npa's in sssfloan

7/27/2019 NPA's in SSSFLoan

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CHMM COLLEGE FOR ADVANCED STUDIES

KERALA UNIVERSITY

NPAS IN EDUCATION LOAN

Internship Report submitted to SBI in completion of the requirement of Summer Internship at

State Bank of India

NAME OF THE STUDENT: MUHAMMED ASHIK.M

PROJECT MENTOR :BRANCH MANAGER OF SBI ATTINGAL: MR.AJAY

MAY 28 2013 TO AUGUST 13 2013


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CERTIFI CATE BY PROJECT MENTOR AT THE BANK

I have read the project/survey/study report submitted by MUHAMMED ASHIK.M and hereby

certify that the student has successfully completed the project, in line with the objectives set for

the same.

(Signature of the Mentor)


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Subject: Evaluation Form

Name of the student : MUHAMMED ASHIK.M

Batch : 2013-14

Period of internship (DD/MM/YYYY): From May 28 2013 to August 13 2013

No. of hours worked every day : 2

Details of the Project Mentor :

Name : MR.AJAY

Designation : Branch manager of SBI ATTINGAL

Contact details: Mob : 9447541000

Email id : [email protected]


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Students Evaluation:

Sr. No. Attributes Marks Awarded Maximum Marks

1. Initiative 10

2. Reliability 5

3. Ability to work in a team 5

4. Confidence 5

5. Punctuality and regularity 5

6. Ability to understand new processes 10

7. Analytical thinking & problem

solving

10

Total 50


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Project/Survey/Study Evaluation:

Sr. No. Attributes Marks Awarded Maximum Marks

1. Initiative 10

2. Reliability 5

3. Ability to work in a team 5

4. Confidence 5

5. Punctuality and regularity 5

6. Ability to understand new processes 10

7. Analytical thinking & problem

solving

10

Total 50

Special Mention if any:

Signature of the Project Mentor Seal of State Bank of India


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Acknowledgement

I have taken efforts in this project. However, it would not have been possible without the kind

support and help of many individuals and organizations. I would like to extend my sincere thanks

to all of them.

I am highly indebted to SBI Branch Manager of ATTINGAL MR AJAY for her guidance and

constant supervision as well as for providing necessary information regarding the project & also

for their support in completing the project.

I would like to express my gratitude towards my parents & members of State bank of India for

their kind co-operation and encouragement which help me in completion of this project.

I would like to express my special gratitude and thanks to industry persons for giving me such

attention and time.

My thanks and appreciations also go to my colleague in developing the project and people who

have willingly helped me out with their abilities


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ABSTRACT

The Education sector is in the concurrent list in India such that both the Centre and the State

Governments have the responsibility to make budgetary allocations for its growth.

Primary and Secondary education in India receive comparatively better allocation than the

higher education. With the advent of the Educational Loan Scheme of the Public Sector Banks inIndia in 2001, there has been a fillip in the enrollment in higher education institutions.

The educational loans(EL) paved theway for pursuing professional and job oriented courses

offered at the self financing colleges and Universities to deservingstudents.

An empirical study of 600 borrowers in the State of Kerala in India reveals that thelions share

of the Non PerformingAssets(NPA) are traceable to the borrowers belonging to the General

Nursing and Midwifery(GNM) and B.Tech Engineering courses.


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KeyTable of contents

1. INTRODUCTION:

Brief Profile Of Student

Brief Profile Of Project Mentor

Brief Profile Of Organization

Nature Of Project

Brief Objectives/Responsibilities Assigned By Project Mentor

2. FRAMEWORK OF STUDY

oTheoretical Framework

o Scope Of The Study:-

o Objectives Of The Study:-

o Data Analysis:-

o Limitations Of The Study:-

3. METHODOLOGY AND ANALYSIS

o Methodology

o Statement of Problem

o Limitations of the study

o Suggestiono Conclusion

BIBLIOGRAPHY

QUESTIONNAIRE


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Introduction

Brief profile of student

Name : Anzar.A.S

Age : 20

Sex : M

Address : Maruthimoottil veedu Palavacode,Kizhakkanela (p.o.) Paripally

Phone no. : 9746008196

Qualification : BCOM 5TH

SEM


Brief profile of project mentor

Name of mentor : MR.GOORE

Designation : Branch Manager of Varkala SBI

Phone No. : 9447506655



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Brief profile of organization

The State Bank of India or SBI is a major state owned bank which was established back in 1806.

While it has a large presence in India , it also has 82 foreign offices in 32 countries around the

world.

It provides banking and financial services products and services to Indian individual customers,

NRI customers, agriculture and SME businesses as well as corporations.

It services it customers through its large network across India including SBI's 21,000 ATMs,

10,000 SBI bank branches and 5,100 associate bank branches. They also engaged electronic self

service channels such as Internet banking and mobile banking.

SBI offers a wide range of savings and deposit account products to assist their customers to save

including term deposit accounts (also called a fixed deposit account), a recurring deposit

accounts or a savings bank accounts.

HI STORY OF STATE BANK OF INDIA

The roots of the State Bank of India rest in the first decade of 19th century, when the Bank ofCalcutta, later renamed theBank of Bengal, was established on 2 June 1806. The Bank of Bengal

and two other Presidency banks, namely, the Bank of Bombay(incorporated on 15 April 1840)

and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were

incorporated as joint stock companies, and were the result of the royal charters. These threebanks received the exclusive right to issue paper currency in 1861 with the Paper Currency Act,

a right they retained until the formation of the Reserve Bank of India. The Presidency banks

amalgamated on 27 January 1921, and the reorganized banking entity took as its name ImperialBank of India. The Imperial Bank of India continued to remain a joint stock company.Pursuant

to the provisions of the State Bank of India Act (1955), the Reserve Bank of India, which is

India's central bank, acquired a controlling interest in the Imperial Bank of India. On 30 April1955 the Imperial Bank of India became the State Bank of India. The Govt. of India recently

acquired the Reserve Bank of India's stake in SBI so as to remove any conflict of interest

because the RBI is the country's banking regulatory authority. In 1959 the Government passed

the State Bank of India (Subsidiary Banks) Act, enabling the State Bank of India to take overeight former State-associated banks as its subsidiaries. On Sept 13, 2008, State Bank of

Saurashtra, one of its Associate Banks, merged with State Bank of India.

SBI has acquired local banks in rescues. For instance, in 1985, it acquired Bank of Cochin in

Kerala, which had 120 branches. SBI was the acquirer as its affiliate,State Bank of Travancore,

already had an extensive network in Kerala.
http://en.wikipedia.org/wiki/Bank_of_Bengalhttp://en.wikipedia.org/wiki/Bank_of_Bengalhttp://en.wikipedia.org/wiki/Bank_of_Bengalhttp://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Joint_stock_companyhttp://en.wikipedia.org/wiki/Joint_stock_companyhttp://en.wikipedia.org/wiki/Royal_charterhttp://en.wikipedia.org/wiki/Royal_charterhttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Central_Bankhttp://en.wikipedia.org/wiki/Central_Bankhttp://en.wikipedia.org/wiki/Govt._of_Indiahttp://en.wikipedia.org/wiki/Govt._of_Indiahttp://en.wikipedia.org/wiki/Sept_13http://en.wikipedia.org/wiki/Sept_13http://en.wikipedia.org/wiki/State_Bank_of_Saurashtrahttp://en.wikipedia.org/wiki/State_Bank_of_Saurashtrahttp://en.wikipedia.org/wiki/State_Bank_of_Saurashtrahttp://en.wikipedia.org/wiki/Keralahttp://en.wikipedia.org/wiki/Keralahttp://en.wikipedia.org/wiki/State_Bank_of_Travancorehttp://en.wikipedia.org/wiki/State_Bank_of_Travancorehttp://en.wikipedia.org/wiki/State_Bank_of_Travancorehttp://en.wikipedia.org/wiki/State_Bank_of_Travancorehttp://en.wikipedia.org/wiki/Keralahttp://en.wikipedia.org/wiki/State_Bank_of_Saurashtrahttp://en.wikipedia.org/wiki/State_Bank_of_Saurashtrahttp://en.wikipedia.org/wiki/Sept_13http://en.wikipedia.org/wiki/Govt._of_Indiahttp://en.wikipedia.org/wiki/Central_Bankhttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Royal_charterhttp://en.wikipedia.org/wiki/Joint_stock_companyhttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Bank_of_Bengal


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INTRODUCTION

A strong banking sector is important for flourishing economy. One of the most importantand major roles played by banking sector is that of lending business. It is generally

encouraged because it has the effect of funds being transferred from the system to productive

purposes, which also results into economic growth. As there are pros and cons of everything,

the same is with lending business that carries credit risk, which arises from the failure of

borrower to fulfill its contractual obligations either during the course of a transaction or on a

future obligation. The failure of the banking sector may have an adverse impact on other

sectors.

Non- performing assets are one of the major concerns for banks in India. NPAs reflect the

performance of banks. A high level of NPAs suggests high probability of a large number ofcredit defaults that affect the profitability and net-worth of banks and also erodes the value

of the asset. The NPA growth involves the necessity of provisions, which reduces the over all

profits and shareholders value. The issue of Non Performing Assets has been discussed at

length for financial system all over the world. The problem of NPAs is not only affecting the

banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but

a reflection of the state of health of the industry and trade.This project deals with

understanding the concept of NPAs, its magnitude and major causes for an account becoming

non-performing, projection of NPAs over next years in banks and concluding remarks.

The magnitude of NPAs have a direct impact on Banks profitability legally they are not allowed

to book income on such accounts and at the same time banks are forced to make provisions on

such assets as per RBI guidelines The RBI has advised all State Co-operative Banks as well as

the Central Co-operative Banks in the country to adopt prudential norms from the year ending

31-03-1997. These have been amended a number of times since 1997. As per their guidelines

the meaning of NPAs, the norms regarding assets classification and provisioningIts now very

known that the banks and financial institutions in India face the problem of amplification of non-

performing assets (NPAs) and the issue is becoming more and more unmanageable. In order tobring the situation under control, various steps have been taken. Among all other steps most

important one was the introduction of Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002 by Parliament, which was an important step towards

elimination or reduction of NPAs.


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An asset is classified as non-performing asset (NPAs) if dues in the form of

principal and interest are not paid by the borrower for a period of 180 days, However with effect

from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If

any advance or credit facility granted by bank to a borrower becomes non-performing, then the

bank will have to treat all the advances/credit facilities granted to that borrower as non-

performing without having any regard to the fact that there may still exist certain advances /

credit facilities having performing status.

The NPA level of our banks is way high than international standards.

One cannot ignore the fact that a part of the reduction in NPAs is due to the writing off bad

loans by banks. Indian banks should take care to ensure that they give loans to credit worthy

customers. In this context the dictum prevention is always better than cure acts as the goldenrule to reduce NPAs.

Objectives of the study

(i) To make an empirical study regarding the profile of the defaulters of educational loans in the

state of Kerala, who have availed loans for their higher studies in various professional streams;

(ii) To analyse the courses pursued by the borrowers and their employment status;

(iii) To analyse the Non Performing Assets and repayment status and

(iv) To make suggestions on the basis of the findings of the study.


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SCOPE OF THE STUDY

Thefollowing are the main scope of the study:

Scope of this study is limited to the organization selected ie. state bank of India.

Present a picture of the movement of NPA in Education loan SBI is Limited.

This study will help to know the drawbacks of the present recovery strategies.

This study will help them to think about new innovative recovery strategy.

For this purpose I have covered officials of the bank from various department.

1. .


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EDUCATION LOAN IN SBI

A term loan granted to Indian Nationals for pursuing higher education in India or abroad where

admission has been secured.

Eligible Courses

a. Studies in India:

Graduation, Post-graduation including regular technical and professional

Degree/Diploma courses conducted by colleges/universities approved by UGC/

AICTE/IMC/Govt. etc

Regular Degree/ Diploma Courses conducted by autonomous institutions like IIT, IIM

etc

Teacher training/ Nursing courses approved by Central government or the State

Government

Regular Degree/Diploma Courses like Aeronautical, pilot training, shipping etc.

approved by Director General of Civil Aviation/Shipping

Vocational Training and Skill Development Study Courses will not be covered under

the regular Education Loan Schemes. A separate scheme for Loans for Vocational

Education and Training has been launched which covers financing for such Vocational

courses

b. Studies abroad:

Job oriented professional/ technical Graduation Degree courses/ Post Graduation Degree

and Diploma courses like MCA, MBA, MS, etc offered by reputed universities


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Expenses considered for loan

Fees payable to college/school/hostel

Examination/Library/Laboratory fees

Purchase of Books/Equipment/Instruments/Uniforms, Purchase of computers- essential

for completion of the course (maximum 20% of the total tuition fees payable for

completion of the course)

Caution Deposit/Building Fund/Refundable Deposit (maximum 10% tuition fees for the

entire course)

Travel Expenses/Passage money for studies abroad

Cost of a Two-wheeler upto Rs. 50,000/-

Any other expenses required to complete the course like study tours, project work etc.

Amount of Loan

For studies in India, maximum Rs. 10 lacs

Studies abroad, maximum Rs. 30 lacs

Processing Fees

No processing fee/ upfront charges

Deposit of Rs. 5000/- for education loan for studies abroad which will be adjusted in the

margin money

Repayment Tenure

Repayment will commence one year after completion of course or 6 months after securing a job,

whichever is earlier.


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Maximum Loan Limit Repayment Period

Upto Rs. 4 Lacs 5-7 years

Above Rs. 4 Lacs and

upto Rs. 7.5 Lacs

5-7 years

Above Rs. 7.5 Lacs Upto 12 years

Security

Particular Security

Upto Rs. 4 lacs loan

amount

Only Parent/ Guardian as co-

borrower

Above Rs. 4 lacs to

Rs. 7.50 lacs loan

amount

Parent/ Guardian as co-borrower

and Collateral security in the

form of suitable third party

guarantee*.

*Third Party Guarantee can be

replaced with Parent/Guardian as

co-borrower provided the Gross

Annual Income o

Parent/Guardian (co-borrower)

as given in latest Income Tax

Return is 3 times of the loan

amount.

Above Rs. 7.50 lacs

loan amount

Parent/ Guardian as co-borrower

and tangible collateral security


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In case of married person, co-obligator can be either spouse or the parent(s)/ parents-in-

law

Margin

For loans up to Rs.4.0 lacs : No Margin

For loans above Rs.4.0 lacs:

o Studies in India: 5%

o Studies Abroad: 15%

Documentation Required

Completed Education Loan Application Form.

Mark sheets of last qualifying examination

Proof of admission scholarship, studentship etc

Schedule of expenses for the specified course

2 passport size photographs

PAN Card of the student and the Parent/ Guardian

Borrower's Bank account statement for the last six months

Income tax Returns/ IT assessment order, of last 2 yrs (If IT Payee)

Brief statement of assets and liabilities, of the Co-borrower

Proof of Income (i.e. Salary slips/ Form 16 etc. if applicable)


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The genesis (origin) of an NPA

There are many reasons as to why a loan goes bad. For a business, it could be because it fails to

take off.

Such a situation may arise because of sudden health expenditure or job loss or death. Often, as in

the US today, it can be because of over-leveraging, when consumers borrow against most of their

assets and, maybe, have unsecured loans too.

In such a case, any hit on income can jeopardize all repayments. They, however, can file for

bankruptcy under Chapters 7, 11 and 13 of the United States Bankruptcy Code. Indians dont

have such an option.

In India, the situation has worsened due to banks aggressively pushing loans, even unsecured

ones, to individuals to prevent idle assets on their books. President and founder of International

Consumer Rights Protection Council, an NGO, says most customers in India are not financially

educated and banks are luring them to take more and more loans, often without checking their

financial position

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

generate income for the bank.

A 'non-performing asset' (NPA) was defined as a credit facility in respect of which the interest

and/ or installment of principal has remained 'past due' for a specified period of time.

With a view to moving towards international best practices and to ensure greater transparency, it

has been decided to adopt the ' 90 days' overdue'norm for identification of NPAs, from the year

ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset

(NPA) shall be a loan or an advance where;

> Interest and/ or installment of principal remain overdue for a period of more than 90

days in respect of a term loan,


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> The account remains 'out of order' for a period of more than 90 days, in respect of

an Overdraft/Cash Credit (OD/CC),

> The bill remains overdue for a period of more than 90 days in the case of bills

purchased and discounted,

> Interest and/or installment of principal remains overdue for two harvest seasons but

for a period not exceeding two half years in the case of an advance granted for

agricultural purposes, and

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

respect of other accounts.

Basis of non-performing assets

The basis of treating a credit facility as N.P.As is as detailed below: ASSET-In respect of which

interest has remained past due for six months.

1. TERM LOAN

Inclusive of unpaid interest, when the installments is overdue for more than six months/on

which interest amount remained past due for six months.

2. Bills: -Which remains overdue for six months

3. OTHER CURRENT ASSETS

The interest in respect of a debt/income on a receivable in the nature of short-term

loans/advances, which remains overdue for a period of six months.


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4. SALE OF ASSETS/SERVICE RENDERED

5. Any dues on account of these/reimbursement of expenses rendered, which remained

overdue for a period of six months.

5. LEASE RENTAL/HIRE PURCHASE INSTALMETS

The installments, which has become overdue for a period of more than twelve months.

6. OTHER CREDIT FACILITES

The balance outstanding including interest accrued made available to the borrower/beneficiary in

the same capacity when any of the credit facilities become N.P.A

Identification of assets as NPAs should be done on an ongoing

basis

The system should ensure that identification of NPAs is done on an on-going basis and doubts inasset classification due to any reason are settled through specified internal channels within onemonth from the date on which the account would have been classified as NPA as per prescribednorms. Banks should also make provisions for NPAs as at the end of each calendar quarter i.e. as

at the end of March/ June/ September/ December, so that the income and expenditure account forthe respective quarters as well as the P&L account and balance sheet for the year end reflects theprovision made for NPAs.


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Treatment of Accounts as NPAs

Record of Recovery

The treatment of an asset as NPA should be based on the record of recovery. Banks should not

treat an advance as NPA merely due to existence of some deficiencies which are of temporary in

nature such as non-availability of adequate drawing power, balance outstanding exceeding the

limit, non-submission of stock statements and the non-renewal of the limits on the due date, etc.

Where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should

be treated as NPA.

Borrowers have been regularized by repayment of overdue amounts through genuine sources

(not by sanction of additional facilities or transfer of funds between accounts), the accounts need

not be treated as NPAs. In such cases, it should, however, be ensured that the accounts remain in

order subsequently and a solitary credit entry made in an account on or before the balance sheet

date which extinguishes the overdue amount of interest or installment of principal is not

reckoned as the sole criteria for treatment the account as a standard asset.

Types of non-performing assets

Classified as 1) gross NPA 2) net NPA

1) Gross NPA

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI

guidelines as on Balance Sheet date. Gross NPA ref lects the qual i ty of the loans made by

banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets.


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2) Net NPA

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

regarding NPAs. Net NPA shows the actual bur den of banks. Since in India, bank

balance sheets contain a huge amount of NPAs and the process of recovery and write off

of loans is very time consuming, the provisions the banks have to make against the NPAs

according to the central bank guidelines, are quite significant. That is why the difference

between gross and net NPA is quite high.

Difference between gross NPA and net NPA

Gross NPA is the amount outstanding in the borrowal account, in books of the bank other than

the interest which has been recorded and not debited to the borrowal account. Net NPAs is the

amount of gross NPAs less (1) interest debited to borrowal and not recovered and not recognized

as income and kept in interest suspense (2) amount of provisions held in respect of NPAs and (3)

amount of claim received and not appropriated.

The Reserve Bank of India defines Net NPA as

Net NPA = Gross NPA(Balance in Interest Suspense account + DICGC/ECGC claims

Received and held pending adjustment + Part payment received and kept in suspense

Account + Total provisions held).

The Reserve Bank of India Banks has advised the banks to compute their Gross

Advances, Net Advances, Gross NPAs and Net NPAs as per the following format w.e.f.

September 2009.


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ASSET CLASSIFICATION

Banks should classify their assets into the following broad groups, viz.

1. Standard Assets

2. Sub-standard Assets

3. Doubtful Assets

4. Loss Assets

1. Standard Assets

Standard Asset is one which does not disclose any problems and which does not carry more

than normal risk attached to the business. Such an asset should not be an NPA.

2. Sub-standard Assets

(I) with effect from March 31, 2005 an asset would be classified as Sub-standard if it remained

NPA for a period less than or equal to 12 months. In such cases, the current net worth of the

borrowers/ guarantors or the current market value of the security charged is not enough to ensure

recovery of the dues to the banks in full. In other words, such assets will have well defined credit

weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct

possibility that the banks will sustain some loss, if deficiencies are not corrected.

(ii) An asset where the terms of the loan agreement regarding interest and principal have been re-

negotiated or rescheduled after commencement of production, should be classified as sub-

standard and should remain in such category for at least 12 months of satisfactory performance

under the re-negotiated or rescheduled terms. In other words, the classification of an asset should

not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this

condition.

3) Doubt full assetsWith effect from March 31, 2005, an asset is required to be classifieds doubtful, if it has

remained NPA for more than 12 months. For Tier I banks, the 12-month period of classification


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of a substandard asset in doubtful category is effective from April 1, 2009. As in the case of

sub-standard assets, rescheduling does not entitle the bank to upgrade the quality of an

advance automatically. A loan classified as doubtful has all the weaknesses inherent as that

classified as sub-standard, with the added characteristic that the weaknesses Make collection

or liquidation in full, on the basis of currently known facts, conditions and values, highly

questionable and improbable.

Note: Consequent to change in asset classification norms w.e.f. March 31, 2005 banks are

permitted to phase the consequent additional provisioning over a five year period commencing

from the year ended March 31, 2005, with a minimum of 10 % of the required provision in each

of the first two years and the balance in equal installments over the subsequent three years.

4) Loss Assets A loss asset is one where loss has been identified by the bank or internal or

external auditors or by the Co-operation Department or by the Reserve Bank of India inspection

but the amount has not been written off, wholly or partly. In other words, such an asset is

considered un-collectible and of such little value that its continuance as a bankable asset is not

warranted although there may be some salvage or recovery value.

Guidel ines for Classif ication of Assets

Basic Considerations

(I) broadly speaking, classification of assets into above categories should be done taking into

account the degree of well defined credit weaknesses and extent of dependence on collateral

security for realization of dues.

(ii) In respect of accounts where there are potential threats to recovery on account of erosion in

the value of security and existence of other factors such as, frauds committed by borrowers, it

will not be prudent for the banks to classify them first as sub-standard and then as doubtful after

expiry of 12 months from the date the account has become NPA. Such accounts should be


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straight away classified as doubtful asset or loss asset, as appropriate, irrespective of the period

for which it has remained as NPA.

Internal System for Classification of Assets as NPA

I) Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPAs, especially in respect of high value accounts. The banks may

fix a minimum cut-off point to decide what would constitute a high value account depending

upon their respective business levels. The cut-off point should be valid for the entire accounting

year.

(ii) Responsibility and validation levels for ensuring proper asset classification may be fixed by

the bank.

(iii) The system should ensure that doubts in asset classification due to any reason are settled

through specified internal channels within one month from the date on which the account would

have been classified as NPA as per extant guidelines.

(iv) RBI would continue to identify the divergences arising due to non-compliance, for fixing

accountability. Where there is willful non-compliance by the official responsible for classificationand is well documented, RBI would initiate deterrent action including imposition of monetary

penalties.


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INCOME RECOGNITION

Income RecognitionPolicy

1. The policy of income recognition has to be objective and based

on the record of recovery. Income from non-performing assets(NPA) is not recognized on accrual basis but is booked asincome only when it is actually received. Therefore, banks

should not take to income account interest on non-performingassets on accrual basis.

2. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policiesmay be taken to income account on the due date, provided adequate margin is available in theaccounts.

3. Fees and commissions earned by the banks as a result of renegotiations or rescheduling of

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

4. If Government guaranteed advances become 'overdue' andthereby NPA, the interest on such advances should not betaken to income account unless the interest has been realized.

Provisional norms and disclosure norms of NPA

RBI guidelines on provisioning requirement of bank advances

As and when an asset is classified as an NPA, the bank has to further sub-classify it into sub-

standard, loss and doubtful assets. Based on this classification, bank makes the necessary provision

against these assets.

Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank

advances where the recovery is doubtful. Banks are also required to comply with such guidelines

in making adequate provision to the satisfaction of its auditors before declaring any dividends on

its shares.


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In case of loss assets, guidelines specifically require that full provision (100%) for the amount

outstanding should be made by the concerned bank. This is justified on the grounds that such an

asset is considered uncollectible and cannot be classified as bankable asset.

Also in case of doubtful assets, guidelines requires the bank concerned to provide entirely the

unsecured portion and in case of secured portion an additional provision of 20%-50% of the

secured portion should be made depending upon the period for which the advance has been

considered as doubtful.

For instance, for NPAs which are up to 1-year old, provision should be made of 20% of secured

portion, in case of 1-3 year old NPAs up to 30% of the secured portion and finally in case of more

than 3 year old NPAs up to 50% of secured portion should be made by the concerned bank.

In case of a sub-standard asset, a general provision of 10% of total outstanding should be made.

Standard Assetsgeneral provision of a minimum of 0.25%

Reserve Bank of India (RBI) has merely laid down the minimum provisioning requirement that

should be complied with by the concerned bank on a mandatory basis. However, where there is a

substantial uncertainty to recovery, higher provisioning should be made by the bank concerned.

ASSETS PROVISION NORMS

Standard assets General provision of 0.25%

Sub standard assets 10% on total outstanding balance, 10 %


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on unsecured exposures identified as

sub-standard & 100% for unsecured

doubtful assets.

Doubtful debts 100% to the extent advance not covered by

realizable value of security. In case of

secured portion, provision may be made in

the range of 20% to 100% depending on

the period of asset remaining sub-standard

Loss assets 100% of the out standing

Disclosure Norms:

Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and

borrowings. Apart from this, banks are also required to give details of their exposure to foreign

currency assets and liabilities and movement of bad loans. These disclosures were to be made for

the year ending March 2000

In fact, the banks must be forced to make public the nature of N.P.As being written off. This

should be done to ensure that the taxpayers money given to the banks, as capital is not used to

write off private loans without adequate efforts and punishment of defaulters. # A Close look:

For the future, the banks will have to tighten their credit evaluation process to prevent this scale

of sub-standard and loss assets. The present evaluation process in several banks is burdened with

a bureaucratic exercise, sometimes involving up to 18 different officials, most of whom do notadd any value (information or judgment) to the evaluation. But whether this government and its

successors will continue to play with bank funds remains to be seen. Perhaps even the loan

waivers and loan "melas" which are often decried by bankers form only a small portion of the

total N.P.As. As mentioned above, much more stringent disclosure norms are the only way to

increase the accountability of bank management to the taxpayers. A lot therefore


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depends upon the seriousness with which a new regime of regulation is pursued by RBI and the

newly formed Board for Financial Supervision.

Treatment of NPAsBorrower-wise and not Facility-wise

(i) In respect of a borrower having more than one facility with a bank, all the facilities granted by

the bank will have to be treated as NPA and not the particular facility or part thereof which has

become irregular.

(ii) However, in respect of consortium advances or financing under multiple banking

arrangements, each bank may classify the borrowal accounts according to its own record of

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

Global Developments and NPAs

The core banking business is of mobilizing the deposits and utilizing it for lending to industry.

Lending business is generally encouraged because it has the effect of funds being transferredfrom

the system to productive purposes which results into economic growth.

However lending also carries credit risk, which arises from the failure of borrower to fulfill its

contractual obligations either during the course of a transaction or on a future obligation

A question that arises is how much risk can a bank afford to take? Recent happenings in the

business world - Enron, WorldCom, Xerox, Global Crossing do not give much confidence to

banks. In case after case, these giant corporate became bankrupt and failed to provide investors

with clearer and more complete information thereby introducing a degree of risk that many

investors could neither anticipate nor welcome. The history of financial institutions also reveals

the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting


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their lending operations to secured avenues only with adequate collateral on which to fall back

upon in a situation of default.

Why such huge levels of NPAs exist in the Indian banking system (IBS)?

The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the

banks concerned. What is needed is having adequate preventive measures in place namely, fixing

pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision.

Banks concerned should continuously monitor loans to identify accounts that have potential to

become non-performing.

Why NPAs have become an issue for banks and financial institutions in India?

To start with, performance in terms of profitability is a benchmark for any business enterprise

including the banking industry. However, increasing NPAs have a direct impact on banks

profitability as legally banks are not allowed to book income on such accounts and at the same

time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI)

guidelines.

Also, with increasing deposits made by the public in the banking system, the banking industry

cannot afford defaults by borrower s since NPAs affects the repayment capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through

various rate cuts and banks fail toutilize this benefit to its advantage due to the fear of burgeoning

non-performing assets.


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Health code system

A critical analysis of a comprehensive and uniform credit monitoring was introduced in 1985-86

by RBI by way of the Health Code System in banks, which inter alia, provided information

regarding the health of individual advances, the quality of credit portfolio and extent of advances

causing in relation to total advances. It was considered that such information would be of

immense use to bank management for control purposes. The RBI advised all commercial banks

to introduce the Health Code Classification indicating the quality of individual advances in the

following eight categories with a health code assigned to each borrowal account:

1. Satisfactory: Conduct is satisfactory, all terms and conditions are compiled with, all

accounts are in order, and safety of the account is not in doubt.

2. Irregular: The safety of the advances is not suspected, though there may be occasional

irregularities, which may be considered to be as a short-term phenomenon.

3. Sick-Viable: Advances to units, which are sick but viable under nursing and unit in

respect of which nursing/revival programs are taken up.

4. Sick-Nonviable/Sticky:

The irregularities continue to persist and there are no immediate prospects of regularization, the

accounts could throw some of the usual signs of incipient sickness.

5. Advances Recalled: Accounts where the repayment is highly doubtful and nursing is not

considered worthwhile, includes where decisions have been taken to recall the advances.

6. Suit Filed Accounts: Accounts where legal actions or recovery proceedings have been

initiated.

7. Decreed Debts: Where decrees have been

obtained.

8. Bad and Doubtful Debts: Where the recoverability of the banks dues has become

doubtful on account of shortfall in value of security, difficulty in enforcing and realizing the

securities, or inability/unwillingness of the borrowers to repay the banks dues partly or wholly.


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FACTORS CONTRIBUTING TO NPAs

According to recent study conducted by the RBI, the underlying reasons for NPAs in

India can be classified into two heads, namely:

a) internal factors

b) external factors

INTERNAL FACTORS

The following internal factors contribute to NPAs in the order of performance:

1. Defective Lending process

There are three cardinal principles of bank lending that have been followed by the commercial

banks since long

Principles of safety

Principle of liquidity

Principles of profitability

Principles of safety:-

By safety it means that the borrower is in a position to repay

the loan both principal and interest. The repayment of loan

depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay


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Capacity to pay depends upon:

1. Tangible asset

2. success in business

Willingness to pay

Character

Honest

Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise or business for

which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he

should be a person of integrity and good character.

2. Inappropriate technology-Due to inappropriate technology and management information

system, market driven decisions on real time basis can not be taken. Proper MIS and financial

Accounting system is not implemented in the banks, which leads to poor credit collection,

thus NPA. All the branches of the bank should be computerized

3. Improper SWOT analysis-The improper strength, weakness, opportunity and threat

analysis is another reason for rise in NPAs. While providing unsecured advances the banks

depend more on the honesty, integrity, and financial soundness and credit worthiness of the

borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from_

A. From bankers.

B. Enquiry from market/segment of trade, industry, business.


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C. From external credit rating agencies.

Analyze the balance sheet:-True picture of business will be revealed on analysis of

profit/loss a/c and balance sheet.

Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To ensure safety and

liquidity, banks should grant loan for productive purpose only. Bank should analyze the

profitability, viability, long term acceptability of the project while financing 4. Poor credit

appraisal system--Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit

appraisal the bank gives advances to those who are not able to repay it back. They should use

good credit appraisal to decrease the NPAs

5. Managerial deficiencies

The banker should always select the borrower very carefully and should take

tangible assets as security to safe guard its interests. When accepting securities banks should

consider the_

1. Marketability

2. Acceptability

3. Safety

4. Transferability.

The banker should follow the principle of diversification of risk based on the famous maxim "do

not keep all the eggs in one basket"; it means that the banker should not grant advances to a few

big farms only or to concentrate them in few industries or in a few cities. If a new big customer

meets misfortune or certain traders or industries affected adversely, the overall position of the

bank will not be affected.


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Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom

industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), And the handloom sector

Orissa hand loom WCS ltd (2439.60lakhs).

6. Absence of regular industrial visit--The irregularities in spot visit also increases the NPAs.

Absence of regularly visit of bank officials to the customer point decreases the collection of

interest and principals on the loan. The NPAs due to willful defaulters can be collected by

regular visits.

7. Re loaning process--Non remittance of recoveries to higher financing agencies and re

loaning of the same have already affected the smooth operation of the credit cycle.

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

day.

EXTERNAL FACTORS

The external factors that contribute to NPAs are the following:

1. Ineffective recovery tribunal--The Govt has set of numbers of recovery tribunals, which

works for recovery of loans and advances. Due to their negligence and ineffectiveness in their

work the bank suffers the consequence of non-recover, their by reducing their profitability and

liquidity.

2. Willful Defaults

There are borrowers who are able to payback loans but are intentionally withdrawing it. These

groups of people should be identified and proper measures should be taken in order to get back

the money extended to them as advances and loans.

3. Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and

then India is hit by major natural calamities thus making the borrowers unable to pay back there


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loans. Thus the bank has to make large amount of provisions in order to compensate those loans,

hence end up the fiscal with a reduced profit.

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

farmers are not to achieve the production level thus they are not repaying the loans.

4. Industrial sickness

Improper project handling , ineffective management , lack of adequate resources , lack of

advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence

the banks that finance those industries ultimately end up with a low recovery of their loans

reducing their profit and liquidity.

5. Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which

ultimately piles up their product thus making them unable to pay back the money they borrow to

operate these activities. The banks recover the amount by selling of their assets, which covers a

minimum label. Thus the banks record the non recovered part as NPAs and has to make

provision for it.

6. Change on Govt, policies

With every new govt, banking sector gets new policies for its operation. Thus it has to cope with

the changing principles and policies for the regulation of the rising of NPAs.

The fallout of handloom sector is continuing as most of the weavers Cooperative societies have

become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out

by the Central government to revive the handloom sector has not yet been implemented. So the

over dues due to the handloom sectors are becoming NPAs.


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PROBLEMS DUE TO NPAs

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

2. Depositors do not receive a market return on saving. In the worst case if the bank fails,

depositors loose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest rates, lower

deposit rates and higher lending rates repress saving and financial market, which hamper

economic growth.

4. Non performing loans epitomize bad investment. They misallocate credit from good

projects, which do not receive funding, to failed projects. Bad investment ends up in

misallocation of capital, and by extension, labour and natural resources.

IMPACT OF NPA

1. Profitability: -

NPA means booking of money in terms of bad asset, which occurred due to wrong choice of

client. Because of the money getting blocked the prodigality of bank decreases not only by the

amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some

return earning project/asset. So NPA doesn't affect current profit but also future stream of profit,

which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in

profitability is low ROI (return on investment), which adversely affect current earning of bank.

2. Liquidity:-Money is getting blocked, decreased profit lead to lack of enough cash at handwhich lead to borrowing money for shot\rtes period of time which lead to additional cost to


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the Company. Difficulty in operating the functions of bank is another cause of NPA due to

lack of money. Routine payments and dues.

3. Involvement of management:-

Time and efforts of management is another indirect cost which bank has to bear due to NPA.

Time and efforts of management in handling and managing NPA would have diverted to some

fruitful activities, which would have given good returns. Now day's banks have special

employees to deal and handle NPAs, which is additional cost to the bank.

4. Credit loss:-

Bank is facing problem of NPA then it adversely affect the value of bank in terms of marketcredit. It will lose its goodwill and brand image and credit which have negative impact to the

people who are putting their money in the banks.

Preventive measures of NPAs

1. Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, it's too late to

retrieve the situation- both in terms of rehabilitation of the project and recovery of bank's dues.

Identification of weakness in the very beginning that is: When the account starts showing first

signs of weakness regardless of the fact that it may not have become NPA, is imperative.

Assessment of the potential of revival may be done on the basis of a techno-economic viability

study. Restructuring should be attempted where, after an objective assessment of the promoter's

intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of

totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the

unit earlier, so as to recover whatever is possible through legal means before the security position

becomes worse.


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2. Identifying Borrowers with Genuine Intent:-

Identifying borrowers with genuine intent from those who are non- serious with no commitment

or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the

branch level is paramount as they are the ones who have intelligent inputs with regard to

promoters' sincerity, and capability to achieve turnaround. Bases don this objective assessment,

banks should decide as quickly as possible whether it would be worthwhile to commit additional

finance.

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

business transaction, books of account in order to ascertain real factors that contributed to

sickness of the borrower. Banks may have penal of technical experts with proven expertise and

track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden

requirement of additional fund may be entertained at branch level, and for this purpose a special

limit to such type of cases should be decided. This will obviate the need to route the additional

funding through the controlling offices in deserving cases, and help avert many accounts slipping

into NPA category

3. Timeliness and adequacy of resources

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial

element in any restructuring or rehabilitation activity. The response decided on the basis of

techno-economic study and promoter's commitment, has to be adequate in terms of extend of

additional funding and relaxations etc. under the restructuring exercise. The package of

assistance may be flexible and bank may look at the exit option.

4. Focus on Cash Flows

While financing, at the time of restructuring the banks may not be guided by the conventional

fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh


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credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow

rather than only on the basis of Funds Flow.

5. Management Effectiveness:-

The general perception among borrower is that it is lack of finance that leads to sickness and

NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse

business conditions is a very important aspect that affects a borrowing unit's fortunes. A bank

may commit additional finance to an align unit only after basic viability of the enterprise also in

the context of quality of management is examined and confirmed. Where the default is due to

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

consultant appointed as early as possible to examine this aspect. A proper techno- economic

viability study must thus become the basis on which any future action can be considered.

6. Multiple Financing

A.)During the exercise for assessment of viability and restructuring, a Pragmatic

and unified approachby all the lending banks/ FIs as also sharing of all

relevant information on the borrower would go a long way toward overall success

of rehabilitation exercise, given the probability of success/failure.

b). In some default cases, where the unit is still working, the bank should make sure that it

captures the cash flows (there is a tendency on part of the borrowers to

switch bankers once they default, for fear of getting their cash flows forfeited),

and ensure that such cash flows are used for working capital purposes. Toward

this end, there should be regular flow of information among consortium

members. A bank, which is not part of the consortium, may not be allowed to


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Offer credit facilities to such defaulting clients. Current account facilities may also be

denied at non-consortium banks to such clients and violation may attract penal action. The

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

information exchange on defaulting borrowers once the setup becomes fully operational.

C) In a forum of lenders, the priority of each lender will be different. While one set of

lenders may be willing to wait for a longer time to recover its dues, another

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

letter categories of lenders may be willing to exit, even a t a cost - by a

discounted settlement of the exposure. Therefore, any plan for

restructuring/rehabilitation may take this aspect into account.

D) Corporate Debt Restructuringmechanism has been institutionalized in 2001 to

provide a timely and transparent system for restructuring of the corporate debt of

Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside

the legal framework. Under this system, banks may greatly benefit in terms of

restructuring of large standard accounts (potential NPAs) and viable sub

standard accounts with consortium/multiple banking arrangement.

Different Approaches to Valuation of Non Performing Assets

N.P.As are by-product of most financial systems and the level of N.P.As is an indicator of the

health of the financial system of an economy. Valuation techniques should present the situation,

which maximize the overall interest of all the concerned parties.

The broad objectives of the valuation framework are essentially:

1. To set a sound basis for the selling bank/institution to finalize theSale of assets,

2. To provide a basis for the fair market value of the assets,


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3. To promote transparency of the valuation processes and,.

4. To comply with internationally accepted practices.

The valuation of an asset or the pool of assets is a precursor to any restructuring exercise.

Any valuation exercise shall attempt to address the following issues:

The fair market value of the asset should represent the price at which market participants

would undertake a restructuring.

The transaction value should reflect the potential for income generation and return of

principal, balanced against the applicable risk profile and market lending margins. The valuation framework should allow for valuation of specific assets as well as a

portfolio of assets (i.e. portfolio of loans to be acquired from a bank.) In most cases, a

single value will apply to each loan required. For larger loans, however, an element of

risk/return sharing with the selling bank may be considered.

There are various methodologies used to value the companies or their debt. Typically, cash

flows, assets or replacement values, or a combination of these, are considered when determining

the value of the company or its debt. Some of the widely used approaches towards valuation of

an NPA by the valuation firms are detailed as under:

1. Discounted Cash Flows

One of the commonly used methods for estimating the value of the companys debt is the

anticipated cash flow. The cash flow stream will represent the interest and principal payments

expected to be received by the lender, primarily out of the internal cash flow generation from

underlying business activities. Where the asset is a partly completed project, the cash flow

stream will have to take onto account whether the project will be completed and if so how it will

be financed. If certain lenders decide to fund through extended facility, this will be taken into

account I the assets cash flow stream. Essentially the decision on the projects financial viability


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will be determined by using an incremental cash flow analysis. Normally, the value of a healthy

asset is computed as the discounted value of the expected future cash flows. However, a

company is distress or an NPA may have negative earnings and may be likely to incur operating

losses for the next few years. For such companies, the estimation of future cash flows is not soeasy, as there is a strong possibility of bankruptcy. Under such a scenario the asset valuation is

also based on subjective parameters. A company under financial distress has some or all of the

following characteristics: operating loss, inability to meet the debt obligations and high debt

equity ratio. When dealing with such cases, the credit analysts need to evaluate the possibility

and timing of positive financial performance of the company of infusion of additional funds and

the overall macro economic environment. If the company is expected to improve its financial

position in the future, the following discounted cash flow model may be used for the distress

companies/ NPAs.

2.Liquidation Value Approach

If the loan is in default with no or low expectations of its being services, the cash flow from

liquidation of the asset and collateral will be the primary approach rather than net present value

of the cash flow. In this case, the take out of the lender is primarily by way of exercise of their

rights on the assets and attached collateral. The liquidation value of the company is the aggregate

of the value of the assets of the company if solid at the market rates, net of transactions and legal

costs. The estimation of the assets becomes quite complicated when the assets of the company

cannot be easily separated like in a steel, textile or petrochemical plant. If such assets are sold

individually, majority of the asset may not fetch a price closer to their books value. Further,

when such sale is to take place at a quick place, the value of the assets further fall down, as it is

more or less equal to forced sale of the assets. As a result of this forced sale, the seller has to

accept a discount on the fair market value of such assets. In most cases, such a realization is not

able to cover even the secured debt fully and hence the valuation of the debt would be limited by

this realized value. This approach has been widely used in countries like Thailand where a

significant number of loans were secured by real estate and other marketable securities of various

kinds.


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3. Earning Model

In performing companies, the P/E ration of the industry or other similar companies may be used

as a tool for determining the market value of the assets of company. If the debt of the company ismore than its assets, then a proportionate discount may be applied to the debt. The above

approach, however, cannot be used for most of the N.P.As, as they would have negative EPS. In

such cases, the cash earning per share of the company and cash P/E ratio of the similar

companies may be used to arrive at a market value of the NPA debt.

4. Case Specific Valuation Model -

Depending on case to case, various models have been evolved and used for specific

requirements. I shall discuss here one of such models to provide an insight as to how provide

varied models can be from the conventional approaches.

Segmentation into buckets:

For a huge portfolio of small loans, different kind of approach may be used for arriving at the

realistic valuation. One of them is categorizing the loans in various buckets and then analyzing a

sample picked from various buckets. Post currency crisis of late 1990s in Thailand, the price of

real estate had declined to abysmally low levels and majority of the property-linked loans had

become N.P.As in the books of the local banks. One of the leading financial companies in the

world was contemplating to purchase these loans totaling over 20,000 small loans. For arriving

at the appropriate valuation, they had followed the following methodology:

Segmentation of the assets in various buckets.

Selection of a sample out of each bucket.

Detailed analysis of each sample.

Statistical extrapolation of the sample to the entire bucket.

Arriving at the final range of the valuation of the portfolio.


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1. LokAdalat:

Lok Adalat institutions help banks to settle disputes involving account in "doubtful" and

"loss" category, with outstanding balance of Rs.5 lakh for compromise settlement under Lok

Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on

cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for

speedy justice and recovery of small loans. The progress through this channel is expected to

pick up in the coming years.

Referring the cases to lakadalats constituted under the legal services authorities act, 1987

which help in resolving disputes between the parties by conciliation, mediation, compromise,

or amicable settlement. Every award of the lokadalt shall be deemed to be a decree of a civil

court.

2. CDR: -Corporate Debt Restructuring mechanism has been institutionalized in 2001 to

provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore

and above with the banks and FIs on a voluntary basis and outside the legal framework.

Under this system, banks may greatly benefit in terms of restructuring of large standardaccounts (potential NPAs) and viable substandard accounts with consortium/multiple

banking arrangements.

The objective of CDR is to ensure a timely and transparent mechanism for restructuring of the

debts of viable corporate entities affected by internal and external factors, outside the purview of

BIFR, DRT or other legal proceedings.

The legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA). All

participants in the CDR mechanism must enter the ICA with necessary enforcement and penal

clauses.

The scheme applies to accounts having multiple banking/ syndication/ consortium accounts with

outstanding exposure of Rs.10 crore and above. The CDR system is applicable to standard and


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sub-standard accounts with potential cases of NPAs getting a priority. Packages given to

borrowers are modified time & again Drawback of CDRReaching of consensus amongst the

creditors delays the process

3.DRT ACT: -

The banks and FIs can enforce their securities by initiating recovery proceeding under the

Recovery if Debts due to Banks and FI act, 1993 (DRT Act) by filing an application for

recovery of dues before the Debt Recovery Tribunal constituted under the Act. On

adjudication, a recovery certificate is issued and the sale is carried out by an auctioneer or a

receiver.

DRT has powers to grant injunctions against the disposal, transfer or creation of third party

interest by debtors in the properties charged to creditor and to pass attachment orders in respect

of charged properties. In case of non-realization of the decreed amount by way of sale of the

charged properties, the personal properties if the guarantors can also be attached and sold.

However, realization is usually time-consuming. Steps have been taken to create additional

benches.

4.PROCEEDING UNDER CODE OF CIVIL PROCEDURE: -

For claims below Rs.10 lacks, the banks and FIs can initiate proceedings under the Code of

Civil Procedure of 1908, as amended, in a civil court.

The courts are empowered to pass injunction orders restraining the debtor through itself or

through its directors, representatives, etc from disposing of, parting with or dealing in any

manner with the subject property.

Courts are also empowered to pass attachment and sales orders for subject property before

judgment, in case necessary.

The sale of subject property is normally carried out by way of open public auction subject to

confirmation of the court. The foreclosure proceedings, where the DRT Act is not applicable,


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can be initiated under the Transfer of Property Act of 1882 by filing a mortgage suit where the

procedure is same as laid down under the CPC.

5.BIFR AND AIFR:-

BIFR has been given the power to consider revival and rehabilitation of companies under the

Sick Industrial Companies (Special Provisions) Act of 1985 (SICA), which has been repealed by

passing of the Sick Industrial Companies (Special Provisions) Repeal Bill of 2001.

The board of Directors shall make a reference to BIFR within sixty days from the date of

finalization of the duly audited accounts for the financial year at the end of which the company

becomes sick. The company making reference to BIFR to prepare a scheme for its revival and

rehabilitation and submit the same to BIFR the procedure is same as laid down under the

CPC.The shelter of BIFR misused by defaulting and dishonest borrowers It is a time consuming

process.

6.NATIONAL COMPANY LAW TRIBUNAL:-

In December 2002, the Indian Parliament passed the Companies Act of 2002 (Second

Amendment) to restructure the Companies Act, 1956 leading to a new regime of tackling

corporate rescue and insolvency and setting up of NCLT.

NCLT will abolish SICA; have the jurisdiction and power relating to winding up of companies

presently vested in the High Court and jurisdiction and power exercised by Company Law Board

The second amendments seeks to improve upon the standards to be adopted to measure the

competence, performance and services of a bankruptcy court by providing specialized

qualification for the appointment of members to the NCLT.

However, the quality and skills of judges, newly appointed or existing, will need to be reinforced

and no provision has been made for appropriate procedures to evaluate the performance of

judges based on the standards


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Writing off of NPAs

1. In terms of Section 43(D) of the Income Tax Act 1961, income by way of interest in

relation to such categories of bad and doubtful debts as may be prescribed having regardto the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax inthe previous year in which it is credited to the banks profit and loss account or received,whichever is earlier.

2. This stipulation is not applicable to provisioning required to be made as indicated

above. In other words, amounts set aside for making provision for NPAs as above are noteligible for tax deductions.

3. Therefore, the banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate

methodology in consultation with their auditors/tax consultants. Recoveries made in suchaccounts should be offered for tax purposes as per the rules.

4 Write-off at Head Office Level

Banks may write-off advances at Head Office level, even though the relative advancesare still outstanding in the branch books. However, it is necessary that provision is madeas per the classification accorded to the respective accounts. In other words, if an advanceis a loss asset, 100 percent provision will have to be made therefore.

Credit Risk and NPAs

Quite often credit risk management (CRM) is confused with managing non-performing assets

(NPAs). However there is an appreciable difference between the two. NPAs are a result of past

action whose effects are realized in the present i.e. they represent credit risk that has already

materialized and default has already taken place.

On the other hand managing credit risk is a much more forward-looking approach and is mainly

concerned with managing the Quality of credit portfolio before default takes place. In other

words, an attempt is made to avoid possible default by properly managing credit risk.Considering

the current global recession and unreliable information in financial statements, there is high credit

risk in the banking and lending business.

To create a defense against such uncertainty, bankers are expected to develop an effective internal

credit risk models for the purpose of credit risk management.


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How important is credit rating in assessing the risk of default for lenders?

Fundamentally Credit Rating implies evaluating the creditworthiness of a borrower by an

independent rating agency. Here objective is to evaluate the probability of default. As such, credit

rating does not predict loss but it predicts the likelihood of payment problems.

Credit rating has been explained by Moody's a credit rating agency as forming an opinion of the

future ability, legal obligation and willingness of a bond issuer or obligor to make full and timely

payments on principal and interest due to the investors.

Banks do rely on credit rating agencies to measure credit risk and assign a probability of default.

Credit rating agencies generally slot companies into risk buckets that indicate company's credit

risk and is also reviewed periodically. Associated with each risk bucket is the probability of

default that is derived from historical observations of default behavior in each risk bucket.

However, credit rating is not fool-proof. In fact, Enron was rated investment grade till as late as a

month prior to it's filing for Chapter 11 bankruptcy when it was assigned an in-default status by the

rating agencies. It depends on the information available to the credit rating agency. Besides, there

may be conflict of interest which a credit rating agency may not be able to resolve in the interest

of investors and lenders.

Stock prices are an important (but not the sole) indicator of the credit risk involved. Stock prices

are much more forward looking in assessing the creditworthiness of a business enterprise.

Historical data proves that stock prices of companies such as Enron and WorldCom had started

showing a falling trend many months prior to it being downgraded by credit rating agencies.

Usage of financial statements in assessing the risk of default for lenders

For banks and financial institutions, both the balance sheet and income statement have a key role

to play by providing valuable information on a borrowers viability. However, the approach ofscrutinizing financial statements is a backward looking approach. This is because; the focus of

accounting is on past performance and current positions.The key accounting ratios generally

used for the purpose of ascertaining the creditworthiness of a business entity is that of debt-equity

ratio and interest coverage ratio. Highly rated companies generally have low leverage. This is


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because; high leverage is followed by high fixed interest charges, non-payment of which results

into a default.

Capital Adequacy Ratio (CAR) of RBI and Basle committee on banking supervision (BCBS)

Reserve Bank of India (RBI) has issued capital adequacy norms for the Indian banks. The

minimum CAR which the Indian Banks are required to meet at all times is set at 9%. It should

be taken into consideration that the bank's capital refers to the ability of bank to withstand

losses due to risk exposures.

To be more precise, capital charge is a sort of regulatory cost of keeping loans (perceived as

risky) on the balance sheet of banks. The quality of assets of the bank and its capital are often

closely related. Quality of assets is reflected in the quantum of NPAs. By this, it implies that if the

asset quality was poor, then higher would be the quantum of non-performing assets and vice-versa.

Market risk is the risk arising due to the fluctuations in value of a portfolio due to the volatility of

market prices.

Operational risk refers to losses arising due to complex system and processes.

It is important for a bank to have a good capital base to withstand unforeseen losses. It indicates

the capability of a bank to sustain losses arising out of risky assets.

The Basel Committee on Banking Supervision (BCBS) has also laid down certain minimum risk

based capital standards that apply to all internationally active commercial banks. That is, bank's

capital should at least be 8% of their risk-weighted assets. This in fact helps bank to provide

protection to the depositors and the creditors

The main objective here is to build a sort of support system to take care of unexpected financial

losses thereby ensuring healthy financial markets and protecting depositors.

Excess liquidity? No problem, but no lending please!!!

One should also not forget that the banks are faced with the problem of increasing liquidity in the

system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the system through


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various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy

away from such an option due to the high risk of default.

In order to promote certain prudential norms for healthy banking practices, most of the developed

economies require all banks to maintain minimum liquid and cash reserves broadly classified into

Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).

Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the form

of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as

a certain percentage of its demand and time liabilities. The objective is to ensure the safety and

liquidity of the deposits with the banks.

On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company shall

maintain in India in the form of cash, gold or unencumbered approved securities, an amount which

shall not, at the close of business on any day be less than such percentage of the total of its

demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the

Reserve Bank of India (RBI) may specify from time to time.

A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBI's vaults

and further infuses greater funds into a system. However, almost all the banks are facing the

problem of bad loans, burgeoning non-performing assets, thinning margins, etc. as a result of

which, banks are little reluctant in granting loans to corporate.

As such, though in its monetary policy RBI announces rate cut but, such news are no longer

warmly greeted by the bankers.

High cost of funds due to NPAs

Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting

NPAs. Either the bank is reluctant in providing the requisite funds to the genuine borrowers or if

the funds are provided, they come at a very high cost to compensate the lenders losses caused dueto high level of NPAs.

Therefore, quite often corporate prefer to raise funds through commercial papers (CPs) where the

interest rate on working capital charged by banks is higher. With the enactment of the

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,


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2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to

clear their dues within 60 days. Once the borrower receives a notice from the concerned bank

andthe financial institution, the secured assets mentioned in the notice cannot be sold or

transferred without the consent of the lenders.

The main purpose of this notice is to inform the borrower that either the sum due to the bank or

financial institution is paid by the borrower or else the former will take action by way of taking

over the possession of assets. Besides assets, banks can also takeover the management of the

company. Thus the bankers under the aforementioned Act will have the much needed authority to

either sell the assets of the defaulting companies or change their management.

But the protection under the said Act only provides a partial solution. What banks should ensureis that they should move with speed and charged with momentum in disposing off the assets.

This is because as uncertainty increases with the passage of time, there is all possibility that the

recoverable value of asset also reduces and it cannot fetch good price. If faced with such a situation

than the very purpose of getting protection under the Securitization Act, 2002 would be defeated

and the hope of seeing a must have growing banking sector can easily vanish.

Reporting of NPAs to RBI

1) Banks are required to furnish a Report on NPAs as on 31st

March each year after completionof audit. The NPAs would relate to the banks global portfolio, including the advances at the

foreign branches. The Report should be furnished as per the prescribed format given in the

Annex I.

2) While reporting NPA figures to RBI, the amount held in interest suspense account, should beshown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAsand net advances. Banks which do not maintain Interest Suspense Account for parking interestdue on non-performing advance accounts, may furnish the amount of interest receivable on

NPAs as a foot note to the Report.

3) Whenever NPAs are reported to RBI, the amount of technical write off, if any, should bereduced from the outstanding gross advances and gross NPAs to eliminate any distortion in thequantum of NPAs being reported.


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Growth of Educational Loans and H igher EducationSector i n I ndia

In India, over a period of seven years starting from the year 2005 to 2011 the educational loans

have risen from INR 51bn to INR 437bn[19]. It can be translated into a CAGR of 43.05 per cent.

In the year 1990-91 there were 190 universities and 7,346 colleges. These grew to 611

universities and 31,324colleges as of August 2011. During the same period the student enrol-

ment grew from 4.9m to 16.9m in the universities and colleges. The Gross Enrolment Ratio

has risen from 11% in 2005 to 13.8% in 2011 in India.[24]

The national target of higher education enrolment in India is fixed at 30% in 2020. To achieve

this objective the present capacity of 14.6m seats should be raised to 40m rendering an ad-

ditional seat of 25.4m.

The share of private unaided institutions operating in higher education increased from 43% in

2001 to63% in 2006 and the enrolment in the same institutions grew from 33% to 53%. To raise

the capacity from the present 14.6m seats to 40m seats by 2020, India needs an additional invest-

ment of INR 10,000bn and assuming that private sector partici- pation will continue to be 53per

cent (53% in 2006 mentioned as above) investment of the private players will be INR 5300bn.

That is on an average of INR 530bn per year.

Performance of Educational Loans in the state of Kerala

The number of outstanding EL rose from 265,573 in December 2009 to 350,574 in December

2011 in Kerala State. The outstanding loan amount has grown from INR 45,970 m in 2009 to

INR 70360 m in 2011.

The Non performing assets numbered 6,803 and amounted to INR 1,340m in 2009. In 2010 the

number of NPA rose to7,860 at an amount of INR 2,280m. In 2011 these figures were

respectively 24,858 and INR 4,470m.

The NPA generated at the state level was 2.91 per cent in2009, 3.9 per cent in 2010 and 6.35

percent in 2011.


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Demographi cs and Socio-Economic Profi le of the Education loan Borrowers under sur vey

600 education loan beneficiaries surveyed in Ernakulam District are in the age group of 17-26

years.

197 males and 403 females constituted the sample.

86 per cent of the samples parents are having annual income less than INR 0.5 million.

78 per cent of the parents are Higher Secondary or below qualified. 22 percent of the parents are

graduates or post graduates.


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ANALYISIS AND INTERPRETATION

STATE BANK OF INDIA

TOTAL ASSET

YEAR

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

TOTAL ASSET(RS.

CR) 407185 459883 494029 566565 721526

0

100000

200000

300000

400000

500000

600000

700000

800000

1 2 3 4 5 6

YEAR

YEAR

TOTAL ASSET(RS. CR)


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Interpretation:-Above graph show that total assets of SBI is increased in 2004-05 by 52658

crore, in 2007-08 increased by 154961rs. crore. So assets of the SBI bank increased from

last five year.

GROSS NPA

YEAR

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

_GROSS

NPA(RS.CR) 12667 12456 9628 9998 12837

_GROSS NPA(RS.CR)

0

2000

4000

6000

8000

10000

12000

14000

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

_GROSS

NPA(RS.CR)


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Interpretation:- above graph shows that Non-performing assets of SBI decreased from

2003-04 to2006-

npa's in sssfloan

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