PREFACE

Indian banking industry is faced with the serious problem of huge amount of nonperforming

Assets (NPAs).Banks big or small, public or private all are carrying the burden of NPAs in all

sectors of economy. Infrastructure projects have contributed in a large measure to the kitty of

NPAs. It appears that ever greening of accounts was resorted to in a big way by the banks and

financial institutions till the time RBI cracked its whip and under took Asset Quality Review

across the banking system and this brought to surface the ground reality of NPA problem.

The incidence of non-performing assets (NPAs) is affecting the performance of the credit

institutions both financially and psychologically. Non-performing assets (NPA) in many ways

have rendered banks and bankers to be non-performing as these have:

• Prevented or delayed recycling of funds.

• Delayed income receipt and recognition of interest on such assets.

• Erosion of profits by way of huge provisions.

RBI has laid down prudential norms for classification of assets, income recognition and

provisioning. Generally an asset has to be classified as Non Performing in case the borrower

defaults on payment of interest and /or principal for a period exceeding 90 days. This applies

to term loans and bills discounted/ purchased by banks. In case of working capital limits if the

account remains irregular for a period exceeding 90 days the account is classified as NPA.

Irregular account means one in which the limits are exceeded from sanctioned limits or the

drawing power. Also in these loans if the interest remains unserviced in total or in part, the

account is classified as non- performing.

NPA is a disorder resulting in non-performance of a portion of loan portfolio leading to non-

recovery or under recovery of principal and/or income to the lender. NPAs represent the

quantified “Credit Risk”. All this also plays havoc on the mental make-up of the banker where
in the banker tries to go slow on lending, fearing future NPAs, which may lead to delay and

denial of credit resulting in low off- take of lendable funds. NPAs are a burden on the banking

industry. Success and health of a bank of a bank depends upon the methods of managing

NPAs and keeping them within tolerance level.

Banks need to monitor their standard assets regularly for early detection of the weaknesses in

the accounts and to take appropriate measures to prevent them slipping to NPA category.

There are four types of assets including Non Performing Assets according to the guidelines

given by the Reserve Bank of India, These are:

1. Standard assets: A standard assets one which does not disclose any problems and which

and does not carry more than normal risk attached to the business. Such an asset is not a non-

performing assets.

2. Sub-standard assets: With effect from March 31,2005 is the one in which there is a default

in respect of repayment of interest and or principal for a period exceeding 90 days and also

the accounts which remained irregular as described in one of the paragraph above.

3. Doubtful assets: With effect from March 31, 2005, an asset is classified as doubtful if it has

remained in the sub-standard category for a period of 12 months. Such an asset has all the

inherent weaknesses as in a sub-standard asset and an added characteristic that the

weaknesses make the collection or liquidation in full highly improbable or questionable.

4. Loss assets: a loss asset is one where loss has been identified by: (i) The bank (ii). The

internal or external auditors (iii). The RBI inspection But the amount has not been written off

wholly. In the 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. Generally an asset is considered to be a Loss Asset if the available security

against the asset is less than ten percent of its value.

amount of provision to be made in respect of advances. The balance sheet presentation of

advances is governed by the Schedule III of Banking Regulation Act, 1949.

Provisioning norms for NPA’S

Classification of loan assets requires the banks to make sufficient provision against each of

the NPA accounts for possible loan losses as per prudential norms laid down by RBI.

Provisioning requirements as per the RBI guidelines are furnished below.

According to RBI, “A general provision of 15 percent on total outstanding should be made

without making any allowances for ECGC guarantee cover and securities available “. NPA

under substandard asset category the ‘unsecured exposures’ which are identified as

‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent on

the outstanding balance. Unsecured portion of Doubtful Assets is to be provided for 100 per

cent.

In respect of secured portion of the Doubtful Assets the provision according to the length of

the period for which the asset the remained doubtful.

Up to one year 25%

One to three years 40%

More than three years. 100%

Factors for rising NPAs

The banking sector is facing problem of fast rising NPAs. As compared to private and foreign

bank public sector banks are witnessing this problem of higher magnitude. The NPAs have

grown due to internal and external factors of the environment. These are:

Internal factors

1. Poor Appraisal Process: Deficiencies are observed in appraisal system as here under

-Accepting higher projections in projects

working capital requirements

-Accepting improper valuations

-Flaws in verification of securities

-Non adherence to common principles of lending

-Non verification of antecedents of the promotor's

-Inadequate assessment of capabilities of promotor's and management abilities to run the

projects.

2. Inappropriate Technology: Due to inappropriate technology and management information

system, market decisions on real time basis cannot be taken. Proper MIS and financial

accounting system is not implemented in some banks, which leads to poor credit collection

and thus NPAs. All the banks need to integrate their entire systems on a common platform to

overcome this factor.

3. Inadequate knowledge of the markets in various sectors leading to poor credit analysis.

4 Poor monitoring of compliance with the terms and conditions of the sanction.

5. Absence of Regular Visits to Borrowers premises

6 Non coordination amongst various banks to share information on borrower's conduct on

regular basis.

External factors

1. Legal impediments in recoveries: The banks have found it difficult to effect recoveries due

to legal hurdles. Despite setting up of the NCLT all the issues have not been resolved. In

certain cases suits and in many cases decrees have been pending for a long time in courts of

law. Enforcement of securities has been a major issue.

2. Willful Defaulters: It is well said that the units go sick but the promoter’s become fat.

There are large number of cases of siphoning off of the funds or diversion of funds by
unscrupulous promoters. There are cases wherein despite the ability to pay the borrowers do

not repay to bank and take advantage of lax recovery laws.

3. Natural calamities: This is one of the major factors, which is creating alarming raise in

NPA in public sector banks especially in India major hit by natural calamities thus making a

borrower unable to pay back their loans particularly in the agricultural sector.

4. Industrial sickness: Improper project handling, ineffective management, lack of adequate

resources, lack of adequate technology give birth to industrial sickness and causes growth of

NPAs.

5. Government policies: With the changing governments the banking sector gets new policies

for its activities. Waivers of loans by certain Government’s has promoted financial

indiscipline and has dissuaded even able and willing borrowers not to repay thereby

increasing the NPA level in the banking.

6. Slowdown in Economy: Last four to five years have seen sluggish economic activity

thereby adding to NPAs.

7. Fear of 3C's: There is a growing fear amongst bankers with regard to C&AG, CVC and

CBI and they are not willing to extend credit thereby fueling sluggishness in economic

activity and consequently accentuating NPA growth.

The present study is mainly divided in two parts, such as (1) Theoretical description and (2)

Empirical analysis, In theoretical description, the first chapter shows the introduction of the

non-performing assets, the second chapter reflects the genesis and historical growth of the

public and private sector banks in India along with the history of the banks which are under

study, the third chapter begins with the Research Methodology and the review of the literature

related to the research work, the fourth chapter deals with the analysis of the NPA on the basis

of the research methodology and RBI guidelines. The summary of the major findings and

suggestions are given in the fifth chapter.

(Amarjit Chopra)
Acknowledgements

Carrying out this kind of a work, particularly at my age, requires motivation. There are large

number of individuals who have motivated me to undertake this study. Also there are

individuals without whose co-operation it would not have been possible to complete the work.

To begin with I wish to dedicate this work to my parents late Sh. Sardari Lal Chopra and Late

Smt. Bimla Vati Chopra for their motivational words to me all through my life. According to

them, it was never too late in life to learn something.

Second source of inspiration has been my wife Ms. Monika Chopra (Dimpy). But for whose

patience and sacrifice, it would not have been possible to even commence work on this

research.

Two grandsons Abir and Ahaan have been a constant source of joy. Only a joyful and

pleasant mind can take to study and focus on one’s goal. They have provided me all that. My

children Sandeep, Neha, Pragya and pulkit have always inspired me to do something new.

And to a large extent, this work is result of that inspiration.

I also acknowledge blessings of my mother in law and father in law namely Smt. Kamla

Choudhary and Mr. Gurdiyal Singh Choudhary. Their continued blessings continue to

energise me.

My gratitude to all my brothers and sisters for their motivational support.

In particular I wish to place on record my sincere appreciation for guidance by Prof. C.K

shah, but for whose effort this work would not have been completed in a manner that it has

been.

No words would describe my gratitude towards Ms. Rashmi and CA Swati Chutani for their

untiring effort in typing work and collection of data.

I express my heartfelt thanks to all those I interviewed and held discussions with.
I thankful acknowledge the role of my partners of GSA & Associates LLP New Delhi in

allowing me time to complete this study.

No words are good enough to acknowledge the benevolence of Almighty God , who has kept

in good health and spirits to be able to take up this work

(Amarjit Chopra)