MEMBERS' REFERENCE SERVICE

LARRDIS
LOK SABHA SECRETARIAT, NEW DELHI

REFERENCE NOTE

No. 39/RN/Ref/October/2016

1
For the use of Members of Parliament NOT FOR PUBLICATION

NON PERFORMING ASSETS IN

PUBLIC SECTOR BANKS

Prepared by Smt. Parama Chatterjee, Additional Director (23034926) and Shri Harsh Banga, DD of Lok
Sabha Secretariat under the supervision of Smt. Kalpana Sharma, Joint Secretary and Smt. Anita Khanna,
Director.

The reference material is for personal use of the Members in the discharge of their Parliamentary duties, and is not
for publication. This Service is not to be quoted as the source of information as it is based on the sources indicated
at the end/in the text. This Service does not accept any responsibility for the accuracy or veracity of the information
or views contained in the note/collection.
 Non Performing Assets in Public Sector Banks2

“The NPA situation is an important issue for the RBI...We will be

dealing with the situation with firmness but also with pragmatism so
that the economy does not feel any lack of credit....There are 4 stages,
identification, recording and reporting of NPAs all of which have
been done satisfactorily but we need to work more on resolution,” 3
RBI Governor, Urjit Patel

Introduction
 An asset, including a leased asset, according to the Reserve Bank of India
(RBI) Master Circular on Prudential norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances, becomes non-
performing when it ceases to generate income for the bank.
 A Non-Performing Asset (NPA) is a loan or an advance where among other
things interest and/ or installments of principal remain overdue for a period
of more than 90 days in respect of a term loan.
 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.
 Sluggishness in growth, slowdown in recovery in the global economy and
continuing uncertainty in the global markets are the main reasons for
increase in NPAs of banks.
Categories of NPAs
 A "Substandard Asset" is one which has remained NPA for a period less
than or equal to 12 months and has well defined credit weaknesses that
jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not
corrected.

2
The Reference Note is primarily based on the material received from the Department of Financial Services,
Ministry of Finance, unless otherwise mentioned in the Note. Additional information available at Annexures.
3
"Urjit Patel may junk Rajan's NPA approach; may transfer stressed assets to bad bank entity", Economic Times, 4
October 2016, available at http://economictimes.indiatimes.com/industry/banking/finance/banking/urjit-patel-may-
junk-rajans-npa-approach-may-transfer-stressed-assets-to-bad-bank-entity/articleshow/54679403.cms
 2

 An asset is classified as a "Doubtful Asset" if it has remained in the

substandard category for a period of 12 months and has all the weaknesses
inherent in assets that were classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, – on
the basis of currently known facts, conditions and values – highly
questionable and improbable
 A "Loss Asset" is one where loss has been identified by the bank or internal
or external auditors or the RBI inspection but the amount has not been
written off wholly or an asset which is considered uncollectible and of such
little value that its continuance as a bankable asset is not warranted although
there may be some salvage or recovery value.
NPA Scenario in the Country
 According to RBI, Gross NPAs of the Scheduled Commercial Banks
(SCBs), especially Public Sector Banks (PSBs) have shown an increase
during the recent years.
 On account of good economic conditions, establishment of Debt Recovery
Tribunals (DRTs) and enactment of the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act, the
Gross Non-Performing Assets (GNPAs) ratio of PSBs steadily declined
from 13.11 per cent in 2000-01 to 2.10 per cent in 2008-09 and GNPA ratio
of SCBs steadily declined from 12.04 per cent to 2.45 per cent.
 NPAs have stood at 7.72 per cent as on Dec 2015 and to 9.83 per cent as on
March, 2016 in respect of PSBs and the same have been at 4.62 per cent as
on March 2015 but have risen to 6.24 per cent as on Dec 2015 and to 7.79
per cent as on March, 2016 in respect of SCBs.
 Taking GNPA and restructured advances together the stress on PSBs is
14.40 per cent to total advances as on March, 2016 and 11.45 per cent to
total advances as on March, 2016 in respect of Scheduled Commercial
Banks (SCBs).
 3

 Gross bad loans at commercial banks could increase to 8.5 per cent of total
advances by March 2017, from 7.6 per cent in March 2016 4 , as per
Projection by RBI.
 The Gross bad loans of public sector banks increased to 9.6 per cent as of
March 2016, from about 6 per cent a year earlier: RBI data5
 Gross non-performing assets (NPAs) rose to 9.5 per cent of total advances in
2015-16, up from five per cent the year before6.
 At the aggregate level, PSBs reported a loss of Rs 17,672 crore in 2015-16,
down from a profit of Rs 36,350 crore in 2014-157.
 Government has budgeted to provide Rs 25,000 crore in 2016-17 for bank
recapitalisation, it ended up giving Rs 19,950 crore in 2014-158.
Addressing NPAs
 In the event of default by the company, all the guarantors are liable to repay
the loan with interest as the liability of the guarantor is co-extensive with the
borrower.
 The Government has advised banks to take action against guarantors in
event of default by borrower under relevant sections of SARFAESI Act,
Indian Contract Act & Recovery of Debts due to Banks and Financial
Institutions (RDDB&FI) Act.
 The general principle of any restructuring is that the shareholders bear the
first loss rather than the debt holders and that restructuring package
stipulates the timeline during which certain prescribed viability milestones
would be achieved.
 Reserve Bank has issued guidelines on ‘Strategic Debt Restructuring (SDR)
Scheme’, according to which inter alia at the time of restructuring, lenders

4
"Bank NPAs may hit 8.5% by March", The Hindu, 28 June 2016, available at
http://www.thehindu.com/business/Economy/financial-stability-report-released/article8784187.ece
5
ibid.
6
"Statsguru: Tackling the NPA Problem in Public Sector Banks" , Business Standard, 25 July 2016, available at
http://www.business-standard.com/article/specials/statsguru-tackling-the-npa-problem-in-public-sector-banks-
116072400718_1.html
7
ibid.
8
ibid.
 4

must incorporate an enabling clause to convert their loans into equity if the
borrower fails to achieve the viability milestones/critical conditions.
 Once decided to pursue SDR, lenders must approve the conversion package
within 90 days and actual conversion shall be within another 90 days.
 Under SDR, lenders are also exempt from RBI’s regulatory
ceilings/restrictions on Capital Market Exposures, investment in Para-
Banking activities and intra-group exposure.
 The objective of the Corporate Debt Restructuring (CDR) framework is to
ensure timely and transparent mechanism for restructuring the corporate
debts of viable entities facing problems, outside the purview of Board of
Industrial Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT)
and other legal proceedings, for the benefit of all concerned.
 The CDR Mechanism is an organizational framework institutionalized for
speedy disposal of restructuring proposals of large borrowers availing
finance from more than one banks/FIs. CDR System has a three tier
structure which includes the CDR Standing Forum, the CDR Empowered
Group and CDR Cell and are at present housed in Industrial Development
Bank of India Ltd.
 Various legal mechanisms for early recovery of loans include the
SARFAESI Act, 2002; RDDB&FI Act, 1993 and the Lok Adalats. The
SARFAESI Act, 2002, inter alia provides for enforcement of security
interest for realisation of dues without the intervention of courts or tribunals.
RDDB&FI Act, 1993 provides for setting up of DRTs and Debt Recovery
Appellate Tribunals (DRATs) for expeditious and exclusive disposal of suit
filed by banks/FIs for recovery of their dues in NPA accounts with
outstanding amount of Rs.10 lacs and above. Lok Adalat mechanism offers
expeditious, in-expensive and mutually acceptable way of settlement of
disputes. Section 89 of the Civil Procedure Code provides resolution of
disputes through Alternative Dispute Resolution (ADR) methods such as
Arbitration, Conciliation, Lok Adalats and mediation.
 5

Conclusion
 The sharp increase in stressed assets has adversely impacted the profitability
of the banks; with annual return on assets coming down from 1.09 per cent
during 2010-11 to 0.78 per cent during 2014-159.
 There is an urgent need for banks to reduce their stressed assets and clean up
their balance sheets lest they become a drag on the economy.
 It has been observed that having a regulatory limit on the number of
members in a consortium or multiple banking arrangements so that every
member has at least 10 per cent of the exposure, will lead to serious
independent credit appraisal and credit monitoring10.
 Managing asset quality is always very important and becomes a prominent
objective especially during a period of economic downturn.
 Recognizing the importance of effective asset quality management, Reserve
Bank has issued various guidelines to banks, from time to time, on various
aspects of asset quality management.
 RBI has been urging Banks to ensure that while granting loans and
advances, realistic repayment schedules are fixed on the basis of cash flows
with borrowers.
 It is anticipated that Government's reforms in the core sectors such as
infrastructure, power, telecom and mining would help reduce the stress in
the banking sector.
References
 "Asset Quality of banks: Evidence from India"; by Arpita Ghosh, Indian
Institute of Banking and Finance; available at
http://www.iibf.org.in/documents/reseach-
report/Asset_quality_AG_IIBF_Submission_review_comments_incorporate
d_sent.pdf
 http://economictimes.indiatimes.com/industry/banking/finance/banking/stag
e-set-for-banks-to-take-effective-action-on-npas-arun-
jaitley/articleshow/54979182.cms

9
"Asset Reconstruction and NPA Management in India", Shri R. Gandhi, Deputy Governor, RBI, available at
https://rbi.org.in/scripts/FS_Speeches.aspx?Id=974&fn=2
10
Ibid.
 6

 http://www.business-standard.com/article/specials/statsguru-tackling-the-
npa-problem-in-public-sector-banks-116072400718_1.html
 http://www.ey.com/in/en/services/assurance/fraud-investigation---dispute-
services/ey-unmasking-indias-npa-issues-can-the-banking-sector-overcome-
this-phase#
 http://www.thehindu.com/business/Economy/financial-stability-report-
released/article8784187.ece
 https://rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7357#gen
 https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=8756
 Material received from Department of Financial Services, Ministry of
Finance, Govt. of India.
 https://rbi.org.in/scripts/FS_Speeches.aspx?Id=974&fn=2
 ANNEXURES

Source: RBI
Gross NPAs, Gross NPA to Gross Advances and Total Gross Advances of PSBs/
SCBs as on June 2016 (Prov.):
(In ` crore)
Bank Gross NPA to Gross
Gross NPA s Total Gross Advances
Group Advances (%)
Mar Mar Mar
June Mar Mar Mar June Mar Mar Mar June
2014 2015 2016
2016 2014 2015 2016 2016 2014 2015 2016 2016
(prov (prov (prov.
.) .) )
216739 267065 50206 56191 4.72 5.43 9.83 11.28 459045 491722 5104915 498114
PSBs
8 6 8 8 4

Private 22744 31576 48380 51399 1.88 2.20 2.70 2.80 121173 143733 1791681 183242
Banks 1 8 7
SCBs 251060 309408 56625 62749 4.11 4.62 7.79 8.72 610177 669252 7274787 719889
9 7 5 2 7
Source: RBI: OSMOS Database (Based on latest updation)

Corporate Debt Restructuring Cell

(Progress report as on June 30, 2016)
(`` crore)
Period Total References Cases Rejected Cases under Total Cases Approved
Received before consideration of
by CDR Cell Admission or CDR EG
Approval
(1) (2) (3) (4)
No. of Aggregate No. of Aggregate No. of Aggregate No. of Aggregate
cases Debt cases Debt cases Debt cases Debt
Mar-10 256 115990 32 7050 9 4641 215 104299

Mar-11 305 138604 42 9667 21 18023 242 110914

Mar-12 392 206493 59 20817 41 35161 292 150515

Mar-13 521 297990 87 36894 33 32083 401 229013

 8

Mar-14 622 429989 111 57540 35 42005 476 330444

Sep-14 638 446156 121 65581 12 12968 505 367607

Dec-14 647 452940 122 65925 5 6130 520 380885

Mar-15 655 474002 125 70998 - - 530 403004

Jun-15 655 474002 125 70998 - - 530 403004

Sep-15 655 474002 125 70998 - - 530 403004

Dec-15 655 474002 125 70998 - - 530 403004

Mar-16 655 474002 125 70998 - - 530 403004

Jun-16 655 474002 125 70998 - - 530 403004

(Source: CDR Cell)

NPAs of PSBs recovered through various channels

(` ` crore)
2013-14 2014-15 2015-16
Channels No of Amoun Amount No of Amoun Amount No of Amoun Amount
of cases t recovered cases t recovered cases t recovered
Recovery referred involve * referred involve * referred involve *
d d d

Lok 11,67,05 25,96 42,44,80

Adalat 9 17016 1414 351 27020 931 0 69017 3134
DRTs 24,813 45350 4460 18397 53203 3484 19,133 57439 5590
SARFAE #1,81,21
SI 6 86783 22178 1,66,804 146306 23434 1,59,147 65008 11033
13,73,08 27,81,55 44,23,08
Total 8 149149 28052 2 226529 27849 0 191464 19757
Source: RBI

NPAs of SCBs recovered through various channels

(` crore)
2013-14 2014-15 2015-16
Channels No of Amount Amount No of Amount Amou No of Amount Amount
of cases involved recovere cases involved nt cases involved recover
Recovery referred d* referred recove referred ed*
red*
Lok Adalat 16,36,957 23205 1440 29,58,313 30979 984 44,56,634 72033 3224
DRTs 28,258 55318 5261 22,004 60371 4208 24,537 69341 6365
SARFAESI #1,94,707 95251 25329 1,75,355 156778 25600 1,73,582 80100 13179
Total 18,59,922 173774 32030 31,55,672 248128 30792 46,54,753 221474 22768
Source: RBI

* Refers to amount recovered during the given year, which could be with reference to cases
referred during the given year as well as during the earlier years.
# No. of notices issued.
 9

DRTs- Debt Recovery Tribunals