A study on Non Performing Assets of HSIIDC

2. Corporate profile- HSIIDC

3. introduction

4. objective

5. quality policy

6. financial services offered by HSIIDC

7. objective of the study

8. literature review

9. research methodology

10. study of NPA accounts

11. introduction

12. definition

13. settlement formula

14. one time settlement scheme

15. definition of doubtful accounts as per the policy

16. factors for rise in NPAs

17. impact of NPA

18. early symptoms by which one can recognize a performing assets turning into NPA

19. preventive measures of NPAs

20. provisioning norms

21. analysis of study

22. NPAs in HSIIDC

23. HSIIDC v/s other banks

24. Recovery process

25. Case study on NPA- M/S JYOTI OIL INDUSTRIES LTD.

26. Findings

27. Suggestions

29. Providing financial assistant by the way of term loans/direct participation in equity.

30. Financial infrastructural development

31. Performing agency functions on behalf of the state government/IDBI/SIDBI.

33. Performance of the unit, if existing;

34. Performance of sister units;

35. Suitability and adequacy of land, location etc.;

36. Adequacy of proposed building;

37. Suitability and adequacy of proposed machinery;

38. Background and reputation of the machinery suppliers;

39. In case of second hand machinery, year of manufacture, residual life, cost of similar new machinery;

40. Sources and availability of raw material, price data for the last 1- 2 years;

41. Adequacy of utilities like water, steam, skilled manpower etc.

42. Technical /Financial tie-ups;

43. Adequacy of equipments for pollution control;

44. Opinion of the banker on the promoters and conduct with them; and

46. Vincent Bouvatier (2000) in their study titled ‘Provisioning Rules and Bank Lending: A Theoretical Model’ describes that this paper develops a partial equilibrium model of a banking firm to analyze how provisioning rules influence loan market fluctuations. We show that a backward-looking provisioning system amplifies the pro-cyclicality of loan market fluctuations. We demonstrate that, in a forward-looking provisioning system where statistical provisions are used to smooth the evolution of total loan loss provisions, the issue of pro-cyclicality of loan market fluctuations does not exist. Our findings support the call for the implementation of a dynamic provisioning system.

47. Larry G. Meeker and Laura Gray (2002) in their study titled ‘A note on non-performing loans as an indicator of asset quality’ used the tool of regression analysis and described that, the public was given its first opportunity to review bank asset quality in the form of non-performing asset information. The purpose of this study is to evaluate that information. A regression analysis comparing the non-performing asset statistics with examiner classifications of assets suggests that the non-performing asset information can be useful aid in analyzing the asset quality of banks, particularly when the information is timely.

48. Milind Sathye (2003) in their study titled ‘Efficiency of banks in a developing economy: The case of India’, says that the objective of this paper is to measure the productive efficiency of banks in a developing country, that is, India. The measurement of efficiency is done using data envelopment analysis. Two models have been constructed to show how efficiency scores vary with change in inputs and outputs. The efficiency scores, for three groups of banks, that are, publicly owned, privately owned and foreign owned, are measured. The study shows that the mean efficiency score of Indian banks compares well with the world mean efficiency score and the efficiency of private sector commercial banks as a group is, paradoxically lower than that of public sector banks and foreign banks in India. The study recommends that the existing policy of reducing non-performing assets and rationalization of staff and branches may be continued to obtain efficiency gains and make the Indian banks internationally competitive which is a declared objective of the Government of India.

49. Rituparna Das (2003) in their study titled ‘Managing the Risk of Non Performing Assets in the Small Scale Industries in India’ tries to seek a solution to the problem of NPA in the small scale industries under the present circumstances of banking and insurance working together under the same roof. What is stressed in this article is the pressing need of the small-scale entrepreneur for becoming aware and educated in modern business management holding a professional attitude toward rational decision-making and banks have to facilitate that process as a part of the credit policy sold by them.

50. Peng Hui Li Yong (2004) in their study titled ‘An Analysis on the Return and Risk Management during Securitization of Non-Performing Assets-the Effect of Securitization on

51. Originator’ and his paper expounded the calculation method of gain on sale and revenue on retained interest during non-performing assets securitization, analyze the relationship between return of securitization and expected cash flow of asset pool, circulation volume of asset-backed security, funding cost, upfront cost. For the first time, this paper showed

52. that the total benefit of asset securitization could be divided into three parts: excess spread, excess loss provision and value-added cash flow. Securitization of NPL could increase recovery rate and revenue, provide further loss protection and increase return on equity. Nevertheless, originating banks should carefully establish efficient risk evaluating system and strengthen internal management to control retained risk and new risk exposure generated during securitization.

53. John Wiley (2005) in their study titled ‘Banking reform in India’ describes that the important process about financial reform in the area of bank illiquidity in low-income emerging markets. This process is taking place within the context of a debate as to whether or not governments should try to rehabilitate existing state-owned banks or allow a new or parallel banking system to emerge in order to reduce non-performing assets from state-owned commercial banks. A comparison of institutional development in China and India suggests that new entry rather than the rehabilitation approach may work more favorably to reduce non-performing assets. The paper offers an explanation as to why governments choose rehabilitation over new entry.

54. Prashanth K. Reddy (2005) in their study titled ‘A comparative study of Non Performing Assets in India in the Global context - similarities and dissimilarities, remedial measures’ analyzed that Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences 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.

55. Jean Dermine (2005) in their study titled‘Provisioning practices’ describes that A fair level of provisions on bad and doubtful loans is an essential input in mark-to-market accounting, and in the calculation of bank capital and solvency. Few academic studies have analyzed the adequacy of loan-loss provisioning because, due to the private nature of bank loan transactions, few micro data are readily available. Access to data on recovery over time on bad and doubtful bank loans allows developing and applying two methodologies to calculate a fair level of loan-loss provisions. Empirical estimates are then compared to a regulatory provisioning schedule imposed by a central bank.

58. The minimum amount that should be recovered under the policy in respect of compromise settlement of NPAs classified as doubtful or loss as on March 31, 2006 would be 100% of the outstanding balance in the account as on the date on which the account was categorized as doubtful NPA.

59. NPAs classified as sub-standard as on March 31, 2006 which became doubtful or loss subsequently.

63. doubtful for less than three years. off entire penal interest plus 25% of

64. component of compounded interest.

65. However, the waiver shall not exceed

67. doubtful for more than three years but entire penal interest plus 50% of

68. less than five years. component of compounded interest

69. but waiver should not be more than 50%

70. of total outstanding.

72. (c) Doubtful loan account ( Category- C)

73. Where the loan account has remained Accounts may be settled by waving of

74. doubtful for more than five years. entire penal 100% component of

75. compounded interest.

79. 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 and financial institutes suffers the consequence of non-recover, their by reducing their profitability and liquidity.

80. Willful Defaults

81. There are borrowers who are able to pay back 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.

82. Natural calamities

83. This is the major factor, which is creating alarming rise in NPAs of the PSBs and financial institutes. India usually faces major natural calamities thus making the borrowers unable to pay back there loans. Thus the financial institutes have to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit.

84. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans.

85. Lack of demand

86. 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 financial institute recovers the amount by selling of their assets, which covers a minimum label. Thus the financial institute records the non recovered part as NPAs and has to make provision for it.

87. Change on Govt. policies

88. With every new govt. financial sector and 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 government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.

89. Improper SWOT analysis

90. The improper strength, weakness, opportunity and threat analysis while project appraisal is another reason for rise in NPAs. While providing unsecured advances the financial institutes depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower.

91. Financial institutes should consider the borrowers own capital investment.

92. It should collect credit information of the borrowers from-

93. From bankers.

94. Enquiry from market/segment of trade, industry, business.

95. From external credit rating agencies.

96. Analyze the balance sheet-True picture of business will be revealed on analysis of profit/loss a/c and balance sheet.

97. Purpose of the loan-

98. When financial institute give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, financial institute should grant loan for productive purpose only. Financial institute should analyze the profitability, viability, long term acceptability of the project while financing.

99. Poor credit appraisal system

100. Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the financial institutes gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs.

101. Absence of regular industrial visit

103. Avoidance of contact with bank.

105. Death of borrower.

109. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa.

110. As we can see from the chart that HSIIDC and PNB is doing good, as their gross NPAs has reduced but in the case of SBI position of NPA is not good.

111. In year 2006 and 2007, HSIIDC was at 2nd position but in after that it become at 1st position.

113. From the table it becomes clear that the NPA ratio of PNB and HSIIDC has improved as compared to SBI.

114. HSIIDC has shown considerable improvements in reducing its Net NPAs as compared to its performance in last year.

116. It has direct bearing on the Profitability, Dividend and Safety of shareholders’ fund.

117. If the provision ratio is less, it indicates that the Banks has made under provision.

118. Here, the NPA percentage has increased of HSIIDC only.

119. By increasing tax, HSIIDC can prevent itself from future problems.

120. But PNB and SBI are reducing their provisions which can create problems in future because provisioning is very important.

122. If PAR is high, it implies that the concerned bank or financial institute has the highest probability of creating NPAs in the near future.

123. It is clear from the graph that in previous years HSIIDC was having the highest probability of creating NPAs but later on it has improved a lot.

124. Now the PAR ratio of every bank and financial institute is good.

126. Each bank needs to create the capital Reserve to compensate the Non Performing Assets.

127. Each Asset has given a risk weightage as per RBI guidelines

128. Risk weighted Asset = Asset * Risk Weightage

129. So, More the Risk weighted Assets are, Bank has to maintain more capital.

131. Availability of Raw material was not so high in the market so it leads to long processing cycle.

132. The Machinery used by the company becomes obsolete that results in higher cost and low profits and that leads it to NPA.

133. Market availability

135. As per the guidelines of RBI, provisioning of loans is increasing day by day and this increment is resulting in a positive way for HSIIDC as through provisioning ultimate loss of the company reduces.

136. Proper analysis of NPA is essential for financial institutes because increase in NPAs lead to an institute’s degradation in goodwill and funds.

137. The reduction of NPAs would help the HSIIDC to boost up the profits, smooth recycling of funds and this would ultimately help the nation to develop its economy by providing better financial services to the nation.

138. When many borrowers fail to pay interest, financial institutes experience liquidity shortages. These shortages jam payments across the country and as a result Non-performing loans spill over the financial system and contract the money stock, which leads to economic contraction.

139. Once a project becomes NPA, it is necessary to keep an eye on the recovery process by selling the collateral securities of that particular company to regain the funds rather than focussing on NPS.

140. It was found out after comparing HSIIDC with SBI and PNB, that PNB has minimum NPAs and also reducing it day by day.

141. It was also observed that in terms of giving unsecured loan HSIIDC is doing much better than PNB and SBI.

142. Suggestions

143. Since it is comparably difficult to make non-performing assets back to performing assets. So, it is advisable to take corrective measures in order to protect those assets falling under the non-performing category.

144. It was suggested that there should not be flat repayments schedule for instalments. It is seen that in number of projects appraised, the default in the initial period arises because the combined burden of interest and instalments in the initial period is higher. Repayments schedule for the loan is generally of flat instalments over the years, and interest on outstanding amount goes on decreasing. As a result burden initially is higher but then it decreases to a significant level. But, if we reverse it i.e. make such an arrangement that the burden on the borrower in the initial period is less and then increase or make repayment of equal amount over the years, there is high probability that it will lead to decrease in the default in the initial period.

145. Proper training is important to the staff of the financial institute at the appropriate level with ongoing process to teach them the technique of dealing with cases of NPAs.

146. To prevent any financial institute from NPA, it is essential to focus on project appraisal. So same is the case with HSIIDC, it should check all the aspects of project, its viability and chances of failure, so that it can prevent itself from NPAs.

147. Sometimes HSIIDC neglect the negative points of a project as they see profits out of it in the near future, so company should avoid doing this.

148. Most of the time cash flows are over-estimated. It was observed that actual cash flows differ from projected inflows by large amounts. So, careful evaluation of those cash flows should be done at the time of appraisal.

149. Bibliography

150. Meeker Larry, (2002): ‘Predicting Corporate Sickness in India’, A note on non-performing loans as an indicator of asset quality’

151. Sathye Milind, (2003): ‘Efficiency of banks in a developing economy: The case of India’, Paper presented at the Conference on Money, Risk and Investment held at Nottingham Trent University, November 2003.

152. Peng-yan, LI, (2007): ‘A risk evaluation of non-performing assets securitization on the basis of analytic hierarchy process’, Oxford University Press, New Delhi.

153. Yong Peng, (2004): ‘an Analysis on the Return and Risk Management during Securitization of Non-Performing Assets-the Effect of Securitization on Originator Oxford University Press, New Delhi.

154. Thomas Shawn, (1999): Bank loan loss provisions’ –An Economics Approach’, AITBS

155. Publishers and Distributors, New Delhi.

156. Wiley John, (2005): ‘Banking reform in India’ RBI Bulletin, March

157. Dermine jean, (2005): ‘Provisioning practices’ economic & Political Weekly,Vol.XLII

158. Rajaraman, I & Vashistha, G (2002): ‘Non-Performing Loans of Indian Public Sector Banks – Some Panel Results’, Economic & Political Weekly

159. Bouvatier Vincent, (2002): ‘Provisioning Rules and Bank Lending: A Theoretical Model’ Studies in Banking & Finance

160. Das rituparna (2003): ‘Managing the Risk of Non Performing Assets in the Small Scale Industries in India’

161. http://www.rbi.org.in

162. http://hsiidc.org/abouthsidc.htm

163. http://www.sidbi.com/