"NPA Management"

In Partial Fulfillment of the Requirement For Master of Management Studies For The Academic Year 2002-2003 From The University Of Mumbai.

Submitted by:

Suchet D Bangera MMS FINANCE

N.L.Dalmia Institute Of Management Studies And Research.

CERTIFICATE
N.L.Dalmia Institute of Management Studies and Research

This is to certify that the project entitled NPA Management is successfully completed by Mr.Suchet Bangera during the second year of his course in Partial fulfillment of the Master of Management Studies under the University of Mumbai through N.L.Dalmia Institute of Management Studies and Research, Mumbai. This project represents the work done by Mr.Suchet Bangera under my guidance.

Guided ByMr. Sunil Mahajan (Faculty Finance)

ACKNOWLEDGEMENT

I express my heart- felt indebtness and gratitude to Prof P.L.Arya , Director,

N.L.Dalmia Institute of Management Studies and Research for his encouragement and support. I sincerely wish to acknowledge Prof Sunil Mahajan for his keen interest and valuable guidance on this program. I would also like to express my deep sense of gratitude to Mr.Mehernosh Nogamawalla, Assistant Manager, ICICI Bank venture. for his noteworthy suggestions, constant inspiration and unstinted guidance in carrying out this

Place: Date:

Signature (Suchet Bangera)

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ABSTRACT
The aim of the project is to study NPA from 2 perspective, Firstly ,an indepth analysis of the NPAs in the three major financial institution in India and Secondly on the basis of a comparative study of NPAs in India in the Global context. Financial sector reforms in India has progressed rapidly on aspects like Interest rate deregulation, prudential norms, reduction in reserve requirement and barriers to entry. But progress on the structural- institutional aspects has been much slower and is a cause of concern. The sheltering of weak institution while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. To be truly effective, there requires to be changes to be done to tackle the NPA problem spanning the entire gamut of judiciary, political and the bureaucracy. This project deals with the experience of the 3 major financial institution in India and the experience of other Asian countries in handling of NPAs.It further looks into the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on experiences from other countries.

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CONTENTS
CHAPTER
Chapter-1 Chapter-2 2-1 2-2 2-3 2-4 2-5

SUBJECT
Introduction Research Methodology Objectives Scope Limitation Research Design Sources of Data

PAGE NO.
1 (2-3) 2 2 3 3 3

SECTION A
NPA Management Chapter -3 3-1 3-2 3-3 3-4 3-5 3-6 Chapter-4 4-1 4-2 4-3 Chapter-5 14) 5 NLDIMSR Introduction to NPAs Non-Performance of Assets Definition of NPAs Asset Classification Partial recoveries of NPA Provisioning & Write- offs Charging of Interest on NPAs Over view of the Three Indian Fls About the Institution -ICICI IDBI IFCI (5-10) 5 5 6 6 7 8 (10-11) 10 11 11

Analysis on NPA management level of FIs (12-

NPA MANAGEMENT 5-1 5-2 Chapter-6 6-1 6-2 6-3 Comparative Analysis of FIs Comments Coping Strategies of Fls ICICI Ltd. IFCI Ltd. IDBI Ltd. SECTION -B A comparative study of Non Performing Assets in India in the Global context - Similarities and dissimilarities, remedial measures. Chapter-7 (21-24) 7-1 22 7-2 22 7-3 23 Sector wise split up Based on Loan loss provisioning Based on Gross and Net NPAs Overview of performance 13 13 (15-19) 15 17 18

Chapter-10 (34-37) Conclusion 37 Annexure 38-40 Bibliography

Solutions

RBI Guidelines

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CHAPTER-1
INTRODUCTION

The Indian Financial institution and Banks are facing a very grim situation today, due to rising level of non-perfoming assets (NPAs) . This factors adversely hits the bottom line, thus yielding low profits for the organization It calls for Planning and executing clear, exit strategies on the part of these Fls and NPAs being a cause for serious concern,I have decided to draw attention on this aspect in the present project. To deal with this topic, I have adopted a two-pronged strategy. Firstly I made an in depth analysis of the existing level of NPAs of country's three leading financial 'institutions, namely -ICICI, IDBI and IFCI. Then, analysis of the strategies adapted by them to cope with this problem has been carried out. Secondly, to obtain further insight in this matter, I have also focussed on the levels of NPAs in other Asian countries and try to bring out measures responsible for their reduction in NPAs . 7 NLDIMSR

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I hope this project will enable in throwing light on key areas of finance and also assist in addressing the current situation of NPAs to some extent.

CHAPTER-II
RESEARCH METHODOLOGY
2.1 OBJECTIVES The purpose of doing this project is mainly to make a thorough study on NPA To study the level of NPA in the leading- Indian Fls, and how they are coping with this problem. To make a comparative study on the three Fls and gauging their efficiency on this ground. The objective also includes exploring the situation of other Asian Countries in dealing with NPAs. To suggest few financial restructuring measures,by giving solutions. 8 NLDIMSR

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2.2

SCOPE The predicted scope for the first half of the study, is as follows: To study all the financial statements. To make a comparative analysis on the level of NPAs . Bringing out the results of financial statements through ratio analysis. Charting out the strategies adopted by these Fls to cope with this problem in future.

The scope for the second half of the study, can be outlined as follows: To study overview of performance in the global arena To make a comparative analysis on the level of NPAs in the Asian countries . The similarities and Dissimilarities. Charting out the strategies adopted to cope with this problem in future.

2.3

LIMITATIONS

Every project and its results possess their own limitations. So also does this project. These limitations are in terms of: Time constraint- Due to lack of sufficient time, the study could not be made very comprehensive. The inferences drawn are true only keeping in mind the assumptions taken.

2.4

RESEARCH DESIGN

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NPA MANAGEMENT The first half of the study dealt with NPAs and their management by the three leading financial institutions. The research design used was descriptive in nature. The second half comprised of an in depth analysis of NPAs in other Asian countries. The research design used was analytical and exploratory in nature.

2.5

SOURCES OF DATA Secondary sources: Information from Published Material, for example, Annual reports of the

companies, organizations, RBI guidelines circulars, Case papers on NPAs and also, from Internet websites.

SECTION -A NPA MANAGEMENT IN INDIAN FIs.

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CHAPTER-III
INTRODUCTION OF NPAs
3.1 NON- PERFORMING ASSETS In the year 1994, the Committee on the Financial System under the Chairmanship of Shri. M. Narasimham had considered the existing system prevailing in banks and financial institutions (FIs) for income recognition, classification of assets and provisioning for bad debts and recommended that the policy of income recognition should be objective and based on record of recovery, rather than on any subjective considerations. Keeping this in view, the Committee issued several guidelines to these institutions, which were modified from time to time. But, before we examine the RBI guidelines on income. Recognition, asset classification, provisioning and other related matters, we should understand the basic terms referred in these guidelines. 11 NLDIMSR

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3.2 DEFINITION OF NON-PERFORMING ASSETS (NPAs) The Committee has defined a NPA as an advance where, as on the date of the balance Sheet of the FI, (a) (b) In respect of term loans, interest remains past due' for a period of more than 180 days, In respect of bills purchased/discounted, the bills remain overdue and unpaid for a period of more than, 180 days and (c) In respect of other advances, any amount to be received remains 'past due' for a period of more than 180 days. In other words, an asset becomes non-performing when it ceases to generate income for a Fl. In this context, an amount is considered 'past due' when it remains outstanding for 30 days beyond the due date. Thus, while interest may become 'due' on, say 31 March 1993, it becomes 'Past due' on 30 April 1993. Furthermore, NPA was to be defined as a credit/loan facility in respect of which interest has remained 'past -due') for a period of four quarters during the year ending 31 March 1994, three quarters during the year ending 31 March 1995 and two quarters during the year ending 31 March 1996 and onwards.

3.3 ASSET CLASSIFICATION As from the end of the accounting year, 1993-94, all Fls had to classify their loans/advances into four broad groups, viz. (i) (ii) Standard assets, Sub-standard assets,

(iii)Doubtful assets and (iv)Loss assets.

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NPA MANAGEMENT Broadly speaking, classification of assets into the above categories should be done taking into account the degree of well-defined credit weaknesses and extent of dependence on collateral security for realization of dues. (i) Standard asset:

These are Assets that do not disclose any problems or which do not carry any risk other than normal business risk. (ii) Sub-standard assets:

Assets (i) that are non performing for a period not exceeding two years or (ii) that have been renegotiated or rescheduled after the project to which they relate has commenced production are classified as sub-standard assets. Eg) A term loan should be treated as substandard, if the installments of principal are Overdue for two quarters but not exceeding two years. (iii) Doubtful assets: Assets (1) that are non-performing for more than two years or where there are potential threats to recoveries on account of erosion in the value of security and other factors such as fraud are classified as doubtful assets. (iv) Loss assets: Assets (i) the losses on which are crystallized or (ii) that are considered uncollectible are classified as loss assets. Payments on renegotiated or rescheduled loans should have no past due amounts for one year after renegotiations or rescheduling, as the case may be, in order for the loan to be upgraded. Further, if interest or installments of principal is in arrears for any two quarters out of four quarters during the year, the credit facility should be treated as NPAs, although the default may not be continuously for two quarters during the year.

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NPA MANAGEMENT 3.4 PARTLAL RECOVERIES OF NPAS Interest partly recovered on NPAs may be credited to income account but it should be ensured that the credits in the accounts towards interest are not out of fresh/ additional credit facility sanctioned to the borrowers concerned.

3.5

PROVISIONING AND WRITE-OFFS

Standard assets: A 0.25% general provision. Sub-standard assets: A 10% provision. Doubtful assets: A 1OO% write-off is made for the unsecured portion of the doubtful asset and charged against income. The value assigned to the collateral securing a loan is that reflected on the borrowers books or that determined by third party appraisers to be Realizable. In those cases where there is a secured portion of the asset, provision of 20% to 50% is made depending upon the period for which the asset remains doubtful. Provisions on such secured assets are made as follows upto 1 year-20%, 1 to 3 years-30% and more than 3 years 50%. Loss assets: The entire asset is written off/provided for.

3.6 CHARGING OF INTEREST ON NPAs. (a) As per the RBI guidelines, none of the Fls were to charge and take to income account, interest on any NPA. So far as bills purchased/ discounted/ rediscounted are concerned, overdue interest should not be charged and taken to income account unless it is realized. In respect of all NPAs, interest accrued and other charges like fees and commission credited to income account during the previous accounting years but which have not been actually realized should be reversed or provided for 14 NLDIMSR

NPA MANAGEMENT in the current accounting period. From the year 1999-2000, the unrealised income booked in loan ledger on NPAs, if any need to be reversed in the year the asset becomes NPA. (b) In case of new projects, where moratorium period is available for payment of interest becomes 'due' only after the moratorium period is over. (c) In case of housing loans or other advances granted to staff members, where interest is payable after recovery of principal, interest need not be considered as 'past due' from the first quarter onwards. They should be classified, as NPA only when there is default in payment of 'interest on the due of payment. (d) In case of borrowers who have been granted more than one loan or credit facility, all the dues from them will have to be treated as NPA when an individual loan or facility or part thereof has become irregular. (e) The availability of security or net worth of borrower/guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, as income recognition is based on record of recovery. (f) In case of loans /credit facilities extended to a unit by more than one Fl under formal consortium arrangement, those loans/ facilities which have been classified as 'substandard', 'doubtful' or loss' by the concerned leader, should be so classified by the other members of the consortium and requisite provision, in accordance with the prescribed norms, will have to be made thereof.

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CHAPTER-IV
OVERVIEW OF THREE LEADING INDIAN FINANCIAL INSTITUTIONS (FIs)
1 2 3 4.1 1 ICICI Ltd. IFCI Ltd. IDBI ABOUT THE INSTITUTIONS: INDUSTRIAL CREDIT AND INVESTMENT CORPORATION OF INDIA ICICI Ltd. was founded by the World Bank, the Government of India and representatives of private industry on January 5, 1955 to encourage and assist industrial development and investment in India. Over the years, ICICI has evolved into a diversified financial institution. ICICI's principal business activities include mediumterm and long-term project financing for the infrastructure and manufacturing sectors, corporate finance to meet the treasury requirements of Indian companies, lease finance as well as a comprehensive range of financial and advisory services. For regulatory and strategic reasons, ICICI set up specialised subsidiaries in the areas of commercial banking, investment banking, non-banking finance, investor servicing, broking, venture 16 NLDIMSR

LTD. ( ICICI LTD.)

NPA MANAGEMENT capital financing and state-level infrastructure financing. Also, on 22nd September 1999, it became the first Indian Company to get listed in NYSE, marking the successful completion of a US $ 500 million capital-raising programme. ICICI has therefore created a virtual Universal Banking Group that offers a comprehensive range of financial products and services.

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

IFCI, the first Development Finance Institution in India, Was set 1948, as a Statutory Corporation, to pioneer institutional credit to Medium and large industries. IFCI was also the first institution in financial sector to be converted from a Statutory Corporation into a public limited company. It also has two wholly owned subsidiaries; namely, IFCI Financial services Ltd. and IFCI Venture Capital Funds 3 INDUSTRIAL DEVELOPMENT BANKOF INDIA (IDBI) IDBI is also considered as one of the premier financial institutions of India. It offers a range of financial services, like in the form of Direct Finance (project finance and nonproject finance). It also pays due emphasis to Infrastructure finance; Venture Capital and Fee based services. They comprise activities such as issue management, corporate advisory services, credit syndication and debenture/mortgage trusteeship. IDBI opens Letters of Credit and effects foreign currency remittances on behalf of its assisted units for import of capital goods/ services. IDBI has a few wholly owned subsidiaries too engaged in specific sectors. These were mainly established to cater to the needs of the developing economy as well as to equip it to face the challenges thrown by the global economy. Prime amongst its subsidiaries are Small Industries Development Bank of India (SIDBI); IDBI Bank Ltd.; IDBI Capital Market Services Ltd. (ICMS) and IDBI Investment Management Company Ltd. (IIMCO).

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CHAPTER-V
ANALYSIS ON NPA MANAGEMENT LEVEL OF THE THREE Fls.

Over the past few years, the rapid reduction in trade barriers and integration with global markets, along with the downtrend in global commodity markets, has caused difficulty in the Indian economy to those commercial enterprises with cost inefficiencies, high debt burden, poor technology and fragmented capacities. As a result, while the Indian economy has continued to grow, although at a slower rate than in past periods, certain corporate and commercial enterprises have had to adopt certain measures to restructure their operations to deal with the financial stress they have encountered. Against this backdrop, we are going to analyse the strategies adopted by the earlier mentioned Fls to cope up with this serious problem. Before this, let us take a look on the current level of NPAs of these institutions.

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5. 1

COMPARATIVE ANALYSIS OF THE FINANCLAL INSTITUTIONS' (As on March 3lst 2001) Particulars Ratings PLRs RATIOS-ROA (%) - R 0 E (%) cap.ad.ratio EPS Net N P L/N.Worth Div.payout ratio % Net NPA to Total AssetsNPA classification -Loss -Doubtful -Substandard 0 3.1 4.7 0 8.6 12.9 0 4.3 7.7 7.8 21.5 12 2.25 21.1 11.9 21.3 69.5 25.8 18.8 7.6 11.4 3.1 214.1 21.6 2.37 17.2 13.4 2.3 64.5 14.9 ICICI AAA 12.5% IFCI AA+ 13% IDBI AAA 13 %

STRENGTH & FEATURES:

5.2

COMMENTS 19 NLDIMSR

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From the above cited figures, we can see! That currently, of the (Fls) ICICI, is the Market Outperformed; IDBI is the Market Performer, whereas IFCI is the Market Underperforrner. ICICI has been successful to a great extent in curbing its level of NPAs in comparison to the other Institutions where it is still quite high but after its subsequent merger with its subsidiary ICICI Bank, its NPA levels have come down drastically. IDBI appears extensively affected by the economic slow down. It is losing its premier position to ICICI, though only in incremental loan disbursals, and both profitability and asset quality are under significant strain. On the other hand, ICICI is demonstrating a high degree of resilience amidst currently adverse conditions. It is continuing business growth while designing new initiatives to tackle non-performing loans. IFCI is believed to have had far worse asset quality than other FIs and banks. As its fee income is relatively quite less than ICICI and IDBI, it implies that its profit drivers are weak. Also, it appears that IFCI is less vigorous in exploiting opportunities for fee 'income unlike the other two Fls. From the above figure it is evidently observed that ICICI has a favorable Return on Assets ratio (ROA), capital adequacy ratio; Return on Equity and EPS. Also, while on one hand it has an attractive dividend payout -ratio, on the other hand, it has low level of NPA, which compliments or favours the bottomline. This however is not the case with IDBI and more importantly with IFCI. Here, the case is just the reverse for the latter and this ruins the bottomline of the Organisation.

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CHAPTER-VI
COPING STRATEGIES OF THE THREE FIs
MEASURES UNDER TAKEN BY THE FIs TO REDUCE NPA LEVEL IN THEIR RESPECTIVE ORGANISATIONS

6.1

ICICI Ltd. During the year 1998-99, ICICI continually focused on proactive management of

problem loans. It set in place a process involving a detailed and periodic analysis of its performing assets portfolio, to determine on an on-going basis, the health of every borrower account in the loan portfolio.One major step taken by ICICI ICICI used the interest cover approach to determine stress levels in the performing assets portfolio. 21 Conceptually, this approach involves NLDIMSR

NPA MANAGEMENT assessing the underlying cash flows of the borrower and then determining adequacy of interest cover after allowing for all expenses required to maintain the corporate as a going concern. For projections, typically a worst-case scenario is used for product and input prices and capacity utilisation levels.

ICICI has followed a two-pronged approach towards non-performing loans depending on whether these are viable or unviable companies. > In respect of viable companies, which have economically sized plants, strong sponsors and modern technology, ICICI has focused on restructuring to minimise losses, enhancing security mechanisms, and pledging of additional collateral or injection of additional sponsor equity. > In respect of unviable companies, which are essentially uneconomical projects, ICICI adopts an aggressive approach Aimed at out-of-court settlements, enforcing collateral and driving consolidation. Its efforts in tackling non-performing loans have been spearheaded by the Special Asset Management Group, which was created to focus exclusively on large non-performing loans and problem loans. Further, it is also taking measures to enhance the security structures in accounts under stress. This is being done through the pledge of promoters shareholding, the right to convert debt into equity at par so as to transfer control to ICICI and escrow mechanisms to capture cash flows. The institution is also striving to facilitate the integration of fragmented capacities, catalyse the merger of weak and unviable units through 22 NLDIMSR

NPA MANAGEMENT technology upgradation, enable financial restructuring and take early steps for legal action where deemed necessary. ICICI firmly believes that all these measures will enable the industry and the economy to emerge stronger once the restructuring process is complete.

6.2

IFCI Ltd IFCI is making continual efforts to reduce the level of NPAs by playing a proactive

role on the restructuring of borrower concerns, since it has become necessary to restructure their viability in the rapidly changing business environment. A new division named the Corporate Restructuring Division has been set up at the Corporate Office of IFCI to strengthen restructuring activities amongst borrower concerns. Sustained efforts in this direction are also being made through the timely grant of reliefs and concessions, encouragement to mergers and amalgamations with healthy companies, and one-time settlement of dues. In addition, a continuous monitoring of large exposures is also being undertaken, in order to prevent new cases from slipping into the NPA category. IFCI has also adopted a host of measures, against this backdrop, which include restructuring the asset portfolio, restricting exposure to chronic industries and individual companies and invoking the state government guarantees which have failed to make payments. 23 NLDIMSR

NPA MANAGEMENT The institution also sought one-time settlement in respect to government -guaranteed cases. All these measures were incorporated by IFCI with the view that it will ensure recovery of atleast 50 to 60 per cent of the NPAs within a period of 3-4 years.

6.3

IDBI IDBI has also drawn major plans to restructure its non-performing assets and high

interest costs. They can be elucidated in the following: Astringent reworking of the non-performing loans is done, involving extending of maturity in cases, which are deemed viable. Further, the (FI) is also in the process of lowering its interest rates for some of its borrowers who were finding it difficult to repay due to high rates. But this was to be done only on the condition that they pay 50 per cent pre payment premium. This approach was selective and would apply only to those companies whose accounts were good and whom the Fl would want to retain as customers. IDBI also set up Close Monitoring Cells (CMCS) for constantly monitoring performance of assisted companies to improve recovery And initiate timely remedial action.

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NPA MANAGEMENT Restructuring Committees (RCs) have also been set up in various zones to tackle NPAS. The RCs look into the long-term viability of projects and recommend restructuring schemes to various delegated authorities. For expeditious decision-making, Empowered Committee (EMC) and High Powered Committee (HPC) have been set up. These Committees consider OTS and restructuring proposals involving waivers. In order to improve credit quality, credit appraisal and delivery systems have been further strengthened. through proper mechanisms-. IDBI has also resorting to additional security by way of pledge of promoters equity, additional collateral, conversion of loan into equity, etc. With improvement in the economic scenario and restructuring measures initiated by the Bank, it is expected that some of the NPAs of this institution would become performing within a few years. Apart from incorporating individual strategies to cope with the rising NPA level, the three Fls had approached the banking division with a proposal to form a common asset reconstruction company (ARC) to clean up their balance sheets. The plan envisages transfer of only large accounts that are common to the institutions. If all the lenders free their rights on a debtor and give it to one entity, it can fight with the debtor and recover whatever money can come. Though it is still in the conceptual stage, it is yet to be seen how far thing improves if the plan materialises. It has also taken steps to monitor cash flows

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SECTION -B NPA MANAGEMENT GLOBAL CONTEXT.

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Introduction
After nationalization, the initial mandate that banks were given was to expand their branch network increase the savings rate & extend credit to the rural & SSI sectors. This mandate has been achieved admirably. Since the early 90s the focus has shifted towards improving quality of assets & better risk management. The Narsimhan Committee has recommended prudential norms on income recognition, asset classification & provisioning. In a change from the past, Income recognition is now not on an accrual basis but when it is actually received. Past problems faced by banks were to a great extent attributable to this. Classification of what an NPA is has changed with tightening of prudential norms. Currently an asset is non-performing if interest or installments of principal due remains unpaid for more than 180 days.

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CHAPTER-VII
1. Overview of Performance
There has been noticeable improvement in the financial health of banks in terms of asset quality. Further, pre and post reform NPA levels are not strictly comparable as there has been a significant tightening of accounting norms.

7.1 Basis on Gross & Net NPAs

Gross NPAs Year 1992-1993 1993-1994 1994-1995 1995-1996 Amount (Rs Crore) 39253.14 41041.33 38385.18 41660.94 As a percentage of total advances 23.18 24.78 19.45 18.01 28

Net NPAs Amount (Rs Crore) As a percentage of total advances No data 14.46 10.67 8.9 NLDIMSR

19690.74 17566.64 18297.49

NPA MANAGEMENT 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 43577.09 45652.64 51710.5 53294.02 54773.16 17.84 16.02 15.89 14.02 12.4 20284.73 21232.13 24211.49 26187.6 27968.11 Exhibit 1 9.18 8.15 8.13 7.42 6.74

7.2 Based on loan loss provisioning The net NPAs have continually declined from 14.46% in 1993-1994 to 2000-2001. RBI regulations require that banks build provisions upto at least 50% of their gross NPAs. The current provisioning is 35% gross NPAs.

7.3 Sector wise split-up As can be seen the main culprits are not the priority sectors or PSUs but are the large industries. If government sops to agriculture & SSIs are excluded, the NPA in the priority sectors is even lower.

Borrowing segment wise distribution of Gross NPAs Public sector units Large industries Medium industries Other non priority sectors

Gross NPA on March 31, 201 Amount Percentage of total NPA (Rs crore) 1334.05 2.44 11498.1 8658.69 9516.62 29 20.99 15.81 17.37 NLDIMSR

NPA MANAGEMENT Agriculture Small sector industries Other priority sectors 7311.4 10284.97 6169.33 Exhibit 2 13.35 18.78 11.72

The problem India faces is not lack of strict prudential norms but 1. The legal impediments and the time consuming nature of asset disposal process. 2. Postponement of the problems in order to report higher earnings. 3. Manipulation by the debtors using political influence. A perverse effect of the slow legal process is that banks are shying away from risks by investing a greater than required proportion of the assets in the form of sovereign debt paper. The government recently enacted the Asset Reconstruction Ordinance to try and tackle the problem. It gave wide-ranging powers for banks to dispose of assets & allowed creation if Asset Reconstruction Companies for this purpose.

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CHAPTER-X
Solutions
Dont Eliminate Manage!

Studies have shown that management of NPAs rather than elimination is prudent. Indias growth rate and bank spreads are higher than western nations. As a result we can support a non-zero level of NPAs which balances the risk vis--vis return appropriate to the Indian context. Effectiveness of ARCs

Concerns have been raised about the relevance to India. A significant percentage of the NPAs of the PSBs are in the priority sector. Loans in rural areas are difficult to collect and banks by virtue of their sheet reach are better placed to recover these loans. Lok Adalats and debt Recovery Tribunals are other effective mechanism to handle this task. ARCs should focus on borrowers. Further, there is a need for private sector and foreign participation in the ARC. Private parties will look for active resolution of the problem and not mearly regard it as a book transaction. Moving NPAs to an ARC doesnt get rid of the problem. In China, potential investors are still worried about the risks of non-enforcement of ownership rights of the assets they purchase from the ARCs.Actions and measures have to be taken to build investor confidence.

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NPA MANAGEMENT Well Developed Capital markets Numerous papers have stressed the criticality of a well-developed capital market in the restructuring process. A capital market brings liquidity and mechanism for write off of loans. Without this a bank may postpone the NPA problem for fear of capital adequacy problems and resort to tactics like evergreening. Monitoring by bondholders is better as they have no motive to sustain uneconomic activity. Further, the banks can manage credit risk better as it is easier to sell or securitize loans and negotiate credit derivatives. Indian debt market is relatively under developed and attention should be focused on building liquidity and volumes. Contextual Decision-making Regulations must incorporate a contextual perspective (like temporary cash flow problems) and clients should be handled in a manner, which reflects true value of their assets and future potential to pay. The top management should delegate authority and back decisions of this kind taken by middle level managers.

Effects of Capital norm tightening There is a fear that disposal through the provision of excessive reserves may result in a deflationary spiral. A through provision of reserves will have no negative impact on the long-term dividends paid to the shareholders. Firstly, it helps restore credibility in the financial system. Further, an adjustment mechanism can be created by which the capital gains and future profits that will result from the disposal of NPAs will pass back to the creditors as the tax payers who incurred the losses today. The swift disposal of NPAs during the Great Depression in the middle of a severe deflationary current helped restore the credibility of the financial system. Realignment of performance matrix Traditional performance measures like ROE and NPA Ratio are not really indicative of performance-A high volume of bad lending today will impact 32 NLDIMSR

NPA MANAGEMENT positively on ROE, asset growth and NPA ratio and only show up 5 years later as NPAs.The complexity of the balance sheet makes it impossible to disaggregate the impact of these actions even if stricter disclosure norms are put in place. Economic Value of Equity (EVE) (or Market value) and Economic value of Equity at Risk (EVER) are useful mechanisms to handle this problem. EVE is the value of the firm if its assets are instantaneously liquidated (assuming the availability of the liquid markets). Books Values vis-a- vis EVE comparisons give an idea of whether the fair value is being reflected. EVER can be computed by using what if scenarios like downgrading the ratings of assets or changing interest rates. Now, at every stage banks can check if their actions are consistent with the goal of maximizing EVE, subject to an acceptable level of EVER. Consistency of Purpose! Some experts argues that the current organizational competencies, regulatory framework, quality of disclosure and incentive structure produce an inconsistent framework, which leads to an unsustainable performance level for a bank. Macro level issues will have to be addressed in order to root out the problem. Processes at every stage of an assets life impact the overall quality of the intermediation process and so a consistent set of procedures are necessary to handle the problem Legal Issues There have been instances of banks extending credit to doubtful debtors (who willfully default on debt) and getting kickbacks for the same. Ineffective legal mechanisms and inadequate internal control mechanisms have made this problem grow-quick action has to be taken on both counts so that both the defaulters and the authorizing officer are punished heavily. Without this, all the mechanisms suggested above may prove to be ineffective.

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CONCLUSION
The project stresses the importance of a sound understanding of the macro economic variables and systemic issues pertaining to banks and the economy for solving the NPA problem along with the criticality of a strong legal framework. Foreign experiences must be utilized along with a clear understanding of the local conditions to create a tailor made solution, which is transparent and fair to all stakeholders.

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ANNEXURE
RBI GUIDELINES TO FIs (For rehabilitation of sick industrial units) Characteristics of these guidelines are discussed below: (i) Tackling incipient sickness: There is need to gear up the organisational machinery in the banks and Fls for taking effective measure to detect incipient sickness and safeguard their interests. In this context the steps necessary to be taken include Pre and post-sanction inspection. Stock verification and stock audit, Continuous supervision over large accounts, Proper documentation , Proper training and guidance to the staff at operational level, Preparation and furnishing detailed checklist for scrutinising Quarterly Information System(QIS), statements to the operating staff and taking follow-up action, (i) (ii) (iii) System of taking appropriate action by banks and FIS Concept of 'accountability' at branch level to be made more effective. Co-ordination between Financial Institutions and amongst banks: Participation in rehabilitation packagesGroup approach: 35 NLDIMSR

NPA MANAGEMENT When units in an 'industrial group becomes sick, the 'institutions should examine whether sickness has arisen on account of internal factors such as mismanagement, diversion of funds, neglect, etc., or on account of external factors and take adequate steps accordingly. Recall of advances: - There should be proper consultation among the banks and FIs so that the decision to recall advances is taken jointly. Preparation of Packages:- While preparing packages, the overall objective of the Operating Agency/Lead Institution should be the rehabilitation of the unit, keeping in view the sacrifices that the participating agencies would be prepared to make. The following factors can be taken 'into consideration> Where management deficiency is found to be the reason for sickness, it should be ensured that the dishonest and/or incompetent management is removed so that the rehabilitation package can succeed. Where the management is weak, it should be strengthened by inducting professional managers/nominees of banks/ Financial Institutions. Constitution of Management Committees may also be considered where necessary. > Considering the overall need to strengthen the equity base of sick industrial units,

FIs, Banks should insist on promoters' augmenting the capital base. Where necessary, restructuring of the equity should also be considered. > > Expansion, diversification should be encouraged only where it is imperative. A definite time frame for compliance of the package by each of the agencies should be clearly spelt out in consultation with the agencies concerned and should be given to BEFR. > A Nodal Agency should be designated for monitoring the implementation of the rehabilitation package by all agencies. 36 NLDIMSR

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Implementation of Packages-Fls and banks should ensure that there is sufficient delegation of powers so that the time lag between sanction of the scheme by the BIFR and formal approval by the Board/competent authority is minimised and delay in implementation of the rehabilitation package does not arise on this account.

Monitoring the implementation of packages Furnishing of information to Board for Industrial and Financial Reconstruction (BIFR).

Training arrangements.

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BIBLIOGRAPHY
I
1. 2. 3. 4. 11. Books Chandra P.C., Financial Management Principles & Practice. Khan & Jain, Finincial Management Panday I.M., Financial Management Kothiri C.R., Research Methodology

Magazines 1. 2. 3. Investor Business India Business Today

111.

Newspapers 1. 2. The Economic Times The Business Standard

3. The Financial Express I V. Published Material I. 2. 3 4. 2000-2001 Annual Report of IFCI 2000-2001 Annual Report of ICICI 2000-2001 Annual Re-port of IDBI RBI Guidelines Circulars on Income Recognition and Asset Classification 38 NLDIMSR

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V.

Other Sources Internet Websites I. 2. 3. www.rbi.org.com www.indiainfoline.com

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