25-02-2013, 02:36 PM
A PROJECT REPORT ON NPA RECOVERY MANAGEMENT
RECOVERY MANAGEMENT.docx (Size: 106.29 KB / Downloads: 37)
Executive summary
With the growing competition in the market and globalization coming into role it has become essential for any Bank to keep in touch with the recent technology. My subject of project mainly targets the NPA Recovery in Dena Bank.
Thus, for a bank to survive in a market it is very essential to stick to rules and regulations of RBI, as it is the governing body of every nationalized bank. In present economic scenario, we here many things of banks getting close due to high percentage of NPA. So the question comes in mind, that, what is NPA?
NPA is an asset, which ceases to generate income to the bank. It is basically a loan for which the interest or installment or both remains unpaid for the period of 180 days. Thus to keep track of increasing amount of NPAs, banks have setup recovery Departments. Dena Bank where I completed my project is also one of them. Recovery is most important department of Banks. In many financial services, recovery forms the heart of its operation without which the organization can’t survive. If there is no satisfactory recovery the organization will become sick. Dena Bank has a very effective recovery department. It has a team of experts controlling the recovery of loan, who are equipped with very good system. This helps in one side the normal recovery and on the other side also in timely identification of default cases. The department acts in more proactive manner than reactive. With today’s world getting close and considering a world a global village, Dena Bank has been successful in expanding its wings by opening new branches and updating themselves with the latest technologies.
Overdue:-
Any amount due to bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by bank.
Income Recognition
The policy of income recognition has to be objective and based on the record of recovery. According to the international terms income from Non Performing Assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not change and take to income account interest on any NPA.
However interest on advances against term deposits, NSCs, IVPs, KVPs, and life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
If the Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realized.
RBI guidelines on income recognition (Interest income on NPAs)
Banks recognized income including interest income on advances on accrual basis. That is income is accounted for as and when it is earned.
The prime-facie condition for accrual of income is that it should not be
unreasonable to expect its ultimate collection. However, NPAs involves
significant uncertainty with respect to its ultimate collection.
Considering this fact, in accordance with the guidelines for income recognition issued by the Reserve Bank of India (RBI), banks should not recognize interest income on such NPAs until it is actually realized.
Recovery from NPAs
•whether banks go in for setting up of recovery branches or not, what is more important is to strengthen the recovery machinery. In this regard, few aspects of the problem need to be worked & should be considered on priority basis. Finally, branches, which require close monitoring, also need to be prioritized.
•Diagnostic study has to be considered by each bank in respect of cases lost in the court of law during the recent past. The study should highlight the nature of deficiencies found by the court authorities in evidences, claims and procedures. Conclusion of the study will help in strengthening the recovery system.
•Involvement of the lawyers in suit filed cases should be given utmost importance. Unfortunately, they seem to be too busy and, therefore bank cases are not monitored in time. In this regard, the present system of empanelment of lawyers needs fresh look. Similarly, some incentive schemes should be worked out so that the efficient lawyers are rewarded adequately.
•Enforcement of securities has been one of the problem areas. This requires certain expertise and contacts with the local people, police department etc. to supplement banker’s efforts, services of outside professionals may be employed. But it should be ensured that such professionals do not take unlawful measures in taking possession of securities. In view of rising number of decreed cases, certain schemes have to be worked out to involve professionals in the enforcement of securities.
•It is suggested that banks may jointly promote a subsidiary to act an asset recovery agency. It can purchase decreed debts at certain discount. Thereafter, it should be able to recover the dues fully from borrowers by creating professional expertise, and infrastructure, developing contacts, etc. finally it should work as a profit making venture. This will substitute the proposed idea of setting up of Asset Reconstruction Fund.
Need for Recovery
In the wake of financial sector reforms, generation of profit is the main concern of banks. In this respect, the Narsimha committee is of the opinion that the viability of banks should be the sole criterion for survival and growth in the competitive environment. For this purpose each bank has to maintain low risk bearing advances. Hence, a paramount task before banks is to bring down Non Performing Advances. This can as well be done by writing off NPAs which is not feasible due to low profitability of banks. So, they have to concentrate basically on recovery. In the last year, significant changes have taken place in system and arrangements relating to recovery of NPAs. Consequently, the percentage of NPAs to total advances in Dena Bank has declined from 5.53% to 3.50 % (i.e. the ratio of gross NPAs to gross advances) & Net NPAs to Net advances has been reduced from 2.03 % in FY 2009-10 to 1.21 % in FY 2010-11. Further, analysis of achievements of the target set under Mouse shows that there are four areas in which banks made considerable progress, and reduction in NPAs in one of them. But the banks have yet to go a long way to go to make full recovery from NPAs. Every bank has its own policy for recovery. Accordingly, Dena Bank also has its own policy for Recovery.
Problem Faced in Recovery-
Whenever a bank sanction a loan to a borrower, it applies interest at a specific percentage on the loan amount. Thus the borrower is expected to repay the whole amount i.e. the principal amount + interest amount to the bank. The bank takes certain securities against the loan sanctioned to the borrower. These are in the form of fixed assets or current assets. The usual observation of the bank is that the fixed asset losses their value over a period of time, and are also difficult to sell, thus they probably try for the current assets, as they are liquid in nature and can easily fetch the bank their dues.
Above all the bank practices and above mentioned strategies to recover the dues from the borrower. Usually for the account turning into NPA has two reasons, first is of willful default of the borrower & second if the bank do not properly scrutinize the loan account. In most of the cases it is borrowers fault as they are unable to repay the loans, thus to recover dues from them the banks adopts the following policies.
Once all the efforts to recover the bank dues are exhausted, the bank is compiled to file the suit in the court / tribunal. In fact the situation indicates the borrowers non cooperation and therefore, requires vigorous follow up.
After filing the suit, constant follow up with the court or tribunal through the advocate is done.
History of Banking in India
The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country.
The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold.
After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services.