Introduction: After liberalization, the Indian banking sector developed very rapidly.

The RBI also nationalized good amount of commercial banks for proving socio economic services to the people of the nation. The Public Sector Banks have shown very good performance as far as the financial operations are concerned. If we look to the glance the advances have been increased to 549,351.16crore from 414,989.36crore in 2003. The total income of the public sector banks have also shown good performance since the last few years and currently it is 128,464.40crore. The Public Sector Banks have also shown comparatively good result. The gross profits of the Public Sector Banks currently 29,715.26crore that has been doubled to the last to last year, and the net profit of the Public Sector Banks is 12,295,47crore. However, the only problem of the Public Sector Banks these days are the increasing level of the non-performing assets. The non performing assets of the Public Sector Banks have been increasing regularly year by year. If we glance on the numbers of non performing assets we may come to know that in the year 1997 the NPAs were 47,300crore and reached to 80,246crore in 2002. The only problem that hampers the possible financial performance of the Public Sector Banks is the increasing results of the non performing assets. The non performing assets impacts drastically to the working of the banks. The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks, but at the same time banks are required to make provisions for such NPAs...

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 provisions, which reduces the overall profits and shareholders value. The issue of Non Performing Assets has been discussed atlength for financial 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 .

The Narasimhan Committee has recommended prudential norms on income recognition, asset classification and provisioning. In a change from the past ,Income recognition is now not on an accrual basis but when it is actually received. Past problems faced by banks were to a great extent attributable to this. Classification of what an NPA is has changed with tightening of prudential norms. Currently an asset is nonperforming if interest or instalments of principal due remain unpaid for more than 180 days.

DEVELOPMENT BANKS:

Economic development of a country requires easy availability of adequate financial resources to meet long term capital needs of agriculture and industry. Development banks are set up specially to provide financial assistance for development project both (i) directly-(a) by extending term loans and (b) by subscribing to shares and debentures; as well as ( ii) indirectly(a) by underwriting new issues and (b) providing guarantees for term loans and deferred payments.

Development banks or term loan banks are the specialised financial institutions which serve twin objectives of (a) performing banking functions, and (b) promoting economic development. As banks, they provide finance, but the development banks are not ordinary banks. They specialised institutions and are quite different from ordinary commercial banks. Development banks do not accept deposits from the general public as the commercial banks do. Development banks provide medium term and long term finance, whereas commercial banks provide short-term loans. Unlike other finance institutes, the development banks not provide term finance, but also perform developmental and promotional functions.

Development banks play a very dominant role for promoting investment and enterprise in different sectors of the economy. These banks provide: It provides risk capital

 Underwrite new issues; Gives guarantee for term loans and deferred loans; Make arrangements for foreign exchange loans; Identify investment projects; Prepare and evaluate project reports; Provide technical advice, market information and management services.

Need for development banks:

Development banks are established to accelerate the economic development of developing economics. 1. Developing economics are unable to raise the required financial resource these for development. 2. In these countries, the rate of capital formation is low. Development banks help to reduce the gap between in investment, demand and savings availability. 3. In under developed economics, capital market is not organised to cater to the development needs. Development banks help to the dynamic growth of capital market.

Functions of development banks.

Development banks are expected to formulate their lending policies and direct their general operations in accordance with the broad socio-economic objectives of the country. They must actively participate in the realization of these objective of the country. They must actively participate in the realisation of these objectives. In India, the social objectives of the development banks are to serve the following areas on a priority basis: Provide medium-term loan and long-term loan to industrial concerns.

 To act as underwriters for the issues of share, bonds and debentures of industrial units. Give guarantees to the loan are raised by industries Directly invest in shares and bonds. Encourage starting of new units, prepare project reports, render advice on technical and managerial problems.

Structure of development banks in India.

Development banks in India (with exception of land development banks) have developed in post independence period. The structure of Indian development banks can be divided into two broad categories: (a) Those who promote agriculture development. (b) Those who promote industrial development.

1. agriculture development banks: agriculture development banks in India are further classified into three heads: i. ii. iii. At all India level. National bank for Agriculture and rural Development NABARD At state level. State land development banks. (SLDBS) At local level. Primary land development banks. (PLDBS), and branches of state development banks (SLDBS)

2. Industrial development banks. Industrial development banks in India are also divided in to two groups. i. At all India level. Industrial Finance Corporation of India ( IFCI), Industrial

Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Reconstruction Bank of India ( IRBI).

ii.

At state level. State Finance Corporation (SFCs)., and State Industrial

Development Corporation (SIDCs).

Industry profile. A central finance industrial corporation was set up industrial finance corporation
act 1948, in order to provide medium and long term credit to industrial undertaking which fall outside normal activites of commercial banks. The state government expressed the desire similar corporation to be set up in states to supplement the work of the industrial financial corporation. State government also expressed that state corporation be established under a special statue in order to make possible to incorporate in the constitution necessary provision in regard to majority control by government, guarented by state government in regard to payment principal. In order to implement the views expressed by the state government the SFC bills was introduced in parliament. Financial resources of the SFCs: The SFCs mobilize their financial resource from the following sources. Their own share capital. Income from investors and repayment of loans. Sale of bonds. Loan from IDBI (to some extent). Borrowing from RBI. Deposit from public. Loan from state government.

Functions: Various functions and types of financial assistance to be provided by the SFCs are given below.

The SFCs have been established to provide long-term finance to small-scale and medium-sized industrial concerns organised as public or private companies, corporation, partnership or proprietary concerns.

The SFCs extend loans and advances to the industrial concerns repayable within a period of 20 years. The SFCs guarantee loans raised by the industrial concerns in the market or from scheduled or cooperative banks and repayable within 20 years. The SFCs acts as an agent of central or state government or some industrial financing institution for sanctioning and disbursing loans to small industries.

Features:
Important features of the working of SFCs are; The SFCs were set up with the objective of providing financial assistance to small as well as medium industrial concerns. Though there has been a notable rise in the overall financial assistance, the performance in individual corporations differed largely due to the attitudes and motivations of the local entrepreneurs in different states. Prior to 1966, the SFCs showed preference for medium industries. But now there has been a marked shift in their lending policies in favour of the small units. In 1985-1986, the share of small units in the total loans sanctioned was 82 percent. Major beneficiaries of the financial assistance of SFCs has been the food processing industries, services (mainly road transport), chemicals, textiles, metal products, machinery and transport equipment industries. A special feature of the lending operations of SFCs has been the provision of finance to industries concerns of backward areas. In 1985-86, the share of backward areas in total assistance sanctioned by the SFCs was 53%. The SFCs provide concessional assistance to the industrial units located in backward areas in terms of soft loans at concessional rates, lower margins, reduced service charges, etc.

 In order to encourage self employment, the SFCs have formulated schemes of assistance to technician-entrepreneurs.

SFCs contribution towards the development of small scale industries in the Indian economy.
There are presently 18 SFCs and almost every state has a financial corporation of its During 2000-2001 SFCs had sanctioned loans aggregating to Rs. 2800 crores and disbursed Rs. 2000 crores. Their assistance in the form of loan has declined subsequently due to the existence of large amount of NPA.

Over 70% of the total assistance sanctioned and disbursed by all SFC is provided to small-scale industries (SSI). Attempts are now being made to strengthen the role of SFCs as regional development banks.

The SFC sanctioned seed assistance under seed capital scheme introduced and operated by IDBI. These assistance is available to promoter of small business units. Since june 1989, SFC have also been implementing special scheme of seed capital assistance to women entrepreneurs. Assistance is extended in the form of loans and grants or combination of loan or grants or combination of both to voluntary agency working for women in decentralized industries.

In crores Loan sanctioned Loan disbursed

1980-1981 370 250

1990-1991 1860 1270

2000-2001 2800 2000

2003-2004 1130 860

Total written off (loss) Rs 1880 crores.

List of 18 SFCs in India. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Assam state finance corporation. Andhra Pradesh state finance corporation. Bihar state finance corporation. Delhi state finance corporation. Gujarat state finance corporation. The economic development corporation of Goa. Haryana financial corporation. Jammu and Kashmir state finance corporation. Karnataka state finance corporation. Kerala financial corporation. Madhya Pradesh financial corporation. Maharashtra state financial corporation. Orissa state financial corporation. Punjab financial corporation. Rajasthan state financial corporation Tamil Nadu state financial corporation Uttar Pradesh state financial corporation. West Bengal state financial corporation

Company profile:
Andhra Pradesh State Financial Corporation [APSFC] is a term lending Institution established in 1956 for promoting small and medium scale industries in Andhra Pradesh under the provisions of the Sate Financial Corporations Act, 1951.The corporation came into existence on 1-11-1956 by merger of Andhra State Financial Corporation and Hyderabad State Financial Corporation. The corporation has launched many entrepreneur-friendly schemes to provide term loans, working capital term loans, special and seed capital assistance to suit the needs of various categories of entrepreneurs. The Corporation has completed five decades of dedicated service in industrial financing of tiny, small and medium scale sector units and contributing to the balanced regional development of the state.

Objectives:
To industrialise the state through balanced regional development and dispersal of industries Extending term loan to tiny, small and medium scale industries and service based industries like hospitals, hotels, construction, marketing assistance by extending need based credit to them To act as a catalyst for generation of employment. Nurtures entrepreneurship and encourage first generation entrepreneurs.

Services:
APSFC offers liberal financial assistance for acquiring fixed assets like land., buildings and machinery. The term loan assistance from the corporation is available up to Rs. 1000.00 lakhs per unit and is offered through various convenient and easily repayable schemes to suit individual and particular requirement.

For the past four decades and more, APSFC has provided finance to thousands of industrial units of almost every hue. APSFC also offers the expertise of experienced professionals to counsel entrepreneurs at each stage in every discipline of industry. What APSFC delivers therefore, is a complete package deal, which means the corporation is one with the entrepreneur from concept to commissioning of the unit. With its widespread network of 25 Branch offices APSFC is reaching the farthest orders of the state and brings assistance to the door step of the entrepreneur, thus facilitating accelerated and balanced industrial development in the state.

What APSFC look for while financing Background of the entrepreneur. Capability of the entrepreneur to invest his markings. Capability of the entrepreneur to offer collateral security for the term loans as well as working capital. Technical feasibility of the project. Market potential for the products/services. Financial Viability.

ELIGIBILITY:
All firms, companies, co-operatives societies whose capital and free reserves does not exceed Rs. 30 crores

Debit equity ratio.

The debit-equity ratio reckoned at a maximum of 2:1.

Lending norms:

Financial assistance to industrial and service sector units.

All the project satisfying the definition of MSME are eligible for loans irrespective of project cost.

Activities for which financial assistance can be considered includes:

- Manufacturing/processing industries

- Service sectors- Information Technology, Nursing Homes and other services units.

- Tourism- Hotels, Restaurants And Tourist resorts.

- Working capital term loans to existing profit making units.

- Marketing of SSI products.

Schemes for financial assistance:

1. General loan: Existing / new tiny, small& medium scale industries and service sectors enterprise. 2. Hotels: For setting up of hotels and restaurant projects.

3. 4.

Scheme for tourism related facilities: for setting up of tourism related activites. Assistance to hospitals/nursing homes: Setting up of allopathic nursing homes,

Hospitals having qualified P.G doctors (MD/MS) on full time basis having a minimum strength of 10 beds. Ayurvedic /homeopethic /Unani /Naturopathy Nursing Homes are not eligible. 5. Single window scheme: Deserving units with venture outlay not exceeding

RS.200 lakhs including working capital. 6. Road laying work under build operate transfer scheme: A class civil

contractors /reputed construction companies with ready work allotment from R&B. Tripartite agreement among Bidder entrepreneur, government favoring APSFC for collection of toll tax in case of defaults. 7. Marketing assistance scheme for SSI products: Individuals, partnership firms,

private and public limited companies with experience in marketing SSI products. 8. MSME MTL: medium term loan scheme for extending financial assistance

towards working capital and other business needs of industrial concerns and service enterprises. 9. Scheme for extending financial assistance for purchase of exiting assets: torro

all sole proprietor concerns, partnership firms private and public limited companies and co-operate societies. 10. Scheme for financial assistance to SC /ST entrepreneurs for setting up of

industrial units /service enterprise.

Milestone achievements of APSFC:

So far sanctioned 11,134 crores for 92,689 units in Andhra Pradesh as on 31/03/2011

 Disbursed 7,634 crores to 72,297 units - 70% to Tiny/SSI sector as on 31/03/2011 Recovered Rs 8,382 crores including interest since inception till 31/03/2011 Established unblemished repayment track record since inception Has consistent record of earning operating profit throughout its history Created total Investment of around 23,656 crores Generated direct and indirect employment to about 11 lakh persons Channelled a significant share of assistance of around 70% to tiny and small scale industries Industrialised backward areas by extending 50% of its assistance to industries coming Up in notified backward areas. Enjoying 60% of the market share in term lending in promoting First Generation Entrepreneurs in Andhra Pradesh.

APSFC provides loan requirement to establish Manufacturing & Service Enterprise. Entrepreneur friendly approach. Easy accessibility Simplified system & procedures Support to 1st generation entrepreneurs.

Liberal terms of funding. Debt-Equity ratio (DER) at maximum of 2:1. Loan eligibility up to 85% on fixed assets Reasonable collateral security requirements by way of urban immovable properties starting as low as 25% of term loan based on lending policy of corporation.

Competitive interest rates in a band of 12% to 14.5% based on credit rating. Term loan assistance to existing units operating in profits at liberal terms.

QUALITY POLICY OF APSFC:

APSFC aims at to be the leading term lending financial institution in the state by providing adequate and timely financial assistance to its customers for industrialization specifically in small and medium scale sector including service enterprise. APSFC shall ensures customers satisfaction through professional management and teamwork with commitment to implement the requirement of quality management system 9001:2008 APSFC also review and improve continually the suitability and effectiveness of quality management system and its quality objective

Annual performance.

Year: 2007-08

Reduction of NPA'SNPA reduction is usually long-term drawn process. The net NPA'S, which stood at 35% in 1999-2000, was brought down to 25.83% as on 31.03.07. They were further reduced to 22.03% at the end of March 08. It may be noted that the high level of NPA'S is the legacy of the past when the corporation has sanctioned a large number of small loans with out collateral security. The new loans now being sanctioned are subjected to rigorous approach and also secured with collateral commensurate with the risk perception of the corporation. Let us seek confirmation of balances outstanding in loan accounts were sent by the corporation to loans. Some of them have responded conforming the said balances. Provision for various categories of NPA'S and standard assets as on the 31.03.08 is made on the following basis with the accordance guidelines issued by SIDBI on asset classification and provision in norms as follows: CATEGORY OF ASSET Standard assets Sub-standard assets Doubtful - Up to 3 years period - Above 3 years period Loss assets
PROVISION ON AMOUNT OUTSTANDING

0.25% 10%

25% 50% 100%

Year 2009-10

The corporation earned a net profit of rs. 67.68 crores during financial year 2009-10 after providing for taxation. The net profit during the year recorded a tangible jump. The net worth of the corporation improved to Rs. 332.19 crores as on 31st march 10 from Rs. 2665.59 crores as on 31st march 2009. Year 20010-2011. The corporation earned a net profit of rs. 67.33 crores during financial year 2010-11 after providing for taxation. The net profit during the year recorded a tangible jump. The net worth of the corporation improved to Rs. 377.16 crores as on 31st march 2011 from Rs. 332.19 crores as on 31st march 2010

Research methodology.

The major objective of the study is to study the incidence of Non-Performing Assets(NPAs) in the banking sector as a whole. It can help in identifying the reasons

and causes of this major problem faced by institutions today. An important parameter in the analysis of financial performance of the corporation is the level of NPA study was conducted in APSFC (vijayawada branch)

Project details.

Project brief: The project brief explains the meaning of Non-Performing Assets and the steps take by the APSFC to solve the problem of increasing NPAs. This chapter also explains as to why the problem of NPA persists even after the efforts of RBI and government of India. The objective of the study is also covered under the same heading. Purpose and scope of the study: The purpose and scope of the study has divided in to the following topics.
a) Problem diagnosis: The effect of NPA on APSFC.

b) Research methodology
c) Procedure for data collection: For the collection of

data internal sources like year-end files, balance sheets were collected. External data were collected through sources like internet and periodicals.

Brief description of the problem:

The financial institution of our country is concern with providing medium term and long term loans to the industrial concern. Lending business is generally encouraged

because it has the effect of funds being transferred from the system to production purpose, which results in to economic growth.

One of the major threats to the health of the Indian banking system or financial corporation comes from high level of Non-Performing Assets(NAPs). NPAs are the loans, which are unlikely to be paid. This means either interest or principal payment has been outstanding on these loans for more than 90 days. Increasing NPAs have direct impact on the financial institution or banks profitability as legally these institutions are forced to make provision on such assets as per RBI guidelines. The financial institution in our country is burdened with huge volume of NPA on which borrowers have defaulted on interest and amortisation of payments. The depth of the problem of NPA was first realised only in early 1990s. the magnitude and financial institution is over Rs. 1,50,000 crores. A question that arises that how much risk can these financial institutions afford to take?. The recent happening in the business world do not give much confidence to the banks. In case after case the giant corporation become bankrupt and failed to provide investors with cleaner and more complete information, there by introducing a degree of risk that many investor could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest financial institutions failures were due to credit risk.

Emergence of the word NPA.

The

issues

relating

to

definantion,

management

or

mismanagement

and

recommendation calling for spectacular solution to the problem of non-performing assets of financial institutions are being deliberated at a frequent intervals during last decade or so. In late 80s the concept of classification of bank advances in several categories took place though the terminology NPA did not exits at that time. This is followed by early 90s Anglo-American model of classification categorization of bank lending portfolio in several blocks of nomenclature in that included the NPA. The rapid popularity of the phenomeno can be ascribed to the opening up of the Indian economy and consequent pressure from western powers to influence our banking system in the name of the international standards of accounting, congruence of banking supervision by basle committee and so on.. The sudden shock of guidelines relating to NPA and simultaneous of income recognition made the Indian banking system totter and a number of public sector banks started incurring losses from the mid nineties. Then came the recommendation of the Narasimham committee with the proposition of creating asset reconstruction fund for cleaning balance sheet of the banks of NPA as a one time measure

Definition of NPA:
A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments. For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.

Therefore, Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India.

Ninety days overdue

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2004. 1. Interest and / or instalments of principal remain overdue for a period of more than 90 days in respect of a term Loan. 2. The account remains out of order for a period of more than 90 days, in respect of an Overdraft / Cash Credit. 3. The bill remains overdue for a period of more than 90 days in case of the bill purchase and discounted. 4. Interest and / or instalments of principal remain overdue for two harvest season but for a period not exceeding two half years in the case of an advance granted for agricultural purpose. 5. Any amount to be received remains over-due for a period of more than 90 days in respect of the other accounts.

Out of order
An account treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as 'out of order. It is known as out of order.

In line with RBI guidelines from time to time the loan given by the financial institutions are classified as performing or non-performing assets for the purpose of income recognition and provisioning.

The criteria for classification are: Performing/standard assets: loan in respect of which interest and principal are received regularly are called standard assets or performing assets. Standard assets also include loans where arrears of interest or of principal amount do not exceed days at the end of financial year. No provision is required for such loans. Non-performing assets: according to RBI rules any loan repayment which is delayed beyond 90 days, has to be identified as non-performing assets. NPAs are further classified as sub-standard assets, doubtful assets, and loss assets. Sub-standard assets: sub-standard assets are those, which are non performing for a period not exceeding two years. Also, in cases where the loan repayment is rescheduled RBI has asked banks to recognise the loans as sub-standard at least for at least for 1 year. Doubtful assests: The loan is treated as doubtful assets for exceeding 2 years and which are not considered as loss assets. A major portion of assets under these category relate to sick companies as referred by the board for industrial and financial reconstruction(BIFR) and awaiting financialisation of rehabilitations packages. Loss assets: The assets where loss has identified but the amount has not been written off wholly or partly. In other words, such an assets is considered uncollectible expect for salvage value.

Provision
RBI has laid down provision rules for NPA. These means banks have to set aside a portion of their funds to safeguard against any losses on unpaid loans. As and when an assets is classified as an NPA, the bank has to further sub-

classify into sub-standard, doubtful, and loss assets. Based on these classification, financial institution make the necessary provision against these assets. In case of loss assets, guidelines specially require concerned institute should make the full provision for the amount outstanding. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset. Also in case of doubtful assets, guidelines require the bank concerned to provide entirely the unsecured portion and in case of secured portion an additional provision of 20% to 50% of the secured portion should be made depending upon the period for which advance has been considered as doubtful.

Assets classification and provisioning. Asset category Standard asset Age of arrears Provising to be made

Where the principal and /or 0.25% interest arrears are not more than 90 days.

Sub-standard asset.

Where the principal and /or 10% interest arrears are more than1 year 3 months but not more than 2 years 3 years.

Doubtful-1

Where the principal and/ or Secured portion 20% interrst arrears are more than Unsecured 1 years 3 months but not 100% more than 2 years 3 months portion

Doubtful-2

Where the principal and/ or Secured portion 30% interrst arrears are more than Unsecured portion 100 2 years 3 months but not more than 4 years 3 months

Doubtful-3

Where the principal and/ or Secured portion 100% interrst arrears are more than

4 years 3 months

Unsecured 100%

portion

Loss

1.where are the primary Secured portion 100% assets aree sold or fully Unsecured missing. 100% 2.where balance is nil and other expenses are still to be recovered portion

Types of NPA.
Gross NPA Net NPA.

Gross NPA. The sum total of all loans or advances that are classified as NPA as per RBI guidelines as on balance sheet date. Gross NPA reflects the quality of the loans made by the banks. It consist of all non-standard assets like sub-standard, doubtful and loss assets. It can be calculated as following: Gross NPA=Total of all NPA from the total advances.

Net NPA: Net NPA are those in which the banks have deducted the provision regarding NPA. Net NPA shows the actual burden of banks. Since in India, balance sheet contain a huge amount of NPAs and the process of recovery and write off loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between the gross and net NPA is quite high. It is calculated as:

Net NPA=gross NPA provision.

Factors for rise in NPA.

The financial institution has been faceing the problems of the rising NPAs. But the problem of npas is more in public sector banks when compared to private sector banks and foreign banks. The NPA in public sector banks are growing due the external and internal factors.

External factors.

1. Ineffective recovery tribunal: the government has set a number of recovery tribunals which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the banks suffer the consequences of non-recover, their by reducing their profitability and liquidity. 2. wilful defaults: there are borrowers who are not able to payback loans but are intentionally withdrawing it. These group of people should be identified aand proper measures should be taken in order to get back the money extended to them as advances and loans. 3. natural calamities. This is the major factor which is creating alarming raise in NPAs in public sector banks. Every now and then India is hit by major calamities thus making the borrowers unable to payback their loans. Thus the banks has to make large amount of provisions in order to compensate those loans, hence end up with a reduced profit. Mainly our farmers depend on the rainfalls for cropping. Due to the irregularities of rainfall the farmers depend are not able to achieve the production level, there by they are unable to repay the loans. 4. industrial sickness. Improper project handling, inefficient management, lack of adequate resources, lack of advance technology, day to day change of

government policies give birth to industrial sickness. Hence the bank that finance th industries ultimately end up with low recovery of their loans, there by reducing their profits and liquidity. 5. lack of demand. Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable t pay back the money they have borrowed to operate these activities. The banks recover the amount by selling their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it.

Internal factors. 1. Defective lending process: There are 3 cardinal principles of bank lending that have been followed by the Principle of safety: By safety, it means that the borrower is in position to repay both principle and the interest. The repayment of loan depends on the borrowers. Capacity to pay Willingness to pay. 3. Reputation of the borrower: the banker should therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully. He should be a person of integrity and good character. 4. Managerial deficiencies: the banker should always select the borrower very carefully and should take tangible assets as security to safeguard its interests. When accepting the securities bank should consider; Marketability Acceptability Safety. Transferability.

The banker should follow the principle of diversification of risk. do not keep all the eggs in one basket it means that the banker should not grant advances to a few big firms only or to concentrate only in few industries. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank is affected.

5. Inappropriate technology: due to inappropriate technology and management information system, market driven decisions on real time basis can not be taken. Proper management information system is not implemented in the institutions, leads to poor credit collections, thus leading to rise in NPA. 6. Purpose of loan: when banker give loan, he should analysis the purpose of the purpose of the loan. To ensure safety and liquidity, banks should grant loans for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing. 7. Absence of regular industrial visits: the irregularity in spot visit also increase the NPA. Absence of regular visit of bank officials to the customers point decreases the collection of interest and principle on the loan. The NPA due to wilful defaulters can too be collected by regular visits.

NPA'S have a deleterious effect on the return on assets in several ways:

They erode current profits through provisioning requirements They result in reduced interest income They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future, and They limit recycling of funds, sets in asset-liability mismatches, etc There is at times a tendency among some of the banks to understate the level of NPA'S in order to reduce the provisioning and boost up lines. It would only postpone.

In the context of crippling effect on a bank's operations in all spheres, asset quality has been placed as one of the most important parameters in the measurement of a bank's performance under the CAMELS supervisory rating system of RBI. Other implication: "The most important business implication of the NPA'S is that it leads to the credit risk management assuming priority over other aspects of bank's recovery procedures rather; than concentrating on expanding business. "As already mentioned earlier, a bank with high level of NPA'S would be forced to incur carrying costs on a non-income yielding assets. Other consequences profitability and capital adequacy, gradual decline in ability to meet steady increase in cost, increased pressure on net interest margin (NIM) thereby reducing competitiveness, steady erosion of capital resources and increased difficulty in augmenting capital resources. "The lesser appreciated implications are reputation risks arising out of greater disclosures on quantum and movement of NPA'S, provisions etc. The non-quantifiable implications can be psychological like 'play safe' attitude and risk aversion, lower morale and disinclination to take decisions at all levels of staff in the bank.

Management of NPA'S
"The quality and performance of advances have a direct bearing on the profitability and viability of banks. Despite an efficient credit appraisal and disbursement mechanism, problems can still arise due to various factors. The essential component of a sound NPA management system is quick identification of nonperforming advances, their containment at minimum levels and ensuring that their impingement on the financials is minimum. "The approach to NPA management has to be multi-pronged, calling for different strategies at different stages a credit facility passes through. RBI's guidelines to banks (issued in 1999) on Risk Management Systems outline the strategies to be followed for efficient management of credit portfolio. I would like to touch upon a few essential aspects of NPA management; in this paper.

Excessive reliance on collateral has led Indian banks nowhere except to long drawn out litigation and hence it should not be sole criterion for sanction. Sanctions above certain limits should be through Committee, which can assume the status of an 'Approval Grid'. "It is common to find banks running after the same borrower/borrower groups as we see from the spate of requests for considering proposals to lend beyond the prescribed; exposure limits. I would like to caution that running after niche segment may be fine in the short run but is equally fraught with risk. Banks should rather manage within the appropriate exposure limits. A linkage to net owned funds also needs; to be developed to control high leverages at borrower level. "Exchange of credit information among banks would be of immense help to them to avoid possible NPA'S. There is no substitute for critical management information system and market intelligence. "Banks should ensure that sanctioning of further credit facilities is done only at higher levels. A quick review of all documents originally obtained and their validity should be made. A phased programmer of exit from the account should also be considered.

Recovery tools and its effectiveness.:

The recovery tools adopted by bansks and other financial instutions are: Debt recovery tribunals. Lok adalats Asset recovery company. Revenue recovery act SARFASE act.

Preventive measures to control NPA:

1.Early identification:

Identification of accounts showing early warning signals. High value of NPA should be given focussed attention. A systematic review of problem loans should be done. The time norm for the problem loans review should be adhere to. Action plan should be draw for each account and follow up.

2. recovery: actual recovery occurs in the accounting in which total recovery of dues is warranted. Through regular pre end post post sanction monitoring, follow up should be done to eliminate NPA. 3. upgradation: the NPA accounts in which part recovery of the total dues is upgrade the accounts from NPA to performing assets. Generally the NPA accounts with less than 2 years of age are covered. The main charateristics of these accounts is after eliminating from NPA, these continued to be part of advances; since lending is a main business of the bank upgradation of the account is preferred. Sub-standard account to be specially targeted for upgradation. Upgradation strategies include adjustmnets of irregularities, repayment of over dues interest/instalments. Replacement /reschudling of loan should be done in deserving case promptly. After one year of successful implementation, accounts to be reveiwed for upgradation. Rehabilitation: units should be taken up in deserving cases. 4. Compromise: through compromise the accounts are closed by negotiated settlements with borrowers as per compromise policy of the bank. Genrally companies are encouraged in chase chronic NPA accounts. Compromise proposal need to be considered when necessary and in time.

Impact of NPA:

1. profitability: NPA means blocking of money in terms of bad assets, which occurred due to wrong choice of client. Because of money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also, as that much of profit is invested in some return earning project /assets. So npa does not affect current profit but also future stream of profit, which may lead to loss of some long term beneficial opportunity. Another impact of reduction in profitability is low return of interest, which adversely affects current earning of the bank. 2.liqudity: money is getting blocked, thereby decreased profit lead to lack of enough cash at hand which lead to borrowing money for shorter period of time which in turn leads to additional cost to the company. Difficulty in operating the function of bank is another cause. 3. Involvement of management.: time and effort of management is another indirect cost which bank has to bear due to NPA. Time and effort of managemnet is handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now a days banks have special employees to deal and handle NPAs, which is additional cost to banks. 4. credit loan: bank is facing problem of NPA that adversely affects the value of ban in terms of market credit. It will lose its goodwill and brand image which have a negative impact to people who are putting their money in the banks.

ACCOUNTS AND TABLES OF NPA'S

TABLE-1 : APSFC: TRENDS IN OTHER EXPENCES AS A PERCENTAGE OF LOANS & AD7VENCES DURING 2006-07 TO 2009-10.

Year (at the end Other expenses of march) 2006-07 2007-08 2008-09 2009-10 150.95 152.50

Loans

&

% of other expenses to L & A 0.17 0.16

Advances 91028.93 93235.09 166049.79 185141.20

From

2006-2007 the other expenses are maximum in the year 1996-97 i.e.

2,330.53 lacks. For the better performance of the financial institution other expenses should be controlled from 1996-97 i.e. 2330.52 lacks that has been decreased to 152.50 lacks in 2004-2005. By this we can say that the institution has the better performance.:.

TABLE-2 : APSFC: TRENDS IN PERSONNEL EXPENCES AS A PERCENTAGE OF LOANS & ADVENCES DURING 1998-99 TO 2007-08.

Year (at the end of march) 2005-06 2006-07 2007-08

Personnel expenses 1974.92 2436.89 1783.58

Loans

&

of

personnel

Advances 94175.23 91028.93 93235.09

expenses to L & A 2.10 2.68 1.91

2008-09 2009-10

3163.26 3454.01

166049.79 18.15 1851.41 19.66

The personal expenses are also plying an important role as compared to the other expense. These personal expenditure includes the salaries and allowances of managing director, staff and others, medical expenses of staff and others, compensation paid under VRS, PF, gratuity, staff welfare etc. these personal expenditure in 2007-08 was Rs. 1783.58 which has been increased to Rs. 1851.20 lakhs in 2009-10

TABLE-3

: APSFC: TRENDS IN TOTAL COSTS AS A PERCENTAGE OF LOANS & ADVENCES DURING 1998-99 TO 2007-08.

Year (at the end of march) 2003-04 2004-05 2005-06 2006-07 2007-08

Total Costs 12222.43 14656.48 14701.04 13556.82 12161.34

Loans Advances 94681.22 90123.70 94175.23 91028.93 93235.09

&

% of Total Costs toL& A 12.91 16.26 15.61 14.89 13.04

By subtracting the depreciation and bad debts written off from the total expenditure we will get the total cost. By the above table we can say that the total cost is very high in 2004-05 and it is decreased from 16.26% to 13.04% in 2007-08

TABLE-4

APSFC: TRENDS IN OTHER INCOME AS A PERCENTAGE OF LOANS & ADVENCES DURING 1998-99 TO 2007-08.

Year (at the end of march) 2006-07 2007-08 2008-09 2009-10

Other Income 1074.93 975.95

2870.1 4 3108.8 2

Loans & Advances 83618.08 93235.09

1660.49 18 51.41

% of Other Income to L & A 1.29 1.05

1.72 1.67

The other income includes the service charges, upfront fee, bad debts written off recovered,, interest on staff advances, premium on pre matured closure of accounts, interest on income tax / income tax refund, consultancy charges, rent received and others. The other income should increase. By the above table the financial institution has to maximize the other income.

TABLE-5 : APSFC: TRENDS IN RATIO OF TOTAL COSTS TO INCOME DURING 1998-99 TO 2007-08. Year(at the end of march) 2003-04 2004-05 2005-06 2006-07 2007-08 Total Costs 12222.43 14656.48 14701.04 13556.82 12161.34 Income 12628.68 14780.76 15264.41 14309.21 13004.80 % of Total Costs to Income 96.78 99.16 96.31 94.74 93.51

The total cost should be low and income should be high, the percentage of the total cost to total income should be low. The percentage should be minimized. In 2004-05 it is very high and i.e. decreased from 99.16% to 93.52% in 2007-08; this indicates the better performance of the institution.

Financial performance:

Gross profit

YEAR Total Income Total Expenditure Operating Profit Gross Profit %

2006-07 143.09 137.08 6.01 4.20

2007-08 130.04 121.14 8.9 0.68

2008-09 237.53 192.95 44.58 18.76

2009-010
288.16

2010-11 322.35 222.15 100.28 31.10

188.51
99.65

34.58

Operating profit is an indication of the performance of the business organization. In the year 2009-10 the is an amount of 99.65 crores but it has increased to 100.23 crores and this is an indication of the good performance of the institution. YEAR Total Income Net Profit after Tax Net Profit % 2006-07 143.09 10.10 7.06 2007-08 130.04 13.14 10.00 2008-09
237.38 42.85 18.05

2009-107
288.85 67.67 23.42

2010-11
322.35

67.33
20.88

LOANS & ADVANCES ON PURPOSE WISE BASIS (Amount in Lakhs) YEAR General Loans Bridge Loans Transport Loans Mini Loans Composite Loans Fisheries Loans Spl. Relief Fund Equipment Refinance Scheme Spl. Loans-Soft Loans Financial Assistance Working Capital Term Loans Rehabilitation Loan to VRS Staff Marketing Related Activities ADD other Expenses Less Provision Against NPA TOTAL 2003-04 78765.84 5.29 3323.27 0.75 638.67 1.55 0.09 300.45 215.95 2189.32 9240.04 0.00 0.00 94681.22 767.64 95448.86 15322.15 80126.71 2004-05 84199.85 5.29 3228.81 0.75 714.20 1.55 0.09 188.41 216.51 3623.95 13871.58 7.57 0.00 106058.56 780.87 106839.43 16715.73 90123.70 2005-06 84284.23 5.29 2753.08 0.75 692.56 1.55 0.09 101.92 188.55 4693.68 17558.28 7.45 0.00 110287.43 703.16 110990.59 16815.36 94175.23 2006-07 79210.69 5.29 1843.49 0.65 629.02 1.55 0.09 15.62 180.34 4623.38 20127.50 4.62 99.73 106741.97 662.01 1074033.98 16375.05 91028.93 2007-08 79646.16 5.29 1237.29 0.65 601.61 1.55 0.08 12.54 174.22 5542.42 21094.5 3.18 206.65 108526.14 576.09 109102.23 15867.14 93235.09

NET LOANS OUTSTANDING - EFFECTIVE ASSET CLASSIFICATION (Amount in lakhs)

YEAR 2006-07 CLASSIFICATION Standard asset Sub standard asset Doubtful asset 2007-08 Standard asset Sub standard asset Doubtful asset 2008-09 Standard asset Sub standard asset Doubtful asset 2009-10 Standard asset Sub standard asset Doubtful asset AMOUNT 67395.27 11946.83 1151792. 47,77671,17 62.398.84 29996.30
83427.86 17797.13 14681.53 1088.03 12071.85 33826.26 865906.52

TOTAL 90860.02

507826.14

20666.38

The amount regarding to doubtful assets are decreasing from the year 2006-07 to 2008-09 but in 2009-10 there is a considerable increase. Therefore the corporation should take necessary steps to control NPA.

REASONS FOR NPA'S IN APSFC'S Location: One of the major reasons for causing the NPA'S is the disadvantage that many establishments face with regard to the location which is away from the main stream commercial area and also, from the ready market and the consumer, in view of the same business man are finding it difficult to sell their products, also competition from large business houses. Infra structure facilities: Water, road, and electronics: one of the major reasons for large NPA'S is the poor infrastructure facilities, water, road and electronics to APSFC, in view of the business are not achieved expected growth and thus resulting in higher NPA'S. Raw Material Requirement: Some of the industries established are facing the problem of raw materials and thus the shortage of the same effects, their production and consequently their profits, which can also be considered as one of the reasons. Marketing of Finished Products: Being away from the main stream and competition from the large business houses and enable to establish a brand from themselves are some of the reasons of the difficulties that many business are facing as a result it contributing to NPA'S .

Extremist's Area: Since it is an extremist area there is a problem of skilled and the area doesn't create business optimism.

Disputes among Partners/Directors: In some of the businesses especially, partnership firms there are constant disputes between partner and as consequence business suffers and in some of the private limited companies, there are disputes between the directors, which can cause the business to fail and thus may result in NPA'S. Lack of Working Capital: In some of the business the entrepreneur who are technically sound may not lack the required knowledge of the financial aspects as a result they may not be able to manage their finances in the proper manner and as a result, they may mismanage their working capital and as a result their profits are likely effected which too can one of the reason for the NPA'S. Cut throat competition/ marketing programme: Cut throat competition and the lack of proper marketing programmer can be one of the reasons for the cause of the poor performance of some of the business and thus, they can result in NPA'S. Machinery breaks down: In some of the companies there are frequent problems of machinery resulting in affecting their production which can also one of the reason for the cause of NPA'S.

1. Problem of the machinery supply 2. Delay in supply of machinery 3. Lack of technical know how 4. Non availability of parts of machinery in that area 5. Delay in project implementation. 6. Seasonal industry's increase in cost of raw material 7. Delay of power supply 8. Problems of financial institution for funding 9. Government policies

Recovery tools and its effectiveness.:

The recovery tools adopted by bansks and other financial instutions are: 1. The Debts Recovery Tribunal have been constituted under Section 3 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The original aim of the Debts Recovery Tribunal was to receive claim applications from Banks and Financial Institutions against their defaulting borrowers. 2..Section 29 of SFC Act and particularly Sub-section 4 of Section 29 of SFC Act creates a first charge and gives priority to the dues of Corporation over all other dues of the defaulter. Once a Notice/ Order under Section 29 of SFC Act is issued an possession is taken over, the Corporation takes over the management or possession or both, of the industrial concern and the Corporation becomes the owner of the defaulting unit for all practical purpose . Sub-section 4 prescribes the order of payment from the realization of the proceeds of the sale of the assets of the defaulting unit, according to which, the dues of the Corporation shall be realized prior to the other dues. As such, if the Corporation has taken over the possession of the unit, the Corporation shall have the first right to recover its dues. 3. constant follow up with the borrowers: a constant follow up is done by sending letters /telegrams and by frequent phone calls. 4. . The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, allows banks and financial institutions to auction properties (residential and commercial) when borrowers fail to repay their loans. It enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction. It enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery or reconstruction.

NPA MANAGEMENT

The APSFC adopted a two pronged strategies in npa managemnet during the year 2009-10. First,

the corporation focused on upgradation of the NPA account through

improvement in the collections of dues. Secondly, major emphasis was laid on containing of NPAs, out of the fresh loans by ensuring proper selection of assets and due diligences in the context of the credit processing. In these regard the corporation put in place well defined recovery policy. During the year the 2009-10 the corporation reveiwed the policy and rearticulated,based on the feedback from the customers and the branch officiers.the objective of the loan recovery was to maximize the recoveries of due especially from NPA and to contain the npa to acceptable level.

Schemes for financial assistance:

The problem persists.

Fourteen of the largest and major banks were nationalised in 1969 and Non Performing Assets figure were Rs 70,000 crore in year 2001-02 within the period of 23years. The banks had to file a suite against their customers in civil court and after decision of trial court, there was an appeal in the high court. The banks practically did not recover their dues. The government after 23 years had established Debt Recovery Tribunal for the banks in 1993. The exclusive jurisdiction of the Debt Recovery Tribunal was not sufficient remedy to recover the dues of the banks promptly for the debtors of the banks .The Central Government has taken 32 years to pass an Act Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 . The Act enables

the setting up of assets management companies, addressing the problems of NonPerforming Assets of banks and financial institutions and enhancing rights of the creditors. Even the SFC have there own act, which is sec 29 of SFC act. This is a classic case where Reserve Bank of India, State Bank of India and other financial institution and the Central Government did not apply their minds to find out the right remedy to recover dues in time. Due to delay in finding out a remedy NonPerforming Assets have increased to Rs 1, 10,000 crore at the end of year 2004-05.

There are number of other instances, which can be given where decisions are not taken at proper time, which has resulted in enormous loss of public money. The issues relating to definitions, management or mismanagement and recommendations calling for spectacular solutions to the pro b l e m o f N o n - P e r f o r m i n g Assets of banks are being deliberated at frequent intervals during a decade or so. It all started in the late 80s the concept of classification of banks advances in several health -c o d e categories though the terminology of NPAs was not existent at that time. This followed, in early 90s; with Angloportfolio in American model of categorisation of bank lending several blocks of nomenclature that includes the NPAs.

Definition of NPA:
A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The

nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments. For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.

Therefore, Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India.

Ninety days overdue

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2004. 6. Interest and / or instalments of principal remain overdue for a period of more than 90 days in respect of a term Loan. 7. The account remains out of order for a period of more than 90 days, in respect of an Overdraft / Cash Credit. 8. The bill remains overdue for a period of more than 90 days in case of the bill purchase and discounted. 9. Interest and / or instalments of principal remain overdue for two harvest season but for a period not exceeding two half years in the case of an advance granted for agricultural purpose. 10. Any amount to be received remains over-due for a period of more than 90 days in respect of the other accounts.

Out of order
An account treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as 'out of order. It is known as out of order. In line with RBI guidelines from time to time the loan given by the financial institutions are classified as performing or non-performing assets for the purpose of income recognition and provisioning.

The criteria for classification are: Performing/standard assets: loan is respect of which interest and principal are received regularly are called standard assets or performing assets. Standard assets also include loans where arrears of interest or of principal amount do not exceed days at the end of financial year. No provision is required for such loans. Non-performing assets: according to RBI rules any loan repayment which is delayed beyond 90 days, has to be identified as non-performing assets. NPAs are further classified as sub-standard assets, doubtful assets, and loss assets. Sub-standard assets: sub-standard assets are those, which are non performing for a period not exceeding two years. Also, in cases where the loan repayment is rescheduled RBI has asked banks to recognise the loans as sub-standard at least for at least for 1 year. Doubtful assests: The loan is treated as doubtful assets for exceeding 2 years and which are not considered as loss assets. A major portion of assets under these category relate to sick companies as referred by the board for industrial and financial reconstruction(BIFR) and awaiting financialisation of rehabilitations packages.

 Loss assets: The assets where loss has identified but the amount has not been written off wholly or partly. In other words, such an assets is considered uncollectible expect for salvage value.

Provision
RBI has laid down provision rules for NPA. These means banks have to set aside a portion of their funds to safeguard against any losses on unpaid loans. As and when an assets is classified as an NPA, the bank has to further subclassify into sub-standard, doubtful, and loss assets. Based on these classification, financial institution make the necessary provision against these assets. In case of loss assets, guidelines specially require concerned institute should make the full provision for the amount outstanding. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset. Also in case of doubtful assets, guidelines require the bank concerned to provide entirely the unsecured portion and in case of secured portion an additional provision of 20% to 50% of the secured portion should be made depending upon the period for which advance has been considered as doubtful.

Schemes for financial assistance:

Sl.no. Activity/schemes

purpose

remarks