non performing asesst

8/20/2019 Non performing asesst

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INTRODUCTION

Banking sector reforms in India has progressed promptly on aspects

like interest rate deregulation, reduction in statutory reserve requirements,prudential norms for interest rates, asset classification, income recognitionand provisioning.

But it could not match the pace with which it was expected to do. Theaccomplishment of these norms at the execution stages without restructuringthe banking sector as such is creating havoc.

This research paper deals with the problem of having non-performingassets, the reasons for mounting of non-performing assets and the practicespresent in other countries for dealing with non-performing assets.

uring pre-nationali!ation period and after independence, the bankingsector remained in private hands "arge industries who had their control in themanagement of the banks were utili!ing ma#or portion of financial resources of the banking system and as a result low priority was accorded to prioritysectors.

$overnment of India nationali!ed the banks to make them as aninstrument of economic and social change and the mandate given to thebanks was to expand their networks in rural areas and to give loans to prioritysectors such as small scale industries, self-employed groups, agriculture andschemes involving women.

To a certain extent the banking sector has achieved this mandate. "eadBank %cheme enabled the banking system to expand its network in a plannedway and make available banking series to the large number of population andtouch every strata of society by extending credit to their productive endeavors.

This is evident from the fact that population per office of commercialbank has come down from &&,''' in the year ()&) to ((,''' in *''+.%imilarly, share of advances of public sector banks to priority sector increasedform (+.& in ()&) to ++ of the net bank credit.

The number of deposit accounts of the banking system increased fromover crores in ()&) to over ' crores. Borrowed accounts increased from*.' lakhs to over *.&/ crores.

DEFINITION:-

0 loan or lease that is not meeting its stated principal and interestpayments. Banks usually classify as nonperforming assets any commercialloans which are more than )' days overdue and any consumer loans whichare more than (/' days overdue. 1ore generally, an asset which is notproducing income.

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NON PERFORMING ASSET

0ction for enforcement of security interest can be initiated only if thesecured asset is classified as 2on 3erforming 0sset.

2on 3erforming 0sset means an asset or account of borrower, whichhas been classified by a bank or financial institution as sub-standard,doubtful or loss asset, in accordance with the directions or guidelinesrelating to asset classification issued by 4BI.

0n amount due under any credit facility is treated as 5past due5 when ithas not been paid within ' days from the due date. ue to theimprovement in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc.

It was decided to dispense with 6past due6 concept, with effect from1arch (, *''(. 0ccordingly, as from that date, a 2on performing asset72308 shell be an advance where

i. Interest and 9or installment of principal remain overdue for a period of more than (/' days in respect of a Term "oan,

ii. The account remains 6out of order6 for a period of more than (/' days,in respect of an overdraft9 cash :redit7;9::8,

iii. The bill remains overdue for a period of more than (/' days in thecase of bills purchased and discounted,

iv. Interest and9 or installment of principal remains overdue for two harvestseasons but for a period not exceeding two half years in the case of anadvance granted for agricultural purpose, and

v. 0ny amount to be received remains overdue for a period of more than(/' days in respect of other accounts.


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iv. %easons but for a period not exceeding two half years in the case of anadvance granted for agricultural purpose, and

v. 0ny amount to be received remains overdue for a period of more than

)' days in respect of other accounts.

“ OUT OF ORDER”

0n account should be treated as 6out of order6 if the outstandingbalance remains continuously in excess of the sanctioned limit9 drawingpower. In case where the outstanding balance in the principal operatingaccount is less than the sanctioned limit9 drawing power.

But there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited duringthe same period, these account should be treated as 6out of order6.

“ OVERDUE”

0ny amount due to the bank under any credit facility is 6overdue6 if it isnot paid on the due date fixed by the bank.

Classification of Assets as Non-Pefo!in"

0n asset becomes non-performing when it ceases to generate

Income for the bank. >arlier an asset was considered as nonperforming

0sset 72308 based on the concept of 63ast ue6. 0 ?non

3erforming asset@ 72308 was defined as credit in respect of which

Interest and9 or installment of principal has remained ?past due@ for 0 specific period of time. The specific period was reduced in a

3hased manner as underA

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ear ended 1arch, ( %pecific period

------------------------------ ---------------------

()) + quarters

())+ quarters

()) * quarters

0n amount is considered as past due, when it remains outstanding for ' days beyond the due date. Cowever, with effect from 1arch (, *''( the?past due@ concept has been dispensed with and the period is reckoned fromthe due date of payment.


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F0n account should be treated as 6out of order6 if theoutstanding balance remains continuously in excess of the sanctionedlimit9drawing power. In cases where the outstanding balance in theprincipal operating account is less than the sanctioned limit9drawingpower, but there are no credits continuously for )' days or credits are

not enough to cover the interest debited during the same period, theseaccounts should be treated as 6out of order6G.

Hnit banks i.e. banks having a single branch9 C; with depositsunto 4s. ('' crore and banks having multiple branches within a singledistrict with deposits upto 4s. ('' crore have been permitted to classifyloan accounts as 230s based on (/' days delinquency norm insteadof the extant )' days norm.

This relaxation will be in force for three financial years i.e.financial years ended9 ending 1arch (, *'', *''& and *''.

The details of the changes and the consequent impact on theexisting instructions with regard to asset classification and incomerecognition in respect of these banks are given in the 0nnex .

The deposit base of 4s. ('' crore for the above will bedetermined on the basis of average of the fortnightly 2et emand andTime "iabilities in the financial year concerned. Jor the above categoryof banks, an account would be classified as 2on 3erforming 0sset if

theA

7I8 Interest and9or installment of principal remain overdue for a period of more than (/' days in respect of a Term "oan.

7ii8 The account remains 6;ut of order6 for a period of more than (/'days, in respect of an ;verdraft9:ash :redit 7;9::8.

7iii8 The bill remains overdue for a period of more than (/' days, in thecase of bills purchased and discounted.

7iv8 0ny amount to be received remains overdue for a period of morethan (/' days in respect of other accounts.

The relaxations are given for the explicit purpose of enabling the H:Bsconcerned to transit to the )' day 230 norm in the year *''-*''/ bybuilding up adequate provisions and strengthening their appraisal,disbursement and post disbursement procedures.

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0ll H:Bs other than those referred to at 3ara *.(. shall classify their loan accounts as 230 as per )' day norm as hitherto. Cowever, $old loansand small loans up to 4s. ( lakh will be governed by the )'-day norm witheffect from the year ending 1arch (, *''. Till then, they will be governed bythe (/'-day norm as thereto.

A"ic#lt#al A$%ance

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I$entification of assets as NPAs s&o#l$ 'e $one on an on"oin" 'asis

The system should ensure that identification of 230s is done on an on-

going basis and doubts in asset classification due to any reason are settledthrough specified internal channels within one month from the date on whichthe account would have been classified as 230 as per prescribed norms.

Banks should also make provisions for 230s as at the end of eachcalendar quarter i.e. as at the end of 1arch9 Kune9 %eptember9 ecember, sothat the income and expenditure account for the respective quarters as wellas the 3L" account and balance sheet for the year end reflects the provisionmade for 230s.

C&a"in" of inteest at !ont&l( ests

I8 Banks should charge interest at monthly rests in the context of adoption of )' days norm for recognition of loan impairment w.e.f. fromthe year ended 1arch (, *''+ and consequential need for close

monitoring of borrowers6 accounts. Cowever, the date of classificationof an advance as 230 as stated in proceeding pares, should not bechanged on account of charging of interest at monthly basis.

7ii8 The existing practice of charging9compounding of interest onagricultural advances would be linked to crop seasons and theinstructions regarding charging of interest on monthly rests shall not beapplicable to agricultural advances.

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NPA MANAGEMENT

I>2TIJI:0TI;2 ;J 3;T>2TI0" 230 9 %T4>%%> 0%%>T%

)* Rec+onin" of NPA :

0 230 account to be identified based on its status 9 position of the accounts erosion in security as on the date of balance sheet of the bank.2evertheless, the date of a 230 account would be the actual date on whichthe slippage occurred. If an account is regulari!ed before the balance sheet

date by repayment of overdue amount through genuine sources 7not bysanctioning of additional facilities or transfer of funds between accounts8, theaccount need not be treated as 230.

It has, however, to be ensured that in the account remains inorder subsequently and a solitary or few credits made in the account on or before the balance sheet date which extinguishes the overdue amount of interest or installment of principal is not reckoned as the sole criterion for treating the asset as standards one.

,* I$entification an$ !onitoin" of otential NPA . stesse$assets:

Indention of potential 230 account as its incipient stage of sickness and initiating immediate corrective measures is themost important step for preventing an asset from becoming230. The guidelines issued by :redit 1onitoring :ell 7:1:8:0, C; should be followed in this regard.

/* Constit#tion f NPA Pe%ention Cell at t&e ROs*

It has been decided to constitute a 230 3revention cell atthe 4;s to monitor the %tandard-B accounts and to ensure theprevention of their slippage to 230. The cell headed by 4egional1anager would comprise 4egional 1anager, y. 4egional1anager and :redit ;fficer. It will conduct its meeting everyfortnight.

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ITS FUNCTION 0I11 2E AS UNDER:

To examine the information received from branches relating to

%tandard ?B@ 7based on &' days norms8, 230 accounts and

identify the accounts for restructuring. The entire process shouldbe completed within a time frame of ' days.

To review the performance of the existing restructured accounts

including BIJ4 and :4 cases.

The cell will send information on fortnightly basis to :1:, :0

Cead ;ffice.

4egional 1anager to cell for the explanation from the Branch

1anagers whose performance in recovery is far fromsatisfactory.

3* Re%ie4 an$ eotin" of otential NPA . Stesse$ assets

Jollowing steps be taken for review and reporting of potential 230 9 %tressed 0ssetsA

Ste-): 0nalysis of reason of deterioration of health, signs of sickness,

problem character of the 0Mc.

Ste-,: :lose interaction with the borrower, visit to the unit, close andfrequent monitoring of the account, drawing the attention of theborrower to the irregularity 9 deterioration in he asset quality 9 signs of weakness in the account.

Ste-/A 0dvice the borrower to correct the irregularity immediately in atime bound manner and obtain his categorical assurance.

Ste-3A :orrective measures for prevention of slippagesA

4eview the account and consider sanction of need based

working capital limits on merits, if the present limits areinadequate.

Identify %tressed 0ssets accounts and consider restructuring 9

realignment 9 re-schedulement on merits.

>arly warning signal, if any, to be watched and addressed to.

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Nerification of 7i8 the documents for its correctness,

enforceability, 7ii8 correctness of 4; 7iii8 insurance covers 7iv8value9marketability of prime9collateral security eye.

Nerification of existence of primary 9 collateral security of theborrower.

Ste-5A 4eport to the next higher authority, the details on the aboveaspects and suggesting specific corrective measures in time.

Ste-6: Implement the corrective action and report to higher authority.

5* Maintainin" t&e Assets 7#alit( :

3ost sanction monitoring, supervision, and follow up

Jollowing measures should be put in place.

8i9 Te!s an$ con$ition of t&e sanction:

Terms and condition of sanction have to be strictlycomplied with

8ii9 Veification:

Nerification of end use of the funds, stocks and assets byBank officials or through duly appointed concurrent auditors asper norms for effective monitoring of the accounts.

8iii9 1e"al Fo!alities:

Jormalities like obtaining 9 execution of documents 9search certificates, registration of charges, timely revival of thedocuments, completion of equitable mortgage formalities etc. asper norms are the most important steps.

8i%9 Stoc+ State!ents:

Branches should obtain stock statements at monthlyintervals regularly. 0s per 4BI guidelines, the outstandingin the 09: based on the drawing powers calculated fromstock statements older than months would be deemedas irregular and if such irregular drawings are permittedfor )' days continuously, the 09: will be 230.

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8%9 Stoc+ a#$it:

%tock audit is to be conducted every year in every 230

account with outstanding limit of 4s ( crore and above.Cowever, wherever current assets are depleted or unit isclosed, the stipulation may be exempted.

6* Mana"e!ent of NPA:

The 41s personally verify and ensure that all accounts,especially high value advances are properly classified intostandard, %ub-std. oubtful or loss categories strictly as per

prudential norms. It will be their responsibility to finali!e andeliminate delay or postponed of identification of 230.

In case of doubts due to any reason, 41s may seekguidance from C; and settle the matter within one month fromthe date on which the account would have been classified as230 as per norms.

It may be noted that if 4BI observes any divergences inasset classification, especially in high value accounts due towillful non-compliance of 4BI guidelines by any officialresponsible for classification then 4BI may initiate deterrentaction including imposition of monetary penalty.

* Aoiation of eco%e( in NPAs:

a8 2on decreed accountsA

In case of 230 accounts in all categories i.e. %ub standard,oubtful and "oss appropriated first against outstanding in the

account and the surplus available, if any, is to be taken tointerest 9 income. The same norm will be applicable to thecompromised accounts also.

b8 ecreed accountsA

In case of decreed accounts where there is no compromisesettlement amount recovered should be appropriated as per thedecretal terms. Cowever, if there is no specific term as regardsappropriation of recovery in the decrial terms, the recoveryshould be appropriated first towards 3rincipal and the balance

towards interest.

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c8 0ppropriation of >:$: claim amount in 230 0ccountsA

0s per the existing procedure, Bank is expected to keep the

claim amount received from the >:$: in a separatememorandum account and pursue recovery efforts against theconcerned >xporter borrower for the full amount of duesinclusive of the claim amount settled.

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MASTER CIRCU1AR

ON

INCOME RECOGNITION; ASSET C1ASSIFICATION;

PROVISIONING < OT=ER RE1ATED MATTERS

GENERA1

In order to reflect a bank6s actual financial health in its balance sheetand as per the recommendations made by the :ommittee on Jinancial%ystem 7:hairman %hri 1. 2arasimham8, the 4eserve Bank has introduced,in a phased manner, prudential norms for income recognition, assetclassification and provisioning for the advances portfolio of the primary7urban8 co-operative banks.

Broadly, the policy of income recognition should be ob#ective andbased on record of recovery rather than on any sub#ective considerations."ikewise, the classification of assets of banks has to be done on the basis of ob#ective criteria, which would ensure a uniform and consistent application of the norms.

0vailability of security or net worth of the borrower9 guarantor shouldnot be taken into account for the purpose of treating an advance asnonperforming asset or otherwise. The provisioning should be made on thebasis of the classification of assets into different categories.

The requirements of the %tate :o-operative %ocieties 0cts and 9 or rules made thereunder or other statutory enactments may continue to befollowed, if they are more stringent than those prescribed hereby.


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TREATMENT OF ACCOUNTS AS NPAS

Reco$ of Reco%e(

7i8The treatment of an asset as 230 should be based on the record of recovery. Banks should not treat an advance as 230 merely due toexistence of some deficiencies which are of temporary in nature suchas non-availability of adequate drawing power, balance outstandingexceeding the limit.

2o submission of stock statements and the non-renewal of thelimits on the due date, etc. 2oo4e-4ise an$ not Facilit(-4ise

7I8 In respect of a borrower having more than one facility with a bank,all the facilities granted by the bank will have to be treated as 230 andnot the particular facility or part thereof which has become irregular.

7ii8 Cowever, in respect of consortium advances or financing under multiple banking arrangements, each bank may classify the borrower accounts according to its own record of recovery and other aspectshaving a bearing on the recoverability of the advances.

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A"ic#lt#al A$%ances > Defa#lt in ea(!ent $#e to nat#alCala!ities

7I8


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CREDIT FACI1ITIES GUARANTEED 2? CENTRA1

.STATE GOVERNMENT

7I8 The credit facilities backed by guarantee of the :entral $overnmentthough overdue should not be treated as 230.

7ii8 This exemption from classification of government guaranteedadvances as 230 is not for the purpose of recognition of income.

7iii8 Jrom the year ended 1arch (, *''&, %tate $overnmentguaranteed advance and investment in %tate $overnment guaranteedsecurities would attract asset classification and provisioning norms, if interest and9or principal or any other amount due to the bank remainsoverdue for more than )' days irrespective of the fact whether theguarantee have been invoked or not.

Po@ect Financin"

Therefore, such amounts of interest do not become overdue and hence230, with reference to the date of debit of interest. They become overdueafter due date for payment of interest, if uncollected.

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7a8 In order to arrive at a decision as to whether theunit9pro#ect has achieved regular commercial production, themain guiding factor would be whether the unit has achievedcash break-even in order to service the loan.

7b8 If in the opinion of the bank, the bottleneck inachieving regular commercial production is of atemporary nature not indicative of any long-termimpairment of the unit6s economic viability and it is likelyto achieve cash break even if some time is allowed, thebank may reschedule the loan and treat the asset asstandard.

7c8 Cowever, the lead time would normally not exceed

one year from the schedule of commencement of commercial production as indicated in the terms of sanction.

7ii8 In respect of credit facilities sanctioned under consortiumarrangements, the decision as to whether the borrowing unit hasachieved regular commercial production and there is a need for

rescheduling may be taken by the lead institution or lead bank andother participating institutions9banks may follow the same.

7iii8 8A9 TREATMENT OF RESTRUCTURED ACCOUNTS

7i8 4estructuring9rescheduling9re negotiation of theterms of loan agreement in respect of standard andsubstandard accounts can take place at three stages, vi!.7a8 before commencement of commercial production, 7b8after commencement of commercial production butbefore the asset has been classified as sub-standard,and 7c8 after commencement of commercial productionand the asset has been classified as sub-standard.

7ii8 In each of the foregoing three stages, therescheduling, etc. of principal and9or of interest could takeplace with or without sacrifice.

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829 TREATMENT OF RESTRUCTURED STANDARDACCOUNTS

7i8 0 rescheduling of the installments of principalalone, at any of the stages at 7a8 and 7b8 abovewould not cause a standard asset to be classifiedin the substandard category provided theloan9credit facility is fully secured.

7ii8 0 rescheduling of interest element at any of the

aforesaid two stages would not cause an asset to

be down-graded to sub-standard category sub#ectto the condition that the amount of sacrifice, if any,in the element of interest, is either written off or provision is made to the extent of the sacrificeinvolved.

8C9 TREATMENT OF RESTRUCTURED SU2-STANDARD ACCOUNTS

7I8 0 rescheduling of the installment of principalalone would render a sub-standard asset eligible to becontinued in the sub-standard category for the specifiedperiod, provided the loan9credit facility is fully secured.

7ii8 0 rescheduling of interest element would render a substandard asset eligible to be continued to beclassified in substandard category for the specified periodsub#ect to the condition that the amount of sacrifice, if

any, in the element of interest, is either written off or provision is made to the extend the sacrifice involved.

7iii8 The substandard accounts which have beensub#ected to structuring, etc. whether in respect of principal installment or interest amount, would be eligibleto be upgraded to the standard category only after thespecified period, i.e. one year term the date when the firstpayment of interest or principal, whichever is earlier, fallsdue, sub#ect to satisfactory performance during the

period.

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7iv8 In case, however, the satisfactory performanceduring the one ear period is not evidenced, the assetclassification of the structured account would begoverned as per the applicable prudential norms withreference to the pre-restructuring payment schedule.

8D9 APP1ICA2I1IT?

7I8 The foregoing norms for restructuring, etc.would be applicable to standard and sub-standard assetsonly. 0ll other prudential guidelines relating to incomerecognition, asset classification and provisioning wouldremain unaltered.

7ii8 The aforesaid instructions would be applicableto all types of credit facilities, including working capitallimit extended to industrial units, provided they are fullycovered by tangible securities.

7iii8 These guidelines are not applicable to creditfacilities extended to traders.

7iv8


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ASSET C1ASSIFICATION

C1ASSIFICATION

The primary 7urban8 co-operative banks should classify their assetsinto the following broad groups, vi!.

7I8 %tandard 0ssets

7ii8 %ub-standard 0ssets

7iii8 oubtful 0ssets

7iv8 "oss 0ssets

DEFINITIONS

Stan$a$ Assets

%tandard 0sset is one which does not disclose any problems andwhich does not carry more than normal risk attached to the business. %uch anasset should not be an 230.

S#'-stan$a$ Assets

7i8


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7ii8 0n asset where the terms of the loan agreement regarding interestand principal have been re-negotiated or rescheduled after commencement of production, should be classified as substandard andshould remain in such category for at least (* months of satisfactoryperformance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely asa result of rescheduling, unless there is satisfactory compliance of thiscondition.

Do#'tf#l Assets


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Ce$it !onitoin"

FOeeping a constant watch on the conduct and performanceG of theborrower for the purpose of ensuring regular returns and safely of banks fundsis termed as ?credit monitoring@.

CREDIT MONITORING MEC=ANISM ::

Traditionally, monitoring of advances is being done atvarious levels starting from the desk officer at the branch to thecorporate level, through various systems, broadly outlined asunderA

• :onduct and operations in the account

• %tatements of stocks 9 book debts and audit thereof.

• Inspection 9 verification of assets charged

• Jinancial Jollow up reports 7JJ48

• Puarterly 4eview sheets 7P4%

• 1onthly control returns 71(-1)8 and 1*• - 9


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Po'e A

;btaining regular and comprehensive information on aBank@s borrower s the step towards effective monitoring system.xit from the account.

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DIFFICU1T? 0IT= T=E NON-PERFORMING ASSETS:

)* ;wners do not receive a market return on their capital. In the worstcase, if the bank fails, owners lose their assets. In modern times, thismay affect a broad pool of shareholders.

,* epositors do not receive a market return on savings. In the worstcase if the bank fails, depositors lose their assets or uninsuredbalance. Banks also redistribute losses to other borrowers by charginghigher interest rates. "ower deposit rates and higher lending rates

repress savings and financial markets, which hampers economicgrowth.

/* 2on performing loans epitomi!e bad investment. They misallocatecredit from good pro#ects, which do not receive funding, to failedpro#ects. Bad investment ends up in misallocation of capital and, byextension, labour and natural resources. The economy performs belowits production potential.

3* 2on performing loans may spill over the banking system andspillover effect can canali!e through illiquidity or bank insolvency=

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In normal circumstances banks, before extending any loan, wouldmake a thorough study of the actual need of the party concerned, the

prospects of the business in which it is engaged, its track record, the quality of management and so on. %ince this is not looked into, many of the loansbecome 230s.

The loans for the weaker sections of the society and the waiving of theloans to farmers are another dimension of the politici!ation of bank lending.

1ost of the depositor@s money has been frittered away by the banks atthe instance of politicians, while the same depositors are being made to paythrough taxes to cover the losses of the bank.:omparative %tudy with ;ther :ountries.

I* C=INA:

8a9 Ca#ses:

7i8 The %tate ;wned >nterprises 7%;>@s8 believe that there thegovernment will bail them out in case of trouble and so they continue totake high risks and have not really strived to achieve profitability and toimprove operational efficiency.

7ii8 3olitical and social implications of restructuring big %;>@s force thegovernment to keep them afloat,

7iii8 Banks are reluctant to lend to the private enterprises because whilean 230 of an %;> is financially undesirable, an 230 of a privateenterprise is both financially and politically undesirable,

7iv8 :ourts are not reliable enforcement vehicles.

8'9 Meas#es:

7i8 4educing risk by strengthening banks, raising disclosure standardsand spearheading reforms of the %;>@s by reducing their level of debt,

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7ii8 "aws were passed allowing the creation of asset managementcompanies, foreign equity participation in securiti!ation and assetbacked securiti!ation,

7iii8 The government which bore the financial loss of debt [email protected] swaps were allowed in case a growth opportunity existed,

7iv8 Incentives like tax breaks, exemption from administration fees andclear cut asset evaluation norms were implemented.

II* OREA:

8a9 Ca#ses:

7i8 3rotracted periods of interest rate control and selective creditallocations gave rise to an inefficient distribution of funds,

7ii8 "ack of 1onitoring Banks relied on collaterals and guarantees inthe allocation of credit, and little attention was paid to earningsperformance and cash flows,

8'9 Meas#es:

7i8 The speedy containment of systemic risk and the domestic creditcrunch problem with the in#ection of large public funds for bankrecapitali!ation,

7ii8 :orporate 4estructuring Nehicles 7:4Ns8 and ebt9>quity %wapswere used to facilitate the resolution of bad loans,

7iii8 :reation of the Oorea 0sset 1anagement :orporation 7O01:;8and a 230 fund to fund to finance the purchase of 230s,

7iv8 %trengthening of 3rovision norms and loan classification standardsbased on forward-looking criteria 7like future cash flows8 wereimplemented=

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III* BAPAN:

8a9 Ca#ses:

7i8 Investments was made real estate at high prices during the boom.The recession caused prices to crash and turned a lot of these loansbad,

7ii8 "egal mechanisms to dispose bad loans were time consuming andexpensive and 230s remained on the balance sheet, 7iii8 >xpansionaryfiscal policy measures administered to stimulate the economysupported industrial sectors like construction and real estate, whichmay further exacerbated the problem,

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III* PAISTAN:

8a9 Ca#ses:

7i8 :ulture of 5!ero equity5 pro#ects where there was minimal duediligence was done by banks in giving loans coupled with collusivelending and poor corporate

governance,

7ii8 3oor entrepreneurship,

7iii8 :hronic over-capacity9lack of competitive advantage,

7iv8 irected lending where the senior management of the publicsector banks gave loans to political heavy weights9 militarycommanders.

8'9 Meas#es:

7i8 The top management of the banks was changed and appointmentof independent directors in the board of directors,

7ii8 aggressive settlements were done by banks with their defaultingborrowers at values well below the actual debt outstanding and9or theamount awarded through the court process..... i.e., large haircuts9 write

offs,

7iii8 setting up of :orporate and Industrial 4estructuring :orporation7:I4:8 to take over the non-performing loan portfolios of nationali!edbanks on certain agreed terms and conditions and issue governmentguaranteed bonds earning market rates of return

7iv8 The Banking :ompanies 74ecovery of "oans, 0dvances, :reditsand Jinances8 0ct, ()) was introduced in Jebruary ()). %pecialbanking courts have been established under this 0ct to facilitate therecovery of non-performing loans and advances from defaulted

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PREVENTION

Ce$it Dis'#sal No!s

• The bank will ensure that the company 9 borrower have achieved

financial closure before disbursement to term loans.

• 2o branch shall disburse funds or open letters of credit or issue any

guarantee in respect of any borrower unless all terms and conditionsas per sanction terms are complied with. Branch, before disbursingfunds under JB" or open "etters of :redit or issue any guaranteeunder 2JB" shall keep a certificate on record that all terms andconditions are complied with and that all required documentation iscompleted in respect of sanction at branch level. In cases of sanctionsby 4egional manager 9 $eneral 1anager 7$u#arat8 9 $eneral manager 7:redit8.

• xecutive irector.

Post Dis'#se!ent Monitoin"

• Inspection of plant and machinery, land and building and other fixed

assets should be done periodically should be rectified immediately.

• 3roper execution of documentation including timely registration o

charge with 4;: should be ensured in accordance with the guide linedgiven in manual of instructions

• :onduct of the unit should be examined through monthly 1onitoring

%tatement for any symptoms of weakness in the health of the account,and the same should be rectified to set right the account.

• The bank shall carry out dynamic financial analysis by scrutini!ing the

audited accounts for previous years so as to ascertain the trend of growth in production, sales, profitability and improvement 9 impairment

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in all important financial parameters in order to know the overall healthof the borrower account.

• The Bank will follow a policy of appraising financial positions of a

borrower 7for sanction of new limits 9 enhancement of existing limits

and for renewal 9 9review8 based on the audited financial statements of the borrower for previous financial year whoever available.

Jurther, the bank will follow a system of introducingdisincentives to borrowers who fail to submit audited accounts in timeby levying interest rate applicable to next lower credit rating than theone assigned to the borrower beyond six months from closure of afinancial year for which audited accounts are not submitted.

•


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GUIDE1INES FOR C1ASSIFICATION OF ASSETS

2asic Consi$eations

7i8 Broadly speaking, classification of assets into above categoriesshould be done taking into account the degree of well defined creditweaknesses and extent of dependence on collateral security for reali!ation of dues.

7ii8 In respect of accounts where there are potential threats to recoveryon account of erosion in the value of security and existence of other factors such as, frauds committed by borrowers, it will not be prudentfor the banks to classify them first as sub-standard and then asdoubtful after expiry of (* months from the date the account hasbecome 230. %uch accounts should be straight away classified asdoubtful asset or loss asset, as appropriate, irrespective of the periodfor which it has remained as 230.

A$%ances Gante$ #n$e Re&a'ilitation Pac+a"es Ao%e$

'( 2IFR.Te! 1en$in" Instit#tions

7i8 Banks are not permitted to upgrade the classification of anyadvance in respect of which the terms have been re-negotiatedunless the package of re-negotiated terms has worked

satisfactorily for a period of one year.


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packages9nursing programmers have been drawn by the banksthemselves or under consortium arrangements.

Intenal S(ste! fo Classification of Assets as NPA

7i8 Banks should establish appropriate internal systems to eliminate thetendency to delay or postpone the identification of 230s, especially inrespect of high value accounts. The banks may fix a minimum cut-off point to decide what would constitute a high value account dependingupon their respective business levels. The cut-off point should be validfor the entire accounting year.

7ii8 4esponsibility and validation levels for ensuring proper assetclassification may be fixed by the bank.

7iii8 The system should ensure that doubts in asset classification due toany reason are settled through specified internal channels within onemonth from the date on which the account would have been classifiedas 230 as per extant guidelines.

7iv8 4BI would continue to identify the divergences arising due to non-compliance, for fixing accountability.


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INCOME RECOGNITION

Inco!e Reco"nition > Polic(

The policy of income recognition has to be ob#ective and based on therecord of recovery. Income from non-performing assets 72308 is notrecogni!ed on accrual basis but is booked as income only when it is actuallyreceived. Therefore, banks should not take to income account interest on non-performing assets on accrual basis.

Cowever, interest on advances against term deposits, 2%:s, IN3s,ON3s and "ife policies may be taken to income account on the due date,provided adequate margin is available in the accounts.

Jees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recogni!ed onan accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit.

If $overnment guaranteed advances become 6overdue6 and thereby230, the interest on such advances should not be taken to income accountunless the interest has been reali!ed.

Re%esal of Inco!e on Acco#nts 2eco!in" NPAs

If any advance including bills purchased and discounted becomes 230as at the close of any year, interest accrued and credited to income account inthe corresponding previous year, should be reversed or provided for if thesame is not reali!ed This will apply to $overnment guaranteed accounts also.

If interest income from assets in respect of a borrower becomessub#ect to non-accrual, fees, commission and similar income with respect tosame borrower that have been accrued should ceased to accrue in the

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current period and should be reversed or provided for with respect to pastperiods, if uncollected.

Banks undertaking equipment leasing should follow prudentialaccounting standards. "ease rentals comprise two elements Q a financecharge 7i.e. interest charge8 and a charge towards recovery of the cost of theasset. The interest component alone should be taken to income account.

%uch income taken to income account, before the asset became 230,and remained unreali!ed should be reversed or provided for in the current

accounting period.

2oo+in" of Inco!e on In%est!ents in S&aes < 2on$s

0s a prudent practice and in order to bring about uniform accountingpractice among banks for booking of income on *' units of HTI and equity of 0ll India Jinancial Institutions, such income should be booked on cash basisand not on accrual basis.

Cowever, in respect of income from $overnment securities9bonds of public sector undertakings and 0ll India Jinancial Institutions, where interestrates on the instruments are predetermined, income may be booked onaccrual basis, provided interest is serviced regularly and is not in arrears.

Patial Reco%e( of NPAs

Interest reali!ed on 230s may be taken to income account provided

the credits in the accounts towards interest are not out of fresh9additionalcredit facilities sanctioned to the borrower concerned.

Inteest Alication

In case of 230s where interest has not been received for )' days or more, as a prudential norm, there is no use in debiting the said account byinterest accrued in subsequent quarters and taking this accrued interestamount as income of the bank as the said interest is not being received. It is

simultaneously desirable to show such accrued interest separately or park ina separate account so that interest receivable on such 230 account is

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computed and shown as such, though not accounted as income of the bankfor the period.

The interest accrued in respect of performing assets may be taken to

income account as the interest is reasonably expected to be received.Cowever, if interest is not actually received for any reason in these cases andthe account is to be treated as an 230 at the close of the subsequent year asper the guidelines, then the amount of interest so taken to income in thecorresponding previous year should be reversed or should be provided for infull.


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PROVISIONING NORMS

No!s fo Po%isionin" on 1oans < A$%ances

In conformity with the prudential norms, provisions should be made onthe non-performing assets on the basis of classification of assets intoprescribed categories as detailed in paragraph above.

Taking into account the time lag between an account becomingdoubtful of recovery, its recognition as such, the reali!ation of the security andthe erosion over time in the value of security charged to the bank, the banksshould make provision against loss assets, doubtful assets and substandardassets as belowA

8i9 1oss Assets

7a8 The entire assets should be written off after obtainingnecessary approval from the competent authority and asper the provisions of the :o- operative %ocieties 0ct94ules. If the assets are permitted to remain in thebooks for any reason, ('' per cent of the outstandingshould be provided for.

7b8 In respect of an asset identified as a loss asset, fullprovision at ('' per cent should be made if the expected

salvage value of the security is negligible.

8ii9 Do#'tf#l Assets

7a8 ('' per cent of the extent to which the advance is notcovered by the reali!able value of the security to whichthe bank has a valid recourse should be made and thereali!able value is estimated on a realistic basis.

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7b8 In regard to the secured portion, provision may be

made on the following basis, at the rates ranging from *'per cent to ('' per cent of the secured portion dependingupon the period for which the asset has remained

doubtfulA

8iii9 S#'-stan$a$ Assets

0 general provision of (' per cent on total outstandingshould be made without making any allowance for I:$:9>:$: guarantee cover and securities available.

8i%9 Po%ision on Stan$a$ Assets

7a8 Jrom the year ended 1arch (, *''', the banksshould make a general provision of a minimum of '.*per cent on standard assets.

7b8 Cowever, unit banks and banks having multiplebranches within a single district with deposit of 4s (''crore and above and all other H:Bs operating in morethan one district will be sub#ected to higher provisioningnorms on standard asset as underA

i. The general provisioning requirement for ?standard advances@ shall be '.+' per cent fromthe present level of '.* percent. Cowever, directadvances to agricultural and %1> sectors whichare standard assets, would attract a uniformprovisioning requirement of '.* per cent of the

funded outstanding on a portfolio basis, as hitherto

ii. Jor personal loans, loans and advancesqualifying as capital market exposures andcommercial real estate loans provisioningrequirement would be (.' .

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7c8 The provisions towards Fstandard assetsG need not benetted from gross advances but shown separately as5:ontingent 3rovision against %tandard 0ssets5 under 5;ther Junds and 4eserves5 Ritem.* 7viii8 of :apital and"iabilitiesS in the Balance %heet.

7d8 In case banks are already maintaining excessprovision than what is required9prescribed by %tatutory 0uditor94BI Inspection for impaired credits under Bad andoubtful ebt 4eserve, additional provision required for %tandard 0ssets may be segregated from Bad andoubtful ebt 4eserve and the same may be parkedunder the head 5:ontingent 3rovisions against %tandard 0ssets5 with the approval of their Board of irectors.%hortfall if any, on this account may be made good in thenormal course.

7e8 The above contingent provision will be eligible for inclusion in Tier II capital.

8%9 =i"&e o%isions

There is no ob#ection if the banks create bad and doubtfuldebts reserve beyond the specified limits on their own or if provided in the respective %tate :o-operative %ocieties 0cts.

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PROVISIONING FOR RETIREMENT 2ENEFITS

3rimary 7urban8 co-operative banks may have retirement benefitschemes for their staff, vi!. 3rovident Jund, $ratuity and 3ension. It isnecessary that such liabilities are estimated on actuarial basis and fullprovision should be made every year for the purpose in their 3rofit and "oss 0ccount.

3rovisioning 2orms for sale of financial assets to %ecuriti!ation

:ompanies 7%:89 4econstruction :ompanies 74:8

7a8 If the sale to %:94: is at a price below the net bookvalue72BN8 7i.e. book value less the provision held8, the shortfall should be written off 9 debited to 3L" 09c of that year, sub#ectto the provisions of the co-operative societiesacts9rules9administrative guidelines in regard to write-off of debts.

7b8 If the sale is for a value higher than the 2BN, the excessprovision will not be reserved but will be utili!ed to meet theshortfall9 loss on account of sale of other assets to %:94:.

G#i$elines fo Po%isions in Secific Cases

7i8 %tate $overnment guaranteed advances Jrom the year ended1arch (, *''&= %tate $overnment guaranteed advance andinvestment in %tate $overnment

guaranteed securities would attract extant provisioning norms, if interest and9or principal or any other amount due to the bank remainsoverdue for more than )' days irrespective of the fact whether theguarantee have been invoked or not.

7ii8 0dvances granted under rehabilitation packages approved byBIJ49term lending institutions

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7a8 The existing credit facilities sanctioned to a unit under rehabilitation package approved by BIJ49term lendinginstitutions should continue to be classified as sub-standard or doubtful asset as the case may be.

7b8 Cowever, the additional facilities sanctioned as per packagefinali!ed by BIJ4 and9or term lending institutions, the incomerecognition and asset classification norms will becomeapplicable after a period of one year from the date of disbursement.

7c8 In respect of additional credit facilities granted to %%I unitswhich are identified as sick and where rehabilitation

packages9nursing programmers have been drawn by the banksthemselves or under consortium arrangements, no provisionneed be made for a period of one year.

7iii8 0dvances against fixed9term deposit, 2%:s eligible for surrender,IN3s, ON3s, and life policies are exempted from provisioningrequirements.

7iv8 0dvances against gold ornaments, government securities and all

other kinds of securities are not exempted from provisioningrequirements.

7v8 0dvances covered by >:$:9I:$: guarantee

7a8 In the case of advances guaranteed by I:$:9>:$:,provision should be made only for the balance in excess of theamount guaranteed by these :orporations.

7b8 In case the banks are following more stringent method of provisioning in respect of advances covered by the guaranteesof I:$:9 >:$:, as compared to the method given above,they may have the option to continue to follow the sameprocedure.

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DIVERSION IN ASSET C1ASSIFICATION AND

PROVISIONING

7i8 Banks should ensure scrupulous compliance with the instructions for recognition of credit impairment and view aberrations by dealingofficials seriously.

7ii8 Banks should establish appropriate internal systems to eliminate thetendency to delay or postpone the identification of 230s, especially in

respect of high value accounts. Banks should fix a minimum cut off point to decide what would constitute a high value account dependingupon their respective levels. The cut off point should be valid for theentire year.

7iii8 The responsibility and validation levels for ensuring proper asset

classification may be fixed by the banks.

7iv8


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T&e E!e"ence of NPA in In$ian 2an+in" <

Financial Instit#tions an$ its Di!ensions

2on-performing 0sset 72308 has emerged since over a decade as analarming threat to the banking industry in our country sending distressingsignals on the sustainability and endurability of the affected banks. Thepositive results of the chain of measures effected under banking reforms bythe $overnment of India and 4BI in terms of the two 2arasimhan :ommittee4eports in this contemporary period have been neutralised by the ill effects of

this surging threat. espite various correctional steps administered to solve and end this

problem, concrete results are eluding. It is a sweeping and all pervasive virusconfronted universally on banking and financial institutions. The severity of theproblem is however acutely suffered by 2ationalised Banks, followed by the%BI group, and the all India Jinancial Institutions.

0s at (.'.*''( the aggregate gross 230 of all scheduled commercialbanks amounted to 4s.&,// :rore. Table 2o.I gives the figures of gross andnet 230 for the last four years.

It shows an increase of 4s.(,'&/ :rore or more than * in the lastfinancial year, indicating that fresh accretion to 230 is more than therecoveries that were effected, thus signifying a losing battle in containing thismenace.

Table 2o. I230 %tatistics -0ll %cheduled:ommercialBanks ..................................70mount in :rores8 ear

Total 0dvances

$ross230

2et 0dvances

2et230

-age of $ross230 tototaladvances

-age of 2et230 to netadvances

())-)/ *&) '/( *** *+ (+.+ .

())/-)) ))+)& /** &'(* */)* (+. .&()))-*''' +(( &'+'/ +++*)* '*(( (*. &./

*'''-*''( /&& &// *&*) *&* ((.+ &.*

The apparent reduction of gross 230 from (+.+ to ((.+ between())/ and *''( provides little comfort, since this accomplishment is onaccount of credit growth, which was higher than the growth of $ross 230 andnot through appreciable recovery of 230.

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There is neither reduction nor even containment of the threat. Thegross 230 and net 230 for 3%Bs as at (.'.*''( are (*.) and &.+ are

higher than the figures for %:Bs at ((.+and &.*. :omparative figures for 3%Bs, %BI $roup and 2ationalised Banks are as under.

Table -* A 230 of 3%Bs70mount in :rores8 ear

Total 0dvances

$ross230

2et230


-age of 2et230 tonetadvances

())&-) *++*(+ + *'*/ (./ ).*

())-)/ */+)( +& *(** (&.' /.*

())/-)) **/ ((' *+*(( (.) /.(

()))-*''' /'' ' *&(// (+.'' .)*'''-*''( ++*(+ + *)& (*.) &.+

Table -A 230 of %tate Bank$roup..70mount in :rores8 ear

Total 0dvances

$ross230

2et230



())-)/ ((&' (** &/*) (+. &.)/

((/)) (/&+( &+(.&

.+

()))-*''' (*)* () +(( (+.'/ &.

*'''-*''( (')' *'/& /(* (*. &.*&

Table -+A 230 of 2ationalisedBanks.70mount in :rores8 ear

Total 0dvances

$ross230

2et230



())-)/ (&&*** '(' (+++( (&.// /.)(())/-)) (//)*& '&) () (&.'* /.

()))-*''' **+/(/ *( ()) (.)) ./'

*'''-*''( *&+* +&') (&')& (*.() .'(

Jurther it is revealed that commercial banks in general suffer a tendencyto understate their 230 figures. There is the practice of 6ever-greening6 of advances, through subtle techniques.

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0s per report appearing in a national daily the banking industry has under-estimated its non-performing assets 7230s8 by whopping 4s. ,/&*.(' :roreas on 1arch ()). The industry is also estimated to have under-provided tothe extent of 4s (,+(*.*) :rore.

The worst 5offender5 is the public sector banking industry. 2ineteennationalised banks along with the %tate Bank of India and its seven associatebanks have underestimated their 230s by 4s ,'*).*) :rore. %uch deceptionof 230 statistics is executed through the following ways.

• Jailure to identify an 230 as per stipulated guidelinesA There wereinstances of Usub-standard6 assets being classified as Ustandard6=

• ssentially arising from the wrong classification of 230s, there was avariation in the level of loan loss provisioning actually held by the bank andthe level required to be made. This practice can be logically explained as adesperate attempt on the part of the bankers, whenever adequate currentearnings were not available to meet provisioning obligations.

riven to desperation and impelled by the desire not to accept defeat,

they have chosen to mislead and claim compliance with the provisioningnorms, without actually providing. This only shows that the problem hasswelled to graver dimensions.

The international rating agency %tandard L 3oor 7% L 38 conveys thegloomiest picture, while estimating 230s of the Indian banking sector between to ' of its total outstanding credit. 1uch of this, up to of the total banking assets, as per the rating agency would be accounted as 230if rescheduling and restructuring of loans to make them good assets in thebook are not taken into account.

Cowever 4BI has contested this dismal assessment. But the fact remainsthat the infection if left unchecked will eventually lead to what has beenforecast by the rating agency. This invests an urgency to tackle this virus as afire fighting exercise.

Jinancial institutions have not far lagged behind. 230s of ten leadinginstitutions have reported a rise of ((./) per cent, or 4s (,)*) :rore, to 4s(/,(+& :rore during the year ended 1arch *''' from 4s (&,*( :rore lastyear.

The 230 statistics of the three leading Jinancial Institutions for the lasttwo years are given in Table- IBI tops the list by notching up bad loans

worth 4s && :rore by 1arch *'''. In fact, its 230s have gone up by 4s(,(/ :rore from 4s &,+)' :rore in the previous year.

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IJ:I followed with 230s of 4s +,(' :rore, but it reported fall of 4s (+:rore from the previous year6s level of 4s +,* :rore. I:I:I6s 230s went upto 4s ,)) :rore from 4s ,&* :rore in the previous year.

Table 230 %tatistics of thethree 1a#or Term"ending Institutions asat (.'.*''(. 70mountin :rores8 2ame of JI

Total "oans(..*'''

Total "oans(..*''(

230(..*'''

230- age(..*'''

230(..*''(

230- age(..*''(

IBI ')) &+ && (.+ /& (.)

I:I:I *+( ' )) '.& */* '.*IJ:I ()/+( (/( +(' *'. /) *'./

E!e"ence of NPA as an Ala!in" T&eat to Nationalise$2an+s

230 is a brought forward legacy accumulated over the past threedecades, when prudent norms of banking were forsaken basking by the haloof security provided by government ownership. It is not wrong to have

pursued social goals, but this does not #ustify relegating banking goals andfiscal discipline to the background.

But despite this extravagance the malaise remained invisible to thepublic eyes due to the practice of not following transparent accountingstandards, but keeping the balance sheets opaque. This artificially conveyedpicture of 6all is well6 with 3%Bs suddenly came to an end when the lid wasopen with the introduction of the prudential norms of banking in the year ())*-), bringing total transparency in disclosure norms and 6cleansing6 thebalance sheets of commercial banks for the first time in the country.

=o4 R2I Desci'es t&is Ne4 De%elo!ent in its 0e'Site

In the peak crisis period in early 2ineties, when the first %eries of Banking 4eforms were introduced, the working position of the %tate-owned

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banks exhibited the severest strain. :ommenting on this situation the 4eserveBank of India in its web-site has pointed out as underA

5Till the adoption of prudential norms relating to income recognition,asset classification, provisioning and capital adequacy, twenty-six out of twenty-seven public sector banks were reporting profits 7H:; Bank wasincurring losses from ()/)-)'8.

In the first post-reform year, i.e., ())*-), the profitability of the 3%Bsas a group turned negative with as many as twelve nationalised banksreporting net losses. By 1arch ())&, the outer time limit prescribed for attaining capital adequacy of / per cent, eight public sector banks were stillshort of the prescribed.5

:onsequently 3%Bs in the post reform period came to be classifiedunder three categories as -

• Cealthy banks 7those that are currently showing profits and hold noaccumulated losses in their balance sheet8

• Banks showing currently profits, but still continuing to have

accumulated losses of prior years carried forward in their balancesheets

• Banks which are still in the red, i.e. showing losses in the past and inthe present.

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C1ARIFICATION ON CERTAIN FRE7UENT1?ASED 7UESTIONS

0&et&e a 4o+in" caital acco#nt 4ill 'eco!e an NPA if t&e stoc+state!ents ae not s#'!itte$ e"#lal(

0&at s&o#l$ 'e t&e eio$ fo 4&ic& t&e stoc+ state!ents can 'e inaeas 'efoe t&e acco#nt is teate$ as an NPA

Banks should ensure that drawings in the working capital accounts arecovered by the adequacy of current assets, since current assets are firstappropriated in times of istress.

:onsidering the practical difficulties of large borrowers, stockstatements relied upon by the banks for determining drawing power shouldnot be older than three

months. The outstanding in the account based on drawing power calculatedfrom stock statements older than three months would be deemed as irregular. 0 working capital

borrower account will become 230 if such irregular drawings are permitted inthe account for a continuous period of )' days 7with effect from 1arch (,*''+8.

0&et&e an acco#nt 4ill 'eco!e an NPA if t&e e%ie4.ene4al of e"#la.a$-&oc ce$it li!its ae not $one 4&en $#e

0&at s&o#l$ 'e eio$icit( of e%ie4.ene4al to $eci$e t&e esentstat#s of an acco#nt

4egular and ad-hoc credit limits need to be reviewed9regulari!ed notlater than three months from the due date9date of ad-hoc sanction. In case of constraints such as non-availability of financial statements and other datafrom the borrowers, the branch should furnish evidence to show thatrenewal9review of credit limits is already on and would be completed soon.

In any case, delay beyond six months is not considered desirable as ageneral discipline. Cence, an account where the regular9ad-hoc credit limits

have not been reviewed or have not been renewed within (/' days from the

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due date9date of ad-hoc sanction will be treated as 230, which period will bereduced to )' days with effect from 1arch (, *''+.

0&et&e it 4ill 'e in o$e to teat a 'oo4e acco#nt as stan$a$; if it&as 'een ie"#la fo a !a@o at of t&e (ea; '#t &as 'een e"#laie$nea t&e 'alance s&eet

$ate

The asset classification of borrower accounts where a solitary or a fewcredits are recorded before the balance sheet date should be handled with

care and without scope

for sub#ectivity. rosion in the value of security can be reckoned as significant whenthe reali!able value of the security is less than ' per cent of the valueassessed by the bank or accepted by 4BI at the time of last inspection, as thecase may be. %uch 230s may be straightaway classified under doubtful

category and provisioning should be made as applicable to doubtful assets.

:lassification of credit facilities under consortium In certain cases of consortium accounts, though the record of recovery in the account with amember bank may suggest that the account is a 230, the banks submit that,at times, the borrower has deposited adequate funds with the consortiumleader9member of the consortium and the bank6s share is due for receipt.

In s#c& cases; 4ill it 'e in o$e fo t&e !e!'e 'an+ to classif( t&eacco#nt as stan$a$ in its 'oo+s

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0sset classification of accounts under consortium should be based onthe record of recovery of the individual member banks and other aspectshaving a bearing on the recoverability of the advances.


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0 number of banks adopt the practice of parking the dues of theborrower in respect of devolved letters of credit and invoked guarantees in aseparate account which is not a regular sanctioned facility. 0s a result theseare not reflected in the principal operating account of the borrower.

This renders application of the prudential norms for identification of 230s difficult. It is, therefore, advised that if the debts arising out of devolvement of letters of credit or invoked guarantees are parked in aseparate account, the balance outstanding in that account also should betreated as a part of the borrower6s principal operating account for the purposeof application of prudential norms on income recognition, asset classificationand provisioning.

Treatment of loss assets 0n 230 account will be classified as a lossasset only when there is no security in the account or where there isconsiderable erosion in the reali!able value of the security in the account.

0&at can 'e te!e$ asconsi$ea'le eosion fo t&e acco#nt to 'eclassifie$ as a loss asset

If the reali!able value of the security, as assessed by the bank9approved values 9 4BI is less than (' per cent of the outstanding in theborrower accounts, the existence of security should be ignored and the assetshould be straightaway classified as loss asset. It may be either written off after obtaining necessary permission from the competent authority as per the

:o-operative %ocieties 0ct94ules, or fully provided for by the bank.Naluation of %ecurity 0 ma#or source of divergence in provisioning

requirement was the reali!able value of the primary and collateral security.:an uniform guidelines be prescribed for adoption in this area, at least for large value accountsV


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Re"istation an$ !attes inci$ental t&eeto

7i8 >very %ecuriti!ation :ompany or 4econstruction :ompany shallapply for registration in the form of application specified videnotification 2o.2B%.(9:$17:%18-*'', dated 1arch , *'' andobtain a certificate of registration from the Bank as provided under %ection of the 0ct=

7ii8 0 %ecuriti!ation :ompany or 4econstruction :ompany, which hasobtained a certificate of registration issued by the Bank under %ection of the 0ct, can undertake both securiti!ation and asset

reconstruction activities=

7a8 0 %ecuriti!ation :ompany or 4econstruction :ompany shallcommence business within six months room the date of grant of :ertificate of 4egistration by the Bank= provided that on theapplication by the %ecuriti!ation :ompany or 4econstruction:ompany, the Bank may rant extension for such further period,not exceeding one year in aggregate from he date of grant of :ertificate f 4egistration.

7b8 0 %ecuriti!ation :ompany or 4econstruction :ompany,which has obtained a :ertificate of 4egistration from the Bankunder %ection of the 0ct and not commenced business as onthe date of the 2otification shall commence business within sixmonths from the date of 2otification.

7iii8 0ny entity not registered with the Bank under %ection of the 0ctmay conduct the business of securiti!ation or asset reconstructionoutside the purview.

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CONC1USION:-

2pa are usually not good for the banks. 2pa should e as minimum as itcan be.

The sugertion for decreasing npa are as follows A

• Identification of new avenues, assessment of existing product

line and portfolio based on the risk-return profile andpreviousexperience of the bank to update negative, discretionary andopen list of the bank.

• xport sector plays pivotal role in the country@s economy and the

bank@s thrust on export credit will be maintained9fine-tuned withspecific references to the gold card scheme in vogue and newpotential export avenues.

• In a phased manner, all credit exposures shall be covered under

credit rating framework of the bank.

• :ompliance with all the statutory and regulatory

stipulations9requirements shall be strictly ensured in credit

operations of the bank.• Based on the credit expansion plans, the bank shall assess,

induct and develop through training and work experience,adequate number of credit officers for assessing, approving andmanaging credit risks.

non performing asesst

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