GP - NPA in Various Banks123

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A PROJECT STUDY

REPORT

ONManagement of non-performing assets of

Agriculture loan and its impact on performance

of SBI at Sayla Branch in Surendranagar

In Partial fulfillment of requirement of two years

Master of Business Administration programme of Gujarat University,

Ahmedabad.

SUBMITTED TO:

Mr. J.M.Bhatt

B.K.SCHOOL OF BUSINESS MANAGEMENT

GUJARAT UNIVERSITY

SUBMITTED BY:

PRITESH CHAUDHARI (2011-13)

PRAGNESH CHAUDHARI (2011-13)

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B. K. School of Business Management

Gujarat University

Ahmedabad

CERTIFICATE

This is to certify that Mr. Pritesh Chaudhari and Mr. Pragnesh Chaudhari, students

of Full Time MBA (2011-13 batch) at B. K. School of Business Management, Gujarat

University, Ahmedabad have prepared a Project Study Report on Management of non-

performing assets of Agriculture loan and its impact on performance of SBI at Sayla

Branch in Surendranagar in partial fulfillment of two years full-timeMBA Programme

of Gujarat University. This project work has been undertaken under the guidance of Prof.

J.M.Bhatt, core faculty at B. K. School of Business Management, Gujarat University, and

Ahmedabad.

This is also to ascertain that this project has been prepared only for the award of MBA

degree and has not been submitted for any other purpose.

Prof. J.M.Bhatt Dr. Sarla Achuthan

Director

Date:

Place:

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UNDERTAKING FROM STUDENTS

This is to confirm that the information contained in the Project Report titled

______________________ has been prepared by us on the basis of data collected by us

from various secondary as well as primary sources. We would be solely responsible for

piracy or plagiarism of any information included in this report.

(Pritesh Chaudhari) (Pragnesh Chaudhari)

B. K. School of Business Management B. K. School of Business Management

MBA Batch (2011-13) MBA Batch (2011-13)

Date:

Place:

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PREFACE

Loans have to be paid back one day. Had this been realized by all, how nice life

would have been on this Planet. It would not have prompted the poet to say

Neither be a Lender, nor a Borrower Be. Alas! Given the realities in life, this

could remain at best a wishful thinking.

So their business is to lend and lend more. Their proficiency; skill; competency are

all tested in how much they lend and how much they RECOVER and how quickly.

Suffice it would be to state that this can be likened to the vigor and strength with

which one goes about after fully recovering from any ailment. It is agreed by al

beyond doubt Recovery is essential and get recovery is very essential.

We know right from the appraisal stage up to the actual repayment stage the banksneed to be careful. We also know that once the money is in the hands of a borrower,

attitudinal changes take place. The borrower, with some few exceptions may be,

feels a bit more complacent as after all it is not this own money which is at stake.

Therefore an attempt is made here to put all that we know already proper

perspective.

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ACKNOWLEDGEMENTS

At outset, we would like to thank the institutions for having provided us with an

opportunity to carry out a project of this magnitude that helped me satisfy mycuriosity as far as my area of interest was concerned.

The essence of this project, i.e. its contents have been compiled with help of varied

sources of secondary database, but we would specially like to acknowledge the

support, suggestions and feedback received from my Project Guide- Mr. J M Bhatt

and that of the other faculty members as well.

A lot of other people have also contributed directly and indirectly to completion of

this project would not have seen light of the day. Our hearts felt gratitude to all of

them.

Pragnesh Chaudhari

Pritesh Chaudhari

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EXECUTIVE SUMMARY

The most important problem that the Indian banks are facing is the problem of their

NPAs. It is only since a couple of years that this particular aspect has been given so

much importance. The banks have to overcome these difficulties properly in orderto effectively counter the competition faced by the foreign banks. With the framing

of laws as per international standards and setting up of Debt recovery tribunal we

can say that steps have been taken in this direction.

Banks in India have traditionally been saddled with very high Non-Performing

Assets. The banking sector was heading for a crisis in 2001 with NPAs crossing a

mammoth 64000 crores. Banks burdened with huge NPAs faced uphill tasks in

recovering then due to archaic laws and procedures. Realizing the gravity of the

situation the government was quick to implement the recommendations of the

Narsimham Committee and Andhuarjuna Committee leading to the enactment of

the SARFESI ACT 2002(Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act).

This Act gave the banks the much needed teeth to curb the menace of NPAs. The

non performing assets (NPAs) of banks have at last begun shrinking. As reported

from surveys, it is understood that there has been substantial improvements in non-

performing assets and this has been because of several measures such as formation

of asset reconstruction companies, debt restructuring norms, securitization,

provisioning norms and prudential norms for income recognition. The gross NPAsof the banking system are about 16 per cent of the total assets of the nationalized

banks as of 2000-01. This is against a global norm of about 5%. Hence there is a

long way to go before we can say that the NPAs of our banks are under control.

The improvements in NPAs of individual nationalized banks have been in the order

of 10% to 20%, thanks to the various schemes and measures introduced. This paper

addresses the results we have achieved so far since the measures have been

implemented and the thrust on measures that need to be taken to expedite recovery

of NPAs. We also give our suggestions as to how NPA retrieval can be made easy

and in what way the NPA scenario is headed.

The crucial factor that decides the performance of banks now days is the spotting of

non-performing assets (NPA). NPAs are those loans given by a bank or financial

institution where the borrower defaults or delays interest or principal payments

banks are now required to recognize such loans faster and then classify them as

problem assets.

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TABEL OF CONTENT

S.R

NO

PARTICULAR PAGE

NO.

1 Indian banking industry 9

1.1 introduction 10

1.2 Regulatory authorities 13

1.3 Development in banking sector 15

2 Company profile

2.1 introduction of state bank of India 23

2.2 associated banks 32

3 Research design 343.1 Research plan 36

3.2 Research problem 36

3.3 Research objective 36

3.4 Research methodology 37

3.5 Limitation

4 Recovery management 38

5 Findings 59

6 Suggestions 61

7 Conclusion 63

8 Bibliography 66

9 Annexure 68

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CHAPTER ONE

INDIAN BANKING INDUSTRY

1.1 INTRODUCTION:

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Banking can be described as the business of running an establishment where money

is deposited in accounts, withdrawn and borrowed also by the customers. Banks

perform their function of attracting deposits and providing credit. However banks

today function for customer satisfaction rather than being just a mere intermediary.

TYPES OF BANKS:

The Indian Banking Industry can be broadly classified into:

1. Public Sector Banks

2. Old and New Private Sector Banks

3. Foreign Banks

4. Co-operative Banks

1. Public Sector Banks

Public sector banks are a bank wherein the government has a holding of 100%.This

was a situation prior to liberalization. The stake has fallen because of a public issue

in the post liberalization period. Some of the other leading banks in this segment

have also proposed to come out with an equity issue to raise further capital. The

government is proposing to bring out a bill wherein its share in all these banks

would stand reduced to 33% from the current levels

The public sector banks largely dominate the Indian Banking industry. These banks

till the early 90s were involved in the traditional banking business of deposits and

credit lending. The public sector banks have a strong distribution network all over

the country. But the strength of the earlier periods has now become a concern for

these banks. As compared to the tech-equipped distribution network of the new

private sector banks and the foreign banks, these banks have found it difficult to

upgrade them on the technology front. These banks are also facing the problem of

surplus manpower. Most of these banks are now coming out with a VRS to bring

down their number of employees and improve the efficiency ratios.

The public sector banks still control a major share in the banking operations of the

country. Their inefficiencies have been exposed only when the market was thrown

open for competition and new players started eating up their share. But given their

size and the strong network, most of these banks can change their perception. The

recent thrust on reduction of government stake; VRS, NPA settlement schemes etc

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have been some of the steps in this direction. Since the growth of the economy is

largely dependent on the performance of these banks, even with the growth of new

private and foreign players, these banks will have an important role to play.

Some of the players here are State Bank of India and its associates, Bank of Baroda,

Corporation Bank, Punjab National Bank, Union Bank of India, etc.

2. A) Private Sector Banks-Old

These banks existed prior to the promulgation of Banking Nationalization Act but

were not nationalized due to their smaller size and regional focus. Most of these

banks continue to have a regional focus and are relatively smaller in size. A large

number of these banks are basically from the south. Being small in size, these banks

focus on service and technology and thus face competition from new private and

foreign banks. Most of these banks are trying to increase their presence nationwideand are planning to enter other business areas like insurance.

The old private sector banks have performed reasonably well during the FY2000.

As these banks were facing stiff competition from the new private banks and the

foreign players who were making inroads in their markets. These banks have been

able to increase their net profits by over 50%. As a result of the increasing

competition in the sector, these banks have been trying to improve upon their

margins and asset quality. Most of these banks have a high CAR and as such they

do not face any capital constraint in their growth plans. Even their return on net

worth has been at par in most of the cases with the other new players in the market.But the coming years would be more challenging for these banks as the public

sector are also trying to adapt to the new environment and the new banks have

already equipped themselves to have a major share in any opportunity that would

accrue.

Some of the private sector-old players are Bank of Madura Ltd., Tamilnad

Mercantile Bank Ltd., The Jammu & Kashmir Bank Ltd., The Vysya Bank Ltd.,

etc.

B) Private Sector Banks- New

The Banking Regulation Act was amended in 1993 permitting the entry of new

private sector banks. The act also specified certain criteria for establishing new

private sector banks. The criteria are as follows:

1. The banks should have a minimum net worth of Rs1bn.

2. The promoters holding should be minimum 25% of the paid up capital.

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3. The banks should offer shares to the public within three years of their

operations. (This condition was relaxed in case of many banks due to poor

state of capital markets).

The first new private sector bank started operations in 1995. The minimum net

worth requirement of Rs1bn and difficulty in getting the banking license has kept

the option open for very few players.

The new private sector banks have performed very well in the FY2000.Most of this

banks have registered an increase in net profits of over 50%.They have been able to

make significant inroads in the retail market of the public sector and the old private

sector banks. During the year, the two leading banks in this sector had set a new

trend in the Indian banking sector. HDFC Bank, as a part of its expansion plans had

taken over Times Bank. ICICI Bank became the first bank in the country to list its

shares on NYSE.

Some of the private sector-new players include, Centurion Bank Ltd., Global Trust

Bank Ltd., HDFC Bank., ICICI Banking Corporation Ltd., IDBI Bank Ltd., etc.

3. Foreign Banks

Foreign banks have been doing the normal banking business in the country. During

the period of nationalization, the entry of new foreign banks and expansion by

existing foreign banks were prohibited. Even, when the norms were relaxed later

on, RBI was very slow in granting any further approvals to these banks. But most ofthese banks have concentrated on the metropolitan cities of the country and have

been able to do reasonably well. These banks have used the latest technology to

compensate for the limited number of branches they have.

Some of the foreign banks operating in India are ABN-AMRO Bank N.V., ANZ

Grind lays Bank Ltd, Citibank N.A., Deutsche Bank AG, Standard Chartered Bank,

etc.

4. Co-Operative Banks

Co-operative banks are a part of the vast and powerful superstructure of co-

operative institutions, which are engaged in the tasks of production, processing,

marketing, and distribution, servicing, and banking in India. The co-operative banks

were conceived in order to substitute unorganized money market agencies like

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moneylenders, to provide adequate short-term and long-term institutional credit at

reasonable rates of interest, and to bring about integration of the unorganized and

organized segments of the money market.

The main aim of the co-operative banks is to provide cheaper credit to their

members, and not to maximize their profits. There has been an impressive growth in

deposits, credit and working capital of these banks. The annual rates of growth of

co-operative banks have been quite high, and are comparable with those of

commercial banks. The government and the RBI have taken a number of steps to

improve the health and strength of co-operative banks in India. In keeping with

other financial sectors reforms, certain co-operative banking reforms also have been

carried out after 1991.

1.2 REGULATORY AUTHORITIES

The RBI regulates the activities of commercial banks in India. The urban co-

operative banks, in addition to these regulatory authorities, have State co-operative

banks (SCBs) and the District co-operative banks (DCBs) to monitor their

activities.

In the policy framework, the important priority in the past few years has been to

introduce appropriate norms in respect of capital adequacy, income recognition and

provisioning. The RBI has introduced new guidelines to accelerate credit

disbursement in infrastructure. The liberalization has changed the future course of

the Indian banking scene. This has set trends in greater specialization in niche

markets such as retail, hi-tech agriculture, exports, small-scale industries andcorporate sector. There will be a market shift from the interest-based activities to

investment and foreign exchange operations/bullion trade to shore up the bottom

line.

Highlights of policy initiatives and reforms undertaken recently are as follows:

1. Bank allowed operating different PLRs for different maturities.

2. Bank allowed offering fixed rate for all term loans in conformity with

ALM guidelines.

3. Wherever the deposit rate is in excess of PLR, advances to depositorsagainst fixed depositors by banks allowed without reference to PLR

ceiling.

4. Board of Directors allowed delegating necessary powers to ALM

Committee for fixing interest rates on deposits and advances, subject to

reporting to the Board immediately thereafter.

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5. Board of Directors allowed prescribing detailed rules for determining the

date of commencement of commercial production.

6. Interest rate surcharge of 30% on import finance withdrawn.

7. The minimum rate of 20 % interest on overdue export bills withdrawn

banks allowed deciding appropriate rate of interest on overdue export

bills.

8. MMMFs (Money Market Mutual Funds) brought within the purview of

SEBI Regulations; banks and FIs required to seek clearance from RBI

for setting up MMMFs; MMMFs to set up as separate entities in the

form of Trusts only.

Financial Restructuring Measures

1. Deregulation of interest rates is more or less complete.

2. Gradual reduction in reserve requirement.

3. Move towards integration of various segments of financial markets.

4. Permission to banks to approach capital market for augmenting their

capital base to meet capital adequacy.

5. Autonomy in operational matters.

6. Freedom to formulate bank specific loan appraisal methods.

7. Introduction of new products and players in the market resulting in

increased competition in financial sector.

8. Move towards capital account convertibility.

9. Enhanced use of information technology.

The banks have been allowed by the central government to enter into forward

trading in gold by adding gold to the list of commodities eligible for hedging under

the Forward Contract (Regulation) Act, 1952.

Banks are free to fix their own interest rates on GDS. They are required to put in

place risk management mechanisms to hedge the price risk arising from price

fluctuations in conformity with RBI guidelines.

Lending Norms

The skills of Credit Risk Management are another extremely important area for the

healthy functioning of any financial institution. With the adoption of international

norms of income recognition and asset classification many PSBs in India find

themselves burdened with huge loads of NPAs. Debt Recovery Tribunals (DRTs)

were set up to help banks speed up the recovery process. DRTs were meant to

handle only large defaulters with outstanding of over Rs. 10 lacs a simple and cost

effective legal system. Though DRTs have started functioning for over 5 years, its

impact has not been felt in the reduction of NPAs because of the delay in getting

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Recovery Certificate and execution of the same. At many DRTs either the Principal

Officer is not posted after retirement of the existing one or the Recovery Officer is

not available.

Prior to the implementation of the Narsimham Committee Recommendations banks

were booking interest income on advances as long as there was sufficient security to

back the advance. Accrual system of accounting was followed. Now, the banks are

required to classify an advance as NPA if interest or installments for 6 months are

not recovered and they should not book interest income until they are recovered- a

shift from Accrual System of Accounting to Cash System. Narsimham Committee

II recommendations have proposed reduction of the default period from present 6

months to 3 months.

Even the Provisioning norms for bad advances underwent a sea change. Contrary to

the earlier norms, now banks have to make the provision for all advances if they are

NPAs on a graded base depending on the age of NPA even though the security foran advance covers more than the outstanding debt balance. Now banks are asks to

make provisions on a nominal scale on Good Advances also (termed Standard

Assets in the Bankers parlance).

1.3 DEVELOPMENT IN BANKING SECTOR

A. Universal Banking:

Most of the banks have now been trying to function on the concept of a Universal

Bank. Apart from the traditional functions of a commercial bank, they are taking

steps to build themselves into a one stop financial centre wherein all the financial

products would be available. Banks have started catering to the retail segment to

improve their deposit portfolio. In order to have a maximum share in this segment,

most of the banks have been introducing new products. The delivery channels have

also been shifted from branches to ATMs, phone banking, net banking etc.

B. Technology up gradation:

Technology has become an important medium of not only attracting new customers

but also in retaining them. The new generation private sector banks have made a

strong presence in the most lucrative business areas in the country because of

technology up gradation. While, their operating expenses have been falling as

compared to the PSU banks, their efficiency ratios (employees productivity andprofitability ratios) have also improved significantly. The innovative process of

banking for improved customer services matching international standards through

infusion of technology includes Electronic Funds Transfer, Tele-Banking, Any

Where Banking, 7 Day week, Credit/Debit Cards, ATMs. Etc.

Centralized on-line banking:

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Few banks have already taken up on-line system where the database is

stored at a central place which gives customer the advantage of accessing

his account from any one of the branches of the bank. It gives the customer

the unique advantage of doing anywhere banking. ON LINE ANYWHERE

BANKING will be the main agenda for the banks to acquire competitive

edge.

Internet banking:

The Internet not only allows the banks to keep the expenditure to the

minimum, but also serves the customer anywhere, any time. It provides the

customer the convenience of service from anywhere in the world on his

time. The customer will be able to transfer money between any of his two

accounts, check the status of the cheques clearance; pay bills open accounts,

give standing instructions and any other operations which he normally doeswith the bank.

C. Banc assurance:

Most of the banks are also planning to enter the insurance business and are

in the process of identifying their strategic partners. Since most of the banks

already have an extensive distribution network, this new business should

result in substantial revenues. But with most of the top league players

planning to enter this business, the more efficient and proactive players

would be able to take a lead.

D. Asset-Liability statement:

From the financial year ended 31/3/2001, RBI has made it compulsory for

all banks to publish along with their Audited Financial statements, a

statement on Asset-liability Management duly audited, Capital Adequacy

Norms, Income Recognition, Asset Classification and Provisioning, have

been introduced as per international norms.

E. Capital Adequacy Norms:

Capital Adequacy Norms, Income Recognition, Asset classification and

Provisioning, have been introduced as per international norms. The

government is planning to increase its stake in the public sector banks to

74%. This move will enable these banks to raise further capital to adhere to

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the CAR requirements and will also help in changing their perception in the

market Vis-a Vis the private sector banks.

Income Recognition and Asset Classification Norms:

With the adoption of international norms of income recognition and asset

classification many PSBs in India find themselves burdened with huge loads of

NPAs. Debt Recovery Tribunals (DRTs) were set up to help the bank speed up their

recovery process. DRTs were meant to handle only large defaulters with

outstanding of over Rs. 10 lacks.

Contrary to earlier norms, now Banks have to make the provision for all advances if

they are NPAs on a graded basis depending on the age of NPA even though the

security for an advance that covers more than the outstanding debt balance. Now

Banks are asked to make provision on a nominal scale on Good Advances also

(termed Standard Assets in the Bankers parlance).Cash System of Accounting for NPAs:

Prior to the implementation of the Narsimham Committee Recommendations,

Banks were booking interest income on advances as long as there was sufficient

was followed. Now, the banks are required to classify as advance as NPA if

interest/ installments for 6 months are not recovered and they should not book

interest income until they are recovered a shift from Accrual System of Accounting

to cash System. Narsimham Committee recommendation has proposed reduction of

the default period from present 6 months to 3 months.

1.4 INDIAN BANKING INDUSTRY PROBLEMS

The Indian banking industry is facing serious problem because of the competition

posed by the foreign banks. On one hand the entry of foreign banks was

advantageous to the Indian banks in the sense that foreign banks brought in latest

technology along with them. But on the other hand it took away a big share of the

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Indian banks by using their technology over here. Even though a major part of the

private banks have adopted those technologies and are in neck-to-neck competition

with these banks, the main onus for development lies with the nationalized banks of

our country, as they are the ones within the reach of the masses of our country.

Hence technology up gradation is very much essential here.

Secondly, up to a couple of years earlier, the Indian banks functioned mainly as an

intermediary offering loans and deposits to its customer. It is only now that the

concept of customer-the-king has popped up.

The third and the most important problem that the Indian banks are facing is the

problem of their NPAs. It is only since a couple years that this particular aspect has

been given so much importance. The increasing amount of NPAs eats away major

part of the banks profits.

The banks have to overcome these difficulties properly in order to effectively

counter the competition faced by the foreign banks. With the framing of laws as per

international standards and setting up of Debt recovery tribunals we can say that

steps have been taken in this direction.

1.5 WHERE THE INDUSTRY IS HEADED

The banking industry in India, long associated with obsolete infrastructure and

influenced by die-hard traditionalists, is waking up to the winds of change.

In the changing global scenario banks in India will have to have clear objectives,

such as:

1. Enhancing the efficiency of operations by employing high

technology.

2. Enhancing asset quality and profitability of the bank.

3. Stream ling the organizational structure in accordance with the

changing environment.

4. Increasing staff involvement through HRD and training while enhancing

job satisfaction of employees.5. Projecting the image of the bank as a socially responsive and viable

organization and

6. Continuing to act as a financial intermediary while at the same time

responding to the growing needs of the customer

7.

1) Outsourcing

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The challenge of managing the diverse services in a networked environment has

caused the banks to introspect on what should be considered as their core skills and

primary roles. If banks do invest in creating these skills sets, the value that can be

unlocked by spinning off the technology unit is much greater than the advantage of

keeping it in-house. This could be in two forms- the products developed or the

services company that produces application themselves, In future, banks will need

to focus on value-differtiating services by keeping in-house their competitive

advantages while partnering with others who complement its services-making the

argument for best-of-breed integration a necessity.

2) In sourcing

In sourcing is a model wherein banks perform operations that are originally done

by their customers/other banks. Corporate clients may outsource activities likereceivable management, accounting and risk management of corporate investments

to banks. New product offerings will emerge as a combination of existing products

and the new in sourced activities Banks, with their established processing

capacities, are ideal partners of insurance and other financial service firms in their

pursuit of customer reach and service provision.

3) Product management

Existing products and services are changing way for value-added ones thanks to

the one-upmanship game among competing banks, sparked off by soaring

consumer-demands. In future, the market space will see banks and non-banks

striving to seek opportunities for profit, in wake of product commoditization.

4) Adjust, adapt, and change.

Thats the message that technology has sent across to modern day banking. The

new mindset is illustrated by innovations and speculative bets taken by banks,

where investments in technology have focused on benefit-realization. Banks that

adapt this mindset will realize benefits from: Customer management-focused investments where integrated informational

views and transactional capabilities across products, services, and channels

will enable the banks to obtain a better picture of customer preferences,

risk, and profitability.

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Investments aimed at managing risk and regulation issues with banks

gaining the ability to identify, manage, and allocate risk exposures on

across the enterprise to prioritize business decisions.

Developing a portfolio of shared service alliances focused on providing

integrated cross-channel access and new range of services.

Implementing best-of-breed workflow around the core e-Enabled business

systems to provide the right linkages to yield business benefits.

In India, investments in technologies by financial services organizations are

increasing, and new initiatives emerging, albeit at a basic level (See the Impact of

IT). However, in the long run, it is evident that technology investments in

transaction and process automation will cease to be a differentiator.

5) Payments systems

In recent years, alternate money transmission avenues, especially the development

of electronic money schemes, have been gaining currency. This raises policy issues

for central banks in its role as the guardian of the payment network and

implementer of the monetary policy. The emergence of peer-to-peer money

transmission mechanisms poses a challenge to current role of banks as gatekeepers

to traditional payment systems. Robust payment systems therefore are a key

requirement in maintaining and promoting financial stability with technology

playing both a facilitating and disruptive role in them.

Despite the radical new trends emerging, banks will continue to play their role as

trust-enablers in all commercial activities. Their role as financial intermediaries

and payment enablers will also continue, but they will be outsourcing all non-core

activities to specialized service providers and in source opportunities where they

have a saleable value proposition. The transfer of money will not generate profits-it

will, however, be the basis of other services that banks will provide. The level of

integration that banks achieve with their customers supply chain will determine

profitability.

Armed with a technology backbone, banking will remain the best business modelfor managing liquidity, creating trust, and managing risk. The ability to make

informed decisions based on business benefits, to become intelligent investors in

technology, and seek sourcing options would be some tenants of successful

organizations on the right side of this divide.

6) Analytics

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As they realize that product and related services by themselves cannot provide

sustainable competitive advantage, banks are paying more attention to relationship

with their customers and the way they manage risk, determine price, and allocate

capital. Going forward, banks will attempt to augment their behavioral and

economic views of the customer, preferably captured at point of contact in addition

to existing transactional and demographic data (In-house an external). Banks will

require use of analytics to effectively manage their customer relationships, conduct

detailed analysis that help more accurately model, and predict future customer

behavior and lay a quantified foundation for strategic decision making.

The future will see increasing investment in risk analytics as part an integrated

framework supporting asset pricing, performance measurement, and asset

allocation models.

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CHAPTER-2

COMPANY PROFILE

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STATE BANK OF INDIA

1. Introduction

The origin of the State Bank of India goes back to the first decade of the nineteenth

century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three

years later, the bank received its charter and was re-designed as the Bank of Bengal (2

January 1809). A unique institution, it was the first joint-stock bank of British India

sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the

Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at

the apex of modern banking in India till their amalgamation as the Imperial Bank of India

on 27 January 1921.

History

1806: The Bank of Calcutta is established as the first Western-type bank.

1809:The bank receives a charter from the imperial government and changes its name to

Bank of Bengal.

1840:A sister bank, Bank of Bombay, is formed.

1843:Another sister bank is formed: Bank of Madras, which, together with Bank of Bengal

and Bank of Bombay become known as the presidency banks, which had the right to issuecurrency in their regions.

1861: The Presidency Banks Act takes away currency issuing privileges but offers

incentives to begin rapid expansion, and the three banks open nearly 50 branches among

them by the mid-1870s.

1876: The creation of Central Treasuries ends the expansion phase of the presidency banks.

1921: The presidency banks are merged to form a single entity, Imperial Bank of India.

1955: The nationalization of Imperial Bank of India results in the formation of the State

Bank of India which then becomes a primary factor behind the country's industrial,

agricultural, and rural development.

1969: The Indian government establishes a monopoly over the banking sector.

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1972: SBI begins offering merchant banking services.

1986: SBI Capital Markets is created.

1995: SBI Commercial and International Bank Ltd. are launched as part of SBI's stepped-

up international banking operations.

1998: SBI launches credit cards in partnership with GE Capital.

2002: SBI networks 3,000 branches in a massive technology implementation.

2004: A networking effort reaches 4,000 branches.

2005: SBI open new branch at vadakara and roll out new loan schemes and entered in to

agreement with Bharat petroleum corporation Ltd.

2006: SBI teams up with up with Nihilent to unveil feedback system.

2007: The SBI has become first become foreign bank to set up branch in the Israel.

2008: SBI has signed joint venture with insurance Australia group and also rolled out

micro insurance schemes.

2009: SBI launched two new loan products as SBI easy home loan and SBI advantage

home loan.

2010: SBI acquire the State bank of Indore and also launched special schemes for Air force

personal.

2011: SBI acquisition of SBICI bank.

2012: SBI launched virtual debit cards to check online fraud and promote ecommerce.

Principal Competitors: ICICI Bank; Bank of Baroda; Canara Bank; Punjab National

Bank; Bank of India; Union Bank of India; Central Bank of India; HDFC Bank; Oriental

Bank of Commerce

FULL BRANCH COMPUTERISATION (FCBs): All the branches of the Bank are now fully

computerized. This strategy has contributed to improvement in customer service.

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ATM SERVICES: There are 5290 ATMs on the ATM Network. These ATMs are located in

1721 centers spread across the length and breadth of the country, thereby creating a truly

national network of ATMs with an unparalleled reach. Value added services like ATM

locator, payment of fees for college students, multilingual screens, voice over and drawal

of cash advance by SBI credit card holders have been introduced.

INTERNET BANKING (INB): This on-line channel enables customers to access their account

information and initiate transactions on a 24x7, boundary less basis. 2225 branches,

covering 555 centers are extending INB service to their customers. All functionalities other

than Cash and Clearing have been extended to individual retail customers. A separate

Internet Banking Module for Corporate customers has been launched and available at 1305

branches. Bulk upload of data for Corporate, Inter-branch funds transfer for Retail

customers, online payment of Customs duty and Govt. tax, Electronic Bill Payment, SMS

Alerts, E-Poll, IIT GATE Fee Collection, Off-line Customer Registration Process and

Railway Ticket Booking are the new features deployed.

GOVT. BUSINESS: Software has been developed and rolled out at 7785 fully

computerized branches. Electronic generation of all reports for reporting, settlement and

reconciliation of Govt. funds is available.

STEPS: Under STEPS, the bank's electronic funds transfer system; the Products offered

are e-Transfer, e-Realization, and e-Debit (CMP) and ATM reconciliation. STEPS handle

payment messages and reconciliation simultaneously.

SEFT: SBI has launched the Special Electronic Fund Transfer (SEFT) Scheme of RBI, tofacilitate efficient and expeditious Inter-bank transfer of funds. 241 branches of our Bank

in various LHO Centers are participating in the scheme. Security of message transmission

has been enhanced.

MICR (Magnetic Ink Character Recognition) Centers: MICR Cheque Processing

systems are operational at 16 centers viz. Mumbai, New Delhi, Chennai, Kolkata,

Vadodara, Surat, Patna, Jabalpur, Gwalior, Jodhpur, Trichur, Calicut, Nasik, Raipur,

Bhubaneswar and Dehradun.

Core Banking: The Core Banking Solution provides the state-of-the-art anywhere anytime

banking for our customers. The facility is available at 1012 branches.

Trade Finance: The solution has been implemented, providing efficiency in handling

Trade Finance transactions with Internet access to customers and greatly enhances the

bank's services to Corporate and Commercial Network branches. This new Trade Finance

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solution, EXIMBILLS, will be implemented at all domestic branches as well as at Foreign

offices engaged in trade finance business during the year.

WAN: The bank has set up a Wide Area Network, known as SBI connect, which provides

connectivity to 4819 branches/offices of SBI Group across 385 cities as at 31st March

2005. This network provides across the board benefits by providing nationwide

connectivity for its business applications

2.2 ASSOCIATE BANKS

State Bank of India has the following seven Associate Banks (ABs) with controlling

interest ranging from 75% to 100%.

1. State Bank of Bikaner and Jaipur (SBBJ)

2. State Bank of Hyderabad (SBH)

3. State Bank of Indore (SBIr)4. State Bank of Mysore (SBM)

5. State Bank of Patiala (SBP)

6. State Bank of Saurashtra (SBS)

7. State Bank of Travancore (SBT)

The seven ABs have a combined network of 4596 branches in India which are fully

computerized and 1070 ATMs networked with SBI ATMs, providing value added services

to clientele.

The ABs recorded an impressive performance during 2003-04. The combined net profits ofthese banks are increased by 38% over the previous year to reach Rs.1938 crores. Deposits

and advances grew by 20% and 22%, respectively, during the year. Three of the ABs viz.

SBIr, SBP and SBS achieved NIL Net NPA status while the combined Net NPA ratio of all

ABs was at 0.84% as on 31st March 2012.

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General information of Sayla branch

STATE BANK OF INDIA - SAYLA is located at GUJARAT state, SURENDRANAGAR

district, SURENDRANAGAR city and the bank branch's address is [BAZAR SAYLA

363430]. Contact phone number / numbers - 02755-220737, FAX0 IP NO-6151581. The

IFSC Code is SBIN0060110. Branch code is the last six characters of the IFSC Code -

060110. Individual bank branch's details are listed below.

IFSC Code: SBIN0060110 (5th character is zero)

MICR Code: 363002430

Branch Code: 060110 (Last 6 Characters of the IFSC Code)

City: Surendranagar

Address: Bazaar Sayla 363430

Contact: 02755-220737 FAX0 IP NO-6151581

Sayla branch is providing all its facilities to 18 villages within geo-graphical boundary of

surendranagar. Population of these villages are approximately 18,000. It provides all

banking facilities but mainly focus on agriculture loan and government businesses.

Structure

Branch manager : Mr. M.V.Vyas

Accountant : Mr. K.V.Maheta

Cash officer : Mr. G.C.Varma

Field officer : Mr. B.P.Gohil

There are six window operators, one messenger and four arm guards.

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Types of agricultural loan

1) AGRICULTURAL GOLD LOANS

Purpose

Bank extends hassle free finance to farmers / agriculturists against Gold Ornaments /

gold wares to increase their liquidity to meet crop production expenses, Investment

expenses related to agriculture and / or allied agricultural activities.

Eligibility

Any person engaged in agriculture or allied activities as well as persons engaged in

activities permitted to be classified under agriculture.

Quantum of Loan

Up to 70% of the value of the ornaments .Value will be as advised by the bank to the

branches periodically.

Demand Loan / Term Loan: The repayment period of the loan should be fixed so

as to coincide with the harvesting and marketing season / generation of income from

the activity, allowing 2 to 3 months time after harvesting to market the produce andrealize the proceeds. However, the total period will not generally exceed one year

from the disbursement of the loan in the case of short-term loan / production credit

and 36 months in other cases.

2) KISAN CREDIT CARD (KCC)Purpose:

To provide timely and adequate credit to farmers to meet their production credit

needs (cultivation expenses) besides meeting contingency expenses and expensesrelated to ancillary activities through simplified procedure facilitating an ailment of

the loans as and when needed.

Who are eligible for the loan?

Owner cultivators, tenant cultivators and Share croppers.

Agricultural borrowers having good track record for the last 2 years

Creditworthy new borrowers can also be financed.

Loan

100% of the cultivation cost available as loan up to Rs 50000/ and 85 % of the costas loan above Rs 50000/. Expenses to meet important ancillary activities to

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production can also be financed in addition to the above the total limit is inclusive of

20% of production credit, which includes crop production expenses and working

capital for allied agricultural activity, as contingency credit /consumption loan.

Disbursement of the Loan

As per the cultivation requirements of the crop, the loan will be disbursed in cash.

SecurityLoan amount up to Rs 50000/ Hypothecation of Crops.

Above Rs 50000/ up to Rs 100000

(1) Hypothecation of crops.

(2) Mortgage of land or third party guarantee *Above Rs 100000/

(1) Hypothecation of crops(2) Mortgage of lands

*For loans up to Rs 1 lack to farmers having legal ownership of agricultural landswith good track record for last 2 years

3) PRODUCE MARKETING LOAN

Purpose:

To help farmers avoid distress sale of their produce

To enable prompt repayment of crop loan dues and provide liquidity tofarmers to meet contingency needs.

To offer the facility of loan against the stocks stored in farm houses, in

addition to loan against warehouse receipts.

Who are eligible for the loan?

1. All non-defaulter borrowers of our branches, who can store the produce either in

their own farm/premises itself or in a Warehouse / cold storage.

2. Crop loan borrowers of other Banks and also Non-Borrower Farmers, who storetheir produce/ stocks in a Warehouse / cold storage.

Loan amount60 to 80% of value of produce depending upon the place of storage subject to a

maximum of Rs.10 lacs.

SECURITY:

1. Loan sanctioned against goods stored in Farmers godown:Primary: Hypothecation of stocks.

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Collateral: Mortgage / Charge over Land or Third Party guarantee for loans above

Rs. 50,000/-.

2. Loans sanctioned against Warehouse Receipts (WHR):

Primary: Pledge of stocks.

Collateral: No collateral is required for loans up to the maximum permitted limit ofRs.10 lakhs under the scheme.

4) SETTING UP OF AGRI-CLINIC & AGRI BUSINESS CENTRES

Purpose

The scheme is to provide self employment opportunities to technically trainedpersons and to augment extension services for agriculture.

Who are eligible for this loan?

Agricultural graduates / graduates in subjects allied to agriculture like horticulture,animal husbandry, forestry, dairy, veterinary, poultry, pisciculture and other

activities.

Loan amount

Individual Activity: - Rs.10 lacsGroup Activity: - Rs.50 lacs (maximum). In case of group projects, if the group

consists of 5 or more persons, all except one of them would have to be agriculture

graduate trained under the scheme and the remaining could be non-agri graduatewith experience in business development and management.

Loan amount for loans up to Rs 5.00 lacs 100%

Loans above Rs 5 lacs up to 85 % of the cost

SUBSIDY:

Credit linked capital subsidy @25% of the capital cost of the project funded through

bank loan would be eligible. This subsidy would be 33.33% in respect of borrowersbelonging to SC, ST, women and other disadvantaged sections and those from

North-Eastern and Hill States. In addition to the above subsidy, full interest subsidy

would be eligible for the first two years of the project. The capital subsidy will beback-ended with minimum 3 years lock-in period. The interest subsidy would,

however, be concurrent.

SECURITY:

Up to Rs. 5.00 lacs Hypothecation of assets created. Above Rs. 5.00 lacs:

Hypothecation of assets created and Mortgage of land or Third party guarantee.

5) FINANCING OF SECOND HAND / USED TRACTORS SCHEME

SBI: - Mahindra Vishwas, SBI TAFE Nayaroop.

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Purpose:

Loans provided for the purchase of second hand tractors refurbished by Mahindra &

Mahindra and Tractors & Farm Equipments Ltd. Tractors which are up to 7 yearsold.

Who are eligible?

Individual farmer or a group of farmers not exceeding three in number (as co-

borrowers) owning minimum 3 acres of perennially irrigated agricultural land. In

case of co-borrowers the land should be in same area.

Loan amount

Up to 85% of the cost

The cost will be based on the price fixed by the company for each tractor after

refurbishing. The overall maximum limit will be Rs.2.50 lack including the cost ofimplements. The implements purchased shall be new.

Security

Loan up to Rs 50000/ Hypothecation of tractor and accessoriesAbove Rs.50, 000/-

Hypothecation of tractor and accessories Mortgage of the land of the farmer or any other tangible Security to cover at

least 50% of the loan amount or suitable.

6) SANJEEVANI

(FINANCE FOR REPAIRS, MAINTENANCE AND ADDITION OF NEW IMPLEMENTS ETC. TTRACTORS)

Purpose:

To assist the farmers, who are regular in their repayments for repairs / maintenance of tractor and fpurchase of additional implements

Eligibility:

Borrowers who have already availed the tractor / power tiller / combined harvester loan facility from o

Bank before three years or more and whose accounts are closed / or regular/standard (IRAC) and w

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have paid a minimum of 2 yearly installments or 4 half yearly installments after moratorium period a

considered eligible for the loan. The borrower should not have availed the benefit of a compromi

scheme earlier.

Facility: Agricultural Term Loan.

Quantum of Loan: Repairs: Up to a Maximum of Rs. 50,000/-

Addition of new implements: Up to a Maximum of Rs. 1, 00,000/-

Margin:

Up to Rs.50, 000 NIL

Above Rs.50, 000 - 15-25% of invoice price

Security:

A. For borrowers who had already repaid / closed the Tractor loans:

a. Up to Rs. 50,000/-

Primary: - Hypothecation of tractor (value to be assessed based on the age and condition of the vehicand new implements. (Noting of Banks Charge with Road Transport Authority on tractor is a mu

Collateral: - NIL

b. Above Rs. 50,000/-Primary: - Hypothecation of tractor (value to be assessed based on the age and condition of the vehic

and new implements. (Noting of Banks Charge with Road Transport Authority on tract

Collateral: - Mortgage / Charge over the Land

B. For borrowers having existing Tractor Loan A/c s:a. Up to Rs. 50,000/-

Primary: - Hypothecation of existing tractor / new implementsCollateral: - Extension of Mortgage / Charge over the LandRepayment: Maximum 5 years or up to the last installment of the existing tractor whichever is earlier

half yearly installments.

Insurance: Tractor to be insured till the advance is repaid in full.Interest Rate: As per the card rate applicable on aggregate limits for the facility and periodici

(Interest rate Effective from 29.06.2009)

Up to Rs. 50,000. - 10.50 % p.a.

Above Rs.50, 000/- and up to Rs. 2 lacs - 11.50 % p.a)

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CHAPTER- THREE

RESEARCH DESIGN

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3.1 Research Plan

(A) Defining the Problem:

Non performing Assets in banking Industry has become a subject of intenseimportance and discussion. It has assumed greater significance in the world of banking

and banks. It has become a barometer of the health of banks and discussions on any

bank is incomplete without the mention of NPA, NPA has now become heart of the

banking Industry, which in turn, is the heart of finance and economy of a nation.

Assets of a bank, generally, consist of cash investment, loans and advances, fixed assets

and miscellaneous assets. The resources of a bank are deployed in these assets. The

resources consist of capital and reserves, deposits, borrowings and other liabilities.

These liabilities are carried at a cost and hence its deployments into various assets

should generate enough income to service the cost of the liabilities. In other words, the

assets in which the liabilities are deployed should perform in such a way that it generate

income to cover the cost of resources and also a surplus, which is a profit of the bank,

Thus the performance of assets reflects the health of the banking industry.

Earlier, the buzzword in the banking industry was deposits as it is the basic raw

material for the banking industry. The status of the bank was, determined on the

volume and size of its deposits. The career of bankers used to depend on the level of

deposits achieved by him. Banks were not bothered about the performance of their

assets. But from 1991, a sea change was made in the way income of banks wasrecognized. With the first generation economic and finance sector reforms coming into

being, the method of income recognition in the banking sector was changed from

accrual basis to cash basis. An income will be carried to profit and loss account only of

it is realized in cash in 180 days. This was like a bolt from blue for deposit happy

bankers. All along, they were simply doing an accounting exercise in debiting a loan

account and credit the income account without bothering to see whether it is actually

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paid by the borrower or not. Thus the performance of an asset was defined for the first

time in Indian Banking Industry.

This change of income recognition compelled the banks to unrecognized the income if

the interest is not received in cash from the borrowers. Not only this depending upon

the quality of the assets, is various provisions now required to be made on such non

performing assets. This had compelled many large banks to declare loss for the first

time in history of banking. This had ominous portents for the entire banking industry.

This also resulted in dwindling flow of credit of trade and industry.

Thus NPA has the potential to directly affect the economy of the country. Many big

nations like Japan are suffering from this disease of high NPAs. Our country also now

having a large portion of bank credit locked in NPAs and hence NPA is receiving

greater importance of NPAs , that we thought to select it as a subject for Grand

Project.

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3.2 Research Problem

To study way of recovery of agriculture loan and how to manage NPA

3.3 Research Objective

(1) To evaluate NPAs of agriculture (Gross and Net) in the SBI of Sayla branch in

Surendranagar.

(2) To Know the Concept of Non-Performing Asset.

(3) To Know the Impact of NPAs.

(4) To Know the Reasons for NPAs of agriculture is high at SBI sayla branch.

(5) To learn Preventive Measures.

(6) To know the about management of NPA in banks.

3.4 Research Methodology

A) TYPE OF RESEARCH DESIGN:- Direct interview

B) DATA COLLECTION:-

i. PRIMARY SOURCES: - we would contact officer of Sayla SBI branch. We

would take depth interview for primary information of NPA management and

recovery methods.

ii. SECONDARY SOURCES:-Internet, books, Newspapers, brochure/handouts of

banks

C) SAMPLING DESIGN:-

We are expecting to meet the Bank officer or Bank manager of Sayla

branch.

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3.5 Limitations

1. The sample size may not necessarily represent true state of banks because it

consists only one branch of SBI.

2. All the answers given by the respondents have been assumed to be true.

3. Decisions on recovery management are largely taken at the Head Quarters. The

project was undertaken in Surendranager hence the concerned decision makers in

this context couldnt be contacted.

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CHAPTER FOUR

RECOVERY MANAGEMENT

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4.1 Introduction

The crucial factor that decides the performance of banks nowadays is the spotting of

non-performing assets (NPA). NPAs are those loans given by a bank of financial

institution where the borrower defaults of delays interest of principal payments.

Banks are now required to recognize such loans faster and then classify them as

problem assets. Close to 16 percent of loans made by Indian banks are NPAs-very

high compared to 5 percent in advanced countries.

Banks are not allowed to book any income from NPAs. Also, they have to provide

for these NPAs, or keep money aside in case they cant collect from the borrower,

which affects their profitability adversely.

Classification of NPAs

In April 1992, it was decided to implement the Narsimham Committees

recommendations on financial sector reforms in a phased manner over a three-year

period commencing from the financial year 1992-93. Income Recognition, Assets

Classification and Provisioning (IRAC) norms were introduced with a view to reflect

a true picture of financials of Banks on the basis of their booking the income on

actual basis than on accrual basis and also classify assets according to the level of

risks attached to them. The criteria for classification is :

Performing/Standards Assets: Loan assets in respect of which interest andprincipal are received regularly are called standard or performing assets. Standard

assets also include loans where arrears of interest and / or of principal do not exceed

180 days as at the end of a financial year. No provisioning is required for such loans.

Non-Performing Assets: According to RBI rules, any loan repayment or interest

thereof that is delayed beyond 180 days has to be identified as an NPA. NPAs are

further sub-classified into sub-standard, doubtful and loss assets:

Sub-standard Assets: Sub-standard assets are those that are non-performing for a

period not exceeding two years. Also, in cases where the loan repayment is

rescheduled, RBI has asked banks to recognize the loans as sub-standard at least for

one year.

Doubtful Assets: Loans which have remained non-performing for a period

exceeding two years and which are not considered as loss assets are known as

doubtful assets. Major portions of assets under this category relate to sick

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companies referred to the Board for Industrial and Financial Reconstruction (BIFR)

and waiting finalization of rehabilitation packages.

Loss Assets: A loss asset is one where loss has been identified but the amount has

not been written off wholly or partly. In other words, such an asset is considered

uncollectible. There may be some salvage value.

Provision for NPAs

The RBI has also laid down provisioning rules for the non-performing assets. This

means that banks have to set aside a portion of their funds to safeguard against any

losses incurred on impaired loans. Banks have to set aside 10 percent of sub-standard

assets as provisions. The provisioning for doubtful assets is 20 percent and for loss

assets it is 100 percent.

4.2 Debt Recovery Problems

(1) To identify assets and properties of borrowers and guarantors is a difficult exercise.

Even when banks get the decrees, execution may be difficult as the exact position of

borrowers/ guarantors properties may not be known .i.e. whether it is

unencumbered, in good physical and financial condition etc.

(2) Constraints of time and adequate staff to supervise and follow-up the large number

of accounts that are often scattered over wide areas, also hinders recovery effort. At

times inadequate transport and roads also hinders recovery effort. At timesinadequate transport and roads also make it difficult to reach borrowers.

(3) Despite the good intentions, it will depend on how fast the measures are

implemented. Since their introduction in 1994, DRTs have not been able to make a

sound impact due to the lethargy on the implementation front. Unless the

Government takes concrete and speedy measures to strengthen the Tribunals and

streamline the legal systems, the DRTs will amount to deferring the NPA problem.

(4) As against 50 to 60 Judges in High Courts, the Act provides for only one presiding

Officer for each Tribunal. The appellate Tribunal has suggested that when thenumber of pending cases exceeds 2000, Government should appoint another

Presiding Officer. This suggestion needs to be acted upon quickly to prevent further

delay in the settlement of cases. Further, the Tribunals need to have their own

permanent staff instead of depending mainly on persons who are on deputation.

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(5) Statutory powers

Give Empowering banks to acquire assets for disposal without intervention of

courts (sec. 29 of State Financial Act.) This would work as deterrent against

intentional defaulters.

(6) Lok Adalats

(a) Establishing Lok Adalats in all States.

(b) To be made compulsory for both borrowers and banks for settlement of

smaller loans (present limit 5. Lac)

(7) BIFR ( Board for Industrial and Finance Reconstruction)

(a) Relook into functioning of BIFR- whether objectives achieved since the

ratio of cases registered and cases dismissed/winding up was only 49% in1996.

(b) Increase in number of benches-Housing separate benches for major cities

like Mumbai, Chennai.

(c) Time frame for rehabilitation (6 months).

(d) Reference to BIFR should be prerogative of banks.

(e) Prevent unscrupulous/dishonest promoters taking shelter under BIFR.

(8) In the case of immovable property, recovery continues to be a problem even where

the court decree of certificate has been passed. While the Act provides for

attachment and sale of property after the court decree has been issued there is no

provision to prevent a borrower from disposing off the property while the suit is

still on. DRT Act empowers Recovery Officers to recover the debt through

attachment and sale of movable or immovable property of the defendant but does

not explicitly mention how to enforce hypothecation, mortgage, etc.

(9) There are instances where the borrower has mortgaged the same property to

several banks and availed facilities with predetermined criminal intention to cheat

the banks with false and fabricated documents.

(10) Valuation reports of properties are inflated to suit the needs of the borrowers.

(11) Several problems have been faced by the banks while obtaining shares as

collateral security. As the shares are not transferred in the name of the bank,

ultimately the matter has to be taken to the Company Law Board (CLB) for

redressal, which, not to mention, consumes very much time.

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4.3 Why assets become NPAs?

A several factors are responsible forever increasing size of NPAs in PSBs. The

Indian banking industry has one of the highest percent of NPAs compared to

international levels. A few prominent reasons for assets becoming NPAs are as

under:

Poor credit appraisal system. Lack of vision/fore slightness while

sanctioning/reviewing or enhancing credit limits.

Lack of proper monitoring and follow up measures.

Reckless advances to achieve the budgetary targets.

Lack of sincere corporate culture. Inadequate legal provisions on foreclosure

and bankruptcy.

Change in economic policies/environment.

Non transparent accounting policy and poor auditing practices.

Lack of coordination between Banks/FIs.

Directed lending to certain sectors.

Failure on part of the promoters to bring in their portion of equity from their

own sources or public issue due to market turning unfavorable.

Abolition of license raj and tough competition in the liberalized Indian

economy.

4.4 NPAs and Its Effects

NPAs are drag on profitability of Banks because besides provisioning,

Banks are also required to meet the cost of funding these unproductive

assets.

NPAs reduce earning power of assets. Return on assets (ROA) also gets

affected. NPAs carry risk weights of 100% (to the extent it is uncovered).

Hence, they block capital for maintaining capital adequacy.

As NPAs do not earn any income, they adversely affect capital adequacy

ratio (CAR).

No recycling of funds.

NPAs also attract cost of capital for maintaining capital adequacy ratio.

Capital cost involves dividend for Tier I capital and Interest for Tier II

capital.

Carrying NPAs require incurring of cost of capital adequacy and cost of

funds blocked in NPAs. PSBs are incurring around as high as 11% of their

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earnings as operating cost for monitoring and recovering NPAs every

year.

NPAs demoralize the operating staff.

Regulatory and credit rating agencies abroad are also not comfortable with

the high level of NPAs of Indian Banks. New Branch license are also not given to the Banks that have high level of

NPAs.

4.5 What steps have been taken so far to solve NPAs Problems?

Banks need to have better credit appraisal systems so as to prevent new NPAs from

occurring. However, once NPAs do come into existence, the problem can be solved

only if there is enabling legal structure, since recovery of NPAs often requires

litigation and court orders to recover stuck loans. With long-winded litigation in India,

debt recovery takes very long time.

Banks are now working on utilizing the services of Debt Recovery Tribunals to solve

this problem. The government has also mooted the suggestion of an Asset

Reconstruction Company, which will be specialized agency set up for rehabilitating

revivable NPAs (say, salvaging projects which are inherently sound) and recovering

funds out of unrevivable NPAs.

Other Strategies

Fixing up of budgets for profits and recovery rather than for advances.

Budget oriented approach, at times leads to release of credit facilities without

ensuring compliance of covenants of sanction. A suitable mechanism could

be drawn at each Bank level to provide monetary benefits/recognition to the

operating staff particularly for recovery in NPAs/write off cases.

Project with old technology should not be considered for finance.

Large exposure on big corporate/single project should avoid.

There is a need to shift in PSBs approach from collateral security to viability

of the project and intrinsic strength of promoters.

Up gradation of credit skills of the operating staff working in advances

department.

Timely sanction/release to avoid time and cost overruns.

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4.6 TOOLS FOR MANAGING NPAs

1) HEALTH CODE SYSTEM

The RBI introduced HCS in banks in 1985-86, this system provide the following

information:-

Regarding the Health of individual advances.

The quality of credit portfolio and

The extent of doubtful or bad advances in relation to total advances.

The RBI, since 1985, requires all commercial banks in India to provide information

indicator the quality of individual advances in the following eight categories:

1) Satisfactory: Conduct is satisfactory the account of the borrowing firm is in

order in all respect and its safety is not in doubt.

2)Irregular: Occasional irregularity is observed but the safety of the loan is not in

question.

3) Sick Viable: Loan to sick units that are under nursing through the revival

programmed. The units, though currently sick, are viable.

4) Sick Non Viable: The irregularities continue to persist and there are no

immediate chances of accounts becoming regular.

5)Advances Recalled: Such loan accounts where repayment is highly doubtful and

nursing is not considered worthwhile, in case of such advances decision is taken to

recall them.

6) Suit Filed account: Loan account where the recovery proceedings have been

initiated.

7) Decreed Debts: Loan accounts where the recovery proceeding have been

completed.

8) Bad and Doubtful: Loan accounts where the recovery of dues debts has become

doubtful on accounts of shortfall in value of security.

The RBI has classified problem loans with the banks in three categories.

(i) Advances classified as Bad and Doubtful by the bank [ Health Code No. 8]

(ii) Advances where suits were filed/ decrees obtained. [HC No.6 & 7].

(iii) Those advances with Major undesirable features [HC No.4 &

5].

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EVALUATION OF HCS

Though the HCS provide for classification of assets it does not provide what action

to take regarding the improvement of quality of such assets.

(a) Diversion of funds [as in 1 above] is the single most prominent reason. Moreover,

reversionary trends developing during expansion/diversification phase and failure to

raise capital/debt from public issue is also an important factor.

(b) Internals factors [No.4 above] of business failure, inefficient management etc., are

next important in the creation of NPA.

(c) External factors [No.3 above] are the next in importance,(d) Time/cost overrun during the project implementation stage leading to liquidity

strain.

(e) Other factors in their order of prominence are government policy changes, wilful

default, fraud etc. and lastly deficiencies on the part of banks in the form of delay in

release of limits etc.

2) SETTLEMENT ADVISORY COMMITTEES:

To tackle chronic NPAs in priority sector RBI had come out with a onetime

measure constitution of Settlement Advisory Committees (SACs) by banks. Thiswas to promote compromise settlement in small sector viz., SSI small business

including trades, agricultural and personal segments, Bankers need to appreciate the

fact that compromise settlement is an effective and accepted non legal remedy for

recovery in chronic NPA. According the scheme, applicable to NPA accounts

which are at least 3 years old at 31-03-1999 was effective up to 30 sept. 2000.

There is a case for extending the deadline and matching these guidelines applicable

for compromise settlement in medium and large sectors.

EVALUATION

ADVANTAGES TO BORROWER

1) Settling for a lower payout than the contracted one, scaling down of dues.

2) Releasing assets charged to the bank

3) Saving time, energy and expense on defending the inevitable legal case.

4) Keeping avenues of bank finance open for further development needs.

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5) Restoring status/position in the market/society, avoiding stigma of being branded

as a borrower who is litigant type.

ADVANTAGES TO THE BANK

1) Concept of time value of money i.e. a bird in hand is worth two in bush. The

money realized early could be invested to earn.

2) Realization of securities is difficult stocks, machinery have high incidence of

depreciation and obsolescence on taking possession, storage, safety thereof poses a

problem and also involves cost for a longer period. Even in cases where court

receiver/commissioner is appointed, assets do not realized fast value of mortgaged

agricultural land properties located in rural, semi-urban areas is difficult to realize

and no bidder comes forward when the property is put to auction. This is precisely

the reason why many decrees obtained by the banks have merely remained on paper

for want of effective execution thereof.

3) To maintain the image of development banker, compromises, which involve

sacrifices, can be pursued only if both the parties to the settlement perceive latent

gain in the process of bargain.

3) CORPORATE DEBT RESTRUCTURING (CDR):

A need was felt to create a special agency to facilitate debt restructuring becausethere has been some hesitancy on the part of banks and financial institutions to

implement RBI guidelines on debt restructuring. Recently a three-tier body, viz.,

CDR has been set up to coordinate corporate debt restructuring programme. It is yet

to be operationalised CDR consists of Forum, group and Cell. While the forum

evolves broad policy-guidelines the group takes decisions on the proposals

recommended by the Cell. Initially the borrower approaches his Lead Bank/ FI with

a request to restructure debt, which in then puts up the proposal to the cell. The

CDR covers only multiple banking accounts enjoying credit facilities exceeding Rs.

20 crore. Cases of DRT BIFR and wilful defaults, doubtful and loss accounts and

suit filed cases are outside the purview of the CDR. Thus, standard and Sub-standard accounts are only eligible to seek CDR Shelter. If 75% of the secured

creditors agree to the rehabitation plan, it is lending on the other banks/FIs.

The CDR is a voluntary system on debtor creditor agreement and inter-creditors

agreement. No banker/ borrower can take recourse to any legal action during the

stand-still period of 90-180 days. Lastly CDR will observe the RBI Guidelines on

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Debt Restructuring issued in March 2001. While the arrangements under CDR seem

to be feasible from the debt restructuring perspective, its success depends upon the

cooperation extended by borrowers and bankers, on one hand, and understanding

among banks and FIs on the other. Doubts are raised about the implementation of

these agreements taking into the present working of the loan consortium

arrangement.

CDR though is not directly linked with NPA recovery, is aiming at preserving

viable corporate affected by certain internal and external factors and minimizing the

losses to the creditors and other stakeholders through a restructuring programme.

Even though the CDR system will be applicable only to standard and sub-standard

accounts potentially viable cases of NPA, are also to get priority.

EVALUATION:

The mechanism will be more effective if accepted by 75 % of term lending

institution and 75 % of bank, which provide working capital instead of 75 % of total

lenders.

(4) LOKADALATS

These are voluntary agencies created by the state government to assist in matter of

loan compromise cases involving an amount up to Rs. 5 lakhs may be referred Lok

Adalat. The scheme includes all NPA a/cs. Both suit filed and mensuit filled MCS

Lokadalats meet at different places for the convenience if banks and borrowers onthe given date of the lokadalats meeting, both the banker and borrower should be

present. After looking into the evidence and listening to both parties, the lokadalats

works out an acceptable compromise. Thereafter, lokadalat issues a recover

certificate, which will enable the bank in obtaining decree from the concerned

court. This arrangement shortens the period in obtaining a court decree, which is

normally awarded after taking a much longer period. Along with this, efforts should

be made to give wide publicity to the scheme, besides educating both banks and

borrowers about Lokadalats.

EVALUATION

Merits-

There is no court fees involved when fresh disputes are referred to it.

It can take cognizance of any existing suit in the court as well as look into and

adjudicate upon fresh dispute

If no settlement is arrived at the parties can continue with the court proceedings

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Its decree has legal status and is binding.

In view of this unique advantage the government is thinking of strengthening

them and raising the monetary limit set for referred cases

Demerits- It is observed that banks have not taken adequate advantage of Lokadalats for

compromise settlement of their NPAs

No cutoff date is suggested since Lokadalat is an ongoing process. But this may

contribute to increasing delays in settlement of cases.

Most Lokadalats should be set up in different parts of country to set up the

recovery procedures.

(5) DEBT RECOVERY TRIBUNALS

The MOF has taken a number of steps to strengthen the DRTs. Banks and FIs now

can nominate one nodal officer for each DRP. There is a suggestion for setting up

co-ordination committees for DRTs a Debt Recovery Appellate Tribunal with

representations from major banks and financial institutions.

In the context of recovery from NPAs, DRTs are assuming great importance since

efforts are to set up mere DRTs during this year and also to strengthen them.

Though the recovery through DRTs is at present less than two percent of the claim

amount, banks FIs have to depend heavily on them, efforts are as to amend the

recovery Act to assign more power to DRT. More importantly, the borrowerstendency to challenge the verdict of the Appellate tribunal in the High court to seek

natural justice needs to be checked. Otherwise, early recovery efforts through DRTs

would be futile. Secondly, training of residing officers of Tribunals about the

intricacies of banking practices is very essential. Further, the number of Recovery

officer has to be enhanced in every DRT for effective recovery. Finally, banker and

FIs have to come forward to provide liberal help to DRTs to equip them in terms of

infrastructure, manpower, etc.

It has been announced in the Union Budget for 2001-02 that the Govt. has decided

to set up 7 more DRTs during 2001-02 in addition to the existing 22 DRTs, 5

Appellate Tribunals to facilitate bank to quickly recover their dues from borrowers.

Besides, the Govt. has proposed to bring in legislation for facilitating foreclosure

and enforcement of securities in case o default so as to enable banks and financial

institutions to realize their dues.

EVALUATION

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11 new DRTs are being opened over the last 2 years

7 more DRTs are in pipeline

DRTs are facing an uphill task with the number of cases

The amount involved is increasing at alarming rate in the value of burgeoningNPA. The cases involving Rs. 7705.32 crore are still pending. In Mumbai DRTs

out of the total amount of Rs. 1677.60 crore involved only Rs. 397.43 crore was

recovered.

There is a huge demand supply mismatch among the DRTs. The requirement is

far higher than the number of DRTs available. The number of settlement cases

is high in Mumbai and there is shortage of man power in Mumbai DRTs.

The RBI guidelines, which stipulates that a presiding officer in a DRT cannot

settle more than 800 cases in a year, constraints the operations of DRTs.

There is inadequacy of trained staff and their lack of exposure to the judicial

system acts as a hindrance.

Their needs speeding up of recovery procedures.

6) CIRCULATION OF INFORMATION ON DEFAULTERS

The RBI has put in place a system for periodical circulation of details of wilful

defaults of borrowers of banks and financial institutions. This serves as a caution

list while considering requests for new or additional credit limits from defaulting

borrowing units and also from the directors /proprietors / partners of these entities.

RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and

above) against whom suits have been filed by banks and FIs for recovery of their

funds, as on 31st March every year. It is our experience that these measures had not

contributed to any perceptible recoveries from the defaulting entities. However,

they serve as negative basket of steps shutting off fresh loans to these defaulters. I

strongly believe that a real breakthrough can come only if there is a change in the

repayment psyche of the Indian borrowers.

7) RECOVERY ACTION AGAINST LARGE NPAS

After a review of pendency in regard to NPAs by the Humble Finance Minister,RBI had advised the public sector banks to examine all cases of wilful default of Rs

1 crore and above and file suits in such cases, and file criminal cases in regard to

wilful defaults. Board of Directors are required to review NPA accounts of Rs.1

crore and above with special reference to fixing of staff accountability.

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On their part RBI and the Government are contemplating several supporting

measures including legal reforms, some of them I would like to highlight.

8) ASSET RECONSTRUCTION COMPANY:

An Asset Reconstruction Company with an authorized capital of Rs.2000 crore andinitial paid up capital Rs.1400 crore is to be set up as a trust for undertaking

activities relating to asset reconstruction. It would negotiate with banks and

financial institutions for acquiring distressed assets and develop markets for such

assets.. Government of India proposes to go in for legal reforms to facilitate the

functioning of ARC mechanism.

EVALUATION

The ARCs will assist in cleansing the Balance Sheet of the weaker as well as

potential weak banks.

It will also try to identify possible conceptual glitches and legal infirmities in

the arrangement.

It is to be noted that given the inadequacies of SICA, BIFR, DRTs foreclosures

and other recovery processes, an ARC may find it difficult to lead a viable

existence. Therefore, simultaneously it is required to make radical changes in

bankruptcy and recovery laws and procedures.

Under this scheme the banks liabilities will get transferred from one bank to

another. The total liability to the banking system would remain unchanged.

9) CREDIT INFORMATION BUREAU

Institutionalization of information sharing arrangements through the newly formed

Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering

the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise

the scheme of information dissemination on defaults to the financial system. The

main recommendations of the Group include dissemination of information relating

to suit-filed accounts regardless of the amount claimed in the suit or amount of

credit granted by a credit institution as also such irregular accounts where the

borrower has given consent for disclosure. This, I hope, would prevent those whotake advantage of lack of system of information sharing amongst lending

institutions to borrow large amounts against same assets and property, which had in

no small measure contributed to the incremental NPAs of banks.

10) PROPOSED GUIDELINES ON WILFUL DEFAULTS/DIVERSION OF

FUNDS

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RBI is examining the recommendation of Kohli Group on wilful defaulters. It is

working out a proper definition covering such classes of defaulters so that credit

denials to this group of borrowers can be made effective and criminal prosecution

can be made demonstrative against wilful defaulters.

11) CORPORATE GOVERNANCE

A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set up by

the Reserve Bank to review the supervisory role of Boards of banks and financial

institutions and to obtain feedback on the functioning of the Boards vis--vis

compliance, transparency, disclosures, audit committees etc. and make

recommendations for making the role of Board of Directors more effective with a

view to minimizing risks and over-exposure. The Group is finalizing its

recommendations shortly and

Documents

GP - NPA in Various Banks123