NPA Report

EVALUATION OF NON-PERFORMING ASSETS
AT SOUTH INDIAN BANK
CHENNAI GEORGE TOWN BRANCH
CHENNAI-600 001
Submitted by
Tejal R. Pujara
(PGDMB14/088)
In partial fulfillment for the award of the degree of
POST GRADUATE DIPLOMA IN MANAGEMENT
INSTITUTE FOR FINANCIAL MANAGEMENT AND RESEARCH
24, Kothari Road, Nungambakkam, Chennai - 600 034
(2013-14)

CERTIFICATE
This is to certifythat this project report “Evaluationof Non-Performing Assets (NPAs)” is thebona
fide work of Ms Tejal R. Pujara who carried out the project work under my supervision.
(Signature)
Mr. Vikas Oberoi
Credit Manager,
South Indian Bank
Date

ACKNOWLEDGEMENT
I would like to thank South Indian bank for giving me this opportunity to intern at the George Town
branch of South Indian Bank. I would like to thank Mr. T. V. Joseph, Assistant GeneralManager, for
his guidance and support throughout my stint. I would like to sincerelythank Mr.Vikas Oberoi, Credit
Manager for mentoring me throughout my internship period and patiently clarifying all my queries. I
would like to thank Prof. RameshSubramanian, FacultyIFMRfor mentoringand guidingme throughout
my internship period.
Tejal R. Pujara

EXECUTIVE SUMMARY
This project deals with defining Non-performing Assets (NPAs), evaluating the size of NPAs, their
impact onthe bankingindustry, studyingthe causes ofthe existence ofthese, understandingthe recovery
procedure of NPAs and measure its effectiveness.
Granting of credit facilities for economic activities is the primary task of banking. Apart from raising
funds through fresh deposits, borrowings, etc. recycling of funds received back from borrowers is a
major part offundingcredit dispensationactivities. Non-recoveryofthe instalments and also the interest
onloans negates the effectiveness ofthis process ofthe credit cycle. InIndia NPAs are one ofthe major
concerns for banks. NPA is the best indicator for the health of the banking industry as it reflects the
performances ofbanks and is the primaryindicator ofcredit risk. NPAs are aninevitable burdenonthe
banking industry. Hence the success of a bank depends upon methods ofmanagingNPAs. Generally
reduction in NPAs shows that banks have strengthened their credit appraisalprocesses over the years
and increase in NPAs shows the necessity of provisions, which bring down the overall profitability of
banks. Non-recoveryrequires maintainingmore owned funds bywayofcapitaland creationofreserves
and provisions to act as cushion for the loan losses. Avoidance of loan losses is one of the pre-
occupations of the management of banks. While complete elimination of loans losses is not possible,
bank managements aim to keep it at a low level. Infact, it is the levelofNPAs, which, to a great extent,
differentiates between a good bank and a bad bank.
The Indian banking sector is facing a serious problem of NPA, which are considered to be at higher
levels than those in other countries, have of late attracted the attention of public and also international
financialinstitutions. The magnitude ofNPA is comparativelyhigher inpublic sectors banks thanprivate
sector banks. To improve the efficiency and profitability of banks the NPA need to be reduced and
controlled. This has gained further prominence in the wake of transparency and disclosure measures
initiated by the RBI recently.
Concrete efforts have to be made to improve recovery performance. The main reasons of increasing
NPAs are the target-oriented approach, which deteriorates the qualitative aspect oflendingbybanks
and willful defaults, ineffective supervision of loan accounts, lack oftechnicaland managerialexpertise
on the part of borrowers.
Contents

SOUTHINDIAN BANK – AN INTRODUCTION...............................................................................................................1
SOUTHINDIAN BANKGEORGETOWN BRANCH – INTRODUCTION...................................................................3
CREDIT APPRAISAL – INTRODUCTION.........................................................................................................................4
MEANING ................................................................................................................................................................................4
TYPES OF ADVANCES............................................................................................................................................................4
CREDIT APPRAISAL PROCESS.........................................................................................................................................8
PRE-SANCTION APPRAISAL PROCEDURE & TECHNIQUES ...................................................................................................8
PROCEDURES AND TOOLS FOR ANALYSING FINANCIAL STATEMENTS – FINANCIAL STATEMENT ANALYSIS & RATIO
ANALYSIS .............................................................................................................................................................................12
ASSESSMENT AND FINANCING OF WORKING CAPITAL .....................................................................................................14
FORMULA UNDER TURNOVER METHOD....................................................................................................................14
ASSESSMENT OF TERM LOAN PROPOSALS ........................................................................................................................17
DISBURSEMENT, FOLLOW UP & POST SANCTIONINGOF ADVANCES .........................................................21
MONITORING/ FOLLOW UP – SOMEIMPORTANT POINTS ................................................................................22
LEGAL FOLLOW-UP...............................................................................................................................................................22
FINANCIAL FOLLOW-UP.......................................................................................................................................................23
PHYSICAL FOLLOW-UP.........................................................................................................................................................24
REVIEW AND MONITORINGOF WATCH& NPA ACCOUNTS .............................................................................26
NON-PERFORMINGASSETS (NPAS)............................................................................................................................29
TYPES OF NPA.....................................................................................................................................................................32
RBIGUIDELINES FOR NPA CLASSIFICATION & PROVISIONING......................................................................33
PROVISION COVERAGERATIO (PCR)........................................................................................................................38
CAUSES OF NPA..................................................................................................................................................................39
IMPACT OF NPA..................................................................................................................................................................41
EARLYSYMPTOMS ............................................................................................................................................................43
PREVENTIVEMEASUREMENT FOR NPA.....................................................................................................................44
RESTRUCTURINGOF LOANS AND ADVANCES .......................................................................................................46
LOAN RECOVERYMEASURES:......................................................................................................................................47
SALE OF PLEDGED ITEMS.....................................................................................................................................................48
SARFAESI ACT 2002.........................................................................................................................................................48
RECOVERY THROUGH COURTS/ DRT..................................................................................................................................49
INSTITUTION OF CDR MECHANISM....................................................................................................................................49
INCREASED POWERS TO NCLTS AND THE PROPOSED REPEAL OF BIFR:........................................................................50
ONE TIME SETTLEMENT ......................................................................................................................................................51
NEGOTIATED SETTLEMENT SCHEMES................................................................................................................................51
RECOVERY CAMPS ...............................................................................................................................................................52

SALE OF ACCOUNTS TO ASSET RECONSTRUCTION COMPANIES (ARCS)........................................................................52
WRITE-OFF/ WAIVER OF LEGAL ACTION ..........................................................................................................................52
OBJECTIVEOF THESTUDY.............................................................................................................................................53
METHODOLOGY..................................................................................................................................................................53
ANALYSIS OF NPAS AT SOUTHINDIAN BANK (SIB).............................................................................................54
ANALYSIS OF NPAS AT SOUTHINDIAN BANK(SIB) – GEORGETOWN BRANCH.......................................60
FINDINGS AND RECOMMENDATIONS:.......................................................................................................................61
CONCLUSION.......................................................................................................................................................................62
ANNEXURE1.........................................................................................................................................................................63
REFERENCES ........................................................................................................................................................................64

Evaluation of Non-Performing Assets (NPAs)
Tejal R. Pujara (PGDMB14/088) Page 1
SOUTH INDIAN BANK – AN INTRODUCTION
The South Indian Bank Limited (SIB) is a private sector bank headquartered at Thrissur City
in Kerala, India. South Indian Bank has 800 branches spread across more than 26 states and union
territories in India. It has set up 1006 ATMs all over India.
One of the earliest banks inSouthIndia, "SouthIndianBank"was started in1929 and came into being
during the Swadeshi movement. The establishment of the bank was the fulfilment of the dreams of a
group of enterprising men who joined together at Thrissur, a major town (now known as the Cultural
CapitalofKerala), inthe erstwhile State ofCochinto provide for the people a safe, efficient and service
oriented repository of savings of the community on one hand and to free the business communityfrom
the clutches ofgreedymoneylenders onthe other byprovidingneed based credit at reasonable rates of
interest.
Its products include personal loan, vehicle loans, educational loan, gold loan, agricultural loan,
Recurring Deposit Scheme (NRE), Portfolio Investment Scheme (PIS) for NRI’s, Debit Card, Credit
Card, Mutual Fund, Insurance, Travel Card, Internet and Mobile Banking Services for retail and
corporate clients. It also provides online value added services like stock trading, ticket booking, mobile
recharges, shopping, utility payments, offerings etc.
During the year 2013-14, the bank has earned a net profit ofRs. 507.5 crore. The Bank could achieve
this healthy growth in net profit essentiallyonaccount ofhigher scale ofoperations, better management
of assets and liabilities and focus on enhancement of non-interest revenue of the Bank.
During the year, the Bank opened 50 new branches and 137 ATMs across the country. The Bank has
been successful in widening its coverage across the country with 7 branches transforming it into a pan
India institution. The branchnetwork now covers 29 states/unionterritories and has a network of1006
ATMs.
Financial Highlights:
 Operating Profit registered a y-o-y growth of ₹ 35.76 Crore (4.21%) and was higher at ₹
884.35 Crore for year ended 31.3.2014 as against ₹ 848.59 Crore for year ended 31.3.2013.
 Net Profit of the Bank for the year ended 31.03.2014 stood at ₹ 507.50 Crore against ₹
502.27 Crore for the year ended 31.03.2013.

 The Bank’s total income recorded a growth of ₹ 3071.50 Crore (12.88%) duringthe year
ended 31.3.2014 from₹ 4769.22 Crore for the year ended 31.3.2013 to ₹ 5383.53 Crorefor
the year ended 31.3.2014.
 Net Interest Income improved to ₹ 5015.07 Crore for 2013-14 as compared to ₹ 4434.29
Crore for 2012-13, registering a growth of 13.1%.
 The Other Income during 2013-14 increased to ₹ 368.46 Crore from ₹ 334.93 Crore for
2012-13, a growth rate of 10%.
 Gross NPA stood at ₹ 432.62 Crore as on 31.03.2014 as against ₹ 433.87 Crore as on
31.03.2013 and in percentage terms, the Gross NPA ratio was 1.19% as on 31.03.2014 as
against 1.36% as on 31.03.2013.
 Net NPA stood at ₹ 281.67 Crore as on 31.03.2014 as against ₹ 249.53 Crore as on
31.03.2013. In percentage terms, the Net NPA ratio was 0.78% for both the years.
Milestones
 The FIRST among the private sector banks in Kerala to become a scheduled bank in 1946
under the RBI Act.
 The FIRSTbank inthe private sector inIndia to open a CurrencyChest onbehalfofthe RBI in
April 1992.
 The FIRST private sector bank to open a NRI branch in November 1992.
 The FIRST bank in the private sector to start an Industrial Finance Branch in March 1993
 The FIRST among the private sector banks in Kerala to open an "Overseas Branch"to cater
exclusively to the export and import business in June 1993.
 The FIRSTbank inKerala to develop anin-house, fullyintegrated branchautomationsoftware
in addition to the in-house partial automation solution operational since 1992.
 The FIRST Kerala based bank to implement Core Banking System
 The THIRD largest branchnetwork amongPrivate Sector banks, in India, withallits branches
under Core banking System.

SOUTH INDIAN BANK GEORGE TOWN BRANCH – INTRODUCTION
This branchis headed bythe Assistant GeneralManager whichis opposite to the Madras HighCourt in
George Town and is one of the oldest branches ofthe bank inthe city. The followingtable summarizes
the size of this branch.
Particulars Amount (in ₹ Crores)
Total Income 62,02,38,992.16
Total Deposits 2,96,70,32,402.52
Total Advances 6,23,65,45,047.67
 Secured by Tangible Assets
 Covered by Bank/ Govt. Guarantees
 Unsecured
6,07,38,86,217
1,41,89,755
14,39,69,075.62
Net Profit 49,20,62,080.96.

CREDIT APPRAISAL – INTRODUCTION
Meaning
Credit appraisal means an investigation/assessment done by the bank before providing any loans &
advances/project finance & also checks the commercial, financial & technical viability of the project
proposed, its funding pattern & further checks the primary & collateral security cover available for
recovery of such funds.
Credit Appraisal is a process to ascertainthe risks associated withthe extensionofthe credit facility. It
is generally carried by the financial institutions which are involved in providing financial funding to its
customers. Credit risk is a risk related to non-repayment of the credit obtained by the customer of a
bank. Thus it is necessary to appraise the credibilityofthe customer inorder to mitigate the credit risk.
Proper evaluationofthe customer is performed, whichmeasures the financialconditionand the abilityof
the customer to repay back the loan in future. Generally the credit facilities are extended against the
security know as collateral. But eventhoughthe loans are backed bythe collateral, banks are normally
interested inthe actualloanamount to be repaid alongwiththe interest. Thus, the customer's cashflows
are ascertained to ensure the timely payment of principal and the interest.
It is the process of appraising the credit worthiness of a loan applicant. Factors like age, income,
number ofdependents, nature ofemployment, continuityofemployment, repayment capacity, previous
loans, credit cards, etc. are takeninto account while appraisingthe credit worthiness ofa person. Every
bank or lending institution has its own panel of officials for this purpose.
Types Of Advances
Advances can be broadly classified into:
 Fund-based facilities: Includes overdrafts, cash credits, term loans, project finance, bills
purchased and bills discounted. These are divided into three categories:
o Long-term loans – These are advance granted for more than 36 months.
o Medium-term loans – These are advances granted for more than 12 months but less
than 36 months.
o Short-term Loans – These are advances granted for up to 12 months.

 Non-fundbasedfacilities: Includes Letter ofCredit (LC), Bank Guarantee, Co-acceptances
of bills/ deferred payment guarantee.
 Term Loans: TermLoanis a single transactionlimit where the loanamount is disbursed either
in a lump sum or instages and the same is repaid ininstallments alongwithinterest. Unlike inan
operative account, the facilityofreinstatingthe limit to the extent ofrepayment is not available in
a term loan. This is due to the fact that the loan is availed for a specific purpose/ project.
 Short Term Loans and Working Capital Limits: The short term finances are mainly
extended for workingcapitalrequirement whichare employed as current assets ofthe business.
Banks mayalso extend short termpersonalloans to individuals bothas cleanloans and secured
loans. WorkingCapitalfinance for trade and industryis extended bybanks bywayofinventory
limits inthe formofoverdrafts, cashcredit, WCTLetc. Post sales limits are extended bywayof
discounting of bills/ cheques, advances against book debts etc.
Based on the security available, advances canbe fullysecured, partlysecured and cleanor unsecured.
 Overdrafts:
Overdraft is a facility whereby the current account is allowed to be overdrawn up to the
sanctioned limit. The borrower may remit funds into the account reducingthe debit balance or
he may draw onthe account up to the limit. It is sanctioned to individuals, traders and industrial
concerns. Overdraft maybe unsecured (clean), partly secured or fullysecured against pledge,
mortgage or hypothecation of securities acceptable to the bank.
 Cash Credit:
It is a drawing account against credit granted by the bank and is operated inexactlythe same
manner as a current account on which an OD has been sanctioned.
 Loans (Secured/ Unsecured):
These are advances or fixed amounts and no further debits maybe rose in the account
subsequent to the initial debit except bywayofinterest, insurance premiumand other charges.

Loans canbe fullysecured (FSL) against gold, Government Securities, LIC policies, sharesand
other securities acceptable to the bank.
The remittances made under the loan amount will be appropriated in the loan account in the
chronological order ofdemand for charges, interest or principal, bythe system. This practice is
followed to avoid the situationofthe account technicallybecominganNPA, for non-satisfaction
of a demand towards a small charge for more than 90 days.
Clayton’s Rule: In this case, The Court held that the first credit in an account would go
towards adjusting the first debit in the said account, and so on. Inthe case ofa Bankingfirm,
under partnership constitution, uponthe deathofone partner, credits made bya customer inhis
account would become the responsibilityofthe remainingpartners, and could not be repaid out
of the estate of the deceased partner.
 Bills Purchased & Discounted/ Cheques Purchased:
This type of advance can be classified into 3 distinct groups:
o Bills purchased (B.P): These maybe in the nature of on demand Clean or
Documentarybills beingbills payable onDemand drawnonoutstationcenters forwhich
immediate credit is afforded to party’s account less our discount and handlingcharges.
o Usance Bills Discounted (USB)/ Drawee Bill Discounted (DBD):
Usance Clean or Documentary bills are bills payable on due date after expiry of the
usance period drawnondrawees/ payees against whichimmediate credit is giventothe
party’s account less interest for the usance period, handling charges postage etc.
o Cheques purchased (C.P): Outstation cheques or drafts drawn on branches of our
Bank or other banks are purchased and immediate credit is afforded to party’s account
less our discount/ commission. Due to the advent od ‘speed clearing’ in which the
outstation cheques and other instruments drawn on any CBS enabled bank branch is
payable at any clearing house in the country, which has implemented the ‘Speed
Clearing’, the necessity for this type of facility has reduced to a great extent.
 Letters Of Credit (LC)
Credit means any arrangement however named or described that is irrevocable and thereby

constitutes a definite undertakingofthe issuingbank to honour a complyingpresentation. Honor
means:
o to pay at sight if the credit is available by sight payment.
o To incur a deferred payment undertakingand payat maturityifthe credit is available by
deferred payment.
o To accept a bill of exchange (draft) drawnbythe beneficiaryand payat maturityifthe
credit is available by acceptance.
Thus Letter ofCredit is a writtenundertakingbya bank (issuingbank)givento the seller (beneficiary) at
the request and inaccordance withthe instructions ofthe buyer (applicant) to effect payment ofa stated
amount within a prescribed time limit and against stipulated documents provided all the terms and
conditions of the credit are complied with.
 Bank Guarantee
Contract of guarantee can be defined as a contract to perform the promise, or discharge the
liability of a third person in case of his default. The contract of guarantee has three principal
parties:
o Principal Debtor: The person who has to perform or discharge the liabilityand whose
default the guarantee is given
o Principal Creditor: The person to whom the guarantee is given for due fulfilment of
contract by principal debtor. Principal Creditor is also sometimes referred to as
beneficiary.
o Guarantor or Surety: The person who gives the guarantee.

CREDIT APPRAISAL PROCESS
The Credit Appraisal process is divided into 3 stages:
Flowchart 1
Pre-Sanction Appraisal Procedure & Techniques
 Branch Manager/ Officer In charge granting or recommending the grant of advances for
business, trade, industry, personal, agriculture or for any other purposes satisfythemselves of
the following 6 C’s ofcredit ofthe applicant to be examined bydiscrete enquiries fromoutside
parties engaged insimilar line ofbusiness and fullrecords ofthese are maintained inthe personal
file of the borrower.
Flowchart 2
Pre-sanction
Appraisal
Sanctioning
of Loan
Post-
sanction
Monitoring
6C'sofCredit
Character
Capacity
Cash Flow
Capital
Collateral
Condition

 Individualworthstatements for allthe signatories inthe capacity as the borrower, co-obligator/
guarantor should be obtained. The value of assets stated in the form such as cash, goods,
investments, buildings, landed property etc. should be ascertained by obtaining documentary
proof compulsorily in the case of landed properties and investments as far as possible in the
case of other assets.
 The nature and extent of liabilities should be verified by in dependent enquiry and wherever
possible by examination of existing bank accounts and other books of accounts.
 The value of the liquid assets or easily realizable assets such as cash, book debts, stocks,
outstanding’s considered good etc. should ordinarilyexceed, withanample margin, the totalof
the short-dated liabilities such as sundry creditors, short-term borrowings etc.
 The applicants should have personal/ commercial integrity and should be respectable.
 The purpose for which the advance is required should be enquired and confirmed.
 The plan and source of repayment should be enquired and satisfied.
 The advance should be proportionate to applicant’s means:
o The amount of advance should be related to the owned capital/ independent means of
the borrower.
o It should also be possible by a reference to the past 2 or 3 years’ financialstatements,
to ascertain the quantum of stocks that would be carried by the business or raw
materials required to be stored for the purpose of carrying on the business.
o Projected turnover, inventory levels and credit limits proposed should compare level
with past trend.
o Sufficient reasons to justify any large variations in projections, from the past trend
should be adduced.
 Exposure to sister concerns, Close relatives:
o While considering advances, credit facilities enjoyed by allied and associate firms or
partners/directors individually should also be put onrecord, showingthe exposure for
each individual/ firm/ company.
o If facilities are enjoyed at other offices by connected firms or partners/ directors, the
fact should be ascertained and details given in the proposal.

 The integrity of the borrower and capacity to repay:
o Branch managers must make sure that borrowers are men/womenofintegrityand had
the capacity to repay.
 The borrower’s knowledge of business:
o A borrower cannot thrive unless he knows allaspects ofthe business and it mayalsobe
difficult in such cases to recover the bank dues. Due importance should be givento the
managerial competency.
o The applicant must be adequatelytechnicallyqualified or continued technicalassistance
should be ensured.
o Satisfactory marketing arrangements should be ensured:
- Examine the proposalfromthe angles ofsafety, feasibilityand national
priority etc.
- Make a critical study of the financial statements, project report and
other information submitted by the borrower.
- Do not enter into propositions which are likely to land the bank even
into the slightest loss.
 Government policies, licenses and permissions:
o Gather the govt. policies relevant to the industry. Consider the impact ofanychange in
the current Govt. policy for the industry and the unit to be financed.
o Ensure that alllicense/ quota/ permissionrequired is obtained and a copyofthe same is
available on record along with the proposal.
o Ensure that the clearance from the local govt. authority, factories, inspectors, local
body, electricity board, pollution control board etc. is obtained.
Sources of Credit Information:
 Confidential opinion from existing bankers.
 Opinion from reliable sources who knew the borrower well.
 Opinion based on the existing account
 Financial Statements
 Enquiry from Competitors and NBFC’s/ money lenders.
 Independent assessment by the branch head

Appraisal of the Primary Security and Collateral Security offered:
 In case of advances against goods:
o The amount announced to anyone borrower should commensurate withthe extentofhis
resources, as margin have to be maintained out of these resources, if prices fall.
o The commodities should be readily saleable and not be subject to rapid deterioration.
o They should be stored in such a way as to permit periodical inspections.
o Hypothecation of goods as security should be taken only from parties of very good
standing and except in very exceptional cases such limits should have additional
collateral security.
o Only approved goods should be considered as security by way of pledge.
 Loans/Overdrafts against Company shares/ debentures:
o These should be granted to persons who are able to pay up margins without delay in
event of a fall in the market price of the script.
o Shares must be fullypaid and should stand registered inthe borrower’s name or is held
in the Demat account of the borrower.
 Loans/ Overdrafts against Surrender Value of an Insurance Policy:
o The surrender value should be ascertained from the concerned office of the Insurer.
o The policy should be assignable in the bank’s favour and the assignment can be
registered with the Insurer.
 Advance against deposits:
o Deposits with other banks should not be taken as security.
o An undertaking should be taken from the depositor agreeing to adjust the deposit on
maturity towards adjustment of the loan/ overdraft..

Procedures and Tools for Analysing Financial Statements – Financial Statement Analysis &
Ratio Analysis
Note: The procedure below canbe used to for the assessment ofbothworkingcapitaland termloans.
Ratio analysis: It is based on the fact that ifa relationship betweentwo accountingfigures is created,
useful information relating to performance, strengths and weaknesses can be derived. Different ratios
used for analysingfinancialstatements canbe grouped as revenue ratios, balance sheet ratios and mixed
ratios. Some ofthe important financialratios used inthe appraisalofworkingcapitalcredit facilities and
term loans are given below:
a) Current Ratio = Current Assets/ Current Liabilities
Minimum Requirement
For export oriented units (EOU’s) – 1.10 & above
o MSME Sector:
Limits below Rs. 1 crore – 1.10
Limits Rs. 1 crore & above – 1.33 (Turnover Method 1.25)
o For others – 1.33 and above except where RBI guidelines stipulate otherwise.
b) Quick Ratio = (CA – Inventory) / (CL – Borrowings)
o Should be at least 1
c) Inventory Turnover Ratio = CGS/ Avg. Inventory
o A decrease in this ratio is a danger signal
d) Debtor Velocity Ratio = (Receivables/ Credit Sales) x 360 days
e) Creditor Velocity Ratio = (Sundry Creditors/ Credit Purchases) x 360 days
f) Asset Turnover Ratio = Gross Sales/ Operating Assets

g) Debt Equity Ratio = Term Liabilities/ Tangible Net Worth
Minimum Requirement
o Facility upto Rs. 100 lakhs – 1.50:1
o Facility Rs. 100 lakhs & above – 2:1
h) TOL/ TNW = Total Outside Liabilities/ Total Net Worth
A desirable TOL/ TNW:
o Facility upto Rs. 100 lakhs – 2.50:1
o Facility Rs. 100 lakhs & above – 3:1
o TOL/ TNW ratio upto 10:1 is approved for considering credit limits to NBFC’s.
o Aggregate non-fund based limits to anysingle borrower shallnot exceed 5 times of the
Tangible Net Worth(TNW) ofthe borrower and aggregate offunded plus non-funded
exposure shall not exceed 10 times of the TNW.
i) Fixed Assets Coverage Ratio = (Fixed Assets + Non-Current Assets)
(Long term liabilities + TNW)
j) Debt-Service Coverage Ratio =
Net Profit + Depreciation + Interest on Term Loan/ Deferred Credit
Int. on Term Loan/Deferred Credit + Installments of Term Loan/Def. Credit
It measures the capacity of the Company to repay its debt.
o Desirable Minimum = 1.75:1 each year
o Below 1.50:1 is not allowed
o Avg. DSCR is taken into account
Financial Statement Analysis: It is a tool of financial analysis in which significant relationships of
different items of financial statements are created and highlighted. These relationships are then
interpreted in simple words. For Example, the earning data is related with investments.
Two types offinancialstatement analysis are important. One is horizontalanalysis and second is vertical
analysis. Inhorizontalanalysis, one compares allitems ofBalance Sheet and Profit & Loss account with

previous year’s balance sheet and Profit & Loss items. Inverticalanalysis one converts eachelement of
the informationinto percentage ofthe totalamount ofstatement so as to establishrelationship withother
components of the same.
Assessment and Financing of Working Capital
Bank sanctions working capital credit facilities to borrowers for the purpose of building up current
assets required for the day to day operations of the business/ manufacturing unit. Working Capital
finance extended to Industry/ trade/ business must be within the Maximum Permissible Bank Finance
(MPBF).
 Turnover Method: Under the turnover method, assessment of total working capital is to be
based on the basis of estimated turnover, while the margin is to be taken at actuallevel. But if
the available margin(Net WorkingCapital) is more than5% ofthe projected turnover, thebank
finance willbe correspondinglyreduced from20% so that the totalworkingcapitalrequirement
comprising the bank finance and borrower’s contributionis maintained at 25% ofthe turnover,
as bank finance is only intended to support the need-based requirement of a borrower.
FORMULA UNDER TURNOVER METHOD
A. Projected Turnover (A)
B. 20% of (A)
C. Margin Requirement at 5% of (A)
D. Margin (NWC = CA – CL)
E. Surplus/ Shortfall (C-D)
F. Eligible Minimum Bank Finance (20% of A)
G. Bank Borrowings (F-G)
Table 1: Calculation of WCR under Turnover Method:
Particulars 20012-13 (Rs.
Lakhs)
2013-14 (Rs.
Lakhs)
Annual Turnover 320.61 485.00

NWC (Margin of WC) 25.25 27
Total WCR @ 25% Turnover 80.15 121.25
Minimum Margin to be brought by borrower
(20% of total WCR or 5% of total turnover)
16.03 24.25
Actual NWC available with unit Nil 25.25
WC (fund based) limits to be sanctioned by bank – 80%
of total requirement or 20% of turnover
Nil 97
The bank in this case will sanction total fund based WC limit of Rs. 97 lakhs
 Second Method of Lending: Under this method, the borrower has to provide a minimumof
25% of current assets out of owned funds and term borrowings.
MPBF = (WCG – Actual NWC) or (WCG – Stipulated NWC) whichever is less.
The MPBF shall be arrived at based on the Projected Balance Sheet and Profit & Loss
Account. If the borrower needs higher limits thanassessed as per turnover method, the eligible
working capital may be calculated under the ‘Second Method of Lending’. The higher of the
two limits may be allowed to the borrower. Actual disbursement will be regulated through
availability of Drawing Power (D.P) in the account.
Table 2: Calculation of WCR under Second Method of Lending:
Particulars Year1 (Rs.
Lakhs)
Year2 (Rs.
Lakhs)
i) Total Current Assets 1957.42 2169.63
ii) Total Current Liabilities other than bank borrowing 624.99 624.99
iii) Working Capital Gap 1332.43 1544.64
iv) Min. required margin being 25% of Total CA 489.36 542.40
v) Actual/Projected NWC 200.98 200.98
vi) (iii) – (iv) 843.07 1002.24
vii) (iii) – (v) 1131.45 1343.66

viii) MPBF (Min. of (vi) or (vii)) 843.07 1002.24
ix) Excess Bank Borrowings 288.38 341.42
The margin of 25% under both the methods is the minimum requirement. If a borrower has
more liquid surplus, the MPBF will be reduced accordingly.

 Cash Budget Method
o Cash budget containing cash receipts and cash payments for a particular period is
obtained from the borrower.
o The difference of cash receipt and payments for individual month represents surplus/
deficit.
o The openingcashsurplus/deficit and the surplus /deficit for individualmonths arecarried
forward from month to month, with cumulative effect.
o The limit is fixed based on the peak cumulative deficit and drawings for individual
months are allowed within the deficit for the respective month.
When to use the appropriate method:
The above methods are used in the following ways:
 Turnover Method to be used for:
o Small borrowers
o Small scale and tiny industries – Total credit limits maybe extended up to Rs. 5 crores
 Cash Budgeting System to be adopted in respect of large borrowers.
 The computation of MPBF is done based on the projected figures whether under turnover
method or Second Method of Lending. However, we should accept onlyrealistic projections.
Assessment of Term Loan Proposals
There are 6 broad aspects of valuation of term loans:
Technical Feasibility
The examination of technical feasibility requires a detailed assessment of the type of technology
proposed for the unit. It should be examined:
i. Whether the technology is latest or outdated?
ii. Whether the unit is capital intensive or labor intensive?
iii. What will be the impact on the firm in case of the change of technology?
iv. In case of changes in product or shift in consumer preference, whether the unit willbe
able to meet the situation by diversifying its production activities?
v. Whether the proposed plant is of the right size based on capital requirements, cost-
benefit analysis and present and future demand of the product?

vi. What is the levelofoptimumcapacityutilisationand the capacityat whichthe plant will
operate? Break-even analysis reveals the required information in this regard
vii. The reputation of the machinery supplier and the quality of the machinery?
viii. The location of the project/ unit – whether adequate supply of raw material. Power,
water, labor and other infrastructural facilities aare available at reasonable cost?
ix. Issues ofsocio-economic factors, strategic considerations and Government policieslike
balanced regional development.
x. Fulfilment of the rules and regulations of the government as far as the technical and
social considerations are concerned.
xi. Availability of suitable technical personnel to implement the project and the facilityfor
training for its personnel to implement the project on technical the side.
 Commercial Feasibility
This involves study of the project for analyzing:
i. The present and future demand for the product to be produced
ii. Share of the product in the total market (present and future)
iii. Anypossible fluctuations indemand due to changes inconsumer preferences or change
in technology.
Mere productionwillnot complete the cycle and the products should be sold inthe market.The
propensity and capacity to repay the loanamount is entirelydependent onsales revenue ofthe
project.
The demand for the commodityshould be estimated onthe basis ofmacro and micro analysisof
the data available through market surveys and other methods available.
After estimating the present size of the market, projections should be made in respect of
seasonalvariations and cyclicalvariations ofdemand, fluctuations indemand due to technology,
prices, consumer taste or preference and availability of substitutes.
The present supplypositionofthe same commodityand similar commodities should beassessed
because it is an important ingredient to know the acceptability of the product in the market
 Financial Feasibility
It is necessaryfor bankers to studyand examine the projected financialstatements ofthe unit to

evaluate the project. There are four important techniques of financial evaluation for lending
decisions namely
i. Ratio Analysis: The ratios mentioned above include the leverage or solvency ratios
which give a measure of the long-term financial stability of the Company.
ii. Break-evenAnalysis:Banker is interested ingettinghimoneyback fromloanees out of
the surplus generated. The first question that comes to his mind is: When does this
surplus start in the unit? The break-evenpoint is a levelat whichthe unit is able to raise
its output ata total cost which will be equal to the sales revenue of the output.
Repayment ofthe termloans granted bybanks is generallyscheduled to beginafter the
unit braeks-even.
iii. CashFlow and Funds Flow Analysis:Cashflow estimates are drawnup to indicate the
inflow and outflow of funds of the concern year by year covering the entire period of
term advance. The cash flow estimate helps the banker to fix a proper repayment
schedule and to grant repayment holidays, ifnecessary. The appraisaltechnique should
also be helpful to find out how the funds came and how theywere applied. Ifthe funds
are properly applied, then only the working results will be good and financialposition
satisfactory to effect timely payment.
iv. Return on Investment: There are four method to measure return on investments
 Payback Approach
 Accounting Rate of Return
 Incremental Rate of Return
 Discounted Cash Flow Method
By using these techniques the banker canevaluate and rank the projects accordingto their
profitability. Discounted cash-flow method is idealto be used for the purpose ofselectionof
projects as it takes into account the time value ofmoneyand considers net cashflow being
recovery of the original investment plus required rate of return on invested capital. This is
much useful to the banker since the recovery of original investment with required rate of
return on capital revelas the project’s abilityto meet the debt obligations to the banks. The
repayment capacity of the borrower is most important.

 Managerial Feasibility:
managerialabilityand honestyare the most essentialfactors whichshould be considered bythe
banker while scrutinizing the loan applications. Even if the project is technically sound,
commercially viable and financially profitable it will not be a worthwhile venture for financingif
the project cannot be managed properly. Nothing canbe substituted for efficient management
and a weak management results in failure of even a well-conceived project. It is the
management that runs a project and it is through the management that a banker canensure the
end-use of the loan and determine the character of the borrowing unit. The past history ofthe
promoters can give some useful hints.
 Socio-economic Feasibility:
The object of this evaluation is to undertake social cost benefit analysis of the project under
consideration with a view to determine the contributionofthe project towards fulfilment ofthe
nationalobjectives and inassessingthe socialreturnonthe project. The major criteria inthis are
national objectives, economic life of the project and social cost-benefit analysis.
 Global Competence of the Industry
Study of the projects thoroughly fromthese five angles should be done and select onlythose whichwill
be technically sound, commercially feasible, financially profitable, managerially competent and
economically and socially viable to meet its financial obligations.

DISBURSEMENT, FOLLOW UP & POST SANCTIONING OF ADVANCES
The post-sanctioncredit process canbe broadlyclassified into three stages viz., follow-up, supervision
and monitoring, which together facilitate efficient and effective credit management and maintaininghigh
level ofstandard assets. The objectives ofthe three stages ofpost sanctionprocess are detailed below.
Table 3: Stages of Post Sanction Process
Basis ofa good lendingis sound appraisaland assessment ofcapacity/ intentionto repay. Past recordof
good performance and integrity are no guarantee for future performance. Even a loan granted on the
basis of sound appraisal may go bad if the borrower did not carry out his promises regarding
performance. To realise this fact a proper supervision and follow-up of advance is essential. Pre-
sanction appraisal and post-sanction monitoring are two sides of the same coin and bothare essential
for the timely repayment.
Some of the important generalprocedures to be followed inthe monitoringofworkingcapitaland term
loan credit facilities are as below:
 Opening of Loan Account and Disbursement:
The terms of sanction have to be thoroughly understood and fully complied with. The
disbursement should be made onlyafter the completionofdocumentationand complyingwithall
the terms of the sanction order. If stage release is stipulated, the time schedule has to be
adhered to and no installment should be released before the time in which it is to be made.
Working capital limit to be disbursed only at the time of requirement i.e generally after the
construction of the building , installation of the machinery and power connection is obtained.
 Disbursement ofWC/ TLshould be made after ensuringthat our disbursements are intune with
:
a. Borrower’s investment/ Promoter’s Contribution

b. Disbursement made by term lending financial institutions/ other banks/
c. Raising outside loans/ unsecured creditors and subordinating the same to bank
(wherever stipulated)
 Wherever necessary/ stipulated the following should be ensured while disbursing the loan
amount itself.
a. Subordination of unsecured loans/ other creditors etc. where stipulated.
b. Raising of promoters contribution
c. Availment of State/ Central subsidy etc.
d. Securing power connection, water connection, Pollution Control Clearance etc.
 Wherever refinance is a precondition to the release of the loan, the same should be ensured
without fail. Periodical disbursement under the loan is to be reported to Head Office for
obtaining refinance.
MONITORING/ FOLLOW UP – SOME IMPORTANT POINTS
Monitoring is to start soon after the disbursement and to continue till the advance is liquidated.
Monitoring can be broadly divided into legal, financial and physical follow-up:
Legal Follow-up
Documentation:
 In the correct formats
 Adequately stamped
 Properly executed by right persons
 Complete in all respects
 AOD/ renewal documents obtained in time
 Inthe case od equitable mortgage, assure correct title deeds a comprehensive legalopinionand
obtain up-to-date EC and tax paid receipts.
 Approval of legal opinion by RO/HO legal officers.
 Registration of letter listing title deeds, wherever necessary and obtentation of the registered
deed from the SRO.
 Verification of documentation by legal officers

 Obtain necessary declarations as prescribed.
 Compliance with all terms and conditions of the sanction order
In Company Accounts:
 Registration of charge with ROC within stipulated time.
 Board resolution for borrowings
Insurance:
 Risks fully covered
 Policy with bank clause
 Policy renewed in time
 ECGC cover - for all eligible export
Vehicle Loans:
 Registration of Bank’s charge with RTA
 Obtain blank transfer forms
Financial Follow-Up
1. Monitoring the end use of funds lent:
End use of funds to be ensured and documentaryproofto be kept, wherever required without
fail and as far as possible in all cases. Some of the situations, pointing out to diversion of the
funds are:
a. Crediting of term loan disbursements to Current/ Cash credit accounts of borrowers
and utilizationthereoffor day-too-dayoperations, instead of, for the purpose for which
the term loan was given.
b. Exclusive reliance on CA’s certification both in regard to infusion of promoter’s
contribution and deployment of bank’s funds.
c. No meaningful scrutiny of periodical progress reports and operating/ financial
statements of the borrowers. For eg, whether there is sufficient stock to cover the
drawings in CCOL accounts, is sometimes not scrutinized.
d. No regular visits to the assisted units and inspectionofsecurities charged/ hypothecated
to the bank.
e. No periodical scrutiny of books of accounts of borrowers.

f. No periodical stock audit as stipulated by the bank.
2. Scrutinize:
No indiscriminate ad hoc/ TOD, as the sanctioningofTOD/ Adhoc points out to inadequateor
incorrect assessment of the working capital needs of the party.
a. Ledger accounts/ drawings by cheques (to find out diversion, if any)
b. Liability registers, stock statements
c. Compare stock statements with earlier ones – verify accumulation
d. Regulate DP as per the value of the stock in the stock statement as verified duringthe
monthly stock/ unit verification.
3. Where applicable:
a. Call for QIS statements
b. Fix quarterly operative limits
c. Monitor performance with budgets
d. Ensure compliance with inventory norms (where applicable) and lending norms
e. Take note of early warning signals
4. Call For:
a. Financial Statements when due and examine them.
b. Required date to carry out the renewal exercise in time.
5. Execute:
a. Send the renewal credit reports in time
b. Take-up reschedulement nursingproposals (where necessary) before the accountturns
NPA
c. Send the control returns in time to RO/ HO.
Physical Follow-up
A. Qualitative:

a. Be prudent with due care
b. Inspect the system of maintenance of books and registers
c. Probe the age and quality of goods, sundry creditors and debtors.
d. See that stock and machinery are insured
e. Verify whether rent and other Govt. dues are paid upto date
f. See whether the bank’s name board is properly placed.
g. Discuss with partners/ directors/ about the unit’s progress/ problems etc.
h. Probe if frequent change of personnel is there.
B. Quantitative:
a. Inspect (even by random check) stock/machinery etc.
b. Compare quantity of goods with stock registers/ statements.
c. Find out unpaid stock, if any.
d. Verify turnover/ accumulation of stock.
e. Stocking pattern to be noted.
f. Verify method of valuation if necessary compare with invoices.
g. If there is a spurt or decline, from the usual activity, probe into it.
C. Unit Visits:
Unit visits and periodicalinspectionofsecurities under hypothecation/ pledge to the bank playa
vital role in effective credit monitoring, especially on the following fronts:
a. Bank can satisfy that the unit is functioning well.
b. Bank can satisfy that there is adequate merchandise/ inventory to cover our advance.
c. Satisfy that the fixed assets for which we have financed the units are stillinthe custody
of the parties and are in good working condition
d. Bank can interact with the borrowers and find out whether they are experiencing any
difficulties and if so, take remedial steps like nursing/ reschedulement and ensure that
the borrowers’ grievances in conduct of accounts are reduced to the extent possible.
e. Satisfy that our bank’s name board continues to be displayed inthe unit premises, and
name painted on the machineries/ vehicles and ensure that there is no dual finance in
existence.
f. Collect information about potential deposit/ advance customers in the locality.

g. The stocks hypothecated must be verified by the manager before disbursement ofthe
working capital and thereafter periodically by manager or other officers and record
suchinspections inthe Unit Visit Diary. Periodicalstock statements should be obtained
and DP arrived.
h. Units of all NPA and border line accounts should be visited bythe manager frequently
and followed up. Ways and means ofregularizationor settlement ofsuchaccounts are
to be discussed and initiated for implementationand consultationand concurrence with
the RO approval of the sanctioning authority.
i. Branches should also identify NPA/ Watch accounts with scope of settlement, by
visitingthe units alongwitha senior officer fromRO, ifrequired and pursue the units for
settlement.
By regular unit visits of the borrowers, signs of sickness of borrowal accounts can be identified in the
very beginning itself and bank will be able to initiate corrective steps immediately.
Unit visit is the most important monitoring tool to prevent the incidence of NPA.
REVIEW AND MONITORING OF WATCH & NPA ACCOUNTS
 All loan/ advance accounts will have to be followed up scrupulously to avert accounts slipping
into NPA category.
 In the present economic scenario there is possibility of delayed cash realisation for business
enterprises impacting prompt repayment of loans and servicing of interest. Hence, ideally, the
follow up of loans and advances must start from the date of disbursal
 The initial signals for concern start after an overdue position of 30 days in an account.
 Watchcategoryaccounts is a prelude to NPA. Loan/ limit accounts are classified as “Standard
Watch Accounts” where either principal or interest is overdue for 30 days or more.
 The following accounts are to be classified as Standard Watch Accounts:
o Accounts where installment defaulted by 30 days or more after the due date.
o Accounts which have become overdue for closure.
o Accounts in which interest is not remitted within 30 days, from date of charging.
o Slight bills purchased outstanding be;yond 30 days or retention period whichever is
later.
o Cheques discounted outstanding beyond 30 days.

o OPG/ Bills co-accepted in which one installment is defaulted.
o Invoked guarantee/ devolved LC’s (Advance billa/c)whichhave not been honored by
our party within one week.
o Key loans outstanding beyond the storage period allowed or 6 months where storage
period is not specified.
o Temporary OD accounts o/s beyond the stipulated period.
o Accounts in which there is no operation for 30 days.
o Accounts where serious irregularities (i.e. shortage ofstock, closingdownofbusiness,
mis-utilisation/ diversion of funds, etc.) are observed.
o Usance bills discounted and not realized within 30 days after the due dates.
o Gold loans outstandingbeyond 13 months. (conditionalto the point that gold loans are
sanctioned for 12 months)
 Advances which have already been classified as NPA should not be reported as Standard
Watch Accounts.
 Close monitoring of the advances – whether they are big or small – at the verybeginningitself
will enable the branches to ensure that their advance accounts are maintained satisfactorily.
 Fresh advances extended can be avoided from slippage, by close monitoring from the initial
stage itself. Monitoring efforts should be intensified when the account turn standard watch.
 There maybe some cases where accounts become sticky at the initial stage due to delay in
project implementation, delayingettingpower connection, cost escalationand other unforeseen
circumstances. Such cases should be carefully studied by the Branch officials and suggest
remedialmeasures/ reschedulement/ nursingwellinadvance and at appropriate time supported
by reasons justifying the same.
 As the interest rate is now linked to Base Rate and Spread and subject to fluctuations, there is
everychance that installments are not sufficient to liquidate the loans. Incase, where rephrasing
or reschedulingis essentialfor various reasons, suchproposals should be takenup sufficientlyin
advance before the account turns NPA.
 Standard Watch Accounts and NPA accounts with balance outstanding=< Rs. 1 lakhshould
be reviewed and followed up at the Branch Level and reviewed periodically.

 A certificate for havingreviewed allthe NPA and standard watchaccounts withbalance =<Rs.
1 lakh along with the number and total amount outstanding under such accounts should be
submitted to the Regional Office every quarter, immediately after the course of the quarter.
 Standard Watchaccounts and NPA accounts withbalance outstanding<= Rs. 10 lakhs should
be followed up at the RO level.
 The review of standard watch accounts and NPA accounts withbalance e outstanding>= Rs.
10 lakhs should be done by the Recovery-cum-monitoring cell at RO, face to face with the
Branch Manager, during the quarterly business review meetings.
 All regional offices should form an NPA-cum-Monitoring Cell under the supervision of one
Chief Manager, one or more of the Credit officers and the Legal Officer.
 The Recover-cum-Monitoring Cell will be responsible for closely monitoring payment of
installment/ servicingofinterest ondue dates, contactingthe borrowers and remindingthemwell
in advance.
 Recovery-cum-MonitoringCellwilltake allpossible steps frompreventingthe watchaccounts
turning into NPA and ensure prompt repayment, servicingofinterest inother accounts as well.
 The credit officers at branches shall inform the concerned officers at HOC Credit Monitoring
Department regardingprogress made inthe recover/ up gradation/ further slippage ofaccounts
with all relevant details on an on-going basis.

NON-PERFORMING ASSETS (NPAs)
When loans and advances made by a bank or financial institution turn out non-productive or non-
rewarding, they become NPAs. According to SARFAESI Act 2002, NPA is anasset or account ofa
borrower which has been classified by a bank or a financialinstitutionas a Standard asset, Doubtfulor
Loss Asset, in accordance with the guidelines relating to asset classification issued by the RBI.
An asset, including a leased asset, becomes non performing when it ceases to generate
income for the bank. A non-performing asset (NPA) is a loan or an advance where:
 interest and/ or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,
 the account remains ‘out of order’, 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,
 the instalment of principal or interest thereon remains overdue for two crop seasons for short
duration crops,
 the instalment of principal or interest thereon remains overdue for one crop season for long
duration crops,
 the amount of liquidity facility remains outstanding for more than 90 days, in respect of a
securitisation transaction undertaken in terms of guidelines onsecuritisationdated February1,
2006.
 in respect of derivative transactions, the overdue receivables representing positive mark-to-
market value of a derivative contract, if these remain unpaid for a period of 90 days from the
specified due date for payment.
In case of interest payments, banks should, classify an account as NPA only if the interest due and
charged during any quarter is not serviced fully within 90 days from the end of the quarter.
‘Out of Order’ status
Anaccount should be treated as 'out of order' ifthe outstandingbalance remains continuouslyinexcess
ofthe sanctioned limit/drawingpower. Incases where the outstandingbalance inthe principaloperating
account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90

days as on the date of Balance Sheet or credits are not enoughto cover the interest debited duringthe
same period, these accounts should be treated as 'out of order'.
‘Overdue’
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid onthe due date fixed
by the bank.
Accounts with temporary deficiencies
The classification of an asset as NPA should be based on the record of recovery. Bank should not
classify an advance account as NPA merely due to the existence of some deficiencies which are
temporary in nature such as non -availability of adequate drawing power based onthe latest available
stock statement, balance outstanding exceeding the limit temporarily, non -submission of stock
statements and non-renewalofthe limits onthe due date, etc. Inthe matter ofclassification ofaccounts
with such deficiencies banks may follow the following guidelines:
 Banks should ensure that drawings inthe workingcapitalaccounts are covered bythe adequacy
ofcurrent assets, since current assets are first appropriated intimes ofdistress. Drawingpower
is required to be arrived at based onthe stock statement whichis current. However, considering
the difficulties of large borrowers, stock statements relied upon by the banks for determining
drawingpower should not be older thanthree months. The outstandinginthe account based on
drawingpower calculated fromstock statements older thanthree months, would be deemed as
irregular.
A working capital borrowal account will become NPA if such irregular drawings are permitted in the
account for a continuous period of 90 days even though the unit may be working or the borrower's
financial position is satisfactory.
 Regular and ad hoc credit limits need to be reviewed/ regularized not later than three months
from the due date/date of ad hoc sanction. In case of constraints such as non- availability of
financial statements and other data from the borrowers, the branch should furnishevidence to
show that renewal/ review of credit limits is already on and would be completed soon. Inany

case, delay beyond six months is not considered desirable as a general discipline. Hence, an
account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180
days from the due date/ date of ad hoc sanction will be treated as NPA.
Income Recognition Policy
 The policy of Income Recognition has to be objective and based on the record of recovery.
Internationally income from NPA is not recognized on accrual basis but is booked as income
onlywhenit is actuallyreceived. Therefore, the branches should not charge and take to income
account interest on any NPA. However, interest on deposits against term deposits, NSC’s,
IVP’s, KVP’s and life policies may be taken to income account on the due date, provided
adequate margin is available in the accounts.
 Fees and Commission earned by the bank as a result of renegotiations or rescheduling of
outstanding debts should be recognized onanaccrualbasis over the period oftime covered by
the renegotiated or rescheduled extension of credit.
 Ifgovernment guaranteed advances become NPA, the interest onsuchadvances should not be
taken to income account unless the interest has been realised.
Reversal of Income
Ifanyadvance includingbills purchased and discounted, becomes NPA, the entire interest accrued and
credited to income account in the past periods, should be reversed ifthe same is not realised. This will
apply to Government guaranteed accounts also.
In respect of NPA’s, fees, commission and similar income that have accrued should cease to accrue in
the current period and should be reversed with respect to past records, if uncollected.
Appropriation of Recovery in NPA’s
Interest realised on NPA’s maybe taken to income account provided the credits in the accounts
towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.
Appropriation of recoveries in NPA’s (i.e. towards principal or interest due), is done ina uniformand
consistent manner as per the finacle system at SIB.

Interest Application
On an account turning NPA, banks should reverse the interest already charged and not collected by
deleting P&L account and stop further application of interest.
Note: However, as per SIB’s practice, Finacle system continues to debit suchaccrued interest inthe
loan accounts. However, for the purpose ofcomputingGross Advances, interest debited insuchNPA
accounts will not be credited inthe Interest account, but willbe credited in‘Interest onNPA’ account,
by the system.
TYPES OF NPA
 Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per the 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:
Gross NPAs Ratio = Gross NPAs / Gross Advances
 Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actualburdenofbanks. Since inIndia, bank balance sheets contain
a huge amount of NPAs and the process of recovery and write off of loans is very time
consuming, the provisions the banks have to make against the NPAs according to the central
bank guidelines, are quite significant. That is whythe difference betweengross and net NPA is
quite high. It can be calculated by following:
Net NPAs = Gross NPAs – Provisions / Gross Advances – Provisions

RBI GUIDELINES FOR NPA CLASSIFICATION & PROVISIONING
Flowchart 3
Asset Classification
Assets are classified into following four categories:
 Standard Assets
 Sub-standard Assets
 Doubtful Assets
 Loss Assets
Standard Assets:
Standard assets are the ones inwhichthe bank is receivinginterest as wellas the principalamountof
the loan regularly from the customer. Here it is also very important that in this case the arrears of
interest and the principal amount ofloando not exceed 90 days at the end offinancialyear. Ifasset
fails to be in category of standard asset that is amount due more than 90 days then it is NPA and
NPAs are further need to classify in sub categories.
Provisioning Norms:
Assets
Non-Performing
Assets
Sub-standard
Assets
Doubtful Assets
Loss Assets
Performing/
StandardAssets

Fromthe year ending31.03.2000, the banks should make a generalprovisionofa minimumof0.40
per cent onstandard assets ongloballoanportfolio basis. The provisions onstandard assets should
not be reckoned for arriving at net NPAs. 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 reasonabilityofthe
dues:
 Sub Standard Assets
 Doubtful Assets
 Loss Assets
Sub Standard Assets:
With effect from31 March2005, a substandard asset would be one, whichhas remained NPA for
a period less thanor equalto 12 month. The followingfeatures are exhibited bysubstandard 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 bythe
distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
Provisioning Norms:
A general provision of 10 percent on total outstanding should be made without making any
allowance for DICGC/ECGC guarantee cover and securities available.
Doubtful Assets:
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-
standard, withthe added characteristic that the weaknesses make collectionor liquidationinfull, on
the basis ofcurrentlyknownfacts, conditions and values – highlyquestionable 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.
Provisioning Norms:

 100 percent of the extent to which the advance is not covered by the realizable value of the
securityto whichthe bank has a valid recourse and the realizable value is estimated ona realistic
basis.
 In regard to the secured portion, provision may be made on the following basis, at the rates
rangingfrom20% to 50% ofthe secured portiondependinguponthe period for whichthe asset
has remained doubtful.
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- althoughthere maybe some salvage or recoveryvalue. Also,these
assets would have beenidentified as”loss assets “bythe bank or internalor externalauditors or the
RBI inspection but the amount would not have been written-off wholly.
Provisioning Norms:
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 for.
Table 4: Classification of NPAs
Classification of
NPA’s
Guidelines for classification
from 31-3-2001
Provisioning Norms
Sub-standard Assets NPA’s for a period less than or
equal to 18 months
10% ofoutstandingprincipal+ Entire
outstanding Interest
Doubtful Assets NPA’s for a period exceeding
18 months
For advances not covered by
realizable securities – provide 100%
advances.
For advance covered by realizable
securities provide at:
 20% ofadvances, ifdoubtful
or below 1 year.

for 1-3 yrs.
for 3 & above years.
Loss Assets Identified as lost by the bank or
auditors or RBI on inspection
Write-off entire asset or provide at
100%
Standard Assets Which are not NPA’s but has
business risks.
A minimum of 0.25% on ‘Global
Portfolio’ but not on ‘Domestic
Portfolio’.
Guidelines for Classification of Assets:
Broadly speaking, classification of assets into above categories should be done takinginto account the
degree of well-defined credit weaknesses and the extend of dependence on collateral security for
realisation of dues,
As per the RBI guidelines, banks should establishappropriate internalsystems to eliminate the tendency
to delay or postpone the identification of NPA’s, especially in respect of high value accounts.
Accordingly SIB is classifyingNPA accounts as at everyquarter end, reckoningthe 91st
dayofdefault
as the NPA date. Now, with a view to avoid any divergence in asset classification/ shortfall in
provisioning of NPA accounts, with effect from the quarter ended June 30, 2011, SIB has switched
over to automated classification of NPA accounts, using the NPA software “iRAC”.
Availability of Security/ Net worth of Borrower/ Guarantor
The availability ofsecurityor net worthofborrower/ guarantor should not be takeninto account for the
purpose of treating an advance as NPA or otherwise, as income recognitionis based onthe record of
recovery.
Up gradation of Loan Accounts classified as NPA’s
If arrears of interest and principal are fully paid by the borrower inthe case ofloanaccounts classified
as NPA’s, the account should no longer be treated as non-performing and maybe classified as

‘standard’ accounts. As per SIB’s guidelines inrespect ofNPA borrowers withtotalexposure ofRs.5
lakhs and above, up gradation can be done through CDMC.
Asset classification to be borrower-wise and not facility-wise
 All the facilities granted by a bank to a borrower and investment in all the securities issued by
the borrower will have to be treated as NPA and not the particular facility/ investment or part
thereof which has become irregular.
 Ifthe debits arisingout ofdevolvement ofletters ofcredit or invoked guarantees are parked ina
separate account, the balance outstandinginthat account also should be treated as a part ofthe
borrower’s principal operating account for the purpose of application of prudential norms on
income recognition, asset classification and provisioning.
Advances against Consortium Arrangements
Asset classification of accounts under consortium should be based on the record of recovery of the
individual member banks and other aspects having a bearing on the recoverability of the advances.
Where the remittances by the borrower under consortium lending arrangements are pooled with one
bank and/ or where the bank receiving remittances not parting with the share ofother member banks,
the account will be treated as not serviced in the books of the other member banks, and therefore, be
treated as NPA. The banks participating in consortium should therefore arrange to get their share of
recovery transferred from the lead bank for the transfer of their share of recovery, to ensure proper
asset classification in their respective books.
Accounts where there is erosion in the value of security/ frauds committed by borrowers:
 In respect of accounts where there are potential threats for recovery on account oferosionin
the value of securityor non-availabilityofsecurityand existence ofother factors suchas frauds
committed by borrowers, it will not be prudent that such accounts should go through various
stages of asset classification. In cases of such serious credit impairment the asset should be
straightaway classified as doubtful or loss asset as appropriate.
 Erosion in the value of the security can be reckoned as significant whenthe realisable value of
the security is less than 50% of the value assessed bythe bank or accepted byRBI at the time
oflast inspection, as the case maybe. SuchNPA’s maybe straightawayclassified under doubtful
category and provisioning should be made as applicable to doubtful debts.

 Ifthe realisable value ofthe securityas assessed bythe bank/ approved valuers/ RBI is lessthan
10% of the outstanding in the borrowal accounts, the existence of security should be
straightaway classified as loss asset. It maybe either written off or fully provided for by the
bank.
Agricultural Advances:
 A loan granted for short duration crops willbe treated as NPA, ifthe instalment ofprincipalor
interest thereon remains overdue for 2 crop seasons.
 A loan granted for long duration crops will be treated as NPA, ifthe instalment or principalor
interest thereon remains overdue for one crop season.
 For the purpose ofthe above guidelines “longduration”crops would be crops withcrop season
longer than one year and crops which are not “long duration” crops will be treated as “short
duration”crops. The crop seasonfor eachcrop, whichmeans the period up to harvestingofthe
crops raised, would be determined by the State Level Bankers Committee in each state.
Depending on the duration of crops raised by an agriculturalist, the above NPA norms would
also be made applicable to agricultural term loans availed of by him.
PROVISION COVERAGE RATIO (PCR)
 PCR is essentially the ratio of provisioning to gross non-performing assets and indicates the
extent of funds a bank has kept aside to cover loan losses.
 From a macro-prudential perspective, bank should build up provisioningand capitalbuffers in
good times i.e whenthe profits are good, whichcanbe used for absorbinglosses ina downturn.
This willenhance the soundness ofindividualbanks, and also the stabilityofthe financialsector.
It was therefore, decided that banks should augment their provisioning cushions consisting of
specific provisions against NPA’s as wellas floatingprovisions, and ensure that their totalPCR,
including floating provisions is not less than 70%.
 Computation of Gross NPA and Net NPA is given in Annexure 1.

CAUSES OF NPA
The causes can be categorized into 3:
 Banks
 Borrowers
 Government
Banks
 Improper Selection of Borrower:
Selection of borrower is a very important part in financing as the whole story starts with it.
Selection of borrower should be done very cautiously. It would be right to say that the most
important factor, which needs to be studied, is a borrower, his character and competency, but
verylittle has beensaid regardingthe character and competency, ofborrowers inthe context of
loaning.
 Inordinate Delay in Financing:
Owing to delay the borrower does not get loan at the time of need, this would normallyupset
his plant of investment. Obviously, this will have a bearingthe borrower’s planofreturningthe
loan and as a consequence the assets may turn into NPA.
 Poor Interaction with the Borrowers:
It has beenfound that the interactions withthe borrowers are verypoor. While interacting,many
information can be taken, like his thinking regarding loan, views regarding repayment, his
earning, familyback ground etc. After disbursement, whenbankers do not meet the borrowers
periodically, they tend to forget the bank and their repayment liability to the bank also out of
sight, out of mind, thus goes a saying.
 Other Reasons:
o Unrealistic terms and conditions.
o Lengthy and time taking procedure of lending.
o Lack of supervision and follow up.

o Lack of management information system.
o No direct inquiry at the time of sanction.
Borrowers
 Diversion of Funds:
Diversion of funds means the loanare not used for the purpose for whichit is sanctioned, many
areas have been identified where he can divert the loan. Chief among them are:
o Utilization of loan to repay the old debt.
o Utilization of loans towards other purposes such, as house purpose etc.
o Utilization of loan towards death rituals in rural areas.
o Utilisation of loans for comfort of life.
 Wilful Defaulters:
According to the RBI. “Any borrower, who has the ability to pay but does not pay could be
termed as a wilfuldefaulter”. A “wilfuldefault”would be deemed to have occurred, ifanyofthe
following events is noted:
o The unit has defaulted inmeetingits payment/ repayment obligations to the lender even
when it has the capacity to honour the said obligations.
o The unit has defaulted in meeting its payment/ repayment obligations to the lender and
has not utilised the finance from the lender for the specific purpose for which finance
was availed of but has diverted the funds for other purpose.
o The unit has defaulted in;meetingits payment/ repayment obligations to the lender and
has siphoned off the funds so that funds have not beenutilised for the specific purpose
for whichfinance was availed for, nor are the funds available withthe unit inthe formof
other assets.
o The unit has defaulted in meeting its payment/ repayment obligations to the lender and
has also disposed off or removed the movable fixed assets or immovable property
given by himor it for the purpose ofreceivinga termloanwithout the knowledge ofthe
bank/ lender.
Government

Causes, which are attributable to Government:
 Political interference in sanctioning of loans.
 Political patronage to defaulters.
 Announcement of debt relief scheme.
 One time settlement scheme of RBI.
 Over regulated environment.
IMPACT OF NPA
 Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrongchoice of
client. Because of the money gettingblocked the prodigalityofbank decreases not onlybythe
amount of NPA but NPA lead to opportunitycost also as that muchofprofit invested insome
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.
The quality of assets is an important indicator of banks’ financial health. It also reflects the
efficacy of banks’ credit risk management and the recovery environment. A studyofthe asset
quality of banks was carried out based on data submitted by banks, covering their domestic
operations, through off-site returns.
The study indicated that gross non-performing assets, whichdeclined from 700 billionat end-
March 2003 to 500 billion at end-March 2007, recorded anaverage growthof24.7 per cent
duringthe last sixyears to reachto 1,839 billionat end-March2013. Similarly, net NPAs have
recorded an average growth of 29.0 per cent since March 2007 and reached 883 billion by
end-March2013. The gross NPA and net NPA ratios have beenincreasingsince March2008,
except during 2010-11, and reached 3.42 per cent and 1.46 per cent, respectively, by end-
March 2013. The highlevelofNPAs cost the banks bywayofloss ofinterest income, besides
provisioning, recovery and litigation costs.

According to the analysis, the loss to banks due to NPAs has been more than 60 per cent of
their net profit since March2010. Inaddition, about 18 per cent ofbanks’ net interest incomeis
used for making risk provisions and write-offs ofNPAs. Had the NPAs not beenthere, banks
would have improved their yield onadvances, onanaverage, by124 basis points (considering
the position since March 2009).
 Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand whichlead 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.
Routine payments and dues.
 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 managingNPA would have diverted to some
fruitful activities, which would have given good returns. Nowadays banks have special
employees to deal and handle NPAs, which is additional cost to the bank.
 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.
The RBI has summarized the finer factors contributing to higher level of NPAs 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 withrecessionarytrends 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, naturalcalamities
etc. The externalization problems in other countries also lead to growth of NPAs 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, whichare because ofsiphoning-offfunds, fraud/ misappropriation, promoters/
directors disputes etc.
 Deficiency on the part of banks, viz, delays in release of limits and payments/ subsidies bythe
Government of India.
EARLY SYMPTOMS
By which one can recognize a performing asset turning in to non-performing asset Four categories of
early symptoms:-
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.
Operational and Physical:
 If information is received that the borrower has either initiated the process ofwindingup 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.
 Nonpayment of wages.
Attitudinal Changes
 Use for personal comfort, stocks and shares by borrower.
 Avoidance of contact with bank.
 Problem between partners
Others
 Change in Government policies.
 Death of Borrower
 Competition in the Market
PREVENTIVE MEASUREMENT FOR NPA
 Early Recognition of the Problem:
Invariably, by the time banks start their efforts to get involved ina revivalprocess, 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 inthe verybeginningthat is :Whenthe 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 revivalmaybe done onthe basis ofa techno-economic viability
study. Restructuring should be attempted where, after an objective assessment of the
promoter’s intention, banks are convinced of a turnaround within a scheduled timeframe. In
respect of totally unviable units as decided by the bank, it is better to facilitate winding up/
selling of the unit earlier, so as to recover whatever is possible through legalmeans before the
security position becomes worse.
 Identifying Borrowers with Genuine Intent:
Identifyingborrowers withgenuine intent fromthose who are non- serious withno 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 intelligent inputs with regard to
promoters‟ sincerity, and capabilityto achieve turnaround. Based onthis objective assessment,

banks should decide as quicklyas possible whether it would be worthwhile to commit additional
finance. In this regard banks may consider having “Special Investigation” of all financial
transaction or business transaction, books of account in order to ascertain real factors that
contributed to sickness ofthe borrower. Banks mayhave penaloftechnicalexperts withproven
expertise and track record ofpreparingtechno-economic studyofthe project ofthe borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement ofadditionalfund maybe entertained at branchlevel, and for this purpose a special
limit to such type of cases should be decided. This willobviate the need to route the additional
fundingthroughthe controllingoffices indeservingcases, and help avert manyaccounts slipping
into NPA category.
 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 restructuring or rehabilitation activity. The response decided on the basis of
techno-economic study and promoter’s commitment, has to be adequate interms ofextend of
additional funding and relaxations etc. under the restructuring exercise. The package of
assistance may be flexible and bank may look at the exit option.
 Focus on Cash Flows:
While financing, at the time of restructuring the banks may not be guided by the conventional
fund 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 the Cash Flow
rather than only on the basis of Funds Flow.
 Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to sickness and
NPAs. But this may not be the case allthe time. Management effectiveness intacklingadverse
business conditions is a very important aspect that affects a borrowing unit’s fortunes. A bank
may commit additional finance to an ailing unit only after basic viabilityofthe 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
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.
 Multiple Financing:

o 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 exercise, given the probability of success/failure.
o In some default cases, where the unit is stillworking, the bank should make sure that it
captures the cash flows (there is a tendency on part of the borrowers to switch
bankers once theydefault, for fear ofgettingtheir cashflows forfeited), and ensure that
such cash flows are used for working capitalpurposes. Toward this end, there should
be regular flow ofinformationamongconsortiummembers. A bank, whichis not partof
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 suchclients
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.
o 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 letter categories of
lenders may be willing to exit, even a t a cost – by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitationmaytake this aspect into
account.
o Corporate Debt Restructuring mechanism has been institutionalized in 2001 to
provide a timely and transparent system for restructuring of the corporate debt ofRs.
20 crore and above with the 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 NPAs) and viable sub-standard accounts with
consortium/multiple banking arrangements.
RESTRUCTURING OF LOANS AND ADVANCES
Restructured Accounts
A restructured account is one where the bank, for economic or legalreasons relatingto the borrower's
financial difficulty, grants to the borrower concessions that the bank would not otherwise consider.

Restructuring would normally involve modification of terms of the advances / securities, which would
generally include, among others, alteration of repayment period / repayable amount/ the amount of
instalments / rate of interest (due to reasons other than competitive reasons). However, extension in
repayment tenor of a floating rate loan on reset of interest rate, so as to keep the EMI unchanged
provided it is applied to a class of accounts uniformly will not render the account to be classified as
‘Restructured account’. In other words, extension or deferment of EMIs to individual borrowers as
against to an entire class, would render the accounts to be classified as 'restructured accounts’.
Inthe cases ofroll-over ofshort termloans, where proper pre-sanctionassessment has beenmade,and
the roll-over is allowed based on the actual requirement of the borrower and no concessionhas been
provided due to credit weakness of the borrower, then these might not be considered as restructured
accounts. However, ifsuchaccounts are rolled-over more thantwo times, thenthird roll-over onwards
the account would have to be treated as a restructured account. Besides, banks should be circumspect
while granting such facilities as the borrower may be availing similar facilities from other banks in the
consortium or under multiple banking. Further, Short Term Loans for the purpose ofthis provisiondo
not include properly assessed regular Working Capital Loans like revolving Cash Credit or Working
Capital Demand Loans.
Repeatedly Restructured Accounts
When a bank restructures an account a second (or more) time(s), the account willbe considered as a
'repeatedlyrestructured account'. However, ifthe second restructuringtakes place after the periodupto
whichthe concessions were extended under the terms ofthe first restructuring, that account shallnot be
reckoned as a 'repeatedly restructured account'.
LOAN RECOVERY MEASURES:
The basic objective ofloanrecoverypolicyis to maximise recoveryofdues fromNPAs. It also aims at
ensuring that all NPAs are attended to at the earliest and recovery tools are applied expeditiously.
Strategies forRecovery: Once anaccount becomes non-performing, the possibilityofupgradingthe
account by way of recovery of over dues/ restructuring/ rescheduling or otherwise shallbe examined.

Recoverymeasures shallbe initiated onlyifthe account cannot be upgraded bywayofrecoveryof over
dues/ restructuring/ rescheduling or otherwise.
Delay in taking recovery measures mayimpact the recoverabilityofdues as the financialpositionofthe
borrower may deteriorate and/ or value of securities may get eroded during the period. Hence, it is
necessary that recovery measures are initiated at the right time, one Bank is satisfied that the account
cannot be upgraded.
Sale of Pledged Items
In case of loans against pledge of goods, the goods pledged should be disposed ofat the earliest, after
giving due notice to the borrowers. Immediate action as necessary should be taken in this regard
considering the life of the goods, fluctuationinprice etc. As a generalrule anyitempledged to the bank
has to be disposed of within 3 months from the date on which the account has turned NPA.
SARFAESI Act 2002
One of the major tools for recovery is the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act 2002). It was enacted to regulate
securitisation and reconstruction of financial assets and enforcement of security interests bya secured
creditor without the interventionofa Court or a Tribunal. Ifanyborrower fails to discharge his liabilityin
repayment of secured debt within60 days ofnotice fromthe date ofnotice bythe secured creditor, the
secured creditor is conferred with powers under the SARFAESI Act to:
 Take possession of the secured asset of the borrower, including transfer by way of lease,
assignment or sale, for realizing the secured assets.
 Takeover of the management of the business of the borrower including the right to transfer by
way of lease, assignment or sale, for realizing the secured assets.
 Appoint any person to manage the secured assets possessionofwhichis takenbythe secured
creditor, and
 Require any person, who has acquired any of the secured assets fromthe borrower and from
whom money is due to the borrower, to pay the secured creditor, so much of the moneyas if
sufficient to pay the secured debt.

Recovery through courts/ DRT
 The banks and FI’s can enforce their securities by initiating recovery proceeding under the
Recovery of Debts due to banks and FI Act, 1993 (DRT Act) by filing an application for
recovery of dues before the Debt Recovery Tribunal constituted under this act.
 Onadjudication, a recoverycertificate is issued and the sale is carried out byanauctioneer or a
receiver.
 DRT has powers to grant injunctions against the disposal, transfer or creation of third party
interest by debtors in the properties charged to creditor and the pass attachment orders in
respect of charged properties.
 In case of non-realization of the decreed amount bywayofsale ofthe charged properties, the
personal properties if the guarantors can also be attached and sold.
 However, realization is usually time-consuming.
Institution of CDR Mechanism
The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of
NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in India is
broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The
objective of the CDR mechanism has been to ensure timely and transparent restructuring of
corporate debt outside the purview of the Board for Industrial and Financial Reconstruction
(BIFR), DRTs or other legal proceedings. The framework is intended to preserve viable
corporate affected by certain internal/external factors and minimize losses to creditors/other
stakeholders through an orderly and coordinated restructuring programme. RBI has issued
revised guidelines inFebruary2003 withrespect to the CDRmechanism. 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 inaligningrepayment obligations for bankers withthe cashflow projections as reassessed
at the time of restructuring. Therefore it is critical to prepare a restructuringplanonthe 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
eligibilitycriteria (amount ofborrowings) and time frame for restructuring. Foreignbanks arenot
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 CDRforum. Lenders inIndia
prefer to resort to CDRmechanismto avoid unnecessarydelays inmultiple 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.
Increased Powers to NCLTs and the Proposed Repeal of BIFR:
InIndia, companies whose net worthhas beenwiped out onaccount ofaccumulated 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 evenifanenquiryis pendingas 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 NPAs. 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), inplace ofBIFR, with
modifications to address weaknesses experienced under the SICA provisions. The NCLT would
prepare a scheme for reconstructionofanysick companyand there is no bar onthe lendinginstitutionof
legal proceedings against suchcompanywhilst the scheme is beingprepared bythe 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
muchrelevance anylonger and probablydoes not extend to the tribunalfor 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

One Time Settlement
 The aim of the bank is to recover loan accounts with interest in full without any sacrifice. At
times, this becomes difficult due to anadverse change inthe financialpositionofthe borroweror
erosion inthe value ofsecurities. Insuchcases, it would be better to get the accounts settled by
givingsome concessions. For effective and faster recoveryand for utilizingthe recovered funds
for better deployment it becomes necessary to offer some concessions to the borrowers for
settling the accounts.
 At times it also becomes necessaryto allow concession/ sacrifice inaccounts that have notbeen
classified as NPAs. It would be better to exit fromanaccount that shows signs ofsickness, by
giving some concessions, if the proposed concession / sacrifice is lesser than the loss that the
bank may suffer if the account turns into an NPA.
 Hence, NPA/ non-NPA account maybe closed under OTS Scheme, whereinthe bank allows
the borrower certain concessions in principal/ interest or both, provided the account is closed
within a specified time. Staff Accountability should be examined while consideringOTS onall
borrowal accounts, if not already examined.
 The level of sacrifice to be allowed in an account shall be considered after takinginto account
the historyofthe account, the nature ofdefault (willfulor otherwise) value ofsecurities available,
resources of the borrower etc. and shall be considered on a case to case basis.
Negotiated Settlement Schemes
The RBI/Government has been encouraging banks to design and implement policies for negotiated
settlements, particularly for old and unresolved NPAs. The broad framework for suchsettlements was
put in place in July 1995. Specific guidelines were issued in May 1999to public sector banks for one-
time settlements of NPAs of small scale sector. This scheme was valid until September 2000 and
enabled banks to recover Rs 6.7 billion from various accounts. Revised guidelines were issued inJuly
2000 for recovery of NPAs of Rs. 50 millionand less. These guidelines were effective untilJune 2001
and helped banks recover Rs. 26 billion.

Recovery Camps
Regional Offices shall decide to conduct recoverycamps at various locations dependingonthe spread
of branches and NPA accounts. A committee of minimum 3 officials, one of whom shall be from the
cadre of Chief Manager or above of the Bank, shall take the decisions at the camps. The officials
attendingthe camps shallhave extensive discretionarypowers, so that settlement decisions canbetaken
on the spot in respect of both NPA and Non-NPA accounts.
Sale of accounts to Asset Reconstruction Companies (ARCs)
Recovery may be done bysellingNPAs to Asset ReconstructionCompanies and other banks who are
interested in purchasing the assets from the bank. Sale to ARCs/ Banks shall be decided after
considering the value of securities available, hurdles for recovery through legal route, price offered by
the ARCs/ Banks etc.
Write-off/ Waiver of Legal Action
 If the borrower has no means to pay and the bank is sure that the dues are irrevocable, bank
shall waive legal action and write off the amount.
 Waiver of legal action/ write-off shall be permitted only when the authorized functionary is
satisfied that the borrower has no tangible security or any attachable assets, has no adequate
income of repayment and no useful purpose will be served by resorting to legal recourse.
 Initiation of Revenue Recovery Measures (wherever applicable) shall be a precondition to
waiver of legal action.

OBJECTIVE OF THE STUDY
 To study the concept and procedure of Credit Appraisal in banks which is the basis if an
account becomes an NPA.
 To study the follow-up and monitoring procedures of advances.
 To study the concept of Non-performing Assets (NPA).
 To study the NPA standards of RBI.
 To study the reasons for and impact of NPA.
 To understand the recovery measures used to recover advances.
 To evaluate the efficiency of South Indian Bank in managing NPAs using NPA ratios and
comparing NPA with profits.
METHODOLOGY
The study was conducted using secondary data about NPA and its composition, classificationofloan
assets, profits and advances of the bank which are all taken from the Reserve Bank of India website,
South Indian Bank website and the manual of South Indian Bank for Loans and Advances.

ANALYSIS OF NPAs AT SOUTH INDIAN BANK (SIB)
During the year 2013-14, as a result of the focused and sustained efforts like earlyrecoveryofNPAs,
throughprompt and effective measures under the SARFAESI Act, follow up ofrecoverycases pending
before DRTs and civil courts, one time compromise settlements ofaccounts, etc., Bank has recovered
NPAs to the extent ofRs. 532.69 crore, (recoveryincludingupgradation Rs.301.16 crores) as against
the target of Rs. 250.00 crore. The recovery during the current year also surpassed the recovery of
Rs.270.73 crore for the previous financial year ended March 31, 2013. The thrust on selection of
credit, adequate due diligence and improvement in credit administration were maintained ensuring
improvement in quality of assets.
During the year, the Gross NPA ofthe Bank declined fromRs.433.87 crore as onMarch31, 2013 to
Rs.432.62 crore as on March 31, 2014. But Net NPA marginallyincreased from Rs.249.53 crore as
on March 31, 2013 to Rs.281.67 Crore as on March 31, 2014. Out of this GNPA of Rs.432.62
crores, Rs.186.28 crores is accounted byfreshslippage and provisionrequirement was only Rs.38.16
crores. In terms of percentage, GNPA improved from1.36 % as onMarch31, 2013 to 1.19 % as on
March 31, 2014 and net NPA remain unchanged at 0.78% as on March 31, 2014.
Graph 1: Net NPA of SIB (2009-10 to 2013-14)
0
66.02
76.51
249.53
281.67
0
50
100
150
200
250
300
2009-10 2010-11 2011-12 2012-13 2013-14
AmtinRs.Crore
Year
Net NPA
Net NPA

From the above it is observed that Net NPA ofSouthIndianBank has beenincreasingeveryyear. The
increase in the year 2014 was relativelylesser thanthe significant increase fromthe year 2012 to 2013.
The above increase in NPA was due to the slippage of 3 large value accounts inthe Corporate sector
during the year ended March 2013.
Graph 2: % of Net NPA of SIB (2009-10 to 2013-14)
The percentage of Net NPA to advances has increased over the years. After a significant increase in
Net NPA against Net Advances from 2012 to 2013 South Indian Bank was able to maintain this
proportion at the same level in 2014, even though there was an increase in Net Advances.
2009-10 2010-11 2011-12 2012-13 2013-14
% of Net NPA 0 0.29 0.28 0.78 0.78
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
%ofNetNPA
Year
% of Net NPA % of Net NPA

Graph 3: Comparison of Net Profit & Net NPA of SIB (2009-10 to 2013-14)
There is a constant rise in the Net Profit over the years with an average percentage increase of
approximately 30%. There is a constant rise in Net NPA over the years with an average percentage
increase of approximately 25%. So this shows there is a positive relationship betweenthe Net Profits
and Net NPA of the Bank.
2009-10 2010-11 2011-12 2012-13 2013-14
Net NPA 0 66.02 76.51 249.53 281.67
Net Profit 233.76 292.56 401.65 502.27 507.5
0
100
200
300
400
500
600
AmtRs.inCrores
Year
Comparisonof Net NPA and Net Profit
Net NPA
Net Profit

Graph 4: Comparison of % Gross NPA to % Net NPA
The difference between the % of Gross NPA and % of Net NPA was the highest in 2010-11 which
reduced in the next year, 2011-12, where % Gross NPA reduced but % of Net NPA remained the
same. The difference between the two has reduced over the years which show that the bank has
reduced the amount ofprovisionfor loss assets and this gives a positive sign. This canbe considered as
one of the reasons for its increased profitability.
Table 5: Asset Quality of SIB
Particulars 31.03.2014 31.03.2013
Percentage of net NPAs to net advances (%) 0.78 0.78
Provision Coverage Ratio (%) 62.71 53.20
The asset qualityofthe bank has improved over the last year withhigher thanindustrybusiness growth.
The slippage was largelydrivenbydecline inslippages and higher recoveries. PCRstands improved at
62.71% from 53.20% in the previous year.
2009-10 2010-11 2011-12 2012-13 2013-14
% of Net NPA 0 0.29 0.28 0.78 0.78
% of Gross NPA 0 1.11 0.97 1.36 1.19
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
% Gross NPA to % Net NPA
% of Net NPA
% of Gross NPA

Table 6: Sector-wise NPA
Sl. No. Sector Percentage of NPAs to Total Advances in
that sector
Particulars 31.03.2014 31.03.2013
Gross Net Gross Net
1. Agriculture & allied activities1
0.62 0.42 7.33 3.20
2. Industry (Micro & Small, Medium
and Large)
1.97 1.49 1.49 1.19
3. Services 0.55 0.32 0.42 0.25
4. Personal Loans2
0.90 0.28 0.62 0.18
1 Represents loan towards agriculture and allied activities that qualify for priority sector lending.
2 Excludes retail loans towards agriculture and relied activities that qualify for priority sector lending.
The agriculture sector saw animprovement ingrowthto 3.6% duringthe first nine months offiscal2014,
compared to 1.4% inthe correspondingperiod offiscal2013. Stronggrowthinagriculture and services
sectors as well as the personal loans segment has helped to push bank credit growth.
Table 7: NPA Position of Old Private Sector Banks in India
Bank wise Gross NPAs, Gross Advances and Gross NPA Ratio of Old Private Sector
Banks
as on March 31, 2013 (Amount in Millions)
Banks Gross NPAs
Gross
Advances
Gross NPAs to
Gross Advances
Ratio (%)
Catholic Syrian Bank 2109 89760 2.35
City Union Bank 1731 153429 1.13
Dhanalaxmi Bank 3803 78963 4.82
Federal Bank 15540 451946 3.44
ING Vyasya Bank Ltd 1214 318916 0.38
Jammu & Kashmir Bank 6438 398537 1.62
Karnataka Bank 6389 254165 2.51
Karur Vyasya Bank 2859 297059 0.96
Lakshmi Vilas Bank 4599 118923 3.87
Nainital Bank 673 21726 3.09
Ratnakar Bank 259 63592 0.4
South Indian Bank 4339 320140 1.36
Tamilnad Merchantile Bank 2145 163661 1.31
From the above data we find that as on31st
March2013 amongthe Old Private Sector Banks inIndia,
Dhanalakshmi Bank has the highest % of Gross NPA to Gross Advances at 4.82% and ING Vyasya

Bank Ltd has the lowest % of Gross NPA to Gross Advances at 0.38%. SouthIndianBank stands at
1.36% which is comparatively lower thanthat ofhalfofthe banks mentioned above. As on31st
March
2014, the % of Gross NPA of South Indian Bank dropped from 1.36% to 1.19%. The Managing
Director of the Bank attributed this decline to a good team in the recovery department.
Last year the bank took a conscious decision on credit sanctioning, and looked for good proposals
rather thanachievingtargets. Accounts were monitored consistently, and actionwas takenimmediately
the moment the system indicated some level of stress in an account.

ANALYSIS OF NPAs AT SOUTH INDIAN BANK (SIB) – GEORGE TOWN BRANCH
Table 8: Asset classification of Portfolios
Asset Classification of Portfolio 2013-14
Standard Assets 6,22,18,16,191.67
Sub-standard Assets 1,33,05,461
Doubtful Assets 13,56,147
Loss Assets 67,248
Total Advances 6,23,65,45,047.67
This branch of the bank has TotalAdvance of Rs. 623.65 crores out whichonlyRs. 1.47 crores ofthe
total advances have turned into NPAs. This accounts for only0.24% ofits totaladvances. Most ofthe
NPAs of the branch fall under the category of sub-standard assets.
Table 9: Break-up of NPAs
No. of Cases of NPA’s Amount Blocked No. of Years
12 8400387.22 (57.03%) Less than 3 years
3 3358372.75 (22.8%) 3-5 years
1 67215 (0.46%) 5-7 years
5 2902881 (19.71%) More than 7 years
Total – 21 14728855.97
Fromthe above table we find that the bank totallyhas 21 NPA accounts out ofwhich12 accounts have
slipped into the NPA category in the last 3 years. The remaining 9 accounts have remained NPAs for
more than 3 years. This shows that the branch has not been very successfulinrecoveringits old NPA
accounts as there are 5 NPA accounts which have been in this category for a very long time of more
than 7 years.
Further study has shown that out of the 21 NPA accounts 15 parties to these accounts belong to the
personal sector and the remaining to the service sector.

FINDINGS AND RECOMMENDATIONS:
 If the maximum utilization is not up to the drawingpower for the whole year, the bank needs to
ask for reasons for underutilization. Ifthe underutilizationis due to temporaryreasons, thenthe
bank should maintain the DP. If not, it should reduce their limit to 10% above maximum
utilization and use that excess funds in another efficient projects.
 Personal loans account for most of the NPAs in the bank which canbe reduced bytakingthe
same steps used to provide loans to other sectors. This canensure that the advance provided is
used for a necessary purpose and is backed by enough income of the borrower.
 Unlike agriculture and industrialsector, personalloansector does not involve anysystemic risk
and involves onlysystematic risk. It is important to examine whichsegment withinthis sectorhas
not performed so that prompt actioncanbe taken. The home loansegment is identified riskyin
this sector where high interest rates affect the repayment capacity.
 Uneven scale of repayment schedule with higher repayment inthe initialyears normallyshould
be preferred.
 The bank needs to focus more on the recovery of its Sub-standard accounts.
 The bank can use e-auction to sell its NPAs where NPAs can be auctioned over the internet.
The bank can join www.npasource.org which is an online website to sell the NPA accounts.
Many of the major Indian banks have used this method to sell their NPAs.
 The data base ofcredit informationcompanies, based onthe declarationofwilfuldefaulters by
banks, be updated on a real time basis and not at; the end of the quarter.
 Agriculture is the most vulnerable sector generatingNPAs. Banks are required to lend 40% of
their loans to agriculture and economically weaker sections of the society as a step towards
financialinclusion. But it becomes a contradictionwhenbanks have to complywithglobalnorms
of capital adequacy and quality of assets besides being answerable to shareholders. Ideally
banks should not be forced to lend to specific sectors. But if it has to be done, then the bad
assets which arise on account of say, crop failure, should be financed throughCentral& State
Budgets. As it is not easy to figure out what part of the NPA is due to error in judgment and
what is due to climate failure.

 The bank can exercise its powers for companies from which loans need to be recovered as
stated under the following sections of the Companies Act for the concerned reasons:
o Section 36 – Punishment for fraudulently inducing persons to invest money
o Section 247 – Valuation by registered valuers
o Section 180 – Restriction on Power of Board
o Section 185 – Loan to Directors
o Section 186 – Loan and Investment by a Company
CONCLUSION
 NPA is one of the biggest problems that the Indian Banks are facing today. If proper
management of NPAs is not undertaken it would hamper the business of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.
NPAs would destroy the current profit, interest income due to large provisions of the NPAs,
and would affect the smooth functioning of the recycling of the funds Banks also redistribute
losses to other borrowers by charging higher interest rates. Lower deposit rates and higher
lending rates repress savings and financial markets, which hampers economic growth. But
efficient management of NPA is not the sole factor that determines the overall efficiency of
banks. Accordingto the FinancialStabilityReport ofDecember 2013 published bythe RBI,the
risks to the banking sector have further increased. All major risk dimensions captured in the
Banking Stability Indicator show increase in vulnerabilities in the banking sector. Failure of a
major corporate or a major corporate group could trigger a contagion in the banking system
due to exposures ofa large number ofbanks to suchcorporates. Asset qualitycontinues to bea
major concern for Scheduled CommercialBanks (SCBs). The Gross Non-performingAssets
ratio ofSCBs as wellas their restructured standard advances ratio has increased. Therefore,the
total stressed advances ratio rose significantly to 10.2 per cent of total advances as at end
September 2013 from 9.2 per cent of March 2013. Macro stress tests on credit risk suggest
that if the adverse macroeconomic conditions persist, the credit quality of commercial banks
could deteriorate further. However, under improved conditions, the present trend in credit
quality may reverse during the second half of 2014-15.

ANNEXURE 1
COMPUTATION OF GROSS ADVANCES, GROSS NPAs, NET ADVANCES, & NET
NPAs
Part A
Details of Gross Advances, Gross NPAs, Net Advances and Net NPAs
(Rs. in Crore up to two decimals)
Particulars
Amount
1. Standard Advances
2. Gross NPAs *
3. Gross Advances ** ( 1+2 )
4. Gross NPAs as a percentage of Gross Advances (2/3) (in %)
5. Deductions
(i) Provisions held inthe case ofNPA Accounts as per asset classification(includingadditionalProvisions
for NPAs at higher than prescribed rates).
(ii) DICGC / ECGC claims received and held pending adjustment
(iii) Part payment received and kept in Suspense Account or any other similar account
(iv) Balance in Sundries Account (Interest Capitalization - Restructured Accounts), in respect of NPA
Accounts
(v) Floating Provisions***
(vi) Provisions in lieu of diminution in the fair value of restructured accounts classified as NPAs
(vii) Provisions in lieu of diminution in the fair value of restructured accounts classified as standard assets
6. Net Advances(3-5)
7. Net NPAs {2-5(i + ii + iii + iv + v + vi)}
8. Net NPAs as percentage of Net Advances (7/6) (in %)
* Principal dues ofNPAs plus Funded Interest TermLoan(FITL) where the correspondingcontra credit
is parked in Sundries Account (Interest Capitalization - Restructured Accounts), in respect of NPA
Accounts.

** For the purpose ofthis Statement, ‘Gross Advances' meanalloutstandingloans and advances including
advances for whichrefinance has beenreceived but excludingrediscounted bills, and advances writtenoff
at Head Office level (Technical write off).
*** Floating Provisions would be deducted while calculating Net NPAs, to the extent, banks have
exercised this option, over utilising it towards Tier II capital.
REFERENCES
 www.rbi.org.in
 www.southindianbank.com
 www.moneycontrol.com
 www.thehindubusinessline.com
 www.financialexpress.com
 www.abhinavjournal.com
 www.bankdrt.com

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