PROJECT REPORT ON NON PERFORMING ASSETS IN ASSOCIATION WITH SOUTH INDIAN BANK

ACKNOWLEDGEMENT

I am really happy and excited in representing this summer training project report before you.

I must express my gratitude towards SOUTH INDIAN BANK for giving me an opportunity to work with on this report.

And of course I am very much thankful to our honourable MRS HARSH LATTA (PROJECT GUIDE) for giving me opportunity and her guidance help me through out preparing this report. She has also provided me a valuable suggestions and excellence guidance about this training, which proved very helpful to me to utilize my theoretical knowledge in practical field.

At last I am also thankful to my friends, to all known and unknown individuals who have given me their constructive advise, educative suggestion, encouragement, co-operation and motivation to prepare this report.

DECLARATION

I, Ms. Shreya Virmani do hereby declare that the project report titled NON PERFORMING ASSETS is a genuine research work undertaken by me and it has not been published anywhere earlier.

Date: Place:

INDEX
CHAPTER 1. INDIAN BANKING 1.1 Introduction to indian banking 6 1.2 Defination 1.3 History of Indian Banking 1.4 Structure of Indian Banking 9 CHAPTER 2. OVERVIEW OF SOUTH INDIAN BANK 2.1About South Indian Bank 19 2.2 History of South Indian Bank 21 2.3 Business Performance 2.4 Awards and Recognition 23 CHAPTER 3. INTRODUCTION TO NON-PERFORMING ASSETS 3.1Introduction 43 3.2 Non-performing Assets in banks 47 3.3 Asset classification 3.4 Types of NPA 3.5 Provisioning Norms 3.6 Guidelines for provisions under special circumstances 3.7 Underline reasons for NPA 3.8 Symptoms of turning performing assets into NPA 3.9 Impact of NPA on banks 3.10 Preventive measurement for NPA 3.11 Managing NPAs through legal measures

6 8

49 51 53

CHAPTER 4. RESEARCH METHODOLOGY 4.1 Meaning 67 4.2 Objectives 67 4.3 Data Analysis and Interpretation 4.4 Ratio analysis of NPA in South Indian Bank 68 CHAPTER 5. FINDINGS AND RECOMMENDATIONS 77 5.1 Finding from ratios 5.2 Recommendations 5.3 Conclusion CHAPTER 6. LIMITATIONS OF THE STUDY 80 CHAPTER 7. BIBLIOGRAPHY S80

CHAPTER 1

INDIAN BANKING

1.1 INTRODUCTION TO INDIAN BANKING

A bank is a financial institution that provides banking and other financial services. By the term bank is generally understood an institution that holds a Banking Licenses. Banking licenses are granted by financial supervision authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank, a so-called Non-bank. Banks are a subset of the financial services industry.

The word bank is derived from the Italian banca, which is derived from German and means bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Moneylenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.

1.2

DEFINITION OF BANK An organization, usually a corporation, chartered by a state or federal

government, which does most or all of the following: receives demand deposits and time deposits, honors instruments drawn on them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks, drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.

DEFINITION OF BANKING In general terms, The business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit So we can say that Banking is a company, which transacts the business of banking. The Banking Regulations Acts defines the business as banking by stating the essential function of a banker. The term banking is defined as

Accepting for the purpose of leading or investment, deposits of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise.

1.3 HISTORY OF INDIAN BANKING

Typically, a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset. Development of banking industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred

even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. Banking in India has an early origin where the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, was the turn of the agency houses to carry on the banking business. The General Bank of India was first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank Hindustan and the Bengal Bank.

In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established in 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken by the newly constituted State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935 by passing Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for licensing, supervision and control of banks. Considering the proliferation of weak banks, RBI compulsorily merged many of them with stronger banks in 1969.

 The three decades after nationalization saw a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system, during the late eighties the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. Accordingly, a high-level committee was set up on 14 August 1991 to examine all aspects relating to the structure, organization, functions and procedures of the financial system. Based on the recommendations of the Committee (Chairman: Shri M. Narasimham), a comprehensive reform of the banking system was introduced in 1992-93. The objective of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health. One of the important measures related to income recognition, asset classification and provisioning by banks, on the basis of objective criteria was laid down by the Reserve Bank. The introduction of capital adequacy norms in line with international standards has been another important measure of the reforms process.

1. Comprises balance of expired loans, compensation and other bonds such as National Rural Development Bonds and Capital Investment Bonds. Annuity certificates are excluded. 2. These represent mainly non- negotiable non- interest bearing securities issued to International Financial Institutions like International Monetary Fund, International Bank for Reconstruction and Development and Asian Development Bank. 3. At book value.

4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits of Non- Government

In the post-nationalization era, no new private sector banks were allowed to be set up. However, in 1993, in recognition of the need to introduce greater competition which could lead to higher productivity and efficiency of the banking system, new private sector banks were allowed to be set up in the Indian banking system. These new banks had to satisfy among others, the following minimum requirements:

(i) (ii)

It should be registered as a public limited company; The minimum paid-up capital should be Rs 100 crore;

(iii) The shares should be listed on the stock exchange; (iv) The headquarters of the bank should be preferably located in a centre which does not have the headquarters of any other bank; and (v) The bank will be subject to prudential norms in respect of banking operations, accounting and other policies as laid down by the RBI. It will have to achieve capital adequacy of eight per cent from the very beginning.

A high level Committee, under the Chairmanship of Shri M. Narasimham, was constituted by the Government of India in December 1997 to review the record of implementation of financial system reforms recommended by the CFS in 1991 and chart the reforms necessary in the years ahead to make the banking system stronger and better equipped to compete effectively in international economic environment. The Committee has

submitted its report to the Government in April 1998. Some of the recommendations of the Committee, on prudential accounting norms, particularly in the areas of Capital Adequacy Ratio, Classification of Government guaranteed advances, provisioning requirements on standard advances and more disclosures in the Balance Sheets of banks have been accepted and implemented. The other recommendations are under consideration.

The banking industry in India is in a midst of transformation, thanks to the economic liberalization of the country, which has changed business environment in the country. During the pre-liberalization period, the industry was merely focusing on deposit mobilization and branch expansion. But with liberalization, it found many of its advances under the non-performing assets (NPA) list. More importantly, the sector has become very competitive with the entry of many foreign and private sector banks. The face of banking is changing rapidly. There is no doubt that banking sector reforms have improved the profitability, productivity and efficiency of banks, but in the days ahead banks will have to prepare themselves to face new challenges.

1.4

Structure of Indian banking

RESERVE BANK OF INDIA

CORPORATIVE BANK

COMMERCIALBANK SCHEDUL ED

REGIONAL RURAL BANK

RURAL

SHORT SHORTTERM STRUCTUR E

URBAN/PRIMA RY
LONG TERM STRUCTURE

NONSCHEDULED

SCHEDULE

SBI AND ASSOCIATES

SCARDBs

STCBs
PCARDBs

NONSCHEDULE

NATIONALIZED BANKS

CCBs PACs

PRIVATE SECTOR BANKS

FOREIGN BANKS

CHAPTER 2

OVERVIEW OF SOUTH INDIAN BANK

2.1

About South Indian Bank

South Indian Bank is a leading commercial bank in India, a pole-position achieve, as a result of an enduring pursuit of excellence and an intense desire to understand our customers, who are treated to the best of breed products and services. Our offerings are designed from core values strengthened by a rich tradition and technology at its best. On 29th January 1929, South Indian Bank was brought to life by an ensemble of entrepreneurs at Thrissur, with a passion to free the society from the vice clutches of unscrupulous money lenders. And today, after 82 long years, as we pioneer information technology based financial inclusion efforts in remote villages of the country, we belief that the passion has never dwindled, and the vision of our forefathers lives on. South Indian Bank, as of March 31, 2011 had achieved a total business of Rs. 50,380 Crore, comprising a deposit base of Rs. 29,721 Crore, and an advance base of Rs. 20,659 Crore. We have a spread out branch network of 600+, supplemented by an equally diverse ATM network of 400+, ensuring our footprint in 26 States/ Union Territory. The bank has a strong capital base with a diverse shareholding pattern. (Around 38% held by FIIs, around 12% by other institutions and remaining 50% by other non-institutional investors) Our capital adequacy ratio stands at 15.86% (Basel-II), as of 30th September 2010. We are proud to have a patronage of more than 3 million customers, leaders in their own right, with their unstinted efforts to build a better world in their chosen paths. With a dedicated work force of more than 5000 professionals and a suite of diverse financial products & services, the Bank is fully geared to meet the everchanging needs of the market. We have always been early birds in embracing the latest technology on offer, but never at the cost of customer inconvenience. The faith reposed on us by our customers throughout these years, is our biggest motivator for increasing our service levels, to greater heights. Today we offer all personal banking and corporate banking services, in

addition to the value added financial services such as Insurance, Mutual Funds, and Stock Trading etc. under one roof. As always, we stay committed to serve you better, in offering Next Generation Banking.

Building Blocks

One of the earliest banks in South India, South Indian Bank" came into being during the Swadeshi movement. The establishment of the bank was the fulfillment of the dreams of a group of enterprising men who joined together at Thrissur, a major town (now known as the Cultural Capital of Kerala), in the erstwhile State of Cochin 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. Translating the vision of the founding fathers as its corporate mission, the bank has during its long sojourn been able to project itself as a vibrant, fast growing, service oriented and trend setting financial intermediary. 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.

Future Perfect

The South Indian Bank with a new logo and image marches on. With branches all over India and a clientele across the world, the bank is considered one of the most pro active banks in India with a competent tech savvy team of professional at the core of services.

Vision 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

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.

Technology at SIB

Our bank had embarked upon a massive technology up gradation drive by introduction of a Centralized Core banking solution. For this a modern Data Center has been set up at Kochi, connecting all branches with all the Departments at Head Office, all Regional Offices, and the Treasury Dept at Mumbai and the IBD at Kochi. This robust network facilitates anywhere banking, Networked ATMs, Internet Banking, Mobile Banking, Global debit cum ATM card operations, Online trading, online shopping etc. The Sibertech project was launched with a target of connecting the 200 odd branches in two phases by March 2004. Towards this endeavor, the bank has concluded a technology partnership with M/s Infosys Technologies Ltd for Finacle, the Core Banking Solution, M/s HCL Infosystems Ltd. for Network Integration and M/s WIPRO for Data Centre set up and Maintenance. The Sibertech Project was formally launched on January 17, 2001 by Sri.N.R.Narayana Murthy, Chief Mentor, Infosys Technologies Ltd in a colorful function at Kochi. The state of the art Data Center of international standards at Kochi, is the only one of its kind in the banking industry in Kerala. A number of dignitaries have visited this Data Center, including Sri.Azim.H.Premji, Chairman & Managing Director,WiproLtd. Per se bank has achieved 100% Core Banking Solutions by 24th March, 2007.Further to strengthen the ATM reach and global acceptability Bank has introduced Master Card Global Debit- cum- ATM card, which can be used at ATMs and merchandise all over the world. We have launched internet banking primarily focusing the individual as well as corporate clients. The Bank has also

introduced Mobile banking for customers as a value addition. The aim of the Bank is to offer the latest technology driven value added services to the customers without compromising our motto - Blending Tradition with Technology.

2.2 History of SIB

A brief history of South Indian Bank:

South Indian Bank is one of the oldest banks in South India.

 Incorporated on January 25, 1929, with its Head Office at Thrissur, Kerala. It is the first among the Private Sector Banks in Kerala to become a SCB in 1946. A pioneer- First Private Sector Bank To open a NRI branch in Nov, 1992. To open an IFB branch in March, 1993. Among Private Sector Banks in Kerala, to open an Overseas Branch in June, 1993. Listed in NSE, BSE and CSE- IPO in 1998, successful FPO in 2006. Successful QIP in 2007.

2.3 Business Performance

As the organization was set up in 1929 as a Private Sector bank, it has achieved a long run in the business field. The vast and rapidly growing branch network is a result of profitable business.

2.4 Awards and Recognition

 BUSINESSWORLD INDIAs BEST BANK 2010 AWARD to SOUTH INDIAN BANK South Indian Bank has bagged the Businessworld Indias Best Bank 2010 Award. The Managing Director & Chief Executive Officer of South Indian Bank, Dr. V.A.Joseph, received the award from Sri. Pranab Mukherjee, The Hon. Union Minister for Finance, in a colourful function held at Mumbai on 23rd December 2010.

SOUTH INDIAN BANK BAGGED THE BEST WEB SITE AWARD FROM KMA South Indian Bank has bagged the best web site award from Kerala Management Association. On 4th February 2011, Executive Director Sri. Abraham Thariyan and Deputy General Manager (DICT) Sri. P J Jacob received the award from Sri. Jayaraj, Addl. Chief Secretary of Karnataka at a glittering function in Kochi.

BEST BANK AWARD TO SOUTH INDIAN BANK Our MD&CEO, Dr.V.A.Joseph receives the award for the Best Bank in the old generation banks category - fe Indias Best Bank Awards from Hon: Union Finance Minister Mr.Pranab Mukherjee . Financial Express Awards for Indias Best Banks were selected by Ernst &Young. The function was organized at the Taj Mahal Hotel, Mumbai on 25th July, 2009.

Award for the best bank in asset quality among all private sector banks in India Our MD & CEO Dr.V A Joseph receives the award for the best bank in asset quality among all private sector banks in India from Mr.James E Thompson, GBS Chairman & Chief Executive, Crown Group of companies on 18th February

2009 at Mumbai. Accompanied by Dr.Manoj Vaish, Presedisent & CEO, Dun&Bradstreet, India.

The best Asian Banking Web Site award from Asian Banking & Finance Magazine

South Indian Bank (SIB) bagged the best Asian Banking Web Site award from the Charlton Media Group, Singapore under the banner Asian Banking & Finance Retail Banking Awards-2008.

South Indian Bank Bags Special Award from IDRBT for Banking Technology Excellence

South Indian Bank has won a special award for excellence in Banking Technology from IDRBT (Institute for Development and Research in Banking Technology) the technical arm of the Reserve Bank of India. This award was presented to our Bank as a national level recognition to the excellent contribution made in the area of Information Systems Security Policies and Procedures. Dr. V.A Joseph, Chairman and CEO received Banking Technology Excellence Award from Dr. Y.V Reddy, Governor of RBI. Also seen are Sri. Arvind Sharma, Director of IDRBT and Sri. V.P Shetty, Chairman of IBA

CHAPTER 3

INTRODUCTION TO NON PERFORMING ASSETS

3.1 Introduction to Non-performing Assets

The three letters NPA Strike terror in banking sector and business circle today. NPA is short form of Non Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more

than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to avoid NPA, no cannot be then left is to look after the factor responsible for it and managing those factors.

Definitions: An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained past due for a specified period of time. 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. Accordingly, with effect from March 31, 2004, a nonperforming asset (NPA) shall be a loan or an advance where; Interest and/ or instalment 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/CC),

The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

 Interest and/or instalment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes, and

Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004.

3.2 NON PERFORMING ASSETS IN BANKS

One of the major problems Indian banks facing today is the size of nonperforming assets over which the top management of all banks are spending significant amount of their time and energy. On account of the intricacies in involved in handling the non-performing assets, ticklish task of asset management of the bank has become a tight rope-walk affair for the controlling managers, because a little indiscretion on any front may put a bank into serious trouble. Moreover, the huge non-performing assets of the banks are also a constant worry for the regulators and the ministry, because is seen as an important instrument of development for a developing country like India. The problems become all the more crucial for the Indian banks because in the changing scenario at the world level, they cannot afford to remain unresponsive to the global requirements.

However, banks are well aware of the grim situations and they have tried their level best in the last decade to reduce their NPA portfolio thereby bringing it closer to the international level. Realizing the problems faced by the banks, Reserve Bank of India in the capacity of a regulator has come out with appropriate guidelines for NPA portfolio. The commercial banks have welcomed these announcements which are seen as life lines to maintain their financial help in an increasing league competitive and deregulated environment.

3.3

ASSET CLASSIFICATION

Categories of NPAs Standard Assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan do not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories. Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained nonperforming and the realisability of the dues:

( 1 ) Sub-standard Assets ( 2 ) Doubtful Assets ( 3 ) Loss Assets

( 1 ) Sub-standard Assets:--

With effect from 31 March 2005, a sub standard asset would be one, which has remained NPA for a period less than or equal to 12 month. The following features are exhibited by sub standard assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full; and the asset has well-defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

( 2 ) Doubtful Assets:-A loan classified as doubtful has all the weaknesses inherent in assets that were 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.

With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months.

( 3 ) Loss Assets:-A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted- although there may be some salvage or recovery value. Also, these assets would have been identified as loss assets by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly.

3.4 Types of NPA

A] Gross NPA B] Net NPA

A] Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as substandard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs Gross Advances

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

Net NPAs = Gross NPAs Provisions Gross Advances - Provisions

3.5 Provisioning Norms

General In order to narrow down the divergences and ensure adequate provisioning by banks, it was suggested that a bank's statutory auditors, if they so desire, could have a dialogue with RBI's Regional Office/ inspectors who carried out the bank's inspection during the previous year with regard to the accounts contributing to the difference.

Pursuant to this, regional offices were advised to forward a list of individual advances, where the variance in the provisioning

requirements between the RBI and the bank is above certain cut off levels so that the bank and the statutory auditors take into account the assessment of the RBI while making provisions for loan loss, etc.

The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. 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 banks should make provision against sub-standard assets, doubtful assets and loss assets as below:

Loss assets: The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.

Doubtful assets: 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.

In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful:

Period for which the advance has Provision been considered as doubtful Up to one year One to three years requirement (%) 20 30

More than three years: (1) Outstanding stock of NPAs as on March 31, 2004. (2) Advances classified

60% with effect from March 31,2005. 75% effect from March as 31, 2006. 100% with effect from March 31, 2007.

doubtful more than three years on or after April 1, 2004.

Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31, 2003 has to be made in phases as under: As on 31.03.2003, 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful category. As on 31.03.2002, balance of the provisions not made during the previous year, in addition to the provisions needed, as on 31.03.2002. Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.

Note: Valuation of Security for provisioning purposes

With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Valuers appointed as per the guidelines approved by the Board of Directors should get collaterals such as immovable properties charged in favour of the bank valued once in three years.

Sub-standard assets: A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available.

Standard assets: From the year ending 31.03.2000, the banks should make a general provision of a minimum of 0.40 percent on standard assets on global loan portfolio basis.

The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.

Floating provisions: Some of the banks make a 'floating provision' over and above the specific provisions made in respect of accounts identified as NPAs. The floating provisions, wherever available, could be set-off against provisions required to be made as per above stated provisioning guidelines. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice.

Provisions on Leased Assets: Leases are peculiar transactions where the assets are not recorded in the books of the user of such assets as Assets, whereas they are recorded in the books of the owner even though the physical existence of the asset is with the user (lessee).

Sub-standard assets : -

10 percent of the 'net book value'.

As per the 'Guidance Note on Accounting for Leases' issued by the ICAI, 'Gross book value' of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or financial statements.

Statutory depreciation should be shown separately in the Profit & Loss Account. Accumulated depreciation should be deducted from the Gross Book Value of the leased asset in the balance sheet of the lesser to arrive at the 'net book value'.

Also, balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book value' of the leased assets. The amount of adjustment in respect of each class of fixed assets may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate column in the section related to leased assets.

Doubtful assets :100 percent of the extent to which the finance is not secured by the realisable value of the leased asset. Realisable value to be estimated on a realistic basis. In addition to the above provision, the following provision on the net book value of the secured portion should be made, depending upon the period for which asset has been doubtful:

Period Up to one year One to three years More than three years

%age of provision 20 30 50

 Loss assets :The entire asset should be written-off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component should be provided for. ('net book value')

3.6 Guidelines for Provisions under Special Circumstances

Government guaranteed advances

With effect from 31 March 2000, in respect of advances sanctioned against State Government guarantee, if the guarantee is invoked and remains in

default for more than two quarters (180 days at present), the banks should make normal provisions as prescribed in paragraph 4.1.2 above.

As regards advances guaranteed by State Governments, in respect of which guarantee stood invoked as on 31.03.2000, necessary provision was allowed to be made, in a phased manner, during the financial years ending 31.03.2000 to 31.03.2003 with a minimum of 25 percent each year.

Advances granted under rehabilitation packages approved by BIFR/term lending institutions:

In respect of advances under rehabilitation package approved by BIFR/term lending institutions, the provision should continue to be made in respect of dues to the bank on the existing credit facilities as per their classification as sub-standard or doubtful asset.

As regards the additional facilities sanctioned as per package finalised by BIFR and/or term lending institutions, provision on additional facilities sanctioned need not be made for a period of one year from the date of disbursement.

In respect of additional credit facilities granted to SSI units which are

identified as sick [as defined in RPCD circular No.PLNFS.BC.57 /06.04.01/20012002 dated 16 January 2002] and where rehabilitation packages/nursing

programmes have been drawn by the banks themselves or under consortium arrangements, no provision need be made for a period of one year.

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life policies are exempted from provisioning requirements.

However, advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements.

Treatment of interest suspense account: Amounts held in Interest Suspense Account should not be reckoned as part of provisions. Amounts lying in the Interest Suspense Account should be deducted from the relative advances and thereafter, provisioning as per the norms, should be made on the balances after such deduction.

Advances covered by ECGC/DICGC guarantee In the case of advances guaranteed by DICGC/ECGC, provision should be made only for the balance in excess of the amount guaranteed by these Corporations. Further, while arriving at the provision required to be made for doubtful assets, realizable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by these Corporations and then provisions are made.

Advance covered by CGTSI guarantee In case the advance covered by CGTSI guarantee becomes nonperforming, no provision need be made towards the guaranteed portion. The amount outstanding in excess of the guaranteed portion should be provided for as per the extant guidelines on provisioning for non-performing advances.

Take-out finance The lending institution should make provisions against a 'take-out finance' turning into NPA pending its take-over by the taking-over institution. As and when the asset is taken-over by the taking-over institution, the corresponding provisions could be reversed.

3.7 Underlying Reasons for NPA

Internal Factors: Diversion of funds for expansion or diversification or modernization is the major factor on non-repayments of bank dues. Even taking up new projects or promoting associate concern divert the funds thereby create sickness in the original unit. Secondly, time and cost over-run during the project implementation stage also affects the fund-flow plan, thereby turning the accounts into NPAs in the long-run. Needless to add that the business failure due to inefficiency in management is the major internal factor which is responsible for creation of NPAs in the corporate world. Similarly, slackness in credit management and monitoring compelled with lack of coordination among the leaders often lead to non-payment of dues in time. If these factors are further compounded with technical problems then recovery of NPAs become very difficult.

External Factors: Recession in the market will genuinely affect the repayment capacity of a firm. If this factor is compounded with price escalation of inputs and exchange rate fluctuations, then the matter will become more serious. Accidents and natural calamities are the unexpected external factors upon which are not within anybodys control. Sometimes change in government policies in connection with excise duties, import duties, pollution control, etc.

Along with power-shortage affect the paying capacity of the firm thereby leading to creation and increase of NPAs.

NPAs Identification: There is no doubt that high level of NPAs dampens the performance of the banks, hence identification of potential problem accounts and their close monitoring assumes importance. Though most banks have early warning system identification of potential NPAs, the actual process is followed differ from bank to bank. The early warning system enables a bank to identify the borrowal accounts which show signs of credit deterioration and thereby to initiate remedial action. Many banks already evolved and adopted an elaborate system which allows them to identify potential distress signal and plan their preventive options well ahead of time. First of all, warning signals such as president in regularities in accounts, delays in servicing of interest, frequent development of letter of credits, units financial problems etc., are captured by the system. Based on the intensity of the problems, certain effective systems are implemented for effective check and balances. Some of these processes are discussed below:

Posting Relationship Manager: The Relationship Manager is the official who has to keep in constant touch with the borrower and report all developments in connection with the borrowers accounts. He is expected to have true knowledge about the personal situation of the borrower, his business developments and his future plans. As a part of his contact, he is also expected to conduct inspections and to monitor the account for possible financial malfeasance.

Preparing Know your silent profile:

As a part of this system, visits are planned to be made on salience and their place of business. However, the frequency of such visits depends on the nature of relationship and other incidental developments.

Implementing Credit Rating System: Credit rating system is used to measure and monitor the credit risk of an individual proposal. At the whole bank level, this system enables tracking the health of the entire credit portfolio. Most banks have developed their own models to rate while a few take the help of credit rating agencies. Credit rating model take into account various associated with a borrowal unit. Usually, the rating exercise is carried out at the time of sensation of the proposal and at the time of review or renewal of the exciting credit facilities.

Preparation of a watch-list: It serves the need of the management to identify and monitor potential risk of a loan asset. The purpose of identification of potential NPAs is to ensure that timely appropriate corrective steps could be initiated by the bank to protect against the loan-asset becoming non-performing. Most of the banks have system to put certain borrowal accounts under watch-list or special mention category if performing advances operating under adverse business coordination exhibiting certain distress signals. This accounts generally exhibit weaknesses which are amendable but warrant banks closer attention.

Sensitive to early warning signals: Several banks have laid down a series of operational, financial, transactional indicators that could serve to identify emerging problems in credit exposures at an early stage. These indicators which may trigger early warning system depend not only on default in payment of installment and

interest but also other factors such as deterioration in operating and financial performance of the borrower, weakening industry characteristics, regulatory changes, general economic conditions, etc. a host of early warning signals in the categories of financial, operational, banking, management and external factors are used by different banks for identification of potential NPAs.

3.7 EARLY SYMPTOMS BY WHICH ONE CAN RECOGNIZE A PERFORMING ASSET TURNING IN TO NON-PERFORMING ASSET

Four categories of early symptoms:-

(1) Financial: Non-payment of the very first installment in case of term loan. Bouncing of cheque due to insufficient balance in the accounts. Irregularity in installment. Irregularity of operations in the accounts. Unpaid over-due bills. Declining Current Ratio. Payment which does not cover the interest and principal amount of that installment. While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.

(2) Operational and Physical: If information is received that the borrower has either initiated the process of winding up or are not doing the business. Overdue receivables.

 Stock statement not submitted on time. External non-controllable factor like natural calamities in the city where borrower conduct his business. Frequent changes in plan. Non-payment of wages.

(3) Attitudinal Changes: Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank. Problem between partners.

(4) Others: Changes in Government policies. Death of borrower. Competition in the market.

3.8 IMPACT ON NON-PERFORMING ASSETS ON BANKS

Profitability:

NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the 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 invested in some return earning project/asset. So NPA doesnt 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 ROI (return on investment), which adversely affect current earning of bank.

Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Routine payments and dues.

Involvement of management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit

which have negative impact to the people who are putting their money in the banks.

3.9

Preventive Measurement For NPA Early Recognition of the Problem: Invariably, by the time banks start their efforts to get involved in a

revival process, its too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of banks dues. Identification of weakness in the very beginning that is : When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Restructuring should be attempted where, after an objective assessment of the promoters intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse.

Identifying Borrowers with Genuine Intent: Identifying borrowers with genuine intent from those who are nonserious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who have intelligent inputs with regard to promoters sincerity, and capability to achieve turnaround. Based on this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance.

In this regard banks may consider having Special Investigation of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.

Timeliness and Adequacy of response: Longer the delay in response greater is the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoters commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option.

Focus on Cash Flows: While financing, at the time of restructuring the banks may not be

guided by the conventional fund flow analysis only, which could yield a

potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.

Management Effectiveness: The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing units fortunes. A bank may commit additional finance to an aling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered.

Multiple Financing:A. During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.

B. In some default cases, where the unit is still working, the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for

working capital purposes. Toward this end, there should be regular flow of information among consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at nonconsortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements.

3.10 Managing NPAs through legal measure

 Debt recovery tribunals: The Debt Recover Tribunals are vested with competence to entertain cases referred to them by banks for recovery of debts. The order passed by a DRT is applicable to the appellate tribunal. An important power conferred on the tribunal is that of making an interim order against the defendant e.g. the defaulting borrower to debar him from transferring, alienating or otherwise dealing with or disposing of any property and the assets belonging to him without prior permission of the Tribunal. This order can be passed even while the claim is pending. Validity of the act is often challenged in the court which hinders and delays its effective implementation. Therefore, much needs to be done for making them stronger in terms of power and provisions of infrastructure.

Lokadalats: The Lokadalats helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known for effecting mediation and counseling between the parties and is designed to reduce burden on the courts, especially for small loans. Every award of the lokadalat shall be deemed to be a decree of the civil court and no appeal can be made to any court against the award made by the lokadalats. They take up cases which are suitable for settlement for debt for certain consideration. Parties are heard and explained of their legal position and are mostly advised to arrive at some settlement. In general, however, banks do not get full advantage of the lokadalats. It is difficult to gather the concerned borrowers willing to go in for compromise on the day when the lokadalats meet.

SERFAESI Act: The securitization and reconstruction of financial assets and enforcement of security interest act provide the formal legal basis and regularity framework for setting up asset reconstruction company (ARC) in India. In addition to asset reconstruction, the act deals with securitization, enforcement of security interest and creation of a central registry. The act

permits the secured creditors like banks to enforce their security interest in relation to the underlying security without reference to the court after giving a 60 days notice to the defaulting borrowers upon classification of the corresponding financial asset as a non-performing asset. The act permits the secured creditors to take over position as well as take over of the management of the secured assets of the borrower including right to transfer by way of lease, assignment or sale. The act also permits to secured creditors to appoint in person as a manager of the secured asset and recover receivables in respect of any secured assets which have been transferred. Due to certain legal hurdles it has not been possible to recover full value from most of the seizures. Still lenders are now clearly in a much better bargaining position than before the enactment of this act. Moreover, when the legal hurdles will be removed in due course the bargaining power of the lenders is likely to improve further and one would expect to see a large number of NPA cases being resolved in shortest time either through security enforcement or through settlements. Under this act, asset reconstruction companies can be set up to enforce for security interest, takeover or change the management of the business of the borrower; sale or lease the borrowers business settle the borrowers due and can restructure or reschedule the debt. ARCs are also permitted to act as a manager of collateral assets taken over by lender under securities enforcement rights available to them or as a recovery agent for any bank and to receive a fees for the discharge of the functions.

Corporate Debt restructuring Mechanism: The objectives of Corporate Debt Restructuring (CDR) mechanism has been to ensure timely and transparent restructuring of corporate debt outside the purview of the Board for Industrial Financial Reconstruction, Debt Recovery Tribunals or other legal proceeding. The framework is intended to preserve viable corporate affected by certain internal or external factors and

minimize losses to creditors and other stake holders through an orderly and coordinated restructuring program. Corporate borrowers with borrowings from the banking system of Rs. 20 crores and above under multiple banking arrangement are eligible under the CDR mechanism. Accounts falling under standard, sub-standard and doubtful categories can only be considered for restructuring. CDR is a non-statutory mechanism based on debtors-creditor agreement. As restructuring helps in aligning repayment obligations for bankers, it is critical to prepare the restructuring plan on the lines of the expected business plan along with projected cash flows. Lenders prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender arrangements and to increase transparency in the processes.

Compromises Settlement Scheme: All cases on which the banks have initiated legal action can be covered under the settlement scheme. Under the one time settlement (OTS), for NPAs up to upon Rs.10 crores, the minimum amount to be recovered should be 100% of the outstanding balance in the account. For NPAs above Rs10crores, the chairman of the respective banks should personally supervise the settlement on case to case bases. The reserve bank of India as well as the government of india has been encouraging banks to design and implement policies for negotiated settlements particularly for those old unresolved accounts. Strategic Recommendation Though a number of measures have been introduced in the recent past for quick recovery of NPAs, a lot is desired in terms of effectiveness of these measures. An important element is the detention of NPAs and for this, strengthening of early warning system is the key. Some strategic areas connected to this aspect, are discussed below.

Credit Risk Management:

A credit risk management framework with detailed introductions should be put in place in all banks. It should focus on matching credit risk with capital provisions to cover expected losses from default. Sound procedures to ensure that all risks associated with requested credit facilities are promptly and fully evaluated by the concerned lending and credit managers. Similarly, systems and procedures should be implemented which allow for monitoring financial performance of customers and for controlling outstanding within limits. A process should also be there to conduct regular analysis of the portfolio and to ensure ongoing control and management of risk concentrations.

Special investigative audit: In case the bankers suspect diversion of funds, mismanagement, genuineness of promoters intent, etc. It is recommended that a special investigative audit of all financial transactions in the books of accounts of the borrowers unit be carried out to determine the real factors which contributed to the sickness. It would be useful to appoint a financial consultant urgently to examine all the concerned aspects. In the beginning, analysis of the financial information to identify areas of concern requiring detailed security be carried out followed by the areas identified for special investigation.

Strategic option analysis: Prior to determining any appropriate restructuring plan for the NPAs, a detailed strategic option analysis be conducted with an analysis of the current financial position of a firm and the expected future performance of the unit. A SWOT analysis covering large claims or other significant liabilities should be looked into in the first step. Secondly, matter connected with additional funding and debt restructuring may be studied. Finally, strategic option would include business regeneration measures, divestment of non-core activities, performance monitoring, etc.

Special workout units:

Currently banks are stressed assets management groups in their head offices. Some banks have also set up dedicated rehabilitation and recovery branches to handle complicated and complex assets. These special outfits have been focusing total attention in tackling the NPAs and they have achieved reasonable success. To improve efficacy of these outfits, the skills, knowledge, practical experience and negotiating skills of each credit official should match with the level of complexity to be managed.

Recovery management training: Suitable regular training needs to be imparted at appropriate levels on an ongoing basis. The main objective of the training should be to appraise the regulatory changes and their implications for the banks efforts for recovery of NPAs. Sometimes it is better to share the international experience in connection with recover management along with their appropriateness to the Indian environment. Likewise, orientation program should be conducted for all concerned officials explaining the characteristics and management of NPA portfolio of the bank. Other subjects where emphasis can be laid may include the regulatory framework, rights available to the lenders under various provisions and tools available to prevent to slippage of quality assets into NPAs. Finally, trainings on resolution framework should include options available for recovery, factors affecting restructuring decisions and a glance through the industry scenario.

CHAPTER 4

RESEARCH METHODOLOGY

4.1 RESEARCH METHODOLOGY- MEANING

Research is a one kind of process to get knowledge about some topic. Research is done so that systematic analysis can be done and problem can also be solved.

TITLE OF STUDY Here it is NON-PERFORMING ASSETS

BENEFITS FROM THE STUDY

. It helps me to know more about NPA and the situation of NPA in bank. . It helps me to know the strategies adopted by banks to reduce the NPA level and to understand the NPA provisions norms in bank.

RESEARCH PROBLEM NPA always affect the profit of bank and also the prestige of bank. So here the research problem is to identify the causes for the NPA and to identify the action plan to reduce the NPA.

RESEARCH DESIGN Here the research design is exploratory which helps me to explore the NPA problem of bank.

RESEARCH INSTRUMENT As a research instrument I have taken guidance from the Senior manager of the south Indian bank, Chandigarh branch and also my faculty of college. DATA COLLECTION Primary Data Secondary Data Hence it is an exploratory research there is not any dependence on primary data. Sources of secondary data 1. Annual report 2. Journals 3. Websites 4. Books

4.2 OBJECTIVES

Some objectives for the selection of this project are as follows

. To study and understand the concept of NPA

. To analyze the banks policy to recover the level of NPA

. To understand the effect of NPA on banks profit and its prestige

. To understand how corrective measures taken by bank for NPA

. To understand RBIS rules and regulations for the control of NPA

. To understand the credit appraisal policy and NPA recovery policy of bank.

4.3

DATA ANALYSIS & INTERPRETATION

POSITION OF NON PERFORMING ASSETS IN DIFFERENT BANKS

BANKS HDFC ICICI SBI PUN & SIND PNB DENA

%GrossNPA %NetNPA 1.1 3.85 1.80 .99 1.79 1.86 .2 .94 .98 .56 .85 1.22

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 HDFC ICICI SBI PUN & SIND PNB DENA %GrossNPA %NetNPA

INTERPRETATION

Gross NPA shows the banks credit appraisal policy. High Gross NPA ratio means bank have liberal appraisal policy and vice-versa. On the other hand percentage of gross NPA is lowest in Punjab and Sind bank which is .99 indicates that bank has good appraisal system

Net NPA ratio shows the degree of risk in portfolio of bank. High net NPA ratio means banks dont have enough fund to do provision against the Gross NPA. As we can see that percentage of net npa of HDFC is .2, which is lowest among all other banks, this indicates that bank has sufficient funds to create provision against NPAs When all bank will do provision then Net NPA will become zero but if we want to know the true and fair situation of bank we must consider the Gross NPA of bank.

4.4 RATIO ANALYSIS OF NPA IN SOUTH INDIAN BANK To analyse the NPA situation in bank and from that to know about the banks credit appraisal system and level of risk in bank I have done the ratio analysis. Ratio analysis is the tool which will help us to do financial analysis of bank. Some names of the ratio are as follows: a. GROSS NPA RATIO b. NET NPA RATIO c. PROBLEM ASSETS RATIO d. SHAREHOLDERS RATIO f. PROVISION RATIO

a. GROSS NPA RATIO Gross NPA is the sum of the total assets which are classified as the NPA by bank at the end of every year. Gross NPA is the ratio of Gross NPA to Gross Advances. It is expressed in percentage form. Gross NPA Ratio= Gross NPA * 100 Gross Advances (Rs. In 000) YEAR 2007-08 2008-09 2009-10 2010-11 GROSS NPA 1884800 2605600 2110000 2303400 GROSS ADVANCES 107543600 121450000 159700000 206590000 GROSSNPA RATIO (%) 1.78 2.18 1.32 1.11

Gross NPA Ratio(%)

2.5 2

1.5 Gross NPA Ratio(%) 1

0.5

0 2007-08 2008-09 2009-10 2010-11

ANALYSIS Gross NPA shows the banks credit appraisal policy. High Gross NPA ratio means bank have liberal appraisal policy and vice-versa. In South Indian Bank this ratio was 1.78% in 2007-08 and it has been increased to 2.18 in year 2008-09. The increase in the total outstanding under gross NPA is mainly on account of a few large accounts not adhering to the credit discipline stipulated by the Bank and hence has been categorized as NPAs. But then it shows the decreasing trend from year 2009 to 2011. This ratio was 1.32% in 2009-10 and now by the end of 2010-2011, it is 1.11%. However it is revels from the chart that banks Gross NPA ratio is continuously decreasing which is positive trend for bank and we can say that bank have good appraisal system.

b. NET NPA RATIO The Net NPA Ratio is the ratio of net NPA to Net Advances. This ratio shows the degree of risk in banks portfolio. Net NPA Ratio can be obtain by Gross NPA minus the NPA provisions divided by Net Advances.

Net NPA Ratio=

Net NPA Net Advances

* 100

(Rs. In 000) YEAR 2007-08 2008-09 2009-10 2010-11 NET NPA 339700 1343100 615700 600200 NET ADVANCES 104537496 118520274 158229174 204887333 NET NPA RATIO (%) .33 1.13 .39 .29

Net NPA = Gross NPA Provision for NPA Net Advances = Gross NPA Provision for NPA

Net NPA Ratio(%)

1.2 1 0.8 0.6 0.4 0.2 0 2007-08 2008-09 2009-10 2010-2011

Net NPA Ratio(%)

ANALYSIS Net NPA ratio shows the degree of risk in portfolio of bank. High net NPA ratio means banks dont have enough fund to do provision against the Gross NPA. In South Indian Bank Net NPA ratio was .33% in year 2007-08 which shows that in that year bank had enough fund for provisions. But it has been increased to 1.13% in year 2008-09. The increase in the total outstanding under Net NPA is mainly on account of a few large accounts not adhering to the credit discipline stipulated by the Bank and hence has been categorized as NPAs.

But then it shows the decreasing trend from year 2009 to 2011. This ratio was .39% in 2009-10 and now by the end of 2010-2011, it is .29%. However it is revels from the chart that Net ratio is continuously decreasing which is positive trend for bank and we can say that bank has sufficient fund for provisions. South Indian bank has done more provision every year which is good at one side but at other side it also reduces the profit of bank. And shareholder will get fewer dividends. When all bank will do provision then Net NPA will become zero but if we want to know the true and fair situation of bank we must consider the Gross NPA of bank.

c. PROBLEM ASSETS RATIO

This ratio is also known as the Gross NPA to Total Assets ratio. This ratio shows the percentage of risk on the total assets of the bank. High ratio means high risk for bank.

Problem Assets Ratio= Gross NPA Total Assets

*100

(Rs. In 000) YEAR 2007-08 2008-09 2009-10 2010-11 GROSS NPA 1884800 2605600 2110000 2303400 TOTAL ASSETS 170899298 203835219 255340446 328202205 PROBLEM ASSETS RATIO (%) 1.1 1.28 .83 .70

Problem Assets Ratio(%)

1.4 1.2 1 0.8 0.6 0.4 0.2 0 2007-08 2008-09 2009-10 2010-11 Problem Asset Ratio(%)

ANALYSIS This ratio shows the percentage of risk on the assets of bank. It shows the level of risk on banks assets. High ratio shows the high risk on liquidity. In South Indian Bank this ratio was 1.1% in 2007-08 but in 2008-09 it had been increased to 1.28%. after that it has been decreased from 1.28 to .70 in 201011. This ratio is increased in year 2008-09 but after that it is continuously decreasing in bank. But overall this ratio is good for bank which indicates the level of risk is low in bank.

d. SHAREHOLDERS RISK RATIO

It is the ratio of Net NPA to Total Capital and Reserve of bank.

Shareholders risk ratio=

Net NPA

* 100

Total Capital & Reserve

(Rs. In 000) YEAR 2007-08 2008-09 2009-10 2010-11 NET NPA 339700 1343100 615700 600200 TOTAL CAPITAL & RESERVE 11609816 13040040 14847154 18451590 SHAREHOLDERS RISK RATIO (%) 2.93 10.3 4.15 3.25

Shareholder's Risk Ratio(%)

12 10 8 6 4 2 0 2007-08 2008-09 2009-10 2010-11

Shareholder's Risk Ratio(%)

ANALYSIS This ratio shows the degree of risk with share holders investment. High ratio means high ratio with the investment. In South Indian Bank this ratio was 2.93% in year 2007-08 and it had been increased to 10.3% in year 2008-09 which shows that in that year risk on share holders investment was quite high but after that this ratio was 4.15% in 2009-10 and then again decreased to 3.25% in 2010-11, which shows that Bank have enough capacity for provision and the risk on investment is low. As we know that this ratio is decreasing which shows that the risk is nil but on the other side because of more provision the profit will decrease and the shareholder will get less dividends.

f. PROVISION RATIO

Provisions are to be made against the Gross NPA of bank. As bank make provision for NPA it directly affects the profit of bank. This ratio shows the relation of total provision to Gross NPA.

Provision Ratio = Total Provision Gross NPA

*100

(Rs. In 000) YEAR 2007-08 2008-09 2009-10 2010-11 TOTAL PROVISION 1190288 1639261 1768109 2326990 GROSS NPA 1884800 2605600 2110000 2303400 PROVISION RATIO (%) 63.15 62.19 83.77 101.02

Provision Ratio(%)
120 100 80 60 40 20 0 2007-08 2008-09 2009-10 2010-11

Provision Ratio(%)

ANALYSIS Provision ratio shows the degree of provision that is made against the Gross NPA of bank. As bank made the provision it directly affect the profit of bank and also the dividend payout ratio of bank too. If Provision ratio is less then it means that bank has make under provision and if provision is more then it means that it is over provision. In South Indian Bank they have made 63.15% provision in 2007-08 and 62.91% in 2008-09 which shows that it was under provision but after that in 2009-10, they have made 83.77% which was above under provision but below fair provision. And then in 2010-11, this ratio was 101.02% which is fair ratio.

CHAPTER 5

FINDINGS & RECOMMENDATIONS

5.1 FINDINGS FROM RATIOS

As I have already analyze the ratio and from that I can say that banks financial condition is good.

From ratio I am able to find the following findings

1. The Gross NPA ratio of bank was 1.78% in the year 2007-08 after then it reaches to 1.11% in the year 2010-11. Hence, the idle gross NPA ratio is 5.00% and bank have 1.11%. So, we can say that banks financial condition is good.

2. Banks Net NPA ratio was .33% in the year 2007-08 and after then it reaches .29% in year 2010-11 which is positive for bank.

3. The Problem assets ratio was 1.1% in the year 2007-08 and after then it decreases to .70 % in year 2010-11 which is good for bank.

4. Provision ratio for the year 2007-08 was 63.15% which show that their was under provision in that year but in year 2010-11 this ratio is 101.02% which shows that bank have enough profit for the provision.

5.2 Recommendations
Since in India, bank balance sheets contains a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPA according to the central bank guidelines, should be significant. Banks should check the creditability of the customer like the proper Identification and also its reputation in the market. Banks must find out the real reason behind availing of loan by the customer. Proper identification of the guarantor should be checked by the bank. The stocks and assets of the firms/ companies which have availed loan must be checked periodically so that the bank is aware of its position. The rules/ norms/ regulation laid by the RBI, the ICAI and the Finance Act must be followed by the banks to reduce the NPAs.

5.3 Conclusion
No matter how good the credit dispensation process may be, total elimination of NPAs is not possible in banking business owning to externalities but their incidents can be minimized. Moreover, as the viability of the bank depends upon the profit generating capacity of its operations, effective NPAs reduction policy must encompass the objectives of sound risk management, credit administration and staff motivation. In other situation where in a bank already saddled with a large quantum of NPAs, launching a strategic initiative for reducing its quantum by taking recovery monitoring as a broad-based movement through technological aid can bring about substantial improvement in its functioning. Though in last few year, significant progress have been made in NPA Management, much still needs to be done in area such as credit risk management, proper identification and resolution of NPA in a time bound manner. In this connection some international practices may be introduced by the banks to get more effective results. Finally, repeating a word of caution, that NPA reduction should become an important organizational goal to survive in the present global competition.

CHAPTER 6

LIMITATIONS OF THE STUDY

LIMITATION OF PROJECT

Some times bank officer was hesitant to give all data on NPA.

I have selected only one bank for NPA which is very small sample size.

I face difficulty in doing proper analysis as I dont have prior experience for making project report.

Time limit and budget is another limitation of the project.

CHAPTER 7

BIBLIOGRAPHY

1. http://www.rbi.org.in/ 2. http://www.southindianbank.com/ 3. 4. http://www.wikipedia.org/ 5. http://www.google.co.in/ 6. http://www.investopedia.com/