Abstract

Npa intro
Movtivation
Problem/define problem-need of the study
literature review
objective of the study
hypothesis
Npa types
Advantages
Disadvantages
Factrs-internal/external
List of banks
Bank npa schemes
Conclusion
Bibliography

Abstract:

The reforms in Indian banking sector since 1991 is deliberated mostly in terms of the
significant measures that were implemented in order to develop a more vibrant, healthy,
stable and efficient banking sector in India. The effect of a highly regulated banking
environment on asset quality, productivity and performance of banks necessitated the reform
process and resulted the incorporation of prudential norms for income recognition, asset
classification and provisioning and capital adequacy norms, in line with international best
practices. The improvements in asset quality and a reduction in non-performing assets were
the primary objective enunciated in the reform measures. In this context, the present research
critically evaluates the trend in movement of nonperforming assets of public sector banks in
India during the period 2000-01 to 2015-16, thereby facilitates an evaluation of the
effectiveness of NPA management in the post-millennium period. The non-performing assets
is not a function of loan/advance alone, but is influenced by other bank performance
indicators and also by the macroeconomic variables. In addition to explaining the trend in
the movement of NPA, this research also explained the moderating and mediating role of
various bank performance and macroeconomic indicators on incidence of NPA.
To achieve the stated objectives secondary data are utilized. In order to corroborate the
inferences generated from the secondary data analysis are obtained on the incidence, impact
and management of NPA. To assess the relative efficiency of public sector banks in Indian
banking sector in the management of NPA, a bank group-wise analysis is undertaken.
The research findings highlighted the need for improvements in NPA management in
Indian public sector banks. Though the PSBs were able to curtail their NPA during the first
half of the study period, the trend has reversed in the second half especially since the global
financial crisis during 2007. The analysis revealed significant linkages between NPA and
selected bank performance indicators and macroeconomic indicators. In a highly
competitive, diverse, sophisticated banking environment, NPA can be effectively managed
through incorporating more proactive measures, notably an improvement in the credit
evaluation, appraisal and monitoring system of banks.

Chp1: Introduction

The banking sector plays an important role in the economic growth of a country.
Through its intermediary activities, the banking sector fosters the production, distribution,
exchange and consumption processes in the economic system. It stimulates the flow of funds
in the economy and fuels economic growth. The efficiency of banking system, thus
determines the pace of development of the economy. Similar to any other business enterprise,
the efficiency of a bank is evaluated based on profitability and quality of assets it possess. But
unlike other commercial ventures, Indian banking has social commitments integrated into its
operations. The banking system in India has had to serve the goals of economic policies
enunciated in successive five year development plan, particularly concerning equitable
income distribution, balanced regional economic growth and the reduction and elimination of
private sector monopolies in trade and industry. In the post-independence period, the banking
sector has played a catalyst and commendable role in supporting the government to achieve
its social and economic objectives through deposit mobilization, mass branch networking,
and priority sector lending, employment generation etc. Achieving such societal objectives
resulted in imposing extensive regulations by the government which in turn hampered the
productivity of Indian banking during the pre-liberalization era.
An evaluation of the Indian banking industry during the pre-liberalization era revealed
the presence of several shortcomings which crept into the financial system over the years
notably reduced productivity, deteriorated asset quality and efficiency and increased cost
structure due to technological backwardness. Among these deficiencies, policy makers
identified the erosion of asset quality as the most significant obstacle for the development of
a sound and efficient banking sector. In fact, the various practices that were followed during
pre-liberalization period that includes asset classification using health code system, accrual
basis used to book interest in bank accounts etc., concealed the gravity of asset quality issues
of the banking sector. The asset quality is a prime concern and impacts various performance
indicators, i.e., profitability, intermediation costs, liquidity, credibility, income generating
capacity and overall functioning of banks. The reduction in asset quality results in
accumulation of Non-Performing Assets (NPAs).
The intermediation process is the principal function of a commercial bank. Since it
involves counterparty risk; risk is inherent in banking. A banker should expect that all loan
portfolios will not fetch returns/earnings in the normal course. The loans/advances is an
important source of income for the banks. The strength and soundness of the banking system

primarily depend on the quality and performance of the loan portfolio, i.e. the fulfilment of
obligations by borrowers promptly.
Non-performing assets indicate an advance for which interest or repayment of principal
or both remains overdue for a period of 90 days or more. An advance/loan is treated as nonperforming when it fails to satisfy its repayment obligations. Thus, non-performing assets are
loans in jeopardy of default. The level of NPAs is an indicator of the efficiency of bankers
credit risk management and efficiency of resource allocation to productive sectors. The Basel
Committee on Banking Supervision defines credit risk as potential default of a borrower to
meet the obligation in accordance with the agreed terms (BIS, 2005). Higher nonperforming assets resulted in many bank failures (Kayaked al, 2010). NPAs represent a real
economic cost in modern days as they reflect the application of scarce capital and credit
funds to unproductive use. It also affects the lending capacity since funds are blocked and
repayment is disturbed and has also resulted in additional cost for intermediation and
realizing the NPAs.
The banking sector reforms in India during the post-liberalization period mostly
focused on improving the efficiency of the banking sector by incorporating prudential norms
for income recognition, asset classification and provisioning and through integrating
international standards. The alarming level of NPAs is recognized as one of the major
explanations for implementing structural changes and reform measures in the banking sector
during this period. Keeping in view the inefficiencies in the banking sector and the presence
of non-performing assets, the Committee on Financial System (Narasimham Committee I)
was set up.
Banking reforms were initiated to upgrade the operating standards, health and financial
soundness of banks to internationally accepted levels in an increasingly globalized market
(Pathak, 2009). The reforms have been undertaken gradually with mutual consent and wider
debate amongst the participants and in a sequential pattern that is reinforcing to the overall
economy (Bagola and Verma, 2006). These reform measures substantiate the views that
highlight the key role in economic development that could be played by a banking system
free from the types of controls on interest rates and quantities that were prevalent at the time
(Barajas et al, 2012).
Two decades had completed since the banking sector initiated measures to uplift the
banking sector in line with international standards and to improve productivity and efficiency

of banks. Many researches on NPA illustrated the relationship between asset quality and
financial distress and considered management of NPA as a major prerequisite to counter the
recessionary pressures and foster economic development. Some of the major observations
from previous researches include;

The problem of the NPA is severe in countries where severe government intervention had led
to the institutional decay of banks or prevented their sound development (Renaud, 1997)

NPA management assumes priority over other aspects of bank functioning (Batra, 2003)

The existing capital adequacy regulations tried to protect the interest of depositors (avoiding
bankruptcy), but impacted availability of funds for productive purposes. (Murine and Yaseen,
2004)

Reduction in NPA ratios does not indicate a reduction of fresh NPA. For ex, Banks have
aggressively provided for their bad debts from the treasury profits during 2003-04 in order to
show a better NPA picture, resulting a decline in NPA by 24.7% as against a decline of 8% in
2002-03. (Pathak, 2009)

The NPA is a significant threat to Indian Banking Sector (Estrella et al, 2000; Gopalakrishan,
2004; Ahmed et al, 2007; Heidi and Kruger, 2011)

The Slowdown in economic growth and rapid credit growth are independently associated
with higher levels of NPA (Bock and Demy nets, 2012)
Upon analysing the banking sector in India, it is evident that the NPAs still pose a
significant threat to the banking sector. This research is an attempt to examine the nonperforming assets of public sector banks (PSBs) in India and to evaluate the various facets of
NPA and its management in Indian banking sector.

1.2. Statement of Problem

Indian Banking, whose environment till early 1990s was insulated from the global
context and dominated by state controls of directed credit delivery, regulated interest rates
and investment structure did not participate in the vibrant global banking revolution. The
Indian banking sector is dominated by public sector banks (PSBs) that include SBI &
associates and nationalized banks. The post-liberalization period saw an upsurge of many
private sector banks and foreign banks. One of the major objectives of banking sector reforms

was to encourage operational self-sufficiency, flexibility and competition in the system and to
improve banking standards in India to the international best practices. Based on the
recommendations of various committees especially the Committee on Financial Sector
Reforms under the chairmanship of Mr M. Narasimham and according the Basel
requirements, various measures were implemented to liberalize the banking sector and it
include;

Liberalizing rules for entry of more domestic and foreign banks.

Infusion of government capital in PSB and permission to inject private equity

1.3: Objectives of the Study:

1. To study the status of Non- Performing Assets of Indian private Banks in India.

2. To study the impact of NPAs on Banks.

3. To analyse the major causes NPA and their significance on the generation of NPA.

4. To suggest measures for the efficient and effective management of NPA.

5. To know the recovery of NPAS through various channels.

6. To make appropriate suggestions to avoid future NPAs and to manage existing NPAs
in Bank.

1.4: Research Questions:

The various research questions addressed in this study include;
1

Whether the NPA of Public Sector Banks (PSBs) are efficiently managed?

Do the various bank groups show similar trend in the movement of NPA?

Do additions to NPA occur at a faster rate in post millennium period?

Do the selected micro and macro variables pose a mediating and moderating effect on asset
quality of banks?

Are Public Sector Banks (PSBs) still vulnerable to financial crisis?

What are the various reasons and the significance of each in creating NPA?

1.5: Scope of the Study:

1

This research evaluates the trend in the movement of NPA of public sector banks (PSBs) in
India during post-millennium period (from 2000-01 to 2011-12). The post-millennium period
is considered since RBI implemented the second phase reforms during 1998-99.

The study focuses on public sector banks (PSBs) even though for comparative purpose, all
bank groups are considered. The variables selected that include NPA indicators, bank
performance indicators and macroeconomic indicators are based on previous studies on NPA
conducted in India and international context.

The bank groups in India include (a) Public sector banks, (b) Private sector banks and, (c)
Foreign banks. Public sector banks are further classified into (a) SBI & Associates, and (b)
Nationalized banks.

To evaluate the trend in the movement of NPA variables, the study period is divided into pre
financial crisis period and post financial crisis period. The period from 2000-01 to 2006-07 is
considered as pre financial crisis period, while the period from 2007-08 to 2015-16 is
considered as post-financial crisis period. Such a classification is undertaken based on expert
feedback on the financial crisis that erupted globally during 2007.

In order to substantiate secondary data analysis and to analyse the various facets of nonperforming assets. The public sector banks, which comprise of the State Bank of India and
nationalized banks, hold more than 75% of total advances and sloans of all scheduled
commercial banks in India.

1.6: Limitations of the Study

Even though, utmost care is exercised in all aspects of this research, certain limitations
have been perceived and are acknowledged herewith.

The results of the study cannot be generalized to other bank groups except public sector
banks as the data are obtained with special focus on public sector banks.

The research utilized feedback from officers working in State Bank of Travancore, a premier
scheduled commercial bank based in Kerala. The incidence of the NPA is explained with
special reference to the selected bank.

The study is conducted for the period 2000-01 to 2011-12. Influence of regulatory measures
taken after the study period might influence the findings of the study.

Respondent bias would have to some extent affected the quality of data in spite of all
precautionary measures taken to ensure its reliability.

1.7: RESEARCH METHODOLOGY:

In order to realize the stated objectives, the researcher utilized a combined approach
that embraces features of both descriptive and analytical research designs. Though several
research studies on NPA in Indian banking sector are available, the studies on a closer look
validated NPA problem using secondary data and most often depended ratio analysis to
identify whether NPA is managed efficiently. A closer look into the studies highlighted
insufficient analytical studies on the interaction between different bank specific performance
indicators and macroeconomic indicators on incidence of NPA of banks. The methodology
for this research is designed considering the above aspects; to evaluate asset quality of public
sector banks explained using the trend in movement non-performing assets.

i.

Type of Research:

The research methodology adopted for carrying out the study were

In this project Descriptive research methodologies were use .

At the first stage theoretical study is attempted.
At the second stage Historical study is attempted.
At the Third stage Comparative study of NPA is undertaken

a) Descriptive Research:
This research by and large is descriptive in nature. A descriptive study used to make
descriptions of the phenomena or the characteristics associated with a subject population:
who, what, when, where and how of a topic (Cooper and Schindler, 2003). The methods
typically used in a descriptive study could be surveys, panels, observations or secondary data
analysed in a quantitative manner (Malhotra, 2004). This research used secondary sources in
order to explain the non-performing assets of public sector banks in India. Statistics on NPA
and various NPA indicators during post-millennium period (from 2000-01 to 2011-12) along
with selected bank performance indicators and macroeconomic variables were utilized in
order to study the trends in movement of NPA, its relationship with selected variables, and
efficiency of management of NPA during post-millennium period.

b) Analytical Phase:
The analytical part of this research employed facts or information already available, and
analysed them to make a critical evaluation of the subject. Basically, the analytical part
utilized the statistical inputs and verified the research hypotheses put forward in the study. In
addition to this, the results of secondary data analysis are verified to provide an insight into
why such trends are observed.

ii.

Data Sources
In order to achieve the stated objectives, this research utilized secondary data.

iii.

Secondary Data
The primary emphasis of this research is focused on analysing nonperforming assets of

public sector banks in India during the period 2000-01 to 2011-12. In specific terms, it
includes (a) analysing the trend in the movement of NPA variances during the study period,
(b) the moderating role of bank performance variables on the relationship between advances
and NPA, (c) the moderating role of NPA on the relationship between income and
profitability of banks, and (d) the mediating role of macroeconomic indicators on the

relationship between advances and NPA of banks. To achieve the stated objectives, data are
collected from various sources and include;
1

Research reports, published articles, news reports and conference proceedings available in
both national and international level related to NPA. The information obtained from these
sources are used for critical evaluation of the subject and identify research gap in the area of
study. These secondary sources are part of different chapters in this report.

Statistical Data on NPA, bank-specific and economic indicators during 2000-01 to 2011-12,
collected mainly from RBI website, Indian Banks Association, India State and Ministry of
National Economy. In addition to the above, information is obtained from individual bank
web sites.

Unpublished reports on the above topic.

iv.

Sampling plan

To prepare this Project we took two banks from public sector.

Chp2: NON PERFORMING ASSETS

WHAT IS A NPA (NON PERFORMING ASSETS)?

Action for enforcement of security interest can be initiated only if the secured asset is
classified as Nonperforming asset. Non-performing asset means an asset or account of
borrower, which has been classified by bank or financial institution as sub standard,
doubtful or loss asset, in accordance with the direction or guidelines relating to assets
classification issued by RBI.
An amount due under any credit facility is treated as past due when it is not been
paid within 30 days from the due date. Due to the improvement in the payment and
settlement system, recovery climate, up gradation of technology in the banking system etc, it
was decided to dispense with past due concept, with effect from March 31, 2001.
Accordingly as from that date, a Non performing asset shell be an advance where
i.

Interest and/or installment of principal remain overdue for a period of more than

ii.

180 days in respect of a term loan,

The account remains out of order for a period of more than 180 days ,in respect

iii.

of an overdraft/cash credit (OD/CC)

The bill remains overdue for a period of more than 180 days in case of bill

iv.

purchased or discounted.
Interest and/or principal remains overdue for two harvest season but for a period
not exceeding two half years in case of an advance granted for agricultural

v.

purpose ,and
Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt 90 days overdue norms for identification of
NPAs, from the year ending March 31 2004, a non performing asset shell be a loan or an
advance where;

i.

Interest and/or installment of principal remain overdue for a period of more than

ii.

90 days in respect of a term loan,

The account remains out of order for a period of more than 90 days in respect

iii.

of an overdraft/cash credit (OD/CC)

The bill remains overdue for a period of more than 90 days in case of bill
purchased or discounted.

iv.

Interest and/or principal remains overdue for two harvest season but for a period
not exceeding two half years in case of an advance granted for agricultural

v.

purpose.
Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts
With the effect from March 31, 2004, NPA shall be a loan or an advance where:

1. Term loan:
Interest and /or installment of principal remain overdue for a period of more
than 90 days.
2. Cash credit/overdraft:
The account remains &#39out of order' for a period of more than 90 days.
3. Bills:
The bill remains overdue for a period of more than 90days from due date of
payment.
4. Other Loans:
Any amount to be received remains overdue for a period of more than 90 days.
5. Agricultural Accounts:
In the case of agriculture advances, where repayment is based on income from
crop. An account will be classified as NPA as
a) If loan has been granted for short duration crop: interest and/or installment of
Principal remains overdue for two crop seasons beyond the due date
b) If loan has been granted for long duration crop: Interest and/or installment of
principal remains overdue for one crop seasons beyond due date.

2.2: Classification of loans

In India bank loans are classified on the following basis:
a) Performing Assets:
Loans where the interest and/or principal are not overdue beyond 180 days at the
end of the financial year.
b) Non-Performing assets:
Any loan repayment, which is overdue beyond 180 days or two quarters, is
considered as NPA. According to the securitization and re construction of financial assets and
enforcement of security interest Ordinance, 2002 &quote non-performing assets &quote

(NPA) means &quote an asset or a/c of a borrower, which has been classified by a bank or
financial institution as sub-standard, doubtful or loss asset, in accordance with the directions
or guidelines relating to asset classification issued by the Reserve Bank.

Out of order:
An account should be treated as out of order if the outstanding balance remains continuously
in excess of sanctioned limit /drawing power. in case where the out- standing balance in the
principal operating account is less than the sanctioned amount /drawing power, but there are
no credits continuously for six months as on the date of balance sheet or credit are not enough
to cover the interest debited during the same period ,these account should be treated as out of
order.

Overdue:
Any amount due to the bank under any credit facility is overdue if it is not paid on due date
fixed by the bank.

2.3: REVIEW OF LITERATURE

This chapter encapsulates the major conclusions and propositions of previous research
studies on NPA. The review of literature is utmost important in any research as it offers an
explanation for the necessity of the current research initiatives. The asset quality and nonperforming assets (NPAs) is debated in many academic literatures across the world. In Indian
context, the literature focused mainly on a review of NPA among different bank groups and
its management since the post-liberalization period. The review of the literature offered an indepth view on the treatment of NPA in Indian banking sector over the years. The comparative
studies available on NPA helped the researcher to evaluate the incidence of NPA and its
management in different economies.

The non-performing assets (NPAs) engrossed the attention of researchers in the late
1980s when the necessity to transform the banking sector was felt in Indian economy. The
studies in this period highlighted the shortcomings in the functioning of the banking sector
and stressed the need to incorporate prudential norms for income recognition, asset
classification and provisioning. Such analysis and inferences to a great extent helped the
researcher in identifying the stages of development in NPA management.

2.4: Studies on NPA in Indian Context:

The observations of Gopalakrishnan, T.V. (2004), explained in the research study
Management of Non-Performing Advances portrayed the severity of NPA on banks
survival and growth. Assessing the performance of Indian banking, especially the public
sector banks (PSBs) during 1993-2001, the author confirmed a significant relationship
between NPA and macroeconomic indicators like GDP, Inflation, Index of industrial and
Agricultural Production, etc. Based on primary data, the author stressed the need to further
enhance existing measures to manage NPA. The findings of the study reiterated that NPA
pose significant blow on the balance sheets and profitability of banks and high level of NPAs
in bank books is a great risk to banks health, stability, viability and soundness.
The above observations were further reiterated by Reddy, B.R. (2004) who compiled 38
research papers presented in National Conference on NPA in Tirupathi during 2000. Using
both secondary and primary data, these research articles highlighted the developments in the
management of NPA. In summary, these studies identified NPA as a severe threat for the
existence and stability of Indian banking and demanded more proactive and curative
measures to manage it.
In a similar research on NPA in Indian commercial banks, Jain Vibha (2007) explained
that in the early stages, the NPA was mainly contributed by directed lending and significant
government intervention. The analytical part evaluated the trend in the movement of NPA
during 1997-2003 and concluded that the root cause of NPA is the inadequate credit risk
management system. The author reiterated that the profitability of banks is invariably related
to its alertness, operational efficiency, customer orientation, creation of large volumes of
performing assets and attainment of optimum level of productivity.
In a descriptive research, Pathak (2009) elucidated the role of asset quality in financial
health of banks. Using statistical data, the study explained that NPA is a serious threat to the

Indian economy, estimated around 9.8% of GDP at constant prices in 2005. The study
detailed the list of banks whose NPA is more than their net worth which posed a significant
question on the efficiency of credit risk management.
Apart from explaining a conceptual framework of the NPA, Faizanuddin, Md and
Mishra R.K. (2011) examined the dimensional approach of NPA in the banking system in
India with special focus on State Bank of India, Patna Circle, Bihar. Findings and inferences
based on analysis recommended major changes in the recovery policy, project financing
norms, legal aspects and supervision of NPA accounts.
Ghosh, et al (1998) examined the narrow banking in India and asserted that an
increased presence of NPA forced banks to select tactics to reduce risk by investing in safe
and liquid assets. A major contribution of this study is their finding that even without a
directive, narrow banking on the asset side is being practiced as part of the asset-liability
management of these banks. It is observed based on the analysis that the narrow banking may
expose weak banks to immense market and interest rate risks and thus make it vulnerable to
idiosyncratic and systemic risks arising from macroeconomic shocks.
In a comparative study on NPA of Indian Banks with international markets, Deolalkar,
G.H. (1998) stated that the increased focus on NPA particularly after 1991 influenced the
risk-taking behaviour of banks. The problem of the NPA is handled differently by different
countries depending on the politico-economic system under which the banks operate. The
author further stated that banks in India holds higher levels of NPA than international
markets. The analysis supported the need for an effective asset reconstruction company
(AMC) to manage the NPA accounts. The author recommended more autonomy for banks to
improve its operational efficiency and to reduce the increased trend of NPA.
In an attempt to examine the presence of high average NPA shares in total bank
advances and the higher level of dispersion among banks, Raja Raman, et al (1999)
undertook specification tests for the impact of region of operation on domestically-owned
banks during 1996-97. The authors based on analysis confirmed that operational environment
is an important determinant of bank efficiency. The authors further commented that no
sustainable improvement in the performing efficiency of domestic banks is possible without
prior improvement in the enforcement environment in difficult regions of the country.

In a descriptive and comparative study Reddy, PK. (2002) assessed NPA management
measures in selected Asian countries. The study identified legal impediments, postponement
of the problem by the banks to show higher returns and manipulation by the debtors using
political influence as major reasons for the high NPA level in Indian banks. All the Asian
countries had a weak legal mechanism for asset disposal that prevented early resolution of the
problem. The author explained the need to understand the macroeconomic variables and
systemic issues pertaining to banks and the economy for solving the NPA problem along with
the criticality of a strong legal framework and legislative framework.
In order to examine the presence of variations of NPA within PSBs that are homogenous
on ownership dimension, Raja Raman, and Vasishtha, G. (2002) applied a panel regression
model on the data available on NPA of PSBs for a five year period ending 1999-2000. Twenty
seven PSBs were taken for the study. The analysis grouped banks with higher than average
NPAs into those explained by poor operating efficiency, and those where the operating
indicator does not suffice to explain the high level of NPAs, and leaves an unexplained
intercept shift. The results of the study explained that two of the three weak banks identified
by the Verma Committee, Indian Bank and United Bank of India, fall in this category. The
authors concluded that the recapitalization of banks with operational restructuring is not
recommended as a mean to manage NPA in cases where there exists a residual problem even
after controlling for operating efficiency.
In a similar research article, Dong, H. (2002) explained that the credit quality is low in PSBs
and development finance institutions (DFIs). The study is comparative in nature and drawn
conclusions based on the analysis of regional and cross country experiences in dealing with
impaired assets during the periods
The review of literature mentioned above indicated the distressing role of NPAs in
banking sector stability and growth, Even though many studies focussed on explaining the
trend in the movement of the NPA, the analytical part mostly concentrated on ratio analysis,
correlation and regression using a shorter study period. The primary emphasis of these studies
was to evaluate the movement of NPA and to check effectiveness of various regulatory
measures in managing NPA of banks. The majority of these studies recommended further
studies on NPA and the establishment of more proactive and curative measures to manage it.
NPA emanates due to various reasons and is influenced by many bank specific and economy
specific factors. This relationship which is moderating or mediating in nature is not explained
in the literatures. A detailed discussion on NPA during the financial crisis and a comparison

between pre-crisis and post-crisis period is not undertaken. Also, the expert feedback on
incidence of the NPA and its management is discussed in a few studies. The present research
addresses the suggestions of previous researches and discusses NPA in detail.

Chp3: Indian banking sector

3.1 -Introduction:
The banking system is central to a nations economy. Banks are special as
they not only accept and deploy large amounts of uncollateralized public funds
in a fiduciary capacity, but also leverage such funds through credit creation. In
general, the banking system performs four basic functions essential to
economic development and growth: mobilization of savings, allocation of
resources to productive uses, facilitating transactions and risk management and
exerting corporate control. The banking system in India is significantly
different from that of other Asian nations because of the countrys unique
geographic, social and economic characteristics. India has a large population
and land size, a diverse culture, and extreme disparities in income, which are
marked among its regions. The banking system in India has had to serve the

goals of economic policies enunciated in the successive five year development

plans, particularly concerning equitable income distribution, balanced regional
economic growth and the reduction and elimination of private sector
monopolies in trade and industry.

3.2-History of banking sector:

The history of modem Indian banking goes back to 1683 when the first
Indian Bank was established on western lines in Madras. The establishment of
the Bank of Calcutta in 1806 marked the beginning of the modern banking era
in India. Two more Presidential Banks, namely, Bank of Bombay and Bank of
Madras were set up in 1840 and 1843 respectively. With the launch of the
Swedish movement in 1905, there were outbursts of banking activities. Many
banks like Bank of Burma (1904), Bank of India (1906), Canara Bank (1906),
Bank of Rangoon (1906), Indian Specie Bank (1906), Indian Bank (1906),
Bank of Baroda (1908) and Central Bank (1911) had their operation with a paid
up capital of Rupees Five lakhs and above. The Indian banking system had
developed considerably since 1935. The Reserve Bank of India has started its
operation in 1935. A critical review of the growth of banking in India in the
pre-independence period revealed that the banking system had neither a definite
shape nor policy until the creation of RBI in 1935. With enactment of the
Banking Regulation Act in 1949, the Indian banking system had undergone
substantial changes structurally, geographically and functionally. In 1955, the
RBI acquired control of the Imperial Bank of India, which was renamed as
State Bank of India (SBI). In 1959, SBI took over control of eight private banks
floated in the erstwhile princely states, making them as its 100% subsidiaries. It
was in 1960, when RBI was empowered to force compulsory mergers of weak
banks with the strong ones. The move significantly reduced the total number of
banks from 566 in 1951 to 85 in 1969 (gosh and Joshi, 2012). As observed by
Banerjee (2004), Indias post-war development strategy was in many ways a
socialist one, and the government felt that the banks in private hands did not
lend enough to those who needed it most. Up to 1990s, this psychology
prevailed as may be observed from various policies and developments in Indian
banking.

The Indian financial system consists of different types of financial

institutions, classified into banking and non-banking institutions. The banking
institutions comprise of; Commercial Banks, Industrial or Investment Banks
and Rural Banks. The commercial banking system consists of Non-scheduled
banks and Scheduled banks. Non-scheduled banks refer to those banks that
are not included in the Second Schedule of the Banking Regulation Act and,
thus, do not satisfy the conditions laid down by that schedule. Scheduled banks
consist of scheduled commercial banks and scheduled cooperative banks. The
former are further divided into four categories: (1) Public Sector Banks (which
are further classified as Nationalized Banks and State Bank of India (SBI) &
Associate banks); (2) Private Sector Banks (which are further classified as Old
Private Sector Banks and New Private Sector Banks that emerged after 1991;
(3) Foreign Banks in India; and (4) Regional Rural Banks (which operate
exclusively in rural areas to provide credit and other facilities to small and
marginal farmers, agricultural workers, artisans, and small entrepreneurs).
These scheduled commercial banks with exception of the foreign banks are
registered in India under Companies Act.

Chp4: NPA in Indian banking sector

4.1: CONCEPT:
After having examined the theoretical framework on NPA and
Indian banking sector, the present chapter elucidates the trend in the movement of
NPA of Indian Public Sector Banks (PSBs) during post-millennium period. In
addition to explaining the trend in the movement of the NPA, the chapter
describes the moderating relationship of selected bank performance indicators on
the relationship between advances and NPA of banks. The mediating role of
selected macroeconomic variables on the relationship between NPA and advances
of banks is also emphasized. While explaining the trend in the movement of NPA,
an attempt is made to evaluate the effect of global financial crisis on the asset
quality of banks in India. In order to establish the relative efficiency of the

different bank groups in managing the NPA notably the PSBs, the analysis is done
bank group wise based on ownership.
Undoubtedly the world economy has slowed down, recession is at its
peak, globally stock markets have tumbled and business itself is getting hard to
do. The Indian economy has been much affected due to high fiscal deficit, poor
infrastructure facilities, sticky legal system, cutting of exposures to emerging
markets by FIIs, etc.
Further, international rating agencies like, Standard & Poor
have lowered India & credit rating to sub-investment grade. Such negative
aspects have often outweighed positives such as increasing for 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 institutions in
India hold non-performing assets worth Rs. 1, 10,000 Crores. Bankers have
realized that unless the level of NPAs is reduced drastically, they will find it
difficult to survive. The actual level of Non-Performing Assets in India is
around $40 billion much higher than government&#39 estimation of $16
billion. This difference is largely due to the discrepancy in accounting the NPAs
followed by India and rest of the world. The Accounting norms of the India are
less stringent than those of the developed economies. The. Indian banks also
have the tendency to extend the past dues. Considering the GDP of India nearly
$470 billion, the NPAs are 8% of total GDP, which was better than the many
Asian countries. The NPA of china was 45%of the GDP, while Japan had NPAs
of 25% of the GDP and Malaysia had 42%.The aggregate level of the NPAs in
Asia has increased from $2.5 billion in 2007 to $3.4 billion in 2009.looking to
such overall picture of the market, we can say that India is performing well and
the steps taken are looking favourable.

4.2: 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 nonstandard assets like as sub-standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAS/ Gross Advances
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance
sheets contain a huge amount of NPAs and the process of recovery and write off of loans is
very time consuming, the provisions the banks have to make against the NPAs according to
the central bank guidelines, are quite significant. That is why the difference between gross
and net NPA is quite high.

It can be calculated by following

Net NPAs = Gross NPAs Provisions/ Gross Advances Provisions

4.3: Asset classification

Assets can be categorized into Four categories namely (1) Standard
(2)Sub Standard (3) Doubtful (4) Loss the last three categories are classified as NPAs
based on the period for which the asset has remained non-performing and the
reliability of the dues.
(1) Standard assets:
The loan accounts which are regular and do not carry more than
normal risk. Within standard assets, there could be accounts which though have

not become NPA but are irregular. Such accounts are called as special Mention
accounts.
(2) Sub-Standard Assets:
A sub- standard asset is one, which is classified as NPA for a period
not exceeding 12 Months (earlier it was 18 months). In such cases, the current
net worth of the borrower/ guarantor or the current market value of the security
charged is not enough to ensure recovery of the dues to the bank in full. In
other words, such an asset will have well defined credit weakness that
jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not
corrected.
(3) Doubtful Assets:
An asset is to be classified as doubtful, if it has remained NPA or substandard for a period exceeding 12 months (earlier it was 18 months). A loan
classified as doubtful has all the weaknesses inherent in assets that were
classified as sub-standard, with the added characteristic that the weakness make
collection or liquidation in full, on the basis of currently known facts,
conditions and values- highly questionable and improbable.
(4) Loss assets:
A loss asset is one where loss has been identified by the bank or
internal or external auditors or the RBI inspection but the amount has not been
written off wholly. In other words, such an asset is considered uncollectible and
of such little value that its continuance as a bankable asset is not warranted
although there may be some salvage or recoverable value.

4.4: INSTRUMENTS OF NON PERFORMING ASSETS:

As the name suggests, these are those securities which cannot be sold in capital
markets like others marketable securities viz. shares, debenture and the like. Investors
can invest in these securities but they cannot sell these securities in financial market.
Some of the non-marketable investment includes:
a) Post office saving scheme:

Post office acts as one of the most important saving mobiliser in India. Post
office has branches in all part of the country even in rural areas, this helps
in mobilising savings from all corners of the country. The funds are
deposited with the government hence it offers 100% safety in money. The
post office also offers decent rate of interest. Many of the postal scheme
enjoy tax benefits also. Post office normally cannot provide good services
to the investors due to too much paper work, lack of staff, outdated
procedures etc. despite this post office scheme are one of the highly popular
scheme in India.
Various post office schemes are as follows:
Post office savings accounts.
5-year post office recurring deposit account.
Post office time deposit account.
Kisan vikas patra.
National saving certificate
Senior citizen saving scheme.

i.
ii.
iii.
iv.
v.
vi.

b) Public provident fund (PPF):

i.

Interest rate of 8.7% per annum w.e.f. 01-04-2013.

Minimum deposit is 500/- per annum. Maximum deposit is Rs. 1, 50,000/- pa

ii.

The scheme is for 15 years.

iii.

Investment up to Rs 1, 50,000/- per annum qualifies for Income Tax Rebate under
section 80C of IT Act.

iv.

Interest is completely tax-free.

v.

Deposits can be made in lump sum or in 12 instalments.

vi.

One deposit with a minimum amount of Rs 500/- is mandatory in each financial

year.

vii.

Withdrawal is permissible from 6th financial year.

viii.

Loan facility available from 3rd financial year up to 5th financial year. The rate of
interest charged on loan taken by the subscriber of a PPF account on or after
01.12.2011 shall be 2% p.a. However, the rate of interest of 1% p.a. shall continue
to be charged on the loans already taken or taken up to 30.11.2011.

ix.

Free from court attachment.

x.

Non-Resident Indians (NRIs) not eligible.

xi.

An individual cannot invest on behalf of HUF (Hindu Undivided Family) or

Association of persons.

xii.

Ideal investment option for both salaried as well as self-employed classes.

c) Bank deposits:
It is the simplest avenue of investment. A bank deposit can be made by opening a bank
account and depositing money in it. Different types of bank deposit account are:
i.
ii.
iii.
iv.

Current account.
Saving account.
Fixed deposit account.
Recurring deposit.
d) Company fixed deposits:
The deposit placed by investors with companies for a fixed term
carrying a prescribed rate of interest is called Company Fixed Deposit.
Financial institutions and Non-Banking Finance Companies (NBFCs) also
accept such deposits. Deposits thus mobilised are governed by the Companies
Act under Section 58A. These deposits are unsecured, i.e., if the company
defaults, the investor cannot sell the documents to recover his capital, thus
making them a risky investment option.
e) Unit linked insurance plans (ULIP):
A Unit Link Insurance Plan is basically a combination of insurance
as well as investment. A part of the premium paid is utilized to provide
insurance cover to the policy holder while the remaining portion is invested in
various equity and debt schemes. The money collected by the insurance
provider is utilized to form a pool of fund that is used to invest in various
markets instruments (debt and equity) in varying proportions just the way it is
done for mutual funds. Policy holders have the option of selecting the type of
funds (debt or equity) or a mix of both based on their investment need and
appetite. Just the way it is for mutual funds, ULIP policy holders are also
allotted units and each unit has a net asset value (NAV) that is declared on a

daily basis. The NAV is the value based on which the net rate of returns on
ULIPs are determined. The NAV varies from one ULIP to another based on
market conditions and the funds performance.

4.5: Income Recognition - Policy

1. The Policy of income recognition has to be objective and based on the record of recovery.
Internationally income from non-performing asset (NPA) is not recognized on accrual basis
but is booked as income only when it is actually received. Therefore, the banks should not
charge and take to income account interest on any NPA.
2. On an account turning NPA, banks should reverse the interest already charged and not
collected by debiting profit and loss account, and stop further application of interest.
However, banks may continue to record such accrued interest in a memorandum account in
their books.
3. However, interest on advances against term deposits, NSCs, IVPs, KVPs, and Life policies
may be taken to income account on the due date, provided adequate margin is available in the
accounts.
4. If government guaranteed advances become NPA, the interest on such advances should not
be taken to income account unless the interest has been realized.
5. If any advance, including bills purchased and discounted, become s NPA as at the close of
any year, the entire interest accrued and credited to income account in the past periods,
should be reversed or provided for if the same is not realized. This will apply to government
guaranteed accounts also.

4.6: PROVISING NORMS

There is time lag between an account becoming doubtful for recovery, the realization of
security and erosion over a period of time in its value. So RBI directive now requires the
banks to make provisions in their balance sheet for all non-standard loss assets. Provisioning
is made on all types of assets i.e. Standard, Sub Standard, Doubtful and loss assets.

1. Standard Assets:
RBI revised the provisioning requirements. For all types of standard assets it
has been reduced to a uniform level of 0.40 per cent of outstanding at global basis
except in the case of direct advances to agricultural and SME sectors, which shall
continue to attract a provisioning of 0.25 per cent. The provision on standard assets
relating to exposure in commercial real estate has been increased again to 1% as per
policy statement issued in Oct 09. The provisions on standard assets should not be
reckoned for arriving at net NPAs. 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 .
2. Sub Standard Assets:
In respect of sub-standard assets the rate of provision is 10% of outstanding
balance without considering ECGC guarantee cover or securities available. However,
if the loan was unsecured from the begging (unsecured Exposure&), there would be
additional provision of 10% I.e. total provision would be 20% of outstanding balance.
Unsecured exposure is defined as an exposure where the realizable value of the
security, as assessed by the bank/approved values/ Reserve Bank& inspecting officers,
is not more than 10 percent, ab-intio, of the outstanding exposure.
3. Doubtful assets:
In case of doubtful assets, while making provisions, realizable value of
security is to be considered. 100% provision is made for unsecured portion. In case of
secured portion, the rate of provision depends on age of the doubtful assets as under:

Classification of bank advances for determination of the amount of

provision:
Group of assets

Meaning

%of
provision
required

Standard assets

It is an asset which does not pose any problem

and which does not carry more than normal risk
attached to the business.

0.40%

Sub-standard asset

It is an asset which is classified as NPA for a

10%

period not exceeding 12 months.

Doubtful asset

It is an asset which has remained NPA for a

period exceeding 12 months:

100%

a) On unsecured portion
b) On secured portion if the period for
which

advance

doubtful:
c) Up to 1 year
Exceeding

Loss asset

is

considered

as

20%
30%

year

but

not

100%

exceeding 3 years
Exceeding 3 years

It is an asset where loss has been identified by

100%

the bank or RBI inspection but the amount has

not been written off

Chp5: INCIDENCE OF NPA

5.1- CAUSES OF NPA:

A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. The Indian banking
system, which was operating in a closed economy, now faces the challenges of an open
economy.
On one hand a protected environment ensured that banks never needed to develop
sophisticated treasury operations and Asset Liability Management skills.
On the other hand a combination of directed lending and social banking relegated
profitability and competitiveness to the background. The net result was unsustainable
NPAs and consequently a higher effective cost of banking services.
One of the main causes of NPAs into banking sector is the directed loans system under
which commercial banks are required a prescribed percentage of their credit (40%) to
priority sectors. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-core'
doubtful and loss assets, accumulated over the years.

The problem India Faces is not lack of strict prudential norms but
The legal impediments and time consuming nature of asset disposal proposal.
ii. Postponement of problem in order to show higher earnings.
iii. Manipulation of debtors using political influence.

5.2: 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 a well as internal factors.

a) EXTERNAL FACTORS:i.

Ineffective recovery tribunal:

The Govt. has set of numbers of recovery tribunals, which were 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.

ii.

Wilful 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.

iii.

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. Mainly ours farmers depends on rain fall for cropping. Due to
irregularities of rain fall the farmers are not to achieve the production level thus
they are not repaying the loans.

iv.

Industrial sickness:
Improper project handling, ineffective management, lack of adequate resources ,
lack of advance technology , day to day changing govt. Policies give birth to

industrial sickness. Hence the banks that finance those industries ultimately end
up with a low recovery of their loans reducing their profit and liquidity.
v.

Lack of demand:
Entrepreneurs in India could not foresee their product demand and starts
production which ultimately piles up their product thus making them unable to pay
back the money they borrow to operate these activities. The banks recover the amount
by selling of their assets, which covers a minimum label. Thus the banks record the no
recovered part as NPAs and has to make provision for it.

vi.

Change on Govt. policies:

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. The fallout of handloom sector is continuing as
most of the weavers Co-operative societies have become defunct largely due to
withdrawal of state patronage. The rehabilitation plan worked out by the Central
government to revive the handloom sector has not yet been implemented. So the
over dues due to the handloom sectors are becoming NPAs.

b) INTERNAL FACTORS:-

i.

Defective Lending process:

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
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.

ii.

Inappropriate technology:

Due to inappropriate technology and management information system,

market driven decisions on real time basis cannot be taken. Proper MIS and financial
accounting system is not implemented in the banks, which leads to poor credit collection,
thus NPA. All the branches of the bank should be computerize
iii.

Improper SWOT analysis:

The improper strength, weakness, opportunity and threat analysis is another

reason for rise in NPAs. While providing unsecured advances the banks depend more on the
honesty, integrity, and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from_

A. From bankers.
B. Enquiry from market/segment of trade, industry, business.
C. From external credit rating agencies.
iv.

Analyse the balance sheet:

True picture of business will be revealed on analysis of profit/loss a/c and

balance sheet.
v.

Purpose of the loan:

When bankers give loan, he should analyse the purpose of the loan. To ensure

safety and liquidity, banks should grant loan for productive purpose only. Bank should
analyse the profitability, viability, long term acceptability of the project while financing.
vi.

Poor credit appraisal system:

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.
vii.

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.
The banker should follow the principle of diversification of risk based on the famous
maxim do not keep all the eggs in one basket; it means that the banker should not grant
advances to a few big farms only or to concentrate them in few industries or in a few cities. If
a new big customer meets misfortune or certain traders or industries affected adversely, the
overall position of the bank will not be affected.
viii.

Absence of regular industrial visit:

The irregularities in spot visit also increases the NPAs. Absence of regularly visit

of bank officials to the customer point decreases the collection of interest and principals on
the loan. The NPAs due to wilful defaulters can be collected by regular visits.
ix.

Re loaning process:
Non remittance of recoveries to higher financing agencies and re loaning of the

same have already affected the smooth operation of the credit cycle.

5.3: 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. Non- performing loans epitomize bad investment. They misallocate credit from good
projects, which do not receive funding, to failed projects. Bad investment ends up in
misallocation of capital, and by extension, labour and natural resources.
Non -performing asset may spill over the banking system and contract the money stock,
which may lead to economic contraction. This spill over 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,
b) Illiquidity constraints bank in paying depositors
c) Undercapitalized banks exceeds the banks capital base.
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.

5.4: Impact of NPA:

a) Profitability
NPA means booking of money in terms of bad asset, which occurred due
to wrong choice of client. Because of the money getting blocked the prodigality of
bank decreases not only by the amount of NPA but NPA lead to opportunity cost also
as that much of profit invested in some return earning project/asset. So NPA doesnt
affect current profit but also future stream of profit, which may lead to loss of some
long-term beneficial opportunity. Another impact of reduction in profitability is low
ROI (return on investment), which adversely affect current earning of bank.

b) liquidity:Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shortest 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.
c) 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 days banks have special
employees to deal and handle NPAs, which is additional cost to the bank.

d) Credit loss:Bank is facing problem of NPA then it adversely affect the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which have negative impact to the
people who are putting their money in the banks.

5.4: Preventive Measurement for NPA:

EARLY RECOGNIGATION OF THE PROBLEM:
Invariably, by the time banks start their efforts to get involved in a revival
process, its too late to retrieve the situation- both in terms of rehabilitation of the project and
recovery of banks 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 promoters 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: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 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.
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 promoters 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.
Focus on Cash Flows: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 analyzing 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 units
fortunes. A bank may commit additional finance to an align 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.