NON PERFORMING ASSET

NON PERFORMING ASSET2013

UNIVERSITY OF MUMBAIProject Report onNon-Performing AssetsB.Com - BANKING & INSURANCESEMESTER V

PROJECT GUIDEPROF. SMITA KUNTAY(MCOM, M.PHIL, B.ED)T.Y.B.COM (BANKING & INSURANCE)2013-2014

SUBMITTED BYZEBA SAYEDROLL NO: 53SYDENHAM COLLEGE OF COMMERCE & ECONOMICS, CHURCHGATE, MUMBAI-400020.

DECLARATION

I undersign state that MS. Zeba Sayed has done this project under my guidance and supervision with my due consultation.This project is authentic of MS. Zeba Sayed .

PROF. SMITA KUNTAY(PROJECT GUIDE)(MCOM, M.PHIL, B.ED)

DECLARATION

I, Zeba Sayed Student of B.Com Banking and Insurance Semester V (2013-2014) hereby declare that I have completed the project On NON-PERFORMING ASSET. Whenever the data/information have been taken from any book or other sources the same have been mentioned in the Bibliography.The information submitted is true and original to the best of my knowledge.

Signature of the studentZEBA SAYED

PREFACE

I Have great pleasure in presenting this project of NON-PERFORMING ASSET.I Have made a sincere effort to make this project informative and I am sure it would help in understanding the concept of NON-PERFORMING ASSET in a better way.I am very thankful to Prof Smt. Smita Kuntay for her response and suggestions which have necessitated for successful project.

ZEBA SAYED

ACKNOWLEDGEMENT

Its gives me immense pleasure to present this project on

NON-PERFORMING ASSETI would like to express my gratitude to all those who gave us the possibility to complete this project.I would like to thank Sydenham College and Mumbai University for giving me an opportunity to work on this project.I am indebted to my project guide Prof. Smita Kuntay whose help, suggestions and encouragement helped me during the making of this project.You have been magnificently supportive; its been sheer joy working on these topics, without your systematic approach this research would not have been possible.I would like to thank all my family and friends for supporting me to give my best effort to the project.I sincerely solicit the esteemed readers to offer their criticism and suggestion for further improvement of the project.

ZEBA SAYED

INDEXSR NOTITLEPAGE NO

EXECUTIVE SUMMARY8-9

1Chapter1-Introduction1.1 Introduction of NPAs1.2 Meaning of NPAs1.3 Definition of NPAs1.4 Objectives of NPAs10-11

2Chapter2- Reveiw of literature12-13

3Chapter 3-NPAs Managament3.1 Identification of potential NPA/ stressed asset14-16

4Chapter 4- Policies of NPAs4.1 To reduce fresh NPA generation4.2 Causes of NPAs17

5Chapter 5- Reasons for Account becoming as NPAs5.1 Several reasons for Account becoming as NPAs5.2 Causes for Account becoming as NPAs5.3 General reasons for Account becoming as NPAs18-21

6Chapter 6- Methods to manage the NPAs6.1 Compromise6.2 Legal remedies6.3 Regular training programs6.4 Recovery camps6.5 Write off6.6 Spot visit22-23

7Chapter 7- NPAs in banking sector7.1 Prudential Standards7.2 Credit Allocation7.3 Local Currency Finding7.4 Debt Collection Agency 7.5 Transparency of Local banking &Regulations7.6 Accounting Standards7.7 Valuation of non performing loan24-26

8Chapter 8- Impact of NPAs on Banks Profits and Lending Prowess

27

9Chapter 9-RBI Guidelines9.1 Scope9.2 Structure9.3 Asset classification as per the RBI Guidelines28-31

10Chapter 10- Country wise Analysis10.1 Comparison with other Asian Economies32-33

11Chapter 11- Case study of NPA on Oriental Bank of Commerce (OBC)11.1 Introduction11.2 Our vision11.3 Our mission11.4 OBC fact file11.5 Working result of OBC11.6 profitability of OBC11.7 Technology implementation34-37

12Chapter 12- Findings & Conclusion38-39

13Chapter 13- Suggestions & Recommendation13.1 Suggestions to overcome the problem of NPAs13.2 Recommendations for future research13.3 Data Analysis40-41

Bibliography42

EXECUTIVE SUMMARY

The future of Indian Banking represents a unique mixture of unlimited opportunities and insurmountable challenges. On the one hand we see the scenario represented by rapid process of globalization presently taking shape bringing the community of nations in the world together, transcending geographical boundaries, in the sphere of trade and commerce and even unemployment opportunities of individuals. All these indicates newly emerging opportunities for Indian Banking, But on the darker side we see the accumulated morass, brought out by three decades of controlled and regimented management of banks in the past. It has siphoned profitability of many banks accumulated NPAs and threatens Capital Adequacy of the Banks and their continued stability.

Need For Study: This study will help to know the recent norms of NPA. This study helps to know how NPA Causing Problems to Banking Sector and what might be the solution to overcome from this problem and also its impact on Profitability of New Profit Banks

Scope Of The Study Banks can improve their financial position or can increase their income from credits with the help of this project. This project can be used for comparing the performance of the bank with others. This can also be applicable to know the reasons of increase in NPAs. Concept of NPAs can be made clear.

Statement of theproblem Profitability is considered as a benchmark for evaluating the performance of any business enterprise including the banking industry. However, increasing Non-Performing Assets, have a great impact on profitability of banks and financial institutions. Legally banks and financial institutions are not allowed to book income on such account and at the same times they are forced to make

provisions on such assets. So This project is undertaken to know the Impact of Non-Performing Assets on Profitability of Banks.

Limitations The study is based mostly on secondary data. Data has been drawn from journals, so information may not be complete.

For the analysis only the advances and NPA percentages of banks and operatingprofit, provisions and contingencies as awhole and net profit of New PSBs are taken into consideration

Methodology -All the information provided on NON PERFORMING ASSET in the project has been collected through secondary resources. No survey has been conducted to collect information for the study. Therefore only secondary data is used in the study. Secondary resources used in the study for information collection is internet. Websites have been used and the information retrieved from these sources is then gathered in this project. Other tools used in the study which are used in the preparation of the project after collecting information is Microsoft Word.

CHAPTER: 1 INTRODUCTION1.1) Introduction of NPA: 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.

1.2) Meaning of NPAs: An asset which ceases to generate income of the bank is called non-performing asset. The past due amount remaining uncovered for the two quarter consequently the amount would be classified as NPA for the whole year. It includes borrowers defaults or delays in interest or principal repayment. An asset is classified as Non-performing Asset (NPA) if the borrower not pays due in the form of principal and interest 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 facilities granted by banks 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. Though the term NPA connotes a financial asset of a commercial bank, which has stopped earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm, concern, industry and nation where that asset is idling. The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004 onwards.

1.3) Definition- Nonperforming asset :Financial definition : A loan or lease that is not meeting its stated principal and interest payments.

Banks usually classify as Non performing assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset, which is not producing income.

1.4) Objectives Of The Study:The general objective of this research is to analyze the NPAs in banking sector. The specific objectives of this research are :-

To highlight Loans and Advances trend in banking sector.

To study the general reasons for assets become NPAs

To point out the amount of NPAs in banking sector.

To focus the amount of impairment losses in banking sector.

To find out the problems of Bank due to NPAs.

CHAPTER: 2 REVIEW OF LITERATURE The objective of study is to review the available literature on banking business for finding out the impact on non performing asset in banking sector. The details study of NPA literature provide useful framework for further research in this direction. Economic times NPA decline on report newspaper June 21,2004 In the newspaper THE ECONOMICS times gave the article on NPA on decline: report The decline in NPAs is evident across bank groups Among bank groups, the old private sector banks had the highest net NPAs ratio at 3.8 % , followed by public sector banks, new private banks and foreign banks. NPA is a classification used byfinancial institutionsthat refer to loans that are in jeopardy ofdefault. Once the borrower has failed to make interest or principal payments for 90 days the loan is considered to be a non-performing asset. Non-performing assets are problematic for financial institutions since they depend on interest payments for income. Troublesome pressure from the economy can lead to a sharp increase innon-performing loansand often results in massive write-downs. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for identification of NPA, from the year ending March 31, 2004.

Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where i. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,ii. the account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), iii. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. 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 the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004.

Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; i. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, ii. The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC), iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. 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 the sanctioned limit/ drawing power. In case where the outstanding balance in the principaloperating 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 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 the due date fixed by the bank. 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 durability of the affected banks.

CHAPTER:3 NPA MANAGEMENT3.1) IDENTIFICATION OF POTENTIAL NPA / STRESSED ASSETS1) Reckoning of NPA : A NPA account to be identified based on its status / position of the accounts erosion in security as on the date of balance sheet of the bank. Nevertheless, the date of a NPA account would be the actual date on which the slippage occurred. If an account is regularized before the balance sheet date by repayment of overdue amount through genuine sources (not by sanctioning of additional facilities or transfer of funds between accounts), the account need not be treated as NPA.2) Identification and monitoring of potential NPA / stressed assets: Indention of potential NPA account as its incipient stage of sickness and initiating immediate corrective measures is the most important step for preventing an asset from becoming NPA. The guidelines issued by Credit Monitoring Cell (CMC) CAD, HO should be followed in this regard.3) Constitution of NPA Prevention Cell at the ROs. It has been decided to constitute a NPA Prevention cell at the ROs to monitor the Standard-B accounts and to ensure the prevention of their slippage to NPA. The cell headed by Regional Manager would comprise Regional Manager, Dy. Regional Manager and Credit Officer. It will conduct its meeting every fortnight.ITS FUNCTION WILL BE AS UNDER: To examine the information received from branches relating to Standard B (based on 60 days norms), NPA accounts and identify the accounts for restructuring. The entire process should be completed within a time frame of 30 days.

To review the performance of the existing restructured accounts including BIFR and CDR cases.

The cell will send information on fortnightly basis to CMC, CAD Head Office.

Regional Manager to cell for the explanation from the Branch Managers whose performance in recovery is far from satisfactory.

4) Review and reporting of potential NPA / Stressed assets:Following steps be taken for review and reporting of potential NPA / Stressed Assets:

Step-1: Analysis of reason of deterioration of health, signs of sickness, problem character of the A\c.Step-2: Close interaction with the borrower, visit to the unit, close and frequent monitoring of the account, drawing the attention of the borrower to the irregularity / deterioration in he asset quality / signs of weakness in the account.Step-3: Advice the borrower to correct the irregularity immediately in a time bound manner and obtain his categorical assurance.Step-4: Corrective measures for prevention of slippages. Verification of :(i) the documents for its correctness, enforceability,(ii) correctness of ROD(iii) insurance covers(iv) value/marketability of prime/collateral security eye.

Verification of existence of primary / collateral security of the borrower.Step-5: Report to the next higher authority, the details on the above aspects and suggesting specific corrective measures in time.Step-6: Implement the corrective action and report to higher authority.

5. Maintaining the Assets Quality :Following measures should be put in place.(i) Terms and condition of the sanction:Terms and condition of sanction have to be strictly complied with .

(ii) Verification:Verification of end use of the funds, stocks and assets by Bank officials or through duly appointed concurrent auditors as per norms for effective monitoring of the accounts.

(iii) Legal Formalities:Formalities like obtaining / execution of documents / search certificates, registration of charges, timely revival of the documents, completion of equitable mortgage formalities etc. as per norms are the most important steps.

(iv) Stock Statements:Branches should obtain stock statements at monthly intervals regularly. As per RBI guidelines, the outstanding in the A/C based on the drawing powers calculated from stock statements older than 3 months would be deemed as irregular and if such irregular drawings are permitted for 90 days continuously, the A/C will be NPA.(v) Stock audit:Stock audit is to be conducted every year in every NPA account with outstanding limit of Rs 1 crore and above.

6. Management of NPA: The RMs personally verify and ensure that all accounts, especially high value advances are properly classified into standard, Sub-std. Doubtful or loss categories strictly as per prudential norms. It will be their responsibility to finalize and eliminate delay or postponed of identification of NPA. In case of doubts due to any reason, RMs may seek guidance from HO and settle the matter within one month from the date on which the account would have been classified as NPA as per norms.

7. Appropriation of recovery in NPAs:a) Non decreed accounts: In case of NPA accounts in all categories i.e. Sub standard, Doubtful and Loss appropriated first against outstanding in the account and the surplus available, if any, is to be taken to interest / income. The same norm will be applicable to the compromised accounts also.b) Decreed accounts: In case of decreed accounts where there is no compromise settlement amount recovered should be appropriated as per the decretal terms. However, if there is no specific term as regards appropriation of recovery in the decrial terms, the recovery should be appropriated first towards Principal and the balance towards interest.c) Appropriation of ECGC claim amount in NPA Accounts: As per the existing procedure, Bank is expected to keep the claim amount received from the ECGC in a separate memorandum account and pursue recovery efforts against the concerned Exporter borrower for the full amount of dues inclusive of the claim amount settled.

CHAPTER: 4 POLICIES OF NON PERFORMING ASSETThere are various sets of policy of non-performing asset, like4.1) To reduce fresh NPA generation. As far as old NPAs are concerned, a bank can remove it on its own or sell the assets to AMCs to clean up its balance sheet. For preventing fresh NPAs, the bank itself should adopt proper policies.4.2) Causes for Non Performing Assets. A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. The Indian banking system, which was operating in a closed economy, now faces the challenges of an open economy.

On one hand a protected environment ensured that banks never needed to develop sophisticated treasury operations and Asset Liability Management skills.

On the other hand a combination of directed lending and social banking relegated profitability and competitiveness to the background. The net result was unsustainable NPAs and consequently a higher effective cost of banking services.

One of the main causes of NPAs into banking sector is the directed loans system under which commercial banks are required a prescribed percentage of their credit (40%) to priority sectors. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-core' doubtful and loss assets, accumulated over the years.

The problem India Faces is not lack of strict prudential norms buti. The legal impediments and time consuming nature of asset disposalproposal.ii. Postponement of problem in order to show higher earnings.iii. Manipulation of debtors using political influence.

CHAPTER: 5 REASON FOR ACCOUNT BECOME AS AN NPA5.1) There are several reasons for an account becoming NPA.* Internal factors* External factorsInternal factors:1. Funds borrowed for a particular purpose but not use for the said purpose.2. Project not completed in time.3. Poor recovery of receivables.4. Excess capacities created on non-economic costs.5. In-ability of the corporate to raise capital through the issue of equity or otherdebt instrument from capital markets.6. Business failures.7. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns.8. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc.External factors:1. Sluggish legal system - Long legal tangles Changes that had taken place in labour laws Lack of sincere effort.2. Scarcity of raw material, power and other resources.3. Industrial recession.4. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents.5. Failures, non payment\ over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc.6. Government policies like excise duty changes, Import duty change.

5.2)Causes for an Account becoming NPA.Those Attributable to Borrower Causes Attributable to Banks Other Causes(1) Failure to bring in Required capital(2)Too ambitious project(3)Longer gestation period(4)Unwanted Expenses(5)Over trading(6)Imbalances of inventories(7) Lack of proper planning(8) Dependence on single customers(9) Lack of expertise(10) Improper working Capital Mgmt.(11) Miss management(12) Diversion of Funds(13) Poor Quality Management(14) Heavy borrowings(15) Poor Credit Collection(16) Lack of Quality Control(17) Wrong selection of borrower(18) Poor Credit appraisal(19) Unhelpful in supervision(20) Tough stand on issues(21) Too inflexible attitude(22) Systems overloaded(23) Non inspection of Units(24) Lack of motivation(25) Delay in sanction(26) Lack of trained staff

(27) Lack of delegation of work(28) Sudden credit squeeze by banks(29) Lack of commitment to recovery(30) Lack of technical, personnel & zeal to(31) Lack of Infrastructure(32) Fast changing technology(33) Un helpful attitude of Government(34) Changes in consumer preferences(35) Increase in material cost(36) Government policies(37) Credit policies(38) Taxation laws(39) Civil commotion(40) Political hostility(41) Sluggish legal system(42) Changes related to Banking amendment Act

5.3) General reasons for assets becoming NPAS .A multiplicity of factor is responsible forever increasing size of NPAs in banks. A few prominent reasons for assets becoming NPAs are as under.Poor credit appraisal systemLack of proper monitoringReckless advances to achieve the budgetary targets.There is no or lack of corporate culture in the Bank. In adequatelegal provisions on Foreclosure and bankruptcy.Change in economic policies/ environment.No transparent accounting policy and poor auditing practices.

Lack of coordination between banks.Directed lending to certain sectors.Failure on the part of the promoters to bring their portion of equity from their Source or public issue due to market turning lukewarm.

CHAPTER: 6 METHODS TO MANAGE THE NPAS:General Methods Of Management Of NPAs: The management of NPA is the difficult task in practice. Management of NPAs means, how to settle the NPAs account in the books. In simple it focuses on the methods of settlement of NPAs account. The methods are differs from bank to bank. The following paragraph explains some general methods of Management of NPAs by the banks.6.1)Compromise6.2)Legal remedies6.3)Regular Training Program6.4)Recovery Camps6.5)Write off6.6)Spot Visit

6.1) Compromise: The dictionary meaning of the term compromise is settlement of dispute reached by mutual concessions. The following are the detailed guidelines for compromise/negotiated settlements of NPAs. The compromise should be a negotiated settlement under which the bank should ensure recovery of its dues to the maximum extent possible of minimum expenses.

Proper distinction should be made between willful defaulters and borrowers defaulting in repayments due to circumstances beyond their control.

An advantage in settlement cases is that banks can promptly recycle the funds instead of resorting to expensive recovery proceedings spread over a long period.

All compromise proposals approved by any functionary should be promptly reported to the next higher authority for post facto scrutiny.

Proposal for write off/ compromise should be first by a committee of senior executives of the bank.

Special recovery cells should be set up at all regional levels.

6.2) Legal remedies: The legal remedies are one of the methods of management of NPAs. The banks observed that the borrower is making willful default; no more time should be lost instituting appropriate recovery proceedings. The legal remedies are filling of civil suits

6.3) Regular Training Program: The all levels of executives are compelling to undergrowth the regular training program on credit and NPA management. It is very useful and helpful to the executives for dealing the NPAs properly.

6.4) Recovery Camps: The banks should conduct the regular or periodical recovery camps in the bank premises or some other common places; such type of recovery camps reduces the level of NPAs in the Banks

6.5) Write offs: Write offs is also one of the common management techniques of NPAs. The assets are treated as loss assets, when the bank writes off the balances. The ultimate aim of the write off is to cleaning the Balance sheet.

6.6) Spot Visit: The bank officials should visit to the borrowers business place or borrowers field regularly or periodically. It is also help full to the bank to control or reduce the NPAs limit.

Chapter :7 NPA in banking sectorBanking And Non-Performing Asset ManagementDuring initial sage the percentage of NPA was higher. This was due to show ineffective recovery of bank credit, lacuna in credit recovery system, inadequate legal provision etc.Various steps have been taken by the government to recover and reduce NPAs.1.One time settlement / compromise scheme2.Lokadulate3.DebtRecoveryTribunals4. Securitization & reconstruction of financial assets and enforcement5.Corporate Reconstruction Companies6.Credit information on defaulters and role of credit information bureaus .7.1) Prudential Standard Although a foreign banks operating presence in Korea is in the form of a branch and not a subsidiary, Korean regulations require branches to be separately capitalized. This in turn impacts other regulations that are based on local branch capital, thereby constraining foreign bank activities. For example, credit limits to companies/groups are based on branch capital, as are open foreign exchange positions. Although this is a welcomed step, Seoul cannot easily develop into a global or regional financial center without further liberalization of what constitutes capital in a branch of a foreign financial institution.7.2) Credit Allocation The Korean government has historically played an active role in allocating credit, initially through domestic bank policy loans but also through portfolio restrictions that apply to all banks operating in Korea. Foreign banks are held to strict monthly ratios for small and medium sized companies. These ratios severely constrain operations, resulting in an inefficient allocation and pricing of credit services.7.3) Local Currency Funding Foreign banks have been able to increase capital with relative ease over the past several years (although thin capitalization rules are still a constraint) and negotiable CD limits have also been increased dramatically. urthermore, the inter-bank market does not facilitate borrowings for greater periods of time other than on an overnight basis. The government has revised regulations to allow commercial funding swaps and has offered to increase central bank funding swaps.

7.4) Debt Collection Agency Effective, privately managed, third party, non-banking related loan servicing and debt collection agencies are needed in order to provide lenders and investors in Non-Performing Loans (NPLs) with quality, professional NPL restructuring, collection and resolution services. Currently Debt Collection Licenses are not available to qualified restructuring, loan service and asset management companies, which do a financial institution, not own.7.5) Transparency of Local Banking Regulations Korean regulators are moving to address transparency problems but foreign banks continue to be hampered by ambiguous and sometimes. outdated regulations subject to various interpretations by different regulatory authorities.7.6) Accounting Standards Significant progress has been made during the past year in the application advisory Service (FSS) to improve its communications to foreign banks have been considerable. Complete the revision of Korean Generally Accepted Accounting Practices (GAAPs) to improve the consistency and accuracy in financial reporting. Strictly follow the standards once set and enforce discipline when rules are violated.7.7) Valuation of Non-Performing Loans Although Korea has taken many important steps to lower the level of non-performing loans on the books of its financial institutions, more could be done to facilitate the process. .Many banks are reluctant to sell assets because of the accounting loss the sale would create. This reluctance to sell NPLs appears to be slowing the process of improving the health of financial institutions.Procedure for NPAs identification and resolution in banking sector.During the course of discussion with the concerned officials the following points emerged for NPAs identification and resolution.1) Relation manager credit officer- Most of the banks have relationship manager in their credit department and bankers are of the view tha5 this helps in close monitoring of the accounts.The relationship manager has to keep in constant touch with borrower report all development impacting the borrower account . As part of this contact he is also expected to conduct scrutiny and account Inspection.2) Know your client profile- some of the banks in India have a system of preparing KYC profiles a part of KYC system visit are made on clients and their places of business. The frequency of such visit is not structured and depends on the nature and needs of relationship. Most of the banks, which do not have at presently in operation also, have a positive view about the same.

3) Credit rating system- Most banks in India have put in place the system of internal credit rating by developing their own models a few banks have adopted credit rating designed by rating agencies. Credit rating models take into account various types various types risk viz financial industry and management, etc associated with a borrower unit.. The credit rating system is essentially one point measure and monitor the credit risk of individual proposal. At the whole bank level credit rating system enables tracking the health of bank entire credit portfolio.4. Watch list special mention category- Most of the banks have a system to put certain borrower accounts under watch list or special mention category, if performing advances, operating under adverse business or economic condition, are exhibiting certain distress signals. These accounts generally exhibit weakness, which are correctable but warrant bank closure attention.5) Early warning signals Different banks for identification of potential NPAs use a host of early warning signals. Most banks in India have load down a series of operational financial transactional indicator that could serve to identify emerging problem in credit exposures at any early stage further it is revealed that the indicator which may trigger early warning system depends not only on default in payment of installment and interest but also other factor such as deterioration in operating & financial performance of the borrower weakening industry characteristic, regulatory changes, general economic condition etc.

Chapter - 8 Impact of NPAs on Banks Profit and Lending ProwessThe efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks,but at thesame timebanks arerequired make provisionsforsuchNPAs from their current profits. NPAs have a deleteriouseffect on the return on assets inseveral ways - They erode current profits through provisioning requirements

They result in reduced interest income

They require higher provisioning requirements affecting profits and accretion tocapital funds and capacity to increase good quality risk assets in future, and

They limit recycling of funds, set in asset-liability mismatches, etc there is at times a tendency among some of the banks to understate the level of NPAs in order to reduce the provisioning and boost up bottom lines. It would only postpone the In the context of crippling effect on a bank's operations in all spheres, asset quality hasbeen placed as oneof the most important parameters in the measurement ofa bank'sperformance under the CAMELS supervisory rating system of RBI.

CHAPTER: 9 RBI GUIDELINESReserve Bank Guidelines on purchase/ sale of Non Performing Financial Assets9.1) SCOPE1.These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling non performing financial assets, from/ to other banks/FIs/NBFCs (excluding securitisation companies/ reconstruction companies).2. A financial asset, including assets under multiple/consortium banking arrangements, would be eligible for purchase/sale in terms of these guidelines if it is a non-performing asset/non performing investment in the books of the selling bank.3. The reference to 'bank' in the guidelines would include financial institutions and NBFCs.9.2) STRUCTUREThe guidelines to be followed by banks purchasing/ selling non-performing financial assets from / to other banks are given below. The guidelines have been grouped under the following headings:i) Procedure for purchase/ sale of non-performing financial assets by banks, including valuation and pricing aspects.ii) Prudential norms, in the following areas, for banks for purchase/ sale of non-performing financial assets: a. Asset classification normsb. provisioning normsc. Accounting of recoveriesd. Capital adequacy normse. Exposure normsiii) Disclosure requirements.a. Non performing financial assets that may be purchased/ sold;b. Norms and procedure for purchase/ sale of such financial assets;c. Valuation procedure to be followed to ensure that the economic valueof financialassets is reasonably estimatedd. Delegation of powers of various functionaries for taking decision on the purchase/sale of the financial assets; etc.e. Accounting policy

9.3) ASSET CLASSIFICATION AS PER THE RBI GUIDELINES:The primary (urban) co-operative banks should classify their assets into the following broad groups, viz.1) Standard Assets2) Sub-standard Assets3) Doubtful Assets4) Loss Assets

1) Standard Assets: Standard Asset is one which does not disclose any problems andwhich does not carry more than normal risk attached to the business. Such an asset should not be an NPA.

2) Sub-standard Assets :(i) With effect from March 31, 2005 an asset would be classified as sub-standard if it remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrowers/ guarantors 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 assets 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.

(ii) An asset where the terms of the loan agreement regarding interest and principal have been re-negotiated or rescheduled after commencement of production, should be classified as substandard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this condition.

3) Doubtful Assets:With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months. As in the case of sub-standard assets, rescheduling does not entitle the bank to upgrade the quality of an advance automatically.

A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Note: Consequent to change in asset classification norms w.e.f. March 31, 2005 banks are permitted to phase the consequent additional provisioning over a five year period commencing from the year ended March 31, 2005, with a minimum of 10 % of the required provision in each of the first two years and the balance in equal installments over the subsequent three years.

4) Loss Assets: A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or partly. In other words, such an asset is considered un-collectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

CHAPTER: 10 COUNTRY-WISE ANALYSIS10.1) Comparison with other Asian EconomiesComparison of Problems and Solutions Across 5 countriesCountryCauses of ProblemMechanisms used to solve the problem

India1. Legal impediments and time consuming nature of asset disposal process.1. Strengthening of Legal Norms

2. Manipulation by the debtors using political influence has been a cause for industrial bad debt being so high.2. Aligning of prudential norms with international standards

3.Political tool - Directed Credit to SSI and Rural sectors

3. Legal mechanisms including creation of ARCs and partialdisbanding of the BIFR

China1. Moral Hazard - SOE's belief that bailout will happen in a crisis situation1. Creation of AssetManagement Companies for the big four banks

2. Bankruptcy laws favour borrowers2. Foreign equity participation in the NPA disposal process

3. Inefficient legal enforcement mechanisms

3. Raising of disclosure standards

Japan1. Real estate boom and bust1. Strict action (including closure) for non compliance of capital norms

2. Time consuming legal mechanism

2. Securitisation of Real estate loans

3. Crony capitalism3. Extensive public funding for Bailouts

Korea1.Directed credit: Interest rate control1. Swift action in containing systemic risk

2.The compressed growth policy2. Use of CorporateRestructuring Vehicles(CRVs) and Debt/Equity Swaps

3. Lack of effective monitoring

3. Creation of Korea Asset Management Corporation (KAMCO) in 1997

4.Contagion Effects from South East Asia4. Extensive use ofSecuritization

Thailand1. legal system that favoured debtors1. Privatisation of government entities

2. Liberalised capital and current account.Borrowing were made with inaccurate assessment of foreign exchange risk2. Removal of caps on foreign equity ownership in FIs was removed.

3. Real estate speculation - Spike in prices and growth rate projections were wrong3. Creation of AMCs

4. Steep interest rate increase turned loans bad4. Government takeover of banks and FIs

CHAPTER: 11CASE STUDY OF NPA ON ORIENTAL BANK OF COMMERCE11.1) Introduction Oriental Bank of Commerce India was established in the year 1943 on 19th February in Lahore. After partition, Oriental Bank of Commerce shifted its Registered Office from Lahore to Amritsar paying every rupee to it. Oriental Bank of Commerce was nationalized on 15th April in 1980. Then departing customers of OBC bank had 307 branches with Rs. 282.61 crores as deposits and as advance Rs. 152.69. OBC has formulated the pattern of Bangladesh Grameen Bank with a unique feature of disbursing small loans ranging from Rs. 75 onwards. The Bank is providing training to rural people in using locally available raw material to produce pickles, jams etc. This in return increases self-employment and adds in increasing the income levels.11.2) Our Vision To be a sound all India, customer centric, efficient retail bank with contemporary size, technology and human capital; endeavouring to enrich lives across all sections of society; and committed to upholding the highest standards of corporate governance.11.3)Our mission To provide the finest banking services by upgrading human capital and infusing advanced technology, thereby achieving total customer satisfaction; and being reckoned as the Best Bank in the Industry on all efficiency parameter to enhance shareholders wealth by ensuring sound growth of business and make valuable contributions to national economic growth.11.4) Oriental Bank of Commerce Fact File Amongst the strongest banks in India High Capital Adequacy Ratio Consistent Profit-making Bank One of the Lowest Spreads in Banking Industry Total Working crosses the 35700 crore mark CRISIL Ratings The Highest Productivity per Employee NPA - One of the lowest

Oriental Bank of Commerce (OBC) have emerged as the top performing banks in terms of cleaning their bad assets and bringing down non-performing assets, taking advantage of healthy GDP growth and impressive top line and bottom line performance by borrowers.11.5) Working results of oriental bank of commerceDated 28th April 2011The oriental bank has announce the working results of the Bank for the year ended 31st March 2011. The Board of Directors met on 28th April 2011 in New Delhi and at the conclusion of the Meeting, the Results were declared.

WORKING RESULTSThe business figures of Oriental Bank of Commerce India for the last five years are as under:Rupees in Lakhs

FOR THE YEAR2003-20042004-20052005-20062006-20072007-2008

Total Income204641267943302645351438383566

Total expenditure181629240081282356319383337871

Net Profit for the year2301227862202883205545695

AT THE END OFYEARMar-04Mar-05Mar-06Mar-07Mar-08

Capital & Reserves123148142840154866161973210934

Deposits16804882209521246804328488392980909

Advances770756932553110764114157871567723

Total Assets18784162454120270724332262923398763

No. of branches899915932967989

No. of employees1444714398135881358913507

11.6)Profitability of OBC :a) Profitability of OBCThe gross profit OBC Bank stood at Rs. 1533 Crore as against Rs. 1163 Crore last year. After providing for contingencies and more than required provisions against non performing assets, the Bank has earned a handsome net profit of Rs. 686 Crore as against Rs. 457 Crore last year, thereby registering a growth of 50 % mainly on account of reduction in cost of deposits, strict control on expenses, efficient cash management, treasury income and large recoveries in NPA accounts.b)Dividend of OBCThe Oriental Bank of Commerce has provided for payment of 30% final dividend to the shareholders in addition to 20% interim dividend already paid during the financial year 2007-08 making total dividend 50%.c)Retail Portfolio of OBCThe retail loans of OBC have increased to Rs. 4318 Crores as against Rs. 2779 Crores last year, with a growth of 55.4%. These assets constitute 20.9 % of total loan assets. Oriental Bank of Commerce Housing loans account for 80% of retail portfolio.d) OBC Shareholder's EquityThe Net worth of Oriental Bank of Commerce has improved by Rs.567.46 Crore and reached a level of Rs. 2676.79 Crore against Rs. 2109.33 Crore last year.e) The OBC BusinessThe total business of Oriental Bank of Commerce has gone up to Rs. 56286 Crore from Rs. 46333 Crore last year thus registering a growth of 21.5%, due to high growth in deposits as well as advances. The deposit growth of OBC has been to the extent of 19.7 %( previous year 4.63%) while in advances the growth is 25.5 % (previous year 10.7%).11.7) Technology ImplementationOriental Bank of Commerce of India has implemented Centralized Banking Solution in 21 branches till date. It will give freedom of anywhere and anytime banking to customers. The business captured has resulted in 97% live computerized environment as against 93% last year. More than 350 branches have been networked .OBC emerged as the best performer in terms of size of net NPAs. OBCs net NPAs were 0.5 per cent cede its NPAs by 61.54 per cent as on March 31, 2010 as compared on March 31,2011.

Advice of RBI Though, the banks have exhibited a remarkable performance inlowering their NPAs in the fiscal 2009-10, at the same time, thebanks also need to focus on deposit mobilization, as per the RBI advice.

Oriental Bank of Commerce (OBC) has announced that it will moveto 100 per cent provisioning cover in the current financial yearending March 31, 2009.

A combination of factors including reduction of cost of deposits,strict control on expenses, efficient cash management and largerecoveries of non-performing assets (NPAs), besides treasuryincome accounted for the profit.

Treasury operations contributed Rs 481.59 crore (41.41%) to thegross profit of Rs 1,163.06 crore, while banking operationscontributed the balance Rs 681.47 crore (58.59%).

Total income increased from Rs 3,514.38 crore to Rs 3,835.66crore during the fiscal. Gross profit stood at Rs 1,163.06 crore,26.82 per cent higher than the previous fiscals Rs 917.09 crore.

CHAPTER: 12 FINDING & CONCLUSIONNon-performing assets of banks on the decline: ReportGroup wise movement inNon -performing asset 2011-2012

PositonScheduled bankPublic sector bankOld private bankNew private sector bankForeign bank

Gross NPAs as at the end march 201168,69854,0904,2917,4922,826

Gross NPAs as at the end march 20126478951538439259632894

Net NPAs as at the end march 2011326572486725474335907

Net NPAs as at the end march 2012246171886021402717900

Conclusion: The asset quality of scheduled commercial banks (SCBs) has shown a remarkable improvement in 2011-12, according to the RBI report on `Trends and Progress of Banking in India' released on Monday.

The central bank has noted that the gross non-performing assets (NPAs) of SCBs has declined in absolute terms for a second year in succession, despite the switch over to the 90-day delinquency norm, effective March 2012.

Gross NPAs of scheduled commercial banks declined by 5.6 per cent in 2011-12, against a decline of 3 per cent in 2010-11. Due to significant provisioning, the net NPAs declined substantially by 24.7 per cent during 2011-12 against a decline of 8 per cent in 2011-12, the report said.

The decline in NPAs is evident across bank groups. During 2011-12,reductions outpaced additions in the NPAs account. For SCBs, the decline in NPAs was accompanied by the decline in doubtful and loss assets by 8.8 per cent and 15 per cent respectively, the central bank has observed.

The ratio of net NPAs to net advances of SCBs declined from 4.4 percent in 2010-11 to 2.9 percent in 2011-12. All bank groups witnessed a decline in the ratio of net NPAs to net advances in 2011-12.

Among bank groups, the old private sector banks had the highest net NPAs ratio at 3.8 per cent, followed by public sector banks, new private banks and foreign banks. During 2011-12, the share of NPAs in the priority sector to total NPAs of public sector banks increased marginally. However, there was a decline in the share of NPAs of agriculture sector and small-scale industries but an increase in the share of other priority sectors.

The share of NPAs on account of public sector undertakings declined while the share of NPA of non-priority sectors increased during 2011-12. For private sector banks, the share of NPAs on account of agriculture sector was lower when compared with 2010-11. However, there was an increase in the shares of NPAs on account of small-scale industries and other priority sector as well as their overall NPAs for the priority sector.

The share of non-priority sector NPAs in total NPAs of private sector banks was lower than that in 2010-11. According to the report, the gross non-performing assets ratio of public sector banks has declined to 7.8 per cent in 2011-12 from 23 per cent in 2000-01.

As on June 30, 2012, 27 public sector banks had issued 61,263 notices involving an outstanding amount of Rs 19,744 crore and had recovered an amount of Rs 1,748 crore, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002.

CHAPTER: 13 SUGGESTIONS & RECCOMENDATION

13.1) SUGGESTIONS TO OVERCOME THE PROBLEM OF NPAs:

NPAs are increasing day by day in the CBE for a multiplicity of reasons. The following recommendations are suggested to the CBE to control over the NPAs. The recommendations are classified into three categories, are as follows.

A) General suggestions: The Bank should adopt the following General strategies for control of NPAs.The suggestions are as follows:

Projects with old technology should not be considered for finance

Large exposure on big corporate or single project should be avoided.

There is need to shift banks approach from collateral security to viability of the project and intrinsic strength of promoters.

Timely sanction and or release of loans by the bank is to avoid timeand cost overruns.

B) Pre-sanction suggestions: Analysis should therefore be based on trends of capacity utilization,profitability etc. Assumptions not account for ground realities.

Better taking up any fresh/exciting proposals for assessment, sourcesfor margin money should be thoroughly examined.

Uneven scale of repayment schedule with higher repayment in theinitial years normally is preferred.

C) Post sanctions suggestions: Bank should prevent diversion of funds by the promoters.

Operating staff should scrutinize the level of inventories/receivables at the time of assessment of working capital.

The Credit section should carefully watch the warning signals viz. non-payment of quarterly interest, dishonour of check etc.

Effective inspection system should be implemented.

13.2) Recommendation for future research The researchers who want to do future studies relating to the project on non- Performing asset in banking sector. For those researchers there are some recommendation.

Allow branches to use head office capital for regulatory purposes Eliminate limits for all banks Establish policy to improve foreign bank access to the won inter-bank market; Revise central bank swap pricing from a fixed return to cost basis. Assist in the development of professional, third party, qualified private, non-banking related loan-servicing and debt collection companies.

13.3 data analysis: After the relevant data were collected, descriptive analysis was carried out which was preferred for assessment purposes. Hence for all data interpretations were made and have been used to support discussions related to findings. Finally, conclusion and recommendations were made accordingly.Various studies have been conducted to analysis the reasons for NPA. Whatever may be complete elimination of NPA is impossible. The reasons may be widely classified in two:

(1) Over hang component(2) Incremental component

Over hang component is due to the environment reasons, business cycle etc.Incremental component may be due to internal bank management, credit policy, terms of credit etc.

BIBLIOGRAPHY

(A) WEBSITES:- http://en.m.wikipedia.org/ http://m.investorwords.com http://m.timesofindia.com http://www.rbi.org.in http://www.vissionbooksindia.com http://www.orientalpaperbacks.com http://www.ssbfnet.com

(B) BOOKS REFERED:- Non-Performing-Assets in Commercial Banks (Vibha Jain. New Delhi).

Managing Non-performing Assets in BanksS. N. BidaniK. Seethapathi

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