Comparative Analysis of NPA in Public, Private & in Private Sector Banks.

Comparative analysis of NPA in public, private and foreign sector banks.
1. INTRODUCTION OF NPA.
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1. Meaning :-
NPA is a classification used by financial institutions that refer to loans
that are in jeopardy of default. Once the borrower has failed to make interest or
principle payments for 90 days the loan is considered to be a non-performing asset.
Non-performing assets are problematic for financial institutions since they depend
on interest payments for income. Troublesome pressure from the economy can lead
to a sharp increase in non-performing loans and often results in massive write-downs.
With a view to moving towards international best practices and to ensure greater
transparency, it had been decided to adopt the ‘90 days’ overdue’ norm for
identification of NPA, from the year ending March 31, 2004. Accordingly, with
effect from March 31, 2004, a non-performing asset (NPA) is a loan or an advance
where;
 Interest and/or installment of principal remain overdue for a period of more
than 90 days in respect of a term loan,
 The account remains ‘out of order’ for a period of more than 90 days, in
respect of an Overdraft/Cash Credit (OD/CC),
 The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,
 Interest and/or installment of principal remains overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes, and
 Any amount to be received remains overdue for a period of more than 90
days in respect of other accounts.
 Non submission of Stock Statements for 3 Continuous Quarters in case of
Cash Credit Facility.
 No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC)
for more than 90 days.

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2. Classification :-
Banks are required to classify non-performing assets further into the
following three categories based on the period for which the asset has remained
non-performing and the reliability of the dues:
1. Sub-Standard Assets :- A sub standard asset is one which has been classified
as NPA for a period not exceeding 12 months.
2. Doubtful Assets :- A doubtful asset is one which has remained NPA for a
period exceeding 12 months.
3. Loss Assets :- Where loss has been identified by the bank, internal or
external auditor or central bank inspectors. But the amount has not been
written off, wholly or partly.
Sub-standard asset is the asset in which bank have to maintain 15% of its reserves.
All those assets which are considered as non-performing for period of more than
12 months are called as Doubtful Assets. All those assets which cannot be
recovered are called as Loss Assets.
3. Reasons for occurrence of NPA :-
NPA’s result from what are termed “Bad Loans” or defaults.
Default, in the financial parlance, is the failure to meet financial obligations, say
non-payment of a loan installment. These loans can occur due to the following
reasons :-
 Usual banking operations / Bad lending practices
 A banking crisis (as happened in South Asia and Japan)
 Overhang component (due to environmental reasons, business cycle, etc)
 Incremental component (due to internal bank management, like credit
policy, terms of credit, etc).

2. ASSET CLASSIFICATION OF NPA.
 Assets are classified into following four categories :-
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1. Standard Assets.
2. Sub-standard Assets.
3. Doubtful Assets.
4. Loss Assets.
1. Standard Assets :-
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 NPA’s are further need to classify in sub categories.
Provisioning Norms :-

From the year ending 31.03.2000, the banks should make a general
provision of a minimum of 0.40 percent on standard assets on global
loan portfolio basis.

The provisions on standard assets should not be reckoned for
arriving at net NPA’s.

The provisions towards Standard Assets need not be netted from
gross advances but shown separately as 'Contingent Provisions
against Standard Assets' under 'Other Liabilities and Provisions -
Others' in Schedule 5 of the balance sheet. Banks are required to
classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing
and the reasonability of the dues :-
1) Sub-standard Assets
2) Doubtful Assets

3) Loss Assets
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2. Sub-standard Assets :-
With effect from 31 March 2005, a substandard asset would be one, which has
remained NPA for a period less than or equal to 12 month. The following
features are exhibited by substandard assets: the current net worth of the
borrowers / guarantor or the current market value of the security charged is not
enough to ensure recovery of the dues to the banks in full; and the asset has
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.
 A general provision of 10 percent on total outstanding should be
made without making any allowance for DICGC/ECGC guarantee
cover and securities available.
3. Doubtful Assets :-
A loan classified as doubtful has all the weaknesses inherent in assets that were
classified as sub-standard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently known facts,
conditions and values – highly questionable and improbable. With effect from
March 31, 2005, an asset would be classified as doubtful if it remained in the
sub-standard category for 12 months.
100 percent of the extent to which the advance is not covered by the
realizable value of the security to which the bank has a valid
recourse and the realizable value is estimated on a realistic basis.
In regard to the secured portion, provision may be made on the
following basis, at the rates ranging from 20 percent to 50 percent of

the secured portion depending upon the period for which the asset
has remained doubtful :-
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Period for which the advance
has been considered as
doubtful.
Provision requirement (%).
Up to one year 20
One to three years 30
More than three years: (1)
Outstanding stock of NPA’s as on
March 31, 2004. (2) Advances
classified as „doubtful‟ more than
three years on or after
April 1, 2004.
60% with effect from March 31,
2005. 75% effect from March 31,
2006. 100% with effect from
March 31, 2007.

Additional provisioning consequent upon the change in the
definition of doubtful assets effective from March 31, 2003 has to be
made in phases as under :-
i.) As on 31.03.2003, 50 percent of the additional provisioning
requirement on the assets which became doubtful on account
of new norm of 18 months for transition from sub-standard
asset to doubtful category.
ii.) As on 31.03.2002, balance of the provisions not made
during the previous year, in addition to the provisions
needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning consequent
upon the reduction in the transition period from substandard to
doubtful asset from 18 to 12 months over a four year period
commencing from the year ending March 31, 2005, with a minimum
of 20 % each year.

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4. Loss Assets :-
A loss asset is one which considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted- although there may be some
salvage or recovery value. Also, these assets would have been identified as
“Loss assets” by the bank or internal or external auditors or the RBI inspection
but the amount would not have been written-off wholly.
 The entire asset should be written off. If the assets are permitted to
remain in the books for any reason, 100 percent of the outstanding
should be provided.

3. TYPES OF NPA.
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Types of NPA :-
1. Gross NPA
2. Net NPA
1. Gross NPA :-
Gross NPA’s are the sum total of all loan assets that are classified as
NPA’s 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
nonstandard assets like as sub-standard, doubtful, and loss assets. It
can be calculated with the help of following ratio :-
 Formula :- Gross NPA’s Ratio = Gross NPA’s ÷ Gross Advances .
2. Net NPA :-
Net NPA’s are those type of NPA’s in which the bank has deducted the
provision regarding NPA’s. Net NPA shows the actual burden of
banks. Since in India, bank balance sheets contain a huge amount of
NPA’s and the process of recovery and write off of loans is very time
consuming, the provisions the banks have to make against the NPA’s
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 :-
 Formula :- Net NPA’s = Gross NPA’s – Provisions ÷ Gross
Advances – Provisions.

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

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2. External factors : -
1) Sluggish legal system :-
 Long legal tangles.
 Changes that had taken place in labour laws.
 Lack of sincere effort.
2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw material / input price escalation, power
shortage, industrial recession, excess capacity, natural calamities like
floods, accidents.
5) Failures, nonpayment / over dues in other countries, recession in other
countries, externalization problems, adverse exchange rates etc.
6) Government policies like excise duty changes, Import duty changes etc.
The RBI has summarized the finer factors contributing to higher
level of NPA’s in the Indian banking sector as :-
 Diversion of funds, which is for expansion, diversification,
modernization, undertaking new projects and for helping
associate concerns. This is also coupled with recessionary
trends and failures to tap funds in capital and debt markets.
 Business failures (such as product, marketing etc.), which are
due to inefficient management system, strained labour
relations, inappropriate technology / technical problems,
product obsolescence etc.

 Recession, which is due to input / power shortage, price
variation, accidents, natural calamities etc. The externalization
problems in other countries also lead to growth of NPA’s in
Indian banking sector.
 Time / cost overrun during project implementation stage.
 Governmental policies such as changes in excise duties,
pollution control orders etc.
 Willful defaults, which are because of siphoning-off funds,
fraud / misappropriation, promoters / directors disputes etc.
 Deficiency on the part of banks, delays in release of limits and
payments / subsidies by the Government of India.
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5. IMPACT OF NPA.
 Some of the impact of NPA are as follows :-
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1. Profitability :-
NPA means booking of money in terms of bad asset, which occurred due
to wrong choice of client. Because of the money getting blocked the
prodigality of bank decreases not only by the amount of NPA but NPA
lead to opportunity cost also as that much of profit invested in some return
earning project/asset. So NPA doesn’t affect current profit but also future
stream of profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low ROI (return
on investment), which adversely affect current earning of bank.
2. Liquidity :-
Money is getting blocked, decreased profit lead to lack of enough cash at
hand which lead to borrowing money for shortest period of time which
lead to additional cost to the company. Difficulty in operating the functions
of bank is another cause of NPA due to lack of money that is due to routine
payments and dues.
3. Involvement of management :-
Time and efforts of management is another indirect cost which bank has to
bear due to NPA. Time and efforts of management in handling and
managing NPA would have diverted to some fruitful activities, which
would have given good returns. Nowadays banks have special employees
to deal and handle NPA’s, which is additional cost to the bank.

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4. Credit loss :-
Bank is facing problem of NPA then it adversely affect the value of bank
in terms of market credit. It will lose its goodwill and brand image and
credit which have negative impact to the people who are putting their
money in the banks.

6. EARLY SYMPTOMS OF NPA.
 Some of the early symptoms of NPA are as follows :-
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1.) Financial :-

 Non-payment of the very first installment in case of term loan.
 Bouncing of cheque due to insufficient balance in the accounts.
 Irregularity in installment.
 Irregularity of operations in the accounts.
 Unpaid overdue bills.
 Declining Current Ratio.
 Payment which does not cover the interest and principal amount of
that installment.
 While monitoring the accounts it is found that partial amount is
diverted to sister concern or parent company.
2.) Operational and Physical :-

 If information is received that the borrower has either initiated the
process of winding up or are not doing the business.
 Overdue receivables.
 Stock statement not submitted on time.
 External non-controllable factor like natural calamities in the city where
borrower conduct his business.
 Frequent changes in plan.
 Non-payment of wages.

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3.) Attitudinal Changes :-
 Use for personal comfort, stocks and shares by borrower.
 Avoidance of contact with bank.
 Problem between partners.
4.) Others :-
 Changes in Government policies.
 Death of borrower.
 Competition in the market.

7. PROCEDURES FOR NPA IDENTIFICATION AND
RESOLUTION IN INDIA.
1. Internal Checks and Control :-
Since high level of NPA’s dampens the performance of the banks identification
of potential problem accounts and their close monitoring assumes importance.
Though most banks have Early Warning Systems (EWS) for identification of
potential NPA’s, the actual processes followed, however, differ from bank to
bank. The EWS enable a bank to identify the borrower accounts which show
signs of credit deterioration and initiate remedial action. Many banks have
evolved and adopted an elaborate EWS, which allows them to identify potential
distress signals and plan their options beforehand, accordingly. The early
warning signals, indicative of potential problems in the accounts, viz. persistent
irregularity in accounts, delays in servicing of interest, frequent devolvement of
L/C’s, units' financial problems, market related problems, etc. are captured by
the system. In addition, some of these banks are reviewing their exposure to
borrower accounts every quarter based on published data which also serves as
an important additional warning system. These early warning signals used by
banks are generally independent of risk rating systems and asset classification
norms prescribed by RBI.
The major components/processes of a EWS followed by banks in India as
brought out by a study conducted by Reserve Bank of India at the instance of
the Board of Financial Supervision are as follows :-
 Designating Relationship Manager / Credit Officer for monitoring
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account/s.
 Preparation of know your client profile.
 Credit rating system.
 Identification of watch-list / special mention category accounts.
 Monitoring of early warning signals.

Relationship Manager/Credit Officer :-
The Relationship Manager / Credit Officer is an official who is expected to
have complete knowledge of borrower, his business, his future plans, etc.
The Relationship Manager has to keep in constant touch with the borrower
and report all developments impacting the borrowable account. As a part of
this contact he is also expected to conduct scrutiny and activity inspections.
In the credit monitoring process, the responsibility of monitoring a corporate
account is vested with Relationship Manager / Credit Officer.
‘Know Your Client’ profile (KYC) :-
Most banks in India have a system of preparing ‘know your client’ (KYC)
profile / credit report. As a part of ‘KYC’ system, visits are made on clients
and their places of business / units. The frequency of such visits depends on
the nature and needs of relationship.
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Credit Rating System :-
The credit rating system is essentially one point indicator of an individual
credit exposure and is used to identify measure and monitor the credit risk of
individual proposal. At the whole bank level, credit rating system enables
tracking the health of banks entire credit portfolio. Most banks in India have
put in place the system of internal credit rating. While most of the banks
have developed their own models, a few banks have adopted credit rating
models designed by rating agencies. Credit rating models take into account
various types of risks viz. financial, industry and management, etc.
associated with a borrowable unit. The exercise is generally done at the time
of sanction of new borrowable account and at the time of review renewal of
existing credit facilities.
Watch-list/Special Mention Category :-
The grading of the bank's risk assets is an important internal control tool. It
serves the need of the Management to identify and monitor potential risks of
a loan asset. The purpose of identification of potential NPA’s is to ensure
that appropriate preventive / corrective steps could be initiated by the bank

to protect against the loan asset becoming non-performing. Most of the
banks have a system to put certain borrowable accounts under watch list or
special mention category if performing advances operating under adverse
business or economic conditions are exhibiting certain distress signals.
These accounts generally exhibit weaknesses which are correctable but
warrant banks' closer attention. The categorization of such accounts in watch
list or special mention category provides early warning signals enabling
Relationship Manager or Credit Officer to anticipate credit deterioration and
take necessary preventive steps to avoid their slippage into non performing
advances. Early Warning Signals It is important in any early warning
system, to be sensitive to signals of credit deterioration. A host of early
warning signals are used by different banks for identification of potential
NPA’s. Most banks in India have laid down a series of operational, financial,
transactional indicators that could serve to identify emerging problems in
credit exposures at an early stage. Further it is revealed that the indicators
which may trigger early warning system depend not only on default in
payment of installment and interest but also other factors such as
deterioration in operating and financial performance of the borrower,
weakening industry characteristics, regulatory changes, general economic
conditions, etc. Early warning signals can be classified into five broad
categories viz.
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a) Financial
b) Operational
c) Banking
d) Management and
e) External factors.
Financial related warning signals generally emanate from the borrowers'
balance sheet, income expenditure statement, statement of cash flows,
statement of receivables etc. Following common warning signals are
captured by some of the banks having relatively developed EWS.

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Financial warning signals :-
 Persistent irregularity in the account.
 Default in repayment obligation.
 Devolvement of LC / invocation of guarantees.
 Deterioration in liquidity/working capital position.
 Substantial increase in long term debts in relation to equity.
 Declining sales.
 Operating losses / net losses.
 Rising sales and falling profits.
 Disproportionate increase in overheads relative to sales.
 Rising level of bad debt losses Operational warning signals.
 Low activity level in plant.
 Disorderly diversification/frequent changes in plan.
 Nonpayment of wages/power bills
 Loss of critical customers.
 Frequent labor problems.
 Evidence of aged inventory/large level of inventory.
Management related warning signals :-
 Lack of co-operation from key personnel.
 Change in management, ownership, or key personnel.
 Desire to take undue risks.
 Family disputes.
 Poor financial controls.
 Fudging of financial statements.
 Diversion of funds.
Banking related signals :-
 Declining bank balances/declining operations in the account.
 Opening of account with other bank.
 Return of outward bills/dishonored cheques.
 Sales transactions not routed through the account.
 Frequent requests for loan.

 Frequent delays in submitting stock statements, financial data, etc.
Signals relating to external factors :-
 Economic recession.
 Emergence of new competition.
 Emergence of new technology.
 Changes in government / regulatory policies.
 Natural calamities.
2. Management/Resolution of NPA’s :-
A reduction in the total gross and net NPA’s in the Indian financial system
indicates a significant improvement in management of NPA’s. This is also on
account of various resolution mechanisms introduced in the recent past which
include the SRFAESI Act, one time settlement schemes, setting up of the CDR
mechanism, strengthening of DRT’s. From the data available of Public Sector
Banks as on March 31, 2003, there were 1,522 numbers of NPA’s as on March
31, 2003 which had gross value greater than Rs. 50 million in all the public
sector banks in India. The total gross value of these NPA’s amounted to Rs. 215
billion. The total number of resolution approaches (including cases where
action is to be initiated) is greater than the number of NPA’s, indicating some
double counting. As can be seen, suit filed and BIFR are the two most common
approaches to resolution of NPA’s in public sector banks. Rehabilitation has
been considered / adopted in only about 13% of the cases. Settlement has been
considered only in 9% of the cases. It is likely to have been adopted in even
fewer cases. Data available on resolution strategies adopted by public sector
banks suggest that Compromise settlement schemes with borrowers are found
to be more effective than legal measures. Many banks have come out with their
own restructuring schemes for settlement of NPA accounts. State Bank of India,
HDFC Limited, M/s. Dun and Bradstreet Information Services (India) Pvt. Ltd.
and M/s. Trans Union to serve as a mechanism for exchange of information
between banks and FIs for curbing the growth of NPA’s incorporated credit
Information Bureau (India) Limited (CIBIL) in January 2001. Pending the
enactment of CIB Regulation Bill, the RBI constituted a working group to
examine the role of CIB’s. As per the recommendations of the working group,
Banks and FIs are now required to submit the list of suit-filed cases of Rs. 10
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million and above and suit filed cases of willful defaulters of Rs. 2.5 million
and above to RBI as well as CIBIL. CIBIL will share this information with
commercial banks and FIs so as to help them minimize adverse selection at
appraisal stage. The CIBIL is in the process of getting operationalised.
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3. Willful Defaulters :-
RBI has issued revised guidelines in respect of detection of willful default and
diversion and siphoning of funds. As per these guidelines a willful default
occurs when a borrower defaults in meeting its obligations to the lender when
it has capacity to honor the obligations or when funds have been utilized for
purposes other than those for which finance was granted. The list of willful
defaulters is required to be submitted to SEBI and RBI to prevent their access
to capital markets. Sharing of information of this nature helps banks in their
due diligence exercise and helps in avoiding financing unscrupulous elements.
RBI has advised lenders to initiate legal measures including criminal actions,
wherever required, and undertake a proactive approach in change in
management, where appropriate.
4. Legal and Regulatory Regime :-
Debt Recovery Tribunals :-
DRT’s 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 DRT’s 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 appealable 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 Affiliate 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. DRT’s are criticized in respect of recovery made
considering the size of NPA’s in the Country. In general, it is observed that
the defendants approach the High Country 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 DRT’s.
Lastly, many needs to be done for making the DRT’s stronger in terms of
infrastructure.
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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.

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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 (ARC’s) in India.
In addition to asset reconstruction and ARC’s, 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 NPA’s 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).
 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.
 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-a-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
NPA’s 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.
[23]

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
[24]
borrower.
 The sale or lease of the business of the borrower.
 Settlement of the borrower’s dues.
 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.
Institution of CDR Mechanism :-
The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism
for resolution of NPA’s 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), DRT’s 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 co-ordinate 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 inter-creditor
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.
Compromise Settlement Schemes :-
1.) One Time Settlement Schemes :-
NPA’s in all sectors, which have become doubtful or loss as on 31st
March 2000. The scheme also covers NPA’s 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
[25]

Courts/DRT’s/BIFR, subject to consent decree being obtained from
the Courts/DRT’s/BIFR are covered. However cases of willful
default, fraud and malfeasance are not covered. As per the OTS
scheme, for NPA’s up to Rs. 10crores, the minimum amount that
should be recovered should be 100% of the outstanding balance in
the account.
2.) Negotiated Settlement Schemes :-
The RBI/Government has been encouraging banks to design and
implement policies for negotiated settlements, particularly for old and
unresolved NPA’s. The broad framework for such settlements was put
in place in July 1995. Specific guidelines were issued in May 1999to
public sector banks for one-time settlements of NPA’s 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 NPA’s of Rs. 50
million and less. These guidelines were effective until June 2001 and
helped banks recover Rs. 26 billion.
Increased Powers to NCLT’s and the Proposed Repeal of BIFR
In India, companies whose net worth has been wiped out on account of
accumulated losses come under the purview of the Sick Industrial
Companies Act (SICA) and need to be referred to BIFR. Once a company is
referred to the BIFR (and even if an enquiry is pending as to whether it
should be admitted to BIFR), it is afforded protection against recovery
proceedings from its creditors. BIFR is widely regarded as a stumbling block
in recovering value for NPA’s. Promoters systematically take refuge in
SICA - often there is a scramble to file a reference in BIFR so as to obtain
protection from debt recovery proceedings. The recent amendments to the
Companies Act vest powers for revival and rehabilitation of companies with
the National Company Law Tribunal (NCLT), in place of BIFR, with
modifications to address weaknesses experienced under the SICA
[26]

provisions. The NCLT would prepare a scheme for reconstruction of any
sick company and there is no bar on the lending institution of legal
proceedings against such company whilst the scheme is being prepared by
the NCLT. Therefore, proceedings initiated by any creditor seeking to
recover monies from a sick company would not be suspended by a reference
to the NCLT and, therefore, the above provision of the Act may not have
much relevance any longer and probably does not extend to the tribunal for
this reason. However, there is a possibility of conflict between the activities
that may be undertaken by the ARC, e.g. change in management, and the
role of the NCLT in restructuring sick companies. The Bill to repeal SICA is
currently pending in Parliament and the process of staffing of NCLTs has
been initiated.
[27]

8. MEASURES TAKEN BY PUBLIC, PRIVATE AND
FOREIGN SECTOR BANK TO REDUCE NPA.
1.) Early recognition of the problem :-
a. Recognize the problem early :-
Invariably, by the time banks start their efforts to get involved in a revival
process, it’s too late to retrieve the situation - both in terms of
rehabilitation of the project and recovery of bank’s dues. Identification of
weakness in the very beginning (i.e., when the account starts showing first
signs of weakness regardless of the fact that it may not have become
NPA) is imperative. Assessment of the potential of revival may be done
on the basis of a techno economic viability study. Restructuring should be
attempted where, after an objective assessment of the viability and
promoter’s intention (and his stake), banks are convinced of a turnaround
within a scheduled timeframe. In respect of totally unviable units as
decided by the bank/consortium, it is better to facilitate winding up/selling
of the unit early, so as to recover whatever is possible through legal means
before the security position becomes worse.
b. Recourse to the new ordinance :-
The Government of India has promulgated an ordinance on June 21, 2002,
called “The Securitization and Reconstruction of financial Assets and
Enforcement of Security Interest Ordinance, 2002” to facilitate
foreclosure of financial assets. In respect of totally unviable units as
decided by the bank/consortium, action under this ordinance may be
initiated without any loss of time. Banks are also strongly encouraged to
take immediate recourse to this legal remedy where they encounter
malfeasance on the part of promoters/borrowers.
[28]
c. Early Alert System :-
The strategy for management of NPA’s may be governed by the
circumstances connected to each individual case. Generally, the NPA is

more likely to be resolved in terms of recovery if the company is in
operation. For this to be effective there must be a system of identifying the
weakness in accounts at an early stage. Banks may put in place an “Early
Alert” system that captures early warning signals in respect of accounts
showing first signs of weakness. This system may be an integral part of
the risk management process of the bank. Internationally, there is a similar
system of “Special Mention Accounts”. Depending upon the identified
weaknesses, one may go back (rather than with reference to current
period) to a prior or earlier period in determining the rehabilitation
response. Under the “Early Alert” system, for internal monitoring
purpose, banks may designate a time limit for overdue accounts to
determine the threshold for a proactive intervention - well before the
account becomes NPA. This is to enable a bank to assess whether the
default is due to some inherent weakness or due to a temporary liquidity
or cash flow problem, and accordingly calibrate its response. For example,
where there is a default in an account for 30 days, it may be shifted to a
special category. Out of the accounts, ones that show promise may be
considered for granting incremental facility for specific purposes, such as
for capital expenditure, by ensuring strictest possible end use of the
money. All the accounts displaying unsatisfactory features/early warning
signals should be put under potential NPA list for follow up and time
bound action to prevent their slippage.
The account may be classified as potential NPA on account of one or
more of the following illustrative list of features even though the account
may be regular :-
1. Delay in submission of stock statement / Other control
statements / financial statements.
2. Return of cheques issued by borrowers.
3. Devolvement of DPG installments and non-payment within a
[29]
reasonable period
4. Frequent devolvement of LC and non-payment within a
reasonable period.

5. Frequent invocation of BGs and non-repayment within a
[30]
reasonable period.
6. Return of bills / cheques discounted.
7. Non-payment of bills discounted or under collection.
8. Poor financial performance in terms of declining sales and
profits, cash losses, net losses, erosion of net worth etc.
9. Incomplete documentation in terms of creation / registration
of charge / mortgage etc.
10. Non-compliance of terms and conditions of sanction.
d. Special Mention Accounts :-
A system of early recognition with timely and adequate interventions may
form the focus of approach in dealing with slippage of NPA’s. In this
context, it is suggested that banks introduce a new asset category between
‘Standard’ and ‘Sub-standard’ for their own internal monitoring and
follow up. This asset category may be in line with international practice of
‘Special Mention Assets’ used by FDIC, U.S.A., MAS, Singapore, etc.,
while keeping in view the local requirements. An asset may be transferred
to this category once the earliest signs of sickness/irregularities are
identified. This will help banks to look at accounts with potential
problems in a focused manner right from the onset of the problem, so that
monitoring and remedial actions can be more effective. Once these
accounts are categorized and reported as such, proper top management
attention would also be ensured. Under off-site reporting, data on potential
NPA’s in terms of overdue position such as (i) Loans and Advances
overdue for less than two quarters and (ii) Loans and Advances overdue
for less than one quarter, are required to be submitted by banks on a
quarterly basis. Banks already compile this data, which may be used
gainfully by top management to gauge the potential asset problems.
However, introduction of a ‘Special Mention’ category of assets would be
on the basis of not only overdue position in the account but also other
factors which reflect sickness/irregularities in the account. Some banks

which already have ‘special mention’ category (by whichever name
called) may continue the same on the basis of their internal norms.
A Special mention account may briefly have the following main
characteristics :-

The asset has potential weaknesses which deserves close
management attention and which can be resolved through timely
remedial action.
If left un-corrected, the potential weaknesses in Special mention
assets may result in deterioration of the repayment prospects and
subsequent adverse asset classification.
Often a bank’s weak origination/servicing policies are the reason
behind classification of an asset under the Special mention category
though there may be cases where technical or other factors may also
be responsible.
Apart from continuing irregularities, “special mention accounts”
may also be categorized on the basis of factors such as inadequate
cash flows and management integrity.
Special mention assets would not require provisioning, as they are
not classified as NPA’s. Nor are these proposed to be brought under
regulatory oversight and prudential reporting immediately. The step
is mainly with a view to alerting management to the prospects of
such an account turning bad, and thus taking preventive action well
in time.
As regards introducing a ‘special mention’ category as part of RBI's
'Income Recognition and Asset classification norms' (IRAC norms),
it would be considered in due course.
2.) Identifying borrowers with genuine intent :-
Identifying borrowers with genuine intent from those who are non- serious
with no commitment or stake in revival is a challenge confronting bankers.
Here the role of frontline officials at the branch level is paramount as they are
the ones who have intelligence inputs with regard to promoters’ sincerity,
wherewithal, and capability to achieve a turn around. Based on this objective
[31]

assessment, banks should decide as quickly as possible whether it would be
worthwhile to commit additional finance. In this regard, banks may consider
having ‘Special Investigative Audit’ of all financial transactions/business
transactions, books of accounts in order to ascertain real factors that
contributed to sickness of the borrower. Banks may have a panel of technical
experts with proven expertise and track record for preparation of techno-economic
viability study of the projects of the borrowers. Borrowers having
genuine problems due to temporary mismatch in funds flow or sudden
requirements of additional funds may be entertained at the branch level, and
for this purpose a special limit to tide over such contingencies may be built
into the sanction process itself. This will obviate the need to route the
additional funding request through the controlling offices in deserving cases,
and help avert many accounts slipping into NPA category.
3.) Timeliness and adequacy of response :-
Longer the delay in response, greater the injury to the account and the asset.
Time is a crucial element in any re-structuring / rehabilitation strategy. Further,
the response decided on the basis of techno-economic study and promoter’s
commitment, has to be adequate in terms of extent of additional funding,
relaxations etc. under the restructuring exercise. The package of assistance may
be flexible, and where required, the bank may also look at the exit option.
[32]
4.) Focus on Cash Flows :-
While financing, at the time of restructuring, banks may not be guided by the
conventional Funds Flow Analysis only, which could yield a potentially
misleading picture. Appraisal for fresh credit requirements may be done by
analyzing Funds Flow in conjunction with Cash Flows rather than only on the
basis of Funds Flow.
5.) Management effectiveness :-
The general perception among borrowers is that it is lack of finance that leads
to sickness and NPA’s. But this may not be the case all the time. Management
effectiveness in tackling adverse business conditions is a very important aspect

that affects a borrowing unit’s fortunes. Additional finance to an ailing unit
may be committed by a bank only after basic viability of the enterprise also in
the context of quality of management is examined and confirmed. Where the
default is due to deeper malady, viability study or investigative audit should be
done it will be useful to have a consultant appointed as early as possible to
examine this aspect. A proper techno-economic viability study must thus
become the basis on which any future action can be considered.
6.) Consortium/multiple financing :-
a. During the exercise for assessment of viability and restructuring, a
pragmatic and unified approach by all the lending banks/FIs as also sharing
of all relevant information on the borrower would go a long way toward
overall success of rehabilitation effort. However, there is an element of risk
in any restructuring exercise, given the probability of success/failure. One
may expect a success rate of 50% in restructuring efforts, for it is
unrealistic to expect 100% success rate.
b. In some default cases, where the unit is still working, the bank should make
sure that it captures the cash flows (there is a tendency on part
of the borrowers to switch bankers once they default, for fear of getting
their cash flows forfeited), and ensure that such cash flows are used for
working capital purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not part of the
consortium, may not be allowed to offer credit facilities to such defaulting
clients. Current account facilities may also be denied at non-consortium
banks to such clients and violation may attract penal action. The Credit
Information Bureau of India Ltd. (CIBIL) may be very useful for
meaningful information exchange on defaulting borrowers once the setup
becomes fully operational.
c. In a forum of lenders, the priority of each lender will be different. While
one set of lenders may be willing to wait for a longer time to recover its
dues, another lender may have a much shorter timeframe in mind. So it is
possible that the latter category of lenders may be willing to exit, even at a
cost i.e., by a discounted settlement of the exposure. Therefore, any plan
for restructuring/rehabilitation may take this aspect into account.
[33]

d. Corporate Debt Restructuring mechanism has been institutionalized in 2001
to provide a timely and transparent system for restructuring of the
corporate debts of Rs.20 crore and above with banks and FIs on a
voluntary basis and outside the legal framework. Under this system, banks
may greatly benefit in terms of restructuring of large standard accounts
(potential NPA’s) and viable sub-standard accounts with
consortium/multiple banking arrangements.
[34]
7.) Legal and related issues :-
a. Change in mindset regarding legal action :-
Legal action may be initiated once the Banks/FIs are convinced and have
reached the conclusion that rehabilitation is not possible and there is no
other way out. This will put pressure on the borrowers and will reduce the
chances of depletion in the value of the security. In this context, the new
securities ordinance, as mentioned earlier, will go a long way in
developing the culture of prompt repayment of banks’ / FI’s dues. Under
this ordinance, substantial powers have been granted to the Banks / FIs for
enforcement of securities without the intervention of the courts / tribunals.
Similarly powers have been given to Banks / FIs to take over the
management of business of the defaulting borrowers. With these special
powers a strong message is being sent to the borrowers of Banks /FIs
across the country. Banks would do well to capitalize on this message in
dealing with recalcitrant borrowers and willful defaulters.
b. Avoiding of misleading information :-
Banks may take recourse to criminal proceedings along with civil suit
where misleading information has been furnished influencing the bank’s
credit decision. Also in case of value-less guarantees and diversion of
funds, bank may not hesitate to initiate criminal proceedings. Also
borrowers may be asked to declare on oath their borrowings, assets, and
all other material facts, which can be the basis for criminal action in
future, if details are not found to be correct.

c. Exercise the control the ownership/management :-
When considering a plan for the revival/rehabilitation, the lenders should
retain the right to exercise control over the ownership/management. This
can be done by ensuring pledge of promoter’s shareholding to the lenders
with a right to change ownership if certain covenants/stipulations are not
met.
[35]
8.) Auditor’s Responsibility :-
In case any falsification of accounts on the part of the borrowers is observed by
the banks/FIs, they should lodge a formal complaint against the auditors of the
borrowers with the Institute of Chartered Accountants of India (ICAI) if it is
observed that the auditors were negligent or deficient in conducting the audit to
enable the ICAI to examine and fix accountability of the auditors. With a view
to monitoring end-use of funds, if the lenders desire a specific certification
from the borrowers’ auditors regarding diversion/ siphoning of funds by the
borrower, the lender should award a separate mandate to the auditors for the
purpose. To facilitate such certification by the auditors, the banks and FIs will
also need to ensure that appropriate covenants in the loan agreements are
incorporated to enable award of such a mandate by the lenders to the
borrowers/auditors.
9.) Government relief :-
State Government relief (state tax waiver, subsidy etc.) in respect of accounts
enjoying the same takes long time to come, thus worsening the overdue
position. There is a need to work in the direction of cutting down / reducing the
time lags by closer monitoring. While it may so happen that circumstances
warrant a different course of action, the above set of guidelines may be adhered
to as a broader framework for preventing slippage of NPA’s.

9. FACTORING OF NPA.
[36]
1.) Meaning of factoring :-
A financial intermediary that purchases receivables from a company. A factor
is essentially a funding source that agrees to pay the company the value of the
invoice less a discount for commission and fees. The factor advances most of
the invoiced amount to the company immediately and the balance upon
receipt of funds from the invoiced party.
2.) Overview :-
There are three parties directly involved: the factor who purchases
the receivable, the one who sells the receivable, and the debtor who has
a Financial Liability that requires him / her to make a payment to the owner of
the invoice. The receivable, usually associated with an invoice for work
performed or goods sold, is essentially a financial asset that gives the owner of
the receivable the legal right collect money from the debtor whose liability
directly corresponds to organization level. The seller sells the receivables at
a discount to the third party, the specialized financial organization (aka the
factor) to obtain cash. This process is sometimes used in manufacturing
industries when the immediate need for raw material outstrips their
available cash and ability to purchase "on account". 2014 Generally,
both invoice discounting and factor in glare used by businesses to ensure they
have the immediate cash flow necessary to meet their current and immediate
obligations. The sale of the receivable transfer’s ownership of
the receivable to the factor, indicating the factor obtains all of the rights
associated with the receivables. Accordingly, the receivable becomes the
factor's asset, and the factor obtains the right to receive the payments made by
the debtor for the invoice amount, and is free to pledge or exchange the
receivable asset without unreasonable constraints or restrictions. Usually, the
account debtor is notified of the sale of the receivable, and the factor bills the
debtor and makes all collections; however, non-notification factoring, where
the client (seller) collects the accounts sold to the factor, as agent of the factor,
also occurs. In the UK the arrangement is usually confidential in that the
debtor is not notified of the assignment of the receivable and the seller of the
receivable collects the debt on behalf of the factor. If the factoring transfers
the receivable "without recourse", the factor (purchaser of the receivable)

must bear the loss if the account debtor does not pay the invoice amount. If
the factoring transfers the receivable "with recourse", the factor has the right
to collect the unpaid invoice amount from the transferor (seller). However,
any merchandise returns that may diminish the invoice amount that is
collectable from the Accounts receivable are typically the responsibility of
the seller, and the factor will typically holdback paying the seller for a portion
of the receivable being sold (the "factor's holdback receivable") in order to
cover the merchandise returns associated with the factored receivables until
the privilege to return the merchandise expires.
There are three principal parts to the factoring transaction, all of which are
recorded separately by an accountant who is responsible for recording the
factoring transaction :-
(a) The "Fee" paid to the factor.
(b) The Interest Expense paid to the factor for the advance of money prior
to the receipt of payments from debtors.
(c) The "Bad Debt Expense" associated with portion of the receivables that
the seller expects will remain unpaid and uncollectable.
(d) The "Factor's Holdback Receivable" amount to cover merchandise
[37]
returns, and
(e) Any additional "Loss" or "Gain" the seller must attribute to the sale of
the receivables. Sometimes the factor's charges paid by the seller (the
factor's "client") covers a discount fee, additional credit risk the factor
must assume, and other services provided. The factor's overall profit is
the difference between the price it paid for the invoice and the money
received from the debtor, less the amount lost due to non-payment.
3.) Risk :-
 Counter party credit risk related to clients and risk covered debtors. Risk
covered debtors can be reinsured, which limit the risks of a factor. Trade
receivables are a fairly low risk asset due to their short duration.
 External fraud by clients :- fake invoicing, miss-directed payments, pre-invoicing,
not assigned credit notes, etc. A fraud insurance policy and
subjecting the client to audit could limit the risks.

 Legal, compliance and tax risks , large number of applicable laws and
regulations in different countries.
 Operational risks, such as contractual disputes.
 Uniform Commercial Code (UCC-1) securing rights to assets.
 IRS liens associated with payroll taxes etc.
 ICT risks :- complicated, integrated factoring system, extensive data
[38]
exchange with client.

10. THIRD PARTY MAINTENANCE OF NPA.
1.) Meaning of Third Party Maintenance of NPA :-
Acceptance of deposits and maintenance of deposit accounts is the core
activity in any bank. The very basic legal interpretation of the word 'banking"
as defined in the Banking Regulation Act, 1949 means accepting deposits of
money, for the purpose of lending or investment, from the public, repayable
on demand or otherwise, and withdraw able by cheque, draft, order or
otherwise. Thus, deposits are the major resource and mainstay of a bank and
the main objective of a bank are to mobilize adequate deposits. Various
instructions, guidelines, etc. issued from time to time to primary (urban) co-operative
banks (UCB’s) in regard to opening and conduct/monitoring of
deposit accounts are detailed hereunder.
2.) Opening of Deposit Accounts :-
a. Introduction of New Depositors :-
A large number of frauds are perpetrated in banks mainly through opening
of accounts in fictitious names, irregular payment of cheques,
manipulation of accounts and un-authorized operations in accounts.
Considering the fact that opening of an account is the first entry point for
any person to become a customer of the bank, utmost vigilance in opening
of accounts and operations in the accounts is called for. Even the legal
protection under the Negotiable Instruments Act, 1881 which governs
payment and collection of negotiable instruments and provides certain
rights, liabilities (obligations) and protections to the issuers/drawers,
payees, endorsees, drawees, collecting banks and paying/drawee banks,
will be available, only if the bank makes the payment or receives payment
of a cheque/draft payable to order in due course. Any payment or
collection of a negotiable instrument is deemed in due course only when
the bank acts in good faith and without negligence and does so for a
customer.
[39]

b. Necessity of Introduction :-
 Introduction of an account is obtained not merely as a formality to
get protection under section 131 of the Negotiable Instruments Act,
1881, but also to enable proper identification of the person opening
an account, so that it would be possible, to trace the person later
when required.
 It is necessary for banks to know their customers and to put in place
proper systems and procedures. The practice of obtaining proper
introduction should not be treated as a mere formality, but as a
measure of safe-guard against opening of accounts by undesirable
persons or in fictitious names with a view, inter alia, to depositing
unaccounted money.
[40]
c. Proper Introduction :-
 The account should not be normally opened without a meeting
between the bank official and the customer.
 The banks should invariably insist upon prospective depositors to
furnish introduction from either any of the existing account holders
or a respectable member of the local community known to the bank
or the bank's staff) for opening not only current and cheque
operated savings bank accounts but also all deposit accounts
including call, short-term and fixed deposits. The banks should take
steps to satisfy themselves about the identity of their depositors.
 The role of the introducers should be made more specific. It is not
sufficient to state that he has known the person for a sufficient
length of time.
 The person giving introduction should be of some standing and
have an account with the bank for at least six months to ensure that
the accounts are not opened on the introduction of new account
holders or persons having small and marginal balances. The interval

will also enable the bank to monitor the account closely to satisfy
itself that the transactions in the introducer's account are
satisfactory.
 Branch Managers/staff members should be discouraged from giving
[41]
the introduction.
 Where the party is not able to provide an introduction satisfactorily,
it must be made incumbent upon him to provide sufficient proof of
his antecedents before the account is allowed to be opened.
 Customers of good standing should be educated to realise the
implications of introducing an account without knowing the new
parties.
 In the case of a customer who will be getting credits, say by way of
salary, and making cheques to payment government/semi-government
agencies/individuals, simple introduction along with
photograph, may suffice.
 In case of accounts, which are likely to be used for putting through
remittance transactions and for collection of cheques of substantial
amounts besides business payments, deeper enquiries would be
necessary on the part of the bank.
d. Introduction in absentia :-
 When an introducer does not personally call at the branch to
introduce an account, the fact of having introduced a new account
should be got confirmed from him in writing.
 In cases where the account opening forms bear the signatures of
manager/officials of other branches of the bank for introduction,
apart from verifying the signatures of such introducers with the
specimen signatures available on record, the branch concerned
should obtain written confirmation of the introduction from the
officials of the branches who introduced the account.

 Till such time the confirmation is received, the banks should not
collect cheques/draft through the newly opened accounts.
 The same procedures should be adopted in cases where the
introducers of accounts are not officials of the bank and do not
personally call at the bank to introduce an account.
 The bank should send a letter by post both to the customer and the
introducer and seek their confirmation for opening the
account/giving introduction. Cheque book may be issued after
receipt of confirmation from both.
e. Photographs of Account Holders :-
 The banks should obtain photographs of the depositors/account
holders who are authorized to operate the accounts at the time of
opening of all new accounts. The customers' photographs should be
recent and the cost of photographs to be affixed on the account
opening forms may be borne by the customers.
 Only one set of photographs need be obtained and separate
photographs should not be obtained for each category of deposit.
The applications for different types of deposit accounts should be
properly referenced.
 Photographs of persons authorized to operate the deposit accounts
viz. S.B. and Current accounts should be obtained. In case of other
deposits viz. Fixed, Recurring, Cumulative etc. photographs of all
depositors in whose names the deposit receipt stands may be
obtained, except in the case of deposits in the name of minor, where
guardians' photographs could be obtained.
 The banks should also obtain photographs of ‘Pardanashin’ women.
 The banks should also obtain photographs of Non-Resident
(External) (NRE), Non-Resident Ordinary (Rupee) (NRO), Foreign
Currency Non-Resident (FCNR) account holders.
[42]

 For operations in the accounts, banks should not ordinarily insist on
the presence of account holder unless the circumstances so warrant.
Photographs cannot be a substitute for specimen signatures.
[43]
f. Exceptions :-
 The photographs need not be insisted upon by banks in the under
noted cases.
 New savings bank accounts where cheque facility is not provided
and fixed and other term deposits up to an amount and inclusive of
Rs. 10,000/-. However, the banks should take usual and necessary
precautions/safeguards in regard to opening and operation of these
accounts. Where a depositor has a term deposit of less than Rs.
10,000/- but he/she is also having a savings bank account with
cheque facility or a current account, it will be necessary to have the
photograph of the depositor.
 Banks, local authorities and Government departments (excluding
public sector undertakings or quasi-Government bodies) are
exempted from the requirement of photographs.
 The photographs need not be obtained for borrowal accounts viz.
Cash Credit, Overdrafts accounts, etc.
 The banks may not insist for photographs in case of accounts of
staff members (Single/Joint).
g. Address of Account Holders :-
It is not proper for banks even unwittingly to allow themselves to be
utilized by unscrupulous persons for the purpose of tax evasion.
Therefore, banks should obtain full and complete address of depositors
and record these in the books and the account opening forms so that the
parties could be traced without difficulty, in case of need. Independent
confirmation of the address of the account holder should be obtained in all
cases.

[44]
h. Other Safeguards :-
Permanent Account Number (PAN)/General Index Register (GIR)
Number The banks are required to obtain PAN/GIR number of a
depositor opening an account with an initial deposit of Rs.50,000/- and
above.
i. Authorization :-
The opening of new accounts should be authorized only by the Branch
Manager or by the Officer-in-Charge of the Deposit Accounts Department
concerned at bigger branches.
j. Completion of Formalities :-
The banks should ensure that all account opening formalities are
undertaken at the bank's premises and no document is allowed to be taken
out for execution. Where it is absolutely necessary to make exception of
the above rule, banks may take precaution such as deputing an officer to
verify the particulars, obtaining a signed photograph on a suitably
formatted verification sheet, forwarding by registered Acknowledgement
Due, mailing a copy of the account opening form and accompanying
instructions to the client for necessary verification before any operations
are conducted in the accounts.
k. Opening of current account - Need for discipline :-
 Keeping in view the importance of credit discipline for reduction in
Non-Performing Assets (NPA) level of banks, banks should insist
on a declaration from the account-holder to the effect that he is not
enjoying any credit facility with any other bank or obtain a
declaration giving particulars of credit facilities enjoyed by him
with any other banks. The account-opening bank should ascertain
all the details and should also inform the concerned lending banks.
The account-opening bank should obtain No-objection Certificate
from such banks.

 However, in case no response is received from the existing bankers
after a minimum period of a fortnight, banks may open current
accounts of prospective customers.
 Further, where the due diligence is carried out on the request of a
prospective customer who is a corporate customer or a large
borrower enjoying credit facilities from more than one bank, the
bank may inform the consortium leader, if under consortium, and
the concerned banks, if under multiple banking arrangement.
 Banks are advised to be guided by the need for effective due
diligence in these matters as also the objective of customer
satisfaction and ensure that suitable arrangements are in place for
prompt and serious attention to references received from banks in
this regard.
l. Accounts of Proprietary Concerns :-
In the case of proprietary concerns, at the time of opening of the account,
the banks have to verify, in addition to the identity of the individual
proprietors, the identity of the proprietary concern also. Accordingly, the
banks may call for and verify the following documents :-
 Identity as also the address proof of the proprietor, such as passport,
PAN card, Voter ID card, Driving license, Ration card with photo,
etc. – any of these documents is to be obtained.
 Proof of the name, address and activity of the concern, like
registration certificate in the case of a registered concern),
certificate/license issued by the Municipal authorities under Shop
and Establishment Act, sales and income tax Returns, CST/VAT
certificate, License issued by the Registering authority like
Certificate of Practice issued by Institute of Chartered Accountants
of India, Institute of Cost Accountants of India, Institute of
Company Secretaries of India, Indian Medical council, Food and
Drug Control Authorities, etc. – any two of the documents are to be
[45]

obtained. These documents should be in the name of the proprietary
concern. Apart from these documents, any certificate/registration
document issued by Sales Tax/Service Tax/Professional Tax
authorities may also be considered for verification of the proof of
name, address and activity of the proprietary concern.
 With effect from May 11, 2012, it has been decided to include the
following documents in the indicative list of required documents for
opening accounts of proprietary concerns :-
 The complete Income Tax Return (not just the
acknowledgement) in the name of the sole proprietor where
the firm’s income is reflected duly authenticated /
acknowledged by the Income Tax Authorities.
 Utility bills such as electricity, water and landline telephone
bills in the name of the proprietary concern.
m. Opening of NRO/NRE accounts :-
UCB’s may maintain NRO accounts arising from their redesignation as
such, upon the existing resident account holders becoming non-resident
and in such accounts only, periodical credit of interest will be permitted.
UCB’s are not permitted to open any fresh NRO accounts (with the
exception of Category I Authorized Dealers).UCB’s registered in States
that have entered into a Memorandum of Understanding (MOU) with
Reserve Bank of India (Reserve Bank) for supervisory and regulatory co-ordination
and those registered under the Multi State Co-operative
Societies Act, 2002 and complying with the following norms are eligible
for authorization to maintain NRE accounts :-
(i) Minimum net worth of Rs 25 crore.
(ii) CRAR of not less than 9%.
(iii) Net NPAs to be less than 10%
(iv) Compliance with CRR/SLR requirements.
[46]

(v) Net profit for preceding 3 years without any accumulated losses.
(vi) Sound internal control systems.
(vii) Satisfactory compliance with KYC/AML guidelines.
[47]
n. Financial Inclusion :-
While recognizing the role of UCB’s in providing basic and affordable
banking services in their respective area of operation, it is observed that in
some banks, the requirement of minimum balance continues to deter a
sizeable section of population from opening / maintaining bank accounts
with a view to achieving the objective of greater financial inclusion, all
UCB’s are advised to make available a basic banking 'no-frills' account
either with 'nil' or very low minimum balances as well as charges that
would make such accounts accessible to vast sections of population. The
nature and number of transactions in such accounts could be restricted, but
made known to the customer in advance in a transparent manner. All
UCB’s are advised to give wide publicity to the facility of such ‘no-frills'
account including display on their web sites indicating the facilities and
charges in a transparent manner. However, financial inclusion objectives
would not be fully met if the banks do not increase the banking outreach
to the remote corners of the country. This has to be done with affordable
infrastructure and low operational costs with the use of appropriate
technology. This would enable banks to lower the transaction costs to
make small ticket transactions viable. Banks are, therefore, urged to scale
up their financial inclusion efforts by utilizing appropriate technology.
Care must be taken to ensure that the solutions developed are highly
secure, amenable to audit and follow widely accepted open standards to
allow inter-operability among the different systems adopted by different
banks.

11. CONCLUSION.
NPA in the banking sector is the common problem in all the public, private and the
foreign sector bank but the bank also had taken certain strict measures to control
the NPA. Increase in NPA causes increase in debt due to reduce NPA Reserve
Bank Of India (RBI) had also taken some strict measures to control NPA. NPA
should be controlled by the bank immediately if it is not controlled immediately
the bank have to face many problem and due to which it effects the profitability of
the bank and it also creates the problem of insolvency too many banks. Many of
the banks are much focused to control the NPA in banking sector if the bank tackle
the problem of NPA the problem of insolvency in banking sector will get largely
reduced.
However, the problem NPA also occurs due to lack of efficiency in the banking
sector and also due to lack of management in the banking sector if this two things
are largely controlled in banking sector the problem of NPA will get vanished and
there should also be innovation of new technique to solve the problem of NPA in
the banking sector. Bank should only give the loan to those account holders who
have the ability to pay the loan at a maturity date if the bank give the loan without
seeing the investor ability to pay in future the bank will commonly face the
problem of NPA. Bank should also follow RBI rule and regulation to control NPA
due to this it avoids the problem of NPA in future.
Hence the problem is there everywhere but it requires lot of will and mental calibre
to solve it and the problem of NPA will get solved early and easily in every
banking sector.
[48]

12. BIBLIOGRAPHY/WEBLOGRAPHY.
[49]
Bibliography :-
 Managing Non-performing Assets in Banks – S.N.Bidani,
K.Seethapathi
Weblography :-
1.) http://www.wikipedia.com
2.) http://www.investopedia.com
3.) http://www.economictimes.com
4.) http://www.accountnet.com
5.) http://www.investorwords.com
6.) http://www.moneyterms.com
7.) http:// www.businessdictionary.com
8.) http://www.rbi.org.in
9.) http://www.investinganswers.com
10.) http://www.slangeek.com
11.) http://www.bloomberg.com
12.) http://www.forbes.com
13.) http://www.timesofindia.com
14.) http://www.ask.com
15.) http://www.globalguidelines.com

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Comparative Analysis of NPA in Public, Private & in Private Sector Banks.

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