Preface

It is a matter of great pleasure to present this project as a student of bachelor of commerce of

banking and insurance. This project is prepare exactly as per prescribed by guider DR.Vaidehi
daptardar and coordinator abhay neoge. The project presents the subjective in a simple and
convincing language.
The NPA problem is the biggest challenge faced by the current government. This is a gigantic
problem, Panagariya said at an event organized by the Confederation of Indian Industry.
Consolidation of banks will bring down the NPA (non-performing assets) problem by a bit, he
said. Discussions are on to address the problem of the increasing NPAs, Panagariya said. The
finance ministry had last month announced plans to set up an expert group to study consolidation
among the PSU banks. The government has in case of State Bank of India and to consolidate
weak banks into larger banks.
As a student, I have made humble attempt to fill up all the aspect of non-performing assets. This
project is outcome of all data, information, analysis, and guidelines to my teachers. We are very
much thankful to librarian to prof.satputy for his personal involvement and assistance in this
project. I am also very much tankful to his colleague manohar for their personal interest and
involvement

Index

SR.NO

PARTICULAR

1.

CHAPTER 1 : INTRODUCATION

2.

3.

MEANING

DEFINITION

CONCEPT

CHAPTER 2 : HISTORY

START

NARSIMHAM COMMITTEE

CHAPTER 3 : Technical Aspects

4.

5.

SYSTEM

CHAPTER 4 : CLASSIFICATIO

AS GENERAL

ASSETS

CHAPTER 5 :GUIDELINES

INTRODUCATION

PAGES

6.

BY RBI

CHAPTER 6 : NORMS

STANDARD ASSETS

DOUBTFUL ASSETS

LOSS ASSETS

OTHER

Introduction
Management of nonperforming assets poses a great challenge for banks world over. Banking
sector forms the backbone of many developing economies .If the banks fail to manage their nonperforming assets effectively then it leads to draining profitability and decreasing market
goodwill not only for the banks but for the country as a whole. According to definition of NPAs
the loan or lease that is not meeting its stated principal and interest payments. Banks usually
classify as nonperforming assets any commercial loans which are more than 90 days overdue and
any consumer loans which are more than 180 days overdue. More generally, an asset which is
not producing income .The structure of our Indian banking system is very complex and it has
evolved under the influence of many factors including political considerations. .1Structure of
Banking in Indi

The public sector banks and the private sector banks are the majority contributors to the total Net
NPAs of the scheduled commercial banks. As the banks are primarily into the business of
accepting deposits and lending money, the NPAs become the natural fall out of the business. It is
impossible completely avoid them but efforts can be taken in the direction of minimizing the
losses. On Performing assets or NPAs as we usually call them are nothing but the loans and
advances given by the banks which turn into bad debts due to various reasons. In other words it
can be said that when a bank gives a loan and is unable to recover the principal and the interest
amount on time the loan is said to have turned into a NPA. In short the time period of 90 days is
taken as the base and if the principal or interest payment is not received during this period the
asset is turned into an NPA. As interest on loan is one of the major source of income for the
banks, its collection becomes one of the priority tasks.

Meaning and Definition of NPAs

A non-performing asset, in a narrow sense, may be defined as an asset which does not directly
contribute to the corporate profits or yield any positive returns. This may be appropriate when
applied to loans and advances. However, there are other assets such as cash balances held which
are certainly require for business operations but do not yield any direct return. Although banks
cannot completely do away with such non-performing assets from their books, they have to
manage to keep them at a minimum possible level to maximize profits.12 The term nonperforming asset has been defined by several experts, SARFAESI Act and RBI on the basis of
recommendation of Narsimham Committee.
1) Mohan, B. and Rajesh, K. defined A non-performing asset is one which does not generate
income for the bank. In other words an advance account which ceases to yield income in a nonperforming asset.
2) Lakshmi, U.N defined NPA as an advance where payment of interest or repayment of
installment on principal (in case of term loans) or both remain unpaid for a period of 2 quarters
or more and if they have become past due. An amount under any of the credit facilities is to be
treated as past due when it remains unpaid for 30 days beyond due date. D3) Reddy, C.S. and
Kalavathi, V. defined NPA as an asset which ceases to yield income for the bank and that any
income accrued from such asset shall not be treated as income until it is actually realized.
4) SARFEASI Act, 2002 defined NPA as an asset or account of borrower, which has been
classified by a bank or financial institutions as sub-standard, doubtful or loss assets in
accordance with the direction issued the Reserve Bank of India.
5) As per RBI guidelines advances are classified into performing and nonperforming advances
(NPAs). NPAs are further classified into sub-standard, doubtful and loss assets based on the
criteria stipulated by RBI.

Some conceptD
Statue of 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 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 90 days
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
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.

Origin of NPA/ History

The Bank under study, since 1976, is following well laid down norms regarding treatment to
identify bad and doubtful accounts. The bank directed the branches to cease charging interest on
doubtful advances, on the basis of the criteria laid down, irrespective of whether the suits are
filed for recovery of the dues or not. The criteria then adopted for the purpose were :
Nonpayment of the interest applied during the last four relevant periods i.e. month/quarters/half
years / years as the case may be.
Existence of a provision for bad and doubtful debts or a provision is proposed to be made.
In the case of advances guaranteed by CGO / DICGC it advances, once the bad or doubtful
character of an advance becomes apparent, as any subsequent interest whether debited or
accounted for separately would not be eligible to be included in the amount in default and
claimed from the corporation .
It was also decided that ceasing to charge interest with effect from 1/1/1980 be made applicable
to all suit filed accounts including where the decision to take legal action was waived,
irrespective of the outstanding amounts.
The Reserve Bank of India introduced the Health Code System of classification of
borrower accounts by banks in the year 1985, exactly after three years of implementation of the
system by Bank under study. Based on this classification of advances it was decided by the
Reserve Bank in the year 1989 and 1990 that banks should cease charging interest compulsorily
in accounts under Health Codes 5 to 8 i.e. Recalled Suit filed, Decreed and Bad and doubtful and
selectively taking into account the availability and reliability of security in accounts under Health
Code 4 i.e. Sick Non-viable /Sticky Accordingly banks have been classifying their accounts as
per Health Code System and ceasing to recognize income according to the scheme of things
envisaged under the system. Reserve Bank of India introduced a critical analysis for a
comprehensive and uniform credit and monitoring by way of the Health Code System, in banks,
which provided information regarding health of individual advances in 1985 86. It was
considered that such information would be of immense use to banks management for control
purpose. Reserve Bank of India advises all commercial banks on 7thNovember, 1987 to
introduce the health classification indicating the quality of individual advances in the following
eight categories with Health Code assigned to each borrower account
.1. SATISFACTORY: The account in which all terms and conditions are complying with and
safety of advances are not in doubt.
2. IRREGULAR: The account where safety of advances is not suspected, though there may be
occasional irregularities.

3. SICK VIABLE: Advances to units which are sick but viable under nursing or revival
programs are under taken.
4. SICK NON VIABLE / STICKY: Advances where irregularities continue to persist and
there are no immediate prospects of regularization.
5. ADVANCES RECALLED: Advances where the recalled repayment is highly doubtful and
nursing is not considered worthwhile, includes accounts where decision has been taken to recall
the advances.D
6. SUIT FILE ACCOUNTS: Accounts where legal action or recovery proceedings have been
initiated.
7. DECREED DEBTS: Accounts for which decrees have been obtained.
8. BAD AND DOUBTFUL ACCOUNTS: The accounts in which the recoverability is in doubtful
due to shortfall in the value of the securities and inability / unwillingness of the borrower to
repay the banks dues partly or wholly
The NPA concept introduced by the Reserve Bank in the year 1992 is the outcome of the
Narsimham Committee recommendations on financial sector reforms. The Committee obtained
the policy of income recognition should be objective and based on record of recovery, rather than
any subjective consideration. The international practice is that an asset is treated as Nonperforming when interest is overdue for at least two quarters. According to the committee,
advances would be treated as non-performing assets, as on the balance sheet date.
In respect of term loans, interest remains past due for a period of more than 180 days. In
respect of overdraft and cash credit, account remains out of order for a period of more than 180
days.
In respect of bills purchased and discounted, the bill remains overdue and unpaid for a period
of more than 180 days.
In respect of other accounts, any amount to be received remains past due for a period of more
than 180 days.
An amount is considered post due when it remains outstanding 30 days beyond the due date.The
Reserve Bank of India examined the above criteria of the Committee in regard to classification
of advances as non- performing assets and credited to implement the same in a phased manner
beginning with accounting year 1st April 1992. The following was the basis for treating a credit
facility as non-performing
i) Term Loan
If interest remains past due for a period of

Year ended March, 31

1993

Specific period
4 quarters

1994

3 quarters

1995

2 quarters

Onwards
ii) Cash Credit and Overdrafts
If the accounts remains out of order for the period indicated as above.
iii) Bills Purchased / Discounted
If the bill remains overdue & unpaid for the periods specified here in above. iv) Other Accounts
If any amount to be received in respect of that facility remains past due for the periods specified.
It was also clarified that an account should be treated as out of order if the balance outstanding in
the account remains 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 during the same period, these accounts should also be treated as NPA. Such accounts
should stagnant accounts with very little operations. Here drawing power in case of our Bank
may be construed as drawing limit and no credits continuously for six months as on the date of
balance sheet date would mean between 31st March and 30th September for the relative year i.e.
as on 31st March 1994, the six months prior to that would mean between 31st March 1993 and
30 September 1993.

Technical Aspects!
It was very easy for the banks to debit the interest amount to the loan account and credit the same to
income account without considering the fact whether the interest will be realized and there would be
return of principal amount. This practice of passing the entries in the books of accounts in respect of
interest accrued but not realized as income results in losing the value of assets. Thus such assets become
almost dead by not performing anything. Such non performing assets were accumulated to the large
extent and became unbearable. On one hand the books of accounts of the banks used to show huge profit
and on the other hand there was no realization of income because of such accounting system. This affects
the banking system adversely. Thus major element of the financial sector reform in India was introduced
in the form of prudential norms and regulations. These prudential norms and regulations are basically
aimed at ensuring the safety and soundness of the financial system, imparting of greater transparency and
accountability in operation and restoring creditability in Indian Financial System. Prudential norms serve
two primary purposes, which are:
(1) Bringing out the true position of a banks loan profitability
(2) Help arrest its deterioration
A proper system for
(1) Income recognition
(2) Classification of assets and
(3) Provisioning for bad debts on prudential basis is necessary if balance sheet of a bank is to reflect its
original financial health. The committee on financial system under Dthe chairmanship of Shri M.
Narsimham had examined this issue, recommended that a policy of income recognition should be
objective, and based on recovery rather than on any subjective consideration. Similarly, the classification
of assets which would ensure a uniform and consistent application of norms.
The recommendations of Shri M. Narsimham Committee regarding income recognition, asset
classification and provisioning were sought to be implemented by Reserve Bank of India in a phased
manner over a three year period from the year commencing from the year 1992-93. In this regard RBI
has issued a separate guideline for different category of commercial scheduled banks (in April 1992). All
financial institutions (in April 1992 with some modifications considering their functioning) NBFCs (in
June, 1994) RRBs (in March 1996) at the proper time with the adequate modification. In 1993 all the
primary co-operative banks have been told that they should comply with prudential norms and regulations
with income recognition, asset classification and provisioning with some modifications. Later on a high
power committee on Urban Co-operative banks constituted in May 1999 under the chairmanship of K.
Madhava Rao

NPA CLASSIFICATION
With effect from 31-03-2001, With a view to moving towards international best practices and to
ensure greater transparency, '90 days' overdue norms for identification of NPAs have been made
applicable from the year ended March 31, 2004. As such, with effect from March 31, 2004, a
non-performing asset shall be a loan or an advance where:
I. interest and/ or installment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
ii. The account remains out of order as indicated at paragraph 2.2 below, in respect of an
Overdraft/Cash Credit (OD/CC),
iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,
iv. The installment of principal or interest thereon remains overdue for two crop seasons for short
duration crops,
V. the installment of principal or interest thereon remains overdue for one crop season for long
duration crops,
vi. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a
securitization transaction undertaken in terms of guidelines on securitization dated February 1,
2006.
vii. in respect of derivative transactions, the overdue receivables representing positive mark-tomarket value of a derivative contract, if these remain unpaid for a period of 90 days from the
specified due date for payment.
"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 90 days or credits are not enough to cover the interest debited during the
same period, these accounts should be treated as 'out of order'".
Regular and ad-hoc credit limits need to be reviewed / regularized not later than three months
from the due date / date of ad-hoc sanction. In case of constraints such as non-availability of
financial statements and other data from the borrowers, the branch should furnish evidence to
show that renewal / review of credit limits is already on and would be completed soon. In any
case, delay beyond six months is not considered desirable as a general discipline. Hence, an
account where the regular / ad-hoc credit limits have not been reviewed or have not been

renewed within 180 days from the due date / date of ad-hoc sanction will be treated as NPA,
which period will be reduced to 90 days with effect from March 31, 2004.
Banks should ensure that drawings in the working capital accounts are covered by the adequacy
of current assets, since
current assets are first appropriated in times of distress. Considering the practical difficulties of
large borrowers, stock statements relied upon by the banks for determining drawing power
should not be older than three months. The outstanding in the account based on drawing power
calculated from stock statements older than three months would be deemed as irregular. A
working capital borrowable account will become NPA if such irregular drawings are permitted in
the account for a continuous period of 90 days (with effect from March 31, 2004).
If Government guaranteed advances become NPA, the interest on such advances should not be
taken to income account unless the interest has been realized. Advances against term deposits,
NSCs eligible for surrender, IVPs, KVPs and Life policies need not be treated as NPAs although
interest thereon may not have been paid for more than 90 days provided adequate margin is
available in the accounts. The investments are also subject to the prudential norms on income
recognition. Banks should not book income on accrual basis in respect of any security
irrespective of the category in which it is included, where the interest / principal is in arrears for
more than 90 days. The system of identification of NPA should be ongoing basis. Banks should
also make provisions for NPAs as at the end of each calendar quarter i.e as at the end of March /
June / September /December, so that the income and expenditure account for the respective
quarters as well as the P&L account and balance sheet for the year end reflects the provision
made for NPAs.Interest realized on NPAs may be taken to income account provided the credits in
the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the
borrower concerned. In the absence of a clear agreement between the bank and the borrower for
the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks
should adopt an accounting principle and exercise the right of appropriation of recoveries in a
uniform and consistent manner.
On an account turning NPA, banks should reverse the interest already charged and not collected
by debiting Profit and Loss account, and stop further application of interest. However, banks may
continue to record such accrued interest in a Memorandum account in their books. For the
purpose of computing Gross Advances, interest recorded in the Memorandum account should not
be taken into account. The treatment of an asset as NPA should be based on the record of
recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies
which are of temporary in nature such as non-availability of adequate drawing power, balance
outstanding exceeding the limit, non-submission of stock statements and the non-renewal of the
limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is
in doubt, the asset should be treated as NPA. In respect of a borrower having more than one
facility with a bank, all the facilities granted by the bank will have to be treated as NPA and not

the particular facility or part thereof which has become irregular. However, in respect of
consortium advances or financing under multiple banking arrangements, each bank may classify
the borrowable accounts according to its own record of recovery and other aspects having a
bearing on the recoverability of the advances. Banks cant classify all the a/cs of a group (i.e.
Common management by one or more directors / partners having common in different firms) as
NPA on ground of any one facility being NPA. The classification of NPA is borrower wise and
not GroupWise. Asset classification of accounts under consortium should be based on the record
of recovery of the individual member banks and other aspects having a bearing on the
recoverability of the advances. Where the remittances by the borrower under consortium lending
arrangements are pooled with one bank and /or where the bank receiving remittances is not
parting with the share of other member banks, the account will be treated as not serviced in the
books of the other member banks, and therefore, be treated as NPA. The banks participating in
the consortium should, therefore, arrange to get their share of recovery transferred from the lead
bank or get an express consent from the lead bank for the transfer of their share of recovery, to
ensure proper asset classification in their respective books.

, was set up to review the performance of Urban Co-operative Banks and to make necessary
changes to strengthen this sector. There was a need for structural reforms in the complete set up
of the co-operative banks.

ASSETS CLASSIFICATION
RBI serves as the regulatory body over all the banks and according to guidelines issued by it
the banks have to classify their assets into 4 categories:
The assets of the banks which dont perform (that is dont bring any return) are called NonPerforming Assets (NPA) or bad loans. Banks assets are the loans and advances given to
customers. If customers dont pay either interest or part of principal or both, the loan turns into
bad loan. According to RBI, terms loans on which interest or installment of principal remain
overdue for a period of more than 90 days from the end of a particular quarter is called a Nonperforming Asset. However, in terms of Agriculture / Farm Loans; the NPA is defined as under:
For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan
(installment /interest) is not paid for 2 crop seasons, it would be termed as a NPA.
For Long Duration Crops, the above would be 1Crop season from the due date.

For the evaluation of bank performance, it is important to identify the quality of assets of the
bank. In the light of Narasimham Committee recommendations, the Reserve Bank of India has
redefined the non-performing assets and advised all commercial banks in public sector, old and
new private sector banks, development banks and the cooperative banks, to classify their
advances into four broad categories i.e. Standard, Substandard, Doubtful and Loss assets. The
standard assets are treated as performing assets and the remaining three categories are treated as
non-performing assets. With reference to master circular No. DBOD. No. BP. BC.
17/21.04.048/2009-10 dated July 1, 2009 banks are required to classify nonperforming assets
further into the following three categories based on the period for which the asset has remained
nonperforming and the reliability of the dues:

1. Substandard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for
a period less than or equal to 12 months. In such cases, the current net worth of the borrower/
guarantor or the current market value of the security charged is not enough to ensure recovery of
the dues to the banks in full. In other words, such an asset will have well defined credit
weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.

2. Doubtful Assets:
With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in
the substandard category for a period of 12 months. A loan classified as doubtful has all the
weaknesses inherent in assets that were classified as substandard, 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.

3. Loss Assets:
A loss asset is one where loss has been identified by the bank or internal or external auditors or
the RBI inspection but the amount has not been written off wholly. In other words, such an asset
is 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.D
The major reasons identified behind the increase in NPAs are listed as under:
1. Will full default on the grounds of borrower.
2. Political interferences in the working of banks.
3. Loopholes in scrutinizing the applications before sanctioning the loans.
4. Death of the borrower.
5. Natural calamities.
6. Non- performance of the business for which loan was take
7. Corruption.
The above mentioned list definitely not exhaustive In nature and many efforts are being taken in
this Regards to find maximum possible reasons behind The problem. This leaves grounds for
researchers to explore the area in detail and come up with findings and solutions to help the
banking sector face the challenge of rising NPAs.

Sector wise classification of NPAs:

As per the guidelines of RBI, the NPAs in banks of India may be classified in to two categories,
such are:
- Priority sector NPAs, further it may classify in to agriculture sector, small scale industries (now
it is broadly covered as MSME sector), and others.
- Non-priority sector NPAs, further it may classify in to public sector and others.The reality of
NPAs in public sector banks is shown in the following table. For better understanding, public
sector banks are categorized in to nationalized banks and SBI and its associates.

A Table showing Composition of Total NPAs16

Nationalized bank

Guidelines for classification of assets

Broadly speaking, classification of assets into above categories should be done taking into
account the degree of well-defined credit weaknesses and the extent 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 banks may fix a minimum cut off point to decide what would constitute a high
value account depending upon their respective business levels. The cutoff point should be valid
for the entire accounting year. Responsibility and validation levels for ensuring proper asset
classification may be fixed by the banks. The system should ensure that doubts in asset
classification due to any reason are settled through specified internal channels within one month
from the date on which the account would have been classified as NPA as per extant guidelines.

Availability of security / net worth of borrower/ guarantor

The availability of security or net worth of borrower/ guarantor should not be taken into account
for the purpose of treating an advance as NPA or otherwise, except to the extent provided in Para
5.9.7(fraudulent a/cs) as income recognition is based on record of recovery.
Accounts 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 such as non-availability of adequate drawing power based on the latest
available stock statement, balance outstanding exceeding the limit temporarily, non-submission
of stock statements and non-renewal of the limits on the due date, etc. In the matter of
classification of accounts with such deficiencies
Banks may follow the following guidelines:!
Banks should ensure that drawings in the working capital accounts are covered by the adequacy
of current assets, since current assets are first appropriated in times of distress. Drawing power is
required to be arrived at based on the stock statement which is current. However, considering the
difficulties of large borrowers, stock statements relied upon by the banks for determining
drawing power should not be older than three months. The outstanding in the account based on
drawing power calculated from stock statements older than three months, would be deemed as
irregular. A working capital borrower account will become NPA if such irregular drawings are

Permitted in the account for a continuous period of 90 days even though the unit may be working
or the borrower's financial position is satisfactory. Regular and ad hoc credit limits need to be

reviewed/ regularized not later than three months from the due date/date of ad hoc sanction. In
case of constraints such as non-availability of financial statements and other data from the
borrowers, the branch should furnish evidence to show that renewal/ review of credit limits is
already on and would be completed soon. In any case, delay beyond six months is not considered
desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits have
not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be
treated as NPA.
Up gradation of loan accounts classified as NPAs
If arrears of interest and principal are paid by the borrower in the case of loan accounts classified
as NPAs, the account should no longer be treated as nonperforming and may be classified as
standard accounts. With regard to up gradation of a restructured/ rescheduled account which is
classified as NPA, contents of paragraphs 5.9.13 and 5.9.14 will be applicable.5.9.4 Accounts
regularized near about the balance sheet dateThe asset classification of borrower accounts where
a solitary or a few credits are recorded before the balance sheet date should be handled with care
and without scope for subjectivity. Where the account indicates inherent weakness on the basis of
the data Davailable, the account should be deemed as a NPA. In other genuine cases, the banks
must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner
of regularization of the account to eliminate doubts on their performing status.
Asset Classification to be borrower-wise and not facility-wise
i) It is difficult to envisage a situation when only one facility to a borrower/one investment in any
of the securities issued by the borrower becomes a problem credit/investment and not others.
Therefore, all the facilities granted by a bank to a borrower and investment in all the securities
issued by the borrower will have to be treated as NPA/NPI and not the particular
facility/investment or part thereof which has become irregular.(one a/c npa, all a/c npa)
ii) If the debits arising out of devolvement 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 norms on
income recognition, asset classification and provisioning.

iii) The bills discounted under LC favoring a borrower may not be classified as a Nonperforming
advance (NPA), when any other facility granted to the borrower is classified as NPA. However,
in case documents under LC are not accepted on presentation or the payment under the LC is not
made on the due date by the LC issuing bank for any reason And the borrower does not
immediately make good the amount disbursed as a result of discounting of concerned bills, the
outstanding bills discounted will immediately be classified as NPA with effect from the date
when the other facilities had been classified as NPA.

iv) The overdue receivables representing positive mark-to-market value of a derivative contract
will be treated as a non-performing asset, if these remain unpaid for 90 days or more. In case the
over does arising from forward contracts and plain vanilla swaps and options become NPAs, all
other funded facilities granted to the client shall also be classified as non-performing asset
following the principle of borrower-wise classification as per the existing asset classification
norms. Accordingly, any amount, representing positive mark-to-Dmarket value of the foreign
exchange derivative contracts (other than forward contract and plain vanilla swaps and options)
that were entered into during the period April 2007 to June 2008, which has already crystallized
or might crystallize in future and is / becomes receivable from the client, should be parked in a
separate account maintained in the name of the client / counterparty. This amount, even if
overdue for a period of 90 days or more, will not make other funded facilities provided to the
client, NPA on account of the principle of borrower-wise asset classification, though such
receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant IRAC
norms. The classification of all other assets of such clients will, however, continue to be
governed by the extant IRAC norms.

v) If the client concerned is also a borrower of the bank enjoying a Cash Credit or Overdraft
facility from the bank, the receivables mentioned at item (iv) above may be debited to that
account on due date and the impact of its non-payment would be reflected in the cash credit /
overdraft facility account. The principle of borrower-wise asset classification would be
applicable here also, as per extant norms.

vi) In cases where the contract provides for settlement of the current mark-to-market value of a
derivative contract before its maturity, only the current credit exposure (not the potential future
exposure) will be classified as a non-performing asset after an overdue period of 90 days.
vii) As the overdue receivables mentioned above would represent unrealised income already
booked by the bank on accrual basis, after 90 days of overdue period, the amount already taken
to 'Profit and Loss a/c' should be reversed and held in a 'Suspense a/c' in the same manner as is
done in the case of overdue advances.
D

Norms for Provisioning on Loans & Advances:In conformity with the prudential norms, provisions should be made on the nonprescribed
categories as detailed above.
Standard Assets
(a) From the year ended March 31, 2000, the banks should make a general provision of a
minimum of 0.25 per cent on standard assets.
(b) However, from the year ended March 31, 2007, Tier II banks will be subjected to higher
provisioning norms on standard asset as under:
(i) The general provisioning requirement for standard advances shall be0.40 per cent from the
present level of 0.25 percent. However, direct advances to agricultural and SME sectors which
are standard assets, would attract a uniform provisioning requirement of 0.25 per cent of the
funded outstanding on a portfolio basis, as hitherto.D
(ii) For personal loans, loans and advances qualifying as capital market exposures and
commercial real estate loans, loans and advances to systemically important NBFCs-ND
provisioning requirement would be 2.0%.
(c) The provisioning towards standard assets need not be netted from gross advances but
shown separately as Contingent Provision against Standard Assets under Other Funds and
Reserves in the Balance Sheet.
(d) In case banks are already maintaining excess provision than what is required/prescribed by
Statutory Auditor/RBI Inspection for impaired credits under Bad and Doubtful Debt Reserve,
additional provision required for Standard Assets may be segregated from Bad and Doubtful
Debt Reserve and the same may be parked under the head Contingent Provisions against

Standard Assets with the approval of their Board of Directors. Shortfall if any, on this account,
may be made good in the normal course.
(e) The above contingent provision will be eligible for inclusion in Tier II capital.Substandard
Assets general provision of 10 per cent on total outstanding should be made without making any
allowance for DICGS/ECGC guarantee cover and securities available.
Doubtful Assets
(a) Provision should be for 100 per cent of the extent to which the advance is not covered by the
realizable value of the security to which the bank has a valid recourse should be made and the
realizable value is estimated on a realistic basis.
(b) In regard to the secured portion, provision may be made on the following basis, at the rates
ranging from 20 per cent to 100 per cent of the secured portion depending upon the period for
which the asset has remained doubtful:D

Tier I Bank
Period for which the advance has
remained in doubtful
category#

Provision requirement

Up to one year

20 per cent

One to three years

30 per cent

More than three years(D-III)

- 50 per cent as on March 31, 2010

- 60 per cent with effect from March 31,
2011
- 75 per cent with effect from March 31,
2012
- 100 per cent with effect from March 31,
2013- 100 percent

(i) Outstanding stock of NPAs as on

March 31, 2010
(ii) Advances classified as doubtful for
more than three years on or after April
1, 2010

Tier II Bank

Period for which the advance has Provision requirement#

remained
in
doubtful
category#
Up to one year

20 per cent

One to three years

30 per cent

More than three years(D-III)

- 50 per cent as on March 31, 2007

- 60 per cent with effect from March 31,
2008
- 75 per cent with effect from March 31,
2009
- 100 per cent with effect from March 31,
2010
- 100 percent

(iii) Outstanding stock of NPAs as on

March 31, 2007
(iv) Advances classified as doubtful for
more than three years on or after April
1, 2007

Additional provisioning consequent upon the change in the definition of doubtful

assets effective from March 31 2002 has to be made in phases as under:

O As on 31-03-2002, 50% 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.
O As on 31-03-2003, balance of the provisions not made during the previous year, in
addition to the provisions needed as on 31-03-2003.

The provision on standard assets must not be reckoned for arriving at net NPA.
The provision towards standard assets need not be netted from gross advances shown
separately as contingent provisions against standard assets under Other Liabilities and
Provisions Other Funds and Reserves (item. 2(viii) of Capital and Liabilities) in the
Balance Sheet.
In respect of the advances covered by ECGC / DICGC guarantee banks were advised that
in the case of advances guaranteed by ECGC / DICGC, provision should be made only
for the Balance in excess of the amount guaranteed by these corporations. From the year
1995-96 and onwards, banks should deduct realizable value of security from outstanding
balance before the ECGC / DICGC guarantee is offset for example, the following method
should be adopted to find out the provisioning requirement in respect of doubtful
assets:D
Outstanding balance.
: Rs.10 lakh
D ECGC / DICGC cover.
: 60%
D Period for which the advanced has remained doubtful : more than 3 year
Value of Security.
: 3 lakh
CALCULATION OF PROVISION:Outstanding balance
D Less: Value of security held.
D Balance.
D Less: ECGC / DICGC cover(60% of Bal.).
D Bal. of amount required provisioning.
D Provision for unsecured portion
100% after adjusting the guarantee cover
D Provision for secured portion (50)

D Total provision required to be made

: Rs.10 lakhs
: Rs 03 lakhs
: Rs 07 lakhs
: Rs. 4.2 lakhs
:Rs.2.8 lakhs
: Rs.2.8 lakhs
:Rs. 1.5 lakhs
:Rs. 4.3 lakhs

Advances against the gold ornaments government securities and all other kind of securities are
not exempted from provisioning requirements. The RBI in its circular dated 2nd July, 1996 has
advised the banks to classify on performing assets into sub - standard, doubtful and loss assets

before finalizing the accounts as at 31st March and submit the copy of a statement to the Reserve
Bank of India, duly certified by the statutory auditor of the bank who have been appointed to
audit the annual accounts of the banks.
Loss Assets
(a) The entire assets should be written off obtaining necessary approval from the competent
authority and as per the provisions of the Co-operative Societies Act/Rules. If the assets are
permitted to remain in the books for any reason, 100 per cent of the outstanding should be
provided for.
(b) (b) In respect of an asset identified as a loss asset, full provision at 100 per cent should be
made if the expected salvage value of the security is negligible.
(c)
(d) FLOATING PROVISIONS:(e) Some of the banks make floating provisions over and above specific provisions made in
respect of accounts identified as NPAs. The floating provision, wherever available, could be
set off against provisions made as per above stated provisioning guidelines.
(f)
(g) OTHER PROVISIONAL NORMS:-[CLARIFICATIONS FOR PRUDENTIAL NORMS]
(h) (1) Treatment of NPAs of Agricultural Advances:
(i) Where natural calamities impair the repaying capacity of agricultural borrowers, primary
(urban) co-operative banks, as a relief measure may deside on their own to:
(j) (a) Convert the short term production loan into a term loan or reschedule the repayment
period, and
(b) Sanction fresh short term loans. 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 non-performing asset (NPA). The asset classification of these loans would,
therefore, be Dgoverned by the revised term and conditions and these would be treated as NP
under the extant norms applicable for classifying agricultural advances as NPAs.
(2) Net worth of borrower / guarantor or value of security:
It is clarified that availability of security or net worth of borrower / guarantor should not be taken
into account for the purpose of treating an advances as NPA or otherwise, as income recognition
is based on record of recovery.
(3) Projecting Financing:
In the case of bank finance given for industrial projects where moratorium is available for
payment of interest, payment of interest becomes due only after the moratorium or gestation
period is over. Therefore, such amounts of interest do not become overdue and hence NPA, with
reference to the date of debit of interest. They become overdue after due date for payment of
interest, if uncollected.

(4) Credit facilities guaranteed by Central/State Government:

(i) The credit facilities backed by guarantee of the Central Government though overdue should
not be treated as NPA.
(ii) This exemption from classification of Government guaranteed advances as NPA is not for the
purpose of recognition of income.
(5) Accrued Interest on NPAs:
Interest accrued on NPA should not be debited to borrowed account, but to Interest Receivable
and credited to Overdue Interest Reserve Account and shown on the assets and liabilities side
of the balance sheet respectively. In this context, it may be clarified that the amount held in the
Overdue Interest Reserve Account cannot be regarded as a reserve or as part of the owned
funds of the bank.
(6) Accrued interest on performing assets:
In the case of performing assets, interest accrued may be debited to borrowal account and
credited to interest account. As the accrued interest for the quarter ended March, if not realized
becomes past due only on 30th April of the following accounting year. If the relevant credit
facility becomes NPA at a later date, the bank should reverse the entry of the unrealized interests
amount by debiting Profit and loss account and crediting to the Overdue Interest Reserve
Account should not be deducted from the advances outstanding.
(7) Reversal of Unrealized Interest:
In respect of advances including bills purchased and discounted which have been classified as
non performing assets for the first time during the current year, the interest accrued and
credited to the income account in the previous year which has not been realized, should be
reversed or provided for during the current year. This will be applicable to un realized interest
on Government guaranteed accounts also.
(8) Partial Recoveries of NPAs:
In respect of the interest partially recovered in non performing assets, it has been clarified that
banks may take to income account interest realized in NPAs provided it is ensured that the
credits in the accounts towards interest are not out of fresh / additional facilities sanctioned to the
borrowers concerned.

Reasons for Growing NPAs

The banking sector all over the world is facing the problem of mounting NPAs. The rate of
growth of NPAs is such a high that it has become the matter of concern for the bankers. The
bankers are investigating the reasons for such high growth rate of NPAs. Following are some of
the reasons for the high growth rate of NPAs.

Inability and unwillingness of the borrower to pay:

Sometimes the borrower takes the loan from the bank in a large amount but they are unable to
repay the same or sometimes they are unwilling to repay the amount. Such amount is not realized
back by the bank and as a result the NPA is created. Sometimes willful defaults, frauds and
misappropriations of accounts by the borrowers also results in NPA.

Mismanagement and diversion of funds:

Because of the mismanagement of the fund or because of diversion of the investment, the fund is
invested in low interest securities or the securities that dont pay any interest. Such kind of
investment creates the NPA.

Failure of the activity:

When the borrower has taken the loan for any specific business activity and that very activity
fails, the borrower is unable to repay the loan. This creates NPA in the bank.

Recessionary market trend:

Because of the effect of economic cycles, the profits of the firm decreases. In the situation of
recession, the firm is not able to generate enough revenue and it is unable to repay the borrowed
fund. When the recession becomes very stiff, it results into the bankruptcy of the firms, which
results into NPAs for the banks. Recently such situation was faced in America when the Lehman
Bros. filed the bankruptcy; it created NPA in several banks over there from which the Lehman
Bros. had taken the loanDto utilize the fund effectively. It will not be able to generate enough
cash flow to repay the amount of loan and ultimately it will result into NPAs.

Improper selection of borrowers/activities:

Sometimes the banker makes the mistake in the selection of borrower or the business activity.
When the less creditworthy borrower is selected by the bank, the amount given as a loan does not
realize back and the NPA results.

Selection of borrower under influence:

For the banks RBI has issued guidelines for sanctioning the loans. Banks have to compulsorily
follow these guidelines but sometimes the banks have to act under the political pressure and
relativism. The banks sanction the loans to such less creditworthy borrowers. The amounts of
such loans are not recovered and consequently the NPA is created. Generally such cases happen
more in cooperative banks.

Lack of proper pre-appraisal and follow-up:

According to RBI guidelines, the banks must appraise the project report before sanctioning the
loan to any borrower. But sometimes the banks do not perform proper appraisal of the project
reports. Without such pre-appraisal, the loan is sanctioned. In addition to it, proper follow-up is
also not taken by the bank. In such situation the bank does not get the installments regularly and
sometimes such loan is converted into NPA.

Non-compliance of sanction terms and conditions:

The banks must follow the terms and conditions provided by the RBI for sanctioning the loan. In
some cases, the banks do not comply with this terms and conditions and they sanction the loan.
In such cases, there are chances of NPAs.

Inadequate/excess sanction of the loan:

While sanctioning the loan, the bank must consider the economic size of the unit to which the
loan is to be sanctioned. In some cases, bank does not consider the economic size of the unit and
sanction the loan. If the amount sanctioned is inadequate for the business, the business will face
the financial crunch and it will not survive for longer. It will result into NPAs for the bank. On
the other hand if the excessive amount is sanctioned as a loan to the smaller unit, it will not be
ableD

Unrealistic repayment schedule:

The schedule for the repayment of the loan should be prepared after considering two main things
i.e. the amount of loan and the repayment capacity of the borrower. Sometimes the bank makes
the mistakes in preparing the repayment schedule for some borrowers. It creates overburden on
such borrowers and they are unable to repay the amount according to the prescribed schedule.
They face the financial crisis and ultimately turn to liquidation.

Lack of inter-bank co-ordination:

When there is lack of inter-bank co-ordination as well as lack of co-operation with financial
institutions, there is no exchange of information of the solvency of the borrowers. Because of
this the borrowers make default in more than one bank. As a result one borrower becomes the
cause of NPA in many banks.

Factors Internal to the business:

The business of the borrowers fails due to certain internal factors such as inefficient
management, inefficient marketing, inappropriate technology, labor unrest, etc. When the
business of the borrower fails, he is not able to repay the borrowed amount. This creates NPAs in
the banks.

Highly Ambitious Projects:

The borrowers take the loans for establishing the projects. They over-estimate the return on
Investment on such projects. And because of that they prepare the tight re-payment schedule for
the loans taken by them. In reality the project does not generate that much return and the
borrower is not capable to repay the loan. This results into NPAs in the banks.

Unhealthy Competition:
Sometimes the businessmen enter into cut throat competition. When they enter into price base
competition, they suffer a loss. Because of such loss they are not capable to repay the amount of
loan. This results into NPAs in Banks.D

Cost overruns during the project implementation:

Because of inflationary trends the cost project increases over and above the estimation of the cost
of project before starting it. The loan taken by the businessmen is not enough for such project.
The project experiences financial crisis and it is not able to repay the loans. This creates NPAs in
the banks.

No fear of legal action under the present complex legal system:

In India, when a borrower makes the default in the repayment of the loan, legal actions are taken
against him. But the legal procedure is too much complex. The procedure runs for year long and
judgments are delayed. Such kind of legal system does not create any fear in the mind of
borrower and they are not hesitant to make the default in the repayment of the loans. They
willingly create the default. It results into NPAs in the banks.

Government policy for financing priority sector:

For making growth and development of the Indian economy and to maintain the regional and
sectorial balance, the government has selected some priority sector. According to the government
policy, public sector banks have to give loans to this priority sector at a low rate of interest and
sometimes loans are subsidized. This is the direct loss to the bank. In addition to it, these priority
sectors do not work efficiently and hence are not capable to repay the loans. This creates NPAs in
public sector banks. As per the RBI guidelines, the NPAs are classified into two categories viz.

priority sector and non-priority sector. This is enough evidence that RBI itself accepts that there
are more chances of NPAs in priority sector.D

Suggestions for Reducing Non-Performing Assets

The non-performing asset is like termite which eats the whole financial system. If this termite is
not controlled, it will be dangerous for the financial system. The government has taken several
policy decisions and has prepared several strategies to control the high rate of NPAs in the
banking sector. But these steps have not created desired effect on the rate of NPAs. Here are
some suggestions for reducing nonperforming assets. If these suggestions are implemented
effectively, they will be helpful for reducing NPAs with immediate effect.

Proper selection of borrower/activity:

When the borrower/activity is wrongly selected, it definitely results into NPAs.To reduce this
danger, the banks should take enough care in selection of the borrower/activity. For this the bank
should perform an in-depth investigation about the creditworthiness of the borrower. The bank
must collect as much information as possible. After making thorough analysis of this
information, the bank should take the decision whether to sanction the loan or not.
Regular post-sanction follow up:
Generally it happens that after sanctioning the loan, banks do not take any follow up of the
borrower. Lack of regular follow up makes the borrower careless in the repayment of loans. And
it results into default. To remove this danger, the bank must take regular follow up of the
borrower after sanctioning the loan. Follow up taken at a regular interval will keep the borrower
alert and the chances of default will be reduced. Reporting to the top level management of the
bank about the repayment schedule of the borrower should be done regularly.
Establishment of a recovery cell:
The efforts made by the banks to recover the amount of loan are not enough. In this situation the
amounts of NPAs are continuously rising. The bank should form a special recovery cell to
recover the outstanding amount of loan. This recovery cell is responsible to recover the
outstanding loans. For this, the recovery cell is empowered to take necessary steps to recover the
outstanding loans.D
Publishing the name of defaulters in local news papers:
This can be an effective step for recovering the outstanding loans from the defaulters. The banks
should publish the names of such defaulters in the local news papers with outstanding amounts.
This will affect the dignity of such defaulter and there are chances that they may repay the
amount of loan. This will be a helpful step for other banks also. By considering the names of
defaulters, other banks would not sanction loans to such defaulter.
Set up a group of auctioneers:

Generally the assets that are kept as security are auctioned to recover the amount of default. But
there are no bidders to purchase such moveable or immovable property due to the fear of the
defaulters. Because of this the bank can not realize the full amount of default. In such case the
bank should assign such case to a special group of auctioneer that will find out an appropriate
bidder so that the full amount of default can be realized by selling the securitized property held
with the bank.
Constant touch with persons trading with the borrower:
To know about the creditworthiness of the borrower and to obtain market report yin regard to his
trade dealings and solvency, the bank should keep a touch with the persons trading with the
borrower. By this the bank can take immediate steps as and when some negative information
about the borrower is received from the market.
Setting up of credit investigation and information agency:
The banks should establish an agency which is assigned the duty to investigate about the
creditworthiness of the borrowers. The information obtained by such agency should be easily
accessible by all the bankers. This will be helpful in the selection of borrowers. Before
sanctioning the loan, such agency should be contacted to obtain the information about the
creditworthiness of the borrowers. This will reduce the chances of wrong selection of borrower.
Legislative changes:
The government should pass some legislation in the direction of effective recovery of
outstanding loans. By passing the legislation, recovery tribunals, recovery cell, lok-adalatas etc.
should be given more authority and they should be made autonomous institutions. If they have
more power to recover the outstanding loans, they can take immediate and effective steps for the
recovery. This kind of institutions will be helpful for the banks to make the legal recovery of
outstanding loans.
Interest discounts for prompt repayments:
To reduce the NPAs, the bank should start some schemes under which the defaulters are given a
special interest discount if they make the prompt repayment of the outstanding amount. This step
may be helpful to recover the outstanding amount from those defaulters who have sense of
market credit.
Asset Reconstruction Fund:
The NPAs of weak banks may be transferred to state owned asset reconstruction fund (ARF),
managed by an independent private sector firms. The ARF will buy the NPAs from the weak
banks at a price it decides. Its objective will be to make profits out of deals. It is just like
business buying impaired loans, recovering them and in the process, making profits.17

Pro-active steps by banks:

To reduce the chances of NPAs, banks should be pro-active in recognizing sickness and then
going to the courts for obtaining relief, before the borrower could take the shelter of BIFR
proceedings. The lending bank should initiate action as soon as the total loss crosses half of the
net worth. Banks should not wait till they wipe out the entire net worth.
Delegation of more power to branch manager: The branch managers do not have more powers
to undertake strict recovery of loans. Because of this, though it is possible branch manager
cannot do anything due to lack of power. If the branch managers are assigned more power, they
can perform strict recovery of such loan and the chances of NPAs would reduce. The branch
manager should give the power to take over or realize securities charged to them for the recovery
of loans without going to courts. This provision will reduce court cases and the recovery will be
quick.D

REDUCING THE NPAs (given by RBI):

Guidelines issued by Reserve Bank of India regarding recognition, asset classification and
provisioning norms have compelled banks in India not to show true financial picture in the
balance sheet but also to take corrective steps for improving their loan portfolio. With the
adoption of these guidelines, banks are now fully vigilant about quality of their loan assets and
various steps are being taken by them to reduce the NPAs. It is always better to follow the proper
policy for appraisal, supervision and follow up of advances to avoid NPAs. However, risks
attached to lending cannot be completely eliminated. If certain advances are converted into
NPAs, it is necessary to take corrective steps to reduce them. Reduction in NPAs is necessary to
improve profitabilityDResearcher would like to suggest following strategies (techniques) to
Banks for reducing their NPAs.
1. Replacement of loans:
Repayment of a term loan depends on income generating capacity of the borrowing concern. It
may be difficult to get repayment of the term loans if the borrowing unit does not generate profit.
A unit, which does not earn profit, may repay a few installments by borrowing from other
sources or diverting short term fund for repayment. But ultimately a unit not earning profit will
not be able to repay the term loan. Therefore, it is necessary to fix repayment schedule for a term
loan according to income generating capacity of the unit. If repayment schedule is not fixed
properly or a unit is not able to generate expected profit, possibility may be explored in
consultation with the borrowers, for replacement of loan installments. Banks are not permitted to
upgrade the classification of any advances in respect of which terms have been renegotiated
unless the package of renegotiated term has worked satisfactorily for a period of two years. The
classification of assets may improve, if performance of the loan account remains satisfactory for
two years after replacement. It may be mentioned that rephasement of the loan installment
should be done only when it is expected to get repayment after the rephasement.D
2. Rehabilitation of the potentially viable units:
If a sick unit is potentially viable, necessary efforts should be made to finalize the rehabilitation
package without the loss of time. Provision need not be made for a period of additional facilities
sanctioned under rehabilitation packages approved by BIFRJ term lending institution. If the

rehabilitation program runs smoothly, it may be necessary to make provisions even after one year
for additional facilities provided statutory auditors are also satisfied about the progress of
rehabilitation program. If the unit becomes viable, the entire outstanding (including existing
facilities) will become standard assets. Although rehabilitation of sick unit is a long drawn
procedure, it may be encouraged where units are potentially viable and the management is
reliable. However, non-viable sick units should be liquidated to get funds for recycling without
avoidable loss of time in decision making.
3. Acquisitions of sick units by healthy units:
If healthy unit acquires a sick unit, the outstanding loan amount of sick unit may be transferred to
the healthy unit the entire NPA may be even wiped off. Therefore, banks should encourage
merger/acquisition of sick units wherever they feel it may reduce the NPAs. Banks may even
help the sick units to get stable buyers, if a part of the consideration is to be received by the sick
unit is likely to be used for liquidating the NPA. Banks should make a comparative study of
gains of merger/acquisition and sacrifice to be made by them to clinch the deal.
4. Compromise the borrowers:
A compromise may be called a negotiated settlement in which the borrower agrees to pay a
certain amount to the banker after getting certain concession. A large number of compromise
proposal are being approved by banks with a view to reducing the NPAs and recycling the funds
instead of resorting to expensive recovery proceedings spread over a long period. However a
compromise proposal should not be approved without proper scrutiny. Banks should try to
recover their dues to the maximum extent possible at minimum expenses. While entering into the
compromise proposals, following points should be taken into consideration:
(a) A bank keeping in view the guidelines given in its Loan Recovery Policy should accept
compromise proposal.D
(b) Where security is available, its realizable value should be assessed taking into consideration
its location, present condition, marketable title and possession.
(c) Worth of the guarantor, if any, should be assured. Many a times banks may be able to recover
the amount with the help of guarantee available.
(d) Borrowers creditability and his paying ability should be assured if recovery is to be made in
installments as per the compromise proposal.
(e) Staff accountability should be examined expeditiously and completed within a time frame.
(g) All compromise proposal approved by any functionary should be promptly reported to the
next higher authority for post facto security.
!5. Calling up the advances and filing of civil suits:

It is not possible to receive a unit or enter into a reasonable settlement with the borrower, it is
better to recall the advances at an early stage instead of waiting for a long time which may result
in deterioration of the security available. Further, if it is not possible to sell the security without
obtaining courts order, civil suits may be filed against such borrowers who are not likely to
come to reasonable settlement. Banks should not feel that their job over by filing the court case.
Banks should revise the list of approved advocates from time to time keeping in view their
performance. Advocates who do not perform well should not be given new cases.D
6. Approaching debt recovery tribunal:
An act has been passed by parliament for setting up Debt Recovery Tribunal for expeditious
adjudication and recovery of debts due to banks and financial institutions. The provisions of this
act titles as the recovery of debts due to banks and financial institutions act, 1993, are
applicable where the amount of debt due to any bank of financial institutions of to a consortium
of banks or financial institutions is not less than Rs. 10 lakhs. The Central Government have,
however, been empowered to reduce the lower limit of Rs. 10 lakhs but not below Rs. 1 lakh by
issuing notification. The Debt Recovery Tribunals are being setup in various states and an
Appellate Tribunal has also been set up at Bombay to hear the appeals against the decision of the
Debt Recover Tribunals. However, a provision has been which may discourage un necessary
delay in settlement of case. It is hoped that establishment of debt recovery tribunal may not only
facilitate quick decisions but also induce borrowers to enter into settlements with the banks.
7. Recovery of advances given under Government sponsored Programs:
Banks should take advantage of the legislation enacted by State Government for specially
recovery of banks overdue. They should promptly file cases against willful defaulters with the
concerned authorities of the State Government. While filing the cases, they may ensure that
necessary details and settlements are submitted. Representative of the banks should also attend
the courts on fixed dates. The matters relating to recovery of advances should be discussed into
State Level Bankers meeting and necessary help for recovery should be obtained from the State
Government authorities. Sometimes, it may be useful to organize Recovery Camp for effecting
speedy recovery of the banks dues. A list of defaulters may be for each village before organizing
the Recovery Camp with which Recovery Officers, Block Department officers, Dataries, Gram
Savakis, etc. may be closely associated. Banks in rural areas should take full advantage of non
public business working days for recovery of advances. If necessary, branch wise analysis of
overdue in a particular branch, proper monitoring of overdue from rural branches is also essential
to reduce the outstanding advances.D
8. Settlement of claims with DICGC / ECGC:
If DICGC / ECGC claims are available, banks should submit their proposal for the same with
necessary details. Proper follow up with DICGC / ECGC is necessary for settlement of claims
and reducing the NPAs to certain extent.

9. Establishment of Asset Recovery Branches:

Some banks have opened Asset Recovery Branches at critical centers for undertaking recovery.
Bad and doubtful debts of various existing branches have been transferred to the recovery
branch, which may have expert trained staff with necessary background for recovery. The
specialized recovery branches may give undivided attentions to recovery of dues. Establishment
of such specialized branches may help in reducing NPAs.
10. Write-off the outstanding:
If all the efforts for recovery fail, banks may have to write off the advances. Such write-off
should be done after exhausting all other remedies. When chances of recovery are negligible,
some banks prefer to write-off an advance to reduce its income and save tax. In such cases, banks
should continue to make efforts for recovery even after writing-off the advance.It may be
observed from the above that various techniques can be used for reducing NPAs. If one
technique fails while dealing with a particular NPA, the Bank may have to try with other
techniques for that case.D

2.11 Non-Performing Assets Recovery Mechanism

Reduction in NPAs is the most important task for the banks. It is the burning issue for the RBI as
well as the Government of India to control the NPAs. The government of India has taken certain
steps for reducing NPAs of the Indian banking sector. For this, the government has established a
recovery mechanism that involves the following steps.

Sending reminders and visiting the borrowers business premises/residence:

The banks should take continuous follow up for collecting the advances. The bank should
adopt the policy of the older the advances, the tighter the follow up. The bank should send
reminders to the borrowers on a periodical basis or the bank should visit the premises of the
business or the residence of the borrowers. The bank should make it a point that the reminders
are sent on time and without fail. Frequent visits should be taken in the case of hardcore
borrowers. The visit should not be only the formality but it should bring some quality results.18
Recovery camps:
In case of agricultural advances and advances given to seasonal businesses, recovery camps
should be organize during the peak season of the business or during the harvest season in
agriculture. In the recovery camp the banks can recover maximum advances by offering some
discount or certain other relaxations. Such recovery camp should be properly planned to ensure

maximum advantage. It is advisable to take the help of outsiders such as local panchayat
officials, regional bank managers and similar other person. Such camps should be widely
publicized to ensure maximum recovery of loans.
Redesigning unpaid loan installments:
The bank should make an effort to redesign the loan repayment schedule for those borrowers
who are unable to repay the loans. The banks can reduce the amount of installment and can
extend the time for repayment of the loan. This will convince the borrowers that they can repay
the loan. The banks need to be sympathetic to the sincere borrowers.
! One-time settlement/Compromise scheme:
The bank can start compromise schemes or one-time settlement schemes for the recovery of
loans. The RBI in consultation with the government of India has issued the guidelines for such
one-time settlement/compromise scheme for the dues of commercial banks up to Rs. 10,
00,000.19
Rehabilitation of sick units:
The banks should identify sick units in SSI as well as in medium and large scale industry. The
banks should introduce rehabilitation package for such sick units according to RBI guidelines.
While introducing such rehabilitation package, the bank should keep in mind that the causes of
sickness should be genuine and the project should be viable in terms of debt-service coverage
ratio.
Filing of civil suits or legal actions for recovery:
Where the compromise proposals given by the banks are not accepted by the borrowers, it is
better for the banks to file the civil suits instead of waiting for the long time. The bank should
start immediate actions against such borrowers because there are chances of their willful
default.20
Asset Reconstruction Companies (ARC):
The Committee on Banking Sector Reforms (CBSR) Report suggest remedies to recover the
NPAs as well their subsequent transfer as asset through Asset Reconstruction Companies. The
most effective way of removing NPAs from the books of the weak banks would be to move these
out to a separate agency which will buy the loans and make it own efforts for their recovery. The
ARCs efforts are profit oriented and its aim is to recover from the acquired assets more than the
price paid for it. These companies are to be registered with the RBI with a minimum capital base
of Rs.2, 00,00,000.D
Lok adulates:

Lok adulates are voluntary agencies created by state governments to assist in matters of loan
compromise. Lok adalats work out an acceptable compromise and issue a recovery certificate
which shortens the period of obtaining a court decree. The government should make an effort to
give wide publicity to the scheme, besides educating the bankers and borrowers about Lok
adalats. Lok adalats have been set up for the recovery of dues in accounts falling in the doubtful
and loss categories with outstanding balance up to Rs.5,00,000 by way of compromise
settlements. Government has recently revised the monetary ceiling of cases to be referred to Lok
adalats organized by civil courts from Rs.5,00,000 to Rs.20,00,000. RBI has issued guidelines to
commercial banks advising them to make use of Lok adalats.22
SARFAESI Act:
SARFAESI is the preferred route for finding solution to NPA. There was no legal provision for
facilitating securitization of financial asset of the bank and financial institutions or power to take
possession of securities and sell them. This resulted in slow recovery of defaulting loan and
mounting levels of NPA of bank and financial institutions and a need was felt for keeping pace
with changing commercial practice and financial sector reforms. Keeping with this, an enabling
legislative and regulatory framework was put in place with the enactment of the Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The
primary objective of the act is reduction of NPA levels of banks or financial institutions and
unlocking value from distressed asset in the banking and financial system.23
Debt Recovery Tribunal (DRT):
The government of India passed the recovery of Debts due to Banks and Financial Institutions
(amendment) Act, 2000. This act has helped in strengthening the functioning of DRTs.
Provisions for placement of more than Done recovery officer, power to attach defendantDs
property or asset before judgment, penal provision for disobedience of tribunalDs order or for
breach of any terms has provided necessary strength to DRTs.
Corporate Debt Restructuring (CDR):
Corporate Debt Restructuring mechanism has been introduced in the year 2001. The aim is to
provide a timely and transparent system for restructuring of the corporate debt of Rs.20,
00,00,000 and above with the banks and financial institutions. The CDR process enables the
companies to restructure their dues and reduce the incidence of fresh NPAs. It reforms the loan
servicing obligation of the borrower and gives some concession in the interest rate.
Revenue Recovery Act:
On the basis of recommendations of Trawler Committee, a simplified procedure for recovery of
commercial banks dues has been introduced. The recommendations of the committee have been
accepted by most of the states but the results in terms of recovery are not encouraging.

Settlement of claim with Deposit Insurance and Credit Guarantee Corporation of India
(DICGC): Bank should submit their proposals for outstanding loans with DICGC for settlement
of their claims and reduce their NPAs. DICGC will recover the outstanding loans on behalf of the
banks

Explained in 5 charts: How Indian banks' big

NPA problem evolved over years

By Dinesh Unnikrishnan and Kishor Kadam

The writing was on the wall; just that no one wanted to acknowledge it. The bad
loan crisis that has gripped Indias Rs 95 trillion banking sector didn't happen
overnight.

For years, Indian lenders, especially state-run banks,were engaged in volume

game to balloon their balance sheets and appease their promoter (the
government).That has been so ever since nationalization of these banks
happened in two stages (beginning 1969).Governments often treated these
banks as their extendedarms and used them for populist measures.There
used to be competition among sarkari banks to flagtheir total business
number on front-pages of nationalnewspapers but very little attention was
paid to thequality of assets. Every outgoing chairman passed thebuck to his
successor.
"That was a time (2011-2013) when everyone rushed togive money to
corporations, no matter what the creditperception was. Everyone expected a
miraculous pick-up in the economy, recalled a former banker with
anationalised bank who now works as a consultant.
Firstpost takes a look at how the NPA picture of India's government-owned
banks have volved so far:

From Rs 53,917 crore, Indian banks gross non-performing assets (GNPAs) in

September 2008 (just before the 2008 global financial crisis broke out
following the collapse of Lehman Brothers), the bad loans have now grown to
Rs3,41,641 crore in September 2015. In other words, the total GNPAs of
banks, as a percentage of the total loans,has grown from 2.11 per cent to
5.08 percent.

Surprisingly, in the pre-crisis period, private banks topped the list of banks
with highest NPAs (see the chart). A quick look at the top ten NPA scorers in

September 2008 shows ICICI Bank at the top. This was followed by small and
medium-sized private sector banks such as Karnataka Bank, Lakshmi Vilas
Bank, Kotak Mahindra and IndusInd Bank. Among the few sarkari banks that
figure in the list are Central Bank,Uco Bank and Syndicate Bank.
By March 2009, a few months before the Congress-led UPA II assumed
power, the scene began changing gradually. More state-run banks began
appearing in th picture. The country's largest lender by assets, State Bankb
of India (SBI) and Indian Overseas Bank found place in the list of top NPA
scorers. Still private sector lenders figured prominently in the list with ICICI
and DCB Bank leading the pack. To be sure, there is no direct link between

the ascension of UPA-II and the increase in the NPA picture, but this is when

the state-run banks beganfeeling the heat of NPAs.

Things had worsened to a great extent by March 2014, incidentally, months

before the Narendra Modi government assumed power at the Centre with a
landslide victory over the Congress-led UPA government. The bad loan
troubles of government banks began to hit hard despite the best efforts by
banks to cover up possible NPA stock to restructured loan category. The list
now is dominated mostly by public sector banks, witheight out of ten banks
being government owned.

Twenty months into the Modi government rule, it wouldn't be an

exaggeration to say that state-run banks are on the verge of a crisis due to
their high NPAs, which constitute over 90 percent of the total bad loans of
the industry. Many of them have reported losses on account of huge NPAs in
the December quarter, surprising analysts. Investors are dumping shares of
these banks while there is a sense of uncertainty prevailing on the extent of
troubles in the banking sector. Nine out of 10 most stressed banks in the
sector are government banks. The RBI has given a deadline of March 2017
for all banks to clean up their balance sheets, which also require these
lenders to set aside huge chunk of capital in the form of provisions. RBI
governor Raghuram Rajan has given a clear message to banks to deal with
the NPA problem upfront, instead of postponing it and worsening it.But, there
is also huge capital implication on these banks on account of high NPAs too.
Banks need to set aside money (known as provisions) to cover their bad
loans. The onus to keep government banks stay afloat lies with the
government, which is the owner of these banks that control 70 per cent of
the banking industry assets. Experts have opined that the government's
promised capital infusion in these banks is inadequate. Finance minister,
Arun Jaitley, has to work out ways to bring in solutions in the long term. For
now, all eyes are on the Union budget for a roadmap.

MANAGING NON PERFORMING ASSETS

Reasons for managing non performing assets.
NPAs have multifold effects on the performance of banks. It shows the
weakness of management of bank. It is necessary to manage non
performing assets for following reasons
1. To protect the interest of share holders.
Members of the bank are true owners of bank. They contribute or invest their
amount in banks to earn dividend. Being amount of NPA with their amount in
banks to earn dividend because high amount of NPAs means earning assets
are on deterioration consequently, means lower income of banks that will
make unable to satisfy the members by paying high rate of dividend.
2. To protect the interest of depositors.
Depositors are the key person of the banks because of their deposits the
banks are able to lend to borrowers. Depositors want consistence interest
income on their deposits. When their deposits, advanced to borrowers, which
would, later on, if become a NPA, banks would be unable to pay timely
interest to depositors will switch of their deposits from one bank to another
bank which is not commendable for particular bank. Thus it is very important
for banks to manage efficiently their advances, which are likely to turn into
NPAs.
3. For profitability:
Non performing Assets means an asset, which cease to generate any
income. Thus more and more NPA will reduce the income of banks as interest
which is main component of banks income thus it will jeopardize the
profitability or return on assets consequently it will be constraint for banks
growth.
4. High provision:
Higher NPA leads banks to compel higher provision for Bad Debts Reserve
as per the norms of RBI. Provision will be done by realized profit and NPA will
block the actual profit of banks for current year thus NPA has a dual effect
i.e. not realization of interest income and separate provision for NPA from
Profit & Loss account.

5. Creditworthiness of the Banks:

NPA works as a tool for worthiness of particular bank. If banks are having
high NPA level then it will be very difficult to raise additional funds from
market. It will make bad impression of banks on people.
6. Expansion plan:
For instance banks want to start as its expansion plan and its NPA level is
higher. Then prescribed by RBI that is 15% of advances, banks will not be
able to get permission from the RBI for starting a new branch. Thus it is
necessary to control NPA level within prescribed limit for future growth of
banks.
7. Welfare of employees:
If banks are having high NPA it will ruin the whole capital and past reserves,
which raises question for existence of banks. Thus, many personnel will loss
employment, but also banks cannot make any provision for welfare activities
of theemployees future benefits due to lack of availability of free reserves.
8. In the interest of sustained economic growth:
For the interest of sustained economic growth it is necessary to control and
minimize NPAs of nations banking sectors. High NPA leads to inflation in
economy. Further, NPAs will reduce the opportunities for productive
investment, ruin the efforts of directed allocation of funds, preferred
investment areas, subsequently economy of country will not be able to
achieve expected growth, which is decided on formation of budget.

(2) When an account becomes NPA?

We must know the date of accounts becoming NPA.

Date of default

Date of NPA old, new

Over due V/s installment due.

(3) What is the impact of NPAs on performance of the Bank?

(I) Interest income is reduced due to non performance of assets.

(II) Desirable yield is not achieved.

(III) The total net worth of the bank stands reduced.

(IV) The bank has to incur additional cost in supervision and follow up.

(V) The bank has to face the problem of demoralized staff.

(VI) The bank has to provide for the provisioning, thus effecting the net profit
of

the bank.

(VII) The bank faces difficulty to get license for new branches.

(VIII) NPAs have a very negative effect on CRAR (Capital Risk Adequacy
Ratio).

(IX) NPAs restrict the recycling of funds.

It would be imperative for these banks to take effective measures to reduce

their

NPAs to the maximum possible extent. Not only reduction in NPAs even up
gradation

in the quality of such assets would help the banks to improve their bottom
lines

because the provisions already made can be transferred to the income head
in case of

up gradation of NPAs.
Conclusion

The problem of NPAs can be tackled only with proper credit assessment and
risk

management mechanism.
enthusiasm of the

In

situation

of

liquidity

overhang,

the

banking system to increase lending may compromise on asset quality,

raising concern

about their adverse selection and potential danger of addition to the stock of
NPAs. It is

necessary that the banking system is to be equipped with prudential norms

to minimize if

not completely to avoid the problem of NPAs. The onus for containing the
factors leading

to NPAs rests with banks themselves. This will necessitate organizational

restructuring,

improvement in the managerial efficiency and skill up gradation for proper

assessment of

creditworthiness. It is better to avoid NPAs at the nascent stage of credit

consideration by

putting in place rigorous and appropriate credit appraisal mechanisms.

Quite often borrowers face the difficulties in raising funds from banks due to
mounting

NPAs. Either the bank is reluctant in providing the requisite funds to the
genuine

borrowers or if the funds are provided, they come at a very high cost to
compensate the

lenders losses caused due to high level of NPAs. While the gross NPA reflects
the

quality of loans made by banks, net NPA shows the actual burden of banks.
The banks

have to take initiative to reduce NPAs in a time bound strategic approach.

There has been

a continuous decrease in the time period considered to declare a loan as

non-performing.

The continuous decrease in the time period is to bring the Indian banking
norms at par

with international norms. Such policy revisions will certainly reduce the NPAs
and in

turn improve the asset quality of the banks.

Bibliography
1. Rajput N.,Gupta M.,Chauhan A.K., 2013, A Comparative Analysis of NPA
Management Between SBI And CBI , Indian Journal of research,Vol 2,Issue 4.

2. Reddy, (2002), A comparative study on NPA in India in the Global

Context,
available
at,
http://www.crisil.com/youngthoughtleader/winners/2002/topic3-PrashanthReddy-iimahm.pdf

3. Reserve Bank of India, Reports on Trend and Progress of Banking in

India, several issues, Some Aspects and Issues Relating to NPAs, and
Annual Reports, RBI Publication, Mumbai, available at, www.rbi.org.in.
4. Karunakar et al., (2008), Are nonPerforming Assets Gloomy or Greedy
from Indian Perspective?, Research Journal of Social Sciences, Vol. 3, pp. 412, INSI net Publications.
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Millennium, Edited Book Banking in the New Millennium, pp. 279-291
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7. Kumar R., (2000), NPA Management for Better Banking, Proceedings of

the Bank Economist Conference, pp. 68-73.
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