banks non raising funds

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A

PROJECT REPORT

ON

Comparative Analysis

on

Non Performing Assets

of

Private And Public Sector Bans

S!B"#TTE$ #N PART#A% &!%%%"ENT O& RE'!#R"ENT O& P(

PRO(RA"E

Session) *+,*-*+,.

Submitted to SubmittedbyProf/ Smriti Sood JatinC0aud0ary!niversity business sc0ool "ano1umar

[Comparative analysis on NPA of Private & Public sector Banks] Page 1[University Business School, Panjab University, Chandigarh]


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Pan1ab university San1eevumarc0andigar0 2asSa0ota

ACKNOWLEDGEMENTACKNOWLEDGEMENT

With a deep sense of gratitude we express our thanks to all those who have been

instrumental in the development of the project report.

We are also grateful to University Business School, anjab University, !handigarh

who gave us a valuable opportunity of involving us in real business project. We are

greatly thankful to Prof. Smriti Soodwhose positive attitude, guidance and faith in

our ability spurred us to perform well.

We are also indebted to all Bank managers, friends and associates for their

valuable feedback, stimulated suggestions and overwhelming support without

which the project would not have been a success.



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CERT#CATE

We here by declare that the project report entitledCO"PARAT#2E ANA%3S#S ONNON PER&OR"#N( ASSETS O& PR#2ATE AN$ P!B%#C SECTOR BAN4S

submitted in partial fulfillment of the requirements for the degree of Masters of

Business Administration to !niversity Business Sc0ool5 Pan1ab !niversity5

C0andigar05 #ndia5are our original work and not submitted for the award of any

other degree, diploma, fellowship, or any other similar title or prizes.

NA"E

S#(NAT!RE

Jatin C0aud0ary"ano1 umarSan1eev umar2as Sa0ota

$ate)

Place)



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Table of Contents

able o! Contents"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#

$%&'(UC$'%""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""")Preventive *easure+ent or %P- """""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#3

ools !or recovery o! %P-s"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""#.

[Comparative analysis on NPA of Private & Public sector Banks] Page #[University Business School, Panjab University, Chandigarh]


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INTRODUCTION

"he accumulation of huge non#performing assets in banks has"he accumulation of huge non#performing assets in banks has

assumed great importance. "he depth of the problem of bad debts was firstassumed great importance. "he depth of the problem of bad debts was first

reali$ed only in early %&&'s. "he magnitude of ()s in banks and financialreali$ed only in early %&&'s. "he magnitude of ()s in banks and financial

institutions is over *s.%,+',''' crores.institutions is over *s.%,+',''' crores.

While gross () reflects the uality of the loans made by banks, netWhile gross () reflects the uality of the loans made by banks, net

() shows the actual burden of banks. (ow it is increasingly evident that the() shows the actual burden of banks. (ow it is increasingly evident that the

major defaulters are the big borrowers coming from the non#priority sector. "hemajor defaulters are the big borrowers coming from the non#priority sector. "he

banks and financial institutions have to take the initiative to reduce ()s in a timebanks and financial institutions have to take the initiative to reduce ()s in a time

bound strategic approach.bound strategic approach.

ublic sector banks figure prominently in the debate not only becauseublic sector banks figure prominently in the debate not only because

they dominate the banking industries, but also since they have much larger ()sthey dominate the banking industries, but also since they have much larger ()s

compared with the private sector banks. "his raises a concern in the industry andcompared with the private sector banks. "his raises a concern in the industry and

academia because it is generally felt that ()s reduce the profitability of a banks,academia because it is generally felt that ()s reduce the profitability of a banks,

weaken its financial health and erode its solvency.weaken its financial health and erode its solvency.

-or the recovery of ()s a broad framework has evolved for the-or the recovery of ()s a broad framework has evolved for the

management of ()s under which several options are provided for debt recoverymanagement of ()s under which several options are provided for debt recovery

and restructuring. Banks and -s have the freedom to design and implement theirand restructuring. Banks and -s have the freedom to design and implement their

own policies for recovery and write#off incorporating compromise and negotiatedown policies for recovery and write#off incorporating compromise and negotiated

settlements.settlements.

[Comparative analysis on NPA of Private & Public sector Banks] Page )[University Business School, Panjab University, Chandigarh]


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*/S/)*!0 1/"02324256*/S/)*!0 1/"02324256

"ype of *esearch

The research methodology adopted for carrying out the study were

n this project 3escriptive research methodologies were use.

)t the first stage theoretical study is attempted.

)t the second stage 0istorical study is attempted.

)t the "hird stage !omparative study of () is undertaken.

Scope of the StudyScope of the Study

!oncept of (on erforming )sset

5uidelines

mpact of ()s

*easons for ()s

reventive 1easures "ools to manage ()s

Sampling plan

"o prepare this roject we took five banks from public sector as well as five banks

from private sector.

2B7/!"8/S 2- "0/ S"U36"he basic idea behind undertaking the 5rand roject on () was to9

"o evaluate ()s :5ross and (et; in different banks.

"o study the past trends of ()

[Comparative analysis on NPA of Private & Public sector Banks] Page /[University Business School, Panjab University, Chandigarh]


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"o calculate the weighted of () in risk management in Banking

"o analy$e financial performance of banks at different level of ()

"o evaluate profitability positions of banks

"o evaluate () level in different economic situation.

"o


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:::::: !2("/("S!2("/("S ;;;;;;

[Comparative analysis on NPA of Private & Public sector Banks] Page [University Business School, Panjab University, Chandigarh]


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Introduction to the topicIntroduction to the topic

"he three letters =()> Strike terror in banking sector and business circle today.

() is short form of =(on erforming )sset>. "he dreaded () rule says simply

this9 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. "he recovery of

loan has always been problem for banks and financial institution. "o come out of

these first we need to think is it possible to avoid (), no can not be then left is to

look after the factor responsible for it and managing those factors.

Definitions:Definitions:

)n asset, including a leased asset, becomes non#performing when it ceases to

generate income for the bank.

) ?non#performing asset@ :(); was defined as a credit facility in respect of whichthe interest andA 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 ()s, from the year ending 1arch %, C''D. )ccordingly, with

effect from 1arch %, C''D, a non#performing asset :(); shall be a loan or an

advance whereE

nterest andA or instalment of principal remain overdue for a period of

more than &' days in respect of a term loan,



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"he account remains ?out of order@ for a period of more than &' days, in

respect of an 2verdraftA!ash !redit :23A!!;,

"he bill remains overdue for a period of more than &' days in the case

of bills purchased and discounted,

nterest andAor 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

)ny amount to be received remains overdue for a period of more than

&' days in respect of other accounts.

)s a facilitating measure for smooth transition to &' days norm, banks have

been advised to move over to charging of interest at monthly rests, by )pril %,

C''C. 0owever, the date of classification of an advance as () should not be

changed on account of charging of interest at monthly rests. Banks should,

therefore, continue to classify an account as () only if the interest charged during

any uarter is not serviced fully within %F' days from the end of the uarter with

effect from )pril %, C''C and &' days from the end of the uarter with effect from

1arch %, C''D.



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HISTO! O" I#DI$# %$#&I#'

)(an) is a financial institution that provides banking and other financial services.

By the term bank is generally understood an institution that holds a Banking4icenses. 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. "here are also financial institutions that provide certain

banking services without meeting the legal definition of a bank, a so#called (on#

bank. Banks are a subset of the financial services industry.

"ypically, 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. 3evelopment of banking industry in ndia followed below stated steps.

Banking in ndia has its origin as early as the 8edic period. t is believed that

the transition from money lending to banking must have occurred even

before 1anu, the great 0indu 7urist, who has devoted a section of his work

to deposits and advances and laid down rules relating to rates of interest.

Banking in ndia has an early origin where the indigenous bankers played a

very important role in lending money and financing foreign trade and

commerce. 3uring the days of the /ast ndia !ompany, was the turn of the

agency houses to carry on the banking business. "he 5eneral Bank of ndia

was first 7oint Stock Bank to be established in the year %GFH. "he others

which followed were the Bank 0industan and the Bengal Bank.

n the first half of the %&th century the /ast ndia !ompany established three



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banksE the Bank of Bengal in %F'&, the Bank of Bombay in %FD' and the

Bank of 1adras in %FD. "hese three banks also known as residency

banks were amalgamated in %&C' and a new bank, the mperial Bank of

ndia was established in %&C%. With the passing of the State Bank of ndia

)ct in %&++ the undertaking of the mperial Bank of ndia was taken by the

newly constituted State Bank of ndia.

"he *eserve Bank of ndia which is the !entral Bank was created in %&+

by passing *eserve Bank of ndia )ct, %&D which was followed up with the

Banking *egulations in %&D&. "hese acts bestowed *eserve Bank of ndia

:*B; with wide ranging powers for licensing, supervision and control of

banks. !onsidering the proliferation of weak banks, *B compulsorily

merged many of them with stronger banks in %&H&.

"he three decades after nationali$ation saw a phenomenal expansion in the

geographical coverage and financial spread of the banking system in the

country. )s certain rigidities and weaknesses were found to have developed

in the system, during the late eighties the 5overnment of ndia 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. )ccordingly, a high#

level committee was set up on %D )ugust %&&% to examine all aspects

relating to the structure, organi$ation, functions and procedures of the

financial system. Based on the recommendations of the !ommittee

:!hairman9 Shri 1. (arasimham;, a comprehensive reform of the banking

system was introduced in %&&C#&. "he objective of the reform measures

was to ensure that the balance sheets of banks reflected their actual

financial health. 2ne 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 *eserve Bank. "he introduction of



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capital adeuacy norms in line with international standards has been

another important measure of the reforms process.

%. !omprises balance of expired loans, compensation and other bonds such

as (ational *ural 3evelopment Bonds and !apital nvestment Bonds.

)nnuity certificates are excluded.

C. "hese represent mainly non# negotiable non# interest bearing securities

issued to nternational -inancial nstitutions like nternational 1onetary

-und, nternational Bank for *econstruction and 3evelopment and )sian

3evelopment Bank.

. )t book value.

D. !omprises accruals under Small Savings Scheme, rovident -unds,

Special 3eposits of (on# 5overnment

n the post#nationali$ation era, no new private sector banks were allowed to

be set up. 0owever, in %&&, 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

ndian banking system. "hese new banks had to satisfy among others, thefollowing minimum reuirements9

:i; t should be registered as a public limited companyE

:ii; "he minimum paid#up capital should be *s %'' croreE

:iii; "he shares should be listed on the stock exchangeE

:iv; "he headuarters of the bank should be preferably located in a

centre which does not have the headuarters of any other bankE

and

:v; "he bank will be subject to prudential norms in respect of banking

operations, accounting and other policies as laid down by the *B. t



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will have to achieve capital adeuacy of eight per cent from the very

beginning.

) high level !ommittee, under the !hairmanship of Shri 1. (arasimham,

was constituted by the 5overnment of ndia in 3ecember %&&G to review the

record of implementation of financial system reforms recommended by the

!-S in %&&% and chart the reforms necessary in the years ahead to make

the banking system stronger and better euipped to compete effectively in

international economic environment. "he !ommittee has submitted its report

to the 5overnment in )pril %&&F. Some of the recommendations of the

!ommittee, on prudential accounting norms, particularly in the areas of

!apital )deuacy *atio, !lassification of 5overnment guaranteed

advances, provisioning reuirements on standard advances and more

disclosures in the Balance Sheets of banks have been accepted and

implemented. "he other recommendations are under consideration.

"he banking industry in ndia is in a midst of transformation, thanks to the

economic liberali$ation of the country, which has changed business

environment in the country. 3uring the pre#liberali$ation period, the industry

was merely focusing on deposit mobili$ation and branch expansion. But with

liberali$ation, it found many of its advances under the non#performing assets

:(); list. 1ore importantly, the sector has become very competitive with

the entry of many foreign and private sector banks. "he face of banking is

changing rapidly. "here 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.

ndian Banking9


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%&H& 5overnment acuires ownership in major banks

)lmost all banking operations in manual mode

Some banks had Unit record 1achines of B1 for B* I

ay roll%&G'# %&F' Unprecedented expansion in geographical coverage, staff,

business I transaction volumes and directed lending to

agriculture, SS I SB sector

1anual systems struggle to handle exponential rise in

transaction volumes ##

2utsourcing of data processing to service bureau begins

Back office systems only in 1ultinational :1(!; banksJ

offices%&F%# %&&' *egulator :read *B; led " introduction in Banks

roduct level automation on stand alone !s at branches

:)41s;

n#house /3 infrastructure with Unix boxes, batch

processing in !obol for 1S.

1ainframes in corporate office

%&&%#%&&+ /xpansion slows down

Banking sector reforms resulting in progressive de#

regulation of banking, introduction of prudential banking

norms entry of new private sector banks

"otal Branch )utomation :"B); in 5ovt. owned and old

private banks begins

(ew private banks are set up with !BSA"B) form the start

[Comparative analysis on NPA of Private & Public sector Banks] Page 1)[University Business School, Panjab University, Chandigarh]


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%&&H#C''' (ew delivery channels like )"1, hone banking and

nternet banking and convenience of any branch banking

and auto sweep products introduced by new private and

1(! banks

*etail banking in focus, proliferation of credit cards

!ommunication infrastructure improves and becomes

cheap. 3*B" sets up 8S)" network for Banks

5ovt. owned banks feel the heat and attempt to respond

using intermediary technology, "B) implementation surges

ahead under fiat from !entral 8igilance

!ommission :!8!;, 6C< threat consumes last two years

C'''#C'' )lternate delivery channels find wide consumer acceptance

" Bill passed lending legal validity to electronic transactions

5ovt. owned banks and old private banks start

implementing !BSs, but initial attempts face problems

Banks enter insurance business launch debit cards

:Source9 1.6.,rd edition ublication by

")") 1c5raw hill;

[Comparative analysis on NPA of Private & Public sector Banks] Page 1/[University Business School, Panjab University, Chandigarh]


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#O# P*"O+I#' $SS*TS ,#P$-

H$T IS $ #P$ ,#O# P*"O+I#' $SS*TS- /

)ction for enforcement of security interest can be initiated only if the secured assetis classified as (onperforming asset.

(on performing asset means an asset or account of borrower ,which has beenclassified by bank or financial institution as sub Kstandard , doubtful or loss asset,in accordance with the direction or guidelines relating to assets classificationissued by *B .

)n amount due under any credit facility is treated as =past due> when it is notbeen paid within ' days from the due date. 3ue to the improvement in thepayment and settlement system, recovery climate, up gradation of technology inthe banking system etc, it was decided to dispense with =past due =concept, witheffect from 1arch %, C''%. )ccordingly as from that date, a (on performing asset

shall be an advance where

i. nterest andAor installment of principal remain overdue for a period of more

than %F' days in respect of a term loan,

[Comparative analysis on NPA of Private & Public sector Banks] Page 1.[University Business School, Panjab University, Chandigarh]


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ii. "he account remains ?out of order ? for a period of more than %F' days ,in

respect of an overdraftAcash credit :23A!!;

iii. "he bill remains overdue for a period of more than %F' days in case of bill

purchased or discounted.

iv. nterest andAor principal remains overdue for two harvest season but for a

period not exceeding two half years in case of an advance granted for

agricultural purpose ,and

v. )ny amount to be received remains overdue for a period of more than %F'

days in respect of other accounts

With a view to moving towards international best practices and to ensuregreater transparency, it has been decided to adopt @&' days overdue ?norms for

identification of ()s ,from the year ending 1arch %,C''D,a non performingasset shall be a loan or an advance whereE

i. nterest andAor installment of principal remain overdue for a period of

more than &' days in respect of a term loan,

ii. "he account remains ?out of order ? for a period of more than &'

days ,in respect of an overdraftAcash credit :23A!!;

iii. "he bill remains overdue for a period of more than &' days in case of

bill purchased or discounted.

iv. nterest andAor principal remains overdue for two harvest season but

for a period not exceeding two half years in case of an advance

granted for agricultural purpose ,and

v. )ny amount to be received remains overdue for a period of more

than &' days in respect of other accounts

Out of order

)n account should be treated as out of order if the outstanding balanceremains continuously in excess of sanctioned limit Adrawing power. in case wherethe out standing balance in the principal operating account is less than thesanctioned amount Adrawing power, but there are no credits continuously for six



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months as on the date of balance sheet or credit are not enough to cover theinterest debited during the same period ,these account should be treated as ?outof order@.

Oerdue

)ny amount due to the bank under any credit facility is ?overdue@ if it is notpaid on due date fixed by the bank.

"$1TOS "O IS* I# #P$s

"he banking sector has been facing the serious problems of the rising()s. But the problem of ()s is more in public sector banks when compared toprivate sector banks and foreign banks. "he ()s in SB are growing due toexternal as well as internal factors.

*2T*#$3 "$1TOS :44444444444444444444444444444444444

Ineffectie recoery tri(unal

"he 5ovt. has set of numbers of recovery tribunals, which works for

recovery of loans and advances. 3ue to their negligence and ineffectiveness

in their work the bank suffers the conseuence of non#recover, their by

reducing their profitability and liuidity.

illful Defaults

"here are borrowers who are able to payback loans but areintentionally withdrawing it. "hese groups of people should be identified andproper measures should be taken in order to get back the money extendedto them as advances and loans.

#atural calamities



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"his is the measure factor, which is creating alarming rise in ()s of

the SBs. every now and then ndia is hit by major natural calamities thus

making the borrowers unable to pay back there loans. "hus the bank has to

make large amount of provisions in order to compensate those loans, henceend up the fiscal with a reduced profit.

1ainly ours farmers depends on rain fall for cropping. 3ue to

irregularities of rain fall the farmers are not to achieve the production level

thus they are not repaying the loans.

Industrial sic)ness

mproper project handling , ineffective management , lack of

adeuate resources , lack of advance technology , day to day changing

govt. olicies give birth to industrial sickness. 0ence the banks that finance

those industries ultimately end up with a low recovery of their loans reducing

their profit and liuidity.

3ac) of demand

/ntrepreneurs in ndia could not foresee their product demand and starts

production which ultimately piles up their product thus making them unable

to pay back the money they borrow to operate these activities. "he banks

recover the amount by selling of their assets, which covers a minimum label.

"hus the banks record the non recovered part as ()s and has to make

provision for it.

1hange on 'ot. policies



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With every new govt. banking sector gets new policies for its

operation. "hus it has to cope with the changing principles and policies for

the regulation of the rising of ()s.

"he fallout of handloom sector is continuing as most of the weavers

!o#operative societies have become defunct largely due to withdrawal of

state patronage. "he rehabilitation plan worked out by the !entral

government to revive the handloom sector has not yet been implemented.

So the over dues due to the handloom sectors are becoming ()s.

I#T*#$3 "$1TOS :4

444444444444444444444444444444444

Defectie 3ending process

"here are three cardinal principles of bank lending that have been followed

by the commercial banks since long.

i. rinciples of safety

ii. rinciple of liuidity

iii. rinciples of profitability

i. rinciples of safety 9#



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By safety it means that the borrower is in a position to repay the loan

both principal and interest. "he repayment of loan depends upon the

borrowers9

a. !apacity to pay

b. Willingness to pay

Capacity to pay depends upon:%. "angible assetsC. Success in business

Willingness to pay depends on:%. !haracterC. 0onest. *eputation of borrower

"he banker should, there fore take utmost care in ensuring that theenterprise or business for which a loan is sought is a sound one and theborrower is capable of carrying it out successfully .he should be a person ofintegrity and good character.

Inappropriate technology

3ue to inappropriate technology and management information system,

market driven decisions on real time basis can not be taken. roper 1S and

financial accounting system is not implemented in the banks, which leads to

poor credit collection, thus (). )ll the branches of the bank should be

computeri$ed.



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Improper SOT analysis

"he improper strength, weakness, opportunity and threat analysis is another

reason for rise in ()s. While providing unsecured advances the banks

depend more on the honesty, 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 fromL

a. -rom bankers.

b. /nuiry from marketAsegment of trade, industry, business.

c. -rom external credit rating agencies.

)naly$e the balance sheet.

"rue picture of business will be revealed on analysis of profitAloss aAc

and balance sheet.

urpose of the loan

When bankers give loan, he should analy$e the purpose of the loan.

"o ensure safety and liuidity, banks should grant loan for productive



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purpose only. Bank should analy$e the profitability, viability, long term

acceptability of the project while financing.

Poor credit appraisal system

oor credit appraisal is another factor for the rise in ()s. 3ue to poor

credit appraisal the bank gives advances to those who are not able to repay

it back. "hey should use good credit appraisal to decrease the ()s.

+anagerial deficiencies

"he 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 theL

%. 1arketability

C. )cceptability

. Safety

D. "ransferability.

"he 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. f a new big customer

meets misfortune or certain traders or industries affected adversely, the

overall position of the bank will not be affected.

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$(sence of regular industrial isit

"he irregularities in spot visit also increases the ()s. )bsence of

regularly visit of bank officials to the customer point decreases the collection

of interest and principals on the loan. "he ()s due to willful defaulters can

be collected by regular visits.

e loaning process

(on remittance of recoveries to higher financing agencies and re loaning of

the samehave already affected the smooth operation of the credit cycle .

PO%3*+S D5* TO #P$

%. 2wners do not receive a market return on there capital .in the worst case, ifthe banks fails, owners loose their assets. n modern times this may affect a

broad pool of shareholders.

C. 3epositors do not receive a market return on saving. n the worst case if the

bank fails, depositors loose their assets or uninsured balance.

. Banks redistribute losses to other borrowers by charging higher interest

rates, lower deposit rates and higher lending rates repress saving and

financial market, which hamper economic growth.

D. (on performing loans epitomi$e bad investment. "hey 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.



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(on performing asset may spill over the banking system and contract the money

stock, which may lead to economic contraction. "his spill over effect can

channeli$e through liuidity or bank insolvency9

a; When many borrowers fail to pay interest, banks may experience liuidity

shortage. "his can jam payment across the country,

b; lliuidity constraints bank in paying depositors

c; Undercapitali$ed banks exceeds the banks capital base.

)s a facilitating measure for smooth transition to &' days norm, banks have been

advised to move over to charging of interest at monthly rests, by )pril %, C''C.

0owever, the date of classification of an advance as () should not be changed

on account of charging of interest at monthly rests. Banks should, therefore,

continue to classify an account as () only if the interest charged during any

uarter is not serviced fully within %F' days from the end of the uarter with effect

from )pril %, C''C and &' days from the end of the uarter with effect from 1arch

%, C''D.



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Types of #P$Types of #P$

$6 'ross #P$$6 'ross #P$

%6 #et #P$%6 #et #P$

$6 'ross #P$:$6 'ross #P$:

5ross ()s are the sum total of all loan assets that are classified as ()s as per

*B guidelines as on Balance Sheet date. Gross NPA reflects the uality of the

loans !ade by banks" t consists of all the non standard assets like as sub#

standard, doubtful, and loss assets.

t can be calculated with the help of following ratio9

'ross #P$s atio 'ross #P$s

'ross $dances

#$ Net NPA:#$ Net NPA:

(et ()s are those type of ()s in which the bank has deducted the provisionregarding ()s. Net NPA sho%s the actual burden of banks" Since in ndia,

bank balance sheets contain a huge amount of ()s and the process of recovery

and write off of loans is very time consuming, the provisions the banks have to



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make against the ()s according to the central bank guidelines, are uite

significant. "hat is why the difference between gross and net () is uite high.

t can be calculated by followingL

#et #P$s 'ross #P$s 7 Proisions

'ross $dances 4 Proisions

I#1O+* *1O'#ITIO#I#1O+* *1O'#ITIO#

Income recognition 7 PolicyIncome recognition 7 Policy

"he policy of income recognition has to be objective and based on the

record of recovery. nternationally income from non#performing assets :();

is not recognised on accrual basis but is booked as income only when it is

actually received. "herefore, the banks should not charge and take to

income account interest on any ().

0owever, interest on advances against term deposits, (S!s, 8s,


30/85

f 5overnment guaranteed advances become (), the interest on such

advances should notbe taken to income account unless the interest has

been realised.

eersal of income:eersal of income:

f any advance, including bills purchased and discounted, becomes () as

at 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 'oernment guaranteed

accounts also.

n respect of ()s, fees, commission and similar income that have accrued

should cease to accrue in the current period and should be reversed or

provided for with respect to past periods, if uncollected.

3eased $ssets

"he 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.

"he term Jnet lease rentalsJ would mean the amount of finance chargetaken to the credit of rofit I 4oss )ccount and would be worked out as gross



31/85

lease rentals adjusted by amount of statutory depreciation and lease

eualisation account.

)s per the 8'uidance #ote on $ccounting for 3eases8 issued by the!ouncil of the nstitute of !hartered )ccountants of ndia :!);, a separate

4ease /ualisation )ccount should be opened by the banks with a

corresponding debit or credit to 4ease )djustment )ccount, as the case may

be. -urther, 4ease /ualisation )ccount should be transferred every year to

the rofit I 4oss )ccount and disclosed separately as a deduction

fromAaddition to gross value of lease rentals shown under the head J5ross

ncomeJ.

$ppropriation of recoery in #P$s$ppropriation of recoery in #P$s

nterest realised on ()s may be taken to income account provided the

credits in the accounts towards interest are not out of freshA additional credit

facilities sanctioned to the borrower concerned.

n the absence of a clear agreement between the bank and the borrower for

the purpose of appropriation of recoveries in ()s :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.

Interest $pplication:Interest $pplication:

"here is no objection to the banks using their own discretion in debiting interest to

an () account taking the same to nterest Suspense )ccount or maintaining only

a record of such interest in proforma accounts.



32/85

eporting of #P$seporting of #P$s

Banks are reuired to furnish a *eport on ()s as on %st1arch each year

after completion of audit. "he ()s would relate to the banks@ global

portfolio, including the advances at the foreign branches. "he *eport should

be furnished as per the prescribed format given in the )nnexure .

While reporting () figures to *B, the amount held in interest suspense

account, should be shown as a deduction from gross ()s as well as gross

advances while arriving at the net ()s. Banks which do not maintain

nterest Suspense account for parking interest due on non#performing

advance accounts, may furnish the amount of interest receivable on ()s

as a foot note to the *eport.

Whenever ()s are reported to *B, the amount of technical write off, if

any, should be reduced from the outstanding gross advances and gross

()s to eliminate any distortion in the uantum of ()s being reported.

*POTI#' "O+$T "O #P$ 7 'OSS $#D #*T #P$

#ame of the %an):

Position as on

P$TI153$S

%; 5ross )dvanced M

C; 5ross () M

; 5ross () as Nage of 5ross )dvanced



33/85

D; "otal deduction: aObOcOd ;

: a ; Balance in interest suspense aAc MM

: b ; 3!5!A/!5! claims received and held pending

adjustment

: c ; part payment received and kept in suspense aAc

: d ; "otal provision held MMM

+; (et advanced : %#D ;

H; (et () : C#D ;

G; (et () as a Nage of (et )dvance

Mexcluding "echnical write#off of *s.LLLLLLLLcrore.

MMBanks which do not maintain an interest suspense aAc to park the accrued

interest on ()s may furnish the amount of interest receivable on ()s.

MMM/xcluding amount of "echnical write#off :*s.LLLLLLcrore; and provision on

standard assets. :*s.LLLLLcrore;.

$sset 1lassification$sset 1lassification

44444444444444444444444444444444444444444444444444444444444444

1ategories of #P$s1ategories of #P$s

Standard $ssets:Standard $ssets:

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. 0ere it is also very

important that in this case the arrears of interest and the principal amount of loan

does not exceed &' days at the end of financial year. f asset fails to be in category



34/85

of standard asset that is amount due more than &' days then it is () and ()s

are further need to classify in sub categories.

Banks are reuired to classify non#performing assets further into

the following three categories based on the period for which the asset has

remained non-performingand the realisabilityof the dues9

( 1 ) Sub-standard Assets( 1 ) Sub-standard Assets

( 2 ) Doubtful Assets( 2 ) Doubtful Assets

( 3 ) oss Assets( 3 ) oss Assets

, - Su(4standard $ssets:44, - Su(4standard $ssets:44

With effect from % 1arch C''+, a sub standard asset would be one, which has

remained () for a period less than or eual to %C month. "he following features

are exhibited by sub standard assets9 the current net worth of the borrowers A

guarantor or the current market value of the security charged is not enough to

ensure recovery of the dues to the banks in fullE and the asset has well#defined

credit weaknesses that jeopardise the liuidation of the debt and are characterisedby the distinct possibility that the banks will sustain some loss, if deficiencies are

not corrected.

, ; - Dou(tful $ssets:44, ; - Dou(tful $ssets:44

) 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 liuidation in full, K on the basis of currently known facts, conditions

and values K highly uestionable and improbable.



35/85

With effect from 1arch %, C''+, an asset would be classified as doubtful if it

remained in the sub#standard category for %C months.

, < - Loss Assets:--Loss Assets:--

) 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. )lso, these assets would have been identified as ?loss

assets@ by the bank or internal or external auditors or the *B inspection but the

amount would not have been written#off wholly.

Proisioning #ormsProisioning #orms

444444444444444444444444444444444444444444444444444444444444444444444444444444444444

'eneral'eneral

n order to narrow down the divergences and ensure adeuate provisioning

by banks, it was suggested that a bankJs statutory auditors, if they so desire,



36/85

could have a dialogue with *BJs *egional 2fficeA inspectors who carried out

the bankJs inspection during the previous year with regard to the accounts

contributing to the difference.

ursuant to this, regional offices were advised to forward a list of individual

advances, where the variance in the provisioning reuirements between the

*B and the bank is above certain cut off levels so that the bank and the

statutory auditors take into account the assessment of the *B while making

provisions for loan loss, etc.

"he primary responsibility for making adeuate provisions for any diminutionin the value of loan assets, investment or other assets is that of the bank

managements and the statutory auditors. "he assessment made by the

inspecting officer of the *B is furnished to the bank to assist the bank

management and the statutory auditors in taking a decision in regard to

making adeuate and necessary provisions in terms of prudential guidelines.

n 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 D supra. "aking 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 below9

3oss assets:3oss assets:

"he entire asset should be written off. f the assets are permitted to remain

in the books for any reason, %'' percent of the outstanding should be provided for.



37/85

Dou(tful assets:Dou(tful assets:

%'' 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.

n regard to the secured portion, provision may be made on the following

basis, at the rates ranging from C' percent to +' percent of the secured

portion depending upon the period for which the asset has remained

doubtful9

Period for which the adance has

(een considered as dou(tful

Proision

re=uirement ,>-

Up to one year C'

2ne to three years '

1ore than three years9

:%; 2utstanding stock of ()s as on

1arch %, C''D.

:C; )dvances classified as ?doubtful@

H'N with effect from 1arch

%,C''+.

G+N effect from 1arch %,

C''H.



38/85

more than three years on or after

)pril %, C''D.

%''N with effect from

1arch %, C''G.

)dditional provisioning conseuent upon the change in the definition of

doubtful assets effective from 1arch %, C'' has to be made in phases as

under9

)s on%.'.C'', +' percent of the additional provisioning reuirement onthe assets which became doubtful on account of new norm of %F months for

transition from sub#standard asset to doubtful category.

)s on %.'.C''C, balance of the provisions not made during the previous

year, in addition to the provisions needed, as on %.'.C''C.

Banks are permitted to phase the additional provisioning conseuent upon

the reduction in the transition period from substandard to doubtful asset from

%F to %C months over a four year period commencing from the year ending

1arch %, C''+, with a minimum of C' N each year.

#ote: ?aluation of Security for proisioning purposes

With a view to bringing down divergence arising out of difference in assessment of

the value of security, in cases of ()s with balance of *s. + 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. 8aluers appointed as per the guidelines approved by the Board of

3irectors should get collaterals such as immovable properties charged in favour of

the bank valued once in three years.



39/85

Su(4standard assets:Su(4standard assets:

) general provision of %' percent on total outstanding should be made without

making any allowance for 3!5!A/!5! guarantee cover and securities available.

Standard assets:Standard assets:

-rom the year ending %.'.C''', the banks should make a general

provision of a minimum of '.D' percent on standard assets on global loan

portfolio basis.

"he provisions on standard assets should not be reckoned for arriving at net

()s.

"he provisions towards Standard )ssets need not be netted from gross

advances but shown separately as J!ontingent rovisions against Standard

)ssetsJ under J2ther 4iabilities and rovisions # 2thersJ in Schedule + of the

balance sheet.

"loating proisions:"loating proisions:

Some of the banks make a Jfloating provisionJ over and

above the specific provisions made in respect of accounts identified as ()s. "he



40/85

floating provisions, wherever available, could be set#off against provisions reuired

to be made as per above stated provisioning guidelines. !onsidering 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.

Proisions on 3eased $ssets:Proisions on 3eased $ssets:

4eases are peculiar transactions where the assets are not recorded in the books of4eases are peculiar transactions where the assets are not recorded in the books of

the user of such assets as )ssets, whereas they are recorded in the books of thethe user of such assets as )ssets, whereas they are recorded in the books of the

owner even though the physical existence of the asset is with the user :lessee;.owner even though the physical existence of the asset is with the user :lessee;.

LL:)S%& !);LL:)S%& !);

Su(4standard assets : 4

%' percent of the 8net (oo) alue8.

)s per the J5uidance (ote on )ccounting for 4easesJ issued by the !), 8'ross

(oo) alue8of 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 rofit I 4oss )ccount.

)ccumulated depreciation should be deducted from the 5ross Book 8alue of the

leased asset in the balance sheet of the lesser to arrive at the 8net (oo) alue8.



41/85

)lso, balance standing in J4ease )djustment )ccountJ should be adjusted in theJnet book valueJ of the leased assets. "he amount of adjustment in respect of each

class of fixed assets may be shown either in the main balance sheet or in the -ixed

)ssets Schedule as a separate column in the section related to leased assets.

Dou(tful assets :4

%'' percent of the extent to which the finance is not secured by the realisable value

of the leased asset. *ealisable value to be estimated on a realistic basis. In

addition to the a(oeprovision, the following provision on the net (oo) alueof

the secured portionshould be made, depending upon the period for which asset

has been doubtful9

Period >age of proision

Up to one year C'

2ne to three years '

1ore than three years +'

3oss assets :4

"he entire asset should be written#off. f for any reason, an asset is allowed to

remain in books, %'' 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. :8net (oo) alue8-



42/85

'uidelines for Proisions under Special'uidelines for Proisions under Special

1ircumstances1ircumstances

'oernment guaranteed adances'oernment guaranteed adances

With effect from % 1arch C''', in respect of advances sanctioned against State5overnment guarantee, if the guarantee is invoked and remains in default for more

than two uarters :%F' days at present;, the banks should make normal provisions

as prescribed in paragraph D.%.C above.

)s regards advances guaranteed by State 5overnments, in respect of whichguarantee stood invoked as on %.'.C''', necessary provision was allowed to be

made, in a phased manner, during the financial years ending %.'.C''' to

%.'.C'' with a minimum of C+ percent each year.

)dvances granted under rehabilitation packages approved by)dvances granted under rehabilitation packages approved by

B-*Aterm lending institutions9B-*Aterm lending institutions9

n respect of advances under rehabilitation package approved by B-*Atermlending institutions, the provision should continue to be made in respect of dues to

the bank on the e@isting credit facilities as per their classification as sub#

standard or doubtful asset.



43/85

)s regards the additional facilities sanctioned as per package finalised by B-*andAor term lending institutions, provision on additional facilities sanctioned need

not be made for a period of one yearfrom the date of disbursement.

n respect of additional credit facilities granted to SS units which are identified

as sick Pas defined in *!3 circular (o.4(-S.B!.+G A'H.'D.'%AC''%#C''C dated

%H 7anuary C''CQ and where rehabilitation packagesAnursing programmes have

been drawn by the banks themselves or under consortium arrangements, no

provision need be made for a period of one year.

$dances against term depositsA #S1s eligi(le for$dances against term depositsA #S1s eligi(le for

surrenderA I?PsA &?PsA and life policies are e@emptedsurrenderA I?PsA &?PsA and life policies are e@empted

from proisioning re=uirements.from proisioning re=uirements.

HoweerA adances against gold ornamentsA goernmentHoweerA adances against gold ornamentsA goernment

securities and all other )inds of securities are notsecurities and all other )inds of securities are note@empted from proisioning re=uirements.e@empted from proisioning re=uirements.

"reatment of interest suspense account9"reatment of interest suspense account9

)mounts held in nterest Suspense )ccount should not be reckoned as part of

provisions. )mounts lying in the nterest Suspense )ccount should be deducted

from the relative advances and thereafter, provisioning as per the norms, should be

made on the balances after such deduction.



44/85

)dvances covered by /!5!A3!5! guarantee)dvances covered by /!5!A3!5! guarantee

n the case of advances guaranteed by 3!5!A/!5!, provision should be made

only for the (alance in e@cess ofthe amount guaranteed by these !orporations.-urther, while arriving at the provision reuired 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 !orporations and then

provision made as illustrated hereunder9

&'a!ple

2utstanding Balance *s. D lakhs

3!5! !over +' percent

eriod for which the advance has remained

doubtful

1ore than years

remained doubtful

8alue of security held

:excludes worth of *s.;

*s. %.+' lakhs

Provision reuired to be !ade

2utstanding balance *s. D.'' lakhs

4ess9 8alue of security held *s. %.+' lakhs

Unrealised balance *s. C.+' lakhs



45/85

4ess9 3!5! !over

:+'N of unrealisable balance;

*s. %.C+ lakhs

(et unsecured balance *s. %.C+ lakhs

rovision for unsecured portion of

advance

*s. %.C+ lakhs :R %'' percent of

unsecured portion;

rovision for secured portion of

advance

*s. '.G+ lakhs :R +' percent of

secured portion;

"otal provision reuired to be made *s. C.'' lakhs

$dance coered (y 1'TSI guarantee$dance coered (y 1'TSI guarantee

n case the advance covered by !5"S guarantee becomes non#performing, noprovision need be made towards the guaranteed portion. "he amount outstanding

in excess of the guaranteed portion should be provided for as per the extant

guidelines on provisioning for non#performing advances.

Ta)e4out financeTa)e4out finance

"he lending institution should make provisions against a Jtake#out financeJ turning

into () pending its take#over by the taking#over institution. )s and when the asset

is taken#over by the taking#over institution, the corresponding provisions could be

reversed.



46/85

esere for *@change ate "luctuations $ccountesere for *@change ate "luctuations $ccount

,*"$-,*"$-

When exchange rate movements of ndian rupee turn adverse, the outstanding

amount of foreign currency denominated a loan :where actual disbursement was

made in ndian *upee; which becomes overdue goes up correspondingly, with its

attendant implications of provisioning reuirements. Such assets should not

normally be revalued. n case such assets need to be revalued as per reuirement

of accounting practices or for any other reuirement, the following procedure may

be adopted9

"he loss on revaluation of assets has to be booked in the bankJs rofit I 4oss)ccount.

Besides the provisioning reuirement as per )sset !lassification, banks should

treat the full amount of the *evaluation 5ain relating to the corresponding assets, if

any, on account of -oreign /xchange -luctuation as provision against the particular

assets.



47/85

Impact of #P$Impact of #P$

Profita(ility:4Profita(ility:4

() 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 () but

() lead to opportunity cost also as that much of profit invested in some

return earning projectAasset. So () doesn@t affect current profit but also

future stream of profit, which may lead to loss of some long#term beneficial

opportunity. )nother impact of reduction in profitability is low *2 :return on

investment;, which adversely affect current earning of bank.

3i=uidity:43i=uidity:4

1oney is getting blocked, decreased profit lead to lack of enough cash at hand

which lead to borrowing money for shotrtes period of time which lead to additional

cost to the company. 3ifficulty in operating the functions of bank is another cause

of () due to lack of money. *outine payments and dues.

Inolement of management:4Inolement of management:4

"ime and efforts of management is another indirect cost which bank has to bear

due to (). "ime and efforts of management in handling and managing ()

would have diverted to some fruitful activities, which would have given good



48/85

returns. (ow day@s banks have special employees to deal and handle ()s, which

is additional cost to the bank.

1redit loss:41redit loss:4

Bank is facing problem of () then it adversely affect the value of bank in terms of

market credit. t will lose it@s goodwill and brand image and credit which have

negative impact to the people who are putting their money in the banks .



49/85

*$SO#S "O #P$:*$SO#S "O #P$:

easons can (e diided in to two (road categories:4

A$ (nternal )actor#$ &'ternal )actor

* A $ (nternal )actors:+* A $ (nternal )actors:+

nternal -actors are those, which are internal to the bank and are controllable by

banks.

oor lending decision9

(on#!ompliance to lending norms9

4ack of post credit supervision9

-ailure to appreciate good payers9

/xcessive overdraft lending9



50/85

(on K "ransparent accounting policy9

* # $ &'ternal )actors:+* # $ &'ternal )actors:+

/xternal factors are those, which are external to banks they are not controllable by

banks.

Socio political pressure9

!hang in industry environment9

/ndangers macroeconomic disturbances9

(atural calamities

ndustrial sickness

3iversion of funds and willful defaults

"imeA cost overrun in project implementation

4abour problems of borrowed firm

Business failure



51/85

nefficient management

2bsolete technology

roduct obsolete

*arly symptoms (y which one can recogniBe a*arly symptoms (y which one can recogniBe a

performing asset turning in to #on4performingperforming asset turning in to #on4performingassetasset

"our categories of early symptoms:4"our categories of early symptoms:4

444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444444

, - "inancial:, - "inancial:

(on#payment of the very first installment in case of term loan. Bouncing of cheue due to insufficient balance in the accounts.

rregularity in installment.

rregularity of operations in the accounts.

Unpaid over due bills.

3eclining !urrent *atio.

ayment 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.

[Comparative analysis on NPA of Private & Public sector Banks] Page #1[University Business School, Panjab University, Chandigarh]


52/85

, ; - Operational and Physical:

f information is received that the borrower has either initiated the process

of winding up or are not doing the business.

2verdue receivables.

Stock statement not submitted on time.

/xternal non#controllable factor like natural calamities in the city where

borrower conduct his business.

-reuent changes in plan.

(on payment of wages.

, < - $ttitudinal 1hanges:

Use for personal comfort, stocks and shares by borrower.

)voidance of contact with bank.

roblem between partners.

, C - Others:

!hanges in 5overnment policies.

3eath of borrower.

!ompetition in the market.



53/85

Preentie +easurement "or #P$Preentie +easurement "or #P$

&arly ,ecognition of the Proble!:+&arly ,ecognition of the Proble!:+

nvariably, by the time banks start their efforts to get involved in a revival process,

it@s too late to retrieve the situation# both in terms of rehabilitation of the project and

recovery of bank@s dues. dentification of weakness in the very beginning that is 9

When the account starts showing first signs of weakness regardless of the fact that

it may not have become (), is imperative. )ssessment of the potential of revival

may be done on the basis of a techno#economic viability study. *estructuring

should be attempted where, after an objective assessment of the promoter@s

intention, banks are convinced of a turnaround within a scheduled timeframe. n

respect of totally unviable units as decided by the bank, it is better to facilitate

winding upA selling of the unit earlier, so as to recover whatever is possible through

legal means before the security position becomes worse.



54/85

(dentifying #orro%ers %ith Genuine (ntent:+(dentifying #orro%ers %ith Genuine (ntent:+ dentifying

borrowers with genuine intent from those who are non# serious with no commitment

or stake in revival is a challenge confronting bankers. 0ere 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 uickly as possible

whether it would be worthwhile to commit additional finance.

n this regard banks may consider having Special InestigationE of all financialtransaction 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 reuirement of additional fund may be entertained at branch level,

and for this purpose a special limit to such type of cases should be decided. "his

will obviate the need to route the additional funding through the controlling offices in

deserving cases, and help avert many accounts slipping into () category.

-i!eliness and Adeuacy of response:+-i!eliness and Adeuacy of response:+

4onger the delay in response, grater the injury to the account and the asset. "imeis a crucial element in any restructuring or rehabilitation activity. "he response

decided on the basis of techno#economic study and promoter@s commitment, has to

be adeuate in terms of extend of additional funding and relaxations etc. under the



55/85

restructuring exercise. "he package of assistance may be flexible and bank may

look at the exit option.

)ocus on Cash )lo%s:+)ocus on Cash )lo%s:+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. )ppraisal for fresh credit reuirements may be done by analy$ing funds

flow in conjunction with the !ash -low rather than only on the basis of -unds -low.

.anage!ent &ffectiveness:+.anage!ent &ffectiveness:+

"he general perception among borrower is that it is lack of finance that leads to

sickness and ()s. But this may not be the case all the time. 1anagement

effectiveness in tackling adverse business conditions is a very important aspect

that affects a borrowing unit@s fortunes. ) bank may commit additional finance to an

aling unit only after basic viability of the enterprise also in the context of uality of

management is examined and confirmed. Where the default is due to deeper

malady, viability study or investigative audit should be done K it will be useful to

have consultant appointed as early as possible to examine this aspect. ) proper

techno# economic viability study must thus become the basis on which any future

action can be considered.

.ultiple )inancing:+.ultiple )inancing:+

$. 3uring the exercise for assessment of viability and restructuring, a

Pragmatic and unified approachby all the lending banksA -s as also

sharing of all relevant information on the borrower would go a long way

[Comparative analysis on NPA of Private & Public sector Banks] Page ##[University Business School, Panjab University, Chandigarh]


56/85

toward overall success of rehabilitation exercise, given the probability of

successAfailure.

%. n 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. "oward this end, there should be regular flow of information

among consortium members. ) bank, which is not part of the consortium,

may not be allowed to offer credit facilities to such defaulting clients. !urrent

account facilities may also be denied at non#consortium banks to such

clients and violation may attract penal action. "he 1redit Information

%ureau of India 3td.,1I%I3-may be very useful for meaningful information

exchange on defaulting borrowers once the setup becomes fully operational.

1. n 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 Kby a discounted settlement of the exposure. "herefore, any plan for

restructuringArehabilitation may take this aspect into account.

D. 1orporate De(t estructuring mechanism has been institutionali$ed in

C''% to provide a timely and transparent system for restructuring of the

corporate debt of *s. C' crore and above with the banks and -s 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 ()s; and viable sub#standard accounts with consortiumAmultiple

banking arrangements.

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Tools for recoery of #P$sTools for recoery of #P$s

2nce () occurred, one must come out of it or it should be managed in most

efficient manner. 4egal ways and means are there to over come and manage

()s. We will look into each one of it.

Willful /efault :+Willful /efault :+

)Q 4ok )dalat and 3ebt *ecovery "ribunal

BQ Securiti$ation )ct

!Q )sset *econstruction

ok Adalat!ok Adalat!

4ok )dalat institutions help banks to settle disputes involving account

in =doubtful> and =loss> category, with outstanding balance of *s. + lakh forcompromise settlement under 4ok )dalat. 3ebt recovery tribunals have been

empowered to organi$e 4ok )dalat to decide on cases of ()s of *s. %' lakh and

above. "his mechanism has proved to be uite effective for speedy justice and

recovery of small loans. "he progress through this channel is expected to pick up in

the coming years.

Debt "e#o$ery %ribunals(D"%)!Debt "e#o$ery %ribunals(D"%)!

"he recovery of debts due to banks and

financial institution passed in 1arch C''' has helped in strengthening the function

of 3*"s. rovision for placement of more than one recovery officer, power to

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attach defendant@s propertyAassets before judgment, penal provision for

disobedience of tribunal@s order or for breach of any terms of order and

appointment of receiver with power of reali$ation, management, protection and

preservation of property are expected to provide necessary teeth to the 3*"s and

speed up the recovery of ()s in the times to come. 3*"s which have been set

up by the 5overnment to facilitate speedy recovery by banksA3-s, have not been

able make much impact on loan recovery due to variety of reasons like inadeuate

number, lack of infrastructure, under staffing and freuent adjournment of cases. t

is essential that 3*" mechanism is strengthened and vested with a proper

enforcement mechanism to enforce their orders. (on observation of any order

passed by the tribunal should amount to contempt of court, the 3*" should have

right to initiate contempt proceedings. "he 3*" should empowered to sell asset of

the debtor companies and forward the proceed to the winding K up court for

distribution among the lenders

(nability to Pay(nability to Pay

&onsortium arrangements&onsortium arrangements::

)sset classification of accounts under

consortium should be based on the record of recoery of the indiidual mem(er

(an)sand 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 andAor 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 ().

"he 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



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the lead bank for the transfer of their share of recovery, to ensure proper asset

classification in their respective books.

egal #asisegal #asis

"he legal basis to the !3* mechanism shall be provided by the De(tor4

1reditor $greement ,D1$- and the Inter41reditor $greement."he debtors shall

have to accede to the 3!), either at the time of original loan documentation :for

future cases; or at the time of reference to !orporate 3ebt *estructuring !ell.

Similarly, all participants in the !3* mechanism through their membership of the

Standing -orum shall have to enter into a legally binding agreement, with

necessary enforcement and penal clauses, to operate the System through laid#

down policies and guidelines.

1tand+1till Clause:1tand+1till Clause:

2ne of the most important elements of 3ebtor#!reditor

)greement would be 8stand still8 agreement (inding for 90 daysA or %F' days by

both sides. Under this clause, both the debtor and creditor:s; shall agree to a

legally (inding 8stand4still8 where(y (oth the parties commit themseles notto ta)ing recourse to any other legal action during the Jstand#stillJ period, this

would be necessary for enabling the !3* System to undertake the necessary debt

restructuring exercise without any outside intervention judicial or otherwise.

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"he nter#!reditors )greement would be a legally binding agreement

amongst the secured creditors, with necessary enforcement and penal clauses,

wherein the creditors would commit themselves to abide by the various elements of

!3* system. -urther , the creditors shall agree that if FG> of secured creditors

(y alueAagree to a debt restructuring package, the same would be binding on the

remaining secured creditors.

Accounting treat!ent for restructured accountsAccounting treat!ent for restructured accounts

"he accounting treatment of accounts restructured under !3* would be governed

by the prudential norms indicated in circular 3B23. B. B!. &F A C%.'D.'DF A C'''#

'% dated 1arch ', C''%. *estructuring of corporate debts under !3* could take

place in the following stages9

Before commencement of commercial productionE

)fter commencement of commercial production but before the asset has

been classified as sub#standardE

)fter commencement of commercial production and the asset has been

classified as sub#standard.

"he prudential treatment of the accounts, subjected to restructuring under !3*,

would be governed by the following norms9

-reat!ent of standard accounts restructured under C/,:-reat!ent of standard accounts restructured under C/,:

) rescheduling of the instalments of principal alone, at any of the aforesaid

first two stages Pparagraph +:a; and :b; aboveQ would not cause a standard

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asset to be classified in the sub#standard category, provided the loan A credit

facility is fully secured.

) rescheduling of interest element at any of the foregoing first two stageswould 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. -or 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 4* O 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.

n case there is a sacrifice involved in the amount of interest in present value

terms, as at :b; above, the amount of sacrifice should either be written off or

provision made to the extent of the sacrifice involved.

-reat!ent of sub+standard accounts restructured under C/,-reat!ent of sub+standard accounts restructured under C/,

) rescheduling of the instalments of principal alone, would render a sub#

standard asset eligible to be continued in the sub#standard category for the

specified period, provided the loan A credit facility is fully secured.

) 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. -or the purpose, the future interest due as



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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 4* O 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.

1pecial Cases1pecial Cases

A##ounts 'ith temporary defi#ien#ies!A##ounts 'ith temporary defi#ien#ies!

"he classification of an asset as () should be based on the record of

recovery. Bank should not classify an advance account as () merely due to the

existence of some deficiencies which are temporary in nature such as non#

availability of adeuate drawing power based on the latest available stock

statement, balance outstanding exceeding the limit temporarily, non#submission of



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stock statements and non#renewal of the limits on the due date, etc. n the matter

of classification of accounts with such deficiencies banks may follow the following

guidelines9

Banks should ensure that drawings in the working capital accounts arecovered by the adeuacy of current assets, since current assets are first

appropriated in times of distress. 3rawing power is reuired to be arrived at based

on the stock statement which is current. 0owever, considering the difficulties of

large borrowers, stock statements relied upon by the banks for determining drawing

power should not be older than three months. "he outstanding in the account

based on drawing power calculated from stock statements older than three months,would be deemed as irregular. ) working capital borrower account will become

() if such irregular drawings are permitted in the account for a continuous period

of %F' days even though the unit may be working or the borrowerJs financial

position is satisfactory.

*egular and ad hoc credit limits need to be reviewedA regularised not later

than three months from the due dateAdate of ad hoc sanction. n case of constraints

such as non#availability of financial statements and other data from the borrowers,

the branch should furnish evidence to show that renewalA review of credit limits is

already on and would be completed soon. n any case, delay beyond six months is

not considered desirable as a general discipline. 0ence, an account where the

regularA ad hoc credit limits have not been reviewedA renewed within %F' days from

the due dateA date of ad hoc sanction will be treated as ().

A##ounts regularised near about the balan#e sheet date!A##ounts regularised near about the balan#e sheet date!

"he

asset classification of borrower accounts where a solitary or a few credits are



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recorded before the balance sheet date should be handled with care and without

scope for subjectivity. Where the account indicates inherent weakness on the basis

of the data available, the account should be deemed as a (). n other genuine

cases, the banks must furnish satisfactory evidence to the Statutory

)uditorsAnspecting 2fficers about the manner of regularisation of the account to

eliminate doubts on their performing status.

Asset &lassifi#ation to be borro'er-'ise and not fa#ility-'iseAsset &lassifi#ation to be borro'er-'ise and not fa#ility-'ise

t is difficult to envisage a situation when only one facility to a borrower becomes a

problem credit and not others. "herefore, all the facilities granted by a bank to a

borrower will have to be treated as () and not the particular facility or part thereof

which has become irregular.

f the debits arising out of devolvement of letters of credit or invoked

guarantees are parked in a separate account, the balance outstanding in that

account also should be treated as a part of the borrower@s principal operating

account for the purpose of application of prudential norms on income recognition,

asset classification and provisioning.

A##ounts 'here there is erosion in the $alue of se#urityA##ounts 'here there is erosion in the $alue of se#urity

) () need not go through the various stages of classification in cases of

serious credit impairment and such assets should be straightaway classified as

doubtful or loss asset as appropriate. /rosion in the value of security can berecko

banks non raising funds

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