“NON PERFORMING ASSETS”

A Project submitted to

University of Mumbai for partial completion of the degree of

Bachelor in Commerce (Banking & Insurance)

Under the Faculty of Commerce

By
Ms. Pranali Kisan Pingale

Under the Guidance of

Mr. Kishor Chauhan

JVM’s Mehta College

Plot no. 9, Sector 19, Airoli, Navi Mumbai 400708

March 2020
 DECLARATION

I the undersigned Ms. Pranali Kisan Pingale hereby, declare that the work embodied
in this project work titled “Non Performing Asset”, forms my own contribution to
the research work carried out under the guidance of Mr. Kishor Chauhan is a result of
my own research work and has not been previously submitted to any other University
for any other Degree/ Diploma to this or any other university.

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

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

Name and Signature

Certified by

Name and signature of the guiding teacher

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

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

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

I would like to thank my principal, Dr. (Mrs.) Leena Sarkar for providing the
necessary facilities required for completion of this project.

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

I would also like to express my sincere gratitude towards my project guide Mr. Kishor
Chauhan whose guidance and care made the project successful.

I would like to thank my college library JVM’s Mehta College, for having provided
various reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped
me in the completion of the project especially my Parents and Peers who supported
me throughout my project.
 INDEX

S.R NO Chapter Name Page no

1. 1.1 Introductin
1.2 Definations
2. 2.1 Advantages of NPA
2.2Disadvantages Of NPA
2.3 Types
2.4 Status of out of order

3. 3.1 Objectives
3.2 Key facts about indian
3.3 Reasons for NPA
3.4 How to tackle problems
3.5 Resolving The problem
4. 4.1 Improving quality of lending
4.2 Classifications
4.3 Guidelines for provisions under special
circumstances
5.1 Provisions required to be made
5. 5.2 Two types of NPA
5.3 Income Recognization
5.4 Guidelines for classification
5.5 Accounts where there are is erosion in the
value of security frauds committed by borrowers

6. 6.1 Reasons for an accounting becoming NPA

6.2 Symptoms of NPA
6.3 Preventive measurement of NPA

7. 7.1 Consequence ofNPA

7.2 Functions
7.3 Functions, Powers and duties of Registration

8. 8.1 NPA in different bank

8.2 NPA in state Bank of india
8.3 NPA in RBI
8.4 NPA in Bank of India
8.5 NPA In DENA Bank
8.6 NPA in Punjab national Bank
8.7 NPA in ICICI Bank

9.1 Review of litreture

9. 9.2 why assests become
9.3 Net NPA gross NPA
9.4 Indian Banks and their NPA
9.5 NPA Impact

10. 10.1 Effect on NPA of bank

10.2 Impact of NPA balance sheet
10.3 Effect of high NPA for bank
10.4 Steps pulling out of Bank of NPA
10.5 How Will banks NPA Affects the common

11. Conclusion

12. Biliography
 1. NON PERFORMING ASSETS

1.1 INTRODUCTION

A Non Performing Assets is defined as credit facility in respect of which the

interes

and/or installment of principle has remained ‘past due’ for a specified period of time.
In simple terms, an asset is tagged as none performing when it ceases to generate
income for lender.

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

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

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

than 91 days in respect of a term loan.

● The account remains ‘out of order’ for a period of more than 90 days, in
respect of an Overdraft/cash credit (OD/CC).

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

● Interest and /or installment of principal remain overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advanced granted for agricultural purposes, and

● Any amount to be received remains overdue for a period of more than 90 days
in respects of other account.

● Non submission of stock statements for 3 continuous Quarters in case of cash

credit facility.

● No active transactions in the account (cash credit/over draft/EPS/PCFC) for

more than 91 days
Further classify non-performing assets further into the following three categories

based on the period for which the asset has remained non-performing and the
reliability of the dues:

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

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

the substandard category for a period of 12 months.

3. Loss assets: where loss has been identified by the bank, internal or external
auditor or central bank inspectors. But the amount has not been written off,
wholly or partly.

Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All
those assets which are considered as non-performing for period of more than
12months are called as Doubtful Assets. All those assets which cannot be recovered
are
called as Loss Assets. Some advanced tools like Experiance India's "Hunter Fraud
Score" have also been launched that work on data mining and calculate some
authentic score that can help banks detect fraud and lower their losses.

1.2 DEFINATION OF NON PERFORMING ASSETS

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

which the
interest and/or installment of Bond finance principal has remained 'past due' for a
specified period of time. NPA is used by financial institutions that refer to loans that
are in jeopardy of default the so called NPL.
A non performing asset (NPA) is a loan or advance for which the principal or
interest
payment remained overdue for a period of 90 days..

Description:

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

1. Substandard assets: Assets which has remained NPA for a period less than or
equal to 12 months.
2. Doubtful assets: An asset would be classified as doubtful if it has remained in
the substandard category for a period of 12 months.

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

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

interest and/or installment of Bond finance principal has remained ‘past due’ for a
specified period of time. NPA is used
by financial institutions that refer to loans that are in jeopardy of default the so
called NPL. Once the borrower has failed to make interest or principal payments for
90 days the loan is considered to be a non-performing asset. Non-performing assets

are problematic for financial institutions since they depend on interest payments for
Income.

Troublesome pressure from the economy can lead to a sharp increase in

NPLs and often results in massive write-downs.
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for
identification of NPA, from the year ending March 31, 2004. Accordingly, with effect
from March 31, 2004, a non-performing asset (NPA)is a loan or an advance where;

NON PERFORMING ASSETS

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

than
91 days in respect of a term loan,

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

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

 Interest and/or installment of principal remains overdue for two harvest

seasons but for a period not exceeding two half years in the case of an advance
granted for agricultural purposes, and

 Any amount to be received remains overdue for a period of more than 90 days
in
respect of other accounts.
  Non submission of Stock Statements for 3 Continuous Quarters in case of
Cash
Credit Facility.

 No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for

more than 91days

2. ADVANTAGES OF NON PEFORMING ASSET

Better and speedier realization from Non Performing Assets :

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

Transparency and visibility of information on NPA :

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

Better efficiencies in the management of NPAs :

While traditionally we used to avail the services of news media to create awareness
about the Non Performing Asset, NPA source.com brings into play the unlimited
power of technology for the lender to undergo due-diligence.
Robust data collection for use by all lenders across the country :
Even lenders will find it very easy to upload data on the website and take huge
advantage of the portal to release the value of their non performing assets easily and
effectively.

Attracting prospective investors / buyers from across the globe :

Geographical boundaries will not restrict the resolving of NPAs. Individuals from
across the world will be able to access the portal and avail the benefits.
List of the NPA and their assets at a single location enabling lenders
to take informed decision :

With maximum information available related to NPA, the prospective investor can
take informed decision towards the NPA.
Revival of a sick unit/ industry by infusing required capital through prospective
investors : The portal will help greatly in unlocking huge values and once again
bringing into action the units long lying sick.

Help from facilitators:

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

2.1The Disadvantages of Nonperforming Assets

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

Reduced Income
Interest Income is the first account that gets hit whenever an asset is declared
nonperforming. Lending companies such as banks are primarily in the business of
earning income from interest paid by borrowers. A loan that has fallen into the
nonperforming asset category has not yielded interest for at least 90 days. Any
decrease in interest payments will translate into a decrease in net income. A
company's income level falls as Unrecoverable PrincipalThe principal, or money used
by the amount of nonperforming assets climbs. banks to finance loans, comes largely
from the bank's depositors. Banks borrow the money deposited by account holders
and loan it to their customers. It is imperative for the
bank to recover the money, because it's not the bank's money in the first place. When
a borrower defaults on loan payments, the bank is unable to recover the principal.
Unrecoverable principal must be replaced by the bank to keep its depositors' funds
intact.

Reduced Cash Flow

Companies react to high levels of nonperforming assets by tightening credit policies.

Unrecoverable income and a decrease in interest collections translate into less cash
flow. With an increase in nonperforming assets and with less cash floating around,
lending companies tend to resort to tighter credit policies. This outcome can slow
down economic growth, because some businesses won't be able to obtain a loan.
Negative Indicator Nonperforming assets can be used as indicators of a lender's
ability to manage its loanportfolio efficiently. The efficiency of lending companies in
recovering their principaland earning interest can be measured by comparing their
nonperforming assets ratioagainst those of peer companies. Dividing the amount of
nonperforming assets by thetotal gross loans will yield this ratio. A lending company's
efficiency ratingdeteriorates as the ratio increases

2.2Types of Non-Performing Assets (NPA)

1 – TERM LOANS
A term loan i.e. plain vanilla debt facility will be treated as an NPA when the
principal or the interest installment of the loan has been due for more than 90 days.

2 – CASH CREDIT AND OVERDRAFT

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

3 – Agricultural Advances
Agricultural advances that have been past due for more than two crop seasons for
short crop duration or one crop duration for long duration crops. There could be
various other types of NPAs including residential mortgage, home equity loans, credit
card loans and non-credit card outstanding, direct and indirect consumer loans.

2.3 Non Performing Assets

An asset, including a leased asset, becomes none performing when it ceases to
Generate income for the bank. A non performing asset (NPA) is a loan or an advance
where;
i. interest and/ or installments of principal remain overdue for a period of more than
90 Days in respect of a Term loan,

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

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

iv. The installments of principal or interest thereon remain overdue for two crops
Seasons for short duration crops,(Agricultural loans)

v. the installments of principal or interest thereon remains overdue for one crop
season for
Long duration crops,

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

2.4 Status of Out of Order.

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

Continuously in excess of the sanctioned limit/drawing power. In cases where the
Outstanding balance in the principal operating account is less than the sanctioned
Limit/drawing power, but there are no credits continuously for 90 days as on the date
of
Balance Sheet or credits are not enough to cover the interest debited during the same
Period, these accounts should be treated as 'out of order'.
‘Overdue’
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on
the due
Date fixed by the bank.

3. OBJECTIVES OF THE STUDY:

The basic idea behind undertaking the Grand Project on NPA was to:
1. To evaluate NPAs (Gross and Net) in different banks.

2. To study the past trends of NPA

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

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

5. To evaluate profitability positions of banks

6. To evaluate NPA level in different economic situation.

7. To Know the Concept of Non Performing Asset

 8. To Know the Impact of NPAs

9. To Know the Reasons for NPAs

10. To learn Preventive Measures

Scope of the Study

The study has the following scope:

The study could suggest measures for the banks to avoid future NPAs & to
reduce existing NPAs.

The study may help the government in creating & implementing new
strategies to control NPAs.

The study will help to select appropriate techniques suited to manage the
NPAs and develop a time bound action plan to check the growth of NPAs.

Methodology of Study

For our study, we have considered Non Performing Assets in Scheduled

Commercial Banks which includes public sector banks, private sector banks and
foreign banks which are listed in the Second Schedule of the Reserve Bank of India
Act, 1934.

The study is based on secondary data. The paper discusses the conceptual
framework of NPA and it also highlights the trends, status and impact of NPA on
scheduled commercial banks during the period of 14 years i.e. from 2000 to 2014.
Several reputed research journal including research paper and articles have been used
by the researchers. Moreover, RBI Report on Trend and Progress of Banking in India
for various years, websites and a book on banking has been referred during the study.
Population

Banking industry is taken for the study, where aggregate data related to NPA
for Public sector Banks, Private Sector Banks and Foreign Banks is used.
Time- Period of the Paper 14 year’s Aggregate data from 2000 to 2014 is used for the
study.
3.1Key Facts about India’s NPA Problem
● The financial position of India’s Public Sector Banks has deteriorated sharply
since 2011.

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

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

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

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

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

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

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

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

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

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

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

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

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

3.2Reasons for NPAs

3.3 How to Tackle Problem of NPAs
3.4 Resolving the NPA Problem

● The legacy of the NPAs must be resolved as quickly as possible so that banks
can focus on resuming lending.
● Some assets that are classified as Loss assets should be written off from banks
books.

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

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

fresh capital from investors and new management.

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

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

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

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

● S4A leaves the project in the hands of existing managements and also gives
the banks more flexibility in the time taken to resolve the problem. A key
issue is how large a part of the debt is deemed to be sustainable. Management
and banks are bound to differ on this issue.

● There is much talk of selling assets to privately managed asset reconstruction

companies (ARCs), which can then organize the turnaround.

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

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

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

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

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

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

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

 The P.J. Nyack committee had suggested that if the dilution of shareholding is
not acceptable, it should be possible to distance the government from the
managements of the banks by creating a public sector holding company and
vesting the government’s shares in the holding company. Some statements
have been made that this may be acceptable and the newly created Banks
Board Bureau is the first step in this direction.
● There are two key elements in any effort to distance government. One is that
the public sector banks should deal with only one regulator, RBI, and the
extensive quasi-regulatory control exercised by the department of financial
services should be ended. The role of the government as the owner would be
performed by the holding company, and the government would deal only with
the holding company on all issues.

● A second requirement is that public sector banks should become boardmanaged

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

● The objective of creating a genuinely commercial environment in which

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

4.1Classification of Assets:

Assets are classified into following four categories:

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

1) Standard Assets:

Standard assets are the ones in which the bank is receiving interest as well as
the principal amount of the loan regularly from the customer. Here it is also very
important that in this case the arrears of interest and the principal amount of loan do
not exceed 90 days at the end of financial year. If asset fails to be in category of
standard asset that is amount due more than 90 days then it is NPA and NPAs are
further need to classify in sub categories using norms.
Banks are required to classify non-per forming assets further into the following three
categories based on the period for which the asset has remained non- performing and
the reasonability of the dues:
* Sub-Standard Assets
* Doubtful Assets
* Loss Assets
a) Sub-Standard Assets:

With effect from 31 March 2005, a substandard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following features are
exhibited by substandard assets: the current net worth of the borrowers / guarantor or
the current market value of the security charged is not enough to ensure recovery of
the dues to the banks in full; and the asset has well-defined credit weaknesses that
jeopardize the liquidation of the debt and are characterized by the distinct possibility
that the banks will sustain some loss, if deficiencies are not corrected.

b) Doubtful Assets:

A loan classified as doubtful has all the weaknesses inherent in assets that
were classified as sub-standard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently known facts,
conditions and values – highly questionable and improbable. With effect from March
31, 2005, an asset would be classified as doubtful if it remained in the sub- standard
category for 12 months.
Provision requirement Period for which the advance has r remained in ‘doubtful’

Period for which the Provision required (%)

advances has remained in
doubtful category
Upto one year 20 (25% since 2011)

One to Three Year 30 (40% since 2011)

More than three year 100(100% since 2011)

( Note: Figure in brackets
as given as per RBI
circular dated 8th may
2011)

c) Loss Assets:

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

2)Substandard assets

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

Making Any allowance for ECGC guarantees cover and securities available.

(ii) The ‘unsecured exposures’ which are identified as ‘substandard’ would attract
Additional Provision of 10 per cent, i.e., a total of 20 per cent on the outstanding
balance. The Provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent.
Unsecured Exposure is defined as an exposure where the realizable value of the
security, as Assessts By the bank/approved values/Reserve Bank’s inspecting officers,
is not more than 10 Percent, an -initio, of the outstanding exposure. ‘Exposure’ shall
include all funded and non--Funded exposures (including underwriting and similar
commitments). ‘Security’ will meanTangible security properly discharged to the bank
and will not include intangible
Securities like guarantees (including State government guarantees), comfort letters
etc.

(iii) In order to enhance transparency and ensure correct reflection of the unsecured
Advances in Schedule 9 of the banks' balance sheet, it is advised that the following
would be Applicable from the financial year 2009-10 onwards:
a) For determining the amount of unsecured advances for reflecting in schedule 9 of
the Published balance sheet, the rights, licenses, authorizations, etc., charged to the
banks as Collateral in respect of projects (including infrastructure projects) financed
by them, should Not be reckoned as tangible security. Hence such advances shall be
reckoned as unsecured.

b) Banks should also disclose the total amount of advances for which intangible
securities Such as charge over the rights, licenses, authority, etc. has been taken as
also the estimated Value of such intangible collateral. The disclosure may be made
under a separate head in "Notes to Accounts". This would differentiate such loans
from other entirely unsecured Loans

3) Loss assets

Loss assets should be written off. If loss assets are permitted to remain in the books
For Any reason, 100 percent of the outstanding should be provided for.

4) Doubtful assets

100 percent of the extent to which the advance is not covered by the realizable value
Of the security to which the bank has a valid recourse and the realizable value is
Estimated On a realistic basis.

ii. In regard to the secured portion, provision may be made on the following basis, at
The rates ranging from 25 percent to 100 percent of the secured portion depending
Upon The period for which the asset has remained doubtful: would highlight the
position as per the latest norm announced on May 2016)
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.
Asset Category Revised Existing
Assests Category Revised Existing

Substandard (secured) 15% 10%

(Remains NPA for 12
months)
Subsets ( Unsecured) 25% 20%

Doubtful ( remain unpaid 25% 20%

for 1 year
Doubtful up to 3 year 40% 30%

Beyond 3 years 100% 100%

Restructured advances
( classified as std) 2% 1%
 4.2Guidelines for Provisions under Special Circumstance
Advances granted under rehabilitation packages approved by
BIFR/term lending institutions
(i) In respect of advances under rehabilitation package approved by BIFR/term
LendingInstitutions, the provision should continue to be made in respect of dues to the
bank on theExisting credit facilities as per their classification as substandard or
doubtful asset.

(ii) As regards the additional facilities sanctioned as per package finalized by BIFR
and/orTerm lending institutions, provision on additional facilities sanctioned need not
be made forA period of one year from the date of disbursement.

(iii) In respect of additional credit facilities granted to SSI units which are identified
As sick [as defined in Section IV (Para 2.8) of RPCD circular RPCD.PLNFS.BC. No
83/06.02.31/20042005 dated 1 March 2005] and where rehabilitation
packages/nursing Programmed have been drawn by the banks themselves or under
consortium arrangements,No provision need be made for a period of one year.
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, gold
Ornaments, government & other securities and life insurance policies would attract
Provisioning requirements as applicable to their asset classification status.

Treatment of interest suspense account

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

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

Advances covered by ECGC guarantee

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

should be Made only for the balance in excess of the amount guaranteed by the
Corporation. Further, While arriving at the provision required to be made for doubtful
assets, realizable value of The securities should first be deducted from the outstanding
balance in respect of the Amount guaranteed by the Corporation and then provision
made as illustrated hundread:

Example

Example No:1 - ECGC guarantee.

Outstanding Balance Rs. 4 lakes

ECGC Cover 50 percent

Period for which the advance has
remained doubtful More than 3 years remained
doubtful
(as on March 31, 2004)
Value of security held
(worth of Rs.) Rs. 1.50 lakes

5. Provision required to be made

Outstanding balance Rs. 4.00 laths

Less: Value of security held Rs. 1.50 laths
Unrealized balance Rs. 2.50 laths
(-)ECGC Cover(50% of un realizable
balance) Rs. 1.25 lakes
Net unsecured balance Rs. 1.25 lakes
Provision for unsecured portion of
Advance Rs. 1.25 lakes(@ 100 percent of
unsecured portion)
Provision for secured portion Of
Advance (as on March 31, 2005)
Rs.0.90 lakes (@ 60 per cent of the
secured portion)
Total provision to be made Rs.2.15 lakes (as on March 31, 2005)

1. Types of NPA:
Types of Non-Performing Assets (NPA)

5.1 There are two types of NPA

* Gross NPA
* Net NPA

a) Gross NPA:

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

b) Net NPA:

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

5.2INCOME RECOGNITION

Income Recognition Policy

The policy of income recognition has to be objective and based on the record
ofRecovery. Internationally income from nonperforming assets (NPA) is not
recognized on accrual Basis but is booked as income only when it is actually received.
Therefore, the banks should Not charge and take to income account interest on any
NPA.However, interest on advances against term deposits, NSCs, IVPs, KVPs and
Life Policies may be taken to income account on the due date, provided adequate
margins available in the accounts.
Fees and commissions earned by the banks as a result of renegotiation's or
rescheduling of outstanding debts should be recognized on an accrual basis over the
period of time covered By the renegotiated or rescheduled extension of credit. If
Government guaranteed advances become NPA, the interest on Such advances should
not Reversal of incomeIf any advance, including bills purchased and discounted,
becomes NPA as at the close of Any year, the entire interest accrued and credited to
income account in the past periods, should be reversed or provided for if the same is
not realized. This will apply to Government ranted accounts also. In respect of NPAs,
fees, commission and similar income that have accrued should cease to Accrue in the
current period and should be reversed or provided for with respect to past Periods, if
uncollected. Leased Assets
The finance charge component or finance income [as defined in ‘AS 19 Leases’
issued by the Council of the Institute of Chartered Accountants of India (ICAI)] on
the leased asset which Has accrued and was credited to income account before the
asset became nonperforming, And remaining unrealized, should be reversed or
provided for in the current accounting Period

5.3Appropriation of recovery in NPAs:

Interest realized on NPAs may be taken to income account provided the credits in the
Accounts towards interest are not out of fresh/ additional credit facilities sanctioned to
the Borrower concerned. In the absence of a clear agreement between the bank and
the borrower for the purpose of Appropriation of recoveries in NPAs (i.e. towards
principal or interest due), banks should Adopt an accounting principle and exercise
the right of appropriation of recoveries in uniform and consistent manner.Interest
ApplicationThere is no objection to the banks using their own discretion in debiting
interest to an NPA Account taking the same to Interest Suspense Account or
maintaining only a record of such Interest in preformed accounts. Computation of
NPA levelsBanks should deduct the following items from the Gross Advances and
Gross NPAs to arrive at the Net advances and Net NPAs respectively:

i) Balance in Interest Suspense Account

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

iii) Part payment received and kept in suspense account

iv) Total provisions held (excluding amount of technical write off and provision on
standard Assets) for the purpose, the amount of gross advances should exclude the
amount of Technical Write off but would include all outstanding loans and advances;
including the advances for Which refinance has been availed but excluding the
amount of re discounted bills. The level of gross and net NPAs will be arrived at in
percentage terms by dividing the amount of gross and net NPAs by gross and net
advances, computed as above, respectively.
5.4Guidelines for classification of assets
Broadly speaking, classification of assets into above categories should be done
taking into account the degree of well-defined credit weaknesses and the extent of
dependence on collateral security for realization of dues. Banks should establish
appropriate internal systems to eliminate the tendency to delay or postpone the
identification of NPAs, especially in respect of high value accounts. The bans may fix
a minimum cut off point to decide what would constitute a high value account
depending upon their respective business levels.

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

Availability of security / net worth of borrower/ guarantor

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

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

recovery. Bank should Not classify an advance account as NPA merely due to the
existence of some Deficiencies which are temporary in nature such as non-availability
of adequate drawing Power based on the latest available stock statement, balance
outstanding exceeding the Limit temporarily, non-submission of stock statements and
non-renewal of the limits on the due date, etc. In the matter of classification of
accounts with such Deficiencies banks may follow the following guidelines: Banks
should ensure that drawings in the working capital accounts are covered by the
Adequacy of current assets, since current assets are first appropriated in times of
distress. Drawing power is required to be arrived at based on the stock statement
which is current. However, considering the difficulties of large borrowers, stock
statements relied upon by the banks for determining drawing power should not be
older than three months. The outstanding in the account based on drawing power
calculated from stock statements older than three months, would be deemed as
irregular. A working capital borrower account will become NPA if such irregular
drawings are permitted in the account for a continuous period of 90 days even though
the unit may be working or the borrower's financial position is satisfactory.
Regular and ad hoc credit limits need to be reviewed/ regularized not later than three
months from the due date/date of ad hoc sanction. In case of constraints such as non--
availability of financial statements and other data from the borrowers, the branch
should furnish evidence to show that renewal/ review of credit limits is already on and
would be completed soon. In any case, delay beyond six months is not considered
desirable as general discipline. Hence, an account where the regular/ ad hoc credit
limits have not been reviewed/ renewed within 180 days from the due date/ date of ad
hoc sanction will be treated as NPA. Up gradation of loan accounts classified as
NPAs
If arrears of interest and principal are paid by the borrower in the case of loan
Accounts classified as NPAs, the account should no longer be treated as
nonperforming and May be classified as ‘standard’ accounts. With regard to up
gradation of a restructured/Rescheduled account which is classified as NPA, contents
of paragraphs 5.9.13 and 5.9.14Will are applicable.
Accounts regularized near about the balance sheet date
The asset classification of borrower accounts where a solitary or a few credits are
recorded before the balance sheet date should be handled with care and
without scope for subjectivity. Where the account indicates inherent weakness
on the basis of the data available, the account should be deemed as a NPA. In
other genuine cases, the banks must furnish satisfactory evidence to the
Statutory Auditors/Inspecting Officers about the manner of regularization of
the account to eliminate doubts on their performing status.

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

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

ii) If the debits arising out of development of letters of credit or invoked are
parked in a separate account, the balance outstanding in that account also
shouldbe 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.

iii) The bills discounted under LC favoring a borrower may not be classified
as aNon-performing advance (NPA), when any other facility granted to the
borrower is classified asps. However, in case documents under LC are not
accepted on presentation or the payment under the LC is not made on the due
date by the LC issuing bank for any reason and the borrower does not
immediately make good the amount disbursed as a result of discounting of
concerned bills, the outstanding bills discounted will immediately be classified
as NPA with effect from the date when the other facilities had been classified
asps.

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

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

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

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

v) If the client concerned is also a borrower of the bank enjoying a Cash

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

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

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

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

I. Erosion in the value of security can be reckoned as significant when the realizable
value of The security is less than 50 per cent of the value assessed by the bank or
accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be
straightaway classified under doubtful category and provisioning should be made as
applicable to doubtful assets.

ii. If the realizable value of the security, as assessed by the bank/ approved values/
Riis less than 10 per cent of the outstanding in the borrower accounts, the existence of
security should be ignored and the asset should be straightaway classified as loss
asset. It may be either written off or fully provided for by the bank.

Advances to PACS/FSS ceded to Commercial Banks

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

Advances against Term Deposits, NSCs, KVP/IVP, etc

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

Loans with moratorium for payment of interest

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

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

I. A loan granted for short duration crops will be treated as NPA, if the
installment of principal or interest thereon remains overdue for two crop
seasons. A loan granted for long duration crops will be treated as NPA, if
the installments of principal or interest thereon remain overdue for one
crop season. For the purpose of these guidelines, “long duration”rops
would be crops with crop season longer than one year and crops, which are
not “long duration” crops would be treated as “short duration” crops. The
crop season for each crop, which means the period up to harvesting of the
crops , would be as determined by the State Level Bankers’ Committee in
each State.

II. Depending upon the duration of crops raised by an agriculturist, the above
NPA norms would also be made applicable to agricultural tarlatans availed
of by him. The above norms should be made applicable to all direct
agricultural advances to priority sector. In respect of agricultural loans,
identification of NPAs would be done on the same basis as nonagricultural
advances, which, at present, is the 90 days delinquency norm.

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

iii. In such cases of conversion or reschedulement, the term loan as well as fresh
short-term loan may be treated as current dues and need not be classified as NPA. The
asset classification of these loans would thereafter be governed by the revised terms
&conditions and would be treated as NPA if interest and/or installment of principal
remain overdue for two crop seasons for short duration crops and for one crop season
furlong duration crops. For the purpose of these guidelines, "long duration" crops
would be crops with crop season longer than one year and crops, which are not 'long
duration" would-be treated as "short duration" crops.

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

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

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

Interest due in the financial year 2002-03 on crop loans should also be deferred and
no interest should be charged on the deferred interest. In such cases of conversion or
reschedule of crop loans into term loans, the term loans may be treated as current dues
and need not be classified as NPA.
The asset classification of these loans would thereafter be governed by the revised
terms and conditions and would be treated as NPA if interest and / or installment of
principal remain overdue for two crop seasons.

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

Government guaranteed advances

The credit facilities backed by guarantee of the Central Government though

overdue may be treated as NPA only when the Government repudiates its guarantee
when invoked. This exemption from classification of Government guaranteed
advances as NPA is not forth purpose of recognition of income.

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

.i: It was observed that there were instances, where despite substantial time
overrunning the projects under implementation, the underlying loan assets remained
classified in the standard category merely because the project continued to be under
implementation. Recognizing that unduly long time overrun in a project adversely
affected its viability and the quality of the asset deteriorated, a need was felt to evolve
an objective and definite time frame for completion of projects so as to ensure that the
loan assets relating to projects under implementation were appropriately classified and
asset quality correctly reflected
In the light of the above background, it was decided to extend the norms detailed
below on income recognition, asset classification and provisioning to banks with
respect to industrial projects under implementation, which involve time overrun.

i. The projects under implementation are grouped into three

categories for the purpose of determining the date when the
project ought to be completed: Category

ii. I: Projects where financial closure had been achieved and

formally documented. Category II: Projects sanctioned before
1997 with original project cost of Rs.100 core or more where
financial closure was not formally documented.

III: Projects sanctioned before 1997 with original project cost of less than Rs.100
Core where financial closure was not formally documented
6.REASONS FOR AN ACCOUNT BECOMING NPA

6.1. 1) Internal Factors:

* Funds borrowed for a particular purpose but not use for the said purpose.

* Project not completed in time.

* Poor recovery of receivables.

* Excess capacities created on non-economic costs.

* In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.

* Business failures.

* Diversion of funds for expansion\modernization\setting up new projects\ helping or

promoting sister concerns.

* Willful defaults, siphoning of funds, fraud, disputes, management disputes,

misappropriation etc.

* Deficiencies on the part of the banks viz. in credit appraisal, monitoring and
followups,
delaying settlement of payments\ subsidiaries by government bodies etc.,

2) External Factors:

* Sluggish Legal System i.e. long legal tangles, changes that had taken place in labour
laws & lack of sincere effort.

* Scarcity of raw material, power and other resources.

* Industrial Recession.

* Shortage of raw material, raw material / input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.

* Failures, nonpayment over dues in other countries, recession in other countries,

externalization problems, adverse exchange rates etc.
* Government policies like excise duty changes, Import duty changes etc.

1) Profitability:

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

2) Liquidity:

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

3) Involvement of Management:

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

4) Credit Loss:

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

6.2Symptoms of NPA:

There are four symptoms by which one can recognize a Performing Asset turning in
to Non Performing Asset.
1) Financial:
* Non-payment of the very first installment in case of term loan.
* Bouncing of cherubs due to insufficient balance in the accounts.
* Irregularity in installment.
* Irregularity of operations in the accounts.
* Unpaid overdue bills
* Declining Current Ratio.
* Payment which does not cover the interest and principal amount of that installment.
* While monitoring the accounts it is found that partial amount is diverted to sister
concern or parent company.

2) Operational and Physical:

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

3) Attitudinal Changes:

* Use for personal comfort, stocks and shares by borrower.

* Avoidance of contact with bank.
* Problem between partners.
4) Others:
* Changes in Government policies.
* Death of borrower.
* Competition in the market.

6.3Preventive Measurement for NPA:

1) Early Recognition of the Problem:

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

2) Identifying Borrowers with genuine intent :

Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of
front line officials at the branch level is paramount as they are the ones who have
intelligent inputs with regard to promoter’s sincerity, and capability to achieve
turnaround.
Based on this objective assessment, banks should decide as quickly as possible
whether it would be worthwhile to commit additional finance. "Special
Investigation" In this regard banks may consider having of all financial transaction or
business transaction, books of account in order to ascertain real factors that
contributed to sickness of the borrower. Banks may have penal of technical experts
with proven expertise and track record of preparing techno-economic study of the
project of the borrowers.

3) Timeliness & Adequacy of response:

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

4) Focus on Cash flows :

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

5) Management Effectiveness:

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

6) Multiple Financing:

During the exercise for assessment of viability and restructuring, a Pragmatic and
unified approach by all the lending banks / FIs as also sharing of all relevant
information on the borrower would go a long way toward overall success of
rehabilitation exercise, given the probability of success/failure.
News feature: Internal review planned by the NPA
The NPA takes the view that this is necessary because it has a responsibility to ensure
the professional and commercial profitability of its community pharmacist members,
who it sees as needing help and support if they are to survive and prosper in today’s
rapidly changing world.
John Darcy, the NPA chief executive, responds to the assertion that the strategy looks
like an internal review with an un challenging time-scale, by saying: “We are not a
broken organization; we are working very well indeed, but there is always room for
development. We are not going to sit around navel-gazing and in reflective
contemplation.”
Mr Darcy says that the plan is set out as a five-year strategy in order to show that
what is intended is a long-term process of support for community pharmacy. “If
you’re doing a quick and dirty review, you can do that in a month. But if you want a

top-to-bottom while you continue to function it’s going to take time. It’s about
development and it will take time to do and get right. We will start on most of the
objectives immediately, but the delivery will take time.”
Given, then, that the strategy sets out what Mr. Darcy believes the NPA should be
doing anyway, why has it been written down and published to NPA members in a
glossy brochure?
John Darcy responds: “We need to have the plan written down to show the members.
The final element of the strategy is to bring all community pharmacy owners into
membership. John Darcy says: “The community pharmacy pitch is changing
enormously, but if we are relevant to everybody except Boots, why is that? Boost’s
membership might not be achievable, but it’s an objective.”
He answers that challenge by explaining that the NPA was formed in 1921, when
most pharmacies were independents and Boots was the only real multiple, with the
aim of championing the cause of pharmacy owners. It was not formed to represent
independent pharmacies.
Mr Darcy goes on: “We have to represent the sector as a whole. We cannot do this if
we speak from a fragmented position. One of the issues is that pharmacy is
fragmented and we need to speak with one voice. There is a particular need to do so
for community pharmacy.”
With this in mind, the strategy also sets out to find a way of bringing within the NPA
fold individual pharmacists who, in the very near future, will hold personal contracts
for local pharmaceutical services.
7. CONSEQUENCES OF NON-PERFORMING ASSETS

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

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

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

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

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

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

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

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

recovery costs.

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

adversely affected.

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

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

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

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

14. The cost of poor quality loans is transferred to other bank customers by charging
higher rate of interest.
7.1Functions of NPA

 There are four divisions within NPA that execute the core functions of the
Authority.The divisions are: Inspection, Monitoring and Licensing (IML),
Pricing, Planning and Research (PPR), the Unified Petroleum Price Fund
(UPPF) and the Petroleum Product Marking Scheme (PPMS).The IML
department (as the name implies) is responsible for issuing licenses to PSPs,
monitoring of the operations of PSPs and inspecting facilities of PSPs in
thedownstream industry.

 The IML department also ensures that the design, construction and operation
of allpetroleum infrastructures are executed to predetermined standards.
Additionally, thedepartment ensures that consumers receive high quality fuel
that is safe, efficient andvalue for money.

 PPR monitors the supply and consumption of petroleum products around the
countryto ensure that there are adequate stocks of petroleum products to meet
theconsumption needs of the country. This is done through planning and
monitoring theactivities and performance statistics of bulk distribution
companies (BDCs) and oilmarketing companies (OMCs) in the distribution of
petroleum products across thecountry.

 The object of PPR's function is to protect the interests of consumers, promote

faircompetition among petroleum service providers and ensure that the
industry isefficient and profitable. The team also conducts studies relating to
economy,efficiency and effectiveness of the downstream sector of the
petroleum Industry.its mandate is to compute the ceilings of the Ex-Refinery
ad Ex-pump prices ofpetroleum products, and all resultant costs/revenue to
the government and the
petroleum service providers (PSPs) based on tithe prescribed petroleum
pricingformula. Petroleum product prices are established within a period
called the pricing window,which is currently two weeks. The unit also engages
key stakeholders on petroleum prices ceiling as well as all price related
information to applicable stakeholders in the industry.
In the normal scheme of pricing petroleum products, the distance between the
storage depot and the retail outlet determines the price per liter.
This is very common in most part of the world. However in Ghana, fuel prices
for llOMCs are the same irrespective of which part of Ghana you live - that
which makes this possible is the UPPF.
The UPPF ensures that the unified prices of petroleum products include as
elementrepresenting as near as possible the actual cost of distribution.
The UPPF sees to it that petroleum products reach the consumer wherever
they live in Ghana efficiently and that fuel is transported throughout the
country in a manner thatis simple, effective and inexpensive to operate
administratively.
 The Petroleum Product Marking Scheme provides a foundation for an
effectivequality monitoring systems by:

 Offering consumer quality assurance and protection for products at the final
dispensing outlet.

 Checking/controlling malpractices that result in loss of government revenue

and asecondary effect of interfering with product quality.

 Increased tax base & revenue

 Reduced smuggling

 Fair business competition

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

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

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

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

7.2Functions, duties and powers of Registrar:

 Toexamine andverifydocumentsincluding competitions,notesof defenseand

memoranda Ofappeals tobe filedwiththetribunal orappellate tribunal
andregister them if theymeet Requirementsor endorsethem withreasonsif
theycannotbe registered,
  Toverifyduplicatecopiessubmittedina case withtheoriginalsand certifythem
iftheyAppearin order,andiftheoriginalsappear tohavesome
defects,tomentionsuchdefectsandget theconcernedpartyto signtothateffect,

 Toverifywhetherdocumentssubmittedalongwithpetitionsmemorandaof appeal
endNotesof defensearecorrect or not

 Toissue summons andget itserved,

 Toappoint days for appearance incases, indicatingreasonable reasonspursuant

tolaw,

 Toobtainpower ofattorney andget a case assumedpursuant toprevailinglaw,

 Topromptlyexecute, orcause tobeexecuted,actions asreferredtointheorder

madebytheBench,

 Tohave securityor guarantee asper theordermade bytheBench,

 Tomaintain, orcause tobe maintained,updatedrecordsincluding

registrationbooks,

 Tomaintainpersonalrecordsof employees,

 Tosafelyretainordersand directionsina serial order

8.NPA IN DIFFERENT BANK

8.1NPA IN STATE BANK OF INDIA

The country's largest lender State Bank of Indians 1.31 % will sell eight
nonperforming assets to recover dues worth over Rs 3,900 core and has invited bids
from asset reconstruction companies (ARCs) and financial institutions (FIs). "In terms
of the bank's revised policy on sale of financial assets in line with the regulatory
guidelines, we place these accounts for sale to ARCs/banks/NBFCs/FIs, on the terms
and conditions indicated Of the eight accounts on the block, Kolkata-based Remit
Ferro Tech has the highest loan outstanding against it at Rs 1,320.37 core, followed
by Indian Steel Corporation Ltd at Rs 928.97 core; Jai Bajaj Industries at Rs 859.33
core and Mahalaxmi TMT Put Ltd at Rs 409.78 core.

The remaining accounts belong to Impel Ferro Tech (Rs 200.67 core), Kohinoor Steel
Put Ltd (Rs 110.17 core), Modern India Comcast (Rs 71.16 core) and Ballarpur
Industries (Rs 47.17 core). has asked the interested ARCs/FIs to conduct the due
diligence of these assets with immediate effect after submitting expression of interest
and executing a nondisclosure agreement with the bank.

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

SBI's gross NPAs rose to 10.69 per cent of the total advances at the end of June this
year, as against 9.97 per cent a year ago. In value terms, they increased to Rs 2,12,840
core, from Rs 1,88,068 core. ..
In the first quarter ended June of the current fiscal, SBI has reported a hefty loss of Rs
4,876 core due to higher NPAs or bad loans.
Banks, especially state-owned, are sitting on heavy bad loans and are adopting
aggressive approach to resolve them by making recoveries through various modes.

NON PERFORMING ASSETS

8.2NPA IN RBI
NPA woes may continue for banks in 2018-19 due to current economic
situation: RBI Reserve Bank of India said today that banks will witness further
deterioration in their non-performing assets (NPAs) or bad loans due to the "economic
situationprevailing"in the current fiscal.
A Parliamentary committee recently questioned RBI for failing to take
preemptive action in checking bad loans in the banking system.

 The Gross NPA ratio of scheduled commercial banks may increase further in
2018-19
 In order to curb NPAs, RBI also put in place revised and harmonized
guidelines
 NPAs in public sector banks increased by about Rs 6.2 lake core between
March 2015-2018
 Cording to the Reserve Bank of India (RBI), banks will continue to face
deterioration in their non-performing assets (NPAs) or bad loans due to the
current economic conditions in the current fiscal year.
 The gross non-performing assets (GNPAs) plus restructured standard
advancesin the banking system remained elevated at 12.1 per cent of gross
advances atend-March 2018, RBI's annual report for 2017-18 stated.
 "Going forward, the stress tests carried out by the Reserve Bank suggest that
under the baseline assumption of the current economic situation prevailing,
theGNPA ratio of scheduled commercial banks (SCBs) may increase further
in2018-19," it said.
 The aggregate gross NPAs of SCBs increased primarily as a result of this
 transparent recognition of stressed assets as NPAs, from Rs 3, 23,464 core,
ason March 31, 2015, to Rs 10,35,528 core, as on March 31, 2018.
 In order to curb NPAs, RBI also put in place revised and harmonized
guidelines for resolution of stressed assets during the year, replacing earlier
schemes.
 A Parliamentary committee recently questioned RBI for failing to take
preemptive action in checking bad loans in the banking system prior to the
Asset Quality Review undertaken in December 2015.
 According to sources familiar with the report of the Standing Committe
onFinance, RBI needs to find out as to why the early signals of stressed
account were not captured before the AQR.
 The report was adopted by the Committee headed by senior Congress leader
M Veerappa Moil today and is likely to be placed in the Parliament in the
Winter Session.
 The panel, which includes former prime minister Minoan Singh as a
member,wanted to know the reasons of ever-greening of stressed accounts
throughrestructuring schemes of the RBI.
 The issue of rising NPAs is a legacy issue and role of RBI has not been up
tothe mark, sources said.
 NPAs in public sector banks (PSBs) increased by about Rs 6.2 lake
corebetween March 2015 and March 2018.
 This led to substantial provisioning of Rs 5.1 lake core, sources said
quotingthe report. (With inputs from PTI

8.3NPA IN BOD
Bank of Baroda, Dena, Vijay merger :

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

The Narendra Modi government's decision to merge three State-run banks — Bank of
Baroda, Vijay Bank and Dena Bank — isn't an unexpected one, given that this
consolidation is an idea that has been discussed for a long time. It is also a step
carrying far lesser risk for a political leadership than going for outright privatization
that will irk trade unions.
Beyond the initial excitement of the merger announcement — which will create
India's third largest bank by assets, a closer look will show that the three-way merger
is actually an unofficial bailout package for bad loan-ridden Dena Bank, which is one
of the most struggling lenders in the sector. The other two — Bank of Baroda and
Vijay Bank — have relatively healthier balance sheets.
Dena Bank is already under Prompt Corrective Action (PAC) of the Reserve Bank of
India on account of high bad loans and negative return on assets. Its NPA levels are
among the highest for Indian banks. As on 30 June, Dena Bank's Gross Non-
Performing Assets (GNPAs) stood at 22.69 percent, which makes it the fifth highest
NAP-ridden bank among State-run lenders.

Being under PAC, the bank has restrictions on lending and fresh recruitment. Due to
high provisions, Dena Bank's first quarter marked a loss of Rs 722 core as compared
with a loss of Rs 133 core in the corresponding quarter last year.
Following the merger, Dena Bank’s chances of survival are better, since it will be
part of the bigger entity that has more bargaining power to grab a bigger share of
government capital. In one step, the bank is escaping the spotlight.
Compared to Dena, Bank of Baroda is a turnaround bank that has been improving its
performance rapidly. Its gross NPA levels are in lower double digits and the bank
posted a profit, which more than doubled, in the latest quarter on higher net interest
income.

In 2015, the government had effected certain top-level management changes in Bank
of Baroda by bringing in private sector candidates and this appears to have helped its
fortunes. Similarly, Vijay Bank too is a relatively better performing bank in the PSU
lot; it showed a decline in the first quarter profit figures on account of higher
provisions, but if one looks at interest income growth and asset quality, the bank is
much better than its peers. Gross NPAs, at end of first quarter, stood lower at 6.19
percent in the first quarter against 6.34 percent in the previous quarter. Its net NPAs
too declined to 4.1 percent from 4.32 percent on a quarter-on-quarter basis.
Dena Bank has a capital adequacy ratio of 10.6 percent — not far from the minimum
required level while Vijaya and Bank of Baroda have 13.9 and 12.1 percent
respectively.
To sum up, this is a merger of two healthy banks with one weak, capital-starved,
NAP-ridden candidate and it is easy to see who stands to gain the most. The healthier
duo will have to absorb the NPA shocks and capital needs of the target entity.

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

gives the industry certain benefits. It helps to create large-sized banks that can then
work to build enough muscle mass to compete in a global banking industry presently
dominated by large-sized lenders. With a Rs 10 laky core asset size, the post-merger
Bank of Baroda-Vijay a Bank-Dena Bank entity will still not be a match for the top
global banks (even SBI is not big enough to be among the top banks on the global
list), but India is slowly creating large-sized banks.
Through a series of mergers, perhaps the country will have five or six large banks that
can be groomed to compete in the global market. This makes sense now also because
RBI has now started giving permits to a number of small banks that can focus on
expanding small-scale banking activities in rural areas.
In any case, it did not make sense to control the ownership of so many banks in an
ambitious economy. There has been no progress on the privatization of State-run
banks which would have been the ideal case to bring in private talent and money. The
IDBI Bank-LIC deal can be hardly called a privatization move, since LIC is
technically a government-run entity.
Thus, with not enough political will and scope for privatisation of these banks,
consolidation seems to be the only way to keep the momentum going for banking
sector reforms.But there is an important question the government will need to answer
when it goes ahead with the PSB consolidation drive: Does the merger solve the NPA
problem of State-run banks and the insatiable capital hunger of these banks, especially
the weaker ones?
Take the Bank of Baroda, Dena Bank and Vijay Bank merger for example. The
combined entity will have a total gross NPAs of Rs 79,320 core, which as a
percentage of total advances stand at around 13 percent. How will the merger help in
addressing this problem? What is happening here is only the process of bundling of a
few small problems into a bigger one.

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

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

The point is that if consolidation is the way ahead for the government, it will have to

invest equally in a management revamp and out-of the-box solutions to address the
NPA problem, beyond the Insolvency and Bankruptcy Code resolution. If the
fundamental problems are not addressed, consolidation will end up as unannounced
bailout packages for zombie banks.
8.4NPA IN DENA BANK
Non-performing assets: Dena Bank puts NPAs worth Rs 3,324 core
on sale na Bank on Tuesday put on sale 84 non-performing assets (NPAs) worth Rs
3,324 corer,inviting bids on full-cash basis or through a mix of cash and security
receipts (SRs). “Theexpression of interest requires that prospective investors shall
also make the followingstatements

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

(b) In undertaking the sale process, the prospective investor has no conflict of interest
with and is not related, directly or indirectly, to Dena Bank/borrowers,” the public
sector bank (PSB) said in a sale document.
E-bidding for the accounts will be held on November 29, and execution of the
assignment agreements and fund transfer will take place in the second week of
December. Dena Bank is set to be amalgamated with larger peers Bank of Baroda
(Bob) and Vijay Bank by the end of the current financial year. It is currently under the
RBI’s prompt corrective action (PCA) framework and is the only lender to have been
asked to freeze lending altogether order to boost cash recoveries and ease their
provisioning burden arising from older NPAs, a number of banks have resorted to sale
of NPAs to asset reconstruction companies.
Last month, Bank of India (Boy) had put on sale NPAs worth Rs 10,710 corer,
including its exposures to eight power projects and five accounts named on either of
the RBI’s two lists.

This followed a similar bid by Boil to sell bad loans worth Rs 8,831 corer in
September, including its exposures to Essay Steel, Bhutan Power and Steel and Amok
Industries. All three accounts, part of the RBI’s first list of large NPAs, remained
unresolved over a year since the list was issued amid several rounds of litigation.
In September, SBI had sought bids for eight NPAs worth Rs 3,948 corer on sale,
including its exposures to Jai Bajaj Industries, Ballarpur Industries and Rosita Ferro
Tech. All eight assets were offered on a 100% cash basis.

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

Public sector lender Punjab National Banks 3.70 % (PNB) has put up for sale two
dozen non-performing assets to recover dues of over Rs 1,779 corer.
These 24 dud loan accounts are majorly concentrated in Mumbai, Delhi and Kolkata
zones of the bank.
Two accounts belong to Chandigarh and Bhopal zones while one is of Patna zone, as
per the sale notice on its website.
"We intend to place these accounts for sale to ARCs/NBFCs/other banks/FIs etc on
the terms and conditions ..
Stipulated in the banks policy, in line with the regulatory guidelines," PNB said.
The bank has to make recovery of Rs 1,779.18 corer from these 24 non-performing
assets (NPAs). Among the major borrowers are Bandana Vilyui with an outstanding
amount of Rs 454.02 corer, Moser Beyer Solar (Rs 233.06 corer), Divine Vilyui (Rs
132.66 corer), Visa Resources India Ltd (Rs 115.20 corer), Allied Strips (Rs 118.81
corer), Archival Northern FTWZ Ltd (Rs 96.70 corer), Birla Surya (Rs 73.58 .. and
Trident Tools (Rs 68.81 corer).
The sale process is to be handled by the Stressed Assets Targeted Resolution Action
(SASTRA) Division of the bank.
The submission of financial bids will be only through e-auction method, which will
take place on the portal of the bank, it said.
The last date for evincing interest in these accounts is December 10, PNB said. The
ebidding process will take place on December 21.
PNB, hit by a massive Rs 14,000-crore scam allegedly perpetrated by jeweler duo
Nora Mode and Maul Chooks, has enhanced its recovery mechanism by forming the
Stressed Asset Management Vertical (SAMV) and SASTRA.
The bank posted a staggering loss of Rs 4,532.35 corer for the second quarter of the
current fiscal on rising bad loans. Its gross non-performing assets (NPAs) as a
proportion of gross advances rose sharply to 17.16 per cent (Rs 81,250.83 corer) at
the end of September 2018, from 13.31 percent (Rs 57,630.11 corer) a year ago.

8.6NPA IN ICICI BANK

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

 Private sector lender ICICI Bank, on Wednesday, said it has made full
disclosures about its bad loans and non-performing assets (NPAs) in its annual
report, investor presentations and analysts’ calls.

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

9.1Review of literature
Kauri K. and Singh B. (2011) in their study on Non-performing assets of public and
private sector banks (a comparative study) studied that NPAs are considered as an
important parameter to judge the performance and financial health of banks. The level
of NPAs is one of the drivers of financial stability and growth of the banking sector.
Chattered C., Mukherjee J. and Das (2012) in their study on Management of
nonperforming assets - current scenario has concluded that banks should find out the
original reasons/purposes of the loan required byte borrower.
Proper identification of the guarantor should be checked by the bank including
scrutiny of his/herwealth.Rai (2012) in her study on Study on performance of NPAs
of Indian commercial banks find out that corporate borrowers even after defaulting
continuously never had the fear of bank taking action to recover their dues. This is
because there was no legal framework to safeguard the real interest of banks

9.2Why assets become NPA?

A several factors are responsible forever increasing size of NPAs in PSBs. The Indian
banking industry has one of the highest percents of NPAs compared to international
levels. A few prominent reasons for assets becoming NPAs are as under:
 Lack of proper monitoring and follow-up measures.
 Lack of sincere corporate culture. Inadequate legal provisions on foreclosure
and bankruptcy.
 Change in economic policies/environment.
 Non transparent accounting policy and poor auditing practices.
 Lack of coordination between banks/FIs.
 Directed landing to certain sectors.
 Failure on part of the promoters to bring in their portion of equity from their
own sources or public issue due to market turning unfavorable.
 Criteria for classification of assets
Liberalization of economy/removal of restriction/reduction of tariffs
A large number of NPA borrowers were unable to compete in a competitive market in
which lower prices and greater choices were available to consumers. Further,
borrowers operating in specific industries have suffered due to political, fiscal and
social compulsions, compounding pressures from liberalization.
Lax monitoring of credit and failure to recognize Early Warnings
Signals It has been stated that approval of loan proposal is generally thorough and
eachproposal passes through many levels before approval is granted.

However, the
monitoring of sometimes complex credit files has not received the attention it needed
which meant that early warning signals were not recognized and standard assets
slipped to NPA category without banks being able to take proactive measures to
prevent this. Partly due to this reason, adverse trends in borrower’s performance were
not noted and the position further deteriorated before action was taken.
Over optimistic promoters Promoters were often optimistic in setting up large projects
and in some cases werenot fully aboveboard in their intentions. Screening procedures
did not always
highlight these issues. Often projects were set up with the expectation that part of the
funding would be arranged from the capital markets which were booming at the time
of the project appraisal. When the capital markets subsequently crashed, the requisite
funds could never be raised, promoter often lost interest and lenders were left stranded
with incomplete/unavailable projects.

Directed lending Loans to some segment were dictated by Governments policies than
commercialimperatives.
Highly Leveraged borrowers Some borrowers were under capitalized and over
burdened with debt to absorb thechanging economic situation in the country.
Operating within a protected markedresulted economic situation in the country.
Operating within a protected marketresulted in low appreciation of
commercial/market risk. Funding mismatch
There are said to be many cases where loans granted for short terms were used to fund
long term transactions.
High Cost of Funds
Interest rates as high as 20% were not uncommon. Coupled with high leveraging and
falling Denmark, borrowers could not continue to service high cost debt.
Willful Defaulters
There are a number of borrowers who have strategically defaulted on their debt
service obligation realizing that the legal resource available to creditors is slow in
achieving results.

9.3NPA - Impact

The problem of NPAs in the Indian banking system is one of the foremost and the
most formidable problems that had impact the entire banking system. Higher NPA
ratio trembles the confidence of investors, depositors, lenders etc. It also causes poor
recycling of funds, which in turn will have deleterious effect on the deployment of
credit. The non-recovery of loans effects not only further availability of credit but also
financial soundness of the banks.
Profitability: NPAs put detrimental impact on the profitability as banks stop to earn
income on onehand and attract higher provisioning compared to standard assets on the
other hand.On an average, banks are providing around 25% to 30% additional
provision onincrement NPAs which has direct bearing on the profitability of the
banks.Asset (Credit) contraction:
The increased NPAs put pressure on recycling of funds and reduces the ability of
banks for lending more and thus results in lesser interest income. It contracts the
money stock which may lead to economic slowdown.
Liability Management:
In the light of high NPAs, Banks tend to lower the interest rates on deposits on one
hand and likely to levy higher interest rates on advances to sustain NIM. This may
become hurdle in smooth financial inter mediation process and hampers banks
‘business as well as economic growth.
Capital Adequacy:
As per Basel norms, banks are required to maintain adequate capital on risk weighted
asset son an ongoing basis. Every increase in NPA level adds to risk weighted assets
which warrant the banks to shore up their capital base further. Capital has a price tag
ranging from 12% to 18% since it is a scarce resource.
Shareholders’ confidence: Normally, shareholders are interested to enhance value of
their investments through
higher dividends and market capitalization which is possible only when the bank posts
significant profits through improved business. The increased NPA level is likely to
have adverse impact on the bank business as well as profitability thereby the
shareholders do not receive market return on their capital and sometimes it may erode
their value of investments. As per extant guidelines, banks whose Net NPA level is
5% &above are required to take prior permission from RBI to declare dividend and
also stipulate cap on dividend payout.
Public confidence: Credibility of banking system is also affected greatly due to higher
level NPAsbecause it shakes the confidence of general public in the soundness of the
bankingsystem. The increased NPAs may pose liquidity issues which is likely to lead
run onbank by depositors.

Thus, the increased incidence of NPAs not only affects the performance of the banks
but also affect the economy as a whole. In a nutshell, the high incidence of NPA has
cascading impact on all important financial ratios of the banks viz., Net Interest
Margin, Return on Assets, Profitability, Dividend Payout, Provision coverage ratio,
Credit contraction etc., which may likely to erode the value of all stakeholders
including Shareholders, Depositors, Borrowers, Employees and public at large.
Findings Because of mismanagement in bank there is a positive relation between
TotalAdvances, Net Profits and NPA of bank which is not good. Positive relation
betweenNPA & profits are due to wrong choice of clients by Banks. There is an
adverse effecton the Liquidity of Bank.
Bank is unable to give loans to the new customers due to lack of funds which arises
due to NPA As per the government, the main reasons for rise in NPAs are
sluggishness in the domestic growth in the recent past, slow recovery in the global
economy and continuing uncertainty in global markets leading to lower exports of
various products such as textiles and leather.
Suggestion Advances provided by banks need to be done pre-sanctioning evaluation
and postdisbursement controls that NPA can decrease. Good management needed on
the sideof banks to decrease the level of NPA. Proper selection of borrowers & follow
upsrequired to get timely payment. on performing assets are a drain to the banks.

The banks in India are adopting various strategies to reduce the non performing
assets in their banks and they are also adopting various methodologies by which
further addition to NPA portfolio is minimized In the real sense, in case there is a
recovery in principal and installments due in respect of the loans granted to the banks
are received 100%, the question of nonperforming assets do not arise. However, there
is no such ideal bank where the NPA is nil. Except banks which were originated
recently, all banks are prone to have some portion of their loans and advances as non
performing advances The following are some strategies by which banks are trying to
curtail nonperforming assets to a great extent:
Recovery camps: Bank personnel jointly approach the defaulting borrowers for
repayment at a placeand time convenient to both the parties. These are more suited to
small loans.Normally the borrowers who had availed small loans will be more in
number in ruraland semi urban areas rather than urban and metro centers. As such, the
banks insteadsearch areas rather than urban and metro centers.
As such, the banks instead of conducting the recovery camps at their branches, they
usually conduct such recovery camps in centers like panchayat board offices, court
buildings, government department buildings etc such recovery camps so that the
borrowers find it convenient to attend the recovery camps. Under certain
circumstances, the manager in charge of the bank branches along with some branch
officials go to each visit each house of the borrowers and recover the installments due
in respect of loans availed by them. This type of recovery camp will be successful in
case an advance notice is served on the borrowers mentioning the date of recovery
camps
Preference of claims:
Banks should expeditiously and properly claim indemnity from organizations like
Deposit Insurance and Credit Guarantee Corporation called DICGC, Export Credit
Guarantee Corporation called ECGC, Credit Guarantee Fund Trust for small scale
industries, Insurance Companies etc ant invoke Government/other personal
guarantees to recover loan dues and reduce nonperforming assets.
Compromise proposals :
Compromise routes are adopted by banks, where borrowers experience certain
genuine difficulties and where normal recovery is not possible. It involves certain
sacrifices on the part of the banks on the principle of one bird at hand is worth two in
the bush”. Such proposals can be taken up considering the history of the borrowed
account, security available, net worth of the borrower/guarantor, time value of offer
made etc

Technical write off :

Normally banks decide writing off small loans which have become bad and the
recovery is not at all possible in those accounts under any circumstances on account
of the facts that the borrower might have been expired; he has no means to repay the
loan at any cost and there may be huge losses in respect of the propertiesetc. This is
for the sole purpose of servicing such non performing accounts.
One time settlement scheme::
To reduce the absolute amount of nonperforming assets, Government of India along
with Reserve Bank of India is announcing one time settlement schemes periodically
for the past few years. When the borrowers are alive and when the borrowers
farmers, small entrepreneurs etc and they find it very difficult today their dues for
various reasons like bad health and fall in their business ventures, , however, they
have the inclination to repay their debts to the banks, this type of practice is very
much helpful to the borrowers and the lending institutions. Surely the banks are in a
position to lose certain portion of their loan amount when they are conducting one
time portion of their loan amount when they are conducting one time settlement
schemes.

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

Debt recovery tribunals:

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

Lock adults:
It is a legal forum for expeditious settlement of loan dues on consensus arrived
between the bank and the borrowers mediated by the Lock Adulate
Securitization Act.
The securitization and financial assets and enforcement of security interest –
SARFAESI act 2002 aims to empower banks as secured creditors to take possession,

manage and sell the securities without the intervention of court/tribunal. It also aims
at Asset Reconstruction by securitization or Reconstruction Company. However, loan
with balance below Rs. 1 Lake unsecured loans and loans against collateral of
agricultural land are exempted from the purview of this act.

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

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

10.1Impact of NPA On Banks

“NPA’s Non-performing assets are the assets of the banks which are not performing,
banks to run the economies also provide short-term and a long-term loan to the
industries, individuals, farmers, a bank also gives loan against the home, vehicles and
many more.
In some cases, the borrower unable to pay the interest amount on time as well as
unable to return the principal amount too, in that case, bank declares that amount as
nonperforming. The bank also runs the recovery scenario for that amount, the impact
of NPA on the profitability of banks brings a dent on the balance sheet of the bank,
but until then the amount is nonperforming.
The increase of Non-Performing Assets also affects the expectation of Stakeholder as
well as investors, Banks has to run the proper evaluation of the proposal at the first
instance, this will reveal the status of unviable projects too. Bank need to collect full
information about Industry, management, future prospects etc before approving the
Loa

10.2Impact of Non Performing Assets on Balance Sheet

High Non Performing Assets are the foremost problem for the banking system for any
economy, that shakes the whole banking system of the country.
The confidence level of the investor, Depositors, Stack holders also effects. This also
causes the rotation of money
Profitability due to NPA
Non Performing Assets not only reduces the profit of the Bank but also increases the
Loss. Also, banks also providing 25 % to 30% additional provision on Non
Performing Assets which directly impact the Profitability of the Bank.
Liability Management
Due to high Non Performing Assets, Bank for forced for lower the interest rates of the
deposit and on advances likely to pay Higher interest rates on advances.
This situation is a very difficult situation and also hampers the banking business
Share Holders confidence
Not in the Banking sector, but shareholders need their money in safe hands,
Shareholders are interested in the enhancement of investment and market
capitalization. High Non Performing Assets reduces the confidence level of the
investor which significantly impact the Share price of the Bank in this situation, banks
stop payout of dividend to the shareholders, which was not in the interest of the
investor. Public Confidence The poor performance of the Bank due to increases in
Non Performing Assets notonly lower the sentiments of the investor but the bank also
lose the faith of Public,this directly affects the deposits into the bank.
High Non Performing Assets affects the economy as a whole.
25% of NPA Under Big Bulls: (Need to known)?
Gross Non-Performing Asset (NPA) is expected to rise by 9.5 Laky Core by March
2018, compared to 8 Laths Core last year recent new from – Economic times
NPA and society are parallel paths move together for the growing Economy.
NPA’s are the loan provided to the business companies which are not in the slab of
Performance

10.3Effects of High NPA’s for Banks

Effects of High NPA’s for Banks

Higher NPA impact the revenue strength of the banks and also lose the confidence
level of consumers and depositors, banks are back boon to the financial economy of
every country. Here are some effects in details:
Changes in Interest Rates
Higher NPA reflects the reduction of interest rate on the deposit into banks, only poor
public directly impact the consequences of Higher NPA’s of the bank.
Levies of charges for every operation
Looking at the above scenario, the bank is recovering their losses by levies charges on
those operations which were free of cost like
–
 Withdrawal limit from ATM
 Withdrawal number of times
 Cash deposits in other branches
 Internet transaction charges

Increase in Current account deficit

NPA plays an important role in every economic condition and also the main cause of
the increase in the current account deficit. Interest rates, Loan, Housing Loans, CRR,
and SLR all are directly affected by the system.
The Corporatism also affect the impact of higher NPA.
Confidence in Share Holders Higher NPA’s in banking system losing the confidence
of shareholders, and thedepositors, they are switching the segments and losing the
trust in the system.Effect on the serious borrower
Increase in NPA not only affects the public but also affecting the serious
honest borrower with good credentials and credit ranking. They have to suffer and on
the other hand, the economy is losing hope of improvement.

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

The Government of India making lots of changes and making things transparent to
keep the level of NPA under control and also trying to get it reduced, some of the
major steps which are required to implement to improve the Banking situation.
Bank has to think conservative
Its high time bank has to think conservative if the banks only think of distributing
loans and increasing the numbers just to take some benefits in the form of subsidy
from the Government of India, they are also increasing the number of NPA.
Loan process restructuring Bank has to tighten their scanner of selection of borrower
not only through creditrating but also have to investigate the previous performance of
the company and themembers of the company, whether anybody is being defaulter in
their pastperformance.
That will not only save the bank but also the shareholder confidence.
Relying less on Restructuring of Loan
Why banks wait for the Loan for converting into NPA, and allow the borrower to
restructure the loan, this act cause loss for the bank and have a greater chance of
getting the Laon into Non-Performing Asset (NPA), rather then relying on
restructuring bank needs to take the proper examination before releasing the Loan.
RBI disclosed the list of companies having the huge burden of Loan –
According to RBI just 12 companies are under the radar of bankruptcy and are
holding 25% of Gross Non-Performing Asset (NPA) in Banks.
List of Banks consist of high
NPA’S Looking at the above scenario, is there any action plan ready for the
government andFinance Department, the amount of money involved in this Non-
Performing Asset(NPA) must be utilized to other segments of the economy like
employment, food,health, farmers etc. Apart from releasing Loan to the Corporate, the
Government has to work on the
platform to reduce NPA.

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

 We talk about a common man saving, it’s a serious matter because they don’t
have any other tap to fill their water tank, and they have only one source of
income.
So the question is:
 Whether the saving is under threat of NPA for the common man.
The government of India is taking the step to make sure that the saving or investment
made by the common man into the banks is under the umbrella.
 Its high time we have to open our eyes and start diversification of our fund,
depending upon trusted bank like SBI or ICICI bank is not 100% sure.
 We must start investing in mutual funds, equity market, bonds etc to cover up
our insurance and money health.
Bottom Line :
The Financial results of the bank viz. Net Interest Margin, Return on Assets,
Profitability, Dividend Yield, Credit Contraction etc. while will impact the valuation
of the Bank. On the other hand, Investors waiting to invest in the bank will watch and
wait for the correct valuation and then invest when the NPA issue is under control. At
that time the investor will get the share price at a lower valuation.

11. Conclusion

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

So the problem of NPA needs lots of serious efforts otherwise NPAs will keep
killing the profitability of banks which is not good for the growing Indian
economy at all.

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