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A Summer Training Report
On
ANALYSIS OF ON NON PERFORMING ASSETS OF PUNJAB
AND SIND BANK
Undertaken at
SUBMITTED TO PUNJABI UNIVERSITY,PATIALA
IN PARTIAL FULFILLMENT OF THR REQUIREMENT FOR
THE AWARD OF THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION(SESSION 2009-2011)
Submitted to :- Submitted by:-
GEETIKA
MBA(III)
PUNJABI UNIVERSITY,PATIALA
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DECLARATION
I, GEETIKA hereby declare that this project report entitled
Analysis of non performing assets of Punjab and Sind bank
Prepared by me is a confide record of work done at Punjab and Sind bank, Branch Office,
Patiala, under the guidance of Prof S.S Virdhi, faculty, PUNJABI UNIVERSITY, Patiala in
partial fulfilment of MBA Program- during academic year-2009-11.
I further declare that the information presented in this project is true and original to the best of
my knowledge.
(GEETIKA)
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PREFACE
Research Project is an integral part of the professional studies and its purpose is to provide the
students with the practical exposure of the market in todays changing scenario.
It helps in the development of knowledge, skills and analytical thinking progress.
Theoretical Knowledge without practical learning is of little value.
To fulfill the need, the management course has the provision of practical learning.
We took our summer training in PUNJAB AND SIND BANK. It was our fortune that we
got the opportunity to do our summer training in an esteemed organization in very healthy and
co-operative atmosphere.
In the forthcoming pages, an attempt has been made to present a comprehensive report
concerning different aspects of our training.
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ACKNOWLEDGEMENT
If words are considered to be signs of gratitude then let these words convey the very same.
My sincere gratitude to PUNJAB AND SIND BANK for providing me with an opportunity
to work with BANK and giving necessary directions on doing this project to the best of my
abilities.
At the very outset I would like to express my sincere gratitude to Mr.Surjeet Singh, Branch
Manager,Sector-34, Chandigarh, who was kind enough for providing me this opportunity to
supervise my summer training in this organization.
I would like to extend my heartfelt thanks to the staff members of Punjab and Sind bank,Branch Office, G.N.N Tripuri, Patiala without whose guidance and support I would not have
been able to successfully complete my project. I also offer my sincere appreciation to the
staff in PSB.
My several well-wishers helped me directly or indirectly; I virtually fall short of words to
express my gratefulness to them. Therefore I am leaving this acknowledgement incomplete in
their reminiscence.
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TABLE OF CONTENTS
S.NO TOPICS PAGES
1. Introduction 8-12
2. Company Profile 13-22
3. Literature Review 23-26
4. Research Methodology 27-30
5. NPA and Provisioning 31-62
6. Analysis and Interpretation 63-75
7. Recovery Procedure 76-79
8. Suggestions and Conclusion 80-85
9. Bibliography 86
10. Annexure 87
EXECUTIVE SUMMARY
NPAs have turned to be a major stumbling block affecting the profitability of Indianbanks before 1992,banks did not disclose the bad debts sustained by them and provision made
by them fearing that it may have an adverse. Owing to the low levels of profitability, banks
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owned funds had to be strengthened by repeated infusion of additional capital by the
government. The introduction of prudential norms strengthen the banks financial position and
enhance transparency is considered as a milestone measure in the financial sector reform.
These prudential norms relate to income recognition, asset classification, provisioning for bad
and doubtful debts and capital adequacy.
An Explorative & Descriptive study was considered to be adequate to achieve the
objectives of the study, and the study was conducted in PUNJAB AND SIND BANK, on An
analysis of NPA in commercial banks with special reference to Punjab and Sind Bank. The
general objective of the study was to analyze the NPA level in commercial banks. However
the study was conducted with the following specific objectives..
To analyze the NPA level of Punjab and Sind bank.
To study the recovery procedures of Punjab and Sind Bank.
To examine how far the bank has been successful in reducing the NPA level.
To suggest measures for efficient management of NPAs.
The major limitation of the study was the paucity of time. Even then, maximum care has
been taken to arrive at appropriate conclusion. The method adopted for collection of data was
personal interview with bank officials using Inventory schedule as a tool for the same, and
it was also sourced from the secondary data. After collecting data from the respective sources,
analysis & interpretation of data has been made. On analyzing the data, the following findings
were arrived at:-
Net advances are an upward trend.
Net NPAs are decreasing.
Staff productivity is increasing and is reflected the recovery results.
Based on the findings, logical conclusions are drawn, and further, suitable suggestions &
recommendations are brought out. The entire project report is presented in the form of a report
using chapter scheme, developed logically and sequentially from introduction to bibliography &
references.
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HISTORY OF BANKING
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Banks were born to facilitate trade to lend monies to purchase goods, to store monies and to
change currencies. Banking began thousands of years ago. The Assyrians, Babylonians and
Ancient Greeks practiced simple forms of banking safekeeping, exchanging foreign coins
and making loans mainly in connection with trade. Temples such as those of Ephesus and
Delphi were Greek banking institutions. The Romans did not have State Banks but had minute
regulations regarding private banks. These were calculated to create utmost confidence in the
system.
Banking is nearly as old as civilization. The history of banking could be said to have started
with the appearance of money. The first record of minted metal coins was in Mesopotamia in
about 2500B.C. the first European banknotes, which was handwritten appeared in1661, in
Sweden. cheque and printed paper money appeared in the 1700s and 1800s, with many
banks created to deal with increasing trade.
The history of banking in each country runs in lines with the development of trade and
industry, and with the level of political confidence and stability. The ancient Romans
developed an advanced banking system to serve their vast trade network, which extended
throughout Europe, Asia and Africa.
Modern banking began in Venice. The word bank comes from the Italian word ban co,
meaning bench, because moneylenders worked on benches in market places. The bank of
Venice was established in 1171 to help the government raise finance for a war.
At the same time, in England merchant started to ask goldsmiths to hold gold and silver in
their safes in return for a fee. Receipts given to the Merchant were sometimes used to buy or
sell, with the metal itself staying under lock and key. The goldsmith realized that they could
lend out some of the gold and silver that they had and charge interest, as not all of the
merchants would ask for the gold and silver back at the same time. Eventually, instead of
charging the merchants, the goldsmiths paid them to deposit their gold and silver.
The bank of England was formed in 1694 to borrow money from the public for the
government to finance the war of Augsburg against France. By 1709, goldsmith were using
bank of England notes of their own receipts.
BANKING HISTORY OF INDIA
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Banking in India originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are
now defunct. The oldest bank in existence in India is the State Bank of India being established
as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks
like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time,
Calcutta was the most active trading port, mainly due to the trade of the British Empire, and
due to which banking activity took roots there and prospered. The first fully Indian owned
bank was the Allahabad Bank, which was established in 1865.
By the 1900s, the market expanded with the establishment of banks such as Punjab National
Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded
under private ownership. The Reserve Bank of India formally took on the responsibility of
regulating the Indian banking sector from 1935. After India's independence in 1947, the
Reserve Bank was nationalized and given broader powers.
NATIONALIZATION
The next significant milestone in Indian Banking occurred on July 19, 1969 when the then
Indira Gandhi government nationalized the 14 largest commercial banks. A second
nationalization of 6 more commercial banks followed in 1980. The stated reason for the
nationalization was to give the government more control of credit delivery. After this, until the
1990s, the nationalized banks grew at a leisurely pace of around 4%, closer to the average
growth rate of the Indian economy.
LIBERALIZATION
In the early 1990s the Narasimha Rao government embarked on a policy of liberalization and
gave licenses to a small number of private banks, which came to be known as new generation
tech-savvy banks, which included banks such as UTI Bank (the first of such new generation
banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in
the economy of India, kick started the banking sector in India, which has seen rapid growth
with strong contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%.
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The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new
wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.
All this led to the retail boom in India. People not just demanded more from their banks but
also received more.
BANKING STRUCTURE IN INDIA
In todays dynamic world banks are inevitable for the development of a country. Banks play a
pivotal role in enhancing each and every sector. They have helped bring a draw of
development on the worlds horizon and developing country like India is no exception.
Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for
moving finance from those who have surplus money to (however temporarily depositors
whose accounts are in credit to borrowers who are in debit.
Without the intermediary of the banks both their depositors and their borrowers would
have to contact each other directly. This can and does happen of course. This is what has
lead to the very foundation of financial institution like banks.
Before few decades there existed some influential people who used to land money. But a
substantially high rate of interest was charged which made borrowing of money out of the
reach of the majority of the people so there arose a need for a financial intermediate.
The Bank have developed their roles to such an extent that a direct contact between the
depositors and borrowers in now known as disintermediation. Banking industry has always
revolved around the traditional function of taking deposits, money transfer and making
advances. Those three are closely related to each other, the objective being to lend money,
which is the profitable activity of the three. Taking deposits generates funds for lending and
money transfer services are necessary for the attention of deposits. The Bank have introduced
progressively more sophisticated versions of these services and have diversified introduction
in numerable areas of activity not directly relating to this traditionaltrinity
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COMPANY OVERVIEW
(a)HISTORY
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It was in the year 1908, when a humble idea to uplift the poorest of poor of the land
culminated in the birth of Punjab & Sind Bank with the far-sighted vision of luminaries like
Bhai Vir Singh, Sir Sunder Singh Majitha and Sardar Tarlochan Singh.They enjoyed the
highest respect with the people of Punjab.
The bank was founded on the principle of social commitment to help the weaker section of the
society in their economic endeavours to raise their standard of life.
Decades have gone by, even today Punjab & Sind Bank stands committed to honor the social
commitments of the founding fathers.
(b)VISION AND MISSION
CORPORATE VISION
We envision to emerge as a strong vibrant Bank through synchronization of the human,
financial and technological resources.
CORPORATE MISSION
To put in place the effective risk management and internal contol system.
To adopt and operationalise high-level technology standards.
To strive to achieve excellence in customer service.
To achieve the highest standards of transparency and accountability in the conduct of
banking business.
To maximize profitability and profits of the Bank with due compliance of prudential
guidelines.
To maximize competitive risk adjusted return on capital, through planned reduction in the
average cost of funds, increased yield on advances and investments besides reduction in cost
of operations.
(c) MANAGEMENT
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SHRI PARVEEN KUMAR ANAND
EXECUTIVE DIRECTOR
DIRECTORS
SHRI A. BHATTACHARYA DIRECTOR (Ministry of Finance, Deptt. of Financial Services,
New Delhi)
SHRI R. SADANANDAM (RBI Nominee Director)
SHRI SANDIP GHOSE, ADDITIONAL DIRECTOR (Regional Director, RBI New Delhi)
NON- OFFICIAL DIRECTORS
SHRI MATTA VENKATA SIVA PRASAD
SHRI KRISHAN MURARI GANGAWAT
SHRI HARI CHAND BAHADUR SINGH
SHRI A.K. SURANA (C.A. Category)
SHRI KARANPAL SINGH SEKHON
SHRI MANISH GUPTA
GENERAL MANAGERS
SARDAR GURCHARAN SINGH REKHI
(Chief General Manager)
(Posted at H.O.)
SARDAR HARCHARAN SINGH MAKKER (Posted at H.O.)
SARDAR HARCHARN SINGH LAMBA
SARDAR PARAMJIT SINGH GHAWRI (Posted at H.O.)
SARDAR JASPAUL SINGH KOCHAR (Posted at H.O.)SARDAR GURVINDER SINGH BINDRA (Posted at H.O.)
SARDAR KULWANT SINGH SUCHDEVA (Posted at H.O.)
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SARDAR GURCHARAN SINGH
(Posted at H.O.)
SARDAR GURPAL SINGH MALIK (Posted at Z.O.
KOLKATTA)
SARDAR HARVINDER PAL SINGH (Posted at Z.O. MUMBAI)
SARDAR MANJIT SINGH (Posted at H.O.)
SHRI DINESH KUMAR GUPTA (CVO - Posted at H.O)
(d) SERVICE PROFILE
DEPOSITS
Different types of deposit accounts:
Different types of deposit accounts:
(a) Saving Bank account (b) Term deposit account
(c) interest rate account (d) Current account
(e) Recurring deposit account (f) Lockers account
ADVANCES
Base rate
Priority sector
Housing
Consumer
Conveyance
Personal loan
Education
Debt restructuring
Other loans
FPC leading
SERVICES
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ATM branches
Locker facilities
Credit cards
RTGS/NEFT
PSB-eFunds transfer
(e) SPL TIEUPS
PSB AVIVA ALLIANZ-Insurance
Punjab & Sind Bank has special tie-up arrangements for Non Life insurance business withM/s Bajaj Allianz General Insurance Company and Life Insurance business arrangements with
M/s Aviva Life Insurance Company India Pvt. Ltd. for providing its valued customers all the
insurance related services under one roof. The Bank has established insurance desks
throughout the country at different branches where Insurance Officers are posted and have
also allotted cluster of surrounding branches.
About PSB and Aviva Tie-up
Aviva signed Corporate Agency Agreement with PSB in September 2004 under which
the bank deployed its Insurance Officers (Specified Persons) to sell the Life Insurance
products to its customers through vast network of 918 branches spread over 175
Districts ,25 States and Union Territory of Chandigarh.
The Bank has tied up with Bajaj Allianz Life Insurance Company Ltd. (BALIC) to provide
Low Cost Life Insurance Cover to New & Existing Education Loan and Housing Loan
borrowers on voluntary basis, under the Group Insurance Scheme.
PSB-MARUTI SUZUKI
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The Bank having signed MOU with MSIL for Auto financing through their approved dealers.
The features of the scheme under Tie-up arrangement are as under
1
.
Purpose To finance new Maruti Suzuki vehicles
2
.
Eligibility:
(i)
Employees of Central/
State Government PSUs,
Organisations.
(ii)
Employees of established
& recognized schools/
colleges / local registered
bodies, where loan
installment is paid by salary
deduction or undertaking
from employer for
remitting the terminal
benefits is available.
(iii
)
Employees of Corporate
clients of Bank, where loan
installment is paid by salary
deduction or undertaking
from employer for
remitting the terminal
benefits is available.
(iv)
Employees of reputed
Corporates in regular
service and having
permanent residence proof.
(v)
Professionals/ Self
employed, CAs doctors ,
Architects and General
public.
Quantum of Loan
(i) to
(iv):
Thrice the average of annual
income of past three years as per
ITR/ Salary details subject to a
maximum of Rs.10 lac . ( Income
of spouse can be clubbed)
(v)
Thrice the average of annual
income of the past three years as
per ITR ( Income of spouse can
be clubbed ) . Maxm.Rs.10 lac .
40% of the total income to meet
day to day expenses should be
ensured.
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PSB- Tata Motors Ltd.
In order to boost lendings under Commercial Vehicle segment Bank has entered into an
MOU with Tata Motors Ltd Indias largest Commercial Vehicle Co for financing of com-
mercial vehicles . In this context, under this arrangement, Bank has introduced a compete-
tive and innovative credit delivery system in association with TML, effective implementa-
tion which will be a source of successful business growth for the Bank.
The salient features of the approved scheme are as under:
1. Eligibility
a)Individuals, proprietorship/partnership firm./ Limited company, trust, society, owning and
operating or proposing to own and operate transport vehicles for carrying passengers or good
on hire.
b) The borrower should have sufficient net worth to pay for the margin and initial recurring
expenses like registration, Insurance, etc. In case where the borrower does not meet this
requirement, a co-borrower having sufficient net worth to be included.
.
2. Margin: 15% on chasis and 25% on body.
3. DSCR Minimum 1.75
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THE DEPOSITS OF PUNJAB AND SIND BANK
(FROM 04-05 TO 09-10)
Amount in crores
The aggregate deposits of the bank has increased from 11844.02 crores to 22939.56 crores
during the period 2004-05 to 2009-10. On analyzing the trend of such increase in the deposits
over the period we can clearly see that it is increasing at a increasing rate. The modest growth
especially during the last three years is mainly due to a conscious decision on to shed the
Year
Deposits
of the
bank
(Rs)
Increase /
Decrease
over the
previous
years figure
2004-05 11844.02 ---
2005-06 12591.50 6.31
2006-07 13877.06 10.20
2007-08 15656.46 12.81
2008-09 19351.26 23.60
2009-10 22939.56 18.54
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highest cost deposits. With focus on bringing down the cost of deposit, field function areas
have been constantly exhorted to step up the share of low cost of deposit.
ADVANCES OF THE PUNJAB AND SIND BANK
(FROM 2004-05 TO 2009-10)
Amount in crores
YearAdvance of the
Bank (Rs)Increase/decrease over
the previous year figure
%Increase /
Decrease over the
previous years
figure
2004-05 39567.33_
---
2005-06 40834.71 1267.38 3.20
2006-07 48271.60 7437.89 0.18
2007-08 56810.81 8538.21 17.68
2008-09 84868.22 28057.41 49.38
2009-10 66648.85 (18219.37) (21.46)
The aggregate advances of the bank has increased from 39567.33 crores to 66648.85 crores
during the period 2004-05 to 2009-10.The credit appraisal system was fine tuned and effective
system was put to place to ensure the quality of asset. A tenor linked prime lending rate was
introduced during the year 2006 to give a boost to short term lending. Exposure to various
sectors is strictly maintained within the stipulated ceiling. The system and procedures were
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streamlined to incipient irregularities in the asset step without delay. A substantial positive
change in credit dispensation and monitoring was initiated through a visited credit policy.
Which primarily aim at segmentation of the retail and corporate portfolios for improved thrust
in both these areas.
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S WOT ANALYSIS OF PSB
MISSION
Promotion and sustenance of economic interest & providing easy finance, cost effective and
quality banking services to customer & PACs.
STRENGTHS
Special incentives in form of aides and subsidised loans given by state and central
government in order to expand credit to rural and priority sector.
Diversified Portfolio with innovative schemes like Revolving Cash Credit to farmers (RCC),
Conversion loan facility, Commercial Dairy development scheme, Non Farm sector loan
scheme(NFS) that caters to the special needs of farmers and other priority sectors.
Well laid organisation structure and effective leadership.
Well Qualified and trained staff fully dedicated towards fulfillment of banks objectives.
WEAKNESSES
No provision of new age services like Home Banking, On-line Banking, Telephone Banking.
Lack of ATMs and debit card facility to its customers.
Limited Branch network.
Partial computerization of the operations.
OPPURTUNITIES
Introduction of new and innovative loan schemes like Dairy loan scheme for purchase of cow,
Advances to salary earners etc.
THREATS
Increased competition from innovative service profile of private sector banks like ICICI,
HDFC etc.
Competition in core sectors like rural advances, SSI loans from other UCBs and public sector
banks
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Caprio & Klingebiel (1996), studied the Bank insolvency is more costly in the developing
world, where losses represent a greater share of income. The authors present data on bank
insolvency episodes since the late 1970s. This new database can be used in conjunction with
readily available data. Information and insights are presented in seven tables on: a) major
bank insolvencies episodes and systemic banking crises; b) main characteristics of banking
crises; c) trade terms in crisis countries; d) trade concentration prior to crises; e) restructuring
characteristics; f) financial analysis of crisis countries; and g) restructuring outcome in crisis
countries. In a companion paper the authors discuss possible preventatives and the tradeoff
between safety and soundness versus efficiency. Meanwhile, this initial database suggests
further avenues for research. There is a dearth of widely available indicators on bank
performance. More attention should be focused on developing indicators that might predict
bank insolvency for individual banks and systems as a whole. The authors devise criteria for
assessing how governments deal with insolvency and find that countries handle it well.
Lawrence Sez (2001), analyzes the important process about financial reform in the area of
bank illiquidity in low-income emerging markets. This process is taking place within the
context of a debate as to whether or not governments should try to rehabilitate existing state-
owned banks or allow a new or parallel banking system to emerge in order to reduce non-
performing assets from state-owned commercial banks. A comparison of institutional
development in China and India suggests that new entry rather than the rehabilitation
approach may work more favorably to reduce non-performing assets. The paper offers an
explanation as to why governments choose rehabilitation over new entry.
Milind Sathye(2001), measured the productive efficiency of banks in a developing country,
that is, India. The measurement of efficiency is done using data envelopment analysis. Two
models have been constructed to show how efficiency scores vary with change in inputs and
outputs. The efficiency scores, for three groups of banks, that is, publicly owned, privately
owned and foreign owned, are measured. The study shows that the mean efficiency score of
Indian banks compares well with the world mean efficiency score and the efficiency of private
sector commercial banks as a group is, paradoxically lower than that of public sector banks
and foreign banks in India. The study recommends that the existing policy of reducing non-
performing assets and rationalization of staff and branches may be continued to obtain
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efficiency gains and make the Indian banks internationally competitive which is a declared
objective of the Government of India.
Reddy Prashanth K. (2002), studied financial sector reform in India has progressed rapidly
on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry,
prudential norms and risk-based supervision. But progress on the structural-institutional
aspects has been much slower and is a cause for concern. The sheltering of weak institutions
while liberalizing operational rules of the game is making implementation of operational
changes difficult and ineffective. Changes required to tackle the NPA problem would have to
span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper
deals with the experiences of other Asian countries in handling of NPAs. It further looks into
the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem
by drawing on experiences from other countries.
Reddy, Mohan (2003, 2004),examined that several studies have underscored the role of
banks lending policy and terms of credit, which include cost, maturity and collateral in
influencing the movement of non-performing assets of banks.
Satish Kumar B. (2005), analyzed that in liberalizing economy, banking and financial sector
get high priority. Indian banking sector is having a serious problem due to non performing
loans. The financial reforms have helped largely to clean NPA was around Rs. 52,000 crores
in the year 2004. The earning capacity and profitability of the bank are highly affected due to
this. The extent of NPA is comparatively higher in public sectors banks. It is highly
impossible to have zero percentage NPA. But at least Indian banks can try competing with
foreign banks to maintain international standard.
Dhanuskodi R. (2006), studied the Non-Performing Assets (NPAs) in Commercial Bank of
Ethiopia. Banks play a very important role in the economic development of every nation.
They have control over a large part of the supply of money in circulation. Banks are the main
stimulus of the economic progress of a country. In general there are several challenges
confronting of commercial banks. The main challenge confronting the commercial bank is the
disbursement of funds in quality assets (loans and advances).
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RESEARCH METHODOLOGY
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The purpose of research is to discover answers to the questions through the application of
scientific procedures. The main aim of research is to find out the truth which is hidden and
which has not been discovered as yet. Though each research study has its own specific
purpose, we may think of research objectives as falling into a number of following broad
categories:
To gain familiarity with a phenomenon or to achieve new insights into it.
To portray accurately the characteristics of a particular individual, situation or a
group.
To determine the frequency with which something occurs or with which it is
associated with something else.
To test a hypothesis of a casual relationship between variables.
Research methodology is a way to systematically solve the research problem . it may be
understood as a science of studying how research is done scientifically. In it we study the
various steps that are generally adopted by a researcher in studying his research problem
along with the logic behind them.
Research methodology has many dimensions and research methods do constitute a part of the
research methodology. The scope of research methodology is wider than that of research
methods. Thus, when we talk of research methodology we not only talk of the research
methods but also consider the logic behind the methods we use in the context of our research
study and explain why we are using a particular method or technique and why we are not
using others so that research results are capable of being evaluated either by the researcher
himself or by others. Why a research study has been undertaken, what data have been
collected and what particular method has been adopted, why particular technique of analyzing
data has been used and a host of similar other question are usually answered when we talk of
research methodology concerning a research problem or study.
Research is often described as active; diligent and systematic process of inquiry aimed at
discovering, interpreting and revising facts. This intellectual investigation produces a greater
understanding of events, behaviors or theories and makes practical application through laws
and theories. In other words we can say, the purpose of research is to discover answers to the
questions through the application of scientific procedures. The main aim of research is to find
out the truth which is hidden and which has not been discovered as yet.
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Research methodology is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done scientifically. In it we study the
various steps that are generally adopted by a researcher in studying his research problem
along with the logic behind them.
OBJECTIVE OF THE STUDY
The general objective of the study was to analyze the NPA level of banks. However the
study was conducted with the following specific objectives.
To analyze the NPA level of Punjab and Sind bank.
To study the recovery procedures of Punjab and Sind bank
To examine how far the bank has been successful in reducing the NPA level.
To suggest measures for efficient management of NPAs.
To bring out an explorative & descriptive report on Analysis of NPA in banks, with special
reference to Punjab and Sind bank,Patiala
METHODOLOGY OF STUDY
The research methodology adopted for carrying out the study were:
In this project Descriptive research methodologies were use.
At the first stage theoretical study is attempted.
At the second stage Historical study is attempted.
At the Third stage Comparative study of NPA is undertaken.
SAMPLING TECHNIQUE
Sampling refers to selecting a part of the population to represent the characteristics of the
population. However, in this study, Finance Manager of the bank is the source of data and
therefore, since he is the only one source of information, there is no question of any sampling.
Both primary and secondary data were collected & used for drawing conclusions for the
study.
Primary data:- were collected using Inventory schedule & also through interview, held withthe Finance Manager in presence of the other officials of Punjab and Sind bank .
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Secondary data:- were collected from the published annual reports of the Bank and other
sources. Such data collected were analyzed for some kind of a trend and its impact on the
profit of the bank.
TOOLS USED FOR ANALYSIS OF DATA
The data collected were analyzed with the help of statistical tools like frequency,
percentage and trend analysis. Tables are used to represent the consolidated data. Graphical
representation is also used for better comprehension & presentation.
SCOPE OF THE STUDY
The study was conducted in the Punjab and Sind bank,Patiala.The following are the main
scope of the study:
Scope of this study is limited to the organization selected.
Present a picture of the movement of NPA in Punjab and Sind bank.
This study will help to know the drawbacks of the present recovery strategies.
This study will help them to think about new innovative recovery strategy.
For this purpose I have covered officials of the bank from various department.
LIMITATIONS OF THE STUDY
The major limitation of the study was the paucity of time. Even then, maximum care has
been taken to arrive at appropriate conclusion. Following are the limitations of the study:
For the purpose of collecting vital information, Finance Manager of the bank is only
contacted & interviewed. Since he is an individual, his biases may have crept into the data
given.
Data pertains to NPA from 2004-05 to 2009 10 only.
Due to time constraint depth analysis could not be made.
Some of the information is considered confidential and not available for the study.
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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,
no can not be then left is to look after the factor responsible for it and managing those factors.
Definitions:
An asset, including a leased asset, becomes non-performing when it ceases to generate income
for the bank.
A non-performing asset (NPA) was defined as a credit facility in respect of which the
interest and/ or instalment of principal has remained past due for a specified period of time.
PERFORMING AND NON PERFORMING ASSETS
A performing asset is an advance, which generate income to the bank by way of interest and
their charges.
An NPA is an advance of borrower account which does not generate income for the bank but
they incur various inherent costs like a) Cost of deposit b) Cost of servicing c) provisioning at
appropriate rates d) Capital adequacy requirements on these assets and e) Cost of recovery.
NON PERFORMING ASSETS (NPA)
Nonperforming 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 .
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I DENTIFICATION OF NPAs
Identification of an account as NPA depends upon the nature of borrowable account whether it
is a) Operative b) Non operative c) Bills d) Agricultural advances or any other miscellaneous
accounts.
A. Operative like cash credit, over draft etc: -
A cash credit / over draft account will have to be treated as NPA if account remains out of
order for more than 180 days.
An account shall be out of order if any one of the following conditions exist:-
a. The balance outstanding remakes continuously in excess of the sanctioned limit
during the last six months prior to balance sheet.
b. The balance outstanding is within the limit / drawing / drawing power but there is no
credit in the account continuously for six months as on the balance sheet date.
c. There is credit but such credit is not enough to cover the interest debited during the
six month as on the date of banks balance sheet.
B. Non operative like term loans, borrowal account with repayment programs: -
If interest / installment of principal remain overdue for a period of more than 180 days.
Note: When the prudential norms were introduced in 1992, the concept of past due was
incorporated and it was classified that an amount should be classified as past due when it
remains outstanding for 30 days beyond the due date. However due to improvement in the
payment and settlement systems, recovery climate, up gradation of technology in banking
systems etc. It has been decided by RBI to dispense with the past due concept with effect
from 31st March 2001. Hence to all account to become NPA, cut off date is September 30th
of the Year under audit.
C. Bill purchased / Discounted / Negotiated:
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A bill purchased / discounted / negotiated becomes NPA, if it remains overdue and unpaid for
two quarters or more. For bills discounted, for the unusance period and grace period should
be taken to consideration for arriving at the due date.
D. Agricultural advances: -
Agricultural advances where interest and or installments of principal remains unpaid after it
has become past due for two harvest season but for a period exceeding to half years should be
treated as NPA.
E. Miscellaneous accounts:-
Any other credit facility or account should be treated as NPA if any amount to be received in
respect of that facility or amount remains unrealized / uncovered for a period of two quarters.
Adoption of 90 days norm:
The RBI has advised banks to adopt 90 days norm instead of 180 days for classification of
assets as in impaired one with effect from MARCH 2004 and to start making additional
provisions for such asserts from March 2002 to absorb the impact due to reduction of NPA
period. The accounts which may turn NPA with 90-day period have to be identified and 10%
rprovision to be found out.
90 Days Norms:
With a view to moving towards international best practices and to ensure greater transparency,
the 90 days overdue norm for identification of NPAs has been adopted, from the year ended
March 31, 2004. The 90 days norm would continue to be applicable for the Balance Sheet as
at 31.03.2007.
Accordingly, a Non Performing Asset shall be a loan or advance where:
Interest and/or installment of principal remain overdue for a period of more than 90 days in
respect of a Term loan.
The account remains out of order in respect of an Overdraft/ Cash Credit (OD/CC).
The bill remains overdue for a period of more than 90 days in the case of Bills Purchasedand Discounted.
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In case of advance granted for agricultural purposes interest and/or installment of principal
remains for two crop seasons (in case of short duration crops) and for one crop season (in case
of long duration crops)
Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.
Even though, interest is being charged at monthly rests, the date of classification of an
advance as NPA should not be changed on account of charging of interest at monthly rests.
Branches should therefore, continue to classify an account as NPA only if the interest charged
during any quarter is not serviced fully with in 90 days from the end of the quarter.
'Out of Order' status'Out of Order' status::
An account should be treated as 'out of order'if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding
balance in the principal operating account is less than the sanctioned limit/drawing power, but
there are no credits continuously for six months as on the date of Balance Sheet or credits are
not enough to cover the interest debited during the same period, these accounts should be
treated as 'out of order'.
Overdue: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.
Due Date:
Due Date refers to the date on which interest/installment is payable by the borrower. Interest
has to be collected at monthly rests in respect of Working Capital and Term Loans, except
Agriculture Advances as per instructions.
Normally interest falls due for payment immediately on the date of debit. In respect of certain
category of advances such as Project Finance, Agricultural Advances (including Gold Loans),
Loans granted to Staff, Education Loan etc., where repayment holiday is granted, the due date
should fall only after the expiry of the said specified period. The installment of principal falls
due for payment as per the term of sanction. In case of EMI Loans, due date refers to the due
date for the stipulated installment which comprises both principal and interest.
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Asset classification Norms
Standard Assets:Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this case
the arrears of interest and the principal amount of loan do not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is amount due more than 90
days then it is NPA and NPAs are further need to classify in sub categories.
Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
realisability of the dues:
(1) Sub-standard Assets(1) Sub-standard Assets
(2) Doubtful Assets(2) Doubtful Assets
(3) Loss Assets(3) Loss Assets
(1) Sub-standard Assets:--(1) Sub-standard Assets:--
With effect from 31 March 2005, a sub standard asset would be one, which has remained
NPA for a period less than or equal to 12 month. The following features are exhibited by sub
standard assets: the current net worth of the borrowers / guarantor or the current market value
of the security charged is not enough to ensure recovery of the dues to the banks in full; and
the asset has well-defined credit weaknesses that jeopardise the liquidation of the debt and are
characterised by the distinct possibility that the banks will sustain some loss, if deficiencies
are not corrected.
(2) Doubtful Assets:--(2) Doubtful Assets:--
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as
sub-standard, with the added characteristic that the weaknesses make collection or liquidation
in full, on the basis of currently known facts, conditions and values highly questionable
and improbable.
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With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the
sub-standard category for 12 months.
(3) Loss Assets:--Loss Assets:--
A loss asset is one which considered uncollectible and of such little value that its continuance
as a bankable asset is not warranted- although there may be some salvage or recovery value.
Also, these assets would have been identified as loss assets by the bank or internal or
external auditors or the RBI inspection but the amount would not have been written-off
wholly.
Guidelines for classificationn of assets
The classification of assets into above categories should be done taking into account the
degree of well-defined credit weakness and the extend of dependence on collateral security for
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 accounts. The bank
may fix a minimum cut off point to decide what would constitute a high value account
depending upon their respective business levels. The cut off point will be valid for the entire
accounting year.
Accounts with temporary deficiencies: -
The classification of assets as NPA should be based on record of recovery. Banks should
not classify an advance as NPA merely due to the existence of some deficiencies which are
temporary in nature such as non availability of adequate drawing power base don the latest
available stock statement, balance outstanding exceeding the limits temporarily, non
submission of stock statements and non renewal of the limits on the due date etc.
Asset classification to be borrower-wise and not facility-wise
a. It is difficult to envisage a situation when only one facility to a borrower becomes a
problems 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 part there of which has
become irregular.
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b. If the debits arising out of development of letters of credit or invoked guarantees
are parked in a separate account, the balance outstanding in that account also should be treated
as a part of the borrowers principal operating account for the purpose of application of
prudential loans on income recognition, asset classification and provision.
Accounts where there is erosion in the value of security
a. A NPA need not go through various stages of classification in cases of serious credit
impairment and such assets should be straight away classified as doubtful or loss asset as
appropriate. Erosion in the value of security can be reckoned as significant when realizable
value of the security is less than 50% of the value assessed by the bank or accepted by the RBI
at the time of last inspection, as the case may be. Such NPAs may be straight away classified
under doubtful category and provisioning should be made as applicable to doubtful assets.
b. If the realizable value of the security has assessed by the bank/approved valuers /
RBI is less than 10% of the outstanding in the borrowal accounts, the existence of security
should be ignored and the asset should be straight away classified as loss asset. It may be
either written off or fully provided for by the bank.
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TYPES OF NPATYPES OF NPA
A] Gross NPAA] Gross NPA
B] Net NPAB] Net NPA
A] Gross NPA:A] Gross NPA:Gross NPAs are the sum total of all loan assets that are classified as NPAs
as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of 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: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 burdenof 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 as follows:
Net NPAs Gross NPAs Provisions
Gross Advances - Provisions
The following are deducted from gross NPA to arrive at net NPA.
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a. Balance in Interest Suspense account, if applicable;
b. Deposit Insurance Guarantee Corporation / Export Credit Guarantee Corporation claim
receive and pending adjustment;
c. Part payment received and kept in Suspense account;
d. Total provisions held excluding technical write off made at Head Office and provision
of standard assets.
RBI has advised that while reporting banks has to reduce technical write off made at Head
Office from gross advance also.
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INCOME RECOGNITIONINCOME RECOGNITION
Interest income is recognized on an approval basis except in case of NPAs where it is
recognized on receipt. This means income can be recognized only on receipt for NPA
accounts. For performing assets, income can be recognized on the basis of receipts, accrual or
both. Due to the implementation of the prudential norms accrual concept has been changed
into recoverability concept in recognizing in the income on NPA.
Income recognition PolicyIncome recognition Policy
The policy of income recognition has to be objective and based on the record of
recovery. Internationally income from non-performing assets (NPA) is not recognised on
accrual basis but is booked as income only when it is actually received. Therefore, the banks
should not charge and take to income account interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided adequate margin is
available in the accounts.
Fees and commissions earned by the banks as a result of re-negotiations or
rescheduling of outstanding debts should be recognised on an accrual basis over the period of
time covered by the re-negotiated or rescheduled extension of credit.
If Government guaranteed advances become NPA, the interest on such advances
should not be taken to income account unless the interest has been realised
Reversal of income:Reversal of income:
If any advance, including bills purchased and discounted, becomes NPA as at the
close of any year, interest accrued and credited to income account in the corresponding
previous year, should be reversed or provided for if the same is not realised. This will apply
to Government guaranteed accounts also.
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In respect of NPAs, fees, commission and similar income that have accrued should
cease to accrue in the current period and should be reversed or provided for with respect to
past periods, if uncollected.
PROVISIONING NORMS
Loss assets:Loss assets:
The entire asset should be written off. If the assets are permitted to remain in the books for
any reason, 100 percent of the outstanding should be provided for.
Doubtful assets:Doubtful assets:
100 percent of the extent to which the advance is not covered by the realisable value
of the security to which the bank has a valid recourse and the realisable value is estimated on a
realistic basis.
In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20 percent to 50 percent of the secured portion depending upon the period
for which the asset has remained doubtful:
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Period for which the advance
has been considered as doubtful
Provision
requirement (%)
Up to one year 20
One to three years 30
More than three years:
(1) Outstanding stock of
NPAs as on March 31, 2004.
(2) Advances classified as
doubtful more than three years
on or after April 1, 2004.
60% with effect
from March
31,2005.
75% effect from
March 31, 2006.
100% with effect
from March 31,
2007.
Additional provisioning consequent upon the change in the definition of doubtful
assets effective from March 31, 2003 has to be made in phases as under:
As on31.03.2003, 50 percent of the additional provisioning requirement on the assets which
became doubtful on account of new norm of 18 months for transition from sub-standard asset
to doubtful category.
As on 31.03.2002, balance of the provisions not made during the previous year, in addition
to the provisions needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning consequent upon the
reduction in the transition period from substandard to doubtful asset from 18 to 12 months
over a four year period commencing from the year ending March 31, 2005, with a minimum
of 20 % each year.
Note: Valuation of Security for provisioning purposes
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With a view to bringing down divergence arising out of difference in assessment of the value
of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual
intervals by external agencies appointed as per the guidelines approved by the Board would be
mandatory in order to enhance the reliability on stock valuation. Valuers appointed as per the
guidelines approved by the Board of Directors should get collaterals such as immovable
properties charged in favour of the bank valued once in three years.
Sub-standard assets:Sub-standard assets:
A general provision of 10 percent on total outstanding should be made without making any
allowance for DICGC/ECGC guarantee cover and securities available.
Standard assets:Standard assets:
From the year ending 31.03.2000, the banks should make a general provision of a
minimum of 0.40 percent on standard assets on global loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at net NPAs.
The provisions towards Standard Assets need not be netted from gross advances but
shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities
and Provisions - Others' in Schedule 5 of the balance sheet.
Floating provisions:Floating provisions:
Some of the banks make a 'floating provision' over and above the
specific provisions made in respect of accounts identified as NPAs. The floating provisions,
wherever available, could be set-off against provisions required to be made as per above
stated provisioning guidelines. Considering that higher loan loss provisioning adds to the
overall financial strength of the banks and the stability of the financial sector, banks are urged
to voluntarily set apart provisions much above the minimum prudential levels as a desirable
practice.
Provisions on Leased Assets:Provisions on Leased Assets:
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Leases are peculiar transactions where the assets are not recorded in the books of the user ofLeases are peculiar transactions where the assets are not recorded in the books of the user of
such assets as Assets, whereas they are recorded in the books of the owner even though thesuch assets as Assets, whereas they are recorded in the books of the owner even though the
physical existence of the asset is with the user (lessee).physical existence of the asset is with the user (lessee).
__(AS19 ICAI)__(AS19 ICAI)
Sub-standard assets : -
10 percent of the 'net book value'.
As per the 'Guidance Note on Accounting for Leases' issued by the ICAI, 'Gross book
value' of a fixed asset is its historical cost or other amount substituted for historical cost in the
books of account or financial statements. Statutory depreciation should be shown separately in
the Profit & Loss Account. Accumulated depreciation should be deducted from the Gross
Book Value of the leased asset in the balance sheet of the lesser to arrive at the 'net book
value'.
Also, balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book
value' of the leased assets. The amount of adjustment in respect of each class of fixed assets
may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate
column in the section related to leased assets.
Doubtful assets :-
100 percent of the extent to which the finance is not secured by the realisable value of the
leased asset. Realisable value to be estimated on a realistic basis. In addition to the above
provision, the following provision on the net book value of the secured portion should be
made, depending upon the period for which asset has been doubtful:
Period %age of
provision
Up to one year 20
One to three
years
30
More than three
years
50
Loss assets :-
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The entire asset should be written-off. If for any reason, an asset is allowed to remain in
books, 100 percent of the sum of the net investment in the lease and the unrealised portion of
finance income net of finance charge component should be provided for. ('net book value')
Guidelines for Provisions under Special CircumstancesGuidelines for Provisions under Special Circumstances
Government guaranteed advancesGovernment guaranteed advances
With effect from 31 March 2000, in respect of advances sanctioned against State
Government guarantee, if the guarantee is invoked and remains in default for more than two
quarters (180 days at present), the banks should make normal provisions as prescribed in
paragraph above.
As regards advances guaranteed by State Governments, in respect of which guarantee stood
invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner,
during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent
each year.
Advances granted under rehabilitation packages approved by BIFR/term lending institutions:Advances granted under rehabilitation packages approved by BIFR/term lending institutions:
In respect of advances under rehabilitation package approved by BIFR/term lending
institutions, the provision should continue to be made in respect of dues to the bank on the
existing credit facilities as per the their classification as sub-standard or doubtful asset.
As regards the additional facilities sanctioned as per package finalised by BIFR and/or term
lending institutions, provision on additional facilities sanctioned need not be made for a period
ofone year from the date of disbursement.
In respect of additional credit facilities granted to SSI units which are identified as sick [as
defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002] and
where rehabilitation packages/nursing programmes have been drawn by the banks themselves
or under consortium arrangements, no provision need be made for a period of one year.
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Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and lifeAdvances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life
policies are exempted from provisioning requirements.policies are exempted from provisioning requirements.
However, advances against gold ornaments, government securities and all other kinds ofHowever, advances against gold ornaments, government securities and all other kinds of
securities are not exempted from provisioning requirements.securities are not exempted from provisioning requirements.
Treatment of interest suspense account:Treatment of interest suspense account:
Amounts held in Interest Suspense Account should not be reckoned as part of provisions.
Amounts lying in the Interest Suspense Account should be
deducted from the relative advances and thereafter, provisioning as per the norms, should be
made on the balances after such deduction.
Advances covered by ECGC/DICGC guarantee:Advances covered by ECGC/DICGC guarantee:
In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the
balance in excess ofthe amount guaranteed by these Corporations. Further, while arriving at
the provision required to be made for doubtful assets, realisable value of the securities should
first be deducted from the outstanding balance in respect of the amount guaranteed by these
Corporations and then provision made as illustrated hereunder:
Example
Outstanding Balance Rs. 4 lakhs
DICGC Cover 50 percent
Period for which the advance has
remained doubtful
More than 3
years remained
doubtful
Value of security held
(excludes worth of Rs.)
Rs. 1.50 lakhs
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Provision required to be made
Outstanding balance Rs. 4.00 lakhs
Less: Value of security held Rs. 1.50 lakhs
Unrealised balance Rs. 2.50 lakhs
Less: DICGC Cover
(50% of unrealisable balance)
Rs. 1.25 lakhs
Net unsecured balance Rs. 1.25 lakhs
Provision for unsecured portion
of advance
Rs. 1.25 lakhs (@ 100
percent of unsecured
portion)
Provision for secured portion of
advance
Rs. 0.75 lakhs (@ 50
percent of secured
portion)
Total provision required to be
made
Rs. 2.00 lakhs
Advance covered by CGTSI guaranteeAdvance covered by CGTSI guarantee
In case the advance covered by CGTSI guarantee becomes non-performing, no provision need
be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed
portion should be provided for as per the extant guidelines on provisioning for non-
performing advances. Two illustrative examples are given below:
Example I
Asset classification
status:
Doubtful More than 3
years;
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CGTSI Cover 75% of the amount
outstanding or 75% of
the unsecured amount or
Rs.18.75 lakh,
whichever is the least
Realisable value ofSecurity
Rs.1.50 lakh
Balance outstanding Rs.10.00 lakh
Less Realisable
value of security
Rs. 1.50 lakh
Unsecured amount Rs. 8.50 lakh
Less CGTSI cover
(75%)
Rs. 6.38 lakh
Net unsecured and
uncovered portion:
Rs. 2.12 lakh
Provision
Required
Secured portion Rs.1.50 lakh Rs. 0.75 lakh
(@ 50%)
Unsecured &
uncovered portion
Rs.2.12 lakh Rs. 2.12 lakh
( 100%)
Total provision
required
Rs. 2.87 lakh
Example II
Asset classification
status
Doubtful More than 3
years;
CGTSI Cover 75% of the amount
outstanding or75% of
the unsecured amount or
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Rs.18.75 lakh,
whichever is the least
Realisable value of
Security
Rs.10.00 lakh
Balance outstanding Rs.40.00 lakh
Less Realisable
value of security
Rs. 10.00 lakh
Unsecured amount Rs. 30.00 lakh
Less CGTSI cover
(75%)
Rs. 18.75 lakh
Net unsecured and
uncovered portion:
Rs. 11.25 lakh
Provision
Required
Secured portion Rs.10.00 lakh Rs. 5.00 lakh
(@ 50%)
Unsecured &
uncovered portion
Rs.11.25 lakh Rs.11.25 lakh
(100%)
Total provision
required
Rs. 16.25 lakh
Take-out financeTake-out finance
The lending institution should make provisions against a 'take-out finance' turning into NPA
pending its take-over by the taking-over institution. As and when the asset is taken-over by the
taking-over institution, the corresponding provisions could be reversed.
Reserve for Exchange Rate Fluctuations Account (RERFA)Reserve for Exchange Rate Fluctuations Account (RERFA)
When exchange rate movements of Indian rupee turn adverse, the outstanding amount of
foreign currency denominated a loan (where actual disbursement was made in Indian Rupee)
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which becomes overdue goes up correspondingly, with its attendant implications of
provisioning requirements. Such assets should not normally be revalued. In case such assets
need to be revalued as per requirement of accounting practices or for any other requirement,
the following procedure may be adopted:
The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account.
Besides the provisioning requirement as per Asset Classification, banks should treat the full
amount of the Revaluation Gain relating to the corresponding assets, if any, on account of
Foreign Exchange Fluctuation as provision against the particular assets.
REPORTING OF NPAsREPORTING OF NPAs
Banks are required to furnish a Report on NPAs as on 31st March each year after
completion of audit. The NPAs would relate to the banks global portfolio, including the
advances at the foreign branches. The Report should be furnished as per the prescribed format
given in the Annexure I.
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While reporting NPA figures to RBI, the amount held in interest suspense account,
should be shown as a deduction from gross NPAs as well as gross advances while arriving at
the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due
on non-performing
advance accounts, may furnish the amount of interest receivable on NPAs as a footnote to the Report.
Whenever NPAs are reported to RBI, the amount of technical write off, if any,
should be reduced from the outstanding gross advances and gross NPAs to eliminate any
distortion in the quantum of NPAs being reported.
IMPACT OF NPAIMPACT OF NPA
Profitability:-Profitability:-
NPA means booking of money in terms of bad asset, which occurred due to wrong choice of
client. Because of the money getting blocked the prodigality of bank decreases not only by the
amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some
return earning project/asset. So NPA doesnt affect current profit but also future stream of
profit, which may lead to loss of some long-term beneficial opportunity. Another impact of
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reduction in profitability is low ROI (return on investment), which adversely affect current
earning of bank.
Liquidity:-Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand which
lead to borrowing money for shorter period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to lack of
money, Routine payments and dues.
Involvement of management:-Involvement of management:-
Time and efforts of management is another indirect cost which bank has to bear due to NPA.
Time and efforts of management in handling and managing NPA would have diverted to some
fruitful activities, which would have given good returns. Now days banks have special
employees to deal and handle NPAs, which is additional cost to the bank.
Credit loss:-Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which have negative impact to the
people who are putting their money in the banks.
REASONS FOR NPA:REASONS FOR NPA:
Reasons can be divided in to two broad categories:-
A] Internal Factor
B] External Factor
[ A ] Internal Factors:-[ A ] Internal Factors:-
Internal Factors are those, which are internal to the bank and are controllable by banks.
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Poor lending decision:
Non-Compliance to lending norms:
Lack of post credit supervision:
Failure to appreciate good payers:
Excessive overdraft lending:
Non Transparent accounting policy:
[ B ] External Factors:-[ B ] External Factors:-
External factors are those, which are external to banks they are not controllable by banks.
Socio political pressure:
Chang in industry environment:
Endangers macroeconomic disturbances:
Natural calamities
Industrial sickness
Diversion of funds and wilful defaults
Time/ cost overrun in project implementation
Labour problems of borrowed firm
Business failure
Inefficient management
Obsolete technology
Product obsolete
Early symptoms by which one can recognize a performing asset turning in
to Non-performing asset
Four categories of early symptoms:-
---------------------------------------------------
(1) Financial:
Non-payment of the very first instalment in case of term loan.
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Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in instalment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that instalment.
While monitoring the accounts it is found that partial amount is diverted to sister concern or
parent company.
(2) Operational and Physical:
If information is received that the borrower has either initiated the process of winding up or
are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where borrower conduct
his business.
Frequent changes in plan.
Non payment of wages.
( 3 ) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners.
(4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
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PREVENTIVE MEASUREMENTS FOR NPA
Early Recognition of the Problem:-Early Recognition of the Problem:-
Invariably, by the time banks start their efforts to get involved in a revival process, its too late
to retrieve the situation- both in terms of rehabilitation of the project and recovery of banks
dues. Identification of weakness in the very beginning that is : When the account starts
showing first signs of weakness regardless of the fact that it may not have become NPA, is
imperative. Assessment of the potential of revival may be done on the basis of a techno-
economic viability study. Restructuring should be attempted where, after an objective
assessment of the promoters intention, banks are convinced of a turnaround within a
scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to
facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible throughlegal means before the security position becomes worse.
Identifying Borrowers with Genuine Intent:Identifying Borrowers with Genuine Intent:
Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of frontline
officials at the branch level is paramount as they are the ones who has intelligent inputs with
regard to promoters sincerity, and capability to achieve turnaround. Based on this objective
assessment, banks should decide as quickly as possible whether it would be worthwhile to
commit additional finance.
In this regard banks may consider having Special Investigation of all financial transaction
or business transaction, books of account in order to ascertain real factors that contributed to
sickness of the borrower. Banks may have penal of technical experts with proven expertise
and track record of preparing techno-economic study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will obviate the need to route the
additional funding through the controlling offices in deserving cases, and help avert many
accounts slipping into NPA category.
Timeliness and Adequacy of response:-Timeliness and Adequacy of response:-
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Longer the delay in response, grater the injury to the account and the asset. Time is a crucial
element in any restructuring or rehabilitation activity. The response decided on the basis of
techno-economic study and promoters commitment, has to be adequate in terms of extend of
additional funding and relaxations etc. under the restructuring exercise. The package of
assistance may be flexible and bank may look at the exit option.
Focus on Cash Flows:-Focus on Cash Flows:-
While financing, at the time of restructuring the banks may not be guided by the conventional
fund flow analysis only, which could yield a potentially misleading picture. Appraisal for
fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash
Flow rather than only on the basis of Funds Flow.
Management Effectiveness:-Management Effectiveness:-
The general perception among borrower is that it is lack of finance that leads to sickness and
NPAs. But this may not be the case all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that affects a borrowing units fortunes.
A bank may commit additional finance to an aling unit only after basic viability of the
enterprise also in the context of quality of management is examined and confirmed. Where the
default is due to deeper malady, viability study or investigative audit should be done it will
be useful to have consultant appointed as early as possible to examine this aspect. A proper
techno- economic viability study must thus become the basis on which any future action can
be considered.
MEASURES INITIATED BY RBI AND GOVERNMENT OF
INDIA FOR REDUCTION OF NPAs
Compromise settlement schemes
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The RBI / Government of India have been constantly goading the banks to take steps for
arresting the incidence of fresh NPAs and have also been creating legal and regulatory
environment to facilitate the recovery of existing NPAs of banks. More significant of them, I
would like to recapitulate at this stage.
The broad framework for compromise or negotiated settlement of NPAs advised by RBI
in July 1995 continues to be in place. Banks are free to design and implement their own
policies for recovery and write-off incorporating compromise and negotiated settlements with
the approval of their Boards, particularly for old and unresolved cases falling under the NPA
category. The policy framework suggested by RBI provides for setting up of an independent
Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinize
and recommend compromise proposals.Specific guidelines were issued in May 1999 to public
sector banks for one time non-discretionary and non-discriminatory settlement of NPAs of
small sector. The scheme was operative up to September 30, 2000. [Public sector banksrecovered Rs. 668 crore through compromise settlement under this scheme.]
Guidelines were modified in July 2000 for regcovery of the stock of NPAs of Rs. 5 crore
and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001
helped the public sector banks to recover Rs. 2600 crore by September 2001]
An OTS Scheme covering advances of Rs.25000 and below continues to be in operation and
guidelines in pursuance to the budget announcement of the Honble Finance Minister
providing for OTS for advances up to Rs.50,000 in respect of NPAs of small/marginal farmers
are being drawn up.
Lok Adalats
Lok Adalat institutions help banks to settle disputes involving accounts in doubtful and
loss category, with outstanding balance of Rs.5 lakh for compromise settlement under Lok
Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to
decide on cases of NPAs of Rs.10 lakhs and above. The public sector banks had recovered
Rs.40.38 crore as on September 30, 2001, through the forum of Lok Adalat. The progress
through this channel is expected to pick up in the coming years particularly looking at the
recent initiatives taken by some of the public sector banks and DRTs in Mumbai. For more
details about Lok Adalats please refer to page Lok Adalat
Debt Recovery Tribunals
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The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in
March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of
more than one Recovery Officer, power to attach defendants property/assets before judgment,
penal provisions for disobedience of Tribunals order or for breach of any terms of the order
and appointment of receiver with powers of realization, management, protection and
preservation of property are expected to provide necessary teeth to the DRTs and speed up the
recovery of NPAs in the times to come.
Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals
located in five centers viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they could
decide only 9814 cases for Rs.6264.71 crore pertaining to public sector banks since inception
of DRT mechanism and till September 30, 2001.The amount recovered in respect of these
cases amounted to only Rs.1864.30 crore.
Looking at the huge task on hand with as many as 33049 cases involving Rs.42988.84 crore
pending before them as on September 30, 2001, I would like the banks to institute appropriate
documentation system and render all possible assistance to the DRTs for speeding up
decisions and recovery of some of the well collateralized NPAs involving large amounts. I
may add that familiarization programmes have been offered in NIBM at periodical intervals to
the presiding officers of DRTs in understanding the complexities of documentation and
operational features and other legalities applicable of Indian banking system. RBI on its part
has suggested to the Government to consider enactment of appropriate penal provisions
against obstruction by borrowers in possession of attached properties by DRT receivers, and
notify borrowers who default to honour the decrees passed against them.
Circulation of information on defaulters
The RBI has put in place a system for periodical circulation of details of willful defaults of
borrowers of banks and financial institutions. This serves as a caution list while considering
requests for new or additional credit limits from defaulting borrowing units and also from the
directors /proprietors / partners of these entities. RBI also publishes a list of borrowers (with
outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks
and FIs for recovery of their funds, as on 31st March every year. It is our experience that these
measures had not contributed to any perceptible recoveries from the defaulting entities.
However, they serve as negative basket of steps shutting off fresh loans to these defaulters. Istrongly believe that a real breakthrough can come only if there is a change in the repayment
psyche of the Indian borrowers.
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Recovery action against large NPAs
After a review of pendency in regard to NPAs by the Honble Finance Minister, RBI had
advised the public sector banks to examine all cases of willful default of Rs 1 crore and above
and file suits in such cases, and file criminal cases in regard to willful defaults. Board of
Directors are required to review NPA accounts of Rs.1 crore and above with special reference
to fixing of staff accountability.
On their part RBI and the Government are contemplating several supporting measures
including legal reforms, some of them I would like to highlight.
Asset Reconstruction Company :
An Asset Reconstruction Company with an authorized capital of Rs.2000 crore and initial
paid up capital Rs.1400 crore is to be set up as a trust for undertaking activities relating to
asset reconstruction. It would negotiate with banks and financial institutions for acquiring
distressed assets and develop markets for such assets.. Government of India proposes to go in
for legal reforms to facilitate the functioning of ARC mechanism
Legal Reforms
The Honorable Finance Minister in his recent budget speech has already announced the
proposal for a comprehensive legislation on asset foreclosure and Securitization. Since
enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in December
2002.
Corporate Debt Restructuring (CDR )
Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a
timely and transparent system for restructuring of the corporate debts of Rs.20 crore and
above with the banks and financial institutions. The CDR process would also enable viable
corporate entities to restructure their dues outside the existing legal framework and reduce the
incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a
Standing Forum and Core Group for administering the mechanism had already been put in
place. The experiment however has not taken off at the desired pace though more than six
months have lapsed since introduction. As announced by the Honble Finance Minister in the
Union Budget 2002-03, RBI has set up a high level Group under the Chairmanship of Shri.Vepa Kamesam, Deputy Governor, RBI to review the implementation procedures of CDR
mechanism and to make it more effective. The Group will review the operation of the CDR
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Scheme, identify the operational difficulties, if any, in the smooth implementation of the
scheme and suggest measures to make the operation of the scheme more efficient.
Credit Information Bureau
Institutionalisation of information sharing arrangements through the newly formed Credit
Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the
recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of
information dissemination on defaults to the financial system. The main recommendations of
the Group include dissemination of information relating to suit-filed accounts regardless of the
amount claimed in the suit or amount of credit granted by a credit institution as also such
irregular accounts where the borrower has given consent for disclosure. This, I hope, would
prevent those who take advantage of lack of system of information sharing amongst lending
institutions to borrow large amounts against same assets and property, which had in no small
measure contributed to the incremental NPAs of banks.
Proposed guidelines on wi
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