NON PERFORMING ASSETS IN

ALLAHABAD BANK
PROJECT REPORT
In Partial fulfillment for the award of
Requirements for the award of the degree of
Master of Business Adinistration
DECLARATION
I here by declare that the project report titled !NON PERFORMING
ASSETS IN ALLAHABAD BANK" prepared under the guidance ###
(finance department) of #### towards partial fulfillment for the
requirement of award of M$B$A$
The Project report has not been submitted to any other University for
the ward of any !egree or !iploma"
####

CHAPTERISATION
#$PT%R & I I'TR(!U#TI('
#$PT%R & II )RI%* PR(*I+% (* ++$)! )',
#$PT%R & III (P%RTI('+ !%*I'ITI('-
#$PT%R & I. 'Ps & ' '+/TI#+ -TU!/
0 1%'I'2 '! 'TUR%
3 #U-%- *(R 'Ps
4 12'ITU!% (* 'Ps I'
++$)! )',
#$PT%R & . I1P#T (* 'Ps
0 I1P#T (* 'Ps I'
++$)! )',
3 R%#(.%R/ (* 'Ps I'
++$)! )',
#$PT%R & .I 1'2%1%'T (* 'Ps
4 1'2% 'Ps
5 #(11ITT%%-
#$PT%R & .II *I'!I'2- '! ()-%R.TI('-
#$PT%R & .III #('#+U-I(' '! ()-%R.TI('-
#$PT%R & I6 PR(7%#TI(' (* 'Ps
CHAPTER % I
INTROD&CTION

INTROD&CTION TO THE TOPIC'
The Indian ban8ing sector underwent a major transformation in 09:9
when a large number of ban8s were nationali;ed" The policy thrust in those
days was to spread ban8ing services far and wide into the country side" nd
this objective was largely achieved"
)an8 branches increased rapidly and deposit mobili;ation rose
steadily" This has undeniably aided the process of bringing in large amount
of savings into the financial mar8ets for development purposes" )esides<
targeted lending to priority sectors they led to capital becoming available to
new and small enterprises" The e=pansion of these services not surprisingly<
did not come without any ill effects" loans given the ban8s are there assets
and as the repayment of several of the loans were poor< quality of these
assets was steadily deteriorating" #redit allocation became >loan melas?<
loan proposal evaluations were slac8 and as a result repayments were very
poor"
The first and fore most casualty of ban8ing sector reforms initiated in the
early nineties has been > non@performing assets?('P)< which were cutting
into the ban8s bottom lines in two ways@
0 )an8s were not able to boo8 interest accrued on such assets
3 They had to ma8e provisions for these 'Ps
(ver the years< much has been tal8ed about 'Ps< which has also become
(ne of the parameters to decide partial autonomy to be given to select
ban8s" $ow ever< the emphasis so far has been only on identification and
quantification of 'Ps rather than on ways to reduce and upgrade them"
Though< the term 'P can notes a financial asset of a commercial
ban8 which has stopped earning an e=pected reasonable return< it is also a
reflection of the productivity of the unit< firm< concern< industry and nation
where that asset is idling"
.iewed with this broad perspective< the 'P is a result of an
environment which prevents it from performing up to e=pected levels"
$ow ever< the global slow down and the fall of ban8s world wide
give IndiaAs financial system some breathing space to catch up" The problem
of 'Ps is two fold@
0 Tac8ling the e=isting 'Ps
3 Preventing a build up for additional 'Ps
The 'P level has to be brought down to at least BC to :C" *or this<
Indian ban8s need to set up evaluation of various credit ris8s< to develop
advance s8ills in ris8 management and a need to set up speedy recovery
mechanism"
The 'Ps in ban8 balance sheet reflects the health the economy" If
the economy is doing well and if all its sectors are doing well< ban8 'Ps
will also show an improvement" $ence< it is a joint responsibility of policy@
ma8ers< judiciary< entrepreneurs and ban8ers to collectively fight this
problem"
The ban8ing system in India remains handicapped in the absence of an
adequate legal framewor8 to ensure e=peditious recovery of loans as also
enforcement of security"
#omprehensive ban8ing legislation and enforcement machinery be
put in place not only to reduce the quantum of 'Ps but also to ensure that
such a framewor8 serves as a deterrent for future defaulters"
>)an8s are yet another sector where the rot has already set inD?
It is high time to ta8e stringent measures to curb 'Ps and see to it
that the >'('@P%R*(R1I'2 --%T-? may not turn ban8s into
>'('@P%R*(R1I'2 )',-?< instead< steps should be ta8en to convert
>'('@P%R*(R1I'2 --%T-? into >'(E@P%R*(R1I'2 --%T-?"
>It is now or never?"
The study conducted to analyse the importance of 'Ps in the
ban8ing sector" The study lays emphasis to find out the causes for 'Ps<
impact of 'Ps in ++$)! )',< management of 'Ps and
projection of 'Ps over the ne=t three years"
The study aims to gain an insight into tha aspect of 'Ps and impact
of 'Ps on the profitability of the ban8"
The procedure adopted for the study includes the primary statistical
tools to correlate results and analy;ing the trend of 'Ps in over the last 4
years and projecting the e=tent of 'Ps in the ne=t 4 years in
++$)! )',"
In India< 'Ps< which are considered to be at higher levels than those
in other countries< of late< attracted attention of public and the subject of
high 'Ps in ban8s has also been frequently raised in various areas" These
developments have promoted us to underta8e a study of 'Ps in ban8s< to
understand the problem< its genesis and influence on ban8ing sector"
NEED AND IMPORTANCE'
%ver since introduction and implementation of prudential norms<
management of non performing advances has become the most important
issue before the ban8s"
R)I has therefore advised that ban8s should have a well@laid recovery
management policy approved by the board and the same should be put in
place for meticulous compliance so that the level of 'P can be brought
down"
1anagement of 'on@performing advances covers both recovery of
'P as also regulars review monitoring of 'P accounts< write off etc in
terms of prudential norms issued by R)I"
part from up gradation and cash recovery< the ban8 has introduced
several (T- modules aiming at various types of borrowers to ensure
recovery through compromise settlement" *urther< various modifications are
also made for operational aspects of the said (T- modules based on infield
e=periencesFrevised norms issued by R)I from time to time and changed
ban8ing scenario to ma8e the modulesFschemes more effective and fruitful"
part from recovery of 'Ps< various other important issues li8e review of
'P accounts< monitoring of suitified accounts" !ecreed debts< waiver of
legal action in deserving cases< write off of bad debts< delegated authority<
appropriation of recovery in 'P accounts< estimation of sacrifice< disclose
of information< guidelines in respect of implementation of the securiti;ation
ct@3GG5 and sale of financial asset etc< are also important in day to day
functioning of the branchesFoffices"
AIM OF THE PROJECT '
To assess the impact of role of the non@performing assets ('PAs) on
the profitability of the ban8"
OBJECTI(ES'
0 To study the nature and cause of 'Ps
3 To assess the growth and magnitude of 'Ps in ++$)!
)',"
4 To study the measures ta8en by ++$)! )', to reduce
'Ps"
METHODOLOG)'
0 Personal interviews and discussions are conducted with the officials
of the ban8"
3 %=pertAs opinions soughted on various aspects dealing with 'Ps"
4 nalysis of annual report< profit and loss account and balance sheet of
++$)! )',"
SCOPE OF THE ST&D)'
The study is laid on macro level and to find the impact of 'Ps in
++$)! )'," It also analyses the efficiency of recovery measures
underta8en by ++$)! )',"
PERIOD OF ST&D)'
-tudy is underta8en regarding the 'Ps in ++$)! )', for
period of 4 years"
LIMITATIONS'
0 -tudy is entirely based on data willingly provided by the ban8
officials"
3 -tudy is confidential in nature< so the views e=pressed by the officials
may be a general opinion"
4 The findings of the -tudy can not be applied to other branches of
++$)! )',"

CHAPTER % II
ORGANISATION PROFILE


A BRIEF PROFILE OF ALLAHABAD BANK'
BEGINNING'
The effects of the first war of independence of 1ay< 0HBI were
cooling down by the start of 0H:G" +ater there was a perceptible increase in
trading and business activity which made the conditions propitious for the
emergence of ban8ing industry which till that time was confined to setting
up offices and branches at ports" need was being clearly felt to have
ban8ing facilities in the interiors of the country too" Therefore< there then
began among a group of few prominent persons both %uropeans and Indians<
in llahabad< a series of discussions for the establishment of a ban8 with its
head office in that town on 0B
th
march< 0H:B"
few wee8s later< the formalities has been completed
and with a subscribed capital of Rs"4"GG lacs on 35
th
pril< 0H:B< a wee8
after the association had been incorporated< T$% ++$)! )',
+I1IT%!< in terms of an announcement< published in The Pioneer of that
date< >open to receive money in current and fi=ed deposit account?" !rafts
negotiable at par at nine Indian towns could be secured >at moderate rate of
e=change?" )ills of e=change on +ondon were also available" The ban8 was
from the first 8een on fi=ed deposits< being prepared to pay :C on money
requiring 03 months notice of withdrawal" 'o charge was made on current
deposit account< but no interest was paid either"
THE RAPID RACE'
The story of the ban8As second century of e=istence is a story of
rapid development and fast e=pansion" draft bill which created quite a
flutter was introduced on 34
rd
!ecember< 09:I with provisions of control
over ban8ing policy and was referred to a select committee on 3:
th
march
09:H" fter critical deliberations< the bill passed through and came in to
effect from 3
nd
*ebruary 09:9" The measure of social control< a midway
measure between public ownership and private control of ban8ing< however<
could hardly produce the intended impact"
The most significant step was the liberali;ed branch licensing
policy of the R)I with the objective of ma8ing ban8s spread their activities
to either to neglected rural un ban8ed and under ban8ed areas" llahabad
ban8 responded to this challenge with almost missionary ;eal" Ehen the first
one hundred branches too8 a period of one hundred years< the ne=t one
hundred branches too8 only B years from 09:5 to 09IG" the number branches
at that time of nationali;ation were 0B0 increased to 440 at the end of 09I4
and was close to BGG by 09IB end "
notable development was the introduction of lead ban8
scheme in !ecember< 09IB under which major ban8s were allotted
responsibility of the 44I districts of the country where they were e=pected to
be development by providing integrated ban8ing facilities" The lead ban8
was responsible to survey their economic potentialities in the districts
allotted< identify growth centers for branch e=pansion and estimate the credit
gaps" llahabad ban8 has been functioning as lead ban8 in 0G districts in
U"P" and one district each in 1"P" and Eest )engal"
(ne of the crucial aims of the ban8s nationali;ation was increasing
credit flow to the priority sector including wea8er sections of the society"
The ban8 had rationali;ed its operations to meet this requirement"
great event in the history of ban8ing industry was the
'TI('+I-TI(' of fourteen commercial ban8s each with deposits
e=ceeding Rs"BG crores on 09
th
7uly< 09:9" llahabad ban8 was proud to be
one of them" (ur ban8s position at the time of nationali;ation was 0:9
branches< deposits Rs"035"9G crores< advances Rs"HB":5 crores< paid@up
capital Rs"0"GB crores< net profit Rs"G"5G crores< wor8ing fund Rs"04B"GG
crores" The measure of ban8 nationali;ation brought under the control of
public@sector HBC of the deposits and advances of the total ban8ing
system" It is in pursuance of this objective that the ban8 is increasingly
catering to the needs of the priority sectors of our economy"
CHAPTER % III
OPERATIONAL DEFINITIONS


OPERATIONAL DEFINITIONS'
*$ BANK RATE'
It is the rate at which the R)I lends to other commercial ban8s" It is the rate
at which the R)I re@discounts the bill of e=change" It acts as a signal to the
economy on the monetary policy"
+$ BANK CREDIT'
The credit e=tended by ban8s to its customers"
,$ NON-PERFORMING ASSETS'
'P is a loan (whether term loan< cash credit< overdraft or bills discounted)
which is in default for more than three months" In case of such assets< the
income should be shown on receipt basis in ban8As boo8s and not on due
basis"
.$ GROSS NON-PERFORMING ASSETS'
)an8 even after ma8ing provisions for the advances considered
irrecoverable< continued to hold such advances in their boo8s is termed as
2'P"
/$ NET NON-PERFORMING ASSETS'
'et non@performing assets are gross 'Ps less provision made in the
accounts< balance in interest suspense account< claims received from
!I#2#< and amounts received in compromise settlements"
0$ CASH RESER(E RATIO 1CRR2'
%very commercial ban8 is required to 8eep a certain percentage of its
demand and time liabilities (deposits) with R)I (either as cash or boo8
balance)" R)I is empowered to fi= the #RR between 4C and BC"
3$ STAT&TOR) LI4&IDIT) RATIO 1SLR2'
#ommercial ban8s are also required to 8eep (in addition to #RR)liquid
assets in the shape of cash< gold or approved securities as a certain
percentage of their net demand and time liabilities('!T+)"
5$ CAPITAL ADE4&AC) RATIO 1CAR2'
)an8s are required to maintain a minimum capital to ris8 assets ratio< which
helps the ban8 to survive even during sub stainable losses" (To ensure good
performance< R)I has specified minimum adequate capital for ban8s)"
6$ CAMELS'
s per the recommendation of wor8ing groups set up by R)I on
Jsupervision of ban8sA a new approach has been adopted in the annual
financial inspection of ban8s"
It evaluates ban8s &
#PIT+ !%KU#/
--%T KU+IT/
1'2%1%'T
%R'I'2-
+IKUI!IT/
-/-T%1 '! #('TR(+"
*7$ (RS'
.oluntary retirement scheme< which is issued as a tool to remove the surplus
staff in a ban8 organi;ation" ($owever< .R- for ban8s had been cleared by
1inistry of *inance in 'ovember 3GG3)"
**$ RE-CAPITALISATION'
It is a means through which the government infuses fresh additional capital
in to the wea8 ban8s to restructure their business" This is also a budgetary
support for wea8 ban8s"
*+$ RISK 8EIGHTED ASSETS 1R8A2'
ccording to the ris8 involved in the assets of a ban8< they are given some
weightage" R)I from time to time has been changing the weightage given to
various classes of assets"
*,$ RET&RN ON ASSETS 1RAO2'
This is profit after ta= as percentage of average total assets of average total
assets of current and previous year" Total assets are ta8en net of revaluation<
advance ta=< and miscellaneous e=penditure to the e=tent not written off"
*.$ RET&RN ON IN(ESTMENTS 1ROI2'
This is ratio of interest and dividend income earned as percentage of average
instruments of current and previous year" Interest earned considered here
e=cludes interest earned on advances"
*/$ OPERATIONAL E#PENSES'
%=penses incurred by ban8s other than interest and ta="
*0$ CAPITAL STR&CT&RE'
TI%R@ 0< TI%R@ 3
)an8s and *Is should have the capital structure as defined by R)I"
TI%R@ 0 #apital is the most permanent and readily available support against
une=pected losses"
It consists of &
0" paid up capital
3" statutory reserves
4" capital reserves
5" (ther disclosed free reserves"
+essL 0" %quity investments in subsidiaries
3" Intangible assets
4" #urrent and accumulated losses< If any"
Tier@ 3 #apital is not permanent or< is not readily available"
It consists of@
0" Undisclosed reserves and cumulative preference shares
3" Revaluation reserves
4" general provision and loss reserves
5" $ybrid debt capital investments
B" -ubordinate debt"
'(T%L Tier@ 3 #apital should not be more than Tier@ 0 #apital"
*3$ DEBT RECO(ER) TRIB&NAL 1DRT2'
It is a recovery mechanism which was set up 1inistry of *inance in
0994 under a separate act" The defaulter can apply to the !RT for the
settlement of the debt suggesting the terms on which he wants to settle" The
tribunal will hear both the parties and pass the final which will bind both the
parties"
*5$ SETTLEMENT AD(ISOR) COMMITTEE 1SAC2'
This committee has also been set up by 1inistry of *inance to suggest
measures for the quic8 recovery of loans and settle the accounts
permanently"
*6$ ASSET RECONSTR&CTION COMPAN)9F&ND 1ARC2'
The principal objective of R# is to ta8e up the bad and doubtful
assets of the ban8s< which are in the recovery process< at a discounted price
in the form of 'P<swap bonds"( These ban8s would qualify for the -+R
investments)"
CHAPTER % I(
NPA:S ANAL)TICAL ST&D)

NPAs % AN ANAL)TICAL ST&D)'
MEANING AND NAT&RE OF NPAs$
2ranting of credit facilities for economic activities is the main reason
of ban8ing" part from raising resources through fresh deposits< borrowings
and recycling of funds received bac8 from borrowers constitutes a major part
of funding credit dispensation activity" 'on@recovery of installments as also
interest on the loan portfolio negates the effectiveness of this process of the
credit cycle" 'on recovery also affects the profitability of ban8s besides
being required to maintain more owned funds by way of capital and creation
of reserves and provisions to act as cushion for the loan losses" voidance of
loan losses is one of the pre occupations of the managements of ban8s"
Ehile complete elimination of such losses is not possible< ban8 management
aims to 8eep the losses at a low level"
To begin with< it seems appropriate to define 'on@performing advance<
popularly called >'P?"
'on performing advance is defined as
An advance where payment of interest or repayment of
installment of principal ( in case of term loans) or both remains
unpaid for a period of two quarters or more. An amount under any
of the credit facilities is to be treated as past due when it is
remains unpaid for 30 days beyond due date.
s per recommendation of 'arasimham committee< it has been decided that
credit facilities granted by ban8s will be classified in to JPerformingA and
J'on performing assetA"
!"A is a loan ( whether term loan# cash credit# overdraft#
or bills discounted) which is in default for more than three
months. $n case of such assets# the income should be shown only
on receipt and not shown in the ban%s boo% on a due basis.
The ratio of 'on@performing assets to advances reflects the quality of a
ban8As loan portfolio"
distinction is often made between J2ross 'PA and J'%T 'PA"
'%T 'P< which is obtained by deducting from gross 'P items li8e
interest due but not recovered< part payment received and 8ept in suspense
account< etc"< is internationally accepted as the more relevant indicator of
financial health of the ban8s"
It is the level of non@performing assets which< to a grant e=tent<
differentiates between a good and bad ban8" The subject of high 'P levels
in ban8s has also been frequently raised in various area"
IMPORTANCE OF NON PERFORMING ASSETS'
The one major cause for the current wea8ened state of ban8ing sector
is the level and volume of 'Ps" The problem has not been loo8ed at in its
proper perspective" !escriptions such as decreased portfolio and figures
running into thousands of crores have all led to treating the problem as a
major one@time aberration requiring emergency treatment" The casual
e=planations & political interference< willful defaults< targeted lending and
even fraudulent behavior by ban8s & allowed them selves to be pressuri;ed
into lowering their guard in the one area of business that is their bread and
butter of e=istence & ris8 assessment"
+ending to priority sectors or medium and small companies is
li8ely to be the ban8As main activity in time to come" The bigger< established
corporations would have the wide world to choose from and to meet their
requirements" The shift to medium@si;ed borrowers and slightly ris8ier
lending will form the prime activity of all ban8s" The problem will then< be
to ensure that such lending is justifiable on a commercial criterion"
The high level of 'Ps in Indian ban8ing sector is the result of
application of prudential norms of accounting from 0993 onwards" The
introduction of ## is subject to the 'P level being brought down to less
than BC from the present level of around 0:C" The government of India
already initiated several steps to help ban8s in reducing their 'Ps" -everal
of these 'Ps are still outstanding in the boo8s of accounts because they are
not supported by adequate provisions"
Introduction of prudential norms on income< recognition< asset
classification and provisioning during 0993@94 and other steps initiated apart
from bringing in transparency in the loan portfolio of ban8ing industry have
significantly contributed towards improvement of the pre@sanction appraisal
and post sanction supervision which is reflected in lowering of the levels of
fresh accretion of 'Ps of ban8s after 0993"
NAT&RE OF NPAs '
There is no gain saying the fact that Indian ban8ing has been the
governmentAs step child as far as economic policy is concerned" The two
rounds of ban8 nationali;ation in 09:9 and in 09HG created public sector
ban8ing behemoths which were slothful< indifferent and anachronistic"
(n the one hand a protected environment ensured that ban8As never
needed to develop sophisticated treasury operations and asset liability
management s8ills" (n the other hand a combination of directed lending and
social ban8ing relegated profitability and competitiveness to the
bac8ground" The net result was unsustainable 'Ps and consequently a
higher effective cost of ban8ing services"
The crucial factor that decides the performance of ban8s now@a@days is
the recogni;ing 'Ps in their advances at the earliest"
'Ps are those loans given by a ban8 or financial institutions where
the borrower defaults or financial institution delays interest or principal
payment" )an8s are now required to recogni;e such loans faster and then
classify them as problem assets and ta8e measures to recover them"
#lose to 0IC of loan made by Indian ban8s are 'Ps & very high
compared to say BC in ban8ing systems in advanced countries" The burden
of 'Ps is a millstone round the nec8s of the ban8s" The 'Ps are posing a
major threat not only to the ban8ing sector but for the economy as a whole"
CA&SES FOR NON-PERFORMING ASSETS'
strong ban8ing sector is important for a flourishing economy" The
failure of the ban8ing sector may have an adverse impact on all other
sectors" The Indian ban8ing system< which was operating in a closed
economy< now faces the challenges of an open economy" )an8s started
getting concerned about non@performing assets consequent to the
introduction of prudential accounting norms"
'Ps reflect the performance of ban8s" high level of 'Ps
suggests high probability of a large number of credit defaults that affects
cash flows" ccording to the R)I< the gross 'Ps of scheduled commercial
ban8s rose from 35"5C in 1arch 3GG: to 35"9C in 1arch 3GGI"
Thus< increasing 'Ps are a matter of concern for ban8s" In India< the
ban8ing sector is still not strong on the solvency front" $aving adhered to
stipulated capital adequacy norms does not suggest that a ban8 is strong
enough" It is important to improve the quality of assets and ensure timely
recovery of loans"
IMPACT OF PRIORIT) SECTOR AD(ANCES OF NPAs'
There is a general perception that the prescription of 5GC of net ban8
credit to priority sector have led to higher level of 'Ps< due to credit to
these sectors becoming stic8y"
The information obtained with regard to the 'Ps in the priority
sector advances< their proportion to total 'Ps of ban8s< the 'Ps in non@
priority sector advances< their proportion to total 'Ps of the
++$)! )', as on 40
st
march 3GGB<3GG: and 3GGI revealed that
the proportion of 'Ps in priority sector to total net 'Ps were I"GHC<
3"4IC and 0"3HC respectively"
The proportion though lesser than 'Ps in non@priority sector< reveals
that the incidence of 'Ps in priority sector is much higher in view of the
fact that the priority sector advances constitute only 4GC to 4BC of the gross
ban8 credit during the period" $owever< gradual increase in the proportion
on 'Ps in non@priority sector have been increasingly seen in borrowal
accounts of industrial sector during the recent years" It is observed that the
share of priority sector 'Ps of ++$)! )',< though reduced
from I"GHC to 3"4IC< was significantly higher than the proportion of
priority sector advances to total advances< which ranged between 4GC and
4BC during three year period"
1anagement of non@performing assets< now a days is a critical
performance area for ban8s< especially in public sector ban8s" It is better for
Indian ban8s to try for the international standards in terms of efficiency<
productivity< profitability< asset recognition norms< and provisioning and
capital adequacy to compete in the competitive new economy" t present<
any borrowal account not serving for either interest or principal for at least 4
months will be called non@performing assets or 'Ps"
Reserve ban8 of India (R)I) has been implementing stringent rules
and regulations for asset classification from the year 0990@93< in a phased
manner" It includes adoption of new method in measuring profitability<
performance and evaluation of assets< to find the financial conditions of
ban8s"
There are several reasons for an account becoming 'P" These include L
0" -luggish legal system
0 +ong legal tangles
3 #hanges that had ta8en place in labour laws
4 +ac8 of sincere effort
3" *unds borrowed for a particular purpose but not used for the said purpose
4" Project not completed in time"
5" -carcity of raw materials< power and other resources"
B" Poor recovery of receivable"
:" Industrial recession"
I" %=cess capacities created on non@economic costs"
H" In@ability of the corporate to raise capital through issue of equity or other
debt instruments from capital mar8ets"
9" )usiness failures"
0G" !iversion of funds for e=pansionMmoderni;ationMsetting up new
projectsMhelping or promoting sister concerns"
00" %=ternal factors li8e raw material shortage< raw materialM input price
escalation< power shortage< industrial recession< e=cess capacity< natural
calamities li8e floods< accidents"
03" *ailure< non paymentMoverdue in other countries< e=ternali;ation
problems< adverse e=change rate etc"
04" 2overnment policies li8e e=cise< import duty changes< de@regulation< and
pollution control orders etc"
05" Eilful defaults< siphoning of funds< fraud< disputes< management disputes<
mis@appropriation etc"
0B" !eficiencies on the part of the ban8s vi;" in credit appraisal< monitoring
and follow@up< delay in settlement of paymentsMsubsidiaries by government
bodies etc"
CONCL&SION REGARDING CONTRIB&TOR)
REASONS '
The study of about 9GG top 'P accounts in ++$)! )',
has been tabulated from the available information revealed that the
following are the important causative factors for units becoming sic8Mwea8
and constantly accounts turning 'P in the order of prominence"
0 !iversification of funds mostly for e=pansionFdiversificationF
moderni;ation" Ta8ing up of new projects< is the single most
prominent reason" )esides being so< this factor also has significant
proportion of cases< when compared to other factors"
3 Internal factor such as failure of business (products)< inefficient
management< inappropriate technology< product obsolescence"
4 %=ternal factors such as industrial recession< price escalation< power
shortage< accidents etc"
5 TimeFcost over run during the project implementation stage leading
to liquidity strain and turning 'P in to ne=t factor"
B (ther factors in order or prominence are government policies li8e
changes in importFe=cise duties etc< willful default< fraud< disputes
etc< and lastly< deficiencies on the part of ban8s delay in release of
limits in settlement of payments by govt" bodies"
CA&SES FOR AN ACCO&NTS BECOMING NPA'
#U-%- TTRI)UT)+% T( )(RR(E%R
0" *ailure to bring in required capital
3" Too ambitious project
4" +onger gestation period
5" Unwanted e=penses
B" (ver trading
:" Imbalances of inventories
I" +ac8 of proper planning
H" !ependence on single customer
9" +ac8 of e=pertise
0G"Improper wor8ing capital management
00"1ismanagement
03"!iversion of funds
04"Poor quality management
05"$eavy out side borrowings
0B"Poor credit collections
0:"+ac8 of quality control
#U-%- TTRI)UT)+% T( )',-
0" Erong selection of borrowers
3" Poor credit appraisal
4" +ac8 of supervision
5" Tough stand on issues
B" Too fle=ible on attitude
:" -ystems overloaded
I" 'on inspection of units
H" +ac8 of motivation
9" !elay in sanction
0G"+ac8 of trained staff
00"+ac8 of delegation of wor8
03"-udden credit squee;e by R)I
04"+ac8 of commitment to recovery
05"+ac8 of adequate technology
0B"+u8ewarm effort by staff to wor8
0:"+ac8 of technical personnel and ;eal to wor8"
I" (T$%R #U-%-
0" +ac8 of infrastructure
3" *ast changing technology
4" Unhelpful attitude of the govt"
5" #hanges in consumer preferences
B" Increase in material cost
:" 2ovt" policies
I" #redit policies
H" Ta=ation laws
9" #ivil disturbances
0G"Political hostility
00"%=ternal pressure
03"-luggish +egal -ystem
04"#hanges related to ban8ing amendment act"
R)I should ta8e stringent measures from time to time to govern and
supervise the operation of ban8s by introducing new set of norms of
international standard" This is important since successFfailure of these ban8s
are strongly lin8ed to the performance of the financial system" In addition<
these measures help to weed out the in efficient ban8s and lead to
strengthening of the system" In India< the government has been recapitali;ing
wea8er ban8s in order to ma8e them operative< however this alone will not
improve the performance of the ban8s"
MAGNIT&DE OF NON-PERFORMING ASSETS IN
ALLAHABAD BANK'
In India< the 'Ps which are considered to be at higher levels than
those in other countries have of late< attracted the attention of public" The
subject of high 'P levels in ban8s has also been frequently raised in
various forces"
The percentage of 'Ps when compared to international standards is
definitely high for Indian ban8s" The problem of 'Ps is not only affecting
the ban8s but also the whole economy" In fact high level of 'Ps in Indian
ban8s is nothing but a reflection of the state of health of the industry and
trade" It has also been possible to combat the menace of 'Ps by bringing
down net 'Ps from the level of I"GHC as on 40"G4"3GGB to 3"4IC as on
40"G4"3GG:" Thus< in a single year net 'Ps declined by 5"I0C" This
compares favorably with the industry" 2ross 'Ps of the )an8 declined to
Rs" 0<50H"5: crore as on 40"G4"3GG: from Rs" 0<H50"BG crore as on
40"G4"3GGB while net 'Ps reduced to Rs" 4:3"H4 crore from Rs" HH:"9H
crore during the period" Provision #overage Ratio was brought up from
B0"34C during 3GGB@G: to I4"IBC during 3GG:@GI"
++$)! )', has laid thrust on 'P recovery<
specially ta8ing advantage of -ecuriti;ation and Reconstruction of *inancial
ssets and %nforcement of -ecurity ct< 3GG3< as also (ne Time -ettlement
-chemes formulated by R)I" In order to improve asset quality< the )an8 is
pursuing improved credit appraisal techniques supported by #redit Ris8
Rating< industry trend analysis etc" It has also strengthened credit@
monitoring system for improvement of asset quality and detection of early
warning signals etc"
EXTENT OF NPAs in PUBLIC SECTOR BANKS :
2006-07
There has been improvement in the health of the ban8ing sector in
terms of bad loans with the ban8ing industry showing a reduction in gross
and net 'Ps as a percentage of total advances during the year 3GG:" In
absolute terms however< there has been a growth in both gross as well as net
'Ps" The gross and net 'Ps stood at :B<HBG crores and 3H<3HB crores
respectively"Public sector ban8s< which accounted for the ma=imum share of
'Ps< have shown an increase in the share of standard assets in total
advances< which rose to H:C in the year 3GG:@3GGI" the ratio of gross 'Ps
to gross advances declined to 05C< net 'Ps to net advances also showed a
decline to I"5C"The number of ban8s having net 'Ps between 0GC @ 3GC
in the year 3GG:@GB is BC" The sector wise analysis of 'Ps of public sector
ban8s showed that the share of 'Ps of priority sector increased to 55"BC in
the year 3GG:" $owever< contrary to this phenomenon the share of 'Ps in
respect to ++$)! )', declined to 5"I0C and the share of 'Ps
of non@priority sector to BH"BC in the same period which may be attributed
to faulty lending policies adopted by the ban8"

Gross NPA/ Gross Advance
2003 2004 2005 2006
Public sector
bank
12.37 11.09 9.36 7.79
Private
sector
.37 9.64 .07 5.4
!orei"n
bank
6.4 5.3 5.25 4.62
CHAPTER % (
IMPACT OF NPA:s

IMPACT OF NPAs IN ALLAHABAD BANK'
This chapter focuses on e=amining the impact of
'Ps in ++$)! )'," s the 'P from year to year 8eep on
increasing< It is a difficult tas8 for the ban8s< especially public sector ban8s
to tac8le the high level of 'Ps"
)ut over the years the position of net 'Ps of
++$)! )', has improved as can be seen from the sharp decline
of I"GHC to 3"4IC to 0"3HC in 3GGI" This is due to time bound
implementation of prudential accounting norms and liberal infusion of
capital by the government to meet the capital adequacy requirements besides
strenuous recovery efforts by ban8s" If other netting items li8e recoveries
and pending adjustments< interest charged to the borrower accounts but not
ta8en to income accounts etc"< for which data are not available< are ta8en in
to account of the net 'P position< perhaps may further come down below
to 0"BC mar8"
RECO(ER) OF NON-PERFORMING ASSETS'
The second phase of reforms lays thrust on
improvement in the organi;ational efficiency of ban8s" The most crucial
factor being the improvement of profitability of ban8s in the reduction of
'Ps" This issue is closely connected with the overall stability of the
financial system and needs to be recogni;ed as such for underta8ing multi
pronged efforts" part from internal facts such preponderance of certain
traditional industries in the credit portfolio of certain ban8s< majority of
which are suffering from serious inherent operational problems< natural
calamities< policy and technological changes which increase the incidence of
sic8ness< labour problems and non@availability of the raw materials and other
such factors which are not with in the control of ban8s"
Ehile ban8s cannot be blamed for advances becoming non@
performing due to e=ternal factors< there is an urgent need that the ban8s
address the problems arising out of internal factors and this may call for
organi;ations restructuring of ban8s< a change in the approach of ban8s
towards legal action which is generally the last step and not the first step< no
sooner the account becomes bad and a clear thrust on improving the s8ill of
officials for proper assessment of credit proposal< ris8 factor and repayment
possibilities"
The following are the figures of gross and net 'Ps of
++$)! )', from the period 3GGB@3GGI"

2R(-- '! '%T 'Ps (* ++$)! )', P%RI(! (3GG5@3GGI)
%nd@
1arch
2ross
'Ps
C To
2ross
advances
C To
total
assets
'et
'Ps
C To net
advances
CTo total
assets
3GGB 0<H50"B
G
04":B 5"0B 3<03B I"GH 4"44
3GG: 0<50H"5
:
H":: 4"G3 5BG"44 3"4I 4"0G
3GGI 0<3H5"3
I
B"HG 0"33 BGH"55 0"3H 4"GG
!rastic measures should be ta8en for reducing the mounting level of
'Ps in terms of both JgrossA and JnetA" Though there are problems in
effecting recoveries and write off and in compromise settlements for ma8ing
recovery process more smooth and less time consuming and also create other
alternative channelsFagencies for recovery of debtFreduction of 'Ps"
2overnment and other authorities should devise policies having a bearing on
the industrial sector< agriculture and trade with a long term perspective to
avoid sic8ness in the industry and adverse impact on borrowers because of
sudden shift in the policy"
rresting of non@performing assets is fast turning out to be a myth"
!espite an aggressive recovery drive< the ++$)! )', has failed
to arrest the growth in 'Ps" s shown in the table the gross and net 'Ps
went on increasing< but most of the ban8s have been able to pave the growth
of 'Ps because of the e=pansion in their asset portfolio"
The fresh accretion of 'Ps during the financial year 3GG:@GB has
outpaced recovery of bad loans" This has come to light for the first time<
following the R)IAs directive to disclose the movement of 'Ps"
EFFECTI(ENESS OF LEGAL RECO(ER) MEAS&RES IN
BANKS'
In 40
st
march 3GG: it was noticed that as many as 05<4:<I49 suit file
cases were pending for an amount of Rs" 30<H35"93 crs" This procedure for
recovery of bad debts due to public sector ban8s has resulted in bloc8ing of
a significant portion of their funds in un productive assets< the value of hich
deteriorates with the passage of time"
The multiple litigation opportunities available to the borrowers for
delaying the verdictsFenforcement< courts being burdened< as they are< with
heavy wor8 load< coupled with the tardy decision ma8ing process in the
ban8s< rendered legal process less useful" The recovery made though the
legal measuresFcourts process indicated above is self@revealing" -tatements
collected from public sector ban8s visited during the study regarding the
recovery process< revealed that significant portion of the suits were pending
for more than a decade" In some cases there were legal cases which were
pending for 0B to 3G years< but no progress were made in the suit"
It was observed during the perusal of filed cases in public sector ban8s
that it too8 many years< in many cases more than a decade< for the courts to
settle the cases even after passing of the ordersFdecree< due to the multiple
litigation opportunities< eg"< referring to appellate courts< higher courts< full
benches etc< long time is ta8en for the settlement of the cases" !ifficulties
are also faced and delay is occurring in the e=ecution of decree"
part from the suit filing and legal measures the govt" and R)I has
suggested other vehicles to address the problem of 'Ps recovery"
mong these are &
i" !ebt recovery tribunals
ii" !ebt settlement tribunals
iii" )I*RF-I#
iv" +o8 adalats
v" sset Reconstruction company
vi" Revenue recovery act
vii" -ettlement advisory committee
viii" (ne time settlement scheme
i=" nd other means for the recovery of 'Ps in
++$)! )',"
)ut at the end< data suggests that the wor8ing of all these Jother vehiclesA
had fallen short of the e=pectations by not creating a fast trac8 system for
recovery of ban8 dues"
In a bid to speed up recovery efforts of the ban8s< debt recovery tribunals
(!RT) were set up in 0994 by an act of parliament" This was welcomed by
both ban8s and borrowers ali8e" *inally< it was hoped there would be a non@
confrontationist middle path where both ban8s and borrowers could meet"
-even years on both sides agree that a lot still needs to be done to ma8e the
!RTs an effective recovery tool for the Indian ban8ing sector"
t the end of 7une 3GGI< out of the total numbers of 00<IGG cases filed and
transferred to debt recovery tribunal (!RT) involving Rs" H<H::":I crs" (nly
0G5B cases have been decided and meager amount of Rs" 0IH"GH crs was
recovered"
8ORKING GRO&P'
Ta8ing a serious note of this situation< the central board of R)I in
3GGI reviewed the effectiveness of !RTs" R)I therefore decided to set up a
wor8ing group under the chairman ship of '"." !eshpande< former legal
advisor to R)I< comprising officials from the govt" ban8ing divisions< some
ban8ers and R)I officials to loo8 into the various issues and to suggest
measures for their effective functioning"
The terms of reference of the wor8ing group were mainly &
0 To loo8 into various issues and problems confronting the functions of
!RTs and to suggest measures to ma8e them more effective"
3 The group was also to e=amine the e=isting statutory provisions and
suggest necessary amendments to the 0994 act with a view to
improving the efficiency of the legal machinery"
)y august 3GGI the wor8ing group submitted its final suggestions &
0 *irst it was noticed that once an application had been made to !RT<
the branch managers and staff of the ban8s did not ta8e any interest in
the proceedings
3 In many cases< ban8 officials themselves were unaware of even the
e=ecution of loan documents and names of the borrowers"
4 The wor8ing group suggested that the ban8s and *Is should impress
upon their officers and staff to ta8e a 8een interest in the proceeding"
5 The group also said that the recovery officers should be given
assistance of agencies li8e police and professional debt recovery
agencies and the act be amended to provide licensing and regulating
professional recovery agencies"
B (ne of the most important recommendations was that not only should
there be a tribunal in every state< there should be more than one !RT
in the same state if the wor8load of the tribunals so justified" The
presiding officers of !RTs should not have more than 4G cases on the
board on any given data and there should not be more than HGG cases
pending before it at any given point of time"
The center on march 9
th
<3GGG introduced the recovery of debts due
to ban8s (amendment ) bill 3GGG" the aim was to correct the legal
anomalies pointed out by the supreme court such as the stipulation that
tribunals would continue to function not with standing court stay or
transfer of petitions" The amendments< first brought into force through
the ordinance from 0I
th
7anuary<3GGG addresses many of the other
lacunae" It empowers !RTs to attachN the property of the borrower on
filing of the applications to that effect"
CHAPTER % (I

MANAGEMENT OF NPA:s

MANAGEMENT OF NON PEFROMING ASSETS'
The new concepts of income recognition< asset classification
and provisioning have been introduced in phases with effect from 0993@94"
The impact of implementation of these prudential guidelines on the
commercial ban8s has been so strong that out of 3G nationali;ed ban8s< one
had to be merged and out of the remaining 09 ban8s e=cepting :< all others
were in red< showing net losses aggregating to a staggering level of 4BI4"04
crores" In march 0994 and still a higher level of Rs"5IGB"G0 crores in march
0995" *urther< due to staggering net loss revealed by the Indian ban8< the
aggregate net loss of the 09 nationali;ed ban8s even in march 099: was rs"
00B4"9: crores" $owever the aggregate net profit of 09 nationali;ed ban8s<
as on 40
st
march 099I was Rs"055B"5H crores"
This drastic change of profitability scenario of ban8s in India since
3GGB@GB was mainly due to recognition of income based on record of
recovery rather than on accrual basis< due to implementation of new
prudential norms"
The message is now very loud and clear" If a ban8 wants to survive
and grow< it has no option but to actually recover the interest and principal in
accordance with the terms of sanction" If it fails to recover< the ban8 branch
can not recogni;e the interest debited to the account as income" In case
income is not received as per prudential norms< the loan will become a 'P
with all its necessary consequences"

The 'P effects adversely the health of the ban8 in several ways as followsL
I"Potential interests income is derecogni;ed since it can not be boo8ed
as income< profit of the ban8 depletes"
II" !epending up on the categori;ation of 'P< that
is sub@standard< doubtful (!0<!3<!4) or loss assets ban8 will have to
ma8e provision against such loan ranging from 0GC to BGC or even
0GGC in case of some of assets" )an8s profitability is thus doubly
hurt" *irst income accruing on 'P is not recogni;ed and secondly
ban8 has to ma8e provision for it"
III" In case ban8 fails to upgrade the 'Ps into the
performing assets< it may be forced to incur legal e=penses by going
to court or recovery tribunals"
I." s a consequence profit and profitability of the
ban8 is depleted and it may face problem in maintaining the required
capital adequacy norm of HC or more"
." Inadequate capital adequacy may downgrade
ban8s rating and effect its growth and survival"
1anagement of 'Ps would have the following objectivesL @
0" Improving the quality of 'Ps to the performing status so that
income of such assets could be recogni;ed"
3" Upgrading the status of the asset so as to reduce the provisioning
requirement"
4" #leansing the balance sheet of ban8 of loss assets and also of
unsecured portion of doubtuful assets< ultimately leading to
improvement in the capital adequacy ratio of the ban8"
The above objectives can be achieved by adopting the following
strategies as a measure of reduction in the level out standing 'on performing
assets('Ps)"
.arious steps for reducing 'Ps
0 -tudying the problem of 'Ps & branch wise< amount wise and age
wise"
3 Preparation of a loan recovery policy and strategies for reducing
'Ps"
4 #reation of special recovery calls at headFregional level
5 Identifying critical branches for recovery
B *i=ing targets of recovery and draw the time bound action program
: -electing proper techniques for solving the problem of each 'P
I 1onitoring implementation of the time bound action plan
H Ta8ing corrective steps when ever found necessary while monitoring
the action plan ma8e changes in the original plan if necessary"
STRATEGIES FOR MANAGING NPAs'
0 .ery careful selection of new borrowers based on their credit
worthiness and ris8 analysis" -imilarly< for high credit rated e=isting
borrowers< need based credit requirement should be promptly met"
3 Post@sanction follow@up must be done meticulously at all levels< ie"<
branches< regional offices< ;onal offices and head offices" ll
prescribed operational information system such as annual
reviewsFrenewal< quarterly information system" Kuarterly review
sheets< monthly stoc8 statements< etc"< must be received and
meaningfully analy;ed and required follow@up action ta8en on time"
4 ll big borrower accounts (Rs"BG la8hs and above) falling in the
category of >standard assets? must be reviewed on quarterly basis and
prompt action ta8en if any adverse feature is noted< with a view to
ensure that they do not slip bac8 to a lower category i"e"< sub standard"
5 Those borrower accounts which are at the lower@end of the list of
>standard assets? deserve special attention and the moment they show
any sign of wea8ness to >slip@bac8?< immediate pro@active steps< for
lower end of list of sub@standard assets should be ta8en to prevent this
happening"
ACTION POINTS IN REGARD TO E#ISTING NPA
ACCO&NTS'
1ain action points in regard to e=isting 'Ps may be summed up as underL
I" The borrowal accounts lying at the top@end of the list of >sub standard
assets? are li8ely to be 'P of less than 0@year i"e"< they must have
slipped bac8 to this category only recently" ll@out efforts should be
made to upgrade these accounts and ma8e them performing (standard
assets) by recovering the derecogni;ed interest of all four quarters of
last year and at least three quarters of the current year or ta8ing other
relevant measures which are necessary to ma8e their performing assets"
II" Top priority should be given to upgrade progressively the quality of
all 'Ps to ne=t higher category of better@quality loan assets e"g"< !4
may progressively upgraded to !3 and !0 then to >sub@standard? and
ultimately to >standard? category over a period through persuasion<
nursing and rehabilitation based on major contribution from the
promoters" O$ere !0 &upto 0year< !3 & 0year to 4 years< !4 &more than
4 yearsP"
I" ll the securities charged to the ban8 should be >re@valued? on realistic
basis through approved values and provisions should be made strictly on
this basis"
II" In case upgradation on 'P appears difficult and value of security is
adequate to cover ban8As loan and charge on the same is validly created in
ban8As favor< serious efforts at senior level should be made through a >high
power? compromise committee to enter into one@time settlement with the
party in a manner that results into ma=imum recovery and lease write@off in
conformity with the available security level as far as possible" This may
involve some sacrifice in the form of >write@off? on the part of ban8 also"
I" In case where steps (ii) and(iv) do not succeed< ban8 has no option
but to resort to legal action within the limitations period either by going
to debt recovery tribunals (or) judicial courts" In case of agricultural and
other smaller loans ban8s may file recovery certificates under state acts
or approach lo8 adalats< if necessary for amicable settlement"
I" Tac8ling 'P< is a massive and intricate job< where involvement of
concerned staff at all relevant levels is a must and should be done by
forming >compromise committees? at regional< ;onal and head office
levels" This is also in terms of R)I guidelines"
I" -peciali;ed recovery branches should be set up at selected centers<
8eeping in view concentration of ban8s 'Ps and presence of !RT in
that area for e=peditious recovery of ban8 dues"
I"Top priority should be accorded for effective follow@up of pending
suits of e=ecution of the decrees"
II" Qones should be as8ed to submit a Jmonthly progress reportA in
a prescribed format in regard to 'P account"
III" ll the )I*R cases under rehabilitation program or under
ban8s own nursing program should be closely monitored so as to
ensure that the rehabilitation is on right course"

STRATEG) FLO8 CHART
STRATEG) - I STRATEG) % II
#areful selection of -election of top end of sub@
standard
'ew borrowers assetsR 0year S ta8e efforts to
T recover interest"
Post sanction follow up T
T #lassification of assets in toL
#lassification of assets and !0 up to 0 year
Kuarterly review !3 0 year to 4 years
T !4 U 4 years
Proactive steps for lower level T
(f sub@standard assets Revalue of collateral securities for
such advances and ma8e provisions
T
.alue of securities is adequate to given loan

T
If difficult (ne Time -ettlement
T
*orm compromise committees
T
-pecial recovery branches follow up
;
-ubmission of monthly progress report
;
#lose monitoring of )I*R cases
PRE(ENTING OCC&RANCE OF NE8 NPAs'
1anagers of rural and semi@urban branches generally sanction these
loans" In the changed conte=t of new prudential norms and emphasis on
quality lending and profitability< managers should ma8e it amply clear to
quality lending and profitability< managers should ma8e it amply clear to
potential borrowers that ban8s resources are scarce and these are meant to
finance viable ventures so that these are repaid on time and relent to other
needy borrowers for improving the economic lot of ma=imum number of
households"
$ence< selection of right borrowers< viable economic activity<
adequate finance< and timely disbursement< correct endues of funds and
timely recovery of loans is absolutely necessary preconditions for preventing
or minimi;ing the incidence of new 'Ps" )esides functioning as ban8ers<
they have to wor8 as a friend< philosopher and guide of borrowers< develop
mutual trust so as to ma=imi;e recovery in case of new loans"
ACTION PLAN IN REGARD TO E#ISTING NPAs'
These are as followsL
0 *requent recovery camps should be organi;ed on periodicities
synchroni;ing with harvesting seasons in case of agricultural loans
and at monthlyFbimonthly intervals in other cases< so as to recover
the ban8 dues from the sale proceeds on due dates"
3 #ash recovery of some minimum installments (3BC) of smaller
loans has now become a pre@condition for lodging claims with the !I
and #2#" $ence< branches must build genuine pressure on
borrowers to repay the installments whenever due< without
e=ception" *or this purpose even clerical and subordinate staff
member may also be involved for effecting recovery through
personnel contacts" To motivate the staffV managers may issue
appreciation letters to good performers"
4 !isposal of recovery certificates (R#s) cases< whenever pending in
large numbers should be ta8en up suitably by the regionalF;onal
managers with the district magistrate< who is laso chairman of the
district consultative committee (!##)"
5 -uitable colored printed post card in local languages may be
supplied for issuing notices of recovery camps and such camps may
be attended by regional managers or other senior officers of the
regional office"
B )an8 may also try recovery peons (in ban8 uniforms) who may visit
borrowers before 9 am or after Bpm for meeting the borrowers for
recovery of ban8 dues"
: >'o default certificate? or >)est borrower certificate? should be
given to such borrowers in a borrowers meeting specially organi;ed
for the purpose< in the presence of gram pradhan" This is li8ely to
encourage others to repay ban8 dues in time and create healthy
recovery climate in the area"
I Ehere recovery is not forthcoming despite due efforts< compromise
proposals should be mobili;ed by concerned region committee and
sent to ;onal officer for necessary action"
H $ead office and ;onal offices should also ta8e advantage of lo8
adalats" Ehere available< for stri8ing instant compromise judgements
in the presence of both parties" )ut <this will require necessary home
wor8 by the ;onal heads in advance so that large number of cases are
mobili;ed and concurrence ta8en from competent authority< before
attending the pre@determined dates of lo8 adalats"
9 In all those cases where recovery chances are blea8 and there is
neither any operation in the account nor any recovery has been
effected during the last 3@4 years< but the cases are eligible for
lodgment in terms of latest !0 and #2# guidelines< branches should
be advised to prepare all such cases correctly and send to nodal
center of the ban8 for prompt lodgement of claims with !0 and
#2#< 1umbai" -ubsequently< there should be close effective follow@
up by the ban8 with !I and #2#< 1umbai for prompt settlement"
0G fter settlement of those cases< the eligible portion can be written@
off by the competent authority as per ban8s rule so as to reduce the
amount of >loss assets? from the boo8s of the ban8"
00 In cases where adequate security is available< activity is continuing<
but the repayment is not coming< but ban8 may opt for legal action<
after giving due notice to borrowers"
03 There should be close follow@up with ban8s lawyers having large
number of un disposed cases and their selection or future assignment
of cases to them should be based on merit and performances"
(ne of the main reasons of low profitability of ++$)! )',
is the incidence of very high non@performing assets" )ut the level of 'P
varies significantly among different ban8s" (Range being as wide as 5C in
case of best ban8 to more than 5GC in case of worst ban8)"
-ignificantly< variation in the relative si;es of 'P is not related to the
si;e of the ban8 in terms of business or branch networ8" .ariation e=ist
between ban8s of comparable si;e< whether small or large< suggesting that
organi;ational culture and quality of management have played a crucial role
in determining the quality of loan assets or ban8s over all performance"
Thus< there is need to improve the quality of leadership and
management at various levels in the mean time< improvement in recovery
performance must be accorded top priority in ban8s corporate plans" The
maintenance of recovery discipline requires that boo8s vigorously pursue
recovery even for advances that have been provisioned against"
> +oan is not a charity and it has to be repaid on the due date come
what may"? -hould be the slogan of a good ban8er"
FLO8 CHART FOR ACTION PLAN
*requent recovery camps should be organi;ed at monthlyFbimonthly
intervals
T
#ash recovery of some minimum installments
T
!isposal of recovery certificates should be ta8en up
T
Issuing notices of recovery camps
T
Recovery peons may visit borrowers
T
!efault certificateF best borrower certificate should be given
T
#ompromise proposals should be mobili;ed
T
$ead office and ;onal office ta8e advantage of lo8 adalats
T
+odgment of claims with !T and #2#
T
fter settlement reduce the amount of loss assets from ban8 boo8s
T
(pt for legal action
T
#lose follow up with ban8s lawyers having large number of un disposed
cases
COMMITTEES AND RECOMMENDATIONS
I$ NARASIMHAM COMMITTEE REPORT <I9II=$
The government of India has appointed a high level committee under the
chairmanship of 1r" 1" 'arasimham< the former chairman of -)I< to
e=amin all aspects relating to the structure< organi;ation< functions and
procedures of the Indian financial system" The committee was appointed on
ugust 05< 0990 which submitted its report on 4G
th
'ovember 0990"
Ma>or re?oendations of t@e ?oittee reAatinB to NPAs '
0" -+R to be reduced from 4H"BC to 3BC over ne=t five years and
#RR to be brought down to 4C"
3" !irected credit@loans to priority sector< different interest
schemes< IR!P< IR%P etc" should be phased out the committee
was of the view that easy availability of credit was more
important than subsidi;ed credit to the rural poor"
4" 'ot more than 0GC of the aggregate ban8 credit should be
earmar8ed for the redefined priority sector"
5" #apital adequacy requirement (#R) should ta8e into account
mar8et ris8s in addition to credit ris8"
B" 1inimum capital to ris8 assets ratio be increased from HC to
0GC by 3GG5 in a phased manner"
:" n asset be classified as doubtful if it is in the substandard
category for 0H months in the first instances and eventually for
03 months and loss if it has been identified but not written off"
These norms should be regarded as minimum and brought into
force in a phased manner"
I" *or evaluating the quality of asset portfolio< advances covered
by government guarantees< which have turned stic8y< be treated
as 'Ps"
H" sset reconstruction fund (R*) should be constituted to ta8e
over the 'Ps of public sector ban8s at a discount"
9" *or ban8s with a high 'P portfolio< two alternative
approaches could be adopted" (ne approach can be that all loan
assets in the doubtful and loss categories< should be identified
and their reali;able value should be determined" These assets
could be transferred to asset Reconstruction #ompany which
would issue 'P swap bonds"
0G"Introduction of general provision of 0C on standard assets in a
phased manner be considered by R)I"
00"n incentive to ma8e specific provision< they may be made ta=
deductible"
03"doption of income recognition of asset classification and
provisioning norms to be compulsory"
04"-pecial tribunals should be set up for speedy recovery of the
ban8 loan dues"
05"There should be an independent loan review mechanism
especially for large borrowal accounts and systems to identify
potential 'Ps"
0B"The minimum share of government holdingFR)I holding in the
equity of nationali;ed ban8s should be brought down to 44C"

II$ (ERMA PANNEL REPORT
The committee which was headed by 1r" 1"-" .erma< *ormer
chairman of -)I< identified the specific ailments prevailing in the ban8ing
sector and come out with a panacea prescription"
The following are the recommendations of .erma panel L
The panel identified 4 wea8 P-)s and recommended a conditional
bail out pac8age of BGGGcrs"< out of which 4GGGcrs"< will be used for the
recapitali;ation of wea8 ban8s"
The most significant suggestion< however is the formation of a private
sector asset management company presided over by some of the most
talented professionals of the business" It will do away with the bureaucratic
hurdles li8e delayed decision ma8ing in disposing off the assets grabbed by
asset reconstruction fund"
The report also said about setting up of financial reconstruction
authority of statutory status will mar8 the beginning of a serious effort to
bring bac8 the ban8ing sector into a healthy state"
RBI MEAS&RES TO C&RB NPAs'
In view of the time factor involved in recovering 'Ps by legal
means< the R)I has come out with simplified non@discretionary guidelines
for compromise settlement of bad debts upto B crs for uniform
implementation by them"
NON % DISCRETIONAR) AND NON % DISCRIMINATOR)
NORMS'
The guidelines issued by R)I covers all outstanding< doubtful and loss
assets of Rs"B crores or less as on 1arch 40
st
< 099I and which had turned
into doubtful or loss assets subsequently also would be covered< according to
a statement issued by the I)" The R)I said these guidelines< which would
be operative up to 40
st
1arch< 3GG4< would cover 'Ps relating to all
sectors including small sector" #ases pending in courtsFdebt recovery
tribunalsF)I*R are covered under the guidelines subject to the consent
decree being obtained< the ape= ban8 averred and added cases of willful
default or malfeasance would not be covered" The amount of settlement
arrived at should preferably be paid in one lump sum" If not< at least 3BC
down payment and balance in settlements with in a period of one year
together with interest at the e=isting P+R from the date of settlement upto
the date of final payment"
RBI EASES NORMS ON NPA FOR ALLAHABAD BANK'
!ONE TIME SETTLEMENT"'
To achieve ma=imum reali;ation of public sector ban8s the R)I
simplified the guidelines for the recovery of 'Ps"
The revised guidelines will cover 'Ps relating to all sectors
including the small sector< but will not cover cases of willful default< fraud
and malfeasance" The ban8s should give notice to the defaulting borrowers
to avail of the opportunity for >one@time settlement? of outstanding dues"
Under the new guidelines< the minimum amount that should be
recovered under compromise settlement of 'Ps classified as doubtful (or)
loss< which would be 0GGC of the outstanding balance in the account" This
would be as on the date of transfer to the protested bills account or the
amount outstanding as on the date on which the account was categori;ed as
doubtful 'Ps whichever happened earlier"
The guidelines have been circulated to all public sector ban8s" The
R)I move comes in the wa8e of complaints by such ban8s that the
guidelines are infle=ible of retarded the progress in the recovery of 'Ps"
CHAPTER % (II
FINDINGS AND OBSER(ATIONS

FINDINGS AND OBSER(ATIONS'
0" The C of 'Ps of private sector ban8s is less as compared to the
public sector ban8s li8e ++$)! )',"
3" The C of net 'Ps to net advances of ++$)! )', is less
than the C of gross 'Ps to total advances (1ore provisioning)"
4" >2ross? S?'et? terms e=ist only in India"
5" ++$)! )', 'Ps are increasing when compared to that of
other nationali;ed ban8s"
B" 'et 'Ps of ++$)! )', are li8ely to reduce over ne=t 4
years than the 2ross 'Ps"
:" (verall 'Ps in ++$)! )', as a C of advances are in
decreasing trend< though the 'Ps in the absolute terms are
increasing"
I" !ue to compulsory lending to the priority sector< 'Ps are more in
++$)! )',"
H" The recovery of non performing assets is slow due to the sluggish
legal system prevailing in India"
9" Recognition of an account becoming an 'P is not done in time"
0G"'o proper credit appraisal"
00"!ue to high level of 'Ps in ++$)! )',< operationg
profits 8ept on decreasing"
03"!ue to high provisioning< the R( in ++$)! )', was in
negative terms"
04"%ven after providing Re@#apitali;ation facility by the government to
the wea8 ban8s< not much change has been observed in the
performance of the ban8s"
CHAPTER % (III
S&GESSTIONS
AND RECOMENDATIONS




S&GGESTIONS AND RECOMMENDATIONS '
Tac8ling the high level 'Ps is certainly a major concern for the
Indian ban8ing industry" Raising level of 'Ps is becoming a concern
for the ban8s"
The report on 'Ps in ++$)! )', conveys its concern
about management of 'Ps in the Indian ban8ing system"
The suggestion and recommendations are listed below L
0" ++$)! )', must employFadopt scientific approach for
appraisal before the loan is distributed and monitor it closely in real
time"
3" It must provide need based micro@credit for needy entrepreneur with
good proposals and implement a system for selecting a good
borrower"
4" It must build a credit information bureau to restrict the errant
borrower< from switching ban8s"
5" )an8s should always follow basic lending norms and ta8e quic8 credit
decisions"
B" It must brea8 up recovery to branch level networ8"
:" It must set up separate 'P cell at each branch level"
I" Ta8e every 'P case as a separate issue and analyse the need for
future findings from an economic point"
H" (pt for out of court settlements"
9" Remove the J2rossA and J'etA terms while distinguishing the 'Ps"
0G"2overnment should set up asset reconstruction company as proposed
by the 'arasimham committee< to ta8e over the bad loans of
commercial ban8s and salvage what they can"
00")an8s should develop advanced s8ills in ris8 management and
evaluation of various credit ris8s"
03"The regulatory authority should strengthen the debt recovery tribunal
by appointing more judge and adequate number of recovery officers to
dispose off the case"
04"Periodically a list of defaulters may be published to enable the ban8s
to ta8e necessary action against the defaulters"
05"mend the relevant laws li8e #P#< +imitations act< -tamp act<
%vidence act etc< to ensure that the ban8 default cases are dealt with
an altogether different basis with limited number of adjournments"
0B"R)I could lower the ban8As e=posure to individual borrowers< to bring
economic prosperity equally around the country"
0:"The government should see to that the strong ban8 should not be
merged with the wea8 ban8< as it may effect the performance of the
strong ban8"
0I"The ban8s should cut down the operational e=penses to bring ban8 the
bac8 on the trac8 of profitability" .R- is one such measure to reduce
the e=penses"
0H"2overnment should not provide any re@capitali;ation facility from
here after< as infusion of new capital may not restructure or lift the
ban8s performanceV hence the wea8 ban8s should be closed down"
ANNE#&RES
!isclosure in terms of R)I guidelinesL
a2 SiBnifi?ant Cerforan?e indi?ators
+77*-7+ +77+-7, +77,-7. +77.-7/ +77/-70
I"Percentage of shareholding
(f the govt" of India 0GGC 0GGC I0"0:C I0"0:C I0"0:C
II" Percentage of net 'Ps
to
'et advances 00"34C 0G"BIC I"GHC 3"4IC 0"3HC
III" !etails of provisions and
#ontingencies in pSl aFcL
(in crores) provision for standard advances
3 W G"3BC 4"3I 4"39 5"B0 H"9: 0B"GG
4 (thers @@@@ 9"BG @@@@@@ @@@@@@@ @@@@@@@
Provision made to 'Ps 054"43 3BG"B: 0I4"04 5IH"55 5G"GG
Provision for depreciation on
Investments (net) BB":5 4"H3 09"54 @BH":3 3H:":9
Provision for income ta= and
Eealth ta= 35"44 BI"I3 03G"G3 0GG"GG B5"GG
(ther provisions(net) @ G"5I 3"HH 00"04 @3"59 044"HI
Total provisions 33:"G9 43I"II 459"H5 503"HI B4G"H3
I." -ubordinated debt raised
s Tier II capital 33:":0 430":0 530":0 :30":0 :30":0
." #apital adeqacy ratio
0G"BGC 0G":3C 00"0BC 03"B3C 03"B4C
Business ratios'
+77*-7+ +77+-7, +77,-7. +77.-7/ +770-7/
i" Interest income as a C to
Eor8ing funds 9"I9C 9"50C 9"45C H"44C I"H4C
ii" 'on@interest income as a C
To wor8ing funds 0"04C 0"B9C 0"9GC 3"45C 0"BIC
iii" (perating profita as a C to
Eor8ing funds 0"3:C 0":9C 0"HIC 3"I4C 3":5C
iv" Return on assets G"0HC G"43C G"B9C 0"45C 0"3GC
v" )usiness(deposits plus 039 0B4 0H4 30B 3H3
dvances) per employee
in la8hs
vi" Profit per volume G"09 G"5G G"HI 3"5: 3"H:
in la8hs
MoDeent in NPAs'
+77*-7+ +77+-7, +77,-7. +77.-7/ +77/-70
i" 2ross 'P at the beginning
(f the year 0:95"0: 0H30"40 3GG4"HB 0H50"BG 050H"5:
ii" dditions during the year 5IG"B5 B4G":3 50G":G 4II"90 4B0"49
iii" !eduction during the year 3HG"49 4BG"GH BIG"9B HGG"9B B"BH
iv" 2ross 'Ps at the
end of year 0H30"40 3GG4"HB 0H50"BG 050H"5: 3H5"3I
v" 'et 'Ps at the
end of year 0GI5":5 00:G"0: HH:"9H 4:3"H4 3IG"IG
MoDeent of CroDisions toEards NPAs
+77*-7+ +77+-7, +77,-7. +77.-7/ +77/-70
i" (pening balance :50"4I I44"GB H33"B0 954"45 0G5:"00
ii" ddL provision made
during yr 054"43 3BG"B: 0H3":4 5IH"55 5G"GG
iii" +essL write bac8 of e=cess
Provision during year B0":5 0:0"0G :0"HG 4IB":I HB"50
iv" #losing balance I44"GB H33"B0 954"45 0G5:"00 0GGG"IG
MoDeent of CroDisions for deCre?iation on inDestents
+77*-7+ +77+-7, +77,-7. +77.-7/ +77/-70
i" (pening balance 5H"II 0G5"50 0GH"34 0G5"40 5B"3I
ii" ddL Provision made
during yr BB":5 0I"44 09"54 @@@@@@@@ 9B"43
iii" +essL write bac8 of e=cess
Provision during year @@@@@@ 04"B0 34"4B BH":3 @@@@@@@@
iv" #losing balance 0G5"50 0GH"34 0G5"40 5B"3I 05G"B9
LendinB to Cri?e sensitiDe se?tor
+77*-7+ +77+-7, +77,-7. +77.-7/ +770-7/
i" dvances to capital mar8et
-ector G"H9 :"9: 3"5: 5"HH 9"99
ii" dvances to real estate
sector 03"HG 3I"33 3I"90 004"5I 0::"5I
iii" dvances to
#ommodities sector 3G4"33 0I:"5: 0H:"45 0G9":4 I9"99

R%*%R%'#%-

'ews papers
)an8 maga;ines
Rewiew of literature
II) maga;ines
Internet
nnual reports of ++$)! )',