non-performing assest

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Analysis of Non Performing

Asset in Public and PrivateBanks

Submitted By:

Name: KHALID H SSAIN

!ourse: "BA#$% S&"'(

&nrollment No: A)**+,+(*-.

S/eciali0ation: 1INAN!&

nder $uidance 2f:

1aculty $uide: D34 A3 N K "A3 BHADA 3IA

Designation: L&!5 3&3

ABS6 L !KN27

A"I58 B SIN&SS S!H22L

A"I58 NI9&3SI58 55A3 P3AD&SH


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S5 D&N5:S !&35I1I!A5&

Certified that this report is prepared based on the Dissertation project

undertaken by me on ; Analysis of Non Performing Asset in Public and Private Banks <from 2 - rd Dec .*+= to ( A/ril .*+>6 under the guidance of Dr4 Arun KumarB?adauria in partial fulfilment of the requirement for award of degree of Masters ofBusiness Administration from Amity Uni ersity! Uttar "radesh#

Date$

$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$ $$$$$$$$$$$$$$$$$

%halid &ussain Dr# Arun %umar Bhadaauria Mr# '# "# (ahi

)ecturer Director *AB(+


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1A! L58 !&35I1I!A5&

,orwarded here with a dissertation report on ; Analysis of Non Performing Asset in

Public and Private Banks < submitted by K?alid Hussain ! -nrolment .o

A)**+,+(*-. ! student of "BA#$% 9I t? Semester #.*+('+>% #

/his project work is partial fulfilment of the requirement for the degree of Masters

of Business Administration from Amity Uni ersity )ucknow Campus! Uttar

"radesh#

''''''''''''''''''''''''''''''''

Dr# Arun %umar Bhadauria

)ecturer

Amity Uni ersity!

)ucknow Campus


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BIBLI2$3APH8 3&1&3&N!&S ANN& 3&S

ABS53A!5A strong banking sector is important for flourishing economy# 0ne of the most important and

major roles played by banking sector is that of lending business# 1t is generally encouraged because it has the effect of funds being transferred from the system to producti e purposes!

which also results into economic growth# As there are pros and cons of e erything! the same is

with lending business that carries credit risk! which arises from the failure of borrower to fulfil

its contractual obligations either during the course of a transaction or on a future obligation# /he

failure of the banking sector may ha e an ad erse impact on other sectors# .on$ performing


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assets are one of the major concerns for banks in 1ndia# ."As reflect the performance of banks# A

high le el of ."As suggests high probability of a large number of credit defaults that affect the

profitability and net$worth of banks and also erodes the alue of the asset# /he ."A growth

in ol es the necessity of pro isions! which reduces the o erall profits and shareholders alue#

/he issue of .on "erforming Assets has been discussed at length for financial system all o er the

world# /he problem of ."As is not only affecting the banks but also the whole economy# 1n fact

high le el of ."As in 1ndian banks is nothing but a reflection of the state of health of the

industry and trade# /his project deals with understanding the concept of ."As! its magnitude and

major causes for an account becoming non$performing! projection of ."As o er ne3t years in

banks and concluding remarks#

/he magnitude of ."As ha e a direct impact on Banks profitability legally they are not

allowed to book income on such accounts and at the same time banks are forced to make pro isions on such assets as per 4B1 guidelines /he 4B1 has ad ised all (tate Co$operati e

Banks as well as the Central Co$operati e Banks in the country to adopt prudential norms from

the year ending 56$75$6889# /hese ha e been amended a number of times since 6889# As per

their guidelines the meaning of ."As! the norms regarding assets classification and pro isioning

1ts now ery known that the banks and financial institutions in 1ndia face the problem of

amplification of non$performing assets *."As+ and the issue is becoming more and more

unmanageable# 1n order to bring the situation under control! arious steps ha e been taken#

Among all other steps most important one was the introduction of (ecuriti:ation and

4econstruction of ,inancial Assets and -nforcement of (ecurity 1nterest Act! 2772 by

"arliament! which was an important step towards elimination or reduction of ."As#

An asset is classified as non$performing asset *."As+ if dues in the form of principal and

interest are not paid by the borrower for a period of 6;7 days! &owe er with effect from March

277

or credit facility granted by bank to a borrower becomes nonperforming! then the bank will ha e

to treat all the ad ances=credit facilities granted to that borrower as non$performing without

ha ing any regard to the fact that there may still e3ist certain ad ances = credit facilities ha ing

performing status# /he ."A le el of our banks is way high than international standards# 0ne

cannot ignore the fact that a part of the reduction in ."A s is due to the writing off bad loans by

banks# 1ndian banks should take care to ensure that they gi e loans to credit worthy customers# 1n


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this conte3t the dictum >pre ention is always better than cure? acts as the golden rule to reduce

."A s#

!HAP5&3'I


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IN532D !5I2N 52

BANK

Introduction of BankingBank A financial institution that is licensed to deal with money and its substitutes by accepting

time and demand deposits! making loans! and in esting in securities# /he bank generates profits

from the difference in the interest rates charged and paid# /he de elopment of banking is an

ine itable precondition for the healthy and rapid de elopment of the national economic structure#

Banking institutions ha e contributed much to the de elopment of the de eloped countries of the

world# /oday we cannot imagine the business world without banking institutions# Banking is as

important as blood in the human body# Due to the de elopment of banking ad ances are


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increased and business acti ities de eloping so it is rightly said! @/he de elopment of banking is

not only the root but also the result of the de elopment of the business world#@ After

independence! the 1ndian go ernment also has taken a series of steps to de elop the banking

sector# Due to considerable efforts of the go ernment! today we ha e a number of banks such as

4eser e Bank of 1ndia! (tate Bank of 1ndia! nationali:ed commercial banks! 1ndustrial Banks and

cooperati e banks# 1ndian Banks contribute a lot to the de elopment of agriculture! and trade and

industrial sectors# - en today the banking system of 1ndia possess certain limitations! but one

cannot doubt its important role in the de elopment of the 1ndian economy#

&arly ?istory

Banking in 1ndia originated in the last decades of the 6;th century# /he first banks were >/he

eneral Bank of 1ndia? which started in 69; ! and the Bank of &industan! both of which are nowdefunct# /he oldest bank in e3istence in 1ndia is the (tate Bank of 1ndia! which originated in the

Bank of Calcutta in une 6;7 ! which almost immediately became the Bank of Bengal# /his was

one of the three presidency banks! the other two being the Bank of Bombay and the Bank of

Madras! all three of which were established under charters from the British -ast 1ndia Company#

,or many years the "residency banks acted as quasi$central banks! as did their successors# /he

three banks merged in 6826 to form the 1mperial Bank of 1ndia! which! upon 1ndia s

independence! became the (tate Bank of 1ndia#

Banking in India

Currently! 1ndia has 8 scheduled commercial banks *(CBs+ $ 29 public sector banks *that is with

the o ernment of 1ndia holding a stake+! 56 pri ate banks *these do not ha e go ernment stakeE

they may be publicly listed and traded on stock e3changes+ and 5; foreign banks# /hey ha e a

combined network of o er F5!777 branches and


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Banking in 1ndia has its origin as early as the 'edic period# 1t is belie ed that the transition from

money lending to banking must ha e occurred e en before Manu! the great &indu urist! who

has de oted a section of his work to deposits and ad ances and laid down rules relating to rates

of interest# During the Mogul period! the indigenous bankers played a ery important role in

lending money and financing foreign trade and commerce# During the days of the -ast 1ndia

Company! it was the turn of the agency houses to carry on the banking business# /he eneral

Bank of 1ndia was the first oint (tock Bank to be established in the year 69; # /he others which

followed were the Bank of &industan and the Bengal Bank# /he Bank of &industan is reported to

ha e continued till 687 while the other two failed in the meantime# 1n the first half of the 68 th

century the -ast 1ndia Company established three banksE the Bank of Bengal in 6;78! the Bank

of Bombay in 6;


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!HAP5&3'II


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!2N!&P5 21 NPA s

NPA #N2N P&3123"IN$ ASS&5%

Action for enforcement of security interest can be initiated only if the secured asset is classified

as .on "erforming Asset# .on "erforming Asset means an asset or account of borrower! which

has been classified by a bank or financial institution as sub$standard! doubtful or loss asset! in

accordance with the directions or guidelines relating to asset classification issued by 4B1# An

amount due under any credit facility is treated as @past due@ when it has not been paid within 57


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days from the due date# Due to the impro ement in the payment and settlement systems!

reco ery climate! up gradation of technology in the banking system! etc#! it was decided to

dispense with past due concept! with effect from March 56! 2776#

Accordingly! as from that date! a .on performing asset *."A+ shell be an ad ance where $

6# 1nterest and =or installment of principal remain o erdue for a period of more than 6;7 days in

respect of a /erm )oan!

2# /he account remains out of order for a period of more than 6;7 days! in respect of an

o erdraft= cash credit *0D=CC+!

5# /he bill remains o erdue for a period of more than 6;7 days in the case of bills purchased and

discounted!

6# 1nterest and =or installment of principal remain o erdue for a period of more than 87 days in

respect of a /erm )oan!

2# /he account remains out of order for a period of more than 87 days! in respect of an

o erdraft= cash Credit*0D=CC+!

5# /he bill remains o erdue for a period of more than 87 days in the case of bills purchased and

discounted!


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F# Any amount to be recei ed remains o erdue for a period of more than 87 days in respect of

other accounts#

1n case of agriculture ad ance

6# A loan granted to a short duration crop will be treated as ."A! if the installment or interest

thereon remains o erdue for two crop seasons#

2# A loan granted for long duration *crop season longer than one years+ crops will be treated as

."A! if the installment=interest remain unpaid for one crop season#

Assets !lassification and Provisions

.on$"erforming Asset or ."A! 1t is called such as while it is an @Asset@! it does not bring

substantial income to its 0wner or is just dormant# /he 4B1 has issued guidelines to banks for

classification of assets into four categoriesI$

6# (tandard assets2# (ub$standard assets


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5# Doubtful assetsE and


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March56!277< $9F percent with effect from

March 56! 277 #

$677 percent with effect from

March56!277911# Ad ances classified as doubtful for more

than three years on or after

April6!277<

677 percent with effect from March 56!277F


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t o cro/ seasons and loans granted for long duration cro/s will be treated as ."A! if

installment of principal or interest thereon remains o erdue for one cro/ season ! and# Any amount to be recei ed remains o erdue for a period of more than 87 days in respect

of other accounts#

2ut of 2rder I An account should be treated as out of order if the outstanding balance remains

continuously in e3cess of the sanctioned limit=drawing power# 1n cases where the outstanding

balance in the principal operating account is less than the sanctioned limit=drawing power! but

there are no credits continuously for 87 days as on the date of Balance (heet or credits are not

enough to co er the interest debited during the same period! these accounts should be treated as

out of order #

2verdue I Any amount due to the bank under any credit facility is Ko erdue if it is not paid on

the due date fi3ed by the bank# /he date of ."A will be the actual date on which slippage

occurred! as mentioned belowI$

1or 5erm LoanCDemand Loan Accounts:' /he date on which interest and=or

installment of principal ha e remained o erdue for a period of more than 90 days.

1or 2verdraftC!as? !redit Accounts:' /he date on which the account completed a period of

more than 90 days of being continuously out of order#

Income 3ecognition @ Policy

+4 /he "olicy of income recognition has to be objecti e and based on the record of reco ery#

1nternationally income from non$performing asset *."A+ is not recogni:ed on accrual basis but

is booked as income only when it is actually recei ed# /herefore! the banks should not charge

and take to income account interest on any ."A#.4 0n an account turning ."A! banks should re erse the interest already charged and not

collected by debiting profit and loss account! and stop further application of interest# &owe er!

banks may continue to record such accrued interest in a memorandum account in their books#


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-4 &owe er! interest on ad ances against term deposits! .(Cs! 1'"s! %'"s! and )ife policies

may be taken to income account on the due date! pro ided adequate margin is a ailable in the

accounts#

(4 1f go ernment guaranteed ad ances become ."A! the interest on such ad ances should not be

taken to income account unless the interest has been reali:ed#

=41f any ad ance! including bills purchased and discounted! become s ."A as at the close of any

year! the entire interest accrued and credited to income account in the past periods! should be

re ersed or pro ided for if the same is not reali:ed# 5?is ill a//ly to government guaranteed

accounts also4

5y/es of NPA

$ross NPA:ross ."As are the sum total of all loan assets that are classified as ."As as per 4B1

guidelines as on Balance (heet date# ross ."A reflects the quality of the loans made by banks# 1t consists of all the nonstandard assets like as sub$standard! doubtful! and loss

assets# 1t can be calculated with the help of following ratioI

ross ."As 4atio L ross ."As = ross Ad ances


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Net NPA: .et ."As are those type of ."As in which the bank has deducted the pro ision regarding

."As# .et ."A shows the actual burden of banks# (ince in 1ndia! bank balance sheets

contain a huge amount of ."As and the process of reco ery and write off of loans is ery

time consuming! the pro isions the banks ha e to make against the ."As according to the

central bank guidelines! are quite significant# /hat is why the difference between gross

and net ."A is quite high# 1t can be calculated by followingI

.et ."As L ross ."As J "ro isions = ross Ad ances J "ro isions

ross ."A is an ad ance which is considered irreco erable! for bank has made pro isions! andwhich is still held in banks books of account# .et ."A is obtained by deducting items like

interest due but not reco ered! part payment recei ed and kept in suspense account from ross

."A# /he 4eser e Bank of 1ndia states that! compared to other Asian countries and the U(! the

gross non$performing asset figures in 1ndia seem more alarming than the net ."A figure# /he

problem of high gross ."As is simply one of inheritance# &istorically! 1ndian public sector banks

ha e been poor on credit reco ery! mainly because of ery little legal pro ision go erning

foreclosure and bankruptcy! lengthy legal battles! sticky loans made to go ernment public sector

undertakings! loan wai ers and priority sector lending#

.et ."As are comparati ely better on a global basis because of the stringent pro isioning norms

prescribed for banks in 6886 by .arashimam Committee# 1n 1ndia! e en on security taken against

loans! pro ision has to be created# ,urther! 1ndian banks ha e to make a 677 per cent pro ision

on the amount not co ered by the reali:able alue of securities in case of doubtful ad ance!

while in some countriesE it is 9F per cent or just F7 per cent# /he A((0C&AM (tudy titled

$(ol ency Analysis of the 1ndian Banking (ectors! re eals that on an a erage 2< per cent rise in

net non performing assets ha e been registered by 2F public sector and commercial banks duringthe second quarter of the 2778 as against 277;# According to the 4B1! @4eduction of ."As in the

1ndian banking sector should be treated as a national priority item to make the system stronger!

resilient and geared to meet the challenges of globali:ation# 1t is necessary that a public debate is

started soon on the problem of ."As and their resolution#@


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Difficulties it? t?e Non'Performing Assets:

6# 0wners do not recei e a market return on their capital# 1n the worst case! if the bank fails!

owners lose their assets# 1n modern times! this may affect a broad pool of shareholders#2# Depositors do not recei e a market return on sa ings# 1n the worst case if the bank

fails!depositors lose their assets or uninsured balance# Banks also redistribute losses toother borrowers by charging higher interest rates# )ower deposit rates and higher lending

rates repress sa ings and financial markets! which hampers economic growth#5# .onperforming loans epitomi:e bad in estment# /hey misallocate credit from good

projects! which do not recei e funding! to failed projects# Bad in estment ends up in


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misallocation of capital and! by e3tension! labour and natural resources# /he economy

performs below its production potential#


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Im/actC &ffects of NPA u/on banks

A strong banking sector is important for flourishing economy# /he failure of the banking sector

may ha e an ad erse impact on other sectors# .on$performing assets are one of the major

concerns for banks in 1ndia# /he only problem that hampers the possible financial performance

of the public sector banks is the increasing results of the .on$ performing Assets# /he

.onperforming Assets impacts drastically to the working of the banks# /he efficiency of a bank

is not always reflected only by the si:e of its balance sheet but by the le el of return on its assets#

."As do not generate interest income for the banks! but the same time banks are required to

make pro isions for such ."As from their current profits#


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• /hey erode current profits through pro isioning requirements#• /hey result in reduced interest income#• /hey require higher pro isioning requirements affecting profits and accretion to capital#

/hey limit recycling of funds! set in assets$liability mismatches! etc#• Ad erse impact on Capital Adequacy 4atio#• 40- and 40A goes down because ."As do not earn#• Bank s rating gets affected#• Bank s cost of raising funds goes up#• 4B1 s appro al required for declaration of di idend if .et ."A ratio is abo e 5G#• Bad effect on oodwill#• Bad effect on equity alue#

/he 4B1 has also de elop many schemes and tools to reduce the ."A assets by introducing

internal checks and control scheme! relationship mangers as stated by 4B1 who ha e complete

knowledge of the borrowers! credit rating system ! and early warning system and so on#

/he 4B1 has also tried to impro e the securiti:ation Act and (4,A-(1 Act and other acts related

to the pattern of the borrowings#

/hough 4B1 has taken number of measures to reduce the le el of the .on performing Assets the

result is not up to e3pectations# /o impro e ."As each bank should be moti ated to introduce

their own precautionary steps# Before lending the banks must e aluate the feasible financial andoperational prospecti e results of the borrowing companies or customer# /hey must e aluate the

borrowing companies by keeping in considerations the o erall impacts of all the factors that

influence the business# ."As reflect the performance of banks# A high le el of ."As suggests

high probability of a large number of credit defaults that affect the profitability and net worth of

banks and also erodes the alue of the asset# /he ."A growth in ol es the necessity of

pro isions! which reduces the o erall profits and shareholders alue#

Im/act of NPA on t?e o/erations of banks

+4 Profitability


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."A 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 ."A but ."A lead to opportunity cost also as that much of profit in ested in some

return earning project=asset# (o ."A does not affect current profit but also future stream of profit!

which may lead to loss of some long$term beneficial opportunity# Another impact of reduction in

profitability is low 401 *return on in estment+! which ad ersely affect current earning of bank#

.4 LiEuidity

Money is getting blocked! decreased profit lead to lack of enough cash at hand which lead to

borrowing money for shortest period of time which lead to additional cost to the company#

Difficulty in operating the functions of bank is another cause of ."A due to lack of money#

-4 Involvement of "anagement

/ime and efforts of management is another indirect cost which bank has to bear due to ."A#

/ime and efforts of management in handling and managing ."A would ha e di erted to some

fruitful acti ities! which would ha e gi en good returns# .ow days! banks ha e special

employees to deal and handle ."As! which is additional cost to the bank#

(4 !redit Loss

1f a bank is facing problem of ."A! then it ad ersely affects the alue of bank in terms of market

for credit# 1t will lose its goodwill and brand image and credit which ha e negati e impact to the

people who are putting in their money in the banks *C#(# Balasubramaniam! 2766+#


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&arly sym/toms by ?ic? one can recogni0ea /erforming asset turning in to Non'

/erforming asset

,our categories of early symptomsI

i4 1inancial:• .on$payment of the ery first installment in case of term loan#• Bouncing of cheque due to insufficient balance in the accounts#• 1rregularity in installment• 1rregularity of operations in the accounts#• Unpaid o erdue bills#• Declining Current 4atio• "ayment which does not co er the interest and principal amount of that installment• Hhile monitoring the accounts it is found that partial amount is di erted to sister concern

or parent company#

ii4 2/erational and P?ysical:• 1f information is recei ed that the borrower has either initiated the process of winding up

or are not doing the business#• 0 erdue recei ables#• (tock statement not submitted on time#


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3easons for an asset turning NPA #!ausesres/onsible for rising NPAs%

A strong banking sector is important for a flourishing economy# /he failure of the banking sector

may ha e an ad erse impact on other sectors# /he 1ndian banking system! which was operating

in a closed economy! now faces the challenges of an open economy# 1t is ery unfortunate that

non$performing assets ha e increased not due to economic slowdown! delay in implementationof project! it is due to improper assessment of the proposals# Many banks still rely upon

proposals come chartered accountants! intermediaries etc who just want to earn commission

bring in proposal and reco ery procedure is not effecti e# /here are cases banks ha e lend crores

of rupees! in spite of borrower had no background of business acti ity# /he gross ."As of public

sector banks stood at 4s# 9;!688 crores by the end of une 2766# As far as old ."As are

concerned! a bank can remo e it on its own or sell the assets to AMCs to clean up its balance

sheet# ,or pre enting fresh ."As! the bank itself should adopt proper policies# /here are arious

factors behind the transformations of assets from performing to non$performing# /he causes are

funds borrowed for a particular "rojects not completed in time! "oor reco ery of recei ables!

lack of proper follow$up! Delay in sanctioning! .on$co$operation of o t# Agencies in reco ery!

(ocial$political pressures! 1mbalances of in entories! "oor quality management! Hillful defaults!

.atural calamities! "roduct failure due to lack of demand or quality! 1ndustrial recession! power

shortage! industrial recession! e3cess capacity! (trikes! lockouts and labor problems! &ea y

market competition! (luggish legal system! )ow morale and

ethics#

/he banking sector has been facing the serious problems of the rising ."As# 1n fact public

sector banks are facing more problems than the pri ate sector banks# /he ."As in public

sector banks are growing due to e3ternal as well as internal factors# 0ne of the main causes of

."As in the banking sector is the Directed loans system under which commercial banks are


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required to supply


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."A arise out of lending to priority sector at the dictates of politicians and bureaucrats#

2# -conomicI rowth! distribution! efficient allocation of resource#

5# (ocialI Acceptability! mobility! education#


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$-3pansion=di ersification=moderni:ation#$/aking up new projects#$&elping=promoting associate concerns#

O /ime=cost o errun during the project implementation#O 1nefficient management#

O (trained labour relations#O 1nappropriate technology=technical problems#O "roduct obsolescence! etc#O "oor credit Appraisals! monitoring and follow up! improper (H0/ analysis on the

part of banks#O "arameter set for functioning was deficient#O )ack of freedom to choose product and pricing#O Hrong lending decision#O )ack of 4esource and poor training#O )ack of system and procedure#O )ack of ability to handle assets and liability#O )ack of mechanism of credit information dissemination#O )ack of an effecti e judicial system for reco ery from defaulters#O Collateral based lending to idle assets#O ,i3ing of price and quantum of loans#O )ack of effecti e 1/ system and M1(#

External Factors

O 4ecession#O 1nput or power shortage#O "rice escalation#O -3change rate fluctuation#O Accidents and natural calamities#O Changes in go ernment policy such as e3cise! import and e3port duties! pollution

control order etc#O Hillful defaulters ha e been there because they knew that legal recourse a ailable to

the lenders is time consuming and slow#O (ickness of the industry also leads to gradual erosion of the liquidity and units start

failing to honor its obligations for the loan payments# &ea y funds are locked up in

these units#O "olitical tool$Directed credit to ((1 and 4ural sectors has been thereO Manipulation by the debtors using political influence has been a cause for high

industrial bad debts#O Une3posed to international marketing methods and products#

e% 3easons from t?e loan structuring side


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• /he ."A may be classified as standard in the books of the purchasing bank for a period

of 87 days from date of purchase and thereafter it would depend on the record of reco ery

with reference to cash flows estimated while purchasing#• /he bank may purchase= sell ."A only on without recourse basis#• 1f the sale is conducted below the net book alue! the short fall should be debited to " )

account and if it is higher! the e3cess pro ision will be utili:ed to meet the loss on

account of sale of other ."A#

"easures to !ontrol NPAs1n present scenario ."As are at the core of financial problem of the banks# Concrete efforts

ha e to be made to impro e reco ery performance# Measures required to be undertaken aremainly two fold# Banks should make efforts first to a oid fresh addition on ."As by their

effecti e presentation appraisal and secondly to reco er the amount from accounts which ha e

already turned bad#

6# Preventive "easures I


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• Most of the bankers feel that genuine iability problem of the borrowing units! weakness

in credit appraisal system! absence of effecti e monitoring and super ision of loan

account! absence of credit information sharing among the banks etc# are some of the

significant causati e factors of high le el of ."As internal to the banks#• (o for pre enti e the fresh inflow of funds into the non$performing category! banks

should reformulate their credit appraisal techniques#• "roper e aluation of the loan application may help in detecting the un iable projects at

the first instance#• ,ull information about unit! industry! its financial stake! management etc# should be

collected#• 1ndustrial cell should be established at the bank le el! which would ha e complete

information about the industry and its prospects in future#•

"roper credit monitoring should be equally emphasi:ed# /here should be proper flow of information from the units regarding their financial area! annual accounts! stock reports

etc#! which would enable the banker to know the need based credit requirement of

borrower and warning signals for taking quick remedial action#• Banks should inspect the progress of the project or the business# (eparate monitoring

department should be established in large branches for periodical re iew of accounts!

comparati e risk analysis and compliance of terms and conditions of sanction# -qual

emphasis should be gi en for monitoring of standard assets also#• Banks should be equipped with latest credit risk management techniques to protect the

bank funds and minimi:e insol ency risks# Banks should de elop credit deri ati es

markets to a oid these risks# /here should be regular outflow of senior bank officers

from all public sector banks for speciali:ed training in training institute to equip them

with latest procedures and practices#

2# !urative "easures : • Besides making efforts to stop the fresh additions of ."As banks ha e to takesteps to reco er the amount from assets! which ha e already slipped into ."As

category# (ignificant causati e factors highlighted were slow reco ery of legal

cases! willful default induced by officially announced loan wai er schemes etc#


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the 1ndian legal system is sympathetic towards the borrowers and works against

the banks interest#• Despite most of their loans being backed by security! banks are unable to enforce their

claims on the collateral! when the loans turn non$performing and therefore loan

reco eries ha e been insignificant#• /he .arshimham Committee on financial system *6886+ has recommended the

establishment of Debt 4eco ery /ribunals *D4/+ for the speedy reco ery of the assets

from ."As category# 0n the basis of recommendations 22 D4/s were established by

passing the bill on 4eco ery of Debt due to Banks and ,inancial 1nstitutions Act 6885#

But the performance of D/4s for the past years has not been found satisfactory or up to

the mark#• /he Act has some limitations! which must be remo ed to make its effecti e

implementation#• At present one presiding officer is handling at least ;7$87 cases per day# 1t is suggested

that D4/ Act may be amended to enable the central go ernment to appoint additional

presiding officers for speedy disposal of reco ery cases#• 0ne of the major factors accounting for delay in disposing of application by D4/ is the

delay caused due to refusal by defendants to accept the summons! and at times due to

change in address too#• D4/ may be empowered to order ser ice of summons by hand! registered post and by

publications simultaneously# Attachment of immo able property of borrower is not

admitted due to ser ice of summons#• -nforcement of security and obtaining court decree take unduly long time! it encourages

willful default and ultimately the banks may be compelled to write off loans# Hillful

default should be declared a criminal offence#• o ernment should not go for mass wai er of interest= installments as it sends unhealthy

signals to the borrower# During 6887$86 there was a massi e wai er of rural debt

amounting to o er 4s# 6F777 crore and 4s# F777 crore in 277;# /hese types of acti ities

put a premium on willful default and dishonesty# 1t lowers the repayment ethics#• 1n case of go ernment sponsored schemes go ernment should assist in reco ery# 1t may

be noted that suggestions enumerated will go a long way in reducing the ."As# /his will

only considerably impro e the profitability of the banks! impro e the quality of assets!


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but also make the 1ndian @Banking system stringent! resilient and geared to meet the

challenges of globali:ation *Mohan %umar o ind (ingh! 2762+

!HAP5&3'I9


37/56

INDIAN &!2N2"8 AND NPAS

Undoubtedly the world economy has slowed down! recession is at its peak! globally stock markets ha e tumbled and business itself is getting hard to do# /he 1ndian economy has been

much affected due to high fiscal deficit! poor infrastructure facilities! sticky legal system! cutting

of e3posures to emerging markets by ,11s! etc# ,urther! international rating agencies like!

(tandard "oor ha e lowered 1ndia s credit rating to sub$in estment grade# (uch negati e

aspects ha e often outweighed positi es such as increasing for reser es and a manageable

inflation rate#

Under such a situation! it goes without saying that banks are no e3ception and are bound

to face the heat of a global downturn# 0ne would be surprised to know that the banks and

financial institutions in 1ndia hold non$performing assets worth 4s# 6!67!777 Crores# Bankers

ha e reali:ed that unless the le el of ."As is reduced drastically! they will find it difficult to

sur i e#


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/he actual le el of .on "erforming Assets in 1ndia is around P


39/56

• 4B1 has ad ised banks to e3amine all cases of willful default of 4s#6 crore and abo e and

file suits in such cases# Board of Directors are required to re iew ."A accounts of 4s#6

crore and abo e with special reference to fi3ing of staff accountability#• 4eporting quick mortality cases• (pecial mention accounts for early identification of bad debts# )oans and ad ances

o erdue for less than one and two quarters would come under this category# &owe er!

these accounts do not need pro isioning

"&AS 3&S INI5IA5&D B8 3BI AND

$29&3N"&N5 21INDIA 123 3&D !5I2N 21 NPAs

."A MA.A -M-./ J 4-(0)U/10.I$• Compromise (ettlement (chemes• 4estructuring = 4eschedulement• )ok Adalat• Corporate Debt 4estructuring Cell• Debt 4eco ery /ribunal *D4/+• "roceedings under the Code of Ci il "rocedure• Board for 1ndustrial ,inancial 4econstruction *B1,4+= AA1,4 • .ational Company )aw /ribunal *.C)/+• (ale of ."A to other banks


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• (ale of ."A to A4C= (C under (ecuriti:ation and 4econstruction of ,inancial

Assets and -nforcement of (ecurity 1nterest Act 2772 *(4,A-(1+• )iquidation

I4 !om/romise settlement sc?emes :

/he 4B1 = o ernment of 1ndia ha e been constantly goading the banks to take steps for

arresting the incidence of fresh ."As and ha e also been creating legal and regulatory

en ironment to facilitate the reco ery of e3isting ."As of banks# More significant of them! 1

would like to recapitulate at this stage#

/he broad framework for compromise or negotiated settlement of ."As ad ised by

4B1 in uly 688F continues to be in place# Banks are free to design and implement their own

policies for reco ery and write$off incorporating compromise and negotiated settlements

with the appro al of their Boards! particularly for old and unresol ed cases falling under the

."A category# /he policy framework suggested by 4B1 pro ides for setting up of an

independent (ettlement Ad isory Committees headed by a retired udge of the &igh Court to

scrutini:e and recommend compromise proposals#

(pecific guidelines were issued in May 6888 to public sector banks for onetime non$

discretionary and non$discriminatory settlement of ."As of small sector# /he scheme wasoperati e up to (eptember 57! 2777# Q"ublic sector banks reco ered 4s# ; crore through

compromise settlement under this scheme#R

uidelines were modified in uly 2777 for reco ery of the stock of ."As of

4s# F crore and less as on 56 March 6889# Q/he abo e guidelines which were alid up to

une 57! 2776 helped the public sector banks to reco er 4s# 2 77 crore by (eptember 2776R

An 0/( (cheme co ering ad ances of 4s#2F777 and below continues to be in operation and

guidelines in pursuance to the budget announcement of the &on ble ,inance Minister

pro iding for 0/( for ad ances up to 4s#F7!777 in respect of ."As of small=marginal

farmers are being drawn up#

Negotiating for compromise settlements:-


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/he first crucial step towards meaningful ."A management is to accept that reco eries are one s

own responsibility# /o keep the Bank s operating cycle going smoothly! it is essential that this

reali:ation of one s duties be transformed into deeds by resorting to arious methods of reco ery#

0f the arious methods a ailable for ."A Management! Compromise (ettlements are the most

attracti e! if handled in a professional manner#

Advantages

i4 Saves money6 time and man/o er

Banks are mainly concerned with reco ery of dues! to the ma3imum possible e3tent! at minimum

e3pense# By entering into compromise settlements! the objecti e is achie ed# Also! a lot of

e3ecuti e time is sa ed because most of the usual problems = delays associated with court action

are a oided#

ii4 ProFects a ?el/ful image of t?e Bank

A well$concluded compromise settlement! which results in a KH1.$H1. for the Bank as well as

the borrower! is a strong positi e propaganda for the Bank# /he impression generated is that the

Bank is capable not only of sympathy! but also empathy#

iii4 &G/edites recycling of funds

Compromise settlements aim at quick reco ery# 4eco ery means funds becoming a ailable for

recycling and! additional interest generation#

iv4 !leanses Balance S?eet

Hith the ."A le el going down! and the additional funds becoming a ailable for recycling as

fresh ad ances! the asset quality of the Bank is bound to go up# 1mpro ed asset quality signifies

higher profits by reduced pro isions and increased interest income# Hith additions to the

reser es! the capital position also impro es! impro ing the Capital Adequacy position#

Besides the abo e! compromise offers the best option when!

/he documents are defecti e and cannot be rectified!


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security is not enforceable!forced sale is e3tremely difficult! or would result only in reali:ing a paltry amount

and/he borrowers become untraceable and reco ery can be only though guarantors#

Disadvantages

i# Compromise in ol es loss! since full reco ery is not possible# 1n fact! full

reco ery is not e en en isaged! but sacrifice is#ii# 1t may be iewed as a reward for default! especially if chronic default cases are

settled by negotiations#iii# 1t may ha e a demonstrati e effect! and so may itiate the culture of repaymenti # /here is also the possibility of misuse or! e en! malafides! since assessment of

situation is highly subjecti e#

Practical as/ects of com/romise settlements

- ery compromise proposal needs to be looked at indi idually! e aluated strictly on merits! and

negotiated properly for ma3imi:ation of benefit to the Bank# &ence! a straight jacket approach is

not possible! neither is it desirable! to gi e strict guidelines for compromise settlements#

II4 3estructuring and 3e?abilitation

A4 Banks are free to design and implement their own policies for restructuring= rehabilitation of

the ."A accounts

B4 4e$schedulement of payment of interest and principal after considering the Debt ser ice

co erage ratio! contribution of the promoter and a ailability of security

III4 Lok Adalats

)ok Adalat institutions help banks to settle disputes in ol ing accounts in >doubtful? and >loss?

category! with outstanding balance of 4s#F lakhs for compromise settlement under )ok Adalats#


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Debt 4eco ery /ribunals ha e now been empowered to organi:e )ok Adalats to decide on cases

of ."As of 4s#67 lakhs and abo e# /he public sector banks had reco ered 4s#


44/56

o ernment to consider enactment of appropriate penal pro isions against obstruction by

borrowers in possession of attached properties by D4/ recei ers! and notify borrowers who

default to honor the decrees passed against them#

94 !irculation of information on defaulters

/he 4B1 has put in place a system for periodical circulation of details of willful defaults of

borrowers of banks and financial institutions# /his ser es as a caution list while considering

requests for new or additional credit limits from defaulting borrowing units and also from the

directors =proprietors = partners of these entities# 4B1 also publishes a list of borrowers *with

outstanding aggregating 4s# 6 crore and abo e+ against whom suits ha e been filed by banks and

,1s for reco ery of their funds! as on 56st March e ery year# 1t is our e3perience that these

measures had not contributed to any perceptible reco eries from the defaulting entities# &owe er!

they ser e as negati e basket of steps shutting off fresh loans to these defaulters# 1 strongly

belie e that a real breakthrough can come only if there is a change in the repayment psyche of

the 1ndian borrowers#

9I4 3ecovery action against large NPAs

After a re iew of pendency in regard to ."As by the &on ble ,inance Minister! 4B1 had ad isedthe public sector banks to e3amine all cases of willful default of 4s 6 crore and abo e and file

suits in such cases! and file criminal cases in regard to willful defaults# Board of Directors are

required to re iew ."A accounts of 4s#6 crore and abo e with special reference to fi3ing of staff

accountability# 0n their part 4B1 and the o ernment are contemplating se eral supporting

measures

9II4 Asset 3econstruction !om/any:

An Asset 4econstruction Company with an authori:ed capital of 4s#2777 crore and initial paid

up capital 4s#6


45/56

assets and de elop markets for such assets# o ernment of 1ndia proposes to go in for legal

reforms to facilitate the functioning of A4C mechanism

9III4 Legal 3eforms

/he &onorable ,inance Minister in his recent budget speech has already announced the proposal

for a comprehensi e legislation on asset foreclosure and (ecuriti:ation# (ince enacted by way of

0rdinance in une 2772 and passed by "arliament as an Act in December 2772#

I 4 !or/orate Debt 3estructuring #!D3 %

Corporate Debt 4estructuring mechanism has been institutionali:ed in 2776 to pro ide a timely

and transparent system for restructuring of the corporate debts of 4s#27 crore and abo e with the banks and financial institutions# /he CD4 process would also enable iable corporate entities to

restructure their dues outside the e3isting legal framework and reduce the incidence of fresh

."As# /he CD4 structure has been headquartered in 1DB1! Mumbai and a (tanding ,orum and

Core roup for administering the mechanism had already been put in place# /he e3periment

howe er has not taken off at the desired pace though more than si3 months ha e lapsed since

introduction# As announced by the &on ble ,inance Minister in the Union Budget 2772$75! 4B1

has set up a high le el roup under the Chairmanship of (hri# 'epa %amesam! Deputy o ernor!4B1 to re iew the implementation procedures of CD4 mechanism and to make it more effecti e#

/he roup will re iew the operation of the CD4 (cheme! identify the operational difficulties! if

any! in the smooth implementation of the scheme and suggest measures to make the operation of

the scheme more efficient#

4 !redit Information Bureau

1nstitutionali:ation of information sharing arrangements through the newly formed Credit

1nformation Bureau of 1ndia )td# *C1B1)+ is under way# 4B1 is considering the recommendations

of the (#4#1yer roup *Chairman of C1B1)+ to operationalise the scheme of information


46/56

dissemination on defaults to the financial system# /he main recommendations of the roup

include dissemination of information relating to suit$filed accounts regardless of the amount

claimed in the suit or amount of credit granted by a credit institution as also such irregular

accounts where the borrower has gi en consent for disclosure# /his! 1 hope! would pre ent those

who take ad antage of lack of system of information sharing amongst lending institutions to

borrow large amounts against same assets and property! which had in no small measure

contributed to the incremental ."As of banks#

I4 Pro/osed guidelines on ilful defaultsCdiversion of funds

4B1 is e3amining the recommendation of %ohli roup on wilful defaulters# 1t is working out a

proper definition co ering such classes of defaulters so that credit denials to this group of borrowers can be made effecti e and criminal prosecution can be made demonstrati e against

wilful defaulters#

II4 !or/orate $overnance

A Consultati e roup under the chairmanship of Dr# A#(# anguly was set up by the 4eser e

Bank to re iew the super isory role of Boards of banks and financial institutions and to obtain

feedback on the functioning of the Boards is$S$ is compliance! transparency! disclosures! auditcommittees etc# and make recommendations for making the role of Board of Directors more

effecti e with a iew to minimi:ing risks and o er$e3posure# /he roup is finali:ing its

recommendations shortly and may come out with guidelines for effecti e control and super ision

by bank board s o er credit management and ."A pre ention measures# QDr# Bimal alan!

o ernor! 4B1! in a speech titled @Banking and ,inance in the .ew Millennium#@ deli ered at

22nd Bank -conomists Conference! .ew Delhi! Fth ,ebruary! 2776R


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!HAP5&3'9

3&S&A3!H

"&5H2D2L2$8


48/56

3esearc? "et?odology 4esearch Methodology is the systematic way of sol ing research problem# According to reen

and /ail >A research design is the specification of the method and procedure of acquiring the

information needed# 1t is the o erall operational pattern or framework of the project that

stipulates which information is to be collected! from where it is to be collected and by what

procedure#?

2bFectives:

• /o know what is ."A#• /o state the present status of ."A in banks#• /o know the reasons for an asset becoming .on$"erforming Asset• /o study the position of .on$performing Assets in arious banks#• /o know why ."A are the greater challenge to banksT•

/o know what steps are been taken by the 1ndian banking system to reduce ."AT• /o study the procedure and tools used for management of ."As#• Hhat are the measures adopted by banks to look after ."A managementT

5y/e of 3esearc?:'

/his project ;Analysis of Non Performing Asset in Public and Private Banks< is considered

as an e3ploratory research#

-3ploratory research is basically a secondary research such as re iewing a ailable literature

and=or data! or qualitati e approaches such as informal discussions with consumers! employees!

management or competitors! and more formal approaches through in$depth inter iews! focus


49/56

groups! projecti e methods! case studies or pilot studies# /he 1nternet allows for research

methods that are more interacti e in nature#

"et?od of data collection

/he data which has been collected for the mentioned project is from secondary data source# /hesecondary data are those which ha e already collected and stored# (econdary data easily getthose secondary data from records! annual reports of the company etc# 1t will sa e the time!money and efforts to collect the data# /he secondary data has been sourced from journals!maga:ines! articles and media reports# Different news articles! Books and Heb were used whichwere enumerated and recorded#


50/56

!HAP5&3'9

DA5A ANAL8SIS ANDIN5&3P3&5A5I2NS


51/56

Analysis of NPAs of /ublic and /rivate sector

banks

(ourceI 4B1 annual financial report! ."A of public pri ate sector banks

!om/arison of $ross NPAs and Net NPAs of Public Sector Private Sector Banks

"ublic (ectorBank

"ri ate (ectorBank

Nears ross ."As*G+ .et ."As*G+ ross ."As*G+ .et ."As*G+2776$72 66#78 F#;2 8# < F#952772$75 8#5


52/56

0

2

4

6

8

10

12

Public Sector Bank GrossNPAS(%)

Private Sector Bank GrossNPAS(%)

!om/arison of $ross NPAs of Public Sector Private Sector Banks


53/56

0

1

2

3

4

6

Public Sector Bank NetNPAS(%)

Private Sector Bank NetNPAS(%)

!om/arison of Net NPAs of Public Sector Private Sector Banks

IN5&3P3&5A5I2N:'

/he public sector and pri ate sector banks showed a declining trend in gross and net ."As o er

the period of study as shown in /able but public sector banks has higher ."A compare to "ri ate


54/56

sector banks# /he reason for it is that pri ate sector banks ha e a secured loan policy as

compared to public sector banks#

1t has been obser ed that gross ."As as absolute and in percentage terms with gross ad ances of

public sector banks ha e declined from 66#78G to 2#77G in the period of 2776$72 to 277;$78!

whereas gross ."As as percentage with gross ad ances of "ri ate sector banks ha e declined

from 8#


55/56

LI"I5A5I2NS

O /he data collected my me was not sufficient for dissertation project#

O 1 ha en t got enough time to study my report so that become a cause of limitation to my

project#

O (ince my study is based upon secondary data! the practical operations as related to ."A s

adopted by banks are not learned#

O (olutions are not applicable to e ery bank #

1INDIN$S

O /he reduction in loan installment to 87 days may raise the ."A le els in the short

O run# But in turn will impro e the asset quality of the banks#

O 2# /he lenders cannot take undue ad antage of the new act# "ro isions for lenders

O liquidity ha e been added to protect the borrowers against irresponsible claims by

O lenders#O 5# "ri ate Banks ha e more efficient management of ."As as compared to "(Bs#

O


56/56

S $$&S5I2NS

O /here surely is a need to distinguish between willful and unwilling defaulters# 1n caseof the latter category of defaulters the law should not be as harsh as in case of willfuldefaulters#

O /he act should be judiciously and selecti ely applied so that ."As could becon erted into performing assets#

O Compromise where er possible and desirable should be resorted to as per bank se3tent terms and conditions#

O Creation of additional benches and enhancing the capacity of D4/ *debt reco ery

tribunal+ can be rationali:ed and delays could be a oided#

O (egregation of the benches should be done in order to ensure that a flood of small cases do not retard the disposal of larger cases#

O 1n order to reduce the balance of ."As! Bank should constantly re iew andmonitor the accounts and the progress of the project for which the loan has beensanctioned#

!2N!L SI2N

O /here has been a continuous decrease in the time period considered to declare aloan as non$performing# /he continuous decrease in the time period is to bringthe 1ndian banking norms at par with international norms# /his mo e will

certainly reduce the ."As and in turn impro e the asset quality of the banks#O /ill recent past! corporate borrowers e en after defaulting continuously ne er hadthe fear of bank taking action to reco er their dues# /his is because there was nolegal framework to safeguard the real interest of banks#

O &owe er with the introduction of (A4,A-C1 AC/ banks can issue notices todefaulters to repay their loans# Also! the (upreme Court has recently gi en the banks the freedom to sell mortgage assets of the borrowers! if they do not respondto the legal proceedings initiated by lender# /his enables banks to get rid of sticky

non-performing assest

Documents