Académique Documents
Professionnel Documents
Culture Documents
Seminar On
Contemporary Issues In
Management
NON PERFORMING
ASSETS
SUBMITTED TO:
Rajasthan Technical University , Kota
1.Introduction.....................................................................................................
1
2. What is NPA...................................................................................................2
3.AssetsClassification.........................................................................................
3
4. Management of NPA....................................................................................5
13. Conclusion..................................................................................................20
AMIT GHAWARI
PREFACE
This Project is done for the partial fulfillment of the two year MBA program.
This Research project is a compulsory part of the academics. This research is
done in the second semester of the MBA program.
The topic of the study is “study ot non performing assets i india”. The reason
for selecting this topic the NPA is a problem facing by the Indian banks.
Banking industry plays an important sector to the overall economic
development of India is ever inreasing.
• The other objective of the topic were to analyse the trands in NPA
of Indian banking sector.
• A comperative analysis of NPA in various banking sector like
public sector,SBI & its associates, Nationalise bank etc.
• The First topic is the introduction of the NPA. In this chapter there are
detail about History of NPA.
• In the Second topic the Mening of NPA is given.
• The Third topic is about Assets classification in which General Reasons
for Assets Becoming NPA,Classification of assets of scheduled
commercial bank, Gross and net NPA of different sector of bank are
coverd.
• The Fourth & Fifth topics are about Management of NPA, General
Method of Management of NPA.
• The Sixth & Seventh topics are deeply discribe Difficulties with the
Non-performing Assets, Comparison with other Asian Economies.
• Next Eighth & Nineth topics are Bank-Wise (NPAs) of Scheduled
Commercial Bank,Some Facts Regarding NPA of Major 25 Banks of
India.
• The Tenth & Eleventh topics are about Changing Dynamics in Asian
Non- Performing Loans with Developing the Asian Markets for Non-
Performing Assets.
• The Twelth topic is all about Developing the Indian Markets for Non-
Performing Assets.
• The last Thirteen, Fourteen & Fifteen topics are about Conclusion,
Suggestion & Bibliography & References.
This report is a honest work towards the topic. There can be many short
comings in it bceause ot the lack of the time, un availability of data and other
constraints.
INTRODUCTION
To a certain extent the banking sector has achieved this mandate. Lead Bank
Scheme enabled the banking system to expand its network in a planned way
and make available banking series to the large number of population and touch
every strata of society by extending credit to their productive Endeavour’s.
This is evident from the fact that population per office of commercial bank has
come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of
advances of public sector banks to priority sector increased form 14.6% in
1969 to 44% of the net bank credit. The number of deposit accounts of the
banking system increased from over 3 crores in 1969 to over 30 crores.
Borrowed accounts increased from 2.50 lakhs to over 2.68 crores.
WHAT IS A NPA (NON PERFORMING ASSET)
Action for enforcement of security interest can be initiated only if the secured
asset is classified as Non Performing Asset.
Non Performing Asset means an asset or account of borrower, which has been
classified by a bank or financial institution as sub-standard, doubtful or loss
asset, in accordance with the directions or guidelines relating to asset
classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it has not
been paid within 30 days from the due date. Due to the improvement in the
payment and settlement systems, recovery climate, up gradation of technology
in the banking system, etc., it was decided to dispense with 'past due' concept,
with effect from March 31, 2001. Accordingly, as from that date, a Non
performing asset (NPA) shell be an advance whereinterest and /or installment
of principal remain overdue for a period of more than 180 days in respect of a
Term Loan, the account remains 'out of order' for a period of more than 180
days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains overdue
for a period of more than 180 days in 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 purpose, and any amount to be received
remains overdue for a period of more than 180 days in respect of other
accounts.
The RBI has issued guidelines to banks for classification of assets into four
categories.
1. Standard ASSESTS:
These are loans which do not have any problem are less risk.
2. Substandard ASSESTS:
Non-performing loans or advances past due 90(ninety) days or more but less
than 180(one-hundred- eighty days) days shall, at a minimum, is classified sub
standard.
Without prejudice to the classification criteria used for the sub standard
category set out above, the following non-performing loans and advances shall
be categorized as substandard
3. Doubtful ASSESTS:
Non-performing loans or advances past due 180 days or more, but less than 360
days shall be classified, at a minimum, as doubtful.
4. Loss ASSESTS:
Non-performing loans or advances past due 360 days or more shall be
classified as Loss.
The table II and III shows that the percentage of gross NPA/ gross advance and
net NPA/ net advance are in a decreasing trend. This shows the sign of
efficiency in public and private sector banks. but still if compared to foreign
banks Indian private sector and public sector banks have a higher NPA.
MANAGEMENT OF NPA
The table II&III shows that during initial sage the percentage of NPA was
higher. This was due to show ineffective recovery of bank credit, lacuna in
credit recovery system, inadequate legal provision etc. Various steps have been
taken by the government to recover and reduce NPAs. Some of them are.
All Banks shall maintain a Provision for Loans Losses Account which shall be
created by charges to provision expense in the income statement and shall be
maintained at a level adequate to absorb potential losses in the loans or
advances portfolio. In determining the adequacy of the Provisions for Loan
Losses Account, provisions may be attributed to individual loans or advances
or groups of loans or advances.
The provisions for Loan Losses Account shall always have a credit balance.
Additions to or reductions of the Provisions for Loan Losses Account shall be
made only through charges to provisions in the income statement.
Based on the asset classification, the banks are required to make a provision
against the Loans or advances. Bank shall maintain the minimum provision
percentages against the outstanding provision and of each loan or advances.
GENERAL METHODS OF MANAGEMENT OF NPAS
Compromise
Legal remedies
Recovery Camps
Write offs
Spot Visit
Other Methods
Compromise:
* The compromise should be a negotiated settlement under which the bank should
ensure recovery of its dues to the maximum extent possible of minimum expenses.
* Proper distinction should be made between willful defaulters and borrowers
defaulting in repayments due to circumstances beyond their control.
* Where security is available for assessing the realizable value, proper weight age
should be given to the location, condition and marketable title and possession of sub
security.
* An advantage in settlement cases is that banks can promptly recycle the funds
instead of resorting to expensive recovery proceedings spread over a long period.
* All compromise proposals approved by any functionary should be promptly
reported to the next higher authority for post facto scrutiny.
* Proposal for write off/ compromise should be first by a committee of senior
executives of the bank.
* Special recovery cells should be set up at all regional levels.
Legal remedies:
The legal remedies are one of the methods of management of NPAs. The banks
observed that the borrower is making willful default; no more time should be lost
instituting appropriate recovery proceedings. The legal remedies are filling of civil
suits.
The all levels of executives are compelling to undergrowth the regular training
program on credit and NPA management. It is very useful and helpful to the
executives for dealing the NPAs properly.
Recovery Camps:
The banks should conduct the regular or periodical recovery camps in the bank
premises or some other common places; such type of recovery camps reduces the
level of NPAs in the Banks.
Write offs:
Write offs is also one of the common management techniques of NPAs. The assets are
treated as loss assets, when the bank writes off the balances. The ultimate aim of the
write off is to cleaning the Balance sheet.
Spot Visit:
The bank officials should visit to the borrowers’ business place or borrowers field
regularly or periodically. It is also help full to the bank to control or reduce the NPAs
limit.
Difficulties with the non-performing assets
1. Owners do not receive a market return on their capital. In the worst case, if
the bank fails, owners lose their assets. In modern times, this may affect a
broad pool of shareholders.
2. Depositors do not receive a market return on savings. In the worst case if the
bank fails, depositors lose their assets or uninsured balance. Banks also
redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets,
which hampers economic growth.
4. Non performing loans may spill over the banking system and contract the
money stock, which may lead to economic contraction. This spillover effect
can channelize through illiquidity or bank insolvency; (a) when many
borrowers fail to pay interest, banks may experience liquidity shortages. These
shortages can jam payments across the country, (b) illiquidity constraints bank
in paying depositors e.g. cashing their paychecks. Banking panic follows. A
run on banks by depositors as part of the national money stock become
inoperative. The money stock contracts and economic contraction follows (c)
undercapitalized banks exceeds the banks capital base.
The loans for the weaker sections of the society and the waiving of the loans to
farmers are another dimension of the politicization of bank lending.
Most of the depositor’s money has been frittered away by the banks at the
instance of politicians, while the same depositors are being made to pay
through taxes to cover the losses of the bank.
Comparison with other Asian Economies
Nationalised Banks
Foreign Banks
AB Bank 3 26 10.2
● The average capital adequacy ratio (CAR) of 25 banks slipped to 12.68 per
cent in Q2-FY ’09 from 13.41 per cent in the previous year.
● Karur Vysya Bank recorded maximum rise of 275.36 per cent in net NPAs in
Q2-FY’09 with Rs. 50.03 crore as against Rs 13.33 crore in Q2-07.
● Among the private sector banks only South Indian Bank registered an
improvement in net NPAs by -29.82 per cent.
● 16 banks witnessed a fall in their CAR from the previous fiscal, but they still
managed to remain above the prescribed limit of nine per cent posed by the
Basel II accord.
● Axis bank registered the maximum decline in CAR from 17.59 per cent in
Q2 FY’08 to 12.2 per cent in Q2 FY’09.
● Federal Bank had the maximum rise in CAR unto 20.81 per cent in Q2 FY
2008-09 from 13.08 per cent a year earlier.
The author has often described the many so-called restructurings taking place
in some of the Asian countries as fictional rescheduling, which have taken
place without there being a realistic expectation that the debtor will be able to
comply in full with the rescheduled timetable for repayment and without any
serious attempts at operational restructuring or other real restructuring
techniques. As defaults take place under these fictional rescheduling,
reworking the workouts has already begun in many countries, with debtors
commonly able to achieve a better deal the second time around. This odd
phenomenon is partly due to the fact that the first round of fictional
rescheduling rarely included a “haircut” of debt, as the banks’ balance sheets
could not, at that time, sustain the loss, and often ramped up interest rates after
a few years of reduced rates or interest holidays. As time has passed since the
1997-2002 period when many of these deals were done, the economies in some
of the so-called crisis economies such as Korea, Malaysia, Thailand, and, to a
more limited extent, Indonesia have improved. As the economies have
rebounded, often without any real change in fundamentals or in overall
competitiveness of enterprises on a comparative basis, interest rates have
fallen. Banks have been recapitalized and can now sustain the losses from
writing off portions of debt which the bank really has almost no prospect of
recovering, and are therefore now processing losses that really should have
been processed in 1997.
The author has often quoted one banker as saying “we will do the rescheduling
now and then do the restructuring next time they default”. In reality, as things
have turned out, the second round has involved either another rescheduling or a
haircut and a reduction of interest rates. In other words, the second round of
restructuring has resulted in a better result for the debtor. From the debtor’s
perspective “re-working the workouts works.”
There has also been a wave of new restructurings, which have generally been
conducted in a realistic manner. Some of these cases have involved essentially
good businesses or projects, often involving multinational sponsors. In many
cases, these restructurings did not occur in the immediate aftermath of the 1997
crisis. These restructurings were delayed because the debtor often enjoyed a
lengthy moratorium, either formal or informal, over the last six years, as its
creditors realized that they really have no attractive legal recourse and have sat
still, despite continuing to threaten the debtor in an unconvincing manner. As
these cases have involved viable businesses with strong sponsors (who have
often through relationships with the banks insulated or provided protection to
the debtor from its bankers) it is not surprising that these deals have become the
first bright spark as the Asian economies have started to rebound.
India is perhaps the largest new market, with new laws enabling the
establishment of asset reconstruction companies (ARCs). ARCIL, one of the
first ARCs, is acquiring loans from many of the major banks including ICIC
Bank and SBI. Legal challenges have, however, delayed the implementation of
the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Ordinance (SRFAESI) under which ARCs are established.
The proposed National Company Law Tribunal (NCLT), which replaces the
existing Board for Industrial and Financial Reconstruction (BIFR), which
handled cases under the sick industrial companies’ legislation, has also been
delayed. It is hoped that the NLCT will speed the process of referring
companies to rehabilitation although there are concerns as to whether it will be
fully staffed with an adequate number of competent judges. There is also great
need in India to develop a private profession of liquidators.
Whilst debtors abused the moratorium on legal actions under the sick industrial
company’s legislation, the removal of the stay in its entirety in the second
amendment to the company’s code is somewhat reactionary. A better solution
would have been to provide for a clearly time bound stay on legal actions
during the period of rehabilitation.
Stamp duty and taxation incentives are also required if the ARCs are going to
become drivers of restructuring in India.
Impact on profitability
Commercial banks incurred a total amount of Rs. 31 251 crore towards
provisioning NPAs from 1 April 1993 to 31 March 2001. This has brought net
NPAs to Rs.32 632 crore or 6.2% of net advances. The enormous provisioning
of NPAs together with the holding cost of such non-productive assets over the
years has acted as a severe drain on the profitability of the PSBs. Equity issues
of nationalized banks that have already tapped the market are now quoted at a
discount in the secondary market. This has alternatively forced PSBs to borrow
heavily from the debt market to build Tier II capital to meet capital adequacy
norms, thus putting severe pressure on their profit margins. It is worthwhile to
compare the aggregate figures of the 19 nationalized banks for the year ended
March 2001, as published by RBI in its Report on Trends and Progress of
Banking in India
Over the past year or so, the government of India has taken several steps to
help create an enabling environment for NPL resolution. Notable among these
are:
iii) A National Company Law Tribunal (NCLT) is being set up to replace the
BIFR. NCLT is, inter alia, envisaged to perform BIFR’s functions more
effectively.
i) Legal challenges
A tremendous outcry has been raised against the provisions of the SRFAESI
Act by borrowers who have termed it as being against the principles of “natural
justice”. A number of petitions are currently pending before the Supreme Court
that challenge the right of lenders to take over and sell the borrower assets with
limited opportunity of borrowers to challenge the action in a court of law. The
Supreme Court judgment on this issue could profoundly affect the efficacy of
this act.
The high level of transaction costs in the form of the stamp duty, payable on
the transfer of financial assets by way of assignment, is a significant deterrent
to the acquisition process except in the case of some progressive states.
While the government appears keen to encourage both foreign and domestic
investors, the need for specific policy, regulations and tax provisions
responsive to their requirements has still to be addressed.
Conclusion
The Indian banking sector is facing a serious problem of NPA. The extent of
NPA is comparatively higher in public sectors banks. To improve the
efficiency and profitability, the NPA has to be scheduled. Various steps have
been taken by government to reduce the NPA. It is highly impossible to have
zero percentage NPA. But at least Indian banks can try competing with foreign
banks to maintain international standard.
The Bank should adopt the following General strategies for control of NPAs.
The suggestions are as follows:
· Projects with old technology should not be considered for finance
· Large exposure on big corporate or single project should be avoided.
· Operating staffs’ credit skills should be up graduation.
· There is need to shift banks approach from collateral security to viability
of the project and intrinsic strength of promoters.
· Timely sanction and or release of loans by the bank is to avoid time and
cost overruns.
Pre-sanction suggestions:
Websites
www.icfaipress.org/archives/Analyst/1998/Nov/ASAF-counterMeasurescrises1.htm
Lahiri, Ashok K. “Rising NPAs: Where has all the money gone?”
http://www.rediff.com/money/2002/aug/01spec.htm