punjab sind

7/30/2019 Punjab Sind

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A Summer Training Report

On

ANALYSIS OF ON NON PERFORMING ASSETS OF PUNJAB

AND SIND BANK

Undertaken at

SUBMITTED TO PUNJABI UNIVERSITY,PATIALA

IN PARTIAL FULFILLMENT OF THR REQUIREMENT FOR

THE AWARD OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION(SESSION 2009-2011)

Submitted to :- Submitted by:-

GEETIKA

MBA(III)

PUNJABI UNIVERSITY,PATIALA


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DECLARATION

I, GEETIKA hereby declare that this project report entitled

Analysis of non performing assets of Punjab and Sind bank

Prepared by me is a confide record of work done at Punjab and Sind bank, Branch Office,

Patiala, under the guidance of Prof S.S Virdhi, faculty, PUNJABI UNIVERSITY, Patiala in

partial fulfilment of MBA Program- during academic year-2009-11.

I further declare that the information presented in this project is true and original to the best of

my knowledge.

(GEETIKA)


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PREFACE

Research Project is an integral part of the professional studies and its purpose is to provide the

students with the practical exposure of the market in todays changing scenario.

It helps in the development of knowledge, skills and analytical thinking progress.

Theoretical Knowledge without practical learning is of little value.

To fulfill the need, the management course has the provision of practical learning.

We took our summer training in PUNJAB AND SIND BANK. It was our fortune that we

got the opportunity to do our summer training in an esteemed organization in very healthy and

co-operative atmosphere.

In the forthcoming pages, an attempt has been made to present a comprehensive report

concerning different aspects of our training.


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ACKNOWLEDGEMENT

If words are considered to be signs of gratitude then let these words convey the very same.

My sincere gratitude to PUNJAB AND SIND BANK for providing me with an opportunity

to work with BANK and giving necessary directions on doing this project to the best of my

abilities.

At the very outset I would like to express my sincere gratitude to Mr.Surjeet Singh, Branch

Manager,Sector-34, Chandigarh, who was kind enough for providing me this opportunity to

supervise my summer training in this organization.

I would like to extend my heartfelt thanks to the staff members of Punjab and Sind bank,Branch Office, G.N.N Tripuri, Patiala without whose guidance and support I would not have

been able to successfully complete my project. I also offer my sincere appreciation to the

staff in PSB.

My several well-wishers helped me directly or indirectly; I virtually fall short of words to

express my gratefulness to them. Therefore I am leaving this acknowledgement incomplete in

their reminiscence.


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TABLE OF CONTENTS

S.NO TOPICS PAGES

1. Introduction 8-12

2. Company Profile 13-22

3. Literature Review 23-26

4. Research Methodology 27-30

5. NPA and Provisioning 31-62

6. Analysis and Interpretation 63-75

7. Recovery Procedure 76-79

8. Suggestions and Conclusion 80-85

9. Bibliography 86

10. Annexure 87

EXECUTIVE SUMMARY

NPAs have turned to be a major stumbling block affecting the profitability of Indianbanks before 1992,banks did not disclose the bad debts sustained by them and provision made

by them fearing that it may have an adverse. Owing to the low levels of profitability, banks


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owned funds had to be strengthened by repeated infusion of additional capital by the

government. The introduction of prudential norms strengthen the banks financial position and

enhance transparency is considered as a milestone measure in the financial sector reform.

These prudential norms relate to income recognition, asset classification, provisioning for bad

and doubtful debts and capital adequacy.

An Explorative & Descriptive study was considered to be adequate to achieve the

objectives of the study, and the study was conducted in PUNJAB AND SIND BANK, on An

analysis of NPA in commercial banks with special reference to Punjab and Sind Bank. The

general objective of the study was to analyze the NPA level in commercial banks. However

the study was conducted with the following specific objectives..

To analyze the NPA level of Punjab and Sind bank.

To study the recovery procedures of Punjab and Sind Bank.

To examine how far the bank has been successful in reducing the NPA level.

To suggest measures for efficient management of NPAs.

The major limitation of the study was the paucity of time. Even then, maximum care has

been taken to arrive at appropriate conclusion. The method adopted for collection of data was

personal interview with bank officials using Inventory schedule as a tool for the same, and

it was also sourced from the secondary data. After collecting data from the respective sources,

analysis & interpretation of data has been made. On analyzing the data, the following findings

were arrived at:-

Net advances are an upward trend.

Net NPAs are decreasing.

Staff productivity is increasing and is reflected the recovery results.

Based on the findings, logical conclusions are drawn, and further, suitable suggestions &

recommendations are brought out. The entire project report is presented in the form of a report

using chapter scheme, developed logically and sequentially from introduction to bibliography &

references.


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HISTORY OF BANKING


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Banks were born to facilitate trade to lend monies to purchase goods, to store monies and to

change currencies. Banking began thousands of years ago. The Assyrians, Babylonians and

Ancient Greeks practiced simple forms of banking safekeeping, exchanging foreign coins

and making loans mainly in connection with trade. Temples such as those of Ephesus and

Delphi were Greek banking institutions. The Romans did not have State Banks but had minute

regulations regarding private banks. These were calculated to create utmost confidence in the

system.

Banking is nearly as old as civilization. The history of banking could be said to have started

with the appearance of money. The first record of minted metal coins was in Mesopotamia in

about 2500B.C. the first European banknotes, which was handwritten appeared in1661, in

Sweden. cheque and printed paper money appeared in the 1700s and 1800s, with many

banks created to deal with increasing trade.

The history of banking in each country runs in lines with the development of trade and

industry, and with the level of political confidence and stability. The ancient Romans

developed an advanced banking system to serve their vast trade network, which extended

throughout Europe, Asia and Africa.

Modern banking began in Venice. The word bank comes from the Italian word ban co,

meaning bench, because moneylenders worked on benches in market places. The bank of

Venice was established in 1171 to help the government raise finance for a war.

At the same time, in England merchant started to ask goldsmiths to hold gold and silver in

their safes in return for a fee. Receipts given to the Merchant were sometimes used to buy or

sell, with the metal itself staying under lock and key. The goldsmith realized that they could

lend out some of the gold and silver that they had and charge interest, as not all of the

merchants would ask for the gold and silver back at the same time. Eventually, instead of

charging the merchants, the goldsmiths paid them to deposit their gold and silver.

The bank of England was formed in 1694 to borrow money from the public for the

government to finance the war of Augsburg against France. By 1709, goldsmith were using

bank of England notes of their own receipts.

BANKING HISTORY OF INDIA


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Banking in India originated in the first decade of 18th century with The General Bank of India

coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are

now defunct. The oldest bank in existence in India is the State Bank of India being established

as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks

like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time,

Calcutta was the most active trading port, mainly due to the trade of the British Empire, and

due to which banking activity took roots there and prospered. The first fully Indian owned

bank was the Allahabad Bank, which was established in 1865.

By the 1900s, the market expanded with the establishment of banks such as Punjab National

Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded

under private ownership. The Reserve Bank of India formally took on the responsibility of

regulating the Indian banking sector from 1935. After India's independence in 1947, the

Reserve Bank was nationalized and given broader powers.

NATIONALIZATION

The next significant milestone in Indian Banking occurred on July 19, 1969 when the then

Indira Gandhi government nationalized the 14 largest commercial banks. A second

nationalization of 6 more commercial banks followed in 1980. The stated reason for the

nationalization was to give the government more control of credit delivery. After this, until the

1990s, the nationalized banks grew at a leisurely pace of around 4%, closer to the average

growth rate of the Indian economy.

LIBERALIZATION

In the early 1990s the Narasimha Rao government embarked on a policy of liberalization and

gave licenses to a small number of private banks, which came to be known as new generation

tech-savvy banks, which included banks such as UTI Bank (the first of such new generation

banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in

the economy of India, kick started the banking sector in India, which has seen rapid growth

with strong contribution from all the three sectors of banks, namely, government banks,

private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the

norms for Foreign Direct Investment, where all Foreign Investors in banks may be given

voting rights which could exceed the present cap of 10%.


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The new policy shook the Banking sector in India completely. Bankers, till this time, were

used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new

wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.

All this led to the retail boom in India. People not just demanded more from their banks but

also received more.

BANKING STRUCTURE IN INDIA

In todays dynamic world banks are inevitable for the development of a country. Banks play a

pivotal role in enhancing each and every sector. They have helped bring a draw of

development on the worlds horizon and developing country like India is no exception.

Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle for

moving finance from those who have surplus money to (however temporarily depositors

whose accounts are in credit to borrowers who are in debit.

Without the intermediary of the banks both their depositors and their borrowers would

have to contact each other directly. This can and does happen of course. This is what has

lead to the very foundation of financial institution like banks.

Before few decades there existed some influential people who used to land money. But a

substantially high rate of interest was charged which made borrowing of money out of the

reach of the majority of the people so there arose a need for a financial intermediate.

The Bank have developed their roles to such an extent that a direct contact between the

depositors and borrowers in now known as disintermediation. Banking industry has always

revolved around the traditional function of taking deposits, money transfer and making

advances. Those three are closely related to each other, the objective being to lend money,

which is the profitable activity of the three. Taking deposits generates funds for lending and

money transfer services are necessary for the attention of deposits. The Bank have introduced

progressively more sophisticated versions of these services and have diversified introduction

in numerable areas of activity not directly relating to this traditionaltrinity


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COMPANY OVERVIEW

(a)HISTORY


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It was in the year 1908, when a humble idea to uplift the poorest of poor of the land

culminated in the birth of Punjab & Sind Bank with the far-sighted vision of luminaries like

Bhai Vir Singh, Sir Sunder Singh Majitha and Sardar Tarlochan Singh.They enjoyed the

highest respect with the people of Punjab.

The bank was founded on the principle of social commitment to help the weaker section of the

society in their economic endeavours to raise their standard of life.

Decades have gone by, even today Punjab & Sind Bank stands committed to honor the social

commitments of the founding fathers.

(b)VISION AND MISSION

CORPORATE VISION

We envision to emerge as a strong vibrant Bank through synchronization of the human,

financial and technological resources.

CORPORATE MISSION

To put in place the effective risk management and internal contol system.

To adopt and operationalise high-level technology standards.

To strive to achieve excellence in customer service.

To achieve the highest standards of transparency and accountability in the conduct of

banking business.

To maximize profitability and profits of the Bank with due compliance of prudential

guidelines.

To maximize competitive risk adjusted return on capital, through planned reduction in the

average cost of funds, increased yield on advances and investments besides reduction in cost

of operations.

(c) MANAGEMENT


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SHRI PARVEEN KUMAR ANAND

EXECUTIVE DIRECTOR

DIRECTORS

SHRI A. BHATTACHARYA DIRECTOR (Ministry of Finance, Deptt. of Financial Services,

New Delhi)

SHRI R. SADANANDAM (RBI Nominee Director)

SHRI SANDIP GHOSE, ADDITIONAL DIRECTOR (Regional Director, RBI New Delhi)

NON- OFFICIAL DIRECTORS

SHRI MATTA VENKATA SIVA PRASAD

SHRI KRISHAN MURARI GANGAWAT

SHRI HARI CHAND BAHADUR SINGH

SHRI A.K. SURANA (C.A. Category)

SHRI KARANPAL SINGH SEKHON

SHRI MANISH GUPTA

GENERAL MANAGERS

SARDAR GURCHARAN SINGH REKHI

(Chief General Manager)

(Posted at H.O.)

SARDAR HARCHARAN SINGH MAKKER (Posted at H.O.)

SARDAR HARCHARN SINGH LAMBA

SARDAR PARAMJIT SINGH GHAWRI (Posted at H.O.)

SARDAR JASPAUL SINGH KOCHAR (Posted at H.O.)SARDAR GURVINDER SINGH BINDRA (Posted at H.O.)

SARDAR KULWANT SINGH SUCHDEVA (Posted at H.O.)


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SARDAR GURCHARAN SINGH

(Posted at H.O.)

SARDAR GURPAL SINGH MALIK (Posted at Z.O.

KOLKATTA)

SARDAR HARVINDER PAL SINGH (Posted at Z.O. MUMBAI)

SARDAR MANJIT SINGH (Posted at H.O.)

SHRI DINESH KUMAR GUPTA (CVO - Posted at H.O)

(d) SERVICE PROFILE

DEPOSITS

Different types of deposit accounts:

Different types of deposit accounts:

(a) Saving Bank account (b) Term deposit account

(c) interest rate account (d) Current account

(e) Recurring deposit account (f) Lockers account

ADVANCES

Base rate

Priority sector

Housing

Consumer

Conveyance

Personal loan

Education

Debt restructuring

Other loans

FPC leading

SERVICES


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ATM branches

Locker facilities

Credit cards

RTGS/NEFT

PSB-eFunds transfer

(e) SPL TIEUPS

PSB AVIVA ALLIANZ-Insurance

Punjab & Sind Bank has special tie-up arrangements for Non Life insurance business withM/s Bajaj Allianz General Insurance Company and Life Insurance business arrangements with

M/s Aviva Life Insurance Company India Pvt. Ltd. for providing its valued customers all the

insurance related services under one roof. The Bank has established insurance desks

throughout the country at different branches where Insurance Officers are posted and have

also allotted cluster of surrounding branches.

About PSB and Aviva Tie-up

Aviva signed Corporate Agency Agreement with PSB in September 2004 under which

the bank deployed its Insurance Officers (Specified Persons) to sell the Life Insurance

products to its customers through vast network of 918 branches spread over 175

Districts ,25 States and Union Territory of Chandigarh.

The Bank has tied up with Bajaj Allianz Life Insurance Company Ltd. (BALIC) to provide

Low Cost Life Insurance Cover to New & Existing Education Loan and Housing Loan

borrowers on voluntary basis, under the Group Insurance Scheme.

PSB-MARUTI SUZUKI


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The Bank having signed MOU with MSIL for Auto financing through their approved dealers.

The features of the scheme under Tie-up arrangement are as under

1

.

Purpose To finance new Maruti Suzuki vehicles

2

.

Eligibility:

(i)

Employees of Central/

State Government PSUs,

Organisations.

(ii)

Employees of established

& recognized schools/

colleges / local registered

bodies, where loan

installment is paid by salary

deduction or undertaking

from employer for

remitting the terminal

benefits is available.

(iii

)

Employees of Corporate

clients of Bank, where loan

installment is paid by salary

deduction or undertaking

from employer for

remitting the terminal

benefits is available.

(iv)

Employees of reputed

Corporates in regular

service and having

permanent residence proof.

(v)

Professionals/ Self

employed, CAs doctors ,

Architects and General

public.

Quantum of Loan

(i) to

(iv):

Thrice the average of annual

income of past three years as per

ITR/ Salary details subject to a

maximum of Rs.10 lac . ( Income

of spouse can be clubbed)

(v)

Thrice the average of annual

income of the past three years as

per ITR ( Income of spouse can

be clubbed ) . Maxm.Rs.10 lac .

40% of the total income to meet

day to day expenses should be

ensured.


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PSB- Tata Motors Ltd.

In order to boost lendings under Commercial Vehicle segment Bank has entered into an

MOU with Tata Motors Ltd Indias largest Commercial Vehicle Co for financing of com-

mercial vehicles . In this context, under this arrangement, Bank has introduced a compete-

tive and innovative credit delivery system in association with TML, effective implementa-

tion which will be a source of successful business growth for the Bank.

The salient features of the approved scheme are as under:

1. Eligibility

a)Individuals, proprietorship/partnership firm./ Limited company, trust, society, owning and

operating or proposing to own and operate transport vehicles for carrying passengers or good

on hire.

b) The borrower should have sufficient net worth to pay for the margin and initial recurring

expenses like registration, Insurance, etc. In case where the borrower does not meet this

requirement, a co-borrower having sufficient net worth to be included.

.

2. Margin: 15% on chasis and 25% on body.

3. DSCR Minimum 1.75


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THE DEPOSITS OF PUNJAB AND SIND BANK

(FROM 04-05 TO 09-10)

Amount in crores

The aggregate deposits of the bank has increased from 11844.02 crores to 22939.56 crores

during the period 2004-05 to 2009-10. On analyzing the trend of such increase in the deposits

over the period we can clearly see that it is increasing at a increasing rate. The modest growth

especially during the last three years is mainly due to a conscious decision on to shed the

Year

Deposits

of the

bank

(Rs)

Increase /

Decrease

over the

previous

years figure

2004-05 11844.02 ---

2005-06 12591.50 6.31

2006-07 13877.06 10.20

2007-08 15656.46 12.81

2008-09 19351.26 23.60

2009-10 22939.56 18.54


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highest cost deposits. With focus on bringing down the cost of deposit, field function areas

have been constantly exhorted to step up the share of low cost of deposit.

ADVANCES OF THE PUNJAB AND SIND BANK

(FROM 2004-05 TO 2009-10)

Amount in crores

YearAdvance of the

Bank (Rs)Increase/decrease over

the previous year figure

%Increase /

Decrease over the

previous years

figure

2004-05 39567.33_

---

2005-06 40834.71 1267.38 3.20

2006-07 48271.60 7437.89 0.18

2007-08 56810.81 8538.21 17.68

2008-09 84868.22 28057.41 49.38

2009-10 66648.85 (18219.37) (21.46)

The aggregate advances of the bank has increased from 39567.33 crores to 66648.85 crores

during the period 2004-05 to 2009-10.The credit appraisal system was fine tuned and effective

system was put to place to ensure the quality of asset. A tenor linked prime lending rate was

introduced during the year 2006 to give a boost to short term lending. Exposure to various

sectors is strictly maintained within the stipulated ceiling. The system and procedures were


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streamlined to incipient irregularities in the asset step without delay. A substantial positive

change in credit dispensation and monitoring was initiated through a visited credit policy.

Which primarily aim at segmentation of the retail and corporate portfolios for improved thrust

in both these areas.


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S WOT ANALYSIS OF PSB

MISSION

Promotion and sustenance of economic interest & providing easy finance, cost effective and

quality banking services to customer & PACs.

STRENGTHS

Special incentives in form of aides and subsidised loans given by state and central

government in order to expand credit to rural and priority sector.

Diversified Portfolio with innovative schemes like Revolving Cash Credit to farmers (RCC),

Conversion loan facility, Commercial Dairy development scheme, Non Farm sector loan

scheme(NFS) that caters to the special needs of farmers and other priority sectors.

Well laid organisation structure and effective leadership.

Well Qualified and trained staff fully dedicated towards fulfillment of banks objectives.

WEAKNESSES

No provision of new age services like Home Banking, On-line Banking, Telephone Banking.

Lack of ATMs and debit card facility to its customers.

Limited Branch network.

Partial computerization of the operations.

OPPURTUNITIES

Introduction of new and innovative loan schemes like Dairy loan scheme for purchase of cow,

Advances to salary earners etc.

THREATS

Increased competition from innovative service profile of private sector banks like ICICI,

HDFC etc.

Competition in core sectors like rural advances, SSI loans from other UCBs and public sector

banks


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Caprio & Klingebiel (1996), studied the Bank insolvency is more costly in the developing

world, where losses represent a greater share of income. The authors present data on bank

insolvency episodes since the late 1970s. This new database can be used in conjunction with

readily available data. Information and insights are presented in seven tables on: a) major

bank insolvencies episodes and systemic banking crises; b) main characteristics of banking

crises; c) trade terms in crisis countries; d) trade concentration prior to crises; e) restructuring

characteristics; f) financial analysis of crisis countries; and g) restructuring outcome in crisis

countries. In a companion paper the authors discuss possible preventatives and the tradeoff

between safety and soundness versus efficiency. Meanwhile, this initial database suggests

further avenues for research. There is a dearth of widely available indicators on bank

performance. More attention should be focused on developing indicators that might predict

bank insolvency for individual banks and systems as a whole. The authors devise criteria for

assessing how governments deal with insolvency and find that countries handle it well.

Lawrence Sez (2001), analyzes the important process about financial reform in the area of

bank illiquidity in low-income emerging markets. This process is taking place within the

context of a debate as to whether or not governments should try to rehabilitate existing state-

owned banks or allow a new or parallel banking system to emerge in order to reduce non-

performing assets from state-owned commercial banks. A comparison of institutional

development in China and India suggests that new entry rather than the rehabilitation

approach may work more favorably to reduce non-performing assets. The paper offers an

explanation as to why governments choose rehabilitation over new entry.

Milind Sathye(2001), measured the productive efficiency of banks in a developing country,

that is, India. The measurement of efficiency is done using data envelopment analysis. Two

models have been constructed to show how efficiency scores vary with change in inputs and

outputs. The efficiency scores, for three groups of banks, that is, publicly owned, privately

owned and foreign owned, are measured. The study shows that the mean efficiency score of

Indian banks compares well with the world mean efficiency score and the efficiency of private

sector commercial banks as a group is, paradoxically lower than that of public sector banks

and foreign banks in India. The study recommends that the existing policy of reducing non-

performing assets and rationalization of staff and branches may be continued to obtain


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efficiency gains and make the Indian banks internationally competitive which is a declared

objective of the Government of India.

Reddy Prashanth K. (2002), studied financial sector reform in India has progressed rapidly

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

prudential norms and risk-based supervision. But progress on the structural-institutional

aspects has been much slower and is a cause for concern. The sheltering of weak institutions

while liberalizing operational rules of the game is making implementation of operational

changes difficult and ineffective. Changes required to tackle the NPA problem would have to

span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper

deals with the experiences of other Asian countries in handling of NPAs. It further looks into

the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem

by drawing on experiences from other countries.

Reddy, Mohan (2003, 2004),examined that several studies have underscored the role of

banks lending policy and terms of credit, which include cost, maturity and collateral in

influencing the movement of non-performing assets of banks.

Satish Kumar B. (2005), analyzed that in liberalizing economy, banking and financial sector

get high priority. Indian banking sector is having a serious problem due to non performing

loans. The financial reforms have helped largely to clean NPA was around Rs. 52,000 crores

in the year 2004. The earning capacity and profitability of the bank are highly affected due to

this. The extent of NPA is comparatively higher in public sectors banks. It is highly

impossible to have zero percentage NPA. But at least Indian banks can try competing with

foreign banks to maintain international standard.

Dhanuskodi R. (2006), studied the Non-Performing Assets (NPAs) in Commercial Bank of

Ethiopia. Banks play a very important role in the economic development of every nation.

They have control over a large part of the supply of money in circulation. Banks are the main

stimulus of the economic progress of a country. In general there are several challenges

confronting of commercial banks. The main challenge confronting the commercial bank is the

disbursement of funds in quality assets (loans and advances).
http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=337820http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=337820


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RESEARCH METHODOLOGY


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The purpose of research is to discover answers to the questions through the application of

scientific procedures. The main aim of research is to find out the truth which is hidden and

which has not been discovered as yet. Though each research study has its own specific

purpose, we may think of research objectives as falling into a number of following broad

categories:

To gain familiarity with a phenomenon or to achieve new insights into it.

To portray accurately the characteristics of a particular individual, situation or a

group.

To determine the frequency with which something occurs or with which it is

associated with something else.

To test a hypothesis of a casual relationship between variables.

Research methodology is a way to systematically solve the research problem . it may be

understood as a science of studying how research is done scientifically. In it we study the

various steps that are generally adopted by a researcher in studying his research problem

along with the logic behind them.

Research methodology has many dimensions and research methods do constitute a part of the

research methodology. The scope of research methodology is wider than that of research

methods. Thus, when we talk of research methodology we not only talk of the research

methods but also consider the logic behind the methods we use in the context of our research

study and explain why we are using a particular method or technique and why we are not

using others so that research results are capable of being evaluated either by the researcher

himself or by others. Why a research study has been undertaken, what data have been

collected and what particular method has been adopted, why particular technique of analyzing

data has been used and a host of similar other question are usually answered when we talk of

research methodology concerning a research problem or study.

Research is often described as active; diligent and systematic process of inquiry aimed at

discovering, interpreting and revising facts. This intellectual investigation produces a greater

understanding of events, behaviors or theories and makes practical application through laws

and theories. In other words we can say, the purpose of research is to discover answers to the

questions through the application of scientific procedures. The main aim of research is to find

out the truth which is hidden and which has not been discovered as yet.


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Research methodology is a way to systematically solve the research problem. It may be

understood as a science of studying how research is done scientifically. In it we study the

various steps that are generally adopted by a researcher in studying his research problem

along with the logic behind them.

OBJECTIVE OF THE STUDY

The general objective of the study was to analyze the NPA level of banks. However the

study was conducted with the following specific objectives.

To analyze the NPA level of Punjab and Sind bank.

To study the recovery procedures of Punjab and Sind bank

To examine how far the bank has been successful in reducing the NPA level.

To suggest measures for efficient management of NPAs.

To bring out an explorative & descriptive report on Analysis of NPA in banks, with special

reference to Punjab and Sind bank,Patiala

METHODOLOGY OF STUDY

The research methodology adopted for carrying out the study were:

In this project Descriptive research methodologies were use.

At the first stage theoretical study is attempted.

At the second stage Historical study is attempted.

At the Third stage Comparative study of NPA is undertaken.

SAMPLING TECHNIQUE

Sampling refers to selecting a part of the population to represent the characteristics of the

population. However, in this study, Finance Manager of the bank is the source of data and

therefore, since he is the only one source of information, there is no question of any sampling.

Both primary and secondary data were collected & used for drawing conclusions for the

study.

Primary data:- were collected using Inventory schedule & also through interview, held withthe Finance Manager in presence of the other officials of Punjab and Sind bank .


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Secondary data:- were collected from the published annual reports of the Bank and other

sources. Such data collected were analyzed for some kind of a trend and its impact on the

profit of the bank.

TOOLS USED FOR ANALYSIS OF DATA

The data collected were analyzed with the help of statistical tools like frequency,

percentage and trend analysis. Tables are used to represent the consolidated data. Graphical

representation is also used for better comprehension & presentation.

SCOPE OF THE STUDY

The study was conducted in the Punjab and Sind bank,Patiala.The following are the main

scope of the study:

Scope of this study is limited to the organization selected.

Present a picture of the movement of NPA in Punjab and Sind bank.

This study will help to know the drawbacks of the present recovery strategies.

This study will help them to think about new innovative recovery strategy.

For this purpose I have covered officials of the bank from various department.

LIMITATIONS OF THE STUDY

The major limitation of the study was the paucity of time. Even then, maximum care has

been taken to arrive at appropriate conclusion. Following are the limitations of the study:

For the purpose of collecting vital information, Finance Manager of the bank is only

contacted & interviewed. Since he is an individual, his biases may have crept into the data

given.

Data pertains to NPA from 2004-05 to 2009 10 only.

Due to time constraint depth analysis could not be made.

Some of the information is considered confidential and not available for the study.


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

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

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

turns a non performing asset. The recovery of loan has always been problem for banks and

financial institution. To come out of these first we need to think is it possible to avoid NPA,

no can not be then left is to look after the factor responsible for it and managing those factors.

Definitions:

An asset, including a leased asset, becomes non-performing when it ceases to generate income

for the bank.

A non-performing asset (NPA) was defined as a credit facility in respect of which the

interest and/ or instalment of principal has remained past due for a specified period of time.

PERFORMING AND NON PERFORMING ASSETS

A performing asset is an advance, which generate income to the bank by way of interest and

their charges.

An NPA is an advance of borrower account which does not generate income for the bank but

they incur various inherent costs like a) Cost of deposit b) Cost of servicing c) provisioning at

appropriate rates d) Capital adequacy requirements on these assets and e) Cost of recovery.

NON PERFORMING ASSETS (NPA)

Nonperforming asset means an asset or account of borrower ,which has been classified by

bank or financial institution as sub standard , doubtful or loss asset, in accordance with the

direction or guidelines relating to assets classification issued by RBI .


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I DENTIFICATION OF NPAs

Identification of an account as NPA depends upon the nature of borrowable account whether it

is a) Operative b) Non operative c) Bills d) Agricultural advances or any other miscellaneous

accounts.

A. Operative like cash credit, over draft etc: -

A cash credit / over draft account will have to be treated as NPA if account remains out of

order for more than 180 days.

An account shall be out of order if any one of the following conditions exist:-

a. The balance outstanding remakes continuously in excess of the sanctioned limit

during the last six months prior to balance sheet.

b. The balance outstanding is within the limit / drawing / drawing power but there is no

credit in the account continuously for six months as on the balance sheet date.

c. There is credit but such credit is not enough to cover the interest debited during the

six month as on the date of banks balance sheet.

B. Non operative like term loans, borrowal account with repayment programs: -

If interest / installment of principal remain overdue for a period of more than 180 days.

Note: When the prudential norms were introduced in 1992, the concept of past due was

incorporated and it was classified that an amount should be classified as past due when it

remains outstanding for 30 days beyond the due date. However due to improvement in the

payment and settlement systems, recovery climate, up gradation of technology in banking

systems etc. It has been decided by RBI to dispense with the past due concept with effect

from 31st March 2001. Hence to all account to become NPA, cut off date is September 30th

of the Year under audit.

C. Bill purchased / Discounted / Negotiated:


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A bill purchased / discounted / negotiated becomes NPA, if it remains overdue and unpaid for

two quarters or more. For bills discounted, for the unusance period and grace period should

be taken to consideration for arriving at the due date.

D. Agricultural advances: -

Agricultural advances where interest and or installments of principal remains unpaid after it

has become past due for two harvest season but for a period exceeding to half years should be

treated as NPA.

E. Miscellaneous accounts:-

Any other credit facility or account should be treated as NPA if any amount to be received in

respect of that facility or amount remains unrealized / uncovered for a period of two quarters.

Adoption of 90 days norm:

The RBI has advised banks to adopt 90 days norm instead of 180 days for classification of

assets as in impaired one with effect from MARCH 2004 and to start making additional

provisions for such asserts from March 2002 to absorb the impact due to reduction of NPA

period. The accounts which may turn NPA with 90-day period have to be identified and 10%

rprovision to be found out.

90 Days Norms:

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

the 90 days overdue norm for identification of NPAs has been adopted, from the year ended

March 31, 2004. The 90 days norm would continue to be applicable for the Balance Sheet as

at 31.03.2007.

Accordingly, a Non Performing Asset shall be a loan or advance where:

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

respect of a Term loan.

The account remains out of order in respect of an Overdraft/ Cash Credit (OD/CC).

The bill remains overdue for a period of more than 90 days in the case of Bills Purchasedand Discounted.


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In case of advance granted for agricultural purposes interest and/or installment of principal

remains for two crop seasons (in case of short duration crops) and for one crop season (in case

of long duration crops)

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

other accounts.

Even though, interest is being charged at monthly rests, the date of classification of an

advance as NPA should not be changed on account of charging of interest at monthly rests.

Branches should therefore, continue to classify an account as NPA only if the interest charged

during any quarter is not serviced fully with in 90 days from the end of the quarter.

'Out of Order' status'Out of Order' status::

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

continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding

balance in the principal operating account is less than the sanctioned limit/drawing power, but

there are no credits continuously for six months as on the date of Balance Sheet or credits are

not enough to cover the interest debited during the same period, these accounts should be

treated as 'out of order'.

Overdue:Overdue:

Any amount due to the bank under any credit facility is overdue if it is not paid on due date

fixed by the bank.

Due Date:

Due Date refers to the date on which interest/installment is payable by the borrower. Interest

has to be collected at monthly rests in respect of Working Capital and Term Loans, except

Agriculture Advances as per instructions.

Normally interest falls due for payment immediately on the date of debit. In respect of certain

category of advances such as Project Finance, Agricultural Advances (including Gold Loans),

Loans granted to Staff, Education Loan etc., where repayment holiday is granted, the due date

should fall only after the expiry of the said specified period. The installment of principal falls

due for payment as per the term of sanction. In case of EMI Loans, due date refers to the due

date for the stipulated installment which comprises both principal and interest.


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Asset classification Norms

Standard Assets:Standard Assets:

Standard assets are the ones in which the bank is receiving interest as well as the principal

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

the arrears of interest and the principal amount of loan do not exceed 90 days at the end of

financial year. If asset fails to be in category of standard asset that is amount due more than 90

days then it is NPA and NPAs are further need to classify in sub categories.

Banks are required to classify non-performing assets further into the following three

categories based on the period for which the asset has remained non-performing and the

realisability of the dues:

(1) Sub-standard Assets(1) Sub-standard Assets

(2) Doubtful Assets(2) Doubtful Assets

(3) Loss Assets(3) Loss Assets

(1) Sub-standard Assets:--(1) Sub-standard Assets:--

With effect from 31 March 2005, a sub standard asset would be one, which has remained

NPA for a period less than or equal to 12 month. The following features are exhibited by sub

standard assets: the current net worth of the borrowers / guarantor or the current market value

of the security charged is not enough to ensure recovery of the dues to the banks in full; and

the asset has well-defined credit weaknesses that jeopardise the liquidation of the debt and are

characterised by the distinct possibility that the banks will sustain some loss, if deficiencies

are not corrected.

(2) Doubtful Assets:--(2) Doubtful Assets:--

A loan classified as doubtful has all the weaknesses inherent in assets that were classified as

sub-standard, with the added characteristic that the weaknesses make collection or liquidation

in full, on the basis of currently known facts, conditions and values highly questionable

and improbable.


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With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the

sub-standard category for 12 months.

(3) Loss Assets:--Loss Assets:--

A loss asset is one which considered uncollectible and of such little value that its continuance

as a bankable asset is not warranted- although there may be some salvage or recovery value.

Also, these assets would have been identified as loss assets by the bank or internal or

external auditors or the RBI inspection but the amount would not have been written-off

wholly.

Guidelines for classificationn of assets

The classification of assets into above categories should be done taking into account the

degree of well-defined credit weakness and the extend of dependence on collateral security for

realization of dues.

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

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

may fix a minimum cut off point to decide what would constitute a high value account

depending upon their respective business levels. The cut off point will be valid for the entire

accounting year.

Accounts with temporary deficiencies: -

The classification of assets as NPA should be based on record of recovery. Banks should

not classify an advance as NPA merely due to the existence of some deficiencies which are

temporary in nature such as non availability of adequate drawing power base don the latest

available stock statement, balance outstanding exceeding the limits temporarily, non

submission of stock statements and non renewal of the limits on the due date etc.

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

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

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

will have to be treated as NPA and not the particular facility or part there of which has

become irregular.


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b. If the debits arising out of development of letters of credit or invoked guarantees

are parked in a separate account, the balance outstanding in that account also should be treated

as a part of the borrowers principal operating account for the purpose of application of

prudential loans on income recognition, asset classification and provision.

Accounts where there is erosion in the value of security

a. A NPA need not go through various stages of classification in cases of serious credit

impairment and such assets should be straight away classified as doubtful or loss asset as

appropriate. Erosion in the value of security can be reckoned as significant when realizable

value of the security is less than 50% of the value assessed by the bank or accepted by the RBI

at the time of last inspection, as the case may be. Such NPAs may be straight away classified

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

b. If the realizable value of the security has assessed by the bank/approved valuers /

RBI is less than 10% of the outstanding in the borrowal accounts, the existence of security

should be ignored and the asset should be straight away classified as loss asset. It may be

either written off or fully provided for by the bank.


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TYPES OF NPATYPES OF NPA

A] Gross NPAA] Gross NPA

B] Net NPAB] Net NPA

A] Gross NPA:A] Gross NPA:Gross NPAs are the sum total of all loan assets that are classified as NPAs

as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans

made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and

loss assets.

It can be calculated with the help of following ratio:

Gross NPAs Ratio Gross NPAs

Gross Advances

B] Net NPA:B] Net NPA:

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

NPAs.Net NPA shows the actual burdenof banks. Since in India, bank balance sheets

contain a huge amount of NPAs and the process of recovery and write off of loans is very time

consuming, the provisions the banks have to make against the NPAs according to the central

bank guidelines, are quite significant. That is why the difference between gross and net NPA

is quite high.

It can be calculated as follows:

Net NPAs Gross NPAs Provisions

Gross Advances - Provisions

The following are deducted from gross NPA to arrive at net NPA.


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a. Balance in Interest Suspense account, if applicable;

b. Deposit Insurance Guarantee Corporation / Export Credit Guarantee Corporation claim

receive and pending adjustment;

c. Part payment received and kept in Suspense account;

d. Total provisions held excluding technical write off made at Head Office and provision

of standard assets.

RBI has advised that while reporting banks has to reduce technical write off made at Head

Office from gross advance also.


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INCOME RECOGNITIONINCOME RECOGNITION

Interest income is recognized on an approval basis except in case of NPAs where it is

recognized on receipt. This means income can be recognized only on receipt for NPA

accounts. For performing assets, income can be recognized on the basis of receipts, accrual or

both. Due to the implementation of the prudential norms accrual concept has been changed

into recoverability concept in recognizing in the income on NPA.

Income recognition PolicyIncome recognition Policy

The policy of income recognition has to be objective and based on the record of

recovery. Internationally income from non-performing assets (NPA) is not recognised on

accrual basis but is booked as income only when it is actually received. Therefore, the banks

should not charge and take to income account interest on any NPA.

However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life

policies may be taken to income account on the due date, provided adequate margin is

available in the accounts.

Fees and commissions earned by the banks as a result of re-negotiations or

rescheduling of outstanding debts should be recognised on an accrual basis over the period of

time covered by the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on such advances

should not be taken to income account unless the interest has been realised

Reversal of income:Reversal of income:

If any advance, including bills purchased and discounted, becomes NPA as at the

close of any year, interest accrued and credited to income account in the corresponding

previous year, should be reversed or provided for if the same is not realised. This will apply

to Government guaranteed accounts also.


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In respect of NPAs, fees, commission and similar income that have accrued should

cease to accrue in the current period and should be reversed or provided for with respect to

past periods, if uncollected.

PROVISIONING NORMS

Loss assets:Loss assets:

The entire asset should be written off. If the assets are permitted to remain in the books for

any reason, 100 percent of the outstanding should be provided for.

Doubtful assets:Doubtful assets:

100 percent of the extent to which the advance is not covered by the realisable value

of the security to which the bank has a valid recourse and the realisable value is estimated on a

realistic basis.

In regard to the secured portion, provision may be made on the following basis, at the

rates ranging from 20 percent to 50 percent of the secured portion depending upon the period

for which the asset has remained doubtful:


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Period for which the advance

has been considered as doubtful

Provision

requirement (%)

Up to one year 20

One to three years 30

More than three years:

(1) Outstanding stock of

NPAs as on March 31, 2004.

(2) Advances classified as

doubtful more than three years

on or after April 1, 2004.

60% with effect

from March

31,2005.

75% effect from

March 31, 2006.

100% with effect

from March 31,

2007.

Additional provisioning consequent upon the change in the definition of doubtful

assets effective from March 31, 2003 has to be made in phases as under:

As on31.03.2003, 50 percent of the additional provisioning requirement on the assets which

became doubtful on account of new norm of 18 months for transition from sub-standard asset

to doubtful category.

As on 31.03.2002, balance of the provisions not made during the previous year, in addition

to the provisions needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning consequent upon the

reduction in the transition period from substandard to doubtful asset from 18 to 12 months

over a four year period commencing from the year ending March 31, 2005, with a minimum

of 20 % each year.

Note: Valuation of Security for provisioning purposes


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With a view to bringing down divergence arising out of difference in assessment of the value

of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual

intervals by external agencies appointed as per the guidelines approved by the Board would be

mandatory in order to enhance the reliability on stock valuation. Valuers appointed as per the

guidelines approved by the Board of Directors should get collaterals such as immovable

properties charged in favour of the bank valued once in three years.

Sub-standard assets:Sub-standard assets:

A general provision of 10 percent on total outstanding should be made without making any

allowance for DICGC/ECGC guarantee cover and securities available.

Standard assets:Standard assets:

From the year ending 31.03.2000, the banks should make a general provision of a

minimum of 0.40 percent on standard assets on global loan portfolio basis.

The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross advances but

shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities

and Provisions - Others' in Schedule 5 of the balance sheet.

Floating provisions:Floating provisions:

Some of the banks make a 'floating provision' over and above the

specific provisions made in respect of accounts identified as NPAs. The floating provisions,

wherever available, could be set-off against provisions required to be made as per above

stated provisioning guidelines. Considering that higher loan loss provisioning adds to the

overall financial strength of the banks and the stability of the financial sector, banks are urged

to voluntarily set apart provisions much above the minimum prudential levels as a desirable

practice.

Provisions on Leased Assets:Provisions on Leased Assets:


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Leases are peculiar transactions where the assets are not recorded in the books of the user ofLeases are peculiar transactions where the assets are not recorded in the books of the user of

such assets as Assets, whereas they are recorded in the books of the owner even though thesuch assets as Assets, whereas they are recorded in the books of the owner even though the

physical existence of the asset is with the user (lessee).physical existence of the asset is with the user (lessee).

__(AS19 ICAI)__(AS19 ICAI)

Sub-standard assets : -

10 percent of the 'net book value'.

As per the 'Guidance Note on Accounting for Leases' issued by the ICAI, 'Gross book

value' of a fixed asset is its historical cost or other amount substituted for historical cost in the

books of account or financial statements. Statutory depreciation should be shown separately in

the Profit & Loss Account. Accumulated depreciation should be deducted from the Gross

Book Value of the leased asset in the balance sheet of the lesser to arrive at the 'net book

value'.

Also, balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book

value' of the leased assets. The amount of adjustment in respect of each class of fixed assets

may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate

column in the section related to leased assets.

Doubtful assets :-

100 percent of the extent to which the finance is not secured by the realisable value of the

leased asset. Realisable value to be estimated on a realistic basis. In addition to the above

provision, the following provision on the net book value of the secured portion should be

made, depending upon the period for which asset has been doubtful:

Period %age of

provision

Up to one year 20

One to three

years

30

More than three

years

50

Loss assets :-


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The entire asset should be written-off. If for any reason, an asset is allowed to remain in

books, 100 percent of the sum of the net investment in the lease and the unrealised portion of

finance income net of finance charge component should be provided for. ('net book value')

Guidelines for Provisions under Special CircumstancesGuidelines for Provisions under Special Circumstances

Government guaranteed advancesGovernment guaranteed advances

With effect from 31 March 2000, in respect of advances sanctioned against State

Government guarantee, if the guarantee is invoked and remains in default for more than two

quarters (180 days at present), the banks should make normal provisions as prescribed in

paragraph above.

As regards advances guaranteed by State Governments, in respect of which guarantee stood

invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner,

during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent

each year.

Advances granted under rehabilitation packages approved by BIFR/term lending institutions:Advances granted under rehabilitation packages approved by BIFR/term lending institutions:

In respect of advances under rehabilitation package approved by BIFR/term lending

institutions, the provision should continue to be made in respect of dues to the bank on the

existing credit facilities as per the their classification as sub-standard or doubtful asset.

As regards the additional facilities sanctioned as per package finalised by BIFR and/or term

lending institutions, provision on additional facilities sanctioned need not be made for a period

ofone year from the date of disbursement.

In respect of additional credit facilities granted to SSI units which are identified as sick [as

defined in RPCD circular No.PLNFS.BC.57 /06.04.01/2001-2002 dated 16 January 2002] and

where rehabilitation packages/nursing programmes have been drawn by the banks themselves

or under consortium arrangements, no provision need be made for a period of one year.


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Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and lifeAdvances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life

policies are exempted from provisioning requirements.policies are exempted from provisioning requirements.

However, advances against gold ornaments, government securities and all other kinds ofHowever, advances against gold ornaments, government securities and all other kinds of

securities are not exempted from provisioning requirements.securities are not exempted from provisioning requirements.

Treatment of interest suspense account:Treatment of interest suspense account:

Amounts held in Interest Suspense Account should not be reckoned as part of provisions.

Amounts lying in the Interest Suspense Account should be

deducted from the relative advances and thereafter, provisioning as per the norms, should be

made on the balances after such deduction.

Advances covered by ECGC/DICGC guarantee:Advances covered by ECGC/DICGC guarantee:

In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the

balance in excess ofthe amount guaranteed by these Corporations. Further, while arriving at

the provision required to be made for doubtful assets, realisable value of the securities should

first be deducted from the outstanding balance in respect of the amount guaranteed by these

Corporations and then provision made as illustrated hereunder:

Example

Outstanding Balance Rs. 4 lakhs

DICGC Cover 50 percent

Period for which the advance has

remained doubtful

More than 3

years remained

doubtful

Value of security held

(excludes worth of Rs.)

Rs. 1.50 lakhs


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Provision required to be made

Outstanding balance Rs. 4.00 lakhs

Less: Value of security held Rs. 1.50 lakhs

Unrealised balance Rs. 2.50 lakhs

Less: DICGC Cover

(50% of unrealisable balance)

Rs. 1.25 lakhs

Net unsecured balance Rs. 1.25 lakhs

Provision for unsecured portion

of advance

Rs. 1.25 lakhs (@ 100

percent of unsecured

portion)

Provision for secured portion of

advance

Rs. 0.75 lakhs (@ 50

percent of secured

portion)

Total provision required to be

made

Rs. 2.00 lakhs

Advance covered by CGTSI guaranteeAdvance covered by CGTSI guarantee

In case the advance covered by CGTSI guarantee becomes non-performing, no provision need

be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed

portion should be provided for as per the extant guidelines on provisioning for non-

performing advances. Two illustrative examples are given below:

Example I

Asset classification

status:

Doubtful More than 3

years;


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CGTSI Cover 75% of the amount

outstanding or 75% of

the unsecured amount or

Rs.18.75 lakh,

whichever is the least

Realisable value ofSecurity

Rs.1.50 lakh

Balance outstanding Rs.10.00 lakh

Less Realisable

value of security

Rs. 1.50 lakh

Unsecured amount Rs. 8.50 lakh

Less CGTSI cover

(75%)

Rs. 6.38 lakh

Net unsecured and

uncovered portion:

Rs. 2.12 lakh

Provision

Required

Secured portion Rs.1.50 lakh Rs. 0.75 lakh

(@ 50%)

Unsecured &

uncovered portion

Rs.2.12 lakh Rs. 2.12 lakh

( 100%)

Total provision

required

Rs. 2.87 lakh

Example II

Asset classification

status

Doubtful More than 3

years;

CGTSI Cover 75% of the amount

outstanding or75% of

the unsecured amount or


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Rs.18.75 lakh,

whichever is the least

Realisable value of

Security

Rs.10.00 lakh

Balance outstanding Rs.40.00 lakh

Less Realisable

value of security

Rs. 10.00 lakh

Unsecured amount Rs. 30.00 lakh

Less CGTSI cover

(75%)

Rs. 18.75 lakh

Net unsecured and

uncovered portion:

Rs. 11.25 lakh

Provision

Required

Secured portion Rs.10.00 lakh Rs. 5.00 lakh

(@ 50%)

Unsecured &

uncovered portion

Rs.11.25 lakh Rs.11.25 lakh

(100%)

Total provision

required

Rs. 16.25 lakh

Take-out financeTake-out finance

The lending institution should make provisions against a 'take-out finance' turning into NPA

pending its take-over by the taking-over institution. As and when the asset is taken-over by the

taking-over institution, the corresponding provisions could be reversed.

Reserve for Exchange Rate Fluctuations Account (RERFA)Reserve for Exchange Rate Fluctuations Account (RERFA)

When exchange rate movements of Indian rupee turn adverse, the outstanding amount of

foreign currency denominated a loan (where actual disbursement was made in Indian Rupee)


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which becomes overdue goes up correspondingly, with its attendant implications of

provisioning requirements. Such assets should not normally be revalued. In case such assets

need to be revalued as per requirement of accounting practices or for any other requirement,

the following procedure may be adopted:

The loss on revaluation of assets has to be booked in the bank's Profit & Loss Account.

Besides the provisioning requirement as per Asset Classification, banks should treat the full

amount of the Revaluation Gain relating to the corresponding assets, if any, on account of

Foreign Exchange Fluctuation as provision against the particular assets.

REPORTING OF NPAsREPORTING OF NPAs

Banks are required to furnish a Report on NPAs as on 31st March each year after

completion of audit. The NPAs would relate to the banks global portfolio, including the

advances at the foreign branches. The Report should be furnished as per the prescribed format

given in the Annexure I.


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While reporting NPA figures to RBI, the amount held in interest suspense account,

should be shown as a deduction from gross NPAs as well as gross advances while arriving at

the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due

on non-performing

advance accounts, may furnish the amount of interest receivable on NPAs as a footnote to the Report.

Whenever NPAs are reported to RBI, the amount of technical write off, if any,

should be reduced from the outstanding gross advances and gross NPAs to eliminate any

distortion in the quantum of NPAs being reported.

IMPACT OF NPAIMPACT OF NPA

Profitability:-Profitability:-

NPA means booking of money in terms of bad asset, which occurred due to wrong choice of

client. Because of the money getting blocked the prodigality of bank decreases not only by the

amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some

return earning project/asset. So NPA doesnt affect current profit but also future stream of

profit, which may lead to loss of some long-term beneficial opportunity. Another impact of


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reduction in profitability is low ROI (return on investment), which adversely affect current

earning of bank.

Liquidity:-Liquidity:-

Money is getting blocked, decreased profit lead to lack of enough cash at hand which

lead to borrowing money for shorter period of time which lead to additional cost to the

company. Difficulty in operating the functions of bank is another cause of NPA due to lack of

money, Routine payments and dues.

Involvement of management:-Involvement of management:-

Time and efforts of management is another indirect cost which bank has to bear due to NPA.

Time and efforts of management in handling and managing NPA would have diverted to some

fruitful activities, which would have given good returns. Now days banks have special

employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss:-Credit loss:-

Bank is facing problem of NPA then it adversely affect the value of bank in terms of market

credit. It will lose its goodwill and brand image and credit which have negative impact to the

people who are putting their money in the banks.

REASONS FOR NPA:REASONS FOR NPA:

Reasons can be divided in to two broad categories:-

A] Internal Factor

B] External Factor

[ A ] Internal Factors:-[ A ] Internal Factors:-

Internal Factors are those, which are internal to the bank and are controllable by banks.


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Poor lending decision:

Non-Compliance to lending norms:

Lack of post credit supervision:

Failure to appreciate good payers:

Excessive overdraft lending:

Non Transparent accounting policy:

[ B ] External Factors:-[ B ] External Factors:-

External factors are those, which are external to banks they are not controllable by banks.

Socio political pressure:

Chang in industry environment:

Endangers macroeconomic disturbances:

Natural calamities

Industrial sickness

Diversion of funds and wilful defaults

Time/ cost overrun in project implementation

Labour problems of borrowed firm

Business failure

Inefficient management

Obsolete technology

Product obsolete

Early symptoms by which one can recognize a performing asset turning in

to Non-performing asset

Four categories of early symptoms:-

---------------------------------------------------

(1) Financial:

Non-payment of the very first instalment in case of term loan.


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Bouncing of cheque due to insufficient balance in the accounts.

Irregularity in instalment.

Irregularity of operations in the accounts.

Unpaid overdue bills.

Declining Current Ratio.

Payment which does not cover the interest and principal amount of that instalment.

While monitoring the accounts it is found that partial amount is diverted to sister concern or

parent company.

(2) Operational and Physical:

If information is received that the borrower has either initiated the process of winding up or

are not doing the business.

Overdue receivables.

Stock statement not submitted on time.

External non-controllable factor like natural calamities in the city where borrower conduct

his business.

Frequent changes in plan.

Non payment of wages.

( 3 ) Attitudinal Changes:

Use for personal comfort, stocks and shares by borrower.

Avoidance of contact with bank.

Problem between partners.

(4) Others:

Changes in Government policies.

Death of borrower.

Competition in the market.


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PREVENTIVE MEASUREMENTS FOR NPA

Early Recognition of the Problem:-Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, its too late

to retrieve the situation- both in terms of rehabilitation of the project and recovery of banks

dues. Identification of weakness in the very beginning that is : When the account starts

showing first signs of weakness regardless of the fact that it may not have become NPA, is

imperative. Assessment of the potential of revival may be done on the basis of a techno-

economic viability study. Restructuring should be attempted where, after an objective

assessment of the promoters intention, banks are convinced of a turnaround within a

scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to

facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible throughlegal means before the security position becomes worse.

Identifying Borrowers with Genuine Intent:Identifying Borrowers with Genuine Intent:

Identifying borrowers with genuine intent from those who are non- serious with no

commitment or stake in revival is a challenge confronting bankers. Here the role of frontline

officials at the branch level is paramount as they are the ones who has intelligent inputs with

regard to promoters sincerity, and capability to achieve turnaround. Based on this objective

assessment, banks should decide as quickly as possible whether it would be worthwhile to

commit additional finance.

In this regard banks may consider having Special Investigation of all financial transaction

or business transaction, books of account in order to ascertain real factors that contributed to

sickness of the borrower. Banks may have penal of technical experts with proven expertise

and track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden

requirement of additional fund may be entertained at branch level, and for this purpose a

special limit to such type of cases should be decided. This will obviate the need to route the

additional funding through the controlling offices in deserving cases, and help avert many

accounts slipping into NPA category.

Timeliness and Adequacy of response:-Timeliness and Adequacy of response:-


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Longer the delay in response, grater the injury to the account and the asset. Time is a crucial

element in any restructuring or rehabilitation activity. The response decided on the basis of

techno-economic study and promoters commitment, has to be adequate in terms of extend of

additional funding and relaxations etc. under the restructuring exercise. The package of

assistance may be flexible and bank may look at the exit option.

Focus on Cash Flows:-Focus on Cash Flows:-

While financing, at the time of restructuring the banks may not be guided by the conventional

fund flow analysis only, which could yield a potentially misleading picture. Appraisal for

fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash

Flow rather than only on the basis of Funds Flow.

Management Effectiveness:-Management Effectiveness:-

The general perception among borrower is that it is lack of finance that leads to sickness and

NPAs. But this may not be the case all the time. Management effectiveness in tackling

adverse business conditions is a very important aspect that affects a borrowing units fortunes.

A bank may commit additional finance to an aling unit only after basic viability of the

enterprise also in the context of quality of management is examined and confirmed. Where the

default is due to deeper malady, viability study or investigative audit should be done it will

be useful to have consultant appointed as early as possible to examine this aspect. A proper

techno- economic viability study must thus become the basis on which any future action can

be considered.

MEASURES INITIATED BY RBI AND GOVERNMENT OF

INDIA FOR REDUCTION OF NPAs

Compromise settlement schemes


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The RBI / Government of India have been constantly goading the banks to take steps for

arresting the incidence of fresh NPAs and have also been creating legal and regulatory

environment to facilitate the recovery of existing NPAs of banks. More significant of them, I

would like to recapitulate at this stage.

The broad framework for compromise or negotiated settlement of NPAs advised by RBI

in July 1995 continues to be in place. Banks are free to design and implement their own

policies for recovery and write-off incorporating compromise and negotiated settlements with

the approval of their Boards, particularly for old and unresolved cases falling under the NPA

category. The policy framework suggested by RBI provides for setting up of an independent

Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinize

and recommend compromise proposals.Specific guidelines were issued in May 1999 to public

sector banks for one time non-discretionary and non-discriminatory settlement of NPAs of

small sector. The scheme was operative up to September 30, 2000. [Public sector banksrecovered Rs. 668 crore through compromise settlement under this scheme.]

Guidelines were modified in July 2000 for regcovery of the stock of NPAs of Rs. 5 crore

and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001

helped the public sector banks to recover Rs. 2600 crore by September 2001]

An OTS Scheme covering advances of Rs.25000 and below continues to be in operation and

guidelines in pursuance to the budget announcement of the Honble Finance Minister

providing for OTS for advances up to Rs.50,000 in respect of NPAs of small/marginal farmers

are being drawn up.

Lok Adalats

Lok Adalat institutions help banks to settle disputes involving accounts in doubtful and

loss category, with outstanding balance of Rs.5 lakh for compromise settlement under Lok

Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to

decide on cases of NPAs of Rs.10 lakhs and above. The public sector banks had recovered

Rs.40.38 crore as on September 30, 2001, through the forum of Lok Adalat. The progress

through this channel is expected to pick up in the coming years particularly looking at the

recent initiatives taken by some of the public sector banks and DRTs in Mumbai. For more

details about Lok Adalats please refer to page Lok Adalat

Debt Recovery Tribunals


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The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in

March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of

more than one Recovery Officer, power to attach defendants property/assets before judgment,

penal provisions for disobedience of Tribunals order or for breach of any terms of the order

and appointment of receiver with powers of realization, management, protection and

preservation of property are expected to provide necessary teeth to the DRTs and speed up the

recovery of NPAs in the times to come.

Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals

located in five centers viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they could

decide only 9814 cases for Rs.6264.71 crore pertaining to public sector banks since inception

of DRT mechanism and till September 30, 2001.The amount recovered in respect of these

cases amounted to only Rs.1864.30 crore.

Looking at the huge task on hand with as many as 33049 cases involving Rs.42988.84 crore

pending before them as on September 30, 2001, I would like the banks to institute appropriate

documentation system and render all possible assistance to the DRTs for speeding up

decisions and recovery of some of the well collateralized NPAs involving large amounts. I

may add that familiarization programmes have been offered in NIBM at periodical intervals to

the presiding officers of DRTs in understanding the complexities of documentation and

operational features and other legalities applicable of Indian banking system. RBI on its part

has suggested to the Government to consider enactment of appropriate penal provisions

against obstruction by borrowers in possession of attached properties by DRT receivers, and

notify borrowers who default to honour the decrees passed against them.

Circulation of information on defaulters

The RBI has put in place a system for periodical circulation of details of willful defaults of

borrowers of banks and financial institutions. This serves as a caution list while considering

requests for new or additional credit limits from defaulting borrowing units and also from the

directors /proprietors / partners of these entities. RBI also publishes a list of borrowers (with

outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks

and FIs for recovery of their funds, as on 31st March every year. It is our experience that these

measures had not contributed to any perceptible recoveries from the defaulting entities.

However, they serve as negative basket of steps shutting off fresh loans to these defaulters. Istrongly believe that a real breakthrough can come only if there is a change in the repayment

psyche of the Indian borrowers.


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Recovery action against large NPAs

After a review of pendency in regard to NPAs by the Honble Finance Minister, RBI had

advised the public sector banks to examine all cases of willful default of Rs 1 crore and above

and file suits in such cases, and file criminal cases in regard to willful defaults. Board of

Directors are required to review NPA accounts of Rs.1 crore and above with special reference

to fixing of staff accountability.

On their part RBI and the Government are contemplating several supporting measures

including legal reforms, some of them I would like to highlight.

Asset Reconstruction Company :

An Asset Reconstruction Company with an authorized capital of Rs.2000 crore and initial

paid up capital Rs.1400 crore is to be set up as a trust for undertaking activities relating to

asset reconstruction. It would negotiate with banks and financial institutions for acquiring

distressed assets and develop markets for such assets.. Government of India proposes to go in

for legal reforms to facilitate the functioning of ARC mechanism

Legal Reforms

The Honorable Finance Minister in his recent budget speech has already announced the

proposal for a comprehensive legislation on asset foreclosure and Securitization. Since

enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in December

2002.

Corporate Debt Restructuring (CDR )

Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a

timely and transparent system for restructuring of the corporate debts of Rs.20 crore and

above with the banks and financial institutions. The CDR process would also enable viable

corporate entities to restructure their dues outside the existing legal framework and reduce the

incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a

Standing Forum and Core Group for administering the mechanism had already been put in

place. The experiment however has not taken off at the desired pace though more than six

months have lapsed since introduction. As announced by the Honble Finance Minister in the

Union Budget 2002-03, RBI has set up a high level Group under the Chairmanship of Shri.Vepa Kamesam, Deputy Governor, RBI to review the implementation procedures of CDR

mechanism and to make it more effective. The Group will review the operation of the CDR


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Scheme, identify the operational difficulties, if any, in the smooth implementation of the

scheme and suggest measures to make the operation of the scheme more efficient.

Credit Information Bureau

Institutionalisation of information sharing arrangements through the newly formed Credit

Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the

recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of

information dissemination on defaults to the financial system. The main recommendations of

the Group include dissemination of information relating to suit-filed accounts regardless of the

amount claimed in the suit or amount of credit granted by a credit institution as also such

irregular accounts where the borrower has given consent for disclosure. This, I hope, would

prevent those who take advantage of lack of system of information sharing amongst lending

institutions to borrow large amounts against same assets and property, which had in no small

measure contributed to the incremental NPAs of banks.

Proposed guidelines on wi

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