CHAPTER: 1: INTRODUCTION OF BANKING

The development of banking is an inevitable precondition for the

healthy and rapid development of the national economic structure.

Banking institutions have contributed much to the development of the

developed countries of the world. Today we cannot imagine the business

world without banking institutions. Banking is as important as blood in

the human body. Due to the development of banking advances are

increased and business activities developing so it is rightly said, " The

development of banking is not only the root but also the result of the

development of the business world." After independence, the Indian

government also has taken a series of steps to develop the banking sector.

Due to considerable efforts of the government, today we have a number

of banks such as Reserve Bank of India, State Bank of India, nationalised

commercial banks, Industrial Banks and cooperative banks. Indian Banks

contribute a lot to the development of agriculture, and trade and industrial

sectors. Even today the banking system of India possess certain

limitations, but one cannot doubt its important role in the development of

the Indian economy.

1

INTRODUCTION OF CO-OPERATIVE BANK

Unlike commercial banks which are engaged in serving the

industrial and commercial sectors of the economy, the cooperative banks,

on the other hand provide credit and allied facilities to the rural and

agricultural sectors. The dawn of this country saw the evolution

cooperative movement in India. Cooperative societies came into being

when the Cooperative Societies Act, 1904, was enacted. The movement

was started with the aim of providing farmers funds with low rates of

interest so that exploitation by the village moneylenders is foiled. The Act

provided for the formation of cooperative credit societies and a number of

small primary credit societies were established in various parts of the

country. These societies, however, could not mobilise enough resources

as compared to loans demanded by its members. This led to the

enactment of a new act in 1912. The Cooperative Societies Act of 1912

provided for starting Central Cooperative Banks with headquarters

located in urban centers. In 1914, necessary steps were taken by the then

government to strengthen the cooperative movement .The government

appointed the Maclagan Committee to look into and make

recommendations for the improvement of a State Cooperative Bank for

each State. The state Cooperative Bank is formed by the federation of

Central Cooperative Banks functioning at the district level. The present

organisation of the cooperatives in India is based on the recommendation

made by the Maclagan Committee. In 1919, the Montague Chemsford

Act made Cooperation a provincial subject. Since then, separate

Cooperative Societies Acts have been passed by all state governments.

Although cooperative banks in India have shown progress since

their establishment, there still exists a number of defects in the

2

organisation. This has led qualitative improvement to suffer. However,

the Reserve Bank of India took the initiative to revitalize, reorganize and

promote the growth of cooperative banking in India. Under the Banking

Regulation Act of 1949, Cooperative banks have been brought under the

control of the Reserve Bank of Bank.

Farmers in India are scattered all over the country and need short-

term small borrowings for agricultural purposes. This need is not fulfilled

by commercial banks which are unsuited for financing agriculture. Land

which these farmers can offer to cover bank advances is not generally

accepted as security by commercial banks. Therefore, special types of

banks are necessary for the financing of agriculture. Co-operative banks

are best suited for this purpose. The object of co-operative banks is to

offer banking facilities to persons of limited means requiring credit for

productive purposes in the use of the land and labour at their disposal.

The co-operative banking structure in India may be divided into

three component parts, viz.,

1. Primary co-operative credit societies.

2. Central / district co-operative banks.

3. State co-operative banks (also called as apex banks) at the top.

1. Primary co-operative credit societies: -

Primary credit society is at the bottom of the three-tier structure of

co-operative banks.

The society normally contacts farmers. So, only a few people living

within the area of society are admitted as members. Here individuals of a

particular area meet together inspired by sentiment of co-operation. Every

3

member has to pay his share In a share capital. The price of a share is

nominal so that even a common man can be a member. The functioning

of such society is limited. The society is managed by elected people.

Hon-secretary and members of working committee. Such a society

collects its funds by admission fees ,share capital and deposit of people.

In case of need such society also get finance from central co-operative

banks or state co-operative bank. Normally society grants loans to

members on individual responsibility.

2. District co-operative Bank: -

This bank is a link joining state co-operative bank with the primary

credit society. After the report of all India rural advances inquiry

committee in 1945, the central co-operative banks earned much

importance the flow of rural advances reach to every farmer's home

through this bank via credit society. In reality central co-operative banks

were establish to supply financial help to primary credit society.

3. State Co-operative Banks: -

This is the apex bank in the three tier structure set up of the

country. Maclegan Committee appointed in 1974 recommended to

establish at least one state co-operative bank per state. To day every state

has the state co-operative bank. This bank especially co-operative

ordinates them and give required guidance. There were approximately 26

state co-operative banks at the end of 77/78 in India.

Since state co-operative bank is an apex bank, its main function is

co-ordination of co-operative lending, its balance and controlling. The

financial help for co-operative lending activity given by Reserve Bank is

also given through state co-operative bank.

4

Chapter: 2: History of The Bank

First decade of 20th century has a very important place in the

history of cooperation for entire country and Surat District as well. Many

cooperation institutions were initiated during this period. First coop.

Society in Surat District was registered at Degam, Taluka Chikhli on

dated 23-5-1906 (Now in Bulsar District).

In the year 1908, with the efforts of Late Shri B.A.Modi and Shri

K.G.Desai. The Surat Dist co-op. union Ltd., was registered on dated 17-

6-1909. It was this institution which is known as THE SURAT

DISTRICT CO.OP. BANK LTD.

When the Union was empowered to establish new societies etc. By

1921 The Surat District co.op. (Urban) union was initiated. In 1923 The

Surat District Co.op. Bank Ltd., The work extended to the entire Surat

District, which had 21 talukas and a vast working area with geographical

variation. The coastal area which included city of Surat and towns like

Navasari - Bulsar - Bilimora the fertile flat and than totally tribal area

with hills and dense forests.

The Vast Surat District was bifurcated in 1965 and of Bulsar was

separated. At present there are 14 talukas in the district, of which 9 are in

the tribal area.

Bank had a separated department for agriculture advances form

1944, and become an effective central agency for coordination and

smooth flow of finance to cooperative sector in the district.

After 1960 when shree Khedut Sahakari Khand Udyog Mandali

Ltd., Bardoli came into existence, the entire Surat District gradually

become a sugar belt. All exiting eight-sugar factories had teething

financial troubles in the beginning, Bank had provided them enough

finance and assistance even for share capital also. By lapse of time Sugar

5

cane has now become now become principal crop in the district our of

total cultivable area of 419000 hectares 89800 hectares is under sugar

cane cultivation. This revolution in agriculture was amply supported by

The Surat District Co.op. Bank Ltd., These factories have became main

strength of the economic structure of the district, particularly for farmers.

Totally together these factories have a crushing capacity of 37500 tons

per day. Annual sugar production exceeds Rs.500/- crores. Bank has

sanctioned limits exceeding Rs.300/- crores to this sector.

In the year 1965 The Surat Dist.co.op. Bank was separated from

this bank after formation of Bulsar District from old Surat District. After

separation bank's Financial Position is as under.

No. Of Branches 15

Share Capital Rs. 0.22 Crores

Reserves Rs. 0.09 Crores

Deposits Rs. 3.06 Crores

Advances Rs. 1.71 crores

6

Management:

Since 1965 the structure of Board of directors has remained

unchanged. In all, there are 21 members on the Board as under.

One Director from each Taluka 13

Two Individual Directors 2

One Director from Surat City 1

Three nominated director by state

Government

3

One director from The Gujarat State

Co.op. Bank Ltd.

1

District Registrar (Co.op. Societies) 1

TOTAL MEMBERS 21

Past Chairman of the Board Shri P.K.Desai has been awarded

"Kaka Saheb Gadgil" award forhis outstanding services to the society. He

has also been awarded by the Gujarat State Co.op. Union by "Sahakari

Award". He is Director of the bank since 1952 and Chairman from 1967

to 1975 he continues to be the Chairman up to 8-01-2001.

Management has always remained progressive, be a challenge after

Bank Nationalization introduction of nonfarm advances, introduction of

New banking concepts in liberalized economy.

Board has formed committees for loans, staff matters, Legal

matters, and new construction etc. power have been delegated properly to

smoothen day to day working.

7

Deposits

Growth of deposit was steady and in harmony with Advances.

Deposit growth was unprecedented during 1994-'95. There was a huge

demand from sugar co.op. Factories for funds, Bank has to resort short

term planning for funds.

During the same period RBI removed the interest restrictions on

deposits.

Advances

Major chunk and advances goes to sugar sector:

It is obvious true as the major crop of the district is sugar cane.

There are 8 sugar factories in Co-operative sector, all of them

totally have a turnover exceeding Rs. 600/- crores and as such bank's

major share goes to this sector.

It the last decade, bank has gradually paid more attention to non-

agriculture and Individual advances. New schemes, to finance for

consumer durable, vehicles, House construction. Professional loans also

have been introduced. More attention is paid to develop banking routing

business also. Bank has actively taken up the steps for diversification of

Loan portfolio. Powers are delighted to the branch Manager to sanction

loans up to

Rs.1, 00,000/- for 'A1-Grade branch and Rs.50, 000/- for 'B' Grade

branch under individual confirm sector loans from dec.'98. Also power

are delighted to the branch Manager to sanction loans up to Rs.50, 000/-

for all branch under individual farm sector loans from Nov.'99.

8

YEAR TOTAL ADVANCES

1965 2.45

1985 45.03

1995 216.77

1998 293.01

1999 236.66

Bank has also assisted cooperative institutions and farmers in hours

of crisis, in formation of a sugar factory, sale purchases union, SUMUL.

In a natural calamity like floods, riots etc bank has assisted them oftenly.

Bank has faced successfully overcome may challenges. Banks,

management and staff has worked hand to hand. Mutual confidence

between staff union and management has benefited the organization. The

bank was judged as best bank by NABARD & Beat performance award

for the year 1995-'96 was awarded by NABARD. Reserve bank of India

has granted license to the bank to carry on banking business in India, very

few DCCBs are having such license. Bank has always been securing

Audit classification under category 'A' and has paid highest permissible

dividend under state co.op. Act. To its members.

Under the new environment of liberalization bank has to plan for

modernization of its activities. To keep a pace with modern banking

system, bank has accepted to go for Automation of banking work, at

present five branches are computerized. Has to plan its resources in more

coordinated way and search for new avenues to maximize the profit, has

to provide more effective customer service, to market its products

successfully. This all has to be achieved keeping in view the co-operative

principles and farmer's interest.

9

CHAPTER 3: OBJECTIVSS OF THE PROJECT

The main objective of behind this project is to analysis the actual

position of NPA deeply

To know about the NPA classification and provisioning

requirement for non-performing asset:

To calculate the total non-performing asset and compare with other

banks and on the basis to decide the growth rate of different bank.

The main object is know about the proper system of bank for

reducing non-performing asset or for conversion of non-performing

asset.

To know the various and strategies for non-performing asset for the

bank.

To learn about how to solve the problem of non-performing asset.

10

CHAPTER 4 : LIMITATION

o The bank I have chosen is totally on rural or agricultural bases, so

the bank cannot provide some English literature for helping me

in project.

o It is on rural basis, and other banks, which are comparing and with

it are not only rural basis so comparison will not made properly.

o This bank is on basis of rural or agricultural part so it will not

accept the system of urban banks.

o The amount of loans and advances are also limited so it is obvious

that the non-performing of this bank will les than the other

comparatives banks.

o Non performing asset cannot be totally converted into performing

asset but only these are some solutions for reducing it.

11

CHAPTER: 5: METHODOLOGY OF THE PROJECT

This project is prepared on Non-Performing Assets. The

methodology used in this project is as follows.

First of all I have the basis studied the basic concept of NPA.

After the introduction, the asset classification is described and the

provisioning norms for it by NAARD are shown.

All the above matters according to narsimha committee is shown.

Then according to NPA statement the NPA analysis is done on the

basis of previous year’s financial data.

Comparative statement on the basis of various ratios is done.

At, last the recovery part is shown & various reasons, strategies,

warning signals, recovery procedure and steps for reducing NPA

are included.

12

CHAPTER:6:

INTRODUCTION OF NON PERFORMANCE ASSET

WHAT IS NPA?

A non performing asset is defined generally as a credit facility in

respect of which interest or installment of principal is in areas for two

quarters or more, however, in respect of agriculture advances if interest

has not been paid during the last two harvest seasons ( covering two half

years) after it has become a past due (i.e. days beyond the due date). Such

advances should be treated as NPA. It is important to note that the

overdue installment only as per the guidelines of RBI on prudential

norms.

Standard assets

Standard assets is one which does not disclosed and problem and

which does not carry more than normal risk attached to business. Thus an

assets, which is not NPA, may be treated as standard or Good assets.

Such account holders/customers pay interest in cash regularly on

prescribed dates and repay the amount of installment of loan on the due

dates or before the grace period if granted.

Sub-standard asset

A non-performing asset may be classified as sub-standard asset

when the asset had remained overdue for a period not exceeding three

years. An asset where the terms and conditions of the loans regarding

payment of interest and repayment of principals have been renegotiated

or rescheduled should be classified as substandard for the last two years

13

of satisfactory performance. Performance can be judged from the

recovery of interest and repayment of installment of principal of loan

credit facility.

Double Asset

A non-performing asset may be classified as doubtful asset when

the asset had remained overdue for a continuous period exceeding three

years.

Loan asset

Loss asset are those where loss was identified by the bank

auditor/RBI/NABARD inspections but the amount has not been written

off wholly or partially. An asset which is considered unrealizable and/or

of such little value that its continuance as a doubtful asset is not

worthwhile, should be considered as loss asset.

Past Due

A credit facility is treated as past due when it remains outstanding

for days beyond the due date. In agriculture crop loans due dated are

fixed in accordance with harvesting seasons different types of copies I.e.

kharif Corp., cash crop rabicrop etc. In investment term loan due dates or

fixed after some grace period depending the returns to be derived from in

investment.

14

GUIDELINES ON PRUDENTIAL NORMS INCOME

RECOGNITION, ASSET CLASSIFICATION AND

PROVISIONING NORMS

INCOME RECOGNITION NORMS TO CO-OPERATIVE BANKS

The prudential norms for income recognition should be

based on record of recovery and therefore SCBs/CCBs should not take

unrealized income to profit and loss accounts. However in the case of

certain states where the state co-op act provides for taking such

unrealized interest to income head in the P & L A/C. it is necessary for

those SCBs to make full provisioning for equivalent amount by

charging to P & L A/C. In other words, the SCBs which are charging

for interest to all overdue loans and if such interest remains unrealized

the same may be taken to income account provided matching provision

is fully made for the same by charging to P & L A/C. Accured interest

taken to income account in the previous year should also be provided

in full in case the same becomes overdue.

Fee, commission and other income may be treated as the

income only when the account is classified as standard; Besides, a

matching provision should be created to the extent such items were

treated as income in the previous year but not realized in the

subsequent year.

Fee and commission earned by banks as a result of

renegotiation or scheduling of outstanding debts should be recognized

15

on an accrual basis over the period of time covering the renegotiated

of credit.

Even in the case of credit facilities backed by

Government guarantee, over due interest can be taken to P & L A/C.

only in case of matching provision is made.

The bills purchased should be treated as overdue if the

same remain unpaid. Interest may be charged to such bills and the

same may be P & L A/C provided matching provision is made.

16

NORMS FOR TREATING LOANS/ADVANCES ETC., AS NPA

(OVERDUE) FOR THE PURPOSE OF ASSET CLASSIFICATION

Definition of Non-performing asset (NPA)

A credit facility is treated as past due when it remains outstanding

for Days beyond the due date, A non-performing asset (NPA) is defined

generally as a credit facility in respect of which interest or installment of

principal is in arrears for quarters or more.

Treatment of Agricultural Advances

In respect of advances granted for agricultural purposes where

interest payment is on a half yearly basis, In other words, if interest has

not been paid during the last two seasons of harvest(covering two half

years) after it has become past due when such an advance should be

treated as NPA.

Treatment of Advances for a Allied Agricultural

Activities As Well As the Non-Farm Sector

Credit facility granted for other allied agricultural activities as well

as for non-farm sector activities should be treated as NPA, if amount of

installments of principal and/or interest remain outstanding for a period of

30 days beyond two quarters from the due date.

17

Term Loans (All Types)

Loans in respect of which interest or installments of principal

amount remained as overdue for two quarters as on balance sheet date

may be treated as NPA.

Project/Housing Loans, Etc.

In respect of project (industry and plantation, etc.) where

moratorium is given for payment, loans become due only after

moratorium or gestation period is over i.e. such a loan becomes overdue

if installment is not paid on due date. Similarly, in case of housing loans

or similar advances granted to staff members where interest is payable

after recovery of principal, such loans should be classified as overdue

(NPA) when there is a default in repayment of principal on due date of

payment and overdue criteria will be the basis for classification of asset.

TREATEMENT OF DIFFERENT FACILITIES TO BORROWER

AS OVERDUE (NPA)

Short term agricultural advances are granted by SCBs to PACS for

the purpose of leading. In respect of advances as well as advances for

other purpose, if any, granted under lending system, only that particular

facility which become irregular should be treated as overdue (NPA) and

not all other facilities granted to a borrower, all such loans should be

become overdue (NPA) even if one loan a/c becomes overdue (NPA).

18

NORMS FOR ASSET CLASSIFICATION

CRITERIA FOR CLASSIFICATION OF ASSET

Classification of agricultural and non-agricultural loans is required

to be done into four categories, on the basis of age overdue, as under.

Good/standard Assets

Good asset is one which can not disclose any problem and which

does not carry more than normal risk attached to business. Thus, in

general, all the current loans, ST agricultural and non-agricultural loan

which have not become NPA may be treated as standard asset.

Sub-standard Assets

A non-performing may be classified as sub-standard on the

following basis of criteria.

1) An Asset which has remained overdue for a period not

exceeding

3 years in respect of both agricultural and non agricultural loan

should be treated as sub standard.

2) In case of all types of loans, where installments are overdue

for a

Period not exceeding 3 years, the entire outstanding in term

loan should be treated as sub standard.

19

3) An asset, where the terms and condition of the loans regarding

payment of interest and repayment of principal have been

renegotiated rescheduled after commencement of production,

should be classified as substandard and should remain so in

such category for at least two years of satisfactory performance

under the renegotiated terms In other words, the classification

of asset should be upgraded merely as a result of rescheduling

unless there is satisfactory compliance of the above condition.

Doubtful Asset

A non performing asset may be classified as doubtful on the basis

of following criteria.

1) An Asset which has remained overdue for a period exceeding 3

years in respect of both agricultural and nonagricultural loans

should be treated as doubtful asset.

2) In case of all type of loans, where installments are overdue for

more than 3 years, the entire outstanding in terms of loans

should be treated as doubtful

Loss Asset

Loss asset are those where loss is identified by the bank inspectors

but amount has not been written off wholly or party. In other words an

asset which is considered un realizable or such little value of its

continuance as a doubtful asset is not worthwhile, should be treated as a

loss asset such loss asset will include overdue loans in which cases-

20

1) Decreases of executions petitions have been time barred or

documents are loss or no other legal proof is available to claim

the debt.

2) Where the members and their sureties are declared insolvent or

have died leaving no tangible assets.

3) Where the members are left the area of operation of the society

leaving no properly and their securities have also no means to

pay the dues.

4) Where the loans is fictitious or when gross utilization is notified

5) An amount which can not be recovered in case of liquidated

societies.

21

PROVISIONING NORMS ON THE BASIS OF ASSET

CLASSIFICATION

1) Provisioning is necessary considering the value of security charges

to the banks over a period of time. Therefore, after the assets of SCBs

are classified in to various categories necessary provision has to be

made for the same. The details of provisioning requirements in the

respects of various categories of assets are mention below.

2) The following aspects, however, may be kept in view while

making provisions.

A. Agricultural Loans As Secured

All agricultural loans may be treated as fully secured as the

same are disbursed against charge on land as provided in the

respective state co-operative societies rules.

B. Treatment to P.F. and gratuity Amount

Liability towards PF and gratuity should be estimated on

actuarial basis and fully provided for.

C. Loans exempted from provisioning

Advances against term deposit NCSs eligible for surrender,

life policies are exempted from provisioning. Therefore, the above

account may not be classified as NPA.

22

D. Loans against gold/Govt. securities

Advances against gold, government securities are exempted

from provisioning requirements.

E. Depreciation in investment-accounting procedure.

The investment portfolio of the bank would normally consist

of approved securities and other shares, debentures and bonds of

co-operative and other institution. Investment in the approved

securities should be bifurcated into permanent and current

investments. Permanent investment are those, which banks intend

to hold till maturity and current investment are those, which bank

intend to deal in, that buy and sell 0 day-to-day basis. Bank should

keep not more than 50% of their investment in permanent category.

While the depreciation in respect of permanent investment is not

likely to affect their realizable value of maturity, depreciation need

not be provided for investments in the permanent category.

Investment in the current category should be carried at lower of

cost value or market value, on a consistent basis. Depreciations in

the current investments, if any, therefore be fully provided for.

Banks following a more prudent method of valuation (e.g. all the

investments marked to market) should continue to do so and there

should not be any slip back in their case.

Investment should be shown in the balance sheet net of

depreciation. It is however, open to bank to show the book value of

23

investment, the depreciation against and net amount of investments

separately.

As regard valuation of securities other than approved

securities they should be valued at lower of cost price or market

values. Investments in the shares of co-op. institutions, however,

may be valued at carrying cost price.

24

GENERAL GUIDELINES TO PRUDENTIAL NORMS

1. With a view to preparing the profit and loss a/c. and balance sheet,

reflecting bank’s actual financial health, a proper system for recognition

of income, classification of asset and provisioning on a prudential basis is

necessary. The prudential norms for recovery rather than on any

subjective consideration. Likewise, the classification of norms, regarding

provisions should be made on the basis of classifications of assets into

four different categories. In this connection, we advise that such

prudential norms have already been made applicable to SCBs with

suitable modification has been decided that these prudential norms should

be adopted by SCBs on prudential norms for income recognition, asset

classification and provisioning on the basis of classification of asset are

given in the Annexure enclosed. These guidelines may please be studied

carefully and arrangement made for their implication.

2. Year of Implementation

Banks are advised to implement the instructions from the

accounting year 1996-97. Each branch should undertake competent

officials from the internal inspection departments should verify the

exercise of classifications of assets, making provisions and the same. The

bank should also get the classification, verified by auditors and a

certification to this effect obtain

25

from the Auditors. The balance sheet for the year ending 31.03.97 should

reflect the financial position of the bank as arrived at on the basis of

instructions now issued to banks. After the exercise is completed banks

are advised to prepare a comprehensive note indicating the banks

position in the light of instructions contained in the circular and put it up

loss a/c and balance sheet as required under sec. 29 of B.R. act, (AACS)

and instructions issued from time to time on the subject.

3. Provisioning Requirement - Phasing

In order to give some time to co-operative banks to adjust

themselves to the new system, phasing of provision is suggested as

indicated below;

a) First Year

100% in respect of loss assets and less than 30% of the

provisioning needed in respect of sub-standard and doubtful assets.

b) Second Year

The balance provisioning needed in respect of the above

categories of assets together with current provision needed in

respect of assets classified in the second year. In other words, all

the doubtful and sub-standard assets have to be provided fully from

second year onwards in addition to 100% for loss assets.

The requirements of state co-operative societies Acts and or

Rules made there under or other statutory attachment may continue

26

to be followed if they are more stringent than the guidelines now

prescribed by us.

A copy of this latter is being sent to the RCS of your state

Territory for his information with request to advised the statutory

Auditors of SCBs to look into compliance of the guidelines at the

time of their audit.

27

INCOME RECOGNITION

Till march 1992, some commercial banks have been accounting

interest income on accrual basis i.e. total interest accrued were being

accounted as interest income irrespective of its actual collection. Based

on the recommendation of Mr. narsimhan committee, RBI has now issued

a directive that the policy of income recognition should be objective and

it should be based on the record, of recovery rather than on any subjective

consideration.

It has been suggested that the income from the non performing

asset (NPA) cannot be recognized on accrual basis unless the same is

actually received.

For the purpose of this prudential accounting, past due status have

been defined as follows;

PAST DUE STATUS

Any amount, which remains outstanding for 30 days beyond the date will

be reckoned as ‘past due’ whereas an asset become NPA, when it ceases

to generate income for bank.

NPA is defined as a credit facility in respect of which the interest

has remained unpaid for a period of four quarters during the year ending

31st march, 1993, three quarterly during the year ending 31st march, 1994,

and two quarters during the year ending 31st march, 1995, and onwards.

28

This shows that from 31st march, 1995, onwards, interest pending

collection for more than 2 quarters prior to the date of the balance sheet

should not be accounted as income. This is applicable to term loans, cash

credits, overdrafts and other types of advances also.

In respect of advance granted for agricultural purposes, where

interest payment is on half yearly basis synchronizing with harvest, then

the bank should adopt agricultural seasons after “past due” then such

advance will become NPA.

In respect of cash credits and over drafts, in addition to the above

norms, the account should be treated as ‘out of order’ if the out standing

balance remains continuously in excess of the sanctioned limits drawing

power. In cases, where the outstanding balance is within the sanctioned

limit/drawing power, but there are no credits continuously for six months

as on the date of balance sheet or credit are not enough to cover the

interest debited during the same period, this accounts should be treated as

‘out of order’.

REMARKS ON CO-OPERATIVE BANKS

In the light of the prescription illustrated above, it is of urgent necessary

that the co-operative banks also implement this prudential norms either

into or with modification in a planned and phased manner. This

prescription has also been implemented for the urban co-operative banks.

The following critical points may come up in the course of the

implementation of the above prudential norms.

29

As per the existing accounting system in the co-operative banks, the

interest income is sanctioned on accrual basis. But a corresponding

provision as ‘ overdue reserves’ is being made for the overdue interest in

respect of-

I. Interest accrued on loans and demanded during the period for which it

remains unrealized as on the date of the balance sheet.

II. Interest realize by debiting un-renewed cash credits and overdrafts.

But as per prudential norms prescribed by RBI for commercial

banks, a provision should be made for the interest accrued on the non

performing assets. It indicates that no such provision is required to be

made for the interest accrued on the asset till it becomes NPA. Whereas,

the system now being followed by the co-operative banks, regarding

income recognition ensures that interest overdue on irrespective of period

of overdue is not included as income. Hence the existing income

recognition norm of co-operative banks is more stringent than those

prescribed by RBI for commercial banks.

To illustrate the interest accrued and due on a particular accounts

as on 31st December. 1992 can be treated as income, even thought it is not

realized as on 31st march 1993, as per the norms prescribed by the RBI

for commercial banks. But in case of co-op. banks, even the interest

accrued and due for payment on 31st march 1993, if not realized then it

30

will not be treated as income for the purpose of profit as on 31st march

1993.

SYSTEM OF REVERSAL OF UNREALISED INTEREST

As per the state co-operative society Act and by Low of the co-

operative banks, at last 40% of the profit each year is to be appropriated

to statutory Reserve Fund and Agriculture Credit Stabilization fund at the

rate of 25% and 15% respectively. the remaining amount of profit is also

appropriated as per by low provisions. But there is no system of carrying

over the profit or part of here is required to be made, then there may not

be sufficient profit left in that year to carry out such reversal.

31

TRANSPARENCY IN ACCOUNTS & PROVISIONING

REQUIREMENTS AND ITS LIKELY IMPACT ON RURAL

CREDIT

Government of India set-up a committee on financial system which

is known as narsimhan committee to examine all aspects relating to the

structure, organization, functions, procedure of the financial system of

our country including banking and non banking organizations.

On consequent upon the nationalization of commercial co-

operative banks, exhibits true picture and become transparent. Here it is

humbly tried to examine and to study such recommendation on income

recognition, asset classification and provisioning on P & L a/c. and its

likely impact on rural credit provided by co-operative bank as well as

commercial bank.

1) INCOME RECOGNITION

The committee was of the view that the banks in India should

follow the international practice of treating an account as non-performing

asset (NPA) when interest is overdue for at least two quarters. No income

should be recognized on such accounts. Having accepted this

recommendation, the RBI has already issued guidelines to all scheduled

commercial banks indicating that an amount under any credit facility to

be treated as ‘ past due’ when it has remind outstanding for 10days

beyond the due date. Further, a NPA should be defined as a credit facility

32

I respect of which interest has reminded unpaid for period of our quarters

during the year ending March 1933, three quarters during the year ending

31st March 1994 & two quarters during the year ending 31st March 1995

and onwards. N case of agricultural loans the account will be treated as

NPA if interest has not been paid during the last two seasons of harvest

after it has become past due.

2) The bank should not charge and take to income account interest on all

NPAs. The RBI instructions indicate that the interest accrued and credited

to income account only during 1991-92 with respect to NPAs should be

reversed or provided for on the current accounting period i.e. 1992-93 if

uncollected.

3) For applying these norms credit facilities with outstanding balance of

Rs.25000/- and above alone need e considered. Credit facilities backed by

government guarantees though ‘past due’ should not be treated as NPA.

(4) As in the case of income reorganization, the provisioning norms will

apply only for such credit facilities with an outstanding balance of

Rs.25000/- and above, however, in respect of amounts below Rs.25000/-

aggregate provision to the extent of 2.5% of the total outstanding should

be made as prudential norms. Incase of advances guaranteed by ECGC

provision should be made only for the balance in excess of the amount

guaranteed by this corporations. The banks also been allowed to face half

of their provision requirements during the year 1992-93 to the subsequent

year.

33

(5) Transparency in accounts

The committee also felt that the banks balance should follow the

recommendation of the International Accountant Standards (IAS).

Committee with regard to transparency and disclosures.

(6) Income recognition

The income recognition norms, prior to the fresh guidelines issued

by the RBI, were not aligned to the international norms as recommitted

by the committee. The earlier guidelines required scheduled commercial

banks not to recognize income in respect of degree, suit field and identify

bad doubtful accounts. The application of these norms allowed a major of

subjective ness compare to the objective assessment on income

reorganization to be followed under the IAS norms. It has been

understood that most of the scheduled commercial bank to which the

norms where apply had indicated that the recognition of income as per the

prudential nouns would put them into losses, leading to the revision of the

norms by the RBI in December 1992. the separate treatment of

agriculture accounts for classifying them as NPA being co related to

harvest seasons is appropriate logical.

(7) As per the provisions of sections 29 and 31 of the BR act 1949 the co

operatives are require to take the total interest accrued to the profit and

loss account and make full provisions for the interests not realized.

However the provisions actually made may not be adequate in many

cases. since the BR act does not cover all the co-operatives, 1949 some of

34

them follow a system of taking only the realize interest to the profit and

loss account. If any notice in this regard are followed up for rectification.

(8) Provisioning requirements.

The need for an objective definition to identify non-performing

assets has been felt since as the Health Code Classification applicable

leaves much to the discretion of the individual banks. The classification

into four bored groups, as suggested by the committee, is likely to

minimize the subjective element. Extent of provision to be made in

respect of the assets will now depend upon their classification into four

groups with specific time dimensions. It is understood that the proposal to

provide tax incentives to induce to make adequate provisions against loan

losses is under consideration.

(9) Transparency in accounts

Under the provision of the B.R. Act 1949 the RBI has already

introduce a new format for reporting the annual accounts which, among

others, in corporate number of schedules for reporting item wise brake

up. The schedule commercial bank s have reported there annual accounts

for the final year 1991-1992 as per the new format. However it has been

felt that the co-operatives may continue to report their annual accounts in

the existing formats since the requisite data needed for the monitoring

and analysis is already available them.

35

CHAPTER 7 : COMPARATIVE FINANCIAL STATEMENT

As the name indicates we simply compare the changes, which have

taken place in the various items of financial statements, in percentage

terms. The increase and the decrease in various items of assets and

liability and similarly the changes in the figures of profit and loss account

indicate the effects of a business being conducted during certain period.

SURAT DISTRICT CO-OPERATIVE BANK

PARTICULARS 2000-2001 2001-2002 2002-2003

Standard Asset 33431.85 43597.49 37206.50

Sub-standard

Asset

785.39 794.95 793.48

Doubtful Asset 1003.63 1352.32 1145.38

Loss Asset 241.11 263.58 288.98

Total Provision 646.01 747.65 846.47

Outside Liability 99845.70 110574.59 113999.72

Capital & Surplus 6934.53 7559.43 8233.94

Interest Earned 2106.91 2313.40 1932.33

Interest Paid 236.24 234.37 215.58

36

Total Assets 113357.09 126855.34 128395.66

PRIME DISTRICT CO-OPERATIVE BANK

PARTICULARS 2000-2001 2001-2002 2002-2003

Standard Asset 4722.50 6020.56 7375.84

Sub-standard

Asset

138.01 210.85 290.65

Doubtful Asset 58.38 80.34 110.69

Loss Asset ---- ---- ----

Total Provision 21.28 18.78 14.24

Outside Liability 8324.59 9981.50 13434.87

Capital & Surplus 851.97 1215.84 1688.79

Interest Earned 1028.03 1442.27 1784.13

Interest Paid 517.04 754.09 859.77

Total Assets 9488 14932 23608

37

CHAPTER: 8: RATIO ANALYSIS

A ratio can be worked out to between two variables having either

cause and effect relationship or connected with other in some other

manner. These two variables can be selected either from balance sheet

and another from profit and loss account.

Ratio are expressed in mathematical terms, like percentage or the

number of time of or in numbers. Some ratio are better expressed when

worked out in percentage like the gross or operating profit to sales. But

certain ratios appear to be more effective when expressed in number of

times like the stocks turnover.

The following ratios are found out for ratio analysis as well as

comparative statement analysis.

Gross NPA Ratio

Net NPA Ratio

Problem Asset Ratio

Depositor’s Safety Ratio

Shareholder’s Risk Ratio

Provisions Ratio

Interest Spread Ration

Sub-standard Asset Ration

Doubtful Asset Ration

38

Loss Asset Ratio

RATIO ANALYSIS

1. GROSS NPA RATIO

Gross NPA is sum of all the loan assets that are classified as NPA

as per the RBI guidelines as on the balance sheet data. Gross NPA ratio is

the ratio of gross NPA to gross advantages of the bank. When it is to be

expressed in percentage, it is known as gross NPA percentage.

Gross NPA Ratio = Gross NPAs x 100 Gross advances

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.5.65% 5.23% 5.75%

PRIME5.16% 4.16% 3.99%

Interpretation:

Above table and chart indicates the quality of credit portfolio of the

banks. High gross NPA ration indicates low quality credit portfolio of the

bank and vice-versa. We can see from the above two banks gross NPA

39

ratio that is Surat district co-operative bank has stable at 5 to 6% and

prime bank ratio has increasing from the last 3 year. It indicates that the

quality of credit portfolio of Surat District Bank is lower.

2. NET NPA RATIO :

The net NPA percentage is the ration of NPA to net advances,

whereas the net NPA can be simply worked out as the gross NPA minus

provisions held for NPA account, and net advances can be simply worked

out as the gross advances minus provisions held for the NPA account.

Net NPA Ratio = Net NPA x 100 Net Advances

Net NPA Ratio = Net NPA - provisions x 100 Gross advances - provisions

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.3.58% 3.67% 4%

PRIME4.99% 4.33% 3.57%

40

Interpretation:

Above table and charts indicates the degree of risk in the portfolio

of the bank. High NPA ratio indicates high quantity of the risky assets in

the bank for which no provision was made. Above table of two banks are

indicates that the net NPA ration of the Surat district bank was higher

than prime bank. It saws that Surat district bank consist of risky assets on

which no provision has been made. It will become dangerous in the long-

term solvency.

3. PROBLEM ASSET RATIO:

It is the ratio of gross NPA to total assets of the bank.

Problem asset Ratio = Gross NPAs x 100

Total asset

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.1.74% 1.90% 1.8%

PRIME1.70% 1.95% 2.07%

41

Interpretation:

It has been direct bearing on return of assets as well as liquidity

risk management of the bank. High problem assets ratio means high

liquid. Above table shows that Surat District bank becomes successful in

achieving lower problem asset ratio whereas prime bank have

comparatively higher ratio indicates.

4. DEPOSITORS SAFETY RATIO :

It is also known as standard asset to total outside liquidity ratio.

Here standard asset means total standard loans assets and investments.

Outside liquidities are total liquidities minus capital and reserves.

Depositors safety Ratio = Total Standard Asset x 100 Total Outside liability

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.33.22% 39.43% 33.48%

PRIME54.90% 60.32% 56.73%

Interpretation:

42

It indicates the degree of safety of depositor’s money. The above

table of two bank saws the ratio of depositor’s safety ratio is lower than

compare to prime bank in each year. Surat District Bank should improve

in order to win the confidence of depositors.

5. SHAREHOLDERS RISK RATIO :

It is the ratio of NET NPA to total of capital and reserve of the

bank.

Shareholder’s Risk Ratio = Net NPAs x 100

Total Capital & Surplus

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.16.78% 21.99% 20.10%

PRIME22.92% 22.41% 20.55%

Interpretation:

43

It indicates the degree of risk associated with the shareholders

investment. High ratio means high risk to the shareholder. Above table of

two bank indicates the prime bank is able to reduce the shareholder’s risk

in the last three years while in case of Surat district correlated-operative

bank’s ratio is moderate but increasing which may leads to divert their

funds to other bank which has lower risk. Bank should keep constant eye

on this ratio to maintain and attract the funds of shareholders.

6. PROVISION RATIO:It is the ratio of total provision held in respect to gross NPA of the

bank.

Provision ratio = Total Provision x 100

Gross NPAs

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.38% 31% 31.67%

PRIME3.55% 6.45% 10.84%

Interpretation:

44

It indicates the degree of safety measures adapted by the banks. It

has direct bearing on profitability, dividend and safety of the shareholders

fund. If the provision ratio is less, it indicates that the bank has made

under provision. The above table indicates the provision ratio of two

bank’s which saws Surat district bank has more than 30% of its gross

NPA from last three year which saws over provision of NPA which

indicates that bank believe in top keep higher safety for profitability,

dividend and safety of shareholder’s funds. The prime bank has not more

provision ratio so the bank has to improve this ratio.

7. INTEREST SPREAD RATIO:

This is the excess of total interest earn over the total interest

expanded.

( Interest earned during the year-

Interest Spread ratio = Interest paid during the year x 100

Standard Assets

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.4.61% 4.77% 5.60%

PRIME12.53% 11.43% 10.82%

45

Interpretation:

This ratio indicates the efficiency of the bank in managing and

marching the interest expenditure and interest income effectively. Interest

spread is critical to a bank’s success as it exerts a strong influence on its

bottom line. The above table shows that Surat district bank is leading in

interest spread ratio compare to prime bank but we can also see that from

last three year its interest spread ratio increasing which indicates that

banks earning asset is increasing and non-performing account is rapidly

converting in the performing account.

8. SUBSTANDARD ASSETS

It is the ratio of total substandard assets to gross NPA of the bank.

Substandard assets = Total substandard Assets x 100

Gross NPAs

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.35.62% 32.97% 38.99%

PRIME72.42% 72.41% 70.27%

46

Interpretation:

It indicates the scope of up gradation / improvement in NPA.

Above table of different ratio of substandard shows that prime co-

operative Bank has highest ratio which means in all NPA’ substandard

ratio has major proportion which indicates that there is the highest scope

for advance up gradation on improvement because it will be very easy to

recover the loan as minimum duration of defaults. The ratio of Surat

district co-operative bank has not much scope of loan gradation or

improvement as their ratio is very low.

9. DOUBTFUL ASSET RATIO:

It is the ratio of total doubtful assets to gross NPA of the bank.

Doubtful Asset = Total doubtful Assets x 100

Gross NPAs

47

BANK2002-2003 2001-2002 2000-2001

SURAT DIST.51.41% 56.10% 49.19%

PRIME27.58% 27.59% 29.73%

Interpretation:

It indicates scope of compromise of up NPA’s reduction. Above

table shows the Surat District Bank ratio is considerably decreasing for

the last three years, which implies that it has to go for compromise as its

substandard assets consist highest portion in the total NPA’s. While in

prime bank it remains very stable.

IN COMPARISON TO THE PREVIOUS YEAR PERFORMANCE

RATIODISTRICT

(02-03)DISTRICT

(01-02)PTIME (02-03)

PRIME (01-02)

48

Gross NPAIncrease Increase Increase Increase

Net NPAIncrease Increase Increase Increase

Gross NPA Ratio

Increase Decrease Increase Increase

Net NPA Ratio

Decrease Decrease Increase Increase

Problem Asset Ratio

Decrease Increase Increase Increase

Depositor’s Safety Ratio

Decrease Increase Decrease Increase

Shareholder’s risk Ratio

Decrease Increase Increase Increase

Provision Ratio

Increase Decrease Decrease Decrease

Interest Spread Ratio

Decrease Decrease Increase Increase

Sub-Standard Asset Ratio

Increase Decrease Increase Increase

Doubtful Asset Ratio

Decrease Increase Decrease Decrease

WORKING

SURAT DISTRICT BANK FOR 2002-2003

1. Gross NPA Ratio = 2227.84 x 100

49

39434.34 = 5.65%

2. Net NPA Ratio = 2227.84-846.47 x 100 39434.34-846.47 = 3.58%

3. Problem Asset Ratio = 2227.84 x 100 128395.66 = 1.74%

4. Depositor’s Safety Ratio = 37206.5 x 100 113999.72

= 33.22%

5. Shareholder’s Risk Ratio = 2227.84-747.65 x 100 8233.94

= 16.78% 6. Provision Ratio = 846.47 x 100 2227.84

= 38%

7. Interest Spread Ratio = 1932.33-215.58 x 100 37206.5

= 4.61%

8. Sub-standard Asset Ratio = 793.48 x 100 2227.84

= 35.62%

50

9. Doubt-full Asset Ratio = 1145.38 x 100 2227.84

= 51.41%

CHAPTER: 9: FINDIGS

1) From the gross NPA Ratio of the bank in 2001 is 5.75%. Which

suddenly decreases in 2002 i.e. 5.23% by 0.52%. It is good for the

51

bank But in increases in 2003 i.e. 5.65% by 0.42%, which is bad

for the bank.

2) Gross NPA Ratio i.e. surat district co-operative bank has stable 5 to

6 % and Prime bank ratio has increases from the last three years.

So quality of credit portfolio of surat district bank is lower.

3) Net NPA Ratio of The Surat District Bank was higher than Prime

Bank. It shows that Surat District Bank consist of risky assets. It

will become dangerous in the long term solvency.

4) Depositor’s Safety ratio is lower than compare to prime bank in

each year. So Surat district bank should improve it.

5) The prime bank is reduce the share holder’s risk in last three years

while in case of surat District Bank Ratio is moderate but

increasing, So bank is divert their funds to other banks.

6) Provision ratio find that total provision divided gross NPAs of the

bank in 2001 is 31.67% and it decreasing in 2002 i.e. 31% by

0.67% and it also increases in 2003 i.e. 38% by 7% increases. So

we can say that firm keep higher safety to compare the prime bank.

7) Substandard Asset Ratio find that total substandard asset upon

gross NPAs of the bank in 2001 is 38.99% it decreases in 2002 i.e.

32.97% by 5.02% decrease and also increase in 2003 i.e. 35.62%

by increase 2.5% in other side prime bank ratio is increases its ratio

in each year.

8) Substandard ratio of surat district bank has not much scope of loan

gradation or improvement as their ratio is very low.

52

CHAPTER: 10 : SUGGESTIONS

Identifying reasons for turning of each account of a branch into

NPA is the most important factor for upgrading the asset quality, as

that would help initiate suitable steps to upgrade the accounts.

The bank must focus on recovery form those borrows who have the

capacity to repay but are not repaying initiation of coercive action a

few such borrows may help.

53

The recovery machinery of the bank has to be streamlined, targets

should be fixed for field officers / supervisors not only for recovery

in general but also in terms of upgrading number of existing NPAs.

In the bank there should be a proper manpower planning.

Bank should try to establish the branches in competitive market, so

it will increase their profit.

Now a day more competition increase in the market so bank should

give more facility to its customers like ATM facilities by which it

can attract more and more customers.

Bank has required increasing the cash and bank balances by

reducing the unnecessary expenses for future plan.

Increase the advances, which is beneficial for the bank to meet

cash requirements from the out side.

Bank should increase the deposits through the advertisement &

dividend payment etc.

In last, I suggest that bank should update its website for better

marketing so customer see the bank's position progress.

BIBLIOGRAPHY

Introduction of company

Annual Report 2000-2001/ 2001-2002 / 2002-2003.

Norms For NPAs

NABARD guidelines 2000

54

Ration Analysis

IBA Bulletin October 2000

55