NPA

NON PERFORMING ASSTES
EXECUITVE SUMMARY
This report deals with the problem of having non-performing assets in India, the reasons for mounting of non-performing assets and the practices present in country for dealing with non-performing assets. Banks are in the business of managing risk, not avoiding it.. Risk is the fundamental element that drives financial behavior. Without risk, the financial system would be vastly simplified. However, risk is omnipresent in the real world. Financial Institutions, therefore, should manage the risk efficiently to survive in this highly uncertain world. The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater significance in the recent past for various reasons. Foremost among them is the wind of economic liberalization that is blowing across the globe. India is no exception to this swing towards market driven economy. Better credit portfolio diversification enhances the prospects of the reduced concentration credit risk as empirically evidenced by direct relationship between concentration credit risk profile and NPAs of banks. A banks success lies in its ability to assume and aggregate risk within tolerable and manageable limits.
Page 1 of 80
NON-PERFORMING ASSET
2.1) INTRODUCTION:
It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (N.P.As) and the issue is becoming more and more unmanageable. In order to bring the situation under control, some steps have been taken recently. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was passed by Parliament, which is an important step towards elimination or reduction of N.P.As.
2.2) DEFINITION OF NPA:An asset becomes non-performing when it cease to generate income to the bank. A non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installments of principal has remained overdue for a specified period of time.
Page 2 of 80
2.3) MEANING:
An asset is classified as non-performing asset (N.P.As) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facility granted by bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as nonperforming without having any regard to the fact that there may still exist, certain advances / credit facilities having performing status. 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.
Page 3 of 80
2.4) THE EMERGENCE OF NPA:

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures effected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralised by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.
NPA statistics is executed through the following ways. Failure to identify an NPA as per stipulated guidelines: There were instances of `sub-standard' assets being classified as `standard'; Wrong classification of an NPA: classifying a `loss' asset as a `doubtful' or `sub-standard' asset; classifying a `doubtful' asset as a `sub-standard' asset. Classifying an account of a credit customer as `substandard' and other accounts of the same credit customer as `standard', throwing prudential norms to the winds.
Page 4 of 80
Essentially arising from the wrong classification of NPAs, there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made. This practice can be logically explained as a desperate attempt on the part of the bankers, whenever adequate current earnings were not available to meet provisioning obligations. Driven to desperation and impelled by the desire not to accept defeat, they have chosen to mislead and claim compliance with the provisioning norms, without actually providing. This only shows that the problem has swelled to graver dimensions. The international rating agency Standard & Poor (S & P) conveys the gloomiest picture, while estimating NPAs of the Indian banking sector between 35% to 70%, of its total outstanding credit. Much of this, up to 35% of the total banking assets, as per the rating agency would be accounted as NPA if rescheduling and restructuring of loans to make them good assets in the book are not taken into account. However RBI has contested this dismal assessment. But the fact remains that the infection if left unchecked will eventually lead to what has been forecast by the rating agency. This invests an urgency to tackle this virus as a fire fighting exercise.
Page 5 of 80
EMERGENCE OF NPA A THREAT TO NATIONALISED BANKS
NPA is a brought forward legacy accumulated over the past three decades, when prudent norms of banking were forsaken basking by the halo of security provided by government ownership. It is not wrong to have pursued social goals, but this does not justify relegating banking goals and fiscal discipline to the background. But despite this extravagance the malaise remained invisible to the public eyes due to the practice of not following transparent accounting standards, but keeping the balance sheets opaque. This artificially conveyed picture of 'all is well' with PSBs suddenly came to an end when the lid was open with the introduction of the prudential norms of banking in the year 1992-93, bringing total transparency in disclosure norms and 'cleansing' the balance sheets of commercial banks for the first time in the country.
Page 6 of 80
2.5) EVOLUTION OF NPA:

In the early Nineties, PSBs were suffering from acute capital inadequacy and many of them were depicting negative profitability. This is because the parameters set for their functioning were deficient and they did not project the paramount need for these corporate goals. Incorrect goal perception and identification led them to wrong destination. Since the 70s, the SCBs of India functioned totally as captive capsule units cut off from international banking and unable to participate in the structural transformations, the sweeping changes, and the new type of lending products emerging in the global banking Institutions. The personnel lacked desired training and knowledge resources required to compete with international players. Such and other chaotic conditions in parts of the Indian Banking industry had resulted in the accumulation of assets, which were termed as non-productive in an unprecedented level "Audit and Inspections" remained as functions under the control of the executive officers, which were not independent and were thus unable to correct the effect of serious flaws in policies and directions of the higher ups. The quantum of credit extended by the PSBs increased by about 160 times in the three decades after nationalization (from around Rs. 3000 crore in 1970 to Rs. 475113 Crore in 2004). The Banks were not developed in terms of skills and expertise to regulate such stupendous growth in the volume and manage the diverse risks that emerged in the process.
Page 7 of 80
The need for organizing an effective mechanism to gather and disseminate credit information amongst the commercial banks was never felt or implemented. The archaic laws of secrecy of customers-information that was binding Bankers in India, disabled banks to publish names of defaulters for common knowledge of the other Banks in the system. Lack of effective corporate management Credit management on the part of the lenders to the borrowers to secure their genuine and bonafide interests was not based on pragmatically calculated anticipated cash flows of the borrower concern, while recovery of installments of Term Loans was not out of profits and surplus generated but through recourse to the corpus of working capital of the borrowing concerns. This eventually led to the failure of the project financed leaving idle assets. Functional inefficiency was also caused due to over-staffing, manual processing of over expanded operations and failure to computerize Banks in India, when elsewhere throughout the world the system was to switch over to computerization of operation.
Page 8 of 80
RESEARCH METHODOLOGY
3.1) OBJECTIVE OF THE STUDY: Primary objective:

The primary objective of the making report is: To know why NPAs are the great challenge to the Public Sector Banks.
Secondary objectives:
To understand what is Non Performing Assets and what are the underlying reasons for the emergence of the NPAs.
To understand the impacts of NPAs on the operations of the Public Sector Banks. To know what steps are being taken by the Indian banking sector to reduce the NPAs
Page 9 of 80
3.2) DATA COLLECTION Formulating the problem

Providing credit facility to the borrower is one of the important factors as far as the banking sector is concerned. On the basis of the analyzed factor, I felt that the important issue right now as far as the credit facilities are provided by bank is non performing assets. I started knowing about the basics of the NPAs and decided to study on the NPAs.
Research Design
The research design for this study is basically analytical because it utilizes the large number of data of the Public Sector Banks.
Type of the data

Primary data takes much time and are also expensive whereas the secondary data are easy to search and are not expensive too. For my study I have utilized totally the secondary data.
Data Source
Page 10 of 80
3.3) LIMITATIONS OF THE STUDY:

The limitations that we felt in our study are: It was critical for us to gather the financial data of the every bank of the Public Sector Banks so the better evaluations of the performance of the banks are not possible. Every bank submitting suit file /NPA Data to RBI under: 1. Quarterly RBI format 2. Comprehensive statement a) Sharing recovery in suit filed A/c b) Age wise classification of A/c c) Sector wise i.e. C&IC, Agriculture and SSI etc.
Since our study is based on the secondary data, the practical operations as related to the NPAs are adopted by the banks are not exercised.
Since there is mass banking as far as amount as well as no. of branches are so wide Even Bank of India is having more than 3000 branches so it was not possible for us to cover all the banks of the Indian banking sector.
Provision for the classification of the Assets / NPAs are differs as per guidelines of controlling banks i.e. RBI within each public sector bank & this information is not available publicly.
The RBI norms for the classification of assets / NPAs are available on a pay site & not publicly available through any source.
Page 11 of 80
BANKING
4.1) MEANING & DEFINITION:

Banks are institutions that accept various types of deposits and use those funds for granting loans. The business of banking is that of an intermediary between the saving and investment units of the economy. It collects the surplus funds of millions of individual savers who are widely scattered and channelizes them to the investors.
Money Surplus Units
Money Intermediary (Banks)
Money Deficit Units
(Savers)
(Investors)
In simple terms, banks serve as a middle man from the money surplus units to the money deficit units. They are intermediaries, who transfer funds from savers to investors through grants for business, commerce, education, and other purposes. According to Section 5(b) of the BANKING REGULATION ACT, 1949 defines banking as, the accepting for the purpose of lending or investment, of deposits from the public, repayable or otherwise & withdrawal by cheque, draft, order or otherwise.
Page 12 of 80
4.2) HISTORY OF BANKING:
Banking in its simplest form is as old as authenticated history. In India, reference about banking habits and regulations exist in our scriptures and ancient texts. During the Vedic times (2000-1400 B.C), money lending and debt are repeatedly mentioned in the Vedic period and epic literature. During the smirit period, which followed the Vedic period and epic age Manu, the great law giver of that time spoke of vaishs earning money through interest. Chanakyas Arthashastra (About 300 B.C) is full of facts to show that there were powerful guilds of merchant bankers in existence who received deposits, advanced loans and carried on the other banking functions. A system of banks had also been devised as early as 2000 B.C by the Babylonians. In ancient Greece and Rome, the practice of granting credit was widely prevalent. The Bank of Venice, which was established in 1157, is considered to be the most ancient bank. In Florence, Monte was established in 1336, and a public bank was set up in 1401 in Barcelona. For fulfilling the needs of merchants, the Bank of Amsterdam was set up in 1609. Early history apart modern banking began with the goldsmiths of London in the 17th century. At that time money was held in the form of gold and silver coins. As the goldsmiths had excellent strong rooms, people started keeping their money with them for safe keeping in return for a fee. The goldsmiths used to issue receipts for the same which began to be transferred from one trader to another for settlement of debts. In this manner, the trader avoided the problem of withdrawing their coins from the goldsmith to make the payment to their creditors. The creditors, in turn, were saved from the necessity of having to
Page 13 of 80
deposit the same with the goldsmith for safe keeping. To make such transactions simpler, the goldsmith started issuing receipts in convenient denominations and made them payable to bearer. The goldsmiths soon observed that at a time only a small proportion of coin were needed for making payment, so they started lending the surplus money and charging certain interest for doing so. The goldsmiths began entrusting reserves to the Exchequer under sanction and care of king. Unfortunately, King Charles 2 shut up the exchequer one day and that caused the ruin of the goldsmiths. However, this proved to be a turning point in the history of English banking with the growth of private banking and the Bank of England in 1694. At this point, it is pertinent to mention that apart from the goldsmiths, the money lenders and merchants also had a strong role to play. Each of these was closely concerned in dealing of money which in those days was in the form of coins made of precious metals. Merchants were trustworthy people to whom people gave their money for safe keeping. They also issued receipts acknowledging their liabilities and honored them when the receipts were presented. Money lenders in villages too lent money to people on interest. This money was usually their own, but it also belonged to people with surplus money who gave it to them. Money lenders, thus, became embryonic banks by serving as money borrowers as well as moneylenders. As these money changers transacted their business sitting on benches, they came to be known as BANKS.
Page 14 of 80
3.2) FEATURES:
Borrowing, raising or taking up of money. Lending / advancing of money either with or without security. Drawing, making, accepting, discounting, buying, selling, collecting & dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates & other instruments whether transferrable or negitable or not. Granting & issuing of Letter of Credit, travelers cheque & circular notes. Buying & selling of foreign exchange including bank notes. Buying & selling of bullion & specie. Receiving all kinds of bonds & Valuables on deposit or for safe custody. Acquiring, holding, issuing on commission, underwriting & dealing in stocks, funds, shares, debentures, bonds, obligations, securities & investments of all kinds. Purchasing & selling of bonds, scripts or other form of securities on behalf of constituents or others, the negotiating of loans & advances.
Page 15 of 80
3.3) STRUCTURE:
Scheduled banking structure in India
INDIAN BANKING SYSTEM
Reserve Bank of India

Co operative Banks
Commercial Banks
Regional Rural Banks
State Co operative Banks

Public Sector Banks Private sector Banks
Central/District Cooperative Banks
Indian State Bank Group Nationalized Bank
Foreign
Primary credit societies
Old Banks
State Bank of India
New Banks
Subsidiary Banks
Page 16 of 80
3.4) FUNCTIONS:
Functions of Banks are elucidated as follows: A) ACCEPTANCE OF DEPOSIT: 1) Saving Deposit: Encourages small savings. Rate of Interest is comparatively lower than any other accounts. Provided with Cheque facility for withdrawal of money. Limited amount of withdrawal in a week. 2) Fixed Deposit: It is also known as Term Deposit. Money deposited for a specific period, i.e., for 1, 2 or 5 years. Restricted to Withdraw money before maturity. Rate of interest is higher than any other accounts. Longer the period higher the rate of interest. Entails a penalty if withdrawn before the maturity.
Page 17 of 80
3) Current Deposits: It is also known as Demand deposit and Checking deposit. Withdrawal of money is allowed at any time. Generally opened & operated by businessmen. The bank levies charges for the facilities provided to the depositors such as incidental charges. Bank pays money to the depositor or the authorized person whom the cheque is given by the depositor.
4) Recurring Deposit: Form of a saving account. Opens account with a fixed amount & the same amount is deposited every month. A higher rate of interest is earned depending upon the maturity period. Pre Maturity withdrawal is restricted. Instead a loan upto 75% of the deposit can be given to the depositor at 2% rate of interest charged on the same.
B) GRANTING ADVANCES: 1) Overdrafts: Allowed to withdraw over and above the depositors credit balance in the current account either against or without any security. Temporary facility allowed to respectable & reliable Current account holders. Limited amount can be withdrawn but only by cheques. Permitted to repay any no. of times upto the sanctioned amount. An interest is charged to the depositors for availing this facility.
Page 18 of 80
2) Cash Credit: Its one type of short period (more period than overdraft) finance or loan. Cash Credit faclitiy is a provision to create loan or advance or credit by lender (mainly bank or financial institute) to borrower (mainly business concern). Its used to fulfill working capital requirements which are needed to run trading operation in a business. Only business concern can enjoy this facility. Working Capital = Current Assets Current Liabilities. Business concern can enjoy Cash Credit facility against Pledge or Hypothecation of Stock, book debt as a security or guarantee of the finance. Advance is sanctioned & money transfer to Cash Credit account by Bank or Financial Institute. Borrower can withdraw money from Cash Credit account within permissible amount fixed by Bank for specific period. Borrower cant withdraw total loan amount at a time. Interest charged amount actually withdrawn in daily basic, not full loan amount. Bank can charge certain amount on portion of loan not used by business concern because bank cant use cash credit sanctioned amount. Bank is not funded total required working capital. Some portion of working capital is invested by the business entities himself & balance amount is supply by bank in way Cash Credit. 3) Loans: A specified sum of money is given against some collateral security. Entire Loan amount is transferred to the borrowers account at once & he can use it as per his requirements. Bank can recall such loans at its option.
Page 19 of 80
4) Discounting of Bills: It is a type of loan against the security of the bill or the bill is purchased by the banks in some cases. A sum after deducting the discount is transferred to the customers account. Bank receives her interest in advance at the time of discounting. Bank collects the amount on maturity from the drawee of the bill.
C) AGENCY FUNCTIONS: 1) Transfer of Funds: Helps in transferring funds from one place to another. Instrument used for this transfer is known as Bank Draft. A small commission is charged for providing the facility by the banks. 2) Collecting Customers Funds: Bank collects funds of its customers from other banks & credits them to their accounts. 3) Purchase & Sale of Shares & Securities for its Customers: Banks buys & sells stocks & shares of private companies as well as government securities on behalf of its customers. 4) Collecting Dividends on shares of the Customers: Banks collects dividends as well as interest on the shares & debentures of its customers & credits them to their accounts. 5) Acts as Trustee & the executor: Banks preserves the wills of the customers & executes them after their death.
Page 20 of 80
6) Income Tax Consultant: Banks gives advices on Income Tax matters to its customers. Banks also files Income Tax Returns for their customers on payment of its fee. 7) Acts as correspondent: Banks acts as a correspondent, agent or representative for its customers. Bank may obtain passports, travelers tickets & even secure air & sea passages for its customers.
D) UTILITY FUNCTIONS: 1) Locker: Bank provides this facility for the safe custody of valuable goods. Valuables like gold, ornaments, important papers, shares & debentures. An annual rent is charged for this service. 2) Underwriting: Banks also do underwriting for private companies. Banks charges a small underwriting commission from the companies. 3) Social welfare programmes: Nationalized banks in India have framed schemes of credit to help small agriculturists, village & cottage industries, retailers, artisans, etc through loans at concessional rates of interest. These scheme serves in reduction & eradication of inequalities of income & wealth, poverty & unemployment in the country.
Page 21 of 80
4) The other Functions are as follows: Drafts Project reports Creation of Credit. Giving Advices on Financial Matters. Giving information about its customers. Collection of statistics. Financing Internal & Foreign Trade. Purchase & Sale of Foreign Exchange. Investments of Funds, etc.
Page 22 of 80
CONCEPT OF NPA & ASSET CLASSIFICATION
CONCEPT OF NPA:
The concept of specified period is reduced in a phased manner. The shortening of the period is from 4 quarters in 1993 when the concept of IRAC norms was first introduced in India to present level of 90 days. 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, upgradation 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 where interest 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),
Page 23 of 80
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 accounts. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; 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.
Page 24 of 80
ASSET CLASSIFICATION:
While new private banks are careful about their asset quality and consequently have low non-performing assets (N.P.As), public sector banks have large N.P.As due to wrong lending policies followed earlier and also due to government regulations that require them to lend to sectors where potential of default is high. Allaying the fears that bulk of the Non-Performing Assets (N.P.As) was from priority sector, NPA from priority sector constituted was lower at 46 per cent than that of the corporate sector at 48 per cent. Loans and advances account for around 40 per cent of the assets of SCBs. However, delay/default in payment of interest and/or repayment of principal has rendered a significant proportion of the loan assets non-performing. As per RBIs prudential norms, a Non-Performing Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for more than two quarters after it has become past due. Past due denotes grace period of one month after it has become due for payment by the borrower.
Regulations for asset classification

Assets should be classified into four classes - Standard, Sub-standard, Doubtful, and Loss assets. N.P.As is loans on which the dues are not received for two quarters. N.P.As consist of assets fewer than three categories: sub-standard, doubtful and loss. RBI for these classes of assets should evolve clear, uniform, and consistent definitions. The health code system earlier in use would have to be replaced. The banks should classify their assets based on weaknesses and dependency on collateral securities into four categories:
Page 25 of 80
Standard Assets:
It carries not more than the normal risk attached to the business and is not an NPA.
Sub-standard Asset:
An asset which remains as NPA for a period exceeding 24 months, where the current net worth of the borrower, guarantor or the current market value of the security charged to the bank is not enough to ensure recovery of the debt due to the bank in full.
Doubtful Assets:
An NPA, which continued to be so for a period exceeding two years (18 months, with effect from March, 2001, as recommended by Narsimham Committee II, 1998).
Loss Assets:
An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset, but the amount has not yet been written off wholly or partly. The banking industry has significant market inefficiencies caused by the large amounts of Non Performing Assets (N.P.As) in bank portfolios, accumulated over several years. Discussions on non-performing assets have been going on for several years now. One of the earliest writings on N.P.As defined them as "assets which cannot be recycled or disposed off immediately, and which do not yield returns to the bank, examples of which are: Overdue and stagnant accounts, suit filed accounts, suspense accounts and miscellaneous assets, cash and bank balances with other banks, and amounts locked up in frauds".
Page 26 of 80
Asset Classification Standard assets Substandard assets Doubtful assets
Provision requirements 0.25% 20%(irrespective of value of security) 20% - 50% of the secured portion depending on the age of NPA, and 100% of the unsecured portion.
Loss assets
100%
Guidelines for the classification of assets

1) Classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and the extent of dependencies on collateral security for the realization of dues.
2) Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs especially in respect of high value of accounts.
3) Account with temporary Deficiencies: The classification of an asset as NPA should be based on the record of recovery .Bank should not classify an advance account as NPA merely due to the existence of some deficiencies, which are temporary in nature as such as non availability of adequate drawing power based on latest stock. 4) Asset classification to be borrower wise and not facility-wise: It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a
Page 27 of 80
borrower will have to be treated as NPA and not the particular facility or a part thereof, which has become irregular.
5) Advances under consortium arrangements: Asset classified of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having bearing on the recoverability of the advances.
6) Accounts where there is erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50percent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightway classified under doubtful category and provisioning should be made as applicable to doubtful assets.
7) Agricultural Advances (a) In respect of advances granted for agricultural purpose purpose where interest and / or installment of principal remains unpaid after it has become past due for two harvest seasons but for a period not exceeding two half years , such an advance should be treated as NPA.
(b) Where the natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure-conversion of the short term production loan into a term or re-schedulement of the repayment period.
(c) In such cases of conversation or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA.
Page 28 of 80
8) Restructuring /Rescheduling of loans: A standard asset where the terms of the loan arrangement regarding interest and principal have been renegotiated or rescheduled after the commencement of production should be as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or restructured terms. In case of substandard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advances automatically unless there is satisfactory performance under the rescheduled renegotiated terms.
9.) Exceptions :As trading involves only buying and selling of commodities and the problems associated with manufacturing units.
'Out of order'
An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the 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 account should be treated as 'out of order'.
Overdue
Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank.
Page 29 of 80
IMPACT OF NPA
INDIAN ECONOMY & NPAs:

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FIIs, etc.
Further, international rating agencies like, Standard & Poor have lowered India's credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate.
Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. Bankers have realized that unless the level of N.P.As is reduced drastically, they will find it difficult to survive.
Page 30 of 80
GLOBAL DEVELOPMENT & NPAs

The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. A question that arises is how much risk can a bank afford to take? Recent happenings in the business world - Enron, WorldCom, Xerox, Global Crossing do not give much confidence to banks. In case after case, these giant corporates became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default.
Page 31 of 80
IMPACT ON PROFITABILITY:
The enormous provisioning of NPA 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. In turn PSBs are seen as poor performers and unable to approach the market for raising additional capital. Equity issues of nationalised banks that have already tapped the market are now quoted at a discount in the secondary market. Other banks hesitate to approach the market to raise new issues. This has alternatively forced PSBs to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins, else they are to seek the bounty of the Central Government for repeated Recapitalisation. NPA is not merely non-remunerative. It is also cost absorbing and profit eroding. In the context of severe competition in the banking industry, the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. The options for these banks are lost. "The spread is the bread for the banks". This is the margin between the cost of resources employed and the return therefrom. In other words it is gap between the return on funds deployed(Interest earned on credit and investments) and cost of funds employed(Interest paid on deposits). When the interest rates were directed by RBI, as heretofore, there was no option for banks. But today in the deregulated market the banks decide their lending rates and borrowing rates. In the competitive money and capital Markets, inability to offer
Page 32 of 80
competitive market rates adds to the disadvantage of marketing and building new business. In the face of the deregulated banking industry, an ideal competitive working is reached, when the banks are able to earn adequate amount of noninterest income to cover their entire operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference between the gross interest income and interest cost will constitute its operating profits. Theoretically even if the bank keeps 0% spread, it will still break even in terms of operating profit and not return an operating loss. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation.
DEVELOPMENT OF FINANCIAL INSTITUTIONS HEALTH:

The efficiency of any Development Financial Institutions is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate any income for DFIs but at the same time DFIs are required to make provisions for such NPAs from their current profits. Following are the deleterious effect on the return on assets in several ways: They erode current profits through provisioning requirements They result in reduced interest income They require high provisioning requirements affecting profits They limit recycling of funds, set in asset- liability mismatches, etc.
Page 33 of 80
BASIS & PROVISIONAL NORMS OF NPA
BASIS OF NPA:
The basis of treating a credit facility as N.P.As is as detailed below: ASSET- In respect of which interest has remained past due for six months. TERM LOAN Inclusive of unpaid interest, when the installments is overdue for more than six months/on which interest amount remained past due for six months. BILL - Which remains overdue for six months. OTHER CURRENT ASSETS The interest in respect of a debt/income on a receivable in the nature of short-term loans/advances, which remains overdue for a period of six months. SALE OF ASSETS/SERVICE RENDERED Any dues on account of these/reimbursement of expenses rendered, which remained overdue for a period of six months. LEASE RENTAL/HIRE PURCHASE INSTALMETS The installments, which has become overdue for a period of more than twelve months.
Page 34 of 80
OTHER CREDIT FACILITES The balance outstanding including interest accrued made available to the borrower/beneficiary in the same capacity when any of the credit facilities become N.P.A
PROVISIONAL NORMS:
Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent basis so that the balance sheets reflect a true picture of the financial status of the bank. The Narsimham Committee has recommended the following provisioning norms (i) 100 per cent of loss assets or 100 per cent of out standings for loss assets; (ii) 100 per cent of security shortfall for doubtful assets and 20 per cent to 50 per cent of the secured portion; and (iii) 10 per cent of the total out standings for substandard assets.
A provision of 1% on standard assets is required as suggested by Narsimham Committee II 1998. Banks need to have better credit appraisal systems so as to prevent N.P.As from occurring. The most important relaxation is that the banks have been allowed to make provisions for only 30 per cent of the "provisioning requirements" as calculated using the Narsimham Committee
Page 35 of 80
recommendations on provisioning (but with the diluted asset classification). The encouraging profits recently declared by several banks have to be seen in the light of provisions made by them. To the extent that provisions have not been made, the profits would be fictitious.
Disclosure Norms:
Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and borrowings. Apart from this, banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. These disclosures were to be made for the year ending March 2000 In fact, the banks must be forced to make public the nature of N.P.As being written off. This should be done to ensure that the taxpayers money given to the banks, as capital is not used to write off private loans without adequate efforts and punishment of defaulters.
Write Off Policy

Write Off is resorted to in the borrowal accounts when the bank has exhausted. All possible avenues of recovery and there are no more chances for effecting the recovery. Write Off is of two kinds- Prudential write off and Regular Write of. The basic difference between prudential and Regular write off is that in prudential write off there is possibility of recovery at a distant future even after write off while in Regular write off is no/little possibility of recovery.
Page 36 of 80
Regular Write off General conditions:- A Regular write off will be considered on the happening of 1 and 2 and any of the 3 to 4 below:Account is classified as loss Asset. 100% provision is held in such accounts as at the end of previous accounting year. Prior approval for waiver of legal action including where account is already time barred/termination of suit proceedings/waiver of appeal, etc. All efforts for recovery have been taken to their conclusion, by means of action under SARFEASI Act, legal action, execution of decree, etc. and there is absolutely no prospect for any further recovery In exceptional cases, where the borrower has or have expired or their whereabouts cannot be traced in spite of security which can be realized. Cases where all efforts of recovery have been adopted and the remaining balance and circumstances are such that any further effort is considered cost-ineffective. As a result of a negotiated settlement in any account, where any proportion of the outstanding balance, unrealized interest and/or uncharged interest/ charges is agreed to be written off or waived, this write off shall be effected after receipt of full compromise amount plus interest if any, as per terms of OTS approved . No specific approval is required for this since the write off is part of compromise settlement duly approved by competent authority. all efforts, and there is no
Page 37 of 80
NPA AN ISSUE FOR BANKS & FINANCIAL INSTITUTIONS IN INDIA
To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing N.P.As have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrower s since N.P.As affects the repayment capacity of banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-performing assets. The following are the primary causes for turning the accounts into NPA: Diversion of funds, mostly for the expansion/ diversification of business or for promoting associate concern. Factors internal to business like product/ marketing failure, inefficient management, inappropriate technology, labour unrest Changes in the Macro-environment like recession in the economy, infrastructural bottlenecks etc.
Page 38 of 80
Inadequate control/ supervision, leading to time/cost over-runs during project Implementation. Changes in Government policies e.g. Import duties. Deficiencies like delay in the release of limits/ funds by banks/FIs
Secondary causes are as follows:Selection of the project. Implementation of the project- time over-run, cost over-run, underfinancing technology involved. Intention of the borrower. Industrial/ Economic trend. Absence of the up gradation of the unit/ ploughing back of the profit.
Page 39 of 80
REASONS FOR AN ASSET TURNING NPA
The various reasons, either singly or jointly, behind an asset turning NPA can be classified as follows: Reasons from the economy side Reasons from the industry side Reasons from the borrowers side Reasons from the banking system side Reasons from the loan structuring side Reasons from the security side collateral v/s cash flow Reasons from the regulatory side From the above, it may be surprising to many that only the borrower is not always at fault. At times, systemic faults can also adversely affect the profitability of financial intermediaries. The following discussion will clarify our position. Reasons from the economy side a) Political mindset regarding paradigm, proactive, fiscally responsible (national income accounts). b) Economic growth, distribution, efficient allocation of resources. c) Social acceptability, mobility, education d) Technological advances in use of IT e) Legal Enforceability of loan contracts f) Environmental liberalization & globalization
Page 40 of 80
If loan contracts are not easily enforceable, there will naturally be a tendency to default. Opening up of the economy can render companies uncompetitive. Lack of adaptation of IT will make data processing difficult and information dissemination will be impossible. Objective analysis of risk would be difficult and appraisal would remain a subjective matter. Similarly, directed programs of lending can be counterproductive. Reasons from the industry side a. Global competition b. Cyclical downswing c. Sunset industry d. Frequent changes in regulatory norms Reasons from the borrowers side a. Misconceived project b. Poor governance c. Product failure d. Inefficient management e. Diversion of funds f. Dormant capital market g. Regulatory changes
Reasons from the banking system side a) Parameters set for their functioning were deficient: incorrect goal perception and identification lazy banking. b) Directed banking and lack of freedom to choose products and pricing.
Page 41 of 80
c) Being unexposed to international marketing methods and products, people lacked training and knowledge resources. d) Ownership and management were not distinguished composition of Board of Directors. e) Lack of systems and procedures audit and inspections f) Banks lacked the ability to handle enormous growth in liabilities and assets g) Lack of a mechanism of credit information dissemination h) Lack of an effective judicial system for recovery from defaulters i) Collateral based lending leading to idle assets j) Fixing of price and quantum of loans k) Lack of an effective IT system and MIS Reasons from the loan structuring side a) High debt equity ratio b) Timing of raising equity c) Discrepancy between the rate of interest charged and the realistic rate of return. d) Inconsistency between revenue generation and the loan repayment schedule e) Lack of binding penal clauses and performance guarantees. Reasons from the security side collateral vs cash flow There is a tendency among banks and institutions to depend excessively on collateral for advancing of loans. While this is important, it presumes from the very beginning that the borrower would default and the security would need to
Page 42 of 80
be encashed for recovery of the loan. Clearly, this logic is unacceptable. Emphasis should then be on cash generation and a charge on this should be built into the loan contract through some escrow mechanism. Reasons from the regulatory side Frequent regulatory changes can turn assets non-performing. Accounting reason like reduction in income recognition norms from 180 days to 90 days could be one such reason. Pollution related issues could be the other reason. Distance between two sugar mills could be a third. Management of non-performing assets of the financial sector was put on fast track recently with the Union Cabinet approving the promulgation of an ordinance to facilitate securitisation and reconstruction of financial assets.
Page 43 of 80
FACTORS RESPONSIBLE FOR NPAs
The dues of the banking sector are generally related to the performance of the unit/industrial segment. In a few cases, the cause of NPA has been due to internal factors (to the bank) such as weak appraisal or follow up of loans but more often than not, it is due to the factors such as management inefficiency of borrowing funds, obsolescence, lack of demand, non availability if inputs, environmental factors, etc. The main reasons for sickness and the factors leading to N.P.As are as under: Internal Factors: Diversion of Funds For expansion, modernization, setting up of new projects, helping or promoting sister concerns.Time/Cost overruns while implementing the projects. Business failure like product failing to capture market, inefficient management, strike/strained labour relations, wrong technology, technical problems, product obsolescence, etc. External factors: Failure, non-payment/overdue, recession in other countries,
externalization problems, adverse exchange rate, etc. Government policies like excise, import duty changes, deregulation, pollution control orders, etc. Willful default, siphoning of funds, fraud, misappropriation, and promoter/management disputes, etc.
Page 44 of 80
Deficiencies on the part of the bank, viz, in credit appraisal, monitoring and follow up, delay in release of limits, delay in settlements
payments/subsidies by government bodies, etc. External factors like raw material shortage, raw material/input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents, etc. Contribution to N.P.As by factors like siphoning off funds through fraud/misappropriation was less significant in comparison with other factors. Incidence of N.P.As on account of deficiencies on the part of banks such as delay in sanction and disbursement of funds whereby borrowing units are starved of funds when in need, and delay in settlement of payments/subsidies by the government bodies was on the low side in proportion to other factors. Lack of effective co-ordination between banks and financial institution in respect of large value projects does contribute to the emergence of N.P.As even at the implementation stage. RBI had, in February 2000 drawn up certain ground rules in this regard in consultation with the banks, FII and IBA and circulated the same among banks and financial institution for implementation. Susceptibility of the sanctioning authorities to external pressure, failings of CEOs and the ineffectiveness of the board to check his ways also contributed in no small measures to the unusual build up of N.P.As in some of the banks. One of the most prominent causes for N.P.As, as often observed by RBI Inspectors, is the slackness on the part of the credit management staff in their follow up to detect and prevent diversion of funds in the post disbursement stage.
Page 45 of 80
DIFFICULTIES WITH THE NPAS
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 represent bad investments. NPA 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. (c) Undercapitalized banks exceeds the banks capital base.
Page 46 of 80
CORRECTIVE STEPS & MEASURES TO RECOVER N.P.As

Over the last few years Indian banking in its attempt to integrate itself with the global banking has been facing lots of hurdles in its way due to its inherent weaknesses, despite its high sounding claims and lofty achievements. One of the major hurdles, the Indian banking is facing today, is its ever-growing size of non-performing assets over which the top management of almost each bank is baffled. On account of the intricacies involved in handling the N.P.As the ticklish task of assets management of the bank has become a tight rope walk affair for the controlling heads, because a little wavering this or that side may land the concern bank in trouble. The growing N.P.As is a potent source of worry for the finance minister as well, because in a developing country like ours, banking is seen as an important instrument of development, while with the backbreaking N.P.As banks have become helpless burden on the economy.
N.P.As with outstanding up to 5 crore:

In case of doubtful and loss assets, through the modified schemes, the banks have been directed to follow up a settlement formula under which the minimum amount to be recovered, amounts to be entire outstanding running ledger balances as on the date the account was identified as NPA i.e. the date from which the interest was not charged to the running ledger, an analysis of the given formula shows that RBI has been very much generous in granting huge relaxation to the borrowers who were not coming forward for setting their overdue loans due to one or other reason. The scheme is of high practical value as it protects the borrowers who were having genuine problems in clearing their dues because the interest component constituted a multiplied amount of principal outstanding. On the other hand, the concerned banks were also finding
Page 47 of 80
in difficult to sacrifice the entire interest component, but outstanding in the dummy ledger. Now as per the provision to the scheme, they will be ready to grant such relaxation in favour of the borrowers. These guidelines have come as a windfall for borrowers who after a lot of negotiations were almost ready to repay back their principal as well as part of the interest component to settle their accounts, as under the modified scheme, they would be able to save the interest component. To that extent the concerned bank stands to lose. In the case of sub standard assets, the settlement formula as given in the modified scheme states that the minimum sum to be recovered must contain the entire running ledge outstanding balance as on the date of the account was identified as NPA i.e. the date from the which interest was not charged to the running ledger + interest at the existing prime lending rate of the bank. As per the modified sac scheme, the terms suggested for the payment of settlement amount NPA are simple and pragmatic. As per the terms of the scheme, the settlement amount should be paid in lump sum by the borrower. However in case of the borrower is unable to repay back in a lump sum, the scheme allows sufficient breathing period to enable him to arrange the funds and clear at least 25 percent of the settlement amount to be paid upfront and the remaining amount to be recovered in installments spread over a period of one year along with interest at the existing PLR from the date of settlement up to the date of final payment.
N.P.As with outstanding over Rs. 5 crores:

For recovery of N.P.As over Rs. 5 crore, RBI has left the matter to the concerned banks and advised that the concerned banks may formulate policy guidelines regarding their settlement and recovery. The freedom, in such cases,
Page 48 of 80
is given to the banks, because the attending circumstances in each case may vary from the other. Therefore it was in the right direction that adopting a generalized approach was not thought appropriate. In cases, where the amount involved is above Rs. 5 crore, RBI expects CMD of each bank to supervise the NPA personally. The CMDs of the concerned banks are advised to review all such cases within a given timeframe and decide the course of action in terms of rehabilitation/restructuring. RBI also desires the submission of a quarterly report of all N.P.As above Rs. 5 crore from PSU banks. Thus by putting up the cut-off dates for the implementing of the scheme, RBI desires the banks to realize the seriousness of the issue and gear up to sweep away the N.P.As in one go. For commercial banks, it is a golden opportunity to clear the mess, consolidate and come out on a track leading t the path of global banking. The time given for weeding out the disastrous N.P.As is neither too long nor too short and the banks, with proper planning and follow up can drastically reduce their N.P.As, if they firmly resolve to do so. RBI expects the commercial banks to follow the guidelines in letter and spirit without any discrimination or discretion as a slight dilution may jeopardize their interest. A proper monitoring system is also desired to be evolved for monitoring the progress of the scheme. As this is a rare opportunity given to the defaulting borrowers so that they can avail the chance given for the settlement of their loans. Without adequate publicity of the scheme the response from the defaulting borrowers may not be there to the expected level.
Page 49 of 80
Page 50 of 80
DIFFERENT APPROACHES TO VALUATION OF NPAs:
N.P.As are by-product of most financial systems and the level of N.P.As is an indicator of the health of the financial system of an economy. Valuation techniques should present the situation, which maximize the overall interest of all the concerned parties. The broad objectives of the valuation framework are essentially: To set a sound basis for the selling bank/institution to finalize the sale of assets, To provide a basis for the fair market value of the assets, To promote transparency of the valuation processes and, To comply with internationally accepted practices. The valuation of an asset or the pool of assets is a precursor to any restructuring exercise. Any valuation exercise shall attempt to address the following issues: The fair market value of the asset should represent the price at which market participants would undertake a restructuring. The transaction value should reflect the potential for income generation and return of principal, balanced against the applicable risk profile and market lending margins. The valuation framework should allow for valuation of specific assets as well as a portfolio of assets (i.e. portfolio of loans to be acquired from a bank.) In most cases, a single value will apply to each loan required. For larger loans, however, an element of risk/return sharing with the selling bank may be considered.
Page 51 of 80
There are various methodologies used to value the companies or their debt. Typically, cash flows, assets or replacement values, or a combination of these, are considered when determining the value of the company or its debt. The matrix shows the risk profile of the NPA based on its cash flows and collateral. As shown, stronger the cash flows and collateral, lower the risk profile of the asset. Some of the widely used approaches towards valuation of an NPA by the valuation firms are detailed as under:
Discounted Cash Flows

One of the commonly used methods for estimating the value of the companys debt is the anticipated cash flow. The cash flow stream will represent the interest and principal payments expected to be received by the lender, primarily out of the internal cash flow generation from underlying business activities. Where the asset is a partly completed project, the cash flow stream will have to take onto account whether the project will be completed and if so how it will be financed. If certain lenders decide to fund through extended facility, this will be taken into account I the assets cash flow stream. Essentially the decision on the projects financial viability will be determined by using an incremental cash flow analysis. Normally, the value of a healthy asset is computed as the discounted value of the expected future cash flows. However, a company is distress or an NPA may have negative earnings and may be likely to incur operating losses for the next few years. For such companies, the estimation of future cash flows is not so easy, as there is a strong possibility of bankruptcy. Under such a scenario the asset valuation is also based on subjective parameters. A company under financial distress has some or all of the following
Page 52 of 80
characteristics: operating loss, inability to meet the debt obligations and high debt equity ratio. When dealing with such cases, the credit analysts need to evaluate the possibility and timing of positive financial performance of the company of infusion of additional funds and the overall macro economic environment. If the company is expected to improve its financial position in the future, the following discounted cash flow model may be used for the distress companies/ N.P.As.
Liquidation Value Approach

If the loan is in default with no or low expectations of its being services, the cash flow from liquidation of the asset and collateral will be the primary approach rather than net present value of the cash flow. In this case, the take out of the lender is primarily by way of exercise of their rights on the assets and attached collateral. The liquidation value of the company is the aggregate of the value of the assets of the company if solid at the market rates, net of transactions and legal costs. The estimation of the assets becomes quite complicated when the assets of the company cannot be easily separated like in a steel, textile or petrochemical plant. If such assets are sold individually, majority of the asset may not fetch a price closer to their books value. Further, when such sale is to take place at a quick place, the value of the assets further fall down, as it is more or less equal to forced sale of the assets. As a result of this forced sale, the seller has to accept a discount on the fair market value of such assets. In most cases, such a realization is not able to cover even the secured debt fully and hence the valuation of the debt would be limited by this realized value. This approach has
Page 53 of 80
been widely used in countries like Thailand where a significant number of loans were secured by real estate and other marketable securities of various kinds.
Earning Model In performing companies, the P/E ration of the industry or other similar companies may be used as a tool for determining the market value of the assets of company. If the debt of the company is more than its assets, then a proportionate discount may be applied to the debt. The above approach, however, cannot be used for most of the N.P.As, as they would have negative EPS. In such cases, the cash earning per share of the company and cash P/E ratio of the similar companies may be used to arrive at a market value of the NPA debt.
Case Specific Valuation Model

Depending on case to case, various models have been evolved and used for specific requirements. I shall discuss here one of such models to provide an insight as to how provide varied models can be from the conventional approaches.
Page 54 of 80
Segmentation into buckets

For a huge portfolio of small loans, different kind of approach may be used for arriving at the realistic valuation. One of them is categorizing the loans in various buckets and then analyzing a sample picked from various buckets. Post currency crisis of late 1990s in Thailand, the price of real estate had declined to abysmally low levels and majority of the property-linked loans had become N.P.As in the books of the local banks. For arriving at the appropriate valuation, they had followed the following methodology: Segmentation of the assets in various buckets. Selection of a sample out of each bucket. Detailed analysis of each sample. Statistical extrapolation of the sample to the entire bucket. Arriving at the final range of the valuation of the portfolio.
Page 55 of 80
TOOLS FOR MANAGING NPAs
Compromise Settlement Scheme Lok Adalats Debt Recovery Tribunals Corporate Debt Restructuring Willful Defaulters SARFAESI Act, 2002 Asset Reconstructing Companies CIBIL 1) COMPROMISE SETTLEMENT SCHEME: One Time Settlement Schemes:NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The scheme also covers NPAs classified as sub-standard as on 31st March 2000, which have subsequently become doubtful or loss. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account.
Negotiated Settlement Schemes
The RBI/Government has been encouraging banks to design and implement policies for negotiated settlements, particularly for old and
Page 56 of 80
unresolved NPAs. The broad framework for such settlements was put in place in July 1995. Specific guidelines were issued in May 1999 to public sector banks for one-time settlements of NPAs of small scale sector. This scheme was valid until September 2000 and enabled banks to recover Rs 6.7 billion from various accounts. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs. 50 million and less. These guidelines were effective until June 2001 and helped banks recover Rs. 26 billion.
2) LOKADALATS:
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987 helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known for effecting mediation and counseling between the parties and to reduce burden on the court, especially for small loans. Cases involving suit claims up to Rs. l million can be brought before the Lokadalat and every award of the Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any court against the award made by the Lokadalat. Several people of particular localities/ various social organizations are approaching Lokadalats which are generally presided over by two or three senior persons including retired senior civil servants, defense personnel and judicial officers. They take up cases which are suitable for settlement of debt for certain consideration. Parties are heard and they explain their legal position. They are advised to reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social workers. If the compromise is arrived at, the parties to the litigation sign a statement in
Page 57 of 80
presence of Lokadalats which is expected to be filed in court to obtain a consent decree. Normally, if such settlement contains a clause that if the compromise is not adhered to by the parties, the suits pending in the court will proceed in accordance with the law and parties will have a right to get the decree from the court. In general, it is observed that banks do not get the full advantage of the Lokadalats. It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the Lokadalat meets. In any case, we should continue our efforts to seek the help of the Lokadalat.
3) DEBT RECOVERY TRIBUNAL:
Any person aggrieved by any measure taken by secured creditor or his authorised officer may file an appeal to Debts Recovery Tribunal, within 45 days from date on which such measure was taken. i.e. action of taking possession of asset, takeover of management of business of borrower, appointing person to manage secured asset etc. is taken by the creditor. When a borrower files an appeal, the appeal cannot be entertained unless; the borrower deposits 75% of the amount claimed in the notice by secured creditor. The DRT can waive or
Page 58 of 80
reduce the amount required to be deposited. The amount is not required to be deposited at the time of filing appeal, but appeal will not be heard till the amount is deposited. The borrower while filing the appeal should also file an application requesting the Debt Recovery Tribunal to admit the appeal without deposit of any amount. It the DRT orders partial deposit of the amount and the same is not deposited, appeal can be dismissed. The 75% deposit is only required if the appeal is filed by the borrower. If some other aggrieved person (e.g. guarantor, shareholder) files it the deposit is not required. DEBT RECOVERY APPELATE TRIBUNAL If a person is aggrieved by the order of the DRT, it can file an appeal to the Appellate Tribunal within 30 days from date of receipt of the DRT order. If the DRT or Appellate Tribunal holds that possession of assets by the secured creditor was wrongful and directs the secured creditor to return asset to concerned borrower, the borrower shall be entitled to compensation and costs as may be determined by DRT or Appellate tribunal. The Tribunal can also direct return of asset, if the secured creditor had already sold or transferred the asset to a third party. In liberalizing economy banking and financial sector get high priority. Indian banking sector of having a serious problem due non performing. The earning capacity and profitability of the bank are highly affected due to this NPA is defined as an advance for which interest or repayment of principal or both remain outstanding for a period of more than two quarters. The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of resource. In liberalizing economy banking and financial sector get high priority. Indian banking sector of having a serious problem due non performing. The financial
Page 59 of 80
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 NPA is defined as an advance for which interest or repayment of principal or both remain outstanding for a period of more than two quarters. The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of resource.
Reasons:
Various studies have been conducted to analysis the reasons for NPA. What ever may be complete elimination of NPA is impossible. The reasons may be widely classified in two. :
(1) Over hang component (2) Incremental component
. .
Over hang component is due to the environment reasons, business cycle etc. Incremental component may be due to internal bank management, credit policy, terms of credit etc.
Steps to be taken under DRT route :(a) Procedure Before Filing the case before DRT:Sell pledge goods after sending reasonable notice to the borrower. Ensure that documents/securities are enforceable against
borrowers/guarantors.
Page 60 of 80
(b) Procedure while filing the case in DRT:Recovery application should contain description of all relevant documents and securities charged to the bank. Original documents should be retained with the Branch till DRT requires the same.
(c) After filing the case before DRT:If the recovery application filed is complete in all respects, DRT gives a serial number; issues summons to borrowers/guarantors called defendants. (d) Execution of Recovery Certificates:Recovery Officer of DRT executes Recovery Certificates (RCs) issued by Presiding Officer of DRT. Branch/Zone should supply the Asset details within one month of the issuance of the RC.
Designation of Registrar:Government of Nepal has to designate one officer level employee of the gazette third class of Nepal Judicial Service to act as the Registrar of the tribunal or appellate tribunal, in order to carry out functions relating to general administration of the tribunal or appellate tribunal, subject to general direction and control of such tribunal and appellate tribunal.
Page 61 of 80
Functions, duties and powers of Registrar:In addition to the functions, duties and powers mentioned elsewhere in this regulation, the functions, duties and powers of the Registrar shall be as follows. To examine and verify documents including petitions, notes of defense and memoranda of appeals to be filed with the tribunal or appellate tribunal and register them if they meet requirements or endorse them with reasons if they cannot be registered, To verify duplicate copies submitted in a case with the originals and certify them if they appear in order, and if the originals appear to have some defects, to mention such defects and get the concerned party to sign to that effect, To verify whether documents submitted along with petitions, memoranda of appeal and notes of defense are correct or not, To issue summons and get it served, To appoint days for appearance in cases, indicating reasonable reasons pursuant to law, To obtain power of attorney and get a case assumed pursuant to prevailing law, To promptly execute, or cause to be executed, actions as referred to in the order made by the Bench, To have security or guarantee as per the order made by the Bench, To maintain, or cause to be maintained, updated records including registration books, To maintain personal records of employees, To safely retain orders and directions in a serial order.
Page 62 of 80
What is the power of Debt Recovery Officer?

The order issued by the Debt Recovery Officer shall deemed to be the order issued by the Tribunal. If any person disobeys any order given by the Debt Recovery Officer, the Tribunal may institute contempt proceedings against that person under the provision of the Act. In recovering the principal and interest of a loan, the Debt Recovery Officer, may follow the following procedures: In consistent with the decision of the Tribunal the Debt Recovery Officer may follow the following procedures, subject to the prevailing law. To take possession of, or auction, the borrower's other movable or immovable property whether furnished as security or not, To take possession of, or auction, the guarantor's movable or immovable property, Where any individual is a borrower or guarantor, to arrest such individual and detain him pursuant to the prevailing law.
Presiding officer:He is the Head of the department. He has judicial power to execute the case.
Page 63 of 80
4) INSTITUTION OF CDR MECHANISM:

The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in India is broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The objective of the CDR mechanism has been to ensure timely and transparent restructuring of corporate debt outside the purview of the Board for Industrial and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is intended to preserve viable corporate affected by certain internal/external factors and minimize losses to
creditors/other stakeholders through an orderly and coordinated restructuring programme. RBI has issued revised guidelines in February 2003 with respect to the CDR mechanism. Corporate borrowers with borrowings from the banking system of Rs. 20crores and above under multiple banking arrangement are eligible under the CDR mechanism. Accounts falling under standard, substandard or doubtful categories can be considered for restructuring. CDR is a non-statutory mechanism based on debtor-creditor agreement and inter-creditor agreement. Restructuring helps in aligning repayment obligations for bankers with the cash flow projections as reassessed at the time of restructuring. Therefore it is critical to prepare a restructuring plan on the lines of the expected business plan along with projected cash flows. The CDR process is being stabilized. Certain revisions are envisaged with respect to the eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks are not members of the CDR forum, and it is expected that they would be signing the agreements shortly. However they attend meetings. The first ARC to be operational in India- Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum.
Page 64 of 80
Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender arrangements and to increase transparency in the process. While in the RBI guidelines it has been recommended to involve independent consultants, banks are so far resorting to their internal teams for recommending restructuring programs.
5) WILLFUL DEFAULTERS: I. Introduction

Pursuant to the instructions of the Central Vigilance Commission for collection of information on willful defaults of Rs.25 lakhs and above by RBI and dissemination to the reporting banks and FIs, a scheme was framed by RBI with effect from 1st April 1999 under which the banks and notified All India Financial Institutions were required to submit to RBI the details of the willful defaulters. Willful default broadly covered the following: a) Deliberate non-payment of the dues despite adequate cash flow and good networth; b) Siphoning off of funds to the detriment of the defaulting unit; c) Assets financed either not been purchased or been sold and proceeds have misutilised; d) Misrepresentation / falsification of records; e) Disposal / removal of securities without bank's knowledge; f) Fraudulent transactions by the borrower. Accordingly, banks and FIs started reporting all cases of wilful defaults, which occurred or were detected after 31st March 1999 on a quarterly basis. It covered all non-performing borrowal accounts with outstandings (funded facilities and such non-funded facilities which are converted into funded facilities) aggregating Rs.25 lakhs and above identified as wilful default by a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs. Banks/FIs were advised that they should examine all cases of
Page 65 of 80
wilful defaults of Rs 1.00 crore and above for filing of suits and also consider criminal action wherever instances of cheating/fraud by the defaulting borrowers were detected. In case of consortium/multiple lending, banks and FIs were advised that they report wilful defaults to other participating/financing banks also. Cases of wilful defaults at overseas branches were required be reported if such disclosure is permitted under the laws of the host country.
II.1 Definition of wilful default
The term "willful default" has been redefined in supersession of the earlier definition as under: A "willful default" would be deemed to have occurred if any of the following events is noted :(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations. (b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. (c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. (d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.
II.2 Diversion and siphoning of funds

The terms diversion of funds and siphoning of funds should construe to mean the following:II.2.1 Diversion of funds, referred to at para 2.1(b) above, would be construed to include any one of the undernoted occurrences:
Page 66 of 80
(a) utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction; (b) deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned; (c) transferring funds to the subsidiaries / Group companies or other corporates by whatever modalities; (d) routing of funds through any bank other than the lender bank or members of consortium without prior permission of the lender; (e) investment in other companies by way of acquiring equities / debt instruments without approval of lenders; (f) shortfall in deployment of funds vis--vis the amounts disbursed / drawn and the difference not being accounted for. II.2.2 Siphoning of funds, referred to at para 2.1(c) above, should be construed to occur if any funds borrowed from banks / FIs are utilised for purposes unrelated to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgement of the lenders based on objective facts and circumstances of the case. The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorised as wilful must be intentional, deliberate and calculated. 2.5 Penal measures In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful defaulters (non-suit filed accounts) and list of wilful defaulters (suit filed accounts) are forwarded to SEBI by RBI and Credit Information Bureau (India) Ltd. (CIBIL) respectively. The following measures should be initiated by the banks and FIs against the wilful defaulters identified as per the definition indicated at paragraph 2.1 above:
Page 67 of 80
a) No additional facilities should be granted by any bank / FI to the listed wilful defaulters. In addition, the entrepreneurs / promoters of companies where banks / FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Development Financial Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a period of 5 years from the date the name of the wilful defaulter is published in the list of wilful defaulters by the RBI. b) The legal process, wherever warranted, against the borrowers / guarantors and foreclosure of recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against wilful defaulters, wherever necessary. c) Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the wilfully defaulting borrower unit. d) A covenant in the loan agreements, with the companies in which the banks / notified FIs have significant stake, should be incorporated by the banks / FIs to the effect that the borrowing company should not induct a person who is a promoter or director on the Board of a company which has been identified as a wilful defaulter as per the definition at paragraph 2.1 above and that in case, such a person is found to be on the Board of the borrower company, it would take expeditious and effective steps for removal of the person from its Board. It would be imperative on the part of the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action. III. Grievances Redressal Mechanism Banks/FIs should take the following measures in identifying and reporting instances of wilful default: (i) With a view to imparting more objectivity in identifying cases of wilful default, decisions to classify the borrower as wilful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs as decided by the Board of the concerned bank/FI.
Page 68 of 80
(ii) The decision taken on classification of wilful defaulters should be well documented and supported by requisite evidence. The decision should clearly spell out the reasons for which the borrower has been declared as wilful defaulter vis--vis RBI guidelines. (iii) The borrower should thereafter be suitably advised about the proposal to classify him as wilful defaulter along with the reasons therefor. The concerned borrower should be provided reasonable time (say 15 days) for making representation against such decision, if he so desires, to a Grievance Redressal Committee headed by the Chairman and Managing Director and consisting of two other senior officials. (iv) Further, the above Grievance Redressal Committee should also give a hearing to the borrower if he represents that he has been wrongly classified as wilful defaulter. (v) A final declaration as wilful defaulter should be made after a view is taken by the Committee on the representation and the borrower should be suitably advised. IV. Criminal Action against Wilful Defaulters 4.1 J.P.C. Recommendations Reserve Bank examined, the issues relating to restraining wilful defaults in consultation with the Standing Technical Advisory Committee on Financial Regulation in the context of the following recommendations of the JPC and in particular, on the need for initiating criminal action against concerned borrowers, viz. a. It is essential that offences of breach of trust or cheating construed to have been committed in the case of loans should be clearly defined under the existing statutes governing the banks, providing for criminal action in all cases where the borrowers divert the funds with malafide intentions. b. It is essential that banks closely monitor the end-use of funds and obtain certificates from the borrowers certifying that the funds have been used for the purpose for which these were obtained. c. Wrong certification should attract criminal action against the borrower.
Page 69 of 80
4.2 Monitoring of End Use Banks / FIs should closely monitor the end-use of funds and obtain certificates from borrowers certifying that the funds are utilised for the purpose for which they were obtained. In case of wrong certification by the borrowers, banks / FIs may consider appropriate legal proceedings, including criminal action wherever necessary, against the borrowers. 4.3 Criminal Action by Banks / FIs It is essential to recognise that there is scope even under the existing legislations to initiate criminal action against wilful defaulters depending upon the facts and circumstances of the case under the provisions of Sections 403 and 415 of the Indian Penal Code (IPC) 1860. Banks / FIs are, therefore, advised to seriously and promptly consider initiating criminal action against wilful defaulters or wrong certification by borrowers, wherever considered necessary, based on the facts and circumstances of each case under the above provisions of the IPC to comply with our instructions and the recommendations of JPC. It should also be ensured that the penal provisions are used effectively and determinedly but after careful consideration and due caution. Towards this end, banks / FIs are advised to put in place a transparent mechanism, with the approval of their Board, for initiating criminal proceedings based on the facts of individual case.
Page 70 of 80
6.) ENACTMENT OF SARFAESI ACT:
The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act" (SARFAESI) provides the formal legal basis and regulatory framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition to asset reconstruction and ARCs, the Act deals with the following largely aspects,
Securitization and Securitization Companies Enforcement of Security Interest Creation of a central registry in which all securitization and asset reconstruction transactions as well as any creation of security interests has to be filed.
The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover various aspects relating to registration, operations and funding of ARCS and resolution of NPAs by ARCS. The RBI has also issued guidelines to banks and financial institutions on issues relating to transfer of assets to ARCS, consideration for the same and valuation of instruments issued by the ARCS. Additionally, the Central Government has issued the security enforcement rules ("Enforcement Rules"), which lays down the procedure to be followed by a secured creditor while enforcing its security interest pursuant to the Act. The Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to the
Page 71 of 80
underlying security without reference to the Court after giving a 60 day notice to the defaulting borrower upon classification of the corresponding financial assistance as a non-performing asset.
The Act permits the secured creditors to take any of the following measures: Take over possession of the secured assets of the borrower including right to transfer by way of lease, assignment or sale; Take over the management of the secured assets including the right to transfer by way of lease, assignment or sale; Appoint any person as a manager of the secured asset (such person could be the ARC if they do not accept any pecuniary liability); and Recover receivables of the borrower in respect of any secured asset which has been transferred. After taking over possession of the secured assets, the secured creditors are required to obtain valuation of the assets. These secured assets may be sold by using any of the following routes to obtain maximum value. By obtaining quotations from persons dealing in such assets or otherwise interested in buying the assets; By inviting tenders from the public; By holding public auctions; or By private treaty.
Lenders have seized collateral in some cases and while it has not yet been possible to recover value from most such seizures due to certain legal hurdles, lenders are now clearly in a much better bargaining position vis-a-vis defaulting
Page 72 of 80
borrowers than they were before the enactment of SARFAESI Act. When the legal hurdles are removed, the bargaining power of lenders is likely to improve further and one would expect to see a large number of NPAs being resolved in quick time, either through security enforcement or through settlements.
Under the SARFAESI Act ARCS can be set up under the Companies Act, 1956. The Act designates any person holding not less than 10% of the paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a controlling interest in, being the holding company of or being in control of the ARC. The SARFAESI and SARFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less than Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted assets. ARCS have been granted a maximum realization time frame of five years from the date of acquisition of the assets.
The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction. These include: Enforcement of security interest; Taking over or changing the management of the business of the borrower; The sale or lease of the business of the borrower; Settlement of the borrowers' dues; and Restructuring or rescheduling of debt.
Page 73 of 80
ARCS are also permitted to act as a manager of collateral assets taken over by the lenders under security enforcement rights available to them or as a recovery agent for any bank or financial institution and to receive a fee for the discharge of these functions. They can also be appointed to act as a receiver, if appointed by any Court or DRT.
7.) ASSET RECONSTRUCTING COMPANIES:

The genesis of asset reconstruction business in India owes its origin to enactment of the Securitisation Act (THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT), 2002 which was enacted by the parliament in December 2002. Prior to promulgation of the Securitisation Act, 2002, banks and financial institutions had no option but to enforce their security interests through the court process, which was extremely time consuming. After the enactment of the act many asset reconstruction companies (ARCs) were formed. The Asset Reconstruction Company of India ltd (ARCIL) was the first one to set up the shop. It was promoted by ICICI bank, IDBI bank, and SBI. ARCIL has recently launched retail NPAs resolution initiative through ARMS. Currently there are about fifteen ARCs in the country. Prominent among them are India SME Asset Reconstruction Company Limited (ISARC),Pegasus Assets Reconstruction Pvt. Ltd.,Reliance Asset Reconstruction Company Ltd, etc. The Securitisation Act principally provides for the following: Enforcement of Security Interests by secured creditors; Transfer of NPLs to asset reconstruction companies (ARCs), which can then take measures for recovery as prescribed under the Securitisation Act, 2002; A legal framework for securitisation of assets.
Page 74 of 80
Benefits of Asset reconstruction IndustryAs the cash realisation activity from defaulting borrowers is a lengthy and cumbersome procedure, relieving banks of the burden of NPAs will allow them to focus better on managing the core business including new business opportunities. The transfer should help restore depositor and investor confidence by ensuring the lenders financial health. The banks use it as a method to hive off the bad loans from their balance sheet. ARCs are meant to maximise recovery value while minimizing costs. ARCs also helps building industry expertise in loan resolution and restructuring management, besides serving as a catalyst for important legal reforms in bankruptcy procedures and loan collection. ARCs play an important role in developing capital markets through secondary asset instruments. The growth of Asset reconstruction sector is important for the Indian Economy. Some kind of fiscal incentives should be provided to fuel the growth of the industry.Also as total NPA in the Indian banks is reducing the ARCs should look forward towards other avenues of business like, business turnaround management and debt restructuring. There should be mechanism to review to working of ARC which should work upon increasing the transparency in the sector .As more and more private players enter into this sector, this space is really worth watching for.
ARCIL Historical Background

The 1990s witnessed several financial and economic crises worldwide, crippling the economies of the affected countries. In most cases, crises in the financial sector culminate into non-performing Loans (NPL)). A high level of NPAs in the banking system can severely affect the economy in many ways: Management and financial resources of the banking system are diverted to resolution of NPA problems causing an opportunity loss for more productive use of resources. The banks tend to become risk averse in making new loans, particularly to small and medium sized companies. Thus, large scale NPAs when left unattended cause
Page 75 of 80
continued economic and financial degradation in the country. This results in a credit crunch and generally signals adverse investment climate. This explains why most countries in the grip of systemic financial and economic crisis have attempted system-wide clean up of NPAs as a part of restructuring of their banking system. Often, solutions result in the creation of Asset Reconstruction Companies (ARCs), which are globally publicly/ government owned. ARCs act as debt aggregators and engage in acquisition of NPAs. Thus ARCs take away the distraction by isolating NPAs from the banking system and act as the "bad bank". This leaves the rest of the banking system free to act as a "good bank" and return to equity markets and normal banking business. Governments encourage transfer of assets to ARCs through creation of a supportive environment. Governments may also provide special powers to ARCs that are not otherwise available to the banking system.
Indian Scenario
The problem of recovery from NPAs, in the Indian banking system, was recognized by the Government of India (GOI) as far back as in 1997, when the "Narasimhan Committee" was appointed. The Narasimhan Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform. It was expected that with a combination of policy and institutional development, new NPAs in future could be lower. However, the problem of a huge backlog of existing NPAs remained. This impinged severely on banks performance and their profitability. The Report envisaged the creation of an "Asset Reconstitution Fund" to take the NPAs off the lender's books at a discount. Unlike in some countries where ARCs have been set up post financial crises and for the purpose of bailout, in India, the GOI proactively initiated certain measures to control NPAs. In order to regulate and control the NPAs and quicken recovery, the GOI set up Debt Recovery Tribunals and Debt Appellate Tribunals under the "Recovery of Debts Due to Banks and Financial Institutions Act, 1993". As a corollary to this and to speed up the process of recovery from NPAs, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, was enacted for regulation of securitization and reconstruction of financial assets and enforcement of security interest by secured creditors, including Securitization or Reconstruction Companies (SC/RC). The RBI has already issued guidelines / directives to ARCs, banks and financial
Page 76 of 80
institutions for transfer of assets to ARCs, defining prudential guidelines for ARCs and permitting Indian banks and financial institutions to participate in papers issued by ARCs.
.
Asset Reconstruction
ARCs are formed to acquire NPL from banks and financial institutions with the objective of focused management and optimal recovery, thereby relieving banks and financial institutions of the burden of NPL and allowing them to focus on core activities.The word asset reconstruction company is a typical Indian word the global equivalent of which is asset management companies. The word "asset reconstruction" in India owes its origin to Narsimham Committee I which envisaged the setting up of a central Asset Reconstruction Fund with money contributed by the Central Government, which was to be used by banks to shore up their balance sheets to clean up their non-performing loans. This idea never worked: so Narsimham Committee II thought of ARCs, the likes of which had already been successful in Malaysia, Korea and several other countries in the world. To keep the tune the same as the original idea of asset reconstruction fund, as also to give an impression that ARCs are not merely concerned with realisation of bad loans but they are going to do "reconstruction", e.g. resurrect bad loans into good ones, the word ARC has been used in India.
.
Securitisation Framework
The Parliament of India enacted and passed the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (the Act) to regulate securitisation and reconstruction of financial assets and enforcement of Security Interest (as defined in the Act) and for matters connected therewith. The Act provides for setting up of Securitisation Companies/ Reconstruction Companies (SC/RC) termed in popular parlance as ARCs . The Act enables the banks and financial institutions to realize long term assets, manage problems of liquidity, asset liability mismatch and improve recovery by exercising powers to take possession of security, sell them and reduce Non Performing Loans (NPL) by adopting measures for recovery or reconstruction within the framework of the Act, the rules framed there under and the guidelines and notifications issued pursuant thereto, by the Reserve Bank of India (RBI). The SC/RCs acquires NPAs from banks, financial institutions a by raising funds from Qualified Institutional Buyers (as defined in the Act) by issue of Security Receipts (as defined in the Act) representing undivided interest in such financial assets. Like banks , financial institution , the Act also enables SC/ RC to take possession of secured assets of the borrowers
Page 77 of 80
including right to transfer and realize the secured assets. SC/RCs act as debt aggregators and are focused in the resolution of NPAs. Thus SC/RCs take away the distraction of banks by isolating NPAs from the banking system. This leaves rest of the banking system free to act in their core area of lending and normal banking business. A SC/RC can commence or carry on business of SC/RC only upon obtaining certificate of registration under SRFAESI. RBI issues various circulars, guidelines and notifications pertaining to SC/RCs from time to time. The notifications, guidelines and circulars may be viewed at www.rbi.org.in.
8) CIBIL:
Credit Information Bureau (India) Limited or CIBIL is a Credit Information Company (CIC) founded in 2001. Post Inception, we have come to play a critical role in Indias financial system. Whether it is to help loan providers manage their business or help consumers secure credit faster and at better terms, the use of CIBILs products have led to a massive change in the way the credit life cycle is managed by both loan providers and consumers. CIBIL collects and maintains records of an individuals payments pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders, on a monthly basis. This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to lenders in order to help evaluate and approve loan applications.
What is our role in the Loan Approval Process?

CIBILs products, especially the CIBIL TransUnion Score and the CIR are very important in the loan approval process. The credit score helps loan providers quickly determine, who they would like to evaluate further to provide credit. The CIBIL TransUnion Score ranges from 300 to 900. Our data indicates that loan providers prefer a credit scores which are greater than 700.
Page 78 of 80
Once the loan provider has decided which set of loan applicants to evaluate, it analyzes the CIR in order to determine the applicants eligibility. Eligibility basically means the applicants ability to take additional debt and repay additional outflows given their current commitments. Post completion of these first 2 steps the loan provider will request for the applicants income proof and other relevant documents in order to finally sanction the loan.
What this means for you as an individual

Since, the credit score and CIR not only helps loan providers identify consumers who are likely to be able to pay back their loans, but also helps them to do this
Page 79 of 80
more quickly and economically. This translates into faster loan approvals. Until recently, there was little visibility and transparency with regards to the loan approval process and the elements that loan providers used to evaluate your loan application. Since, CIBIL has made your credits score and CIR available to you, you will be able to see how valuable a customer you are to loan providers. In alignment with our creed , CIBIL empowers both loan providers and individuals to see their world more clearly and hence, take better and more informed decisions.
MISSION / VISION
To Catalyze growth of Credit in India through: 1. SOLUTIONS that enable well informed Credit decisions 2. TECHNOLOGY that enables superior information availability 3. PEOPLE that provide high quality services
Being pioneers in this field, we have gained knowledge, experience and expertise to offer advanced data and technology-backed solutions that provide superior insights and information to our customers. Our range of comprehensive solutions, developed carefully over the years, help our customers make intelligent decisions at every stage of their customer lifecycle. In order to maintain our image of a responsible credit bureau, we strive to apply best available technology and processes in our operations. Our people strive to offer these cutting edge solutions and services to all customers, with our aspiration to remain their first choice. We take great pride in having pioneered the concept of credit information sharing in India, which enables the credit grantor to take prudent and information-backed credit decisions.
Page 80 of 80

NPA

Diunggah oleh

Informasi Dokumen

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

NPA

Diunggah oleh

Hak Cipta:

Format Tersedia

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

2.4) THE EMERGENCE OF NPA:

NON PERFORMING ASSTES

NON PERFORMING ASSTES

EMERGENCE OF NPA A THREAT TO NATIONALISED BANKS

NON PERFORMING ASSTES

2.5) EVOLUTION OF NPA:

NON PERFORMING ASSTES

NON PERFORMING ASSTES

3.1) OBJECTIVE OF THE STUDY: Primary objective:

NON PERFORMING ASSTES

3.2) DATA COLLECTION Formulating the problem

Type of the data

NON PERFORMING ASSTES

3.3) LIMITATIONS OF THE STUDY:

NON PERFORMING ASSTES

4.1) MEANING & DEFINITION:

Money Surplus Units

Money Intermediary (Banks)

Money Deficit Units

NON PERFORMING ASSTES

4.2) HISTORY OF BANKING:

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

Scheduled banking structure in India

INDIAN BANKING SYSTEM

Reserve Bank of India

Regional Rural Banks

State Co operative Banks

Central/District Cooperative Banks

Indian State Bank Group Nationalized Bank

Primary credit societies

State Bank of India

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

CONCEPT OF NPA & ASSET CLASSIFICATION

NON PERFORMING ASSTES

NON PERFORMING ASSTES

Regulations for asset classification

NON PERFORMING ASSTES

NON PERFORMING ASSTES

Asset Classification Standard assets Substandard assets Doubtful assets

Guidelines for the classification of assets

NON PERFORMING ASSTES

NON PERFORMING ASSTES

NON PERFORMING ASSTES

INDIAN ECONOMY & NPAs:

NON PERFORMING ASSTES

GLOBAL DEVELOPMENT & NPAs

NON PERFORMING ASSTES

NON PERFORMING ASSTES

DEVELOPMENT OF FINANCIAL INSTITUTIONS HEALTH:

NON PERFORMING ASSTES

BASIS & PROVISIONAL NORMS OF NPA

NON PERFORMING ASSTES