January_2015

The Institute of Cost Accountants of India
(Statutory body under anAct of Parliament) www.icmai.in
SPECIAL FOCUS
INSIDE ‘Most cited reason for under achievement in financial inclusion is high cost’ page 77
THE JOURNAL FOR CMAs JANUARY 2015 VOL 50 NO. 1 `100
ACCOUNTANT
theMANAGEMENT
NPA MANAGEMENT
AND CORPORATE DEBT
RESTRUCTURING

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ACCOUNTANT
theMANAGEMENT

The Institute of
Cost Accountants
of India
Behind every successful business decision, there is always a CMA
MISSION STATEMENT
The CMA Professionals would ethically drive
enterprises globally by creating value to stakeholders
in the socio-economic context through competencies
drawn from the integration of strategy, management
and accounting.
VISION STATEMENT
The Institute of Cost Accountants of India would be
the preferred source of resources and professionals
for the financial leadership of enterprises globally.
IDEALS THE INSTITUTE STANDS FOR
• to develop the Cost and Management Accountancy profession
• to develop the body of members and properly equip them for functions
• to ensure sound professional ethics
• to keep abreast of new developments
PRESIDENT
CMA Dr A S Durga Prasad
president@icmai.in
VICE PRESIDENT
CMA Pramodkumar Vithaldasji Bhattad
vicepresident@icmai.in
COUNCIL MEMBERS
CMA Amit Anand Apte, CMA Aruna Vilas Soman,
CMA D L S Sreshti, CMA Hari Krishan Goel,
CMA M Gopalakrishnan, CMA Manas Kr Thakur,
CMA Dr P V S Jagan Mohan Rao,
CMA Rakesh Singh, CMA Sanjay Gupta,
CMA Dr Sanjiban Bandyopadhyaya,
CMA Dr S C Mohanty, CMA Dr S R Bhargave,
CMA T C A Srinivasa Prasad
GOVERNMENT NOMINEES
Ashish Kumar, G Sreekumar, K Govindaraj,
Pramod Kumar, Suresh Pal
Secretary (Acting)
CMA Kaushik Banerjee
secy@icmai.in
Director (Administration)
CMA Arnab Chakraborty
admin.arnab@icmai.in
Director (Professional Development)
CMA J K Budhiraja
pd.budhiraja@icmai.in
Director (Examinations)
CMA Amitava Das
exam.amitava@icmai.in
Director (CAT), (Training Placement)
CMA L Gurumurthy
cat.gurumurthy@icmai.in
Director (Finance)
CMA S R Saha
finance.saha@icmai.in
Director (Administration–Delhi Office
Public Relations)
CMA S C Gupta
admin.gupta@icmai.in
Director (Research Journal)
CMA Dr Debaprosanna Nandy
rnj.dpnandy@icmai.in
Director (Advanced Studies)
CMA Dr P S S Murthy
advstudies.murthy@icmai.in
Director (Technical)
CMA A S Bagchi
dirtechnical.delhi@icmai.in
Director (Discipline) and
Joint Director (Membership)
CMA Rajendra Bose
membership.rb@icmai.in
Editorial Office
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WEBSITE
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THE INSTITUTE OF COST ACCOUNTANTS OF INDIA (erstwhile
The Institute of Cost and Works Accountants of India) was first established in
1944 as a registered company under the Companies Act with the objects of
promoting,regulating and developing the profession of Cost Accountancy.
On 28 May 1959, the Institute was established by a special Act of Parliament,
namely, the Cost and Works Accountants Act 1959 as a statutory professional
body for the regulation of the profession of cost and management accountancy.
It has since been continuously contributing to the growth of the industrial and
economic climate of the country.
The Institute of Cost Accountants of India is the only recognised statutory
professional organisation and licensing body in India specialising exclusively in
Cost and Management Accountancy.
JANUARY 2015 the MANAGEMENT ACCOUNTANT 3www.icmai.in

JANUARY 2015 VOL 50 NO. 1 `100
DISCLAIMER
The views expressed by the
authors are personal and do
not necessarily represent
the views of the Institute
and therefore should not be
attributed to it.
The Management Accountant,
official organ of The Institute
of Cost Accountants of India,
established in 1944 (founder
member of IFAC, SAFA and CAPA)
EDITOR
CMA Dr Debaprosanna Nandy
editor@icmai.in
PRINTER PUBLISHER
President, The Institute of Cost
Accountants of India
12 Sudder Street
Kolkata 700 016
and printed at
Swapna Printing Works Private Ltd.
EDITORIAL OFFICE
CMA Bhawan, 4th Floor, 84, Harish
Mukherjee Road, Kolkata-700 025
Tel: +91 33 2454-0086/0087/0184
Fax: +91 33 2454-0063
The Institute of Cost Accountants of
India is the owner of all the written
and visual contents in this journal.
Permission is neccessary to re-use
any content and graphics for any
purpose.
the MANAGEMENT ACCOUNTANT JANUARY 20154 www.icmai.in
Inside
January 2015
Non-Performing Assets
in Indian Banks: Its
Causes, Consequences
Cure
30
NPA Management
by Banks: Interbank
Disparities in India
34
COMPETITIVE AUGMENTATION OF
SMALL BUSINESSES IN GLOBALIZED
ECONOMY – A STUDY ON MSE
FINANCE BY BANKS IN INDIA20
An overview of non-
performing assets
management and
banking performance –
an empirical analysis
42
Social banking:
finding the route
to entrepreneurial
frustration – NPA
52
COVER STORY

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Back Cover 50,000 2,500
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Ordy. Qrtr. Page 7,500 750
From the
Editor’s desk
6
President’s
communique
7
ICAI-CMA
Snapshots
11
Economy
Updates
17
Newsletter
103
Institute News
109
From the
Research Desk
82
Reading the Rosetta
stone: The new
GST Constitution
Amendment Bill
85
Value Added to Value
Management – Role of
CMAs
96
Taxing Deemed
Dividends90
Tax Titbits93
TAXATION
SURVEY
VALUE MANAGEMENT
50 Years of Management
Accounting research
in India
99
GOLDEN JUBILEE
Study on India’s NPA
Management efficient
banks
Bank Credit to
agriculture: problems
of recovery and
Non-performing Assets
58
A Critical Review of
some measures to
quantify credit risk
in lending
68
78CMA
Dossier
116
'We encourage women
to transform into
entrepreneurs'
72
INTERVIEW: MS. USHA
ANANTHASUBRAMANIAN
'CMAs can help FIs to
optimise cost efficiency
without compromising
quality'
76
INTERVIEW: MR. CHANDRA
SHEKHAR GHOSH

FROMTHEEDITOR’SDESK
Greetings!
Banks have been increas-
ingly facing the pressure
of non-performing assets
owing to the protracted
economic slowdown in
India. Stalled manufac-
turing and infrastructure
projects have resulted into
blocking of cash flows of
the big ticket bank bor-
rowers leading to recovery
woes for banks,particular-
ly for public sector banks.
NPA can be defined as an
advance where payment
of interest or repayment
of installment of principal
(in case of term loans) or
both remains unpaid for
a certain period. In India,
the definition of NPAs
has changed over time. According to the Narasim-
ham Committee Report (1991), those assets (ad-
vances, bills discounted, overdrafts, cash credit etc.)
for which the interest remains due for a period of
four quarters (180 days) should be considered as
NPAs. Subsequently, this period was reduced, and
from March 1995 onwards the assets for which the
interest has remained unpaid for 90 days were con-
sidered as NPAs.
Corporate Debt Restructuring (CDR)
A proper CDR mechanism is very helpful in a coun-
try like India, where the Balance Sheets of the lend-
ers show a large number of Non Performing Assets.
Corporate Debt Restructuring is basically a mech-
anism by way of which a company restructures its
outstanding debts when it finds it is difficult to repay
the same.
Objectives of CDR
• To ensure timely and transparent mechanism for re-
structuring
• To minimize losses of creditors and other stake hold-
ers
• To make the corporates financially viable
Assets Reconstruction
Companies (ARC)
ARC specializes in the re-
covery and liquidation of
assets. Banks which wish
to clean their balance sheet
at one go, may divest their
NPA to an ARC at a dis-
counted value after which
it is the latter’s responsibili-
ty to recover the outstand-
ing dues from the borrow-
ers directly.
Prevention is always
better than post-mor-
tems. During an econom-
ic downturn, the focus
should be on strict due
diligence before selection
of assets. CMA profession-
als can play an important
role in the current scenar-
io to help banking sector in effective NPA manage-
ment.CMAs can support the Banking and Financial
Institutions in the areas of their operations such as
Pre-Sanction Level, Post-Sanction Level, Monitoring
of the stressed accounts, Risk Based Internal Audit in
Banks, Business and Asset valuation, Development of
Cost Management module for different operations of
the Bank, Evaluation of cost of different transactions,
Effective Cost Management in banking transactions,
Strategic Cost Management, Risk Management in
Banking Sector and new product pricing, etc.
The Management Accountant has been published reg-
ularly since 1966.We are now stepping into the Gold-
en Jubilee year in 2015.We will be introducing new
sections in the Journal from January 2015 to cater the
needs of the readers.This issue presents a good number
of articles on the cover story theme‘NPA Management
and Corporate Debt Restructuring’ by distinguished
experts and authors and interviews from industry stal-
warts.We look forward to constructive feedback from
our readers on the articles and overall development of
the journal. Please send your mails at editor@icmai.in.
We thank all the contributors to this important issue
and hope our readers enjoy the articles.I wish you all a
very happy and prosperous new year ahead.

President, The Institute of Cost Accountants of India
EMPHASISON‘MAKEININDIA’AND
‘MAKEINDIACOMPETITIVE’POINTS–
THEDIRECTIONTOWARDSTHECMAs
PRESIDENT’S
COMMUNIQUE
I wish you and your families a very delightful and memorable New
Year 2015. I pray to almighty for happiness, joy and satisfaction
to be an integral part of your life. Professionally too I wish our
Institute expand its wings internationally and grow to new heights
of success. I am sure that our profession will touch a new high this
year and will play its role of helping the society, stakeholders and
country effectively.
I wish you a Happy New Year 2015.
Recent shift in the focus of Management
Accounting
The clarion call of the Honorable Prime Minister is to achieve extra
ordinary results in the focused sectors wherein the country has
a competitive advantage. Extra Ordinary results cannot come
from business as usual approach. It needs completely enhanced
business practices driven by the leadership of the India Inc. In this
context, we call upon the Indian business to adopt best in class
cost and management accounting practices and embed the same
in business processes for extra ordinary results. This cannot flow
from a financial accounting mentality of the as Usual Business.
The business will have to make strategic choices on competing
with China and other economies on products/services, offer cost
effective value added services, embed sustainable business
practices and manage processes efficiently. These outcomes can
be powered only by a robust cost and management accounting
framework and not by even international financial reporting
standards.
The field of management accounting is experiencing a
punctuated shift toward more progressive methods and practices.
The cause is reaction to business marketing and sales techniques
that are increasingly customer centric and require predictive
planning and operational manager needs to improve productivity
by removing waste, shortening cycle times, and increasing
efficiency and effectiveness.
The shift to predictive accounting is a major transition from
management accounting for reporting costs and profits to
decision support and analysis that impact the future. In the
current challenging arena competency and software capabilities
with analytics provides a competitive edge. The need for better
skills and competency with behavioral cost management requires
change-agent management accountants to motivate mid-
level managers and other “champions” to demonstrate to their
coworkers that progressive management accounting and EPM
methodologies make sense to implement.
The continued emphasis being made on “Make in India” and
“Make India Competitive” by the Government continues to point
the direction towards the Cost and Management Accountants,
who can make the dream a reality.
International Seminar on Integrated Reporting
The Institute in association with South Asian Federation of
Accountants (SAFA) organized SAFA Events at Bhubaneswar
on 4thDecember 2014. As part of these events the Institute
organized 37thBoard meeting of SAFA and an international
seminar on Integrated Reporting, which was attended by around
60 participants. The inaugural session of the International Seminar
was presided over by Mr. Upendra Nath Behera, IAS Additional
Chief Secretary, Finance, Government of Odisha.
In my presidential address I outlined the importance of Integrated
Reporting in the emerging business scenario wherein stakeholders
are becoming conscious and vocal regarding the concept and
philosophy of triple Ps -People, Planet and Profits. Prominent
speakers like Dr. Aditi Haldar, Prof. Asish Bhattacharyya and Dr.
S.K. Gupta interacted with the participants during the deliberations
and said that the seminar would help in improving understanding
My Dear Professional Colleagues,
Life is a series of experiences,each one of which makes us
bigger,even though sometimes it is hard to realize this.For the
world was built to develop character,and we must learn that the
setbacks and grieves which we endure help us in our marching
onward.– Henry Ford

of the concept and practice of Integrated Reporting. The seminar
focused on the changing business perspective the world over with
emerging attention on the integration of Social, Environmental
and Economic aspects of business. It was reiterated that move
towards Integrated Reporting is inevitable as the world over
attention is now converging on developing an integrated reporting
structure and format.
SAFA BPA Awards and SAARC Anniversary
Awards
Presentation ceremony of SAFA BPA Awards and SAARC
Anniversary Awards for Corporate Governance Disclosures
for 2013 was organized in the evening of 4thDecember 2014
at Bhubaneswar. The event was apt for the release of SAFA
History Document titled 'History of South Asian Federation of
Accountants - A Glorious Journey spanning Last Three Decades'
by the Chief Guest Dr. Pradeep Kumar Panigrahy, Hon’ble Minister
of State (I/c) for Higher Education, Science Technology and
Rural Water Supply, Government of Odisha. This was followed by
the Presentation of Awards by the Chief Guest. The Chief Guest
presented 72 awards in various categories to the awardees from
Bangladesh, India, Nepal, Sri Lanka and Pakistan. The event was
concluded with a glittering Cultural Program by the Odisha Folk
Artists followed by Dinner.
NIRC Seminar on GST
Northern India Regional Council of the Institute organized a
seminar on “GST- Game-Changer for the Economy and Industry”
on 27thDecember 2014 at New Delhi. Shri V.K Garg, IRS and
former JS (TRU), covered various aspects of GST. Speaking on
the occasion I conveyed that industry is looking at us with lots of
hope and positivity. GST is an evolving process. There are clear
indications that it will be rolled out from April 2016 as announced
by the Government. Around 300 members and students attended
the seminar.
SIRC CMA Summit 2014
Southern India Regional Council of the Institute hosted CMA
Summit 2014-15 on the theme of “Make in India – Role of
CMAs” at Thiruvananthapuram on 19th and 20th December
2014. I addressed the participants and said that CMAs have
tremendous sense of duty towards Nation Building and it is time
they come up to the task assigned to them by the society, their
organisations and profession. I believe that CMAs have a role
to play in performance management and devising proper pricing
model which aims at monitoring the outcomes of resources
utilization, pricing of goods and services affecting the day to day
life, controlling health care, education and pricing of government
services, effective procurement pricing of governmental buying
and effective control of the usage of environmental resources by
the business.
To apprise all the members about the activities / initiatives
undertaken by the Departments/ Directorates of the Institute, I
now present a brief summary of the activities.
Continuing Professional Development Directorate
I am pleased to inform that the CPD Department and PD Department
of the Institute jointly organized a session on 'A way ahead to
GST' at New Delhi. Shri Upender Gupta, Addl. Commissioner,
(working as OSD, study Group on GST in CBEC) discussed the
government initiatives on GST and shared his expert views. There
was overwhelming response by the members and session was
very much appreciated.The Institute in association with Standing
Conference of Public Enterprises (SCOPE) jointly organized
One Day Workshop on “The Evolving Role of The Internal Audit
Function Value Creation Preservation” on 19thDecember 2014
at New Delhi. There was active participation by the professionals
in PSEs.I am proud to inform that during the month our Regional
Councils and Chapters actively organized many programs,
seminars and discussions for the members on the topics of
professional relevance such as on Excise, Service Tax Customs,
Payment of VAT and input Tax Rebate, GST – Game Changer for
the Industry Economy, Small Service Providers and Procedural
aspects, Indian Debt Market, Cost Management – Fundamental
Principles, Transfer Pricing, Cost Audit In Electricity Distribution
Companies, International Financial Reporting Standards-Overview,
CAS-4, Contracts and their Management, Overview of SAP – BPC,
Preparation of Detailed Project Report Including Structuring,
Syndication and Restructuring, Commercial Tax: Applicability and
Incidence of Commercial Tax, Role of Professionals Accountants
in the Emerging Scenario, CMA Summit 2014-15 Make in India-
Role of CMAs, Balancing Energy Efficiency with Green Growth,
and so on.
Cost Management Accounting Committee
Cost Management Accounting Committee has initiated to
organise Webinars on ‘Series on Cost Management” to reach
members at large. First two sessions in December 2014 were
well received by the members. We are grateful to the domain
experts from the Institute Prof. Asish Bhattacharyya, CMA S.A.
Muraliprasad of Chennai, Prof. Purushottam Sen of IIM-Kolkata
and Prof. Sailesh Gandhi of IIM-Ahmedabad, who presentedthe
first webinars of the series. The full details of the webinars are
available on the website of the Institute. I look forward to the
continued active participation from the members. The committee
has also come out with the Draft Guidance Manual for Healthcare
Cost and the Draft Guidance Manual for Education Cost which will
be discussed at the forthcoming CMA Committee meeting.
Examination Directorate
The Examination Directorate had successfully conducted
Intermediate and Final examinations from 10thto 17thDecember
2014. The examination instates of Jharkhand and Jammu
Kashmir was conducted on 21stDecember 2014 due to elections
on 14th December 2014. I am pleased to inform that the Foundation
online examination was successfully conducted on 21stDecember
2014 and result was announced on 24th December 2014. Around
70000 students had applied to appear in these examinations.
Hyderabad Center of Excellence
The Diploma in Management Accountancy examination was
conducted in 8 centers across India for December 2014 Term.
The webinars for the Diploma in IS Audit and control, Business
Valuation, and Internal Audit were also conducted for the
participants.
PRESIDENT’S
COMMUNIQUE

ICWAI MARF Programs
The ICWAI MARF programs directorate organized Certified
Accountant Program for the officers of Mahindra Finance Academy
during 15th to 20thDecember 2014 at New Delhi. The certificate
course on ‘International Financial Reporting Standards (IFRS) and
Converged Indian Accounting Standards (Ind-AS)’ was organized
during 15th to 19thDecember 2014 at New Delhi which was
attended by executives of various organizations. A program for
the officers of Balasore Alloys Limited was organised on ‘Activity
Based Costing’ during 18th to 20thDecember 2014 at Balasore,
Odisha. Two programs on ‘Service Tax – Issues and Problems’ and
‘Contracts and their Management’ were organized during 16th to
19thDecember 2014 at Shirdiand were attended by executives of
various organizations.
International Affairs Department
Shri Mahesh Basnet, Hon’ble Minister of Industries, Government of
Nepal visited Delhi Office of the Institute on 9th December 2014 at
2000 hours. Shri Maheswar Neupane, Joint Secretary, Ministry of
Industries, Government of Nepal and Shri Tirtharaj Vagle, Director,
Nepal High Commission in India also accompanied the Hon’ble
Minister. During the discussions with the members Hon’ble
Minister praised the role of CMAs in the economy and industrial
development of India and promised to pass on the request of the
Institute to the Education Minister of Nepal for constitution of CMA
Institute in Nepal.
The Technical meeting of Accounting Body’s Network (ABN)
was held at London, to discuss the key areas of focus for ABN
members and areas for collaboration with A4S and other Network
members on 10th December 2014. The meeting reviewed the
achievement of ABN and A4S with other network members.HRH
The Prince of Wales marked his Accounting for Sustainability (A4S)
Project’s tenth anniversary on 11th December 2014 by setting a
challenge to accountants worldwide. The theme of this year’s
anniversary was “Transforming Finance and Accounting: Meeting
the Challenges of the Next Decade”. The event was attended by
CMA Sanjay Gupta, Chairman, International Affairs Committee and
Council Member of the Institute.
Membership Department
It is observed that some of our members have not yet made their
payments towards membership fee for FY 2014-15 presumably
because of their pressing official commitments. I urge upon all
such members to make their membership fee payment at the
earliest to continue to avail the benefits of membership. I also
request all our esteemed members to impress upon the final
qualified candidates, working in their organizations to apply for
the Associate membership of this Institute after the candidates
satisfy their eligibility criteria for membership, details of which are
mentioned on the Institute website www.icmai.in
Research Journal Directorate
I am happy to inform that the Institute in collaboration with the
Rabindranath Tagore Centre for Human Values, Kolkata conducted a
3-days workshop on ‘Values Ethics for Professional Leadership
Excellence’ from 28thNovember 2014 till 30thNovember 2014
at EIRC Auditorium. Professor (Dr.) S.K Chakraborty, Mentor
Emeritus, Rabindranath Tagore Centre for Human Values, Prof. B.K
Sarkar, Vice Principal, Prof. (Mrs.) Anupurba Banerjee, Assistant
Tagore Fellow were the key resource persons in the seminar. This
three days workshop ended with the valedictory address of CMA
Manas Kumar Thakur, Chairman, Research, Innovation Journal
Committee of the Institute.
A Round Table Discussion on the theme ‘Relevance of
Micro Finance in India’ had been held at EIRC Auditorium on
18thDecember 2014 organized by the Directorate of Research
Journal of the Institute. Shri Chandra Sekhar Ghosh, Chairman
Managing Director, Bandhan Financial Services Pvt. Ltd, ShriKuldip
Maity, MD CEO, Village Financial Services Pvt. Ltd, Shri Suparna
Pathak, Business Editor, ABP Ltd, Professor Samar Kumar Datta,
Entrepreneurship Development Institute of India, Gujarat, Prof.
CMA Sudipti Banerjea, Calcutta University were among the
eminent dignitaries present in the discussion. CMA Manas Kumar
Thakur, Council Member, ICAI, also chaired an important session in
the seminar. CMA (Dr.) Debaprosanna Nandy, Director, Research
and Journal, ICAI concluded the programme with a vote of thanks
and there was an interactive questionnaire session beautifully
resolved by the eminent dignitaries on the dais.
On 19th December 2014, K.K Das College, Department of
Commerce in collaboration with our Institute organized a UGC
Sponsored National Level Seminar on ‘Cost Competitiveness
in Micro, Small and Medium Enterprises in India’. CMA Manas
Kumar Thakur, Chairman, Research, Innovation Journal
Committee, Prof. Ajitava Raychaudhuri, Professor, Dept. of
Economics, Jadavpur University, Professor Samar Kumar Datta,
Entrepreneurship Development Institute of India, Gujarat, CMA
(Dr.) Debaprosanna Nandy, Director, Research Journal, Prof.
Soma Mukherjee, Teacher in Charge, K.K. Das College, Professor
Rinku Saha, Dept. of Commerce, K K Das College were among the
dignitaries. The seminar was highly successful and the eminent
dignitaries present over there shared their valuable opinions about
the Cost Competitiveness of MSME sector and the governmental
initiatives, their effectiveness as well as the challenges.
56th National Cost Convention
Friends, I invite you to attend the 56th National Cost Convention
of the Cost Management Accountants scheduled to be held
at Hyderabad on 31st January – 1st February 2015. I urge the
members of the profession to assemble in big numbers to
showcase the strength of the profession and also to make this
annual event of the Institute a grand success. All the details are
available on the website of the Institute.
I wish prosperity and happiness to members, students and
their family on the occasion of New Year 2015 and Lohri, Makar
Sankranti, Pongal, Guru Gobind Singh’s Birthday, Subhash Chandra
Bose Jayanti and Republic Day.
With warm regards,
(CMA Dr A S Durga Prasad)
1st January 2015

(Statutory Body under an Act of Parliament)
Dear Sir,
I have gone through your article as published in our esteemed Journal ‘The Management Accountant’ of December, 2014 issue.
You have nicely elaborated some of the provisions of finance act 1994 and mega exemption list and also notification 26/2012. Keep
it on. I would like to see the specific problems wise analysis of service tax, like Manpower, Legal, Erection, Finishing etc. in the next
issue as these will facilitate the reader
–– CMA Utpal K Saha
Letter to the Editor

1. CMA Dr A S Durga Prasad, President of the Institute greeting
Sri N Chandrababu Naidu, Hon’ble Chief Minister of Andhra
Pradesh on a courtesy visit on November 22, 2014
2. Shri Sadhan Pande, Minister of Consumer Affairs, Govt. of
West Bengal, Rear Admiral Shri A K Verma, CMD, GRSE Ltd,
CMA Harijiban Banerjee, CMA Amal Kr. Das, Past Presidents
of the Institute, CMA Manas Kr. Thakur, Chairman, Research
Innovation and Journal Committee, CMA Srikanta Sahoo,
Chairman EIRC, CMA Bibekananda Mukhopadhyay, Secretary
EIRC and CMA Shiba Prasad Padhi, Treasurer EIRC at the
inauguration session of Regional Students Conference 2014
organized by EIRC in Kolkata on December 21, 2014
3. At the inaugural function of new premises held at Surat
South Gujarat Chapter on November 16, 2014. From the left
CMA Nanty Shah, Joint Secretary of the Chapter, CMA A B
Nawal, Chairman WIRC, CMA S N Mundra, Chairman of the
Chapter, Hon’ble Shri Chhatrasinh Mori, Minister of State, Food
Civil Supplies, Consumer affairs, Chief Guest and President
CMA Dr A S Durga Prasad, CMA P V Bhattad, Vice President,
CMA B M Sharma, Past President and CMA G P Rao of the
Institute
4. CMA Manas Kr. Thakur, Council Member and CMA
Bibekananda Mukhopadhyay, Secretary EIRC meeting Shri
Jitan Ram Manjhi, Chief Minister of Bihar for a discussion on
economic growth of Bihar, December 19, 2014 in Patna
5. CMA Manas Kr. Thakur, Council Member, CMA Bibekananda
Mukhopadhyay, Secretary, EIRC, CMA A N Singh, Vice
Chairman, Patna Chapter during a visit to Dr Bhim Singh,
Minister of Commerce Industry. Others seen are the team
of people at Ministry for Industrial Development of Bihar,
December 2, 2014
ICAI-CMASNAPSHOTS
5
1 2
3
4

6a 6b. CMA Sanjay Gupta, Council Member, in interaction with
His Royal Highness, The Prince of Wales, at the A4S Summit 2014
hosted by the Prince at London in December 2014, on Integrated
Reporting Sustainability
7. CMA Sanjay Gupta, Council Member Chairman- International
Affairs Committee deliberating at the ‘International Seminar on
Integrated Reporting’ at Bhubaneswar, December 4, 2014
8. CMA Sanjay Gupta, Council Member Chairman- International
Affairs Committee welcoming Shri Mahesh Basnet, Hon’ble
Minister of Industries, Government of Nepal at Round Table Meet
on December 9, 2014 at CMA Bhawan, New Delhi
9. Shri Mahesh Basnet, Hon’ble Minister of Industries,
Government of Nepal in interaction with CMA Sanjay Gupta,
Council Member, CMA K L Jaisingh, Past President, CMA Sumit
Goyal and other members at Delhi
ICAI-CMASNAPSHOTS
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9
8
6a 6b

10. CMA Dr A S Durga Prasad, President
lighting the lamp at CMA Summit 2014-15
held by SIRC. Also seen CMA P V Bhattad,
Vice President, and CMA H Padmanabhan,
Chairman, SIRC and other dignitaries
11. CMA P V Bhattad, Vice President,
lighting the lamp at CMA Summit 2014-
15 held by SIRC. Also seen CMA Dr A
S Durga Prasad, President, and CMA H
Padmanabhan, Chairman, SIRC and other
dignitaries
12. CMA Rakesh Singh, Past President of the
Institute addressing the plenary session on
role of the Board in promoting sustainability
on ‘Management Accounting Principles
for Sustainable Success’ at the ‘National
Convention on Corporate Governance and
Sustainability IOD Annual Meet’ organized
by the Institute of Directors on December 20,
2014 at New Delhi
13. On November 16, 2014 CMA TCA
Srinivasa Prasad, Council Member presenting
a memento to Sri Satish Govind and
Members of SR Business Solutions on the
occasion of ‘Persuasion Presentation Skills
that win Business’ held at CMA Bhawan,
Himayatnagar
14. CMA Dr PVS Jagan Mohan Rao, Council
Member counselling the students about
CMA course at Andhra Vidyalaya College (AV
College), Domalguda on November 15, 2014
ICAI-CMASNAPSHOTS
10 11
12
13
14

15. Chief Guest Sri Arvind Patwari, Director, MSME-Development Institute,
Hyderabad is being felicitated with a floral bouquet by CMA Radha Krishna
Komaragiri, Chairman, Hyderabad Chapter in connection with a joint
programme titled ‘MSME and Role of Cost Accountants’ held on November
1, 2014. CMA DLS Sreshti, Council Member and CMA H Padmanabhan,
Chairman, SIRC are also seen
16. CMA A B Nawal, Chairman WIRC, addressing participants at prize
distribution cultural programme held by Surat South Gujarat Chapter on
November 16, 2014. From the left on the dais CMA Amit Apte, CMA S N
Mundra, Shri R K Aggarwal, Chief Guest, Operation Director, Kribhco, CMA
Dr A S Durga Prasad, President CMA P V Bhattad, Vice president, CMA B M
Sharma, Past President, CMA G P Rao, CMA Shrenik Shah, CMA R K Rathi of
the Institute
17. CMA P V Bhattad, Vice President of the Institute at the ‘Annual Seminar
2014-15’ at Asansol Chapter, held on December 7, 2014 on the theme
‘Balancing Energy Efficiency with Green Growth’. From the left on the dais are
CMA Sudip Dasgupta, Chairman, Asansol Chapter, CMA Amitava Saha, D(F),
BCCL, CMA Chandan Kumar Dey, D(F), ECL, Sri K S Patro, D(P), ECL and CMA
Shyamal Bhattacharya, Treasurer, EIRC
18. A Session on ‘A way ahead to GST’, held on December 9, 2014 at New
Delhi. From the left CMA Atul Kumar Gupta, Tax Consultant, Shri Upender
Gupta, Additional Commissioner (Working as OSD, Study Group on GST in
CBEC), CMA Nisha Dewan, Joint Secretary, Continuing PD, and CMA J K
Budhiraja, Director, Professional Development of the Institute
19. One day workshop on ‘The Evolving Role of the Internal Audit Function-
Value Creation Preservation’ held on December 19, 2014 at New Delhi.
From the left Shri Subhash C Agrawal, Director (Finance), Cement Corporation
of India, Dr U D Choubey, Director General, SCOPE, Prof. CMA Asish
Bhattacharyya, Chairman, Board of Advanced Studies of the Institute and Dr
Amit Bagga, Consultant
20. Dr Sugata Marjit, RBI Professor of Industrial Economics as the Key Speaker
in the Annual Seminar 2014-15 conducted by Asansol Chapter. Also seen on
the dais are CMA C R Chattopadhyay, Past Chairman, EIRC and Chairman of
the Technical Session, the Guest Speaker CMA B N Bhattacharya, Former Chief
Internal Auditor, DVC and Sri Anjan Fouzdar, Environmental Engineer WBSPCB
ICAI-CMASNAPSHOTS
15 16
17
18
19
20

theMANAGEMENT
ACCOUNTANTTHE JOURNAL FOR CMAs ISSN 0972-3528
PAPERS INVITED
Cover stories on the topics given
below are invited for The Management
Accountant for the four forthcoming
months.
The above subtopics are only suggestive and hence the articles may not be limited to them only.
Articles on the above topics are invited from readers and authors along with scanned copies of their
recent passport-size photograph and scanned copy of declaration stating that the articles are their
own original and have not been considered for publication anywhere else. Please send your articles
by e-mail to editor@icmai.in latest by the 1st of the previous month.
Directorate of Research Journal
The Institute of Cost Accountants of India (Statutory body under an Act of Parliament)
CMA Bhawan, 4th Floor, 84 Harish Mukherjee Road, Kolkata - 700 025, India
Board: +91-33- 2454 0086 / 87 / 0184, Tel-Fax: +91-33- 2454 0063
www.icmai.in
Issue months Themes Subtopics
February 2015
Cost Competitiveness through
Leadership
• Economic development through effective leadership
• Strategic cost management
• Leadership and organizational competitiveness
• Essentials of cost leadership
• Differential leadership strategy
• Related case studies
March 2015
Infrastructure Development
Economic growth
• Infrastructure investment
• Risk Management
• Social infrastructure
• Sustainable growth
• PPP Model
• Real Estate
• Global trend
• Role of Government
April 2015 FDI Economic Growth
• Suitability of FDI in Indian context
• FDI and economic growth indicators
• FDI flow at sectoral level of Indian economy
• ‘Make in India’ and FDI
• Prospects of FDI in India
• FDI and domestic industry
• FDI policies in India
May 2015
Integrated Reporting and Business
Sustainability
• Concept of Integrated Reporting(IR)
• Need, emergence current trend of IR
• Pre-requisites for successful implementation of IR
• Stakeholders expectations from IR
• Enterprise Performance Management and IR
• Sustainability Reporting, CSR and IR
• Linkage between IR and GRI G4
• Role of CMAs in IR

ECONOMY UPDATES
Banking
• Levy of penal charges on
non-maintenance of minimum
balances in savings bank accounts
In this connection, a reference is invited to
paragraph 30 of Part B of First Bi-monthly
Monetary Policy Statement, 2014-15
announced on April 1, 2014, regarding
‘Developmental and Regulatory Policies’
proposing certain measures towards
consumer protection. One of the proposals
contained therein was that banks should
not take undue advantage of customer
difficulty or inattention. Instead of levying
penal charges for non-maintenance of
minimum balance in ordinary savings
bank accounts, banks should limit
services available on such accounts
to those available to Basic Savings
Bank Deposit Accounts and restore the
services when the balances improve to
the minimum required level. A reference
is also invited to the recommendations
of Damodaran Committee on customer
service in banks which, inter-alia,
recommended that ‘banks should inform
the customer immediately on the balance
in the account breaching minimum
balance and the applicable penal charges
for not maintaining the balance by SMS/
email/letter. Further, the penal charges
levied should be in proportion to the
shortfall observed’.
Source: Notification No. RBI/2014-15/363
(DBR.RRB.BC.No.55/03.05.33/2014-15)
dated: December 22, 2014
• Non-Cooperative Borrowers
A non-cooperative borrower is one who
does not engage constructively with his
lender by defaulting in timely repayment of
dues while having ability to pay, thwarting
lenders’ efforts for recovery of their dues
by not providing necessary information
sought, denying access to assets financed
/ collateral securities, obstructing sale of
securities, etc. In effect, a non-cooperative
borrower is a defaulter who deliberately
stone walls legitimate efforts of the lenders
to recover their dues. In this connection,
banks/FIs should take the following
measures in classifying/declassifying a
borrower as non-cooperative borrower and
reporting information on such borrowers
to Central Repository of Information on
Large Credits (CRILC).
(DBR.No.CID.BC.54/20.16.064/2014-15)
dated: December 22, 2014
• F-TRAC – Counterparty
Confirmation
A reference is invited to RBI circular IDMD.
PCD. 13 /14.01.02/2013-14 dated June
25, 2014 regarding reporting of OTC
trades in Commercial Papers (CPs) and
Certificate of Deposits (CDs); and OTC
repo trades in corporate debt securities,
CPs, CDs and non-convertible debentures
(NCDs) of original maturity less than one
year on F-TRAC - the reporting platform
of Clear corp Dealing Systems (India)
Ltd. (CDSIL). As per extant guidelines,
the above-mentioned trades have to be
physically confirmed by the back offices
of the counterparties. In F-TRAC, both the
counterparties individually report their
respective sides of the trades and the
trades are validated for trade details before
matching by F-TRAC. This ensures implicit
confirmation by both counterparties.
Further, the details of the transactions are
available on the F-TRAC system.
On a review, it has been decided to waive
the requirement of exchange of physical
confirmation of trades matched on F-
TRAC subject to the following conditions:
i. Participants entering into one time
bilateral agreement for eliminating the
exchange of confirmation;
ii. Participants adhering to the extant laws
such as stamp duty as may be applicable;
and
iii. Participants ensuring adherence to a
sound risk management framework and
complying with all the regulatory and legal
requirements and practices, in this regard.
FMRD.FMID.01/14.01.02/2014-15 dated:
December 19, 2014
• Persons already having bank
account need not to open a fresh
one to avail benefits of the Pradhan
Mantri Jan Dhan Yojana
Government said persons already having
bank account need not to open a fresh one
to avail benefits of the Pradhan Mantri Jan
Dhan Yojana. A person who is already
having a bank account with any bank need
not have to open a separate account under
PMJDY. He/she will just have to get issued
a RuPay card in his existing account to get
benefit of accidental insurance, a Finance
Ministry statement said. The overdraft
facility can be extended in existing account,
it said. Accidental insurance of Rs 1 lakh
will be available to all RuPay card holders
between 18-70 years. They will need to use
their RuPay card once in 45 days of receipt
of the card to get the benefit. The accidental
claim intimation should be given to bank
within 30 days from the date of accident,
it added. For life insurance coverage, one
person per family will get a single cover of
Rs 30,000 on one card only despite having
multiple accounts/cards.
Source: PTI | 17 Dec 2014
• PSBs told to offer net, mobile
banking services in Hindi also
Continuing with its Hindi overdrive, the
home ministry has asked finance ministry
to ensure that all net banking web portals
and mobile banking applications of
nationalized banks are offered in Hindi apart
from English, while e-mails and SMS alerts
are sent to customers in Hindi as well. The
home ministry first and foremost wants
ATM machines to print receipts in Hindi
apart from English. It also wants option

for customers to work in Hindi on internet
banking web portals. The home ministry
has also pointed out that mobile banking
applications are not available in Hindi and
it also needs to be ensured that e-mails
and SMS alerts sent to customers by banks
should be in Hindi as well.
Source: Economic Times | 17 Dec 2014
Service Tax
• Govt. empowers CMAs / CAs
nominated as special auditors, to
conduct Service Tax Audits
As per notification no. 23/2014- Service
Tax dated: 5th December, 2014, every
assessee, shall, on demand make
available to the officer empowered under
sub-rule (1) or the audit party deputed
by the Commissioner or the Comptroller
and Auditor General of India, or a Cost
Accountant or Chartered Accountant
nominated under section 72A of the
Finance Act, 1994:
(i) the records maintained or prepared by
him in terms of sub-rule (2) of rule 5;
(ii) the cost audit reports, if any, under
section 148 of the Companies Act, 2013
(18 of 2013); and
(iii) the income-tax audit report, if any,
under section 44AB of the Income-tax Act,
1961 (43 of 1961),
for the scrutiny of the officer or the audit
party, or the cost accountant or chartered
accountant, within the time limit specified
by the said officer or the audit party or the
cost accountant or chartered accountant, as
the case may be.
Central Excise
• Amendment of notification no 12/2012
- Central Excise dated 17/03/2012 so
as to increase the Basic Excise Duty
(BED) on petrol (both branded as well as
unbranded) and diesel (both branded as
well as unbranded) vide notification no.
24/2014-CE, dt. 02-12-2014.
• Grants exemption from Basic Excise
Duty to goods donated or purchased
out of cash donations for the relief and
rehabilitation of people affected by
the floods in the State of Jammu and
Kashmir vide notification no. 25/2014-
CE, dt. 11-12-2014.
Customs
• Grants exemption from the duties of
Customs to goods imported for donation
for the relief and rehabilitation of people
affected by the floods in the State of
Jammu and Kashmir vide notification
No. 33/2014-Cus, dt. 11-12-2014.
• Re-warehousing of goods imported and/
or procured indigenously by EOU/EHTP/
STP/BTP units:
Attention is drawn to the self-bonding/
warehousing procedure on the above
subject specified in Circular No. 19/2007-
Cus dated 03.05.2007. It has been brought
to the notice of the Board that the units
which are under the said procedure are
facing difficulty in obtaining deemed export
benefits as the ARE-3 is not certified by the
Central Excise authorities. The matter was
examined in consultation with the DGFT
and DG (EP). To resolve the issue and
facilitate trade, it has been decided by the
Board to provide that the Superintendent –
in- charge of the unit shall make two legible
photocopies of the original copy of ARE-3
(that bears his counter signature) and attest
each of them as true copies with his dated
signature. One attested copy shall be kept
in the Range office for records and the other
one shall be handed over (against dated
vide Circular No.16/2014-Customs dated:
18th December, 2014.
• Amendment of Notification No.
012/2012 Customs dated 17.03.2012
so as to increase duty on crude and
refined edible oils vide notification no.
34/2014-Cus, dt. 24-12-2014.
• Anti-dumping duty
i. Impose of definitive anti-dumping duty
on imports of Clear Float Glass originating
in or exported from Pakistan, Saudi Arabia
and United Arab Emirates (UAE) vide
notification no. 48/2014-Cus (ADD), dt.
11-12-2014.
ii. Levy of definitive anti-dumping duty
on imports of cable ties, originating in or
exported from People's Republic of China
and Chinese Taipei, for a period of five year
vide notification no. 47/2014-Cus (ADD),
dt. 09-12-2014.
iii. Impose of anti-dumping duty on
Sodium Nitrite originating in or exported
from China PR vide notification no.
46/2014-Cus (ADD), dt. 08-12-2014.
Income Tax
• Income-tax deduction from Salaries
during the financial year 2014-15 under
section 192 of the Income Tax act, 1961
vide circular no: 17/2014.
Read more at: http://www.incometaxindia.
gov.in/communications/circular/
circular17_2014.pdf
SEBI
• Modification to Offer for Sale (OFS)
of Shares through stock exchange
Mechanism vide Circular CIR/MRD/
DP/32 /2014 December 01, 2014.
• Facilitating transaction in Mutual Fund
schemes through the Stock Exchange
Infrastructure vide Circular CIR/MRD/
DSA/33/2014 December 09, 2014.
(For further details on these issues,
please visit the Institute’s website:
www.icmai.in for the complete CMA
e-Bulletin, January 2015, Vol 3, No.
1, in the ‘Research and Publications’
section.)
ECONOMY UPDATES

CMA Dr Ram Jass Yadav
Assistant General Manager
Vice Principal
Bank of Baroda
Ahmedabad
MALL Medium En-
terprises (SME) sector in
India is highly heteroge-
neous in terms of the size
of the enterprises, variety
of products and services and the levels
of technology employed.While one end
of the SME spectrum comprises highly
innovative and high growth enterprises,
more than 90% of the SMEs are micro
small enterprises (MSEs) and unregistered
with a large number of them established
in the unorganized sector. In present
globalised world, marked by competi-
tion and innovation, is posing newer and
varied challenges to the MSEs, because
of their small size, individual MSEs are
handicapped in achieving economies of
scale in procuring equipment, raw mate-
rials, finance and consulting services. Of-
ten they are unable to identify potential
markets to take advantage of market op-
portunities, which require large volumes,
consistent quality, homogenous standards
and assured supply. In today’s globalised
economy, improvements in product,
processes, technology and organization-
al functions such as design, logistics and
marketing have become key drivers in
delivering competitiveness, including for
MSEs. Finance is considered major con-
straint to meet these challenges before
MSEs to build their capacity for com-
petitiveness and effectiveness in business
world. Banks in India are considered to
be major source of finance for SMEs for
a variety of purposes such as purchase of
land, building, plant and machinery as
S
PRESIDENT’S
COMMUNIQUE
PRESIDENT’S
COMMUNIQUE
COVER
STORY
COMPETITIVE AUGMENTATION
OF SMALL BUSINESSES IN
GLOBALIZED ECONOMY – A
STUDY ON MSE FINANCE BY
BANKS IN INDIA
“MSME is a dynamic and vibrant sector
that nurtures entrepreneurial talent besides
meeting social objectives including that of
providing employment to millions of people
across the country” – Economic Survey,
2011-12(pp:217)

also for working capital and exports
receivables financing,etc.,but banks
are risk averse in their approach of
lending based on guarantees se-
curities. Credit is usually extend-
ed only against collateral equiva-
lent to and / or more than 100%
of the loan amount. Many of the
SMEs especially those in the start
up phase are unable to provide suf-
ficient assets as collateral for lend-
ing.This makes the banking system
inaccessible for SMEs especially for
first generation entrepreneurs.
Over the years there has been a
significant increase in credit ex-
tended to this sector by the banks.
The outstanding credit provided by
public sector banks (PSBs) in India
to MSE sector stood Rs.4784 bil-
lion in 7.46 accounts for the year
ended March 2013 as against Rs.
1511 billion in 3.97 accounts in
March 2008. Despite the increase
in credit outstanding, the small en-
trepreneurs feel that the banks are
not doing justice for them and are
catering more to the needs of large
corporate for making small incom-
petent thus gap is being perceived
in the sector for enhancing their
capacity building to compete them
in global market.
Hypothesis of study
MSE being GEN-NEXT engine
of growth; is an answer to realize
12th Plan with special reference to
generate employment and export
of the country. In light of great sig-
nificant of the sector in economy
and also huge potential of banks’
lending from MSEs for sustainable
growth, the present study aims to
identify major issues in financing
to small businesses more particu-
larly without collateral properties
and 3rd party guarantee.The pres-
ent study broadly based on the hy-
pothesis “why banks’ do not prefer
lending without collateral to small
businesses such as –
• Lack of knowledge of the
schemes among bankers bor-
rowers
• Entrepreneurs feel that levy
of guarantee fee under Credit

Guarantee Scheme is very high
and increase their burrowing
while Bankers’ feel that guar-
antee cover under the scheme is
very low.
• Branding, innovations tech-
nology are assumed to be bottle-
neck for capacity building
Sample, objectives
methodology of study
In the above background signif-
icance of small entrepreneurs in
Indian economy that they contrib-
ute 45% of the manufacturing out-
put, 40% of the total exports of the
country and about 8.7% in GDP;
a study has been conducted taking
51 Regional Processing Centers
(RPCs) of a public sector bank into
sample which are functioning across
the country therefore; it is diversi-
fied sample to represent the bankers’
perception on SME financing. To
examine key issues narrated as hy-
pothesis of the study, primary infor-
mation has been gathered from the
bankers through a personal inter-
view of RPC Head of each process-
ing center by using a questionnaire
developed for the purpose.The study
aims –
a) To identify obstacles in extend-
ing finance to small entrepreneurs
without collateral
b) To ascertain reasons of not pre-
ferring lending to Micro entrepre-
neurs
c) To examine causes of defaults by
Micro enterprises in repaying bank
loans
d) To suggest measures for improv-
ing access of MSEs to banks.
The simple statistical tools such as
mean, comparison ratio analysis
have been used to arrive at empiri-
cal observations from the data used
in study and making viable recom-
mendations.
Hedging default risk – credit
guarantee scheme (CGS)
There have been widespread com-
plaints from the MSE sector that
many of them, particularly techno-
crats and first generation entrepre-
neurs in the sector, find themselves
handicapped in accessing credit from
the banking system primarily for
want of secondary collateral and/ or
third party guarantee. Banks gener-
ally insist on secondary collateral to
hedge against default in the small
loan segment.Reserve Bank of India
had enjoined upon banks not to take
secondary collateral from MSE units
with credit limits up to Rs. One
Million. Besides, the Government
of India in collaboration with SID-
BI has set up a trust in August 2000
which is prestigiously know as Cred-
it Guarantee FundTrust for Micro
Small Enterprises (CGTMSE) aimed
at providing collateral free loans up
to Rs. 10 Mn to small businesses.
In an effort to minimize the impact
of default on the loans, the Cred-
it Guarantee scheme (CGS) seeks
to reassure the lender that, in the
event of a MSE unit, which availed
collateral free credit facilities, fails to
discharge its liabilities to the lender,
the Guarantee Trust would make
good the loss incurred by the lend-
er. CGTMSE extends guarantee of
loans through various member lend-
ing institutions (MLIs).Almost all of
the scheduled commercial banks in-
cluding public sector as well as the
private sector banks are registered as
MLIs with CGTMSE. The risks of
default covers under the scheme var-
ies from 50% to 85% of loan amount
availed by eligible MSE based on
the category of unit, amount of loan
availed,location of unit such as north
east region and ownership of busi-
ness. The coverage of guarantee is
depicted below in table –
Category Maximum extent of Guarantee where credit facility is
Micro Enterprises Up to Rs.5 lakh Above Rs.5 lakh up to Rs.50 lakh
Above Rs.50 lakh up to Rs.100
Lakhs
85% of the amount in default
subject to a maximum of Rs.4.25
lakh
75% / Rs.37.50 lakh
50% of total amount in default
subject to overall ceiling of
Rs.50.00 lakh
Women Entrepreneurs / Units
located in North East Region
(incl. Sikkim) other than credit
facility up to Rs.5 lakh to micro
enterprises
80% of the amount in default subject to a maximum of Rs.40 lakh
Rs.50.00 lakh
All other category of borrowers 75% / Rs.37.50 lakh
Rs.50.00 lakh
PRESIDENT’S
COMMUNIQUE
PRESIDENT’S
COMMUNIQUE
COVER
STORY

The cardinal principles of the
guarantee scheme are to provide
loan to MSEs without collateral and
third party guarantee.To distinguish
primary and collateral securities,
the ‘Primary security’ defines as the
assets created out of credit facili-
ty so extended and / or which are
directly associated with the project,
or business, for which credit facili-
ty is extended. This definition was
not in sync with the international
banking practice. Internationally, an
asset which is acquired by utilizing
the bank finance is treated as the
‘primary security’ for the lender and
any other additional security offered
whether belonging to the borrower,
or to a third party, is treated as ‘sec-
ondary or supplementary collateral’.
Since the small borrowers venturing
in business with innovations do not
defend to offer the assets belonging
to the unit as additional security to
banks, thus present covenant of pri-
mary security for the purpose has
been continued to secure loan to
MSEs by primary collateral as well as
secondary collateral which belong to
the unit and are directly connected
to the business activity of the unit.
Despite the fact that CGTMSE
is a unique initiative, the credit flow
to the sector is not found to be ad-
equate. Though different estimates
give different picture on credit gap,
they are indicative of the huge cred-
it gap in the MSE Sector which is
adversely affecting the growth of
the sector.The gap is normally met
through informal channels, which
are often at higher cost than the
institutional finance. In order to re-
duce the SME credit gap, some of
the important proposals are under
consideration with policy makers
MSME Ministry, GOI as recom-
mended by the “Working Group on
MSMEs Growth for 12th Five Year
Plan (2012-2017)”to boost the cred-
it to SME sector,which includes –
a) Scheduled Commercial
Banks (SCBs) to maintain minimum
22% in their outstanding credit
growth to MSME sector during the
first two years of the 12th FiveYear
Plan (i.e. FY 2012-13 and FY 2013-
14)
b) Minimum 25% during the re-
maining three years of the 12th
Five Year Plan (i.e. FY 2014-15, FY
2015-16 and FY 2016-17).
c) Banks should achieve 10% in-
crease in new micro enterprises bor-
rowers on yearly basis.
d) Banks to add at least 12 new
MSMEs in their semi-urban and ur-
ban branches.
e) Guarantee coverage under
CGTMSE may be increased to at
least 10 times the corpus during 12th
FiveYear Plan.And it is expected to
make available Rs 180,000 crore of
credit guarantees to MSEs by the
end of 12th Plan.
f) Develop the capacity of the MSE
loan officers by the banks to provide
various advisory services like tech-
nology up gradation,consortium-led
marketing etc.to the SMEs.
As mentioned in the paper that
significant progress has been made
in credit flow to the sector because
compound annual growth rate
(CAGR) in outstanding credit of
PSBs in March 2013 over the base of
March 2008 was 25.92% 13.45%
in terms of amount and accounts re-
spectively.The further analysis of the
published data reveals that retail trade
was not part of MSEs in year 2008
which was included in service sector
in year 2010 and CAGR over base
year ended 31.03.2010 in year end-
ed 31.03.2013 was merely 20.08%
in amount outstanding and 1.10%
in number of accounts. .Thus credit
flow to the sector is not considered
DESPITE THE FACT
THAT CGTMSE
IS A UNIQUE
INITIATIVE, THE
CREDIT FLOW TO
THE SECTOR IS
NOT FOUND TO
BE ADEQUATE.
THOUGH
DIFFERENT
ESTIMATES
GIVE DIFFERENT
PICTURE ON
CREDIT GAP, THEY
ARE INDICATIVE
OF THE HUGE
CREDIT GAP
IN THE MSE
SECTOR WHICH
IS ADVERSELY
AFFECTING THE
GROWTH OF THE
SECTOR

adequate in light of the projected
growth mentioned above for the
12th Five Year Plan projections de-
spite a unique support of credit guar-
antee to the sector under CGTMSE
scheme.Therefore, the present study
is undertaken to examine reasons of
not registering expected growth and
to suggest measures for improving
credit flow for competitive enhance-
ment of the small sector in economy.
Findings of the study
Following observations have been
derived from the empirical evidenc-
es of the study –
1. Impacting Factors for Fi-
nance under CGS
Bankers dealing with marketing and
processing of loan applications of
small borrowers at their processing
centers across the country were in-
terviewed to gather their impression
on performance under CGTMSE
scheme.The results of their feedback
are tabulated in table-1.
• Small businesses feel that interest
charged by banks is already very
high and coverage of the loan
under CGTMSE scheme further
increases the borrowing cost and
make them uncompetitive in the
market.Twenty four (24) out of 27
RPC executives constituting 89%
observed that borrower are not
willing to avail credit under the
scheme because of the reason that
service fees levied for the guar-
antee cover increases their cost of
borrowings.
• 85.71 % of the respondents ex-
pressed their view that branches
loss their control over borrowings
units which are financed with-
out any collateral and third party
guarantee, thus lenders insist to
borrower for collateral to have ad-
equate control on borrowers.
• 84.21 % of total executives re-
sponded to the questionnaire
found that lack of knowledge at
branch level causing a problem of
canvassing account under collater-
al free loans.
• Bankers also found of the mindset
that coverage of guarantee under
the scheme is very less and major
portion of the credit remains un-
hedged, therefore, performance
under present scheme observed to
be poor 72.73% respondents.
Impediments in Financing to
Micro Enterprises
Around 99% of micro small en-
terprises are from micro categories
and separate lending targets have
been fixed by the government for
the inclusive growth in the econo-
my. However, performance of ex-
tending credit to the micro sector is
not encouraging owing to various
reasons shared by the bankers during
the survey which are presented in
table -2.
• Study reveals that the major rea-
sons with highest among all im-
pressions representing 92.31%
bankers is low ticket size of the
business that increases transaction
cost to the bank branches and also
follow up cost for recovering the
dues.
• Inadequate and ineffective ac-
counting and books of transac-
tions is observed because of poor
lending to the micro units as 18
out of 20 responses constituting
90% responses of the survey found
to be of this opinion.
• 86.96% bankers feel that borrow-
ers of this category fail to bring
into the required margin in busi-
nesses that cause delinquency and
also failure of projects.
• Bankers at processing center of the
bank observed that delinquency
rate is higher in case of micro units
which are endorsed by 83.33% of
total responses in the study thus this
segment of business is high risky.
Table -1: Factors affecting performance under CGTMSE
Feedback from Bankers
Responses
% to TotalTotal
Response
Agree to
feedback
Guarantee levy under the scheme is high burden on
borrowers
27 24 88.89
Lenders loss control over MSEs if loan is collateral free 14 12 85.71
Lack of knowledge at Bank Branches 19 16 84.21
Guarantee cover/amount is very less 11 8 72.73
Table -2: Lending to Micro Enterprises in MSEs -Impediments
Impressions of the Bankers
Responses
% to TotalTotal
Response
Agree to
impression
Low ticket size advances – High transaction follow
up cost
13 12 92.31
Poor accounting and books keeping 20 18 90.00
Promoters’ failure to bring own contribution 23 20 86.96
Delinquency rate is high in Micro Enterprises 12 10 83.33
No or Low credit rating of borrowers 4 1 25.00
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• It is observed in 25% responses
that micro borrowers either do not
have credit rating or if they have it
is too low to consider their loan
application
The above reasons have been ob-
served as hindrances for expected
growth in credit to micro enterprises
by bankers in study sample.
Causes of Delinquency
Executives leading the RPCs of the
bank were interviewed to ascertain
contributing factors for default in
repaying bank loans by micro enter-
prises which are tabulated in table-3
• Micro being tiny segment of the
SME,observed poor in its product
branding and marketing tie-up as
reported by 95.24% respondents
of the interview
• Under finance observed in
91.67% cases that forces borrowers
to bridge their gap through private
borrowings which get first priori-
ty to repay by the enterprises.
• Diversion and siphoning off funds
also found to be in 91.30% cases
causing the failure of the units and
default in repaying the loans
• Other major reasons reported for
default in micro accounts include
poor technology innovation
cost efficiency (89.47%), delay in
realization of receivables from big
corporate (88.89%) lack of pro-
fessionalism in micro borrowers
(87.50%).
Promoters guarantee – Primary
Security
There is common confusion on the
subject whether obtaining person-
al guarantee of proprietor, partners,
directors, trustee etc. to mitigate de-
fault risk would constitute to be 3rd
party guarantee for the purpose of
coverage under CGTMSE scheme.
Feedback on its awareness was also
gathered in survey and result col-
lected from the study is presented in
table-4.
Owning the business enhanc-
es the entrepreneurship leading
qualities of the promoters. From
banker’s perspective personal guar-
antee of the promoters ensures to-
tal engagement of the promoters
into the business, thus personal
guarantee of proprietor, partners,
directors, trustees in case of pro-
prietary firm, partnership, compa-
ny and trust accounts are obtained
to mitigate default risk. However,
there is common confusion among
bankers that personal guarantee
of directors in company accounts
is treated as collateral and makes
credit facilities ineligible to cover
under CGTMSE which is evident
from the responses that 90.91% re-
spondents found of the same opin-
ion against the fact that promoters
guarantee is considered to be pri-
mary security and hence such ac-
count are also to be covered under
CGTMSE scheme.
Table – 3: Causes of default in loans repayment
Factors responsible for delinquency
Responses
% to TotalTotal
Response
Concurrence
to response
Inadequate product branding marketing tie up 21 20 95.24
Under finance by bank leads to private borrowings 12 11 91.67
Diverting/ siphoning off funds 23 21 91.30
Low technology innovation cost efficiency 19 17 89.47
Delay in receiving payment from big corporate 18 16 88.89
Lack of professionalism 16 14 87.50
Table -4: Personal Guarantee – Primary or Collateral
Situational analysis – 3rd party guarantee
Awareness Level
% to Total
Total Response Yes
Proprietor personal guarantee is collateral 4 1 25.00
Partners personal guarantee is collateral 4 1 25.00
Directors’ personal guarantee is collateral 22 20 90.91
None of the above is collateral / 3rd party Guarantee 33 32 96.97
Table – 5: Measures to improve performance under CGTMSE
Measures
Response to Measures
% to Total
Total Agree
Awareness campaign for the borrowers and also for
bank staff
27 27 100.00
Waiver of service fees from the borrower Tax
incentives to the Bank for such cost born by them on
behalf of the borrower
25 22 88.00
Increase in Guarantee Cover Guarantee Limit 18 15 83.33
Introduction of Annual Chairman Trophy for the top
three Branch/SMELF/Region/ Zone
9 6 66.67

Measures for Better Performance
The respondents were also requested
to share their opinion for improving
the performance of credit to micro
small enterprises in general and
CGTMSE in particular. Responses
collected from bankers are shown in
table -5 reveals that –
• All 100% executives leading RPCs
of the bank have unanimously
agreed that awareness campaign
to be organized for both bankers
and borrowers about the lending
scheme for MSEs
• Eighty eight (88%) percent re-
spondents have suggested to
waive service fee for the borrow-
er in light of rationalizing their
borrowing cost and tax incen-
tive to be provided for bank, if
the same is born on behalf of the
MSEs.
• Necessity of reviewing guarantee
cover and limit is felt because 50%
ceiling of guarantee for loan over
Rs.50 lacs observed to be on lower
side.
• A scheme to incentivize the op-
erating units such as branches,
Regions, Zones can be felicitat-
ed with a “Chairman Trophy”
for top winners who performed
exceedingly well in the area
which is supported by 66.67%
responses.
Ways for competitive
enhancement
With modern technology an in-
stant connect with global trends,
what MSMEs need most is credit
support and handholding by bigger
players in the sector. Suggestions
emerged on the basis of empirical
observations from the survey dis-
cussed in the paper are being pre-
sented for the uses of bankers to
facilitate in enhancement of com-
petitiveness of small enterprises.
01.Bankers Entrepreneurs Learn-
ing Training (BELT) – Growth
Driver
Small businesses in Indian economy
considered to be growth driver for
its equitable sustainable growth.
Study exhibits that banks support
is not available to the expected lev-
el for this category of economy de-
spite that MSEs are the feeder line to
corporate sector. Lace of knowledge
about various initiatives including
CGS launched by the government
to enhance accessibility of small en-
terprises to banks found responsible.
It is suggested by 100% respondents
in survey that awareness campaign
should be conducted by banks man-
agement for disseminating knowl-
edge of the scheme for both bankers
entrepreneurs across the country.
It will help to surplus scarce capital
of banks owing to zero risk weight of
the credit exposure under CGTMSE
scheme, quick realization of guaran-
tee claims as compared to years’time
taken for loan recovery by disposing
of collateral properties. It will also
facilitate entrepreneurs to link them
from formal channeling of funding
which economize their borrowing
cost.It is thus recommended that –
a) Banks to allocate due share say
10% in total trainings for MSEs
b) Specific share of training say 5%
in total programs of the training cal-
endar to be kept for MSEs awareness
particularly collateral free lending for
supporting competitive enhance-
ment
c) Officials placed in credit depart-
ment of bank branches should quali-
fy preliminary knowledge test of the
scheme before their posting in the
department
d) Training to MSEs including skill
development programs by the banks
for them should be considered a part
of budget allocated under CSR un-
der new Companies Act 2013.
02.Credit Reservation Policy
for MSEs
Attitude perception being the de-
terminants in lending business,banks
need to be mandated for granting
credit to MSEs in terms of number
of accounts and amount both.Banks
have been allocated targets to ensure
60% share of micro units in total ad-
vances to MSE sector but banks are
not mandated for adequate share of
MSEs in total advances like 18% of
total credit to agriculture credit and
also collateral free lending under to-
tal MSEs. It is therefore, suggested
to -
a) Introduce mandatory lending
under collateral free scheme in total
outstanding loan to MSEs say 25% of
MSEs
b) Share of MSEs in total outstand-
ing should be allocated say 20% of
total credit to MSEs
03.Credit Guarantee Scheme – Re-
view Levy Claim Norms
Trust (CGTMSE) levies service fee
as consideration for extending credit
guarantee to eligible MSEs which at
present ranges from 0.75% to 1.00%
of loan amount based on the location
of unit, ownership of establishment
and loan quantum. The guarantee
cover ranges from 50% to 85% of the
loan amount on the criteria specified
in the scheme. It is common feeling
of the bankers that guarantee cover
is on lower side except 85% cover
for micro units up to loan of Rs.5.00
lacs that need to be reviewed by pol-
icy makers as requirement of loan for
MSEs in today’s context would be
much higher to upgrade technology,
bring innovations, product branding
and marketing for building their ca-
pacity. In light of the observations of
the study,it is recommended that –
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a) Guarantee cover limit should be
increased from present cap of Rs.100
lacs to Rs150 lacs
b) Claim amount should also be en-
hanced from 50% over loan limit of
Rs.100 lacs and cap of Rs.50 lacs
need to lift out.
c) Guarantee service fee should be
rationalized as it increases the bor-
rowing cost of entrepreneurs. Re-
newal fee for guarantee cover should
be on outstanding amount in case
of term loan and if banks bear the
cost, the tax obligations of the bank
should be reduced to the extent of
amount of guarantee services paid.
04.Performance Reward Policy –
Fear Psychosis
Rewarding the efforts is considered
to be an organization culture in man-
agement science which encourages
its people to proactively accept chal-
lenging tasks and create their path to
achieve the ambitious business goals.
It is therefore, suggested that banks
should introduce incentive scheme
which may be in cash and kind as
deemed fit by the management.
Union ministry of MSME has such
reward schemes for entrepreneurs
and top performing banks who con-
tribute in the growth of SME sector.
Banks’Board should thus implement
a suitable reward policy which may
include-
a) A concept of “ChairmanTrophy”
for top performing three processing
centers / branches in Region, three
Regions in Zone three Zones in
the Bank.
b) Annual Performance Appraisal
Report (APAR) should have a pro-
vision to incentivize those officers
who have generated adequate leads
from MSEs to link them with bank-
ing channel for not only inclusive
equitable growth but also to build
their capacity for competing in glob-
al market.
c) Performance of individual officers
may be recognized by giving them
preference in training to learn from
the experience of SMEs in emerg-
ing market economies (EMEs) of the
world, cash incentive, overseas post-
ing, choice transfer posting, pro-
motion etc.
This will not only help to over-
come from fear psychosis of individ-
uals to work in advance department
but this would be driving force to
find an opportunity of working in
credit department.
05.Technology Innovation
Technology has changed the style
of doing business and living the life.
Innovation is neither synonymous
nor substitute of technology but it
is forecasting future taste demand
of users adopt the change to lead.
Technology backwardness is major
problem before SMEs because they
are doing business with traditional
approach comparatively less tech-
no innovation with no succession
planning which are either closed or
divided on death or disputes among
key members of family. So, technol-
ogy up gradation and innovation are
essential to make SMEs an on-going
concern. But the promoters do not
have adequate funds for technology
up gradation. It is therefore, suggest-
ed that –
a) A loan for capex investment in
technology up gradation and innova-
tion of SMEs should be mandatorily
considered; otherwise it may lead to
diversion of funds from working cap-
ital to capital expenditure or increase
private borrowings.
b) The loan for technology up gra-
dation may be subsidized from
government fund by way of capital
subsidy or interest subvention etc.
This finance may be called ‘Capacity
Building or Mezzanine Finance’ to
SMEs.
c) The disbursement of sanctioned
loan limit reserved for competi-
tive enhancement should be strictly
based on a detailed implementation
plan submitted by promoters for
their business.
06.Governance – Building
Credit Culture
Small businesses observed to be poor
in keeping their books of account
which is found to be major hin-
drance in financing their business by
banks. It is also felt that MSEs either
do not have credit rating or their rat-
ing is below the qualifying grade ac-
ceptable to the banks.The reasons of
poor book keeping and credit rating
informed to be lack of knowledge of
recording keeping their accounts,
tax evasion, withdrawing funds from
business instead plough back to build
capital base, private borrowings from
money lenders or private lenders at
high cost,poor credit score in CIBIL
etc.
It is also reported that banks do
not share the causes of not delaying
declining credit request. In a high
level summit on aerospace de-
fense held in Delhi, an IIT Madras
post graduate,former HAL Engineer
who is now an entrepreneur said –
“ In my 8 years, I have not got a
single loan from State Bank of India.
My track record for 35 years does not
have a single negative balance sheet.
I don’t know on what basis my loan
application is rejected – Business
Line (24.11.2014)”. Small entrepre-
neurs are therefore, required to be
sensitized in the subject for making
their financial strong to improve their
credit rating for accessibility to banks.
The measures suggested in this re-
gard may include –
a) Awareness program to be con-

ducted to cover all small businessmen
on various ways of building cred-
it history with credit information
companies like CIBIL or any other
credit bureaus registered with RBI.
b) Skill development programs on
maintaining books of accounts and
building capital. Awareness of effec-
tive accounting system and high cap-
ital base should be shared with en-
trepreneurs that factors credit rating
of the business
c) Bankers should mandatorily share
the rating core with MSMEs high-
lighting the areas of improvement
along with doctoral prescription for
improving score.
Credit rating considered to be de-
terminant of taking credit decisions
by banks. The Industry associations
of SMEs should take lead for ar-
ranging such programs in association
of bankers to benefit their member
businesses. Credit rating should also
be shared in transparently by banks
counseling the beneficiaries to im-
prove their performance on the area
where they could not score well. It
is also to be educated that 800 out
of 900 trans union scores of CIBIL
is treated to be very good score by
lenders to grant a long therefore,
credit score need to be improved by
SMEs to enhance their accessibility
to banking channel.
07.Product Branding Marketing –
Policy Support
Products development by small en-
trepreneurs at their own is a difficult
task owing to lack of product brand
and packaging quality.Huge amount
of expenses are to be incurred to-
wards market making movement and
such type of expenses are of capital
nature which should be amortized
in due course of time. It is felt that
costs involved in marketing like ap-
pointment of marketing personnel,
advertisement of products on print
electronic media,expanding network
through agents or representative at
up-country centers etc.;but expenses
on these items are not considered by
bankers while appraising loan appli-
cation. It is therefore, recommended
that –
a) Investment for market develop-
ment activities illustrated herein the
paper should be considered permis-
sible cost of project for finance at par
with capex in plant machinery
otherwise in absence of the same the
assessment of loan limit would be in-
complete.
b) A scheme of clean overdraft for
marketing development may be
worked out as ratio of working cap-
ital limit say 15% of such limit, as
clean cash credit or overdraft limit
for innovation in product, market-
ing and technology up gradation by
small businesses to encourage them
for innovations in their business and
compete in global market.
c) Government procuring policy re-
garding buying at least 20% of annual
purchase from SMEs has put in place
but not being adhered to in its letter
and spirit by big giants. Since MSEs
do not have expertise / skills for ap-
proaching to the large corporate thus
District Industry Center (DIC) or
Directors, MSME establishments at
regional level should own responsi-
bility of providing details of products
of these MSEs to the Government /
PSU buyers reinforcing mandatory
guidelines and also verifying their
compliance from time to time.
d) Also Banks should mark lien in to-
tal working capital limit as sub-limit
reserved for purchasing from SMEs
while sanctioning credit facilities to
large corporate.
e) Various forums like BLBC/
DLRC/SLBC should have stand-
ing agenda in these meetings to take
stock of implementing the above
suggested measures.
Market development initiatives
would give direct access of SMEs to
end-users of their products at price
with adequate margin rather selling
the products to large corporate at
lower price and blocking funds for
longer period.
Sum - up
Some of the interesting finding has
been unveiled from the study such
as there is wide gap of knowledge
among bankers about the scheme of
collateral free financing which re-
quire to be addressed through a cam-
paign of awareness across the country.
Financing alone will not help SMEs
for competitive enhancement, banks
should come forward in providing
counseling to entrepreneurs on both
finance non-finance as their role of
Coach or Counselor to MSEs which
may include benefits of maintaining
proper books of accounts, retaining
profit into business instead evading
of tax payment,benefits of rating the
firm from SME rating agencies,usage
of e-business in branding dissem-
inating production information to
users, practicing financial discipline
in dealing with banks to build their
good credit history with credit infor-
mation companies, and many more.
Banks must invest in networking and
mentoring of small units by creating
separate cells to provide consultancy
to teach them how to function and
manage data such that their perfor-
mance can be analyzed easily to ex-
pedite the loan sanctioning process.
Author has made an attempt to offer
some suggestions for bankers, entre-
preneurs and policy makers based on
the observations of the study in the
paper to address the issues in financ-
ing to small businesses which are still
not availing institutional credit for
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equitable development and inclu-
sive growth of the economy and also
to enhance competitiveness of the
sector to succeed and lead in global
market.
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August 2014
ramjassyadav@rediffmail.com
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ROSPERITY of any coun-
try depends upon its pros-
perous economy; which in
turn relies upon its vibrant
banking system.The vitali-
ty of the Indian banking system, particu-
larly Public Sector Banks which control
70% of the banking business, is threatened
by rising non-performing assets (NPAs).
Nonperforming asset is defined as an asset
which does not earn any income to the
bank.The gross NPAs of the Indian Banks
stood at Rs.2,04,249 Crores and GNPA
percentage is 4.10% as on 31.03.2014.
Besides NPAs, the stress assets (restruc-
tured standard advances) constitute about
5.9 percentage of the gross advances as
on 31.03.2014. It is reported by some
rating firms that NPAs in the banking
system are set to increase in the range of
Rs.60,000 crore to Rs. 1 lac crore in next
five months. The Indian banking system
may not sustain such huge NPA pile-up.
The Economy Survey 2014 has observed
that the deteriorating asset quality of the
banking sector is a major concern. It is
therefore important for all concerned to
understand causes consequences of ris-
ing NPA accordingly to take curative
measures urgently so as to manage NPA at
a minimum level.
Causes of NPAs
The causative factors for rising NPAs in
the banks are 3 ‘B’s i.e. Business Environ-
ment, Borrower Banker. These causes
are elaborated as under.
a) Business Environment:
Business environment refers to econ-
omy, regulatory regime, legal system and
political climate in which banks are oper-
ating. The causative factors attributing to
business environment are as under:
i) Recession in the economy
ii) Sudden change in Global Domes-
tic markets
P
NON-PERFORMING ASSETS IN
INDIAN BANKS: ITS CAUSES,
CONSEQUENCES CURE
The NPA demon is eating away the Indian
economy slowly and steadily as it is making
the credit costly and scarce. Unless it is
managed effectively quickly, it will mar the
financial inclusion as well as infrastructure
development in the country
Banambar Sahoo
Deputy General
Manager
Allahabad Bank,
Kolkata

iii) Lack of conducive legal system
for loan recovery i.e. inadequate
legal provisions on foreclosure
bankruptcy laws and dilatory legal
procedures in enforcing security
rights
iv) Lack of cohesive regulatory
framework
v) Political pronouncements like
debt relief
vi) Socio-political pressures on
commercial credit decisions
vii) Vitiated loan repayment culture
viii) Policy reversal i.e. changes in
governmental policies, for exam-
ple cancellation of Telecom Coal
mine licences in recent times.
ix) Natural Calamities
x) Scams
b) Borrower:
The causative factors attributing to
borrowers are as under:
i) Improper choice of project/ac-
tivity
ii) Adoption of obsolete technolo-
gy
iii) Promoters/ Management dis-
putes
iv) Inefficient management
v) Resource crunch
vi) Strained labour relation
vii) Diversion siphoning of funds
viii) Wilful defaulter
ix) Fraudulent intention
c) Banker:
The causative factors attributing to
bankers are as under:
i) Lack of credit skill
ii) Delay in credit decision dis-
bursement
iii) Credit decision taken under ex-
traneous influences
iv) Lack of proper credit monitor-
ing
v) Lack of effective NPA manage-
ment
Consequences of Rising NPAs
Like any business, loan business of
the banks is also subjected to busi-
ness risk i.e.default risk.So it cannot
be totally eliminated, but it should
be managed within the threshold
limit. But, rising NPAs have dev-
astating effect on the economy. Its
consequences are discussed briefly as
under:
i) Profitability of the banks is ham-
pered severely as the Banks do not
earn any income from non-per-
forming assets, rather they incur cost
for their maintenance and have to
provide for future losses. It is report-
ed that total net profit of all Pub-
lic Sector Banks including SBI fell
sharply by 26.8 percent to Rs.37017
crore for the financial year ended
March 2014 over the previous year.
On NPA stock of Rs.2 lac crores as
per various estimations, the Banking
industry is incurring minimum loss
of Rs.20,000 crores annually besides
making provision of Rs.1 lac crores.
It also adversely affects on capital
building of the banks.
ii) Due to non-realisation of NPAs
the credit flow to needy persons/
sectors is held up.
iii) To compensate their interest loss
in NPAs, to some extent banks are
charging the good customers a high-
er rate of interest.Thus, the cost of
credit i.e. interest rate goes up and
consequently the high interest rate
affects the viability of many running
units.
iv) Because of rising NPAs, bankers
are becoming averse to lending.
Curative Measures
For containing NPA at a managea-
ble level,the following three curative
measures have to be taken simulta-
neously:
a) Preventive Measures
b) Corrective Measures
c) Punitive Measures
a) Preventive Measures:
The preventive measures are those
measures which prevent creation of
nonperforming assets in banks.
i) Framing cohesive conducive
regulatory regime.For example,RBI
should be more liberal in IRAC
norms when the economy is on
downturn; particularly for those sec-
tors; which are severely affected due
to economy slump political scam;
such as coal based industries, infra-
structure,textile,aviation,etc.
ii) Improving loan repayment cul-
ture in the society by banning po-
litical loan waiver schemes giving
incentives for timely loan repayment
iii) Strengthening the legal provi-
sions on foreclosure bankruptcy
iv) Improving credit skills and credit
monitoring tools techniques of
the bankers
v) Some borrowers are not putting
or are withdrawing their capital/eq-
uity tactfully from the units/projects
in connivance with various consult-
ants/professionals such as Chartered
Accountants, valuers, legal advis-
ers, etc.There should be some legal
mechanism for punishing those con-
sultants who do not follow their le-
gal ethics values while submitting
their reports to the bankers who rely
on them for taking credit decision.
vi) Some borrowers open their
current accounts with other banks
outside the consortium conduct
their business transactions at the cost
of the lending banks. Many current
account opening banks are reluctant
to close their accounts even after the
matter brought to their knowledge
by the lending bankers. Not rout-
ing transactions through the lending
banks facilitates the loan accounts
becoming NPA. Therefore, banks
should be barred from opening the

current accounts of the borrowing
companies/ firms/individuals with-
out written consent of their existing
lenders.
b) Corrective Measures:
Bankers should adopt the corrective
measures proactively in credit man-
agement. They should effectively
adopt 3 ‘R’ measures i.e. Rectifica-
tion, Restructuring Recovery as
advised by Reserve Bank of India.
For revitalizing distressed assets in
the economy, Reserve Bank of In-
dia has come up guidelines on Joint
Lenders’ Forum (JLF) Correc-
tive Action Plan (CAP) for taking
prompt action for early identifi-
cation of distressed assets taking
corrective actions for regularising
the accounts, revival of viable units
and recovery/sale of unviable units
on proper diagnosing the problems.
These guidelines have been made
applicable to only Special Mention
Account-2 (SMA-2 accounts are
those accounts where principal or
interest payment is overdue between
61-90 days); which are reported to
Central Repository of Information
on Large Credits (CRILIC) by any
of the lenders under Consortium
and Multiple Banking Arrangements
(MBA).These guidelines should also
be extended to existing NPA ac-
counts for taking prompt action for
revival/ recovery by lenders jointly
under consortium/MBA.For exam-
ple, prior to above RBI guidelines,
if any account under consortium/
multiple banking arrangement has
already been declared NPA by any
lender, but it is standard not be-
ing reported as SMA-2 by any other
lenders, then that particular lender is
not able to take corrective measures
for this distressed asset,as other lend-
ers are not mandatorily compelled
for such joint action.
c) Punitive Measures
There should be strong penal meas-
ures so as to punish the non-cooper-
ative borrowers and wilful defaulters
who are primary responsible for cre-
ation of nonperforming assets in the
economy. A few measures are sug-
gested as under:
i) At the time of availing credit /
restructuring /CDR some borrow-
ers furnish undertakings for infusion
of capital /providing additional col-
laterals, to which they do not adhere
to later on; which makes the project
unviable. Such acts of the borrowers
should be considered as wilful act for
declaring them as wilful defaulter.
ii) In case of wilful defaulters a
criminal complaint should be filed
trial should be completed in a
time bound manner.They should be
barred from participating in election.
iii) DRT Act SARFAESI Act are
two punitive legal measures for re-
covery of bad debts. But due to the
legal loopholes unscrupulous bor-
rowers have made these weapons
ineffective. For example as per the
DRT laws cases before the DRT
should be disposed off in 6 months
whereas on an average it takes about
4 years to decide the case. During
such long journey for justice, the
charged assets on which the bankers
can lay hand get deteriorated/ dis-
posed off. Similarly recovery action
under SARFAESI Act is becoming
less effective due to interferences/
stays granted by various legal author-
ities, delay in getting physical pos-
session, under developed e-auction
market for stressed assets,etc.
The loopholes in the legal system
should be plugged in at the earliest so
as to recover huge bad debts locked
in the legal entanglement.
Conclusion
The NPA demon is eating away the
Indian economy slowly steadily
as it is making the credit costly
scarce.Unless it is managed effective-
ly quickly, it will mar the finan-
cial inclusion as well as infrastructure
development in the country. India
should learn from the fundamen-
tal lesson of banking stress in recent
years across the globe. It is high time
for all concerned to recognise this
gigantic problem and reframe the
regulatory measures, strengthen the
legal system and create credit disci-
pline loan repayment culture so as
to make the Indian banking system
vibrant to sustain the economic de-
velopment.
Note: The views expressed in this
article are personal views of the au-
thor not necessarily the views of
the institution to which author be-
longs.
shribanambarsahoo@gmail.com
PRESIDENT’S
COMMUNIQUE
PRESIDENT’S
COMMUNIQUE
COVER
STORY
BANKERS
SHOULD ADOPT
THE CORRECTIVE
MEASURES
PROACTIVELY
IN CREDIT
MANAGEMENT.
THEY SHOULD
EFFECTIVELY ADOPT
THE 3 ‘R’ MEASURES:
RECTIFICATION,
RESTRUCTURING
AND RECOVERY

January_2015

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