A RESEARCH REPORT ON

“A study of Non Performing Asset Management of Bank of India”

SUBMITTED IN THE PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE MASTER OF BUSINESS ADMINISTRATION

Under The Guidance of: Submitted by: Mrs. Gunjan Kulsrestha Ravi Gupta (FACULTY) Roll no.: 0906370083

Batch: 2009-2011 MBA-4th SEM

G.L.A. INSTITUTE OF TECHNOLOGY AND MANAGEMENT, MATHURA

(AFFILIATED TO GAUTAM BUDDH TECHNICAL UNIVERSITY, LUCKNOW)

ACKNOWLEDGEMENT

This is to express my earnest gratitude and extreme joy at being bestowed with an opportunity

to get an opportunity to get an interesting and informative project. It is impossible to thank all the

people who have helped me in completion of project, but I would avail this opportunity to express

my profound gratitude and indebtness to the following people for all the help they have given me.

I am extremely grateful to my project guide and co-coordinator Prof. Gunjan Kulsrestha who

has given an opportunity to work on such an interesting project. She proved to be a constant source

of inspiration to me and provided constructive comments on how to make this project better. Credit

also goes to my friends whose constant encouragement let me in good stead. Lastly, I would also

like to thank the staff of Bank of India for providing me few but very valuable details about my

project.

Ravi Gupta

EXECUTIVE SUMMARY

After liberalization the Indian banking sector developed very appreciate. The RBI also

nationalized good amount of commercial banks providing socio economic services to the people of

the nation. The public Sector banks have shown very good performance as far as the financial

operations are concerned. The total income of the public sector banks has also shown good

performance since the last few years. The public sector Banks have shown comparatively good

result. The gross profits and the net profits of the Public Sector banks have been on a high from past

few years. The private sector banks are also showing good results in case of profits. However, the

only problem of the Scheduled Commercial Banks these days are the increasing level of the non

performing assets. The Non-Performing Assets (NPAs) problem is one of the foremost and the most

formidable problems that have shaken the entire banking industry in India like an earthquake. Like

a canker worm, it has been eating the banking system from within, since long. It has grown like a

cancer and has infected every limb of the banking system.

At macro level, NPAs have choked off the supply line of credit to the potential borrowers,

thereby having a deleterious effect on capital formation and arresting the economic activity in the

country. At the micro level, the unsustainable level of NPAs has eroded the profitability of banks

through reduced interest income and provisioning requirements, besides restricting the recycling of

funds leading to serious asset liability mismatches. The problem of NPAs is not a matter of concern

for the lenders alone. It is a matter of grave concern to the public as well, as bank credit is the

catalyst to the economic growth of the country and any bottleneck in the smooth flow of credit, one

cause for which is mounting NPAs, is bound to create adverse repercussions in the economy.

Mounting menace of NPA has raised the cost of credit, made banks more adverse to risk and

squeezed genuine small and medium enterprise from accessing competitive credit and has throttled

their enterprising spirits as well.

The spiraling and the devastating effect of NPA on the economy have made the problem of

NPA as issue of public debate and of national priority. Therefore, any measure or reform on this

front would be inadequate and incomprehensive, if it fails to make a dent in NPA reduction and

stall their growth in future, as well.

NPAs have deleterious effect on the return on assets in several ways: ---

(1) They erode current profits through provisioning requirements

(2) They result in reduced interest income

(3) They require higher providing requirements affecting profits and accretion to Capital funds

recycling of funds, set in asset-liability mismatches, etc.

The RBI has also tried to develop many schemes and tools to reduce the non Performing assets

the results are not up to the expectations. To improve NPAs each bank should be motivated to

introduce their own precautionary steps. Before lending the banks must evaluate the feasible

financial and operational prospective results of the borrowing companies by keeping in

Considerations the overall impacts all the factors that influence the business.

INTRODUCTION

MANAGEMENT OF NON-PERFORMING ASSETS – A BRIEF OVERVIEW

INTRODUCTION

In human life, sickness, bankruptcy and death are not welcome, but they do occur. So is the case

with advances, which fall sick, go into liquidation and die much against the wishes of all concerned.

Realities cannot be escaped. It is necessary to face them.

In the context of non-performing assets the situation is no different. The frequent references to

non-performing assets primarily concern sick industrial units and mounting over dues in all other

sectors of advances, particularly in agriculture. Financial assets become non-performing primarily

because of the failure of the units financed by banks.

The costs of managing non-performing assets are exorbitant. Bankers are compelled to get bogged

down with these matters thereby neglecting their role as a developing catalyst.

NATURE OF NON-PERFORMING ASSETS

The term non-performing assets can be defined both in the wider and in the narrower sense. While

in the narrow sense it includes only non-performing credit portfolio, in the wider sense it may also

include the volume of unutilized cash balances, unutilized or underutilized physical assets like

buildings and premises in the still wider sense, it may also include non-performing human resources

– a large volume of workforce not effectively utilized.

A non-performing asset in the banking sector also is termed as an asset not contributing to the

income of the Bank. In other words they are the zero yielding assets that are considered. The non-

performing assets, inter-alia, includes surplus cash and bankers balances hold over the optimal

levels, amounts lying in the suspense account, investments in shares or debentures and other

securities not yielding any dividend or interest, advances where interest is not forthcoming and even

the principal amount is difficult to recover. In terms of Health code basis, we may say that advances

classified under the Health Code Numbers 6,7,8 and those advances under the Health Code

Numbers 4,5 on which no interest is being charged, may be classified among non-performing

assets.

REASONS FOR ACCUMULATION OF NON-PERFORMING ASSETS:

There may be various internal and external factors behind the transformation of an asset from a

performing one to a non-performing one. Some of the reasons for accumulation of the non-

performing assets are:

The fast and rapid geographical expansion of the banking sector during a short span,

throughout the country, and our inability to cope with the voluminous work in an orderly

manner.

Lack of adequate care while appraising the various proposals in the initial stage.

Inadequacy of the technical staff equipped with the latest market information and the

technological developments is also an important factor in faulty appraisal of proposals.

In case of most of the large and medium scale industries, the main reason for sickness has

been found to be mismanagement.

Power shortages, outdated machinery, fluctuations in supply of raw materials due to various

causes, non-release of subsidy in time and deficiency in demand are also important reasons.

Small scale industries are prone to sickness mainly due to lack of managerial experience,

technical incompetence and decline in demand for their products and overall demand

recession.

Further cases are not unknown where deliberate efforts are made by a certain category of

borrowers to declare their units sick, or weak to avail of benefits from different sources.

PROFILE OF THE ORGANIZATION

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from

Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalised

along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and 50 employees,

the Bank has made a rapid growth over the years and blossomed into a mighty institution with a

strong national presence and sizable international operations. In business volume, the Bank

occupies a premier position among the nationalised banks.

The Bank has 3101 branches in India spread over all states/ union territories including 93

specialized branches. These branches are controlled through 48 zonal offices. There are 33

branches/offices (including three representative offices) abroad. The Bank came out with its maiden

public issue in 1997. Total number of shareholders as on 31/12/2008 is 2, 27,310.

While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of

introducing various innovative services and systems. Business has been conducted with the

successful blend of traditional values and ethics and the most modern infrastructure. The Bank has

been the first among the nationalized banks to establish a fully computerized branch and ATM

facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder

Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for

evaluating / rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into an

agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an

association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to

extend depository services to the stock broking community. Bank of India was the first Indian Bank

to open a branch outside the country, at London, in 1946, and also the first to open a branch in

Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 33 branches

(including three representative offices) at key banking and financial centre’s viz. London, Newyork,

Paris, Tokyo, Hong-Kong and Singapore.

The Bank has a strong position in financing foreign trade. Over 270 branches provide export

credit. The expertise in this area has enabled the Bank to achieve a leading position in providing

export credit in certain areas like diamond export.

To effectively meet the ever-growing challenges and competition, the Bank has made a good

head-way in bringing about technological up gradation. MIS and critical functions of controlling

offices have been computerized. At present, the operations at about 2562 branches are totally

computerized. 70 branches operate in partially-computerized mode besides these 964 branches and

31 extension counters are migrated to Core Banking Solution. New facilities such as, Telebanking,

ATM & Signature Retrieval Systems have been introduced in a progressing manner to add value to

services. Telebanking facilities with Fax on Demand facility, Remote Access Terminals for

Corporate Customers are now available at many branches. The Bank has installed ATMs in

Mumbai and other centre’s in the country. The Bank is a member of the RBI's VSAT Network and

has installed 39 VSATs linking strategic branches/offices. The Bank is making a paradigm shift

from branch automation to bank automation and is in the process of implementing a Multi-Branch

Banking Project, which facilitates City-wise Connectivity of Computerized Branches. The Bank is

in the process of installing BOINET, a Wide Area Network for providing a inter- and intra-city

connectivity, as a part of enhancing its decision support system.

The Bank's corporate personality and philosophy are fully reflected in the emblem, which is a

five-pronged Star -- a harmonious blend of traditional and the functional. The elongated prong

pointing upwards conveys the Bank's drive to achieve ascending goals. The Star is a beacon and

guide to those in need of direction.

Mission of Bank of India

"To provide superior, proactive banking services to niche markets globally, while providing cost-

effective, responsive services to others in our role as a development bank, and in so doing, meet the

requirements of our stakeholders".

Vision of Bank of India

"To become the bank of choice for corporate, medium businesses and upmarket retail customers

and to provide cost effective developmental banking for small business, mass market and rural

markets"

LITERATURE REVIEW

Magazine name – CAPITAL MARKET Dec. 2009 issue

The article taken for reference from this magazine and the article is named “Short term pains,

long-term gain” on Pg.-4. It discusses about the rising NPAs, increase in provision coverage,

sluggish credit off take and dwindling treasury income. It states that these measures are going to set

ways for better valuations. It tells about how the BSE Bankex has outperformed the BSE Sensex by

recording robust returns of 174%. It discusses about various banks namely Bank of India, Union

Bank of India, State Bank of India, Bank of Baroda, Punjab National Bank and IndusInd Bank have

reached their all time high during Oct. – Nov. 2009 period. It discusses about the preparedness of

various banks for reducing NPAs i.e. by improving capital adequacy ratio, increasing the minimum

provision coverage ratio, introducing new policies for broader interest rate regime, creating more

transparent system and extending banking reach. It also discusses about the benchmark prime

lending rate (BPLR) concept of RBI which helps to ensure appropriate pricing of loans.

Magazine name – BUSINESS TODAY Dec. 2009 issue

The magazine gives us the data about the various commercial banks operating in India and

Ranks them according to four groups namely Large banks, Mid–size banks, Small banks and Very

Small banks. From the data given in the magazine done by BT-KPMG study is clear that despite the

global credit crisis continues to take its toll- last month the 100th US bank collapsed since Lehman

Brothers the Indian Banks continue to do business as usual and the result is given in numbers

through this survey.

Research Paper – “A comparative study of Non Performance Assets in India” by Prashanth K

Reddy, IIM- Ahmedabad

This article discusses about the financial sector reform in India which has progressed rapidly on

aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry,

prudential norms and risk based supervision but the progress on the structural-institutional aspects

has been much slower and is a cause for concern. It tells about what changes are required to tackle

the NPA problem. This paper also deals with the experiences of other Asian countries in handling

of NPAs. It also suggests mechanisms to handle the problem by drawing on experiences from other

countries.

Report on “Maximizing Value of Non-Performing Assets” by Organization for Co-Operation

and Development (OECD)

This report deals with the changing dynamics in Asian Non Performing Loans and the

sociological reflections on Insolvency reforms in East Asia. But more importantly it mentions

different country reports of Asian region. In case of India “Sumant Batra” discusses the

developments in India. It tells us about what is NPA and gives an overview of non performing

assets in India. It also discusses about the factors contributing to NPAs and its impact on the

working of commercial banks. The legal reforms and the RBI guidelines for NPAs are discussed.

Research Paper on “Rooting Out Non-Performing Assets” by Nachiket Mor, ICICI research

centre

The paper attempts to highlight some major micro-level issues that are at the root of why

unsustainable performance levels are being observed within Banks. The authors argue that unless

the micro level issues are dealt with, even after the systemic issues are resolved, the problem of

NPAs or other failures of the intermediation process may resurface with greater intensity. The

manner in which banks manage the three phases in the life cycle of an asset (creation, monitoring

and recovery) determines the quality of the intermediation process within a bank. In this paper, the

need for internally consistent business models to guide the behavior of a bank in each of these three

phases is discussed.

RESEARCH OBJECTIVE

To understand what is Non Performing Assets and what are the underlying reasons for the

emergence of the NPAs.

To know what steps are being taken by the Indian banking sector to reduce the NPAs?

To study the NPA management policy of Bank of India.

To review Bank of India’s performance in non-performing assets for the time period of

2009-2010.

HYPOTHESIS OF STUDY:

Statement for Hypothesis

H0: The problem of NPA is less acute in Bank of India as compared to other commercial banks.

H1: The null hypothesis is not correct, i.e. the NPA problem of Bank of India is severe.

The project is to determine how to manage the Non Performing Assets in Banks and what is the

trend of NPAs from the past years. To carry out the study regarding NPAs which is of great concern

in today’s scenario, a very simple approach is followed to draw a conclusion. The comparison is

done between the data of Bank of India & other commercial banks. The hypothesis testing will help

us in formulating an outcome. Since this being a descriptive research much emphasis will be given

on comparison analysis of various years’ secondary data to carry out an inference.

Scope of the Study:

The scope of the study is limited to the objectives as mentioned earlier. The study ranges from

understanding the significance of non-performing assets to defining the criteria of identifying non-

performing assets in the banking sector, to review Bank of India’s performance in the management

of non-performing assets. It also reviews the framework of Bank of India’s recovery policy with

which it hopes to bring down the percentage of net non-performing assets to the net advances. The

study also encompasses the recommendations, the adhering of which will bring good results to the

organization.

Conceptual

Framework

Why NPA have become an issue for banks and financial institutions in India?

To start with, performance in terms of profitability is a benchmark for any business enterprise

including the banking industry. However, increasing NPA have a direct impact on banks

profitability as legally banks are not allowed to book income on such accounts and at the same time

banks are forced to make provision on such assets as per the Reserve Bank of India (RBI)

guidelines.

Also, with increasing deposits made by the public in the banking system, the banking industry

cannot afford defaults by borrowers since NPA affects the repayment capacity of banks. Further,

Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate

cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-

performing assets.

The following are the primary causes for turning the accounts into NPA:

Diversion of funds, mostly for the expansion / diversification of business or for promoting

associate concern.

Factors internal to business like product / marketing failure, inefficient management,

inappropriate technology, labor unrest.

Changes in the Macro-environment like recession in the economy, infrastructural

bottlenecks

Inadequate control / supervision, leading to time / cost over-runs during project.

Changes in Government policies e.g. Import duties.

Deficiencies like delay in the release of limits/ funds by banks / FIs

Secondary causes are as follows:-

Selection of the project.

Implementation of the project- time over-run, cost over-run, under-financing technology

involved

Intention of the borrower.

Industrial / Economic trend.

Absence of the up gradation of the unit / ploughing back of the profit

WHAT IS NPA?

Non-Performing Assets - Background:

It's a known fact that the banks and financial institutions in India face the problem of swelling

non-performing assets (NPA) and the issue is becoming more and more unmanageable. In order to

bring the situation under control, some steps have been taken recently. The Securitization and

Reconstruction of Financial Assets and Enforcement of Security Interest Act, (SARFAESI) 2002

was passed by Parliament, which is an important step towards elimination or reduction of NPA.

Meaning of NPA: An asset is classified as non-performing asset (NPA) if dues in the form of principal and interest

are not paid by the borrower for a period of 180 days. However with effect from March 2004,

default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit

facility granted by bank to a borrower becomes non-performing, then the bank will have to treat all

the advances/credit facilities granted to that borrower as non-performing without having any regard

to the fact that there may still exist certain advances / credit facilities having performing status.

NPA MANAGEMENT POLICY

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

form of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other

due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non

performing asset. The recovery of loan has always been problem for banks and financial institution.

To come out of these first we need to think is it possible to avoid NPA, then left is to look after the

factor responsible for it and managing those factors.

Definition of NPA

NON PERFORMING ASSET (NPA)

Action for enforcement of security interest can be initiated only if the secured asset is classified

as Non Performing Asset. Non Performing Asset means an asset or account of borrower which has

been classified by bank or financial institution as sub –standard, doubtful or loss asset, in

accordance with the direction or guidelines relating to assets classification issued by RBI. An

amount due under any credit facility is treated as “past due “when it is not been paid within 30 days

from the due date. Due to the improvement in the payment and settlement system, recovery climate,

up gradation of technology in the banking system etc, it was decided to dispense with “past due

“concept, with effect from March 31, 2001. Accordingly as from that date, a Non performing asset

shell be an advance where…

1. Interest and / or installment 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 of an

overdraft / cash credit (OD/CC)

3. The bill remains overdue for a period of more than 180 days in case of bill purchased or

discounted.

4. Interest and / or principal remains overdue for two harvest season but for a period not

exceeding two half years in case of an advance granted for agricultural purpose ,and

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

other accounts.

With a view to moving towards international best practices and to ensure greater transparency, it

has been decided to adopt ‟90 days overdue „norms for identification of NPAs, from the year

ending March 31, 2004, a non performing asset shall be a loan or an advance where;

1. Interest and / or installment of principal remain overdue for a period of more than 90 days in

respect of a term loan,

2. The account remains „out of order „ for a period of more than 90 days ,in respect of an

overdraft/cash credit (OD/CC)

3. The bill remains overdue for a period of more than 90 days in case of bill purchased or

discounted.

4. Interest and/or principal remains overdue for two harvest season but for a period not

exceeding two half years in case of an advance granted for agricultural purpose ,and

5. Any amount to be received remains overdue for a period of more than 90 days in respect of

other accounts

Out of order

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

in excess of sanctioned limit / drawing power. In case where the outstanding balance in the

principal operating account is less than the sanctioned amount /drawing power, but there are no

credits continuously for six months as on the date of balance sheet or credit are not enough to

cover the interest debited during the same period, these account 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 due date

fixed by the bank.

In short

A NPA is a loan or an advance where;

1. Interest and/ or installment of principal remain overdue for a period of more than 90 days in

respect of a term loan

2. The account remains “out of order” in respect of an overdraft/ cash credit

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

and discounted

4. The installment or interest remains overdue for two crop seasons in case of short duration

crops and for one crop season in case of long duration crops

ASSET CLASSIFICATION AND NPA NORMS Classification of Assets:

While new private banks are careful about their asset quality and consequently have low non-

performing assets (NPAs), public sector banks have large NPAs due to wrong lending policies

followed earlier and also due to government regulations that require them to lend to sectors where

potential of default is high. Allaying the fears that bulk of the Non-Performing Assets (NPA) was

from priority sector, NPA from priority sector constituted was lower at 46 per cent than that of the

corporate sector at 48 per cent.

Loans and advances account for around 40 per cent of the assets of SCBs. However,

delay/default in payment of interest and/or repayment of principal has rendered a significant

proportion of the loan assets non-performing. As per RBI‟s prudential norms, a Non-Performing

Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for

more than two quarters after it has become past due. “Past due” denotes grace period of one month

after it has become due for payment by the borrower.

Regulations for asset classification

Assets are classified into four classes - Standard, Sub-standard, Doubtful, and Loss assets. NPA

consist of assets under three categories: sub-standard, doubtful and loss. RBI for these classes of

assets should evolve clear, uniform, and consistent definitions. The banks should classify their

assets based on weaknesses and dependency on collateral securities into four categories:

i. Standard Assets:

It carries not more than the normal risk attached to the business and is not an NPA. Standard

assets are the ones in which the bank is receiving interest as well as the principal amount of the loan

regularly from the customer. Here it is also very important that in this case the arrears of interest

and the principal amount of loan do not exceed 90 days at the end of financial year. If asset fails to

be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are

further need to classify in sub categories

ii. Sub-standard Asset:

A sub-standard asset is one which has remained NPA for a period less than or equal to 12

months from 31.3.2005. In such case 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 jeopardize the

liquidation of the debt and are characterized by the distinct possibility that the banks will sustain

some loss, if deficiencies are not corrected.

iii. Doubtful Assets:

With effect from 31.3.2005, an asset is to be classified as doubtful, if it has remained NPA for a

period exceeding 12 months. A loan classified as doubtful has all the weaknesses inherent in assets

that were classified as sub-standard, with the added characteristics that the weaknesses make

collection or liquidation in full, - on the basis of currently known facts, conditions and values-

highly questionable and improbable. Under this category there are three stages:

D-I Doubtful up to one year

D-II Doubtful for further two years

D-III Doubtful beyond three years.

iv. Loss Assets:

An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset, but

the amount has not yet been written off wholly or partly. The banking industry has significant

market inefficiencies caused by the large amounts of Non Performing Assets (NPA) in bank

portfolios, accumulated over several years. Discussions on non-performing assets have been going

on for several years now. One of the earliest writings on NPA defined them as "assets which cannot

be recycled or disposed off immediately, and which do not yield returns to the bank, examples of

which are: Overdue and stagnant accounts, suit filed accounts, suspense accounts and miscellaneous

assets, cash and bank balances with other banks, and amounts locked up in frauds".

Guidelines for the classification of assets

Classification of assets into above categories should be done taking into account the degree

of well defined credit weaknesses and the extent of dependencies on collateral security for

the realization of dues.

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

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

Account with temporary Deficiencies:

The classification of an asset as NPA should be based on the record of recovery. Bank should not

classify an advance account as NPA merely due to the existence of some deficiencies, which are

temporary in nature as such as non – availability of adequate drawing power based on latest stock.

Asset classification to be borrower – wise and not facility-wise:

It is difficult to envisage a situation when only one facility to a borrower becomes a problem

credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be

treated as NPA and not the particular facility or a part thereof, which has become irregular.

Advances under consortium arrangements:

Asset classified of accounts under consortium should be based on the record of recovery of the

individual member banks and other aspects having bearing on the recoverability of the advances.

Accounts where there is erosion in the value of security can be reckoned as significant when the

realizable value of the security is less than 50 percent of the value assessed by the bank or accepted

by RBI at the time of last inspection, as the case may be. Such NPAs may be straightway classified

under doubtful category and provisioning should be made as applicable to doubtful assets.

Agricultural Advances

In respect of advances granted for agricultural purpose where interest and / or installment of

principal remains unpaid after it has become past due for two harvest seasons but for a

period not exceeding two half years , such an advance should be treated as NPA.

Where the natural calamities impair the repaying capacity of agricultural borrowers, banks

may decide on their own as a relief measure-conversion of the short –term production loan

into a term or re-schedulement of the repayment period.

In such cases of conversation or re-schedulement, the term loan as well as fresh short-term

loan may be treated as current dues and need not be classified as NPA.

Restructuring /rescheduling of loans:

A standard asset where the terms of the loan arrangement regarding interest and principal have

been renegotiated or rescheduled after the commencement of production should be as sub-standard

and should remain in such category for at least one year of satisfactory performance under the

renegotiated or restructured terms. In case of substandard and doubtful assets also, rescheduling

does not entitle a bank to upgrade the quality of advances automatically unless there is satisfactory

performance under the rescheduled –renegotiated terms.

Exceptions:

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.

NPA Norms Provisional Norms:

Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent

basis so that the balance sheets reflect a true picture of the financial status of the bank. The

Narsimham Committee has recommended the following provisioning norms

100 per cent of loss assets or 100 per cent of out- standings for loss assets;

100 per cent of security shortfall for doubtful assets and 20 percent to 50 per cent of the

secured portion; and

10 per cent of the total out standings for substandard assets.

A provision of 1% on standard assets is required as suggested by Narsimham Committee II,

1998. Banks need to have better credit appraisal systems so as to prevent NPA from occurring. The

most important relaxation is that the banks have been allowed to make provisions for only 30 per

cent of the "provisioning requirements" as calculated using the Narsimham Committee

recommendations on provisioning. The encouraging profits recently declared by several banks have

to be seen in the light of provisions made by them. To the extent that provisions have not been made,

the profits would be fictitious.

Disclosure Norms:

Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and

borrowings. Apart from this, banks are also required to give details of their exposure to foreign

currency assets and liabilities and movement of bad loans. These disclosures were to be made for

the year ending March 2000. In fact, the banks must be forced to make public the nature of NPA

being written off. This should be done to ensure that the taxpayer’s money given to the banks, as

capital is not used to write off private loans without adequate efforts and punishment of defaulters.

Asset Classification

Provision requirements

Standard assets 0.25% of the o/s dues in all Standard Assets under SME and Agricultural

sector

1.00% of the o/s dues in all Standard Assets of the A/cs to Capital market

exposure, personal loan, commercial real estate and residential HSG. Beyond

Rs. 20lakhs.

0.40% of the o/s dues in all standard assets belonging to all other

categories.

Substandard

assets

10% of the sum of the net investment in the lease and the unrealised

portion of finance income net of finance charge component. The terms „net

investment in the lease‟,‟ finance income‟ and finance charge are as defined

in „AS19 – Leases‟ issued by the ICAI.

Doubtful

assets

20% - 50% of the secured portion depending on the age of NPA, and

100% of the unsecured portion.

Loss assets It may be either written off or fully provided by the bank. The entire asset

should be written off

If the assets are permitted to remain in the books for any reason, 100 % of

the outstanding should be provided for.

FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. But the problem of

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

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

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.

Willful Defaults

There are borrowers who are able to payback loans but are intentionally withdrawing it. These

groups of people should be identified and proper measures should be taken in order to get back the

money extended to them as advances and loans.

Natural calamities

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

and then India is hit by major natural calamities thus making the borrowers unable to pay back there

loans. Thus the bank has to make large amount of provisions in order to compensate those loans,

hence end up the fiscal with a reduced profit. Mainly ours framers depends on rain fall for cropping.

Due to irregularities of rain fall the framers 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. 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.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

i. Principles of safety

By safety it means that the borrower is in a position to repay the loan both principal and interest.

The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon:

1. Tangible assets

2. Success in business

Willingness to pay depends on:

1. Character

2. Honest

3. Reputation of borrower

The banker should, therefore take utmost care in ensuring that the enterprise or business for

which a loan is sought is a sound one and the borrower is capable of carrying it out successfully he

should be a person of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management information system, market driven decisions on

real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in

the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be

computerized.

Improper swot analysis

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.

1. Banks should consider the borrowers own capital investment.

2. It should collect credit information of the borrowers from

From bankers

Enquiry from market/segment of trade, industry, business.

From external credit rating agencies.

Analyze the balance sheet

True picture of business will be revealed on analysis of profit/loss a/c and balance sheet.

Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity,

banks should grant loan for productive purpose only. Bank should analyze the profitability,

viability, long term acceptability of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the

bank gives advances to those who are not able to repay it back. They should use good credit

appraisal to decrease the NPAs.

Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible assets as

security to safe guard its interests. When accepting securities banks should consider the

1. Marketability

2. Acceptability

3. Safety

4. Transferability.

The banker should follow the principle of diversification of risk based on the famous maxim

“do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few

big farms only or to concentrate them in few industries or in a few cities. If a new big customer

meets misfortune or certain traders or industries affected adversely, the overall position of the bank

will not be affected.

Absence of regular industrial visit

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

to the customer point decreases the collection of interest and principals on the loan. The NPAs due

to willful defaulters can be collected by regular visits.

Re loaning process

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

affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and

PACs, the NPAs of OSCB is increasing day by day.

MANAGING NPA:

The primary aim of any business is to make profits. Therefore, any asset created in the

course of the conduct of business should generate income for the business.

This applies equally to the business of banking. The banks the worlds over deal in money,

by accepting deposits (liabilities) and out of such deposits (liabilities) lend/create loans

(assets). If for any reason such assets created do not generate income or become sticky and

difficult of recovery, then the very position of the banks in repaying the deposits (liabilities)

on the due dates would be at stake and in jeopardy. Banks with such assets portfolio would

become weak and naturally such weak banks will lose the faith and confidence of the

investors.

With the introduction of prudential norms for income recognition, assets classification and

provisioning, banks have become quite sensitive and are taking all possible steps to

strengthen their assets acquisition and monitoring systems.

There is also a growing awareness to bring down non-performing assets as these are having

adverse impact on their profitability due to de-recognition of interests as well as requirement

of heavy loan loss provisions on such assets. Therefore it would be prudent for banks to

manage their assets in such a manner that they always remain healthy, generate sufficient

income and capable of repayment/recovery on the due dates.

Management of performing/non-performing assets in banks has become an `art and science'

and virtually `a battle of wits' between the banker and the borrower with the latter

demanding write off or at least a major sacrifice from the bankers side irrespective of

whether he is in a position to pay or not.

Management of non-performing assets of the financial sector was put on fast track recently

with the Union Cabinet approving the promulgation of an ordinance to facilitate

securitization and reconstruction of financial assets.

Besides enabling banks and financial institutions to create a market for the securitized assets

and improve their asset liability management, the Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest Ordinance would also assist in setting

up Asset Reconstruction Companies. Though this is a welcome development, the bankers

have to do their basic homework and to utilize this opportunity to clean up and recover their

dues at an early date.

MEASURES TO RECOVER NPA’S

Over the last few years Indian banking in its attempt to integrate itself with the global banking

has been facing lots of hurdles in its way due to its inherent weaknesses, despite its high sounding

claims and lofty achievements. One of the major hurdles, the Indian banking is facing today, is its

ever-growing size of non-performing assets over which the top management of almost each bank is

baffled. On account of the intricacies involved in handling the NPA the ticklish task of assets

management of the bank has become a tight rope walk affair for the controlling heads, because a

little wavering „this or that side‟ may land the concern bank in trouble. The growing NPA is a

potent source of worry for the finance minister as well, because in a developing country like ours,

banking is seen as an important instrument of development, while with the backbreaking NPA

banks have become helpless burden on the economy.

NPA with outstanding up to 5 crore:

In case of doubtful and loss assets, through the modified schemes, the banks have been directed

to follow up a settlement formula under which the minimum amount to be recovered, amounts to be

entire outstanding running ledger balances as on the date the account was identified as NPA i.e. the

date from which the interest was not charged to the running ledger, an analysis of the given formula

shows that RBI has been very much generous in granting huge relaxation to the borrowers who

were not coming forward for setting their overdue loans due to one or other reason. The scheme is

of high practical value as it protects the borrowers who were having genuine problems in clearing

their dues because the interest component constituted a multiplied amount of principal outstanding.

On the other hand, the concerned banks were also finding in difficult to sacrifice the entire interest

component, but outstanding in the dummy ledger. Now as per the provision to the scheme, they will

be ready to grant such relaxation in favour of the borrowers. These guidelines have come as a

windfall for borrowers who after a lot of negotiations were almost ready to repay back their

principal as well as part of the interest component to settle their accounts, as under the modified

scheme, they would be able to save the interest component. To that extent the concerned bank

stands to lose.

In the case of sub standard assets, the settlement formula as given in the modified scheme states that

the minimum sum to be recovered must contain the entire running ledge outstanding balance as on

the date of the account was identified as NPA i.e. the date from the which interest was not charged

to the running ledger plus interest at the existing prime lending rate of the bank. As per the

modified scheme, the terms suggested for the payment of settlement amount NPA are simple and

pragmatic. As per the terms of the scheme, the settlement amount should be paid in lump sum by

the borrower. However in case of the borrower is unable to repay back in a lump sum, the scheme

allows sufficient breathing period to enable him to arrange the funds and clear at least 25 percent of

the settlement amount to be paid upfront and the remaining amount to be recovered in installments

spread over a period of one year along with interest at the existing PLR from the date of settlement

up to the date of final payment.

NPA with outstanding over Rs. 5 crores:

For recovery of NPA over Rs. 5 crore, RBI has left the matter to the concerned banks and

advised that the concerned banks may formulate policy guidelines regarding their settlement and

recovery. The freedom, in such cases, is given to the banks, because the attending circumstances in

each case may vary from the other. Therefore it was in the right direction that adopting a

generalized approach was not thought appropriate. In cases, where the amount involved is above

Rs. 5 crore, RBI expects CMD of each bank to supervise the NPA personally. The CMDs of the

concerned banks are advised to review all such cases within a given timeframe and decide the

course of action in terms of rehabilitation/restructuring. RBI also desires the submission of a

quarterly report of all NPA above Rs. 5 crore from PSU banks. Thus by putting up the cut-off dates

for the implementing of the scheme, RBI desires the banks to realize the seriousness of the issue

and gear up to sweep away the NPA in one go.

For commercial banks, it is a golden opportunity to clear the mess, consolidate and come out on

a track leading the path of global banking. The time given for weeding out the disastrous NPA is

neither too long nor too short and the banks, with proper planning and follow up can drastically

reduce their NPAs, if they firmly resolve to do so. RBI expects the commercial banks to follow the

guidelines in letter and spirit without any discrimination or discretion as a slight dilution may

jeopardize their interest. A proper monitoring system is also desired to be evolved for monitoring

the progress of the scheme. As this is a rare opportunity given to the defaulting borrowers so that

they can avail the chance given for the settlement of their loans. Without adequate publicity of the

scheme the response from the defaulting borrowers may not be there to the expected level.

Legal and Regulatory Regime

A. Debt Recovery Tribunals

DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993.

Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and Debt

Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain cases

referred to them, by the banks and FIs for recovery of debts due to the same. The order passed by a

DRT is appeal able to the Appellate Tribunal but no appeal shall be entertained by the DRAT

unless the applicant deposits 75% of the amount due from him as determined by it. However, the

Appellate Tribunal may, for reasons to be received in writing, waive or reduce the amount of such

deposit. Advances of Rs. 1 million and above can be settled through DRT process. An important

power conferred on the Tribunal is that of making an interim order (whether by way of injunction

or stay) against the defendant to debar him from transferring, alienating or otherwise dealing with

or disposing of any property and the assets belonging to him within prior permission of the

Tribunal. This order can be passed even while the claim is pending. DRTs are criticized in respect

of recovery made considering the size of NPAs in the Country. In general, it is observed that the

defendants approach the High Court challenging the verdict of the Appellate Tribunal which leads

to further delays in recovery. Validity of the Act is often challenged in the court, which hinders the

progress of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of

infrastructure.

Registrar

Functions, duties and powers of Registrar:

To examine and verify documents including petitions, notes of defense and memoranda of

appeals to be filed with the tribunal or appellate tribunal and register them if they meet

requirements or endorse them with reasons if they cannot be registered,

To verify duplicate copies submitted in a case with the originals and certify them if they appear

in order, and if the originals appear to have some defects, to mention such defects and get the

concerned party to sign to that effect,

To verify whether documents submitted along with petitions, memoranda of appeal and notes of

defense are correct or not,

To issue summons and get it served,

To appoint days for appearance in cases, indicating reasonable reasons pursuant to law,

To obtain power of attorney and get a case assumed pursuant to prevailing law,

To promptly execute, or cause to be executed, actions as referred to in the order made by the

Bench,

To have security or guarantee as per the order made by the Bench,

To maintain, or cause to be maintained, updated records including registration books,

To maintain personal records of employees,

To safely retain orders and directions in a serial order.

Debt Recovery Officer

The order issued by the Debt Recovery Officer shall deem to be the order issued by the Tribunal.

If any person disobeys any order given by the Debt Recovery Officer, the Tribunal may institute

contempt proceedings against that person under the provision of the Act. In recovering the principal

and interest of a loan, the Debt Recovery Officer, may follow the following procedures: In

consistent with the decision of the Tribunal the Debt Recovery Officer may follow the following

procedures, subject to the prevailing law.

Power of Debt Recovery Officer

To take possession of, or auction, the borrower's other movable or immovable property whether

furnished as security or not,

To take possession of, or auction, the guarantor's movable or immovable property,

Where any individual is a borrower or guarantor, to arrest such individual and detain him

pursuant to the prevailing law.

Presiding officer:-

He is the Head of the department.

He has judicial power to execute the case.

B. Lokadalats

The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987 helps in

resolving disputes between the parties by conciliation, mediation, compromise or amicable

settlement. It is known for effecting mediation and counseling between the parties and to reduce

burden on the court, especially for small loans. Cases involving suit claims up to Rs. l million can

be brought before the Lokadalat and every award of the Lokadalat shall be deemed to be a decree of

a Civil Court and no appeal can lie to any court against the award made by the Lokadalat. Several

people of particular localities/ various social organizations are approaching Lokadalats which are

generally presided over by two or three senior persons including retired senior civil servants,

defense personnel and judicial officers. They take up cases which are suitable for settlement of debt

for certain consideration. Parties are heard and they explain their legal position. They are advised to

reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social

workers. If the compromise is arrived at, the parties to the litigation sign a statement in presence of

Lokadalats which is expected to be filed in court to obtain a consent decree. Normally, if such

settlement contains a clause that if the compromise is not adhered to by the parties, the suits

pending in the court will proceed in accordance with the law and parties will have a right to get the

decree from the court. In general, it is observed that banks do not get the full advantage of the

Lokadalats. It is difficult to collect the concerned borrowers willing to go in for compromise on the

day when the Lokadalat meets. In any case, we should continue our efforts to seek the help of the

Lokadalat.

C. Enactment of SRFAESI Act

The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest Act" (SRFAESI) provides the formal legal basis and regulatory framework for setting up

Asset Reconstruction Companies (ARCs) in India. In addition to asset reconstruction and ARCs,

the Act deals with the following largely aspects,

Securitization and Securitization Companies

Enforcement of Security Interest

Creation of a central registry in which all securitization and asset reconstruction transactions as

well as any creation of security interests has to be filed.

The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued

Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003 for

regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover various

aspects relating to registration, operations and funding of ARCS and resolution of NPAs by ARCS.

The RBI has also issued guidelines to banks and financial institutions on issues relating to transfer

of assets to ARCS, consideration for the same and valuation of instruments issued by the ARCS.

Additionally, the Central Government has issued the security enforcement rules ("Enforcement

Rules"), which lays down the procedure to be followed by a secured creditor while enforcing its

security interest pursuant to the Act. The Act permits the secured creditors (if 75% of the secured

creditors agree) to enforce their security interest in relation to the underlying security without

reference to the Court after giving a 60 day notice to the defaulting borrower upon classification of

the corresponding financial assistance as a non-performing asset. The Act permits the secured

creditors to take any of the following measures:

Take over possession of the secured assets of the borrower including right to transfer by way of

lease, assignment or sale;

Take over the management of the secured assets including the right to transfer by way of lease,

assignment or sale;

Appoint any person as a manager of the secured asset (such person could be the ARC if they do

not accept any pecuniary liability); and

Recover receivables of the borrower in respect of any secured asset which has been transferred.

After taking over possession of the secured assets, the secured creditors are required to obtain

valuation of the assets. These secured assets may be sold by using any of the following routes to

obtain maximum value.

By obtaining quotations from persons dealing in such assets or otherwise interested in buying the

assets;

By inviting tenders from the public;

By holding public auctions; or

By private treaty

Lenders have seized collateral in some cases and while it has not yet been possible to recover

value from most such seizures due to certain legal hurdles, lenders are now clearly in a much better

bargaining position vis-à-vis defaulting borrowers than they were before the enactment of

SRFAESI Act. When the legal hurdles are removed, the bargaining power of lenders is likely to

improve further and one would expect to see a large number of NPAs being resolved in quick time,

either through security enforcement or through settlements. Under the SRFAESI Act ARCS can be

set up under the Companies Act, 1956. The Act designates any person holding not less than 10% of

the paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a

controlling interest in, being the holding company of or being in control of the ARC. The SRFAESI

and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less than

Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on an ongoing basis, a

minimum capital adequacy ratio of 15% of its risk weighted assets. ARCS have been granted a

maximum realization time frame of five years from the date of acquisition of the assets. The Act

stipulates several measures that can be undertaken by ARCs for asset reconstruction. These include:

Enforcement of security interest;

Taking over or changing the management of the business of the borrower;

The sale or lease of the business of the borrower;

Settlement of the borrowers' dues; and

Restructuring or rescheduling of debt.

ARCS are also permitted to act as a manager of collateral assets taken over by the lenders under

security enforcement rights available to them or as a recovery agent for any bank or financial

institution and to receive a fee for the discharge of these functions. They can also be appointed to

act as a receiver, if appointed by any Court or DRT.

D. Institution of CDR Mechanism

The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of

NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in India is

broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The objective

of the CDR mechanism has been to ensure timely and transparent restructuring of corporate debt

outside the purview of the Board for Industrial and Financial Reconstruction (BIFR), DRTs or other

legal proceedings. The framework is intended to preserve viable corporate affected by certain

internal/external factors and minimize losses to creditors/other stakeholders through an orderly and

coordinated restructuring programme. RBI has issued revised guidelines in February 2003 with

respect to the CDR mechanism. Corporate borrowers with borrowings from the banking system of

Rs. 20crores and above under multiple banking arrangement are eligible under the CDR

mechanism. Accounts falling under standard, sub-standard or doubtful categories can be considered

for restructuring. CDR is a non-statutory mechanism based on debtor-creditor agreement and inter-

creditor agreement. Restructuring helps in aligning repayment obligations for bankers with the cash

flow projections as reassessed at the time of restructuring. Therefore it is critical to prepare a

restructuring plan on the lines of the expected business plan along with projected cash flows.

The CDR process is being stabilized. Certain revisions are envisaged with respect to the

eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks are not

members of the CDR forum, and it is expected that they would be signing the agreements shortly.

However they attend meetings. The first ARC to be operational in India- Asset Reconstruction

Company of India (ARGIL) is a member of the CDR forum. Lenders in India prefer to resort to

CDR mechanism to avoid unnecessary delays in multiple lender arrangements and to increase

transparency in the process. While in the RBI guidelines it has been recommended to involve

independent consultants, banks are so far resorting to their internal teams for recommending

restructuring programs.

E. Compromise Settlement Schemes

One Time Settlement Schemes

NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The scheme

also covers NPAs classified as sub-standard as on 31st March 2000, which have subsequently

become doubtful or loss. All cases on which the banks have initiated action under the SRFAESI Act

and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from

the Courts/DRTs/BIFR are covered. However cases of wilful default, fraud and malfeasance are not

covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be

recovered should be 100% of the outstanding balance in the account.

Negotiated Settlement Schemes

The RBI/Government has been encouraging banks to design and implement policies for

negotiated settlements, particularly for old and unresolved NPAs. The broad framework for such

settlements was put in place in July 1995. Specific guidelines were issued in May 1999 to public

sector banks for one-time settlements of NPAs of small scale sector. This scheme was valid until

September 2000 and enabled banks to recover Rs 6.7 billion from various accounts. Revised

guidelines were issued in July 2000 for recovery of NPAs of Rs. 50 million and less. These

guidelines were effective until June 2001 and helped banks recover Rs. 26 billion.

RESEARCH

METHODOLOGY

Type of research:

The research design used for carrying out this project is descriptive research because the report

deals with statistical data and the main cause of the report is to describe the factors affecting the

problem mentioned.

Sources of data:

There are two types of data - Primary data or raw data and secondary data or second hand data.

The data which is collected on source which has not been subjected to processing or any other

manipulation is primary data whereas secondary data is the data collected by someone other than

the user through common sources like censuses, surveys, organizational records and data collected

through qualitative methodologies or qualitative research. The data collected is mainly secondary in

nature. The sources of data for this Report include the literature published by the Bank of India and

also the Reserve Bank of India. Also the various magazines dealing with the current banking

scenario and research paper have also been a source of information.

The booklet on Recovery Policy published by the Asset Recovery Department of Bank of India

has been of great help.

Sampling Plan:

The target population of study included the Bank of India in particular and all other commercial

banks in general.

Techniques used for analysis of data:

Analytical tools are been used for data analysis. The analytical tools such as Pie charts, bar

graphs, tables are used to compare the past data with current so as to get a particular inference from

it on analysis.

Scope Of The Study:

The scope of the study is limited to the objectives as mentioned earlier. The study ranges from

understanding the significance of non-performing assets to defining the criteria of identifying non-

performing assets in the banking sector, to review Bank of India’s performance in the management

of non-performing assets. It also reviews the framework of Bank of India’s recovery policy with

which it hopes to bring down the percentage of net non-performing assets to the net advances. The

study also encompasses the recommendations, the adhering of which will bring good results to the

organization.

DATA COLLECTION

&

ANALYSIS

HIGHLIGHTS FOR THE QUARTER ENDED 30th JUNE 2009 of BANK OF INDIA

Business Mix reaches Rs.342831 crores - robust rise of 21.52 %.

Net Profit up by 3.91% from Rs.562 crores to Rs.584 crores.

Operating Profit up by 2.05% (Rs. 1094 Crore) supported by growth in net interest income as well

as other income.

Net Interest Income rises by 10.16% to Rs. 1301Cr from Rs. 1181 Cr,

despite challenging conditions. Net Interest Margin at 2.42%.

Non Interest Income rises by 14.13% from Rs 566 crores to Rs 646 crores.

Gross NPA ratio at 1.89%. Net NPA ratio at 0.84% as against 0.52% as on June 2008 (*).

Provision coverage stands at 67.41% (*).

(*) Due to change in Accounting treatment of floating provisions as per RBI guidelines

Cost to Income Ratio is at 43.82%.

Return on Assets is at 1.03%.

Total Income for the Quarter rose to Rs.5024 Crore from Rs.4115 Crore, showing a growth of

22.09%.

Bank has made adequate provisions for terminal benefits, in line with AS 15 requirements. Rs.

105.77Cr estimated and provided.

CASA amounted to Rs. 51333 crores constituting 32% of Total Deposits as against 31% in

March‟09.

Earnings per share for 12 months go up from Rs. 10.70 to Rs.11.13.

Book value per share rises from Rs. 174.74 to Rs.223.00.

Capital Adequacy Ratio rises to 13.26% from 12.39 %as per Basel II.

Deposits grew by 22.47% on YoY basis to Rs.1, 95,021 crores.

Advances rose by 20.28% to reach Rs.1, 47,809 crores.

Total no of branches are 3031.

All branches are functioning on CBS platform, spanning over 1920 cities & towns.

Net worth of the Bank is at Rs.11728 crores.

Other Highlights

Bank of India has been rated by Economic Times /The Nielsen company survey

“The Most Trusted Brands “(MTB) 2009 as follows:

Under PSU Banking Category –2nd Next TO SBI

Under Top Service Brands–8th

The Debutant –first time in the Top 100

In the MTB, Bank of India ranked 92nd - 54 rankings ahead of last year rankings (146th Rank

during 2008)

Gross NPA:

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as

on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of

all the non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with

the help of following ratio:

Gross NPAs Ratio = Gross NPAs

Gross Advances

B] Net NPA:

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

NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a

huge amount of NPAs and the process of recovery and write off of loans is very time consuming,

the provisions the banks have to make against the NPAs according to the central bank guidelines,

are quite significant. That is why the difference between gross and net NPA is quite high. It can be

calculated by following_

Net NPAs = Gross NPAs – Provisions

Gross Advances - Provisions

PROVISION RATIO:

Provisions are to be made to keep safety against the NPA, & it directly affect on the gross profit

of the Banks. The provision Ratio is nothing but total provision held for NPA to gross NPA of the

Banks. The formula for that is,

(i) Provision Ratio = (Total Provision/Gross NPA)*100

(ii) [Additional Formulae: Net NPA = Gross NPA – Provision

Therefore, Provision = Gross NPA – Net NPA]

CAPITAL ADEQUACY RATIO

Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets, which are

weighted/adjusted according to risk attached to them i.e.

Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100

CONCLUSION

&

RECOMMANDATIONS

Bank of India

Bank of India has performed extremely well in NPA management. Persistent and follow-up of

potential and other NPAs with outstanding of Rs. 1 crore and above is being done through the

introduction of ACTION TAKEN REPORT (ATR) mechanism on periodical basis. Loan

Restructuring and Loan Review Cells have been established to set up restructuring exercise in all

viable cases expeditiously. Responsibilities have been assigned to monitor large NPAs (Rs l0 Lakhs

and above) at administrative levels. The Chairman and Managing Director is personally monitoring

all accounts with outstanding of Rs. 5 crore and above.

General

Banks need to have better credit appraisal systems so as to prevent NPAs from occurring. However,

once NPAs do come into existence, the problem can be solved only if there is enabling legal

structure, since recovery of NPAs often requires litigation and court orders to recover stock loans.

With long-winded litigations in India, debt recovery takes a very long time. Banks are now working

on developing debt recovery tribunals to solve this problem. The Govt. has also mooted the

suggestion of an asset reconstruction company for augmenting recovery measures.

1. The NPA is one of the biggest problems that the Banks are facing today is the problem of Non

Performing Assets. If the proper management of the NPAs is not undertaken it would hamper the

business of the banks.

2. As the global slowdown has crept into the economy, bankers feel that in more loans are going to

turn bad in the coming quarters and therefore they want RBI to relax the deadline for loan

reconstruction.

3. Due to Recession & slowdown in the Indian economy would result in emerging NPAs for the

public sector banks from textiles, real estate, retail, exports and auto sectors.

4. The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of

funds in the nation. This would help the nation to develop more banking branches and developing

the economy by providing the better financial services to the nation.

5. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.

The NPAs would destroy the current profit, interest income due to large provisions of the NPAs,

and would affect the smooth functioning of the recycling of the funds.

6. As a result of the NPA‟s owners do not receive a market return on their capital. In the worst

case, if the bank fails, owners lose their assets & this may affect a broad pool of shareholders & act

as a rain on Profitability.

7. Banks also redistribute losses to other borrowers by charging higher interest rates. Lower deposit

rates and higher lending rates repress savings and financial markets, which hampers economic

growth.

8. When many borrowers fail to pay interest, banks may experience liquidity shortages. These

shortages can jam payments across the country and as a result non performing loans may spill over

the banking system and contract the money stock, which may lead to economic contraction.

9. Banks need to create capital reserve to write off the mounting NPA‟s burden.

10. “A Man without money is like a bird without wings”, the Rumanian proverb insists the

importance of the money. A bank is an establishment, which deals with money. The basic functions

of Commercial banks are the accepting of all kinds of deposits and lending of money. In general

there are several challenges confronting the commercial banks in its day to day operations. The

main challenge facing the commercial banks is the disbursement of funds in quality assets (Loans

and Advances) or otherwise it leads to Non-performing assets.”

RECOMMENDATIONS

Following Recommendations may be adopted to tackle the Problem of NPAs:

Persuasion: It is very much an effective tool of recovery. It is very much an effective tool of

recovery. Continual follow- up will be very effective in most cases.

Filing of Suits: The effectiveness of this tool depends on two major factors:

o Whether other tools have been used;

o Whether there are adequate securities to be realized.

Compromise and Revival: It has been argued that a compromise, whereby the Bank allows

remission of principal and/or interest along with rescheduling of the repayment of debt is a better

way to deal with such advances, especially when banks are drawn into long legal battles.

Involvement of other Agencies: Sometimes other agencies especially govt. agencies are

involved in the recovery of dues and stagnant accounts in the priority sector. Their involvement in

the recovery of loans is very much desirable.

Reference to B1FR: In case of large and medium units, when they are registered for not less

than seven years as companies, we can refer the case of sickness to the Board for Industrial and

Financial Reconstruction (BIFR) for early liquidation or suggestion of rehabilitation packages.

Enforcement of Securities: Enforcement of Securities charged to bank is equally important

aspect of the management of NPAs. Banks, wherever necessary, have to move courts not only to

obtain decrees but also to get them executed.

Rehabilitation and Nursing: Rehabilitation and nursing of sick units, as a matter of policy

should be given a fresh look. Only viable sick units with proven capacity of the management to run

the units should be nursed.

Merger and Amalgamation of Units: Wherever feasible, efforts should be made to

merge the sick units with healthy units.

Appointment of Special Tribunals: In view of ever mounting cases involving bank

advances in the various courts of India, it is highly desirable that special tribunals are established all

over India exclusively for bank's litigation.

Writing off of Bad debts: When no other course will bring positive results it is always

preferable to write off bad advances at the earliest to avail of tax deductions, rather than carry them

forward.

BIBLIOGRAPHY

Websites

http://finance.indiamart.com/investment_in_india/bank_of_india.html

http://en.wikipedia.org/wiki/Non-performing_asset

http://www.bankofindia.com

http://www.iba.org,.in/rsevents7.asp

http://www.rbi.org.in/SCRIPTS/AnnualPublications.aspx?head=Trend%20and%20Progress%20of

%20Banking%20in%20India

http://www.expressindia.com/news/npamanagementpolicy.htm

Books:

Valuation by Damodaran

Financial Management- Khan & Jain

Magazines and Journals

Handbook only for Bank of India Business Today- December 13, 2009 issue Capital Market-

December 13, 2009 issue

Newspapers-

Business Line

Business Standard

Economic Times

Research Paper-

Research Paper – “A comparative study of Non Performance Assets in India” by Prashanth K

Reddy, IIM- Ahmadabad

Research Paper on “Rooting Out Non-Performing Assets” by Nachiket Mor, ICICIresearchcentre

Report on “Maximizing Value of Non-Performing Assets” by Organization For Co-Operation and

Development (OECD)