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IJMBS Vol. 1 I!!"e 3 Se#te$%er 2011

NP&! 'e(")tion Str*te+ie! ,or -o$$er)i*l B*n.! in In(i*

1
1,2

/.V.B0*1*ni Pr*!*( 22.Veen*

,B Commercial an! nternational Bank Dt!, D#analaks#mi Bank Dt!, Karur Cysya Bank Dt!, Bank of (a1ast#an Dt! are some +rivate ,ector Banks. +u$lic sector $anks inclu!e +un1a$ national $ank, Ci1aya $ank, UC0 $ank, oriental $ank, "lla#a$a! $ank, "n!#ra $ank. "2E )rin!lays Bank, "B23"M(0 Bank, "merican :=press Bank Dt!, Citi$ank are some foreign $anks operating in n!ia.

Dept. of Commerce & Business Management, Kakatiya University,Warangal, n!ia

$anks. :very $ank #a! to earmark a minimum " #ealt#y $anking system is essential for any economy percentage of t#eir loan striving to ac#ieve gro%t# an! remain sta$le in competitive portfolio to sectors i!entifie! glo$al $usiness environment. n!ian $anks are favora$le on as ;priority sectors<. *#e gro%t#, asset &uality an! profita$ility' (B an! )overnment manufacturing sector also #ave ma!e some nota$le c#anges in policies an! regulation gre% !uring t#e 1489s in to #elp strengt#en t#e sector. *#ese c#anges inclu!e protecte! environs an! t#e strengt#ening pru!ential norms, en#ancing t#e payments $anking sector %as a critical system an! integrating regulations of commercial $anks. n source. *#e ne=t %ave of terms of &uality of assets an! capital a!e&uacy, t#ese $anks reforms sa% t#e #ave clean, strong an! transparent $alance s#eets relative to nationali-ation of 7 more ot#er $anks in compara$le economies in its region. +,Bs commercial $anks in 14>9. nee! to strengt#en institutional skill levels especially in sales ,ince t#en t#e num$er of an! marketing, service operations, risk management an! t#e sc#e!ule! commercial $anks overall organi-ational performance et#ic & strengt#en #uman increase! four3fol! an! t#e capital. num$er of $ank $ranc#es ,tructural %eaknesses suc# as a fragmente! in!ustry structure, restrictions on capital availa$ility an! !eployment, lack of increase! eig#t3fol!.

&%!tr*)t

II. Nor$! o, NP&! in %*n.in+ in("!tr4 &. B&S67 I Nor$!:

*#e #istory of t#e Basel nternational co!es an! ,tan!ar!s .B ,/ relating to minimum capital a!e&uacy for $anks goes $ack to t#e !evelope! countriesF initiative in 14>> to protect t#e 0rgani-ation for :conomic Cooperation an! Development

institutional support infrastructure, restrictive la$our la%s, %eak "fter t#e secon! p#ase of corporate governance an! ineffective regulations $eyon! financial sector reforms an! ,c#e!ule! Commercial Banks .,CBs/, unless in!ustry utilities li$erali-ation of t#e sector in an! service $ureaus. 0ne of t#e ma1or !ra%$acks of

,CBs is its 2+"s.

t#e early nineties, t#e +u$lic

,ector Banks .+,Bs/ foun! it *#e $est in!icator for t#e #ealt# of t#e $anking in!ustry in a e=tremely !ifficult to compete country is its level of 2on3performing assets .2+"s/. 2+"s %it# t#e ne% private sector are one of t#e ma1or concerns for $anks in n!ia. t reflects t#e $anks an! performance of $anks. (e!uce! 2+"s generally gives t#e t#e foreign $anks. impression t#at $anks #ave strengt#ene! t#eir cre!it *#e ne% private sector $anks appraisal processes over t#e years an! gro%t# in 2+"s first ma!e t#eir appearance involves t#e necessity of provisions, %#ic# $ring !o%n t#e after t#e gui!elines permitting over all profita$ility of $anks. t#em %ere issue! in ?anuary

*#e n!ian $anking sector is facing a serious pro$lem of 2+". 144@. :ig#t ne% private sector *#e magnitu!e of 2+" is comparatively #ig#er in pu$lic sectors $anks are in operation. *#ese $anks. *o improve t#e efficiency an! profita$ility of $anks t#e $anks !ue to t#eir late start 2+" nee! to $e re!uce! an! controlle!. #ave access to state3of3t#e3art *#is paper !eals %it# un!erstan!ing t#e concept of 2+"s, tec#nology, %#ic# in turn #elps its magnitu!e an! ma1or causes for an account $ecoming t#em to save on manpo%er non3performing an! strategies for managing 2+" in n!ian costs an! provi!e $etter $anks. services. ,ince t#en t#e gro%t# of t#e $anking in!ustry 3e45or(! in n!ia #as $een a continuous Banking ,ystem in n!ia, Commercial Banks, +,B, ,CB, 2+, process A1B.

I. B*n.in+ in("!tr4 in In(i*

*#e n!ian Banking in!ustry, %#ic# is governe! $y t#e Banking "s far as t#e present scenario is (egulation "ct of n!ia, 1454 can $e $roa!ly classifie! into t%o concerne! t#e $anking in!ustry ma1or categories, sc#e!ule! $anks an! non3sc#e!ule! $anks.is in a transition p#ase. *#e ,c#e!ule! $anks comprise commercial $anks an! t#e co3+u$lic ,ector Banks, %#ic# are operative $anks. n terms of o%ners#ip, commercial $anks cant#e foun!ation of t#e n!ian Banking system account for $e furt#er groupe! into nationali-e! $anks, t#e ,tate Bank of n!ia an! its associate $anks, regional rural $anks an! more t#an 8> per cent of total private sector $anks .t#e ol!6 ne% !omestic an! foreign/. $anking in!ustry assets.

.0:CD/ $anks from t#e financial crises common !uring t#e 14>9s. Basel norms, %ere set out in 14>> an! accepte! over t#e years $y aroun! 199 Central Banks across t#e glo$e un!er %#at came to $e kno%n as t#e Basel "ccor!. *#e original accor!, no% kno%n as Basel3 , %as &uite simple an! a!opte! a straig#t3for%ar! Gone si-e fits all approac#F t#at !oes not !istinguis# $et%een t#e !iffering risk profiles an! risk management stan!ar!s across $anks. *#e n!ian monetary aut#orities implemente! t#e Basel $y 1444 A@B.
*#e $anks %ere to assess t#eir assets an! off3$alance3s#eet risks taken an! incorporate t#em on t#eir $alance3s#eet. Basel norms prescri$e! a minimum capital a!e&uacy ratio .C("(/ A1B of > H for Banks %#ic# %ere signatories to t#e Basel "ccor!.

*#ese $anks #ave over 78,999 $ranc#es sprea! across Unfortunately t#ey are $ur!ene! %it# e=cessive 2on +erforming t#e country.
assets, massive manpo%er an!

During t#e first p#ase of financial reforms, t#ere %as alack of mo!ern tec#nology A2B. nationali-ation of 15 ma1or $anks in 1474. *#is crucial step le! to a s#ift from Class $anking to Mass $anking. *#is in turn resulte! n!usin! $ank %as t#e first set up private $ank in in a significant gro%t# in t#e geograp#ical coverage of

n!ia. DB , 2) Cyasa Bank,

.
Basel frame%ork %as

confine! to t#e prescription of only

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minimum capital re&uirements for $anks, t#e Basel frame%ork e=pan!s t#is approac# not only to

in net non performing assets .2+"s/ #ave $een registere! $y

capture certain a!!itional risks in t#e minimum capital ratio $ut 2J pu$lic sector an! also inclu!es t%o a!!itional areas, ,upervisory (evie% +rocess commercial $anks !uring an! Market Discipline t#roug# increase! !isclosure. .5/ t#e secon! &uarter of t#e

*#us emerge! (B gui!elines on investments an! 2994 as against 299> A8B. to t#e (B , operations risk, paving t#e %ay for a!option of %#at #ave "ccor!ing L(e!uction of 2+"s in t#e come to $e kno%n as Basel norms. B. B&S67 II Nor$!:

n!ian $anking sector s#oul! $e treate! as a national priority t is t#e secon! accor! %#ic# focuses on operational risk along %it# item to make t#e system market risk an! cre!it risk. Basel tries to ensure t#at t#e anomalies stronger, resilient an! geare! e=iste! in Basel are correcte!. *#e process of implementing Basel to meet t#e c#allenges of norms in n!ia is $eing carrie! out in p#ases. +#ase #as $een glo$alisation. t is necessary carrie! out for foreign $anks operating in n!ia an! n!ian $anks t#at a pu$lic !e$ate is starte! soon on t#e pro$lem of 2+"s #aving operational presence outsi!e an! t#eir resolution.L n!ia %it# effect from Marc# @1,299>.
n p#ase , all ot#er sc#e!ule! commercial $anks .e=cept Docal "rea ssues an! C#allenges for Banks an! ((Bs/ %ill #ave to a!#ere to Basel gui!elines $y Marc# Banking n!ustryM @1, 2994. Wit# t#e !ea!line of Marc# @1, 2994 for full implementation of Basel norms fast approac#ing, $anks are looking to maintain a *#e n!ian $anking system cus#ion in t#eir respective capital reserves. *#e minimum capital to %itnesse! a series of reforms risk3%eig#te! asset ratio .C("(/ in n!ia is place! at 4H, one over t#e past fe% years like t#e percentage point a$ove t#e Basel re&uirement. "ll t#e $anks #ave !eregulation of interest rates, t#eir Capital to (isk Weig#te! "ssets (atio .C("(/ a$ove t#e !ilution of t#e government stipulate! re&uirement of Basel gui!elines .>H/ an! (B gui!elines stake in pu$lic sector $anks an! t#e increase! participation .4H/. "s per Basel

profita$ility t#roug# a loss of interest income, %rite3off of t#e principal loan amount itself. (B issue! gui!elines in 144@ $ase! on recommen!ations of t#e 2arasim#am Committee t#at man!ate! i!entification an! re!uction of 2+"s $e treate! as a Onational priorityN $ecause t#e level of 2+" act as an in!icator s#o%ing t#e $ankers cre!it risks an! efficiency of allocation of resource A4B. *#e financial reforms in n!ian $ank in!usty #ave #elpe! largely to clean 2+" %#ic# %as aroun! (s. J2,999 crores in t#e year 2995. *#e earning capacity an! profita$ility of t#e $ank are #ig#ly affecte! !ue to t#is 2+".

IV. I$#*)t o, NP&! on B*n.in+ O#er*tion!

*#e efficiency of a $ank is not al%ays reflecte! only $y t#e si-e of its $alance s#eet $ut also t#e level of return on its assets.

of private sector $anks $ut n!ian $anks 7H. *#e )overnment of n!ia #as emp#asi-e! t#at pu$lic .$ot# pu$lic an! private/ #ave sector $anks s#oul! maintain C("( of 12H. Ior t#is, it not a$le to tap t#e !omestic announce! measures to re3capitali-e most of t#e pu$lic market also to compete in t#e sector $anks, as t#ese $anks cannot !ilute stake furt#er, glo$al market place. 2e% as t#e )overnment is re&uire! to maintain a stake of foreign $anks are very minimum J1H in t#ese $anks AJB. ent#usiastic to gain in t#e n!ian market. norms, n!ian $anks s#oul! maintain tier capital of at least

III. /ro!! NP& *n( Net NP& )ross 2+" is a a!vance %#ic# is consi!ere! irrecovera$le, *#ere are several c#allenges for $ank #as ma!e provisions, an! %#ic# is still #el! in t#at n!ian $anks %ill $anksF $ooks of account. #ave to face as t#ey look 2et 2+" is o$taine! $y !e!ucting items like interest !ue $ut not recovere!, part payment receive! an! kept in suspense account from )ross 2+".
*#e (eserve Bank of n!ia states t#at, compare! to ot#er "sian countries an! t#e U,, t#e gross non3performing asset figures in n!ia seem more alarming t#an t#e net 2+" figure.
to compete in a glo$ali-e environment.

*#e 2+"s !o not generate interest income for $anks $ut at t#e same time $anks are re&uire! to provi!e provisions for 2+"s from t#eir current profits.

1. *#e

*#ey areM

2.

1 (isk Management 3.

& Basel 2 Consoli!ation 3 0verseas *#e pro$lem of #ig# gross 2+"s is simply one of in#eritance. :=pansion Kistorically, n!ian pu$lic sector $anks #ave $een poor on 4 *ec#nology cre!it recovery, mainly $ecause of very little legal provision governing foreclosure an! $ankruptcy, lengt#y legal $attles, 5 )overnment sticky loans ma!e to government pu$lic sector un!ertakings, (eforms loan %aivers an! priority sector len!ing. 6 2on +erforming 2et 2+"s are comparatively $etter on a glo$al $asis $ecause of "ssets .2+"s/ t#e stringent provisioning norms prescri$e! for $anks in 7 ,kille! Manpo%er 1441 $y 2arasim#am Committee. 8 Consumer n n!ia, even on security taken against loans, provision #as +rotection .>/ to $e create!. Iurt#er, n!ian $anks #ave to make a 199 per 2on +erforming "ssets as a cent provision on t#e amount not covere! $y t#e reali-a$le ma1or issue an! c#allenge value of securities in case of FF!ou$tfulFF a!vance, %#ile in for Banking n!ustryM some countries, it is 8J per cent or 1ust J9 per cent A7B.
*#e ",,0CK"M ,tu!y title! ;,olvency "nalysis of t#e n!ian 2on3performing "ssets are Banking ,ector<, reveals t#at on an average 25 per cent rise

4.

5.

t#reatening t#e sta$ility an! !emolis#ing $ankNs

o$

2+"s #ave !estructive impact on t#e return on assets in t#e follo%ing %ays. *#e interest income of $anks re!uce! it is to $e accounte! only on receipt $asis. *#e current profits of t#e $anks are ero!e! $ecause t#e provi!ing of !ou$tful !e$ts an! %riting it off as $a! !e$ts an! it limits t#e recycling fun!s. *#e capital a!e&uacy ratio is !istur$e! an! cost of capital %ill go up. *#e economic value a!!ition .:C"/ $y $anks gets upset $ecause :C" is e&ual to t#e net operating profit minus cost of capital A19B.

4;

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IJMBS Vol. 1 I!!"e 3 Se#te$%er 2011

emerging pro$lems in cre!it V. -*"!e! re!#on!i%le ,or in)re*!in+ NP&! e=posures at an early stage. *#e $anking sector #as $een facing t#e serious pro$lems of Iurt#er, it is reveale! t#at t#e t#e rising 2+"s. n fact +,Bs are facing more pro$lems t#an in!icators %#ic# may trigger t#e private sector $anks an! foreign $anks. *#e 2+"s in early %arning system !epen! +,Bs are gro%ing !ue to e=ternal as %ell as internal factors. not only on !efault in payment of installment an! 0ne of t#e main causes of 2+"s in t#e $anking sector is t#e interest $ut also ot#er factors Directe! loans system un!er %#ic# commercial $anks are suc# as !eterioration in re&uire! to supply 59H percentage of t#eir cre!it to priority operating an! financial sectors. performance of t#e $orro%er, %eakening in!ustry Most significant sources of 2+"s are !irecte! loans supplie! c#aracteristics, regulatory to t#e ;micro sector< are pro$lematic of recoveries especially c#anges, an! general %#en some of its units $ecome sick or %eak. +,Bs 8 percent economic con!itions. :arly of net a!vances %ere !irecte! to t#ese units A11B. %arning signals can $e +overty elevation programs like (D+, ((:+, ,UM:, ,:+U+, classifie! into five $roa! ?(P, +M(P etc., faile! on various groun!s in meeting t#eir categories vi-.
o$1ectives. *#e #uge amount of loan grante! un!er t#ese sc#emes %as totally unrecovera$le $y $anks !ue to political (1) manipulation, misuse of fun!s an! non3 relia$ility of target (2) au!ience of t#ese sections. Doans given $y $anks are t#eir(3) assets an! as t#e repayments of several of t#e loans %ere poor, (4) t#e &uality of t#ese assets %as stea!ily !eteriorating. (5)

%arning signals

11 Do% activity level in

plant

12 Disor!erly 13 14 15 16
!iversification6fre&uent c#anges in plan 2onpayment of %ages6po%er $ills Doss of critical customer6s Ire&uent la$or pro$lems :vi!ence of age! inventory6large level of inventory

3. M*n*+e$ent

Iinancial 0perational Banking Management an! :=ternal factors.

n n!ia t#e scope for $ranc# e=pansion in rural an! semi3ur$an Iinancial relate! %arning areas is vast an! also necessary. ncreasingly, 2BICs operating signals generally emanate at suc# places are coming un!er regulatory pressure an! are from t#e $orro%ersN $alance likely to a$an!on t#eir interme!iation role. *#ese $ranc#es fin! s#eet, income e=pen!iture priority sector financing as t#e main $usiness availa$le especially in rural6semi3ur$an centers. 0perational restructuring of $anks statement, statement of cas# statement of s#oul! ensure t#at 2+"s in t#e priority sectors are re!uce!, $ut flo%s, receiva$les etc. Iollo%ing not priority sector len!ing. *#is %ill remain a priority for t#e survival of $anks. "ny !ecisions a$out insulating n!ian $anks common %arning signals are from priority sector financing s#oul! not $e reac#e! until full3 capture! $y some of t#e #aving relatively scale researc# is un!ertaken, taking into account several sources $anks !evelope! :W,. inclu!ing recor!s of cre!it guarantee sc#emes A12B.

rel*te( 5*rnin+ !i+n*l! Q Dack of co3operation from key personnel Q C#ange in management, o%ners#ip, or key personnel Q Desire to take un!ue risks Q Iamily !isputes Q +oor financial controls Q Iu!ging of financial statements Q Diversion of fun!s

4. B*n.in+ rel*te( !i+n*l! 1 Declining $ank

$alances6!eclining operations in t#e account 0pening of account %it# ot#er $ank (eturn of out%ar! $ills6!is#onore! c#e&ues ,ales transactions not route! t#roug# t#e account Ire&uent re&uests for loan Ire&uent !elays in su$mitting stock statements, financial !ata, etc. ,ignals relating to e=ternal factors :conomic recession :mergence of ne% competition :mergence of ne% tec#nology C#anges in government 6 regulatory policies 2atural calamities

2 3 4 5 6

2. =in*n)i*l 5*rnin+ VI. Str*te+ie! ,or o1er)o$in+ NP&! Carious steps #ave $een taken $y t#e government an! (B !i+n*l! to recover an! re!uce 2+"s. *#ese strategies are 1 +ersistent irregularity in t#e account necessary to control 2+"s. 2 Default in repayment 1. +reventive management an! o$ligation 2. Curative management 3 Devolvement of DC6invocation of &. Pre1enti1e M*n*+e$ent: guarantees +reventive measures are to prevent t#e asset from $ecoming in a non performing asset. Banks #as to concentrate on t#e 4 Deterioration li&ui!ity6%orking capital follo%ing to minimi-e t#e level of 2+"s. position 1. 6*rl4 <*rnin+ Si+n*l! 5 ,u$stantial increase in *#e origin of t#e flouris#ing 2+"s lies in t#e &uality of managing long term !e$ts in cre!it assessment, risk management $y t#e $anks concerne!. relation to e&uity Banks s#oul! #ave a!e&uate preventive measures, fi=ing 6 Declining sales pre3sanctioning appraisal responsi$ility an! #aving an 7 0perating losses6net effective post3!is$ursement supervision. Banks s#oul! losses continuously monitor loans to i!entify accounts t#at #ave 8 (ising sales an! falling potential to $ecome non3performing A1@B. profits t is important in any early %arning system, to $e sensitive to
signals of cre!it !eterioration. " #ost of early %arning signals are9 use! $y !ifferent $anks for i!entification of potential 2+"s.

7 8 9 10 11

Most $anks in n!ia #ave lai! !o%n a series of operational, financial, transactional in!icators t#at coul! serve to i!entify 10 (ising level of $a! !e$t

Disproportionate increase in over#ea!s relative to sales

losses

0perational
Jo"rn*l o, M*n*+e$ent 9 B"!ine!! St"(ie!

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Kno% your clientN profile .KPC/M Most $anks in n!ia #ave a t#ose for %#ic# finance %as system of preparing Gkno% your clientN .KPC/ profile6cre!it grante!. *#e list of %illful report. "s a part of GKPCN system, visits are ma!e on clients !efaulters is re&uire! to $e an! t#eir places of $usiness6units. *#e fre&uency of suc# su$mitte! to ,:B an! (B to visits !epen!s on t#e nature an! nee!s of relations#ip. .15/ prevent t#eir access to capital
Cre!it "ssessment an! (isk Management Mec#anismM Cre!it markets. assessment an! (isk management mec#anism are ever lasting,#aring of information of solution to t#e pro$lem of 2+"s. Managing cre!it risk is a muc# t#is nature #elps $anks in more for%ar!3looking approac# an! is mainly concerne! %it# t#eir !ue !iligence e=ercise managing t#e &uality of cre!it portfolio $efore !efault takes place. an! #elps in avoi!ing *#e !ocumentation of cre!it policy an! cre!it au!it imme!iately financing unscrupulous after t#e sanction is necessary to upgra!e t#e &uality of cre!it elements. (B #as a!vise! appraisal in $anks. n a situation of li&ui!ity over#ang t#e len!ers to initiate legal ent#usiasm of t#e $anking system is to increase len!ing %it# measures inclu!ing criminal compromise on asset &uality, raising concern a$out a!verse actions, %#erever re&uire!, selection an! potential !anger of a!!ition to t#e 2+"s stock. t is an! un!ertake a proactive necessary t#at t#e $anking system is e&uippe! %it# pru!ential approac# in c#ange in norms to minimi-e if not completely avoi! t#e pro$lem of cre!it management, %#ere risk an! !evelop an effective internal cre!it risk mo!els for t#e appropriate A17B. purpose of cre!it risk management.

utili-e! for purposes ot#er t#an

compromise un!er Dok

settlement

"!alat. De$t recovery tri$unals #ave $een empo%ere! to organi-e Dok "!alat to !eci!e on cases of 2+"s of (s. 19 lak# an! a$ove. *#is mec#anism #as prove! to $e &uite effective for spee!y 1ustice an! recovery of small loans. *#e progress t#roug# t#is c#annel is e=pecte! to pick up in t#e coming years

A18B. 3. 2e%t 'e)o1er4 ?ri%"n*l! (2'?!)

*#e De$t (ecovery *ri$unals #ave $een esta$lis#e! $y t#e )overnment of n!ia un!er an "ct of +arliament ."ct J1 of 144@/ for e=pe!itious a!1u!ication an! recovery of !e$ts !ue to $anks an! financial institutions. *#e De$t (ecovery
*ri$unal is also t#e appellate aut#ority for appeals file! against t#e procee!ings initiate! $y secure! cre!itors un!er t#e ,ecuriti-ation an! (econstruction of Iinancial "ssets an!

0rgani-ational restructuringM Wit# regar! to internal factors B. -"r*ti1e M*n*+e$ent lea!ing to 2+"s t#e onus for containing t#e same rest %it# *#e curative measures are t#e $ank t#emselves. *#ese %ill necessities organi-ational !esigne! to ma=imi-e restructuring improvement in t#e managerial efficiency, skill up recoveries so t#at $anks fun!s gra!ation for proper assessment of cre!it %ort#iness an! a locke! up in 2+"s are c#ange in t#e attitu!e of t#e $anks to%ar!s legal action, %#ic# release! for recycling. *#e is tra!itionally vie%e! as a measure of t#e last resort. Central government an! (B
(e!uce Depen!ence on nterestM *#e n!ian $anks are largely #ave taken steps for controlling !epen!ing upon len!ing an! investments. *#e $anks in t#e inci!ence of fres# 2+"s an! !evelope! countries !o not !epen! upon t#is income %#ereas creating legal >7 percent of income of n!ian $anks is accounte! from an! regulatory environment to interest an! t#e rest of t#e income is fee $ase!. *#e $anker facilitate t#e recovery of can earn sufficient net margin $y investing in safer securities e=isting

t#oug# not at #ig# rate of interest. t facilitates for limiting of 2+"s of $anks. *#ey areM #ig# level of 2+"s gra!ually. t is possi$le t#at average yiel! on loans an! a!vances net !efault provisions an! services 1. One ?i$e Settle$ent costs !o not e=cee! t#e average yiel! on safety securities S)0e$e! *#is sc#eme covers all sectors $ecause of t#e a$sence of risk an! service cost. .1J/
su$ R stan!ar! assets, !ou$tful or loss assets as on *#e gra!ing of t#e $ankNs risk assets is an important internal @1st Marc# 2999. "ll cases on control tool. t serves t#e nee! of t#e Management to i!entify %#ic# t#e $anks #ave initiate! an! monitor potential risks of a loan asset. *#e purpose of action un!er t#e ,(I":, "ct i!entification of potential 2+"s is to ensure t#at appropriate an! also cases pen!ing $efore preventive 6 corrective steps coul! $e initiate! $y t#e $ank to Courts6D(*s6B I(, su$1ect to protect against t#e loan asset $ecoming non3performing. Most consent !ecree $eing o$taine! of t#e $anks #ave a system to put certain $orro%a$le from t#e Courts6D(*s6B I( are accounts un!er %atc# list or special mention category if covere!.

:nforcement of ,ecurity nterest "ct.

*#e recovery of !e$ts !ue to $anks an! financial institution passe! in Marc# 2999 #as #elpe! in strengt#ening t#e function of D(*s. +rovision for placement of more t#an one recovery officer, po%er to attac# !efen!antNs property6assets $efore 1u!gment, penal provision for !iso$e!ience of tri$unalNs or!er or for $reac# of any terms of or!er an! appointment of receiver %it# po%er of reali-ation, management, protection an! preservation of property are e=pecte! to provi!e necessary teet# to t#e D(*s an! spee! up t#e recovery of 2+"s in t#e times to come. D(*s %#ic# #ave $een set up $y t#e )overnment to facilitate spee!y recovery $y $anks6DI s, #ave not $een a$le make muc# impact on loan recovery !ue to variety of reasons like ina!e&uate num$er, lack of infrastructure, un!er staffing an! fre&uent a!1ournment of cases. t is essential t#at D(* mec#anism is

5. <*t)0-li!t>S#e)i*l Mention -*te+or4

performing a!vances operating un!er a!verse $usiness or Ko%ever cases of %illful economic con!itions are e=#i$iting certain !istress signals. !efault, frau! an! *#ese accounts generally e=#i$it %eaknesses %#ic# are malfeasance are not correcta$le $ut %arrant $anksN closer attention. *#e covere!. "s per t#e 0*, categori-ation of suc# accounts in %atc# list or special sc#eme, for 2+"s up to (s. mention category provi!es early %arning signals ena$ling 19crores, t#e minimum (elations#ip Manager or Cre!it 0fficer to anticipate cre!it amount t#at s#oul! $e !eterioration an! take necessary preventive steps to avoi! recovere! s#oul! $e 199H of t#eir slippage into non performing a!vances t#e outstan!ing $alance in t#e account. 6. <ill,"l 2e,*"lter! (B #as issue! revise! gui!elines in respect of !etection of 2. 7o. &(*l*t! %illful !efault an! !iversion an! sip#oning of fun!s. "s per Dok "!alat institutions #elp t#ese gui!elines a %illful !efault occurs %#en a $orro%er $anks to settle !isputes !efaults in meeting its o$ligations to t#e len!er %#en it #as involving account in capacity to #onor t#e o$ligations or %#en fun!s #ave $een ;!ou$tful< an! ;loss< category, %it# outstan!ing $alance of (s. J lak# for

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&A Bnlo).in+ )*#it*l ,or strengt#ene! an! veste! %it# a proper enforcement t0e %*n.in+ !4!te$ *n( mec#anism to enforce t#eir or!ers. 2on o$servation of any t0e e)ono$4

or!er passe! $y t#e tri$unal s#oul! amount to contempt of *#e primary o$1ective of "rcil court, t#e D(* s#oul! #ave rig#t to initiate contempt is to e=pe!ite recovery of t#e procee!ings. *#e D(* s#oul! empo%ere! to sell asset of t#e amounts locke! in 2+"s of !e$tor companies an! for%ar! t#e procee! to t#e %in!ing R len!ers an! t#ere$y recycling up court for !istri$ution among t#e len!ers A1>B. capital. "rcil t#us, provi!es relief to t#e $anking system $y managing 2+"s an! #elp ,ecuriti-ation is a relatively ne% concept t#at is taking roots in t#em concentrate on core n!ia of late. t is still in its infancy %it# only a fe% market $anking activities t#ere$y players. ,ecuriti-ation is consi!ere! an effective tool for s#are#ol!ers improvement of capital a!e&uacy. t is also seen as a tool for en#ancing value. transferring t#e reinvestment risk, apart from cre!it risk

4. Se)"riti@*tion *n( S&'=&6SI &)t

#elping t#e $anks to maintain proper matc# $et%een assets an! lia$ilities. ,ecuriti-ation can also #elp in re!ucing t#e risk arising out of cre!it e=posure norms an! t#e im$alances of cre!it e=posure, %#ic# can #elp in t#e maintenance of #ealt#y assets. *#e ,"(I":, "ct inten!s to promote ,ecuriti-ation, pool toget#er 2+"s of $anks to reali-e t#em an! make enforcement of ,ecurity nterest *ransfer.

B. -re*tin+ * 1i%r*nt $*r.et ,or (i!tre!!e( (e%t *!!et! > !e)"ritie! in In(i* o,,erin+ * tr*(in+ #l*t,or$ ,or 7en(er!

ensure timely an! transparent mec#anism for restructuring of t#e corporate !e$ts of via$le entities facing pro$lems, outsi!e t#e purvie% of B I(, D(* an! ot#er legal procee!ings, for t#e $enefit of all concerne!. n particular, t#e frame%ork %ill aim at preserving via$le corporate t#at are affecte! $y certain internal an! e=ternal factors an! minimi-e t#e losses to t#e cre!itors an! ot#er stake#ol!ers t#roug# an or!erly an! coor!inate! restructuring programme. CD( system in t#e country %ill #ave a t#ree3tier structureM

"rcil #as ma!e successful efforts in funneling investment *#e ,"(I":, "ct 32992 is seen as a $ooster, initially, for $anks from $ot# from !omestic an! players for in tackling t#e menace of 2+"s %it#out #aving to approac# t#e international fun!ing t#ese ac&uisitions of courts. Wit# certain loop#oles still remaining in t#e act, t#e !istresse! assets, follo%e! $y e=periences of $anks %ere t#at t#e "ct in its present form %oul! t#em to not serve t#e envisage! o$1ective of optimum recovery of 2+"s, s#o%casing prospective $uyers. *#is #as particularly %it# t#e #ar!3core 2+" $orro%ers !ragging t#e $anks creation of a into en!less litigation to !elay t#e recovery process. *#e initiate! market of ,upreme Court !ecision in regar! to certain proviso of t#e secon!ary !istresse! assets in t#e ,"(I":, "ct also vin!icate! t#is vie%. *#is section !eals %it# t#e features of ,ecuriti-ation an! its country $esi!es #astening t#eir resourcefulness in tackling 2+", an! a$out t#e ,"(I":, "ct, its resolution. *#e efforts of "rcil resourcefulness an! limitations in tackling t#e 2+" $orro%ers an! t#e %oul! lea! t#e countryNs !istresse! !e$t market to implication of t#e recent ,upreme Court 1u!gment. international stan!ar!s. Wit# t#e stea!y sop#istication of t#e n!ian Iinancial ,ervices ,ector, t#e structure! finance market is also gro%ing significantly, -. ?o e1ol1e *n( )re*te of %#ic# ,ecuriti-ation occupies a prominent place. Wit# Basel !i+ni,i)*nt )*#*)it4 in t0e ,or C"i).er norms imminently $eing implemente! $y 299>, $anks are !4!te$ re&uire! to pool up #uge capital to offset t#e cre!it risk an! re!ol"tion o, NP&! %4 t0e *!!et! operational risk components. ,ecuriti-ation, t#erefore, is seen to (e#lo4in+ $e an effective an! vi$rant tool for capital formation for $anks in o#ti$*ll4 Wit# a vie% to ac#ieving #ig# future A14B. !elivery capa$ilities for resolution,

1. CD( ,tan!ing Iorum 2. CD( :mpo%ere! )roup 3. CD( Cell

&. -2' St*n(in+ =or"$ : *#e CD( ,tan!ing Iorum %oul! $e t#e representative general $o!y of all financial institutions an! $anks participating in CD( system. "ll financial institutions an! $anks s#oul! participate in t#e system in t#eir o%n interest. CD( ,tan!ing Iorum %ill $e a self3empo%ere! $o!y, %#ic# %ill lay !o%n policies an! gui!elines, gui!e an! monitor t#e progress of corporate !e$t restructuring. B. -2' 6$#o5ere( /ro"#:
*#e CD( :mpo%ere! )roup %oul! $e man!ate! to look into eac# case of !e$t restructuring, e=amine t#e via$ility an! re#a$ilitation potential of t#e Company an! pprove t#e restructuring package %it#in a specifie! time frame of 49 !ays, or at $est 1>9 !ays of reference to t#e :mpo%ere! )roup.

VII. &!!et 'e)on!tr")tion -o$#*n4 (&'-)

"rcil #as put in place a aime! at n!ian $anking system, namely, ,tate Bank of n!ia .,B /, C C structure outsourcing t#e various Bank Dimite! . C C / an! DB Bank Dimite! . DB / to come toget#er to set3up t#e first "(C. "rcil %as incorporate! as a su$3functions of resolution pu$lic limite! company on Ie$ruary 11, 2992 an! o$taine! its to speciali-e! agencies, certificate of commencement of $usiness on May 8, 299@. n %#erever applica$le un!er provision of t#e pursuance of ,ection @ of t#e ,ecuriti-ation "ct 2992, it #ol!s a t#e certificate of registration !ate! "ugust 24, 299@, issue! $y t#e ,ecuriti-ation "ct, 2992. (eserve Bank of n!ia .(B / an! operates un!er po%ers "rcil #as also encourage, groome! an! !evelope! conferre! un!er t#e ,ecuriti-ation "ct, 2992. "rcil is also a Lfinancial institutionL %it#in t#e meaning of ,ection 2 .#/ many suc# agencies to .ia/ of t#e (ecovery of De$ts !ue to Banks an! Iinancial en#ance its capacity in line %it# t#e gro%t# of its activity nstitutions "ct, 144@ .t#e LD(* "ctL/. "rcil is t#e first "(C in t#e country to commence $usiness of A29B.
*#is empo%erment encourage! t#e t#ree ma1or players in resolution of non3performing assets .2+"s/ upon ac&uisition from n!ian $anks an! financial institutions. "s t#e first "(C, VIII. -or#or*te 2e%t .CD(/
$

-. -2' -ell

"rcil #as playe! a pioneering role in setting stan!ar!s for 'e!tr")t"rin+ (-2') Corporate De$t (estructuring t#e in!ustry in n!ia.
frame%ork
Intern*tion*l

is

to

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IJMBS Vol. 1 I!!"e 3 Se#te$%er 2011

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later t#e gross 2+" are *#e CD( ,tan!ing Iorum an! t#e CD( :mpo%ere! )roup %ill increase!, it reac#e! to (s. $e assiste! $y a CD( Cell in all t#eir functions. *#e CD( Cell %ill >5858 crores in t#e year 29943 make t#e initial scrutiny of t#e proposals receive! from $orro%ers 19. 0n t#e ot#er #an! t#e 6 len!ers, $y calling for propose! re#a$ilitation plan an! ot#er recovery percentage of 2+" s information an! put up t#e matter $efore t#e increase!, 18H$y D(*s an!

CD( :mpo%ere! )roup, %it#in one mont# to !eci!e %#et#er 15.8H $y ,"(I":, "ct from re#a$ilitation is prima facie feasi$le, if so, t#e CD( Cell %ill t#e year 299@ 395 to >1H $y procee! to prepare !etaile! (e#a$ilitation +lan %it# t#e #elp D(*s an! @@H $y ,"(I":, of len!ers an! if necessary, e=perts to $e engage! from "ct in 299>394. Iollo%ing t#e outsi!e. f not foun! prima facie feasi$le, t#e len!ers may gross 2+"s t#e recovery start action for recovery of t#eir !ues. percentage !ecrease! to @2H
$y D(*s an! @9H $y ,"(I":, "ct in t#e year CD( %ill $e a 2on3statutory mec#anism. CD( mec#anism %ill $e 2994319. *#e increase in level a voluntary system $ase! on !e$tor3cre!itor agreement an! of 2+"s an! !iminis#ing inter3cre!itor agreement. *#e sc#eme %ill not apply to accounts percentage of recoveries are involving only one financial institution or one $ank. *#e CD( !ue to mec#anism %ill cover only multiple $anking accounts 6 n!ian $anks #as largely syn!ication 6 consortium accounts %it# outstan!ing e=posure of follo%e! a lagge! cyclical (s.29 crore an! a$ove $y $anks an! institutions. *#e CD( pattern %it# regar! to cre!it system %ill $e applica$le only to stan!ar! an! su$3stan!ar! gro%t#. *#is un!erline! t#e accounts. Ko%ever, as an interim measure, permission for pro3cyclical $e#aviour of t#e corporate !e$t restructuring %ill $e ma!e availa$le $y (B on t#e $anking system, %#erein $asis of specific recommen!ation of CD( LCore3)roupL, if a asset &uality can get minimum of 8J per cent .$y value/ of t#e len!ers constituting compromise! !uring $anks an! I s consent for CD(, irrespective of !ifferences in perio!s of #ig# cre!it asset classification status in $anks6 financial institutions. *#ere gro%t# an! t#is can result in %oul! $e no re&uirement of t#e account 6 company $eing sick t#e creation of 2+" or $eing in !efault for a specifie! perio! $efore reference to nonperforming assets for t#e CD( )roup. $anks in t#e later years *#is approac# %oul! provi!e t#e necessary fle=i$ility an! A2@B. facilitate timely intervention for !e$t restructuring. +rescri$ing any milestone.s/ may not $e necessary, since t#e !e$t restructuring DII. -re(it In,or$*tion e=ercise is $eing triggere! $y $anks an! financial institutions or B"re*" %it# t#eir consent. n no case, t#e re&uests of any corporate *#e institutionali-ation of in!ulging in %illful !efault or misfeasance %ill $e consi!ere! for information s#aring restructuring un!er CD( A21B. arrangement is no% possi$le

ID. ?0e Me)0*ni!$ o, t0e -2'

necessary t#at t#e $anking system is to $e e&uippe! %it# pru!ential norms to minimi-e if not completely to avoi! t#e pro$lem of 2+"s. *#e onus for containing t#e factors lea!ing to 2+"s rests %it# $anks t#emselves. *#is %ill necessitates organi-ational restructuring, improvement in t#e managerial efficiency an! skill up gra!ation for proper assessment of cre!it %ort#iness. t is $etter to avoi! 2+"s at t#e nascent stage of cre!it consi!eration $y putting in place of rigorous an! appropriate cre!it appraisal mec#anisms.

'e,eren)e!
A1B Commercial Banks in n!iaM )ro%t#, C#allenges an! ,trategies6Benson Kun1ukun1u. 2e% Del#i, 2e% Century +u$., 299>, ==, @52 p., ta$les, ,B2 >13889>31J93

[2] Business.mapsofin!ia.
com6$anks3in3in!ia6 last up!ate onM ?uly 5,2994 A0nlineB "vaila$le M #ttpM66gvkk.$logspot.co m6 Basel norms an! Banking n!ustry, 2994 A0nlineB "vaila$le M %%%.c#illi$ree-e.com 0pportunities opene! $y Basel ( + Balakris#nan
A0nlineB "vaila$le M #ttpM%%%.scri$!.com.!oc6 @@7178>>6 $asel3norms3 for3in!ian3$anks

[3]

D. -ir)"l*tion o, In,or$*tion o, 2e,*"lter!

*#e (B #as put in place a system for perio!ical circulation of Bureau of n!ia Dimite! .C B D/ !etails of %illful !efaulters of $anks an! financial institutions. *#e t %as set up in ?anuary 2991, (B also pu$lis#es a list of $orro%ers .%it# outstan!ing $y ,B , KDIC, an! t%o foreign aggregate rupees one crore an! a$ove/ against %#om $anks an! tec#nology partners. *#is %ill financial institutions in recovery of fun!s #ave file! suits as on prevent t#ose %#o take @1st Marc# every year. t %ill serve as a caution list %#ile a!vantage of lack of system of consi!ering a re&uest for ne% or a!!itional cre!it limits from information s#aring amongst !efaulting $orro%ing units an! also from t#e !irectors, proprietors lea!ing institutions to $orro% an! partners of t#ese entities A22B. large amount against same assets an! property, %#ic# #as DI. 'e)o1er4 &)tion *+*in!t 7*r+e NP&! "mong t#e various c#annels of recovery availa$le to $anks in no measures contri$ute! to for !ealing %it# $a! loans, t#e ,"(I":, "ct an! t#e De$t t#e incremental of 2+"s of (ecovery *ri$unals .D(*s/ #ave $een t#e most effective in $anks. .25/

t#roug# t#e ne%ly forme! Cre!it nformation

[4]

[5]

[6] ,.

Daks#mi 2arasim#an, ;2+"s improve, $ut nee! more attention<, @9 ?uly 1444
25H rise in Banks 2+"s in 2n! S( an! Capital "!e&uacy (atio !eclines $y 2H +oints, says "ssoc #am

[7]

terms of amount recovere!. *#e amount recovere! as DIII. -on)l"!ion percentage of amount involve! %as t#e #ig#est un!er t#e *#e pro$lem of 2+"s can $e D(*s, follo%e! $y ,"(I":, "ct. *#e (B #as !irecte! t#e ac#ieve! only %it# proper +,Bs to e=amine all cases of %illful !efault of (s. 0ne crore cre!it assessment an! risk an! a$ove an! file criminal cases against %illful !efaulters. management mec#anism. n a *#e $oar! of !irectors are re&ueste! to revie% 2+"s situation of li&ui!ity over#ang, accounts of one crore an! a$ove %it# special reference to fi= t#e ent#usiasm of t#e $anking staff accounta$ility in in!ivi!ually.

[8] ;Banking in

system to increase len!ing *#e gross 2+"s of t#e $anks is gra!ually !ecline! from (s. may compromise on asset &uality, raising concern a$out 89>71 crores in 2991 3 92 to (s. J9JJ2 crores in 2997 R 98, t#eir a!verse selection an! potential !anger of a!!ition to t#e stock of 2+"s. t is

[9]

n!ia R issues an! c#allenges for t#e future, report co!eM 2D(3999J, (eport lengt#M2J pages, year of pu$licationM299J. ,.2. Bi!ani , ;Managing 2on3

performing "ssets in Banks<

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Intern*tion*l Jo"rn*l
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IJMBS Vol. 1 I!!"e 3 Se#te$%er 2011

+erspectiveT<

[11] M. Karunakar, Mrs. K.Casuki, Mr. ,. ,aravanan A0nlineB

"vaila$le M %%%.aensionline.com6r1ss6r1ss6299>65

[12]

A0nlineB "vaila$le M %%%.a!$.org6Documents6Books6 (isingUtoUt#e...6in!iaU$nk.p!f [13] A0nlineB "vaila$le M #ttpM66%%%[email protected] vie%topic.p#pT pV15J49 [14] A0nlineB "vaila$le M management para!ise.com6forums6 arc#ieve6in!e=6p#p6

[15]

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[16]

?igar ?. ,oni. ;" +ro1ect on Comparitve "nalysis 0n 2on +erforming "ssets 0f +rivate an! +u$lic ,ector Banks< , BM "#ema!a$a!. [17] A0nlineB "vaila$le M #ttpM66%%%.scri$!.com6 !oc61714>1>>6Iinal3(eport2+"3+( 2*30U*@

[18]

A0nlineB "vaila$le #ttpM66%%%.m$aknol.com6$usiness3 finance6management3resolution3of3npas3legal3an!3 regulatory3regime6

[19] [20]

A0nlineB "vaila$le M #ttpM66%%%.!rt.co.in6

A0nlineB "vaila$le M %%%.$ooks.iupin!ia.org6overvie%. aspT $ooki!V B1191199 [21] A0nlineB "vaila$le M #[email protected]"rcil16 kno%le!geUcentre6pu$lications6papers62+"U,1U"rcil3

+ositioning.p!f A0nlineB "vaila$le M #ttpM66%%%.c!rin!ia.org6 A0nlineB "vaila$le M %%%.r$i.com (eport on tren! an! progress of $anking in n!ia 299539J,2997398, 2994319. p!f [25] A0nlineB "vaila$le M %%%.ci$il.com

[22] [23] [24]

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