A RESEARCH REPORT ON
“A study of Non Performing Asset Management of Bank of India” SUBMITTED IN THE PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE MASTER OF BUSINESS ADMINISTRATION
Under The Guidance of: Mrs. Gunjan Kulsrestha (FACULTY)
Submitted by: Ravi Gupta Roll no.: 0906370083 Batch: 2009-2011 MBA-4th SEM
G.L.A. INSTITUTE OF TECHNOLOGY AND MANAGEMENT, MATHURA (AFFILIATED TO GAUTAM BUDDH TECHNICAL UNIVERSITY, LUCKNOW)
ACKNOWLEDGEMENT This is to express my earnest gratitude and extreme joy at being bestowed with an opportunity to get an opportunity to get an interesting and informative project. It is impossible to thank all the people who have helped me in completion of project, but I would avail this opportunity to express my profound gratitude and indebtness to the following people for all the help they have given me. I am extremely grateful to my project guide and co-coordinator Prof. Gunjan Kulsrestha who has given an opportunity to work on such an interesting project. She proved to be a constant source of inspiration to me and provided constructive comments on how to make this project better. Credit also goes to my friends whose constant encouragement let me in good stead. Lastly, I would also like to thank the staff of Bank of India for providing me few but very valuable details about my project.
Ravi Gupta
EXECUTIVE SUMMARY After liberalization the Indian banking sector developed very appreciate. The RBI also nationalized good amount of commercial banks providing socio economic services to the people of the nation. The public Sector banks have shown very good performance as far as the financial operations are concerned. The total income of the public sector banks has also shown good performance since the last few years. The public sector Banks have shown comparatively good result. The gross profits and the net profits of the Public Sector banks have been on a high from past few years. The private sector banks are also showing good results in case of profits. However, the only problem of the Scheduled Commercial Banks these days are the increasing level of the non performing assets. The Non-Performing Assets (NPAs) problem is one of the foremost and the most formidable problems that have shaken the entire banking industry in India like an earthquake. Like a canker worm, it has been eating the banking system from within, since long. It has grown like a cancer and has infected every limb of the banking system. At macro level, NPAs have choked off the supply line of credit to the potential borrowers, thereby having a deleterious effect on capital formation and arresting the economic activity in the country. At the micro level, the unsustainable level of NPAs has eroded the profitability of banks through reduced interest income and provisioning requirements, besides restricting the recycling of funds leading to serious asset liability mismatches. The problem of NPAs is not a matter of concern for the lenders alone. It is a matter of grave concern to the public as well, as bank credit is the catalyst to the economic growth of the country and any bottleneck in the smooth flow of credit, one cause for which is mounting NPAs, is bound to create adverse repercussions in the economy. Mounting menace of NPA has raised the cost of credit, made banks more adverse to risk and squeezed genuine small and medium enterprise from accessing competitive credit and has throttled their enterprising spirits as well. The spiraling and the devastating effect of NPA on the economy have made the problem of NPA as issue of public debate and of national priority. Therefore, any measure or reform on this front would be inadequate and incomprehensive, if it fails to make a dent in NPA reduction and stall their growth in future, as well. NPAs have deleterious effect on the return on assets in several ways: --(1) They erode current profits through provisioning requirements (2) They result in reduced interest income (3) They require higher providing requirements affecting profits and accretion to Capital funds recycling of funds, set in asset-liability mismatches, etc.
The RBI has also tried to develop many schemes and tools to reduce the non Performing assets the results are not up to the expectations. To improve NPAs each bank should be motivated to introduce their own precautionary steps. Before lending the banks must evaluate the feasible financial and operational prospective results of the borrowing companies by keeping in Considerations the overall impacts all the factors that influence the business.
INTRODUCTION
MANAGEMENT OF NON-PERFORMING ASSETS – A BRIEF OVERVIEW INTRODUCTION In human life, sickness, bankruptcy and death are not welcome, but they do occur. So is the case with advances, which fall sick, go into liquidation and die much against the wishes of all concerned. Realities cannot be escaped. It is necessary to face them. In the context of non-performing assets the situation is no different. The frequent references to non-performing assets primarily concern sick industrial units and mounting over dues in all other sectors of advances, particularly in agriculture. Financial assets become non-performing primarily because of the failure of the units financed by banks. The costs of managing non-performing assets are exorbitant. Bankers are compelled to get bogged down with these matters thereby neglecting their role as a developing catalyst.
NATURE OF NON-PERFORMING ASSETS The term non-performing assets can be defined both in the wider and in the narrower sense. While in the narrow sense it includes only non-performing credit portfolio, in the wider sense it may also include the volume of unutilized cash balances, unutilized or underutilized physical assets like buildings and premises in the still wider sense, it may also include non-performing human resources – a large volume of workforce not effectively utilized. A non-performing asset in the banking sector also is termed as an asset not contributing to the income of the Bank. In other words they are the zero yielding assets that are considered. The nonperforming assets, inter-alia, includes surplus cash and bankers balances hold over the optimal levels, amounts lying in the suspense account, investments in shares or debentures and other securities not yielding any dividend or interest, advances where interest is not forthcoming and even the principal amount is difficult to recover. In terms of Health code basis, we may say that advances classified under the Health Code Numbers 6,7,8 and those advances under the Health Code Numbers 4,5 on which no interest is being charged, may be classified among non-performing assets.
REASONS FOR ACCUMULATION OF NON-PERFORMING ASSETS: There may be various internal and external factors behind the transformation of an asset from a performing one to a non-performing one. Some of the reasons for accumulation of the nonperforming assets are: •
The fast and rapid geographical expansion of the banking sector during a short span, throughout the country, and our inability to cope with the voluminous work in an orderly manner.
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Lack of adequate care while appraising the various proposals in the initial stage.
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Inadequacy of the technical staff equipped with the latest market information and the technological developments is also an important factor in faulty appraisal of proposals.
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In case of most of the large and medium scale industries, the main reason for sickness has been found to be mismanagement.
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Power shortages, outdated machinery, fluctuations in supply of raw materials due to various causes, non-release of subsidy in time and deficiency in demand are also important reasons. Small scale industries are prone to sickness mainly due to lack of managerial experience, technical incompetence and decline in demand for their products and overall demand recession.
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Further cases are not unknown where deliberate efforts are made by a certain category of borrowers to declare their units sick, or weak to avail of benefits from different sources.
PROFILE OF THE ORGANIZATION
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen from Mumbai. The Bank was under private ownership and control till July 1969 when it was nationalised along with 13 other banks. Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lakhs and 50 employees, the Bank has made a rapid growth over the years and blossomed into a mighty institution with a strong national presence and sizable international operations. In business volume, the Bank occupies a premier position among the nationalised banks. The Bank has 3101 branches in India spread over all states/ union territories including 93 specialized branches. These branches are controlled through 48 zonal offices. There are 33 branches/offices (including three representative offices) abroad. The Bank came out with its maiden public issue in 1997. Total number of shareholders as on 31/12/2008 is 2, 27,310. While firmly adhering to a policy of prudence and caution, the Bank has been in the forefront of introducing various innovative services and systems. Business has been conducted with the successful blend of traditional values and ethics and the most modern infrastructure. The Bank has been the first among the nationalized banks to establish a fully computerized branch and ATM facility at the Mahalaxmi Branch at Mumbai way back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the introduction of the Health Code System in 1982, for evaluating / rating its credit portfolio. The Bank's association with the capital market goes back to 1921 when it entered into an agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House. It is an association that has blossomed into a joint venture with BSE, called the BOI Shareholding Ltd. to extend depository services to the stock broking community. Bank of India was the first Indian Bank to open a branch outside the country, at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable presence abroad, with a network of 33 branches
(including three representative offices) at key banking and financial centre’s viz. London, Newyork, Paris, Tokyo, Hong-Kong and Singapore. The Bank has a strong position in financing foreign trade. Over 270 branches provide export credit. The expertise in this area has enabled the Bank to achieve a leading position in providing export credit in certain areas like diamond export. To effectively meet the ever-growing challenges and competition, the Bank has made a good head-way in bringing about technological up gradation. MIS and critical functions of controlling offices have been computerized. At present, the operations at about 2562 branches are totally computerized. 70 branches operate in partially-computerized mode besides these 964 branches and 31 extension counters are migrated to Core Banking Solution. New facilities such as, Telebanking, ATM & Signature Retrieval Systems have been introduced in a progressing manner to add value to services. Telebanking facilities with Fax on Demand facility, Remote Access Terminals for Corporate Customers are now available at many branches. The Bank has installed ATMs in Mumbai and other centre’s in the country. The Bank is a member of the RBI's VSAT Network and has installed 39 VSATs linking strategic branches/offices. The Bank is making a paradigm shift from branch automation to bank automation and is in the process of implementing a Multi-Branch Banking Project, which facilitates City-wise Connectivity of Computerized Branches. The Bank is in the process of installing BOINET, a Wide Area Network for providing a inter- and intra-city connectivity, as a part of enhancing its decision support system. The Bank's corporate personality and philosophy are fully reflected in the emblem, which is a five-pronged Star -- a harmonious blend of traditional and the functional. The elongated prong pointing upwards conveys the Bank's drive to achieve ascending goals. The Star is a beacon and guide to those in need of direction. Mission of Bank of India "To provide superior, proactive banking services to niche markets globally, while providing costeffective, responsive services to others in our role as a development bank, and in so doing, meet the requirements of our stakeholders". Vision of Bank of India "To become the bank of choice for corporate, medium businesses and upmarket retail customers and to provide cost effective developmental banking for small business, mass market and rural markets"
LITERATURE REVIEW Magazine name – CAPITAL MARKET Dec. 2009 issue The article taken for reference from this magazine and the article is named “Short term pains, long-term gain” on Pg.-4. It discusses about the rising NPAs, increase in provision coverage, sluggish credit off take and dwindling treasury income. It states that these measures are going to set ways for better valuations. It tells about how the BSE Bankex has outperformed the BSE Sensex by recording robust returns of 174%. It discusses about various banks namely Bank of India, Union Bank of India, State Bank of India, Bank of Baroda, Punjab National Bank and IndusInd Bank have reached their all time high during Oct. – Nov. 2009 period. It discusses about the preparedness of various banks for reducing NPAs i.e. by improving capital adequacy ratio, increasing the minimum provision coverage ratio, introducing new policies for broader interest rate regime, creating more transparent system and extending banking reach. It also discusses about the benchmark prime lending rate (BPLR) concept of RBI which helps to ensure appropriate pricing of loans. Magazine name – BUSINESS TODAY Dec. 2009 issue The magazine gives us the data about the various commercial banks operating in India and Ranks them according to four groups namely Large banks, Mid–size banks, Small banks and Very Small banks. From the data given in the magazine done by BT-KPMG study is clear that despite the global credit crisis continues to take its toll- last month the 100th US bank collapsed since Lehman Brothers the Indian Banks continue to do business as usual and the result is given in numbers through this survey. Research Paper – “A comparative study of Non Performance Assets in India” by Prashanth K Reddy, IIM- Ahmedabad This article discusses about the financial sector reform in India which has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk based supervision but the progress on the structural-institutional aspects has been much slower and is a cause for concern. It tells about what changes are required to tackle the NPA problem. This paper also deals with the experiences of other Asian countries in handling of NPAs. It also suggests mechanisms to handle the problem by drawing on experiences from other countries.
Report on “Maximizing Value of Non-Performing Assets” by Organization for Co-Operation and Development (OECD) This report deals with the changing dynamics in Asian Non Performing Loans and the sociological reflections on Insolvency reforms in East Asia. But more importantly it mentions different country reports of Asian region. In case of India “Sumant Batra” discusses the developments in India. It tells us about what is NPA and gives an overview of non performing assets in India. It also discusses about the factors contributing to NPAs and its impact on the working of commercial banks. The legal reforms and the RBI guidelines for NPAs are discussed. Research Paper on “Rooting Out Non-Performing Assets” by Nachiket Mor, ICICI research centre The paper attempts to highlight some major micro-level issues that are at the root of why unsustainable performance levels are being observed within Banks. The authors argue that unless the micro level issues are dealt with, even after the systemic issues are resolved, the problem of NPAs or other failures of the intermediation process may resurface with greater intensity. The manner in which banks manage the three phases in the life cycle of an asset (creation, monitoring and recovery) determines the quality of the intermediation process within a bank. In this paper, the need for internally consistent business models to guide the behavior of a bank in each of these three phases is discussed.
RESEARCH OBJECTIVE
To understand what is Non Performing Assets and what are the underlying reasons for the emergence of the NPAs. To know what steps are being taken by the Indian banking sector to reduce the NPAs? To study the NPA management policy of Bank of India. To review Bank of India’s performance in non-performing assets for the time period of 2009-2010.
HYPOTHESIS OF STUDY: Statement for Hypothesis H0: The problem of NPA is less acute in Bank of India as compared to other commercial banks. H1: The null hypothesis is not correct, i.e. the NPA problem of Bank of India is severe. The project is to determine how to manage the Non Performing Assets in Banks and what is the trend of NPAs from the past years. To carry out the study regarding NPAs which is of great concern in today’s scenario, a very simple approach is followed to draw a conclusion. The comparison is done between the data of Bank of India & other commercial banks. The hypothesis testing will help us in formulating an outcome. Since this being a descriptive research much emphasis will be given on comparison analysis of various years’ secondary data to carry out an inference.
Scope of the Study: The scope of the study is limited to the objectives as mentioned earlier. The study ranges from understanding the significance of non-performing assets to defining the criteria of identifying nonperforming assets in the banking sector, to review Bank of India’s performance in the management of non-performing assets. It also reviews the framework of Bank of India’s recovery policy with which it hopes to bring down the percentage of net non-performing assets to the net advances. The study also encompasses the recommendations, the adhering of which will bring good results to the organization.
Conceptual Framework
Why NPA have become an issue for banks and financial institutions in India? To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPA have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPA affects the repayment capacity of banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning nonperforming assets.
The following are the primary causes for turning the accounts into NPA: Diversion of funds, mostly for the expansion / diversification of business or for promoting associate concern. Factors internal to business like product / marketing failure, inefficient management, inappropriate technology, labor unrest. Changes in the Macro-environment like recession in the economy, infrastructural bottlenecks Inadequate control / supervision, leading to time / cost over-runs during project. Changes in Government policies e.g. Import duties. Deficiencies like delay in the release of limits/ funds by banks / FIs
Secondary causes are as follows: Selection of the project. Implementation of the project- time over-run, cost over-run, under-financing technology involved Intention of the borrower.
Industrial / Economic trend. Absence of the up gradation of the unit / ploughing back of the profit
WHAT IS NPA? Non-Performing Assets - Background: It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (NPA) and the issue is becoming more and more unmanageable. In order to bring the situation under control, some steps have been taken recently. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, (SARFAESI) 2002 was passed by Parliament, which is an important step towards elimination or reduction of NPA.
Meaning of NPA: An asset is classified as non-performing asset (NPA) if dues in the form of principal and interest are not paid by the borrower 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 facility granted by bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status.
NPA MANAGEMENT POLICY The three letters “NPA” Strike terror in banking sector and business circle today. NPA is short form of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to avoid NPA, then left is to look after the factor responsible for it and managing those factors.
Definition of NPA NON PERFORMING ASSET (NPA) Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset. Non Performing Asset means an asset or account of borrower which has been classified by bank or financial institution as sub –standard, doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI. An amount due under any credit facility is treated as “past due “when it is not been paid within 30 days from the due date. Due to the improvement in the payment and settlement system, 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 shell be an advance where…
1. Interest and / or installment of principal remain overdue for a period of more than 180 days in respect of a term loan, 2. The account remains „out of order „ for a period of more than 180 days, in respect of an overdraft / cash credit (OD/CC) 3. The bill remains overdue for a period of more than 180 days in case of bill purchased or discounted. 4. Interest and / or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and 5. 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 ‟90 days overdue „norms for identification of NPAs, from the year ending March 31, 2004, a non performing asset shall be a loan or an advance where; 1. Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, 2. The account remains „out of order „ for a period of more than 90 days ,in respect of an overdraft/cash credit (OD/CC) 3. The bill remains overdue for a period of more than 90 days in case of bill purchased or discounted.
4. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and 5. 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 sanctioned limit / drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned amount /drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period, these account should be treated as „out of order‟.
Overdue Any amount due to the bank under any credit facility is „overdue‟ if it is not paid on due date fixed by the bank.
In short A NPA is a loan or an advance where; 1. Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan 2. The account remains “out of order” in respect of an overdraft/ cash credit 3. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted 4. The installment or interest remains overdue for two crop seasons in case of short duration crops and for one crop season in case of long duration crops
ASSET CLASSIFICATION AND NPA NORMS Classification of Assets: While new private banks are careful about their asset quality and consequently have low nonperforming assets (NPAs), public sector banks have large NPAs due to wrong lending policies followed earlier and also due to government regulations that require them to lend to sectors where potential of default is high. Allaying the fears that bulk of the Non-Performing Assets (NPA) was from priority sector, NPA from priority sector constituted was lower at 46 per cent than that of the corporate sector at 48 per cent. Loans and advances account for around 40 per cent of the assets of SCBs. However, delay/default in payment of interest and/or repayment of principal has rendered a significant proportion of the loan assets non-performing. As per RBI‟s prudential norms, a Non-Performing Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for more than two quarters after it has become past due. “Past due” denotes grace period of one month after it has become due for payment by the borrower.
Regulations for asset classification Assets are classified into four classes - Standard, Sub-standard, Doubtful, and Loss assets. NPA consist of assets under three categories: sub-standard, doubtful and loss. RBI for these classes of assets should evolve clear, uniform, and consistent definitions. The banks should classify their assets based on weaknesses and dependency on collateral securities into four categories:
i. Standard Assets: It carries not more than the normal risk attached to the business and is not an NPA. Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan do not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories
ii. Sub-standard Asset: A sub-standard asset is one which has remained NPA for a period less than or equal to 12 months from 31.3.2005. In such case the current net worth of the borrower/guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that 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.
iii. Doubtful Assets: With effect from 31.3.2005, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristics that the weaknesses make collection or liquidation in full, - on the basis of currently known facts, conditions and valueshighly questionable and improbable. Under this category there are three stages: D-I Doubtful up to one year D-II Doubtful for further two years D-III Doubtful beyond three years.
iv. Loss Assets: An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset, but the amount has not yet been written off wholly or partly. The banking industry has significant market inefficiencies caused by the large amounts of Non Performing Assets (NPA) in bank portfolios, accumulated over several years. Discussions on non-performing assets have been going on for several years now. One of the earliest writings on NPA defined them as "assets which cannot be recycled or disposed off immediately, and which do not yield returns to the bank, examples of which are: Overdue and stagnant accounts, suit filed accounts, suspense accounts and miscellaneous assets, cash and bank balances with other banks, and amounts locked up in frauds".
Guidelines for the classification of assets •
Classification of assets into above categories should be done taking into account the degree of well defined credit weaknesses and the extent of dependencies on collateral security for the realization of dues.
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Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs especially in respect of high value of accounts.
Account with temporary Deficiencies: The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies, which are temporary in nature as such as non – availability of adequate drawing power based on latest stock.
Asset classification to be borrower – wise and not facility-wise: It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or a part thereof, which has become irregular.
Advances under consortium arrangements: Asset classified of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having bearing on the recoverability of the advances. Accounts where there is erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightway classified under doubtful category and provisioning should be made as applicable to doubtful assets.
Agricultural Advances •
In respect of advances granted for agricultural purpose where interest and / or installment of principal remains unpaid after it has become past due for two harvest seasons but for a period not exceeding two half years , such an advance should be treated as NPA.
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Where the natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure-conversion of the short –term production loan into a term or re-schedulement of the repayment period.
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In such cases of conversation or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA.
Restructuring /rescheduling of loans: A standard asset where the terms of the loan arrangement regarding interest and principal have been renegotiated or rescheduled after the commencement of production should be as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or restructured terms. In case of substandard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advances automatically unless there is satisfactory performance under the rescheduled –renegotiated terms.
Exceptions: As trading involves only buying and selling of commodities and the problems associated with manufacturing units such as bottleneck in commercial production, time and cost escalation etc. are not applicable to them.
NPA Norms Provisional Norms: Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent basis so that the balance sheets reflect a true picture of the financial status of the bank. The Narsimham Committee has recommended the following provisioning norms •
100 per cent of loss assets or 100 per cent of out- standings for loss assets;
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100 per cent of security shortfall for doubtful assets and 20 percent to 50 per cent of the secured portion; and
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10 per cent of the total out standings for substandard assets.
A provision of 1% on standard assets is required as suggested by Narsimham Committee II, 1998. Banks need to have better credit appraisal systems so as to prevent NPA from occurring. The most important relaxation is that the banks have been allowed to make provisions for only 30 per cent of the "provisioning requirements" as calculated using the Narsimham Committee recommendations on provisioning. The encouraging profits recently declared by several banks have to be seen in the light of provisions made by them. To the extent that provisions have not been made, the profits would be fictitious.
Disclosure Norms: Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and borrowings. Apart from this, banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. These disclosures were to be made for the year ending March 2000. In fact, the banks must be forced to make public the nature of NPA being written off. This should be done to ensure that the taxpayer’s money given to the banks, as capital is not used to write off private loans without adequate efforts and punishment of defaulters.
Asset Classification
Provision requirements
Standard assets 0.25% of the o/s dues in all Standard Assets under SME and Agricultural sector 1.00% of the o/s dues in all Standard Assets of the A/cs to Capital market exposure, personal loan, commercial real estate and residential HSG. Beyond Rs. 20lakhs. 0.40% of the o/s dues in all standard assets belonging to all other categories.
Substandard
10% of the sum of the net investment in the lease and the unrealised
assets
portion of finance income net of finance charge component. The terms „net investment in the lease‟,‟ finance income‟ and finance charge are as defined in „AS19 – Leases‟ issued by the ICAI.
Doubtful
20% - 50% of the secured portion depending on the age of NPA, and
assets
100% of the unsecured portion.
Loss assets
It may be either written off or fully provided by the bank. The entire asset should be written off If the assets are permitted to remain in the books for any reason, 100 % of the outstanding should be provided for.
FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors. EXTERNAL FACTORS: Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity. Willful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans. Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours framers depends on rain fall for cropping. Due to irregularities of rain fall the framers are not to achieve the production level thus they are not repaying the loans. Industrial sickness Improper project handling, ineffective management, lack of adequate resources, lack of advance technology, day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.
Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it. Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central govt to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.
INTERNAL FACTORS Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of profitability i. Principles of safety By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers: a. Capacity to pay b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully he should be a person of integrity and good character. Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized. Improper swot analysis The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. 1. Banks should consider the borrowers own capital investment. 2. It should collect credit information of the borrowers from From bankers Enquiry from market/segment of trade, industry, business. From external credit rating agencies. Analyze the balance sheet True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. Purpose of the loan When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing.
Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the 1. Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits. Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.
MANAGING NPA: The primary aim of any business is to make profits. Therefore, any asset created in the course of the conduct of business should generate income for the business. This applies equally to the business of banking. The banks the worlds over deal in money, by accepting deposits (liabilities) and out of such deposits (liabilities) lend/create loans (assets). If for any reason such assets created do not generate income or become sticky and difficult of recovery, then the very position of the banks in repaying the deposits (liabilities) on the due dates would be at stake and in jeopardy. Banks with such assets portfolio would become weak and naturally such weak banks will lose the faith and confidence of the investors. With the introduction of prudential norms for income recognition, assets classification and provisioning, banks have become quite sensitive and are taking all possible steps to strengthen their assets acquisition and monitoring systems. There is also a growing awareness to bring down non-performing assets as these are having adverse impact on their profitability due to de-recognition of interests as well as requirement of heavy loan loss provisions on such assets. Therefore it would be prudent for banks to manage their assets in such a manner that they always remain healthy, generate sufficient income and capable of repayment/recovery on the due dates. Management of performing/non-performing assets in banks has become an `art and science' and virtually `a battle of wits' between the banker and the borrower with the latter demanding write off or at least a major sacrifice from the bankers side irrespective of whether he is in a position to pay or not. Management of non-performing assets of the financial sector was put on fast track recently with the Union Cabinet approving the promulgation of an ordinance to facilitate securitization and reconstruction of financial assets. Besides enabling banks and financial institutions to create a market for the securitized assets and improve their asset liability management, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance would also assist in setting up Asset Reconstruction Companies. Though this is a welcome development, the bankers have to do their basic homework and to utilize this opportunity to clean up and recover their dues at an early date.
MEASURES TO RECOVER NPA’S Over the last few years Indian banking in its attempt to integrate itself with the global banking has been facing lots of hurdles in its way due to its inherent weaknesses, despite its high sounding claims and lofty achievements. One of the major hurdles, the Indian banking is facing today, is its ever-growing size of non-performing assets over which the top management of almost each bank is baffled. On account of the intricacies involved in handling the NPA the ticklish task of assets management of the bank has become a tight rope walk affair for the controlling heads, because a little wavering „this or that side‟ may land the concern bank in trouble. The growing NPA is a potent source of worry for the finance minister as well, because in a developing country like ours, banking is seen as an important instrument of development, while with the backbreaking NPA banks have become helpless burden on the economy.
NPA with outstanding up to 5 crore: In case of doubtful and loss assets, through the modified schemes, the banks have been directed to follow up a settlement formula under which the minimum amount to be recovered, amounts to be entire outstanding running ledger balances as on the date the account was identified as NPA i.e. the date from which the interest was not charged to the running ledger, an analysis of the given formula shows that RBI has been very much generous in granting huge relaxation to the borrowers who were not coming forward for setting their overdue loans due to one or other reason. The scheme is of high practical value as it protects the borrowers who were having genuine problems in clearing their dues because the interest component constituted a multiplied amount of principal outstanding. On the other hand, the concerned banks were also finding in difficult to sacrifice the entire interest component, but outstanding in the dummy ledger. Now as per the provision to the scheme, they will be ready to grant such relaxation in favour of the borrowers. These guidelines have come as a windfall for borrowers who after a lot of negotiations were almost ready to repay back their principal as well as part of the interest component to settle their accounts, as under the modified scheme, they would be able to save the interest component. To that extent the concerned bank stands to lose. In the case of sub standard assets, the settlement formula as given in the modified scheme states that the minimum sum to be recovered must contain the entire running ledge outstanding balance as on the date of the account was identified as NPA i.e. the date from the which interest was not charged to the running ledger plus interest at the existing prime lending rate of the bank. As per the modified scheme, the terms suggested for the payment of settlement amount NPA are simple and
pragmatic. As per the terms of the scheme, the settlement amount should be paid in lump sum by the borrower. However in case of the borrower is unable to repay back in a lump sum, the scheme allows sufficient breathing period to enable him to arrange the funds and clear at least 25 percent of the settlement amount to be paid upfront and the remaining amount to be recovered in installments spread over a period of one year along with interest at the existing PLR from the date of settlement up to the date of final payment.
NPA with outstanding over Rs. 5 crores: For recovery of NPA over Rs. 5 crore, RBI has left the matter to the concerned banks and advised that the concerned banks may formulate policy guidelines regarding their settlement and recovery. The freedom, in such cases, is given to the banks, because the attending circumstances in each case may vary from the other. Therefore it was in the right direction that adopting a generalized approach was not thought appropriate. In cases, where the amount involved is above Rs. 5 crore, RBI expects CMD of each bank to supervise the NPA personally. The CMDs of the concerned banks are advised to review all such cases within a given timeframe and decide the course of action in terms of rehabilitation/restructuring. RBI also desires the submission of a quarterly report of all NPA above Rs. 5 crore from PSU banks. Thus by putting up the cut-off dates for the implementing of the scheme, RBI desires the banks to realize the seriousness of the issue and gear up to sweep away the NPA in one go. For commercial banks, it is a golden opportunity to clear the mess, consolidate and come out on a track leading the path of global banking. The time given for weeding out the disastrous NPA is neither too long nor too short and the banks, with proper planning and follow up can drastically reduce their NPAs, if they firmly resolve to do so. RBI expects the commercial banks to follow the guidelines in letter and spirit without any discrimination or discretion as a slight dilution may jeopardize their interest. A proper monitoring system is also desired to be evolved for monitoring the progress of the scheme. As this is a rare opportunity given to the defaulting borrowers so that they can avail the chance given for the settlement of their loans. Without adequate publicity of the scheme the response from the defaulting borrowers may not be there to the expected level.
Legal and Regulatory Regime A. Debt Recovery Tribunals DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain cases referred to them, by the banks and FIs for recovery of debts due to the same. The order passed by a DRT is appeal able to the Appellate Tribunal but no appeal shall be entertained by the DRAT unless the applicant deposits 75% of the amount due from him as determined by it. However, the Appellate Tribunal may, for reasons to be received in writing, waive or reduce the amount of such deposit. Advances of Rs. 1 million and above can be settled through DRT process. An important power conferred on the Tribunal is that of making an interim order (whether by way of injunction or stay) against the defendant to debar him from transferring, alienating or otherwise dealing with or disposing of any property and the assets belonging to him within prior permission of the Tribunal. This order can be passed even while the claim is pending. DRTs are criticized in respect of recovery made considering the size of NPAs in the Country. In general, it is observed that the defendants approach the High Court challenging the verdict of the Appellate Tribunal which leads to further delays in recovery. Validity of the Act is often challenged in the court, which hinders the progress of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of infrastructure.
Registrar Functions, duties and powers of Registrar: To examine and verify documents including petitions, notes of defense and memoranda of appeals to be filed with the tribunal or appellate tribunal and register them if they meet requirements or endorse them with reasons if they cannot be registered, To verify duplicate copies submitted in a case with the originals and certify them if they appear in order, and if the originals appear to have some defects, to mention such defects and get the concerned party to sign to that effect, To verify whether documents submitted along with petitions, memoranda of appeal and notes of defense are correct or not, To issue summons and get it served, To appoint days for appearance in cases, indicating reasonable reasons pursuant to law, To obtain power of attorney and get a case assumed pursuant to prevailing law,
To promptly execute, or cause to be executed, actions as referred to in the order made by the Bench, To have security or guarantee as per the order made by the Bench, To maintain, or cause to be maintained, updated records including registration books, To maintain personal records of employees, To safely retain orders and directions in a serial order.
Debt Recovery Officer The order issued by the Debt Recovery Officer shall deem to be the order issued by the Tribunal. If any person disobeys any order given by the Debt Recovery Officer, the Tribunal may institute contempt proceedings against that person under the provision of the Act. In recovering the principal and interest of a loan, the Debt Recovery Officer, may follow the following procedures: In consistent with the decision of the Tribunal the Debt Recovery Officer may follow the following procedures, subject to the prevailing law.
Power of Debt Recovery Officer To take possession of, or auction, the borrower's other movable or immovable property whether furnished as security or not, To take possession of, or auction, the guarantor's movable or immovable property, Where any individual is a borrower or guarantor, to arrest such individual and detain him pursuant to the prevailing law.
Presiding officer: He is the Head of the department. He has judicial power to execute the case.
B. Lokadalats The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987 helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known for effecting mediation and counseling between the parties and to reduce burden on the court, especially for small loans. Cases involving suit claims up to Rs. l million can be brought before the Lokadalat and every award of the Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any court against the award made by the Lokadalat. Several
people of particular localities/ various social organizations are approaching Lokadalats which are generally presided over by two or three senior persons including retired senior civil servants, defense personnel and judicial officers. They take up cases which are suitable for settlement of debt for certain consideration. Parties are heard and they explain their legal position. They are advised to reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social workers. If the compromise is arrived at, the parties to the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to obtain a consent decree. Normally, if such settlement contains a clause that if the compromise is not adhered to by the parties, the suits pending in the court will proceed in accordance with the law and parties will have a right to get the decree from the court. In general, it is observed that banks do not get the full advantage of the Lokadalats. It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the Lokadalat meets. In any case, we should continue our efforts to seek the help of the Lokadalat.
C. Enactment of SRFAESI Act The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition to asset reconstruction and ARCs, the Act deals with the following largely aspects, Securitization and Securitization Companies Enforcement of Security Interest Creation of a central registry in which all securitization and asset reconstruction transactions as well as any creation of security interests has to be filed. The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover various aspects relating to registration, operations and funding of ARCS and resolution of NPAs by ARCS. The RBI has also issued guidelines to banks and financial institutions on issues relating to transfer of assets to ARCS, consideration for the same and valuation of instruments issued by the ARCS. Additionally, the Central Government has issued the security enforcement rules ("Enforcement Rules"), which lays down the procedure to be followed by a secured creditor while enforcing its security interest pursuant to the Act. The Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to the underlying security without
reference to the Court after giving a 60 day notice to the defaulting borrower upon classification of the corresponding financial assistance as a non-performing asset. The Act permits the secured creditors to take any of the following measures: Take over possession of the secured assets of the borrower including right to transfer by way of lease, assignment or sale; Take over the management of the secured assets including the right to transfer by way of lease, assignment or sale; Appoint any person as a manager of the secured asset (such person could be the ARC if they do not accept any pecuniary liability); and Recover receivables of the borrower in respect of any secured asset which has been transferred. After taking over possession of the secured assets, the secured creditors are required to obtain valuation of the assets. These secured assets may be sold by using any of the following routes to obtain maximum value. By obtaining quotations from persons dealing in such assets or otherwise interested in buying the assets; By inviting tenders from the public; By holding public auctions; or By private treaty Lenders have seized collateral in some cases and while it has not yet been possible to recover value from most such seizures due to certain legal hurdles, lenders are now clearly in a much better bargaining position vis-à-vis defaulting borrowers than they were before the enactment of SRFAESI Act. When the legal hurdles are removed, the bargaining power of lenders is likely to improve further and one would expect to see a large number of NPAs being resolved in quick time, either through security enforcement or through settlements. Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956. The Act designates any person holding not less than 10% of the paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a controlling interest in, being the holding company of or being in control of the ARC. The SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less than Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted assets. ARCS have been granted a maximum realization time frame of five years from the date of acquisition of the assets. The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction. These include: Enforcement of security interest;
Taking over or changing the management of the business of the borrower; The sale or lease of the business of the borrower; Settlement of the borrowers' dues; and Restructuring or rescheduling of debt. ARCS are also permitted to act as a manager of collateral assets taken over by the lenders under security enforcement rights available to them or as a recovery agent for any bank or financial institution and to receive a fee for the discharge of these functions. They can also be appointed to act as a receiver, if appointed by any Court or DRT.
D. Institution of CDR Mechanism The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in India is broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The objective of the CDR mechanism has been to ensure timely and transparent restructuring of corporate debt outside the purview of the Board for Industrial and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is intended to preserve viable corporate affected by certain internal/external factors and minimize losses to creditors/other stakeholders through an orderly and coordinated restructuring programme. RBI has issued revised guidelines in February 2003 with respect to the CDR mechanism. Corporate borrowers with borrowings from the banking system of Rs. 20crores and above under multiple banking arrangement are eligible under the CDR mechanism. Accounts falling under standard, sub-standard or doubtful categories can be considered for restructuring. CDR is a non-statutory mechanism based on debtor-creditor agreement and intercreditor agreement. Restructuring helps in aligning repayment obligations for bankers with the cash flow projections as reassessed at the time of restructuring. Therefore it is critical to prepare a restructuring plan on the lines of the expected business plan along with projected cash flows. The CDR process is being stabilized. Certain revisions are envisaged with respect to the eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks are not members of the CDR forum, and it is expected that they would be signing the agreements shortly. However they attend meetings. The first ARC to be operational in India- Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum. Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender arrangements and to increase transparency in the process. While in the RBI guidelines it has been recommended to involve
independent consultants, banks are so far resorting to their internal teams for recommending restructuring programs.
E. Compromise Settlement Schemes One Time Settlement Schemes NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The scheme also covers NPAs classified as sub-standard as on 31st March 2000, which have subsequently become doubtful or loss. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. However cases of wilful default, fraud and malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account. Negotiated Settlement Schemes The RBI/Government has been encouraging banks to design and implement policies for negotiated settlements, particularly for old and unresolved NPAs. The broad framework for such settlements was put in place in July 1995. Specific guidelines were issued in May 1999 to public sector banks for one-time settlements of NPAs of small scale sector. This scheme was valid until September 2000 and enabled banks to recover Rs 6.7 billion from various accounts. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs. 50 million and less. These guidelines were effective until June 2001 and helped banks recover Rs. 26 billion.
RESEARCH METHODOLOGY
Type of research: The research design used for carrying out this project is descriptive research because the report deals with statistical data and the main cause of the report is to describe the factors affecting the problem mentioned.
Sources of data: There are two types of data - Primary data or raw data and secondary data or second hand data. The data which is collected on source which has not been subjected to processing or any other manipulation is primary data whereas secondary data is the data collected by someone other than the user through common sources like censuses, surveys, organizational records and data collected through qualitative methodologies or qualitative research. The data collected is mainly secondary in nature. The sources of data for this Report include the literature published by the Bank of India and also the Reserve Bank of India. Also the various magazines dealing with the current banking scenario and research paper have also been a source of information. The booklet on Recovery Policy published by the Asset Recovery Department of Bank of India has been of great help.
Sampling Plan: The target population of study included the Bank of India in particular and all other commercial banks in general.
Techniques used for analysis of data: Analytical tools are been used for data analysis. The analytical tools such as Pie charts, bar graphs, tables are used to compare the past data with current so as to get a particular inference from it on analysis.
Scope Of The Study: The scope of the study is limited to the objectives as mentioned earlier. The study ranges from understanding the significance of non-performing assets to defining the criteria of identifying nonperforming assets in the banking sector, to review Bank of India’s performance in the management of non-performing assets. It also reviews the framework of Bank of India’s recovery policy with which it hopes to bring down the percentage of net non-performing assets to the net advances. The study also encompasses the recommendations, the adhering of which will bring good results to the organization.
DATA COLLECTION & ANALYSIS
HIGHLIGHTS FOR THE QUARTER ENDED 30th JUNE 2009 of BANK OF INDIA Business Mix reaches Rs.342831 crores - robust rise of 21.52 %. Net Profit up by 3.91% from Rs.562 crores to Rs.584 crores. Operating Profit up by 2.05% (Rs. 1094 Crore) supported by growth in net interest income as well as other income. Net Interest Income rises by 10.16% to Rs. 1301Cr from Rs. 1181 Cr, despite challenging conditions. Net Interest Margin at 2.42%. Non Interest Income rises by 14.13% from Rs 566 crores to Rs 646 crores. Gross NPA ratio at 1.89%. Net NPA ratio at 0.84% as against 0.52% as on June 2008 (*). Provision coverage stands at 67.41% (*). (*) Due to change in Accounting treatment of floating provisions as per RBI guidelines
Cost to Income Ratio is at 43.82%. Return on Assets is at 1.03%. Total Income for the Quarter rose to Rs.5024 Crore from Rs.4115 Crore, showing a growth of 22.09%. Bank has made adequate provisions for terminal benefits, in line with AS 15 requirements. Rs. 105.77Cr estimated and provided. CASA amounted to Rs. 51333 crores constituting 32% of Total Deposits as against 31% in March‟09. Earnings per share for 12 months go up from Rs. 10.70 to Rs.11.13. Book value per share rises from Rs. 174.74 to Rs.223.00. Capital Adequacy Ratio rises to 13.26% from 12.39 %as per Basel II. Deposits grew by 22.47% on YoY basis to Rs.1, 95,021 crores. Advances rose by 20.28% to reach Rs.1, 47,809 crores. Total no of branches are 3031. All branches are functioning on CBS platform, spanning over 1920 cities & towns. Net worth of the Bank is at Rs.11728 crores.
Other Highlights Bank of India has been rated by Economic Times /The Nielsen company survey “The Most Trusted Brands “(MTB) 2009 as follows: Under PSU Banking Category –2nd Next TO SBI Under Top Service Brands–8th The Debutant –first time in the Top 100 In the MTB, Bank of India ranked 92nd - 54 rankings ahead of last year rankings (146th Rank during 2008)
Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio: Gross NPAs Ratio = Gross NPAs Gross Advances
B] Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following_ Net NPAs =
Gross NPAs – Provisions Gross Advances - Provisions
PROVISION RATIO: Provisions are to be made to keep safety against the NPA, & it directly affect on the gross profit of the Banks. The provision Ratio is nothing but total provision held for NPA to gross NPA of the Banks. The formula for that is, (i) Provision Ratio = (Total Provision/Gross NPA)*100 (ii) [Additional Formulae: Net NPA = Gross NPA – Provision Therefore, Provision = Gross NPA – Net NPA]
CAPITAL ADEQUACY RATIO Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets, which are weighted/adjusted according to risk attached to them i.e. Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100
CONCLUSION & RECOMMANDATIONS
Bank of India Bank of India has performed extremely well in NPA management. Persistent and follow-up of potential and other NPAs with outstanding of Rs. 1 crore and above is being done through the introduction of ACTION TAKEN REPORT (ATR) mechanism on periodical basis. Loan Restructuring and Loan Review Cells have been established to set up restructuring exercise in all viable cases expeditiously. Responsibilities have been assigned to monitor large NPAs (Rs l0 Lakhs and above) at administrative levels. The Chairman and Managing Director is personally monitoring all accounts with outstanding of Rs. 5 crore and above.
General Banks need to have better credit appraisal systems so as to prevent NPAs from occurring. However, once NPAs do come into existence, the problem can be solved only if there is enabling legal structure, since recovery of NPAs often requires litigation and court orders to recover stock loans. With long-winded litigations in India, debt recovery takes a very long time. Banks are now working on developing debt recovery tribunals to solve this problem. The Govt. has also mooted the suggestion of an asset reconstruction company for augmenting recovery measures. 1. The NPA is one of the biggest problems that the Banks are facing today is the problem of Non Performing Assets. If the proper management of the NPAs is not undertaken it would hamper the business of the banks. 2. As the global slowdown has crept into the economy, bankers feel that in more loans are going to turn bad in the coming quarters and therefore they want RBI to relax the deadline for loan reconstruction. 3. Due to Recession & slowdown in the Indian economy would result in emerging NPAs for the public sector banks from textiles, real estate, retail, exports and auto sectors. 4. The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of funds in the nation. This would help the nation to develop more banking branches and developing the economy by providing the better financial services to the nation. 5. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. The NPAs would destroy the current profit, interest income due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of the funds.
6. As a result of the NPA‟s owners do not receive a market return on their capital. In the worst case, if the bank fails, owners lose their assets & this may affect a broad pool of shareholders & act as a rain on Profitability. 7. Banks also redistribute losses to other borrowers by charging higher interest rates. Lower deposit rates and higher lending rates repress savings and financial markets, which hampers economic growth. 8. When many borrowers fail to pay interest, banks may experience liquidity shortages. These shortages can jam payments across the country and as a result non performing loans may spill over the banking system and contract the money stock, which may lead to economic contraction. 9. Banks need to create capital reserve to write off the mounting NPA‟s burden. 10. “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 to day operations. The main challenge facing the commercial banks is the disbursement of funds in quality assets (Loans and Advances) or otherwise it leads to Non-performing assets.”
RECOMMENDATIONS Following Recommendations may be adopted to tackle the Problem of NPAs:
Persuasion: It is very much an effective tool of recovery. It is very much an effective tool of recovery. Continual follow- up will be very effective in most cases.
Filing of Suits: The effectiveness of this tool depends on two major factors: o Whether other tools have been used; o Whether there are adequate securities to be realized.
Compromise and Revival: It has been argued that a compromise, whereby the Bank allows remission of principal and/or interest along with rescheduling of the repayment of debt is a better way to deal with such advances, especially when banks are drawn into long legal battles.
Involvement of other Agencies: Sometimes other agencies especially govt. agencies are involved in the recovery of dues and stagnant accounts in the priority sector. Their involvement in the recovery of loans is very much desirable.
Reference to B1FR: In case of large and medium units, when they are registered for not less than seven years as companies, we can refer the case of sickness to the Board for Industrial and Financial Reconstruction (BIFR) for early liquidation or suggestion of rehabilitation packages.
Enforcement of Securities: Enforcement of Securities charged to bank is equally important aspect of the management of NPAs. Banks, wherever necessary, have to move courts not only to obtain decrees but also to get them executed.
Rehabilitation and Nursing: Rehabilitation and nursing of sick units, as a matter of policy should be given a fresh look. Only viable sick units with proven capacity of the management to run the units should be nursed.
Merger and Amalgamation of Units: Wherever feasible, efforts should be made to merge the sick units with healthy units.
Appointment of Special Tribunals: In view of ever mounting cases involving bank advances in the various courts of India, it is highly desirable that special tribunals are established all over India exclusively for bank's litigation.
Writing off of Bad debts: When no other course will bring positive results it is always preferable to write off bad advances at the earliest to avail of tax deductions, rather than carry them forward.
BIBLIOGRAPHY
Websites http://finance.indiamart.com/investment_in_india/bank_of_india.html http://en.wikipedia.org/wiki/Non-performing_asset http://www.bankofindia.com http://www.iba.org,.in/rsevents7.asp http://www.rbi.org.in/SCRIPTS/AnnualPublications.aspx?head=Trend%20and%20Progress%20of %20Banking%20in%20India http://www.expressindia.com/news/npamanagementpolicy.htm
Books: Valuation by Damodaran Financial Management- Khan & Jain
Magazines and Journals Handbook only for Bank of India Business Today- December 13, 2009 issue Capital MarketDecember 13, 2009 issue
NewspapersBusiness Line Business Standard Economic Times
Research PaperResearch Paper – “A comparative study of Non Performance Assets in India” by Prashanth K Reddy, IIM- Ahmadabad Research Paper on “Rooting Out Non-Performing Assets” by Nachiket Mor, ICICIresearchcentre Report on “Maximizing Value of Non-Performing Assets” by Organization For Co-Operation and Development (OECD)
