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7/31/2019 Introduction (NPA)

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INTRODUCTION

A strong banking sector is important for flourishing economy. One of

the most important and major roles played by banking sector is that of

lending business. It is generally encouraged because it has the effect of

funds being transferred from the system to productive purposes, which

also results into economic growth. As there are pros and cons of

everything ,the is with lending business that carries credit risk, which

arises from the failure of borrower to fulfill its contractual obligations

either during the course of a transaction or on a future obligations either

during the course of a transaction or on a future obligations. The failure

of the banking sector may have an adverse impact on other sectors.

Non-performing assets are one of the major

concerns for banks in India. NPAs reflect the performance of banks. A

high level of NPAs suggests high probability of a large number of credit

defaults that affect the profitability and net-worth of banks and also

erodes the value of the asset. The NPA growth involves the necessity of

provision, which reduces the overall profits and share holders value. The

issue of the Non Performing Assets has been discussed at length forfinancial system all over the world. The problem of NPAs is not only

affecting the banks but also the whole economy. In fact high level of

NPAs in Indian banks is nothing but a reflection of the state of health of

the industry and trade. This project deals with understanding the concept

of NPAs, its magnitude and major causes for an account becoming non-

performing, projection of NPAs over next years in banks and concluding

remarks.The magnitude of NPAs have a direct impact on Banks

profitability legally they are not allowed to book income on such

accounts and at the same time banks are forced to make provisions on

such assets as per RBI guidelines. The RBI has advised all State Co-

operative Banks as well as Central Co-operative Banks in the country to


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adopt prudential norms from the year ending 31-03-1997. These have

been amended a number of times since 1997. As per their guidelines the

meaning of NPAs, the norms regarding assets classification and

provision. Its now very known that the banks and financial institutionsin India face the problem of amplications of non-performing assets

(NPAs) and the issue is becoming more unmanageable. In order to bring

the situation under control, various steps have been taken. Among all

other steps most important one was the introduction of the Securitization

and reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002 by Parliament, which was an important step towards

elimination or reduction of NPAs.

An asset is classified as non-performing asset (NPAs)

if dues in the form of principal and interest are not paid by the borrower

for a period of 180 days. However with effect from March 2004, default

status would be given to a borrower of dues are not paid for 90 days. If

any advance or credit facility granted by bank to a borrower becomes

non-performing, then the bank will have to treat all the advances/credit

facilities granted to that borrower as non-performing without having any

regard to the fact that there are may still exist certain advances/credit

facilities having performing status. The NPA level of our banks is way

high than international standards.

One cannot ignore the fact that a part of the reduction in

NPAs is due to the writing off bad loans by banks. Indian Banks should

take care to ensure that they give loans to credit worthy customers. In

this context the dictum prevention is always better than cure acts as the

golden rule to reduce NPAs


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NON-PERFORRMING ASSETS (NPA)

Non-Performing Asset means an asset or an account of

borrower, which has been classified by a bank or financial institution assub-standard, doubtful or loss asset, in accordance with the directions or

guidelines relating to asset classification issued by The Reserve Bank Of

India. An asset, including a leased asset, becomes non-performing when

it ceases to generate income for the bank. A NPA is a loan or an advance

where interest and/or installment of principal remain overdue for a

period of more than 90 days in respect of a team loan. Earlier assets

were declared as NPA after completion of the period for the payment of

total amount of loan and 30 days grace. In present scenario assets are

declared as NPA if none of the installment is paid till 180 days i.e. six

months in respect of term loan. With effect from March 30, 2004 a non-

performing asset (NPA) shall be a loan or an advance where: Interest

and/or installments of principal remain overdue for a period of more

than 90 days in respect of a term loan. The account remains out of order

for a period of more than 90 days, in respect of an overdraft/cash credit

(od/cd). The bill remains overdue for a period of more than 90 days in

the case of bills purchased and discounted, interest and or installments of

principal remains overdue for two harvest seasons but for a period not

exceeding two half years in the case of advance granted for agriculture

purpose, and may amount to be received remains overdue for a period of

more than 90 days in respect of other accounts.

RBI introduced in 1992, the prudential norms for

income recognition, asset classification and provisioning IRAC norms inshort in respect of the loan portfolio of the Co-operative Banks. The

objective was to bring out the true picture of a bank loan portfolio. The

fallout of this momentous regulatory measure for the management of the

CBs was to divert its focus to profitability, which tell then used to be a


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low priority area for it. Asset quality assumed greater importance for the

CBs when maintenance of high quality credit portfolio continues to be a

major challenge for the CBs, especially with RBI gradually moving

towards convergence with more stringent global norms for impairedassets. The quality of a bank loan portfolio can impact its profitability,

capital and liquidity. Asset quality problems are at the root of other

financial problems for banks, leading to reduced net interest income and

higher provisioning costs. If loan losses exceed the Bad and Doubtful

Debt Reserve, capital strength is reduced. Reduced income means less

cash, which can potentially strain liquidity. Market knowledge that the

bank is having asset quality problems and associated financial conditions

may cause overflow of deposits. Thus, the performance of a bank is

inextricably linked with its asset quality. Managing the loan portfolio to

minimize bad loans is, therefore, fundamentally important for a financial

institution in todays extremely competitive market driven business

environment. This is all the more important for the CBs which are at a

disadvantage of the commercial banks in terms of professionalized

management, skill levels, technology adoption and effective risk

management systems and procedures. Management of NPAs begins with

the consciousness of a good portfolio, which warrants a better

understanding of risks in lending. The board has to decide a strategy

keeping in view the regulatory norms, the business environment, its

market share, the risk portfolio, the available resources etc. The strategy

should be reflected in Board approved policies and procedures to

monitor implementation.

The essential components of sound NPA management are Quick identification of NPAs, Their containment at a minimum level, Ensuring minimum impact of NPAs on the financials.


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TYPES OF NPA

The RBI has issued the guidelines to banks for classified of

assets in to following categories

STANDARD ASSETS: Standard asset is one of which does not disclose

any problems and which does not carry more than normal risk attached

to the business/banks. These are loans which do not have any problem

are less risk. Such an asset is not a non-performing asset. In other words,

it carries not more than normal risk attached to the business.

SUB-STANDARD ASSET: It is classified as non-performing for a

period not exceeding 12 months. The account holder comes in this

category when they dont pay three installments continuously after 90

days and up to 1 year. For this category bank has made 10% provision of

funds from their profit to meet losses generated from NPA. With effect

from March 31, 2005 an asset would be classified as sub-standard if it

remained NPA for a period less than equal to 12 months. In such cases,

the current net worth of the borrowers/guarantors or the current market

value of the security charged is not enough to ensure recovery of the

dues to the banks in full. In other words, such assets will have well

defined credit weaknesses that jeopardize the liquidation of the debt and

are characterized by the distinct possibility that the banks will sustain

some loss, if deficiencies are not corrected.

An asset where the terms of the loans agreement

regarding interest and principal have been re-negotiated or rescheduled

after commencement of production, should be classified as sub-standardand should remain in such category for at least 12 months of satisfactory

performance under the re-negotiated or rescheduled terms. In other

words, the classification of an asset should not be upgraded merely as a


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result of rescheduling, unless there is satisfactory compliance of this

condition.

Doubtful NPA: An asset that has remained an NPA for a periodexceeding 12 months is a doubtful asset. These are NPA exceeding 12

months.

Under doubtful NPA there are three sub categories:

D1 i.e. up to 1 year: 20%provision is made by bank.D2 i.e. up to 2 year: 30%provision is made by bank.D3 i.e. up to 3 years: 100%provision made by bank.

With effect from March 31, 2005 an asset is required to be classified as

doubtful, if it has remained NPA for more than 12 months. The 12-

month period of classification of a substandard asset in doubtful

category is effective from April 1, 2009. A loan classified as doubtful

has all the weaknesses inherent as that classified as sub-standard, with

the added characteristic that the weaknesses make collection or

liquidation in full, on the basis of currently known facts, conditions and

values, highly questionable and improbable.

Loss Assets: A loss asset is one where loss has been identified by the

bank or internal or external auditors or by the Co-operation Department

or by the Reserve Bank of India inspection but the amount has not been

written off, wholly or partly. In other words, such an asset is considered

un-collectible and of such little value that its continuance as a bankable

asset is not warranted although there may be some salvage or recoveryvalue. Here loss is identified by the banks concerned, by internal

auditors, by external auditors, or by the Reserve Bank India upon

inspection. These NPA which are identified unreliable by internal


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inspector of bank or auditors or by RBI. Under this 100% provision is

made.

Effects of NPA on Bank:Restriction on flow of cash done by bank due to the provisions of

fund made against NPA.

Drain of profit.Bad effect on Goodwill.Bad effect on equity value.

DIFFICULTIES WITH THE NON-PERFORMING ASSETS:

Owners do not receive a market return on their capital. In worstcase, if the bank fails, owners lose their assets. In modern times,

this may affect a broad pool of shareholders.

Depositors do not receive a market return on savings. In the worstcase if the bank fails, depositors lose their assets or uninsured

balance. Banks also redistribute losses to other borrowers b

charging higher interest rates. Lower deposit rates and higher

lending rates repress savings and financial markets, which

hampers economic growth.

Non-performing loans epitomize bad investment. Theymisallocate credit from good projects, which do not receive

funding, to failed projects. Bad investment ends up in

misallocation of capital and, by extension, labor and natural

resources. The economy performs below its production potential.Non-performing loans may spill over the banking system and

contract the money stock, which may lead to economic

contraction. This spillover effect can channelize through

illiquidity or bank insolvency.


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a)When many borrowers fail to pay interest, banks may experienceliquidity shortages. These shortages can jam payments across the

country.

b)Illiquidity constraints bank in paying depositors e.g. cashing theirpaychecks. Banking panic follows. A run on banks by depositors

as part of the national money stock become inoperative. The

money stock contracts and economic contraction follows

undercapitalized banks exceeds the bank capital base.

Lending by banks has been highly politicized. It is common knowledge

that loans are given to various industrial houses not on commercial

considerations; some politician would ask the bank to extend the loan to

a particular corporate and the bank would oblige. In normal

circumstances banks, before exceeding any loan, would make a thorough

study of the actual need of the party concerned, the prospects of the

business in which it is engaged, its track record, the quality of the

management and so on. Since this is not looked into, many of the loans

become NPAs. The loans for the weaker sections of the society and the

waiving of the loans to farmers are another dimension of the

politicization of bank lending.

REVIEW OF LITERATURE

A number of studies related to performance and over dues of banking

sector have been conducted by many researchers and institutions in

India. An analytical attempt is being made to review some related worksdone to organize them in a presentable form.

A.Studies Prior to Financial Sector Reforms(1991):The Maclegan Committee (1914), which is the historical document in the


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annals of cooperative movement, has examined the performance of credit

cooperatives. It stated that when the funds are kept rotating, any loaning

function of the bank can gear up successfully and serve very useful purpose.

Unless the loans are rapid punctually, cooperation is both financially and

Educationally an illusion.Kalyani (1970) emphasized on a longer period for the

repayment of long term loans in India. He added that the total burden of

interest would be relatively higher in the long period than in the shorter

period, but then this burden would be spread over quite a long period,

making it easier for the borrower to repay his loan in easy installments,

thereby resulting in lesser over dues.

The All India Rural Credit Review Committee (1972) stated that there is

an utter lack of administrative supervision, staff of right type and the requisitescale of and, therefore, a full check on the utilization of loans is rather

difficult. Further it pointed out that the cooperative system had remained

stagnant both in respect of coverage of credit as well as borrowing

members as proportion to the total number of members. Cooperativecredit was short of standards of timeliness, adequacy and dependability.

Generally the overdue were heavy and were rising from year to year.

Datey the Chairman of the Report of the study team on overdue in

cooperative credit institutions (1974) studied the problem of overdue incooperative banks and remarked. About three fourths of overdue arose due to

willful default besides internal reasons. And he suggested that stern action

on recalcitrant borrowers should be taken up.

Economic Survey (2005-2006), Monetary and Banking Developments:

According to this survey, the target for institutional credit for agriculture byall the agencies was fixed at Rs.105, 000crore for the year 2004-05,ensuring

30% growth over previous years achievement. The overall achievement by

all agencies during 2004-05 was 1,15,243 crores, equivalent to 32%growth over the previous year s achievement. It further highlighted thatwhile the Commercial Banks and Regional Rural Banks over performed vis-

-vis their target of Rs 57000 crores and 8500 crores, there was a shortfall of

over Rs.8000 crores by Cooperative Banks vis--vis their target of 39,000

crores, attributing the same to low resource base and inefficient recovery


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system, thereby leading to excessive Overdue. The position of NPAs has

significantly improved in Scheduled Commercial Banks due to wider

options available to these for recovery of their dues on one hand and

sale of their NPAs to Asset Reconstruction Co(India) limited (ARCIL)

on the other hand. This resulted in NPAs declining by 6487 croresbetween March 2004 and end March 2005.

Bagchi,(2006). made an attempt to analyze the performance of

Cooperative Credit Institutions especially Primary Agriculture Credit

Societies, and observed that PACS could not match up to the increasing

requirements of growth dimensions in the Agri/Rural developments in

the Post Independence Period, although till the late 50 s, they were the

only available source of institutional rural finance. According to the RBI

Report on Trend and Progress of Banking in India 2004-05, released on24-11-05, the Cooperative Credit Institutions had extended an amount of

Rs.39, 638 crores to Agri-Allied sectors i.e., about half of credit

advanced by Commercial Banks (72,886 crores) and double the amount

advanced by RRBs (11,718 crores). The dismal performance of

Cooperative Banks was due to unnecessary State Government

intervention and above all the inefficient loan recovery system leading to

NPAs.

PROFILE OF THE CENTRAL CO-

OPERATIVE BANK

Cooperatives - An IntroductionCooperatives have played a vital role in improving the economic conditions of

farmers and accelerating the pace of development in Punjab. Development

through Cooperatives was a dream cherished by freedom fighters of India

ever since Independence. Cooperative principles ensure harmonious

development, through democratic management and governance. Cooperatives

have brought both the services and resources at the doorsteps of villagers


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in Punjab. These have been enthusiastically serving the people of Punjab in

area such as agriculture, housing, spinning, sugar production, weaving and

dairy etc. The performance of Cooperative Movement in Punjab, is very

impressive Cooperatives constitute the major source of institutional credit for

agriculture. Cooperatives are playing a pivotal role in socio-economicdevelopment of the State. These are key instruments of the State to developand sustain its rural economy, which is primarily agrarian. The Department of

Cooperation has accelerated Cooperative movement in Punjab during the last

three years.

Values and Principles

Cooperatives

A cooperative is an system voluntarily to meet their common economic, social

and cultural needs and aspirations through a jointly-owned anddemocratically controlled enterprise.

Principles: Voluntary and open membership Democratic member Control Members Economic Participation Autonomy and Independence Education, Training and Information Cooperation among Cooperatives Concern for Community

HISTORY

MISSION

Promotion and sustainance of economic interest & providing easy finance,

cost effective and quality banking services of customer & PACs.

AREA OF OPERATIONIn the area of this bank, there were five unions that were functioning as credit

institutions for co-operative societies. In 1956, all these unions were absorbed

in the bank. The area of the operation of the bank is jalandhar district that

comprises three Tehsils i.e Nakodar, Phillaur and Jalandhar. In 1956, the totalnumber of branches of the bank were two in number this number stands at 72

now out of these branches, 7 are in Urban areas, 22 in semi- urban areas and


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43 in rural areas.

OBJECTIVES OF THE BANK

The main objectives of the bank as mentioned in its bye laws is to facilitate

the operation of the affiliated co-operative societies in pursuance of thisobject, the bank has laid down in its byelaws to undertake the followingactivities:

To carry on banking and credit business.

To promote economic interest of the members of the bank and public-in

accordance with co-operative principles.

To provide credit facilities to its members on as convenient and suitable

facilities.

RESEARCH METHODOLOGY

For accomplishing the objectives of the study, both secondary and

primary data will be analyzed.

Secondary Data

The Secondary Data for three years from 2006 to 2008 will be used for thepurpose of this study. The data will be collected from:

The Annual Accounts, Audit Reports, and Inspection Reports of theselected DCCBs.

Publications of Reserve Bank Of India. Publications of NABARD. Economic Surveys. Existing literature and other scholarly works.

2. Observation: Some information will be gathered throughpersonal observation and interaction with the officials of NABARD and

State Cooperative Banks.


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POPULATION AND SAMPLE OF THE STUDY

Punjab has twenty (20) District Central Cooperative Banks (refer annexure1). The Proposed study will be primarily based on the Secondary Data

of preceding three years from 2006-07 to 2008-09.The main source ofthe secondary data will be the published Annual Reports, Circulars and

Policy letters of the Jalandhar Central Cooperative Banks of Punjab.

Tools of Analysis:

Consistent with the objectives of the study, different accountingtechniques such as Ratio analysis, etc., will be utilized. In addition to

these, simple statistical techniques like averages, graphs, percentages maybe used aiming at the achievement of study objectives and findings of

the existing studies.

OBJECTIVES OF THE STUDY

To understand the meaning & nature of NPAs. To examine the causes for NPAs in Jalandhar Central Co-

operative bank.

To project the NPAs in bank over next three years. To analyze the NPA and its relation with operating profit of the bank. To study the general reasons for assets become NPAs. To point out the amount of NPAs in different central banks. What is the criteria to recover the advances from the bank. What are the methods adopted by the bank to look after NPA

management.

SCOPE OF THIS STUDY: To present a picture of movement of NPA in The Jalandhar Central Co-

Operative Bank.

To know how NPA level will affect the profit of the banks.


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FINDINGS & RECOMMENDATION

CAUSES OF NPAs IN BANKS

Non-performing Assets (NPAs) are the smoking gun threatening the very

stability of Indian banks. NPAs wreck a bank's profitability both through a

loss of interest income and write-off of the principal loan amount itself. In a

bid to stem the lurking rot, RBI issued in 1993 guidelines based on

recommendations of the Narasimham Committee that mandated identification

and reduction of NPAs. Their implementation immediately pushed many

banks into the red. So serious is the problem that an RBI report suggested that

reducing NPAs be treated as a 'national priority'.

Dealing with NPAs involves two sets of policies

Relating to existing NPAsTo reduce fresh NPA generation. As far as old NPAs are concerned, a bankcan remove it on its own or sell the


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