CHATER 1

1.1 INTRODUCTION TO THE PROJECT

Non-performing assets, also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments than a bank makes its profits. Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as non-performing. A high level of non-performing assets compared to similar lenders may be a sign of problems, as may an sudden increase. However this needs to be looked at in the context of the type of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of nonperforming debt, but will make up for this by charging borrowers higher interest rates, increasing spreads. A mortgage lender will almost certainly have lower non-performing assets than a credit card specialist, but the latter will have higher spreads and may well make a bigger profit on the same assets, even if it eventually has to write off the non-performing loans.

1.2 OBJECTIVES OF THE STUDY 1

1. 2. 3.

To know the reasons for an assets becoming Non- Performing Assets To study the position of Non Performing Assets in various banks To study the procedure and tools used for management of NPAS.

1.3 Meaning

Non-Performing Assets are popularly known as NPA. Banks assets are of various types. All those assets which generate periodical income are called as Performing Assets (PA). While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA). If the customers do not repay principal amount and interest for a certain period of time then such loans become nonperforming assets (NPA). Thus non-performing assets are basically non-performing loans. In India, the time frame given for classifying the asset as NPA is 180 days as Compared to 45 days to 90 days of international norms.

1.4 DEFINATION OF NON PERFORMING ASSETS

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

1.5 Research methodology of NPAs

Research methodology is designed in order to solve a research problem. I have conducted a descriptive research to understand and develop knowledge on the existing problem of non-performing assets. This research has made an attempt: To understand the concept of non-performing assets and thereby providing a solution to the problem

Secondary data:
Secondary data are those, which have already been collected by someone else and which have already been passed through the statistical process. This data is collected from the following sources. Report of State Bank of India, union Bank of India, Oriental Bank of India Magazines Journals Newspapers Internet website

CHAPTER 2

2.1Non-Performing Assets

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the Bank. A nonperforming asset is an asset in respect of which either the principal or interest remains overdue for more than 90 days (180 days for fiscal years ending before 31 March 2004). The RBI guidelines stipulate the criteria for determining and classifying a nonperforming asset (an NPA). An NPA is a loan or an advance where: Interest and/or an installment of principal remained overdue for a period of more than 90 days in respect of a term loan; The account remained out-of-order (as defined below) in respect of an overdraft or cash credit for more than 90 days; the bill remained overdue for a period of more than 90 days in the case of bills purchased and discounted; In the case of a loan granted for short duration crops, if the installments of principal or interest thereon remain overdue for two crop seasons

CHAPTER 2

2.1 NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA

To start with, performance in term of profitability is a benchmark for any business enterprise including the banking industry .However, increasing NPAs have a direct impact on the profitability as legally bank are not allowed to book income on such assets as per the Reserve Bank of India guidelines. Also, with increasing deposit made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks. Further, Reserve Bank of India successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the tear of burgeoning non performing assets.

2.2 INDIAN ECONOMY AND NPAs Undoubtedly the world economy has slowed down recession is at its peak, globally stock market have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FIs, etc. Further, international rating agencies like, Standard and poor have lowered Indias credit rating to sub-investment grade. Such negative aspects have often outweighed positive such as increasing forex reserves and a manageable inflation rate. Under such a situation, it goes without saying that is no exception and is bound to face the heat of a global downturn. One would be surprised to know that the banks and financial institution in India hold non performing assets worth Rs. 110000 crores Bankers have realized that unless the level of NPAs is drastically, they will find it difficult to survive.

2.3 GLOBAL DEVELOPMENTS AND NPAs

The core banking business is of mobilizing the deposit and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfil its contractual obligation either during the course of a transaction or on a future obligation. A question that arises is how much risk can a bank afford to take? Recent happening in the business world Enron, World com, Xerox, Global Crossing do not give much confidence to bank. In case after case, these giant corporate became bankrupt and failed to provide investor with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institution also reveals the fact that the biggest Failures were due to credit risk.

2.4 REASONS FOR HUGE LEVEL OF NPAS

1. Willful Default:

If the borrower doesn't pay though he has the capacity to pay. He is termed as willful defaulter. The features of willful default are wrong use of funds and siphoning of funds 2. Improper functioning of Debt Recovery Tribunals: Although the setting up of Debt Recovery Tribunals had raised much hope about speeding up of the recovery proceedings initiated by banks these hopes have largely remained unfulfilled. At quite a few places, the DRTs are still to be set up and, even where these have been set up, they are not yet fully equipped to handle very large number of cases already before them or those that can be placed before them. In some of theDRTs, the number of pending cases is quite large. While the government has been reviewing the operations of DRTs, as yet a Stage has not come when it can be said that these are helping recoveries of banks' dues substantially. 3. Project appraisal Deficiencies: It includes deficiencies regarding technical feasibility" economic viability andproject management deficiencies in regard to implementation, production, and labor
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"marketing" financial and administrative.

4. Ineffective Credit Monitoring: Ineffective credit monitoring al1d follow-up mechanism of' the banks have also Contributed to slippage of' standard loans into bad loans. 5. Diversion of Funds: Diversion of' funds mostly for expansion/diversification/modernization and takingup new projects and for promoting associated concerns is a prominent reason for high level of NPAs. 6. External factors: The RBI study noted that non-availability of raw materials, power shortage, transport bottlenecks, financial bottlenecks, change in Govt. policy, natural calamities, industrial sickness, increase in import cost, increase in overhead cost, market saturation, product obsolescence, fill in demand and others were responsible for weak performance

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2.5 ADVERSE EFFECTS OF NPAs An NPA on the balance sheet of an institution deteriorates its health in several ways
1. Problem of moral hazard:

Interest income cannot be booked on the loandeclared as an NPA, and so profits get affected In addition, provisioning against assets creats further losses. Thus, financial institutions have a tendency to rollover non-performing loans. The borrower is given more loans to pay interest on past loans repay whatever amount is possible.

2. Adverse Incentive:

A bank with say 25% NPA, Will have to earn on 75% of its assets to meet its expenses and make profit. It will have a tendency to go for more risky venture always have a greater probability of becoming non-performing, thus completing the self fulfilling cycle. 3 Huge opportunity cost:

Assuming RS.1, 00, 000 crore locked up due to NPAs started earted earning interest, say at 10%, it would immediately boost the interest..
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2.6 Guidelines for Provisions under Special Circumstances Government guaranteed advances 1. With effect from 31 March 2000, in respect of advances sanctioned against State Government guarantee, if the guarantee is invoked and remains in default for more than two quarters (180 days at present), the banks should make normal provisions as prescribed in paragraph 4.1.2above. 2. As regards advances guaranteed by State Governments, in respect of which guarantee stood invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner, during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year. 3. 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 assts

4. 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.
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CHAPTER 3
3.1India and Non-Performing Assets (NPA)

In India, NPA were very high in the beginning of 90's. Over a period of time there is considerable decline in the NPA's of all banks. In the case of public sector banks, gross non-performing assets were 9.4% in 2002-03 and it declined to 7.8% in 200304. The net NPA during the same period declined from 4.5% to 3%.

Types of NPA

NPA have been divided or classified into following four types:Standard Assets: A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets. Sub-Standard Assets: All those assets (loans and advances) which are
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considered as non-performing for a period of 18 months are called as Sub-Standard assets. Doubtful Assets: All those assets which are considered as non-performing for period of more than 18 months are called as Doubtful Assets. Loss Assets: All those assets which cannot be recovered are called as Loss Assets. These assets can be identified by the Central Bank or by the Auditors. Provision on types of assets Provision is allocating money every year to meet possible future loss.

3.2 Causes of NPA NPA arises due to a number of factors or causes like:Speculation: Investing in high risk assets to earn high income. Default: Willful default by the borrowers. Fraudulent practices: Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc. Diversion of funds: Most of the funds are diverted for unnecessary expansion and diversion of business. Internal reasons: Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies.
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External reasons: External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.

CHAPTER 4

4.1 NARSIMHAN COMMITTEE'S RECOMMENDATIONS Committee on financial system (CFS) Narsimhan committee which reported in 1991,meanwhile major changes have taken place in the domestic, economic and institutional science, indicating the movement towards global integration of financial services.Committee has presented second-generation reforms. 1. To strengthen the foundation of financial system 2. Related to this, streamlining procedures, upgrading technology and human resource development 3. Structural changes in the system It is recommended that an asset can be classified as doubtful if it is in the sub standard category for 18 months in the first instance and eventually for 12 months as loss if it has been so identified but not written off. These norms, which should be regarded as theMinimum may be brought into force in a phased manner.
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Corporation and FI should avoid the practice of 'ever greening' by making fresh advances to their troubled constituents only with a view to settling interest dues and avoiding classification of the loans in question as NPAs. The committee notes that the regulatory and supervisory' authorities are paying particular attention and such breaches in tileThere is no denying the fact that any effort at financial restructuring in the form of having off NP As portfolio from the books of the corporation or measures to initiate the impact of high level of NPAs must go hand with operational structuring. Cleaning up the balance .Heets of banks thus make sense only if simultaneous steps are taken to prevent of limit the re-emergence of new NPAs. Direct credit has a proportionately higher share in NPAs portfolio of corporations and has been one of the factors in erosion in the quality of asset portfolio. There is a continuing need of Financial Corporations to extend Credit to SS 1 sector, which is important Segment of national economy but on commercial considerations and on basis of creditworthiness. Government feels reluctant to accept the recommendation for reducing the scope of directed credit under priority sector because tiny sector of industry and small businesses have problem with regard to obtaining credit and some remaining may be necessary for this sector. Poverty alleviation and employment generation schemes. GivenThe special needs of these sectors, the current practice may continue. As an incentive to bank is to makes specific provision, the consideration be given to Making such provisions tax deductible. Banks should pay greater attention to asset liability management to avoid such Mismatch And to cover, among others, liquidity and interest rate risks. And to cover, among others, liquidity and interest rate risks. There is a need for greater use of computerized system. Computerization has to be Recognized as an indispensable tool for improvement in customer service. The
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institution and operation of better control systems, greater efficiency in information technology. The main issue with regard to operations of banks is to ensure operational flexibility And measure of competition and adequate internal autonomy in matters of loan Sanctioning And internal administration.The committee believes that the balance sheets of banks and f7Is should be made more transparent and full disclosure made in balance sheet. "This is to be done in phased manner.

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CHAPTER 5

NORMAS FOR TREATING VARIOUS ADVANCES AS NPAs Nonperforming asset [NPA]. The basic factor to determine whether an account is NPA or not is record of recovery and not the availability of security. RBI has advised following norms for identifying the kind of advances as nonperforming. An asset which ceases to generate income for the bank is called a 5.1 Loans [loans repayable in installments] A loan shall be treated as NPA if interest and/or installment of principal remain overdue/or a period of more than 90 days. Any amount due to the bank under any credit facility is overdue if it is not Bold Italic Arial paid on the due date fixed by the bank. Hence a loan account shall be treated as NPA as on 31.03.2004, if interest and/or installment of principal remain overdue for a period of more than 90 days. Illustrations;

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 IF INTEREST DUE FOR THE MONTH ENDED 31.12.2004 is not paid ,it becomes NPA ON 30.03.2005 [I,E. OVERDUE FOR more than 90 days]. Hence the amount shall be classified as NP A as on 31.03.2005 IF installment towards principal due on 01.01.2005 is not paid it becomes NPA as on 31.03.2005 [i.e. overdue for more than 90 days].

5.2 Special case:

Equated monthly installments; In case of loans repayable in equated for identifying the kind of advances as nonperforming monthly installments where a part of the interest is including in the installments and not with reference to the date of debit of monthly interest. Loans with moratorium for payment of interest;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 becomes overdue and hence NPA, with reference to date of debit of interest. They become overdue after due date for payment of interest, if uncollected. Staff housing loans: in case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first month onwards such loans/advances should be classified as NP A only when there is a default in repayment of installment of principal or payment of the respective due dates. Advance payments: Where the borrower has made advance payment of installments fixed towards the loan as on 31.03.2004 the loan account is regular, such loan
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account need not be treated as NPA even if technically interest is due for more than 90 days.

5.3BILLS PURCHASED/DISCOUNTED:

A Bill purchased/discounted shall be treated as NPA if it remains overdue for a period of more than 90 days. Hence a cheque /draft /bill purchased/discounted shall be treated as NPA as on 31.03.2005 if it remains overdue for more than 90 days as on 31.03.2005.

5.4 AGRICULTURAL LOANS:

An agricultural advance shall be treated as NPA if interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years. Hence in respect of advances granted for agricultural purpose where interest and/or Installment of principal remains unpaid for two harvest seasons but for a period not Exceeding two half years after it has become due, such advance should be treated as NPA. In respect of agricultural advances such as dairy, poultry, sericulture, Animal husbandry, fishery etc, income recognition, Asset classification and Provisioning should be done on the same basis as non-agricultural advances as per 90 days noun.

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5.5 OTHER ACCOUNTS: Any other credit facility shall be treated as NPA if any amount to be received remains overdue for a period of more than 90 days. Hence any other credit facility shall be classified as NPA as on 31.03.2005 if interest/principal remains overdue for more than 90 days.

5.6 ACCOUNTS, WHICH NEED NOT BE CLASSIFIED AS NPA: Loans on deposits and loans against Govt. securities:

Advances fully secured against term deposit (inclusive of accrued interest, if any), NSC,INDIRA VIKAS PATRA (IVP), KISAN VIKAS PATRA (KVP) and LIC Policies should not be treated as NPA. Such securities are exempt from provision requirement and hence, they shall be classified as performing assets only. Advances guaranteed by state/central Government: Govt. guaranteed advances mean the advances repayment of which is guaranteed by state or central Government, by executing guarantee bond/guarantee letter by the concerned Government department. Borrower accounts of public sector Undertakings should unless specific Guarantee bond/guarantee letter is executed by
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the concerned Govt. Department. The credit facilities backed by guarantee of the central Govt. though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification of Govt. guaranteed advances, as NPA is not for the purpose of recognition of income. Advances sanctioned against state Government guarantees should be classified as NPA in the normal course, if the guarantee is invoked and remains in default for more than 90days.

5.7 MEASURES IN CASE OF NON-PAYMENT

IF the borrower pays within 60 days no further action is required. However if he fails to pay full amount within specified period the secured creditor can take one or more of the following measures to recover his dues. Take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.Takeover the management of secured asset of the borrower including the right to transfer by way of lease, assignment or sale and realize the secured asset.

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CHAPTER 6

Securitization

6.1 A Tool for Management of NPA

Securitization is the buzzword in todays world of finance. Its not a new subject to the developed economies. It is certainly a new concept for the emerging markets like India. The technique of securitization definitely holds a great promise for a developing Country like India. One of the major issues in the development of banking sector in India is the reducing of non-performing assets in their balance sheets. One such financial innovation to reduce non- performing assets is Securitization. Securitization is the financial instrument of the new Millennium. The process of securitization creates the strata of risk-return and different maturity securities and is marketable into the capital markets as per the needs of the investors. It has become one of the most important financing vehicles in the
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developed countries like USA. Its use is rapidly expanding worldwide. Securitization enables many companies to raise funds at a lower cost than through traditional financing.

Definition

Securitization is the process of pooling and re-packaging of homogeneous illiquid financial assets into marketable securities that can be sold to investors. Every such process which converts a financial relation into a transaction in simple

Words:Selling the cash flow generated from the assets (either existing or future) against the charge of the assets, by converting them into homogeneous market negotiable instruments is known as securitization. 6.2 Nature of the SPV:

Selection of a proper financial vehicle through which non-performing loans can be transfered out of the banks books is a key issue. It may take three forms Government Owned Government Managed: Considering the size of the capital that will be needed for this exercise, the problems relating to pricing of assets to be transferred, the desirability of making these transfers unchallengeable by the borrower or anyone else and the urgent need for changes in the available legal framework so that early enforcement of the lenders rights becomes possible, it would be best if the ownership of transferred assets lies with the government. The government shall also appoint a management team to handle the agency.
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Government Owned privately managed: The government body owning the assets may not possess the necessary skills and attitude to ensure their recovery and it may suffer from the limitations, which most public sector units suffer. It would therefore be prudent to have a management structure in which the ownership of the assets will lie with the government and the management thereof, with a separate private sector entity having the necessary expertise and organization. Being in the private sector it will have the managerial and operational flexibility, which the public sector units do not normally have and will be able to employ/hire, the needed expertise. Privately Owned and privately managed: Here an independent private player may purchase the NP As from the banks and manage them professionally. However a private player entering such high-risk business is less likely. Though the revenue model would primarily be commission based, the profitability poses a question mark for the entry of the private player. Thus a SPV owned by the government or the issuing bank and professionally managed would be the ideal structure for the Indian condition. Securitization is the process of pooling and repackaging of homogeneous illiquid financial assets into marketable securities that can be sold to investors. It has emerged as an important means of financing in recent times. A typical securitization transaction consists of following steps: Creation of special purpose vehicle to hold the financial assets underlying the

Securities: Sale of the financial assets by the originator or holder of the assets to special

purpose vehicle, which will hold the assets and realize the assets.
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6.3 Importance for Securitization

The generic need for securitization is as old as that for organized financial markets From the distinction between a financial relation and a financial transaction earlier, we understand that a relation in variably needs the coming together and remaining intermediaries in the process, but a relation involves fixity over a second time. Financial market develops in response to the need to involve the large number of investors in the market place. As the number of investor increases, the average size per investor come down- This is a simple rule of the market place because growing size means involvement of a wider base of investors. The small investors are not a professional investor: He is not as such in the business of investment. Hence, he needs an instrument which is easier to understand, and is liquid. These two needs said the stage for evolution of financial instrument which would convert financial claims into liquid, easy to understand and homogenous products, at times carrying certified quality labels, which would be available in small denominations to suit everyones purse. Thus securitization in a generic sense is basic to the world of finance, and it is truism to say that it envelops the entire range of financial instruments, and hence, the entire range of financial assets.

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6.4 Parties involved Securitization program usually involved several participant each carrying out a specialist function, such as creating and analyzing the asset pool, administration, credit rating, accounting, legal negotiation etc. These include; The originator- also interchangeably referred to as the seller- is the entity Special purpose vehicle (SPV), which as the issuer of ABS ensures distancing The Investors- the Investors may be in the form of individuals or institutional

whose receivable portfolio forms the basis for asset backed security (ABS) issuance. of the instrument from the originator. investors like FIs and Mutual Funds etc. They buy a participating interest in the total pool of receivables and receive their payment in the form of interest and principals as per agreed pattern. 6.5 Other parties

The obligor is the originators debtor (borrower of the original loan). The servicer who bears all administrative responsibilities relating to the The trustee or the investor representative, who act in a fiduciary capacity safe the investors in the ABS. The credit rating agencies, which provide an objective estimate of the credit
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securitization transaction. guarding the interest of

risk in the transaction by assigning a well, defined credit rating.

The regulators, whose principal concerns related to the capital adequacy, liquidity and

the balance sheet treatment of the transaction.

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CHAPTER 7

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

Scope

1. These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling non performing financial assets, from/ to other banks/FIs/NBFCs (excluding securitization companies/ reconstruction companies). 2. A financial asset, including assets under multiple/consortium banking arrangements, would be eligible for purchase/sale in terms of these guidelines if it is a non-performing asset/non performing investment in the books of the selling bank. 3. The reference to 'bank' in the guidelines would include financial institutions and NBFCs. 4. The guidelines to be followed by banks purchasing/ selling non-performing financial assets from / to other banks are given below. The guidelines have been grouped under the i. Procedure for purchase/ sale of non performing financial assets by banks, including valuation and pricing aspects. ii. Prudential norms, in the following areas, for banks for purchase/ sale of non performing financial assets: a. Asset classification norms b. Provisioning norms c. Accounting of recoveries
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d. Capital adequacy norms e. Exposure norms iii. Disclosure requirements 5. Procedure for purchase/ sale of non performing financial assets, including valuation and pricing aspects i. A bank which is purchasing/ selling non-performing financial assets should ensure that the purchase/ sale is conducted in accordance with a policy approved by the Board. The Board shall lay down policies and guidelines covering, inter alia, a. Non performing financial assets that may be purchased/ sold; b. Norms and procedure for purchase/ sale of such financial assets; c. Valuation procedure to be followed to ensure that the economic value of financial assets is reasonably estimated based on the estimated cash flows arising out of repayments and recovery prospects; d. Delegation of powers of various functionaries for taking decision on the purchase/ sale of the financial assets; etc. ii. While laying down the policy, the Board shall satisfy itself that the bank has adequate skills to purchase non performing financial assets and deal with them in an efficient manner which will result in value addition to the bank. The Board should also ensure that appropriate systems and procedures are in place to effectively address the risks that a purchasing bank would assume while engaging in this activity. iii) The estimated cash flows are normally expected to be realised within a period of three years and not less than 5% of the estimated cash flows should be realized in each half year. iv) A bank may purchase/sell non-performing financial assets from/to other banks only on 'without recourse' basis, i.e., the entire credit risk associated with the nonperforming financial assets should be transferred to the purchasing bank. Selling bank shall ensure that the effect of the sale of the financial assets should be such that the asset is taken off the books of the bank and after the sale there should not be any known liability devolving on the selling bank.
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v) Banks should ensure that subsequent to sale of the non performing financial assets to other banks, they do not have any involvement with reference to assets sold and do not assume operational, legal or any other type of risks relating to the financial assets sold. Consequently, the specific financial asset should not enjoy the support of credit enhancements / liquidity facilities in any form or manner. vi) Each bank will make its own assessment of the value offered by the purchasing bank for the financial asset and decide whether to accept or reject the offer. vii) Under no circumstances can a sale to other banks be made at a contingent price whereby in the event of shortfall in the realization by the purchasing banks, the selling banks would have to bear a part of the shortfall. viii) A non-performing asset in the books of a bank shall be eligible for sale to other banks only if it has remained a non-performing asset for at least two years in the books of the selling bank. ix) Banks shall sell non-performing financial assets to other banks only on cash basis. The entire sale consideration should be received upfront and the asset can be taken out of the books of the selling bank only on receipt of the entire sale consideration. x) A non-performing financial asset should be held by the purchasing bank in its books at least for a period of 15 months before it is sold to other banks. Banks should not sell such assets back to the bank, which had sold the NPFA. (xi) Banks are also permitted to sell/buy homogeneous pool within retail nonperforming financial assets, on a portfolio basis provided each of the non-performing financial assets of the pool has remained as non-performing financial asset for at least 2 years in the books of the selling bank. The pool of assets would be treated as a single asset in the books of the purchasing bank. xii) The selling bank shall pursue the staff accountability aspects as per the existing instructions in respect of the non-performing assets sold to other banks.

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7.2 RBI GUIDELINES ON INCOME RECOGNITION (interest income on) NPAs Banks recognize income including interest income on advances on accrual basis. That is,income is accounted for as and when it is earned.The prima-facie condition for accrual of income is that it should not be unreasonable toexpect its ultimate collection. However, NPAs involves significant uncertainty withrespect to its ultimate collection Considering this fact, in accordance with the guidelines for income recognition issued bythe Reserve Bank of India (RBI), banks should not recognize interest income on such NPAs until it is actually realized

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CHAPTER 8

Bank profile 8.1NON PERFORMING ASSETS IN ICICI BANK Abstract A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and networth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. This report deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming non-performing, projection with special reference to ICICI bank.

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Objectives:

The main objective of the research is to understand the concept of nonperforming assets. What is the definition of nonperforming assets? Why they are increasing? What are the causes of NPAs? How we can control this thing? Through this project we can also analyze the banking industry. What type of challenges this industry is facing. I also include Basel committee report in my project which tells about the risk management in the banks. I choose ICICI BANK for my study of NPA. It is the leading private sector bank. They control NPA in very good manner. That why it is interesting to know how they able to do this one, To carry out my project I have used the descriptive research. Descriptive research includes surveys and fact-finding enquiries of different kinds. The major purpose of descriptive research is description of the state of affairs, as it exists at present. The main characteristic of this method is that the researcher has no control over the variables; he can only report what has happened or what is happening. It is also called as ex post facto research. Most ex post facto research projects are used for descriptive studies in which researcher seeks to measure such items as, for example, frequency of shopping, preferences of people, or similar data. Descriptive research also includes attempts by the researcher to discover causes even when they cannot control the variables. The methods of research utilized in descriptive research are survey methods of all kinds. Limitations: The limitations that I felt in my study are: It was critical for me to gather the financial data of the every bank of the Public Sector Banks so the better evaluations of the performance of the banks are not possible. Since my study is based on the secondary data, the practical operations as related to the NPAs are adopted by the banks are not learned. Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector.
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Provision for the classification of the Assets / NPAs differs within each public sector bank & this information is not available Publicly. The RBI norms for the classification of assets / NPAs are available on a pay site & not publicly available through any source .

8.2 UNION BANK OF INDIA

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MISSION STATEMENT Bank is committed to maintain its identity as a leading innovative commercial bank alive to the changing needs of the society The Bank aims to provide all retail banking service and selective wholesale banking service above benchmarked quality if standards of the best in the Industry. The Bank will strengthen its role function as a development bank in furthering socio-economic objectives of the Govt. of India. The Bank will continue to enhance its reputation as Good People to Bank With being proactive to customers needs, expectations and the challenges at the Industry level. The Bank is committed to a continuous process of upgrading its operational efficiency and productivity. In essence, the Mission is to fulfill its obligations to the society at large, its shareholders, present and future and contribute to GDP at all times. TO GAIN MARKET RECOGNITION IN THE CHOSEN AREAS. To attain abusiness mix of Rs. 100000 crores and operating profit of Rs. 1700 crores within 2005. Highlights of Bank's performance for the year ended March 2005 Total Deposit Rs. 50559 Cr. Total Advance Rs. 30928 Cr.
36

 Total Business Rs. 81487 Cr. Net Profit 712 Cr. Net NPA 2.87% CAR 12.32% against the bench mark of 9% Productivity 2.86 crore EPSR Rs. 15.48 Dividend 35% Credit deposit ratio improved to 61.17% from 59.55% achieved during 2004-05. The priority sector now constitutes 49.05 of NBC. Return on assets improved from 1.08%T to 1.22%. The share of SB deposits increased from 24.97% to 25.88%. Average cost of deposit has declined from 6.46% to 5.64%. Low cost portfolio deposit accounts for nearly 40% of the total deposits 449 branches under CBS branches (25.11.04) Telebanking in all the CBS branches
37

 Host of new initiatives including Cash Management Services, Gold Trading. Corporate Agency for Life and Non Life Policies and Distribution of Mutual fund products. 228 branches/offices at various locations across the country certified under ISO 9001-2000 norms. Amongst the seven entrants to Forbes-2000 list of Worlds biggest and most Powerful companies. Bagged the award from the Gem arid Jewellary Export Council for highest growth in total limits sanctioned to the Diamonds industry.

8.3 ORIENTAL BANK OF COMMERCE BANKS PHILOSPHY

38

The Banks philosophy is to grow without making compromise on the quality of assets. This is reflected in the 19.7% growth of deposits and 25.5% growth in advances. The Bank Is also conscious on the costing side and has reduced the cost of deposit by 140basis points to 5.6% and improved the net interest margin to 3.9%, which is one of the finest in the banking industry. Moreover, better recoveries and low nonPerforming Assets and improvement in deposit-mix have contributed towards shoring up the bottom-line. The productivity per employee has reached the level of Rs. 4.16 crore and per branch business of Rs. 55.5 crore is one of the highest amongst the public sector banks. The book value of share has touched Rs. 139 on 31.3.2005 representing an increase of 26.9%. The Bank proposes to declare a higher dividend of 50% (inclusive of an interim dividend of 20%) as against 45% last year. With this the EPS will stand at Rs. 35.63. Recovery The Bank is having a well-codified recovery policy. Reserve Bank of India has introduced the One Time Settlement Scheme for non-performing assets with outstanding of Rs. 10.00 crore and below on 29.3.2005 which was later on extended up to 31.10.2003.Thereafter, RBI further extended the said scheme upto 31.7.2005. Bank is utilizing the maximum benefit under the scheme and a sum of Rs. 23.17 crore has been recoveredupto 31.3.2005. Bank is hopeful to recover the maximum amount in the coming months under the scheme

8.4 BANK OF INDIA Economic Backdrop and Banking Environment India firmly established itself amongst the fastest growing economies in the world during2004-05. Good corporate results, increase in outward foreign investment by Indian companies as well as increase in foreign investment inflows reflects
39

increasing business confidence.

FINANCIAL PERFORMANCE

Profit The Operating Profit of the Bank for 2004-05 stood at Rs.9, 553.46 crore as compared toRs.7,775.40 crore in 2004-05, recording a growth of 22.87%. The Bank has posted a Net Profit of Rs.3,681.00 crore for 2004-05 as compared to Rs.3, 105.00 crore in 2004-05,registering a growth of 18.55%. The growth in profit in 2004-05 has been achieved through increases, both in Net Interest Income as well as Profit on sale of Investments. Profit on sale of investments in 2004-05was Rs.3, 073.45 crore as against Rs.1, 694.60 crore in 2004-05, and thus the increase under this head contributed to the growth in profit of 2004-05 to the extent of Rs.1,378.85 crore

CHAPTER 9
DATA ANALYSIS OF NPAs

9.1 Oriental Bank of commerce

(IN Crores)
Particulars 2003-2004 2004-2005 2005-2006

NPAs

3.54%

4.92%

10.25%

NP As

3.54% 2003-2004 2004-2005 10.25% 4.92% 2005-2006

Figure: NPAs as percentage of Gross

12 10

9.2 Oriental Bank Of Commerce

Year Total Advances

03-04 7.62

04-05 7.71

05-06 Advance
NPA 11.41 Column1

41
2002-03(in crores) 2003-04(in crores) 2004-05(in crores)

NPAs

.27

.38

1.17

NPAs as % Of Gross Advance

NPAs as % Of Gross Advance

9.3 Union Bank of India (In Crores

42

Particulars NPAs

03-04 9.5%

04-05 6.86%

05-06 5.33%

NP As
Figure : NPA as percentage of Gross Advances
5.33 9.5 2002-03 2003-04 2004-05 6.86

Figure: NPA as percentage of Gross Advances

9.4 Union Bank Of India

43

Particulars Total 1000 NPAs

1200

03-04 9.5 .91

04-05 10.34 .71

05-06 10.13 .54

600

Advance NPA

400

200

0 2002-03 (in lacs) 2003-04(in lacs) 2004-05(in lacs)

NPAs as % of Gross Advances

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CHAPTER 10

FINDINGS

The reduction in loan installment to 90 days raises the NPA levele In the short run. But in turn will improve the asset quality of the bank. The lenders cannot take undue advantage of the new act. Provisions fo lenders liquidity have been added to protect the borrowers against irresponsible. 5771.17. Private Banks have more efficient management of NPAs as compared to PSBs.

Gross NPAs of PSBS are 51537 and whereas private sector Banks are

Due to the introduction of securitization, public sector banks have been able to reduce

their NPAs to a considerable event.

issues are yet to be resolved for effective, implementation of the Act. NPAs art can help reset lending rates. The net NPAs of UBI has reduced from 9.5% to 5.33% The net NPAs of SBI has reduced from 6.527% to 3.44%
The net NPA of OBC has risen from 3.54 to 10.25%.

CONCLUSION
45

There has been a continuous decrease in the time period considered to declare a loan as non-performing. The continuous decrease in the time Period is to bring the Indian banking norms atpar with international Norms. This move will certainly reduce the NPAs and in turn improve the asset quality of the banks.

Till recent past, 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.

However with the introduction of SARFAECI ACT banks can issue notices to defaulters toRepay their loans. Also, the Supreme Court has recently given the banks the freedom to sell Mortgage assets of the borrowers, if they do not respond to the legal proceeding initiated byLender. This enables banks to get rid of sticky loans thereby improving their bottom lines.

SUGGESTION

46

There surely is a need distinguish between willful and unwilling defaulters. In case of the latter category of defaulters the law should not be as harsh as in case of willful defaulters.

The act should be judiciously and selectively applied so that NPAs could be converted in to performing assets. Compromise wherever possible and desirable should be resorted to as per banks extent term and conditions. Creation of additional benches and enhancing the capacity of DRT can be rationalized and delays could be avoided. Segregation of the benches should be done in order to ensure that a flood of small cases do to not retard the disposal of larger cases. In order to reduce the balance of NPAs, bank should constantly review and monitor the accounts and the progress of the project for which the loan has been sanctioned.

BIBLIOGRAPHY

47

Journals and magazines Economic and political weekly, October 16, 2004, CARLTON PEREIRA, INVESTING IN NPAs. Chartered Financial Analyst, August 2004, B P Dhaka,; SARFAEST ACT: THE DIAGNOSIS.

The chartered Account, February 2005, Raj Kumar S Adukia, SECURITISATION AN OVERVIEW

Treasury Management, December 2004, MPM Vinay Kumar, SECURITISATION: ISSUES AND PERSPECTIVES. Chartered Secretary, February 2003, V S Datey; SECURITISATION, RECONSTRUCTION AND ENFORCEMENT OF SECURITY INTEREST. Book Banking and insurance (O.P.AGER WEBSITES

www.reservebankofindia.org www.indianbanksassociation.org www.tribuneindia.com

www.google.com

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