Dissertation Report

In Partial Fulfillment of Award of Master of Business Administration

On Management of NPA in Commercial Banks

By:

Simerjeet kaur A0101908151 MBA Class of 010

Under the Super ision of

Mr! Santos" #umar

$e%turer &e'artment of Finan%e

AM!"# BUS!N$SS SC%&&' AM!"# UN!($RS!"# U""AR PRAD$S% S$C"&R )*+, N&!DA - *.)/./, U""AR PRAD$S%, !ND!A *.). DECLARATION

I,

Simerjeet Kaur, student of Masters of Business Administration from Amity Business

School, Amity University Uttar Pradesh hereby declare that I have completed Dissertation on Mana!ement of "PAs in #ommercial Ban$s% as part of the course re&uirement'

I further declare that the information presented in this project is true and ori!inal to the best of my $no(led!e'

Date: ))*+,*-+ Khurana Place: "oida

Name :

Simerjeet Kaur

Enroll. No: A+-+-.+/-0Program: MBA 123 )+-+

AMITY UNIVERSITY UTTAR PRADESH AMITY BUSINESS SCHOOL CERTI ICATE

I, Mr.Santo!" #$mar% hereby certify that S&mer'eet (a$r, student of Masters of Business Administration at Amity Business School, Amity University Uttar Pradesh has completed dissertation on Mana!ement of "PAs in #ommercial Ban$s% under my !uidance'

Mr' Santosh $umar Assistant Proffesor Department 4f 5inance

AC#NO)LED*EMENT
Above all I (ant to e6press my !ratitude to the 2od Almi!hty, (ho !ave me life' My Alma mater, Amity Business School, the place (here I have spent most memorable days of my life, the place that has al(ays inspired to deliver my best, I o(e all my motivation and success' I am not the most popular names of this institution, but I (ant to be the most motivated and most inspired person from this place'

7his dissertation could not have been (ritten (ithout Mr'Santosh Kumar, (ho not only !uided me but also encoura!ed and challen!ed me throu!hout my dissertation, never acceptin! less than my best efforts' Special than$s to Dr' Sanjay Srivastava, an unfor!ettable name for me, (ho has motivated me to achieve me (hat I (anted to' 8is (ay of thin$in! and tal$in! has inspired me from the first day of my life in Amity' 7he staff in Amity Business School, especially in the academic section, (hich (ere al(ays around me, al(ays there to help me in need, my friends, (ho tau!ht me a lot of thin!s, they all deserve a (ord of honor' 9ast but not the least, my parents Mr'Inderpal sin!h and Mrs'Meetpal $aur , for !ivin! me life in the first place, for educatin! me, for providin! me enou!h comfort, for unconditional support and encoura!ement to pursue my interests, even (hen the interests (ent beyond boundaries of lan!ua!e, field and !eo!raphy and their ability to provide the same'

Ta+le o, Content!
Declaration #ertificate from faculty !uide Ac$no(led!ement
S(!)O! *OPIC ,-,C.*I/, S.MMA(0 1 Introdu%tion 1 1 1 1 1 2"at is )PA Asset %lassifi%ation 3 'ro4isionin5 &eterminants of )PA Im'a%t of )PA on workin5 of 6anks Measures taken to deal wit" )PA 7 9188 PA+, )O! 8 91 8 10 1 15

$iterature re4iew

(esear%" met"odolo59 1 1 1 1 1 1 1 O6je%ti4es (esear%" desi5n (esear%" instrument Sam'le si;e Sam'lin5 met"od &ata %olle%tion 3 anal9sis $imitations

8718: 85 85 85 85 85 85 8: 8<17: 7<178 79151 5 155 5:15<

7 5 : < 8

&ata anal9sis 3 inter'retation Findin5s 3 %on%lusions (e%ommendations A)),-.(,S (,F,(A)C,S

List of Figures
S( )O! &ata anal9sis 1 Fi5 1 (e'resentation of 9ears of e='erien%e in re%o4er9 Fi5 8 7 5 : < 8 9 10 (e'resentation of no of %ases re%ei4ed 88 88 89 89 70 70 71 71 7 7 *OPIC PA+, )O

Fi5 8 (e'resentation of 'rofile of t"e defaulters Fi5 7 (e'resentation of a5e 5rou's of defaulters Fi5 5 (e'resentation of effe%ti4eness of Banks Fi5 : (e'resentation of %ate5or9 of )P$>s Fi5 < (e'resentation of reasons of default1 loanies 4iew Fi5 8 (e'resentation of reasons of default1 6ankers 4iew Fi5 9 (e'resentation of met"ods used for re%o4er9 Fi5 10 (e'resentation of su55estions to redu%e )PA

E-ECUTIVE SUMMARY

"on:Performin! Asset means an asset or account of borro(er, (hich has been classified by a ban$ or financial institution as sub : standard, doubtful or loss asset, in accordance (ith the directions or !uidelines relatin! to asset classification issued by ;BI'

At present , local ban$s are saddled (ith the mana!ement of non< or sub : performin! loans 1"P9s3, real estate properties and other fi6ed assets 1"PAs3 for (hich they do not have the mana!ement time nor the resources for a proper resolution process' As a result, they are reluctant to ma$e ne( loans to industrial or commercial enterprises s both the "P9s and "PAs put a strain on their resources' 7he unavailability of ne( loans can, therefore, hinder economic !ro(th and development As the thrust of second phase of reform is on improvement in the or!ani=ational efficiency of ban$s, the most critical area in the improvement of profitability of ban$s is the reduction of "PAs' 7his issue is intimately connected (ith the overall stability of the financial system and need to be reco!ni=ed for concerted and multipron!ed efforts' Apart from internal factors such as (ea$ credit appraisal, non<compliance and (illful default, there are several e6ternal factors such as preponderance of certain traditional industries in the credit portfolio of certain ban$s, majority of (hich are sufferin! from serious inherent operational problems, natural calamities, policy and technolo!ical chan!es (hich increase the sic$ness, labour problems and non : availability of ra( materials and other such factors (hich are not (ithin the control of ban$s' ;eduction of "PAs in ban$in! sector should be treated as a national priority item to ma$e the Indian ban$in! system stron!er, resilient and !eared to meet the challen!es of !lobali=ation' 7his is the reason (hy this research study aims to study the "PA situation in India' 7he objectives of this research (ere to study the nature, ma!nitude, mana!ement of the "PA in some of Indian commercial ban$ 'and also to compare the "PA situation (ith some of the other Asian countries'

INTRODUCTION

)"at &! NPA

7he past decade (itnessed several financial and economic crises (orld (ide, cripplin! the economies of the affected countries' In most cases, crises in the financial sector culminate into non<performin! assets 1"PAs3' A hi!h level of "PAs in the ban$in! system can severely affect the economy in many (ays' Mana!ement and financial resources of the ban$in! system are diverted to resolution of "PA problems causin! an opportunity loss for more productive use of resources' 7he ban$s tend to become ris$ averse in ma$in! ne( loans, particularly to small and medium si=ed companies' 7hus, lar!e scale "PAs (hen left unattended, cause continued economic and financial de!radation of the country' 7his results in a credit crunch and !enerally si!nals adverse investment climate' 7his e6plains

(hy most countries in the !rip of systemic financial and economic crisis have attempted system<(ide clean up of "PAs as a part of restructurin! of their ban$in! system' 7hus, the problem of "on<Performin! Assets has been and continues to be a ve6atious issue and off and on the !overnment is called upon to bail out the problem usin! ban$s> bud!etary resources since no !overnment ca remain a hapless spectator and i!nore the problem of unmana!eable "PAs' 2iven the Indian 2overnment?s limited room for manoeuvre on the 5iscal front, the problem of "PAs needs to be !iven top priority' Until recently, several measures attempted based on empirical studies and other(ise, did not yield positive results either to contain "PAs or prevent them from assumin! (orrisome proportion or (ipe out the problem (ithout affectin! ban$s> profitability or invitin! financial support from the 2overnment' 4ne of the reasons for ineffectiveness of the measures (as due to focus bein! overstressed on tac$lin! the problem only from the an!le of the lenders and not from the an!le of the borro(ers, (ho basically are the cause for "on : Performin! Advances after derivin! all possible benefits from the ban$s' Since the problem of "PAs lar!ely emanates from the borro(ers, it is only appropriate and prudent that solution should also be!in from them' 7he solution to the problem of "PAs has to be found (ith the involvement of borro(ers' Most lenders donot have a result:oriented strate!y at all, as (ell as problem credits are concerned' 7his more often compounds the problem and results in delayin! or denyin! solution' Many ban$ers have this misconception that thin!s (ill someho( !et better on their o(n if they (ait' But this does not happen' 7he !reatest barrier to improvin! the eventual recoverability of a loan is !ettin! the lender to reco!ni=e and that too early, that a credit is in trouble' In spite of both common sense and ;e!ulatory ;eportin! Procedures, it is not unusual for a lender to believe that a borro(ers> situation is not bad or atleast not as bad as it loo$s' 7he ne6t hurdle is convincin! the borro(er as (ell, that there is a problem' 7his is ho( the problem should be loo$ed at the micro level' "PA>s surfaced in the Indian ban$in! scenario around the ei!hties' India has ac&uired an alarmin! number of "on<Performin! Ass'ets 1"PA>s3 over the last t(o decades' So let>s be!in (ith first definin! the "PAs in order to better understand this problem' De,&n&t&on o, NPA An asset, includin! a leased asset, becomes nonperformin! (hen it ceases to !enerate income for the ban$'

A nonperformin! asset 1"PA3 is a loan or an advance (here@ i3 Interest and* or installment of principal remain overdue for a period of more than .+ days in respect of a term loan, iii3 7he installment of principal or interest thereon remains overdue for t(o crop seasons for short duration crops, 1iv3 7he installment of principal or interest thereon remains overdue for one crop season for lon! duration crops As per the ;BI instructions ban$s should, classify an account as "PA only if the interest char!ed durin! any &uarter is not serviced fully (ithin .+ days from the end of the &uarter'

A!!et Cla!!&,&cat&on: Categor&e! o, NPA!

Stan.ar. A!!et!: Standard assets are the ones in (hich the ban$ is receivin! interest as (ell as the principal amount of the loan re!ularly from the customer' 8ere it is also very important that in this case the arrears of interest and the principal amount of loan do not e6ceed .+ days at the end of financial year' If asset fails to be in cate!ory of standard asset that is amount due more than .+ days then it is "PA and "PAs are further need to classify in sub cate!ories' Ban$s are re&uired to classify nonperformin! assets further into the follo(in! three cate!ories based on the period for (hich the asset has remained nonperformin! and the reliability of the duesA 1-3 Sub<standard Assets 1)3 Doubtful Assets 1,3 9oss assets /01S$+2!tan.ar. A!!et!:22 Bith effect from ,- March )++0, a substandard asset (ould be one, (hich has remained "PA for a period less than or e&ual to -) month' 7he follo(in! features are e6hibited by substandard assetsA the current net (orth of the borro(ers * !uarantor or the current mar$et value of the security char!ed is not enou!h to ensure recovery of the dues to the ban$s in full@ and the asset has (ell<defined credit (ea$nesses that jeopardi=e the li&uidation of the debt and are characteri=ed by the distinct possibility that the ban$s (ill sustain some loss, if deficiencies are not corrected'

/31Do$+t,$l A!!et!:22 A loan classified as doubtful has all the (ea$nesses inherent in assets that (ere classified as sub<standard, (ith the added characteristic that the (ea$nesses ma$e collection or li&uidation in full, : on the basis of currently $no(n facts, conditions and values : hi!hly &uestionable and improbable' Bith effect from March ,-, )++0, an asset (ould be classified as doubtful if it remained in the sub<standard cate!ory for -) months' /41Lo!! A!!et!:22 A loss asset is one (hich considered uncollectible and of such little value that its continuance as a ban$able asset is not (arranted< althou!h there may be some salva!e or recovery value' Also, these assets (ould have been identified as ?loss assets> by the ban$ or internal or e6ternal auditors or the ;BI inspection but the amount (ould not have been (ritten<off (hollyi' Pro5&!&on&ng Norm!: *eneral In order to narro( do(n the diver!ences and ensure ade&uate provisionin! by ban$s, it (as su!!ested that a ban$Cs statutory auditors, if they so desire, could have a dialo!ue (ith ;BICs ;e!ional 4ffice* inspectors (ho carried out the ban$Cs inspection durin! the previous year (ith re!ard to the accounts contributin! to the difference' Pursuant to this, re!ional offices (ere advised to for(ard a list of individual advances, (here the variance in the provisionin! re&uirements bet(een the ;BI and the ban$ is above certain cut off levels so that the ban$ and the statutory auditors ta$e into account the assessment of the ;BI (hile ma$in! provisions for loan loss, etc' 7he primary responsibility for ma$in! ade&uate provisions for any diminution in the value of loan assets, investment or other assets is that of the ban$ mana!ements and the statutory auditors' 7he assessment made by the inspectin! officer of the ;BI is furnished to the ban$ to assist the ban$ mana!ement and the statutory auditors in ta$in! a decision in re!ard to ma$in! ade&uate and necessary provisions in terms of prudential !uidelines'

In conformity (ith the prudential norms, provisions should be made on the non< performin! assets on the basis of classification of assets into prescribed cate!ories '7a$in! into account the time la! bet(een an account becomin! doubtful of recovery, its reco!nition as such, the reali=ation of the security and the erosion over time in the value of security char!ed to the ban$, the ban$s should ma$e provision a!ainst sub<standard assets, doubtful assets and loss assets as belo(A /01Lo!! a!!et!: 7he entire asset should be (ritten off' If the assets are permitted to remain in the boo$s for any reason, -++ percent of the outstandin! should be provided for' /31Do$+t,$l a!!et!: -'-++ percent of the e6tent to (hich the advance is not covered by the reali=able value of the security to (hich the ban$ has a valid recourse and the reali=able value is estimated on a realistic basis' )' In re!ard to the secured portion, provision may be made on the follo(in! basis, at the rates ran!in! from )+ percent to 0+ percent of the secured portion dependin! upon the period for (hich the asset has remained doubtful' /41S$+2!tan.ar. a!!et!: A !eneral provision of -+ percent on total outstandin! should be made (ithout ma$in! any allo(ance for DI#2#*D#2# !uarantee cover and securities available'

/61Stan.ar. a!!et!: 5rom the year endin! ,-'+,')+++, the ban$s should ma$e a !eneral provision of a minimum of +'E+ percent on standard assets on !lobal loan portfolio basis' 7he provisions on standard assets should not be rec$oned for arrivin! at net "PAs'

Determ&nant! o, NPA! : Some Conce7t$al an. Em7&r&cal I!!$e!

In a layman>s perception, "PA formation in a ban$ is parado6ical' Unli$e moneylenders, (ho on several occasions lend money (ithout any collateral, the advances made by the ban$s are !enerally bac$ed by some $ind of collateral, (hich can be li&uidated in case of default' 7his collateral is in fact insisted on (hile ma$in! an advance to !uard a!ainst the possibility of default' But, the problem arises in several cases of default (hen some of these collaterals could not be ac&uired or li&uidated by the ban$ to reali=e the loss involved' 7his inability (as primarily due to institutional constraints, such as inappropriate le!al frame(or$, political interference or the !eneral non<compliance attitude of the borro(in! community' In addition to that, the e6istence of inade&uately formed asset mar$et mi!ht have a!!ravated the problem further' 8i!h transaction costs of operatin! in such a mar$et also may be another reason' Dven if accept that "PA is a fact of life, so far as ban$in! practices are concerned, then ideally there should be no reason (hy one should be (orried about it' A ban$ can obtain the desired rate of return throu!h properly adjustin! the rate of interest on different cate!ories of loans*advances in accordance (ith their ris$ profile' If the sample si=e is lar!e enou!h for different cate!ories of advances, (hich is in fact true for most of the Indian ban$s, the reali=ed return, and desired return on the total asset of the ban$ (ould coincide' 7he loss due to "PA (ould e6actly be compensated by hi!her interest earnin! in specific ris$ cate!ories' In other (ords, hi!h incidence of "PA need not necessarily affect the profitability of the ban$' In fact, both can !o to!ether' 7his is because hi!h profits can be earned only at the cost of facin! hi!h ris$, i'e' !eneratin! hi!h "PA' 7here is no problem (ith a moderate "PA as it can be ta$en care of by differential rates of interest on advances made to different sectors' 8o(ever, there is a limit to (hich the rate of interest can be increased in order to reflect the hi!h profile of an asset cate!ory' If "PA becomes very hi!h, it (ill be difficult to deal (ith its aftermath by means of an increase in rate of interest' A rise in the rate of interest may !o a!ainst the central ban$>s dictum' It may also lead to adverse selection' If the increment in the rate of interest (ere very hi!h , the problem (ould be a!!ravated by further increase in default' 7his occurs throu!h t(o routes' 5irstly, at a hi!h rate of interest, a section amon! borro(ers borro(s (ith an intention to default' Secondly, an increase in the probability of default ta$es place because individuals (ould ta$e more ris$ (hen the interest is hi!her (hen demand for loans is

elastic' But if, the demand for loans is inelastic, raisin! the rate of interest may not reduce the demand for credit' It (ill create a cate!ory of !enuine defaulters (hose mar!in is s&uee=ed' 7his poses a limit to the use of the tool of raisin! the interest rate to overcome the "PA problems'

In case of lar!e "PA accumulation by a ban$, it may also react by decreasin! its e6posure to the particular sector !eneratin! hi!h "PA and chan!in! its composition of advances' 8o(ever, this is also not (ithout problems' Bith chan!e in the composition of advances and increase in advances to non<ris$y sectors, rate of interest offered to these sectors (ill fall' 7his is currently happenin! to Indian ban$s, (hich, (hen faced (ith "PAs ori!inatin! from industries affected by recession, are increasin! their investment in !overnment securities on the one hand and (ooin! the household sector (ith lo(er interest rate on personal loans on the other' 8o(ever, apart from ceilin! on interest rate or statutory restrictions on interest rates for some cate!ories of loans irrespective of their ris$ profile, there may e6ist !enuine problems of estimation of ris$s' ;is$s may not be time independent' 7hey vary (ith the chan!es in overall business conditions' 7hey may increase (ith economic slo(do(n and decrease (ith economic upturn' In addition to this there may also e6ist the problem of moral ha=ard or intentional default, principal a!ency problems (here mana!ers satisfy their o(n interest (ithout considerations to the depositors*shareholders, political intervention and conta!ious effects in case of non< recovery, and all this may a!!ravate the problem of "PA' Infact, many of these factors proved very critical for the Indian PSBs, raisin! the "PA to an alarmin! level' 7his indicates that the role of evaluation and monitorin! by the ban$s and transparency in ban$in! operations assumes primary importance'

REASONS OR ASSETS BECOMIN* NON PER ORMIN* ASSETS

;A"D4M 5A#74;S 7he random component of default is assumed to be stochastic in nature' 7he different economic or commercial activities involve different levels of ris$ that are faced by

borro(ers (ith varied ability to sustain' #onse&uently, these ris$s are translated into "PAs throu!h default' 7he relevant parameters can be estimated (ith a hi!h de!ree of confidence (hen the number of borro(ers in different cate!ories of advances is reasonably hi!h' "4"<;A"D4M 5A#74;S A. E82 ante In,ormat&on A!9mmetr9 : Irrespective of the si=e of the project, almost F+<F0G of the investment is financed by ban$s and financial institutions and )0<,+G comes from the promoters as their contribution in the form of capital' In other (ords, major part of the investment in all the projects is financed by ban$s and financial institutions' It is the job of the ban$er to properly scrutini=e the projects and stay a(ay from unviable and un<ban$able projects' 7he ban$s> role is to screen potential projects to determine e6pected return and ris$ from the not very objective data presented by the demanders of funds' #learly, the ban$s> credit department ta$es the centre sta!e, because it is throu!h its evaluation of potential investment opportunities the ban$ productively invests idle deposits mobili=ed from the household sector in the public interest' 7erm project proposals re&uire detailed scrutiny as compared to (or$in! capital proposals, particularly $eepin! in vie( the future !ro(th prospects of the project and that of the industry' 7he decision of the term loan is irreversible and any (ron! decision can result in bad investment' 7here may e6ist situations (here many borro(ers hide information (hile borro(in! and once the loans are !ranted they default' Bhen ban$s fail to detect them adverse selection problem result' Adverse selection of the projects (ithout properly scrutini=in! their viability has led to substantial accumulation of "PA in the ban$s' 7he follo(in! situations lead to failure to overcome e6<ante information asymmetry and thereby cause adverse selection of borro(ers' a3 9ac$ of or!ani=ational learnin! in the ban$<repeated lendin! to same person or !roup of persons (ith similar dubious characteristics: 4r!ani=ational learnin! on the part of the ban$ is very important in controllin! the !ro(th of "PA' It is obvious that (ith the e6perience of repeated lendin! over a period of time to varieties of borro(ers, a ban$ can identify a particular type of borro(er (ho is more li$ely to default' But in practice it fails to learn from the past' Due to several constraints, (hether internal or e6ternal, li$e political interference, it cannot bar these potential defaulters' 5or instance, loans have been e6tended toA < < Industries in the ne!ative list circulated by IDBI, department of industries and ;BI' D6istin! accounts (hich have !one irre!ular, i'e' ever<!reenin! of accounts'

< <

A party (hich is irre!ular on e6istin! accounts in a different branch of the same ban$@ and Several projects (ith promoters or directors (ith doubtful inte!rity'

b3 9ac$ of vision of ban$ in sanctionin!, revie(in! and enhancin! credit limitsA Bhile e6aminin! lon! term viability, both foresi!ht as (ell as proper scrutiny is lac$in! on the part of the ban$' Inefficient decisions have resulted in many ne(ly born projects turnin! sic$ or closin! do(n' 7here are instances in (hich instalments and interest have become due before the commencement of commercial production' Such accounts are considered as "PA, (hich reflects improper scrutiny and failure in considerin! moratorium period on a realistic basis' c3 Political interferenceA Political leaders*or!ani=ations (ield enormous po(er over the ban$s in !rantin! loans to particular borro(ers' It pays the political leaders to encoura!e default by the borro(ers, in the absence of an efficient le!al system ' 5or instance, rural panchayats are responsible for recommendin! loans, but once the loan is disbursed, these rural political bodies ta$e no initiative to ensure that the loan is serviced and repaid' 7here are many instances (here bi! companies received a lar!e volume of loans under political influence and (ere able to escape punishment after default' D6amples include UB Dn!ineerin! promoted by Hijay Mallaya, an MP in the ;ajya Sabha and Mu$and Steel promoted by Hiren Shah, the e6< !overnor of Best Ben!al' Darlier, loan melas and debt (rite<offs under political pressure have also contributed to "PA problem (hich (ill be discussed later' B. E8 7o!t In,ormat&on A!9mmetr9 : 7here are asymmetries of information that develop subse&uent to si!nin! of a contract' Dven (hen information asymmetries do not e6ist at the time of contractin!, the parties to a contract often anticipate that asymmetries (ill develop sometime after a contract is si!ned' Because lenders have trouble ascertainin! the &uality of investment projects that borro(ers (ish to underta$e, the borro(ers have incentives to en!a!e in activities that may be personally beneficial but increase the probability of default and thus harm the lender' 5or e6ample, the borro(er has incentives to cheat by misallocatin! funds for his o(n personal use, either throu!h embe==lement or by spendin! on per&uisites, (hich donot lead to increased profits' Moreover, the borro(er has incentives to underta$e investment in unprofitable projects that increase his po(er or to invest in projects (ith hi!her ris$, in

(hich the borro(er does (ell if the project succeeds but the lender bears most of the loss if the project fails' Bhen there are some actions (hich the borro(er can ta$e and (hich affect the li$elihood of not bein! able to repay the debt, then there e6ists a $ind of moral ha=ard problem' ;BI 1-...3 report on "PA investi!ated around /++ top "PA accounts in -F ban$s' It reveals that (hile loans (ere ta$en mostly for e6pansion, diversification, moderni=ation, ta$in! up ne( projects and for helpin!* promotin! associated concerns, the sin!le most prominent reason for units becomin! sic$ and accounts turnin! sic$ is the diversion of funds by promoters' 5urther, nontransparent accountin! policy and poor auditin! practices often mislead the ban$s (ho other(ise could have ta$en appropriate measures to minimi=e loss due to default' C. Lac( o, Mon&tor&ng on t"e Part o, Ban(! : 4nce lendin! decisions are made, on!oin! monitorin! needs to be done (ith a vie( to prevent moral ha=ard or other(ise in order to assure the ma6imum possibility of repayment' Dspecially, the Indian PSBs are not in a position to monitor perfectly the actions of those to (hom they lend money' ;BI report on "PA provided a number of instances (here ban$s have financed projects of a company (hose re!istered office is far a(ay from the concerned branch of the ban$, thus ma$in! it very difficult to monitor the accounts' Disbursement of loan in another area created problems for the ban$ers (ho often failed to $eep trac$ and chec$ on end<use of the fund disbursed' 4ver< invoicin! in cost of construction and machinery@ disbursements a!ainst machines<materials<asset not relevant to the project, fre&uent cash (ithdra(als of hu!e amount, inter<firm transactions, payments for buyin! property of the partner or director by (ithdra(in! from cash credit account, and operatin! cash credit accounts for public issues' 7here are some prominent e6amples (hich point to the fact that ban$ers have not been vi!ilant in controllin! the end : use o funds' Durin! periodic inspection, appropriate en&uiries are i!nored even (hen certain irre!ularities are observed by the ban$ers' Bhen it comes to PSBs, three decades of !overnment o(nership has rendered ban$s or!ani=ationally (ea$' 5aulty appraisals, absence of effective post<sanction monitorin! have resulted in "PAs' Defective credit appraisal system, absence of ris$ ratin! and deficiencies in post<credit supervision and follo(<up are important reasons that led to accumulation of "PAs' 5urther, it may be seen ho( conflict bet(een !overnment policy and ban$>s interest !enerates "PA in the priority sector' In the case of priority sector lendin!, a certain proportion of the total advances (ould be provided to a particular type of

borro(er, irrespective of re&uirement, usa!e of the money, credibility or ability to repay' Bhile devisin! such pro!rams, the !overnment has not devised any method of recoverin! loans in case of default' 7hus, pre<approved nature of loans sanctioned under sponsored pro!rams 1leadin! to adverse selection 3, lac$ of effective follo(<up due to lar!e number of accounts 1 and lac$ of monitorin! 3 lead to formation of "PA in priority sectors for Indian PSBs' D1 Incom7lete Contract 2 #ontracts are inherently incomplete as it is difficult to specify all the modalities and the terms and conditions prior to si!nin! of a contract' 7his is seen to be all the more true in the case of financial transactions in the PSBs (here many disputed emer!ed re!ardin! the ma!nitude of the interest amount dues' 5or instance, chan!es in the ban$in! practice of applyin! and fi6in! of interest from &uarterly to monthly caused confusion re!ardin! the e6act annual interest rates and thereby interest bills' Already a lar!e number of liti!ations involvin! a si=eable amount of ban$ money is pendin! in the court , for (hich neither interest nor the principal is forthcomin!'

Interact&on +et;een Ran.om an. Non2 Ran.om actor!

"PAs are also created by interaction of random and non<random components' Bhen a borro(er cannot pay bac$ due to the fact that his venture failed and he escapes any form of penalty, this induces another to default, even (hen he has the capacity to pay bac$' In such a scenario, occurrence of "PA due to random reasons leads to creation of additional "PA due to non<random reasons, a phenomenon called conta!ious default' ;BI 1-...3 study of top /++ "PA borro(al accounts 1referred above3 distin!uished bet(een internal and e6ternal reasons behind accumulation of "PA' 7he e6ternal factors may be mentioned as under : Industrial recession "atural calamities li$e floods and accidents #han!es in economic policy and technolo!y increasin! the incidence of sic$ness' 9abor problems, non availability and price escalations of ra( materials, po(er shorta!e and other factors not (ithin the control of the ban$s' Amon! internal factors, mention has been made of the follo(in!A

 Inefficient mana!ement and business failure' Inappropriate technolo!y and product obsolescence time and cost over runs by units'

Dach of the e6ternal and internal reasons for "PA formation !iven by ;BI may come under both random and non<random processes of default as discussed above' 5or e6ample, industrial recession or policy of technolo!ical chan!es increasin! the intensity of sic$ness (hich come under e6ternal factors' 7his mi!ht have !enuinely affected the borro(er, thereby ma$in! it a random factor behind "PA formation' It is also possible that an unaffected borro(er (illfully defaults and pretends that the above factor affected his business' 7his comes under non<random factor behind default' 7he e6ternal factors, accordin! to ;BI, are beyond the control of the ban$s and thus, the ban$s cannot be held responsible for the defaults caused by these factors'

Im7act o, NPA<! on t"e ;or(&ng o, Commerc&al Ban(!

01 Im7act on t"e o$tloo( o, Ban(er! to;ar.! Cre.&t Del&5er9 7he psycholo!y of the ban$s today is to insulate themselves (ith =ero percent ris$ and turn lu$e(arm to fresh credit' 7his has affected adversely credit !ro(th compared to !ro(th of deposits, resultin! a lo( #*D ;atio around 0+G to 0EG for the industry' It is evident that the e6istence of collateral security at best may convert the credit e6tended to productive sectors into an investment a!ainst real estate, but (ill not prevent the account turnin! into "PA' 5urther bloc$ed assets and real estate represent the most illi&uid security and "PA in such advances has the tendency to persist for a lon! duration' "ationalised ban$s have reached a dead<end of the tunnel and their future prosperity depends on an ur!ent solution of this hoverin! threat' 31 E8ce!!&5e ,oc$! on cre.&t r&!( management 7he most important business implication of the "PAs is that it leads to the credit ris$ mana!ement assumin! priority over other aspects of ban$>s functionin!' 7he ban$>s (hole machinery (ould thus be pre<occupied (ith recovery procedures rather than concentratin! on e6pandin! business' As already mentioned hereinabove, a ban$ (ith hi!h level of "PAs (ould be forced to incur carryin! costs on a non<income yieldin! assets' 4ther conse&uences (ould be reduction in interest income, hi!h level of provisionin!, stress on profitability and capital ade&uacy, !radual decline in ability to meet steady increase in cost, increased pressure on net interest mar!in 1"IM3 thereby reducin! competitiveness, steady erosion of capital resources and increased difficulty in au!mentin! capital resources' 7he lesser<appreciated implications are reputational ris$s arisin! out of !reater disclosures on &uantum and movement of "PAs, provisions etc' 7he non&uantifiable implications can

be psycholo!ical li$e >play safe> attitude and ris$ aversion, lo(er morale and disinclination to ta$e decisions at all levels of staff in the ban$' 7(o decades of re!imented and directed ban$in! to credit delivery has deprived ban$ mana!ers of the instinct s$ill and $no(led!e' "ationalised ban$in! did not produce a sprin! of talent resources from (ithin' Directive Inputs and coursedirection came e6ternally from ;BI and 5inance Ministry (hich (ere*are e6ternal to the day<to<day affairs and problems of the Indian ban$in! industry' 7he system did not promote initiative and talent, but bred corruption and nepotism' 7his is the scene of Indian Ban$in! stru!!lin! hard to transition from old primitive systems and values to modern professional business ethics and corporate !ood !overnanc

41 H&g" co!t o, ,$n.! .$e to NPA! Iuite often !enuine borro(ers face the difficulties in raisin! funds from ban$s due to mountin! "PAs' Dither the ban$ is reluctant in providin! the re&uisite funds to the !enuine borro(ers or if the funds are provided, come at a very hi!h cost to compensate the lender>s losses caused due to hi!h level of "PAs' 7herefore, &uite often corporates prefer to raise funds throu!h commercial papers 1#Ps3 (here the interest rate on (or$in! capital char!ed by ban$s is hi!her' 61 Im7act on +an(! !cr&7! on Stoc( E8c"ange! In further of a report, the ;BI has said informational asymetries arisin! from less onsite* off<site inspection, declinin! performance and shootin! "PAs (ei!hed heavily on ban$ stoc$s' 7he ;BI has for the first time included stoc$ mar$et behaviour of ban$ scrips in its annual revie( of the ban$in! sector' As per a ;BI ;eport, despite the various reforms bein! carried out in Indian stoc$ e6chan!es, many ban$ scrips remain illi&uid and thinly traded' In fact, out of )0 ban$s traded on the "ational Stoc$ D6chan!e 1"SD3, the share of the top five ban$s in turnover and capitali=ation constituted .J'E per cent and /)'/) per cent respectively durin! -../<..' Mean(hile, the share price of 8D5# Ban$ 9td, a private< sector ban$, sho(ed a decline of a mere -'- per cent durin! the year -../<..' 7he ;BI ;eport says KPrivate sector ban$ stoc$s (hose mar$et performance (as affected included Ban$ of ;ajasthan, 5ederal Ban$ and 8D5# Ban$,K and attributed the batterin! the scrips !ot in the secondary mar$et to their poor performance in !eneral and the concern of the mar$et over their "PAs' 7here are various other pressin! factors that are relevant from the point of vie( of Indian ban$in! operations (ith a vie( to focusin! on "PAs and its related effects

Mea!$re! ta(en to .eal ;&t" NPA!

7he problem of recovery from "PAs, in the Indian ban$in! system, (as reco!ni=ed by the 2overnment of India 124I3 as far bac$ as in -..F, (hen the K"arasimhan #ommitteeK (as appointed' 7he "arasimhan #ommittee ;eport mentioned that an important aspect of the continuin! reform process (as to reduce the hi!h level of "PAs as a means of ban$in! sector reform' It (as e6pected that (ith a combination of policy and institutional development, ne( "PAs in future could be lo(er, ho(ever, the problem of the hu!e bac$lo! of e6istin! "PAs still remained' 7his problem of "PAs, impin!ed severely on ban$s performance and their profitability' 7he ;eport envisa!ed creation of an KAsset ;ecovery 5undK to ta$e the "PAs off the lenderCs boo$s at a discount' L Unli$e in some countries (here A;#s have been set up post financial crises and for the purpose of bailout, in India, the 24I proactively initiated certain measures to control "PAs' In order to re!ulate and control the "PAs and &uic$en recovery, the 24I set up Debt ;ecovery 7ribunals and Debt Appellate 7ribunals under the K;ecovery of Debts Due to Ban$s and 5inancial Institutions Act, -..,K' As a corollary to this and to speed up the process of recovery from "PAs, the Securiti=ation and ;econstruction of 5inancial Assets and Dnforcement of Security Interest Act, )++), (as enacted by the 24I for re!ulation of securiti=ation and reconstruction of financial assets and enforcement of security interest by secured creditors, includin! Securiti=ation or ;econstruction #ompanies 1S#*;#3' Mea!$re! ,or ,a!ter legal 7roce!! Lo( A.alat! 9o$ Adalat institutions help ban$s to settle disputes involvin! accounts in KdoubtfulK and KlossK cate!ory, (ith outstandin! balance of ;s'0 la$h for compromise settlement under 9o$ Adalats' Debt ;ecovery 7ribunals have no( been empo(ered to or!ani=e 9o$ Adalats

to decide on cases of "PAs of ;s'-+ la$hs and above' 7he public sector ban$s had recovered ;s'E+',/ crore as on September ,+, )++-, throu!h the forum of 9o$ Adalat' 7he pro!ress throu!h this channel is e6pected to pic$ up in the comin! years particularly loo$in! at the recent initiatives ta$en by some of the public sector ban$s and D;7s in Mumbai' De+t Reco5er9 Tr&+$nal! 7he ;ecovery of Debts due to Ban$s and 5inancial Institutions 1amendment3 Act, passed in March )+++ has helped in stren!thenin! the functionin! of D;7s' Provisions for placement of more than one ;ecovery 4fficer, po(er to attach defendant>s property*assets before jud!ment, penal provisions for disobedience of 7ribunal>s order or for breach of any terms of the order and appointment of receiver (ith po(ers of reali=ation, mana!ement, protection and preservation of property are e6pected to provide necessary teeth to the D;7s and speed up the recovery of "PAs in the times to come' 7hou!h there are )) D;7s set up at major centers in the country (ith Appellate 7ribunals located in five centers vi=' Allahabad, Mumbai, Delhi, #alcutta and #hennai, they have not been able to deliver as e6pected as they !ot s(amped under the hu!e volume of cases 1E-,)E,3 filed (ith them, since inception, out of (hich ,0,/F- cases (ere still pendin! as on ,-',')++)' Ban$s could recover ;s' ),.EF cr only, (hich is less than -G of the amount claimed throu!h the D;7 mechanism up to ,-',')++)' 7he ban$s should institute appropriate documentation system and render all possible assistance to the D;7s for speedin! up decisions and recovery of some of the (ell< collaterali=ed "PAs involvin! lar!e amounts' I may add that familiari=ation pro!rammes have been offered in "IBM at periodical intervals to the presidin! officers of D;7s in understandin! the comple6ities of documentation and operational features and other le!alities applicable of Indian ban$in! system' ;BI on its part has su!!ested to the 2overnment to consider enactment of appropriate penal provisions a!ainst obstruction by borro(ers in possession of attached properties by D;7 receivers, and notify borro(ers (ho default to honour the decrees passed a!ainst them' C&rc$lat&on o, &n,ormat&on on .e,a$lter! 7he ;BI has put in place a system for periodical circulation of details of (illful defaults of borro(ers of ban$s and financial institutions' 7his serves as a caution list (hile considerin! re&uests for ne( or additional credit limits from defaultin! borro(in! units and also from the directors *proprietors * partners of these entities' ;BI also publishes a list of borro(ers

1(ith outstandin! a!!re!atin! ;s' - crore and above3 a!ainst (hom suits have been filed by ban$s and 5Is for recovery of their funds, as on ,- st March every year' It is our e6perience that these measures had not contributed to any perceptible recoveries from the defaultin! entities' 8o(ever, they serve as ne!ative bas$et of steps shuttin! off fresh loans to these defaulters' A real brea$throu!h can come only if there is a chan!e in the repayment psyche of the Indian borro(ers' Reco5er9 act&on aga&n!t large NPA! After a revie( of tendency in re!ard to "PAs by the 8on>ble 5inance Minister, ;BI had advised the public sector ban$s to e6amine all cases of (illful default of ;s - crore and above and file suits in such cases, and file criminal cases in re!ard to (illful defaults' Board of Directors are re&uired to revie( "PA accounts of ;s'- crore and above (ith special reference to fi6in! of staff accountability' 4n their part ;BI and the 2overnment are contemplatin! several supportin! measures includin! le!al reforms, some of them I (ould li$e to hi!hli!ht' A!!et Recon!tr$ct&on Com7an9A An Asset ;econstruction #ompany (ith an authorised capital of ;s')+++ crore and initial paid up capital ;s'-E++ crore is to be set up as a trust for underta$in! activities relatin! to asset reconstruction' It (ould ne!otiate (ith ban$s and financial institutions for ac&uirin! distressed assets and develop mar$ets for such assets' 2overnment of India proposes to !o in for le!al reforms to facilitate the functionin! of A;# mechanism Cor7orate De+t Re!tr$ct$r&ng /CDR1 #orporate Debt ;estructurin! mechanism has been institutionalised in )++- to provide a timely and transparent system for restructurin! of the corporate debts of ;s')+ crore and above (ith the ban$s and financial institutions' 7he #D; process (ould also enable viable corporate entities to restructure their dues outside the e6istin! le!al 5rame(or$ and reduce the incidence of fresh "PAs' 7he #D; structure has been head&uartered in IDBI, Mumbai and a Standin! 5orum and #ore 2roup for administerin! the mechanism had already been put in place' 7he e6periment ho(ever has not ta$en off at the desired pace thou!h more than si6 months have lapsed since introduction' As announced by the 8onCble 5inance Minister in the Union Bud!et )++)<+,, ;BI has set up a hi!h level 2roup under the #hairmanship of Shri' Hepa Kamesam, Deputy 2overnor, ;BI to revie( the implementation procedures of #D; mechanism and to ma$e it more effective' 7he 2roup (ill revie( the operation of the #D; Scheme, identify the operational difficulties, if any,

in the smooth implementation of the scheme and su!!est measures to ma$e the operation of the scheme more efficient' Cre.&t In,ormat&on B$rea$ Institutionali=ation of information sharin! arran!ements throu!h the ne(ly formed #redit Information Bureau of India 9td' 1#IBI93 is under (ay' ;BI is considerin! the recommendations of the S';'Iyer 2roup 1#hairman of #IBI93 to operationalise the scheme of information dissemination on defaults to the financial system' 7he main recommendations of the 2roup include dissemination of information relatin! to suit<filed accounts re!ardless of the amount claimed in the suit or amount of credit !ranted by a credit institution as also such irre!ular accounts (here the borro(er has !iven consent for disclosure' 7his, I hope, (ould prevent those (ho ta$e advanta!e of lac$ of system of information sharin! amon!st lendin! institutions to borro( lar!e amounts a!ainst same assets and property, (hich had in no small measure contributed to the incremental "PAs of ban$s' Pro7o!e. g$&.el&ne! on ;&ll,$l .e,a$lt!=.&5er!&on o, ,$n.! ;BI is e6aminin! the recommendation of Kohli 2roup on (illful defaulters' It is (or$in! out a proper definition coverin! such classes of defaulters so that credit denials to this !roup of borro(ers can be made effective and criminal prosecution can be made demonstrative a!ainst (illful defaulters' Cor7orate *o5ernance A #onsultative 2roup under the chairmanship of Dr'A'2an!uly (as set up by the ;eserve Ban$ to revie( the supervisory role of Boards of ban$s and financial institutions and to obtain feedbac$ on the functionin! of the Boards vis<M<vis compliance, transparency, disclosures, audit committees etc' and ma$e recommendations for ma$in! the role of Board of Directors more effective (ith a vie( to minimisin! ris$s and over<e6posure' 7he 2roup is finalisin! its recommendations shortly and may come out (ith !uidelines for effective control and supervision by ban$ boards over credit mana!ement and "PA prevention measures'

LITERATURE REVIEW

A synoptic revie( of the literature brin!s to the fore insi!hts into the determinants of "P9 across countries' A considered vie( is that ban$s> lendin! policy could have crucial influence on non performin! loans 1Re..9% 3>>63' 8e critically e6amined various issues pertainin! to terms of credit of Indian ban$s' In this conte6t, it (as vie(ed that ?the element of po(er has no bearin! on the ille!al activity' A default is not entirely an irrational decision' ;ather a defaulter ta$es into account probabilistic assessment of various costs and benefits of his decision' Mo"an /3>>43 conceptuali=ed ?la@9 +an(&ng< (hile critically reflectin! on ban$s> investment portfolio and lendin! policy' 7he Indian vie(point alludin! to the concepts of ?credit culture> o(in! to ;eddy 1)++E3 and ?la=y ban$in!>o(in! to Mohan 1)++,a3 has an international perspective since several studies in the ban$in! literature a!ree that banks lending policy is a major driver of non-performing loans 1Mc2oven, -..,, #hristine -..0, Ser!io, -..J, Bloem and 2orters, )++-3' 5urthermore, in the conte6t of "PAs on account of priority sector lendin!, it (as pointed out that the statistics may or may not confirm this'7here may be only a mar!inal difference in the "PAs of ban$s> lendin! to priority sector and the ban$s lendin! to private corporate sector' A!ainst this bac$!round, the study su!!ests that !iven the deficiencies in these areas, it is imperative that ban$s need to be !uided by fairness based on economic and financial decisions rather than system of conventions, if reform has to serve the meanin!ful

purpose' D6perience sho(s that policies of liberalisation, dere!ulation and enablin! environment of comfortable li&uidity at a reasonable price do not automatically translate themselves into enhanced credit flo(' Althou!h public sector ban$s have recorded improvements in profitability, efficiency 1in terms of intermediation costs3 and asset &uality in the -..+s, they continue to have hi!her interest rate spreads but at the same time earn lo(er rates of return, reflectin! hi!her operatin! costs 1Mohan,)++E3' B"attac"ar9a /3>>03 ri!htly points to the fact that in an increasin! rate re!ime, &uality borro(ers (ould s(itch over to other avenues such as capital mar$ets, internal accruals for their re&uirement of funds' Under such circumstances, ban$s (ould have no option but to dilute the &uality of borro(ers thereby increasin! the probability of !eneration of "PAs' In another study, Mo"an/3>>41 observed that lendin! rates of ban$s have not come do(n as much as deposit rates and interest rates on 2overnment bonds' Bhile ban$s have reduced their prime lendin! rates 1P9;s3 to some e6tent and are also e6tendin! sub<P9; loans, effective lendin! rates continue to remain hi!h' 7his development has adverse systemic implications, especially in a country li$e India (here interest cost as a proportion of sales of corporates are much hi!her as compared to many emer!in! economies' 7he problem of "PAs is related to several internal and e6ternal factors confrontin! the borro(ers 1M$n&a77an% 3>>31. 7he internal factors are diversion of funds for e6pansion* diversification* modernisation, ta$in! up ne( projects, helpin!*promotin! associate concerns, time*cost overruns durin! the project implementation sta!e, business 1product, mar$etin!, etc.3 failure, inefficient mana!ement, strained labour relations, inappropriate technolo!y*technical problems, product obsolescence, etc.,(hile e6ternal factors are recession, non<payment in other countries, inputs*po(er shorta!e, price escalation, accidents and natural calamities' In the Indian conte6t, Ra'araman an. Va!&!"t"a /3>>33 in an empirical study provided an evidence of si!nificant bivariate relationship bet(een an operatin! inefficiency indicator and the problem loans of public sector ban$s'

In a similar manner, lar!ely from lenders> perspective, Da! an. *"o!" /3>>41 empirically e6amined non<performin! loans of India>s public sector ban$s in terms of various indicators such as asset si=e, credit !ro(th and macroeconomic condition, and operatin! efficiency indicators' Ser!io 1-..J3 in a study of non<performin! loans in Italy found evidence that, an increase in the ris$iness of loan assets is rooted in a ban$>s lendin! policy adducin! to relatively unselective and inade&uate assessment of sectoral prospects' Interestin!ly, this study refuted that business cycle could be a primary reason for banks NPLs ' 7he study emphasised that increase in bad debts as a conse&uence of recession alone is not empirically demonstrated' It (as vie(ed that the ban$<firm relationship (ill thus, prove effective not so much because it overcomes informational asymmetry but because it recoups certain canons of appraisal' In a study of loan losses of US ban$s, Mc*o5en /0AA41 ar!ued that ?character> has historically been a paramount factor of credit and a major determinant in the decision to lend money' Ban$s have suffered loan losses throu!h rela6ed lendin! standards, un!uaranteed credits, the influence of the -./+s culture, and the borro(ers> perceptions' It (as su!!ested that ban$ers should ma$e a fairly accurate personality<morale profile assessment of prospective and current borro(ers and !uarantors' Besides considerin! personal interaction, the ban$er shouldA 1i3 try to dra( some conclusions about staff morale and loyalty, 1ii3 Study the person>s personal credit report, 1iii3 Do trade<credit reference chec$in!, 1iv3 #hec$ references from present and former ban$ers, and 1v3 Determine ho( the borro(er handles stress' In addition, ban$s can minimi=e ris$s by securin! the borro(er>s !uarantee, usin! 2overnment !uaranteed loan pro!rams, and re&uirin! conservative loan<to<value ratios' Bloem an. *orter /3>>01 su!!ested that a more or less predictable level of non< performin! loans, thou!h it may vary sli!htly from year to year, is caused by an inevitable number of ?wrong economic decisions by individuals and plain bad luc$ 1inclement (eather, une6pected price chan!es for certain products, etc.3' Under such circumstances, the holders of loans can ma$e an allo(ance for a normal share of non<performance in the

form of bad loan provisions, or they may spread the ris$ by ta$in! out insurance' Dnterprises may (ell be able to pass a lar!e portion of these costs to customers in the form of hi!her prices' 5or instance, the interest mar!in applied by financial institutions (ill include a premium for the ris$ of nonperformance on !ranted loans' *$7ta<! !t$.9 /0AB41 on a sample of Indian companies financed by I#I#I concludes that certain cash flo(s covera!e ratios are better indicators of corporate sic$ness' B"at&a /0ABB1 an. Sa"oo% M&!"ra an. Soot"7at"9 /0AAC1 e6amine the predictive po(er of accountin! ratios on a sample of sic$ and non<sic$ companies by applyin! the multi discriminant analysis techni&ues' In both the studies, the selected accountin! ratios are effective in predictin! industrial sic$ness (ith a hi!h de!ree of precision'

RESEARCH METHODOLOGY
OBDECTIVES
7he objectives of the research conducted (ere as follo(sA i3 5actors affectin! "on Performin! Assets 5rom loanies perspective 5rom ban$s perspective

ii3 7o find out the !eneral profile of the defaulters iii3 Measures ta$en by ban$s to recover "PA>s iv3 Searchin! for solutions for controllin! "PA in India' v3 #omparin! rate of "PA (ith other Asian and 5orei!n #ountries

RESEARCH DESI*N
7he research method used here (as descriptive research' Descriptive research is conducted (hen the objective of the research is clear

RESEARCH INSTRUMENT

Structured N Undis!uised &uestionnaire and personal meetin! (ith employees of ban$s are used for data !atherin!'

SAMPLE SIEE
-0 ban$s 17he respondents belon!s to "#; re!ion of India3

SAMPLIN* METHOD
Samplin! method used is Stratified samplin! (here in (hich ban$in! sector is divided into , strata I 'e public, private and forei!n ban$s'

DATA COLLECTION AND ANALYSIS

5or Primary data #ollection, a &uestionnaire is used' Secondary data is collected from various literatures and the (ebsites. Microsoft e6cel )++F is used for the analysis of data and #orrelation as used as a statistical tool

LIMITATIONS
Dvery research suffers from some limitations' Some of the limitations faced by me are as underA i3 Since the Indian ban$in! sector is so (ide so it (as not possible for me to cover all the ban$s of the Indian ban$in! sector' ii3 7a$in! permission from the Mana!er of the ban$ (as one more obstacle as they (ere very peculiar about their information loss and misuse, convincin! them (as very tou!h' iii3 Authentication of the survey (as my prime (orry as Dmployees under recovery profile (ere not ready to provide their personal information'
;esearch Methodolo!y 7he study (ill be done on the basis of secondary data for the period of 0 years from )++0<)+-+' that (ill be collected from the various sources such as various publications of ;BI for instance ;BI Bulletin, 8i!hli!hts of Ban$ Performance< IBA Publications, Mumbai 1Harious Issues3, Annual reports on ban$in! trend and pro!ress in India'

Sample Si=e 7he study is conducted on the commercial ban$s by dividin! the ban$in! sector into three !roupsA -' )' ,' SBI N its associate ban$s "ationalised ban$s Private Sector ban$s' 7he criteria for selectin! these ban$s (ill be the hi!hest Business per Dmployee as per ,- March, )++.' 4n the basis of the hi!hest Business per Dmployee as per the report of the Indian Ban$in! Association, March )++. the follo(in! ban$s are selected'

DATA ANALYSIS & INTERPRETATION

2roup I 1SBI N its associate ban$s3 : State Ban$ of India, State Ban$ of Patiala, State Ban$ of Indore 2roup II 1"ationalised ban$s3 < 4riental Ban$ of #ommerce, #orporation Ban$, Ban$ of Baroda 2roup III 1Private Sector Ban$s3 < I#I#I Ban$ 9td, A6is Ban$ 9td, IndusInd Ban$ 9td *ro;t" o, NPA! Ta+le 02 Non Per,orm&ng A!!et! a! a 7ercentage o, Total A.5ance! o, SBI F &t! a!!oc&ate +an(! 1Amount in ;s' #rore3
State Ban$ of India
Oears 2ross "PAs )++J )++F )++/ )++. )+-+ -+,FJ .../ -)/,F -J,EJ -.0,0 2ross Advances )J-JE) ,,F,,J E-JFJ/ 0E)0+, J,-.-E') 2ross "PA*7otal Advances ,'.F )'.J ,'+/ ,'+,'+. 0E, 0)E 0)0FE -++F ))-/+ )/FF+ ,JE++ E,J,E EJ,EF'),

State Ban$ of Patiala

2ross "PAs 2ross Advances 2ross "PA*7otal Advances )'E0 -'/) -'E, -',) )'-F

State Ban$ of Indore

2ross "PAs ,J, ).E )J0 ,+E., 2ross Advances --/FJ -0,0-/))E )-J-) ),JFF'+/ 2ross "PA*7otal Advances ,'+J -'.) -'E0 -',. )'+/

Source< ;eserve ban$ of India 1((('rbi'or!3

7able - portrays that in the ratio of 2ross "PA*7otal Advances is declinin! in all the three ban$s till the year )++. and it is a!ain risin! in the year )+-+' Ta+le 32 Non Per,orm&ng A!!et! a! a 7ercentage o, Total A.5ance! o, Nat&onal&!e. Ban(! 1Amount in ;s' #rore3
4riental Ban$ of #ommerce
Oears )++J )++F )++/ )++. )+-+ 2ross "PAs )--J -E0E -)/+ -+0/ -EJ. 2ross Advances ,00E. E0,.0 00,)F J.+J0 /,E/.', 2ross "PA*7otal Advances 0'.0 ,')+ )',-'0, -'FJ 2ross "PAs J)J J)0 0/E 00. J0-

#orporation Ban$
2ross Advances )EE), ,+E)) ,.JJE E/.)F J,)+)'0J 2ross "PA*7otal Advances )'0J )'+0 -'EF -'-E -'+, 2ross "PAs ,J, ).E )J0 ,+E.,

Ban$ of Baroda
2ross Advances --/FJ -0,0-/))E )-J-) ),JFF'+/ 2ross "PA*7otal Advances ,'+J -'.) -'E0 -',. )'+/

Source< ;eserve ban$ of India 1((('rbi'or!3

7able ) a!ain sho(s the !ro(th of non<performin! assets in the nationali=ed ban$s (hich also sho(s the declinin! trend for all the years for all the three ban$s e6cept in the year )+-+ the ratio is increasin! for Ban$ of Baroda'

Ta+le 42 Non Per,orm&ng A!!et! a! a 7ercentage o, Total A.5ance! o, Pr&5ate Sector Ban(! 1Amount in ;s' #rore3
I#I#I Ban$ 9td
Oears 2ross "PAs ))), E-)J F0/+ .JE. .)JF 2ross Advances -EFJ)0 -./-., ))./.) )),J)-/-)+J 2ross "PA*7otal Advances -'0)'+/ ,',+ E',) 0'-2ross "PAs ,FE E-E/J /.+ .-+

A6is Ban$ 9td

2ross Advances ))EF,F+)) 0./.. /)-)+ /J-0E 2ross "PA*7otal Advances -'JF -'-+'/-'+/ -'+0

IndusInd Ban$ 9td

2ross "PAs )J. ,E, ,.) )00 )/E 2ross Advances .,/E ---0, -)/.F -0/EF -FFE0 2ross "PA*7otal Advances )'/J ,'+/ ,'+E -'J-'J

)++J )++F )++/ )++. )+-+

Source< ;eserve ban$ of India 1((('rbi'or!3

7able , sho(s that the ratio is sho(in! an increasin! trend of "PAs in case of I#I#I ban$ and in case of A6is ban$ the trend is mi6ed one' 7he trend of "PAs in case of IndusInd Ban$ is sho(in! an increasin! trend uptil the year )++/ (hereas it starts declinin! in the year )++. and )+-+'

Sector ;&!e Non Per,orm&ng A!!et! 7able E sho(s the sector (ise non<performin! assets of three ban$s (hich reveals that the major chun$ of "PAs accrue in the Priority Sector that consist of loans to a!riculture, small scale industries etc (hereas the non< performin! assets in public sector are least and in some cases it is almost nil'

Ta+le 62Sector ;&!e Non Per,orm&ng A!!et! o, SBI F &t! a!!oc&ate +an(! 1Amount in ;s' #rore3 State Ban$ of India
Oears Pr&or&t9 Sector P$+l&c Sector Non2 Pr&or&t9 Sector

State Ban$ of Patiala

Pr&or&t9 Sector P$+l&c Sector Non2 Pr&or&t9 Sector

State Ban$ of Indore

Pr&or&t9 Sector P$+l&c Sector Non2 Pr&or&t9 Sector

)++J )++F )++/ )++. )+-+

0,.+J'E. 0,/-+'-. F0J-')/ F,+-+ .,+F,

,,') -E.',) .-'-J -J, ),0

E,,).'/, ,,.--'0+ E.),'JE F,.,) /,0).

,.E'), ,JF'), ,0+',, ,,J 0E,

,0'"il "il "il "il

--,'J) -0F'-/ -F+'J),/ EJ,

-J-'/, -.E'0J -,F')J -)+ )-+

"il "il "il -+ "il

)+-'..'J0 -)/'-) -F)/,

Source< ;eserve ban$ of India 1((('rbi'or!3

Ta+le G2 Sector ;&!e Non Per,orm&ng A!!et! o, Nat&onal&!e. Ban(! 1Amount in ;s' #rore3 4riental Ban$ of #ommerce
Oears Pr&or&t9 Sector P$+l&c Sector Non2 Pr&or&t9 Sector )++J )++F )++/ )++. )+-+ J/J'E/ 000'F/ J.E'EF J-+ .-E'.. )E'+"il "il -,E)E'/E /FE')J 0/0'J, EE/ 00/ )0)'+E ,-/'/E ,J)'E, ,F, ,./ +'.F "il "il "il "il ,F)'0J ,+0'F, ))-'.. -/J )0, -,-0+'F+ -,+J/'+E -))E'+. /)+ -,EEE "il "il -+'E+ ) /0 Pr&or&t9 Sector P$+l&c Sector Non2Pr&or&t9 Sector Pr&or&t9 Sector P$+l&c Sector Non2 Pr&or&t9 Sector -,--,'-, .+E',J J),'J) /E, JJF

#orporation Ban$

Ban$ of Baroda

Source< ;eserve ban$ of India 1((('rbi'or!3

7able 0 also analyses the same thin! that the major chun$ of "PAs of nationali=ed ban$s accrue in the Priority Sector that consist of loans to a!riculture, small scale industries etc (hereas the non<performin! assets in public sector are least and in some cases it is almost nil'

Ta+le C2 Sector ;&!e Non Per,orm&ng A!!et! o, Pr&5ate Ban(!

I#I#I Ban$ 9td

Oears Pr&or&t9 Sector P$+l&c Sector Non2Pr&or&t9 Sector

A6is Ban$ 9td

Pr&or&t9 Sector P$+l&c Sector Non2 Pr&or&t9 Sector

IndusInd Ban$ 9td

Pr&or&t9 Sector P$+l&c Sector Non2 Pr&or&t9 Sector

)++J

.E',

+'+-

),-)/')/

F+'/0

"il

,+,'+,

-E/'+.

"il

-)+'FE

)++F

./,'/,

+'+-

,-E)'))

--+'+-

"il

,++'0.

/,'E-

"il

)0.',,

)++/

-,0.',E

+'+-

J)--'-)

)-+'0.

"il

)F0'+J

J,'JE

"il

,)/'JF

)++.

-0E)

"il

F+0-

,0)

"il

E0-

FJ

"il

)E-

)+-+

-,.EJ

"il

F,,)-

0)/

"il

FJF

/E

"il

-F-

No o, 9ear! o, e87er&ence o, +an(! &n reco5er9 o, NPA<!

5i!ure -A ;epresentation of years of e6perience

Source A ;esponses from respondents

InterpretationA 7his !raph sho(s that around EJG of the commercial ban$s in India have more than -+ years of e6perience in the recovery of "PA>s and more than ,,G of them have an e6perience of 0 years or more'

N$m+er o, ca!e! rece&5e. +9 +an(! &n an 9ear! t&me

5i!ure )A ;epresentation of number of cases

Source A ;esponses from respondents

InterpretationA 7he above !raph depicts that commercial ban$s EJG of ban$s come across 0<-+ no of cases in a years time and E+G of them handle less than 0 no of cases'

Page | 38

Pro,&le o, t"e .e,a$lter!

5i!ure ,A ;epresentation of profile of defaulters

Source A ;esponses from respondents

InterpretationA Accordin! to F,G ban$s, businessmen are the ma6imum defaulters on loans follo(ed by salaried class (ith )+G'

Age gro$7 o, .e,a$lter!

5i!ure EA ;epresentation of a!e !roup of defaulters

Source A ;esponses from respondents

InterpretationA 7he above !raph depicts that ma6imum defaulters are in the a!e !roup of )J<E0 years follo(ed by a!e !roup of EJ and above'

Page | 39

E,,ect&5ene!! o, +an(! &n reco5er9

5i!ure 0A ;epresentation of effectiveness of ban$s

Source A ;esponses from respondents

InterpretationA 7he above bar !raph depicts the effectiveness of ban$s to(ards recovery'EFG of ban$s solve 0<-+ number of cases in an year N ,,G of them are able to solve less than 0 no of cases'

Categor9 o, NPL<!
5i!ure JA ;epresentation of cate!ory of "P9>s

Source A ;esponses from respondents

InterpretationA 5rom the above pie chart it is found that majority of the cases (here the default occurs are in the home loan cate!ory follo(ed by auto loan and personal loan'

Page | 40

Rea!on! o, .e,a$lt 2 .e,a$lter! 7er!7ect&5e

5i!ureFA ;epresentation of reasons of default

Source A ;esponses from respondents

InterpretationA ,,G of ban$s feel that diversion of funds by loonies is the main cause of default on loans' Some other e&uivalent reasons are rise in inflation and interest rate'FG of ban$s feel intention to cheat is also one of the causes of default'

Rea!on! o, .e,a$lt 2 Ban(er! 7er!7ect&5e

5i!ure /A ;epresentation of reasons of default

Source A ;esponses from respondents

InterpretationA E+G ban$s said that default on loans can occur due to steep interest rate' Bhile )FG of them said directed credit is also one of the reasons '4nly -,G of them admitted that lac$ of monitorin! on their part is also the reason for default at times'

Page | 41

Met"o.! $!e. ,or reco5er&ng loan!

5i!ure .A ;epresentation of methods to recover loans

Source A ;esponses from respondents

InterpretationA Most of the ban$s !o in for le!al action in case of "P9>s1EFG3'4nly FG of them prefer to threaten the loanies')+G of them even !o in for su!!estin! them alternative (ays for settlement of loans'

S$gge!t&on! to re.$ce NPA

5i!ure -+A ;epresentation of su!!estions to reduce "PA

Source A ;esponses from respondents

InterpretationA EFG of ban$s su!!ested that more ta6 brea$s should be provided to "PA>s' Authoritarian monitorin! and fre&uent reminders can also be used as an D&uivalent measure'

Page | 42

Correlat&on +et;een no. o, ca!e! rece&5e. an. reco5ere.

HalueP+'.F InterpretationA 7he value of correlation bet(een the number of "PA cases that the ban$s come across and the number of cases that they are able to solve (ithin an years time is very hi!h (hich indicates that they are hi!hly and positively correlated

Secon.ar9 .ata anal9!&!: CROSS COUNTRY PERSPECTIVE

*lo+al Non2Per,orm&ng Loan! : 3>>BH

Country
Qapan #hina 7ai(an 7hailand Philippines Indonesia India Korea 7otal
R "P9s of all financial institutions'

NP'0US 12illion3
,,+ ,+F -.'-/'/ . -J'. ,+ -0 FEJ

SourceA 2lobal "P9 ;eport )++/, Drnst and Ooun!' InterpretationA 7he above stated table sho(s amon! the amon! the above listed Asian countries, Qapan has the hi!hest amount of "P9>s and Philippines the least' India as compared (ith other Asian countries is still has to !o on alon! (ay in reduction of the "P9>s'
Page | 43

COUNTRY )ISE ANALYSIS

01 CHINA
Causes
-' Moral 8a=ard )' Ban$ruptcy la(s favour borro(ers and la( courts are not reliable enforcement vehicles'
3. Political and social implications of restructurin! bi! S4D>s force the !overnment to $eep

them afloat!

Measures
-' ;educin! ris$ by stren!thenin! ban$s, raisin! disclosure standards and spearheadin! reforms of the S4D>s by reducin! their level of debt' )' 9a(s (ere passed allo(in! the creation of asset mana!ement companies, forei!n e&uity participation in securiti=ation and asset bac$ed securiti=ation'
3. 7he !overnment (hich bore the financial loss of debt ?discountin!>' Debt*e&uity s(aps

(ere allo(ed in case a !ro(th opportunity e6isted!

31 THAILAND Causes
-' 9iberalised capital and current account and e6ternal borro(in!s (ith inaccurate assessment of e6chan!e rate ris$ and ris$ of capital fli!ht in a crisis' )' A le!al system that made credit recovery time consumin! and difficult' ,' Steep interest rate rise turned a lot of loans into "PAs
4. Inability to correctly assess credit risk

Measures
-' Amendments (ere made to the Ban$ruptcy Act'
Page | 44

)' #orporate Debt ;estructurin! Advisory #ommission (as set up for the ta$eover and restructurin! of ban$s' ,' "e( rules !overnin! "PA e6it procedures based on international standards (ere introduced' E' Adoption of international standards for loan classification and provisionin!' 0' #aps on 5orei!n e&uity o(nership in financial institutions (ere removed'

/3 4&R$A
Causes
-' Directed #redit )' 9ac$ of Monitorin! : Ban$s relied on collaterals and !uarantees in the allocation of credit, and little attention (as paid to earnin!s performance and cash flo(s' ,' #onta!ion Dffects from South Dast Asia coincided (ith a period of structural adjustments as (ell as a cyclical do(nturn in Korea'

Measures
-' Speed of Action < 7he speedy containment of systemic ris$ and the domestic credit crunch problem (ith the injection of lar!e public funds for ban$ recapitali=ation (ere critical steps to(ards normali=in! the financial system' )' #orporate ;estructurin! Hehicles 1#;Hs3 and Debt*D&uity S(aps (ere used to facilitate the resolution of bad loans'

53 6APAN
Causes
-' Investments (ere made real estate at hi!h prices durin! the boom' 7he recession caused prices to crash and turned a lot of these loans bad' )' 9e!al mechanisms to dispose bad loans (ere time consumin! and e6pensive and "PAs remained on the balance sheet'

Page | 45

,' Bea$ corporate !overnance coupled (ith a no-bankruptcy doctrine (as a moral ha=ard in Qapanese economy'-0 E' Inade&uate accountin! systems and information flo( ma$es assessment of loan performance outside a ban$ in Qapan difficult'

Measures
-' Accountin! standards : Major business !roups established a private standard settin! vehicle for Qapanese accountin! standards 1)++-3 in line (ith international standards' )' 2overnment Support 2 7he !overnment>s committed public funds to deal (ith ban$in! sector (ea$ness'

Page | 46

FINDINGS & CONCLUSIONS

&n.&ng! F Concl$!&on!:
Page | 47

- 'It is clear from the data analysis that most of the commercial ban$s are adoptin! le!al measures as a tool to recover bad loans' Hery fe( ban$s are optin! for a!!ressive and harsh measures li$e threatenin! the loanies as a strate!y to recover their amounts' )' Data analysis also sho(s that majority of the defaulters are the business people and lie in the a!e !roup of )J<)0 years' Businesspeople majorly default as they have a tendency to siphon off the funds for the purposes other than for (hich loans have been approved' ,' Ban$ers are of the vie( that in the recent times steep rise in interest rate is also one of the viable reasons due to (hich the loanies default' Ma6imum default has been in the home loan cate!ory (hich has seen an increasin! trend of interest rates in the recent times' E' 5or further reducin! the level of "PA>s, ban$ers su!!ested that more ta6 brea$s should be provided so that the disposable income in the hands of loanies increases and the ne!ative impact of inflation on disposable income are offset by the ta6 brea$s' 0' 7he analysis also reveals that mana!ement of "PA in commercial ban$s in India is &uite !ood as the major percenta!e of cases that the ban$s come across are handled &uite effectively' 7his can be attributed to the effectiveness of recovery mechanism in the country'

Page | 48

RECOMMENDATIONS

Recommen.at&on! ,or re.$c&ng NPA!:

Page | 49

-' Dffective and re!ular follo(<up of the end use of the funds sanctioned is re&uired to ascertain any embe==lement or diversion of funds' 7his process can be underta$en every &uarter so that any account convertin! to "PA can be properly accounted for' )' #ombinin! traditional (isdom (ith modern statistical tools li$e Halue<at<ris$ analysis and Mar$ov #hain Analysis should be employed to assess the borro(ers' 7his is to be supplemented by information sharin! amon! the ban$ers about the credit history of the borro(er' In case of ne( borro(ers, especially corporate borro(ers, proper analysis of the cash flo( statement of last five years is to be done carefully' ,' A healthy Ban$er<Borro(er relationship should be developed' Many instances have been reported about forceful recovery by the ban$s, (hich is a!ainst corporate ethics' Debt recovery (ill be much easier in a con!enial environment' E' Assistin! the borro(ers in developin! his entrepreneurial s$ills (ill not only establish a !ood ;elation bet(een the borro(ers but also help the ban$ers to $eep a trac$ of their funds' 0' #ountries such as Korea, #hina, Qapan, 7ai(an have a (ell functionin! Asset ;econstruction* ;ecovery mechanism (herein the bad assets are sold to an Asset ;econstruction #ompany 1A;#3 at an a!reed upon price' In India, there is such mechanism e6ists in the nascent sta!e' J' Some ta6 incentives li$e capital !ain ta6 e6emption, carry for(ard the losses to set off the same (ith other income of the Iualified Institutional Borro(ers 1IIBs3 should be !ranted so as to ensure their active participation by (ay of investin! si=eable amount in distressed assets of ban$s and financial institutions' F' So far the Public Sector Ban$s have done (ell as far as lendin! to the priority sector is concerned' 8o(ever, it is not enou!h to ma$e lendin! to this sector mandatory@ it must be made profitable by sharply reducin! the transaction costs' 7his entails faster embracin! of technolo!y and minimi=in! documentation' /' #ommercial Ban$s should be allo(ed to come up (ith their o(n measures to address the problem of "PAs' 7his may include (aivin! and reducin! the principal and interest on such loans, or e6tendin! the loans, or settlin! the loan accounts' 7hey should be fully authori=ed and they should be able to apply all the preferential policies !ranted to the asset mana!ement companies'

Page | 50

.' Another (ay to mana!e the "PAs by the ban$s is #ompromise Settlement Schemes or 4ne 7ime Settlement Schemes' 8o(ever, under such schemes the ban$s $eep the actual amount recovered secret' Under these circumstances, it is necessary to brin! more transparency in such deals so that any fla( could be removed'

Page | 51

ANNEXURES

7U$S"!&NNA!R$ 8&R BAN4S $MP'&#$$S Page | 52

Proje%t *itle )PA in Commer%ial Banks

*"is sur4e9 is done to anal9;e t"e Fa%tors affe%tin5 )on Performin5 Assets! *"e information 5i4en 69 9ou will onl9 6e used for t"e anal9sis and it will 6e ke't %onfidential!

I- 8o( many years of e6perience do you have in the recovery profileS -< 0 years More than -+ years 0< -+ years

I)' 8o( many cases do you come across in a year timeS 9ess than 0 -+<-0 0<-+ More than -0

I,' Do you !o throu!h the defaulters account before ta$in! any actionS Oes "o

IE' Bhat is the occupation of the majority of the defaultersS Salaried Businessman Professional

4ther TTTTTTTTTTTTTTTTTTT

I0' 2enerally in (hich a!e !roup defaulters fall inS Up to )0 years EJ< 00 years )J : E0 years More than 00 years

IJ' 8o( many cases do you come across under follo(in! cate!oryS
Page | 53

#ate!ories 8ome 9oan Personal 9oan Hehicle 9oan Dducation 9oan 4thers

"o' of Default #ases

IF' Bhat strate!ies do you adopt at the time of recoverin! the loanS Influencin! them 7hreatenin! them 4thers TTTTTTTTTTTTTTTTTTT Su!!estin! them ne( proposal 9e!al action

I/' Bhat are the reasons behind default in payment from defaulter>s sideS Intention to #heat Increase in e6penditure Inflation Diversion of 5unds Steep interest rate rise 9ac$ source of income

I.' Bhat are the reasons behind default in payment from Ban$s sideS Political and social implications ;ise in Inflation Diversion of 5unds 4thersTTTTTTTTTTTTTTTTTTTT

I-+' 8o( many cases do you able to solve (ithin a yearS

Page | 54

9ess than -+ )+<,+

-+< )+ More than ,+

I--' Accordin! to you (hat measures should be ta$en to lo(er the "PA in comin! futureS 7a6 Brea$s Proper analysis of credit (orthiness Stren!thenin! of provision norms "e( rules should be implemented Dvaluation of 9oan Proposal 4ther TTTTTTTTTTTTTTTTTTTTTTTTT

PD;S4"A9 I"54;MA7I4" "ameA TTTTTTTTTTTTTTTTTTTTTTTTTTTTTTT Ban$ "ameA TTTTTTTTTTTTTTTTTTTTTTTTTT

Page | 55

REFERENCES

Re,erence!:
Page | 56

i' ii' iii'

((('rbi'or!'in ((('iba'or!'in Master circulars issued by ;BI to #ommercial Ban$s< 1a3 DB4D'"o'BP'B#'-)*)-'+E'+E/*)++/<+. 1b3 D"BS 1PD3 ##' "o' F * S#;# * -+',+'+++* )++/<+. 1c3 DB4D'"o'9e!'B#'F0 *+.'+F'++0*)++/<+.

iv' v' vi' 'pdf vii'

I#5AI Qournal on Ban$in! and 5inance Drnst N Ooun! 1)++.3, 2lobal "onperformin! 9oan ;eport,)++.@ ((('ey'com httpA**rbidocs'rbi'or!'in*rdocs*Publications*PD5s*J+J-, httpA**((('rbi'or!'in*Scripts*publications'asp6

Page | 57

Page | 58