Non performing assest Final Prjct 2014 (1)

7/25/2019 Non performing assest Final Prjct 2014 (1)

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Non-Performing Assets on Banks

Submitted by:

JAHANGIR Z SHAIKH

T.Y.B.C.B.I. (S!STR "#

Under the guidance of :

Prof. A$%K HAR&IKAR.

Submitted to:

'niersit) of !*m+ai

RAJASTHANI SA!!$AN,S

GHANSHYA!&AS SARA C%$$G

Affiliated to University of Mumbai

ACCREDITED ! "AAC #IT$ %A& 'RADE

(

&*rgaei Saraf J*nior Co//ege

(Arts 0 Commer1e#

S)* Road+ Malad ,#est-+

Mumbai . /000 01/)

Year 2 3456 -3457

2


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RAJASTHANI SA!!$AN,S

GHANSHYA!&AS SARA C%$$G

Affiliated to University of Mumbai

ACCREDITED ! "AAC #IT$ %A& 'RADE

(

&*rgaei Saraf J*nior Co//ege

(Arts 0 Commer1e#

S)* Road+ Malad ,#est-+

Mumbai . /000 01/)

CRTIICAT

I Prof. A$%K HAR&IKAR8 hereby certify that Master: S9aik9 Ja9angir

Z*/fi:*ar A/i + a student of 'hanshyamdas Saraf College of T)!))C))I)

,Semester *- has com3leted 3ro4ect on ;Non-Performing Assets on

Priate 0 P*+/i1 Banks S*+mit < in the academic year 502/65027) This

information submitted is true and original to the best of my 8no9ledge )

=terna/ =aminer 2 Prin1i>a/ 2

&ate 2

Pro?e1t Co-orinator 2 Co//ege Sea/2

&ate2

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ACKN%@$&G!NT

All these years 9e have 4ust studying and 3assing) ut this time

9e have got an o33ortunity to ma8e such a 3ro4ect study) So it is very

obvious for me to than8 all those 3eo3le associated 9ith the ma8ing of the

3ro4ect) I 9ould li8e to than8 the University of Mumbai for giving me this

chance)

I o9e a great many than8s to my 3ro4ect guide Prof. A$%K HAR&IKAR

+ 9ho has been a constant su33ort and guidance throughout the ma8ing ofmy 3ro4ect and for monitoring my 3ro4ect 9ith attention and care) She has

ta8en the 3ains to go through the 3ro4ect and ma8e necessary corrections

as needed)

I 9ould also li8e to than8 our course coordinator !rs. 'ri Jain8 for

being a moral su33ort to us during this 3ro4ect)

I e3ress than8s to my college ;rinci3al !rs. S*?ata Karmarkar8 for

etending her su33ort)

And last but not the least I 9ould ta8e the o33ortunity to than8 my

3arents 9ithout 9hom the 3ro4ect 9ould have been a distant reality)

Sincere than8s to all my fello9 mates and 9ell 9ishers)


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&C$ARATI%N

I !aster2 S9aik9 Ja9angir J*/fi:*ar A/i8 a student of 'hanshyamdas

Saraf College of Arts ( Commerce+ T.Y.B.C.B.I. (Semester "# hereby

declare that I have com3leted 3ro4ect on ;Non-Performing Assets on

Priate 0 P*+/i1 Banks S*+mitte in the academic year 502/65027)

This information submitted is true and original to the best of my

8no9ledge)

&ate 2 Signat*re of St*ent2

/


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IN&.

SR)"= T=;IC

2) Research methodology Introduction

;roblem statement> ob4ectives of the researchers

Data collection sources

5) Indian ban8ing industry


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RSARCH !TH%&%$%GY

I. Intro*1tion

The ban8ing industry has undergone a sea change after the first 3hase of

economic liberaliation in 2@@2 and hence credit management) #hile the

3rimary function of ban8s is to lend funds as loans to various sectors such

as agriculture+ industry+ 3ersonal loans+ housing loans etc)+ in recent times

the ban8s have become very cautious in etending loans) The reason being

mounting non63erforming assets ,";As-) An ";A is defined as a loan

asset+ 9hich has ceased to generate any income for a ban8 9hether in the

form of interest or 3rinci3al re3ayment) As 3er the 3rudential norms

suggested by the Reserve an8 of India ,RI-+ a ban8 cannot boo8 interest

on an ";A on accrual basis) In other 9ords+ such interests can be boo8ed

only 9hen it has been actually received) Therefore+ an ";A account not

only reduces 3rofitability of ban8s by 3rovisioning in the 3rofit and loss

account+ but their carrying cost is also increased 9hich results in ecess (

avoidable management attention) A3art from this+ a high level of ";A also

3uts strain on a ban8s net 9orth because ban8s are under 3ressure to

maintain a desired level of Ca3ital Adeuacy and in the absence of

comfortable 3rofit level+ ban8s eventually loo8 to9ards their internal

financial strength to fulfill the norms thereby slo9ly eroding the net 9orth)

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Pro+/em statement%+?e1tie of t9e resear19

To study of the conce3t of "on ;erforming Asset in Indian

3ers3ective)

To study ";A standard of RI

To study the Reasons for ( Im3act of ";As

To evaluate the efficiency in managing "on ;erforming Asset of

different ty3es of ban8s ,;ublic+ ;rivate ( ?oreign ban8s- using

";A ratios ( com3aring ";A 9ith 3rofits)

To chec8 the 3ro3ortion of ";A of different ty3es of ban8s in

different categories

&ata Co//e1tion So*r1es2

Se1onar) &ata

Secondary data refers to the data 9hich has already been generated and is

available for use)The data about ";As ( its com3osition+ classification of

loan assets+ 3rofits ,net ( gross- ( advances of different ban8s is ta8en

from Reserve an8 of India 9ebsite)

S1o>e of t9e st*)

To understand the conce3t of ";A in Indian an8ing industry)

To understand the causes ( effects of ";A

To analye the 3ast trends of ";A of ;ublic+ ;rivate ( ?oreign

ban8s in different sector)


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IN&IAN BANKING IN&'STRY

INTR%&'CTI%N2

an8ing in India originated in the last decades of the 2Bth century) The

oldest ban8 in eistence in India is the State an8 of India+ a government6

o9ned ban8 that traces its origins bac8 to Fune 2B01 and that is the

largest commercial ban8 in the country) Central ban8ing is the

res3onsibility of the Reserve an8 of India+ 9hich in 2@


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AR$Y HIST%RY2

an8ing in India originated in the last decades of the 2Bth century) The

first ban8s 9ere The 'eneral an8 of India 9hich started in 2B1+ and the

an8 of $industan+ both of 9hich are no9 defunct) The oldest ban8 in

eistence in India is the State an8 of India+ 9hich originated in the an8

of Calcutta in Fune 2B01+ 9hich almost immediately became the an8 of

engal) This 9as one of the three 3residency ban8s+ the other t9o being

the an8 of ombay and the an8 of Madras+ all three of 9hich 9ere

established under charters from the ritish East India Com3any) ?or many

years the ;residency ban8s acted as uasi6central ban8s+ as did their

successors) The three ban8s merged in 2@52 to form the Im3erial an8 ofIndia+ 9hich+ u3on IndiaGs inde3endence+ became the State an8 of India)

Indian merchants in Calcutta established the Union an8 in 2B


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T9e Bank of Benga/8 9i19 /ater +e1ame t9e State Bank of Inia.

The first entirely Indian 4oint stoc8 ban8 9as the =udh Commercial an8+

established in 2BB2 in ?aiabad) It failed in 2@7B) The net 9as the

;un4ab "ational an8+ established in ahore in 2B@7+ 9hich has survived

to the 3resent and is no9 one of the largest ban8s in India)Around the

turn of the 50th Century+ the Indian economy 9as 3assing through a

relative 3eriod of stability) Around five decades had ela3sed since the

Indian Mutiny+ and the social+ industrial and other infrastructure had

im3roved) Indians had established small ban8s+ most of 9hich served

3articular ethnic and religious communities) The 3residency ban8s dominated

ban8ing in India but there 9ere also some echange ban8s and a number

of Indian 4oint stoc8 ban8s) All these ban8s o3erated in different segmentsof the economy) The echange ban8s+ mostly o9ned by Euro3eans+

concentrated on financing foreign trade) Indian 4oint stoc8 ban8s 9ere

generally underca3italied and lac8ed the e3erience and maturity to

com3ete 9ith the 3residency and echange ban8s) This segmentation let

ord Curon to observe+ JIn res3ect of ban8ing it seems 9e are behind the

times) #e are li8e some old fashioned sailing shi3+ divided by solid

9ooden bul8heads into se3arate and cumbersome com3artments)JThe 3eriod

bet9een 2@01 and 2@22+ sa9 the establishment of ban8s ins3ired by the

S9edishmovement) The S9edish movement ins3ired local businessmen and

3olitical figures to found ban8s of and for the Indian community) A

number of ban8s established then have survived to the 3resent such as

an8 of India+ Cor3oration an8+ Indian an8+ an8 of aroda+ Canara

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an8 and Central an8 of India)The fervor of S9edish movement lead to

establishing of many 3rivate ban8s in Da8shina Kannada and Udu3i district

9hich 9ere unified earlier and 8no9n by the name South Canara , South

Kanara - district) ?our nationalised ban8s started in this district and also a

leading 3rivate sector ban8)

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R%! @%R$& @AR I T% IN&PN&NC2

The 3eriod during the ?irst #orld #ar ,2@2/62@2B- through the end of the

Second #orld #ar ,2@enen1e

The 3artition of India in 2@/ adversely im3acted the economies of ;un4ab

and #est engal+ 3aralying ban8ing activities for months) IndiaGs

inde3endence mar8ed the end of a regime of the aisse6faire for the

Indian ban8ing) The 'overnment of India initiated measures to 3lay an

active role in the economic life of the nation+ and the Industrial ;olicy

Resolution ado3ted by the government in 2@/B envisaged a mied

economy) This resulted into greater involvement of the state in different

segments of the economy including ban8ing and finance)

T9e ma?or ste>s to reg*/ate +anking in1/*e2

In 2@/B+ the Reserve an8 of India+ IndiaGs central ban8ing authority+ 9as

nationalied+ and it became an institution o9ned by the 'overnment of

India) In 2@/@+ the an8ing Regulation Act 9as enacted 9hich em3o9ered

the Reserve an8 of India ,RI- Jto regulate+ control+ and ins3ect the

ban8s in India)The an8ing Regulation Act also 3rovided that no ne9 ban8

or branch of an eisting ban8 could be o3ened 9ithout a license from the

RI+ and no t9o ban8s could have common directors)$o9ever+ des3ite

these 3rovisions+ control and regulations+ ban8s in India ece3t the State

an8 of India+ continued to be o9ned and o3erated by 3rivate 3ersons)

This changed 9ith the nationaliation of ma4or ban8s in India on 2@ Fuly

2@1@)

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Nationa/iation

y the 2@10s+ the Indian ban8ing industry had become an im3ortant tool

to facilitate the develo3ment of the Indian economy) At the same time+ it

had emerged as a large em3loyer+ and a debate had ensued about the

3ossibility to nationalise the ban8ing industry) Indira 'andhi+ the6then ;rime

Minister of India e3ressed the intention of the '=I in the annual

conference of the All India Congress Meeting in a 3a3er entitled JStray

thoughts on an8 "ationalisation)J The 3a3er 9as received 9ith 3ositive

enthusiasm) Thereafter+ her move 9as s9ift and sudden+ and the '=I

issued an ordinance and nationalised the 2/ largest commercial ban8s 9ith

effect from the midnight of Fuly 2@+ 2@1@) Faya3ra8ash "arayan+ a nationalleader of India+ described the ste3 as a Jmasterstro8e of 3olitical sagacity)J

#ithin t9o 9ee8s of the issue of the ordinance+ the ;arliament 3assed the

an8ing Com3anies ,Acuisition and Transfer of Underta8ing- ill+ and it

received the 3residential a33roval on @ August 2@1@)A second dose of

nationaliation of 1 more commercial ban8s follo9ed in 2@B0) The stated

reason for the nationaliation 9as to give the government more control of

credit delivery) #ith the second dose of nationaliation+ the '=I controlled

around @2 of the ban8ing business of India) ater on+ in the year 2@@


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$i+era/isation

In the early 2@@0s+ the then "arsimha Rao government embar8ed on a

3olicy of liberaliation+ licensing a small number of 3rivate ban8s) These

came to be 8no9n as "e9 'eneration tech6savvy ban8s+ and included

'lobal Trust an8 ,the first of such ne9 generation ban8s to be set u3-+

9hich later amalgamated 9ith =riental an8 of Commerce+ Ais

an8,earlier as UTI an8-+ ICICI an8 and $D?C an8) This move+

along 9ith the ra3id gro9th in the economy of India+ revitalied the

ban8ing sector in India+ 9hich has seen ra3id gro9th 9ith strong

contribution from all the three sectors of ban8s+ namely+ government ban8s+

3rivate ban8s and foreign ban8s)The net stage for the Indian ban8ing hasbeen setu3 9ith the 3ro3osed relaation in the norms for ?oreign Direct

Investment+ 9here all ?oreign Investors in ban8s may be given voting

rights 9hich could eceed the 3resent ca3 of 20+at 3resent it has gone

u3 to / 9ith some restrictions)The ne9 3olicy shoo8 the an8ing sector

in India com3letely) an8ers+ till this time+ 9ere used to the /616/ method

,orro9 at /Hend at 1H'o home at /- of functioning) The ne9 9ave

ushered in a modern outloo8 and tech6savvy methods of 9or8ing for

traditional ban8s)All this led to the retail boom in India) ;eo3le not 4ust

demanded more from their ban8s but also received more) Currently ,500-+

ban8ing in India is generally fairly mature in terms of su33ly+ 3roduct

range and reach6even though reach in rural India still remains a challenge

for the 3rivate sector and foreign ban8s) In terms of uality of assets and

ca3ital adeuacy+ Indian ban8s are considered to have clean+ strong and

trans3arent balance sheets relative to other ban8s in com3arable economies

in its region) The Reserve an8 of India is an autonomous body+ 9ith

minimal 3ressure from the government) The stated 3olicy of the an8 on

the Indian Ru3ee is to manage volatility but 9ithout any fied echange

rate6and this has mostly been true) #ith the gro9th in the Indian economy

e3ected to be strong for uite some time6es3ecially in its services sector6

2/


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the demand for ban8ing services+ es3ecially retail ban8ing+ mortgages and

investment services are e3ected to be strong) =ne may also e3ect M(As+

ta8eovers+ and asset sales)In March 5001+ the Reserve an8 of India

allo9ed #arburg ;incus to increase its sta8e in Kota8 Mahindra an8 ,a

3rivate sector ban8- to 20) This is the first time an investor has been

allo9ed to hold more than 7 in a 3rivate sector ban8 since the RI

announced norms in 5007 that any sta8e eceeding 7 in the 3rivate

sector ban8s 9ould need to be vetted by them)In recent years critics have

charged that the non6government o9ned ban8s are too aggressive in their

loan recovery efforts in connection 9ith housing+ vehicle and 3ersonal

loans) There are 3ress re3orts that the ban8sG loan recovery efforts have

driven defaulting borro9ers to suicide)

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RCNT HIST%RY % IN&IAN BANKING

Indian ban8ing system+ over the years has gone through various 3hases

after establishment of Reserve an8 of India in 2@


17/54

centre s bringing do9n the 3o3ulation 3er ban8 branch to 25000 a33)

During 2@1+ RRs 9ere established ,on the recommendations of M)

"arasimham Committee re3ort- under the s3onsorshi3 and su33ort of 3ublic

sector ban8s as the


18/54

Conso/iation >9ase2 The 3hase started in 2@B7 9hen a series of 3olicy

initiatives 9ere ta8en by RI 9hich sa9 mar8ed slo9do9n in the branch

e3ansion) Attention 9as 3aid to im3roving house68ee3ing+ customer

service+ credit management+ staff 3roductivity and 3rofitability of ban8s)

Measures 9ere also ta8en to reduce the structural constraints that obstructed

the gro9th of money mar8et)

Reforms >9ase2 The macro6economic crisis faced by the country in 2@@2

3aved the 9ay for etensive financial sector reforms 9hich brought

deregulation of interest rates+ more com3etition+ technological changes+

3rudential guidelines on asset classification and income recognition+ ca3ital

adeuacy+ autonomy 3ac8ages etc)

2B


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BANKING IN IN&IA2 344E-54

The Indian ban8ing system is financially stable and resilient to the shoc8s

that may arise due to higher non63erforming assets ,";As- and the global

economic crisis+ according to a stress test done by the Reserve an8 of

India ,RI-)Significantly+ the RI has the tenth largest gold reserves in the

9orld after s3ending USL 1) billion to9ards the 3urchase of 500 metric

tons of gold from the International Monetary ?und,IM?- in "ovember

500@) The 3urchase has increased the countryGs share of gold holdings in

its foreign echange reserves from a33roimately / 3er cent to about 1 3er

cent)?ollo9ing the financial crisis+ ne9 de3osits have gravitated to9ards

3ublic sector ban8s) According to RIGs Guarterly Statistics on De3ositsand Credit of Scheduled Commercial an8s: Se3tember 500@G+ nationalied

ban8s+ as a grou3+ accounted for 70)7 3er cent of the aggregate de3osits+

9hile State an8 of India ,SI- and its associates accounted for 5


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IN&'STRY ANA$YSIS

S.@.%.T. ANA$YSIS % IN&IAN BANKING IN&'STRY

STRNGTH

an8 lending has been a significant driver of 'D; gro9th and

em3loyment)

The vast net9or8ing ( gro9ing number of branches ( ATMs)

Indian ban8ing system has reached even to the remote corners of

the country)

The governmentGs regular 3olicy for Indian ban8 since 2@1@ has

3aid rich dividends 9ith the nationaliation of 2/ ma4or 3rivate

ban8s of India)

@AKNSS

;Ss need to fundamentally strengthen institutional s8ill levels

es3ecially in sales and mar8eting+ service o3erations+ ris8

management and the overall organiational 3erformance ethic (

strengthen human ca3ital)

=ld 3rivate sector ban8s also have the need to fundamentally

strengthen s8ill levels)

Refusal to dilute sta8e in ;SU ban8s: The government has refused

to dilute its sta8e in ;SU ban8s belo9 72 thus cho8ing the

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headroom available to these ban8s for raining euity ca3ital)

%PP%RT'NITY

an8s 9ill no longer en4oy 9indfall treasury gains that the decade6long secular decline in interest rates 3rovided) This 9ill e3ose the

9ea8er ban8s)

#ith increased interest in India+ com3etition from foreign ban8s

9ill only intensify)

'iven the demogra3hic shifts resulting from changes in age 3rofile

and househol income+consumers 9ill increasingly demand enhanced

institutional ca3abilities and service levels from ban8s)

Reach in rural India for the 3rivate sector and foreign ban8s

THRATS

Threat of stability of the system: failure of some 9ea8 ban8s has

often threatened the stability of the system)

Rise in inflation figures 9hich 9ould lead to increase in interest

rates)

Increase in the number of foreign 3layers 9ould 3ose a threat to

the ;S as 9ell as the 3rivate 3layers)

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INTR%&'CTI%N T% NPA

!ANING % NPA2

"on ;erforming Asset means an asset or account of borro9er+ 9hich has

been classified by a ban8 or financial institution as sub6standard+ doubtful

or loss asset+ in accordance 9ith the directions or guidelines relating to

asset classification issued by RI)An amount due under any credit facility

is treated as J3ast dueJ 9hen it has not been 3aid 9ithin or installment of 3rinci3al remain overdue for a 3eriod of

more than 2B0 days in res3ect of a Term oan+

ii) The account remains Gout of orderG for a 3eriod of more than 2B0 days+

in res3ect of an overdraft> cash Credit,=D>CC-+

iii) The bill remains overdue for a 3eriod of more than 2B0 days in the

case of bills 3urchased and discounted+

iv) Interest and> or installment of 3rinci3al remains overdue for t9o harvest

seasons but for a 3eriod not eceeding t9o half years in the case of an

advance granted for agricultural 3ur3ose+ and

v) Any amount to be received remains overdue for a 3eriod of more than

2B0 days in res3ect of other accounts) #ith a vie9 to moving to9ards

international best 3ractices and to ensure greater trans3arency+ it has been

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decided to ado3t the G@0 days overdueG norm for identification of ";As+

from the year ending March


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TYPS % NPA2

5. Gross NPA

3. Net NPA

GR%SS NPA2 'ross ";As are the sum total of all loan assets

that are classified as ";As as 3er RI guidelines as on alance

Sheet date) 'ross ";A reflects the uality of the loans made by

ban8s) It consists of all the nonstandard assets li8e as sub6standard+

doubtful+ and loss assets) It can be calculated 9ith the hel3 of

follo9ing ratio:

Gross NPAs Ratio Gross NPAs Gross Aan1es

NT NPAs2"et ";As are those ty3e of ";As in 9hich the ban8

has deducted the 3rovision regarding ";As) Net NPA s9os t9e

a1t*a/ +*ren of +anks. Since in India+ ban8 balance sheets

contain a huge amount of ";As and the 3rocess of recovery and

9rite off of loans is very time consuming+ the 3rovisions the ban8s

have to ma8e against the ";As according to the central ban8

guidelines+ are uite significant) That is 9hy the difference bet9een

gross and net ";A is uite high)It can be calculated by follo9ing:

Net NPAs Gross NPAs L Proisions Gross Aan1es

L Proisions

5/


25/54

RAS%NS %R AN ACC%'NT BC%!ING NPA2

5. Interna/ fa1tors

3. =terna/ fa1tors

Interna/ fa1tors2

2- ?unds borro9ed for a 3articular 3ur3ose but not use for the said

3ur3ose)

5- ;ro4ect not com3leted in time)


26/54

/- Shortage of ra9 material+ ra9 materialNin3ut 3rice escalation+ 3o9er

shortage+

industrial recession+ ecess ca3acity+ natural calamities li8e floods+ accidents)

7- ?ailures+ non3aymentN over dues in other countries+ recession in other

countries+

eternaliation 3roblems+ adverse echange rates etc)

1- 'overnment 3olicies li8e ecise duty changes+ Im3ort duty changes etc)+

The RI has summaried the finer factors contributing to higher

level of ";As in the Indian ban8ing sector as:

Diversion of funds+ 9hich is for e3ansion+ diversification+

moderniation+ underta8ing ne9 3ro4ects and for hel3ing associate

concerns) This is also cou3led 9ith recessionary trends and failures

to ta3 funds in ca3ital and debt mar8ets)

usiness failures ,such as 3roduct+ mar8eting etc)-+ 9hich are due

to inefficient management system+ strained labour relations+

ina33ro3riate technology> technical 3roblems+ 3roduct obsolescence

etc)

Recession+ 9hich is due to in3ut> 3o9er shortage+ 3rice variation+

accidents+ natural calamities etc) The eternaliation 3roblems in

other countries also lead to gro9th ";As in Indian ban8ing sector)

Time> cost overrun during 3ro4ect im3lementation stage)

'overnmental 3olicies such as changes in ecise duties+ 3ollution

control orders etc)

#illful defaults+ 9hich are because of si3honing6off funds+ fraud>

misa33ro3riation+ 3romoters> directors dis3utes etc)

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27/54

Deficiency on the 3art of ban8s+ vi+ delays in release of limits

and 3ayments> subsidies by the 'overnment of India

I!PACT % NPA2

Profita+i/it)2

";A means boo8ing of money in terms of bad asset+ 9hich occurred due

to 9rong choice of client) ecause of the money getting bloc8ed the

3rodigality of ban8 decreases not only by the amount of ";A but ";A

lead to o33ortunity cost also as that much of 3rofit invested in some

return earning 3ro4ect>asset) So ";A doesn t affect current 3rofit but also

future stream of 3rofit+ 9hich may lead to loss of some long6term

beneficial o33ortunity)

$i:*iit)2

Money is getting bloc8ed+ decreased 3rofit lead to lac8 of enough cash at

hand 9hich lead to borro9ing money for shortest 3eriod of time 9hich

lead to additional cost to the com3any) Difficulty in o3erating the functions

of ban8 is another cause of ";A due to lac8 of money)Routine 3ayments

and dues)

Ino/ement of management2

Time and efforts of management is another indirect cost 9hich ban8 has to

bear due to ";A) Time and efforts of management in handling and

managing ";A 9ould have diverted to some fruitful activities+ 9hich 9ould

have given good returns ban8)

Creit /oss2

an8 is facing 3roblem of ";A then it adversely affect the value of ban8

in terms of mar8et credit) It 9ill lose its good9ill and brand image and

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28/54

credit 9hich have negative im3act to the 3eo3le 9ho are 3utting their

money in the ban8s)

AR$Y SY!PT%!S2

y 9hich one can recognie a 3erforming asset turning in to non6

3erforming asset

o*r 1ategories of ear/) s)m>toms2-

5# inan1ia/2

"on63ayment of the very first installment in case of term loan)

ouncing of cheue due to insufficient balance in the accounts)

Irregularity in installment)

Irregularity of o3erations in the accounts)

Un3aid overdue bills)

Declining Current Ratio)

)

3# %>erationa/ an P9)si1a/2

If information is received that the borro9er has either initiated the

3rocess of 9inding u3 or are not doing the business)

=verdue receivables)

Stoc8 statement not submitted on time)

Eternal non6controllable factor li8e natural calamities in the city

9here borro9er conduct his business)

5B


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30/54

PR"NTI" !AS'R!NT %R NPA2

ar/) Re1ognition of t9e >ro+/em2

Invariably+ by the time ban8s start their efforts to get involved in a revival

3rocess+ its too late to retrieve the situation6 both in terms of rehabilitation

of the 3ro4ect and recovery of ban8 dues) Identification of 9ea8ness in the

very beginning that is : #hen the account starts sho9ing first signs of

9ea8ness regardless of the fact that it may not have become ";A+ is

im3erative) Assessment of the 3otential of revival may be done on the

basis of a techno6economic viability study) Restructuring should be

attem3ted 9here+ after an ob4ective assessment of the 3romoters intention+

ban8s are convinced of a turnaround 9ithin a scheduled timeframe) In

res3ect of totally unviable units as decided by the ban8+ it is better tofacilitate 9inding u3> selling of the unit earlier+ so as to recover 9hatever

is 3ossible through legal means before the security 3osition becomes 9orse)

Ientif)ing +orroers it9 gen*ine intent 2

Identifying borro9ers 9ith genuine intent from those 9ho are non6 serious

9ith no commitment or sta8e in revival is a challenge confronting ban8ers)

$ere the role of frontline officials at the branch level is 3aramount as theyare the ones 9ho haveintelligent in3uts 9ith regard to 3romoters sincerity+

and ca3ability to achieve turnaround) ased on this ob4ective assessment+

ban8s should decide as uic8ly as 3ossible 9hether it 9ould be 9orth9hile

to commit additional finance )In this regard ban8s may consider having

;S>e1ia/ Inestigation of financial transaction or business transaction+


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boo8s of account in order to ascertain real factors that contributed to

sic8ness of the borro9er)

Time/iness an Ae:*a1) of res>onse2

onger the delay in res3onse+ grater the in4ury to the account and the

asset) Time is a crucial element in any restructuring or rehabilitation

activity) The res3onse decided on the basis of techno6economic study and

3romoter s commitment+ has to be adeuate in terms of etend of

additional funding and relaations etc) under the restructuring eercise) The

3ac8age of assistance may be fleible and ban8 may loo8 at the eit

o3tion)

o1*s on 1as9 f/os2

#hile financing+ at the time of restructuring the ban8s may not be guided

by the conventional fund flo9 analysis only+ 9hich could yield a

3otentially misleading 3icture) A33raisal for fresh credit reuirements may

be done by analying funds flo9 in con4unction 9ith the Cash ?lo9 rather

than only on the basis of ?unds ?lo9)

!anagement ffe1tieness2

The general 3erce3tion among borro9er is that it is lac8 of finance that

leads to sic8ness and ";As) ut this may not be the case all the time)

Management effectiveness in tac8ling adverse business conditions is a very

im3ortant as3ect that affects a borro9ing unit fortunes) A ban8 may

commit additional finance to an aling unit only after basic viability of the

enter3rise also in the contet of uality of management is eamined and

confirmed)


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PR%C&'RS %R NPA I&NTIICATI%N AN&

RS%$'TI%N IN IN&IA2

5. Interna/ C9e1ks an Contro/

Since high level of ";As dam3ens the 3erformance of the ban8sidentification of 3otential 3roblem accounts and their close monitoring

assumes im3ortance) Though most ban8s have Early #arning Systems

,E#S- for identification of 3otential ";As+ the actual 3rocesses follo9ed+

ho9ever+ differ from ban8 to ban8) The E#S enable a ban8 to identify the

borro9er accounts 9hich sho9 signs of credit deterioration and initiate

remedial action) Many ban8s have evolved and ado3ted an elaborate E#S+

9hich allo9s them to identify 3otential distress signals and 3lan their

o3tions beforehand+ accordingly) The ma4or com3onents>3rocesses of a E#S

follo9ed by ban8s in India as brought out by a study conducted by

Reserve an8 of India at the instance of the oard of ?inancial

S*>erision are as fo//os2

Designating Relationshi3 Manager> Credit =fficer for monitoring

account>s

;re3aration of O8no9 your clientG 3rofile

Credit rating system

Re/ations9i> !anagerCreit %ffi1er


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The Relationshi3 Manager>Credit =fficer is an official 9ho is e3ected to

have com3lete8no9ledge of borro9er+ his business+ his future 3lans+ etc)

The Relationshi3 Manager has to 8ee3 in constant touch 9ith the borro9er

and re3ort all develo3ments im3acting the borro9able account) As a 3art of

this contact he is also e3ected to conduct scrutiny and activity ins3ections)

Kno )o*r 1/ientM >rofi/e (KYC#

Most ban8s in India have a system of 3re3aring O8no9 your clientG ,K!C-

3rofile>credit re3ort) As a 3art of OK!CG system+ visits are made on clients

and their 3laces of business>units

Creit Rating S)stem

The credit rating system is essentially one 3oint indicator of an individual

credit e3osure and is used to identify measure and monitor the credit ris8

of individual 3ro3osal) At the 9hole ban8 level+ credit rating system

enables trac8ing the health of ban8s entire credit 3ortfolio) Credit rating

models ta8e into account various ty3es of ris8s vi) financial+ industry andmanagement+ etc) associated 9ith a borro9able unit)

@at19-/istS>e1ia/ !ention Categor)

The grading of the ban8Gs ris8 assets is an im3ortant internal control tool)

It serves the need of the Management to identify and monitor 3otential

ris8s of a loan asset) The 3ur3ose of identification of 3otential ";As is to

ensure that a33ro3riate 3reventive > corrective ste3s could be initiated by

the ban8 to 3rotect against the loan asset becoming non63erforming) Most

of the ban8s have a system to 3ut certain borro9able accounts under 9atch

list or s3ecial mention category if 3erforming advances o3erating under

adverse business or economic conditions are ehibiting certain distress

signals) These accounts generally ehibit 9ea8nesses 9hich are correctable


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but 9arrant ban8sG closer attention)

The Early 9arning signal a can be classified into five broad categories vi)

a- ?inancial

b- =3erational

c- an8ing

d- Management and

e- Eternal factors)

inan1ia/ related 9arning signals generally emanate from the borro9ersG

balance sheet+income e3enditure statement+ statement of cash flo9s+

statement of receivables etc)?ollo9ing common 9arning signals are ca3tured

by some of the ban8s having relatively develo3ed E#S)

inan1ia/ arning signa/s

;ersistent irregularity in the account

Default in re3ayment obligation

Devolvement of C>invocation of guarantees

Deterioration in liuidity>9or8ing ca3ital 3osition

!anagement re/ate arning signa/s


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ac8 of co6o3eration from 8ey 3ersonnel

Desire to ta8e undue ris8s

?amily dis3utes

;oor financial controls

Banking re/ate signa/s

Declining ban8 balances>declining o3erations in the account

=3ening of account 9ith other ban8

Return of out9ard bills>dishonored cheues

Sales transactions not routed through the account

Signa/ re/ating to e=terna/ fa1tors

Economic recession

Emergence of ne9 technology

Changes in government > regulatory 3olicies

3. !anagement Reso/*tion of NPAs

A reduction in the total gross and net ";As in the Indian financial system

indicates a significant im3rovement in management of ";As) This is also

on account of various resolution mechanisms introduced in the recent 3ast9hich include the SR?AESI Act+ one time settlement schemes+ setting u3

of the CDR mechanism+ strengthening of DRTs) ?rom the data available of

;ublic Sector an8s as on March


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these ";As amounted to Rs) 527 billion) The total number of resolution

a33roaches ,including cases 9here action is to be initiated- is greater than

the number of ";As+ indicating some double counting) As can be seen+

suit filed and I?R are the t9o most common a33roaches to resolution of

";As in 3ublic sector ban8s) Rehabilitation has been considered> ado3ted in

only about 2


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entertain cases referred to them+ by the ban8s and ?Is for recovery of

debts due to the same) The order 3assed by a DRT is a33ealable to the

A33ellate Tribunal but no a33eal shall be entertained by the DRAT unless

the a33licant de3osits 7 of the amount due from him as determined by

it)

na1tment of SRASI A1t

The JThe Securitiation and Reconstruction of ?inancial Assets and

Enforcement of Security Interest ActJ ,SR?AESI- 3rovides the formal legal

basis and regulatory frame9or8 for setting u3 Asset Reconstruction

Com3anies ,ARCs- in India) In addition to asset reconstruction and ARCs+

the Act deals 9ith the follo9ing largely as3ects

Securitiation and Securitiation Com3anies

Enforcement of Security Interest

Creation of a central registry in 9hich all securitiation and

asset reconstruction transactions as 9ell as any creation of

security interests has to be filed)

The Reserve an8 of India ,RI-+ the designated regulatory authority for

ARCS has issued Directions+ 'uidance "otes+ A33lication ?orm and

'uidelines to an8s in A3ril 500< for regulating functioning of the

3ro3osed ARCS and these Directions> 'uidance "otes cover various as3ects

relating to registration+ o3erations and funding of ARCS and resolution of

";As by ARCS) The RI has also issued guidelines to ban8s and financial

institutions on issues relating to transfer of assets to ARCS+ consideration

for the same and valuation of instruments issued by the ARCS)

Additionally+ the Central 'overnment has issued the security enforcement


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rules ,JEnforcement RulesJ-+ 9hich lays do9n the 3rocedure to be follo9ed

by a secured creditor 9hile enforcing its security interest 3ursuant to the

Act) The Act 3ermits the secured creditors ,if 7 of the secured creditors

agree- to enforce their security interest in relation to the underlying

security 9ithout reference to the Court after giving a 10 day notice to the

defaulting borro9er u3on classification of the corres3onding financial

assistance as a non63erforming asset)

T9e A1t >ermits t9e se1*re 1reitors to take an) of t9e fo//oing

meas*res:

Ta8e over 3ossession of the secured assets of the borro9er

including right to transfer by 9ay of lease+ assignment or saleH

Ta8e over the management of the secured assets including the right

to transfer by 9ay of lease+ assignment or sale)

y obtaining uotations from 3ersons dealing in such assets or

other9ise

interested in buying the assetsH

y inviting tenders from the 3ublicH

y holding 3ublic auctionsH or

y 3rivate treaty)

enders have seied collateral in some cases and 9hile it has not yet been

3ossible to recover value from most such seiures due to certain legal

hurdles+ lenders are no9 clearly in a much better bargaining 3osition vis6a6

vis defaulting borro9ers than they 9ere before the enactment of SR?AESI

Act) Under the SR?AESI Act ARCS can be set u3 under the Com3anies

Act+ 2@71) The Act designates any 3erson holding not less than 20 of


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the 3aid6u3 euity ca3ital of the ARC as a s3onsor and 3rohibits any

s3onsor from holding a controlling interest in+ being the holding com3any

of or being in control of the ARC) The SR?AESI and SR?AESI Rules>

'uidelines reuire ARCS to have a minimum net6o9ned fund of not less

than Rs) 50+000+000) ?urther+ the Directions reuire that an ARC should

maintain+ on an ongoing basis+ a minimum ca3ital adeuacy ratio of 27

of its ris8 9eighted assets) ARCS have been granted a maimum

realiation time frame of five years from the date of acuisition of the

assets)

Com>romise Sett/ement S19emes

5# %ne Time Sett/ement S19emes

";As in all sectors+ 9hich have become doubtful or loss as on 'overnment has been encouraging ban8s to design and im3lement

3olicies for negotiated settlements+ 3articularly for old and unresolved

";As) The broad frame9or8 for such settlements 9as 3ut in 3lace in Fuly

2@@7) S3ecific guidelines 9ere issued in May 2@@@to 3ublic sector ban8s


40/54

for one6time settlements of ";As of small scale sector) This scheme 9as

valid until Se3tember 5000 and enabled ban8s to recover Rs 1) billion

from various accounts) Revised guidelines 9ere issued in Fuly 5000 for

recovery of ";As of Rs) 70 million and less) These guidelines 9ere

effective until Fune 5002 and hel3ed ban8s recover Rs) 51 billion)

#In1rease Poers to NC$Ts an t9e Pro>ose Re>ea/ of

BIR

In India+ com3anies 9hose net 9orth has been 9i3ed out on account of

accumulated losses come under the 3urvie9 of the Sic8 Industrial

Com3anies Act ,SICA- and need to be referred to I?R) =nce a com3any

is referred to the I?R ,and even if an enuiry is 3ending as to 9hether

it should be admitted to I?R-+ it is afforded 3rotection against recovery

3roceedings from its creditors) I?R is 9idely regarded as a stumbling

bloc8 in recovering value for ";As) ;romoters systematically ta8e refuge in

SICA 6 often there is a scramble to file a reference in I?R so as to

obtain 3rotection from debt recovery 3roceeding)

/0


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ANA$YSIS %N NPA

%"RA$$ ANA$YSIS2

/2


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/5


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/


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//


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/7


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/1


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/


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ARTIC$ %N NPA

Reserve an8 'overnor Raghuram Ra4an today said it is too early todeclare victory over the high non63erforming assets in the system+ 9hich9ill im3rove only 9ith an u3tic8 in gro9th e3ected during this fiscal)

JI thin8+ the most immediate 3roblem 9e have to confront is that of risinglevel of stressed assets in the ban8ing system) ?ortunately in the lastuarter those levels of stressed assets ta3ered off or flattened out) ut+ it istoo early to declare victory+J he told re3orters here after the central boardmeeting of the monetary authority)

Ra4an+ 9ho has initiated a sle9 of measures+ including as8ing ban8s to9or8 together to s3ot and resolve asset stress early+ said the remedy forthis lies in Jstronger governance actionsJ li8e clearing 3ro4ects and gro9thnumbers inching u3 faster)

J'ro9th bails out lot of 3ast bad decisions) So I believe that as gro9thcomes bac8+ and I fully e3ect that gro9th 9ill be stronger over thecourse of the year+ that some of the bad assets 9ill turn bac8 3erforming+Jhe said)

It can be noted that lenders+ es3ecially the 3ublic sector ban8s+ are saddled9ith a high amount of asset stress due to a sle9 of 3roblems includingeconomic gloom+ 3ro4ects not getting cleared by the eecutive and alsosome 4udicial interventions li8e the ban on mining)

As of March 502/+ total "A;s stood at a high /)/ 3er cent for thesystem+ 9ith multi3le analysts fearing it 9ill go u3 further)

Commenting on on the early detection and redressal of ";As 9hichincentivises ban8s to detect an issue early and also includes 3enalties forbeing late+ Ra4an said it is still early days for the system but ban8ers haveinformed him that 3romoters are finding it difficult to con the lenders no9)

Mean9hile+ even though he declined to offer a reaction on the udget3resented today saying he had not read it+ Ra4an said the central ban8 9ill

be 9or8ing in close coordination 9ith the government on as3ects li8ecreating a ne9 monetary 3olicy frame9or8 9hich 9as announced byinan1e !inister Ar*n Jait/e).

=n the movement of the ru3ee and the level 9here the RI 9ould li8ethe currency to be+ Ra4an said the ru3ee is holding on to a level currently+and RI 9ill not be Jtoo interventionalJ in the mar8et)

/B


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$e+ ho9ever+ added that it 9ill 9or8 to9ards reducing volatility in thecurrency in either direction)

=n the concerns about the oil 3rices adding to inflationary 3ressures+ Ra4ansaid crude 3rices have stabilised after hitting a high of USD 221 a barreland added that RI 9ill be vigilant on the issue)

#ith the funding needs of the infrastructure sector 3egged to over USD 2trillion during the ongoing 25th ;lan 3eriod+ Ra4an underscored the needfor develo3ing right models to ensure credit flo9 to the sector)

/@


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C%NC$'SI%N

The ";A is one of the biggest 3roblems that the Indian an8s are facing

today) If the 3ro3er management of the ";As is not underta8en it 9ould

ham3er the business of the ban8s) If the conce3t of ";As is ta8en very

lightly it 9ould be dangerous for the Indian ban8ing sector) The ";As

9ould destroy the current 3rofit+ interest income due to large 3rovisions of

the ";As+ and 9ould affect the smooth functioning of the recycling of the

funds an8s also redistribute losses to other borro9ers by charging higher

interest rates) o9er de3osit rates and higher lending rates re3ress savings

and financial mar8ets+ 9hich ham3ers economic gro9th);ublic sector ban8s

are more efficient than 3rivate sector ( foreign ban8s 9ith regard to themanagement of non3erforming assets) Even among 3rivate sector ban8+ old

3rivate sector ban8s are more efficient than ne9 3rivate sector ban8s) ut

efficient management of ";A is not the sole factor that determines the

overall efficiency of ban8s)

70


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72


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CAS ST'&Y %R NPA IN C%!!RCIA$

BANK2

A 9ell6built ban8ing sector is significant for a 3ros3erous economy) Thecrash of the ban8ing sector may have an unfavorable blo9 on othersectors) A ban8er shall be very cautious in lending+ because ban8er is notlending money out of his o9n ca3ital) A ma4or 3ortion of the money lentcomes from the de3osits received from the 3ublic and government share)At 3resent ";A in the ban8ing sector is debate to3ic because ";A isincreasing year by year 3articularly in nationalied ban8s The 'ross "on6;erforming Assets ,'";As- of "ationalied an8s as on Fune 5025 9ereRs)


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BIB$I%GRAPHY2

@e+site2

5# Intro*1tion to Banking In*str)2 Retriee on 37 t9 Jan*ar)8

3454 from 9tt>2en.iki>eia.orgikiBankinginInia

3# Banking in Inia-344E-542Retriee on 4t9 Jan*ar)8 3454 from

9tt>2.i+ef.orgin*str)Banking.as>=

# Re1ent Histor) %f Inian Banking2 Retriee on Dt9 e+r*ar)8

3454 from 9tt>2.+ankinginia*>ate.1omgenera/.9tm/

7


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RRNCS2

2)Maria oyany ,S3ring 5007-+ PTaming the Asian Tiger: Revival on"on6;erforming Assets on the Asian Continent)QThe Fournal of ;rivateEuity

5) Rosy Kalra ,5025-+ P"on6;erforming Assets of Commercial an8s6 ACase Study)Q The IU; Fournal of Monetary Economics

Non performing assest Final Prjct 2014 (1)

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