Management Research Project On NPA

MRP FINAL PROJECT REPORT
ON
COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND

PUBLIC SECTOR BANKS
BY
ANINDYA SANKAR KUNDU
(08BS0000328)
Management Research Project

(Batch of 2010)
1
PROJECT TITLE
COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE

AND PUBLIC SECTOR BANKS.
A report submitted in partial

fulfillment of the requirements of
MBA program
FACULTY GUIDE
Prof. Rajasree Nandy
ICFAI Business School
KOCHI
SUBMITTED BY
2
ANINDYA SANKAR KUNDU
(08BS0000328)
Declaration
I hereby declare that this MRP report on “COMPARATIVE ANALYSIS ON NON
PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS.” has been
written and prepared by me during the academic year 2009-2010.This project
was done under the able guidance and supervision of Prof. Rajasree
Nandi, Finance Faculty, IBS Kochi in partial fulfillment of the requirement
for the Master Of Business Administration Degree course of the ICFAI
Business School.
I also declare that this project is the result of my own effort and has not been
submitted to any other institution for the award of any Degree or Diploma.
Place: Kochi
Anindya Sankar Kundu
08bs0000328
3
Acknowledgements
If words are considered to be signs of gratitude then let these words convey the
very same.
I thank Prof. Rajasree Nandi, ICFAI Business School, Kochi, who has
sincerely supported me with the valuable insights into the completion of this
project.
I am grateful to all faculty members of ICFAI Business School, Kochi and my
friends who have helped me in the successful completion of this Management
Research Project.
4
TABLE OF CONTENTS
Declaration
…………………………………………………………………………
………………………………… 3
Acknowledgments
………………………………………………………………………
……………………….
4
Abstract
……………………………………………………………………………
……………………………………. 7
1. Project Details
1.1 Objective of the project
…………………………………………………………………… 9
1.2 Research
Methodology……………………………………………………
…………………. 9
1.3 Scope of the project
……………………………………………………………………
…… 9
1.4 Sampling Methods
……………………………………………………………………
……… 10
1.5 Limitations of the
project………………………………………………………………
… 10
5
2. Introduction
2.1 Definition of NPA
………………………………………………………………………
……... 12 2.2 NPAs: An issue for banks and FI’s in
India ……………………………… 13
2.3 Indian economy and NPAs
……………………………………………………………. 13
2.4 Global developments and NPAs
………………………………………………….. 14
2.5 Factors for rise in
NPAs………………………………………………………………….
15
2.6 Problems due to NPA
…………………………………………………………………….
19
2.7 Types of NPA
………………………………………………………………………
……………. 20
3. Income Recognition
3.1 Income Recognition
Policy ................................................................. 22
3.2 Reversal of
income ...........................................................................
.... 22
3.3 Leased
Assets ............................................................................
............. 23
3.4 Interest
Application .....................................................................
........ 23
3.5 Reporting of
NPAs ...............................................................................
24
6
4. Assets Classifications
4.1 Sub-standard
Assets .....................................................................
........ 26
4.2 Doubtful
Assets .....................................................................
................ 30
4.3 Loss
Assets ............................................................................
..................
31
5. Impact of NPA & Preventive Measurement for

NPA
5.1 Impact of NPA
........................................................................................
33
5.2 Early
symptoms ......................................................................
...............
34
5.3 Preventive Measurement for
NPA .................................................. 35
6. Tools for recovery of NPA

6.1 Willful Default
…………………………………………………………………
………………… 39
6.2 Inability to Pay
…………………………………………………………………
………………. 40
6.3 Restructuring / Rescheduling of Loans
…………………………………….. 41
7
6.4 Treatment of Restructured Standard Accounts
…………………….. 41
6.5 Treatment of restructured sub-standard
accounts ……………….
42
6.6 Up gradation of restructured accounts
……………………………………. 42
6.7 General
…………………………………………………………………
…………………………….. 43
6.8 Income recognition
…………………………………………………………………
………. 43
6.9 Funded Interest
…………………………………………………………………
…………….. 43
6.9.1 Conversion into equity, debentures or any
other instrument 44
6.9.2 Provisioning
…………………………………………………………………
………………… 44
7. Special Cases
7.1.1 Accounts with temporary deficiencies
……………………………………… 46
7.1.2 Accounts regularized near about the balance
sheet date ….. 46
7.1.3 Asset Classification to be borrower-wise and
not facility-wise 7.1.4 Accounts where there is
erosion in the value of security …
47
7.1.5 Advances to PACS/FSS ceded to Commercial
Banks ………….. 47
7.1.6 Advances against Term Deposits, NSCs,
KVP/IVP ………………. 48
7.1.7 Loans with moratorium for payment of
interest …………………. 48
7.1.8 Agricultural advances
…………………………………………………………………
… 48
8
7.1.9 Government guaranteed advances
…………………………………………. 49
7.2.1 Take-out Finance
…………………………………………………………………
…………
49
7.2.2 Post-shipment Supplier's Credit
……………………………………………… 50
7.2.3 Export Project Finance
………………………………………………………………..
50
7.2.4 Advances under rehabilitation approved by
BIFR/ TLI …….. 50
7.2.5 Role of ARCIL
…………………………………………………………………
……………..
51
8. Data Analysis and interpretation

………………………………………………………..
52
9. Annexure
………………………………………………………………………
………………………………..
64
10. Bibliography
………………………………………………………………………
…………………………
65
9
ABSTRACT
The accumulation of huge non-performing assets in banks has

assumed great importance. The depth of the problem of bad
debts was first realized only in early 1990s. The magnitude of
NPAs in banks and financial institutions is over Rs.1, 50,000
crore.
While gross NPA reflects the quality of the

loans made by banks, net NPA shows the actual burden of
banks. Now it is increasingly evident that the major defaulters
are the big borrowers coming from the non-priority sector. The
banks and financial institutions have to take the initiative to
reduce NPAs in a time bound strategic approach.
Public sector banks figure prominently in the

debate not only because they dominate the banking industries,
but also since they have much larger NPAs compared with the
private sector banks. This raises a concern in the industry and
academia because it is generally felt that NPAs reduce the
profitability of a bank, weaken its financial health and erode its
solvency.
For the recovery of NPAs a broad framework has

evolved for the management of NPAs under which several
options are provided for debt recovery and restructuring.
Banks and FIs have the freedom to design and implement their
own policies for recovery and write-off incorporating
compromise and negotiated settlements.
10
CHAPTER-1
Project Details
11
1.1 OBJECTIVES OF THE STUDY
The basic idea behind undertaking the Grand Project on NPA
was to:
 To evaluate NPAs (Gross and Net) in different banks.

 To study the past trends of NPA.
 To calculate the weighted of NPA in risk management in
Banking
 To analyze financial performance of banks at different
level of NPA
1.2 RESEARCH METHODOLOGY
The research methodology adopted for carrying out the study

were
 In this project Descriptive research methodologies were

use.
 At the first stage theoretical study is attempted.
 At the second stage Historical study is attempted.
 At the Third stage Comparative study of NPA is
undertaken.
1.3 Scope of the Study

 Concept of Non-Performing Asset
 Guidelines
 Impact of NPAs
 Reasons for NPAs
 Preventive Measures
12
 Tools to manage NPAs
1.4 Sampling Methods

To prepare this Project we took five banks from public sector
as well as five banks from private sector.
1.5 Limitations of the study
 It was critical for me to gather the financial data of the

every bank of the Public Sector Banks so the better
evaluations of the performance of the banks are not
possible.
 Since my study is based on the secondary data, the

practical operations as related to the NPAs are adopted by
the banks are not learned.
 Since the Indian banking sector is so wide so it was not

possible for me to cover all the banks of the Indian
banking sector.
13
CHAPTER-2
INTRODUCTIO
N
14
2. Introduction
NPA. The three letters Strike terror in banking sector and
business circle today. NPA is short form of “Non Performing
Asset”. The dreaded NPA rule says simply this: when interest
or other due to a bank remains unpaid for more than 90 days,
the entire bank loan automatically turns a non performing
asset. The recovery of loan has always been problem for banks
and financial institution. To come out of these first we need to
think is it possible to avoid NPA, no cannot be then left is to
look after the factor responsible for it and managing those
factors.
2.1 Definitions:
An asset, including a leased asset, becomes non-
performing when it ceases to generate income for the bank.
A ‘non-performing asset’ (NPA) was defined as a credit facility
in respect of which the interest and/ or instalment of principal
has remained ‘past due’ for a specified period of time.
With a view to moving towards international best practices
and to ensure greater transparency, it has been decided to
adopt the ‘90 days’ overdue’ norm for identification of NPAs,
from the year ending March 31, 2004. Accordingly, with effect
from March 31, 2004, a non-performing asset (NPA) shall be 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’ for a period of more

than 90 days, in respect of an Overdraft/Cash Credit
(OD/CC),
15
 The bill remains overdue for a period of more than 90
days in the case of bills purchased and discounted,
 Interest and/or instalment of principal remains overdue

for two harvest seasons but for a period not exceeding two
half years in the case of an advance granted for agricultural
purposes.
As a facilitating measure for smooth transition to 90 days

norm, banks have been advised to move over to charging of
interest at monthly rests, by April 1, 2002. However, the date
of classification of an advance as NPA should not be changed
on account of charging of interest at monthly rests. Banks
should, therefore, continue to classify an account as NPA only
if the interest charged during any quarter is not serviced fully
within 180 days from the end of the quarter with effect from
April 1, 2002 and 90 days from the end of the quarter with
effect from March 31, 2004.
2.2 NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA
To start with, performance in terms of profitability is a

benchmark for any business enterprise including the banking
industry. However, increasing NPAs have a direct impact on
banks profitability as legally banks are not allowed to book
income on such accounts and at the sometime are forced to
make provision on such assets as per the Reserve Bank of
India (RBI) guidelines. Also, with increasing deposits made by
the public in the banking system, the banking industry cannot
afford defaults by borrower s since NPAs affects the repayment
capacity of banks.
Further, Reserve Bank of India (RBI) successfully creates

excess liquidity in the system through various rate cuts and
banks fail to utilize this benefit to its advantage due to the tear
of burgeoning non-performing assets.
2.3 INDIAN ECONOMY AND NPAs

Undoubtedly the world economy has slowed down, recession is
at its peak, globally stock markets have tumbled and business
itself is getting hard to do. The Indian economy has been much
affected due to high fiscal deficit, poor infrastructure facilities,
sticky legal system, cutting of exposures to emerging markets
by FIs, etc.
16
Further, international rating agencies like, Standard & Poor
have lowered India’s credit rating to sub-investment grade.
Such negative aspects have often outweighed positives such
as increasing forex reserves and a manageable inflation rate.
Under such a situation, it goes without saying that banks are

no exception and are bound to face the heat of a global
downturn. One would be surprised to know that the banks and
financial institution in India hold nonperforming assets worth
Rs. 110000 crores Bankers have realized that unless the level
of NPAs is reduced drastically, they will find it difficult to
survive.
2.4 GLOBAL DEVELOPMENTS AND NPAs
The core banking business is of mobilizing the deposits and

utilizing it for lending to industry. Lending business is generally
encouraged because it has the effect of funds being
transferred from the system to productive purposes, which
results into economic growth.
However lending also carries credit risk, which arises from the
failure of borrower to fulfill its contractual obligations either
during the course of a transaction or on a future obligation.
A question that arises is how much risk can a bank afford to

take? Recent happenings in the business world -Enron,
WorldCom, Xerox, Global Crossing do not give much
confidence to banks. In case after case, these giant corporate
becan1e bankrupt and failed to provide investors with clearer
and more complete information thereby introducing a degree
of risk that many investors could neither anticipate nor
welcome. The history of financial institutions also reveals the
fact that the biggest banking failures were due to credit risk.
Due to this, banks are restricting their lending operations to
secured avenues only with adequate collateral on which to fall
back upon in a situation of default.
17
2.5 FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of

the rising NPAs. But the problem of NPAs is more in public
sector banks when compared to private sector banks and
foreign banks. The NPAs in PSB are growing due to external as
well as internal factors.
2.5.1 EXTERNAL FACTORS:-
Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which

works for recovery of loans and advances. Due to their
negligence and ineffectiveness in their work the bank
suffers the consequence of non-recover, thereby reducing
their profitability and liquidity.
Willful Defaults
18
There are borrowers who are able to pay back loans but
are intentionally withdrawing it. These groups of people
should be identified and proper measures should be taken
in order to get back the money extended to them as
advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise

in NPAs of the PSBs. every now and then India is hit by
major natural calamities thus making the borrowers
unable to pay back there loans. Thus the bank has to
make large amount of provisions in order to compensate
those loans, hence end up the fiscal with a reduced profit.
Mainly ours farmers depends on rain fall for

cropping. Due to irregularities of rain fall the farmers are
not to achieve the production level thus they are not
repaying the loans.
Industrial sickness
Improper project handling , ineffective management ,

lack of adequate resources , lack of advance technology ,
day to day changing govt. Policies give birth to industrial
sickness. Hence the banks that finance those industries
ultimately end up with a low recovery of their loans
reducing their profit and liquidity.
Lack of demand
Entrepreneurs in India could not foresee their product

demand and starts production which ultimately piles up
their product thus making them unable to pay back the
money they borrow to operate these activities. The banks
recover the amount by selling of their assets, which covers a
minimum label. Thus the banks record the non-recovered part as NPAs and
has to make provision for it.
 Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thus
it has to cope with the changing principles and policies for the regulation of
the rising of NPAs.
The fallout of handloom sector is continuing as most of the weavers

Co-operative societies have become defunct largely due to withdrawal of
19
state patronage. The rehabilitation plan worked out by the Central
government to revive the handloom sector has not yet been implemented.
So the over dues due to the handloom sectors are becoming NPAs.
2.5.2 INTERNAL FACTORS:-

 Defective Lending process
There are three cardinal principles of bank lending that

have been followed by the commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability
i. Principles of safety :-
By safety it means that the borrower is in a position to

repay the loan both principal and interest. The
repayment of loan depends upon the borrowers: a)
Capacity to pay b) Willingness to pay
a) Capacity to pay depends upon:

1. Tangible assets
2. Success in business
b) Willingness to pay depends on:
1. Character
2. Honest
3. Reputation of borrower
The banker should, therefore take utmost care in

ensuring that the enterprise or business for which a loan
is sought is a sound one and the borrower is capable of
carrying it out successfully .He should be a person of
integrity and good character.
 Inappropriate technology
Due to inappropriate technology and management

information system, market driven decisions on real time
basis cannot be taken. Proper MIS and financial
accounting system is not implemented in the banks,
which leads to poor credit collection, thus NPA. All the
branches of the bank should be computerized.
20
 Improper SWOT analysis
The improper strength, weakness, opportunity and threat

analysis is another reason for rise in NPAs. While
providing unsecured advances the banks depend more on
the honesty, integrity, and financial soundness and credit
worthiness of the borrower.
• Banks should consider the borrowers own capital

investment.
• it should collect credit information of the borrowers
from_
a. From bankers.
b. Enquiry from market/segment of trade, industry,
business.
c. From external credit rating agencies.
• Analyze the balance sheet.
True picture of business will be revealed on analysis
of profit/loss a/c and balance sheet.
• Purpose of the loan
When bankers give loan, he should analyze the
purpose of the loan. To ensure safety and liquidity,
banks should grant loan for productive purpose only.
Bank should analyze the profitability, viability, long
term acceptability of the project while financing.
 Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs.

Due to poor credit appraisal the bank gives advances to
those who are not able to repay it back. They should use
good credit appraisal to decrease the NPAs.
 Managerial deficiencies
The banker should always select the borrower very

carefully and should take tangible assets as security to
safe guard its interests. When accepting securities banks
should consider the_
1. Marketability
2. Acceptability
21
3. Safety
4. Transferability.
The banker should follow the principle of

diversification of risk based on the famous maxim “do not
keep all the eggs in one basket”; it means that the banker
should not grant advances to a few big farms only or to
concentrate them in few industries or in a few cities. If a
new big customer meets misfortune or certain traders or
industries affected adversely, the overall position of the
bank will not be affected.
Like OSCB suffered loss due to the OTM Cuttack, and
Orissa hand loom industries. The biggest defaulters of
OSCB are the OTM (117.77lakhs), and the handloom
sector Orissa hand loom WCS ltd (2439.60lakhs).
 Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs.

Absence of regularly visit of bank officials to the customer
point decreases the collection of interest and principals
on the loan. The NPAs due to willful defaulters can be
collected by regular visits.
 Re loaning process
Non remittance of recoveries to higher financing agencies

and re loaning of the same have already affected the
smooth operation of the credit cycle. Due to re loaning to
the defaulters and CCBs and PACs, the NPAs of OSCB is
increasing day by day.
2.6 PROBLEMS DUE TO NPA

1. Owners do not receive a market return on their capital .in
the worst case, if the banks fails, owners lose their assets.
22
In modern times this may affect a broad pool of
shareholders.
2. Depositors do not receive a market return on saving. In
the worst case if the bank fails, depositors lose their
assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging
higher interest rates, lower deposit rates and higher
lending rates repress saving and financial market, which
hamper economic growth.
4. Nonperforming loans epitomize bad investment. They
misallocate credit from good projects, which do not
receive funding, to failed projects. Bad investment ends
up in misallocation of capital, and by extension, labor and
natural resources.
Nonperforming 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:
a) When many borrowers fail to pay interest, banks may

experience liquidity shortage. This can jam payment across
the country.
b) Illiquidity constraints bank in paying depositors
c) Undercapitalized banks exceed the bank’s capital base.
'Out of Order' status:
An account should be treated as 'out of order' if

the outstanding balance remains continuously in excess of the
sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less
than the sanctioned limit/drawing power, but there are no
credits continuously for six months as on the date of Balance
Sheet or credits are not enough to cover the interest debited
during the 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 on the due date fixed by the
bank.
23
2.7 Types of NPA
A] Gross NPA
B] Net NPA
A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are
classified as NPAs as per RBI guidelines as on Balance Sheet
date. Gross NPA reflects the quality of the loans made
by banks. It consists of all the non-standard 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
B] Net NPA:
Net NPAs are those type of NPAs in which the bank has
deducted the provision regarding NPAs. Net NPA shows the
actual burden of banks. Since in India, 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 why the
difference between gross and net NPA is quite high.
It can be calculated by following
Net NPAs  Gross NPAs – Provisions

Gross Advances - Provisions
24
CHAPTER-3
INCOME
RECOGNITION
25
3. INCOME RECOGNITION
3.1. Income recognition – Policy
➢ The policy of income recognition has to be objective and

based on the record of recovery. Internationally income
from non-performing assets (NPA) is not recognised on
accrual basis but is booked as income only when it is
actually received. Therefore, the banks should not charge
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.
➢ Fees and commissions earned by the banks as a result of

re-negotiations or rescheduling of outstanding debts
should be recognised on an accrual basis over the period
of time covered by the re-negotiated or rescheduled
extension of credit.
➢ If Government guaranteed advances become NPA, the

interest on such advances should not be taken to income
account unless the interest has been realised.
3.2. Reversal of income:
➢ If any advance, including bills purchased and discounted,

becomes NPA as at the close of any year, interest accrued
and credited to income account in the corresponding
previous year, should be reversed or provided for if the
same is not realised. This will apply to Government
guaranteed accounts also.
➢ In respect of NPAs, fees, commission and similar income

that have accrued should cease to accrue in the current
period and should be reversed or provided for with
respect to past periods, if uncollected.
26
3.3 Leased Assets
 The net lease rentals (finance charge) on the leased

asset accrued and credited to income account before the
asset became non-performing, and remaining unrealised,
should be reversed or provided for in the current accounting
period.
 The term 'net lease rentals' would mean the amount of

finance charge taken to the credit of Profit & Loss Account
and would be worked out as gross lease rentals adjusted by
amount of statutory depreciation and lease equalisation
account.
 As per the 'Guidance Note on Accounting for

Leases' issued by the Council of the Institute of Chartered
Accountants of India (ICAI), a separate Lease Equalisation
Account should be opened by the banks with a
corresponding debit or credit to Lease Adjustment Account,
as the case may be. Further, Lease Equalisation Account
should be transferred every year to the Profit & Loss
Account and disclosed separately as a deduction
from/addition to gross value of lease rentals shown under
the head 'Gross Income'.
Appropriation of recovery in NPAs
➢ Interest realised on NPAs may be 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.
➢ In the absence of a clear agreement between the bank

and the borrower for the purpose of appropriation of
recoveries in NPAs (i.e. towards principal or interest due),
banks should adopt an accounting principle and exercise
the right of appropriation of recoveries in a uniform and
consistent manner.
27
3.4 Interest Application:
There is no objection to the banks using their own discretion in

debiting interest to an NPA account taking the same to Interest
Suspense Account or maintaining only a record of such interest
in proforma accounts.
3.5 Reporting of NPAs
➢ Banks are required to furnish a Report on NPAs as on 31st

March each year after completion of audit. The NPAs
would relate to the banks’ global portfolio, including the
advances at the foreign branches. The Report should be
furnished as per the prescribed format given in the
Annexure I.
➢ While reporting NPA figures to RBI, the amount held in

interest suspense account, should be shown as a
deduction from gross NPAs as well as gross advances
while arriving at the net NPAs. Banks which do not
maintain Interest Suspense account for parking interest
due on non-performing advance accounts, may furnish
the amount of interest receivable on NPAs as a foot note
to the Report.
➢ Whenever NPAs are reported to RBI, the amount of

technical write off, if any, should be reduced from the
outstanding gross advances and gross NPAs to eliminate
any distortion in the quantum of NPAs being reported.
REPORTING FORMAT FOR NPA – GROSS AND NET NPA
Annexure-I (Page no-64)
28
CHAPTER-4
- Asset Classification
- Provisioning Norms
29
4. Asset Classification
Categories of NPAs
Standard Assets:
Standard assets are the ones in which the bank is receiving
interest as well as the principal amount of the loan regularly
from the customer. Here it is also very important that in this
case the arrears of interest and the principal amount of loan do
not exceed 90 days at the end of financial year. If asset 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.
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 reliability of the dues:
( 1 ) Sub-standard Assets
( 2 ) Doubtful Assets
( 3 ) Loss Assets
( 1 ) Sub-standard Assets:--
With effect from 31 March 2005, a substandard asset would be
one, which has remained NPA for a period less than or equal to
12 month. The following features are exhibited by
substandard 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
jeopardise the liquidation of the debt and are characterised by
the distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.
30
( 2 ) Doubtful Assets:--
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.
With effect from March 31, 2005, an asset would be classified
as doubtful if it remained in the sub-standard category for 12
months.
( 3 ) 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- although there may be some salvage or recovery
value. Also, these assets would have been identified as ‘loss
assets’ by the bank or internal or external auditors or the RBI
inspection but the amount would not have been written-off
wholly.
Provisioning Norms
General
➢ In order to narrow down the divergences and ensure
adequate provisioning by banks, it was suggested that a
bank's statutory auditors, if they so desire, could have a
dialogue with RBI's Regional Office/ inspectors who
carried out the bank's inspection during the previous year
with regard to the accounts contributing to the difference.
➢ Pursuant to this, regional offices were advised to forward

a list of individual advances, where the variance in the
provisioning requirements between the RBI and the bank
is above certain cut off levels so that the bank and the
statutory auditors take into account the assessment of
the RBI while making provisions for loan loss, etc.
➢ The primary responsibility for making adequate provisions

for any diminution in the value of loan assets, investment
or other assets is that of the bank managements and the
statutory auditors. The assessment made by the
inspecting officer of the RBI is furnished to the bank to
assist the bank management and the statutory auditors in
taking a decision in regard to making adequate and
necessary provisions in terms of prudential guidelines.
31
➢ In conformity with the prudential norms, provisions should
be made on the non-performing assets on the basis of
classification of assets into prescribed categories as
detailed in paragraphs 4 supra. Taking into account the
time lag between an account becoming doubtful of
recovery, its recognition as such, the realisation of the
security and the erosion over time in the value of security
charged to the bank, the banks should make provision
against sub-standard assets, doubtful assets and loss
assets as below:
Loss assets:
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.
Doubtful assets:
➢ 100 percent of the extent to which the advance is not

covered by the realisable value of the security to which
the bank has a valid recourse and the realisable value is
estimated on a realistic basis.
➢ In regard to the secured portion, provision may be made

on the following basis, at the rates ranging from 20
percent to 50 percent of the secured portion depending
upon the period for which the asset has remained
doubtful:
Period for which the Provision

advance has been requirement (%)
considered as doubtful
Up to one year 20
One to three years 30
More than three years: 60% with effect

(1)Outstanding stock of from March
32
NPAs as on March 31, 31,2005.
2004. 75% effect from
(2)Advances classified as March 31, 2006.
‘doubtful’ more than 100% with effect
three years on or after from March 31,
April 1, 2004. 2007.
➢ Additional provisioning consequent upon the change in

the definition of doubtful assets effective from March 31,
2003 has to be made in phases as under:
 As on 31.03.2003, 50 percent of the additional
provisioning requirement on the assets which became
doubtful on account of new norm of 18 months for transition
from sub-standard asset to doubtful category.
 As on 31.03.2002, balance of the provisions not made
during the previous year, in addition to the provisions
needed, as on 31.03.2002.
➢ Banks are permitted to phase the additional provisioning
consequent upon the reduction in the transition period
from substandard to doubtful asset from 18 to 12 months
over a four year period commencing from the year ending
March 31, 2005, with a minimum of 20 % each year.
Note: Valuation of Security for provisioning purposes
With a view to bringing down divergence arising out of

difference in assessment of the value of security, in cases of
NPAs with balance of Rs. 5 crore and above stock audit at
annual intervals by external agencies appointed as per the
guidelines approved by the Board would be mandatory in order
to enhance the reliability on stock valuation. Valuers appointed
as per the guidelines approved by the Board of Directors
should get collaterals such as immovable properties charged in
favour of the bank valued once in three years.
Sub-standard assets:
A general provision of 10 percent on total outstanding should

be made without making any allowance for DICGC/ECGC
guarantee cover and securities available.
Standard assets:
33
➢ From the year ending 31.03.2000, the banks should make
a general provision of a minimum of 0.40 percent on
standard assets on global loan portfolio basis.
➢ The provisions on standard 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.
Floating provisions:
Some of the banks make a 'floating

provision' over and above the specific provisions made in
respect of accounts identified as NPAs. The floating provisions,
wherever available, could be set-off against provisions required
to be made as per above stated provisioning guidelines.
Considering that higher loan loss provisioning adds to the
overall financial strength of the banks and the stability of the
financial sector, banks are urged to voluntarily set apart
provisions much above the minimum prudential levels as a
desirable practice.
Provisions on Leased Assets:

Leases are peculiar transactions where the assets are not
recorded in the books of the user of such assets as Assets,
whereas they are recorded in the books of the owner even
though the physical existence of the asset is with the user
(lessee). __(AS19 ICAI)
Sub-standard assets : -
 10 percent of the 'net book value'.
 As per the 'Guidance Note on Accounting for Leases' issued

by the ICAI, 'Gross book value' of a fixed asset is its historical
cost or other amount substituted for historical cost in the
34
books of account or financial statements. Statutory
depreciation should be shown separately in the Profit & Loss
Account. Accumulated depreciation should be deducted from
the Gross Book Value of the leased asset in the balance sheet
of the lesser to arrive at the 'net book value'.
 Also, balance standing in 'Lease Adjustment Account' should

be adjusted in the 'net book value' of the leased assets. The
amount of adjustment in respect of each class of fixed assets
may be shown either in the main balance sheet or in the Fixed
Assets Schedule as a separate column in the section related to
leased assets.
 Doubtful assets :-
100 percent of the extent to which the finance is not secured
by the realisable value of the leased asset. Realisable value to
be estimated on a realistic basis. In addition to the above
provision, the following provision on the net book value of
the secured portion should be made, depending upon the
period for which asset has been doubtful:
Period %age of
provision
Up to one year 20
One to three years 30
More than three 50

years
 Loss assets :-
The entire asset should be written-off. If for any reason, an
asset is allowed to remain in books, 100 percent of the sum of
the net investment in the lease and the unrealised portion of
finance income net of finance charge component should be
provided for. (‘Net book value')
Guidelines for Provisions under Special Circumstances

35
Government guaranteed advances
 With effect from 31 March 2000, in respect of advances

sanctioned against State Government guarantee, if the
guarantee is invoked and remains in default for more than two
quarters (180 days at present), the banks should make normal
provisions as prescribed in paragraph 4.1.2 above.
 As regards advances guaranteed by State Governments, in

respect of which guarantee stood invoked as on 31.03.2000,
necessary provision was allowed to be made, in a phased
manner, during the financial years ending 31.03.2000 to
31.03.2003 with a minimum of 25 percent each year.
36
CHAPTER-5
- Impact of NPA
- Preventive Measurement for

NPA
4.Impact of NPA
 Profitability:-
NPA means booking of money in terms of bad
asset, which occurred due to wrong choice of client. Because of
the money getting blocked the prodigality of bank decreases
not only by the amount of NPA but NPA lead to opportunity
37
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, 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.
 Liquidity:-
Money is getting blocked, decreased profit lead to lack of
enough cash at hand which lead to borrowing money for
shot\rtes 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 managing NPA would have diverted to some
fruitful activities, which would have given good returns. Now
day’s 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 it’s goodwill
and brand image and credit which have negative impact to the
people who are putting their money in the banks.
5.2 Early symptoms by which one can

recognize a performing asset turning
in to Non-performing asset:-
38
Four categories of early symptoms:-
---------------------------------------------------
(1) Financial:
✔ Non-payment of the very first instalment in case of term
loan.
✔ Bouncing of cheque due to insufficient balance in the
accounts.
✔ Irregularity in instalment.
✔ Irregularity of operations in the accounts.
✔ Unpaid overdue bills.
✔ Declining Current Ratio.
✔ Payment which does not cover the interest and principal
amount of that instalment.
✔ While monitoring the accounts it is found that partial
amount is diverted to sister concern or parent company.
(2) Operational and Physical:

✔ If information is received that the borrower has either
initiated the process of winding up 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.
✔ Non-payment of wages.
(3) Attitudinal Changes:

✔ Avoidance of contact with bank.
✔ Problem between partners.
(4) Others:
✔ Changes in Government policies.
✔ Death of borrower.
✔ Competition in the market.
5.3 Preventive Measurement for NPA

39
Early Recognition of the Problem:-
Invariably, by the time banks start their efforts to get involved

in a revival process, 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 in the very beginning that is:
When the 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 revival may be done
on the basis of a 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 legal means before the security
position becomes worse.
Identifying Borrowers with Genuine Intent:-
Identifying borrowers with genuine intent from those who are

non- serious with no 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 has intelligent inputs with regard to promoters’ sincerity,
and capability to achieve turnaround. Based on this objective
assessment, banks should decide as quickly as 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 of the borrower. Banks may have
penal of technical experts with proven expertise and track
record of preparing techno-economic study of the project of
the borrowers.
Borrowers having genuine problems due to temporary
mismatch in fund flow or sudden requirement of additional
fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will
obviate the need to route the additional funding through the
controlling offices in deserving cases, and help avert many
accounts slipping into NPA category.
40
Timeliness and Adequacy of response:-
Longer the delay in response, grater 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 in terms of extend 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 analysing 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 all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that
affects a borrowing unit’s fortunes. A bank may commit
additional finance to an aling unit only after basic viability of
the 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:-
A. 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
41
the borrower would go a long way toward overall success of
rehabilitation exercise, given
the probability of success/failure.
B. In some default cases, where the unit is still working, the

bank should make sure that it captures the cash flows
(there is a tendency on part of the borrowers to switch bankers
once they default, for fear of getting their cash flows forfeited),
and ensure that such cash flows are used for working capital
purposes. Toward this end, there should be regular flow of

information among consortium members. A bank, which is not
part of the consortium, may not be
allowed to offer credit facilities to such defaulting clients.

Current account facilities may also be denied at no consortium
banks to such clients 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.
C. 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/rehabilitation may take this aspect
into account.
D. Corporate Debt Restructuring mechanism has been

institutionalized in 2001 to provide a timely and transparent
system for restructuring of the corporate debt of Rs. 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.
42
CHAPTER-6
Tools For recovery of npa
43
Once NPA occurred, one must come out of it or it should be
managed in most efficient manner. Legal ways and means are
there to overcome and manage NPAs. We will look into each
one of it.
6.1 Willful Default:-

A] Lok Adalat and Debt Recovery Tribunal
B] Securitization Act
44
C] Asset Reconstruction
Lok Adalat:
Lok Adalat institutions help banks to settle disputes involving
account in “doubtful” and “loss” category, with outstanding
balance of Rs.5 lakh for compromise settlement under Lok
Adalat. Debt recovery tribunals have been empowered to
organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh
and above. This mechanism has proved to be quite effective
for speedy justice and recovery of small loans. The progress
through this channel is expected to pick up in the coming
years.
Debt Recovery Tribunals (DRT):

The recovery of debts due to banks and financial institution
passed in March 2000 has helped in strengthening the function
of DRTs. Provision for placement of more than one recovery
officer, power to attach defendant’s property/assets before
judgment, penal provision for disobedience of tribunal’s order
or for breach of any terms of order and appointment of
receiver with power of realization, management, protection
and preservation of property are expected to provide
necessary teeth to the DRTs and speed up the recovery of
NPAs in the times to come. DRTs which have been set up by
the Government to facilitate speedy recovery by banks/DFIs,
have not been able make much impact on loan recovery due to
variety of reasons like inadequate number, lack of
infrastructure, under staffing and frequent adjournment of
cases. It is essential that DRT mechanism is strengthened and
vested with a proper enforcement mechanism to enforce their
orders. Non observation of any order passed by the tribunal
should amount to contempt of court, the DRT should have right
to initiate contempt proceedings. The DRT should empowered
to sell asset of the debtor companies and forward the proceed
to the winding – up court for distribution among the lenders.
6.2 Inability to Pay

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
45
borrower under consortium lending arrangements are pooled
with one bank and/or where the bank receiving remittances is
not parting with the share of other 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 the consortium should, therefore, arrange to
get their share of recovery transferred from the lead bank or
get an express consent from the lead bank for the transfer of
their share of recovery, to ensure proper asset classification in
their respective books.
6.3 Restructuring / Rescheduling of Loans
A standard asset where the terms of the loan agreement
regarding Interest and principal have been renegotiated or
rescheduled after commencement of production should be
classified as sub-standard and should remain in such category
for at least one year of satisfactory performance under the
renegotiated or rescheduled terms. In the case of sub-standard
and doubtful assets also, rescheduling does not entitle a bank
to upgrade the quality of advance automatically unless there is
satisfactory performance under the rescheduled / renegotiated
terms. Following representations from banks that the foregoing
stipulations deter the banks from restructuring of standard
and sub-standard loan assets even though the modification
of terms might not jeopardize the assurance of repayment of
dues from the borrower, the norms relating to restructuring of
standard and sub-standard assets were reviewed in March
2001. In the context of restructuring of the accounts, the
following stages at which the restructuring / rescheduling /
renegotiation of the terms of
loan agreement could take place, can be identified:
1) Before commencement of commercial production;
2) After commencement of commercial production but before
the asset has been classified as substandard,
3) After commencement of commercial production and after
the asset has been classified as substandard.
In each of the foregoing three stages, the rescheduling, etc., of

principal and/or of interest could take place, with or without
sacrifice, as part of the restructuring package evolved.
6.4 Treatment of Restructured Standard Accounts:

A rescheduling of the installments of principal alone, at any
of the aforesaid first two stages would not cause a standard
46
asset to be classified in the substandard category provided the
loan/credit facility is fully secured.
A rescheduling of interest element at any of

the foregoing first two stages would not cause an asset to be
downgraded to substandard category subject to the condition
that the amount of sacrifice, if any, in the element of interest,
measured in present value terms, is either written off or
provision is made to the extent of the sacrifice involved. For
the purpose, the future interest due as per the original loan
agreement in respect of an account should be discounted to
the present value at a rate appropriate to the risk category of
the borrower (i.e., current PLR+ the appropriate credit risk
premium for the borrower-category) and compared with the
present value of the dues expected to be received under the
restructuring package, discounted on the same basis.
In case there is a sacrifice involved in the
amount of interest in present value terms, as at (b) above, the
amount of sacrifice should either be written off or provision
made to the extent of the sacrifice involved.
6.5 Treatment of restructured sub-standard accounts:

A rescheduling of the installments of principal
alone would render a sub-standard asset eligible to be
continued in the sub-standard category for the specified
period, provided the loan/credit facility is fully secured.
A rescheduling of interest element would render a
sub-standard asset eligible to be continued to be classified in
substandard category for the specified period subject to the
condition that the amount of sacrifice, if any, in the element of
interest, measured in present value terms, is either written
off or provision is made to the extent of the sacrifice involved.
For the purpose, the future interest due as per the original loan
agreement in respect of an account should be discounted to
the present value at a rate appropriate to the risk category of
the borrower (i.e., current PLR + the appropriate credit risk
premium for the borrower category) and compared with the
present value of the dues expected to be received under the
restructuring package, discounted on the same basis.
In case there is a sacrifice involved in the amount of

interest in present value terms, as at (b) above, the amount of
sacrifice should either be written off or provision made to the
extent of the sacrifice involved. Even in cases where the
47
sacrifice is by way of write off of the past interest dues, the
asset should continue to be treated as sub-standard.
6.6 Up gradation of restructured accounts:

The sub-standard accounts which have been subjected to
restructuring etc., whether in respect of principal installment or
interest amount, by whatever modality, would be eligible to be
upgraded to the standard category only after the specified
period i.e., a period of one year after the date when first
payment of interest or of principal, whichever is earlier, falls
due, subject to satisfactory performance during the period. The
amount of provision made earlier, net of the amount provided
for the sacrifice in the interest amount in present value terms
as aforesaid, could also be reversed after the one year period.
During this one-year period, the substandard asset will not
deteriorate in its classification if satisfactory performance of
the account is demonstrated during the period. In case,
however, the satisfactory performance during the one-year
period is not evidenced, the asset classification of the
restructured account would be governed as per the applicable
prudential norms with reference to the pre restructuring
payment schedule.
6.7 General:
These instructions would be applicable to all type of

credit facilities including working capital limits, extended to
industrial units, provided they are fully covered by tangible
securities.
As trading involves only buying and selling of

commodities and the problems associated with manufacturing
units such as bottleneck in commercial production, time and
cost escalation etc. are not applicable to them, these
guidelines should not be applied to restructuring/ rescheduling
of credit facilities extended to traders.
While assessing the extent of security cover available

to the credit facilities, which are being restructured/
rescheduled, collateral security would also be reckoned,
provided such collateral is a tangible security properly charged
to the bank and is not in the intangible form like guarantee etc.
of the promoter/ others.
48
6.8 Income recognition
There will be no change in the existing instructions
on income recognition. Consequently, banks should not
recognise income on accrual basis in respect of the projects
even though the asset is classified as a standard asset if the
asset is a "non performing asset" in terms of the extant
instructions. In other words, while the accounts of the project
may be classified as a standard asset, banks shall recognise
income in such accounts only on realisation on cash basis if the
asset has otherwise become ‘non performing’ as per the extant
delinquency norm of 180 days. The delinquency norm would
become 90 days with effect from 31 March 2004.
Consequently, banks, which have wrongly
recognised income in the past, should reverse the interest if it
was recognised as income during the current year or make a
provision for an equivalent amount if it was recognised as
income in the previous year(s). As regards the regulatory
treatment of income recognised as ‘funded interest’ and
‘conversion into equity, debentures or any other instrument’
banks should adopt the following:
6.9 Funded Interest: Income recognition in respect of the NPAs,

regardless of whether these are or are not subjected to
restructuring/ rescheduling/ renegotiation of terms of the loan
agreement, should be done strictly on cash basis, only on
realisation and not if the amount of interest overdue has been
funded. If, however, the amount of funded interest is
recognised as income, a provision for an equal amount should
also be made simultaneously. In other words, any funding of
interest in respect of NPAs, if recognised as income, should be
fully provided for.
6.9.1. Conversion into equity, debentures or any other

instrument: The amount outstanding converted into other
instruments would normally comprise principal and the interest
components. If the amount of interest dues is converted into
equity or any other instrument, and income is recognised in
consequence, full provision should be made for the amount of
income so recognised to offset the effect of such income
recognition. Such provision would be in addition to the amount
of provision that may be necessary for the depreciation in the
value of the equity or other instruments, as per the investment
valuation norms. However, if the conversion of interest is into
49
equity, which is quoted, interest income can be recognised at
market value of equity, as on the date of conversion, not
exceeding the amount of interest converted to equity. Such
equity must thereafter be classified in the "available for sale"
category and valued at lower of cost or market value. In case
of conversion of principal and /or interest in respect of NPAs
into debentures, such debentures should be treated as NPA, ab
initio, in the same asset classification as was applicable to loan
just before conversion and provision made as per norms. This
norm would also apply to zero coupon bonds or other
Instruments which seek to defer the liability of the issuer. On
such debentures, income should be recognised only on
realisation basis. The income in respect of unrealised interest,
which is converted into debentures or any other fixed maturity
instrument, should be recognised only on redemption of such
instrument. Subject to the above, the equity shares or other
instruments arising from conversion of the principal amount of
loan would also be subject to the usual prudential valuation
norms as applicable to such instruments.
6.9.2. Provisioning
While there will be no change in the extant norms on
provisioning for NPAs, banks which are already holding
provisions against some of the accounts, which may now be
classified as ‘standard’, shall continue to hold the provisions
and shall not reverse the same.
50
CHAPTER-7
Special Cases
7. Special Cases
7.1.1. 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 on the latest
51
available stock statement, balance outstanding exceeding the
limit temporarily, non-submission of stock statements and non-
renewal of the limits on the due date, etc. In the matter of
classification of accounts with such deficiencies banks may
follow the following guidelines:
Banks should ensure that drawings in the

working capital accounts are covered by the adequacy of
current assets, since current assets are first appropriated in
times of distress. Drawing power is required to be arrived at
based on the stock statement which is current. However,
considering the difficulties of large borrowers, stock
statements relied upon by the banks for determining drawing
power should not be older than three months. The outstanding
in the account based on drawing power calculated from stock
statements older than three months, would be deemed as
irregular. A working capital borrower account will become NPA
if such irregular drawings are permitted in the account for a
continuous period of 180 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 furnish evidence to show that
renewal/ review of credit limits is already on and would be
completed soon. In any 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.
7.1.2. Accounts regularized near about the balance sheet date:
The asset classification of borrower accounts
where a solitary or a few credits are recorded before the
balance sheet date should be handled with care and without
scope for subjectivity. Where the account indicates inherent
weakness on the basis of the data available, the account
should be deemed as a NPA. In other genuine cases, the banks
must furnish satisfactory evidence to the Statutory
Auditors/Inspecting Officers about the manner of regularization
of the account to eliminate doubts on their performing status.
52
7.1.3Asset Classification to be borrower-wise and not facility-wise
It is difficult to envisage a situation when only
one facility to a borrower becomes a problem credit and not
others. Therefore, all the facilities granted by a bank to a
borrower will have to be treated as NPA and not the particular
facility or part thereof which has become irregular. If the debits
arising out of devolvement of letters of credit or invoked
guarantees are parked in a separate account, the balance
outstanding in that account also should be treated as a part of
the borrower’s principal operating account for the purpose of
application of prudential norms on income recognition, asset
classification and provisioning.
7.1.4. Accounts where there is erosion in the value of security
A NPA need not go through the various stages of classification
in cases of serious credit impairment and such assets should
be straightaway classified as doubtful or loss asset as
appropriate. Erosion in the value of security can be reckoned
as significant when the realizable value of the security is less
than 50 per cent of the value assessed by the bank or
accepted by RBI at the time of last inspection, as the case may
be. Such NPAs may be straightaway classified under doubtful
category and provisioning should be made as applicable to
doubtful assets.
If the realizable value of the security, as
assessed by the bank/ approved values/ RBI is less than 10 per
cent of the outstanding in the borrower accounts, the
existence of security should be ignored and the asset should
be straightaway classified as loss asset. It may be either
written off or fully provided for by the bank.
7.1.5. Advances to PACS/FSS ceded to Commercial Banks:

In respect of agricultural advances as well as advances for
other purposes granted by banks to ceded PACS/ FSS under
the on-lending system, only that particular credit facility
granted to PACS/ FSS which is in default for a period of two
harvest seasons (not exceeding two half years)/two quarters,
as the case may be, after it has become due will be classified
as NPA and not all the credit facilities sanctioned to a PACS/
FSS. The other direct loans & advances, if any, granted by the
bank to the member borrower of a PACS/ FSS outside the on-
lending arrangement will become NPA even if one of the credit
facilities granted to the same borrower becomes NPA.
53
7.1.6 Advances against Term Deposits, NSCs, KVP/IVP, etc.:
Advances against term deposits, NSCs eligible for surrender,
IVPs, KVPs and life policies need not be treated as NPAs.
Advances against gold ornaments, government securities and
all other securities are not covered by this exemption.
7.1.7 Loans with moratorium for payment of interest

In the case of bank finance given for industrial projects or for
agricultural plantations etc. where moratorium is available for
payment of interest, payment of interest becomes 'due' only
after the moratorium or gestation period is over. Therefore,
such amounts of interest do not become overdue and hence
NPA, with reference to the date of debit of interest. They
become overdue after due date for payment of interest, if
uncollected.
In the case of housing loan or similar advances
granted to staff
members where interest is payable after recovery of principal,
interest need not be considered as overdue from the first
quarter onwards. Such loans/advances should be classified as
NPA only when there is a default in repayment of installment of
principal or payment of interest on the respective due dates.
7.1.8 Agricultural advances

In respect of advances granted for agricultural purpose where
interest and/or installment of principal remains unpaid after it
has become past due for two harvest seasons but for a period
not exceeding two half years, such an advance should be
treated as NPA. The above norms should be made applicable to
all direct agricultural advances as listed at items 1.1, 1.1.2 (i)
to (vii), 1.1.2 (viii)(a)(1) and 1.1.2 (viii)(b)(1) of Master Circular
on lending to priority sector No. RPCD. PLAN. BC. 12/04.09.01/
2001- 2002 dated 1 August 2001. An extract of the list of these
items is furnished in the Annexure II. In respect of agricultural
loans, other than those specified above, identification of NPAs
would be done on the same basis as non-agricultural advances
which, at present, are the 180 days delinquency norm.
54
Where natural calamities impair the repaying
capacity of agricultural borrowers, banks may decide on their
own as a relief measure conversion of the short-term
production loan into a term loan or re-schedulement of the
repayment period; and the sanctioning of fresh short-term
loan, subject to various guidelines contained in RBI circulars
RPCD.No.PLFS.BC.128/05.04.02/97-98 dated 20.06.98 and
RPCD.No.PLFS.BC.9/05.01.04/98-99 dated 21.07.98.
In such cases of conversion or re-schedulement, the

term loan as well as fresh short-term loan may be treated as
current dues and need not be classified as NPA. The asset
classification of these loans would thereafter be governed by
the revised terms & conditions and would be treated as NPA if
interest and/or installment of principal remains unpaid, for two
harvest seasons but for a period not exceeding two half years.
7.1.9.Government guaranteed advances:
The credit facilities backed by guarantee of the Central
Government though overdue may be treated as NPA only when
the Government repudiates its guarantee when invoked. This
exemption from classification of Government guaranteed
advances as NPA is not for the purpose of recognition of
income. With effect from 1st April 2000, advances sanctioned
against State Government guarantees should be classified as
NPA in the normal course, if the guarantee is invoked and
remains in default for more than two quarters. With effect from
March 31, 2001 the period of default is revised as more than
180 days.
7.2.1.Take-out Finance:
Takeout finance is the product emerging in the context of the
funding of long-term infrastructure projects. Under this
arrangement, the institution/the bank financing infrastructure
projects will have an arrangement with any financial institution
for transferring to the latter the outstanding in respect of such
financing in their books on a predetermined basis. In view of
the time-lag involved in taking-over, the possibility of a default
in the meantime cannot be ruled out. The norms of asset
classification will have to be followed by the concerned
bank/financial institution in whose books the account stands as
balance sheet item as on the relevant date. If the lending
55
institution observes that the asset has turned NPA on the basis
of the record of recovery, it should
be classified accordingly. The lending institution should not
recognize income on accrual basis and account for the same
only when it is paid by the borrower/ taking over institution (if
the arrangement so provides). The lending institution should
also make provisions against any asset turning into NPA
pending its takeover by taking over institution. As and when
the asset is taken over by the taking over institution, the
corresponding provisions could be reversed. However, the
taking over institution, on taking over such assets, should
make provisions treating the account as NPA from the actual
date of it becoming NPA even though the account was not in
its books as on that date.
7.2.2. Post-shipment Supplier's Credit

In respect of post-shipment credit extended by the
banks covering
export of goods to countries for which the ECGC’s cover is
available, EXIM Bank has introduced a guarantee-cum-
refinance programme whereby, in the event of default, EXIM
Bank will pay the guaranteed amount to the bank within a
period of 30 days from the day the bank invokes the guarantee
after the exporter has filed claim with ECGC.
Accordingly, to the extent payment has been
received from the EXIM Bank, the advance may not be treated
as a non-performing asset for asset classification and
provisioning purposes.
7.2.3 Export Project Finance:

In respect of export project finance, there could be instances
where the actual importer has paid the dues to the bank
abroad but the bank in turn is unable to remit the amount due
to political developments such as war, strife, UN embargo, etc.
In such cases, where the lending bank is able to
establish through documentary evidence that the importer has
cleared the dues in full by depositing the amount in the bank
abroad before it turned into NPA in the Books of the bank, but
the importer's country is not allowing the funds to be remitted
56
due to political or other reasons, the asset classification may
be made after a period of one year from the date the amount
was deposited by the importer in the bank abroad.
7.2.4. Advances under rehabilitation approved by BIFR/ TLI:

Banks are not permitted to upgrade the classification of any
advance in respect of which the terms have been re-negotiated
unless the package of re-negotiated terms has worked
satisfactorily for a period of one year. While the existing credit
facilities sanctioned to a unit under rehabilitation packages
approved by BIFR/term lending institutions will continue to be
classified as sub-standard or doubtful as the case may be, in
respect of additional facilities sanctioned under the
rehabilitation packages, the Income Recognition, Asset
Classification norms will become applicable after a period of
one year from the date of disbursement.
7.2.5. ROLE OF ARCIL:-

This empowerment encouraged the three major players in
Indian banking system, namely, State Bank of India (SBI), ICICI
Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to come
together to set-up the first ARC. Arcil was incorporated as a
public limited company on February 11, 2002 and obtained its
certificate of commencement of business on May 7, 2003. In
pursuance of Section 3 of the Securitization Act 2002, it holds a
certificate of registration dated August 29, 2003, issued by the
Reserve Bank of India (RBI) and operates under powers
conferred under the Securitization Act, 2002. Arcil is also a
"financial institution" within the meaning of Section 2 (h) (ia) of
the Recovery of Debts due to Banks and Financial Institutions
Act, 1993 (the "DRT Act").
Arcil is the first ARC in the country to commence

business of resolution of non-performing assets (NPAs) upon
acquisition from Indian banks and financial institutions. As the
first ARC, Arcil has played a pioneering role in setting
standards for the industry in India.
57
➢ Unlocking capital for the banking system and the
economy
The primary objective of Arcil is to expedite recovery of the
amounts locked in NPAs of lenders and thereby recycling
capital. Arcil thus, provides relief to the banking system by
managing NPAs and help them concentrate on core banking
activities thereby enhancing shareholders value.
➢ Creating a vibrant market for distressed debt assets

/ securities in India offering a trading platform for
Lenders
Arcil has made successful efforts in funneling investment from

both from domestic and international players for funding these
acquisitions of distressed assets, followed by showcasing them
to prospective buyers. This has initiated creation of a
secondary market of distressed assets in the country besides
hastening their resolution. The efforts of Arcil would lead the
country’s distressed debt market to international standards.
➢ To evolve and create significant capacity in the

system for quicker resolution of NPAs by deploying
the assets optimally
With a view to achieving high delivery capabilities for

resolution, Arcil has put in place a structure aimed at
outsourcing the various sub-functions of resolution to
specialized agencies, wherever applicable under the provision
of the Securitization Act, 2002. Arcil has also encourage,
groomed and developed many such agencies to enhance its
capacity in line with the growth of its activity.
58
CHAPTER-8
Data analysis and
interpretation
7. ANALYSIS
For the purpose of analysis and comparison between Public
and private sector banks, We have taken five banks from both
sectors to compare the non-performing assets of banks. For
understanding we further bifurcate the non-performing assets
in priority sector and non-priority sector, gross NPA and net
NPA in percentage as well as in rupees, deposit – investment –
advances.
Further we also analysis on the basis of Deposit – Investment –

Advances to get the clear view where the bank stands in the
competitive market. At the end of March 2008, in private
59
sector ICICI Bank is the highest deposit-investment-advances
figure in rupees crore, second is HDFC Bank and KOTAK Bank
has least figure.
In public sector banks Punjab National Bank has the highest

deposit investment- advances but when we look at the graph
we can see that the Bank of Baroda and Bank of India are
almost the similar in numbers and Dena Bank is stands last in
public sector bank. When we compare the private sector banks
with public sector banks, we can understand the more number
of people prefer to choose public sector banks for deposit-
investment.
DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and

comparison among them, year 2008-09.
Private Sector Banks:-
(Rs in crore)
BANK DEPOSIT INVESTMENT ADVANCES

AXIS 87626 33705 59661
HDFC 100769 49394 63427
60
ICICI 244431 111454 225616
KOTAK 16424 9142 15552
INDUSIND 19037 6630 12795
TOTAL 468287 210325 377051
Analysis:-From the above figure we can see that the ICICI

Bank deposit-investment-advances are quite high than other
banks like HDFC,AXIS,INDUSIND,KOTAK
Public Sector Banks:-

BOB 152034 43870 106701
BOI 150012 41803 113476
DENA 33943 10282 23024
PNB 166457 53992 119502
UBI 103859 33823 74348
TOTAL 606305 183770 437051
Analysis:- In public sector Punjab National Bank deposit-

investment-advances
are comparatively quite high rather than Bank of Baroda, Bank
of India, United bank of India and Dena Bank.
61
Comparison between ICICI BANK AND PUNJAB NATIONAL BANK in term of
deposit-investment-advances:-
ICICI BANK 244431 111454 225616
PNB 166457 53992 119502
Analysis: - Here we have compared between ICICI BANK AND PUNJAB

deposit-investment-advances. From the
NATIONAL BANK in term of
above figure we can see that ICICI bank deposit and advances
are quite higher than Punjab National Bank. But in case of
Investment ICICI Bank investment amount is doubled than
Punjab National Bank amount.
Gross NPA and Net NPA:-
62
There are two concepts related to non-performing assets a)
gross and b) net. Gross refers to all NPAs on a bank’s balance
sheet irrespective of the provisions made. It consists of all the
non-standard assets, viz. Substandard, doubtful, and loss
assets. A loan asset is classified as ‘ substandard” if it remains
NPA up to a period of 18 months; “ doubtful” if it remains NPA
for more than 18 months; and loss, without any waiting
period, where the dues are considered not collectible or
marginally collectible.
Net NPA is gross NPA less provisions. Since in India, bank
balance sheets contains 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
NPA according to the central bank guidelines, are quite
significant.
Here, we can see that there are huge differences between
gross and net NPA. While gross NPA reflects the quality
of the loans made by banks, net NPA shows the actual
burden of banks. The requirements for provisions are:
 100% for loss assets
 100% of the unsecured portion plus 20-50% of the
secured portion, depending on the period for which the
account has remained in the doubtful category
 10% general provision on the outstanding balance under
the substandard category.
Here, there are gross and net NPA data for 2007-08 and 2008-
09 we taken for comparison among banks. These data are NPA
AS PERCENTAGE OF TOTAL ASSETS. As we discuss earlier that
gross NPA reflects the quality of the loans made by banks.
Among all the ten banks Dena Banks has highest gross NPA as
a percentage of total assets in the year 2007-08 and also net
NPA. Punjab National Bank shows huge difference between
gross and net NPA. There is an almost same figure between
BOI and BOB.
63
Gross NPA and Net NPA Of different Public Sector banks
in the year 2007-08
BANK GROSS NPA NET NPA
BOB 1.46 0.35

BOI 1.48 0.45
DENA 2.37 1.16
PNB 2.09 0.45
UBI 1.82 0.59
Gross NPA and Net NPA Of different Public Sector banks

in the year 2008-09
BOB 1.10 0.27

BOI 1.08 0.33
DENA 1.48 0.56
PNB 1.67 0.38
UBI 1.34 0.10
Gross NPA and Net NPA Of different Private Sector

banks in the year 2007-08
AXIS 0.57 0.36

HDFC 0.72 0.22
ICICI 1.20 0.58
KOTAK 1.39 1.09
INDUSIND 1.64 1.31
Gross NPA and Net NPA Of different Private Sector

banks in the year 2008-09
64
AXIS 0.45 0.23

HDFC 0.68 0.22
ICICI 1.90 0.87
KOTAK 1.55 0.98
INDUSIND 1.69 1.25
Comparison of GROSS NPA with Public and Private

sectors banks for the year 2007-08
Comparison of GROSS NPA with all banks for the year 2007-
08. The growing NPAs affect the health of banks, profitability
and efficiency. In the long run, it eats up the net worth of the
banks. We can say that NPA is not a healthy sign for financial
institutions. Here we take all the ten banks gross NPA together
for better understanding. Average of these ten banks gross
NPAs is 1.29 as percentage of total assets. So if we compare in
private sector banks AXIS and HDFC Bank are below average of
all banks and in public sector BOB and BOI. Average of these
five private sector banks gross NPA is 1.25 and average of
public sector banks is 1.33. Which is higher in compare of
private sector banks.
COMPARISON OF NET NPA WITH PUBLIC AND

PRIVATE SECTORS BANKS FOR THE YEAR 2007-08
Comparison of NET NPA with all banks for the year 2007-08.
Average of these ten bank’s net NPA is 0.56. And in the public
sector banks all these five banks are below this. But in private
sector banks there are three banks are above average. The
difference between private and public banks average is also
vast. Private sector banks net NPA average is 0.71 and in
public sector banks it is 0.41 as percentage of total assets. As
we know that net NPA shows actual burden of banks. IndusInd
bank has highest net NPA figure and HDFC Bank has lowest in
comparison.
65
PRIORITY –NON PRIORITY SECTOR
When we further bifurcate NPA in priority sector and Non
priority sector. Agriculture + small + others are priority sector.
In private sector ICICI Bank has the highest NPA with compare
to other private sector banks. Around 72% of NPA in priority
sector and around 78% in non-priority sector. We can see that
in private sector banks have more NPA in non-priority sector
than priority sector.
BANK AGRI SMALL OTHERS PRIORITY NON-PRIORITY

(1) (2) (3) SECTOR
( 1+2+3 )
AXIS 109.12 14.76 86.71 210.59 275.06
HDFC 36.12 110.56 47.70 194.41 709.23
ICICI 981.85 23.35 354.13 1359.34 6211.12
KOTAK 10.00 33.84 4.04 47.87 405.20
INDUSIND 30.44 3.18 30.02 63.64 328.67
TOTAL 1167.53 185.69 522.60 1875.85 7929.28
When we talk about public sector banks they are more in

priority sector and they give advanced to weaker sector or
industries. Public sector banks give more loans to Agriculture,
small scale and others units and as a result we see that there
are more number of NPA in public sector banks than private
sector banks. BOB given more advanced to priority sector in
2008-09 than other four banks .
66
BANK PRIORITY SECTOR NPA
(ADVANCED RS.CRORE )
BOB 5469 350
BOI 3269 325
DENA 1160 106
PNB 3772 443
UBI 1924 197
But when there are comparison between private bank and

public sector bank still ICICI Bank has more NPA in both priority
and non-priority sector with the comparison of public sector
banks. Large NPA in ICICI Bank because the strategy of bank
that risk-reward attitude and initiative in each sector. Above
we also discuss that ICICI Bank has highest deposit-
investment-advance than other banks.
Now, when we compare the all public sector and private sector
banks on priority and non-priority sector the figures are really
shocking. Because in compare of private sector banks, public
sector banks numbers are very large.
PUBLIC SECTOR NEW PRIVATE

2007-08 2008-09 2007-08 2008-09
SECTOR
PRIORITY 22954 25287 1468 2080
PUBLIC 490 299 3 0
NON PRT 15158 14163 4800 8339
TOTAL 38602 39749 6271 10419
Here, there are huge differences between private and public

sector banks NPA. There is increase in new private sector
banks NPA of Rs.4148 cr in 2008-09 which is almost 66% rise
than previous year. In public sector banks the numbers are
not increased like private sector banks.
67
ANNEXURE-I
REPORTING FORMAT FOR NPA – GROSS AND NET NPA
Name of the Bank:
Position as on………
PARTICULARS
1) Gross Advanced *
2) Gross NPA *
3) Gross NPA as %age of Gross Advanced
4) Total deduction( a+b+c+d )
( a ) Balance in interest suspense a/c **
( b ) DICGC/ECGC claims received and held pending
68
adjustment
( c ) part payment received and kept in suspense a/c
( d ) Total provision held ***
5) Net advanced ( 1-4 )
6) Net NPA ( 2-4 )
7) Net NPA as a %age of Net Advance
8) Net NPA as a %age of Net Advance
*excluding Technical write-off of Rs.________crore.
**Banks which do not maintain an interest suspense a/c to park the accrued interest on
NPAs may furnish the amount of interest receivable on NPAs.
***Excluding amount of Technical write-off (Rs.______crore) and provision on standard

assets. (Rs._____crore).
Bibliography
Journals and magazines
• Economic and political weekly, October 16, 2004, CARLTON

PEREIRA, Page 4602-4604 “INVESTING IN NPAs”.
• Chartered Financial Analyst, August 2004, B P Dhaka, Page

58-62; “SARFAESI ACT: THE DIAGNOSIS”.
• The chartered Accountant, February 2005, Raj Kumar S

Adukia, Page NO. 978-985; “SECURITISATION – AN
OVERVIEW”
• Treasury Management, December 2004, MPM Vinay Kumar,

Page 62-65; “SECURITISATION : ISSUES AND
PERSPECTIVES”.
• Chartered Secretary, Feburary 2003, V S Datey, Page 128-

135; “SECURITISATION, RECONSTRUCTION AND
ENFORCEMENT OF SECURITY INTEREST”.
69
Websites:-
• http://www.indiastat.com/banksandfinancialinstitutions/3/perform
ance/16063/nonperformingassetsnpas/377761/stats.aspx
• http://www.bankcapitalgroup.net/services-non-performing-
assets.php
• http://rituparnodas.blogspot.com/2009/01/npa-management.html
• http://www.finanssivalvonta.fi/en/Statistics/Credit_market/Nonper
forming_assets/Pages/Default.aspx
http://findarticles.com/p/articles/mi_hb5562/is_200905/ai_n3189646
1/
70

Management Research Project On NPA

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Management Research Project On NPA

Uploaded by

Copyright:

Available Formats

MRP FINAL PROJECT REPORT

COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND

Management Research Project

COMPARATIVE ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE

A report submitted in partial

I hereby declare that this MRP report on “COMPARATIVE ANALYSIS ON NON

PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS.” has been

written and prepared by me during the academic year 2009-2010.This project

Nandi, Finance Faculty, IBS Kochi in partial fulfillment of the requirement

for the Master Of Business Administration Degree course of the ICFAI

I am grateful to all faculty members of ICFAI Business School, Kochi and my

friends who have helped me in the successful completion of this Management

5. Impact of NPA & Preventive Measurement for

6. Tools for recovery of NPA

8. Data Analysis and interpretation

The accumulation of huge non-performing assets in banks has

While gross NPA reflects the quality of the

Public sector banks figure prominently in the

For the recovery of NPAs a broad framework has

 To evaluate NPAs (Gross and Net) in different banks.

1.2 RESEARCH METHODOLOGY

The research methodology adopted for carrying out the study

 In this project Descriptive research methodologies were

1.3 Scope of the Study

1.4 Sampling Methods

1.5 Limitations of the study

 It was critical for me to gather the financial data of the

 Since my study is based on the secondary data, the

 Since the Indian banking sector is so wide so it was not

Interest and/ or instalment of principal remain overdue for

 The account remains ‘out of order’ for a period of more

 Interest and/or instalment of principal remains overdue

As a facilitating measure for smooth transition to 90 days

2.2 NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA

To start with, performance in terms of profitability is a

Further, Reserve Bank of India (RBI) successfully creates

2.3 INDIAN ECONOMY AND NPAs

Under such a situation, it goes without saying that banks are

2.4 GLOBAL DEVELOPMENTS AND NPAs

The core banking business is of mobilizing the deposits and

A question that arises is how much risk can a bank afford to

The banking sector has been facing the serious problems of

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which

This is the measure factor, which is creating alarming rise

Mainly ours farmers depends on rain fall for

Improper project handling , ineffective management ,

Entrepreneurs in India could not foresee their product

 Change on Govt. policies

The fallout of handloom sector is continuing as most of the weavers

2.5.2 INTERNAL FACTORS:-

There are three cardinal principles of bank lending that

By safety it means that the borrower is in a position to

a) Capacity to pay depends upon:

The banker should, therefore take utmost care in

Due to inappropriate technology and management

The improper strength, weakness, opportunity and threat

• Banks should consider the borrowers own capital

 Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs.

The banker should always select the borrower very

The banker should follow the principle of