report on retail banking

7/28/2019 Report on retail banking

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CHAPTER 1

INDTRODUCTION


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Importance :

A healthy banking system is essential for any economy striving to achieve good

growth and remain in an increasingly global business environment. The Indian

banking system, with one of the largest banking network in the world, has

witnessed a series of reforms over the past few years line deregulation of interest

rates, dilution of the government stake in public sector banks, guideline being

issued for risk management, asset classification and provisioning etc.

Its known fact that the bank and financial institution in Indian face the problem of

swelling non-performing assets (NPAs) and the issue is becoming more and more

unmanageable.

In the changed scenario, it has now become extremely important for Indian banks

to remain competitive for surviving. This kind of rapid growth however led to

strains in the operational efficiency of banks and accumulation of non performing

assets in their loan portfolios.

The origin of the problem of burgeoning NPAs lies in the quality of managing

credit risk by the banks concerned. What is need is having adequate preventive

measures in place namely, fixing pre-sanctioning appraisal responsibility and

having an effective post-disbursement supervision. Banks concerned shouldcontinuously monitor loans to identify account that have potential to become non-

performing

Objectives

To know the reasons for NPAs.

To know recovery mechanisms adopted by the bank.

To evaluate profitability positions of banks

To know the measures adopted to avoid NPA.

To know the effect of NPA.


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Scope

The study concentrates on non performing assets. A total of 50 samples

were collected in order to study about the awareness of non performing

asset among the different banks.

Both primary and secondary data was used in order to study about non

performing asset.

Data Collection

This project report is based on primary data.

The data was of 50 samples, which were filled by banks.

Limitation

Respondents were reluctant to share information.

Chapter Scheme

Chapter 1 Introduction

Chapter 2 - Review of Literature

Chapter 3 - Analysis & Interpretation

Chapter 4 Findings & Suggestions


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CHAPTER 2CHAPTER 2

REVIEW OF LITERATUREREVIEW OF LITERATURE


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2.1 HISTORY OF INDIAN BANKING

A bankis a financial institution that provides banking and other financial

services. By the term bankis generally understood an institution that holds

a Banking Licenses. Banking licenses are granted by financial supervision

authorities and provide rights to conduct the most fundamental banking

services such as accepting deposits and making loans. There are also

financial institutions that provide certain banking services without meetingthe legal definition of a bank, a so-called Non-bank. Banks are a subset of

the financial services industry.

The word bank is derived from the Italian banca, which is derived from

German and means bench. The terms bankrupt and "broke" are similarly

derived from banca rotta, which refers to an out of business bank, having

its bench physically broken. Money Lenders in Northern Italy originally

did business in open areas, or big open rooms, with each lender working

from his own bench or table.

Typically, a bank generates profits from transaction fees on financial

services or the interest spread on resources it holds in trust for clients

while paying them interest on the asset. Development of the banking

industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed

that the transition from money lending to banking must have occurred

even before Manu, the great Hindu Jurist, who has devoted a section of his

work to deposits and advances and laid down rules relating to rates of

interest

Banking in India has an early origin where the indigenous bankers played


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a very important role in lending money and financing foreign trade

and commerce. During the days of the East India Company, was the turn

of the agency houses to carry on the banking business. The General Bank

of India was first Joint Stock Bank to be established in the year 1786. The

others which followed were the Bank Hindustan and the Bengal Bank.

The Reserve Bank of India which is the Central Bank was created in 1935

by passing Reserve Bank of India Act, 1934 which was followed up with the

Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI)

with wide ranging powers for licensing, supervision and control of banks.

Considering the proliferation of weak banks, RBI compulsorily merged many of

them with stronger banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the

geographical coverage and financial spread of the banking system in the country.

As certain rigidities and weaknesses were found to have developed in the system,

during the late eighties the Government of India felt that these had to be addressed

to enable the financial system to play its role in ushering in a more efficient and

competitive economy. Accordingly, a high-level committee was set up on 14

August 1991 to examine all aspects relating to the structure, organization,

functions and procedures of the financial system. Based on the recommendations

of the Committee (Chairman: Shri M. Narasimham), a comprehensive reform of

the banking system was introduced in 1992-93. The objective of the reform

measures was to ensure that the balance sheets of banks reflected their actual

financial health. One of the important measures related to income recognition,

asset classification and provisioning by banks, on the basis of objective criteria

was laid down by the Reserve Bank.

The introduction of capital adequacy norms in line with international standardshas been another important measure of the reforms process.

Comprises balance of expired loans, compensation and other bonds such as

National Rural Development Bonds and Capital Investment Bonds. Annuity

certificates are excluded.


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These represent mainly non- negotiable non- interest bearing securities issued to

International Financial Institutions like International Monetary Fund, International

Bank for Reconstruction and Development and Asian Development Bank.

At book value.

Comprises accruals under Small Savings Scheme, Provident Funds, Special

Deposits of Non- Government

In the post-nationalization era, no new private sector banks were allowed to be set

up. However, in 1993, in recognition of the need to introduce greater competition

which could lead to higher productivity and efficiency of the banking system, new

private sector banks were allowed to be set up in the Indian banking system.

These new banks had to satisfy among others, the following minimum

requirements:

It should be registered as a public limited company;

The minimum paid-up capital should be Rs 100 crore;

The shares should be listed on the stock exchange;

The headquarters of the bank should be preferably located in a centre which does

not have the headquarters of any other bank; and

The bank will be subject to prudential norms in respect of banking operations,

accounting and other policies as laid down by the RBI. It will have to achieve

capital adequacy of eight per cent from the very beginning.

A high level Committee, under the Chairmanship of Shri M. Narasimham, was

constituted by the Government of India in December 1997 to review the record of

implementation of financial system reforms recommended by the CFS in 1991

and chart the reforms necessary in the years ahead to make the banking system

stronger and better equipped to compete effectively in international economic

environment. The Committee has submitted its report to the Government in April

1998. Some of the recommendations of the Committee, on prudential accounting

norms, particularly in the areas of Capital Adequacy Ratio, Classification of

Government guaranteed advances, provisioning requirements on standard

advances and more disclosures in the Balance Sheets of banks have been accepted

and implemented. The other recommendations are under consideration.


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The banking industry in India is in a midst of transformation, thanks to the

economic liberalization of the country, which has changed business environment

in the country. During the pre-liberalization period, the industry was merely

focusing on deposit mobilization and branch expansion. But with liberalization, it

found many of its advances under the non-performing assets (NPA) list. More

importantly, the sector has become very competitive with the entry of many

foreign and private sector banks. The face of banking is changing rapidly. There

is no doubt that banking sector reforms have improved the profitability,

productivity and efficiency of banks, but in the days ahead banks will have to

prepare themselves to face new challenges.

Banking system which constitutes the core of the financial sector plays a vital role

in transmitting monetary policy impulses to the economic system. Therefore its

efficiency and development are vital for enhancing growth and improving the

changes for stability. During the recent past, profits of the Bank came under

pressure due to rise in interest rates, decrease in non-interest income and increase

in provisions and contingencies.

The Banks and Financial Institutions have also been burdened with ever increasing

Non Performing Assets

The mounting menace of NPAs has raised the cost of credit, made Indian

businessmen uncompetitive as compared to their counterparts in other countries. It

has made Banks more averse to risks and squeezed genuine Small and Medium

enterprises from accessing competitive credit and has throttled their enterprising

spirits as well to a great extent.

2.2 NON PERFORMING ASSETS

The three letters Strike terror in banking sector and business circle today. NPA is

short form of Non Performing Asset. The dreaded NPA rule says simply this:

when interest or other due to a bank remains unpaid for more than 90 days, the


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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 can not be then left is to look

after the factor responsible for it and managing those factors.

An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank.

A non-performing asset (NPA) was defined as a credit facility in respect of

which the interest and/ or instalment of principal has remained past due for a

specified period of time. With a view to moving towards international best

practices and to ensure greater transparency, it has been decided to adopt the 90

days overdue norm for identification of NPAs, from the year ending March 31,

2004. Accordingly, with effect from March 31, 2004, a non-performing asset

(NPA) shall be a loan or an advance where;

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

than 90 days in respect of a term loan, The account remains out of order for a

period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills

purchased and discounted, Interest and/or instalment of principal remains overdue

for two harvest seasons but for a period not exceeding two half years in the case

of an advance granted for agricultural purposes, and Any amount to be received

remains overdue for a period of more than 90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been

advised to move over to charging of interest at monthly rests, by April 1, 2002.

However, the date of classification of an advance as NPA should not be changed

on account of charging of interest at monthly rests. Banks should, therefore,

continue to classify an account as NPA only if the interest charged during any

quarter is not serviced fully within 180 days from the end of the quarter with

effect from April 1, 2002 and 90 days from the end of the quarter with effect from

March 31, 2004.

'Out of Order' status:'Out of Order' status:


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

continuously in excess of the sanctioned limit/drawing power. In cases where the

outstanding balance in the principal operating account is less than the sanctioned

limit/drawing power, but there are no credits continuously for six months as on

the date of Balance Sheet or credits are not enough to cover the interest debited

during the same period, these accounts should be treated as 'out of order'.

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.

2.2.1 Types of NPA:2.2.1 Types of NPA:

2.2.2.1 Gross NPA2.2.2.1 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. It can be calculated with the help of

following ratio:

Gross NPAs Ratio Gross NPAs

Gross Advances

2.2.2.2 Net NPA:2.2.2.2 Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision

regarding NPAs. It can be calculated by following

Net NPAs Gross NPAs Provisions

Gross Advances - Provisions

2.3 INCOME RECOGNITION2.3 INCOME RECOGNITION


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Income recognition - PolicyIncome recognition - Policy

The policy of income recognition has to be objective and based on the record of

recovery. Internationally income from non-performing assets (NPA) is not

recognised on accrual basis but is booked as income only when it is actually

received. Therefore, the banks should not charge and take to income account

interest on any NPA.

However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life

policies may be taken to income account on the due date, provided adequate

margin is available in the accounts.

Fees and commissions earned by the banks as a result of re-negotiations or

rescheduling of outstanding debts should be recognised on an accrual basis over

the period of time covered by the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on such advances

should not be taken to income account unless the interest has been realised.

Reversal of income:Reversal of income:

If any advance, including bills purchased and discounted, becomes NPA as at the

close of any year, interest accrued and credited to income account in the

corresponding previous year, should be reversed or provided for if the same is not

realised. This will apply to Government guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued

should cease to accrue in the current period and should be reversed or provided

for with respect to past periods, if uncollected.

The net lease rentals (finance charge) on the leased asset accrued and credited to

income account before the asset became non-performing, and remaining

unrealised, should be reversed or provided for in the current accounting period.

The term 'net lease rentals' would mean the amount of finance charge taken to the

credit of Profit & Loss Account and would be worked out as gross lease rentals

adjusted by amount of statutory depreciation and lease equalisation account. As

per the 'Guidance Note on Accounting for Leases' issued by the Council of the


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Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation

Account should be opened by the banks with a corresponding debit or credit to

Lease Adjustment Account, as the case may be. Further, Lease Equalisation

Account should be transferred every year to the Profit & Loss Account and

disclosed separately as a deduction from/addition to gross value of lease rentals

shown under the head 'Gross Income'.

Interest realised on NPAs may be taken to income account provided the credits in

the accounts towards interest are not out of fresh/ additional credit facilities

sanctioned to the borrower concerned.

In the absence of a clear agreement between the bank and the borrower for the

purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest

due), banks should adopt an accounting principle and exercise the right of

appropriation of recoveries in a uniform and consistent manner.

There is no objection to the banks using their own discretion in debiting interest to

an NPA account taking the same to Interest Suspense Account or maintaining

only a record of such interest in proforma accounts.

Banks are required to furnish a Report on NPAs as on 31 st March each year after

completion of audit. The NPAs would relate to the banks global portfolio,

including the advances at the foreign branches. The Report should be furnished as

per the prescribed format given in the Annexure I.

While reporting NPA figures to RBI, the amount held in interest suspense

account, should be shown as a deduction from gross NPAs as well as gross

advances while arriving at the net NPAs. Banks which do not maintain Interest

Suspense account for parking interest due on non-performing advance accounts,

may furnish the amount of interest receivable on NPAs as a foot note to the

Report.

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

2.4. Asset Classification2.4. Asset Classification


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2.4.1 Standard Assets:2.4.1 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

does 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.

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 realisability of the dues:

2.4.22.4.2Sub-standard Assets:Sub-standard Assets:

A sub-standard asset was one, which was classified as

NPA for a period not exceeding two years. With effect from 31 March 2001, a

sub-standard asset is one, which has remained NPA for a period less than or equal

to 18 months. In such cases, the current net worth of the borrower/ guarantor or

the current market value of the security charged is not enough to ensure recovery

of the dues to the banks in full. In other words, such an asset will have 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.

2.4.3 Doubtful Assets:2.4.3 Doubtful Assets:

A doubtful asset was one, which remained NPA for a period

exceeding two years. With effect from 31 March 2001, an asset is to be classified

as doubtful, if it has remained NPA for a period exceeding 18 months. 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.


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With effect from March 31, 2005, an asset would be classified as doubtful if it

remained in the sub-standard category for 12 months.

2.4.3 Loss Assets:2.4.3 Loss Assets:

A loss asset is one where the bank or internal or external auditors

have identified loss or the RBI inspection but the amount has not been written off

wholly. In other words, such an asset is 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.

2.5 Provisioning Norms2.5 Provisioning Norms

In order to narrow down the divergences and ensure adequate provisioning by

banks, it was suggested that a bank's statutory auditors, if they so desire, could

have a dialogue with RBI's Regional Office/ inspectors who carried out the bank's

inspection during the previous year with regard to the accounts contributing to the

difference.

Pursuant to this, regional offices were advised to forward a list of individual

advances, where the variance in the provisioning requirements between the RBI

and the bank is above certain cut off levels so that the bank and the statutory

auditors take into account the assessment of the RBI while making provisions for

loan loss, etc.


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The primary responsibility for making adequate provisions for any diminution in

the value of loan assets, investment or other assets is that of the bank

managements and the statutory auditors. The assessment made by the inspecting

officer of the RBI is furnished to the bank to assist the bank management and the

statutory auditors in taking a decision in regard to making adequate and necessary

provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on the non-

performing assets on the basis of classification of assets into prescribed categories

as detailed in paragraphs 4 supra. Taking into account the time lag between an

account becoming doubtful of recovery, its recognition as such, the realisation of

the security and the erosion over time in the value of security charged to the bank,

the banks should make provision against sub-standard assets, doubtful assets and

loss assets as below:

2.5.1 Loss assets:2.5.1 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.

2.5.2 Doubtful assets2.5.2 Doubtful assets::

100 percent of the extent to which the advance is not covered by the realisable

value of the security to which the bank has a valid recourse and the realisable

value is estimated on a realistic basis.

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

at the rates ranging from 20 percent to 50 percent of the secured portion

depending upon the period for which the asset has remained doubtful:

With a view to bringing down divergence arising out of difference in assessment

of the value of security, in cases of NPAs with balance of Rs. 5 crore and above

stock audit at annual intervals by external agencies appointed as per the guidelines

approved by the Board would be mandatory in order to enhance the reliability on


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stock valuation. Valuers appointed as per the guidelines approved by the Board of

Directors should get collaterals such as immovable properties charged in favour

of the bank valued once in three years. A general provision of 10 percent on total

outstanding should be made without making any allowance for DICGC/ECGC

guarantee cover and securities available.

The provisions on standard assets should not be reckoned for arriving at net

NPAs.

The provisions towards Standard Assets need not be netted from gross advances

but shown separately as 'Contingent Provisions against Standard Assets' under

'Other Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.

Some of the banks make a 'floating provision' over and above the specific

provisions made in respect of accounts identified as NPAs. The floating

provisions, wherever available, could be set-off against provisions required to be

made as per above stated provisioning guidelines. Considering that higher loan

loss provisioning adds to the overall financial strength of the banks and the

stability of the financial sector, banks are urged to voluntarily set apart provisions

much above the minimum prudential levels as a desirable practice.

2.6 Impact of NPA2.6 Impact of NPA

2.6.1 Profitability:2.6.1 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


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opportunity cost also as that much of profit invested in some return earning

project/asset. So NPA doesnt 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.

2.6.2 Liquidity:2.6.2 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 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.

2.6.32.6.3 Involvement of management: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.

2.6.4 Credit loss:2.6.4 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 .

2.7 REASONS FOR NPA:2.7 REASONS FOR NPA:

2.7.1Internal Factors:2.7.1Internal Factors:


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Internal Factors are those, which are internal to the bank and are controllable by

banks

Poor lending decision:

Non-Compliance to lending norms:

Lack of post credit supervision:

Failure to appreciate good payers:

Excessive overdraft lending:

Non Transparent accounting policy:

2.7.2 External Factors:2.7.2 External Factors:

External factors are those, which are external to banks they are not controllableby banks.

Socio political pressure:

Chang in industry environment:

Endangers macroeconomic disturbances:

Natural calamities

Industrial sickness

Diversion of funds and willful defaults

(Time/ cost overrun in project implementation Labor problems of borrowed firm

Business failure

Inefficient management

Obsolete technology

Product obsolete


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2.8 Preventive Measurement For NPAPreventive Measurement For NPA

2.8.1Early Recognition of the Problem:Early Recognition of the Problem:

Invariably, by the time banks start their efforts to get involved in a revivalprocess, its too late to retrieve the situation- both in terms of rehabilitation of the

project and recovery of banks 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 promoters 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.

2.8.2Identifying Borrowers with Genuine Intent:Identifying Borrowers with Genuine Intent:

Identifying borrowers with genuine intent from those who are non- serious with

no commitment or stake in revival is a challenge confronting bankers. Here the

role of frontline officials at the branch level is paramount as they are the ones who

has intelligent inputs with regard to promoters sincerity, and capability to achieve

turnaround. Base don 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


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obviate the need to route the additional funding through the controlling offices in

deserving cases, and help avert many accounts slipping into NPA category

2.8.22.8.2 Timeliness and Adequacy of responseTimeliness and Adequacy of response::

Longer the delay in response, grater the injury to the account and the asset. Time

is a crucial element in any restructuring or rehabilitation activity. The response

decided on the basis of techno-economic study and promoters 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.

2.8.3Focus on Cash Flows: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.

2.8.32.8.3 Management Effectiveness: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 units 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.

2.8.4 Multiple Financing:2.8.4 Multiple Financing:


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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.

In some default cases, where the unit is still working, the bank should make sure

that it captures the cash flows (there is a tendency on part of the borrowers to

switch bankers once they default, for fear of getting their cash flows forfeited),

and ensure that such cash flows are used for working capital purposes. Toward

this end, there should be regular flow of information among consortium members.

A bank, which is not part of the consortium, may not be allowed to offer credit

facilities to such defaulting clients. Current account facilities may also be denied

at non-consortium banks to such clients and violation may attract penal action.

The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for

meaningful information exchange on defaulting borrowers once the setup

becomes fully operational.

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.

Corporate Debt Restructuring mechanism has been institutionalized in 2001 to

provide a timely and transparent system for restructuring of the corporate debt of

Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside

the legal framework. Under this system, banks may greatly benefit in terms of

restructuring of large standard accounts (potential NPAs) and viable sub-standard

accounts with consortium/multiple banking arrangements.


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2.9 Tools For recovery Of NPAs2.9 Tools For recovery Of NPAs

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 over come and manage

NPAs. We will look into each one of it .

A] Lok Adalt and Debt Recovery Tribunal

B] Securitisation Act

C] Asset Reconstruction

2.9.1 Lok Adalat:2.9.1 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 chennel is expected to pick up

in the coming years.

2.9.2Debt Recovery Tribunals(DRT):Debt Recovery Tribunals(DRT):

The recovery of debts due to banks and

financial institution passed in March 2000 has helped in strengthening the

function of DRTs. Provision for placement of more than one recovery officer,

power to attach defendants property/assets before judgment, penal provision for


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disobedience of tribunals order or for breach of any terms of order and

appointment of receiver with power of realization, management, protection and

preservation of property are expected to provide necessary teeth to the DRTs and

speed up the recovery of NPAs in the times to come. DRTs which have been set

up by the Government to facilitate speedy recovery by banks/DFIs, have not been

able make much impact on loan recovery due to variety of reasons like inadequate

number, lack of infrastructure, under staffing and frequent adjournment of cases.

It is essential that DRT mechanism is strengthened and vested with a proper

enforcement mechanism to enforce their orders. Non observation of any order

passed by the tribunal should amount to contempt of court, the DRT should have

right to initiate contempt proceedings. The DRT should empowered to sell asset

of the debtor companies and forward the proceed to the winding up court for

distribution among the lenders

\\

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.

2.9.3 Corporate debt Restructuring (CDR):2.9.3 Corporate debt Restructuring (CDR):

In spite of their best efforts and intentions, sometimes corporate find themselves

in financial difficulty because of factors beyond their control and also due to

certain internal reasons. For the revival of the corporate as well as for the safety of

the money lent by the banks and FIs, timely support through restructuring in


24/93

genuine cases is called for. However, delay in agreement amongst different

lending institutions often comes in the way of such endeavours.

Based on the experience in other countries like the U.K., Thailand, Korea, etc. of

putting in place institutional mechanism for restructuring of corporate debt and

need for a similar mechanism in India, a Corporate Debt Restructuring System

has been evolved, as under :

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure

timely and transparent mechanism for restructuring of the corporate debts of

viable entities facing problems, outside the purview of BIFR, DRT and other legal

proceedings, for the benefit of all concerned. In particular, the framework will

aim at preserving viable corporate that are affected by certain internal and

external factors and minimize the losses to the creditors and other stakeholders

through an orderly and coordinated restructuring programme

2.9.3.1 CDR Standing Forum2.9.3.1 CDR Standing Forum ::

The CDR Standing Forum would be the representative general body of all

financial institutions and banks participating in CDR system. All financial

institutions and banks should participate in the system in their own interest. CDR

Standing Forum will be a self-empowered body, which will lay down policies and

guidelines, guide and monitor the progress of corporate debt restructuring.

The Forum will also provide an official platform for both the creditors and

borrowers (by consultation) to amicably and collectively evolve policies and

guidelines for working out debt restructuring plans in the interests of all

concerned.

The CDR Standing Forum shall comprise Chairman & Managing Director,

Industrial Development Bank of India; Managing Director, Industrial Credit &

Investment Corporation of India Limited; Chairman, State Bank of India;

Chairman, Indian Banks Association and Executive Director, Reserve Bank of

India as well as Chairmen and Managing Directors of all banks and financial

institutions participating as permanent members in the system. The Forum will


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elect its Chairman for a period of one year and the principle of rotation will be

followed in the subsequent years. However, the Forum may decide to have a

Working Chairman as a whole-time officer to guide and carry out the decisions of

the CDR Standing Forum.

A CDR Core Group will be carved out of the CDR Standing Forum to assist theStanding Forum in convening the meetings and taking decisions relating to policy,

on behalf of the Standing Forum. The Core Group will consist of Chief

Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank of India, Punjab National

Bank, Indian Banks Association and a representative of Reserve Bank of India.

The CDR Standing Forum shall meet at least once every six months and would

review and monitor the progress of corporate debt restructuring system. The

Forum would also lay down the policies and guidelines to be followed by the

CDR Empowered Group and CDR Cell for debt restructuring and would ensure

their smooth functioning and adherence to the prescribed time schedules for debt

restructuring. It can also review any individual decisions of the CDR Empowered

Group and CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell (described

in following paragraphs) shall be housed in IDBI. All financial institutions and

banks shall share the administrative and other costs. The sharing pattern shall beas determined by the Standing Forum.

2.9.3.2 CDR Empowered Group and CDR Cell:2.9.3.2 CDR Empowered Group and CDR Cell:

The individual cases of corporate debt restructuring shall be decided by the CDR

Empowered Group, consisting of ED level representatives of IDBI, ICICI Limited

and SBI as standing members, in addition to ED level representatives of financial

institutions and banks who have an exposure to the concerned company. In order

to make the CDR Empowered Group effective and broad based and operate

efficiently and smoothly, it would have to be ensured that each financial

institution and bank, as participants of the CDR system, nominates a panel of two

or three Eds, one of whom will participate in a specific meeting of the

Empowered Group dealing with individual restructuring cases. Where, however, a


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bank / financial institution has only one Executive Director, the panel may consist

of senior officials, duly authorized by its Board. The level of representation of

banks/ financial institutions on the CDR Empowered Group should be at a

sufficiently senior level to ensure that concerned bank / FI abides by the necessary

commitments including sacrifices, made towards debt restructuring.

The Empowered Group will consider the preliminary report of all cases of

requests of restructuring, submitted to it by the CDR Cell. After the Empowered

Group decides that restructuring of the company is prima-facie feasible and the

enterprise is potentially viable in terms of the policies and guidelines evolved by

Standing Forum, the detailed restructuring package will be worked out by the

CDR Cell in conjunction with the Lead Institution.

The CDR Empowered Group would be mandated to look into each case of debt

restructuring, examine the viability and rehabilitation potential of the Company

and approve the restructuring package within a specified time frame of 90 days, or

at best 180 days of reference to the Empowered Group.

There should be a general authorisation by the respective Boards of the

participating institutions / banks in favour of their representatives on the CDR

Empowered Group, authorising them to take decisions on behalf of their

organization, regarding restructuring of debts of individual corporates.

The decisions of the CDR Empowered Group shall be final and action-referencepoint. If restructuring of debt is found viable and feasible and accepted by the

Empowered Group, the company would be put on the restructuring mode. If,

however, restructuring is not found viable, the creditors would then be free to take

necessary steps for immediate recovery of dues and / or liquidation or winding up

of the company, collectively or individually.

2.9.3.3 CDR Cell:2.9.3.3 CDR Cell:

The CDR Standing Forum and the CDR Empowered Group will be assisted by a

CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of the

proposals received from borrowers / lenders, by calling for proposed


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rehabilitation plan and other information and put up the matter before the CDR

Empowered Group, within one month to decide whether rehabilitation is prima

facie feasible, if so, the CDR Cell will proceed to prepare detailed Rehabilitation

Plan with the help of lenders and if necessary, experts to be engaged from outside.

If not found prima facie feasible, the lenders may start action for recovery of their

dues.

To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate

members of staff for the Cell will be deputed from banks and financial

institutions. The CDR Cell may also take outside professional help. The initial

cost in operating the CDR mechanism including CDR Cell will be met by IDBI

initially for one year and then from contribution from the financial institutions and

banks in the Core Group at the rate of Rs.50 lakh each and contribution from

other institutions and banks at the rate of Rs.5 lakh each.

All references for corporate debt restructuring by lenders or borrowers will be

made to the CDR Cell. It shall be the responsibility of the lead institution / major

stakeholder to the corporate, to work out a preliminary restructuring plan in

consultation with other stakeholders and submit to the CDR Cell within one

month. The CDR Cell will prepare the restructuring plan in terms of the general

policies and guidelines approved by the CDR Standing Forum and place for the

consideration of the Empowered Group within 30 days for decision. The

Empowered Group can approve or suggest modifications, so, however, that a final

decision must be taken within a total period of 90 days. However, for sufficient

reasons the period can be extended maximum upto 180 days from the date of

reference to the CDR Cell.

CDR will be a Non-statutory mechanism

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

and inter-creditor agreement.

The scheme will not apply to accounts involving only one financial institution or

one bank. The CDR mechanism will cover only multiple banking accounts /


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syndication / consortium accounts with outstanding exposure of Rs.20 crore and

above by banks and institutions.

The CDR system will be applicable only to standard and sub-standard accounts.

However, as an interim measure, permission for corporate debt restructuring will

be made available by RBI on the basis of specific recommendation of CDR

"Core-Group", if a minimum of 75 per cent (by value) of the lenders constituting

banks and FIs consent for CDR, irrespective of differences in asset classification

status in banks/ financial institutions. There would be no requirement of the

account / company being sick,NPA or being in default for a specified period

before reference to the CDR Group. However, potentially viable cases of NPAs

will get priority. This approach would provide the necessary flexibility and

facilitate timely intervention for debt restructuring. Prescribing any milestone(s)

may not be necessary, since the debt restructuring exercise is being triggered by

banks and financial institutions or with their consent. In no case, the requests of

any corporate indulging in wilful default or misfeasance will be considered for

restructuring under CDR.

Reference to Corporate Debt Restructuring System could be triggered by (i) anyor more of the secured creditor who have minimum 20% share in either working

capital or term finance, or (ii) by the concerned corporate, if supported by a bankor financial institution having stake as in (i) above.

The legal basis to the CDR mechanism shall be provided by the Debtor-Creditor

Agreement (DCA) and the Inter-Creditor Agreement. The debtors shall have to

accede to the DCA, either at the time of original loan documentation (for future

cases) or at the time of reference to Corporate Debt Restructuring Cell. Similarly,

all participants in the CDR mechanism through their membership of the Standing

Forum shall have to enter into a legally binding agreement, with necessary

enforcement and penal clauses, to operate the System through laid-down policies

and guidelines.

Stand-Still Clause:Stand-Still Clause:


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One of the most important elements of Debtor-Creditor

Agreement would be 'stand still' agreement binding for 90 days, or 180 days by

both sides. Under this clause, both the debtor and creditor(s) shall agree to a

legally binding 'stand-still' whereby both the parties commit themselves not to

taking recourse to any other legal actionduring the 'stand-still' period, this would

be necessary for enabling the CDR System to undertake the necessary debt

restructuring exercise without any outside intervention judicial or otherwise.

The Inter-Creditors Agreement would be a legally binding agreement amongst the

secured creditors, with necessary enforcement and penal clauses, wherein the

creditors would commit themselves to abide by the various elements of CDR

system. Further , the creditors shall agree that if 75% of secured creditors by

value, agree to a debt restructuring package, the same would be binding on the

remaining secured creditors.

Accounting treatment for restructured accountsAccounting treatment for restructured accounts

The accounting treatment of accounts restructured under CDR would be governed

by the prudential norms indicated in circular DBOD. BP. BC. 98 / 21.04.048 /

2000-01 dated March 30, 2001. Restructuring of corporate debts under CDR

could take place in the following stages:

Before commencement of commercial production;

After commencement of commercial production but before the asset has been

classified as sub-standard;

After commencement of commercial production and the asset has been classified

as sub-standard.

The prudential treatment of the accounts, subjected to restructuring under CDR,

would be governed by the following norms:

A rescheduling of the instalments of principal alone, at any of the aforesaid first

two stages [paragraph 5(a) and (b) above] would not cause a standard asset to be

classified in the sub-standard category, provided the loan / credit facility is fully

secured.


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A rescheduling of interest element at any of the foregoing first two stages would

not cause an asset to be downgraded to sub-standard category subject to the

condition that the amount of sacrifice, if any, in the element of interest, measured

in present value terms, is either written off or provision is made to the extent of

the sacrifice involved. For the purpose, the future interest due as per the original

loan agreement in respect of an account should be discounted to the present value

at a rate appropriate to the risk category of the borrower (i.e. current PLR + the

appropriate credit risk premium for the borrower-category) and compared with the

present value of the dues expected to be received under the restructuring package,

discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value

terms, as at (b) above, the amount of sacrifice should either be written off or

provision made to the extent of the sacrifice involved.

A rescheduling of the instalments of principal alone, would render a sub-standard

asset eligible to be continued in the sub-standard category for the specified period,

provided the loan / credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to

be continued to be classified in sub-standard category for the specified period

subject to the condition that the amount of sacrifice, if any, in the element of

interest, measured in present value terms, is either written off or provision is made

to the extent of the sacrifice involved. For the purpose, the future interest due as

per the original loan agreement in respect of an account should be discounted to

the present value at a rate appropriate to the risk category of the borrower (i.e.,

current PLR + the appropriate credit risk premium for the borrower-category) and

compared with the present value of the dues expected to be received under the

restructuring package, discounted on the same basis.



provision made to the extent of the sacrifice involved. Even in cases where the


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sacrifice is by way of write off of the past interest dues, the asset should continue

to be treated as sub-standard.

The sub-standard accounts at (ii) (a), (b) and (c) above, which have been

subjected to restructuring, etc. whether in respect of principal instalment or

interest amount, by whatever modality, would be eligible to be upgraded to the

standard category only after the specified period, i.e., a period of one year after

the date when first payment of interest or of principal, whichever is earlier, falls

due, subject to satisfactory performance during the period. The amount of

provision made earlier, net of the amount provided for the sacrifice in the interest

amount in present value terms as aforesaid, could also be reversed after the one-

year period.

During this one-year period, the sub-standard asset will not deteriorate in its

classification if satisfactory performance of the account is demonstrated during

the period. In case, however, the satisfactory performance during the one year

period is not evidenced, the asset classification of the restructured account would

be governed as per the applicable prudential norms with reference to the pre-

restructuring payment schedule.

The asset classification under CDR would continue to be bank-specific based on

record of recovery of each bank, as per the existing prudential norms applicable to

banks.

2.10 Restructuring/ Rescheduling of Loans2.10 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


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stipulations deter the banks from restructuring of standard and sub-standard loan

assets even though the modification of terms might not jeopardise 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:

before commencement of commercial production;

after commencement of commercial production but before the asset has been

classified as sub standard,

after commencement of commercial production and after the asset has been

classified as sub standard.

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.

2.10.1 Treatment of Restructured Standard Accounts:2.10.1 Treatment of Restructured Standard Accounts:

A rescheduling of the instalments of principal alone, at any of the aforesaid first

two stages would not cause a standard asset to be classified in the sub standard

category provided the loan/credit facility is fully secured.

A rescheduling ofinterest element at any of the foregoing first two stages would

not cause an asset to be downgraded to sub standard category subject to the

condition that the amount of sacrifice, if any, in the element of interest, measured

inpresent 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


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present value of the dues expected to be received under the restructuring package,

discounted on the same basis.



provision made to the extent of the sacrifice involved.

2.10.2 Treatment of restructured sub-standard accounts:2.10.2 Treatment of restructured sub-standard accounts:

A rescheduling of the instalments of principal alone, would render a sub-standard

asset eligible to be continued in the sub-standard category for the specified period,

provided the loan/credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to

be continued to be classified in sub standard category for the specified period

subject to the condition that the amount of sacrifice, if any, in the element of

interest, measured in present value terms, is either written off or provision is made

to the extent of the sacrifice involved. For the purpose, the future interest due as

per the original loan agreement in respect of an account should be discounted to

the present value at a rate appropriate to the risk category of the borrower (i.e.,

current PLR + the appropriate credit risk premium for the borrower-category) and

compared with the present value of the dues expected to be received under the

restructuring package, discounted on the same basis.



provision made to the extent of the sacrifice involved. Even in cases where the

sacrifice is by way of write off of the past interest dues, the asset should continue

to be treated as sub-standard.

2.10.3 Up gradation of restructured accounts:2.10.3 Up gradation of restructured accounts:

The sub-standard accounts

which have been subjected to restructuring etc., whether in respect of principal


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instalment or interest amount, by whatever modality, would be eligible to be

upgraded to the standard category only after the specified period i.e., a period of

one year after the date when first payment of interest or of principal, whichever is

earlier, falls due, subject to satisfactory performance during the period. The

amount of provision made earlier, net of the amount provided for the sacrifice in

the interest amount in present value terms as aforesaid, could also be reversed

after the one year period. During this one-year period, the sub-standard asset will

not deteriorate in its classification if satisfactory performance of the account is

demonstrated during the period. In case, however, the satisfactory performance

during the one-year period is not evidenced, the asset classification of the

restructured account would be governed as per the applicable prudential norms

with reference to the pre-restructuring payment schedule.

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.

As trading involves only buying and selling of commodities and the problems

associated with manufacturing units such as bottleneck in commercial production,

time and cost escalation etc. are not applicable to them, these guidelines should

not be applied to restructuring/ rescheduling of credit facilities extended to

traders.

While assessing the extent of security cover available to the credit facilities,

which are being restructured/ rescheduled, collateral security would also be

reckoned, provided such collateral is a tangible security properly charged to the

bank and is not in the intangible form like guarantee etc. of the promoter/ others.

2.11 Projects under implementation2.11 Projects under implementation

It was observed that there were instances, where despite substantial time overrun

in the projects under implementation, the underlying loan assets remained


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classified in the standard category merely because the project continued to be

under implementation. Recognising 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.

The projects under implementation are grouped into three categories for the

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

Projects where financial closure had been achieved and formally documented.

Projects sanctioned before 1997 with original project cost of Rs.100 crore or

more where financial closure was not formally documented.

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

crorewhere financial closure was not formally documented.

In case of each of the three categories, the date when the project ought to be

completed and the classification of the underlying loan asset should be

determined in the following manner:

(Projects where financial closure had been achieved and formally documented):

In such cases the date of completion of the project should be as envisagedat the

time of original financial closure. In all such cases, the asset may be treated as

standard asset for a period not exceeding two years beyond the date of completion

of the project, as originally envisaged at the time of initial financial closure of the

project.

In case, however, in respect of a project financed after 1997, the financial closure

had not been formally documented, the norms enumerated for category III below,

would apply.


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(Projects sanctioned before 1997 with original project cost of Rs.100 crore or

more where financial closure was not formally documented): For such projects

sanctioned prior to 1997, where the date of financial closure had not been

formally documented, an independent Group was constituted with experts from

the term lending institutions as well as outside experts in the field to decide on the

deemed date of completion of projects. The Group, based on all material and

relevant facts and circumstances, has decided the deemed date of completion of

the project, on a project-by-project basis. In such cases, the asset may betreated

asstandard asset for a period not exceeding two years beyond the deemed date of

completion of the project, as decided by the Group. Banks, which have extended

finance towards such projects, may approach the lead financial institutions to

which a copy of the independent Groups report has been furnished for obtaining

the particulars relating to the deemed date of completion of project concerned.

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

crore where financial closure was not formally documented): In these cases,

sanctioned prior to 1997, where the financial closure was not formally

documented, the date of completion of the project would be as originally

envisaged at the time of sanction. In such cases, the asset may be treated as

standard asset only for a period not exceeding two years beyond the date of

completion of the project as originally envisaged at the time of sanction.

In all the three foregoing categories, in case of time overruns beyond the aforesaid

period of two years, the asset should be classified as sub-standard regardless of

the record of recovery and provided for accordingly.

As regards the projects to be financed by the FIs/ banks in future, the date of

completion of the project should be clearly spelt out at the time of financial

closure of the project. In such cases, if the date of commencement of commercial

production extends beyond a period of six months after the date of completion of

the project, as originally envisaged at the time of initial financial closure of the

project, the account should be treated as a sub-standard asset.


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There will be no change in the existing instructions on income recognition.

Consequently, banks should not recognise income on accrual basis in respect of

the projects even though the asset is classified as a standard asset if the asset is a

"non performing asset" in terms of the extant instructions. In other words, while

the accounts of the project may be classified as a standard asset, banks shall

recognise income in such accounts only on realisation on cash basis if the asset

has otherwise become non performing as per the extant delinquency norm of

180 days. The delinquency norm would become 90 days with effect from 31

March 2004.

Consequently, banks, which have wrongly recognised income in the past, should

reverse the interest if it was recognised as income during the current year or make

a provision for an equivalent amount if it was recognised as income in the

previous year(s). As regards the regulatory treatment of income recognised as

funded interest and conversion into equity, debentures or any other instrument

banks should adopt the following:

Funded Interest:Funded Interest: Income recognition in respect of the NPAs, regardless of whether

these are or are not subjected to restructuring/ rescheduling/ renegotiation of

terms of the loan agreement, should be done strictly on cash basis, only on

realisation and not if the amount of interest overdue has been funded. If, however,

the amount of funded interest is recognised as income, a provision for an equal

amount should also be made simultaneously. In other words, any funding of

interest in respect of NPAs, if recognised as income, should be fully provided for.

Conversion into equity, debentures or any other instrumentConversion into equity, debentures or any other instrument:: The amount

outstanding converted into other instruments would normally comprise principal

and the interest components. If the amount of interest dues is converted into

equity or any other instrument, and income is recognised in consequence, full

provision should be made for the amount of income so recognised to offset the

effect of such income recognition. Such provision would be in addition to the


38/93

amount of provision that may be necessary for the depreciation in the value of the

equity or other instruments, as per the investment valuation norms. However, if

the conversion of interest is into equity, which is quoted, interest income can be

recognised at market value of equity, as on the date of conversion, not exceeding

the amount of interest converted to equity. Such equity must thereafter be

classified in the "available for sale" category and valued at lower of cost or

market value. In case of conversion of principal and /or interest in respect of

NPAs into debentures, such debentures should be treated as NPA, ab initio, in the

same asset classification as was applicable to loan just before conversion and

provision made as per norms. This norm would also apply to zero coupon bonds

or other instruments which seek to defer the liability of the issuer. On such

debentures, income should be recognised only on realisation basis. The income in

respect of unrealised interest, which is converted into debentures or any other

fixed maturity instrument, should be recognised only on redemption of such

instrument. Subject to the above, the equity shares or other instruments arising

from conversion of the principal amount of loan would also be subject to the usual

prudential valuation norms as applicable to such instruments.


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CHAPTER 3CHAPTER 3

ANALYSISANALYSIS


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ANDAND

INTERPRETATIONINTERPRETATION

Functioning of Branches

Table No 3.1

Source:- Primary Data

Graph No 3.1

DescriptionDescription 0-2 years0-2 years 2-3 years2-3 years 3-5 years3-5 years 5 years5 years& above& above

TotalTotal

No ofNo ofRespondentRespondent

0202 0909 2121 1818 5050

%% 0404 1818 4242 3636 100100


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Interpretation:

From the above graph it is observed that, 02(04%) respondent respondedthat their branch is functioning from 0-2 years, 09(18%) respondent

responded that their branch is functioning from 2-3 years, 21(42%)

respondent responded that their branch is functioning from 3-5 years,

18(36%) respondent responded that their branch is functioning from 5years and above.

Duration of Working in this BankTable No 3.2

DescriptionDescription 0-1 years0-1 years 2-3 years2-3 years 4-5 years4-5 years More thanMore than5 years5 years

TotalTotal

No ofNo of

RespondentRespondent

0202 2525 1313 1010 5050

%% 0404 5050 2626 2020 100100


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Source-Primary Data

Graph No 3.2

Interpretation:

From the above graph it is observed that, 02(04%) respondent responded that their

working in this branch from 0-2 years, 25(50%) respondent responded that theirworking in this branch from 2-3 years, 13(26%) respondent responded that their

working in this branch from 3-5 years, 10(20%) respondent responded that their

working in this branch from more than 5 years.

Presence of NPA

Table No 3.3

DescriptionDescription 0-1 years0-1 years 2-3 years2-3 years 4-5 years4-5 years More thanMore than5 years5 years

TotalTotal

No ofNo of

RespondentRespondent0303 3030 1414 0303 5050


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%% 0606 6060 2828 0606 100100

Source-Primary Data

Graph No 3.3

Interpretation:

From the above graph it is observed that, 03(06%) respondent responded

that presence of NPAs is observed in there branch from 0-2 years,

30(60%) respondent responded that presence of NPAs is observed in there

branch from 2-3 years, 14(28%) respondent responded that presence ofNPAs is observed in there branch from 3-5 years, 03(06%) respondent

responded that presence of NPAs is observed in there branch from morethan 5 years.

Reasons of NPA

Table No 3.4


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DescriptionDescription ImproperImproper

CreditCredit

AppraisalAppraisal

Lack ofLack of

EffectiveEffective

FollowFollow

upup

ManagemeManageme

ntnt

FailureFailure

DifficultyDifficultyInIn

ExecutionExecution

DiversionDiversion

OfOf

FundsFunds

OthersOthers TotalTotal

No ofNo of

RespondentRespondent

0303 1111 3333 0202 0303 0000 5050

%% 0606 2222 6666 0404 0606 0000 100100

Source Primary Data

Graph No 3.4

Interpretation:


that main reason of NPAs in banks are improper credit appraisal,11(22%)respondent responded that main reason of NPAs in banks are lack of

effective follow up,33(66%) respondent responded that main reason of

NPAs in banks is management failure,02(04%) respondent responded thatmain reason of NPAs in banks is diversion of funds.

Percentage of Standard assets to Total Assets

Table No 3.5.1


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DescriptionDescription 0-200-20 21-4021-40 41-6041-60 61-8061-80 81-10081-100 TotalTotal

No ofNo of

RespondentRespondent0404 1111 3333 0202 0000 5050

%% 0808 2222 6666 0404 0000 100100

Source- Primary Data

Graph No 3.5.1

Interpretation:


that 0-20 percent of total assets are standard assets in their branch,11(22%)respondent responded that 21-40 percent of total assets are standard assets

in their branch,33(66%) respondent responded that 41-60 percent of totalassets are standard assets in their branch,02(04%) respondent responded

that 61-80 percent of total assets are standard assets in their branch.

Percentage of Sub-Standard assets to Total Assets

Table No 3.5.2


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DescriptionDescription 0-0-

202021-4021-40 41-6041-60 61-8061-80 81-10081-100 TotalTotal


0505 1010 3232 0303 0000 5050

%% 1010 2020 6464 0606 0000 100100


Graph No 3.5.2

Interpretation:


that 0-20 percent of total assets are sub-standard assets in theirbranch,10(20%) respondent responded that 21-40 percent of total assets

are sub-standard in their branch,32(64%) respondent responded that 41-60

percent of total assets are sub-standard in their branch,03(06%) respondent

responded that 61-80 percent of total assets are sub-standard in theirbranch.

Percentage of Doubtful Assets to Total Assets


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Table No 3.5.3


202021-4021-40 41-6041-60 61-8061-80 81-10081-100 TotalTotal

No ofNo of


%% 1414 2626 1616 4444 0000 100100Source- Primary Data

Graph No 3.5.3

Interpretation:

From the above graph it is observed that, 07(10%) respondent responded that 0-20

percent of total assets are doubtful assets in their branch,13(26%) respondentresponded that 21-40 percent of total assets are doubtful in their branch,08(16%)

respondent responded that 41-60 percent of total assets are doubtful in their

branch,22(44%) respondent responded that 61-80 percent of total assets are

doubtful in their branch.


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Percentage of Loss Assets to Total

Assets

Table No 3.5.4


2020

21-4021-40 41-6041-60 61-8061-80 81-10081-100 TotalTotal

No ofNo of


%% 1010 6262 1818 1010 0000 100100


Graph No 3.5.4

Interpretation:

From the above graph it is observed that, 05(10%) respondent respondedthat 0-20 percent of total assets are loss assets in their branch,31 (62%)

respondent responded that 21-40 percent of total assets are loss assets in

their branch,09(18%) respondent responded that 41-60 percent of totalassets are loss assets in their branch,05(10%) respondent responded that

61-80 percent of total assets are loss assets in their branch.


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Effect of NPA in Last 5 years

Table No 3.6

DescriptionDescription ImproveImprove

ProfitabilityProfitability

DecreasedDecreased

ProfitabilityProfitability

NoNo

ChangeChange

TotalTotal

No ofNo of

RespondentRespondent1010 3838 0202 5050

%% 2020 7676 0404 100100


Graph No 3.6

Interpretation:

From the above graph it is observed that, 05(10%) respondent responded that 0-

20 percent of total assets are loss assets in their branch,31 (62%) respondentresponded that 21-40 percent of total assets are loss assets in their

branch,09(18%) respondent responded that 41-60 percent of total assets are loss

assets in their branch,05(10%) respondent responded that 61-80 percent of total

assets are loss assets in their branch.


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Loan Maximum causes NPA

Table No 3.7

DescriptionDescription CommercialCommercial PersonalPersonal TotalTotalNo ofNo of

RespondentRespondent1515 3535 5050

%% 3030 7070 100100

Source Primary Data

Graph No 3.7

Interpretation:

From the above graph it is observed that, 15(35%) respondent responded thatmaximum NPAs are caused from commercial loan, 35(70%) respondent

responded that maximum NPAs are caused from Personal loan.


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Commercial Loan

Table No 3.7.1

DescriptionDescription SSISSI TradersTraders OthersOthers TotalTotalNo ofNo of


%% 1313 4747 4040 100100

Source Primary Data

Graph No 3.7.1

Interpretation:

From the above graph it is observed that, 02(13%) respondent responded that

NPA caused from commercial loan is due to SSI, 07(47%) respondent responded

that NPA caused from commercial loan is due to Traders, , 06(40%) respondentresponded that NPA caused from commercial loan is due to other loans.


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Personal Loan

Table No 3.7.2

DescriptionDescription HousingHousingLoanLoan

EducationEducationLoanLoan

OthersOthers TotalTotal

No ofNo of


%% 1414 1111 7575 100100

Source Primary Data

Graph No 3.7.2

Interpretation:

From the above graph it is observed that, 05(14%) respondent responded thatNPA caused from personal is due to Housing loan, 04(11%) respondent

responded that NPA caused from personal loan is due to Education

loan,26(75%) , respondent responded that NPA caused from commercial loan is

due to other Loans.


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Impact of NPA in profitability

Table No 3.8DescriptionDescription < 5 %< 5 % 6-10 %6-10 % 11-20 %11-20 % > 20 %> 20 % TotalTotal

No ofNo of


%% 0404 4848 4444 0404 100100

Source Primary Data

Graph No 3.8

Interpretation:


NPA caused from personal is due to Housing loan, 04(11%) respondentresponded that NPA caused from personal loan is due to Education

loan,26(75%) , respondent responded that NPA caused from commercial loan is

due to other Loans.


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NPA Control

Table No 3.9

DescriptionDescription YesYes NoNo TotalTotal


1818 3232 5050

%% 3636 6464 100100

Source Primary Data

Graph No 3.9

Interpretation:


NPA can be controlled, 32(64%) respondent responded that NPA cant be

controlled.


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One Time Settlement scheme

Table No 3.10


No ofNo of

RespondentRespondent1515 3535 5050

%% 3030 7070 100100

Source Primary Data

Graph No 3.10

Interpretation:


they have one time settlement scheme in their branch, 35(70%) respondent

responded that doesnt they have one time settlement scheme in their branch.


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Benefit of One Time Settlement scheme

Table No 3.10.1

DescriptionDescription Waiver inWaiver in

PenalPenal

chargescharges

ConcessionConcession

InIn

InterestInterest

ConcessionConcession

principalprincipalOthersOthers TotalTotal

No ofNo of


%% 2727 3939 2727 0707 100100

Source Primary Data

Graph No 3.10.1

Interpretation:

From the above graph it is observed that, 04 (27%) respondent responded thatcustomers gets waiver in penal charges in one time settlement scheme,06(39%)

respondent responded that customers gets concession in interest in one time

settlement scheme,04(27%) respondent responded that customers gets concessionin principal in one time settlement scheme.


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Additional Securities to Curtail NPA

Table No 3.11



3636 1414 5050

%% 7272 2828 100100

Source Primary Data

Graph No 3.11

Interpretation:

From the above graph it is observed that, 36 (72%) respondent responded thatthey take additional securities in the form of collateral to curtail NPA, 14(28%)

respondent responded that they doesnt take additional securities in the form of

collateral to curtail NPA.


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Measures to avoid NPA

Table No 3.12

Descriptio

n

Prudent

Selection

of

borrower

s

Appropriat

e

Valuation

of

Assets

Regular

Supervisio

n

Effective

Loan

Others Total

No of

Respo

ndent

02 03 35 07 03 50

% 04 06 70 14 06 100Source Primary Data

Graph No 3.12

Interpretation:

From the above graph it is observed that, 02 (04%) respondent responded that

measure taken to avoid NPA is prudent selection of borrowers, 03(06) %)

respondent responded that measure taken to avoid NPA is appropriate valuationof assets,35(70%) %) respondent responded that measure taken to avoid NPA is

regular supervision, 07( 14%) %) respondent responded that measure taken to


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avoid NPA is effective loan procedure ,03(06%) respondent responded that

others are measure taken to avoid NPA.

Adoption of NPA reduction Techniques

Table No 3.13

DescriptionDescription ImprovedImproved NoNo

ChangeChangeNotNot

ImprovedImprovedTotalTotal

No ofNo of


%% 7272 2020 0808 100100

Source Primary Data

Graph No 3.13

Interpretation:

From the above graph it is observed that, 36 (72%) respondent responded that

profitability has improved after adopting NPA reduction techniques, 10(20%)

respondent responded that there is no change in profitability after adopting NPAreduction techniques, 04(08%) respondent responded that profitability had not

improved after adopting NPA reduction techniques.


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NPA caused due to improper selection of borrowers

Table No 3.14.1

DescriptionDescription VeryVery

HighHighHighHigh ModerateModerate LowLow TotalTotal

No ofNo of


%% 2020 4040 3030 1010 100100


Graph No 3.14.1

Interpretation:

From the above graph it is observed t

report on retail banking

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