Nirma University

Institute of Law
VII Semester B.A.LL.B.(Hons.)Course

S u b m i s s i o n of F i n a l P ro j e c t
o n t h e Top i c of

Critical analysis of Non Performing

Assets and its Management

In the Course of Banking and Insurance Law

As a part of continuous evaluation scheme.

Submitted to: Ms. Neha Chopra

Submitted by: Rupali Jani (09BAL018)

INDEX

Sr. No.
1.

Particulars
Ch- I: Introduction

Page No.
05
06-08

Synopsis

2.

Ch II: Defining the term Non Performing Assets

09-10

3.

Ch III: Factors contributing to NPA

11-12

4.

Ch IV: Preventive measures to NPA

13

5.

Ch V: NPA Management- Resolution

6.

Ch VI: Conclusion

16

Bibliography

17

14-15

DECLARATION

I Rupali Jani declare the work entitled Critical analysis of Non Performing
Assets and its Management being submitted to Nirma University for the project
in the subject of Banking Law is original and where the text is taken from the
authenticated books, articles or web articles, appropriate reference is given. It
is true in my best of knowledge.

Date :

Rupali Jani
Roll No 09 BAL 018
VII Semester, (2012-13)
Institute of Law
Nirma University

CERTIFICATE

This is to certify that the project entitled Critical analysis of Non Performing
Assets and its Management submitted by Ms. Rupali Jani for the project work
in the subject of Banking Law embodies independent and original research
work carried out by her under my supervision and guidance.
To the best of my knowledge and belief, it is her original work submitted to fulfil
the project assignment for the Semester End Examination of seventh semester
of B.A.LL.B. Programme during the academic year 2012-13.

Date :

Ms. Neha Chopra

Asst. Professor in Law,
Institute of Law,
Nirma University
Ahmedabad

Chapter I
Introduction

Over the years Indian banking industry has been dogged by Non-Performing Assets
(NPAs), the extent of which varies from anywhere between Rs.1000, 000 to 3000,000
crores as reported by various official and un-official sources. However, due to the
inadequacy of appropriate legal framework, professional expertise and other factors, the
Lenders have not been very successful in recovery of these funds from corporate and
other defaulters. Non Performing Asset can be defined as a loan or an advance where
Interest or instalment of principal remains overdue for a period of more than 90 days in
respect of a term loan.
The Indian banking system has undergone significant
transformation following financial sector reforms. It is adopting international best
practices with a vision to strengthen the banking sector. The public sector banks dominate
the Indian banking system with almost 82 percent market share in the total deposits and
advances of the industry. Several prudential and provisioning norms have been
introduced, and these are pressurizing banks to improve efficiency and trim down NPAs
to improve the financial health in the banking system.1

1 www.indianjournals.com

SYNOPSIS:

RESEARCH PROBLEM
Non Performing Asset is a loan or an advance where Interest or instalment of
principal remains overdue for a period of more than 90 days in respect of a term
loan. This research basically deals to find out the intricacies and problems
involved because of the NPA.
AIMS AND OBJECTIVE
The fundamental objective of the present research is;
To critically examine that what are the factors contributing to NPAs.
To critically observe that what are the preventive measures to NPAs.
HYPOTHESIS
In order to conduct a research work, formulation of Hypothesis is essential. In any
given study or research work, the focal points and assumptions are normally
available through the formulation of hypothesis.
The hypothesis developed on the basis of literature review is as follows:
Non Performing Assets are always bad for banks.
NPAs are always lessens down the credibility of banks.

RESEARCH METHODOLOGY
In order to accomplish the present research work, an attempt has been made to
study the evaluation of term NPA and its management.
The material has been collected from the secondary sources, i.e. books, various
websites, articles.

SCOPE OF THE STUDY

The scope of the study is limited to the Banking laws in India.

SCHEME OF THE STUDY

For the sake of convenience, the present work is simplified by chapterisation, and
hence it is divided in V chapters, namely;
o Chapter I : Introduction
o Chapter II : Definition of the term Non Performing Assets.
o Chapter III : Factors contributing to NPA.
o Chapter IV : Preventive measures to NPA.
o Chapter V : NPA Management- Resolution
o Chapter VI : Conclusion

REVIEW OF LITERATURE

In order to accomplish the research work, the researcher has collected the material
from secondary sources, i.e. books, websites.
The work has been mainly depended on the analysis of the term NPA and its
managent. Besides the researcher has visited website of manupatra, indlaw,
heinonline, in order to make an authentic study of the topic.
Moreover, the researcher has read various articles in order to understand the aspect
of NPA and its management.
Moreover, the researcher has referred the following book, namely;
Banking Law & Practise, Volume 2 by R. K. Gupta, Modern Law Publications, 2 nd
editions.
Law of Banking & Negotiable Instrument, An introduction Avtar Singh, Eastern
Book Company, first edition 2003.
S. N. Gupta, Banking Law in theory of practise, 4 th edition, Universal Law
Publishing Co.

Chapter II
Definition of the term NPA

A NPA is a loan or an advance where;

Interest and/ or installment of principal remain overdue for a period of more than
90 days in respect of a term loan,
The account remains out of order in respect of an overdraft/ cash credit
The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted
The installment or interest remains overdue for two crop seasons in case of short
duration crops and for one crop season in case of long duration crops.

CATEGORIES OF NPA
Substandard Assets Which has remained NPA for a period less than or equal to 12
months.
Doubtful Assets Which has remained in the sub-standard category for a period of 12
months
Loss Assets 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.2

PROVISIONING NORMS
Standard Assets general provision of a minimum of 0.25%
2 www.indianjournals.com
9

Substandard Assets 10% on total outstanding balance, 10 % on unsecured exposures

identified as sub-standard & 100% for unsecured doubtful assets.
Doubtful Assets 100% to the extent advance not covered by realizable value of security.
In case of secured portion, provision may be made in the range of 20% to 100%
depending on the period of asset remaining sub-standard
Loss Assets 100% of the outstanding3

3 supra
10

Chapter III
Factors contributing to NPA

In the early 1990s PSBs started suffering from acute capital inadequacy and lower/
negative profitability. The parameters set for their functioning did not project the
paramount need for these corporate goals. The banks had little freedom to price products,
cater products to chosen segments or invest funds in their best interest.
Since 1970s, the SCBs functioned as units cut off from international banking and unable
to participate in the structural transformations and new types of lending products.
Audit and control functions were not independent and thus unable to correct the effect of
serious flaws in policies and directions.
Banks were not sufficiently developed in terms of skills and expertise to regulate the
humongous growth in credit and manage the diverse risks that emerged in the process
Inadequate mechanism to gather and disseminate credit information amongst commercial
banks
Effective recovery from defaulting and overdue borrowers was hampered on account of
sizeable overhang component arising from infirmities in the existing process of debt
recovery, inadequate legal provisions on foreclosure and bankruptcy and difficulties in
the execution of court decrees.4

Other Factors Contributing To NPA

Poor Credit discipline
4 www.indiansharestips.com
11

 Inadequate Credit & Risk Management

Diversion of funds by promoters
Funding of non-viable projects

IMPACT OF NPAS ON OPERATIONS

Drain on Profitability
Impact on capital adequacy
Adverse effect on credit growth as the bankers prime focus becomes zero percent
risk and as a result turns lukewarm to fresh credit.
Excessive focus on Credit Risk Management
High cost of funds due to NPAs5

Chapter IV
Preventive measures to NPA

Formation of the Credit Information Bureau (India) Limited (CIBIL)

5 supra
12

Release of Wilful Defaulters List: RBI also releases a list of borrowers with aggregate
outstanding of Rs.1 crore and above against whom banks have filed suits for recovery of
their funds
Reporting of Frauds to RBI The frauds done by the customer can be reported to
Reserve Bank of India so that NPA can be prevented by RBI.
Norms of Lenders Liability framing of Fair Practices Code with regard to lenders
liability to be followed by banks, which indirectly prevents accounts turning into NPAs
on account of banks own failure.6
Risk assessment and Risk management
RBI has advised banks to examine all cases of wilful default of Rs.1 crore and above and
file suits in such cases. Board of Directors are required to review NPA accounts of Rs.1
crore and above with special reference to fixing of staff accountability.
Reporting quick mortality cases
Special mention accounts for early identification of bad debts. Loans and advances
overdue for less than one and two quarters would come under this category. However,
these accounts do not need provisioning

Chapter V
NPA Management - Resolution

6 supra
13

There are various resolutions schemes to manage and handle the NPA. However
researcher had discussed some schemes of resolution. They are as follows:
1. Compromise Settlement Schemes
Banks are free to design and implement their own policies for recovery and
write off incorporation compromise and negotiated settlements with board
approval
Specific guidelines were issued in May 1999 for one time settlement of
small enterprise sector and were modified in July 2000 for recovery of
NPAs of Rs.5 crore and less as on 31st March 2007.
2. Restructuring and Rehabilitation
Banks are free to design and implement their own policies for restructuring/
rehabilitation of the NPA accounts
Reschedulement of payment of interest and principal after considering the
Debt service coverage ratio, contribution of the promoter and availability of
security
3. Lok Adalats

Small NPAs up to Rs.20 Lacs

Speedy Recovery
Less expensive
Easier way to resolve

4. Debt Recovery Tribunal (DRT) Act

The banks and FIs can enforce their securities by initiating recovery
proceeding under the Recovery if Debts due to Banks and FI act, 1993
(DRT Act) by filing an application for recovery of dues before the Debt
Recovery Tribunal constituted under the Act.

14

 DRT has powers to grant injunctions against the disposal, transfer or

creation of third party interest by debtors in the properties charged to
creditor and to pass attachment orders in respect of charged properties 7

5. Sale of NPA to other Banks

A NPA is eligible for sale to other banks only if it has remained a NPA for
at least two years in the books of the selling bank
The NPA must be held by the purchasing bank at least for a period of 15
months before it is sold to other banks but not to bank, which originally
sold the NPA.
The NPA may be classified as standard in the books of the purchasing bank
for a period of 90 days from date of purchase and thereafter it would
depend on the record of recovery with reference to cash flows estimated
while purchasing
The bank may purchase/ sell NPA only on without recourse basis
If the sale is conducted below the net book value, the short fall should be
debited to P&L account and if it is higher, the excess provision will be
utilized to meet the loss on account of sale of other NPA.

Chapter VI
Conclusion

Non Performing Asset can be defined as a loan or an advance where Interest or

instalment of principal remains overdue for a period of more than 90 days in respect of a
7 www.indianjournals

15

term loan. The Indian banking system has undergone significant transformation following
financial sector reforms. It is adopting international best practices with a vision to
strengthen the banking sector. The public sector banks dominate the Indian banking
system with almost 82 percent market share in the total deposits and advances of the
industry. Several prudential and provisioning norms have been introduced, and these are
pressurizing banks to improve efficiency and trim down NPAs to improve the financial
health in the banking system.

Bibliography

Books : Banking Law & Practise, Volume 2 by R. K. Gupta, Modern Law Publications, 2 nd
editions.
16

 Law of Banking & Negotiable Instrument, An introduction Avtar Singh, Eastern

Book Company, first edition 2003.
S. N. Gupta, Banking Law in theory of practise, 4 th edition, Universal Law
Publishing Co.

Web References : www.indianjournals.com

www.indiansharestips.com
www.uttumabumwala.co.in

17