Final project 3

Executive summary

The future of Indian Banking represents a unique mixture of unlimited opportunities amidst
insurmountable challenges. On one hand, we see the scenario represented by the rapid
process of globalization presently taking shape bringing the community of nations in the
world together, transcending geographical boundaries, in the sphere of trade and commerce,
and even employment opportunities of individuals. All these indicate newly emerging
opportunities for Indian Banking.

But on the darker side we see the accumulated morass, brought out by three decades of
controlled and regimented management of the banks in the past. It has siphoned profitability
of the banks, accumulated bloated NPA and threatens Capital Adequacy of the Banks and
their continued stability. In the nutshell the problem is how to shed the legacies of the past
and adapt to the demands of the new age.

The accumulation of huge non-performing assets in banks has assumed great importance.
The depth of the problem of bad debts was first realized only in early 1990s. The magnitude
of NPAs in banks and financial institutions is over Rs.1, 50,000crore.

The project has tried to analyze the present situation in Indian banks. With the process of
liberalization and globalization, the bank credit has witnessed spectacular growth as a catalyst
of economic growth. With the increase in the growing volume of credit, the volume of
impaired credit has also multiplied due to various factors. This burgeoning level of NPA had
become a grave matter of concern for the Indian banks.

In the study conducted focus was laid on the approach of various banks to manage NPAs, the
process of identification of the same, the classification and assessment of provisions and the
pre-sanction appraisal methodology and the post-sanction follow-up procedure.

The nature of research was descriptive as well as exploratory as the study was aimed at
studying the various measures adopted by banks for management of NPAs in the banking
sector.

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Alliance Business Academy

While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual
burden of banks. Now it is increasingly evident that the major defaulters are the big
borrowers coming from then on-priority sector. The banks and financial institutions have to
take the initiative to reduce NPAs in a time bound strategic approach.

Public sector banks figure prominently in the debate not only because they dominate the
banking industries, but also since they have much larger NPAs compared with the private
sector banks. This raises a concern in the industry and academia because it is generally felt
that NPAs reduce the profitability of a bank, weaken its financial health and erode its
solvency.

For the recovery of NPAs a broad framework has evolved for the management of NPAs
under which several options are provided for debt recovery and restructuring. Banks and FIs
have the freedom to design and implement their own policies for recovery and write-off
incorporating compromise and negotiated settlements.

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1. Introduction

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

1.1Definitions:

An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank.
A „non-performing asset‟ (NPA) was defined as a credit facility in respect of which the
interest and/ or instalment of principal has remained „past due‟ for a specified period of time
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the „90 days’ overdue’ norm for identification of
NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004,
a non-performing asset (NPA) shall be a loan or an advance where;

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

 The account remains „out of order‟ for a period of more than 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 instalment 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.

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

Banking:

„Banking‟ as defined in the Section 5 (b) of the Banking Regulations Act, 1949 is the
business of "Accepting deposits of money from the public for the purpose of lending or
investment". These deposits are repayable on demand or otherwise, and withdraw able by a
cheque, draft, and order or otherwise.

1.2 NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA

To start with, performance in terms of profitability is a benchmark for any business enterprise
including the banking industry. However, increasing NPAs have a direct impact on banks
profitability as legally banks are not allowed to book income on such accounts and at the
sometime are forced to make provision on such assets as per the Reserve Bank of India (RBI)
guidelines. Also, with increasing deposits made by the public in the banking system, the
banking industry cannot afford defaults by borrower s since NPAs affects the repayment
capacity of banks.

Further, Reserve Bank of India (RBI) 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.

1.3 FACTORS FOR RISE IN NPAs

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

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1.3.1EXTERNAL FACTORS:-

 Ineffective recovery tribunal

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

 Willful Defaults

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

 Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every
now and then India is hit by major natural calamities thus making the borrowers
unable to pay back there loans. Thus the bank has to make large amount of provisions
in order to compensate those loans, hence end up the fiscal with a reduced profit.
Mainly ours farmers depends on rain fall for cropping. Due to irregularities of
rain fall the farmers are not to achieve the production level thus they are not repaying
the loans.

 Industrial sickness

Improper project handling , ineffective management , lack of adequate resources ,
lack of advance technology , day to day changing govt. Policies give birth to
industrial sickness. Hence the banks that finance those industries ultimately end up
with a low recovery of their loans reducing their profit and liquidity.
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 Lack of demand

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

 Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to
cope with the changing principles and policies for the regulation of the rising of
NPAs.

The fallout of handloom sector is continuing as most of the weavers Co-
operative societies have become defunct largely due to withdrawal of state patronage.
The rehabilitation plan worked out by the Central government to revive the handloom
sector has not yet been implemented. So the over dues due to the handloom sectors
are becoming NPAs.

1.3.2INTERNAL FACTORS:-

 Defective Lending process

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

i. Principles of safety :-

By safety it means that the borrower is in a position to repay the loan both
principal and interest. The repayment of loan depends upon the borrowers: a)
Capacity to pay b) Willingness to pay

a) Capacity to pay depends upon:
1. Tangible assets
2. Success in business
b) Willingness to pay depends on:
1. Character
2. Honest
3. Reputation of borrower

The banker should, therefore take utmost care in ensuring that the enterprise or
business for which a loan is sought is a sound one and the borrower is capable of
carrying it out successfully .He should be a person of integrity and good character.

 Inappropriate technology

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

 Improper SWOT analysis
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The improper strength, weakness, opportunity and threat analysis is another reason for
rise in NPAs. While providing unsecured advances the banks depend more on the
honesty, integrity, and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.
it should collect credit information of the borrowers from_
a. From bankers.
b. Enquiry from market/segment of trade, industry, business.
c. From external credit rating agencies.
Analyze the balance sheet.
True picture of business will be revealed on analysis of profit/loss a/c and
balance sheet.
Purpose of the loan
When bankers give loan, he should analyze the purpose of the loan. To ensure
safety and liquidity, banks should grant loan for productive purpose only.
Bank should analyze the profitability, viability, long term acceptability of the
project while financing.

 Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are not able to repay it back. They
should use good credit appraisal to decrease the NPAs.

 Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible
assets as security to safe guard its interests. When accepting securities banks should
consider the_

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1. Marketability
2. Acceptability
3. Safety
4. Transferability.

The banker should follow the principle of diversification of risk based on the
famous maxim “do not keep all the eggs in one basket”; it means that the banker
should not grant advances to a few big farms only or to concentrate them in few
industries or in a few cities. If a new big customer meets misfortune or certain traders
or industries affected adversely, the overall position of the bank will not be affected.
Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries.
The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector
Orissa hand loom WCS ltd (2439.60lakhs).

 Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of
bank officials to the customer point decreases the collection of interest and principals
on the loan. The NPAs due to willful defaulters can be collected by regular visits.

 Re loaning process

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

1.4 PROBLEMS DUE TO NPA

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1. Owners do not receive a market return on their capital .in the worst case, if the banks
fails, owners lose their assets. In modern times this may affect a broad pool of
shareholders.

2. Depositors do not receive a market return on saving. In the worst case if the bank
fails, depositors lose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest rates, lower
deposit rates and higher lending rates repress saving and financial market, which
hamper economic growth.

4. Nonperforming loans epitomize bad investment. They misallocate credit from good
projects, which do not receive funding, to failed projects. Bad investment ends up in
misallocation of capital, and by extension, labor and natural resources.

Nonperforming asset may spill over the banking system and contract the money stock, which
may lead to economic contraction. This spillover effect can channelize through liquidity or
bank insolvency:

a) When many borrowers fail to pay interest, banks may experience liquidity shortage. This
can jam payment across the country.

b) Illiquidity constraints bank in paying depositors

c) Undercapitalized banks exceed the bank‟s capital base.

'Out of Order' status:

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

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‘Overdue‟:
Any amount due to the bank under any credit facility is „overdue‟ if it is not paid
on the due date fixed by the bank.

1.5 Types of NPA

A] Gross NPA
B] Net NPA

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

Gross NPAs Ratio Gross NPAs
Gross Advances

B] Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross and
net NPA is quite high.

It can be calculated by following

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Net NPAs  Gross NPAs – Provisions
Gross Advances - Provisions

1.6 GLOBAL DEVELOPMENTS AND NPAs

The core banking business is of mobilizing the deposits 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 fulfill
its contractual obligations 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 happenings in the
business world -Enron, WorldCom, Xerox, Global Crossing do not give much confidence to
banks. In case after case, these giant corporate becan1e bankrupt and failed to provide
investors with clearer and more complete information thereby introducing a degree of risk
that many investors could neither anticipate nor welcome. The history of financial institutions
also reveals the fact that the biggest banking failures were due to credit risk. Due to this,
banks are restricting their lending operations to secured avenues only with adequate collateral
on which to fall back upon in a situation of default.

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2.1 BACKGROUND:

Banking system which constitutes the core of the financial sector plays a vital role in
transmitting monetary policy impulses to the economic system. Therefore its efficiency and
development are vital for enhancing growth and improving the changes for stability. During
the recent past, profits of the Bank came under pressure due to rise in interest rates, decrease
in non-interest income and increase in provisions and contingencies.

2.2LITERATURE REVIEW

In presence of NPAs has affected the profitability, liquidity and competitive functioning of
banks and finally the psychology of the bankers in respect of their disposition towards credit
delivery and credit expansion. Effects range from liquidity crisis, deposit runs and bank
failures that lead to writing off of non-performing loans, restructuring, mergers and
acquisitions and even closer of weaker banks. The accumulation of huge non-performing
assets in banks has assumed great importance. The depth of the problem of bad debts was
first realized only in early 1990s. The magnitude of NPAs in banks and financial institutions
is over Rs.1, 50,000crores.

While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual
burden of banks. Now it is increasingly evident that the major defaulters are the big
borrowers coming from the non-priority sector. The banks and financial institutions have to
take the initiative to reduce NPAs in a time bound strategic approach.

Lepley, William (1998) in his article “Systematic Risk, Total risk and bank risk assessment”
states that in bank finance, the risk assessment of individual loans appears to be based on
total risk rather than systematic risk. Research found that total risk will reduce firm value by
quicker liquidation leading to bankruptcy.

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Giampaola, Gabbi (2000) in his article “Measuring liquidity risk on a Banking” states that to
mitigate risk, a comparison between the potential loss produced by the individual financial
positions using VAR, it is possible to figure the capital required to bear maximum loss. The
integration of financial flows makes it possible to find a higher efficient frontier.

Thirwell, John (2002) in his article “Operational risk, the banks and the regulators struggle”
states that the research was conducted to know the awareness of the banks about the
operational risk and its management. The research found that the operational risk is not the
mean of distribution curve. It is the level of future loss.

Fthemi, Ali and Fooladi, Iraj (2006) in their article “Credit risk management- A survey of
practices” states that the purpose is to shed light on current practices of financial institutions.
The research found that identifying counter party default risk is the single most important
purpose served by the credit risk models. Only few banks use vendor-marketed model for
managing credit risk.

Waseem, Ahmed (2006) in his article “Non-Performing Assets (NPAs) in Banks” states that
with the liberalization of economy, banking industry is facing several challenges giving rise
to NPAs. It depends on the quality of the credit risk management of banks. NPAs have direct
impact on banks profitability, building up stress on management.

Pillai, Manoj (2007) in his article “ARCIL and management of NPAs of Indian Banks” states
that presence of NPAs has had an adverse impact on the productivity and efficiency of Indian
banks resulted in erosion of profits. The research found that during last 4 years the aggregate
advances increased by 104% but NPAs has reduced, and gives this credit to establishment of
ARCIL.

In 2009 Article “Are Banks stock sensitive to risk management?” states that the risk
management capabilities of banks have been improving overtime except for its last two years.
The return through stocks is sensitive to risk management capabilities of banks.

Article in livemint(2010)Mumbai: The Reserve Bank of India (RBI) has asked banks to
provide sector-wise details of their non-performing assets and exposures in the balance sheets
from this fiscal. The banks have also been asked to furnish details of any special purpose
vehicles sponsored by the banks.
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According to analysts, the move would bring in more transparency in the banks‟
operations.“It has been decided to prescribe the following additional disclosures in the „notes
to accounts‟ in the banks‟ balance sheets...(like) concentration of deposits, advances,
exposures and NPAs, sector-wise NPAs, overseas assets, NPAs and revenue, off-balance
sheet SPVs sponsored by banks,” RBI said in an statement.

Public sector banks figure prominently in the debate not only because they dominate the
banking industries, but also since they have much larger NPAs compared with the private
sector banks. This raises a concern in the industry and academia because it is generally felt
that NPAs reduce the profitability of banks, weaken its financial health and erode its
solvency.

For the recovery of NPAs a broad framework has evolved for the management
of NPAs under which several options are provided for debt recovery and restructuring.
Banks and FIs have the freedom to design and implement their own policies for recovery and
write-off incorporating compromise and negotiated settlements.

2.3 STATEMENT OF THE PROBLEM:

“Comparative Analysis on Non Performing Assets Of Private And Public Sector Banks”

“While The Banking Industry in India is progressively complying with the international
prudential norms and Accounting practices, there are certain areas like recovery management
in which it does not have a legal playing field as compared to other participants in the
International financial markets”

2.4 NEED AND IMPORTANCE OF THE STUDY

 The Banks and Financial Institutions have been burdened with ever increasing Non
Performing Assets.
 The recovery method of collection NPAs is not appropriate.
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2.5 OBJECTIVES OF THE STUDY:

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

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

 To study the past trends of NPA

 To calculate the weighted of NPA in risk management in Banking

 To analyze financial performance of banks at different level of NPA

 To evaluate profitability positions of banks

 To evaluate NPA level in different economic situation.

 To Know the Concept of Non Performing Asset

 To Know the Impact of NPAs

 To Know the Reasons for NPAs

 To learn Preventive Measures

2.6 SCOPE OF THE STUDY:

 Concept of Non Performing Asset
 Guidelines
 Impact of NPAs
 Reasons for NPAs
 Preventive Measures

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2.7 OPERATIONAL DEFINITIONS:

 NPA: An asset is classified as non-performing asset (NPA‟s) if dues in the form of
principal and interest are not paid by the borrower for a period of 90 days.
 Standard Assets: Such an asset is not a non-performing asset. In other words, it
carries not more than normal risk attached to the business.
 Sub-standard Assets: It is classified as non-performing asset for a period not
exceeding 18 months.
 Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a
doubtful asset.
 Loss Assets: Here loss is identified by the banks concerned or by internal auditors or
by external auditors or by Reserve Bank India (RBI) inspection
 Statutory Liquidity Ratio (SLR): It is the one which every banking company shall
maintain in India in the form of cash, gold or unencumbered approved securities, an
amount which shall not, at the close of business on any day be less than such
percentage of the total of its demand and time liabilities in India as on the last Friday
of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify
from time to time.
 Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with
itself in the form of cash reserves or by way of current account with the Reserve Bank
of India (RBI), computed as a certain percentage of its demand and time liabilities.
The objective is to ensure the safety and liquidity of the deposits with the banks.

2.8 RESEARCH METHODOLOGY

Type of Research: The research methodology adopted for carrying out the study
were

 In this project Descriptive research methodologies were use.

 At the first stage theoretical study is attempted.

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 At the second stage Historical study is attempted.

 At the Third stage Comparative study of NPA is undertaken.

Type of Data: Secondary Data
Source of data collection: Websites, Research Articles

2.9 Limitations of the study:

 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 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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3. Industry profile

3.1Definition of Banking

“In general terms, the business activity of accepting and safeguarding money owned by
other individuals andentities, and then lending out this money in order toearn a profit.”

Bank - An organization, usually a corporation, chartered by a state or federal government,
which does most or all of the following:... More

Deposit - Money given in advance to show intention to complete the purchase of a property.

Loan - An arrangement in which a lender gives money or property to a borrower, and the
borrower agrees to return the property or repay

“A bank is a financial intermediary that accepts deposits and channels those deposits into
lending activities. Banks are a fundamental component of the financial system, and are also
active players in financial markets. The essential role of a bank is to connect those
who have capital (such as investors or depositors), with those who seek capital (such as
individuals wanting a loan, or businesses wanting to grow)”

Section 6 of Banking Regulations Act, 1949 elaborately specifies the other forms of business
which a banking company may carry in addition to banking as defined in section 5. Some of
these are mentioned below:

 Issuing Demand Drafts & Travellers Cheques
 Collection of Cheques, Bills of exchange

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 Discounting and purchase of Bills
 Issuing Letters of Credit & Letters of Guarantee
 Sale and Purchase of Foreign Exchange
 Custodial Services
 Investment services

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

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

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

 In the first half of the 19th century the East India Company established three banks;
the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in
1843. These three banks also known as Presidency banks were amalgamated in 1920
and a new bank, the Imperial Bank of India was established in 1921. With the passing
of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India
was taken by the newly constituted State Bank of India.

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

 The three decades after nationalization saw a phenomenal expansion in the
geographical coverage and financial spread of the banking system in the country. As
certain rigidities and weaknesses were found to have developed in the system, during
the late eighties the Government of India felt that these had to be addressed to enable
the financial system to play its role in ushering in a more efficient and competitive
economy. Accordingly, a high-level committee was set up on 14 August 1991 to
examine all aspects relating to the structure, organization, functions and procedures of
the financial system. Based on the recommendations of the Committee (Chairman:
Shri M. Narasimham), a comprehensive reform of the banking system was introduced
in 1992-93. The objective of the reform measures was to ensure that the balance
sheets of banks reflected their actual financial health. One of the important measures
related to income recognition, asset classification and provisioning by banks, on the
basis of objective criteria was laid down by the Reserve Bank. The introduction of
capital adequacy norms in line with international standards has been another
important measure of the reforms process.
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1. Comprises balance of expired loans, compensation and other bonds such as
National Rural Development Bonds and Capital Investment Bonds. Annuity
certificates are excluded.

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

3. At book value.

4. Comprises accruals under Small Savings Scheme, Provident Funds, Special
Deposits of Non- Government

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

(i) It should be registered as a public limited company;
(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located in a centre which
does not have the headquarters of any other bank; and
(v) The bank will be subject to prudential norms in respect of banking operations,
accounting and other policies as laid down by the RBI. It will have to
achieve capital adequacy of eight per cent from the very beginning.

 A high level Committee, under the Chairmanship of Shri M. Narasimham, was
constituted by the Government of India in December 1997 to review the record of
implementation of financial system reforms recommended by the CFS in 1991 and

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chart the reforms necessary in the years ahead to make the banking system stronger
and better equipped to compete effectively in international economic environment.
The Committee has submitted its report to the Government in April 1998. Some of the
recommendations of the Committee, on prudential accounting norms, particularly in
the areas of Capital Adequacy Ratio, Classification of Government guaranteed
advances, provisioning requirements on standard advances and more disclosures in
the Balance Sheets of banks have been accepted and implemented. The other
recommendations are under consideration.

 The banking industry in India is in a midst of transformation, thanks to the
economic liberalization of the country, which has changed business environment in
the country. During the pre-liberalization period, the industry was merely focusing on
deposit mobilization and branch expansion. But with liberalization, it found many of
its advances under the non-performing assets (NPA) list. More importantly, the sector
has become very competitive with the entry of many foreign and private sector banks.
The face of banking is changing rapidly. There is no doubt that banking sector
reforms have improved the profitability, productivity and efficiency of banks, but in
the days ahead banks will have to prepare themselves to face new challenges.

Indian Banking: Key Developments

1969  Government acquires ownership in major banks
 Almost all banking operations in manual mode
 Some banks had Unit record Machines of IBM for IBR & Pay roll
1970- 1980  Unprecedented expansion in geographical coverage, staff,
business & transaction volumes and directed lending to
agriculture, SSI & SB sector
 Manual systems struggle to handle exponential rise in transaction
volumes --
 Outsourcing of data processing to service bureau begins
 Back office systems only in Multinational (MNC) banks' offices
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1981- 1990  Regulator (read RBI) led IT introduction in Banks
 Product level automation on stand alone PCs at branches
(ALPMs)
 In-house EDP infrastructure with Unix boxes, batch processing in
Cobol for MIS.
 Mainframes in corporate office

1991-1995  Expansion slows down
 Banking sector reforms resulting in progressive de-regulation of
banking, introduction of prudential banking norms entry of new
private sector banks
 Total Branch Automation (TBA) in Govt. owned and old private
banks begins
 New private banks are set up with CBS/TBA form the start

1996-2000  New delivery channels like ATM, Phone banking and Internet
banking and convenience of any branch banking and auto sweep
products introduced by new private and MNC banks
 Retail banking in focus, proliferation of credit cards
 Communication infrastructure improves and becomes cheap.
IDRBT sets up VSAT network for Banks
 Govt. owned banks feel the heat and attempt to respond using
intermediary technology, TBA implementation surges ahead
under fiat from Central Vigilance
 Commission (CVC), Y2K threat consumes last two years

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2000-2003  Alternate delivery channels find wide consumer acceptance
 IT Bill passed lending legal validity to electronic transactions
 Govt. owned banks and old private banks start implementing
CBSs, but initial attempts face problems
 Banks enter insurance business launch debit cards

3.3 Initial Phase of Nationalization:

Government implemented the exercise of nationalization of significant part of the Indian
Banking system in the year 1955, when Imperial Bank of India was Nationalized in that year
for the stated objective of "extension of banking facilities on a large scale, more particularly
in the rural and semi-urban areas, and for diverse other public purposes" to form State Bank
of India. SBI was to act as the principal agent of the RBI and handle banking transactions of
the Union & State Governments throughout India. The step was in fact in furtherance of the
objectives of supporting a powerful rural credit cooperative movement in India and as
recommended by the "The All-India Rural Credit Survey Committee Report, 1954". State
Bank of India was obliged to open an accepted number of branches within 5 years in
unbanked centres. The seven banks now forming subsidiaries of SBI were nationalized in the
year 1960. This brought one-third of the banking segment under the direct control of the
Government of India.

The major process of nationalization was carried out on 19th July 1969, when the Prime
Minister of India, Mrs. Indira Gandhi announced the nationalization of 14 major commercial
banks in the country. One more phase of nationalization was carried out in the year 1980,
when seven more banks were nationalized. This brought 80% of the banking segment in India
under Government ownership. The country entered the second phase, i.e. the phase of
Nationalized Banking with emphasis on Social Banking in 1969/70.

3.4 TYPES OF BANKS AND THERE INTRODUCTION

3.4.1PUBLIC BANKS:

 DENA Bank

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 Punjab National Bank
 Union Bank Of India
 Bank Of Baroda
 Bank Of India

3.4.2 PRIVATE BANKS:

 ICICI Banks
 KOTAK Mahindra Banks
 AXIS Bank
 HDFC Banks
 INDUSIND Banks

3.4.3Private sector Banks Introduction

ICICI Bank:

ICICI Bank is the largest private sector bank in India. To understand about this big bank,
we need to understand how it became so big a force to reckon with. ICICI (Industrial Credit
Investment Corporation of India) promoted the ICICI bank in 1994 with its stake reducing to
46% after the IPO in 1998. ICICI is a well-known name in India along with IDBI and was
formed in 1955 at the initiative of the World Bank, Indian Government and Indian Industries.
Both of these institutions have an exceptional brand-image and one of the highest possible
ratings from CRISIL and other rating organizations. ICICI can be considered an oligopolistic
corporation along with IDBI (please M2M me, if you want to discuss this!). ICIC listed in
NYSE in 2000. In 2001 it underwent a tight marriage with Bank of Madura in a stock-only
amalgamation. This was a tough marriage and I guess they are still suffering from this
hiccup, which kind of substantiates their mediocre performance today, in my perspective.
This and the merger with the ICICI Corporation have caused some management strain and
some tough merger time. I could only wish they come over this and serve the customers in a
better manner.

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Kotak Mahindra Bank:

Kotak Mahindra is one of India's leading financial organizations, offering a wide range of
financial services that encompass every sphere of life. From commercial banking, to stock
broking, to mutual funds, to life insurance, to investment banking, the group caters to the
diverse financial needs of individuals and corporate.

The group has a net worth of over Rs. 7,100crore and has a distribution network of branches,
franchisees, representative offices and satellite offices across cities and towns in India and
offices in New York, London, San Francisco, Dubai, Mauritius and Singapore. The Group
services around 6.5 million customer accounts.

The Kotak Mahindra Group was born in 1985 as Kotak Capital Management Finance
Limited. This company was promoted by Uday Kotak, Sidney A. A. Pinto and Kotak &
Company. Industrialists Harish Mahindra and Anand Mahindra took a stake in 1986, and
that's when the company changed its name to Kotak Mahindra Finance Limited.

AXIS Bank:

Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted
jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I),
Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC)
and other four PSU insurance companies, i.e. National Insurance Company Ltd., The New
India Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India
Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 405.17crores with the public holding (other
than promoters and GDRs) at 53.09%.

The Bank's Registered Office is at Ahmadabad and its Central Office is located at Mumbai.
The Bank has a very wide network of more than 1000 branches and Extension Counters (as
on 31st March 2010). The Bank has a network of over 4055 ATMs (as on 31st March 2010)
providing 24 hrs a day banking convenience to its customers. This is one of the largest ATM
networks in the country. The Bank has strengths in both retail and corporate banking and is

27


committed to adopting the best industry practices internationally in order to achieve
excellence.

HDFC Bank:

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the
private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The
bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its
registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled
Commercial Bank in January 1995.

HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build sound
customer franchises across distinct businesses so as to be the preferred provider of banking
services for target retail and wholesale customer segments, and to achieve healthy growth in
profitability, consistent with the bank's risk appetite. The bank is committed to maintain the
highest level of ethical standards, professional integrity, corporate governance and regulatory
compliance. HDFC Bank's business philosophy is based on four core values - Operational
Excellence, Customer Focus, Product Leadership and People.
As on 31st March, 2010 the authorized share capital of the Bank is Rs. 550crore. The paid-up
capital as on said date is Rs. 457,74,32,720/- (45,77,43,272 equity shares of Rs. 10/- each).
The HDFC Group holds 23.73 % of the Bank's equity and about 16.97 % of the equity is held
by the ADS Depository (in respect of the bank's American Depository Shares (ADS) Issue).
26.59 % of the equity is held by Foreign Institutional Investors (FIIs)..

The shares are listed on the Bombay Stock Exchange Limited and The National Stock
Exchange of India Limited. The Bank's American Depository Shares (ADS) are listed on the
New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's Global
Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN No
US40415F2002.

INDUSIND Bank:

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IndusInd Bank derives its name and inspiration from the Indus Valley civilisation - a culture
described by National Geographic as 'one of the greatest of the ancient world' combining a
spirit of innovation with sound business and trade practices.

Mr. Srichand P. Hinduja, a leading Non-Resident Indian businessman and head of the
Hinduja Group, conceived the vision of IndusInd Bank - the first of the new-generation
private banks in India - and through collective contributions from the NRI community
towards India's economic and social development, brought our Bank into being.

The Bank, formally inaugurated in April 1994 by Dr. Manmohan Singh, Honourable Prime
Minister of India who was then the country‟s Finance Minister, started with a capital base of
Rs.1,000 million (USD 32 million at the prevailing exchange rate), of which Rs.600 million
was raised through private placement from Indian Residents while the balance Rs.400 million
(USD 13 million) was contributed by Non-Resident Indians.

IndusInd Bank is one of the new generation private-sector banks in India, which commenced
its operations in 1994. The Bank caters to the needs of both Consumer & Corporate Clients
and has a robust technology platform supporting multi – channel delivery capabilities. The
Bank enjoys a patronage of 2 million customers and has a network of 209 branches and 427
ATMs spread over 168 geographical locations in 28 states and union territories across the
country. The Bank also has a Representative Office in Dubai and London.

The Bank‟s total business (deposits plus advances) as on December 31, 2009 crossed Rs.
43,000 crore. The Bank is driven by state-of-the-art technology since its inception. It has
multi-lateral tie-ups with other banks providing access to more than 21000 ATMs for its
customers. It enjoys clearing bank status for both major stock exchanges - BSE and NSE -
and three major commodity exchanges in the country – MCX, NCDEX, and NMCE. It also
offers DP facilities for stock and commodity segments. The Bank has been bestowed with the
mandate of being a Settlement Banker for tea auctions at Kolkata, Siliguri, Coonoor,
Coimbatore and Guwahati.

During the quarter, in a pioneering initiative in „Green Banking‟ the Bank became the first
bank in Maharashtra to open a solar-power ATM. Subjects like sustainable development,

29


social responsibility and climate change are fast becoming part of the corporate vocabulary
and IndusInd is at the forefront of this change in the Indian banking sector.

The Bank has been awarded the highest P1+ rating for its Fixed Deposits and Certificates of
Deposit by CRISIL. Recently, CRISIL has reaffirmed its P1+ rating of IndusInd Bank‟s fixed
deposits and certificates of deposit program. The rating continues to reflect the Bank‟s
established presence in the Commercial Vehicle (CV) financing business and the significant
improvement in its asset quality. The rating also features in the Bank‟s modest resource and
earnings profile, and average capitalization levels.

3.4.4 PUBLIC BANKS:

DENA Bank:

Dena Bank was founded o n 26th May, 1938 by the family of Devkaran Nanjee under the
name Devkaran Nanjee Banking Company Ltd.

It became a Public Ltd. Company in December 1939 and later the name was changed to Dena
Bank Ltd.

In July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is now a
Public Sector Bank constituted under the Banking Companies (Acquisition & Transfer of
Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in
addition to the business of banking, the Bank can undertake other business as specified in
Section 6 of the Banking Regulations Act, 1949.

Milestones

üOne among six Public Sector Banks selected by the World Bank for sanctioning a loan of
Rs.72.3crores for augmentation of Tier-II Capital under Financial Sector Developmental
project in the year 1995.

One among the few Banks to receive the World Bank loan for technological up
gradation and training.

30


Launched a Bond Issue of Rs.92.13crores in November 1996.

Maiden Public Issue of Rs.180Crores in November 1996.

Introduced Tele banking facility of selected metropolitan centers.

Dena Bank has been the first Bank to introduce:

Minor Savings Scheme.

Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP).

Drive-in ATM counter of Juhu, Mumbai.

Smart card at selected branches in Mumbai.

Customer rating system for rating the Bank Services.

PUNJAB NATIONAL BANK:

Punjab National Bank (PNB) (BSE: 532461), was registered on May 19, 1894 under the
Indian Companies Act with its office in Anarkali Bazaar Lahore. Today, the Bank is the
second largest government-owned commercial bank in India with about 5000 branches across
764 cities. It serves over 37 million customers. The bank has been ranked 248th biggest bank
in the world by the Bankers Almanac, London. The bank's total assets for financial year 2007
were about US$60 billion. PNB has a banking subsidiary in the UK, as well as branches
in Hong Kong, Dubai and Kabul, and representative offices in Almaty,Dubai, Oslo,
and Shanghai.

History:

1895: PNB commenced its operations in Lahore. PNB has the distinction of being the first
Indian bank to have been started solely with Indian capital that has survived to the present.
(The first entirely Indian bank, the Oudh Commercial Bank, was established in 1881
in Faizabad, but failed in 1958.) PNB's founders included several leaders of
the Swadeshi movement such as Dyal Singh Majithia and Lala HarKishen Lal,[1] Lala

31


Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi
Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management of
the Bank in its early years.

1904: PNB established branches in Karachi and Peshawar.

1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi circle.

1947: Partition of India and Pakistan at Independence. PNB lost its premises in Lahore, but
continued to operate in Pakistan.

1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became Bharat
Nidhi Ltd.

1961: PNB acquired Universal Bank of India.

1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).

September 1965: After the Indo-Pak war the government of Pakistan seized all the offices in
Pakistan of Indian banks, including PNB's head office, which may have moved to Karachi.
PNB also had one or more branches in East Pakistan (Bangladesh).

1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.

1969: The Government of India (GOI) nationalized PNB and 13 other major commercial
banks, on July 19, 1969.

1976 or 1978: PNB opened a branch in London.

1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank of
India after the branch was involved in a fraud scandal.

1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisition
added Hindustan's 142 branches to PNB's network.

1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980.

1998: PNB set up a representative office in Almaty, Kazakhstan.

32


2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At the time
of the merger with PNB, Nedungadi Bank's shares had zero value, with the result that its
shareholders received no payment for their shares.

PNB also opened a representative office in London.

2004: PNB established a branch in Kabul, Afghanistan.

PNB also opened a representative office in Shanghai.

PNB established an alliance with Everest Bank in Nepal that permits migrants to transfer
funds easily between India and Everest Bank's 12 branches in Nepal.

2005: PNB opened a representative office in Dubai.

2007: PNB established PNBIL - Punjab National Bank (International) - in the UK, with two
offices, one in London, and one in South Hall. Since then it has opened a third branch in
Leicester, and is planning a fourth in Birmingham.

2008: PNB opened a branch in Hong Kong.

2009: PNB opened a representative office in Oslo, Norway, and a second branch in Hong
Kong, this in Kowloon.

2010: PNB received permission to upgrade its representative office in the Dubai International
Financial Centre to a branch.

UNION BANK OF INDIA:

The dawn of twentieth century witnesses the birth of a banking enterprise par excellence-
UNION BANK OF INDIA- that was flagged off by none other than the Father of the
Nation, Mahatma Gandhi. Since that the golden moment, Union Bank of India has this far
unflinchingly traveled the arduous road to successful banking a journey that spans 88 years.
We at Union Bank of India, reiterate the objective of our inception to the profound thoughts
of the great Mahatma... "We should have the ability to carry on a big bank, to manage
efficiently crores of rupees in the course of our national activities. Though we have not
many banks amongst us, it does not follow that we are not capable of efficiently
33


managing crores and tens of crores of rupees."

Union Bank of India is firmly committed to consolidating and maintaining its identity as a
leading, innovative commercial Bank, with a proactive approach to the changing needs of
the society. This has resulted in a wide gamut of products and services, made available to its
valuable clientele in catering to the smallest of their needs. Today, with its efficient, value-
added services, sustained growth, consistent profitability and development of new
technologies, Union Bank has ensured complete customer delight, living up to its image
of, “GOOD PEOPLE TO BANK WITH”. Anticipative banking- the ability to gauge the
customer's needs well ahead of real-time - forms the vital ingredient in value-based services
to effectively reduce the gap between expectations and deliverables.

The key to the success of any organization liew with its people. No wonder, Union Bank's
unique family of about 26,000 qualified / skilled employees is and ever will be dedicated
and delighted to serve the discerning customer with professionalism and wholeheartedness.
Union Bank is a Public Sector Unit with 55.43% Share Capital held by the Government of
India. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Follow
on Public Offer in February 2006. Presently 44.57 % of Share Capital is presently held by
Institutions, Individuals and Others.

Over the years, the Bank has earned the reputation of being a techno-savvy and is a front
runner among public sector banks in modern-day banking trends. It is one of the pioneer
public sector banks, which launched Core Banking Solution in 2002. Under this solution
umbrella, All Branches of the Bank have been 1135 networked ATMs, with online Tele-
banking facility made available to all its Core Banking Customers - individual as well as
corporate. In addition to this, the versatile Internet Banking provides extensive information
pertaining to accounts and facets of banking. Regular banking services apart, the customer
can also avail of a variety of other value-added services like Cash Management Service,
Insurance, Mutual Funds and Demat.

The Bank will ever strive in its Endeavour to provide services to its customer and enhance

34


its businesses thereby fulfilling its vision of becoming “the bank of first choice in our
chosen area by building beneficial and lasting relationship with customers through a
process of continuous improvement”.

BANK OF BARODA:

It has been a long and eventful journey of almost a century across 25 countries. Starting in
1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda Corporate Centre
in Mumbai is a saga of vision, enterprise, financial prudence and corporate governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in private
capital, princely patronage and state ownership. It is a story of ordinary bankers and their
extraordinary contribution in the ascent of Bank of Baroda to the formidable heights of
corporate glory. It is a story that needs to be shared with all those millions of people -
customers, stakeholders, employees & the public at large - who in ample measure, have
contributed to the making of an institution. Our new logo is a unique representation of a
universal symbol. It comprises dual „B‟ letterforms that hold the rays of the rising sun. We
call this the Baroda Sun.

The sun is an excellent representation of what our bank stands for. It is the single most
powerful source of light and energy – its far reaching rays dispel darkness to illuminate
everything they touch. At Bank of Baroda, we seek to be the sources that will help all our
stakeholders realize their goals. To our customers, we seek to be a one-stop, reliable partner
who will help them address different financial needs. To our employees, we offer rewarding
careers and to our investors and business partners, maximum return on their investment.

The single-color, compelling vermillion palette has been carefully chosen, for its
distinctiveness as it stands for hope and energy.
We also recognize that our bank is characterized by diversity. Our network of branches spans
geographical and cultural boundaries and rural-urban divides. Our customers come from a
wide spectrum of industries and backgrounds. The Baroda Sun is a fitting face for our brand
because it is a universal symbol of dynamism and optimism – it is meaningful for our many
35


audiences and easily decoded by all.

Our new corporate brand identity is much more than a cosmetic change. It is a signal that we
recognize and are prepared for new business paradigms in a globalised world. At the same
time, we will always stay in touch with our heritage and enduring relationships on which our
bank is founded. By adopting a symbol as simple and powerful as the Baroda Sun, we hope
to communicate both.

BANK OF INDIA:

Bank of India (BoI), established on 7 September 1906 is a bank with headquarters
in Mumbai. Government-owned since nationalization in 1969, It is one ofIndia's
leading banks, with about 3140 branches including 27 branches outside India. BoI is a
founder member of SWIFT (Society for Worldwide Inter Bank Financial
Telecommunications) in India which facilitates provision of cost-effective financial
processing and communication services. The Bank completed its first one hundred years of
operations on 7 September 2006.

Previous banks that used the name Bank of India:

At least three banks having the name Bank of India had preceded the setting up of the
present Bank of India.

A person named Ramakishen Dutt set up the first Bank of India in Calcutta (now Kolkata) in
1828, but nothing more is known about this bank.

The second Bank of India was incorporated in London in the year 1836 as an Anglo-Indian
bank.

The third bank named Bank of India was registered in Bombay(now Mumbai) in the year
1864.

The current bank:

The earlier holders of the Bank of India name had failed and were no longer in existence by
the time a diverse group of Hindus, Muslims, Parsis, and Jews helped establish the present

36


Bank of India in 1906. It was the first bank in India promoted by Indian interests to serve all
the communities of India. At the time, banks in India were either owned by Europeans and
served mainly the interests of the European merchant houses, or by different communities
and served the banking needs of their own community.

The promoters incorporated the Bank of India on 7 September 1906 under Act VI of 1882
with an authorized capital of Rs. 1crore divided into 100,000 shares each of Rs. 100. The
promoters placed 55,000 shares privately, and issued 45,000 to the public by way of IPO on 3
October 1906; the bank commenced operations on 1 November 1906.

The lead promoter of the Bank of India was Sir Sassoon J. David (1849-1926). He was a
member of the community of Baghdadi Jews, which was notable for its history of social
service and included theSassoons. He was a prudent banker, and remained the Chief
Executive of the bank from its founding in 1906 until his death in 1926.

The first board of directors of the bank consisted of Sir Sassoon David, Sir Cowasjee
Jehangir, J. Cowasjee Jehangir, Sir Frederick Leigh Croft, Ratanjee Dadabhoy Tata,
Gordhandas Khattau, Lalubhai Samaldas, Khetsety Khiasey, Ramnarain Hurnundrai,
Jenarrayen Hindoomull Dani, Noordin Ebrahim Noordin.

3.5 NPAs IN INDIAN BANKING SYSTEM:

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock
markets 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 & Poor have lowered India‟s credit
rating to sub-investment grade. Such negative aspects have often outweighed positives such
as increasing for ex-reserves and a manageable inflation rate.

Under such a situation, it goes without saying that banks are no exception and are bound to
face the heat of a global downturn. One would be surprised to know that the banks and

37


financial institution in India hold nonperforming assets worth Rs. 110000crores Bankers have
realized that unless the level of NPAs is reduced drastically, they will find it difficult to
survive.

NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the midst of
turbulent structural changes overtaking the international banking institutions, and when the
global financial markets were undergoing sweeping changes. In fact after it emerged as if the
problem of NPA kept hidden and gradually swelling unnoticed and unperceived, in the maze
of defective accounting standards that still continued with Indian Banks up to the Nineties
and opaque Balance sheets.

In a dynamic world, it is true that new ideas and new concepts that emerge through such
changes caused by social evolution bring beneficial effects, but only after levying a heavy
initial toll. The process of quickly integrating new innovations in the existing set-up leads to
an immediate disorder and unsettled conditions. People are not accustomed to the new
models. These new formations take time to configure, and work smoothly. The old is cast
away and the new is found difficult to adjust. Marginal and sub-marginal operators are swept
away by these convulsions. Banks being sensitive institutions entrenched deeply in traditional
beliefs and conventions were unable to adjust themselves to the changes. They suffered easy
victims to this upheaval in the initial phase.

Consequently banks underwent this transition-syndrome and languished under distress and
banking crises surfaced in quick succession one following the other in many countries. But
when the banking industry in the global sphere came out of this metamorphosis to re-adjust to
the new order, they emerged revitalized and as more vibrant and robust units. Deregulation in
developed capitalist countries particularly in Europe, witnessed a remarkable innovative
growth in the banking industry, whether measured in terms of deposit growth, credit growth,
growth intermediation instruments as well as in network.

During all these years the Indian Banking, whose environment was insulated from the global
context and was denominated by State controls of directed credit delivery, regulated interest
rates, and investment structure did not participate in thi kars vibrant banking revolution.
Suffering the dearth of innovative spirit and choking under undue regimentation, Indian
38


banking was lacking objective and prudential systems of business leading from early
stagnation to eventual degeneration and reduced or negative profitability. Continued political
interference, the absence of competition and total lack of scientific decision-making, led to
consequences just the opposite of what was happening in the western countries.

Imperfect accounting standards and opaque balance sheets served as tools for hiding the
shortcomings and failing to reveal the progressive deterioration and structural weakness of
the country's banking institutions to public view. This enabled the nationalized banks to
continue to flourish in a deceptive manifestation and false glitter, though stray symptoms of
the brewing ailment were discernable here and there.

The government hastily introduced the first phase of reforms in the financial and banking
sectors after the economic crisis of 1991. This was an effort to quickly resurrect the health of
the banking system and bridge the gap between Indian and global banking development.
Indian Banking, in particular PSB‟s suddenly woke up to the realities of the situation and to
face the burden of the surfeit of their woes.

Simultaneously major revolutionary transitions were taking place in other sectors of the
economy on account the ongoing economic reforms intended towards freeing the Indian
economy from government controls and linking it to market driven forces for a quick
integration with the global economy. Import restrictions were gradually freed. Tariffs were
brought down and quantitative controls were removed. The Indian market was opened for
free competition to the global players. The new economic policy in turn revolutionaries the
environment of the Indian industry and business and put them to similar problems of new
mixture of opportunities and challenges. As a result we witness today a scenario of banking,
trade and industry in India, all undergoing the convulsions of total reformation battling to
kick off the decadence of the past and to gain a new strength and vigor for effective links
with the global economy. Many are still languishing unable to get released from the old set-
up, while a few progressive corporate are making a niche for themselves in the global
context.

During this decade the reforms have covered almost every segment of the financial sector. In
particular, it is the banking sector, which experienced major reforms. The reforms have taken
39


the Indian banking sector far away from the days of nationalization. Increase in the number of
banks due to the entry of new private and foreign banks; increase in the transparency of the
banks' balance sheets through the introduction of prudential norms and norms of disclosure;
increase in the role of the market forces due to the deregulated interest rates, together with
rapid computerization and application of the benefits of information technology to banking
operations have all significantly affected the operational environment of the Indian banking
sector.

In the background of these complex changes when the problem of NPA was belatedly
recognized for the first time at its peak velocity during 1992-93, there was resultant chaos and
confusion. As the problem in large magnitude erupted suddenly banks were unable to analyze
and make a realistic or complete assessment of the surmounting situation. It was not realized
that the root of the problem of NPA was cantered elsewhere in multiple layers, as much
outside the banking system, more particularly in the transient economy of the country, as
within. Banking is not a compartmentalized and isolated sector delinked from the rest of the
economy. As has happened elsewhere in the world, a distressed national economy shifts a
part of its negative results to the banking industry.

In short, banks are made ultimately to finance the losses incurred by constituent industries
and businesses. The unpreparedness and structural weakness of our banking system to act to
the emerging scenario and de-risk itself to the challenges thrown by the new order, trying to
switch over to globalization were only aggravating the crisis. Partial perceptions and hasty
judgments led to a policy of ad-hoc-ism, which characterized the approach of the authorities
during the last two-decades towards finding solutions to banking ailments and dismantling
recovery impediments. Continuous concern was expressed. Repeated correctional efforts
were executed, but positive results were evading. The problem was defying a solution.

The threat of NPA was being surveyed and summarized by RBI and Government of India
from a remote perception looking at a bird's-eye-view on the banking industry as a whole
delinked from the rest of the economy. RBI looks at the banking industry's average on a
macro basis, consolidating and tabulating the data submitted by different institutions. It has
collected extensive statistics about NPA in different financial sectors like commercial banks,

40


financial institutions, urban cooperatives, NBFC etc. But still it is a distant view of one
outside the system and not the felt view of a suffering participant. Individual banks inherit
different cultures and they finance diverse sectors of the economy that do not possess
identical attributes. The scenario is not so simple to be generalized for the industry as a whole
to prescribe a readymade package of a common solution for all banks and for all times.

3.6 REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPAS IN
THE INDIAN BANKING SYSTEM (IBS):

The origin of the problem of burgeoning NPA‟s lies in the quality of managing credit risk by
the banks concerned. What is needed is having adequate preventive measures in place
namely, fixing pre-sanctioning appraisal responsibility and having an effective post-
disbursement supervision. Banks concerned should continuously monitor loans to identify
accounts that have potential to become non-performing.

To start with, performance in terms of profitability is a benchmark for any business enterprise
including the banking industry. However, increasing NPA‟s have a direct impact on banks
profitability as legally banks are not allowed to book income on such accounts and at the
same time banks are forced to make provision on such assets as per the Reserve Bank of
India (RBI) guidelines. Also, with increasing deposits made by the public in the banking
system, the banking industry cannot afford defaults by borrowers since NPA‟s affects the
repayment capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system
through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear
of burgeoning non-performing assets.

Some of the reasons are:

 After the nationalization of banks sector wise allocation of credit disbursements
became compulsory.

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 Banks were compelled to give credit to even those sectors, which were not considered
to be very profitable, keeping in mind the federal policy.
 People in the agricultural sector were hardly interested in returning the loans as they
were confident that the loans with the interest would be written off by the successive
governments.
 The small scale industries also availed credit even though they were not sure of
performing to the extent of returning the loans.
 Banks were also not in the position to press enough securities to cover the loans in
calls of timings.
 Even if the assets were provided they proved to be substandard assets as the values
that could be realized were very low.
 The slackness in effort by the bank authorities to collect or recover loan advances in
time also contributes to the increase in NPA‟s.
 Lack of accountability of the officers, who sanctioned the loans led to a caste whole
approach by the officers recovering the loans.
 Loans sanctioned to under servicing candidates due to pressure from the ministers and
other politicians also led to the non recovery of debts.
 Poor credit appraisal system, lack of vision while sanctioning credit limits.
 Lack of proper monitoring.
 Reckless advances to achieve the budgetary targets.
 Lack of sincere corporate culture, inadequate legal provisions on foreclosure and
bankruptcy.
 Change in economic policies/environment.
 Lack of co-ordination between banks.

Some of the internal factors of the organization leading to NPA‟s are:

 Division of funds for expansion, diversification, modernization, undertaking new
projects and for helping associate concerns, this is coupled with recessionary trends
and failure to tap funds in the capital and debt markets.
 Business failure( product, marketing etc.,),inefficient management, strained labor
relations, inappropriate technology, technical problems, product obsolescence etc.,

42


 Recession , shortage of input, power shortage, price escalation, accidents, natural
calamities, besides externalization problem in other countries leading to non payment
of over dues.
 Time/cost overrun during the project implementation stage.
 Government policies like changes in the excise duties, pollution control orders.
 Wilful default, siphoning off of funds, fraud, misappropriation, promoters/directors
disputes etc.
 Deficiencies on the part of the banks like delay in release of limits and delay in
release of payments/subsidies by the government.

3.7 RBI GUIDELINES ON INCOME RECOGNITION (INTEREST
INCOME ON NPA‟s)

In the peak crisis period in early Nineties, when the first Series of Banking Reforms were
introduced, the working position of the State-owned banks exhibited the severest strain.
Commenting on this situation the Reserve Bank of India has pointed out as under:

"Till the adoption of prudential norms relating to income recognition, asset classification,
provisioning and capital adequacy, twenty-six out of twenty-seven public sector banks were
reporting profits (UCO Bank was incurring losses from 1989-90). In the first post-reform
year, i.e., 1992-93, the profitability of the PSB‟s as a group turned negative with as many as
twelve nationalized banks reporting net losses. By March 1996, the outer time limit
prescribed for attaining capital adequacy of 8 per cent, eight public sector banks were still
short of the prescribed."

Consequently PSB‟s in the post reform period came to be classified under three categories as
-

 Healthy banks (those that are currently showing profits and hold no accumulated
losses in their balance sheet)

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 Banks showing currently profits, but still continuing to have accumulated losses of
prior years carried forward in their balance sheets
 Banks which are still in the red, i.e. showing losses in the past and in the present.

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 to expect its ultimate collection. However,
NPA‟s involves significant uncertainty with respect to its ultimate collection.

Considering this fact, in accordance with the guidelines for income recognition issued by the
Reserve Bank of India (RBI), banks should not recognize interest income on such NPA‟s
until it is actually realized.

3.7.1 Income recognition – Policy

 The policy of income recognition has to be objective and based on the record of
recovery. Internationally income from non-performing assets (NPA) is not recognised
on accrual basis but is booked as income only when it is actually received. Therefore,
the banks should not charge and take to income account interest on any NPA.

 However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided adequate margin is
available in the accounts.

 Fees and commissions earned by the banks as a result of re-negotiations or
rescheduling of outstanding debts should be recognised on an accrual basis over the
period of time covered by the re-negotiated or rescheduled extension of credit.

 If Government guaranteed advances become NPA, the interest on such advances
should not be taken to income account unless the interest has been realised.

3.7.2. Reversal of income:

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 If any advance, including bills purchased and discounted, becomes NPA as at the
close of any year, interest accrued and credited to income account in the
corresponding previous year, should be reversed or provided for if the same is not
realised. This will apply to Government guaranteed accounts also.

 In respect of NPAs, fees, commission and similar income that have accrued should
cease to accrue in the current period and should be reversed or provided for with
respect to past periods, if uncollected.

3.7.3 Leased Assets

The net lease rentals (finance charge) on the leased asset accrued and credited to
income account before the asset became non-performing, and remaining
unrealised, should be reversed or provided for in the current accounting period.

The term 'net lease rentals' would mean the amount of finance charge taken to the
credit of Profit & Loss Account and would be worked out as gross lease rentals
adjusted by amount of statutory depreciation and lease equalisation account.

As per the 'Guidance Note on Accounting for Leases' issued by the Council of
the Institute of Chartered Accountants of India (ICAI), a separate Lease
Equalisation Account should be opened by the banks with a corresponding debit
or credit to Lease Adjustment Account, as the case may be. Further, Lease
Equalisation Account should be transferred every year to the Profit & Loss
Account and disclosed separately as a deduction from/addition to gross value of
lease rentals shown under the head 'Gross Income'.

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Appropriation of recovery in NPAs

 Interest realised on NPAs may be taken to income account provided the credits in the
accounts towards interest are not out of fresh/ additional credit facilities sanctioned to
the borrower concerned.

 In the absence of a clear agreement between the bank and the borrower for the
purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due),
banks should adopt an accounting principle and exercise the right of appropriation of
recoveries in a uniform and consistent manner.

3.7.4 Interest Application:

There is no objection to the banks using their own discretion in debiting interest to an NPA
account taking the same to Interest Suspense Account or maintaining only a record of such
interest in preformed accounts.

3.7.5 Reporting of NPAs

 Banks are required to furnish a Report on NPAs as on 31st March each year after
completion of audit. The NPAs would relate to the banks‟ global portfolio, including
the advances at the foreign branches. The Report should be furnished as per the
prescribed format given in the Annexure I.

 While reporting NPA figures to RBI, the amount held in interest suspense account,
should be shown as a deduction from gross NPAs as well as gross advances while
arriving at the net NPAs. Banks which do not maintain Interest Suspense account for
parking interest due on non-performing advance accounts, may furnish the amount of
interest receivable on NPAs as a foot note to the Report.

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 Whenever NPAs are reported to RBI, the amount of technical write off, if any, should
be reduced from the outstanding gross advances and gross NPAs to eliminate any
distortion in the quantum of NPAs being reported.

3.8 Asset Classification
Categories of NPAs

(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.

(2) 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 jeopardise the liquidation of the debt
and are characterised by the distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.
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(3) 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.

(4) Loss Assets:

A loss asset is one which considered uncollectible and of such little value that its continuance
as a bankable asset is not warranted- although there may be some salvage or recovery value.
Also, these assets would have been identified as „loss assets‟ by the bank or internal or
external auditors or the RBI inspection but the amount would not have been written-off
wholly.

3.9 IMPACT OF EXCESS LIQUIDITY:

One should also not forget that the banks are faced with the problem of increasing liquidity in
the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the system
through various rate cuts. Banks can get rid of its excess liquidity by increasing its lending
but, often shy away from such an option due to the high risk of default. In order to promote
certain prudential norms for healthy banking practices, most of the developed economies
require all banks to maintain minimum liquid and cash reserves broadly classified into Cash
Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).

Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the
form of cash reserves or by way of current account with the Reserve Bank of India (RBI),
computed as a certain percentage of its demand and time liabilities. The objective is to ensure
the safety and liquidity of the deposits with the banks.

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On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company
shall maintain in India in the form of cash, gold or unencumbered approved securities, an
amount which shall not, at the close of business on any day be less than such percentage of
the total of its demand and time liabilities in India as on the last Friday of the second
preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.

A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBI's
vaults and further infuses greater funds into a system. However, almost all the banks are
facing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. as
a result of which, banks are little reluctant in granting loans to corporate.

As such, though in its monetary policy RBI announces rate cut but, such news are no longer
warmly greeted by the bankers.

3.10 HIGH COST OF FUNDS DUE TO NPAs:

Quite often genuine borrowers face the difficulties in raising funds from banks due to
mounting NPA‟s. Either the bank is reluctant in providing the requisite funds to the genuine
borrowers or if the funds are provided, they come at a very high cost to compensate the
lender‟s losses caused due to high level of NPA‟s. Therefore, quite often corporate prefer to
raise funds through commercial papers (CPs) where the interest rate on working capital
charged by banks is higher.

With the enactment of the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, banks can issue notices to the defaulters to pay
up the dues and the borrowers will have to clear their dues within 60 days. Once the borrower
receives a notice from the concerned bank and the financial institution, the secured assets
mentioned in the notice cannot be sold or transferred without the consent of the lenders.

49


The main purpose of this notice is to inform the borrower that either the sum due to the bank
or financial institution be paid by the borrower or else the former will take action by way of
taking over the possession of assets. Besides assets, banks can also takeover the management
of the company. Thus the bankers under the aforementioned Act will have the much needed
authority to either sell the assets of the defaulting companies or change their management.

But the protection under the said Act only provides a partial solution. What banks should
ensure is that they should move with speed and charged with momentum in disposing off the
assets. This is because as uncertainty increases with the passage of time, there is all
possibility that the recoverable value of asset also reduces and it cannot fetch good price. If
faced with such a situation than the very purpose of getting protection under the
Securitization Act, 2002 would be defeated and the hope of seeing a must have growing
banking sector can easily vanish.

3.11 Provisioning Norms

General:

 In order to narrow down the divergences and ensure adequate provisioning by banks,
it was suggested that a bank's statutory auditors, if they so desire, could have a
dialogue with RBI's Regional Office/ inspectors who carried out the bank's inspection
during the previous year with regard to the accounts contributing to the difference.

 Pursuant to this, regional offices were advised to forward a list of individual
advances, where the variance in the provisioning requirements between the RBI and
the bank is above certain cut off levels so that the bank and the statutory auditors take
into account the assessment of the RBI while making provisions for loan loss, etc.

50


 The primary responsibility for making adequate provisions for any diminution in the
value of loan assets, investment or other assets is that of the bank managements and
the statutory auditors. The assessment made by the inspecting officer of the RBI is
furnished to the bank to assist the bank management and the statutory auditors in
taking a decision in regard to making adequate and necessary provisions in terms of
prudential guidelines.

 In conformity with the prudential norms, provisions should be made on the non-
performing assets on the basis of classification of assets into prescribed categories as
detailed in paragraphs 4 supra. Taking into account the time lag between an account
becoming doubtful of recovery, its recognition as such, the realisation of the security
and the erosion over time in the value of security charged to the bank, the banks
should make provision against sub-standard assets, doubtful assets and loss assets as
below:

a. Loss assets:

The entire asset should be written off. If the assets are permitted to remain in the books for
any reason, 100 percent of the outstanding should be provided for.

b. Doubtful assets:

 100 percent of the extent to which the advance is not covered by the realisable value
of the security to which the bank has a valid recourse and the realisable value is
estimated on a realistic basis.

 In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20 percent to 50 percent of the secured portion depending upon the
period for which the asset has remained doubtful:
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Period for which the advance has been Provision
considered as doubtful requirement (%)

Up to one year 20

One to three years 30

More than three years: 60% with effect from March
31,2005.
(1) Outstanding stock of NPAs as on
March 31, 2004. 75% effect from March 31,
(2) Advances classified as „doubtful‟ 2006.
more than three years on or after
100% with effect from March
April 1, 2004.
31, 2007.

 Additional provisioning consequent upon the change in the definition of doubtful
assets effective from March 31, 2003 has to be made in phases as under:

As on31.03.2003, 50 percent of the additional provisioning requirement on the assets
which became doubtful on account of new norm of 18 months for transition from sub-
standard asset to doubtful category.

 As on 31.03.2002, balance of the provisions not made during the previous year, in
addition to the provisions needed, as on 31.03.2002.

 Banks are permitted to phase the additional provisioning consequent upon the
reduction in the transition period from substandard to doubtful asset from 18 to 12
months over a four year period commencing from the year ending March 31, 2005,
with a minimum of 20 % each year.
Note: Valuation of Security for provisioning purposes

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With a view to bringing down divergence arising out of difference in assessment of the value
of security, in cases of NPAs with balance of Rs. 5crore and above stock audit at annual
intervals by external agencies appointed as per the guidelines approved by the Board would
be mandatory in order to enhance the reliability on stock valuation. Values appointed as per
the guidelines approved by the Board of Directors should get collaterals such as immovable
properties charged in favour of the bank valued once in three years.

c. Sub-standard assets:

A general provision of 10 percent on total outstanding should be made without making any
allowance for DICGC/ECGC guarantee cover and securities available.

d. Standard assets:

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

 Net NPAs.

 The provisions towards Standard Assets need not be netted from gross advances but
shown separately as 'Contingent Provisions against Standard Assets' under 'Other
Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.

3.11.1 Floating provisions:

Some of the banks make a 'floating provision' over and above the specific provisions made in
respect of accounts identified as NPAs. The floating provisions, wherever available, could be
Set-off against provisions required to be made as per above stated provisioning guidelines.
Considering that higher loan loss provisioning Adds to the overall financial strength of the

53


banks and the stability of the financial sector, banks are urged to voluntarily set apart
provisions much above the minimum prudential levels as a desirable practice.

311.2 Provisions on Leased Assets:

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

 Doubtful assets :-
100 percent of the extent to which the finance is not secured by the realisable value of the
leased asset. Realisable value to be estimated on a realistic basis. In addition to the above
provision, the following provision on the net book value of the secured portion should be
made, depending upon the period for which asset has been doubtful:

Period %age of provision

Up to one year 20

One to three years 30

More than three years 50

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

3.11.3 Guidelines for Provisions under Special Circumstances

Government guaranteed advances:

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 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 4.1.2 above.

 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%
each year.

Advances granted under rehabilitation packages approved by BIFR/term lending
institutions:

 In respect of advances under rehabilitation package approved by BIFR/term lending
institutions, the provision should continue to be made in respect of dues to the bank on the
existing credit facilities as per their classification as sub-standard or doubtful asset.

 As regards the additional facilities sanctioned as per package finalized by BIFR and/or
term lending institutions, provision on additional facilities sanctioned need not be made for a
period of one year from the date of disbursement.

 In respect of additional credit facilities granted to SSI units which are identified as sick
[as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002]
and where rehabilitation packages/nursing programmers have been drawn by the banks
themselves or under consortium arrangements, no provision need be made for a period of one
year.

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

However, advances against gold ornaments, government securities and all other kinds of
securities are not exempted from provisioning requirements.

Treatment of interest suspense account:

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Amounts held in Interest Suspense Account should not be reckoned as part of provisions.
Amounts lying in the Interest Suspense Account should be deducted from the relative
advances and thereafter, provisioning as per the norms, should be made on the balances after
such deduction.

Advances covered by ECGC/DICGC guarantee:

In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the
balance in excess of the amount guaranteed by these Corporations. Further, while arriving at
the provision required to be made for doubtful assets, realisable value of the securities should
first be deducted from the outstanding balance in respect of the amount guaranteed by these
Corporations and then provision made as illustrated hereunder:

Example

Outstanding Balance Rs. 4lakhs

DICGC Cover 50 percent

Period for which the advance has remained More than 3 years remained
doubtful doubtful

Value of security held Rs. 1.50lakhs
(excludes worth of Rs.)

Provision required to be made

Outstanding balance Rs. 4.00lakhs

Less: Value of security held Rs. 1.50lakhs

Unrealised balance Rs. 2.50lakhs

Less: DICGC Cover Rs. 1.25lakhs
(50% of unrealisable balance)

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Net unsecured balance Rs. 1.25lakhs

Provision for unsecured portion of advance Rs. 1.25lakhs (@ 100 percent of
unsecured portion)

Provision for secured portion of advance Rs. 0.75lakhs (@ 50 percent of
secured portion)

Total provision required to be made Rs. 2.00lakhs

Advance covered by CGTSI guarantee

In case the advance covered by CGTSI guarantee becomes non-performing, no provision
need be made towards the guaranteed portion. The amount outstanding in excess of the
guaranteed portion should be provided for as per the extant guidelines on provisioning for
non-performing advances. Two illustrative examples are given below:

Example I

Asset classification status: Doubtful – More than 3 years;

CGTSI Cover 75% of the amount outstanding or
75% of the unsecured amount or
Rs.18.75lakh, whichever is the least

Realisable value of Security Rs.1.50lakh

Balance outstanding Rs.10.00lakh

Less Realisable value of Rs. 1.50lakh
security

Unsecured amount Rs. 8.50lakh

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Less CGTSI cover (75%) Rs. 6.38lakh

Net unsecured and uncovered Rs. 2.12lakh
portion:

Provision Required

Secured portion Rs.1.50lakh Rs. 0.75lakh (@ 50%)

Unsecured & uncovered portion Rs.2.12lakh Rs. 2.12lakh ( @100%)

Total provision required Rs. 2.87lakh

Example II

Asset classification status Doubtful – More than 3 years;

CGTSI Cover 75% of the amount outstanding
or75% of the unsecured amount or
Rs.18.75lakh, whichever is the least

Realisable value of Security Rs.10.00lakh

Balance outstanding Rs.40.00lakh

Less Realisable value of Rs. 10.00lakh
security

Unsecured amount Rs. 30.00lakh

Less CGTSI cover (75%) Rs. 18.75lakh

Net unsecured and uncovered Rs. 11.25lakh
portion:

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Provision Required

Secured portion Rs.10.00lakh Rs. 5.00lakh (@ 50%)

Unsecured & uncovered portion Rs.11.25lakh Rs.11.25lakh (100%)

Total provision required Rs. 16.25lakh

Take-out finance

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

Reserve for Exchange Rate Fluctuations Account (RERFA)

When exchange rate movements of Indian rupee turn adverse, the outstanding amount of
foreign currency denominated a loan (where actual disbursement was made in Indian Rupee)
which becomes overdue goes up correspondingly, with its attendant implications of
provisioning requirements. Such assets should not normally be revalue. In case such assets
need to be revaluing as per requirement of accounting practices or for any other requirement,
the following procedure may be adopted:

 The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account.

Besides the provisioning requirement as per Asset Classification, banks should treat the full
amount of the Revaluation Gain relating to the corresponding assets, if any, on account of
Foreign Exchange Fluctuation as provision against the particular assets.

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3.12 Impact of NPA:

 Profitability:-

NPA means booking of money in terms of bad asset, which occurred due to wrong choice of
client. Because of the money getting blocked the prodigality of bank decreases not only by
the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in
some return earning project/asset. So NPA 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
earning of bank.

 Liquidity:-

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

 Involvement of management:-

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

 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.

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3.13 Early symptoms by which one can recognize a performing asset

turning in to Non-performing asset:-

Four categories of early symptoms:-
---------------------------------------------------
(1) Financial:

 Non-payment of the very first instalment in case of term loan.
 Bouncing of cheque due to insufficient balance in the accounts.
 Irregularity in instalment.
 Irregularity of operations in the accounts.
 Unpaid overdue bills.
 Declining Current Ratio.
 Payment which does not cover the interest and principal amount of that instalment.
 While monitoring the accounts it is found that partial amount is diverted to sister
concern or parent company.

(2) Operational and Physical:

 If information is received that the borrower has either initiated 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.
 Frequent changes in plan.
 Non-payment of wages.

(3) Attitudinal Changes:

 Avoidance of contact with bank.

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 Problem between partners.

(4) Others:

 Changes in Government policies.
 Death of borrower.
 Competition in the market.

3.14 Preventive Measurement for NPA

 Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, it‟s too
late to retrieve the situation- both in terms of rehabilitation of the project and recovery of
bank‟s dues. Identification of weakness in the very beginning that is: When the account starts
showing first signs of weakness regardless of the fact that it may not have become NPA, is
imperative. Assessment of the potential of revival may be done on the basis of a techno-
economic viability study.

Restructuring should be attempted where, after an objective assessment of the promoter‟s
intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of
totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the
unit earlier, so as to recover whatever is possible through legal means before the security
position becomes worse.

 Identifying Borrowers with Genuine Intent:-

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

In this regard banks may consider having “Special Investigation” of all financial transaction
or business transaction, books of account in order to ascertain real factors that contributed to
sickness of the borrower. Banks may have penal of technical experts with proven expertise
and track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will obviate the need to route the
additional funding through the controlling offices in deserving cases, and help avert many
accounts slipping into NPA category.

 Timeliness and Adequacy of response:-

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial
element in any restructuring or rehabilitation activity. The response decided on the basis of
techno-economic study and 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.

 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 analysing funds flow in conjunction with the Cash
Flow rather than only on the basis of Funds Flow.

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 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 an aling 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.

 Multiple Financing:-

A. During the exercise for assessment of viability and restructuring, a Pragmatic and
unified approach by all the lending banks/ FIs as also sharing of all relevant information on
the borrower would go a long way toward overall success of rehabilitation exercise, given the
probability of success/failure.

B. In some default cases, where the unit is still working, the bank should make sure that it
captures the cash flows (there is a tendency on part of the borrowers to switch bankers once
they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are
used for working capital purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not part of the consortium, may
not be allowed to offer credit facilities to such defaulting clients. Current account facilities
may also be denied at no consortium banks to such clients and violation may attract penal
action. The Credit Information Bureau of India Ltd. (CIBIL) may be very useful for
meaningful information exchange on defaulting borrowers once the setup becomes fully
operational.

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C. In a forum of lenders, the priority of each lender will be different. While one set of lenders
may be willing to wait for a longer time to recover its dues, another lender may have a much
shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing
to exit, even a t a cost – by a discounted settlement of the exposure. Therefore, any plan for
restructuring/rehabilitation may take this aspect into account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide
a timely and transparent system for restructuring of the corporate debt of Rs. 20crore and
above with the banks and FIs on a voluntary basis and outside the legal framework. Under
this system, banks may greatly benefit in terms of restructuring of large standard accounts
and viable sub-standard accounts with consortium/multiple banking arrangements.

3.15 Tools for recovery of NPAs

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Once NPA occurred, one must come out of it or it should be managed in most efficient
manner. Legal ways and means are there to overcome and manage NPAs. We will look into
each one of it.
3.15.1Willful Default:-

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A] Lok Adalat
B] Debt Recovery Tribunal
C] Securitization Act
D] Asset Reconstruction

A. Lok Adalat:

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

B. Debt Recovery Tribunals (DRT):

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

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C. SECURITIZATION ACT, 2002:

The need for the setting up an asset reconstruction company for acquiring distressed assets
from Banks and FIs with a view to develop market for such assets was being felt, since long.
Narasimham Committee 1 &2 and the Verma Committee on restructuring of weak Banks has
strongly recommended the setting up of Asset Reconstruction Companies (ARCs).

The business of Securitization and Reconstruction is primarily meant for more than one
purpose:

 To regulate the business of securitization and reconstruction of the financial
interest
 To regulate enforcement of the security interest and for the matters connected
therewith or the matters incidental thereto
The debt securitization is a new concept in the Indian financial markets and is primarily
meant for enhancing the liquidity of the Banks and FIs which have extended financial
assistance to the borrowers for various purposes.

The debt securitization makes available with these institutions the security papers against the
financial assets which have been created out of the financial assistance sanctioned and
disbursed by these institutions and in the case of a default by the borrowers the secured
creditors can have a recourse to either the securitization of the financial asset or the
reconstruction of the same.

3.15.2Inability to Pay

Consortium arrangements:
Asset classification of accounts under consortium should be based on the record of recovery
of the individual member banks and other aspects having a bearing on their cover ability of
the advances. Where the remittances by the borrower under consortium lending arrangements
are pooled with one bank and/or where the bank receiving remittances is not parting with the
share of other member banks, the account will be treated as not serviced in the books of the

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other member banks and therefore, be treated as NPA. The banks participating in the
consortium should, therefore, arrange to get their share of recovery transferred from the lead
bank or get an express consent from the lead bank for the transfer of their share of recovery,
to ensure proper asset classification in their respective books.

Corporate debt Restructuring (CDR):

Background

In spite of their best efforts and intentions, sometimes corporate find themselves in financial
difficulty because of factors beyond their control and also due to certain internal reasons. For
the revival of the corporate as well as for the safety of the money lent by the banks and FIs,
timely support through restructuring in genuine cases is called for. However, delay in
agreement amongst different lending institutions often comes in the way of such endeavours.

Based on the experience in other countries like the U.K., Thailand, Korea, etc. of
putting in place institutional mechanism for restructuring of corporate debt and need for a
similar mechanism in India, a Corporate Debt Restructuring System has been evolved, as
under :

Objective

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and
transparent mechanism for restructuring of the corporate debts of viable entities facing
problems, outside the purview of BIFR, DRT and other legal proceedings, for the
benefit of all concerned. In particular, the framework will aim at preserving viable corporate
that are affected by certain internal and external factors and minimize the losses to the
creditors and other stakeholders through an orderly and coordinated restructuring
programmer.

Structure:

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

(A) CDR Standing Forum
(B) CDR Empowered Group
(C) CDR Cell

(A) CDR Standing Forum :

The CDR Standing Forum would be the representative general body of all financial
institutions and banks participating in CDR system. All financial institutions and banks
should participate in the system in their own interest. CDR Standing Forum will be a self-
empowered body, which will lay down policies and guidelines, guide and monitor the
progress of corporate debt restructuring.

The Forum will also provide an official platform for both the creditors and borrowers
(by consultation) to amicably and collectively evolve policies and guidelines for working out
debt restructuring plans in the interests of all concerned.

The CDR Standing Forum shall comprise Chairman & Managing Director, Industrial
Development Bank of India; Managing Director, Industrial Credit & Investment Corporation
of India Limited; Chairman, State Bank of India; Chairman, Indian Banks Association and
Executive Director, Reserve Bank of India as well as Chairmen and Managing Directors of
all banks and financial institutions participating as permanent members in the system. The
Forum will elect its Chairman for a period of one year and the principle of rotation will be
followed in the subsequent years. However, the Forum may decide to have a Working
Chairman as a whole-time officer to guide and carry out the decisions of the CDR Standing
Forum.

A CDR Core Group will be carved out of the CDR Standing Forum to assist the
Standing Forum in convening the meetings and taking decisions relating to policy, on behalf
of the Standing Forum. The Core Group will consist of Chief Executives of IDBI, ICICI,

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SBI, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks Association and a
representative of Reserve Bank of India.

The CDR Standing Forum shall meet at least once every six months and would review
and monitor the progress of corporate debt restructuring system. The Forum would also lay
down the policies and guidelines to be followed by the CDR Empowered Group and CDR
Cell for debt restructuring and would ensure their smooth functioning and adherence to the
prescribed time schedules for debt restructuring. It can also review any individual decisions
of the CDR Empowered Group and CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell (described in
following paragraphs) shall be housed in IDBI. All financial institutions and banks shall share
the administrative and other costs. The sharing pattern shall be as determined by the Standing
Forum.

CDR Empowered Group and CDR Cell:

The individual cases of corporate debt restructuring shall be decided by the CDR
Empowered Group, consisting of ED level representatives of IDBI, ICICI Limited and SBI as
standing members, in addition to ED level representatives of financial institutions and banks
who have an exposure to the concerned company. In order to make the CDR Empowered
Group effective and broad based and operate efficiently and smoothly, it would have to be
ensured that each financial institution and bank, as participants of the CDR system,
nominates a panel of two or three EDs, one of whom will participate in a specific meeting of
the Empowered Group dealing with individual restructuring cases. Where, however, a bank /
financial institution has only one Executive Director, the panel may consist of senior
officials, duly authorized by its Board. The level of representation of banks/ financial
institutions on the CDR Empowered Group should be at a sufficiently senior level to ensure
that concerned bank / FI abides by the necessary commitments including sacrifices, made
towards debt restructuring.

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The Empowered Group will consider the preliminary report of all cases of requests of
restructuring, submitted to it by the CDR Cell. After the Empowered Group decides that
restructuring of the company is prima-facie feasible and the enterprise is potentially viable in
terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring
package will be worked out by the CDR Cell in conjunction with the Lead Institution.

The CDR Empowered Group would be mandated to look into each case of debt
restructuring, examine the viability and rehabilitation potential of the Company and
approve the restructuring package within a specified time frame of 90 days, or at best 180
days of reference to the Empowered Group.

There should be a general authorisation by the respective Boards of the participating
institutions / banks in favour of their representatives on the CDR Empowered Group,
authorising them to take decisions on behalf of their organization, regarding restructuring of
debts of individual corporate.

The decisions of the CDR Empowered Group shall be final and action-reference
point. If restructuring of debt is found viable and feasible and accepted by the Empowered
Group, the company would be put on the restructuring mode. If, however, restructuring is not
found viable, the creditors would then be free to take necessary steps for immediate recovery
of dues and / or liquidation or winding up of the company, collectively or individually.

CDR Cell:

The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR
Cell in all their functions. The CDR Cell will make the initial scrutiny of the proposals
received from borrowers / lenders, by calling for proposed rehabilitation plan and other
information and put up the matter before the CDR Empowered Group, within one month to
decide whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to
prepare detailed Rehabilitation Plan with the help of lenders and if necessary, experts to be
engaged from outside. If not found prima facie feasible, the lenders may start action for
recovery of their dues.
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To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate members
of staff for the Cell will be deputed from banks and financial institutions. The CDR Cell may
also take outside professional help. The initial cost in operating the CDR mechanism
including CDR Cell will be met by IDBI initially for one year and then from contribution
from the financial institutions and banks in the Core Group at the rate of Rs.50lakh each and
contribution from other institutions and banks at the rate of Rs.5lakh each.

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

Other features:

CDR will be a Non-statutory mechanism.

CDR mechanism will be a voluntary system based on debtor-creditor
agreement and inter-creditor agreement.

The scheme will not apply to accounts involving only one financial institution
or one bank. The CDR mechanism will cover only multiple banking accounts /
syndication / consortium accounts with outstanding exposure of Rs.20crore
and above by banks and institutions.

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The CDR system will be applicable only to standard and sub-standard accounts.
However, as an interim measure, permission for corporate debt restructuring will be made
available by RBI on the basis of specific recommendation of CDR "Core-Group", if a
minimum of 75 per cent (by value) of the lenders constituting banks and FIs consent for
CDR, irrespective of differences in asset classification status in banks/ financial institutions.
There would be no requirement of the account / company being sick, NPA or being in
default for a specified period before reference to the CDR Group. However, potentially
viable cases of NPAs will get priority. This approach would provide the necessary
flexibility and facilitate timely intervention for debt restructuring. Prescribing any
milestone(s) may not be necessary, since the debt restructuring exercise is being triggered by
banks and financial institutions or with their consent. In no case, the requests of any corporate
indulging in wilful default or misfeasance will be considered for restructuring under CDR.

Reference to Corporate Debt Restructuring System could be triggered by (i)any or
more of the secured creditor who have minimum 20% share in either working capital or term
finance, or (ii) by the concerned corporate, if supported by a bank or financial institution
having stake as in (i) above.

Legal Basis

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

Stand-Still Clause:

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One of the most important elements of Debtor-Creditor Agreement would be 'stand still'
agreement binding for 90 days, or 180 days by both sides. Under this clause, both the
debtor and creditor(s) shall agree to a legally binding 'stand-still' whereby both the
parties commit themselves not to taking recourse to any other legal action during the
'stand-still' period, this would be necessary for enabling the CDR System to undertake the
necessary debt restructuring exercise without any outside intervention judicial or otherwise.

The Inter-Creditors Agreement would be a legally binding agreement amongst the secured
creditors, with necessary enforcement and penal clauses, wherein the creditors would commit
themselves to abide by the various elements of CDR system. Further , the creditors shall
agree that if 75% of secured creditors by value, agree to a debt restructuring package, the
same would be binding on the remaining secured creditors.

Accounting treatment for restructured accounts

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

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

The prudential treatment of the accounts, subjected to restructuring under CDR, would be
governed by the following norms:

Treatment of standard accounts restructured under CDR:

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 A rescheduling of the instalments of principal alone, at any of the aforesaid first two
stages [paragraph 5(a) and (b) above] would not cause a standard asset to be classified
in the sub-standard category, provided the loan / credit facility is fully secured.

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

 In case there is a sacrifice involved in the amount of interest in present value terms, as
at (b) above, the amount of sacrifice should either be written off or provision made to
the extent of the sacrifice involved.

Treatment of sub-standard accounts restructured under CDR

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

A rescheduling of interest element would render a sub-standard asset eligible to be
continued to be classified in sub-standard category for the specified period subject to the
condition that the amount of sacrifice, if any, in the element of interest, measured in present
value terms, is either written off or provision is made to the extent of the sacrifice involved.
For the purpose, the future interest due as per the original loan agreement in respect of an
account should be discounted to the present value at a rate appropriate to the risk category of
the borrower (i.e., current PLR + the appropriate credit risk premium for the borrower-

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category) and compared with the present value of the dues expected to be received under the
restructuring package, discounted on the same basis.

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

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

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

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

3.16 Restructuring / Rescheduling of Loans

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A standard asset where the terms of the loan agreement regarding Interest and principal have
been renegotiated or rescheduled after commencement of production should be classified as
sub-standard and should remain in such category for at least one year of satisfactory
performance under the renegotiated or rescheduled terms. In the case of sub-standard and
doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance
automatically unless there is satisfactory performance under the rescheduled / renegotiated
terms. Following representations from banks that the foregoing stipulations deter the banks
from restructuring of standard and sub-standard loan assets even though the modification
of terms might not jeopardize the assurance of repayment of dues from the borrower, the
norms relating to restructuring of standard and sub-standard assets were reviewed in
March2001. In the context of restructuring of the accounts, the following stages at which the
restructuring / rescheduling / renegotiation of the terms of loan agreement could take place,
can be identified:

1) Before commencement of commercial production;
2) After commencement of commercial production but before the asset has been classified
as substandard,
3) After commencement of commercial production and after the asset has been classified as
substandard.
In each of the foregoing three stages, the rescheduling, etc., of principal and/or of interest
could take place, with or without sacrifice, as part of the restructuring package evolved.

3.16.1 Treatment of Restructured Standard Accounts:
A rescheduling of the installments of principal alone, at any of the aforesaid first two stages
would not cause a standard asset to be classified in the substandard category provided the
loan/credit facility is fully secured.
A rescheduling of interest element at any of the foregoing first two stages would not cause
an asset to be downgraded to substandard category subject to the condition that the amount of
sacrifice, if any, in the element of interest, measured in present value terms, is either
written off or provision is made to the extent of the sacrifice involved. For the purpose, the
future interest due as per the original loan agreement in respect of an account should be

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discounted to the present value at a rate appropriate to the risk category of the borrower (i.e.,
current PLR+ the appropriate credit risk premium for the borrower-category) and compared
with the present value of the dues expected to be received under their structuring package,
discounted on the same basis.
In case there is a sacrifice involved in the amount of interest in present value terms, as at (b)
above, the amount of sacrifice should either be written off or provision made to the extent
of the sacrifice involved.

3.16.2 Treatment of restructured sub-standard accounts:

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

A rescheduling of interest element would render a sub-standard asset eligible to be continued
to be classified in substandard category for the specified period subject to the condition that
the amount of sacrifice, if any, in the element of interest, measured in present value terms,
is either written off or provision is made to the extent of the sacrifice involved. For the
purpose, the future interest due as per the original loan agreement in respect of an account
should be discounted to the present value at a rate appropriate to the risk category of the
borrower (i.e., current PLR + the appropriate credit risk premium for the borrower category)
and compared with the present value of the dues expected to be received under the
restructuring package, discounted on the same basis.

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

3.16.3Up gradation of restructured accounts:

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The sub-standard accounts which have been subjected to restructuring etc., whether in respect
of principal installment or interest amount, by whatever modality, would be eligible to be
upgraded to the standard category only after the specified period i.e., a period of one year
after the date when first payment of interest or of principal, whichever is earlier, falls due,
subject to satisfactory performance during the period. The amount of provision made earlier,
net of the amount provided for the sacrifice in the interest amount in present value terms as
aforesaid, could also be reversed after the one year period. During this one-year period, the
substandard asset will not deteriorate in its classification if satisfactory performance of the
account is demonstrated during the period. In case, however, the satisfactory performance
during the one-year period is not evidenced, the asset classification of the restructured
account would be governed as per the applicable prudential norms with reference to the pre-
restructured payment schedule.

3.16.4 Income recognition

There will be no change in the existing instructions on income recognition. Consequently,
banks should not recognize income on accrual basis in respect of the projects even though the
asset is classified as a standard asset if the asset is a "non performing asset" in terms of the
extant instructions. In other words, while the accounts of the project may be classified as a
standard asset, banks shall recognize income in such accounts only on realization on cash
basis if the asset has otherwise become „non performing‟ as per the extant delinquency norm
of 180days.The delinquency norm would become 90 days with effect from 31 March2004.

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

3.16.5 Funded Interest:

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

Conversion into equity, debentures or any other instrument: The amount
outstanding converted into other instruments would normally comprise principal and
the interest components. If the amount of interest dues is converted into equity or
any other instrument, and income is recognized in consequence, full provision
should be made for the amount of income so recognized to offset the effect of such
income recognition. Such provision would be in addition to the amount of provision
that may be necessary for the depreciation in the value of the equity or other
instruments, as per the investment valuation norms. However, if the conversion of
interest is into equity, which is quoted, interest income can be recognized at market
value of equity, as on the date of conversion, not exceeding the amount of interest
converted to equity. Such equity must thereafter be classified in the "available for
sale" category and valued at lower of cost or market value. In case of conversion of
principal and /or interest in respect of NPAs into debentures, such debentures should
be treated as NPA, in the same asset classification as was applicable to loan just
before conversion and provision made as per-norms. This norm would also apply to
zero coupon bonds or other
Instruments which seek to defer the liability of the issuer. On such debentures, income should
be recognized only on realization basis. The income in respect of unrealized interest, which is
converted into debentures or any other fixed maturity instrument, should be recognized only
on redemption of such instrument. Subject to the above, the equity shares or other
instruments arising from conversion of the principal amount of loan would also be subject to
the usual prudential valuation norms as applicable to such instruments.
Provisioning

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While there will be no change in the extant norms on provisioning for NPAs, banks which are
already holding provisions against some of the accounts, which may now be classified as
„standard‟, shall continue to hold the provisions and shall not reverse the same.

3.17 FUTURE OF THE INDIAN BANKING INDUSTRY:

In the past few years, the Indian banking industry has come of age. There have been several
new developments and innovations that are responsible for the growth of the same. One of
the major drivers of growth of the Indian banking industry is the advent of globalization and
liberalization. Globalization refers to extensive and liberal movement of goods, capital and
people across nations. In India, the globalization process took off after 1991 in the shape of
the banking reforms, which can rightly be called a watershed event in our march towards
globalization.

There have been several changes in the banking scenario due to globalization, which have
been listed below:

 Interest rates have moved downward to conform to the global pattern. Even spreads
have fallen as much as 3%, while the figure was 6% prior to 1991, necessitating a
quantum jump in the need for cost control measures and productivity goals.

 Foreign trade as a percentage of GDP, which was less than 10% before 1991, now
exceeds 20%. Thus, the demand for trade finance, payment services and investment
volumes has a higher foreign component than before.

 The legal and regulatory regime governing commerce, banking and industry in India
is converging to global standards. This includes freer markets, privatization,
securitization, etc. of particular importance to banks are international accounting
standards and capital norms under Basel I and Basel II.

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3.18 CHALLENGES FOR THE FUTURE:

 The regulatory and political regimes vary considerably in some cases. A retreat-and-
cut loss policy will be necessary where very adverse circumstances are encountered.

 Wholesale banking in the global markets is likely to yield diminishing returns, unless
the wholesale activities embrace non-traditional areas such as derivatives.

 As of today Indian banks are less global than their developed country counterparts.
This is an initial competitive disadvantage. Basically Indian banks need to ride on the
India story in the global economy.

 Risk management is a major challenge both in domestic and foreign assets. In the
domestic area, the risk arises from the greater unhedged for-ex exposure of domestic
borrowers as well as the greater competition they face. To meet this challenge, Indian
banks must go beyond Basel II and manage their risk on the basis of lower correlation
in a diversified portfolio, which is the advantage that they enjoy.

Thus, we see that the Indian banks have a wide sea of opportunity in front of them because of
opening up of the global markets. But, at the same time, it also poses several challenges for
the same. As legal and state environment is increasingly becoming conducive, what is needed
is a mindset to look beyond the horizon. Indian banks today have everything. They need to do
only one thing –dream big. The world will then follow them.

3.19 GLOBAL DEVELOPMENTS AND NPAs:

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The core banking business is of mobilizing the deposits 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 fulfill
its contractual obligations 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 happenings in the
business world - Enron, WorldCom, Xerox, Global Crossing do not give much confidence to
banks. In case after case, these giant corporate became bankrupt and failed to provide
investors with clearer and more complete information thereby introducing a degree of risk
that many investors could neither anticipate nor welcome. The history of financial institutions
also reveals the fact that the biggest banking failures were due to credit risk.

Due to this, banks are restricting their lending operations to secured avenues only with
adequate collateral on which to fall back upon in a situation of default.

3.20 SPECIAL CASES

3.20.1. 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.
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However, considering the difficulties of large borrowers, stock statements relied upon by the
banks for determining drawing power should not be older than three months. The outstanding
in the account based on drawing power calculated from stock statements older than three
months, would be deemed as irregular. A working capital borrower account will become
NPA if such irregular drawings are permitted in the account for a continuous period of 180
days even though the unit may be working or the borrower's financial position is satisfactory.

Regular and ad hoc 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 a 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.

3.20.2 Accounts regularized near about the balance sheet date:

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

3.20.3Asset Classification to be borrower-wise and not facility-wise

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

3.20.4. Accounts where there is erosion in the value of security

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

3.20.5. Advances to PACS/FSS ceded to Commercial Banks:

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

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arrangement will become NPA even if one of the credit facilities granted to the same
borrower becomes NPA.

3.20.6 Advances against Term Deposits, NSCs, KVP/IVP, etc.:

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

3.20.7 Loans with moratorium for payment of interest

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

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

3.20.8 Agricultural advances

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

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these items is furnished in the Annexure II. In respect of agricultural loans, other than those
specified above, identification of NPAs would be done on the same basis as non-agricultural
advances which, at present, are the 180 days delinquency norm.

Where natural calamities impair the repaying capacity of agricultural borrowers, banks may
decide on their own as a relief measure conversion of the short-term production loan into a
term loan or re-scheduled of the repayment period; and the sanctioning of fresh short-term
loan, subject to various guidelines contained in RBI circulars.

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

3.20.9. Government guaranteed advances:

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

3.20.10 Take-out Finance:

Takeout finance is the product emerging in the context of the funding of long-term
infrastructure projects. Under this arrangement, the institution/the bank financing
infrastructure projects will have an arrangement with any financial institution for transferring
to the latter the outstanding in respect of such financing in their books on a predetermined

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basis. In view of the time-lag involved in taking-over, the possibility of a default in the
meantime cannot be ruled out. The norms of asset classification will have to be followed by
the concerned bank/financial institution in whose books the account stands as balance sheet
item as on the relevant date. If the lending institution observes that the asset has turned NPA
on the basis of the record of recovery, it should be classified accordingly. The lending
institution should not recognize income on accrual basis and account for the same only when
it is paid by the borrower/ taking over institution (if the arrangement so provides). The
lending institution should also make provisions against any asset turning into NPA pending
its takeover by taking over institution. As and when the asset is taken over by the taking over
institution, the corresponding provisions could be reversed. However, the taking over
institution, on taking over such assets, should make provisions treating the account as NPA
from the actual date of it becoming NPA even though the account was not in its books as on
that date.

3.20.11 Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the banks covering export of goods to
countries for which the ECGC‟s cover is available, EXIM Bank has introduced a guarantee-
cum-refinance programs whereby, in the event of default, EXIM Bank will pay the
guaranteed amount to the bank within a period of 30 days from the day the bank invokes the
guarantee after the exporter has filed claim with ECGC.

Accordingly, to the extent payment has been received from the EXIM Bank, the advance may
not be treated as a non-performing asset for asset classification and provisioning purposes.

3.20.12 Export Project Finance:

In respect of export project finance, there could be instances where the actual importer has
paid the dues to the bank abroad but the bank in turn is unable to remit the amount due to
political developments such as war, strife, UN embargo, etc.

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In such cases, where the lending bank is able to establish through documentary
evidence that the importer has cleared the dues in full by depositing the amount in the bank
abroad before it turned into NPA in the Books of the bank, but the importer's country is not
allowing the funds to be remitted due to political or other reasons, the asset classification
maybe made after a period of one year from the date the amount was deposited by the
importer in the bank abroad.

3.20.13 Advances under rehabilitation approved by BIFR/ TLI:

Banks are not permitted to upgrade the classification of any advance in respect of which the
terms have been re-negotiated unless the package of re-negotiated terms has worked
satisfactorily for a period of one year. While the existing credit facilities sanctioned to a unit
under rehabilitation packages approved by BIFR/term lending institutions will continue to be
classified as sub-standard or doubtful as the case may be, in respect of additional facilities
sanctioned under the rehabilitation packages, the Income Recognition, Asset Classification
norms will become applicable after a period of one year from the date of disbursement.

3.21 ROLE OF ARCIL:-

This empowerment encouraged the three major players in Indian banking system, namely,
State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to
come together to set-up the first ARC. Arcil was incorporated as a public limited company on
February 11, 2002 and obtained its certificate of commencement of business on May 7, 2003.
In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of registration
dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates under powers
conferred under the Securitization Act, 2002. Arcil is also a "financial institution" within the
meaning of Section 2(h) (ia) of the Recovery of Debts due to Banks and Financial Institutions
Act, 1993 (the "DRT Act").

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Arcil is the first ARC in the country to commence business of resolution of non-
performing assets (NPAs) upon acquisition from Indian banks and financial institutions. As
the first ARC, Arcil has played a pioneering role in setting standards for the industry in India.

 Unlocking capital for the banking system and the economy

The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of
lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by
managing NPAs and help them concentrate on core banking activities thereby enhancing
shareholders value.

 Creating a vibrant market for distressed debt assets /securities in India offering a
trading platform for Lenders

Arcil has made successful efforts in funneling investment from both from domestic and
international players for funding these acquisitions of distressed assets, followed by
showcasing them to prospective buyers. This has initiated creation of a secondary market of
distressed assets in the country besides hastening the irresolution. The efforts of Arcil would
lead the country‟s distressed debt market to international standards.

 To evolve and create significant capacity in the system for quicker resolution of
NPAs by deploying the assets optimally

With a view to achieving high delivery capabilities for resolution, Arcil has put in place a
structure aimed at outsourcing the various sub-functions of resolution to specialized agencies,
wherever applicable under the provision of the Securitization Act, 2002. Arcil has also
encourage, groomed and developed many such agencies to enhance its capacity in line with
the growth of its activity.

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4. ANALYSIS AND INTERPRETATION

Introduction:

For the purpose of analysis and comparison between Public and private sector banks, We
have taken five banks from both sectors to compare the non-performing assets of banks. For
understanding we further bifurcate the non-performing assets in priority sector and non-
priority sector, gross NPA and net NPA in percentage as well as in rupees, deposit –
investment– advances.
Further we also analysis on the basis of Deposit – Investment – Advances to get the clear
view where the bank stands in the competitive market. At the end of March 2008, in private
sector ICICI Bank is the highest deposit-investment-advances figure in rupees crores, second
is HDFC Bank and KOTAK Bank has least figure.
In public sector banks Punjab National Bank has the highest deposit investment-advances but
when we look at the graph we can see that the Bank of Baroda and Bank of India are almost
the similar in numbers and Dena Bank is stands last in public sector bank. When we compare
the private sector banks with public sector banks, we can understand the more number of
people prefer to choose public sector banks for deposit-investment.

4.1 DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and
comparison among them, year 2008-09.

Private Sector Banks:-

(Rs in crore )

BANK DEPOSIT INVESTMENT ADVANCES
AXIS 87626 33705 59661
HDFC 100769 49394 63427
ICICI 244431 111454 225616
KOTAK 16424 9142 15552
INDUSIND 19037 6630 12795

TOTAL 468287 210325 377051

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Analysis: From the above figure we can see that the ICICI Bank deposit-investment-
advances are quite high than other banks like HDFC, AXIS, INDUSIND, KOTAK.

4.2 Public Sector Banks:-

BOB 152034 43870 106701
BOI 150012 41803 113476
DENA 33943 10282 23024
PNB 166457 53992 119502
UBI 103859 33823 74348
TOTAL 606305 183770 437051

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Analysis: In public sector Punjab National Bank deposit-investment-advances are
comparatively quite high rather than Bank of Baroda, Bank of India, United bank of India
and Dena Bank.

4.3 COMPARISON BETWEEN ICICI BANK AND PUNJAB NATIONAL BANK
IN TERM OF DEPOSIT-INVESTMENT-ADVANCES:-


ICICI BANK 244431 111454 225616

PNB 166457 53992 119502

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Analysis: -Here we have compared between ICICI BANK AND PUNJAB NATIONAL
BANK in term of deposit-investment-advances. From the above figure we can see that ICICI
bank deposit and advances are quite higher than Punjab National Bank. But in case of
Investment ICICI Bank investment amount is doubled than Punjab National Bank amount.

4.4 Gross NPA and Net NPA:-

There are two concepts related to non-performing assets a) gross and b) net. Gross refers to
all NPAs on a bank‟s balance sheet irrespective of the provisions made. It consists of all the
non-standard assets, viz. Substandard, doubtful, and loss assets. A loan asset is classified as „
substandard” if it remains NPA up to a period of 18 months; “ doubtful” if it remains NPA
for more than 18 months; and loss, without any waiting period, where the dues are
considered not collectible or marginally collectible.

Net NPA is gross NPA less provisions. Since in India, bank balance sheets contains a huge
amount of NPAs and the process of recovery and write off of loans is very time consuming,

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the provisions the banks have to make against the NPA according to the central bank
guidelines, are quite significant.

Here, we can see that there are huge differences between gross and net NPA. While gross
NPA reflects the quality of the loans made by banks, net NPA shows the actual burden
of banks. The requirements for provisions are:

 100% for loss assets
 100% of the unsecured portion plus 20-50% of the secured portion, depending on the
period for which the account has remained in the doubtful category
 10% general provision on the outstanding balance under the substandard category.

Here, there are gross and net NPA data for 2007-08 and 2008-09 we taken for comparison
among banks. These data are NPA AS PERCENTAGE OF TOTAL ASSETS. As we
discuss earlier that gross NPA reflects the quality of the loans made by banks. Among all the
ten banks Dena Banks has highest gross NPA as a percentage of total assets in the year 2007-
08 and also net NPA. Punjab National Bank shows huge difference between gross and net
NPA. There is an almost same figure between BOI and BOB.

4.5 Gross NPA and Net NPA Of different Public Sector banks in the year 2007-08

BANK GROSS NPA NET NPA

BOB 1.46 0.35
BOI 1.48 0.45
DENA 2.37 1.16
PNB 2.09 0.45
UBI 1.82 0.59

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Analysis: here Dena bank having highest gross NPAs and highest net NPAs in
comparison on other Banks which shows that Dena bank.

4.6 Gross NPA and Net NPA Of different Public Sector banks in the year 2008-09


BOB 1.10 0.27
BOI 1.08 0.33
DENA 1.48 0.56
PNB 1.67 0.38
UBI 1.34 0.10

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Analysis: In 2007-2008 Gross and Net NPAs of DENA Bank is higher in comparison other
banks but in 2008-09 PNB having a highest Gross and Net NPAs.

4.7 Gross NPA and Net NPA Of different Private Sector banks in the year
2007-08


AXIS 0.57 0.36
HDFC 0.72 0.22
ICICI 1.20 0.58
KOTAK 1.39 1.09
INDUSIND 1.64 1.31

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Analysis: From the above information its clearly shows that INDUIND Bank having highest
gross and Net NPAs in comparison to other Private Banks.

4.8 Gross NPA and Net NPA Of different Private Sector banks in the year
2007-08


AXIS 0.45 0.23
HDFC 0.68 0.22
ICICI 1.90 0.87
KOTAK 1.55 0.98
INDUSIND 1.69 1.25

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Analysis: In 2007-08 Gross and Net NPAs of INDUSIND is highest and In 2008-09 Gross
and Net NPAs of ICICI Bank is highest in comparison other bank.

4.9 Comparison of GROSS NPA with Public and Private sectors banks for the year
2007-08

Analysis: Comparison of GROSS NPA with all banks for the year 2007-08.The growing
NPAs affect the health of banks, profitability and efficiency. In the long run, it eats up the
net worth of the banks. We can say that NPA is not a healthy sign for financial institutions.

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Here we take all the ten banks gross NPA together for better understanding. Average of these
ten banks gross NPAs is 1.29 as percentage of total assets. So if we compare in private sector
banks AXIS and HDFC Bank are below average of all banks and in public sector BOB and
BOI. Average of these five private sector banks gross NPA is 1.25 and average of public
sector banks is 1.33.

4.10 COMPARISON OF NET NPA WITH PUBLIC AND PRIVATE SECTORS
BANKS FOR THE YEAR 2007-08

Analysis: Comparison of NET NPA with all banks for the year2007-08. Average of these
ten bank‟s net NPA is 0.56. And in the public sector banks all these five banks are below
this. But in private sector banks there are three banks are above average. The difference
between private and public banks average is also vast. Private sector banks net NPA average
is 0.71 and in public sector banks it is 0.41 as percentage of total assets. As we know that net
NPA shows actual burden of banks. Indus India bank has highest net NPA figure and HDFC
Bank has lowest in comparison.

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4.11 PRIORITY –NON PRIORITY PRIVATE SECTOR BANKS SECTOR

BANK AGRI SMALL OTHERS PRIORITY NON-PRIORITY
(1) (2) (3) SECTOR
( 1+2+3 )
AXIS 109.12 14.76 86.71 210.59 275.06
HDFC 36.12 110.56 47.70 194.41 709.23
ICICI 981.85 23.35 354.13 1359.34 6211.12
KOTAK 10.00 33.84 4.04 47.87 405.20
INDUSIND 30.44 3.18 30.02 63.64 328.67
TOTAL 1167.53 185.69 522.60 1875.85 7929.28

Analysis: When we further bifurcate NPA in priority sector and Non priority sector.
Agriculture + small + others are priority sector. In private sector ICICI Bank has the highest
NPA with compare to other private sector banks. Around 72% of NPAs in priority sector and
around 78% in non-priority sector. We can see that in private sector banks have more NPA in
non-priority sector than priority sector.

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4.12 PRIORITY –NON PRIORITY PRIVATE SECTOR BANKS SECTOR

BANK PRIORITY SECTOR NPA
(ADVANCED RS.CRORE )
BOB 5469 350
BOI 3269 325
DENA 1160 106
PNB 3772 443
UBI 1924 197

Analysis:

When we talk about public sector banks they are more in priority sector and they give
advanced to weaker sector or industries. Public sector banks give more loans to Agriculture,
small scale and others units and as a result we see that there is more number of NPA in public
sector banks than private sector banks. BOB given more advanced to priority sector in 2008-
09 than other four banks.
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4.13 COMPARISON BETWEEN PRIVATE AND PUBLIC BANKS ON NPA
IN BOTH PRIORITY AND NON PRIORITY.

PUBLIC SECTOR NEW PRIVATE
SECTOR 2007-08 2008-09 2007-08 2008-09
PRIORITY 22954 25287 1468 2080
PUBLIC 490 299 3 0
NON PRT 15158 14163 4800 8339
TOTAL 38602 39749 6271 10419

Analysis:
But when there are comparison between private bank and public sector bank still ICICI Bank
has more NPA in both priority and non-priority sector with the comparison of public sector
banks. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and

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initiative in each sector. Above we also discuss that ICICI Bank has highest deposit-
investment-advance than other banks.

Now, when we compare the all public sector and private sector banks on priority and non-
priority sector the figures are really shocking. Because in compare of private sector banks,
public sector banks numbers are very large.

Here, there are huge differences between private and public sector banks NPA. There is
increase in new private sector banks NPA of Rs.4148 cr in 2008-09 which is almost 66% rise
than previous year. In public sector banks the numbers are not increased like private sector
banks.

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5. SUMMARY OF FINDINGS, CONCLUSIONS & SUGGESTIONS:

5.1 INTRODUCTION:

The study entitled “Comparative Analysis on Non Performing Assets of Private And Public
Sector Banks” was conducted to study the various types of strategies adopted by the Indian
banks to bring down the level of NPAs as well as several account specific actions and the
policy guidelines, which help in effective recovery. With the increase in the growing volume
of credit, the volume of impaired credit has also multiplied due to various factors. This
burgeoning level of NPA had become a grave matter of concern for the Indian banks.

In the study conducted focus was laid on the approach of various banks to manage NPAs, the
process of identification of the same, the classification and assessment of provisions and the
pre-sanction appraisal methodology and the post-sanction follow-up procedure. It also dealt
with the various measures adopted by banks for reduction of their NPAs.

The measures to tackle the NPAs adopted by the bank includes the increasing use of the
forum of Lok Adalats, Civil Courts, Debt recovery Tribunal, use of Corporate Debt Re-
Structuring, One-time settlement schemes

The nature of research was descriptive as well as exploratory as the study was aimed at
studying the various measures adopted by banks for management of NPAs

5.2 SUMMARY OF FINDINGS:

The following are the main findings from the study conducted:

 Banking sector plays an indispensable role in economic development of a country
through mobilization of savings and deployment of funds to the productive sectors.
Currently the Indian banking sector is not in a good health. The symptoms of the
disease are vastly apparent viz. rising NPAs, high labor costs, competition from
mutual funds, bureaucratic hurdle etc.
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 An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank. NPAs are those assets which do not generate any income to the
banks. They drain off the profit of the banks earned by the performing assets. The
NPA affects the banks and financial institutions mainly in the following ways:

At the Macro level, NPAs have choked off the supply line of credit of the potential
lenders thereby having a deleterious effect on Capital formulation and arresting the
economic activity in the country.

At the Micro level, unsustainable level of NPAs has eroded current profits of Banks.
They have led to reduction in interest income and increase in provisions and have
restricted the recycling of funds leading to various asset-liability mismatches. Besides
this, it has led to erosion in their capital base and reduction in their competitiveness.

 The mounting menace of NPAs has raised the cost of credit, made Indian
businessmen uncompetitive as compared to their counterparts in other countries. It has
made Banks more averse to risks and squeezed genuine Small and Medium
enterprises from accessing competitive credit and has throttled their enterprising
spirits as well to a great extent.

 While The Banking Industry in India is progressively complying with the
international prudential norms and Accounting practices, there are certain areas like
recovery management in which it does not have a level playing field as compared to
other participants in the International financial markets. Our existing legal frame work
relating to the commercial transactions has not kept pace with the changing times, this
resulted in slow pace of recovery of defaulting loan & mounting levels of NPA‟s in
banks.

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 It was found that the main reason for NPAs in banks is diversion of funds, improper
credit appraisal and willful default followed by decrepit legal system, cost ineffective
legal measures, lack of effective follow-up and difficulty in execution of decrees.

 The measures to tackle the NPAs adopted by the bank includes the increasing use of
the forum of Lok Adalats, Civil Courts, Debt recovery Tribunal, use of Corporate
Debt Re-Structuring, One-time settlement schemes

 The banker had limited options for recovery which consisted of having an intensive
follow-up and interaction with the borrower and initiating legal actions either through
courts or Debt recovery tribunals.

 The upfront payment by the borrower for challenging the action of the private bank
should be re-introduced with a lesser percentage of the claimed amount.

 The lending bank should be given more powers to seize and dispose off the security
and to attach any other additional security/asset available with the defaulting borrower
and court intervention in such proceeding should be eliminated.
 Public banks Bankers has to handling the recovery operations should be educated on
the management and disposal process of the acquired assets and should also be
provided with management expertise while taking over the operations of the
companies.

 The recovery pattern of public banks in context of NPAs is very long and there is
many mistakes in there planning process for collecting credit from the persons.

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5.3 CONCLUSIONS:

Objective No.1:

 To study the methodology adopted by Public and private banks to classify and
categorize NPAs.

RBI introduced prudential norms on the recommendations of the Narasimham committee in
the year 1992-93. The above norms have three main criteria:

Asset classification
Income Recognition
Provisioning

1. ASSET CLASSIFICATION:

The loans given by the Banks are classified into performing and non-performing assets on the
following basis:

Performing Assets: also known as standard assets are the assets which do not
disclose any problem and which do not carry more than the normal risk attached to
the business. Performing asset is one which generates income for the bank. It is an
asset where the interest and or principal are not overdue beyond 180 days (modified to
90 days w.e.f. Mar 2004) at the end of the financial year.

Non Performing Assets: An amount is to be treated as non performing asset when it
ceases to generate income for the Bank. An asset may be treated as Non Performing
Asset (NPA), if interest and /or installment of Principal remain overdue for a period
exceeding 180 days (modified to 90 days w.e.f. Mar 04)and Banks and FIs should not
take into their Income account, the interest accrued on such NPAs, unless it is actually
received/recovered. NPAs are further classified into:

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a) Substandard Assets: Loans which are non-performing for a period not exceeding
two years, where the current net-worth of the borrower or the current market value of
the security, against which the loan is taken, is not enough to ensure full recovery of
the debt.
b) Doubtful Assets: Loans which have remained non-performing for a period exceeding
two years and which are not classified as loss assets by the management or the
internal/external auditor appointed by RBI.
c) Loss Assets: Assets where loss has been identified by the internal/external auditor of
the bank or the RBI, but the amount has not been written-off wholly or partly. These
assets are considered unrecoverable and are of little value to the lending institution.

2. INCOME RECOGNITION:

The income recognition is linked to the concept of performance of the assets. In other words
the income from performing assets only is to be recognized. The income from non-
performing assets is recognized only to the extent of actual recovery made during the
accounting year.

3. PROVISIONING:

The amount of provision required to be created for each asset depends on the classification
of the assets, availability/value of security, other guarantee available, the age of the NPA etc.

From the foregoing, it may be observed that the Prudential norms have twin effect on the
profitability of the Banks:

The income from the non-performing assets cannot be recognized except to the
extent of actual recovery.
Bank is required to create provision for the non-performing assets.
Both these have a negative impact on the profitability of banks.

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Objective No.2:

 Guidelines issued by RBI and the various strategies adopted by the banks for
controlling NPAs and effective strategies to be used for NPA retrieval.

The various measures used to reduce NPAs are as follows:

1) Dismantling of controls and deregulation of working of commercial banks

2) The process of deregulation freed the banks from the control of the Finance Ministry and
RBI

3) RBI in the year 1993 introduced prudential norms as conveyed by Basel Accord of 1988
applicable to Indian banks

4) Avenues of New Recovery Forums/strategies

5) Banks were permitted to seek infusion of fresh equity from the public retaining
Government share of equity capital at 51%

6) Rescheduling Or Restructuring at the bank level

7) Lok Adalats

8) Corporate Debt Restructuring Mechanism

9) Debt Recovery Tribunal (DRT)

10) One Time Settlement Schemes (OTSS)

11) Asset Reconstruction & Securitization

12) Strengthening of Board for Industrial and Financial reconstruction (BIFR)

Objective No.3:

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 To assess the effectiveness of the act in realizing the proposed objectives.

1) It was evident after the analysis as that 100% of the respondents said that the securitization
act has empowered the banks with additional powers by facilitating the setting up of Asset
reconstruction companies/Securitization companies.

2) It was evident that the Act has helped in reduction of NPAs in the banks as 88% of the
respondents said that the enactment of the Securitization Act has reduced the level of NPAs
in the banks and they rated the impact of Securitization act in reduction of NPAs as five and
above 5.

3) The mean Gross NPA of both public sector as well as private sector banks has decreased
after Securitization Act of 2002, thereby leading to an overall decline in combined NPA after
coming up of the Act.

4) The mean Net NPA of public sector banks has decreased, but the mean Net NPA of private
sector banks has increased after Securitization Act of 2002. Although it is evident that there is
a overall decline in mean Net NPA of both the banks taken together after coming up of the
Act.

5) The Mean of percentage of NPA to Net advances of both public as well as private sector
banks has declined after Securitization Act, 2002. Thereby leading to a overall decline in
Mean of percentage of NPA to Net advances of both the banks taken together after coming up
of the Act.

6) From the T-test, it was clearly revealed that their exists a statistical significant difference
amongst the Gross NPA, Net NPA and percentage of NPA to Net advances of both the public
as well as private sector banks before as well as after the Securitization Act, 2002.

7) Although the Securitization Act, 2002 has not helped in reduction of Gross as well as Net
NPAs of the private sector banks in comparison to the public sector banks where it has
reduced the level of Gross as well as Net NPAs. But, at the same time it has helped in
reduction of the percentage of NPA to Net advances of the private sector banks.

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It could be concluded that the SARFAESI Act, 2002 holds the promise of reformulating the
contours of asset management and of rectifying the imbalance between borrowers and tenders
in India, a direct consequence of which has been the colossal accumulation of NPAs. The
loopholes and inequalities of in the act need to be ironed out through appropriate legislative
measures. The basic structure of the act must not be tampered with, though a few changes
like making appeals easier, framing rules and guidelines to prevent misuse of the powers
under the Act, making a reasonable distinction between willful and other defaulters etc., can
be considered.

It must be said that the Act, by empowering lenders to exercise their right of expeditious
attachment and foreclosure for the enforcement of security, has made a beginning in the right
direction.

Moreover, if the banks have to survive in the competitive and increasingly globalized market
conditions they should be helped both by the RBI and the government in the form of faster
recovery climate, especially for the legal processes of enforcement of contracts. Till such
time the banks may be helped by recognizing their provisions against standard assets,
additional provisions over and above the prudential norms, etc., as Tier II capital.

5.4 SUGGESTIONS:

The following are the suggestions to reduce the level of mounting NPAs in banking sectors.

 In India, bulk of the NPAs relate to units that are either defunct or in sectors like steel
and textiles that have become uncompetitive or obsolete with the opening up of the
economy, lowering of tariffs or introduction of modern technology etc. Unlike other
countries, where there are specialized markets for buying out the NPAs and selling
them overtime, there is no market for distressed assets in India. Hence specialized
markets for such assets must be established.
 Fixing up the budget for profits and recovery rather than for advances. Budget
oriented approach at times leads to release of credit facilities without ensuring
compliance of covenants of sanction. A suitable mechanism could be drawn at each

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bank level to provide monetary benefits/ re-organization of the operating staff
particularly for recovery in NPA‟s write-off cases.
 Projects with old technology should not be considered for finance.
 Large exposure for big corporate/single project should be avoided.
 Up gradation of credit skills of the operating staff working in advance.

 Timely sanction/ release to avoid time and cost overruns.
 Possible restructuring of banks through mergers and acquisitions to keep themselves
competitive in the high credit risk market in India.
 Unless the magnitude of NPA‟s is brought down and ROA levels improved banks
may not be able to infuse the confidence in the market in general and capital market in
particular order to meet their capital adequacy needs.
 Banks and Asset reconstruction companies must be given sufficient legal powers to
recover the assets and dispose them off without the intervention of the courts.
 The banks and FIs will be shareholders as well as the customers of the ARCs and
hence they have an interest in its financial performance, therefore the ARCs have to
be given operational independence.
 Banks should recognize hidden losses in transfer of NPAs to ARCs, if banks transfer
the NPAs at the market price they will have to book further losses. Government
should evolve a mechanism to quantify these losses and arrange to recapitalize banks.
 The NPA assets must be rated by a rating agency which would facilitate the market
for such assets this would in turn reduce the holding cost of the seized assets to the
bank.

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MY LEARNINGS:

It was a great learning experience and a period of value addition in terms of knowledge
instilled. Some of my leanings are:

 I got an insight that with increasing globalization and with diversified ownership
where credit rating agencies constantly review the strength of banks, managing the
level of NPAs becomes very critical. It is a fact that the most critical condition for
bringing about an improvement in the profitability of banks is a reduction in the level
of non-performing assets. In view of this, the RBI along with the Government has
initiated several institutional measures to contain the levels of NPAs.

 During the period, I learnt about the banking industry, its history, deficiencies,
composition, RBI guidelines as well as present and the future potential of this
particular industry.

 The project provided with the information regarding the monitoring system used by
the banks for monitoring NPAs, the performance of various Indian banks in the wake
of their NPA management techniques, the process of NPA recovery, their risk
management techniques and various measures adopted by banks for reduction of
NPAs.

 As I have undergone the process of research in a systematic way, I clearly understood
how to carry out a research. I understood various aspects of research in a more
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practical manner, starting from identifying a problem to eliciting the solutions to that
problem.

BIBLIOGRAPHY:

BOOKS

 Bidani, S.N, “Managing Non-Performing Assets in banks”

 Chandra, Prasanna, “Financial Management”, Tata McGraw Hill publishing Limited

 Gordan, Natarajan, “ Financial Markets and Services- HPH”

 Bhat, Suhindra, “Financial Institutes and Markets”, Excel Books

 Cooper Schindler, “Business Research Methods”, 9th edition, Tata McGraw Hill
publishing Limited

 Kothari, C.R., “Research Methodology”, Revised Second edition, New Age
International Publishers, New Delhi, 2006, ISBN no. 81-224-1522-9

JOURNALS

 Goel, GC., “ Indian Banker”, Issue-12, Volume-2, Dec-07

 Pillai, Manoj, “Prajnan”, Issue-2, Volume-3, Feb-08

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 Sona, School of management Journal, “Global Management Review”, Issue-4,
Volume-2, Aug-08

 Ammannaya, K., “Indian Banker”, Issue-10, Volume-3, Oct-08

 Rajendran, D.S., “Indian Banker”, Issue-5, Volume-3, May-08

 Padhy, Kishore Chandra, “Pratibimba: Journal of IMIS, Issue-2, Volume-2, Feb-07

 Krishnmoha, N.V Rao, D.Suryachandra, “Gitam Journal of Management”, Issue-2,
Volume-5, Feb-08

 Sharma, K.C., “Indian Banker”, Issue-4, Volume-2, Apr-07

 Deepak K Srivastava, Umesh Holani, Naval Bajpai, “ Prajnam- Banking Reforms,
Indian Public Sector Bank”, Issue-1, Volume-35, Feb-07

 BANKING LAWS- “SECURITISATION ACT”, dated Oct11-17, 2004, Page no: 183
to 192

WEB SITES

 www.rbi.org.in
 www.economywatch.com
 www.allbankingsolutions.com
 www.economictimes.com
 www.livemint.com

OTHER SOUCES

 Annual reports of the banks

 RBI bulletins and journals

 Financial Magazines

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