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[Comparative analysis on NPA of Private & Public sector Banks] Page 2

GURU NANAK COLLEGE OF ARTS, SCIENCE AND

COMMERCE

GURU TEGH BAHADUR NAGAR, MUMBAI-400037

COMPARATIVE ANALYSIS ON

NON PERFORMING ASSETS

OF PRIVATE AND PUBLIC SECTOR BANKS

BACHELOR OF COMMERCEBANKING AND INSURANCE

SEMESTER V

(2010-2011)

SUBMITTED

In Partial Fulfillment of the requirements

For the Award of the Degree of

Bachelor of Management

BY

ANIL KUMAR PANDEY

ROLL NO: 14


3/98


GURU NANAK COLLEGE OF ARTS, SCIENCE AND

COMMERCE

GURU TEGH BAHADUR NAGAR, MUMBAI-400037

DDEECCLLAARRAATTIIOONN

I _________________________ THE STUDENT OF B.COM

BANKING AND INSURANCE SEMESTER V (2010-2011)

HEREBY DECLARE THAT I HAVE COMPLETED THE

PROJECT ON ______________________________________.

THE INFORMATION SUBMITTED IS TRUE AND

ORIGINAL TO THE BEST OF MY KNOWLEDGE.

SIGNATURE OF STUDENT

ANIL KUMAR PANDEY

ROLL NO: 14

GURU NANAK COLLEGE OF ARTS, SCIENCE &

COMMERCE

GURU TEGH BAHADUR NAGAR, MUMBAI400037


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C E R T I F I C A T E

THIS IS TO CERTIFY THATSHRI/MISS_____________________________OF B.COM.

BANKING AND INSURANCE SEMESTER V (2010-2011)

HAS SUCCESSFULLY COMPLETED THE PROJECT

ON_____________________________________ UNDER THE

GUIDANCE OF ________________________________

COURSE CO-ORDINATOR PRINCIPAL

PROJECT GUIDE

EXTERNAL EXAMINER


5/98


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22 IInnttrroodduuccttiioonn ttoo TTooppiicc

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44 PPrroovviissiioonniinngg NNoorrmmss

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66 PPrreevveennttiivvee MMeeaassuurreemmeenntt

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IInntteenntt

TTiimmeelliinneessss


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77 TToooollss ffoorr RReeccoovveerryy

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99 FFiinnddiinngg,, SSuuggggeessttiioonnss aanndd CCoonncclluussiioonnss

1100 BBiibblliiooggrraapphhyy


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HISTORY OF INDIAN BANKING

Abankis 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 believedthat 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.


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Banking in India has an early origin where the indigenous bankers played avery 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 threebanks; 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 1935by 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 thegeographical coverage and financial spread of the banking system in the


10/98


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.

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


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In the post-nationalization era, no new private sector banks were allowed tobe 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 bankingoperations, 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


12/98


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 theeconomic 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


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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 intransaction volumes --

Outsourcing of data processing to service bureau begins Back office systems only in Multinational (MNC) banks'

offices

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, batchprocessing 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 andold private banks begins

New private banks are set up with CBS/TBA form thestart


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1996-2000 New delivery channels like ATM, Phone banking andInternet 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 respondusing intermediary technology, TBA implementation

surges ahead under fiat from Central Vigilance

Commission (CVC), Y2K threat consumes last twoyears

2000-2003 Alternate delivery channels find wide consumeracceptance

IT Bill passed lending legal validity to electronictransactions

Govt. owned banks and old private banks startimplementing CBSs, but initial attempts face problems

Banks enter insurance business launch debit cards


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IInnttrroodduuccttiioonn ttoo tthhee ttooppiicc

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.

DDeeffiinniittiioonnss::

An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank.

A non-performing asset (NPA) was defined as a credit facility in

respect of which the interest and/ or instalment of principal has remained past due

for a specified period of time.With a view to moving towards international best practices and to

ensure greater transparency, it has been decided to adopt the 90 days overdue

norm for identification of NPAs, from the year ending March 31, 2004.

Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall

be a loan or an advance where;

Interest and/ or instalment of principal remain overdue for a period ofmore than 90 days in respect of a term loan,


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The account remains out of order for a period of more than 90 days, inrespect of an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the caseof bills purchased and discounted,

Interest and/or instalment of principal remains overdue for two harvestseasons 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 than90 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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NON PERFORMING ASSETS (NPA)

WHAT IS A NPA (NON PERFORMING ASSETS) ?

Action for enforcement of security interest can be initiated only if the secured asset

is classified as Nonperforming asset.

Non performing asset means an asset or account of borrower ,which has been

classified by bank or financial institution as substandard , 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 thepayment and settlement system, recovery climate, up gradation of technology in

the banking system etc, it was decided to dispense with past due concept, witheffect from March 31, 2001. Accordingly as from that date, a Non performing asset

shell be an advance where

i. Interest and/or installment of principal remain overdue for a period of morethan 180 days in respect of a term loan,

ii.

The account remains out of order for a period of more than 180 days ,inrespect of an overdraft/cash credit (OD/CC)

iii. The bill remains overdue for a period of more than 180 days in case of billpurchased or discounted.

iv. Interest and/or principal remains overdue for two harvest season but for aperiod not exceeding two half years in case of an advance granted for

agricultural purpose ,and

v. Any amount to be received remains overdue for a period of more than 180days 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


18/98


identification of NPAs ,from the year ending March 31,2004,a non performing asset shell be

a loan or an advance where;

i. Interest and/or installment of principal remain overdue for a period of more than90 days in respect of a term loan,

ii. The account remains out of order fora period of more than 90 days ,in respectof an overdraft/cash credit (OD/CC)

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

iv. Interest and/or principal remains overdue for two harvest season but for a periodnot exceeding two half years in case of an advance granted for agricultural

purpose ,and

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

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 arenot 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 facil ity is overdue if it is not paid on duedate fixed by the bank.

FACTORS FOR RISE IN NPAs


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The banking sector has been facing the serious problems of the rising NPAs. But theproblem 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 tribunalThe 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 DefaultsThere 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 calamitiesThis is the measure factor, which is creating alarming rise in NPAs of the PSBs.

every now and then India is hit by major natural calamities thus making the borrowers

unable to pay back there loans. Thus the bank has to make large amount of provisions in

order to compensate those loans, hence end up the fiscal with a reduced profit.

Mainly ours farmers depends on rain fall for cropping. Due to irregularities of

rain fall the farmers are not to achieve the production level thus they are not repaying the

loans.

Industrial sicknessImproper 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 demandEntrepreneurs 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


20/98


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. policiesWith 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 processThere are three cardinal principles of bank lending that have been followed by the

commercial banks since long.

i. Principles of safetyii. Principle of liquidityiii. 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 payb. Willingness to pay

Capacity to pay depends upon:


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1. Tangible assets

2. Success in business

Willingness to pay depends on:1. Character

2. Honest3. Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise or businessfor 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 technologyDue 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 analysisThe improper strength, weakness, opportunity and threat analysis is another reason for

rise in NPAs. While providing unsecured advances the banks depend more on thehonesty, 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.


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Purpose of the loanWhen bankers give loan, he should analyze the purpose of the loan.

To ensure safety and liquidity, banks should grant loan for productivepurpose only. Bank should analyze the profitability, viability, long

term acceptability of the project while financing.

Poor credit appraisal systemPoor credit appraisal is another factor for the rise in NPAs. Due to poorcredit 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 deficienciesThe 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.


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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 visitThe 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 processNon remittance of recoveries to higher financing agencies and re loaning of

the samehave 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.

PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst case, ifthe 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 thebank fails, depositors loose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interestrates, lower deposit rates and higher lending rates repress saving and

financial market, which hamper economic growth.


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4. Non performing loans epitomize bad investment. They misallocate creditfrom 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 thesefirst 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 harvestseasons 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 90days in respect of other accounts.


25/98


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.

''OOuutt ooffOOrrddeerr'' ssttaattuuss::

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

order'.

OOvveerrdduuee::

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.

TTyyppeess ooffNNPPAA

AA]] GGrroossss NNPPAA

BB]] NNeett NNPPAA


26/98


AA]] GGrroossss NNPPAA::

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 NPAsGross Advances

BB]] NNeett NNPPAA::

Net NPAs are those type of NPAs in which the bank has deducted the provision

regarding NPAs. Net NPA shows the actual burdenof 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 NPAsProvisionsGross Advances - Provisions


27/98


IINNCCOOMMEE RREECCOOGGNNIITTIIOONN

IInnccoommee rreeccooggnniittiioonnPPoolliiccyy

The policy of income recognition has to be objective and based on the recordof 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, KVPsand 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 orrescheduling 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 suchadvances should not be taken to income account unless the interest has been

realised.


28/98


RReevveerrssaall ooffiinnccoommee::

If any advance, including bills purchased and discounted, becomes NPA asat 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 accruedshould 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 andcredited 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 takento 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 theCouncil of the Institute of Chartered Accountants of India (ICAI), a separate

Lease Equalisation Account should be opened by the banks with a


29/98


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'.

AApppprroopprriiaattiioonn ooffrreeccoovveerryy iinn NNPPAAss

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

In the absence of a clear agreement between the bank and the borrower forthe 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.

IInntteerreesstt AApppplliiccaattiioonn::

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.

RReeppoorrttiinngg ooffNNPPAAss


30/98


Banks are required to furnish a Report on NPAs as on 31 st March each yearafter 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 suspenseaccount, 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, ifany, 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 NPAGROSS AND NET NPA

Name of the Bank:

Position as on

PARTICULARS

1) Gross Advanced *2) Gross NPA *3) Gross NPA as %age of Gross Advanced4) Total deduction( a+b+c+d )


31/98


( 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.

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

standard assets. (Rs._____crore).

AAsssseett CCllaassssiiffiiccaattiioonn

CCaatteeggoorriieess ooffNNPPAAss

SSttaannddaarrdd AAsssseettss::

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


32/98


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:

(( 11 )) SSuubb--ssttaannddaarrdd AAsssseettss

((

22

))

DD

oo

uu

bb

ttffuu

ll

AA

sssseettss

(( 33 )) LLoossss AAsssseettss

(( 11 )) SSuubb--ssttaannddaarrdd AAsssseettss::----

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.

(( 22 )) DDoouubbttffuull AAsssseettss::----

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 valueshighly questionable and improbable.


33/98


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 ) LLoossss AAsssseettss::----

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.

PPrroovviissiioonniinngg NNoorrmmss

GGeenneerraall

In order to narrow down the divergences and ensure adequate provisioningby 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.


34/98


Pursuant to this, regional offices were advised to forward a list of individualadvances, 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.

The primary responsibility for making adequate provisions for anydiminution 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 thenon-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:

LLoossss aasssseettss::

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.

DDoouubbttffuull aasssseettss::


35/98


100 percent of the extent to which the advance is not covered by therealisable 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 followingbasis, 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

Provision

requirement (%)

Up to one year 20

One to three years 30

More than three years:

(1)Outstanding stock of NPAs ason March 31, 2004.

(2)Advances classified asdoubtful more than three years

60% with effect from

March 31,2005.

75% effect from March

31, 2006.

100% with effect from


36/98


on or after April 1, 2004. March 31, 2007.

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

under:

As on31.03.2003, 50 percent of the additional provisioning requirement onthe 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 uponthe 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


37/98


Directors should get collaterals such as immovable properties charged in favour of

the bank valued once in three years.

SSuubb--ssttaannddaarrdd aasssseettss::

A general provision of 10 percent on total outstanding should be made without

making any allowance for DICGC/ECGC guarantee cover and securities available.

SS

ttaa

nn

dd

aa

rrdd

aa

sssseettss::

From the year ending 31.03.2000, the banks should make a generalprovision 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 netNPAs.

The provisions towards Standard Assets need not be netted from grossadvances but shown separately as 'Contingent Provisions against Standard

Assets' under 'Other Liabilities and Provisions - Others' in Schedule 5 of the

balance sheet.

FFllooaattiinngg pprroovviissiioonnss::

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


38/98


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.

PPrroovviissiioonnss oonn LLeeaasseedd AAsssseettss::

LLeeaasseess aarree ppeeccuulliiaarr ttrraannssaaccttiioonnss wwhheerree tthhee aasssseettss aarree nnoott rreeccoorrddeedd iinn tthhee bbooookkss ooff

tthhee uusseerr ooff ssuucchh aasssseettss aass AAsssseettss,, wwhheerreeaass tthheeyy aarree rreeccoorrddeedd iinn tthhee bbooookkss ooff tthhee

oowwnneerr eevveenn tthhoouugghh tthhee pphhyyssiiccaall eexxiisstteennccee ooff tthhee aasssseett iiss wwiitthh tthhee uusseerr ((lleesssseeee))..

__

__

((AA

SS

11

99

IICC

AA

II))

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 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.


39/98


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 %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')

GGuuiiddeelliinneess ffoorr PPrroovviissiioonnss uunnddeerr SSppeecciiaall CCiirrccuummssttaanncceess

GGoovveerrnnmmeenntt gguuaarraanntteeeedd aaddvvaanncceess

With effect from 31 March 2000, in respect of advances sanctioned againstState Government guarantee, if the guarantee is invoked and remains in default for


40/98


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 whichguarantee 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.

AAddvvaanncceess ggrraanntteedd uunnddeerr rreehhaabbiilliittaattiioonn ppaacckkaaggeess aapppprroovveedd bbyy BBIIFFRR//tteerrmm lleennddiinngg

iinn

ssttiittuu

ttiioo

nn

ss::

In respect of advances under rehabilitation package approved by BIFR/termlending institutions, the provision should continue to be made in respect of dues to

the bankon 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 BIFRand/or term lending institutions, provision on additional facilities sanctioned need

not be made for a period ofone year from the date of disbursement.

In respect of additional credit facilities granted to SSI units which areidentified 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.


41/98


AAddvvaanncceess aaggaaiinnsstt tteerrmm ddeeppoossiittss,, NNSSCCss eelliiggiibbllee ffoorr ssuurrrreennddeerr,, IIVVPPss,, KKVVPPss,, aanndd

lliiffee ppoolliicciieess aarree eexxeemmpptteedd ffrroomm pprroovviissiioonniinngg rreeqquuiirreemmeennttss..

HHoowweevveerr,, aaddvvaanncceess aaggaaiinnsstt ggoolldd oorrnnaammeennttss,, ggoovveerrnnmmeenntt sseeccuurriittiieess aanndd aallll

ootthheerr kkiinnddss ooffsseeccuurriittiieess aarree nnoott eexxeemmpptteedd ffrroomm pprroovviissiioonniinngg rreeqquuiirreemmeennttss..

TTrreeaattmmeenntt ooffiinntteerreesstt ssuussppeennssee aaccccoouunntt::

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.

AAddvvaanncceess ccoovveerreedd bbyy EECCGGCC//DDIICCGGCC gguuaarraanntteeee

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


42/98


doubtful remained doubtful

Value of security held

(excludes worth of Rs.)

Rs. 1.50 lakhs

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

(50% of unrealisable balance)

Rs. 1.25 lakhs

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

AAddvvaannccee ccoovveerreedd bbyy CCGGTTSSII gguuaarraanntteeee

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:


43/98


Example I

Asset classification status: DoubtfulMore 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

security

Rs. 1.50 lakh

Unsecured amount Rs. 8.50 lakh

Less CGTSI cover (75%) Rs. 6.38 lakh

Net unsecured and

uncovered portion:

Rs. 2.12 lakh

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


44/98


Asset classification status DoubtfulMore than 3 years;

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 ofsecurity

Rs. 10.00 lakh

Unsecured amount Rs. 30.00 lakh

Less CGTSI cover (75%) Rs. 18.75 lakh

Net unsecured and

uncovered portion:

Rs. 11.25 lakh

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

TTaakkee--oouutt ffiinnaannccee


45/98


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.

RReesseerrvvee ffoorr EExxcchhaannggee RRaattee FFlluuccttuuaattiioonnss AAccccoouunntt ((RREERRFFAA))

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 & LossAccount.

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.

IImmppaacctt ooffNNPPAA

PPrrooffiittaabbiilliittyy::--


46/98


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.

LL

iiqq

uu

iidd

iittyy

::--

Money is getting blocked, decreased profit lead to lack of enough cash at hand

which lead to borrowing money for shot\rtes period of time which lead to

additional cost to the company. Difficulty in operating the functions of bank is

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

IInnvvoollvveemmeenntt ooffmmaannaaggeemmeenntt::--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.

CCrreeddiitt lloossss::--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 .


47/98


RREEAASSOONNSS FFOORR NNPPAA::

Reasons can be divided in to two broad categories:-

A] Internal Factor

B] External Factor

[[

AA

]]

IInn

tt

eerrnn

aa

ll

FF

aa

ccttoo

rrss

::--

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:

Excessive overdraft lending:

NonTransparent accounting policy:


48/98


[[BB ]] EExxtteerrnnaallFFaaccttoorrss::--

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


49/98


Obsolete technology

Product obsolete

EEaarrllyy ssyymmppttoommss bbyy wwhhiicchh oonnee ccaann rreeccooggnniizzee aa ppeerrffoorrmmiinngg aasssseett ttuurrnniinngg iinn ttoo

NNoonn--ppeerrffoorrmmiinngg aasssseett

FFoouurr ccaatteeggoorriieess ooffeeaarrllyy ssyymmppttoommss::--

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

(( 11 )) FFiinnaanncciiaall::

Non-payment of the very first installment in case of term loan. Bouncing of cheque due to insufficient balance in the accounts. 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 tosister concern or parent company.

( 2 ) Operational and Physical:


50/98


If information is received that the borrower has either initiated the processof 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.

( 4 ) Others:

Changes in Government policies.

Death of borrower.

Competition in the market.

PPrreevveennttiivvee MMeeaassuurreemmeenntt FFoorr NNPPAA

EEaarrllyy RReeccooggnniittiioonn oofftthhee PPrroobblleemm::--

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


51/98


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.

IIddeennttiiffyyiinngg BBoorrrroowweerrss wwiitthh GGeennuuiinnee IInntteenntt::--

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.

In this regard banks may consider having Special Investigation of all financial

transaction or business transaction, books of account in order to ascertain real

factors that contributed to sickness of the borrower. Banks may have penal of

technical experts with proven expertise and track record of preparing techno-

economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund

flow or sudden requirement of additional fund may be entertained at branch level,

and for this purpose a special limit to such type of cases should be decided. This


52/98


will obviate the need to route the additional funding through the controlling offices

in deserving cases, and help avert many accounts slipping into NPA category.

TTiimmeelliinneessss aannddAAddeeqquuaaccyy ooffrreessppoonnssee::--

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 maylook at the exit option.

FFooccuuss oonn CCaasshh FFlloowwss::--

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.

MMaannaaggeemmeenntt EEffffeeccttiivveenneessss::--

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


53/98


management is examined and confirmed. Where the default is due to deeper

malady, viability study or investigative audit should be done it will be useful to

have consultant appointed as early as possible to examine this aspect. A proper

techno- economic viability study must thus become the basis on which any future

action can be considered.

MMuullttiippllee FFiinnaanncciinngg::--

A.During the exercise for assessment of viability and restructuring, aPragmatic and unified approach by all the lending banks/ FIs as alsosharing of all relevant information on the borrower would go a long way

toward overall success of rehabilitation exercise, given the probability of

success/failure.

B. In some default cases, where the unit is still working, the bank should makesure 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. Toward this end, there should be regular flow of

information among consortium members. A bank, which is not part of the

consortium, may not be allowed to offer credit facilities to such defaulting

clients. Current account facilities may also be denied at non-consortium

banks to such clients and violation may attract penal action. The Credit

Information Bureau of India Ltd.(CIBIL) may be very useful for

meaningful information exchange on defaulting borrowers once the setup

becomes fully operational.


54/98


C.In a forum of lenders, the priority of each lender will be different. While oneset of lenders may be willing to wait for a longer time to recover its dues,

another lender may have a much shorter timeframe in mind. So it is possible

that the letter categories of lenders may be willing to exit, even a t a cost

by a discounted settlement of the exposure. Therefore, any plan for

restructuring/rehabilitation may take this aspect into account.

D.Corporate Debt Restructuring mechanism has been institutionalized in2001 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. Under this system, banks

may greatly benefit in terms of restructuring of large standard accounts

(potential NPAs) and viable sub-standard accounts with

consortium/multiple banking arrangements.


55/98


TToooollss ffoorr rreeccoovveerryy ooffNNPPAAss

CCrreeddiittDDeeffaauulltt

IInnaabbiilliittyyttooPPaayy WWiillllffuullddeeffaauulltt

UUnnvviiaabbllee VViiaabbllee

LLookkAAddaallaatt

DDeebbttRReeccoovveerryy

TTrriibbuunnaallss

Securitization

Act

AAsssseett

RReeccoonnssttrruuccttiioonn

mmpprroommiisseeRReehhaabbiilliittaattiioonn

CCoonnssoorrttiiuummFFiinnaanncceeSSoolleeBBaannkkeerr

CCoorrppoorraatteeDDeebbttRReessttrruuccttuurriinngg

IIssssuueeooff CCoonnvveerrssiioonn FFrreesshhWWCCLLiimmiittRReepphhaasseemmeennttooff

RReeppaayymmeennttPPeerriioodd


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Once NPA occurred, one must come out of it or it should be managed in most

efficient manner. Legal ways and means are there to over come and manage NPAs.

We will look into each one of it.

WWiillllffuullDDeeffaauulltt ::--A] Lok Adalat and Debt Recovery Tribunal

B] Securitization Act

C] Asset Reconstruction

LLookkAAddaallaatt::

Lok Adalat institutions help banks to settle disputes involving account in

doubtful and loss category, with outstanding balance of Rs. 5 lakh for

compromise settlement under Lok Adalat. Debt recovery tribunals have been

empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and

above. This mechanism has proved to be quite effective for speedy justice and

recovery of small loans. The progress through this channel is expected to pick up

in the coming years.

DDeebbttRReeccoovveerryy TTrriibbuunnaallss((DDRRTT))::

The recovery of debts due to banks and

financial institution passed in March 2000 has helped in strengthening the function

of DRTs. Provision for placement of more than one recovery officer, power to

attach defendants property/assets before judgment, penal provision for


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disobedience of tribunals order or for breach of any terms of order and

appointment of receiver with power of realization, management, protection and

preservation of property are expected to provide necessary teeth to the DRTs and

speed up the recovery of NPAs in the times to come. DRTs which have been set

up by the Government to facilitate speedy recovery by banks/DFIs, have not been

able make much impact on loan recovery due to variety of reasons like inadequate

number, lack of infrastructure, under staffing and frequent adjournment of cases. It

is essential that DRT mechanism is strengthened and vested with a proper

enforcement mechanism to enforce their orders. Non observation of any order

passed by the tribunal should amount to contempt of court, the DRT should have

right to initiate contempt proceedings. The DRT should empowered to sell asset of

the debtor companies and forward the proceed to the winding up court for

distribution among the lenders

IInnaabbiilliittyy ttoo PPaayy

CCoonnssoorrttiiuumm aarrrraannggeemmeennttss::

Asset classification of accounts under

consortium should be based on the record of recovery of the individual member

banks and other aspects having a bearing on the recoverability of the advances.

Where the remittances by the borrower under consortium lending arrangements are

pooled with one bank and/or where the bank receiving remittances is not parting

with the share of other member banks, the account will be treated as not serviced in

the books of the other member banks and therefore, be treated as NPA. The banks

participating in the consortium should, therefore, arrange to get their share of

recovery transferred from the lead bank or get an express consent from the lead


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bank for the transfer of their share of recovery, to ensure proper asset classification

in their respective books.

CCoorrppoorraattee ddeebbtt RReessttrruuccttuurriinngg ((CCDDRR))::

BBaacckkggrroouunndd

In spite of their best efforts and intentions, sometimes corporate find themselves in

financial difficulty because of factors beyond their control and also due to certain

internal reasons. For the revival of the corporate as well as for the safety of the

money lent by the banks and FIs, timely support through restructuring in genuine

cases is called for. However, delay in agreement amongst different lending

institutions often comes in the way of such endeavours.

Based on the experience in other countries like the U.K., Thailand, Korea,

etc. of putting in place institutional mechanism for restructuring of corporate debt

and need for a similar mechanism in India, a Corporate Debt Restructuring System

has been evolved, as under :

OObbjjeeccttiivvee

The objective of the Corporate Debt Restructuring (CDR) framework is to

ensure timely and transparent mechanism for restructuring of the corporate debts of

viable entities facing problems, outside the purview of BIFR, DRT and other

legal proceedings, for the benefit of all concerned. In particular, the framework

will aim at preserving viable corporate that are affected by certain internal and

external factors and minimize the losses to the creditors and other stakeholders

through an orderly and coordinated restructuring programme.


59/98


SSttrruuccttuurree::

CDR system in the country will have a three-tier structure:

(A) CDR Standing Forum

(B) CDR Empowered Group

(C) CDR Cell

((AA)) CCDDRR SSttaannddiinngg FFoorruumm ::

The CDR Standing Forum would be the representative general body of all

financial institutions and banks participating in CDR system. All financial

institutions and banks should participate in the system in their own interest. CDR

Standing Forum will be a self-empowered body, which will lay down policies and

guidelines, guide and monitor the progress of corporate debt restructuring.

The Forum will also provide an official platform for both the creditors and

borrowers (by consultation) to amicably and collectively evolve policies and

guidelines for working out debt restructuring plans in the interests of all concerned.

The CDR Standing Forum shall comprise Chairman & Managing Director,

Industrial Development Bank of India; Managing Director, Industrial Credit &

Investment Corporation of India Limited; Chairman, State Bank of India;

Chairman, Indian Banks Association and Executive Director, Reserve Bank of

India as well as Chairmen and Managing Directors of all banks and financial


60/98


institutions participating as permanent members in the system. The Forum will

elect its Chairman for a period of one year and the principle of rotation will be

followed in the subsequent years. However, the Forum may decide to have a

Working Chairman as a whole-time officer to guide and carry out the decisions of

the CDR Standing Forum.

A CDR Core Group will be carved out of the CDR Standing Forum to assist

the Standing Forum in convening the meetings and taking decisions relating to

policy, on behalf of the Standing Forum. The Core Group will consist of Chief

Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank of India, Punjab National

Bank, Indian Banks Association and a representative of Reserve Bank of India.

The CDR Standing Forum shall meet at least once every six months and

would review and monitor the progress of corporate debt restructuring system. The

Forum would also lay down the policies and guidelines to be followed by the CDR

Empowered Group and CDR Cell for debt restructuring and would ensure their

smooth functioning and adherence to the prescribed time schedules for debt

restructuring. It can also review any individual decisions of the CDR Empowered

Group and CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell

(described in following paragraphs) shall be housed in IDBI. All financial

institutions and banks shall share the administrative and other costs. The sharing

pattern shall be as determined by the Standing Forum.

CCDDRR EEmmppoowweerreeddGGrroouupp aannddCCDDRR CCeellll::


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The individual cases of corporate debt restructuring shall be decided by the

CDR Empowered Group, consisting of ED level representatives of IDBI, ICICI

Limited and SBI as standing members, in addition to ED level representatives of

financial institutions and banks who have an exposure to the concerned company.

In order to make the CDR Empowered Group effective and broad based and

operate efficiently and smoothly, it would have to be ensured that each financial

institution and bank, as participants of the CDR system, nominates a panel of two

or three EDs, one of whom will participate in a specific meeting of the Empowered

Group dealing with individual restructuring cases. Where, however, a bank /

financial institution has only one Executive Director, the panel may consist of

senior officials, duly authorized by its Board. The level of representation of banks/

financial institutions on the CDR Empowered Group should be at a sufficiently

senior level to ensure that concerned bank / FI abides by the necessary

commitments including sacrifices, made towards debt restructuring.

The Empowered Group will consider the preliminary report of all cases of

requests of restructuring, submitted to it by the CDR Cell. After the Empowered

Group decides that restructuring of the company is prima-facie feasible and the

enterprise is potentially viable in terms of the policies and guidelines evolved by

Standing Forum, the detailed restructuring package will be worked out by the CDR

Cell in conjunction with the Lead Institution.

The CDR Empowered Group would be mandated to look into each case of

debt restructuring, examine the viability and rehabilitation potential of the

Company and approve the restructuring package within a specified time frame of

90 days, or at best 180 days of reference to the Empowered Group.


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There should be a general authorisation by the respective Boards of the

participating institutions / banks in favour of their representatives on the CDR

Empowered Group, authorising them to take decisions on behalf of their

organization, regarding restructuring of debts of individual corporate.

The decisions of the CDR Empowered Group shall be final and action-

reference point. If restructuring of debt is found viable and feasible and accepted

by the Empowered Group, the company would be put on the restructuring mode.

If, however, restructuring is not found viable, the creditors would then be free to

take necessary steps for immediate recovery of dues and / or liquidation or winding

up of the company, collectively or individually.

CCDDRR CCeellll::

The CDR Standing Forum and the CDR Empowered Group will be assisted

by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of

the proposals received from borrowers / lenders, by calling for proposed

rehabilitation plan and other information and put up the matter before the CDR

Empowered Group, within one month to decide whether rehabilitation is prima

facie feasible, if so, the CDR Cell will proceed to prepare detailed Rehabilitation

Plan with the help of lenders and if necessary, experts to be engaged from outside.

If not found prima facie feasible, the lenders may start action for recovery of their

dues.

To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate

members of staff for the Cell will be deputed from banks and financial institutions.

The CDR Cell may also take outside professional help. The initial cost in operating

the CDR mechanism including CDR Cell will be met by IDBI initially for one year


63/98


and then from contribution from the financial institutions and banks in the Core

Group at the rate of Rs.50 lakh each and contribution from other institutions and

banks at the rate of Rs.5 lakh each.

All references for corporate debt restructuring by lenders or borrowers will

be made to the CDR Cell. It shall be the responsibility of the lead institution /

major stakeholder to the corporate, to work out a preliminary restructuring plan in

consultation with other stakeholders and submit to the CDR Cell within one month.

The CDR Cell will prepare the restructuring plan in terms of the general policies

and guidelines approved by the CDR Standing Forum and place for the

consideration of the Empowered Group within 30 days for decision. The

Empowered Group can approve or suggest modifications, so, however, that a final

decision must be taken within a total period of 90 days. However, for sufficient

reasons the period can be extended maximum upto 180 days from the date of

reference to the CDR Cell.

OOtthheerr ffeeaattuurreess::

CDR will be a Non-statutory mechanism.

CDR mechanism will be a voluntary system based on debtor-creditor

agreement and inter-creditor agreement.

The scheme will not apply to accounts involving only one financial

institution or one bank. The CDR mechanism will cover only multiple banking

accounts / syndication / consortium accounts with outstanding exposure of Rs.20

crore and above by banks and institutions.

37921541 final non performing assets of banks repaired)

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