A Project Report on Non Performing Assets & Banking Studies

CONTENTS

SL. NO 1

2

3

PARTICUALARS

PAGE .NO

1-3 EXECUTIVE SUMMARY

4 INTRODUCTION TO THE STUDY

5-13 INDUSTRY PROFILE

14-27

4

ORGANISATION PROFILE 5

6

7

8

9

10

11

12

28-60 NON PERFORMING ASSETS

61 OBJECTIVES OF THE STUDY

62-63 METHODOLOGY

64-70 ANALYSIS AND INTERPRETATION OF DATA

71 FINDINGS

72 SUGGESTIONS

73 CONCLUSION BIBLIOGRAPHY

74

Project Report on Non Performing Assets & Banking Studies

EXECUTIVE SUMMARY Industry Profile Banking in India has its origin as carry as the Vedic period. It is believed that the transition from money lending to banking must have occurred occurred even before Manu, the great Hindu jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to the interest. During the mogal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of East India Company, it was to turn of the agency houses top carry on the banking business. The general bank of India India was the first joint stock bank bank to be established established in the year 1786.Th 1786.Thee others which followed were the Bank of Hindustan and the Bengal Bank

Company Profile The The Belg Belgau aum m Distr District ict Centr Central al Co-op Co-oper erati ative ve Bank Bank estab establis lishe hed d in the the year year 1918 1918 and and The The Belgaum District central Co-operative Bank’s operations were started by the following year that is by 1919 1919.. The bank is is establish established ed mainly mainly

for the purpo purpose se to serve serve the Farmers Farmers and

general people who were in the hands of private and capitalist in the year 1919. Now the bank is successfully running running by serving serving all the sectors. Now a day all the sectors are affected by the Political interferences, interferences, lack of honesty, honesty, lack of social service and lack of innovative innovative ideas. But BDCC Bank is going far away from these difficulties. There are totally 650 employees, 5 Deputy General Managers, & 1 General Manager. Total branches branches of the bank are are 84 plus plus 1 Head Head office. office. The Bank Bank is currentl currently y achieve achieved d Rs.605 Rs.605.97 .97 crores crores deposit deposits, s, Rs.592 Rs.592.64 .64 crores crores Advance Advances, s, Rs.104041 Rs.104041.95 .95 crores working capital. capital. By which the bank is running in the success path. Loan Repayment is recorded with 75% which has made an important aspect for the deposits and advances. The BDCC Bank has over 85 Branch offices .

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Project Report on Non Performing Assets & Banking Studies SCOPE OF THE STUDY: •

The scope of the study here was confined to the organization only.

•

The study covers to find out the strategy required to reduce the NPAs.

•

The concentration is given only in understanding the NPAs growth with the reference of BDCC Bank.

•

The data is purely based on the secondary data and collected from website and journal.

•

The scope is limited to drawn conclusions from analysis and interpretation of the primary and secondary secondary data of the the BDCC BDCC bank. bank.

OBJECTIVES OF THE STUDY: •

•

To offer useful suggestions to reduce the NPAs in the bank To evaluate the BDCC Bank’s assets quality.

•

To study the management of total assets and advances of the BDCC Bank.

•

To analyze sector wise non-performing assets.

.

METHODOLOGY: Introduction The The qual qualit ity y of the the proj projec ectt work work depe depend ndss on the the meth method odol olog ogy y adop adopte ted d for for the the stud study. y. Metho Methodo dolo logy gy,, in turn turn,, depe depend ndss on the natur naturee of the the proj project ect work. work.

The The use use of prop proper er

methodolog methodology y is an essential part of any research. research. In order to conduct conduct a study scientifically, scientifically, suitable methods and measures are to be followed.

Research Design: The type of research used for the collection and analysis of the data is “Historical Research Method”. Method”. The main source of data for this study is the past record prepared prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception and to identify the ways in which the performance especially the non-performing assets of the BDCC Bank can be improved. The data regarding bank history and profile are collected through “Exploratory Research Design” particularly through the study of secondary sources and discussions with individuals.


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Data collection method Primary Primary data: Discu Discussi ssion on with with the mana manage gerr and and offic officers ers of the the bank bank to get get gene general ral information about the bank and its activities. •

Having face to face discussions with the bank officials.

•

By taking guidance from bank guide and departmental guide.

Secondary data: Collection of data through bank annual reports, bank manuals and other relevant documents. Collection of data through the literature provided by the bank

RECOMMENDATIONS: Banks Banks concern concerned ed should should continu continuous ously ly monitor monitor loans loans to identif identify y account accountss that have have potential to become non-performin non-performing. g. BDCC Bank should offer rescheduling rescheduling of loans of those borrowers who were struggling with high interest rates in a falling interest rate environment. environment. BDCC Bank should should concentrate concentrate more on credit appraisal, appraisal, monitoring, monitoring, credit risk management and recoveries.

CONCLUSION: NPA Act is fine, comprehensive comprehensive and an extra-ordinary extra-ordinary piece of legislation. legislation.

It is also a

reassuring sign of Government’s commitment to reforms. The Act empowers bank to change or take over the management or even take possession of secured assets of the borrowers and sell or lease out the assets. This is for the first time that the banks can take take over the immovable immovable assets of the defaulting borrowers borrowers without without the intervention intervention of the court. They can claim future future receivables receivables and supersede the Board of Directors Directors of the defaulting corporate. corporate. No court, other other than Debt Recovery Tribunal, can entertain any appeal against the action taken by banks and financial institutions under this act.


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INTRODUCTION TO THE STUDY A study on the Management of ‘Non Performing Assets’ in the BDCC Bank is done at the BDCC Bank near central bus stand, Belgaum (Dist), Karnataka state. The type of research used for the collection and analysis of the data is “Historical Research Method”. Method”. The main source source of data for this study is the past records prepared by the bank. The focus of the study is to determine determine the Non Performing Performing Assets of the bank since its inception and to identify the ways in which the performance especially the non-performing assets of the BDCC Bank can be improved. The The data data rega regard rding ing bank bank histo history ry and and profil profilee are colle collecte cted d thro throug ugh h “Explo “Explora rator tory y Research Design” particularly through the study of secondary sources and discussions with individuals.

Title of the Project: “A STUDY ON BDCC BANK AND ITS NON PERFORMING ASSETSS” BACKGROUND OF PROJECT TOPIC

A crucia cruciall issue issue which which is enga engagi ging ng the the const constant ant atten attentio tion n of the bank banking ing indust industry ry is the the alarming alarmingly ly high level of non performi performing ng assets (NPA). Anothe Anotherr major major anxiety anxiety before before the banking banking industry is the high transaction cost of carrying non performing assets in their books. The resolution of the non performing assets problem requires greater accountability on the part of the corporate, greater disclosure in the case of defaults, an efficient credit information sharing system and an appropriate legal framework pertaining to the banking system so that court procedures can be stream lined and actual recoveries made within an acceptable time frame. So the project title “A Study on The Management of Non Performing Assets in the BDCC Bank” looks in to the implications of high NPAs and suggests effective recovery measures measures for resolving problem loans loans and thus making the banks banks NPAs level healthy. It also compares the position of BDCC Bank with other public sector banks in terms of their NPAs in the last five years and also to study the management of total assets and advances of the BDCC BDCC Bank among other public sector banks. Babasabpatilfreepptmba.com

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INDUSTRY PROFILE MEANING OF BANKS: A banking company in India has been defined in the banking companies Act 1949 as “One which transacts the business of banking which means the accepting of the purpose of sending or investment of deposits of money from the public repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise”.

History: Banking in India has its origin as carry as the Vedic period. It is believed that the transition from money lending to banking must have occurred occurred even before Manu, the great Hindu jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to the interest. During the mogal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of East India Company, it was to turn of the agency houses top carry on the banking business. The general bank of India India was the first joint stock bank bank to be established established in the year 1786.Th 1786.Thee others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906, while the other two failed in the meantime. In the first half of the 19th Century the East India Company established three banks; The Bank of Bengal in 1809, The Bank of Bombay in 1840 and The Bank of Madras in 1843.These three banks also known as presidency presidency banks and were independent independent units and functioned functioned well. These three banks were amalgamated in 1920 and The Imperial Bank of India was established on the 27 th Jan 1921, with the passing of the SBI Act in 1955, the undertaking of The Imperial Bank of India was taken over by the newly constituted SBI. The Reserve Bank which is the Central Bank was created in 1935 by passing of RBI Act 1934, in the wake of swadeshi movement, movement, a number number of banks with Indian Management Management were established in the country namely Punjab National National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, The Bank of Baroda Ltd, The Central Bank of India Ltd .On July 19 th 1969, 14 Major Banks of the country were nationalized and in 15 th April 1980 six more commercial private sector banks were also taken over by the government. The Indian Banking industry, which is governed by the Banking Regulation Act of India 1949, can be broadly classified into two major categories, non-scheduled banks and


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Project Report on Non Performing Assets & Banking Studies scheduled banks. Scheduled Banks comprise commercial banks and the co-operative banks. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from class banking to mass banking. This in turn resulted in the significant growth in the geographical coverage of banks. Every bank had to earmark a min percentage percentage of their loan portfolio to sectors identified as “priority sectors” the manufacturing sector also grew during the 1970’s in protected environments and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial commercial banks in 1980 since then the number of scheduled commercial banks increased four- fold and the number of bank branches increased to eight fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties. The PSB’s found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector first made their appearance appearance after the guidelines permitting them were issued in January 1993.This is how the Banking Industry grew.

The Indian Banking System: Banking in our country is already witnessing the sea changes as the banking sector seeks new technology and its applications. The best port is that the benefits are beginning to reach the masses. Earlier this domain was the preserve of very few organizations. Foreign banks with heavy investments in technology started giving some “Out of the world” customer services. But, such services were available only to selected few- the very large account holders. Then came the liberalization and with it a multitude of private banks, a large segment of the urban population population now now requires requires minimal minimal time time and space space for its its banking banking needs. needs. Automated teller machines or popularly known as ATM are the three alphabets that have changed the concept of banking like nothing before. Instead of tellers handling your own cash, today there are efficient machines that don’t talk but just dispense cash. Under the Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled banks. The scheduled banks are those, which are entered in the Second Schedule of RBI Act, 1934. Such banks are those, those, which which have paidpaid- up capital capital and reserves reserves of an aggregate aggregate value value of not less then Rs.5 lacs and which satisfy RBI that their affairs are carried out in the interest of their deposit depositors. ors. All commer commercial cial banks banks Indian Indian and Foreig Foreign, n, regiona regionall rural rural banks banks and state cooperative banks are Scheduled banks. Non Scheduled banks are those, which have not been included included in the Second Schedule of the RBI Act, 1934.The organized organized banking system in India Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies can be broadly classified into three categories: (i) Commercial Banks (ii) Regional Rural Banks and (iii) Co-operative Co-operative banks. The Reserve Bank of India is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all commercial banks and hence is known as the “ Reserve Bank ” Banks play important role in economic development of a country, like:



Banks mobilise the small savings of the people and make them available for productive purposes. purposes.



Promotes the habit of savings among the people thereby offering attractive rates of interests on their deposits.



Provides safety and security to the surplus money of the depositors and as well provides a convenient and economical method of payment.



Banks provide convenient means of transfer of fund from one place to another.



Helps the movement of capital from regions where it is not very useful to regions where it can be more useful.



Banks advances exposure in trade and commerce, industry and agriculture by knowing their financial requirements and prospects.



Bank acts as an intermediary between the depositors and the investors. Bank also acts as mediator between exporter and importer who does foreign trades.

Thus Indian banking has come from a long way from being a sleepy business institution to a highly pro-active pro-active and dynamic entity. entity. This transformation transformation has been largely brought brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities opportunities rather than generating generating revenues revenues from conventional conventional streams (i.e. borrowing borrowing and lending). lending). The banking banking in India is highly highly fragmented fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advances.


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Project Report on Non Performing Assets & Banking Studies The Structure of Indian Banking: The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are again split into old banks and new banks.

Reserve Bank of India

Scheduled

Scheduled Commercial Banks

Public Sector Banks

Nationalized Banks

Scheduled Co-operative Banks

ForeignPrivate Sector Regional Banks Banks

Scheduled Urban Co-Operative Banks

SBI & its Associates

Old Private Sector Banks

Scheduled State Co-Operative Banks

New Private Sector


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Co-operative Banking: India is a country where where agriculture agriculture is still a predominant predominant activity. Our farmers farmers by and large are poor and usually used to depend on money lenders Indigenous bankers and financiers etc. Till 1951-52 the money lenders were providing 70% of the requirements of farmers and thus constituted constituted the most important important source of rural finance. However However the share of Moneylenders Moneylenders in rural rural credit credit was reduced reduced to 49%. 49%.

This This was due to high rates rates of interest, interest, dishonest dishonesty y and

fraudulent practices followed by the money lenders. The cooperative Movement was started in India in 1904 with the objective of providing finance to agric agricul ultur turist istss for for produ producti ctive ve purp purpose ose at low low rates rates of inter interest est and and thereb thereby y reliev relieving ing agriculturists from the chetches of the Money lenders. The co-operative society Act of 1912 contributed contributed to the establishment of central co-operative co-operative banks and the state co-operative banks to provide refinance to primary credit societies which could not mobilize funds by their own efforts. The co-operative credit movement made food progress during and after the 1 st world of 191418, but during the the great depression of 1929-193 1929-1933, 3, it received a serious setback. With the out break of Second World War of 1939-45, 1939-45, the co-operative credit movement movement made considerable considerable progress progress once again. again. Since then, then, the progress progress has been been maintained. maintained. A co-operative bank promotes economic activity and provides banking facilities and service service to the rural people people.. The significan significantt role role of co-opera co-operative tive banks in the agricultur agricultural al economy imparts a lesson to commercial banks and dispels from their minds the age old inertia and the gloom of conservatism by shifting emphasis from credit worthiness of the purpose and from tangible security to the character of the business. Co-operative means “ a form of organization where in persons voluntarily associate together as human beings on the basis of equality for the promotion of the economic interest of themse themselv lves” es”..

So, So, co-o co-oper perati ative vess are chara charact cteri erized zed by volu volunta ntary ry assoc associat iatio ion n and and open open

membership, democratic management, limited interest on capital, education and training equity of distribution distribution of profits etc. “Each for all and all for each” is the underlying underlying principle principle of cooperatives.


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Project Report on Non Performing Assets & Banking Studies The main principles of these societies are: •

Restricted membership to rural masses

•

Limited area of operation

•

No share share capital

•

Unlimited liability of the members

•

The management of the society is honorary

•

Schu Schulze lze Delitz Delitzsch sch societ societies ies are a form form of urba urban n credit credit societ societies ies..

The The main main

principles principles of these are: are: •

Membership is open to artisans, middle class people

•

Living in towns and cities

•

Large area of operation

•

Limited liability of members

•

Large share capital

So, co-operative came as an answer to the problem of rural indebtedness which was rampant through act the country during the later decades of 19 th century. It was an official remedy to be introduced on a voluntary basis, with the principles of self-help, thrift and mutual co-operation. This This was supposed supposed to be the beginning beginning of genuine genuine Indian co-opera co-operative tive moveme movement. nt. So the objective of co-operative movement is actively implementing socio economic program with the ultimate aim of uplifting the living standard of economically backward and weaker section of society. In 1919 the government of India Act 1919 was passed and co-operation became a state subject. So several states passed their own acts for the development of the co-operative movement in their respective states through the co-operative movement in India was born at the beginning of century as an instrument of dealing with agricultural indebt ness, it was only after attaining independence that attaining independence that attention was paid in a big way to this issue. After independence the co-operative movement received added support from Government. So to sum up, the co-operative movement has made remarkable progress in terms of number, membership membership share capital and working working capital. capital. The progress progress of co-operative co-operative movement movement has been remarkable in the fields of agricultural agricultural credit, marketing and supply of farm inputs and processing. processing. Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies The Indian co-operative banking system is a 3-tier system. If consists of three sectors. 1. Prima Primary ry cred credit it societ societies ies at the the base base 2. Central Central co-o co-opera perative tive Socie Societies ties in the middl middlee 3. State State co-opera co-operative tive Bank Bankss or Apex Apex Bank Bankss at the top. top.

Primary Credit Societies It is an association of ten or m more ore persons residing in a particular locality. The funds at primary credit societies societies consist of entrance fees, share capital, Reserve fund, Fixed Deposits from members members and non-members non-members and loans loans from central co-operative co-operative banks. The primary credit societies extend extend short and long term loans loans to the members. Generally, Generally, loans are given for a period of 6 months, one year and 2 years. Loans are ordinarily given, on Personal Personal security of borrowers supported by personal security of borrowers supported by personal.

Central Co-operative Banks The primary credit societies failed to mobilize enough deposits from their members for meeting their requirements. They were in need for refinance from some agency. So the cooperatives societies Act of 1912, provided for the establishment of the central co-operative Bank to provide finance to primary credit societies. Central co-operative banks are federation of primary credit societies operating in a specific specific area. General Generally ly they are located located in the district district head quarters quarters and some prominen prominentt towns of the district. The funds funds of central co-operative Banks Banks consist of share capital, reserve funds, funds, deposi deposits ts from from member memberss and non-memb non-members ers and loans and advanced advanced form state cooperative Banks. Some times they raise loans from commercial banks also.

STATE CO-OPERATIVE BANKS Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies Every state has a state co-operative co-operative Bank at the top of the co-operative co-operative banking banking structure. structure. If is known as Apex Bank as it controls and co-ordinates the working of all co-operative credit institutions institutions in the state. state. If is found in in the state capital. capital. The table table 1.1 shows shows the co-operative co-operative credit structure in the whole state of Karnataka. The funds of the state co-operative Banks consists of share capital, reserve funds, deposits from members and general public and loans from RBI, state Government and commercial Banks. However loans and advances from the RBI constitute a major part of their funds.

DISTRICT CENTRAL CO-OPERATIVE BANK (DCC BANK) Primary co-operative co-operative credit societies in a particular area, generally generally a district, federate and form a district central co-operative co-operative bank. Generally Generally the DCC bank located located of the head quarters of the district. Some DCC DCC banks have branches in some towns in the particular district. The DCC DCC Banks are of two types. types. In one type of DCC DCC Banks the membership membership is confined confined to primary primary societies only. This type is therefore known as “Banking Union”. In the case of the second type of the DCC banks, there is mixed membership consisting of both primary societies and individual individual possessing possessing some financial status as influence, influence, some special business capacity and and experience experience in the the field of co-opera co-operative tive banking. banking. The presence presence of some some of these these indiv individ idua uals ls in the DCC DCC bank bankss and and thus thus on their their board board of mana manage geme ment nt is deem deemed ed necessary because the organization and working of DCC Banks is supposed to be complex. And the representatives of primary societies on the board of management of DCC Banks may not have the necessary ability and experience required running the DCC Bank efficiently and thus inspiring confidence in the mind of the public.

Table Table Showin Showing g The Distri District ct Co-Op Co-Opera erativ tivee Credit Credit Str Struct uctur uree in the Wh Whole ole State State of Karnataka for the Year 2007-08: Babasabpatilfreepptmba.com

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SL.NO

PERTICULARS

SCB

DCCB

PACS

1.

Number

1

22

4532

2.

No. of Branches

30

628

-

3.

No. of staff

498

4931

10567

4.

Total Membership

79

34645

5549000

5.

Borrowing Membership

79

5234

873793


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Project Report on Non Performing Assets & Banking Studies ORGANISATION PROFILE


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In this chapter I have concentrate over the introduction of co-operation and co-operative and profile of the the Belgaum Belgaum district central central co-operative co-operative Bank Bank Belgaum. Belgaum. and organizational organizational structure structure of the bank, objectives of the bank, limitation of the bank.

MEANING OF CO-OPERATION AND CO-OPERATIVES: The co-operation means working together for some common purpose. The basic principle of co-operation is each for all and all for each. The meaning for co-operation is different from thinker to thinker. A co-operative is an autonomous association of persons united voluntarily to meet their common, economic, social, cultural needs. And aspiration through jointly owned and democratically controlled enterprises, offices, functioning is based on decentralized decisions making principles. In tradition its aim is economic, social and moral development of its members.

Co-operatives are the voluntary and democratic associations of human beings organized on the principles principles of equality equality for the attainment attainment of the satisfaction of their common common economic economic needs concerned with economic welfare.

PRINCIPLES OF CO-OPERATIVES: The foundation of any co-operative activity is based on certain principles. These principles are the guiding force behind the development of the co-operative movement throughout the world. These principles are as follows:

1) Volunt Voluntary ary and and open memb members ership hip:: Co-operatives Co-operatives are voluntary organizations organizations open for all persons to use their services and willing willing to accept accept the responsi responsibili bilities ties of member membership ship without without gender genders, s, social, social, politica politicall and religious religious discrimination. discrimination. Universal character of membership membership must be maintained, maintained, provided the member fulfill all the qualification and always act in the interest of the bank and other comembers

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Project Report on Non Performing Assets & Banking Studies 2) Democratic Democratic managem management ent and equality equality of of voting rights: rights: A co-operative bank is democratic in its management. All members are treated equal and and exerc exercise ised d thro throug ugh h the princ principl iplee of “one “one man man one one vote” vote”.. A princ principl iplee of demo democra cracy cy representatives is accountable to the membership.

3) Self Self help help throug through h mutua mutuall help: help: The co-operative bank strives on the principle of mutual fund help. It is an association of financially weaker sections of the society, the financially weaker persons cannot achieve their aims single handedly, and they need mutual helps.

4) Concer Concern n for for comm communi unity: ty: Co-operative works for the sustainable development of the community through policies whic which h do the the memb member erss appr approv ove, e, the the co-o co-ope pera rati tive vess must must quit quit to the the loca locall need needss and and environment.

5) Autono Autonomy my and and indepe independe ndence nce:: Co-operatives are autonomous and self help organizations controlled by members. if they enter into agreement with other organizations including government or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative economy.

6) Education Education training training and informati information on to member members: s: Co-operative provides education, training and information to their members, elected repre represen senta tativ tives, es, manag managers ers and emplo employee yees, s, so that that they they can can contr contrib ibut utee effec effectiv tively ely to the the development at their co-operative.


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Project Report on Non Performing Assets & Banking Studies BACKGROUND OF CO-OPERATIVE MOVEMENT IN INDIA The co-operative movement `was started in India in the year 1904 by establishing co-operative bank to encourage encourage thrift, self help and co-operation, co-operation, these finance for both agricultural, agricultural, small scale and cottage industries, after the independence independence the central government government as well as the state government encouraged the co-operative movement to improve the economic conditions of the weak weaker er sect sectio ion n of the the soci societ ety y part partic icul ular arly ly the the rura rurall popu popula lati tion on..

Co-o Co-ope pera rati tive ve bank bankin ing g as

yet yet rema remains ins the the best best answ answer er or most most satisf satisfact actory ory in situa situatio tions ns for for prov providi iding ng finan finance ce to borrowers borrowers in the rural rural area and also occupy occupy a significant significant role also. also. it seeks the help help of members members and work for the benefit throughout them for larger good of the community.

PROFILE OF THE DISTRICT CENTRAL CO-OPERATIVE BANK LIMITED, BELGAUM . The district central urban co-operative bank Ltd was established in the year. The Belgaum district central co-operative bank ltd is registered as co-operative society. Under central act II of 1912. Its registration number is 2163, dated 17-12-1918. It was later deemed to be registered under the Bombay co-operative society’s act 1925 and now it is deemed to be registered under the Karn Karnata ataka ka co-o co-ope perat rative ivess societ societies ies’’ act 1959 1959.. Its addr address ess for presen presentt shall shall be Poon PoonaaBangalore road, Belgaum. Its operation shall be the whole of the Belgaum district. it may be referred to the central bank”.


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Project Report on Non Performing Assets & Banking Studies Board of Directors: The present composition and category of Board of Directors of the Bank are furnished below:

S/No

Name Of The Directors

Category Of Director

1.

Shri. Ramesh V. Katti

Chairman & MP Of Chikkodi

2.

Shri. Mahantesh B. Dodagoudar

V. Chairman

3.

Shri. D. V. Sangannavar

Director

4.

Shri. G. N. Kvalli

Director

5.

Shri. L. S. Savadhi

6.

Shri. Aravind C. Patil

Director & Co-Operative Minister Of Karnataka Govt Director

7.

Shri. N. B. Patil

Director

8.

Shri. D. T. Patil

Director

9.

Shri. Mahantesh S. Patil

Director

10.

Shri. S. S. Dhavan

Director

11.

Shri. A. M. Kuligude

Director

12.

Shri. S. G. Dhavleshwar

Director

13.

Shri. Ganesh P. Hukkei

Director & ZP member

14.

Shri. P. B. Dyamangodar

Director

15.

Shri. C. B. Patil

Director

16.

Shri. A. S. Navalgatti

Director

17.

Shri. S. B. Kamatgi

APEX Bank Nominee

18.

Shri. G. M. Patil

Deputy Registrar

19.

Shri. S. B. Tubachi

General Manager

OBJECTIVES OF THE DISTRICT CENTRAL Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies CO-OPERATIVE BANK LTD BELGAUM 1)

To enco encour urag agee thr thrift ift help help and and co-o co-ope pera rati tion on amon among g the the mem membe bers rs,, ass assoc ocia iate te

memb member ers, s,

nominal members and depositors of the bank.

2)

To prov provid idee requi require red d financ financee to prio priori rity ty sect sector orss like like agri agricu cult ltur ure, e, cotta cottage ge indu indust stri ries es and and

small scale industries.

3)

To borro borrow w fund fundss from from memb member erss and non non mem membe bers rs and and to be be utili utilize zed d for for grant granting ing loans loans

to members and non members for useful purposes.

4)

To act as an an agen agentt for for the join jointt purp purpos oses es of of dome domest stic ic and and othe otherr requi require reme ment nt of the the

members and non members.

5)

To arra arrang ngee for for the the saf safee cus custo tody dy of valu valuab able less and and docu docume ment nts. s.

6)

To carry carry out out inst instruc ructio tions ns for for perio periodi dicc or colle collecti ction ons, s, rem remitt ittanc ancee etc etc of the the mem membe bers rs and and

non members.

7)

To pre prepa pare re and and finan finance ce proj projec ects ts to impr improv ovee the econ econom omic ic cond condit itio ions ns of of the memb member erss

particularly particularly those belonging belonging to weaker weaker sections sections of the society. society.

8)

To exte extend nd fina financ ncial ial and and techn technica icall assis assista tance nce to the the une unemp mplo loye yed d to star startt their their indus industry try /

profession. profession.

9)

The The bra branc nche hess of dist distri rict ct cen centr tral al coco-op oper erat ativ ivee bank bank Ltd Ltd,, Belg Belgau aum. m. SI. No. Operation Areas 1. Head office: 1 2. Branches through district: 85

HEAD OFFICE AT A GLANCE Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies Organizational structure of DCC Bank Belgaum

Chairman

Directors Genral Manager

Dy. G.M ADMINISRATIO N

Dy. G.M

Dy. G.M BRANCH CONTROL

Dy. G.M LOANS & OPERATION

Dy. G.M ACCOUNTS & BRANCH’S

SUPERIDENTS

SUPERIDENTS

SUPERIDENTS

SUPERIDENTS

SECTION OFFICERS

SECTION OFFICERS

SECTION OFFICERS

SECTION OFFICERS

Br. MANAGER /

Br. MANAGER /

Br. MANAGER /

Br. MANAGER /

BANK INESPECTORS

BANK INESPECTORS

BANK INESPECTORS

BANK INESPECTORS

SUB ACCOUNTANT

SUB ACCOUNTANT

SUB ACCOUNTANT

SUB ACCOUNTANT

SECOND DIVISION CLASS




SUB STAFF

SUB STAFF

SUB STAFF

SUB STAFF

Planning & Devlopment

SUPERIDENTS

SECTION OFFICERS Br. MANAGER / BANK INESPECTORS SUB ACCOUNTANT


SUB STAFF


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Project Report on Non Performing Assets & Banking Studies NOMINAL MEMBERSHIP: Not with standing anything anything contained in any other bye-laws any person who is above the age 18 and who is competent to contract residing in the jurisdiction of the bank who is not the member of any other co-operative credit society or bank, may be admitted as a nominal subject to the following conditions.

I.

He sh shall pa pay an an ad admission fe fee of of Rs Rs. 50 50 = 00 00

II.

He should be credit wo worthy.

III. III.

He shal shalll not hav havee right right to vot votee or to part partici icipat patee in the the mana manage geme ment nt of the the bank bank or or in the the

distribution of its profits or liabilities, except the liability against him, as a borrower or surety or both in the event of its winding up except that such member may attend the general body meeting of the bank with prior permission of the board by its resolution.

IV. IV.

He shal shalll be be elig eligib ible le for for the the foll follow owin ing g typ types es of of loan loans. s.

a)

Personal loan

b)

Mortgage Mortgage loans loans

c)

Loan agai agains nstt dep depo osits sits and and gov gover ernm nmeent secu securi riti ties es

d)

Loan aga agains inst governme nment & guarant ranteee

e)

Loan Loan for for hous housee cons constr truc ucti tion on / purc purcha hase se / mor mortg tgag agee / purc purcha hase se of of plot plotss

f)

Loan Loan agai agains nstt ple pledg dgee of of goo goods ds or immo immova vabl blee pro prope pert rty y of of his his own. own.

The BDCC Bank has over 85 Branch offices It is to ensure that the Bank is providing its services all over the Belgaum as well as in the State. The other details of Bank are as provided below: below:


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Project Report on Non Performing Assets & Banking Studies Membership and Share Capital Membership

Share capital

Years Societies 31-03-2004

1984

Individual Members 282

31-03-2005

2000

281

3453.79

31-03-2006

2017

281

3736.37

31-03-2007

2028

281

4114.37

31-03-2008

2028

281

4259.91

3450.16

Deposits The BDCC Bank’s deposits are shown as follows: (Rupees in Lakhs)


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Project Report on Non Performing Assets & Banking Studies Years

Deposits

% of Increase

2003-04

45852.91

-

2004-05

45525.45

-

2005-06

53841.11

18.27

2006-07

54924.41

2.01

2007-08

60596.78

10.33

The securities like Deposits Insurance and Credit Guarantee Corporation Law 1961 are made and Nationalized Banks providing higher rate of interest to the Bank.

Working Capital

Years

Working capital

2003-04

74372.94

2004-05

71243.78

2005-06

78085.9


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Project Report on Non Performing Assets & Banking Studies 2006-07

100811.11

2007-08

10401.95

Short Term and Medium Term Agricultural Loans: (Rupees in Lakhs) Year

Short term

Medium term

Advances

Demands

ODs

Advances

Demands

ODs

2003-04

15171.48

26452.64

13988.24

11.84

3306.78

2190.77

2004-05

13725.32

23993.51

13161.60

1.67

3023.45

2384.40

2005-06

34703.70

25667.46

4373.05

26.95

729.05

502.12

2006-07

22847.04

33730.28

14851.69

2511.48

2634.25

96.26

2007-08

29919.01

30818.46

5878.89

648.52

2360.86

278.19

Kisan Credit Card Plan: Under this plan the Farmers can make use of Kisan Credit Card Plan by applying it for the low rate of interest on their borrowings. borrowings. Under this plan totally totally 190736 190736 Cards are issued in the current year by choosing the Agricultural Co-operative Societies.

Development Action Plan: Under this plan the BDCC Bank’s Targets and Achievements are as Follows: Details

31-3-2007

2007-08 Target

31-3-2008 Achievements

% Of Achievements

Share capital

4114.37

4200

4259.91

3.54


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Project Report on Non Performing Assets & Banking Studies Funds

12124.09

12236

12236.21

0.92

Deposits

54924.41

60400

60596.78

10.51

Outside Loans

16550.51

16500

15941.81

(-)3.68

Working Capital

100811.01

103030

10401.95

3.2

Advances

58339.08

58847

58808.58

0.8

Branch Transactions

1172.22

1198.02

1209.79

3.21

250000

% Of Achiev Achievem em ents 3 .54 10.51 (-)3.68

200000 31-3-2008 Achievem Achievem ents 4259.91 12236.21 60596 15941.81 2007-08 Target 4200 122 60400 16500

150000 100000 50000

31-3-2007 31-3-2007 41 14.37 1212 54924.41 1655 0.51 0.51

0 Working Capital

Ad van va n c e s

B ra n c h Transactions

BDCC PRODUCTS A. Shor Shortt term term loans loans B. Medi Medium um ter term m loan loanss C. Long Long term term loan loanss D. Deposits

A. Short term loans Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies Short term loans to societies: 1. Decen Decentt kisa kisan n cred credit it card card 2. Toba Tobacc cco o ple pledg dgee loa loan n 3. Gene Genera rall cas cash h cre credi ditt 4. Key Key loa loans ns to sugar sugar fact factor ory y 5. Hypot Hypotheca hecation tion loan loan to sugar sugar factor factories ies 6. Hypot Hypotheca hecation tion loan loan to spinnin spinning g mills mills 7. Clea Clean n C.C C.C to to spin spinnin ning g mill millss 8. Clea Clean n C.C C.C to suga sugarr facto factory ry

Short term loans to individuals: 1. Depos eposit it loan loanss 2. Gold loans 3. Indiv Individu iduals als cash cash credi creditt 4. 20 poin pointt eco econ n pro prog g 5. N.S.C loan loanss

Other loans 1. Bills ills dis disco coun unte ted d 2. Sigh Sightt & Mud Mudat atii hund hundie iess

B. Medium term loans Medium term loans to societies 1. Sche Schema mati ticc fina financ ncee 2. M.T M.T agric agricul ultu ture re purp purpose ose 3. M.T M.T conv convers ersio ion n / reph rephasm asmen entt 4. M.T M.T non non agric agricul ultu ture re purpo purpose se 5. M.T non agricul agriculture ture to sug sugar ar factori factories es Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies 6. M.T non agricul agriculture ture to spin spinning ning mills mills

Medium term loans to other institute 1. Block CTL to Vishawnath sugars

Medium term loans to individuals 1. Vehicl icle loan loan 2. Vehic Vehicle le loan loan(co (conv nvers ersio ion) n) 3. Non Non far farm m acti activit vities ies loan loanss 4. Cons Consum umer er dura durabl blee 5. self self hel help grou roups 6. Salar alary y earn earner erss

Long term loans 1. Hosi Hosing ng loan loanss (sta (staff ff)) 2. Housi Housing ng loans loans (gen (genera eral) l) 3. Educa ducati tio on loan loanss 4. Mortg rtgage age loa loans ns

Deposits 1. Rese Reserv rvee fun fun dep depos osit itss 2. Fixed ixed depo deposi sits ts 3. Bhag Bhagya yajy jyot otii depos deposit itss 4. Recu Recurr rrin ing g dep depos osit itss 5. Savin aving g de deposi posits ts 6. Curre urrent nt de deposi posits ts


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Project Report on Non Performing Assets & Banking Studies 7. Fixed Fixed deposi deposits ts matur matured ed but but not not with with drowns drowns The BDCC Bank is currently undergoing with the following Plans: •

Kisan Credit Card Plan.

•

Development Activities Plan.

•

Business Development plan.

•

National National Corp Insurance Insurance Plan.

•

Yashasvini Insurance Plan.

•

Janashree Insurance Plan

NON PERFORMING ASSETS

MEANING OF NPA:

An asset is classified as non-performing asset (NPA) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, 2004, default default status would would be given to a borrow borrower er if dues dues are not paid for 90 days. days. If any advance or credit facilities granted by the bank to a borrower becomes non-performing, then Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies the bank will have to treat all the advances / credit facilities granted to that borrower as non performing performing without without having any regard to the fact that there may still exit certain advances advances / credit facilities having performing status.

NBE’S DEFINITION OF NON- PERFORMING: NBE[Supervisio NBE[Supervision n of Banking Banking Business Directives (Directive No. SBB/3212002) SBB/3212002)]] defines, the term Non-performing is, “loans or advances whose credit quality has deteriorated such that full collection of principal principal and /or interest in accordance accordance with the contractual repayment repayment terms of the loan or advances is in question”. For purpos purposes es of this Directiv Directive, e, loans loans or advance advancess with with pre-est pre-establi ablished shed repayme repayment nt programs programs are non-performin non-performing g when principal principal and or interest is due and uncollectible uncollectible for 90 days or more beyond the scheduled payment date or maturity. A “Non Performing Asset” (NPA) was defined as a credit facility in respect of which the interest and / or installment of principal as remained ‘Past Due’ for a specified period of time. An amount due under any credit facility is treated as “Past Due” when it has not been paid within within 30 days from the the due date. Due to the improvement improvement in the the payment payment and settlement settlement systems, recovery climate, up gradation of technology in the banking system, etc, it was decided to dispense dispense with ‘Past Due’ concept, concept, with effect from March 31, 2001. 2001. Accordingly, Accordingly, as from that date, a Non Performing Asset (NPA) shall be an advance where i. Interest Interest or installm installment ent of principa principall remain remain overdue overdue for a period of more more than 180 180 days in respect of a Term Loan, ii. The accou account nt remains remains ‘Out ‘Out Of Order’ Order’ for a period period of more more than 180 180 days, in respec respectt of an overdraft / cash credit (OD / CC), iii. The bill bill remains overdue overdue for for a period period of more more than 180 days days in the the case of bills bills purchased purchased and discounted, iv. Interest and and / or installment installment of of principal principal remains remains overdue overdue for two two harvest harvest seasons but but for a period not exceeding exceeding two half years in the case of an advance advance granted granted for agriculture agriculture purpose, purpose, and v. Any amount amount to be received received remains overdue overdue for for a period of more than 180 180 days in respect of other accounts.


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Project Report on Non Performing Assets & Banking Studies ‘90 Days Overdue Norm’ With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the ’90 days overdue norm’ for identification of NPAs, from from the year year ending March March 31, 2004 2004.. Accordingly, Accordingly, with with effect from March 31, 31, 2004, 2004, a NPAs shall shall be a loan or an advance advance where; where;

i. Interest and and / or installment installment of of principal principal remain overdue overdue for a period period of more more than 90 days days in respect of a Term Loan, ii. The accoun accountt remains remains ‘Out Of Order’ Order’ for a period period of more than than 90 days, days, in respect respect of an overdraft / cash credit (OD / CC), iii. The bill bill remains overdue overdue for a period of of more than than 90 days days in the case of of bills purchased purchased and discounted, iv. Interest and and / or installment installment of of principal principal remains remains overdue overdue for two two harvest harvest seasons but but for a period not exceeding exceeding two half years in the case of an advance advance granted granted for agriculture agriculture purpose, purpose, and v. Any amount amount to be received received remains remains overdue overdue for a period of more more than 90 days in respect of other accounts As a facilitating measure for smooth transition to 90 days norm, bank has been advised to more over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly monthly rests. Banks should, should, therefore, therefore, continued continued to classify an account account as NPA only if the interest charged during any quarter is not serviced fully with 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004.

‘Out Of Order’ Status An account should be treated as ‘Out Of Order’ if the outstanding balance remains continuously in excess of the sanctioned limit / drawing power. In cases where the outstanding balance in the the principal principal operating operating account is less than the sanctioned sanctioned limit limit / drawing power, power, but but there are no credits continuously for 180 days (to be reduced to 90 days, with effect from March 31, 2004) as on the date of Balance Sheet or credits are not enough to cover the interest debited the same period, these accounts should be treated as ‘out of order’.


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Project Report on Non Performing Assets & Banking Studies ‘Overdue’ Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

Asset Type

Percentage of Provision

Sub standard (age up to 18 months)

10%

Doubtful 1 (age up to 2.5 years)

20%

Doubtful 2 (age 4.5 years)

30%

Doubtful 3 (age above 4.5 years)

50%

Loss Asset

100%

INCOME RECOGNITION – POLICY: The policy of income recognition has to be objective and based on the record of recovery. Internationally Internationally income from NPAs is not recognized recognized on accrual bases but is booked as income only when when it is actually received. Therefore, Therefore, the bank should should not charge and take take to income account interest on any NPA. However, interest on advances against term deposits, NSCs, VIPs, KVPs and Life Policies may be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the re-negotiated re-negotiated or rescheduled rescheduled extension extension of credit. If Government Government guaranteed advances advances become become NPA, the interest on such advances should should not to be taken to income account unless the interest has been realized.

REVERSAL OF INCOME: If any advance, advance, including bills purchased and discounted, discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed reversed or provided provided for if the same is not realized. This will apply apply to Government Government guaranteed accounts also. In respect of NPAs, fees, commissions and similar income that have accrued should cease to accrue in the current period and should be reversed provided for with respect to past records, if uncollected. Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies THE CONCEPT OF GROSS NPA: Income recognitio recognition n is not possible once an account account becomes NPA. NPA. Interest accrued accrued on non performing performing loan accounts accounts is debited to the respective accounts accounts and credited to the interest suspense suspense account instead of Profit and Loss account. account. Usually Usually no debits are permitted in NPA expect unavoidable expenditure like litigation expenses, insurance, etc. Hence the balance outstanding in an NPA account includes:

1. Balance Balance as on on date date of of becom becoming ing an NPA NPA.. 2. Inter Interest est accru accrued ed but but not reali realized zed..

On balance sheet date banks make provisions for loan losses. This provision is calculated not on the balance outstanding but on the net balance, balance net of the amount kept in the interest suspense suspense account. This book balance balance of the net interest suspense account is known as Gross NPA. But in cases where guarantee claim is received from credit guarantee corporations like ECGC, before making the provision for loan losses, such claim received is also netted from the gross NPA. The terminology Net Net NPA indicates indicates the balance in interest suspense account. For evaluatio evaluation n RBI and other other rating rating agencie agenciess relay relay on purpose purpose usually usually the Net NPA balance. balance. Thus, Gross NPA means, balance outstanding outstanding minus balance in interest suspense suspense account. account. Net NPA means: means: Gross NPA minus balance balance claim received amount amount and provision provision outstanding in that account.

IMPACT OF NPA: At the Macro level, NPAs have chocked off the supply line of credit of the potential lenders thereby having a deleterious effect on capital formation and arresting the economic activity in the country. At the Micro level, unsustainable level of NPAs has eroded current profits of banks and FIs. They They have led to reductio reduction n of interest interest income income and increase increase in provision provisionss and have have


33

Project Report on Non Performing Assets & Banking Studies restricted and recycling of funds leading to various Asset Asset Liability mismatches. Besides this, it has led to erosion in their capital base and reduction in competitiveness. The problem problem of NPA is not a matter of concern concern to banks and FIs FIs alone. It is the matter of grave concern to the country and any bottleneck in the smooth flow of credit is bound to create adverse repercussion repercussion in the economy. economy. The mounting mounting menace menace of NPAs has raised the cost of credit, made Indian business man uncompetitive as compared to their counterparts in other countries. It has made banks more adverse to risks and squeezed genuine Small and Medium Enterprises (SMEs) from accessing competitive credit and has throttled their enterprising spirits as well, to a great extent. Due to their crippling effect on the operation of the banks, Asser quality has been considered as one of the most important parameters in the measurement of bank’s performing under the CAMELS Supervisory Rating System of RBI.

REASONS FOR NPAs: In priority sector advances:

1. Directed and pre-approv pre-approved ed natures natures of loans loans sanctioned sanctioned under under sponsore sponsored d programs. programs. 2. Miss-uti Miss-utiliza lization tion of loan loanss and and subsid subsidies. ies. 3. Dive Divers rsio ion n of of fund funds. s. 4. Abse Absenc ncee of of secu securi rity ty.. 5. Lack of effective effective follow-up follow-up (Post (Post sanction supervision supervision and control) control) 6. Absenc Absencee of Bankr Bankruptc uptcy y and fore fore-clos -closure ure loan loans. s. 7. Decr Decrep epit it lega legall syst system em.. 8. Cost Cost in-effe in-effectiv ctivee legal legal recov recovery ery measure measures. s. 9. Difficul Difficulty ty in executi execution on of of Decree Decreess obtaine obtained. d.

In Non-Priority Sector Advances:

1. Inad Inadeq equa uate te cred credit it appra appraisa isal. l. 2. Dema Demand nd rece recess ssio ion. n. 3. Industr Industrial ial sickn sickness ess and and labo labour ur prob problem lems. s. 4. Slow Slow lega legall sys syste tem. m. 5. Dive Divers rsio ion n of of fund funds. s. 6. Willf illful ul def defau ault lt.. Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies 7. Tech Techno nolog logy y obsol obsolesc escen ence. ce. 8. Manag Manageri erial al ineffi inefficie cienc ncy. y. 9. Politica Politicall comp compulsi ulsion on and corrupt corruptii

WRITING-OFF NPAs: In terms of section 43(D) of the Income Tax Act 1961, income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to the bank’s profit and loss account or received, whichever is earlier. This stipulation is not applicable to provisioning required to be made as indicated above. above. In other words, words, amounts amounts set aside for making provis provision ion for NPAs NPAs as above are not eligible for tax deductions. Therefore Therefore the banks should either either make full provision as per the guidelines guidelines or write-off such such adva advanc nces es and and claim claim such such tax bene benefit fitss as are applic applicab able le,, by evol evolvin ving g appr approp opria riate te methodolog methodology y in consultation consultation with their auditors auditors / tax consultants. Recoveries Recoveries made in such accounts should be offered for tax purposes as per the rules.

WRITE-OFF AT HEAD OFFICE LEVEL: Banks may write-off advances at Head Office Level, even though the relative advances are still outstanding in the branch books. books. However, it is necessary that provision is made made as per the classification classification accorded to the respective respective accounts. accounts. In other words, words, if an advance is a loss asset, 100 percent provision will have to make there for.

DEBT RECOVERY TRIBUNAL: Any person aggrieved by any measures taken by secured creditor or his authorized officer may file an appeal to Debts Recovery Tribunal, within 45 days from date on which such measure was taken. taken. That is action of taking possessio possession n of asset, takeover takeover of management management of business of borrower, borrower, appointin appointing g person person to manage manage secured secured asset etc. is taken taken by the creditor. creditor. When a borrower files an appeal, the appeal cannot be entertained unless, the borrower deposits deposits 75% of the amount claimed claimed in the notice by secured creditor. creditor. The Debts Debts Recovery Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies Tribunal can waive or reduce the amount required to be deposited. The amount is not not required to be deposited at the time of appeal, but appeal will not heard till the amount is deposited. The borrower borrower while filing the appeal should also file an application application requesting the Debts Recovery Recovery Tribunal Tribunal to admit the appeal without deposit of any amount. amount. If the Debts Recovery Tribunal Tribunal orders partial deposit of the amount and the same is not deposited, appeal can be dismissed. The 75%deposit is only required if the appeal is filed by the borrower. If some other aggrieved person (e.g. guarantor, shareholder) files it the deposit is not required. If a person is aggrieved by the order of the Debts Recovery Tribunal, it can be file an appeal to the Appellate Tribunal within 30 days from the date of receipt of the Debts Recovery Tribunal order. If the Debts Recovery Recovery Tribunal or Appellate Appellate Tribunal holds that possession possession of the asset by the secured creditor creditor was wrongful wrongful and directs the secured creditor to return asset to concerned borrower, the borrower shall be entitled to compensation and costs as may be determined by Debts Recovery Tribunal or Appellate Tribunal.

SECURITIZATION ACT: With the enactment of the Securitization and Reconstruction of the financial asses and Enforcement of Security Interest Act 2002, banks can issue notices to the defaulters to pay up the dues and the borrowers borrowers will have to clear clear their dues within 60 days. days. Once the borrower borrower receives a notice from the concerned bank and the financial institutions, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution is paid by the borrower borrower or else the former will take the action by way of taking taking over the possessio possession n of assets. assets. Beside Besidess assets, assets, bank can also take take over the management management of the company. company. Thus the bankers bankers under the aforementioned aforementioned Act will have the much needed authority to either sell the defaulting companies or chare their management.

OVERALL BANKING AND NPA BANKING REFORMS IN INDIA: The Nationalization of the major commercial banks in the year 1969 and 1980 had brought brought radical change changess in the banking banking system in India. It had broug brought ht about major shifts shifts in the priorities in the banking banking operations. operations. Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies Branch expansion policies of banks were tuned up to meet the banking needs of the people in rural and semi urban centers.

For accelerating the socio-economic socio-economic and rural

development process several Governments sponsored programs were launched and lending in the priority sector, irrational lending under socio political pressures, mounting levels of bad debts, debts, branch branch expans expansion ion at non viable centers centers etc. gradua gradually lly started started affectin affecting g the financi financial al health of the banking sector sector in the country. Commercial Commercial banks were not following following uniform uniform accounting policies camouflaged the true financial position of banks. Quality of loan asset was not a concern and a high proportion of loan assets started becoming non-performing. Most of the banks were under capitalized and some of them even with negative worth. Thus there was a compelling need for a change and various policy corrections had to be taken with with the view view of strengthe strengthening ning the economy economy.. Thus Thus the Governm Government ent of India India was forced forced it initiate a process of reforming the financial sector which banks constitute a dominant part. The reforms process includes:

•

Introduction of prudential norms.

•

Transparency in Balance Sheets.

•

Deregulation of interest rates.

•

Partial deviation from directed lending.

•

Up gradation of technology.

•

Entry of new private sector banks.

EMERGING BANKING TRENDS: During the current financial year, the focus of non-going reforms reforms in the banking sector was on soft interest rates regime, increasing operational efficiency of banks, strengthening regulatory regulatory mechanisms mechanisms and on technological technological up-gradation. up-gradation. As a step towards a softer interest rate regime, RBI in its Annual Policy Statement had advises banks to introduced flexible interest rate system for new deposits, announce a maximum spread over PLR for all advances other than consumer credit and to review the present maximum spread over PLR and reduce them wherever they are unreasonably high.

A BRIEF HISTORY OF NPA: Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies The concept of Asset Quality on the books of Public Sector Banks (PSBs) and Financial Institutions came into being when RBI introduced prudential norms on the recommendations of the Narasimha Committee Committee in the year 1992-1993. 1992-1993. The committee committee recommended recommended that an asset may be treated as NPA, if interest or installment of principal remains overdue for a period exceeding 180 days and that banks and FIs should not take into their income account, the interest accrued on such NPAs, unless it is actually received or recovered. The committee also recommended that Assets be classified into four categories: •

Standard,

•

Substandard,

•

Doubtful and

•

Loss Assets.

And that certain specified percentages of the same be held as provision there against. Before the reform process, banks were booking income on an accrual basis and their balances sheets did not reflect their true specified financial financial health. Thus the profit, profit, capital and reserves were overstated by them. After 10 years of NPA terror in the banking industry, “Now the Banks Have Teeth”, a new law lightens the burden burden of bad loans for Indian Banks. Banks. The law that has been the catalyst for the bad loan cleans up passed passed India’s Parliament Parliament in November November 2002. it allows lenders to more more easily easily foreclose foreclose on debtors debtors assets or even even demand demand a change change in manage management ment.. Within Within weeks of the law’s passage, banks saw a flood of loans once deemed unrecoverable being repaid in double double time. The Act is The Securitization Securitization and Reconstruction Reconstruction of Financial Assets Assets and Enforcement Enforcement of Security Security Interest Act, 2002 (Also known known as the Securitization Securitization Act). This Act enables the setting up of asset management companies for addressing the problems of NPAs of of banks and FIs. FIs.

INDIAN BANKING AND NPA: The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place name namely ly,, fixin fixing g pre-sa pre-sanct nctio ionin ning g appr apprais aisal al respo responsi nsibil bility ity and and havi having ng an effec effectiv tivee post post-disbursement disbursement supervision. supervision. Banks Banks concerned should should continuously continuously monitor monitor loans to identity accounts that have potential to become non-performing.


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Project Report on Non Performing Assets & Banking Studies The core banking business is of mobilizing the deposits and utilizing it for lending to industry. industry. Lending Lending business is generally generally encouraged encouraged because it has the effect of funds being transfer transferred red from from the system system to produc productive tive purpos purposes es which which results results into economic economic growth growth.. However lending also carries credit risk, which arises from the failure of the borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. The above information is in general but according to some management professionals and philosophers philosophers the Indian Banking Banking and NPA is explained explained with their operation since they are nationalized nationalized and being effected effected with the NPAs. NPAs. Banks and FI's FI's in India is to issue a Recall of Loan letter. The letter is just a stepping stone to filing a suit and has no other practical utility. As soon as a Recall letter is issued, the banker is relaxed because his headaches are now over. He will pass the necessary entries in his books classifying the loan as Non-Performing Asset (NPA). He can now blame everybody else for all his omissions and commissions with the entrepreneur being the key accused. In any other part of the world, the first option that a banker is supposed to exercise with the support and consent of the entrepreneur is a change in ownership. It always makes more sense to sell a business as a going concern rather than sell it as a dead horse. In any business there are intangibles like goodwill, key customers, key employees who may be lost as soon as a court case is filed.

Sometim Sometimes es such intangible intangible assets may be more more valuab valuable le than than tangible tangibless like land, building, building, plant & machinery machinery etc. etc. Indian banks banks and financial institutions institutions live live in a fool's paradise thinking that a court or tribunal can get them all that they need. What they do not realize is that no judicial body can help them get possession of a running unit without sacrificing its vitality. The bureaucratic attitude of Indian banks and FI's has had two negative effects. On one hand it has fed and strengthened a generation of shady businessmen and con-men who know how to fool the banks for a multitude of projects - some of which even turn profitable. On the other hand it has killed a new generation generation of capable entrepreneurs. Indian Banks Banks and FI's have looked looked at balance sheets and financial financial statements for too often. It is time that they learn to look at human capabilities. It is time that they learn to evaluate ideas rather than run in herd-like Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies manner. Tribunals and Courts are like surgeons who can cut and operate but cannot give life and good health. Unless Indian banks and FI's learn to build their health as well as the health of their clients, they will keep converting useful assets of the country into NPA's.

LENDING BEHAVIOUR OF BANKS: Due to the excess liquidity in the banking system, banks are are now giving giving credit credit to even even non-priority in an aggressive manner. Now banks give credit more too unproductive purposes, like car loans, loans, housing housing loans, consumer consumer durabl durables es loans loans and persona personall loans. loans. This This reckless reckless lending paves the way to repayment irregularities and more of NPA in the banking system. But on the others side economy has become buoyant and the borrowers are now in a position to repay the loans even if it is an unproductive loan. Banks have improved their credit appraisal system. NPA percentage percentage in City Banks car Loan Portfolio Portfolio is zero, because of the sophisticated sophisticated credit appraisal system followed by the bank. Banks now give priority to ‘businesses’ and lending schemes also follow the path.

CLASSIFICATION OF ASSETS: CATEGORIES OF NPAs: Banks are required to classify non-performing assets further into the following three categori categories es based based on the period period for which which the asset asset has remained remained non-pe non-perfor rformin ming g and the reliability of the dues:

a) SubSub-St Stan anda dard rd Ass Asset etss b) Doubtful Doubtful Assets Assets c) Loss Asse ssets.

SUB-STANDARD ASSETS: Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies A sub-standard asset was one, which was classified as NPA for a period not exceeding exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. In such cases the current net worth of the borrower borrower / guarantor guarantor or the current market value of the security charged is not enough is not enough recovery of the dues to the banks in fu;;. In other words, such an asset will have well defined credit weakness weakness that jeopardize jeopardize the liquidation liquidation of the debt and are characterized characterized by the distinct possibility possibility that the banks will sustain some loss, if deficiencies deficiencies are not corrected. corrected. With effect from 31 March 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal equal to 12 months. months.

DOUBTFUL ASSETS: A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, as asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 months. months. A loan classified as doubtful doubtful has all the weaknesses weaknesses inherent inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full; - on the basis of currently know facts, conditions and values – highly questionable and improbable.

LOSS ASSETS: A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable bankable asset is not not warranted warranted althoug although h there may may be some some salvage salvage or recovery recovery value. value. It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the presentation of advances in the bank balance sheet. The Third Schedule to the banking regulation act 1949 solely governs presentation of advances in the balance sheet. Banks have started issuing notices under the securitization act, 2002 directing the defaulter to either pay back the dues to the bank or else give the possession possession of the secured assets mentioned mentioned in the notice. However, there is a potential threat to recovery if there is substantial erosion in the Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies value of security given by the borrower has committed fraud. Under such a situation it will be prudent prudent to directly directly classify the advances advances as a doubtful doubtful or loss loss asset, as appropr appropriate. iate.

RBI GUIDELINES FOR CLASSIFICATION OF ASSETS: Broadly speaking classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high valid account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extent guidelines.

UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAs: If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as ‘standard’ accounts.

Asset Classification to be borrower – wise and not facility –wise: i.

It is difficult to envisage a situation when only one facility to borrower becomes a problem problem credit and not others. Therefore, Therefore, all the facilities granted granted by a bank to a borrower borrower will have to be treated treated as NPAs and and not the the particular or or part thereof thereof which has become irregular.

ii.

If the debts arising out of development of letter of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account for should be treated as a part of the borrower’s principal operating account for the purpose of Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies applicat application ion of pruden prudential tial norms norms on income income recognit recognition, ion, asset asset classific classificatio ation n and provisioning. provisioning.

Accounts where there is erosion in the value of Security: i.

A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightway classified as doubtful or loss asset as appropriate. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets.

ii.

It the realizable value of the security, as assessed by the bank / approved values / RBI RBI is less less than than 10 perce percent nt of the the outst outstand anding ing in the borro borrowa wall accou accounts nts,, the existence of security should be ignored and the asset should be straight away classified as loss asset. It may be either written off of fully provided for by the bank.

RESTRUCTURING / RESCHEDULING OF LOANS: A standard asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled rescheduled after commencement commencement of production should be classified as sub-sta sub-standar ndard d and should should remain remain in such such categor category y for at least least one year of satisfactory satisfactory performance performance under the renegotiated or rescheduled terms . In the case of sub-standard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms. Following representations from banks that the foregoing stipulations deter the banks from restructuring of standard and sub-standard loan assets were reviewed in March 2001. In the context of restructuring of the accounts, the following stages at which the restructuring / rescheduling / renegotiation pf the terms of loan agreement could take place can be identified: a) Before commencement of commercial production. b) After commencement commencement of commercial commercial production production but before the asset has been classified as sub-standard. Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies c) After commencement of commercial production and after the asset has been classified as Asset Type

Percentage of Provision

Sub standard (age up to 18 months)

10%

Doubtful 1 (age up to 2.5 years)

20%

Doubtful 2 (age 4.5 years)

30%

Doubtful 3 (age above 4.5 years)

50%

Loss Asset

100%

sub-standard.

PROVISION REQUIREMENTS: As and when an asset is classified as an NPA, the bank has to further sub-classify if into sub-standard, sub-standard, loss and doubtful doubtful assets. Based on this classification, classification, bank makes the necessary provision provision against against these assets. assets. RBI has issued guidelines on provisioning requirements of bank advances where the recovery recovery is doubt doubtful. ful. Banks Banks are also require required d to comply comply with such guideline guideliness in making making adequate provision to the satisfaction of its auditors before declaring any dividends on its shares. In case of loss assets, guidelines specifically require that full provision for the amount outstanding should be made by the concerned bank. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset.

THE NPA PROBLEM: The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks which are concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective postdisbursement disbursement supervision. supervision. Banks concerned concerned should continuous continuously ly monitor loans to identify accounts that have potential to become non-performing. The performance in terms of profitability is a benchmark for any business enterprise including including the banking industry. industry. However, However, increasing NPAs NPAs have a direct impact on banks profitability profitability as legally legally banks banks are not allowed allowed to books books income income on such accounts accounts and at the same


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Project Report on Non Performing Assets & Banking Studies time banks are forced to make provision provision on such assets assets as per the RBI guidelines. guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPA affects the repayment capacity of banks. Further, 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 performing assets. assets.

CREDIT APPRAISAL SYSTEM: Prev Preven entio tion n of stand standard ardss asset assetss from from migr migrat ating ing to nonnon-pe perfo rform rming ing statu statuss is most most important in NPA management. This depends on the style of Credit Management Mechanism available in banks. The quality of credit appraisal and the effectiveness of post credit appraisal and effectiveness of post credit follow up influences the asset quality of the banks in a big way.

At Pre-Credit Stage: 1. Extensive Extensive enquiry enquiry about about the character character and and the credit credit worthiness worthiness of of the borrower. borrower. 2. Viabili Viability ty of the projec projectt to be financed financed is meticu meticulou lously sly studied studied.. 3. Adequate Adequate coverage coverage of collateral collateral is ensured to the the extent extent possible. possible. 4. Financ Financial ial statemen statements ts of the borrower borrower are obtained obtained and poor poor analysis analysis of their financial financial strength is done. 5. Apart Apart from the published published financia financiall statements statements independ independent ent enquirie enquiriess are made with previous previous bankers. bankers. 6. Pre-Cre Pre-Credit dit inspec inspection tion of of the assets assets to financ financee is made. made.

At Post-Credit Stage: 1. Operatio Operations ns in the the accou account nt are close closely ly monito monitored red.. 2. Unit Unit visit visit is is done done at irregul irregular ar interv intervals. als. 3. Asset Asset verifica verification tion is done done on on a regul regular ar basis. basis. 4. Borrow Borrowers ers Subm Submit it control control retu returns rns regul regularly arly.. 5. Accounts Accounts are periodically periodically to evaluate evaluate the financial financial health of the unit. 6. Early Early warnin warning g signals signals are are properl properly y attende attended d to.


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Project Report on Non Performing Assets & Banking Studies 7. Close Close contrac contractt with the borro borrower wer is is maintain maintained. ed. 8. Potent Potential ial NPAs NPAs are are kept unde underr special special watch watch list. list. 9. Potent Potential ial viable viable units units are are restru restructur ctured. ed. 10. Repayment Program of accounts with temporary cash flow problem is rescheduled. Immediate legal action is initiated in cases where the defaults are willful and the intention of the borrower is bad.

CREDIT MONITORING: Credit Monitoring System is for: 1. Preventing Preventing the slipping of quality quality assets assets through through the monitoring monitoring of Standard Standard Assets. Assets. 2. Up gradati gradation on of quality quality of impaired impaired loan loan asset through through recoveri recoveries es by means of legal legal or otherwise. 3. Up gradation gradation of loan assets through through nursing nursing in deserving deserving and viable viable cases. cases.

WARNING SIGNALS: 1. Default Default in servic servicing ing period periodic ic installm installment entss and interest interest.. 2. Accumu Accumulati lation on of stock stock and non-mo non-movem vement ent of stock stock.. 3. Oper Operati ating ng loss loss / net net loss. loss. 4. Slow turnover turnover of debtors debtors and fall in level of sundry sundry creditors. creditors. 5. Return Return of of outward outward bills bills for for collecti collection on / return return of cheque cheque.. 6. Labo Labour ur trou troubl bles es.. 7. High High tur turno nove verr of key key person personnel nel.. 8. Loss Loss of criticall critically y impor importan tantt custo customer mers. s. 9. Cour Courtt case casess again against st the the unit unit.. 10. Avoidance Avoidance of contacts contacts with the bank. bank. 11. Delayed Delayed submission submission of financial statements. statements. 12. Disputes Disputes among partners partners / promoters. promoters.

CREDIT RISK NPA: Quite Quite often often cred credit it risk risk manag managem emen entt (CRM (CRM)) is confu confused sed with with manag managing ing NPAs NPAs.. However However there is an appreciable difference difference between the two. NPAs are a result of past action Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies whose whose effec effects ts are reali realized zed in the the presen present. t. I.e. I.e. they they repre represe sent nt credit credit risk risk that that has has alrea already dy materialized and default has already taken place. On the other hand, managing credit risk is a much more forward-looking approach and is mainly concerned w with ith managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk. Conside Considering ring the current current global global recession recession and unrelia unreliable ble informa information tion in financia financiall statements, there is high credit risk in the banking and lending business.

CREDIT INFORMATION BUREAU (CIB): It is in this context context that the facility facility of CIB become becomess relevant. relevant. A CIB provide providess an institutional mechanism for sharing of credit information on borrowers and potential borrowers among among banks banks and FIs. It acts as a facilitator facilitator for credit credit dispen dispensatio sation n and helps mitigate mitigate the credit risk involved in lending.

Based on cross country experiences, initiatives have been taken in India to establish a CIB. The bureaus established in these countries collect information on both individual borrowers (Retail segment) and the corporate sector.

EXCESS LIQUIDITY: Now banks are faced with the problem of increasing liquidity liquidity in the system. Further, Further, RBI is increasing the liquidity liquidity in the system through through various rate cuts. Banks can get a rid of its excess liquidity by increasing its lending but, often shy away from such an option due to high risk of default. In order to promote promote certain prudential norms for healthy banking practices, practices, most of the developed developed economies require all banks to maintain minimum minimum liquid and cash reserves broadly classified in to Cash Reserve Ratio (CRR) and The Statutory Liquidity Ratio (SLR). Cash Reserve Ratio is the reserve which the banks have to maintain with itself in the form of cash reserve or by way of current account with the RBI, computed as a certain percentage percentage of its demand and time liabilities. liabilities. The objective objective is to ensure the safety and liquidity liquidity of deposits with the banks. On the other hand, SLR is one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second proceeding fortnight, as the RBI may specify from time to time. A rate cut (For instance, decrease in CRR) results into lesser fund to be locked up in RBI’s vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem of bad loans, burgeoning NPA, thinning margins, etc. As a result of which, banks are little reluctant reluctant in granting granting loans to corporate. corporate. As such, through in its monitory policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers.

HIGH COST OF FUNDS DUE TO NPA: Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting mounting NPAs. Either the bank is reluctant in providing providing the requisite funds to the genuine borrowers borrowers or if the funds are provided, provided, they come at a very high cost to compensate compensate the lender’s losses caused due to high level of NPAs. Therefore, quite often corporate prefer to raise funds through commercial papers (CPs) where the interest rates on working capital charged by the banks is higher. The main purpose of this notice is to inform the borrower that either the sum due to the bank or FIs be paid by the borrower or else the former will take action by way of taking over the management of the company. Thus the bankers under the aforementioned Act will have the much much need needed ed autho authorit rity y to sell sell the the asset assetss of the the defau defaulti lting ng comp compan anies ies or chang changee their their management. But the protectio protection n under the said Act only only provides provides a partial partial solution. solution. What What banks banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty uncertainty increases increases with the passage of time, there there are all possibilities possibilities that the the recoverable recoverable value value of assets assets also reduces reduces and it cannot fetch good good price. price.

MEASURES FOR NPA CONTAINMENT: Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies MEASURES TO TACKLE NPAs: Seei Seeing ng the grav gravity ity of the the situa situatio tion, n, RBI RBI has has taken taken seve several ral const constru ructi ctive ve steps steps for for arresting the incidence incidence of NPAs. It has also created a regulatory environme environment nt to facilitate the recovery of existing NPAs of banks.

accounts falling 1. Lok Adalats: Lok Adalats have been set up for recovery of dues in accounts in the doubtful and loss category with outstanding balance up to Rs.500000, by way of compromise settlements. This mechanism has proved to be a quite quite effective for speedy justice and and recovery recovery of small small loans. loans. 2. Debt Recovery Tribunals: DRTs which have been set up by the Government to

facilitate the speedy recovery by banks / DFIs have not been able to make much impact on loan recovery due to a variety if reasons like inadequate number, lack infrastructure, under-staffing and frequent adjournment of cases. It is essential that the DRT mechanism is strengthened and DRTs are vested with a proper enforcement mechanism to enforce their orders. Non-observance of any order passed by the Tribunal Tribunal should amount amount to contempt proceedings. proceedings. The DRTs could also be empowered empowered to sell the assets of the debtor debtor companies companies and forward the proceeds of the Winding Up Up court for distribution distribution among the lenders. lenders. Also, DRTs DRTs could be set up in more centers centers preferably in District District Head Quarters Quarters with more presiding presiding officers. 22 DRTs DRTs have been set up in the country during during the half last a decade. DRTs DRTs have not been able to deliver as they got swamped under burden of large number of cases filed with since their inception.

Corpor orat atee 3. Corp

Debt Debt Restr Restruc uctur turin ing: g: Corporate Debt Debt Restr Restruc uctu turin ring g (CDR (CDR))

mechanism is an additional safeguard to protect the interest of the creditors and revive potentially potentially viable units.

The Corporate Corporate Debt Restructuring system was set up, in

accordance with the guidelines of RBI evolved in consultation with Government of India. The objective objective of of the Corporate Corporate Debt Restructuring system is to ensure a timely and transparent mechanism for restructuring of corporate debts for viable entities and to minimize the losses to the creditors and other stake holders through an orderly and coordinated coordinated restructurin restructuring g program. program.

With Corporate Corporate Debt Restructuring, Restructuring, banks can

arrest fresh slippage slippage of performing assets into the magnitude magnitude of the assets. Under the


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Project Report on Non Performing Assets & Banking Studies system standard, standard, sub-standard sub-standard and doubtful doubtful assets can be restructured. The Corporate Corporate Debt Restructuring mechanism is based upon effective coordinate among banks.

4. Asset Reconstruction Companies (ARCs): One of the most effective ways of

removing NPAs from the books of banks / DFIs would be to move these out to a separate agency which would buy the assets and make its own efforts for recovery. On this front, the SRES Act has provided a frame work for setting up to ARCs in India. A pilot company company called Asset Reconstruction Reconstruction Company Company (India) Limited Limited (ARCIL) (ARCIL) has been set up under the sponsorship sponsorship of IDBI, ICICI bank, SBI and other banks which is likely likely to prov provid idee an effect effective ive mecha mechanis nism m for for bank bankss to deal deal with with the defau defaulti lting ng companies. companies. RBI has already issued issued final guidelines on the regulatory regulatory frameworks frameworks for ARCs in April, 2003. 2003. However, However, the success of Arcs will again depend upon upon the legal framework which has to be addressed first. Legal provisions are required for transfer of the existing loan portfolio to the ARCs without the consent of the borrowers, for exercise exercise of the power power of private private foreclos foreclosure ure by ARCs, authorizin authorizing g ARCs ARCs to take recourse to the Debt Recovery Tribunals and granting exemption to ARCs from Income Tax in order to mobilize resources by issue of bonds and exemptions to ARCs from payment payment of stamp stamp duty on conveya conveyance nce / transfer transfer of loans loans assets. 5. Reduction in NPAs: The problem of the existing NPAs is currently being tackled

in several several ways. ways.

Efforts Efforts are made made through through negotia negotiation tionss and discussio discussions ns with the Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies borrowers borrowers to bring bring them them around around to settle settle the dues. dues. Such settlements settlements in the form of OneOneTime Settlement (OTS) and Negotiated Settlement (NS) are now being increasingly used used by banks to reduce reduce the level of NPAs. NPAs. Under Under these schemes schemes banks banks focus focus on maximum payment under the settlements being received up-front, and balance within the same financial year for quicker realization of locked up proceeds. However, despite such efforts made by the lenders, many defaulting borrowers exhibit reluctance to cooper operate ate,, leavi leaving ng the bank bankss no option option but, but, to seek the lega legall route route..

Here Here lies lies the the

importance of a transparent legal system. Reforms in the existing legal system will go a long way in reducing the level and growth of NPAs in the banking system. legall fram framew ewor ork k sets sets stan standa dard rdss of beha behavi vior or for for mark market et 6. Legal Legal Reforms: Reforms: The lega participants, participants, details the rights and responsibilities responsibilities of transacting parties, assures that completed transactions are legally binding and also provides the regulators with the necessary Teath to enforce Standards and ensure complains and adherence to law. Does Does the lega legall frame framewo work rk is a key key eleme element nt for for limiti limiting ng moral moral hazar hazards ds in India Indian n Banking. Banking. As the problem problem of NPAs is closely linked linked with the issue of legal reforms reforms the Government has taken up initiatives to align the legal set up with the requirements of the banking system. system. As early as in 1999 the Andhyaru Andhyarujina jina Committee Committee set up by the Government of India to formulate specific proposals to give effect to the suggestions made by the Narasihmam Committee (1998) recommended amending the recovery of Debt Debtss due due to the the bank bankss and and Fina Financi ncial al Instit Institut utio ions ns Act Act 1993 1993 and and Sick Sick Indu Industr strial ial Companies Act 1995. It also recommended a new legislation for banks and FIs to take possessions possessions and sale of securities securities without without the intervention intervention of the court, in respect of both immovable immovable property property and movable movable assets which resulted in the enactment enactment of SRFAESI Act 2002. The committee also considered the Securitization as an instrument to tackle the NPA problem. 7. Securitization: Securitization enables risk sharing and trading of loans where the

bas assets of banks can be securitized and sold at a discount. discount. The lending institution’s institution’s NPAs are hence removed removed from their balance balance sheets and are instead funded funded by investors investors through through negotiable financial financial instruments. instruments. The security is backed by the expected cash flows from the the assets. With securitization securitization the NPAs NPAs in a bank’s balance balance sheet can be cash upfront, which could be put to productive use.


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Project Report on Non Performing Assets & Banking Studies High incidence of stamp duties makes securitization transactions unviable.

Under

statutory assignment, securitization involves transfer of debt, which can be effected only only by means means of an instrum instrument ent in writing writing..

Every Every instrum instrument ent by which property property,,

whether whether movable or immovable immovable,, is transferred attracts as valorem stamp duty. duty. Also, stamp duties being a state subject, vary from State to State.

RISK MANAGEMENT: Banking and risk are inseparable and risk management assumes significance as the banks have to take considerable considerable risks.

Analysis Analysis of risks also assumes importance importance as it

determines determines the pricing for the the products. products. As banking banking is subject to several several types of risks like market risk, credit risk, liquidity risk, default risk, interest rate risk, investment risk, transaction risk, forex risk, etc., proper perception and evaluation of risk is extremely important and any short coming coming on this score can play havoc havoc on the financial decision. decision. It has been seen that in banks managing managing NPAs has been a reactive response rather than a proactive proactive function. function. In a market market driven driven enviro environme nment, nt, volatil volatility ity and risk have have increase increased d conside considerabl rably y in any credit credit dispensation. dispensation. Hence, Hence, a proper perception perception and evaluation evaluation of risk becomes essential along with market intelligence about the industry concerned.

EFFECTIVE APPRAISAL AND MONITORING OF LOANS: In the present liberalized environment, globalization has a far reaching impact on the fortunes of the domestic industry and the bankers have to be alert and equip themselves with the knowledge of the knowledge of the latest global trends and also study on an ongoing basis its implicatio implications ns on the industrie industriess finance financed d by them. them.

Thus, Thus, the apprais appraisal al and monitor monitoring ing

mechanism mechanism for loans needs to be revamped revamped for control control of NPAs. Banks need need a robust end to end credit process.

A robust credit process begins with an in depth appraisal focused on risk inherent in a loan proposal. proposal. Along with the appraisal close monitoring of the loan account is equally important. It is a well known fact that loans loans often go bad due to poor poor monitoring. monitoring. An account account does not become become an NPAs overnight. overnight. System should should be in place such that the banker should be alert to catch signals of an account turning in to NPA and quickly react, analyze and take corrective action.


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Project Report on Non Performing Assets & Banking Studies Bank should have a proper system in place to ensure that to the extent possible the assets are performing performing and do not turn turn in to NPAs. In cases where the problems problems are of a short term nature and borrowers agree to clear the over dues within a short time period, temporary deferment is generally granted by the banks. banks. In cases where the company company requires longer time, depending upon the problems faced and the expected future cash flows, the proposals are considered for restructuring / re-placement of the dues. All cases should be reviewed regularly and on the basis of review, ‘stress cases’ are identifi identified ed which require require more closer and effectiv effectivee monitor monitoring ing.. For these cases it become becomess imperative to keep a close watch on the working of the company by taking up regular visits, calling for the progress reports with greater frequency, engaging the services of concurrent auditor auditorss / technic technical al consul consultant tantss to exercise exercise proper proper supervis supervision ion and to obtain obtain indepe independe ndent nt report / assessment.

ASSETS RECOVERY BRANCH: Assets Recovery Branches are specified branches for recovering NPAs. The personnel in the branches are professionally professionally competent to deal with defaulters and ensure repayment. It is meant for shifting the work of “high problem loans recovery” of main branches to specialized branches. branches.

It gives time to other branches branches to concentrate concentrate more upon branch’s branch’s business business

development activities.

90 DAYS OVERDUE EFFECT: As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1 st 2002. However, the date of classification of an advance as an NPA should not be changed on account of charging of interests at monthly rests.

Bank should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter


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Project Report on Non Performing Assets & Banking Studies with effect from April 1st 2002 and 90 days from the end of the quarter with effect from March 31st 2004. There are two aspects to the adoption of the ‘90 days’ overdue norm for identification of the NPAs. NPAs. The negative negative aspect is is that NPAs NPAs will increase increase in short term. term. But the positive positive aspect is that banks will become proactive in detecting smoke signals about an account becoming becoming bad and according accordingly ly initiate remedial remedial steps.

PROBLEM IN LOAN IDENTIFICATION: IDENTIFICATION OF ACCOUNT: 1. Term loan if interest / installments installments are overdue overdue for 4 months months and above. above. 2. Check on overdue overdue,, cash credit credit account if it is out out of order order continuou continuously sly for 4 months. months. 3. In other other loans loans if if overd overdue ue 4 mont months hs and and more. more.

GENERAL REASONS FOR ASSETS BECOMING NPAs: A multiplicity of factor is responsible responsible forever increasing size of NPAs in banks. A few prominent prominent reasons for assets becomin becoming g NPAs NPAs are as under. under. •

Poor credit appraisal system.

•

Lack of proper monitoring.

•

Reckless advances to achieve the budgetary targets.

•

There is no or lack of corporate culture in the Bank. In adequate legal provisions on foreclosure and bankruptcy.

•

•

Change in economic policies/ environment. No transparent transparent accounting accounting policy policy and poor auditing auditing practices.

•

Lack of coordination between banks.

•

Directed lending to certain sectors.

•

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.


54

Project Report on Non Performing Assets & Banking Studies REASONS FOR NON PERFORMANCE IN LOAN ASSETS: 1. Antiquated Antiquated legal legal system in the country country and the defaulter defaulter taking shelter under under this. this. 2. Even Even DRT cases cases are not getting getting settled settled the way it was envisag envisaged ed when when tribunal tribunalss were set up. 3. In agricu agricultu lture re secto sectorr poor poor recove recovery ry has has been been due to variou variouss facto factors rs – recov recover ery y and and RPDS advances advances have been been affected by the sharp fall in rubber prices. prices. Throughout Throughout the coun countr try y aqua aqua cult culture ure mise miserab rably ly faile failed d due due to reason reasonss beyo beyond nd the the contr control ol of the borrowers borrowers we are are not an an exception. exception. 4. Poor recovery recovery in schematic schematic loans is is mainly due to willful default default by by the borrowe borrowers. rs. 5. Default Default in share share loans loans has been due due to setback setback in securities securities market market and sharp sharp decline decline in the values of equities.

RECOVERY ROUTE: 1. Lok Adala alat. 2. Compromise Compromise route route is the most most effective and and time consuming consuming procedure, procedure, due to the delay delay in obtaini obtaining ng a favorab favorable le decree decree,, further further delay delay in the execution execution of the decree, decree, the securities available to bank may get depreciated or alleviated.

COMPROMISE ROUTE IS POSSIBLE IN THE FOLLOWING CASES:

1. When When all the remed remedies ies other other than than filing filing a suit are are exhauste exhausted. d. 2. Activit Activity y of the borrow borrower er closed closed / become become unviabl unviablee due to reasons beyond beyond his control control and overdue mounting up due to application of interest / penal interest and other charges and the recovery of the debt has become doubtful. 3. Lega Legall posit positio ion n of ban bank k is wea weak. k. 4. Values Values of the primar primary y / collateral collateral securit securities ies are inadeq inadequate uate.. 5. Not Not a will willful ful defau defaulte lter. r.


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RECOVERY MANAGEMENT – SUGGESSIONS FOR IMPROVEMENT 1. Recovery Recovery camps camps to be conduc conducted ted at centers centers identified identified as having having higher higher concentratio concentration n of irregular loans in the times of revenue recovery camps. 2. Across Across the table decisio decisions ns on comprom compromise ise proposal proposal submitt submitted ed at the recovery recovery campus campus.. Officials from corporate office who attend such campus to be delegated with the powers to arrive at the decisions as above. 3. Asset recovery recovery cells cells to be strengthened strengthened with with additional additional professional professional man man power. power. 4. At branche branchess where conce concentra ntration tion of of NPAs is more, more, one of of the member memberss of the award staff who is well versed with locality and the borrowers should be spared from other works works of the office and asked asked to facilitate facilitate recoveries recoveries throug through h persona personall visits visits and assisting assisting the recovery recovery officers officers in the unit / borrow borrower er visits. Conve Conveyanc yancee expense expensess incurred by such staff members to be reimbursed.

ASSET RECOVERY DEPARTMENT: 1. Asset Recovery Department will conduct a study of banks exposure in different

sector , types of advances and other various parameters viz the NPA position and the

findings will be communicated to all field functionaries initiating corrective action. 2. Efforts shall be taken by branches to speed up the disposal of non-banking assets at

the possession possession of the bank. The real effect of the continuing continuing menace of NPA NPA will have a cascading effect on the bottom line because of the higher and higher provisions required on such such accounts. accounts. Therefore Therefore the management management of NPAs calls for a short term and long term strategy strategy..

Preven Preventio tion n from further further deteriora deterioration tion and recovery recovery of the

existing NPAs alone are the two alternatives for us to come out of the present problems.

DEALING PROBLEMS LOANS: ASSETS COMING UNDER SMALL VALUE SEGMENTS: 1. Acco Accoun unts ts with net balance balance up to Rs.5 Rs.500 000 0 are identi identifie fied d as small small value value assets assets and and considering the huge volume of such accounts, they had taken decisions to shed such Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies assets coming under priority sector (Loss and doubtful category only) and regional heads are given delegation to write-off such assets. 2. Now it’s it’s felt that that small small value value bond can can be extend extended ed up to Rs.1 Rs.1000 0000. 0. Similar Similarly, ly, non non priority sector, small loans identified identified as loss or doubtful doubtful will also have to shed to give administrative efficiency up to larger NPAs. 3. Recove Recovery ry policies policies in this segment segment shall shall be more flexible flexible and functio functionari naries es at regional regional office shall be given complete complete freedom in the settlement settlement of such accounts. accounts. Most of the accou account ntss unde underr this this categ category ory come come unde underr prior priority ity secto sectorr and and prim primary ary / colla collater teral al securities are not generally available and many borrowers are not even available for contact, there is no such scope for legal action also. Hence recovery done by means of: •

Personal contacts.

•

Persuasion.

•

Compromise.

•

Revenue recovery.

4. Salv Salvag agee oper operati ation onss are to be inten intensif sified ied for effec effectin ting g reco recove verie riess unde underr loss loss asset assetss categories and also in cases where they have already shed assets. 5. Ince Incenti ntive vess schem schemes es for motiv motivati ating ng membe members rs of staff staff are to be built built in the recove recovery ry policy of the bank. bank. Considering Considering the above facts, the department department suggests the following following measures for the optimum recovery in the small value bond up to Rs.10000. 1. No legal legal actions to to be initiated initiated against against borrowers borrowers coming coming under under the small small valued valued bond. bond. 2. In cases of of failure of of letter personal personal contact contact and persuasion persuasion fall, go go for comprom compromise. ise. 3. Services Services of approved approved recovery recovery agents agents can be be considered considered very very discreetly discreetly in the recovery recovery of small value accounts. 4. If all the the above efforts fall the regional regional heads heads can use their their discretion discretion for shedding shedding such assets.

SUB-STANDARD ASSETS: This segment is more effort elastic in terms of recovery and hence the bank’s recovery policy is is to be tuned up for maximizing maximizing the the recoveries recoveries from the the sub-standard sub-standard efforts.


57

Project Report on Non Performing Assets & Banking Studies NPA RECOVERY ACTION PLAN: 1. Send Send simple remain remainder der letter letter in installment installmentss / interests interests debited debited are not service serviced d on due dates. 2. If no resul results ts are forthco forthcomi ming ng from the remain remainde ders, rs, meet meet the the borro borrowe werr in person person and and persuade persuade them to to settle the the accounts accounts in persons. persons. 3. Official Officialss from the assets assets recovery recovery cell cell at the regiona regionall office to compuls compulsoril orily y meet the borrower borrower with Rs.5000 Rs.500000 00 and evaluate evaluate the reasons reasons for the non-perform non-performance ance of accounts accounts and suggest / evolve methods to improve the quality. 4. In cases of sick but viable viable industr industries ies units units prospects prospects for rehabilita rehabilitation tion are too looked looked into a nursing program to be evolved.

DOUBTFUL ASSETS Slippage of assets from sub-standard category to doubtful necessitates higher provisions provisions requirements. Depending Depending on the age of the asset, 20% to 50% provision provision has to be made on such assets on the secured portion and 100% provision is required on the unsecured provision. provision. Recovery Recovery of the doubtful doubtful assets in the normal course is difficult; difficult; the following following strategies can be adopted in handling doubtful assets: 1. Borrowers Borrowers are to be be met in person to get the accounts accounts settled throug through h persuasion. persuasion. 2. Ensure that the securities charged charged to the bank bank are in tact and and are not not alienated. alienated. 3. Securities Securities are to be inspected inspected at periodic periodic intervals intervals and correct value value properly properly recorded. recorded. 4. Lega Legall reme remedy dy is is the the last last resor resort. t. 5. Most Most of the accounts accounts coming coming unde underr this category category are either either suit field field or RR initiated initiated.. Incase of suit field accounts, cases are to be closely followed up with the advocated to ensure that the decree is obtained within a reasonable time.

LOSS ASSETS: CHANCES OF RECOVERY IN MOST OF THESE CASES ARE VERY REMOTE:


58

Project Report on Non Performing Assets & Banking Studies 1. If recovery recovery in the normal normal course course is difficult difficult,, they may have have to resort to legal legal remedies remedies against the borrowers, guarantor, co-obligate, and efforts shall be made to bring them to a compromise table for the settlement of accounts. 2. Incase of of accounts accounts coming under priority priority sector, sector, recovery recovery through through the RR route is to be resorted too. 3. As per loss assets assets are conc concern erned ed they they have have made made 100% 100% provis provisio ion n for loan loan losses. losses. Hence Hence there will not be any further further impact on bottom bottom line. If these assets assets are shed, shed, notionally notionally from the books of the banks. Such notional notional write-off will help in cleansing the balance sheet. 4. Even Even after write-off write-off the branche branchess can continue continue the recover recovery y efforts thus thus made and can improve the bottom line of the bank. 5. Recove Recovery ry throug through h legal legal action action is time cons consumi uming. ng.

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 Compromise C of NPAs by the banks. The same information is shown below: Legal L remedies

General Methods of Management of NPAs R Regular Training Program

Recovery R Camps

Write W offs

Spot S Visit Rehabilitation of potentially Babasabpatilfreepptmba.com viable v units Other O Methods

59


Compromise: The dictionary meaning of the term compromise is “settlement of dispute reached by mutual mutual conces concession sions. s. The followi following ng are the detailed detailed guidel guidelines ines for compro compromise mise/neg /negotia otiated ted settlements of NPAs. •

The compromise should be a negotiated settlement under which the bank should ensu ensure re reco recove very ry of its dues dues to the maxim maximum um exte extent nt possi possibl blee of minim minimum um expenses.

•

Proper distinction distinction should be made between between willful defaulters and borrowers defaulting in repayments due to circumstances beyond their control.

•

An advantage in settlement cases is that banks can promptly recycle the funds instead instead of resorting resorting to expensi expensive ve recove recovery ry procee proceeding dingss spread spread over over a long long period.

•

All compromise proposals approved by any functionary should be promptly reported to the next higher authority for post facto scrutiny.

•

Proposal for write off/ compromise should be first by a committee of senior executives of the bank.


60

Project Report on Non Performing Assets & Banking Studies Legal remedies: The The lega legall reme remedie diess are one of the the meth method odss of manag managem emen entt of NPAs NPAs.. The The bank bankss 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.

Regular Training Program: The all levels of executives are compelling to undergrowth the regular training program on credit and NPA management. It is very useful and helpful to the executives for dealing the NPAs properly properly..

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.

Write offs: Write offs is also one of the common management management techniques 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.

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.

Rehabilitation of potentially viable units:

The unit is sick due to technical obsolescence’s of inefficient management or financial irregularities. When the Bank settles the dues, of such, companies through the compromise or through the legal actions the better is to be followed.

Other Methods: Persistent phone calls Media announcement Babasabpatilfreepptmba.com

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OBJECTIVES OF THE STUDY:

•

To evaluate the BDCC Bank’s assets quality.

•

To study the management of total assets and advances of the BDCC Bank.

•

To identify the effectiveness of the risk management system, undertaken by the bank.

•

To analyze sector wise non-performing assets.

•

To offer useful suggestions to reduce the NPAs in the bank.


62


METHODOLOGY: Introduction The quality of the project work depends on the methodology adopted for the study. Metho Methodo dolo logy gy,, in turn turn,, depe depend ndss on the natur naturee of the the proj project ect work. work.

The The use use of prop proper er

methodolog methodology y is an essential part of any research. research. In order to conduct conduct a study scientifically, scientifically, suitable methods and measures are to be followed.

Research Design: The type of research used for the collection and analysis of the data is “Historical Research Method”. The main source source of data for this study is the past record prepared prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception and to identify the ways in which the performance especially the non-performing assets of the BDCC Bank can be improved.


63

Project Report on Non Performing Assets & Banking Studies The data data regardi regarding ng bank bank history history and profile profile are collect collected ed throug through h “Explo “Explorato ratory ry Researc Research h Design” particularly through the study of secondary sources and discussions with individuals.

Data collection method Primary data: Discussion with the manager and officers of the bank to get general information about the bank and and its activities activities •

Having face to face discussions with the bank officials.

•

By taking guidance from bank guide and departmental guide.

Secondary data: •

Collect Collection ion of data throug through h bank bank annual annual reports, reports, bank bank manuals manuals and other relevant relevant documents.

•

Collection of data through the literature provided by the bank.

Research Measuring Tool: The tools used for data collection are: 1. Pers Person onal al int inter ervi view ew.. 2. Seco Second ndar ary y sou sourc rces es.. 1. Pers Person onal al Inte Interv rvie iew: w:

In this, this, discu discussi ssion onss more more held held direc directly tly with with mana manage gers rs and and offic official ialss to get get the the clear clear cut cut information about the topic and data to be collected for the purpose of analysis. 2. Sec Secon onda dary ry Sour Source ces: s:

Annual company reports, Balance Sheets, Profit and Loss account are used to collect the data.


64


ANALYSIS AND INTERPRETATION OF DATA FINANCIAL ANALYSIS: The The term term finan financi cial al analy analysis sis refer referss to the proces processs of deter determi minin ning g finan financia ciall streng strength thss and and weakness of the firm by establishing relationship between the items of balance sheet, Profit and loss account account other other operati operative ve data.

The purpos purposee of financia financiall analysi analysiss is to diagnose diagnose the

information contained in financial statements so as to judge the profitability and financial soundness of the firm. Under the BDCC Bank’s analysis, the performance and management of NPAs is analyzed by considering the past 5 year’s financial records.


65


TABLE: 1 SHOWING PROVISIONS MADE FOR BAD DEBTS, NPA AND STANDARD ASSETS: (Rs. In Lakhs) Year

Bad Debts

NPA

Standard Assets

2003-04

729

7467.19

90.00

2004-05

729

8067.19

90.00

2005-06

729

8517.19

140.00

2006-07

763.79

8517.19

160.00

2007-08

765.57

8517.19

210.00


66


INTERPRETATION By the table it is clear that BDCC Bank is maintaining adequate amount of provisions as regulated by the RBI. The Bank has found a stable amount of provisions as it lends the loans to the farmers through the Co-operative societies, which brings the borrower with a repayment capacity. By the graph it is also clear that the BDCC Bank is maintaining high or equal amount of provisions as compared to the previous years

TABLE: 2 SHOWING ASSETS OF THE BDCC BANK

Year

Standard

Sub-standard

Doubtful

Loss assets

Total

2003-04

35505.93

5856.51

10801.64

131.75

52295.83

2004-05

25117.63

5511.39

7554.04

4864.53

43047.59

2005-06

33733.24

1743.59

3016.47

4860.31

43353.61

2006-07

49217.52

2154.52

6660.14

306.89

58339.07

2007-08

48091.07

4108.32

6761.24

303.33

59263.97


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INTERPRETATION From the table it is clear that the Standard assets were suddenly declined when the NPA rule was applicable i.e. in the year 2004-05. Then the loss assets were also increased due to some internal factors. But the Sub Standard and Doubtful assets shows the fluctuating trends.

TABLE: 3 SHOWING ADVANCES OF THE BDCC BANK (Rs. In Lakhs) Year

S. A. O. Short term

Cash Credit & ODs

Cash Credit

Bills Discounted

Term Loans

Total

2003-04

26454.65

2456.65

18283.14

3.75

5063.88

52295.83

2004-05

23995.52

2189.78

12177.92

2.62

4682.76

43047.6

2005-06

25669.47

2677.94

11783.06

4.87

3218.26

43353.6

2006-07

33747.41

3870.17

15595.09

2.76

5123.64

58339.08

2007-08

30820.47

3986.08

16970.15

2.93

7484.32

59263.97


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INTERPRETATION BDCC Bank advances loans mainly for Agricultural purposes through co-operative societies. The advances for Agricultural loans were increasing year by year. The bank provides cash credit but less than the agricultural loan. The Bank also provides loans as ODs, Bills discounting and term loans in a small proportions.

NON PERFORMING ASSETS RATIO: Ratio shows or indicates the relationship between two or more elements. Non performing assets ratio shows the ratio of Non Performing assets to the Loans sanctioned or to the Performing assets.

NET NPA RATIO: As explained in the theoretical part Net NPA Ratio is an important ratio which measures the NPA as as a percentage percentage of advances. advances. TABLE: 4 SHOWING NET NPA RATIO FROM 2002-03 TO 2O07-08.

2003-04

2004-05

2005-06

2006-07


2007-08

69

Project Report on Non Performing Assets & Banking Studies 14.28

18.74

19.64

14.60

18.85

INTERPRETATION From the graph and table it is clear that the Net NPA Ratio of BDCC Bank has fluctuations. In the year 2005-06 it has recorded a highest Net NPA Ration of 19.64% and lowest in the year 2002-03 i.e., 13.82.

TABLE: 5 SHOWING RETURN ON ASSETS (ROA) FROM 2003-04 TO 2007-08 IN PERCENTAGES (%)

2003-04

2004-05

2005-06

2006-07

2007-08

4.72

-4.5

2.25

2.48

2.66


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INTERPRETATION This ratio correlates between the total assets and the net profit. The return on total assets (also return on capital employed or return on investment) is defined as Net Income (Profit) divided by average total assets. A return of 10 percentages percentages is considered considered as ideal ratio. As such, if the actual ratio is equal or more than 10 percentage, it indicates the higher productivity of the total resources / assets and vice verse in adverse cases. In the year 2004-05 BDCC Bank faced loss so the return on assets was recorded negative. But in the year 2003-04 it has recorded almost 5%, which is the highest in last 5 years.

BDCC BANK’S PROGRESS REPORT:

DETAILS

1918-19

1948-49

1968-69

1978-79

1988-89


1998-99

2007-08

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Project Report on Non Performing Assets & Banking Studies 1. Number of members: . Societies

9

544

972

1102

1342

1998

2025

Personal

26

1215

569

341

297

286

281

Co-operative

0

0

0

0

0

0

3

2. Share Capital

5170

692550

7729200

21150550

80478500

286040900

425991055

3. Reserves and Funds

-

481616

2382219

13251847

36908261

372562119

1223620850

4. Deposits

8233

6265468

48924623

149213250

702232753

3692753173

60059677630

5. Working Capital

13403

8868222

80101042

236500169

112686422

5779068089

10404194856

Societies

-

2484492

4904373

175917824

715045621

4176818953

5505221980

Personal

-

1872043

1736639

6361105

68860052

232207844

408675074

-

-

-

-

12500000

12500000

41468

746223

2184206

3810637

29327693

33203929

6. Advances

Others 7. Net Profit

-

INTERPRETATION As shown in the table BDCC Bank has increased its members, share capital, reserves, funds, deposits, working capital, advances, and net profit year by year. No it can be said that BDCC Bank is growing in a moderate speed.

FINDINGS The Findings about the project in BDCC Bank: Findings about the Priority Sector Lending:Babasabpatilfreepptmba.com

72

Project Report on Non Performing Assets & Banking Studies 

The BDCC bank has taken steps to implement an Integrated Risk Management System, covering credit, operational and market risk.



Bankers claim that in order to meet the Agricultural loans to farmers through the Cooperati operative ve Societie Societies, s, they they are forced forced to lend lend even even to prospec prospective tive default defaulters ers further, further, priority and agricultural agricultural loans presents some major problems problems that are believed to result in a higher percentage of bad debts.



There are a large number of small loans scattered apart, thus making recoveries very difficult.

Findings about Appraisal and Disbursement:

The banks do not have any database about the defaulter of the past. First of all there is no way of rejecting rejecting a loan proposal, proposal, on the basis basis of earlier default. In fact, there is no systematic method of inter bank sharing of information but there is a also lack of communication between branches of the same bank



The existing system is a tool for pricing a loan and is not appropriate appropriate for evaluating the risk involved. The system incorporates many control factors, which do not reflect the credit risk.



The financial parameters used are static figures as on balance sheet date. Historical trend of number of previous years are not taken into account. Hence the figures do not give a complete picture of the financial position of the company.

Findings about Debt Recovery: 

Inadequate staff for recovery.



There is large number of scattered accounts.



Lack of knowledge or observance of legal formalities leads to necessary delay and adjournments.

SUGGESTIONS 

Banks concerned should continuously monitor loans to identify accounts that have potential potential to become become non-perfo non-performing. rming.


73

Project Report on Non Performing Assets & Banking Studies 

BDCC Bank should offer rescheduling of loans of those borrowers who were struggling with high interest rates in a falling interest rate environment.



BDCC BDCC Bank Bank should should concent concentrate rate more more on credit credit apprais appraisal, al, monitor monitoring, ing, credit risk management and recoveries.



Finding out the real reason behind irregular repayments or defaults and if it is not willful then offer good debt management advice to the borrower.



Nameplate Nameplate indicating hypothecation hypothecation of assets in favor of the financing financing bank may be affixed to assets lie carts, cycles, rickshaws, etc. this will prevent to some extent the asset changing hands.



Approaching borrowers before due date – The date for payment of the loan should coincide with the borrowers cash flows. Banks should intimate borrowers regularly regarding the due dates of payment that are approaching. Harvesting regarding season should be used effectively to ensure the recovery of dues.



Branch wise analysis of over dues – branch wise analysis of over dues may be done and in those branches where over dues as a percentage of advances exceed a specified limit, a specia speciall reco recove very ry depar departm tmen entt may may be set set up. up. These These cells cells can can take take up not not only only monitoring of bad loans but existing loans as well. Senior official may visit branches to regular intervals.

CONCLUSION NPA Act is fine, comprehensive comprehensive and an extra-ordinary extra-ordinary piece of legislation. legislation.

It is also a

reassuring sign of Government’s commitment to reforms. The Act empowers bank to change or Babasabpatilfreepptmba.com

74

Project Report on Non Performing Assets & Banking Studies take over the management or even take possession of secured assets of the borrowers and sell or lease out the assets. This is for the first time that the banks can take take over the immovable immovable assets of the defaulting borrowers borrowers without without the intervention intervention of the court. They can claim future future receivables receivables and supersede the Board of Directors of the defaulting corporates. corporates. No court, other than Debt Recovery Tribunal, can entertain any appeal against the action taken by banks and financial institutions under this act. The The probl problem em bad bad loans loans coul could d be due due to bad bad inten intentio tions ns or bad bad finan financia ciall mana manage geme ment nt or otherwis otherwisee and also due to several several externa externall reasons reasons.. The The main main concern concern is the prevent prevention ion of further slippage of performing accounts into the non performing category in the first instance. Preventing fresh flow of NPAs is as important as the recovery of the existing heavy stock of NPAs. There can not be any quick fix or one short solution solution to solve the NPA problem once recovery reforms are carried out, market for stressed assets are developed, this Securitization Act will surely help banks in reduction of of NPAs to a great extent. Passing of the law can not not be considered considered to be synonymous synonymous with addressing the underlying underlying problem our legal system has so far failed to enforce contractual obligations and this is hardly likely to cure this fundamental ill, unless more legal reforms are made and strictly enforced in true letter and spirit. Banks should also be empowered to proceed against the personal assets of the directors of the defaulting units / companies / groups etc. to enable the act to be more effective and proactive as well. Exchange of credit information among banks would be of immense help to avoid possible NPAs. The banking banking system ought ought to be so geared geared that that a defaulter defaulter at one place is recognized recognized as a defaulte defaulterr by the system. system. The system system will have to provide provide a mechani mechanism sm to ensure that the unscrupulous borrowers are unable to play one bank against the other.

BIBLIOGRAPHY •

Dr.Baligar.G.B. Banking Law and Practice. Publisher, Ashok Prakashan 2004 Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies •

Singh.s.k. Banking and Financial sector Reforms in

India. Deep & Deep publications 2002 Bedi.H.Lpractical Banking Advance Publisher. Ashok Prakashan 2004

•

REPORTS

Annual Report of Belgaum District Central Co-operative Bank

WEBSITES •

•

•

www.Google.com www.bdcc.co www.banknetindia.com


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A Project Report on Non Performing Assets &amp; Banking Studies

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