Npa

INTRODUCTION:
The accumulation of huge non-performing assets in banks has assumed great importance. The depth of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,50,000 crores. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the nonpriority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This raises a concern in the industry and academic because it is generally felt that NPAs reduce the profitability of a bank, weaken its financial health and erode its solvency. For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements. The Prudential Norms for Income Recognition, Asset Classification and Provisioning have come into effect from the accounting year 31.03.1993.
MANAGEMENT OF NON PERFORMING ASSETS Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India Financial Institutions viz. IDBI, ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June, 1994 and to Regional Rural banks in March, 1996. They have adopted these guidelines for the purpose of Income Recognition and Assets Classification from the accounting year 1995-96. However, guidelines relating to provisioning for RRBs have been made effective from the financial' year ended 31.03.1997. The definition of NPAs is also gradually becoming tough for RRBs to cover all advances like Commercial Banks. Although most of-the guidelines relating to RRBs are similar to that of Commercial Banks, they have been made applicable in a phased manner for RRBs.
CENTRAL UNIVERSITY OF KARNATAKA
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MANAGEMENT OF NON PERFORMING ASSETS
SCOPE OF THE STUDY

The scope of the study here was confined to the organization only. The study covers to find out the strategy required to reduce the NPAs. The concentration is given only in understanding the NPAs growth with the reference of Canara Bank. TTT data is purely based on the primary and secondary data. The scope is limited to drawn conclusions from analysis and interpretations of the primary and secondary data of the Canara Bank.
OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA was to:
To evaluate NPAs (Gross and Net) of Canara bank
To study the past trends of NPA

To Know the Concept of Non Performing Asset
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. To Know the Impact of NPAs . To Know the Reasons for NPAs To learn Preventive Measures
Research Design
The type of research used for the collection & analysis of the data is Historical Research Method. The main source of data for this study is the past records prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception & to identify the ways in which the performance especially the non-performing assets of the Canara Bank can be improved. The data regarding bank history & profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with manager. Data Collection Method Primary Data Discussion with the manager & officers of the bank to get general information about the bank & its activities. Having face to face discussions with the bank officials By taking guidance from bank guide & departmental guide.
Secondary Data Collection of data through bank annual reports, bank manuals and other relevant documents. Collection of data through the literature provided by the bank.
Research Measuring Tool: The tools used for data collection are: CENTRAL UNIVERSITY OF KARNATAKA - -
1. Personal Interview 2. Secondary Sources
1. Personal Interview: In this, discussions were held directly with the manager & officials to get the clear-cut information about the topic and data to be collected for the purpose of analysis.
2. Secondary Sources: Annual company reports, Balance Sheets are used to collect the data.
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LIMITATIONS OF THE STUDY: : The study is mainly based on the secondary data provided by the bank as such it is subject to the limitations of the secondary data. : The study is based only on NPAs with respect to loans. : The confidentiality of some facts and figures is a limitation. : The study is based on the data given by the officials and reports of the bank. : The non-availability of relevant information is one of the limitations. : The study is done only for the limited past 3 years.
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THEORITICAL OVERVIEW: NPA ITS IMPACT AND MAGNITUDE: 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. How ever 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 facilities granted by bank to a borrower becomes nonperforming, 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 exit certain advances / credit facilities having performing status. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and / or installment of installment of principal has remained Past Due for a specified period of time. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where
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MANAGEMENT OF NON PERFORMING ASSETS 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 the case of bills Purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.
90 days overdue norm 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, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell 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 the case of bills Purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. 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, bank has 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 with 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.
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 180 days (to be reduced to 90 days, with effect from March 31, 2004) as on the date of Balance Sheet or credits are not enough to cover the interest debited the same period, these accounts should be treated as out of order.
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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.
Asset Type Percentage of Provision Sub standard (age up to 18 months) 10% Doubtful 1 (age up to 2.5 years) 20% Doubtful 2 (age 4.5 years) 30% Doubtful 3 (age above 4.5 years) 50% Loss Asset 100% INCOME RECOGNITION-POLICY: The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. However, interest on advances against term deposits, NSCs, VIPs, KVPs, and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. If Government guaranteed advances become NPA, the interest on such
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MANAGEMENT OF NON PERFORMING ASSETS advances should not to be taken to income account unless the interest has been realized.
REVERSAL OF INCOME: If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realized. This will apply to Government guaranteed accounts also. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.
THE CONCEPT OF GROSS NPA: Income recognition is not possible once an account becomes NPA. Interest accrued on non performing loan accounts is debited to the respective account and credited to the interest suspense account instead of the profit and loss account. Usually no debits are permitted in non performing asset expect unavoidable expenditure like litigation expenses, insurance etc. Hence the balance outstanding in an NPA account includes: 1. Balance as on date of becoming an NPA. 2. Interest accrued but not realized. On balance sheet date banks make provisions for loan losses. This provision is calculated not on the balance outstanding but on the net balance, balance net of the amount kept in the interest suspense account. This book balance of the net of the interest suspense account is known as Gross NPA.
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MANAGEMENT OF NON PERFORMING ASSETS But in cases where guarantee claim is received from credit guarantee corporations like ECGC, before making the provision for loan losses, such claim received is also netted from the gross NPA. The terminology net NPA indicates the balance in interest suspense account. For evaluation RBI and other rating agencies rely on purpose usually the net NPA balance. Thus Gross NPA means, balance outstanding minus balance in interest suspense account. Net NPA means: Gross NPA minus balance claim received amount and provision outstanding in that account.
IMPACT OF NPA: At the Macro level, NPAs have chocked off the supply line of Credit of the potential lenders thereby having a deleterious effect on capital formation and arresting the economic activity in the country. At the Micro level, unsustainable level of NPAs has eroded current profits of banks and FIs. They have led to reduction of interest income and increase in provisions and have restricted and recycling of funds leading to various Asset Liability mismatches. Besides this, it has led to erosion in their capital base and reduction in competitiveness. The problem of NPA is not a matter of concern to banks and FIs alone. It is the matter of grave concern to the country and any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy. The mounting menace of NPAs has raised the cost of credit, made Indian business man uncompetitive as compared to their counterparts in other countries. It has made banks more adverse to risks and squeezed genuine Small and Medium Enterprises (SMEs) from accessing competitive credit and has throttled their enterprising spirits as well, to a great extent. Due to their crippling effect on the operation of the banks, Asset quality has been
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MANAGEMENT OF NON PERFORMING ASSETS Considered as one of the most important parameters in the measurement of banks performance under the CAMELS Supervisory Rating System of RBI.
THE MAGNITUDE: Non-Performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalized Banks, followed by the SBI group, and the all India Financial Institutions. As at 31.03.2004 the aggregate gross NPA of all scheduled commercial banks amounted to Rs.63883 crore. Table No.1 gives the figures of net NPA for the last three years. The ratio of net non-performing assets to net advances also declined during 2005-06. Majority of the banks, this ratio is less than 4 percent. Punjab and Sind Bank has the highest ratio with 9.62 percent followed by Dena Bank of India with 9.4 percent. 4 banks reported nil ratio during 2005-2006. Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures. There is the practice of ever-greening of advances, through subtle techniques. As per report appearing in a national daily the banking industry has under estimated its non-performing assets (NPAs) by whopping Rs.3862.10 Crore as on March 1997. The industry is also estimated to have under-provided to the extent of Rs. 1,412.29 Crore. The worst offender is the public sector banking industry. Nineteen nationalized banks have
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MANAGEMENT OF NON PERFORMING ASSETS underestimated their NPAs by Rs. 3,029.29 Crore. Such deception of NPA statistics is executed through the following ways. Failure to identity an NPA as per stipulated guidelines: There were instances of sub-standard assets being classified as standard. Wrong classification of an NPA: Classifying a loss asset as a doubtful or sub-standard asset, classifying a doubtful asset as a sub-standard asset. Classifying an account of a credit customer as substandard and other Accounts of the same credit customer as standard, throwing prudential norms to the winds.
REASONS FOR NPAs: In Priority Sector Advances:
1. Directed and pre-approved natures of loans sanctioned under sponsored Programs. 2. Mis-utilization of loans and subsidies. 3. Diversion of funds. 4. Absence of security. 5. Lack of effective follow-up (Post sanction supervision and control) 6. Absence of Bankruptcy and fore-closure loans. 7. Decrepit legal system. 8. Cost in-effective legal recovery measures. 9. Difficulty in execution of Decrees obtained. In Non-Priority Sector Advances: 1. Inadequate credit appraisal.
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MANAGEMENT OF NON PERFORMING ASSETS 2. Demand recession. 3. Industrial sickness and labor problems. 4. Slow Legal system. 5. Diversion of funds. 6. Willful default. 7. Technology Obsolescence. 8. Managerial inefficiency. 9. Political compulsion and corruption. WRITING OFF NPAs: In terms of section 43(D) of the Income Tax Act 1961, income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to the banks profit and loss account or received, whichever earlier. This stipulation is not applicable to provisioning required to be made as indicated above. In other words, amounts set aside for aside for making provision for NPAs as above are not eligible for tax deductions. Therefore the banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors / tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules. WRITE-OFF AT HEAD OFFICE LEVEL: Banks may write-off advances at Head Office Level, even though the relative advances are still outstanding in the branch books. However, it is necessary that provision is made as per the classification accorded to the respective accounts.
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MANAGEMENT OF NON PERFORMING ASSETS In other words, if an advance is a loss asset, 100 percent provision will have to be made there for.
DEBT RECOVERY TRIBUNAL: Any person aggrieved by any measure taken by secured creditor or his authorized officer may file an appeal to Debts Recovery Tribunal, within 45days from date on which such measure was taken. That is action of taking possession of asset, takeover of management of business of borrower, appointing person to manage secured asset etc. is taken by the creditor. When a borrower files an appeal, the appeal cannot be entertained unless, the borrower deposits 75% of the amount claimed in the notice by secured creditor. The DRT can waive or reduce the amount required to be deposited. The amount is not required to be deposited at the time of filing appeal, but appeal will not heard till the amount is deposited. The borrower while filing the appeal should also file an application requesting the Debt Recovery Tribunal to admit the appeal without deposit of any amount. If the DRT orders partial deposit of the amount and the same is not deposited, appeal can be dismissed. The 75% deposit is only required if the appeal is filed by the borrower. If some other aggrieved person (e.g. guarantor, shareholder) files it the deposit is not required. If a person is aggrieved by the order of the DRT, it can file an appeal to the Appellate Tribunal within 30days from the date of receipt of the DRT order. If the DRT or Appellate Tribunal holds that possessions of assets by the secured creditor was wrongful and directs the secured creditor to return asset to concerned borrower, the borrower shall be entitled to compensation and costs as may be determined by DRT or Appellate Tribunal.
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SECURITIZATION ACT: With the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to clear their dues within 60days. Once the borrower receives a notice from the concerned bank and the financial institution, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, bank can also takeover the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to either sell the defaulting companies or charge their management. OVERALL BANKING AND NPA BANKING REFORMS IN INDIA: The Nationalization of the major commercial banks in the year 1969 and 1980 had brought radical changes in the banking system in India. It had brought about major shifts in the priorities in the banking operations. Branch expansion policies of banks were tuned up to meet the banking needs of the people in rural and semi urban centers. For accelerating the socio-economic and rural development process several Governments sponsored programs were launched and lending in the priority sector, irrational lending under socio political pressures, mounting levels of bad debts, branch expansion at non viable centers etc. gradually started affecting the financial health of the banking sector in the country. Commercial banks were not following uniform accounting policies camouflaged the true
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MANAGEMENT OF NON PERFORMING ASSETS financial position of banks. Quality of loan asset was not a concern and a high proportion of loan assets started becoming non performing. Most of the banks were under capitalized and some of them even with negative worth. Thus there was a compelling need for a change and various policy corrections had to be taken with the view of strengthening the economy. Thus the Government of India was forced to initiate a process of reforming the financial sector which banks constitute a dominant part. The reforms process includes: 1. Introduction of prudential norms. 2. Transparency in balance sheets. 3. Deregulation of interest rates. 4. Partial deviation from directed lending. 5. Upgradation of technology. 6. Entry of new private sector banks. NARASIMHAM COMMITTEE: The first phase of banking sector reforms was initiated in the year 1992 in pursuance of recommendations of the committee on financial sector reforms headed by Narasimham Committee. As per the recommendations of Narasimham Committee, The Reserve Bank of India introduced in a phased manner, prudential norms for income recognition, asset classification, and provisioning in the year 1998 Narasimham Committee-II came out with more stringent norms for the industry. The prudential norms were revised from time to time to fall in line with the best accounting practices and for transparency in published accounts. It is widely recognized that as a result of these reforms, the Indian Banking System is becoming increasingly mature in terms of the transformation of business processes and the appetite for risk management. Deregulation, technological upgradation and increased market integration have been the key factors driving change in the financial sector.
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EMERGING BANKING TRENDS: During the current financial year, the focus of non-going reforms in the banking sector was on soft interest rates regime, increasing operational efficiency of banks, strengthening regulatory mechanisms and on technological up-gradation. As a step towards a softer interest rate regime, RBI in its Annual Policy Statement had advised banks to introduced flexible interest rate system for new deposits, announce a maximum spread over PLR for all advances other than consumer credit and to review the present maximum spread over PLR and reduce them wherever they are unreasonably high. A BRIEF HISTORY OF NPA: The concept of Asset Quality on the books of Public Sector Banks (PSBs) and Financial Institutions (FIs) came into being when Reserve Bank of India (RBI) introduced prudential norms on the recommendations of the Narasimham Committee in the year 1992-1993. The Committee recommended that an asset may be treated as Non- Performing Asset (NPA), if interest or installment of principal remains overdue for a period exceeding 180days and that banks and FIs should not take into their income account, the interest accrued on such NonPerforming Assets, unless it is actually received or recovered. The Committee also recommended that Assets be classified into four categories namely Standard, Sub-standard, Doubtful and Loss Assets and that certain specified percentage of the same be held as provision there against. Before the reform process, banks were booking income on an accrual basis and their balance sheets did not reflect their true specified financial health. Thus the profit, capital and reserves were overstated by them. After 10years of NPA terror in the banking industry, Now the Banks Have Teeth, a new law lightens the burden of bad loans for Indian Banks. The law that has been the catalyst for the bad loan clean up passed Indias Parliament in
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MANAGEMENT OF NON PERFORMING ASSETS November 2002. It allows lenders to more easily foreclose on debtors assets or even demand a change in management. Within weeks of the laws passage, banks saw a flood of loans once deemed unrecoverable being repaid in double time. The Act is The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Also know as the Securitization Act). This Act enables the setting up of asset management companies for addressing the problems of non-performing assets of banks and FIs. INDIAN BANKING AND NPA: The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post disbursement supervision. Banks
concerned should continuously monitor loans to identity accounts that have potential to become non-performing. The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. GLOBAL NPA: The core banking is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from
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MANAGEMENT OF NON PERFORMING ASSETS the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. A question that arises is how much risk can a bank afford to take? Recent happenings in the business world Enron, WorldCom, Xerox, Global Crossing do not give much confidence to banks. In case after case, these giant corporates became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. It needs to be recognized that prudential norms in respect of loan classification vary widely across countries. A country follows varied approaches, from the subjective to the prescriptive. Illustratively, in the United Kingdom, supervisors do not require banks to adopt any particular form of loan classification and either is there any recommendation on the number of classification categories that banks should employ. Other countries, such as, the United States follow a more prescriptive approach, wherein loans are classified into several categories based on a set of criteria ranging from payment experience to the environment in which the debtor evolves. The adoption of such a system points to the usefulness of a structured approach those facilities the supervisors ability to analyze and compare banks loan portfolios. India is a better bet than China for investors to pump money into non-performing assets (NPAs) restructuring as it has better environment for recovery, according to consulting firm Price water House Coopers (PwC).
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WARNING: STANDARD & POOR: Standard & Poors and The Credit Rating Information Services of India Ltd., (CRISIL) estimate that Indias schedule commercial banks require between US$11billion- US$13billion in new capital to support losses embedded in impaired assets. The significant capital shortfall estimated recognizes the existing moderate reported capital position of Indian banks, the inadequate loan loss reserves maintained by the banks to absorb likely losses. The weak capital position of the Indian banking system is largely a reflection of growing asset-quality problems stemming from weak underwriting and credit management system, and the vulnerabilities of the Indian banking sector to the impact of globalization on the countrys key industry sectors. The asset-quality position also has suffered from regulations with respect to lending to priority sectors. The capital shortfall calculated assumes a significantly higher system non-performing loan level to that reported under Indian regulatory standards, said Peter Sikora, associate director, Financial Services Rating, Standard & Poors, together with CRISIL are, however, of the view that non performing loan levels for Indian banks will be significantly higher at 20%-25% if more conservative classification standards are adopted and restructured, and ever greened loans are included as impaired assets. LENDING BEHAVIOUR OF BANKS: Due to the excess liquidity in the banking system, banks are now giving credit to even non-priority sectors in an aggressive manner. Now banks give credit more to unproductive purposes, like car loans, housing loans, consumer durables loans and personal loans. This reckless lending paves the way to repayment
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MANAGEMENT OF NON PERFORMING ASSETS irregularities and more of NPA in the banking system. But on the others side economy has become buoyant and the borrowers are now in a position to repay the loans even if it is an unproductive loan. Banks have improved their credit appraisal system. NPA percentage in City Banks Car Loan Portfolio is zero, because of the sophisticated credit appraisal system followed by the bank. Banks now give priority to businesses and lending schemes also follow the path. CLASSIFICATION OF ASSETS: CATEGORIES OF NPAs: Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained nonperforming and the reliability 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 31March 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 is not enough recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weakness 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. With effect from 31March 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months.
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MANAGEMENT OF NON PERFORMING ASSETS DOUBTFUL ASSETS: A doubtful asset was one, which remained NPA for a period exceeding two years With effect from 31March 2001, as 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 know facts, conditions and values highly questionable and improbable. With effect from 31March, 2005, an asset to be classified as doubtful if it remained in the sub-standard category for 12 months. LOSS ASSETS: A loss asset is one where loss has been identified by the bank or internal or external auditors 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. It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the presentation of advances in the bank balance sheet. The Third Schedule to the Banking Regulation Act 1949 solely governs presentation of advances in the balance sheet. Banks have started issuing notices under The Securitization Act, 2002 directing the defaulter to either pay back the dues to the bank or else give the possession of the secured assets mentioned in the notice. However, there is a potential threat to recovery if there is substantial erosion in the value of security given by the borrower or if borrower has committed fraud. Under such a situation it will be prudent to directly classify the advances as a doubtful or loss asset, as appropriate. RBI GUIDELINES FOR CLASSIFICATION OF ASSETS:
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MANAGEMENT OF NON PERFORMING ASSETS Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for 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 accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extent guidelines. UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAs: If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as nonperforming and may be classified as standard accounts. Asset Classification to be borrower-wise and not facility-wise: i. It is difficult to envisage a situation when only one facility to 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 NPAs and not the particular facility or part there of which has become irregular. Il. If the debts arising out of development of letter of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account for should be treated as a part of the borrowers principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. Accounts where there is erosion in the value of Security:
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MANAGEMENT OF NON PERFORMING ASSETS i. A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightaway classified as doubtful or loss asset as appropriate. 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 straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. ii. If the realizable value of the security, as assessed by the bank / approved valuers / RBI is less than 10 percent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straight away classified as loss asset. It may be either written off or fully provided for by the bank. PROVISIONING REQUIREMENTS: As and when an asset is classified as an NPA, the bank has to further subclassify it into sub-standard, loss and doubtful assets. Based on this classification, bank makes the necessary provision against these assets. Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank advances where the recovery is doubtful. Banks are also required to comply with such guidelines in making adequate provision to the satisfaction of its auditors before declaring any dividends on its shares. In case of loss assets, guidelines specifically require that full provision for the amount outstanding should be made by the concerned bank. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset. THE NPA PROBLEM: The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal
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MANAGEMENT OF NON PERFORMING ASSETS responsibility and having an effective postdisbursement supervision. Banks
concerned should continuously monitor loans to identify accounts that have potential to become non-performing. The performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced t make provision on such assets as per the RBI guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks. Further, 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. CREDIT APPRAISAL SYSTEM: Prevention of standard assets from migrating to non performing status is most important in NPA management. This depends on the style of Credit Management Mechanism available in banks. The quality of credit appraisal and the effectiveness of post credit appraisal and effectiveness of post credit follow up influences the asset quality of the banks in a big way. At Pre-Credit Stage: 1. Extensive enquiry about the character and the credit worthiness of the borrower. 2. Viability of the project to be financed is meticulously studied. 3. Adequate coverage of collateral is ensured to the extent possible. 4. Financial statement of the borrower is obtained and poor analysis of their financial strength is done. 5. Apart from the published financial statements independent enquires are made with previous bankers. At Post-Credit Stage: 1. Operations in the account are closely monitored.
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MANAGEMENT OF NON PERFORMING ASSETS 2. Unit visit is done at irregular intervals. 3. Asset verification is done on a regular basis. 4. Borrowers submit control returns regularly. 5. Accounts are periodically to evaluate the financial health of the unit. 6. Early warning signals are properly attended to. 7. Close contract with the borrower is maintained. 8. Potential NPAs are kept under special watch list. 9. Potentially viable units are restructured. 10. Repayment program of accounts with temporary cash flow problem is rescheduled. Immediate legal action is initiated in cases where the default is willful and the intention of the borrower is bad. WARNING SIGNALS: 1. Default in servicing periodic installments and interest. 2. Accumulation of stock & non-movement of stock. 3. Operating loss / net loss. 4. Slow turnover of debtors & fall in level of sundry creditors. 5. Return of outward bills for collection / return of cheque. 6. Labor troubles. 7. High turnover of key personnel. 8. Loss of critically important customers. 9. Court cases against the unit. 10. Avoidance of contacts with the bank. 11. Delayed submission of financial statements. 12. Disputes among partners / promoters.
HIGH COST OF FUNDS DUE TO NPA: Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant in providing the requisite
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MANAGEMENT OF NON PERFORMING ASSETS funds to the genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lenders losses caused due to high level of NPAs. Therefore, quite often corporates prefer to arise funds through commercial papers (CPs) where the interest rate on working capital charged by banks is higher. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to sell the assets of the defaulting companies or charge their management. But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty increases with the passage of time, there is all possibility that the recoverable value of asset also reduces and it cannot fetch good price. MEASURES FOR NPA CONTAINMENT: MEASURES TO TACKLE NPAs: Seeing the gravity of the situation, RBI has taken several constructive steps for arresting the incidence of NPAs. It has also created a regulatory environment to facilitate the recovery of existing NPAs of banks. 1. Lok Adalats: Lok Adalats have been set up for recovery of dues in accounts falling in the doubtful and loss category with outstanding balance up to Rs.5lakh, by way of compromise settlements. This mechanism has, proved to be quite effective for speedy justice and recovery of small loans. 2. Debt Recovery Tribunals: DRTs which have been set up by the Government to facilitate to speedy recovery by banks / DFIs, have not been able to make much impact on loan recovery due to a variety of reasons like inadequate
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MANAGEMENT OF NON PERFORMING ASSETS number, lack of infrastructure, under-staffing and frequent adjournment of cases. It is essential that the DRT mechanism is strengthened and DRTs are vested with a proper enforcement mechanism to enforce their orders. Nonobservance of any order passed by the Tribunal should amount to contempt proceedings. The DRTs could also be empowered to sell the assets of the debtor companies and forward the proceeds to the Winding-up Court for distribution among the lenders. Also, DRTs could be set up in more centers preferably in district headquarters with more presiding officers. 22 DRTs have been set up in the country during the half last a decade. DRTs have not been able to deliver, as they got swamped under the burden of large number of cases their inception. 3. Corporate Debt Restructuring: Corporate Debt Restructuring (CDR) Mechanism is an additional safeguard to protect the interest of the creditors and revive potentially viable units. The CDR system was set up, in accordance with the guidelines of RBI evolved in consultation with Government of India. The objective of the CDR system is to ensure a timely and transparent mechanism for restructuring of corporate debts of viable entities and to minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme. With CDR, banks can arrest fresh slippage of performing assets into the magnitude of assets. Under the system standard, substandard and doubtful assets can be restructured. The CDR based upon effective co-ordinate among banks. 4. Asset Reconstruction Companies (ARCs): One of the most effective ways of removing NPAs from the books of the banks / DFIs would be to move these out to a separate agency which would buy the assets and make its own efforts for recovery. On this front, the SRES Act has provided a frame work for setting up to Asset Reconstruction Companies (ARCs) in India. A pilot company called Asset Reconstruction Company (India) Ltd (ARCIL) has been set up under the joint sponsorship of IDBI, ICICI Bank, SBI and other banks which is likely to mechanism is filed with since
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MANAGEMENT OF NON PERFORMING ASSETS provide an effective mechanism for banks to deal with the defaulting companies. RBI has already issued final guidelines on the regulatory frame work for ARCs in April, 2003. However, the success of ARCs will again depend upon the legal frame work which has to be addressed first. Legal provisions are required for transfer of the existing loan portfolio to the ARCs without the consent of the borrowers, for exercise of the power of private foreclosure by ARCs, authorizing ARCs to take recourse to the Debt Recovery Tribunals and granting exemption to ARCs fro income-tax in order to mobilize resources by issue of bonds and exemption ARCs from payment of stamp duty on conveyance / transfer of loans assets. 5. Reduction in NPAs: The problem of the existing NPAs is currently being tackled in several ways. Efforts are made through negotiations and discussions with the borrowers to bring them around to settle the dues. Such settlements in the form of One-time settlement (OTS) and Negotiated Settlement (NS) are now being increasingly used by banks to reduce the level of NPAs. Under these schemes banks focus on maximum payment under the settlements being received up-front, and balance within the same financial year for quicker realization of locked up proceeds. However, despite such efforts made by the lenders, many defaulting borrowers exhibit reluctance to cooperate, leaving the banks no option but, to seek the legal route. Here lies the importance of a transparent legal system. Reforms in the existing legal system will go a long way in reducing the level and growth of NPAs in the banking system. 6. Legal Reforms: The legal frame work sets standards of behavior for marke participants, details the rights and responsibilities of transacting parties, assures that completed transactions are legally binding and also provides the regulators with the necessary teeth to enforce standards and ensure compliance and adherence to law. Thus the legal frame work is a key element for
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MANAGEMENT OF NON PERFORMING ASSETS limiting moral hazards in Indian Banking. As the problem of NPAs is closely linked with the issue of legal reforms the Government has taken up initiatives to align the legal set-up with the requirements of the banking system. As early as in 1999 the Andhyarujina Committee set up by Government of India to formulate specific proposals to give effect to the suggestions made by the Narasimham Committee (1998) recommended amending the Recovery of Debts due to the Banks and Financial Institutions Act 1993 and Sick Industrial Companies Act, 1995. It also recommended a new legislation for banks and Financial Institutions to take possession and sale of securities without the intervention of the Court, in respect of both immovable property and movable assets which resulted in the enactment of SRFAESI Act 2002. The Committee also considered securitization as an instrument to tackle the NPA problem. 7. Securitization: Securitization enables risk sharing and trading of loans where the bad assets of banks can be securitized and sold at a discount. The lending Institutions NPAs are hence removed from their balance sheets and are instead funded by investors through negotiable financial instruments. The security is backed by the expected cash flows from the assets. With securitization the NPAs in a banks balance sheet can be cash upfront, which could be put to productive use.
How they are bad for the economy? NPAs constitute a real economic cost to the nation in that they reflect the application of scarce capital and credit funds to unproductive uses. The money locked up in NPAs are not available for productive use and to the extent that banks seek, to make provisions for NPAs or to write them off, it is a charge on their profit. To be able to do so, banks have to charge their productive and diligent customers a higher rate of interest. It thus becomes a tax on efficiency. It is the customer who uses credit efficiently that subsidizes the inefficiency
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MANAGEMENT OF NON PERFORMING ASSETS represented by NPAs. This also raises the transaction costs in the system thus denying the diligent credit customers the benefits of lower rates, which would help them to be more efficient and competitive. NPAs, in short, are not just a problem for the banks. They are bad for the economy.
ASSETS RECOVERY BRANCH: Assets Recovery Branches are specified branches for recovering NPA. The personnel in the branches are professionally competent to deal with defaulters and ensure repayment. It is meant for shifting the work of high problem loans recovery of main branches to specialized branches. It gives time to other branches to concentrate more upon branchs business development activities.
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INDUSTORY PROFILE
1.1 INTRODUCTION TO BANKING IN INDIA
The banking section will navigate through all the aspects of the Banking System in India. It will discuss upon the matters with the birth of the banking concept in the country to new players adding their Names in the industry in coming few years. The of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined under three separate heads with one page dedicated to each bank. However, in the introduction part of the entire banking cosmos, the past has been well explained under three different heads namely: : History of Banking in India : Nationalization of Banks in India : Scheduled Commercial Banks in India The first deals with the history part since the dawn of banking system in India. Government took major step in the 1969 to put the banking sector into systems and it nationalized 14 private banks in the mentioned year. This has been elaborated in Nationalization Banks in India. The last but not the least explains about the scheduled and unscheduled banks in India.Section 42 (6) (a) of RBI Act 1934 lays down the condition of scheduled commercial banks. The description along with a list of scheduled commercial banks are given on this page 1.1.1HISTORY OF BANKING IN INDIA Without a sound and effective banking system in India it cannot have a Healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system CENTRAL UNIVERSITY OF KARNATAKA - -
MANAGEMENT OF NON PERFORMING ASSETS has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends With the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.
Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by CENTRAL UNIVERSITY OF KARNATAKA - -
MANAGEMENT OF NON PERFORMING ASSETS Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore was set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership.
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MANAGEMENT OF NON PERFORMING ASSETS The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 Crore. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. Phase III this phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.
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1.1.2SCHEDULED COMMERCIAL BANKS IN INDIA The commercial banking structure in India consists of: : Scheduled Commercial Banks in India : Unscheduled Banks in India : Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks. "Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank". "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".
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MANAGEMENT OF NON PERFORMING ASSETS The following are the Scheduled Banks in India (Public Sector): State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Saurashtra State Bank of Travancore Andhra Bank Allahabad Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Punjab and Sind Bank Syndicate Bank Union Bank of India United Bank of India UCO Bank Vijaya Bank
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MANAGEMENT OF NON PERFORMING ASSETS The following are the Scheduled Banks in India (Private Sector): ING Vysya Bank Ltd Axis Bank Ltd Indusind Bank Ltd ICICI Bank Ltd South Indian Bank HDFC Bank Ltd Centurion Bank Ltd Bank of Punjab Ltd IDBI Bank Ltd The following are the Scheduled Foreign Banks in India: American Express Bank Ltd. ANZ Gridlays Bank Plc. Bank of America NT & SA Bank of Tokyo Ltd. Banquc Nationale de Paris Barclays Bank Plc Citi Bank N.C. Deutsche Bank A.G. Hongkong and Shanghai Banking Corporation
Standard
Chartered Bank.
The Chase Manhattan Bank Ltd. Dresdner Bank AG.
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MANAGEMENT OF NON PERFORMING ASSETS 1.1.3BANKING SERVICES IN INDIA With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the services provided by banks have become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south. This section of banking deals with the latest discovery in the banking instruments along with the polished version of their old systems.
BANK ACCOUNT The most common and first service of the banking sector. There are different types of bank account in Indian banking sector. The bank accounts are as follows: Bank Savings Account - Bank Savings Account can be opened for eligible person / persons and certain organizations / agencies (as advised by Reserve Bank of India (RBI) from time to time) Bank Current Account - Bank Current Account can be opened by individuals / partnership firms / Private and Public Limited Companies / HUFs / Specified Associates / Societies / Trusts, etc. Bank Term Deposits Account - Bank Term Deposits Account can be opened by individuals / partnership firms / Private and Public Limited Companies / HUFs/ Specified Associates / Societies / Trusts, etc. Bank Account Online - With the advancement of technology, the major banks in the public and private sector has faciliated their customer to open bank account online. Bank account online is registered through a PC with an internet connection. The advent of bank account online has saved both the cost of operation for banks as well as the time taken in opening an account.
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MANAGEMENT OF NON PERFORMING ASSETS PLASTIC MONEY : Credit cards in India are gaining ground. A number of banks in India are encouraging people to use credit card. The concept of credit card was used in 1950 with the launch of charge cards in USA by Diners Club and American Express. Credit card however became more popular with use of magnetic strip in 1970. Credit card in India became popular with the introduction of foreign banks in the country. Credit cards are financial instruments, which can be used more than once to borrow money or buy products and services on credit. Basically banks, retail stores and other businesses issue these. LOANS: Banks in India with the way of development have become easy to apply in loan market. The following loans are given by almost all the banks in the country: : Personal Loan : Car Loan or Auto Loan : Loan against Shares : Home Loan : Education Loan or Student Loan In Personal Loan, one can get a sanctioned loan amount between Rs 25,000 to 10, 00,000 depending upon the profile of person applying for the loan. SBI, ICICI, HDFC, HSBC are some of the leading banks which deals in Personal Loan. Almost all the banks have jumped into the market of car loan which is also sometimes termed as auto loan. It is one of the fast moving financial products of banks. Car loan / auto loan are sanctioned to the extent of 85% upon the exshowroom price of the car with some simple paper works and a small amount of processing fee. Loan against shares is very easy to get because liquid guarantee is involved in it. Home loan is the latest craze in the banking sector with the development of the infrastructure. Now people are moving to township outside the city. More number of townships is coming up to meet the demand of 'house for all'. The RBI has
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MANAGEMENT OF NON PERFORMING ASSETS also liberalised the interest rates of home loan in order to match the repayment capability of even middle class people. Almost all banks are dealing in home loan. Again SBI, ICICI, HDFC, HSBC are leading. The educational loan, rather to be termed as student loan, is a good banking product for the mass. Students with certain academic brilliance, studying at recognised colleges/universities in India and abroad are generally given education loan / student loan so as to meet the expenses on tuition fee/ maintenance cost/books and other equipment.
MONEY TRANSFER: Beside lending and depositing money, banks also carry money from one corner of the globe to another. This act of banks is known as transfer of money. This activity is termed as remittance business. Banks generally issue Demand Drafts, Banker's Cheques, Money Orders or other such instruments for transferring the money. This is a type of Telegraphic Transfer or Tele Cash Orders. It has been only a couple of years that banks have jumped into the money transfer businesses in India. The international money transfer market grew 9.3% from 2003 to 2004 i.e. from US$213 bn. to US$233 bn. in 2004. Economists say that the market of money transfer will further grow at a cumulative 12.1% average growth rate through 2009.
1.2 FUTURE OF BANKING IN INDIA A healthy banking system is essential for any economy striving to achieve good growth and yet remain stable in an increasingly global business environment. The Indian banking system has witnessed a series of reforms in the past, like deregulation of interest rates, dilution of government stake in PSBs, and increased participation of private sector banks. It has also undergone rapid changes, reflecting a number of underlying developments. This trend has created
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MANAGEMENT OF NON PERFORMING ASSETS new competitive threats as well as new opportunities. This paper aims to foresee major future banking trends, based on these past and current movements in the market. Given the competitive market, banking will (and to a great extent already has) become a process of choice and convenience. The future of banking would be in terms of integration. This is already becoming a reality with new-age banks such as YES Bank, and others too adopting a single-PIN. Geography will no longer be an inhibitor. Technology will prove to be the differentiator in the short-term but the dynamic environment will soon lead to its saturation and what will ultimately be the key to success will be a better relationship management 1.2.1 OVERVIEW If one were to say that the future of banking in India is bright, it would be a gross understatement. With the growing competition and convergence of services, the customers (you and I) stand only to benefit more to say the least. At the same time, emergence of a multitude of complex financial instruments is foreseen in the near future (the trend is visible in the current scenario too) which is bound to confuse the customer more than ever unless she spends hours (maybe days) to understand the same. Hence, I see a growing trend towards the importance of relationship managers. The success (or failure) of any bank would depend not only on tapping the untapped customer base (from other departments of the same bank, customers of related similar institutions or those of the competitors) but also on the effectiveness in retaining the existing base. India has witness to a sea change in the way banking is done in the past more than two decades. Since 1991, the Reserve Bank of India (RBI) took steps to reform the Indian banking system at a measured pace so that growth could be achieved without exposure to any microenvironment and systemic risks. Some of these initiatives were deregulation of interest rates, dilution of the government stake in public sector banks (PSBs), guidelines being issued for risk management, asset classification, and provisioning. Technology has made tremendous impact in banking. Anywhere banking and
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MANAGEMENT OF NON PERFORMING ASSETS Anytime banking have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows. In the wake of greater financial deregulation and global financial integration, the biggest challenge before the regulators is of avoiding instability in the financial system.
1.2.2 RISK MANAGEMENT The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. Although capital serves the purpose of meeting unexpected losses, capital is not a substitute for inadequate decontrol or risk management systems. Coming years will witness banks striving to create sound internal control or risk management processes. With the focus on regulation and risk management in the Basel II framework gaining prominence, the post-Basel II era will belong to the banks that manage their risks effectively. The banks with proper risk management systems would not only gain competitive advantage by way of lower regulatory capital charge, but would also add value to the shareholders and other stakeholders by properly pricing their services, adequate provisioning and maintaining a robust financial structure. The future belongs to bigger banks alone, as well as to those which have minimized their risks considerably.
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MANAGEMENT OF NON PERFORMING ASSETS COMPANY PROFILE OF THE CANARA BANK: HISTORICAL TREND: Canara Bank established in 1906 with the name of Canara Bank Hindu Permanent Fund in Mangalore, India, by Ammembal Subba Rao Pai, is one of the oldest and major commercial bank of India. Its name was changed to Canara Bank Limited in 1910. The bank, along with 13 other major commercial banks of India, was nationalized on 19th July, 1969, by the Government of India. Currently (2008), the bank has 2508 branches spread all over India. The bank also has international presence in several centers, including London, Hong Kong, Moscow, Shanghai, Doha, and Dubai. In terms of business it is the largest nationalized commercial bank in India with a total business of about Rs.2000 billion (about US $43 billion). ORGANISATION STRUCTURE: The bank has fourteen wings in the Head Office, Bangalore. 1. Personnel Wing 2. Corporate Credit Wing 3. Risk Management Wing 4. Priority Credit Wing 5. Inspection Wing 6. Department of Information Technology Wing 7. Marketing and Customer Relationship 8. Planning and Development Wing 9. Recovery Wing 10. General Administration Wing 11. Financial Management Wing 12. Treasury and International Operation Wing 13. Retail Banking and Subsidiaries Wing 14. Vigilance Wing
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MANAGEMENT OF NON PERFORMING ASSETS OFFICE AND BRANCHES: Canara bank has a network of 2415 branches, spread over 22states/ 4 union territories of the country and overseas branch @ London which are administrated through Head Office at Bangalore 13 Circles offices / International Division 35 Regional offices 2441 Branches BRANCHES ABORAD: CANARA BANK established its International Division in 1976, to supervise the functioning of it various foreign department to give the required thrust to Foreign Exchange business, particularly export and to meet the requirements of NRIs. Though small in size the Banks presence abroad has brought in considerable foreign business, particularly NRI deposits. The presence of bank is shown under. CANARA BANK, London, UK (Branch) Indo Hong Kong International Finance Co Ltd Hong Kong (Subsidiary) AL Razouki International Exchange company , Dubai, UAE According to the latest information, both the CANARA BANK and State Bank of India have come into a mutual agreement as to both the banks will be operating as a one unit in the Moscow.
CORPORATE VISION: To top as a World Class Bank with best practices in the realms of asset portfolio, Customer orientation, Product Innovation, Profitability an enhanced value for stake holders. To set new standards in IT application, Customer responsiveness, Asset quality and profitability, culminating in higher stoke holder value.
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MANAGEMENT OF NON PERFORMING ASSETS To scale new peaks in respect of IT based banking, efficient service delivery market leadership in profitability. CORPORATE MISSION: Augmenting low cost deposits. Toning up asset quality. Accent on cost control. Thrust on retail banking. Customer centric focus. Product innovation and marketing. Leveraging IT for comprehensive MIS. Maximize stockholders value. CORPORATE OBJECTIVE: E- Efficiency. P- Profitability and Productivity. O- Organization Effectiveness. C- Customers centric H- Hi Tech Banking ACHIVEMENTS: The Bank has already carved a niche in providing IT based services. Computerized branches, for 65% of the branches & 81% of aggregated business provided a wide array of services such as Network ATMs, any where Banking , Tele Banking & Remote Access Terminals etc., The Bank was the first to launch networked ATMs & obtain ISO certification. CANARA BANK shares are listed & Bangalore, Mumbai & National Stock Exchanges. Establish well-developed quality circles have participated in many National & International level competitions and have returned with handsome prizes.
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MANAGEMENT OF NON PERFORMING ASSETS Has set up its own Apex level Training colleges to its employees and thereby takes care of the knowledge, skills and attitudinal development of employees. PERRFORMACE HIGHLIGHTS OF 2007-2008 Canara Bank has posted net profit of s.581 cr for the half year ended September 2007 as against Rs.419 cr during the corresponding previous half year, registered a growth rate of 38.60%. The Bank operating profit registered an increase of Rs.548 cr (57.81%) to reach Rs.1496 crore, up from Rs.948 cr for the first half of the preceding financial. Return of assets a standard measure of profitability improved from 1.08% (annualized) at a September 2004 to 1.28% (annualized) as at September 2007. Number of branches moved up to 2441 from 2416 as at September 2004, besides 248 extension counter. Global deposits of the Bank aggregated to as Rs.75, 396crore as against Rs.67734 crore a year ago, year growth being 11.31%. MATURITY CLASSIFICATION OF VARIOUS ASSETS AND LIABILITIES: In respects of the certain Assets and liabilities, CANARA BANK have undertaking a behavior study, embedded options in the basis of past of past data, based on which the bank is in a position to decide on the maturities of the asset and liabilities.
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MANAGEMENT OF NON PERFORMING ASSETS FINANCIAL ANALYSIS: The term financial analysis refers to the process of determining financial strengths and weakness of the firm by establishing strategic relationship between the items of balance sheet, profit and loss account other operative data. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. 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 substandard, doubtful, and loss assets. GROSS NPA of Canara bank Rs in crores Table showing Gross NPA from 2007-2011
Years Gross NPA
2007 1493
2008 1415
2009 1829
2010 2549
2011 3089
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MANAGEMENT OF NON PERFORMING ASSETS GRAPH: 1 Graph showing Gross NPA from 2007-2011
Analysis Gross NPA of the bank as at march 2007 stood Rs 1493 crore ,due to the introduction of New 90 days norms. As a result Gross NPA of the bank further stood in 2008 Rs 1415 crore, 2009 Rs 1829 crore, 2010 Rs 2549 crore and in 2011 Rs 3089 crore. In 2008 NPA decreases to Rs 1415 crore the change of Rs 678 crore but in 2009 it went to Rs 1829 crore i.e. change of Rs 414 crore, in 2010 again the NPA stood Rs 2549 and change of Rs 720 crore and in 2011 the Gross NPA of Canara bank went to Rs 3089 i.e. change of Rs 540 crore.
B] Net NPA: CENTRAL UNIVERSITY OF KARNATAKA - -
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.
Net NPA of Canara bank Rs in Crores
years Net NPA
2007 927
2008 899
2009 1020
2010 1800
2011 2347
GRAPH: 2 CENTRAL UNIVERSITY OF KARNATAKA - -
MANAGEMENT OF NON PERFORMING ASSETS Graph showing Net NPA from 2007-2011
Analysis The Net NPA in 2007 was Rs 927 crore, in 2008 the NPA came to Rs 899 crore changes of Rs 28 crore, in the year 2009 the Net NPA raised to Rs 1020 crore i.e. change of Rs 121 crore compare to 2008.in 2010 the Net NPA was Rs 1800 crore and in 2011 the net NPA was Rs 2347 crore change of Rs 547 crore.
C]. GROSS NPA RATIOS:
- -
MANAGEMENT OF NON PERFORMING ASSETS Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank. Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI guidelines. The ratio is to be counted in terms of percentage and the formula for GNPA is as follows: Gross NPA ratio = Gross NPA *100
Gross advances
2007
= 1493 *100 98506 = 1.515%
2008
= 1415 107238 = 1.319%
*100
= 1829 *100 2009 138219 = 1.3235 2010 = 2549 *100 169335 = 1.505%
2011
= 3089
*100
- -
MANAGEMENT OF NON PERFORMING ASSETS 212467 = 1.453%
- -
Analysis : The Gross NPA Ratio in 2007 was 1.515% and in 2008 it came down to 1.319% and change of 0.196% and in 2009 the Gross NPA went to 1.323% and increase of 0.004%. The trend was continue that in 2010 also the Gross NPA increased to 1.505% where the change of 0.182% and in the year of 2011 the Gross NPA decreased to 1.453% where the change off 0.052%. In all the 5years the Gross NPA was in zigzag way, where there were fluctuations in the Gross NPA.
- -
MANAGEMENT OF NON PERFORMING ASSETS 2. Problem Asset Ratio: It is the ratio of gross NPA to total asset of the bank. The formula for that is: Problem Asset Ratio = GrossNPAs TotalAssets 2007 = 1493 *100 *100
165961 = 0.899%
2008
= 1415 180529 = 0.783%
*100
2009
= 1829
* 100
219645 = 0.832%
2010
= 2549 264741 = 0.962%
*100
2011
= 3089 336079 = 0.919%
* 100
- -
Analysis The problem asset ratio in 2007 was 0.899% in 2008 it decreased to 0.783% the change of 0.166%.in 2009 the problem asset ratio was 0.832%, where it increased by 0.049%. The trend was continue that where in 2010 the problem asset ratio was 0.962% and in 2011 it was 0.919% and the change of 0.043%.In this case also the ratios were in fluctuated in all the year.
- -
MANAGEMENT OF NON PERFORMING ASSETS FINDINGS: The Net NPA ratio of the Canara Bank increased from 1.06% as at March 31st 2010 to 1.11% as at March 31st 2011. Canara Bank has recovered its NPA which is amounted to Rs.3089 crore during 2011. The Net NPA of the Canara Bank declined from Rs.2347 crore as on 31st march 2011. The Net NPA percentage of Canara Bank has reduced by over 1.29% as at 31st march 2009 to 1.06 during 2010-2011
SUGGESSATIONS:
- -
MANAGEMENT OF NON PERFORMING ASSETS Canara Bank should concentrate more on credit appraisal, monitoring, credit risk management and recoveries. Settlement is a better option for the banks wrestling with the problem of nonperforming assets. Credit scoring allows lenders to determine whether or not you fit the profile of the type of customers they are looking for. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. . Bank has to work more on recovery function. . Bank has to work more on minimize the Non Performing Assets.
CONCLUSION: Securitization Act will surely help banks in reduction of NPA to a great extent.
- -
MANAGEMENT OF NON PERFORMING ASSETS preventing fresh flow of NPAs to a great extent. Exchange of credit information among banks would be of immense help to avoid possible NPAs.
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Npa

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INTRODUCTION:

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

SCOPE OF THE STUDY

OBJECTIVES OF THE STUDY

To study the past trends of NPA

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

MANAGEMENT OF NON PERFORMING ASSETS

1. Personal Interview 2. Secondary Sources

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

REASONS FOR NPAs: In Priority Sector Advances:

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

MANAGEMENT OF NON PERFORMING ASSETS

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

The Chase Manhattan Bank Ltd. Dresdner Bank AG.

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA

CENTRAL UNIVERSITY OF KARNATAKA