Axis Bank NPA

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“Analysis of Non Performing Assets at AXIS Bank” EXECUTIVE SUMMERY The future of the Indian Banking represents a unique mixture of unlimited opportunities amidst insurmountable challenges. On the one hand we see the scenario represented by the rapid process of globalization which transcending the geographical boundaries in the sphere of trade and commerce and which also indicates the newly emerging opportunities for the Indian Banking Industry. On the other side as we all know when there are advantages their also some disadvantages like that because of neck to neck competition between nationalized and private sector banks and among the private sector banks, forcing these banks to form a very flexible bank policy regarding lending which in turn push these banks to make reckless lending to capture maximum market share and these banks are lending at the competitive rates, as a result of this banks are now facing the problem of recovery and this also created the problem of increasing rate of NPA [Non-performing assets] Private sector banks in India can solve these problems only if they assert a spirit of self initiative and self reliance through developing their in-house expertise. In AXIS bank as per my study their bank policy especially relating to term loan and working capital loans is working K L E Society’s IMSR, HUBLI-31 1

Transcript of Axis Bank NPA

Analysis of Non Performing Assets at AXIS Bank

EXECUTIVE SUMMERY

The future of the Indian Banking represents a unique mixture of unlimited opportunities amidst insurmountable challenges. On the one hand we see the scenario represented by the rapid process of globalization which transcending the geographical boundaries in the sphere of trade and commerce and which also indicates the newly emerging opportunities for the Indian Banking Industry. On the other side as we all know when there are advantages their also some disadvantages like that because of neck to neck competition between nationalized and private sector banks and among the private sector banks, forcing these banks to form a very flexible bank policy regarding lending which in turn push these banks to make reckless lending to capture maximum market share and these banks are lending at the competitive rates, as a result of this banks are now facing the problem of recovery and this also created the problem of increasing rate of NPA [Non-performing assets] Private sector banks in India can solve these problems only if they assert a spirit of self initiative and self reliance through developing their in-house expertise.In AXIS bank as per my study their bank policy especially relating to term loan and working capital loans is working very effectively which can be proved very well with its good recovery and NPA rate. NPA rate is 0.74 where as NPA of AXIS is 0.35 As AXIS is lending to only few segment as follows: Large and mid corporate.

Small and Medium scale enterprise.

Agricultural loans

In the above three segments, SME lending is one of the most risky segment. My learning in the project was the tools which can be used to mitigate this risk like Credit Risk Management.

The robust growth in the demand for housing finance in recent years has been remarkable because lower interest rates, tax incentives rates for home ownership, massive competition by providers of housing finance has helped consumers considerable. The primary market for housing finance has now matured.

For taking the advantage of this emerging trend in the Home Loan sector, this project has been undertaken in the AXIS BANK.

Home finance is the long term financial assistance specifically advanced to acquire/purchase/construct a dwelling unit against the security of first charge on the property to be founded. Apart from financial assistance home finance provides legal technical assistance to the customer in selecting a sound property.

Due to the increase in the income level of the middle class in India. There is a stiff competition among all the Banks to attract the customers & also the products have been designed in the same way.

Design of the study

Title of the ProjectAnalysis of Non Performing Assets at AXIS BankNeed For Study This study will help to know the recent norms of NPA.

This study helps to know how NPA Causing Problems to Banking Sector and what might be the solution to overcome from this problem and also its impact on Profitability of Banks.Statement of the Problem Profitability is considered as a benchmark for evaluating performance of any business enterprise including the banking industry. However, increasing Non- Performing Assets, have a direct impact on profitability of banks and financial institutions. Legally speaking banks and financial intuitions are not allowed to book income on such account and at the same times they are forced to make provision on such assets. So this project is undertaken to now impact of NPA on Profitability of New Private Sector Banks.

Objectives of Project To understand the concept of Non Performing Asset.

To study the classification of the Non Performing Assets.

Provisioning Norms.

To know the Authorities and responsibilities given for the Credit manager.

To study the RBI norms on Non Performing Assets, and the various reasons for the existence of huge level of NPA in Indian banking. To know the RBI Guidelines regarding credit rating and risk analysis and know the guidelines of CRISIL.

To gain insights into the Non Performing Asset management activities of the Bank. To recommend measures for Improving performance and reduction of Non Performing Assets.Company where the project is undertaken AXIS BANK, Address: 163/20Akalburgi plaza, Despande Nagar, HUBLI 580029

Duration of the study

The time duration for the study was from 09th February to May 25th 2009.

MethodologyData collection method: To fulfill the objectives of my study, I have taken both into considerations which is primary & secondary data. Primary data: Primary data has been collected through personal interview by direct contact method.

The method which was adopted to collect the information is Personal Interview method.

Personal interview and discussion was made with credit manager and other personnel in the organization for this purpose.

Secondary data: The data is collected from the Magazines, Annual reports, Internet. Text books

The various sources that were used for the collection of secondary data are

Various Text books were used to understand the concepts of portfolio management.

Internal files & materials

Manuals, Brochures and

Websites Various sites like www. sharekhan.com

www.indiainfoline.com

www.Axisbank.com

www.investopedia.com

www.en.wikepedia.com and other sites

FINDINGS In the current market scenario of global slow down, the banks will be tested to maintain the quality of their asset portfolio.

The banks need to be selective about taking up new proposals for green field projects and taking over of limits from other banks.

The asset quality of Indian banks has shown substantial improvement in recent years due its conservative approach towards credit decision making.

The major tool the bank has adopted towards improving its credit operations has been the introduction of Basel Norms.

Net NPA improved to 0.73 per cent for the FY 2008 as against 0.83 per cent for FY 2007. However, 2008-09 and 2009-10 has the potential to keep up this trend. As India witness slowdown in economic activity, banks will face a lower demand for loans. NPAs will also increase on account of borrowers finding it difficult to repay loans.

Rise in NPAs would mainly be attributed to export oriented small and medium enterprises(SMEs)which are hard hit due to surging costs. Banks are being watchful about taking over of assets from other Banks/FIs. The new generation banks are particular about taking over only standard assets.

Banks comply with strict provisioning norms in the current scenario.

Monitoring and follow up of accounts has been a key focus area to keep up the quality.

Most of the Banks have devised early warning system and have created a signaling for the probable NPAs.RECOMMENDATION1. Fixing up the budget 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.

2. A suitable mechanism could be drawn at each bank level to provide monetary benefits/ re-organization of the operating staff particularly for recovery in NPAs write-off cases.

3. Projects with old technology should not be considered for finance.4. Up gradation of credit skills of the operating staff working in advance to avoid over and under finance.5. Credit guarantee covers like ECGC, State/Central government guarantee to be insisted upon the customers even with a extra expense of premium.

6. Due diligence on the credit history of the customer to be conducted prior to the disbursal of limits.

7. Sufficient collateral security to be insisted to cover the risk of the bank.

8. Constant monitoring of the operations of the accounts to detect NPA in the initial period. Also have a early warning system installed in the process to detect probable NPAs at the initial period.

9. Constant follow up with accounts having irregularity in their operations.

10. Few points which needs to be looked into while preparing a proper credit appraisal which will lead to creation of standard accounts:

understanding the business model of the customer

usage of all financial ratios in the appraisal system to find out the financial strength of the organization

customer base analysis of the entity to be conducted

supplier strength to be analyzed

industry analysis to be critically undertaken

compliance with all the regulatory

stipulation of adequate terms and conditions and also financial convenient to maintain discipline in the operations of the customer SWOT Analysis to be conductedCONCLUSIONA strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Over the years, much has been talked about NPAs and the emphasis so far has been only on identification and quantification of NPAs rather than on ways to reduce and upgrade them. There is also a general perception that the prescription of 40% of net bank credit to priority sectors have led to higher NPAs, due to credit to these sectors becoming sticky. Hence, selection of right borrowers, viable economic activity, adequate finance and timely disbursement, correct end use of funds and timely recovery of loans is absolutely necessary pre conditions for preventing or minimizing the incidence of new NPAs.

However, banks are yet another sector where the rot has already set inIt is high time to take stringent measures to curb NPAs and see to it that the Non-Performing Assets may not turn banks into Non-Performing Banks; instead steps should be taken to covert Non-Performing Assets into Now-Performing Assets.Axis bank has been very professional in their approach and has been performing well by posting healthy top line and bottom line for the past few years. The NPA levels have been lower as compared to the industry and even in case of NPA the recovery rate has been good. The credit appraisal system of the bank is above the bench mark level of the industry. It will be worth mentioning that Axis Bank Hubli have a zero percentage of NPA. They have not got a single NPA so far and all the credit has to go to the concerned effort put in by the management and the staff of the Axis Bank, which helped them in achieving the remarkable progress.

Keeping up the same trend and maintaining the present quality of the assets Axis Bank is expected to reach the top position in Banking and Finance industry.

Introduction

Banking IndustriesIn modern economy, banking plays an inseparable role. Banking has changed dramatically over the past few years. Banks today they offer a wider range of products and services than ever before, and deliver them faster and more efficiently. But the central function of banking remains the same- mobilizing the savings of the economy towards investment.

But during the last decade, five powerful forces have created the foundation for a dynamic new environment for banks. They are as follows.

Deregulation: The removal of government controls from an industry or sector, to allow for a free and efficient marketplace.

Financial innovation: Financial innovation is the systematic process of change in instruments, institutions. And operating policies that determine the structure of the financial system

Securitization: Securitization is the process of converting financial assets into marketable securities.

Globalization: Globalization is the gradual evolution of markets and institutions such that geographical boundaries do not restrict financial transactions.

Advances in technology: Deregulation increased competition for financial institutions and the increased competition caused banks to assume more portfolio risks to earn acceptable returns.

Now more than 50% is contributed by service sector in such competitive world banking sector is one of the fastest growing service sector. Though banking sector is contributing more to GDP of country but it facing cut-throat competition. In such a rapid growing competition, AXIS bank is one of the fastest growing private sector banks and it is growing at a rate of 53% every year.With computerization , and by using more and more advanced softwares as well as by employing quality employees AXIS is doing well in all its areas and trying to the maximum extent to satisfy every class of customers by designing specialized services for each kind of customers.

Origin of Banking in India A money economy existed in India since the days of Buddha, but banking in India flourished in the ancient vedic times. Even in the Rig vedha there was mention about indebtedness and earliest dharma shastras lay down rates of interest and regulations governing debts and mortgages.

The Indian banking system can be traced to the olden days where it was in the form of money lenders. This concept slowly changed into indigenous banking, where it was doing additional job of accepting deposits.

The banking industry has been in existence for centuries tracing their presence to the times of Vedic period. The fast growth of modern commercial banks and the indigenous banks continue to hold on even in present times. Indigenous banks despite facing many shortcomings, like attempts of regulating them and competition from modern banks, have survived with old practices, which no longer fit in the emerging new requirements of economic life.

In the present life indigenous banks continue their services in the areas where modern banking has so far been inadequate. The operation of these banks is simple and

Flexible. By virtue of modernization, in respect of organization and functioning, as also the massive funds at their disposal, commercial banks are crucial in promoting the growth

of Indian economy. The banking system, along with entrepreneurship is regarded as the key agent in the process of development.

Structure of Indian Banking.

The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are again split interest old banks and new banks.

Chart Showing Three Different Sectors of Banks

i) Public Sector Banks

ii) Private Sector Banks

Public Sector Banks

SBI and Nationalized Regional Rural

subsidiaries

Banks Banks

SBI and subsidiaries

This group comprises of the State Bank of India and its seven subsidiaries viz., State Bank of Patiala, State Bank of Hyderabad, State Bank of Travancore, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Saurashtra, State Bank of IndiaState Bank of India (SBI) is the largest bank in India. If one measures by the number of branch offices and employees, SBI is the largest bank in the world. Established in 1806as Bank of Bengal it is the oldest commercial bank in the Indian subcontinent. SBI provides various domestic, international and NRI products and services, through its vast network in India and overseas. With an asset base of $126 billion and its reach, it is a regional banking behemoth. The government nationalized the bank in1955, with the Reserve bank of India taking a 60% ownership stake. In recent years the bank has focused on two priorities, 1), reducing its huge staff through Golden hand shake schemes known as the Voluntary Retirement Scheme, which saw many of its best and brightest defect to the private sector, and 2), computerizing its operations.The State Bank of India traces its roots to the first decade of19th century, when the Bank of Kolkata, later renamed the Bank of Bengal, was established on 2 June 1806. The government amalgamated Bank of Bengal and two other Presidency banks, namely, the Bank of Bombay and the bank of Madras, and named the reorganized banking entity the Imperial Bank of India. All these Presidency banks were incorporated as companies, and were the result of the royal charters. The Imperial Bank of India continued to remain a joint stock company. Until the establishment of a central bank in India the Imperial Bank and its early predecessors served as the nation's central bank printing currency.

The State Bank of India Act 1955, enacted by the parliament of India, authorized the Reserve Bank of India, which is the central Banking Organisation of India, to acquire a controlling interest in the Imperial Bank of India, which was renamed the State Bank of India on30th April 1955.

In recent years, the bank has sought to expand its overseas operations by buying foreign banks. It is the only Indian bank to feature in the top 100 world banks in the Fortune Global 500 rating and various other rankings. According to the Forbes 2000 listing it tops all Indian companies.

Nationalized banks

This group consists of private sector banks that were nationalized. The Government of India nationalized 14 private banks in 1969 and another 6 in the year 1980. In early 1993, there were 28 nationalized banks i.e., SBI and its 7 subsidiaries plus 20 nationalized banks. In 1993, the loss making new bank of India was merged with profit making Punjab National Bank. Hence, now only 27 nationalized banks exist in India.

Regional Rural banks

These were established by the RBI in the year 1975 of banking commission. It was established to operate exclusively in rural areas to provide credit and other facilities to small and marginal farmers, agricultural laborers, artisans and small entrepreneurs.

Private Sector Banks

Private Sector Banks

Old private

New private

Sector Banks Sector Banks

Old Private Sector Banks

This group consists of the banks that were establishes by the privy sectors, committee organizations or by group of professionals for the cause of economic betterment in their operations. Initially, their operations were concentrated in a few regional areas. However, their branches slowly spread throughout the nation as they grow. New private Sector Banks

These banks were started as profit orient companies after the RBI opened the banking sector to the private sector. These banks are mostly technology driven and better managed than other banks. Foreign Banks

These are the banks that were registered outside India and had originated in a foreign country.

The major participants ofthe Indian financial system are the commercial banks, the Financial Institutions (FIs), encompassing term-lending institutions, investment institutions, specialized financial institutions and the state-level development banks, Non-Bank Financial Companies (NBFCs) and other market intermediaries such as the stock brokers and money-lenders. The commercial banks and certain variants of NBFCs are among the oldest of the market participants. The FIs, on the other hand, are relatively new entities in the financial market place.

Importance of Banking Sector in a Growing EconomyIn the recent times when the service industry is attaining greater importance compared to manufacturing industry, banking has evolved as a prime sector providing financial services to growing needs of the economy.

Banking industry has undergone a paradigm shift from providing ordinary banking services in the past to providing such complicated and crucial services like, merchant banking, housing finance, bill discounting etc. This sector has become more active with the entry of new players like private and foreign banks. It has also evolved as a prime builder of the economy by understanding the needs of the same and encouraging

the development by way of giving loans, providing infrastructure facilities and financing activities for the promotion of entrepreneurs and other business establishments.

For a fast developing economy like ours, presence of a sound financial system to mobilize and allocate savings of the public towards productive activities is necessary. Commercial banks play a crucial role in this regard.

The Banking sector in recent years has incorporated new products in their businesses, which are helpful for growth. The banks have started to provide fee-based services like, treasury operations, managing derivatives, options and futures, acting as bankers to the industry during the public offering, providing consultancy services, acting as an intermediary between two-business entities etc. At the same time, the banks are reaching out to other end of customer requirements like, insurance premium payment, tax payment etc. It has changed itself from transaction type of banking into relationship banking, where you find friendly and quick service suited to your needs. This is possible with understanding the customer needs their value to the bank, etc. This is possible with the help of well organized staff, computer based network for speedy transactions, products like credit card, debit card, health card, ATM etc. These are the present trend of services. The customers at present ask for convenience of banking transactions, like 24 hours banking, where they want to utilize the services whenever there is a need.The relationship banking plays a major and important role in growth, because the customers now have enough number of opportunities, and they choose according to their satisfaction of responses and recognition they get. So the banks have to play cautiously, else they may lose out the place in the market due to competition, where slightest of opportunities are captured fast.Another major role played by banks is in transnational business, transactions and networking. Many leading Indian banks have spread out their network to other countries, which help in currency transfer and earn exchange over it.

These banks play a major role in commercial import and export business, between parties of two countries. This foreign presence also helps in bringing in the international standards of operations and ideas. The liberalization policy of 1991 has allowed many foreign banks to enter the Indian market and establish their business. This has helped large amount of foreign capital inflow & increase our Foreign exchange reserve.

Another emerging change happening all over the banking industry is consolidation through mergers and acquisitions. This helps the banks in strengthening their empire and expanding their network of business in terms of volume and effectiveness.

Emerging Scenario in the Banking SectorThe Indian banking system has passed through three distinct phases from the time of inception. The first was being the era of character banking, where you were recognized as a credible depositor or borrower of the system. This era come to an end in the sixties. The second phase was the social banking. Nowhere in the democratic developed world, was banking or the service industry nationalized. But this was practiced in India. Those were the days when bankers has no clue whatsoever as to how to determine the scale of finance to industry. The third era of banking which is in existence today is called the era of Prudential Banking. The main focus of this phase is on prudential norms accepted internationally.

AXIS Bank

AXIS Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the, AXIS.

Life Insurance Corporation of India (LIC) General Insurance Corporation Ltd. Other four PSU companies, i.e. National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United Insurance Company Ltd.The Bank today is capitalized to the extent of Rs. 280.51 Crores with the public holding (other than promoters) at 72.46 %. The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. Presently the Bank has a very wide network of more than 469 branch offices and Extension Counters. The Bank has a network of over 2016 ATMs providing 24hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.

About Axis Bank

Axis Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the, Unit Trust of India.

Life Insurance Corporation of India (LIC) General Insurance Corporation Ltd. Other four PSU companies, i.e. National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United Insurance Company Ltd.The Bank today is capitalized to the extent of Rs. 358.97 crores with the public holding (other than promoters) at 57.59%.Presently; the Bank has a very wide network of more than 729 branch offices and Extension Counters. The Bank has a network of over 3171 ATMs providing 24 hrs day banking.The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence.The latest offerings of the bank along with Dollar variant is the Euro and Pound Sterling variants of the International Travel Currency Card. The Travel Currency Card is a signature based pre-paid travel card which enables travelers global access to their money in local currency of the visiting country in a safe and convenient way.

Mission of AXIS Bank: Customer Service and Product Innovation tuned to diverse needs of individual and corporate clientele.

Continuous technology upgradation while maintaining human values.

Progressive globalization and achieving international standards.

Efficiency and effectiveness built on ethical practices.

Core Values Customer Satisfaction through --Providing quality service effectively and efficiently --Smile, it enhances your face value" is a service quality stressed on --Periodic Customer Service Audits Maximization of Stakeholder value Success through Teamwork, Integrity and People Board of DirectorsMs Shikha SharmaChairman & CEO

Shri N.C. SinghalDirector

Shri J.R. VarmaDirector

Dr. R.H. PatilDirector

Smt. Rama BijapurkarDirector

Shri R.B.L. VaishDirector

Shri M.V. SubbiahDirector

Shri Ramesh RamanathanDirector

Shri K. N. PrithvirajDirector

Organization Chart of Axis Bank CHAIRMAN /CMD

DIRECTOR

CORPORATE BANKING

CORPORATE RETAIL BANKING

CORPORATE OPERATION BANKING

CORPORATE PROJECT AND PLANNING BANKING

CORPORATE FINANCE AND ACCOUNT BANKING

CORPORATE INSPECTION AND AUDIT BANKING

CORPORATE SUPPORT SERVICE BANKING

CORPORATE INFORMATION TECHNOLOGY BANKING

CORPORATE MARKETING BANKING

Bank Profile Axis Bank Branch Office HubliOrganization chart of HUBLI branch

AXIS Bank milestones

1993- The Bank was incorporated on 3rd December and Certificate of business on14th December. - The bank was the first private sector bank to get a license under the new guidelines issued by the RBI

1996 Crosses Rs.1000 crore deposit mark

1997 The Bank obtained license to act as Depository Participant with NSDL and applied for registration with SEBI to act as `Trustee to Debenture Holders'.

1998 The Bank has 28 branches in urban and semi urban areas as on 31st July. All the branches are fully computerized and networked through VSAT. ATM services are available in 27 branches.

2000 - The Bank has announced the launch of Tele-Depository Services for its depository clients.

- AXIS Bank has launch of `iConnect', its Internet banking Product.

- AXIS Bank has entered into an agreement with Stock Holding Corporation of India for providing loans against shares to SCHCIL's customers and funding investors in public and rights issues.

- AXIS Bank has tied up with L&T Trade.com for providing customized online trading solAxison for brokers.

2004 -Comes out with Rs. 500 mn Unsecured Redeemable Non-Convertible Debenture Issue, issue fully subscribed

-AXIS Bank, Geojit in pact for trading platform in Qatar

-AXIS Bank ties up with Shriram Group Cos

2005: AXIS Bank appointed by Government of Karnataka as the sole banker for the Bangalore One (B1) project.

- AXIS Bank launches a powerful version of Kisan Credit Card.

- AXIS Bank gets listed on the London Stock Exchange, raises US$ 239.30 million through Global Depositary Receipts (GDRs).

- AXIS Bank and Bajaj Allianz join hands to distribute general insurance products.

- AXIS Bank and Visa International launch Mobile Refill facility - Anytime, Anywhere Pre-Paid Mobile Refill for all Visa Cardholders in India.

- AXIS Bank wins International Financing Review (IFR) Asia India Bond House award for the year 2005.

2006: AXIS Bank and AXIS Mutual Fund to launch a new service for sale and redemption of mutual fund schemes through the Banks ATMs across the country.

- AXIS Bank opens its first international branch in Singapore.

- AXIS Bank and LIC join hands to launch an Annuity Card for group pensioners of LIC.

2007:

Axis Bank gets AAA National Long-Term Rating from Fitch Ratings

Axis Bank ties up with Banque Prive Edmond de Rothschild Europe for Wealth Management

AXIS Bank re-brands itself as Axis Bank

AXIS Bank successfully raises USD 1050 million

AXIS Bank ties up with Tata Motors Ltd. for Car Loans

AXIS Bank's expansion into Asia supported by FRS

AXIS Bank launches 'Spice Rewards' on the bankcards - India's first-ever merchant-supported rewards program

AXIS Bank opens a Financial Services Category I Branch in the DIFC in Dubai

AXIS Bank ties up with Hyundai Motor India Ltd. for Car Loans

AXIS Bank ties up with IIFCL to provide finance for infrastructural projects in the country

AXIS Bank launches Car Loans in association with MarAxis Udyog Ltd

AXIS Bank opens a Full Licence Bank Branch in Hong Kong

Finance Minister Shri P. Chidambaram Launches Shriram - AXIS Bank Co - Branded Credit Card Exclusively For Small Road Transport Operators (SRTOS)

AXIS Bank announces the launch of its Meal Card

AXIS Bank announces the launch of its Gift Card

LIC Premium payment now through AXIS Bank Branches

AXIS bank opens Priority Banking branch in Mumbai and Kolkata

2008

Axis Bank launches Platinum Credit Card, India's first EMV chip based card

SWOT AnalysisStrength

AXIS Bank has been in the banking industry since 1994. It has successfully completed 12 years in the Banking industry.

The bank has a sound network i.e Anywhere Banking facility in 450 Branches and 1891ATM's at strategic locations in India.

AXIS Bank stands one among the top ten banks in India and is ranked 1st in growth in business The bank is having well experienced, trained, most dedicated and committed staff. In has a strong customer base.

Weakness

Tedious procedures have to be followed before advancing loans causing inconvenience to customers.

Opportunities

Global aspirations of Indian consumers and growing integration with NRIs.

The bank can optimize the growth opportunities arising out of retail banking and small and medium enterprises (SMEs).

Further expansion of ATMs networks and possible arrangements of sharing networks of other banks by issuing mutual funds and insurance.Threat

Bank is facing competition from its other Private Sector Banks and even the foreign Banks Changing economic policies of Government will have serious impact on interest rates and reserve ratio maintained with RBI

SMALL SCALE INDUSTRIESAs my project is conducted in AXIS Main Branch of Hubli, and it mainly lends long term loans and working capital loans to SMEs so it is better to know the brief history and working of SMEs in India.

Small scale enterprise management has assumed greater importance in the post liberalization economy. The development of small scale enterprises is generally believed to contribute substantially to employment creation and generation of income, particularly for low income population groups. In Indian context, management of over 35 lakh small enterprise units is of great significance and importance in the wake of emerging global competitive economy.The small scale sector is the major contributor to the industrial economy of the country. It accounts for 95% of countries factory ownership, contributes nearly 45% of total Industrial production and export from this sector account for 45% of Indian exports. Apart from the direct exports, products of large number of enterprises are exported indirectly through merchant exporters, export houses and other channels.

Financing is the most important activity for running smoothly a small scale enterprise. Finance is the one of the most and basic requirements of a project. The entrepreneur needs capital to start with and needs financial assistance at every sage of the project. Project finance is needed both for short term and long term. Credit is available on the basis of credit worthiness of the entrepreneur. In regard to capital structure and working capital management. There are many differences between large, medium and small-scale industries.

FINANCIAL SOURCES TO SMEs

1. INTERNAL

A. Reserve Surplus

(i) Capital reserve

(ii) Development rebate reserves

(iii) Others

B. Provisions

(i) Taxation

(ii) Depreciation

2. EXTERNAL

A. Borrowings

(i) From Banks

(ii) From term lending institutions like IDBI, IFCI, ICICI.

(iii) From Government and semi Government agencies

(iv) Others

B. Trade dues and other current liabilities

(i) Sun. Creditors

(ii) Others

Financial institutions and banks make a critical appraisal of projects which are submitted to them by entrepreneurs for getting loans. Financial institutions and Banks have traditionally been accepting the data provided by the entrepreneur as valid while

Assessing the project appraisals. In fact, the emphasis has largely been on the cash flow and financial viability of project in assessing their suitability for extending support.

ratings are given by the financial institutions so that it will help in taking decisions relating to lending whether to accept the proposal or not . For rating purpose usually these institutions uses guidelines of RBI and CRISIL

CRISIL: [Credit Rating Information Services of India Limited]An important institutional support to the development of capital market on sound lines has been the establishment of the First Indian credit rating agency; it has been promoted by ICICI and AXIS with the purpose of evaluating the debt obligations of all type companies.

CRISIL has announced it ratings under 3 categories. Which is, high investment grade, investment grade and speculative grade, they have AAA and AA which are judged to have highest and high safety of timely payment of interest and principal respectively. The two ratings differ only marginally. Investment grade securities include A adequate safety and BBB low safety. Changes in circumstances can adversely affect such issues more than in the higher rated categories. Speculative grades include BB inadequate safety, B high, C substantial risk and D in default.

CRISIL SME rating scale

CRISIL SME RatingDefinition

SME 1Highest

SME 2High

SME 3Above Average

SME 4Average

SME 5Below Average

SME 6Inadequate

SME 7Poor

SME 8Default

Small Medium Enterprise IN KARNATAK

Reasons For The Existence Of Huge Level Of Npas In The Indian Banking SystemThe origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing.

To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines.

Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to Axislize this benefit to its advantage due to the fear of burgeoning non-performing assets.

Some of the other reasons were:

After the nationalization of banks sector wise allocation of credit disbursements became compulsory.

Banks were compelled to give credit to even those sectors, which were not considered to be very profitable, keeping in mind the federal policy.

People in the agricultural sector were hardly interested in returning the loans as they were confident that the loans with the interest would be written off by the successive governments.

The small scale industries also availed credit even though they were not sure of performing to the extent of returning the loans.

Banks were also not in the position to press enough securities to cover the loans in calls of timings.

Even if the assets were provided they proved to be substandard assets as the values that could be realized were very low.

Free distribution done during loan mails (congress regime) also contributed to the heavy increase in NPAs.

The slackness in effort by the bank authorities to collect or recover loan advances in time also contributes to the increase in NPAs.

Lack of accountability of the officers, who sanctioned the loans led to a caste whole approach by the officers recovering the loans.

Loans sanctioned to under servicing candidates due to pressure from the ministers and other politicians also led to the non recovery of debts.

Poor credit appraisal system, lack of vision while sanctioning credit limits.

Lack of proper monitoring.

Reckless advances to achieve the budgetary targets.

Lack of sincere corporate culture, inadequate legal provisions on foreclosure and bankruptcy. Change in economic policies/environment. Lack of co-ordination between banks.

Some of the internal factors of the organization leading to NPAs are:

Division of funds for expansion, diversification, modernization, undertaking new projects and for helping associate concerns, this is coupled with recessionary trends and failure to tap funds in the capital and debt markets.

Business failure( product, marketing etc.,),inefficient management, strained labor relations, inappropriate technology, technical problems, product obsolescence etc.,

Recession , shortage of input, power shortage, price escalation, accidents, natural calamities, besides externalization problem in other countries leading to non payment of overdue.

Time/cost overrun during the project implementation stage.

Government policies like changes in the excise duties, pollution control orders.

Willful default, siphoning off of funds, fraud, misappropriation, promoters/directors disputes etc.,

Deficiencies on the part of the banks like delay in release of limits and delay in release of payments/subsidies by the government.Axis Bank offers fast track loans for SMEs under the following schemes:Mpower-Term Loan (Mpower-TL)

Axis Bank's Mpower-TL provides a hassle free way of meeting your business needs of expansion and other long term funding requirements against the security of immovable residential or commercial property. Mpower-TL is an EMI based loan and can be availed by Partnership firms, Private Ltd. Companies and Trusts. Mpower-TL has the following features:

Loans upto Rs 5 crores*

Flexible repayment options of upto 10 years

Attractive market related interest rates

Fast processing and quick disbursement

Business Loan for Property Looking to acquire an office space for your business? Axis Bank's BLFP offers you a convenient way. It is an EMI based term loan and can be availed by Partnership firms, Private Ltd. Companies and Trusts. BLFP has the following features:

Loans upto Rs 5 crores*

Flexible repayment options of upto 10 years

Attractive market related interest rates

Fast processing and quick disbursement

Power Rent

Having a rental income from commercial property leased out to reputed corporate or Public Sector Units or Banks or Insurance Companies? Axis Bank's Power Rent is just the right product for you. The product offering involves discounting the future receivables and providing an upfront loan to the landlord, thus extending immediate liquidity in the hands of the landlord. It is an EMI based term loan, which can be availed by Proprietors, Partnerships, Private Ltd. Companies and Trusts. Power Rent has the following features:

Loans upto Rs20crores*

Flexible repayment options of upto 10 years

Attractive market related interest rates

Fast processing and quick disbursement Power Trade

At Axis Bank we understand the unique needs of the trader segment and we have tailor designed a specific product 'Power Trade' to meet your business needs. Axis Bank's Power Trade is a hassle free and flexible credit facility for meeting your working capital requirements like Cash Credit, Bills discounting, Export Credit, Bank Guarantee, Letter of Credit or a term loan.

Loan upto Rs2.5crore*

Stock statements to be submitted quarterly*

Tenure - 1 year for Working capital and 3 years for Term Loans Mpower-OD

Axis Bank's Mpower-OD helps you meet your short-term funding needs and allows you to leverage every business opportunity that comes your way against the security of residential or commercial property.

Loans upto Rs 2 crores*

Tenure - 1 year

Immovable Property as collateral

Attractive market related interest rates

Fast processing and quick disbursement

Enterprise Power

Axis Bank's Enterprise Power is a unique product designed keeping in mind the business requirements of Micro and Small Enterprises (MSE).

Loans upto Rs. 1.00 crore*

Tenure-1 year for working capital and 3 years for term loan

Attractive market related interest rates

Fast processing and quick disbursement Equipment Power

This product is a term loan facility with a tenor upto 48 months for purchase of construction, medical and office equipments. There is a standard list of equipments, which the Bank would finance under the scheme and the maximum exposure permitted under the product is Rs. 100.00 lacs.

Zero Collateral Loans to SSI Units (ZCL)

Collateral free product to facilitates the MSE and software/IT related services to avail both working capital and term finance from the Bank. The facility is secured by guarantee cover of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGMSE). Maximum loan amount under the product is Rs. 50 lacs.

Small Medium Enterprise StandardFor a business on the growth phase with a wide range of opportunities to explore, timely availability of credit is an integral ingredient needed to scale new heights. At Axis Bank we understand this and endeavor to be not just a bank but also your financing partner, so that you focus on your business needs whereas we cater to your financing needs.

Our services ranging from Funded to Non-Funded, from Short Term to Long Term and from Credit to Trade Services ensures that you get finance the way it is best suited for your business.

Our Service:Cash Credit We offer Cash Credit facilities to meet your day-to-day working capital needs. Cash Credit is provided against the primary security of stock, debtors, other current assets, etc., and/or collateral security of movable fixed assets, immovable property, personal or corporate guarantee, etc. Interest is charged not on the sanctioned amount but on the utilized amount.

Working Capital Demand Loan

We also provide working capital facilities in the form of Working Capital Demand Loan instead of cash credit facility. The primary or collateral security will be as mentioned in cash credit facility. Here also interest is levied on the amount drawn rather than on the amount utilized.

Export Finance

We provide finance for export activities in the form of Pre-Shipment Credit against firm order and or Letter of Credit and Post shipment credit. Credit is available for procuring raw materials, manufacturing the goods, processing and packaging the goods and shipping the goods. Finance is provided in Indian or foreign currency depending upon the need of the borrower.

Short Term Loan

You may enjoy Working Capital facilities to meet your day-to-day working capital needs and Term Loan for your capex. However there may be occasions where you may need ad hoc or short-term finance for general corporate purposes, meeting temporary mismatches in working capital or for meeting contingent expenses. In such situations we provide Short Term Loans for tenure upto a year so as to ensure that your business runs smoothly.

Term Loan

Given the growth opportunities your business enjoys you may need long-term funds for capex or capacity expansions or plant modernization and so on. Keeping these requirements in mind we provide term loans upto acceptable tenor with suitable moratorium, if required, and repayment options structured on the basis of your estimated cash flows. These loans are primarily secured by a first charge on the fixed assets acquired through the loan amount. Suitable collateral security is also taken whenever required.

Clean Bill Discounting

We provide clean bill discounting facilities to fund your receivables. We discount bills or receivables from your credit worthy clients and provide credit against that. This facility is provided for a period of 3-6 months depending upon the tenor of the bill.

LC Backed Bill Discounting

We discount trade bills drawn under Letters of Credit issued by reputed banks to fund your receivables. This facility is provided for a period of 3-6 months depending upon the tenor of the bill or Letter of Credit.

Co-Acceptance of Bills

We also provide co-acceptance of trade bills depending upon the need of the borrower.Credit Facilities against Guarantee or Stand by Letter of Credit issued by Foreign Banks

Various foreign companies set up subsidiary in India. We provide funding to such companies against guarantees or SBLCs of acceptable foreign banks.

Letter of Credit

Apart from fund based working capital facilities we provide a range of Non-Fund Based facilities such as Letter of credit, Bank Guarantees, Solvency certificates, etc. Letter of Credit is provided to meet your trade purchases. These are generally provided for 3-6 months depending upon your Trade cycle. Apart from this we provide Import Letter of Credit for importing machinery or capital goods. Such LCs are for tenure ranging from 1-3 years depending upon the need of the borrower.

Bank Guarantee

We provide Bank Guarantee on behalf of our client to various other entities such as Government, quasi govt bodies, corporate and so on. We provide a range of guarantee such as Performance guarantee, financial guarantee, EPCG etc. The tenure of Bank Guarantee range from 1 year to 10 years depending upon the purpose of the guarantee.

Solvency Certificates

We also provide solvency certificate depending upon the need of the borrower.

COMPETITORS PROFILE

ICICI Bank is India's second-largest bank with total assets of about Rs.1,676.59 bn(US$ 38.5 bn) at March 31, 2005 and profit after tax of Rs. 20.05 bn(US$ 461 mn) for the year ended March 31, 2005 (Rs. 16.37 bn(US$ 376 mn) in fiscal 2004). ICICI Bank has a network of about 573 branches and extension counters and over 2,000 ATMs. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. ICICI Bank set up its international banking group in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic banking strengths to offer products internationally. ICICI Bank currently has subsidiaries in the United Kingdom, Canada and Russia, branches in Singapore and Bahrain and representative offices in the United States, China, United Arab Emirates, Bangladesh and South Africa.

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 on 2nd 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 19

The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. All our branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes. Our business is more than banking because we touch the lives of people anywhere in many ways. Our commitment to nation-building is complete & comprehensive.

INTRODUCTION

It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (NPAs) and the issue is becoming more and more unmanageable. In order to bring the situation under control, some steps have been taken recently. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was passed by Parliament, which is an important step towards elimination or reduction of NPAs.

MEANING OF NPAs:

An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by bank to a borrower become non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facility.

ASSET CLASSIFICATION

The primary (urban) co-operative banks should classify their assets into the

Following broad groups which are.

(i) Standard Assets

(ii) Sub-standard Assets

(iii) Doubtful Assets

(iv) Loss AssetsDefinitionsStandard Assets

Standard Asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business. Such an asset should not be an NPA.

Sub-standard Assets

(i) With effect from March 31, 2005 an asset would be classified as substandard if it remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrowers/ guarantors or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such assets will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

(ii) An asset where the terms of the loan agreement regarding interest and principal have been re-negotiated or rescheduled after commencement of production, should be classified as sub-standard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling, unless there is satisfactory compliance of this condition.

Doubtful Assets

With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months. For Tier I banks the 12-month period of classification of a substandard asset in doubtful category will be effective from April 1, 2008. As in the case of sub-standard assets, rescheduling does not entitle the bank to upgrade the quality of an advance automatically. A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

Note: Consequent to change in asset classification norms w.e.f. March 31, 2005 banks are permitted to phase the consequent additional provisioning over a five year period commencing from the year ended March 31, 2005, with a minimum of 10 % of the required provision in each of the first two years and the balance in equal installments over the subsequent three years.

Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external

Auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or partly. In other words, such an asset is considered un-collectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.Operational definitions:

NPA: An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 90 days.

Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business.

Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 18 months

Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a doubtful asset.

Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external auditors or by Reserve Bank India (RBI) inspection

Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks.

Statutory Liquidity Ratio (SLR): It is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.

RBI Guidelines on Income Recognition (Interest Income on NPAs)Income Recognition: Income from Non Performing Assets should not recognize on accrual basis but should be booked as income only when it is actually received. Therefore interest should not be charged and taken into income account till the account become standard asset.

Interest charged to be stopped

Provision to be made

Over Due: Any amount due to the Bank under any credit facility is

Over due if it is not paid on the due date fixed by the Bank.

Out of Order: An account should be treated as out of order

If the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power.

In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for 90 days as on the date of Banks Balance Sheet or Where are credits are not enough to cover the interest debited during the same period.

A Non Performing Asset shall be an advance where:

Term Loan: Interest and/ or installment of principal remain over due for a period of more than 90 days.

Cash Credit/ Over Draft: If the account remains out of order for a period more than 90 days.

Bills: Overdue for a period of more than 90 days.

Other accounts: Any amount to be received remains overdue for a period of more than 90 days.

Short duration crops: If the installment of principal or interest there on remains overdue for two crop seasons.

Long duration crops: If installment of principal or interest there on remains overdue for One Crop season.

An account would be classified as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.

RBI Guidelines on Provisioning Requirement of Bank AdvancesLoss Assets: 100% of the outstanding amount.

Doubtful Assets: 100% of unsecured portion.

Secured portion

Up to one year20%

One to three years30%

More than 3 years

1. Outstanding stock of NPA as on 31.3.2004

2. Advances classified as doubtful more than 3 years on or after 31.3.2004- 50 per cent as on March 31, 2010

- 60 per cent with effect from March 31, 2011

- 75 per cent with effect

from March 31, 2012

- 100 per cent with effect

from March 31, 2013- 100 percent

Substandard Assets: Secured portion 10% and unsecured portion 20% on total outstanding.

Standard Assets: A general provision of 0.40% (For direct Agriculture & SME Sector 0.25%). Provisioning for standard assets will be done at corporate office centrally.

Calculation of Net NPA (Non Performing Asset)

Formula:

GROSS NPA

LESS: Balance in Interest Suspense Account

LESS: DICGC/ECGC Claims received but pending for adjustment

LESS: Part payment received and kept in suspense account

Illustration: (Based on annual reports of AXIS bank 2005-06)

ParticularsAmount

Gross NPA of AXIS for the year 200637428

LESS: Balance from interest suspense account12704

LESS: DICGC/ECGC Claims received but pending for adjustment36

LESS: Part payment received and kept in Suspense A/c2928

NET NON PERFORMING ASSETS21760

NET NPA IN PERCENTAGE0.97%

Credit Risk and NPAs:Quite often credit risk management (CRM) is confused with managing non-performing assets (NPAs). However there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present i.e. they represent credit risk that has already materialized and default has already taken place.

On the other hand managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk. Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business. To create a defense against such uncertainty, bankers are expected to develop an effective internal credit risk models for the purpose of credit risk management.

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 borrowers viability. However, the approach of scrutinizing financial statements is a backward looking approach. This is because; the focus of accounting is on past performance and current positions.

The key accounting ratios generally used for the purpose of ascertaining the creditworthiness of a business entity are that of debt-equity ratio and interest coverage 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.

Capital Adequacy Ratio (CAR)Reserve Bank of India (RBI) has issued capital adequacy norms for the Indian banks. Capital adequacy ratios (CAR) are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.

The minimum CAR which the Indian Banks are required to meet at all times is set at 11%. It should be taken into consideration that the bank's capital refers to the ability of bank to withstand losses due to risk exposures.

To be more precise, capital charge is a sort of regulatory cost of keeping loans (perceived as risky) on the balance sheet of banks. The quality of assets of the bank and its capital are often closely related. Quality of assets is reflected in the quantum of NPAs. By this, it implies that if the asset quality was poor, then higher would be the quantum of non-performing assets and vice-versa.

Market risk is the risk arising due to the fluctuations in value of a portfolio due to the volatility of market prices. Operational risk refers to losses arising due to complex system and processes. It is important for a bank to have a good capital base to withstand unforeseen losses. It indicates the capability of a bank to sustain losses arising out of risky assets.

The Basel Committee on Banking Supervision (BCBS) has also laid down certain minimum risk based capital standards that apply to all internationally active commercial banks. That is, banks capital should at least be 8% of their risk-weighted assets. This in fact helps bank to provide protection to the depositors and the creditors.

The main objective here is to build a sort of support system to take care of unexpected financial losses thereby ensuring healthy financial markets and protecting depositors.

Capital adequacy ratio is defined as:

Risk weighting:

Since different types of assets have different risk profiles, CAR primarily adjusts for assets that are less risky by allowing banks to discount lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% risk weighting that is, they are subtracted from total assets for purposes of calculating the CAR.

Risk weighting exampleLocal regulations establish that cash and government bonds have a 0% risk weighting, and residential mortgage loans have a 50% risk weighting. All other types of assets (loans to customers) have a 100% risk weighting.

Bank A has assets totaling 100 units, consisting of:

Cash: 10 units.

Government bonds: 15 units.

Mortgage loans: 20 units.

Other loans: 50 units.

Other assets: 5 units.

Bank A has deposits of 95 units, all of which are deposits. By definition, equity is equal to assets minus debt, or 5 units.

Bank As risk-weighted assets are calculated as follows:

Cash10 * 0% = 0

Government bonds15 * 0% = 0

Mortgage loans20 * 50% = 10

Other loans50 * 100% = 50

Other assets5 * 100% = 5

Total risk:

Weighted assets65

Equity5

CAR (Equity/RWA7.69%

Even though Bank A would appear to have a debt-to-equity ratio of 95:5, or equity-to-assets of only 5%, its CAR is substantially higher. It is considered less risky because some of its assets are less risky than others.

Recent norms of NPAExisting Norms New Norms

(i) W.e.f 31.03.2004 the norm for classification of an asset as non performing has been reduced to 90 days from 180 days.

(ii) Gold loans and small loans up to Rs 1 lakh will be governed by the 90 days norm with effect from the year ending 31.03.2007.

(iii) W.e.f 31.03.2005 an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. (i) These banks will be required to identify NPAs on the basis of 180 day delinquency norm for three more years commencing March 31 2005, i.e. up to March31, 2007. However, these banks should build up adequate provisions in the BDDR over the next three years such that they would be able to transit to 90 day NPA norm by March 31 2008.

(ii)In view of (i) above, gold loans and small loan up to Rs 1 lakh will also be governed by 180 days norm up to March 31, 2007

(iii) A Sub standard account will continue to be classified as doubtful after 18 months instead of 12 months up to March 31, 2007.

(i) Sub standard- 10%

(ii) Doubtful (up to one year):100% of unsecured portion plus 20% of secured portion

(iii) Doubtful (one to three years) : 100% of unsecured portion plus 30% of secured portion

(iv) Doubtful for more than 3 years: 100% of unsecured portion. For secured portion the provision are as under:

Outstanding stock of NPAs as on March 31, 2006

50 percent up to March 2006.

60 per cent as on March 31, 2007

75 per cent as on March 31, 2008

100 per cent as on March 31, 2009

Advances classified as 'doubtful more than three years' on or after April 1, 2006-100 %.

-

(v) Loss: 100%.The provisioning norms will be as under from year ended31.03.2005 up to year ending 31.03.2007:

(i) Sub standard- 10%

(ii) Doubtful (up to one year):100% of unsecured portion plus 20% of secured portion

(iii) Doubtful (one to three years) : 100% of unsecured portion plus 30% of secured portion

(iv) Doubtful for more than 3 years: 100% of unsecured portion plus 50% of secured portion

(v) Loss: 100%.

Note:

Implementation of the instructions requiring classification of substandard account into doubtful category after 12 months and 100 % provisioning for secured portion of doubtful assets of over 3 years would be deferred by three years. As such the banks should build up adequate provisions over this period to facilitate smooth transition.

RBI liberalizes NPA norms: (Updated: Jan 03, 2009 at 2258 hrs IST)

Further liberalizing the prudential norms for the treatment of non-performing assets in the context of ongoing slowdown in the Indian economy, the Reserve Bank of India said all accounts which were standard accounts on September 1, 2008 would be treated as standard accounts on restructuring provided the restructuring is taken up on or before January 31, 2009 and the restructuring package is put in place within a period of 120 days from the date of taking up the restructuring package. aid all accounts which were standard accounts on September 1, 2008 would be treated as standard accounts on restructuring provided the restructuring is taken up on or before January 31, 2009 and the restructuring package is put in place within a period of 120 days from the date of taking up the restructuring package.The period for implementing the restructuring package has also been extended from 90 days to 120 days in respect of those accounts. The special regulatory treatment will also be available to standard and sub-standard accounts. These provisions would be in addition to the usual provisions as per the current regulation. Earlier special regulatory treatment was extended to commercial real estate exposures restructured for the first time as well as to exposures (other than commercial real estate, capital markets and personal/ consumer loans) which were viable but were facing temporary cash flow problems and needed a second restructuring.

The RBI which had announced liberalization of NPA norms earlier had received representation that the accounts which turned non-performing between September and December 2008 were excluded from the special regulatory treatment extended in December 2008.

The period of 90 days allowed for restructuring may not be adequate in view of the large number of accounts potentially requiring restructuring.

Also drawing power has been affected due to decline in inventory prices necessitating conversion of irregular portions of working capital limits into working Capital Term Loan (WCTL) on restructuring.

However, as the borrowers may be unable to provide further tangible security in the current context, accounts even after restructuring will be classified as NPAs. The condition of WCTL being fully secured by tangible security may, therefore, be relaxed, said RBI.

Understanding the NPA

An asset becomes non-performing when it ceases to generate income for the bank. Earlier an asset was considered as non-performing asset (NPA) based on the concept of Past Due. A non performing asset (NPA) was defined as credit in respect of which interest and/ or installment of principal has remained past due for a specific period of time. With a view to moving towards international best practices and to ensure greater transparency, '90 days' overdue* norms for identification of NPAs have been Made applicable from the year ended March 31, 2004.

With effect from March 31, 2004,a non-performing asset shall be a loan or an advance where:

Interest and/or installment of principal remain overdue for a period of more than

90 days in respect of a Term Loan.

The account remains Out of order for a period of more than 90 days, in

Respect of an Overdraft/ Cash Credit (OD/CC).

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

Purchased and discounted.

The RBI has issued guidelines to banks for classification of assets into four categories.

Standard asset: these are loans which do not have problem are less risk.

Sub- standard: these are assets which come under the category of NPA for a period of less than 12 months.

Doubtful assets: these are NPA exceeding 12 months Loss of assets: these NPA which are identified as unreliable by internal inspector of bank or auditor or RBI.

Treatment of Accounts as NPAThe treatment of an asset as NPA should be based on the record of recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies which are of temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit, non-submission of stock statements and the non-renewal of the limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should be treated as NPA.

Where the accounts of the borrowers have been regularized by repayment of overdue amounts through genuine sources (not by sanction of additional facilities or transfer of funds between accounts), the accounts need not be treated as NPA.

Treatment of NPA Borrower-wise and not Facility-wise: In respect of a borrower having more than one facility with a bank, all the facilities granted by the bank will have to be treated as NPA and not the particular facility or part thereof which has become irregular.

However, in respect of consortium advances or financing under multiple banking

Arrangements, each bank may classify the borrowal accounts according to its own

Record of recovery and other aspects having a bearing on the recoverability of the

Advances.Recognition of Income on Investment Treated as NPA:

The investments are also subject to the prudential norms on income recognition. Banks should not book income on accrual basis in respect of any security irrespective of the category in which it is included, where the interest/principal is in arrears for more than 90 days

IMPACT OF EXCESS LIQUIDITY:

One should also not forget that the banks are faced with the problem of increasing liquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the system through various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy away from such an option due to the high risk of default. In order to promote certain prudential norms for healthy banking practices, most of the developed economies require all banks to maintain minimum liquid and cash reserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).

Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks.

On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.

A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBI's vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. as a result of which, banks are little reluctant in granting loans to corporate.

As such, though in its monetary policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers.THE NARASIMHAN COMMITTEE'S FIRST REPORT

The salient features of these reforms include:

Phasing out of statutory pre-emption - The SLR requirement have been brought down from 38.5% to 25% and CRR requirement from 7.50% to 5.75%. (Presently 4.5%)

Deregulation of interest rates - All lending rates except for lending to small borrowers and a part of export finance have been de-regulated. Interest on all deposits are determined by banks except on savings deposits.

Capital adequacy - CAR of 9 % prescribed with effect from March 31, 2000.

Other prudential norms - Income recognition, asset classification and provisioning norms has been made applicable. The provisioning norms are more prudent, objective, transparent, and uniform and designed to avoid subjectivity.

Debt Recovery Tribunals - 22 DRTs and 5 DRATs have already been set up and 7 more DRTs will be set up during the current financial year. Comprehensive amendment in the Act have been made to make the provisions for adjudication, enforcement and recovery more effective.

Transparency in financial statements - Banks have been advised to disclose certain key parameters such as CAR, percentage of NPAs, provisions for NPAs, net value of investment, Return on Assets, profit per employee and interest income as percentage to working funds.

Entry of new private sector banks - 9 new private sector banks have been set up with a view to induce greater competition and for improving operational efficiency of the banking system. Competition has been introduced in a controlled manner and today we have nine new private sector banks and 36 foreign banks in India competing with the public sector banks both in retail and corporate banking

Functional autonomy - The minimum prescribed Government equity was brought to 51%. Nine nationalized banks raised Rs.2855 crores from the market during 1994-2001. Banks Boards have been given more powers in operational matters such as rationalization of branches, credit delivery and recruitment of staff.

Hiving off of regulatory and supervisory control - Board for financial supervision was set up under the RBI in 1994 bifurcating the regulatory and supervisory functions.NARASIMHAN COMMITTEE- SECOND REPORT

The Narasimhan Committee on Banking Reforms, in its second report, has combined drastic surgery with a strong dose of medicine to cure the ailing industry. On-performing assets (NPAs) have been the bane of the industry. The panel has identified poor credit decisions by managements, cyclical changes in the economic environment, directed credit and crude forms of behest-lending as the factors responsible for poor asset quality. The panel points a finger at priority sector credit as having a high contamination coefficient and suggests that quantitative targets have caused erosion of asset quality. It laments the fact that infusion of recapitalization funds notwithstanding, NPAs remain uncomfortably high. Yet it recommends that advances covered by government guarantees that have turned sticky should also be reckoned as net NPAs. The Narasimhan Committee's solution for NPAs is the creation of an Asset Reconstruction Fund (ARF), which will take over the bad debts of banks from their balance sheets to enable them to start on a clean slate. Recapitalization through budgetary infusion, the panel correctly points out, is not a sustainable option. But bankers are skeptical about the workability of the ARF. A senior banker asked, "At what price will the ARF take over my NPAs? How will the discount be worked out?" He said that the ARF cannot bail out banks under the present legal system. Although every bad debt is secured, banks cannot encash the security because of legal hurdles. The Urban Land Ceiling Act is a major deterrent to debt recovery. Bankers say that the legal system has to be revamped to facilitate recovery so that the ARF can pick up "NPAs at a viable price".

The committee has recommended that net NPAs be brought down to less than 5 per cent by the year 2000 and 3 per cent by the year 2002. "Easier said than done," says a top banker. "Already we do a lot of window-dressing. Outstanding accounts are shown as priority lending to meet targets. We keep lending to defaulters to roll over the NPAs. Fixing unrealistic targets will be counterproductive."

The committee has recommended that banks should not lend to defaulters, but bankers say that this is unrealistic. They claim that in the absence of fresh loans, the defaulting companies will close down, and leading to loss of jobs. "Will that be acceptable?" asks a banker. Bankers also complain that they are forced by the Board for Industrial and Financial Reconstruction (BIFR) to lend to sick companies, yet more often than not there is no turnaround and the accounts turn bad.

Credit Risk and NPAs:Quite often credit risk management (CRM) is confused with managing non-performing assets (NPAs). However there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present i.e. they represent credit risk that has already materialized and default has already taken place.

On the other hand managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk. Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business. To create a defense against such uncertainty, bankers are expected to develop an effective internal credit risk models for the purpose of credit risk management.

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 borrowers viability. However, the approach of scrutinizing financial statements is a backward looking approach. This is because; the focus of accounting is on past performance and current positions.

The key accounting ratios generally used for the purpose of ascertaining the creditworthiness of a business entity are that of debt-equity ratio and interest coverage 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.

Capital Adequacy Ratio (CAR) of RBI and Basel committee on banking supervision (BCBS):Reserve Bank of India (RBI) has issued capital adequacy norms for the Indian banks. The minimum CAR which the Indian Banks are required to meet at all times is set at 9%. It should be taken into consideration that the bank's capital refers to the ability of bank to withstand losses due to risk exposures.

To be more precise, capital charge is a sort of regulatory cost of keeping loans (perceived as risky) on the balance sheet of banks. The quality of assets of the bank and its capital are often closely related. Quality of assets is reflected in the quantum of NPAs. By this, it implies that if the asset quality was poor, then higher would be the quantum of non-performing assets and vice-versa.

Market risk is the risk arising due to the fluctuations in value of a portfolio due to the volatility of market prices.

Operational risk refers to losses arising due to complex system and processes. It is important for a bank to have a good capital base to withstand unforeseen losses. It indicates the capability of a bank to sustain losses arising out of risky assets.

The Basel Committee on Banking Supervision (BCBS) has also laid down certain minimum risk based capital standards that apply to all internationally active commercial banks. That is, bank's capital should at least be 8% of their risk-weighted assets. This in fact helps bank to provide protection to the depositors and the creditors.

The main objective here is to build a sort of support system to take care of unexpected financial losses thereby ensuring healthy financial markets and protecting depositors.

IMPACT OF EXCESS LIQUIDITY:One should also not forget that the banks are faced with the problem of increasing liquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the system through various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy away from such an option due to the high risk of default. In order to promote certain prudential norms for healthy banking practices, most of the developed economies require all banks to maintain minimum liquid and cash reserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).

Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks.

On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.

A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBI's vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. as a result of which, banks are little reluctant in granting loans to corporate.

As such, though in its monetary policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers.

HIGH COST OF FUNDS DUE TO NPAs:Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lenders losses caused due to high level of NPAs.

Therefore, quite often corporate prefer to raise funds through commercial papers (CPs) where the interest rate on working capital charged by banks is higher.

With the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to clear their dues within 60 days. Once the borrower receives a notice from the concerned bank and the financial institution, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders.

The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, banks can also takeover the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to either sell the assets of the defaulting companies or change their management.

But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty increases with the passage of time, there is all possibility that the recoverable value of asset also reduces and it cannot fetch good price. If faced with such a situation than the very purpose of getting protection under the Securitization Act, 2002 would be defeated and the hope of seeing a must have growing banking sector can easily vanish.

NORMSPROVISIONING NORMS

Norms for Provisioning on Loans & Advances

1. In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories as detailed in paragraph 3 above.2. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against loss assets, doubtful assets and sub-standard assets as below:

(i) Loss Assets

(a) The entire assets should be written off after obtaining necessary approval from the competent authority and as per the provisions of the Co-operative Societies Act/Rules. If the assets are permitted to remain in the books for any reason, 100 per cent of the outstanding should be provided for.

(b) In respect of an asset identified as a loss asset, full provision at 100 per cent

should be made if the expected salvage value of the security is negligible.

(ii) Doubtful Assets(a) Provision should be for 100 per cent of the extent to which the advance is not

covered by the realisable value of the security to which the bank has a valid recourse should be made and the realisable value is estimated on a realistic basis.

(b) In regard to the s