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INTRODUCTION OF TOPIC

The accumulation of huge non-performing assets in banks has assumed great

importance. The depth of the problem of bad debts was first realized only inearly 1990s. The magnitude of NPAs in banks and financial institutions is overRs.1,50,000 crores. While gross NPA reflects the quality of the loans made by

banks, net NPA shows the actual burden of banks. Now it is increasinglyevident that the major defaulters are the big borrowers coming from the non-

priority sector. The banks and financial institutions have to take the initiativeto reduce NPAs in a time bound strategic approach. Public sector banks figure

prominently in the debate not only because they dominate the bankingindustries, but also since they have much larger NPAs compared with the

private sector banks. This raises a concern in the industry and academia

because it is generally felt that NPAs reduce the profitability of a banks,weaken its financial health and erode its solvency. For the recovery of NPAs a

broad framework has evolved for the management of NPAs under whichseveral options are provided for debt recovery and restructuring. Banks and FIshave the freedom to design and implement their own policies for recovery andwrite-off incorporating compromise and negotiated settlements.

Source of data collection

The data collected for the study was secondary data in Nature.

Scope of the Study

Concept of Non Performing Asset

Reasons for NPAs

Preventive Measures

Tools to manage NPAs

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CH-1 INTRODUCTION ABOUT BANKING

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MEANING OF BANK:

Bank is one type of organization or institute which deals in money. it

means bank related with monitory activity. Bank received money from public

and gives the needy personas advance class of bank.

The bank is derived from the Latin word bonous or banca means

bench. A bank refers to the function of accepting deposits, lending, repaying the

deposit money of demand and functioning and agent whenever as

ked.

Banking Regulation Act of India, 1949 defined banking as Accepting

for the purpose of lending or investment of deposit of the money from public,

repayment of demand or otherwise & withdrawal by cheque, draft, and order.

Banking is establishment which makes to individual, such advances of

money as may be required & safely made to which individuals entrustedmoney when not needed by them for use.

-Walter leat

Most of the banking activities a bank performs are derived from the

above definition. In addition bank are allowed to perform certain activities

which are ancillary to This business of accepting deposits and lending a bank

relationship with the public therefore ,revolves around accepting deposit and

lending more both domestics & foreign from one place to another place.

The banking activities

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HISTORY OF BANK IN INDIA:

Without a sound and effective banking system in India it cannot have

a healthy economy. The banking system of India should not only be hassle free

but it should be able to meet new challenges posed by the technology and other

external & internal factors.

For the past three decades Indias banking system has several

outstanding achievements to its extensive reach. It is no longer confined to only

metropolitans or cosmopolitans in the India. In fact Indian banking system has

reach even to the remote corners of the country. This is one of the main reasons

of Indias growth process.

The governments regular policy for Indian bank since 1969 has paid reach

dividend with the nationalization of 14 major private banks of India. not long

ago ,on account holder had to wait for hours at the bank counters for getting a

draft or for withdrawing his own money. Today, he has a choice gone are days

when the most efficient bank transferred money from one branch to another

branch in two days now it is simple as instant messaging or dial a pizza. Money

has become a order of the day. The first bank in India, though conservative was

established in 1786. From 1786 till today the journey of Indian banking system

can be segregated in to three distinct phases. They are as mention below:

PHASES

1. Early phase from 1786to 1969 of Indian banks.

2. Nationalization of Indian bank and up to 1991 prior to Indian banking

sector reforms.

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PHASE-2

Government of India took major steps in this Indian banking sector

reform after independence in 1955 it nationalized imperial bank of India with

extensive banking facility on a large scale especially in rural and semi urban

areas. it formed state bank of India to act as the principle agent of RBI and to

handle banking transaction of the union and state governments allover country.

Seven bank forming subsidiary of state bank of India was nationalized in 1960

on 19th July, 1969, major process of nationalization was carried out it was the

effort of then prime minister of India, Mrs. Indira Gandhi. 14 major commercial

banks in country were nationalized.

Second phase of nationalization of Indian banking sector reform was

carried out in 1980 with seven more banks. This step bought 80% of the

banking segment in India under government ownership. The following are the

stapes taken by government of India to regulate banking institution in the

country.

1949: Enactment of banking regulation.

1955: Nationalization of SBI.

1959: nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit Guarantor Corporation.

1975: Creation of regional rural bank.

After nationalization of Banks, the branches of the public sector bank India

realized to approximately 800% in deposits and advances took a huge jump by

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11000% banking in the sunshine of government ownership gave the public implicit

faith and immense confidence about the sustainability of this institution.

PHASE-3

This phase has introduced many more products and facilities in the

banking sector in its reforms measures in 1991 under the chairmanship of

M.narasimham, a committee was set up by this name which worked for the

liberalization of banking practices.

The country is flooded with the foreign banks and their ATM

stations efforts are being put to give a satisfactory service to customers. Phone

banking, net banking, is introduced the entire system becomes more convenient

and swift time is more important than money.

The financial system of India has Shawn great deal of resilience. It is

sheltered from any crisis triggered by any external macroeconomics shock as

other East Asian country suffered. This is all due to a flexible exchange rate

regime, the foreign reserves are high, the capital amount is not yet fully

convertible, and banks and their customers have limited foreign exchange

exposure.

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CLASSIFICATION OF BANKS:

1. Commercial banks:

Commercial banks perform all the business transaction of a typical bank.

Commercial bank accepts three types of deposits.

The saving deposit

Fixed deposit

Current deposit

The commercial banks confines their activities to day to day functions of

trade & industry for short duration they provide funds only short term needs or

trade & commerce.

2.Industrial banks:

Industrial banks are those banks which provide funds on long term base for

industries. The banks have specialized in providing long term loans to

industries with a view to buy plant &Machinery and Obtain funds through share

capital, debenture& long term deposits from bank.

3.Exchange banks:

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Exchange banks are known as foreign banks or foreign exchange banks

which provide foreign exchange for import trade their main functions are to

make international payment through the purchase &sell of exchange bill.

4. Co-operative banks:

Co-operative banks are promoted to meet the banking requirement of

customers not only in urban areas but also the rural areas. The co-operative

banks functions like commercial bank receiving deposits and lending money.

They provide short medium term loans. The co-operative bank performs several

functions connected with agriculture, industry trade, transport etc

5. Saving banks:

Saving banks are specified financial institution establish to mobilize

saving from the people generally they pool savings of the small incomes of the

community the banks are also offer interest on these deposits. The deposits are

allowed to withdrawal from their accounts as and when necessary.

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CH-2 INTRODUCTION OF BANK OF INDIA

Bank of India was founded on 7th September, 1906 by a group

of eminent businessmen from Mumbai. The Bank was under

private ownership and control till July 1969 when it was

nationalised along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of

Rs.50 lakh and 50 employees, the Bank has made a rapid

growth over the years and blossomed into a mighty institution

with a strong national presence and sizable international

operations. In business volume, the Bank occupies a premier

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position among the nationalised banks.

The Bank has 3101 branches in India spread over all states/

union territories including 141 specialised branches. These

branches are controlled through 48 Zonal Offices . There are 29

branches/ offices (including three representative offices)

abroad.

The Bank came out with its maiden public issue in 1997 and

follow on Qualified Institutions Placement in February 2008. .

Total number of shareholders as on 30/09/2009 is 2,15,790.

While firmly adhering to a policy of prudence and caution, the

Bank has been in the forefront of introducing various

innovative services and systems. Business has been conducted

with the successful blend of traditional values and ethics and

the most modern infrastructure. The Bank has been the first

among the nationalised banks to establish a fully computerised

branch and ATM facility at the Mahalaxmi Branch at Mumbai

way back in 1989. The Bank is also a Founder Member of SWIFT

in India. It pioneered the introduction of the Health Code

System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to

1921 when it entered into an agreement with the Bombay

Stock Exchange (BSE) to manage the BSE Clearing House. It is

an association that has blossomed into a joint venture with

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BSE, called the BOI Shareholding Ltd. to extend depository

services to the stock broking community. Bank of India was the

first Indian Bank to open a branch outside the country, at

London, in 1946, and also the first to open a branch in Europe,

Paris in 1974. The Bank has sizable presence abroad, with a

network of 29 branches (including five representative office) at

key banking and financial centres viz. London, Newyork, Paris,

Tokyo, Hong-Kong and Singapore. The international business

accounts for around 17.82% of Bank's total business.

LOGO OF BANK OF INDIA

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Our Mission

"to provide superior, proactive banking services to niche markets globally,while providing cost-effective, responsive services to others in our role as adevelopment bank, and in so doing, meet the requirements of our stakeholders".

Our Vision

"to become the bank of choice for corporates, medium businesses and upmarketretail customers and to provide cost effective developmental banking for small

business, mass market and rural markets"

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AWARDS&ACCOLADES

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The NDTV business leadership awards 2008-Indiasbest PSU bank

award.

Business world-PWC survey-no.1 public Sector bank.

Business today KPGM Survey ranked No.1 The best banks

2008.

Dun &Bradstreet study 2008- Best Public sector Bank and overall

best bank in the country.

Dun &Bradstreet-rolta corporate awards 2008-top Indian company

under banks.

Best performance in western zone under the rural employmentgeneration program of KVIC.

BRANCH NETWORK & EXPANSION

The Bank has a geographically well-spread branch network in

India and abroad. The Bank 3207 branches in India as at the

end of March 2010. In the foreign countries, 24 branches and 5

representative offi ces keep our presence felt in all time zones

and important fi nancial centres of the globe.

During the year 2009-10, Bank opened 186 new branches

including 13 Extension Counters converted into full-fl edged

branches. Distribution of these branches is Metropolitan 43,

Urban 39, Semi-Urban 77 and Rural 27.

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MARKETING & PUBLICITY

Marketing has been an important focus in the Bank to induct

new customers and create a set of customer centric processes

for enhancing value for them. A team of over 1000 proactive

and well trained personnel for focused marketing and

relationship efforts has been placed in all the zones.

For automating the entire Sales Force process and consequently

better administration of marketing staff, Sales Force Automation

(SFA) Software Package has been launched and made LIVE

from 01.02.2010 in all the zones. The system will effectively

capture, monitor, track, close and analyze leads generated

during pre-sales process. This system will also be used for

administering the incentive schemes as well.

The Bank has with a view to enhance its corporate image and

identity, initiated media campaigns on the existing theme

"Relationships beyond Banking". Towards this end three TVCs

were produced in line with our Relationship theme viz. Old

Couple, Friends and Bus which were aired on both National as

well as Regional Channels.

Bank has also been advertising our products in newspapers,

magazines, television, hoardings, banners, bus panels, trains,

glow signs at railway stations, events and sponsorships, leafl ets

and brochures.

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CH-3 INTRODUCTION OF NPA

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PREAMBLE

Lending is a business associated with risks. One of the risks being risk of

default. Banks being commercial organisations have to continue lending

activity to earn profits. Profitability very much depends on how Banks are able

to roll over their advances portfolio. Rolling over of advances would be

possible only if there is a timely recovery of money lent. Prompt recovery of

Loans and Advances by Banks not only increases liquidity and profitability but

it also keeps funds cycle moving by continuous lending for the development of

the economy. Further, recoveries in written-off accounts/URI/UCI have direct

and significant bearing on the Banks bottom-line.

Income Recognition and Asset Classification (IRAC norms) and Capital

Adequacy norms, Banks have become increasingly sensitive to credit risks and

there is a growing awareness of the need to keep Non Performing Assets

(NPAs) at a low level. For all Banks having international exposure, required to

maintain Capital Adequacy Ratio as per Basel II recommendations, it is

imperative to abide by stricter risk assessment norms and provision

requirements.

With the last modifications in IRAC norms and provision requirement

announced by the Reserve Bank of India in July 2004, it is implied that an asset

will require 100% provision after 48 months from the date of the account

becoming NPA, irrespective of availability of any security or not. The 100%

provision to be made on an account which does not yield any income to the

organisation is a severe strain on the bottom line of any Bank. In this context,

the management of NPA portfolio assumes paramount importance.

For the focussed attention of NPA Management, we have established 15

specialised Asset Recovery branches in various main centres.

Asset Quality

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Quality of borrower accounts assumes greater importance in the wake of stricter

Prudential Accounting Norms. The quality of borrowal accounts can be ensured

by :

i) Proper and careful evaluation of risks associated with the borrowers andtheir activities;

ii) Meticulous compliance of pre-sanction / post-sanction formalities;

iii) Regular follow-up of borrowal accounts to ascertain the efficiency of

operations and end use of credit;

iv) Timely recovery of interest and instalment;

v) Timely detection of symptoms of sickness;

vi) Timely initiation of corrective measures in respect of irregularities.

On account of changing market scenario, the monitoring system is required to

be changed by identifying the risks associated with the individual borrower.

In order to maintain the quality of assets, Branches may look into the cash flowof the borrowers so as to assess the payment of interest and instalments in time.

Quality of assets charged to the Bank like stocks, goods, properties mortgaged,

etc. assumes great significance for their marketability and realisation of the

values presumed. In order to have a clear picture of the realisable value of

securities, especially mortgaged immovable assets (land, building, plant and

machinery) it is advisable that a valuation of the same is done once in every two

years. Preferably the task may be assigned to a different panel value at each

time. If the present valuation shows substantial variation from the previous

valuation (other than on account of standard depreciation) by about 15%

downwards, we may analyse the case in detail and endeavour to impress upon

the borrower to provide additional securities.

Monitoring and Follow Up Measures

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Zones / Branches / Offices are required to keep updating the master

circularswith the modifications that may be advised by RBI / our Bank

from time to time.

With the Income Recognition and Asset Classification Norms becoming

stricter, Branches are required to be more alert and proactive in monitoring the

accounts. For this purpose, monthly interest application has become a useful

tool to tackle potential delinquencies or defaults in standard accounts. To retain

the asset quality, Branches should promptly act and :-

a) Recover the overdues or at least the critical amount through active follow up

with borrowers;

b) Put the accounts under holding on operations in case of temporary cash flow

mismatches;

c) Reschedule the repayment terms as per expected cash flows;

d) Restructure the dues in keeping with the expected cash flows and gaps in

cash flows, if any as per guidelines given in the restructuring policy.

Any one or more of the above actions should be taken before the account

becomes NPA as per extant guidelines under Restructuring / Rehabilitation

Policies. These aspects have been dealt with in detail in the Credit Monitoring

Policy of the Bank.

The above measures can also be taken under the auspices of Corporate Debt

Restructuring mechanism (CDR) and/ or BIFR mechanism, as well as Banks

own Restructuring Policy which are dealt with separately in their policy

guidelines by the concerned departments and hence not detailed in this booklet.

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viii) Filing suit in Court / DRT Execution of decree

ix) ECGC claim, if any, to be lodged after recalling the advance, reporting the

default and follow up for early settlement of the claim

x) Sale of financial assets to ARCs

xi) Sale of financial assets to Banks / FIs / NBFCs

xii) Lastly, after all the chances of recovery of dues are exhausted, we may

resort to writing off of the balance dues

All these means have to be effectively pursued for resolution of NPAs.

Appointment of Nominee Director:

As an effective measure for closely monitoring the NPA accounts where our

exposure is substantial or where we are the sole bankers (or in consortium

where we have substantial share), we may appoint Nominee Director in

consultation with the borrower company. Recommendations for appointing

Nominee Director shall be submitted by the Zonal Office for approval at Head

Office. A committee of 3 General Managers shall process the requirement and

after their clearance, the same shall be submitted to Executive Director andChairman & Managing Director for approval. The Nominee Director shall be an

official of the Bank, not below the rank of Assistant General Manager, who is

conversant with the affairs of the company. The appointments (and also

changes due to transfer/retirement of officials) shall be subject to annual

review.

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Prudential norms of income recognition, asset classification & provisioning

pertaining to impaired assets

Standard Assets :-

The standard assets consists of assets which are totally regular, safe and

conducted as per norms of sanction. However, during the operations of such

accounts, some of them, at times, show signs of deviations, sickness, out of

order position wherein they became irregular. When such irregularities are

noticed, they are classified as Watch Category assets with Code No. 12 but

continues to be a part of Standard Asset. These accounts need higher level of

monitoring and have to be regularised before these irregularities continue for

more than 90 days. Provision requirement for a standard asset (including Watch

Category asset) is given below:

i) Amount receivable

from Govt. of India

under Agri-Debt

Waiver Scheme

0.00%

ii) Amount receivable

from Govt. of India

under Agri-Debt Relief

Scheme

0.25%

iii) Direct advances toagriculture and SME

Sector

0.25%

iv) All other loans and

advances

0.40%

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Definition of an NPA :-

An asset becomes non-performing when it ceases to generate income to the

Bank. A non-performing asset (NPA) is defined as a credit facility in respect of

which the interest and / or instalments of principal has remained overdue for a

specified period of time.

The concept of specified period is reduced in a phased manner. The

shortening of the period is from 4 quarters in 1993 when the concept of IRAC

norms was first introduced in India to present level of 90 days. 7 8

Thus in the present context, 90 days overdue norms for identification of NPAs

has been adopted from 31.3.2004 onwards in all advances except direct

agricultural advances where the norms are different. Thus from 31.3.2004 an

advance or loan (other than direct agricultural advance) shall be classified as anNPA where -

a) Interest and / or instalment of principal remain overdue for a period of more

than 90 days in respect of a term loan.

b) The account remain out of order in respect of an overdraft / cash credit for

more than 90 days.

c) The bill remain overdue for a period of more than 90 days in the case of bills

purchased and discounted.

d) Any amount to be received remains overdue for a period more than 90 days

in respect of any other accounts.

In case of direct agricultural advances, w.e.f. 30.9.2004, a loan granted for short

duration crops will be treated as NPA, if the instalment of principal or interest

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thereon remains overdue for 2 crops seasons. In case of long duration crops, the

loan will be treated as NPA if the instalment of principal or interest thereon

remains overdue for 1 crop season. All direct agricultural loans specified in the

annexure to our Branch Circular 98/100 dated 26.8.2004 (reproduced from

Annexure to RBI Circular No.DBOD.BP.BC.102:21.04.048:2003-04 dated

24.6.2004 RPCD.PLAN.BC.42A:04.09.01:2001-02 dated 11.11.2002) shall

also be governed by these norms. All other direct / indirect agricultural

advances including allied activities (not listed in the said annexure) shall be

governed by 90 days delinquency norms as applicable to other general

advances.

Asset Classification

Categories of NPAs

Banks are required to classify NPAs further into following categories, based on

the period for which asset has remained non-performing and realisability of

dues.

a) Sub-standard Asset

b) Doubtful Asset

c) Loss Asset

Substandard Asset

With effect from 31st March 2005, substandard asset is one which has remained

NPA for a period less than or equal to 12 months. Its Asset Code is 20. The

provision requirement in substandard asset was earlier flat 10% of the

outstanding dues, irrespective of the category of the advance (secured or clean).

Now RBI has removed the CAP on the unsecured exposures and individual

Bank Boards were given the freedom to formulate their own policy guidelines

for prudential norms on unsecured exposures. Simultaneous with this

liberalisation, RBI has made norms of provision requirement on unsecured

exposure of Banks more stringent. Unsecured exposure is defined as an

exposure where the realisable value of security as stipulated and ascertained by

the valuation is not more than 10% `ab initio. That means all clean / unsecured

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III on or after 1.4.2004 shall require 100% provision as on 31.3.2005 and

thereafter (irrespective of RVS).

As an intermediate measure for smooth transition, RBI had implemented

a graded system of provision requirement at 60% and 75% of the RVS + 100%of shortfall for the year ending 31.03.05 and 31.03.06 for accounts which were

classified as Doubtful III category as on 31.03.04 (i.e. Stock Doubtful III A/cs).

However, these accounts also will require 100% provision from 31.03.07

onwards.

As per the existing provisioning norms, all accounts entering into or already

classified as Doubtful III will uniformly require 100% provision as on 31.3.07

and thereafter.

Loss Assets Code 40

A loss asset is one where loss has been identified by Bank or internal or

external creditors or RBI inspectors but the amount has not been fully written

off. Such an asset is considered uncollectible and of such little value that its

continuance is not warranted, even though there may be some small (less than

10%) salvage recovery value. The provision requirement is 100% of net

outstanding dues. These loss assets should be gradually written off from the

books. 10

Government guaranteed advances

The credit facilities backed by the guarantee of Central Government though

overdue may be treated as NPA only when the Government repudiates its

guarantee when invoked. As per recent RBI guidelines, w.e.f. 31.3.2005, all

State Government guaranteed advances will attract asset classification and

provisioning norms if interest and / or principal instalments or any other

amounts due to the bank remain over due. (i.e. despite the availability of State

Government guarantee, the accounts will become NPA if they are not

conducted as standard assets and will require normal NPA classification and

income recognition and provision norms as applicable to all other NPAs).

Presently (w.e.f. 31.3.2006), these State Govt. guaranteed accounts will also

become NPA with 90 days delinquency norms.

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FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs. Butthe problem of NPAs is more in public sector banks when compared to privatesector banks and foreign banks. The NPAs in PSB are growing due to external aswell as internal factors.

EXTERNAL FACTORS :

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery ofloans and advances. Due to their negligence and ineffectiveness in their work the

bank suffers the consequence of non-recover, their by reducing their profitabilityand liquidity.

Willful Defaults

There are borrowers who are able to payback loans but are intentionallywithdrawing it. These groups of people should be identified and proper measuresshould be taken in order to get back the money extended to them as advances and

loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs.every now and then India is hit by major natural calamities thus making the

borrowers unable to pay back there loans. Thus the bank has to make largeamount of provisions in order to compensate those loans, hence end up the fiscalwith a reduced profit.

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Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rainfall the farmers are not to achieve the production level thus they are not repayingthe loans.

Industrial sickness

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Improper project handling , ineffective management , lack of adequate resources ,lack of advance technology , day to day changing govt. Policies give birth toindustrial sickness. Hence the banks that finance those industries ultimately endup with a low recovery of their loans reducing their profit and liquidity.

Lack of demand

Entrepreneurs in India could not foresee their product demand and startsproduction which ultimately piles up their product thus making them unable topay back the money they borrow to operate these activities. The banks recover theamount by selling of their assets, which covers a minimum label. Thus the banksrecord the non recovered part as NPAs and has to make provision for it.

Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus ithas to cope with the changing principles and policies for the regulation of therising of NPAs.

The fallout of handloom sector is continuing as most of the weavers Co-operativesocieties have become defunct largely due to withdrawal of state patronage. Therehabilitation plan worked out by the Central government to revive the handloomsector has not yet been implemented. So the over dues due to the handloomsectors are becoming NPAs.

INTERNAL FACTORS :

Defective Lending process

There are three cardinal principles of bank lending that have been followed by thecommercial banks since long. i. ii. iii. Principles of safety Principle of liquidity

Principles of profitability

i.

Principles of safety :-

By safety it means that the borrower is in a position to repay the loan bothprincipal and interest. The repayment of loan depends upon the borrowers:

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a. Capacity to payb. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business

Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower[Comparative analysis on NPA of Private & Public sector Banks] Page 28

The banker should, there fore take utmost care in ensuring that the enterprise orbusiness for which a loan is sought is a sound one and the borrower is capable ofcarrying it out successfully .he should be a person of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management information system, market

driven decisions on real time basis can not be taken. Proper MIS and financialaccounting system is not implemented in the banks, which leads to poor creditcollection, thus NPA. All the branches of the bank should be computerized.

Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is anotherreason for rise in NPAs. While providing unsecured advances the banks dependmore on the honesty, integrity, and financial soundness and credit worthiness ofthe borrower.

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REASONS FOR NPA:

Reasons can be divided in to two broad categories:

A] Internal FactorB] External Factor

[A] Internal Factors:

Internal Factors are those, which are internal to the bank and are controllable bybanks.

Poor lending decision:

Non-Compliance to lending norms:

Lack of post credit supervision:

Failure to appreciate good payers:

Excessive overdraft lending:

non Transparent accounting policy:

[B] External Factors:

External factors are those, which are external to banks they are not controllableby banks.

Socio political pressure

Chang in industry environment

Endangers macroeconomic disturbances

Natural calamities

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Industrial sickness

Diversion of funds and willful defaults

Time/ cost overrun in project implementation

Labour problems of borrowed firm

Business failure

Inefficient management

Obsolete technology

Product obsolete

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Types of NPA

A] Gross NPAB] Net NPA

A] Gross NPA:

Gross NPAs are the sum total of all loan assets that are classified as NPAs asper RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of

the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help offollowing ratio:

Gross NPAs Ratio

Gross NPAs Gross Advances

B] Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provisionregarding NPAs. Net NPA shows the actual burden of banks. Since in India,

bank balance sheets contain a huge amount of NPAs and the process ofrecovery and write off of loans is very time consuming, the provisions the

banks have to make against the NPAs according to the central bank guidelines,are quite significant. That is why the difference between gross and net NPA isquite high. It can be calculated by following_ Net NPAs Gross

NPAsProvisions Gross Advances - Provisions

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Wilful defaulters :

Wilful Default is defined as follows :-

"A Wilful Default would be deemed to have occurred if any of the

following events is noted :-

The unit has defaulted in meeting its payment / repayment obligations to the

lender even when it has the capacity to honour the said obligations.

The unit has defaulted in meeting its payment / repayment obligations to the

lender and has not utilised the finance from the lender for the specific purposes

for which finance was availed of but has diverted the funds for other purposes.

The unit has defaulted in meeting its payment/repayment obligations to the

lender and has siphoned off the funds so that the funds have not been utilised

for the specific purpose for which finance was availed of, nor are the funds

available with the unit in the form of other assets.

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SARFAESI Act 2002

The Securitisation & Reconstruction of the Financial Assets and Enforcement

of Security Interest Act 2002 (SARFAESI Act 2002)

The Securitisation and Reconstruction of Financial Assets and Enforcement ofSecurity Interest Act, 2002 is an effective tool in the hands of the Bank to

enforce the security interests and recover the dues thereby reducing NPAs. The

Act has three segments

a) Securitisation and Asset Reconstruction Companies

b) Central Registry

c) Enforcement of Security Interest

This Chapter confines itself to enforcement of Security Interest and gives

the gist of the salient features of the Act, Rules and important

instructions. The instructions contained below are to be read alongwith

the following:

i) The Securitisation and Reconstruction of Financial Assets and Enforcementof Security Interest Act, 2002;

ii) The Security Interest (Enforcement) Rules, 2002;

iii) The Enforcement of Security Interest and Recovery of Debts Laws

(Amendment) Act, 2004.

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iv) The Security Interest (Enforcement) Amendment Rules, 2007 i.e.

02.02.2007.

v) Security Interest (Enforcement) (Amendment) Rules, 2007 w.e.f.

26.10.2007.

The SARFAESI Act enables the Bank wherever the Bank is a secured

creditor to enforce security interest for recovery of its dues without the

intervention of the Court or Debt Recovery Tribunal provided that

secured interest has been properly created in favour of the Bank.

The term Security Interest has been defined under the SARFAESI Act as

under:

Security Interest means right, title and interest of any kind whatsoever

upon property, created in favour of any secured creditor and includes

mortgage, charge, hypothecation and assignment

Criteria for invoking the provisions of the SARFAESI Act.Before enforcing security interest, branches should ensure that the

borrower accounts comply with the following criteria

The contractual dues in the account should be Rs.1.00 lakh and above

The default must have occurred i.e. the account should have become

NPA as per RBI norms.

The security charged to the Bank must be specific, clear and available to

the Bank. It must be duly and effectively charged to the Bank and

therefore, enforceable if the borrower fails to pay in response to the

Notice. The security documents in the advance account should be in full force on

the date of serving the 60 days notice. As an abundant caution, it should

be ensured that they are in force even at the time of the Action that will

follow for enforcement of security i.e. at least up to one year from the

date of serving the notice.

The security documents should be duly filled in and no column should

be kept blank.

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a) Identification of accounts & Obtention of Approval for Action

the entire NPA portfolio of the Branch should be gone through and

accounts fulfilling the eligibility conditions as given above should be

identified.

Out of those identified accounts such account should be short-listed in

which charged security can be taken into possession for sale/lease for

recovery of Banks dues.

The Branch must put up the proposal before the Competent Authority for

approval for Action under the Act as per the prescribed format.

on objection of approval, 60 days notice(s) should be sent under the

signature of the Authorised Officer.

there is no waiting period for issuing notices under the Act. As soon as

the account becomes NPA, notices under the Act should be issued after

obtaining appropriate approval from Competent Authority.

b) Issue of notices.

Service of proper notice is a pre-requisite for enforcement of security interest.

Hence, it should be ensured that proper notices are served on the borrowers/

guarantors who have created the security interest.

The authority for approving proposal for issuing notice and taking Action

under the SARFAESI Act is as under :-

(Rs.in lakh)

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Chairman and Managing

Director

Executive Director

General Manager/ Scale VII

Dy. Gen. Manager/ Scale VI

Asst. Gen. Mgr./ Scale V

Chief Manager / Scale IV

Senior Branch Manager (Large

Branch) Scale III

Full powers

2500.00

1000.00

750.00

250.00

50.00

10.00

Note:

i) The amounts represent suit claims/ contractual dues.

ii) The delegate approving issue of notice should not have sanctioned the credit

proposal. In such a case, it should be submitted to the next higher authority.

iii) The powers are to be exercised by the chief incumbent at the Branch. Inrespect of administrative/ controlling/ Zonal Offices, designated officers of the

rank of Chief Manager/ Scale IV and above may exercise the above delegation

within their functional area.

iv) At Head Office Level the powers will be exercised by Dy. General Manager

(Law/ARD) onwards as per the above delegation.

Other important instructions regarding issuing of notices:

a) Though approval for issuing notices can be given as above, notices are to be

signed by the officer duly authorised by the Zonal Manager as `Authorised

Officer.

b) The period of notice will be 60 days.

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c) Notices can be issued not only to the principal borrower but also to the

guarantor if security interest is created by the guarantor. However, if no security

is created by the borrower but only by the guarantor then notice can be issued

ONLY to the guarantor who has created security and the borrower should be

issued usual RECALL NOTICE. Notices must be issued in the prescribed

format, specimen of which are given in Annexure I & II.

d) The service of the notice is to be made by Regd. Post / A.D., Speed Post,

Courier, E-mail, UPC, Fax etc. In case of non-delivery of service, the service is

to be affected by affixing the notice on the conspicuous part of the building

where the borrower / guarantor resides and / or carries on business and also on

the property in which the security interest is created. It may also be published in

two leading newspapers, one in vernacular language having sufficient

circulation in that locality and the other in English.

e) Where the borrower is a Body Corporate, the Demand Notice shall be served

on the Registered Office and also on any of the branches of such Body

Corporate as specified under Sub Rule (1) of Rule 3 of Security Interest

Enforcement Rules 2002.

f) When there is more than one borrower, the Demand Notice shall be served on

each borrower.

g) In case of Joint Financing/Multiple Lending, whenever it is decided to

proceed under the Act, all the Banks shall issue their notices separately for their

respective dues.

h) The Authorised Officers so issuing the notice as well as monitoring and

follow up of the action will have immunity granted for all Action done in good

faith and without negligence while exercising the right on the securities created.

C) Objection / Representation received from the borrower on receipt of

Notice:

After issuance of notice under Section 13(2) of the SARFAESI Act by

the Bank, if any borrower/guarantor makes any representation or raises

any objection, then the Bank, being a secured creditor, has to consider

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Bank can issue notice and take possession and other measures under Section 13

(4) of the Act for recovery of the Banks dues {where there is no rehabilitation

scheme in operation} when our Bank is the sole Banker or our dues against the

borrowers constitute 75 % in value of the amount outstanding against financial

assistance disbursed to the borrower/s whose units have been referred to BIFR.

Where our Bank is neither the sole Banker nor Banks dues constitute 75% as

aforesaid, then for taking Action under the Act, the consent of secured creditors

representing not less than 75 % in value of the amount outstanding against such

borrower is required. Alternatively, in

such cases our Bank can give consent to other secured creditors / Lead

Bank for taking Action. However, our Bank must issue the Notice under

Section 13 (2) for our dues only, after taking permission from appropriate

authority. Once the Notice is issued and/or possession of a secured asset

is taken or any other measure under Section 13 (4) is taken by any of the

secured creditor then the reference before BIFR shall abate and further

Action for recovery of Banks dues can be initiated / continued before

other forums, DRTs etc.

h) Enforcement action in suit filed / DRT accounts:

Position prior to Supreme Court Judgement in M/s Transcore vs Union of

India: -

The Banks were taking simultaneous action for recovery under the

SARFAESI Act as well as DRT Act, prior to the following amendment.

The Government has promulgated an Ordinance on 11.11.04 named as

Enforcement of Security Interest and Recovery of Debts Laws

(Amendment) Ordinance, 2004. By the said Ordinance, Section 19 of the

DRT Act has been amended. The said Ordinance was repealed and the

Act was passed and notified in the Gazette on 31.12.04. The amendedSection 19 of the DRT Act prohibits the Banks and Financial Institutions

from taking simultaneous action under the SARFAESI Act as well as

DRT Act.

However, our Bank had taken a view that the said Amendment Act is not

having retrospective effect i.e. the said amendment became effective

prospectively from the date of the promulgation of the Ordinance on

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11/11/2004. In case of suits pending before the amendment of Section 19

of the DRT Act i.e. suits filed prior to 11/11/04, Bank could always take

simultaneous action under the SARFAESI Act as also the DRT Act. As

regards the suit filed/decreed cases after 11/11/2004 where the Bank had

not taken any action under the SARFAESI Act and decided to take action

i.e. after the issuance of the said Ordinance, then it had been decided to

file a suitable application before the Honble DRT/Civil Court to keep

the Banks OA/Suit adjourned with liberty to the Bank to revive the same

after the completion of the proceedings initiated under the SARFAESI

Act. If the Honble DRT/Court did not entertain the Banks Application,

in that case it was decided to continue the proceedings before the

Honble DRT/Court as withdrawing the OA / Suit against the

borrowers/guarantors, the Bank may lose its legal right to file fresh OA /Suit as it will be hit by the provisions of the Limitation Act.

Position after Supreme Court Judgement in M/s Tran score vs. Union of

India:-

The issue relating to simultaneous action under the DRT Act and the

SARFAESI Act was examined by the Humble Supreme Court of India in

the Civil Appeal No. 3228 of 2006 between M/s.Transcore and Union of

India & Another and a detailed judgment has been given on 29.11.06. Inthe said Civil Appeal, the Honble Apex Court has interalia considered

the following points/issues and has given its findings:

(i) Whether the banks or financial institutions having elected to seek their

remedy in terms of DRT Act, 1993 can still invoke the SARFAESI Act, 2002

for realizing the secured assets without withdrawing or abandoning the O.A.

filed before the DRT under the DRT Act. 68

(ii) Whether recourse to take possession of the secured assets of the

borrower in terms of Section 13 (4) of the SARFAESI Act comprehends

the power to take actual possession of the immovable property.

The Honble Apex Court has answered the above questions in the affirmative

i.e. in favour of the Banks/Financial Institutions (FIs) and accordingly the

Appeal filed by the borrower was dismissed. Having regard to the fact that the

Honble Apex Court has decided the above issues in favour of the Banks/FIs,

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Write off Policy

Write off is resorted to in the borrow accounts when the Bank has exhausted all

possible avenues of recovery and there are no more chances for effecting the

recovery.

Write off is of two kinds 1) prudential write off and 2) Regular write off.

The basic difference between prudential and regular write off is that in

Prudential write off there is possibility of recovery at a distant future even after

write off while in Regular write off there is no/ little possibility of recovery.

It is open to the Bank to resort to partial write off also. Partial write off would

be in the accounts classified as doubtful assets, to the extent of provision heldon the outstanding and not covered by any security.

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Ch-4 ANALYSIS& INTERPRETATION

The following table show the management of NPA.

2010 2009 2008 2007

Gross npa 2471 1931 2101 2479

Less:cash recovery 622 752 814 676

up gradation 204 325 275 132

Write off 743 384 446 441

Agr.debt waiver/debt

relief scheme2008

0 175 0 0

Total reduction 1569 1560 1535 1325

Add:

slippages 4162 2100 1365 947

Gross npa(closing) 4883 2471 1931 2101

Recovery in write off 300 280 368 352

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Net npa 2207 628 592 812

%of gross Npa to gross

advances

2.85 1.71 1.68 2.42

%of net Npa to net

advances

1.31 0.44 0.52 0.96

INTERPRETATION:

From the following table we show that the gross NPA of the bank is increasesin the year 2010 and it is 2471 carore .

Cash recovery is increases up to the year 2009 752carore inthen it is

decreases by 622 crore in the year 2010.

Write-off is also decreases up to 2009 then it is increases in 2010 i.e.

51%.

Slippages are also increases in the year 2010 it is by 51%. it is impact on

the profitability of the bank.

Net NPA of the bank are increases in the year 2010 i.e. 2207carore.

Recovery in write off increases by 9o% it is good sign for the bank.

Gross npa of the bank are increases by 2.85%.

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Interpretation:

In the following graph we show that the percentage of the gross npa to

gross advances ratio is increases in the current year so bank has to

minimize this ratio

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Interpretation:

In the second graph is of % of net npa to net advances. This ratio is also

increases in the year 2010. it is bad for the bank.

ANALYSIS OF BHARUCH BRANCH:

May1

0

Apr10 Mar1

0

Feb10 Jan10 Dec09 Nov0

9

Oct09

Npa outstanding 93327 92781 92804 91824 91824 90857 112315 112245

Cash

recovery

46 24 23235 23188 23188 23123 842 807

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upgradatio

n

- - - - - - - -

slippages - - 11425

1

11180

4

11180

4

11180

4

110981 110876

Write-off - - 345 - - - - -

Recovery

in

UCI/URI

- - 4430 4430 120 75 75 75

Recovery

in write off

- 11 575 - - - - -

Total

advances

290235 28998

4

28660

1

59247

3

45815

8

40479

2

674715 298603

32.15 31.99 32.38 15.49 20.04 22.44 16.65 37.59

Interpretation:

The npa the of the bharuch branch is decreases every month so it is good

for the branch.

The cash recovery of the branch is increases up to the march then it is

decreases so bank is attention on the getting the cash recovery of npa

amount.

Recovery in UCI or URI is also increases up to march month

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Findings

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Recovery camps and participation in LOK ADALAT for speedy

Resolutions of small NPAs has been undertaken in a big way at the

Zones. The Bank has made recovery of Rs.28.64 Crores

Through LOK-ADALAT and Recovery Camps.

The Operating Profi t of the Bank for the year 2009-10 stood at

Rs.4705 crore as against Rs.5457 crore last year and the Net

Profi t stood at Rs.1741 crore as compared to Rs.3007 crore

for last year. The Banks Profit was impacted by drop in Net

Interest Margin mainly because of high cost deposits picked up

during the earlier part of the year and decline in the yields on

advances. The fall in Treasury income due to adverse market

conditions and higher NPA provisions also affected the profit

level.

Book Value per share Rs.236.84

(Rs.211.89 previous year)

profitability of the bank is affected because of one reason is the NPA the

banks NPA ratio is increases by

Gross NPA ratio at 2.85% as on 31.03.2010 and Net NPA ratio at 1.31%

as on 31.03.2010.

we also found that the profitability of the bharuch branch is also good

It has npa a/c is decrease day by day npa is not harm the banks

Profitability.

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Total business (Deposit + Advances) reached at Rs. 401,079 crore

recording a growth of Rs. 66,639 crore (19.93%). Domestic business

grew by 20.72% to reach the level of Rs.331, 779 crore.

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SUGGETION

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BANK SHOULD MAKE CQNTRALERMAINTAIN ITS EXPENSES

TO IN GREASES ITS INCOME & PROFIT OF THE BANK.

BANK HAS CONSERNTRUTE ON NPA A/C.FOR THEIR

REDUCTION.

BANK HAS TO