DECLARATION

I Priyanka Priyadarshini, student of IMIS (Institute of Management & Information Science), Bhubaneswar, here by declare that this project work presented in this Dissertation report is my own work and has been carried out under the supervisor of Prof. Ashok Kumar Mishra. My report is submitted as a part of study curriculum and as a partial fulfillment of the degree of PGDM (Post Graduate Diploma in Management). I am also declaring that I am submitting this Dissertation report regarding the Non Performing Management. I guarantee this project report has not been submitted for the awards to any other university for degree, diploma or other such prizes.

Date:

Priyanka Priyadarshini 08dm030 2008-2010 PGDM

ACKNOWLEDGEMENT
There are some things in the life of person which, even if they come only for a short time, leave an indelible impression on his mind. Dissertation was a great experience for me. The completion of the project was possible only because of the co-operation, guidance and encouragement from several quarters. It is a great pleasure for me to acknowledge the contribution of the people who have helped in the successful completion of my Dissertation project report. First of all I would like to express my deep sense of gratitude to my guide Prof. Ashok Kumar Mishra, whose timely guidance and suggestions made it possible for me to prepare my project report. I am deeply indebted to my faculty Guide whose constant help, stimulating suggestions and encouragement helped me in giving the final shape to this project.

Abstract
Decision making is a fundamental part of the research process. Decisions regarding that what you want to do, how you want to do, what tools and techniques must be used for the successful Completion of the project. In fact it is the researchers efficiency as a decision maker that makes project fruitful for those who concern to the area of study. Basically when we are playing with computer in every part of life, I used it in my project not for the ease of my but for the ease of result explanation to those who will read this project. The project presents the role of financial system in life of persons. I had toiled to achieve the goals desired. Being a neophyte in this highly competitive world of business, I had come across several difficulties to make the objectives a reality. I am presenting this hand carved efforts in black and white. If anywhere something is found not in tandem to the theme then you are welcome with your Valuable suggestions.

CONTENTS
Declaration Acknowledgement Abstract Chapter I Introduction Chapter II Literature Review Chapter III 3.1 Objective of the study 3.2 Research Methodology 3.3 Limitation of the study Chapter IV Non Performing Asset 4.1 Meaning of NPAs 4.2 Classification of Loans 4.3 Reason of NPAs in India 4.4 NPA Management Chapter V Tools for Recovery of NPA Chapter VI Data Analysis & Interpretation Conclusion 1 2 3

References

Chapter I

Introduction
The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans. An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. As per the prudential norms suggested by the Reserve Bank of India (RBI), a bank cannot book interest on an NPA on accrual basis. In other words, such interests can be booked only when it has been actually received. Therefore, this has become what is called as a critical performance area of the banking sector as the level of NPAs affects the profitability of a bank. Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and loss account, but their carrying cost is also increased which results in excess & avoidable management attention. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable profit level, banks eventually look towards their internal financial strength to fulfill the norms thereby slowly eroding the net worth. Today the Net NPAs of Indian Public Sector Banks (which account for around three-fourths of the total assets of Indian banking industry) are as low as 0.72 percent and gross NPAs are at 2.5 percent. However, Nitsure (2007) contends that once there is a slowdown in private expenditure and corporate earnings growth, companies on these banks books will not be in a position to service their debts on time and there is a strong likelihood of generation of new NPAs. Moreover, he also suggests that with rising interest rates in the government bond market, the banks treasury incomes have declined considerably. So, banks will not have enough profits to make provisions for NPAs. Under these circumstances, management of NPAs is a difficult task. Therefore, my study focused on the problem of NPAs being faced by the public sector banks.

Chapter II
Literature Review
Trends and Challenges by Gurudas Saha, starts off with the hypothesis that NPAs have a multiplier effect on the value destruction of an economy and the magnitude of the total distressed asset stock in India as of March, 2005, excluding state financial corporations, mutual funds and the insurance sector, was around Rs.2,55,000 crores. Given this amount, for recovery, various efforts by the Indian economy included setting up special tribunals like Debt Recovery Tribunals under the Recovery of Debts due to Banks and Financial Institutions Act, 1993, with exclusive jurisdiction to try and dispose of matters pertaining to recovery of debts due to banks and financial institutions. Further, to dispose of larger NPAs, the CDR mechanism was introduced which has worked out restructuring packages in over 100 cases so far. In 2002, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was enacted with the primary objective of reduction of NPA levels of banks/FIs and unlocking value from distressed assets in the banking and financial system. The article concludes that the large impaired assets comprise industrial assets having good restructuring potential. Hence, the seed of success of managing the impaired assets in any economy lies in the speed of recycling these assets and their realization into cash. A Case Study of SBI and ICICI by B S Bodla and Richa Verma. There are various reasons for assets turning non-performing and there can be alternative resolution strategies. Identification of the reasons and timely action are the key to improved profitability of financial sector intermediaries. In this context, this article deals with the details of the CAMEL model that RBI introduced for evaluating performance of banks and the need for this arose from the systemic generation of large volume of NPAs. As a case study, data from SBI and ICICI Bank have been taken. CAMEL covers capital adequacy, asset quality, management quality, earnings ability and liquidity. This article demonstrates that all the elements are interlinked with the issue of NPAs and a good rating would involve a balance of all of them. Analysis shows that, while SBI has an edge over ICICI Bank in terms of capital adequacy, the opposite is true for parameters like assets quality, earning quality and

management quality. Maximizing Value of Non-Performing Assets (NPAs) is by Tamal Datta Chaudhuri. The various reasons, either singly or jointly, behind an asset turning NPA can be from the economy side, from the industry side, from the borrowers side, from the banking system side, from the loan structuring side, from the security side and from the regulatory side. The article argues that the strategy for recovery is dependent on the reason. The various recovery strategies that can be undertaken include financial restructuring, change in management, one time settlement, sale to an Asset Reconstruction Company (ARC) or legal action. The article provides a state-resolution mapping framework where it is shown that the reasons behind an asset turning NPA and its current state would determine the asset resolution strategy. With the help of 2x2 matrices, alternative scenarios are constructed to arrive at a resolution strategy. SARFAESI Act 2002 Is it a Boon to Securitization or a Tool for NPA Management? by Rajeswari Krishnan the author elaborates on the concept of securitization and looks at the benefits from the points of view of the originator, the investor and the financial system as a whole. Securitization is a process of selling illiquid loans and receivables by issuing marketable securities against them. Securitization helps improve liquidity, restructures the balance sheet, reduces market risk, enables efficient allocation of capital, helps reduce NPAs, and reduces exposure to sectors. The outcome is unlocking of value and creating a market for such assets. The author argues that the SARFAESI Act promotes securitization, enables formation of ARCs, and introduces enforcement of security interest without court intervention. It provides an enabling environment for recovery from NPAs without recourse to lengthy court proceedings. The author, however, argues that this Act is partial to lenders and equity investors and depositors have been discriminated against. The other issues that need to be resolved relate to Stamp Duty and taxation.

Developing the Enabling Environment for and Structuring Asset Reconstruction Companies in India is by Tamal Datta Chaudhuri. This report includes, inter alia, a review of the Indian NPA situation and the existing legal and operational framework for ARC operations including the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

(SARFAESI or the Act). It recommends suitable changes for effective functioning of ARCs in India. The paper elaborates on the fact that the Act prescribes ring fencing of investments made by different QIBs and financial assets acquired by ARCs using such investments. Such ring fencing may be achieved by setting up different schemes. While the Act does not specifically discuss trust structure, the Directions clarify that these schemes, for achieving ring fencing, may be set up using the trust structure with ARCs acting as trustees of these trusts. In this context, a mutual fund like structure is likely to be used for the ARCs. Discussion on the experience of working of AMCs in other countries indicates that AMC structures used worldwide can be classified into following broad categories: Government owned/supported AMCs Bank owned AMCs Workout Units and Bad Bank models Private sector AMCs. The recommendations of the article revolve around ownership issues, acquisition and valuation issues, transaction costs, capital adequacy and provisioning and clarity on funding and sale of NPAs. The Long Road to Basel II Implications for Indian Banks is by Manoranjan Sharma. In line with the emphasis in this section on options for recovery from NPAs, this article provides a brief description of the three pillars of Basel II. Indeed Basel II is more about a framework to handle NPAs and take preventive measures against such eventualities. Financial integration of economies has led to domino effect in times of economic crises. Further, the traditional face of banks has transformed from management of on balance sheet to off balance sheet items, from capital adequacy to capital efficiency and from banking to financial services. In this background, this article emphasizes the importance of adoption of risk management techniques. Further, better aligning of regulatory capital to underlying risks provides banks with an opportunity to enhance risk management capabilities. The article goes on to describe credit risk, market risk and operational risk and how to allocate capital for each risk. It explains concepts of Internal Ratings Based Method, Probability of Default, Loss Given Default and Exposure at Default. Demystifying Basel II by V Leeladhar. The importance of Basel II has been emphasized in the previous article. In this article, it is explained that certain elements of the Basel II Framework may be a

challenge to India and a better understanding of the relevant perspectives among banks, regulators, users of the banking system and other market players would be useful for an effective and meaningful implementation of Basel II. The article also explains that Basel II is more risk sensitive, it recognizes developments in risk measurement and risk management techniques employed in the banking sector and accommodates them within the framework and aligns regulatory capital closer to economic capital. It highlights the importance of external ratings, the internal capital adequacy assessment process, and stress testing and data requirements. Approach to Basel II by Shyamala Gopinath describes the broad contours of the regulatory approach in India and the thinking about some of the issues arising in the context of Basel II that encourages the use of modern risk management techniques. It points out the need for balancing risk management capabilities with business risk. The RBI had taken several steps for implementation of Basel II and the emerging issues. It gave the options available before banks under Basel II and a road map by the end of December, 2004 for migration to Basel II and review the progress made at quarterly intervals. The article explains that all banks were advised to undertake a self-assessment of the various risk management techniques they had adopted, with specific reference to the 3 major risks covered under Basel II and initiate necessary remedial measures. Finally, the article opines that banks should view opportunities opened up by complex financial instruments in the perspective of larger economic interest.

Indias Experience with Recovery from Non-Performing Assets (NPAs) by Tamal Datta Chaudhuri starts with an enumeration of the various reasons behind assets turning NPA and suggests that the process of recovery can be split into three parts, namely early identification of financial vulnerability, quick action either in terms of financial restructuring or overall rehabilitation or liquidation, and in case of liquidation, method for disposition of assets. After analyzing the implications of NPAs, the article provides an account of the various steps that have been taken in India for recovery from NPAs and these include setting up of dedicated financial institutions and quasi-judiciary bodies, introduction of prudential norms, legal enactments and setting up of Asset Reconstruction Agencies. The article then provides detailed data on recovery from NPAs in India from sources like BIFR, RBI, 9

ARCIL and CIBIL. It is concluded by saying that there are gaps in data availability and there is need to pool more information to develop a comprehensive database. Dealing with the Non-Performing Loan Problems: Taiwans Experience is by Wei-Chiao Huang, Wei-Jang Huang and Christina Y Liu. The Asian financial crisis had minimal impact on the economy of Taiwan due to its strong macroeconomic fundamentals including high current account surplus and savings ratio, non-existent savings investment gap, prudent exchange rate policy and sound liberalization of capital movements. However, economists in 2001 and 2002 had predicted that Taiwan was going to be hit by a banking crisis as the rate of growth of export of semi-conductors had declined and there was a stock market bubble, which could burst leading to erosion in the value of collateral securities and cause damage to the stability of the financial sector. In this background, the article analyses the way in which Taiwan handled the NPA problem. Data analysis by the authors suggests that Taiwan was able to control and effectively reduce the NPA percentage through a three-pronged strategy involving fund infusion by the government to absorb NPAs, sale of NPAs to Asset Management Companies and also bringing about a strong discipline among financial institutions to recognize NPAs and write-off wherever necessary. Although the latter had a short run depressing effect on the quality of the balance sheet, a target oriented approach called 258 did have positive effects in the long run and Taiwan was able to avoid a banking crisis. Management of Non-Performing Assets in China is by Tamal Datta Chaudhuri. In China, bank lending is the dominant form of financing and the size of the capital market is not yet close to the extent of bank financing as a source of finance. The four big Wholly State Owned Commercial Banks (SOCBs) (Bank of China [BOC], Industrial and Commercial Bank of China [ICBC], Agricultural Bank of China [ABC], China Construction Bank [CCB]) have the highest share in banking sector assets amounting to around 53% in 2006. The article explains that the financial health of these four major banks is not great and their share of NPAs is also the highest and of concern. The policy package that China has adopted over the last few years, include recapitalization of the SOCBs, reform in the ownership structure of these banks, selling off NPAs to Asset Management Companies (AMCs), securitization of loans, listing requirement of banks in the stock market, bringing about greater disclosure and transparency in operations, encouraging strategic partnership, and also greater focus on prudential norms.

10

China has set up four AMCs, each to be associated with one SOCB. The AMCs that took over the loans from the SOCBs bought the past due and idle loans and these were funded by issuance of bonds and also borrowing from the PBC. The AMCs have considered, among other measures, debt-equity swaps for loans granted to better performing state owned enterprises which can go public in future providing them with an exit option at reasonable prices.

Chapter III
3.1 Objectives of the study
The main aim behind making this report is to know how public sector Banks are operating their business and how NPAs play its role to the operations of the public sector Banks. The report NPAs are classified according to the sector, industry, and state wise. The present study also focuses on the existing system in India to solve the problem of NPAs and comparative analysis to understand which bank is playing what role with concerned to NPAs. Thus, the study would help the decision makers to understand the financial performance and growth of public sectors banks are compared to the NPAs. The secondary objectives of preparing this report are: To understand what is Non Performing Assets and what are the underlying reasons for the emergence of the NPAs in India. To know what steps are being taken by the Indian banking sector to reduce the NPAs and tools and recovery of NPA. To study Comparative analysis on Non Performing Asset of private sector and public sector bank.

3.2 Research methodology

The research methodology adopted for carrying out the study was; In this project Descriptive research methodologies were use. At the first stage theoretical study is attempted. At the second stage Historical study is attempted. At the Third stage Comparative study of NPA is undertaken.

3.3 Limitation of the study

The limitations that left in my side are:

11

 it was critical for me to gather the financial data of the every bank of the public sector Banks so the better evaluations of the performance of the banks are not possible. since my study is based on the secondary data, the practical operations as related to the NPAs are adopted by the banks are not learned. Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector.

Chapter IV NON-PERFORMING ASSETS

The world is going faster in terms of services and physical products. However it has been researched that physical products are available because of service industries. In the nation economy also service industry plays vital role in the boosting up of the economy. The nations like US, UK, and Japan have service industries more than 55%.The banking sector is one of appreciated service industry. The banking sector plays large role in chanalizing money from one end to other end. It helps almost every person in utilizing the money at their best. The banking sector accepts the deposits of the people and provides fruitful return to people on the invested money. But for providing the better returns plus principle amounts to the clients; it becomes important for the bank to earn the main source of income for banks are the interest that they earn on the loans that have been disbursed general person, businessman, or any industry for development. Thus, we may find the input-output system in the banking sector. Banks first, accepts the deposits from the people and secondly they lend this money to people who are in the need of it. By the way of chanalizing money from one end to another end, Banks earn their profits. However, Indian banking sector has recently faced the serious problem of Non Performing Assets. This problem has been emerged largely in Indian banking sector since three decade. Due to this problem many public sector Banks have been adversely affected to their performance and operations. In simple words Non Performing Assets problem is one where banks are not able to recollect their landed money from the clients or clients have been in such a condition that they are not in the position to provide the borrowed money to the banks. The problem of NPAs is danger to the banks because it destroys the healthy financial conditions of them. The trust of the people would not be any more if the banks have the higher NPAs. So, the

12

problem of NPAs must be tackled out in such a way that would not destroy the operational, financial conditions and would not affect the image of the banks. Recently, RBI has taken number steps to reduce NPAS of the Indian banks. And it is also found that the many banks have shown positive figures in reducing NPAs as compared to the past years.

4.1

MEANING OF NPAs

An asset is classified as non performing assets (NPAs) if the borrower does not pay dues in the form of principle and interest for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues were not paid for 90 days. If any advance or credit facilities granted by bank to a borrower become nonperforming, 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.

4.2

CLASSIFICATION OF LOANS

In India the bank loans are classified on the following basis; Performing Assets:
Loans where interest and /or principle are repayable regularly as term and conditions sanction letter.

Non- Performing Assets:

Any loan the interest and/or installment of the principle are overdue more than 90 days, the account becomes NPA. According to the securitization and reconstruction of financial assets and enforcement of security interest ordinance, 2002 non- performing assets (NPA) means an assets or account of a borrower, which has been classified by a bank or financial institutions as substandard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classifications issued by the Reserve Bank. Internationally, income from non-performing assets is not recognized on accrual basis, but is taken into account as income only when it is actually received. It has been decided to adopt similar practice in our country also. Banks have been advised that they should not charge and take to income account the interest on all Nonperforming assets. An asset becomes non- performing for a bank when it ceases to generate income. 13

S.N 1.

Category of assets
Standard Assets

Basis for Deciding the category

An asset, which does not disclose any problem and also does not carry more than normal risk attached to the business, it should not fail under the category o NPA. An asset, which has been identified as NPA for a period not exceeding two years. In the case of term loan, if the installments of principal are overdue for more than one year but not exceeding two years, it is to be treated as sub-standard asset. An asset, which remains NPA for more than two years. An asset where loss has been identified by the bank or internal/external auditors or by RBI inspection but the amount has not been written-off, wholly or parity.

2.

Sub- standard Assets

3. 4.

Doubtful Assets Loss Assets

Potential NPA: - Standard assets which disclose problem/irregularities beyond 45 days but less than
90 days.

4.3

REASONS FOR NPAs IN INDIA

The following factors contribute to NPAs --Internal Factors

Diversion of funds for Expansion/ diversification/ modernization taking up new projects Helping /promoting associate concerns time / cost overrun during the project implementation stage Business (Product, marketing, etc) failure

14

 Inefficiency in management Slackness in credit management and monitoring Inappropriate technology/ technical problems Lack of co-ordination among lenders

External factors
Recession Input/ power shortage Price escalation Exchange rate fluctuations Accidents and natural calamities, etc\ Changes in government policies in excise /import duties, pollution control orders, etc. Liberalization of economy /removal of restrictions/ reduction of tariffs A large number of NPA borrowers were unable to compete in a competitive market in which lower prices and greater choices were available to consumers. Further, borrowers operating in specific industries have suffered due to political, fiscal and social compulsions, compounding pressure from liberalization (e.g., sugar and fertilizer industries).

Over optimistic promoters: Promoters were often optimistic in setting up large projects
and in some cases were not fully above board in their intentions. Screening procedures did not always highlight these issues. Often projects were set up with the expectations that part of the funding would be arranged from the capital markets, which were booming at the time of project appraisal. When the capital markets subsequently crashed, the requisite funds could never be raised, promoters often lost interest and lenders were left standard with incomplete /unavailable projects.

Funding mismatch: There are said to be many cases where loans granted for short terms
were used fund long term transactions.

High cost of funds: Interest rates as high as 20% were not uncommon. Coupled with falling
demand, borrowers could not continue to service high cost debt.

15

Highly leveraged borrowers: Some borrowers were under capitalized and over burdened
with debt to absorb the changing economic situation in the country.

4.4 NPA MANAGEMENT

(A) Non-legal Measures:1) Seasonal/ Area based recovery drive 2) Follow up of Potential NPA 3) Review of NPA account 4) Preparation of village wise /Area wise list 5) Visit to Borrowers business premise/Residence 6) Allotment of NPA account to staff 7) Appointment of professional Recovery Agent 8) Rehabilitation of sick units 9) Corporate debt Restructuring 10) Lok adalat / lok nayalaya 11) Circulation of list of defaulters 12) Recalling of advances 13) Recovery through Recovery Branches 14) Up gradation of NPA 15) Cash Recovery 16) Recovery through compromise cases 17) Revival of failed compromise cases 18) Recovery of written-off cases 19) Restructuring / Rescheduling 20) Sale of financial Assets (Asset Reconstruction companies) (B) Write-off Legal Measures 1) Recovery certificate (Tehsil office) 2) Recovery through Judicial process (Filing of suit)

16

3) Execution of decreed cases 4) Debt Recovery Tribunals (DRT) 5) Securitization and Reconstruction of Financial assets and Enforceability of security interest Act 2002 (SARFAESI) 6) Other legal measures

Chapter V Tools For Recovery of NPA

Once NPA occurred, one must come out of it or it should be managed in most efficient manner. Legal ways and means are there to overcome and manage NPAs. We will look into each one of it.

17

5.1 Willful Default:A] Lok Adalat and Debt Recovery Tribunal B] Securitization Act C] Asset Reconstruction

18

Lok Adalat: Lok Adalat institutions help banks to settle disputes involving account in doubtful
and loss category, with outstanding balance of Rs.5 lakh for compromise settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice and recovery of small loans. The progress through this channel is expected to pick up in the coming years.

Debt Recovery Tribunals ( DRT): The recovery of debts due to banks and financial institution
passed in March 2000 has helped in strengthening the function of DRTs. Provision for placement of more than one recovery officer, power to attach defendants property/assets before judgment, penal provision for disobedience of tribunals order or for breach of any terms of order and appointment of receiver with power of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. DRTs which have been set up by the Government to facilitate speedy recovery by banks/DFIs, have not been able make much impact on loan recovery due to variety of reasons like inadequate number, lack of infrastructure, under staffing and frequent adjournment of cases. It is essential that DRT mechanism is strengthened and vested with a proper enforcement mechanism to enforce their orders. Non observation of any order passed by the tribunal should amount to contempt of court, the DRT should have right to initiate contempt proceedings. The DRT should empowered to sell asset of the debtor companies and forward the proceed to the winding up court for distribution among the lenders.

5.2 Inability to Pay Consortium arrangements: Asset classification of accounts under consortium should be based on
the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books.

19

5.3 Restructuring / Rescheduling of Loans

A standard asset where the terms of the loan agreement regarding Interest and principal have been renegotiated or rescheduled after commencement of production should be classified as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. In the case of sub-standard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms. Following representations from banks that the foregoing stipulations deter the banks from restructuring of standard and sub-standard loan assets even though the modification of terms might not jeopardize the assurance of repayment of dues from the borrower, the norms relating to restructuring of standard and sub-standard assets were reviewed in March 2001. In the context of restructuring of the accounts, the following stages at which the restructuring / rescheduling / renegotiation of the terms of loan agreement could take place can be identified: 1) Before commencement of commercial production; 2) After commencement of commercial production but before the asset has been classified as substandard, 3) After commencement of commercial production and after the asset has been classified as substandard. In each of the foregoing three stages, the rescheduling, etc., of principal and/or of interest could take place, with or without sacrifice, as part of the restructuring package evolved.

5.4 Treatment of Restructured Standard Accounts:

A rescheduling of the installments of principal alone, at any of the aforesaid first two stages would not cause a standard asset to be classified in the substandard category provided the loan/credit facility is fully secured. A rescheduling of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to substandard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e., current PLR+ the appropriate credit risk premium 20

for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis. In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved.

5.5 Treatment of restructured sub-standard accounts:

A rescheduling of the installments of principal alone would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period, provided the loan/credit facility is fully secured. A rescheduling of interest element would render a sub-standard asset eligible to be continued to be classified in substandard category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms , is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e., current PLR + the appropriate credit risk premium for the borrower category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis. In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. Even in cases where the sacrifice is by way of write off of the past interest dues, the asset should continue to be treated as sub-standard.

5.6 Up gradation of restructured accounts:

The sub-standard accounts which have been subjected to restructuring etc., whether in respect of principal installment or interest amount, by whatever modality, would be eligible to be upgraded to the standard category only after the specified period i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period. The amount of provision made earlier, net of the amount provided for the sacrifice in the interest amount in present value terms as aforesaid, could also be reversed after the one year period. During this one-year period, the substandard asset will not deteriorate in its classification if satisfactory performance of the account is demonstrated during the period. In case, however, the satisfactory 21

performance during the one-year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre restructuring payment schedule.

5.7 General:
These instructions would be applicable to all type of credit facilities including working capital limits, extended to industrial units, provided they are fully covered by tangible securities. 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, these guidelines should not be applied to restructuring/ rescheduling of credit facilities extended to traders. While assessing the extent of security cover available to the credit facilities, which are being restructured/ rescheduled, collateral security would also be reckoned, provided such collateral is a tangible security properly charged to the bank and is not in the intangible form like guarantee etc. of the promoter/ others.

5.8 Income recognition

There will be no change in the existing instructions on income recognition. Consequently, banks should not recognize income on accrual basis in respect of the projects even though the asset is classified as a standard asset if the asset is a "non performing asset" in terms of the extant instructions. In other words, while the accounts of the project may be classified as a standard asset, banks shall recognize income in such accounts only on realization on cash basis if the asset has otherwise become non performing as per the extant delinquency norm of 180 days. The delinquency norm would become 90 days with effect from 31 March 2004. Consequently, banks, which have wrongly recognized income in the past, should reverse the interest if it was recognized as income during the current year or make a provision for an equivalent amount if it was recognized as income in the previous year(s). As regards the regulatory treatment of income recognized as funded interest and conversion into equity, debentures or any other instrument banks should adopt the following:

5.9 Funded Interest:

22

Income recognition in respect of the NPAs, regardless of whether these are or are not subjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement, should be done strictly on cash basis, only on realization and not if the amount of interest overdue has been funded. If, however, the amount of funded interest is recognized as income, a provision for an equal amount should also be made simultaneously. In other words, any funding of interest in respect of NPAs, if recognized as income, should be fully provided for.

5.9.1. Conversion into equity, debentures or any other instrument:

The amount outstanding converted into other instruments would normally comprise principal and the interest components. If the amount of interest dues is converted into equity or any other instrument, and income is recognized in consequence, full provision should be made for the amount of income so recognized to offset the effect of such income recognition. Such provision would be in addition to the amount of provision that may be necessary for the depreciation in the value of the equity or other instruments, as per the investment valuation norms. However, if the conversion of interest is into equity, which is quoted, interest income can be recognized at market value of equity, as on the date of conversion, not exceeding the amount of interest converted to equity. Such equity must thereafter be classified in the "available for sale" category and valued at lower of cost or market value. In case of conversion of principal and /or interest in respect of NPAs into debentures, such debentures should be treated as NPA, ab initio, in the same asset classification as was applicable to loan just before conversion and provision made as per norms. This norm would also apply to zero coupon bonds or other Instruments which seek to defer the liability of the issuer. On such debentures, income should be recognized only on realization basis. The income in respect of unrealized interest, which is converted into debentures or any other fixed maturity instrument, should be recognized only on redemption of such instrument. Subject to the above, the equity shares or other instruments arising from conversion of the principal amount of loan would also be subject to the usual prudential valuation norms as applicable to such instruments.

23

5.9.2. Provisioning
While there will be no change in the extant norms on provisioning for NPAs, banks which are already holding provisions against some of the accounts, which may now be classified as standard, shall continue to hold the provisions and shall not reverse the same.

Chapter VI
24

Data analysis and interpretation

ANALYSIS
For the purpose of analysis and comparison between Public and private sector banks, we have taken five banks from both sectors to compare the non-performing assets of banks. For understanding we further bifurcate the non-performing assets in priority sector and non-priority sector, gross NPA and net NPA in percentage as well as in rupees, deposit investment advances. Further we also analysis on the basis of Deposit Investment Advances to get the clear view where the bank stands in the competitive market. At the end of March 2008, in private sector ICICI Bank is the highest deposit-investment-advances figure in rupees crores, second is HDFC Bank and KOTAK Bank have least figure. In public sector banks Punjab National Bank has the highest deposit investment- advances but when we look at the graph we can see that the Bank of Baroda and Bank of India are almost the similar in numbers and Dena Bank is stands last in public sector bank. When we compare the private sector banks with public sector banks, we can understand the more number of people prefer to choose public sector banks for deposit investment. DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and Comparison among them, year 2008-09. \Private Sector Banks:-

Analysis: - From the above figure we can see that the ICICI Bank deposit-investment-advances are quite high than other banks like HDFC,AXIS, INDUSIND, KOTAK

25

Public Sector Banks:-

Analysis: - In public sector Punjab National Bank deposit investment- advances are comparatively quite high rather than Bank of Baroda, Bank of India, United bank of India and Dena Bank. Comparison between ICICI BANK AND PUNJAB NATIONAL BANK in term of Depositinvestment-advances:-

Analysis: - Here we have compared between ICICI BANK AND PUNJAB NATIONAL BANK in term of deposit-investment-advances. From the above figure we can see that ICICI bank deposit and advances are quite higher than Punjab National Bank. But in case of Investment ICICI Bank investment amount is doubled than Punjab National Bank amount. Gross NPA and Net NPA:There are two concepts related to non-performing assets a) gross and b) net. Gross refers to all NPAs on a banks balance sheet irrespective of the provisions made. It consists of all the non-standard assets, viz. Substandard, doubtful, and loss assets. A loan asset is classified as substandard if it remains NPA up to a period of 18 months; doubtful if it remains NPA for more than 18 months; and loss, without any waiting period, where the dues are considered not collectible or marginally collectible. Net NPA is gross NPA less provisions. Since in India, bank balance sheets contains 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 NPA according to the central bank guidelines, are quite significant. Here, we can see that there are huge differences between gross and net NPA.

26

While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. The requirements for provisions are: 100% for loss assets 100% of the unsecured portion plus 20-50% of the secured portion, depending on the period for which the account has remained in the doubtful category 10% general provision on the outstanding balance under the substandard category.

Here, there are gross and net NPA data for 2007-08 and 2008-09 we taken for comparison among banks. These data are NPA AS PERCENTAGE OF TOTAL ASSETS. As we discuss earlier that gross NPA reflects the quality of the loans made by banks. Among all the ten banks Dena Banks has highest gross NPA as a percentage of total assets in the year 2007-08 and also net NPA. Punjab National Bank shows huge difference between gross and net NPA. There is an almost same figure between BOI and BOB. Gross NPA and Net NPA Of different Public Sector banks in the year 2007-08

Gross NPA and Net NPA Of different Public Sector banks in the year 200 8-0 9

27

Gross NPA and Net NPA Of different Private Sector banks in the year 2007-08

Gross NPA and Net NPA Of different Private Sector banks in the year 200 8-0 9

Comparison of GROSS NPA with Public and Private sectors banks for the year 2007-08 Comparison of GROSS NPA with all banks for the year 2007-08. The growing NPAs affect the health of banks, profitability and efficiency. In the long run, it eats up the net worth of the banks. We can say that NPA is not a healthy sign for financial institutions. Here we take all the ten banks gross NPA together for better understanding. Average of these ten banks gross NPAs is 1.29 as percentage of total assets. So if we compare in private sector banks AXIS and HDFC Bank are below average of all banks and in public sector BOB and BOI. Average of these five private sector banks gross NPA is 1.25 and average of public sector banks is 1.33, which is higher in compare of private sector banks. COMPARISON OF NET NPA WITH PUBLIC AND PRIVATE SECTORS BANKS FOR THE YEAR 2007-08 Comparison of NET NPA with all banks for the year 2007-08, Average of these ten banks net NPA is 0.56. And in the public sector banks all these five banks are below this. But in private sector banks

28

there are three banks are above average. The difference between private and public banks average is also vast. Private sector banks net NPA average is 0.71 and in public sector banks it is 0.41 as percentage of total assets. As we know that net NPA shows actual burden of banks. IndusInd bank has highest net NPA figure and HDFC Bank has lowest in comparison. PRIORITY NON PRIORITY SECTOR When we further bifurcate NPA in priority sector and Non priority sector, Agriculture + small + others are priority sector. In private sector ICICI Bank has the highest NPA with compare to other private sector banks. Around 72% of NPA in priority sector and around 78% in non-priority sector, we can see that in private sector banks have more NPA in non-priority sector than priority sector.

When we talk about public sector banks they are more in priority sector and they give advanced to weaker sector or industries. Public sector banks give more loans to Agriculture, small scale and others units and as a result we see that there are more number of NPA in public sector banks than private sector banks. BOB given more advanced to priority sector in 2008-09 than other four banks.

29

But when there are comparison between private bank and public sector bank still ICICI Bank has more NPA in both priority and non-priority sector with the comparison of public sector banks. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and initiative in each sector. Above we also discuss that ICICI Bank has highest deposit investment- advance than other banks. Now, when we compare the all public sector and private sector banks on priority and non-priority sector the figures are really shocking. Because in compare of private sector banks, public sector banks numbers are very large.

Here, there are huge differences between private and public sector banks NPA. There is increase in new private sector banks NPA of Rs.4148 crores in 2008-09 which is almost 66% raise than previous year. In public sector banks the numbers are not increased like private sector banks.

30

Conclusion
The growing NPAs affect the health of banks, profitability and efficiency. In the long run, it eats up the net worth of the banks. We can say that NPA is not a healthy sign for financial institutions. When we further bifurcate NPA in priority sector and Non priority sector, Agriculture + small + others are priority sector.In private sector ICICI Bank has the highest NPA with compare to other private sector banks. Around 72% of NPA in priority sector and around 78% in non-priority sector, we can see that in private sector banks have more NPA in non-priority sector than priority sector. . Public sector banks give more loans to Agriculture, small scale and others units and as a result we see that there are more number of NPA in public sector banks than private sector banks. BOB given more advanced to priority sector in 2008-09 than other four banks. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and initiative in each sector. Above we also discuss that ICICI Bank has highest deposit investment- advance than other banks. Now, when we compare the all public sector and private sector banks on priority and non-priority sector the figures are really shocking. Because in compare of private sector banks, public sector banks numbers are very large. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. For the recovery of NPAs a broad framework should be evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs should have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements. A strong framework and clear idea will bring advantage to the situations prevailing in the banks.

31

REFERENCES
search.ebscohost.com Indian Banks Association: www.iba.org.in www.scribd.com
RBIGuidelines.htm

Articles:
Management of NPAs Trends and Challenges by Gurudas Saha (March, 2005) Evaluating Performance of Banks through CAMEL Model: A Case Study of SBI and ICICI by B S Bodla and Richa Verma Resolution Strategies for Maximizing Value of Non-Performing Assets (NPAs) is by Tamal Datta Chaudhuri SARFAESI Act 2002 Is it a Boon to Securitization or a Tool for NPA Management? by Rajeswari Krishnan The Long Road to Basel II Implications for Indian Banks is by Manoranjan Sharma Approach to Basel II by Shyamala Gopinath (December, 2004) Indias Experience with Recovery from Non-Performing Assets (NPAs) by Tamal Datta Chaudhuri Experience of Asian Asset Management Companies (AMCs): Do they Increase Moral Hazard? Evidence from Thailand is by Akiko Terada-Hagiwara and Gloria Pasadilla Dealing with the Non-Performing Loan Problems: Taiwans Experience is by Wei-Chiao Huang, Wei-Jang Huang and Christina Y Liu (2001 and 2002) Management of Non-Performing Assets in China is by Tamal Datta Chaudhuri

32