i

CHAPTER -1

1.1 PURPOSE OF STUDY

After liberalization the Indian banking sector developed very appreciate. The RBI
also nationalized good amount of commercial banks for proving socio economic
services to the people of the nation. The Public Sector Banks and private sectors
banks have shown very good performance as far as the financial operations are
concerned. If we look to the glance of the financial operations, we may find that
deposits of public to the Public Sector Banks have increased from 859,461.95crore
to 1,079,393.81crore in 2003, the investments of the Public Sector Banks have
increased from 349,107.81crore to 545,509.00crore, and however the advances
have also been increased to 549,351.16crore from 414,989.36crore in 2003. The
total income of the public sector banks have also shown good performance since
the last few years and currently it is 128,464.40crore. However, the only problem
of the Public Sector Banks these days are the increasing level of the non
performing assets. The non performing assets of the Public Sector Banks and
private sectors banks have been increasing regularly year by year. The only
problem that hampers the possible financial performance of the Public Sector
Banks and private sector banks is the increasing results of the non performing
assets. The non performing assets impacts drastically to the working of the banks.
The efficiency of a bank is not always reflected only by the size of its balance sheet
but by the level of return on its assets. NPAs do not generate interest income for the
banks, but at the same time banks are required to make provisions for such NPAs
from their current profits

1
1.2 RESEARCH OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA was to:

To evaluate NPAs (Gross and Net) in different banks.

To study the past trends of NPA

To calculate the weighted of NPA in risk management in Banking

To analyze financial performance of banks at different level of NPA

To evaluate profitability positions of banks

To evaluate NPA level in different economic situation.

To Know the Concept of Non Performing Asset

To Know the Impact of NPAs

To Know the Reasons for NPAs

To learn Preventive Measures

2
1.3 RESEARCH METHODOLOGY

1.3.1 RESEARCH DESIGN

In this project Descriptive research methodologies were use
.
At the first stage theoretical study is attempted.

At the second stage Historical study is attempted.

At the Third stage Comparative study of NPA is undertaken.

Scope of the Study

Concept of Non Performing Asset

Guidelines

Impact of NPAs

Reasons for NPAs

Preventive Measures

Tools to manage NPAs

3
1.3.2 DATA COLLECTION
The data collected for the study was secondary data in Nature. To prepare this
Project we took three banks from public sector as well as three banks from private
sector.
SECONDARY DATA COLLECTION METHOD:
Reference books
Internet

1.3.3LIMITATIONS OF THE STUDY

The limitations that I felt in my study are: It was critical for me to gather the
financial data of the Public Sector Banks and private sectors bank therefore I have
taken old data of the ended year 2006-07 and 2007-08, so the better evaluations of
the performance of the banks are not possible. Since my study is based on the
secondary data, the practical operations as related to the NPAs are adopted by the
banks are not learned. Since the Indian banking sector is so wide so it was not
possible for me to cover all the banks of the Indian banking sector.

4
 CHAPTER-2
NON PERFORMING ASSETS

2.1 INTRODUCTION
The three letters NPA Strike terror in banking sector and business circle today.
NPA is short form of Non Performing Asset. The dreaded NPA rule says simply
this: when interest or other due to a bank remains unpaid for more than
90 days
The entire bank loan automatically turns a nonperforming asset. The recovery of lo
an has always been problem for banks and financial institution. To come out
of these first we need to think is it possible to avoid NPA, no can not be then left is
to look after the factor responsible for it and managing those factors.

DEFINITIONS:
An asset, including a leased asset, becomes non-performing when it ceases to
generate income for the bank.
A non-performing asset (NPA) was defined as a credit facility in respect of which
the interest and/ or installment of principal has remained past due for a specified
period of time.

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the 90 days overdue norm for
identification of NPAs, from the year ending March 31,
2004.Accordingly, with effect from March 31, 2004, a non-performing asset (NPA)
shall be a loan or an advance where;

5
 Interest and/ or installment of principal remain overdue for a
period of more than 90 days in respect of a term loan,

The account remains out of order for a period of more than 90days, in respect of
an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,

Interest and/or 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 purposes, and

Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by April 1, 2002.
However, the date of classification of an advance NPA should not be changed on
account of charging of interest at monthly rests. Banks should, therefore, continue
to classify an account as NPA only if the interest charged during any quarter is not
serviced fully within 180 days from the end of the quarter with effect from April 1,
2002and 90 days from the end of the quarter with effect from March 31, 2004.

6
2.2 HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial

services. By the term bank is generally understood an institution that
holds a Banking Licenses. Banking licenses are granted by financial supervision
authorities and provide rights to conduct the most fundamental banking services
such as accepting deposits and making loans.
There are also financial institutions that provide certain banking services without
meeting the legal definition of a bank, a so-called Non-bank. Banks are a subset of
the financial services industry. The word bank is derived from the Italian banca,
which is derived from German and means bench. The terms bankrupt and "broke"
are similarly derived from banca rotta which refers to an out of business bank,
having its bench physically broken. Moneylenders in Northern Italy originally did
business in open areas, or big open rooms, with each lender working from his own
table.
Typically, a bank generates profits from transaction fees on financial services or the
interest spread on resources it holds in trust for clients while paying them interest
on the asset. Development of banking industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed that the
transition from money lending to banking must have occurred even before Manu,
the great Hindu Jurist, who has devoted a section of his work to deposits and
advances and laid down rules relating to rates of interest.

Banking in India has an early origin where the indigenous bankers played a very
important role in lending money and financing foreign trade and commerce. During
the days of the East India Company was the turn of the agency houses to carry on
7
the banking business. The General Bank of India was first Joint Stock Bank to be
established in the year 1786. The others which followed were the Bank Hindustan
and the Bengal Bank.

In the first half of the 19th century the East India Company established three
banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of
Madras in 1843. These three banks also known as Presidency banks were
Amalgamated in 1920and a new bank, the Imperial Bank of India was established
in1921. With the passing of the State Bank of India Act in 1955 the undertaking of
the Imperial Bank of India was taken by the newly constituted State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935 by
passing Reserve Bank of India Act, 1934 which was followed up with the Banking
Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide
ranging powers for licensing, supervision and control of banks. Considering the
proliferation of weak banks, RBI compulsorily merged many of them with stronger
banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the

geographical coverage and financial spread of the banking system in the country.
As certain rigidities and weaknesses were found to have developed in the system,
during the late eighties the Government of India felt that these had to be addressed
to enable the financial system to play its role in ushering in a more efficient and
competitive economy. Accordingly, a high-level committee was set up on 14

8
August 1991 to examine all aspects relating to the structure, organization, functions
and procedures of the financial system.

Based on the recommendations of the Committee (Chairman: Shri M.

Narasimham), a comprehensive reform of the banking system was introduced
in1992-93. The objective of the reform measures was to ensure that the balance
sheets of banks reflected their actual financial health. One of the important
measures related to income recognition, asset classification and provisioning by
banks, on the basis of objective criteria was laid down by the Reserve Bank. The
introduction of capital adequacy norms in line with international standards has been
another important measure of the reforms process.

1. Comprises balance of expired loans, compensation and other bonds such as

National Rural Development Bonds and Capital Investment Bonds. Annuity
certificates are excluded.

2. These represent mainly non- negotiable non- interest bearing securities issued to
International Financial Institutions like International Monetary Fund, International
Bank for Reconstruction and Development and Asian Development Bank.

3. At book value.

4. Comprises accruals under Small Savings Scheme, Provident Funds, Special

Deposits of Non- Government

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 In the post-nationalization era, no new private sector banks were allowed to be
set up. However, in 1993, in recognition of the need to introduce greater
competition which could lead to higher productivity and efficiency of the banking
system, new private sector banks were allowed to be set up in the Indian banking
system. These new banks had to satisfy among others, the following minimum
requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;

(iii)The shares should be listed on the stock exchange;

(iv)The headquarters of the bank should be preferably located in a centre which

does not have the headquarters of any other bank; and

(v)The bank will be subject to prudential norms in respect of banking operations,

accounting and other policies as laid down by the RBI. It will have to achieve
capital adequacy of eight per cent from the very beginning.

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2.3 NON PERFORMING ASSETS (NPA)

2.3.1 WHAT IS A NPAS (NON PERFORMING ASSETS)?

Action for enforcement of security interest can be initiated only if the secured asset
is classified as Nonperforming asset.

Non performing asset means an asset or account of borrower, which has been
classified by bank or financial institution as sub standard, doubtful or loss asset, in
accordance with the direction or guidelines relating to assets classification issued
by RBI.

An amount due under any credit facility is treated as past due when it is not been
paid within 30 days from the due date. Due to the improvement in the payment and
settlement system, recovery climate, up gradation of technology in the banking
system etc, it was decided to dispense with past due concept, with effect from
March 31, 2001.Accordingly as from that date, a Non performing asset shell be an
advance where
i. Interest and/or installment of principal remain overdue for a period of more than
180 days in respect of a term loan,

ii. The account remains out of order for a period of more than 180 days ,in respect
of an overdraft/cash credit (OD/CC)

iii The bill remains overdue for a period of more than 180 days in case of bill
purchased or discounted.

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iv. Interest and/or principal remains overdue for two harvest season but for a period
not exceeding two half years in case of an advance granted for agricultural purpose

2.3.2 OUT OF ORDER

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

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

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2.4 FACTORS FOR RISE IN NPAs

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

2.4.1 EXTERNAL FACTORS:-

INEFFECTIVE RECOVERY TRIBUNAL

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

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

NATURAL CALAMITIES
This is the measure factor, which is creating alarming rise in NPAs of the PSBs.
every now and then India is hit by major natural calamities thus making the
borrowers unable to pay back there loans. Thus the bank has to make large amount
of provisions in order to compensate those loans, hence end up the fiscal with are
reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to

13
irregularities of rain fall the farmers are not to achieve the production level thus
they are not repaying the loans
INDUSTRIAL SICKNESS
Improper project handling , ineffective management , lack of adequate resources ,
lack of advance technology , day to day changing govt. Policies give birth to
industrial sickness. Hence the banks that finance those industries ultimately end up
with a low recovery of their loans reducing their profit and liquidity.

LACK OF DEMAND

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

CHANGE ON GOVT. POLICIES

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

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2.4.2 INTERNAL FACTORS:-

DEFECTIVE LENDING PROCESS

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

I Principles of safety:-
By safety it means that the borrower is in a position to repay the loan both principal
and interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon:
1. Tangible assets
2. Success in business
Willingness to pay depends on:
1. Character
2. Honest
3. Reputation of borrower
The banker should, there fore take utmost care in ensuring that the enterprise or
business for which a loan is sought is a sound one and the borrower is capable of
carrying it out successfully .He should be a person of integrity and good character.

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

IMPROPER SWOT ANALYSIS

The improper strength, weakness, opportunity and threat analysis is another reason
for rise in NPAs. While providing unsecured advances the banks depend more on
the honesty, integrity, and financial soundness and credit worthiness of the
borrower.
Banks should consider the borrowers own capital investment.
It should collect credit information of the borrowers from_
From bankers
Enquiry from market/segment of trade, industry, business
From external credit rating agencies.
ANALYZE THE BALANCE SHEET.
True picture of business will be revealed on analysis of profit/loss a/c and balance
sheet.
PURPOSE OF THE LOAN
When bankers give loan, he should analyze the purpose of the loan. To ensure
safety and liquidity, banks should grant loan for productive purpose only. Bank
should analyze the profitability, viability, long term acceptability of the project
while financing.

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 POOR CREDIT APPRAISAL SYSTEM
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are notable to repay it back. They
should use good credit appraisal to decrease the NPAs.
MANAGERIAL DEFICIENCIES
The banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting securities
banks should consider the
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
The banker should follow the principle of diversification of risk based on the
famous maxim do not keep all the eggs in one basket;
it means that the banker should not grant advances to a few big farms only or to
concentrate them in few industries or in a few cities. If a new big customer meets
misfortune or certain traders or industries affected adversely, the overall position of
the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack,
and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM
(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).
ABSENCE OF REGULAR INDUSTRIAL VISIT
The irregularities in spot visit also increases the NPAs. Absence of regularly visit
of bank officials to the customer point decreases the collection of interest and
principals on the loan. The NPAs due to willful defaulters can be collected by
regular visits.

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

2.5 PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst case, if the
banks fails, owners loose their assets. In modern times this may affect a broad pool
of shareholders.
2. Depositors do not receive a market return on saving. In the worst case if the bank
fails, depositors loose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interest rates,
lower deposit rates and higher lending rates repress saving and financial market,
which hamper economic growth.
4. Non performing loans epitomize bad investment. They misallocate credit from
good projects, which do not receive funding, to failed projects. Bad investment
ends up in misallocation of capital, and by extension, labour and natural resources.
Non performing asset may spill over the banking system and contract the money
stock, which may lead to economic contraction. This spill over effect can
channelize through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can jam payment across the country,
b) Liquidity constraints bank in paying depositors
c) Undercapitalized banks exceed the banks capital base.

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The three letters Strike terror in banking sector and business circle today.NPA is
short form of Non Performing Asset. The dreaded NPA rule says simply this:
when interest or other due to a bank remains unpaid for morethan90 days,
The entire bank loan automatically turns a non performing asset. The recovery of
loan has always been problem for banks and financial institution. To come out of
these first we need to think is it possible to avoid NPA, no can not be then left is to
look after the factor responsible for it and managing those factors.
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 purposes, and
Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by April 1, 2002.
However, the date of classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should, therefore, continue
to classify an account as NPA only if the interest charged during any quarter is not
serviced fully within 180 days from the end of the quarter with effect from April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004
An account should be treated as 'out of order' if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on the
date of Balance Sheet or credits are not enough to cover the interest debited during
the same period, these accounts should be treated as 'out of order'
.

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Overdue:
Any amount due to the bank under any credit facility is overdue if it is not paid on
the due date fixed by the bank.
2.6 TYPES OF NPA
A] Gross NPA
B] Net NPA
2.6.1 GROSS NPA
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per
RBI guidelines as on Balance Sheet date.
Gross NPA reflects the quality of the loans made by banks.
It consists of all then on standard assets like as sub-standard, doubtful, and loss
assets. It can be calculated with the help of following ratio:
Gross NPAs Ratio
Gross NPAs
Gross Advances
2.6.2 NET NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs.Net NPA shows the actual burden of banks.
Since in India, bank balance sheets contain a huge amount of NPAs and the process
of recovery and write off of loans is very time consuming, the provisions the banks
have to make against the NPAs according to the central bank guidelines, are quite
significant. That is why the difference between gross and net NPA is quite high. It
can be calculated by following_
Net NPAs
Gross NPAs Provisions
Gross Advances Provisions

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2.7 INCOME RECOGNITION
The policy of income recognition has to be objective and based on the record of
recovery. Internationally income from non-performing assets (NPA) is not
recognized on accrual basis but is booked as income only when it is actually
received. Therefore, the banks should not charge and take to income account
interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided adequate margin
is available in the accounts.
Fees and commissions earned by the banks as a result of re-negotiations or
rescheduling of outstanding debts should be recognized on an accrual basis over the
period of time covered by the re-negotiated or rescheduled extension of credit.
If Government guaranteed advances become NPA, the interest on such advances
should not be taken to income account unless the interest has been realized.

2.7.1 REVERSAL OF INCOME:

If any advance, including bills purchased and discounted becomes NPA as at the
close of any year, interest accrued and credited to income account in the
corresponding previous year, should be reversed or provided for if the same is not
realized. This will apply to Government guaranteed accounts also.
In respect of NPAs, fees, commission and similar income that have accrued
should cease to accrue in the current period and should be reversed or provided for
with respect to past periods, if uncollected.

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2.7.2 LEASED ASSETS
The net lease rentals (finance charge) on the leased asset accrued and credited to
income account before the asset became non-performing, and remaining unrealized,
should be reversed or provided for in the current accounting period.
The term 'net lease rentals' would mean the amount of finance charge taken to the
credit of Profit & Loss Account and would be worked out as gross lease rentals
adjusted by amount of statutory depreciation and lease equalization account.
As per the 'Guidance Note on Accounting for Leases' Issued by the Council of the
Institute of Chartered Accountants of India (ICAI),a separate Lease Equalization
Account should be opened by the banks with a corresponding debit or credit to
Lease Adjustment Account, as the case may be.
Further, Lease Equalization Account should be transferred every year to the Profit
& Loss Account and disclosed separately as a deduction from/addition to gross
value of lease rentals shown under the head 'Gross Income'.

2.7.3 APPROPRIATION OF RECOVERY IN NPAS

Interest realized on NPAs may be taken to income account provided the credits in
the accounts towards interest are not out of fresh/ additional credit facilities
sanctioned to the borrower concerned.
In the absence of a clear agreement between the bank and the borrower for the
purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest
due), banks should adopt an accounting principle and exercise the right of
appropriation of recoveries in a uniform and consistent manner.
2.7.4 INTEREST APPLICATION:
There is no objection to the banks using their own discretion in debiting interest to
an NPA account taking the same to Interest Suspense Account or maintaining only
a record of such interest in Performa accounts.

22
2.8 REPORTING OF NPAS
Banks are required to furnish a Report on NPAs as on 31stMarch each year after
completion of audit. The NPAs would relate to the banks global portfolio,
including the advances at the foreign branches. The Report should be furnished as
per the prescribed format given in the Annexure I.
While reporting NPA figures to RBI, the amount held in interest suspense account,
should be shown as a deduction from gross NPAs as well as gross advances while
arriving at the net NPAs.
Banks which do not maintain Interest Suspense account for parking interest due on
non-performing advance accounts, may furnish the amount of interest receivable on
NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write off, if any,
should be reduced from the outstanding gross advances and gross NPAs to
eliminate any distortion in the quantum of NPAs being reported.
REPORTING FORMAT FOR NPA GROSS AND NET NPA
Name of the Bank:
Position as on
PARTICULARS
1)Gross Advanced *
2)Gross NPA *
3)Gross NPA as %age of Gross Advanced
4)Total deduction( a+b+c+d )
( a ) Balance in interest suspense a/c **
( b ) DICGC/ECGC claims received and held pending adjustment
( c ) part payment received and kept in suspense a/c
( d ) Total provision held ***
5)Net advanced ( 1-4 )
23
6)Net NPA ( 2-4 )
7)Net NPA as a %age of Net Advance*excluding Technical
Write-off of Rs.________crore.**
Banks which do not maintain an interest suspense a/c to park the accrued interest
on NPAs may furnish the amount of interest receivable on NPAs
***Excluding amount of Technical write-off (Rs.______crore) and provision on
standard assets. (Rs._____crore)

2.9 ASSET CLASSIFICATION

2.9.1 STANDARD ASSETS:
Standard assets are the ones in which the bank is receiving interest as well as the
principal amount of the loan regularly from the customer. Here it is also very
important that in this case the arrears of interest and the principal amount of loan do
not exceed 90 days at the end of financial year. If asset fails to be in category of
standard asset that is amount due more than 90 days then it is NPA and NPAs are
further need to classify in sub categories. Banks are required to classify non-
performing assets further into the following three categories based on the period for
which the asset has remained non-performing and the reliability of the dues:
(1) Sub-standard Assets
(2) Doubtful Assets
(3) Loss Assets
(1) Sub-standard Assets:-
With effect from 31 March 2005, a sub standard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following features
are exhibited by sub standard assets: the current net worth of the borrowers /
guarantor or the current market value of the security charged is not enough to
ensure recovery of the dues to the banks in full; and the asset has well-defined
24
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.
(2) Doubtful Assets:-
A loan classified as doubtful has all the weaknesses inherent in assets that were
classified as sub-standard, with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known facts, conditions
and values highly questionable and improbable. With effect from March 31,
2005, an asset would be classified as doubtful if it remained in the sub-standard
category for 12 months.
(3) Loss Assets:-
A loss asset is one which considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted- although there may be some
salvage or recovery value. Also, these assets would have been identified as loss
assets by the bank or internal or external auditors or the RBI inspection but the
amount would not have been written-off wholly.

25
2.10 PROVISIONING NORMS
2.10.1 GENERAL
In order to narrow down the divergences and ensure adequate provisioning
by banks, it was suggested that a bank's statutory auditors, if they so desire,
could have a dialogue with RBI's Regional Office/ inspectors who carried
out the bank's inspection during the previous year with regard to the accounts
contributing to the difference.
Pursuant to this, regional offices were advised to forward a list of individual
advances, where the variance in the provisioning requirements between the
RBI and the bank is above certain cut off levels so that the bank and the
statutory auditors take into account the assessment of the RBI while making
provisions for loan loss, etc.
The primary responsibility for making adequate provisions for any
diminution in the value of loan assets, investment or other assets is that of
the bank managements and the statutory auditors. The assessment made by
the inspecting officer of the RBI is furnished to the bank to assist the bank
management and the statutory auditors in taking a decision in regard to
making adequate and necessary provisions in terms of prudential guidelines.
In conformity with the prudential norms, provisions should be made on the
non-performing assets on the basis of classification of assets into prescribed
categories as detailed in paragraphs 4supra. Taking into account the time lag
between an account becoming doubtful of recovery, its recognition as such,
the realization of the security and the erosion over time in the value of
security charged to the bank, the banks should make provision against sub-
standard assets, doubtful assets and loss assets as below:

26
 LOSS ASSETS:
The entire asset should be written off. If the assets are permitted to remain in the
books for any reason, 100 percent of the outstanding should be provided for.
DOUBTFUL ASSETS:
100 percent of the extent to which the advance is not covered by the realizable
value of the security to which the bank has a valid recourse and the realizable value
is estimated on a realistic basis.
In regard to the secured portion, provision may be made on the following basis, at
the rates ranging from 20 percent to 50 percent of the secured portion depending
upon the period for which the asset has remained doubtful:
Period for which the advance Provision requirement (%)
has been considered as doubtful

Up to one year 20

One to three years 30

More than three years: 60% with effect from March

31,2005.

(1)Outstanding stock of NPAs as 75% effect from March 31,

On March 31, 2004. 2006

(2)Advances classified as doubtful 100% with effect from March

More than year on or after 31,2006

27
Additional provisioning consequent upon the change in the definition of doubtful
assets effective from March 31, 2003 has to be made in phases as under:
As on31.03.2003, 50 percent of the additional provisioning requirement on the
assets which became doubtful on account of new norm of 18 months for transition
from sub-standard asset to doubtful category.
As on 31.03.2002, balance of the provisions not made during the previous year, in
addition to the provisions needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning consequent upon the
reduction in the transition period from substandard to doubtful asset from 18 to 12
months over a four year period commencing from the year ending March 31, 2005,
with a minimum of 20 % each year.
With a view to bringing down divergence arising out of difference in assessment of
the value of security, in cases of NPAs with balance of Rs.5 crore and above stock
audit at annual intervals by external agencies appointed as per the guidelines
approved by the Board would be mandatory in order to enhance the reliability on
stock valuation. Values appointed as per the guidelines approved by the Board of
Directors should get collaterals such as immovable properties charged in favour of
the bank valued once in three years.

SUB-STANDARD ASSETS:

A general provision of 10 percent on total outstanding should be made without

making any allowance for DICGC/ECGC guarantee cover and securities available.

STANDARD ASSETS:

From the year ending 31.03.2000, the banks should make a general provision of a
minimum of 0.40 percent on standard assets on global loan portfolio basis.

28
The provisions on standard assets should not be reckoned for arriving at net NPAs.
The provisions towards Standard Assets need not be netted from gross advances
but shown separately as 'Contingent Provisions against Standard Assets' under
'Other Liabilities and Provisions -Others' in Schedule 5 of the balance sheet.

2.10.2 FLOATING PROVISIONS:

Some of the banks make a 'floating provision' over and above the specific
provisions made in respect of accounts identified as NPAs. The floating provisions,
wherever available, could be set-off against provisions required to be made as per
above stated provisioning guidelines. Considering that higher loan loss
provisioning ads to the overall financial strength of the banks and the stability of
the financial sector, banks are urged to voluntarily set apart provisions much above
the minimum prudential levels as a desirable practice.

2.10.3 PROVISIONS ON LEASED ASSETS:

Leases are peculiar transactions where the assets are not recorded in the Leases are
peculiar transactions where the assets are not recorded in the books of the user of
such assets as Assets, whereas they are recorded in books of the user of such assets
as Assets, whereas they are recorded in the books of the owner even though the
physical existence of the asset is the books of the owner even though the physical
existence of the asset is with the user (lessee). __(AS19 ICAI)with the user (lessee).
__(AS19 ICAI)

2.10.4 SUB-STANDARD ASSETS: -

10 percent of the 'net book value' As per the 'Guidance Note on Accounting for
Leases' issued by the ICAI, 'Gross book value' of a fixed asset is its historical cost
or other amount substituted for historical cost in the books of account or financial
statements. Statutory depreciation should be shown separately in the Profit & Loss
29
Account. Accumulated depreciation should be deducted from the Gross Book
Value of the leased asset in the balance sheet of the lesser to arrive at the 'net book
value' Also, balance standing in 'Lease Adjustment Account' should be adjusted in
the 'net book value' of the leased assets. The amount of adjustment in respect of
each class of fixed assets may be shown either in the main balance sheet or in the
Fixed Assets Schedule as a separate column in the section related to leased assets.

2.10.5 DOUBTFUL ASSETS:-

100 percent of the extent to which the finance is not secured by the realizable value
of the leased asset. Realizable value to be estimated on a realistic basis.

In addition to the above provision, the following provision on the net book value of
the secured portion

Should be made, depending upon the period for which asset has been doubtful:

Period %age of provision

Up to one year 20
One to three years 30
More than three years 50

2.10.6 LOSS ASSETS:-

The entire asset should be written-off. If for any reason, an asset is allowed to
remain in books, 100 percent of the sum of the net investment in the lease and the
unrealized portion of finance income net of finance charge component should be
provided for. (Net book value')

30
2.11 GUIDELINES FOR PROVISIONS UNDER SPECIAL
CIRCUMSTANCES

2.11.1 GOVERNMENT GUARANTEED ADVANCES

With effect from 31 March 2000, in respect of advances sanctioned against State
Government guarantee, if the guarantee is invoked and remains in default for more
than two quarters (180 days at present), the banks should make normal provisions
as prescribed in paragraph 4.1.2above.

As regards advances guaranteed by State Governments, in respect of which

guarantee stood invoked as on 31.03.2000, necessary provision was allowed to be
made, in a phased manner, during the financial years ending 31.03.2000 to
31.03.2003 with a minimum of 25 percent each year.

Advances granted under rehabilitation packages approved by BIFR/term

lending institutions:

In respect of advances under rehabilitation package approved by BIFR/term

lending institutions, the provision should continue to be made in respect of dues to
the bank on the existing credit facilities as per their classification as sub-standard or
doubtful asset. As regards the additional facilities sanctioned as per package
finalized by BIFR and/or term lending institutions, provision on additional facilities
sanctioned need not be made for a period of one year from the date of
disbursement.

In respect of additional credit facilities granted to SSI units which are identified as
sick [as defined in RPCD circular No.PLNFS.BC.57/06.04.01/2001-2002 dated 16
January 2002] and where rehabilitation packages/nursing programmers have been

31
drawn by the banks themselves or under consortium arrangements, no provision
need be made for a period of one year.

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and
life policies are surrender, IVPs, KVPs, and life policies are exempted from
provisioning requirements.

However, advances against gold ornaments, government securities and all

other kinds of government securities and all other kinds of securities are not
exempted from provisioning.

2.10.2 TREATMENT OF INTEREST SUSPENSE ACCOUNT:

Amounts held in Interest Suspense Account should not be reckoned as part of

provisions. Amounts lying in the Interest Suspense Account should be deducted
from the relative advances and thereafter, provisioning as per the norms, should be
made on the balances after such deduction.

Advances covered by ECGC/DICGC guarantee

In the case of advances guaranteed by DICGC/ECGC, provision should be made

only for the balance in excess of the amount guaranteed by these Corporations.
Further, while arriving at the provision required to be made for doubtful assets,
realizable value of the securities should first be deducted from the outstanding
balance in respect of the amount guaranteed by these Corporations and then
provision made as illustrated here under:

Example

Outstanding Balance Rs. 4lakhs

DICGC Cover 50 percent
Period for which the advance has remained More than 3 years remained doubtful
32
doubtful
Value of security held(excludes worth of Rs. 1.50 lakhs
Rs.)

Provision required to be made

Outstanding balance Rs. 4.00 lakhs

Less: Value of security held Rs. 1.50 lakhs
Unrealized balance Rs. 2.50 lakhs
Less: DICGC Cover (50% of unrealizable
balance) Rs. 1.25 lakhs
Net unsecured balance Rs. 1.25 lakh
Provision for unsecured portion of Rs.1.25 lakhs @ 100 percent
advance
Provision for secured portion of advance Rs. 0.75 lakhs @ 50 percent
Total provision required to be made Rs. 2.00 lakhs

Advance covered by CGTSI guarantee

In case the advance covered by CGTSI guarantee becomes non-performing, no

provision need be made towards the guaranteed portion. The amount outstanding in
excess of the guaranteed portion should be provided for as per the extant guidelines
on provisioning for non-performing advances. Two illustrative examples are given
below:

Example I
33
Asset classification status: Doubtful More than 3 years;
75% of the amount outstanding or
CGTSI Cover 75% of the unsecured amount or
Rs.18.75 lakh, whichever is the least

Realizable value of Security Rs.1.50 lakh

Balance outstanding Rs.10.00 lakh
Less Realizable value of security Rs. 1.50 lakh
Unsecured amount Rs. 8.50 lakh
Less CGTSI cover (75%) Rs. 6.38 lakh
Net unsecured and uncovered portion: Rs. 2.12 lakh

Provision Required

Secured portion Rs.1.50 lakh Rs. 0.75 lakh 50%

Unsecured & uncovered portion Rs.2.12 lakh Rs. 2.12 lakh ( 100%)
Total provision required Rs. 2.87 lakh

2.10.3 TAKE-OUT FINANCE

The lending institution should make provisions against a 'take-out finance' turning
into NPA pending its take-over by the taking-over institution. As and when the
asset is taken-over by the taking-over institution, the corresponding provisions
could be reversed.

34
2.12 IMPACT OF NPA

PROFITABILITY:-

NPA means booking of money in terms of bad asset, which occurred due to wrong
choice of client. Because of the money getting blocked the prodigality of bank
decreases not only by the amount of NPA but NPA lead to opportunity cost also as
that much of profit invested in some return earning project/asset. So NPA doesnt
affect current profit but also future stream of profit, which may lead to loss of some
long-term beneficial opportunity. Another impact of reduction in profitability is
low ROI (return on investment), which adversely affect current earning of bank.

LIQUIDITY:-

Money is getting blocked, decreased profit lead to lack of enough cash at hand
which lead to borrowing money for shot\rtes period of time which lead to
additional cost to the company. Difficulty in operating the functions of bank is
another cause of NPA due to lack of money. Routine payments and dues.

INVOLVEMENT OF MANAGEMENT:-

Time and efforts of management is another indirect cost which bank has to bear
due to NPA. Time and efforts of management in handling and managing NPA
would have diverted to some fruitful activities, which would have given good
returns. Now days banks have special employees to deal and handle NPAs, which
is additional cost to the bank.

35
 CREDIT LOSS:-

Bank is facing problem of NPA then it adversely affect the value of bank in terms
of market credit. It will lose its goodwill and brand image and credit which have
negative impact to the people who are putting their money in the banks.

2.13 REASONS FOR NPA:

Reasons can be divided in to two broad categories:-

A] Internal Factor

B] External Factor

[A] INTERNAL FACTORS:-

Internal Factors are those, which are internal to the bank and are controllable by
banks.

Poor lending decision:

Non-Compliance to lending norms:

Lack of post credit supervision:

Failure to appreciate good payers:

Excessive overdraft lending:

Non Transparent accounting policy:

36
[B] EXTERNAL FACTORS:-

External factors are those, which are external to banks they are not controllable by
banks.

Socio political pressure:

Change in industry environment:

Endangers macroeconomic disturbances:

Natural calamities

Industrial sickness

Diversion of funds and willful defaults

Time/ cost overrun in project implementation

Labour problems of borrowed firm

Business failure

Inefficient management

Obsolete technology

Product obsolete

37
2.14 EARLY SYMPTOMS BY WHICH ONE CAN
RECOGNIZE A PERFORMING ASSET TURNING IN A
TURNING IN TO NON-PERFORMING ASSET

2.14.1 FOUR CATEGORIES OF EARLY SYMPTOMS:

(1) FINANCIAL:

Non-payment of the very first installment in case of term loan.

Bouncing of cheque due to insufficient balance in the accounts.

Irregularity in installment.

Irregularity of operations in the accounts.

Unpaid over due bills.

Declining Current Ratio.

Payment which does not cover the interest and principal amount of that
installment.

While monitoring the accounts it is found that partial amount is diverted to

sister concern or parent company.

(2) OPERATIONAL AND PHYSICAL:

If information is received that the borrower has either initiated theprocess of

winding up or are not doing the business.

Overdue receivables.

Stock statement not submitted on time.

38
 External non-controllable factor like natural calamities in the city where
borrower conduct his business.

Frequent changes in plan.

Non payment of wages.

(3) ATTITUDINAL CHANGES:

Use for personal comfort, stocks and shares by borrower.

Avoidance of contact with bank.

Problem between partners.

(4) OTHERS:

Changes in Government policies.

Death of borrower.

Competition in the market

39
2.15 PREVENTIVE MEASUREMENT FOR NPA

EARLY RECOGNITION OF THE PROBLEM:-

Invariably, by the time banks start their efforts to get involved in a revival process,
its too late to retrieve the situation- both in terms of rehabilitation of the project
and recovery of banks dues. Identification of weakness in the very beginning that
is : When the account starts showing first signs of weakness regardless of the fact
that it may not have become NPA, is imperative. Assessment of the potential of
revival may be done on the basis of a techno-economic viability study.
Restructuring should be attempted where, after an objective assessment of the
promoters intention, banks are convinced of a turnaround within a scheduled
timeframe. In respect of totally unviable units as decided by the bank, it is better to
facilitate winding up/ selling of the unit earlier, so as to recover whatever is
possible through legal means before the security position becomes worse.

IDENTIFYING BORROWERS WITH GENUINE INTENT:-

Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of
frontline officials at the branch level is paramount as they are the ones who has
intelligent inputs with regard to promoters sincerity, and capability to achieve
turnaround. Based on this objective assessment, banks should decide as quickly as
possible whether it would be worth while to commit additional finance.

In this regard banks may consider having Special Investigation of all financial
transaction or business transaction, books of account in order to ascertain real
factors that contributed to sickness of the borrower. Banks may have penal of
technical experts with proven expertise and track record of preparing techno-
economic study of the project of the borrowers. Borrowers having genuine
40
problems due to temporary mismatch in fund flow or sudden requirement of
additional fund may be entertained at branch level, and for this purpose a special
limit to such type of case should be decided. This will obviate the need to route the
additional funding through the controlling offices in deserving cases, and help avert
many accounts slipping into NPA category.

TIMELINESS AND ADEQUACY OF RESPONSE:-

Longer the delay in response, grater the injury to the account and the asset. Time is
a crucial element in any restructuring or rehabilitation activity. The response
decided on the basis of techno-economic study and promoters commitment, has to
be adequate in terms of extend of additional funding and relaxations etc. under the
restructuring exercise. The package of assistance may be flexible and bank may
look at the exit option.

FOCUS ON CASH FLOWS:-

While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading
picture. Appraisal for fresh credit requirements may be done by analyzing funds
flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow

MANAGEMENT EFFECTIVENESS:-

The general perception among borrower is that it is lack of finance that leads to
sickness and NPAs. But this may not be the case all the time. Management
effectiveness in tackling adverse business conditions is a very important aspect that
affects a borrowing units fortunes. A bank may commit additional finance to an
ailing unit only after basic viability of the enterprise also in the context of quality of
management is examined and confirmed. Where the default is due to deeper
malady, viability study or investigative audit should be done it will be useful to
41
have consultant appointed as early as possible to examine this aspect. A proper
techno-economic viability study must thus become the basis on which any future
action can be considered.

MULTIPLE FINANCING:-

A. During the exercise for assessment of viability and restructuring, a Pragmatic

and unified approach by all the lending banks/ FIs as also sharing of all relevant
information on the borrower would go along way toward overall success of
rehabilitation exercise, given the probability of success/failure.

B. In some default cases, where the unit is still working, the bank should make sure
that it captures the cash flows(there is a tendency on part of the borrowers to switch
bankers once they default, for fear of getting their cash flows forfeited), and ensure
that such cash flows are used for working capital purposes. Toward this end, there
should be regular flow of information among consortium members. A bank, which
is not part of the consortium, may not be allowed to offer credit facilities to such
defaulting clients. Current account facilities may also be denied at non-consortium
banks to such clients and violation may attract penal action. The Credit Information
Bureau of India Ltd(CIBIL)maybe very useful for meaningful information
exchange on defaulting borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one set
of lenders may be willing to wait for a longer time to recover its dues, another
lender may have a much shorter timeframe in mind. So it is possible that the letter
categories of lenders may be willing to exit, even at a cost by a discounted
settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may
take this aspect into account.
D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to
provide a timely and transparent system for restructuring of the corporate debt of
42
Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the
legal framework. Under this system, banks may greatly benefit in terms of
restructuring of large standard accounts (potential NPAs) and viable sub-standard
accounts with consortium/multiple banking arrangements

Once NPA occurred, one must come out of it or it should be managed inmost
efficient manner. Legal ways and means are there to over come and manage NPAs.
We will look into each one of it.

2.16 TOOLS FOR RECOVERY

2.16.1 WILLFUL DEFAULT:-

A] Lok Adalat and Debt Recovery Tribunal

B] Securitization Act

C] Asset Reconstruction

LOK ADALAT:

Lok Adalat institutions help banks to settle disputes involving account in

doubtful and loss category, with outstanding balance of Rs.5 lakh for
compromise settlement under Lok Adalat. Debt recovery tribunals have been
empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and
above. This mechanism has proved to be quite effective for speedy justice and
recovery of small loans. The progress through this channel is expected to pick up in
the coming years.

DEBT RECOVERY TRIBUNALS(DRT):

The recovery of debts due to banks and financial institution passed in March 2000
has helped in strengthening the function of DRTs. Provision for placement of more
43
than one recovery officer, power to attach defendants property/assets before
judgment, penal provision for disobedience of tribunals order or for breach of any
terms of order and appointment of receiver with power of realization, management,
protection and preservation of property are expected to provide necessary teeth to
the DRTs and speed up the recovery of NPAs in the times to come. DRTs which
have been set up by the Government to facilitate speedy recovery by banks/DFIs,
have not been able make much impact on loan recovery due to variety of reasons
like inadequate number, lack of infrastructure, under staffing and frequent
adjournment of cases. It is essential that DRT mechanism is strengthened and
vested with a proper enforcement mechanism to enforce their orders. Non
observation of any order passed by the tribunal should amount to contempt of
court, the DRT should have right to initiate contempt proceedings. The DRT should
empowered to sell asset of the debtor companies and forward the proceed to the
winding up court for distribution among the lenders

2.16.2 INABILITY TO PAY

CONSORTIUM ARRANGEMENT

Asset classification of accounts under consortium should be based on the record of

recovery of the individual member banks and other aspects having a bearing on the
recoverability of the advances Where the remittances by the borrower under
consortium lending arrangements are pooled with one bank and/or where the bank
receiving remittances is not parting with the share of other member banks, the
account will be treated as not serviced in the books of the other member banks and
therefore, be treated as NPA. The banks participating in the consortium should,
therefore, arrange to get their share of recovery transferred from the lead bank or
get an express consent from the lead bank for the transfer of their share of recovery,
to ensure proper asset classification in their respective books.

44
 CORPORATE DEBT RESTRUCTURING (CDR):

BACKGROUND

In spite of their best efforts and intentions, sometimes corporate find themselves in
financial difficulty because of factors beyond their control and also due to certain
internal reasons. For the revival of the corporate as well as for the safety of the
money lent by the banks and FIs, timely support through restructuring in genuine
cases is called for. However, delay in agreement amongst different lending
institutions often comes in the way of such endeavors. Based on the experience in
other countries like the U.K., Thailand, Korea, etc. of putting in place institutional
mechanism for restructuring of corporate debt and need for a similar mechanism in
India, a Corporate Debt Restructuring System has been evolved, as under :

OBJECTIVE

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure

timely and transparent mechanism for restructuring of the corporate debts of viable
entities facing problems, outside the purview of BIFR, DRT and other legal
proceedings, for the benefit of all concerned.

In particular, the framework will aim at preserving viable corporate that are
affected by certain internal and external factors and minimize the losses to the
creditors and other stakeholders through an orderly and coordinated restructuring
programmed Structure:

CDR system in the country will have a three-tier structure:

(A) CDR Standing Forum

(B) CDR Empowered Group

(C) CDR Cell

45
(A) CDR STANDING FORUM:

The CDR Standing Forum would be the representative general body of all financial
institutions and banks participating in CDR system. All financial institutions and
banks should participate in the system in their own interest. CDR Standing Forum
will be a self-empowered body, which will lay down policies and guidelines, guide
and monitor the progress of corporate debt restructuring. The Forum will also
provide an official platform for both the creditors and borrowers (by consultation)
to amicably and collectively evolve policies and guidelines for working out debt
restructuring plans in the interests of all concerned. The CDR Standing Forum shall
comprise Chairman & Managing Director, Industrial Development Bank of India;
Managing Director, Industrial Credit & Investment Corporation of India Limited;
Chairman, State Bank of India; Chairman, Indian Banks Association and Executive
Director, Reserve Bank of India as well as Chairmen and Managing Directors of all
banks and financial institutions participating as permanent members in the system.
The Forum will elect its Chairman for a period of One year and the principle of
rotation will be followed in the subsequent years. However, the Forum may decide
to have a Working Chairman as a whole-time officer to guide and carry out the
decisions of the CDR Standing Forum. A CDR Core Group will be carved out of
the CDR Standing Forum to assist the Standing Forum in convening the meetings
and taking decisions relating to policy, on behalf of the Standing Forum. The Core
Group will consist of Chief Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank
of India, Punjab National Bank, Indian Banks Association and a representative of
Reserve Bank of India. The CDR Standing Forum shall meet at least once every six
months and would review and monitor the progress of corporate debt restructuring
system. The Forum would also lay down the policies and guidelines to be followed
by the CDR Empowered Group and CDR Cell for debt restructuring and would
ensure their smooth functioning and adherence to the prescribed time schedules for

46
debt restructuring. It can also review any individual decisions of the CDR
Empowered Group and CDR Cell. The CDR Standing Forum, the CDR
Empowered Group and CDR Cell (described in following paragraphs) shall be
housed in IDBI. All financial institutions and banks shall share the administrative
and other costs. The sharing pattern shall be as determined by the Standing Forum.

(B) CDR EMPOWERED GROUP AND CDR CELL:

The individual cases of corporate debt restructuring shall be decided by the CDR
Empowered Group, consisting of ED level representatives of IDBI, ICICI Limited
and SBI as standing members, in addition to ED level representatives of financial
institutions and banks who have an exposure to the concerned company. In order to
make the CDR Empowered Group effective and broad based and operate efficiently
and smoothly, it would have to be ensured that each financial institution and bank,
as participants of the CDR system, nominates a panel of two or three EDs, one of
whom will participate in a specific meeting of the Empowered Group dealing with
individual restructuring cases. Where, however, a bank / financial institution has
only one Executive Director, the panel may consist of senior officials, duly
authorized by its Board. The level of representation of banks/ financial institutions
on the CDR Empowered Group should be at a sufficiently senior level to ensure
that concerned bank / FI abides by the necessary commitments including sacrifices,
made towards debt restructuring. The Empowered Group will consider the
preliminary report of all cases of requests of restructuring, submitted to it by the
CDR Cell. After the Empowered Group decides that restructuring of the company
is prima-facie feasible and the enterprise is potentially viable in terms of the
policies and guidelines evolved by Standing Forum, the detailed restructuring
package will be worked out by the CDR Cell in conjunction with the Lead
Institution. The CDR Empowered Group would be mandated to look into each case
of debt restructuring, examine the viability and rehabilitation potential of the
47
Company and approve the restructuring package within a specified time frame of
90 days or at best 180 days of reference to the Empowered Group.

There should be a general authorization by the respective Boards of the

participating institutions / banks in favour of their representatives on the CDR
Empowered Group, authorizing them to take decisions on behalf of their
organization, regarding restructuring of debts of individual corporate. The decisions
of the CDR Empowered Group shall be final and action-reference point. If
restructuring of debt is found viable and feasible and accepted by the Empowered
Group, the company would be put on the restructuring mode. If, however,
restructuring is not found viable, the creditors would then be free to take necessary
steps for immediate recovery of dues and / or liquidation or winding up of the
company, collectively or individually.

(C) CDR CELL:

The CDR Standing Forum and the CDR Empowered Group will be assisted by a
CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of the
proposals received from borrowers / lenders, by calling for proposed rehabilitation
plan and other information and put up the matter before the CDR Empowered
Group, within one month to decide whether rehabilitation is prima facie feasible, if
so, the CDR Cell will proceed to prepare detailed Rehabilitation Plan with the help
of lenders and if necessary, experts to be engaged from outside. If not found prima
facie feasible, the lenders may start action for recovery of their dues. To begin with,
CDR Cell will be constituted in IDBI, Mumbai and adequate members of staff for
the Cell will be deputed from banks and financial institutions. The CDR Cell may
also take outside professional help. The initial cost in operating the CDR
mechanism including CDR Cell will be met by IDBI initially for one year and then
from contribution from the financial institutions and banks in the Core Group at the

48
rate of Rs.50lakh each and contribution from other institutions and banks at the rate
of Rs.5 lakh each. All references for corporate debt restructuring by lenders or
borrowers will be made to the CDR Cell. It shall be the responsibility of the lead
institution / major stakeholder to the corporate, to work out a preliminary
restructuring plan in consultation with other stakeholders and submit to the CDR
Cell within one month. The CDR Cell will prepare the restructuring plan in terms
of the general policies and guidelines approved by the CDR Standing Forum and
place for the consideration of the Empowered Group within 30 days for decision.
The Empowered Group can approve or suggest modifications, so, however, that a
final decision must be taken within a total period of 90 days. However, for
sufficient reasons the period can be extended maximum up to 180 days from
thedate of reference to the CDR Cell.

2.15.3 OTHER FEATURES:

CDR will be a Non-statutory mechanism.CDR mechanism will be a voluntary

system based on debtor-creditor agreement and inter-creditor agreement. The
scheme will not apply to accounts involving only one financial institution or one
bank. The CDR mechanism will cover only multiple banking accounts /
syndication / consortium accounts with outstanding exposure of Rs.20 crore and
above by banks and institutions. The CDR system will be applicable only to
standard and sub-standard accounts. However, as an interim measure, permission
for corporate debt restructuring will be made available by RBI on the basis of
specific recommendation of CDR "Core-Group", if a minimum of 75 per cent (by
value) of the lenders constituting banks and FIs consent for CDR, irrespective of
differences in asset classification status in banks/ financial institutions. There
would be no requirement of the account / company being sick, NPA or being in
default for a specified period before reference to the CDR Group. However,

49
potentially viable cases of NPAs will get priority. This approach would provide the
necessary flexibility and facilitate timely intervention for debt restructuring.
Prescribing any milestone(s) may not be necessary, since the debt restructuring
exercise is being triggered by banks and financial institutions or with their consent.
In no case, the requests of any corporate indulging in willful default or misfeasance
will be considered for restructuring under CDR. Reference to Corporate Debt
Restructuring System could be triggered by

1. Any or more of the secured creditor who have minimum20% share in either
working capital or term finance, or

2. by the concerned corporate, if supported by a bank or financial institution having

stake as in (i) above.

LEGAL BASIS

The legal basis to the CDR mechanism shall be provided by the Debtor-Creditor
Agreement (DCA)and the Inter-Creditor Agreement. The debtors shall have to
accede to the DCA, either at the time of original loan documentation (for future
cases) or at the time of reference to Corporate Debt Restructuring Cell. Similarly,
all participants in the CDR mechanism through their membership of the Standing
Forum shall have to enter into a legally binding agreement, with necessary
enforcement and penal clauses, to operate the System through laid-down policies
and guidelines.

STAND-STILL CLAUSE:

One of the most important elements of Debtor-Creditor Agreement would be

'Stand still' agreement binding for 90days, or 180 days by both sides. Under this
clause, both the debtor and creditor(s) shall agree to a legally binding 'stand-still'
whereby both the parties commit themselves not to taking recourse to any other
50
legal action during the 'stand-still' period, this would be necessary for enabling the
CDR System to undertake the necessary debt restructuring exercise without any
outside intervention judicial or otherwise. The Inter-Creditors Agreement would be
a legally binding agreement amongst the secured creditors, with necessary
enforcement and penal clauses, wherein the creditors would commit themselves to
abide by the various elements of CDR system. Further, the creditors shall agree that
if 75% of secured creditors by value, agree to a debt restructuring package, the
same would be binding on the remaining secured creditors.

2.17 ACCOUNTING TREATMENT FOR RESTRUCTURE

ACCOUNTS
The accounting treatment of accounts restructured under CDR would be governed
by the prudential norms indicated in circular DBOD. BP. BC. 98 /21.04.048 /
2000-01 dated March 30, 2001. Restructuring of corporate debts under CDR could
take place in the following stages:

Before commencement of commercial production;

After commencement of commercial production but before the asset has been
classified as sub-standard;

After commencement of commercial production and the asset has been classified
as sub-standard. The prudential treatment of the accounts, subjected to restructuring
under CDR, would be governed by the following norms:

2.17.1 TREATMENT OF STANDARD ACCOUNTS

RESTRUCTURED UNDER CDR:
A rescheduling of the installments of principal alone, at any of the a fore said first
two stages [paragraph 5(a) and (b) above] would not cause a standard asset to be

51
classified in the sub-standard category, provided the loan / credit facility is fully
secured.

A rescheduling of interest element at any of the foregoing first two stages would
not cause an asset to be downgraded to sub-standard category subject to the
condition that the amount of sacrifice, if any, in the element of interest, measured in
present value terms, is either written off or provision is made to the extent of the
sacrifice involved. For the purpose, the future interest due as per the original loan
agreement in respect of an account should be discounted to the present value at a
rate appropriate to the risk category of the borrower (i.e. current PLR + the
appropriate credit risk premium for the borrower-category) and compared with the
present value of the dues expected to be received under the restructuring package,
discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value

terms, as at (b) above, the amount of sacrifice should either be written off or
provision made to the extent of the sacrifice involved

2.17.2 TREATMENT OF SUB-STANDARD ACCOUNTS

RESTRUCTURED UNDER CDR
A rescheduling of the installments of principal alone would render a sub-standard
asset eligible to be continued in the sub-standard category for the specified period,
provided the loan / credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to be

continued to be classified in sub-standard category for the specified period subject
to the condition that the amount of sacrifice, if any, in the element of interest,
measured in present value terms, is either written off or provision is made to the
extent of the sacrifice involved.

52
For the purpose, the future interest due as per the original loan agreement in respect
of an account should be discounted to the present value at a rate appropriate to the
risk category of the borrower (i.e., current PLR + the appropriate credit risk
premium for the borrower-category) and compared with the present value of the
dues expected to be received under the restructuring package, discounted on the
same basis.

In case there is a sacrifice involved in the amount of interest in present value terms,
as at (b) above, the amount of sacrifice should either be written off or provision
made to the extent of the sacrifice involved. Even in cases where the sacrifice is by
way of write off of the past interest dues, the asset should continue to be treated as
sub-standard.

The sub-standard accounts at (ii) (a), (b) and (c) above, which have been subjected
to restructuring, etc. whether in respect of principal installment or interest amount,
by whatever modality, would be eligible to be upgraded to the standard category
only after the specified period, i.e., a period of one year after the date when first
payment of interest or of principal, whichever is earlier, falls due, subject to
satisfactory performance during the period. The amount of provision made earlier,
net of the amount provided for the sacrifice in the interest amount in present value
terms as aforesaid, could also be reversed after the one-year period.

During this one-year period, the sub-standard asset will not deteriorate in its
classification if satisfactory performance of the account is demonstrated during the
period. In case, however, the satisfactory performance during the one year period is
not evidenced, the asset classification of the restructured account would be
governed as per the applicable prudential norms with reference to the pre-
restructuring payment schedule.

53
The asset classification under CDR would continue to be bank-specific based on
record of recovery of each bank, as per the existing prudential norms applicable to
banks.

2.17.3 RESTRUCTURING / RESCHEDULING OF LOANS

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

Following representations from banks that the foregoing stipulations deter the
banks from restructuring of standard and sub-standard loan assets even though the
modification of terms might not jeopardize the assurance of repayment of dues
from the borrower, the norms relating to restructuring of standard and sub-standard
assets were reviewed in March2001. In the context of restructuring of the accounts,
the following stages at which the restructuring / rescheduling / renegotiation of the
terms of loan agreement could take place can be identified:

Before commencement of commercial production;

After commencement of commercial production but before the asset has

been classified as sub standard,

In each of the foregoing three stages, the rescheduling, etc., of principal

and/or of interest could take place, with or without sacrifice, as part of the
restructuring package evolved.

54
2.17.4 UP GRADATION OF RESTRUCTURED ACCOUNTS:
The sub-standard accounts which have been subjected to restructuring etc., whether
in respect of principal installment or interest amount, by whatever modality, would
be eligible to be upgraded to the standard category only after the specified period
i.e., a period of one year after the date when first payment of interest or of
principal, whichever is earlier, falls due, subject to satisfactory performance during
the period. The amount of provision made earlier, net of the amount provided for
the sacrifice in the interest amount in present value terms as aforesaid, could also
be reversed after the one year period.

During this one-year period, the sub-standard asset will not deteriorate in its
classification if satisfactory performance of the account is demonstrated during the
period. In case, however, the satisfactory performance during the one-year period is
not evidenced, the asset classification of the restructured account would be
governed as per the applicable prudential norms with reference to the pre-
restructuring payment schedule.

2.18 GENERAL:

These instructions would be applicable to all type of credit facilities including

working capital limits, extended to industrial units, and provided they are fully
covered by tangible securities. As trading involves only buying and selling of
commodities and the problems associated with manufacturing units such as
bottleneck in commercial production, time and cost escalation etc. are not
applicable to them, these guidelines should not be applied to restructuring/
rescheduling of credit facilities extended to traders.

While assessing the extent of security cover available to the credit facilities, which
are being restructured/ rescheduled, collateral security would also be reckoned,

55
provided such collateral is a tangible security properly charged to the bank and is
not in the intangible form like guarantee etc. of the promoter/ others.

2.19 INCOME RECOGNITION

There will be no change in the existing instructions on income recognition.

Consequently, banks should not recognize income on accrual basis in respect of the
projects even though the asset is classified as a standard asset if the asset is a "non
performing asset" in terms of the extant instructions. In other words, while the
accounts of the project maybe classified as a standard asset, banks shall recognize
income in such accounts only on realization on cash basis if the asset has otherwise
become none performing as per the extant delinquency norm of 180 days.

The delinquency norm would become 90 days with effect from 31

March2004.Consequently, banks, which have wrongly recognized income in the
past, should reverse the interest.

If it was recognized as income during the current year or make a provision for an
equivalent amount if it was recognized as income in the previous year(s). As
regards the regulatory treatment of income recognized as funded interest and
conversion into equity, debentures or any other instrument banks should adopt the
following:

FUNDED INTEREST:

Income recognition in respect of the NPAs, regardless of whether these are or are
not subjected to restructuring/rescheduling/ renegotiation of terms of the loan
agreement, should be done strictly on cash basis, only on realization and not if the
amount of interest overdue has been funded. If, however, the amount of funded
interest is recognized as income, a provision for an equal amount should also be

56
made simultaneously. In other words, any funding of interest in respect of NPAs, if
recognized as income, should be fully provided for.

CONVERSION INTO EQUITY DEBENTURES OR ANY OTHER

INSTRUMENT:

The amount outstanding converted into other instruments would normally comprise
principal and the interest components. If the amount of interest dues is converted
into equity or any other instrument and income is recognized in consequence, full
provision should be made for the amount of income so recognized to offset the
effect of such income recognition. Such provision would be in addition to the
amount of provision that may be necessary for the depreciation in the value of the
equity or other instruments, as per the investment valuation norms. However, if the
conversion of interest is into equity, which is quoted, interest income can be
recognized at market value of equity, as on the date of conversion, not exceeding
the amount of interest converted to equity. Such equity must here after be classified
in the "available for sale" category and valued at lower of cost or market value. In
case of conversion of principal and /or interest in respect of NPAs into debentures,
such debentures should be treated as NPA, an initio, in the same asset classification
as was applicable to loan just before conversion and provision made as per norms.
This norm would also apply to zero coupon bonds or other instruments which seek
to defer the liability of the issuer.

On such debentures, income should be recognized only on realization basis. The

income in respect of unrealized interest, which is converted into debentures or any
other fixed maturity instrument, should be recognized only on redemption of such
instrument. Subject to the above, the equity shares or other instruments arising
from conversion of the principal amount of loan would also be subject to the usual
prudential valuation norms as applicable to such instruments.

57
2.20 SPECIAL CASES

2.20.1ACCOUNTS WITH TEMPORARY DEFICIENCIES:

The classification of an asset as NPA should be based on the record of recovery.

Bank should not classify an advance account as NPA merely due to the existence of
some deficiencies which are temporary in nature such as non-availability of
adequate drawing power based on the latest available stock statement, balance
outstanding exceeding the limit temporarily, non-submission of stock statements
and non-renewal of the limits on the due date, etc. In the matter of classification of
accounts with such deficiencies banks may follow the following guidelines:

Banks should ensure that drawings in the working capital accounts are covered by
the adequacy of current assets, since current assets are first appropriated in times of
distress. Drawing power is required to be arrived at based on the stock statement
which is current. However, considering the difficulties of large borrowers, stock
statements relied upon by the banks for determining drawing power should not be
older than three months. The outstanding in the account based on drawing power
calculated from stock statements older than three months, would be deemed as
irregular. A working capital borrower account will become NPA if such irregular
drawings are permitted in the account for a continuous period of 180 days even
though the unit may be working or the borrower's financial position is satisfactory.

Regular and ad hoc credits limits need to be reviewed/ regularized not later than
three months from the due date/date of ad hoc sanction. Incase of constraints such
as non-availability of financial statements and other data from the borrowers, the
branch should furnish evidence to show that renewal/ review of credit limits is
already on and would be completed soon. In any case, delay beyond six months is
not considered desirable as a general discipline. Hence, an account where the

58
regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from
the due date/ date of ad hoc sanction will be treated as NPA.

2.20.2 ACCOUNTS REGULARIZED NEAR ABOUT THE

BALANCE SHEET DATE:
The asset classification of borrower accounts where a solitary or a few credits are
recorded before the balance sheet date should be handled with care and without
scope for subjectivity. Where the account indicates inherent weakness on the basis
of the data available, the account should be deemed as a NPA. In other genuine
cases, the banks must furnish satisfactory evidence to the Statutory
Auditors/Inspecting Officers about the manner of regularization of the account to
eliminate doubts on their performing status.

2.20.3 ASSET CLASSIFICATION TO BE BORROWER-WISE

AND NOT FACILITY-WISE
It is difficult to envisage a situation when only one facility to a borrower becomes a
problem credit and not others. Therefore, all the facilities granted by a bank to a
borrower will have to be treated as NPA and not the particular facility or part
thereof which has become irregular. If the debits arising out of devolvement of
letters of credit or invoked guarantees are parked in a separate account, the balance
outstanding in that account also should be treated as a part of the borrowers
principal operating account for the purpose of application of prudential norms on
income recognition, asset classification and provisioning.

59
2.20.4 ACCOUNTS WHERE THERE IS EROSION IN THE
VALUE OF SECURITY

A NPA need not go through the various stages of classification incases of serious
credit impairment and such assets should be straight away classified as doubtful or
loss asset as appropriate. Erosion in the value of security can be reckoned as
significant when the realizable value of the security is less than 50 per cent of the
value assessed by the bank or accepted by RBI at the time of last inspection, as the
case maybe. Such NPAs may be straightaway classified under doubtful category
and provisioning should be made as applicable to doubtful assets. If the realizable
value of the security, as assessed by the bank/approved values/ RBI is less than 10
per cent of the outstanding in the borrower accounts, the existence of security
should be ignored and the asset should be straightaway classified as loss asset. It
may be either written off or fully provided for by the bank

2.20.5 ADVANCES TO PACS/FSS CEDED TO COMMERCIAL

BANKS:
In respect of agricultural advances as well as advances for other purposes granted
by banks to ceded PACS/ FSS under the on-lending system, only that particular
credit facility granted to PACS/ FSS which is in default for a period of two harvest
seasons (not exceeding two half years)/two quarters, as the case may be, after it has
become due will be classified as NPA and not all the credit facilities sanctioned to a
PACS/FSS. The other direct loans & advances, if any, granted by the bank to the
member borrower of a PACS/ FSS outside the on-lending arrangement will become
NPA even if one of the credit facilities granted to the same borrower becomes
NPA.

60
2.20.6 ADVANCES AGAINST TERM DEPOSITS, NSCS,
KVP/IVP, ETC:

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life
policies need not be treated as NPAs. Advances against gold ornaments,
government securities and all other securities are not covered by this exemption.

Loans with moratorium for payment of interest Loans with moratorium for
payment of interest In the case of bank finance given for industrial projects or for
agricultural plantations etc. where moratorium is available for payment of interest,
payment of interest becomes 'due' only after the moratorium or gestation period is
over. Therefore, such amounts of interest do not become overdue and hence NPA,
with reference to the date of debit of interest. They become overdue after due date
for payment of interest, if uncollected.

In the case of housing loan or similar advances granted to staff members where
interest is payable after recovery of principal, interest need not be considered as
overdue from the first quarter onwards. Such loans/advances should be classified as
NPA only when there is a default in repayment of installment of principal or
payment of interest on the respective due dates

2.20.7 AGRICULTURAL ADVANCES

In respect of advances granted for agricultural purpose where interest and/or
installment of principal remains unpaid after it has become past due for two harvest
seasons but for a period not exceeding two half-years, such an advance should be
treated as NPA. The above norms should be made applicable to all direct
agricultural advances as listed at items 1.1, 1.1.2 (i) to (vii), 1.1.2 (viii)(a)(1) and
1.1.2 (viii)(b)(1) of Master Circular on lending to priority sector No. RPCD. PLAN
BC. 12/04.09.01/2001- 2002 dated 1 August 2001. An extract of the list of these

61
items is furnished in the Annexure II. In respect of agricultural loans, other than
those specified above, identification of NPAs would be done on the same basis as
non agricultural advances which, at present, are the 180 days delinquency norm.
Where natural calamities impair the repaying capacity of agricultural borrowers,
banks may decide on their own as a relief measure.

In such cases of conversion or re-schedulement, the term loan as well as fresh

short-term loan may be treated as current dues and need not be classified as NPA.
The asset classification of these loans would thereafter be governed by the revised
terms & conditions and would be treated as NPA if interest and/or installment of
principal remains unpaid, for two harvest seasons but for a period not exceeding
two half years.

2.20.8 GOVERNMENT GUARANTEED ADVANCES:

The credit facilities backed by guarantee of the Central Government though

overdue may be treated as NPA only when the Government repudiates its guarantee
when invoked. This exemption from classification of Government guaranteed
advances as NPA is not for the purpose of recognition of income. With effect from
1st April 2000, advances sanctioned against State Government guarantees should
be classified as NPA in the normal course, if the guarantee is invoked and remains
in default for more than two quarters. With effect from March 31, 2001 the period
of default is revised as more than 180 days.

62
 CHAPTER -3

ANALYSIS

For the purpose of analysis and comparison between private sector and public
sector banks, we take three-three banks in both sectors to compare then on
performing assets of banks. For understanding we further bifurcate the non
performing assets in priority sector and non priority sector, gross NPA and net
NPA in percentage as well as in rupees, deposit investment advances. Deposit
Investment Advances is the first in the analysis because due to these we can
understand the where the bank stands in the competitive market. As at end of the
year, in private sector ICICI Bank is the highest deposit-investment-advances
figures in rupees crore, second is HDFC Bank and AXIS Bank has least figures.

In public sector banks PUNJAB NATIONAL BANK has highest deposit-

investment-advances but when we look at graph BANK OF BARODA is second
and Bank of India has least figures in public sector bank. When we compare the
private sector banks with public sector banks among these banks, we can
understand the more number of people prefer to choose public sector banks for
deposit-investment. But when we compare the public sector banks PNB Bank with
the private sector bank ICICI Bank is more deposit-investment figures and first in
the all banks.

63
DEPOSIT-INVESTMENT AND ADVANCES (RS.CRORE)
OF BOTH SECTOR BANKS AND COMPARISON
AMONG THEM AT THE END OF YEAR (2007-08)

PRIVATE SECTORS BANK

Table no- 3.1

BANK DEPOSIT INVESTMENT ADVANCES

AXIS 87626 33705 59661
HDFC 100769 49394 63427
ICICI 244431 111454 225616
TOTAL 332826 194553 348704

Graph no-3.1
300000

250000

200000
AXIS
150000
HDFC

100000 ICICI

50000

0
DEPOSIT INVESTMENT ADVANCES

Conclusion:- In private sector ICICI Bank is the highest deposit-investment-

advances figures in rupees crore, second is HDFC Bank and AXIS Bank has least
figures.
64
PUBLIC SECTORS BANK

Table no-3.2
BANK DEPOSIT INVESTMENT ADVANCES
PNB 166457 53992 119502

BOB 152034 43870 106701

BOI 150012 41803 113476

Graph no-3.2
300000

250000

200000

PNB
150000
ICICI

100000

50000

0
DEPOSIT INVESTMENT ADVANCES

Conclusion:- In public sector banks PUNJAB NATIONAL BANK has highest

deposit-investment-advances but when we look at graph BANK OF BARODA is
second and Bank of India has least figures in public sector bank

65
COMPARISON OF PRIVATE SECTOR BANK ICICI AND PUBLIC
SECTOR BANK PNB

Table no-3.3 2012(IN CRORES)

DEPOSIT INVESTMENT ADVANCES

ICICI 244431 111454 225616

PNB 166457 53992 119502

Graph no-3.3

300000

250000

200000

150000 PNB
ICICI
100000

50000

0
DEPOSIT INVESTMENT ADVANCES

Conclusion:-when we compare the public sector banks PNB Bank with the private
sector bank ICICI Bank is more deposit-investment figures and first in the all
banks.

66
There are two concepts related to non-performing assets_ gross and net. Gross
refers to all NPAs on a banks balance sheet irrespective of the provisions made. It
consists of all the non standard assets, viz. substandard, doubtful, and loss assets. A
loan asset is classified as sub standard if it remains NPA up to a period of 18
months; doubtful if it remains NPA for more than 18 months; and loss, without
any waiting period, where the dues are considered not collectible or
marginallycollectible.Net NPA is gross NPA less provisions. Since in India, bank
balance sheets contains a huge amount of NPAs and the process of recovery and
write off of loans is very time consuming, the provisions the banks have to make
against the NPA according to the central bank guidelines, are quite significant.
Here, we can see that there is huge difference between gross and net NPA.

While gross NPA reflects the quality of the loans made by banks, net NPA shows
the actual burden of banks.

The requirements for provisions are:

100% for loss assets

100% of the unsecured portion plus 20-50% of the secured portion, depending on
the period for which the account has remained in the doubtful category

10% general provision on the outstanding balance under the substandard

category.

Here, there are gross and net NPA data for 2006-07 and 2007-08 we taken for
comparison among banks. These data are NPA AS PERCENTAGE OF TOTAL
ASSETS. As we discuss earlier that gross NPA reflects the quality of the loans
made by banks. Among all the banks BOI Banks has highest gross NPA as a
percentage of total assets in the year 2006-07 and also net NPA. In 2007-08 BOB
has least net NPA and gross NPA.
67
COMPARISON OF GROSS NPA AND NET NPA IN PUBLIC SECTORS
BANKS IN 2006-07

Table no-3.4 2006-07(IN %)

BANK GROSS NPA NET NPA

BOI 1.48 .45
BOB 1.46 .35
PNB 2.09 .45

Graph no-3.4 2006-07(IN %)

2
1.8
1.6
1.4
1.2
1 GROSS NPA

0.8 NET NPA

0.6
0.4
0.2
0
AXIS HDFC ICICI

Conclusion:- Among all the banks BOI Banks has highest gross NPA as a
percentage of total assets in the year 2006-07 and also net NPA

68
COMPARISON OF GROSS NPA AND NET NPA IN PUBLIC SECTORS
BANKS IN 2007-08

Table no-3.5 2007-08(IN %)

BANK GROSS NPA NET NPA

BOI 1.08 .33
BOB 1.10 .27
PNB 1.67 .38

Graph no-3.5 2007-08 (IN %)

2
1.8
1.6
1.4
1.2
1 GROSS NPA

0.8 NET NPA

0.6
0.4
0.2
0
AXIS HDFC ICICI

Conclusion:-In 2007-08 BOB has least net NPA and gross NPA.

69
COMPARISON OF GROSS NPA AND NET NPA IN PRIVATE SECTORS
BANKS IN 2006-07

Table no-3.6 2006-07(IN %)

GROSS NPA NET NPA

AXIS .57 .36
HDFC .72 .22
ICICI 1.20 .58

Graph no-3.6
2
1.8
1.6
1.4
1.2
1 GROSS NPA

0.8 NET NPA

0.6
0.4
0.2
0
AXIS HDFC ICICI

Conclusion:-Among all the banks ICICI Banks has highest gross NPA as a
percentage of total assets in the year 2006-07 and also net NPA

70
COMPARISON OF GROSS NPA AND NET NPA IN PRIVATE SECTORS
BANKS IN 2007-08

Table no-3.7

BANK GROSS NPA NET NPA

AXIS .45 .23
HDFC .68 .22
ICICI 1.90 .87

Graph no-3.7
2

1.8

1.6

1.4

1.2

1 GROSS NPA

0.8 NET NPA

0.6

0.4

0.2

0
AXIS HDFC ICICI

Conclusion:-Among all the banks ICICI Banks has highest gross NPA as a
percentage of total assets in the year 2007-08 and also net NPA

71
 COMPARISON OF GROSS NPA WITH ALL BANKS FOR THEYEAR
2007-08

The growing NPAs affect the health of banks, profitability and efficiency. In the
long run, it eats up the net worth of the banks. We can say that NPA is not a healthy
sign for financial institutions. If we compare in private sector banks AXIS and
HDFC Bank are below average of all banks and in public sector BOB and BOI.
The highest NPA is having by the ICICI BANK that is 1.90.

Table no-3.8
BANK GROSS NPA
AXIS .45
HDFC .68
ICICI 1.90
BOI 1.08
BOB 1.10
PNB 1.67

Graph no-3.8
GROSS NPA
2
1.8
1.6
1.4
1.2
1
GROSS NPA
0.8
0.6
0.4
0.2
0
AXIS HDFC ICICI BOI BOB PNB

72
COMPARISON OF NET NPA WITH ALL BANKS FOR THE YEAR 2007-
08 Average of these six banks net NPA is 0.75. The difference between private
and public banks average is also vast. Private sector banks net NPA average is 0.12
and in public sector banks it is .49 as percentage of total assets. As we know that
net NPA shows actual burden of banks. BOI bank and PNB has highest net NPA
figure and HDFC Bank has lowest in comparison

Table no-3.9
BANK NET NPA
AXIS .23
HDFC .27
ICICI .87
BOI .33
BOB .27
PNB .38

Graph no-3.9

NET NPA
1
0.9
0.8
0.7
0.6
0.5
0.4 NET NPA
0.3
0.2
0.1
0
0.45 0.68 1.9 1.08 1.1 1.67
AXIS HDFC ICICI BOI BOB PNB

73
ADVANCES TO PRIORITY NON PRIORITY SECTOR BY PRIVATE
SECTORS BANK

When we further bifurcate NPA in priority sector and Non priority sector.
Agriculture + small + others are priority sector. In private sector banks ICICI Bank
has the highest NPA in both sectors in compare to other private sector banks.
Around 72% of NPA is with ICICI Bank with Rs.1359 crore in priority sector and
around 78% in non priority sector. We can see that in private sector banks, banks
has more NPA in non priority sector than priority sector

Table no-3.10
BANK AGRI SMALL OTHERS PRIORITY NON-
PRIORITY

(1) (2) (3) (1+2+3 )

AXIS 109.12 14.76 86.71 210.59 275.06
HDFC 36.12 110.56 47.70 194.41 709.23
ICICI 981.85 23.35 354.13 1359.34 6211.12

Graph no-3.10
7000

6000

5000 AGRI
4000 SMALL

3000 OTHERS
PRIORITY
2000
NON-PRIORITY
1000

0
AXIS HDFC ICICI

74
ADVANCES TO PRIORITY SECTOR BY PUBLIC SECTORS BANK

Table no-3.11
BANK PRIORITY NPA
(ADVANCED IN CRORES)
BOI 5469 350
BOB 3269 325
PNB 3772 197

Graph no-3.11
6000

5000

4000

3000 PRIORITY SECTOR

NPA

2000

1000

0
BOI BOB PNB

75
When we talk about public sector banks they are more in priority sector and they
given advanced to weaker sector or industries. Public sector banks give more loans
to Agriculture, small scale and others units and as a result we see that there are
more number of NPA in public sector banks than in private sector banks. BOB
given more advanced to priority sector in than other four banks and Dena Bank is
in least. But when there is comparison between private bank and public sector bank
still ICICI Bank has more NPA in both priority and non priority sector with the
comparison of public sector banks. Large NPA in ICICI Bank because the strategy
of bank that risk-reward attitude and initiative in each sector. Above we also
discuss that ICICI Bank has highest deposit-investment-advance than other banks.
Now, when we compare the all public sector banks and public sector banks on
priority and non-priority sector than the figures are really shocking. Because in
compare of private sector banks, public sector banks numbers are very large.

Table no-3.12
PUBLIC SECTOR NEW PRIVATE

PRIORITY 22954 25287 1468 2080

PUBLIC 490 299 3 0

NON PRT 15158 14163 4800 8339

TOTAL 38602 39749 6271 1041

There is increase in new private sector banks NPA of Rs.4148 crore which is
almost 66% raise than previous year. In public sector banks the numbers are not
increased like private sector banks.

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 CHAPTER-4

CONCLUSION

NPA is an important factor, which affects the performance of the banks. So it is

very important to check it, from time to time and try to minimize it in order to get
increasing returns. This study analyzed the NPA in Priority Sector and comparison
is also done between Public Sector Banks and Private Sector Banks. The following
are the points of Conclusion:

1. The Total Priority Sector Advances by Public Sector Banks has been increased
from Rs. 104094crores to Rs 608963 crores in past years, whereas Advances by
Private Sector Banks has increased from Rs. 14155 to Rs. 163223 crores in past
years.

2. Advances in Agriculture category contributed highest 40.84% of Priority Sector

Lending by Public Sector Banks, whereas advances in Others category contributed
highest 36.42% of Priority Sector Lending.

3. The reasons for growing Advances in Priority Sector are the Norms given by
RBI, where banks need to compulsorily invest in these sectors.

4. NPA produced by Public Sector Banks Rs. 25286croresis more than that of
Private Sector Banks Rs.3418 crores.

5. Using Regression analysis it is clear that Priority Sector lending has significant
impact on Total NPA in Public Sector Banks, whereas in Private Sector Banks
Priority Sector lending has no significant impact on Total NPA.

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 BIBLIOGRAPHY

Books

1. Sundaram and varshney Indian banking system

Internet

1. http://smartinvestor.business-standard.com/company/comp_5554-
Axis_Bank_Ltd.htm

2. http://smartinvestor.business
standard.com/BSCMS/PDF/hdfc_130712.pdf

3. http://smartinvestor.business-
standard.com/BSCMS/PDF/icicibank_010812.pdf

4. http://smartinvestor.business-
standard.com/BSCMS/PDF/pnb_010812.pdf

5. http://smartinvestor.business-
standard.com/BSCMS/PDF/bankofbaroda_020812.pdf

6. http://smartinvestor.business-
standard.com/BSCMS/PDF/bankofindia_010812.pdf

7. http://www.scribd.com/doc/14245136/Non-Performing-Assets-of-
Banks

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