History of the Kangra Central Co-op Bank Ltd.

Came into existence on 17th March 1920 (License No. RPCD.09/2009-10).

Indora Banking Union was merged and 2nd Branch of the Bank opened at
Nurpur in Jan1956

Palampur Banking Union was merged and 3rd Branch of the Bank opened at
Palampur in Jan1957.

Nanaon Banking Union was merged and 4th Branch of the Bank opened at
Hamirpur in Oct1958.

The Bank suffered losses because of the partition in 1947 to the tune of Rs.10.64
Lacs

In Mar 1962, the bank suffering from the setback of partition was granted Rs.4.09
Lacs by the Govt.

Govt also provided Interest Free Relief Loan of Rs.3.98 Lacs and Govt of India
Loan of Rs.4.97 Lacs @ 3.87% in 1962 In 1971-72

The Bank entered into the deposit mobilisation scheme of Pong Dam Area
aggressively and secured maximum share of Deposit Bank Deposits increased from
Rs. 256 Lacs in 1971-72 to Rs. 1054 Lacs in 1973-74.

INTRODUCTION TO NPA
The three letters Strike terror in banking sector and business circle today. NPA is short
form of Non Performing Asset. The dreaded NPA rule says simply this: when interest
or other due to a bank remains unpaid for more than 90 days, the entire bank loan
automatically turns a non performing asset. The recovery of loan has always been
problem for banks and financial institution. To come out of these first we need to think is
it possible to avoid NPA, no can not be then left is to look after the factor responsible for
it and managing those factors.
Interest and/or instalment 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 purposes, and

Any amount to be received remains overdue for a period of more than

90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been advised
to move over to charging of interest at monthly rests, by April 1, 2002. However, the date
of classification of an advance as NPA should not be changed on account of charging of
interest at monthly rests. Banks should, therefore, continue to classify an account as NPA
only if the interest charged during any quarter is not serviced fully within 180 days from
the end of the quarter with effect from April 1, 2002 and 90 days from the end of the
quarter with effect from March 31, 2004
NPA is a classification used by financial institutions that refer to loans that are in jeopardy
of default. Once the borrower has failed to make interest or principle payments for 90 days
the loan is considered to be a non-performing asset. Non-performing assets are problematic
for financial institutions since they depend on interest payments for income. Troublesome
pressure from the economy can lead to a sharp increase in non-performing loans and often
results in massive write-downs.
Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
realisability of the dues:
1. Sub-standard assets: a sub standard asset is one which has been classified as NPA
for a period not exceeding 12 months.
2. Doubtful Assets: a doubtful asset is one which has remained NPA for a period
exceeding 12 months.

3. Loss assets: where loss has been identified by the bank, internal or external auditor
or central bank inspectors. But the amount has not been written off, wholly or
partly.
Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All
those assets which are considered as non-performing for period of more than 12 months are
called as Doubtful Assets. All those assets which cannot be recovered are called as Loss
Assets.

With a view to moving towards international best practices and to ensure greater
transparency, it had been decided to adopt the 90 days overdue norm for identification of
NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004,
a non-performing asset (NPA)is a loan or an advance where;

Definitions

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

generate income for the bank.

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

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

Investopedia explains 'Non-Performing Asset - NPA '

Non-performing assets are problematic for financial institutions since they depend on
interest payments for income. Troublesome pressure from the economy can lead to a sharp
increase in non-performing loans and often results in massive write-downs.

Concept of NPA
The concept of NPA was introduced by RBI to reflect banks actual financial health in its
balance sheet and as per the recommendations made by the Committee on Financial
Syatem(Chairman Sh. M. Narsimham). The provisioning should be made on the basis of
the classification of assets into different categories.
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 teh 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:

Interest and/or installment of principal remain overdue for a period of more than 90
days in respect of a term loan,
The account remains out of order for a period of more than 90 days, in respect of
an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
Interest and/or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purposes, and
Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
Non submission of Stock Statements for 3 Continuous Quarters in case of Cash
Credit Facility.
No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more
than 90 days.

Out of order status

An account should be treated as out of order if the outstanding balance remains
continuously in excess of sanctioned limit /drawing power. in case where the out standing
balance in the principal operating account is less than the sanctioned amount /drawing
power, but there are no credits continuously for six months as on the date of balance sheet
or credit 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 due
date fixed by the bank. As a facilitating measure for smooth transition to 90 days norm,
banks have been advised to move over to charging of interest at monthly rests, by April 1,
2002. However, the date of classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should, therefore, continue to
classify an account as NPA only if the interest charged during any quarter is not serviced
fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90
days from the end of the quarter with effect from March 31, 2004.

NORMS FOR ASSETS CLASSIFICATIONS AND PROVISION FOR LOAN

ASSETS
The loan accounts in Banks are classified into four categories. Out of these four categories,
the following three categories are considered as NPAs :(a) Sub-standard Assets
(b) Doubtful Assets
(c) Loss Assets
The fourth category of loan accounts, which is not included in NPA category is
Standard Assets. Standard Asset is one which does not disclose any problems and which
carries only normal risk attached to the business.
Sub-standard Assets

Earlier a sub-standard asset was one, which was classified as NPA for a period not
exceeding two years. With effect from 31 March 2001, a sub-standard asset was one, which
has remained NPA for a period less than or equal to 18 months. With effect from 31 March
2005 the norms have been further tightened and a sub-standard 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 jeopardise the
liquidation of the debt and are characterised by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.

Doubtful Assets
Earlier a doubtful asset was one, which remained NPA for a period exceeding two years.
With effect from 31 March 2001, an asset is to be classified as doubtful, if it had remained
NPA for a period exceeding 18 months. With effect from March 31, 2005, the norms have
been further tightened, and an asset would be classified as doubtful if it remained in the
sub-standard category for 12 months.
A loan classified as doubtful has all the weaknesses inherent in assets that were classified
as sub-standard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently known facts, conditions and values highly
questionable and improbable.

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.
However, only those advances are classified as loss assets where no security is available. In
accounts where some security / ECGC /DICGC cover is available, these accounts are not
reported under loss assets.

Types of NPA

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

Gross NPAs
Gross Advances

B. Net NPA:
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

INCOME RECOGNITION
Income recognition Policy
The policy of income recognition has to be objective and based on the record of
recovery. Internationally income from non-performing assets (NPA) is not
recognised on accrual basis but is booked as income only when it is actually
received. Therefore, the banks should not charge and take to income account
interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on

the due date, provided adequate margin is available in the accounts.

Fees and commissions earned by the banks as a result of re-negotiations or
rescheduling of outstanding debts should be recognised on an accrual basis over
the period of time covered by the re-negotiated or rescheduled extension of credit.
If Government guaranteed advances become NPA, the interest on such advances
should not be taken to income account unless the interest has been realised.
Reversal of income:
If any advance, including bills purchased and discounted, becomes NPA as at the
close of any year, interest accrued and credited to income account in the
corresponding previous year, should be reversed or provided for if the same is not
realised. This will apply to Government guaranteed accounts also.
Leased Assets
The net lease rentals (finance charge) on the leased asset accrued and credited to income
account before the asset became non-performing, and remaining unrealised, should be
reversed or provided for in the current accounting period.
The term 'net lease rentals' would mean the amount of finance charge taken to the credit
of Profit & Loss Account and would be worked out as gross lease rentals adjusted by
amount of statutory depreciation and lease equalisation account.
As per the 'Guidance Note on Accounting for Leases' issued by the Council of the
Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account
should be opened by the banks with a corresponding debit or credit to Lease Adjustment
Account, as the case may be. Further, Lease Equalisation Account should be transferred
every year to the Profit & Loss Account and disclosed separately as a deduction
from/addition to gross value of lease rentals shown under the head 'Gross Income'.

Appropriation of recovery in NPAs

Interest realised 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.
Interest Application:
There is no objection to the banks using their own discretion in debiting interest to an
NPA account taking the same to Interest Suspense Account or maintaining only a record
of such interest in performa accounts.
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.

Factors responsible for rise in 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.

Principles of safety

ii.

Principle of liquidity

iii.

Principles of profitability

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:
Capacity to pay depends upon:
Tangible assets
Success in business

Willingness to pay depends on:

Character
Honest
Reputation of borrower
The banker should, there fore 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.

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.

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.
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, their by 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.

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 non recovered part as NPAs
and has to make provision for it.

Change in 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.
Greater overhead expenditure
People spend more than they earn and hence sometimes are unable to pay off loans.
Carelessness
Sometimes people build a careless attitude about loan repayments. Or maybe they
are so busy in their work that they almost forget to make regular payments to the
bank until a notice is issued to them by the bank regarding missed installments.
Recession in market/Business failure:
Due to recession in business sector, customers of the bank might find it difficult to
repay the loan due to a decrease in sales or in case of closing down a business.
Impact of NPA
An NPA account not only reduces profitability of
banks by provisioning in the profit and loss account, but
their carrying cost is also increased which results in
excess & avoidable management attention. Apart from
this, a high level of NPA also puts strain on a banks net
worth because banks are under pressure to maintain a
desired level of Capital Adequacy and in the absence of
comfortable profit level, banks eventually look towards
their internal financial strength to fulfill the norms
thereby slowly eroding the net worth.
However, once there is a slowdown in private
expenditure and corporate earnings growth, companies
on these banks books will not be in a position to service
their debts on time and there is a strong likelihood of
generation of new NPAs.

Moreover, he also suggests that with rising interest

rates in the government bond market, the banks
treasury incomes have declined considerably. So banks
will not have enough profits to make provisions for
NPAs.
Profitability:NPA means booking of money in terms of bad asset, which occurred due to wrong choice
of client. Because of the money getting blocked the prodigality of bank decreases not
only by the amount of NPA but NPA lead to opportunity cost also as that much of profit
invested in some return earning project/asset. So NPA doesnt affect current profit but
also future stream of profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low ROI (return on
investment), which adversely affect current earning of bank.
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.
Involvement of management:Time and efforts of management is another indirect cost which bank has to bear due to
NPA. Time and efforts of management in handling and managing NPA would have
diverted to some fruitful activities, which would have given good returns. Now days
banks have special employees to deal and handle NPAs, which is additional cost to the
bank.
Credit loss: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.

SYMPTOMS OF NPAs
Four categories of early symptoms:( 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 over due 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.
( 2 ) Operational and Physical:
If information is received that the borrower has either initiated the process of
winding up or are not doing the business.

Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where borrower conduct his
business.
Frequent changes in plan. Non payment of wages.
( 3 ) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank.
Problem between partners.
( 4 ) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.

PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst case, if the banks fails, owners
loose their assets. In modern times this may affect a broad pool of shareholders.
2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors
loose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and
higher lending rates repress saving and financial market, which hamper economic growth.
4. Non performing loans epitomize bad investment. They misallocate credit from good projects, which
do not receive funding, to failed projects. Bad investment ends up in misallocation of capital, and by
extension, labour and natural resources.

5. The day to day operating the account becomes difficult as Bank starts adjusting money deposited
against their dues.
6. The reputation of the borrower in the market is adversely affected.

7. The Bankers attitude towards the borrower becomes more arrogant, authoritative and threatening,
instead of extending helping hand to them to get out of the situation.
8. This leads to demoralization of the borrower who has been working with the Bank for number of
years and as customer has contributed in the profit of the Bank.
9. The principle of customer care is neglected and customer torture begins. This brings the borrower in
a helpless situation and at the mercy of the Bank.

Non performing asset may spill over the banking system and contract the money stock, which may lead to
economic contraction. This spill over effect can channelise through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity shortage. This can jam
payment across the country,
b) Illiquidity constraints bank in paying depositors
c) Undercapitalized banks exceeds the banks capital base.

SOME REMEDIES TO NPA FROM RBI

The Reserve Bank of India (RBI) has offered some leeway to banks for early detection and resolution of bad
loans. Under the new regime kicking off from April 1, lenders can finance 50 per cent of the outstanding
loan value, RBI said in Framework for Revitalising Distressed Assets in the Economy, released on Thursday.
Earlier, RBI had proposed to allow takeover of existing loans by new financiers at 60 per cent or more of the
loan value.
The central bank also diluted rules for accelerated provisioning it had proposed for non-performing
accounts. Now lenders will make 25 per cent provision for unsecured loans that remain unpaid for six
months. Initially, RBI had proposed 30 per cent provisions.
Plus, for loans that have remained unpaid for two years, banks have to set aside 40 per cent, instead of 50
per cent.
The new framework calls for early formation of a lenders' committee with the timeline to agree to a plan for
resolution. It also offers incentives for lenders to agree collectively and quickly to a restructuring plan. It
will give better regulatory treatment of stressed assets if a resolution plan is underway. However, it will
attract accelerated provisioning if no agreement can be reached. Seeking improvements in the current debt
restructuring process, the framework allows independent evaluation of large value restructuring. This is for
purpose of framing viable plans and a fair sharing of losses (and future possible upsides) between promoters

and creditors. It also mooted steps to enable better functioning of asset reconstruction companies. This is
apart from encouraging sector-specific companies and private equity firms to play active role in stressed
assets market. It has offered liberal regulatory treatment provided for asset sales. Lenders can spread loss on
sale over two years, provided the loss is fully disclosed. Leveraged buyouts will be allowed for specialised
entities for acquisition of 'stressed companies'.
Steps to enable better functioning of asset reconstruction companies mooted.
The sector-specific companies / private equity firms will be encouraged to play an active role in stressed
assets market, RBI said.
The continuing slowdown in the economy has led to a historic pile of bad loans in the system.
RBI in its Financial Stability Report on December 30 had warned the strain on asset quality continues to be
a major concern. "In a base case scenario, with the present conditions continuing, the gross NPAs (nonperforming assets) in the system will rise to 4.6 per cent by September 2014 from 4.2 per cent in September
2013 or to about Rs 2.29 trillion from Rs 1.67 trillion a year earlier," it had noted.
Key drivers under new regime
* Early formation of Joint Lender's Forum for action plan
* Carrot for lenders to agree collectively and quickly to a plan
* Penalty of higher provisioning for delayed actions
* Independent evaluation for large recast deals
* Take-out and refinancing will not be treated as restructuring
* Losses from selling of NPAs can be spread over two years
* Buying and selling of NPAs between asset recast firms

Preventive Measures for NPA

Formation of the Credit Information Bureau (India)
Limited (CIBIL).
Release of Willful 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.

 Norms of Lenders Liabilityframing 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 Risk
assessment and Risk management.
RBI has advised banks to examine all cases of willful
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.

Recommendations for Reducing NPAs

Effective and regular follow-up of the end use of the
funds sanctioned is required to ascertain any
embezzlement or diversion of funds. This process can be
undertaken every quarter so that any account converting
to NPA can be properly accounted for.
Combining traditional wisdom with modern statistical
tools like Value-at-risk analysis and Markov Chain
Analysis should be employed to assess the borrowers.
This is to be supplemented by information sharing
among the bankers about the credit history of the
borrower. In case of new borrowers, especially
corporate borrowers, proper analysis of the cash flow
statement of last five years is to be done carefully.
A healthy Banker-Borrower relationship should be
developed. Many instances have been reported about
forceful recovery by the banks, which is against
corporate ethics. Debt recovery will be much easier in a
congenial environment.
Assisting the borrowers in developing his
entrepreneurial skills will not only establish a good
relation between the borrowers but also help the bankers
to keep a track of their funds.
Countries such as Korea, China, Japan, Taiwan have a
well functioning Asset Reconstruction/ Recovery
mechanism wherein the bad assets are sold to an Asset
Reconstruction Company (ARC) at an agreed upon
price. In India, there is an absence of such mechanism
and whatever exists, it is still in nascent stage. One
problem that can be accorded is the pricing of such
loans. Therefore, there is a need to develop a common
prescription for pricing of distressed assets so that they
can be easily and quickly disposed. The ARCs should
have clear financial acquisition policy and guidelines
relating to proper diligence and valuation of NPA
portfolio.
Some tax incentives like capital gain tax exemption,
carry forward the losses to set off the same with other
income of the Qualified Institutional Borrowers (QIBs)
should be granted so as to ensure their active
participation by way of investing sizeable amount in
distressed assets of banks and financial institutions.
So far the Public Sector Banks have done well as far as
lending to the priority sector is concerned. However, it
is not enough to make lending to this sector mandatory;

it must be made profitable by sharply reducing the

transaction costs. This entails faster embracing of
technology and minimizing documentation.
Commercial Banks should be allowed to come up with
their own measures to address the problem of NPAs.
This may include waiving and reducing the principal
and interest on such loans, or extending the loans, or settling the loan accounts. They should be fully
authorized and they should be able to apply all the
preferential policies granted to the asset management
companies.
Another way to manage the NPAs by the banks is
Compromise Settlement Schemes or One Time
Settlement Schemes. However, under such schemes the
banks keep the actual amount recovered secret. Under
these circumstances, it is necessary to bring more
transparency in such deals so that any flaw could be
removed.
Cash recoveryBanks, instead of organizing a recovery
drive based on overdue, must short list those accounts,
the recovery of which would provide impetus to the
system in reducing the pressure on profitability by
reduced provisioning burden. Vigorous efforts need to
be made for recovery of critical amount (overdue
interest and installment) that can save an account from
NPA classification:
In case of a term loan, the banker gets 90 days after the
date of default to take appropriate action and to persuade
the borrower to pay interest or installment whichever is
due.
In case of a cash credit account, the banker gets 90
days for ensuring that the irregularity in the account is
rectified.
In case of direct agricultural loans, the account is
classified NPA only after two crop seasons (from
sowing to harvesting) from the due date in case of short
duration loans and one crop season from the due date in
case of long duration loans.

IV. TOOLS FOR RECOVERING NPAS

Lok Adalats
To settle disputes involving account in doubtful and
loss category.
Outstanding balance of Rs. 5 lacs for compromise
settlement.
Proved to be quite effective for speedy justice and
recovery of small loans.
Lok Adalat is a system of alternative dispute resolution developed in India.
Presided over by a sitting or retired judicial officer or other person of respect and legal knowledge as
the chairman, with two other members.
Fees
o There is no court fee and no rigid procedural requirement.
o Parties can directly interact with the judge.
Intake
o Cases that are pending in regular courts can be transferred to a Lok Adalat if both the parties
agree.
Focus
o The focus in Lok Adalats is on compromise.
Small NPAs up to Rs.20 Lacs
Advantages
o Speedy Recovery
o Veil of Authority
o Less expensive
o Easier way to resolve
Compromise Settlement Schemes
Banks are free to design and implement their own policies for recovery
Specific guidelines were issued in May 1999 for one time settlement of small enterprise
sector.
Guidelines were modified in July 2000 for recovery of NPAs of Rs.5 crore and less as on 31
st March 2007.
Restructuring and Rehabilitation
Banks are free to design and implement their own policies for restructuring/ rehabilitation of
the NPA accounts
Rescheduling of payment of interest and principal after considering the Debt service
coverage ratio, contribution of the promoter and availability of security

Corporate Debt Restructuring

o The objective of CDR is to ensure a timely and transparent mechanism for restructuring of
the debts of viable corporate entities affected by internal and external factors, outside the
purview of BIFR, DRT or other legal proceedings
o The legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA). All
participants in the CDR mechanism must enter the ICA with necessary enforcement and
penal clauses.
o The scheme applies to accounts having multiple banking/ syndication/ consortium accounts
with outstanding exposure of Rs.100 crores and above.
o The CDR system is applicable to standard and sub-standard accounts with potential cases of
NPAs getting a priority.
o Packages given to borrowers are modified time & again
o Drawback of CDR Reaching of consensus amongst the creditors delays the process
Debt Recovery Tribunals (DRT)
To recover bad debt quickly and efficiently.
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
In case of non-realization of the decreed amount by
way of sale of the charged properties, the personal
properties if the guarantors can also be attached and
sold.
It is the special court established by Central
Government for the purpose of bank or any financial
institutions recovery.
The judges of the court are the retired judges of high
court.
SARFAESI act, 2002
The Act provides three alternative methods for
recovery of non-performing assets, namely
Securitization
o Asset reconstruction
o Enforcement of security without the intervention of
the court.
NPA loans with outstanding above Rs. 1. Lac.
NPA loan accounts where the amount is less than 20%
of the principal and the interest are not eligible to be
dealt with this act.
This act empowers the bank:
To issue demand notice to the defaulting borrower and
guarantor, calling upon them to discharge their dues in
full within 60 days from the day of the notice.
To give notice to any person who has acquired any of
the secured assets from the borrower to surrender the
same to the bank.

 To ask the debtor of the borrower to pay any sum due

or becoming due the borrower.
Any security interest created over agricultural land
cannot be proceeded with.
How it works?
The SARFAESI Act, 2002 gives powers of "seize and desist" to banks. Banks can give a notice in writing to
the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply
with the notice, the Bank may take recourse to one or more of the following measures: Take possession of
the security for the loan Sale or lease or assign the right over the security Manage the same or appoint any
person to manage the same The SARFAESI Act also provides for the establishment of Asset Reconstruction
Companies (ARCs) regulated by RBI to acquire assets from banks and financial institutions. The Act
provides for sale of financial assets by banks and financial institutions to asset reconstruction companies
(ARCs). RBI has issued guidelines to banks on the process to be followed for sales of financial assets to
ARCs.
Background of the act
The previous legislation enacted for recovery of the default loans was Recovery of Debts due to Banks and
Financial institutions Act ,1993. This act was passed after the recommendations of the Narsimham
Committee - I were submitted to the government. This act had created the forums such as Debt Recovery
Tribunals and Debt Recovery Appellate Tribunals for expeditious adjudication of disputes with regard to
ever increasing non-recovered dues. However, there were several loopholes in the act and these loopholes
were mis-used by the borrowers as well as the lawyers. This led to the government introspect the act and this
another committee under Mr. Andhyarujina was appointed to examine banking sector reforms and
consideration to changes in the legal system . This committee recommended to enact a new legislation for
the establishment of securitisation and reconstruction companies and to empower the banks and financial
institutions to take possession of the Non performing assets. Thus, via the Sarfaesi act, for the first time, the
secured creditors were empowered to recover their dues without the intervention of the court. However, as
soon as the act was passed, its implementation was challenged in the court and this delayed its coming into
force for 2 years. In the Mardia Chemicals v. Union of India, the Supreme Court upheld the validity of the
SARFAESI act was upheld.
Rights of Borrowers
The above observations make it clear that the SAFAESI act was able to provide the effective measures to the
secured creditors to recover their long standing dues from the Non performing assets, yet the rights of the
borrowers could not be ignored, and have been duly incorporated in the law. The borrowers can at any time
before the sale is concluded, remit the dues and avoid loosing the security. In case any unhealthy/illegal act
is done by the Authorised Officer, he will be liable for penal consequences. The borrowers will be entitled to
get compensation for such acts. For redressing the grievances, the borrowers can approach firstly the DRT
and thereafter the DRAT in appeal. The limitation period is 45 days and 30 days respectively

Pre-conditions
The Act stipulates four conditions for enforcing the rights by a creditor.
The debt is secured
The debt has been classified as an NPA by the banks
The outstanding dues are one lakh and above and more than 20% of the principal loan amount and interest
there on.
The security to be enforced is not an Agricultural land.
Methods of Recovery
According to this act, the registration and regulation of securitization companies or reconstruction
companies is done by RBI. These companies are authorized to raise funds by issuing security receipts to
qualified institutional buyers (QIBs), empowering banks and Fls to take possession of securities given for
financial assistance and sell or lease the same to take over management in the event of default.
this act makes provisions for two main methods of recovery of the NPAs as follows: Securitisation:
Securitisation is the process of issuing marketable securities backed by a pool of existing assets such as auto
or home loans. After an asset is converted into a marketable security, it is sold. A securitization company or
reconstruction company may raise funds from only the QIB (Qualified Institutional Buyers) by forming
schemes for acquiring financial assets.
Asset Reconstruction:
Enacting SARFAESI Act has given birth to the Asset Reconstruction Companies in India. It can be done by
either proper management of the business of the borrower, or by taking over it or by selling a part or whole
of the business or by rescheduling of payment of debts payable by the borrower enforcement of security
interest in accordance with the provisions of this Act. Further, the act provides Exemption from the
registration of security receipt. This means that when the securitization company or reconstruction company
issues receipts, the holder of the receipts is entitled to undivided interests in the financial assets and there is
not need of registration unless and otherwise it is compulsory under the Registration Act 1908.
However, the registration of the security receipt is required in the following cases:
There is a transfer of receipt
The security receipt is creating, declaring, assigning, limiting, extinguishing any right title or interest in a
immovable property.

Asset Recovery Construction Industry Limited

(ARCIL)
A company which is set up with the objective of taking
over distressed assets from banks or financial
institutions and to reconstruct or re-pack these assets to
make those assets saleable.
To buy out troubled loan from banks and make special
efforts at recovering value from the assets, if necessary

by special legislation, with special powers for recovery.

Restructuring of weak banks to divest the bad loan
portfolio.
BIFR and AAIFR
BIFR has been given the power to consider revival and
rehabilitation of companies under the Sick Industrial
Companies (Special Provisions) Act of 1985 (SICA),
which has been repealed by passing of the Sick Industrial Companies (Special Provisions) Repeal Bill
of 2001.
The Board of Directors shall make a reference to BIFR
within sixty days from the date of finalization of the
duly audited accounts for the financial year at the end of
which the company becomes sick.
The company making reference to BIFR to prepare a
scheme for its revival and rehabilitation and submit the
same to BIFR the procedure is same as laid down under
the CPC.
The shelter of BIFR misused by defaulting and
dishonest borrowers

Sale of NPAs to other banks.

MANAGEMENT OF NPAS: SECURITIZATION

1. NPAs in India - The Current Scenario
For the past few years, the Indian Banking system has been struggling to manage the vast
portfolio of bad loans, popularly known as Non-Performing Assets (NPAs). The problem
is more acute in the case of PSU banks. As of March 2003, the total NPAs of the private
and public sector banks put together stood at a whopping Rs 65,000 crore (Source: Trend
and Progress of Banking in India, RBI).
NPAs, simply defined, are those loans and advances in respect of which interest and/or
principal instalment have not been paid for 180 days from the due date. From April 1,

2004, however, any loan on which interest or principal installment is not paid for more
than 90 days would be reckoned as NPA. The banking system is, therefore, sure to see a
swelling NPA portfolio in the coming years. This poses a serious liquidity and credit risk
on the banking system, which unless managed effectively would jeopardize the same.

Thus, to prevent the collapse of the whole system due to non- payment of loans by the
borrowers, there ought to be some mechanism in place. Two major steps were taken in
this regard -

1. The RBI directed the banks to maintain compulsory provisions for different types
of NPAs;
2. The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 was enacted.
The SARFAESI Act allowed the banks and financial institutions to take possession of the
collateral security given by the defaulting borrowers and sell these assets without having
to go through protracted legal procedures.

2. Securitization
Securitization is the process of conversion of existing assets or future cash flows into
marketable securities. For the purpose of distinction, the conversion of existing assets
into marketable securities is known as asset-backed securitization and the conversion of
future cash flows into marketable securities is known as future-flows securitization.
The purpose of the Securitization Act is to promote the setting up of asset reconstruction /
securitization companies to take over the Non Performing Assets (NPA) accumulated
with the banks and public financial institutions. The Act provides special powers to
lenders and securitization / asset reconstruction companies, to enable them to take over of
assets of borrowers without first resorting to courts.
The Act was welcomed by the banking community, but resisted by the borrower
community. The validity was challenged in various courts on the ground that it was
predominantly in favor of lenders. Hence, lenders were unable to enforce the provisions
in full. But the crux of the issue was whether the Act would be an effective tool to make a
drastic difference to the NPA menace.

3. Securitization - Relevance to the Banking Sector

The growth in credit off take of banks has been the second highest in the last 55 years.
But at the same time the incremental credit deposit ratio for the past one-year has been
greater than one. Thus, for every Rs 100 worth of deposit coming into the system more
than Rs 100 is

being disbursed as credit. So, the mismatch between the credit given and the funds
received creates an issue of proper management of increased credit off-take.
One of the measures adopted by the banks to cater to this credit boom is by selling their
investments in government securities and giving the amount raised as loans. But there is a
limit to such credit funding due to minimum SLR requirements of 25% in government
and semi government securities.

Once the banks reach this level of 25 per cent, they cannot sell any more government
securities to generate liquidity. And given the pace of credit off take, some banks could
reach this level very fast. So banks, in order to keep giving credit, need to ensure that
more deposits keep coming in.

Securitization also helps banks to sell off their NPAs to asset reconstruction companies
(ARCs). ARCs, which are typically publicly / government owned, act as debt aggregators
and are engaged in acquiring bad loans from the banks at a discounted price, thereby
helping banks to focus on core activities. On acquiring bad loans ARCs restructure them
and sell them to other investors as 'Pass Through Certificates' (PTCs), thereby freeing the
banking system to focus on normal banking activities.

4. Future Outlook
Securitization is expected to become more popular in the near future in the banking
sector. Banks are expected to sell off a greater amount of NPAs to ARCIL by 2007, when
they have to shift to Basel-II norms. Blocking too much capital in NPAs can reduce the
capital adequacy of banks and can be a hindrance for banks to meet the Basel-II norms.
Thus, banks will have two options - either to raise more capital or to free capital tied up
in NPAs and other loans through securitization

OBSERVATIONS