banks to design and implement policies for negotiated settlements particularly for those old unresolved accounts. Strategic Recommendation Though a number of measures have been introduced in the recent past for quick recovery of NPAs, a lot is desired in terms of effectiveness of these measures. An important element is the detention of NPAs and for this, strengthening of early warning system is the key. Some strategic areas connected to this aspect, are discussed below. Credit Risk Management: A credit risk management framework with detailed introductions should be put in place in all banks. It should focus on matching credit risk with capital provisions to cover expected losses from default. Sound procedures to ensure that all risks associated with requested credit facilities are promptly and fully evaluated by the concerned lending and credit managers. Similarly, systems and procedures should be implemented which allow for monitoring financial
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performance of customers and for controlling outstanding within limits. A process should also be there to conduct regular analysis of the portfolio and to ensure ongoing control and management of risk concentrations.

Special investigative audit: In case the bankers suspect diversion of funds, mismanagement, genuineness of promoters intent, etc. It is recommended that a special investigative audit of all financial transactions in the books of accounts of the borrowers unit be carried out to determine the real factors which contributed to the sickness. It would be useful to appoint a financial consultant urgently to examine all the concerned aspects. In the beginning, analysis of the financial information to identify areas of concern requiring detailed security be carried out followed by the areas identified for special investigation. Strategic option analysis: Prior to determining any appropriate restructuring plan for the NPAs, a detailed strategic option analysis be conducted with an analysis of the current financial position of a firm and the expected future performance of the unit. A SWOT analysis covering large claims or other significant liabilities should be looked into in the first step. Secondly, matter connected with additional funding and debt restructuring may be studied. Finally, strategic option would include business regeneration measures, divestment of non-core activities, performance monitoring, etc.
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 Special workout units: Currently banks are stressed assets management groups in their head offices. Some banks have also set up dedicated rehabilitation and recovery branches to handle complicated and complex assets. These special outfits have been focusing total attention in tackling the NPAs and they have achieved reasonable success. To improve efficacy of these outfits, the skills, knowledge, practical experience and negotiating skills of each credit official should match with the level of complexity to be managed.

Recovery management training: Suitable regular training needs to be imparted at appropriate levels on an ongoing basis. The main objective of the training should be to appraise the regulatory changes and their implications for the banks efforts for recovery of NPAs. Sometimes it is better to share the international experience in connection with recover management along with their appropriateness to the Indian environment. Likewise, orientation program should be conducted for all concerned officials explaining the characteristics and management of NPA portfolio of the bank. Other subjects where emphasis can be laid may include the regulatory framework, rights available to the lenders under various provisions and tools available to prevent to slippage of quality assets into NPAs. Finally, trainings on resolution framework should include options available for recovery, factors affecting restructuring decisions and a glance through the industry scenario.
35

36

Tools assets

for recovery of

Non-performing

Credit Default

Inability to Pay

Willful default

Unviable

Viable Lok Adalat Debt Recovery Tribunals Securitization Act

Compromise

Rehabilitation

Consortium Finance

Sole Banker Asset Reconstruction

Corporate Debt Restructuring

37

Rephasement of Repayment

Fresh Issue of Term Loan

Conversion into WCTL

Fresh WC Limit

Corporate debt Restructuring (CDR)

Background 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 : Objective 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
38

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.

Structure:

CDR system in the country will have a three-tier structure: (A) CDR Standing Forum (B) CDR Empowered Group (C) CDR Cell (A) CDR Standing Forum :

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 &
39

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 institutions participating as permanent members in the system.

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.

(B) CDR Empowered Group:

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,
40

a bank / financial institution have 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 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.

The decisions of the CDR Empowered Group shall be final and actionreference 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. (C) CDR Cell:

41

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 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

42

sufficient reasons the period can be extended maximum upto 180 days from the date of reference to the CDR Cell.

Other features: 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. The CDR system will be applicable only to standard and sub-standard accounts. However, as an interim measure, permission for corporate debt restructuring will be made available by RBI on the basis of specific recommendation of CDR "Core-Group", if a minimum of 75 per cent (by value) of the lenders constituting banks and FIs consent for CDR, irrespective of differences in asset classification status in banks/ financial institutions. There would be no requirement of the account / company being sick, NPA or being in default for a specified period before reference to the CDR Group. However, potentially viable cases of NPAs will get priority. This approach would provide the necessary flexibility and facilitate timely intervention for debt restructuring. Prescribing any milestone(s) may not be necessary, since the debt restructuring exercise is being triggered by banks and financial institutions or with their consent. In no case, the requests of any corporate indulging in wilful default or misfeasance will be considered for restructuring under CDR.
43

Reference to Corporate Debt Restructuring System could be triggered by (i) any or more of the secured creditor who have minimum 20% share in either working capital or term finance, or (ii) by the concerned corporate, if supported by a bank or financial institution having stake as in (i) above.

Legal Basis

The legal basis to the CDR mechanism shall be provided by the DebtorCreditor Agreement (DCA) and the Inter-Creditor Agreement. The debtors shall have to accede to the DCA, either at the time of original loan documentation (for future cases) or at the time of reference to Corporate Debt Restructuring Cell. Similarly, all participants in the CDR mechanism through their membership of the Standing Forum shall have to enter into a legally binding agreement, with necessary enforcement and penal clauses, to operate the System through laiddown policies and guidelines.

Stand-Still Clause:

One of the most important elements of Debtor-Creditor Agreement would be 'stand still' agreement binding for 90 days, or 180 days by both sides. Under this clause, both the debtor and creditor(s) shall agree to a
44

legally binding 'stand-still' whereby both the parties commit themselves not to taking recourse to any other legal action during the 'stand-still' period, this would be necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention judicial or otherwise.

The Inter-Creditors Agreement would be a legally binding agreement amongst the secured creditors, with necessary enforcement and penal clauses, wherein the creditors would commit them to abide by the various elements of CDR system. Further, the creditors shall agree that if 75% of secured creditors by value, agree to a debt restructuring package, the same would be binding on the remaining secured creditors.

45

Restructuring / 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 and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. In the case of sub-standard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms. Following representations from banks that the foregoing stipulations deter the banks from restructuring of standard and sub-standard loan assets even though the modification of terms might not jeopardise the assurance of repayment of dues from the borrower, the norms relating to restructuring of standard and sub-standard assets were reviewed in March 2001. In the context of restructuring of the accounts, the following stages at which the restructuring /
46

rescheduling / renegotiation of the terms of loan agreement could take place can be identified: Before commencement of commercial production; After commencement of commercial production but before the has been classified as sub standard, After commencement of commercial production and after the asset has been classified as sub standard. In each of the foregoing three stages, the rescheduling, etc., of principal and/or of interest could take place, with or without sacrifice, as part of the restructuring package evolved. asset

Treatment of Restructured Standard Accounts:

A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages would not cause a standard asset to be classified in the sub standard category provided the loan/credit facility is fully secured. A rescheduling of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to sub standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the 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
47

the present value of the dues expected to be received under the restructuring package, discounted on the same basis. In case there is a sacrifice involved in the amount of interest in present value terms, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved.

Treatment of restructured sub-standard accounts:

A rescheduling of the instalments of principal alone would render a substandard asset eligible to be continued in the sub-standard category for the specified period, provided the loan/credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to be continued to be classified in sub standard category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the 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 be received under the restructuring package, discounted on the same basis. In case there is a sacrifice involved in the amount of interest in present value terms, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. Even in cases where the sacrifice is

48

by way of write off of the past interest dues, the asset should continue to be treated as sub-standard.

Up gradation of restructured accounts:

The sub-standard accounts which have been subjected to restructuring etc., whether in respect of principal instalment or interest amount, by whatever modality, would be eligible to be upgraded to the standard category only after the specified period i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period. The amount of provision made earlier, net of the amount provided for the sacrifice in the interest amount in present value terms as aforesaid, could also be reversed after the one year period. During this one-year period, the sub-standard asset will not deteriorate in its classification if satisfactory performance of the account is demonstrated during the period. In case, however, the satisfactory performance during the one-year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.

General:

These instructions would be applicable to all type of credit facilities including working capital limits, extended to industrial units, provided they are fully covered by tangible securities.
49

As trading involves only buying and selling of commodities and the problems associated with manufacturing units such as bottleneck in commercial production, time and cost escalation etc. are not applicable to them, these guidelines should not be applied to restructuring/ rescheduling of credit facilities extended to traders. While assessing the extent of security cover available to the credit facilities, which are being restructured/ rescheduled, collateral security would also be reckoned, provided such collateral is a tangible security properly charged to the bank and is not in the intangible form like guarantee etc. of the promoter/ others.

Income recognition

There will be no change in the existing instructions on income recognition. Consequently, banks should not recognise income on accrual basis in respect of the projects even though the asset is classified as a standard asset if the asset is a "non performing asset" in terms of the extant instructions. In other words, while the accounts of the project may be classified as a standard asset, banks shall recognise income in such accounts only on realisation on cash basis if the asset has otherwise become non-performing as per the extant delinquency norm of 180 days. The delinquency norm would become 90 days with effect from 31 March 2004.

Consequently, banks, which have wrongly recognised income in the past, should reverse the interest if it was recognised as income during the current year or make a provision for an equivalent amount if it was recognised as income in
50

the previous year(s). As regards the regulatory treatment of income recognised as funded interest and conversion into equity, debentures or any other instrument banks should adopt the following: Funded Interest: Income recognition in respect of the NPAs, regardless of whether these are or are not subjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement, should be done strictly on cash basis, only on realisation and not if the amount of interest overdue has been funded. If, however, the amount of funded interest is recognised as income, a provision for an equal amount should also be made simultaneously. In other words, any funding of interest in respect of NPAs, if recognised as income, should be fully provided for. Conversion into equity, debentures or any other instrument: The amount outstanding converted into other instruments would normally comprise principal and the interest components. If the amount of interest dues is converted into equity or any other instrument, and income is recognised in consequence, full provision should be made for the amount of income so recognised to offset the effect of such income recognition. Such provision would be in addition to the amount of provision that may be necessary for the depreciation in the value of the equity or other instruments, as per the investment valuation norms.

Provisioning

While there will be no change in the extant norms on provisioning for NPAs, banks which are already holding provisions against some of the accounts,
51

which may now be classified as standard, shall continue to hold the provisions and shall not reverse the same.

(Chapter 6 analysis of NPA in various public sector and privative sector banks)

ANALYSIS

For the purpose of analysis and comparison between private sector and public sector banks, we take five-five banks in both sector to compare the non performing assets of banks. For understanding we further bifurcate the non
52

performing assets in priority sector and non priority sector, gross NPA and net NPA in percentage as well as in rupees, deposit investment advances.

Deposit Investment Advances is the first in the analysis because due to these we can understand the where the bank stands in the competitive market. As at end of March 2009, in private sector ICICI Bank is the highest depositinvestment-advances figures in rupees crore, second is HDFC Bank and KOTAK Bank has least figures. In public sector banks Punjab National Bank has highest deposit-investmentadvances but when we look at graph first three means Bank of Baroda and Bank of India are almost the similar in numbers and Dena Bank is stands for last in public sector bank. When we compare the private sector banks with public sector banks among these banks, we can understand the more number of people prefer to choose public sector banks for deposit-investment.

But when we compare the private sector bank ICICI Bank with the public sector banks ICICI Bank is more deposit-investment figures and first in the all banks.

DEPOSIT-INVESTMENT-ADVANCES ( RS.CRORE) of both sector banks and comparison among them, year 2008-09.

BANK AXIS

DEPOSIT 87626

INVESTMENT 33705
53

ADVANCES 59661

HDFC ICICI KOTAK INDUSIND TOTAL

100769 244431 16424 19037 468287

49394 111454 9142 6630 210325

63427 225616 15552 12795 377051

250000 200000

150000
100000 50000 0 ICICI HDFC AXIS INDUSIND KOTAK

DEPOSIT INVESTMENT ADVANCES

BANK

DEPOSIT

INVESTMENT
54

ADVANCES

BOB BOI DENA PNB UBI TOTAL

152034 150012 33943 166457 103859 606305

43870 41803 10282 53992 33823 183770

106701 113476 23024 119502 74348 437051

180000 160000 140000 120000 100000 80000 60000 40000 20000 0

PNB BOB BOI UBI DENA

DEPOSIT INVESTMENT ADVANCES

ICICI BANK AND PUNJAB NATIONAL BANK :-

BANK

DEPOSIT

INVESTMENT
55

ADVANCES

ICICI BANK PNB

244431 166457

111454 53992

225616 119502

250000 200000 150000 100000 50000 0 ICICI PNB

DEPOSIT INVESTMENT ADVANCES

There are two concepts related to non-performing assets_ gross and net. Gross refers to all NPAs on a banks balance sheet irrespective of the provisions made. It consists of all the non standard assets, viz. sub standard, doubtful, and loss assets. A loan asset is classified as sub standard 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 of

56

loans 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 is huge difference between gross and net NPA. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. 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 sub standard 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. 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 vast difference between gross and net NPA. There are almost same figures between BOI and BOB. YEAR 2008-09

BANK

GROSS NPA

NET NPA

BOB

1.46
57

0.35

BOI DENA PNB UBI

1.48 2.37 2.09 1.82

0.45 1.16 0.45 0.59

2.5 2 1.5 1 0.5 0 DENA UBI PNB BOI BOB

GROSS NPA NET NPA

2008-09

BANK

GROSS NPA

NET NPA

BOB BOI DENA

1.10 1.08 1.48

58

0.27 0.33 0.56

PNB UBI

1.67 1.34

0.38 0.10

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 DENA PNB BOI BOB UBI

GROSS NPA NET NPA

2007-08

BANK

GROSS NPA

NET NPA

AXIS HDFC ICICI

0.57 0.72 1.20

59

0.36 0.22 0.58

KOTAK INDUSIND

1.39 1.64

1.09 1.31

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 INDUSIND KOTAK ICICI AXIS HDFC

GROSS NPA NET NPA

2008-09

BANK

GROSS NPA

NET NPA

AXIS HDFC

0.45 0.68
60

0.23 0.22

ICICI KOTAK INDUSIND

1.90 1.55 1.69

0.87 0.98 1.25

2 1.5 1 0.5 0 INDUSIND KOTAK ICICI HDFC AXIS

GROSS NPA NET NPA

COMPARISON OF GROSS NPA WITH ALL BANKS FOR THE YEAR 2008-09. The growing NPAs affects the health of banks, profitability and efficiency. In the long run, it eats up the net worth of the banks. We can say that NPA is not a healthy sign for financial institutions. Here we take all the ten banks gross NPA together for better understanding. Average of these ten banks gross NPAs is 1.29 as percentage of total assets. So if we compare in private sector banks AXIS and HDFC Bank are below average of all banks and in public sector BOB and BOI. Average of these five private sector banks gross NPA is 1.25 and average of public sector banks is 1.33. Which is higher in compare of private sector banks.

61

GROSS NPA :2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 ICICI INDUSIND KOTAK HDFC AXIS BOI BOB UBI DENA PNB

COMPARISON OF NET NPA WITH ALL BANKS FOR THE YEAR 2007-08. Average of these ten banks net NPA is 0.56. And in the public sector banks all these five banks are below this. But in private sector banks there are three banks are above average. The difference between private and public banks average is also vast. Private sector banks net NPA average is 0.71 and in public sector banks it is 0.41 as percentage of total assets. As we know that net NPA shows actual burden of banks. IndusInd bank has highest net NPA figure and HDFC Bank has lowest in comparison.

NET NPA of banks:-

62

1.4 1.2 1 0.8 0.6 0.4 0.2 0 ICICI KOTAK AXIS BOB DENA

PRIORITY NON PRIORITY SECTOR When we further bifurcate NPA in priority sector and Non priority sector. Agriculture + small + others are priority sector. In private sector banks ICICI Bank has the highest NPA in both sector in compare to other private sector banks. Around 72% of NPA is with ICICI Bank with Rs.1359 crore in priority sector and around 78% in non priority sector. We can see that in private sector banks , banks has more NPA in non priority sector than priority sector.

BANK

AGRI (1)

SMALL (2)

OTHERS (3)

PRIORITY SECTOR ( 1+2+3 )

NONPRIORITY

AXIS HDFC ICICI KOTAK

109.12 36.12 981.85 10.00

14.76 110.56 23.35 33.84 3.18

86.71 47.70 354.13 4.04 30.02 522.60

210.59 194.41 1359.34 47.87 63.64 1875.85

275.06 709.23 6211.12 405.20 328.67 7929.28

INDUSIND 30.44 TOTAL

1167.53 185.69

63

7000 6000 5000 4000 3000 2000 1000 0 AXIS HDFC ICICI KOTAK INDUSIND
PRIORITY NON-PRIORITY

BANK

PRIORITY SECTOR (ADVANCED RS.CRORE )

NPA

BOB BOI DENA PNB UBI

5469 3269 1160 3772 1924

350 325 106 443 197

6000 5000 4000 3000 2000 1000 0 BOB BOI DENA PNB UBI
PRIORITY NPA

64

When we talk about public sector banks they are more in priority sector and they given advanced to weaker sector or industries. Public sector banks give more loans to Agriculture , small scale and others units and as a result we see that there are more number of NPA in public sector banks than in private sector banks. BOB given more advanced to priority sector in 2007-08 than other four banks and Dena Bank is in least.

But when there are comparison between private bank and public sector bank still ICICI Bank has more NPA in both priority and non priority sector with the comparison of public sector banks. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and initiative in each sector. Above we also discuss that ICICI Bank has highest deposit-investment-advance than other banks.

Now, when we compare the all public sector banks and public sector banks on priority and non-priority sector than the figures are really shocking. Because in compare of private sector banks, public sector banks numbers are very large.

PUBLIC SECTOR SECTOR PRIORITY PUBLIC NON PRT TOTAL 2006-07 22954 490 15158 38602 2007-08 25287 299 14163 39749

NEW PRIVATE 2006-07 1468 3 4800 6271 2007-08 2080 0 8339 10419

65

Here, there are huge difference between private and public sector banks NPA. There is increase in new private sector banks NPA of Rs.4148 cr in 2007-08 which is almost 66% rise than previous year. In public sector banks the numbers are not increased like private sector bank

Findings
There had been increase in Non-performing assets of SBI during recession which later on declined. Gross refers to all NPAs on a banks balance sheet irrespective of the provisions made. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Growing NPAs affects the health of banks, profitability and efficiency. In the long run, non-performing assets eats up the net worth of the banks. Gross NPA reflects the quality of the loans made by banks.

The biggest worry for indian banks

Both the gross as well as net non-performing assets, or NPAs, of the Indian banking industry are on the rise and things could get out of hand if the banks are not smart enough to take prompt corrective action
Bankers T | Tamal Bandyopadhyay The Indian banking industry seems to be in pretty good shape. At least thats what the earnings of listed banks suggest. Barring six, all banks have posted a higher net profit in the fiscal year that ended in March. Collectively, the net profit of 39 listed banks has risen by around 17% to Rs51,020 crore. Operating profit grew by almost an identical margin. Only five banks have shown a drop in operating profit. The four banks that feature in both lists are Dhanalakshmi Bank Ltd, Development Credit Bank Ltd, Indian Overseas Bank and Bank of India.

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Overall, the Indian banking industry is not only profitable, but also adequately capitalized. In fact, some banks capital adequacy ratioa measure of capital expressed as a percentage of riskweighted assetsis much above what they are required to maintain. For instance, Federal Banks capital adequacy ratio is 17.27% and that of three othersAxis Bank Ltd, Development Credit Bank and Corporation Bank is at least 15%. Is there any worry for the Indian banks at this point of time? A central banker tells me the biggest worry is the quality of assets. Both the gross as well as net non-performing assets, or NPAs, of the Indian banking industry are on the rise and things could get out of hand if the banks are not smart enough to take prompt corrective action. How bad is the situation? The gross NPAs of this set of banks have risen by 25.5% to Rs76,000 crorearound 50% more than the collective net profit of these banks. Net NPAsexcluding the loans against which provisions have been madehave risen by around 26% to Rs35,400 crore. Technically, there are three types of bad assetssubstandard, doubtful and loss assets. While the loss assets are to be provided for fully, the provisions for substandard and doubtful assets depend on the age of the assets. The Indian central bank wants all banks to provide for 70% of bad assets, irrespective of their age and classification, but most banks are resisting this move. The most critical point to note is that 34 of the 39 listed banks have shown an increase in their gross bad assets in absolute terms. In percentage terms, 24 banks have shown a rise. Similarly, the net NPAs of 30 banks have risen in the past year in absolute terms even though in percentage terms only 24 banks have shown a rise in net NPAs. This is no consolation. In a growing economy, when banks lend money to consumers, bad assets as a percentage of loans always decline. By setting aside more money, banks can also lower the percentage of net NPAs, but an ominous sign is the growth of bad assets in absolute terms. Bank of Indias gross NPAs have almost doubled from Rs2,470 crore to Rs4,883 crore and Indian Overseas Banks gross NPAs have grown some 88%, from Rs1,923 crore to Rs3,611 crore. After making hefty provisions, Bank of Indias net NPAs have grown some 251%, from Rs628 crore to Rs2,207 crore. The growth in Punjab National Banks net NPAs is even higher272%from Rs264 crore to Rs982 crore. Union Bank of Indias net NPAs have almost doubled to Rs965 crore and that of Bank of Maharashtra have grown 144% to Rs662 crore. Overall, State Bank of India has the biggest book of gross and net NPAsRs19,535 crore and Rs10,870 crore, respectively, but their growth in percentage term is not that high. Not too long ago, barring a few exceptions, all Indian banks had less than 1% of net NPAs and many of them even had zero net NPAs. They managed this feat by keeping a close eye on the quality of assets and aggressively making provisions. Thats no more that case. There is no zero-net NPA bank in India now. Eighteen of the 39 banks have at least 1% net NPAs, with Development Credit Bank topping the list (3.11%), followed by Indian Overseas Bank (2.52%). When it comes to gross NPAs as a percentage of loans, once again Development Credit Bank is the worst performer (8.69%). Other prominent names in this list are ICICI Bank Ltd (5.06%), Indian Overseas Bank (4.47%), Kotak Mahindra Bank Ltd (3.62%), United Bank of India (3.21%) and State Bank of India (3.05%).

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Things can get worse this year as many of the loans that were restructured in fiscal 2009 when economic growth slowed and an unprecedented credit crunch hit the financial system in the wake of the collapse of US investment bank Lehman Brothers Holdings Inc. are likely to turn bad. The Reserve Bank of India allowed Indian lenders to restructure those loans where borrowers were hit by the slowdown and could not service debt. That gave a temporary reprieve to the banks as they were not required to classify many such loans as bad assets, but now they are being forced to do so. State Bank of India had restructured around Rs16,800 crore worth of loans and around 10% of such loans have already turned bad. Other banks, too, are feeling the heat. Rising bad assets dent banks profitability as they need to set aside more money to cover them. Besides, they do not earn any interest income from the bad assets. By aggressively growing their loan books, banks can always distort the real picture of NPAs (as bad assets in percentage terms decline) but this does not help in the long run. At least some of the banks now need to focus more on bad loan recovery than on growing assets and the industry needs to be put on high alert.

Recommendations

Since in India, bank balance sheets contains 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 NPA according to the central bank guidelines, should be significant. Banks should check the creditability of the customer like the proper identification and also its reputation in the market. Banks must find out the real reason behind availing of loan by the customer. Proper identification of the guarantor should be checked by the bank. The stocks and assets of the firms/ companies which have availed loan must b checked periodically so that the bank is aware of its position. The rules/ norms/ regulation laid by the RBI, the ICAI and the Finance Act must be followed by the banks to reduce the NPAs.
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Conclusion

No matter how good the credit dispensation process may be, total elimination of NPAs is not possible in banking business owning to externalities but their incidents can be minimized. Moreover, as the viability of the bank depends upon the profit generating capacity of its operations, effective NPAs reduction policy must encompass the objectives of sound risk management, credit administration and staff motivation. In other situation where in a bank already saddled with a large quantum of NPAs, launching a strategic initiative for reducing its quantum by taking recovery monitoring as a broad-based movement through technological aid can bring about substantial improvement in its functioning. Though in last few year, significant progress have been made in NPA management, much still needs to be done in area such as credit risk management,
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proper identification and resolution of NPA in a time bound manner. In this connection some international practices may be introduced by the banks to get more effective results. Finally, repeating a word of caution, that NPA reduction should become an important organizational goal to survive in the present global competition.

CONCLUSION

It is not possible to eliminate totally the NPAs in the banking business but can only be minimized. It is always wise it follow the proper policy appraisal, supervision and follow-up of advances to avoid NPAs.

The banks should not only take steps for reducing present NPAs, but necessary precaution should also be taken to avoid future NPAs.

The bank has achieved its target because the net profit is also increased and there is a decrease in NPAs. So it is in better position compared to last year

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http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5781 http://sbi.co.in/webfiles/uploads/files/1275994607852_11_BALANCESHEET_S BI.pdf http://sbi.co.in/webfiles/uploads/files/AR0809/108-160.pdf

Management of NPAs Country Experiences, Tamal Datta Chaudhary

M.Y.KHAN, INDIAN FINANCIAL SYSYEM,3rd edition Publication by TATA McGraw hill)

Sugan Jain, Non-performing assets of banks.

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