UNIVERSITY OF MUMBAI

RAYAT SHIKSHAN SANSTHA'S

KARMAVEER BHAURAO PATIL COLLEGE

VASHI, NAVI MUMBAI - 400703

COLLEGE CODE:-

A PROJECT REPORT ON

COMPAIRATIVE ANALYSIS ON NON PERFORMING

ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS

SUBMITTED BY

ROSHAN P. BHIVANDE

PROJECT GUIDE:-

PROF. SNEHA MORE

IN PARTIAL FULFILLMENT FOR THE COURCE OF

BACHELOR OF COMMERCE ( BANKING & INSURANCE )

SEMESTER V

ACADEMIC YEAR 2016-2017

 DECLARATION

I, ROSHAN PRADEEP BHIVANDE Student of KARMAVEER BHAURAO PATIL

COLLEGE, VASHI Studying in T.Y.B.COM (BANKING AND INSURANCE)
(SEMESTER V) hereby declare that I have completed project report on
COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND
PUBLIC SECTOR BANKS and has not been submitted to any other university or
institute for the award of any degree, diploma etc. The information is submitted to me is
true and original to the best of my knowledge.

Date: Signature

Place:VASHI
 ACKNOWLEDGEMENT

I would like to extend my sincere Gratitude to all those people who helped me in the
successful completion of my project entitled COMPARATIVE ANALYSIS ON NON
PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS". First and
foremost I wish to take this opportunity of express my deep sense of gratitude to Prof.
SNEHA MORE for her valuable guidance in this endeavor. She has been a constant
source of inspiration and I sincerely thank her for her suggestions and help to
preparation this project.

I am grateful to our coordinator Prof. C.D.BHOSALE and H.O.D Prof. Archana

Salunkhe for giving me valuable information regarding project.

Special thanks to my parents who have always stood by me I also wish to thank
my friends for their constant support and assignment to make this project worth
presentation before you.
 RAYAT SHIKSHAN SANSTHA'S

KARMAVEER BHAURAO PATIL COLLEGE

VASHI, NAVI MUMBAI - 400703

CERTIFICATE

This is to certify that ROSHAN P.BHIVANDE student of B.COM (Banking & Insurance)
SEMISTER V has completed his project on COMPARATIVE ANALYSIS ON NON
PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS" And has
submitted a satisfactory report under the guidance of Prof. SNEHA MORE in the partial
fulfillment of B.COM (Banking & Insurance) course of university of Mumbai in the
academic year 2016-2017

--------------------------- ----------------------------- --------------------------

Project Guide Coordinator Principal

University Examiner
INDEX
Chapte Sub Topic Name Page No.
r No. Topics

CHa.1 INTRODUCTION TO THE STUDY

1.1 Introduction
1.2 Objectives of the study
1.3 Need of the study
1.4 Research methodology 1-4
1.4.1 Scope of study
1.4.2 Sampling plan
1.4.3 Data collection
1.5 Concept of NPA
CH.2 PROFILE OF THE ORGANIZATION
2.1 Introduction of Private and Public sector
bank
2.2 History of private and public bank 6-14
2.3 History of Indian Banking

CH.3 CONCEPTUAL FRAMEWORK

3.1 Factors Rise In NPA

3.2 Problems due to NPA
3.3 Types of NPA
3.4 Income Recognisation
3.5 Reporting of NPA
3.6 Classification of Assets 16-54
3.7 Provisons Norms
3.7.1 General
3.7.2 Floating Provisins
3.7.3 Leased Assets
3.7.4 Guidline under special circumstance
3.8 Impact of NPA
3.8.1 Resons for NPA
3.9 Preventive Measurement

CH.4 DATA ANALYSIS & INTERPRETATION

4.1 Deposit-Investment Advances
4.2 Gross NPAs and NET NPAs 57-65
4.3 Priority and Non-Prority Sector

CONCLUSION AND BIBILIOGRAPHY

CH.5 5.1 Conclusion
5.2 Bibliography 67-68
CHAPTER-1
I NTRODUCTION
TO
THE
STUDY
1.1 INTRODUCTION TO THE STUDY
A strong banking sector is important for flourishing economy. One of the
most important and major roles played by banking sector is that of lending
business. It is generally encouraged because it has the effect of funds being
transferred from the system to productive purposes, which also results into
economic growth. As there are pros and cons of everything, the same is with
lending business that carries credit risk, which arises from the failure of
borrower to fulfill its contractual obligations either during the course of a
transaction or on a future obligation. The failure of the banking sector may
have an adverse impact on other sectors. Non- performing assets are one of
the major concerns for banks in India. NPAs reflect the performance of banks.
A high level of NPAs suggests high probability of a large number of credit
defaults that affect the profitability and net-worth of banks and also erodes
the value of the asset. The NPA growth involves the necessity of provisions,
which reduces the overall profits and shareholders value. The issue of Non
Performing Assets has been discussed at length for financial system all over
the world. The problem of NPAs is not only affecting the banks but also the
whole economy. In fact high level of NPAs in Indian banks is nothing but a
reflection of the state of health of the industry and trade. This project deals
with understanding the concept of NPAs, its magnitude and major causes for
an account becoming non-performing, projection of NPAs over next years in
banks and concluding remarks.

The magnitude of NPAs have a direct impact on Banks

profitability legally they are not allowed to book income on such accounts
and at the same time banks are forced to make provisions on such assets as
per RBI guidelines The RBI has advised all State Co-operative Banks as well
as the Central Co-operative Banks in the country to adopt prudential norms
from the year ending 31-03-1997. These have been amended a number of
times since 1997. As per their guidelines the meaning of NPAs, the norms
regarding assets classification and provisioning Its now very known that the
banks and financial institutions in India face the problem of amplification of
non-performing assets (NPAs) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, various steps
have been taken. Among all other steps most important one was the
introduction of Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 by Parliament, which was an
important step towards elimination or reduction of NPAs.

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1.2 OBJECTIVE OF THE STUDY
The basic idea behind undertaking the Grand Project on NPA was to:
To evaluate NPAs (Gross and Net) in different banks.
To study the past trends of NPA
To calculate the weighted of NPA in risk management in Banking
To analyze financial performance of banks at different level of NPA
To evaluate profitability positions of banks
To evaluate NPA level in different economic situation.

1.3 IMPORTANCE OF THE STUDY

Importance of Non Performing Assets has become more and more since the formation of Shri

M. Narshimham Committee on banking sector reform in 1991. We can say that it is a second

landmark in banking sector in India after nationalization of banks. After nationalization of banks

it has been given much attention on the lending policy of nationalized banks but not much

attention has been given to the recovery of advances of nationalized banks by Reserve Bank of

India (RBI). Recovery of non performing assets has become critical performance area for all

banks in India. As per RBI report, March 1999, the gross NPA of all the scheduled commercial

banks and primary co operative banks have gone up to Rs. 58,554 crores (14.6%) and to Rs.

4,535 (12.2%) crore respectively. There was a lack of specific and 36 unanimous guidelines

which resulted in mis allocation of (banks) huge funds and ruin the sustained economic growth

of nation.

1.4 REASEARCH METHODOLOGY

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1.4.1Type 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.

1.4.2 Scope of the Study

Concept of Non Performing Asset
Guidelines
Impact of NPAs
Reasons for NPAs
Preventive Measures
Tools to manage NPAs

1.4.3 Sampling plan

To prepare this Project we took five banks from public sector as well as five banks from private
sector.

1.4.4Source of data collection

The data collected for the study was secondary data in Nature.

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1.5 CONCEPT OF NON PERFORMING ASSETS
Concept The three letters NPA strike terror in banking sector and business
circle today. NPA is a short form of Non-Performing Assets. In banking, NPA are loans given
to doubtful customers who may or may not repay the loan on time. There are two types of assets
viz. performing and non-performing. Performing loans are standard loans on which both the
principle and interest are secured and their return is guaranteed. Non Performing assets means
the debt which is given by the Bank is unable to recover it is called NPA .

. Non Performing assets means the debt which is given by the Bank is
unable to recover it is called NPA .Non- Performing Asset [NPA] is a result of asset Liability
mismatch, A NPA account in the books of accounts is an asset as it indicates the amount
receivable from the Defaulters. It means if any bank gives loan to the customer if the interest for
that loan is not paid by the customer till 90 days then that account is called as NPA account. A
loan or lease that is not meeting its stated principal and interest payments.

. Banks usually classify as nonperforming assets any commercial loans

which are more than 90 days overdue and any consumer loans which are more than 180 days
overdue. More generally, an asset which is not producing income.

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 CHAPTER-2
PROFILE
OF
THE

ORAGANIZATION

2.1 INTRODUCTION TO THE STUDY

5 | Page
PRIVATE BANKS

The private-sector banks in India represent part of the indian banking sector that is made up of
both private and public sector banks. The "private sector banks" are banks where greater parts of
state or equity are held by the private shareholders and not by government.

Banking in India has been dominated by public sector banks since the 1969 when all major banks
were nationalised by the Indian government. However, since liberalisation in government
banking policy in the 1990s, old and new private sector banks have re-emerged. They have
grown faster & bigger over the two decades since liberalisation using the latest technology,
providing contemporary innovations and monetary tools and techniques.[1]

The private sector banks are split into two groups by financial regulators in India, old and new.
The old private sector banks existed prior to the nationalisation in 1969 and kept their
independence because they were either too small or specialist to be included in nationalisation.
The new private sector banks are those that have gained their banking license since the
liberalisation in the 1990s.

PUBLIC BANKS

Today, 17 years after economic liberalization began; we have a vibrant banking sector powered
by both improved-efficiency public sector banks and growth-hungry private ones. The number of
instruments available, the number of services banks provide-to both retail and corporate
customers, the levels of technology involved, would have been considered pure imagination even
ten years ago. As India has gained confidence and eyed more and more global deals, Indian
banking has kept pace, with its advisorys ervices, financial structuring expertise, negotiating
skills; indeed, they have partnere dIndia Inc in its global journey without missing a beat. The
industry not only acts as a facilitator for industrial and agricultural growth, but also affects the
daily life and well being of the citizens. Since Independence , Indian banks have gone through
three major changes- a period of consolidation of banks(up to 1966), aperiod of historic
expansion in both geographical and functional terms (from 1966 tomid- 1980s), and a period of
consolidation (from mid- 1980s to 1991). The pre-reform banking system was characterized by
unprecedented growth and the pursuit of mass banking.

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 2.2 HISTORY

PRIVATE SECTOR BANKS

Private Sector Banks existed for over a century in India. Formation of State Bank Group in 1955/
1957 and two nationalizations in 1969 and 1980 lead to dominant Public Sector Banks Economic
reforms in 1991 and Banking Sector Reforms again in 1997-98 have changed the banking scene
totally. People generally rely on nationalized banks backed by Government Change in mindset of
the customers forced RBI to allow new private banks a decade
back.World Trade Organisation (WTO) and globalization initiated more foreign banks to addcom
petition and a proper level playing field .It is pertinent and appropriate to mention that Imperial
Bank of India was also a large private sector bank but handling all the commercial banking
business as well as treasury related work of Government until Reserve Bank of India (RBI) was
formed in the year 1934, once again as a private bank! It was in the post independent era in the
year 1948 that RBI itself was converted into a fully state-owned bank followed by formation of
State Bank of India in 1955.

PUBLIC SECTOR BANKS

The public sector banks (PSBs) continue to be a dominant part of the banking system. A son
March 31, 2008, the PSBs accounted for 69.9 per cent of the aggregate assets and 72.7per cent of
the aggregate advances of the Scheduled commercial banking system. This paper conducts
productivity and efficiency analysis of Public Sector Banks operating in India .The number of
instruments available, the number of services banks provide-to both retail and corporate
customers, the levels of technology involved, are the mantras for leap bound progress of public
sector banks but still there is a long way to go. Today Public Sector Banks are facing challenges
of squeezed spreads, demanding customers and lack of matching skills with private sector banks
of India; this has increased pressure one efficiency and productivity of the banks. This paper
empirically defines and an attempt as been made by the authors to analyze technical efficiency of
Public Sector Banks operating in India applying Data Envelopment Analysis (DEA) Model .The
performanceof Banks is assessed in DEA using the concept of efficiency or productivity, which
is theratio of total outputs to total inputs.

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8 | Page
 2.3 HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial services. By the term
bank is generally understood an institution that holds a Banking Licenses. Banking licenses are
granted by financial supervision authorities and provide rights to conduct the most fundamental
banking services such as accepting deposits and making loans. There are also financial
institutions that provide certain banking services without meeting the legal definition of a bank, a
so-called Non-bank. Banks are a subset of the financial services industry.

The word bank is derived from the Italian banca, which is derived from German and means
bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to
an out of business bank, having its bench physically broken. Moneylenders in Northern Italy
originally did business in open areas, or big open rooms, with each lender working from his own
bench or table.

Typically, a bank generates profits from transaction fees on financial services or the interest
spread on resources it holds in trust for clients while paying them interest on the asset.
Development of banking industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed that the
transition from money lending to banking must have occurred even before Manu, the
great Hindu Jurist, who has devoted a section of his work to deposits and advances and
laid down rules relating to rates of interest.

Banking in India has an early origin where the indigenous bankers played a very
important role in lending money and financing foreign trade and commerce. During the
days of the East India Company, was the turn of the agency houses to carry on the
banking business. The General Bank of India was first Joint Stock Bank to be established
in the year 1786.

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 In the first half of the 19th century the East India Company established three banks; the
Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843.
These three banks also known as Presidency banks were amalgamated in 1920 and a new
bank, the Imperial Bank of India was established in 1921. With the passing of the State
Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken by the
newly constituted State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935 by passing
Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in
1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for
licensing, supervision and control of banks. Considering the proliferation of weak banks,
RBI compulsorily merged many of them with stronger banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the geographical
coverage and financial spread of the banking system in the country. As certain rigidities
and weaknesses were found to have developed in the system, during the late eighties the
Government of India felt that these had to be addressed to enable the financial system to
play its role in ushering in a more efficient and competitive economy. Accordingly, a
high-level committee was set up on 14 August 1991 to examine all aspects relating to the
structure, organization, functions and procedures of the financial system. Based on the
recommendations of the Committee (Chairman: Shri M. Narasimham), a comprehensive
reform of the banking system was introduced in 1992-93. The objective of the reform
measures was to ensure that the balance sheets of banks reflected their actual financial
health. One of the important measures related to income recognition, asset classification
and provisioning by banks, on the basis of objective criteria was laid down by the
Reserve Bank. The introduction of capital adequacy norms in line with international
standards has been another important measure of the reforms process.

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 1. Comprises balance of expired loans, compensation and other bonds such as National
Rural Development Bonds and Capital Investment Bonds. Annuity certificates are
excluded.
2. These represent mainly non- negotiable non- interest bearing securities issued to
International Financial Institutions like International Monetary Fund, International
Bank for Reconstruction and Development and Asian Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits
of Non- Government

In the post-nationalization era, no new private sector banks were allowed to be set up.
However, in 1993, in recognition of the need to introduce greater competition which
could lead to higher productivity and efficiency of the banking system, new private
sector banks were allowed to be set up in the Indian banking system. These new banks
had to satisfy among others, the following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located in a centre
which does not have the headquarters of any other bank; and
(v) The bank will be subject to prudential norms in respect of banking operations,
accounting and other policies as laid down by the RBI. It will have to achieve
capital adequacy of eight per cent from the very beginning.

A high level Committee, under the Chairmanship of Shri M. Narasimham, was

constituted by the Government of India in December 1997 to review the record of
implementation of financial system reforms recommended by the CFS in 1991 and chart
the reforms necessary in the years ahead to make the banking system stronger and better
equipped to compete effectively in international economic environment. The Committee
has submitted its report to the Government in April 1998. Some of the recommendations

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 of the Committee, on prudential accounting norms, particularly in the areas of Capital
Adequacy Ratio, Classification of Government guaranteed advances, provisioning
requirements on standard advances and more disclosures in the Balance Sheets of banks
have been accepted and implemented. The other recommendations are under
consideration.

The banking industry in India is in a midst of transformation, thanks to the economic

liberalization of the country, which has changed business environment in the country.
During the pre-liberalization period, the industry was merely focusing on deposit
mobilization and branch expansion. But with liberalization, it found many of its advances
under the non-performing assets (NPA) list. More importantly, the sector has become
very competitive with the entry of many foreign and private sector banks. The face of
banking is changing rapidly. There is no doubt that banking sector reforms have
improved the profitability, productivity and efficiency of banks, but in the days ahead
banks will have to prepare themselves to face new challenges.

Indian Banking: Key Developments

1969 Government acquires ownership in major banks
Almost all banking operations in manual mode
Some banks had Unit record Machines of IBM for IBR & Pay roll
1970- 1980 Unprecedented expansion in geographical coverage, staff,
business & transaction volumes and directed lending to
agriculture, SSI & SB sector
Manual systems struggle to handle exponential rise in transaction
volumes --
Outsourcing of data processing to service bureau begins
Back office systems only in Multinational (MNC) banks' offices

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1981- 1990 Regulator (read RBI) led IT introduction in Banks
Product level automation on stand alone PCs at branches
(ALPMs)
In-house EDP infrastructure with Unix boxes, batch processing in
Cobol for MIS.
Mainframes in corporate office

1991-1995 Expansion slows down

Banking sector reforms resulting in progressive de-regulation of
banking, introduction of prudential banking norms entry of new
private sector banks
Total Branch Automation (TBA) in Govt. owned and old private
banks begins
New private banks are set up with CBS/TBA form the start

1996-2000 New delivery channels like ATM, Phone banking and Internet
banking and convenience of any branch banking and auto sweep
products introduced by new private and MNC banks
Retail banking in focus, proliferation of credit cards
Communication infrastructure improves and becomes cheap.
IDRBT sets up VSAT network for Banks
Govt. owned banks feel the heat and attempt to respond using
intermediary technology, TBA implementation surges ahead under
fiat from Central Vigilance
Commission (CVC), Y2K threat consumes last two years

2000-2003 Alternate delivery channels find wide consumer acceptance

IT Bill passed lending legal validity to electronic transactions
Govt. owned banks and old private banks start implementing
CBSs, but initial attempts face problems
Banks enter insurance business launch debit cards

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(Source: M.Y.KHAN, INDIAN FINANCIAL SYSYEM,3 rd edition Publication by TATA
McGraw hill)

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 CHAPTER-3

CONCEPECTUAL

FRAMEWORK

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3.1 FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector banks and
foreign banks. The NPAs in PSB are growing due to external as well as internal factors.

EXTERNAL FACTORS :-
----------------------------------

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of
loans and advances. Due to their negligence and ineffectiveness in their work the bank
suffers the consequence of non-recover, their by reducing their profitability and liquidity.

Willful Defaults
There are borrowers who are able to payback loans but are intentionally
withdrawing it. These groups of people should be identified and proper measures should
be taken in order to get back the money extended to them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs.
every now and then India is hit by major natural calamities thus making the borrowers
unable to pay back there loans.

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.

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 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.

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.

INTERNEL FACTORS

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

i. Principles of safety :-
By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon:

1. Tangible assets
2. Success in business

Willingness to pay depends on:

1. Character

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 2. Honest
3. Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise or business
for which a loan is sought is a sound one and the borrower is capable of carrying it out
successfully .he should be a person of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis can not 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 computerized.

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.

Analyze the balance sheet.

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

Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To ensure
safety and liquidity, banks should grant loan for productive purpose only. Bank
should analyze the profitability, viability, long term acceptability of the project
while financing.

Poor credit appraisal system

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 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.

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.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the
handloom sector Orissa hand loom WCS ltd (2439.60lakhs).

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 willful defaulters can be collected by regular visits.

3.2 PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst case, if the banks
fails, owners loose their assets. In modern times this may affect a broad pool of
shareholders.

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 2. Depositors do not receive a market return on saving. In the worst case if the bank fails,
depositors loose 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 can not be
then left is to look after the factor responsible for it and managing those factors.

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

Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

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As a facilitating measure for smooth transition to 90 days norm, banks have been advised to
move over to charging of interest at monthly rests, by April 1, 2002. However, the date of
classification of an advance as NPA should not be changed on account on of charging of interest
at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the
interest charged during any quarter is not serviced fully within 180 days from the end of the
quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from
March 31, 2004.

3.3 Types of NPA

A] Gross NPA
B] Net NPA

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A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines
as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It
consists of all the non standard assets like as sub-standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:

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
3.4 INCOME RECOGNITION

Income recognition Policy

The policy of income recognition has to be objective and based on the record of recovery.
Internationally income from non-performing assets (NPA) is not recognised on accrual

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 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.

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.

Fees and commissions earned by the banks as a result of re-negotiations or rescheduling

of outstanding debts should be recognised on an accrual basis over the period of time
covered by the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on such advances should
not be taken to income account unless the interest has been realised.

Reversal of income:

If any advance, including bills purchased and discounted, becomes NPA as at the close of
any year, interest accrued and credited to income account in the corresponding previous
year, should be reversed or provided for if the same is not realised. This will apply to
Government guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should cease
to accrue in the current period and should be reversed or provided for with respect to past
periods, if uncollected.

Leased Assets

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 The net lease rentals (finance charge) on the leased asset accrued and credited to income
account before the asset became non-performing, and remaining unrealised, should be
reversed or provided for in the current accounting period.

The term 'net lease rentals' would mean the amount of finance charge taken to the credit
of Profit & Loss Account and would be worked out as gross lease rentals adjusted by
amount of statutory depreciation and lease equalisation account.

As per the 'Guidance Note on Accounting for Leases' issued by the Council of the
Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account
should be opened by the banks with a corresponding debit or credit to Lease Adjustment
Account, as the case may be. Further, Lease Equalisation Account should be transferred
every year to the Profit & Loss Account and disclosed separately as a deduction
from/addition to gross value of lease rentals shown under the head 'Gross Income'.

Appropriation of recovery in NPAs

Interest realised on NPAs may be taken to income account provided the credits in the
accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the
borrower concerned.

In the absence of a clear agreement between the bank and the borrower for the purpose of
appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should
adopt an accounting principle and exercise the right of appropriation of recoveries in a
uniform and consistent manner.

Interest Application:
There is no objection to the banks using their own discretion in debiting interest to an NPA
account taking the same to Interest Suspense Account or maintaining only a record of such
interest in proforma accounts.

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3.5 Reporting of NPA

Banks are required to furnish a Report on NPAs as on 31 st March each year after
completion of audit. The NPAs would relate to the banks global portfolio, including the
advances at the foreign branches. The Report should be furnished as per the prescribed
format given in the Annexure I.

While reporting NPA figures to RBI, the amount held in interest suspense account, should
be shown as a deduction from gross NPAs as well as gross advances while arriving at the
net NPAs. Banks which do not maintain Interest Suspense account for parking interest
due on non-performing advance accounts, may furnish the amount of interest receivable
on NPAs as a foot note to the Report.

Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be
reduced from the outstanding gross advances and gross NPAs to eliminate any distortion
in the quantum of NPAs being reported.

REPORTING FORMAT FOR NPA GROSS AND NET NPA

REPORTING FORMAT FOR NPA GROSS AND NET NPA

Name of the Bank:

Position as on
PARTICULARS
1) Gross Advanced *

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 2) Gross NPA *
3) Gross NPA as %age of Gross Advanced
4) Total deduction( a+b+c+d )
( a ) Balance in interest suspense a/c **
( b ) DICGC/ECGC claims received and held pending
adjustment
( c ) part payment received and kept in suspense a/c
( d ) Total provision held ***
5) Net advanced ( 1-4 )
6) Net NPA ( 2-4 )

*excluding Technical write-off of Rs.________crore.

**Banks which do not maintain an interest suspense a/c to park the accrued interest on NPAs
may furnish the amount of interest receivable on NPAs.

***Excluding amount of Technical write-off (Rs.______crore) and provision on standard assets.

(Rs._____crore).

3.6 ASSETS CLASSIFICATION

Categories of NPAs

Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this case
the arrears of interest and the principal amount of loan does not exceed 90 days at the end of

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financial year. If asset fails to be in category of standard asset that is amount due more than 90
days then it is NPA and NPAs are further need to classify in sub categories.

Banks are required to classify non-performing assets further into the following
three categories based on the period for which the asset has remained non-performing and the
realisability of the dues:

( 1 ) Sub-standard Assets
( 2 ) Doubtful Assets
( 3 ) Loss Assets

( 1 ) Sub-standard Assets:--
With effect from 31 March 2005, a sub standard asset would be one, which has remained NPA
for a period less than or equal to 12 month. The following features are exhibited by sub standard
assets: the current net worth of the borrowers / guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the banks in full; and the asset
has well-defined credit weaknesses that jeopardise the liquidation of the debt and are
characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are
not corrected.

( 2 ) Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-
standard, with the added characteristic that the weaknesses make collection or liquidation in full,
on the basis of currently known facts, conditions and values highly questionable and
improbable.

With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the
sub-standard category for 12 months.

( 3 ) Loss Assets:--

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A loss asset is one which considered uncollectible and of such little value that its continuance as
a bankable asset is not warranted- although there may be some salvage or recovery value. Also,
these assets would have been identified as loss assets by the bank or internal or external
auditors or the RBI inspection but the amount would not have been written-off wholly.

3.7 PROVISION NORMS

3.7.1 General

In order to narrow down the divergences and ensure adequate provisioning by banks, it
was suggested that a bank's statutory auditors, if they so desire, could have a dialogue
with RBI's Regional Office/ inspectors who carried out the bank's inspection during the
previous year with regard to the accounts contributing to the difference.

Pursuant to this, regional offices were advised to forward a list of individual advances,
where the variance in the provisioning requirements between the RBI and the bank is
above certain cut off levels so that the bank and the statutory auditors take into account
the assessment of the RBI while making provisions for loan loss, etc.

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 The primary responsibility for making adequate provisions for any diminution in the
value of loan assets, investment or other assets is that of the bank managements and the
statutory auditors. The assessment made by the inspecting officer of the RBI is furnished
to the bank to assist the bank management and the statutory auditors in taking a decision
in regard to making adequate and necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on the non-
performing assets on the basis of classification of assets into prescribed categories as
detailed in paragraphs 4 supra. Taking into account the time lag between an account
becoming doubtful of recovery, its recognition as such, the realisation of the security and
the erosion over time in the value of security charged to the bank, the banks should make
provision against sub-standard assets, doubtful assets and loss assets as below:

Loss assets:
The entire asset should be written off. If the assets are permitted to remain in the books for any
reason, 100 percent of the outstanding should be provided for.

Doubtful assets:

100 percent of the extent to which the advance is not covered by the realisable value of
the security to which the bank has a valid recourse and the realisable value is estimated
on a realistic basis.

In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20 percent to 50 percent of the secured portion depending upon the
period for which the assets has remained doubtful

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 Period for which the advance has been Provision
considered as doubtful requirement (%)

Up to one year 20

One to three years 30

More than three years: 60% with effect from March

31,2005.
(1) Outstanding stock of NPAs as on
March 31, 2004. 75% effect from March 31,
2006.
(2) Advances classified as doubtful
more than three years on or after 100% with effect from March
April 1, 2004. 31, 2007.

Additional provisioning consequent upon the change in the definition of doubtful assets
effective from March 31, 2003 has to be made in phases as under:

As on 31.03.2003, 50 percent of the additional provisioning requirement on the assets

which became doubtful on account of new norm of 18 months for transition from sub-
standard asset to doubtful category.

As on 31.03.2002, balance of the provisions not made during the previous year, in
addition to the provisions needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning consequent upon the reduction
in the transition period from substandard to doubtful asset from 18 to 12 months over a
four year period commencing from the year ending March 31, 2005, with a minimum of
20 % each year.
Note: Valuation of Security for provisioning purposes

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With a view to bringing down divergence arising out of difference in assessment of the value of
security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals
by external agencies appointed as per the guidelines approved by the Board would be mandatory
in order to enhance the reliability on stock valuation. Valuers appointed as per the guidelines
approved by the Board of Directors should get collaterals such as immovable properties charged
in favour of the bank valued once in three years.

Sub-standard assets:

A general provision of 10 percent on total outstanding should be made without making any
allowance for DICGC/ECGC guarantee cover and securities available.

Standard assets:

From the year ending 31.03.2000, the banks should make a general provision of a
minimum of 0.40 percent on standard assets on global loan portfolio basis.
The provisions 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.

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3.7.2Floating provisions:

Some of the banks make a 'floating provision' over and above the specific
provisions made in respect of accounts identified as NPAs. The floating provisions, wherever
available, could be set-off against provisions required to be made as per above stated
provisioning guidelines. Considering that higher loan loss provisioning adds to the overall
financial strength of the banks and the stability of the financial sector, banks are urged to
voluntarily set apart provisions much above the minimum prudential levels as a desirable
practice.
3.7.3 Provisions on Leased Assets:
Leases are peculiar transactions where the assets are not recorded in the books of the user of such
assets as Assets, whereas they are recorded in the books of the owner even though the physical
existence of the asset is with the user (lessee). __(AS19
ICAI)

Sub-standard assets : -

10 percent of the 'net book value'.

As per the 'Guidance Note on Accounting for Leases' issued by the ICAI, 'Gross book value'
of a fixed asset is its historical cost or other amount substituted for historical cost in the books of
account or financial statements. Statutory depreciation should be shown separately in the Profit
& Loss Account. Accumulated depreciation should be deducted from the Gross Book Value of
the leased asset in the balance sheet of the lesser to arrive at the 'net book value'.

Also, balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book
value' of the leased assets. The amount of adjustment in respect of each class of fixed assets may

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be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate column
in the section related to leased assets.

Dobtful Assets
100 percent of the extent to which the finance is not secured by the realisable value of the leased
asset. Realisable value to be estimated on a realistic basis. In addition to the above provision,
the following provision on the net book value of the secured portion should be made,
depending upon the period for which asset has been doubtful:

Period %age of provision

Up to one year 20

One to three years 30

More than three years 50

Loss assets :-
The entire asset should be written-off. If for any reason, an asset is allowed to remain in books,
100 percent of the sum of the net investment in the lease and the unrealised portion of finance
income net of finance charge component should be provided for. ('net book value')

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34 | P a g e
 3.7.4Guidelines for Provisions under Special Circumstances

Government guaranteed advances

With effect from 31 March 2000, in respect of advances sanctioned against State Government
guarantee, if the guarantee is invoked and remains in default for more than two quarters (180
days at present), the banks should make normal provisions as prescribed in paragraph 4.1.2
above.

As regards advances guaranteed by State Governments, in respect of which guarantee stood

invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner,
during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each
year.

Advances granted under rehabilitation packages approved by BIFR/term lending institutions:

In respect of advances under rehabilitation package approved by BIFR/term lending

institutions, the provision should continue to be made in respect of dues to the bank on the
existing credit facilities as per their classification as sub-standard or doubtful asset.

As regards the additional facilities sanctioned as per package finalised by BIFR and/or term
lending institutions, provision on additional facilities sanctioned need not be made for a period of
one year from the date of disbursement.

In respect of additional credit facilities granted to SSI units which are identified as sick [as
defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002] and
where rehabilitation packages/nursing programmes have been drawn by the banks themselves or
under consortium arrangements, no provision need be made for a period of one year.

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policies
are exempted from provisioning requirements.

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However, advances against gold ornaments, government securities and all other kinds of
securities are not exempted from provisioning requirements.

Treatment of interest suspense account:

Amounts held in Interest Suspense Account should not be reckoned as part of provisions.
Amounts lying in the Interest Suspense Account should be deducted from the relative advances
and thereafter, provisioning as per the norms, should be made on the balances after such
deduction.

Advances covered by ECGC/DICGC guarantee

In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the
balance in excess of the amount guaranteed by these Corporations. Further, while arriving at the
provision required to be made for doubtful assets, realisable value of the securities should first be
deducted from the outstanding balance in respect of the amount guaranteed by these
Corporations and then provision made as illustrated hereunder:

Example

Outstanding Balance Rs. 4 lakhs

DICGC Cover 50 percent

Period for which the advance has remained More than 3 years remained
doubtful doubtful

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 Value of security held Rs. 1.50 lakhs
(excludes worth of Rs.)

Provision required to be made

Outstanding balance Rs. 4.00 lakhs

Less: Value of security held Rs. 1.50 lakhs

Unrealised balance Rs. 2.50 lakhs

Less: DICGC Cover Rs. 1.25 lakhs

(50% of unrealisable balance)

Net unsecured balance Rs. 1.25 lakhs

Provision for unsecured portion of advance Rs. 1.25 lakhs (@ 100 percent of
unsecured portion)

Provision for secured portion of advance Rs. 0.75 lakhs (@ 50 percent of

secured portion)

Total provision required to be made Rs. 2.00 lakhs

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Advance covered by CGTSI guarantee

In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be
made towards the guaranteed portion. The amount outstanding in excess of the guaranteed
portion should be provided for as per the extant guidelines on provisioning for non-performing
advances. Two illustrative examples are given below:

Example I

Asset classification status: Doubtful More than 3 years;

CGTSI Cover 75% of the amount outstanding or

75% of the unsecured amount or
Rs.18.75 lakh, whichever is the
least

Realisable value of Security Rs.1.50 lakh

Balance outstanding Rs.10.00 lakh

Less Realisable value of Rs. 1.50 lakh

security

Unsecured amount Rs. 8.50 lakh

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Less CGTSI cover (75%) Rs. 6.38 lakh

Net unsecured and uncovered Rs. 2.12 lakh

portion:

Provision Required

Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%)

Unsecured & uncovered portion Rs.2.12 lakh Rs. 2.12 lakh ( 100%)

Total provision required Rs. 2.87 lakh

Example II

Asset classification status Doubtful More than 3 years;

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CGTSI Cover 75% of the amount outstanding
or75% of the unsecured amount or
Rs.18.75 lakh, whichever is the
least

Realisable value of Security Rs.10.00 lakh

Balance outstanding Rs.40.00 lakh

Less Realisable value of Rs. 10.00 lakh

security

Unsecured amount Rs. 30.00 lakh

Less CGTSI cover (75%) Rs. 18.75 lakh

Net unsecured and uncovered Rs. 11.25 lakh

portion:

Provision Required

Secured portion Rs.10.00 lakh Rs. 5.00 lakh (@ 50%)

Unsecured & uncovered portion Rs.11.25 lakh Rs.11.25 lakh (100%)

Total provision required Rs. 16.25 lakh

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Take-out finance
The lending institution should make provisions against a 'take-out finance' turning into NPA
pending its take-over by the taking-over institution. As and when the asset is taken-over by the
taking-over institution, the corresponding provisions could be reversed.

Reserve for Exchange Rate Fluctuations Account (RERFA)

When exchange rate movements of Indian rupee turn adverse, the outstanding amount of foreign
currency denominated a loan (where actual disbursement was made in Indian Rupee) which
becomes overdue goes up correspondingly, with its attendant implications of provisioning
requirements. Such assets should not normally be revalued. In case such assets need to be
revalued as per requirement of accounting practices or for any other requirement, the following
procedure may be adopted:

The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account.

Besides the provisioning requirement as per Asset Classification, banks should treat the full
amount of the Revaluation Gain relating to the corresponding assets, if any, on account of
Foreign Exchange Fluctuation as provision against the particular assets.

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 3.8 IMPACT OF NPA

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.

Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at
which lead to borrowing money for shot\rtes period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to lack of
money. Routine payments and dues.

Involvement of management:-
Time and efforts of management is another indirect cost which bank has to bear due to NPA.
Time and efforts of management in handling and managing NPA would have diverted to some

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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.Bank is facing .

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 .

3.8.1 REASONS FOR NPAs

Reasons can be divided in to two broad categories:-

A] Internal Factor
B] External Factor

[ A ] Internal Factors:-

Internal Factors are those, which are internal to the bank and are controllable by banks.

Poor lending decision:

Non-Compliance to lending norms:

Lack of post credit supervision:

Failure to appreciate good payers:

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 Excessive overdraft lending:

Non Transparent accounting policy:

[ B ] External Factors:-
External factors are those, which are external to banks they are not controllable by banks.

Socio political pressure:

Chang in industry environment:

Endangers macroeconomic disturbances:

Natural calamities

Industrial sickness

Diversion of funds and willful defaults

Time/ cost overrun in project implementation

Labour problems of borrowed firm

Business failure

Inefficient management

Obsolete technology

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 Product obsolete

3.9 PREVENTIVE MEASUREMENT OF NPAs

Early Recognition 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. Base don this objective assessment, banks should decide as
quickly as possible whether it would be worthwhile to commit additional finance.

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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 aling unit only after basic viability of the enterprise also in
the context of quality of management is examined and confirmed.

Multiple Financing:-

A. During the exercise for assessment of viability and restructuring, a Pragmatic and
unified approach by all the lending banks/ FIs as also sharing of all relevant information
on the borrower would go a long way toward overall success of rehabilitation exercise,
given the probability of success/failure.

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 B. In some default cases, where the unit is still working, the bank should make sure that it
captures the cash flows (there is a tendency on part of the borrowers to switch bankers
once they default, for fear of getting their cash flows forfeited), and ensure that such cash
flows are used for working capital purposes..

C. In a forum of lenders, the priority of each lender will be different. While one set of
lenders may be willing to wait for a longer time to recover its dues, another lender may
have a much shorter timeframe in mind. So it is possible that the letter categories of
lenders may be willing to exit, even a t a cost by a discounted settlement of the
exposure..

D.Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a

timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above
with the banks and FIs on a voluntary basis and outside the legal framework.

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3.10 SPECIAL CASES

Accounts with temporary deficiencies:

The classification of an asset as NPA should be based on the record of recovery. Bank
should not classify an advance account as NPA merely due to the existence of some deficiencies
which are temporary in nature such as non-availability of adequate drawing power based on the
latest available stock statement, balance outstanding exceeding the limit temporarily, non-
submission of stock statements and non-renewal of the limits on the due date, etc. In the matter
of classification of accounts with such deficiencies banks may follow the following guidelines:

Banks should ensure that drawings in the working capital accounts are covered by the
adequacy of current assets, since current assets are first appropriated in times of distress.
Drawing power is required to be arrived at based on the stock statement which is current.
However, considering the difficulties of large borrowers, stock statements relied upon by the
banks for determining drawing power should not be older than three months. The outstanding in
the account based on drawing power calculated from stock statements older than three months,
would be deemed as irregular. A working capital borrower account will become NPA if such
irregular drawings are permitted in the account for a continuous period of 180 days even though
the unit may be working or the borrower's financial position is satisfactory.

Regular and ad hoc credit limits need to be reviewed/ regularised not later than three
months from the due date/date of ad hoc sanction. In case of constraints such as non-availability
of financial statements and other data from the borrowers, the branch should furnish evidence to
show that renewal/ review of credit limits is already on and would be completed soon. In any
case, delay beyond six months is not considered desirable as a general discipline. Hence, an
account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days
from the due date/ date of ad hoc sanction will be treated as NPA.

Accounts regularised near about the balance sheet date:

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 The asset classification
of borrower accounts where a solitary or a few credits are recorded before the balance sheet date
should be handled with care and without scope for subjectivity. Where the account indicates
inherent weakness on the basis of the data available, the account should be deemed as a NPA. In
other genuine cases, the banks must furnish satisfactory evidence to the Statutory
Auditors/Inspecting Officers about the manner of regularisation of the account to eliminate
doubts on their performing status.

Asset Classification to be borrower-wise and not facility-wise

It is difficult to envisage a situation when only one facility to a borrower becomes a problem
credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be
treated as NPA and not the particular facility or part thereof which has become irregular.

If the debits arising out of devolvement of letters of credit or invoked guarantees are
parked in a separate account, the balance outstanding in that account also should be treated as a
part of the borrowers principal operating account for the purpose of application of prudential
norms on income recognition, asset classification and provisioning.

Accounts where there is erosion in the value of security

A NPA need not go through the various stages of classification in cases of serious credit
impairment and such assets should be straightaway classified as doubtful or loss asset as
appropriate. Erosion in the value of security can be reckoned as significant when the realisable
value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI
at the time of last inspection, as the case may be. Such NPAs may be straightaway classified
under doubtful category and provisioning should be made as applicable to doubtful assets.

If the realisable value of the security, as assessed by the bank/ approved values/ RBI is
less than 10 per cent of the outstanding in the borrower accounts, the existence of security should

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be ignored and the asset should be straightaway classified as loss asset. It may be either written
off or fully provided for by the bank.

Advances to PACS/FSS ceded to Commercial Banks:

In respect of
agricultural advances as well as advances for other purposes granted by banks to ceded PACS/
FSS under the on-lending system, only that particular credit facility granted to PACS/ FSS which
is in default for a period of two harvest seasons (not exceeding two half years)/two quarters, as
the case may be, after it has become due will be classified as NPA and not all the credit facilities
sanctioned to a PACS/ FSS. The other direct loans & advances, if any, granted by the bank to the
member borrower of a PACS/ FSS outside the on-lending arrangement will become NPA even if
one of the credit facilities granted to the same borrower becomes NPA.

Advances against Term Deposits, NSCs, KVP/IVP, etc:

Advances against term
deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs.
Advances against gold ornaments, government securities and all other securities are not covered
by this exemption.

Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or for agricultural plantations etc.
where moratorium is available for payment of interest, payment of interest becomes 'due' only
after the moratorium or gestation period is over. Therefore, such amounts of interest do not
become overdue and hence NPA, with reference to the date of debit of interest. They become
overdue after due date for payment of interest, if uncollected.

In the case of housing loan or similar advances granted to staff members where interest is
payable after recovery of principal, interest need not be considered as overdue from the first
quarter onwards. Such loans/advances should be classified as NPA only when there is a default in
repayment of instalment of principal or payment of interest on the respective due dates

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Agricultural advances

In respect of advances granted for agricultural purpose where interest and/or instalment
of principal remains unpaid after it has become past due for two harvest seasons but for a period
not exceeding two half-years, such an advance should be treated as NPA. The above norms
should be made applicable to all direct agricultural advances as listed at items 1.1, 1.1.2 (i) to
(vii), 1.1.2 (viii)(a)(1) and 1.1.2 (viii)(b)(1) of Master Circular on lending to priority sector No.
RPCD. PLAN. BC. 12/04.09.01/ 2001- 2002 dated 1 August 2001. An extract of the list of these
items is furnished in the Annexure II. In respect of agricultural loans, other than those specified
above, identification of NPAs would be done on the same basis as non agricultural advances
which, at present, is the 180 days delinquency norm.

Where natural calamities impair the repaying capacity of agricultural borrowers, banks
may decide on their own as a relief measure - conversion of the short-term production loan into a
term loan or re-schedulement of the repayment period; and the sanctioning of fresh short-term
loan, subject to various guidelines contained in RBI circulars
RPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98 and RPCD.No.PLFS.BC.9/05.01.04/98-
99 dated 21.07.98.

In such cases of conversion or re-schedulement, the term loan as well as fresh short-term
loan may be treated as current dues and need not be classified as NPA. The asset classification of
these loans would thereafter be governed by the revised terms & conditions and would be treated
as NPA if interest and/or instalment of principal remains unpaid, for two harvest seasons but for a
period not exceeding two half years.

Government guaranteed advances:

The credit facilities backed by guarantee of the Central Government though overdue may
be treated as NPA only when the Government repudiates its guarantee when invoked. This

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exemption from classification of Government guaranteed advances as NPA is not for the purpose
of recognition of income. With effect from 1st April 2000, advances sanctioned against State
Government guarantees should be classified as NPA in the normal course, if the guarantee is
invoked and remains in default for more than two quarters. With effect from March 31, 2001 the
period of default is revised as more than 180 days.

Take-out Finance:

Takeout finance is the product emerging in the context of the funding of long-term
infrastructure projects. Under this arrangement, the institution/the bank financing infrastructure
projects will have an arrangement with any financial institution for transferring to the latter the
outstanding in respect of such financing in their books on a pre-determined basis. In view of the
time-lag involved in taking-over, the possibility of a default in the meantime cannot be ruled out.
The norms of asset classification will have to be followed by the concerned bank/financial
institution in whose books the account stands as balance sheet item as on the relevant date. If the
lending institution observes that the asset has turned NPA on the basis of the record of recovery,
it should be classified accordingly. The lending institution should not recognise income on
accrual basis and account for the same only when it is paid by the borrower/ taking over
institution (if the arrangement so provides). The lending institution should also make provisions
against any asset turning into NPA pending its take over by taking over institution. As and when
the asset is taken over by the taking over institution, the corresponding provisions could be
reversed. However, the taking over institution, on taking over such assets, should make
provisions treating the account as NPA from the actual date of it becoming NPA even though the
account was not in its books as on that date.

Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the banks covering export of goods to

countries for which the ECGCs cover is available, EXIM Bank has introduced a guarantee-cum-
refinance programme whereby, in the event of default, EXIM Bank will pay the guaranteed

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amount to the bank within a period of 30 days from the day the bank invokes the guarantee after
the exporter has filed claim with ECGC.

Accordingly, to the extent payment has been received from the EXIM Bank, the advance
may not be treated as a non-performing asset for asset classification and provisioning purposes.

Export Project Finance:

In respect of export project finance, there could be instances where the actual importer
has paid the dues to the bank abroad but the bank in turn is unable to remit the amount due to
political developments such as war, strife, UN embargo, etc.

In such cases, where the lending bank is able to establish through documentary evidence
that the importer has cleared the dues in full by depositing the amount in the bank abroad before
it turned into NPA in the books of the bank, but the importer's country is not allowing the funds
to be remitted due to political or other reasons, the asset classification may be made after a
period of one year from the date the amount was deposited by the importer in the bank abroad.

Advances under rehabilitation approved by BIFR/ TLI:

Banks are not permitted to
upgrade the classification of any advance in respect of which the terms have been re-negotiated
unless the package of re-negotiated terms has worked satisfactorily for a period of one year.
While the existing credit facilities sanctioned to a unit under rehabilitation packages approved by
BIFR/term lending institutions will continue to be classified as sub-standard or doubtful as the
case may be, in respect of additional facilities sanctioned under the rehabilitation packages, the
Income Recognition, Asset Classification norms will become applicable after a period of one
year from the date of disbursement.

ROLE OF ARCIL :-

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This empowerment encouraged the three major players in Indian banking system, namely, State
Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come
together to set-up the first ARC. Arcil was incorporated as a public limited company on February
11, 2002 and obtained its certificate of commencement of business on May 7, 2003. In pursuance
of Section 3 of the Securitization Act 2002, it holds a certificate of registration dated August 29,
2003, issued by the Reserve Bank of India (RBI) and operates under powers conferred under the
Securitization Act, 2002. Arcil is also a "financial institution" within the meaning of Section 2
(h) (ia) of the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (the "DRT
Act").
Arcil is the first ARC in the country to commence business of resolution of non-performing
assets (NPAs) upon acquisition from Indian banks and financial institutions. As the first ARC,
Arcil has played a pioneering role in setting standards for the industry in India.

Unlocking capital for the banking system and the economy

The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of
lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by
managing NPAs and help them concentrate on core banking activities thereby enhancing
shareholders value.

Creating a vibrant market for distressed debt assets / securities in India offering a
trading platform for Lenders

Arcil has made successful efforts in funneling investment from both from domestic and
international players for funding these acquisitions of distressed assets, followed by
showcasing them to prospective buyers. This has initiated creation of a secondary market
of distressed assets in the country besides hastening their resolution. The efforts of Arcil
would lead the countrys distressed debt market to international standards.

To evolve and create significant capacity in the system for quicker resolution of NPAs
by deploying the assets optimally

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 With a view to achieving high delivery capabilities for resolution, Arcil has put in place a
structure aimed at outsourcing the various sub-functions of resolution to specialized
agencies, wherever applicable under the provision of the Securitisation Act, 2002. Arcil
has also encourage, groomed and developed many such agencies to enhance its capacity
in line with the growth of its activity.

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 CHAPTER-4
DATA ANALYSIS
AND
INTERPRETION

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4.1 ANALYSIS

For the purpose of analysis and comparison between private sector and public sector banks, we
take five-five banks in both sector to compare the non performing assets of banks. For
understanding we further bifurcate the non performing assets in priority sector and non priority
sector, gross NPA and net NPA in percentage as well as in rupees, deposit investment
advances.

Deposit Investment Advances is the first in the analysis because due to these we can
understand the where the bank stands in the competitive market. As at end of march 2008, in
private sector ICICI Bank is the highest deposit-investment-advances figures in rupees crore,
second is HDFC Bank and KOTAK Bank has least figures.
In public sector banks Punjab National Bank has highest deposit-investment-advances but when
we look at graph first three means Bank of Baroda and Bank of India are almost the similar in
numbers and Dena Bank is stands for last in public sector bank. When we compare the private
sector banks with public sector banks among these banks, we can understand the more number of
people prefer to choose public sector banks for deposit-investment.

But when we compare the private sector bank ICICI Bank with the public sector banks ICICI
Bank is more deposit-investment figures and first in the all banks.

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4.2DEPOSIT-INVESTMENT-ADVANCES ( RS.CRORE) of both sector
banks and comparison among them, year 2014-15

BANK DEPOSIT INVESTMENT ADVANCES

AXIS 87626 33705 59661
HDFC 100769 49394 63427
ICICI 244431 111454 225616
KOTAK 16424 9142 15552
INDUSIND 19037 6630 12795
TOTAL 468287 210325 377051

250000

200000

150000
DEPOSIT INVESTMENT ADVANCES
100000

50000

0
ICICI HDFC AXIS INDUSIND KOTAK

INTERPRETION- It can be understood from the above diagram, IN,ICICI Bank Deposit
Advances and Investment Higher Than Other Banks. Axis ,Kotak, Indusind banks given
very low performance

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 BANK DEPOSIT INVESTMENT ADVANCES
BOB 152034 43870 106701
BOI 150012 41803 113476
DENA 33943 10282 23024
PNB 166457 53992 119502
UBI 103859 33823 74348
TOTAL 606305 183770 437051

180000
160000
140000
120000
100000
80000DEPOSIT INVESTMENT ADVANCES

60000
40000
20000
0
PNB BOB BOI UBI DENA

INTERPRETION-
From the above diagram ,calculated deposit investment and advances of all banks .PNB
banks given highest performances .BOB and BOI deposit investments and advances are same.
advances are vey low in DENA banks.

ICICI BANK AND PUNJAB NATIONAL BANK :-

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BANK DEPOSIT INVESTMENT ADVANCES
ICICI BANK 244431 111454 225616
PNB 166457 53992 119502

250000

200000

150000
DEPOSIT INVESTMENT ADVANCES
100000

50000

0
ICICI PNB

INTERPRETION-
From the above diagram, calculated deposits investment advances of the ICICI bank
and PNB bank.in ICICI bank deposits is high. investment is very low in PNB bank. advances in
ICICI bank above 200000.

4.3-GROSS NPA AND NET NPA

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 Bank GROSS NPA NET NPA
BOB 1.46 0.35
BOI 1.48 0.45
DENA 2.37 1.16
PNB 2.09 0.45
UBI 1.82 0.59

2.5

1.5
GROSS NPA NET NPA
1

0.5

0
DENA UBI PNB BOI BOB

INTERPRETION-
From the above diagram ,calculated GROSS NPA and NET NPA.in DENA bank
GROSS NPA is 2.37 and NET NPA is 1.16. GROSS NPA and NET NPA in DENA bank is is
more than other banks.NET NPA in UBI banks are 0.10.UBI banks given very week
performance.

2014-15

BANK GROSS NPA NET NPA

BOB 1.10 0.27

BOI 1.08 0.33
DENA 1.48 0.56
PNB 1.67 0.38

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 UBI 1.34 0.10

1.8
1.6
1.4
1.2
1
GROSS NPA NET NPA
0.8
0.6
0.4
0.2
0
DENA PNB BOI BOB UBI

INTERPRETION-
From the above diagram, calculated GROSS NPA and NET NPA of banks.in 2014-15
GROSS NPA is more in PNB banks.NET NPA are more in DENA Banks.NPA is decrease in UBI
banks.GROSS NPA is increase in PNB banks

Year- 2013-14

BANK GROSS NPA NET NPA

AXIS 0.57 0.36

HDFC 0.72 0.22
ICICI 1.20 0.58
KOTAK 1.39 1.09
INDUSIND 1.64 1.31

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 1.8
1.6
1.4
1.2
1
GROSS NPA NET NPA
0.8
0.6
0.4
0.2
0
INDUSIND KOTAK ICICI AXIS HDFC

INTERPRETION-
From the above diagram ,calculated GROSS NPA and NET NPA of particular banks.in
INDUSIND banks GROSS NPA and NET NPA are increased.in AXIS banks both GROSS AND
NET NPA decreased .GROSS NPA and NET NPA OF KOTAK and ICICI Banks is increased and
decresed.

Year-2015-16

BANK GROSS NPA NET NPA

AXIS 0.45 0.23

HDFC 0.68 0.22
ICICI 1.90 0.87
KOTAK 1.55 0.98
INDUSIND 1.69 1.25

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 2
1.8
1.6
1.4
1.2
1 GROSS NPA NET NPA
0.8
0.6
0.4
0.2
0
INDUSIND KOTAK ICICI HDFC AXIS

INTERPRETION-
From the above diagram .it is calculated GROSS NPA and NET NPA of particular
banks. GROSS NPA of ICICI Banks is increased in 2015-16.NET NPA decreased in HDFC
Bank. KOTAK and INDUSIND Banks both GROSS AND NET was increased and
decresed.NET NPA of AXIS Banks is decresed.

4.4PRIORITY NON PRIORITY SECTOR

Year-2014-15
BANK AGRI SMALL OTHERS PRIORITY NON-
(1) (2) (3) SECTOR PRIORITY
( 1+2+3 )
AXIS 109.12 14.76 86.71 210.59 275.06
HDFC 36.12 110.56 47.70 194.41 709.23
ICICI 981.85 23.35 354.13 1359.34 6211.12
KOTAK 10.00 33.84 4.04 47.87 405.20
INDUSIN 30.44 3.18 30.02 63.64 328.67
D
TOTAL 1167.53 185.69 522.60 1875.85 7929.28

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 7000
6000
5000
4000
PRIORITY NON-PRIORITY
3000
2000
1000
0
AXIS HDFC ICICI KOTAK INDUSIND

INTERPRETION-
From the above diagram NPA in priority sector and Non priority sector. Agriculture +
small + others are priority sector. In private sector banks ICICI Bank has the highest NPA in both sector
in compare to other private sector banks. Around 72% of NPA is with ICICI Bank with Rs.1359 crore in
priority sector and around 78% in non priority sector. We can see that in private sector banks.

Year-2015-16
BANK PRIORITY SECTOR NPA
(ADVANCED
RS.CRORE )
BOB 5469 350
BOI 3269 325
DENA 1160 106
PNB 3772 443
UBI 1924 197

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 6000

5000

4000

3000 PRIORITY NPA

2000

1000

0
BOB BOI DENA PNB UBI

INTERPRETION-

When we talk about public sector banks they are more in priority sector and they given advanced
to weaker sector or industries. Public sector banks give more loans to Agriculture , small scale
and others units and as a result we see that there are more number of NPA in public sector banks
than in private sector banks. BOB given more advanced to priority sector in 2015-16than other
four banks and Dena Bank is in least.

CHAPTER-5
CONCLUSION
AND
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 BIBLIOGRAPHY

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 CONCLUSION

A report is not said to be completed unless and until the conclusion is given to the report. A
conclusion reveals the explanations about what the report has covered and what is the essence of
the study. What my project report covers is concluded below. The problem statement on which I
focused my study is NPAs the big challenge before the Banks. The Indian banking sector is the
important service sector that helps the people of the India to achieve the socio economic
objective. The Indian banking sector has helped the business and service sector to develop by
providing them credit facilities and other finance related facilities. The Indian banking sector is
developing with good appreciate as compared to the global benchmark banks. The Indian
banking system is classified into scheduled and non scheduled banks. The Banks play very
important role in developing the nation in terms of providing good financial 82 services. The
SBOP Bank has also shown good performance in the last few years. The only problem that the
Bank is facing today is the problem of nonperforming assets. The non performing assets means
those assets which are classified as bad assets which are not possibly be returned back to the
banks by the borrowers. If the proper management of the NPAs is not undertaken it would
hamper the business of the banks. The NPAs would destroy the current profit, interest income
due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of
the funds. If we analyze the past years data, we may come to know that the NPAs have increased
very drastically. The RBI has also been trying to take number of measures but the ratio of NPAs
is not decreasing of the banks. The bank must have to find out the measures to reduce the
evolving problem of the NPAs. If the concept of NPAs is taken very lightly it would be
dangerous for the Bank. The reduction of the NPAs would help the bank to boost up their profits,
smooth recycling of funds in the nation.

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 BIBILIOGRAPHY

Websites
www.google.com
www.wiki.answers.com
www.bankingbusiness.com

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