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Seminar On
Contemporary Issues In


Rajasthan Technical University , Kota

Submitted By: Under Guidance


Vision School Of Management

Affiliated to Rajasthan Technical University Kota AICTE
E-Mail :
Website :


2. What is NPA...................................................................................................2


3.1 General Reasons for Assets Becoming NPA.......................................3

3.2 Classification of assets of scheduled commercial bank..............4

3.3 Gross and net NPA of different sector of bank............................4

4. Management of NPA....................................................................................5

4.1 Provisioning Requirement for Loans or


5. General Method of Management of NPA...............................................6- 7

6. Difficulties with the Non-performing Assets...............................................8

7. Comparison with other Asian Economies...................................................9

8. Bank-Wise (NPAs) of Scheduled Commercial Bank 2008..................10-


9. Some Facts Regarding NPA of Major 25 Banks of India........................13

10. The Changing Dynamics in Asian Non- Performing Loans.............14-16

11. Developing the Asian Markets for Non-Performing Assets...................17

12. Developing the Indian Markets for Non-Performing Assets............18-19

13. Conclusion..................................................................................................20

14. Suggestion to Overcome the Problem of NPA........................................21

15. Bibliography & References.......................................................................22


In preparation of this report by me, I feel great pleasure because it gives

me extensive practical knowledge. I get idea about Non Performing Assets by
this report.

I express my deep sense of gratitude to Dr. A.L. Jain (Director of

vision school of Management, Chittorgarh) for his valuable guidance during
my report work. I also grateful to all Faculty members Dr. Snehal Maheshkar,
Mr.Vibhor Paliwal, Mrs.Pratibha Pagaria, Miss. Shobhika Tyagi, Mr.
Rahul Jain and Staff members Mr. Purshottam Dashora, Mr.
Rastraverdhan who guided me in my report.

I am thankful to my friends Latika Surana, Ranu Shetiya, Preeti Paul,

Bharti Sharma for valuable inspiration and guidance provided me through out
this report work.

I would like to take opportunity to express my gratitude towards all of

them who have contributed directly or indirectly in my project work.


This Project is done for the partial fulfillment of the two year MBA program.
This Research project is a compulsory part of the academics. This research is
done in the second semester of the MBA program.

The topic of the study is “study ot non performing assets i india”. The reason
for selecting this topic the NPA is a problem facing by the Indian banks.
Banking industry plays an important sector to the overall economic
development of India is ever inreasing.

• The other objective of the topic were to analyse the trands in NPA
of Indian banking sector.
• A comperative analysis of NPA in various banking sector like
public sector,SBI & its associates, Nationalise bank etc.

The report is devided in to Fifteen Chepter.

• The First topic is the introduction of the NPA. In this chapter there are
detail about History of NPA.
• In the Second topic the Mening of NPA is given.
• The Third topic is about Assets classification in which General Reasons
for Assets Becoming NPA,Classification of assets of scheduled
commercial bank, Gross and net NPA of different sector of bank are
• The Fourth & Fifth topics are about Management of NPA, General
Method of Management of NPA.
• The Sixth & Seventh topics are deeply discribe Difficulties with the
Non-performing Assets, Comparison with other Asian Economies.
• Next Eighth & Nineth topics are Bank-Wise (NPAs) of Scheduled
Commercial Bank,Some Facts Regarding NPA of Major 25 Banks of
• The Tenth & Eleventh topics are about Changing Dynamics in Asian
Non- Performing Loans with Developing the Asian Markets for Non-
Performing Assets.
• The Twelth topic is all about Developing the Indian Markets for Non-
Performing Assets.
• The last Thirteen, Fourteen & Fifteen topics are about Conclusion,
Suggestion & Bibliography & References.
This report is a honest work towards the topic. There can be many short
comings in it bceause ot the lack of the time, un availability of data and other


Banking sector reforms in India has progressed promptly on aspects like

interest rate deregulation, reduction in statutory reserve requirements,
prudential norms for interest rates, asset classification, income recognition and
provisioning. But it could not match the pace with which it was expected to do.
The accomplishment of these norms at the execution stages without
restructuring the banking sector as such is creating havoc. This research paper
deals with the problem of having non-performing assets, the reasons for
mounting of non-performing assets and the practices present in other countries
for dealing with non-performing assets.

During pre-nationalization period and after independence, the banking sector

remained in private hands Large industries who had their control in the
management of the banks were utilizing major portion of financial resources of
the banking system and as a result low priority was accorded to priority sectors.
Government of India nationalized the banks to make them as an instrument of
economic and social change and the mandate given to the banks was to expand
their networks in rural areas and to give loans to priority sectors such as small
scale industries, self-employed groups, agriculture and schemes involving

To a certain extent the banking sector has achieved this mandate. Lead Bank
Scheme enabled the banking system to expand its network in a planned way
and make available banking series to the large number of population and touch
every strata of society by extending credit to their productive Endeavour’s.
This is evident from the fact that population per office of commercial bank has
come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of
advances of public sector banks to priority sector increased form 14.6% in
1969 to 44% of the net bank credit. The number of deposit accounts of the
banking system increased from over 3 crores in 1969 to over 30 crores.
Borrowed accounts increased from 2.50 lakhs to over 2.68 crores.

Action for enforcement of security interest can be initiated only if the secured
asset is classified as Non Performing Asset.

Non Performing Asset means an asset or account of borrower, which has been
classified by a bank or financial institution as sub-standard, doubtful or loss
asset, in accordance with the directions or guidelines relating to asset
classification issued by RBI.

An amount due under any credit facility is treated as "past due" when it has not
been paid within 30 days from the due date. Due to the improvement in the
payment and settlement systems, recovery climate, up gradation of technology
in the banking system, etc., it was decided to dispense with 'past due' concept,
with effect from March 31, 2001. Accordingly, as from that date, a Non
performing asset (NPA) shell be an advance whereinterest and /or installment
of principal remain overdue for a period of more than 180 days in respect of a
Term Loan, the account remains 'out of order' for a period of more than 180
days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains overdue
for a period of more than 180 days in the case of bills purchased and
discounted, 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 any amount to be received
remains overdue for a period of more than 180 days in respect of other

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 form March 31, 2004, a non-performing asset (NPA) shell be a loan
or an 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' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC), the bill remains overdue for a period of more
than 90 days in the case of bills purchased and discounted, interest and/ or
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 any amount to be received remains overdue for a
period of more than 90 days in respect of other accounts.

The RBI has issued guidelines to banks for classification of assets into four

1. Standard ASSESTS:
These are loans which do not have any problem are less risk.

2. Substandard ASSESTS:
Non-performing loans or advances past due 90(ninety) days or more but less
than 180(one-hundred- eighty days) days shall, at a minimum, is classified sub

Without prejudice to the classification criteria used for the sub standard
category set out above, the following non-performing loans and advances shall
be categorized as substandard

3. Doubtful ASSESTS:
Non-performing loans or advances past due 180 days or more, but less than 360
days shall be classified, at a minimum, as doubtful.

4. Loss ASSESTS:
Non-performing loans or advances past due 360 days or more shall be
classified as Loss.


A multiplicity of factor is responsible forever increasing size of NPAs in banks.
A few prominent reasons for assets becoming NPAs are as under.

4Poor credit appraisal system

4Lack of proper monitoring
4Reckless advances to achieve the budgetary targets.
4There is no or lack of corporate culture in the Banking adequate legal
provisions on foreclosure and bankruptcy.
4Change in economic policies/ environment.
4No transparent accounting policy and poor auditing practices.
4Lack of coordination between banks.
4Directed lending to certain sectors.
4Failure on the part of the promoters to bring their portion of equity from their
own source or public issue due to market turning lukewarm.
The classification of assets of scheduled commercial bank

Table1 (Amount Rs. crores)

Assets 2001 2002 2003 2004
494716 609972 709260 837130
Standard assets
(88.6) (89.6) (91.2) (92.8)
18206 21382 20078 21026
Sub standard assets
(3.3) (3.1) (2.6) (2.3)
37756 41201 39731 36247
Doubtful assets
(6.8) (6.1) (5.1) (4.36)
8001 8370 8971 7625
Loss assets
(1.4) (1.2) (1.2) (0.8)
63963 70953 68780 902027
Total NPA
(11.4) (10.4) (8.8) (100)

Income recognition and provisioning

Income from NPA is not recognized on accrued basic but is booked as income
only when, it is actually received. RBI has also tightened red the provisions
norms against asset classification. It ranges from 0.25% to 100% from standard
asset to loss asset respectively.

Gross and net NPA of different sector of bank

Table 2 (end of March 31) (in %)
category Gross NPA/ Gross Advance
2001 2002 2003 2004
Public sector bank 12.37 11.09 9.36 7.79
Private sector 8.37 9.64 8.07 5.84
Foreign bank 6.84 5.38 5.25 4.62

Table 3 (end of March 31) (in %)

category Net NPA / Net Advance
2001 2002 2003 2004
Public sector bank 6.74 5.82 4.53 2.98
Private sector 2.27 2.49 2.32 1.32
Foreign bank 1.82 1.89 1.76 1.49

The table II and III shows that the percentage of gross NPA/ gross advance and
net NPA/ net advance are in a decreasing trend. This shows the sign of
efficiency in public and private sector banks. but still if compared to foreign
banks Indian private sector and public sector banks have a higher NPA.

The table II&III shows that during 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. Some of them are.

1.One time settlement / compromise scheme

2. Lok Adalats
3. Debt Recovery Tribunals
4. Securitization and reconstruction of financial assets and enforcement of
Security Interest Act 2002.
5. Corporate Reconstruction Companies
6. Credit information on defaulters and role of credit information bureaus

Provisioning Requirement for Loans or Advances

All Banks shall maintain a Provision for Loans Losses Account which shall be
created by charges to provision expense in the income statement and shall be
maintained at a level adequate to absorb potential losses in the loans or
advances portfolio. In determining the adequacy of the Provisions for Loan
Losses Account, provisions may be attributed to individual loans or advances
or groups of loans or advances.

The provisions for Loan Losses Account shall always have a credit balance.
Additions to or reductions of the Provisions for Loan Losses Account shall be
made only through charges to provisions in the income statement.

Based on the asset classification, the banks are required to make a provision
against the Loans or advances. Bank shall maintain the minimum provision
percentages against the outstanding provision and of each loan or advances.

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. The same information is given in the chart 1.1.


Legal remedies

Regular Training Program

Recovery Camps

Write offs

Spot Visit

Rehabilitation of potentially viable


Other Methods

General Methods of Management of NPAs


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.
* Where security is available for assessing the realizable value, proper weight age
should be given to the location, condition and marketable title and possession of sub
* 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.

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

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.

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.

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.

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
Difficulties with the non-performing assets

1. Owners do not receive a market return on their capital. In the worst case, if
the bank fails, owners lose their assets. In modern times, this may affect a
broad pool of shareholders.

2. Depositors do not receive a market return on savings. In the worst case if the
bank fails, depositors lose their assets or uninsured balance. Banks also
redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets,
which hampers economic growth.

3. Non performing loans epitomize bad investment. They misallocate credit

from good projects, which do not receive funding, to failed projects. Bad
investment ends up in misallocation of capital and, by extension, labour and
natural resources. The economy performs below its production potential.

4. Non performing loans may spill over the banking system and contract the
money stock, which may lead to economic contraction. This spillover effect
can channelize through illiquidity or bank insolvency; (a) when many
borrowers fail to pay interest, banks may experience liquidity shortages. These
shortages can jam payments across the country, (b) illiquidity constraints bank
in paying depositors e.g. cashing their paychecks. Banking panic follows. A
run on banks by depositors as part of the national money stock become
inoperative. The money stock contracts and economic contraction follows (c)
undercapitalized banks exceeds the banks capital base.

Lending by banks has been highly politicized. It is common knowledge that

loans are given to various industrial houses not on commercial considerations
and viability of project but on political considerations; some politician would
ask the bank to extend the loan to a particular corporate and the bank would
oblige. In normal circumstances banks, before extending any loan, would make
a thorough study of the actual need of the party concerned, the prospects of the
business in which it is engaged, its track record, the quality of management and
so on. Since this is not looked into, many of the loans become NPAs.

The loans for the weaker sections of the society and the waiving of the loans to
farmers are another dimension of the politicization of bank lending.
Most of the depositor’s money has been frittered away by the banks at the
instance of politicians, while the same depositors are being made to pay
through taxes to cover the losses of the bank.
Comparison with other Asian Economies

Comparison of Problems and Solutions Across 5 countries

Country Causes of Problem Mechanisms used to solve the

India 1. Legal impediments and time 1. Strengthening of Legal Norms
consuming nature of asset disposal
2. Manipulation by the debtors using 2. Aligning of prudential norms with
political influence has been a cause for international standards
industrial bad debt being so high.
3.Political tool - Directed Credit to SSI 3. Legal mechanisms including
and Rural sectors creation of ARCs and partial
disbanding of the BIFR
China 1. Moral Hazard - SOE's belief that 1. Creation of Asset Management
bailout will happen in a crisis situation Companies for the big four banks
2. Bankruptcy laws favour borrowers 2. Foreign equity participation in the
NPA disposal process
3. Inefficient legal enforcement 3. Raising of disclosure standards
4. Political & social implications 4.Laws enabling Asset backed
compulsions force the government to securitisation.
keep them afloat.
Japan 1. Real estate boom and bust 1. Strict action (including closure) for
non compliance of capital norms
2. Time consuming legal mechanisms 2. Securitisation of Real estate loans
3. Crony capitalism 3. Extensive public funding for
4. 'The no-bankruptcy doctrine'
Korea 1.Directed credit: Interest rate control 1 Swift action in containing systemic
2.The “compressed growth” policy 2. Use of Corporate Restructuring
Vehicles (CRVs) and Debt/Equity
3. Lack of effective monitoring 3. Creation of Korea Asset
Management Corporation (KAMCO)
in 1997
4.Contagion Effects from South East 4. Extensive use of securitization
Thailand 1. legal system that favoured debtors 1. Privatisation of government entities
4. Steep interest rate increase turned 4. Government takeover of banks
loans bad and FIs
3. Real estate speculation - Spike in 3. Creation of AMCs
prices andgrowth rate projections were

(Amount in Rs. Crore)

As on March 31
Bank Name Gross Gross Gross NPA
NPAsAdvance Ratio %
State Bank of India & its Associates
State Bank of Bikaner & Jaipur 437 25304 1.7

State Bank of Hyderabad 312 35901 0.9

State Bank of India 12837 422181 3.0
State Bank of Indore 265 18356 1.4
State Bank of Mysore 359 21305 1.7
State Bank of Patiala 521 36724 1.4
State Bank of Saurashtra 179 12309 1.5
State Bank of Travancore 571 28440 2.0

Nationalised Banks

Allahabad Bank 1011 50312 2.0

Andhra Bank 372 34556 1.1

Bank of Baroda 1981 107672 1.8
Bank of India 1931 114793 1.7
Bank of Maharashtra 766 29798 2.6
Canara Bank 1416 107655 1.3
Central Bank of India 2350 74287 3.2
Corporation Bank 584 39664 1.5
Dena Bank 573 23381 2.4
IDBI Bank Ltd 1565 83608 1.9
Indian Bank 487 40228 1.2
Indian Overseas Bank 997 61058 1.6
Oriental Bank of Commerce 1280 55327 2.3
Punjab & Sind Bank 136 18409 0.7
Punjab National Bank 3319 120932 2.7
Syndicate Bank 1769 65197 2.7
UCO Bank 1652 55627 3.0
Union Bank of India 1657 75879 2.2
United Bank of India 761 28152 2.7
Vijaya Bank 512 32019 1.6

Foreign Banks
AB Bank 3 26 10.2

ABN AMRO Bank 294 20502 1.4

Abu Dhabi Commercial Bank 19 182 10.7
Antwerp Diamond Bank - 476 0.0
BNP Paribas 34 3805 0.9
Bank of America 1 3453 0.0
Bank of Bahrain & Kuwait 25 301 8.4
Bank of Ceylon 17 56 29.6
Bank of Nova Scotia 2 4776 0.0
Barclays Bank 61 7664 0.8


(Amount in Rs. Crore)
Bank Name As on March 31
Gross Gross Gross NPA
NPAsAdvance Ratio %
Calyon Bank 2 1815 0.1
China Trust Commercial Bank 1 129 1.0
Citibank 1011 38915 2.6
Deutsche Bank 60 9000 0.7
Development Bank of Singapore 5 2368 0.2
Hongkong & Shanghai Banking Corporation 697 30467 2.3
JP Morgan Chase Bank 121 1158 10.5
Krung Thai Bank - 9 0.0
Mashreq Bank - 41 0.0
Mizuho Corporate Bank 7 863 0.8
Oman International Bank - 1 0.0
Shinhan Bank - 314 0.0
Societe Generale - 385 0.0
Sonali Bank Ltd 1 9 10.0
Standard Chartered Bank 723 33729 2.1
State Bank of Mauritius - 214 0.0
The Bank of Tokyo - Mitsubishi UFJ - 2307 0.0

Other Scheduled Commercial Banks

Axis Bank 486 59899 0.8

Bank of Rajasthan 126 7529 1.7
Catholic Syrian Bank 131 3387 3.9
Centurion Bank of Punjab 540 16455 3.3
City Union Bank 83 4575 1.8
Development Credit Bank 63 4105 1.5
Dhanalakshmi Bank 63 2146 2.9
Federal Bank 469 19327 2.4
HDFC Bank 904 64032 1.4
ICICI Bank 7580 229892 3.3
IndusInd Bank 392 12897 3.0
ING Vysya Bank 116 14663 0.8
Jammu & Kashmir Bank 485 19164 2.5
Karnataka Bank 380 11102 3.4
Karur Vysya Bank 194 9569 2.0
Kotak Mahindra Bank 453 15729 2.9
Lakshmi Vilas Bank 138 3931 3.5
Nainital Bank 19 1002 1.8
Ratnakar Bank 37 617 6.0
SBI Commercial & International Bank 5 364 1.4
South Indian Bank 188 10597 1.8
Tamilnad Mercantile Bank 122 5431 2.2
Yes Bank 11 9432 0.1

All Scheduled Commercial Banks 56668 2507885 2.3

Note : Data are Provisional. Figures are rounded off. Data pertain to the
balance sheets of banks.
Source : Department of Banking Supervision, RBI

Some facts regarding NPA of major 25 banks of India are:

● Net non-performing assets (NPAs) of 25 banks have risen by an average

21.75 per cent in Q2
● FY ’09 as against Q2 FY’08.The aggregate net non-performing assets (NPA)
of 25 banks increased to Rs 17,992.82 crore in second quarter of 2008-09 from
Rs 15,462.84 crore in the same period of FY’08

● The average capital adequacy ratio (CAR) of 25 banks slipped to 12.68 per
cent in Q2-FY ’09 from 13.41 per cent in the previous year.

● Karur Vysya Bank recorded maximum rise of 275.36 per cent in net NPAs in
Q2-FY’09 with Rs. 50.03 crore as against Rs 13.33 crore in Q2-07.

● Seven major PSBs recorded a significant decrease in net NPAs.

● Among the private sector banks only South Indian Bank registered an
improvement in net NPAs by -29.82 per cent.

● 16 banks witnessed a fall in their CAR from the previous fiscal, but they still
managed to remain above the prescribed limit of nine per cent posed by the
Basel II accord.

● Axis bank registered the maximum decline in CAR from 17.59 per cent in
Q2 FY’08 to 12.2 per cent in Q2 FY’09.

● Federal Bank had the maximum rise in CAR unto 20.81 per cent in Q2 FY
2008-09 from 13.08 per cent a year earlier.

The Changing Dynamics in Asian Non Performing Loans

The changing dynamics

In the last year, many of the dynamics underpinning the approach in Asia to
resolving and maximizing value from non-performing loans (NPLs) have
changed. The author’s regional review for the second Forum for Asian
Insolvency Reform (held in Bangkok, Thailand in December 2003) highlighted
a number of areas of progress and some of the pitfalls in Asian corporate debt
restructuring as well as providing a country-by-country summary of
developments. This paper builds on that review and focuses on some of the
evolving aspects of NPL resolution techniques and on shifts in approach to
resolving Asia’s estimated 2 trillion US dollars in NPLs.

Reworking the fictional rescheduling – the strategic double defaulters

The author has often described the many so-called restructurings taking place
in some of the Asian countries as fictional rescheduling, which have taken
place without there being a realistic expectation that the debtor will be able to
comply in full with the rescheduled timetable for repayment and without any
serious attempts at operational restructuring or other real restructuring
techniques. As defaults take place under these fictional rescheduling,
reworking the workouts has already begun in many countries, with debtors
commonly able to achieve a better deal the second time around. This odd
phenomenon is partly due to the fact that the first round of fictional
rescheduling rarely included a “haircut” of debt, as the banks’ balance sheets
could not, at that time, sustain the loss, and often ramped up interest rates after
a few years of reduced rates or interest holidays. As time has passed since the
1997-2002 period when many of these deals were done, the economies in some
of the so-called crisis economies such as Korea, Malaysia, Thailand, and, to a
more limited extent, Indonesia have improved. As the economies have
rebounded, often without any real change in fundamentals or in overall
competitiveness of enterprises on a comparative basis, interest rates have
fallen. Banks have been recapitalized and can now sustain the losses from
writing off portions of debt which the bank really has almost no prospect of
recovering, and are therefore now processing losses that really should have
been processed in 1997.

In these changing environments, “strategic debtors” have again appeared.

Strategic debtors is a term which was used in the period between 1997-1999 to
describe debtors who were able to pay their debts but choose to use the Asian
financial crisis as an excuse not to pay their financiers and commence
restructuring negotiations in the hope of receiving some accommodation from
their bankers. This tactic was very successful. As interest rates have fallen, and
with banks’ balance sheets now far better placed to take a hit, strategic double
defaulters have sprung up. Requests for reduced interest rates and for haircuts
are common requests and, commonly, the requests are agreed. The dynamic is
also odd as (commonly) the debtor would have complied with its first
restructuring plan for many years and then a default occurs (or a cynic would
say is engineered) and the debtor is suddenly able to again achieve
accommodations from its bankers. Some debtors, whilst acting cleverly and
perhaps a little disingenuously, are not entirely to blame for this situation. If
their bankers had, in the first round of restructuring, been less concerned with
their own balance sheets and instead focused on realistic financial restructuring
and operational restructuring of the debtor, assessing the viability of the
debtor’s business and leaving it with a sustainable level of debt, the debtor may
well have become more profitable and competitive in the interim period if it
had not had to operate under the shadow of an overhang of unsustainable debt.
In truth, the debtor’s bankers never hoped to recover this unsustainable debt,
but delayed writing it off.

The author has often quoted one banker as saying “we will do the rescheduling
now and then do the restructuring next time they default”. In reality, as things
have turned out, the second round has involved either another rescheduling or a
haircut and a reduction of interest rates. In other words, the second round of
restructuring has resulted in a better result for the debtor. From the debtor’s
perspective “re-working the workouts works.”

The new wave of realistic restructurings

There has also been a wave of new restructurings, which have generally been
conducted in a realistic manner. Some of these cases have involved essentially
good businesses or projects, often involving multinational sponsors. In many
cases, these restructurings did not occur in the immediate aftermath of the 1997
crisis. These restructurings were delayed because the debtor often enjoyed a
lengthy moratorium, either formal or informal, over the last six years, as its
creditors realized that they really have no attractive legal recourse and have sat
still, despite continuing to threaten the debtor in an unconvincing manner. As
these cases have involved viable businesses with strong sponsors (who have
often through relationships with the banks insulated or provided protection to
the debtor from its bankers) it is not surprising that these deals have become the
first bright spark as the Asian economies have started to rebound.

The new markets – India at the head

India is perhaps the largest new market, with new laws enabling the
establishment of asset reconstruction companies (ARCs). ARCIL, one of the
first ARCs, is acquiring loans from many of the major banks including ICIC
Bank and SBI. Legal challenges have, however, delayed the implementation of
the Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Ordinance (SRFAESI) under which ARCs are established.
The proposed National Company Law Tribunal (NCLT), which replaces the
existing Board for Industrial and Financial Reconstruction (BIFR), which
handled cases under the sick industrial companies’ legislation, has also been
delayed. It is hoped that the NLCT will speed the process of referring
companies to rehabilitation although there are concerns as to whether it will be
fully staffed with an adequate number of competent judges. There is also great
need in India to develop a private profession of liquidators.
Whilst debtors abused the moratorium on legal actions under the sick industrial
company’s legislation, the removal of the stay in its entirety in the second
amendment to the company’s code is somewhat reactionary. A better solution
would have been to provide for a clearly time bound stay on legal actions
during the period of rehabilitation.
Stamp duty and taxation incentives are also required if the ARCs are going to
become drivers of restructuring in India.

Developing the Asian Markets for Non-Performing Assets:

Developments in India

Non-performing assets in India: An overview

India has acquired an alarming number of Non-Performing Assets .As at 31
March 2003, the banks and financial institutions in India held NPAs worth
approximately Rs. 1 100 000 crore as against an aggregate gross NPAs of all
scheduled commercial banks amounting to Rs. 63 883 crore at 31 March 2001.
A review of the figures of gross and net NPAs for the last four years shows an
increase of Rs. 13 068 crore (more than 25%)
The apparent reduction of gross NPAs from 14.4% to 11.4% between 1998 and
2001 provides little comfort since this accomplishment is because of credit
growth, which was higher than the growth of gross NPAs and not through any
appreciable recovery of NPAs. There is neither a reduction nor even
containment of the threat. The gross NPAs and net NPAs for public sector
banks (PSBs) as at 31 March 2001 of 12.39% and 6.74% respectively, are
higher than the figures for scheduled commercial banks (SCB’s) at 11.4% and

Impacts of NPAs on the working of commercial banks

NPAs affected the profitability, liquidity and competitive functioning of public
and private sector banks, and finally the psychology of the bankers in respect of
their disposition towards credit delivery and credit expansion.

Impact on profitability
Commercial banks incurred a total amount of Rs. 31 251 crore towards
provisioning NPAs from 1 April 1993 to 31 March 2001. This has brought net
NPAs to Rs.32 632 crore or 6.2% of net advances. The enormous provisioning
of NPAs together with the holding cost of such non-productive assets over the
years has acted as a severe drain on the profitability of the PSBs. Equity issues
of nationalized banks that have already tapped the market are now quoted at a
discount in the secondary market. This has alternatively forced PSBs to borrow
heavily from the debt market to build Tier II capital to meet capital adequacy
norms, thus putting severe pressure on their profit margins. It is worthwhile to
compare the aggregate figures of the 19 nationalized banks for the year ended
March 2001, as published by RBI in its Report on Trends and Progress of
Banking in India

Developing the Indian Markets for Non-Performing Assets

1) The emerging Indian market

The process of resolution of NPLs has only just been initiated in countries like
India. Banks and financial institutions in India are faced with the task of
dealing with NPLs, which are reportedly worth around 20 billion US dollars as
on 31 March 2002. While the NPL situation in India may not be as grim as
some other Asian countries at the height of the Asian crisis,2 it is significant
enough to warrant urgent attention. The total distressed assets are considerably
higher than the reported NPL numbers, and it is widely believed that NPLs
could be double the reported figure if more stringent international classification
norms are applied in India.

Creditor rights have historically been difficult to enforce in India, often

involving long-winded court procedures. Furthermore, in India defaulting
borrower companies have often misused the shelter provided by the mechanism
of the Board for Industrial and Financial Reconstruction (BIFR). A company
entering the purview of BIFR was protected through a moratorium on lender
actions during the course of its proceedings. Proceedings often took very long
to complete on account of systemic deficiencies in the workings of the BIFR.

a) Steps taken by the government of India

Over the past year or so, the government of India has taken several steps to
help create an enabling environment for NPL resolution. Notable among these

i) The enactment of the Securitization and Reconstruction of Financial Assets

and Enforcement of Security Interest Act (SRFAESI) in December 2002,
which lays down the legal basis for the formation of asset reconstruction
companies (ARCs) and provides lenders and ARCs with the powers to enforce
security interest (if 75% by value of the secured creditors agree) and sell the
assets of the borrower without court intervention. Furthermore, SRFAESI
empowers lenders to remove a company from the purview of the BIFR. ARCs
are also allowed various measures for asset reconstruction, including change of
management of the borrower’s business though guidelines for implementing
this are still awaited.

ii) An out-of-court restructuring mechanism called Corporate Debt

Restructuring (CDR) has been set up, which provides a platform for resolution
of inter-creditor and debtor-creditor issues.

iii) A National Company Law Tribunal (NCLT) is being set up to replace the
BIFR. NCLT is, inter alia, envisaged to perform BIFR’s functions more

b) Development of the Indian NPL market

Pursuant to the SRFAESI Act, a number of ARCs have applied to the Reserve
Bank of India for setting up operations. Asset Reconstruction Company (India)
Limited (ARCIL) and Asset Care Enterprises Ltd. have been promoted by
groups of Indian lenders and are among the first ARCs in India. The process of
acquisition by ARCIL of the first lot of assets is currently underway.
A number of issues could however hamper effective development of the Indian
NPL market:

i) Legal challenges

A tremendous outcry has been raised against the provisions of the SRFAESI
Act by borrowers who have termed it as being against the principles of “natural
justice”. A number of petitions are currently pending before the Supreme Court
that challenge the right of lenders to take over and sell the borrower assets with
limited opportunity of borrowers to challenge the action in a court of law. The
Supreme Court judgment on this issue could profoundly affect the efficacy of
this act.

ii) Tax and regulatory issues

The high level of transaction costs in the form of the stamp duty, payable on
the transfer of financial assets by way of assignment, is a significant deterrent
to the acquisition process except in the case of some progressive states.

While the government appears keen to encourage both foreign and domestic
investors, the need for specific policy, regulations and tax provisions
responsive to their requirements has still to be addressed.


The paper stresses the importance of a sound understanding of the macro

economic variables and systemic issues pertaining to banks and the economy
for solving the NPA problem along with the criticality of a strong legal
framework and legislative framework. Foreign experiences must be utilized
along with a clear understanding of the local conditions to create a tailor made
solution which is transparent and fair to all stakeholders.

The Indian banking sector is facing a serious problem of NPA. The extent of
NPA is comparatively higher in public sectors banks. To improve the
efficiency and profitability, the NPA has to be scheduled. Various steps have
been taken by government to reduce the NPA. It is highly impossible to have
zero percentage NPA. But at least Indian banks can try competing with foreign
banks to maintain international standard.

NPA is a double-edged weapon, which affects bank profitability due to interest

income not being recognized on NPA accounts and loan loss previously to be
created from profit earned. The bank must adopt structured NPAs management
policy for elimination or reducing the NPAs in the Bank. In general the trend of
NPAs in CBE are increasing trend, on the same time the CBE has been adopted
a very good techniques to control over the NPAs.


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.
· Operating staffs’ credit skills should be up graduation.
· 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 time and
cost overruns.

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, sources for
margin money should be thoroughly examined.
· Uneven scale of repayment schedule with higher repayment in the initial
years normally is preferred.
· As for as possible, repayment of term loans should be fixed on monthly
basis rather than on quarterly or semi annual basis.
· Personal guarantees of the promoter directors/major shareholders should
normally be insisted upon.

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, dishonor of check etc.
· Effective inspection system should be implemented.



ASAF (1998) “Countermeasures to Overcome Asian Economic Crises-I”

ICRA “Rating of Structured Obligations” Indian Credit Rating Agency

Lahiri, Ashok K. “Rising NPAs: Where has all the money gone?”

News paper, journal and magazine Articles

Kohli, Renu (2002) “The informational quality of financial systems” Financial

Express January 19 2002

Muniappan, G. P (2002a) “Indian Banking: Paradigm Shift – A regulatory

point of view” Address at the Bank Economist Conference, Kolkata January
14, 2002

RBI (2001a) “Prudential Norms on Income Recognition, Asset Classification

Provisioning - Pertaining to Advances” Reserve Bank of India Mumbai. Sept

RBI (2002b) “Selected Ratios of Scheduled Commercial Banks: 2000 and

2001”, 2002

RBI (2002c) “Financial Institutions”, 2002