7/28/2019 BM Project NPA897987987

1/23

BANK MANAGAMENT

MANAGEMENT OF NON-PERFORMING ASSETS

Date

7/28/2019 BM Project NPA897987987

2/23

INTRODCUTION

For banks good loans are the most profitable assets. Returns come in the form of loan

interest, fee income and investments. The most costly risk is the inability of the borrower torepay the borrowed amount.

Proper management and speedy disposal of NPAs is one of the most critical tasks of banks

today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has

been a matter of grave concern not only for the banks but also for the real economy in

general, as NPAs can choke further expansion of credit which would impede the economic

growth of the country. Any bottleneck in the smooth flow of credit is bound to create adverse

repercussions in the economy. NPAs are not therefore the concern of only lenders but also the

public at large.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the

banking industry in our country sending distressing signals on the sustainability and

insurability of the affected banks. The positive results of the chain of measures affected under

banking reforms by the Government of India and RBI in terms of the two Narasimhan

Committee Reports in this contemporary period have been neutralized by the ill effects of this

surging threat. Despite various correctional steps administered to solve and end this problem,

concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on

banking and financial institutions. The severity of the problem is however acutely suffered by

Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.

DEFINITION OF NON PERFORMING ASSETS

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

income for the bank. A non performing asset was defined as a credit facility in respect of

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

period of time. The specified period was reduced in a phased manner as under:

Year ending March 31 Specified period

1993 Four Quarters

1994 Three Quarters

1995 Onwards Two quarters

An amount due under any credit facility is treated as past due when it has not been paid

within 30 days from the due date. Due to the improvements in the payment and settlement

systems, recovery climate, up gradation of technology in the banking sector, etc, it was

decided to dispense with the past due concept, with effect from 31st March, 2001.

7/28/2019 BM Project NPA897987987

3/23

Accordingly, as from that date, a NPA shall be an advance where,

1. Interest and/or instalment of principal remain overdue for a period of more than 180

days in respect of a term loan.

2. The account remains out of order for a period of more than 180 days, in respect ofan overdraft/cash credit.

3. 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 agriculture

purposes.

4. Any amount to be received remains overdue for a period of more than 180 days in

respect of other accounts.

With a view to move towards international best practices, it has been decided to adopt the 90

days overdue norm for identification of NPAs, from 31st March, 2004.

Out of Order Status

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

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

balance in the principal operating account is less than the sanctioned limit/drawing power, but

there are no credits continuously for six months as on the date of Balance Sheet or credits are

not enough to cover the interest debited during the same period, these accounts should be

treated as out of order.

Overdue

Any amount due to the bank under any credit facility is overdue if it is not paid on the duedate fixed by the bank.

CLASSIFICATION OF NPAs

Banks are required to classify NPAs further into the following three categories based on the

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

1. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a

period less than or equal to 18 months. In such cases, the current net worth of the

borrower, or the current market value of the security charged is not enough to ensure

recovery of the dues to the banks in full. Such assets will have well defined credit

weakness that jeopardize the liquidation of the debt and are characterized by the

distinct possibility that the bank will sustain a loss.

2. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding

18 months. It has all the weaknesses inherent to a sub-standard asset with the added

characteristic that the collection or liquidation in full on the basis of currently

known factsis highly questionable and improbable.

3. Loss Assets: A loss asset is one where a loss has been identified by the bank or,

internal or external auditors but the amount has not been written off wholly

7/28/2019 BM Project NPA897987987

4/23

GUIDELINES FOR CLASSIFICATION OF NPAs

Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPAs, especially in respect of high value accounts.

Accounts with temporary deficiencies: These should be classified based on the past

recovery records.

Accounts regularize near about the balance sheet date: These accounts should be

handled with care and without scope for subjectivity. Where the account indicates

inherent weakness based on available data, it should be deemed as an NPA.

Asset classification should be borrower-wise and not facility-wise: If a single facility

to a borrower is classified as NPA, others should also be classified the same way, as it

is difficult to envisage only a solitary facility becoming a problem credit and not

others.

Advances under consortium arrangements: Classification here should be based on the

recovery record of the individual member banks.

Accounts where there is erosion in the value of the security: If there is a significant

(i.e. the realizable value of the security is less than 50% of that assessed by the bank

during acceptance) the account may be classified as NPA.

NPA: SOME ASPECTS AND ISSUES

The NPAs of banks in India are considered to be at higher levels than those in other

countries. This issue has attracted attention of public as also of international financial

institutions and has gained further prominence in the wake of transparency and

disclosure measures initiated by RBI during recent years.

The NPA Management Policy document of SBI lays down to contain net NPAs to less

than 5% of bank's total loan assets in conformity with the international standard. It is,

therefore necessary that as per guidelines provided in NPA Management Policy

document, every effort is made at all levels to cut down the NPAs. All this requires

greater efforts and teamwork.

It is essential to keep a constant watch over the non-performing assets not just to keep

it performing but also that once they become non-performing, effective measures are

initiated to get full recovery and where this is not possible, the various means are tobe initiated to get rid of the NPAs from the branch books.

NPAs adversely affect the wealth condition of the branch advances as also the

profitability of the branch. Some of the reasons for this are as under:

a) Interest cannot be applied on the loan accounts classified as NPAs.

b) The Branch 'has to pay interest to central office on outstanding classified as

NPA.

c) The Branch has to incur cost in supervision and follow up of such advances.

d) Provision has to be made on NPAs at Bank level.

Under Income Recognition, Assets Classification and provisioning, NPA may be Substandard, Doubtful or loss assets.

7/28/2019 BM Project NPA897987987

5/23

Once the assets are classified as NPA, the Branch Manager has to take all the

necessary steps to get the dues recovered there-under to maintain the good health of

advances and the higher profitability at the-Branch. This requires management of

NPAs in such a Planned and scientific manner that the percentage of NPAs to the total

advances will be minimum.

NARSIMHAN COMMITTEES RECOMMENDATIONS

Committee on Financial System (CFS) Narsimhan committee which reported in 1991,

meanwhile major changes have taken place in the domestic, economic and institutional

science, indicating the movement towards global integration of financial services. Committee

has presented second generation reforms.

a. To strength the foundation of financial system.

b. Related to this, streamlining procedures, upgrading technology and human resource

development.

c. Structural changes in the system.

1. It is recommended that an asset be classified as doubtful if it is in the sub standard

category for 18 months in the first instance and eventually for 12 months as loss if it

has been so identified but not written off. These norms, which should be regarded as

the minimum, may be brought into force in a phased manner.

2. Corporations and FIs should avoid the practice of "ever greening" by making fresh

advances to their troubled constituents only with a view to settling interest dues and

avoiding classification of the loans in question as NPAs. The committee notes that the

regulatory and supervisory authorities are paying particular attention to such breachesin the adherence to the spirit of the NPA definitions and are taking appropriate

corrective action.

3. The committee believes that objective should be to reduce the average level of net

NPAs for all banks to below 5% by the year 2000 and 3% by 2002. These targets

cannot be achieved in the absence of measure to tackle the problem of backlog NPAs

on one time basis and the implementation of strict prudential norms and management

efficiency.

4. There is no denying the fact that any effort at financial restructuring in the form of

having off NPAs portfolio from the books of the corporation or measures to initiate

the impact of high level of NPAs must go hand with operational restructuring.

Cleaning up the balance sheets of banks would thus make sense only if simultaneous

steps are taken to prevent of limit the re emergence of new NPAs.

5. Direct credit has a proportionately higher share in NPA portfolio of corporations and

has been one of the factors in erosion in the quality of asset portfolio. There is a

continuing need of Financial Corporations to extend Credit to SSI sector, which is

important segment of national economy but on commercial considerations and on

basis of credit worthiness. Government feels reluctant to accept the recommendation

for reducing the scope of directed credit under priority sector because tiny sector of

industry and small businesses have problems with regard to obtaining credit and some

remaining may be necessary for this sector. A poverty alleviation and employment

7/28/2019 BM Project NPA897987987

6/23

generation schemes. Given the special needs of these sectors, the current practice may

continue.

6. With regard to income recognition in India, income stops occurring when

interest/instalment of principal is not paid within 180 days. However, we should move

towards international Practices in this regard and introduce the norm of 90 days in aphased manner by the 2002.

7. As an incentive to Bank is to make specific provision, the consideration be given to

making such provisions tax deductible.

8. Banks should pay greater attention to asset liability management to avoid mismatch

and to cover, among others, liquidity and interest rate risks.

9. It should be encouraged to adopt statistical risk management techniques like value at

risk in respect of balance sheet term which are susceptible to market price fluctuation,

forex rate volatility and interest rate changes. While the RBI and IDBI may initially,

prescribe certain normative models for market risk management, the ultimate

objective should be that of building up their models and RBI blacklisting them for

their validity on a periodical basis.

10.There is a need for a greater use of computerized system than at present.

Computerization has to be recognized as an indispensable tool for improvement in

customer service, the institution and operation of better control systems, greater

efficiency in information technology.

11.State Financial Corporations at present are over regulated and over administered.

Supervision should be based on evolving prudential norms and regulations which

should be adhered to rather than excessive control over administrative and other

aspects of organisation and functioning. Internal audit and internal inspection systemsshould be strengthened.

12.The main issues with regard to operations of Banks are to ensure operationa l

flexibility and measure of competition and adequate internal autonomy in matters of

loan sanctioning and internal administration.

REASONS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs. But the problem

of NPAs is more in public sector banks when compared to private sector banks and foreign

banks. The NPAs in PSB are growing due to external as well as internal factors.

EXTERNAL FACTORS

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans

and advances. Due to their negligence and ineffectiveness in their work the bank

suffers the consequence of non-recover, their by reducing their profitability and

liquidity.

Wilful 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.

7/28/2019 BM Project NPA897987987

7/23

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every

now and then India is hit by major natural calamities thus making the borrowers

unable to pay back there loans. Thus the bank has to make large amount of provisions

in order to compensate those loans, hence end up the fiscal with a reduced profit.Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall

the farmers are not to achieve the production level thus they are not repaying the

loans.

Industrial sickness

Improper project handling , ineffective management , lack of adequate resources ,

lack of advance technology , day to day changing govt. Policies give birth to

industrial sickness. Hence the banks that finance those industries ultimately end up

with a low recovery of their loans reducing their profit and liquidity.

Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production

which ultimately piles up their product thus making them unable to pay back the

money they borrow to operate these activities. The banks recover the amount by

selling of their assets, which covers a minimum label. Thus the banks record the non

recovered part as NPAs and has to make provision for it.

Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to

cope with the changing principles and policies for the regulation of the rising of

NPAs. E.g. the fallout of handloom sector is continuing as most of the weavers Co-

operative societies have become defunct largely due to withdrawal of state patronage.The rehabilitation plan worked out by the Central govt to revive the handloom sector

has not yet been implemented. So the over dues due to the handloom sectors are

becoming NPAs.

INTERNAL FACTORS

Defective Lending process

There are three cardinal principles of bank lending that have been followed by the

commercial banks since long.

1. Principles of safety

2. Principle of liquidity3. Principles of profitability

Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis cannot be taken. Proper MIS and financial accounting

system is not implemented in the banks, which leads to poor credit collection, thus

NPA. All the branches of the bank should be computerised.

Improper swot analysis

The improper strength, weakness, opportunity and threat analysis is another reason for

rise in NPAs. While providing unsecured advances the banks depend more on the

honesty, integrity, and financial soundness and credit worthiness of the borrower.

7/28/2019 BM Project NPA897987987

8/23

Banks should consider the borrowers own capital investment. It should collect credit

information of the borrowers. Bank should analyse the profitability, viability, long

term acceptability of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor creditappraisal 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 marketability, acceptability, safety and transferability.

Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of

bank officials to the customer point decreases the collection of interest and principals

on the loan. The NPAs due to wilful defaulters can be collected by regular visits.

Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same

have already affected the smooth operation of the credit cycle.

GUIDELINES OF GOVERNMENT AND RBI FOR REDUCTION OF NPAs

1. Compromise settlement schemes:

The RBI/Government of India have been constantly goading the banks to take steps

for arresting the incidence of fresh NPAs and have also been creating legal andregulatory environment to facilitate the recovery of existing NPAs of banks. More

significant of them, we would like to recapitulate at this stage,

The broad framework for compromise or negotiated settlement of NPAs advised by

RBI in July 1995 continues to be in place. Banks are free to design and implement

their own policies for recovery and write-off incorporating compromise and

negotiated settlements with the approval of their Boards, particularly for old and

unresolved cases falling under the NPA category. The policy framework suggested by

RBI provides for setting up of an independent Settlement Advisory Committees

headed by a retired Judge of the High Court to scrutinise and recommend compromise

proposals.

Specific guidelines were issued in May 1999 to public sector banks for one time

nondiscretionary and non discriminatory settlement of NPAs of small sector. The

scheme was operative up to September 3, 2000. [Public sector banks recovered Rs.

668 crore through compromise settlement under this scheme].

Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5

crore and less as on 31 March 1997. [The above guidelines which were valid up to

June 30, 2001helped the public sector banks to recover Rs. 2600 crore by September

2001].

2. An OTS Scheme covering advances of Rs. 25000 and below continues to be inoperation and guidelines in pursuance to the budget announcement of the Hon'ble

7/28/2019 BM Project NPA897987987

9/23

Finance Minister providing for OTS for advances up to Rs. 50,000 in respect of NPAs

of small/marginal farmers are being drawn up.

3. Lok Adaltas:

Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss"category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok

Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats

to decide on cases of NPAs of Rs. 10 lakhs and above. The public sector banks had

recovered Rs. 40.38 crore as on September 30, 2001, through the forum of Lok Adalat.

The progress through this channel is expected to pick up in the coming years

particularly looking at the recent initiatives taken by some of the public sector banks

and DRTs in Mumbai.

4. Debt Recovery Tribunals:

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act,

passed in March 2000 has helped in strengthening the functioning of DRTs.

Provisions for placement of more than one Recovery Officer, power to attach

defendant's property/assets before judgement, penal provisions for disobedience of

Tribunal's order or for breach of any terms of the order and appointment of receiver

with powers of realization, management, protection and preservation of property are

expected to provide necessary teeth to the DRTs and speed up the recovery of NPA

sin the times to come. Though there are 22 DRTs set up at major centres in the

country with Appellate Tribunals located in five centres viz. Allahabad, Mumbai,

Delhi, Calcutta and Chennai, they could decide only 9814 cases for Rs. 6264.71 crorepertaining to public sector banks since inception of DRT mechanism and till

September 30, 2001. The amount recovered in respect of these cases amounted to

only Rs. 1864.30 crore.

5. Circulation of information on defaulters

The RBI has put in place a system for periodical circulation of details of wilful

defaults of borrowers of banks and financial institutions. This serves as a caution list

while considering requests for new or additional credit limits from defaulting

borrowing units and also from the directors/proprietors/partners of these entities. RBI

also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and

above) against whom suits have been filed by banks and FIs for recovery of their

funds, as on 31st March every year. It is our experience that these measures had not

contributed to any perceptible recoveries from the defaulting entities. However, they

serve as negative basket of steps shutting off fresh loans to these defaulters. We

strongly believe that a real breakthrough can come only if there is a change in the

repayment psyche of the Indian borrowers.

6. Recovery action against large NPAs

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI

had advised the public sector banks to examine all cases of wilful default of Rs 1crore

7/28/2019 BM Project NPA897987987

10/23

and above and file suits in such cases, and file criminal cases in regard to wilful

defaults. Board of Directors are required to review NPA accounts of Rs. 1 crore and

above with special reference to fixing of staff accountability. On their part RBI and

the government are contemplating several supporting measures including legal

reforms.

7. Corporate Debt Restructuring (CDR)

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to

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

Rs.20 crore and above with the banks and financial institutions. The CDR process

would also enable viable corporate entities to restructure their dues outside the

existing legal framework and reduce the incidence of fresh NPAs. The CDR structure

has been headquartered in IDBI, Mumbai and a Standing Forum and Core Group for

administering the mechanism had already been put in place. The experiment however

has not taken off at the desired pace though more than six months have lapsed since

introduction. As announced by the Hon'ble Finance Minister in the Union

Budget2002-03, RBI has set up a high level Group under the Chairmanship of Shri

VepaKamesam, Deputy Governor, RBI to review the implementation procedures of

CDR mechanism and to make it more effective. The Group will review the operation

of the CDR Scheme, identify the operational difficulties, if any, in the smooth

implementation of the scheme and suggest measures to make the operation of the

scheme more efficient.

8. Credit Information BureauInstitutionalisation of information sharing arrangements through the newly formed

Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the

recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalize the

scheme of information dissemination on defaults to the financial system. The main

recommendations of the Group include dissemination of information relating to suit-

filed accounts regardless of the amount claimed in the suit or amount of credit granted

by a credit institution as also such irregular accounts where the borrower has given

consent for disclosure. This, I hope, would prevent those who take advantage of lack

of system of information sharing amongst lending institutions to borrow large

amounts against same assets and property, which had in no small measures

contributed to the incremental NPAs of the bank.

9. Proposed guidelines on wilful defaults/diversion of funds

RBI is examining the recommendation of Kohli Group on wilful defaulters. It is

working out a proper definition covering such classes of defaulters so that credentials

to this group of borrowers can be made effective and criminal prosecution can be

made demonstrative against wilful defaulters.

7/28/2019 BM Project NPA897987987

11/23

10.Corporate Governance

A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the

Reserve Bank to review the supervisory role of Boards of Banks and financial

institutions and to obtain feedback on the functioning of the Boards vis--vis

compliance, transparency, disclosure, audit committees etc. and makerecommendations for making the role of Board of Directors more effective with a

view to minimising risks and overexposure. The group is finalising its

recommendations shortly and may come out with guidelines for effective control and

supervision by bank boards over credit management and NPA prevention measures.

11.Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002

The Act provides, inter alia for enforcement of security interest for realisation of dues

without the intervention of courts or tribunals. The Security Interest (Enforcement)

Rules, 2002 has also been notified by Government to enable Secured Creditors to

authorise their officials to enforce the securities and recover the dues from the

borrowers. As on June 30, 2004, 27 public sector banks had issued 61, 263 notices

involving outstanding amount of Rs. 19,744 crore, and had recovered an amount of

Rs. 1,748 crore from 24,092 cases.

BANKWISE NPAs OF SCHEDULED COMMERCIAL BANKS-2006

Bank Name Gross NPA Gross Advances Gross NPA Ratio

State Bank of India 1037575 26745825 3.9

Allahabad Bank 118383 3006122 3.9Bank of Baroda 23904 6136043 3.9

Bank of India 247918 6666223 3.7

PNB 313829 7650114 4.1

Punjab & Sind Bank 94150 979992 9.6

ICICI 222258 14762531 1.5

HDFC 49651 3540258 1.4

Kotak Mahindra 3991 637292 0.6

IDBI Ltd. 111552 5632228 2

Dena Bank 94940 1474779 6.4

Bank of Ceylon 3279 6993 46.9

Societe Generale 531 27617 1.9

Yes Bank - 240709 0Source: Department of Banking Supervision, RBI

7/28/2019 BM Project NPA897987987

12/23

NPA of Public sector banks

7/28/2019 BM Project NPA897987987

13/23

Source: International journal of innovation, Management & Technology, Vol 2, No. 3 , June 2011

NPA IN ALLAHABAD BANK

2011 2010 2009

Net NPA (%) 0.79 0.66 0.72

For year 2011 sector wise NPA for Allahabad bank is as follows,

Agriculture and allied activities 4.06%

MSME 0.77%

Services 4.29%

Personal Loans 1.29%

The Bank attached great importance on recovery of nonperforming assets. The Bank has

recovered Rs 929.16 cr from non performing assets including written off debts during 2010-

11 as against Rs 681.35 cr in 2009-10.

Steps taken by Allahabad Bank to reduce NPA,

All Regional Heads have been authorised by the board to issue notices and exercise

rights and powers under the Act. Detailed guidelines on the provisions of act and rules

along with formats of the notices have been issued to all regional heads from time to

time.

Region wise list of values have been approved by the Board as per the requirement

under the rules.

In case the borrowers fail to repay the dues within 60 days notice period, the Regional

head have been advised to take all steps for taking possession of the secured assets

and give wide publicity of the same through media, besides, publication of thepossession notice in the newspaper in terms of the rules.

7/28/2019 BM Project NPA897987987

14/23

The recovery and up gradation efforts are executed through a separate Recovery and

Rehabilitation Department.

Credit monitoring system has been revamped.

High value NPAs are reviewed individually.

An incentive scheme has been launched to better the NPA recovery. Best use of new ordinance to recover Banks dues.

Five-point short-term strategies

All potential NPA accounts must be critically reviewed and monitored so as to sustain

them as performing assets

All potential performing asset accounts where up gradation or cash recovery is

possible should be followed up vigorously

Emphatic stress should be given on all compromise settled cases for recovery of dues

as per agreed terms

Execution of Decrees and recovery thereof should be ensured. All recovery proceedings before DRTs should be followed up for recovery of dues

expeditiously

NPA IN BANK OF BARODA

2011 2010

Net NPA (%) 0.35 0.34

Percentage of NPAs to total advances in that sector

2011 2010

Agriculture and allied activities 3.47% 3.33%MSME 1.76% 1.06%

Services 1.22% 0.82%

Personal Loans 1.72% 3.68%

While the Indian banking industry continued to reel under the pressure of stressed asset

quality, Bank of Baroda (BOB) could again restrict its Gross NPA to 1.36% and Net NPA to

0.35% during 2010-11, thanks to its robust systems of credit origination, credit monitoring

and asset recovery. The Banks Incremental Delinquency Ratio too was contained at 1.09%

during the year under review. BOBs rigorous follow up of all NPA accounts and timelyresponse to early warning signals resulted in Cash Recovery of Rs 455.49 crore. It could

upgrade accounts to the tune of Rs 189.17 crore to standard category.

Moreover, BOB recovered Rs 272.66 crore from the prudentially written off accounts. BOBs

NPA Coverage Ratio (including technical write-off) stood at the rich level of 85.0% in 2010-

11 as against the regulatory requirement of 70.0%.

7/28/2019 BM Project NPA897987987

15/23

NPA IN STATE BANK OF INDIA

2011 2010

Net NPA (%) 2.04 1.7

Break up of NPAs

DISTRIBUTION OF OUTSTANDING ADVANCES OF PUBLIC SECTOR BANKS TOAGRICULTURE - 2010

(No. of Accounts in lakh and Amount in Rs. crore)

Bank Group /

Bank

Total Agricultural

Advances

Direct Agricultural

Advances

Indirect Agricultural

Advances

No.of Amount No.of Amount No.of Amount

Accounts outstanding Accounts outstanding Accounts outstanding

State Bank Group 110.10 117225 108.47 89018 1.62 28208

7/28/2019 BM Project NPA897987987

16/23

DISTRIBUTION OF OUTSTANDING DIRECT AND INDIRECT ADVANCES OF PUBLIC

SECTOR BANKS TO SMALL ENTERPRISES - 2010

(No. of Accounts in lakh and Amount in ` crore)

Bank Group

/ Bank

As on the last reporting Friday of March

Total credit to Small

Enterprises including

manufacturing &

services enterprises

Direct Credit to Small

Enterprises

Indirect Credit to Small

Enterprises

No. of

Accounts

Amount

Outstanding

No. of

Accounts

Amount

Outstanding

No. of

Accounts

Amount

Outstanding

State Bank

Group 27.89 70894 27.89 70894 - -

Summary of SBI NPAs since Mar 06 as a % of its total assets.(In Rs Crores)

11-Mar 10-Mar 09-Mar 08-Mar 07-Mar 06-Mar

Gross Non-PerformingAssets 25,326.29 19,534.89 15,714.00 12,837.34 9,998.22 9,628.14

Net Non PerformingAssets 12,346.90 10,870.17 9,677.42 7,424.33 5,257.72 4,911.41

% of Net Non-Performing Assets toNet Advance 1.63 1.72 1.79 1.78 1.56 1.88

Total Assets 12,24,693.81 10,53,956.61 9,65,042.96 7,22,125.08 5,66,806.13 4,94,160.62

YOY increase in NPA 13.59% 12.33% 30.35% 41.21% 7.05% -8.18%

Net NPA as a % oftotal assets 1.01% 1.03% 1.00% 1.03% 0.93% 0.99%

Gross NPA as a % oftotal assets 2.07% 1.85% 1.63% 1.78% 1.76% 1.95%

DISTRIBUTION OF OUTSTANDING ADVANCES OF PUBLIC SECTOR BANKS TO MICRO

CREDIT, STATE SPONSORED ORGANISATIONS, EDUCATION AND HOUSING2010

(No. of Accounts in lakh and Amount in Rs. crore)

Bank

Group /

Bank

Micro Credit(other

than for agriculture

& allied activities)

State Sponsored

Organisations for

SC/ST

Education Housing

No. of

A/Cs

Amount

outstanding

No.of

A/Cs

Amount

outstanding

No.of

A/Cs

Amount

outstanding

No.of

A/Cs

Amount

outstanding

State

BankGroup 2.37 84 0.04 4 6.25 12774 16.71 71113

7/28/2019 BM Project NPA897987987

17/23

7/28/2019 BM Project NPA897987987

18/23

ASSET QUALITY

Asset quality continued to remain healthy with gross non-performing assets as on March 31,

2011 at 1.1% of gross advances as against 1.4% at the end of the previous year. The ratio of

net non-performing assets to net advances as of March 31, 2011 was at 0.2%, down from

0.3% as at March 31, 2010. The Banks provisioning policies for specific loan loss provisions

remained higher than regulatory requirements. The NPA coverage ratio based on specific

provisions (not including write-offs, technical or otherwise) was at 82.5% as on March 31,

2011 while that on March 31, 2010 was 74.8%. Total restructured loans (including

applications received and under process for restructuring) were at 0.4% of gross advances of

which 0.1% were restructured loans classified as NPAs as on March 31, 2011.

NPA IN ICICI Bank Ltd

Particulars regarding nonperforming assets for the last three years:-

Year ended Gross NPA Net NPA Net customer

Asset

% of net NPA to net

customer assets

March31, 2009 98.03 46.19 2,358.24 1.96%

March31, 2010 96.27 39.01 2,091.22 1.87%

March31, 2011 101.14 24.58 2,628.16 0.94%

At March 31, 2011, the gross non-performing assets (net of write-offs, interest suspense and

derivatives income reversal) were ` 101.14 billion compared to ` 96.27 billion at March 31,

2010. The increased level of non-performing assets was after taking into consideration the

additions to gross NPA (` 4.11 billion) arising out of the amalgamation of Bank of Rajasthan

with effect from close of business at August 12, 2010. Net non-performing assets were `

24.58 billion at March 31, 2011 compared to ` 39.01 billion at March 31, 2010. The ratio of

net non-performing assets to net customer assets decreased from 1.87% at March 31, 2010 to

0.94% at March 31, 2011. During fiscal 2011, we wrote-off NPAs, including retail NPAs,

with an aggregate outstanding of ` 2.29 billion against ` 28.48 billion during fiscal 2010.

Classification of Non-Performing Assets by Industry

The following table sets forth, at March 31, 2010 and March 31, 2011, the composition of

gross non-performing assets by industry sector. ( in billion, except percentages)March 20

10 March 31, 2011

March 31,2010 March 31, 2011

Amount % Amount %

Retail finance 64.73 67.2% 66.35 65.6%

Wholesale/retail 2.17 2.3 3.85 3.8

7/28/2019 BM Project NPA897987987

19/23

trade

Food and

beverages

1.62 1.7 2.88 2.9

Servicesfinance 2.43 2.5 2.30 2.3

Textiles 1.90 2.0 2.25 2.2Chemicals and

fertilisers

2.47 2.6 2.05 2.0

Metal and metal

products

0.68 0.7 1.30 1.3

Electronics and

engineering

0.69 0.7 0.68 0.7

Automobiles 0.59 0.6 0 .55 0.5

Paper and paper

products

0.03 0.0 0.46 0.5

Servicesnon

finance

0.38 0.4 0.38 0.4

Power 0.14 0.1 0.18 0.2

Iron/steel and

products

1.43 1.5 0.17 0.2

Shipping 0.01 0.0 0.06 0.1

Other Industries 17.00 17.7 17.68 17.3

Total 96.27 100.0% 101.14 100.0%

NPA IN AXIS BANK

Net non-performing assets to net advances are set out below:

31 March, 2011 (%) 31 March, 2010 (%)

Net non performing assets as a

percentage of net advances

0.29 0.40

Non-performing assets as percentage of total assets in that sector is set out below:

Sr. No. Sector 31 March, 2011 (%) 31 March, 2010 (%)

1. Agriculture and

allied activities

2.56 2.31

2. Industry (Micro &

Small, Medium and

Large)

1.15 0.95

3. Services* 0.21 0.69

4. Personal loans 1.38 1.86

7/28/2019 BM Project NPA897987987

20/23

* includes nil (previous year 0.06%) NPAs in respect of commercial real estate and 0.11%

(previous year 0.39%) in respect of trade segment

Important Highlights

Profit after tax up 34.76% to 3,388.49 crores

Net Interest Income up 31.14% to 6,562.99 crores

Deposits up 33.93% to 189,237.80 crores

Advances up 36.48% to 142,407.83 crores

Net NPA ratio as a percentage of net customer assets down to 0.26% from 0.36%

Capital Adequacy Ratio stood at 12.65% as against the minimum regulatory norm of 9%

7/28/2019 BM Project NPA897987987

21/23

CONCLUSIONS

Public sector banks in comparison to private sector banks are more adversely affected

by NPA problem which is shown by higher net NPA ratio. This is partly due to

prudential norms on public sector banks which have social responsibility to fund newprojects for economy to grow. In this process public sector banks advance sub

standard loans thereby making some part of loan unrecoverable resulting in higher

NPA.

Also, better IT systems used in private sector banks help them to gauge risk in a better

manner and thus are able to avoid advancing of loans which may turn out to be non

performing.

Looking at the NPAs of given public and private sector banks, it can be clearly seen

that major chunk of NPA for these banks is from agricultural sector and for public

sector banks; it is an issue of concern. HDFC has been able to maintain its asset

quality better as compared to other banks. Also its recoverability of bad loans is better

which is partly due to the restructuring of loans in a much efficient manner.

Allahabad bank is one public sector bank which has implemented number of steps to

improve its quality of loans and to decrease NPA. Such steps are found missing in

other banks.

SUGGESTIONS

Asset restructuring companies: The word asset reconstruction company is a typical

Indian word - the global equivalent of which is asset management companies. The

word "asset reconstruction" in India owes its origin to Narsimham I which envisaged

the setting up of a central Asset Reconstruction Fund with money contributed by the

Central Government, which was to be used by banks to shore up their balance sheets

to clean up their non-performing loans. Advantages of ARC are:

1. Centralisation of bad loans in one or a few hands and therefore obviously

more clout.

2. It is possible to give special legislative powers to a few AMCs rather than

to each bank

3. Banks are left with cleaner balance sheets and do not have to deal with problem clients. Regular banking relations with the group are not affected.

4. Because it deals with a larger portfolio, it can mix up good assets with bad

ones and make a sale which is palatable to buyers.

5. It is easier to do a capital-market based funding for an AMC than for the

banks themselves.

Banks should obey the RBI norms and provide facilities as per the norms, which are

not being followed by the banks. While the customer must be given prompt services

and the bank officer should not have any fear on mind to provide the facilities as per

RBI norms to the units going sick.

7/28/2019 BM Project NPA897987987

22/23

Effective and regular follow-up of the end use of the funds sanctioned is required to

ascertain any embezzlement or diversion of funds. This process can be undertaken

every quarter so that any account converting to NPA can be properly accounted for.

Combining traditional wisdom with modern statistical tools like Value-at-risk analysis

and Markov Chain Analysis should be employed to assess the borrowers. This is to besupplemented by information sharing among the bankers about the credit history of

the borrower. In case of new borrowers, especially corporate borrowers, proper

analysis of the cash flow statement of last five years is to be done carefully.

A healthy Banker-Borrower relationship should be developed. Many instances have

been reported about forceful recovery by the banks, which is against corporate ethics.

Debt recovery will be much easier in a congenial environment.

Countries such as Korea, China, Japan, Taiwan have a well functioning Asset

reconstruction/Recovery mechanism wherein the bad assets are sold to an Asset

Reconstruction Company (ARC) at an agreed upon price. In India, there is an absence

of such mechanism and whatever exists, it is still in nascent stage. One problem that

can be accorded is the pricing of such loans. Therefore, there is a need to develop a

common prescription for pricing of distressed assets so that they can be easily and

quickly disposed. The ARCs should have clear financial acquisition policy and

guidelines relating to proper diligence and valuation of NPA portfolio.

Some tax incentives like capital gain tax exemption, carry forward the losses to set off

the same with other income of the Qualified Institutional Borrowers (QIBs) should be

granted so as to ensure their active participation by way of investing sizeable amount

in distressed assets of banks and financial institutions.

So far the Public Sector Banks have done well as far as lending to the priority sector

is concerned. However, it is not enough to make lending to this sector mandatory; it

must be made profitable by sharply reducing the transaction costs. This entails faster

embracing of technology and minimizing documentation.

Commercial Banks should be allowed to come up with their own measures to address

the problem of NPAs. This may include waiving and reducing the principal and

interest on such loans, or extending the loans, or settling the loan accounts. They

should be fully authorized and they should be able to apply all the preferential policies

granted to the asset management companies.

Another way to manage the NPAs by the banks is Compromise Settlement Schemesor One Time Settlement Schemes. However, under such schemes the banks keep the

actual amount recovered secret. Under these circumstances, it is necessary to bring

more transparency in such deals so that any flaw could be removed.

7/28/2019 BM Project NPA897987987

23/23

Sources of data and information:

1. Annual reports of SBI, Bank of Baroda, Axis Bank, HDFC, Allahabad Bank

2. RBI circulars on NPA