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BY
ANINDYA SANKAR KUNDU
(08BS0000328)
1
PROJECT TITLE
FACULTY GUIDE
Prof. Rajasree Nandy
ICFAI Business School
KOCHI
SUBMITTED BY
2
Declaration
PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS.” has been written and
under the able guidance and supervision of Prof. Rajasree Nandi, Finance
Faculty, IBS Kochi in partial fulfillment of the requirement for the Master Of
I also declare that this project is the result of my own effort and has not been
submitted to any other institution for the award of any Degree or Diploma.
Place: Kochi
Anindya Sankar Kundu
08bs0000328
3
Acknowledgements
If words are considered to be signs of gratitude then let these words convey the
very same.
I thank Prof. Rajasree Nandi, ICFAI Business School, Kochi, who has
sincerely supported me with the valuable insights into the completion of this
project.
Research Project.
4
TABLE OF CONTENTS
Declaration …………………………………………………………………………………………………………… 3
Acknowledgments ………………………………………………………………………………………………. 4
Abstract …………………………………………………………………………………………………………………. 7
1. Project Details
1.1 Objective of the project …………………………………………………………………… 9
1.2 Research Methodology………………………………………………………………………. 9
1.3 Scope of the project ………………………………………………………………………… 9
1.4 Sampling Methods …………………………………………………………………………… 10
1.5 Limitations of the project………………………………………………………………… 10
2. Introduction
2.1 Definition of NPA ……………………………………………………………………………... 12
2.2 NPAs: An issue for banks and FI’s in India ……………………………… 13
2.3 Indian economy and NPAs ……………………………………………………………. 13
2.4 Global developments and NPAs ………………………………………………….. 14
2.5 Factors for rise in NPAs…………………………………………………………………. 15
2.6 Problems due to NPA ……………………………………………………………………. 19
2.7 Types of NPA ……………………………………………………………………………………. 20
3. Income Recognition
3.1 Income Recognition Policy ................................................................. 22
3.2 Reversal of income ............................................................................... 22
3.3 Leased Assets ......................................................................................... 23
3.4 Interest Application ............................................................................. 23
3.5 Reporting of NPAs ............................................................................... 24
4. Assets Classifications
4.1 Sub-standard Assets ............................................................................. 26
4.2 Doubtful Assets ..................................................................................... 30
4.3 Loss Assets .............................................................................................. 31
5
6. Tools for recovery of NPA
6.1 Willful Default …………………………………………………………………………………… 39
6.2 Inability to Pay …………………………………………………………………………………. 40
6.3 Restructuring / Rescheduling of Loans …………………………………….. 41
6.4 Treatment of Restructured Standard Accounts …………………….. 41
6.5 Treatment of restructured sub-standard accounts ………………. 42
6.6 Up gradation of restructured accounts ……………………………………. 42
6.7 General ……………………………………………………………………………………………….. 43
6.8 Income recognition …………………………………………………………………………. 43
6.9 Funded Interest ……………………………………………………………………………….. 43
6.9.1 Conversion into equity, debentures or any other instrument 44
6.9.2 Provisioning …………………………………………………………………………………… 44
7. Special Cases
7.1.1 Accounts with temporary deficiencies ……………………………………… 46
7.1.2 Accounts regularized near about the balance sheet date ….. 46
7.1.3 Asset Classification to be borrower-wise and not facility-wise
7.1.4 Accounts where there is erosion in the value of security … 47
7.1.5 Advances to PACS/FSS ceded to Commercial Banks ………….. 47
7.1.6 Advances against Term Deposits, NSCs, KVP/IVP ………………. 48
7.1.7 Loans with moratorium for payment of interest …………………. 48
7.1.8 Agricultural advances …………………………………………………………………… 48
7.1.9 Government guaranteed advances …………………………………………. 49
7.2.1 Take-out Finance …………………………………………………………………………… 49
7.2.2 Post-shipment Supplier's Credit ……………………………………………… 50
7.2.3 Export Project Finance ……………………………………………………………….. 50
7.2.4 Advances under rehabilitation approved by BIFR/ TLI …….. 50
7.2.5 Role of ARCIL ……………………………………………………………………………….. 51
9. Annexure ……………………………………………………………………………………………………….. 64
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ABSTRACT
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 has evolved for the
management of NPAs under which several options are provided for debt
recovery and restructuring. Banks and FIs have the freedom to design and
implement their own policies for recovery and write-off incorporating
compromise and negotiated settlements.
7
CHAPTER-1
Project Details
8
1.1 OBJECTIVES OF THE STUDY
The basic idea behind undertaking the Grand Project on NPA was to:
The research methodology adopted for carrying out the study were
9
1.4 Sampling Methods
To prepare this Project we took five banks from public sector as well as five
banks from private sector.
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 the Indian banking sector is so wide so it was not possible for me
to cover all the banks of the Indian banking sector.
10
CHAPTER-2
INTRODUCTION
11
2. Introduction
NPA. The three letters Strike terror in banking sector and business circle today.
NPA is short form of “Non Performing Asset”. The dreaded NPA rule says
simply this: when interest or other due to a bank remains unpaid for more
than 90 days, the entire bank loan automatically turns a non performing asset.
The recovery of loan has always been problem for banks and financial
institution. To come out of these first we need to think is it possible to avoid
NPA, no cannot be then left is to look after the factor responsible for it and
managing those factors.
2.1 Definitions:
An asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank.
A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of
which the interest and/ or instalment of principal has remained ‘past due’ for a
specified period of time.
With a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt the ‘90 days’ overdue’
norm for identification of NPAs, from the year ending March 31, 2004.
Accordingly, with effect from March 31, 2004, a non-performing asset (NPA)
shall be a loan or an advance where;
The account remains ‘out of order’ for a period of more than 90 days, in
respect of an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,
12
2.2 NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA
Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the
system through various rate cuts and banks fail to utilize this benefit to its
advantage due to the tear of burgeoning non-performing assets.
Further, international rating agencies like, Standard & Poor have lowered
India’s credit rating to sub-investment grade. Such negative aspects have often
outweighed positives such as increasing forex reserves and a manageable
inflation rate.
Under such a situation, it goes without saying that banks are no exception and
are bound to face the heat of a global downturn. One would be surprised to
know that the banks and financial institution in India hold nonperforming
assets worth Rs. 110000 crores Bankers have realized that unless the level of
NPAs is reduced drastically, they will find it difficult to survive.
13
2.4 GLOBAL DEVELOPMENTS AND NPAs
The core banking business is of mobilizing the deposits and utilizing it for
lending to industry. Lending business is generally encouraged because it has
the effect of funds being transferred from the system to productive purposes,
which results into economic growth.
However lending also carries credit risk, which arises from the failure of
borrower to fulfill its contractual obligations either during the course of a
transaction or on a future obligation.
A question that arises is how much risk can a bank afford to take? Recent
happenings in the business world -Enron, WorldCom, Xerox, Global Crossing do
not give much confidence to banks. In case after case, these giant corporate
becan1e bankrupt and failed to provide investors with clearer and more
complete information thereby introducing a degree of risk that many investors
could neither anticipate nor welcome. The history of financial institutions also
reveals the fact that the biggest banking failures were due to credit risk. Due to
this, banks are restricting their lending operations to secured avenues only
with adequate collateral on which to fall back upon in a situation of default.
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2.5 FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs.
But the problem of NPAs is more in public sector banks when compared to
private sector banks and foreign banks. The NPAs in PSB are growing due to
external as well as internal factors.
2.5.1 EXTERNAL FACTORS:-
The Govt. has set of numbers of recovery tribunals, which works for
recovery of loans and advances. Due to their negligence and
ineffectiveness in their work the bank suffers the consequence of non-
recover, thereby reducing their profitability and liquidity.
Willful Defaults
There are borrowers who are able to pay back loans but are intentionally
withdrawing it. These groups of people should be identified and proper
measures should be taken in order to get back the money extended to
them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the
PSBs. every now and then India is hit by major natural calamities thus
making the borrowers unable to pay back there loans. Thus the bank has
to make large amount of provisions in order to compensate those loans,
hence end up the fiscal with a reduced profit.
Industrial sickness
With every new govt. banking sector gets new policies for its operation. Thus
it has to cope with the changing principles and policies for the regulation of
the rising of NPAs.
There are three cardinal principles of bank lending that have been
followed by the commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability
i. Principles of safety :-
16
The banker should, therefore take utmost care in ensuring that the
enterprise or business for which a loan is sought is a sound one and the
borrower is capable of carrying it out successfully .He should be a person
of integrity and good character.
Inappropriate technology
Poor credit appraisal is another factor for the rise in NPAs. Due to poor
credit appraisal the bank gives advances to those who are not able to
repay it back. They should use good credit appraisal to decrease the
NPAs.
17
Managerial deficiencies
The banker should always select the borrower very carefully and should
take tangible assets as security to safe guard its interests. When
accepting securities banks should consider the_
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
Re loaning process
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2.6 PROBLEMS DUE TO NPA
1. Owners do not receive a market return on their capital .in the worst
case, if the banks fails, owners lose their assets. In modern times this
may affect a broad pool of shareholders.
2. Depositors do not receive a market return on saving. In the worst case if
the bank fails, depositors lose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interest
rates, lower deposit rates and higher lending rates repress saving and
financial market, which hamper economic growth.
4. Nonperforming loans epitomize bad investment. They misallocate credit
from good projects, which do not receive funding, to failed projects. Bad
investment ends up in misallocation of capital, and by extension, labor
and natural resources.
Nonperforming asset may spill over the banking system and contract the
money stock, which may lead to economic contraction. This spillover effect can
channelize through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can jam payment across the country.
‘Overdue’:
Any amount due to the bank under any credit facility is ‘overdue’ if
it is not paid on the due date fixed by the bank.
19
2.7 Types of NPA
A] Gross NPA
B] Net NPA
A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as
per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of
the loans made by banks. It consists of all the non-standard assets like as sub-
standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. Since in India,
bank balance sheets contain a huge amount of NPAs and the process of
recovery and write off of loans is very time consuming, the provisions the
banks have to make against the NPAs according to the central bank guidelines,
are quite significant. That is why the difference between gross and net NPA is
quite high.
It can be calculated by following
20
CHAPTER-3
INCOME RECOGNITION
21
3. INCOME RECOGNITION
22
3.3 Leased Assets
The net lease rentals (finance charge) on the leased asset accrued and
credited to income account before the asset became non-performing, and
remaining unrealised, should be reversed or provided for in the current
accounting period.
The term 'net lease rentals' would mean the amount of finance charge
taken to the credit of Profit & Loss Account and would be worked out as
gross lease rentals adjusted by amount of statutory depreciation and lease
equalisation account.
In the absence of a clear agreement between the bank and the borrower
for the purpose of appropriation of recoveries in NPAs (i.e. towards
principal or interest due), banks should adopt an accounting principle
and exercise the right of appropriation of recoveries in a uniform and
consistent manner.
23
3.5 Reporting of NPAs
While reporting NPA figures to RBI, the amount held in interest suspense
account, should be shown as a deduction from gross NPAs as well as
gross advances while arriving at the net NPAs. Banks which do not
maintain Interest Suspense account for parking interest due on non-
performing advance accounts, may furnish the amount of interest
receivable on NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write off, if
any, should be reduced from the outstanding gross advances and gross
NPAs to eliminate any distortion in the quantum of NPAs being reported.
24
CHAPTER-4
- Asset Classification
- Provisioning Norms
25
4. Asset Classification
Categories of NPAs
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as
the principal amount of the loan regularly from the customer. Here it is also
very important that in this case the arrears of interest and the principal
amount of loan do not exceed 90 days at the end of financial year. If asset fails
to be in category of standard asset that is amount due more than 90 days then
it is NPA and NPAs are further need to classify in sub categories.
Banks are required to classify non-performing assets further
into the following three categories based on the period for which the asset has
remained non-performing and the reliability of the dues:
( 1 ) Sub-standard Assets
( 2 ) Doubtful Assets
( 3 ) Loss Assets
( 1 ) Sub-standard Assets:--
With effect from 31 March 2005, a substandard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following
features are exhibited by substandard assets: the current net worth of the
borrowers / guarantor or the current market value of the security charged is
not enough to ensure recovery of the dues to the banks in full; and the asset
has well-defined credit weaknesses that jeopardise the liquidation of the debt
and are characterised by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
( 2 ) Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in assets that
were classified as sub-standard, with the added characteristic that the
weaknesses make collection or liquidation in full, – on the basis of currently
known facts, conditions and values – highly questionable and improbable.
With effect from March 31, 2005, an asset would be classified as doubtful if it
remained in the sub-standard category for 12 months.
( 3 ) Loss Assets:--
A loss asset is one which considered uncollectible and of such little value that
its continuance as a bankable asset is not warranted- although there may be
some salvage or recovery value. Also, these assets would have been identified
as ‘loss assets’ by the bank or internal or external auditors or the RBI
inspection but the amount would not have been written-off wholly.
26
Provisioning Norms
General
In order to narrow down the divergences and ensure adequate
provisioning by banks, it was suggested that a bank's statutory auditors,
if they so desire, could have a dialogue with RBI's Regional Office/
inspectors who carried out the bank's inspection during the previous
year with regard to the accounts contributing to the difference.
Loss assets:
The entire asset should be written off. If the assets are permitted to remain in
the books for any reason, 100 percent of the outstanding should be provided
for.
27
Doubtful assets:
100 percent of the extent to which the advance is not covered by the
realisable value of the security to which the bank has a valid recourse
and the realisable value is estimated on a realistic basis.
28
With a view to bringing down divergence arising out of difference in
assessment of the value of security, in cases of NPAs with balance of Rs. 5
crore and above stock audit at annual intervals by external agencies appointed
as per the guidelines approved by the Board would be mandatory in order to
enhance the reliability on stock valuation. Valuers appointed as per the
guidelines approved by the Board of Directors should get collaterals such as
immovable properties charged in favour of the bank valued once in three
years.
Sub-standard assets:
Standard assets:
From the year ending 31.03.2000, the banks should make a general
provision of a minimum of 0.40 percent on standard assets on global
loan portfolio basis.
The provisions towards Standard Assets need not be netted from gross
advances but shown separately as 'Contingent Provisions against
Standard Assets' under 'Other Liabilities and Provisions - Others' in
Schedule 5 of the balance sheet.
Floating provisions:
29
Provisions on Leased Assets:
Leases are peculiar transactions where the assets are not recorded in the
books of the user of such assets as Assets, whereas they are recorded in the
books of the owner even though the physical existence of the asset is with the
user (lessee). __(AS19 ICAI)
Sub-standard assets : -
10 percent of the 'net book value'.
As per the 'Guidance Note on Accounting for Leases' issued by the ICAI,
'Gross book value' of a fixed asset is its historical cost or other amount
substituted for historical cost in the books of account or financial statements.
Statutory depreciation should be shown separately in the Profit & Loss
Account. Accumulated depreciation should be deducted from the Gross Book
Value of the leased asset in the balance sheet of the lesser to arrive at the 'net
book value'.
Doubtful assets :-
100 percent of the extent to which the finance is not secured by the realisable
value of the leased asset. Realisable value to be estimated on a realistic basis.
In addition to the above provision, the following provision on the net book
value of the secured portion should be made, depending upon the period for
which asset has been doubtful:
30
Loss assets :-
The entire asset should be written-off. If for any reason, an asset is allowed to
remain in books, 100 percent of the sum of the net investment in the lease and
the unrealised portion of finance income net of finance charge component
should be provided for. (‘Net book value')
31
CHAPTER-5
- Impact of NPA
- Preventive Measurement for NPA
32
5. Impact of NPA
Profitability:-
Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand
which lead to borrowing money for shot\rtes period of time which lead to
additional cost to the company. Difficulty in operating the functions of bank is
another cause of NPA due to lack of money. Routine payments and dues.
Involvement of management:-
Time and efforts of management is another indirect cost which bank has to
bear due to NPA. Time and efforts of management in handling and managing
NPA would have diverted to some fruitful activities, which would have given
good returns. Now day’s banks have special employees to deal and handle
NPAs, which is additional cost to the bank.
Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in
terms of market credit. It will lose it’s goodwill and brand image and credit
which have negative impact to the people who are putting their money in the
banks.
33
5.2 Early symptoms by which one can recognize a
performing asset turning in to Non-performing asset:-
(4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
34
5.3 Preventive Measurement for NPA
Early Recognition of the Problem:-
Invariably, by the time banks start their efforts to get involved in a revival
process, it’s too late to retrieve the situation- both in terms of rehabilitation of
the project and recovery of bank’s dues. Identification of weakness in the very
beginning that is: When the account starts showing first signs of weakness
regardless of the fact that it may not have become NPA, is imperative.
Assessment of the potential of revival may be done on the basis of a techno-
economic viability study. Restructuring should be attempted where, after an
objective assessment of the promoter’s intention, banks are convinced of a
turnaround within a scheduled timeframe. In respect of totally unviable units
as decided by the bank, it is better to facilitate winding up/ selling of the unit
earlier, so as to recover whatever is possible through legal means before the
security position becomes worse.
Identifying borrowers with genuine intent from those who are non- serious
with no commitment or stake in revival is a challenge confronting bankers.
Here the role of frontline officials at the branch level is paramount as they are
the ones who has intelligent inputs with regard to promoters’ sincerity, and
capability to achieve turnaround. Based on this objective assessment, banks
should decide as quickly as possible whether it would be worthwhile to commit
additional finance.
In this regard banks may consider having “Special Investigation” of all financial
transaction or business transaction, books of account in order to ascertain real
factors that contributed to sickness of the borrower. Banks may have penal of
technical experts with proven expertise and track record of preparing techno-
economic study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow
or sudden requirement of additional fund may be entertained at branch level,
and for this purpose a special limit to such type of cases should be decided.
This will obviate the need to route the additional funding through the
controlling offices in deserving cases, and help avert many accounts slipping
into NPA category.
35
Timeliness and Adequacy of response:-
Longer the delay in response, grater the injury to the account and the asset.
Time is a crucial element in any restructuring or rehabilitation activity. The
response decided on the basis of techno-economic study and promoter’s
commitment, has to be adequate in terms of extend of additional funding and
relaxations etc. under the restructuring exercise. The package of assistance
may be flexible and bank may look at the exit option.
While financing, at the time of restructuring the banks may not be guided by
the conventional fund flow analysis only, which could yield a potentially
misleading picture. Appraisal for fresh credit requirements may be done by
analysing funds flow in conjunction with the Cash Flow rather than only on the
basis of Funds Flow.
Management Effectiveness:-
The general perception among borrower is that it is lack of finance that leads
to sickness and NPAs. But this may not be the case all the time. Management
effectiveness in tackling adverse business conditions is a very important aspect
that affects a borrowing unit’s fortunes. A bank may commit additional finance
to an aling unit only after basic viability of the enterprise also in the context of
quality of management is examined and confirmed. Where the default is due
to deeper malady, viability study or investigative audit should be done – it will
be useful to have consultant appointed as early as possible to examine this
aspect. A proper techno economic viability study must thus become the basis
on which any future action can be considered.
Multiple Financing:-
B. In some default cases, where the unit is still working, the bank should make
sure that it captures the cash flows (there is a tendency on part of the
borrowers to switch bankers once they default, for fear of getting their cash
flows forfeited), and ensure that such cash flows are used for working capital
36
purposes. Toward this end, there should be regular flow of information among
consortium members. A bank, which is not part of the consortium, may not be
C. In a forum of lenders, the priority of each lender will be different. While one
set of lenders may be willing to wait for a longer time to recover its dues,
another lender may have a much shorter timeframe in mind. So it is possible
that the letter categories of lenders may be willing to exit, even a t a cost – by
a discounted settlement of the exposure. Therefore, any plan for
restructuring/rehabilitation may take this aspect into account.
37
CHAPTER-6
Tools For recovery of npa
38
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.
39
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.
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.
42
6.7 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.
43
6.9.1. 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 recognised in
consequence, full provision should be made for the amount of income so
recognised 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 recognised 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 recognised only on realisation basis. The income in respect
of unrealised interest, which is converted into debentures or any other fixed
maturity instrument, should be recognised 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.
6.9.2. 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.
44
CHAPTER-7
Special Cases
45
7. Special Cases
7.1.1. Accounts with temporary deficiencies:
The classification of an asset as NPA should be based on the
record of recovery. Bank should not classify an advance account as NPA merely
due to the existence of some deficiencies which are temporary in nature such
as non-availability of adequate drawing power based on the latest available
stock statement, balance outstanding exceeding the limit temporarily, non-
submission of stock statements and non-renewal of the limits on the due date,
etc. In the matter of classification of accounts with such deficiencies banks may
follow the following guidelines:
Banks should ensure that drawings in the working capital
accounts are covered by the adequacy of current assets, since current assets
are first appropriated in times of distress. Drawing power is required to be
arrived at based on the stock statement which is current. However, considering
the difficulties of large borrowers, stock statements relied upon by the banks
for determining drawing power should not be older than three months. The
outstanding in the account based on drawing power calculated from stock
statements older than three months, would be deemed as irregular. A working
capital borrower account will become NPA if such irregular drawings are
permitted in the account for a continuous period of 180 days even though the
unit may be working or the borrower's financial position is satisfactory.
Regular and ad hoc credit limits need to be reviewed/ regularized
not later than three months from the due date/date of ad hoc sanction. In case
of constraints such as non-availability of financial statements and other data
from the borrowers, the branch should furnish evidence to show that renewal/
review of credit limits is already on and would be completed soon. In any case,
delay beyond six months is not considered desirable as a general discipline.
Hence, an account where the regular/ ad hoc credit limits have not been
reviewed/ renewed within 180 days from the due date/ date of ad hoc
sanction will be treated as NPA.
7.1.2. Accounts regularized near about the balance sheet date:
The asset classification of borrower accounts where a solitary or a
few credits are recorded before the balance sheet date should be handled with
care and without scope for subjectivity. Where the account indicates inherent
weakness on the basis of the data available, the account should be deemed as
a NPA. In other genuine cases, the banks must furnish satisfactory evidence to
the Statutory Auditors/Inspecting Officers about the manner of regularization
of the account to eliminate doubts on their performing status.
46
7.1.3Asset Classification to be borrower-wise and not facility-wise
It is difficult to envisage a situation when only one facility to a
borrower becomes a problem credit and not others. Therefore, all the facilities
granted by a bank to a borrower will have to be treated as NPA and not the
particular facility or part thereof which has become irregular. If the debits
arising out of devolvement of letters of credit or invoked guarantees are
parked in a separate account, the balance outstanding in that account also
should be treated as a part of the borrower’s principal operating account for
the purpose of application of prudential norms on income recognition, asset
classification and provisioning.
7.1.4. Accounts where there is erosion in the value of security
A NPA need not go through the various stages of classification in cases of
serious credit impairment and such assets should be straightaway classified as
doubtful or loss asset as appropriate. Erosion in the value of security can be
reckoned as significant when the realizable value of the security is less than 50
per cent of the value assessed by the bank or accepted by RBI at the time of
last inspection, as the case may be. Such NPAs may be straightaway classified
under doubtful category and provisioning should be made as applicable to
doubtful assets.
If the realizable value of the security, as assessed by the
bank/ approved values/ RBI is less than 10 per cent of the outstanding in the
borrower accounts, the existence of security should be ignored and the asset
should be straightaway classified as loss asset. It may be either written off or
fully provided for by the bank.
47
7.1.6 Advances against Term Deposits, NSCs, KVP/IVP, etc.:
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life
policies need not be treated as NPAs. Advances against gold ornaments,
government securities and all other securities are not covered by this
exemption.
48
In such cases of conversion or re-schedulement, the term loan as
well as fresh short-term loan may be treated as current dues and need not be
classified as NPA. The asset classification of these loans would thereafter be
governed by the revised terms & conditions and would be treated as NPA if
interest and/or installment of principal remains unpaid, for two harvest
seasons but for a period not exceeding two half years.
7.1.9.Government guaranteed advances:
The credit facilities backed by guarantee of the Central Government though
overdue may be treated as NPA only when the Government repudiates its
guarantee when invoked. This exemption from classification of Government
guaranteed advances as NPA is not for the purpose of recognition of income.
With effect from 1st April 2000, advances sanctioned against State
Government guarantees should be classified as NPA in the normal course, if
the guarantee is invoked and remains in default for more than two quarters.
With effect from March 31, 2001 the period of default is revised as more than
180 days.
7.2.1.Take-out Finance:
Takeout finance is the product emerging in the context of the funding of long-
term infrastructure projects. Under this arrangement, the institution/the bank
financing infrastructure projects will have an arrangement with any financial
institution for transferring to the latter the outstanding in respect of such
financing in their books on a predetermined basis. In view of the time-lag
involved in taking-over, the possibility of a default in the meantime cannot be
ruled out. The norms of asset classification will have to be followed by the
concerned bank/financial institution in whose books the account stands as
balance sheet item as on the relevant date. If the lending institution observes
that the asset has turned NPA on the basis of the record of recovery, it should
be classified accordingly. The lending institution should not recognize income
on accrual basis and account for the same only when it is paid by the
borrower/ taking over institution (if the arrangement so provides). The lending
institution should also make provisions against any asset turning into NPA
pending its takeover by taking over institution. As and when the asset is taken
over by the taking over institution, the corresponding provisions could be
reversed. However, the taking over institution, on taking over such assets,
should make provisions treating the account as NPA from the actual date of it
becoming NPA even though the account was not in its books as on that date.
49
7.2.2. Post-shipment Supplier's Credit
In respect of post-shipment credit extended by the banks covering
export of goods to countries for which the ECGC’s cover is available, EXIM Bank
has introduced a guarantee-cum-refinance programme whereby, in the event
of default, EXIM Bank will pay the guaranteed amount to the bank within a
period of 30 days from the day the bank invokes the guarantee after the
exporter has filed claim with ECGC.
Accordingly, to the extent payment has been received from
the EXIM Bank, the advance may not be treated as a non-performing asset for
asset classification and provisioning purposes.
50
7.2.5. ROLE OF ARCIL:-
This empowerment encouraged the three major players in Indian banking
system, namely, State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI
Bank Limited (IDBI) to come together to set-up the first ARC. Arcil was
incorporated as a public limited company on February 11, 2002 and obtained
its certificate of commencement of business on May 7, 2003. In pursuance of
Section 3 of the Securitization Act 2002, it holds a certificate of registration
dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates
under powers conferred under the Securitization Act, 2002. Arcil is also a
"financial institution" within the meaning of Section 2 (h) (ia) of the Recovery
of Debts due to Banks and Financial Institutions Act, 1993 (the "DRT Act").
Arcil has made successful efforts in funneling investment from both from
domestic and international players for funding these acquisitions of distressed
assets, followed by showcasing them to prospective buyers. This has initiated
creation of a secondary market of distressed assets in the country besides
hastening their resolution. The efforts of Arcil would lead the country’s
distressed debt market to international standards.
With a view to achieving high delivery capabilities for resolution, Arcil has put
in place a structure aimed at outsourcing the various sub-functions of
resolution to specialized agencies, wherever applicable under the provision of
the Securitization Act, 2002. Arcil has also encourage, groomed and developed
many such agencies to enhance its capacity in line with the growth of its
activity.
51
CHAPTER-8
Data analysis and
interpretation
52
8. 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.
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.
53
DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and
comparison among them, year 2008-09.
(Rs in crore)
250000
200000
DEPOSIT
150000
INVESTMENT
100000
ADVANCES
50000
0
ICICI HDFC AXIS INDUSIND KOTAK
Analysis:-From the fig 8.1 we can see that the ICICI Bank deposit-investment-
advances are quite high than other banks like HDFC,AXIS,INDUSIND,KOTAK
54
Public Sector Banks:-
180000
160000
140000
120000
100000 DEPOSIT
80000 INVESTMENT
60000 ADVANCES
40000
20000
0
PNB BOB BOI UBI DENA
55
Comparison between ICICI BANK AND PUNJAB NATIONAL BANK in term of deposit-
investment-advances:-
250000
200000
150000 DEPOSIT
INVESTMENT
100000
ADVANCES
50000
0
ICICI PNB
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.
56
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 bank’s 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.
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.
57
Gross NPA and Net NPA Of different Public Sector banks in the year 2007-08
2.5
1.5
GROSS NPA
1 NET NPA
0.5
0
DENA UBI PNB BOI BOB
Gross NPA and Net NPA Of different Public Sector banks in the year 2008-09
1.8
1.6
1.4
1.2
1 GROSS NPA
0.8
NET NPA
0.6
0.4
0.2
0
DENA PNB BOI BOB UBI
58
Gross NPA and Net NPA Of different Private Sector banks in the year 2007-08
1.8
1.6
1.4
1.2
1 GROSS NPA
0.8
NET NPA
0.6
0.4
0.2
0
INDUSIND KOTAK ICICI AXIS HDFC
Gross NPA and Net NPA Of different Private Sector banks in the year 2008-09
2
1.8
1.6
1.4
1.2
1 GROSS NPA
0.8 NET NPA
0.6
0.4
0.2
0
INDUSIND KOTAK ICICI HDFC AXIS
59
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.
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
ICICI INDUSIND KOTAK HDFC AXIS BOI BOB UBI DENA PNB
Comparison of NET NPA with all banks for the year 2007-08. Average of these
ten bank’s net NPA is 0.56. And in the public sector banks all these five banks
are below this. But in private sector banks 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.
1.4
1.2
1
0.8
0.6
0.4
0.2
0
ICICI INDUSIND KOTAK HDFC AXIS BOI BOB UBI DENA PNB
60
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.
7000
6000
5000
4000
PRIORITY
3000
NON-PRIORITY
2000
1000
0
AXIS HDFC ICICI KOTAK INDUSIND
61
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 .
6000
5000
4000
3000 PRIORITY
2000 NPA
1000
0
BOB BOI DENA PNB UBI
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.
62
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 cr in 2008-09
which is almost 66% rise than previous year. In public sector banks the
numbers are not increased like private sector banks.
63
ANNEXURE-I
REPORTING FORMAT FOR NPA – GROSS AND NET NPA
Position as on………
PARTICULARS
1) Gross Advanced *
2) Gross NPA *
adjustment
**Banks which do not maintain an interest suspense a/c to park the accrued interest on
NPAs may furnish the amount of interest receivable on NPAs.
64
Bibliography
Economic and political weekly, October 16, 2004, CARLTON PEREIRA, Page
4602-4604 “INVESTING IN NPAs”.
The chartered Accountant, February 2005, Raj Kumar S Adukia, Page NO.
978-985; “SECURITISATION – AN OVERVIEW”
Websites:-
http://www.indiastat.com/banksandfinancialinstitutions/3/performance/1606
3/nonperformingassetsnpas/377761/stats.aspx
http://www.bankcapitalgroup.net/services-non-performing-assets.php
http://rituparnodas.blogspot.com/2009/01/npa-management.html
http://www.finanssivalvonta.fi/en/Statistics/Credit_market/Nonperforming_a
ssets/Pages/Default.aspx
http://findarticles.com/p/articles/mi_hb5562/is_200905/ai_n31896461/
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