NPA, SARFAESI Act and the Impact of ARCs in India

NPA, SARFAESI Act and the impact of ARCs in India South Indian Bank

EXECUTIVE SUMMARY

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

only since a couple of years that this particular aspect has been given so much importance. The

banks have to overcome these difficulties properly in order to effectively counter the competition

faced by the foreign banks. With the framing of laws as per international standards and setting up

of Debt recovery tribunal we can say that steps have been taken in this direction.

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

banking sector was heading for a crisis in 2001 with NPA’s crossing a mammoth Rs. 64000

Crores. Banks burdened with huge NPA’s faced uphill tasks in recovering then due to archaic

laws and procedures. Realizing the gravity of the situation the government was quick to

implement the recommendations of the Narsimham Committee and Andhuarjuna Committee

leading to the enactment of the SARFAESI Act 2002 (Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act).

This Act gave the banks the much needed teeth to curb the menace of NPA’s. The non

performing assets (NPAs) of banks have at last begun shrinking. It is understood that there has

been substantial improvements in nonperforming assets and this has been because of several

measures such as formation of asset reconstruction companies, debt restructuring norms,

securitization, provisioning norms and prudential norms for income recognition. The gross NPAs

of the banking system are about 16 per cent of the total assets of the nationalized banks as of

2000-01. This is against a global norm of about 5%. Hence there is a long way to go before we

can say that the NPA’s of our banks are under control. The improvements in NPAs of individual

nationalized banks have been in the order of 10% to 20%, thanks to the various schemes and

measures introduced.

The RBI has tried to develop many schemes and tools to reduce Non Performing assets. To

improve NPAs each bank should be motivated to introduce their own precautionary steps. Before

lending the banks must evaluate the feasible financial and operational prospective results of the

borrowing companies by keeping in considerations the overall impacts all the factors that

Alliance University School of Business 1


influence the business.

The problem is no doubt about recovery management where the objective is to find out about the

reasons behind NPAs. In this paper I am also going to look into the financial performance of

South Indian Bank for the past four years. It also includes discussion about SARFAESI Act and

the impact of asset reconstruction companies in India. This paper tells you how successful the

asset reconstruction companies have been in reducing the amount of NPAs. The impact of

technology to reduce frauds and the measures needed to be taken is also been discussed.



CHAPTER-1Introduction

1.1INTRODUCTION



The crucial role of bank economists is in transforming the banking system in India. Economists

had to be more ‘mainstreamed’ within the operational structure of commercial banks. Apart from

the traditional functioning of macro-scanning, the inter linkages between treasuries, dealing

rooms and trading rooms of banks need to be viewed not only with the day-to-day needs of

operational necessity, but also with analytical content and policy foresight. Banking sector

reforms in India has progressed promptly on aspects like interest rate deregulation, reduction in

statutory reserve requirements, prudential norms for interest rates, asset classification, income

recognition and provisioning. But it could not match the pace with which it was expected to do.

The accomplishment of these norms at the execution stages without restructuring the banking

sector as such is creating havoc.

During pre-nationalization period and after independence, the banking sector remained in private

hands, large industries who had their control in the management of the banks were utilizing

major portion of financial resources of the banking system and as a result low priority was

accorded to priority sectors. Government of India nationalized the banks to make them as an

instrument of economic and social change and the mandate given to the banks was to expand

their networks in rural areas and to give loans to priority sectors such as small scale industries,

self-employed groups, agriculture and schemes involving women.

To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the

banking system to expand its network in a planned way and make available banking series to the

large number of population and touch every strata of society by extending credit to their

productive endeavors.

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 any other external and internal factors. For the past three

decades India's banking system has several outstanding achievements to its credit. The most

striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in

India. In fact, Indian banking system has reached even to the remote corners of the country.

Granting of credit for economic activities is the prime duty of banking. Apart from raising

resources through fresh deposits, borrowings and recycling of funds received back from

borrowers constitute a major part of funding credit dispensation activity. Lending is generally



encouraged because it has the effect of funds being transferred from the system to productive

purposes, which results into economic growth. However lending also carries a risk called credit

risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a

major hurdle in the process of credit cycle. Thus, these loan losses affect the bank’s profitability

on a large scale. Though complete elimination of such losses is not possible, but banks can

always aim to keep the losses at low level. Non-performing Asset (NPA) has emerged since over

a decade as an alarming threat to the banking industry in our country sending distressing signals

on the sustainability and endurability of the affected banks. The positive results of the chain of

measures affected under banking reforms by the Government of India and RBI in terms of the

two Narasimham Committee Reports in this contemporary period have been neutralized by the

ill effects of this surging threat. Despite various correctional steps administered to solve and end

this problem, concrete results are eluding. Because of this the biggest challenge facing the banks

is NPA management

After the global financial turmoil in 2008, Indian banks began the New Year with a lurking fear

that their NPAs would go up with their portfolios coming under severe stress. There is already a

visible strain on consumer, credit card and vehicle loan portfolios and many banks have taken

conscious decision to scale down their advances to risky sectors. Some banks have also revised

their credit growth targets downwards as the year has come to a close.

In 2009-10 there was a slowdown in the balance sheet growth of scheduled commercial banks

(SCBs) with some slippages in their asset quality and profitability. Bank credit posted a lower

growth of 16.6 per cent in 2009-10 on a year-on-year basis but showed signs of recovery from

October 2009 with the beginning of economic turnaround. Gross Non Performing Assets (NPAs)

as a ratio to gross advances for SCBs, as a whole, increased from 2.25 per cent in 2008-09 to

2.39 per cent in 2009-10. Notwithstanding some weakening of asset quality, the Capital to Risk

Weighted Assets Ratio (CRAR) of Indian banks in terms of Basel II norms at 14.5 per cent as at

end March, 2010 was much higher than the regulatory prescription. However, the profitability of

Indian banks as reflected by the Return on Assets (RoA) was lower at 1.05 per cent in 2009-10

than 1.13 per cent during the previous year.

Liquidity management is a fundamental component for safe and sound functioning of all

financial institutions. Sound liquidity management involves prudent management of assets and



liabilities (on- and off-balance sheet), supported by a process of liquidity planning taking into

account changes in economic, regulatory or other operating conditions. Banks will have to put in

place a robust liquidity management plan, especially through encouragement and retention of

stable retail deposits.

The management of NPAs is one of the main business objectives of banks which requires

appropriate appraisal, monitoring and management of issued loans. Gross NPA ratio has shown

an increase in 2009-10. Moreover, there has been a deterioration of the asset quality as reflected

by an increase in the proportion of doubtful and loss assets in the NPA profile of banks in 2009-

2010. The signs of financial stress thus remain an important concern for the Indian banking

sector in the medium to long-term.

1.2 CHALLENGES FACING BANKING INDUSTRY IN INDIA

The banking industry in India is undergoing a major transformation due to changes in economic

conditions and continuous deregulation. These multiple changes happening one after other has a

ripple effect on a bank trying to graduate from completely regulated sellers market to completed

deregulated customers market.

Deregulation:

This continuous deregulation has made the Banking market extremely competitive with greater

autonomy, operational flexibility, and decontrolled interest rate and liberalized norms for foreign

exchange. The deregulation of the industry coupled with decontrol in interest rates has led to

entry of a number of players in the banking industry. At the same time reduced corporate credit

off take thanks to sluggish economy has resulted in large number of competitors battling for the

same pie.

New rules:



As a result, the market place has been redefined with new rules of the game. Banks are

transforming to universal banking, adding new channels with lucrative pricing and freebees to

offer. Natural fall out of this has led to a series of innovative product offerings catering to

various customer segments, specifically retail credit Efficiency: This in turn has made it

necessary to look for efficiencies in the business. Banks need to access low cost funds and

simultaneously improve the efficiency. The banks are facing pricing pressure, squeeze on spread

and have to give thrust on retail assets

Figure 1.1Challenges Facing Indian Banking Industry

Diffused Customer loyalty:



This will definitely impact Customer preferences, as they are bound to react to the value added

offerings. Customers have become demanding and the loyalties are diffused. There are multiple

choices; the wallet share is reduced per bank with demand on flexibility and customization.

Given the relatively low switching costs; customer retention calls for customized service and

hassle free, flawless service delivery.

Misaligned mindset:

These changes are creating challenges, as employees are made to adapt to changing conditions.

There is resistance to change from employees and the Seller market mindset is yet to be changed

coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowly

creeping in but the utilization is not maximized.

Competency Gap:

Placing the right skill at the right place will determine success. The competency gap needs to be

addressed simultaneously otherwise there will be missed opportunities. The focus of people will

be on doing work but not providing solutions, on escalating problems rather than solving them

and on disposing customers instead of using the opportunity to cross sell.

Strategic options with banks to cope with the challenges:

Leading players in the industry have embarked on a series of strategic and tactical initiatives to

sustain leadership.

The major initiatives include:

Investing in state of the art technology as the back bone of to ensure reliable service

delivery savings deposits.

Making aggressive forays in the retail advances segment of home and personal loans.



Implementing organization wide initiatives involving people, process and technology to

reduce the fixed costs and the cost per transaction

Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade

services)

Innovating Products to capture customer ‘mind share’ to begin with and later the wallet

share

Improving the asset quality as per Basel II norms

1.3 NON PERFORMING ASSETS:

NPA or non performing assets refer to those assets which fail to generate income within the

stipulating time for the organisation. It forms one of the main areas of concern for banking sector

For a bank to classify an asset as performing, it requires to meet the guidelines prescribed by

Reserve Bank of India. With regard to the loans, it defines some aspects like ‘Past Due’, ‘Out of

Order’, ‘Over Due’ and finally ‘Non-Performing Assets’.

Past Due

An amount due under any credit facility is treated as Past Due when it has not been paid within

30 days from the due date. The past due concept have been dispensed off w.e.f 31st March 2002

due to advancement in technology and improvement in payment and settlement system.

Out of Order

An account is treated as ‘Out of Order’ if the outstanding balance remains continuously in excess

of the sanction limit/drawing power. In cases where the outstanding balance in the principal

operating account is less than sanctioned limit/ drawing power, but there are no credits

continuously for 90 days as on the date of balance sheet or credits are not enough to cover the

interest debited during the same period, these accounts should be treated as ‘Out of Order’.

Over Due



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

date fixed by the bank.

Non Performing Assets

An asset becomes Non Performing when it ceases to generate income for a Bank. It is also

defined as credit facility in respect of which the interest and or instalments of principal has

remained ‘Past Due’ for a specified time. As a step forward towards international best practices

and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for

identification of NPA’s from the year ending March 31, 2004. According, NPA shall be a loan or

advance where:

a) Interest and/ or instalment of principal remain overdue for a period of more than 90 days

in respect of term loan.

b) The account remains ‘Out of Order’ for a period for more than 90 days in the respect of

over draft/ cash credit.

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

or discounted

d) Interest and/ or instalments of principal remain overdue for to crop seasons for short

duration crops.

e) Interest and/ or instalments of principal remain overdue for one crop season for long

duration crops.

f) The amount of liquidity facility remains outstanding for more than 90 days, in respect of

a securitization transaction undertaken in terms of guidelines on securitization dated

February 1, 2006.

g) In respect of derivative transactions, the overdue receivables representing positive mark

to market value of a derivative contract, if these remain unpaid for a period of 90 days

from the specified due date for payment.

PERFORMING / NON-PERFORMING ASSETS



A performing asset is an advance which generates income to the bank by way of interest and

their charges.

An NPA is an advance or borrower account which does not generate income for the bank but

they incur various inherent costs like a) cost of deposit b) cost of servicing c) provisioning at

appropriate rates d) capital adequacy requirements on these assets and e) cost of recovery.

The causes for NPAs and the impediments faced by the bank in the recovery process are the

inadequacy of proper securities, negligence from the part of officials of the bank, ailments and

infirmities with the legal system.

Income Recognition

While evaluating the NPA, the interests accrued are treated based on the Income recognition

policy.

Income recognition policy

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

Internationally income from NPA is not recognised on accrual basis but is booked as income

only when it is actually received. Therefore the banks should not charge interest and take it to

income account on any NPA

Reversal of income

a) If any advance, including bills purchased and discounted, becomes NPA as at the close of

any year, interest accrued and credited to income account in the correspondence previous

year, should be reversed or provided for if the same is not realised. This will apply to

government guaranteed account also.

b) In respect of NPAs, Fees, Commission and similar income that have accrued should have

ceased to accrue in the current period and should be reversed or provided for with respect

to past periods, if uncollected.



c) Leased assets: The net lease rentals on the leased asset accrued and credited in income

account before the asset became non performing should be reversed or provided for in the

current accounting period. The term “Net lease rentals” would mean the amount of

finance charge taken in the credit of profit and loss account and would be worked out as

gross lease rentals adjusted by amount of statutory Depreciation.

Reporting of NPAs

Banks are required to furnish a report on NPA as on 31st march each year after the completion of

audit. The NPAs would relate to the Banks global portfolio including the advances at the foreign

branches. While reporting NPA figures to RBI, the amount held in interest suspense account,

should be shown as a deduction from gross NPA as well as gross advances while arriving at the

net NPAs.

Sub Classification of NPA

Banks are required to classify NPA further into the following three categories based on the

period for which the asset has remained non performing and the reliability of the dues:

a) Sub standard Assets

Sub standard assets are those, which are classified as NPA for a period not exceeding one

year. With effect from 31st march 2005, a sub standard asset is one, which has remained NPA

for a period less than or equal to 12 months. Such assets will have well defined credit

weakness that jeopardise the liquidation of the debt and are characterised but the distinct

possibility that the banks will sustain some loss, if deficiencies are not corrected.

b) Doubtful Assets

With effect from March 31, 2005 an asset would be classified as doubtful if it has remained

in the sub standard category for a period of 12 months. A loan classified as doubtful has all

the weaknesses inherent in assets that were classified as sub standard, with the added

characteristic that the weakness makes collection or liquidation in full, on the basis of

currently known facts, conditions and values highly questionable and improbable.

c) Loss Assets



A loss asset is one where the bank or an internal has identified loss or external auditors or the

RBI inspection but the amount has not been written of wholly. In the other words such an

asset is considered uncollectable and of such little value that its continuance as a bankable

asset is not warranted although there may be some salvage or recovery value.

Besides these three classifications we have a category called the “Standard Assets” that refers

to those that belong to the” income generating” category or Performing category. The

classification of these assets is based on the Reserve Bank’s guidelines, which are given

below:

1) Classification of assets into the above categories should be done taking into account the

degree of well defined credit weakness and the extent of dependencies on collateral

security for realisation of dues.

2) Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPAs, especially in respect of high value of accounts.

3) Account with temporary Deficiencies: The classification of an asset as NPA should be

based on the record of recovery. Bank should not classify an advance account as NPA

merely due to the existence of some deficiencies, which are temporary in nature as such

as non-availability of adequate drawing power based on latest stock.

4) Asset classification to be borrowed wise and not facility wise: It is difficult to envisage a

situation when only one facility to a borrower becomes a problem credit and not others.

Therefore, all the facilities granted y a bank to a borrower will have to be treated as NPA

and not the particular or a part thereof, which has become irregular.

5) Advances under consortium arrangements: Asset classified of accounts under consortium

should be based on the record of recovery of the individual member Banks and other

aspects having a bearing on the recoverability of the advances.

6) Accounts where there is erosion in the value of security: Erosion in the value of security

can be reckoned as significant when the realisable value of the security is less than 50

percent of the value assessed by the bank or accepted by the RBI at the time of last

inspection, as the case may be. Such NPAs may be straightway classified under doubtful

category and provisioning should be made as applicable to doubtful assets.



7) Agricultural advances

a) In respect of advances granted for agricultural purpose where interest and/ or

installment of the principal remains unpaid after it has become past due for two

harvest seasons but for a period not exceeding two half years, such an advance should

be treated as NPA.

b) Where the natural calamities impair the repaying capacity of agricultural borrowers,

Banks may decide on their own as a relief measure – conversion of the short – term

production loan into a term loan or re-schedulement of the repayment period.

c) In such cases of conversion or re-schedulement, the term loan as well as fresh short –

term loan may be treated as current dues and need not be classified as NPA.

8) A standard asset where the term of the loan agreement regarding interest and principal

have been renegotiated or rescheduled after the commencement of production should be

classified as sub standard and should remain in such category for atleast one year of

satisfactory performance under the renegotiation or restructured terms. In case of sub

standard and doubtful assets also rescheduling does not entitle a Bank to upgrade the

quality of advances automatically unless there is satisfactory performance under the

rescheduled/ renegotiated terms.

Provisioning

It is mandatory for all banks in India to make adequate provision for loan loss before the

finalisation of the balance sheet every year. RBI prescribes different rates for making provision

in respect of NPA. In conformity with the prudential norms, provisions should be made on the

NPA on the basis of classification of assets into prescribed categories. Taking into account the

time lag between an Account becoming Doubtful of recovery, its recognition as such, the

realisation of the security and the erosion over time in the value of security charged to the bank,

the bank should make provision against substandard assets, doubtful assets and loss assets as

below:



Table 1.1 Provisions for Different Asset class Source: RBI Website

1.4 Reasons for Rise of NPAs:

Reasons can be divided into two categories, i.e., internal factors and external factors, as

mentioned below:

Internal Factors:

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

Funds borrowed for a particular purpose but not use for the said purpose.

Project not completed in time.

Poor recovery of receivable.

Excess capacities created on non- economic costs.

In ability of the corporate to raise capital through the issue of equity or other debt

instrument from capital markets.

Business failures.

Diversion of funds for expansion/ modernisation/ setting up new projects/ helping or

promotion sister concerns.



Will full defaults, siphoning of funds, frauds, disputes, management disputes and

misappropriation.

Deficiencies on the part of the Banks viz. in credit appraisal, monitoring and follow-ups,

delay in settlement of payments/ subsidiaries by government bodies etc.

External Factors:

External factors are those which are external to banks and are not controllable by banks.

Sluggish legal system – long legal tangles changes that had taken place in labour laws,

lack of sincere effort.

Scarcity of raw material, power and other resources.

Industrial recession.

Shortage of raw material, raw material/ input price escalation. Power shortage, industrial

recession, excess capacity, natural calamities like flood accidents.

Failures, non payment/ over dues in other countries, recession in other countries,

externalisation problems, and adverse exchange rates etc.

Government policies like excising duty changes, importing duty changes etc.

1.5 Recovery measures for Non-Performing Assets

1. Corporate Debt Restructuring

Corporate debt restructuring is a significant modification made to the debt, operation or structure

of a company. It is a method used by the companies with outstanding obligations to alter the

terms of the debt agreements in order to achieve some advantage. This type of corporate action is

usually made when there are significant problems in a company, which are causing some form of

financial harm and putting the overall business in jeopardy.

2. Setting up of Adalats

Civil court and Lok Adalats are one traditional means of recovering from the credit defaulters.

Cases pending in the civil courts take time for settlement hence commercial banks opt for the

Lok Adalats in which both the party agree for the out of court settlement. The evolution of this



movement was a part of the strategy to relieve heavy burden on the court with pending cases.

The reasons create such camps were the pending cases and to give relief to the litigants who

were in a queue to get justice, except matters relating to offences, which are not compoundable.

A Lok Adalat has jurisdiction to deal with all matters pending or at pre-trial stage, providing a

reference to the court or the concerned authority or committee. When the dispute is at pre-trial

stage and not before a court of law it can be referred to Lok Adalats. Parliament enacted the legal

services authorities Act 1987, and one of the aims for the enactment of this act was to organise

Lok Adalats to secure that the operation of legal system promoted justice on the basis of an equal

opportunity.

The Act gives statutory recognition to the resolution of disputes by the compromise and

settlement by the Lok Adalats. The concept has been gathered from system of Panchayats courts,

which has roots in the history, and culture of the country. It has a native flavour known to the

people, the provisions of the act based on indigenous concept are meant to supplement the court

system. They will go a long way in resolving the disputes at almost no cost to the litigants and

with minimum delay. At the same time, the Act is not meant to replace and supplants the court

system. The Act is a legislative to decongest the court from heavy burden of cases. There is a

need for decentralisation of justice.

3. Reschedulement of loans

In reschedulement of loans bank considers the repayment schedule of the defaulters in a more

flexible way so as to increase the linkness of payment of interest. Here the bank’s work within

the regulatory framework and in line with Bank policy

4. One-Time Settlements

The Bank has formulated policy guidelines in order to arrive at one-time settlements. It means a

process of reconciliation with the borrower for recovery of dues with sacrifice. This sacrifice is

on the part of the bank only and not the borrower. The guidelines are based on the security,

recovery and cost aspects.



5. SARFAESI ACT, 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest

Act, 2002 empowers Banks Financial institutions to recover their non-performing assets without

the intervention of the court. The Act provides three alternative methods for recovery of non-

performing assets, namely:

a) Securitization

b) Asset reconstruction

c) Enforcement of security without the intervention of the court

The provisions of this Act are applicable only for NPA loans with outstanding above Rs.1 lakh.

NPA loan accounts where the amount is less than 20% of the principle and interest are not

eligible to be dealt with under this Act. Non Performing Assets should be backed by securities

charged to the bank by way of hypothecation or mortgage or assignment. Security Interest by

way of Lien, pledge, hire purchase and lease not liable or attachment under sec 60 of CPC, are

not covered under this Act. This act empowers the Bank:

a) To issue demand notice to the defaulting borrower and guarantor calling upon them to

discharge their dues in full within 60 days from the date of the notice.

b) To give notice to any person who has acquired any of the secured assets from the

borrower to surrender the same to the Bank.

c) To ask any debtor of the borrower to pay any sum due or becoming due to the borrower

d) Any security Interest created over Agricultural Land cannot be proceeded with.

If on receipt of demand notice, the borrower makes any presentation or raises anti objection,

Authorised Officer shall consider such representation or objection carefully and if he comes to

conclusion that such representation or objection is not acceptable or tenable, he shall

communicate the reason for non acceptance within one week of receipt of such representation or

objection. A borrower aggrieved by the action of the Bank can file an appeal with DRT and then

with DRAT, but not with any civil court. The borrower has to deposit 50% of the dues before an

appeal with DRAT. If the borrower fails to comply with the notice, the bank may take the

recourse to one or more of the following measures:



a) Take possession of the security.

b) Sale or lease or assign the right over the security.

c) Manage the same or appoint any person to manage the same.

6. Recovery Melas.

The Bank conducts Recovery Melas in certain identified centres, in order to settle maximum

number of NPA accounts by giving some waiver/remissions.

7. Restructuring at the bank level

Here the banks make use of its powers like prudential write offs or other wavering of loan

amount to restructure the asset at the bank level.

8. Debt Recovery Tribunal

In view of considerable difficulties in recovering loans and in enforcing of securities charged to

the banks and financial institutions in India, the committee on financial systems headed by shri.

M. Narashimham, former Governor of RBI, had recommended the setting up of special tribunals

for speedy realisation of dues of the credit institutions. The recovery of Debts Due to the banks

and financial institutions Act, 1993 (DRT Act) was enacted on 27 th august 1993 to provide for

establishment of tribunals for expeditious adjudication and recovery of debts due to banks and

financial institutions and action was initiated immediately foe establishment of recovery

tribunals and Appellate Tribunal in the country. As on date, there are 29 DRTs and 5 DRATs

functioning all over the country. The pecuniary jurisdiction of these tribunals is Rs. 10 lakh and

above.

Prevention of New NPA

The NPA prone accounts or Borderline accounts of the branches are to be closely monitored to

prevent them from turning into NPA.



Chapter-2Research methodology

2.1 SCOPE OF WORK

This report shows the analysis of Non Performing Assets (NPAs) with reference to South Indian

Bank. The NPAs are considered to be one of the critical factors to judge the performance and



financial health of the banks. The level of NPAs is one of the drivers of financial stability and

growth of the banking sector. This report shows how South Indian Bank had been performing for

the past four years. This also includes the impact of Asset Reconstruction Companies and

SARFAESI Act towards reduction of NPAs, also how the technology helped in reduction of

frauds that takes place in the banking sector. By doing the comparative analysis of the bank will

give an idea on how the bank is performing and what all strategies has to be framed to further

improve its performance with respect to its competitors in the banking sector as well as NPA

management.

2.2 OBJECTIVES OF THE STUDY

To study what are factors that causes the rise of NPAs in the banking sector.

To identify the recovery methods adopted.

To find out South Indian Bank’s movement of NPA for the past four years.

To study various provisions of the act and their impact towards the banking sector.

To study the impact of technology towards reduction of frauds in the banking sector.

To contribute suggestions as to how to manage and reduce NPAs.

2.3 METHODOLOGY OF STUDY

The nature of research is exploratory as well as diagnostic as the study is aimed at exploring the

impact of SARFAESI Act on the NPA’s in the banking sector as well as the impact of Asset

Reconstruction companies. This study is based on secondary data that has been collected through

various means, i.e., internet, articles, annual reports, magazines. This study is basically to find

out the challenges that are being faced by the banks in India.

2.4 SOURCES OF DATA



Only secondary data was collected from the internet, company websites, magazines and various

articles. Capitaline databases have been the main source of information for company analysis as

well as the annual reports provided by the company.

2.5 LIMITATIONS OF THE STUDY

Inadequate data

Since the number of financial ratios used for analysis are limited, the results obtained

might not show the exact complete picture on how the bank is performing

Since the analysis is in reference to just one particular bank this wouldn’t give the

complete picture as to how the Indian banking sector is performing with respect to NPA

management

Since there is no primary data involved in analysing the impact of asset reconstruction

companies in recovery of NPAs and technology involved in reducing frauds there could

be some minor variations in the results of the study.

2.6 TOOLS USED FOR ANALYSIS:

Ratio analysis:

Financial ratio analysis can reveal much about a company and its operations. However,

there are several points to keep in mind about ratios. First, a ratio is a "flag" indicating

areas of strength or weakness. One or even several ratios might be misleading, but when

combined with other knowledge of a company's management and economic

circumstances, financial analysis can tell much about a corporation. Second, there is no

single correct value for a ratio. The observation that the value of a particular ratio is too

high, too low, or just right depends on the perspective of the analyst and on the

company's competitive strategy. Third, financial ratios are meaningful only when



compared with some standard, such as an industry trend, ratio trend, a trend for the

specific company being analyzed, or a stated management objective.



Chapter-3Industry, company & product

profile

3.1 INDUSTRY PROFILE



The Indian banking has come a long way from being a sleepy business institution to a highly

proactive and dynamic entity. This transformation has been largely brought about by the large

dose of liberalization and economic reforms that allowed banks to explore new business

opportunities rather than generating revenues from conventional streams (i.e. borrowing and

lending). The stalwarts of India's financial community nodded their heads sagaciously when

Prime Minister Manmohan Singh said in a speech:

"If there is one aspect in which we can confidentially assert that India is ahead of China, it is in

the robustness and soundness of our banking system." Indian banks have been rated higher than

Chinese banks by international rating agency Standard & Poor's.

The competition heated up with the entry of private and foreign banks deregulation and

globalization resulted in increased competition that refined the traditional way of doing business.

They have realized the importance of a customer centric approach, brand building and IT

enabled solutions. In the fierce battle for market share and mind share, the most potent weapon is

a strong, well recognized and trusted brand name. Brands attract and convince people that they

will get what is promised. Banking today has transformed into a technology intensive and

customer friendly model with a focus on convenience. The companies have redoubled their

efforts to woo the customers and establish themselves firmly in the market. It is no longer an

option for a company to provide good customer service, it is expected.

Reforms are continuing as part of the overall structural reforms aimed at improving the

productivity and efficiency of the economy. The sector is set to witness the emergence of

financial supermarkets in the form of universal banks providing a suite of services from retail to

corporate banking and industrial lending to investment banking. The financial services market

has become a battle ground with the marketers with the latest and the most sophisticated

weapons.

Currently overall, banking in India is considered as fairly mature in terms of supply, product

range and reach-even though reach in rural India still remains a challenge for the private sector

and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are

considered to have clean, strong and transparent balance sheets-as compared to other banks in



comparable economies in its region. The Indian banking industry is currently in a transition

phase. On the one hand, the public sector banks, which are the mainstay of the Indian banking

system, are in the process of consolidating their position by capitalizing on the strength of their

huge networks and customer bases. On the other, the private sector banks are venturing into a

whole new game of mergers and acquisitions to expand their bases. The use of technology has

placed Indian banks at par with their global peers. It has also changed the way banking is done in

India. ‘Anywhere banking’ and ‘Anytime banking’ have become a reality. The financial sector

now operates in a more competitive environment than before and intermediates relatively large

volume of international financial flows.

In the Indian banking industry some of the Private Banks operating are ICICI Bank, Axis Bank,

ING Vysya Bank, South Indian Bank, Federal Bank and Banks from the Public sector includes

State Bank of India, Punjab National Bank, UCO Bank, Oriental Bank of Commerce, Allahabad

Bank among others. ABN AMRO Bank, American Express Bank, Citibank, DBS Bank,

Deutsche Bank, HSBC, Standard Chartered Bank is some of the foreign banks operating in the

Indian Banking Industry.

3.2 COMPANY PROFILE

Established in 1929, South Indian Bank (SIB) got its status of Scheduled Bank in 1946. In 1960,

SIB expanded by taking over 15 smaller banks. Presently, it has a network of 642 branches and 3

extension counters, spread across 26 States and Union Territories in India.

Started as a private sector bank at Thrissur, a major town (now known as the Cultural Capital of

Kerala) to provide for the people a safe, efficient and service oriented repository of savings of

the community on one hand and to free the business community from the clutches of greedy



money lenders on the other by providing need based credit at reasonable rates of interest. The

bank in its 72 year long sojourn has been able to present itself as a vibrant, fast growing, service

oriented and trend setting financial intermediary.

In Dec. 1998, the Bank, for the first time made a public issue of 1, 60, 00, 000 equity shares of

Rs.10/- each at a premium of Rs.22/- per share. ICICI, the premier DFI is the biggest share

holder of the Bank with the group company holding 11.38% of the bank’s equity.

SIB was the first among the Kerala based banks to offer a Credit Card to customers in Nov.

1992. Further the bank also has develop an in-house, a fully integrated branch automation

software.

During 2000-2001 the new product introduced were 'Gold Rush Scheme' and 'Siber Loan', the

former has been introduced for the benefit of traders and agriculturists while the latter has been

introduced for the general public and students. The bank also introduced FINACLE, an

integrated, on-line enterprise banking solution designed to provide the 'e-platform' for global

banking industry developed by INFOSYS.

The Bank has joined hands with ICICI Prudential Ltd to market their life insurance products

through the Bank's branch network. It has also signed MOU with the Prudential ICICI Asset

Management Company Ltd to distribute their Mutual Fund products.

During 2005-06, the company came out with a Public Offer of 2, 27, 27, 272 equity shares of

Rs.10/- each at a premium of Rs.56/- per share aggregating to Rs.150 Crores through book-

building route. ICICI Bank Ltd, a strategic investor in the bank made an exit from the bank by

divesting its entire shareholding in March 2006.

The Bank also became successful in changing its regional character into a national one by

opening new branches in three more States. The Branch network now covers 19 States and

Union Territories. During the fiscal year 2005-2006, the Bank has opened 21 new branches and



11 new Extension counters. At Present the Bank's branch network stands at 642 branches and 3

extension counters. The Bank has an ATM Network of 505 centres.

The current growth plan of the bank is to establish 750 branches, 750 ATMs and 75000 Crores of

business by the end of financial year 2013. The bank offers major services in various segments

of accounts and deposits, loans, mutual funds, insurance, money transfers and other value added

services. The Kerala Government had given permission to SIB to accept commercial taxes.

Vision Statement:

To emerge as the most preferred bank in the country in terms of brand, values, principles with

core competence in fostering customer aspirations, to build high quality assets leveraging on the

strong and vibrant technology platform in pursuit of excellence and customer delight and to

become a major contributor to the stable economic growth of the nation.

Mission Statement:

To provide a secure, agile, dynamic and conducive banking environment to customers with

commitment to values and unshaken confidence, deploying the best technology, standards,

processes and procedures where customer convenience is of significant importance and to

increase the stakeholders’ value.

Milestones:

The FIRST among the private sector banks in Kerala to become a scheduled bank in 1946

under the RBI Act.

The FIRST bank in the private sector in India to open a Currency Chest on behalf of the

RBI in April 1992.

The FIRST private sector bank to open a NRI branch in November 1992.

The FIRST bank in the private sector to start an Industrial Finance Branch in March

1993.

The FIRST among the private sector banks in Kerala to open an "Overseas Branch" to

cater exclusively to the export and import business in June 1993.



The FIRST bank in Kerala to develop in-house, fully integrated branch automation

software in addition to the in-house partial automation solution operational since 1992.

The FIRST Kerala based bank to implement Core Banking System.

The THIRD largest branch network among Private Sector banks, in India, with all its

branches under Core banking System.

3.3 PRODUCT PROFILE

Products and services offered by South Indian Bank are divided into three categories and are as

follows:

Personal Banking:

Savings account

Term Deposits

Financial Inclusion Smart Card Account

Loans

Mutual Funds

Insurance

Money Transfers including both domestic and international transfers

Value Added Service ( including ASBA, mobile banking, ATM, PAN System)

NRI Banking:

Foreign Currency Deposit

NRE Rupee Account

NRO Rupee Account

Loans

Money Transfers

Mutual Funds

Insurance

Value Added Services



Business Banking:

Business Accounts

Working Capital Finance

Long Term Finance

Non Fund Based Finance

International Finance

Money Transfers

Value Added Services

3.4 SIB STRENGTHS:

Improvement in asset quality through disciplined credit risk management

SIB has been able to improve its advances portfolio by carefully targeting its customer

base and implementing a comprehensive risk assessment process and diligent risk

monitoring and remediation process. SIB actively monitors its loan accounts and applies

aggressive remediation policies to contain non-performing advances which has resulted

in a reduction in its net NPA as % of net advances from 3.8% in FY2005 to 0.39% in

FY2010.

Geographical Spread

SIB has successfully managed to increase its geographical spread by setting up branches

across all regions in India and still it is increasing their number of branches across north

India. At Present the Bank's branch network stands at 642 branches and 3 extension

counters. The Bank has an ATM Network of 505 centres.

Access to low cost deposit base

SIB has signed a secondment agreement in 2006 with Hadi Express Exchange, for

providing managerial support to its exchange houses in Dubai and Sharjah, which has

enabled the bank in maintaining and securing NRI deposits at a relatively lower cost as

against other funds.



Focus on retail banking

The bank has recognised retail banking as one of its core elements for growth and has

taken various initiatives for the same.

Technology driven approach

SIB is in the forefront of technology in the financial services sector. The bank is one of

the few banks in our country which has achieved 100% connectivity across all its

branches and ATMs through Core Banking Solutions (CBS).

Professional and experienced management

South Indian Bank Limited has an experienced Board and Senior Management. Dr. V.A.

Joseph, the Chairman and CEO, holds a doctorate in human resource development and

has over 30 years experience in the banking industry. SIB has been able to build a team

of professionals with relevant experience, including credit evaluation, risk management,

treasury, technology and marketing; and has been able to attract qualified persons such as

MBAs, Engineers, Chartered Accountants, Cost Accountants, Agricultural specialists etc.

SIB believes that it has created a right balance of remuneration and other economic

incentives for our employees, which has inculcated a sense of ownership in its employees

and enabled it to grow.

3.5 RISK FACTORS

INTERNAL FACTORS:

1. Bank’s results of operations depend to a great extent on net interest income, volatility in

interest rates and other market conditions could adversely affect its business and financial

results.

2. SIB is exposed to fluctuations in foreign exchange rates.

3. If SIB is not able to control the level of NPA then its business may be adversely affected.



4. SIB’s funding is primarily through short-term and medium-term deposits, and if

depositors do not roll over deposited funds on maturity or if it’s unable to continue to

increase its deposits, its business could be adversely affected.

5. Significant security breaches or breakdown in SIB’s computer systems and network

infrastructure and fraud could also have a negative impact on its business.

6. A major part of its branch network is in Kerala, i.e., more than 55% of the branches are

located in Kerala. Any disruption, disturbance or breakdown in the economy of Kerala

could adversely affect the result of the business and operations.

EXTERNAL FACTORS:

1. The Indian and global banking industry is very competitive and the ability of banks to

grow depends on their ability to compete effectively.

SIB competes with public and private sector Indian commercial banks as well as foreign

commercial banks. Many of its competitors are large institutions, which may have much

larger customer and deposit bases, larger branch networks and more capital than it has.

Some of the banks, with which it competes, may be more flexible and better positioned to

take advantage of market opportunities than it.

2. Regulatory changes or enforcement initiatives in India or any of the jurisdiction in which

SIB operates, may affect its business and the price of the equity shares.

3. A slowdown in economic growth of India could cause its business to suffer.

4. Regional hostilities, terrorist attacks, or social unrest in some parts of the country could

also affect its business.

5. India has experienced natural calamities like earthquakes, floods and drought in the past

few years. The extent and severity of these natural disasters determine their impact on the



Indian economy. Prolonged spells of below or above normal rainfall or other natural

calamities could adversely affect the Indian economy and our business, especially in view

of the bank’s strategy of increasing its exposure to rural India.

6. A decline in India’s foreign reserves may affect liquidity and interest rates in the Indian

economy, which could have an impact on SIB.

3.6 SWOT ANALYSIS (in reference to private sector banks)

Strengths:

All these private sector banks have well trained professional and dedicated man power.

In contrast to the public sector counterparts, efficiency is maintained at the highest level.

The new private banks have commenced with string financials.

Almost all these banks have compiled with capital adequacy requirements and prudential

norms.

Most of the banks are computerized and techno-savvy.

Weakness:

Both old and new private banks are operating in a limited area confined to a region.

Although highly networked the number of branches are limited.

There is dissimilarity between the old and new private banks by virtue of their age,

functional area, products and services.

Opportunity:

Being in private sector these banks enjoy high level of autonomy in facilitating them for

faster decision making.

To face stiff competition they have to come up with new products and services and

achieve high customer satisfaction.

They can offer cost effective services.

Threats:



Expansion of foreign banks poses severe competition.

Dominant PSBs with higher market share will overshadow the private sector banks

RBI / GOI relaxation of FDI investment norms cause worry among the managements.

3.7 SWOT ANALYSIS (with reference to South Indian Bank)

Strengths:

The bank has branches across 26 states in India. It currently has 642 branches, 3

extension counters and 505 ATMs.

SIB is the first bank to have core banking in all its branches among the old generation

banks.

SIB is still conservative in the field of advance and selection of advance is done by the

norms setup by RBI.

The first private sector bank to provide managerial support to an exchange house in the

Middle East.

The first Kerala based bank to start extended banking hours (12 hours banking)

First Kerala based bank to introduce credit card

First in the private sector to open an NRI branch

First private sector bank in Kerala to implement 100% CBS.

Weakness:

The bank is not willing to go beyond the conservative concept of banking which inturn

affects the growth and advances.

Bank depends on its force for its recovery which hampers the recovery and growth

opportunities.

Opportunity:

Bank can extend its operations to rural and suburban areas by developing products which

suit their needs

Bank can extend their operations to the northern and eastern regions of the country rather

than concentrating only on southern India.



Huge Indian Population

Huge Indian Middle Class

Booming corporate culture

The average age of employees, which forms the important asset of the bank, is young

which will infuse in new ideas and growth opportunities for the bank.

Threats:

Stiff competition from other private and public sector banks like ICICI, HDFC, AXIS,

SBI etc.

Strict regulations and interventions by RBI

The changing economic scenario of India may also hinder the growth of the bank

Also faces threats from foreign banks, which has traditionally served Indian corporate

with cross border trade finance, fee based services and other short term financing

products.



Chapter-4Sarfaesi act 2002 & the

impact of asset reconstruction companies

4.1 SARFAESI Act 2002



It is very important for the Banks to deal with the ‘will defaulters’ and to reduce ‘NPA’ in the

interest of the Banking Industry and in the interest of the country too. There were constant efforts

to enable the banks to speedily recover the dues from the borrowers. Bank could not recover

their dues effectively by approaching Civil Courts and as a result ‘The Recovery of Debts Due to

Banks and Financial Institutions Act, 1993” was enacted. Under the RDDBFI Act, a Special

Tribunal called ‘Debt Recovery Tribunal’ was established and the Banks could file an

application under section 19 of RDDBFI Act seeking a ‘Certificate of Recovery’ against the

borrowers and this ‘Certificate of Recovery’ is like a decree passed by a Civil Court. The DRT

need not follow Civil Procedure Code while entertaining the application filed by the Banks under

section 19 of RDDBFI Act, 1993 and there was a special mechanism for execution of the orders

too. Even with this RDDBFI Act, 1993, Banks could not achieve considerable results forcing the

legislature to think further effective mechanism to recover the dues and as a result and based on

the recommendations of the committee ‘The Securitization and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002’ (SARFAESI Act) was enacted. Under

the SARFAESI Act, 2002, the Banks need not approach any Court or Tribunal to get the dues of

the borrowers determined and to proceed against the ‘Secured Asset’. Under the SARFAESI Act,

2002, if an account is classified as ‘NPA’, then, the Banks can proceed to recover the dues.

Under the said Act, the Banks will give a demand notice to the borrower and guarantor under

section 13 (2) of the Act and the they will deal with the objections of the borrowers to the

demand notice and if the objections of the borrowers are overruled, then, the Bank will proceed

taking symbolic possession of the property, taking physical possession of the property and then

will dispose of the same in accordance with the provisions of the Act and connected rules. Under

SARFAESI Act, 2002, there is no need for the Banks to approach any Court or Tribunal for

recovery of their dues and they may have to get the assistance of the Magistrate Court under

Section 14 of the Act while taking physical possession of the property where there is a resistance

in taking the possession.

If the borrower is aggrieved at the action initiated by the Bank under SARFAESI Act, 2002,

then, he can approach the Debt Recovery Tribunal under Section 17 of the Act by paying the



prescribed fee. Many legal issues under SARFAESI Act, 2002 were now settled. The important

issues dealt by the Courts under SARFAESI Act, 2002, are as follows:

At what stage the borrower can approach the Debt Recovery Tribunal challenging the

action initiated by the Bank?

Can the borrower challenge the notice issued by the Bank under section 13 (2) of

SARFAESI Act, 2002?

The powers of the DRT and as to whether the DRT can look into the correctness of the

‘outstanding due’ arrived by the Bank?

Can the DRT order the restoration of possession if it is proved that the Bank is not right

in proceeding under the provisions of SARFAESI Act, 2002?

Is it right to say that the DRT can only look into the procedural irregularities while

entertaining an Appeal filed by the borrower under the Act?

The issue of deposit to be made to the DRAT while preferring an Appeal against the final

order of the DRT?

The nature of guidelines issued by Reserve Bank of India?

The jurisdiction of Civil Court in respect of SARFAESI matters?

Can the Bank simply reject the objections raised by the borrowers under the Act?

These are the few important issues, the Constitutional Courts have dealt with so far laudably and

all these are infact directed towards protecting the interests of the borrowers and without

disturbing the object of SARFAESI Act, 2002. There were many complaints from the borrowers

that the Bank is unreasonable in proceeding against them under SARFAESI Act, 2002 and many

say that they are not the willful defaulters and the action of the Bank affects them severely. It is

settled that the RBI guidelines on ‘Asset Classification’ are mandatory and not recommendatory.

RBI does frame and update the guidelines dealing with ‘Classification of Assets’ from to time

keeping in view of various issues. A reading of the RBI guidelines appears to be very fair and

infact, the guidelines enables the Bank to exercise their own fair judgment on many issues. The

RBI guidelines on ‘Asset Classification’ are specific on certain issues and on many other issues,

it emphasize the need for not troubling the good borrowers or the bonafide borrowers. I have also

seen guidelines that the Banks should not rely on technical deficiencies if the record of recovery



of Account is good. Likewise, the RBI guidelines on ‘Asset Classification’ appear to be fair and

the question is with regard to interpretation of the guidelines. It is now clear that it is mandatory

for the Banks to follow the RBI guidelines in classifying an account as ‘NPA’. The Banks are

infact, supposed to have their own clear internal mechanism to deal with the ‘Non-performing

Assets’. However, most of the Banks may have their own administrative machinery to make use

of the provisions of SARFAESI Act, 2002 and they will proceed to classify an account as ‘NPA’

relying on RBI guidelines.

There is a specific guideline of the RBI saying that the Bank should proceed ‘borrower-wise’ and

not ‘facility-wise’. There are also incidents where the Banks proceed with ‘borrower-wise’ at

times and proceed with ‘facility-wise’ at times. If it is facility-wise, the Banks may have to issue

so many demand notices and there is no need in issuing so many demand notices to the same

borrower. There is logic behind RBI guideline as I understood. The RBI guidelines appears to be

very fair and it has even dealt with the issue as to what happens if the borrower is very good in

meeting the commitments in respect of so many facilities and if there is a slight deviation in

respect of one facility. If the Bank proceeds ‘borrower-wise’ in these cases, then, the ‘borrower’

will suffer irreparable loss. While emphasizing the object of ‘speedy recovery of dues’, while

framing clear guidelines on certain issues, RBI guidelines expects the Banks to exercise their

own reasonable judgment on their own.

Before explaining the provisions provided by SARFAESI Act let me give a background on how

the Government of India put up various mechanisms during the course of time as to reduce the

NPAs and revive a healthy financial banking system.

4.2 BACKGROUND



With an aim to provide a structured platform to the Banking sector for managing its mounting

NPA stocks and keep pace with international financial institutions, the Securitization and

Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was

put in place to allow banks and FIs to take possession of securities and sell them. As stated in the

Act, it has “enabled banks and FIs to realize long-term assets, manage problems of liquidity,

asset-liability mismatches and improve recovery by taking possession of securities, sell them and

reduce NPAs by adopting measures for recovery or reconstruction.” Prior to the Act, the legal

framework relating to commercial transactions lagged behind the rapidly changing commercial

practices and financial sector reforms, which led to slow recovery of defaulting loans and

mounting levels of NPAs of banks and financial institutions.

The SARFAESI Act has been largely perceived as facilitating asset recovery and reconstruction.

Since Independence, the Government has adopted several ad-hoc measures to tackle sickness

among financial institutions, foremost through nationalization of banks and relief measures. Over

the course of time, the Government has put in place various mechanisms for cleaning the

banking system from the menace of NPAs and revival of a healthy financial and banking sector.

Some of the notable measures in this regard include:

Sick Industrial Companies (Special Provisions) Act, 1985 or SICA: To examine and

recommend remedy for high industrial sickness in the eighties, the Tiwari committee was

set up by the Government. It was to suggest a comprehensive legislation to deal with the

problem of industrial sickness. The committee suggested the need for special legislation

for speedy revival of sick units or winding up of unviable ones and setting up of quasi-

judicial body namely; Board for Industrial and Financial Reconstruction (BIFR) and The

Appellate Authority for Industrial and Financial Reconstruction (AAIRFR) and their

benches. Thus in 1985, the SICA came into existence and BIFR started functioning from

1987.

The objective of SICA was to proactively determine or identify the sick/potentially sick

companies and enforcement of preventive, remedial or other measures with respect to



these companies. Measures adopted included legal, financial restructuring as well as

management overhaul. However, the BIFR SARFAESI ACT 2002: An Assessment

process was cumbersome and unmanageable to some extent. The system was not

favorable for the banking sector as it provided a sort of shield to the defaulting

companies.

Recoveries of Debts due to Banks and Financial Institutions (RDDBFI) Act, 1993: The

procedure for recovery of debts to the banks and financial institutions resulted in

significant portions of funds getting locked. The need for a speedy recovery mechanism

through which dues to the banks and financial institutions could be realized was felt.

Different committees set up to look into this, suggested formation of Special Tribunals

for recovery of overdue debts of the banks and financial institutions by following a

summary procedure. For the effective and speedy recovery of bad loans, the RDDBFI

Act was passed suggesting a special Debt Recovery Tribunal to be set up for the recovery

of NPA. However, this act also could not speed up the recovery of bad loans, and the

stringent requirements rendered the attachment and foreclosure of the assets given as

security for the loan as ineffective.

Corporate Debt Restructuring (CDR) System: Companies sometimes are found to be in

financial troubles for factors beyond their control and also due to certain internal reasons.

For the revival of such businesses, as well as, for the security of the funds lent by the

banks and FIs, timely support through restructuring in genuine cases was required. With

this view, a CDR system was established with the objective to ensure timely and

transparent restructuring of corporate debts of viable entities facing problems, which are

outside the purview of BIFR, DRT and other legal proceedings. In particular, the system

aimed at preserving viable corporate/businesses that are impacted by certain internal and

external factors, thus minimizing the losses to the creditors and other stakeholders. The

system has addressed the problems due to the rise of NPAs. Although CDR has been

effective, it largely takes care of the interest of bankers.

SARFAESI ACT 2002: By the late 1990s, rising level of Bank NPAs raised concerns and

Committees like the Narasimham Committee II and Andhyarujina Committee which



were constituted for examining banking sector reforms considered the need for changes

in the legal system to address the issue of NPAs. These committees suggested a new

legislation for securitization, and empowering banks and FIs to take possession of the

securities and sell them without the intervention of the court and without allowing

borrowers to take shelter under provisions of SICA/BIFR. Acting on these suggestions,

the SARFAESI Act was passed in 2002 to legalize securitization and reconstruction of

financial assets and enforcement of security interest. The act envisaged the formation of

asset reconstruction companies (ARCs)/ Securitization Companies (SCs).

4.3 Provisions of SARFAESI Act

The Act has made provisions for registration and regulation of securitization companies or

reconstruction companies by the RBI, facilitate securitization of financial assets of banks,

empower SCs/ARCs to raise funds by issuing security receipts to qualified institutional buyers

(QIBs), empowering banks and FIs to take possession of securities given for financial assistance

and sell or lease the same to take over management in the event of default.

The Act provides three alternative methods for recovery of NPAs, namely:

Securitization: It means issue of security by raising of receipts or funds by SCs/ARCs. A

securitization company or reconstruction company may raise funds from the QIBs by

forming schemes for acquiring financial assets. The SC/ARC shall keep and maintain

separate and distinct accounts in respect of each such scheme for every financial asset

acquired, out of investments made by a QIB and ensure that realizations of such financial

asset is held and applied towards redemption of investments and payment of returns

assured on such investments under the relevant scheme.

Asset Reconstruction: The SCs/ARCs for the purpose of asset reconstruction should

provide for any one or more of the following measures:



The proper management of the business of the borrower, by changing or takeover

of the management of the business of the borrower

The sale or lease of a part or whole of the business of the borrower

Rescheduling of payment of debts payable by the borrower

Enforcement of security interest in accordance with the provisions of this Act

Settlement of dues payable by the borrower

Taking possession of secured assets in accordance with the provisions of this Act.

Exemption from registration of security receipt: The Act also provides, notwithstanding

anything contained in the Registration Act, 1908, for enforcement of security without

Court intervention: (a) any security receipt issued by the SC or ARC, as the case may be,

under section 7 of the Act, and not creating, declaring, assigning, limiting or

extinguishing any right, title or interest to or in immovable property except in so far as it

entitles the holder of the security receipt to an undivided interest afforded by a registered

instrument; or (b) any transfer of security receipts, shall not require compulsory

registration.

The Guidelines for SCs/ARCs registered with the RBI are:

Act as an agent for any bank or FI for the purpose of recovering their dues from the

borrower on payment of such fees or charges

Act as a manager between the parties, without raising a financial liability for itself;

Act as receiver if appointed by any court or tribunal.

Apart from above functions any SC/ARC cannot commence or carryout other business without

the prior approval of RBI.

4.4 Risk Management in Securitization

The various risks involved in securitization are given below:



Credit Risk: The risk of non-payment of principal and/or interest to investors can be at two

levels: SPV and the underlying assets. Since the SPV is normally structured to have no other

activity apart from the asset pool sold by the originator, the credit risk principally lies with the

underlying asset pool. A careful analysis of the underlying credit quality of the obligors and the

correlation between the obligors needs to be carried out to ascertain the probability of default of

the asset pool. A well diversified asset portfolio can significantly reduce the simultaneous

occurrence of default.

Sovereign Risk: In case of cross-border securitization transactions where the assets and investors

belong to different countries, there is a risk to the investor in the form of non-payment or

imposition of additional taxes on the income repatriation. This risk can be mitigated by having a

foreign guarantor or by structuring the SPV in an offshore location or have a neutral country of

jurisdiction

Collateral deterioration Risk: Sometimes the collateral against which credit is sanctioned to the

obligor may undergo a severe deterioration. When this coincides with a default by the obligor

then there is a severe risk of non-payment to the investors.

Legal Risk: Securitization transactions hinge on a very important principle of “bankruptcy

remoteness” of the SPV from the sponsor. Structuring the asset transfer and the legal structure of

the SPV are key points that determine if the SPV can uphold its right over the underlying assets,

if the obligor declares bankruptcy or undergoes liquidation.

Prepayment Risk: Payments made in excess of the scheduled principal payments are called

prepayments. Prepayments occur due to a change in the macro-economic or competitive industry

situation. For example in case of residential mortgages, when interest rates go down, individuals

may prefer to refinance their fixed rate mortgage at lower interest rates. Competitors offering

better terms could also be a reason for prepayment. In a declining interest rate regime

prepayment poses an interest rate risk to the investors as they have to reinvest the proceedings at

a lower interest rate. This problem is more severe in case of investors holding long term bonds.

This can be mitigated by structuring the tranches such that prepayments are used to pay off the

principal and interest of short-term bonds.



Servicer Performance Risk: The servicer performs important tasks of collecting principal and

interest, keeping a tab on delinquency, maintains statistics of payment, disseminating the same to

investors and other administrative tasks. The failure of the servicer in carrying out its function

can seriously affect payments to the investors.

Swap Counterparty Risk: Some securitization transactions are so structured wherein the floating

rate payments of obligors are converted into fixed payments using swaps. Failure on the part of

the swap counterparty can affect the stability of cash flows of the investors.

Financial Guarantor Risk: Sometime external credit protection in the form of insurance or

guarantee is provided by an external agency. Guarantor failure can adversely impact the stability

of cash flows to the investors.

After going through all these one question that keeps popping in my head is “what action

does the court take for a person who has been treated unjustly under the

SARFAESI Act?”

As we know that under SARFAESI Act the bank can proceed with the recovery process and

proceed with the property mortgaged as security without recourse to traditional civil courts. It is

also true that bank may not be able to recover the entire amount from the debtor or it may get

delayed if they approach civil courts for recovery. Because of this to speed up the recovery

process this provision was introduced under this act. What happens is the bank makes a demand

for payment, receives reply if any, and addresses the grievances of the debtor if required and if

not satisfied with the reply then accordingly the bank goes for auctioning of the property as per

the law and thereby quickens the recovery process. Thus, the object of SARFAESI Act is really

laudable if the law is implemented in letter and spirit. But, when there is a clear violation of

statutory provisions or when the Bank proceeds against a property unreasonably using the

provisions of SARFAESI Act, 2002, then, there should be effective remedy available to the

innocent owner of the property. The act itself provides a relief to the aggrieved to file an appeal

challenging the steps taken by the bank. But how effective is this remedy despite establishing

clear case against the bank.



As a citizen of India we know that we are not allowed to say that we will take loan, execute the

documents and will not repay the loan to the bank. It has also been seen that Debt Recovery

Tribunal (DRT) under the Act deals with the grievances of the aggrieved. It is said that in many

cases DRT passes conditional order while granting stay and this has become a routine. In these

case the innocent owner even hesitate to go to high court directly because many legal

practitioners advices them to approach the tribunal. It is also said that High Court may not likely

entertain a writ petition directly and in many cases such petitions are disposed giving the

aggrieved the liberty to approach the Tribunal. In these cases DRT should really be effective and

should not invite any criticism.

One more question that could rise is that why that person does has to go through all these, i.e., if

he has been treated unjustly instead going for an appeal is there no provision under the Act to get

an automatic relief. I meant “Is it possible to get a relief automatically in such kind

of matters?”

The answer to this is getting automatic relief against bank from DRT is not possible but by

raising some mechanical grounds the borrower can get an interim relief upon the condition that

some amount had to be deposited. It would be temporary and the endeavour of DRT is and will

always be to recover the outstanding due because they cannot act against the express provisions

of the Act. But in cases where the outstanding due amount is not huge then the borrower has to

think about the expenses of approaching the tribunal.

4.5 ASSET RECONSTRUCTION COMPANY

Asset reconstruction companies are created to manage and recover Non Performing Assets

acquired from the banking system, i.e., the company undertakes assets that are declared as Non



Performing by the lending institutions. In other words, ARCs are really debt collectors. The

objective of ARCs is to help banks to maintain clean books by reducing NPAs and they make

profits by buying NPAs at a lower price. And then they make special efforts at recovering value

from the assets if necessary by special legislation.

One question that rises is “what is the need for ARCs if banks and financial

institutions can handle this?

In normal course the banks and financial institutions can handle themselves the job of recovery

for most of their lending. But in the process they might be left with sticky debts which represent

wilful dodgers and sunset industries. The left over or uncovered credit represents difficult cases

and these cases require special attention and action to be taken. And when such overdue credit

outstanding grows large in volume the banks and financial institutions are unable to divert their

attention from their core business to this time consuming job which requiring concerted and

continuous effort. These can therefore be outsourced to specialised agencies, i.e., asset

reconstruction companies. They have built in professional expertise in this task and handle

recovery as their core business.

Benefits:

It relieves the banks of the burden NPAs which would allow them to focus better on their

core business.

Their major objective is to acquire and liquidate NPAs as soon as possible.

ARCs can play an important role in developing capital markets through secondary asset

instruments.

It helps the banks to maintain clean books of account by reducing NPAs.

Less to deal with non performing clients.

4.6 Approaches to resolution of NPAs

There are essentially two ways in resolving the problem of bad loans, they are as follows:

1. Creditor – led Approach

2. ARC Approach



Creditor – led/Bank – led Approach

This means each bank tries to restructure or recover its own assets and the government simply

either provides more capital to the banks or provide fiscal or other incentives to write off bad

loans and backs up with the recovery efforts with appropriate security enforcement legislation.

As it is said that any problem is best resolved by the one who created it, logically, it might seem

that the problem of bad loan could be better handled by the bank itself. Banks with loan files and

some institutional knowledge of the borrower should be better placed to resolve NPAs than the

centralized ARCs. This approach may also provide better incentives for banks to maximize the

recovery value of bad debt and avoid future losses by improving the loan approval and

monitoring procedures.

However individual bank led approach to resolving NPAs has several problems, particularly

where the problem loans are the result of crisis. Fearing the risk of further loans going bad could

make banks shun lending which again would deepen the crisis. In most cases in the name of

restructuring borrowers take more loans and therefore more accounts become Non Performing.

ARC Approach

This approach is based on the premise that NPAs created by a systematic crisis cannot be treated

at par with those accumulated due to bad lending practices and therefore a focused attention is

required which is then backed by appropriate legislation, is required to solve the problem. If

banks were burdened with resolving these problems then they will not be able to attend to the

need to create new loans which will further deepen the crisis. Banks having provisioning

requirements will also face threat of capital erosion. ARCs with their expertise in loan resolution

should maximise recovery value while minimising costs.

There are facts and figures that have shown the use of asset reconstruction companies or distinct

loan workout units have played an important role in systemic difficulties in the banking sector

and could be considered as the best practice.

Advantages of ARC:



Economies of scale: consolidation of scarce work out skills and resources within one

agency.

Can help with securitisation of assets as it has larger pool of assets.

Centralizes ownership of collateral thus providing more leverage over debtors and more

effective management.

Breaks links between banks and corporate and thus could improve collectability of loans.

As it handles the recovery process, it would help bank to focus on its core business.

Allows the application of uniform workout practices.

Can be given special powers to expedite loans

Disadvantages of ARC:

Banks have informational advantages over ARCs as they have collected information on

their borrowers.

Leaving loans in banks may provide better incentives for recovery and for avoiding

future losses by improving loan approval and monitoring procedures.

Banks can provide additional financing which may be necessary for restructuring process.

If assets transferred to ARCs are not actively managed then the existence of ARCs may

lead to general deterioration of payment discipline and further deterioration of assets

value.

4.7 ARC Ownership Models

Different countries have tried out varying models of ownership of ARCs. The options range from

asset workout department or units of banks, bank owned subsidiaries or affiliated companies,

private companies, and government owned asset management agencies. The severity or systemic

nature of a country’s NPA problem usually dictates the NPA resolution strategy and the

parameters for judging its success. A country’s institutional, legal, and market conditions also

influence the decision. Typically, the primary goal is to maximize net present value recovery in

order to minimize losses to either the selling bank or the government, depending on the ARC

model used. Government-based ARCs may have additional challenges such as minimizing

adverse market impact from the asset recovery process or helping to rehabilitate troubled banks



and distressed borrowers. In general, most bank resolution programs involve removing NPA

from normal bank operations. ARCs usually operate through one of the two basic models namely

bank based model, which is a decentralized approach or a government based model, centralized

approach.

Asset workout departments or units of banks:

A separate unit or department within the bank is only as good as bank as a whole, especially

from the viewpoint of legal powers, interests of the shareholding groups, etc. therefore in most

countries this has only been the last choice.

Bank owned subsidiaries or affiliated companies:

This model has been used in several countries like Australia and several continental European

countries. In china as well the big four banks have setup their own ARCs subsequently which

have been privatized. There are certain advantages associated with this model such as:

Use of in-house experience and knowledge of NPAs

Maintenance of important banking relationships

Strengthening of expertise the resolution of bank NPAs

Establishment of new business relationships with new investors involved in asset

workouts.

Bank based ARCs are likely to have more operational flexibility than a government

entity.

Private Companies:

Private companies though with substantial holdings of banks have been used in Thailand. In

India also the model used is one of the private ARCs. Such a company enjoys all the advantages

of the centralized ARC. Centralizing asset management and disposition facilities asset packaging

and marketing ensures consistency and transparency within the ARC.

4.8 Transaction Structure:



Initially, an ARC acquires NPA by floating an SPV which acts as a trust whereby the ARC is a

trustee and manager. NPA are acquired from banks/FIs at fair value based on assessment of

realizable amount and time to resolution. The banks/FIs may receive cash/bonds/debentures as

consideration or may invest in securities issued by the ARCs.

The trust acquires NPAs from banks/FIs and raises resources by formulating schemes for the

financial assets taken over. Accordingly, it issues securities to the investors which are usually

QIBs. Securities represent undivided right, title and interest in the trust fund. Subsequently, the

ARC redeems the investment to the bank/FIs out of the funds received from the issued securities.

After acquiring the NPA, the trust becomes the legal owner and the security holders its

immediate beneficiaries. The NPAs acquired are held in an asset specific or portfolio trust

scheme. In the portfolio approach, due to the small size of the aggregate debt the ARC makes a

portfolio of the loan assets from different banks and FIs. Whereas when the size of the aggregate

debt of a bank/FI is large, the trust takes asset specific approach.

Thereafter, different fund schemes are pooled together in a master trust scheme and sold to other

investors. The ARC periodically declares the NAV of respective schemes.



Figure 4.1 Transaction Structure Stage 1

Figure 4.2 Transaction Structure Stage 2

ARCs in India:

Asset Reconstruction Company (India) Ltd, (ARCIL)

Assets Care Enterprise Ltd.

ASREC (India) Ltd

Pegasus Assets Reconstruction Pvt. Ltd.

Dhir & Dhir Asset Reconstruction & Securitisation Company Ltd.

International Asset Reconstruction Company Pvt. Ltd.

Reliance Asset Reconstruction Company Ltd.

Pridhvi Asset Reconstruction and Securitisation Company Ltd.

Phoenix ARC Pvt Ltd.

Invent Assets Securitisation & Reconstruction Private Limited

JM Financial Asset Reconstruction Company Limited

India SME Asset Reconstruction Company Limited (ISARC)

Edelweiss Asset Reconstruction Company Limited



4.9 Issues Concerning ARCs

There are certain issues under SARFAESI Act that requires attention for better and efficient

functioning of ARCs, they are as follows:

1. Notifying ARC as a financial institution under SARFAESI Act 2002

Under Section 41 of SARFAESI Act, 2002, ARC had been notified as a financial

institution. This was put into effect by inserting a clause under Section 4-A (1) of

Companies Act, 1956. Subsequently in 2004 an amendment was passed to de-notify

ARC as a financial institution by omitting this clause.

This was done so as to block the possibility of a group of ARCs indulging in a ponzi

operation by going on transferring an asset from one to another in a circular way without

making much recovery. Such circular transfers from one ARC to another would defeat

the very purpose for which ARCs were setup which was to realize value from the NPAs

acquired from banks, within a period of 5 years.

But the remedy of de-notifying ARC as a financial institution so that an ARC can acquire

NPAs from a bank or financial institution but not from another ARC has turned out to

create few issues. For it has blocked the transfer of assets between one ARC and another

even for a legitimate purpose. In a rehabilitation/ revival case, for instance, after

acquiring the NPA from a bank/ banks, an ARC needs to infuse fresh funds for turning

the company around. Before committing such extra funds, however, an ARC would like

to acquire at least 75% of the debt so that it has powers of SARFAESI action against the

borrower, in case things go wrong. If another ARC holds debt of 26% or more, the ARC

implementing rehabilitation/ revival must be allowed to acquire the same from the

former. However, under current provisions the law, this is ruled out.

Incidentally, banks do not, normally, infuse fresh funds in NPA cases; they only

‘restructure’ loans. But merely notifying ARC as a financial institution is not the solution

because it will open the floodgates, again, for the ponzi transfer of assets among ARCs in



a circular way, without any real resolution or recovery.

Therefore to resolve this issue what can be done is notifying ARC as a financial

institution under SARFAESI Act and also by introducing a new section in the Act

disallowing sale of assets by one ARC to another except in certain circumstances such as

rehabilitation/ revival or takeover of management, etc., with the prior approval of RBI.

2. Permitting ARCs to acquire assets directly in the name of the trusts

This is necessary so as to ensure that ARC doesn’t pay stamp duty twice on the

assignment of same debt, first time it acquires the debt in its books on behalf of its trust

and a second time when it is transferred by it to the ARC trust.

3. Permitting ARCs to convert debt into equity

ARCs need to convert debt to equity in case of business restructuring/ rehabilitation/

revival. But under companies Act 1956 shareholders’ approval is required to convert debt

to equity. In a case where ARC is proposing to infuse fresh funds for rehabilitation which

may be either with or without takeover of management of a borrower company’s

business, shareholders may or may not give such approval.

The conversion of assets from debt to equity would help to write off this debt to improve

valuation of the company. A portion of the debt can be converted into equity which can

then be sold in the market to recover a part of the debt foregone.

4. Enlarging scope of business

Under the SARFAESI Act, an ARC must acquire a non-performing asset from a bank

first, before it can work on any kind of resolution – whether through a one-time

settlement with the borrower, or sale of physical assets, or rehabilitation/ revival.

In 2002, when the Act was passed, the All Banks Gross NPA Ratio was 10.4% and

“solving” the NPA problem of banks was the primary concern of the government. The

Gross NPA Ratio is about one-fifth of that now, and it is time the scope of ARC’s



operations is enlarged.

The most glaring paradox the industry faces, today, is the following. A company in

distress needs funds for reviving itself but, as a matter of policy, banks do not infuse fresh

funds in an NPA case. An ARC can, and wants to, but is not allowed to do so unless it

acquires at least a part of the NPA first which is not feasible if banks do not want to sell.

4.10 Impact of ARCs in India

In India asset reconstruction structure is unique; no other country operates a model of tightly

regulated private sector companies engaged in the business of unlocking value from non-

performing assets (NPAs) like we do. Yet, the industry scenario is grim. Why such outcome?

Because, a flawed implementation of the asset reconstruction company (ARC) model has

resulted in the focus being shifted from unlocking value to solving banks’ NPA problem. The

key issue for ARCs is not the asset base but recovery and the time-frame within which it is made.

The performance on this front is agonizing; at the end of six years of operation, the combined

recovery of all ARCs works out to 31.9% of the acquisition price paid. Clearly, this points to a

systemic logjam that needs to be tackled. The logjam is on account of legal infirmity, legacy

issues and certain bank practices but the more fundamental question that we need to ask is: Is

ARC operation unlocking value for the economy the way it can and should? The simple answer

to that question is ‘no’.

Garbage disposal cannot be the main role for ARCs; enforcement agents can do that as well, if



not better. The real value from NPAs will get unlocked only if ARCs do two things: one, tackle

troublesome borrowers (that’s what SARFAESI Act was supposed to be all about) in order to

make good recovery from NPAs that still have value; and two, rehabilitate revivable sick cases.

ARCs have not resolved too many cases of the first variety and, as far as the second is

concerned, they have not even scratched the surface.

There is confusion galore as two sets of RBI guidelines prescribe two different standards for

determining the price at which banks should sell their NPAs: one for sale to ARCs and another

for sale to banks. The 2003 guidelines ignored time value of money perhaps because, at that

time, it was expedient to let banks solve their provisioning problem by selling their NPAs to

ARCs at a price higher than warranted against issue of security receipts (SRs). In the absence of

fair practices guidelines, officials in the PSU banks-dominated banking system view sale of

NPAs to ARC as a huge risk fraught with the dangers of a vigilance probe. The logjam is

complete: an ARC can submit cash bid matching the banks’ reserve price only if it is willing to

book a loss.

Chapter-5



Technology & its impact to reduce frauds

5.1 TECHNOLOGY

In the world of banking and finance nothing stands still. The biggest challenge of all is in the

scope of business of banking. Banking in its traditional form is concerned with the acceptance of

deposits from the customers, lending the surplus of deposited money to suitable customers who

wish to borrow and transmission of funds. Apart from traditional business, banks now a day’s

provide a wide range of services to satisfy the financial and non financial needs of all types of

customers from the smallest account holder to the largest company and in some cases of non

customers. The range of services offered differs from bank to bank depending mainly on the type

and size of the bank.

Technology as a differentiator has become the driver of Indian banking business since the past

decade with the financial sector reforms forming firm foundation. Technology has resulted in

improved quality of service, anytime anywhere banking, focused product delivery, cross selling

opportunities, multi channel touch point for consumption of services, etc.

If we look at the status of IT adoption by banks, private sector banks aggressively started



pursuing technology based service offerings. Because of this public sector banks had to move

over from their past legacy. Today, almost every commercial bank branch is at some stage of

technology adoption, be it Automated Ledger Posting Machines, Total Branch automation or

Core Banking Solution (CBS). Keeping in view the large branch network of these banks, the

Core Banking solution (CBS) is being laid across by them in a phased manner. ATMs, internet

banking, any branch banking, credit cards, debit cards, etc, are being increasingly offered.

5.2 Banking Fraud

Banking Fraud is posing threat to Indian Economy. Its vibrant effect can be understood by the

fact that in the year 2004 number of Cyber Crime were 347 in India which rose to 481 in 2005

showing an increase of 38.5% while I.P.C. category crime stood at 302 in 2005 including 186

cases of cyber fraud and 68 cases cyber forgery. Thus it becomes very important that occurrence

of such frauds should be minimized. More upsetting is the fact that such frauds are entering in

Banking Sector as well.

In the present day, Global Scenario Banking System has acquired new dimensions. Banking did

spread in India. Today, the banking system has entered into competitive markets in areas

covering resource mobilization, human resource development, customer services and credit

management as well.

Indian's banking system has several outstanding achievements to its credit, the most striking of

which is its reach. In fact, Indian banks are now spread out into the remotest areas of our

country. Indian banking, which was operating in a highly comfortable and protected environment

till the beginning of 1990s, has been pushed into the choppy waters of intense competition.

A sound banking system should possess three basic characteristics to protect depositor's interest

and public faith. These are

A fraud free culture,

A time tested Best Practice Code, and

An in house immediate grievance remedial system.



A bank fraud is a deliberate act of omission or commission by any person carried out in the

course of banking transactions or in the books of accounts resulting in wrongful gain to any

person for a temporary period or otherwise, with or without any monetary loss for the bank.

5.3 Impact of Technology

Banks are the engines that drive the operations in the financial sector, which is vital for the

economy. With the nationalization of banks in 1969, they also have emerged as engines for

social change. After Independence, the banks have passed through three stages. They have

moved from the character based lending to ideology based lending to today competitiveness

based lending in the context of India's economic liberalization policies and the process of linking

with the global economy.

While the operations of the bank have become increasingly significant banking frauds in banks

are also increasing and fraudsters are becoming more and more sophisticated and ingenious. In a

bid to keep pace with the changing times, the banking sector has diversified its business

manifold. And the old philosophy of class banking has been replaced by mass banking. The

challenge in management of social responsibility with economic viability has increased.

Losses sustained by banks as a result of frauds exceed the losses due to robbery, dacoit, burglary

and theft-all put together. Unauthorized credit facilities are extended for illegal gratification such

as case credit allowed against pledge of goods, hypothecation of goods against bills or against

book debts. Common modus operandi are, pledging of spurious goods, inletting the value of

goods, hypothecating goods to more than one bank, fraudulent removal of goods with the

knowledge and connivance of in negligence of bank staff, pledging of goods belonging to a third

party. Goods hypothecated to a bank are found to contain obsolete stocks packed in between

goods stocks and case of shortage in weight is not uncommon.

An analysis made of cases brings out broadly the under mentioned four major elements

responsible for the commission of frauds in banks.

1. Active involvement of the staff, both supervisor and clerical either independent of



external elements or in connivance with outsiders.

2. Failure on the part of the bank staff to follow exactly laid down instructions and

guidelines.

3. External elements cause to continue indefinitely frauds on banks by forgeries or

manipulations of cheques, drafts and other instruments.

4. There has been a growing collusion between business, top banks executives, civil

servants and politicians in power to defraud the banks, by getting the rules bent,

regulations flouted and banking norms thrown to the winds.

If we look into ATM frauds the most common techniques are by disclosing PIN for withdrawing

money and fraudsters who are tech savvy uses card readers to know the PIN. To handle ATM

frauds there new technologies available like Designated time, Microchip technology, Biometric

tokens, Enhanced security, ATM Monitoring, Customized softwares, Customer motivation,

Alerts, etc can be used to minimize and prevent ATM frauds in India.

One of the most significant areas where IT had a positive impact is on substitutes for traditional

fund movement services. With the advent of electronic banking, electronic funds transfer and

other similar products, funds transfers across different constituents is now easily possible. But

because of this the concept of security has aroused. With the delivery channels relating to funds

based services such as movement of funds electronically between different accounts of

customers taking place with the use of technology, the requirements relating to security also need

to undergo metamorphosis at a rapid pace. Various concepts such as digital signatures,

certification, storage of information in a secure and tamper proof manner like smart cards all

assume significance and also have been part of the practices and procedures in the day-to-day

functioning of banks. I must hasten to add at this stage that all these would be added

requirements and the well established practices of today may also have to not only continue but

also co-exist along with the new requirements. Customers of rural India must get the benefit

through tailor-made technology solutions with different level of sophistication. They need a



human face to interact with banks and back office processing done elsewhere.

The Reserve Bank of India has taken upon itself the setting up of a safe, secure and efficient

communications network for the exclusive use for the banking sector. INFINET (INdian

FInancial NETwork) is already being used by a large number of banks for funds and non fund

based message transfers. INFINET is perhaps one of the very few networks in the world which

uses the latest in technology and security called Public key Infrastructure – PKI, which is used

for authenticity and enhanced confidentiality of data.

With the introduction of cheque truncation system (CTS), helped in improving the efficiency of

cheque clearing cycle. Further it is a more secure system than the current exchange of physical

documents in which cheque moves from one point to another thus it not only creates clearing

delays but also inconveniences to the customer in case the instrument is lost in transit or

manipulated during clearing cycle. Hence cheque truncation system not only speeds up

collection of cheques but also enhances customer service, reduces the scope for clearing related

frauds, minimizes cost of collection of cheques, eliminates logistics problems.

Banks across the country have started the process of setting up ATMs enabled with biometric

technology. Though expensive to install the scope of biometrics is expanding rapidly. It provides

for better security system, by linking credentials verification to recognition of the face,

fingerprints, eyes or voice. Some large banks of the country have taken their first steps towards

large scale introduction of biometric ATMs, especially for rural banking. Hence with the help of

this technology it not only prevents identity fraud but also safeguards data, improves ease of use

and save money without losing passwords.

This would also help in reduction of internal frauds, i.e., employees attempting to withdraw

money from a customer’s account without their consent. This could be ensured by facial

biometrics which would ensure that only authorized personnel would be able to validate financial

transactions. This would also prevent from the happening of cyber crime and also in the case

credit/ debit card loss.



Chapter-6ANALYSIS

&Alliance University School of Business 62


Interpretation

6.1 PERFORMANCE OF SOUTH INDIAN BANK:

The performance highlights of the bank SIB for the financial year ended 31 st March 2010 are as

follows:



Table 6.1 South Indian Bank Performance Highlights

The bank has registered net profit of Rs. 233.76 Crore for the year ended 31st March 2010. The

bank could achieve this because of this substantial improvement because of higher scale of

operations and NPA management. As of the latest audited financial results of SIB they have

reached their net profit to Rs. 292.56 Crore for the year ended 31st March 2011.

6.2 OPERATING REVIEW:

DEPOSITS:



The bank could increase its total deposits to Rs. 29721.08 Crores as of year ended 31st March

2011 from Rs. 23011.52 Crores last year. This registered a growth of 29.16 % which shows that

the bank has been continuously performing well for the past three years.

Year 2010-11 2009-10 2008-09 2007-08 2006-07

Deposits (Crs) 29721.08 23011.52 18092.33 15156.12 12239.21

% Change 29.16% 27.19% 19.37% 23.83% 27.78%

Table 6.2 Deposits

2006-07 2007-08 2008-09 2009-10 2010-110.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Deposits

Graph 6.1 Deposits

Breakup of the deposits as on 31st March 2010 is:

ADVANCES:



Total advances of the bank increased to 29.49% as on the year ended 31st March 2011 when

compared to last year. This helped the bank to touch the mark of Rs. 20,000 Crore by this fiscal

year.

Year 2010-11 2009-10 2008-09 2007-08 2006-07

Advances 20488.73 15822.92 11847.91 10453.75 7918.91

% Change 29.49% 33.55% 13.34% 32.01% 24.31%

Table 6.3 Advances

2006-07 2007-08 2008-09 2009-10 2010-110.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

Advances

Graph 6.2 Advances

INVESTMENTS:

During the fiscal year 2009-10 bank’s gross investment portfolio increased by 16.97% to Rs.

7164.29 Crore as against deposit growth of 27.19% resulting in a more healthy investment

deposit ratio of 31.13% against 33.85% for the year 2008-09. The bank made a trading profit of

Rs. 78.02 Crore for the year 2009-10 compared to Rs. 35.41 Crore in the previous year, i.e.,

2008-09.

Year 2006-07 2007-08 2008-09 2009-10



Investments 3,430.13 4,572.23 6,075.20 7,155.61

%Change 25.22% 33.30% 32.87% 17.78%

Table 6.4 Investments

2006-07 2007-08 2008-09 2009-100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Investments

Graph 6.3 Investments

PRIORITY SECTOR ADVANCES:

Year 2007-08 2008-09 2009-10

Agriculture 1489.05 1751.13 2656.8

Small Enterprises 738.46 857.9 1094.5

Other Priority Sector 1589.21 1637.21 1339.63

Table 6.5 Priority Sector Advances

From the above table we can see that the total amount of advances had always been increasing

year after year. We can also see that SIB’s exposure towards agriculture sector is much

compared to the other priority sectors. This shows how much dedication the bank is putting into

priority sector lending specially for agriculture purposes which also includes short term loans for

raising crops.



2007-08 2008-09 2009-100

500

1000

1500

2000

2500

3000

Priority Sector Advances (Crs)

AgricultureSmall EnterprisesOther Priority Sector

Graph 6.4 Priority Sector Advances

NON-PERFORMING ASSETS MANAGEMENT:

During the year 2009-10, the Bank had taken various steps for recovery of non-performing assets

by conduct of recovery camps, issue of notice under Securitization and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) one-time

settlements, etc.

As a result of the various steps taken, the Bank could recover NPAs to the tune of Rs. 269.62

Crore during the year against the target of Rs. 225 Crore. The Gross and Net NPAs of the Bank

as on March 31, 2010 were Rs. 211 Crore and Rs. 61.57 Crore against Rs. 260.56 Crore and

Rs.134.31 Crore respectively as on March 31, 2009. The percentage of Gross NPA to Gross

Advance came down from 2.18% as on March 31, 2009 to 1.32% as on March 31, 2010.

The most notable achievement in NPA management was that the Bank could reduce the

percentage of net NPA to net Advances from 1.13% to 0.39% as on March 31, 2010.

And as of the latest audited financial results for the year ended 31st March 2011, i.e., for the year

2010-11, the Gross NPA and Net NPA of the bank reached Rs. 230.34 Crore and Rs. 60.02 Crore

respectively. The percentage of Gross NPA and Net NPA came down to 1.11% and 0.29% as on

31st March 2011 when compared with last year’s 1.32% and 0.39% respectively.



6.3 COMPARISON:

I have analysed the bank past four years performance to find out how the bank had been

performing in terms of its NPA management. This would also help to measure their financial

strength and earning capacity of the business.

For this I have used ratio analysis which has become an important tool to measure and to know

how well the company is performing by itself.

6.3.1 Gross NPA Ratio:

Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank. Gross NPA is the sum

of all loan assets that are classified as NPA as per the RBI guidelines. The ratio is to be counted

in terms of percentage and the formula for GNPA is as follows:

Year 2006-07 2007-08 2008-09 2009-10

Gross NPA 321.21 188.48 260.56 211

Gross Avances 8308 10754 11965 15970

Gross NPA Ratio 3.87% 1.75% 2.18% 1.32%

Table 6.6 Gross NPA Ratio



2006-07 2007-08 2008-09 2009-100.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Gross NPA Ratio (%)

Graph 6.5 Gross NPA Ratio

This ratio indicates the credit portfolio of the banks. High gross NPA ratio indicates that bank

has a low credit portfolio and vice-versa. South Indian Bank has always maintained a low ratio in

terms Gross NPA to Gross Advances. They always tried to reduce this ratio when compared to

its previous years. As we can see in the above table for the year 2009-10 the ratio is at 1.32% and

they further brought down this number to 1.11% for the year 2010-11. This also shows how

dedicated they are at bringing their Non Performing Assets down. Hence I can say that have

always tried to maintain higher credit portfolio. If we compare with the industry average SIB is

performing much better. Gross NPA ratio of scheduled commercial banks for the year 2009-10 is

at 2.39% and for private sector banks it is at 2.74%, whereas SIB is at 1.32%. The difference

between the average of private sector banks and SIB is 142 basis points. This shows that SIB is

performing above the industry average.



6.3.2 Net NPA Ratio:

Net NPA Ratio is calculated by reducing cumulative balance of provisions outstanding at period

end from gross NPA. Higher ratios reflect rising bad quality of loans.

Year 2006-07 2007-08 2008-09 2009-10

Net NPA 77.81 33.97 134.31 61.57

Net Advances 7918.91 10453.75 11852.03 15822.92

Net NPA Ratio 0.98% 0.32% 1.13% 0.39%

Table 6.7 Net NPA Ratio

2006-07 2007-08 2008-09 2009-100.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

Net NPA Ratio (%)

Graph 6.6 Net NPA Ratio

This ratio indicates the degree of risk in the portfolio of the banks. High NPA ratio indicates the

high quantity of risky assets in the banks for which no provisions are made. From the above we

can see that SIB has always tried to minimize their quantity of risky assets in their portfolio and

the numbers of the past four years shows that. As we can see that for the year 2009-10 the ratio is

at 0.39% and they have further brought this value down to 0.29% for the year 2010-11. And if

we compare their value with the industry average, SIB is performing far better than the industry

as a whole. The Net NPA Ratio of scheduled commercial banks is at 1.12% and for private



sector banks it is at 1.03% when compared with SIB’s 0.39%. This shows that SIB has always

tried to reduce the amount of risky assets from their portfolio.

6.3.3 Provision Coverage Ratio:

Provisions are made for to keep safety against NPA and it directly affect on gross profits of the

banks. Provision Ratio is nothing but total provisions held for NPA to gross NPA of the banks.

Year 2006-07 2007-08 2008-09 2009-10

Provision 232.47 143.11 113.13 135.43

Gross NPA 321.21 188.48 260.56 211

Provision Coverage Ratio 72.37% 75.93% 43.42% 64.18%

Table 6.8 Provision Coverage Ratio

2006-07 2007-08 2008-09 2009-100.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

Provision Coverage Ratio (%)

Graph 6.7 Provision Coverage Ratio

This ratio indicates the degree of safety measures adopted by the banks. It has direct bearing on

the profitability, dividend and safety of shareholder’s funds. If the provision coverage ratio is



less it indicates that the bank has made under provision. We can also say that it is a measure that

indicates the extent to which bank has provided against the troubled part of its loan portfolio.

SIB has always tried to maintain higher ratio though there had been a decline in this ratio during

the year 2008-09 that was because they wrote off excess provision was high when compared

with the provisions they made during the year. This ratio again increased to 64.18% for the year

2009-10 when compared to the ratio of previous fiscal year which was at 43.42%. We can say

that SIB maintains provisions as per RBI guidelines and also based on their past experience,

evaluation of security and other related factors.

6.3.4 Problem Asset Ratio:

It is the ratio of gross NPA to total asset of the bank. The formula is given as:

Year 2006-07 2007-08 2008-09 2009-10

Gross NPA 321.21 188.48 260.56 211

Total Assets 13,652.58 17,089.93 20,379.41 25,534.04

Problem Asset Ratio 2.35% 1.10% 1.28% 0.83%

Table 6.9 Problem Asset Ratio

2006-07 2007-08 2008-09 2009-100.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Problem Asset Ratio (%)

Graph 6.8 Problem Asset Ratio



This ratio has a direct bearing on return on assets as well as liquidity risk management of the

bank. If the ratio is high then there is high probability of creating NPAs in the near future. If we

look into the above drawn graph we can see that this ratio has been reducing for the past four

years. This is a good sign in terms of performance of the asset portfolio of SIB. In the year 2009-

10 this ratio has gone down to 0.83% which is much better when compared to previous three

years. And again this ratio as further brought down to 0.70% for the year 2010-11. This shows

how dedicated the bank is in bringing down the probability of creating NPAs. This could be

further brought down in the current fiscal year.

6.3.5 Capital Adequacy Ratio:

Capital Adequacy Ratio (CAR) can be defined as ratio of the capital of bank to its assets which

are weighted/ adjusted according to risk attached to them, i.e.,

As per prudential Norms Banks were required to achieve 8% CAR, increased to 9% by March

2000. For the purpose of capital Adequacy Achievement, the capital base, i.e., Tire I + Tire II

should not be less than the prescribed % of total Risk Weighted Assets of the bank.

Year 2006-07 2007-08 2008-09 2009-10

Basel I 11.08 13.80 13.89 14.73

Basel II 14.76 15.39

Table 6.10 Capital Adequacy Ratio



2006-07 2007-08 2008-09 2009-1002468

10121416

Capital Adequacy Ratio (%)

Basel IBasel II

Graph 6.9 Capital Adequacy Ratio

Capital Adequacy Ratio is most important for the banks to maintain as per the banking

regulations. RBI has set minimum capital adequacy ratio to 9% for all the banks in the country.

A ratio below the minimum indicates that the bank is not adequately capitalized to expand its

operations. This ratio ensures that a bank does not expand their business without having adequate

capital.

It must be also known that it would be difficult for an investor to calculate this ratio as banks do

not disclose the details required for calculating the denominator, i.e., risk weighted average of

this ratio in detail. As such, banks provide their CAR from time to time.

Tier I Capital funds include paid-up equity capital, statutory and capital reserves, and perpetual

debt instruments eligible for inclusion in Tier I capital. Tier II capital is the secondary bank

capital which includes items such as undisclosed reserves, general loss reserves, subordinated

term debt, and others.

SIB has always maintained their Capital Adequacy Ratio well above the minimum limits

provided as per RBI guidelines. This ratio has been significantly increasing year after year and

has been brought upto 14.73% for the year 2009-10 as per BASEL I norms and 15.39% as per

BASEL II norms. This ratio ensures that bank can expand their operations and also gives

confidence to the depositors.



6.3.6 Sub Standard Asset ratio:

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

Year 2008-09 2009-10

Substandard Asset 145.12 54.97

Gross NPA 260.56 211

Substandard Asset Ratio 55.70% 26.05%

Table 6.11 Substandard Asset Ratio

2008-09 2009-100.00%

10.00%20.00%30.00%40.00%50.00%60.00%

Substandard Asset Ratio (%)

Graph 6.10 Substandard Asset Ratio

This ratio indicates the scope of improvement in NPA. Higher substandard asset ratio mean in

the whole of NPA substandard asset has the major portion. And this indicates that there is a high

scope for advance improvement because it will be easier to recover the loans within the

minimum duration of default.

We look into the above table it shows that this ratio has been decreased. Though the value of

NPA for the year 2009-10 has been reduced when compared with the year 2008-09 but this is a

good indicator that the value of NPA in the book of accounts has been decreased. The problem

here is that the portion of substandard asset in the whole of NPA is less and this could create

problem in speedy recovery of NPAs. Hence SIB needs to take necessary action for the above

problem.



6.3.7 Doubtful Asset Ratio:

It is the ratio of total doubtful assets to gross NPA of the bank. The formula is given as:

Year 2008-09 2009-10

Doubtful Asset 38.31 53.34


Doubtful Asset Ratio 14.70% 25.28%

Table 6.12 Doubtful Asset Ratio

2008-09 2009-100.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

14.70%

25.28%

Doubtful Asset Ratio (%)

Graph 6.11 Doubtful Asset Ratio

This ratio indicates the scope of compromise for NPA reduction. As per the values shown in the

above table the ratio has increased from 14.70% in the year 2008-09 to 25.28% in the year 2009-

10. This ratio is very much stable but in terms of performance of the bank they have to go for

compromise for NPA reduction. They have to come with better strategies for bringing out value

from these assets and earn income.



6.3.8 Loss Asset Ratio:

It is the ratio of total loss assets to gross NPA of the bank. The formula is given as:

Year 2008-09 2009-10

Loss Asset 77.13 102.69


Loss Asset Ratio 29.60% 48.67%

Table 6.13 Loss Asset Ratio

2008-09 2009-100.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Loss Asset Ratio (%)

Graph 6.12 Loss Asset Ratio

This ratio indicates the proportion of bad loans in the bank. The above table shows that the loss

asset ratio of SIB has increased from 29.60% in the year 2008-09 to 48.67% in the year 2009-10.

Though the proportion of bad loans in the year 2008-09 was quite manageable but this has

further increased in the year 2009-10, i.e., the proportion of loss assets to whole of NPA. In the

year 2009-10 the loss assets has reached almost half of the NPA which is not good for the bank

though overall NPA is less when compared with previous year. To reduce the portion of loss

assets SIB needs to take necessary actions to gain atleast some value from these assets. This can

be done either by selling it to asset reconstruction companies so that they can write off these



NPAs from their balance sheets. This is also an indication of increasing incidence of erosion of

securities and fraudulent loan accounts in the bank.

6.3.9 Shareholder’s Risk Ratio:

It is the ratio of net NPA to total of capital and reserves of the bank.

Net NPA

Shareholder’s Risk Ratio = --------------------------- x 100

Capital +Reserve

Year 2006-07 2007-08 2008-09 2009-10

Net NPA 77.81 33.97 134.31 61.57

Capital 70.41 90.41 113.01 113.01

Reserves 653.55 1070.58 1191 1372.28

Shareholder's Risk Ratio 10.75% 2.93% 10.30% 4.15%

Table 6.14 Shareholder’s Risk Ratio

2006-07 2007-08 2008-09 2009-100.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Shareholder's Risk Ratio (%)

Graph 6.13 Shareholder’s Risk Ratio

This ratio indicates the degree of risk associated with the shareholders investment. High ratio

means high risk to the shareholder. SIB has always tried to maintain this ratio as low as possible.



For the year 2009-10 they have tried to bring down the ratio to 4.15% from 10.30% in the year

2008-09. During the year 2010-11 this ratio has gain increased by a small margin to 6.5%. The

above figures indicates that the bank has always kept an eye to maintain this ratio as low as

possible so that they could attract the funds of shareholder since the degree of risk associated

with their investments is low.

6.3.10 Interest Spread Ratio:

This ratio is calculated as the excess of total interest earned over total interest expended to

standard assets.

Interest Earned – Interest Expended

Interest Spread Ratio = ---------------------------------------------------------- x 100

Standard Assets

Year 2008-09 2009-10

Interest Earned 1686.92 1935.72

Interest Expended 1164.04 1367.43

Standard Assets 11704.6 15759.04

Interest Spread Ratio 4.47% 3.61%

Table 6.15 Interest Spread Ratio

2008-09 2009-100.00%1.00%2.00%3.00%4.00%5.00%

Interest Spread Ratio (%)

Graph 6.14 Interest Spread Ratio



This ratio indicates the efficiency of the bank in managing 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. From the above table we can see that the bank SIB’s interest spread ratio is

decreasing which indicates that bank’s earning assets are decreasing which can be seen in the

increase in proportion of loss assets to the whole of NPA. Hence SIB needs to find ways in

which they can turn nonperforming assets to performing asset by which they can increase their

income through interest earned.



Chapter-7Findings, recommendations

&

Conclusion

7.1 FINDINGS

From analyzing the data collected with various parameters such as deposits, advances, gross

NPA ratio, net NPA ratio etc. of the bank over the past few years, the following findings were

arrived at:

1. Deposits of the bank is increasing at an increasing rate over the years but advances of the

bank though it is increasing but at a decreasing rate.



2. If we look into priority sector lending by the bank, they have focused much of their

advances towards agriculture sector.

3. In terms of gross NPA ratio and net NPA ratio SIB has always outperformed in

comparison with the industry average.

4. Though they brought down the amount of NPAs from their book of accounts but I could

see that there was an increase in the proportion of loss assets when compared with the

whole of NPA.

5. In terms of capital adequacy ratio SIB has always maintained their ratio well above the

minimum limits set by RBI and also made sure that the ratio was always kept above the

previous year’s value.

6. If we look into SARFAESI Act there are certain loopholes which need to cover for

efficient management of grievances such as getting automatic relief for the aggrieved.

7. In case of asset reconstruction companies as per SARFAESI Act they have de-notified it

as financial institution because of which they cannot transfer assets between one ARC to

another even for legitimate purpose.

8. RBI has put up bars against ARCs from converting debt into equity which is actually

required for improving the valuation of the company.

9. ARC must acquire a non-performing asset from a bank first, before it can work on any

kind of resolution – whether through a one-time settlement with the borrower, or sale of

physical assets, or rehabilitation/ revival.

10. Since the operations of the bank have become increasingly significant banking frauds in

banks are also increasing and fraudsters are becoming more and more sophisticated and

ingenious.



11. We can see that banking environment is becoming more and more competitive and to

survive and grow IT has been playing a major role.

12. It is also shown that cyber crime is being increased because of which identity frauds are

being taking place.

13. New technologies are being innovated to reduce the frauds that are arising in the banks,

be it internal or external.

7.2 RECOMMENDATIONS

Some of the recommendations that could be adopted for issues that have been risen in above

paper are:

1. Identify reasons for turning each account of a branch into NPA is the most important

factor for upgrading the asset quality as that would help to initiate suitable steps to

upgrade accounts.

2. Persuasion is an effective tool of recovery for which continuous follow up is required.

3. In case of long legal battles a better approach would be compromise and revival. Here

banks allow remission of principal and/ or interest along with rescheduling the repayment

of debt to deal with such advances.

4. Introduction of biometric systems will help to reduce frauds to a much greater extent, i.e.,

this system would help in reducing the ATM frauds, identity thefts and also from losing

of passwords or PINs.

5. With the help of concepts such as digital signatures, certification, public key

infrastructure will help in security of data, i.e., data authenticity and confidentiality.



6. With the help of facial recognition systems it could help in reduction of internal frauds,

i.e., employees attempting to withdraw money from a customer’s account without their

consent.

7. If we look into the problems of ARCs they are trying to reduce the amount of NPAs from

the economy and are not unlocking the value of these assets. So they need to come out

with solutions in unlocking the values of these assets rather than solving the problems of

the banks.

8. Banking by mobile could transform the workings of rural economy for this not only RBI

but also banks need to take the necessary initiatives to promote mobile banking in India.

9. Since ARCs are not able to transfer assets from one ARC to other even for legitimate

purpose, RBI needs to notify ARCs as financial institution and put in a clause saying that

they could transfer assets in certain circumstances such as rehabilitation/ revival or

takeover of management, etc., with the prior approval of RBI.

10. RBI needs to give permission to ARCs to convert debt to equity, atleast a portion of debt

is to be allowed to convert to equity such that it could sold in the market and recover

atleast part of the debt foregone.

11. Need to permit ARCs to acquire assets directly in the name of the trusts such that it is not

required for them to pay stamp duty twice.

12. It is also seen that during the auction for bad loans even after receiving many bids the

bank cancels the sale on the ground that there is a large gap between the price offered by

ARCs and the bank’s expectation. To overcome this RBI need to bring in fair practice

guidelines which would also look into the pricing standards.

13. SIB needs to come up with various strategies to recover the loss assets by themselves or

sell it to agencies such as ARCs so that they can write off from their balance sheets and

keep it clean.



14. SIB has more NPAs in the service industry so they need to take necessary steps to reduce

the level of NPA in this sector.

15. Prompt payment of loans by borrowers should be recognized and rewarded by way of

rebate for prompt payment which would act as a motivating factor.

16. The monitoring department should ensure that the credit monitoring functions of the bank

is more effective.

17. They should introduce client profile reports and keep continuous monitoring such that the

recovery officer would be able to know the progress and the performance of the

borrower. A close and prompt monitoring system would help the banks to prevent

accounts going bad.

7.3 CONCLUSION

In this study an attempt is made to analyze the financial performance of the bank South Indian

Bank and as a result it is seen that the overall performance of the bank is satisfactory. With

branches all over India this bank is considered to be one of the most pro active banks in India

with a competent tech savvy team of professional at the core of services. This could also been



seen through their slogan, i.e., “Experience Next Generation Banking”. The analysis and

interpretation of financial data of the bank helped to reach a conclusion that they have been able

to manage their level NPA. But it is also seen that the bank can improve their asset quality as the

proportion of loss assets are high in comparison of whole NPA for the year 2009-10.

There are lots of opportunities in the field of technology and especially in the banking sector. We

can see that banking industry is fast growing with the use of technology in the form of ATMs,

online banking, mobile banking, plastic money etc. These developments has helped the banking

industry in reducing the amount of frauds taking place and also improved the efficiency of

operations in the banks.

Above all these one of the challenges that banks are still facing today is the problem of NPA.

Though SIB is outperforming the industry average in maintaining the level of NPA to its

minimum but still it is a problem to be looked into. RBI has also been taking number of

measures but still this something that takes time to be removed from the system. The banks also

need to find out the measures to reduce the evolving problem of the NPAs. If the concept of

NPAs is taken very lightly it would be dangerous for the Indian banking sector. The reduction of

the NPAs would help the banks to boost up their profits, smooth recycling of funds in the nation.

This would help the nation to develop more banking branches and developing the economy by

providing the better financial services to the nation.

To solve this problem to an extent it was possible by following guidelines as per SARFAESI Act

2002, and with the introduction of Asset Reconstruction Companies (ARCs). ARCs helped the

banks to maintain clean books by buying NPAs from them such that the job of recovery is done

by them. Because of which the banks were relieved from the burden of NPAs and could focus

better on their core business.

In the end I would like to say that it is better to avoid NPA at the nascent stage of credit

consideration by putting in place rigorous and appropriate credit appraisal mechanisms. Because

NPAs causes, erosion of profitability and lack of liquidity for banks. Though it is still a challenge

for the banks and it is highly impossible to bring down the level of NPA to zero percentage. But



Indian banks can try competing with foreign banks to maintain international standards.

REFERENCES

DATABASE:

Capitaline Plus

Ebsco

Reserve Bank of India



SEARCH ENGINES:

Google.com

WEBSITES:

http://www.southindianbank.com/

http://www.banknetindia.com/

http://www.thehindubusinessline.in/

http://www.dnb.co.in/

http://www.moneycontrol.com/

http://www.ermjournal.com/

www.krcco.com

www.oecd.org

www.planningcommission.nic.in

http://www.livemint.com/

http://articles.economictimes.indiatimes.com/

http://timesofindia.indiatimes.com/


NPA, SARFAESI Act and the Impact of ARCs in India

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