CHAPTER – I

INTRODUCTION

INTRODUCTION

The Indian banking sector underwent a major transformation in 1969

when a large number of banks were nationalized. The policy thrust in those

days was to spread banking services far and wide into the country side. And

this objective was largely achieved.

Bank branches increased rapidly and deposit mobilization rose

steadily. This has undeniably aided the process of bringing in large amount

of savings into the financial markets for development purposes. Besides,

targeted lending to priority sectors they led to capital becoming available to

new and small enterprises. The expansion of these services not surprisingly,

did not come without any ill effects. loans given the banks are there assets

and as the repayment of several of the loans were poor, quality of these

assets was steadily deteriorating. Credit allocation became “loan melas”,

loan proposal evaluations were slack and as a result repayments were very

poor.

The first and fore most casualty of banking sector reforms initiated in the

early nineties has been “ non-performing assets”(NPA), which were cutting

into the banks bottom lines in two ways-

1 Banks were not able to book interest accrued on such assets

2 They had to make provisions for these NPAs

Over the years, much has been talked about NPAs, which has also become

One of the parameters to decide partial autonomy to be given to select

banks. How ever, the emphasis so far has been only on identification and

quantification of NPAs rather than on ways to reduce and upgrade them.

Though, the term NPA can notes a financial asset of a commercial

bank which has stopped earning an expected reasonable return, it is also a

reflection of the productivity of the unit, firm, concern, industry and nation

where that asset is idling.

Viewed with this broad perspective, the NPA is a result of an

environment which prevents it from performing up to expected levels.

How ever, the global slow down and the fall of banks world wide

give India’s financial system some breathing space to catch up. The problem

of NPAs is two fold-

1 Tackling the existing NPAs

2 Preventing a build up for additional NPAs

The NPA level has to be brought down to at least 5% to 6%. For this,

Indian banks need to set up evaluation of various credit risks, to develop

advance skills in risk management and a need to set up speedy recovery

mechanism.

The NPAs in bank balance sheet reflects the health the economy. If

the economy is doing well and if all its sectors are doing well, bank NPAs

will also show an improvement. Hence, it is a joint responsibility of policy-

makers, judiciary, entrepreneurs and bankers to collectively fight this

problem.

The banking system in India remains handicapped in the absence of an

adequate legal framework to ensure expeditious recovery of loans as also

enforcement of security.

A Comprehensive banking legislation and enforcement machinery be

put in place not only to reduce the quantum of NPAs but also to ensure that

such a framework serves as a deterrent for future defaulters.

“Banks are yet another sector where the rot has already set in!”

It is high time to take stringent measures to curb NPAs and see to it

that the “NON-PERFORMING ASSETS” may not turn banks into

“NON-PERFORMING BANKS”, instead, steps should be taken to convert

“NON-PERFORMING ASSETS” into “NOW-PERFORMING ASSETS”.

“It is now or never”.

The study conducted to analyse the importance of NPAs in the

banking sector. The study lays emphasis to find out the causes for NPAs,

impact of NPAs in HDFC BANK, management of NPAs and projection of

NPAs over the next three years.

The study aims to gain an insight into tha aspect of NPAs and impact

of NPAs on the profitability of the bank.

The procedure adopted for the study includes the primary statistical

tools to correlate results and analyzing the trend of NPAs in over the last 3

years and projecting the extent of NPAs in the next 3 years in HDFC

BANK.

In India, NPAs, which are considered to be at higher levels than those

in other countries, of late, attracted attention of public and the subject of

high NPAs in banks has also been frequently raised in various areas. These

developments have promoted us to undertake a study of NPAs in banks, to

understand the problem, its genesis and influence on banking sector.

NEED AND IMPORTANCE:

Ever since introduction and implementation of prudential norms,

management of non performing advances has become the most important

issue before the banks.

RBI has therefore advised that banks should have a well-laid recovery

management policy approved by the board and the same should be put in

place for meticulous compliance so that the level of NPA can be brought

down.

Management of Non-performing advances covers both recovery of

NPA as also regulars review monitoring of NPA accounts, write off etc in

terms of prudential norms issued by RBI.

Apart from up gradation and cash recovery, the bank has introduced

several OTS modules aiming at various types of borrowers to ensure

recovery through compromise settlement. Further, various modifications are

also made for operational aspects of the said OTS modules based on infield

experiences/revised norms issued by RBI from time to time and changed

banking scenario to make the modules/schemes more effective and fruitful.

Apart from recovery of NPAs, various other important issues like review of

NPA accounts, monitoring of suitified accounts. Decreed debts, waiver of

legal action in deserving cases, write off of bad debts, delegated authority,

appropriation of recovery in NPA accounts, estimation of sacrifice, disclose

of information, guidelines in respect of implementation of the securitization

Act-2009 and sale of financial asset etc, are also important in day to day

functioning of the branches/offices.

AIM OF THE PROJECT : To assess the impact of role of the non-performing assets (NPA’s) on

the profitability of the bank.

SCOPE OF THE STUDY:

The study is laid on macro level and to find the impact of NPAs in HDFC

BANK. It also analyses the efficiency of recovery measures undertaken by

HDFC BANK.

OBJECTIVES: MORE POINTS TO BE INCLUDED1 To study the nature and cause of NPAs

2 To assess the growth and magnitude of NPAs in HDFC BANK.

3 To study the measures taken by HDFC BANK to reduce NPAs.

LIMITATIONS OF THE STUDY

1 Study is entirely based on data willingly provided by the bank

officials.

2 Study is confidential in nature, so the views expressed by the officials

may be a general opinion.

3 The findings of the Study can not be applied to other branches of

HDFC BANK.

METHODOLOGY:1 Personal interviews and discussions are conducted with the officials

of the bank.

2 Expert’s opinions soughted on various aspects dealing with NPAs.

3 Analysis of annual report, profit and loss account and balance sheet of

HDFC BANK.

PERIOD OF STUDY:

Study is undertaken regarding the NPAs in HDFC BANK for period of 3

years.

CHAPTER – II

INDUSTRY PROFILE

Banking in India

Structure of the organised banking sector in India. Number of banks are in brackets.

Banking in India originated in the last decades of the 18th century. The first banks were

The General Bank of India, which started in 1786, and Bank of Hindustan, which started

in 1770; both are now defunct. The oldest bank in existence in India is the State Bank of

India, which originated in the Bank of Calcutta in June 1806, which almost immediately

became the Bank of Bengal. This was one of the three presidency banks, the other two

being the Bank of Bombay and the Bank of Madras, all three of which were established

under charters from the British East India Company. For many years the Presidency

banks acted as quasi-central banks, as did their successors. The three banks merged in

1921 to form the Imperial Bank of India, which, upon India's independence, became the

State Bank of India in 1955.

==History== by ankit jain Merchants in Calcutta established the Union Bank in 1839, but

it failed in 1840 as a consequence of the economic crisis of 1848-49. The Allahabad

Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in

India.(Joint Stock Bank: A company that issues stock and requires shareholders to be

held liable for the company's debt) It was not the first though. That honor belongs to the

Bank of Upper India, which was established in 1863, and which survived until 1913,

when it failed, with some of its assets and liabilities being transferred to the Alliance

Bank of Simla.

Foreign banks too started to app, particularly in Calcutta, in the 1860s. The Comptoir

d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in

1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC

established itself in Bengal in 1869. Calcutta was the most active trading port in India,

mainly due to the trade of the British Empire, and so became a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in

1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established

in Lahore in 1895, which has survived to the present and is now one of the largest banks

in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative

period of stability. Around five decades had elapsed since the Indian Mutiny, and the

social, industrial and other infrastructure had improved. Indians had established small

banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange

banks and a number of Indian joint stock banks. All these banks operated in different

segments of the economy. The exchange banks, mostly owned by Europeans,

concentrated on financing foreign trade. Indian joint stock banks were generally under

capitalized and lacked the experience and maturity to compete with the presidency and

exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it

seems we are behind the times. We are like some old fashioned sailing ship, divided by

solid wooden bulkheads into separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the

Swadeshi movement. The Swadeshi movement inspired local businessmen and political

figures to found banks of and for the Indian community. A number of banks established

then have survived to the present such as Bank of India, Corporation Bank, Indian Bank,

Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in

Dakshina Kannada and Udupi district which were unified earlier and known by the name

South Canara ( South Kanara ) district. Four nationalised banks started in this district

and also a leading private sector bank. Hence undivided Dakshina Kannada district is

known as "Cradle of Indian Banking".

During the First World War (1914–1918) through the end of the Second World War

(1939–1945), and two years thereafter until the independence of India were challenging

for Indian banking. The years of the First World War were turbulent, and it took its toll

with banks simply collapsing despite the Indian economy gaining indirect boost due to

war-related economic activities. At least 94 banks in India failed between 1913 and 1918

as indicated in the following table:

YearsNumber of banks

that failed

Authorised capital

(Rs. Lakhs)

Paid-up Capital

(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West

Bengal, paralyzing banking activities for months. India's independence marked the end of

a regime of the Laissez-faire for the Indian banking. The Government of India initiated

measures to play an active role in the economic life of the nation, and the Industrial

Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This

resulted into greater involvement of the state in different segments of the economy

including banking and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was established in

April 1934, but was nationalized on January 1, 1949 under the terms of the

Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[1]

In 1949, the Banking Regulation Act was enacted which empowered the Reserve

Bank of India (RBI) "to regulate, control, and inspect the banks in India".

The Banking Regulation Act also provided that no new bank or branch of an

existing bank could be opened without a license from the RBI, and no two banks

could have common directors.

Nationalisation

Banks Nationalisation in India: Newspaper Clipping, Times of India, July 20, 1969

Despite the provisions, control and regulations of Reserve Bank of India, banks in India

except the State Bank of India or SBI, continued to be owned and operated by private

persons. By the 1960s, the Indian banking industry had become an important tool to

facilitate the development of the Indian economy. At the same time, it had emerged as a

large employer, and a debate had ensued about the nationalization of the banking

industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the

Government of India in the annual conference of the All India Congress Meeting in a

paper entitled "Stray thoughts on Bank Nationalisation."[2] The meeting received the

paper with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued an

ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance,

1969')) and nationalised the 14 largest commercial banks with effect from the midnight of

July 19, 1969. These banks contained 85 percent of bank deposits in the country[2].

Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of

political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed

the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received

the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The

stated reason for the nationalization was to give the government more control of credit

delivery. With the second dose of nationalization, the Government of India controlled

around 91% of the banking business of India. Later on, in the year 1993, the government

merged New Bank of India with Punjab National Bank. It was the only merger between

nationalized banks and resulted in the reduction of the number of nationalised banks from

20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%,

closer to the average growth rate of the Indian economy. the banking acceptin the

national bankings of other states

Liberalisation

In the early 1990s, the then Narasimha Rao government embarked on a policy of

liberalization, licensing a small number of private banks. These came to be known as

New Generation tech-savvy banks, and included Global Trust Bank (the first of such new

generation banks to be set up), which later amalgamated with Oriental Bank of

Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank. This

move, along with the rapid growth in the economy of India, revitalized the banking sector

in India, which has seen rapid growth with strong contribution from all the three sectors

of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the proposed relaxation in the

norms for Foreign Direct Investment, where all Foreign Investors in banks may be given

voting rights which could exceed the present cap of 10%,at present it has gone up to 74%

with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time,

were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning.

The new wave ushered in a modern outlook and tech-savvy methods of working for

traditional banks.All this led to the retail boom in India. People not just demanded more

from their banks but also received more.

Currently (2010), banking in India is generally fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the private

sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks

are considered to have clean, strong and transparent balance sheets relative to other banks

in comparable economies in its region. The Reserve Bank of India is an autonomous

body, with minimal pressure from the government. The stated policy of the Bank on the

Indian Rupee is to manage volatility but without any fixed exchange rate-and this has

mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong. One may also

expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake

in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor

has been allowed to hold more than 5% in a private sector bank since the RBI announced

norms in 2005 that any stake exceeding 5% in the private sector banks would need to be

vetted by them.

In recent years critics have charged that the non-government owned banks are too

aggressive in their loan recovery efforts in connection with housing, vehicle and personal

loans. There are press reports that the banks' loan recovery efforts have driven defaulting

borrowers to suicide.[3][4][5]

Adoption of banking technology

The IT revolution had a great impact in the Indian banking system. The use of computers

had led to introduction of online banking in India. The use of the modern innovation and

computerisation of the banking sector of India has increased many fold after the

economic liberalisation of 1991 as the country's banking sector has been exposed to the

world's market. The Indian banks were finding it difficult to compete with the

international banks in terms of the customer service without the use of the information

technology and computers.

Number of branche of scheduled banks of India as of March 2005

The RBI in 1984 formed Committee on Mechanisation in the Banking Industry (1984) [6]

whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of India. The

major recommendations of this committee was introducing MICR[7] Technology in all the

banks in the metropolis in India.This provided use of standardized cheque forms and

encoders.

In 1988, the RBI set up Committee on Computerisation in Banks (1988) [8] headed by Dr.

C.R. Rangarajan which emphasized that settlement operation must be computerized in

the clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and

Thiruvananthapuram.It further stated that there should be National Clearing of inter-city

cheques at Kolkata,Mumbai,Delhi,Chennai and MICR should be made Operational.It

also focused on computerisation of branches and increasing connectivity among branches

through computers.It also suggested modalities for implementing on-line banking.The

committee submitted its reports in 1989 and computerisation began form 1993 with the

settlement between IBA and bank employees' association.[9]

In 1994, Committee on Technology Issues relating to Payments System, Cheque Clearing

and Securities Settlement in the Banking Industry (1994)[10] was set up with chairman

Shri WS Saraf, Executive Director, Reserve Bank of India. It emphasized on Electronic

Funds Transfer (EFT) system, with the BANKNET communications network as its

carrier. It also said that MICR clearing should be set up in all branches of all banks with

more than 100 branches.

Committee for proposing Legislation On Electronic Funds Transfer and other Electronic

Payments (1995)[11] emphasized on EFT system. Electronic banking refers to DOING

BANKING by using technologies like computers, internet and networking,MICR,EFT so

as to increase efficiency, quick service,productivity and transparency in the transaction.

Number of ATMs of different Scheduled Commercial Banks Of India as on end March

2005

[9]

Apart from the above mentioned innovations the banks have been selling the third party

products like Mutual Funds, insurances to its clients.Total numbers of ATMs installed in

India by various banks as on end March 2005 is 17,642.[12]The New Private Sector Banks

in India is having the largest numbers of ATMs which is fol off site ATM is highest for

the SBI and its subsidiaries and then it is followed by New Private Banks, Nationalised

banks and Foreign banks. While on site is highest for the Nationalised banks of India.[9]

BANK GROUP NUMBER OF

BRANCHES

ON SITE

ATM

OFF

SITE

ATM

TOTAL

ATM

NATIONALISED

BANKS

33627 3205 1567 4772

STATE BANK OF INDIA 13661 1548 3672 5220

OLD PRIVATE

SECTOR BANKS

4511 800 441 1241

NEW PRIVATE

SECTOR BANKS

1685 1883 3729 5612

FOREIGN BANKS 242 218 579 797

COMPANY PROFILE

The Housing Development Finance Corporation Limited (HDFC) was

amongst the first to receive an 'in principle' approval from the Reserve Bank of India

(RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the

Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name

of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank

commenced operations as a Scheduled Commercial Bank in January 1995.

HDFC is India's premier housing finance company and enjoys an impeccable

track record in India as well as in international markets. Since its inception in 1977, the

Corporation has maintained a consistent and healthy growth in its operations to remain

the market leader in mortgages. Its outstanding loan portfolio covers well over a million

dwelling units. HDFC has developed significant expertise in retail mortgage loans to

different market segments and also has a large corporate client base for its housing

related credit facilities. With its experience in the financial markets, a strong market

reputation, large shareholder base and unique consumer franchise, HDFC was ideally

positioned to promote a bank in the Indian environment.

HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to

build sound customer franchises across distinct businesses so as to be the preferred

provider of banking services for target retail and wholesale customer segments, and to

achieve healthy growth in profitability, consistent with the bank's risk appetite. The bank

is committed to maintain the highest level of ethical standards, professional integrity,

corporate governance and regulatory compliance. HDFC Bank's business philosophy is

based on four core values - Operational Excellence, Customer Focus, Product Leadership

and People.

Capital Structure:-

As on 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore. The

paid-up capital as on the said date is Rs. 469,33,76,540 (234,66,88,270 equity shares of

Rs. 2/- each). The HDFC Group holds 23.15% of the Bank's equity and about 17.29 % of

the equity is held by the ADS / GDR Depositories (in respect of the bank's American

Depository Shares (ADS) and Global Depository Receipts (GDR) Issues). 30.68 % of the

equity is held by Foreign Institutional Investors (FIIs) and the Bank has 4,47,924

shareholders

The shares are listed on the Bombay Stock Exchange Limited and The National Stock

Exchange of India Limited. The Bank's American Depository Shares (ADS) are listed on

the New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's Global

Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN No

US40415F2002.

FINANCIAL RESULTS:

Profit & Loss Account: Quarter ended June 30, 2012

The Bank’s total income for the quarter ended June 30, 2012, was ` 9,536.9 crores as against

` 7,098.0 crores for the quarter ended June 30, 2011. Net revenues (net interest income plus

other income) were at ` 5,013.5 crores for the quarter ended June 30, 2012, an increase of

26.3% over ` 3,968.0 crores for the corresponding quarter of the previous year. Net interest

income (interest earned less interest expended) for the quarter ended June 30, 2012, grew by

22.3% to ` 3,484.1 crores. This was driven by loan growth of 21.5% and a net interest margin

for the quarter of 4.3%.

Other income (non-interest revenue) for the quarter ended June 30, 2012, was ` 1,529.5

crores, up 36.6% over that in the corresponding quarter ended June 30, 2011. The main

contributor to other income for the quarter was fees & commissions of ` 1,143.3 crores, up by

23.9% over ` 922.7 crores in the corresponding quarter ended June 30, 2011. The two other

components of other income were foreign exchange & derivatives revenue of ` 314.8 crores

(` 230.1 crores for the corresponding quarter of the previous year) and profit on revaluation /

sale of investments of ` 66.5 crores (loss of ` 41.3 crores for the quarter ended June 30, 2011).

Business:-

HDFC Bank offers a wide range of commercial and transactional banking services and

treasury products to wholesale and retail customers. The bank has three key business

segments:

Wholesale Banking Services

The Bank's target market ranges from large, blue-chip manufacturing companies in

the Indian corporate to small & mid-sized corporates and agri-based businesses. For

these customers, the Bank provides a wide range of commercial and transactional

banking services, including working capital finance, trade services, transactional

services, cash management, etc. The bank is also a leading provider of structured

solutions, which combine cash management services with vendor and distributor

finance for facilitating superior supply chain management for its corporate

customers. Based on its superior product delivery / service levels and strong

customer orientation, the Bank has made significant inroads into the banking

consortia of a number of leading Indian corporates including multinationals,

companies from the domestic business houses and prime public sector companies. It

is recognised as a leading provider of cash management and transactional banking

solutions to corporate customers, mutual funds, stock exchange members and

banks.

Retail Banking Services

 The objective of the Retail Bank is to provide its target market customers a full

range of financial products and banking services, giving the customer a one-stop

window for all his/her banking requirements. The products are backed by world-

class service and delivered to customers through the growing branch network, as

well as through alternative delivery channels like ATMs, Phone Banking,

NetBanking and Mobile Banking.

 

The HDFC Bank Preferred program for high net worth individuals, the HDFC Bank

Plus and the Investment Advisory Services programs have been designed keeping

in mind needs of customers who seek distinct financial solutions, information and

advice on various investment avenues. The Bank also has a wide array of retail loan

products including Auto Loans, Loans against marketable securities, Personal

Loans and Loans for Two-wheelers. It is also a leading provider of Depository

Participant (DP) services for retail customers, providing customers the facility to

hold their investments in electronic form.

 

HDFC Bank was the first bank in India to launch an International Debit Card in

association with VISA (VISA Electron) and issues the Mastercard Maestro debit

card as well. The Bank launched its credit card business in late 2001. By March

2010, the bank had a total card base (debit and credit cards) of over 14 million. The

Bank is also one of the leading players in the “merchant acquiring” business with

over 90,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at

merchant establishments. The Bank is well positioned as a leader in various net

based B2C opportunities including a wide range of internet banking services for

Fixed Deposits, Loans, Bill Payments, etc.

Treasury

Within this business, the bank has three main product areas - Foreign Exchange and

Derivatives, Local Currency Money Market & Debt Securities, and Equities. With

the liberalisation of the financial markets in India, corporates need more

sophisticated risk management information, advice and product structures. These

and fine pricing on various treasury products are provided through the bank's

Treasury team. To comply with statutory reserve requirements, the bank is required

to hold 25% of its deposits in government securities. The Treasury business is

responsible for managing the returns and market risk on this investment portfolio. 

 Management:-

 

Mr. C.M. Vasudev has been appointed as the Chairman of the Bank with effect from 6th

July 2010. Mr. Vasudev has been a Director of the Bank since October 2006. A retired

IAS officer, Mr. Vasudev has had an illustrious career in the civil services and has held

several key positions in India and overseas, including Finance Secretary, Government of

India, Executive Director, World Bank and Government nominee on the Boards of many

companies in the financial sector.

The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25

years, and before joining HDFC Bank in 1994 was heading Citibank's operations in

Malaysia.

The Bank's Board of Directors is composed of eminent individuals with a wealth of

experience in public policy, administration, industry and commercial banking. Senior

executives representing HDFC are also on the Board. 

Senior banking professionals with substantial experience in India and abroad head

various businesses and functions and report to the Managing Director. Given the

professional expertise of the management team and the overall focus on recruiting and

retaining the best talent in the industry, the bank believes that its people are a significant

competitive strength. 

Credit Rating

The Bank has its deposit programs rated by two rating agencies - Credit Analysis &

Research Limited (CARE) and Fitch Ratings India Private Limited. The Bank's Fixed

Deposit programme has been rated 'CARE AAA (FD)' [Triple A] by CARE, which

represents instruments considered to be "of the best quality, carrying negligible

investment risk". CARE has also rated the bank's Certificate of Deposit (CD) programme

"PR 1+" which represents "superior capacity for repayment of short term promissory

obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.) has assigned

the "AAA ( ind )" rating to the Bank's deposit programme, with the outlook on the rating

as "stable". This rating indicates "highest credit quality" where "protection factors are

very high"

The Bank also has its long term unsecured, subordinated (Tier II) Bonds rated by CARE

and Fitch Ratings India Private Limited and its Tier I perpetual Bonds and Upper Tier II

Bonds rated by CARE and CRISIL Ltd. CARE has assigned the rating of "CARE AAA"

for the subordinated Tier II Bonds while Fitch Ratings India Pvt. Ltd. has assigned the

rating "AAA (ind)" with the outlook on the rating as "stable". CARE has also assigned

"CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II bond issues.

CRISIL has assigned the rating "AAA / Stable" for the Bank's Perpetual Debt programme

and Upper Tier II Bond issue. In each of the cases referred to above, the ratings awarded

were the highest assigned by the rating agency for those instruments?

Corporate Governance Rating

The bank was one of the first four companies, which subjected itself to a Corporate

Governance and Value Creation (GVC) rating by the rating agency, The Credit Rating

Information Services of India Limited (CRISIL). The rating provides an independent

assessment of an entity's current performance and an expectation on its "balanced value

creation and corporate governance practices" in future. The bank has been assigned a

'CRISIL GVC Level 1' rating which indicates that the bank's capability with respect to

wealth creation for all its stakeholders while adopting sound corporate governance

practices is the highest.

On May 23, 2009, the amalgamation of Centurion Bank of Punjab with HDFC Bank was

formally approved by Reserve Bank of India to complete the statutory and regulatory

approval process. As per the scheme of amalgamation, shareholders of CBoP received 1

share of HDFC Bank for every 29 shares of CBoP.

The merged entity will have a strong deposit base of around Rs. 1,22,000 crore and net

advances of around Rs. 89,000 crore. The balance sheet size of the combined entity

would be over Rs. 1,63,000 crore. The amalgamation added significant value to HDFC

Bank in terms of increased branch network, geographic reach, and customer base, and a

bigger pool of skilled manpower.

In a milestone transaction in the Indian banking industry, Times Bank Limited (another

new private sector bank promoted by Bennett, Coleman & Co. / Times Group) was

merged with HDFC Bank Ltd., effective February 26, 2000. This was the first merger of

two private banks in the New Generation Private Sector Banks. As per the scheme of

amalgamation approved by the shareholders of both banks and the Reserve Bank of India,

shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of

Times Bank.

 HDFC Bank Ltd. (BSE: 500180, NYSE: HDB) is a commercial bank of India,

incorporated in August 1994, after the Reserve Bank of India allowed establishing private

sector banks. The Bank was promoted by the Housing Development Finance

Corporation, a premier housing finance company (set up in 1977) of India. HDFC Bank

has 1,412 branches and over 3,295 ATMs, in 528 cities in India, and all branches of the

bank are linked on an online real-time basis. As of September 30, 2010 the bank had total

assets of INR 1006.82 billion. For the fiscal year 2011-12, the bank has reported net

profit of Rs.2,244.9 crore, up 41% from the previous fiscal. Total annual earnings of the

bank increased by 58% reaching at Rs.19,622.8 crore in 2011-12.

Business Focus

HDFC Bank deals with three key business segments – Wholesale Banking Services,

Retail Banking Services, and Treasury. It has entered the banking consortia of over 50

corporates for providing working capital finance, trade services, corporate finance and

merchant banking. It is also providing sophisticated product structures in area of foreign

exchange and derivatives, money markets and debt trading and equity research.

Wholesale Banking Services

The Bank's target m inroads into the banking consortia of a number of leading Indian

corporate including multinationals, companies from the domestic business houses and

prime public sector companies. It is recognized as a leading provider of cash management

and transactional banking solutions to corporate customers, mutual funds, stock exchange

members and banks.

Retail Banking Services

The objective of the Retail Bank is to provide its target market customers a full range of

financial products and banking services, giving the customer a one-stop window for all

his/her banking requirements. The products are backed by world-class service and

delivered to customers through the growing branch network, as well as through

alternative delivery channels like ATM, Phone Banking, Net Banking and Mobile

Banking.

HDFC Bank was the first bank in India to launch an International Debit Card in

association with VISA (VISA Electron) and issues the Master card Maestro debit card as

well. The Bank launched its credit card business in late 2001. By March 2012, the bank

had a total card base (debit and credit cards) of over 13 million. The Bank is also one of

the leading players in the “merchant acquiring” business with over 70,000 Point-of-sale

(POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank

is well positioned as a leader in various net based B2C opportunities including a wide

range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc.

Treasury

Within this business, the bank has three main product areas - Foreign Exchange and

Derivatives, Local Currency Money Market & Debt Securities, and Equities. These

services are provided through the bank's Treasury team. To comply with statutory reserve

requirements, the bank is required to hold 25% of its deposits in government securities.

The Treasury business is responsible for managing the returns and market risk on this

investment portfolio.

Distribution Network

HDFC Bank is headquartered in Mumbai. The Bank has a network of 1,725 branches

spread in 771 cities across India. All branches are linked on an online real-time basis.

Customers in over 500 locations are also serviced through Telephone Banking. The Bank

has a presence in all major industrial and commercial centres across the country. Being a

clearing/settlement bank to various leading stock exchanges, the Bank has branches in the

centre where the NSE/BSE has a strong and active member base.

The Bank also has 3,898 networked ATMs across these cities. Moreover, HDFC Bank's

ATM network can be accessed by all domestic and international Visa/MasterCard, Visa

Electron/Maestro, Plus/Cirrus and American Express Credit/Charge cardholders.

Housing Development Finance Corporation Limited or HDFC (BSE: 500010),

founded 1977 by Ravi Maurya and Hasmukhbhai Parekh, is an Indian NBFC,

focusing on home mortgages. HDFC's distribution network spans 243 outlets that include

49 offices of HDFC's distribution company, HDFC Sales Private Limited. In addition,

HDFC covers over 90 locations through its outreach programmes. HDFC's marketing

efforts continue to be concentrated on developing a stronger distribution network. Home

loans are also Sharcket through HDFC Sales, HDFC Bank Limited and other third party

Direct Selling Agents (DSA).

To cater to non-resident Indians, HDFC has an office in London and Dubai and service

associates in Kuwait, Oman, Qatar, Sharjah, Abu Dhabi, Al Khobar, Jeddah and Riyadh

in Saudi Arabia.

Awards and Achievements - Banking Services

HDFC Bank began operations in 1995 with a simple mission: to be a "World-class

Indian Bank". We realized that only a single-minded focus on product quality and

service excellence would help us get there. Today, we are proud to say that we are well

on our way towards that goal.

It is extremely gratifying that our efforts towards providing customer convenience have

been appreciated both nationally and internationally.

2012

IDRBT Banking Technology

Excellence Awards 2011-12

Best Bank in 'IT for Operational Effectiveness' category

Asia Money 2012 Best Domestic Bank in India

India's Top 500 Companies -

Dun & Bradstreet Corporate

Awards

Best Bank in India

Finance Asia - Best Managed Company

- Best CEO - Mr. Aditya Puri

UTI Mutual Fund CNBC TV

18 Financial Advisor Awards

2011

- Best Performing Bank - Private

Asian Banker International

Excellence in Retail Financial

Services Awards 2012

- Best Retail Bank in India

- Best Bancassurance

- Best Risk Management

5th Loyalty Summit award Customer and Brand Loyalty

Skoch foundation 2012 SHG/JLG linkage programme

ICAI Awards 2011 Excellence in Financial Reporting

2011

Financial Express Best

Bank Survey 2010-11

- Best in Strength and Soundness  

- 2nd Best in the Private Sector

CNBC TV18's Best Bank

& Financial Institution

Awards

- Best Bank

- Mr. Aditya Puri, Outstanding Finance

Professional

Dun & Bradstreet Banking

Awards 2011

Best Private Sector Bank - SME Financing

ISACA 2011 award for IT

Governance

Best practices in IT Governance and IT Security

IBA Productivity

Excellence Awards 2011

New Channel Adopter (Private Sector)

DSCI (Data Security

Council of India)

Excellence Awards 2011

Security in Bank

Euromoney Awards for

Excellence 2011

Best Bank in India

FINANCE ASIA Country

Awards 2011: India

- BEST BANK

- BEST CASH MANAGEMENT BANK

- BEST TRADE FINANCE BANK

Asian Banker Strongest Bank in Asia Pacific

BloombergUTV's Financial

Leadership Awards 2011

Best Bank

IBA Banking Technology

Awards 2010

Winner -

1) Technology Bank of the Year

2) Best Online Bank

3) Best Customer Initiative

4) Best Use of Business Intelligence

5) Best Risk Management System

Runners Up -  

Best Financial Inclusion

IDC FIIA Awards 2011 Excellence in Customer Experience

2010

Outlook Money 2010

Awards

Best Bank

Businessworld Best Bank Best Bank (Large)

Awards 2010

Teacher's Achievement

Awards 2010 (Business)

Mr. Aditya Puri

The Banker and PWM 2010

Global Private Banking

Awards

Best Private Bank in India

Economic Times Awards for

Corporate Excellence 2010

Business Leader of the Year - Mr. Aditya Puri

Forbes Asia Fab 50 Companies - 5th year in a row

NDTV Business Leadership

Awards 2010

Best Private Sector Bank

The Banker Magazine World's Top 1000 Banks

MIS Asia IT Excellence

Award 2010

BEST BOTTOM-LINE I.T. Category

Dun & Bradstreet Banking

Awards 2010 Overall Best Bank

Best Private Sector Bank

Best Private Sector Bank in SME Financing

Institutional Investor

Magazine Poll

HDFC Bank MD, Mr. Aditya Puri among "Asian

Captains of Finance 2010"

IDRBT Technology 2009

Awards

Winner - 1) IT Infrastructure 2) Use of IT within

the Bank  

Runners-up - IT Governance (Large Banks)

ACI Excellence Awards

2010

Highly Commended - Asia Pacific HDFC Bank

FE-EVI Green Business

Leadership Award

Best performer in the Banking category

Celent's 2010 Banking

Innovation Award

Model Bank Award

Avaya Global Connect 2010 Customer Responsiveness Award - Banking &

Financial Services category

Forbes Top 2000 Companies Our Bank at 632nd position and among 130

Global High Performers

Financial Express - Ernst &

Young Survey 2009-10 Best New Private Sector Bank

Best in Growth

Best in strength

Asian Banker Excellence

Awards 2010 Best Retail Bank in India

Excellence in Automobile Lending

Best M&A Integration

Technology Implementation

The Asset Triple A Awards Best Cash Management Bank in India

Euromoney Private Banking

and Wealth Management

Poll 2010

1) Best Local Bank in India (second year in a row)

2) Best Private Banking Services overall (moved

up from No. 2 last year)

Financial Insights Innovation

Awards 2010

Innovation in Branch Operations - Server

Consolidation Project

Global Finance Award Best Trade Finance Provider in India for 2010

2 Banking Technology

Awards 2009

1) Best Risk Management Initiative and 2) Best

Use of Business Intelligence.

SPJIMR Marketing Impact

Awards (SMIA) 2010

2nd Prize

Business Today Best

Employer Survey

Listed in top 10 Best Employers in the country

CHAPTER – III

OPERATIONAL DEFINITIONS

OPERATIONAL DEFINITIONS:

1. BANK RATE:

It is the rate at which the RBI lends to other commercial banks. It is the rate at which the

RBI re-discounts the bill of exchange. It acts as a signal to the economy on the monetary

policy.

2. BANK CREDIT:

The credit extended by banks to its customers.

3. NON-PERFORMING ASSETS:

NPA is a loan (whether term loan, cash credit, overdraft or bills discounted) which is in

default for more than three months. In case of such assets, the income should be shown

on receipt basis in bank’s books and not on due basis.

4. GROSS NON-PERFORMING ASSETS:

Bank even after making provisions for the advances considered irrecoverable, continued

to hold such advances in their books is termed as GNPA.

5. NET NON-PERFORMING ASSETS:

Net non-performing assets are gross NPAs less provision made in the accounts,

balance in interest suspense account, claims received from DICGC, and amounts received

in compromise settlements.

6. CASH RESERVE RATIO (CRR):

Every commercial bank is required to keep a certain percentage of its demand and time

liabilities (deposits) with RBI (either as cash or book balance). RBI is empowered to fix

the CRR between 3% and 5%.

7. STATUTORY LIQUIDITY RATIO (SLR):

Commercial banks are also required to keep (in addition to CRR)liquid assets in the

shape of cash, gold or approved securities as a certain percentage of their net demand and

time liabilities(NDTL).

8. CAPITAL ADEQUACY RATIO (CAR):

Banks are required to maintain a minimum capital to risk assets ratio, which helps the

bank to survive even during sub stainable losses. (To ensure good performance, RBI has

specified minimum adequate capital for banks).

9. CAMELS:

As per the recommendation of working groups set up by RBI on ‘supervision of banks’ a

new approach has been adopted in the annual financial inspection of banks.

It evaluates banks –

CAPITAL ADEQUACY

ASSET QUALITY

MANAGEMENT

EARNINGS

LIQUIDITY

SYSTEM AND CONTROL.

10. VRS:

Voluntary retirement scheme, which is issued as a tool to remove the surplus staff in a

bank organization. (However, VRS for banks had been cleared by Ministry of Finance in

November 2007).

11. RE-CAPITALISATION:

It is a means through which the government infuses fresh additional capital in to the weak

banks to restructure their business. This is also a budgetary support for weak banks.

12. RISK WEIGHTED ASSETS (RWA):

According to the risk involved in the assets of a bank, they are given some weightage.

RBI from time to time has been changing the weightage given to various classes of

assets.

13. RETURN ON ASSETS (RAO):

This is profit after tax as percentage of average total assets of average total assets of

current and previous year. Total assets are taken net of revaluation, advance tax, and

miscellaneous expenditure to the extent not written off.

14. RETURN ON INVESTMENTS (ROI):

This is ratio of interest and dividend income earned as percentage of average instruments

of current and previous year. Interest earned considered here excludes interest earned on

advances.

15. OPERATIONAL EXPENSES:

Expenses incurred by banks other than interest and tax.

16. CAPITAL STRUCTURE:

TIER- 1, TIER- 2

Banks and FIs should have the capital structure as defined by RBI.

TIER- 1 Capital is the most permanent and readily available support against unexpected

losses.

It consists of –

1. paid up capital

2. statutory reserves

3. capital reserves

4. Other disclosed free reserves.

Less: 1. Equity investments in subsidiaries

2. Intangible assets 3.

Current and accumulated losses, If any.

Tier- 2 Capital is not permanent or, is not readily available.

It consists of-

1. Undisclosed reserves and cumulative preference shares

2. Revaluation reserves

3. general provision and loss reserves

4. Hybrid debt capital investments

5. Subordinate debt.

NOTE: Tier- 2 Capital should not be more than Tier- 1 Capital.

17. DEBT RECOVERY TRIBUNAL (DRT):

It is a recovery mechanism which was set up Ministry of Finance in 1993 under a

separate act. The defaulter can apply to the DRT for the settlement of the debt suggesting

the terms on which he wants to settle. The tribunal will hear both the parties and pass the

final which will bind both the parties.

18. SETTLEMENT ADVISORY COMMITTEE (SAC):

This committee has also been set up by Ministry of Finance to suggest measures

for the quick recovery of loans and settle the accounts permanently.

19. ASSET RECONSTRUCTION COMPANY/FUND (ARC):

The principal objective of ARC is to take up the bad and doubtful assets of the

banks, which are in the recovery process, at a discounted price in the form of NPA,swap

bonds.( These banks would qualify for the SLR investments).

CHAPTER – IV

NPA’S ANALYTICAL STUDY

NPAs – AN ANALYTICAL STUDY:

MEANING AND NATURE OF NPAs.

Granting of credit facilities for economic activities is the main reason

of banking. A part from raising resources through fresh deposits, borrowings

and recycling of funds received back from borrowers constitutes a major part

of funding credit dispensation activity. Non-recovery of installments as also

interest on the loan portfolio negates the effectiveness of this process of the

credit cycle. Non recovery also affects the profitability of banks besides

being required to maintain more owned funds by way of capital and creation

of reserves and provisions to act as cushion for the loan losses. Avoidance of

loan losses is one of the pre occupations of the managements of banks.

While complete elimination of such losses is not possible, bank management

aims to keep the losses at a low level.

To begin with, it seems appropriate to define Non-performing advance,

popularly called “NPA”.

A Non performing advance is defined as

“ An advance where payment of interest or repayment of installment of principal (

in case of term loans) or both remains unpaid for a period of two quarters or more. An

amount under any of the credit facilities is to be treated as ‘past due’ when it is remains

unpaid for 30 days beyond due date.”

As per recommendation of Narasimham committee, it has been decided that

credit facilities granted by banks will be classified in to ‘Performing’ and

‘Non performing asset’.

“ NPA is a loan ( whether term loan, cash credit, overdraft, or bills discounted) which is in default for more

than three months. In case of such assets, the income should be shown only on receipt and not shown in the banks book on a due basis.”The ratio of Non-performing assets to advances reflects the quality of a bank’s loan

portfolio.

A distinction is often made between ‘Gross NPA’ and ‘NET NPA’. NET NPA,

which is obtained by deducting from gross NPA items like interest due but not recovered,

part payment received and kept in suspense account, etc., is internationally accepted as

the more relevant indicator of financial health of the banks.

It is the level of non-performing assets which, to a grant extent, differentiates between a

good and bad bank. The subject of high NPA levels in banks has also been frequently

raised in various area.

IMPORTANCE OF NON PERFORMING ASSETS:

The one major cause for the current weakened state of banking sector is the level

and volume of NPAs. The problem has not been looked at in its proper perspective.

Descriptions such as decreased portfolio and figures running into thousands of crores

have all led to treating the problem as a major one-time aberration requiring emergency

treatment. The casual explanations – political interference, willful defaults, targeted

lending and even fraudulent behavior by banks – allowed them selves to be pressurized

into lowering their guard in the one area of business that is their bread and butter of

existence – risk assessment.

Lending to priority sectors or medium and small companies is likely to be

the bank’s main activity in time to come. The bigger, established corporations would

have the wide world to choose from and to meet their requirements. The shift to medium-

sized borrowers and slightly riskier lending will form the prime activity of all banks. The

problem will then, be to ensure that such lending is justifiable on a commercial criterion.

The high level of NPAs in Indian banking sector is the result of

application of prudential norms of accounting from 1992 onwards. The introduction of

CAC is subject to the NPA level being brought down to less than 5% from the present

level of around 16%. The government of India already initiated several steps to help

banks in reducing their NPAs. Several of these NPAs are still outstanding in the books of

accounts because they are not supported by adequate provisions.

Introduction of prudential norms on income, recognition, asset

classification and provisioning during 1992-93 and other steps initiated apart from

bringing in transparency in the loan portfolio of banking industry have significantly

contributed towards improvement of the pre-sanction appraisal and post sanction

supervision which is reflected in lowering of the levels of fresh accretion of NPAs of

banks after 1992.

NATURE OF NPAs :

There is no gain saying the fact that Indian banking has been the government’s step

child as far as economic policy is concerned. The two rounds of bank nationalization in

1969 and in 1980 created public sector banking behemoths which were slothful,

indifferent and anachronistic.

On the one hand a protected environment ensured that bank’s never needed to

develop sophisticated treasury operations and asset liability management skills. On the

other hand a combination of directed lending and social banking relegated profitability

and competitiveness to the background. The net result was unsustainable NPAs and

consequently a higher effective cost of banking services.

The crucial factor that decides the performance of banks now-a-days is the

recognizing NPAs in their advances at the earliest.

NPAs are those loans given by a bank or financial institutions where the borrower

defaults or financial institution delays interest or principal payment. Banks are now

required to recognize such loans faster and then classify them as problem assets and take

measures to recover them.

Close to 17% of loan made by Indian banks are NPAs – very high compared to say

5% in banking systems in advanced countries. The burden of NPAs is a millstone round

the necks of the banks. The NPAs are posing a major threat not only to the banking sector

but for the economy as a whole.

CAUSES FOR NON-PERFORMING ASSETS:

A strong banking sector is important for a flourishing economy. The failure of the

banking sector may have an adverse impact on all other sectors. The Indian banking

system, which was operating in a closed economy, now faces the challenges of an open

economy. Banks started getting concerned about non-performing assets consequent to the

introduction of prudential accounting norms.

NPAs reflect the performance of banks. A high level of NPAs suggests high

probability of a large number of credit defaults that affects cash flows. According to the

RBI, the gross NPAs of scheduled commercial banks rose from 24.4% in March 2011 to

24.9% in March 2012.

Thus, increasing NPAs are a matter of concern for banks. In India, the banking

sector is still not strong on the solvency front. Having adhered to stipulated capital

adequacy norms does not suggest that a bank is strong enough. It is important to improve

the quality of assets and ensure timely recovery of loans.

IMPACT OF PRIORITY SECTOR ADVANCES OF NPAs:

There is a general perception that the prescription of 40% of net bank credit to

priority sector have led to higher level of NPAs, due to credit to these sectors becoming

sticky.

The information obtained with regard to the NPAs in the priority sector advances,

their proportion to total NPAs of banks, the NPAs in non-priority sector advances, their

proportion to total NPAs of the HDFC BANK as on 31st march 2010,2011 and 2012

revealed that the proportion of NPAs in priority sector to total net NPAs were 7.08%,

2.37% and 1.28% respectively.

The proportion though lesser than NPAs in non-priority sector, reveals that the

incidence of NPAs in priority sector is much higher in view of the fact that the priority

sector advances constitute only 30% to 35% of the gross bank credit during the period.

However, gradual increase in the proportion on NPAs in non-priority sector have been

increasingly seen in borrowal accounts of industrial sector during the recent years. It is

observed that the share of priority sector NPAs of HDFC BANK, though reduced from

7.08% to 2.37%, was significantly higher than the proportion of priority sector advances

to total advances, which ranged between 30% and 35% during three year period.

Management of non-performing assets, now a days is a critical performance area

for banks, especially in public sector banks. It is better for Indian banks to try for the

international standards in terms of efficiency, productivity, profitability, asset recognition

norms, and provisioning and capital adequacy to compete in the competitive new

economy. At present, any borrowal account not serving for either interest or principal for

at least 3 months will be called non-performing assets or NPAs.

Reserve bank of India (RBI) has been implementing stringent rules and regulations

for asset classification from the year 1991-92, in a phased manner. It includes adoption of

new method in measuring profitability, performance and evaluation of assets, to find the

financial conditions of banks.

There are several reasons for an account becoming NPA. These include :

1. Sluggish legal system

1 Long legal tangles

2 Changes that had taken place in labour laws

3 Lack of sincere effort

2. Funds borrowed for a particular purpose but not used for the said purpose

3. Project not completed in time.

4. Scarcity of raw materials, power and other resources.

5. Poor recovery of receivable.

6. Industrial recession.

7. Excess capacities created on non-economic costs.

8. In-ability of the corporate to raise capital through issue of equity or other debt

instruments from capital markets.

9. Business failures.

10. Diversion of funds for expansion\modernization\setting up new projects\helping or

promoting sister concerns.

11. External factors like raw material shortage, raw material\ input price escalation,

power shortage, industrial recession, excess capacity, natural calamities like floods,

accidents.

12. Failure, non payment\overdue in other countries, externalization problems, adverse

exchange rate etc.

13. Government policies like excise, import duty changes, de-regulation, and pollution

control orders etc.

14. Wilful defaults, siphoning of funds, fraud, disputes, management disputes, mis-

appropriation etc.

15. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-

up, delay in settlement of payments\subsidiaries by government bodies etc.

CONCLUSION REGARDING CONTRIBUTORY REASONS :

The study of about 900 top NPA accounts in HDFC BANK has been tabulated

from the available information revealed that the following are the important causative

factors for units becoming sick\weak and constantly accounts turning NPA in the order of

prominence.

1 Diversification of funds mostly for expansion/diversification/ modernization.

Taking up of new projects, is the single most prominent reason. Besides being so,

this factor also has significant proportion of cases, when compared to other

factors.

2 Internal factor such as failure of business (products), inefficient management,

inappropriate technology, product obsolescence.

3 External factors such as industrial recession, price escalation, power shortage,

accidents etc.

4 Time/cost over run during the project implementation stage leading to liquidity

strain and turning NPA in to next factor.

5 Other factors in order or prominence are government policies like changes in

import/excise duties etc, willful default, fraud, disputes etc, and lastly,

deficiencies on the part of banks delay in release of limits in settlement of

payments by govt. bodies.

CAUSES FOR AN ACCOUNTS BECOMING NPA:

CAUSES ATTRIBUTABLE TO BORROWER

1. Failure to bring in required capital

2. Too ambitious project

3. Longer gestation period

4. Unwanted expenses

5. Over trading

6. Imbalances of inventories

7. Lack of proper planning

8. Dependence on single customer

9. Lack of expertise

10. Improper working capital management

11. Mismanagement

12. Diversion of funds

13. Poor quality management

14. Heavy out side borrowings

15. Poor credit collections

16. Lack of quality control

CAUSES ATTRIBUTABLE TO BANKS

1. Wrong selection of borrowers

2. Poor credit appraisal

3. Lack of supervision

4. Tough stand on issues

5. Too flexible on attitude

6. Systems overloaded

7. Non inspection of units

8. Lack of motivation

9. Delay in sanction

10. Lack of trained staff

11. Lack of delegation of work

12. Sudden credit squeeze by RBI

13. Lack of commitment to recovery

14. Lack of adequate technology

15. Lukewarm effort by staff to work

16. Lack of technical personnel and zeal to work.

I. OTHER CAUSES

1. Lack of infrastructure

2. Fast changing technology

3. Unhelpful attitude of the govt.

4. Changes in consumer preferences

5. Increase in material cost

6. Govt. policies

7. Credit policies

8. Taxation laws

9. Civil disturbances

10. Political hostility

11. External pressure

12. Sluggish Legal System

13. Changes related to banking amendment act.

RBI should take stringent measures from time to time to govern and supervise the

operation of banks by introducing new set of norms of international standard. This is

important since success/failure of these banks are strongly linked to the performance of

the financial system. In addition, these measures help to weed out the in efficient banks

and lead to strengthening of the system. In India, the government has been recapitalizing

weaker banks in order to make them operative, however this alone will not improve the

performance of the banks.

MAGNITUDE OF NON-PERFORMING ASSETS IN HDFC BANK:

In India, the NPAs which are considered to be at higher levels than those in other

countries have of late, attracted the attention of public. The subject of high NPA levels in

banks has also been frequently raised in various forces.

The percentage of NPAs when compared to international standards is definitely high

for Indian banks. The problem of NPAs is not only affecting the banks but also the whole

economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the

state of health of the industry and trade. It has also been possible to combat the menace of

NPAs by bringing down net NPAs from the level of 7.08% as on 31.03.2010 to 2.37% as

on 31.03.2011. Thus, in a single year net NPAs declined by 4.71%. This compares

favorably with the industry. Gross NPAs of the Bank declined to Rs. 1,418.46 crore as on

31.03.2011 from Rs. 1,841.50 crore as on 31.03.2010 while net NPAs reduced to Rs.

362.83 crore from Rs. 886.98 crore during the period. Provision Coverage Ratio was

brought up from 51.23% during 2010-06 to 73.75% during 2011-12.

HDFC BANK has laid thrust on NPA recovery, specially taking advantage

of Securitization and Reconstruction of Financial Assets and Enforcement of Security

Act, 2007, as also One Time Settlement Schemes formulated by RBI. In order to improve

asset quality, the Bank is pursuing improved credit appraisal techniques supported by

Credit Risk Rating, industry trend analysis etc. It has also strengthened credit-monitoring

system for improvement of asset quality and detection of early warning signals etc.

EXTENT OF NPAs in PUBLIC SECTOR BANKS : 2011-07

There has been improvement in the health of the banking sector in terms of bad

loans with the banking industry showing a reduction in gross and net NPAs as a

percentage of total advances during the year 2011. In absolute terms however, there has

been a growth in both gross as well as net NPAs. The gross and net NPAs stood at 65,850

crores and 28,285 crores respectively.Public sector banks, which accounted for the

maximum share of NPAs, have shown an increase in the share of standard assets in total

advances, which rose to 86% in the year 2011-2012. the ratio of gross NPAs to gross

advances declined to 14%, net NPAs to net advances also showed a decline to 7.4%.The

number of banks having net NPAs between 10% - 20% in the year 2011-12 is 5%. The

sector wise analysis of NPAs of public sector banks showed that the share of NPAs of

priority sector increased to 44.5% in the year 2011. However, contrary to this

phenomenon the share of NPAs in respect to HDFC BANK declined to 4.71% and the

share of NPAs of non-priority sector to 58.5% in the same period which may be

attributed to faulty lending policies adopted by the bank.

Gross NPA/ Gross Advance2008 2009 2010 2011

Public sector bank

12.37 11.09 9.36 7.79

Private sector 8.37 9.64 8.07 5.84Foreign bank 6.84 5.38 5.25 4.62

CHAPTER – V

IMPACT OF NPA’s

IMPACT OF NPAs IN HDFC BANK:

This chapter focuses on examining the impact of

NPAs in HDFC BANK. As the NPA from year to year keep on increasing, It

is a difficult task for the banks, especially public sector banks to tackle the

high level of NPAs.

But over the years the position of net NPAs of HDFC

BANK has improved as can be seen from the sharp decline of 7.08% to

2.37% to 1.28% in 2012. This is due to time bound implementation of

prudential accounting norms and liberal infusion of capital by the

government to meet the capital adequacy requirements besides strenuous

recovery efforts by banks. If other netting items like recoveries and pending

adjustments, interest charged to the borrower accounts but not taken to

income accounts etc., for which data are not available, are taken in to

account of the net NPA position, perhaps may further come down below to

1.5% mark.

RECOVERY OF NON-PERFORMING ASSETS:

The second phase of reforms lays thrust on

improvement in the organizational efficiency of banks. The most crucial

factor being the improvement of profitability of banks in the reduction of

NPAs. This issue is closely connected with the overall stability of the

financial system and needs to be recognized as such for undertaking multi

pronged efforts. Apart from internal facts such preponderance of certain

traditional industries in the credit portfolio of certain banks, majority of

which are suffering from serious inherent operational problems, natural

calamities, policy and technological changes which increase the incidence of

sickness, labour problems and non-availability of the raw materials and other

such factors which are not with in the control of banks.

While banks cannot be blamed for advances becoming non-

performing due to external factors, there is an urgent need that the banks

address the problems arising out of internal factors and this may call for

organizations restructuring of banks, a change in the approach of banks

towards legal action which is generally the last step and not the first step, no

sooner the account becomes bad and a clear thrust on improving the skill of

officials for proper assessment of credit proposal, risk factor and repayment

possibilities.

The following are the figures of gross and net NPAs of HDFC BANK

from the period 2010-2012.

GROSS AND NET NPAs OF HDFC BANK PERIOD (2009-2012)

End-

March

Gross

NPAs

% To

Gross

advances

% To

total

assets

Net

NPAs

% To net

advances

%To total

assets

2010 1,841.50 13.65 4.15 2,125 7.08 3.33

2011 1,418.46 8.66 3.02 450.33 2.37 3.10

2012 1,284.27 5.80 1.22 508.44 1.28 3.00

Drastic measures should be taken for reducing the mounting level of

NPAs in terms of both ‘gross’ and ‘net’. Though there are problems in

effecting recoveries and write off and in compromise settlements for making

recovery process more smooth and less time consuming and also create other

alternative channels/agencies for recovery of debt/reduction of NPAs.

Government and other authorities should devise policies having a bearing on

the industrial sector, agriculture and trade with a long term perspective to

avoid sickness in the industry and adverse impact on borrowers because of

sudden shift in the policy.

Arresting of non-performing assets is fast turning out to be a myth.

Despite an aggressive recovery drive, the HDFC BANK has failed to arrest

the growth in NPAs. As shown in the table the gross and net NPAs went on

increasing, but most of the banks have been able to pave the growth of NPAs

because of the expansion in their asset portfolio.

The fresh accretion of NPAs during the financial year 2011-12 has

outpaced recovery of bad loans. This has come to light for the first time,

following the RBI’s directive to disclose the movement of NPAs.

EFFECTIVENESS OF LEGAL RECOVERY MEASURES IN

BANKS:

In 31st march 2011 it was noticed that as many as 14,36,739 suit file

cases were pending for an amount of Rs. 21,824.92 crs. This procedure for

recovery of bad debts due to public sector banks has resulted in blocking of

a significant portion of their funds in un productive assets, the value of hich

deteriorates with the passage of time.

The multiple litigation opportunities available to the borrowers for

delaying the verdicts/enforcement, courts being burdened, as they are, with

heavy work load, coupled with the tardy decision making process in the

banks, rendered legal process less useful. The recovery made though the

legal measures/courts process indicated above is self-revealing. Statements

collected from public sector banks visited during the study regarding the

recovery process, revealed that significant portion of the suits were pending

for more than a decade. In some cases there were legal cases which were

pending for 15 to 20 years, but no progress were made in the suit.

It was observed during the perusal of filed cases in public sector banks

that it took many years, in many cases more than a decade, for the courts to

settle the cases even after passing of the orders/decree, due to the multiple

litigation opportunities, eg., referring to appellate courts, higher courts, full

benches etc, long time is taken for the settlement of the cases. Difficulties

are also faced and delay is occurring in the execution of decree.

A part from the suit filing and legal measures the govt. and RBI has

suggested other vehicles to address the problem of NPAs recovery.

Among these are –

i. Debt recovery tribunalsii. Debt settlement tribunalsiii. BIFR/SICAiv. Lok adalatsv. Asset Reconstruction companyvi. Revenue recovery actvii. Settlement advisory committeeviii. One time settlement schemeix. And other means for the recovery of NPAs in HDFC BANK.

But at the end, data suggests that the working of all these ‘other vehicles’

had fallen short of the expectations by not creating a fast track system for

recovery of bank dues.

In a bid to speed up recovery efforts of the banks, debt recovery tribunals

(DRT) were set up in 1993 by an act of parliament. This was welcomed by

both banks and borrowers alike. Finally, it was hoped there would be a non-

confrontationist middle path where both banks and borrowers could meet.

Seven years on both sides agree that a lot still needs to be done to make the

DRTs an effective recovery tool for the Indian banking sector.

At the end of June 2012, out of the total numbers of 11,700 cases filed and

transferred to debt recovery tribunal (DRT) involving Rs. 8,866.67 crs. Only

1045 cases have been decided and meager amount of Rs. 178.08 crs was

recovered.

WORKING GROUP:

Taking a serious note of this situation, the central board of RBI in

2012 reviewed the effectiveness of DRTs. RBI therefore decided to set up a

working group under the chairman ship of N.V. Deshpande, former legal

advisor to RBI, comprising officials from the govt. banking divisions, some

bankers and RBI officials to look into the various issues and to suggest

measures for their effective functioning.

The terms of reference of the working group were mainly –

1 To look into various issues and problems confronting the functions of

DRTs and to suggest measures to make them more effective.

2 The group was also to examine the existing statutory provisions and

suggest necessary amendments to the 1993 act with a view to

improving the efficiency of the legal machinery.

By august 2012 the working group submitted its final suggestions –

1 First it was noticed that once an application had been made to DRT,

the branch managers and staff of the banks did not take any interest in

the proceedings

2 In many cases, bank officials themselves were unaware of even the

execution of loan documents and names of the borrowers.

3 The working group suggested that the banks and FIs should impress

upon their officers and staff to take a keen interest in the proceeding.

4 The group also said that the recovery officers should be given

assistance of agencies like police and professional debt recovery

agencies and the act be amended to provide licensing and regulating

professional recovery agencies.

5 One of the most important recommendations was that not only should

there be a tribunal in every state, there should be more than one DRT

in the same state if the workload of the tribunals so justified. The

presiding officers of DRTs should not have more than 30 cases on the

board on any given data and there should not be more than 800 cases

pending before it at any given point of time.

The center on march 9th ,2000 introduced the recovery of debts due

to banks (amendment ) bill 2000. the aim was to correct the legal

anomalies pointed out by the supreme court such as the stipulation that

tribunals would continue to function not with standing court stay or

transfer of petitions. The amendments, first brought into force through

the ordinance from 17th January,2000 addresses many of the other

lacunae. It empowers DRTs to attaché the property of the borrower on

filing of the applications to that effect.

CHAPTER – VI

MANAGEMENT OF NPA’s

MANAGEMENT OF NON PEFROMING ASSETS:

The new concepts of income recognition, asset classification

and provisioning have been introduced in phases with effect from 1992-93.

The impact of implementation of these prudential guidelines on the

commercial banks has been so strong that out of 20 nationalized banks, one

had to be merged and out of the remaining 19 banks excepting 6, all others

were in red, showing net losses aggregating to a staggering level of 3573.13

crores. In march 1993 and still a higher level of Rs.4705.01 crores in march

1994. Further, due to staggering net loss revealed by the Indian bank, the

aggregate net loss of the 19 nationalized banks even in march 1996 was rs.

1153.96 crores. However the aggregate net profit of 19 nationalized banks,

as on 31st march 1997 was Rs.1445.48 crores.

This drastic change of profitability scenario of banks in India since

2010-05 was mainly due to recognition of income based on record of

recovery rather than on accrual basis, due to implementation of new

prudential norms.

The message is now very loud and clear. If a bank wants to survive

and grow, it has no option but to actually recover the interest and principal in

accordance with the terms of sanction. If it fails to recover, the bank branch

can not recognize the interest debited to the account as income. In case

income is not received as per prudential norms, the loan will become a NPA

with all its necessary consequences.

The NPA effects adversely the health of the bank in several ways as follows:

I.Potential interests income is derecognized since it can not be booked

as income, profit of the bank depletes.

II. Depending up on the categorization of NPA, that

is sub-standard, doubtful (D1,D2,D3) or loss assets bank will have to

make provision against such loan ranging from 10% to 50% or even

100% in case of some of assets. Banks profitability is thus doubly

hurt. First income accruing on NPA is not recognized and secondly

bank has to make provision for it.

III. In case bank fails to upgrade the NPAs into the

performing assets, it may be forced to incur legal expenses by going

to court or recovery tribunals.

IV. As a consequence profit and profitability of the

bank is depleted and it may face problem in maintaining the required

capital adequacy norm of 8% or more.

V. Inadequate capital adequacy may downgrade

banks rating and effect its growth and survival.

Management of NPAs would have the following objectives: -

1. Improving the quality of NPAs to the performing status so that

income of such assets could be recognized.

2. Upgrading the status of the asset so as to reduce the provisioning

requirement.

3. Cleansing the balance sheet of bank of loss assets and also of

unsecured portion of doubtuful assets, ultimately leading to

improvement in the capital adequacy ratio of the bank.

The above objectives can be achieved by adopting the following

strategies as a measure of reduction in the level out standing Non performing

assets(NPAs).

Various steps for reducing NPAs

1 Studying the problem of NPAs – branch wise, amount wise and age

wise.

2 Preparation of a loan recovery policy and strategies for reducing

NPAs.

3 Creation of special recovery calls at head/regional level

4 Identifying critical branches for recovery

5 Fixing targets of recovery and draw the time bound action program

6 Selecting proper techniques for solving the problem of each NPA

7 Monitoring implementation of the time bound action plan

8 Taking corrective steps when ever found necessary while monitoring

the action plan make changes in the original plan if necessary.

STRATEGIES FOR MANAGING NPAs:

1 Very careful selection of new borrowers based on their credit

worthiness and risk analysis. Similarly, for high credit rated existing

borrowers, need based credit requirement should be promptly met.

2 Post-sanction follow-up must be done meticulously at all levels, ie.,

branches, regional offices, zonal offices and head offices. All

prescribed operational information system such as annual

reviews/renewal, quarterly information system. Quarterly review

sheets, monthly stock statements, etc., must be received and

meaningfully analyzed and required follow-up action taken on time.

3 All big borrower accounts (Rs.50 lakhs and above) falling in the

category of “standard assets” must be reviewed on quarterly basis and

prompt action taken if any adverse feature is noted, with a view to

ensure that they do not slip back to a lower category i.e., sub standard.

4 Those borrower accounts which are at the lower-end of the list of

“standard assets” deserve special attention and the moment they show

any sign of weakness to “slip-back”, immediate pro-active steps, for

lower end of list of sub-standard assets should be taken to prevent this

happening.

ACTION POINTS IN REGARD TO EXISTING NPA

ACCOUNTS:

Main action points in regard to existing NPAs may be summed up as under:

I. The borrowal accounts lying at the top-end of the list of “sub standard

assets” are likely to be NPA of less than 1-year i.e., they must have

slipped back to this category only recently. All-out efforts should be

made to upgrade these accounts and make them performing (standard

assets) by recovering the derecognized interest of all four quarters of

last year and at least three quarters of the current year or taking other

relevant measures which are necessary to make their performing assets.

II. Top priority should be given to upgrade progressively the quality of

all NPAs to next higher category of better-quality loan assets e.g., D3

may progressively upgraded to D2 and D1 then to “sub-standard” and

ultimately to “standard” category over a period through persuasion,

nursing and rehabilitation based on major contribution from the

promoters. [Here D1 –upto 1year, D2 – 1year to 3 years, D3 –more than

3 years].

I. All the securities charged to the bank should be “re-valued” on realistic

basis through approved values and provisions should be made strictly on

this basis.

II. In case upgradation on NPA appears difficult and value of security is

adequate to cover bank’s loan and charge on the same is validly created in

bank’s favor, serious efforts at senior level should be made through a “high

power” compromise committee to enter into one-time settlement with the

party in a manner that results into maximum recovery and lease write-off in

conformity with the available security level as far as possible. This may

involve some sacrifice in the form of “write-off” on the part of bank also.

I. In case where steps (ii) and(iv) do not succeed, bank has no option

but to resort to legal action within the limitations period either by going

to debt recovery tribunals (or) judicial courts. In case of agricultural and

other smaller loans banks may file recovery certificates under state acts

or approach lok adalats, if necessary for amicable settlement.

I. Tackling NPA, is a massive and intricate job, where involvement of

concerned staff at all relevant levels is a must and should be done by

forming “compromise committees” at regional, zonal and head office

levels. This is also in terms of RBI guidelines.

I. Specialized recovery branches should be set up at selected centers,

keeping in view concentration of banks NPAs and presence of DRT in

that area for expeditious recovery of bank dues.

I.Top priority should be accorded for effective follow-up of pending

suits of execution of the decrees.

II. Zones should be asked to submit a ‘monthly progress report’ in

a prescribed format in regard to NPA account.

III. All the BIFR cases under rehabilitation program or under

banks own nursing program should be closely monitored so as to

ensure that the rehabilitation is on right course.

STRATEGY FLOW CHART

STRATEGY - I STRATEGY – II

Careful selection of Selection of top end of sub-

standard

New borrowers assets< 1year & take efforts to

↓ recover interest.

Post sanction follow up ↓

↓ Classification of assets in to:

Classification of assets and D1 up to 1 year

Quarterly review D2 1 year to 3 years

↓ D3 > 3 years

Proactive steps for lower level ↓

Of sub-standard assets Revalue of collateral securities for

such advances and make provisions

↓

Value of securities is adequate to given loan

↓

If difficult One Time Settlement

↓

Form compromise committees

↓

Special recovery branches follow up

↓

Submission of monthly progress report

↓

Close monitoring of BIFR cases

PREVENTING OCCURANCE OF NEW NPAs:

Managers of rural and semi-urban branches generally sanction these

loans. In the changed context of new prudential norms and emphasis on

quality lending and profitability, managers should make it amply clear to

quality lending and profitability, managers should make it amply clear to

potential borrowers that banks resources are scarce and these are meant to

finance viable ventures so that these are repaid on time and relent to other

needy borrowers for improving the economic lot of maximum number of

households.

Hence, selection of right borrowers, viable economic activity,

adequate finance, and timely disbursement, correct endues of funds and

timely recovery of loans is absolutely necessary preconditions for preventing

or minimizing the incidence of new NPAs. Besides functioning as bankers,

they have to work as a friend, philosopher and guide of borrowers, develop

mutual trust so as to maximize recovery in case of new loans.

ACTION PLAN IN REGARD TO EXISTING NPAs:

These are as follows:

1 Frequent recovery camps should be organized on periodicities

synchronizing with harvesting seasons in case of agricultural loans

and at monthly/bimonthly intervals in other cases, so as to recover

the bank dues from the sale proceeds on due dates.

2 Cash recovery of some minimum installments (25%) of smaller

loans has now become a pre-condition for lodging claims with the DI

and CGC. Hence, branches must build genuine pressure on

borrowers to repay the installments whenever due, without

exception. For this purpose even clerical and subordinate staff

member may also be involved for effecting recovery through

personnel contacts. To motivate the staff; managers may issue

appreciation letters to good performers.

3 Disposal of recovery certificates (RCs) cases, whenever pending in

large numbers should be taken up suitably by the regional/zonal

managers with the district magistrate, who is laso chairman of the

district consultative committee (DCC).

4 Suitable colored printed post card in local languages may be

supplied for issuing notices of recovery camps and such camps may

be attended by regional managers or other senior officers of the

regional office.

5 Bank may also try recovery peons (in bank uniforms) who may visit

borrowers before 9 am or after 5pm for meeting the borrowers for

recovery of bank dues.

6 “No default certificate” or “Best borrower certificate” should be

given to such borrowers in a borrowers meeting specially organized

for the purpose, in the presence of gram pradhan. This is likely to

encourage others to repay bank dues in time and create healthy

recovery climate in the area.

7 Where recovery is not forthcoming despite due efforts, compromise

proposals should be mobilized by concerned region committee and

sent to zonal officer for necessary action.

8 Head office and zonal offices should also take advantage of lok

adalats. Where available, for striking instant compromise judgements

in the presence of both parties. But ,this will require necessary home

work by the zonal heads in advance so that large number of cases are

mobilized and concurrence taken from competent authority, before

attending the pre-determined dates of lok adalats.

9 In all those cases where recovery chances are bleak and there is

neither any operation in the account nor any recovery has been

effected during the last 2-3 years, but the cases are eligible for

lodgment in terms of latest D1 and CGC guidelines, branches should

be advised to prepare all such cases correctly and send to nodal

center of the bank for prompt lodgement of claims with D1 and

CGC, Mumbai. Subsequently, there should be close effective follow-

up by the bank with DI and CGC, Mumbai for prompt settlement.

10 After settlement of those cases, the eligible portion can be written-

off by the competent authority as per banks rule so as to reduce the

amount of “loss assets” from the books of the bank.

11 In cases where adequate security is available, activity is continuing,

but the repayment is not coming, but bank may opt for legal action,

after giving due notice to borrowers.

12 There should be close follow-up with banks lawyers having large

number of un disposed cases and their selection or future assignment

of cases to them should be based on merit and performances.

One of the main reasons of low profitability of HDFC BANK is the

incidence of very high non-performing assets. But the level of NPA varies

significantly among different banks. (Range being as wide as 4% in case of

best bank to more than 40% in case of worst bank).

Significantly, variation in the relative sizes of NPA is not related to the

size of the bank in terms of business or branch network. Variation exist

between banks of comparable size, whether small or large, suggesting that

organizational culture and quality of management have played a crucial role

in determining the quality of loan assets or banks over all performance.

Thus, there is need to improve the quality of leadership and

management at various levels in the mean time, improvement in recovery

performance must be accorded top priority in banks corporate plans. The

maintenance of recovery discipline requires that books vigorously pursue

recovery even for advances that have been provisioned against.

“ Loan is not a charity and it has to be repaid on the due date come

what may.” Should be the slogan of a good banker.

FLOW CHART FOR ACTION PLAN

Frequent recovery camps should be organized at monthly/bimonthly

intervals

↓

Cash recovery of some minimum installments

↓

Disposal of recovery certificates should be taken up

↓

Issuing notices of recovery camps

↓

Recovery peons may visit borrowers

↓

Default certificate/ best borrower certificate should be given

↓

Compromise proposals should be mobilized

↓

Head office and zonal office take advantage of lok adalats

↓

Lodgment of claims with DT and CGC

↓

After settlement reduce the amount of loss assets from bank books

↓

Opt for legal action

↓

Close follow up with banks lawyers having large number of un disposed

cases

COMMITTEES AND RECOMMENDATIONS

I. NARASIMHAM COMMITTEE REPORT [I/II].

The government of India has appointed a high level committee under the

chairmanship of Mr. M. Narasimham, the former chairman of SBI, to

examin all aspects relating to the structure, organization, functions and

procedures of the Indian financial system. The committee was appointed on

August 14, 1991 which submitted its report on 30th November 1991.

Major recommendations of the committee relating to NPAs :

1. SLR to be reduced from 38.5% to 25% over next five years and

CRR to be brought down to 3%.

2. Directed credit-loans to priority sector, different interest

schemes, IRDP, IREP etc. should be phased out the committee

was of the view that easy availability of credit was more

important than subsidized credit to the rural poor.

3. Not more than 10% of the aggregate bank credit should be

earmarked for the redefined priority sector.

4. Capital adequacy requirement (CAR) should take into account

market risks in addition to credit risk.

5. Minimum capital to risk assets ratio be increased from 8% to

10% by 2009 in a phased manner.

6. An asset be classified as doubtful if it is in the substandard

category for 18 months in the first instances and eventually for

12 months and loss if it has been identified but not written off.

These norms should be regarded as minimum and brought into

force in a phased manner.

7. For evaluating the quality of asset portfolio, advances covered

by government guarantees, which have turned sticky, be treated

as NPAs.

8. Asset reconstruction fund (ARF) should be constituted to take

over the NPAs of public sector banks at a discount.

9. For banks with a high NPA portfolio, two alternative

approaches could be adopted. One approach can be that all loan

assets in the doubtful and loss categories, should be identified

and their realizable value should be determined. These assets

could be transferred to asset Reconstruction Company which

would issue NPA swap bonds.

10.Introduction of general provision of 1% on standard assets in a

phased manner be considered by RBI.

11.An incentive to make specific provision, they may be made tax

deductible.

12.Adoption of income recognition of asset classification and

provisioning norms to be compulsory.

13.Special tribunals should be set up for speedy recovery of the

bank loan dues.

14.There should be an independent loan review mechanism

especially for large borrowal accounts and systems to identify

potential NPAs.

15.The minimum share of government holding/RBI holding in the

equity of nationalized banks should be brought down to 33%.

II. VERMA PANNEL REPORT The committee which was headed by Mr. M.S. Verma, Former

chairman of SBI, identified the specific ailments prevailing in the banking

sector and come out with a panacea prescription.

The following are the recommendations of Verma panel :

The panel identified 3 weak PSBs and recommended a conditional

bail out package of 5000crs., out of which 3000crs., will be used for the

recapitalization of weak banks.

The most significant suggestion, however is the formation of a private

sector asset management company presided over by some of the most

talented professionals of the business. It will do away with the bureaucratic

hurdles like delayed decision making in disposing off the assets grabbed by

asset reconstruction fund.

The report also said about setting up of financial reconstruction

authority of statutory status will mark the beginning of a serious effort to

bring back the banking sector into a healthy state.

RBI MEASURES TO CURB NPAs: In view of the time factor involved in recovering NPAs by legal

means, the RBI has come out with simplified non-discretionary guidelines

for compromise settlement of bad debts upto 5 crs for uniform

implementation by them.

NON – DISCRETIONARY AND NON – DISCRIMINATORY

NORMS: The guidelines issued by RBI covers all outstanding, doubtful and loss

assets of Rs.5 crores or less as on March 31st , 1997 and which had turned

into doubtful or loss assets subsequently also would be covered, according to

a statement issued by the IBA. The RBI said these guidelines, which would

be operative up to 31st March, 2008, would cover NPAs relating to all

sectors including small sector. Cases pending in courts/debt recovery

tribunals/BIFR are covered under the guidelines subject to the consent

decree being obtained, the apex bank averred and added cases of willful

default or malfeasance would not be covered. The amount of settlement

arrived at should preferably be paid in one lump sum. If not, at least 25%

down payment and balance in settlements with in a period of one year

together with interest at the existing PLR from the date of settlement upto

the date of final payment.

RBI EASES NORMS ON NPA FOR HDFC BANK: “ONE

TIME SETTLEMENT”:

To achieve maximum realization of public sector banks the RBI

simplified the guidelines for the recovery of NPAs.

The revised guidelines will cover NPAs relating to all sectors

including the small sector, but will not cover cases of willful default, fraud

and malfeasance. The banks should give notice to the defaulting borrowers

to avail of the opportunity for “one-time settlement” of outstanding dues.

Under the new guidelines, the minimum amount that should be

recovered under compromise settlement of NPAs classified as doubtful (or)

loss, which would be 100% of the outstanding balance in the account. This

would be as on the date of transfer to the protested bills account or the

amount outstanding as on the date on which the account was categorized as

doubtful NPAs whichever happened earlier.

The guidelines have been circulated to all public sector banks. The

RBI move comes in the wake of complaints by such banks that the

guidelines are inflexible of retarded the progress in the recovery of NPAs.

CHAPTER – VII

FINDINGS AND OBSERVATIONS

FINDINGS AND OBSERVATIONS:1. The % of NPAs of private sector banks is less as compared to the

public sector banks like HDFC BANK.

2. The % of net NPAs to net advances of HDFC BANK is less than the

% of gross NPAs to total advances (More provisioning).

3. “Gross” &”Net” terms exist only in India.

4. HDFC BANK NPAs are increasing when compared to that of other

nationalized banks.

5. Net NPAs of HDFC BANK are likely to reduce over next 3 years than

the Gross NPAs.

6. Overall NPAs in HDFC BANK as a % of advances are in decreasing

trend, though the NPAs in the absolute terms are increasing.

7. Due to compulsory lending to the priority sector, NPAs are more in

HDFC BANK.

8. The recovery of non performing assets is slow due to the sluggish

legal system prevailing in India.

9. Recognition of an account becoming an NPA is not done in time.

10.No proper credit appraisal.

11.Due to high level of NPAs in HDFC BANK, operationg profits kept

on decreasing.

12.Due to high provisioning, the ROA in HDFC BANK was in negative

terms.

13.Even after providing Re-Capitalization facility by the government to

the weak banks, not much change has been observed in the

performance of the banks.

CHAPTER – VIII

SUGESSTIONS

AND RECOMENDATIONS

SUGGESTIONS AND RECOMMENDATIONS :

Tackling the high level NPAs is certainly a major concern for the

Indian banking industry. Raising level of NPAs is becoming a concern

for the banks.

The report on NPAs in HDFC BANK conveys its concern about

management of NPAs in the Indian banking system.

The suggestion and recommendations are listed below :

1. HDFC BANK must employ/adopt scientific approach for appraisal

before the loan is distributed and monitor it closely in real time.

2. It must provide need based micro-credit for needy entrepreneur with

good proposals and implement a system for selecting a good

borrower.

3. It must build a credit information bureau to restrict the errant

borrower, from switching banks.

4. Banks should always follow basic lending norms and take quick credit

decisions.

5. It must break up recovery to branch level network.

6. It must set up separate NPA cell at each branch level.

7. Take every NPA case as a separate issue and analyse the need for

future findings from an economic point.

8. Opt for out of court settlements.

9. Remove the ‘Gross’ and ‘Net’ terms while distinguishing the NPAs.

10.Government should set up asset reconstruction company as proposed

by the Narasimham committee, to take over the bad loans of

commercial banks and salvage what they can.

11.Banks should develop advanced skills in risk management and

evaluation of various credit risks.

12.The regulatory authority should strengthen the debt recovery tribunal

by appointing more judge and adequate number of recovery officers to

dispose off the case.

13.Periodically a list of defaulters may be published to enable the banks

to take necessary action against the defaulters.

14.Amend the relevant laws like CPC, Limitations act, Stamp act,

Evidence act etc, to ensure that the bank default cases are dealt with

an altogether different basis with limited number of adjournments.

15.RBI could lower the bank’s exposure to individual borrowers, to bring

economic prosperity equally around the country.

16.The government should see to that the strong bank should not be

merged with the weak bank, as it may effect the performance of the

strong bank.

17.The banks should cut down the operational expenses to bring bank the

back on the track of profitability. VRS is one such measure to reduce

the expenses.

18.Government should not provide any re-capitalization facility from

here after, as infusion of new capital may not restructure or lift the

banks performance; hence the weak banks should be closed down.

BIBILOGRAPHY

News papers

Bank magazines

Rewiew of literature

IIB magazines

Internet

Annual reports of HDFC BANK

INCLUDE TEXT BOOK NAME, AUTHOR, EDITION, AND PUBLISHER. INCLUDE MINIMUM 5 TEXT BOOKS AND 3 MAGZINES