TOOLS AND TECHNIQUES OF NPA MANAGEMENT

Author

Name : Pruthvirajsinh N Rathod

Designation : Assistant Professor

Organization : Param Institute of Management & Research

Adi Sankracharya Sikshan Vikas Sankul

Lakhabavad Road – Okha Jamnagar State Highway

Jamnagar 361006– Gujarat - India

E-mail address : pruthvi_1243@yahoo.com

Cell No : +91-9662051243

Subject : Commerce
 ABSTRACT :

The major challenges confronting any bank especially in India are the Non-Performing Assets
and delinquencies. They tend to degrade a bank’s credit rating and lower its credibility. NPAs
are nothing but assets and loans that have become unrecoverable and costs banks a loss of
plenty of resources – neither are banks able to earn interest on the locked amount in loans nor
are they able to recover the base loan amount from the defaulters. Therefore, banks and credit
societies must take serious measures to manage and recover NPAs. Banks can deal with the
problems of managing and recovering NPAs if they invest into right solutions. The NPA
recovery tools are responsible for collecting data from across the sources and undergoing a
predictive analysis for supporting lending decisions based on factors like repayment capacity,
willingness to pay back etc. They also integrate with organisations like High Mark and CIBIL
to learn about the borrower’s financial conditions and behaviour. This paper makes an attempt
to study the term NPA and classification of NPA. The main objective of study is to identify
and give description of tools and techniques for recovery of NPAs. There is great need to
establish an effective recovery system that helps banking sector to strengthen their
performance.

Key Words : Non- Performing Assets, Banking Sector, Economy , Performance.

 INTRODUCTION :

Banking sector plays an important role in economic development of a country through

mobilization of savings and investment of funds to the various sectors of the country.
Financing is the very important for agricultural, industrial and commercial activities of the
country. It is a fact that a fragile banking system can, not only hamper the development of a
particular economy but also it can deepen the real economic crisis and impose heavy social
costs. So the health of the banking system should be one of the primary concerns of the
government of each country. In modern economy, bankers are to be considered not merely as
“dealers in money” but more realistically the “leaders in development”. Similarly, banks are
not just the storehouses of the country's wealth but are the reservoirs of resources necessary for
economic development.

The word NPA is not something new to the bankers. Non-performing assets are one of
the major concerns for banks in India. The magnitude of NPA is comparatively higher in public
sectors banks. NPAs reflect the performance of banks. A high level of NPAs suggests high
probability of a large number of credit defaults that affect the profitability and net-worth of
 banks and also erodes the value of the asset. So to improve the efficiency and profitability of
banks the NPA need to be reduced and controlled.

In general, the Non-Performing assets are found more comparatively in the public
sector banks in comparison to private bank because of liberal rules for the debt recovery. Now
a days the RBI has issued strick guidelines to reduce NPA,s in the banks and due to that the
proportion of NPA,s has reduced up to the extent but not all together. The sound financial
position of a bank depends upon the recovery of loans. The failure of the banking sector may
have an adverse impact on other sectors.

Non-performing Assets are threatening the stability and demolishing banks

profitability through a loss of interest income, write-off of the principal loan amount itself.

 OBJECTIVES OF THE PAPER:

1. To present the Basic understanding of Non – Performing Assets.
2. To reveal the effect of NPA on Banks performance.
3. To reveals the tools and techniques of NPA management
 RESEARCH METHODOLOGY:

The present study is concerned with NPA of Indian Banks in general. Secondary data is
collected from the Annual Report published by various Commercial Banks , RBI Bulletin,
Research Articles published in national and international journals, References books, various
libraries, Government and NGOs Websites, etc.

 WHAT IS NON-PERFORMING ASSETS ?

The word NPA is not something new to the bankers. It is regular but disguised loan
asset. As everyone knows, a portion of assets may become NPA. An asset becomes non-
performing when it ceases to generate income for the bank.

All loan advances of banks are assets. The loan or lease, which is not meeting its stated
interest or principal repayment of the secured debt to the designated lender, is called as a Non-
Performing Asset.

The assets of the banks which don’t perform (that is – don’t bring any return) are called
Non Performing Assets (NPA) or bad loans. Bank’s assets are the loans and advances given to
customers. If customers don’t pay either interest or part of principal or both, the loan turns into
bad loan.
  CLASSIFICATION OF NON-PERFORMING ASSETS
1. Standard: Bank receives the principal and interest repayment, systematically from the
borrower. Another important aspect is that the arrears of the principal as well as the interest
does not surpass more than 90 days on the closing of the FY (Financial Year). An assets
which is generating regular income to the bank called standard assets.
2. Sub-Standard: An asset which is overdue for a period of more than 90 days but less than
12 months are called Sub-Standard
3. Doubtful: A doubtful asset is one which has remained as a NPA for a period exceeding 12
months. A loan classified as doubtful has all the weaknesses inherent in assets that were
classified as sub-standard, with the added characteristic that the weaknesses make collection
or liquidation in full, on the basis of currently-known facts, conditions and values – highly
questionable and improbable.
4. Loss: Assets which are doubtful and considered as non-recoverable by bank, internal or
external auditor or central bank inspectors called loss.

 REVIEW OF LITERATURE
1. In The Research Paper Titled: Management Of Non-Performing Assets A Study Of
Indian Public Sector Banks By Dr. Namita Rajput Anu Priya Arora Baljeet Kaur The
present paper was undertaken to study how banks are managing their growing NPAs. The paper
concluded that the decline of non-performing asset is essential to improve profitability of banks
and fulfil with the capital adequacy norms as per the BASEL accord. For the recovery of NPAs
a broad framework has evolved for the management o0f NPA under which several options are
provided for debt recovery and restructuring. Most banks are following early warning systems
(EWS) for recognition of probable non-performing assets (NPAs).

2. In The Research Paper Titled: Non performing Assets And Its Impact On Indian Public
Sector Banks By Dr S.M.Tariq Zafar, Dr Adeel Maqbool, S.M.Khalid
Managing bad loans and controlling them at lowest level has become paramount important for
the banking industry in recent years. Serious attention required to monitoring of the loans
sanctioned by the banks as most bad loans have been due to poor credit monitoring than to poor
credit approval. To reduce the level of NPAs in the loan portfolio, comprehensive preventive
monitoring mechanism to explore and maintain sound and healthy loan portfolio has Though
one time settlement scheme, DRTs, CIBIL, and SARFAESI Act 2002 has proven effective tool
 in solving the problem of NPAs, but lot more have to be done in this regard to be developed
and adopted.

3. In The Research Paper Titled: NPA Management in Banks : An Indian Perspective by

Anuja Barge
The paper deals with understanding the concept of NPAs, its magnitude and major causes for
an account becoming non-performing and also strategies for reducing NPAs. Management of
NPA is need of the hour. To be effective, NPA management has to be an exercise pervading
the entire bank from the Board down the last level. Time is of prime essence in NPA
management. Finally the paper reveals the some of the tools like DRT,ARCIL, SARFAESI
Act etc.

4. In the research paper titled: Management of Non-Performing Assets in Andhra Bank

by K. Rama Prasad B. Ramachandra Reddy
A mounting level of NPA’s in the banking sector can severely affect the economy in many
ways. If NPA’s are not properly managed, it can cause financial and economic degradation
which in turn signals and adverse investment climate. The problem of NPAs has been a major
issue for the banking industry. The RBI which is the apex body for controlling level of non-
performing assets have been giving guidelines and getting norms for the banks in order to
control the incidents of faults. At paper suggest some of solution for recovery of NPA like,
There must be an effective and regular follow-up with the Customers, close monitoring of the
operations of the accounts Frequent discussions with the staff in the branch and taking their
suggestions for recovery of NPAs, of borrowed units., Another way to manage NPAs by banks
is compromise settlement schemes or One Time Settlement Scheme (OTS).

5. In the research paper titled : Pro-cyclical Management of Banks’ Non-Performing Loans

by the Indian Public Sector Banks by B M Misra and Sarat Dhal
This study provides an analysis of pro-cyclicality of bank indicators with a focus on the
nonperforming loans (NPAs) of India‟s public sector banks. the study found that the terms of
credit variables had significant effect on the banks‟ non-performing loans in the presence of
bank size and macroeconomic shocks. The business cycle impact on non-performing loans
could be managed with appropriate terms of lending in terms of maturity, loan interest rate and
capital requirement. There is great need to recover the lending otherwise its become a real
burden for banks.
 EFFECTS OF NPA :
1. NPA simply means blocking money in terms of bad loan, Because of the money getting
blocked the profitability of bank decreases not that but NPA lead to opportunity cost also as
that much of profit invested in some return earning project/asset. So, NPA doesn’t affect
current profit but also future stream of profit.
2. Money is getting blocked, decreased profit lead to lack of enough cash and which lead to
borrowing money for shortest period of time which leads to additional cost to the company.
NPA created problems of liquidity for banks.
3. Time and efforts of management in handling and managing NPA would have diverted to some
fruitful activities, which would have given good returns. Banks have to bear some additional
cost recover the NPAs.
4. 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.
5. shareholders do not receive a market return on their capital and in the worst case, if the banks
fails, shareholders lose their assets. In modern times this may affect a broad pool of
shareholders.
6. Depositors do not receive a market return on saving. In the worst case if the bank fails,
depositors lose their assets or uninsured balance.
7. Non-performing asset may spill over the banking system and contract the money stock, which
may lead to economic contraction. This spillover effect can channelize through liquidity or
bank insolvency.

 TOOLS AND TECHNIQUES FOR NPA RECOVERY

For recovery of NPA there are different tools are available. The important purpose of these
tools are to recover the loan amount from borrower. These tools can be use according to Loan
amount.
1. LOK ADALATS 2001: Lok Adalats is a mechanism to settle matters relating to recovery of
dues, out of court. These are convened by Debt Recovery Tribunals / Debt Recovery Appellate
Tribunals. Lok Adalats have no judicial powers. It is a mutual forum for the bank and the
borrower to meet and arrive at a mutual settlement. Once the settlement is signed by both the
parties, the same is placed before the court. The court would then pass a suitable decrees /
orders as per the terms of settlement. Such decrees cannot be challenged in the next higher
 courts. At present, accounts in doubtful and loss category with out standing above Rs. 5.00 lacs
can be referred to Lok adalat.. Lok Adalats Proved to be quite effective for speedy justice and
recovery of small loans.

2. DEBT RECOVERY TRIBUNALS (DRT 1993) : Under the Recovery of Debts Due to Banks
and Financial Institutions (RDDBFI) Act, 1993 banks approach the Debts Recovery Tribunal
(DRT) whereas, under Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interests (SARFAESI) Act, 2002 borrowers, guarantors, and other any other person
aggrieved by any action of the bank can approach the Debts Recovery Tribunal (DRT). Debts
Recovery Tribunal are located across the country. Some cities have more than one Debts
Recovery Tribunals. New Delhi, Chennai, Kolkata and Mumbai have three Debts Recovery
Tribunals. Ahmedabad and Chandigarh have two Debts Recovery Tribunal (DRT) each. One
Debts Recovery Tribunal has been constituted at Allahabad, Aurangabad, Bangalore,
Coimbatore, Cuttack, Earnakulam, Guwahati, Hyderabad, Jabalpur, Jaipur, Lucknow,
Madurai,Nagpur, Patna, Pune, Vishakapatnam and Ranchi.

3. SARFAESI ACT, 2002 : The full form of SARFAESI Act as we know is Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks
utilize this act as an effective tool for bad loans (NPA) recovery. It is possible where non-
performing assets are backed by securities charged to the Bank by way of hypothecation or
mortgage or assignment. SARFAESI is effective only for secured loans where bank can enforce
the underlying security eg hypothecation, pledge and mortgages.

4. ASSET RECOVERY CONSTRUCTION INDUSTRY LIMITED(ARCIL) : The word

asset reconstruction company is a typical used in India. Globally the equivalent phrase used
is " asset management companies". The word "asset reconstruction" in India were used in
Narsimham I report where it was envisaged for the setting up of a central Asset Reconstruction
Fund with money contributed by the Central Government, which was to be used by banks to
shore up their balance sheets to clean up their non-performing loans. ARC has been set up to
provide a focused approach to Non-Performing Loans resolution issue by:-

(a) isolating Non Performing Loans (NPLs) from the Financial System (FS),

(b) freeing the financial system to focus on their core activities and

(c) Facilitating development of market for distressed assets.

5. CORPORATE DEBT RESTRUCTURING (CDR 2005) : Corporate debt restructuring is
the reorganization of a company's outstanding obligations, often achieved by reducing the
burden of the debts on the company by decreasing the rates paid and increasing the time the
company has to pay the obligation back.

6. CREDIT INFORMATION BUREAU – 2000 : A good information system is required to

prevent loan falling into bad hands and therefore prevention of NPAs. It helps banks by
maintaining and sharing data of individual defaulters and willful defaulters.
7. JOINT LENDERS FORUM – 2014 : It was created by the inclusion of all PSBs whose loans
have become stressed. It is present so as to avoid loan to same individual or company from
different banks. It is formulated to prevent the instances where one person takes a loan from
one bank to give a loan of the other bank.
8. BAD BANKS – 2017 : Economic survey 16-17, also talks about the formation of a bad bank
which will take all the stressed loans and it will tackle it according to flexible rules and
mechanism. It will ease the balance sheet of PSBs giving them the space to fund new projects
and continue the funding of development projects.

CONCLUSION :

The NPAs have made a major issue for the banks in India. It is quite recently issue for the
banks as well as for the economy as well. The cash locked up NPAs directly affects functioning
and profitability of the bank. The government is set to help banks tackle the mounting bad
loans, which is denting profits of lenders, slowing credit flow to industry and hurting the
economy. The Banking Regulation Act may be amended to give RBI more powers to monitor
bank accounts of big defaulters. The amendment in the banking law will enable setting up of a
committee to oversee companies that have been the biggest defaulters of loans. RBI wants
stricter rules for joint lenders’ forum (JLF) and oversight committee (OC) to curb NPAs. The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
or Sarfaesi Act of 2002 was amended in 2016 as it took banks years to recover the assets..The
government and RBI may also come up with a one-time settlement scheme for top defaulters
before initiating stringent steps against them. Still India has to go so far to improve the current
NPA conditions and strengthen the banking sectors and only way to do so is quick and speedy
recovery of Bad loans from all corporate gaints.
 REFERENCES :

1. Anuja Barge , March 2012 Npa Management In Banks : An Indian Perspective , Abhinav,
Volume-1, Www.Ibmrd.Org
2. K. Rama Prasad, B. Ramachandra Reddy, November 2012,, Management Of Non-
Performing Assets In Andhra Bank, Indian Journal Of Applied Research, Volume : 2 | Issue :
2|
3. Dr. Namita Rajput, Anu Priya Arora,Baljeet Kaur, April 2012 Management Of Non-
Performing Assets A Study Of Indian Public Sector Banks, Volume 2, Issue 4
4. Urmish S. Javeri, May – 2010, Management Of Non Performing Assets (Npa) Of Selected
Nationalised Banks In Gujarat , Sardar Patel University
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