LOVELY PROFESSIONAL UNIVERSITY

DEPARTMENT OF MANAGEMENT

NON PERFORMING ASSETS OF

BANKS

Submitted To:- MRS.Deepika Dhall

(Lovely Professional Univerity)

Submitted By:- ISHA SOOD

M.B.A 4TH SEM
Reg. No. 1O81O608

Index
Sr. No. Particulars Page No.

1. Introduction 3-14
 Non Performing Assets – Concept
 Types of N.P.A
 Difficulties with N.P.A

2. Review Of Literature 15-17

3. Profile of the Bank 18-21

 History
 Obejectives of the bank

4. Research Methodology 22-24

 Obejectives of the study
 Scope of the study
 Sources of data

5 Findings And Recmmendations 25-31

 Causes of Non Performing Assets in bank
 Causes of an Account becoming N.P.A
 Treatment of account as N.P.A

6  Suggestions to reduce N.P.A 32-38

 Reasons Behind N.P.A
 Conclusion

7. Bibliography 39

CHAPTER 1
 Introduction
A strong banking sector is important for flourishing economy. One of the most important
and major roles played by banking sector is that of lending business. It is generally
encouraged because it has the effect of funds being transferred from the system to productive
purposes, which also results into economic growth. As there are pros and cons of everything,
the same is with lending business that carries credit risk, which arises from the failure of
borrower to fulfill its contractual obligations either during the course of a transaction or on
a future obligation. The failure of the banking sector may have an adverse impact on other
sectors.

Non- performing assets are one of the major concerns for banks in India. NPAs reflect the
performance of banks. A high level of NPAs suggests high probability of a large number of
credit defaults that affect the profitability and net-worth of banks and also erodes the value
of the asset. The NPA growth involves the necessity of provisions, which reduces the over all
profits and shareholders value. The issue of Non Performing Assets has been discussed at
length for financial system all over the world. The problem of NPAs is not only affecting the
banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but
a reflection of the state of health of the industry and trade.This project deals with
understanding the concept of NPAs, its magnitude and major causes for an account becoming
non-performing, projection of NPAs over next years in banks and concluding remarks.

The magnitude of NPAs have 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
provisions on such assets as per RBI guidelines The RBI has advised all State Co-operative
Banks as well as the Central Co-operative Banks in the country to adopt prudential norms
from the year ending 31-03-1997. These have been amended a number of times since 1997.
As per their guidelines the meaning of NPAs, the norms regarding assets classification and
provisioningIts now very known that the banks and financial institutions in India face the
problem of amplification of non-performing assets (NPAs) and the issue is becoming more
and more unmanageable. In order to bring the situation under control, various steps have
been taken. Among all other steps most important one was the introduction of Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by
Parliament, which was an important step towards elimination or reduction of NPAs.

An asset is classified as non-performing asset (NPAs) if dues in the form

of principal and interest are not paid by the borrower for a period of 180 days, However
with effect from March 2004, default status would be given to a borrower if dues are not paid
for 90 days. If any advance or credit facility granted by bank to a borrower becomes non-
performing, then the bank will have to treat all the advances/credit facilities granted to that
borrower as non-performing without having any regard to the fact that there may still exist
certain advances / credit facilities having performing status.

The NPA level of our banks is way high than international

standards. One cannot ignore the fact that a part of the reduction in NPA’s is due to the
writing off bad loans by banks. Indian banks should take care to ensure that they give loans
to credit worthy customers. In this context the dictum “prevention is always better than
cure” acts as the golden rule to reduce NPA’s.

Non Performing assets (nPA) - Concept

Non Performing 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 The Reserve Bank of India.
An asset, including a leased asset, becomes nonperforming when it ceases to generate income
for the bank. A NPA is a loan or an advance where Interest and/ or installment of principal
remain overdue for a period of more than 90 days in respect of a term loan. Earlier assets
were declared as NPA after completion of the period for the payment of total amount of
loan and 30 days grace. In present scenario assets are declared as NPA if none of the
installment is paid till 180 days i.e six monts in respect of term loan. With effect from
march,30, 2004, a non performing asset(NPA) shall be a loan or an advance where : Interest
and/or installments of principal remain overdue for a period of more than 90 days in respect
of a term loan, The account remains ‘out of order’ for a period of more than 90 days, in
respect of an overdraft/cash credit(od/cd). The bill remains overdue for a period of more than
90 days in the case of bills purchased and discounted, interest and or installments of principal
remains overdue for two harvest seasons but for a period not exceeding two half years in the
case of advance granted for agricultural purpose, and any amount to be received remains
overdue for a period of more than 90 days in respect of other accounts.

RBI introduced, in 1992, the prudential norms for income recognition, asset
classification & provisioning – IRAC norms in short – in respect of the loan portfolio of the
Co operative Banks. The objective was to bring out the true picture of a bank’s loan portfolio.
The fallout of this momentous regulatory measure for the management of the CBs was to
divert its focus to profitability, which till then used to be a low priority area for it. Asset
quality assumed greater importance for the CBs when Maintenance of high quality credit
portfolio continues to be a major challenge for the CBs, especially with RBI gradually
moving towards convergence with more stringent global norms for impaired assets.The
quality of a bank’s loan portfolio can impact its profitability, capital and liquidity. Asset
quality problems are at the root of other financial problems for banks, leading to reduced net
interest income and higher provisioning costs. If loan losses exceed the Bad and Doubtful
Debt Reserve, capital strength is reduced. Reduced income means less cash, which can
potentially strain liquidity. Market knowledge that the bank is having asset quality problems
and associated financial conditions may cause outflow of deposits. Thus, the performance of a
bank is inextricably linked with its asset quality. Managing the loan portfolio to minimise
bad loans is, therefore, fundamentally important for a financial institution in today’s
extremely competitive and market driven business environment. This is all the more
important for the CBs, which are at a disadvantage of the commercial banks in terms of
professionalised management, skill levels, technology adoption and effective risk
management systems and procedures. Management of NPAs begins with the consciousness
of a good portfolio, which warrants a better understanding of risks in lending. The Board has
to decide a strategy keeping in view the regulatory norms, the business environment, its
market share, the risk profile, the available resources etc. The strategy should be reflected in
Board approved policies and procedures to monitor implementation. The essential
components of sound NPA management are
 i) quick identification of NPAs,
ii) their containment at a minimum level,
iii) ensuring minimum impact of NPAs on the financials.

Types Of NPA:
The RBI has issued the guidelines to banks for classification of assets in to following
categories.

Standard assets:- Standard Asset is one which does not disclose any problems and
which does not carry more than normal risk attached to the business/banks. These are loans
which do not have any problem are less risk. Such an asset is not a non-performing asset. In
other words, it carries not more than normal risk attached to the business.

Sub Standard Assets:- : It is classified as non-performing for a period not exceeding 12

months. The account holder comes in this category when they don’t pay three
installment continuously after 90 days and upto 1 year. For this category bank has made
10% provision of funds from their profit to meet the losses generated from NPA. With
effect from March 31, 2005 an asset would be classified as sub-standard  if it remained NPA 
for a period less than or equal to 12 months. In such cases, the current net worth of the
borrowers/ guarantors or the current market value of the security charged is not enough to
ensure recovery of the dues to the banks in full.  In other words, such assets will have well
defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by
the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

(ii) An asset where the terms of the loan agreement regarding interest and principal have
been re-negotiated or rescheduled after commencement of production, should be classified as
sub-standard and should remain in such category for at least 12 months of satisfactory
performance under the re-negotiated or rescheduled terms.  In other words, the classification
of an asset should not be upgraded merely as a result of rescheduling, unless there is
satisfactory compliance of this condition

Doubtful NPA : An asset that has remained an NPA for a period exceeding 12 months
is a doubtful asset. These are NPA exceeding 12 months.
Under doubtful NPA there are three sub categories:

 D1 i.e upto 1 year: 20% provision is made by banks.

 D2 i.e upto 2 year: 30% provision is made by bank
 D3 i.e upto 3 year: 100% provision made by bank.
With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has
remained NPA  for more than 12 months. The 12-month period of classification of a
substandard asset in doubtful category is effective from April 1, 2009. A loan classified as
doubtful has all the weaknesses inherent as that classified as sub-standard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of
currently known facts, conditions and values, highly questionable and improbable.

Loss Assets:- A loss asset is one where loss has been identified by the bank or internal or
external auditors or by the Co-operation Department or by the Reserve Bank of India
inspection but the amount has not been written off, wholly or partly. In other words, such
an asset is considered un-collectible and of such little value that its continuance as a
bankable asset is not warranted although there may be some salvage or recovery value. Here
loss is identified by the banks concerned, by internal auditors, by external auditors, or by the
Reserve Bank India upon inspection. These NPA which are identified unreliable by internal
inpector of bank or auditors or by RBI. Under this 100% provision is made.

Effects of NPA on Bank:

1. Restriction on flow of cash done by bank due to the provisions of fund made
against NPA.
2. Drain of profit.
3. Bad effect on Goodwill.
4. Bad effect on equity value.

Difficulties with the non-performing assets:

1. Owners do not receive a market return on their capital. In the worst case, if the bank fails,
owners lose their assets. In modern times, this may affect a broad pool of shareholders.

2. Depositors do not receive a market return on savings. In the worst case if the bank fails,
depositors lose their assets or uninsured balance. Banks also redistribute losses to other
borrowers by charging higher interest rates. Lower deposit rates and higher lending rates
repress savings and financial markets, which hampers economic growth.

3. Non performing loans epitomize bad investment. They misallocate credit from good
projects, which do not receive funding, to failed projects. Bad investment ends up in
misallocation of capital and, by extension, labour and natural resources. The economy
performs below its production potential.

4. Non performing loans may spill over the banking system and contract the money stock,
which may lead to economic contraction. This spillover effect can channelize through
illiquidity or bank insolvency;

(a) when many borrowers fail to pay interest, banks may experience liquidity shortages.
These shortages can jam payments across the country,
(b) illiquidity constraints bank in paying depositors e.g. cashing their paychecks. Banking
panic follows. A run on banks by depositors as part of the national money stock
become inoperative. The money stock contracts and economic contraction follows
undercapitalized banks exceeds the banks capital base.

Lending by banks has been highly politicized. It is common

knowledge that loans are given to various industrial houses not on commercial
considerations and viability of project but on political considerations; some politician would
ask the bank to extend the loan to a particular corporate and the bank would oblige. In
normal circumstances banks, before extending any loan, would make 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. Since this is not looked into, many of the
loans become NPAs. The loans for the weaker sections of the society and the waiving of the
loans to farmers are another dimension of the politicization of bank lending.

CHAPTER 2
Review of literature
A number of studies related to performance and overdues of banking sector have been
conducted by many researchers and institutions in India. An analytical attempt is being
made to review some related works done to organize them in a presentable form.
I. Studies Prior to Financial Sector Reforms (1991):

The Maclegan Committee (1914), which is the historical document in the annals of
cooperative movement, has examined the performance of credit cooperatives. It stated that
when the funds are kept rotating, any loaning function of the bank can gear up successfully
and serve very useful purpose. Unless the loans are repaid punctually, cooperation is both
financially and educationally an illusion.

Kalyani (1970) emphasized on a longer period for the repayment of long term loans in India.
He added that the total burden of interest would be relatively higher in the long period than
in the shorter period, but then this burden would be spread over quite a long period, making
it easier for the borrower to repay his loan in easy instalments, thereby resulting in lesser
overdues.

The All India Rural Credit Review Committee (1972) strongly stated that there is an utter
lack of administrative supervision, staff of right type and the requisite scale of and, therefore,
a full check on the utilization of loans is rather difficult. Further it pointed out that the
cooperative system had remained stagnant both in respect of coverage of credit as well as
borrowing members as proportion to the total number of members. Cooperative credit was
short of standards of timeliness, adequacy and dependability. Generally the overdues were
heavy and were rising from year to year.

Datey, the Chairman of the Report of the study team on overdues in cooperative credit
institutions (1974) studied the problem of overdues in cooperative banks and remarked.
About three fourths of overdues arose due to willful default besides internal reasons. And he
suggested that stern action on recalcitrant borrowers should be taken up.
Economic Survey (2005-2006), Monetary and Banking Developments: According to this
survey, the target for institutional credit for agriculture by all the agencies was fixed at
Rs.105,000 crores for the year 2004-05,ensuring 30% growth over previous year’s
achievement. The overall achievement by all agencies during 2004-05 was 1,15,243 crores,
equivalent to 32% growth over the previous year’s achievement. It further highlighted that
while the Commercial Banks and Regional Rural Banks over performed vis-à-vis their target
of Rs 57000 crores and 8500 crores, there was a shortfall of over Rs.8000 crores by
Cooperative Banks vis-à-vis their target of 39,000 crores, attributing the same to low
resource base and inefficient recovery system, thereby leading to excessive Overdues. The
position of NPAs has significantly improved in Scheduled Commercial Banks due to wider
options available to these for recovery of their dues on one hand and sale of their NPAs to
Asset Reconstruction Co(India) limited (ARCIL) on the other hand. This resulted in NPAs
declining by 6487 crores between March 2004 and end March 2005.

Bagchi, (2006). made an attempt to analyze the performance of Cooperative Credit

Institutions especially Primary Agriculture Credit Societies, and observed that PACS could
not match up to the increasing requirements of growth dimensions in the Agri /Rural
developments in the Post Independence Period, although till the late 50’s, they were the
only available source of institutional rural finance. According to the RBI Report on Trend
and Progress of Banking in India 2004-05, released on 24-11-05, the Cooperative Credit
Institutions had extended an amount of Rs.39, 638 crores to Agri-Allied sectors i.e., about
half of credit advanced by Commercial Banks (72,886 crores) and double the amount
advanced by RRBs (11,718 crores). The dismal performance of Cooperative Banks was due to
unnecessary State Government intervention and above all the inefficient loan recovery
system leading to NPAs.

CHAPTER 3
 Profile of the jalandhar central co operative bank
Cooperatives - An Introduction

Cooperatives have played a vital role in improving the economic conditions of farmers and
accelerating the pace of development in Punjab. Development through Cooperatives was a
dream cherished by freedom fighters of India ever since Independence. Cooperative
principles ensure harmonious development, through democratic management and
governance. Cooperatives have brought both the services and resources at the doorsteps of
villagers in Punjab. These have been enthusiastically serving the people of Punjab in area
such as agriculture, housing, spinning, sugar production, weaving and dairy etc.The
performance of Cooperative Movement in Punjab, is very impressive. Cooperatives
constitute the major source of institutional credit for agriculture. Cooperatives are playing
a pivotal role in socio-economic development of the State. These are key instruments of
the State to develop and sustain its rural economy, which is primarily agrarian. The
Department of Cooperation has accelerated Cooperative movement in Punjab during the
last three years.

Values & Principles:- 

"Cooperatives"

A cooperative is an system voluntarily to meet their common economic,

 social and cultural needs and aspirations through a jointly-owned and democratically
controlled enterprise.

Principles:-

 Voluntary and open membership

 Democratic member Control
 Members Economic Participation
 Autonomy and Independence
 Education, Training and Information
 Cooperation among Cooperatives
 Concern for Community

HISTORY
The Jalandhar Central Co-operative Bank ltd., Jalandhar is a premier bank in the Punjab
State. The bank was registered in 1909 under the co-operative societies Act. Among others
Rai Bhahadur Dass and Khan Bahadur Khan Ahmad Shah were the promoters of this. Khan
Bahadur Khan Ahmad Shah was the first president of the bank. This Bank was started with
very small share contribution Rs.2.00 Lacs in a rented building. In 1924, the present building
situated on G.T Road, JalandharCity was constructed and commissioner Jalandhar inaugrated
this building. Initially, the membership of the bank comprised individuals as well as co-
operative institutions but after 1969 the individual share holders were retire.

MISSION
Promotion and sustainance of economic interest &  providing easy finance, cost effective and
quality banking services ot customer & PACs.

AREA OF OPERATION:
In the area of this bank, there were five unions that were functioning as credit institutions
for co-operative societies. In 1956, all these unions were absorbed in the bank. The area of
the operation of the bank is jalandhar district that comprises three Tehsils i.e Nakodar,
Phillaur and Jalandhar. In 1956, the total number of branches of the bank were two in
number this number stands at 72 now out of these branches, 7 are in Urban areas, 22 in
semi- urban areas and 43 in rural areas.

OBEJECTIVES OF THE BANK:

The main objectives of the bank as mentioned in its byelaws is to facilitate the operation of
the affiliated co-operative societies in pursuance of this object, the bank has laid down in its
byelaws to undertake the following activities:

 To carry on banking and credit business.

 To promote economic interest of the members of the bank and public-in accordance
with co-operative principles.
  To provide credit facilities to its members on as convenient and suitable facilities.

Chapter 4
RESEARCH METHODOLOGY
For accomplishing the objectives of the study, both secondary and primary data
will be analyzed.

1. Secondary Data:
The Secondary Data for three years from 2006 to 2008 will be used for the purpose of
this study. The data will be collected from:
 (1) The Annual Accounts, Audit Reports, and Inspection Reports of the selected DCCBs.
(2) Publications of Reserve Bank Of India.
(3) Publications of NABARD.
(4) Economic Surveys
(5) Existing literature and other scholarly works.

2. Observation: Some information will be gathered through personal observation

and interaction with the officials of NABARD and State Cooperative Banks.

POPULATION AND SAMPLE OF THE STUDY

Punjab has twenty (20) District Central Cooperative Banks (refer annexure 1). The Proposed
study will be primarily based on the Secondary Data of preceding three years from 2006-07
to 2008-09.The main source of the secondary data will be the published Annual Reports,
Circulars and Policy letters of the Jalandhar Central Cooperative Banks of Punjab.

Tools of Analysis:

Consistent with the objectives of the study, different accounting techniques such as
Ratio analysis, etc., will be utilized. In addition to these, simple statistical techniques like
averages, graphs, percentages may be used aiming at the achievement of study objectives and
findings of the existing studies.

Objectives of the study

 To understand the meaning & nature of NPAs.
 To examine the causes for NPAs in Jalandhar Central Co-operative bank.
 To project the NPAs in bank over next three years.
 To analyze the NPA and its relation with operating profit of the bank.
  To study the general reasons for assets become NPAs.
 To point out the amount of NPAs in different central banks.
 What is the criteria to recover the advances from the bank.
 What are the methods adopted by the bank to look after NPA management.

Scope of this study:

 To present a picture of movement of NPA in The Jalandhar Central Co-
Operative Bank.
 To know how NPA level will affect the profit of the banks.

Chapter 5
Findings & recommendation
Causes of NPA’s in banks
Non-performing Assets (NPAs) are the smoking gun threatening the very stability of Indian
banks. NPAs wreck a bank's profitability both through a loss of interest income and write-off
of the principal loan amount itself. In a bid to stem the lurking rot, RBI issued in 1993
guidelines based on recommendations of the Narasimham Committee that mandated
identification and reduction of NPAs. Their implementation immediately pushed many
banks into the red. So serious is the problem that an RBI report suggested that reducing
NPAs be treated as a 'national priority'

Dealing with NPAs involves two sets of policies

1. Relating to existing NPAs
2. To reduce fresh NPA generation.
As far as old NPAs are concerned, a bank can remove it on its own or sell the
assets to AMCs to clean up its balance sheet. For preventing fresh NPAs, the bank itself
should adopt proper policies.
A strong banking sector is important for a flourishing economy. The failure of the banking
sector may have an adverse impact on other sectors. The Indian banking system, which was
operating in a closed economy, now faces the challenges of an open economy. On one hand a
protected environment ensured that banks never needed to develop sophisticated treasury
operations and Asset Liability Management skills. On the other hand a combination of
directed lending and social banking relegated profitability and competitiveness to the
background. The net result was unsustainable NPAs and consequently a higher effective cost
of banking services. One of the main causes of NPAs into banking sector is the directed
loans system under which central co operative banks are required a prescribed percentage of
their credit (40%) to priority sectors. As of today nearly 7 percent of Gross NPAs are locked
up in 'hard-core' doubtful and loss assets, accumulated over the years.

The problem India Faces is not lack of strict prudential norms but

i. The legal impediments and time consuming nature of asset disposal proposal.

ii. Postponement of problem in order to show higher earnings.

iii. Manipulation of debtors using political influence.

Causes for an Account becoming NPA

There are several reasons for an account becoming NPA.

* Internal factors
* External factors

Internal factors:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or other
debt instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansion\modernization\setting up new projects\
helping or promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,
mis-appropriation etc.
9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and
follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc
External factors:
1. Sluggish legal system –
 Long legal tangles
 Changes that had taken place in labour laws
 Lack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power shortage, industrial
recession, excess capacity, natural hazards like floods, accidents.
5. Failures, non payment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes etc.
Some Other Reasons:
 Failure to bring in Required capital
 Too ambitious project
 Mis management
 Unwanted Expenses
 Over trading
 Imbalances of inventories
 Lack of proper planning
 Dependence on single customers
 Lack of expertise
 Improper working Capital Mgmt.

Treatment of Accounts as NPA’s

  Record of Recovery
The treatment of an asset as NPA should be based on the record of recovery. Banks should
not treat an advance as NPA merely due to existence of some deficiencies which are of
temporary in nature such as non-availability of adequate drawing power, balance
outstanding exceeding the limit. A credit facility should be treated as NPA.

Treatment of NPAs – Borrower-wise and not Facility-

wise
 I. 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 NPA and not the particular facility or
part thereof which has become irregular.

II. However, in respect of consortium advances or financing under multiple banking

arrangements, each bank may classify the borrowal accounts according to its own
record of recovery and other aspects having a bearing on the recoverability of the
advances.

Recognition of Income on Investment Treated as NPAs

The investments are also subject to the prudential norms on income recognition.  Banks
should not book income on accrual basis in respect of any security irrespective of the
category in which    it is included, where the interest/principal is in arrears for more than 90
days .

NPA Reporting to Reserve Bank

Banks should report the figures of NPAs to the Regional Office of the Reserve Bank at the
end of each year within two months from the close of the year.
Chapter 6
Suggestions to reduce n.p.a
At the pre-disbursement stage, appraisal techniques of bank need to be sharpened. All
technical, economic, commercial, organizational and financial aspects of the project need to
be assessed realistically. Bankers should satisfy themselves that the project is technically
feasible with reference to technical know how, scale of production etc. The project should be
commercially feasible in that all background linkages by way of availability of raw materials
at competitive rates and that all forward linkages by way of assured market are available. It
should be ensured assumptions on which the project report is based are realistic. Some
projects are born sick because of unrealistic planning, inadequate appraisal and faulty
implementation. As the initiative to sanction or reject the project proposal lies with the
banker, he can exercise his judgment judiciously. The banker should at the pre-sanction
stage not only appraise the project but also the promoter – his character and his capacity. It is
said that it is more prudent to sanction a 'B' class project with an 'A' class entrepreneur than
vice-versa. He has to ensure that the borrower complies with all the terms of sanction before
disbursement.
A major cause for NPA is fixation of unrealistic repayment schedule. Repayment schedule
may be fixed taking into account gestation or moratorium period, harvesting season, income
generation, surplus available etc. If the repayment schedule is defective both with reference
to quantum of instalment and period of recovery, assets have a tendency to become NPA. At
the post-disbursement stage, bankers should ensure that the advance does not become and
NPA by proper follow-up and supervision to ensure both assets creation and asset utilisation.
Bankers can do either off-site surveillance or on site inspection to detect whether the unit /
project is likely to become NPA. Instead of waiting for the mandatory period before
classifying an asset as NPA, the banker should look for early warning signals of NPA.
The following are the sources from which the banker can detect signals, which need quick
remedial action:
 Scrutiny of accounts and ledger cards – During a scrutiny of these, banker can be on
alert if there is persistent regularity in the account, or if there is any default in
payment of interest and instalment or when there is a downward trend in credit
summations and frequent return of cheques or bills,
 Scrutiny of statements – If the scrutiny of the statements submitted by the borrower
reveal a sharp decline in production and sales, rising level of inventories, diversion of
funds, the banker should realise that all is not well with the unit.
  External sources – The banker may know the state of the unit through external
sources. Recession in the industry, unsatisfactory market reports, unfavourable
changes in government policy and complaints from suppliers of raw material, may
indicate that the unit is not working as per schedule.
 Computerisation of loan monitoring – In computerised branches, it is possible to
computerise the loan monitoring system so that accounts, which show signs of
sickness or weakness can be monitored more closely than other accounts.Personal
visit and face-to-face discussion – By inspecting the unit the banker is able to see for
himself where the problem lies - either production bottlenecks or income leakage or
whether it is a case of willful default. During discussion with the borrower, the
banker may come to know details relating to breakdown in plant and machinery,
labour strike, change in management, death of a key person, reconstitution of the
firm, dispute among the partners etc. All these factors have a bearing on the
functioning of the unit and on its financial status.

‘Strategy for reducing provision – The extent of provision for doubtful asset is with
reference to secured and unsecured portion. Cent percent provision needs to be made for the
unsecured portion. If banks can ensure that the loan outstanding is fully secured by realisable
security, the quantum of provision to be made would be less. It takes one year for a sub
standard asset to slip into doubtful category. Therefore, as soon as an account is classified as
substandard, the banker must keep strict vigil over the security during the next one year
because in the event of the account being classified as doubtful, the lack of security would be
too costly for the bank.

Cash recovery – Banks, instead of organising a recovery drive based on overdues, must
short list those accounts, the recovery of which would provide impetus to the system in
reducing the pressure on profitability by reduced provisioning burden. Vigorous efforts need
to be made for recovery of critical amount (overdue interest and instalment) that can save
an account from NPA classification:

a) In case of a term loan, the banker gets 90 days after the date of default to take
appropriate action and to persuade the borrower to pay interest or instalment
whichever is due.
b) In case of a cash credit account, the banker gets 90 days for ensuring that the
irregularity in the account is rectified.
c) In case of direct agricultural loans, the account is classified NPA only after two crop
seasons (from sowing to harvesting) from the due date in case of short duration loans
and one crop season from the due date in case of long duration loans.
Up gradation of assets – Once accounts become NPA, then bankers should take steps to
up grade them by recovering the entire overdues. Close follow-up will generally ensure
success.

Compromise settlements – Wherever feasible, in case of chronic NPAs, banks can

consider entering into compromise settlements with the borrowers.

Reasons Behind NPA:-

1. Lack of proper pre –enquiry by the bank for sanctioning a loan to a customer.
2. Non- performance of the business or the purpose for which the customer has taken the
loan.
3. Willful defaulter.
4. Loans sanctioned for the agriculture purposes.
5. Chage in govt. policies leads to NPA.

CONCLUSION
The Indian banking sector is facing a serious problem of NPA. The extent of NPA is
comparatively higher in public sectors banks. To improve the efficiency and profitability, the
NPA has to be scheduled. Various steps have been taken by government to reduce the NPA. It is
highly impossible to have zero percentage NPA. But at least Indian banks can try competing
with foreign banks to maintain international standard. I would suggest 3 ways of solving this
problem of NPAs. They are

 recapitalization of banks with Government aid,

 disposal and write off of NPAs,
 increased regulation.

Various steps have been taken by the government to recover and reduce NPAs. Some of them
are.

1. One time settlement / compromise scheme

2. Lok adalats
3. Debt Recovery Tribunals
4. Securitization and reconstruction of financial assets and enforcement of Security Interest Act
2002.
5. Corporate Reconstruction Companies
6.  Credit information on defaulters and role of credit information bureaus

Chapter7
BiBliography
Data from the bank and internet from following links.

http://pbcooperatives.gov.in/DCCB.htm

http://www.thehindubusinessline.com/2005/07/09/stories/2005070902430600.htm

http://www.newkerala.com/nkfullnews-1-88540.html

http://www.scribd.com/doc/17156683/NPA-Management-project-in-state-bank-of-mysore

http://www.rbi.org.in/scripts/bs_viewmastercirculars.aspx

http://www.taxmann.net/FEMAOnlineweb/FEMA_Online/FemaRBImasterCircular.aspx?
pId=80502