INTRODUCTION

NPA. The three letters 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, no cannot be then left is to look after the factor responsible for it and managing those factors. Non-performing assets, also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments than a bank makes its profits. Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as non-performing. A high level of non-performing assets compared to similar lenders may be a sign of problems, as may a sudden increase. However this needs to be looked at in the context of the type of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of non-performing debt, but will make up for this by charging borrowers higher interest rates, increasing spreads. A mortgage lender will almost certainly have lower nonperforming assets than a credit card specialist, but the latter will have higher spreads and may well make a bigger profit on the same assets, even if it eventually has to write off the non-performing loans.

What is an NPA ?

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained past due for a specified period of time. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance where; i Interest and/ or instalment of principal remain overdue for a period of days in respect of a term loan, The account remains out of order for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004. more than 90

'Out of Order' status: An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the

outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'. Overdue: Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank. Types of NPA: A] Gross NPA B] Net NPA 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. 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. It can be calculated by following Net NPAs Gross NPAs Provisions Gross Advances - Provisions ASSET CLASSIFICATION AND PROVISION REQUIREMENT

Categories of NPAs: Standard Assets:

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 does 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. Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues: a) Sub-standard Assets b) Doubtful Assets c) Loss Assets Sub-standard Assets: A sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. In such cases, 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 jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Doubtful Assets: A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values highly questionable and improbable. With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the substandard category for 12 months. Loss Assets: A loss asset is one where the bank or internal or external auditors have identified loss or the RBI inspection but the amount has not been written off wholly. In other words, such an

asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Provisioning Norms General In order to narrow down the divergences and ensure adequate provisioning by banks, it was suggested that a bank's statutory auditors, if they so desire, could have a dialogue with RBI's Regional Office/ inspectors who carried out the bank's inspection during the previous year with regard to the accounts contributing to the difference.

 Pursuant to this, regional offices were advised to forward a list of individual advances, where the variance in the provisioning requirements between the RBI and the bank is above certain cut off levels so that the bank and the statutory auditors take into account the assessment of the RBI while making provisions for loan loss, etc. The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. In conformity with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against sub-standard assets, doubtful assets and loss assets as below: Loss assets: The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. Doubtful assets: 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful: Period for which the advance has been Provision considered as doubtful Up to one year One to three years More than three years requirement (%) 20 30 50

 Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31, 2001 has to be made in phases as under: As on 31.03.2001, 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful category. As on 31.03.2002, balance of the provisions not made during the previous year, in addition to the provisions needed, as on 31.03.2002. Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year. Note: Valuation of Security for provisioning purposes With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Valuers appointed as per the guidelines approved by the Board of Directors should get collaterals such as immovable properties charged in favour of the bank valued once in three years. Sub-standard assets: A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available. Standard assets: From the year ending 31.03.2000, the banks should make a general provision of a minimum of 0.25 percent on standard assets on global loan portfolio basis. The provisions on standard assets should not be reckoned for arriving at net NPAs. The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions - Others' in Schedule 5 of the balance sheet. Floating provisions:

Some of the banks make a 'floating provision' over and above the specific provisions made in respect of accounts identified as NPAs. The floating provisions, wherever available, could be set-off against provisions required to be made as per above stated provisioning guidelines. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice. Provisions on Leased Assets: Sub-standard assets 10 percent of the 'net book value'. As per the 'Guidance Note on Accounting for Leases' issued by the ICAI, 'Gross book value' of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or financial statements. Statutory depreciation should be shown separately in the Profit & Loss Account. Accumulated depreciation should be deducted from the Gross Book Value of the leased asset in the balance sheet of the lessor to arrive at the 'net book value'. Also, balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book value' of the leased assets. The amount of adjustment in respect of each class of fixed assets may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate column in the section related to leased assets. Doubtful assets 100 percent of the extent to which the finance is not secured by the realisable value of the leased asset. Realisable value to be estimated on a realistic basis. In addition to the above provision, the following provision on the net book value of the secured portion should be made, depending upon the period for which asset has been doubtful: Period Up to one year One to three years More than three years Loss assets The entire asset should be written-off. If for any reason, an asset is allowed to remain in books, 100 percent of the 'net book value' should be provided for. %age of provision 20 30 50

Guidelines for Provisions under Special Circumstances Government guaranteed advances With effect from 31 March 2000, in respect of advances sanctioned against State Government guarantee, if the guarantee is invoked and remains in default for more than two quarters (180 days at present), the banks should make normal provisions as prescribed in paragraph 4.1.2 above. As regards advances guaranteed by State Governments, in respect of which guarantee stood invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner, during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year. Advances granted under rehabilitation packages approved by BIFR/term lending institutions: In respect of advances under rehabilitation package approved by BIFR/term lending institutions, the provision should continue to be made in respect of dues to the bank on the existing credit facilities as per their classification as sub-standard or doubtful asset. As regards the additional facilities sanctioned as per package finalised by BIFR and/or term lending institutions, provision on additional facilities sanctioned need not be made for a period of one year from the date of disbursement. In respect of additional credit facilities granted to SSI units which are identified as sick [as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002] and where rehabilitation packages/nursing programmes have been drawn by the banks themselves or under consortium arrangements, no provision need be made for a period of one year. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policies are exempted from provisioning requirements. However, advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements. Treatment of interest suspense account: Amounts held in Interest Suspense Account should not be reckoned as part of provisions. Amounts lying in the Interest Suspense Account should be deducted from the relative advances and thereafter, provisioning as per the norms, should be made on the balances after such deduction. Advances covered by ECGC/DICGC guarantee In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the balance in excess of the amount guaranteed by these Corporations. Further, while arriving at the provision required to be made for doubtful assets, realisable value of the securities should first be

deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provision made as illustrated hereunder: Example Outstanding Balance DICGC Cover Rs. 4 lakhs 50 percent doubtful Value of security held Rs. 1.50 lakhs (excludes worth of Rs.)

Period for which the advance has remained doubtful More than 3 years remained

Provision required to be made Outstanding balance Less: Value of security held Unrealised balance Less: DICGC (50% of unrealisable balance) Net unsecured balance Provision for unsecured portion of advance Provision for secured portion of advance Total provision required to be made Advance covered by CGTSI guarantee In case the advance covered by CGTSI guarantee becomes non-performing, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for non-performing advances. Two illustrative examples are given below: Example I Rs. 1.25 lakhs Rs. 1.25 lakhs (@ 100 percent of unsecured portion) Rs. 0.75 lakhs (@ 50 percent of secured portion) Rs. 2.00 lakhs Rs. 4.00 lakhs Rs. 1.50 lakhs Rs. 2.50 lakhs Cover Rs. 1.25 lakhs

Asset classification status: CGTSI Cover

Doubtful More than 3 years; 75% of the amount outstanding or 75% of the unsecured amount or Rs.18.75 lakh, whichever is the least

Realisable value of Security Balance outstanding

Rs.1.50 lakh Rs.10.00 lakh

Less Realisable value of security Rs. 1.50 lakh Unsecured amount Less CGTSI cover (75%) Rs. 8.50 lakh Rs. 6.38 lakh

Net unsecured and uncovered Rs. 2.12 lakh portion: Provision Required Secured portion Total provision required Example II Asset classification status CGTSI Cover Doubtful More than 3 years; 75% of the amount outstanding or75% of the unsecured amount or Rs.18.75 lakh, whichever is the least Realisable value of Security Balance outstanding Rs.10.00 lakh Rs.40.00 lakh Rs.1.50 lakh Rs. 0.75 lakh (@ 50%) Rs. 2.12 lakh ( 100%) Rs. 2.87 lakh

Unsecured & uncovered portion Rs.2.12 lakh

Less Realisable value of security Rs. 10.00 lakh Unsecured amount Less CGTSI cover (75%) Rs. 30.00 lakh Rs. 18.75 lakh

Net unsecured and uncovered Rs. 11.25 lakh portion: Provision Required Secured portion Total provision required Take-out finance The lending institution should make provisions against a 'take-out finance' turning into NPA pending its take-over by the taking-over institution. As and when the asset is taken-over by the taking-over institution, the corresponding provisions could be reversed. Reserve for Exchange Rate Fluctuations Account (RERFA) When exchange rate movements of Indian rupee turn adverse, the outstanding amount of foreign currency denominated loans (where actual disbursement was made in Indian Rupee) which becomes overdue, goes up correspondingly, with its attendant implications of provisioning requirements. Such assets should not normally be revalued. In case such assets need to be revalued as per requirement of accounting practices or for any other requirement, the following procedure may be adopted: The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account. Besides the provisioning requirement as per Asset Classification, banks should treat the full amount of the Revaluation Gain relating to the corresponding assets, if any, on account of Foreign Exchange Fluctuation as provision against the particular assets. Rs.10.00 lakh Rs. 5.00 lakh (@ 50%) Rs.11.25 lakh (100%) Rs. 16.25 lakh

Unsecured & uncovered portion Rs.11.25 lakh

Impact of NPA Profitability:

NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesnt affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank. Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Routine payments and dues. Involvement of management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank. Credit loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks .

REASONS FOR NPA: According to a recent study conducted by the RBI, the underlying reasons for NPAs in India can be classified into two heads, namely: 1. Internal Factors

2. External Factors Internal Factors: a. Diversion of funds for expansion/diversification/modernisation or for taking up new projects b. Diversion of funds for assisting or promoting associate concerns c. Time or cost overrun during the project implementation stage d. Business failures due to product failure, failure in marketing, etc e. Inefficiency in management f. Slackness in credit management & monitoring g. Inappropriate technology or problems related to modern technology External Factors: a. Recession in the economy as a whole b. Input or power shortage c. Price escalation of inputs d. Exchange rate fluctuation e. Accidents & natural calamities f. Changes in government policies relating to excise & import duties, pollution control orders, etc g. Government loan waiver scheme

Other Factors: Apart from the above factors, there are certain other factors which are responsible for standard assets becoming NPAs. They are : a. Liberalisation of the economy & the consequent pressures from liberalisation like severe competition, reduction of tariffs, removal of restrictions

b. Poor monitoring of credits & the failure to recognise early warning signals shown by standard assets c. Promoters over-optimism in setting up large projects d. Sudden crashing of capital markets & the failure to raise adequate funds e. Granting of loans to certain sectors on the basis of the Governments directives rather than commercial imperatives f. Mismatch of funding i.e. using loans granted for short term for long term transactions g. High leveraging & high cost of borrowing h. Commitment of wilful defaults sensing that the legal recourse available to collect debts is very slow

Early symptoms by which one can recognize a performing asset turning in to Nonperforming asset

The Early Warning Signals (EWS) are those that clearly indicate or show some signs of credit deterioration in the loan account. They indicate the potential problems involved in the accounts so that remedial action can be initiated immediately. In fact most banks have Early Warning Systems for identification of potential NPAs. Classification of Early Warning Signals

They can broadly be classified into 5 categories: 1. Financial signals 2. Operational signals 3. Banking signals 4. Managerial signals 5. External signals Financial Warning Signals a. Default in repayment b. Continuous irregularity in the account c. Development of L/C or invocation of guarantees d. Deterioration in working capital position or in liquidity e. Declining sales compared to precious period f. Substantial increase in long-term debts g. Rising sales but falling profits h. Incurring operating losses or net losses i. Rising level of bad debt losses Operational Warning Signals a. Underutilisation of plant capacity b. Non-payment of electricity bills, wages, etc c. Frequent labour problems d. Poor diversification & frequent changes in plan for expansion / diversification / modernisation e. Evidence of overstocking & aged inventory f. Loss of important customers Managerial Warning Signals a. Diversion of funds & poor financial controls

b. Lack of co-operation from key personnel c. Change in management or ownership pattern or key personnel d. Undertaking of undue risks e. Fudging of financial statements Banking signals a. Frequent request for further loans b. Delays in servicing of interest c. Reduction of operations in the account or reduction in bank balances d. Opening of accounts with other banks e. Dishonouring of cheques or return of bills sent for collection f. Not routing sales transactions through the account g. Delays in submitting stock statements & other data or non-submission of periodical statements h. Frequent excesses in the account External Warning Signals a Economic recession a. Introduction of new technology b. Changes in Government policies c. Emergence of new competition d. Natural calamities e. Weakening of industry characteristics

Preventive Measurement For NPA Early Recognition of the Problem: Invariably, by the time banks start their efforts to get involved in a revival process, its too late to retrieve the situation- both in terms of rehabilitation of

the project and recovery of banks dues. Identification of weakness in the very beginning that is : When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Restructuring should be attempted where, after an objective assessment of the promoters intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse. Identifying Borrowers with Genuine Intent: Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who has intelligent inputs with regard to promoters sincerity, and capability to achieve turnaround. Base don this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. In this regard banks may consider having Special Investigation of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category. Timeliness and Adequacy of response: Timeliness Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoters commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the

restructuring exercise.the package of assistance may be flexible and bank may look at the exit option. Focus on Cash Flows: While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow. Management Effectiveness: The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing units fortunes. A bank may commit additional finance to an aling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered.

Multiple Financing:

A. During the exercise for assessment of viability and restructuring, a Pragmatic and unified
approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.

B. In some default cases, where the unit is still working, the bank should make sure that it
captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. Toward this end, there should be regular flow of information among consortium members. A bank, which is not part of the consortium,

may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one set of lenders
may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a

timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements.

Non-Performing Assets In Indian Banks

The Non-Performing Assets (NPAs) of the Indian banking sector have been incessantly rising in the past six months. Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2012 and assets under reconstruction had trebled during the same period. Indias biggest lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans. According to a recently published Credit Suisse Group AG report, 10 large industrial houses account for 13% of total assets financed by the Banking system, which means that bank lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are from the services sector while 1.45% are from the agricultural sector. Reasons for growing NPAs
1. Economic slowdown - The global economy is still in the throes of an economic crisis that

is looming large both in the US and Europe. There is a general slackening of domestic

economic activity in India both in manufacturing and the services sectors. A sluggish economy will have a direct impact on the balance sheets and profitability of many firms who have availed of loans from the banking industry. Over a period of time, some of the hard hit firms will be compelled to default on their loans. There is a groundswell of expert opinion in India that NPAs are more an outcome of economic factors rather than any internal systemic failures. 2. High interest rates - It is a known fact that interest rates have been revised upwards, 10 times in the past two years with a view to curb inflation. High interest rate increases the cost of funds to the credit users and has a debilitating effect especially on the repayment capacity of small and medium enterprises. Banks need to maintain their Net Interest Margin and hence pass on any interest rate hike to the borrowers. A high rate of inflation dilutes the quality of assets of the banking sector. Weak supply demand scenario, high borrowing or leveraging and intense competition contribute to loan defaults. 3. New reporting system - Indian banks are to report NPAs from April 2012 in a computer recognized / identified format. It is stated that almost 90% of all banks' loan portfolio is under the computerized system of NPA reporting or system based reporting. The discretion of bank managers in classifying assets according to their local judgment is eliminated. This change in reporting pattern makes identification of NPAs a machine driven objective activity. However, credit risk analysis does have a subjective and judgmental element to it. 4. Aviation sector - The Indian banking system has a total exposure of around Rs. 40,000 crores to the ailing aviation sector. SBI alone has an exposure of 5,000 crores to the aviation industry. It is common knowledge that many airlines are either in the red or marginally profitable. According to an RBI report, nearly three-fourths of the top Banks loans to the aviation sector are either impaired or restructured. Kingfisher airlines and Air India have been the significant aviation borrowers whose performance is below par. Unfortunately, signals emanating from the power and telecom sects are not very encouraging and could further accentuate the problem of asset impairment.

Tools For recovery Of NPAs

For recovery of NPA there are different tools are available. The important purpose of these tools are to recover the loan amount from borrower. These tools can be use according to Loan amount. Following are the different recovery tools.

LOK ADALATS DEBT RECOVERY TRIBUNALS (DRT) SARFAESI ACT, 2002 ASSET RECOVERY CONSTRUCTION INDUSTRY LIMITED(ARCIL) CORPORATE DEBT RESTRUCTURING (CDR) Asset management company (AMC)

Lok Adalats : Lok Adalats is a mechanism to settle matters relating to recovery of dues, out of court. These are convened by Debt Recovery Tribunals / Debt Recovery Appellate Tribunals. Lok Adalats have no judicial powers. It is a mutual forum for the bank and the borrower to meet and arrive at a mutual settlement. Once the settlement is signed by both the parties, the same is placed before the court. The court would then pass a suitable decrees / orders as per the terms of settlement. Such decrees can not be challenged in the next higher courts. At present, accounts in doubtful and loss category with outstanding above Rs. 5.00 lacs can be referred to this forum. Lok Adalats Proved to be quite effective for speedy justice and recovery of small loans. DEBT RECOVERY TRIBUNALS (DRT)

To recover their bad Debt quickly and efficiently. 3 Debt Recovery Tribunal and 5 Debt Recovery Appellate Tribunal It is the special court established by central government for the purpose of bank or any financial institutions recovery. The judges of this court are the retired judges of high court. In this court only the recovery cases of Rs.10 lakhs and above can be filed.

SARFAESI Act The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court.

The Act provides three alternative methods for recovery of non-performing assets, namely: Securitisation Asset Reconstruction Enforcement of Security without the intervention of the Court.

NPA loans with outstanding above Rs. 1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act This Act empowers the Bank: To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice. To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank. To ask any debtor of the borrower to pay any sum due or becoming due to the borrower. Any Security Interest created over Agricultural Land cannot be proceeded with.

ARCIL

A company which is set up with the objective of taking over distressed assets (NPA) from banks or financial institutions and to reconstruct or repack these assets to make those assets saleable. To buy out troubled loans from banks and make special efforts at recovering value from the assets, if necessary by special legislation, with special powers for recovery. Restructuring of weak banks to divest the bad loan portfolio. Indias first ARC with an initial equity of Rs.10 crore with State Bank of India, IDBI and SBI to pick up 24.5% stake each(and remaining to be acquired by HDFC and UTI Bank). Incorporated as a public limited company on February 11, 2002

OBJECTIVES

Unlocking capital for the banking system and the economy Creating a vibrant market for distressed debt assets /securities in India offering a trading platform for Lenders To evolve and create significant capacity in the system for quicker resolution of NPAs by deploying the assets optimally

CORPORATE DEBT RESTRUCTURING (CDR)

For the revival of the corporate as well as for the safety of the money lent by the banks and FI. Based on the experience in other countries like the U.K., Thailand,Korea, etc. Objective was to ensure timely and transparent mechanism for restructuring of the corporate debts CDR mechanism will be a voluntary system based on debtor creditor agreement and intercreditor agreement. CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts . An outstanding exposure of Rs.20 crore and above by banks and institutions.