assessment of non-performing assets and its recovery process
TRANSCRIPT
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.
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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.
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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.
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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
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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.
74
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.
78
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 Asset : Substandard Asset
Category of Loan : Short Term Loan (ST)
Reason of Loan : Crop Loan (Sugarcane)
Amount of Loan : Rs.1, 08,000/-
Security Taken : Papers of Land (“satbara utara”)
Sanctioned Date : 29/03/2007
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.
79
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 Asset : Substandard Asset
Category of Loan : Short Term Loan
Reason of Loan : Crop Loan (Hybrid Tomato)
Amount Of Loan : Rs.28,000/-
Rate Of interest : 10%
Security Taken : Papers of Land (“satbara utara”)
Sanctioned Date : 02/07/2007
Date of NPA : 30/06/2008
Rate of Interest After : 10% + 1.5%(fine)
NPA
Reason : Uncertainty of Rainfall.
Amount recovered : NIL
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)
Sanctioned Date : 30/06/2004
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.
Amount recovered : NIL
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.
86
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.
91
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/