a project report on npa's
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MANAGEMENT OF NON-PERFORMING ASSETS–
A BRIEF OVERVIEW:
INTRODUCTION
In human life, sickness, bankruptcy and death are not welcome, but
they do occur. So is the case with advances, which fall sick, go into
liquidation and die much against the wishes of all concerned. Realities
cannot be escaped. It is necessary to face them.
In the context of non-performing assets the situation is no different. The
frequent references to non-performing assets primarily concern sick
industrial units and mounting over dues in all other sectors of advances,
particularly in agriculture. Financial assets become non-performing
primarily because of the failure of the units financed by banks.
The costs of managing non-performing assets are exorbitant. Bankers are
compelled to get bogged down with these matters thereby neglecting their
role as a developing catalyst.
NATURE OF NON-PERFORMING ASSETS:
The term non-performing assets can be defined both in the wider and
in the narrower sense. While in the narrow sense it includes only non-
performing credit portfolio, in the wider sense it may also include the
volume of unutilized cash balances, unutilized or underutilized physical
assets like buildings and premises in the still wider sense, it may also include
non- performing human resources– a large volume of workforce not
effectively unutilized.
A non-performing asset in the banking sector also is termed as an
asset not contributing to the income of the Bank. In other words they are the
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zero yielding assets that are considered. The non-performing assets,
interalia, includes surplus cash and bankers balances hold over the optimal
levels, amounts lying in the suspense account, investments in shares or
debentures and other securities not yielding any dividend or interest,
advances where interest is not forthcoming and even the principal amount is
difficult to recover. In terms of Health code basis, we may say that advances
classified under the Health Code Numbers 6,7,8 and those advances under
the Health Code Numbers 4,5 on which no interest is being charged, may be
classified among non- performing assets.
REASONS FOR ACCUMULATION OF NON-
PERFORMING ASSETS:
There may be various internal and external factors behind the
transformation of an asset from a performing one to a non-performing one.
Some of the reasons for accumulation of the non-performing assets are:
The fast and rapid geographical expansion of the banking sector during a
short span, throughout
The country and our inability to cope with the voluminous work in an
orderly manner.
Lack of adequate care while appraising the various proposals in the initial
stage. Inadequacy of the technical staff equipped with the latest market
information and the technological developments is also an important factor
in faulty appraisal of proposals.
In case of most of the large and medium scale industries, the main reason for
sickness has been found to be mismanagement.
Power shortages, outdated machinery, fluctuations in supply of raw
materials due to various causes, non-release of subsidy in time and
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deficiency in demand are also important reasons. Small scale industries are
prone to sickness mainly due to lack of managerial experience, technical
incompetence and decline in demand for their products and overall demand
recession.
Further cases are not unknown where deliberate efforts are made by a certain
category of
Borrowers to declare their units sick, or weak to avail of benefits from
different sources.
OBJECTIVE OF THE STUDY:
To know Why NPAs have become an issue for banks and financial
institutions in India.
To understand what is Non Performing Assets and what are the
underlying reasons for the emergence of the NPAs.
To understand the criteria for identification of non-performing assets in
banks.
To understand what the factors for rise of NPAs are.
To know what steps are being taken by the Indian banking sector to
reduce the NPAs.
To study the NPA management policy of Public Sector Banks
To review Bank of India’s performance in non-performing assets for
the particular time period.
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HYPOTHESIS:
Statement for Hypothesis:
H0: The problem of NPA is less acute in private sector banks as compared to
public sector banks.
H1: Over the years banks have started improving their NPA status.
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The project is to determine how to manage the Non Performing
Assets in Banks and what is the trend of NPAs from the past years. To carry
out the study regarding NPAs which is of great concern in toady’s scenario,
a very simple approach is followed to draw a conclusion. The comparison is
done between the data of private sector banks and public sector banks. The
hypothesis testing will help us in formulating an outcome. Since this being a
descriptive research much emphasis will be given on comparison analysis of
various years’ secondary data to carry out an inference.
METHODOLOGY:
The research design used for carrying out this project is descriptive
research because the report deals with statistical data and the main cause of
the report is to describe the factors affecting the problem mentioned.
SOURCES OF DATA:
There are two types of data - Primary data or raw data and secondary
data or second hand data. The data which is collected on source which hasnot been subjected to processing or any other manipulation is primary data
whereas secondary data is the data collected by someone other than the user
through common sources like censuses, surveys, organizational records and
data collected through qualitative methodologies or qualitative research. The
data collected is mainly secondary in nature. The sources of data for this
Report include the literature published by the Bank of India and also the
Reserve Bank of India. Also the various magazines dealing with the current
banking scenario and research paper have also been a source of information.
The booklet on Recovery Policy published by the Asset Recovery
Department of Bank of
India has been of great help
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Sampling Plan:
The target population of study included the Bank of India in particular and
all other Public sector banks and private sector banks in general.
Limitations of the study:
1. The study on management of non-performing assets is limited to the
Bank of India.
2. The basis for identifying non-performing assets is the one that has been
mentioned in the report but some minor changes may have been carried out
through the Reserve Bank of India circulars, which are received on a daily
basis by the bank.3. Since non-performing assets are a critical issue, bank officials are not
willing to part with all the information on them.
4. Non-performing assets is a vast topic and to do full justice to all the
aspects of non-
Performing assets is an impossible task for me.
Scope Of The Study:
The scope of the study is limited to the objectives as mentioned earlier.
The study ranges from understanding the significance of non-performing
assets to defining the criteria of identifying non-performing assets in the
banking sector, to review Bank of India’s performance in the management of
non-performing assets.
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It also reviews the framework of Bank of India’s recovery policy with which
it hopes to bring down the percentage of net non-performing assets to the net
advances. The study also encompasses the recommendations, the adhering of
which will bring good results to the organization.
CONCEPTUAL FRAMEWORK:
Why NPA have become an issue for banks and financial institutions in
India?
To start with, performance in terms of profitability is a benchmark for
any business enterprise including the banking industry. However, increasing NPA have a direct impact on banks profitability as legally banks are not
allowed to book income on such accounts and at the same time banks are
forced to make provision on such assets as per the Reserve Bank of India
(RBI) guidelines.
Also, with increasing deposits made by the public in the banking
system, the banking industry cannot afford defaults by borrowers since NPA
affects the repayment capacity of banks. Further, Reserve Bank of India
(RBI) successfully creates excess liquidity in the system through various rate
cuts and banks fail to utilize this benefit to its advantage due to the fear of
burgeoning non-performing assets.
REASONS FOR NPAs:
The Various Reasons for financial assets turned into Non-Performing
Assets. These are as follows:
1. Reason from Economy Side,
2. Reason from Industry Side.
3. Reason from borrowers side,
4. Reasons from the Security or Regulatory side
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5. Reasons from the loan structuring side.
Or this may classified under internal factors and External Factors.
There are several reasons for an account becoming NPA.
* Internal factors
* External factors
Internal factors:
1. Funds borrowed for a particular purpose but not use for the said
purpose.
2. Project not completed in time.
3. Poor recovery of receivables.4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or
other debt instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansion\modernization\setting up new
projects\ helping or promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management
disputes, mis-appropriation etc.,
9. Deficiencies on the part of the banks viz. in credit appraisal etc.,
External factors:
1. Sluggish legal system - Long legal tangles Changes that had taken
place in labour laws Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power
shortage, industrial recession, excess capacity, natural calamities like
floods, accidents.
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5. Failures, non payment\ over dues in other countries, recession in other
countries, externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes
etc.
NON PERFORMING ASSETS (BACKGROUND):
It's a known fact that the banks and financial institutions in India face
the problem of swelling non-performing assets (NPA) and the issue is
becoming more and more unmanageable. In order to bring the situation
under control, some steps have been taken recently. The Securitization andReconstruction of Financial Assets and Enforcement of Security Interest
Act, (SARFAESI) 2002 was passed by Parliament, which is an important
step towards elimination or reduction of NPA.
MEANING OF NPA:
An asset is classified as non-performing asset (NPA) if dues in the form of
principal and interest are not paid by the borrower for a period of 180 days.
However with effect from March 2004, default status would be given to a
borrower if dues are not paid for 90 days. If any advance or credit facility
granted by bank to a borrower becomes non-performing, then the bank will
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have to treat all the advances/credit facilities granted to that borrower as
non-performing without having any regard to the fact that there may still
exist certain advances / credit facilities having performing status.
NPA MANAGEMENT POLICY:
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, then left is to look after the factor responsible for it
and managing those factors.
DEFINATION OF NPA - NON PERFORMING ASSET:
Action for enforcement of security interest can be initiated only if the
secured asset is classified as Non Performing 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
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i. Interest and / or installment of principal remain overdue for a period of
more than 180 days in respect of a term loan,
ii.The account remains „out of order „ for a period of more than 180 days ,in
respect of an
overdraft / cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 180 days in case of
bill purchased or discounted.
iv. Interest and / or principal remains overdue for two harvest season but for
a period not exceeding two half years in case of an advance granted for
agricultural purpose, and
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 shall be a loan or an advance where;
i. Interest and / or installment of principal remain overdue for a period of
more than 90 days in respect of a term loan,
ii. The account remains „out of order „ for a period of more than 90 days, in
respect of an
overdraft/cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 90 days in case of bill
purchased or discounted.
iv. Interest and/or principal remain overdue for two harvest seasons but for a
period 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 90
days in respect of other accounts
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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 outstanding 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.
In short A NPA is a loan or an advance where;
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” in respect of an overdraft/ cash credit
The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted
The installment or interest remains overdue for two crop seasons in case
of short duration crops and for one crop season in case of long duration
crops
ASSET CLASSIFICATION AND NPA NORMS -
Classification of Assets:
While new private banks are careful about their asset quality and
consequently have low non-performing assets (NPAs), public sector banks
have large NPAs due to wrong lending policies followed earlier and also due
to government regulations that require them to lend to sectors where
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potential of default is high. Allaying the fears that bulk of the Non-
Performing Assets (NPA) was from priority sector, NPA from priority sector
constituted was lower at 46 per cent than that of the corporate sector at 48
per cent.
Loans and advances account for around 40 per cent of the assets of
SCBs. However, delay/default in payment of interest and/or repayment of
principal has rendered a significant proportion of the loan assets non-
performing. As per RBI‟s prudential norms, a Non-Performing Asset (NPA)
is a credit facility in respect of which interest/installment has remained
unpaid for more than two quarters after it has become past due. “Past due”
denotes grace period of one month after it has become due for payment by
the borrower.
Regulations for asset classification
Assets are classified into four classes - Standard, Sub-standard,
Doubtful, and Loss assets. NPA consist of assets under three categories: sub-
standard, doubtful and loss. RBI for these classes of assets should evolve
clear, uniform, and consistent definitions. The banks should classify their
assets based on weaknesses and dependency on collateral securities into four
categories:
I. Standard Assets:
It carries not more than the normal risk attached to the business and is
not an NPA. 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 do not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is amount
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due more than 90 days then it is NPA and NPAs are further need to classify
in sub categories.
ii. Sub-standard Asset:
A sub-standard asset is one which has remained NPA for a period
less than or equal to 12 months from 31.3.2005. In such case the current net
worth of the borrower/guarantor or the current market value of the security
charged is not enough to ensure recovery of the dues to the banks in full. In
other words, such an asset will have well defined credit weaknesses that
jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not
corrected.
iii. Doubtful Assets:
With effect from 31.3.2005, an asset is to be classified as doubtful, if
it has remained NPA for a period exceeding 12 months. A loan classified as
doubtful has all the weaknesses inherent in assets that were classified as sub-
standard, with the added characteristics that the weaknesses make collection
or liquidation in full, - on the basis of currently known facts, conditions and
values- highly questionable and improbable. Under this category there are
three stages:
D-I Doubtful up to one year
D-II Doubtful for further two years
D-III Doubtful beyond three years.
iv. Loss Assets:
An asset identified by the bank or internal/ external auditors or RBI
inspection as loss asset, but the amount has not yet been written off wholly or
partly. The banking industry has significant market inefficiencies caused by
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the large amounts of Non Performing Assets (NPA) in bank portfolios,
accumulated over several years. Discussions on non-performing assets have
been going on for several years now. One of the earliest writings on NPA
defined them as "assets which cannot be recycled or disposed off
immediately, and which do not yield returns to the bank, examples of which
are: Overdue and stagnant accounts, suit filed accounts, suspense accounts
and miscellaneous assets, cash and bank balances with other banks, and
amounts locked up in frauds".
Guidelines for the classification of assets
Classification of assets into above categories should be done taking into
account the degree of well defined credit weaknesses and the extent of
dependencies on collateral security for the realization of dues.
Banks should establish appropriate internal systems to eliminate the
tendency to delay or postpone the identification of NPAs especially in
respect of high value of accounts.
Account with temporary Deficiencies:
The classification of an asset as NPA should be based on the record of
recovery. Bank should not classify an advance account as NPA merely due
to the existence of some deficiencies, which are temporary in nature as such
as non– availability of adequate drawing power based on latest stock.
Asset classification to be borrower– wise and not facility-wise:
It is difficult to envisage a situation when only one facility to a borrower
becomes a problem credit and not others. Therefore, all the facilities granted
by a bank to a borrower will have to be treated as NPA and not the particular
facility or a part thereof, which has become irregular.
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Advances under consortium arrangements:
Asset classified of accounts under consortium should be based on the record
of recovery of the individual member banks and other aspects having
bearing on the recoverability of the advances. Accounts where there is
erosion in the value of security can be reckoned as significant when the
realizable value of the security is less than 50 percent of the value assessed
by the bank or accepted by RBI at the time of last inspection, as the case
may be. Such NPAs may be straightway classified under doubtful category
and provisioning should be made as applicable to doubtful assets.
Agricultural Advances:In respect of advances granted for agricultural purpose where interest and
/ or installment of principal remains unpaid after it has become past due for
two harvest seasons but for a period not exceeding two half years , such an
advance should be treated as NPA.
Where the natural calamities impair the repaying capacity of agricultural
borrowers, banks may decide on their own as a relief measure-conversion of
the short–term production loan into a term or re-schedulement of the
repayment period.
In such cases of conversation or re-schedulement, the term loan as well as
fresh short-term loan may be treated as current dues and need not be
classified as NPA.
Restructuring /rescheduling of loans:
A standard asset where the terms of the loan arrangement regarding interest
and principal have been renegotiated or rescheduled after the
commencement of production should be as sub- standard and should remain
in such category for at least one year of satisfactory performance under the
renegotiated or restructured terms. In case of substandard and doubtful assets
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also, rescheduling does not entitle a bank to upgrade the quality of advances
automatically unless there is satisfactory performance under the
rescheduled–renegotiated terms.
Exceptions:
As trading involves only buying and selling of commodities and the
problems associated with manufacturing units such as bottleneck in
commercial production, time and cost escalation etc. are not applicable to
them.
NPA Norms - Provisional Norms:
Banks will be required to make provisions for bad and doubtful debts on a
uniform and consistent basis so that the balance sheets reflect a true picture
of the financial status of the bank. The Narsimham Committee has
recommended the following provisioning norms
(i) 100 per cent of loss assets or 100 per cent of out- standings for loss
assets;(ii) 100 per cent of security shortfall for doubtful assets and 20 percent to 50
per cent of the secured portion; and
(iii) 10 per cent of the total out standings for substandard assets.
A provision of 1% on standard assets is required as suggested by Narsimham
Committee II, 1998. Banks need to have better credit appraisal systems so as
to prevent NPA from occurring. The most important relaxation is that the
banks have been allowed to make provisions for only 30 per cent of the
"provisioning requirements" as calculated using the Narasimhan Committee
recommendations on provisioning. The encouraging profits recently
declared by several banks have to be seen in the light of provisions made by
them. To the extent that provisions have not been made, the profits would be
fictitious.
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Disclosure Norms:
Banks should disclose in balance sheets maturity pattern of advances,
deposits, investments and borrowings. Apart from this, banks are also
required to give details of their exposure to foreign currency assets and
liabilities and movement of bad loans. These disclosures were to be made for
the year ending March 2000. In fact, the banks must be forced to make
public the nature of NPA being written off. This should be done to ensure
that the taxpayer ’s money given to the banks, as capital is not used to write
off private loans without adequate efforts and punishment of defaulters
Asset
Classification
Provision requirements
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Standard assets 0.25% of the o/s dues in all
Standard Assets under SME and
agriculture sector
1.00% of the o/s
dues in all Standard Assets of the
A/cs to Capital market exposure,
personal loan, commercial real
estate and residential HSG.
Beyond Rs. 20lakhs.
0.40% of the o/s dues in all
standard assets belonging to allother categories.
Substandard assets
10% of the sum of
the net investment in the lease
and the unrealized portion of finance income net of finance
charge component. The terms
„net investment in the lease‟,‟
finance income‟ and finance
charge are as defined in „AS19 –
Leases‟ issued by the ICAI
Doubtful assets 20% - 50% of the secured
portion depending on the age of
NPA, and 100% of theunsecured portion.
Loss assets
.
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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 externals 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
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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 framers depends on rain fall for cropping. Due to irregularities
of rain fall the framers are not to achieve the production level thus they are
not repaying the loans.
→ Industrial sickness
Improper project handling, ineffective management, lack of adequateresources, 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 govt 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. Principle of safety
ii. Principle of liquidity
iii. Principles of profitability
i. Principles of safety
By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the
borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon:
1. Tangible assets 2. Success in business
Willingness to pay depends on:
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1. Character
2. Honest
3. Reputation of borrower
The banker should, therefore take utmost care in ensuring that the enterpriseor 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 cannot be taken. Proper
MIS and financial accounting system is not implemented in the banks, which
leads to poor credit collection, thus NPA. All the branches of the bank
should be computerized.
Improper swot analysis
The improper strength, weakness, opportunity and threat analysis is
another reason for rise in NPAs. While providing unsecured advances the
banks depend more on the honesty, integrity, and financial soundness and
credit worthiness of the borrower.
Banks should consider the borrowers own capital investment.
It should collect credit information of the borrowers
From bankers
Enquiry from market/segment of trade, industry, business.
From external credit rating agencies.
Analyse the balance sheet
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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 analyse the purpose of the loan. To
ensure safety and liquidity, banks should grant loan for productive purpose
only. Bank should analyse the profitability, viability, long term acceptability
of the project while financing.
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
maxims “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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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.
MANAGING NPA:
The primary aim of any business is to make profits. Therefore, any asset
created in the course of the conduct of business should generate income
for the business.
This applies equally to the business of banking. The banks the worldsover deal in money, by accepting deposits (liabilities) and out of such
deposits (liabilities) lend/create loans (assets). If for any reason such
assets created do not generate income or become sticky and difficult of
recovery, then the very position of the banks in repaying the deposits
(liabilities) on the due dates would be at stake and in jeopardy. Banks
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with such assets portfolio would become weak and naturally such weak
banks will lose the faith and confidence of the investors.
With the introduction of prudential norms for income recognition, assets
classification and provisioning, banks have become quite sensitive and
are taking all possible steps to strengthen their assets acquisition and
monitoring systems.
There is also a growing awareness to bring down non-performing assets
as these are having adverse impact on their profitability due to de-
recognition of interests as well as requirement of heavy loan loss
provisions on such assets. Therefore it would be prudent for banks to
manage their assets in such a manner that they always remain healthy,
generate sufficient income and capable of repayment/recovery on the due
dates.
Management of performing/non-performing assets in banks has become
an `art and science' and virtually `a battle of wits' between the banker and
the borrower with the latter demanding write off or at least a major
sacrifice from the bankers side irrespective of whether he is in a position
to pay or not.
Management of non-performing assets of the financial sector
was put on fast track recently with the Union Cabinet approving the
promulgation of an ordinance to facilitate securitization and
reconstruction of financial assets.
→ Besides enabling banks and financial institutions to create a market for
the securitized assets and improve their asset liability management, the
Securitization and Reconstruction of Financial Assets and Enforcement of
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Security Interest Ordinance would also assist in setting up Asset
Reconstruction Companies.
→ Though this is a welcome development, the bankers have to do their
basic homework and to utilize this opportunity to clean up and recover their
dues at an early date.
Measures to Recover NPA’s:
Over the last few years Indian banking in its attempt to integrate itself
with the global banking has been facing lots of hurdles in its way due to its
inherent weaknesses, despite its high sounding claims and lofty
achievements. One of the major hurdles, the Indian banking is facing today,
is its ever-growing size of non-performing assets over which the top
management of almost each bank is baffled. On account of the intricacies
involved in handling the NPA the ticklish task of assets management of the
bank has become a tight rope walk affair for the controlling heads, because a
little wavering „this or that side‟ may land the concern bank in trouble. The
growing NPA is a potent source of worry for the finance minister as well,
because in a developing country like ours, banking is seen as an important
instrument of development, while with the backbreaking NPA banks have
become helpless burden on the economy.
NPA with outstanding up to 5 crore:
In case of doubtful and loss assets, through the modified schemes, the banks
have been directed to follow up a settlement formula under which the
minimum amount to be recovered, amounts to be entire outstanding running
ledger balances as on the date the account was identified as NPA i.e. the date
from which the interest was not charged to the running ledger, an analysis of
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the given formula shows that RBI has been very much generous in granting
huge relaxation to the borrowers who were not coming forward for setting
their overdue loans due to one or other reason. The scheme is of high
practical value as it protects the borrowers who were having genuine
problems in clearing their dues because the interest component constituted a
multiplied amount of principal outstanding. On the other hand, the
concerned banks were also finding in difficult to sacrifice the entire interest
component, but outstanding in the dummy ledger. Now as per the provision
to the scheme, they will be ready to grant such relaxation in favour of the
borrowers. These guidelines have come as a windfall for borrowers who
after a lot of negotiations were almost ready to repay back their principal as
well as part of the interest component to settle their accounts, as under the
modified scheme, they would be able to save the interest component. To that
extent the concerned bank stands to lose.
In the case of sub standard assets, the settlement formula as given in
the modified scheme states that the minimum sum to be recovered must
contain the entire running ledge outstanding balance as on the date of the
account was identified as NPA i.e. the date from the which interest
was not charged to the running ledger plus interest at the existing prime
lending rate of the bank. As per the modified scheme, the terms suggested
for the payment of settlement amount NPA are simple and pragmatic. As per
the terms of the scheme, the settlement amount should be paid in lump sum
by the borrower. However in case of the borrower is unable to repay back in
a lump sum, the scheme allows sufficient breathing period to enable him to
arrange the funds and clear at least 25 percent of the settlement amount to be
paid upfront and the remaining amount to be recovered in installments
spread over a period of one year along with interest at the existing PLR from
the date of settlement up to the date of final payment.
NPA with outstanding over Rs. 5 crores:
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For recovery of NPA over Rs. 5 crore, RBI has left the matter to the
concerned banks and advised that the concerned banks may formulate policy
guidelines regarding their settlement and recovery. The freedom, in such
cases, is given to the banks, because the attending circumstances in each
case may vary from the other. Therefore it was in the right direction that
adopting a generalized approach was not thought appropriate. In cases,
where the amount involved is above Rs. 5 crore, RBI expects CMD of each
bank to supervise the NPA personally. The CMDs of the concerned banks
are advised to review all such cases within a given timeframe and decide the
course of action in terms of rehabilitation/restructuring. RBI also desires the
submission of a quarterly report of all NPA above Rs. 5 crore from PSU
banks. Thus by putting up the cut-off dates for the implementing of the
scheme, RBI desires the banks to realize the seriousness of the issue and
gear up to sweep away the NPA in one go.
For commercial banks, it is a golden opportunity to clear the mess,
consolidate and come out on a track leading the path of global banking. The
time given for weeding out the disastrous NPA is neither too long nor too
short and the banks, with proper planning and follow up can drastically
reduce their NPAs, if they firmly resolve to do so. RBI expects the
commercial banks to follow the guidelines in letter and spirit without any
discrimination or discretion as a slight dilution may jeopardize their interest.
A proper monitoring system is also desired to be evolved for monitoring the
progress of the scheme. As this is a rare opportunity given to the defaulting
borrowers so that they can avail the chance given for the settlement of their
loans. Without adequate publicity of the scheme the response from the
defaulting borrowers may not be there to the expected level.
Legal and Regulatory Regime
A. DEBT RECOVERY TRIBUNALS (DRTs):
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DRTs were set up under the Recovery of Debts due to Banks and
Financial Institutions Act, 1993. Under the Act, two types of Tribunals were
set up i.e. Debt Recovery Tribunal (DRT) and Debt Recovery Appellate
Tribunal (DRAT). The DRTs are vested with competence to entertain cases
referred to them, by the banks and FIs for recovery of debts due to the same.
The order passed by a DRT is appeal able to the Appellate Tribunal but no
appeal shall be entertained by the DRAT unless the applicant deposits 75%
of the amount due from him as determined by it. However, the Appellate
Tribunal may, for reasons to be received in writing, waive or reduce the
amount of such deposit. Advances of Rs. 1 million and above can be settled
through DRT process. An important power conferred on the Tribunal is that
of making an interim order (whether by way of injunction or stay) against
the defendant to debar him from transferring, alienating or otherwise dealing
with or disposing of any property and the assets belonging to him within
prior permission of the Tribunal. This order can be passed even while the
claim is pending. DRTs are criticized in respect of recovery made
considering the size of NPAs in the Country.
In general, it is observed that the defendants approach the High Court
challenging the verdict of the Appellate Tribunal which leads to further
delays in recovery. Validity of the Act is often challenged in the court,
which hinders the progress of the DRTs. Lastly, many needs to be done for
making the DRTs stronger in terms of infrastructure.
Registrar
Functions, duties and powers of Registrar:
To examine and verify documents including petitions, notes of
defense and memoranda of appeals to be filed with the tribunal or
appellate tribunal and register them if they meet requirements or
endorse them with reasons if they cannot be registered,
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To verify duplicate copies submitted in a case with the
originals and certify them if they appear in order, and if the
originals appear to have some defects, to mention such defects and get
the concerned party to sign to that effect,
To verify whether documents submitted along with
petitions, memoranda of appeal and notes of defense are correct or
not,
To issue summons and get it served,
To appoint days for appearance in cases, indicating reasonable
reasons pursuant to law,
To obtain power of attorney and get a case assumed pursuant to
prevailing law,
To promptly execute, or cause to be executed, actions as
referred to in the order made by the Bench,
To have security or guarantee as per the order made by the
Bench,
To maintain, or cause to be maintained, updated records
including registration books,
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To maintain personal records of employees,
To safely retain orders and directions in a serial order.
Debt Recovery Officer
The order issued by the Debt Recovery Officer shall deem to be the order
issued by the Tribunal. If any person disobeys any order given by the Debt
Recovery Officer, the Tribunal may institute contempt proceedings against
that person under the provision of the Act.
In recovering the principal and interest of a loan, the Debt Recovery Officer,
may follow the following procedures:
In consistent with the decision of the Tribunal the Debt Recovery Officer
may follow the
following procedures, subject to the prevailing law.
Power of Debt Recovery Officer
To take possession of, or auction, the borrower's other
movable or immovable property whether furnished as security or
not,
To take possession of, or auction, the guarantor's
movable or immovable property,
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Where any individual is a borrower or guarantor, to arrest
such individual and detain him pursuant to the prevailing law.
Presiding officer:-
He is the Head of the department.
He has judicial power to execute the case.
B. LOKADALATS:
The institution of Lokadalat constituted under the Legal Services
Authorities Act, 1987 helps in resolving disputes between the parties by
conciliation, mediation, compromise or amicable settlement. It is known for
effecting mediation and counseling between the parties and to reduce burden
on the court, especially for small loans. Cases involving suit claims up to Rs.
l million can be brought before the Lokadalat and every award of the
Lokadalat shall be deemed to be a decree of a civil court and no appeal can
lie to any court against the award made by the Lokadalat. Several people of
particular localities/ various social organizations are approaching Lokadalats
which are generally presided over by two or three senior persons including
retired senior civil servants, defense personnel and judicial officers. They
take up cases which are suitable for settlement of debt for certain
consideration. Parties are heard and they explain their legal position. They
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are advised to reach to some settlement due to social pressure of senior
bureaucrats or judicial officers or social workers. If the compromise is
arrived at, the parties to the litigation sign a statement in presence of
Lokadalats which is expected to be filed in court to obtain a consent decree.
Normally, if such settlement contains a clause that if the compromise is not
adhered to by the parties, the suits pending in the court will proceed in
accordance with the law and parties will have a right to get the decree from
the court. In general, it is observed that banks do not get the full advantage
of the Lokadalats. It is difficult to collect the concerned borrowers willing to
go in for compromise on the day when the Lokadalat meets. In any case, we
should continue our efforts to seek the help of the Lokadalat.
C. Enactment of SRFAESI Act
The "The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act" (SRFAESI) provides the formal legal
basis and regulatory framework for setting up Asset Reconstruction
Companies (ARCs) in India. In addition to asset reconstruction and ARCs,
the Act deals with the following largely aspects,
Securitization and Securitization Companies
Enforcement of Security Interest
Creation of a central registry in which all securitization and asset
reconstruction transactions as well as any creation of security interest has to
be filed.
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The Reserve Bank of India (RBI), the designated regulatory authority
for ARCS has issued Directions, Guidance Notes, Application Form and
Guidelines to Banks in April 2003 for regulating functioning of the proposed
ARCS and these Directions/ Guidance Notes cover various aspects relating
to registration, operations and funding of ARCS and resolution of NPAs by
ARCS. The RBI has also issued guidelines to banks and financial
institutions on issues relating to transfer of assets to ARCS, consideration for
the same and valuation of instruments issued by the ARCS. Additionally, the
Central Government has issued the security enforcement rules
("Enforcement Rules"), which lays down the procedure to be followed by a
secured creditor while enforcing its security interest pursuant to the Act. The
Act permits the secured creditors (if 75% of the secured creditors agree) to
enforce their security interest in relation to the underlying security without
reference to the Court after giving a 60 day notice to the defaulting borrower
upon classification of the corresponding financial assistance as a non-
performing asset.
The Act permits the secured creditors to take any of the following measures:
Take over possession of the secured assets of the borrower including
right to transfer by way of lease, assignment or sale;
Take over the management of the secured assets including the right to
transfer by way of lease, assignment or sale;
Appoint any person as a manager of the secured asset (such person
could be the ARC if they do not accept any pecuniary liability); and
Recover receivables of the borrower in respect of any secured asset
which has been
transferred. After taking over possession of the secured assets, the secured
creditors are required to obtain valuation of the assets.
These secured assets may be sold by using any of the following routes to
obtain maximum value.
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By obtaining quotations from persons dealing in such assets or
otherwise interested in buying the assets;
By inviting tenders from the public;
By holding public auctions; or
By private treaty.
Lenders have seized collateral in some cases and while it has not yet
been possible to recover value from most such seizures due to certain legal
hurdles, lenders are now clearly in a much better bargaining position vis-à-
vis defaulting borrowers than they were before the enactment of SRFAESI
Act. When the legal hurdles are removed, the bargaining power of lenders is
likely to improve further and one would expect to see a large number of
NPAs being resolved in quick time, either through security enforcement or
through settlements.
Under the SRFAESI Act ARCS can be set up under the Companies Act,
1956. The Act designates any person holding not less than 10% of the paid-
up equity capital of the ARC as a sponsor and prohibits any sponsor from
holding a controlling interest in, being the holding company of or being in
control of the ARC. The SRFAESI and SRFAESI Rules/ Guidelines require
ARCS to have a minimum net-owned fund of not less than Rs. 20,000,000.
Further, the Directions require that an ARC should maintain, on an ongoing
basis, a minimum capital adequacy ratio of 15% of its risk weighted assets.
ARCS have been granted a maximum realization time frame of five years
from the date of acquisition of the assets.
The Act stipulates several measures that can be undertaken by ARCs for
asset reconstruction. These include:
Enforcement of security interest;
Taking over or changing the management of the business of the
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borrower;
The sale or lease of the business of the borrower;
Settlement of the borrowers' dues; and
Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over
by the lenders under security enforcement rights available to them or as a
recovery agent for any bank or financial institution and to receive a fee for
the discharge of these functions. They can also be appointed to act as a
receiver, if appointed by any Court or DRT.
D. INSTITUTE OF CDR MECHANISM
The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism
for resolution of NPAs of viable entities facing financial difficulties. The
CDR mechanism instituted in India is broadly along the lines of similar
systems in the UK, Thailand, Korea and Malaysia. The objective of the CDR
mechanism has been to ensure timely and transparent restructuring of
corporate debt outside the purview of the Board for Industrial and Financial
Reconstruction (BIFR), DRTs or other legal proceedings. The framework is
intended to preserve viable corporate affected by certain internal/external
factors and minimize losses to creditors/other stakeholders through an
orderly and coordinated restructuring programme. RBI has issued revised
guidelines in February 2003 with respect to the CDR mechanism. Corporate
borrowers with borrowings from the banking system of Rs. 20crores andabove under multiple banking arrangement are eligible under the CDR
mechanism. Accounts falling under standard, sub- standard or doubtful
categories can be considered for restructuring. CDR is a non-statutory
mechanism based on debtor-creditor agreement and inter-creditor
agreement. Restructuring helps in aligning repayment obligations for
bankers with the cash flow projections as reassessed at the time of
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restructuring. Therefore it is critical to prepare a restructuring plan on the
lines of the expected business plan along with projected cash flows.
The CDR process is being stabilized. Certain revisions are envisaged
with respect to the eligibility criteria (amount of borrowings) and time frame
for restructuring. Foreign banks are not members of the CDR forum, and it is
expected that they would be signing the agreements shortly. However they
attend meetings. The first ARC to be operational in India- Asset
Reconstruction Company of India (ARCIL) is a member of the CDR forum.
Lenders in India prefer to resort to CDR mechanism to avoid unnecessary
delays in multiple lender arrangements and to increase transparency in the
process. While in the RBI guidelines it has been recommended to involve
independent consultants, banks are so far resorting to their internal teams for
recommending restructuring programs.
E. COMPRAMISE SETTLEMENT SCHEMES:
One Time Settlement Schemes:
NPAs in all sectors, which have become doubtful or loss as on 31st
March 2000. The scheme also covers NPAs classified as sub-standard as on
31st March 2000, which have subsequently become doubtful or loss. All
cases on which the banks have initiated action under the SRFAESI Act and
also cases pending before Courts/DRTs/BIFR, subject to consent decree
being obtained from the Courts/DRTs/BIFR are covered. However cases of
willful default, fraud and malfeasance are not covered. As per the OTS
scheme, for NPAs up to Rs. 10crores, the minimum amount that should be
recovered should be 100% of the outstanding balance in the account.
Negotiated Settlement Schemes:
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The RBI/Government has been encouraging banks to design and
implement policies for negotiated settlements, particularly for old and
unresolved NPAs. The broad framework for such settlements was put in
place in July 1995. Specific guidelines were issued in May 1999 to public
sector banks for one-time settlements of NPAs of small scale sector. This
scheme was valid until September 2000 and enabled banks to recover Rs 6.7
billion from various accounts. Revised guidelines were issued in July 2000
for recovery of NPAs of Rs. 50 million and less. These guidelines were
effective until June 2001 and helped banks recover Rs. 26 billion
HYPOTHETICAL ANALYSIS:
H0 - The problem of NPAs is more in Private sector banks rather than Public
Sector banks as Public sector banks have shown a great decrease in their
NPA levels from past Five years. So, the hypothetical statement H0 doesn’t
hold true and the hypotheses is rejected.H0 rej ect ed. Hence the statement
should have” The problem of NPA is less acute in public sector banks as
compared to private sector banks.”
H1 - The secondary data shows that there is a decreasing trend in the NPA
status of most of the scheduled commercial banks because of various
stringent practices followed by Banks management and various policies by
government as even the global financial crisis had less effect on the working
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of Indian banks and the banks have started to improve their NPA status. The
Hypothetical statements H1 is accepted.H1 accepted.
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:
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the
provision regarding NPAs. Net NPA shows the actual burden of banks.
Since in India, bank balance sheets contain a huge amount of NPAs and the
process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central
bank guidelines, are quite significant. That is why the difference between
gross and net NPA is quite high.
It can be calculated by following:
PROVISION RATIO:
Provisions are to be made to keep safety against the NPA, & it directly affect
on the gross profit of the Banks. The provision Ratio is nothing but total
provision held for NPA to gross NPA of the Banks. The formula for that is,
Gross NPAs Ratio = Gross NPAs /Gross Advances
Net npa ratio=
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(i) Provision Ratio = (Total Provision/Gross NPA)*100
(ii) [Additional Formulae: Net NPA = Gross NPA– Provision
Therefore, Provision = Gross NPA– Net NPA]
CAPITAL ADEQUACY RATIO:Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to
its assets, which are
Weighted/adjusted according to risk attached to them i.e.
General Conclusions :
Banks need to have better credit appraisal systems so as to prevent NPAs
from occurring. However, once NPAs do come into existence, the problem
can be solved only if there is enabling legal structure, since recovery of
NPAs often requires litigation and court orders to recover stock loans. With
long-winded litigations in India, debt recovery takes a very long time. Banksare now working on developing debt recovery tribunals to solve this
problem. The Govt. has also mooted the suggestion of an asset
reconstruction company for augmenting recovery measures.
1. The NPA is one of the biggest problems that the Banks are facing today is
the problem of Non Performing Assets. If the proper management of the
NPAs is not undertaken it would hamper the business of the banks.
Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100
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2. As the global slowdown has crept into the economy, bankers feel that in
more loans are going to turn bad in the coming quarters and therefore they
want RBI to relax the deadline for loan reconstruction.
3. Due to Recession & slowdown in the Indian economy would result in
emerging NPAs for the public sector banks from textiles, real estate, retail,
exports and auto sectors.
4. The reduction of the NPAs would help the banks to boost up their profits,
smooth recycling of funds in the nation. This would help the nation to
develop more banking branches and developing the economy by providing
the better financial services to the nation.
5. If the concept of NPAs is taken very lightly it would be dangerous for the
Indian banking sector. The NPAs would destroy the current profit, interest
income due to large provisions of the NPAs, and would affect the smooth
functioning of the recycling of the funds.
6. As a result of the NPA‟s owners do not receive a market return on their
capital. In the worst case, if the bank fails, owners lose their assets & this
may affect a broad pool of shareholders & act as a rain on Profitability.
7. Banks also redistribute losses to other borrowers by charging higher
interest rates. Lower deposit rates and higher lending rates repress savings
and financial markets, which hampers economic growth.
8. When many borrowers fail to pay interest, banks may experience liquidity
shortages. These shortages can jam payments across the country and as a
result non performing loans may spill over the banking system and contract
the money stock, which may lead to economic contraction.
9. Banks need to create capital reserve to write off the mounting NPA’s
burden.
10. “A Man without money is like a bird without wings”, the Rumanian
proverb insists the importance of the money. A bank is an establishment,
which deals with money. The basic functions of Commercial banks are the
accepting of all kinds of deposits and lending of money. In general there are
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several challenges confronting the commercial banks in its day to day
operations. The main challenge facing the commercial banks is the
disbursement of funds in quality assets (Loans and Advances) or otherwise it
leads to Non-performing assets.”
RECOMMENDATIONS:
Following Recommendations may be adopted to tackle the Problem of
NPAs:
Persuasion: It is very much an effective tool of recovery. It is very
much an effective tool of recovery. Continual follow- up will be very
effective in most cases.
Filing of Suits: The effectiveness of this tool depends on two major
factors:
o Whether other tools have been used;
o Whether there are adequate securities to be realized.
Compromise and Revival: It has been argued that a compromise,
whereby the Bank allows remission of principal and/or interest along with
rescheduling of the repayment of debt is a better way to deal with such
advances, especially when banks are drawn into long legal battles.
Involvement of other Agencies: Sometimes other agencies especially govt.
agencies are
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involved in the recovery of dues and stagnant accounts in the priority sector.
Their
involvement in the recovery of loans is very much desirable.
Reference to B1FR: In case of large and medium units, when they are
registered for not less than seven years as companies, we can refer the case
of sickness to the Board for Industrial and Financial Reconstruction (BIFR)
for early liquidation or suggestion of rehabilitation packages.
Enforcement of Securities: Enforcement of Securities charged to bank
is equally
important aspect of the management of NPAs. Banks, wherever necessary,
have to move
courts not only to obtain decrees but also to get them executed.
Rehabilitation and Nursing: Rehabilitation and nursing of sick units,
as a matter of
policy should be given a fresh look. Only viable sick units with proven
capacity of the
management to run the units should be nursed.
Merger and Amalgamation of Units: Wherever feasible, efforts should be
made to
merge the sick units with healthy units.
Appointment of Special Tribunals: In view of ever mounting cases
involving bank
advances in the various courts of India, it is highly desirable that special
tribunals are
established all over India exclusively for bank's litigation.
Writing off of Bad debts: When no other course will bring positive
results it is always preferable to write off bad advances at the earliest to