Assessment of Non-performing Assets and Its Recovery Process

1

A PROJECT REPORT

ON

“ASSESSMENT OF NON-PERFORMING ASSETS AND ITS RECOVERY

PROCESS”

AT

“THE SOLAPUR DISTRICT CENTRAL CO-OPERATIVE BANK, HEAD

OFFICE, SOLAPUR.”

BY

SANDEEP M. MENDU

UNDER THE GUIDANCE OF

DR.PUJA BHARDWAJ

SUBMITTED TO

“UNIVERSITY OF PUNE”

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF

THE DEGREE OF MASTER IN BUSINESS ADMINISTRATION (MBA)

THROUGH

Dr. VIKHE PATIL FOUNDATION’S

PRAVARA CENTRE FOR MANAGEMENT RESEARCH AND DEVELOPMENT

PUNE.

(2008-2010)

2

Acknowledgement

Summer project is an imperative program in the MBA curriculum. This is an opportunity

Whereby the student gets hands on exposure of the practicalities involved in the

corporate. Student also gets an opportunity to interact with corporate world and test his

acquired skills; knowledge into the practical environment and learns various new

concepts, which are far away from the reach of subject books.

I take this opportunity to express my deepest sense of gratitude and regards to Mr.

B.V.VALSANGE for his constant encouragement and valuable insight, guidance and

Facilities at all phases of the project.

I would also thank Dr. Puja Bhardwaj for her valuable guidance, inspiration and

encouragement. I am thankful to our Director Dr.Rakesh Dholakiya for being the source

of inspiration and motivation to strive for excellence.

Lastly I would like to take this opportunity to thank all those who criticized me from time

to time regarding my approach towards the project as their criticism acted as a catalyst

for my zeal to succeed.

Sandeep Mendu

MBA-II (Finance)

3

DDEECCLLAARRAATTIIOONN

I, the undersigned, hereby declare that the project report entitled “ASSESSMENT OF

NON PERFORMING ASSETS AND ITS RECOVERY PROCESS” written and

submitted by me to the University Of Pune, Pune in Partial fulfillment of the requirement

for the award of Master of Business Administration (M.B.A.) under the guidance of

Dr.Puja Bhardwaj is my original work and conclusions drawn therein are based on the

materials collected by myself.

Date: Signature

Place: Pune.

(Sandeep Meghanath Mendu)

4

CONTENTS

Sr.No.

Ch. No.

Chapter Name

Page No.

1 --

List Of Tables --

2 --

List of Figures --

3

--

Executive summery 1--2

4

I

Introduction

3--4

5

II

Industry profile

5--10

6

III

Company profile 11--17

7

IV

Objectives Of the Study

18

8

V

Research Methodology

19--23

9

VI

Project Work Undertaken

24--45

10

VII

Data Analysis

46--67

11

VIII

Findings and Observations

68

10

IX

Suggestions 69--70

11

X

Limitations 71

12

XI

Conclusion 72

13

Bibliography 73

5

List of Tables

Table No. Title of the Table Page No.

3.1 Details of No. of branches at each Taluka level for the year

2007-08 13

3.2 Members of the Bank 14

3.3 Share Capital 15

6.1 Provision for Asset Classification 32

6.2 NPA in Asian Countries:2000 36

7.1 Ratio of Gross NPA to Gross Advances 46

7.2 Total Advances to Total Deposits (Credit Deposit Ratio) 48

7.3 Assets position of the Bank regarding Advances 51

7.4 Composition of the NPAs and Provisions made by the Bank 53

7.5 Talukawise Recovery as on 31.3.2009 56

7.6 Percentage of Recovery 58

7.7 Comparison of NPA between SDCC and other Nationalized

Banks 60

6

List of Figures

Figure No. Title of the Figure Page No.

2.1 The Banking Structure in India 7

3.1 Organization Structure 17

7.1 Gross NPA to Gross Advances 47

7.2 Total Advances to Total Deposits 49

7.3 Composition of the Non Performing Assets 54

7.4 Talukawise Recovery percentage 57

7.5 Percentage Of Recovery 59

7.6 Comparison of NPA percentage between SDCC and

other Nationalized banks 61

7

EXECUTIVE SUMMARY

8

EXECUTIVE SUMMARY

As a student of commerce and management I was always attracted by the

professionalism and perfection in operation & recovery process. Recovery is the most

important part of the bank. I consider myself specially privileged for getting an

opportunity to undergo summer training at „The Solapur District Central Co – Operative

Bank‟, Head office, Solapur. On initial exposure to various sections I decided to optimize

my project work in Non performing assets and recovery department that plays an

important role in banking sector.

In today‟s fast moving competitive world banking sector has to cope up to meet the

competition, so considering the need of the society, it is necessary for the banks not only

to meet the demands but also to save part for their development. It is only possible when

there are reductions in the NPAs. These NPAs not only affect the bank‟s profitability but

also affects banks in the following two ways. Firstly banks stop earning from the A/c‟s

which are declared NPAs. Secondly, bank has to make provisions out of their profits for

meeting this NPA A/c. This Non-Performing Assets (NPAs) problem is seen as the

promoter of the potential banking crisis. However, NPAs problem can be converted into

the potential revenue earner for the banks and the economy, if they are resolved

effectively. In many financial services recovery forms the heart of operation without

which the organization cannot survive. If there is no satisfactory recovery the

organization will become sick. Hence prompt recovery is considered as the most

important function. Here DCC bank mainly deals with the farmers & agricultural sector.

Therefore the recovery of loans is wholly depends upon the farm production.

9

The project covers introduction of the topic. It includes the information of banking

sector and about the organization. It also talks about the origins of NPAs in general and

the theory of NPAs. It also consists the data analysis of NPA with different components

& various findings during the study, highlights the suggestions given to reduce the NPAs.

10

CHAPTER-I

INTRODUCTION

11

INTRODUCTION

“A Man without money is like a bird without wings”, the Rumanian proverb

insists the importance of the money. A bank is an establishment, which deals with

money. The basic functions of Commercial banks are the accepting of all kinds of

deposits and lending of money. In general there are several challenges confronting the

commercial banks in its day today operations. The main challenge facing the commercial

banks is the disbursement of funds in quality assets (Loans and Advances) or otherwise it

leads to Non-performing assets.

Over the next ten years Asia could emerge as the world‟s growth engine, led by

China and India, and fueled by an inflow of global capital, technology transfer, an export

boom, and increased domestic consumption. For Asia to realize its promise, the region‟s

reform-minded governments and regulators, companies and businesses, and lenders must

move aggressively to clean up $2 trillion in „Non-Performing Loans.‟

Such a vast volume of „Non-performing Assets‟ of the banks is the main

consequence of economic crisis that took place in many Asian countries. At the same

time non-performing assets of the banks in many Asian countries can be seen as the

probable cause of the potential banking crisis that could be occurred in the future in these

countries. In order to prevent such banking crisis, the „Non-Performing Assets‟ of the

banks are required to be managed and disposed off effectively. Hence management of

non-performing assets held by the banks has become an important function in today‟s

financial world.

12

In Indian banking sector there are so many different problems from that one major

problem is NPA of banks. In the era of globalization there is need to Indian banking

sector to make reduction in NPA. So, that it will meet the challenges of globalization.

The improper provision of NPA affects adversely on bank. So, taking into consideration

the scope of the subject, I have chosen the topic of “NON PERFORMING ASSETS

AND RECOVERY PROCESS IN BANK.”

The whole project is all about the study of Non Performing Assets and various

norms and guidelines provided by the RBI regarding the recovery of the amount which is

declared as the NPA, for that purpose some judicial, non judicial and general measures

are studied in the project. The attempt has been made to study the composition of NPAs

and to give suggestions to the bank to reduce NPA.

NPAs are the concern for banks as they not only erode the value of the assets, but

also affect the profit growth. NPA growth involves the necessity of provisions, which

reduces overall level of profits and hence, shareholder value. The recovery processes are

hence, vital as they tantamount to the booking of new business, as capital is freed and can

be deployed profitably in the creation of new assets.

13

CHAPTER-II

INDUSTRY PROFILE

14

INDUSTRY PROFILE

Introduction to the Banking Industry

All countries of the world are having financial institutions called Banks. In fact,

there is positive relationship between growth of banks and economic development.

However, banking institutions has originated out of necessity and developed and

expanded as per requirements of the society.

Origin of the word "Bank"

The English word "Bank" is derived from Italian word "Banco" and Banco means

„bench‟ used to sit and run the business of money lending and money changing.

Origin and Evolution of Banks

Banking business is as old as human history. As soon as human being started

living together borrowing and lending began which is the essence of banking business.

Before 2000 B.C. Babylon age Egypt had banking business. In Babylon temples were

used as banking business center. In those days people used to keep their valuables (gold,

ornaments) etc. with priest, who was regarded as representative of God.

15

Development of Banking in India

In Kautily‟s Arthashastra reference is available regarding rate of interest etc. use

of Hundi was also known to Indian traders. However, 1st Indian Bank was established in

1720 as "Bank of Bombay" in Bombay.

Definition of Bank

Section 5, clause (b) of Banking Regulation Act, 1949 reads as under:

“Banking is business of accepting deposits from the public for the purpose of

lending or investment, which are repayable on demand or otherwise and withdraw able

by cheque, draft, and order or otherwise.”

Broad Functions of Banks :-

Some of the functions of the banks are as follows:

1. Accepting Deposits - Banks depends on the funds received in form of deposits from

the public. In order to maximize resources, banks have developed different types of

Deposit Accounts, such as Current, Fixed, Saving etc.

2. Borrowing, raising or taking up of money, the lending or advancing of money either

upon or without security, the drawing, making accepting discounting, buying, selling,

collecting and dealing in bills of exchange, promissory notes, coupons, drafts, bills of

lading, granting and issuing of letters of credit, travelers cheque.

3. Negotiating of loans and advances, receiving all kinds of bonds etc. on deposit or for

safe custody providing of safe deposit vaults.

4. Acting as agents for any government or local Authority or any other persons.

5. Carrying on and transacting every kinds of guarantee and indemnify business.

16

6. Managing, selling etc. any property that may come into the possession of the bank.

7. Undertaking and executing trusts etc.

8. General Utility Services

9. Promote capital formation for business.

The Banking Structure in India

Figure No. 2.1

Commercial Banking System (March 31,2001)

Scheduled Banks Non- Scheduled Banks

Scheduled Commercial Banks Scheduled Co-Operative Banks

Private

Sector

Banks

31

Public

Sector

Banks

27

Foreign

Banks

42

Regional

Rural

Banks

196

Urban

Co-Op

Banks

51

State

Co-Op

Banks

16

Old

Banks

23

New

Banks

8

Nationalised

Banks

19

SBI and

Associate

Banks

18

17

The Co-Operative Banks are now days so commercialized that it would not be wrong to

include them in Commercialized Banks.

Role of Commercial Banks in The Developing Economy

Banks create favorable environment for economic development. Economic

development is a process whereby saving, investments, production, employment, national

income and living standard all improve. Therefore, something must be done to encourage

savings. Here, banks perform the same function.

Commercial Banks encourage savings mobiles the same on one hand and make

available the same for investment and economic development.

The role of Commercial Banks in economic development may be

explained with the help of following points:

1. Encourage Saving.

2. Mobilize Saving.

3. Supply capital for production.

4. Encourage industrialization.

5. Help balanced inter-sectoral and inter-reground development.

6. Boost Exports.

7. Create credit money and help economic development.

18

Nationalization of Banks

In July 1969 the 14 major banks were nationalized. The objectives of

Nationalization were as follows: -

1. Removing control by few.

2. Providing adequate credit for agriculture, small-scale industries and exports.

3. Providing adequate turnings as well as reasonable term of services for bank staff.

4. Rapid expansion of banking facilities.

5. Removal of various operations defects in the commercial bank.

It is clear from the bank achievement in the field of branch expansion, deposit

mobilisation and lending to priority sector that Nationalisation of bank is a step in the

right direction.

However, banks are accepted to be more sensitive to the growing and changing

needs of the economy.

The social expectation about banking system is increasing in today's scenario. It is

for the banking to show that they have the capacity and vigor to fulfill these expectations

through their policies and programs.

Banking system occupies an important place in a nation‟s economy. Bank is an

indispensable institution in a modern society and forms the core of the money market,

however is characterized by the existence of both the organized and the unorganized

sector, which meets the credit needs of the various sectors of the economy.

19

The organized sector of the money market consists of the Reserve bank of India,

Commercial Banks, and Co-operative Banks. With the extension of the banking facilities

by the co-operative and commercial banks in the countrywide, credit needs of various

sectors of the economy are now being increasingly met by institutional agencies.

Banking business has its own distinctive features as compared to all other trades

and businesses. A banking company deals with the money of large number of depositors,

who hardly have any say in the conduct of the affairs of the company. The problem

therefore arises to safeguard the interests of the depositors, in addition to that of the

shareholders. Banking regulation Act, 1949, is the main piece of the Central Legislation

in India embodying such specific provisions relating to the banking industry.

The law relating to banking, as we find in India today, is the outcome of the

gradual process of evolution. Structurally, the banking system in India has gained

distinctly in strength and cohesion after nationalization. Also the Reserve Bank of India

Act has been established to which contains provisions related to the banking industry.

The Indian banking has come from a long way from being a sleepy business

institution to a highly proactive and dynamic entity. This transformation has been largely

brought about by the large dose of liberalization and economic reforms that allowed

banks to explore new business opportunities rather than generating revenues from

conventional streams (i.e. borrowing and lending).

20

CHAPTER-III

COMPANY PROFILE

21

COMPANY PROFILE

Name of the organization : The District Central Co – Operative Bank

Limited, Head Office, Solapur. .

Address : 207/8/9, Goldfinch Peth, solapur.

Establishment : 8th

March 1918

Registration No. : 1727 ( Date – 08 / 03 / 1918 )

Current Status : 2008 – 2009

Chairman : Shri. Ranjitsinh V. Mohite-patil

Vice Chairman : Shri. Sampatrao M. Patil

General Manager : Shri. R. L. Utpat

The bank provides advance / grant the loans to the co – operative societies who

are members of the bank for the agricultural and agricultural allied activities. And it

accepts the deposits and provide other banking services to their customers.

The Solapur District Central Co-Operative Bank is well known Bank in the nearly

all over the Maharashtra State. The bank is regularly arranges the programmes for the

development of the agricultural sector and one of the programmes like the

“KESHARMATI KRUSHI PRADARSHAN” exhibition which is arranged by the bank

for the Farmers which is arranged in the year 2007.

22

With the introduction of second co-operative societies Act, 1912 many District

Central Co-Operative Banks were Established in the entire country. In the solapur

District this noble work was done on the 8th

March 1918. Since then this bank has been

able to act as a central financing agency in the District.

AREA OF OPERATION

Total Branches : 214

Total Deposits : 1637.05 (Cr)

Total Advances : 1892.96 (Cr)

23

Table No.3.1

Details of No. of Branches at Each Taluka Level

For the year 2007 - 2008

Sr. No. Taluka

No. of

Branches

Deposits Advances

1 Akkalkot 14 68.13 93.35

2 Barshi 26 136.60 125.12

3 Karmala 12 87.53 139.04

4 Madha 22 122.84 235.12

5 Malshiras 33 259.31 278.78

6 Mangalvedha 14 72.39 55.90

7 Mohol 23 116.50 139.63

8 North Solapur 18 327.03 334.27

9 Pandharpur 17 202.97 201.61

10 Sangola 21 145.84 92.99

11 South Solapur 14 68.47 82.30

Total 214 1861.90 1808.87

24

Table No.3.2

Members of the Bank

Particulars 03 – 04 04 - 05 05 – 06 06 - 07 07 - 08

Individual 2727 2726 2724 2724 2724

Co-operative Society 3778 3834 3857 3908 3938

Total 6505 6560 6581 6632 6662

The Above table shows the No. of Members of the bank for the particular year.

So, in the year 2003-2004 the no. of members of the bank were 6505 in which the 2727

are individual members and the 3778 are the Co-operative societies. And in the year

2004-2005 the no. of members were 6560 in which the 2726 are in the individual

members and the 3834 are the co-operative societies. Like wise in the year 2005-2006 the

total no of members were 6581 in which the 2724 are the individual and 3857 are the co-

operative societies. In the year 2006-2007 the total no. of members of the bank were 6632

in that the 2427 are the individual members and the 3908 are in the co-operative societies.

And in the year 2007-2008 the total no. of members of the bank are 6662 in that the 2424

are the individual members and 3938 are the co-operative societies.

The no. of members is increasing every year by small figures. in the year 2003-

2004 the total no. of members were 6505 and in the year 2007-2008 the total no. of

members are 6662 so, there has been 157 new members have joined in the bank.

25

Table No. 3.3

SHARE CAPITAL (In Crores)

Particulars 04 – 05 05 – 06 06 – 07 07 – 08 08 – 09

Share Capital 70.88 77.49 85.23 87.65 89.81

The above table shows that the share capital of the bank for the period of 2004 to

2009. In the year 2004-2005 the total share capital of the bank was 70.88 crores and in

the next year i.e. in the 2005-2006 the share capital was 77.49 crores and in the year

2006-2007 it was 85.23 crores and lastly in the year 2007-2008 the total share capital of

the Bank is 87.65 crores. In 2008-09 i.e. in the current year the total share capital is

reached to 89.81crores.There has been 26.71% growth in the total share capital in the

period of 5 years.

26

Achievements and Awards :

1. Best performer Award for the year 2000-2001 from NABARD in the form of Rs.

1.5 lakhs and Rs. 5 lakhs rewards for employee welfare in the year 1995-1996.

Features of the Bank:

1. To provide banking facilities to the rural people at convenient places.

2. Active participation in the removal of poverty under the various schemes runs by

the Government of India.

Future Plans of the Bank:

The bank is going to implement the following plans in the near future.

1. Computerization in all 214 Branches in the Solapur District.

2. Online Banking to the customers.

3. ATMs at Head Office and at the Pandharpur Branch.

4. MIS for Connectivity.

5. Frame the new policies for the Promotion of Employees in the Bank by

conducting the various tests and on the basis of Performance.

6. Training centre for the employees and conducting the Guest Lectures.

27

ORGANIZATION STRUCTURE

Organization Structure of „The Solapur District Central

Co–Operative Bank Limited‟

Figure No. 3.1

Board of Directors

Chairman & Vice Chairman

General Manager

Manager

Deputy Manager

Assistant Manager

First Grade Officer

Junior Officer

Clerks

28

CHAPTER-IV

OBJECTIVES OF THE STUDY

29

OBJECTIVES OF THE STUDY

To study the NPAs and recovery process of the Solapur District Central Co –

Operative Bank.

To study the general reasons for assets becoming NPAs.

To make the suggestions to overcome the problems of Bank regarding the NPAs.

To make accurate loan portfolio of bank.

To increase the performance of the recovery cell of the bank.

30

CHAPTER-V

RESEARCH METHODOLOGY

31

RESEARCH METHODOLOGY

1. Need of the study:

In the present scenario of the banking sector, the banks are trying to show the

good picture in the market by manipulating NPA‟s of the bank.

This project helps to find how the banks are trying to reduce their NPA‟s , and

how they are doing their provisioning in the books of the accounts for their assets , and

after which period they considers their assets as non performing assets.

What are the industry standard and how banks have focused in this area and how

much success they got while doing it? NPA‟s as a tool also provides the edge to the

investor either to invest in the banking company or not, and also it provides the

information prior to the joint venture of the banking companies.

This project is useful for the research fraternity, for common man, and for various

people who want to draw any conclusion regarding the NPA‟s of the bank. This can be

useful for the decision making for those who want to draw the finding from this project.

32

2. Scope of the study:

The scope of this study is limited to the study of NPA‟s of Bank. The study is

based upon last five years data regarding NPA‟s and Recovery of the bank.

As banking is one of the growing sector this summer project is more directed

towards the functioning of the bank and majorly emphasizing on the product generated

NPA‟s.

This project helps me to get a deep insight in the banking sector and helped me to

take the immense knowledge about the Banking Sector.

3. Collection of Data:-

During my project I have used lot of data to understand the process of recovery &

NPAs. The data collection was interpreted and then used as information in the project.

Secondary Data: -

Most of the data collected through secondary resources. The source of secondary

data for this project is as follows:

a) ANNUAL REPORTS:

Annual reports were very useful in knowing the actual figures of NPA along with

it provided the basic objective of the bank and other necessary details

b) CIRCULARS:

To know the norms provided by RBI regarding NPA provisions I had to go

through various circulars of NPA.

33

c) BOOKS:

To understand the theoretical background of NPA and for the collection of the

some of the data I had to go through various books provided by the bank.

.d) CONVERSATION:

Talk with relevant personalities handling matters of NPA proved very beneficial

in gathering data and knowing latest provisions and norms on NPA.

4. TOOLS OF ANALYSIS:

Ratios :

For the analysis and interpretation I have used some ratios which are as

follows.

1. Ratio of Gross NPA to Gross Advances:

The above ratio indicates the percentage of Gross NPAs in the total

Advances given by the Bank. The ratio helps us to know whether the

Bank‟s NPA is increasing or decreasing.

2. Ratio of Total Advances to Total Deposits (Credit Deposit Ratio):

This ratio indicates what percentage of the Deposits collected by the

bank is used for making advances. It also indicates whether the Bank has

given loans within the limit of its deposits collected or the bank has

brought the funds from outside.

34

Comparative Analysis :

The comparative study is made regarding the NPA and its recovery. For

the comparison I have considered the last five years data regarding the NPA.

Following comparison is made for the study:

a) Composition of NPA and provisions made:

This will help to know the composition of different types of assets e.g.

Sub-standard, Doubtful, Loss assets etc. in the total NPA. This will also help to

know the how much provision made by the bank against different types of assets.

b) Comparison of Recovery percentage:

The comparison will help to know the performance of the recovery

department and reasons behind good and poor recovery.

c) Comparison of NPA with other Banks:

This shows whether the percentage of NPA of the bank is higher or lower

as compared to other nationalized banks.

Case Study:

To get the practical knowledge about the NPA and its Recovery I have

gone through some real cases of default. This helps to know how the bank has

treated the cases of default.

35

5. Limitations:

The research report on the topic is restricted to the main branch of S.D.C.C. bank

only.

My report is at small scale due to restricted research area, and due to small

sample of data.

The variation can occur for the various branches at different areas in the district,

so any decision on the basis of this report is individualistic and depends on the personal

judgment.

36

CHAPTER-VI

PROJECT WORK UNDERTAKEN

37

PROJECT WORK UNDERTAKEN

Non-Performing Assets - Background:

It's a known fact that the banks and financial institutions in India face the problem

of swelling non-performing assets (N.P.As) and the issue is becoming more and more

unmanageable. In order to bring the situation under control, some steps have been taken

recently. The Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 was passed by Parliament, which is an important step towards

elimination or reduction of NPAs.

Meaning of N.P.As:

An asset which ceases to generate income of the bank is called non-performing

asset. The past due amount which remaining uncovered for the one quarter the amount

would be classified as NPA for the whole year. It includes borrower‟s defaults or delays

in interest or principal repayment.

An asset is classified as non-performing asset (N.P.As) if dues in the form of

principal and interest are not paid by the borrower for a period of 90 days. However with

effect from March 2004, default status would be given to a borrower if dues are not paid

for 90 days. If any advance or credit facilities granted by bank to a borrower become non-

performing, then the bank will have to treat all the advances / credit facilities granted to

that borrower as non-performing without having any regard to the fact that there may still

exist certain advances / credit facilities having performing status.

38

NPA is defined as an advance for which interest or repayment of principal or both

remain outstanding for a period of more than two quarters. The level of NPA acts as an

indicator showing the banker‟s credit risks and efficiency of allocation of resource.

Definition of NPA:

An NPA is a loan that is “not in compliance” with the original loan agreement.

For example, the loan agreement could have provisions that would accelerate the

collection of the loan if certain conditions are not met. These provisions may have

nothing to do with the loan‟s ultimate “value” or borrower‟s ability to service the loan or

repay it when it comes due.

Lack of universal NPA standard:

There is no “universal standard” for determining when a loan becomes non

performing. In many countries, a loan is non performing after it has been delinquent for

90 days; in other countries, 180 days. Once a loan becomes nonperforming, the lender

must classify it as “special mention,” “substandard,” “doubtful,” or “loss.”

Indian economy and N.P.As:

Undoubtedly the world economy has slowed down, recession is at its peak,

globally stock markets have tumbled and business itself is getting hard to do. The Indian

economy has been much affected due to high fiscal deficit, poor infrastructure facilities,

sticky legal system, cutting of exposures to emerging markets by FIIs, etc.

39

Further, international rating agencies like, Standard & Poor have lowered India's credit

rating to sub-investment grade. Such negative aspects have often outweighed positives

such as increasing forex reserves and a manageable inflation rate.

Under such a situation, it goes without saying that banks are no exception and are

bound to face the heat of a global downturn. Bankers have realized that unless the level

of N.P.As is reduced drastically, they will find it difficult to survive.

Why N.P.As has become an issue for banks and financial institutions in India?

To start with, performance in terms of profitability is a benchmark for any

business enterprise including the banking industry. However, increasing N.P.As have a

direct impact on banks profitability as legally banks are not allowed to book income on

such accounts and at the same time banks are forced to make provision on such assets as

per the Reserve Bank of India (RBI) guidelines.

Also, with increasing deposits made by the public in the banking system, the banking

industry cannot afford defaults by borrowers since N.P.As affects the repayment capacity

of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system

through various rate cuts and banks fail to utilize this benefit to its advantage due to the

fear of burgeoning non-performing assets.

40

Basis of Non – Performing Assets:

The basis of treating a credit facility as N.P.As is as detailed below:

1. ASSET - In respect of which interest has remained past due for 90 days.

2. TERM LOAN – Inclusive of unpaid interest, when the installments is overdue for

more than 90 days/on which interest amount remained past due for 90 days.

3. BILL - This remains overdue for 90 days.

4. OTHER CURRENT ASSETS – The interest in respect of a debt/income on a

receivable in the nature of short-term loans/advances, which remains overdue for a

period of 90 days.

5. SALE OF ASSETS/SERVICE RENDERED – Any dues on account of

these/reimbursement of expenses rendered, which remained overdue for a period of

90 days.

6. LEASE RENTAL/HIRE PURCHASE INSTALMETS – The installments, which

has become overdue for a period of more than 180 days.

7. OTHER CREDIT FACILITES – The balance outstanding including interest

accrued made available to the borrower/beneficiary in the same capacity when any

of the credit facilities become N.P.A.

41

Provisional Norms:

Banks will be required to make provisions for bad and doubtful debts on a

uniform and consistent basis so that the balance sheets reflect a true picture of the

financial status of the bank. The Narsimham Committee has recommended the following

provisioning norms:

1) 100 per cent of loss assets or 100 per cent of outstanding for loss assets;

2) 100 per cent of security shortfall for doubtful assets and 20 per cent to 50 per cent

of the secured portion; and

3) 10 per cent of the total out standings for substandard assets.

A provision of 0.25% on standard assets is required as suggested by Narsimham

Committee II 1998. Banks need to have better credit appraisal systems so as to prevent

NPAs from occurring. The most important relaxation is that the banks have been allowed

to make provisions for only 30 per cent of the "provisioning requirements" as calculated

using the Narsimham Committee recommendations on provisioning (but with the diluted

asset classification). The encouraging profits recently declared by several banks have to

be seen in the light of provisions made by them. To the extent that provisions have not

been made, the profits would be fictitious.

42

Classification of Assets:

While new private banks are careful about their asset quality and consequently

have low non-performing assets (N.P.As), public sector banks have large N.P.As due to

wrong lending policies followed earlier and also due to government regulations that

require them to lend to sectors where potential of default is high. Allaying the fears that

bulk of the Non-Performing Assets (N.P.As) was from priority sector, NPA from priority

sector constituted was lower at 46 per cent than that of the corporate sector at 48 per cent.

Loans and advances account for around 40 per cent of the assets of SCBs. However,

delay/default in payment of interest and/or repayment of principal has rendered a

significant proportion of the loan assets non-performing. As per RBI‟s prudential norms,

a Non-Performing Asset (NPA) is a credit facility in respect of which interest/installment

has remained unpaid for more than two quarters after it has become past due. “Past due”

denotes grace period of one month after it has become due for payment by the borrower.

Regulations for asset classification:

Assets should be classified into four classes - Standard, Sub-standard, Doubtful,

and Loss assets. N.P.As are loans on which the dues are not received for two quarters.

N.P.As consist of assets under three categories: sub-standard, doubtful and loss. RBI for

these classes of assets should evolve clear, uniform, and consistent definitions. The

health code system earlier in use would have to be replaced.

43

The banks should classify their assets based on weaknesses and dependency on

collateral securities into four categories.

A) Standard Assets:

Standard asset is one which does not disclose any problems and which does not

carry more than normal risk attached to the business. Such an asset is not a „non-

performing asset‟ (NPA).

B) Sub-standard Asset:

a) An asset which has remained overdue for a period not exceeding 3 years in

respect of both agricultural and non-agricultural loans should be treated as Sub-

Standard Asset.

b) In case of all types of term loans, where installments are overdue for a period not

exceeding 3 years, the entire outstanding in term loan should be treated as Sub-

Standard.

An asset which remains as NPA for a period exceeding 24 months, where the

current net worth of the borrower, guarantor or the current market value of the security

charged to the bank is not enough to ensure recovery of the debt due to the bank in full.

44

C) Doubtful Assets:

Non Performing Asset may be classified as doubtful on the basis of following

criteria:

a) An asset which has remained overdue for a period exceeding 3 years in respect of both

agricultural and non-agricultural loans should be treated as doubtful.

b) In case of all types of term loans, where installments are overdue for more than 3

years, the entire outstanding in term loan should be treated as doubtful. As in the case of

sub-standard assets, rescheduling does not entitle a bank to upgrade the quality of

advance automatically.

D) Loss Assets:

Loss assets are those where loss is identified by the bank/auditor/RBI/NABARD

inspectors but the amount has not written off wholly or partly. In other words, an asset

which is considered unrealizable and / or of such little value that its continuance as a

doubtful asset is not worthwhile should be treated as a loss asset. Such loss asset will

include overdue loans in cases (a) where decrees or execution petitions have been time

barred or documents are lost or no other legal proof is available to claim the debt, (b)

where the members and their sureties are declared insolvent or have died leaving no

tangible assets, (c) where the members have left the area of operation of the society

leaving no property and their sureties have also no means to pay the dues, (d) where the

loan is fictitious or when gross misutilisation is noticed, and (e) amounts which cannot be

recovered in case of liquidated societies.

An asset identified by the bank or internal/ external auditors or RBI inspection as

loss asset, but the amount has not yet been written off wholly or partly.

45

The banking industry has significant market inefficiencies caused by the large

amounts of Non Performing Assets (N.P.As) in bank portfolios, accumulated over several

years. Discussions on non-performing assets have been going on for several years now.

One of the earliest writings on N.P.As defined them as "assets which cannot be recycled

or disposed off immediately, and which do not yield returns to the bank, examples of

which are: Overdue and stagnant accounts, suit filed accounts, suspense accounts and

miscellaneous assets, cash and bank balances with other banks, and amounts locked up in

frauds".

Table No. 6.1

PROVISION FOR ASSET CLASSIFICATION

Asset Classification % of Provision to be made

(a) Standard Assets

(b) Sub-Standard Assets

( 1 to 3 year )

(c) Doubtful Assets

i. 3 to 4 years

ii. 4 to 6 years

iii.Above 6 years

(d) Loss Assets

0.25%

10%

20%

30%

60%

100%

46

GENERAL REASONS FOR ASSETS BECOMING NPAs:

A strong banking sector is important for a flourishing economy. The failure of the

banking sector may have an adverse impact on other sectors. The Indian banking system,

which was operating in a closed economy, now faces the challenges of an open economy.

One of the main causes of NPAs into banking sector is the directed loans system

under which commercial banks are required a prescribed percentage of their credit (40%)

to priority sectors. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-

core' doubtful and loss assets, accumulated over the years.

No. of factors are responsible for increasing the size of NPAs in banks. A few

prominent reasons for assets becoming NPAs are as under:-

1. Poor credit appraisal system

2. Lack of proper monitoring

3. Reckless advances to achieve the budgetary targets.

4. Change in economic policies/ environment.

5. No transparent accounting policy and poor auditing practices.

6. Lack of co-ordination between banks.

7. Directed lending to certain sectors.

8. Failure on the part of the promoters to bring their portion of equity from their own

source or public issue due to market turning lukewarm.

47

Difficulties with the non-performing assets:

1. Owners do not receive a market return on their capital. In the worst case, if the bank

fails, owners lose their assets. In modern times, this may affect a broad pool of

shareholders.

2. Depositors do not receive a market return on savings. In the worst case if the bank

fails, depositors lose their assets or uninsured balance. Banks also redistribute losses

to other borrowers by charging higher interest rates. Lower deposit rates and higher

lending rates repress savings and financial markets, which hampers economic

growth.

3. Non performing loans epitomize bad investment. They misallocate credit from good

projects, which do not receive funding, to failed projects. Bad investment ends up in

misallocation of capital and, by extension, labour and natural resources. The

economy performs below its production potential.

4. Non Performing loans may spill over the banking system and contract the money

stock, which may lead to economic contraction. This spillover effect can channelize

through illiquidity or bank insolvency; (a) when many borrowers fail to pay interest,

banks may experience liquidity shortages. These shortages can jam payments across

the country, (b) illiquidity constraints bank in paying depositors e.g. cashing their

paychecks. Banking panic follows. A run on banks by depositors as part of the

national money stock become inoperative. (c) Undercapitalized banks exceed the

banks capital base.

48

5. Lending by banks has been highly politicized. It is common knowledge that loans

are given to various industrial houses not on commercial considerations and

viability of project but on political considerations; some politician would ask the

bank to extend the loan to a particular corporate and the bank would oblige. In

normal circumstances banks, before extending any loan, would make a thorough

study of the actual need of the party concerned, the prospects of the business in

which it is engaged, its track record, the quality of management and so on. Since

this is not looked into, many of the loans become NPAs.

6. The loans for the weaker sections of the society and the waiving of the loans to

farmers are another dimension of the politicization of bank lending.

7. Most of the depositor‟s money has been frittered away by the banks at the instance

of politicians, while the same depositors are being made to pay through taxes to

cover the losses of the bank.

49

Table No. 6.2

NPAs in Asian Countries: 2000

Country NPA Ratio (%)

Australia 1.0

Singapore 1.0

Hong Kong 4.5

India 6.0

Taiwan 6.7

Korea 11.2

Malaysia 12.0

Japan 16.0

Philippines 17.0

Thailand 18.0

Indonesia 26.0

China 28.0

Source: Asia Week (Web site)

50

The table shows that the Chinese banks are plagued with higher level of NPAs,

followed by banks in Indonesia, Thailand, Philippines and Japan. Singapore and

Australian banks have the lowest ratios of NPAs in the systems. The NPA levels have

gone up due to the slump in the IT industry and the other export oriented industries which

have been affected by the recession in the USA. Bank loans have also been affected by

the state of the consumer goods markets as retail loans do have a relatively higher share

in the total loan portfolio of banks in countries like Hong Kong.

Intensity of crisis and the associated problems of non- performing assets have

been different in different countries. In Japan the problem of NPAs is most severe.

Currency collapse and banking crisis in Indonesia, Korea Malaysia, Thailand and

Philippines during second half of 1997 further worsened NPAs of Japanese banks.

Let us see the various definitions of Non-Performing Assets.

In India an asset is Non Performing if interest and the installments of principle

amount due remain unpaid for more than 90 days.

International comparison of definitions:

• Indonesia-- a loan asset is classified as a Non Performing asset if repayment of loans in

arrear is possible between 3 to 6 months.

• Korea-- a Non Performing asset is defined as an asset which is covered by collateral

but borrowers credit- worthiness are deteriorating and payments are more than 6 months

past due.

• Philippines-- Loans that involve a substantial degree of future loss without any

specification of waiting period are termed as Non Performing asset.

51

Techniques of Resolution of NPAs:

1. Asset Management Companies (AMCs) / Asset Reconstruction

Companies (ARCs):

Countries across the globe have made extensive use of Asset Management

Companies (AMCs) / Asset Reconstruction Companies (ARCs) for the management

and disposal of NPAs. These companies either hived off the NPA‟s from the balance

sheet of a financial institution or restructure the corporate debt.

2. The use of securitization to resolve NPAs:

The impact of the various financial crisis has been to significantly increase the

number of non-performing loans in the books of many banks and financial

institutions. Securitization of these bad loan portfolios has many attractions, primary

among them being release of capital by removal of these non-performing assets from

the balance sheet of the originating banks, better management of non-performing

loans by specialised agencies, and appeal to high risk investors looking for significant

gains.

Measures adopted to resolve NPAs problem in India

NPA Ordinance:

The government recently enacted the „Asset Reconstruction Ordinance‟ to try and tackle

the Problem. It gave wide powers to the banks to dispose off NPAs and allowed creation

of Asset Reconstruction Companies for this Purpose. The securitization and

reconstruction of financial assets and enforcement of security interest ordinance, 2002,

52

has endowed banks, financial institutions, asset reconstruction companies and

securitization companies with unprecedented powers to take over the management of a

defaulting company or take possession of the mortgaged assets of loan defaulters, under

police escorts if deemed necessary. It also largely obviates any role of the Board for

Industrial and Financial Reconstruction (BIFR) as well as court intervention in recovery

of outstanding dues in the financial sector.

GENERAL METHODS OF MANAGEMENT OF NPAs:

The management of NPA is the difficult task in practice. Management of NPAs

means, how to settle the NPAs account in the books. In simple it focuses on the methods

of settlement of NPAs account. The methods are differs from bank to bank. The

following paragraph explains some general methods of Management of NPAs by the

banks.

A) Compromise:

The dictionary meaning of the term compromise is “settlement of dispute reached

by mutual concessions.” The following are the detailed guidelines for

compromise/negotiated settlements of NPAs.

1. The compromise should be a negotiated settlement under which the bank should

ensure recovery of its dues to the maximum extent possible of minimum expenses.

2. Proper distinction should be made between willful defaulters and borrowers

defaulting in repayments due to circumstances beyond their control.

53

3. Where security is available for assessing the realizable value, proper weightage

should be given to the location, condition and marketable title and possession of sub

security.

4. An advantage in settlement cases is that banks can promptly recycle the funds instead

of resorting to expensive recovery proceedings spread over a long period.

5. All compromise proposals approved by any functionary should be promptly reported

to the next higher authority for post facto scrutiny.

6. Proposal for write off/ compromise should be first by a committee of senior

executives of the bank.

7. Special recovery cells should be set up at all regional levels.

B) Legal remedies:

The legal remedies are one of the methods of management of NPAs. The banks

observed that the borrower is making willful default; no more time should be lost

instituting appropriate recovery proceedings. The legal remedies are filling of civil suits.

C) Regular Training Program:

The all levels of executives are compelling to undergo the regular training

program on credit and NPA management. It is very useful and helpful to the executives

for dealing the NPAs properly.

D) Recovery Camps:

The banks should conduct the regular or periodical recovery camps in the bank

premises or some other common places; such type of recovery camps reduces the level of

NPAs in the Banks.

54

E) Write offs:

Write offs is also one of the common management techniques of NPAs. The assets are

treated as loss assets, when the bank writes off the balances. The ultimate aim of the write

off is to cleaning the Balance sheet.

F) Spot Visit:

The bank officials should visit to the borrowers‟ business place or borrowers field

regularly or periodically. It is also help full to the bank to control or reduce the NPAs

limit.

H) Other Methods:

consistent phone calls.

Media announcement.

Various steps have been taken by the government to recover and reduce

NPAs. Some of them are.

1. One time settlement / compromise scheme

2. Lok adalats

3. Debt Recovery Tribunals

4. Securitization and reconstruction of financial assets and enforcement of Security

Interest Act 2002.

5. Corporate Reconstruction Companies.

6. Credit information on defaulters and role of credit information bureaus.

55

Management of Non Performing Assets :

Management of NPAs may require the following of different strategy to tackle

different category of NPAs. The techniques that can be utilized to manage the NPAs are:

I) Preventive Measures :

Recovery policy

Credit appraisal and management

Analysis of NPAs

Recovery cell

Prevention of downgrading of existing accounts / NPAs

Upgrading the asset quality

II) Remedial Measures:

Fixing of suitable repayment schedule

One time Settlement

Compromise

III) Drastic Measures :

Filing of suits

Writing off the loss assets

56

RECOVERY OF NPA – A FEW CONCERNS

1. The most important for the banks is not to set up recovery branches but to strengthen

the recovery machinery. In this regard, a few aspects of the problem need to be

worked and should be considered on priority basis. Finally, branches, which require

close monitoring, also need to be prioritized.

2. Diagnostic study is to be considered by each bank in respect of cases lost in the

court of law during recent past. The study should focus the nature of the

deficiencies found by the court authorities in evidences, claims and procedures.

Conclusion of the study will help in strengthening the recovery system.

3. Involvement of lawyers in suit filed cases should be given utmost importance. In this

regard, some incentive schemes should be worked out so that efficient clerks &

lawyers are rewarded adequately.

4. Enforcement of securities has been one of the problematic areas. This requires

certain expertise and contacts with local people, police departments, etc. To

supplement banker‟s efforts, services of outside professionals may be employed.

But it should be ensured that such professionals do not take any unlawful measures

in taking possession of securities.

5. It is suggested as banks may jointly promote a subsidiary to act as Asset Recovery

Agency. It can purchase decreed debts at certain discounts. Thereafter, it should be

able to recover the fully from the borrowers by creating professionals expertise, and

infrastructure, developing contacts, etc. finally it should work as a profit-making

venture. This will substitute the proposed idea of setting up of Asset Reconstruction

Fund.

57

Recovery process of the District Central Co-operative Bank.

Method of distributing funds / Advances :-

The DCC banks do not provide loans directly to its members. The loans

are provided through the Taluka level co-operative societies. The customer or

the loan seekers become the members of the co-operative socities at taluka

level and through the society they apply for the loans with the bank. Co-

operative societies sent all these loan applications to the DCC bank. Bank

sanctions the loans to these members and distribute the amount of loans

through the co-operative societies.

Co-operative Recovery Process:-

1. Normal / General Recovery:

The customers or the members pay the loans regularly and within

given period and they re-apply for the loan. This process of recovery is called

Normal Recovery.

2. When the loan is not repaid by the member within the given period, he

becomes the defaulter of the bank. Initially the taluka / gram level co-

operative society send the Demand Notice by giving the period of 15 days.

After that the society suits the case against the defaulter according to the Sec

101(1) of the co-operative society recovery act through the taluka level

Assistant Registrar (AR). The Assistant Registrar once again sends the notice

to the defaulter. After that bank can recover the loan with the help of law.

58

3. Legal process of recovery:-

When the farmers or the defaulters of the bank bring their grains to the

market yard, the grains are taken over by the Market yard co-operative society and

this is given to the bank‟s authority.

The sugar factories are advised by the law that , whenever the defaulters

(farmers) bring their sugarcane to their factory, the factory should take the possession

of such sugarcane and pay the bill directly to the respective banks.

59

CHAPTER-VII

DATA ANALYSIS

60

DATA ANALYSIS

About Data Analysis and Interpretation

For the study of data analysis and interpretation we have taken the period of 5

years in to consideration. It is found that in the data analysis part of the project we have

seen that the gross NPAs are in the increasing trend over the years with respect to gross

ADVANCES.

TABLE NO. 7.1

Table showing Ratio of Gross NPA to Gross Advances

(Rs.In Crores)

Year Gross NPA Gross Advances Ratios

2004-2005 40.45 1491.42 2.71%

2005-2006 323.26 1633.18 19.79%

2006-2007 317.92 1892.95 16.79%

2007-2008 312.77 1808.86 17.29%

2008-2009 254.49 1771.81 14.36%

61

Figure No.7.1

The above table shows that the Ratio of Gross NPA to Gross Advances for the

last five years of the bank. The above table shows that the Gross NPAs are increased very

rapidly in the year 2005-2006 i.e. from the 40.45 to 323.26 Crs. And after that negligible

reduction has seen in the NPAs.

The reason for the rapid increase in the NPAs of the Bank is that RBIs Easy

Monetary Policy for priority sector, Bank has issued most of the Loans to the Farmers

and Agri-allied Activities. This leads to increase the NPA‟s.

Considering the above table we come to know that the ratio of gross NPA to gross

advances has been reducing from the year 2005-2006. One of the reasons behind this can

be is that Bank has made improvement in the recovery process and loan portfolio.

Gross NPA to Gross Advances

0

200 400

600 800

1000

1200 1400

1600 1800

2000

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

Years

Rs.I

n C

rore

s

Cro

res

Gross NPA

Gross Advances

62

TABLE NO. 7.2

Table showing Total Advances to Total Deposits

(Credit Deposit Ratio)

(Rs. In Crores)

Year Total Advances Total Deposits Ratios

2004-2005 1491.42 1405.03 106.15%

2005-2006 1633.18 1513.03 107.94%

2006-2007 1892.95 1637.05 115.63%

2007-2008 1808.86 1861.89 97.15%

2008-2009 1771.81 2325.45 76.19%

63

Figure No.7.2

From the above table it is seen that the total deposits of the bank have increased

from. Rs.1405.03 Crs. in 2004-2005 to Rs.2325.45 Crs. in the year 2008-2009. The total

deposits have showing the continuous increasing trend since the last five years.

From the above table it is seen that for the first three years the Ratio of Total

Advances to Total Deposits is more than the 100% because the bank‟s basic main

function is to giving advances to the Agricultural and primary sector, for that the bank

has borrowed money from the outside i.e. from other commercialized banks and

promoters to meet the demand of its customers i.e. Farmers.

0

500

1000

1500

2000

2500 R

s.

in C

rore

s

Cro

res

2004-

2005

2005-

2006

2006-

2007

2007-

2008

2008-

2009

Year

Total Advances to Total Deposits

Total Advances

Total Deposits

64

It is also clear from the above table that the total advances have also been in the

increasing trend. The total advances are Rs.1491.42 Crs. in the year 2004-2005 and it has

increased up to the Rs.1892.95 Crs. in the year 2006-2007 and it has seen slight decline

trend from year 2007-2008 i.e. up to Rs.1808.86 Crs. of advances out of Rs.1861.89 Crs.

of Deposits for the same year. From the year 2007-2008 the bank has offered the

advances less than the Deposits. This is because of the bank has improved their loan

portfolio.

65

TABLE NO. 7.3

Table showing Assets Position of the Bank regarding the Advances

(Rs. in Crores)

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09

Total Advances

Less - Standard Assets

1491.42

1450.96

1633.18

1309.92

1892.95

1575.04

1808.86

1496.09

1771.81

1555.03

Gross NPA 40.45 323.26 317.92 312.77 216.78

a) Sub-Standard

b) Doubtful Assets

c) Loss Assets

20.02 221.70 140.60 125.47 117.91

3.57 83.28 151.64 160.03 64.91

16.86 18.28 25.68 27.00 33.96

The above table shows the asset position of the Bank for the last Five year and

that is only related with the Advances.

The Standard Assets here it means the Performing Assets of the Bank shows the

increasing trend for the two years i.e. for 2004-2005 to 2006-2007. And after that the

slight decline has been seen in the performing assets of the bank i.e. it declines by

Rs.78.95 Crs. as compared with the previous year. The very next year it was gone up to

Rs.1555.03 from Rs.1496.09.

It is found that the portion of sub-standard and Doubtful assets is more in the total

NPA‟s. It indicates that Bank needs to more concentrate on the recovery of the above

assets. It leads to increase their profitability.

66

Loss assets of the bank are showing the continuous increasing trend and it has

increased up to the Rs.33.95 Crs. in the year 2008-2009 from Rs.16.86 Crs. in the year

2004-2005 i.e.Rs.17.10 Crs. hike in the loss assets of the Bank. This shows that bank is

incurring losses from advances due to poor condition of recovery.

67

TABLE No.7.4

Table showing Composition of the Non Performing Assets and

Provision made by the Bank

(Rs. In Crores)

Sr. No. Particulars 04-05 05-06 06-07 07-08 08-09

1 Sub-Standard assets

Sub-Standard assets

as % of NPA

20.02

45.49%

221.70

68.58%

140.60

44.22%

125.47

40.12%

117.91

46.33%

2 Doubtful Assets

Doubtful Assets as

% of NPA

3.57

8.83%

83.28

25.77%

151.64

47.70%

160.03

51.25%

64.91

25.51%

3 Loss Assets

Loss Assets as

% of NPA

16.86

41.68%

18.28

5.65%

25.68

8.08%

27.00

8.63%

33.96

13.34%

4 Gross NPA

(1+2+3)

40.45 323.26 317.92 312.77 216.78

5 Provision for NPA 20.23 61.77 79.65 90.03 104.57

6 Net NPA (4 – 5) 20.22 261.49 238.27 222.74 112.21

68

0%

10%

20%

30%

40%

50%

60%

70%

Pe

rce

nta

ge

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

Years

Composition of the Non Performing

Assets (Rs. In Crores)

Substandard

AssetsDoubtful Assets

Loss Assets

Figure No. 7.3

In the year 2005-2006 the Sub-standard assets were increased very rapidly to

Rs.221.70 Crs. from Rs.20.02 Crs. in the last year. In the year 2006-2007 the sub-

standard assets were decreased. In the year 2008-09 it has come down to Rs.117.91 Crs.

The percentage of doubtful assets to the NPA shows an increasing trend from the

year 2004-2005 to 2007-2008. It is increased by Rs.144.47 Crs. But in the current year it

has come down to Rs.64.91 Crs.

Loss assets are also showing an increasing trend throughout the period. And the

percentage of it to the Gross NPA is also an increasing every year.

69

Bank has made adequate provision as per the guidelines provided by the RBI. The

provision made by the bank for the NPA‟s has increased every year. This leads to

decrease the profitability of the bank. Large portion of the profits are used for the

provision of NPA‟s.

70

TABLE NO.7.5

TABLE SHOWING TALUKAWISE RECOVERY AS ON 31/03/2009

(Rs. in Lakhs)

Sr.NO. TALUKA RECOVERAB

LE

AMOUNT

RECOVERY % RECOVERY

1. MALSHIRAS 5730.05 5099.89 89.00

2. SOUTH SOLAPUR 5413.84

4028.47 74.41

3. MOHOL 6228.24 4246.58 68.47

4. SANGOLA 3693.11 2147.37 58.15

5. MANGALVEDHA 3118.79 1719.74 55.14

6. PANDHARPUR 9637.76 5162.41 53.56

7. NORTH SOLAPUR 2783.49 1407.82 50.58

8. MADHA 11203.56 5418.96 48.37

9. KARMALA 6990.69 3102.60 44.38

10. AKKALKOT 6615.50 2682.89 40.55

11. BARSHI 7753.08 2826.62 36.46

TOTAL 69168.11 37861.35 54.74

71

TALUKAWISE % RECOVERY

0

10

20

30

40

50

60

70

80

90

100

1

TALUKA

% R

EC

OV

ER

YMALSHIRAS

SOUTH SOLAPUR

MOHOL

SANGOLA

MANGALVEDHA

PANDHARPUR

NORTH SOLAPUR

MADHA

KARMALA

AKKALKOT

BARSHI

Figure No. 7.4

The above table shows that the recovery percentage in Malshiras, Mohol and South

Solpur Taluka is quiet good as compared to other Talukas. This shows that the

performance of the recovery department is good. The other reason for this that, previous

year there was good rainfall in these Talukas as compared to others. It shows that the

recovery of advances is mostly depends upon the monsoon.

72

TABLE NO. 7.6

TABLE SHOWING PERCENTAGE OF RECOVERY

(Rs. In Crores.)

YEAR RECOVERABLE

AMOUNT

AMOUNT

RECOVERED

% OF RECOVERY

2004-05 290.36 176.47 60.78

2005-06 394.18 251.33 63.76

2006-07 734.80 375.19 51.06

2007-08 913.37 184.98 20.25

2008-09 691.68 270.49 39.11

73

0

100

200

300

400

500

600

700

800

900

1000

Rs.I

n C

rs.

2004-05 2005-06 2006-07 2007-08 2008-09

YEAR

PERCENTAGE OF RECOVERY ( Rs. In Crs.)

RECOVERABLE AMOUNT

AMOUNT RECOVERED

Figure No. 7.5

From the above table it is found that the recovery percentage is came down from

2005-06. In the year 2007-2008 the recovery percentage was lowest. One of the reasons

for the poor recovery in the year 2007-2008 is that the city has faced the droughtful

situation in the particular year. The monsoon was poor in the above year. An another

reason for the poor recovery is that RBI has issued a guideline to all the DCC banks that

they should not force the farmers to repay their loans. Banks are not allowed to use

coercion in the recovery process.

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TABLE NO. 7.7

COMPARISON OF NPA BETWEEN SDCC BANK & OTHER

NATIONALISED BANKS AS ON 31/03/09

(Rs.In Crores)

NAME OF THE BANK NPA NPA %

SDCC BANK 148.91 8.94

SBI BANK 1827.36 2.89

IDBI BANK 948.96 0.92

UNION BANK OF INDIA 325.94 0.34

BANK OF MAHARASHTRA 271.91 0.79

75

COMPARISON OF NPA % BETWEEN SDCC AND

OTHER NATIONALISED BANKS

0123456789

10

SD

CC

SB

I

IDB

I

UN

ION

BA

NK

OF

IND

IA

BA

NK

OF

MA

HA

RA

SH

TR

A

NAME OF THE BANK

% N

PA

NPA %

Figure No. 7.6

From the above table it is clearly find that the NPA % of the SDCC Bank is higher

as compared to other nationalized banks.i.e.8.94 %. Main reasons behind this higher

percentage of NPA are improper procedure of granting loan to the farmers and the bank.

The DCC banks have the compulsion to give advances to the farmers and priority sector.

The NPA percentage of other nationalized banks is very low. The reasons could be their

strong recovery policies and accurate loan portfolio.

76

CASE STUDY

For the case study I have taken the real cases from the societies which are working under

the SDCC bank. I have taken the cases of loans which are given to the farmers for various

reasons.

CASE STUDY NO.1

Name of the Society : Sanjivani vividh karyakari society, Degaon Tal-North

Solapur.

Name of the Defaulter : Apparao Genappa Rajmane

Category of Asset : Substandard Asset

Category of Loan : Middle Term Loan (MT)

Reason of Loan : Pipeline & Electric Motor for the Farm

Amount Of Loan : Rs.4, 45,500/-

Security Taken : Papers of Land (“satbara utara”)

Sanctioned Date : 09/08/2006

INSTALLMENTS TO BE PAID:

77

DATE INSTALLMENT STATUS

08/08/2008 RS.74250 + Interest Unpaid

08/08/2009 RS.74250 + Interest Unpaid

08/08/2010 RS.74250 + Interest ----

08/08/2011 RS.74250 + Interest ----

08/08/2012 RS.74250 + Interest ----

08/08/2013 RS.74250 + Interest ----

Date of NPA : 08/08/2008

Reason : The purpose for which the loan taken is not gets

completed successfully.

Amount recovered :

Rs.15000/- is collected from the Sugar Factory. When the defaulter brought his

sugarcane to the Sugar factory, the billed amount has been kept by the factory and

subsequently it is returned to the Bank as per the RBI‟s guidelines.

Action taken by the Bank:

Initially bank had sent the Demand Notice through the society by giving the

period of 15 days. Then also there was no response from the defaulter. After that bank

has filed a case against the defaulter according to Sec 101(1) of the Co-operative societies

act, 1960 through Taluka level Assistant Registrar (AR). The case is still running in the

DRT court.

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CASE STUDY NO.2

Name of the Society : Sanjivani vividh karyakari society, Degaon Tal- North

Solapur.

Name of the Defaulter : Annapurna Shankar Jadhav


Category of Loan : Short Term Loan (ST)

Reason of Loan : Crop Loan (Sugarcane)

Amount of Loan : Rs.1, 08,000/-



Date of NPA : 30/06/2008

Reason : Because of poor monsoon the farmer did not get

satisfactory output from her field.

Amount recovered : NIL

Action taken by the Bank:-

As per the RBI‟s guidelines the banks can‟t force the farmers to repay the loans.

They have to go through the normal recovery process which was followed by the bank

against this defaulter.

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CASE STUDY NO.3

Name of the Society : Honsal vividh karya seva sahakari sanstha, Tal- North

Solapur.

Name of the Defaulter : Ashok vishwanath Bhojrange


Category of Loan : Short Term Loan

Reason of Loan : Crop Loan (Hybrid Tomato)

Amount Of Loan : Rs.28,000/-

Rate Of interest : 10%



Date of NPA : 30/06/2008

Rate of Interest After : 10% + 1.5%(fine)

NPA

Reason : Uncertainty of Rainfall.


Action taken by the Bank:-

80

As per the RBI‟s guidelines the banks can‟t force the farmers to repay the loans.

They have to go through the normal recovery process which was followed by the bank

against this defaulter.

CASE STUDY NO.4

Name of the Society : Honsal Vividh Karyakari Seva Sahakari Sanstha, Honsal,

Tal- North Solapur

Name of the Defaulter : Appalal Nadaf

Category of Asset : Doubtful Asset

Category of Loan : Short Term Loan

Reason of Loan : Crop Loan (Grapes)

Amount of Loan : Rs.84, 375/-

Security Taken : Papers of Land (satbara utara)


Date of NPA : 30/06/2005

Reason : 1) Use of traditional method for farming.

2) Because of Poor monsoon the farmer did not get

Satisfactory output from the field.


81

Action taken by the Bank:

The bank has followed the legal procedure & suit the case against defaulter to

recover the amount from him. But till date there is no any positive sign to get the amount

back. Now the defaulter is going to sell his land in December,2009. From this defaulter

get some money. Out of that money he has to pay the unpaid amount to the Bank. Bank

will have the first right on that amount to recover its unrecovered amount. Without

permission of the bank to sale the land, defaulter cannot sale his land.

82

CHAPTER-VIII

FINDINGS AND OBSERVATIONS

83

FINDINGS AND OBSERVATIONS

1. It is observed that the Gross NPAs of the Bank have increased very rapidly from the

year 2004-05 to 2008-09.

2. It is observed that the Deposits of the Bank‟s are also in the increasing trend

throughout the period considered for the study.

3. The sub-Standard assets of the bank were decreased throughout the years. The

Doubtful Assets of the bank showing an increasing trend throughout the period of

study. And also the loss assets of the bank showing a continuous increasing trend

throughout the period under study.

4. It is observed that the bank‟s provision for the NPA has increased every year.

5. No strict action is taken against the defaulters immediately. I feel strict legal action

must be taken against the defaulters.

6. It is also observed that the recovery of advances is mostly depends upon the

rainfall(Monsoon).

7. Income recognition norms are strictly followed.

8. Provisions for NPA‟s are made as per & in accordance with RBI guidelines.

9. There is political influence by the defaulters in the recovery procedure.

10. Because of RBI‟s new guidelines regarding the provision for NPA, the profitability of

the bank has came down. This is because that the major portion of the profit is going

to make provision against NPA.

84

CHAPTER-IX

SUGGESTION/RECOMMENDATIONS

85

SUGGESTIONS

SUGGESTIONS TO OVERCOME THE PROBLEM OF NPAs:

NPAs are increasing day by day in the SDCC for a multiplicity of reasons. The

following recommendations are suggested to the SDCC to have control over the NPAs.

The recommendations are classified into three categories, are as follows.

A). General suggestions:

The Bank should adopt the following General strategies for control of NPAs. The

suggestions are as follows:

1. Projects with old technology should not be considered for finance.

2. There is need to shift banks approach from collateral security to viability of the

project and intrinsic strength of promoters.

B). Pre-sanction suggestions:

1. Analysis should be based on trends of capacity utilization, profitability etc.

2. Before taking up any fresh/exciting proposals for assessment, Available sources

for margin money should be thoroughly examined.

C). Post sanctions suggestions:

1. Bank should prevent diversion of funds by the promoters.

2. The Credit section should carefully watch the warning signals viz. non-payment

of quarterly interest, dishonor of check etc.

3. Effective inspection system should be implemented.

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Other Suggestions:

1. The bank should meet the defaulters personally and should always keep in touch

with them.

2. The bank should send the continuous notices to defaulters regarding the dues and

should conduct the meeting with account holders whose accounts are in the way

of becoming NPAs.

3. There should be proper recovery cell in order to keep the bank updated regarding

the accounts, which are NPA and may be on the way of becoming NPA.

4. Prepare good recovery policy & strategies for reducing NPA have and identify

critical branches for recovery.

5. Bank should fix target for recovery and draw time bound action plans. Monitor

implementation of time bound action plans.

6. Bank should provide required infrastructure for effective recovery.

7. Bank should develop its web site & all the branches should be interconnected

through common network.

87

CHAPTER-X

LIMITATIONS

88

LIMITATIONS

During the course of the study I have faced some problems. The problems were there due

to following limitations.

1. Most of the data is available by the sources of secondary data.

2. The study is restricted to the Solapur District Central Co – Operative bank only.

3. Most of information collected was available through bank circulars and annual

reports.

4. 60 days were insufficient to study the whole NPA activity of SDCC.

5. There was no practical work given. SDCC being a Government undertaking bank

giving work to a summer intern was against their policies. An intern cannot

practically work in the company but can study through given materials (Files &

cases). I with my other interns use to study, discuss & analyze the older cases,

figures, etc.

89

CHAPTER-XI

CONCLUSION

90

CONCLUSION

The concept of introducing NPA in Banking industry by the Narasimham

committee was to reflect the true financial position of the banks. After the completion of

two months summer training project on Non Performing Assets in Solapur District Co-

operative Bank, I can say that study of Non Performing Assets and it‟s recovery process

is very interesting and is very important subject in the banking history.

The NPA figures for the last five years show that the NPA level has been

increased year after year due to poor monsoon condition followed by some other reasons.

The result illustrates that the bank has to follow many rules & regulations issued by the

RBI & NABARD. These rules and regulations restrict the scope of recovery department

of the Bank. It is observed that NPAs are more in substandard assets category, which

needs more attention from the angle of recovery.

At last recovery of NPA is an important aspect of Co-operative Banks. It

minimizes the load and doubtful debt of the bank and also reduces the losses that occur

due to Non Performing Assets. Recovery helps in profit expansion hence bank appoints

well trained and senior personnel to look after the recovery process.

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BIBLIOGRAPHY

92

BIBLIOGRAPHY

Books:

1. Banks and Institutional Management : By, Vasant Desai.

2. Indian Financial System : By, M Y Khan.

Circulars and Annual Reports:

1. Circulars of NABARD and RBI

2. Annual Financial Reports of the Solapur District Central Co-Operative Bank

Limited.

3. Ledger books of the Bank & Societies.

Web Sites:

1. http://www.rbi.org.in/

2. http://www.managementparadise.com/

Assessment of Non-performing Assets and Its Recovery Process

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