A PROJECT REPORT ON

COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS

K.V.PENDHARKAR COLLEGE OF ARTS SCIENCE &COMMERCE DOMBIVLI

SUBMITTED BY: AVINASH ANDY (116302 ) T.Y (BANKING & INSURANCE) Session: 2011-20

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ACKNOWLEDGEMENT

I, WOULD LIKE TO ACKNOWLEDGE THE FOLLOWING AS BEING AN IDEALIST CHANNEL AND A FRESH DIMENSION IN THE COMPLETION OF THIS PROJECT. FIRST AND THE FOREMOST I WOULD LIKE TO THANK MY GUIDE, MR.OMKAR SIR WHOS IN VALUABLE SUPPORT AND GUIDANCE HELPED ME IN EVERY ASPECT OF THIS PROJECT. SECONDLY, I WOULD LIKE TO AGAIN EXPRESS MY DEEP SENSE OF GRATITUDE TOWARDS OUR BANKING AND INSURANCE CO-ORDINATOR FOR THE VALUABLE GUIDANCE AND SUPPORT WITHOUT THIS PROJECT WOULD HAVE NOT BEEN POSSIBLE. LAST BUT NOT THE LEAST I WOULD TO THANK ALL THE RESPONDENTS FOR THEIR SUPPORT AND ALL THOSE PEOPLE WHO DIRECTLY AND INDIRECTLY HELPED ME IN COMPLETING THIS PROJECT SATISFACTOR

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((( CONTENTS )))

CHAPTER NO. 1

SUBJECT COVERED Indian Banking Industry Introduction To NPA Types of NPA Income Rocognition Aseet Classification of NPA Guidelines Impact Tools for Recovery of NPA

PAGE NO.

6 7

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Ch.1 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. [Comparative analysis on NPA of Private & Public sector Banks] Page 4

 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. The others which followed were the Bank Hindustan and the Bengal Bank.

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 [Comparative analysis on NPA of Private & Public sector Banks] Page 5

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 highlevel 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. 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 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 [Comparative analysis on NPA of Private & Public sector Banks] Page 6 Monetary Fund, International Bank for Reconstruction and Development and Asian Development Bank.

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 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. [Comparative analysis on NPA of Private & Public sector Banks] Page 7

 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 preliberalization 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.

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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 & 1970- 1980 Pay roll 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' 1981- 1990 offices 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

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1991-1995

Expansion slows down Banking sector reforms resulting in progressive deregulation 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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NON PERFORMING ASSETS (NPA)

NPA (NON PERFORMING ASSETS) ? Action for enforcement of security interest can be initiated only if the secured asset is classified as Nonperforming asset. Non performing asset means an asset or account of borrower ,which has been classified by bank or financial institution as sub standard , doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI . An amount due under any credit facility is treated as past due when it is not been paid within 30 days from the due date. Due to the improvement in the payment and settlement system, recovery climate, up gradation of technology in the banking system etc, it was decided to dispense with past due concept, with effect from March 31, 2001. Accordingly as from that date, a Non performing asset shell be an advance where i. ii. iii. iv. Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan, The account remains out of order for a period of more than 180 days ,in respect of an overdraft/cash credit (OD/CC) The bill remains overdue for a period of more than 180 days in case of bill purchased or discounted. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and

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v.

Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt 90 days overdue norms for identification of NPAs ,from the year ending March 31,2004,a non performing asset shell be a loan or an advance where; i. ii. iii. iv. Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, The account remains out of order for a period of more than 90 days ,in respect of an overdraft/cash credit (OD/CC) The bill remains overdue for a period of more than 90 days in case of bill purchased or discounted. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts

v.

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

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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. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. [Comparative analysis on NPA of Private & Public sector Banks] Page 13

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

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.

Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it.

Change on Govt. policies

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With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs.

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

INTERNAL FACTORS :-

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

Defective Lending process

There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. ii. iii. Principles of safety Principle of liquidity Principles of profitability

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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 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.

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 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 investment.

consider

the

borrowers

own

capital

it should collect credit information of the borrowers from_

a. From bankers.

b. Enquiry from business.

market/segment

of

trade,

industry,

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

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profitability, viability, long term acceptability of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs.

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 [Comparative analysis on NPA of Private & Public sector Banks] Page 18

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.

Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.

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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. 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 [Comparative analysis on NPA of Private & Public sector Banks] Page 20

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. 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 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.

'Out of Order' status:

An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited [Comparative analysis on NPA of Private & Public sector Banks] Page 21

during the same period, these accounts should be treated as 'out of order'.

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

Ch.2 Introduction to the topic

The three letters NPA 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.

Definitions:
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained past due for a specified period of time.

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for identification of NPAs, from the year ending March 31, 2004. [Comparative analysis on NPA of Private & Public sector Banks] Page 22

Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance where; Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,

The account remains out of order for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, 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. 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 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.

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Ch.3 Types of NPA

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

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 [Comparative analysis on NPA of Private & Public sector Banks] Page 24

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

Ch.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 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 renegotiations 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.

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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

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. [Comparative analysis on NPA of Private & Public sector Banks] Page 26

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:
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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.

Reporting of NPAs

Banks are required to furnish a Report on NPAs as on 31st 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 [Comparative analysis on NPA of Private & Public sector Banks] Page 28

and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.

REPORTING FORMAT FOR NPA GROSS AND NET NPA Name of the Bank: Position as on PARTICULARS 1) Gross Advanced * 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 ) 7) Net NPA as a %age of Net Advance *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. [Comparative analysis on NPA of Private & Public sector Banks] Page 29

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

Ch.5 Asset Classification of NPA ------------------------------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 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

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( 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:-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

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or the RBI inspection but the amount would not have been written-off wholly.

Provisioning Norms -----------------------------------------General

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

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. [Comparative analysis on NPA of Private & Public sector Banks] Page 33

 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 asset has remained doubtful:

Period for which the advance has been considered as doubtful Up to one year One to three years More than three years: (1) Outstanding stock of NPAs as on March 31, 2004. (2) Advances classified as doubtful more than three years on or after April 1, 2004.

Provision requirement (%) 20 30 60% with effect from March 31,2005. 75% effect from March 31, 2006. 100% with effect from March 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:

[Comparative analysis on NPA of Private & Public sector Banks] Page 34

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 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:

[Comparative analysis on NPA of Private & Public sector Banks] Page 35

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.

Floating 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

[Comparative analysis on NPA of Private & Public sector Banks] Page 36

sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice.

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 [Comparative analysis on NPA of Private & Public sector Banks] Page 37

adjustment in respect of each class of fixed assets may 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.

Doubtful assets :-

100 percent of the extent to which the finance is not secured by the realisable value of the leased asset. Realisable value to be estimated on a realistic basis. In addition to the above provision, the following provision on the net book value of the secured portion should be made, depending upon the period for which asset has been doubtful: Period Up to one year One to three years More than three years %age of provision 20 30 50

Ch.6 Guidelines 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 [Comparative analysis on NPA of Private & Public sector Banks] Page 38

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.
[Comparative analysis on NPA of Private & Public sector Banks] Page 39

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 DICGC Cover Rs. 4 lakhs 50 percent than 3 years

Period for which the advance has remained More

[Comparative analysis on NPA of Private & Public sector Banks] Page 40

doubtful Value of security (excludes worth of Rs.)

remained doubtful held Rs. 1.50 lakhs

Provision required to be made

Outstanding balance Less: Value of security held Unrealised balance Less: DICGC (50% of unrealisable balance) Net unsecured balance advance Provision advance Total provision required to be made for secured portion

Rs. 4.00 lakhs Rs. 1.50 lakhs Rs. 2.50 lakhs Cover Rs. 1.25 lakhs Rs. 1.25 lakhs unsecured portion) of Rs. 0.75 lakhs (@ 50 percent of secured portion) Rs. 2.00 lakhs

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

[Comparative analysis on NPA of Private & Public sector Banks] Page 41

Advance covered by CGTSI guarantee

In case the advance covered by CGTSI guarantee becomes nonperforming, 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 nonperforming advances. Two illustrative examples are given below:

Example I Asset classification status: CGTSI Cover Doubtful More than 3 years; 75% of the amount outstanding or 75% of the unsecured amount or Rs.18.75 lakh, whichever is the least Realisable value of Security Balance outstanding Less Realisable value security Unsecured amount Less CGTSI cover (75%) Net unsecured uncovered portion: Provision Required Secured portion Rs.1.50 lakh Rs. 0.75 lakh (@ 50%) Rs. 8.50 lakh Rs. 6.38 lakh and Rs. 2.12 lakh Rs.1.50 lakh Rs.10.00 lakh of Rs. 1.50 lakh

[Comparative analysis on NPA of Private & Public sector Banks] Page 42

Unsecured portion

&

uncovered Rs.2.12 lakh

Rs. 2.12 lakh ( 100%) Rs. 2.87 lakh

Total provision required

Example II Asset classification status CGTSI Cover Doubtful More than 3 years; 75% of the amount outstanding or75% of the unsecured amount or Rs.18.75 lakh, whichever is the least Realisable value of Security Balance outstanding Less Realisable value security Unsecured amount Less CGTSI cover (75%) Net unsecured uncovered portion: Provision Required Secured portion Unsecured portion [Comparative analysis on NPA of Private & Public sector Banks] Page 43 & Rs.10.00 lakh uncovered Rs.11.25 lakh Rs. 5.00 lakh (@ 50%) Rs.11.25 lakh (100%) Rs. 30.00 lakh Rs. 18.75 lakh and Rs. 11.25 lakh Rs.10.00 lakh Rs.40.00 lakh of Rs. 10.00 lakh

Total provision required

Rs. 16.25 lakh

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:

Profit

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

[Comparative analysis on NPA of Private & Public sector Banks] Page 44

Ch.7 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 hand which lead to borrowing money for shot\rtes period of time which lead to additional cost to the company. Difficulty in operating the functions [Comparative analysis on NPA of Private & Public sector Banks] Page 45

of bank is another cause of NPA due to lack of money.Routine payments and dues.

Involvement of management:-

Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss:-

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

Early symptoms by which one can recognize a performing asset turning in to Non-performing asset
Four categories of early symptoms:--------------------------------------------------( 1 ) Financial:
Non-payment of the very first installment in case of term loan. Bouncing of cheque due to insufficient balance in the accounts.

[Comparative analysis on NPA of Private & Public sector Banks] Page 46

Irregularity in installment. Irregularity of operations in the accounts. Unpaid over due bills. Declining Current Ratio. Payment which does not cover the interest and principal amount of that installment. While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.

(2)

Operational and Physical:

If information is received that the borrower has either initiated the process of winding up or are not doing the business. Overdue receivables. Stock statement not submitted on time. External non-controllable factor like natural calamities in the city where borrower conduct his business. Frequent changes in plan. Non payment of wages.

( 3 ) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank. Problem between partners. [Comparative analysis on NPA of Private & Public sector Banks] Page 47

( 4 ) Others:
Changes in Government policies. Death of borrower. Competition in the market.

Ch.9 Tools for recovery of NPAs

Credit Default

Inability to Pay

Willful default

Unviable

Viable

Lok Adalat Debt Recovery Securitization Compromise Tribunals [Comparative analysis on NPA of Private & Public sector Banks] Act Page 48 Rehabilitation Corporate Debt Restructuring Consortium Finance

Rephasement of Repayment Period

Sole Banker

Asset Reconstruction

Fresh Issue of Term Loan

Conversion into WCTL

Fresh WC Limit

[Comparative analysis on NPA of Private & Public sector Banks] Page 49

[Comparative analysis on NPA of Private & Public sector Banks] Page 50