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“A study of Non Performing Asset





Sector - 19, Near Seawoods Dara ve Petrol Pump, Nerul (E),
Navi Mumbai - 400 706

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Date :5th APRIL 2010


This is to certify that Mr. SAHIL B MULLA, Roll No. 91 is a bonafide

student studying for MMS Course of the University of Mumbai in this
institute for the year 2009-10. As a part of the University curriculum he
has completed a Final Project titled “A study of NPA Management”
under the guidance of Prof. Sonali Athawale.

Prof. Sonali Athawale Prof. Anjan Kumar Maiti

Faculty Guide Director

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This is to express my earnest gratitude and extreme joy at being bestowed with an
opportunity to get an opportunity to get an interesting and informative project. It is impossible to
thank all the people who have helped me in completion of project, but I would avail this
opportunity to express my profound gratitude and indebtness to the following people for all the
help they have given me.

I am extremely grateful to my project guide and co-coordinator Prof. Sonali Athawale

who has given an opportunity to work on such an interesting project. She proved to be a constant
source of inspiration to me and provided constructive comments on how to make this project
better. Credit also goes to my friends whose constant encouragement let me in good stead.
Lastly, I would thank our Director Mr. Anjan Maiti and all my faculties for providing all explicit
and implicit support to me during the course of my project. I would also like to thank the staff of
Bank of India for providing me few but very valuable details about my project.

Name: Sahil B Mulla


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After liberalization the Indian banking sector developed very appreciate. The RBI also
nationalized good amount of commercial banks proving socio economic services to the people of
the nation. The public Sector banks have shown very good performance as far as the financial
operations are concerned. The total income of the public sector banks has also shown good
performance since the last few years. The public sector Banks have also shown comparatively
good result. The gross profits and the net profits of the Public Sector banks have been on a high
from past few years. The private sector banks are also showing good results in case of profits.
However, the only problem of the Scheduled Commercial Banks these days are the increasing
level of the non performing assets. The Non-Performing Assets (NPAs) problem is one of the
foremost and the most formidable problems that have shaken the entire banking industry in India
like an earthquake. Like a canker worm, it has been eating the banking system from within, since
long. It has grown like a cancer and has infected every limb of the banking system.

At macro level, NPAs have choked off the supply line of credit to the potential
borrowers, thereby having a deleterious effect on capital formation and arresting the economic
activity in the country. At the micro level, the unsustainable level of NPAs has eroded the
profitability of banks through reduced interest income and provisioning requirements, besides
restricting the recycling of funds leading to serious asset liability mismatches. The problem of
NPAs is not a matter of concern for the lenders alone. It is a matter of grave concern to the
public as well, as bank credit is the catalyst to the economic growth of the country and any
bottleneck in the smooth flow of credit, one cause for which is mounting NPAs, is bound to
create adverse repercussions in the economy. Mounting menace of NPA has raised the cost of
credit, made banks more adverse to risk and squeezed genuine small and medium enterprise from
accessing competitive credit and has throttled their enterprising spirits as well.

The spiraling and the devastating effect of NPA on the economy have made the problem
of NPA as issue of public debate and of national priority. Therefore, any measure or reform on
this front would be inadequate and incomprehensive, if it fails to make a dent in NPA reduction
and stall their growth in future, as well.

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NPAs have deleterious effect on the return on assets in several ways: ---
(1) They erode current profits through provisioning requirements
(2) They result in reduced interest income
(3) They require higher providing requirements affecting profits and accretion to Capital
funds recycling of funds, set in asset-liability mismatches, etc.

The RBI has also tried to develop many schemes and tools to reduce the non Performing
assets the results are not up to the expectations. To improve NPAs each bank should be
motivated to introduce their own precautionary steps. Before lending the banks must evaluate the
feasible financial and operational prospective results of the borrowing companies by keeping in
Considerations the overall impacts all the factors that influence the business.

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Sr.No. Contents Page No.

1. 07

2. Profile of the organization 09

3. Literature Review 12

4. Objectives of the Study 14

5. Hypotheses 15

6. Methodology 16

7. Conceptual Framework 18

8. NPA Management Policy of Bank of India 42

9. Data Collection and Analysis 56

10. Conclusion 67

11. Suggestions and Recommendations 69

12. Bibliography 71

13. Annexure 72

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In human life, sickness, bankruptcy and death are not welcome, but they do occur. So is
the case with advances, which fall sick, go into liquidation and die much against the wishes of all
concerned. Realities cannot be escaped. It is necessary to face them.
In the context of non-performing assets the situation is no different. The frequent references to
non-performing assets primarily concern sick industrial units and mounting over dues in all other
sectors of advances, particularly in agriculture. Financial assets become non-performing
primarily because of the failure of the units financed by banks.
The costs of managing non-performing assets are exorbitant. Bankers are compelled to get
bogged down with these matters thereby neglecting their role as a developing catalyst.


The term non-performing assets can be defined both in the wider and in the narrower
sense. While in the narrow sense it includes only non-performing credit portfolio, in the wider
sense it may also include the volume of unutilized cash balances, unutilized or underutilized
physical assets like buildings and premises in the still wider sense, it may also include non-
performing human resources – a large volume of workforce not effectively unutilized.
A non-performing asset in the banking sector also is termed as an asset not contributing
to the income of the Bank. In other words they are the zero yielding assets that are considered.
The non-performing assets, interalia, includes surplus cash and bankers balances hold over the
optimal levels, amounts lying in the suspense account, investments in shares or debentures and
other securities not yielding any dividend or interest, advances where interest is not forthcoming
and even the principal amount is difficult to recover. In terms of Health code basis, we may say
that advances classified under the Health Code Numbers 6,7,8 and those advances under the
Health Code Numbers 4,5 on which no interest is being charged, may be classified among non-
performing assets.

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There may be various internal and external factors behind the transformation of an asset
from a performing one to a non-performing one. Some of the reasons for accumulation of the
non-performing assets are:
The fast and rapid geographical expansion of the banking sector during a short span, throughout
the country, and our inability to cope with the voluminous work in an orderly manner.
Lack of adequate care while appraising the various proposals in the initial stage. Inadequacy of
the technical staff equipped with the latest market information and the technological
developments is also an important factor in faulty appraisal of proposals.
In case of most of the large and medium scale industries, the main reason for sickness has been
found to be mismanagement.
Power shortages, outdated machinery, fluctuations in supply of raw materials due to
various causes, non-release of subsidy in time and deficiency in demand are also important
reasons. Small scale industries are prone to sickness mainly due to lack of managerial
experience, technical incompetence and decline in demand for their products and overall demand
Further cases are not unknown where deliberate efforts are made by a certain category of
borrowers to declare their units sick, or weak to avail of benefits from different sources.

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Bank of India was founded on 7th September, 1906 by a group of eminent businessmen
from Mumbai. The Bank was under private ownership and control till July 1969 when it was
nationalised along with 13 other banks.
Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and 50
employees, the Bank has made a rapid growth over the years and blossomed into a mighty
institution with a strong national presence and sizable international operations. In business
volume, the Bank occupies a premier position among the nationalised banks.
The Bank has 3101 branches in India spread over all states/ union territories including 93
specialised branches. These branches are controlled through 48 zonal offices. There are 33
branches/offices (including three representative offices) abroad.
The Bank came out with its maiden public issue in 1997. Total number of shareholders as on
31/12/2008 is 2,27,310.
While firmly adhering to a policy of prudence and caution, the Bank has been in the
forefront of introducing various innovative services and systems. Business has been conducted
with the successful blend of traditional values and ethics and the most modern infrastructure.
The Bank has been the first among the nationalised banks to establish a fully computerised
branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is
also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code
System in 1982, for evaluating / rating its credit portfolio.
The Bank's association with the capital market goes back to 1921 when it entered into an
agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an
association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd.
to extend depository services to the stock broking community. Bank of India was the first Indian

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Bank to open a branch outside the country, at London, in 1946, and also the first to open a
branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 33
branches (including three representative offices) at key banking and financial centre‟s viz.
London, Newyork, Paris, Tokyo, Hong-Kong and Singapore.
The Bank has a strong position in financing foreign trade. Over 270 branches provide
export credit. The expertise in this area has enabled the Bank to achieve a leading position in
providing export credit in certain areas like diamond export.
To effectively meet the ever-growing challenges and competition, the Bank has made a
good head-way in bringing about technological upgradation. MIS and critical functions of
controlling offices have been computerized. At present, the operations at about 2562 branches
are totally computerized. 70 branches operate in partially-computerized mode besides these 964
branches and 31 extension counters are migrated to Core Banking Solution. New facilities such
as, Telebanking, ATM & Signature Retrieval Systems have been introduced in a progressing
manner to add value to services. Telebanking facilities with Fax on Demand facility, Remote
Access Terminals for Corporate Customers are now available at many branches. The Bank has
installed ATMs in Mumbai and other centre‟s in the country. The Bank is a member of the RBI's
VSAT Network and has installed 39 VSATs linking strategic branches/offices. The Bank is
making a paradigm shift from branch automation to bank automation and is in the process of
implementing a Multi-Branch Banking Project, which facilitates City-wise Connectivity of
Computerized Branches. The Bank is in the process of installing BOINET, a Wide Area Network
for providing a inter- and intra-city connectivity, as a part of enhancing its decision support
The Bank's corporate personality and philosophy are fully reflected in the emblem, which
is a five-pronged Star -- a harmonious blend of traditional and the functional. The elongated
prong pointing upwards conveys the Bank's drive to achieve ascending goals. The Star is a
beacon and guide to those in need of direction.

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Mission of Bank of India

"To provide superior, proactive banking services to niche markets globally, while providing cost-
effective, responsive services to others in our role as a development bank, and in so doing, meet
the requirements of our stakeholders".

Vision of Bank of India

"To become the bank of choice for corporates, medium businesses and upmarket retail customers
and to provide cost effective developmental banking for small business, mass market and rural

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Magazine name – CAPITAL MARKET Dec. 2009 issue

The article taken for reference from this magazine and the article is named “Short term
pains, long-term gain” on Pg.-4. It discusses about the rising NPAs, increase in provision
coverage, sluggish credit offtake and dwindling treasury income. It states that these measures are
going to set ways for better valuations. It tells about how the BSE Bankex has outperformed the
BSE Sensex by recording robust returns of 174%. It discusses about various banks namely
Bank of India, Union Bank of India, State Bank of India, Bank of Baroda, Punjab National Bank
and IndusInd Bank have reached their all time high during Oct. – Nov. 2009 period. It discusses
about the preparedness of various banks for reducing NPAs i.e. by improving capital adequacy
ratio, increasing the minimum provision coverage ratio, introducing new policies for broader
interest rate regime, creating more transparent system and extending banking reach. It also
discusses about the benchmark prime lending rate (BPLR) concept of RBI which helps to ensure
appropriate pricing of loans.

Magazine name – BUSINESS TODAY Dec. 2009 issue

The magazine gives us the data about the various commercial banks operating in India
and Ranks them according to four groups namely Large banks, Mid–size banks, Small banks and
Very Small banks. From the data given in the magazine done by BT-KPMG study is clear that
despite the global credit crisis continues to take its toll- last month the 100th US bank collapsed
since Lehman Brothers the Indian Banks continue to do business as usual and the result is given
in numbers through this survey.

Research Paper – “A comparative study of Non Performance Assets in India” by Prashanth K

Reddy, IIM- Ahmedabad

This article discusses about the financial sector reform in India which has progressed
rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to

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entry, prudential norms and risk based supervision but the progress on the structural-institutional
aspects has been much slower and is a cause for concern. It tells about what changes are required
to tackle the NPA problem. This paper also deals with the experiences of other Asian countries
in handling of NPAs. It also suggests mechanisms to handle the problem by drawing on
experiences from other countries

Report on “Maximising Value of Non-Performing Assets” by Organisation For Co-Operation

and Development (OECD)

This report deals with the changing dynamics in Asian Non Performing Loans and the
sociological reflections on Insolvency reforms in East Asia. But more importantly it mentions
different country reports of Asian region. In case of India “Sumant Batra” discusses the
developments in India. It tells us about what is NPA and gives an overview of non performing
assets in India. It also discusses about the factors contributing to NPAs and its impact on the
working of commercial banks. The legal reforms and the RBI guidelines for NPAs are discussed.

Research Paper on “Rooting Out Non-Performing Assets” by Nachiket Mor, ICICI research

The paper attempts to highlight some major micro-level issues that are at the root of why
unsustainable performance levels are being observed within Banks. The authors argue that unless
the micro level issues are dealt with, even after the systemic issues are resolved, the problem of
NPAs or other failures of the intermediation process may resurface with greater intensity. The
manner in which banks manage the three phases in the life cycle of an asset (creation, monitoring
and recovery) determines the quality of the intermediation process within a bank. In this paper,
the need for internally consistent business models to guide the behaviour of a bank in each of
these three phases is discussed.

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 To know Why NPAs have become an issue for banks and financial institutions in India.
 To understand what is Non Performing Assets and what are the underlying reasons for
the emergence of the NPAs.

 To understand the criteria for identification of non-performing assets in banks.

 To understand what are the factors for rise of NPAs.
 To know what steps are being taken by the Indian banking sector to reduce the NPAs.
 To study the NPA management policy of Bank of India.
 To review Bank of India‟s performance in non-performing assets for the time period of

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Statement for Hypothesis

H0: The problem of NPA is less acute in private sector banks as compared to public sector banks.
H1: Over the years banks have started improving their NPA status.

The project is to determine how to manage the Non Performing Assets in Banks and
what is the trend of NPAs from the past years. To carry out the study regarding NPAs which is
of great concern in today‟s scenario, a very simple approach is followed to draw a conclusion.
The comparison is done between the data of private sector banks and public sector banks. The
hypothesis testing will help us in formulating an outcome . Since this being a descriptive
research much emphasis will be given on comparison analysis of various years secondary data to
carry out an inference.

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The research design used for carrying out this project is descriptive research because the
report deals with statistical data and the main cause of the report is to describe the factors
affecting the problem mentioned.

Sources of data:
There are two types of data - Primary data or raw data and secondary data or second hand
data. The data which is collected on source which has not been subjected to processing or any
other manipulation is primary data whereas secondary data is the data collected by someone
other than the user through common sources like censuses, surveys, organizational records and
data collected through qualitative methodologies or qualitative research. The data collected is
mainly secondary in nature. The sources of data for this Report include the literature published
by the Bank of India and also the Reserve Bank of India. Also the various magazines dealing
with the current banking scenario and research paper have also been a source of information.

The booklet on Recovery Policy published by the Asset Recovery Department of Bank of
India has been of great help.

Sampling Plan:
The target population of study included the Bank of India in particular and all other
public sector banks and private sector banks in general.

Limitations of the study:

 The study on management of non-performing assets is limited to the Bank of India.

 The basis for identifying non-performing assets is the one that has been mentioned in the
report but some minor changes may have been carried out through the Reserve Bank of
India circulars, which are received on a daily basis by the bank.

 Since non-performing assets are a critical issue, bank officials are not willing to part with
all the information on them.

 Non-performing assets is a vast topic and to do full justice to all the aspects of non-
performing assets is an impossible task for me.

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Scope Of The Study:

The scope of the study is limited to the objectives as mentioned earlier. The study ranges
from understanding the significance of non-performing assets to defining the criteria of
identifying non-performing assets in the banking sector, to review Bank of India‟s performance
in the management of non-performing assets.
It also reviews the framework of Bank of India‟s recovery policy with which it hopes to
bring down the percentage of net non-performing assets to the net advances. The study also
encompasses the recommendations, the adhering of which will bring good results to the

Techniques used for analysis of data:

Analytical tools are been used for data analysis. The analytical tools such as Pie charts,
bar graphs, tables are used to compare the past data with current so as to get a particular
inference from it on analysis.

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Why NPA have become an issue for banks and financial institutions in India?
To start with, performance in terms of profitability is a benchmark for any business
enterprise including the banking industry. However, increasing NPA have a direct impact on
banks profitability as legally banks are not allowed to book income on such accounts and at the
same time banks are forced to make provision on such assets as per the Reserve Bank of India
(RBI) guidelines.
Also, with increasing deposits made by the public in the banking system, the banking
industry cannot afford defaults by borrowers since NPA affects the repayment capacity of banks.
Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through
various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of
burgeoning non-performing assets.

The following are the primary causes for turning the accounts into NPA:
 Diversion of funds, mostly for the expansion / diversification of business or for promoting
associate concern.
 Factors internal to business like product / marketing failure, inefficient management,
inappropriate technology, labour unrest.
 Changes in the Macro-environment like recession in the economy, infrastructural bottlenecks
 Inadequate control / supervision, leading to time / cost over-runs during project.
 Changes in Government policies e.g. Import duties.
 Deficiencies like delay in the release of limits/ funds by banks / FIs

Secondary causes are as follows:-

 Selection of the project.
 Implementation of the project- time over-run, cost over-run, under-financing technology
 Intention of the borrower.
 Industrial / Economic trend.

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 Absence of the up gradation of the unit / ploughing back of the profit

Non-Performing Assets - Background:
It's a known fact that the banks and financial institutions in India face the problem of
swelling non-performing assets (NPA) and the issue is becoming more and more unmanageable.
In order to bring the situation under control, some steps have been taken recently. The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
(SARFAESI) 2002 was passed by Parliament, which is an important step towards elimination or
reduction of NPA.

Meaning of NPA:
An asset is classified as non-performing asset (NPA) if dues in the form of principal and interest
are not paid by the borrower for a period of 180 days. However with effect from March 2004,
default status would be given to a borrower if dues are not paid for 90 days. If any advance or
credit facility granted by bank to a borrower becomes non-performing, then the bank will 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 three letters “NPA” Strike terror in banking sector and business circle today. NPA is short
form of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other
due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a
non performing asset. The recovery of loan has always been problem for banks and financial
institution. To come out of these first we need to think is it possible to avoid NPA, then left is to
look after the factor responsible for it and managing those factors.

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Definition of NPA
Action for enforcement of security interest can be initiated only if the secured asset is classified
as Non Performing Asset. Non Performing Asset means an asset or account of borrower which
has been classified by bank or financial institution as sub –standard, doubtful or loss asset, in
accordance with the direction or guidelines relating to assets classification issued by RBI.
An amount due under any credit facility is treated as “past due “when it is not been paid within
30 days from the due date. Due to the improvement in the payment and settlement system,
recovery climate, up gradation of technology in the banking system etc, it was decided to
dispense with “past due “concept, with effect from March 31, 2001. Accordingly as from that
date, a Non performing asset shell be an advance where
i. Interest and / or installment of principal remain overdue for a period of more than 180 days
in respect of a term loan,
ii. The account remains „out of order „ for a period of more than 180 days ,in respect of an
overdraft / cash credit (OD/CC)
iii. The bill remains overdue for a period of more than 180 days in case of bill purchased or
iv. Interest and / or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose ,and
v. Any amount to be received remains overdue for a period of more than 180 days in respect of
other accounts

With a view to moving towards international best practices and to ensure greater transparency, it
has been decided to adopt ‟90 days overdue „norms for identification of NPAs, from the year
ending March 31, 2004, a non performing asset shall be a loan or an advance where;
i. Interest and / or installment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
ii. The account remains „out of order „ for a period of more than 90 days ,in respect of an
overdraft/cash credit (OD/CC)

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iii. The bill remains overdue for a period of more than 90 days in case of bill purchased or
iv. Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose ,and
v. Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts

Out of order
An account should be treated as out of order if the outstanding balance remains
continuously in excess of sanctioned limit / drawing power. In case where the outstanding
balance in the principal operating account is less than the sanctioned amount /drawing power,
but there are no credits continuously for six months as on the date of balance sheet or credit are
not enough to cover the interest debited during the same period, these account should be treated
as „out of order‟.

Any amount due to the bank under any credit facility is „overdue‟ if it is not paid on due
date fixed by the bank.

In short
 A NPA is a loan or an advance where;
 Interest and/ or installment of principal remain overdue for a period of more than 90 days
in respect of a term loan
 The account remains “out of order” in respect of an overdraft/ cash credit
 The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted
 The installment or interest remains overdue for two crop seasons in case of short duration
crops and for one crop season in case of long duration crops

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Classification of Assets:
While new private banks are careful about their asset quality and consequently have low
non-performing assets (NPAs), public sector banks have large NPAs due to wrong lending
policies followed earlier and also due to government regulations that require them to lend to
sectors where potential of default is high. Allaying the fears that bulk of the Non-Performing
Assets (NPA) was from priority sector, NPA from priority sector constituted was lower at 46 per
cent than that of the corporate sector at 48 per cent.
Loans and advances account for around 40 per cent of the assets of SCBs. However,
delay/default in payment of interest and/or repayment of principal has rendered a significant
proportion of the loan assets non-performing. As per RBI‟s prudential norms, a Non-Performing
Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for
more than two quarters after it has become past due. “Past due” denotes grace period of one
month after it has become due for payment by the borrower.

Regulations for asset classification

Assets are classified into four classes - Standard, Sub-standard, Doubtful, and Loss
assets. NPA consist of assets under three categories: sub-standard, doubtful and loss. RBI for
these classes of assets should evolve clear, uniform, and consistent definitions. The banks should
classify their assets based on weaknesses and dependency on collateral securities into four

i. Standard Assets:
It carries not more than the normal risk attached to the business and is not an NPA.
Standard assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this case
the arrears of interest and the principal amount of loan do not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is amount due more than 90
days then it is NPA and NPAs are further need to classify in sub categories.

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ii. Sub-standard Asset:

A sub-standard asset is one which has remained NPA for a period less than or equal to 12
months from 31.3.2005. In such case the current net worth of the borrower/guarantor or the
current market value of the security charged is not enough to ensure recovery of the dues to the
banks in full. In other words, such an asset will have well defined credit weaknesses that
jeopardize the liquidation of the debt and are characterized by the distinct possibility that the
banks will sustain some loss, if deficiencies are not corrected.

iii. Doubtful Assets:

With effect from 31.3.2005, an asset is to be classified as doubtful, if it has remained
NPA for a period exceeding 12 months. A loan classified as doubtful has all the weaknesses
inherent in assets that were classified as sub-standard, with the added characteristics that the
weaknesses make collection or liquidation in full, - on the basis of currently known facts,
conditions and values- highly questionable and improbable. Under this category there are three
D-I Doubtful up to one year
D-II Doubtful for further two years
D-III Doubtful beyond three years.

iv. Loss Assets:

An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset,
but the amount has not yet been written off wholly or partly. The banking industry has
significant market inefficiencies caused by the large amounts of Non Performing Assets (NPA)
in bank portfolios, accumulated over several years. Discussions on non-performing assets have
been going on for several years now. One of the earliest writings on NPA defined them as
"assets which cannot be recycled or disposed off immediately, and which do not yield returns to
the bank, examples of which are: Overdue and stagnant accounts, suit filed accounts, suspense
accounts and miscellaneous assets, cash and bank balances with other banks, and amounts
locked up in frauds".

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Guidelines for the classification of assets

 Classification of assets into above categories should be done taking into account the degree
of well defined credit weaknesses and the extent of dependencies on collateral security for the
realization of dues.
 Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs especially in respect of high value of accounts.

 Account with temporary Deficiencies:

The classification of an asset as NPA should be based on the record of recovery. Bank should
not classify an advance account as NPA merely due to the existence of some deficiencies, which
are temporary in nature as such as non – availability of adequate drawing power based on latest

 Asset classification to be borrower – wise and not facility-wise:

It is difficult to envisage a situation when only one facility to a borrower becomes a problem
credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be
treated as NPA and not the particular facility or a part thereof, which has become irregular.

 Advances under consortium arrangements:

Asset classified of accounts under consortium should be based on the record of recovery of the
individual member banks and other aspects having bearing on the recoverability of the advances.
Accounts where there is erosion in the value of security can be reckoned as significant when the
realizable value of the security is less than 50 percent of the value assessed by the bank or
accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be
straightway classified under doubtful category and provisioning should be made as applicable to
doubtful assets.

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 Agricultural Advances
 In respect of advances granted for agricultural purpose where interest and / or installment of
principal remains unpaid after it has become past due for two harvest seasons but for a period
not exceeding two half years , such an advance should be treated as NPA.
 Where the natural calamities impair the repaying capacity of agricultural borrowers, banks
may decide on their own as a relief measure-conversion of the short –term production loan into a
term or re-schedulement of the repayment period.
 In such cases of conversation or re-schedulement, the term loan as well as fresh short-term
loan may be treated as current dues and need not be classified as NPA.

 Restructuring /rescheduling of loans:

A standard asset where the terms of the loan arrangement regarding interest and principal have
been renegotiated or rescheduled after the commencement of production should be as sub-
standard and should remain in such category for at least one year of satisfactory performance
under the renegotiated or restructured terms. In case of substandard and doubtful assets also,
rescheduling does not entitle a bank to upgrade the quality of advances automatically unless
there is satisfactory performance under the rescheduled –renegotiated terms.

 Exceptions :
As trading involves only buying and selling of commodities and the problems associated with
manufacturing units such as bottleneck in commercial production, time and cost escalation etc.
are not applicable to them.

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NPA Norms
Provisional Norms:
Banks will be required to make provisions for bad and doubtful debts on a uniform and
consistent basis so that the balance sheets reflect a true picture of the financial status of the
bank. The Narsimham Committee has recommended the following provisioning norms
(i) 100 per cent of loss assets or 100 per cent of out- standings for loss assets;
(ii) 100 per cent of security shortfall for doubtful assets and 20 percent to 50 per cent of the
secured portion; and
(iii) 10 per cent of the total out standings for substandard assets.
A provision of 1% on standard assets is required as suggested by Narsimham Committee II,
1998. Banks need to have better credit appraisal systems so as to prevent NPA from occurring.
The most important relaxation is that the banks have been allowed to make provisions for only
30 per cent of the "provisioning requirements" as calculated using the Narsimham Committee
recommendations on provisioning. The encouraging profits recently declared by several banks
have to be seen in the light of provisions made by them. To the extent that provisions have not
been made, the profits would be fictitious.

Disclosure Norms:
Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and
borrowings. Apart from this, banks are also required to give details of their exposure to foreign
currency assets and liabilities and movement of bad loans. These disclosures were to be made for
the year ending March 2000. In fact, the banks must be forced to make public the nature of NPA
being written off. This should be done to ensure that the taxpayer‟s money given to the banks,
as capital is not used to write off private loans without adequate efforts and punishment of

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Asset Provision requirements


Standard assets  0.25% of the o/s dues in all Standard Assets under SME and
Agricultural sector
 1.00% of the o/s dues in all Standard Assets of the A/cs to Capital
market exposure, personal loan, commercial real estate and residential HSG.
Beyond Rs. 20lakhs.
 0.40% of the o/s dues in all standard assets belonging to all other

Substandard  10% of the sum of the net investment in the lease and the unrealised
assets portion of finance income net of finance charge component. The terms „net
investment in the lease‟,‟ finance income‟ and finance charge are as defined in
„AS19 – Leases‟ issued by the ICAI.

Doubtful assets  20% - 50% of the secured portion depending on the age of NPA, and
100% of the unsecured portion.

Loss assets  It may be either written off or fully provided by the bank. The entire
asset should be written off
 If the assets are permitted to remain in the books for any reason, 100 %
of the outstanding should be provided for.

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The banking sector has been facing the serious problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector banks and
foreign banks. The NPAs in PSB are growing due to external as well as internal factors.

 Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works for recovery of loans
and advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non-recover, their by reducing their profitability and liquidity.

 Wilful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order to get
back the money extended to them as advances and loans.

 Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every
now and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to compensate
those loans, hence end up the fiscal with a reduced profit.
Mainly ours framers depends on rain fall for cropping. Due to irregularities of rain fall the
framers are not to achieve the production level thus they are not repaying the loans.

 Industrial sickness
Improper project handling, ineffective management, lack of 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.

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 Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production
which ultimately piles up their product thus making them unable to pay back the money they
borrow to operate these activities. The banks recover the amount by selling of their assets, which
covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make
provision for it.

 Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to
cope with the changing principles and policies for the regulation of the rising of NPAs. The
fallout of handloom sector is continuing as most of the weavers Co-operative societies have
become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out
by the Central govt to revive the handloom sector has not yet been implemented. So the over
dues due to the handloom sectors are becoming NPAs.

 Defective Lending process
There are three cardinal principles of bank lending that have been followed by the
commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability

i. Principles of safety
By safety it means that the borrower is in a position to repay the loan both principal and interest.
The repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon:
1. Tangible assets
2. Success in business

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Willingness to pay depends on:

1. Character
2. Honest
3. Reputation of borrower
The banker should, therefore 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.

 Inappropriate technology
Due to inappropriate technology and management information system, market driven
decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not
implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of
the bank should be computerised.

 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
From bankers
Enquiry from market/segment of trade, industry, business.
From external credit rating agencies.
 Analyse 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 analyse the purpose of the loan. To ensure safety and
liquidity, banks should grant loan for productive purpose only. Bank should analyse the
profitability, viability, long term acceptability of the project while financing.

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 Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal
the bank gives advances to those who are not able to repay it back. They should use good credit
appraisal to decrease the NPAs.

 Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible
assets as security to safe guard its interests. When accepting securities banks should consider the
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
The banker should follow the principle of diversification of risk based on the famous
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.

 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 wilful defaulters can be collected by regular visits.

 Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and
CCBs and PACs, the NPAs of OSCB is increasing day by day.

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 The primary aim of any business is to make profits. Therefore, any asset created in the
course of the conduct of business should generate income for the business.
 This applies equally to the business of banking. The banks the worlds over deal in money,
by accepting deposits (liabilities) and out of such deposits (liabilities) lend/create loans (assets).
If for any reason such assets created do not generate income or become sticky and difficult of
recovery, then the very position of the banks in repaying the deposits (liabilities) on the due
dates would be at stake and in jeopardy. Banks with such assets portfolio would become weak
and naturally such weak banks will lose the faith and confidence of the investors.
 With the introduction of prudential norms for income recognition, assets classification and
provisioning, banks have become quite sensitive and are taking all possible steps to strengthen
their assets acquisition and monitoring systems.
 There is also a growing awareness to bring down non-performing assets as these are having
adverse impact on their profitability due to de-recognition of interests as well as requirement of
heavy loan loss provisions on such assets. Therefore it would be prudent for banks to manage
their assets in such a manner that they always remain healthy, generate sufficient income and
capable of repayment/recovery on the due dates.
 Management of performing/non-performing assets in banks has become an `art and science'
and virtually `a battle of wits' between the banker and the borrower with the latter demanding
write off or at least a major sacrifice from the bankers side irrespective of whether he is in a
position to pay or not.
 Management of non-performing assets of the financial sector was put on fast track recently
with the Union Cabinet approving the promulgation of an ordinance to facilitate securitization
and reconstruction of financial assets.
 Besides enabling banks and financial institutions to create a market for the securitized assets
and improve their asset liability management, the Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Ordinance would also assist in setting up Asset
Reconstruction Companies. Though this is a welcome development, the bankers have to do their
basic homework and to utilize this opportunity to clean up and recover their dues at an early

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Over the last few years Indian banking in its attempt to integrate itself with the global
banking has been facing lots of hurdles in its way due to its inherent weaknesses, despite its high
sounding claims and lofty achievements. One of the major hurdles, the Indian banking is facing
today, is its ever-growing size of non-performing assets over which the top management of
almost each bank is baffled. On account of the intricacies involved in handling the NPA the
ticklish task of assets management of the bank has become a tight rope walk affair for the
controlling heads, because a little wavering „this or that side‟ may land the concern bank in
trouble. The growing NPA is a potent source of worry for the finance minister as well, because
in a developing country like ours, banking is seen as an important instrument of development,
while with the backbreaking NPA banks have become helpless burden on the economy.

 NPA with outstanding up to 5 crore:

In case of doubtful and loss assets, through the modified schemes, the banks have been directed
to follow up a settlement formula under which the minimum amount to be recovered, amounts to
be entire outstanding running ledger balances as on the date the account was identified as NPA
i.e. the date from which the interest was not charged to the running ledger, an analysis of the
given formula shows that RBI has been very much generous in granting huge relaxation to the
borrowers who were not coming forward for setting their overdue loans due to one or other
reason. The scheme is of high practical value as it protects the borrowers who were having
genuine problems in clearing their dues because the interest component constituted a multiplied
amount of principal outstanding. On the other hand, the concerned banks were also finding in
difficult to sacrifice the entire interest component, but outstanding in the dummy ledger. Now as
per the provision to the scheme, they will be ready to grant such relaxation in favour of the
borrowers. These guidelines have come as a windfall for borrowers who after a lot of
negotiations were almost ready to repay back their principal as well as part of the interest
component to settle their accounts, as under the modified scheme, they would be able to save the
interest component. To that extent the concerned bank stands to lose.
In the case of sub standard assets, the settlement formula as given in the modified scheme
states that the minimum sum to be recovered must contain the entire running ledge outstanding
balance as on the date of the account was identified as NPA i.e. the date from the which interest

NCRDs Sterling Institute of Management Studies 33


was not charged to the running ledger plus interest at the existing prime lending rate of the bank.
As per the modified scheme, the terms suggested for the payment of settlement amount NPA are
simple and pragmatic. As per the terms of the scheme, the settlement amount should be paid in
lump sum by the borrower. However in case of the borrower is unable to repay back in a lump
sum, the scheme allows sufficient breathing period to enable him to arrange the funds and clear
at least 25 percent of the settlement amount to be paid upfront and the remaining amount to be
recovered in installments spread over a period of one year along with interest at the existing PLR
from the date of settlement up to the date of final payment.

 NPA with outstanding over Rs. 5 crores:

For recovery of NPA over Rs. 5 crore, RBI has left the matter to the concerned banks and
advised that the concerned banks may formulate policy guidelines regarding their settlement and
recovery. The freedom, in such cases, is given to the banks, because the attending circumstances
in each case may vary from the other. Therefore it was in the right direction that adopting a
generalized approach was not thought appropriate. In cases, where the amount involved is above
Rs. 5 crore, RBI expects CMD of each bank to supervise the NPA personally. The CMDs of the
concerned banks are advised to review all such cases within a given timeframe and decide the
course of action in terms of rehabilitation/restructuring. RBI also desires the submission of a
quarterly report of all NPA above Rs. 5 crore from PSU banks. Thus by putting up the cut-off
dates for the implementing of the scheme, RBI desires the banks to realize the seriousness of the
issue and gear up to sweep away the NPA in one go.
For commercial banks, it is a golden opportunity to clear the mess, consolidate and come out on
a track leading the path of global banking. The time given for weeding out the disastrous NPA is
neither too long nor too short and the banks, with proper planning and follow up can drastically
reduce their NPAs, if they firmly resolve to do so. RBI expects the commercial banks to follow
the guidelines in letter and spirit without any discrimination or discretion as a slight dilution may
jeopardize their interest. A proper monitoring system is also desired to be evolved for
monitoring the progress of the scheme. As this is a rare opportunity given to the defaulting
borrowers so that they can avail the chance given for the settlement of their loans. Without
adequate publicity of the scheme the response from the defaulting borrowers may not be there to
the expected level.

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Legal and Regulatory Regime

A. Debt Recovery Tribunals
DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act,
1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and
Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain
cases referred to them, by the banks and FIs for recovery of debts due to the same. The order
passed by a DRT is appeal able to the Appellate Tribunal but no appeal shall be entertained by
the DRAT unless the applicant deposits 75% of the amount due from him as determined by it.
However, the Appellate Tribunal may, for reasons to be received in writing, waive or reduce the
amount of such deposit. Advances of Rs. 1 million and above can be settled through DRT
process. An important power conferred on the Tribunal is that of making an interim order
(whether by way of injunction or stay) against the defendant to debar him from transferring,
alienating or otherwise dealing with or disposing of any property and the assets belonging to him
within prior permission of the Tribunal. This order can be passed even while the claim is
pending. DRTs are criticized in respect of recovery made considering the size of NPAs in the
Country. In general, it is observed that the defendants approach the High Court challenging the
verdict of the Appellate Tribunal which leads to further delays in recovery. Validity of the Act is
often challenged in the court, which hinders the progress of the DRTs. Lastly, many needs to be
done for making the DRTs stronger in terms of infrastructure.

Functions, duties and powers of Registrar:
 To examine and verify documents including petitions, notes of defense and memoranda of
appeals to be filed with the tribunal or appellate tribunal and register them if they meet
requirements or endorse them with reasons if they cannot be registered,
 To verify duplicate copies submitted in a case with the originals and certify them if they
appear in order, and if the originals appear to have some defects, to mention such defects and get
the concerned party to sign to that effect,
 To verify whether documents submitted along with petitions, memoranda of appeal and
notes of defense are correct or not,

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 To issue summons and get it served,

 To appoint days for appearance in cases, indicating reasonable reasons pursuant to law,
 To obtain power of attorney and get a case assumed pursuant to prevailing law,
 To promptly execute, or cause to be executed, actions as referred to in the order made by
the Bench,
 To have security or guarantee as per the order made by the Bench,
 To maintain, or cause to be maintained, updated records including registration books,
 To maintain personal records of employees,
 To safely retain orders and directions in a serial order.

Debt Recovery Officer

The order issued by the Debt Recovery Officer shall deem to be the order issued by the Tribunal.
If any person disobeys any order given by the Debt Recovery Officer, the Tribunal may institute
contempt proceedings against that person under the provision of the Act.
In recovering the principal and interest of a loan, the Debt Recovery Officer, may follow the
following procedures:
In consistent with the decision of the Tribunal the Debt Recovery Officer may follow the
following procedures, subject to the prevailing law.
Power of Debt Recovery Officer
 To take possession of, or auction, the borrower's other movable or immovable property
whether furnished as security or not,
 To take possession of, or auction, the guarantor's movable or immovable property,
 Where any individual is a borrower or guarantor, to arrest such individual and detain him
pursuant to the prevailing law.

Presiding officer:-
 He is the Head of the department.
 He has judicial power to execute the case.

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B. Lokadalats
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987
helps in resolving disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counselling between the parties and
to reduce burden on the court, especially for small loans. Cases involving suit claims up to Rs. l
million can be brought before the Lokadalat and every award of the Lokadalat shall be deemed
to be a decree of a Civil Court and no appeal can lie to any court against the award made by the
Lokadalat. Several people of particular localities/ various social organizations are approaching
Lokadalats which are generally presided over by two or three senior persons including retired
senior civil servants, defense personnel and judicial officers. They take up cases which are
suitable for settlement of debt for certain consideration. Parties are heard and they explain their
legal position. They are advised to reach to some settlement due to social pressure of senior
bureaucrats or judicial officers or social workers. If the compromise is arrived at, the parties to
the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to
obtain a consent decree. Normally, if such settlement contains a clause that if the compromise is
not adhered to by the parties, the suits pending in the court will proceed in accordance with the
law and parties will have a right to get the decree from the court. In general, it is observed that
banks do not get the full advantage of the Lokadalats. It is difficult to collect the concerned
borrowers willing to go in for compromise on the day when the Lokadalat meets. In any case, we
should continue our efforts to seek the help of the Lokadalat.

C. Enactment of SRFAESI Act

The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act" (SRFAESI) provides the formal legal basis and regulatory framework for setting up
Asset Reconstruction Companies (ARCs) in India. In addition to asset reconstruction and ARCs,
the Act deals with the following largely aspects,
 Securitization and Securitization Companies
 Enforcement of Security Interest
 Creation of a central registry in which all securitization and asset reconstruction transactions
as well as any creation of security interests has to be filed.

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The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued
Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003 for
regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover
various aspects relating to registration, operations and funding of ARCS and resolution of NPAs
by ARCS. The RBI has also issued guidelines to banks and financial institutions on issues
relating to transfer of assets to ARCS, consideration for the same and valuation of instruments
issued by the ARCS. Additionally, the Central Government has issued the security enforcement
rules ("Enforcement Rules"), which lays down the procedure to be followed by a secured
creditor while enforcing its security interest pursuant to the Act. The Act permits the secured
creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to
the underlying security without reference to the Court after giving a 60 day notice to the
defaulting borrower upon classification of the corresponding financial assistance as a non-
performing asset.
The Act permits the secured creditors to take any of the following measures:
 Take over possession of the secured assets of the borrower including right to transfer by way
of lease, assignment or sale;
 Take over the management of the secured assets including the right to transfer by way of
lease, assignment or sale;
 Appoint any person as a manager of the secured asset (such person could be the ARC if they
do not accept any pecuniary liability); and
 Recover receivables of the borrower in respect of any secured asset which has been
After taking over possession of the secured assets, the secured creditors are required to obtain
valuation of the assets. These secured assets may be sold by using any of the following routes to
obtain maximum value.
 By obtaining quotations from persons dealing in such assets or otherwise interested in
buying the assets;
 By inviting tenders from the public;
 By holding public auctions; or
 By private treaty.

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Lenders have seized collateral in some cases and while it has not yet been possible to recover
value from most such seizures due to certain legal hurdles, lenders are now clearly in a much
better bargaining position vis-à-vis defaulting borrowers than they were before the enactment of
SRFAESI Act. When the legal hurdles are removed, the bargaining power of lenders is likely to
improve further and one would expect to see a large number of NPAs being resolved in quick
time, either through security enforcement or through settlements.
Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956. The Act
designates any person holding not less than 10% of the paid-up equity capital of the ARC as a
sponsor and prohibits any sponsor from holding a controlling interest in, being the holding
company of or being in control of the ARC. The SRFAESI and SRFAESI Rules/ Guidelines
require ARCS to have a minimum net-owned fund of not less than Rs. 20,000,000. Further, the
Directions require that an ARC should maintain, on an ongoing basis, a minimum capital
adequacy ratio of 15% of its risk weighted assets. ARCS have been granted a maximum
realization time frame of five years from the date of acquisition of the assets.
The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction.
These include:
 Enforcement of security interest;
 Taking over or changing the management of the business of the borrower;
 The sale or lease of the business of the borrower;
 Settlement of the borrowers' dues; and
 Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over by the lenders under
security enforcement rights available to them or as a recovery agent for any bank or financial
institution and to receive a fee for the discharge of these functions. They can also be appointed to
act as a receiver, if appointed by any Court or DRT.

D. Institution of CDR Mechanism

The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for
resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism instituted
in India is broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia.
The objective of the CDR mechanism has been to ensure timely and transparent restructuring of

NCRDs Sterling Institute of Management Studies 39


corporate debt outside the purview of the Board for Industrial and Financial Reconstruction
(BIFR), DRTs or other legal proceedings. The framework is intended to preserve viable
corporate affected by certain internal/external factors and minimize losses to creditors/other
stakeholders through an orderly and coordinated restructuring programme. RBI has issued
revised guidelines in February 2003 with respect to the CDR mechanism. Corporate borrowers
with borrowings from the banking system of Rs. 20crores and above under multiple banking
arrangement are eligible under the CDR mechanism. Accounts falling under standard, sub-
standard or doubtful categories can be considered for restructuring. CDR is a non-statutory
mechanism based on debtor-creditor agreement and inter-creditor agreement. Restructuring
helps in aligning repayment obligations for bankers with the cash flow projections as reassessed
at the time of restructuring. Therefore it is critical to prepare a restructuring plan on the lines of
the expected business plan along with projected cash flows.
The CDR process is being stabilized. Certain revisions are envisaged with respect to the
eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks are
not members of the CDR forum, and it is expected that they would be signing the agreements
shortly. However they attend meetings. The first ARC to be operational in India- Asset
Reconstruction Company of India (ARGIL) is a member of the CDR forum. Lenders in India
prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender arrangements
and to increase transparency in the process. While in the RBI guidelines it has been
recommended to involve independent consultants, banks are so far resorting to their internal
teams for recommending restructuring programs.

E. Compromise Settlement Schemes

One Time Settlement Schemes
NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The
scheme also covers NPAs classified as sub-standard as on 31st March 2000, which have
subsequently become doubtful or loss. All cases on which the banks have initiated action under
the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree
being obtained from the Courts/DRTs/BIFR are covered. However cases of wilful default, fraud
and malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the

NCRDs Sterling Institute of Management Studies 40


minimum amount that should be recovered should be 100% of the outstanding balance in the

Negotiated Settlement Schemes

The RBI/Government has been encouraging banks to design and implement policies for
negotiated settlements, particularly for old and unresolved NPAs. The broad framework for such
settlements was put in place in July 1995. Specific guidelines were issued in May 1999 to public
sector banks for one-time settlements of NPAs of small scale sector. This scheme was valid until
September 2000 and enabled banks to recover Rs 6.7 billion from various accounts. Revised
guidelines were issued in July 2000 for recovery of NPAs of Rs. 50 million and less. These
guidelines were effective until June 2001 and helped banks recover Rs. 26 billion

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Begin with June 1982; Bank of India introduced the system of classifying the credit
portfolio in terms of various health codes. Subsequently, in the year 1985, when the Reserve
Bank of India introduced the health code system in the entire banking industry. Branches are
advised to grade the borrowal accounts on an ongoing basis into 12 health codes.
Guidelines for classifying advances as per health code system:

Code 1: satisfactory
This category covers all borrowers where:
 Conduct of the account is satisfactory.

 All terms and conditions (like punctual submission of stock statements, balance sheets for
annual review, execution of annual acknowledgement of debt and security etc) are
complied with.

 Accounts of the borrower are in order.

 The safety of the accounts is not in doubt.

Code 2: Irregular
 This category covers those accounts where the safety of the advance is not suspected,
though there may be occasional irregularities. The accounts are overdrawn beyond the
drawing power or the sanctioned limit for a temporary period.

 Installments in respect of term loans overdue for less than 6 months or under deferred
payment guarantee, if overdue for less than 3 months.

 Some of the bills (not exceeding 10%-15% of the total outstanding in the bills purchased
or discounted, account of the borrower) are overdue for payment by less than 3 months
and/or refund in respect of unpaid bills is not forthcoming immediately.

Code 3: Sick: viable/ under nursing.

 Units in respect of which nursing revival programmes are taken up should be included
under this category.

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Code 4: Sick: Non-viable/ sticky:

Accounts of borrowers under this category are those where the irregularities mentioned
above persist say for a period of six months and over and there are no immediate prospects or

 Apparent stagnation in the business as reflected by slow negligible turnover in the


 Frequent requests for overdrawing or issue of cheques without ensuring availability of

funds in the account.

 Bills purchased or discounted drawn by the borrower remaining overdue for 3 months.

 In the case of term loans, 6 or more monthly installments or 2 or more quarterly

installments are overdue.

 Unexpected delays in submission of stock statements/quarterly/half yearly operating

statements or balance sheets and other information required by the Banks.

 Slow movement of stock observed during inspections.

 Low or negligible level of activity observed during inspections.

 Diversion of funds to sister units/ acquiring capital assets not relevant to the Business/
large personal withdrawals.

 Current liabilities exceeding current assets.

 Basic weaknesses revealed by the financial statements of the unit such as continued cash
losses beyond one year.

It should be noted that above indications are only indicative and not exhaustive and not all of
them may be simultaneously observed.

Code 5: Advances Recalled

This category consists of those accounts where the repayment is highly doubtful and
nursing is not considered worthwhile. If a decision has been taken to recall the advance, such
borrowers will be classified under this code.

NCRDs Sterling Institute of Management Studies 43


Code 6: Suit-Filed Accounts

This category consists of accounts where legal action or recovery proceedings under the
Public Debt Recovery Act wherever applicable have been initiated. They may be classified as

 Amount of advances where suits are pending for more than 5 years.

 Advances where suits are pending for more than 2 and up to 5 years.

 Advances where suits are pending for 2 years or less.

Code 7: Decreed Debts

The advances where suits have been filed and decree obtained will come under this category.
This may be further classified into following:

 Amount of debts where decrees are pending execution for more than 5 years.

 Amount of advances where decrees are pending execution for more than 2 and upto 5

 Amount of advances where decrees are pending for 1 to 2 years.

 Amount of advances where decrees are pending for less than 1 year.

Code 8: Debts Classified By the Bank as Bad/Doubtful

All advances appearing under the health code Nos. 3 to 7 and where the recoverability of the
bank's dues has become doubtful on account of shortfalls in value of security, difficulty in
enforcing and realizing the securities, or inability/unwillingness of the borrowers to repay the
bank's dues partly or wholly, would come under this code. Such advances which are
classified under health code No.8 should be excluded from the categories under health code
No.3 to7.

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Philosophy of Rehabilitation - a reorientation

The emergence of prudential norms and transparency in Banking as an agenda in the
financial sector reforms suggested by Narsimhan Committee made banks study their Balance
Sheets critically. The result highlighted the alarming Non-Performing Assets in the Banking
Industry - Bank of India was no exception. The compulsion for huge provisions has now made
Management of NPA a very critical area of top priority in Banks. While the BOI did set on huge
recovery programmes in 1996 and 1997, the fresh slippages in the quality of advances (health
codes) due to internal as well external factors posed severe challenges in containing NPAs within
budgeted levels. Higher NPAs not only stunt the growth of the Bank but the profitability also
takes a beating, as such advances no more yield interest. Bank is also required to apportion a
sizeable sum by way of provisioning, out of earned profits. With the disinvestments measures of
the Government and with banks going public, every man keeps an eye on banks' profitability and
any negative growth further spoils the Bank's image - particularly in the now highly competitive

Revised policy:
It is proposed to go beyond RBI norms, study the activity and adopt a "Holistic Approach"
towards the borrower/unit right from the first signal of "aberrations" noticed, other words, a pre-
rehabilitation stage is identified to provide proper guidance and support either by rescheduling or
arresting the slippage at the earliest stage and lead to "revival" of the unit to sustain it as
performing asset. The new policy of rehabilitation introduces a third stage in the process, which
would actually precede rehabilitation/nursing and recovery. This stage is referred as
“Restructuring and Revival”.


This stage is identified as crucial and refers to holding on operations and minor
corrections/deviations - permitted for the unit to limp back to normalcy - a stage where the unit is
not as such sick but tends to slip with symptoms of strain on its operations and finance. A critical
study of the malady at this juncture and arriving at a Restructuring Plan is very essential.
Restructuring for revival at this stage is not expected to involve any additional financial outlay

NCRDs Sterling Institute of Management Studies 45


on a regular basis. This exercise is therefore expected to be handled at the Branch level itself.
Branch Managers are to be delegated adequate powers as decisions are required on the spot on
day -to-day basis and the issues cannot brook any delay. However, as restructuring measures will
result in changes in terms of original sanction even if it is temporary, it is proposed that
restructuring plans approved at the branch level be reported to the next higher authority
(Regional Manager/Zonal Manager) on monthly basis for information/data base and guidance if

Symptoms of Imbalance and Need for Restructuring.

Broadly the factors warranting restructuring are as follows:
 Technical problems in production/temporary break down of plant.

 Commercial compulsions caused by demand and supply position, pricing and market.

 Managerial inadequacies such as delay in appointing professional staff.

 Economic factors - external in nature caused by changes in Government policies.

 Financial factors such as cost overrun in project implementation resulting in liquidity

crunch, unexpected payments, delay in release of Bank finance etc.

If the above problems crop up, the account starts throwing one or more of the following
 Request for frequent overdrawing.

 Bouncing of cheques issued by the company/unit.

 Non-submission of periodical statements.

 Inspection reveals slow or no activity.

 Large labour turnover.

 Pressing creditors and large block-up in receivables.

 Wages/statutory dues not paid on time.

 Non-payment of interest or installments

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In the above situation instead of striking an alarm there is an urgent need to study problems
by inspection of the unit and its records, take market reports and hold detailed discussions with
borrowers and arrive at a restructuring plan for revival/ retrieval from the distress. Sudden
rigidity, if imposed, will make the revival attempt very difficult as human factors (emotion and
temper run high) are to be valued. The mechanism by which the unit is allowed to function
without increasing the bank‟s exposure is called a "holding-on-operation". This is to ensure that
the borrower is not weaned away or tempted to open an account with another bank for his day -
to-day operations.

Eligibility norms for undertaking restructuring cannot be rigid but will include: -
 Reasons for the request are genuine.

 Unit being sick for reasons beyond control of the unit.

 Owner‟s stake in the project is adequate.

 Seriousness and concern of the borrower to come out of the muddle.

 Concrete steps are taken/ proposed by the borrower to improve the position.

 Prospects of correction of imbalances should be reasonably promising.

 All compliance of terms of sanction met.

 No diversion of funds outside the company/unit has taken place.

 Default / aberrations are not willful or deliberate.

Once satisfied on the above aspects, the restructuring exercise right should be taken up in right
earnest and implemented.

Plan of Action/Reliefs
Plan of Action and Reliefs proposed shall vary from case to case and there can be no general
prescription. However, one or more of the following reliefs can be considered under
Restructuring Plan: -

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 Extending the moratorium period for repayment of installment/interest in case of new

units and deferral of their recovery (for period not exceeding 3 to 12 months) in existing

 Reduction in margin on various fund based and non -fund based limits - relief not more
than 10% with minimum margin of 15%.

 Permitting need-based interchangeability of working capital limits sanctioned, or re-

alignment of limits.

 Allowing over limits - up to certain level say 20% up to a maximum of 3 to 12 months.

 Purchasing fresh bills to pay off past due bills with interest.

 Permitting cheques/Demand Draft Purchase over and above the sanctioned limit for
genuine transactions.

 Lowering of rate of interest according to cash flows need-based basis.

 Any other relief not involving financial outlay (additional funds).

Before granting any of the above reliefs it should be ensured that: -
 All terms and conditions of original sanction are complied with/without any exception.

 Perfection of security is done.

 Aberrations are of temporary nature and expected to get corrected by reliefs in a short
duration say 3 to 12 months - thereafter reliefs and concessions are expected to be

 No willful/deliberate default of diversion of funds about the unit operations.

 Sacrifice, if any, is quantified and the bank reserves right of recompense.

Control Mechanism and Monitoring

The control mechanism shall include: -
 Control over cheques issued by borrower.

NCRDs Sterling Institute of Management Studies 48


 Monthly statement of borrower's performance.

 Monthly reporting on the results of restructuring by Branch Manager to next higher
 Compulsory Monthly inspection in accounts with fund based limit of Rs.5 Lakhs and
over and quarterly inspections in smaller accounts.

With the above measures constant monitoring of the "Restructuring Plan" and its progress
can be done by Branch/Regional Office/zonal office.

A quarterly review of such accounts can be done in forums like Zonal Committee/NPA
Management Meeting etc. for farther course of action. The steps outlined above are short-term in
nature. These are to be adopted in the case of Aberrations of: -
 Temporary nature, where the borrowal account will be restored to health in a relatively
short period by adopting these measures, and
 Other accounts where a viability study has to be conducted, pending finalisation of the
viability study, and approval of a rehabilitation programme, the short-term steps may be

Viability study should be undertaken in the case of accounts falling under category above
as soon as possible, but not later than 2 months from the identification of the need for
restructuring, and rehabilitation. After a viability study has been conducted, the Bank may reach
a decision on either rehabilitating the unit, or recalling the advance.
In case the rehabilitation route is adopted, the restructuring operations should stop within
one month of the rehabilitation package being approved, and the rehabilitation package put into
operation. This limit would not be applicable in cases under reference to BIFR.

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Rehabilitation programme comes into picture when the unit is declared "sick". In view of
Government guidelines/RBI norms, Banks/FI‟s are required to be in line with the norms as far as
rehabilitation, reliefs/concessions etc. are concerned. Often the units being taken up under
rehabilitation programmes are chronic cases having suffered losses, erosion in net worth etc. We
are not allowed to deviate much from the norms because normally such programmes are drawn
within the prescribed norms/ parameters of Govt./RBI. It is a welcome sign that by a recent
directive, RBI has permitted Banks/agencies to extend reliefs/concessions beyond the broad
parameters laid down by RBI, without its prior approval for potentially viable non SSI sick/weak
industrial units only. The eligibility norms, extent of relief are discussed in the following chapter.

What is pertinent is proper diagnosis of the causes of sickness and if so whether such
rehabilitation programme can turn around the unit in a given time frame. If it can, no time should
be lost in formulating the rehabilitation programme for speedy implementation. On the contrary,
if it is believed that a rehabilitation programme will not be fruitful it is equally important to
counsel the borrower and suggest ways and means of liquidating the dues. This aspect is
discussed in Chapter on "Recovery Policy".

Any rehabilitation programme is a conscious exercise for the revival of the unit to recover
the debt. Hence these units require constant support, monitoring and review. We should be
human in approach to the problems of the unit under rehabilitation. As rehabilitation may
involve additional infusion of funds it is necessary that all efforts should be made to ensure
success of the programme.

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Eligibility for undertaking rehabilitation programmes centres round the following: -

a) The unit is falling within the definition of "sickness" as defined by RBI.
b) The causes of sickness are such that there is hope of revival of the unit within a span
of 5 to 10 years. The prospects of revival depend on technical feasibility and
economic viability of the proposed scheme.

c) There is no deliberate intention of the borrowers to make the unit sick and they are
serious about revival plan.
d) No serious staff accountability.

Having defined the eligibility norms, it will be prudent to look into definition of Sickness.

Sick SSI Unit: RBI Definition.

A Sick SSI unit is one, which has at the end of any accounting year accumulated losses equal to
or exceeding 50% of its peak net worth in the immediately preceding two accounting years, and
any of its borrowal accounts has become a doubtful asset.

Sick Non-SSI Unit: BIFR definition.

A sick non-SSI unit is defined as one which has been registered for a period of 5 years and
whose net worth is fully eroded by accumulated losses –

Weak Industrial Unit:

These units are those whose net worth has been eroded by 50% by accumulated losses. Such
companies should report to the BIFR.

Once a unit is Sick as per the norms and revival prospects are bright, the cases become eligible
for rehabilitation programme.

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Viability of sick units

As per RBI guidelines in regard to viability of sick units here are the prescribed norms
 For units in Corporate Sector under SICA. 1985 including units under non –SSIU:
After implementation of package of reliefs and concessions the company can be considered
as potentially viable provided -

o After extending the reliefs and concessions for a period of 7 years the unit is in a
position to service the debt and interest.

o The restructured debts should be repaid within the following periods:

FITL 3 to 5years
WCTL 5 to 7 years
Other T/L 10 years (max)

 For units under SSIU Sector -

After implementation of package of reliefs and concessions the unit can be considered as
potentially viable provided
o After extending the reliefs and concessions for a period of 5 years the unit is in a
position to service the debt and interest.

o The average DSCR over the rehabilitation plan should not be less than 1.33

o The restructured debts should be repaid within the following periods –

FITL 3 years
WCTL 5 years
Other T/L 7 years

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Pre-conditions for any rehabilitation programme are briefly as follows: -

 The terms of the package are to be duly acceptable to the borrower. Any reservations and
non-compliance of the terms of the package will render the exercise a non -starter.

 The promoters' contribution required for the programme should be fully tied up and
satisfactory proof available of the same.

 Bank should not lose track of validity of documents. Any deficiencies in documentation,
strengthening of security should be removed/ done before agreeing for rehabilitation.

 Necessary approvals from Bank's authority, BIFR (if applicable), consent from other
FI‟s/agencies should be obtained.

 All terms of sanction of the rehabilitation programme are to be meticulously complied

with including documentation, funding of debt, interest reliefs, submission of data etc.

 The financial issues are in place.

Schemes - Reliefs and Concessions

The Bank in case of SSI units may formulate rehabilitation scheme. In case of Sick
Industrial Companies, BIFR appoints an Operating Agency to formulate the rehabilitation
package on behalf of multiple Banks/Fl or consortium of lenders.

The scheme of rehabilitation inter alia involves -

 Ascertaining the unsecured portion of working capital fund based on limits and
converting them into funded loan called Working Capital Term loan.

 Similarly the overdue installments in term loan can be funded or rescheduled

 Overdue interest in Term Loan accounts can be funded in the form of Funded Interest
Term Loan (FITL).

 In addition to the existing working capital (secured) limit, additional working capital
limits can be considered.

NCRDs Sterling Institute of Management Studies 53


 New term loan for purchase of balancing equipment etc. may be granted.

 Interest concessions may be considered from the cut-off date. This is defined as the date
on which the Rehabilitation Package is implemented.

 Some rehabilitation packages may not involve additional funds but only rescheduling of
payments and extended moratorium may be considered.

 Similarly unpaid interest can be funded into Funded Interest Term Loan (FITh).

 Conversion of debt to equity or debentures (Working Capital limit) can be explored.

 Even in interest serviced accounts - need-based write off (like moratorium period interest
etc.) or fresh loan may be considered.

 Offering other loan services such as "factoring" of debt and syndication of required
additional funds to medium/large units also help in rehabilitation.

Recovery Policy
Any form of a rehabilitation policy or restructuring exercise should finally be linked to
recovery of Bank's dues to the maximum possible extent. Hence the entire policy should revolve
around achieving recoveries. Hence certain recovery policy measures are listed below:

 When Bank is not sure about success of the project in its present form the best decision would be
to counsel the borrower to agree for sale of the unit to certain prospective buyers on as is where
is basis with One Time Settlement (OTS). This is the best form of earliest recovery. If any gap
persists, necessary reliefs may be considered with some cash contribution from the owners.

 Where the project is not viable and there are no ready buyers, we may pressurize the borrower to
sell off the assets at the best available price and reduce the dues. There may be some other units
interested not in outright settlement but in taking over the management of the company and Bank
can transfer the liability to the new management (company). Takeover, mergers and acquisitions
are various means of converting the bad debt into realizable one. The branches can explore the
possibility of merger and acquisition of sick unit by another AAA/AA rated unit engaged in
similar/related activities in the same or nearby centres. Some of the profitable units may take-
over sick units under their diversification programme. The Regional Office/zonal Office should

NCRDs Sterling Institute of Management Studies 54


have required base and assist branches in this regard with details of such potential prospective
buyers. Financial Consultants/Chartered Accountants can play major role in furnishing
information. BLBC meetings should be used for exchange of information in this regard. By
means of takeover/ merger/ acquisition the NPA may get paid off fully and liability to other unit
can be treated as standard asset in future.

 Once rehabilitation is implemented, the unit may be asked to adjust a portion of their bill
realization towards overdues.

Problems of recovery: Recovery process has two dimensions: -

a) Voluntary Recovery - This is achieved partially by –

a. Rescheduling of repayment installments.

b. Undertaking effective nursing.

c. Extending reliefs and concessions.

d. Releasing charge over flabby assets for sale/realisation and repayment of dues.

e. Compromise proposals involving certain sacrifice based on present value realisation.

b) Forced Recovery - Where nursing is not viable and borrower is not co-operative, forced
recovery is undertaken by -

a. Filing of suit and attachment of assets.

b. Proceeding against guarantors.

c. Launching of liquidation/insolvency proceedings.

d. Resorting to takeovers / referring the case to BIFR, etc.

It is pertinent to note that even after filing suit, the channel of communication with borrower
should be kept open and a compromise offer can be entertained at any point of time.

e. Reference to Lok Adalats, Debt Recovery Tribunals etc.

f. Peer pressure from group is another effective way recovery.

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Business Mix reaches Rs.342831 crores - robust rise of 21.52 %.

Net Profit up by 3.91% from Rs.562 crores to Rs.584 crores.
Operating Profit up by 2.05% (Rs. 1094 Crore) supported by growth in net interest income as
well as other income.
Net Interest Income rises by 10.16% to Rs. 1301Cr from Rs. 1181 Cr, despite challenging
Net Interest Margin at 2.42%.
Non Interest Income rises by 14.13% from Rs 566 crores to Rs 646 crores.
Gross NPA ratio at 1.89%.
Net NPA ratio at 0.84% as against 0.52% as on June
2008 (*).
Provision coverage stands at 67.41% (*).
(*) Due to change in Accounting treatment of floating provisions as per RBI guidelines

Cost to Income Ratio is at 43.82%.

Return on Assets is at 1.03%.
Total Income for the Quarter rose to Rs.5024 Crore from Rs.4115 Crore, showing a growth of
Bank has made adequate provisions for terminal benefits, in line with AS 15 requirements. Rs.
105.77Cr estimated and provided.
CASA amounted to Rs. 51333 crores constituting 32% of Total Deposits as against 31% in
Earnings per share for 12 months go up from Rs. 10.70 to Rs.11.13.
Book value per share rises from Rs. 174.74 to Rs.223.00.
Capital Adequacy Ratio rises to 13.26% from 12.39 %as per Basel II.
Deposits grew by 22.47% on YoY basis to Rs.1, 95,021 crores.
Advances rose by 20.28% to reach Rs.1, 47,809 crores.
NCRDs Sterling Institute of Management Studies 56

Total no of branches are 3031.

All branches are functioning on CBS platform, spanning over 1920 cities & towns.
Net worth of the Bank is at Rs.11728 crores.

Other Highlights
Bank of India has been rated by Economic Times /The Nielsen company survey
“The Most Trusted Brands “(MTB) 2009 as follows:
Under PSU Banking Category –2nd Next TO SBI
Under Top Service Brands–8th
The Debutant –first time in the Top 100
In the MTB, Bank of India ranked 92nd - 54 rankings ahead of last year rankings (146th Rank
during 2008)

Global Domestic Foreign

NCRDs Sterling Institute of Management Studies 57


NPA Movement (Rs. in Million) of Bank of India

The Gross and NPA levels are well below Industry Average

Sectorwise Breakuo of NPA (Domestic) (Rs. in Million) of Bank of India

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GROUP – I LARGE BANKS (Balance Sheet size more than Rs. 24,000 crore)
Quality of Assets
No. Sheet (Rs Growth Coverage advances (%)
Cr) Rate (%) (%) (%)
1. Axis Bank 147722.05 1.26 63.56 0.40 13.91
2. Bank of India 225501.76 1.64 69.32 0.44 13.01
3. Punjab National Bank 246918.62 1.26 80.05 0.17 12.59
4. Bank of Baroda 227406.73 0.80 43.90 0.31 12.88
5. HDFC Bank 183270.77 4.21 68.43 0.63 15.09
6. Indian Bank 84121.75 0.50 42.58 0.51 13.27
7. Federal Bank 38850.87 2.78 87.34 0.30 20.14
8. Corporation Bank 86905.81 0.54 74.20 0.30 13.61
9. Union Bank of India 160975.51 1.38 80.53 0.34 12.01
10. Citibank 105263.59 6.42 41.81 2.63 13.23
11. State Bank of India 964432.09 2.30 38.72 1.76 12.97
12. State Bank of Travancore 49460.51 1.33 61.17 0.58 12.13
13. HSBC 94620.39 8.27 74.61 1.42 15.31
14. Canara Bank 219645.80 1.94 30.34 1.09 14.10
15. Indian Overseas Bank 121073.40 3.34 39.10 1.56 12.70
16. Standard Chartered 97492.16 2.03 39.14 1.37 11.56
17. State Bank of Hyderabad 76721.89 0.82 42.74 0.38 10.58
18. ICICI Bank 379300.97 2.28 52.81 2.09 15.92
19. Punjab & Sind Bank 41363.79 0.66 49.03 0.32 11.88
20. Andhra Bank 68469.20 0.50 81.49 0.18 12.37
21. Oriental Bank of Commerce 112582.60 0.81 56.20 0.68 12.00
22. State Bank of Bikaner & Jaipur 46370.20 1.22 48.41 0.85 13.18
23. Allahabad Bank 97648.01 1.56 59.51 0.74 13.11
24. Syndicate Bank 130255.67 1.32 58.08 0.77 11.37
25. IDBI Bank 172402.32 0.69 33.90 0.92 11.23
26. State Bank of Patiala 69665.44 0.98 54.06 0.60 11.43
27. State Bank of Indore 33075.89 1.07 39.48 0.89 11.81
28. Jammu and Kashmir Bank 37693.26 2.02 48.36 1.98 13.46
29. UCO Bank 111664.17 1.08 45.75 1.21 9.75
30. State Bank of Mysore 40485.79 0.81 64.89 0.50 12.41
31. Dena Bank 48460.50 2.60 48.27 1.11 10.73
32. Bank of Maharashtra 59030.35 1.16 63.16 0.79 10.75
33. Vijaya Bank 62382.60 1.99 57.36 0.82 13.08
34. Kotak Mahindra Bank 28711.87 3.21 45.69 2.39 19.86
35. Central Bank of India 147655.23 1.10 52.42 1.24 11.75
36. IndusInd Bank 27614.68 1.53 29.76 1.14 12.33
37. ING Vysya Bank 31856.99 2.11 0.00 1.23 11.68
38. RBS 32082.55 6.73 56.69 2.20 12.66
39. United Bank of India 62040.71 2.56 48.53 1.48 13.28

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GROUP – II MID-SIZE BANKS (Balance Sheet less than or equal to Rs. 24,000 crore & No.
of branches more than 10)
Quality of Assets
No. Sheet (Rs Growth Coverage advances (%)
Cr) Rate (%) (%) (%)
1. YES Bank 22900.79 0.81 51.54 0.33 14.50
2. Karur Vysya Bank 17060.74 0.83 74.33 0.25 13.08
3. Dhanalakshmi Bank 5642.83 1.41 55.18 0.90 14.44
4. City Union Bank 9251.01 1.70 36.99 1.14 12.49
5. The Nainital Bank 2439.23 1.08 205.69 -1.77 12.32
6. Karnataka Bank 22857.80 1.43 70.60 0.98 13.54
7. Ratnakar Bank 1709.24 0.68 68.44 0.68 44.87
8. South Indian Bank 20383.52 1.54 43.42 1.13 13.89
9. Lakshmi Vilas Bank 8317.25 0.80 51.34 1.24 10.09
10. Bank of Rajasthan 17224.39 0.85 59.85 0.83 11.50
11. Catholic Syrian Bank 7040.09 1.80 46.50 2.39 11.14
12. Development Credit Bank 5943.02 8.91 53.34 3.88 13.44

GROUP – III SMALL BANKS (Balance Sheet more than or equal to Rs. 3,000 crore & No.
of branches less than or equal to 10)
Quality of Assets
No. Sheet (Rs Growth Coverage advances (%)
Cr) Rate (%) (%) (%)
1. DBS Bank 12564.59 1.21 56.64 0.55 15.70
2. JP Morgan Chase Bank 10531.23 3.35 121.52 1.27 15.90
3. Scotia Bank 6995.70 0.00 100.00 0.00 19.34
4. Barclays Bank PLC 20688.63 11.09 53.75 4.59 17.07
5. Bank of America 9845.35 0.00 100.00 0.00 12.73
6. Deutsche Bank AG 24954.87 4.46 68.19 0.88 15.25
7. Calyon Bank 6615.56 0.00 100.00 0.00 13.20
8. BNP Paribas 9827.99 1.11 48.45 1.04 12.37

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GROUP – IV VERY SMALL BANKS (Balance Sheet size less than Rs. 3,000 crore & No. of
branches less than 10)
Quality of Assets
No. Sheet Growth Coverage advances (%)
(Rs Cr) Rate (%) (%) (%)
1. Mizuho Corporate Bank 2183.52 0.00 100.00 0.00 37.21
2. Shinhan 1035.89 0.00 100.00 0.00 36.80
3. Antwerp Diamond Bank 968.46 4.49 100.00 0.00 29.03
4. Abu Dhabi Commercial Bank 655.43 0.50 100.00 0.00 54.29
5. Bank of Tokyo-Mitsubhishi UFJ 4546.39 0.06 90.31 0.03 29.51
6. Bank of Bahrain & Kuwait B.S.C 610.10 0.23 97.86 0.09 30.54
7. Societe Generale 2158.36 0.00 100.00 0.00 22.47
8. Mashreqbank psc 110.14 0.00 100.00 -0.01 76.80
9. Arab Bangladesh Bank 78.84 0.00 1017.75 -9.36 100.00
10. Oman International Bank S.A.O.G 393.16 0.00 100.00 0.00 27.47
11. Krug Thai Bank 152.25 0.00 100.00 0.00 110.53

Source: BT-KPMG study (Business Today December 2009 issue)


Group-I - Large Banks

Punjab National Bank has the least Net NPA % whereas Citibank has the highest

Indian Bank has the least NPA Growth rate whereas HSBC bank has the highest

Federal Bank has the best NPA coverage whereas ING Vysya Bank has the least coverage

Group-II – Mid-Size Banks

The Nainital Bank has the least Net NPA % whereas Development Credit bank has the highest

Ratnakar Bank has the least NPA Growth rate whereas Development Credit bank has the highest

The Nainital Bank has the best NPA coverage whereas City Union Bank has the least coverage

NCRDs Sterling Institute of Management Studies 61


Group-III – Small Banks

Scotia Bank, Bank of America, Caylon Bank have the least Net NPA % almost 0.00% whereas
Barclays Bank PLC has the highest

Scotia Bank, Bank of America, Caylon Bank have the least Net NPA % almost 0.00% whereas
Barclays Bank PLC bank has the highest

JP Morgan Chase Bank has the best NPA coverage whereas BNP Paribas has the least coverage

Group-IV – Very Small Banks

Arab Bangaladesh Bank have the least Net NPA % whereas Bank of Bahrain & Kuwait B.S.C.
has the highest

Except Antwerp Diamond Bank N.V., Abu Dhabi Commercial Bank, Bank of Tokyo-
Mitsubhishi UFJ all have no NPA Growth while Antwerp Diamond Bank N.V. has the highest

Almost all banks have 100% NPA coverage

According to the BT-KPMG study for the Best Banks 2009 Bank of India ranks second in the
study covering all the factors while Axis Bank ranks first among the group of large banks whose
Balance sheet size is more than Rs. 24,000 crore.

Bank of India ranks 23rd w.r.t. Total NPA Growth Rate (%) about 1.64%

ranks 7th w.r.t. NPA Coverage (%) about 69.32%

ranks 10th w.r.t. Net NPA/ Net Advances (%) about 0.44%

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This secondary data is collected from Reserve Bank of India‟s website

Gross NPA/ Total Assets (%)

Public Sector Banks

Private Sector Banks
1 Foreign Banks


2004-05 2005-06 2006-07 2007-08 2008-09

The Gross NPA/ Total Assets of Public Sector Banks is showing a decreasing trend whereas the
situation for Private Sector banks and Foreign banks is not that good as they are showing a rise in
their Gross NPAs.

Gross NPA/ Gross Advances (%)

Public Sector Banks

Private Sector Banks
2 Foreign Banks

2004-05 2005-06 2006-07 2007-08 2008-09

Through this graph it is clear that the Public sector banks have clearly shown a decreasing trend
in their NPAs level whereas the Private sector and foreign banks show an upward trend from
past three years

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Net NPA/ Total Assets (%)


Public Sector Banks

Private Sector Banks
0.4 Foreign Banks


2004-05 2005-06 2006-07 2007-08 2008-09

Here, the percentage of Net NPA/ Total Assets has been stable for public sector banks from past
three years whereas Private sector banks have shown an increase in those three years when
compared to public sector banks. Foreign banks have hugely increased their percentage in the
last year.

Net NPA/ Net Advances (%)

Public Sector banks
Private Sector banks
Foreign Banks


2004-05 2005-06 2006-07 2007-08 2008-09

Public sector banks have shown a decreasing trend whereas Private sector banks are having
problems in maintaining the percentage of Net NPA/ Net Advances low and foreign banks have
shown variability.

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NPAs of Indian Banks as on

March 2009


Public Sector Banks
65% Private Sector Banks
Foreign Banks

The Public sector banks have a large share of NPAs as March 2009 of about Rs. 44,042 crore
and Private Sector banks have about Rs. 16,887 crore and Foreign Banks have about Rs. 7155
crore. The Public sector banks mainly due to large customer base and extensive reach and
diversified activities have much more cash on their Balance Sheet. But the previous data shows
that the public sector banks have a great recovery as compared to other banks even though
having 65% of the total NPAs.

Hypothetical Analysis:

H0 - The problem of NPAs is more in Private sector banks rather than Public Sector banks as
Public sector banks have shown a great decrease in their NPA levels from past Five years. So,
the hypothetical statement H0 doesn‟t hold true and the hypotheses is rejected. H0 rejected.
Hence the statement should have “The problem of NPA is less acute in public sector banks as
compared to private sector banks.”

H1 - The secondary data shows that there is a decreasing trend in the NPA status of most of the
scheduled commercial banks because of various stringent practices followed by Banks
management and various policies by government as even the global financial crisis had less
effect on the working of Indian banks and the banks have started to improve their NPA status.
The Hypothetical statements H1 is accepted. H1 accepted.

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A] Gross NPA:

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines
as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It
consists of all the non standard assets like as sub-standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAs
Gross Advances
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very time
consuming, the provisions the banks have to make against the NPAs according to the central
bank guidelines, are quite significant. That is why the difference between gross and net NPA is
quite high.
It can be calculated by following_
Net NPAs = Gross NPAs – Provisions
Gross Advances - Provisions

Provisions are to be made to keep safety against the NPA, & it directly affect on the gross profit
of the Banks. The provision Ratio is nothing but total provision held for NPA to gross NPA of
the Banks. The formula for that is,
(i) Provision Ratio = (Total Provision/Gross NPA)*100
(ii) [Additional Formulae: Net NPA = Gross NPA – Provision
Therefore, Provision = Gross NPA – Net NPA]


Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets, which are
weighted/adjusted according to risk attached to them i.e.
Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100

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Bank of India
Bank of India has performed extremely well in NPA management. Persistent and follow-up
of potential and other NPAs with outstanding of Rs. 1 crore and above is being done through the
introduction of ACTION TAKEN REPORT (ATR) mechanism on periodical basis. Loan
Restructuring and Loan Review Cells have been established to set up restructuring exercise in all
viable cases expeditiously. Responsibilities have been assigned to monitor large NPAs (Rs l0
Lakhs and above) at administrative levels. The Chairman and Managing Director is personally
monitoring all accounts with outstanding of Rs. 5 crore and above.

Banks need to have better credit appraisal systems so as to prevent NPAs from occurring.
However, once NPAs do come into existence, the problem can be solved only if there is enabling
legal structure, since recovery of NPAs often requires litigation and court orders to recover stock
loans. With long-winded litigations in India, debt recovery takes a very long time. Banks are now
working on developing debt recovery tribunals to solve this problem. The Govt. has also mooted
the suggestion of an asset reconstruction company for augmenting recovery measures.

1. The NPA is one of the biggest problems that the Banks are facing today is the problem of Non
Performing Assets. If the proper management of the NPAs is not undertaken it would hamper
the business of the banks.
2. As the global slowdown has crept into the economy, bankers feel that in more loans are going
to turn bad in the coming quarters and therefore they want RBI to relax the deadline for loan
3. Due to Recession & slowdown in the Indian economy would result in emerging NPAs for the
public sector banks from textiles, real estate, retail, exports and auto sectors.
4. The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of
funds in the nation. This would help the nation to develop more banking branches and
developing the economy by providing the better financial services to the nation.

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5. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking
sector. The NPAs would destroy the current profit, interest income due to large provisions of the
NPAs, and would affect the smooth functioning of the recycling of the funds.
6. As a result of the NPA‟s owners do not receive a market return on their capital. In the worst
case, if the bank fails, owners lose their assets & this may affect a broad pool of shareholders &
act as a rain on Profitability.
7. Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which hampers
economic growth.
8. When many borrowers fail to pay interest, banks may experience liquidity shortages. These
shortages can jam payments across the country and as a result non performing loans may spill
over the banking system and contract the money stock, which may lead to economic contraction.
9. Banks need to create capital reserve to write off the mounting NPA‟s burden.
10. “A Man without money is like a bird without wings”, the Rumanian proverb insists the
importance of the money. A bank is an establishment, which deals with money. The basic
functions of Commercial banks are the accepting of all kinds of deposits and lending of money.
In general there are several challenges confronting the commercial banks in its day to day
operations. The main challenge facing the commercial banks is the disbursement of funds in
quality assets (Loans and Advances) or otherwise it leads to Non-performing assets.”

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Following Recommendations may be adopted to tackle the Problem of NPAs:
 Persuasion: It is very much an effective tool of recovery. It is very much an effective
tool of recovery. Continual follow- up will be very effective in most cases.

 Filing of Suits: The effectiveness of this tool depends on two major factors:
o Whether other tools have been used;
o Whether there are adequate securities to be realized.

 Compromise and Revival: It has been argued that a compromise, whereby the Bank
allows remission of principal and/or interest along with rescheduling of the repayment of
debt is a better way to deal with such advances, especially when banks are drawn into
long legal battles.

 Involvement of other Agencies: Sometimes other agencies especially govt. agencies are
involved in the recovery of dues and stagnant accounts in the priority sector. Their
involvement in the recovery of loans is very much desirable.

 Reference to B1FR: In case of large and medium units, when they are registered for not
less than seven years as companies, we can refer the case of sickness to the Board for
Industrial and Financial Reconstruction (BIFR) for early liquidation or suggestion of
rehabilitation packages.

 Enforcement of Securities: Enforcement of Securities charged to bank is equally

important aspect of the management of NPAs. Banks, wherever necessary, have to move
courts not only to obtain decrees but also to get them executed.

 Rehabilitation and Nursing: Rehabilitation and nursing of sick units, as a matter of

policy should be given a fresh look. Only viable sick units with proven capacity of the
management to run the units should be nursed.

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 Merger and Amalgamation of Units: Wherever feasible, efforts should be made to

merge the sick units with healthy units.

 Appointment of Special Tribunals: In view of ever mounting cases involving bank

advances in the various courts of India, it is highly desirable that special tribunals are
established all over India exclusively for bank's litigation.

 Writing off of Bad debts: When no other course will bring positive results it is always
preferable to write off bad advances at the earliest to avail of tax deductions, rather than
carry them forward.

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Valuation by Damodaran
Financial Management- Khan & Jain

Magazines and Journals

Handbook only for Bank of India
Business Today- December 13, 2009 issue
Capital Market- December 13, 2009 issue

Business Line
Business Standard
Economic Times

Research Paper-
Research Paper – “A comparative study of Non Performance Assets in India” by Prashanth K
Reddy, IIM- Ahmedabad

Research Paper on “Rooting Out Non-Performing Assets” by Nachiket Mor, ICICIresearchcentre

Report on “Maximising Value of Non-Performing Assets” by Organisation For Co-Operation

and Development (OECD)

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Proforma for regular write off BANK OF INDIA

Ref. No. SARM: 2009-10



Particulars of Borrowers and Guarantors
1 Name of the Account
2 Asset Classification
2a Date of NPA
3 Sector
3a Category
4 Constitution
5 Group/ Principal person
6 Name of Directors & their worth (Rs. in lacs)
Directors At the At present Basis of assessment
time of

Guarantors :

7 Date of establishment
8 Credit facilities since
9 a. Activity
b. Present position
c. Reasons for closure, if not
d. Reasons for account turning NPA
10 Information about the Borrower/
Guarantors, their assets and present
market/ realizable value in brief,
which are not charged to the Bank.

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Details of the Accounts and Security:

1(a)Particulars of existing liabilities (should include suspense debit o/s)

As on
(Rs. in lacs)
Facili Book Of (2) Net Provisio Regular Interest Unchar Prudentia
ty Balanc unreali- O/S (2- n held Write off ceased ged l
e sed 3) as on Proposed date interest Write off
interest last B/S done
in S.Cr. date earlier
(1) (2) (3) (4) (5) (6) (7) (8) (9)

1 (b) Original Sanctioning Authority & Date :

2(a) Security Details
Nature Original Present Basis of Comments
Value realizable assessment

Principal –
Cash Credit
Collateral –
Second charge,
If any.

III. (a) Position of suit, if filed (Rs. in lacs.)

Date of Suit Date of Amount of Decreed Date of Present position of

Suit Amount Decree Decree rate of EP decree

b. Legal expenses incurred :

c. Whether legal expenses have been :

fully absorbed in P & L

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d. If not, amount yet to be charged to :

P & L account

IV. ECGC Claim Position

Date of Amount Date of Amount Bal. Claim Reasons for not

Claim of Claim settlement settled available in filing / rejection
Sundry Credit

V. Details of present status

with BIFR

VI. SAR Status

VII. Last Inspection date &


VIII. Group liabilities, if any.

(Rs. in lacs)
Sr. Account Limits sanctioned Outstanding Asset Remarks
No. Code

IX. Financial Implications: For Regular Write Off

b) (Rs. in lacs)
Recommended as under for adjustment
i. Amount of prudential write off already done (wherever applicable)
ii. Appropriation of ECGC/ DICGC claim (if available)
iii. Reversal of URI
iv. Waiver of UCI
v. Amount of provision held being written off
vi. Residual amount if any recommended for write off to the debit of P

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& L Account
Total (i+ii+iii+iv+v+vi) …..B
A and B should tally


We hereby certify that –

i. We are satisfied that all conditions for write off are satisfied.
ii. The account has not been sanctioned by the undersigned.
iii. There is no alleged fraud and/ or other investigation by any investigative agency in
progress in the account.

Justification and recommendations for Regular Write Off.

Branch Recommendations:

In view of the foregoing we recommend for –

i. Write off ledger o/s of Rs. With conversion of PWO of Rs.

ii. Waiver of UCI of Rs. lakh
iii. Total sacrifice of Rs. Lakh.


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Name of the Bank:
Position as on………
1) Gross Advanced *
2) Gross NPA *
3) Gross NPA as %age of Gross Advanced
4) Total deduction( a+b+c+d )
( a ) Balance in interest suspense a/c **
( b ) DICGC/ECGC claims received and held pending
( c ) part payment received and kept in suspense a/c
( d ) Total provision held ***
5) Net advanced ( 1-4 )
6) Net NPA ( 2-4 )
7) Net NPA as a %age of Net Advance

*excluding Technical write-off of Rs.________crore.

**Banks which do not maintain an interest suspense a/c to park the accrued interest on NPAs
may furnish the amount of interest receivable on NPAs.

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


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