INTRODUCTION

1.1)

NON PERFORMING ASSET: A Man without money is like a bird without wings, the Rumanian

proverb insists the Importance of the money. A bank is an establishment, which deals with money. The basic functions of Commercial banks are the accepting of all kinds of deposits and lending of money. In general there are several challenges confronting the commercial banks in its day today operations. The main challenge facing the commercial banks is the disbursement of funds in quality assets (Loans and Advances) or other wise it leads to Non-performing assets. Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where i. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,

ii.

the account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC),

iii.

The bill remains overdue for a period of more than 180 days in 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.

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), 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.

'Out of order' an account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as 'out of order'. Overdue any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank. 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.

1.2) Meaning of NPAs:

An asset which ceases to generate income of the bank is called nonperforming asset. The past due amount remaining uncovered for the two quarter consequently the amount would be classified as NPA for the whole year. It includes borrowers defaults or delays in interest or principal repayment.

An asset is classified as Non-performing Asset (NPA) if the borrower not pays due in the form of principal and interest for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by banks to a

borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities.

Though the term NPA connotes a financial asset of a commercial bank, which has stopped earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm, concern, industry and nation where that asset is idling. The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004 onwards.

1.3) DEFINITION:

Nonperforming asset Financial definition A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as Non performing assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset, which is not producing income.

NBEs DEFINITION

NBE [Supervision of Banking Business Directives (Directive No. SBB/3212002)] defines, the term Non-performing is, loans or advances whose credit quality has deteriorated such that full collection of principal and /or interest
4

in accordance with the contractual repayment terms of the loan or advances is in question.

1.4)METHODOLOGY OF NON PERFORMING ASSET:

In order to meet the Third objective, the method of Moving Averages is been used, from which we arrive at a Trend Analysis. While the rationale behind selection of 'Three year Moving Average' method is because of the availability of the data. The data available was from the ten years and needless to say that for such a data a 'Six year Moving average' or an 'Eight year Moving Average' wills not workout.

1.5) OBJECTIVES OF THE STUDY:

The general objective of this research is to analyze the NPAs in banking sector. The specific objectives of this research are; To highlight Loans and Advances trend in banking sector. To study the general reasons for assets become NPAs To point out the amount of NPAs in banking sector. To focus the amount of impairment losses in banking sector. To find out the problems of Bank due to NPAs
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REVIEW OF LITERATURE

The objective of study is to review the available literature on banking business for finding out the impact on non performing asset in banking sector. The details study of NPA literature provide useful framework for further research in this direction.

Economic times NPA decline on report newspaper June 21,2004 In the newspaper THE ECONOMICS times gave the article on NPA on decline: report The decline in NPAs is evident across bank groupsAmong bank groups, the old private sector banks had the highest net NPAs ratio at 3.8 % , followed by public sector banks, new private banks and foreign banks The number of cases and value of assets restructured under CDR mechanism as on June 30, 2004 stood at 94 and Rs 64,017 crore respectively. TEXT-Fitch release on Oriental Bank of Commerce Ltd Mon Jun 9, 2008 4:33pm IST

June 9 - Fitch Ratings has today affirmed India's Oriental Bank of Commerce Ltd.'s (ORBC.BO: Quote, Profile, Research) (OBC) Long-term foreign currency Issuer Default Rating at 'BB+', Individual at 'C/D', Support Rating at '3' and Support Rating floor at 'BB-' (BB minus). The Outlook on the ratings is Stable.

 OBC's ratings reflect its historically strong Tier I and solvency (Net NPL to equity ratios) among Indian banks while also taking into account its majority government ownership. Post merger, the bank focused on recoveries from GTB's loan portfolio, which led to a decrease in gross NPA ratio to 2.7% in FY08 from 9% in FY05. Further improvements in asset quality could be challenging with OBC's increased exposures to retail and SME segments, where delinquencies have been rising for the industry as a whole. From lending to predominantly low yielding corporate, OBC has increased its focus on lending to the retail and SME segments, which now constitutes around 30% of total loans. ARTICLE Jalan, b (2000), FIANCE DEVELOPMENT which way now? RBI bulletin January, august 2000. (PP.29-45) Devnath, kalyan (1994), managing non performing asset- a professional for better management, IBA bulletin May 1994 Banambar Sahoo (1999) rating of bank NPA Management IBA bulletin October 1999 (pp 35-45)

BOOKS Non-Performing-Assets in Commercial Banks/Vibha Jain. New Delhi, Regal Pub., 200xviii, 336 p., tables, charts, $50. ISBN 81-89915-20-7.

Contents: Preface. Abbreviations. 1. Introduction. 2. NPA Concept and prudential norms. 3. Trends of Non-Performing Assets. 4. Prevention of Non-Performing Assets. 5. Management of NPAs. 6. NPA Management in perspective. Annexure. Bibliography. "The book provides a comprehensive coverage of the challenges facing the banking industry in India in tackling the bargaining problem of Non-Performing Assets (NPAs). It traces the history of growth of NPAs in the banking industry caused initially by directed lending due to strong government hold on banks. The government control also kept the issue under wraps for a long time, understanding the enormity of the problem only at the advent of economic reforms in early nineties. The book elucidates the various measures taken by Reserve Bank of India to control NPAs over the last decade and a half and critically analyses the success obtained in containing the same. It also provides an international perspective by highlighting the problem of NPAs in other South East Asian countries and the measures taken by them to solve the issue.

NPA MANAGEMENT

IDENTIFICATION OF POTENTIAL NPA / STRESSED ASSETS

1. Reckoning of NPA :

A NPA account to be identified based on its status / position of the accounts erosion in security as on the date of balance sheet of the bank. Nevertheless, the date of a NPA account would be the actual date on which the slippage occurred. If an account is regularized before the balance sheet date by repayment of overdue amount through genuine sources (not by sanctioning of additional facilities or transfer of funds between accounts), the account need not be treated as NPA.

It has, however, to be ensured that in the account remains in order subsequently and a solitary or few credits made in the account on or before the balance sheet date which extinguishes the overdue amount of interest or installment of principal is not reckoned as the sole criterion for treating the asset as standards one.

2. Identification and monitoring of potential NPA / stressed assets:

Indention of potential NPA account as its incipient stage of sickness and initiating immediate corrective measures is the most important step for preventing
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an asset from becoming NPA. The guidelines issued by Credit Monitoring Cell (CMC) CAD, HO should be followed in this regard.

3. Constitution pf NPA Prevention Cell at the ROs.

It has been decided to constitute a NPA Prevention cell at the ROs to monitor the Standard-B accounts and to ensure the prevention of their slippage to NPA. The cell headed by Regional Manager would comprise Regional Manager, Dy. Regional Manager and Credit Officer. It will conduct its meeting every fortnight.

ITS FUNCTION WILL BE AS UNDER: To examine the information received from branches relating to Standard B (based on 60 days norms), NPA accounts and identify the accounts for restructuring. The entire process should be completed within a time frame of 30 days. To review the performance of the existing restructured accounts including BIFR and CDR cases. The cell will send information on fortnightly basis to CMC, CAD Head Office. Regional Manager to cell for the explanation from the Branch Managers whose performance in recovery is far from satisfactory.

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4. Review and reporting of potential NPA / Stressed assets

Following steps be taken for review and reporting of potential NPA / Stressed Assets:

Step-1: Analysis of reason of deterioration of health, signs of sickness, problem character of the A\c.

Step-2: Close interaction with the borrower, visit to the unit, close and frequent monitoring of the account, drawing the attention of the borrower to the irregularity / deterioration in he asset quality / signs of weakness in the account.

Step-3: Advice the borrower to correct the irregularity immediately in a time bound manner and obtain his categorical assurance.

Step-4: Corrective measures for prevention of slippages: Review the account and consider sanction of need based working capital limits on merits, if the present limits are inadequate. Identify Stressed Assets accounts and consider restructuring / realignment / re-schedulement on merits. Early warning signal, if any, to be watched and addressed to.

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 Verification of (i) the documents for its correctness, enforceability, (ii) correctness of ROD (iii) insurance covers (iv) value/marketability of prime/collateral security eye. Verification of existence of primary / collateral security of the borrower.

Step-5: Report to the next higher authority, the details on the above aspects and suggesting specific corrective measures in time.

Step-6: Implement the corrective action and report to higher authority.

5. Maintaining the Assets Quality :

Post sanction monitoring, supervision, and follow up

Following measures should be put in place.

(i) Terms and condition of the sanction:

Terms and condition of sanction have to be strictly complied with

(ii) Verification:

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Verification of end use of the funds, stocks and assets by Bank officials or through duly appointed concurrent auditors as per norms for effective monitoring of the accounts.

(iii)

Legal Formalities:

Formalities like obtaining / execution of documents / search certificates, registration of charges, timely revival of the documents, completion of equitable mortgage formalities etc. as per norms are the most important steps.

(iv)

Stock Statements:

Branches should obtain stock statements at monthly intervals regularly. As per RBI guidelines, the outstanding in the A/C based on the drawing powers calculated from stock statements older than 3 months would be deemed as irregular and if such irregular drawings are permitted for 90 days continuously, the A/C will be NPA.

(v) Stock audit:

Stock audit is to be conducted every year in every NPA account with outstanding limit of Rs 1 crore and above. However, wherever current assets are depleted or unit is closed, the stipulation may be exempted.

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6. Management of NPA:

The RMs personally verify and ensure that all accounts, especially high value advances are properly classified into standard, Sub-std. Doubtful or loss categories strictly as per prudential norms. It will be their responsibility to finalize and eliminate delay or postponed of identification of NPA.

In case of doubts due to any reason, RMs may seek guidance from HO and settle the matter within one month from the date on which the account would have been classified as NPA as per norms.

It may be noted that if RBI observes any divergences in asset classification, especially in high value accounts due to willful non-compliance of RBI guidelines by any official responsible for classification then RBI may initiate deterrent action including imposition of monetary penalty.

7. Appropriation of recovery in NPAs:

a) Non decreed accounts:

In case of NPA accounts in all categories i.e. Sub standard, Doubtful and Loss appropriated first against outstanding in the account and the surplus available, if any, is to be taken to interest / income. The same norm will be applicable to the compromised accounts also.

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b) Decreed accounts:

In case of decreed accounts where there is no compromise settlement amount recovered should be appropriated as per the decretal terms. However, if there is no specific term as regards appropriation of recovery in the decrial terms, the recovery should be appropriated first towards Principal and the balance towards interest.

c) Appropriation of ECGC claim amount in NPA Accounts:

As per the existing procedure, Bank is expected to keep the claim amount received from the ECGC in a separate memorandum account and pursue recovery efforts against the concerned Exporter borrower for the full amount of dues inclusive of the claim amount settled.

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Policies Of Non Performing Asset There are various sets of policy of non-performing asset,like 4.1 To reduce fresh npa recognition As far as old NPAs are concerned, a bank can remove it on its own or sell the assets to AMCs to clean up its balance sheet.

4.2) Causes for Non Performing Assets A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. The Indian banking system, which was operating in a closed economy, now faces the challenges of an open economy. On one hand a protected environment ensured that banks never needed to develop sophisticated treasury operations and Asset Liability Management skills. On the other hand a combination of directed lending and social banking relegated profitability and competitiveness to the background. The net result was unsustainable NPAs and consequently a higher effective cost of banking services. One of the main causes of NPAs into banking sector is the directed loans system under which commercial banks are required a prescribed percentage of their credit (40%) to priority sectors. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-core' doubtful and loss assets, accumulated over the years.

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 The problem India Faces is not lack of strict prudential norms but i. The legal impediments and time consuming nature of asset disposal proposal. ii. Postponement of problem in order to show higher earnings. iii. Manipulation of debtors using political influence.

4.3)Macro perspective behind NPAs

A lot of practical problems have been found in Indian banks, especially in public sector banks. For Example, the government of India had given a massive wavier of Rs. 15,000 Crs. under the Prime Minister ship of Mr. V.P. Singh, for rural debt during 1989-90. This was not a unique incident in India and left a negative impression on the payer of the loan. The huge amount of loan granted under these schemes were totally unrecoverable by banks due to political manipulation, misuse of funds and nonreliability of target audience of these sections. Loans given by banks are their assets and as the repayment of several of the loans were poor, the quality of these assets were steadily deteriorating.

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Reason for account become as an NPA

5.1 there are several reasons for an account becoming towards NPA

Internal factor

1. Funds borrowed for a particular purpose but not use for the said purpose. 2. Project not completed in time. 3.Poor recovery of receivables. 4.Excess capacities created on non-economic costs. 5. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. 6.Business failures. 7. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc., 9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc.

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External factors:

1. Sluggish legal system Long legal tangles Changes that had taken place in labour laws Lack of sincere effort. 2. Scarcity of raw material, power and other resources. 3. Industrial recession. 4. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents. 5. Failures, non payment\ over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc. 6. Government policies like excise duty changes, Import duty change.

5.2)Causes for an Account becoming NPA

Those Attributable to Borrower Causes Attributable to Banks Other Causes

(1) Failure to bring in Required capital (2)Too ambitious project (3)Longer gestation period (4)Unwanted Expenses

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(5)Over trading (6)Imbalances of inventories (7) Lack of proper planning (8) Dependence on single customers (9) Lack of expertise (10) Improper working Capital Mgmt. (11) Miss management (12) Diversion of Funds (13) Poor Quality Management (14) Heavy borrowings (15) Poor Credit Collection (16) Lack of Quality Control (17) Wrong selection of borrower (18) Poor Credit appraisal (19) Unhelpful in supervision (20) Tough stand on issues (21) Too inflexible attitude (22) Systems overloaded (23) Non inspection of Units (24) Lack of motivation (25) Delay in sanction (26) Lack of trained staff (27) Lack of delegation of work (28) Sudden credit squeeze by banks (29) Lack of commitment to recovery (30) Lack of technical, personnel & zeal to (31) Lack of Infrastructure
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(32) Fast changing technology (33) Un helpful attitude of Government (34) Changes in consumer preferences (35) Increase in material cost (36) Government policies (37) Credit policies (38) Taxation laws (39) Civil commotion (40) Political hostility (41) Sluggish legal system (42) Changes related to Banking amendment Act

5.3) GENERAL REASONS FOR ASSETS BECOMING NPAs

A multiplicity of factor is responsible forever increasing size of NPAs in banks. A few prominent reasons for assets becoming NPAs are as under. Poor credit appraisal system Lack of proper monitoring Reckless advances to achieve the budgetary targets. There is no or lack of corporate culture in the Bank. In adequate legal provisions on Foreclosure and bankruptcy. Change in economic policies/ environment. No transparent accounting policy and poor auditing practices. Lack of coordination between banks.

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 Directed lending to certain sectors. Failure on the part of the promoters to bring their portion of equity from their Source or public issue due to market turning lukewarm.

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METHODS TO MANAGE THE NPAs:

General Methods Of Management Of Npas: The management of NPA is the difficult task in practice. Management of NPAs means, how to settle the NPAs account in the books. In simple it focuses on the methods of settlement of NPAs account. The methods are differs from bank to bank. The following paragraph explains some general methods of Management of NPAs by the banks. The same information is given in the chart 1.1 General Methods of Management of NPAs

Compromise Legal remedies Regular Training Program Recovery Camps Write offs Spot Visit Rehabilitation of potentially viable units Other Methods

General Methods of Management of NPA

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6.1) Compromise: The dictionary meaning of the term compromise is settlement of dispute reached by mutual concessions. The following are the detailed guidelines for compromise/negotiated settlements of NPAs. The compromise should be a negotiated settlement under which the bank should ensure recovery of its dues to the maximum extent possible of minimum expenses. Proper distinction should be made between willful defaulters and borrowers defaulting in repayments due to circumstances beyond their control. An advantage in settlement cases is that banks can promptly recycle the funds instead of resorting to expensive recovery proceedings spread over a long period. All compromise proposals approved by any functionary should be promptly reported to the next higher authority for post facto scrutiny. Proposal for write off/ compromise should be first by a committee of senior executives of the bank. Special recovery cells should be set up at all regional levels.

6.2) Legal remedies: The legal remedies are one of the methods of management of NPAs. The banks observed that the borrower is making willful default; no more time should be lost instituting appropriate recovery proceedings. The legal remedies are filling of civil suits
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6.3) Regular Training Program: The all levels of executives are compelling to undergrowth the regular training program on credit and NPA management. It is very useful and helpful to the executives for dealing the NPAs properly.

6.4) Recovery Camps: The banks should conduct the regular or periodical recovery camps in the bank premises or some other common places; such type of recovery camps reduces the level of NPAs in the Banks

6.5) Write offs: Write offs is also one of the common management techniques of NPAs. The assets are treated as loss assets, when the bank writes off the balances. The ultimate aim of the write off is to cleaning the Balance sheet.

6.6) Spot Visit: The bank officials should visit to the borrowers business place or borrowers field regularly or periodically. It is also help full to the bank to control or reduce the NPAs limit.

6.7)Rehabilitation of potentially viable units: The unit is sick due to technical obsolescences of inefficient management or financial irregularities. When the Bank settles the dues, of such, companies through the compromise or through the legal actions the better is to be followed. 6.8) Other Methods: Persistent phone calls. Media announcement.
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NPA IN BANKING SECTOR

Banking And Non-Performing Asset Management

During initial sage the percentage of NPA was higher. This was due to show ineffective recovery of bank credit, lacuna in credit recovery system, inadequate legal provision etc. Various steps have been taken by the government to recover and reduce NPAs. 1.One time settlement / compromise scheme 2.Lokadulate 3.DebtRecoveryTribunals 4. Securitization & reconstruction of financial assets and enforcement 5.Corporate Reconstruction Companies 6.Credit information on defaulters and role of credit information bureaus

7.1) Prudential Standard Although a foreign banks operating presence in Korea is in the form of a branch and not a subsidiary, Korean regulations require branches to be separately capitalized. This in turn impacts other regulations that are based on local branch capital, thereby constraining foreign bank activities. For example, credit limits to companies/groups are based on branch capital, as are open foreign exchange positions. Although this is a welcomed step, Seoul cannot easily develop into a global or regional financial center without further liberalization of what constitutes capital in a branch of a foreign financial institution.

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7.2) Credit Allocation The Korean government has historically played an active role in allocating credit, initially through domestic bank policy loans but also through portfolio restrictions that apply to all banks operating in Korea. Foreign banks are held to strict monthly ratios for small and medium sized companies. These ratios severely constrain operations, resulting in an inefficient allocation and pricing of credit services.

7.3) Local Currency Funding Foreign banks have been able to increase capital with relative ease over the past several years (although thin capitalization rules are still a constraint) and negotiable CD limits have also been increased dramatically. urthermore, the interbank market does not facilitate borrowings for greater periods of time other than on an overnight basis. The government has revised regulations to allow commercial funding swaps and has offered to increase central bank funding swaps.

7.4) Debt Collection Agency Effective, privately managed, third party, non-banking related loan servicing and debt collection agencies are needed in order to provide lenders and investors in Non-Performing Loans (NPLs) with quality, professional NPL restructuring, collection and resolution services. Currently Debt Collection

Licenses are not available to qualified restructuring, loan service and asset management companies, which do a financial institution, not own.

7.5) Transparency of Local Banking Regulations

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Korean regulators are moving to address transparency problems but foreign banks continue to be hampered by ambiguous and sometimes outdated regulations subject to various interpretations by different regulatory authorities.

7.6) Accounting Standards Significant progress has been made during the past year in the application advisory Service (FSS) to improve its communications to foreign banks have been considerable Complete the revision of Korean Generally Accepted Accounting Practices (GAAPs) to improve the consistency and accuracy in financial reporting. Strictly follow the standards once set and enforce discipline when rules are violated.

7.7) Valuation of Non-Performing Loans Although Korea has taken many important steps to lower the level of non-performing loans on the books of its financial institutions, more could be done to facilitate the process. .Many banks are reluctant to sell assets because of the accounting loss the sale would create. This reluctance to sell NPLs appears to be slowing the process of improving the health of financial institutions.

7.8) Revision of the Credit Restructure Promotion Law(CRPL) The Credit Restructure Promotion Law was passed and became effective on September 14, 2001 The valuation and buyout of the opposing

creditors must include a fair, consistent, and timely valuation process, as well as a timely and fair procedure for temporarily staying an opposing creditors rights and the payment and method of the agreed buy-out price.Incentives should be provided

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to those participants that want to advance new money with the consent of those not able to advance new money. This will eliminate the situation whereby a financial institution is forced out of the plan due solely to the requirement to advance new money.

7.9) Awarded Foreclosure Process and Groundless Appeals Currently the foreclosure appeal process allows any party, whether they are a party at interest or not, to appeal an auction award with minimal support for the basis of the appeal. Typically, the reasons are groundless and the appeal process is used to delay and subvert the legal process. There is no cost or

consequence associated with groundless appeals. This process affects not only the NPL buyers in the Korean market, but it also covers all lenders including Korean Lending institutions.

Procedure for NPAs identification and resolution in banking sector. During the course of discussion with the concerned officials the following points emerged for npas identification and resolution.

1) Relation manager credit officerMost of the banks have relationship manager in their credit department and bankers are of the view tha5 this helps in close monitoring of the accounts.The relationship manager has to keep in constant touch with borrower report all development impacting the borrower account . As part of this contact he is also expected to conduct scrutiny and account Inspection.

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2) Know your client profilesome of the banks in India have a system of preparing KYC profiles a part of KYC system visit are made on clients and their places of business. The frequency of such visit is not structured and depends on the nature and needs of relationship. Most of the banks, which do not have at presently in operation also, have a positive view about the same.

3) Credit rating systemMost banks in India have put in place the system of internal credit rating by developing their own models a few banks have adopted credit rating designed by rating agencies. Credit rating models take into account various types various types risk viz financial industry and management, etc associated with a borrower unit.. The credit rating system is essentially one point measure and monitor the credit risk of individual proposal. At the whole bank level credit rating system enables tracking the health of bank entire credit portfolio.

4. Watch list special mention categoryMost of the banks have a system to put certain borrower accounts under watch list or special mention category, if performing advances, operating under adverse business or economic condition, are exhibiting certain distress signals. These accounts generally exhibit weakness, which are correctable but warrant bank closure attention. 5) Early warning signals Different banks for identification of potential NPAs use a host of early warning signals. Most banks in India have load down a series of operational financial transactional indicator that could serve to identify emerging problem in
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credit exposures at any early stage further it is revealed that the indicator which may trigger early warning system depends not only on default in payment of installment and interest but also other factor such as deterioration in operating & financial performance of the borrower weakening industry characteristic, regulatory changes, general economic condition etc.

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RBI GUIDELINES Reserve Bank Guidelines on purchase/ sale of Non Performing Financial Assets

8.1) SCOPE 1.These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling non performing financial assets, from/ to other banks/FIs/NBFCs (excluding securitisation companies/ reconstruction companies). 2. A financial asset, including assets under multiple/consortium banking arrangements, would be eligible for purchase/sale in terms of these guidelines if it is a non-performing asset/non performing investment in the books of the selling bank. 3. The reference to 'bank' in the guidelines would include financial institutions and NBFCs.

8.2) STRUCTURE

The guidelines to be followed by banks purchasing/ selling non-performing financial assets from / to other banks are given below. The guidelines have been grouped under the following headings:

i) Procedure for purchase/ sale of non-performing financial assets by banks, including valuation and pricing aspects.

ii) Prudential norms, in the following areas, for banks for purchase/ sale of nonperforming financial assets: a. Asset classification norms

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b. provisioning norms c. Accounting of recoveries d. Capital adequacy norms e. Exposure norms

iii) Disclosure requirements. a. Non performing financial assets that may be purchased/ sold; b. Norms and procedure for purchase/ sale of such financial assets; c. Valuation procedure to be followed to ensure that the economic value of financial assets is reasonably estimated d. Delegation of powers of various functionaries for taking decision on the purchase/ sale of the financial assets; etc. e. Accounting policy

iv) While laying down the policy, the Board shall satisfy itself that the bank has adequate skills to purchase non performing financial assets and deal with them in an efficient manner which will result in value addition to the bank.

v) The estimated cash flows are normally expected to be realized within a period of three years and not less than 5% of the estimated cash flows should be realized in each half year.

vi) A bank may purchase/sell non-performing financial assets from/to other banks only on 'without recourse' basis,

vii) Banks should ensure that subsequent to sale of the non performing financial assets to other banks, they do not have any involvement with reference to assets
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sold and do not assume operational, legal or any other type of risks relating to the financial assets sold.

vi) Each bank will make its own assessment of the value offered by the purchasing bank for the financial asset and decide whether to accept or reject the offer.

vii) Under no circumstances can a sale to other banks be made at a contingent price whereby in the event of shortfall in the realization by the purchasing banks, the selling banks would have to bear a part of the shortfall.

viii) A non-performing asset in the books of a bank shall be eligible for sale to other banks only if it has remained a non-performing asset for at least two years in the books of the selling bank.

ix) Banks shall sell non-performing financial assets to other banks only on cash basis. The entire sale consideration should be received upfront and the asset can be taken out of the books of the selling bank only on receipt of the entire sale consideration.

x) A non-performing financial asset should be held by the purchasing bank in its books at least for a period of 15 months before it is sold to other banks. Banks should not sell such assets back to the bank, which had sold the NPFA.

xi) Banks are also permitted to sell/buy homogeneous pool within retail nonperforming financial assets, on a portfolio basis provided each of the nonperforming financial assets of the pool has remained as non-performing financial asset for at least 2 years in the books of the selling bank.
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xii) The selling bank shall pursue the staff accountability aspects as per the existing instructions in respect of the non-performing assets sold to other bank

8.3) ASSET CLASSIFICATION AS PER THE RBI GUIDELINES: The primary (urban) co-operative banks should classify their assets into the following broad groups, viz.

(I) Standard Assets

(ii) Sub-standard Assets

(iii) Doubtful Assets

(iv) Loss Assets

Standard Assets

Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA.

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Sub-standard Assets

(i) With effect from March 31, 2005 an asset would be classified as sub-standard if it remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrowers/ guarantors or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such assets will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. (ii) An asset where the terms of the loan agreement regarding interest and principal have been re-negotiated or rescheduled after commencement of production, should be classified as substandard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this condition.

Doubtful Assets

With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months. As in the case of substandard assets, rescheduling does not entitle the bank to upgrade the quality of an advance automatically.

A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the added characteristic that the weaknesses make
36

collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Note: Consequent to change in asset classification norms w.e.f. March 31, 2005 banks are permitted to phase the consequent additional provisioning over a five year period commencing from the year ended March 31, 2005, with a minimum of 10 % of the required provision in each of the first two years and the balance in equal installments over the subsequent three years. Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or partly. In other words, such an asset is considered un-collectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

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Non performing assets

Standard assets (0.40 persontage)

Substandard assets (10 persontage)

Doubtful assets

Loss assets

Secured assets

Unsecured assets

Less than 24 month (20 persontage)

1 to 3 years (30 persontage)

More than 3 years (50 persontage)

31/3/2004 50 31/3/2005 60 Person 31/3/2006 75

31/3/2007 100

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Country-Wise analysis

9.1 China Causes :

1. Moral Hazard: The SOEs believe that there the government will bail them out in case of

trouble and so they continue to take high risks and have not really strived to achieve profitability and to improve operational efficiency

2. Bankruptcy laws favour borrowers and law courts are not reliable enforcement 3. Political and social implications of restructuring big SOEs force the government to keep them afloat.

4. Banks are reluctant to lend to the private enterprises due to a. Non-standard accounting practises b. While an NPA of an SOE is financially undesirable, an NPA of a private enterprise is both financially and politically undesirable.

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Measures :

1. Reducing risk by strengthening banks, raising disclosure standards and spearheading reforms of the SOEs by reducing their level of debt

2. Laws were passed allowing the creation of asset management companies, foreign equity participation in securitisation and asset backed securitisation. 3. The government which bore the financial loss of debt discounting. Debt/equity swaps were allowed in case a growth opportunity existed.

4. Incentives like tax breaks, exemption from administration fees and clearcut asset

9.2 Thailand Causes :

1. Liberalised capital and current account and external borrowings with inaccurate assessment of exchange rate risk and risk of capital flight in a crisis.

2. A legal system that made credit recovery time consuming and difficult.

3. Real estate speculators look massive loans projecting high growth in demand and prices of properties. When this did not materialise all the loans went bad.

4. Steep interest rate rise turned a lot of loans into NPAs

40

Measures :

1. Amendments were made to the Bankruptcy Act. 2. Corporate Debt Restructuring Advisory Commission was set up for the takeover and restructuring of banks. 3. The Financial Sector Restructuring Plan (1998) 9 focused on capital support facilities for bank recapitalization and setting up of AMCs. 4. New rules governing NPA exit procedures based on international standards were introduced. 5. Privatisation of government entities was mooted, but faced strong political opposition for fear of a social backlash. 6. Adoption of international standards for loan classification and provisioning. 7. Caps on Foreign equity ownership in financial institutions were removed.

9.3 Korea Causes :

1. Directed credit: Protracted periods of interest rate control and selective credit allocations gave rise to an inefficient distribution of funds10. The Chaebols focus on increasing market share and pursuing diversification with little attention to profitability caused tremendous stress on the economy. 2. The compressed growth policy via aggressive, leveraged expansion worked well as long as the economy was growing and the ROI exceeded the cost of capital.

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This strategy backfired when slowing demand and rising input costs placed severe stress on their profitability. 3. Lack of Monitoring Banks relied on collaterals and guarantees in the allocation of credit, and little attention was paid to earnings performance and cash flows.

4. Contagion Effects from South East Asia coincided with a period of structural adjustments as well as a cyclical downturn in Korea.

Measures :

1. Speed of Action - The speedy containment of systemic risk and the domestic credit crunch problem with the injection of large public funds for bank recapitalization were critical steps towards normalizing the financial system

2. Corporate Restructuring Vehicles (CRVs) and Debt/Equity Swaps were used to facilitate the resolution of bad loans.

3. Creation of the Korea Asset Management Corporation (KAMCO) and a NPA fund to fund to finance the purchase of NPAs. 4. Securitization KAMCOs recoveries came through asset-backed securitization and outright sales. International investors like the Lone Star Fund participated in the process.

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5. Strengthening of Provision norms and loan classification standards based on forward-looking criteria (like future cash flows) were implemented.

9.4 Japan Causes :

1. Investments were made real estate at high prices during the boom. The recession caused prices to crash and turned a lot of these loans bad.

2. Legal mechanisms to dispose bad loans were time consuming and expensive and NPAs remained on the balance sheet.

3. Expansionary fiscal policy measures administered to stimulate the economy supported industrial sectors like construction and real estate, which may have further exacerbated the problem

4. Crony capitalism to the Keiretsus

5. Weak corporate governance coupled with a no-bankruptcy doctrine was a moral hazard in Japanese economy.

6. Inadequate accounting systems and information flow makes assessment of loan performance outside a bank in Japan difficult.

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Measures :

1. Amendment of foreign exchange control law (l997) and the threat of suspension of banking business in case of failure to satisfy the capital adequacy ratio prescribed. Legislation to improve information flow has been passed. 2. Accounting standards Major business groups established a private standardsetting vehicle for Japanese accounting standards (2001) in line with international standards. 3. Government Support - The governments committed public funds to deal with banking sector weakness.

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9.5) Comparison with other Asian Economies

Country Causes of Problem

Mechanisms used to solve the problem

India

1. Legal impediments and time 1. consuming nature of

Strengthening

of

Legal

asset Norms

disposal process.

2. Manipulation by the debtors 2. using political

Aligning with

of

prudential international

norms

influence has been a cause for standards industrial baddebt being so high. 3.Political tool - Directed Credit 3. Legal mechanisms including to SSI and Rural sectors creation of ARCs and partial disbanding of the BIFR China 1. Moral Hazard - SOE's belief 1. that bailout will happen in a crisis situation Creation of Asset

Management Companies for the big four banks

2.

Bankruptcy

laws

favour 2. Foreign equity participation in the NPA disposal process disclosure

borrowers

3. Inefficient legal enforcement 3. Raising of mechanisms standards

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Exhibit 3 Comparison of Problems and Solutions Across 5 countries

Japan

1. Real estate boom and bust

1. Strict action (including closure) for non compliance of capital norms

2. Time consuming legal 2. mechanism

Securitisation

of

Real

estate loans

3. Crony capitalism

3. Extensive public funding for bailouts

Korea

1.Directed credit: Interest rate 1. Swift action in containing control systemic risk

2.The compressed growth 2. policy

Use

of

Corporate

Restructuring Vehicles (CRVs) Swaps and Debt/Equity

3.

Lack

of

effective 3. Creation of Korea Asset Management Corporation 1997 (KAMCO) in

monitoring

4.Contagion

Effects

from 4.

Extensive

use

of

South East Asia

securitization

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Thailand

1. legal system that favoured 1. debtors

Privatisation

of

government entities Removal of caps on

2. Liberalised capital and 2. current account.

foreign equity ownership in

Borrowing were made with FIs was removed. inaccurate assessment of s

foreign exchange risk 3. Real estate speculation - 3. Creation of AMCs Spike in prices and growth rate projections were wrong 4. Steep interest rate increase 4. Government takeover of turned loans bad banks and FIs

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Case study of Non-Performing Asset on Oriental bank of commerce

10.1) Introduction

Oriental Bank of Commerce India was established in the year 1943 on 19th February in Lahore. After partition, Oriental Bank of Commerce shifted its Registered Office from Lahore to Amritsar paying every rupee to it. Oriental Bank of Commerce was nationalized on 15th April in 1980. Then departing customers of OBC bank had 307 branches with Rs. 282.61 crores as deposits and as advance Rs. 152.69. OBC has formulated the pattern of Bangladesh Grameen Bank with a unique feature of disbursing small loans ranging from Rs. 75 onwards. The Bank is providing training to rural people in using locally available raw material to produce pickles, jams etc. This in return increases self-employment and adds in increasing the income levels.

10.2) Our Vision To be a sound all India, customer centric, efficient retail bank with contemporary size, technology and human capital; endeavouring to enrich lives across all sections of society; and committed to upholding the highest standards of corporate governance.

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10.3)Our Vision

To provide the finest banking services by upgrading human capital and infusing advanced technology, thereby achieving total customer satisfaction; and being reckoned as the Best Bank in the Industry on all efficiency parameter to enhance shareholders wealth by ensuring sound growth of business and make valuable contributions to national economic growth.

10.4) Oriental Bank of Commerce Fact File

Amongst the strongest banks in India High Capital Adequacy Ratio Consistent Profit-making Bank One of the Lowest Spreads in Banking Industry Total Working crosses the 35700 crore mark CRISIL Ratings The Highest Productivity per Employee NPA - One of the lowest

Oriental Bank of Commerce (OBC) have emerged as the top performing banks in terms of cleaning their bad assets and bringing down non-performing assets, taking advantage of healthy GDP growth and impressive top line and bottom line performance by borrowers.

Most of the commercial banks have substantially reduced their nonperforming assets (NPAs) ranging between 29 per cent and 65 per cent, as they registered a handsome growth in their retail advances in the fourth quarter of fiscal

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2005-06. Riding on the above 8 per cent growth of economy, the NPAs of the scheduled commercial banks went down by 44 per cent on an aggregate

10.5) Working results of oriental bank of commerce Dated 28th April 2007 The oriental bank has announce the working results of the Bank for the year ended 31st March 2007. The Board of Directors met on 28 th April 2007 in New Delhi and at the conclusion of the Meeting, the Results were declared.

1. WORKING RESULTS

Highlights of the working results for the year ended March 2007 are as follows: TOTAL BUSINESS Rs. 1,09,391 Crore UP BY 27.57 % Total business has gone up by Rs. 23644.99 Crore (by 27.57 %) to Rs.09,391.00 Crore as on March 2007 from Rs. 85746.01 Cr as on March 2006. NET PROFIT UP BY 2.94 % Net Profit after tax gone up to Rs. 826.81 Crore as on March 2007 from Rs.803.16 Crore as on March 2006. CAPITAL ADEQUACY RATIO - 12.51% CAR as of March 2007 is 12.51 %.

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 Gross NPA reduced to Rs.1454.05

Crore as on March 2007 from Rs. %) Recovery of

2116.31 Crore as on March 2006 ( 3.20 %from 5.95

Rs. 750.15 Crore during the Current year. The Net NPA increased to Rs. 215.66 Crore as on March 2007 from Rs. 162.98 Crore as on March 2006 and remained at 0.49%.

BUSINESS PER EMPLOYEE Rs. 7.40 Crore Employee Productivity has gone up to Rs. 7.40 Crore as on 31stMarch 2007 from Rs.6.66 Crore as on 31st March 2006.One of the significant reasons for a substantial decline in NPAs in the banking system is the low level of default in the retail.

The business figures of Oriental Bank of Commerce India for the last five years are as under: Rupees in Lakhs

FOR THE YEAR Total Income Total expenditure Net Profit for the year

1998-99 1999-2000 2000-2001 2001-2002 2002-2003 204641 267943 181629 240081 23012 27862 302645 282356 20288 351438 319383 32055 383566 337871 45695

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AT THE END OF YEAR Mar-99 Mar-00 Capital & Reserves Deposits Advances Total Assets No. of branches No. of employees 123148 142840 1680488 2209521 770756 932553 1878416 2454120 899 14447 915 14398

Mar-01 154866 2468043 1107641 2707243 932 13588

Mar-02 161973 2848839 1415787 3226292 967 13589

Mar-03 210934 2980909 1567723 3398763 989 13507

10.6)Profitability of OBC

a) Profitability of OBC The gross profit OBC Bank stood at Rs. 1533 Crore as against Rs. 1163 Crore last year. After providing for contingencies and more than required provisions against non performing assets, the Bank has earned a handsome net profit of Rs. 686 Crore as against Rs. 457 Crore last year, thereby registering a growth of 50 % mainly on account of reduction in cost of deposits, strict control on expenses, efficient cash management, treasury income and large recoveries in NPA accounts.

b)Dividend of OBC The Oriental Bank of Commerce has provided for payment of 30% final dividend to the shareholders in addition to 20% interim dividend already paid during the financial year 2003-04 making total dividend 50%.

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c)Retail Portfolio of OBC The retail loans of OBC have increased to Rs. 4318 Crores as against Rs. 2779 Crores last year, with a growth of 55.4%. These assets constitute 20.9 % of total loan assets. Oriental Bank of Commerce Housing loans account for 80% of retail portfolio. d) OBC Shareholder's Equity The Net worth of Oriental Bank of Commerce has improved by Rs.567.46 Crore and reached a level of Rs. 2676.79 Crore against Rs. 2109.33 Crore last year. e) The OBC Business The total business of Oriental Bank of Commerce has gone up to Rs. 56286 Crore from Rs. 46333 Crore last year thus registering a growth of 21.5%, due to high growth in deposits as well as advances. The deposit growth of OBC has been to the extent of 19.7 %( previous year 4.63%) while in advances the growth is 25.5 % (previous year 10.7%).

10.7) Technology Implementation Oriental Bank of Commerce of India has implemented Centralized Banking Solution in 21 branches till date. It will give freedom of anywhere and anytime banking to customers. The business captured has resulted in 97% live computerized environment as against 93% last year. More than 350 branches have been networked OBC emerged as the best performer in terms of size of net NPAs. OBCs net NPAs were 0.5 per cent ced its NPAs by 61.54 per cent as on March 31, 2006 as compared on March 31,

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Advice of RBI Though, the banks have exhibited a remarkable performance in lowering their NPAs in the fiscal 2005-06, at the same time, the banks also need to focus on deposit mobilization, as per the RBI advice. Oriental Bank of Commerce (OBC) has announced that it will move to 100 per cent provisioning cover in the current financial year ending March 31, 2004. B D Narang disclosed this, chairman and managing director Oriental Bank during an analyst meet held on Thursday. Oriental Bank declared a 42.55 per cent growth in net profit for the fiscal ended March 31, 2003, at Rs 456.95 crore, against Rs 320.55 crore for the fiscal ended March 31, 2002. A combination of factors including reduction of cost of deposits, strict control on expenses, efficient cash management and large recoveries of non-performing assets (NPAs), besides treasury income accounted for the profit. Interest expended rose a marginal 1.04 per cent at Rs 2,089.94 crore, while total expenditure was also up marginally by 2.90 per cent at Rs 2,672.60 crore. Oriental Bank has amortized its VRS expenses over a period of five years. The banks net NPAs reduced to 1.40 per cent from 3.20 per cent in the previous fiscal. Treasury operations contributed Rs 481.59 crore (41.41%) to the gross profit of Rs 1,163.06 crore, while banking operations contributed the balance Rs 681.47 crore (58.59%). Total income increased from Rs 3,514.38 crore to Rs 3,835.66 crore during the fiscal. Gross profit stood at Rs 1,163.06 crore, 26.82 per cent higher than the previous fiscals Rs 917.09 crore.

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 The total business of the bank went up to Rs 45,486 crore, a growth of 6.70 per cent compared to Rs 42,974 crore in the previous fiscal. The capital adequacy ratio went up to 14.04 per cent against 10.99 per cent. Business per employee stood at Rs 3.43 crore, while the net worth grew 30.20 per cent at Rs 2,109 crore. The banks return on assets for the fiscal stood at 1.30 per cent.

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Finding & conclusion Non-performing assets of banks on the decline: Report Group wise movement in Non performing asset 2003-2004

Position

Scheduled Bank

Public Old

New

Foreign bank

sector private private bank bank sector bank

Gross NPAs 68,698 as at end

54,090 4,291

7,492

2,826

march 2003 Gross NPAs 64789 as at end 51538 4392 5963 2894

march 2004 Net as at NPAs 32657 end 24867 2547 4335 907

march 2003 Net as at NPAs 24617 end 18860 2140 2717 900

march 2004

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Finding The asset quality of scheduled commercial banks (SCBs) has shown a remarkable improvement in 2003-04, according to the RBI report on `Trends and Progress of Banking in India' released on Monday. The central bank has noted that the gross non-performing assets (NPAs) of SCBs has declined in absolute terms for a second year in succession, despite the switchover to the 90-day delinquency norm, effective March 2004. Gross NPAs of scheduled commercial banks declined by 5.6 per cent in 2003-04, against a decline of 3 per cent in 2002-03. Due to significant provisioning, the net NPAs declined substantially by 24.7 per cent during 2003-04 against a decline of 8 per cent in 2002-03, the report said. The decline in NPAs is evident across bank groups. During 2003-04, reductions outpaced additions in the NPAs account. For SCBs, the decline in NPAs was accompanied by the decline in doubtful and loss assets by 8.8 per cent and 15 per cent respectively, the central bank has observed. The ratio of net NPAs to net advances of SCBs declined from 4.4 per cent in 2002-03 to 2.9 percent in 2003-04. All bank groups witnessed a decline in the ratio of net NPAs to net advances in 2003-04. Among bank groups, the old private sector banks had the highest net NPAs ratio at 3.8 per cent, followed by public sector banks, new private banks and foreign banks. During 2003-04, the share of NPAs in the priority sector to total NPAs of public sector banks increased marginally. However, there was a decline in

57

the share of NPAs of agriculture sector and small-scale industries but an increase in the share of other priority sectors. The share of NPAs on account of public sector undertakings declined while the share of NPA of non-priority sectors increased during 2003-04. For private sector banks, the share of NPAs on account of agriculture sector was lower when compared with 2002-03. However, there was an increase in the shares of NPAs on account of small-scale industries and other priority sector as well as their overall NPAs for the priority sector. The share of non-priority sector NPAs in total NPAs of private sector banks was lower than that in 2002-03. According to the report, the gross non-performing assets ratio of public sector banks has declined to 7.8 per cent in 2003-04 from 23 per cent in 1992-93. As on June 30, 2004, 27 public sector banks had issued 61,263 notices involving an outstanding amount of Rs 19,744 crore and had recovered an amount of Rs 1,748 crore, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002. The number of cases and value of assets restructured under CDR mechanism as on June 30, 2004 stood at 94 and Rs 64,017 crore respectively.

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SUGGESTIONS & RECCOMENDATION

12.1) SUGGESTIONS TO OVERCOME THE PROBLEM OF NPAs:

NPAs are increasing day by day in the CBE for a multiplicity of reasons. The following recommendations are suggested to the CBE to control over the NPAs. The recommendations are classified into three categories, are as follows.

A) General suggestions:

The Bank should adopt the following General strategies for control of NPAs. The suggestions are as follows: Projects with old technology should not be considered for finance Large exposure on big corporate or single project should be avoided. There is need to shift banks approach from collateral security to viability of the project and intrinsic strength of promoters. Timely sanction and or release of loans by the bank is to avoid time and cost overruns.

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B) Pre-sanction suggestions: Analysis should therefore be based on trends of capacity utilization, profitability etc. Assumptions not account for ground realities. Better taking up any fresh/exciting proposals for assessment, sources for margin money should be thoroughly examined. Uneven scale of repayment schedule with higher repayment in the initial years normally is preferred.

C) Post sanctions suggestions: Bank should prevent diversion of funds by the promoters. Operating staff should scrutinize the level of inventories/receivables at the time of assessment of working capital. The Credit section should carefully watch the warning signals viz. nonpayment of quarterly interest, dishonor of check etc. Effective inspection system should be implemented.

12.2) Recommendation for future research

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The researchers who want to do future studies relating to the project on nonPerforming asset in banking sector. For those researchers there are some recommendation. Allow branches to use head office capital for regulatory purposes Eliminate limits for all banks Establish policy to improve foreign bank access to the won inter-bank market; Revise central bank swap pricing from a fixed return to cost basis. Assist in the development of professional, third party, qualified private, nonbanking related loan-servicing and debt collection companies. Eliminate unnecessary banking regulations;

i) Each bank will make its own assessment of the value offered by the purchasing bank for the financial asset and decide whether to accept or reject the offer.

ii) Under no circumstances can a sale to other banks be made at a contingent price whereby in the event of shortfall in the realization by the purchasing banks, the selling banks would have to bear a part of the shortfall

iii) A non-performing asset in the books of a bank shall be eligible for sale to other banks only if it has remained a non-performing asset for at least two years in the books of the selling bank.

12.3 DATA ANALYSIS:

After the relevant data were collected, descriptive analysis was carried out which was preferred for assessment purposes. Hence for all data interpretations
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were made and diagrams and graphs have been used to support discussions related to findings. Finally, conclusion and recommendations were made accordingly.

Various studies have been conducted to analysis the reasons for NPA. What ever may be complete elimination of NPA is impossible. The reasons may be widely classified in two:

(1) Over hang component (2) Incremental component

Over hang component is due to the environment reasons, business cycle etc. Incremental component may be due to internal bank management, credit policy, terms of credit etc.

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Conclusion

NPAs have negative impact on the productivity, achievement of capital adequacy level, funds deployment and mobilization policy, credibility of banking system and overall economy. Therefore, concerted efforts are required at ministry of finance, RBI and banks level to control the menace of NPAs.

WEBILOGRAPHY
http://en.wikipedia.org/wiki/Non-performing_asset http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7370 http://www.infosys.com/finacle/solutions/thought-papers/Documents/nonperforming-assets-indian-perspective.pdf

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