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EXECUTIVE SUMMARY
After liberalization the Indian banking sector developed very appreciate. The RBI also
nationalized good amount of commercial banks proving socio economic services to the people of
the nation. The public Sector banks have shown very good performance as far as the financial
operations are concerned. The total income of the public sector banks has also shown good
performance since the last few years. The public sector Banks have also shown comparatively
good result. The gross profits and the net profits of the Public Sector banks have been on a high
from past few years. The private sector banks are also showing good results in case of profits.
However, the only problem of the Scheduled Commercial Banks these days are the increasing
level of the non performing assets. The Non-Performing Assets (NPAs) problem is one of the
foremost and the most formidable problems that have shaken the entire banking industry in India
like an earthquake. Like a canker worm, it has been eating the banking system from within, since
long. It has grown like a cancer and has infected every limb of the banking system.
At macro level, NPAs have choked off the supply line of credit to the potential
borrowers, thereby having a deleterious effect on capital formation and arresting the economic
activity in the country. At the micro level, the unsustainable level of NPAs has eroded the
profitability of banks through reduced interest income and provisioning requirements, besides
restricting the recycling of funds leading to serious asset liability mismatches. The problem of
NPAs is not a matter of concern for the lenders alone. It is a matter of grave concern to the
public as well, as bank credit is the catalyst to the economic growth of the country and any
bottleneck in the smooth flow of credit, one cause for which is mounting NPAs, is bound to
create adverse repercussions in the economy. Mounting menace of NPA has raised the cost of
credit, made banks more adverse to risk and squeezed genuine small and medium enterprise from
accessing competitive credit and has throttled their enterprising spirits as well.
The spiraling and the devastating effect of NPA on the economy have made the problem of NPA
as issue of public debate and of national priority. Therefore, any measure or reform on this front
would be inadequate and incomprehensive, if it fails to make a dent in NPA reduction and stall
their growth in future, as well.
NPAs have deleterious effect on the return on assets in several ways: ---
(1) They erode current profits through provisioning requirements
(2) They result in reduced interest income
(3) They require higher providing requirements affecting profits and accretion to Capital funds
recycling of funds, set in asset-liability mismatches, etc.
The RBI has also tried to develop many schemes and tools to reduce the non Performing
assets the results are not up to the expectations. To improve NPAs each bank should be
motivated to introduce their own precautionary steps. Before lending the banks must evaluate the
feasible financial and operational prospective results of the borrowing companies by keeping in
Considerations the overall impacts all the factors that influence the business.
MANAGEMENT OF NON-PERFORMING ASSETS– A BRIEF OVERVIEW
INTRODUCTION
In human life, sickness, bankruptcy and death are not welcome, but they do occur. So is the case
with advances, which fall sick, go into liquidation and die much against the wishes of all
concerned. Realities cannot be escaped. It is necessary to face them.
In the context of non-performing assets the situation is no different. The frequent references to
non-performing assets primarily concern sick industrial units and mounting over dues in all other
sectors of advances, particularly in agriculture. Financial assets become non-performing
primarily because of the failure of the units financed by banks.
The costs of managing non-performing assets are exorbitant. Bankers are compelled to get
bogged down with these matters thereby neglecting their role as a developing catalyst.
NATURE OF NON-PERFORMING ASSETS
The term non-performing assets can be defined both in the wider and in the narrower sense.
While in the narrow sense it includes only non-performing credit portfolio, in the wider sense it
may also include the volume of unutilized cash balances, unutilized or underutilized physical
assets like buildings and premises in the still wider sense, it may also include non- performing
human resources– a large volume of workforce not effectively unutilized.
A non-performing asset in the banking sector also is termed as an asset not contributing to the
income of the Bank. In other words they are the zero yielding assets that are considered. The
non-performing assets, interalia, includes surplus cash and bankers balances hold over the
optimal levels, amounts lying in the suspense account, investments in shares or debentures and
other securities not yielding any dividend or interest, advances where interest is not forthcoming
and even the principal amount is difficult to recover. In terms of Health code basis, we may say
that advances classified under the Health Code Numbers 6,7,8 and those advances under the
Health Code Numbers 4,5 on which no interest is being charged, may be classified among non-
performing assets.
REASONS FOR ACCUMULATION OF NON-PERFORMING ASSETS:
There may be various internal and external factors behind the transformation of an asset from a
performing one to a non-performing one. Some of the reasons for accumulation of the non-
performing assets are: The fast and rapid geographical expansion of the banking sector during a
short span, throughout the country, and our inability to cope with the voluminous work in an
orderly manner.
Lack of adequate care while appraising the various proposals in the initial stage. Inadequacy of
the technical staff equipped with the latest market information and the technological
developments is also an important factor in faulty appraisal of proposals. In case of most of the
large and medium scale industries, the main reason for sickness has been found to be
mismanagement.
Power shortages, outdated machinery, fluctuations in supply of raw materials due to various
causes, non-release of subsidy in time and deficiency in demand are also important reasons.
Small scale industries are prone to sickness mainly due to lack of managerial experience,
technical incompetence and decline in demand for their products and overall demand recession.
Further cases are not unknown where deliberate efforts are made by a certain category of
borrowers to declare their units sick, or weak to avail of benefits from different sources.
PROFILE OF THE ORGANIZATION
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from
Mumbai. The Bank was under private ownership and control till July 1969 when it was
nationalised along with 13 other banks.
Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and 50 employees,
the Bank has made a rapid growth over the years and blossomed into a mighty institution with a
strong national presence and sizable international operations. In business volume, the Bank
occupies a premier position among the nationalised banks.
The Bank has 3101 branches in India spread over all states/ union territories including 93
specialised branches. These branches are controlled through 48 zonal offices. There are 33
branches/offices (including three representative offices) abroad.
The Bank came out with its maiden public issue in 1997. Total number of shareholders as on
31/12/2008 is 2,27,310.
While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of
introducing various innovative services and systems. Business has been conducted with the
successful blend of traditional values and ethics and the most modern infrastructure.
The Bank has been the first among the nationalised banks to establish a fully computerised
branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is
also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code
System in 1982, for evaluating / rating its credit portfolio.
The Bank's association with the capital market goes back to 1921 when it entered into an
agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an
association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd.
to extend depository services to the stock broking community. Bank of India was the first Indian
Bank to open a branch outside the country, at London, in 1946, and also the first to open a
branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 33
branches (including three representative offices) at key banking and financialce nt r e‟s viz.
London, Newyork, Paris, Tokyo, Hong-Kong and Singapore.
The Bank has a strong position in financing foreign trade. Over 270 branches provide export
credit. The expertise in this area has enabled the Bank to achieve a leading position in providing
export credit in certain areas like diamond export.
To effectively meet the ever-growing challenges and competition, the Bank has made a good
head-way in bringing about technological upgradation. MIS and critical functions of controlling
offices have been computerized. At present, the operations at about 2562 branches are totally
computerized. 70 branches operate in partially-computerized mode besides these 964 branches
and 31 extension counters are migrated to Core Banking Solution. New facilities such as,
Telebanking, ATM & Signature Retrieval Systems have been introduced in a progressing
manner to add value to services. Telebanking facilities with Fax on Demand facility, Remote
Access Terminals for Corporate Customers are now available at many branches. The Bank has
installed ATMs in Mumbai and othercent r e‟s in the country. The Bank is a member of the
RBI's VSAT Network and has installed 39 VSATs linking strategic branches/offices. The Bank
is making a paradigm shift from branch automation to bank automation and is in the process of
implementing a Multi-Branch Banking Project, which facilitates City-wise Connectivity of
Computerized Branches. The Bank is in the process of installing BOINET, a Wide Area Network
for providing a inter- and intra-city connectivity, as a part of enhancing its decision support
system.The Bank's corporate personality and philosophy are fully reflected in the emblem, which
is a five-pronged Star -- a harmonious blend of traditional and the functional. The elongated
prong pointing upwards conveys the Bank's drive to achieve ascending goals. The Star is a
beacon and guide to those in need of direction.
Mission of Bank of India
"To provide superior, proactive banking services to niche markets globally, while providing cost-
effective, responsive services to others in our role as a development bank, and in so doing, meet
the requirements of our stakeholders".
Vision of Bank of India
"To become the bank of choice for corporates, medium businesses and upmarket retail customers
and to provide cost effective developmental banking for small business, mass market and rural
markets"
LITERATURE REVIEW
Magazine name– CAPITAL MARKET Dec. 2009 issue
The article taken for reference from this magazine and the article is named “Short term pains,
long-term gain” on Pg.-4. It discusses about the rising NPAs, increase in provision coverage,
sluggish credit offtake and dwindling treasury income. It states that these measures are going to
set ways for better valuations. It tells about how the BSE Bankex has outperformed the BSE
Sensex by recording robust returns of 174%. It discusses about various banks namely Bank of
India, Union Bank of India, State Bank of India, Bank of Baroda, Punjab National Bank and
IndusInd Bank have reached their all time high during Oct.– Nov. 2009 period. It discusses about
the preparedness of various banks for reducing NPAs i.e. by improving capital adequacy ratio,
increasing the minimum provision coverage ratio, introducing new policies for broader interest
rate regime, creating more transparent system and extending banking reach.
It also discusses about the benchmark prime lending rate (BPLR) concept of RBI which helps to
ensure appropriate pricing of loans.
Magazine name– BUSINESS TODAY Dec. 2009 issue
The magazine gives us the data about the various commercial banks operating in India and
Ranks them according to four groups namely Large banks, Mid–size banks, Small banks and
Very Small banks. From the data given in the magazine done by BT-KPMG study is clear that
despite the global credit crisis continues to take its toll- last month the 100th US bank collapsed
since Lehman Brothers the Indian Banks continue to do business as usual and the result is given
in numbers through this survey.
Research Paper – “A comparative study of Non Performance Assets in India” by Prashanth K
Reddy, IIM- Ahmedabad
This article discusses about the financial sector reform in India which has progressed
rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to
entry, prudential norms and risk based supervision but the progress on the structural-institutional
aspects has been much slower and is a cause for concern. It tells about what changes are required
to tackle the NPA problem. This paper also deals with the experiences of other Asian countries
in handling of NPAs. It also suggests mechanisms to handle the problem by drawing on
experiences from other countries
Report on “Maximising Value of Non-Performing Assets” by Organisation For Co-Operation
and Development (OECD)
This report deals with the changing dynamics in Asian Non Performing Loans and the
sociological reflections on Insolvency reforms in East Asia. But more importantly it mentions
different country reports of Asian region. In case of India “Sumant Batra” discusses the
developments in India. It tells us about what is NPA and gives an overview of non performing
assets in India. It also discusses about the factors contributing to NPAs and its impact on the
working of commercial banks. The legal reforms and the RBI guidelines for NPAs are discussed.
Research Paper on “Rooting Out Non-Performing Assets” by Nachiket Mor, ICICIr esear ch
centre
The paper attempts to highlight some major micro-level issues that are at the root of why
unsustainable performance levels are being observed within Banks. The authors argue that unless
the micro level issues are dealt with, even after the systemic issues are resolved, the problem of
NPAs or other failures of the intermediation process may resurface with greater intensity. The
manner in which banks manage the three phases in the life cycle of an asset (creation, monitoring
and recovery) determines the quality of the intermediation process within a bank. In this paper,
the need for internally consistent business models to guide the behaviour of a bank in each of
these three phases is discussed.
OBJECTIVE OF THE STUDY
To know Why NPAs have become an issue for banks and financial institutions in India.
To understand what is Non Performing Assets and what are the underlying reasons for the
emergence of the NPAs.
To understand the criteria for identification of non-performing assets in banks.
To understand what are the factors for rise of NPAs.
To know what steps are being taken by the Indian banking sector to reduce the NPAs.
To study the NPA management policy of Bank of India.
To review Bank of India‟s performance in non-performing assets for the time period of
2008-2009.
HYPOTHESIS OF STUDY:
Statement for Hypothesis
H0: The problem of NPA is less acute in private sector banks as compared to public sector
banks.
H1: Over the years banks have started improving their NPA status.
The project is to determine how to manage the Non Performing Assets in Banks and what is the
trend of NPAs from the past years. To carry out the study regarding NPAs which is of great
concern in today‟s scenario, a very simple approach is followed to draw a conclusion. The
comparison is done between the data of private sector banks and public sector banks. The
hypothesis testing will help us in formulating an outcome . Since this being a descriptive
research much emphasis will be given on comparison analysis of various years secondary data to
carry out an inference.
METHODOLOGY
The research design used for carrying out this project is descriptive research because the report
deals with statistical data and the main cause of the report is to describe the factors affecting the
problem mentioned.
Sources of data:
There are two types of data - Primary data or raw data and secondary data or second hand data.
The data which is collected on source which has not been subjected to processing or any other
manipulation is primary data whereas secondary data is the data collected by someone other than
the user through common sources like censuses, surveys, organizational records and data
collected through qualitative methodologies or qualitative research. The data collected is mainly
secondary in nature. The sources of data for this Report include the literature published by the
Bank of India and also the Reserve Bank of India. Also the various magazines dealing with the
current banking scenario and research paper have also been a source of information.
The booklet on Recovery Policy published by the Asset Recovery Department of Bank of
India has been of great help.
Sampling Plan:
The target population of study included the Bank of India in particular and all other
public sector banks and private sector banks in general.
Limitations of the study:
The study on management of non-performing assets is limited to the Bank of India.
The basis for identifying non-performing assets is the one that has been mentioned in the
report but some minor changes may have been carried out through the Reserve Bank of India
circulars, which are received on a daily basis by the bank.
Since non-performing assets are a critical issue, bank officials are not willing to part with
all the information on them.
Non-performing assets is a vast topic and to do full justice to all the aspects of non-
performing assets is an impossible task for me.
Scope Of The Study:
The scope of the study is limited to the objectives as mentioned earlier. The study ranges from
understanding the significance of non-performing assets to defining the criteria of identifying
non-performing assets in the banking sector, to review Bank of India‟s performance in the
management of non-performing assets.
It also reviews the framework of Bank of India‟s recovery policy with which it hopes to bring
down the percentage of net non-performing assets to the net advances. The study also
encompasses the recommendations, the adhering of which will bring good results to the
organization.
Techniques used for analysis of data:
Analytical tools are been used for data analysis. The analytical tools such as Pie charts, bar
graphs, tables are used to compare the past data with current so as to get a particular inference
from it on analysis.
CONCEPTUAL FRAMEWORK
Why NPA have become an issue for banks and financial institutions in India?
To start with, performance in terms of profitability is a benchmark for any business enterprise
including the banking industry. However, increasing NPA have a direct impact on banks
profitability as legally banks are not allowed to book income on such accounts and at the same
time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI)
guidelines.
Also, with increasing deposits made by the public in the banking system, the banking industry
cannot afford defaults by borrowers since NPA affects the repayment capacity of banks. Further,
Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various
rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-
performing assets.
The following are the primary causes for turning the accounts into NPA:
Diversion of funds, mostly for the expansion / diversification of business or for promoting
associate concern.
Factors internal to business like product / marketing failure, inefficient management,
inappropriate technology, labour unrest.
Changes in the Macro-environment like recession in the economy, infrastructural bottlenecks
Inadequate control / supervision, leading to time / cost over-runs during project.
Changes in Government policies e.g. Import duties.
Deficiencies like delay in the release of limits/ funds by banks / FIs
Secondary causes are as follows:-
Selection of the project.
Implementation of the project- time over-run, cost over-run, under-financing technology
involved
Intention of the borrower.
Industrial / Economic trend.
Absence of the up gradation of the unit / ploughing back of the profit
WHAT IS NPA?
Non-Performing Assets - Background: It's a known fact that the banks and financial
institutions in India face the problem of swelling non-performing assets (NPA) and the issue is
becoming more and more unmanageable. In order to bring the situation under control, some steps
have been taken recently. The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, (SARFAESI) 2002 was passed by Parliament, which is an
important step towards elimination or reduction of NPA.
Meaning of NPA:
An asset is classified as non-performing asset (NPA) 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.
NPA MANAGEMENT POLICY
The three letters “NPA” Strike terror in banking sector and business circle today. NPA is short
form of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other
due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a
non performing asset. The recovery of loan has always been problem for banks and financial
institution. To come out of these first we need to think is it possible to avoid NPA, then left is to
look after the factor responsible for it and managing those factors.
Definition of NPA
NON PERFORMING ASSET (NPA)
Action for enforcement of security interest can be initiated only if the secured asset is classified
as Non Performing Asset. Non Performing Asset means an asset or account of borrower which
has been classified by bank or financial institution as sub–standard, doubtful or loss asset, in
accordance with the direction or guidelines relating to assets classification issued by RBI.
An amount due under any credit facility is treated as “past due “when it is not been paid within
30 days from the due date. Due to the improvement in the payment and settlement system,
recovery climate, up gradation of technology in the banking system etc, it was decided to
dispense with “past due “concept, with effect from March 31, 2001. Accordingly as from that
date, a Non performing asset shell be an advance where
i. Interest and / or installment of principal remain overdue for a period of more than 180 days in
respect of a term loan,
ii.The account remains „out of order „ for a period of more than 180 days ,in respect of an
overdraft / cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 180 days in case of bill purchased or
discounted.
iv. Interest and / or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose ,and
v. Any amount to be received remains overdue for a period of more than 180 days in respect of
other accounts
With a view to moving towards international best practices and to ensure greater transparency, it
has been decided to adopt ‟90 days overdue „norms for identification of NPAs, from the year
ending March 31, 2004, a non performing asset shall be a loan or an advance where;
i. Interest and / or installment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
ii. The account remains „out of order „ for a period of more than 90 days ,in respect of an
overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 90 days in case of bill purchased or
discounted.
iv. Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose ,and
v. Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts
Out of order
An account should be treated as out of order if the outstanding balance remains continuously in
excess of sanctioned limit / drawing power. In case where the outstanding balance in the
principal operating account is less than the sanctioned amount /drawing power, but there are no
credits continuously for six months as on the date of balance sheet or credit are not enough to
cover the interest debited during the same period, these account should be treated as „out of
order‟.
Overdue
Any amount due to the bank under any credit facility is „overdue‟ if it is not paid on due date
fixed by the bank.
In short
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
The account remains “out of order” in respect of an overdraft/ cash credit
The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted
The installment or interest remains overdue for two crop seasons in case of short duration
crops and for one crop season in case of long duration crops
ASSET CLASSIFICATION AND NPA NORMS
Classification of Assets:
While new private banks are careful about their asset quality and consequently have low non-
performing assets (NPAs), public sector banks have large NPAs due to wrong lending policies
followed earlier and also due to government regulations that require them to lend to sectors
where potential of default is high. Allaying the fears that bulk of the Non-Performing Assets
(NPA) was from priority sector, NPA from priority sector constituted was lower at 46 per cent
than that of the corporate sector at 48 per cent.
Loans and advances account for around 40 per cent of the assets of SCBs. However,
delay/default in payment of interest and/or repayment of principal has rendered a significant
proportion of the loan assets non-performing. As per RBI‟s prudential norms, a Non-Performing
Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for
more than two quarters after it has become past due. “Past due” denotes grace period of one
month after it has become due for payment by the borrower.
Regulations for asset classification
Assets are classified into four classes - Standard, Sub-standard, Doubtful, and Loss assets. NPA
consist of assets under three categories: sub-standard, doubtful and loss. RBI for these classes of
assets should evolve clear, uniform, and consistent definitions. The banks should classify their
assets based on weaknesses and dependency on collateral securities into four categories:
i.Standard Assets:
It carries not more than the normal risk attached to the business and is not an NPA. Standard
assets are the ones in which the bank is receiving interest as well as the principal amount of the
loan regularly from the customer. Here it is also very important that in this case the arrears of
interest and the principal amount of loan do not exceed 90 days at the end of financial year. If
asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA
and NPAs are further need to classify in sub categories.
ii.Sub-standard Asset:
A sub-standard asset is one which has remained NPA for a period less than or equal to 12 months
from 31.3.2005. In such case the current net worth of the borrower/guarantor 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 an asset will have well defined credit weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
iii.Doubtful Assets:
With effect from 31.3.2005, an asset is to be classified as doubtful, if it has remained NPA for a
period exceeding 12 months. A loan classified as doubtful has all the weaknesses inherent in
assets that were classified as sub-standard, with the added characteristics that the weaknesses
make collection or liquidation in full, - on the basis of currently known facts, conditions and
values- highly questionable and improbable. Under this category there are three stages:
D-I Doubtful up to one year
D-II Doubtful for further two years
D-III Doubtful beyond three years.
iv.Loss Assets:
An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset, but
the amount has not yet been written off wholly or partly. The banking industry has significant
market inefficiencies caused by the large amounts of Non Performing Assets (NPA) in bank
portfolios, accumulated over several years. Discussions on non-performing assets have been
going on for several years now. One of the earliest writings on NPA defined them as "assets
which cannot be recycled or disposed off immediately, and which do not yield returns to the
bank, examples of which are: Overdue and stagnant accounts, suit filed accounts, suspense
accounts and miscellaneous assets, cash and bank balances with other banks, and amounts locked
up in frauds".
Guidelines for the classification of assets
Classification of assets into above categories should be done taking into account the degree of
well defined credit weaknesses and the extent of dependencies on collateral security for the
realization of dues.
Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs especially in respect of high value of accounts.
Account with temporary Deficiencies: The classification of an asset as NPA should be based
on the record of recovery. Bank should not classify an advance account as NPA merely due to
the existence of some deficiencies, which are temporary in nature as such as non– availability of
adequate drawing power based on latest stock.
Asset classification to be borrower– wise and not facility-wise: It is difficult to envisage a
situation when only one facility to a borrower becomes a problem credit and not others.
Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and
not the particular facility or a part thereof, which has become irregular.
Advances under consortium arrangements: Asset classified of accounts under consortium
should be based on the record of recovery of the individual member banks and other aspects
having bearing on the recoverability of the advances. Accounts where there is erosion in the
value of security can be reckoned as significant when the realizable value of the security is less
than 50 percent of the value assessed by the bank or accepted by RBI at the time of last
inspection, as the case may be. Such NPAs may be straightway classified under doubtful
category and provisioning should be made as applicable to doubtful assets.
Agricultural Advances -In respect of advances granted for agricultural purpose where interest
and / or installment of principal remains unpaid after it has become past due for two harvest
seasons but for a period not exceeding two half years , such an advance should be treated as
NPA.
Where the natural calamities impair the repaying capacity of agricultural borrowers, banks
may decide on their own as a relief measure-conversion of the short–term production loan into a
term or re-schedulement of the repayment period.
In such cases of conversation or re-schedulement, the term loan as well as fresh short-term
loan may be treated as current dues and need not be classified as NPA.
Restructuring /rescheduling of loans: A standard asset where the terms of the loan
arrangement regarding interest and principal have been renegotiated or rescheduled after the
commencement of production should be as sub- standard and should remain in such category for
at least one year of satisfactory performance under the renegotiated or restructured terms. In case
of substandard and doubtful assets also, rescheduling does not entitle a bank to upgrade the
quality of advances automatically unless there is satisfactory performance under the
rescheduled–renegotiated terms.
Exceptions : As trading involves only buying and selling of commodities and the problems
associated with manufacturing units such as bottleneck in commercial production, time and cost
escalation etc. are not applicable to them.
NPA Norms
Provisional Norms:
Banks will be required to make provisions for bad and doubtful debts on a uniform and
consistent basis so that the balance sheets reflect a true picture of the financial status of the bank.
The Narsimham Committee has recommended the following provisioning norms
(i) 100 per cent of loss assets or 100 per cent of out- standings for loss assets;
(ii) 100 per cent of security shortfall for doubtful assets and 20 percent to 50 per cent of the
secured portion; and
(iii) 10 per cent of the total out standings for substandard assets.
A provision of 1% on standard assets is required as suggested by Narsimham Committee II,
1998. Banks need to have better credit appraisal systems so as to prevent NPA from occurring.
The most important relaxation is that the banks have been allowed to make provisions for only
30 per cent of the "provisioning requirements" as calculated using the Narsimham Committee
recommendations on provisioning. The encouraging profits recently declared by several banks
have to be seen in the light of provisions made by them. To the extent that provisions have not
been made, the profits would be fictitious.
Disclosure Norms:
Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and
borrowings. Apart from this, banks are also required to give details of their exposure to foreign
currency assets and liabilities and movement of bad loans. These disclosures were to be made for
the year ending March 2000. In fact, the banks must be forced to make public the nature of NPA
being written off.This should be done to ensure that the taxpayer‟s money given to the banks, as
capital is not used to write off private loans without adequate efforts and punishment of
defaulters.
Asset
Classification
Provision requirements
Standard assets
0.25% of the o/s dues in all Standard Assets under SME and Agricultural sector
1.00% of the o/s dues in all Standard Assets of the A/cs to Capital market exposure, personal
loan, commercial real estate and residential HSG. Beyond Rs. 20lakhs.
0.40% of the o/s dues in all standard assets belonging to all other categories.
Substandard assets
10% of the sum of the net investment in the lease and the unrealised portion of finance
income net of finance charge component. The terms „net investment in the lease‟,‟ finance
income‟ and finance charge are as defined in „AS19 – Leases‟ issued by the ICAI.
Doubtful assets
20% - 50% of the secured portion depending on the age of NPA, and 100% of the unsecured
portion.
Loss assets
It may be either written off or fully provided by the bank. The entire asset should be written
off
If the assets are permitted to remain in the books for any reason, 100 % of the outstanding
should be provided for.
WCTL =5 to 7 years
Other T/L
10 years (max)
For units under SSIU Sector -
After implementation of package of reliefs and concessions the unit can be considered as
potentially viable provided
o After extending the reliefs and concessions for a period of 5 years the unit is in a position to
service the debt and interest.
o The average DSCR over the rehabilitation plan should not be less than 1.33
o The restructured debts should be repaid within the following periods–
FITL =3 years
WCTL =5 years
Other T/L =7 years
Preconditions
Pre-conditions for any rehabilitation programme are briefly as follows: -
The terms of the package are to be duly acceptable to the borrower. Any reservations and non-
compliance of the terms of the package will render the exercise a non -starter.
The promoters' contribution required for the programme should be fully tied up and
satisfactory proof available of the same.
Bank should not lose track of validity of documents. Any deficiencies in
documentation,strengthening of security should be removed/ done before agreeing for
rehabilitation.
Necessary approvals from Bank's authority, BIFR (if applicable), consent from other
FI‟s/agencies should be obtained.
All terms of sanction of the rehabilitation programme are to be meticulously complied with
including documentation, funding of debt, interest reliefs, submission of data etc.
The financial issues are in place.
Schemes - Reliefs and Concessions
The Bank in case of SSI units may formulate rehabilitation scheme. In case of Sick Industrial
Companies, BIFR appoints an Operating Agency to formulate the rehabilitation package on
behalf of multiple Banks/Fl or consortium of lenders.
The scheme of rehabilitation inter alia involves -
Ascertaining the unsecured portion of working capital fund based on limits and converting
them into funded loan called Working Capital Term loan.
Similarly the overdue installments in term loan can be funded or rescheduled
Overdue interest in Term Loan accounts can be funded in the form of Funded Interest Term
Loan (FITL).
In addition to the existing working capital (secured) limit, additional working capital limits
can be considered.
New term loan for purchase of balancing equipment etc. may be granted.
Interest concessions may be considered from the cut-off date. This is defined as the dateon
which the Rehabilitation Package is implemented.
Some rehabilitation packages may not involve additional funds but only rescheduling of
payments and extended moratorium may be considered.
Similarly unpaid interest can be funded into Funded Interest Term Loan (FITh).
Conversion of debt to equity or debentures (Working Capital limit) can be explored.
Even in interest serviced accounts - need-based write off (like moratorium period interestetc.)
or fresh loan may be considered.
Offering other loan services such as "factoring" of debt and syndication of required additional
funds to medium/large units also help in rehabilitation.
Recovery Policy
Any form of a rehabilitation policy or restructuring exercise should finally be linked to recovery
of Bank's dues to the maximum possible extent. Hence the entire policy should revolve around
achieving recoveries. Hence certain recovery policy measures are listed below:
When Bank is not sure about success of the project in its present form the best decision would
be to counsel the borrower to agree for sale of the unit to certain prospective buyers on as is
where is basis with One Time Settlement (OTS). This is the best form of earliest recovery. If any
gap persists, necessary reliefs may be considered with some cash contribution from the owners.
Where the project is not viable and there are no ready buyers, we may pressurize the borrower
to sell off the assets at the best available price and reduce the dues. There may be some other
units interested not in outright settlement but in taking over the management of the company and
Bank can transfer the liability to the new management (company). Takeover, mergers and
acquisitions are various means of converting the bad debt into realizable one. The branches can
explore the possibility of merger and acquisition of sick unit by another AAA/AA rated unit
engaged in similar/related activities in the same or nearby centres. Some of the profitable units
may take- over sick units under their diversification programme. The Regional Office/zonal
Office should have required base and assist branches in this regard with details of such potential
prospective buyers. Financial Consultants/Chartered Accountants can play major role in
furnishing information. BLBC meetings should be used for exchange of information in this
regard. By means of takeover/ merger/ acquisition the NPA may get paid off fully and liability to
other unit can be treated as standard asset in future.
Once rehabilitation is implemented, the unit may be asked to adjust a portion of their bill
realization towards overdues.
a)Problems of recovery: Recovery process has two dimensions: -
a)Voluntary Recovery - This is achieved partially by–
a. Rescheduling of repayment installments.
b. Undertaking effective nursing.
c. Extending reliefs and concessions.
d. Releasing charge over flabby assets for sale/realisation and repayment of dues.
e. Compromise proposals involving certain sacrifice based on present value realisation.
b)Forced Recovery - Where nursing is not viable and borrower is not co-operative, forced
recovery is undertaken by -
a. Filing of suit and attachment of assets.
b. Proceeding against guarantors.
c. Launching of liquidation/insolvency proceedings.
d. Resorting to takeovers / referring the case to BIFR, etc.
It is pertinent to note that even after filing suit, the channel of communication with borrower
should be kept open and a compromise offer can be entertained at any point of time.
e. Reference to Lok Adalats, Debt Recovery Tribunals etc.
f. Peer pressure from group is another effective way recovery.
DATA COLLECTION AND ANALYSIS
HIGHLIGHTS FOR THE QUARTER ENDED 30th JUNE 2009 of BANK OF INDIA
Business Mix reaches Rs.342831 crores - robust rise of 21.52 %.
Net Profit up by 3.91% from Rs.562 crores to Rs.584 crores.
Operating Profit up by 2.05% (Rs. 1094 Crore) supported by growth in net interest income as
well as other income.
Net Interest Income rises by 10.16% to Rs. 1301Cr from Rs. 1181 Cr, despite challenging
conditions.
Net Interest Margin at 2.42%.
Non Interest Income rises by 14.13% from Rs 566 crores to Rs 646 crores.
Gross NPA ratio at1. 89 %.
Net NPA ratio at 0.84% as against 0.52% as on June
2008 (*).
Provision coverage stands at 67.41% (*).
(*) Due to change in Accounting treatment of floating provisions as per RBI guidelines
Cost to Income Ratio is at43. 82 %.
Return on Assets is at1. 03 %.
Total Income for the Quarter rose to Rs.5024 Crore from Rs.4115 Crore, showing a growth of
22.09%.
Bank has made adequate provisions for terminal benefits, in line with AS 15 requirements. Rs.
105.77Cr estimated and provided.
CASA amounted to Rs. 51333 crores constituting 32% of Total Deposits as against 31% in
March‟09.
Earnings per share for 12 months go up from Rs. 10.70 to Rs.11.13.
Book value per share rises from Rs. 174.74 to Rs.223.00.
Capital Adequacy Ratio rises to 13.26% from 12.39 %as per Basel II.
Deposits grew by22. 47% on YoY basis to Rs.1, 95,021 crores.
Advances rose by 20.28% to reach Rs.1, 47,809 crores.
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Total no of branches are3031.
All branches are functioning on CBS platform, spanning over 1920 cities & towns.
Net worth of the Bank is at Rs.11728 crores.
Other Highlights
Bank of India has been rated by Economic Times /The Nielsen company survey
“The Most Trusted Brands “(MTB) 2009 as follows:
Under PSU Banking Category–2nd Next TO SBI
Under Top Service Brands–8th
The Debutant–first time in the Top 100
In the MTB, Bank of India ranked 92nd - 54 rankings ahead of last year rankings (146th Rank
during 2008)
Global
Domestic
Foreign
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SECONDARY DATA COLLECTION AND ANALYSIS
GROUP– I LARGE BANKS (Balance Sheet size more than Rs. 24,000 crore)
Sr.
No.
BANKS
Balance
Sheet (Rs
Cr)
Quality of Assets
CAR
(%)
NPA
Growth
Rate (%)
NPA
Coverage
(%)
Net NPA
advances
(%)
1.
Axis Bank
147722.05
1.26
63.56
0.40
13.91
2.
Bank of India
225501.76
1.64
69.32
0.44
13.01
3.
Punjab National Bank
246918.62
1.26
80.05
0.17
12.59
4.
Bank of Baroda
227406.73
0.80
43.90
0.31
12.88
5.
HDFC Bank
183270.77
4.21
68.43
0.63
15.09
6.
Indian Bank
84121.75
0.50
42.58
0.51
13.27
7.
Federal Bank
38850.87
2.78
87.34
0.30
20.14
8.
Corporation Bank
86905.81
0.54
74.20
0.30
13.61
9.
Union Bank of India
160975.51
1.38
80.53
0.34
12.01
10.Citiba nk
105263.59
6.42
41.81
2.63
13.23
11.State Bank of India
964432.09
2.30
38.72
1.76
12.97
12.State Bank of Travancore
49460.51
1.33
61.17
0.58
12.13
13.HS BC
94620.39
8.27
74.61
1.42
15.31
14.Canara Bank
219645.80
1.94
30.34
1.09
14.10
15.Indian Overseas Bank
121073.40
3.34
39.10
1.56
12.70
16.Standard Chartered
97492.16
2.03
39.14
1.37
11.56
17.State Bank of Hyderabad
76721.89
0.82
42.74
0.38
10.58
18.ICICI Bank
379300.97
2.28
52.81
2.09
15.92
19.Punjab & Sind Bank
41363.79
0.66
49.03
0.32
11.88
20.Andhra Bank
68469.20
0.50
81.49
0.18
12.37
21.Oriental Bank of Commerce
112582.60
0.81
56.20
0.68
12.00
22.State Bank of Bikaner & Jaipur
46370.20
1.22
48.41
0.85
13.18
23.Allahabad Bank
97648.01
1.56
59.51
0.74
13.11
24.Syndicate Bank
130255.67
1.32
58.08
0.77
11.37
25.IDBI Bank
172402.32
0.69
33.90
0.92
11.23
26.State Bank of Patiala
69665.44
0.98
54.06
0.60
11.43
27.State Bank of Indore
33075.89
1.07
39.48
0.89
11.81
28.Jammu and Kashmir Bank
37693.26
2.02
48.36
1.98
13.46
29.UCO Bank
111664.17
1.08
45.75
1.21
9.75
30.State Bank of Mysore
40485.79
0.81
64.89
0.50
12.41
31.Dena Bank
48460.50
2.60
48.27
1.11
10.73
32.Bank of Maharashtra
59030.35
1.16
63.16
0.79
10.75
33.Vijaya Bank
62382.60
1.99
57.36
0.82
13.08
34.Kotak Mahindra Bank
28711.87
3.21
45.69
2.39
19.86
35.Central Bank of India
147655.23
1.10
52.42
1.24
11.75
36.IndusInd Bank
27614.68
1.53
29.76
1.14
12.33
37.ING Vysya Bank
31856.99
2.11
0.00
1.23
11.68
38.R BS
32082.55
6.73
56.69
2.20
12.66
39.United Bank of India
62040.71
2.56
48.53
1.48
13.28
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GROUP– II MID-SIZE BANKS (Balance Sheet less than or equal to Rs. 24,000 crore & No.
of branches more than 10)
Sr.
No.
BANKS
Balance
Sheet (Rs
Cr)
Quality of Assets
CAR
(%)
NPA
Growth
Rate (%)
NPA
Coverage
(%)
Net NPA advances (%)
1.
YES Bank
22900.79
0.81
51.54
0.33
14.50
2.
Karur Vysya Bank
17060.74
0.83
74.33
0.25
13.08
3.
Dhanalakshmi Bank
5642.83
1.41
55.18
0.90
14.44
4.
City Union Bank
9251.01
1.70
36.99
1.14
12.49
5.
The Nainital Bank
2439.23
1.08
205.69
-1.77
12.32
6.
Karnataka Bank
22857.80
1.43
70.60
0.98
13.54
7.
Ratnakar Bank
1709.24
0.68
68.44
0.68
44.87
8.
South Indian Bank
20383.52
1.54
43.42
1.13
13.89
9.
Lakshmi Vilas Bank
8317.25
0.80
51.34
1.24
10.09
10.Bank of Rajasthan
17224.39
0.85
59.85
0.83
11.50
11.Catholic Syrian Bank
7040.09
1.80
46.50
2.39
11.14
12.Development Credit Bank
5943.02
8.91
53.34
3.88
13.44
GROUP– III SMALL BANKS (Balance Sheet more than or equal to Rs. 3,000 crore & No.
of branches less than or equal to 10)
Sr.
No.
BANKS
Balance
Sheet (Rs
Cr)
Quality of Assets
CAR
(%)
NPA
Growth
Rate (%)
NPA
Coverage
(%)
Net NPA
advances
(%)
1.
DBS Bank
12564.59
1.21
56.64
0.55
15.70
2.
JP Morgan Chase Bank
10531.23
3.35
121.52
1.27
15.90
3.
Scotia Bank
6995.70
0.00
100.00
0.00
19.34
4.
Barclays Bank PLC
20688.63
11.09
53.75
4.59
17.07
5.
Bank of America
9845.35
0.00
100.00
0.00
12.73
6.
Deutsche Bank AG
24954.87
4.46
68.19
0.88
15.25
7.
Calyon Bank
6615.56
0.00
100.00
0.00
13.20
8.
BNP Paribas
9827.99
1.11
48.45
1.04
12.37
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GROUP– IV VERY SMALL BANKS (Balance Sheet size less than Rs. 3,000 crore & No. of
branches less than 10)
Sr.
No.
BANKS
Balance
Sheet
(Rs Cr)
Quality of Assets
CAR
(%)
NPA
Growth
Rate (%)
NPA
Coverage
(%)
Net NPA advances (%)
1.
Mizuho Corporate Bank
2183.52
0.00
100.00
0.00
37.21
2.
Shinhan
1035.89
0.00
100.00
0.00
36.80
3.
Antwerp Diamond Bank
968.46
4.49
100.00
0.00
29.03
4.
Abu Dhabi Commercial Bank
655.43
0.50
100.00
0.00
54.29
5.
Bank of Tokyo-Mitsubhishi UFJ
4546.39
0.06
90.31
0.03
29.51
6.
Bank of Bahrain & Kuwait B.S.C
610.10
0.23
97.86
0.09
30.54
7.
Societe Generale
2158.36
0.00
100.00
0.00
22.47
8.
Mashreqbank psc
110.14
0.00
100.00
-0.01
76.80
9.
Arab Bangladesh Bank
78.84
0.00
1017.75
-9.36
100.00
10.Oman International Bank S.A.O.G
393.16
0.00
100.00
0.00
27.47
11.Krug Thai Bank
152.25
0.00
100.00
0.00
110.53
Source: BT-KPMG study (Business Today December 2009 issue)
Analysis:
Group-I - Large Banks
Punjab National Bank has the least Net NPA % whereas Citibank has the highest
Indian Bank has the least NPA Growth rate whereas HSBC bank has the highest
Federal Bank has the best NPA coverage whereas ING Vysya Bank has the least coverage
Group-II– Mid-Size Banks
The Nainital Bank has the least Net NPA % whereas Development Credit bank has the highest
Ratnakar Bank has the least NPA Growth rate whereas Development Credit bank has the highest
The Nainital Bank has the best NPA coverage whereas City Union Bank has the least coverage
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Group-III– Small Banks
Scotia Bank, Bank of America, Caylon Bank have the least Net NPA % almost 0.00% whereas
Barclays Bank PLC has the highest
Scotia Bank, Bank of America, Caylon Bank have the least Net NPA % almost 0.00% whereas
Barclays Bank PLC bank has the highest
JP Morgan Chase Bank has the best NPA coverage whereas BNP Paribas has the least coverage
Group-IV–Very Small Banks
Arab Bangaladesh Bank have the least Net NPA % whereas Bank of Bahrain & Kuwait B.S.C.
has the highest
Except Antwerp Diamond Bank N.V., Abu Dhabi Commercial Bank, Bank of Tokyo-
Mitsubhishi UFJ all have no NPA Growth while Antwerp Diamond Bank N.V. has the highest
Almost all banks have 100% NPA coverage
According to the BT-KPMG study for the Best Banks 2009 Bank of India ranks second in the
study covering all the factors while Axis Bank ranks first among the group of large banks whose
Balance sheet size is more than Rs. 24,000 crore.
Bank of India ranks 23rd w.r.t. Total NPA Growth Rate (%) about 1.64%
ranks 7th w.r.t. NPA Coverage (%) about 69.32%
ranks 10th w.r.t. Net NPA/ Net Advances (%) about 0.44%
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This secondary data is collected from Reserve Bank of India‟s website
The Gross NPA/ Total Assets of Public Sector Banks is showing a decreasing trend whereas the
situation for Private Sector banks and Foreign banks is not that good as they are showing a rise in
their Gross NPAs.
Through this graph it is clear that the Public sector banks have clearly shown a decreasing trend
in their NPAs level whereas the Private sector and foreign banks show an upward trend from
past three years
0
0.5
1
1.5
2
2.5
3
2004-05 2005-06 2006-07 2007-08 2008-09
Public Sector Banks
Private Sector Banks
Foreign Banks
0123456
2004-05 2005-06 2006-07 2007-08 2008-09
Public Sector Banks
Private Sector Banks
Foreign Banks
Gross NPA/ Total Assets (%)
Gross NPA/ Gross Advances (%)
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Here, the percentage of Net NPA/ Total Assets has been stable for public sector banks from past
three years whereas Private sector banks have shown an increase in those three years when
compared to public sector banks. Foreign banks have hugely increased their percentage in the
last year.
Public sector banks have shown a decreasing trend whereas Private sector banks are having
problems in maintaining the percentage of Net NPA/ Net Advances low and foreign banks have
shown variability.
0
0.2
0.4
0.6
0.8
1
1.2
2004-05 2005-06 2006-07 2007-08 2008-09
Public Sector Banks
Private Sector Banks
Foreign Banks
0
0.5
1
1.5
2
2.5
2004-05 2005-06 2006-07 2007-08 2008-09
Public Sector banks
Private Sector banks
Foreign Banks
Net NPA/ Total Assets (%)
Net NPA/ Net Advances (%)
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The Public sector banks have a large share of NPAs as March 2009 of about Rs. 44,042 crore
and Private Sector banks have about Rs. 16,887 crore and Foreign Banks have about Rs. 7155
crore. The Public sector banks mainly due to large customer base and extensive reach and
diversified activities have much more cash on their Balance Sheet. But the previous data shows
that the public sector banks have a great recovery as compared to other banks even though
having 65% of the total NPAs.
Hypothetical Analysis:
H0 - The problem of NPAs is more in Private sector banks rather than Public Sector banks as
Public sector banks have shown a great decrease in their NPA levels from past Five years. So,
the hypothetical statement H0 doesn‟t hold true and the hypotheses is rejected.H0 rej ect ed.
Hence the statement should have“The problem of NPA is less acute in public sector banks as
compared to private sector banks.”
H1 - The secondary data shows that there is a decreasing trend in the NPA status of most of the
scheduled commercial banks because of various stringent practices followed by Banks
management and various policies by government as even the global financial crisis had less
effect on the working of Indian banks and the banks have started to improve their NPA status.
The Hypothetical statements H1 is accepted.H1 accep t ed .
65%
25%
10%
NPAs of Indian Banks as on
March 2009
Public Sector Banks
Private Sector Banks
Foreign Banks
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A
A]
] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines
as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists
of all the non standard assets like as sub-standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAs
Gross Advances
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.
Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge
amount of NPAs and the process of recovery and write off of loans is very time consuming, the
provisions the banks have to make against the NPAs according to the central bank guidelines, are
quite significant. That is why the difference between gross and net NPA is quite high.
It can be calculated by following_
Net NPAs =
Gross NPAs– Provisions
Gross Advances - Provisions
PROVISION RATIO:
Provisions are to be made to keep safety against the NPA, & it directly affect on the gross profit
of the Banks. The provision Ratio is nothing but total provision held for NPA to gross NPA of
the Banks. The formula for that is,
(i) Provision Ratio = (Total Provision/Gross NPA)*100
(ii) [Additional Formulae: Net NPA = Gross NPA– Provision
Therefore, Provision = Gross NPA– Net NPA]
CAPITAL ADEQUACY RATIO
Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets, which are
weighted/adjusted according to risk attached to them i.e.
Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100
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CONCLUSION
Bank of India
Bank of India has performed extremely well in NPA management. Persistent and follow-up of
potential and other NPAs with outstanding of Rs. 1 crore and above is being done through the
introduction of ACTION TAKEN REPORT (ATR) mechanism on periodical basis. Loan
Restructuring and Loan Review Cells have been established to set up restructuring exercise in all
viable cases expeditiously. Responsibilities have been assigned to monitor large NPAs (Rs l0
Lakhs and above) at administrative levels. The Chairman and Managing Director is personally
monitoring all accounts with outstanding of Rs. 5 crore and above.
General
Banks need to have better credit appraisal systems so as to prevent NPAs from occurring.
However, once NPAs do come into existence, the problem can be solved only if there is enabling
legal structure, since recovery of NPAs often requires litigation and court orders to recover stock
loans. With long-winded litigations in India, debt recovery takes a very long time. Banks are now
working on developing debt recovery tribunals to solve this problem. The Govt. has also mooted
the suggestion of an asset reconstruction company for augmenting recovery measures.
1. The NPA is one of the biggest problems that the Banks are facing today is the problem of Non
Performing Assets. If the proper management of the NPAs is not undertaken it would hamper
the business of the banks.
2. As the global slowdown has crept into the economy, bankers feel that in more loans are going
to turn bad in the coming quarters and therefore they want RBI to relax the deadline for loan
reconstruction.
3. Due to Recession & slowdown in the Indian economy would result in emerging NPAs for the
public sector banks from textiles, real estate, retail, exports and auto sectors.
4. The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of
funds in the nation. This would help the nation to develop more banking branches and
developing the economy by providing the better financial services to the nation.
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5. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking
sector. The NPAs would destroy the current profit, interest income due to large provisions of the
NPAs, and would affect the smooth functioning of the recycling of the funds.
6.As a result of the NPA‟s owners do not receive a market return on their capital. In the worst
case, if the bank fails, owners lose their assets & this may affect a broad pool of shareholders &
act as a rain on Profitability.
7. 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.
8. When many borrowers fail to pay interest, banks may experience liquidity shortages. These
shortages can jam payments across the country and as a result non performing loans may spill
over the banking system and contract the money stock, which may lead to economic contraction.
9. Banks need to create capital reserve to write off the mounting NPA‟s burden.
10. “A Man without money is like a bird without wings”, the Rumanian proverb insists the
importance of the money. A bank is an establishment, which deals with money. The basic
functions of Commercial banks are the accepting of all kinds of deposits and lending of money.
In general there are several challenges confronting the commercial banks in its day to day
operations. The main challenge facing the commercial banks is the disbursement of funds in
quality assets (Loans and Advances) or otherwise it leads to Non-performing assets.”
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RECOMMENDATIONS
Following Recommendations may be adopted to tackle the Problem of NPAs:
Pe rsu a si o n :It is very much an effective tool of recovery. It is very much an effective
tool of recovery. Continual follow- up will be very effective in most cases.
Filing of Suits: The effectiveness of this tool depends on two major factors:
o
Whether other tools have been used;
o
Whether there are adequate securities to be realized.
Compromise and Revival: It has been argued that a compromise, whereby the Bank
allows remission of principal and/or interest along with rescheduling of the repayment of debt is
a better way to deal with such advances, especially when banks are drawn into long legal battles.
Involvement of other Agencies: Sometimes other agencies especially govt. agencies are
involved in the recovery of dues and stagnant accounts in the priority sector. Their
involvement in the recovery of loans is very much desirable.
Reference to B1FR: In case of large and medium units, when they are registered for not
less than seven years as companies, we can refer the case of sickness to the Board for Industrial
and Financial Reconstruction (BIFR) for early liquidation or suggestion of rehabilitation
packages.
Enforcement of Securities: Enforcement of Securities charged to bank is equally
important aspect of the management of NPAs. Banks, wherever necessary, have to move
courts not only to obtain decrees but also to get them executed.
Rehabilitation and Nursing: Rehabilitation and nursing of sick units, as a matter of
policy should be given a fresh look. Only viable sick units with proven capacity of the
management to run the units should be nursed.
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Merger and Amalgamation of Units: Wherever feasible, efforts should be made to
merge the sick units with healthy units.
Appointment of Special Tribunals: In view of ever mounting cases involving bank
advances in the various courts of India, it is highly desirable that special tribunals are
established all over India exclusively for bank's litigation.
Writing off of Bad debts: When no other course will bring positive results it is always
preferable to write off bad advances at the earliest to avail of tax deductions, rather than
carry them forward.
http://www.expressindia/
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BIBLIOGRAPHY
Websites
http://finance.indiamart.com/investment_in_india/bank_of_india.html
http://en.wikipedia.org/wiki/Non-performing_asset
http://www.bankofindia.com
http://www.rbi.org.in/SCRIPTS/AnnualPublications.aspx?head=Trend%20and%20Progress%20
of%20Banking%20in%20Indiahttp://www.expressindia.com/news/npamanagementpolicy.htm
Books:
Valuation by Damodaran
Financial Management- Khan & Jain
Magazines and Journals
Handbook only for Bank of India
Business Today- December 13, 2009 issue
Capital Market- December 13, 2009 issue
Newspapers-
Business Line
Business Standard
Economic Times
Research Paper-
Research Paper – “A comparative study of Non Performance Assets in India” by Prashanth K
Reddy, IIM- Ahmedabad
Research Paper on “Rooting Out Non-Performing Assets” by Nachiket Mor, ICICIresearchcentre
Report on “Maximising Value of Non-Performing Assets” by Organisation For Co-Operation
and Development (OECD)
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ANNEXURE
Proforma for regular write off
BANK OF INDIA
SPECIALISED ASSET RECOVERY MANAGEMENT BRANCH
Ref. No. SARM: 2009-10
Date:
PROPOSAL FOR REGULAR WRITE OFF
Zone: MSZ
BRANCH: SARM
Particulars of Borrowers and Guarantors
1
Name of the Account
2
Asset Classification
2a
Date of NPA
33a
Sector
Category
4
Constitution
5
Group/ Principal person
6
Name of Directors & their worth
(Rs. in lacs)
Directors
At
the
time of
original
proposal
At present
Basis of assessment
Guarantors :
7
Date of establishment
8
Credit facilities since
9 a. Activity
b. Present position
c. Reasons for closure, if not
functioning
d. Reasons for account turning NPA
10
Information about the Borrower/ Guarantors, their assets and present market/ realizable value in
brief, which are not charged to the Bank.