Monday, 8 February 2016

February 9

Writing Off Bad Bank Loans
In response to an RTI query by The Indian Express, the Reserve Bank of India disclosed that 29 public sector banks wrote off a combined Rs 1.14 lakh crore of bad debt between 2013 and 2015.
Causes of increase in NPAs:

BAD AND doubtful debts of banks, called non-performing assets or NPAs in banking jargon, have been attracting wide attention for varied reasons. Some of the reasons for the burgeoning NPAs are: Bank officers do not know how to lend and are also corrupt.

The rise was due to some infrastructure projects, slowdown in global economic recovery, and continuing uncertainty in global markets leading to lower growth of credit. It was stated that public sector banks continued to be under stress on account of their past lending.

The absence of proper bankruptcy laws and the dilatory legal procedures in enforcing security rights are the root cause of bad debts in banks.

A major portion of bad debts arose out of lending to the priority sector, at the dictates of politicians and bureaucrats. If only banks had monitored their loans effectively, the bad debt problem could have been contained, if not eliminated.

The top managements of the banks were forced by politicians and bureaucrats to throw good money after bad in the case of unscrupulous borrowers. Many big borrowers defaulted only due to the recession in the economy. The absence of proper bankruptcy laws and the dilatory legal procedures in enforcing security rights are the root cause of bad debts in banks.

Why do banks write off bad debt?
Banks prefer to never have to write off bad debt since their loan portfolios are their primary assets and source of future revenue. However, toxic loans, or loans that cannot be collected or are unreasonably difficult to collect, reflect very poorly on a bank's financial statements and can divert resources from more productive activity. Banks use write-offs, which are sometimes called "charge-offs," to remove loans from their balance sheets and reduce their overall tax liability.

The net non-performing assets (NPAs) of state-owned banks — gross NPAs less provisions — at Rs 1.74 lakh crore at the end of September 2015 is equal to almost a third of their total net worth. In other words, if banks have to fully provide for all their bad debts, it would wipe out 33 per cent of their paid-up capital plus reserves and surplus.

In response to an RTI query by The Indian Express, the Reserve Bank of India disclosed that 29 public sector banks wrote off a combined Rs 1.14 lakh crore of bad debt between 2013 and 2015. This is more than one-third of the total gross non-performing assets of Rs 3.06 crore for public sector banks.
Looking at gross NPAs in isolation doesn’t give the full picture. Banks set aside money in the event of default or non-payment — these are called provisions. The net NPA numbers hide some unpleasant details.

One, for some banks such as Indian Overseas Bank, they make up as much as 83.3 per cent at the end of the September quarter, according to Capitaline database. For 16 out of 25 public sector banks for whom data is available, this ratio is more than 33 per cent. The average for private sector banks is 4.9 per cent. Under the fractional banking system, banks need a certain amount of capital to lend. If a large portion of its equity capital and reserves are wiped out, then a bank will not be able to lend freely, or it will have to wait for capital infusion from the government, which might not be forthcoming in times of a fiscal squeeze. Two, banks have been able to reduce their NPA numbers by not only writing off assets, but also by restructuring or refinancing them. While this might save them temporarily from being classified as bad loans, they might turn irrecoverable if investment demand doesn’t revive.

“For banks, this is just the tip of the iceberg. It is going to get much worse. Especially when some of the big companies in the power and infrastructure sector face more problems,” Hemendra Hazari, an independent analyst, said. After an asset quality review undertaken by the RBI in December, bad debts of some private sector banks rose sharply. For instance, ICICI Bank’s gross NPA jumped Rs 5,291 crore during the December quarter, the highest in nearly five years and that of Axis Bank increased by Rs 1,273 crore. Most large PSU banks are yet to report their December quarter numbers and it is only to be expected that their bad debt numbers will go up, experts said. According to rating agencies, loan write-offs are likely to rise in the coming quarters. Rajat Bahl, Director, CRISIL Ratings, said, “Loan write-offs by banks in India have shown a rising trend in the last few years. They reached a level of Rs 50,000 crore for the public sector banks in 2014-15. Another Rs 25,000 crore were written off in the first half of the current financial year, 2015-16. While the pressure on banks to write-off will continue, the extent of write-offs is unlikely to rise significantly due to two reasons — first, PSBs usually write-off to the extent of cash recoveries that they have made during a year, and the recoveries are unlikely to be buoyant due to continued stress in the corporate sector. Second, their ability to take large write-offs will also be constrained by their weak profitability.” “The quantum of provisions for loans that banks need to make, however, will continue to be high, reflecting the ongoing asset quality challenges,” Bahl said. Vibha Batra, Group Head – Financial Sector Ratings, ICRA, said, higher write-offs are on account of around 3.5 times increase in the pool of gross NPAs to over Rs 3 lakh crore, even though write-offs as per cent of opening gross NPAs have remained in the range of 20-23 per cent. Considering further likely increase in gross NPAs and large stressed accounts, write-offs in absolute amount may continue to increase over next 12-18 months. “With bad loans increasing over time, banks have been working towards lowering the same. While better credit practices and economic stability helps in controlling incremental NPAs, banks have also been writing off bad assets to strengthen their books. This in turn puts pressure on the profit and loss account, but can be considered to be necessary as a prudent practice. This will, to my mind, continue to increase until books are put in order,” said D R Dogra, Managing Director & CEO of rating agency CARE. 

Steps taken from RBI side to curb NPAs:

RBI firm on banks cleaning up balance sheet by March 2017

The RBI is not contemplating any extension of the March 2017 deadline for banks to reduce their non-performing assets (NPAs) and clean up their balance sheets, SS Mundra, Deputy Governor, RBI, said on 29 January, 2016.

Banks have already started the process in the quarter ended December 2015. “It will be painful in the short term but will benefit them in the long run,” he added.
When asked about the delay in selling assets of corporate defaulters seized under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi ) Act, 2002 by banks, he said the present legal system allows big defaulters to delay the process while, at the same time, is harsh on petty defaulters. The new bankruptcy law, now on the anvil, will correct this anomaly, he added.
He said corporate sector leverage has currently become an issue of great concern for the economy in general and the banking system in particular.
“As we notice now, several indiscriminate corporate houses continued market borrowing with a view to increase their market share and to expand capacity without any regard to domestic and global demand situation,” he said. In fact, the rate of sales growth of the corporate sector, particularly of listed manufacturing companies, declined from an average of 28.8 per cent in Q1 of 2010-11 to 11.4 per cent in Q2 of 2012-13 at a time when inflation averaged around 10 per cent. Some of these borrowers necessarily fall into the category of Ponzi borrowers, the Deputy Governor pointed out.
Ponzi scheme:  A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.

Ponzi schemes occasionally begin as legitimate businesses, until the business fails to achieve the returns expected. The business becomes a Ponzi scheme if it then continues under fraudulent terms. Whatever the initial situation, the perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.


Stating that the return on assets in public sector banks was “weak”, he said new areas of untapped potential, such as financial inclusion, should be identified, and banks should innovate in technology and products.

Banks should focus on bread and butter issues in business and more research should be taken up. He identified agricultural credit, micro, small and medium enterprise (MSME) advances and risk mitigation, among others, as important areas for research.

Steps taken from Government to curb NPAs:

Insolvency and Bankruptcy Code: A legislation to promote investments, develop credit markets

The government on Decemnber 21, 2015 introduced in Parliament the ‘Insolvency and Bankruptcy Code, 2015’ that provides for resolution of insolvency in a speedier and time-bound manner.

The bill aims at promoting investments, freeing up banks’ resources for other productive uses, boosting credit markets and improving ease of doing business in India.
An effective legal framework for timely resolution of insolvency and bankruptcy would support development of credit markets and encourage entrepreneurship, according to the statement of objects and reasons of the bill tabled in Lok Sabha by Finance Minister Arun Jaitley.
The bill also provides for setting up of an ‘Insolvency and Bankruptcy Board of India’ to regulate professionals, agencies and information utilities engaged in resolution of insolvencies of companies, partnership firms and individuals.
“The Code also proposes to establish a fund to be called the Insolvency and Bankruptcy Fund of India…,” as per the document tabled.
It further says that a new legislation is needed to deal with insolvency and bankruptcy as the existing framework is “inadequate, ineffective and results in undue delays in resolution”.
As per the proposed legislation, the corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days. It also provides for fast-track resolution of corporate insolvency within 90 days.
“The government’s move to table the Bankruptcy Law is a welcome step, given the relatively long duration of insolvency proceedings in India vis-à-vis other OECD (Organisation for Economic Co-operation and Development) countries,” said K.V. Karthik, partner, Financial Advisory Services, Deloitte Touche Tohmatsu India LLP.
Currently, there is no single law dealing with insolvency and bankruptcy in India. Liquidation of companies is handled by the high courts, individual cases are dealt with under the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920.
Other laws which deal with the issue include SICA (Sick Industrial Companies Act), 1985; Recovery of Debt Due to Banks and Financial Institutions Act, 1993, Sarfaesi (Securitisation and Reconsutriction of Financial Asseets and Enforcement of Security Interest) Act, 2002 and Companies Act, 2013.
As a result, four different agencies, the high courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Debt Recovery Tribunals (DRTs), have overlapping jurisdiction, giving rise to the potential of systemic delays and complexities in the process. A strong bankruptcy law can help overcome these challenges.
The Code also seeks to balance the interest of all the stakeholders including alteration in the priority of payment of government dues.
N K Premchandran of RSP opposed the bill, saying it was a defective piece of legislation, but later the lower House through voice allowed its introduction.
The Code seeks to provide for designating National Company Law Tribunal (NCLT) and Debt Recovery Tribunal (DRT) as the adjudicating authorities for corporate persons and firms and individuals, respectively, for resolution of insolvency, liquidation and bankruptcy.
Till the Insolvency and Bankruptcy Board of India is set up, the central government will exercise the powers of the Board or designate any financial sector regulator the powers and functions.
The bill also provides for priority with regard to distribution of proceeds following liquidation of the company. In the order of priority, the first charge will be insolvency resolution process cost and liquidiation costs to be paid in full.
Liquidation proceeds will then be used to clear debts owed to secured creditors, and then to pay workmen’s dues for 12 months, unpaid dues to employees other than workmen, and financial dues owed to unsecured creditors, in that order. Government taxes for two years, other debts, preference shareholders and equity shareholders will receive last priority for payment.
It also provides for monetary penalty and jail term of up to five years for concealment of property, defrauding creditors and furnishing false information.
The Code also provides for fast track corporate insolvency resolution process to be completed in 90 days.
“Having a robust insolvency resolution mechanism can help creditors recover a larger part of their investment faster, allowing them to re-invest in other businesses, thereby facilitating the efficient flow of capital across the economy,” Karthik said.
Comparison with the US Chapter 11
In the US, there are two main bankruptcy procedures for corporations, Chapter 7 and Chapter 11.
Chapter 7 is the liquidation code and provides for the appointment of a trustee by the court to oversee the liquidation of the company. Under Chapter 7, the business is closed down before sale and the assets auctioned.
Chapter 11 allows a firm to remain in operation while a plan of reorganisation is worked out with creditors.
The Indian Code provides for quick identification of financial distress and a 180-day plan, extendable by 90 days, to revive a company, following which the company becomes insolvent.
With regard to management control, under the US Chapter 11, the company retains the management control while working to achieve pre-agreed goals within a certain timeframe.
The Indian code provides for management control to pass over to resolution professionals with significant powers, once an insolvency resolution is underway.

Public sector lenders write off more 
bad loans than recovery

Smart Villages - Shyama Prasad Mukherji Rurban 

Union Cabinet approves Shyama Prasad Mukherji Rurban Mission to drive economic, social and infrastructure development in rural areas on 16 September, 2015.
Shyama Prasad Mukherji - Shyama Prasad Mukherji (6 July 1901 – 23 June 1953) was an Indian politician, barrister and academician, who served as Minister for Industry and Supply in Prime Minister Jawaharlal Nehru's cabinet. After falling out with Nehru, Mukherjee quit the Indian National Congress and founded the right wing nationalist Bharatiya Jana Sangh (which would later evolve into BJP) in 1951.
In an ambitious bid to transform rural areas to economically, socially and physically sustainable spaces, the Union Cabinet chaired by Prime Minister Shri Narendra Modi on 16 September, 2015 approved the Shyama Prasad Mukherji Rurban Mission (SPMRM) with an outlay of Rs. 5142.08 crores.

The Mission aims at development of rural growth clusters which have latent potential for growth, in all States and UTs, which would trigger overall development in the region. These clusters would be developed by provisioning of economic activities, developing skills & local entrepreneurship and providing infrastructure amenities. The Rurban Mission will thus develop a cluster of Smart Villages.

These clusters would be well delineated areas with planned layouts prepared following the planning norms (as laid down in the State Town and Country Planning Acts/similar Central or State statutes as may be applicable), which would be duly notified by the State/UTs. These plans would be finally integrated with the District Plans/Master Plans as the case may be.

The State Governments would identify the clusters in accordance with the Framework for Implementation prepared by the Ministry of Rural Development. The clusters will be geographically contiguous Gram Panchayats with a population of about 25000 to 50000 in plain and coastal areas and a population of 5000 to 15000 in desert, hilly or tribal areas. There would be a separate approach for selection of clusters in Tribal and Non-Tribal Districts. As far as practicable, clusters of village would follow administrative convergence units of Gram Panchayats.

For the selection of clusters, the Ministry of Rural Development is adopting a scientific process of cluster selection which involves an objective analysis at the District, Sub District and Village level, of the demography, economy, tourism and pilgrimage significance and transportation corridor impact. While the Ministry, following this analysis, would provide a suggestive list of sub districts to the State, the State Governments would then select the clusters following a set of indicated principles included in the Framework for Implementation.

The mission aims to create 300 such Rurban growth clusters over the next 3 years, across the country. The funding for Rurban Clusters will be through various schemes of the Government converged into the cluster. The SPMRM will provide an additional funding support of upto 30 percent of the project cost per cluster as Critical Gap Funding (CGF) as Central Share to enable development of such Rurban clusters.

To ensure an optimum level of development, fourteen  components have been suggested as desirable for the cluster, which would include;  Skill development training linked to economic activities, Agro Processing/Agri Services/Storage and Warehousing, Digital Literacy, Sanitation, Provision of piped water supply, Solid and liquid waste management, Village streets and drains, Street lights, Fully equipped mobile health unit, Upgrading school /higher education facilities, Inter-village road connectivity, Citizen Service Centres- for electronic delivery of citizen centric services/e-gram connectivity, Public transport., LPG gas connections.

The States would prepare Integrated Cluster Action Plans for Rurban Clusters, which would be comprehensive plan documents detailing out the strategy for the cluster, desired outcomes  for the cluster under the mission, along with the resources to be converged under various Central Sector, Centrally Sponsored and State Sector schemes, and the Critical Gap Funding (CGF) required for the cluster. 

In addition to the Critical Gap Funding, proactive steps have been taken to ensure the success of the mission with adequate budget provisions for supporting the State Government towards project development, capacity building and other institutional arrangements at the state level.

The Mission envisages institutional arrangements both at the State and Center to ensure smooth implementation of the Mission. The Mission also has an Innovation budget towards facilitating research, development and capacity building.

The scheme through development of rurban growth clusters aimed at catalyzing overall regional growth,  would thus simultaneously benefit the rural as well as urban areas of the country, by achieving twin objectives of strengthening rural areas and de burdening the urban areas hence leading to balanced regional development and growth of the country.
A step towards substitution of SPMRM scheme for PURA and Bharat Nirman Programmes : 
In 2004, the Atal Bihari Vajpayee's NDA government launched a scheme named Provision of Urban Amenities to Rural Areas (PURA) to modernise villages by providing urban infrastructure and services in rural hubs to create economic opportunities outside of cities. PURA envisaged physical connectivity by providing roads, electronic connectivity by providing communication network and knowledge connectivity by establishing professional and technical institutions. The UPA government took it forward under the broader Bharat Nirman programme.
Union Rural Development Minister Birender Singh said the clusters would be developed by stimulating economic activities, developing skills and infrastructure amenities, as well as supporting local entrepreneurship.
He said earlier programmes such as Provision of Urban Amenities in Rural Areas (PURA) failed because of lack of government involvement. Claiming that SPMRM will be different, he said programmes like PURA were run by private agencies and NGOs. “A need was felt to initiate the scheme in a new format,” he added.
Shyama Prasad Mukherji Rurban Mission

Neeranchal National watershed Project
World Bank Assisted Project "Neeranchal" for the Watershed Component (Erstwhile Integrated Watershed Management Programme) of the Pradhan Mantri Krishi Sinchayi Yojana 

The Cabinet Committee on Economic Affairs (CCEA), chaired by the Prime Minister Shri Narendra Modi, on October 7,2015 has given its approval to:

 (i) implement the World Bank assisted National Watershed Management Project "Neeranchal" with a total outlay of $357 million (Rs 2142.30 crore at Rs. 60 = $1)
(ii) implement the project at the National level as well as in the nine States of Andhra Pradesh, Chattisgarh, Gujarat, Jharkhand, Madhya Pradesh, Maharashtra, Odisha, Rajasthan and Telangana.

The total cost of the project is Rs. 2142.30 crore of which the Government's share is Rs. 1071.15 crore (50 percent) and rest is the loan component from the World Bank.

For achieving the major objectives of the Watershed Component of the Pradhan Mantri Krishi Sinchayi Yojana (PMKSY) and for ensuring access to irrigation to every farm (Har Khet Ko Pani) and efficient use of water (Per Drop More Crop), Neeranchal is primarily designed to address the following concerns:

i. bring about institutional changes in watershed and rainfed agricultural management practices in India,
ii. build systems that ensure watershed programmes and rainfed irrigation management practices are better focused, and more coordinated, and have quantifiable results,
iii. devise   strategies   for   the   sustainability   of   improved   watershed management practices in programme areas, even after the withdrawal of project support,
iv. through   the  watershed   plus   approach,   support   improved   equity, livelihoods, and incomes through forward linkages, on a platform of inclusiveness and local participation.

Neeranchal will translate into better implementation outcomes of PMKSY. The programme will lead to reducing surface runoff of rainwater, increasing recharge of ground water and better availability of water in rainfed areas resulting in incremental rainfed agriculture productivity, enhanced milk yield and increased cropping intensity through better convergence related programmes in project areas.

Neeranchal is designed to further strengthen and provide technical assistance to the Watershed Component of PMKSY, in particular and all  components of PMKSY, in general, to enhance its delivery capacity.  Neeranchal will support the Watershed component of PMKSY (erstwhile IWMP) which was implemented by the Department of Land Resources (DoLR) in 28 States.

Watershed development projects are area development programme and all  people living in the project area will be benefitted.


The Integrated Watershed Management Programme (IWMP) was implemented since 2009-10 by the DoLR, for supporting watershed development in 28 States. From 2015-16 onwards, the IWMP will be implemented as the Watershed Component of PMKSY.

The potential of the watershed approach followed by the erstwhile IWMP to support both conservation and production outcomes including the availability of water in rainfed areas, catering to the needs of small and marginal farmers as well as the asset-less, including women, has been successfully demonstrated at scale across various States of India. However, despite these successes, a number of challenges remain for watershed development to achieve better outcomes, including enhanced participation of communities, building stronger capacities and systems to plan, implement, monitor and post-project sustainability of local institutions and assets. These challenges, if not resolved, can result in implementation delays, slow disbursements and benefits.

Pradhan Mantri Krishi Sinchai Yojana:
Pradhan Mantri Krishi Sinchai Yojana 

Krishi Sinchayee Yojana with an outlay of Rs.50,000 crores for a period of 5 years (2015-16 to 2019-20) to achieve convergence of investments in irrigation at the field level. 

Pradhan Mantri Krishi Sinchayee Yojana (PMKSY) has been formulated amalgamating ongoing schemes viz. Accelerated Irrigation Benefit Programme (AIBP) of Ministry of Water Resources, River Development & Ganga Rejuvenation; Integrated Watershed Management Programme (IWMP) of Department of Land Resources; and On Farm Water Management (OFWM) component of National Mission on Sustainable Agriculture (NMSA) of Department of Agriculture and Cooperation. PMKSY is to be implemented in an area development approach, adopting decentralized state level planning and projectised execution, allowing the states to draw their irrigation development plans based on district/blocks plans with a horizon of 5 to 7 years. States can take up projects based on the District/State Irrigation Plan. 

All the States and Union Territories including North Eastern States are covered under the programme. 

The National Steering Committee (NSC) of PMKSY under the chairmanship of Hon’ble Prime Minister, will provide policy direction to programme framework and a National Executive Committee (NEC) under the chairmanship of Vice Chairman of NITI Aayog will oversee the programme implementation at national level. 

Provision has been made under PMKSY during 2015-16 for carrying out extension activities in the field with special focus on water harvesting, water management and crop alignment for farmers and grass root level field functionaries. 

This information was given by the Minister of State for Agriculture Sh. Mohanbhai Kalyanjibhai Kundaria in Lok Sabha on 4 August, 2015. 


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