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A project report submitted in the partial
fulfillment of the requirements for the award of
the degree of
Bachelor of commerce Banking and

Prepared By:
Under the guidance of
(2015 2016)

This is to certify that, Mr. Of T.Y.B.B.I Semester V
(2015-16), Seat No: . has successfully completed
project work On NON PERFORMING ASSETS Under the
guidance of Prof.

(Signature of Project Guide)

(Signature of Principal)

(Signature of Coordinator)
(Signature of External)


I Prof hereby certify that Mr. of TYBBI

Seat No

. has

completed the project on NON PERFORMING ASSETS for the

academic year 2015-2016. The information submitted is true
& original to the best of my knowledge.

Place: - Kalyan .

Date :-

(Signature of

Project Guide)


Life is so short that we forget to thank those people who help

us in tackling various hurdles in our life. But I take my

privilege in conveying heartiest gratitude to all those people,

whose help enabled me to complete the project.

It gives me pleasure and satisfaction to catgorily state that

this presentation is not a solo effort; so many people have
contributed their bit to it. It is very difficult to individualize
their gratefulness here, to all whose contributions have
blossomed into this presentation. My foremost gratitude and
thanks exist for

who has guided, assisted or provided me with

information or otherwise helped me obtain statistics & facts.

I also express my grateful thanks to respondents for giving
their valuable time to make this project to success.
Last but not the least; I would like to pay our gratitude to
my PARENTS, without their help and blessing I cant take a
single step in right direction.



Chapter1. Introduction to NPA

Page No.

Introduction to NPA
Meaning of NPA
Methodology of NPA

Objectives of study
Chapter 2.- Review of literature


Chapter 3. NPA Management
Chapter 4. Policies of NPA


To reduce fresh NPA recognition

Causes for NPA
Micro perspective behind NPA


Chapter5.- Reason for an account becoming


as an NPA

Chapter6.- Methods to manage NPA



Chapter7.- NPA in banking sector



Chapter8.- RBI guideline regarding NPA


Asset classification as per RBI guidelines


Chapter9.- Country wise analysis



Chapter10.- Case study of NPA on Oriental 65-73

Bank of Commerce


Chapter11.- Finding & conclusion



Suggestions & Recommendations



To study concept of Nom performing assets.

To know prevent measures.
To evaluate NPAs in different banks.
To analyze the financial performance of the bank at different
level of NPA

To know the impact of NPA.

To know the reason for NPA.


1.1) Introduction of NPA

1.2) Meaning of NPA
1.3) Definition
1.4) Methodology of NPA
1.5) Objectives of study





A Man without money is like a bird without wings, the Rumanian proverb
insists the Importance of the money. A bank is an establishment, which deals with
money. The basic functions of Commercial banks are the accepting of all kinds of
deposits and lending of money. In general there are several challenges confronting the
commercial banks in its day today operations. The main challenge facing the commercial
banks is the disbursement of funds in quality assets (Loans and Advances) or other wise
it leads to Non-performing assets.

Non Performing Asset means an asset or account of borrower, which has

been classified by a bank or financial institution as sub-standard, doubtful or loss
asset, in accordance with the directions or guidelines relating to asset
classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it
has not been paid within 30 days from the due date. Due to the improvement in

the payment and settlement systems, recovery climate, up gradation of

technology in the banking system, etc., it was decided to dispense with 'past due'
concept, with effect from March 31, 2001. Accordingly, as from that date, a Non
performing asset (NPA) shell be an advance where

Interest and /or installment of principal remain overdue for a period of

more than 180 days in respect of a Term Loan,


the account remains 'out of order' for a period of more than 180 days, in
respect of an overdraft/ cash Credit(OD/CC),


The bill remains overdue for a period of more than 180 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 purpose, and


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

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for
identification of NPAs, form the year ending March 31, 2004. Accordingly, with
effect form March 31, 2004, a non-performing asset (NPA) shell 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 purpose, and


Any amount to be received remains overdue for a period of more than 90

days in respect of other accounts.
'Out of order' an account should be treated as 'out of order' if the

outstanding balance remains continuously in excess of the sanctioned limit/

drawing power. In case where the outstanding balance in the principal

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

1.2) Meaning of NPAs:


An asset which ceases to generate income of the bank is called nonperforming asset. The past due amount remaining uncovered for the two quarter
consequently the amount would be classified as NPA for the whole year. It
includes borrowers defaults or delays in interest or principal repayment.
An asset is classified as Non-performing Asset (NPA) if the borrower not
pays due in the form of principal and interest for a period of 180 days. However
with effect from March 2004, default status would be given to a borrower if dues
are not paid for 90 days. If any advance or credit facilities granted by banks to a
borrower becomes non-performing, then the bank will have to treat all the
advances/credit facilities granted to that borrower as non-performing without
having any regard to the fact that there may still exist certain advances / credit
facilities having performing status.
Though the term NPA connotes a financial asset of a commercial bank,
which has stopped earning an expected reasonable return, it is also a reflection
of the productivity of the unit, firm, concern, industry and nation where that asset
is idling.
The definition of NPAs in Indian context is certainly more liberal with two
quarters norm being applied for classification of such assets. The RBI is moving
over to one-quarter norm from 2004 onwards.

Nonperforming asset
Financial definition

A loan or lease that is not meeting its stated principal and interest payments.
Banks usually classify as Non performing assets any commercial loans which are
more than 90 days overdue and any consumer loans which are more than 180
days overdue. More generally, an asset, which is not producing income.



NBE [Supervision of Banking Business Directives (Directive No.

SBB/3212002)] defines, the term Non-performing is, loans or advances whose
credit quality has deteriorated such that full collection of principal and /or interest
in accordance with the contractual repayment terms of the loan or advances is in

In order to meet the Third objective, the method of Moving Averages

is been used, from which we arrive at a Trend Analysis. While the rationale
behind selection of 'Three year Moving Average' method is because

of the availability of the data. The data available was from the ten years and
needless to say that for such a data a 'Six year Moving average' or an 'Eight year






The general objective of this research is to analyze the NPAs in banking sector.
The specific objectives of this research are;

To highlight Loans and Advances trend in banking sector.

To study the general reasons for assets become NPAs


To point out the amount of NPAs in banking sector.

To focus the amount of impairment losses in banking sector.

To find out the problems of Bank due to NPAs.


The objective of study is to review the available literature on banking business for
finding out the impact on non performing asset in banking sector. The details study of
NPA literature provide useful framework for further research in this direction.

Economic times NPA decline on report newspaper June 21,2004

In the newspaper THE ECONOMICS times gave the article on NPA on decline:
report The decline in NPAs is evident across bank groupsAmong bank groups, the
old private sector banks had the highest net NPAs ratio at 3.8 % , followed by public
sector banks, new private banks and foreign banks


The number of cases and value of assets restructured under CDR

mechanism as on June 30, 2004 stood at 94 and Rs 64,017 crore
TEXT-Fitch release on Oriental Bank of Commerce Ltd
Mon Jun 9, 2008 4:33pm IST

June 9 - Fitch Ratings has today affirmed India's Oriental Bank of

Commerce Ltd.'s (ORBC.BO: Quote, Profile, Research) (OBC) Long-term
foreign currency Issuer Default Rating at 'BB+', Individual at 'C/D', Support
Rating at '3' and Support Rating floor at 'BB-' (BB minus). The Outlook on
the ratings is Stable.
OBC's ratings reflect its historically strong Tier I and solvency (Net NPL
to equity ratios) among Indian banks while also taking into account its
majority government ownership.
Post merger, the bank focused on recoveries from GTB's loan portfolio,
which led to a decrease in gross NPA ratio to 2.7% in FY08 from 9% in
FY05. Further improvements in asset quality could be challenging with
OBC's increased exposures to retail and SME segments, where
delinquencies have been rising for the industry as a whole.
From lending to predominantly low yielding corporate, OBC has
increased its focus on lending to the retail and SME segments, which
now constitutes around 30% of total loans.

Jalan, b (2000), FIANCE DEVELOPMENT which way now?

RBI bulletin January, august 2000. (PP.29-45)


Devnath, kalyan (1994), managing non performing asset- a professional

for better management, IBA bulletin May 1994
Banambar Sahoo (1999) rating of bank NPA Management
IBA bulletin October 1999 (pp 35-45)

Non-Performing-Assets in Commercial Banks/Vibha Jain. New
Delhi, Regal Pub., 200xviii, 336 p., tables, charts, $50. ISBN
Contents: Preface. Abbreviations. 1. Introduction. 2. NPA
Concept and prudential norms. 3. Trends of Non-Performing

Assets. 4. Prevention of Non-Performing Assets. 5. Management of NPAs. 6.

NPA Management in perspective. Annexure. Bibliography.
"The book provides a comprehensive coverage of the challenges facing the
banking industry in India in tackling the bargaining problem of Non-Performing
Assets (NPAs). It traces the history of growth of NPAs in the banking industry
caused initially by directed lending due to strong government hold on banks. The
government control also kept the issue under wraps for a long time,
understanding the enormity of the problem only at the advent of economic
reforms in early nineties.
The book elucidates the various measures taken by Reserve Bank of India to
control NPAs over the last decade and a half and critically analyses the success
obtained in containing the same. It also provides an international perspective by


highlighting the problem of NPAs in other South East Asian countries and the
measures taken by them to solve the issue.





1. Reckoning of NPA :

A NPA account to be identified based on its status / position of the

accounts erosion in security as on the date of balance sheet of the bank.
Nevertheless, the date of a NPA account would be the actual date on which the
slippage occurred. If an account is regularized before the balance sheet date by
repayment of overdue amount through genuine sources (not by sanctioning of
additional facilities or transfer of funds between accounts), the account need not
be treated as NPA.
It has, however, to be ensured that in the account remains in order
subsequently and a solitary or few credits made in the account on or before the
balance sheet date which extinguishes the overdue amount of interest or
installment of principal is not reckoned as the sole criterion for treating the asset
as standards one.
2. Identification and monitoring of potential NPA / stressed assets:
Indention of potential NPA account as its incipient stage of sickness and
initiating immediate corrective measures is the most important step for
preventing an asset from becoming NPA. The guidelines issued by Credit
Monitoring Cell (CMC) CAD, HO should be followed in this regard.


3. Constitution pf NPA Prevention Cell at the ROs.

It has been decided to constitute a NPA Prevention cell at the ROs to

monitor the Standard-B accounts and to ensure the prevention of their slippage
to NPA. The cell headed by Regional Manager would comprise Regional
Manager, Dy. Regional Manager and Credit Officer. It will conduct its meeting
every fortnight.


To examine the information received from branches relating to

Standard B (based on 60 days norms), NPA accounts and identify
the accounts for restructuring. The entire process should be
completed within a time frame of 30 days.

To review the performance of the existing restructured accounts

including BIFR and CDR cases.

The cell will send information on fortnightly basis to CMC, CAD

Head Office.

Regional Manager to cell for the explanation from the Branch

Managers whose performance in recovery is far from satisfactory.


4. Review and reporting of potential NPA / Stressed assets

Following steps be taken for review and reporting of potential

NPA / Stressed Assets:

Step-1: Analysis of reason of deterioration of health, signs of sickness,

problem character of the A\c.

Step-2: Close interaction with the borrower, visit to the unit, close and
frequent monitoring of the account, drawing the attention of the borrower
to the irregularity / deterioration in he asset quality / signs of weakness in
the account.

Step-3: Advice the borrower to correct the irregularity immediately in a

time bound manner and obtain his categorical assurance.

Step-4: Corrective measures for prevention of slippages:

Review the account and consider sanction of need based working
capital limits on merits, if the present limits are inadequate.

Identify Stressed Assets accounts and consider restructuring /

realignment / re-schedulement on merits.
Early warning signal, if any, to be watched and addressed to.


Verification of (i) the documents for its correctness, enforceability,

(ii) correctness of ROD (iii) insurance covers (iv) value/marketability
of prime/collateral security eye.

Verification of existence of primary / collateral security of the borrower.

Step-5: Report to the next higher authority, the details on the above
aspects and suggesting specific corrective measures in time.

Step-6: Implement the corrective action and report to higher authority.

5. Maintaining the Assets Quality :

Post sanction monitoring, supervision, and follow up

Following measures should be put in place.

(i) Terms and condition of the sanction:

Terms and condition of sanction have to be strictly complied with

(ii) Verification:
Verification of end use of the funds, stocks and assets by Bank officials or
through duly appointed concurrent auditors as per norms for effective monitoring
of the accounts.



Legal Formalities:

Formalities like obtaining / execution of documents / search

certificates, registration of charges, timely revival of the documents, completion
of equitable mortgage formalities etc. as per norms are the most important steps.


Stock Statements:

Branches should obtain stock statements at monthly intervals regularly.

As per RBI guidelines, the outstanding in the A/C based on the drawing powers
calculated from stock statements older than 3 months would be deemed as
irregular and if such irregular drawings are permitted for 90 days continuously,
the A/C will be NPA.

(v) Stock audit:

Stock audit is to be conducted every year in every NPA account with outstanding
limit of Rs 1 crore and above. However, wherever current assets are depleted or
unit is closed, the stipulation may be exempted.

6. Management of NPA:

The RMs personally verify and ensure that all accounts, especially
high value advances are properly classified into standard, Sub-std. Doubtful or
loss categories strictly as per prudential norms. It will be their responsibility to
finalize and eliminate delay or postponed of identification of NPA.


In case of doubts due to any reason, RMs may seek guidance from HO
and settle the matter within one month from the date on which the account would
have been classified as NPA as per norms.
It may be noted that if RBI observes any divergences in asset
classification, especially in high value accounts due to willful non-compliance of
RBI guidelines by any official responsible for classification then RBI may initiate
deterrent action including imposition of monetary penalty.

7. Appropriation of recovery in NPAs:

a) Non decreed accounts:

In case of NPA accounts in all categories i.e. Sub standard, Doubtful and
Loss appropriated first against outstanding in the account and the surplus
available, if any, is to be taken to interest / income. The same norm will be
applicable to the compromised accounts also.

b) Decreed accounts:
In case of decreed accounts where there is no compromise settlement
amount recovered should be appropriated as per the decretal terms. However, if
there is no specific term as regards appropriation of recovery in the decrial terms,
the recovery should be appropriated first towards Principal and the balance
towards interest.


c) Appropriation of ECGC claim amount in NPA Accounts:

As per the existing procedure, Bank is expected to keep the claim

amount received from the ECGC in a separate memorandum
account and pursue recovery efforts against the concerned
Exporter borrower for the full amount of dues inclusive of the claim
amount settled.



4.1) To reduce fresh NPA recognition

4.2) Causes for NPA
4.3) Micro perspective behind NPA

Policies Of Non Performing Asset


There are various sets of policy of non-performing asset,like

4.1) To reduce fresh NPA generation.
As far as old NPAs are concerned, a bank can remove it on its own or
sell the assets to AMCs to clean up its balance sheet. For preventing fresh
NPAs, the bank itself should adopt proper policies.
4.2) Causes for Non Performing Assets
A strong banking sector is important for a flourishing economy. The failure
of the banking sector may have an adverse impact on other sectors. The
Indian banking system, which was operating in a closed economy, now
faces the challenges of an open economy.
On one hand a protected environment ensured that banks never needed
to develop sophisticated treasury operations and Asset Liability
Management skills.

On the other hand a combination of directed lending and social banking

relegated profitability and competitiveness to the background. The net
result was unsustainable NPAs and consequently a higher effective cost of
banking services.

One of the main causes of NPAs into banking sector is the directed loans
system under which commercial banks are required a prescribed
percentage of their credit (40%) to priority sectors. As of today nearly 7
percent of Gross NPAs are locked up in 'hard-core' doubtful and loss
assets, accumulated over the years.


The problem India Faces is not lack of strict prudential norms but
i. The legal impediments and time consuming nature of asset disposal
ii. Postponement of problem in order to show higher earnings.
iii. Manipulation of debtors using political influence.

4.3)Macro Perspective behind NPAs

A lot of practical problems have been found in Indian banks, especially
in public sector banks. For Example, the government of India had given a
massive wavier of Rs. 15,000 Crs. under the Prime Minister ship of Mr. V.P.
Singh, for rural debt during 1989-90. This was not a unique incident in India and
left a negative impression on the payer of the loan.
The huge amount of loan granted under these schemes were totally
unrecoverable by banks due to political manipulation, misuse of funds and nonreliability of target audience of these sections. Loans given by banks are their
assets and as the repayment of several of the loans were poor, the quality of
these assets were steadily deteriorating.



5.1) Factor of a/c becoming as an NPA

Internal factor
External factor

5.2) Causes for a/c becoming as an NPA

5.3) General reason for asset become as an NPA


Chapter: 5

Reason for account become as an NPA

5.1 There are several reasons for an account becoming NPA.

* Internal factors
* External factors
Internal factors:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or other
debt instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansion\modernization\setting up new projects\
helping or promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,
mis-appropriation etc.,
9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and
follow-ups, delay in settlement of payments\ subsidiaries by government bodies


External factors:

1. Sluggish legal system -

Long legal tangles

Changes that had taken place in labour laws
Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power
shortage, industrial recession, excess capacity, natural calamities like floods,
5. Failures, non payment\ over dues in other countries, recession in other
countries, externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty change.

5.2)Causes for an Account becoming NPA

Those Attributable to Borrower Causes Attributable to Banks Other Causes

(1) Failure to bring in Required capital

(2)Too ambitious project
(3)Longer gestation period


(4)Unwanted Expenses
(5)Over trading
(6)Imbalances of inventories
(7) Lack of proper planning
(8) Dependence on single customers
(9) Lack of expertise
(10) Improper working Capital Mgmt.
(11) Miss management
(12) Diversion of Funds
(13) Poor Quality Management
(14) Heavy borrowings
(15) Poor Credit Collection
(16) Lack of Quality Control
(17) Wrong selection of borrower
(18) Poor Credit appraisal
(19) Unhelpful in supervision
(20) Tough stand on issues
(21) Too inflexible attitude
(22) Systems overloaded
(23) Non inspection of Units
(24) Lack of motivation
(25) Delay in sanction
(26) Lack of trained staff
(27) Lack of delegation of work
(28) Sudden credit squeeze by banks
(29) Lack of commitment to recovery
(30) Lack of technical, personnel & zeal to
(31) Lack of Infrastructure
(32) Fast changing technology
(33) Un helpful attitude of Government
(34) Changes in consumer preferences


(35) Increase in material cost

(36) Government policies
(37) Credit policies
(38) Taxation laws
(39) Civil commotion
(40) Political hostility
(41) Sluggish legal system
(42) Changes related to Banking amendment Act


A multiplicity of factor is responsible forever increasing size of NPAs in
banks. A few prominent reasons for assets becoming NPAs are as under.

(Poor credit appraisal system

(Lack of proper monitoring
(Reckless advances to achieve the budgetary targets.
(There is no or lack of corporate culture in the Bank. In adequate legal
provisions on
Foreclosure and bankruptcy.
(Change in economic policies/ environment.
(No transparent accounting policy and poor auditing practices.


(Lack of coordination between banks.

(Directed lending to certain sectors.
(Failure on the part of the promoters to bring their portion of equity from
their Source or public issue due to market turning lukewarm.


6.2)Legal remedies
6.3)Regular Training Program
6.4)Recovery Camps
6.5)Write off
6.6)Spot Visit
6.7)Rehabilitation of potentially viable
6.8)Other Methods



General Methods Of Management Of Npas:

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

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


General Methods of

6.1) Compromise:

The dictionary meaning of the term compromise is settlement of dispute reached

by mutual concessions. The following are the detailed guidelines for
compromise/negotiated settlements of NPAs.

The compromise should be a negotiated settlement under which

the bank should ensure recovery of its dues to the maximum extent
possible of minimum expenses.
Proper distinction should be made between willful defaulters and
borrowers defaulting in repayments due to circumstances beyond
their control.
An advantage in settlement cases is that banks can promptly
recycle the funds instead of resorting to expensive recovery
proceedings spread over a long period.
All compromise proposals approved by any functionary should be
promptly reported to the next higher authority for post facto scrutiny.
Proposal for write off/ compromise should be first by a committee of
senior executives of the bank.
Special recovery cells should be set up at all regional levels.


6.2) Legal remedies:

The legal remedies are one of the methods of management of NPAs. The banks
observed that the borrower is making willful default; no more time should be lost
instituting appropriate recovery proceedings. The legal remedies are filling of civil
6.3) Regular Training Program:
The all levels of executives are compelling to undergrowth the regular training
program on credit and NPA management. It is very useful and helpful to the
executives for dealing the NPAs properly.

6.4) Recovery Camps:

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

6.5) Write offs:

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

6.6) Spot Visit:

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


6.7)Rehabilitation of potentially viable units:

The unit is sick due to technical obsolescences of inefficient management or
financial irregularities. When the Bank settles the dues, of such, companies
through the compromise or through the legal actions the better is to be followed.

6.8) Other Methods:

Persistent phone calls.
Media announcement.


A. 7.1) Prudential Standard
7.2) Credit Allocation
7.3) Local Currency Funding
7.4) Debt Collection Agency
7.5) Transparency of Local Banking Regulations
7.6) Accounting Standards
7.7) Valuation of Non-Performing Loans
7.8) Awarded Foreclosure Process and Groundless

B. 7.9) Procedure for NPA identification and resolution in

Banking sector.


Chapter :7


Banking And Non-Performing Asset Management

During initial sage the percentage of NPA was higher. This was due to
show ineffective recovery of bank credit, lacuna in credit recovery system,
inadequate legal provision etc. Various steps have been taken by the
government to recover and reduce NPAs.
1.One time settlement / compromise scheme
4. Securitization & reconstruction of financial assets and enforcement
5.Corporate Reconstruction Companies
6.Credit information on defaulters and role of credit information bureaus

7.1) Prudential Standard

Although a foreign banks operating presence in Korea is in the form of a
branch and not a subsidiary, Korean regulations require branches to be
separately capitalized. This in turn impacts other regulations that are based on
local branch capital, thereby constraining foreign bank activities. For example,
credit limits to companies/groups are based on branch capital, as are open
foreign exchange positions. Although this is a welcomed step, Seoul cannot
easily develop into a global or regional financial center without further


liberalization of what constitutes capital in a branch of a foreign financial


7.2) Credit Allocation

The Korean government has historically played an active role in
allocating credit, initially through domestic bank policy loans but also through
portfolio restrictions that apply to all banks operating in Korea. Foreign banks are
held to strict monthly ratios for small and medium sized companies. These ratios
severely constrain operations, resulting in an inefficient allocation and pricing of
credit services.

7.3) Local Currency Funding

Foreign banks have been able to increase capital with relative ease over
the past several years (although thin capitalization rules are still a constraint)
and negotiable CD limits have also been increased dramatically. urthermore, the
inter-bank market does not facilitate borrowings for greater periods of time other
than on an overnight basis. The government has revised regulations to allow
commercial funding swaps and has offered to increase central bank funding

7.4) Debt Collection Agency

Effective, privately managed, third party, non-banking related loan
servicing and debt collection agencies are needed in order to provide lenders
and investors in Non-Performing Loans (NPLs) with quality, professional NPL


restructuring, collection and resolution services.

Currently Debt Collection

Licenses are not available to qualified restructuring, loan service and asset
management companies, which do a financial institution, not own.

7.5) Transparency of Local Banking Regulations

Korean regulators are moving to address transparency problems but
foreign banks continue to be hampered by ambiguous and sometimes outdated
regulations subject to various interpretations by different regulatory authorities.

7.6) Accounting Standards

Significant progress has been made during the past year in the
application advisory Service (FSS) to improve its communications to foreign
banks have been considerable

Complete the revision of Korean Generally Accepted Accounting Practices

(GAAPs) to improve the consistency and accuracy in financial reporting.
Strictly follow the standards once set and enforce discipline when rules
are violated.

7.7) Valuation of Non-Performing Loans

Although Korea has taken many important steps to lower the level of
non-performing loans on the books of its financial institutions, more could be
done to facilitate the process. .Many banks are reluctant to sell assets because
of the accounting loss the sale would create.

This reluctance to sell NPLs

appears to be slowing the process of improving the health of financial institutions.


7.8) Revision of the Credit Restructure Promotion Law(CRPL)

The Credit Restructure Promotion Law was passed and became
effective on September 14, 2001 The valuation and buyout of the opposing
creditors must include a fair, consistent, and timely valuation process, as well as
a timely and fair procedure for temporarily staying an opposing creditors rights
and the payment and method of the agreed buy-out price.Incentives should be
provided to those participants that want to advance new money with the consent
of those not able to advance new money.

This will eliminate the situation

whereby a financial institution is forced out of the plan due solely to the
requirement to advance new money.

7.9) Awarded Foreclosure Process and Groundless Appeals

Currently the foreclosure appeal process allows any party, whether they
are a party at interest or not, to appeal an auction award with minimal support for
the basis of the appeal. Typically, the reasons are groundless and the appeal
process is used to delay and subvert the legal process. There is no cost or
consequence associated with groundless appeals. This process affects not only
the NPL buyers in the Korean market, but it also covers all lenders including
Korean Lending institutions.

Procedure for NPAs identification and resolution in banking sector.

During the course of discussion with the concerned officials the following
points emerged for npas identification and resolution.

1) Relation manager credit officerMost of the banks have relationship manager in their credit department
and bankers are of the view tha5 this helps in close monitoring of the


accounts.The relationship manager has to keep in constant touch with borrower

report all development impacting the borrower account . As part of
this contact he is also expected to conduct scrutiny and account Inspection.

2) Know your client profilesome of the banks in India have a system of preparing KYC profiles a
part of KYC system visit are made on clients and their places of business. The
frequency of such visit is not structured and depends on the nature and needs of
relationship. Most of the banks, which do not have at presently in operation also,
have a positive view about the same.

3) Credit rating systemMost banks in India have put in place the system of internal credit
rating by developing their own models a few banks have adopted credit rating
designed by rating agencies. Credit rating models take into account various types
various types risk viz financial industry and management, etc associated with a
borrower unit.. The credit rating system is essentially one point measure and
monitor the credit risk of individual proposal. At the whole bank level credit
rating system enables tracking the health of bank entire credit portfolio.
4. Watch list special mention categoryMost of the banks have a system to put certain borrower accounts under
watch list or special mention category, if performing advances, operating under
adverse business or economic condition, are exhibiting certain distress signals.
These accounts generally exhibit weakness, which are correctable but warrant
bank closure attention.


5) Early warning signals

Different banks for identification of potential NPAs use a host of early
warning signals. Most banks in India have load down a series of operational
financial transactional indicator that could serve to identify emerging problem in
credit exposures at any early stage further it is revealed that the indicator which
may trigger early warning system depends not only on default in payment of
installment and interest but also other factor such as deterioration in operating &
financial performance of the borrower weakening industry characteristic,
regulatory changes, general economic condition etc.



8.1) Scope
8.2) Structure
8.3) Asset classification as per RBI guidelines


Reserve Bank Guidelines on purchase/ sale of Non Performing
Financial Assets

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





2. A financial asset, including assets under multiple/consortium banking

arrangements, would be eligible for purchase/sale in terms of these guidelines if
it is a non-performing asset/non performing investment in the books of the selling
3. The reference to 'bank' in the guidelines would include financial institutions
and NBFCs.


The guidelines to be followed by banks purchasing/ selling nonperforming financial assets from / to other banks are given below. The
guidelines have been grouped under the following headings:
i) Procedure for purchase/ sale of non-performing financial assets by banks,
including valuation and pricing aspects.
ii) Prudential norms, in the following areas, for banks for purchase/ sale of nonperforming financial assets:
a. Asset classification norms


b. provisioning norms
c. Accounting of recoveries
d. Capital adequacy norms
e. Exposure norms

iii) Disclosure requirements.

a. Non performing financial assets that may be purchased/ sold;
b. Norms and procedure for purchase/ sale of such financial assets;
c. Valuation procedure to be followed to ensure that the economic value of
financial assets is reasonably estimated
d. Delegation of powers of various functionaries for taking decision on the
purchase/ sale of the financial assets; etc.
e. Accounting policy
iv) While laying down the policy, the Board shall satisfy itself that the bank has
adequate skills to purchase non performing financial assets and deal with them in
an efficient manner which will result in value addition to the bank.

v) The estimated cash flows are normally expected to be realized within a period
of three years and not less than 5% of the estimated cash flows should be
realized in each half year.
vi) A bank may purchase/sell non-performing financial assets from/to other
banks only on 'without recourse' basis,

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


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

vii) Under no circumstances can a sale to other banks be made at a contingent

price whereby in the event of shortfall in the realization by the purchasing banks,
the selling banks would have to bear a part of the shortfall.

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

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

x) A non-performing financial asset should be held by the purchasing bank in its

books at least for a period of 15 months before it is sold to other banks. Banks
should not sell such assets back to the bank, which had sold the NPFA.

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


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


The primary (urban) co-operative banks should classify their assets into
the following broad groups, viz.
(I) Standard Assets
(ii) Sub-standard Assets
(iii) Doubtful Assets
(iv) Loss Assets

Standard Assets

Standard Asset is one which does not disclose any problems and which
does not carry more than normal risk attached to the business. Such an asset
should not be an NPA.

Sub-standard Assets
(i) With effect from March 31, 2005 an asset would be classified as sub-standard
if it remained NPA for a period less than or equal to 12 months. In such cases,
the current net worth of the borrowers/ guarantors or the current market value of
the security charged is not enough to ensure recovery of the dues to the banks in
full. In other words, such assets will have well defined credit weaknesses that


jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.
(ii) An asset where the terms of the loan agreement regarding interest and
principal have been re-negotiated or rescheduled after commencement of
production, should be classified as substandard and should remain in such
category for at least 12 months of satisfactory performance under the renegotiated or rescheduled terms. In other words, the classification of an asset
should not be upgraded merely as a result of rescheduling, unless there is
satisfactory compliance of this condition.

Doubtful Assets

With effect from March 31, 2005, an asset is required to be classified as

doubtful, if it has remained NPA for more than 12 months. As in the case of substandard assets, rescheduling does not entitle the bank to upgrade the quality of
an advance automatically.

A loan classified as doubtful has all the weaknesses inherent as that

classified as sub-standard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently known facts,
conditions and values, highly questionable and improbable.
Note: Consequent to change in asset classification norms w.e.f. March 31, 2005
banks are permitted to phase the consequent additional provisioning over a five
year period commencing from the year ended March 31, 2005, with a minimum
of 10 % of the required provision in each of the first two years and the balance in
equal installments over the subsequent three years.
Loss Assets


A loss asset is one where loss has been identified by the bank or internal
or external auditors or by the Co-operation Department or by the Reserve Bank
of India inspection but the amount has not been written off, wholly or partly. In
other words, such an asset is considered un-collectible and of such little value
that its continuance as a bankable asset is not warranted although there may be
some salvage or recovery value.



Country-wise Analysis

9.1) China
9.2) Thailand
9.3) Korea
9.4) Japan
9.5) Comparison with other Asian Economies


Country-Wise analysis

9.1 China
Causes :

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

case of

trouble and so they continue to take high risks and have not really strived to
achieve profitability and to improve operational efficiency

2. Bankruptcy laws favour borrowers and law courts are not reliable

3. Political and social implications of restructuring big SOEs force the

government to keep them afloat.

4. Banks are reluctant to lend to the private enterprises due to

a. Non-standard accounting practises
b. While an NPA of an SOE is financially undesirable, an NPA of a private
enterprise is both financially and politically undesirable.


Measures :

1. Reducing risk by strengthening banks, raising disclosure standards and

spearheading reforms of the SOEs by reducing their level of debt

2. Laws were passed allowing the creation of asset management companies,

foreign equity participation in securitisation and asset backed securitisation.

3. The government which bore the financial loss of debt discounting. Debt/equity
swaps were allowed in case a growth opportunity existed.

4. Incentives like tax breaks, exemption from administration fees and clearcut

9.2 Thailand


Causes :

1. Liberalised capital and current account and external borrowings with

inaccurate assessment of exchange rate risk and risk of capital flight in a crisis.

2. A legal system that made credit recovery time consuming and difficult.

3. Real estate speculators look massive loans projecting high growth in

demand and prices of properties. When this did not materialise all the loans went

4. Steep interest rate rise turned a lot of loans into NPAs

Measures :

1. Amendments were made to the Bankruptcy Act.

2. Corporate Debt Restructuring Advisory Commission was set up for the
takeover and restructuring of banks.
3. The Financial Sector Restructuring Plan (1998) 9 focused on capital
support facilities for bank recapitalization and setting up of AMCs.
4. New rules governing NPA exit procedures based on international standards
were introduced.


5. Privatisation of government entities was mooted, but faced strong political

opposition for fear of a social backlash.
6. Adoption of international standards for loan classification and
7. Caps on Foreign equity ownership in financial institutions were removed.

9.3 Korea
Causes :

1. Directed credit: Protracted periods of interest rate control and selective credit
allocations gave rise to an inefficient distribution of funds10. The Chaebols focus
on increasing market share and pursuing diversification with little attention to
caused tremendous stress on the economy.

2. The compressed growth policy via aggressive, leveraged expansion

worked well as long as the economy was growing and the ROI exceeded the cost
of capital. This strategy backfired when slowing demand and rising input costs
placed severe stress
on their profitability.

3. Lack of Monitoring Banks relied on collaterals and guarantees in the

allocation of credit, and little attention was paid to earnings performance and
cash flows.


4. Contagion Effects from South East Asia coincided with a period of structural
adjustments as well as a cyclical downturn in Korea.

Measures :

1. Speed of Action - The speedy containment of systemic risk and the domestic
credit crunch problem with the injection of large public funds for bank
recapitalization were critical steps towards normalizing the financial system

2. Corporate Restructuring Vehicles (CRVs) and Debt/Equity Swaps were

used to facilitate the resolution of bad loans.

3. Creation of the Korea Asset Management Corporation (KAMCO) and a

NPA fund to fund to finance the purchase of NPAs.

4. Securitization KAMCOs recoveries came through asset-backed securitization

and outright sales. International investors like the Lone Star Fund participated in
the process.

5. Strengthening of Provision norms and loan classification standards based

on forward-looking criteria (like future cash flows) were implemented.


9.4 Japan
Causes :

1. Investments were made real estate at high prices during the boom. The
recession caused prices to crash and turned a lot of these loans bad.

2. Legal mechanisms to dispose bad loans were time consuming and expensive
and NPAs remained on the balance sheet.

3. Expansionary fiscal policy measures administered to stimulate the

economy supported industrial sectors like construction and real estate, which
may have further exacerbated the problem

4. Crony capitalism to the Keiretsus

5. Weak corporate governance coupled with a no-bankruptcy doctrine was a

moral hazard in Japanese economy.

6. Inadequate accounting systems and information flow makes assessment of

loan performance outside a bank in Japan difficult.


Measures :

1. Amendment of foreign exchange control law (l997) and the threat of

suspension of banking business in case of failure to satisfy the capital adequacy
ratio prescribed. Legislation to improve information flow has been passed.

2. Accounting standards Major business groups established a private

standardsetting vehicle for Japanese accounting standards (2001) in line with
international standards.

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

banking sector weakness.

9.5) Comparison with other Asian Economies



Causes of Problem

Mechanisms used to solve the



1. Legal impediments and time

consuming nature of asset disposal

1. Strengthening of Legal Norms

2. Manipulation by the debtors

using political

2. Aligning of prudential norms

with international standards

influence has been a cause for

industrial baddebt being so high.


3.Political tool - Directed Credit to

SSI and Rural sectors

3. Legal mechanisms including

creation of ARCs and partial
disbanding of the BIFR

1. Moral Hazard - SOE's belief that

bailout will

1. Creation of Asset Management

Companies for the big four banks

happen in a crisis situation

2. Bankruptcy laws favour


2. Foreign equity participation in

the NPA disposal process

3. Inefficient legal enforcement


3. Raising of


Exhibit 3 Comparison of Problems and Solutions Across 5 countries




1. Real estate boom and bust

1. Strict action (including

closure) for non compliance of
capital norms

2. Time consuming legal


2. Securitisation of Real estate


3. Crony capitalism

3. Extensive public funding for


1.Directed credit: Interest rate


1. Swift action in containing

systemic risk

2.The compressed growth


2. Use of Corporate
Restructuring Vehicles
(CRVs) and Debt/Equity Swaps

3. Lack of effective monitoring

3. Creation of Korea Asset

Corporation (KAMCO) in 1997

4.Contagion Effects from South

East Asia


4. Extensive use of


1. legal system that favoured


1. Privatisation of government

2. Liberalised capital and

current account.

2. Removal of caps on foreign

equity ownership in FIs was

Borrowing were made with

inaccurate assessment of
foreign exchange risk

3. Real estate speculation Spike in prices and growth rate

projections were wrong

3. Creation of AMCs

4. Steep interest rate increase

turned loans bad

4. Government takeover of
banks and FIs



10.2)Our vision
10.3)Our mission
10.4)Oriental Bank of Commerce Fact File
10.5)Working result of OBC
10.6)Profitability of OBC
10.7)Technological implication


Chapter 10

Case study of Non-Performing Asset on Oriental bank of commerc e

10.1) Introduction

Oriental Bank of Commerce India was established in the year 1943 on 19th
February in Lahore. After partition, Oriental Bank of Commerce shifted its
Registered Office from Lahore to Amritsar paying every rupee to it. Oriental Bank
of Commerce was nationalized on 15th April in 1980. Then departing customers
of OBC bank had 307 branches with Rs. 282.61 crores as deposits and as
advance Rs. 152.69.
OBC has formulated the pattern of Bangladesh Grameen Bank with a
unique feature of disbursing small loans ranging from Rs. 75 onwards. The Bank
is providing training to rural people in using locally available raw material to
produce pickles, jams etc. This in return increases self-employment and adds in
increasing the income levels.

10.2) Our Vision

To be a sound all India, customer centric, efficient retail bank with
contemporary size, technology and human capital; endeavouring to enrich lives
across all sections of society; and committed to upholding the highest standards


of corporate governance.

10.3)Our Vision

To provide the finest banking services by upgrading human capital and

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

10.4) Oriental Bank of Commerce Fact File

Amongst the strongest banks in India

High Capital Adequacy Ratio

Consistent Profit-making Bank

One of the Lowest Spreads in Banking Industry

Total Working crosses the 35700 crore mark

CRISIL Ratings

The Highest Productivity per Employee

NPA - One of the lowest


Oriental Bank of Commerce (OBC) have emerged as the top performing

banks in terms of cleaning their bad assets and bringing down non-performing
assets, taking advantage of healthy GDP growth and impressive top line and
bottom line performance by borrowers.

Most of the commercial banks have substantially reduced their nonperforming assets (NPAs) ranging between 29 per cent and 65 per cent, as they
registered a handsome growth in their retail advances in the fourth quarter of
fiscal 2005-06. Riding on the above 8 per cent growth of economy, the NPAs of
the scheduled commercial banks went down by 44 per cent on an aggregate

10.5) Working results of oriental bank of commerce

Dated 28th April 2007
The oriental bank has announce the working results of the Bank for
the year ended 31st March 2007. The Board of Directors met on 28 th April 2007 in
New Delhi and at the conclusion of the Meeting, the Results were declared.


Highlights of the working results for the year ended March 2007 are as follows:

TOTAL BUSINESS Rs. 1,09,391 Crore UP BY 27.57 %

Total business has gone up by Rs. 23644.99 Crore (by 27.57 %) to
Rs.09,391.00 Crore as on March 2007 from Rs. 85746.01 Cr as on March



Net Profit after tax gone up to Rs. 826.81 Crore as on March 2007
from Rs.803.16 Crore as on March 2006.


CAR as of March 2007 is 12.51 %.

Gross NPA reduced to Rs.1454.05

Crore as on March 2007 from Rs.

2116.31 Crore as on March 2006 ( 3.20 %from 5.95

%) Recovery

of Rs. 750.15 Crore during the Current year. The Net NPA increased to
Rs. 215.66 Crore as on March 2007 from Rs. 162.98 Crore as on March
2006 and remained at 0.49%.


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

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



1998-99 1999-2000 2000-2001 2001-2002 2002-2003

Total Income

204641 267943




Total expenditure

181629 240081




Net Profit for the year










Capital & Reserves

123148 142840





1680488 2209521





770756 932553




Total Assets

1878416 2454120




No. of branches






No. of employees







10.6)Profitability of OBC

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


NPA accounts.
b)Dividend of OBC
The Oriental Bank of Commerce has provided for payment of 30% final dividend
to the shareholders in addition to 20% interim dividend already paid during the
financial year 2003-04 making total dividend 50%.
c)Retail Portfolio of OBC
The retail loans of OBC have increased to Rs. 4318 Crores as against Rs. 2779
Crores last year, with a growth of 55.4%. These assets constitute 20.9 % of total
loan assets. Oriental Bank of Commerce Housing loans account for 80% of retail
d) OBC Shareholder's Equity
The Net worth of Oriental Bank of Commerce has improved by Rs.567.46 Crore
and reached a level of Rs. 2676.79 Crore against Rs. 2109.33 Crore last year.
e) The OBC Business
The total business of Oriental Bank of Commerce has gone up to Rs. 56286
Crore from Rs. 46333 Crore last year thus registering a growth of 21.5%, due to
high growth in deposits as well as advances. The deposit growth of OBC has
been to the extent of 19.7 %( previous year 4.63%) while in advances the growth
is 25.5 % (previous year 10.7%).

10.7) Technology Implementation


Oriental Bank of Commerce of India has implemented Centralized

Banking Solution in 21 branches till date. It will give freedom of anywhere and
anytime banking to customers. The business captured has resulted in 97% live
computerized environment as against 93% last year. More than 350 branches
have been networked
OBC emerged as the best performer in terms of size of net NPAs.
OBCs net NPAs were 0.5 per cent ced its NPAs by 61.54 per cent as on March
31, 2006 as compared on March 31,

Advice of RBI
Though, the banks have exhibited a remarkable performance in
lowering their NPAs in the fiscal 2005-06, at the same time, the banks
also need to focus on deposit mobilization, as per the RBI advice.
Oriental Bank of Commerce (OBC) has announced that it will move to
100 per cent provisioning cover in the current financial year ending
March 31, 2004. B D Narang disclosed this, chairman and managing
director Oriental Bank during an analyst meet held on Thursday.
Oriental Bank declared a 42.55 per cent growth in net profit for the
fiscal ended March 31, 2003, at Rs 456.95 crore, against Rs 320.55
crore for the fiscal ended March 31, 2002.
A combination of factors including reduction of cost of deposits, strict
control on expenses, efficient cash management and large recoveries
of non-performing assets (NPAs), besides treasury income accounted
for the profit.
Interest expended rose a marginal 1.04 per cent at Rs 2,089.94 crore,
while total expenditure was also up marginally by 2.90 per cent at Rs
2,672.60 crore. Oriental Bank has amortized its VRS expenses over a


period of five years. The banks net NPAs reduced to 1.40 per cent
from 3.20 per cent in the previous fiscal.
Treasury operations contributed Rs 481.59 crore (41.41%) to the gross
profit of Rs 1,163.06 crore, while banking operations contributed the
balance Rs 681.47 crore (58.59%).
Total income increased from Rs 3,514.38 crore to Rs 3,835.66 crore
during the fiscal. Gross profit stood at Rs 1,163.06 crore, 26.82 per
cent higher than the previous fiscals Rs 917.09 crore.
The total business of the bank went up to Rs 45,486 crore, a growth of
6.70 per cent compared to Rs 42,974 crore in the previous fiscal. The
capital adequacy ratio went up to 14.04 per cent against 10.99 per
Business per employee stood at Rs 3.43 crore, while the net worth
grew 30.20 per cent at Rs 2,109 crore. The banks return on assets for
the fiscal stood at 1.30 per cent.


Finding & conclusion

11.1) Non-performing assets of banks on the

decline: REPORT
11.2) Conclusion


Chapter: 11
Finding & conclusion
Non-performing assets of banks on the decline: Report
Group wise movement in
Non performing asset 2003-2004







Gross NPAs
as at end
march 2003






Gross NPAs
as at end
march 2004






Net NPAs as 32657

at end march





Net NPAs as
at end march






The asset quality of scheduled commercial banks (SCBs) has shown a
remarkable improvement in 2003-04, according to the RBI report on `Trends and
Progress of Banking in India' released on Monday.


The central bank has noted that the gross non-performing assets (NPAs)
of SCBs has declined in absolute terms for a second year in succession, despite
the switchover to the 90-day delinquency norm, effective March 2004.
Gross NPAs of scheduled commercial banks declined by 5.6 per cent in
2003-04, against a decline of 3 per cent in 2002-03. Due to significant
provisioning, the net NPAs declined substantially by 24.7 per cent during 2003-04
against a decline of 8 per cent in 2002-03, the report said.
The decline in NPAs is evident across bank groups. During 2003-04,
reductions outpaced additions in the NPAs account. For SCBs, the decline in
NPAs was accompanied by the decline in doubtful and loss assets by 8.8 per
cent and 15 per cent respectively, the central bank has observed.
The ratio of net NPAs to net advances of SCBs declined from 4.4 per cent
in 2002-03 to 2.9 percent in 2003-04. All bank groups witnessed a decline in the
ratio of net NPAs to net advances in 2003-04.
Among bank groups, the old private sector banks had the highest net
NPAs ratio at 3.8 per cent, followed by public sector banks, new private banks
and foreign banks. During 2003-04, the share of NPAs in the priority sector to
total NPAs of public sector banks increased marginally. However, there was a
decline in the share of NPAs of agriculture sector and small-scale industries but
an increase in the share of other priority sectors.
The share of NPAs on account of public sector undertakings declined
while the share of NPA of non-priority sectors increased during 2003-04.
For private sector banks, the share of NPAs on account of agriculture
sector was lower when compared with 2002-03. However, there was an increase
in the shares of NPAs on account of small-scale industries and other priority
sector as well as their overall NPAs for the priority sector.


The share of non-priority sector NPAs in total NPAs of private sector banks
was lower than that in 2002-03. According to the report, the gross non-performing
assets ratio of public sector banks has declined to 7.8 per cent in 2003-04 from
23 per cent in 1992-93.
As on June 30, 2004, 27 public sector banks had issued 61,263 notices
involving an outstanding amount of Rs 19,744 crore and had recovered an
amount of Rs 1,748 crore, under the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act 2002.
The number of cases and value of assets restructured under CDR
mechanism as on June 30, 2004 stood at 94 and Rs 64,017 crore respectively.




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

A) General suggestions:

The Bank should adopt the following General strategies for control of NPAs. The
suggestions are as follows:

Projects with old technology should not be considered for finance

Large exposure on big corporate or single project should be avoided.

There is need to shift banks approach from collateral security to viability of

the project and intrinsic strength of promoters.


Timely sanction and or release of loans by the bank is to avoid time and
cost overruns.

B) Pre-sanction suggestions:

Analysis should therefore be based on trends of capacity utilization,

profitability etc. Assumptions not account for ground realities.

Better taking up any fresh/exciting proposals for assessment, sources for

margin money should be thoroughly examined.

Uneven scale of repayment schedule with higher repayment in the initial

years normally is preferred.

C) Post sanctions suggestions:

Bank should prevent diversion of funds by the promoters.

Operating staff should scrutinize the level of inventories/receivables at the

time of assessment of working capital.

The Credit section should carefully watch the warning signals viz. nonpayment of quarterly interest, dishonor of check etc.


Effective inspection system should be implemented.

12.2) Recommendation for future research
The researchers who want to do future studies relating to the project on nonPerforming asset in banking sector. For those researchers there are some

Allow branches to use head office capital for regulatory purposes

Eliminate limits for all banks
Establish policy to improve foreign bank access to the won inter-bank
Revise central bank swap pricing from a fixed return to cost basis.
Assist in the development of professional, third party, qualified private,
non-banking related loan-servicing and debt collection companies.
Eliminate unnecessary banking regulations;
i) Each bank will make its own assessment of the value offered by the purchasing
bank for the financial asset and decide whether to accept or reject the offer.

ii) Under no circumstances can a sale to other banks be made at a contingent

price whereby in the event of shortfall in the realization by the purchasing banks,
the selling banks would have to bear a part of the shortfall

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



After the relevant data were collected, descriptive analysis was carried
out which was preferred for assessment purposes. Hence for all data
interpretations were made and diagrams and graphs have been used to support
discussions related to findings. Finally, conclusion and recommendations were
made accordingly.

Various studies have been conducted to analysis the reasons for NPA. What ever
may be complete elimination of NPA is impossible. The reasons may be widely
classified in two:
(1) Over hang component
(2) Incremental component
Over hang component is due to the environment reasons, business cycle etc.
Incremental component may be due to internal bank management, credit policy,
terms of credit etc.