CHAPTER :1

EXECUTIVE SUMMARY

1

EXECUTIVE SUMMARY

With the growing competition in the market and globalization coming into role it has become

essential for any Bank/organization to keep in touch with the recent technology. My subject

of project mainly targets the NPAs in bank and the recovery process thus adopted. Thus, for a

bank to survive in a market it is very essential to stick to rules and a regulation of RBI, as it is

the governing body of every nationalized bank.

In present economic scenario, we here many things of banks getting close due to high

percentage of NPA. So the question comes in mind, that, what is NPA? NPA is an asset,

which ceases to generate income to the bank. It is basically a loan for which the interest or

installment or both remains unpaid for the period of 90 days. Thus to keep track of increasing

amount of NPAs, banks have set up recovery Departments. State Bank of India, where I

completed my project is also one of them. Recovery is most important department of Banks.

The causes of NPAs are varied. The factors responsible for formation of NPAs could be internal

or external. Internal factors could be due to fault of the bank or the borrower. NPA due to fault of

the bank occurs due to the following reasons: Poor credit appraisal, Poor Credit Monitoring, Lack

of organizational learning in the bank, Improper repayment schedule, Timing of loan, Inadequacy

of trained and knowledgeable staff, Adverse selection of borrowers, Targeted lending,

Contagious default etc. NPA due to fault of the borrower could be because of willful default,

Diversion of funds, Incorrect financial information and Inefficient management. The external

factors include Natural calamities, Change in government policies, change in technology,

Liberalization, Loan waiver schemes of the government and Defaulter friendly legal system.

In many financial services, recovery forms the heart of its operation without which the

organization can’t survive. If there is no satisfactory recovery the organization will become

sick. State Bank of India Branch Mehkar has a very effective recovery process. there is no

2

separate department in this SBI to control over the NPA .Whole the staff of this branch

working with newly appointed Field Officer Mr. Jakkal for NPA. This helps in one side the

normal recovery and on the other side also in timely identification of default cases. The

branch acts in more proactive manner than reactive.

With today’s world getting close and considering a world a global village, State Bank of

India has been successful in expanding its wings by opening new branches and updating

themselves with the latest technologies.

3

CHAPTER:2

COMPANY PROFILE

4

COMPANY PROFILE – STATE BANK OF INDIA

HISTORY-

The roots of the State Bank of India rest in the first decade of 19th century, when the Bank of

Calcutta, later renamed the Bank of Bengal, was established on 2nd June1806. The Bank of

Bengal and two other Presidency banks, namely, the Bank of Bombay (incorporated on 15

April 1840) and the Bank of Madras (incorporated on 1st July 1843). All three Presidency

banks were incorporated as joint stock companies, and were the result of the royal charters.

These three banks received the exclusive right to issue paper currency in 1861 with the Paper

Currency Act, a right they retained until the formation of the Reserve Bank of India. The

Presidency banks amalgamated on 27th January 1921, and the reorganized banking entity

took as its name Imperial Bank of India. The Imperial Bank of India continued to remain a

joint stock company.

Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India,

which is India's central bank, acquired a controlling interest in the Imperial Bank of India. On

30th April 1955 the Imperial Bank of India became the State Bank of India.

In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the

State Bank of India to take over eight former State-associated banks as its subsidiaries. On

Sept 13, 2008, State Bank of Saurashtra, one of its Associate Banks, merged with State Bank

of India.

The unique feature of the result is that during the fiscal year 2007-08, the bank registered a

growth of 23.4 per cent in both, deposits as well as advances. The deposit base has grown to

Rs 537406 crore and advance base to Rs 422181 crore. An impressive and probably the

5

highest growth in the industry has been observed by the bank in housing loan (20 percent),

small and medium enterprises (25 per cent), auto loans (30percent) and mid corporate (24 per

cent).

AIM-

To help to RBI to achieve its goal.

To fulfill needs of common people .

SOCIAL ASPECT-

The Bank excels in social Banking, overlooking the profit aspect; it has a good share of

priority sector lending having 62% of its branches in rural areas. The social aspect covers,

priority sectors, Agriculture, Small Scale Industries, other priority sectors, Swarna Jayanti

Shehar rozgar Yojana (SJSRY), Prime Minister Rozgar Yojana (PMRY). Assistance to

SC/ST Category Advances to Minority Communities, Lead Bank Scheme and state level

bankers committee.

IMPORTANT SCHEMES /PROJECT OF THE BANK-

New Schemes

The Bank introduced new innovative schemes for extending better services to the Customers.

Schemes like Yuva Yojana & Bachat Gat Yojana were introduced under savings bank

accounts to inculcate savings habits amongst youngsters and general public.

6

Aadhar Scheme for Pensioners

The bank has a special scheme called Aadhar for catering to personal credit needs of the

pensioners. This Scheme has evoked an encouraging response from the pensioners as it has

enabled them to meet their financial needs for medical expenses, travel plans etc. The Bank’s

finance under the scheme increased 23,107 to 32,145.

Other Schemes introduced by the bank includes, Mahabank Salary Gain Scheme, Mahabank

Kisan Credit Card, Finance to Non -conventional sources of Energy, gold loan, Laghu

udhyami credit card scheme, Maha-Enterpreneur, Women Empowerment, Micro Finance etc

the list goes long.

FUTURE PLANS- VISION 2008 –

Systematic approach for reducing NPAs.

Extensive use of Wide Area Network-MAHANET interconnectivity of branches by

providing more customer centric branches like Any Branch Banking Services, Demat

etc.

Extending RTGS facility to almost all branches – RTGS is a software package, which

provides online settlement of payments between financial institutions.

7

SALIENT FEATURES OF BANKS PERFORMANCE DURING THE YEAR ENDED

31/03/2008 –

1. More than 14500 branches and a further 6500+ associate bank branches, the SBI

has extensive coverage.

2. The bank has one of the largest ATM networks in the region. More than 5500

ATMs across India

3. Low cost deposit, percentage is down from 44 per cent to 43 per cent and hence

the cost of deposits has increased to 5.59 per cent from 79per cent. SBI has a

unique feature of equal distribution of business, in all areas viz metro, urban, semi

urban and rural areas.

4. On the income side the bank has registered a robust 29 per cent increase in

income from other heads. Income from mutual funds and insurance has seen an

impressive 79 per cent increase. The bank’s cost to income ratio has declined by

520 basis points from 54.20 per cent to 49 per cent, which leads to an impressive

growth of operating profit by 31 per cent to Rs 13107 crore.

5. It is only on the Non Performing Assets (NPA) side that SBI has not shown

impressive performance. The gross NPA of the bank has Increased marginally to

3.04 per cent (Rs 12837 crore) from 2.92 per Cent (Rs 9998 crore).

8

Structure of State Bank of India Mehkar

Assistant general manager – it is the higher most authority of the bank. Branch manager

use to work under AGM. This authority controls all branch managers under his area.

Branch manager- BM use to control and regulate the branch. He is having authority to

interfere in the work of any staff member.

Accountant- in absence of BM accountant should lead the branch. Normally he used to

check all entries of transaction. Clerk must ask for his permition to do the transaction over

certain amount.

Field officer – this is third one higher authority of the branch. He used to take decision about

loan proposals.

Cash officer- he uses to handle cash directly. In the absence of all above mention higher

authority he uses to command over branch.

9

Assistant General Manager

Branch Manager

Field Officer Accountant Cash Officer

Clerk Clerk Clerk Clerk

Clerk- all these people use to handle the customer directly. They use to do receipt and

payment and all these things directly.

CHAPTER :3

OBJECTIVES OF THE STUDY

10

OBJECTIVES OF THE STUDY

1. To study Non Performing Assets of State Bank of India.

2. To study ratio analysis of SSI to make appraisal.

3. To make right appraisal of customer for giving loan.

4. To recognize the income, assets classification and the provisioning norms related to

NPAs.

5. To study the recovery process of bank.

11

CHAPTER:4

RESEARCH METHODOLOGY

12

METHODOLOGY

Research Methodology is a way to systematically solve the problems. It may be understood

to study how research is done scientifically. In this, we study various steps that are generally

adopted by the researcher in studying research problems along with the logic behind them, to

understand why we are using particular method of technique so that the research results are

capable of being evaluated.

During my project work, I have used primary and secondary data to understand the concept

of NPA and to study the Recovery process. The data collected was interpreted and then used

as information in project.

Data collection –

To collect journals and magazines form the library of the bank.

To collect annual report of bank.

Library Data –

I am thankful to library department of the college for extending their support in order to

collect references from various books. The details of books referred from library are

mentioned in later part of the project, in Bibliography.

13

Use of manual –

As to keep updated from latest norms of RBI for NPA, I have also referred to the latest RBI

manual having guidelines for calculation of NPA.

Internet sites –

Primary Data:

Primary data refers to first hand data collected at its origin. The project being a study on

financial analysis it was essential to have personal interaction with their staff

Data available in bank ex. All types NPA accounts.

Discussion with staff members.

Secondary data

This refers to data already existing or published in order to carry out the study data has been

collected from various source like:

Norms and condition of NPA defined by RBI.

Magazines and journals.

SBI’s own seights.

The sites thus referred by me for the project were mainly of RBI & banks own site. The

details of which are mentioned in Bibliography.

14

CHAPTER :5

PROJECT WORK UNDERTAKEN

15

SMALL SCALE INDUSTRIES

Evolution –

A working definition of small scale unit was first evolved in the year 1955 when the Govt

had initiated a programme of promotional assistance to Small Enterprises. At that time, the

Small Scale units were which were employing less than 50 workers if using power and less

than 100 workers without use of power and with capital asset not exceeding Rs. 5 lacs. A

review of definition was taken during 1959 since it was not serving the purpose, of

maximization of utilization of equipment and capital outlay. According, the ceiling on

employment was made applicable to each shift separately to encourage multiple shift

working. However, in the year 1960, the employment limit was deleted and the investment

limit was raised for an ancillary unit to Rs 10 lacs. With a gradual picking up of economic

and industrial activity after implementation of various five year plans, need was left to

enhance the investment ceiling and accordingly in the year 1966, it was enhanced to Rs 7.5

lacs (whereby the investment in plant and machinery only ). In the year 1975 the ceiling was

further enhanced to Rs 10 lacs for SSI and Rs 15 lacs for SSI ancillary. Another revision took

place in 1980 when the ceiling was raised to Rs 20 lacs and Rs 25 lacs respectively and then

w.e.f.18.3.85 to Rs 35 lacs and Rs 45 lacs respectively.

However with effect from 21.12.1999 the following requirements are to be complied with by

an industrial undertaking to be graded as Small Scale Industry:-

16

An industrial undertaking in which the investment in fixed assets in plant and machinery

weather held on ownership terms on lease or on hire purchase does not exceed Rs 10 million.

( Subject to the condition that the unit is not owned, controlled or subsidiary of any other

industrial undertaking)

Ancillary Industrial Undertaking-

The following requirements are to be complied with by any industrial undertaking for being

regarded as ancillary industrial undertaking:-

An industrial undertaking which is engaged or is proposed to be engaged in the manufacture

or production of parts, components, subassemblies, tooling or intermediaries, or the

rendering of services and undertaking supplies or renders or proposed to supply or render not

less than 50 percent of its production or services, as the case may be, to one or more other

industrial undertakings and whose investment in fixed asset in plant and machinery whether

held on ownership terms or on lease or on hire purchase.

Tiny Enterprises-

Investment limit in plant and machinery in respect to tiny enterprises is Rs 2.5 million

irrespective of location of unit.

Women Entrepreneurs-

A Small Scale Industrial unit/ Industry related service or business enterprise, managed by one

or more women entrepreneurs in proprietary concerns, or in which she/ they individually or

jointly have a share capital of not less than 51 % as partners/ shareholders/ directors of

private limited company/ members of co operative society.

17

Small Scale Service and Business (Industry Related) Enterprises

(SSSBEs) :-

SSSBEs industry related service/ business enterprises with investment upto Rs 5,00,000 in

fixed assets, excluding land and building, are called Small Scale Service Business Enterprises

(SSSBEs). This limit has been raised to Rs 1 million w.e.f. September 2000.

SSI Registration-

Small Scale and Ancillary units (i.e. undertaking with investment in plant and machinery of

less than Rs 10 million) should seek registration with Director of Industries of concerned

state Govt.

The main purpose of registration is to maintain statistics and to maintain a role of such units

for the purposes of providing incentives and support services.

States have generally adopted the uniform registration procedures as per the guidelines.

However, there may be some modifications done by states. It must be noted that small

industries is basically a state subject. States use the same registration scheme for

implementing their own policies. It is possible that some states may have a ‘SIDO

registration scheme’ and a ‘state registration scheme’.

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Arranging Finance-

No SSI unit can take off without monetary support. This need for finance can be classified

into following types:-

Long and medium term loans.

Short term or working capital requirements.

Risk capital.

Seed capital/ marginal money.

Bridge loans.

Financial assistance in India for SSI unit is available from a variety of institutions.

Usage of financial statements in assessing the risk of default for lenders:

For banks and financial institutions, both the balance sheet and income statement have a key

role to play by providing valuable information on a borrower’s viability.

The key accounting ratios generally used for the purpose of ascertaining the creditworthiness

of a business entity are:

Debt-equity ratio - Highly rated companies generally have low leverage. This is because

high leverage is followed by high fixed interest charges, non-payment of which results into a

default.

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Interest coverage ratio – This ratio must in no case be less than 1; otherwise the company

will have problems in making the interest payments.

Debt coverage ratio - This indicates how well your cash flow covers debt and the capacity

of the business to take on additional debt.

Fund Flow statement is also useful for the bank as it gives a list of the sources and uses of

funds. Analyzing this statement gives a complete idea to the bank of whether the borrower

has funded his fixed assets from short-term liabilities or any other source.

Ratio and fund flow analysis must be complementary so that the bank can get a complete

picture.

6. Multi-Discriminate Analysis (MDA)

Combinations of ratios are analyzed together rather than one single ratio.

MDA model is based on Altman Z score model.

Altman Z score model:

The model uses 5 different ratios and assigns weights to them. The products are then added

and a score is arrived at called the Z score.

Z = 1.2X.sub.1 + 1.4X.sub.2 + 3.3X.sub.3 + 0.6X.sub.4 + 1.0X.sub.5

Where

X.sub.1 = Working Capital/Total Assets.

This measures liquid assets in relation to the firm's size.

X.sub.2 = Retained Earnings/Total Assets.

This is a measure of cumulative profitability that reflects the firm's earning power.

X.sub.3 = Earnings Before Income Taxes/Total Assets.

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This is a measure of operating efficiency separated from any leverage effects. It recognizes

operating earnings as a key to long-run viability.

X.sub.4 = Market Value of Equity/Book Value of Debt.

This ratio adds a market dimension.

X.sub.5 = Sales/Total Assets.

This is a standard turnover measure. Unfortunately, it varies greatly from one industry to

another.

Companies with Z scores above 3 would survive and below 1.8 would fail.

Following are some institutions:-

SIDBI: Small Industries Development Bank of India (refinance and direct lending)

SFCs: State Level Financial Corporation e.g. Delhi Financial Corporation.

NSIC: National Small Industry Corporation

Small Industry Development Corporation of various states.

Commercial/ Co-operative Banks.

DIC: District Industry centre.

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CONCEPT OF NPA

NPA means Non Performing Assets. An asset, including a leased asset, becomes non-

performing when it ceases to generate income for bank. As per RBI Guidelines a Non

Performing Asset is a loan or advance where:

1. Interest and/ or installment of principal remains overdue for a period of more than 90

days in respect of term loan.

2. The account remains ‘out of order’ in respect of an Overdraft/ Cash Credit (OD/CC).

3. The bill remains overdue for the period of more than 90 days in the case of bills

purchased and discounted.

An asset is classified as non performing asset (NPAs) if dues in form of principle and interest

are not paid by the borrower for a period of 180 days. However with effect from March 2004

as per RBI guidelines, default status would be given to a borrower if dues are not paid for 90

days. If any advance or credit facilities granted by bank to borrower becomes non

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

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

certain advances / credit facilities having performing status.

Overdue:-

22

Any amount due to bank under any credit facility is ‘overdue’ if it is not paid on the due date

fixed by bank.

Income Recognition

The policy of income recognition has to be objective and based on the record of recovery.

According to the international terms income from non performing Assets (NPA) is not

recognized on accrual basis but is booked as income only when it is actually received.

Therefore, the banks should not change and take to income account interest on any NPA.

However interest on advances against term deposits, NSCs, IVPs, KVPs, and life policies

may be taken to income account on the due date provided adequate margin is available in the

accounts.

If the Government guaranteed advances become NPA, the interest on such advances should

not be taken to income account unless the interest has been realized.

RBI guidelines on income recognition (Interest income on NPAs)

Banks recognized income including interest income on advances on accrual basis. That is

income is accounted for as and when it is earned.

The prime-facie condition for accrual of income is that it should not be unreasonable to

expect its ultimate collection. However, NPAs involves significant uncertainty with respect

to its ultimate collection.

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Considering this fact, in accordance with the guidelines for income recognition issued by the

Reserve Bank of India (RBI), banks should not recognize interest income on such NPAs until

it is actually realized.

Irregularity – wise master charts, etc. so that follow – up of supervised advances is

cost effective and efficient.

Timely receipt, proper scrutiny and interpretation of data to ascertain shortcomings in

hypothecation stock statements/ Monthly select operation Data / Quarterly

Information System Returns (as per core committee) submitted by the borrowers at

the prescribed intervals.

Constant touch with persons trading with the borrower to obtain market report in

regard to his trade dealings, solvency, etc.

Follow-up

In the case of deficiencies / irregularities observed, the borrower concerned / department

should be vigorously followed up for rectification of these irregularities.

Issue of reminders / notices for deposit installments, overdue interest, overdrawing

and for realization of overdue bills etc to the borrowers at appropriate time.

Personal contracts with the borrowers at periodic intervals.

24

In case of the defaulter in rural areas, letter may be written with full particulars of the

borrower to the manager of the bank branch and secretary of primary Agriculture

Credit Society in whose service area the borrower resides or operates the activity,

with copies to:-

Controlling officer of the addressee bank/ society

Lead Bank officer of the district

Bank’s own district coordinator

Assistant general manager

Recovery from NPAs: A few Concerns

Whether banks go in for setting up of recovery branches or not, what is more

important is to strengthen the recovery machinery. In this regard, few aspects of the

problem need to be worked & should be considered on priority basis. Finally,

branches, which require close monitoring, also need to be prioritized.

Diagnostic study has to be considered by each bank in respect of cases lost in the

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

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

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

25

Involvement of the lawyers in suit filed cases should be given utmost importance.

Unfortunately, they seem to be too busy and, therefore bank cases are not monitored

in time. In this regard, the present system of empanelment of lawyers needs fresh

look. Similarly, some incentive schemes should be worked our so that the efficient

lawyers are rewarded adequately.

Enforcement of securities has been one of the problem areas. This requires certain

expertise and contacts with the local people, police department etc. to supplement

banker’s efforts, services of outside professionals may be employed. But it should be

ensured that such professionals do not take unlawful measures in taking possession of

securities. In view of rising number of decreed cases, certain schemes have to be

worked out to involve professionals in the enforcement of securities.

It is suggested that banks may jointly promote a subsidiary to act an asset recovery

agency. It can purchase decreed debts at certain discount. Thereafter, it should be able

to recover the dues fully from borrowers by creating professional expertise, and

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

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

Fund.

The list of innovative schemes could be long. If these are implemented, reduction in

NPAs may take place. But it should be ensured that there would be no more addition

to the list of NPAs in the future.

26

The present system of interviewing a borrower, at the time of credit sanction should

be made more meaningful. It can be ensured to elicit the necessary information about

the managerial competence, professional background of an entrepreneur, planning

budgeting and control system, decision- making system, development of staff etc.

With the growing complexities of business and different risks associated with back lending, it

has become essential to upgrade the quality of appraisal for which extensive use of

computers in lending area on one hand and creation of specialized credit appraisal cadre for

different industries on the other, are called for. Finally the concept of accountability has to be

introduced in management of lending. In this regard, the corporate office has to work out

certain arrangements whereby delegation of authority and accountability go hand in hand.

Need for Recovery:

In the wake of financial sector reforms, generation of profit is the main concern of banks. In

this respect, the Narsimha committee is of the opinion that the viability of banks should be

the sole criterion for survival and growth in the competitive environment. For this purpose

each bank has to maintain low risk bearing advances. Hence, a paramount task before banks

is to bring down Non Performing Advances. This can as well be done by writing off NPAs,

which is not feasible due to low profitability of banks. So, they have to concentrate basically

on recovery. In the last year, significant changes have taken place in system and

arrangements relating to recovery of NPAs. Further, analysis of achievements of the target

set under Mouse shows that there are four areas in which banks made considerable progress,

and reduction in NPAs in one of them. But the banks have yet to go a long way to go to

27

make full recovery from NPAs. Every bank has its own policy for recovery. Accordingly,

State Bank of India also has its own policy for Recovery. Thus to keep control on the

percentage of NPAs Bank has framed the recovery policy, which includes the

following:-

Debt Recovery Tribunal-

Although the data relating to age of NPAs are not available at macro level, banking circles

point out that by and large, avenues for recoveries have now been exhausted and they are

left with mostly hand core NPAs or dead assets. They are mostly age old suit filed cases

and, therefore, recovery has to be effected mostly through court settlements. But our judicial

system is inefficient in timely disposal of bank cases. In this context, the statement of

objects of objects and reasons annexed to Bill on Special Tribunal states that, as of

September 1990, more than 15 lakh cases of the public sector banks were pending in various

courts. On an average, it takes more than 10 years to get a court verdict. So, to overcome the

problem of expeditious court remedies, the government has set up Special Tribunals in

Jaipur and Calcutta under the Recovery of Debts Due to Banks & Financial Institutions Act,

1993.

Recent changes in the Act:

The recent Supreme Court ruling has exempted a borrower from

depositing a maximum of 75% of the outstanding dues with any

court before making an appeal. It has also given Debt Recovery Tribunals

powers to stall banks from selling assets and give interim relief to the

borrower. These are some of the new clauses that have been introduced.

28

court ruled that the requirement to deposit 75% of dues was

unreasonable, more so since the assets were already in the possession of

the lender.

Earlier, banks had to move the court even to take possession of assets

pledged with them against a loan. Now a borrower can appeal only after

the lender has taken possession of the secured assets. Borrowers would

now definitely be afraid of defaulting because they would not like to lose

possession of their assets. This itself would give bankers a better

bargaining power.

According to the Apex court ruling, even if a borrower fails to get a stay

on sale of property from DRT, he can approach appellate DRT, and having

failed there, he can even go up to the high courts. If luck does not favour

him at the high court level, he can even consider going to Supreme Court.

Thus, all the legal channels are open without depositing a penny at any of

the courts. On the other hand, a lender, having taken possession, will

have to bear the cost of maintaining the assets attached and the legal

expenses as borrowers move from one court to another. For lenders,

taking possession can be an expensive affair.

The court has now made it mandatory for the lender to reply, no matter

how briefly, to borrowers’ queries. This means that after the 60-day notice

is served by lenders to take possession, the borrower may reply either

raising some “objection or place facts for consideration of secured

29

creditor”. The court has said that the lender should duly consider the

reply given by the borrower and also respond to the same.

At present there are 29 DRTs in the country. They are functioning at

Delhi, Calcutta, Jaipur, Ahmedabad, Bangalore, Chennai, Guwahati,

Hyderabad, Jabalpur, Ernakulam, Mumbai and Patna, Chandigarh. As on

June ’03, banks had issued notices under the recovery act to 33,736

borrowers, though possession was not taken for nearly half the cases.

The government will have to consider increasing the number of DRTs so

as to expedite the cases. DRTs are criticized in respect of recovery made

considering the size of NPAs in the country. In general it is observed that

the defendants approach the High court challenging the verdict of the

Appellate Tribunal, which leads to further delays in recovery. Validity of

the act is often challenged in the court, which hinders the progress of the

DRTs. Much needs to be done for making the DRTs stronger in terms of

infrastructure.

Recovery -

Tribunals or no tribunals have to continue to deal with NPAs on war footing. In this regard,

State Bank of India is unable to do anything. Every SBI is forced to follow RBI’s rules and

regulations.RBI should control the economy of whole country and tries to breach the gap

between haves and have not. Participation of all concerned like Bank Staff, Govt Agencies,

etc. If done would be of immense help in ensuring desired result hrough their own

practices.

30

Regional Level Review Committee (RLRC)-

To monitor the Non-Performing Assets meaningfully and systematically the Bank

advised the Regional Offices to activate effectively RLRC to ensure creative dialogue on

NPA accounts every month and devising methods to bring down NPA level expeditiously.

Recovery through Private Agencies-

For improving recovery in decreed account, the bank opted for this option. For this the

Bank gives a specific percentage of commission to the advocates or agents, based on the

amount recovered.

Lok Adalats-

The settlement of NPAs pertaining to Banks through Lok Adalats is already in vogue.

However, on taking review it is observed that expected advantage of Lok Adalats has not

been derived by Banks for settlement of NPAs. Thus for increasing use of the forum of

Lok Adalats to settle banking disputes Involving smaller amounts, Reserve Bank of India

has framed certain guidelines modalities for effective implementation, which includes

cover of NPA accounts both suit filed and non suit filed classified in Doubtful and Loss

category.

31

Problem Faced in Recovery-

Whenever a bank sanctions a loan to a borrower, it applies interest at a specific

percentage on the loan amount. Thus the borrower is expected to repay the whole amount

i.e. the principal amount + interest amount to the bank. The bank takes certain securities

against the loan sanctioned to the borrower. These are in the form of fixed assets or

current assets.

The usual observation of the bank is that the fixed asset losses their value over a period of

time, and are also difficult to sell, thus they probably try for the current assets, as they are

liquid in nature and can easily fetch the bank their dues.

Above all the bank practices and above mentioned strategies to recover the dues from the

borrower. Usually for the account turning into NPA has two reasons, first is of willful

default of the borrower & second if the bank do not properly scrutinize the loan account.

In most of the cases it is borrowers fault as they are unable to repay the loans, thus to

recover dues from them the banks adopts the following policies.

Once all the efforts to recover the bank dues are exhausted, the bank is compiled to file

the suit in the court / tribunal. In fact the situation indicates the borrowers’ non

cooperation and therefore, requires vigorous follow up.

After filing the suit, constant follow up with the court or tribunal through the advocate is

done.

Thus to reduce the number of NPAs and have an efficient recovery the present system of

interviewing the borrower, at the time of credit sanction should be made more

meaningful.

32

It can be ensured to elicit the necessary information about the meaningful competence,

professional background of an entrepreneur, planning budgeting and control system,

decision making system, development staff etc.

With the growing complexities of business and different risks associated with back

lending, it has become essential to upgrade the quality of appraisal for which extensive

use of computers in lending area on one hand and creation of specialized credit appraisal

cadre for for different industries on the other, are called for. Finally the concept of

accountability has to be introduced in management of lending. In this regard, the

corporate office has to work out certain arrangements whereby delegation of authority

and accountability go hand in hand.

Despite of fact that recovery is most difficult task for every bank, Bank Of Maharashtra is

of the view that it prefers to utilize the provisions of “securitizations act” to bring its

defaulters to the negotiations table and execute compromise deals towards early recovery

of Non Performing Assets.

Compromise proposal-

A compromise proposal may be called where borrowers agrees to pay a certain amount to

the banker with some concession. A large number of compromise proposals are being

approved by banks with a view to reduce their NPAs and recycling of funds instead of

resorting to legal procedures.

It is an effective tool for speedy recovery of Banks dues in non performing assets through

settlement in which the bank agrees to receive the dues with minimum sacrifice and

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borrower agrees to pay the dues by getting certain concessions in full settlement of the

dues.

According to Banks policy, the bank studies the history of the borrower to whom it is

sanctioning the loan. According the loan amount, installment, loan period & interest is

decided. When a borrower fails to repay the full amount of the loan he approaches

towards the bank for a compromise proposal. Accordingly the bank decides as to how

much amount should be compromised. In case of the consortium account the decision

taken by the leader bank is accepted by other banks related to the borrower.

CHAPTER :6

34

ANALYSIS AND INTERPRETATION OF THE

DATA

ANALYSIS AND INTERPRETATION OF DATA

Every bank in order to recover the dues has a recovery process set for them. The usual

legal recovery process adopted by the bank in the following nature.

Legal Process of Recovery

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Non-performing Assets as a percentage of advances:

36

Notice to Guarantors

Authority Letter to lawyer

Demanding amount through notice

Personal Visit to the Borrower

Not receiving amountReceiving amount from client

File case in court

Recovery expenses Completion of verification

Stopped recovery process after receiving all payment

Debit note for expenses

Lawyers argue before issuing

Argument in court if court satisfied, issue the summons

Police station serving the summons to defaulter

Gross NPA%

Economic

year-

1999-00

2000-01

2001-02

2002-03

1999-00

2000-01

2001-02

2002-03

Public sector bank

13.98 12.37 11.09 9.36 7.42 6.74 5.82 4.54

Private sector bank

8.17 8.37 9.64 8.08 5.41 5.44 5.73 4.95

Foreign

banks

6.99 6.84 5.38 5.22 2.41 1.82 1.89 1.76

Source: journal of IBA

The gross as well as the net NPAs as a percentage of advances of the

public sector banks have gone down over the years from 1999-00 to

2002-03. Gross NPAs reduced from 13.98% to 9.36% and the Net NPAs

reduced from 7.42% to 4.54%. Though the percentage of NPAs has gone

down, the absolute amount has been increasing.

For the Private sector banks the percentage of Gross NPAs increased

marginally in 2000-01. In 2001-02 it increased by more than 1% and then

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Net NPA%

fell to 8.08% in 2002-03. However Net NPAs remained did not change

much from 1999-00 to 2001-02. In 2002-03 it fell to 4.95%.

For the foreign banks both Gross and Net NPAs have fallen from 1999-00 to 2002-03.

Nonperforming assets as a percentage of Advances –

Public Sector Banks.

Name of the Bank

1999-

2000

2000-2001

2001-2002

2002-2003

1999-2000

2000-2001

2001-2002

2002-2003

State Bank Of India

14.25

12.93

11.95

9.34 6.41 6.03 5.64 4.49

Andhra Bank

7.83

6.13 5.26 4.89 3.47 2095 2.45 1.79

Bank Of Baroda

14.73

14.11

12.39

11.02

6.95 6.77 5.68 4.81

Bank Of India

12.9

10.25

9.37 8.55 8.61 6.72 6.01 5.59

Bank Of Maharashtra

12.65

12.35

10.44

9.55 6.97 7.41 5.81 4.83

Corporation Bank

5.39

5.4 5.19 5.27 1.91 1.98 2.31 1.65

Dena Bank

18.15

25.31

24.11 17.86

13.81

18.29 16.31 11.82

Indian Bank

32.77

21.76

17.86

12.39

16.18

10.07

8.28 6.15

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Gross NPAs/ gross advances % Net NPAs/ Net advances %

Oriental Bank Of Commerce

5.54

5.21 6.57 6.94 3.61 3.59 3.21 1.44

Punjab National Bank

13.19

11.71

11.38

11.58

8.52 6.69 5.27 3.80

Oriental Bank of Commerce has declared itself as a zero NPA bank after

shifting to the 90 day norm. Bank of Baroda adopted the 90 day norm

from Dec 03. The Bank’s net NPAs on Dec 31, 2003 slipped to 3.46%

against 4.01% in the corresponding period of the last financial year.

Corporation Bank also adopted the 90 day norm in Dec 03. Its net NPA

level as on Dec 31, 2003 decreased to 1.7% from 2.4% in the

corresponding period of last financial year. SBI’s NPA level may go up

marginally from 2.11% on account of the change. Among the Public

Sector banks Dena bank and Indian bank have the highest percentage of

Gross as well as Net NPAs. Only in 1999-00 the Gross and Net NPAs of

Indian bank were more than that of Dena bank. After that Dena bank has

had the highest percentage of NPAs among the public sector banks.

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Non performing assets as a percentage of Advances –

New Private Sector Banks

Name of the Bank

1999-

2000

2000-2001

2001-2002

2002-2003

1999-2000

2000-2001

2001-2002

2002-2003

Bank of Punjab Ltd

3.44 3.88 5.49 9.23 2.32 2.31 2.93 7.17

Centurion Bank Ltd

7.28 7.34 12.66

15.88 3.87 3.52 6.09 7.92

GTB Ltd

1.52 5.70 13.52

25.84 0.87 3.75 9.23 19.77

HDFC Bank Ltd

3.32 2.81 3.18 2.22 1.10 0.45 0.50 0.37

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Gross NPAs/ Gross advances Net NPAs/ Net advances

ICICI Bank Ltd

2.54 5.42 10.23

8.72 1.53 2.19 5.48 5.21

IDBI Bank Ltd

2.26 6.84 3.89 2.62 1.96 5.24 2.21 1.20

IndusInd Bank Ltd

6.97 6.13 7.41 4.94 5.98 5.25 6.59 4.25

UTI Bank Ltd

5.47 4.64 5.18 3.16 4.71 3.76 3.46 2.26

Among the New Private sector banks, Bank of Punjab, Centurion bank and GTB bank

have shown an increasing trend in their percentage levels of Gross and Net NPAs. The

increase for GTB has been the maximum. Its Gross NPAs increased from 1.52% in 1999-

00 to 25.84% in 2002-03 and Net NPAs increased from 0.87% to 19.77%. HDFC bank

has had the lowest percentage of Gross and Net NPAs for the last two years.

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Nonperforming Assets as a percentage of Advances – Foreign Banks

Name of the Bank

1999-

2000

2000-2001

2001-2002

2002-2003

1999-2000

2000-2001

2001-2002

2002-2003

ABN- AMRO Bank

1.00 2.84 3.43 3.15 0.31 1.22 1.34 1.53

AMEX Bank Ltd

7.14 11.92

14.56

19.29

4.32 6.05 7.56 8.69

BNP Paribas

2.47 3.21 3.60 6.17 0.08 0.64 1.54 3.77

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Gross NPA advances Net NPA advances

Citibank

1.81 1.35 0.93 1.94 1.05 0.71 0.40 1.17

Deutsche Bank

12.02

6.71 3.52 2.49 5.33 1.23 0.38 0.00

HSBC Ltd

9.39 6.64 5.51 5.09 1.04 0.96 2.27 1.03

Standard Chartered

7.94 7.59 3.44 3.17 2.04 1.53 0.40 0.31

Source: RBI website

Among the foreign banks, Deutsche bank has reduced its Gross and Net

NPA percentage significantly. Its gross NPAs have fallen from 12.02% in

1999-00 to 2.49% in 2002-03 and Net NPAs have fallen from 5.33% to 0%.

It is the foreign bank with 0% Net NPAs.

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44

CHAPTER:7

FINDINGS

Findings

This type of bank use to give loans under government schemes because of this

percentage of NPA is increasing.

45

There was quite miss management in beginning stage of my working period because

field officer was new.

This branch is facing a problem of technical NPA, in which system shows false

representation of NPA it shows more NPA.

SBI follows to the RBI which is having quite loose rules.

This branch is having lack of staff due to this they are facing problems in credit

analysis, inspection and recovery.

In this bank customer is concentrating on vehicle loan.

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CHAPTER:8

SUGGESTIONS AND CONCLUSION

Suggestions

Before issue of loan bank should do proper credit analysis.

RBI should make some strict rules towards recovery.

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RBI or zonal bank should give permission to take actions for recovery process

RBI should have separate department which must be concentrate on recovery with

respect to type of loan at zonal level.

They should go for increase their staff. Every SBI is facing lack of staff.

Conclusion

There is no need of marketing to the RBI.

SBI is having large no of NPA as compare to other bank.

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CHAPTER:9

LIMITATIONS

Limitations

There is large data available which is unorganized.

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They forced to work under framework of RBI strictly.

50

CHAPTER:10

BIBLIOGRAPHY

Books:

• NPAs in Banks – Concept, Practice and Management

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By: N.S. Toor

• Law relating to Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest

By: Umarji

Magazines:

Various articles from magazines like:

IBA Bulletin

Journal of IBA

Reports and Papers:

• Report on the working group to review the functioning of Debt Recovery

Tribunals –RBI

Websites visited:

www.rbi.org.in

www.google.com

http://www.indianbanksassociation.org

www.bank.drt.com

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