Professional Documents
Culture Documents
MRP Final Project Report: Comparative Analysis On Non Performing Assets of Private and Public Sector Banks
MRP Final Project Report: Comparative Analysis On Non Performing Assets of Private and Public Sector Banks
ON
BY
ANINDYA SANKAR KUNDU
(08BS0000328)
1
PROJECT TITLE
FACULTY GUIDE
Prof. Rajasree Nandy
ICFAI Business School
KOCHI
SUBMITTED BY
2
Declaration
PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS.” has been written
and prepared by me during the academic year 2009-2010.This project was done
under the able guidance and supervision of Prof. Rajasree Nandi, Finance
Faculty, IBS Kochi in partial fulfillment of the requirement for the Master Of
I also declare that this project is the result of my own effort and has not been
submitted to any other institution for the award of any Degree or Diploma.
Place: Kochi
Anindya Sankar Kundu
08bs0000328
3
Acknowledgements
If words are considered to be signs of gratitude then let these words convey the
very same.
I thank Prof. Rajasree Nandi, ICFAI Business School, Kochi, who has
sincerely supported me with the valuable insights into the completion of this
project.
Research Project.
4
TABLE OF CONTENTS
Declaration
…………………………………………………………………………
………………………………… 3
Acknowledgments
………………………………………………………………………
………………………. 4
Abstract
……………………………………………………………………………
……………………………………. 7
1. Project Details
1.1 Objective of the project
…………………………………………………………………… 9
1.2 Research
Methodology………………………………………………………
………………. 9
1.3 Scope of the project
……………………………………………………………………
…… 9
1.4 Sampling Methods
……………………………………………………………………
……… 10
1.5 Limitations of the
project…………………………………………………………………
10
2. Introduction
2.1 Definition of NPA
…………………………………………………………………………
…... 12 2.2 NPAs: An issue for banks and FI’s in India
……………………………… 13
5
2.3 Indian economy and NPAs
……………………………………………………………. 13
2.4 Global developments and NPAs
………………………………………………….. 14
2.5 Factors for rise in
NPAs………………………………………………………………….
15
2.6 Problems due to NPA
…………………………………………………………………….
19
2.7 Types of NPA
…………………………………………………………………………
…………. 20
3. Income Recognition
3.1 Income Recognition
Policy ................................................................. 22
3.2 Reversal of
income ............................................................................... 22
3.3 Leased
Assets ......................................................................................... 23
3.4 Interest
Application ............................................................................. 23
3.5 Reporting of
NPAs ............................................................................... 24
4. Assets Classifications
4.1 Sub-standard
Assets ............................................................................. 26
4.2 Doubtful
Assets ..................................................................................... 30
4.3 Loss
Assets ..............................................................................................
31
7. Special Cases
7.1.1 Accounts with temporary deficiencies
……………………………………… 46
7
7.1.2 Accounts regularized near about the balance sheet date
….. 46
7.1.3 Asset Classification to be borrower-wise and not facility-
wise 7.1.4 Accounts where there is erosion in the value of
security … 47
7.1.5 Advances to PACS/FSS ceded to Commercial Banks
………….. 47
7.1.6 Advances against Term Deposits, NSCs, KVP/IVP
………………. 48
7.1.7 Loans with moratorium for payment of interest
…………………. 48
7.1.8 Agricultural advances
…………………………………………………………………
… 48
7.1.9 Government guaranteed advances
…………………………………………. 49
7.2.1 Take-out Finance
…………………………………………………………………
………… 49
7.2.2 Post-shipment Supplier's Credit
……………………………………………… 50
7.2.3 Export Project Finance
……………………………………………………………….. 50
7.2.4 Advances under rehabilitation approved by BIFR/ TLI
…….. 50
7.2.5 Role of ARCIL
…………………………………………………………………
…………….. 51
9. Annexure
…………………………………………………………………………
…………………………….. 64
10. Bibliography
…………………………………………………………………………
……………………… 65
8
ABSTRACT
While gross NPA reflects the quality of the loans made by banks,
net NPA shows the actual burden of banks. Now it is increasingly evident that
the major defaulters are the big borrowers coming from the non-priority
sector. The banks and financial institutions have to take the initiative to reduce
NPAs in a time bound strategic approach.
For the recovery of NPAs a broad framework has evolved for the
management of NPAs under which several options are provided for debt
recovery and restructuring. Banks and FIs have the freedom to design and
implement their own policies for recovery and write-off incorporating
compromise and negotiated settlements.
9
CHAPTER-1
Project Details
10
1.1 OBJECTIVES OF THE STUDY
The basic idea behind undertaking the Grand Project on NPA was to:
The research methodology adopted for carrying out the study were
11
1.4 Sampling Methods
To prepare this Project we took five banks from public sector as well as five
banks from private sector.
It was critical for me to gather the financial data of the every bank of the
Public Sector Banks so the better evaluations of the performance of the
banks are not possible.
Since the Indian banking sector is so wide so it was not possible for me
to cover all the banks of the Indian banking sector.
12
CHAPTER-2
INTRODUCTION
2. Introduction
NPA. The three letters Strike terror in banking sector and business circle today.
NPA is short form of “Non Performing Asset”. The dreaded NPA rule says
13
simply this: when interest or other due to a bank remains unpaid for more
than 90 days, the entire bank loan automatically turns a non performing asset.
The recovery of loan has always been problem for banks and financial
institution. To come out of these first we need to think is it possible to avoid
NPA, no cannot be then left is to look after the factor responsible for it and
managing those factors.
2.1 Definitions:
An asset, including a leased asset, becomes non-performing when it
ceases to generate income for the bank.
A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of
which the interest and/ or instalment of principal has remained ‘past due’ for a
specified period of time.
With a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt the ‘90 days’ overdue’
norm for identification of NPAs, from the year ending March 31, 2004.
Accordingly, with effect from March 31, 2004, a non-performing asset (NPA)
shall be a loan or an advance where;
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,
Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the
system through various rate cuts and banks fail to utilize this benefit to its
advantage due to the tear of burgeoning non-performing assets.
Further, international rating agencies like, Standard & Poor have lowered
India’s credit rating to sub-investment grade. Such negative aspects have often
outweighed positives such as increasing forex reserves and a manageable
inflation rate.
Under such a situation, it goes without saying that banks are no exception and
are bound to face the heat of a global downturn. One would be surprised to
know that the banks and financial institution in India hold nonperforming
assets worth Rs. 110000 crores Bankers have realized that unless the level of
NPAs is reduced drastically, they will find it difficult to survive.
The core banking business is of mobilizing the deposits and utilizing it for
lending to industry. Lending business is generally encouraged because it has
the effect of funds being transferred from the system to productive purposes,
which results into economic growth.
15
However lending also carries credit risk, which arises from the failure of
borrower to fulfill its contractual obligations either during the course of a
transaction or on a future obligation.
A question that arises is how much risk can a bank afford to take? Recent
happenings in the business world -Enron, WorldCom, Xerox, Global Crossing do
not give much confidence to banks. In case after case, these giant corporate
becan1e bankrupt and failed to provide investors with clearer and more
complete information thereby introducing a degree of risk that many investors
could neither anticipate nor welcome. The history of financial institutions also
reveals the fact that the biggest banking failures were due to credit risk. Due to
this, banks are restricting their lending operations to secured avenues only
with adequate collateral on which to fall back upon in a situation of default.
The banking sector has been facing the serious problems of the rising NPAs.
But the problem of NPAs is more in public sector banks when compared to
private sector banks and foreign banks. The NPAs in PSB are growing due to
external as well as internal factors.
16
2.5.1 EXTERNAL FACTORS:-
The Govt. has set of numbers of recovery tribunals, which works for
recovery of loans and advances. Due to their negligence and
ineffectiveness in their work the bank suffers the consequence of non-
recover, thereby reducing their profitability and liquidity.
Willful Defaults
There are borrowers who are able to pay back loans but are intentionally
withdrawing it. These groups of people should be identified and proper
measures should be taken in order to get back the money extended to
them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the
PSBs. every now and then India is hit by major natural calamities thus
making the borrowers unable to pay back there loans. Thus the bank has
to make large amount of provisions in order to compensate those loans,
hence end up the fiscal with a reduced profit.
Industrial sickness
Lack of demand
17
Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thus
it has to cope with the changing principles and policies for the regulation of
the rising of NPAs.
There are three cardinal principles of bank lending that have been
followed by the commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability
i. Principles of safety :-
The banker should, therefore take utmost care in ensuring that the
enterprise or business for which a loan is sought is a sound one and the
borrower is capable of carrying it out successfully .He should be a person
of integrity and good character.
Inappropriate technology
Poor credit appraisal is another factor for the rise in NPAs. Due to poor
credit appraisal the bank gives advances to those who are not able to
repay it back. They should use good credit appraisal to decrease the
NPAs.
Managerial deficiencies
The banker should always select the borrower very carefully and should
take tangible assets as security to safe guard its interests. When
accepting securities banks should consider the_
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
19
The banker should follow the principle of diversification
of risk based on the famous maxim “do not keep all the eggs in one
basket”; it means that the banker should not grant advances to a few big
farms only or to concentrate them in few industries or in a few cities. If a
new big customer meets misfortune or certain traders or industries
affected adversely, the overall position of the bank will not be affected.
Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM (117.77lakhs),
and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).
Re loaning process
20
3. Banks redistribute losses to other borrowers by charging higher interest
rates, lower deposit rates and higher lending rates repress saving and
financial market, which hamper economic growth.
4. Nonperforming loans epitomize bad investment. They misallocate credit
from good projects, which do not receive funding, to failed projects. Bad
investment ends up in misallocation of capital, and by extension, labor
and natural resources.
Nonperforming asset may spill over the banking system and contract the
money stock, which may lead to economic contraction. This spillover effect can
channelize through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can jam payment across the country.
‘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.
A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as
per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of
21
the loans made by banks. It consists of all the non-standard assets like as sub-
standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. Since in India,
bank balance sheets contain a huge amount of NPAs and the process of
recovery and write off of loans is very time consuming, the provisions the
banks have to make against the NPAs according to the central bank guidelines,
are quite significant. That is why the difference between gross and net NPA is
quite high.
It can be calculated by following
22
CHAPTER-3
INCOME
RECOGNITION
3. INCOME RECOGNITION
23
when it is actually received. Therefore, the banks should not charge and
take to income account interest on any NPA.
The net lease rentals (finance charge) on the leased asset accrued and
credited to income account before the asset became non-performing, and
remaining unrealised, should be reversed or provided for in the current
accounting period.
The term 'net lease rentals' would mean the amount of finance charge
taken to the credit of Profit & Loss Account and would be worked out as
24
gross lease rentals adjusted by amount of statutory depreciation and lease
equalisation account.
In the absence of a clear agreement between the bank and the borrower
for the purpose of appropriation of recoveries in NPAs (i.e. towards
principal or interest due), banks should adopt an accounting principle
and exercise the right of appropriation of recoveries in a uniform and
consistent manner.
25
While reporting NPA figures to RBI, the amount held in interest suspense
account, should be shown as a deduction from gross NPAs as well as
gross advances while arriving at the net NPAs. Banks which do not
maintain Interest Suspense account for parking interest due on non-
performing advance accounts, may furnish the amount of interest
receivable on NPAs as a foot note to the Report.
Whenever NPAs are reported to RBI, the amount of technical write off, if
any, should be reduced from the outstanding gross advances and gross
NPAs to eliminate any distortion in the quantum of NPAs being reported.
26
CHAPTER-4
- Asset Classification
- Provisioning Norms
4. Asset Classification
Categories of NPAs
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.
27
Banks are required to 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
( 2 ) Doubtful Assets
( 3 ) Loss Assets
( 1 ) Sub-standard Assets:--
With effect from 31 March 2005, a substandard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following
features are exhibited by substandard assets: the current net worth of the
borrowers / guarantor or the current market value of the security charged is
not enough to ensure recovery of the dues to the banks in full; and the asset
has well-defined credit weaknesses that jeopardise the liquidation of the debt
and are characterised by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
( 2 ) 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.
( 3 ) Loss Assets:--
A loss asset is one which considered uncollectible and of such little value that
its continuance as a bankable asset is not warranted- although there may be
some salvage or recovery value. Also, these assets would have been identified
as ‘loss assets’ by the bank or internal or external auditors or the RBI
inspection but the amount would not have been written-off wholly.
Provisioning Norms
General
In order to narrow down the divergences and ensure adequate
provisioning by banks, it was suggested that a bank's statutory auditors,
if they so desire, could have a dialogue with RBI's Regional Office/
inspectors who carried out the bank's inspection during the previous
year with regard to the accounts contributing to the difference.
Loss assets:
The entire asset should be written off. If the assets are permitted to remain in
the books for any reason, 100 percent of the outstanding should be provided
for.
Doubtful assets:
100 percent of the extent to which the advance is not covered by the
realisable value of the security to which the bank has a valid recourse
and the realisable value is estimated on a realistic basis.
29
One to three years 30
More than three years: 60% with effect from
March 31,2005.
(1) Outstanding stock of NPAs as on
March 31, 2004. 75% effect from March
31, 2006.
(2) Advances classified as ‘doubtful’
more than three years on or 100% with effect from
after April 1, 2004. March 31, 2007.
Sub-standard assets:
From the year ending 31.03.2000, the banks should make a general
provision of a minimum of 0.40 percent on standard assets on global
loan portfolio basis.
The provisions towards Standard Assets need not be netted from gross
advances but shown separately as 'Contingent Provisions against
Standard Assets' under 'Other Liabilities and Provisions - Others' in
Schedule 5 of the balance sheet.
Floating provisions:
Sub-standard assets : -
10 percent of the 'net book value'.
As per the 'Guidance Note on Accounting for Leases' issued by the ICAI,
'Gross book value' of a fixed asset is its historical cost or other amount
substituted for historical cost in the books of account or financial statements.
Statutory depreciation should be shown separately in the Profit & Loss
31
Account. Accumulated depreciation should be deducted from the Gross Book
Value of the leased asset in the balance sheet of the lesser to arrive at the 'net
book value'.
Doubtful assets :-
100 percent of the extent to which the finance is not secured by the realisable
value of the leased asset. Realisable value to be estimated on a realistic basis.
In addition to the above provision, the following provision on the net book
value of the secured portion should be made, depending upon the period for
which asset has been doubtful:
Loss assets :-
The entire asset should be written-off. If for any reason, an asset is allowed to
remain in books, 100 percent of the sum of the net investment in the lease and
the unrealised portion of finance income net of finance charge component
should be provided for. (‘Net book value')
32
As regards advances guaranteed by State Governments, in respect of which
guarantee stood invoked as on 31.03.2000, necessary provision was allowed to
be made, in a phased manner, during the financial years ending 31.03.2000 to
31.03.2003 with a minimum of 25 percent each year.
33
CHAPTER-5
- Impact of NPA
- Preventive Measurement for NPA
5. Impact of NPA
Profitability:-
NPA means booking of money in terms of bad asset, which
occurred due to wrong choice of client. Because of the money getting blocked
the prodigality of bank decreases not only by the amount of NPA but NPA lead
to opportunity cost also as that much of profit invested in some return
earning project/asset. So NPA doesn’t affect current profit but also future
stream of profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low ROI (return on
investment), which adversely affect current earning of bank.
Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand
which lead to borrowing money for shot\rtes period of time which lead to
34
additional cost to the company. Difficulty in operating the functions of bank is
another cause of NPA due to lack of money. Routine payments and dues.
Involvement of management:-
Time and efforts of management is another indirect cost which bank has to
bear due to NPA. Time and efforts of management in handling and managing
NPA would have diverted to some fruitful activities, which would have given
good returns. Now day’s banks have special employees to deal and handle
NPAs, which is additional cost to the bank.
Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in
terms of market credit. It will lose it’s goodwill and brand image and credit
which have negative impact to the people who are putting their money in the
banks.
(4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
Invariably, by the time banks start their efforts to get involved in a revival
process, it’s too late to retrieve the situation- both in terms of rehabilitation of
the project and recovery of bank’s dues. Identification of weakness in the very
beginning that is: When the account starts showing first signs of weakness
regardless of the fact that it may not have become NPA, is imperative.
Assessment of the potential of revival may be done on the basis of a techno-
economic viability study. Restructuring should be attempted where, after an
objective assessment of the promoter’s intention, banks are convinced of a
turnaround within a scheduled timeframe. In respect of totally unviable units
as decided by the bank, it is better to facilitate winding up/ selling of the unit
earlier, so as to recover whatever is possible through legal means before the
security position becomes worse.
36
Identifying borrowers with genuine intent from those who are non- serious
with no commitment or stake in revival is a challenge confronting bankers.
Here the role of frontline officials at the branch level is paramount as they are
the ones who has intelligent inputs with regard to promoters’ sincerity, and
capability to achieve turnaround. Based on this objective assessment, banks
should decide as quickly as possible whether it would be worthwhile to commit
additional finance.
In this regard banks may consider having “Special Investigation” of all financial
transaction or business transaction, books of account in order to ascertain real
factors that contributed to sickness of the borrower. Banks may have penal of
technical experts with proven expertise and track record of preparing techno-
economic study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow
or sudden requirement of additional fund may be entertained at branch level,
and for this purpose a special limit to such type of cases should be decided.
This will obviate the need to route the additional funding through the
controlling offices in deserving cases, and help avert many accounts slipping
into NPA category.
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.
While financing, at the time of restructuring the banks may not be guided by
the conventional fund flow analysis only, which could yield a potentially
misleading picture. Appraisal for fresh credit requirements may be done by
analysing funds flow in conjunction with the Cash Flow rather than only on the
basis of Funds Flow.
Management Effectiveness:-
37
The general perception among borrower is that it is lack of finance that leads
to sickness and NPAs. But this may not be the case all the time. Management
effectiveness in tackling adverse business conditions is a very important aspect
that affects a borrowing unit’s fortunes. A bank may commit additional finance
to an aling unit only after basic viability of the enterprise also in the context of
quality of management is examined and confirmed. Where the default is due
to deeper malady, viability study or investigative audit should be done – it will
be useful to have consultant appointed as early as possible to examine this
aspect. A proper techno economic viability study must thus become the basis
on which any future action can be considered.
Multiple Financing:-
B. In some default cases, where the unit is still working, the bank should make
sure that it captures the cash flows (there is a tendency on part of the
borrowers to switch bankers once they default, for fear of getting their cash
flows forfeited), and ensure that such cash flows are used for working capital
purposes. Toward this end, there should be regular flow of information among
consortium members. A bank, which is not part of the consortium, may not be
C. In a forum of lenders, the priority of each lender will be different. While one
set of lenders may be willing to wait for a longer time to recover its dues,
another lender may have a much shorter timeframe in mind. So it is possible
that the letter categories of lenders may be willing to exit, even a t a cost – by
a discounted settlement of the exposure. Therefore, any plan for
restructuring/rehabilitation may take this aspect into account.
CHAPTER-6
39
Tools For recovery of npa
40
Once NPA occurred, one must come out of it or it should be managed in most
efficient manner. Legal ways and means are there to overcome and manage
NPAs. We will look into each one of it.
Lok Adalat:
Lok Adalat institutions help banks to settle disputes involving account in
“doubtful” and “loss” category, with outstanding balance of Rs.5 lakh for
compromise settlement under Lok Adalat. Debt recovery tribunals have been
empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh
and above. This mechanism has proved to be quite effective for speedy justice
and recovery of small loans. The progress through this channel is expected to
pick up in the coming years.
41
Asset classification of accounts under consortium should be based on the
record of recovery of the individual member banks and other aspects having a
bearing on the recoverability of the advances. Where the remittances by the
borrower under consortium lending arrangements are pooled with one bank
and/or where the bank receiving remittances is not parting with the share of
other member banks, the account will be treated as not serviced in the books
of the other member banks and therefore, be treated as NPA. The banks
participating in the consortium should, therefore, arrange to get their share of
recovery transferred from the lead bank or get an express consent from the
lead bank for the transfer of their share of recovery, to ensure proper asset
classification in their respective books.
6.3 Restructuring / Rescheduling of Loans
A standard asset where the terms of the loan agreement regarding Interest
and principal have been renegotiated or rescheduled after commencement of
production should be classified as sub-standard and should remain in such
category for at least one year of satisfactory performance under the
renegotiated or rescheduled terms. In the case of sub-standard and doubtful
assets also, rescheduling does not entitle a bank to upgrade the quality of
advance automatically unless there is satisfactory performance under the
rescheduled / renegotiated terms. Following representations from banks that
the foregoing stipulations deter the banks from restructuring of standard and
sub-standard loan assets even though the modification of terms might not
jeopardize the assurance of repayment of dues from the borrower, the norms
relating to restructuring of standard and sub-standard assets were reviewed in
March 2001. In the context of restructuring of the accounts, the following
stages at which the restructuring / rescheduling / renegotiation of the terms of
loan agreement could take place, can be identified:
In each of the foregoing three stages, the rescheduling, etc., of principal and/or
of interest could take place, with or without sacrifice, as part of the
restructuring package evolved.
42
A rescheduling of interest element at any of the foregoing first
two stages would not cause an asset to be downgraded to substandard
category subject to the condition that the amount of sacrifice, if any, in the
element of interest, measured in present value terms, is either written off or
provision is made to the extent of the sacrifice involved. For the purpose, the
future interest due as per the original loan agreement in respect of an account
should be discounted to the present value at a rate appropriate to the risk
category of the borrower (i.e., current PLR+ the appropriate credit risk
premium for the borrower-category) and compared with the present value of
the dues expected to be received under the restructuring package, discounted
on the same basis.
In case there is a sacrifice involved in the amount of interest in
present value terms, as at (b) above, the amount of sacrifice should either be
written off or provision made to the extent of the sacrifice involved.
6.7 General:
These instructions would be applicable to all type of credit facilities
including working capital limits, extended to industrial units, provided they are
fully covered by tangible securities.
44
income recognised as ‘funded interest’ and ‘conversion into equity,
debentures or any other instrument’ banks should adopt the following:
6.9.2. Provisioning
While there will be no change in the extant norms on provisioning for NPAs,
banks which are already holding provisions against some of the accounts,
45
which may now be classified as ‘standard’, shall continue to hold the provisions
and shall not reverse the same.
CHAPTER-7
Special Cases
46
7.Special Cases
7.1.1. Accounts with temporary deficiencies:
The classification of an asset as NPA should be based on the
record of recovery. Bank should not classify an advance account as NPA merely
due to the existence of some deficiencies which are temporary in nature such
as non-availability of adequate drawing power based on the latest available
stock statement, balance outstanding exceeding the limit temporarily, non-
submission of stock statements and non-renewal of the limits on the due date,
etc. In the matter of classification of accounts with such deficiencies banks may
follow the following guidelines:
47
reviewed/ renewed within 180 days from the due date/ date of ad hoc
sanction will be treated as NPA.
7.1.2. Accounts regularized near about the balance sheet date:
The asset classification of borrower accounts where a solitary or a
few credits are recorded before the balance sheet date should be handled with
care and without scope for subjectivity. Where the account indicates inherent
weakness on the basis of the data available, the account should be deemed as
a NPA. In other genuine cases, the banks must furnish satisfactory evidence to
the Statutory Auditors/Inspecting Officers about the manner of regularization
of the account to eliminate doubts on their performing status.
7.2.1.Take-out Finance:
Takeout finance is the product emerging in the context of the funding of long-
term infrastructure projects. Under this arrangement, the institution/the bank
financing infrastructure projects will have an arrangement with any financial
institution for transferring to the latter the outstanding in respect of such
financing in their books on a predetermined basis. In view of the time-lag
involved in taking-over, the possibility of a default in the meantime cannot be
ruled out. The norms of asset classification will have to be followed by the
concerned bank/financial institution in whose books the account stands as
balance sheet item as on the relevant date. If the lending institution observes
that the asset has turned NPA on the basis of the record of recovery, it should
be classified accordingly. The lending institution should not recognize income
on accrual basis and account for the same only when it is paid by the
50
borrower/ taking over institution (if the arrangement so provides). The lending
institution should also make provisions against any asset turning into NPA
pending its takeover by taking over institution. As and when the asset is taken
over by the taking over institution, the corresponding provisions could be
reversed. However, the taking over institution, on taking over such assets,
should make provisions treating the account as NPA from the actual date of it
becoming NPA even though the account was not in its books as on that date.
Arcil has made successful efforts in funneling investment from both from
domestic and international players for funding these acquisitions of distressed
assets, followed by showcasing them to prospective buyers. This has initiated
creation of a secondary market of distressed assets in the country besides
52
hastening their resolution. The efforts of Arcil would lead the country’s
distressed debt market to international standards.
With a view to achieving high delivery capabilities for resolution, Arcil has put
in place a structure aimed at outsourcing the various sub-functions of
resolution to specialized agencies, wherever applicable under the provision of
the Securitization Act, 2002. Arcil has also encourage, groomed and developed
many such agencies to enhance its capacity in line with the growth of its
activity.
CHAPTER-8
Data analysis and
interpretation
53
8. ANALYSIS
For the purpose of analysis and comparison between Public and private sector
banks, We have taken five banks from both sectors to compare the non-
performing assets of banks. For understanding we further bifurcate the non-
performing assets in priority sector and non-priority sector, gross NPA and net
NPA in percentage as well as in rupees, deposit – investment – advances.
In public sector banks Punjab National Bank has the highest deposit
investment- advances but when we look at the graph we can see that the Bank
of Baroda and Bank of India are almost the similar in numbers and Dena Bank
is stands last in public sector bank. When we compare the private sector banks
with public sector banks, we can understand the more number of people
prefer to choose public sector banks for deposit-investment.
54
DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and
comparison among them, year 2008-09.
(Rs in crore)
250000
200000
150000 DEPOSIT
INVESTMENT
100000 ADVANCES
50000
0
ICICI HDFC AXIS INDUSIND KOTAK
Analysis:-From the above figure we can see that the ICICI Bank deposit-
investment-advances are quite high than other banks like
HDFC,AXIS,INDUSIND,KOTAK
55
Public Sector Banks:-
180000
160000
140000
120000
100000 DEPOSIT
80000 INVESTMENT
60000 ADVANCES
40000
20000
0
PNB BOB BOI UBI DENA
56
Comparison between ICICI BANK AND PUNJAB NATIONAL BANK in term of deposit-
investment-advances:-
250000
200000
150000 DEPOSIT
INVESTMENT
100000 ADVANCES
50000
0
ICICI PNB
Analysis: - Here we have compared between ICICI BANK AND PUNJAB NATIONAL
BANK in term of deposit-investment-advances. From the above figure we can see
that ICICI bank deposit and advances are quite higher than Punjab National
Bank. But in case of Investment ICICI Bank investment amount is doubled than
Punjab National Bank amount.
57
Gross NPA and Net NPA:-
There are two concepts related to non-performing assets a) gross and b) net.
Gross refers to all NPAs on a bank’s balance sheet irrespective of the provisions
made. It consists of all the non-standard assets, viz. Substandard, doubtful,
and loss assets. A loan asset is classified as ‘ substandard” if it remains NPA up
to a period of 18 months; “ doubtful” if it remains NPA for more than 18
months; and loss, without any waiting period, where the dues are considered
not collectible or marginally collectible.
Net NPA is gross NPA less provisions. Since in India, bank balance sheets
contains a huge amount of NPAs and the process of recovery and write off of
loans is very time consuming, the provisions the banks have to make against
the NPA according to the central bank guidelines, are quite significant.
Here, we can see that there are huge differences between gross and net NPA.
While gross NPA reflects the quality of the loans made by banks, net NPA
shows the actual burden of banks. The requirements for provisions are:
100% for loss assets
100% of the unsecured portion plus 20-50% of the secured portion,
depending on the period for which the account has remained in the
doubtful category
10% general provision on the outstanding balance under the
substandard category.
Here, there are gross and net NPA data for 2007-08 and 2008-09 we taken for
comparison among banks. These data are NPA AS PERCENTAGE OF TOTAL
ASSETS. As we discuss earlier that gross NPA reflects the quality of the loans
made by banks. Among all the ten banks Dena Banks has highest gross NPA as
a percentage of total assets in the year 2007-08 and also net NPA. Punjab
National Bank shows huge difference between gross and net NPA. There is an
almost same figure between BOI and BOB.
58
Gross NPA and Net NPA Of different Public Sector banks in the year 2007-08
2.5
1.5
GROSS NPA
1 NET NPA
0.5
0
DENA UBI PNB BOI BOB
Gross NPA and Net NPA Of different Public Sector banks in the year 2008-09
1.8
1.6
1.4
1.2
1 GROSS NPA
0.8 NET NPA
0.6
0.4
0.2
0
DENA PNB BOI BOB UBI
59
Gross NPA and Net NPA Of different Private Sector banks in the year 2007-08
1.8
1.6
1.4
1.2
1 GROSS NPA
0.8 NET NPA
0.6
0.4
0.2
0
INDUSIND KOTAK ICICI AXIS HDFC
Gross NPA and Net NPA Of different Private Sector banks in the year 2008-09
2
1.8
1.6
1.4
1.2
GROSS NPA
1
0.8 NET NPA
0.6
0.4
0.2
0
INDUSIND KOTAK ICICI HDFC AXIS
60
Comparison of GROSS NPA with Public and Private sectors banks for the year
2007-08
Comparison of GROSS NPA with all banks for the year 2007-08. The growing
NPAs affect the health of banks, profitability and efficiency. In the long run, it
eats up the net worth of the banks. We can say that NPA is not a healthy sign
for financial institutions. Here we take all the ten banks gross NPA together for
better understanding. Average of these ten banks gross NPAs is 1.29 as
percentage of total assets. So if we compare in private sector banks AXIS and
HDFC Bank are below average of all banks and in public sector BOB and BOI.
Average of these five private sector banks gross NPA is 1.25 and average of
public sector banks is 1.33. Which is higher in compare of private sector banks.
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
I INDU... K BOI BOB UBI PNB
Comparison of NET NPA with all banks for the year 2007-08. Average of these
ten bank’s net NPA is 0.56. And in the public sector banks all these five banks
are below this. But in private sector banks there are three banks are above
average. The difference between private and public banks average is also vast.
Private sector banks net NPA average is 0.71 and in public sector banks it is
0.41 as percentage of total assets. As we know that net NPA shows actual
burden of banks. IndusInd bank has highest net NPA figure and HDFC Bank has
lowest in comparison.
1.4
1.2
1
0.8
0.6
0.4
0.2
0
I INDU... K BOI BOB UBI PNB
61
PRIORITY –NON PRIORITY SECTOR
When we further bifurcate NPA in priority sector and Non priority sector.
Agriculture + small + others are priority sector. In private sector ICICI Bank has
the highest NPA with compare to other private sector banks. Around 72% of
NPA in priority sector and around 78% in non-priority sector. We can see that
in private sector banks have more NPA in non-priority sector than priority
sector.
7000
6000
5000
4000 PRIORITY
3000 NON-PRIORITY
2000
1000
0
AXIS HDFC ICICI KOTAK INDUSIND
When we talk about public sector banks they are more in priority sector and
they give advanced to weaker sector or industries. Public sector banks give
62
more loans to Agriculture, small scale and others units and as a result we see
that there are more number of NPA in public sector banks than private sector
banks. BOB given more advanced to priority sector in 2008-09 than other four
banks .
6000
5000
4000
3000 PRIORITY
NPA
2000
1000
0
BOB BOI DENA PNB UBI
But when there are comparison between private bank and public sector bank
still ICICI Bank has more NPA in both priority and non-priority sector with the
comparison of public sector banks. Large NPA in ICICI Bank because the
strategy of bank that risk-reward attitude and initiative in each sector. Above
we also discuss that ICICI Bank has highest deposit-investment-advance than
other banks.
Now, when we compare the all public sector and private sector banks on
priority and non-priority sector the figures are really shocking. Because in
compare of private sector banks, public sector banks numbers are very large.
63
PUBLIC SECTOR NEW PRIVATE
2007-08 2008-09 2007-08 2008-09
SECTOR
PRIORITY 22954 25287 1468 2080
PUBLIC 490 299 3 0
NON PRT 15158 14163 4800 8339
TOTAL 38602 39749 6271 10419
Here, there are huge differences between private and public sector banks NPA.
There is increase in new private sector banks NPA of Rs.4148 cr in 2008-09
which is almost 66% rise than previous year. In public sector banks the
numbers are not increased like private sector banks.
ANNEXURE-I
REPORTING FORMAT FOR NPA – GROSS AND NET NPA
64
Position as on………
PARTICULARS
1) Gross Advanced *
2) Gross NPA *
adjustment
**Banks which do not maintain an interest suspense a/c to park the accrued interest on
NPAs may furnish the amount of interest receivable on NPAs.
Bibliography
Economic and political weekly, October 16, 2004, CARLTON PEREIRA, Page
4602-4604 “INVESTING IN NPAs”.
65
The chartered Accountant, February 2005, Raj Kumar S Adukia, Page NO.
978-985; “SECURITISATION – AN OVERVIEW”
Websites:-
http://www.indiastat.com/banksandfinancialinstitutions/3/performance/16063/nonp
erformingassetsnpas/377761/stats.aspx
http://www.bankcapitalgroup.net/services-non-performing-assets.php
http://rituparnodas.blogspot.com/2009/01/npa-management.html
http://www.finanssivalvonta.fi/en/Statistics/Credit_market/Nonperforming_assets/
Pages/Default.aspx
http://findarticles.com/p/articles/mi_hb5562/is_200905/ai_n31896461/
66