12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

TopBSchoolsinIndia|MBAPGDMAdmissionDates&Deadlines |DistanceMBAAdmissions|DistanceMBAInstitutesinIndia
BSchoolswithNRIQuota|BBAColleges|CitywiseListofMBAColleges|MBACATCoachingClasses|MBACATResults
Evening/ExecutiveMBA|PartTimeMBA|ArticlesonManagementbyFaculty|ArticlesonManagementbyStudents
FacultyPositions|MBAJobsinIndia|Ph.D.inManagement|Homepage

NonPerformingAssets&its'RoleinIndianPerspective
(AStudyofPublic,Private&ForeignSectorBanks)
By

AmitKumarSrivastava
AssistantProfessor
ShriRamMurtiSmarakCollegeofEngineering&Technology
Bareilly

AkanshaSrivastava
AssistantProfessor
BansalInstituteofEngineering&Technology
Lucknow

Abstract:
TheNPAisoneofthebiggestproblemsthattheBanksarefacingtoday.Ifthepropermanagementofthe
NPAsisnotundertakenitwouldhamperthebusinessofthebanks.IftheconceptofNPAsistakenvery
lightlyitwouldbedangerousforthewholebankingsector.TheNPAswoulddestroythecurrentprofit,
interestincomeandwouldaffectthesmoothfunctioningoftherecyclingofthefunds.Banksalso
redistributelossestootherborrowersbycharginghigherinterestrates,lowerdepositratesandhigher
lendingratesrepresssavingsandfinancialmarkets,whichhamperseconomicgrowth.Publicsectorbanks
aremoreefficientthanprivatesector&foreignbankswithregardtothemanagementofnonperforming
assets.
NPAsweremorenoticeableinrespectofnewprivatesectorandforeignbanks,whichhavebeenmore
activeintherealestateandhousingloanssegments.Itshowsupwardtrendsovertheyearsascompared
toothers.Theoldprivatesectorbanks,whichhadbeenregisteringasignificantlylowergrowthratethan
theirnewercounterpartsintherecentpast,managedabetterperformanceincurrentyear.Amongall
threesectors,publicsectorbankshavemanagedtoreduceNPAsovertheyears.NPAprofileinthe<2%
categoryofpublicsectorbankswasreachedto100%in200809ascomparedtoPrivateandForeign
sectorbankswhichwasaround80%.NetNPAagainstnetadvancesincreasedmoreinForeignand
Privatesectorbanksin200809whilePublicsectorbankshavesucceededinreducingnetNPAagainstnet
advancesmadeovertheperiodoftime.Publicsectorbankshavemanagedtoincreasethestandard
assetsovertheyears.TheproportionofstandardassetsinPrivatesectorbanksreducedin2008and
2009whichwascompensatedbyincreaseinsubstandardanddoubtfulassets.InForeignsectorbanks
theproportionofsubstandardassethasincreasedtremendouslyby3.5%ofloanassetsin2009which
was1.2%ofloanassetsin2008.ThepercentagechangeingrossNPAtogrossadvancesratio&netNPA
tonetadvancesratioovertheyearsstatesthatpublicsectorbanksmakesmoreprovisionsingrossNPA
&grossAdvancesascomparedtoprivateandforeignbanks.
http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

1/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

1.Introduction:
NonPerformingAssetmeansanassetoraccountofborrower,whichhasbeenclassifiedbyabankor
financialinstitutionassubstandard,doubtfulorlossasset,inaccordancewiththedirectionsor
guidelinesrelatingtoassetclassificationissuedbyRBI.Anamountdueunderanycreditfacilityistreated
as"pastdue"whenithasnotbeenpaidwithin30daysfromtheduedate.Duetotheimprovementinthe
paymentandsettlementsystems,recoveryclimate,upgradationoftechnologyinthebankingsystem,
etc.,itwasdecidedtodispensewithpastdue'concept,witheffectfromMarch31,2001.Accordingly,as
fromthatdate,aNonperformingasset(NPA)shallbeanadvancewhere:
*Interestand/orinstallmentofprincipalremainoverdueforaperiodofmorethan180daysinrespect
ofaTermLoan,
*Theaccountremains'outoforder'foraperiodofmorethan180days,inrespectofanoverdraft/cash
Credit(OD/CC),
*Thebillremainsoverdueforaperiodofmorethan180daysinthecaseofbillspurchasedand
discounted,
*Interestand/orinstallmentofprincipalremainsoverduefortwoharvestseasonsbutforaperiodnot
exceedingtwohalfyearsinthecaseofanadvancegrantedforagriculturalpurpose,and
*Anyamounttobereceivedremainsoverdueforaperiodofmorethan180daysinrespectofother
accounts.
Withaviewtomovingtowardsinternationalbestpracticesandtoensuregreatertransparency,ithas
beendecidedtoadoptthe'90daysoverdue'normforidentificationofNPAs,NonPerformingAssetmeans
anassetoraccountofborrower,whichhasbeenclassifiedbyabankorfinancialinstitutionassub
standard,doubtfulorlossasset,inaccordancewiththedirectionsorguidelinesrelatingtoasset
classificationissuedbyRBI.Anamountdueunderanycreditfacilityistreatedas"pastdue"whenithas
notbeenpaidwithin30daysfromtheduedate.Duetotheimprovementinthepaymentandsettlement
systems,recoveryclimate,upgradationoftechnologyinthebankingsystem,etc.,itwasdecidedto
dispensewith'pastdue'concept,witheffectfromMarch31,2001.
ClassificationofAssets:
Assetsareclassifiedintofollowingfourcategories:
1)StandardAssets
2)SubstandardAssets
3)DoubtfulAssets
4)LossAssets
1)StandardAssets:Standardassetsaretheonesinwhichthebankisreceivinginterestaswellasthe
principalamountoftheloanregularlyfromthecustomer.Hereitisalsoveryimportantthatinthiscase
thearrearsofinterestandtheprincipalamountofloandonotexceed90daysattheendoffinancial
year.Ifassetfailstobeincategoryofstandardassetthatisamountduemorethan90daysthenitis
NPAandNPAsarefurtherneedtoclassifyinsubcategoriesusingnorms.
Banksarerequiredtoclassifynonperformingassetsfurtherintothefollowingthreecategoriesbasedon
theperiodforwhichtheassethasremainednonperformingandthereasonabilityofthedues:
*SubStandardAssets
*DoubtfulAssets
*LossAssets
a)SubStandardAssets:Witheffectfrom31March2005,asubstandardassetwouldbeone,whichhas
remainedNPAforaperiodlessthanorequalto12month.Thefollowingfeaturesareexhibitedby
substandardassets:thecurrentnetworthoftheborrowers/guarantororthecurrentmarketvalueofthe
securitychargedisnotenoughtoensurerecoveryoftheduestothebanksinfullandtheassethaswell
definedcreditweaknessesthatjeopardizetheliquidationofthedebtandarecharacterizedbythedistinct
possibilitythatthebankswillsustainsomeloss,ifdeficienciesarenotcorrected.
b)DoubtfulAssets:Aloanclassifiedasdoubtfulhasalltheweaknessesinherentinassetsthatwere
classifiedassubstandard,withtheaddedcharacteristicthattheweaknessesmakecollectionor
liquidationinfull,onthebasisofcurrentlyknownfacts,conditionsandvalueshighlyquestionableand
improbable.WitheffectfromMarch31,2005,anassetwouldbeclassifiedasdoubtfulifitremainedin
thesubstandardcategoryfor12months.
c)LossAssets:Alossassetisonewhichconsidereduncollectibleandofsuchlittlevaluethatits
continuanceasabankableassetisnotwarranted,althoughtheremaybesomesalvageorrecovery
value.Also,theseassetswouldhavebeenidentifiedaslossassetsbythebankorinternalorexternal
auditorsortheRBIinspectionbuttheamountwouldnothavebeenwrittenoffwholly.
http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

2/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

TypesofNPA:
*GrossNPA
*NetNPA
a)GrossNPA:arethesumtotalofallloanassetsthatareclassifiedasNPAsasperRBIguidelinesason
BalanceSheetdate.GrossNPAreflectsthequalityoftheloansmadebybanks.Itconsistsofallthe
nonstandardassetslikeassubstandard,doubtful,andlossassets.Itcanbecalculatedwiththehelpof
followingratio:

b)NetNPA:arethosetypeofNPAsinwhichthebankhasdeductedtheprovisionregardingNPAs.Net
NPAshowstheactualburdenofbanks.InIndia,bank'sbalancesheetscontainahugeamountofNPAs
andtheprocessofrecoveryandwriteoffofloansisverytimeconsuming,theprovisionsthebankshave
tomakeagainsttheNPAsaccordingtothecentralbankguidelines,arequitesignificant.Thatiswhythe
differencebetweengrossandnetNPAisquitehigh.Itcanbecalculatedbyfollowing:

ReasonsforanaccountbecomingNPA:
1)InternalFactors:
*Fundsborrowedforaparticularpurposebutnotuseforthesaidpurpose.
*Projectnotcompletedintime.
*Poorrecoveryofreceivables.
*Excesscapacitiescreatedonnoneconomiccosts.
*Inabilityofthecorporatetoraisecapitalthroughtheissueofequityorotherdebtinstrumentfrom
capitalmarkets.
*Businessfailures.
*Diversionoffundsforexpansion\modernization\settingupnewprojects\helpingorpromotingsister
concerns.
*Willfuldefaults,siphoningoffunds,fraud,disputes,managementdisputes,misappropriationetc.
*Deficienciesonthepartofthebanksviz.increditappraisal,monitoringandfollowups,delaying
settlementofpayments\subsidiariesbygovernmentbodiesetc.,
2)ExternalFactors:
*SluggishLegalSystemi.e.longlegaltangles,changesthathadtakenplaceinlabourlaws&lackof
sincereeffort.
*Scarcityofrawmaterial,powerandotherresources.
*IndustrialRecession.
*Shortageofrawmaterial,rawmaterial/inputpriceescalation,powershortage,industrialrecession,
excesscapacity,naturalcalamitieslikefloods,accidents.
*Failures,nonpaymentoverduesinothercountries,recessioninothercountries,externalization
problems,adverseexchangeratesetc.
*Governmentpolicieslikeexcisedutychanges,Importdutychangesetc.
ImpactofNPA:
1)Profitability:NPAmeansbookingofmoneyintermsofbadasset,whichoccurredduetowrongchoice
ofclientbecauseofthemoneygettingblockedtheprodigalityofbankdecreasesnotonlybytheamount
ofNPAbutNPAleadtoopportunitycostalsoasthatmuchofprofitinvestedinsomereturnearning
project/asset.SoNPAdoesn'taffectcurrentprofitbutalsofuturestreamofprofit,whichmayleadtoloss
ofsomelongtermbeneficialopportunity.AnotherimpactofreductioninprofitabilityislowROI(Return
OnInvestment),whichadverselyaffectcurrentearningsofbank.
2)Liquidity:Moneyisgettingblocked,decreasedprofitleadtolackofenoughcashathandwhichleadto
borrowingmoneyforshortestperiodoftimewhichleadtoadditionalcosttothecompany.Difficultyin
operatingthefunctionsofbankisanothercauseofNPAduetolackofmoney,routinepaymentsand
dues.
3)InvolvementofManagement:Timeandeffortsofmanagementisanotherindirectcostwhichbank
hasto,bearduetoNPA.TimeandeffortsofmanagementinhandlingandmanagingNPAwouldhave
divertedtosomefruitfulactivities,whichwouldhavegivengoodreturns.Nowdaysbankshavespecial
http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

3/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

employeestodealandhandleNPAs,whichisadditionalcosttothebank.
4)CreditLoss:BankisfacingproblemofNPAthenitadverselyaffectthevalueofbankintermsof
marketcredit.Itwillloseitsgoodwillandbrandimageandcreditwhichhavenegativeimpacttothe
peoplewhoareputtingtheirmoneyinthebanks.
SymptomsofNPA:
TherearefoursymptomsbywhichonecanrecognizeaPerformingAssetturningintoNonPerforming
Asset.
1)Financial:
*Nonpaymentoftheveryfirstinstallmentincaseoftermloan.
*Bouncingofchequesduetoinsufficientbalanceintheaccounts.
*Irregularityininstallment.
*Irregularityofoperationsintheaccounts.
*Unpaidoverduebills
*DecliningCurrentRatio.
*Paymentwhichdoesnotcovertheinterestandprincipalamountofthatinstallment.
*Whilemonitoringtheaccountsitisfoundthatpartialamountisdivertedtosisterconcernorparent
company.
2)OperationalandPhysical:
*Ifinformationisreceivedthattheborrowerhaseitherinitiatedtheprocessofwindinguporarenot
doingthebusiness.
*Overduereceivables.
*Stockstatementnotsubmittedontime.
*Externalnoncontrollablefactorlikenaturalcalamitiesinthecitywhereborrowerconducthisbusiness.
*Nonpaymentofwages.
3)AttitudinalChanges:
*Useforpersonalcomfort,stocksandsharesbyborrower.
*Avoidanceofcontactwithbank.
*Problembetweenpartners.
4)Others:
*ChangesinGovernmentpolicies.
*Deathofborrower.
*Competitioninthemarket.
PreventiveMeasurementforNPA:
1)EarlyRecognitionoftheProblem:Invariably,bythetimebanksstarttheireffortstogetinvolvedin
arevivalprocess,ittoolatetoretrievethesituationbothintermsofrehabilitationoftheprojectand
recoveryofbanksdues.
2)IdentifyingBorrowerswithgenuineintent:Identifyingborrowerswithgenuineintentfromthose
whoarenonseriouswithnocommitmentorstakeinrevivalisachallengeconfrontingbankers.Herethe
roleoffrontlineofficialsatthebranchlevelisparamountastheyaretheoneswhohaveintelligentinputs
withregardtopromoterssincerity,andcapabilitytoachieveturnaround.Basedonthisobjective
assessment,banksshoulddecideasquicklyaspossiblewhetheritwouldbeworthwhiletocommit
additionalfinance."SpecialInvestigation"Inthisregardbanksmayconsiderhavingofallfinancial
transactionorbusinesstransaction,booksofaccountinordertoascertainrealfactorsthatcontributedto
sicknessoftheborrower.Banksmayhavepenaloftechnicalexpertswithprovenexpertiseandtrack
recordofpreparingtechnoeconomicstudyoftheprojectoftheborrowers.
3)Timeliness&Adequacyofresponse:Longerthedelayinresponse,gratertheinjurytotheaccount
andtheasset.Timeisacrucialelementinanyrestructuringorrehabilitationactivity.Theresponse
decidedonthebasisoftechnoeconomicstudyandpromoterscommitment,hastobeadequateinterms
ofextendofadditionalfundingandrelaxationsetc.Undertherestructuringexercise.Thepackageof
assistancemaybeflexibleandbankmaylookattheexitoption.
4)FocusonCashflows:Whilefinancing,atthetimeofrestructuringthebanksmaynotbeguidedby
theconventionalfundflowanalysisonly,whichcouldyieldapotentiallymisleadingpicture.Appraisalfor
freshcreditrequirementsmaybedonebyanalyzingfundsflowinconjunctionwiththeCashFlowrather
thanonlyonthebasisofFundsFlow.
http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

4/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

5)ManagementEffectiveness:Thegeneralperceptionamongborroweristhatitislackoffinancethat
leadstosicknessandNPAs.Butthismaynotbethecaseallthetime.Managementeffectivenessin
tacklingadversebusinessconditionsisaveryimportantaspectthataffectsaborrowingunitsfortunes.A
bankmaycommitadditionalfinancetoanglingunitonlyafterbasicviabilityoftheenterprisealsointhe
contextofqualityofmanagementisexaminedandconfirmed.Wherethedefaultisduetodeepermalady,
viabilitystudyorinvestigativeauditshouldbedoneitwillbeusefultohaveconsultantappointedas
earlyaspossibletoexaminethisaspect.Apropertechnoeconomicviabilitystudymustthusbecomethe
basisonwhichanyfutureactioncanbeconsidered.
6)MultipleFinancing:Duringtheexerciseforassessmentofviabilityandrestructuring,aPragmaticand
unifiedapproachbyallthelendingbanks/FIsasalsosharingofallrelevantinformationontheborrower
wouldgoalongwaytowardoverallsuccessofrehabilitationexercise,giventheprobabilityof
success/failure.
ProceduresforNPAidentification:
1)InternalChecksandControl:SincehighlevelofNPAsdampenstheperformanceofthebanks
identificationofpotentialproblemaccountsandtheirclosemonitoringassumesimportance.Thoughmost
bankshaveEarlyWarningSystems(EWS)foridentificationofpotentialNPAs,theactualprocesses
followed,however,differfrombanktobank.TheEWSenableabanktoidentifytheborroweraccounts
whichshowsignsofcreditdeteriorationandinitiateremedialaction.Manybankshaveevolvedand
adoptedanelaborateEWS,whichallowsthemtoidentifypotentialdistresssignalsandplantheiroptions
beforehand,accordingly.Theearlywarningsignals,indicativeofpotentialproblemsintheaccounts,viz.
persistentirregularityinaccounts,delaysinservicingofinterest,frequentdevolvementofL/Cs,units'
financialproblems,marketrelatedproblems,etc.Arecapturedbythesystem.Inaddition,someofthese
banksarereviewingtheirexposuretoborroweraccountseveryquarterbasedonpublisheddatawhich
alsoservesasanimportantadditionalwarningsystem.Theseearlywarningsignalsusedbybanksare
generallyindependentofriskratingsystemsandassetclassificationnormsprescribedbyRBI.Themajor
components/processesofaEWSfollowedbybanksinIndiaasbroughtoutbyastudyconductedby
ReserveBankofIndiaattheinstanceoftheBoardofFinancialSupervisionareasfollows:
i.RelationshipManager/CreditOfficer:TheRelationshipManager/CreditOfficerisanofficialwhois
expectedtohavecompleteknowledgeofborrower,hisbusiness,hisfutureplans,etc.TheRelationship
Managerhastokeepinconstanttouchwiththeborrowerandreportalldevelopmentsimpactingthe
borrowableaccount.Asapartofthiscontactheisalsoexpectedtoconductscrutinyandactivity
inspections.Inthecreditmonitoringprocess,theresponsibilityofmonitoringacorporateaccountis
vestedwithRelationshipManager/CreditOfficer.
ii.Knowyourclient'profile(KYC):MostbanksinIndiahaveasystemofpreparing`knowyourclient'
(KYC)profile/creditreport.Asapartof`KYC'system,visitsaremadeonclientsandtheirplacesof
business/units.Thefrequencyofsuchvisitsdependsonthenatureandneedsofrelationship.
iii.CreditRatingSystem:Thecreditratingsystemisessentiallyonepointindicatorofanindividual
creditexposureandisusedtoidentifymeasureandmonitorthecreditriskofindividualproposal.At
themwholebanklevel,creditratingsystemenablestrackingthehealthofbanksentirecreditportfolio.
MostbanksinIndiahaveputinplacethesystemofinternalcreditrating.Whilemostofthebankshave
developedtheirownmodels,afewbankshaveadoptedcreditratingmodelsdesignedbyratingagencies.
Creditratingmodelstakeintoaccountvarioustypesofrisksviz.financial,industryandmanagement,
etc.associatedwithaborrowableunit.Theexerciseisgenerallydoneatthetimeofsanctionofnew
borrowableaccountandatthetimeofreviewrenewalofexistingcreditfacilities.
iv.Watchlist/SpecialMentionCategory:Thegradingofthebank'sriskassetsisanimportantinternal
controltool.ItservestheneedoftheManagementtoidentifyandmonitorpotentialrisksofaloanasset.
ThepurposeofidentificationofpotentialNPAsistoensurethatappropriatepreventive/correctivesteps
couldbeinitiatedbythebanktoprotectagainsttheloanassetbecomingnonperforming.Mostofthe
bankshaveasystemtoputcertainborrowableaccountsunderwatchlistorspecialmentioncategoryif
performingadvancesoperatingunderadversebusinessoreconomicconditionsareexhibitingcertain
distresssignals.Theseaccountsgenerallyexhibitweaknesseswhicharecorrectablebutwarrantbanks'
closerattention.Thecategorizationofsuchaccountsinwatchlistorspecialmentioncategoryprovides
earlywarningsignalsenablingRelationshipManagerorCreditOfficertoanticipatecreditdeterioration
andtakenecessarypreventivestepstoavoidtheirslippageintononperformingadvances.EarlyWarning
SignalsItisimportantinanyearlywarningsystem,tobesensitivetosignalsofcreditdeterioration.
Earlywarningsignalscanbeclassifiedintofivebroadcategoriesviz.
*Financial
*Operational
*Banking
*Managementand
*Externalfactors.
http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

5/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

2)Management/ResolutionofNPAs:
AreductioninthetotalgrossandnetNPAsintheIndianfinancialsystemindicatesasignificant
improvementinmanagementofNPAs.Thisisalsoonaccountofvariousresolutionmechanisms
introducedintherecentpastwhichincludetheSRFAESIAct,onetimesettlementschemes,settingupof
theCDRmechanism,strengtheningofDRTs.FromthedataavailableofPublicSectorBanksasonMarch
31,2003,therewere1,522numbersofNPAsasonMarch31,2003whichhadgrossvaluegreaterthan
Rs.50millioninallthepublicsectorbanksinIndia.ThetotalgrossvalueoftheseNPAsamountedtoRs.
215billion.Thetotalnumberofresolutionapproaches(includingcaseswhereactionistobeinitiated)is
greaterthanthenumberofNPAs,indicatingsomedoublecounting.Ascanbeseen,suitfiledandBIFR
arethetwomostcommonapproachestoresolutionofNPAsinpublicsectorbanks.Rehabilitationhas
beenconsidered/adoptedinonlyabout13%ofthecases.Settlementhasbeenconsideredonlyin9%of
thecases.Itislikelytohavebeenadoptedinevenfewercases.Dataavailableonresolutionstrategies
adoptedbypublicsectorbankssuggestthatCompromisesettlementschemeswithborrowersarefoundto
bemoreeffectivethanlegalmeasures.Manybankshavecomeoutwiththeirownrestructuringschemes
forsettlementofNPAaccounts.StateBankofIndia,HDFCLimited,M/s.DunandBradstreetInformation
Services(India)Pvt.Ltd.andM/s.TransUniontoserveasamechanismforexchangeofinformation
betweenbanksandFIsforcurbingthegrowthofNPAsincorporatedcreditInformationBureau(India)
Limited(CIBIL)inJanuary2001.PendingtheenactmentofCIBRegulationBill,theRBIconstituteda
workinggrouptoexaminetheroleofCIBs.Aspertherecommendationsoftheworkinggroup,Banksand
FIsarenowrequiredtosubmitthelistofsuitfiledcasesofRs.10millionandaboveandsuitfiledcases
ofwillfuldefaultersofRs.2.5millionandabovetoRBIaswellasCIBIL.CIBILwillsharethisinformation
withcommercialbanksandFIssoastohelpthemminimizeadverseselectionatappraisalstage.The
CIBILisintheprocessofgettingoperationalised.
3)WillfulDefaulters:RBIhasissuedrevisedguidelinesinrespectofdetectionofwillfuldefaultand
diversionandsiphoningoffunds.Aspertheseguidelinesawillfuldefaultoccurswhenaborrower
defaultsinmeetingitsobligationstothelenderwhenithascapacitytohonortheobligationsorwhen
fundshavebeenutilizedforpurposesotherthanthoseforwhichfinancewasgranted.Thelistofwillful
defaultersisrequiredtobesubmittedtoSEBIandRBItopreventtheiraccesstocapitalmarkets.Sharing
ofinformationofthisnaturehelpsbanksintheirduediligenceexerciseandhelpsinavoidingfinancing
unscrupulouselements.RBIhasadvisedlenderstoinitiatelegalmeasuresincludingcriminalactions,
whereverrequireed,andundertakeaproactiveapproachinchangeinmanagement,whereappropriate.
4)LegalandRegulatoryRegime
i.DebtRecoveryTribunals:DRTsweresetupundertheRecoveryofDebtsduetoBanksandFinancial
InstitutionsAct,1993.UndertheAct,twotypesofTribunalsweresetupi.e.DebtRecoveryTribunal
(DRT)andDebtRecoveryAppellateTribunal(DRAT).TheDRTsarevestedwithcompetencetoentertain
casesreferredtothem,bythebanksandFIsforrecoveryofdebtsduetothesame.Theorderpassedby
aDRTisappealabletotheAppellateTribunalbutnoappealshallbeentertainedbytheDRATunlessthe
applicantdeposits75%oftheamountduefromhimasdeterminedbyit.However,theAffiliateTribunal
may,forreasonstobereceivedinwriting,waiveorreducetheamountofsuchdeposit.AdvancesofRs.
1millionandabovecanbesettledthroughDRTprocess.AnimportantpowerconferredontheTribunalis
thatofmakinganinterimorder(whetherbywayofinjunctionorstay)againstthedefendanttodebar
himfromtransferring,alienatingorotherwisedealingwithordisposingofanypropertyandtheassets
belongingtohimwithinpriorpermissionoftheTribunal.Thisordercanbepassedevenwhiletheclaimis
pending.DRTsarecriticizedinrespectofrecoverymadeconsideringthesizeofNPAsintheCountry.In
general,itisobservedthatthedefendantsapproachtheHighCountrychallengingtheverdictofthe
AppellateTribunalwhichleadstofurtherdelaysinrecovery.ValidityoftheActisoftenchallengedinthe
courtwhichhinderstheprogressoftheDRTs.Lastly,manyneedstobedoneformakingtheDRTs
strongerintermsofinfrastructure.
Lokadalats:TheinstitutionofLokadalatconstitutedundertheLegalServicesAuthoritiesAct,1987helps
inresolvingdisputesbetweenthepartiesbyconciliation,mediation,compromiseoramicablesettlement.
Itisknownforeffectingmediationandcounselingbetweenthepartiesandtoreduceburdenonthecourt,
especiallyforsmallloans.CasesinvolvingsuitclaimsuptoRs.lmillioncanbebroughtbeforethe
LokadalatandeveryawardoftheLokadalatshallbedeemedtobeadecreeofaCivilCourtandno
appealcanlietoanycourtagainsttheawardmadebytheLokadalat.Severalpeopleofparticular
localitiesvarioussocialorganizationsareapproachingLokadalatswhicharegenerallypresidedoverby
twoorthreeseniorpersonsincludingretiredseniorcivilservants,

http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

6/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

defensepersonnelandjudicialofficers.Theytakeupcaseswhicharesuitableforsettlementofdebtfor
certainconsideration.Partiesareheardandtheyexplaintheirlegalposition.Theyareadvisedtoreachto
somesettlementduetosocialpressureofseniorbureaucratsorjudicialofficersorsocialworkers.Ifthe
compromiseisarrivedat,thepartiestothelitigationsignastatementinpresenceofLokadalatswhichis
expectedtobefiledincourttoobtainaconsentdecree.Normally,ifsuchsettlementcontainsaclause
thatifthecompromiseisnotadheredtobytheparties,thesuitspendinginthecourtwillproceedin
accordancewiththelawandpartieswillhavearighttogetthedecreefromthecourt.Ingeneral,itis
observedthatbanksdonotgetthefulladvantageoftheLokadalats.Itisdifficulttocollecttheconcerned
borrowerswillingtogoinforcompromiseonthedaywhentheLokadalatmeets.Inanycase,weshould
continueoureffortstoseekthehelpoftheLokadalat.
iii.EnactmentofSRFAESIAct:The"TheSecuritizationandReconstructionofFinancialAssetsand
EnforcementofSecurityInterestAct"(SRFAESI)providestheformallegalbasisandregulatory
frameworkforsettingupAssetReconstructionCompanies(ARCs)inIndia.Inadditiontoasset
reconstructionandARCs,theActdealswiththefollowinglargelyaspects,
*SecuritizationandSecuritizationCompanies
*EnforcementofSecurityInterest
*Creationofacentralregistryinwhichallsecuritizationandassetreconstructiontransactionsaswellas
anycreationofsecurityinterestshastobefilled.
InstitutionofCDRMechanism:(CorporateDebtRestructuring)
TheRBIhasinstitutedtheCorporateDebtRestructuring(CDR)mechanismforresolutionofNPAsofviable
entitiesfacingfinancialdifficulties.TheCDRmechanisminstitutedinIndiaisbroadlyalongthelinesof
similarsystemsintheUK,Thailand,KoreaandMalaysia.TheobjectiveoftheCDRmechanismhasbeen
toensuretimelyandtransparentrestructuringofcorporatedebtoutsidethepurviewoftheBoardfor
IndustrialandFinancialReconstruction(BIFR),DRTsorotherlegalproceedings.Theframeworkis
intendedtopreserveviablecorporateaffectedbycertaininternal/externalfactorsandminimizelossesto
creditors/otherstakeholdersthroughanorderlyandcoordinatedrestructuringprogramme.RBIhasissued
revisedguidelinesinFebruary2003withrespecttotheCDRmechanism.Corporateborrowerswith
borrowingsfromthebankingsystemofRs.20croresandaboveundermultiplebankingarrangementare
eligibleundertheCDRmechanism.Accountsfallingunderstandard,substandardordoubtfulcategories
canbeconsideredforrestructuring.
CDRisanonstatutorymechanismbasedondebtorcreditoragreementandintercreditoragreement.
Restructuringhelpsinaligningrepaymentobligationsforbankerswiththecashflowprojectionsas
reassessedatthetimeofrestructuring.Thereforeitiscriticaltopreparearestructuringplanonthelines
oftheexpectedbusinessplanalongwithprojectedcashflows.TheCDRprocessisbeingstabilized.
Certainrevisionsareenvisagedwithrespecttotheeligibilitycriteria(amountofborrowings)andtime
frameforrestructuring.ForeignbanksarenotmembersoftheCDRforum,anditisexpectedthatthey
wouldbesigningtheagreementsshortly.Howevertheyattendmeetings.ThefirstARCtobeoperational
inIndiaAssetReconstructionCompanyofIndia(ARGIL)isamemberoftheCDRforum.LendersinIndia
prefertoresorttoCDRmechanismtoavoidunnecessarydelaysinmultiplelenderarrangementsandto
increasetransparencyintheprocess.WhileintheRBIguidelinesithasbeenrecommendedtoinvolve
independentconsultants,banksaresofarresortingtotheirinternalteamsforrecommending
restructuringprograms.
CompromiseSettlementSchemes:
1)OneTimeSettlementSchemes:NPAsinallsectors,whichhavebecomedoubtfulorlossason31st
March2000.TheschemealsocoversNPAsclassifiedassubstandardason31stMarch2000,whichhave
subsequentlybecomedoubtfulorloss.Allcasesonwhichthebankshaveinitiatedactionunderthe
SRFAESIActandalsocasespendingbeforeCourts/DRTs/BIFR,subjecttoconsentdecreebeingobtained
fromtheCourts/DRTs/BIFRarecovered.Howevercasesofwillfuldefault,fraudandmalfeasancearenot
http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

7/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

covered.AspertheOTSscheme,forNPAsuptoRs.10crores,theminimumamountthatshouldbe
recoveredshouldbe100%oftheoutstandingbalanceintheaccount.
2)NegotiatedSettlementSchemes:TheRBI/Governmenthasbeenencouragingbankstodesignand
implementpoliciesfornegotiatedsettlements,particularlyforoldandunresolvedNPAs.Thebroad
frameworkforsuchsettlementswasputinplaceinJuly1995.
ResearchMethodology:
ResearchMethodistheprocedureadoptedforconductingtheresearchstudy.Researchmethodology
shouldbecarefullyplannedastheaccuracy,reliabilityandadequacyofresultistototallydependonthe
researchmethodologyfollowed.Itgivestheresearchaguidelinebywhichhe/shecandecidewhich
techniquesandprocedureswillbeapplicabletoagivenproblem.
Themethodologyshouldbeconsideringthefollowingaspects:
ResearchProblem:Thefirststepwhileconductingaresearchistocarefullydefineaproblem.Herethe
definedproblemis:
"RoleofNPA'SinIndianperspective."
ResearchDesign:Aresearchstudyconductedscientificallyhasaspecifiedframeworkofresearchfrom
theproblemidentificationtotheresearchstudy.Theframeworkofconductingtheresearchisknownas
researchdesign.Researchdesignistheblueprintofanyproblem.Itisplanforcollection,analysisand
interpretationofdatainamannerthatisrelevanttotheresearchpurposewitheconomyinprocedure.
Afterdefiningtheresearchprobleminaclearcuttermitwillberequiredtopreparesucharesearch
designwhichwillstatetheconceptualstructurewithinwhichtheresearchwouldbeconducted.Herethe
researchdesignissubjectiveandexploratory&Descriptive.
Thestudyissubjective&itinvolves:
*Useofsurveymethodwiththesamplingpopulationwasdoneinordertoextractdata.
*Structuralandwellthroughoutinstrumentsforcollectionofdatawereused.
ThestudyisExploratory&itinvolves:
*Anewfieldofresearchhasbeenapproachedwhichwasearliernottested.
*Surveyofexperiencedpersonslikethetopexecutiveandmanagerwhohavepracticalexperiencewhen
thematterwasapproached.
*ThestudyisDescriptive&itinvolves:
*Gatheringdatathatdescribeeventsthenorganizes,tabulates,depicts&describedata.
*Usedescriptionasatooltoorganizedataintopatternsthatemergeduringanalysis.
*Oftenusevisualaidssuchasgraphsandchartstoaidthereader.
*Useofhypothesistesting.
HypothesisTesting:
Hereforhypothesistesting,testofcorelationhasapplied.
TestofCorelation:
Thetestofcorelationisusedtoidentifythecorelationbetweentwo
Variables.Thevariableshereinthisstudyare:
"NetNPAandNetprofitofPublic,PrivateandForeignSectorBanks."
HypothesisforPublicSectorBanks:
Hypothesis:
H0:ThereisnosignificantcorrelationbetweenNPAandProfitofPublicSectorBanksforlast9years
H1:ThereiscorrelationbetweenNPAandProfitofPublicSectorBanksforlast9years
Testing:

http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

8/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

2.3HypothesisTestingforPrivateSectorBanks:
Hypothesis:
H0:ThereisnosignificantcorrelationbetweenNetNPAandNetProfitofPrivate
SectorBanksforlast9years
H1:ThereiscorrelationbetweenNetNPAandNetProfitofPrivateSectorBanksfor
last9years.
Testing:

HypothesisTestingforForeignSectorBanks:
Hypothesis:
H0:ThereisnosignificantcorrelationbetweenNetNPAandNetProfitofForeign
SectorBanksforlast9years.
H1:ThereiscorrelationbetweenNetNPAandNetProfitofprivateSectorBanksforlast9years.
Testing:
http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

9/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

Inallcases.
Conclusion:
*ThereisNegativeCorelationbetweenNetProfit&NetNPAofPublicSectorBanks.
*ThereisPositiveCorelationbetweenNetProfit&NetNPAofPrivateSectorBanks.
*ThereisPositiveCorelationbetweenNetProfit&NetNPAofForeignSectorBanks.
Refrences:
*ResearchMethodology:C.R.Kothari
*http://rbi.org.in/scripts/AnnualPublications.aspx?head=TrendandProgressofBankinginIndia
*http://rbi.org.in/scripts/AnnualPublications.aspx?head=StatisticalTablesRelatingtoBanksofIndia
*http://rbi.org.in/scripts/NotificationUser.aspx
*http://en.wikipedia.org/wiki/Banking_in_India
*http://www.ibef.org/industry/Banking.aspx
*http://www.bankingindiaupdate.com/general.html
Annexure:

http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

10/11

12/8/2016

NonPerformingAssets&itsRoleinIndianPerspective(AStudyofPublic,Private&ForeignSectorBanks)

AmitKumarSrivastava
AssistantProfessor
ShriRamMurtiSmarakCollegeofEngineering&Technology
Bareilly

AkanshaSrivastava
AssistantProfessor
BansalInstituteofEngineering&Technology
Lucknow

Source:EmailDecember20,2014

ArticlesNo.199/ArticlesNo.100199/ArticlesNo.200299/ArticlesNo.300399/ArticlesNo.400499/ArticlesNo.500599
ArticlesNo.600699/ArticlesNo.700799/ArticlesNo.800899/ArticlesNo.9001000/ArticlesNo.10011100
welcometoIndianMBA.com
ArticlesNo.11011200/ArticlesNo.12011300/ArticlesNo.13011400/ArticlesNo.1401Onward
ExperienceSharing(GDPITips)|MBAAbroad|MBAAdmissionDates&Deadlines|MBACATResults|BBAColleges
FacultyColumnMainPage
DistanceMBAAdmissions |DistanceMBAInstitutesinIndia|MBAInstituteswithNRIQuota|EveningMBA|PartTimeMBA
TopMBAColleges(BSchools)ofIndia|OfficialWebsitesofMBAInstitutes|MBA/CATCoachingClasses
PhotoGalleryofBSchools|MBAEntranceTestsinIndia|CitywiseListofMBAColleges
MDPs|Conferences|Seminars|ResearchScholarships|BooksonManagement

ArticlesonManagement|FacultyPositions|MBAJobsinIndia|Ph.D.inManagement
WhereAreYou?Spotted!|MBAContest|SpotAdmissionAnnouncements

AdvertiseonIndianMBA.com/RegisteryourInstituteProfile/Disclaimer/PrivacyPolicy/Home

IndianMBA.com|AllWaysDesigns20002014|AllRightsReserved
..

http://www.indianmba.com/Faculty_Column/FC1576/fc1576.html

11/11