EXECUTIVE SUMMARY The three letters NPA Strike terror in banking sector and business circle today.

NPA is short form of Non-Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution.

The Non-Performing Assets (N.P.As) problem is one of the foremost and the most formidable problems that have shaken the entire banking industry in India like an earthquake. Like a canker worm, it has been eating the banking system from within, since long. And like the dreaded AIDS, banks have not been able to find a reliable cure for this malady. It has grown like a cancer and has infected every limb of the banking system.

Mounting menace of N.P.As has raised the cost of credit, made banks more adverse to risk and squeezed genuine small and medium enterprise from accessing competitive credit and has throttled their enterprising spirits as well.

The spiraling and the devastating effect of N.P.As on the economy have made the problem of N.P.As as issue of public debate and of national priority. Therefore, any measure or reform on this front would be inadequate and incomprehensive, if it fails to make a dent in N.P.As reduction and stall their growth in future, as well.

The purpose behind preparing this project is to study the present situation of NPAs and to provide suggestions to reduce it. This project help us understand about NPA and gives the reason because of which an account becomes as NPA. In the theoretical aspects some of the General reasons of assets becoming NPAs, Causes of NPAs, Some of the indicators suggesting slippages to NPAs and General methods of management of NPAs has been given in the project.

For better understanding, the project includes the country wise analysis of NPA and states the guidelines given by RBI to reduce this problem of NPA. A case study of NPA on OBC in included in the project at the end to understand the measures used by OBC to curtail the problem of NPA and NPA of different bank groups for the year 2008-09 and 2009-10 is included to study the difference in the amount of NPA among bank groups.

INDEX

PART 1.

PARTICULAR Introduction 1.1 1.2 Introduction of NPA Meaning of NPA

PAGE NO

2.

Types of NPA 2.1 2.2 Gross NPA Net NPA

3.

REASON FOR ACCOUNT BECOMING AS AN NPA 3.1 Factor of a/c becoming as an NPA Internal factor External factor 3.2 General reason for asset become as an NPA

4.

Reporting of NPAs And Format 4.1Reporting of NPAs 4.2 Reporting Format For NPA Gross And Net NPA

5.

Impact of NPA 5.1 Profitability 5.2 Liquidity 5.3 Involvement of management 5.4 Credit loss

6.

Early

symptoms

by

which

one

can

recognize a performing asset turning in to Non-performing asset

6.1 Financial 6.2 Operational and Physical 6.3 Attitudinal Changes 6.4 Others

7.

Preventive Measures For NPA 7.1 Early Recognition of the Problem 7.2 Intent 7.3 Timeliness and Adequacy of response 7.4 Focus on Cash Flows 7.5 Management Effectiveness 7.6 Multiple Financing Identifying Borrowers with Genuine

8. 9.

Methods to Manage the NPAs RBI GUIDELINES REGARDING NPA 9.1 Scope 9.2 Structure 9.3 Asset classification as per RBI

guidelines

10.

Country-wise Analysis 10.1 China 10.2 Thailand 10.3 Korea 10.4 Japan 10.5 Comparison with other Asian

Economies

CASE STUDY OF NPA ON ORIENTAL BANK OF COMMERCE 10.1)Introduction 10.2)Our vision 10.3)Our mission 10.4)Oriental Bank of Commerce Fact File 10.5)Working result of OBC 10.6)Profitability of OBC 10.7)Technological implication

11.

Finding & conclusion

12.

Bibliography

INTRODUCTION

1.1)Non-Performing Asset A Man without money is like a bird without wings, the Rumanian proverb insists the Importance of the money. A bank is an establishment, which deals with money. The basic functions of Commercial banks are the accepting of all kinds of deposits and lending of money. In general there are several challenges confronting the commercial banks in its day to day operations. The main challenge facing the commercial banks is the disbursement of funds in quality assets (Loans and Advances) or otherwise it leads to Non-performing assets. Non-Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up-gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where i. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, ii. the account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC),

iii.

The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,

iv.

Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and

v.

Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; 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' for a period of more than 90 days, 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. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. 'Out of order' an account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing

power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as 'out of order'. Overdue Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank. Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability of the affected banks.

1.2) Meaning of NPAs: The three letters NPA Strike terror in banking sector and business circle today. NPA is short form of Non-Performing Asset. An asset which ceases to generate income of the bank is called non-performing asset. The past due amount remaining uncovered for the two quarter consequently the amount would be classified as NPA for the whole year. It includes borrowers defaults or delays in interest or principal repayment.

An asset is classified as Non-performing Asset (NPA) if the borrower not pays due in the form of principal and interest for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by banks to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that

there may still exist certain advances / credit facilities having performing status. Though the term NPA connotes a financial asset of a commercial bank, which has stopped earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm, concern, industry and nation where that asset is idling. The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004 onwards.

TYPES Of NPA

2.1 Gross NPA 2.2 Net NPA

2.1 Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non-standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio

Gross NPAs

Gross Advances

2.2 Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following_ Net NPAs Gross NPAs Provisions Gross Advances - Provisions

Reason for Account Becoming as an NPA

3.1 There are several reasons for an account becoming NPA.

The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors. EXTERNAL FACTORS : Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, thereby reducing their profitability and liquidity. Willful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans. Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit.

Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans.

Industrial sickness Improper project handling , ineffective management , lack of

adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and has to make provision for it. Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by

the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS : Defective Lending process

There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. ii. iii. Principles of safety Principle of liquidity Principles of profitability

i.

Principles of safety :By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers: a. Capacity to pay b. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower

The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character. Inappropriate technology

Due to inappropriate technology and management information system, market driven decisions on real time basis can not be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized. Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. Banks

should

consider

the

borrowers

own

capital

investment. it should collect credit information of the borrowers from_ a. From bankers. b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies. Analyze the balance sheet.

True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. Purpose of the loan When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing. Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the_ 1. Marketability 2. Acceptability 3. Safety 4. Transferability.

The banker should follow the principle of diversification of risk based on the famous maxim do not keep all the eggs in one basket; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a

few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs). Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits. Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.

3.2) General Reasons For Assets Becoming NPAs A multiplicity of factor is responsible forever increasing size of NPAs in banks. A few prominent reasons for assets becoming NPAs are as under. Poor credit appraisal system Lack of proper monitoring Reckless advances to achieve the budgetary targets. There is no or lack of corporate culture in the Bank. In adequate legal provisions on Foreclosure and bankruptcy. Change in economic policies/ environment. No transparent accounting policy and poor auditing practices. Lack of coordination between banks. Directed lending to certain sectors. Failure on the part of the promoters to bring their portion of equity from their Source or public issue due to market turning lukewarm.

Reporting of NPAs And Format

4.1 Reporting of NPAs Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure I. While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report.

Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.

4.2 REPORTING FORMAT FOR NPA GROSS AND NET NPA

Name of the Bank: Position as on PARTICULARS 1) Gross Advanced * 2) Gross NPA * 3) Gross NPA as %age of Gross Advanced 4) Total deduction( a+b+c+d ) ( a ) Balance in interest suspense a/c ** ( b ) DICGC/ECGC claims received and held pending adjustment ( c ) part payment received and kept in suspense a/c ( d ) Total provision held *** 5) Net advanced ( 1-4 ) 6) Net NPA ( 2-4 ) 7) Net NPA as a %age of Net Advance *excluding Technical write-off of Rs.________crore.

**Banks which do not maintain an interest suspense a/c to park the accrued interest on NPAs may furnish the amount of interest receivable on NPAs.

***Excluding amount of Technical write-off (Rs.______crore) and provision on standard assets. (Rs._____crore).

IMPACT of NPA

5.1Profitability NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesnt affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank.

5.2 Liquidity Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Routine payments and dues.

5.3 Involvement of management Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank.

5.4 Credit loss Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks.

Early symptoms by which one can recognize a performing asset turning in to Non-performing asset Four categories of early symptoms 6.1 Financial: Non-payment of the very first installment in case of term loan. Bouncing of cheque due to insufficient balance in the accounts. Irregularity in installment. Irregularity of operations in the accounts. Unpaid overdue bills. Declining Current Ratio. Payment which does not cover the interest and principal amount of that installment. While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.

6.2

Operational and Physical:

If information is received that the borrower has either initiated the process of winding up or are not doing the business. Overdue receivables. Stock statement not submitted on time. External non-controllable factor like natural calamities in the city where borrower conduct his business. Frequent changes in plan. Non-payment of wages.

6.3 Attitudinal Changes: Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank. Problem between partners.

6.4 Others: Changes in Government policies. Death of borrower. Competition in the market.

PREVENTIVE MEASURES FOR NPA

7.1 Early Recognition of the Problem

Invariably, by the time banks start their efforts to get involved in a revival process, its too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of banks dues. Identification of weakness in the very beginning that is When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Restructuring should be attempted where, after an objective assessment of the promoters intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse.

7.2 Identifying Borrowers with Genuine Intent

Identifying borrowers with genuine intent from those who are nonserious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who has intelligent inputs with regard to promoters sincerity, and capability to achieve turnaround. Base done this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance.

In this regard banks may consider having Special Investigation of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.

7.3 Timeliness and Adequacy of response:-

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoters commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option.

7.4 Focus on Cash Flows While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements

may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.

7.5 Management Effectiveness

The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing units fortunes. A bank may commit additional finance to an align unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done it will be useful to have consultant appointed as early as possible to examine this aspect. A proper technoeconomic viability study must thus become the basis on which any future action can be considered.

7.6 Multiple Financing

A. During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.

B. In some default cases, where the unit is still working, the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they

default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. Toward this end, there should be regular flow of information among consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost by a discounted settlement of the exposure. Therefore, any plan for

restructuring/rehabilitation may take this aspect into account.

D. Corporate

Debt

Restructuring

mechanism

has

been

institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements.

METHODS TO MANAGE THE NPAs:

General Methods Of Management Of NPAs:

The management of NPA is the difficult task in practice. Management of NPAs means, how to settle the NPAs account in the books. In simple it focuses on the methods of settlement of NPAs account. The methods are differs from bank to bank. The following paragraph explains some general methods of Management of NPAs by the banks. The same information is given in the chart 1.1

General Methods of Management of NPAs

Compromise Legal remedies Regular Training Program Recovery Camps Write offs Spot Visit Rehabilitation of potentially viable units Other Methods

General Methods of Management of NPA

6.1) Compromise: The dictionary meaning of the term compromise is settlement of dispute reached by mutual concessions. The following are the detailed guidelines for compromise/negotiated settlements of NPAs. The compromise should be a negotiated settlement under which the bank should ensure recovery of its dues to the maximum extent possible of minimum expenses. Proper distinction should be made between willful defaulters and borrowers defaulting in repayments due to circumstances beyond their control. An advantage in settlement cases is that banks can promptly recycle the funds instead of resorting to expensive recovery proceedings spread over a long period. All compromise proposals approved by any functionary should be promptly reported to the next higher authority for post facto scrutiny. Proposal for write off/ compromise should be first by a committee of senior executives of the bank. Special recovery cells should be set up at all regional levels.

6.2) Legal remedies: The legal remedies are one of the methods of management of NPAs. The banks observed that the borrower is making willful default; no more time should be lost instituting appropriate recovery proceedings. The legal remedies are filling of civil suits.

6.3) Regular Training Program The all levels of executives are compelling to undergrowth the regular training program on credit and NPA management. It is very useful and helpful to the executives for dealing the NPAs properly.

6.4) Recovery Camps The banks should conduct the regular or periodical recovery camps in the bank premises or some other common places; such type of recovery camps reduces the level of NPAs in the Banks

6.5) Write offs Write offs is also one of the common management techniques of NPAs. The assets are treated as loss assets, when the bank writes off the balances. The ultimate aim of the write off is to cleaning the Balance sheet.

6.6) Spot Visit The bank officials should visit to the borrowers business place or borrowers field regularly or periodically. It is also help full to the bank to control or reduce the NPAs limit.

6.7) Rehabilitation of potentially viable units The unit is sick due to technical obsolescences of inefficient management or financial irregularities. When the Bank settles the dues, of such, companies through the compromise or through the legal actions the better is to be followed. 6.8) Other Methods Persistent phone calls. Media announcement.

RBI GUIDELINES Reserve Bank Guidelines on purchase/ sale of Non-Performing Financial Assets:

8.1) SCOPE 1.These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling non performing financial assets, from/ to other banks/FIs/NBFCs (excluding securitization companies/ reconstruction companies).

2. A financial asset, including assets under multiple/consortium banking arrangements, would be eligible for purchase/sale in terms of these guidelines if it is a non-performing asset/non performing investment in the books of the selling bank.

3. The reference to 'bank' in the guidelines would include financial institutions and NBFCs.

8.2) STRUCTURE

The guidelines to be followed by banks purchasing/ selling nonperforming financial assets from / to other banks are given below. The guidelines have been grouped under the following headings:

i) Procedure for purchase/ sale of non-performing financial assets by banks, including valuation and pricing aspects.

ii) Prudential norms, in the following areas, for banks for purchase/ sale

of non-performing financial assets: a. Asset classification norms b. provisioning norms c. Accounting of recoveries d. Capital adequacy norms e. Exposure norms

iii) Disclosure requirements. a. Non performing financial assets that may be purchased/ sold; b. Norms and procedure for purchase/ sale of such financial assets; c. Valuation procedure to be followed to ensure that the economic value of financial assets is reasonably estimated d. Delegation of powers of various functionaries for taking decision on the purchase/ sale of the financial assets; etc. e. Accounting policy

iv) While laying down the policy, the Board shall satisfy itself that the bank has adequate skills to purchase non performing financial assets and deal with them in an efficient manner which will result in value addition to the bank.

v) The estimated cash flows are normally expected to be realized within a period of three years and not less than 5% of the estimated cash flows should be realized in each half year.

vi) A bank may purchase/sell non-performing financial assets from/to other banks only on 'without recourse' basis,

vii) Banks should ensure that subsequent to sale of the non performing financial assets to other banks, they do not have any involvement with reference to assets sold and do not assume operational, legal or any other type of risks relating to the financial assets sold.

vi) Each bank will make its own assessment of the value offered by the purchasing bank for the financial asset and decide whether to accept or reject the offer.

vii) Under no circumstances can a sale to other banks be made at a contingent price whereby in the event of shortfall in the realization by the purchasing banks, the selling banks would have to bear a part of the shortfall.

viii) A non-performing asset in the books of a bank shall be eligible for sale to other banks only if it has remained a non-performing asset for at least two years in the books of the selling bank.

ix) Banks shall sell non-performing financial assets to other banks only on cash basis. The entire sale consideration should be received upfront and the asset can be taken out of the books of the selling bank only on receipt of the entire sale consideration.

x) A non-performing financial asset should be held by the purchasing bank in its books at least for a period of 15 months before it is sold to other banks. Banks should not sell such assets back to the bank, which had sold the NPFA.

xi) Banks are also permitted to sell/buy homogeneous pool within retail non-performing financial assets, on a portfolio basis provided each of the non-performing financial assets of the pool has remained as nonperforming financial asset for at least 2 years in the books of the selling bank.

xii) The selling bank shall pursue the staff accountability aspects as per the existing instructions in respect of the non-performing assets sold to other bank

8.3) ASSET CLASSIFICATION AS PER THE RBI GUIDELINES: The primary (urban) co-operative banks should classify their assets into the following broad groups, viz. (I) Standard Assets (ii) Sub-standard Assets (iii) Doubtful Assets (iv) Loss Assets Standard Assets Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA.

Sub-standard Assets (i) With effect from March 31, 2005 an asset would be classified as substandard if it remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrowers/ guarantors 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 assets 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. (ii) An asset where the terms of the loan agreement regarding interest and principal have been re-negotiated or rescheduled after

commencement of production, should be classified as substandard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this condition.

Doubtful Assets With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months. As in the case of sub-standard assets, rescheduling does not entitle the bank to upgrade the quality of an advance automatically. A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Note: Consequent to change in asset classification norms w.e.f. March 31, 2005 banks are permitted to phase the consequent additional provisioning over a five year period commencing from the year ended

March 31, 2005, with a minimum of 10 % of the required provision in each of the first two years and the balance in equal installments over the subsequent three years.

Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or partly. 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.

Non performing assets

Standard assets (0.40 persentage)

Substandard assets (10 persentage)

Doubtful assets

Loss assets

Secured assets

Unsecured assets

Less than 24 month (20 persentage)

1 to 3 years (30 persentage)

More than 3 years (50 persentage)

COUNTRY-WISE ANALYSIS

9.1 CHINA Causes: 1. Moral Hazard: The SOEs believe that there the government will bail them out in case

of trouble and so they continue to take high risks and have not really strived to achieve profitability and to improve operational efficiency 2. Bankruptcy laws favor borrowers and law courts are not reliable enforcement 3. Political and social implications of restructuring big SOEs force the government to keep them afloat. 4. Banks are reluctant to lend to the private enterprises due to a. Non-standard accounting practices. b. While an NPA of an SOE is financially undesirable, an NPA of a private enterprise is both financially and politically undesirable.

Measures: 1. Reducing risk by strengthening banks, raising disclosure standards and spearheading reforms of the SOEs by reducing their level of debt 2. Laws were passed allowing the creation of asset management companies, foreign equity participation in securitization and asset backed securitization. 3. The government which bore the financial loss of debt discounting. Debt/equity swaps were allowed in case a growth opportunity existed. 4. Incentives like tax breaks, exemption from administration fees and clear-cut asset

9.2 THAILAND Causes: 1. Liberalized capital and current account and external borrowings with inaccurate assessment of exchange rate risk and risk of capital flight in a crisis. 2. A legal system that made credit recovery time consuming and difficult. 3. Real estate speculators look massive loans projecting high growth in demand and prices of properties. When this did not materialize all the loans went bad. 4. Steep interest rate rise turned a lot of loans into NPAs

Measures: 1. Amendments were made to the Bankruptcy Act. 2. Corporate Debt Restructuring Advisory Commission was set up for the takeover and restructuring of banks. 3. The Financial Sector Restructuring Plan (1998) 9 focused on capital support facilities for bank recapitalization and setting up of AMCs. 4. New rules governing NPA exit procedures based on international standards were introduced. 5. Privatization of government entities was mooted, but faced strong political opposition for fear of a social backlash. 6. Adoption of international standards for loan classification and provisioning. 7. Caps on Foreign equity ownership in financial institutions were removed.

9.3 Korea Causes: 1. Directed credit: Protracted periods of interest rate control and selective credit allocations gave rise to an inefficient distribution of funds. The Chaebols focus on increasing market share and pursuing diversification with little attention to profitability caused tremendous stress on the economy. 2. The compressed growth policy via aggressive, leveraged expansion worked well as long as the economy was growing and the ROI exceeded the cost of capital. This strategy backfired when slowing demand and rising input costs placed severe stress on their profitability. 3. Lack of Monitoring Banks relied on collaterals and guarantees in the allocation of credit, and little attention was paid to earnings performance and cash flows. 4. Contagion Effects from South East Asia coincided with a period of structural adjustments as well as a cyclical downturn in Korea.

Measures: 1. Speed of Action - The speedy containment of systemic risk and the domestic credit crunch problem with the injection of large public funds for bank recapitalization were critical steps towards normalizing the financial system 2. Corporate Restructuring Vehicles (CRVs) and Debt/Equity Swaps were used to facilitate the resolution of bad loans. 3. Creation of the Korea Asset Management Corporation (KAMCO) and a NPA fund to fund to finance the purchase of NPAs. 4. Securitization KAMCOs recoveries came through asset-backed securitization and outright sales. International investors like the Lone Star Fund participated in the process.

5. Strengthening of Provision norms and loan classification standards based on forward-looking criteria (like future cash flows) were implemented.

9.4 Japan Causes: 1. Investments were made real estate at high prices during the boom. The recession caused prices to crash and turned a lot of these loans bad. 2. Legal mechanisms to dispose bad loans were time consuming and expensive and NPAs remained on the balance sheet. 3. Expansionary fiscal policy measures administered to stimulate the economy supported industrial sectors like construction and real estate, which may have further exacerbated the problem 4. Crony capitalism to the Keiretsus 5. Weak corporate governance coupled with a no-bankruptcy doctrine was a moral hazard in Japanese economy. 6. Inadequate accounting systems and information flow makes assessment of loan performance outside a bank in Japan difficult.

Measures: 1. Amendment of foreign exchange control law (l997) and the threat of suspension of banking business in case of failure to satisfy the capital adequacy ratio prescribed. Legislation to improve information flow has been passed. 2. Accounting standards Major business groups established a private standard setting vehicle for Japanese accounting standards (2001) in line with international standards.

3. Government Support - The governments committed public funds to deal with banking sector weakness.

9.5) Comparison with other Asian Economies Exhibit 3 Comparison of Problems and Solutions Across 5 countries Country Causes of Problem Mechanisms used to solve the problem India 1. Legal impediments and 1. Strengthening of Legal time consuming nature of Norms asset disposal process. 2. Manipulation using by the 2. Aligning with of prudential

debtors

political norms

international

influence has been a cause standards for industrial bad debt being so high. 3.Political tool Directed 3. Legal mechanisms

Credit to SSI and Rural including creation of ARCs sectors and partial disbanding of the BIFR China 1. Moral Hazard - SOE's 1. belief that bailout will happen in a crisis situation Creation of Asset

Management Companies for the big four banks Foreign in the equity NPA

2. Bankruptcy laws favour 2. borrowers

participation

disposal process

3.

Inefficient

legal 3. Raising of standards

disclosure

enforcement mechanisms Japan

1. Real estate boom and 1. Strict action (including bust closure) for non compliance of capital norms

2. Time consuming legal 2. Securitisation of Real mechanism estate loans

3. Crony capitalism

3. Extensive public funding for bailouts

Korea

1.Directed rate control

credit:

Interest 1. Swift action in containing systemic risk

2.The compressed growth 2. policy

Use

of

Corporate

Restructuring Vehicles (CRVs) Swaps and Debt/Equity

3.

Lack

of

effective 3. Creation of Korea Asset Management Corporation 1997 (KAMCO) in

monitoring

4.Contagion

Effects

from 4.

Extensive

use

of

South East Asia Thailand 1. legal system

securitization that 1. Privatisation of

favoured debtors

government entities

2. Liberalised capital and 2. Removal of caps on current account. foreign equity ownership in

Borrowing were made with FIs was removed. inaccurate assessment of s foreign exchange risk 3. Real estate speculation - 3. Creation of AMCs Spike in prices and growth rate projections were wrong 4. Steep interest rate 4. Government takeover of banks and FIs

increase turned loans bad

Case study of Non-Performing Asset on Oriental bank of commerce

10.1) Introduction

Oriental Bank of Commerce India was established in the year 1943 on 19th February in Lahore. After partition, Oriental Bank of Commerce shifted its Registered Office from Lahore to Amritsar paying every rupee to it. Oriental Bank of Commerce was nationalized on 15th April in 1980. Then departing customers of OBC bank had 307 branches with Rs. 282.61 crores as deposits and as advance Rs. 152.69.

OBC has formulated the pattern of Bangladesh Grameen Bank with a unique feature of disbursing small loans ranging from Rs. 75 onwards. The Bank is providing training to rural people in using locally available raw material to produce pickles, jams etc. This in return increases selfemployment and adds in increasing the income levels.

10.2) Our Vision To be a sound all India, customer centric, efficient retail bank with contemporary size, technology and human capital; endeavoring to enrich lives across all sections of society; and committed to upholding the highest standards of corporate governance.

10.3)Our Vision

To provide the finest banking services by upgrading human capital and infusing advanced technology, thereby achieving total customer satisfaction; and being reckoned as the Best Bank in the Industry on all efficiency parameter to enhance shareholders wealth by ensuring sound growth of business and make valuable contributions to national economic growth.

10.4) Oriental Bank of Commerce Fact File

Amongst the strongest banks in India High Capital Adequacy Ratio Consistent Profit-making Bank One of the Lowest Spreads in Banking Industry Total Working crosses the 35700 crore mark CRISIL Ratings The Highest Productivity per Employee NPA - One of the lowest

Oriental Bank of Commerce (OBC) have emerged as the top performing banks in terms of cleaning their bad assets and bringing down nonperforming assets, taking advantage of healthy GDP growth and impressive top line and bottom line performance by borrowers.

Most of the commercial banks have substantially reduced their nonperforming assets (NPAs) ranging between 29 per cent and 65 per cent, as they registered a handsome growth in their retail advances in the fourth quarter of fiscal 2005-06. Riding on the above 8 per cent growth of

economy, the NPAs of the scheduled commercial banks went down by 44 per cent on an aggregate 10.5) Working results of oriental bank of commerce Dated 28th April 2007 The oriental bank has announce the working results of the Bank for the year ended 31st March 2007. The Board of Directors met on 28th April 2007 in New Delhi and at the conclusion of the Meeting, the Results were declared.

1. WORKING RESULTS

Highlights of the working results for the year ended March 2007 are as follows: TOTAL BUSINESS Rs. 1,09,391 Crore UP BY 27.57 % Total business has gone up by Rs. 23644.99 Crore (by 27.57 %) to Rs.09,391.00 Crore as on March 2007 from Rs. 85746.01 Cr as on March 2006. NET PROFIT UP BY 2.94 % Net Profit after tax gone up to Rs. 826.81 Crore as on March 2007 from Rs.803.16 Crore as on March 2006. CAPITAL ADEQUACY RATIO - 12.51% CAR as of March 2007 is 12.51 %. Gross NPA reduced to Rs.1454.05 Crore as on March 2007 from Rs. 2116.31 Crore as on March 2006 ( 3.20 %from 5.95 %)

Recovery of Rs. 750.15

Crore during the Current year. The Net Crore as on March 2007 from Rs.

NPA increased to Rs. 215.66

162.98 Crore as on March 2006 and remained at 0.49%. BUSINESS PER EMPLOYEE Rs. 7.40 Crore Employee Productivity has gone up to Rs. 7.40 Crore as on 31stMarch 2007 from Rs.6.66 Crore as on 31st March 2006.One of the significant reasons for a substantial decline in NPAs in the banking system is the low level of default in the retail.

The business figures of Oriental Bank of Commerce India for the last five years are as under: Rupees in Lakhs

FOR THE YEAR Total Income Total expenditure Net Profit for the year AT THE END OF YEAR

1998-99

19992000

20002001 302645 282356 20288

20012002 351438 319383 32055

20022003 383566 337871 45695

204641 267943 181629 240081 23012 27862

Mar-99

Mar-00

Mar-01 154866

Mar-02 161973

Mar-03 210934

Capital & Reserves 123148 142840 Deposits Advances Total Assets

1680488 2209521 2468043 2848839 2980909 770756 932553 1107641 1415787 1567723

1878416 2454120 2707243 3226292 3398763

No. of branches No. of employees

899 14447

915 14398

932 13588

967 13589

989 13507

10.6)Profitability of OBC

a) Profitability of OBC The gross profit OBC Bank stood at Rs. 1533 Crore as against Rs. 1163 Crore last year. After providing for contingencies and more than required provisions against non-performing assets, the Bank has earned a handsome net profit of Rs. 686 Crore as against Rs. 457 Crore last year, thereby registering a growth of 50 % mainly on account of reduction in cost of deposits, strict control on expenses, efficient cash management, treasury income and large recoveries in NPA accounts.

b)Dividend of OBC The Oriental Bank of Commerce has provided for payment of 30% final dividend to the shareholders in addition to 20% interim dividend already paid during the financial year 2003-04 making total dividend 50%.

c) Retail Portfolio of OBC The retail loans of OBC have increased to Rs. 4318 Crores as against Rs. 2779 Crores last year, with a growth of 55.4%. These assets constitute 20.9 % of total loan assets. Oriental Bank of Commerce Housing loans account for 80% of retail portfolio.

d) OBC Shareholder's Equity The Net worth of Oriental Bank of Commerce has improved by

Rs.567.46 Crore and reached a level of Rs. 2676.79 Crore against Rs. 2109.33 Crore last year.

e) The OBC Business The total business of Oriental Bank of Commerce has gone up to Rs. 56286 Crore from Rs. 46333 Crore last year thus registering a growth of 21.5%, due to high growth in deposits as well as advances. The deposit growth of OBC has been to the extent of 19.7 %( previous year 4.63%) while in advances the growth is 25.5 % (previous year 10.7%).

10.7) Technology Implementation Oriental Bank of Commerce of India has implemented Centralized Banking Solution in 21 branches till date. It will give freedom of anywhere and anytime banking to customers. The business captured has resulted in 97% live computerized environment as against 93% last year. More than 350 branches have been networked. OBC emerged as the best performer in terms of size of net NPAs.

Advice of RBI Though, the banks have exhibited a remarkable performance in lowering their NPAs in the fiscal 2005-06, at the same time, the banks also need to focus on deposit mobilization, as per the RBI advice. Oriental Bank of Commerce (OBC) has announced that it will move to 100 per cent provisioning cover in the current financial year ending

March 31, 2004. B D Narang disclosed this, chairman and managing director Oriental Bank during an analyst meet held on Thursday. Oriental Bank declared a 42.55 per cent growth in net profit for the fiscal ended March 31, 2003, at Rs 456.95 crore, against Rs 320.55 crore for the fiscal ended March 31, 2002. A combination of factors including reduction of cost of deposits, strict control on expenses, efficient cash management and large recoveries of non-performing assets (NPAs), besides treasury income accounted for the profit. Interest expended rose a marginal 1.04 per cent at Rs 2,089.94 crore, while total expenditure was also up marginally by 2.90 per cent at Rs 2,672.60 crore. Oriental Bank has amortized its VRS expenses over a period of five years. The banks net NPAs reduced to 1.40 per cent from 3.20 per cent in the previous fiscal. Treasury operations contributed Rs 481.59 crore (41.41%) to the gross profit of Rs 1,163.06 crore, while banking operations contributed the balance Rs 681.47 crore (58.59%). Total income increased from Rs 3,514.38 crore to Rs 3,835.66 crore during the fiscal. Gross profit stood at Rs 1,163.06 crore, 26.82 per cent higher than the previous fiscals Rs 917.09 crore. The total business of the bank went up to Rs 45,486 crore, a growth of 6.70 per cent compared to Rs 42,974 crore in the previous fiscal. The capital adequacy ratio went up to 14.04 per cent against 10.99 per cent. Business per employee stood at Rs 3.43 crore, while the net worth grew 30.20 per cent at Rs 2,109 crore. The banks return on assets for the fiscal stood at 1.30 per cent.

Chapter: 11 Finding & conclusion Non-performing assets of banks Group wise movement in Non-performing asset 2009-2010

Position

Scheduled Public Old Bank

New

Foreign bank

sector private private bank bank sector bank

Gross NPAs as at end march 2009 Gross NPAs as at end march 2010 Net

68328

44957 3072

13854

6444

84747

59926 3622

14017

7180

NPAs 31564

21155 1159

6252

2996

as at end march 2004 Net NPAs 39126 29644 1271 5234 2975

as at end march 2010

FINDING The asset quality of scheduled commercial banks (SCBs) has shown a remarkable improvement in 2009-10, according to the RBI report on `Trends and Progress of Banking in India' released on Monday. The central bank has noted that the gross non-performing assets (NPAs) of SCBs has declined in absolute terms for a second year in succession, despite the switchover to the 90-day delinquency norm, effective March 2004. Gross NPAs of scheduled commercial banks increased by 24.02 per cent in 2009-10, against an increase of 21.33 per cent in 2008-09. Due to significant provisioning, the net NPAs increased substantially by 23.95 per cent during 2009-10 against a decline of 27.63 per cent in 2008-09, the report said. The ratio of net NPAs to net advances of SCBs remained same as 1.1 per cent in 2009-10 to 1.1 percent in 2008-09. All bank groups witnessed a slight increase/decrease in the ratio of net NPAs to net advances in 2009-10. Among bank groups, the Foreign banks in India had the highest net NPAs ratio at 1.8 per cent, followed by public sector banks, new private banks and SCBs. During 2009-10, the share of NPAs in the priority sector to total NPAs of public sector banks increased marginally. The share of non-priority sector NPAs in total NPAs of private sector banks was lower than that in 2002-03. According to the report, the gross non-performing assets ratio of public sector banks has declined to 2.2 per cent in 2009-10 from 23 per cent in 1992-93.

CONCLUSION

However, the conclusion behind the project is, Bank has to keep tab on fresh additions by increasing quality advances and monitoring them. Critical care has to be taken of stressed accounts to keep control on fresh additions. Bank has to gear up efforts for upgrading S.S.A and recovery in D.A & Loss Assets. Staff in Bank has to gain good experience to fight the menace of NPAs.

SUGGESTIONS TO OVERCOME THE PROBLEM OF NPAs:

NPAs are increasing day by day in the CBE for a multiplicity of reasons. The following recommendations are suggested to the CBE to control over the NPAs. The recommendations are classified into three categories, are as follows.

A) General suggestions: The Bank should adopt the following General strategies for control of NPAs. The suggestions are as follows: Projects with old technology should not be considered for finance Large exposure on big corporate or single project should be avoided. There is need to shift banks approach from collateral security to viability of the project and intrinsic strength of promoters. Timely sanction and or release of loans by the bank is to avoid time and cost overruns.

B) Pre-sanction suggestions: Analysis should therefore be based on trends of capacity utilization, profitability etc. Assumptions not account for ground realities. Better taking up any fresh/exciting proposals for assessment, sources for margin money should be thoroughly examined. Uneven scale of repayment schedule with higher repayment in the initial years normally is preferred.

C) Post sanctions suggestions: Bank should prevent diversion of funds by the promoters. Operating

staff

should

scrutinize

the

level

of

inventories/receivables at the time of assessment of working capital. The Credit section should carefully watch the warning signals viz. non-payment of quarterly interest, dishonor of check etc. Effective inspection system should be implemented.

BIBLOGRAPHY
Reference websites :
www.kalyan-city.blogspot.in www.investorwords.com www.cabible.com www.authorstream.com www.scribd.com www.indianmba.com www.rbi.org.in

www.indiainfoline.com

Books
Non-Performing Assets in Commercial Banks- Vibha Jain

Article
RBI bulletin January, August 2000 Economic times newspaper NPA decline report