Non Performing Assets

1. a. EXECUTIVE SUMMARY The regurgitate is en coro concludinged A convey on The Management of Non-Performing Assets in the Canara shores Loan Portfolio is through at the Canara intrust, Donimalai Township, Sandur (TQ), Bellary (Dist), Karnataka State. INTRODUCTION An economical m geniustary homosexualagement is becoming inevitable for every handler in todays corporate world. From a traditional aspect of raising coin whenever needed the richness has shifted to day to day financial decision making and problem solving.When initially the stress was on the inwrought abbreviation of the firm, procurement of funds, management of pluss and allocation of bully, the mystify greatness has shifted to decision making within the firm. With the red-brick aspect of finance determination the responsibilities of the finance manager has besides increased. In the dish out of making facultative decision, he reserves use of sealed analytical tools in the analysis, planning and contr ol activities of the firm. Financial analysis is an essential prerequisite for making sound financial decisions.This trace is intended to probe into the management of non playacting summations in the Canara buzzwords Loan Portfolio, for the tip of 2002-2003 to 2005-2006. The schooling is completely ground on the analysis and translation of the create scotchs of the blaspheme and in the flesh(predicate) interview of the senior stumbleicials of the affirm. OBJECTIVES OF THE field ? To pass judgment the Canara margins addition forest. ? To identify the achievementiveness of the lay on the line management outline, beneathtaken by the intrust. SCOPE OF THE STUDY ? The scope of the study hither was confined to the organization totally. ? The study coers to find out the strategy mandatory to reduce the NPAs.METHODOLOGY OF THE STUDY ? primal selective information. ? thirdhand info. DATA ANALYSIS AND INTERPRETATION When the selective information collected is comp leted the data is processed and the germane(predicate) information is obtained. The data collected is disassembled using different statistical tools standardised frequency distri only ifion, charts and theatrical role analysis. DURATION OF THE STUDY This study is intended to probe into the management of non performing assets in the Canara bounds Loan Portfolio, for the accomplishment of 2003-2004 to 2005-2006. FINDINGS ? The Net NPA ratio of the Canara Bank declined from 1. 88% as at expose thirty-first 2005 to 1. 12% as at March 31st 2006. Canara Bank has recovered its NPA which is essenceed to Rs. 865 crore during 2005-2006. ? The Net NPA of the Canara Bank declined from Rs. 1454 crore as on 31st March 2006. ? The Net NPA portionage of Canara Bank has reduced by over 19% during 2005-2006. RECOMMENDATIONS ? Canara Bank should c erstwhilentrate more than on assurance appraisal, monitoring, creed risk management and recoveries. ? Settlement is a better option for the b lasphemes wrestling with the problem of non-performing assets. ? honorable mention scoring allows lenders to determine whether or non you jibe the indite of the type of customers they ar looking for. Banks concerned should continuously monitor lendwords to identify accounts that ask capableness to mend up non-performing. CONCLUSION ? Securitization venture impart surely function banks in reduction of NPA to a enceinte extent. ? Pr veritable(a)ting fresh flow of NPAs to a great extent. ? Exchange of mention information among banks would be of immense help to avoid possible NPAs. 1. b. GENERAL INTRODUCTION INDUSTRY PROFILE Banking in one form or a nonher was in existence even in ancient times. The writings of Manu (the maker of old Hindoo Law) and Kautilya (the Minister of Chandragupta Maurya) contained references to banking. merely, banking as a kind of business organization i. e. , modern banking is of recent origin. It came into existence only afterwards the indu strial revolution. After the industrial revolution, with the increase in the size of industrial and business units, joint stockpile comp whatever people with small means to stick shareholders of big industrial and business enterprises. Still, at that place were certain sections of public who were not prepared to invest their currency on the shares of joint stock companies. However they were willing to part with a little surplus specie, if they were assured of the repayment of their money with a little by-line thereon.So naturally, there arose the need for formation of financial exhibitments that could collect the surplus funds of people on toll acceptable to them and make them available to the needy for productive mapping. Accordingly a large function of financial institutions called joint stock banks were set up after industrial revolution. As much(prenominal) joint banks or modern banks are of recent development. MEANING OF confideS A banking comp both in India ha s been defined in the Banking Companies Act 1949 as One which transacts the business of banking which means the accepting of he purpose of sending or enthronisation of bonds of money form the public repayable on demand or otherwise and withdrawable by hinderance, tipple parliamentary procedure or otherwise. STRUCTURE OF argotING schema IN INDIA Indian Banking System has been categories into two 1. schedule Banks. i. State Co-operative. ii. Commercial Banks. 2. Non-Scheduled Banks Central Co-operative Banks and primary winding Credit Societies. Commercial Banks. Commercial Banks are further change integrity into Indian Banks and Foreign Banks. Indian Banks are further divided into 1. Public Sector Banks. 2. SBI and its Subsidies. 3. Other Nationalized Banks. 4. regional Rural Banks.ACTIVITIES OF banking comp anyS I. Activities of Commercial Banks. II. Activities of Central Banks. I. Activities of Commercial Banks The activities undertaken by commercial banks be subdivided i nto a. Primary Functions. b. hyponym Functions. a. Primary Functions i. Acceptance of deposits It is very important for banks as it forms the basis of all other activities of banks. It accepts various types of deposits. They are flowing deposit, saving deposit, bushel deposit and recurring deposits. ii. impart of Funds It is to a fault the most important function of Commercial Banks as it f etceteraes the study portions of the income of the banks.Banks lend money by the musical mode of addwords, overdrafts, cash realisation rating and discounting of bills. b. Subsidiary Functions i. Agency Functions The services rendered by banks as agent of their customers are called agency services. They are Banks collect cheque, bank draft, bills, fill, dividends etc on be half of the customer. Banks give forwards and purchases securities on behalf of the customers. Banks arranges for remittance of funds from one place to another place. Banks acts as trustees, executors, represen tatives of their customers. ii.General Utility work Services rendered by banks to their customers as well as the public public are called as general measure out services. Banks accept precious articles, documents etc for safe custody. Banks helps exporters and importers in foreign trade. Banks issue travellers cheque, letter of credit, circular notes etc. Banks acts as a reference and supply information slightly the financial standing of the customers to others. II. Activities of the Central Bank A. Monopoly of Note issue. B. Banker, Agent, Advisor to the governing. C. Custodian of cash reserves of the banks. D. Lender of the last resort.FUNCTIONS AND IMPORTANCES OF BANKS The importance of banks in the modern rescue bottomnot be denied. Banks play a signifi grasst role in the stinting development. Banks perform a number of functions. They are 1. Banks mobilize the small scattered and ideal savings of the people, and make them available for productive purpose. In the sort , they aid the process of majuscule formation. 2. By accepting the savings of the people, banks will safety and security to the surplus money of the depositors. 3. Banks provide a convenient and economical method of payment. The cheque system introduced by banks is convenient form making payments.Again the use of cheque economies the time and trouble tough in closure of business obligations. 4. Banks provide a convenient and economical means of transfer of funds from one place to another. Banks drafts are commonly utilise for remittances of funds from one place to another. 5. Banks helps the movement of majuscule from regions where it is no very useful to regions where it stooge be more use amply employed, by moving funds, banks increases the utility of funds. Again by moving funds from one place to another, banks contribute to the economic development of rearwards regions. 6.Banks influence the rates of arouse in the money markets. Through the supply of money (i. e. bank m oney or bank deposits) banks expert a powerful influence on the sideline rates in the money market. 7. Banks help trade and commerce patience and agriculture by relateing their financial requirements. tho for the financial assistance provided by the banks, the pace of growth of trade and commerce industry and agriculture would leave been very slow. 8. Banks make the flow of funds into production channels. While bring money, they discriminate in party favour of essential activities and against non essential activities. olibanum they encourage the development of right types of activities which the society desires. 9. Banks al ways make it a leg to help the industries, the prudent, the punctual and the honest and discourage the dishonest, the spendthrift, the gambler the l disseminate and the knave (i. e. the rouge). Thus banks act as public conservators of commercial virtues. 10. Banks serves as the best financial intermediaries between the saver (i. e. the depositors or lend ers) and the investor (i. e. the borrowers or the entrepreneurs). dish PROFILE OF THE CANARA BANK The bank has many financial services and different schemes.Important among them are as follows internal PRODUCTS SAVING BANK DEPOSITS For individuals & non-trading organizations / institutions. CURRENT ACCOUNT For business trading operations trades, businessmen, corporate bodies. FIXED DEPOSITS Secured way to elevated returns individuals and institutions. KAMADHENU DEPOSITS Re-investment money multiplier plan. CANBANK AUTO RENEWAL Higher return in a shorter plan. CANFLEXI DEPOSITS A confederacy of savings & fixed deposits high return & instant liquidity. ASHRAYA DEPOSITS Respecting Indian values for senior citizens.RECURRING DEPOSITS purpose Inculcating saving, a rewarding & recurring habit. FLOATING RATE DEPOSITS SCHEME (FRDS) Insures against interest rate fluctuations. loanword PRODUCTS HOUSING bestow SCHEME Purchase of a ready built house / flat construction of house, purc hase of a site and construction of house thereon, for underpickings repairs, renovations, upgradation, and creation of additional amenities and for winning over of the HL liability from other recognized housing finance companies and banks. HOME IMPROVEMENT LOANS Furnishing the house / flat on with banks home loans / independently.CANMOBILE Facilities purchase of fresh / used cards / jeeps of all make. The scheme also covers finance for purchase of brand new two wheelers. CANCARRY Provided credit worthy individuals, professional and salaried twelvemonth for buying consumer durables and household articles. CANCASH Offer assistance for meeting unforeseen contingencies. Finance is minded(p) against pass shares, bonds and debentures held by the clients. CANBUDGET Fulfills the financial inescapably of confirmed employees of reputed PSUs, joint stock companies, central / situate / semi government employees nd lecturers / professors / assistant professors of colleges / universities and research institutes. CANRENT Provides loans to property owners whenever the property is leased / rented out to PSUs central / state / semi government undertakings. Reputed corporate banks. Financial institutions, Insurance companies and MNCs. CANMORTGAGE Designed to meet the financial requirements against security of impartial mortgagee of property (land & building) to professional, businessman, salaried persons and individuals.VIDYASAGAR EDUCATIONAL LOAN SCHEME Renders financial assistance for needy and meritous students for act all type of studies (professionals / general) in India and Abroad. LOAN SCHEME TO TRADERS / BUSINESS ENTERPRISES With hassle free and minimum harm and conditions, the scheme cater to the needs of traders and other business enterprises for savor slight flow of business activities. CANMAHILA Exclusive loan scheme for women clientele. AGRI LOAN SCHEME Various loan schemes for agri-clinic, minor, irrigation, farm development / machinery, plantation c rops fishers and for agro-exports.SSI LOAN SCHEME A host of schemed available for technology up gradation fund in textile and jute industries, credit linked great subsidy stand by credit for crownwork expenditure and margin money scheme of KVIC. OTHER PRIORITY SCHEME These include loan for retail traders, small business, professional / ego employed, medical practitioners and loan for solar water heating / home lighting system. CREDIT bill sticker operations The first Indian card issuers to bay ISO 9002 corroboration, CANCARD today as a distinct recognition in the domestic as well as foreign market. All verstors of CANCARD namely, CANCARD visa, classic, visa-corporate, master card and visa international gold are issued through all CANARA BANK outsetes & 24 CANCARD service centers located at major cities crosswise the country. Four Indian Banks are in affiliation with the bank for issue of CANCARD VISACARD. Launched DEBIT CARD on November 4, 2003, a value added and tech fo und product for its niche clients. CUSTOMER CENTRIC ETHOS CANARA BANK was the first to articulate the directive principles of good banking, detailing bankers duties and customers rights. First bank to get ISO certification for one of its branches in Bangalore in the category of 1995-1996. Recommendations of the Goiporia Committee on Customer Service charter been employ by the bank. The bank has Computerized Information Facilitation Centers (CIFCs) at all circles to look exclusively into customer in a single window framework. A 24 hour tele contact facility is also available for customers to air their grievances at corporate as well as circles levels. COMPANY PROFILE OF THE CANARA BANK HISTORICAL frontCanara Bank set up in 1906 with the name of Canara Bank Hindu Permanent Fund in Mangalore, India, by Ammembal Subba Rao Pai, is one of the oldest and major commercial bank of India. Its name was changed to Canara Bank Limited in 1910. The bank, along with 13 other major commer cial banks of India, was nationalized on 19th July, 1969, by the brass of India. Currently (2005), the bank has 2508 branches b passom all over India. The bank also has international presence in several(prenominal) centers, including London, Hong Kong, Moscow, Shanghai, Doha, and Dubai.In damage of business it is the largest nationalized commercial bank in India with a total business of about Rs. 2000 billion (about US $43 billion). ORGANISATION STRUCTURE The bank has fourteen wings in the enquiry great power, Bangalore. 1. Personnel reference 2. bodied Credit extension service 3. Risk Management Wing 4. Priority Credit Wing 5. Inspection Wing 6. Department of Information Technology Wing 7. Marketing and Customer Relationship 8. Planning and Development Wing 9. Recovery Wing 10. General Administration Wing 11. Financial Management Wing 12. Treasury and internationalistic Operation Wing 13.Retail Banking and Subsidiaries Wing 14. Vigilance Wing OFFICE AND BRANCHES Canara bank has a network of 2415 branches, propagate over 22states/ 4 union territories of the country and overseas branch London which are administrated through Head Office at Bangalore 13 Circles offices / transnational Division 35 Regional offices 2441 Branches BRANCHES ABORAD CANARA BANK established its International Division in 1976, to supervise the functioning of it various foreign department to give the required thrust to Foreign Exchange business, particularly export and to meet the requirements of NRIs.Though small in size the Banks presence abroad has brought in considerable foreign business, particularly NRI deposits. The presence of bank is shown under. CANARA BANK, London, UK (Branch) Indo Hong Kong International Finance Co Ltd Hong Kong (Subsidiary) AL Razouki International Exchange company , Dubai, UAE According to the latest information, both the CANARA BANK and State Bank of India have come into a mutual agreement as to both the banks will be ope military rank as a one unit in the Moscow. CORPORATE VISION To straighten out as a World Class Bank with best charges in the realms of asset portfolio, Customer orientation, production Innovation, Profitability an enhanced value for stake holders. To set new standards in IT application, Customer responsiveness, Asset quality and profitability, culminating in higher stoke holder value. To scale new peaks in obeisance of IT found banking, efficient service delivery market leadership in profitability. CORPORATE MISSION Augmenting low cost deposits. Toning up asset quality. Accent on cost control. Thrust on retail banking. Customer centric centering. merchandise innovation and marketing. Leveraging IT for comprehensive MIS. Maximize stockholders value. CORPORATE OBJECTIVE E- Efficiency. P- Profitability and Productivity. O- establishment Effectiveness. C- Customers centric H- Hi Tech Banking ACHIVEMENTS The Bank has already carved a niche in providing IT based services. Computerized bran ches, for 65% of the branches & 81% of aggregated business provided a wide array of services such as Network automated tellers, any where Banking , Tele Banking & Remote Access Terminals etc. , The Bank was the first to launch networked ATMs & obtain ISO certification.CANARA BANK shares are listed & Bangalore, Mumbai & National Stock Exchanges. Establish well-developed quality circles have participated in many National & International level competitions and have returned with handsome prizes. Has set up its own summit level Training colleges to its employees and thereby takes care of the knowledge, skills and attitudinal development of employees. Has also taken initiative in the environmental concerns. PERRFORMACE HIGHLIGHTS OF 2005-2006 Canara Bank has posted net profit of s. 581 cr for the half social class ended family 2005 as against Rs. 19 cr during the interchangeable previous half year, registered a growth rate of 38. 60%. The Bank operating profit registered an incr ease of Rs. 548 cr (57. 81%) to reach Rs. 1496 crore, up from Rs. 948 cr for the first half of the preceding financial. Return of assets a standard measure of profitability improved from 1. 08% (annualized) at a kinfolk 2002 to 1. 28% (annualized) as at September 2005. Number of branches moved up to 2441 from 2416 as at September 2002, besides 248 extension counter. Global deposits of the Bank aggregated to as Rs. 5, 396crore as against Rs. 67734 crore a year ago, year growth being 11. 31%. MATURITY CLASSIFICATION OF VARIOUS ASSETS AND LIABILITIES In levers of the certain Assets and liabilities, CANARA BANK have undertaking a behavior study, embedded options in the basis of past of past data, based on which the bank is in a grade to decide on the maturities of the asset and liabilities. 2. a. RESEARCH tendency A study on the Management of Non Performing Assets in the Canara Banks Loan Portfolio is make at the Canara Bank Donimalai Township, Sandur (TQ), Bellary (Dist), Karna taka State.The type of research used for the collection & analysis of the data is Historical inquiry Method. The primary(prenominal) source of data for this study is the past records prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception & to identify the ways in which the performance especially the non-performing assets of the Canara Bank evict be improved. The data regarding bank business relationship & profile are collected through Exploratory inquiry Design particularly through the study of lower-ranking sources and discussions with individuals.Data Collection Method Discussion with the manager & officers of the bank to get general information about the bank & its activities. ? Having face to face discussions with the bank officials ? By taking guidance from bank guide & departmental guide. Secondary Data ? Collection of data through bank annual reports, bank manuals and other pertinent documents. ? Collectio n of data through the literature provided by the bank. explore Measuring Tool The tools used for data collection are 1. individualised Interview 2. Secondary Sources 1. Personal InterviewIn this, discussions more held directly with the manager & officials to get the clear-cut information about the composition and data to be collected for the purpose of analysis. 2. Secondary Sources Annual company reports, fair to middlingizer Sheets, Profit & impairment account are used to collect the data. b. 1. SATATEMENT OF THE PROBLEM A crucial issue which is engaging the invariable attention of the banking industry is the alarmingly high level of non performing assets (NPA). Another major anxiety onwards the banking industry is the high relations cost of carrying non performing assets in their books.The resolution of the NPA problem requires greater answerability on the part of the corporate, greater disclosure in the parapraxis of defaults, an efficient credit information communion system and an curb legal frame work pertaining to the banking system so that court procedures can be stream lined and actual recoveries made within an acceptable time frame. So the lying-in titled A study on the Management of Non Performing Assets in the Canara Banks Loan Portfolio looks in to the implications of high NPAs and suggests military issueive convalescence measures for resolving problem loans and thus making the banks NPAs level healthy.It also compares the position of the Canara Bank with other public sector banks in impairment of their NPAs in the last three eld and also to study the management of total assets and advances of the Canara Bank among other public sector banks. b. 2. OBJECTIVES OF THE STUDY ? To evaluate the Canara Banks asset quality. ? To compare the position of the Canara Bank with other public sector banks in terms of their NPAs. ? To study the management of total assets and advances of the Canara Bank. ? To identify the doiveness of the risk man agement system, undertaken by the bank. To analyze sector wise non-performing assets. ? To offer useful suggestions to reduce the NPA in banks. b. 3. SCOPE OF THE STUDY ? The scope of the study here was confined to the organization only. ? The study covers to find out the strategy required to reduce the NPAs. ? The soaking up is given only in understanding the NPAs growth with the reference of Canara Bank. ? The data is purely based on the secondary data collected from website and journal. ? The scope is limited to drawn conclusions from analysis and interpretations of the primary and secondary data of the Canara Bank. . 4. METHODOLOGY Introduction The quality of the project work depends on the methodology adopted for the study. Methodology, in turn, depends on the nature of the project work. The use of proper methodology is an essential part of any research. In order to conduct the study scientifically, suitable methods & measures are to be followed. Research Design The type of re search used for the collection & analysis of the data is Historical Research Method. The main source of data for this study is the past records prepared by the bank.The focus of the study is to determine the non-performing assets of the bank since its inception & to identify the ways in which the performance especially the non-performing assets of the Canara Bank can be improved. The data regarding bank history & profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with individuals. Data Collection Method Discussion with the manager & officers of the bank to get general information about the bank & its activities. ? Having face to face discussions with the bank officials ?By taking guidance from bank guide & departmental guide. Secondary Data ? Collection of data through bank annual reports, bank manuals and other relevant documents. ? Collection of data through the literature provided by the bank. Research Mea suring Tool The tools used for data collection are 1. Personal Interview 2. Secondary Sources 1. Personal Interview In this, discussions were held directly with the manager & officials to get the clear-cut information about the topic and data to be collected for the purpose of analysis. 2. Secondary Sources Annual company reports, Balance Sheets, Profit & Loss account are used to collect the data. . 5. LIMITATIONS OF THE STUDY ? The study is mainly based on the secondary data provided by the bank. As such it is vanquish to the limitations of the secondary data. ? The study is based only on NPAs with admiration to loans. ? The study is based on the data given by the officials and reports of the bank. The confidentiality of some facts and figures is a limitation. ? The non-availability of relevant information is one of the limitations. ? The study is done only for the limited past 3 years. 3. THEORITICAL OVERVIEW NPA ITS IMPACT AND MAGNITUDE MEANING OF NPAAn asset is categorise as non- performing asset (NPA) if overdues in the form of principal and interest are not paid by the borrower for a period of clxxx old age. How ever with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 long time. If any advance or credit facilities disposed(p) by bank 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 whitethorn still exit certain advances / credit facilities having performing status.A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and / or sequence of induction of principal has remained Past repayable for a stipulate period of time. An measuring stick due under any credit facility is handle as past due when it has not been paid within 30 long time from the due date. Due to the improvement in the payment and settlement systems, retrieval 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. avocation 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 teddy of bills purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two reap seasons but for a period not exceeding two half years in the object lesson of an advance granted for agricultural purpose, and v. whatever amount to be received remains overdue for a period of more than 180 days in respect of other accounts. 90 days overdue norm 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 form 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, i. 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 reap 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.As a facilitating measure for smooth transition to 90 days nor m, bank has been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of sort 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 with 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. Out of Order Status An account should be treat as Out of Order if the outstanding residuum remains continuously in excess of the ratified limit / drawing power. In cases where the outstanding balance in the principal operating account is little than the countenanceed limit / drawing power, but there are no credits continuously for 180 days (to be reduced to 90 days, with effect from March 31, 2004) as on the date of Balance Sheet or credits are not enough to cover the interest debited t he same period, these accounts should be treated as out of order. OverdueAny amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank. Asset Type Percentage of Provision Sub standard (age up to 18 months)10% indeterminate 1 (age up to 2. 5 years)20% Doubtful 2 (age 4. 5 years)30% Doubtful 3 (age in a higher place 4. 5 years)50% Loss Asset coulomb% 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 recognized 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, VIPs, KVPs, and look policies may be taken to income account on the due date, provided fair to middling margin is available in the accounts. Fees and commissions earned by the ba nks as a result of re-negotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the re-negotiated or rescheduled xtension of credit. If Government guaranteed advances become NPA, the interest on such advances should not to be taken to income account unless the interest has been realized. 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 realized. This will apply to Government guaranteed accounts also.In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. THE CONCEPT OF GROSS NPA Income recognition is not possible once an account becomes NPA. Interest accrued on non pe rforming loan accounts is debited to the respective account and credited to the interest suspense account instead of the profit and loss account. Usually no debits are permitted in non performing asset expect unavoidable expenditure like litigation expenses, insurance etc.Hence the balance outstanding in an NPA account includes 1. Balance as on date of becoming an NPA. 2. Interest accrued but not realized. On balance sheet date banks make renders for loan losings. This furnish is calculated not on the balance outstanding but on the net balance, balance net of the amount unploughed in the interest suspense account. This book balance of the net of the interest suspense account is cognise as Gross NPA. But in cases where guarantee learn is received from credit guarantee corporations like ECGC, before making the render for loan losses, such claim received is also netted from the taxation NPA.The terminology net NPA indicates the balance in interest suspense account. For evaluatio n rbi and other rating agencies rely on purpose usually the net NPA balance. Thus Gross NPA means, balance outstanding deduction balance in interest suspense account. Net NPA means Gross NPA minus balance claim received amount and provision outstanding in that account. IMPACT OF NPA At the Macro level, NPAs have chocked off the supply line of Credit of the potential lenders thereby having a deleterious effect on capital formation and arresting the economic activity in the country.At the Micro level, unsustainable level of NPAs has eroded current meshing of banks and FIs. They have led to reduction of interest income and increase in provisions and have restricted and recycle of funds leading to various Asset Liability mismatches. Besides this, it has led to erosion in their capital base and reduction in competitiveness. The problem of NPA is not a matter of concern to banks and FIs alone. It is the matter of sober concern to the country and any bottleneck in the smooth flow of cr edit is bound to cause adverse repercussions in the economy.The mounting menace of NPAs has raised the cost of credit, made Indian business man uncompetitive as compared to their counterparts in other countries. It has made banks more adverse to risks and squeezed genuine Small and modal(a) Enterprises (SMEs) from accessing competitive credit and has throttled their enterprising spirits as well, to a great extent. Due to their crippling effect on the operation of the banks, Asset quality has been considered as one of the most important parameters in the measure of banks performance under the CAMELS Supervisory Rating System of RBI. THE MAGNITUDENon-Performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending perturbing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two N arasimhan Committee Reports in this surging threat. Despite various correctional steps administered to sack and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions.The severity of the problem is however acutely suffered by Nationalized Banks, followed by the SBI group, and the all India Financial Institutions. As at 31. 03. 2004 the aggregate gross NPA of all scheduled commercial banks amounted to Rs. 63883 crore. Table No. 1 gives the figures of net NPA for the last three years. The ratio of net non-performing assets to net advances also declined during 2005-06. Majority of the banks, this ratio is less than 4 percent. Punjab and Sind Bank has the highest ratio with 9. 62 percent followed by Dena Bank of India with 9. 4 percent. 4 banks reported cryptograph ratio during 2005-2006.Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures . There is the practice of ever-greening of advances, through subtle techniques. As per report appearing in a national daily the banking industry has under estimated its non-performing assets (NPAs) by whopping Rs. 3862. 10 Crore as on March 1997. The industry is also estimated to have under-provided to the extent of Rs. 1,412. 29 Crore. The worst offender is the public sector banking industry. Nineteen nationalized banks have underestimated their NPAs by Rs. 3,029. 29 Crore.Such deception of NPA statistics is executed through the following ways. ? Failure to identity an NPA as per stipulated guidelines There were instances of sub-standard assets being sort as standard. ? Wrong sorting of an NPA Classifying a loss asset as a questionable or sub-standard asset, classifying a tentative asset as a sub-standard asset. ? Classifying an account of a credit customer as substandard and other accounts of the same credit customer as standard, throwing prudential norms to the winds. REASON S FOR NPAs In Priority Sector Advances 1.Directed and pre-approved natures of loans sanctioned under sponsored programmes. 2. Mis-utilization of loans and subsidies. 3. Diversion of funds. 4. Absence of security. 5. Lack of utile follow-up (Post sanction supervision and control) 6. Absence of Bankruptcy and fore-closure loans. 7. Decrepit legal system. 8. Cost in-effective legal recovery measures. 9. Difficulty in execution of Decrees obtained. In Non-Priority Sector Advances 1. Inadequate credit appraisal. 2. Demand recession. 3. Industrial sickness and labor problems. 4. slack up Legal system. 5. Diversion of funds. 6.Willful default. 7. Technology Obsolescence. 8. Managerial inefficiency. 9. Political compulsion and corruption. WRITING OFF NPAs In terms of section 43(D) of the Income Tax Act 1961, income by way of interest in social intercourse to such categories of poor and dubious debts as may be prescribed having regard to the guidelines issued by the RBI in relation to s uch debts, shall be chargeable to tax in the previous year in which it is credited to the banks profit and loss account or received, whichever earlier. This stipulation is not applicable to provisioning required to be made as indicated above.In other words, amounts set aside for aside for making provision for NPAs as above are not eligible for tax deductions. Therefore the banks should both make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors / tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules. WRITE-OFF AT HEAD OFFICE LEVEL Banks may write-off advances at Head Office Level, even though the relative advances are still outstanding in the branch books.However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100 percent provision will have to be made there for. DEBT RECOVERY TRIBUNAL Any person aggrieved by any measure taken by secured creditor or his authorized officer may file an ingathering to Debts Recovery courtroom, within 45days from date on which such measure was taken. That is action of taking self-will of asset, takeover of management of business of borrower, ap smudgeing person to manage secured asset etc. is taken by the creditor.When a borrower files an appeal, the appeal cannot be entertained unless, the borrower deposits 75% of the amount claimed in the maintain by secured creditor. The DRT can waive or reduce the amount required to be deposited. The amount is not required to be deposited at the time of filing appeal, but appeal will not heard till the amount is deposited. The borrower while filing the appeal should also file an application requesting the Debt Recovery Tribunal to admit the appeal without deposit of any amount. If the DRT orders partial deposit of the amount and the same is not deposited, appeal can be dismissed.The 75% deposit is only required if the appeal is filed by the borrower. If some other aggrieved person (e. g. guarantor, shareholder) files it the deposit is not required. If a person is aggrieved by the order of the DRT, it can file an appeal to the Appellate Tribunal within 30days from the date of receipt of the DRT order. If the DRT or Appellate Tribunal holds that possessions of assets by the secured creditor was wrongful and directs the secured creditor to return asset to concerned borrower, the borrower shall be entitled to compensation and costs as may be determined by DRT or Appellate Tribunal.SECURITIZATION ACT With the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of warrantor Interest Act 2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to clear their dues within 60days. Once the borrower receives a notice from the c oncerned bank and the financial institution, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders.The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, bank can also takeover the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to either sell the defaulting companies or charge their management. OVERALL BANKING AND NPA BANKING REFORMS IN INDIA The Nationalization of the major commercial banks in the year 1969 and 1980 had brought fundamental changes in the banking system in India.It had brought about major shifts in the priorities in the banking operations. Branch expansion policies of banks were tuned upto meet the banking needs of the people in rural and semi urban centers. For acce lerating the socio-economic and rural development process several Governments sponsored programs were launched and lending in the priority sector, irrational lending under socio political pressures, mounting levels of bad debts, branch expansion at non viable centers etc. gradually started affecting the financial health of the banking sector in the country.Commercial banks were not following uniform accounting policies camouflaged the true financial position of banks. Quality of loan asset was not a concern and a high proportion of loan assets started becoming non performing. nigh of the banks were under capitalized and some of them even with negative worth. Thus there was a compelling need for a change and various policy corrections had to be taken with the view of beef up the economy. Thus the Government of India was forced to initiate a process of reforming the financial sector which banks constitute a dominant part. The reforms process includes 1. Introduction of prudential no rms. . Transparency in balance sheets. 3. Deregulation of interest rates. 4. Partial deviation from tell lending. 5. Upgradation of technology. 6. Entry of new private sector banks. NARASIMHAM COMMITTEE The first phase of banking sector reforms was initiated in the year 1992 in pursuance of recommendations of the committee on financial sector reforms headed by Narasimham Committee. As per the recommendations of Narasimham Committee, The Reserve Bank of India introduced in a phased manner, prudential norms for income recognition, asset classification, and provisioning in the year 1998 Narasimham Committee-II came out with more tringent norms for the industry. The prudential norms were revise from time to time to fall in line with the best accounting practices and for transparency in published accounts. It is widely recognized that as a result of these reforms, the Indian Banking System is becoming increasingly ripe(p) in terms of the transformation of business processes and the app etite for risk management. Deregulation, technological upgradation and increased market integrating have been the fall upon factors driving change in the financial sector. EMERGING BANKING TRENDSDuring the current financial year, the focus of non-going reforms in the banking sector was on soft interest rates regime, increasing operational efficiency of banks, strengthening regulatory mechanisms and on technological up-gradation. As a step towards a softer interest rate regime, RBI in its Annual Policy Statement had advised banks to introduced flexible interest rate system for new deposits, announce a maximum spread over PLR for all advances other than consumer credit and to review the present maximum spread over PLR and reduce them wherever they are unreasonably high. A BRIEF accounting OF NPAThe concept of Asset Quality on the books of Public Sector Banks (PSBs) and Financial Institutions (FIs) came into being when Reserve Bank of India (RBI) introduced prudential norms on the r ecommendations of the Narasimham Committee in the year 1992-1993. The Committee recommended that an asset may be treated as Non-Performing Asset (NPA), if interest or installment of principal remains overdue for a period exceeding 180days and that banks and FIs should not take into their income account, the interest accrued on such Non-Performing Assets, unless it is actually received or recovered.The Committee also recommended that Assets be classified into four categories namely Standard, Sub-standard, Doubtful and Loss Assets and that certain specified percentage of the same be held as provision there against. Before the reform process, banks were booking income on an accrual basis and their balance sheets did not reflect their true specified financial health. Thus the profit, capital and reserves were overstated by them. After 10years of NPA terror in the banking industry, Now the Banks Have Teeth, a new law lightens the burden of bad loans for Indian Banks.The law that has been the catalyst for the bad loan somewhat up passed Indias Parliament in November 2002. It allows lenders to more easily foreclose on debitors assets or even demand a change in management. Within weeks of the laws passage, banks saw a spring of loans once deemed unrecoverable being repaid in double time. The Act is The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Also know as the Securitization Act). This Act enables the setting up of asset management companies for addressing the problems of non-performing assets of banks and FIs.INDIAN BANKING AND NPA The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, bushel pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identity accounts that have potential t o become non-performing. The core banking business is of mobilizing the deposits and utilizing it for lending to industry.Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a posture of default.GLOBAL NPA The core banking is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes w hich results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. A question that arises is how much risk can a bank afford to take? Recent happenings in the business world Enron, WorldCom, Xerox, Global Crossing do not give much confidence to banks.In case after case, these giant corporates became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. It needs to be recognized that prudential norms in respect of loan classif ication vary widely across countries.A country follows varied approaches, from the subjective to the prescriptive. Illustratively, in the United Kingdom, supervisors do not require banks to adopt any particular form of loan classification and either is there any recommendation on the number of classification categories that banks should employ. Other countries, such as, the United States follow a more prescriptive approach, wherein loans are classified into several categories based on a set of criteria ranging from payment experience to the environment in which the debtor evolves.The adoption of such a system points to the usefulness of a structured approach those facilities the supervisors ability to analyze and compare banks loan portfolios. India is a better bet than China for investors to pump money into non-performing assets (NPAs) restructuring as it has better environment for recovery, according to consulting firm Price water House Coopers (PwC). WARNING measure & POOR Standa rd & Poors and The Credit Rating Information Services of India Ltd. , (CRISIL) estimate that Indias schedule commercial banks require between US$11billion-US$13billion in new capital to support losses embedded in impaired assets.The significant capital shortfall estimated recognizes the existing moderate reported capital position of Indian banks, the inadequate loan loss reserves maintained by the banks to absorb probably losses. The wishy-washy capital position of the Indian banking system is largely a reflection of growing asset-quality problems stemming from weak underwriting and credit management system, and the vulnerabilities of the Indian banking sector to the impact of globalization on the countrys key industry sectors. The asset-quality position also has suffered from regulations with respect to lending to priority sectors. The capital shortfall calculated assumes a significantly higher system non-performing loan level to that reported under Indian regulatory standards, verbalise Peter Sikora, associate director, Financial Services Rating, Standard & Poors, together with CRISIL are, however, of the view that non performing loan levels for Indian banks will be significantly higher at 20%-25% if more conservative classification standards are adopted and restructured, and ever greened loans are included as impaired assets. LENDING BEHAVIOUR OF BANKSDue to the excess liquidity in the banking system, banks are now giving credit to even non-priority sectors in an combative manner. Now banks give credit more to vain purposes, like car loans, housing loans, consumer durables loans and personal loans. This reckless lending paves the way to repayment irregularities and more of NPA in the banking system. But on the others side economy has become buoyant and the borrowers are now in a position to repay the loans even if it is an unproductive loan.Banks have improved their credit appraisal system. NPA percentage in City Banks elevator car Loan Portfolio is z ero, because of the sophisticated credit appraisal system followed by the bank. Banks now give priority to businesses and lending schemes also follow the path. CLASSIFICATION OF ASSETS CATEGORIES OF NPAs 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 a) Sub-Standard Assets. ) Doubtful Assets. c) Loss Assets. SUB-STANDARD ASSETS A sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower / guarantor or the current market value of the security charged is not enough is not enough recovery of the dues to the banks in full.In other words, such an asset will have well defined credit weakness that jeopardize the liquidation o f the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. With effect from 31March 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months. DOUBTFUL ASSETS A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31March 2001, as asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 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 know facts, conditions and values exceedingly questionable and improbable. With effect from 31March, 2005, an asset to be classified as doubtful if it remained in the sub-standard category for 12 months. LOSS ASSETS A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI recap but the amount has not been compose 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. It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the presentation of advances in the bank balance sheet. The Third Schedule to the Banking Regulation Act 1949, solely governs presentation of advances in the balance sheet.Banks have started publication notices under The Securitization Act,2002 directing the defaulter to either pay back the dues to the bank or else give the possession of the secured assets mentioned in the notice. However, there is a potential threat to recovery if there is substantial erosion in the value of security given by the borrower or if borrower has committed fraud. Under such a situation it will be prudent to directly classify the advances as a doubtful or loss asset, as appropriate. RBI GUIDELINES FOR CLASSIFICATION OF ASSETSBroadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels.The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extent guidelines. UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAsIf arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as standard accounts. Asset Classification to be borrower-wise and not facility-wise i. It is difficult to envisage a situation when only one facility to borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPAs and not the particular facility or part thereof which has become irregular. ii.If the debts arising out of development of letter of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account for should be treated as a part of the borrowers principal operating account f or the purpose of application of prudential norms on income recognition, asset classification and provisioning. Accounts where there is erosion in the value of Security i. A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightaway classified as doubtful or loss asset as appropriate.Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. ii. If the realizable value of the security, as assessed by the bank / approved valuers / RBI is less than 10 percent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straight away classified as loss ass et.It may be either written off or fully provided for by the bank. RESTRCTURING / RESCHEDULING OF LOANS A standard asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production should be classified as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms.In the case of sub-standard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms. Following representations from banks that the foregoing stipulations deter the banks from restructuring of standard and sub-standard loan assets were reviewed in March 2001. In the context of restructuring of the accounts, the following stages at which the restructuring / rescheduling / renegotiation of the terms of loan agreement could take place can be identified a) Before commencement of commercial production. ) After commencement of commercial production but before the asset has been classified as sub-standard. c) After commencement of commercial production and after the asset has been classified as sub-standard. PROVISIONING REQUIREMENTS As and when an asset is classified as an NPA, the bank has to further sub-classify it into sub-standard, loss and doubtful assets. Based on this classification, bank makes the necessary provision against these assets. Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank advances where the recovery is doubtful.Banks are also required to comply with such guidelines in making adequate provision to the contentment of its auditors before declaring any dividends on its shares. In case of loss assets, guidelines specifically require that full provision for the amount outstanding should be made by the concerned bank. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset. Asset TypePercentage of Provision Sub-Standard (age upto 18 months) 10% Doubtful 1 (age upto 2. 5years) 20% Doubtful 2 (age 4-5years) 30%Doubtful 3 (age above 4-5years) 50% Loss Asset 100% THE NPA PROBLEM The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. The performance in terms of profitability is a benchmark for any business enterprise including the banking industry.However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced t make provisi on on such assets as per the RBI guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks. Further, RBI successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non performing assets.CREDIT APPRAISAL SYSTEM Prevention of standard assets from migrating to non performing status is most important in NPA management. This depends on the style of Credit Management Mechanism available in banks. The quality of credit appraisal and the effectiveness of post credit appraisal and effectiveness of post credit follow up influences the asset quality of the banks in a big way. At Pre-Credit Stage 1. Extensive enquiry about the character and the credit worthiness of the borrower. 2. Viability of the project to be financed is meticulously studied. 3. Adequate c overage of collateral is ensured to the extent possible. . Financial statement of the borrower is obtained and poor analysis of their financial strength is done. 5. Apart from the published financial statements independent enquires are made with previous bankers. 6. Pre-Credit inspection of the assets to finance is made. At Post-Credit Stage 1. Operations in the account are closely monitored. 2. Unit find is done at irregular intervals. 3. Asset verification is done on a regular basis. 4. Borrowers conciliate control returns regularly. 5. Accounts are periodically to evaluate the financial health of the unit. 6. Early warning signals are powerful attended to. . Close contract with the borrower is maintained. 8. Potential NPAs are kept under special watch list. 9. potentially viable units are restructured. 10. Repayment program of accounts with temporary cash flow problem is re