NON PERFORMING ASSETS

PROJECT ON

NON-PERFORMING ASSETS

University of Mumbai for partial completion of the Degree

of Bachelor of Commerce-Banking & Insurance

BACHELOR BANKING AND INSURANCE

SEMESTER VI

(2018-2019)

T. Y.B.COM (BANKING & INSURANCE)

SUBMITTED BY

DHANASHREE GORAKHNATH ARGADE

PROJECT GUIDE

MR.KISHOR CHAUHAN.

SMT. SUSHILADEVI DESHMUKH COLLEGE OF ARTS,

SCIENCE& COMMERCE

SEC-4, AIROLI, NAVI MUMBAI-400708.

 NON PERFORMING ASSETS

PROJECT ON

NON-PERFORMING ASSETS

University of Mumbai for partial completion of the Degree

of Bachelor of Commerce-Banking & Insurance

BACHELOR BANKING AND INSURANCE

SEMESTER VI

(2018-2019)

U. Y.B.COM (BANKING & INSURANCE)

SUBMITTED BY

DHANASHREE GORAKHNATH ARGADE

PROJECT GUIDE

MR.KISHOR CHAUHAN.

SMT. SUSHILADEVI DESHMUKH COLLEGE OF ARTS,

SCIENCE& COMMERCE

SEC-4, AIROLI, NAVI MUMBAI-400708.

 NON PERFORMING ASSETS

DECLARATION
I the undersigned Mrs.DHANASHREE GORAKHNATH ARGADE here by,
declare that the work embodied in this project work titled “NON PERFORMING
ASSETS”,forms my own contribution to the research work carried out under the
guidance of KISHOR CHAUHAN is a result of my own research work and has not
been previously submitted to any other University for any other Degree/Diploma to
this or any other University.

Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.

I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.

Name and signature of the learner

Certified by

Name and signature of guidance teacher

 NON PERFORMING ASSETS

ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth
is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do
this project.

I would like to thank the Principal, Dr.Shalini Vermani for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our coordinator Kishor Chauhan for his moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide

Kishor chauhan whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various

reference book and magazines related to my project.

Lastly, I would like to thank each an every person who directly and

indirectly help me in the completion of project especially My Parents and

Peers who supported me throughout my project.

 NON PERFORMING ASSETS

INDEX

SR.NO TOPIC
1. NON PERFORMING ASSETS 1

1.1 INTRODUCTION 1
1.2 DEFINATION OF NON PERFORMING 2
ASSETS
2.1
2.ADVANTAGES OF NON
PEFORMING 5

ASSET

2.1 The Disadvantages of Nonperforming Assets 6

2.2 Types of Non-Performing Assets (NPA) 8

2.3 Non Performing Assets 9
2.4 Status of Out of Order 10

3. OBJECTIVES OF THE STUDY: 11

3.1 Key Facts about India’s NPA Problem 13

3.2 Reasons for NPAs 15
3.3 How to Tackle Problem of NPAs 16
3.4 Resolving the NPA Problem 17

4. Improving the Quality of Lending 19

4.1 Classification of Assets 20

4.2 Guidelines for Provisions under Special 25
Circumstance
 NON PERFORMING ASSETS

5. Provision required to be made 28

5.1 There are two types of NPA 30

5.2 INCOME RECOGNITION 31
5.3 Appropriation of recovery in NPAs 32
5.4 Guidelines for classification of assets 33
5.5 Accounts where there is erosion in the value of 36
security/frauds committed by Borrowers

6. Reasons for an account becoming NPA 41

6.1 Symptoms of NPA 41

6.2 Preventive Measurement for NPA 43

7. CONSEQUENCES OF NON- 48
PERFORMING ASSETS

7.1 Functions of NPA 49

7.2 Functions, duties and powers of Registrar 51
8.NPA IN DIFFERENT BANK
53

8.1 NPA IN STATE BANK OF INDIA 53

8.2 NPA IN RBI 55
8.3 NPA IN BOD 58
8.4 NPA IN DENA BANK 62
8.5 Punjab National Bank invites bids for two 64
dozen NPA accounts to recover Rs 1,179 corer
8.6 NPA IN ICICI BANK 66
9. Non Performing Assets of Indian Banking 68
System and its
9.1 Review of literature 68
9.2 Why assets become NPA? 69
 NON PERFORMING ASSETS

9.3 Table No.1 Net NPA.Gross NPA and stress 70

assets till March 2016
9.4 Indian banks and their NPA 71
9.5 NPA - Impact 73
10. Effect of NPA (Non performing assets) in 78
Banking Sector

10.1 Impact of NPA On Banks 78

10.2 Impact of Non Performing Assets on Balance 79
Sheet
10.3 Effects of High NPA’s for Banks 82
10.4 Steps of Pulling out Banks from Non- 83
Performing Asset (NPA)
10.5 How will a bank’s NPA affect the common 85
man’s savings?
11. Conclusion 89

12.Bibliography 90
 NON PERFORMING ASSETS

NON PEFORMING ASSET

 NON PERFORMING ASSETS

1. NON PERFORMING ASSETS

1.1 INTRODUCTION
A Non Performing Assets is defined as credit facility in respect of which the interest
and/or installment of principle has remained ‘past due’ for a specified period of time.
In simple terms, an asset is tagged as none performing when it ceases to generate
income for lender.

A NPA used by financial institutions that refer to loan that are in jeopardy of default
the so called NPL. Once the borrower has failed to make interest or principal
payment for 90 days the loan is considered to be a non-performing assets are
problematic for financial institutions since they depend on interest payment for
income. Trouble some pressure from the economy can lead to a sharp increase in
NPL and often results in massive write-downs.

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the ’90 days’ overdue norms for
identification of NPA, from the year ending March 31, 2004, a non performing assets
is a loan or an advance where:

● Interest and/or installment of principal remain overdue for a period of more

than 91 days in respect of a term loan.
● The account remains ‘out of order’ for a period of more than 90 days, 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 remain overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advanced granted for agricultural purposes, and
● Any amount to be received remains overdue for a period of more than 90 days
in respects of other account.
● Non submission of stock statements for 3 continuous Quarters in case of cash
credit facility.
● No active transactions in the account (cash credit/over draft/EPS/PCFC) for
more than 91 days

Further 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: a sub standard asset is one which has been classified as
NPA for a period not exceeding 12 months.

1
 NON PERFORMING ASSETS

2. Doubtful Assets: An asset would be classified as doubtful if it has remained in

the substandard category for a period of 12 months.
3. Loss assets: where loss has been identified by the bank, internal or external
auditor or central bank inspectors. But the amount has not been written off,
wholly or partly.
Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All
those assets which are considered as non-performing for period of more than 12
months are called as Doubtful Assets. All those assets which cannot be recovered are
called as Loss Assets. Some advanced tools like Experiance India's "Hunter Fraud
Score" have also been launched that work on data mining and calculate some
authentic score that can help banks detect fraud and lower their losses.
1.2 DEFINATION OF NON PERFORMING ASSETS
A Non-performing asset (NPA) is defined as a credit facility in respect of which the
interest and/or installment of Bond finance principal has remained 'past due' for a
specified period of time. NPA is used by financial institutions that refer to loans that
are in jeopardy of default the so called NPL.

A non performing asset (NPA) is a loan or advance for which the principal or interest
payment remained overdue for a period of 90 days..

Description:
Banks are required to classify NPAs further into Substandard, Doubtful and Loss
assets.

1. Substandard assets: Assets which has remained NPA for a period less than or
equal to 12 months.

2. Doubtful assets: An asset would be classified as doubtful if it has remained in

the substandard category for a period of 12 months.

3. Loss assets: As per RBI, “Loss asset is considered un collectible and of such
little value that its continuance as a bankable asset is not warranted, although there
may be some salvage or recovery value.”

2
 NON PERFORMING ASSETS

A Non-performing asset (NPA) is defined as a credit facility in respect of which the

interest and/or installment of Bond finance principal has remained ‘past due’ for a
specified period of time. NPA is used

by financial institutions that refer to loans that are in jeopardy of default the so
called NPL. Once the borrower has failed to make interest or principal payments for
90 days the loan is considered to be a non-performing asset. Non-performing assets
are problematic for financial institutions since they depend on interest payments for
income. Troublesome pressure from the economy can lead to a sharp increase in
NPLs and often results in massive write-downs.

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 NPA, from the year ending March 31, 2004. Accordingly, with effect
from March 31, 2004, a non-performing asset (NPA)is a loan or an advance where;

3
 NON PERFORMING ASSETS

 Interest and/or installment of principal remain overdue for a period of more than
91 days in respect of a term loan,
 The account remains ‘out of order’ for a period of more than 90 days, 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.
 Non submission of Stock Statements for 3 Continuous Quarters in case of Cash
Credit Facility.
 No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for
more than 91days

4
 NON PERFORMING ASSETS

2. ADVANTAGES OF NON PEFORMING ASSET

Better and speedier realization from Non Performing Assets :

Provides a meeting ground to the lenders, borrowers and the prospective investors to
speedily address the issue of Non Performing Assets.

Transparency and visibility of information on NPA :

The portal will carry vital information about NPAs providing easy and transparent
access to the prospective buyers who can then evince their interest in such Non
Performing Assets.

Better efficiencies in the management of NPAs :

While traditionally we used to avail the services of news media to create awareness
about the Non Performing Asset, NPA source.com brings into play the unlimited
power of technology for the lender to undergo due-diligence.

Robust data collection for use by all lenders across the country :
Even lenders will find it very easy to upload data on the website and take huge
advantage of the portal to release the value of their non performing assets easily and
effectively.

Attracting prospective investors / buyers from across the globe :

Geographical boundaries will not restrict the resolving of NPAs. Individuals from
across the world will be able to access the portal and avail the benefits.

5
 NON PERFORMING ASSETS

List of the NPA and their assets at a single location enabling lenders
to take informed decision :
With maximum information available related to NPA, the prospective investor can
take informed decision towards the NPA.

Revival of a sick unit/ industry by infusing required capital through prospective

investors : The portal will help greatly in unlocking huge values and once again
bringing into action the units long lying sick.

Help from facilitators:

Investors, borrowers and lenders can take the service of facilitators such as Legal
Advisors, Financial Advisors, Tax Advisors, and Project Consultants & Valuation
Experts thru the portal.

2.1The Disadvantages of Nonperforming Assets

Nonperforming assets typically refer to loans that have problems getting paid on time
or getting paid at all. It is a classification commonly used by financial institutions to
designate loans that are unpaid for at least 90 days, have more than 90 days' worth of
interest delayed or refinanced or have no expectation of payments continuing.
Knowing the disadvantages of nonperforming assets can help you avoid ending up as
a lender or borrower of this type of loan.

Reduced Income

Interest Income is the first account that gets hit whenever an asset is declared
nonperforming. Lending companies such as banks are primarily in the business of
earning income from interest paid by borrowers. A loan that has fallen into the
nonperforming asset category has not yielded interest for at least 90 days. Any
decrease in interest payments will translate into a decrease in net income. A
company's income level falls as

Unrecoverable Principal
The principal, or money used by the amount of nonperforming assets climbs.banks to
finance loans, comes largely from the bank's depositors. Banks borrow the money
deposited by account holders and loan it to their customers. It is imperative for the
bank to recover the money, because it's not the bank's money in the first place. When
a borrower defaults on loan payments, the bank is unable to recover the principal.
Unrecoverable principal must be replaced by the bank to keep its depositors' funds
intact.

6
 NON PERFORMING ASSETS

Reduced Cash Flow

Companies react to high levels of nonperforming assets by tightening credit policies.
Unrecoverable income and a decrease in interest collections translate into less cash
flow. With an increase in nonperforming assets and with less cash floating around,
lending companies tend to resort to tighter credit policies. This outcome can slow
down economic growth, because some businesses won't be able to obtain a loan.

Negative Indicator
Nonperforming assets can be used as indicators of a lender's ability to manage its loan
portfolio efficiently. The efficiency of lending companies in recovering their principal
and earning interest can be measured by comparing their nonperforming assets ratio
against those of peer companies. Dividing the amount of nonperforming assets by the
total gross loans will yield this ratio. A lending company's efficiency rating
deteriorates as the ratio increases.

7
 NON PERFORMING ASSETS

2.2Types of Non-Performing Assets (NPA)

1 – TERM LOANS

A term loan i.e. plain vanilla debt facility will be treated as an NPA when the

principal or the interest installment of the loan has been due for more than 90 days.

2 – CASH CREDIT AND OVERDRAFT

A cash credit or an overdraft when remaining past due for more than 90 days it can be

treated as an NPA.

3 – Agricultural Advances

Agricultural advances that have been past due for more than two crop seasons for

short crop duration or one crop duration for long duration crops. There could be

various other types of NPAs including residential mortgage, home equity loans, credit

card loans and non-credit card outstanding, direct and indirect consumer loans.

8
 NON PERFORMING ASSETS

2.3 Non Performing Assets

An asset, including a leased asset, becomes none performing when it ceases to

Generate income for the bank.
A non performing asset (NPA) is a loan or an advance where;

i. interest and/ or installments of principal remain overdue for a period of more than
90
Days in respect of a Term loan,

ii. the account remains ‘out of order’ as indicated at paragraph 5.3 below, in respect of
an
Overdraft/Cash Credit (OD/CC),

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

iv. The installments of principal or interest thereon remain overdue for two crops
Seasons for short duration crops,(Agricultural loans)
v. the installments of principal or interest thereon remains overdue for one crop
season for
Long duration crops,

vi. The amount of liquidity facility remains outstanding for more than 90 days, in
respect of
a securitization transaction undertaken in terms of guidelines on securitization dated
February 1, 2006.
Banks should, classify an account as NPA only if the interest due and charged
During any quarter is not serviced fully within 90 days .

9
 NON PERFORMING ASSETS

2.4 Status of Out of Order.

An account should be treated as 'out of order' if the outstanding balance remains

Continuously in excess of the sanctioned limit/drawing power. In 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 90 days 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'.

‘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.

10
 NON PERFORMING ASSETS

3. OBJECTIVES OF THE STUDY:

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

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

2. To study th e past trends of NPA

3. To calculate the weighted of NPA in risk management in Banking

4. To analyze financial performance of banks at different level of NPA

5. To evaluate profitability positions of banks

6. To evaluate NPA level in different economic situation.

7. To Know the Concept of Non Performing Asset

8. To Know the Impact of NPAs

9. To Know the Reasons for NPAs

10. To learn Preventive Measures

Scope of the Study

The study has the following scope:

The study could suggest measures for the banks to avoid future NPAs & to
reduce existing NPAs.
The study may help the government in creating & implementing new
strategies to control NPAs.
The study will help to select appropriate techniques suited to manage the
NPAs and develop a time bound action plan to check the growth of NPAs.

11
 NON PERFORMING ASSETS

Methodology of Study

For our study, we have considered Non Performing Assets in Scheduled Commercial
Banks which includes public sector banks, private sector banks and foreign banks
which are listed in the Second Schedule of the Reserve Bank of India Act, 1934.

The study is based on secondary data. The paper discusses the conceptual framework
of NPA and it also highlights the trends, status and impact of NPA on scheduled
commercial banks during the period of 14 years i.e. from 2000 to 2014.

Several reputed research journal including research paper and articles have been used
by the researchers. Moreover, RBI Report on Trend and Progress of Banking in India
for various years, websites and a book on banking has been referred during the study.

Population

Banking industry is taken for the study, where aggregate data related to NPA for
Public sector Banks, Private Sector Banks and Foreign Banks is used.

Time- Period of the Paper

14 year’s Aggregate data from 2000 to 2014 is used for the study.

12
 NON PERFORMING ASSETS

3.1Key Facts about India’s NPA Problem

● The financial position of India’s Public Sector Banks has deteriorated sharply
since 2011.

● Gross NPA has risen to 9.5 percent of total advances in 2015-16.

● Gross NPA has expected to rise further and touch 11.5 percent in coming
years.

● At the aggregate level, PSBs reported a loss of 17672 cores in 2015-16.

● Most of the loans were made during the boom period of 2004-2008.

● The banks inspired by the boom kept on lending to business houses without
inspecting the projects.

● When Global Crisis happened, the projects become unavailable, and losses
started to happen.

● Healthy Banking relies on healthy debt contracts. A debt contract is an

agreement between a borrower and a lender, where the borrower promises to
repay the lender principle with interest as per scheduled timeline. If the
borrower cannot repay, he is in default.

● In India, most of the defaulters in recent years are not the small retail
borrowers but are large borrowers and corporate houses.

13
 NON PERFORMING ASSETS

● Across the World, when a borrower defaults irrespective of how big he is, the
borrower has to make sacrifices if he defaults. Sacrifices can be in terms of
asset confiscation, taking over of firms etc.

● The biggest problem in India’s Banking system is lack of incentives the big
borrower has to repay the loans back. They do not have to make many
sacrifices if they default. This is the single most major reason of the NPAs in
Public Sector Banks.

● In much of the Globe when large borrower defaults they are filled with guilt
and desperate to convince their lenders that they should continue their trust in
them.

● In India, however, large borrower insists on their divine right to stay in control
despite their unwillingness to put in new money. The firms and its workers, as
well as past bank loans, are taken as hostages in this game. The promoters
threaten to run the enterprise into the ground unless the government does not
bail them out.

14
 NON PERFORMING ASSETS

3.2Reasons for NPAs

15
 NON PERFORMING ASSETS

3.3 How to Tackle Problem of NPAs

16
 NON PERFORMING ASSETS

3.4 Resolving the NPA Problem

● The legacy of the NPAs must be resolved as quickly as possible so that banks
can focus on resuming lending.

● Some assets that are classified as Loss assets should be written off from banks
books.

● The new Bankruptcy code can be a game changer but will take time to
operationalise.

● In many cases, the projects can be turned around through a combination of

fresh capital from investors and new management.

● RBI has devised two schemes in this regard: the Strategic Debt Restructuring
Scheme, which allows the bank to convert their debts into equity, take control
of the company and then induced a new management to turn it around.

● Action has been initiated under the SDR, but no successful revival has been
completed so far.

● The second RBI scheme is the Scheme for Sustainable Structuring of Stressed
Assets (S4A) under which bank can offer existing management an opportunity
to rehabilitate the project by dividing the debt into two parts: a “sustainable
component” which can be serviced by the project based on some assumption
by revenue and the “excess component” which can be converted into equity or
redeemable preference shares.

● Sustainable debt must be more than 50% of the total debt.

17
 NON PERFORMING ASSETS

● S4A leaves the project in the hands of existing managements and also gives
the banks more flexibility in the time taken to resolve the problem. A key
issue is how large a part of the debt is deemed to be sustainable. Management
and banks are bound to differ on this issue.
● There is much talk of selling assets to privately managed asset reconstruction
companies (ARCs), which can then organize the turnaround.

● Another idea is that the proposed National Infrastructure and Investment Fund
(NIIF), operating with private partners, provide both equity and new credit to
stressed infrastructure projects going through the SDR mechanism.

● The problem could be solved by creating a government-owned “bad bank”

which purchases problem loans from the banks and concentrates on turning
the projects around, possibly with the help of private ARCs.

● Bank managements will be much more willing to sell assets at a discounted

price to another public sector company, which will then undertake the task of
negotiating the best deal with potential new owners. The terms of reference of
the new entity can be sufficiently clarified to encourage it to negotiate the best
possible deal with new private managements. It could work in partnership with
ARCs to fulfill this mandate.

18
 NON PERFORMING ASSETS

4. Improving the Quality of Lending

● The quality of lending by PSB must be improved in future so that the same
problem does not arise again.

● To provide Public sector banks with greater autonomy the shareholding of the
government can be reduced to less than 50 percent or 33 percent.

 The P.J. Nyack committee had suggested that if the dilution of shareholding is
not acceptable, it should be possible to distance the government from the
managements of the banks by creating a public sector holding company and
vesting the government’s shares in the holding company. Some statements
have been made that this may be acceptable and the newly created Banks
Board Bureau is the first step in this direction.

● There are two key elements in any effort to distance government. One is that
the public sector banks should deal with only one regulator, RBI, and the
extensive quasi-regulatory control exercised by the department of financial
services should be ended. The role of the government as the owner would be
performed by the holding company, and the government would deal only with
the holding company on all issues.

● A second requirement is that public sector banks should become board-

managed institutions, with the board responsible for all appointments,
including that of the chief executive officer (CEO). If the shares of the
government are actually transferred to a holding company, then decisions
regarding appointments could be taken by the board of the new company on
the recommendation of the board of the bank.

19
 NON PERFORMING ASSETS

● The objective of creating a genuinely commercial environment in which

public sector banks can function and managements are made accountable can
only be achieved if the government is willing to step back from exercising
direct control. Unless strong action is taken along these lines, we can assume
that things will continue as they have.

4.1Classification of Assets:

Assets are classified into following four categories:

1) Standard Assets
2) Sub-standard Assets
3) Doubtful Assets
4) Loss Assets

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 using norms.

Banks are required to classify non-per forming assets further into the following three
categories based on the period for which the asset has remained non- performing and
the reasonability of the dues:

* Sub-Standard Assets
* Doubtful Assets
* Loss Assets

20
 NON PERFORMING ASSETS

a) Sub-Standard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following features are
exhibited by substandard 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 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.

b) 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.

21
 NON PERFORMING ASSETS

Provision requirement

Period for which the advance Provision requirement

has (%)
r remained in ‘doubtful’
category
Up to one year 20(25% since 2011)
One to three years 30(40%since 2011)

More than three years 100(100%since 2011)

(Note: Figures in brackets as

given as per RBI
Circular dated1 8th May
2011)

c) Loss Assets:
A loss asset is one which considered un collectible and of such little value that its
continuance as a bankable asset is not warranted, although there may be some salvage
or recovery value. 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 whole

2)Substandard assets
(i) A general provision of 10 percent on total outstanding should be made without
making

Any allowance for ECGC guarantees cover and securities available.

(ii) The ‘unsecured exposures’ which are identified as ‘substandard’ would attract
additional

Provision of 10 per cent, i.e., a total of 20 per cent on the outstanding balance. The

Provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent. Unsecured

Exposure is defined as an exposure where the realizable value of the security, as

assessed

22
 NON PERFORMING ASSETS

By the bank/approved values/Reserve Bank’s inspecting officers, is not more than 10

Percent, an -initio, of the outstanding exposure. ‘Exposure’ shall include all funded
and non--

Funded exposures (including underwriting and similar commitments). ‘Security’ will

mean

Tangible security properly discharged to the bank and will not include intangible

Securities like guarantees (including State government guarantees), comfort letters etc.

(iii) In order to enhance transparency and ensure correct reflection of the unsecured

Advances in Schedule 9 of the banks' balance sheet, it is advised that the following
would be

Applicable from the financial year 2009-10 onwards:

a) For determining the amount of unsecured advances for reflecting in schedule 9 of

the

Published balance sheet, the rights, licenses, authorizations, etc., charged to the banks
as

Collateral in respect of projects (including infrastructure projects) financed by them,

should

Not be reckoned as tangible security. Hence such advances shall be reckoned as

unsecured.

b) Banks should also disclose the total amount of advances for which intangible
securities

Such as charge over the rights, licenses, authority, etc. has been taken as also the
estimated

Value of such intangible collateral. The disclosure may be made under a separate head
in

"Notes to Accounts". This would differentiate such loans from other entirely
unsecured

Loans

3) Loss assets
Loss assets should be written off. If loss assets are permitted to remain in the books
for

23
 NON PERFORMING ASSETS

Any reason, 100 percent of the outstanding should be provided for.

4) 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.

ii. In regard to the secured portion, provision may be made on the following basis, at

The rates ranging from 25 percent to 100 percent of the secured portion depending
upon

The period for which the asset has remained doubtful: would highlight the position as
per the latest norm announced on May 2016)

Asset Category Revised Existing

Substandard 15% 10%
(Secured)(Remains NPA for
12 months)
Subsets (Unsecured) 25% 20%
Doubtful (remains unpaid for 25% 20%
1 year)
Doubtful up to 3 years 40% 30%
Beyond 3 years 100% 100%
Restructured advances 2% 1%
(classified as std)

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.

24
 NON PERFORMING ASSETS

4.2Guidelines for Provisions under Special Circumstance

Advances granted under rehabilitation packages approved by

BIFR/term lending institutions
(i) 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 substandard or doubtful asset.

(ii) 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.

(iii) In respect of additional credit facilities granted to SSI units which are identified

As sick [as defined in Section IV (Para 2.8) of RPCD circular RPCD.PLNFS.BC. No

83

/06.02.31/20042005 dated 1 March 2005] and where rehabilitation packages/nursing

Programmed have been 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, gold

Ornaments, government & other securities and life insurance policies would attract

Provisioning requirements as applicable to their asset classification status.

25
 NON PERFORMING ASSETS

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 guarantee

In the case of advances classified as doubtful and guaranteed by ECGC, provision
should be

Made only for the balance in excess of the amount guaranteed by the Corporation.
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 the Corporation and then provision made as illustrated

hundread:

26
 NON PERFORMING ASSETS

Example

Example No:1- ECGC guarantee.

Outstanding Balance Rs. 4 lakes

ECGC Cover 50 percent

Period for which the advance has More than 3 years remained
doubtful
remained doubtful
(as on March 31, 2004)

Value of security held Rs. 1.50 lakes

(worth of Rs.)

27
 NON PERFORMING ASSETS

5. Provision required to be made

Outstanding balance Rs. 4.00 laths

Less: Value of security held Rs. 1.50 laths

Unrealized balance Rs. 2.50 laths

(-)ECGC Cover(50% of un realizable Rs. 1.25 lakes

balance)

Net unsecured balance Rs. 1.25 lakes

Provision for unsecured portion of Rs. 1.25 lakes(@ 100 percent of

advance
unsecured portion)

Provision for secured portion of Rs.0.90 lakes (@ 60 per cent of the

advance
secured portion)
(as on March 31, 2005)

Total provision to be made Rs.2.15 lakes (as on March 31, 2005)

28
 NON PERFORMING ASSETS

1. Types of NPA:

Types of Non-Performing Assets (NPA)

29
 NON PERFORMING ASSETS

5.1There are two types of NPA

* Gross NPA
* Net NPA

a) Gross NPA:

Gross profit are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans
made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful,
and loss assets. It can be calculated with the help of following ratio:

b) Net NPA:
Net profit is those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. In India, bank's 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:

30
 NON PERFORMING ASSETS

5.2INCOME RECOGNITION

Income Recognition Policy

The policy of income recognition has to be objective and based on the record of
recovery.ternationally income from nonperforming 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 margins available in
the accounts.

Fees and commissions earned by the banks as a result of renegotiation's or

rescheduling of outstanding debts should be recognized on an accrual basis over the
period of time covered By the renegotiated or rescheduled extension of credit. If
Government guaranteed advances become NPA, the interest on Such advances should
not

Reversal of income
If any advance, including bills purchased and discounted, becomes NPA as at the
close of Any year, the entire interest accrued and credited to income account in the
past periods, should be reversed or provided for if the same is not realized. This will
apply to Government ranted 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.

Leased Assets
The finance charge component or finance income [as defined in ‘AS 19 Leases’
issued by the Council of the Institute of Chartered Accountants of India (ICAI)] on
the leased asset which Has accrued and was credited to income account before the
asset became nonperforming, And remaining unrealized, should be reversed or
provided for in the current accounting Period.

31
 NON PERFORMING ASSETS

5.3Appropriation 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 uniform and consistent manner.

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 preformed accounts.

Computation of NPA levels

Banks should deduct the following items from the Gross Advances and Gross NPAs
to arrive at the Net advances and Net NPAs respectively:

i) Balance in Interest Suspense Account

ii) DICGC/ECGC claims received and held, pending adjustment

iii) Part payment received and kept in suspense account

iv) Total provisions held (excluding amount of technical write off and provision on
standard

Assets) for the purpose, the amount of gross advances should exclude the amount of
Technical Write off but would include all outstanding loans and advances; including
the advances for Which refinance has been availed but excluding the amount of re
discounted bills. The level of gross and net NPAs will be arrived at in percentage
terms by dividing the amount of gross and net NPAs by gross and net advances,
computed as above, respectively.

32
 NON PERFORMING ASSETS

5.4Guidelines for classification of assets

Broadly speaking, classification of assets into above categories should be done taking
into account the degree of well-defined credit weaknesses and the extent of
dependence on collateral security for realization of dues. Banks should establish
appropriate internal systems to eliminate the tendency to delay or postpone the
identification of NPAs, especially in respect of high value accounts. The bans may fix
a minimum cut off point to decide what would constitute a high value account
depending upon their respective business levels.

The cutoff point should be valid for the entire accounting year. Responsibility and
validation levels for ensuring proper asset classification may be fixed by the banks.
The system should ensure that doubts in asset classification due to any reason are
settled through specified internal channels within one month from the date on which
the account would have been classified as NPA as per extant guidelines.

Availability of security / net worth of borrower/ guarantor

The availability of security or net worth of borrower/ guarantor should not be taken
into Account for the purpose of treating an advance as NPA or otherwise, except to
the extent Provided in Para 5.9.7(fraudulent a/c) as income recognition is based on
record of Recovery.

Accounts 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

33
 NON PERFORMING ASSETS

continuous period of 90 days even though the unit may be working or the borrower's
financial position is satisfactory.

Regular and ad hoc credit limits need to be reviewed/ regularized not later than three
months from the due date/date of ad hoc sanction. In case 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 general discipline. Hence,
an account where the 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.

Up gradation of loan accounts classified as NPAs

If arrears of interest and principal are paid by the borrower in the case of loan
Accounts classified as NPAs, the account should no longer be treated as
nonperforming and May be classified as ‘standard’ accounts. With regard to up
gradation of a restructured/Rescheduled account which is classified as NPA, contents
of paragraphs 5.9.13 and 5.9.14Will are applicable.

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.

Asset Classification to be borrower-wise and not facility-wise

I) It is difficult to envisage a situation when only one facility to a borrower/one
investment In any of the securities issued by the borrower becomes a problem
credit/investment and Not others. Therefore, all the facilities granted by a bank to a
borrower and investment in all the securities issued by the borrower will have to be
treated as NPA/NPI and not the particular facility/investment or part thereof which
has become irregular.(one a/c nap, all/c nap)

ii) If the debits arising out of development 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 borrower’s principal operating account for the purpose of

34
 NON PERFORMING ASSETS

application of prudential norms on income recognition, asset classification and

provisioning.

iii) The bills discounted under LC favoring a borrower may not be classified as a
Non-performing advance (NPA), when any other facility granted to the borrower is
classified asps. However, in case documents under LC are not accepted on
presentation or the payment under the LC is

not made on the due date by the LC issuing bank for any reason and the borrower
does not immediately make good the amount disbursed as a result of discounting of
concerned bills, the outstanding bills discounted will immediately be classified as
NPA with effect from the date when the other facilities had been classified asps.

iv) The overdue receivables representing positive mark-to-market value of a

derivative contract will be treated as a non-performing asset, if these remain unpaid
for 90 days or more. In case the overdue arising from forward contracts and plain
vanilla swaps adoptions become NPAs, all other funded facilities granted to the client
shall also be classified as non-performing asset following the principle of borrower-
wise classification as per the existing asset classification norms.

Accordingly, any amount, representing positive mark-to-market value of the foreign

exchange derivative contracts (other than forward contract and plain vanilla swaps
and options) that were entered into during the period April 2007 to June2008, which
has already crystallized or might crystallize in future and is / becomes receivable from
the client, should be parked in a separate account maintained in the name of the client
/ counter party. This amount, even if overdue for a period of 90 days or more, will not
make other funded facilities provided to the client, NPA on account of the principle of
borrower-wise asset classification, though such receivable overdue for 90 days or
more shall itself be classified as NPA, as per the extant IRAC norms. The
classification of all other assets of such clients will, however, continue to be governed
by the extant IRAC norms.

v) If the client concerned is also a borrower of the bank enjoying a Cash Credit or
Overdraft facility from the bank, the receivables mentioned at item (iv) above may be
debited to that account on due date and the impact of its non-payment would be
reflected in the cash credit / overdraft facility account. The principle of borrower-wise
asset classification would-be applicable here also, as per extant norms.

vi) In cases where the contract provides for settlement of the current mark-to-market
value of a derivative contract before its maturity, only the current credit exposure
(not the potential future exposure) will be classified as a non-performing asset after an
overdue period of 90 days.

35
 NON PERFORMING ASSETS

5.5Accounts where there is erosion in the value of security/frauds

committed by Borrowers
In respect of accounts where there are potential threats for recovery on account of
erosion in the value of security or non-availability of security and existence of other
factors such as frauds committed by borrowers it will not be prudent that such
accounts should go through various stages of asset classification. In cases of such
serious credit impairment the asset should be straightaway classified as doubtful or
loss asset as appropriate:

I. 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 may be. Such NPAs may be
straightaway classified under doubtful category and provisioning should be made as
applicable to doubtful assets.

ii. If the realizable value of the security, as assessed by the bank/ approved values/
Riis 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.

Advances to PACS/FSS ceded to Commercial Banks

In respect of agricultural advances as well as advances for other purposes granted by
banks to 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 crop seasons in case of
short duration crops and one crop season in case of long duration crops, as the case
may be, after it has become due will be classified as NPA and not all the credit
facilities sanctioned toe 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.

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, provided adequate margin is available in the
accounts. Advances against gold ornaments, government securities and all other
securities are not covered by this exemption.

36
 NON PERFORMING ASSETS

Loans with moratorium for payment of interest

I. 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 do not become NPA, with
reference to the date of debit of interest. They become overdue after due date for
payment of interest, if uncollected.

ii. In the case of housing loan or similar advances granted to staff members where
interest’s 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 default in repayment of installments of principal or payment
of interest on the respective due dates.

Agricultural advances
I. A loan granted for short duration crops will be treated as NPA, if the
installment of principal or interest thereon remains overdue for two crop
seasons. A loan granted for long duration crops will be treated as NPA, if
the installments of principal or interest thereon remain overdue for one
crop season. For the purpose of these guidelines, “long duration”rops
would be crops with crop season longer than one year and crops, which are
not “long duration” crops would be treated as “short duration” crops. The
crop season for each crop, which means the period up to harvesting of the
crops , would be as determined by the State Level Bankers’ Committee in
each State.
II. Depending upon the duration of crops raised by an agriculturist, the above
NPA norms would also be made applicable to agricultural tarlatans availed
of by him. The above norms should be made applicable to all direct
agricultural advances to priority sector. In respect of agricultural loans,
identification of NPAs would be done on the same basis as non-
agricultural advances, which, at present, is the 90 days delinquency norm.

ii. Where natural calamities impair the repaying capacity of agricultural borrowers,
banks may decide on their own as a relief measure conversion of the short-term
production loan into a term loan or reschedule of the repayment period; and the
sanctioning of fresh short-term loan, subject to guidelines contained in RBI circular
RPCD. No.PLFS.BC.6/05.04.02/ 200405 dated July 1, 2005.

iii. In such cases of conversion or reschedulement, 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
remain overdue for two crop seasons for short duration crops and for one crop season

37
 NON PERFORMING ASSETS

furlong duration crops. For the purpose of these guidelines, "long duration" crops
would be crops with crop season longer than one year and crops, which are not 'long
duration" would-be treated as "short duration" crops.

iv. The debts as on March 31, 2004 of farmers, who have suffered production and
income losses on account of successive natural calamities, i.e., drought, flood, or
otheralamities which might have occurred in the districts for two or more successive
years during the past five years may be rescheduled/ restructured by the banks,
provided he State Government concerned has declared such districts as calamity
affected. Accordingly, the interest outstanding/accrued in the accounts of such
borrowers (crop loans and agriculture term loans) up to March 31, 2004 may be
clubbed with the principal outstanding therein as on March 31, 2004, and the amount
thus arrived at shall be repayable over a period of five years, at current interest rates,
including an initialoratorium of two years.

As regards the crop loans and agricultural term loans which have already been
restructured on account of natural calamities as per the standing guidelines, only the
overdue installments including interest thereon as on March 31, 2004 may be taken
into account for the proposed restructuring. On restructuring as above, the farmers
concerned will become eligible for fresh loans. The rescheduled/restructured loans as
also the fresh loans to be issued to the farmers may be treated as current dues and
need not be classified as NPA. While the fresh loans would be governed by the Span
worms as applicable to agricultural loans, in case of rescheduled/restructured loans,
the Span worms would be applicable from the third year onwards,i.e., on expiry of the
initial moratorium period of two years.

v. In case of Sharif crop loans in the districts affected by failure of the South-west
monsoons notified by the State Government, recovery of any amount either by way of
principal orneriest during the financial year 2002-03 need not be affected. Further, the
principal amount of crop loans in such cases should be converted into term loans and
will be recovered over a period of minimum 5 years in case of small and marginal
farmers and 4years in case of other farmers.

Interest due in the financial year 2002-03 on crop loans should also be deferred and
no interest should be charged on the deferred interest. In such cases of conversion or
reschedule of crop loans into term loans, the term loans 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 and conditions and would be treated as NPA if interest and / or installment of
principal remain overdue for two crop seasons.

vi. While fixing the repayment schedule in case of rural housing advances granted to
agriculturists under India Awes Yolanda and Golden Jubilee Rural Housing Finance

38
 NON PERFORMING ASSETS

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 forth purpose of recognition of income.

The requirement of invocation of guarantee has been delinked for deciding the asset
classification and provisioning requirements in respect of State Government
guaranteed exposures. With effect from the year ending 31 March 2006State
Government guaranteed advances and investments in State Government guaranteed
securities would attract asset classification and provisioning norms if interest and/or
principal or any other amount due to the bank remains overdue for more than 90 days.

Projects under implementation

.i: It was observed that there were instances, where despite substantial time
overrunning the projects under implementation, the underlying loan assets remained
classified in the standard category merely because the project continued to be under
implementation.

Recognizing that unduly long time overrun in a project adversely affected its viability
and the quality of the asset deteriorated, a need was felt to evolve an objective and
definite time frame for completion of projects so as to ensure that the loan assets
relating to projects under implementation were appropriately classified and asset
quality correctly reflected

39
 NON PERFORMING ASSETS

. In the light of the above background, it was decided to extend the norms detailed
below on income recognition, asset classification and provisioning to banks with
respect to industrial projects under implementation, which involve time overrun.

i. The projects under implementation are grouped into three

categories for the purpose of determining the date when the
project ought to be completed: Category
ii. I: Projects where financial closure had been achieved and
formally documented. Category II: Projects sanctioned before
1997 with original project cost of Rs.100 core or more where
financial closure was not formally documented. Category

III: Projects sanctioned before 1997 with original project cost of less than Rs.100

Core where financial closure was not formally documented.

40
 NON PERFORMING ASSETS

6.REASONS FOR AN ACCOUNT BECOMING NPA

6.1. 1) Internal Factors:

* Funds borrowed for a particular purpose but not use for the said purpose.
* Project not completed in time.
* Poor recovery of receivables.
* Excess capacities created on non-economic costs.
* In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
* Business failures.
* Diversion of funds for expansion\modernization\setting up new projects\ helping or
promoting sister concerns.
* Willful defaults, siphoning of funds, fraud, disputes, management disputes,
misappropriation etc.
* Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, delaying settlement of payments\ subsidiaries by government bodies etc.,

2) External Factors:

* Sluggish Legal System i.e. long legal tangles, changes that had taken place in labour
laws & lack of sincere effort.
* Scarcity of raw material, power and other resources.
* Industrial Recession.
* Shortage of raw material, raw material / input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
* Failures, nonpayment over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
* Government policies like excise duty changes, Import duty changes etc.

41
 NON PERFORMING ASSETS

1) 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 doesn't
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 earnings of bank.

2) Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which
lead to borrowing money for shortest 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.

42
 NON PERFORMING ASSETS

3) 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 day s
banks have special employees to deal and handle NPAs, which is additional cost to
the bank.

4) 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.

6.2Symptoms of NPA:

There are four symptoms by which one can recognize a Performing Asset turning in
to Non Performing Asset.

1) Financial:

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

* Bouncing of cherubs due to insufficient balance in the accounts.
* Irregularity in installment.
* Irregularity of operations in the accounts.
* Unpaid overdue 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.

43
 NON PERFORMING ASSETS

2) Operational and Physical:

* If information is received that the borrower has either initiated the process of
winding up or are not doing the business.
* Overdue receivables.
* Stock statement not submitted on time.
* External non-controllable factor like natural calamities in the city where borrower
conduct his business.
* Nonpayment 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.

6.3Preventive Measurement for NPA:

1) Early Recognition of the Problem:

Invariably, by the time banks start their efforts to get involved in a revival process, it
too late to retrieve the situation- both in terms of rehabilitation of the project and
recovery of bank s dues.

2) 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
front line officials at the branch level is paramount as they are the ones who have
intelligent inputs with regard to promoter’s sincerity, and capability to achieve
turnaround.

44
 NON PERFORMING ASSETS

Based on this objective assessment, banks should decide as quickly as possible

whether it would be worthwhile to commit additional finance. "Special
Investigation" In this regard banks may consider having 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.

3) Timeliness & 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 promoter s 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.

4) 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.

5) 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 unit s fortunes.

A bank may commit additional finance to angling 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 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.

45
 NON PERFORMING ASSETS

6) Multiple Financing:
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 a long way toward overall success of
rehabilitation exercise, given the probability of success/failure.

News feature: Internal review planned by the NPA

The NPA takes the view that this is necessary because it has a responsibility to ensure
the professional and commercial profitability of its community pharmacist members,
who it sees as needing help and support if they are to survive and prosper in today’s
rapidly changing world.

John Darcy, the NPA chief executive, responds to the assertion that the strategy looks
like an internal review with an un challenging time-scale, by saying: “We are not a
broken organization; we are working very well indeed, but there is always room for
development. We are not going to sit around navel-gazing and in reflective
contemplation.”

Mr Darcy says that the plan is set out as a five-year strategy in order to show that
what is intended is a long-term process of support for community pharmacy. “If
you’re doing a quick and dirty review, you can do that in a month. But if you want a
top-to-bottom while you continue to function it’s going to take time. It’s about
development and it will take time to do and get right. We will start on most of the
objectives immediately, but the delivery will take time.”

Given, then, that the strategy sets out what Mr. Darcy believes the NPA should be
doing anyway, why has it been written down and published to NPA members in a
glossy brochure?

John Darcy responds: “We need to have the plan written down to show the members.

The final element of the strategy is to bring all community pharmacy owners into
membership.

John Darcy says: “The community pharmacy pitch is changing enormously, but if we
are relevant to everybody except Boots, why is that? Boost’s membership might not
be achievable, but it’s an objective.”

He answers that challenge by explaining that the NPA was formed in 1921, when
most pharmacies were independents and Boots was the only real multiple, with the
aim of championing the cause of pharmacy owners. It was not formed to represent
independent pharmacies.

46
 NON PERFORMING ASSETS

Mr Darcy goes on: “We have to represent the sector as a whole. We cannot do this if
we speak from a fragmented position. One of the issues is that pharmacy is
fragmented and we need to speak with one voice. There is a particular need to do so
for community pharmacy.”

With this in mind, the strategy also sets out to find a way of bringing within the NPA
fold individual pharmacists who, in the very near future, will hold personal contracts
for local pharmaceutical services.

47
 NON PERFORMING ASSETS

7. CONSEQUENCES OF NON-PERFORMING ASSETS

1. Funds of banks and financial institutions get blocked and are not available for
further lending.

2. NPAs do not generate interest income. Hence Profit comes down.

3. High levels of NPAs affect the image and prestige of banks and financial
institutions.

4. Provisions have to be made on NPAs, which again eats away the profits of banks.

5. Profitability gets reduced on account of provisions and non-debiting of interest.

6. Balance sheet of banks and financial institutions wear an unpleasant look due to
stressed assets reflected in the balance sheet.

7. Higher levels of NPAs indicate rather a weak management, which is not able to
recover the loan dues.

8. Carrying NPAs in the books of accounts increases administrative, legal and

recovery costs.

9. Subsequent public issue offerings of banks and financial institutions will be

adversely affected.

10. Suppliers, who were hither to supplying goods and materials on credit, will
henceforth demand cash.

11. Stakeholders will be disappointed and upset as they will get less percentages of
profit on their shares.

12. It also implies that the bank management is not taking any effective steps to
recover loan dues.

13. Certain autonomy given by RBI will not be available for those banks whose NPA
levels are high.

14. The cost of poor quality loans is transferred to other bank customers by charging
higher rate of interest.

48
 NON PERFORMING ASSETS

7.1Functions of NPA

There are four divisions within NPA that execute the core functions of the Authority.
The divisions are: Inspection, Monitoring and Licensing (IML), Pricing, Planning and
Research (PPR), the Unified Petroleum Price Fund (UPPF) and the Petroleum Product
Marking Scheme (PPMS).
The IML department (as the name implies) is responsible for issuing licenses to PSPs,
monitoring of the operations of PSPs and inspecting facilities of PSPs in the
downstream industry.
The IML department also ensures that the design, construction and operation of all
petroleum infrastructures are executed to predetermined standards. Additionally, the
department ensures that consumers receive high quality fuel that is safe, efficient and
value for money.
PPR monitors the supply and consumption of petroleum products around the country
to ensure that there are adequate stocks of petroleum products to meet the
consumption needs of the country. This is done through planning and monitoring the
activities and performance statistics of bulk distribution companies (BDCs) and oil
marketing companies (OMCs) in the distribution of petroleum products across the
country.
The object of PPR's function is to protect the interests of consumers, promote fair
competition among petroleum service providers and ensure that the industry is
efficient and profitable. The team also conducts studies relating to economy,
efficiency and effectiveness of the downstream sector of the petroleum Industry.
its mandate is to compute the ceilings of the Ex-Refinery ad Ex-pump prices of
petroleum products, and all resultant costs/revenue to the government and the
petroleum service providers (PSPs) based on tithe prescribed petroleum pricing
formula.
Petroleum product prices are established within a period called the pricing window,
which is currently two weeks. The unit also engages key stakeholders on petroleum
prices ceiling as well as all price related information to applicable stakeholders in the
industry.
In the normal scheme of pricing petroleum products, the distance between the storage
depot and the retail outlet determines the price per liter.
This is very common in most part of the world. However in Ghana, fuel prices for ll
OMCs are the same irrespective of which part of Ghana you live - that which makes
this possible is the UPPF.
The UPPF ensures that the unified prices of petroleum products include as element
representing as near as possible the actual cost of distribution.
The UPPF sees to it that petroleum products reach the consumer wherever they live in
Ghana efficiently and that fuel is transported throughout the country in a manner that
is simple, effective and inexpensive to operate administratively.

49
 NON PERFORMING ASSETS

The Petroleum Product Marking Scheme provides a foundation for an effective

quality monitoring systems by:

 Offering consumer quality assurance and protection for products at the final
dispensing outlet.
 Checking/controlling malpractices that result in loss of government revenue and a
secondary effect of interfering with product quality.
 Increased tax base & revenue
 Reduced smuggling
 Fair business competition

Fuel marking is the introduction of a unique identifier (bio-chemical liquid) in trace

quantities into petroleum products at depots before distribution unto the market. The
marker creates "finger print" and provides a secure, tamper-proof method of
authentication. Marked fuel can be distinguished from unmarked fuel through a
process of testing using specialized detecting equipment (LSX2000 and MSX1000).
The purpose of PPMS is to;

 Preserve and protect the quality and purity of petroleum products.

 Detect and prevent the adulteration of petroleum products.
 Monitor the quality and purity of petroleum products.

The implementation of the PPMS is as a result of NPA's objective of ensuring that the
industry continues to be efficient and profitable whilst consumers are satisfied.

50
 NON PERFORMING ASSETS

7.2Functions, duties and powers of Registrar:

 To examine and verify documents including petitions, notes of defense and memoranda
of appeals to be filed with the tribunal or appellate tribunal and register them if they meet
requirements or endorse them with reasons if they cannot be registered,
 To verify duplicate copies submitted in a case with the originals and certify them if they
appear in order, and if the originals appear to have some defects, to mention such defects and
get the concerned party to sign to that effect,

 To verify whether documents submitted along with petitions, memoranda of appeal end
notes of defense are correct or not

 To issue summons and get it served,

 To appoint days for appearance in cases, indicating reasonable reasons pursuant to law,

 To obtain power of attorney and get a case assumed pursuant to prevailing law,

 To promptly execute, or cause to be executed, actions as referred to in the order made bythe
Bench,

 To have security or guarantee as per the order made by the Bench,

 To maintain, or cause to be maintained, updated records including registration books,

 To maintain personal records of employees,

 To safely retain orders and directions in a serial order

51
NON PERFORMING ASSETS

52
 NON PERFORMING ASSETS

8.NPA IN DIFFERENT BANK

8.1NPA IN STATE BANK OF INDIA

The country's largest lender State Bank of Indians 1.31 % will sell eight non-
performing assets to recover dues worth over Rs 3,900 core and has invited bids from
asset reconstruction companies (ARCs) and financial institutions (FIs). "In terms of
the bank's revised policy on sale of financial assets in line with the regulatory
guidelines, we place these accounts for sale to ARCs/banks/NBFCs/FIs, on the terms
and conditions indicated

53
 NON PERFORMING ASSETS

Of the eight accounts on the block, Kolkata-based Remit Ferro Tech has the highest
loan outstanding against it at Rs 1,320.37 core, followed by Indian Steel Corporation
Ltd at Rs 928.97 core; Jai Bajaj Industries at Rs 859.33 core and Mahalaxmi TMT Put
Ltd at Rs 409.78 core.

The remaining accounts belong to Impel Ferro Tech (Rs 200.67 core), Kohinoor Steel
Put Ltd (Rs 110.17 core), Modern India Comcast (Rs 71.16 core) and Ballarpur
Industries (Rs 47.17 core).

has asked the interested ARCs/FIs to conduct the due diligence of these assets with
immediate effect after submitting expression of interest and executing a non-
disclosure agreement with the bank.

The e-bidding for these accounts will take place on September 26.
Earlier in August, the lender had put two non-performing assets (NPAs) worth Rs
2,490 core for sale to ARCs/FIs. He two accounts on sale were -- Bombay Rayon
Fashions Ltd which owed Rs 2,260.79 core to the bank. The second account, Shiva
Datum Dog Pvt Ltd, had to repay Rs 229.32 core. In April, SBI had invited bids to
sell 12 sour accounts to recover dues worth Rs 848.54 core.

SBI's gross NPAs rose to 10.69 per cent of the total advances at the end of June this
year, as against 9.97 per cent a year ago. In value terms, they increased to Rs 2,12,840
core, from Rs 1,88,068 core. ..
In the first quarter ended June of the current fiscal, SBI has reported a hefty loss of Rs
4,876 core due to higher NPAs or bad loans.

Banks, especially state-owned, are sitting on heavy bad loans and are adopting
aggressive approach to resolve them by making recoveries through various modes.

54
 NON PERFORMING ASSETS

8.2NPA IN RBI

NPA woes may continue for banks in 2018-19 due to current economic
situation: RBI

Reserve Bank of India said today that banks will witness further deterioration in their
non-performing assets (NPAs) or bad loans due to the "economic situation
prevailing"in the current fiscal.

A Parliamentary committee recently questioned RBI for failing to take

preemptive action in checking bad loans in the banking system.

HIGHLIGHTS
 The Gross NPA ratio of scheduled commercial banks may increase further in 2018-19
 In order to curb NPAs, RBI also put in place revised and harmonized guidelines

55
 NON PERFORMING ASSETS

 NPAs in public sector banks increased by about Rs 6.2 lake core between
March 2015-2018

 Cording to the Reserve Bank of India (RBI), banks will continue to face
deterioration in their non-performing assets (NPAs) or bad loans due to the
current economic conditions in the current fiscal year.

 The gross non-performing assets (GNPAs) plus restructured standard advances

in the banking system remained elevated at 12.1 per cent of gross advances at
end-March 2018, RBI's annual report for 2017-18 stated.

 "Going forward, the stress tests carried out by the Reserve Bank suggest that
under the baseline assumption of the current economic situation prevailing, the
GNPA ratio of scheduled commercial banks (SCBs) may increase further in
2018-19," it said.
 The aggregate gross NPAs of SCBs increased primarily as a result of this
transparent recognition of stressed assets as NPAs, from Rs 3, 23,464 core, as
on March 31, 2015, to Rs 10,35,528 core, as on March 31, 2018.
 In order to curb NPAs, RBI also put in place revised and harmonized
guidelines for resolution of stressed assets during the year, replacing earlier
schemes.
 A Parliamentary committee recently questioned RBI for failing to take
preemptive action in checking bad loans in the banking system prior to the
Asset Quality Review undertaken in December 2015.
 According to sources familiar with the report of the Standing Committee on
Finance, RBI needs to find out as to why the early signals of stressed accounts
were not captured before the AQR.
 The report was adopted by the Committee headed by senior Congress leader
M Veerappa Moil today and is likely to be placed in the Parliament in the
Winter Session.
 The panel, which includes former prime minister Minoan Singh as a member,
wanted to know the reasons of ever-greening of stressed accounts through
restructuring schemes of the RBI.

56
 NON PERFORMING ASSETS

 The issue of rising NPAs is a legacy issue and role of RBI has not been up to
the mark, sources said.
 NPAs in public sector banks (PSBs) increased by about Rs 6.2 lake core
between March 2015 and March 2018.
 This led to substantial provisioning of Rs 5.1 lake core, sources said quoting
the report.
 (With inputs from PTI

57
 NON PERFORMING ASSETS

8.3NPA IN BOD

Bank of Baroda, Dena, Vijay merger:

How NAP-ridden Dena ankh just got an unofficial bailout package

The Narendra Modi government's decision to merge three State-run banks — Bank of
Baroda, Vijay Bank and Dena Bank — isn't an unexpected one, given that this
consolidation is an idea that has been discussed for a long time. It is also a step
carrying far lesser risk for a political leadership than going for outright privatization
that will irk trade unions.

Beyond the initial excitement of the merger announcement — which will create
India's third largest bank by assets, a closer look will show that the three-way merger
is actually an unofficial bailout package for bad loan-ridden Dena Bank, which is one
of the most struggling lenders in the sector. The other two — Bank of Baroda and
Vijay Bank — have relatively healthier balance sheets.

Dena Bank is already under Prompt Corrective Action (PAC) of the Reserve Bank of
India on account of high bad loans and negative return on assets. Its NPA levels are
among the highest for Indian banks. As on 30 June, Dena Bank's Gross Non-
Performing Assets (GNPAs) stood at 22.69 percent, which makes it the fifth highest
NAP-ridden bank among State-run lenders.

Being under PAC, the bank has restrictions on lending and fresh recruitment. Due to
high provisions, Dena Bank's first quarter marked a loss of Rs 722 core as compared
with a loss of Rs 133 core in the corresponding quarter last year.

Following the merger, Dena Bank’s chances of survival are better, since it will be
part of the bigger entity that has more bargaining power to grab a bigger share of
government capital. In one step, the bank is escaping the spotlight.

Compared to Dena, Bank of Baroda is a turnaround bank that has been improving its
performance rapidly. Its gross NPA levels are in lower double digits and the bank

58
 NON PERFORMING ASSETS

posted a profit, which more than doubled, in the latest quarter on higher net interest
income.

In 2015, the government had effected certain top-level management changes in Bank
of Baroda by bringing in private sector candidates and this appears to have helped its
fortunes.

Similarly, Vijay Bank too is a relatively better performing bank in the PSU lot; it
showed a decline in the first quarter profit figures on account of higher provisions, but
if one looks at interest income growth and asset quality, the bank is much better than
its peers. Gross NPAs, at end of first quarter, stood lower at 6.19 percent in the first
quarter against 6.34 percent in the previous quarter. Its net NPAs too declined to 4.1
percent from 4.32 percent on a quarter-on-quarter basis.

Dena Bank has a capital adequacy ratio of 10.6 percent — not far from the minimum
required level while Vijaya and Bank of Baroda have 13.9 and 12.1 percent
respectively.

To sum up, this is a merger of two healthy banks with one weak, capital-starved,
NAP-ridden candidate and it is easy to see who stands to gain the most. The healthier
duo will have to absorb the NPA shocks and capital needs of the target entity.

59
 NON PERFORMING ASSETS

Having said that, from a reform-perspective, consolidation among State-run banks

gives the industry certain benefits. It helps to create large-sized banks that can then
work to build enough muscle mass to compete in a global banking industry presently
dominated by large-sized lenders. With a Rs 10 laky core asset size, the post-merger
Bank of Baroda-Vijay a Bank-Dena Bank entity will still not be a match for the top
global banks (even SBI is not big enough to be among the top banks on the global list),
but India is slowly creating large-sized banks.

Through a series of mergers, perhaps the country will have five or six large banks that
can be groomed to compete in the global market. This makes sense now also because
RBI has now started giving permits to a number of small banks that can focus on
expanding small-scale banking activities in rural areas.

In any case, it did not make sense to control the ownership of so many banks in an
ambitious economy. There has been no progress on the privatization of State-run
banks which would have been the ideal case to bring in private talent and money. The
IDBI Bank-LIC deal can be hardly called a privatization move, since LIC is
technically a government-run entity.

60
 NON PERFORMING ASSETS

Thus, with not enough political will and scope for privatisation of these banks,
consolidation seems to be the only way to keep the momentum going for banking
sector reforms.But there is an important question the government will need to answer
when it goes ahead with the PSB consolidation drive: Does the merger solve the NPA
problem of State-run banks and the insatiable capital hunger of these banks, especially
the weaker ones?

Take the Bank of Baroda, Dena Bank and Vijay Bank merger for example. The
combined entity will have a total gross NPAs of Rs 79,320 core, which as a
percentage of total advances stand at around 13 percent. How will the merger help in
addressing this problem? What is happening here is only the process of bundling of a
few small problems into a bigger one.

The work culture and management inefficiencies that led these banks to the present
situation and the onus on the government to feed capital to these banks all remain the
same. Had it been a sell-off instead of a merger among PSBs, fresh private money
would have come in and more efficient management which would have been
accountable for efficient use of that money.

This is something former RBI governor Raghuram Rajang had pointed out in 2015 .
Raja’s main points were that the merger of two (or more) unhealthy banks in the
financial system will create an unhealthy entity that would lead to the creation of a
bigger problem in the economy. Secondly, even in the case of the merger of an
unhealthy bank with a large healthy bank, the merger would bring problems to the
acquiring bank. Thirdly, in the event of a merger of a weak bank with a strong bank,
the acquirer will have to deal with the cultural problems that arise out of the merger,
besides dealing with the primary challenge — the bad loan pile in the weak bank,
thereby creating difficulties for the strong bank.

The point is that if consolidation is the way ahead for the government, it will have to
invest equally in a management revamp and out-of the-box solutions to address the
NPA problem, beyond the Insolvency and Bankruptcy Code resolution. If the
fundamental problems are not addressed, consolidation will end up as unannounced
bailout packages for zombie banks.

61
 NON PERFORMING ASSETS

8.4NPA IN DENA BANK

Non-performing assets: Dena Bank puts NPAs worth Rs 3,324 core

on sale

62
 NON PERFORMING ASSETS

Dena Bank on Tuesday put on sale 84 non-performing assets (NPAs) worth Rs 3,324 corer,
inviting bids on full-cash basis or through a mix of cash and security receipts (SRs). “The
expression of interest requires that prospective investors shall also make the following
statements

: (a) Subject to the due diligence review, the prospective investor intends to submit a bid for
the NPA loan accounts being offered for sale by Dena Bank;

(b) In undertaking the sale process, the prospective investor has no conflict of interest with
and is not related, directly or indirectly, to Dena Bank/borrowers,” the public sector bank
(PSB) said in a sale document.

E-bidding for the accounts will be held on November 29, and execution of the assignment
agreements and fund transfer will take place in the second week of December. Dena Bank
is set to be amalgamated with larger peers Bank of Baroda (Bob) and Vijay Bank by the
end of the current financial year. It is currently under the RBI’s prompt corrective action
(PCA) framework and is the only lender to have been asked to freeze lending altogether
order to boost cash recoveries and ease their provisioning burden arising from older NPAs,
a number of banks have resorted to sale of NPAs to asset reconstruction companies.

Last month, Bank of India (Boy) had put on sale NPAs worth Rs 10,710 corer, including its
exposures to eight power projects and five accounts named on either of the RBI’s two lists.
This followed a similar bid by Boil to sell bad loans worth Rs 8,831 corer in September,
including its exposures to Essay Steel, Bhutan Power and Steel and Amok Industries. All
three accounts, part of the RBI’s first list of large NPAs, remained unresolved over a year
since the list was issued amid several rounds of litigation.

In September, SBI had sought bids for eight NPAs worth Rs 3,948 corer on sale, including
its exposures to Jai Bajaj Industries, Ballarpur Industries and Rosita Ferro Tech. All eight
assets were offered on a 100% cash basis.

63
 NON PERFORMING ASSETS

8.5Punjab National Bank invites bids for two dozen NPA accounts to
recover Rs 1,179 corer

64
 NON PERFORMING ASSETS

Public sector lender Punjab National Banks 3.70 % (PNB) has put up for sale two
dozen non-performing assets to recover dues of over Rs 1,779 corer.

These 24 dud loan accounts are majorly concentrated in Mumbai, Delhi and Kolkata
zones of the bank.

Two accounts belong to Chandigarh and Bhopal zones while one is of Patna zone, as
per the sale notice on its website.

"We intend to place these accounts for sale to ARCs/NBFCs/other banks/FIs etc on
the terms and conditions ..
Stipulated in the banks policy, in line with the regulatory guidelines," PNB said.

The bank has to make recovery of Rs 1,779.18 corer from these 24 non-performing
assets (NPAs).

Among the major borrowers are Bandana Vilyui with an outstanding amount of Rs
454.02 corer, Moser Beyer Solar (Rs 233.06 corer), Divine Vilyui (Rs 132.66 corer),
Visa Resources India Ltd (Rs 115.20 corer), Allied Strips (Rs 118.81 corer), Archival
Northern FTWZ Ltd (Rs 96.70 corer), Birla Surya (Rs 73.58 .. and Trident Tools (Rs
68.81 corer).

The sale process is to be handled by the Stressed Assets Targeted Resolution Action
(SASTRA) Division of the bank.
The submission of financial bids will be only through e-auction method, which will
take place on the portal of the bank, it said.

The last date for evincing interest in these accounts is December 10, PNB said. The e-
bidding process will take place on December 21.

PNB, hit by a massive Rs 14,000-crore scam allegedly perpetrated by jeweler duo

Nora Mode and Maul Chooks, has enhanced its recovery mechanism by forming the
Stressed Asset Management Vertical (SAMV) and SASTRA.

The bank posted a staggering loss of Rs 4,532.35 corer for the second quarter of the
current fiscal on rising bad loans.

Its gross non-performing assets (NPAs) as a proportion of gross advances rose sharply
to 17.16 per cent (Rs 81,250.83 corer) at the end of September 2018, from 13.31 per
cent (Rs 57,630.11 corer) a year ago.

65
 NON PERFORMING ASSETS

8.6NPA IN ICICI BANK

ICICI Bank says it has made full disclosures about NPAs, provisions

66
 NON PERFORMING ASSETS

 Private sector lender ICICI Bank, on Wednesday, said it has made full
disclosures about its bad loans and non-performing assets (NPAs) in its annual
report, investor presentations and analysts’ calls.
 “The bank’s accounts are audited by reputed statutory auditors whose audit
report and audit opinion form part of the bank’s annual report,” it said in a
regulatory filing.
 The bank is conducting an investigation into 31 loan accounts
involving ₹6,082 corer, following a complaint by an anonymous whistle
blower, and is also in touch with the US market regulator Securities and
Exchange Commission (SEC) over “the timing and amount of the bank’s loan
impairment provisions taken under US GAAP”
 .In its latest regulatory filing to the bourse, the lender said that it classifies
loans as non-performing (sub-standard/doubtful/loss) and makes provisions
for them as per RBI guidelines.
 Write-offs are generally made out of existing provisions against existing NPAs.
 “The write-offs do not impact loan classification, additions to NPAs, the profit
and loss account or the net NPA ratio of the bank,” it said, adding that the
Significant Accounting Policies, which are part of the audited financial
statements in the annual report of the bank, have always mentioned that “loss
assets and the unsecured portion of doubtful assets are provided or written-off
as per the extant RBI guidelines”.
 T said it has also made detailed disclosures on write-offs in the financial
statements, as well as management’s discussion and analysis, investor
presentation and analysts’ call.

67
 NON PERFORMING ASSETS

9. Non Performing Assets of Indian Banking System and its

Impact on Economy

9.1Review of literature
Kauri K. and Singh B. (2011) in their study on Non-performing assets of public and
private sector banks (a comparative study) studied that NPAs are considered as an
important parameter to judge the performance and financial health of banks. The level
of NPAs is one of the drivers of financial stability and growth of the banking sector.
Chattered C., Mukherjee J. and Das (2012) in their study on Management of non-
performing assets - current scenario has concluded that banks should find out the
original reasons/purposes of the loan required byte borrower.

Proper identification of the guarantor should be checked by the bank including

scrutiny of his/herwealth.Rai (2012) in her study on Study on performance of NPAs
of Indian commercial banks find out that corporate borrowers even after defaulting
continuously never had the fear of bank taking action to recover their dues. This is
because there was no legal framework to safeguard the real interest of banks

68
 NON PERFORMING ASSETS

9.2Why assets become NPA?

A several factors are responsible forever increasing size of NPAs in PSBs. The Indian
banking industry has one of the highest percents of NPAs compared to international
levels. A few prominent reasons for assets becoming NPAs are as under:

 Lack of proper monitoring and follow-up measures.

 Lack of sincere corporate culture. Inadequate legal provisions on foreclosure
and bankruptcy.
 Change in economic policies/environment.
 Non transparent accounting policy and poor auditing practices.
 Lack of coordination between banks/FIs.
 Directed landing to certain sectors.
 Failure on part of the promoters to bring in their portion of equity from their
own sources or public issue due to market turning unfavorable.
 Criteria for classification of assets

69
 NON PERFORMING ASSETS

9.3Table No.1 Net NPA.Gross NPA and stress assets till March 2016

NPA NE GRO STRESSED

T SS ASSETS%
NP NPA
A% %
MAR-13 3.4 9.2
SEP-13 2.3 4.2 10.2
MAR-14 2.2 4.1 10
SEP-14 2.5 4.5 10.7
MAR-15 2.5 4.6 11.1
SEP-15 2.8 5.6 11.3
MAR-16 4.6 7.6 11.15
MAR-17 8.5 9.3

70
 NON PERFORMING ASSETS

9.4Table No. 2 Indian banks and their NPA

BANK NPA
PNB 5300CR
UCO 1497CR
INDIAN OVERSES BANK 1425CR
CENTERAL BANK 837CR
DENA BANK 667CR
14 OTHER BANK 8883CR
IDBI 1609CR

Liberalization of economy/removal of restriction/reduction of tariffs

A large number of NPA borrowers were unable to compete in a competitive market in
which lower prices and greater choices were available to consumers. Further,
borrowers operating in specific industries have suffered due to political, fiscal and
social compulsions, compounding pressures from liberalization.

Lax monitoring of credit and failure to recognize Early Warnings

Signals
It has been stated that approval of loan proposal is generally thorough and each
proposal passes through many levels before approval is granted. However, the
monitoring of sometimes complex credit files has not received the attention it needed
which meant that early warning signals were not recognized and standard assets
slipped to NPA category without banks being able to take proactive measures to
prevent this. Partly due to this reason, adverse trends in borrower’s performance were
not noted and the position further deteriorated before action was taken.

Over optimistic promoters

Promoters were often optimistic in setting up large projects and in some cases were
not fully aboveboard in their intentions. Screening procedures did not always
highlight these issues. Often projects were set up with the expectation that part of the
funding would be arranged from the capital markets which were booming at the time
of the project appraisal. When the capital markets subsequently crashed, the requisite
funds could never be raised, promoter often lost interest and lenders were left stranded
with incomplete/unavailable projects.

71
 NON PERFORMING ASSETS

Directed lending
Loans to some segment were dictated by Governments policies than commercial
imperatives.

Highly Leveraged borrowers

Some borrowers were under capitalized and over burdened with debt to absorb the
changing economic situation in the country. Operating within a protected marked
resulted economic situation in the country. Operating within a protected market
resulted in low appreciation of commercial/market risk.

Funding mismatch
There are said to be many cases where loans granted for short terms were used to fund
long term transactions.

High Cost of Funds

Interest rates as high as 20% were not uncommon. Coupled with high leveraging and
falling Denmark, borrowers could not continue to service high cost debt.

Willful Defaulters
There are a number of borrowers who have strategically defaulted on their debt
service obligation realizing that the legal resource available to creditors is slow in
achieving results.

72
 NON PERFORMING ASSETS

9.5NPA - Impact
The problem of NPAs in the Indian banking system is one of the foremost and the
most formidable problems that had impact the entire banking system. Higher NPA
ratio trembles the confidence of investors, depositors, lenders etc. It also causes poor
recycling of funds, which in turn will have deleterious effect on the deployment of
credit. The non-recovery of loans effects not only further availability of credit but also
financial soundness of the banks.

Profitability:
NPAs put detrimental impact on the profitability as banks stop to earn income on one
hand and attract higher provisioning compared to standard assets on the other hand.
On an average, banks are providing around 25% to 30% additional provision on
increment NPAs which has direct bearing on the profitability of the banks.

Asset (Credit) contraction:

The increased NPAs put pressure on recycling of funds and reduces the ability of
banks for lending more and thus results in lesser interest income. It contracts the
money stock which may lead to economic slowdown.

Liability Management:
In the light of high NPAs, Banks tend to lower the interest rates on deposits on one
hand and likely to levy higher interest rates on advances to sustain NIM. This may
become hurdle in smooth financial inter mediation process and hampers banks
‘business as well as economic growth.

Capital Adequacy:
As per Basel norms, banks are required to maintain adequate capital on risk-weighted
asset son an ongoing basis. Every increase in NPA level adds to risk weighted assets
which warrant the banks to shore up their capital base further. Capital has a price tag
ranging from 12% to 18% since it is a scarce resource.

Shareholders’ confidence:
Normally, shareholders are interested to enhance value of their investments through
higher dividends and market capitalization which is possible only when the bank posts
significant profits through improved business. The increased NPA level is likely to
have adverse impact on the bank business as well as profitability thereby the
shareholders do not receive market return on their capital and sometimes it may erode
their

73
 NON PERFORMING ASSETS

value of investments. As per extant guidelines, banks whose Net NPA level is 5% &
above are required to take prior permission from RBI to declare dividend and also
stipulate cap on dividend payout.

Public confidence:
Credibility of banking system is also affected greatly due to higher level NPAs
because it shakes the confidence of general public in the soundness of the banking
system. The increased NPAs may pose liquidity issues which is likely to lead run on
bank by depositors.

Thus, the increased incidence of NPAs not only affects the performance of the banks
but also affect the economy as a whole. In a nutshell, the high incidence of NPA has
cascading impact on all important financial ratios of the banks viz., Net Interest
Margin, Return on Assets, Profitability, Dividend Payout, Provision coverage ratio,
Credit contraction etc., which may likely to erode the value of all stakeholders
including Shareholders, Depositors, Borrowers, Employees and public at large.

Findings
Because of mismanagement in bank there is a positive relation between Total
Advances, Net Profits and NPA of bank which is not good. Positive relation between
NPA & profits are due to wrong choice of clients by Banks. There is an adverse effect
on the Liquidity of Bank.

Bank is unable to give loans to the new customers due to lack of funds which arises
due to NPA As per the government, the main reasons for rise in NPAs are
sluggishness in the domestic growth in the recent past, slow recovery in the global
economy and continuing uncertainty in global markets leading to lower exports of
various products such as textiles and leather.

Suggestion
Advances provided by banks need to be done pre-sanctioning evaluation and post
disbursement controls that NPA can decrease. Good management needed on the side
of banks to decrease the level of NPA. Proper selection of borrowers & follow ups
required to get timely payment. on performing assets are a drain to the banks.

74
 NON PERFORMING ASSETS

The banks in India are adopting various strategies to reduce the non performing
assets in their banks and they are also adopting various methodologies by which
further addition to NPA portfolio is minimized In the real sense, in case there is a
recovery in principal and installments due in respect of the loans granted to the banks
are received 100%, the question of nonperforming assets do not arise. However, there
is no such ideal bank where the NPA is nil. Except banks which were originated
recently, all banks are prone to have some portion of their loans and advances as non
performing advances The following are some strategies by which banks are trying to
curtail nonperforming assets to a great extent:

Recovery camps:
Bank personnel jointly approach the defaulting borrowers for repayment at a place
and time convenient to both the parties. These are more suited to small loans.
Normally the borrowers who had availed small loans will be more in number in rural
and semi urban areas rather than urban and metro centers. As such, the banks instead
search areas rather than urban and metro centers.

As such, the banks instead of conducting the recovery camps at their branches, they
usually conduct such recovery camps in centers like panchayat board offices, court
buildings, government department buildings etc such recovery camps so that the
borrowers find it convenient to attend the recovery camps. Under certain
circumstances, the manager in charge of the bank branches along with some branch
officials go to each visit each house of the borrowers and recover the installments due
in respect of loans availed by them. This type of recovery camp will be successful in
case an advance notice is served on the borrowers mentioning the date of
recovery camps

Preference of claims:
Banks should expeditiously and properly claim indemnity from organizations like
Deposit Insurance and Credit Guarantee Corporation called DICGC, Export Credit
Guarantee Corporation called ECGC, Credit Guarantee Fund Trust for small scale
industries, Insurance Companies etc ant invoke Government/other personal
guarantees to recover loan dues and reduce nonperforming assets.

Compromise proposals :
Compromise routes are adopted by banks, where borrowers experience certain
genuine difficulties and where normal recovery is not possible. It involves certain
sacrifices on the part of the banks on the principle of one bird at hand is worth two in
the bush”. Such proposals can be taken up considering the history of the borrowed

75
 NON PERFORMING ASSETS

account, security available, net worth of the borrower/guarantor, time value of offer
made etc

Technical write off :

Normally banks decide writing off small loans which have become bad and the
recovery is not at all possible in those accounts under any circumstances on account
of the facts that the borrower might have been expired; he has no means to repay the
loan at any cost and there may be huge losses in respect of the propertiesetc. This is
for the sole purpose of servicing such non performing accounts.

One time settlement scheme::

To reduce the absolute amount of nonperforming assets, Government of India along
with Reserve Bank of India is announcing one time settlement schemes periodically
for the past few years. When the borrowers are alive and when the borrowers are
farmers, small entrepreneurs etc and they find it very difficult today their dues for
various reasons like bad health and fall in their business ventures, , however, they
have the inclination to repay their debts to the banks, this type of practice is very
much helpful to the borrowers and the lending institutions. Surely the banks are in a
position to lose certain portion of their loan amount when they are conducting one
time portion of their loan amount when they are conducting one time settlement
schemes.

Suit filing:
Filing of suit is taken up as a last resort when all other remedies to recover non
performing assets fail. Banks can initiate recovery proceedings with or without
intervention of the courts of law. To Expedite the process; banks should be alert and
proactive in all stages of the proceedings. i.e. preparation of plaint, service of
summons, written statements, trial of the suit, obtaining decree copy, praying for
interim relief, execution of decrees, attachment of the property, arrest of the
defendants, if needed etc.

76
 NON PERFORMING ASSETS

Debt recovery tribunals:

The debt recovery tribunal act was passed by Indian Parliament in 1993 with the
objective of facilitating the banks and financial institutions for speedy recovery of
dues in cases where the loan amount is Rs.10 lakes and above. The time limit
envisaged under the act is not being adhered to in disposing off the suits because of
inadequate infrastructure and shortage of recovery personnel with the DRTs.
Nonetheless, the Detect and subsequent amendment in 2000 have provided a great
improvement over the normal legal forum on Performing Assets of Indian Banking
System and its Impact on Economides:

Lock adults:
It is a legal forum for expeditious settlement of loan dues on consensus arrived
between the bank and the borrowers mediated by the Lock Adulate

Securitization Act.
The securitization and financial assets and enforcement of security interest –
SARFAESI act 2002 aims to empower banks as secured creditors to take possession,
manage and sell the securities without the intervention of court/tribunal. It also aims
at Asset Reconstruction by securitization or Reconstruction Company. However, loan
with balance below Rs. 1 Lake unsecured loans and loans against collateral of
agricultural land are exempted from the purview of this act.

77
 NON PERFORMING ASSETS

10. Effect of NPA (Non performing assets) in Banking Sector

The role of the banking sector in economic transformation is significant as banks play
a vital role in providing the desired financial resources to the needy sectors. Bank
itself posses the controlling power of the economy. The flow of money person to
person, business to business, country to country just due to the banking system. Banks
fuels the economical vehicle to run smoothly and also said as the backbone of the
economy

10.1Impact of NPA On Banks

“NPA’s Non-performing assets are the assets of the banks which are not performing,
banks to run the economies also provide short-term and a long-term loan to the
industries, individuals, farmers, a bank also gives loan against the home, vehicles and
many more.

In some cases, the borrower unable to pay the interest amount on time as well as
unable to return the principal amount too, in that case, bank declares that amount as
nonperforming.

The bank also runs the recovery scenario for that amount, the impact of NPA on the
profitability of banks brings a dent on the balance sheet of the bank, but until then the
amount is nonperforming.

The increase of Non-Performing Assets also affects the expectation of Stakeholder as

well as investors, Banks has to run the proper evaluation of the proposal at the first
instance, this will reveal the status of unviable projects too. Bank need to collect full
information about Industry, management, future prospects etc before approving the
Loa

78
 NON PERFORMING ASSETS

10.2 Impact of Non Performing Assets on Balance Sheet

High Non Performing Assets are the foremost problem for the banking system for any
economy, that shakes the whole banking system of the country.

The confidence level of the investor, Depositors, Stack holders also effects. This also
causes the rotation of money

Profitability due to NPA

Non Performing Assets not only reduces the profit of the Bank but also increases the
Loss.

Also, banks also providing 25 % to 30% additional provision on Non Performing

Assets which directly impact the Profitability of the Bank.

Liability Management

Due to high Non Performing Assets, Bank for forced for lower the interest rates of the
deposit and on advances likely to pay Higher interest rates on advances.

This situation is a very difficult situation and also hampers the banking business

Share Holders confidence

Not in the Banking sector, but shareholders need their money in safe hands,
Shareholders are interested in the enhancement of investment and market
capitalization.

High Non Performing Assets reduces the confidence level of the investor which
significantly impact the Share price of the Bank in this situation, banks stop payout of
dividend to the shareholders, which was not in the interest of the investor.

79
 NON PERFORMING ASSETS

Public Confidence

The poor performance of the Bank due to increases in Non Performing Assets not
only lower the sentiments of the investor but the bank also lose the faith of Public,
this directly affects the deposits into the bank.

High Non Performing Assets affects the economy as a whole.

25% of NPA Under Big Bulls: (Need to known)?

Gross Non-Performing Asset (NPA) is expected to rise by 9.5 Laky Core by March
2018, compared to 8 Laths Core last year recent new from – Economic times

NPA and society are parallel paths move together for the growing Economy.

NPA’s are the loan provided to the business companies which are not in the slab of
performance

80
 NON PERFORMING ASSETS

81
 NON PERFORMING ASSETS

10.3Effects of High NPA’s for Banks

Effects of High NPA’s for Banks

Higher NPA impact the revenue strength of the banks and also lose the confidence
level of consumers and depositors, banks are back boon to the financial economy of
every country. Here are some effects in details:

Changes in Interest Rates

Higher NPA reflects the reduction of interest rate on the deposit into banks, only poor
public directly impact the consequences of Higher NPA’s of the bank.

Levies of charges for every operation

Looking at the above scenario, the bank is recovering their losses by levies charges on
those operations which were free of cost like –

 Withdrawal limit from ATM

 Withdrawal number of times
 Cash deposits in other branches
 Internet transaction charges
Increase in Current account deficit

NPA plays an important role in every economic condition and also the main cause of
the increase in the current account deficit. Interest rates, Loan, Housing Loans, CRR,
and SLR all are directly affected by the system.

The Corporatism also affect the impact of higher NPA.

Confidence in Share Holders

Higher NPA’s in banking system losing the confidence of shareholders, and the
depositors, they are switching the segments and losing the trust in the system.

Effect on the serious borrower

Increase in NPA not only affects the public but also affecting the serious
honest borrower with good credentials and credit ranking. They have to suffer and on
the other hand, the economy is losing hope of improvement.

82
 NON PERFORMING ASSETS

10.4 Steps of Pulling out Banks from Non-Performing Asset (NPA)

The Government of India making lots of changes and making things transparent to
keep the level of NPA under control and also trying to get it reduced, some of the
major steps which are required to implement to improve the Banking situation.

Bank has to think conservative

Its high time bank has to think conservative if the banks only think of distributing
loans and increasing the numbers just to take some benefits in the form of subsidy
from the Government of India, they are also increasing the number of NPA.

Loan process restructuring

Bank has to tighten their scanner of selection of borrower not only through credit
rating but also have to investigate the previous performance of the company and the
members of the company, whether anybody is being defaulter in their past
performance.

That will not only save the bank but also the shareholder confidence.

Relying less on Restructuring of Loan

Why banks wait for the Loan for converting into NPA, and allow the borrower to
restructure the loan, this act cause loss for the bank and have a greater chance of
getting the Laon into Non-Performing Asset (NPA), rather then relying on
restructuring bank needs to take the proper examination before releasing the Loan.

RBI disclosed the list of companies having the huge burden of Loan –

According to RBI just 12 companies are under the radar of bankruptcy and are
holding 25% of Gross Non-Performing Asset (NPA) in Banks.

83
 NON PERFORMING ASSETS

List of Banks consist of high

NPA’S

Looking at the above scenario, is there any action plan ready for the government and
Finance Department, the amount of money involved in this Non-Performing Asset
(NPA) must be utilized to other segments of the economy like employment, food,
health, farmers etc.
Apart from releasing Loan to the Corporate, the Government has to work on the
platform to reduce NPA.

84
 NON PERFORMING ASSETS

10.5How will a bank’s NPA affect the common man’s savings?

 We talk about a common man saving, it’s a serious matter because they don’t
have any other tap to fill their water tank, and they have only one source of
income.

85
 NON PERFORMING ASSETS

So the question is:

 Whether the saving is under threat of NPA for the common man.
The government of India is taking the step to make sure that the saving or investment
made by the common man into the banks is under the umbrella.

 Its high time we have to open our eyes and start diversification of our fund,
depending upon trusted bank like SBI or ICICI bank is not 100% sure.

 We must start investing in mutual funds, equity market, bonds etc to cover up
our insurance and money health.

Bottom Line :

The Financial results of the bank viz. Net Interest Margin, Return on Assets,
Profitability, Dividend Yield, Credit Contraction etc. while will impact the valuation
of the Bank.

On the other hand, Investors waiting to invest in the bank will watch and wait for the
correct valuation and then invest when the NPA issue is under control. At that time
the investor will get the share price at a lower valuation.

86
 NON PERFORMING ASSETS

Excel based – Income Tax Calculator for FY 2018-19 “AY 2019-20”

87
NON PERFORMING ASSETS

88
 NON PERFORMING ASSETS

11. Conclusion
The Non-Performing Assets have always created a big problem for the banks
in India. It is just not only problem for the banks but for the economy too.
The money locked up in NPAs has a direct impact on profitability of the bank
as Indian banks are highly dependent on income from interest on funds lent.
This study shows that extent of NPA is comparatively very high in public
sectors banks.
Although various steps have been taken by government to reduce the NPAs
but still a lot needs to be done to curb this problem.
The NPAs level of our banks is still high as compared to the foreign banks. It
is not at all possible to have zero NPAs. The bank management should speed
up the recovery process.
The problem of recovery is not with small borrowers but with large borrowers
and a strict policy should be followed for solving this problem.
The government should also make more provisions for faster settlement of
pending cases and also it should reduce the mandatory lending to priority
sector as this is the major problem creating area.
So the problem of NPA needs lots of serious efforts otherwise NPAs will keep
killing the profitability of banks which is not good for the growing Indian
economy at all.

89
 NON PERFORMING ASSETS

12.Bibliography

1) Joshi P.N. (2003), “Non-Performing Assets - Causes, Extent and

Remedies”

2) Dr.Bachhawat N.M.(2001) “Management of Non-Performing Assets in

Commercial Bank”

3) Vera K.H. (2007) “Management of Non-Performing Assets And Asset

Reconstruction Company”

4) Upadhyay H.V. (1994) “Recovery through SEIZURE: Some Aspects”

5) Gavel A.(2000), “Need for Revival of Loss Making Branches”

6) Dr.Kulkarni J.B. (2003), management of Non-Performing Assets”

7) Dashing N.V (2001), “The Secret of Recovery”

8) Dr. Chakra borty K.C. (2005) “Management of NPAs Trends and

Challenges”

9) Kennan K. (2001) “Creation of Performing Assets from NPA to PA”

10) Dr. Kumar M.K., Reddy C.M. and Murtha K.C. (2004) “Causes of NPAs
and Remedial Measures”

11) Dr. Mohan Reddy P. and Mahayana Reddy D.L. (2004), “Non-
Performing Assets in Regional Rural Banks: A Study of Rayalaseema
Garment Bank”

12) Satyr S.R. (1996) “Recovery Management”

13) Sharma R. (2002) “Non -Performing Assets”

14) Rajiv Raman and Sara Chandra Dhal (2003) “Non – P

Reforming Loans and Term of Credit of Public Sector Banks in India:
Empirical Assessment, Reserve Bank of India”
15) Dr. Karan Kumar M., Munisekhar Reddy C. &Muktha Bibliography
K.C.(2004) “Causes of NPAs and Remedial Measures”

90