Npa

NON PERFORMING ASSETS
1.1 What is NPA?
INTRODUCTION To begin with, it seems appropriate to define nonperforming assets, popularly called NPA.
Non Performing Advance is defined as an advance where payment of interest of repayment of installment of principal (in case of term loans) or both remains unpaid for a period to two quarters or more. An amount under any of the credit facilities is to be treated as past due when it remains unpaid for 30 days beyond due date. What is NPA Management? A bank creates an asset by lending 50% to 90% of the project cost. The bank has major stroke in an asset then the borrower, so it should be the responsibility of the bank to see and maintain the health of the asset, while creating an asset the Bank wants that the asset should be performing one from the beginning and remains so till its liquidation. But, sooner or later, it becomes or tends to become NPA; unless managed properly; due to various reasons. Then it becomes a problematic asset and needs intensive care. The objectives of NPA Management 1. To make more assets performing 2. To reduce quantum of NPAs and 3. To minimize the amount of provision requirements.
PADMASHREE INSTITUTE OF MANAGEMENT STUDIES, BANGALORE-60
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Effective NPA management involves the following Aspects. 1. Understanding of NPA amount. a. Understanding of NPA concept b. Understanding of income recognition norms c. Understanding of asset classification norms d. Understanding of provisioning norms e. Understanding of asset cycle. 2. Identification of NPAs; a. Term loans b. Agricultural advances c. Cash credit and overdraft credit facilities. d. Bills purchased and discounted e. Other credit facilities. 3. Prevention of NPAs a. Credit risk management b. Credit marketing c. Management of potential NPAs d. Rephasement of loans 4. Proper NPA accounting system a. Accounting system in NPA accounts] b. Maintenance of NPA records. 5. Up-gradation of fresh NPAs a. Recovery of critical amount b. Rephasement of NPA amount 6. Liquidation of chronic NPAs a. Cash recovery through The bank staff The government agencies The private recovery agents The legal bodies/methods
b. Settlement of claims with DICGC/ECGC

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c. Compromise d. Written off 7.Use of MIS and IT in NPA management 8.Formulation of comprehensive NPA management policy/strategies 9.Rating of NPA management. With a view to moving towards International best practices and to ensure greater transparency the 90 days overdue norm for identification of Non Performing Assets has been adopted by the RBI So NPA refers to, Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan. The account remains out of order in respect of an overdraft/cash credit. Interest or installment 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. So in short NPA refers to those assets where in which the bank does not earn income from that account, asset or loan granted. If an irregular account continuously remain as irregular category for a period of 90 days (earlier 180 days) it becomes NPA. According to the guidelines of the RBI once an account is listed as NPA, the interest has to be deducted out of profit of the same accounting year. The crucial factor decides the performance of the banks and the financial institutions are spotting of Non-performing Assets (NPA), banks are now required to recognize such banks periodically and then classify the assets. Banks are not allowed to book any income from NPAs. Also, they have to make provision for the NPAs which impacts profitability adversely. The concept of classification of bank advances in several categories started in the late 1980 scheme but at the time in terminology of NPA did not exist. It was early 1990 scheme when Anglo-American models which had several blocks of categorization of bank assets. Prior to introduction of assets classification, banks in India had system of their own. However this accounting is not in conformity with International standards.
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NPAs are a part of banking throughout the World: it is not peculiar to public sector banks and financial institutions in India. Incident of NPA is higher in public sector in comparison to private sector banks and foreign banks in India. TRADITIONAL CONCEPT: Earlier to 1991, there was no such word as NPA in Indian Financial Institutions which followed traditional way of accounting procedures in respect of various accounts sticky or otherwise. The system pertaining to repayment of principal amounts and periodical interest are as under, First the bank or financial institutions used to credit the interest accounts on a particular date or given per-specified period (monthly/quarterly/half yearly/yearly), irrespective of whether the borrower paid the interest or not. There were no prompt actions during those days for recovery of principal/ installment and the interest. Recovery actions for interest and principal amount normally initiated either at the financial year or at the end of the financial year or at the time of expiry of documents. The standards set by the concerned authority are also not up to the level of international standards (for financial institutions and banks Basle Committee norms are internationally accepted standards). All borrower accounts were treated institution the same manner till recovery of procedures were initiated like filling the suits for recovery of outstanding interest and loan installment. MODERN CONCEPT: Non-performing Assets came into the Indian Financial System consequent to the introduction of prudential accounting norms. An era of taking profits (even unrealized) was changed to providing for expected loss. From the financial year 1991-1992, the new system of accounting came into existence. More and more new reforms were introduced institution this year. New accounting system for classification of loan and interest come into effect. The financial institutions and banks adopted Iincome Recognition Norms. Reserve Bank of India also took keen interest in this direction and came out with specific guidelines. As a result the method of Asset classification came into force, while introducing these guidelines internationally accepted standards of Basle Committee recommendations were also taken into considerations. As per the norms of these standards income was recognized only in respect of standard/performing loans.
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Steps were taken to debit the borrower account only when the borrower pays the outstanding interest and the installment. Actions and initiatives were taken to recover as and when the interest and installment becomes due. This becomes mandatory for banks and financial institutions. Due to all these efforts the assets were classified as follows. Performing assets/standard assets Non-performing assets By the method of classification, the concept of NPA came into existence and now it has become one of the buzzword in the banking and financial system. As per the guidelines given by RBI, the NPAs are classified into three categories based on certain specified yardsticks. The sub classifications are as under: 1. Sub-Standard Assets 2. Doubtful Assets. 3. Loss Assets. So, it is very clear that many steps were taken towards the effective and efficient functioning of financial institution for reducing the level of NPA to the maximum extent. The decade of nineties heralded an era of economic and monetary policy change brought about by the Government of India and the Reserve Bank of India to globalize the Indian economy. The waves of liberalization that swept across the external trade sector the world over were not without its impact on the domestic sector, the investment policies and indeed the financial sector. The implementation of the Narsimhan Committee ushered in the reformation of the Indian Banking and Financial Industry. Indian banks have adopted international standards of accounting since last six years. Prudential norms were adopted with regards to: Income Recognition. Asset Classification Provisioning for bad and doubtful assets Capital adequacy.
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NON-PERFORMANING ASSETS 1.2 NORMS FOR ASSET CLASSIFICATION Criteria for classification of assets Classification of agricultural and non-agricultural loans is required to be done into four categories, on the basis of age of overdues, as under: 1. Standard Assets Standard asset is one which does not disclose any problem and which does not carry more than normal risk attached to business. Thus, in general all the current loans, agricultural and non-agricultural loans which have not become NPA may be treated as standard asset. 2. Sub-Standard Assets A Non-performing asset may be classified as sub-standard on the basis of the following criteria. a) An asset which has remained overdue for a period not exceeding 3 years in respect of both agricultural and non-agricultural loans should be treated as substandard. b) In case of all types of term loans, where instalments are overdue for a period not exceeding 3 years, the entire outstanding in term loan should be treated as substandard. c) An asset, where the terms and conditions of the loans regarding payment of interest and repayment of principal have been renegotiated or rescheduled, after commencement of production, should be classified as sub-standard and should remain so in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a result of rescheduling unless there is satisfactory compliance of the above condition
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. 3. Doubtful Asset A Non-Performing Asset may be classified as doubtful on the basis of following criteria: An asset which has remained overdue for a period exceeding 3 years in respect of both agricultural and non-agricultural loans should be treated as doubtful. In case of all types of term loans, where installments are overdue for more than 3 years, the entire outstanding in term loan should be treated as doubtful. As in the case of sub-standard assets, as doubtful. As in the case of sub-standard assets, rescheduling does not entitle a bank to upgrade the quality of advance automatically. 4. Loss Asset Loss assets are those where loss is identified, by the bank/auditor/RBI/NABARD inspectors but the amount has not been written off wholly or party. In other words, an asset which is considered unrealizable and/or of such little value that its continuance as a doubtful asset is not worthwhile, should be treated as a loss asset. Such loss assets will include overdue loans in cases: a) Where decrees or execution petitions have been time barred or documents are lost or no other legal proof is available to claim the debt. b) Where the members and their sureties are declared insolvent or have died leaving no tangible assets. c) Where the members have left the area of operation of the society (refers to the borrower in whose name the respective Loan Account with SCB/CCB) leaving no property and their sureties have also no means to pay the dues d) Where the loan is fictitious or when gross misutilisation is noticed, and e) Amounts which cannot be recovered in case of liquidated societies. Provisioning Norms on the basis of Asset classification Need for provisioning Provisioning is necessary considering the erosion in the value of security charged to the banks over a period of time. Therefore, after the assets of CCBs/SCBs are classified into various categories (Viz., standard, sub-standard, doubtful and loss assets) necessary provision has to be
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made for the same. The details of provisioning requirements in respect of various categories of assets are mentioned below:
Standard Asset When the IRAC norms were introduced in the year 1996-97, no provisioning was required in respect of standard assets. From the year ended 31 march 2000, banks are required to make provision on Standard assets of a minimum of 0.25% of the total outstanding in this category. The provision made on standard assets may not be reckoned as erosion in the value of assets and will form part of owned funds of the bank. The advances granted against term deposits, National Savings Certificate (NSC) eligible for surrender, Kisan Vikas Patra (KVP), Indira Vikas Patra (IVP), Life policies, Staff loans would attract provision of 0.25% prescribed for Standard Assets. The provision towards standard assets need not be netted from gross advances and should be shown separately as Contingent provision against Standard Assets under Other liabilities and provisions-others. General provisioning requirement for Standard advances from the present level of 0.25 per cent was increased to 0.40 per cent with effect from the financial year beginning April 1, 2007. Banks direct advances to agricultural and SME sectors would be exempted from the additional provisioning requirement. Sub-Standard Asset A general provision of 10% of total outstanding in this category may be made. Doubtful Assets 100% is to be made to the extent to which the advance is not recovered by realizable value of securities to which the bank has a valid recourse and the realizable value is estimated on a realistic basis. Over and above item (a), provision is to be made depending upon the period for which an asset has remained overdue, 20% to 50% of the secured portion on the following basis. Percentage of provisioning CRITERIA Overdue above 3 years, and up to 4 years
% OF PROVISIONING 20
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Overdue
over
years,
but
not
30
exceeding 6 years Overdue exceeding 6 years
50 (Source: Secondary source)
With the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the chances / extent of recovery of an asset reducing over a period of time, it is essential that banks expedite recovery of NPA. In respect of State and District Central Co-operative Banks, all advances classified as doubtful for more than three years the provisioning requirement would be as under: a) Unsecured portion For portion of the advance, which is not covered by the realizable value of tangible security to which the bank has a valid recourse and the realizable value is estimated on a realistic basis, provision will be to the extent of 100 per cent as hitherto. b) Secured portion Period for which the advance has Provision requirement remained in doubtful category on secured portion (i) outstanding stock of NPAs 60 percent as on March 31, 2008 classified as doubtful for more than three years as on March 31,2007 75 per cent as on March 31, 2009
100 per cent as on March 31, 2010 (ii) advances classified as doubtful 100 per cent more than three years on or after April 1, 2007 (Source: Secondary source) Loss Asset The entire loss asset should be written off. If the assets are permitted to be retained in the books for any reasons, 100% of the outstanding therefore should be fully provided for Loss Assets Provisioning with the effect from 31 March 2004, SCBs and CCBs should move over to charging of interest on monthly rests by 1 April 2004 except for agricultural loans and loans for activities allied to agriculture. However, banks should continue to classify an account as NPA only if interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from 1 April 2004 and within 90 days
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from the end of the quarter with effect 31 March 2006. (Source: Secondary source) Treatment of agricultural advances In respect of advances granted for agricultural purposes where interest payment is on half-yearly basis synchronizing with harvest, banks should adopt the agricultural seasons as the basis. In other words, if interest has not been paid during the last two seasons of harvest (covering two half-years)* after the principal has become overdue then such an advance should be treated as NPA. Identification of NPA would be done on the same basis as non-agricultural an advance which at present is the 180 days delinquency norm. Crop loans for each season, viz., Rabi and Kharif has to be treated as separate account and IRAC norms have to be applied accordingly. A. As per the extant norms, advance granted for direct agricultural purposes are treated as NPA, where interest and/or installment of principal remain unpaid after they become due for two harvest seasons not exceeding two half years. However, in the case of longer duration crops, the current-prescription of not exceeding two half years is inadequate. 2004 the following revised norms will be applicable: a) A loan granted for short duration crops will be treated as NPA if the installment of the principal or interest thereon remains unpaid for two crop seasons beyond the due date. b) A loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon remains unpaid for one crop season beyond the due date. B. For the purpose of these guidelines, long duration crops would be crops with crop season longer than one year, and crops which are not long duration crops would be treated as short duration crops. C. The crop season for each crop, which means the period up the harvesting of the crops raised would be as determined by the State Level Bankers Committee in each state. D. Banks are advised to ensure that while granting loans and advances, realistic repayment schedules may be fixed on the basis of cash flows/fluidity with the borrowers and thus improve the record of recovery in agricultural advances. In order to align the repayment dates with harvesting of crops, banks are advised that with effect from September 30,
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Treatment of advances for allied agricultural activities as well as non farm sector Credit facilities granted for other allied agricultural activities as well as non-farm sector activities should be treated as NPA if amounts of installments of principal and/or interest remain outstanding for a period of two quarters from the due date. Project/ Housing Loans, etc. In case of projects (industry, plantation, etc.) where moratorium is given for payment, [loan becomes due only after moratorium or gestation period is over] such a loan becomes overdue if instalment is not paid on due date. Similarly, in the case of housing loans or similar advances granted to staff members where interest is payable after recovery of principal, such loans should be classified as NPA when there is a default in repayment of principal on due date of payment and overdue criteria will be the basis for classification of assets. Consortium advances In respect of consortium advances each bank is required to classify the borrowal accounts according to its own recovery, i.e., on the recovery of the individual member banks. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred them the lead bank of the consortium. Treatment of different facilities to borrower as NPA Short-term agricultural advances are granted by SCBs/CCBs to CCBs/PACS respectively for the purpose of on-lending. In respect of such advances as well as advances for other purposes, if any, granted under on-lending system, only that particular facility which became irregular should be treated as NPA and not all the other facilities granted to them. Crop loans for each season, viz., Rabi and Kharif have to be treated as separate account and accordingly IRAC norms have to be applied. In aspect of all other direct loans and advances granted to a borrower, all such loans will become NPA even if one loan A/c becomes NPA.
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Out of order statuses In respect of cash credit/over draft an account should be treated as out of order, if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for three months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as out of order. Overdue Any amount due to the bank under any credit facility is overdue, if it is not paid on due date fixed by the bank. Agricultural Loans as secured All agricultural loans may be treated as fully secured as the same are disbursed against charge on land as provided in the respective State Co-operative Societies Acts/ Rules. Treatment to P.F. and Gratuity amount Liabilities towards PF and gratuity should be estimated on actuarial basis and fully provided for. Loans exempted form provisioning Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies are exempted from provisioning. Therefore, the above accounts may not be classified as NPA. As they are treated as standard assets, a provision of 0.25% of the total loans outstanding prescribed for standard assets should be made. Loans against Gold/Govt. Securities Advances against gold ornaments, government securities and all other kinds of securities are not exempted from requirements. Depreciation in investments accounting procedure The investment portfolio of a bank would normally consist of both approved securities (predominantly Government Securities) and Other securities (shares, debentures and bonds or Cooperative and other institutions). Investments in approved securities should be bifurcated into permanent and current investments. Permanent investments are those which banks intend to hold till maturity and current investments are those which banks intend to deal in i.e., buy and sell on a day-to-day basis. These is, however, no minimum percentage stipulated for bifurcation
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of investments into permanent and current category. As regards current investments and other securities, they should be valued at lower of cost price or market value. Investments in shares of cooperative institutions may be valued at carrying cost price. Provision for other assets/outstanding liabilities Loss in respect of cash balances/deposits with other banks, amounts in branch adjustment accounts, frauds and embezzlements, and depreciation on building, furniture and vehicles, etc. may be assessed and fully provided for as per the existing practice. With a view to ensuring full disclosure on the profitability and net worth of the bank. Items not provided for or items of liabilities where inadequate provisions have been made (e.g. Gratuity, Provident Fund, Income Tax, Interest accrued on deposits/ borrowings, etc.), Inspecting Officers should specify the same to arrive at the unprovided for expenditure and treat them as actual expenditure for the purpose of arriving at the net worth. Back-end subsidy scheme Banks are permitted to take the loan outstanding under the Back-end Subsidy-Scheme net of subsidy amount and make provision only on the balance amount. This relaxation is for the purpose of making provisions only and not for other purposes, such as for computation of gross loans and advances, asset classification, etc. SCBs/DCCBs are required to voluntarily set apart provisions much above the minimum prudential levels after seeking their Boards approval. Provisioning Norms: The primary responsibility for making adequate provisions for any deterioration in the value of loan assets is that of the bank management and the statutory auditors. The RBI inspectors furnish their assessment to the banks for assisting them in taking a decision in regard to making adequate and necessary provisions in prudential guidelines. The system of classification of assets as above also forms the basis for determining the provisioning requirements in respect of such assets. The time lag between the accounts becoming doubtful recovery, its recognition, the realization of the security and the erosion overtime in the value of security charged to the Cooperation are taken into account, while determining the quantum of provision to be made in respect of each category of assets Based on these factors, the following provisioning norms have been prescribed.
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PROVISIONING NORMS FOR NON-PERFORMING ASSETS SL.No. 1 2 3 Asset Category Standard assets Sub-standard assets Doubtful assets Up to 1 year 1 year to 3 years 4 Above 3 years Loss assets Provision 0.25% 10% 20% 30% 50% 100% (Source: Secondary source)
CAUSES FOR NON-PERFORMING ASSETS External causes: Natural calamities and climatic conditions. Recession, changes in Government policies changes in economic conditions. Industry related problems. Impact of liberalization on industries. Technical problems. Global competition. Internal defaulters Faculty projects. Most of the project reports are ground realities, proper linkages, product pricing etc. Some approach for the heck of starting a venture, with poor knowledge of product risks, over depended on poorly paid killed workers and technicians. Building up pressure for sanctions. Inept handling by bankers lack of professionalism and appraisal standards. Non-observance of system, procedures and non-insistence of collaterals etc. Lack of post sanction monitoring, unchecked diversions.
Internal causes:
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RBI GUIDELINES Steps/initiatives taken by RBI to contain NPAs Recognizing the fact that the origin of non-performance could be at the initial stage of loan decision making, RBI had impressed upon banks, from time to time, to strengthen credit appraisal and credit supervision. After sanction and disbursal of credit, banks are required to closely monitor the operations of the borrower units and accounts by way of abstention of periodic stock/operation statements, draw downs, end use, etc. The problem accounts above a certain outstanding balance which are required to be monitored individually by designated senior officials of banks. In respect of accounts where the classification of asset worsens, banks are required to take prompt steps to recover the dues and staff accountability is required to be examined. Banks have also been advised to take decisions regarding filing of suits expeditiously and to effective follow-up the cases of suit filed and decreed accounts. During periodic discussion with bank management, special emphasis is given on monitoring of large NPA accounts at the highest level in the banks and also on reduction of NPAs through up gradation, recovery and compromise settlements, RBI has advised and accordingly banks, Boards lay down policies in regard to credit dispensation, recovery of credit, etc. Banks have constituted Recovery Cells, Recovery Branches, NPA Management Departments and fixed recovery targets. Policies evolved and steps taken in this regard are critically examined during the annual on-site inspection of banks. The off-site return also provides RBI an insight into the quality of credit portfolio at quarterly intervals. Introduction of prudential norms on income recognition, asset classification and provisioning during 1992-93 and other steps initiated apart from bringing in transparency in the loan portfolio of banking industry have significantly contributed towards improvement of the presentation appraisal and post sanction supervision which is reflected in lowering of the levels of fresh accretion of Non-Performing Advances of banks after 1992.
MAIN PROVISION APPLICABLE TO CO-OPERATIVE BANKS:

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The provisions of the Banking Regulation Act applicable to co-operative banks are laid down in part 1 of the act under section 56, the main provisions of the act applicable to cooperative bank are: 1. Use of the word Banks and Banking 2. Every co-operative bank governed by the Banking Regulation Act must use a part it name, any of the words, bank, banker or banking. PROVISIONS APPLICABLE TO CO-OPERATIVE BANK; Co-operative banks were brought under the preview of the Banking Regulation Act only since 1st March 1966 after passing of the Banking Laws (Application to Co-operative Societies) Act, 1965. Only state cooperative banks, central banks and district cooperative banks having a paid up capital and reserves of Rs 1 lakhs and more are regulated by the Banking Regulation Act. Cooperative banks having a paid up capital and reserves of less than Rs 1 lakhs are not governed by the banking regulation act. NATIONAL (NABARD): NABARD was established for the promotion of agriculture, small scale industries, cottage industries, village industries and other economic activities. NABARD has been identified as a principal agency for planning, coordinating and monitoring the rural credit delivery system at the district level. Accordingly, NABARD is gradually setting up its officers at the district level with the few technical experts, keeping in view the predominant economic activities of the district. The district office of NABARD, not only co-ordinates the activities of various credit agencies such as, commercial banks, Regional Ruler Banks (RRB), district co-operative banks, land development banks, but also keeps in contact with the concern development departments of the government. The lead bank officer works in close coordination with the NABARD district office. The district development manager of NABARD who is stationed in the district assist the lead bank officer in formulating the district credit plan and formulates the potential link plan (PLP) for the district, which identifies the sect oral credit gaps. Short term refinancing is provided through Apex Co-operative bank and district cooperative bank. NABARD also facilities required credit facilities to active and implement
BANK
FOR
AGRICULTURAL
AND
RURAL
DEVELOPMENT
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government sponsor program like IRDP. In a program of assistance to rural women in non-farm development NABARD refinance women Development Corporation offering group loans to rural women encouraging group enterprise and ancilliarisation of tiny units. Function of NABARD: Before setting up NABARD in July 1982, RBI functioned as the Apex bank. After that, the function performed by RBI for agriculture and rural development was assigned to NABARD. The functions are the following: To provide by way refinance, credit etc. to commercial banks, RRBs the State Cooperative Banks and Land Development Banks for the promotion of agriculture, small scale industrial units in rural areas, cottage and village industries, handicrafts and other allied economic activities in rural areas. To grant loans and advances to the state governments to enable them to subscribe to the share capital of co-operative credit societies. To inspect co-operative banks and RRBs, and To responsible for the development, policy, planning, operational matter, co-ordination, monitoring, research, training, consultancy etc. relating to rural credit.
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Treatment of Accounts as NPAs Record of Recovery 1. The treatment of an asset as NPA should be based on the record of recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies which are of temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit, non-renewal of the limits on the due date, etc. where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should be treated as NPA. Where the accounts of the borrowers have been regularized by repayment of overdue amounts through genuine sources (not by sanction on additional facilities or transfer of funds between accounts): the accounts need not be treated as NPAs. In such cases, it should, however, be ensured that the accounts remain in order subsequently and solitary credit entry made in an account on or before the balance sheet date which extinguishes the overdue amount of interest or installment of principal is not reckoned as the sole criteria for treatment the account as a standard asset. Treatment of NPAs-Borrower-wise and not facility-wise 1. In respect of a borrower having more than one facility with bank, all the facilities granted by the bank will have to be treated as NPA and not the particular facility or part thereof which has become irregular. 2. However, in respect of consortium advances or financing under multiple banking arrangements, each bank may classify the borrower accounts according to this own record of recovery and other aspects having a bearing on the recoverability of the advances.
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Agricultural Advances-Default in repayment due to natural calamities 1. Where natural calamities impair the repaying capacity of agricultural borrowers, primary (urban) co-operative banks, as a relief measure may decide on their own to: a. Convert the short-term production loan into a term loan or reschedule the repayment period, and b. Sanction fresh short-term loans. 2. In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as Non-Performing Asset (NPA). The asset classification of these loans would, therefore, be governed by the revised terms and conditions and these would be treated as NPA under the extant norms applicable for classifying agricultural advances as NPAs. Housing loan to Staff In the case of housing loan or similar advances granted to staff members where interest is repayable after recovery of principal, interest need not to consider as overdue from the first quarter onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of installment of principal or payment of interest on the respective due dates. Credit facilities Guaranteed by Central/State Government 1. The credit facilities backed by guarantee of the Central Government though overdue should not be treated as NPA. 2. This exemption from classification of government guaranteed advances as NPA is not for the purpose of recognition of income. 3. From the year ended March 31, 2006, State Government guaranteed advance and investment in State Government guaranteed securities would attract asset classification and provisioning norms, if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days irrespective of the fact whether the guarantee have been invoked or not.
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Project Financing In the case of bank finance given for industrial projects where moratorium is available for payment of interest, payment of interest becomes due only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence NPA, with reference to the date of debit on interest. They become overdue after due date for payment of interest, if uncollected. Concept relating to commencement of commercial Productions and Restructuring of Loan Accounts. 1. Where a unit commences commercial production, but the level and volume of production reached immediately after the date of completion of the project is not adequate to generate the required cash flow to service the loan, it may be necessary to re-fix the repayment schedule. In such cases, the Board of Directors of the bank may lay down broad parameters for guidance of the staff for taking a view whether the unit has stabilized commercial production and there is a need for rescheduling of the loan to treat such advance as NPA or not. In framing these parameters, the following points may be kept in view. a. In order to arrive at a decision at a decision as to whether the unit/project has achieved regular commercial production, the main guiding would be whether the unit has achieved cash break-even in order to service the loan. b. If in the opinion of the bank, the bottleneck in achieving regular commercial production is of a temporary nature not indicative of any long-term impairment of the units economic viability and it is likely to achieve cash break even if some time is allowed, the bank may reschedule the loan and treat the asset as standard. c. However, the lead time would normally not exceed one year from the schedule of commencement of commercial production as indicated in the terms of sanction. 2. In respect of credit facilities sanctioned under consortium arrangements, the decision as to whether the borrowing unit has achieved regular commercial production and there is a need for rescheduling may be taken by the lead institution or lead bank and other participating institutions/banks may follow the same.
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3. a. Treatment of restructured accounts i. Restructuring/ rescheduling/re negotiation of the terms of loan agreement in respect of standard and sub-standard accounts can take place at three stages, viz. a) before commencement of commercial production, b) after commencement of commercial production but before the asset has been classified as sub-standard, and c) after commencement of commercial production and the asset has been classified as sub-standard. ii. In each of the foregoing three stages, the rescheduling, etc. of principal and/or of interest could take place with or without sacrifice b. Treatment of restructured standard account i. A rescheduling of the installments of principal alone, at any of the stages at a) and b) above would not cause a standard asset to be classified in the sub-standard category provided the loan/credit facility is fully secured. ii. A rescheduling of interest element at any of the aforesaid two stages would not cause an asset to be down-graded to sub-standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, is either written off or provision is made to the extent of the sacrifice involved. c. Treatment of restructured sub-standard accounts i. A rescheduling of the installment of principal alone would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period, provided the loan/credit facility is fully secured. ii. A rescheduling of interest element would render a sub-standard asset eligible to be continued to be classified in sub-standard category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, is either written off or provision is made to the extent of the sacrifice involved. iii. The substandard accounts which have been subjected to restructuring, etc. whether in respect of principal installment or interest amount would be eligible to be upgraded to the standard category only after he specified period, i.e., one year after the date when the first payment of interest or principal, whichever is earlier, falls due, subject to satisfactory.
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iv.
In case, however, the satisfactory during the one year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.
d. Applicability i. The foregoing norms for restructuring, etc. would be applicable to standard and substandard assets only. All other prudential guidelines relating to income recognition, asset classification and provisioning would remain unaltered. ii. The aforesaid instructions would be applicable to all types of credit facilities, including working capital limit extended to industrial units, provided they are fully covered by tangible securities. iii. iv. Those guidelines are not applicable to credit facilities extended to traders. While assessing the extent of security available to the credit facilities, collateral security would also be reckoned, provided such collateral is a tangible security properly charged to the bank and is not in the intangible from like guarantee, etc.
e. General All standard and sub-standard accounts subjects to restructuring, etc. would be eligible for fresh financing of funding requirements, as per normal policy parameters and eligibility criteria. Debt restructuring mechanism for small and medium enterprises (SMEs) As apart of announcement made by the Government of India for improving flow of credit to small and medium enterprises, certain guidelines have been issued to UCBs for restructuring of debt of eligible small and medium enterprises (SMEs).
Other Advances
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1. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and Life policies need not be treated as NPAs although interest thereon may not have been paid for more than 90 days provided adequate margin is available in the accounts. 2. Primary(urban) co-operative banks should fix monthly/quarterly installments for repayment of gold loans for non-agricultural purposes taking into account the pattern if income generation and repayment capacity of the borrowers and such gold loan accounts may be as NPAs if installments of principal and/or interest thereon are overdue for more than 90 days. 3. As regard gold loans granted for agricultural purposes, interest is required to be charged as per Supreme Court judgment at yearly intervals and payment should coincide with the harvesting of crops. Accordingly, such advances will be treated as NPA only if installments of principal and/or interest become overdue after due date. Narasimhan Committee Reports The RBI is going to implement in phases the entire stringent international standard for NPA classification in second generation of reforms as per the recommendations of the Narsimhan Committees second report. The second recommendations with regards to NPA are as follows Narsimhan Committees second report with regards to NPA 1. An asset is classified as NPA if it remains past due/out of order for 90 days (instead of 2 quarters) in a phased manner by the year 2000. 2. An asset is classified as doubted and if it is in the sub-standard category for 18 months in the first instance and subsequently for 12 months and loss if it has been so identified but not written off. 3. For the purpose of evaluating the quality and asset portfolio, government guaranteed advances should be treated as NPA. 4. For standard asset, a general provision of 1% should be introduced in phased manner. 5. The bank should reduce the average level to net NPA to below 5% by the year 2000 and 3% by 2003. 6. There is need to institute an independent loan review mechanism especially for large borrowed accounts and systems to identify potential NPA 7. For banks with a high NPA portfolio, all loan assets in the doubtful and loss categories should be transferred to an asset reconstruction company.
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8. A week bank should be one whose accumulated losses and net NPAs exceeds its net worth or one whose operating profits less its income on recapitalization bond is negative for 3 consecutive years. Recovery Management in the Karnataka State Co-operative Apex Bank Ltd. (KSCAB) Recovery of loans and advances is an integral part of credit management in KSCAB. In the normal circumstances it should be the endeavor of an institution, to increase its loan portfolio, taking into account the resources available, opportunities for lending and other relevant factors like desired risk-return profile. The emphases should be on building a healthy credit portfolio is tune with the corporate objectives and this should have enough cushions to absorb normal loan losses. A recovery of loans as end when due is part of credit management, with provision for dealing with troubled accounts. The strategy that may be adopted for improving recovery on a step-by-step basis is highlighted and these are not in substitution of the well laid down procedure of the corporation for recovery but as an aid in the direction. Spotting troubled accounts Leaving alone the norms for classification of an asset as NPA, anyone of the following could be a trigger point for marketing an account for special treatment. 1.Non-payment of one or more installments (monthly/quarterly) on the due date. 2.Non-payments of quarterly interest when due, say with in a week/ 10 days. 3.Non-receipt of audited financial statements when due. 4.Borrower/his representatives not meet for considerable time. 5.Enquiries from banks. 6.Request for sending II charge on assets/notice of II mortgage. When any of the above or similar things happens be alert. Ask them when you met the borrower lost.1 month, 2 month and 6 month book? And here starts the first,
Steps:
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1. Establish contact with the borrower/chief representative; understand the reason for the irregularity and his not coming to you earlier. 2. Do not start with repayment. Understand the problem. It could be with the unit, including the industry to which it belongs or it could be with the individual. It could be of temporary nature or more prolonged one. 3. Can you do something to mitigate the problem? With your contact with so many other customers, it may be possible for youre help him come out of the difficulties. 4. Make the borrower come out openly with his difficulties, the steps taken by him to overcome them and help the needs. This will help you to devise suitable strategy to regularize the account. 5. Ask him to call on you for further discussion. Do not lose contact, ask him to give in writing the problem faced by him and the help the needs from the corporation (more time, rescheduling etc) and while accepting his liability. 6. Meanwhile, try to get fresh report on him about his business outside commitments, borrowing from other sources etc. 7. Look at your security documents and see that they are in tact. Ensure the availability of the security and the value to cover the indebtedness. When the contacts with the borrower do not yield the desired result, the next best is influence strategy (subject to requirement of secret). May be through the person who introduced the account, the guarantor who in any case in responsible for repayment and other persons of the locality who commands respect and the help of Government officially in the case of Government sponsored schemes. If this also fails and further grant of time will be harmful to the institution, the advance can be recalled, giving specific time to regularize the account. Keep an eye on the documents and securities available before this step is taken. Once you none decided on this course, it should be followed to the logical end to have the effect on the borrower and others. A letter from the institution should mean what is a state, unless the borrower comes for a settlement to the satisfaction of the institution. Legal methods available for recovery of the impaired loans of the Karnataka State Co-operative Apex Bank Ltd.
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The various legal proceedings for recovery of debt are:1. Legal notice 2. Plaint 3. Suit 4. Summons to defendant 5. Written statements from the defendant. 6. Discovery and inspection 7. Notice to admit facts 8. Summon witness 9. Hearing and disposable of units. 10. Judgment debtor Various steps for reducing NPAs in the Karnataka State Co-operative Apex Bank Ltd. It may be observed from the above that various techniques can be used for reducing can be used for reducing NPAs if are techniques fails while dealing with a particular NPA, banks may have to try with other technique for the case, various steps to be taken to be taken for reducing NPAs can summarize in the following chart
**
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Various steps for reducing NPAs.
Study the problem of NPAs branch wise amount, wise and age-wise.
Prepare a loan recovery policy and strategies for reducing NPAs.
Create special recovery cells as head office/zonal office/regional office levels identify critical branches for recovery. Fix targets of recovery and draw time bound action programmer.
Select proper techniques for solving the problem of each NPA.
Monitor implementing of the time bound action plan.
Take corrective steps whenever found necessary while monitoring the action plan and make changes in the original plan if necessary.
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2.1 Title of the study: Non-Performing Assets (NPA) in the Karnataka State Co-operative Apex Bank Ltd., Bangalore. 2.2 Statement of the problem: Banking institutions by providing financial assistance to business units have contributed to economic growth of the country. In recent years, loans and advances given by them are not yielding expected returns giving rise to NPAs. The NPAs are growing in such a rate where banks profits are eaten away by NPAs. Hence there is a need to study the causes of such NPAs and steps taken by banking institutions and government to downsize such NPAs. 2.3 Objectives of the study: The main objectives of the study are 1. To identify the nature of the problem in NPAs. 2. Reasons/causes for the NPAs. 3. To assess the financial implications of NPAs at The Karnataka State Co-operative Apex Bank Ltd. 4. To study relevant models and their application in reducing NPAs at The Karnataka State Co-operative Apex Bank Ltd. 5. To analyze the recovery strategies for improving the profitability of The Karnataka State Co-operative Apex Bank Ltd. 6. To identify appropriate measures to control of NPAs in The Karnataka State Co-operative Apex Bank Ltd. Methodology: 1. Collection of data from The Karnataka State Co-operative Apex Bank Ltd. 2. Discussion with the executives on The Karnataka State Co-operative Apex Bank Ltd through an interview schedule.
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2.4 Scope of the study: The area of the study is limited to the NPA in The Karnataka State Co-operative Apex Bank Ltd. Although they are many financial institutions in the state this study is limited to one financial institution alone KSCAB Ltd this study attempts to analysis the NPA in KSCAB Ltd. 2.5 Sources of data collection: The data collected from the study is divided as 1. Secondary Data The sources of secondary data are published materials such as text books, periodicals, journals, news papers, documents, records and annual reports of the Karnataka State Co-operative Apex Bank Ltd., 2.6 Data analysis: a) Analytical tools: ratio analysis. b) Statistical tools: graphical representation 2.7 limitations of the study Though sincere effort has been made during the study, certain limitations cannot be avoided. They are as follows: Difference in definitions Nonperforming assets is based on NPA statement of the bank prepared as per
accounting practice. This practice in some cases may to window dressing to cover up bad financial position. This study is based only on 3 years NPA statement. NPA statement suffers from inherent weakness of accounting practices, such as their historical nature of matching principle etc. The study is mainly based on the secondary data provided by the bank. As such it is subject to the limitations of the secondary data. The non-availability of relevant information is one of the limitations. The study is done only for the limited period of 8 weeks.
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3.1 INDUSTRY PROFILE OVERVIEW OF BANKING SECTOR Definition of Banking Business Banking as defined in the Section 5 (b) of the Banking Regulations Act, 1949 is Banking means the accepting, for the purpose of lending or investment of, the deposits of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. Characteristics of a Bank: According to the definitions given by the Regulation Act of 1949 the essential characteristics of bank are, Acceptance of deposits from the public on current, fixed and savings bank accounts. Allowing of withdrawals of those deposits by cheques, drafts, orders or otherwise. Utilization of deposits in hand for the purpose of lending or investment in securities. Performance of other activities called subsidiary services, in addition to the principal activities of receiving of deposits and lending of funds. Performance of banking business as the main business. Using the term bank, banker or banking company as part of the name. The definition given by the Indian Banking Regulation Act of 1949 comprises all the essential features of a bank. Composition of Indian Banking System The banking system has three tiers. These are the scheduled commercial banks; the regional rural banks, which operate in rural areas, not covered by the scheduled banks; and the cooperative. There are 26 public sector banks, 7 new private banks, 15 old private banks, 31 foreign banks, 86 regional rural banks, 1721 town co-operative banks, 31 state co-operative banks, 371 DCC banks and 4 local area banks as on today and a number of primary agricultural credit co-operative societies. In terms of business, the public sector banks, namely the State Bank of India and the nationalized banks, dominate the banking sector.
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STRUCTUREOF FINANCIAL INSTITUTIONS IN INDIA
Reserve Bank of India
Commercial Bank
Co-operative Sector
Other Institutions
Public sector
Private Sector
State Cooperative Banks
State land developmet Banks
Government
Public Sector
Private Sector
The Public sector of commercial Banks includes SBI &Associate Banks, Nationalized Banks, RRBs. The Private sector includes Foreign Banks, other Indian Banks and Non-sch. Banks. The state Co-operative Bank includes DCC Banks, UCBs, PACS, Credit Soc. The state Land development Bank include Dist. Banks & PLDBs. The Government sector includes o Saving Banks, National Saving Corp. EPF. The Public sector includes LIC, GIC, UTI, DICGC, ECGC, ICICI, IDBI, NABARD, IFCI, SIDCs. The Private sector includes Chits, Nidhis, Hire purchase co., Corporate bodies, Invt. companies, Merchant Bankin Div., Stock exchange, Leading companies.
PUBLIC SECTOR BANKS:

Reserve Bank of India State Bank of India and its 6 associate Banks Nationalized Banks (20 in number) Regional Rural Banks sponsored by Public sector Banks
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PRIVATE SECTOR BANKS:

Old Generation Private Banks New Generation Private Banks Foreign Banks in India Scheduled Co-operative Banks Non Scheduled Banks
CO-OPERATIVE SECTOR BANKS:

State Co-operative Banks Central Co-operative Banks Primary agriculture Credit Societies Primary co-operative Agricultural and Rural Development Bank. State Co-operative Agricultural & Rural Development Banks Urban Co-operative Banks
DEVELOPMENT BANKS:

Industrial Finance Corporation of India (IFCI) Industrial Development bank of India (IDBI) Industrial Credit & Investment corporation of India (ICICI) Industrial Investment Bank of India (IIBI) Small Industries Development Bank of India (SIDBI) National Bank for Agriculture & Rural Development Export-Import Bank of India India had a fairly well developed commercial banking system in existence at the time of (NABARD)
independence in 1947. The Reserve Bank of India (RBI) was established in 1934. While the RBI became a state owned institution from January 1, 1949, the Banking Regulation Act was enacted in 1949 providing a framework for regulation and supervision of commercial banking activity.
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COOPERATIVE BANKS AN OVERVIEW The cooperative movement in India was introduced with the organization of Primary Agricultural Cooperative Credit Societies (PACS) in villages and Urban Cooperative banks in towns and cities offer passing the Cooperative Credit societies act 1904 with an objective to emancipate the poor people in the rural and urban areas from the clutches of money lenders and middlemen in the market and also to accelerate the pace of agriculture and industrial developments in these areas. With the passing of second Act, viz, Cooperative Societies Act, 1912; the cooperative movement in India entered into all spheres of economic activities besides organizing DCC banks and State cooperative Apex Banks. Growth and Developments Even though cooperative banking was introduced from the year 1905 , the real development in the country was started only after the passing of a separate banking Regulation act for Cooperative banks called Banking regulation ( cooperative societies),rules1966. Cooperative banks are organized and controlled as per the provisions of concerned state cooperative societies Acts, but their banking , operations are regulated by the BR Act 1949 (as applicable to cooperative societies) 1966 and are also controlled by Reserve Bank of India ( RBI) Characteristic Features of Cooperative Banks The characteristic features of cooperative banks are given as follows: Self Help and Mutual Help One man, one vote Motivated by service Mainly Agriculture Finance Government Interference Regulation by Dual masters Statutory Audit Money Market (Financial Market) Financial Intermediaries
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Financial assistance by Government Federal structure.
Problems of Co-operative Banks:Cooperative banks have been suffering from many problems both by internal as well external .Some of them are Weak and Dormant Banks Stiff Competition by commercial Banks Uneven Growth Structural weaknesses Too much officialization and politicization Mounting Over dues Lack of scientific and professionalized management Dual control Structure of Cooperative Banks: The structure of cooperative banks in the country is of federal type and resembles with pyramids. The cooperative banks can be divided into Agricultural and NonAgricultural cooperative banks. Agriculture banks are further divided into short term and medium credit structure which consists of PACS at village level District Central Cooperative (DCC) Banks at the district level and State Cooperative Apex Bank at the state level and these advance short terms and medium term loans .Long term credit structures consists of State Cooperative Agricultural and Rural development Banks (SCA & RD Banks) at state level and Primary Cooperative Agricultural and Rural Development Banks ( PCARDBs) generally at Taluk level. Non- agricultural cooperative banks are urban cooperative banks, salary earners cooperative banks and employees Cooperative credit societies.
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Structure of co-operative banks:
RESERVE BANK OF INDIA
NABARD COOPERATIVE BANKS
Agril.Coop.Banks
Non.Agril.Coop.Banks
Short Term Credit & MT Credit
Urban Coop.Banks L.T. Credit Employees Coop. Banks
State Cooperative Banks
S.C.A & R.D Bank
Salary Earners Coop. Credit Societies District Central Coop.Banks P.C.A & R.D Bank
Primary Argil. Coop. Credit Society
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3.2 BANK PROFILE BACKGROUND OF THE ORGANISATION: The Bank was registered on 10th November 1915 under the name and style of The Mysore Provincial Cooperative Bank Limited, under the Mysore Co-operative Societies Act of 1905. Then , the Bank was not an Apex institution, as it was not exclusively meant for financing the co-operatives in the then State of Mysore. Another Bank called the Bangalore Central Cooperative Bank Limited, Bangalore (which was later converted into an urban bank), which was registered in 1905, was also financing the co-operatives. The bank owes its origin to Sri. M.A. Narayan Iyengar, B.A., B.L., who was the Registrar of Co-operative Societies at that time.
Sri. Vardaraja Iyengar Founder KSCABL The Bank was founded with the objective of financing, inspecting and supervising the cooperative societies in the Mysore State. Subsequently, several district co-operative central banks with the jurisdiction of a district were registered. Five such district central banks were started. But their working was not satisfactory and they became defunct. As such, the provincial bank started financing the societies directly. Besides granting of loans, the Bank served as an outlet for
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investment of the surplus finds of the co-operative societies in the State. The Bank thus acts as the balancing centre of the Co-operative Movement in the State, safeguarding its interests.
Humble beginnings File Photo KSCABL
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3.3 HISTORY OF THE BANK At the time of inception of The Mysore Provincial Co-operative Bank, there was also another co-operative organization, The Bangalore Central Co-operative Bank, which was working on similar lines. This was an anomaly, which led to mutual competition unnecessarily in the matter of financing of co-operative societies. In order to remove this anomaly and to have only one institution as an Apex institution exclusively for financing the co-operatives in the State, the Government appointed an Enquiry Committee known as the Mysore Co-operative Enquiry Committee, 1920-22 presided over by Mr. Lallubhai Samaldas and the Committee after reviewing the position of these two banks, made the following three alternative recommendations to the Government: To amalgamate the Mysore Provincial Co-operative Bank and the Bangalore Central Co-operative Bank. To create a new Apex Bank. To convert the Central Co-operative Bank into an urban bank dealing only with the individuals and to reorganize the Provincial Co-operative Bank into a new Apex Bank. The Bangalore Central Co-operative Bank opposed the amalgamation with the Provincial Co-operative Bank. Thus, the creation of a new Apex Bank was out of question. The Government therefore accepted the third suggestion made by the Committee. Accordingly, the Government passed orders on 14/15.9.1925 permitting the Mysore Provisional Bank to get itself converted into an Apex Bank with the jurisdiction extending over the entire
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State for financing the co-operative societies exclusively and the Bank thereafter was named as the Mysore Provincial Co-operative Apex Bank Ltd., popularly known as Apex Bank. In the beginning, the Bank was advancing long-term loans through agricultural credit cooperatives for land improvements and redemption of prior debts. Large amounts were given for the above purposes. After the organization of Central Co-operative Land Mortgage Bank in the year 1929 and Primary Land Mortgage Banks at the taluk level, the Bank had to give up this model of business. On account of depression between the years 1925-30, the value of lands and the prices of agricultural produce fell very steeply and the Bank had to face a lot of difficulties in the recovery of long term loans advanced. However, during Second World War, there was rise in the land value and agricultural prices and the Bank could therefore recover a major portion of its dues. In order to meet the loss of business on account of stoppage of long-term loans for land improvements and redemption of prior debts consequent on the organization of Central Land Mortgage Bank, the Bank started financing of long-term loans for construction of houses through House Building and House Construction Societies. Besides, on account of Second World War, there was great stimulus for consumer stores activities for distribution of essential commodities through co-operatives. The Bank undertook the financing of these consumer societies in the form of cash credit loan. The financing of House Building Societies continued up to the year 1950 when a separate Apex Institution called the Mysore State Co-operative House Building Corporation was registered. The Government thereupon directed the Bank not to issue loans to the House Building Societies. This was a period of crisis in the history of the Bank.
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The Bank had to satisfy itself by financing a few marketing societies by way of crop and produce loans and a few stores societies. During the year 1956-57, States were reorganized on linguistic basis and the new Mysore State with 19 districts came into existence. Since there were District Cooperative Central Banks in all the integrated districts, all the District Cooperative Central Banks came under the jurisdiction of Apex Bank. Further the State Government notified the Apex Bank as the State Cooperative Bank for the entire state and with the expansion, the responsibility of the Bank increased considerably. The Bank stopped financing of primary societies directly. The membership and share capital held by primary societies in Apex Bank was transferred to the respective District Cooperative Central Banks. There was all round progress in the cooperative movement with the reorganization of the State and also in all spheres of activities of the Apex Bank like share capital, reserves, deposits, borrowings, lending, profit etc. Branches of KSA Bank at Bangalore Head Office Branch Chamrajpet RT Nagar Branch Chandra Layout RPC Layout Branch JP Nagar Branch MS Building Branch Branch Koramangala Branch Ganganagar Branch Gokul Branch PUB Branch Ashoka pillar Vijayanagar Branch Mahalakshmipuram Branch Shivajinagar Branch Jayanagar 4 Block Vidhana Soudha Branch Vivekananda College Kengeri Branch Agara Branch Girinagar Branch Padmanabhanagar LH Extension Counter Jayanagar 9th Block Indiranagar Branch Magadi Road Branch Vyalikaval Branch Lakkasandra Branch Rajajinagar Branch Banashankari Branch Basaveshwaranagar Branch Gandhinagar Branch Branch
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NEWLY PROPOSED BRANCHES The Bank has proposed to open 15 new Branches in the city of Bangalore. 11 Branches are at outer Bangalore City and 4 Branches at Revenue Divisions in the State. OWNERSHIP PATTERN Apex bank is state co-operative bank established by the state government in the year 1915 under the organization of Primary Agricultural Co-Operative Credit Societies (PACS) in villages and Urban Co-Operative Banks in towns and cities offer passing the co-operative credit societies at 1904 to meet mainly short and medium term financial needs of farmers. VISION, MISSION AND OBJECTIVES VISION As a state co-operative bank, Apex bank shall be a dominant financial institution in the state, leading the state to economic prosperity. They shall be the model of an effective, protective, dynamic and financial sound organization, respectively to state goals and aspiration. They shall maintain highly trained and motivated professionals committed to the highest standards of ethics and excellence. They shall contribute to building progressive and standard of co-operative societies in the service of farmers and rural mass. MISSION Ensuring the best quality of life and success of their farmers, agricultural co-operative societies, district central co-operative banks, clients and employees who are the reasons for their being.
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AIMS AND OBJECTIVES a) To serve as a State Co-operative Bank and as a balancing center in the State of Karnataka for registered co-operative societies. b) To raise funds by way of deposits, loans, grants, donations, subscriptions, subsidies etc. for financing the members by way of loans, cash credits, over-drafts and advances. c) To develop, assist and co-ordinate the member DCCBs and other Co-operative Societies and secure financial assistance for them. d) To arrange/hold periodical Co-operative Conferences of the DCCBs and other members of the bank and to take action for the growth & development of the Co-operative Credit Movement. e) To participate in financing Co-operative and other institutions who are members of the bank, directly or through consortium of Bankers. f) To participate in the schematic lending and to provide loans for which refinance facility is available with term lending institutions. g) To arrange for the inspection and supervision of the affiliated DCCBs and other Co-operative Societies and guide them in their working. h) To buy and sell securities for the legitimate investment of surplus funds and act as agents for buyers and sellers of securities of Central/State. i) To carry on general business of Banking and other banking activities to the members and customers. j) To purchase, acquire or raise or otherwise obtain moveable or immoveable property for the own use of the Bank and also to dispose them of when not required. k) To take measures to help Co-operative Education. l) To promote and undertake Co-operative Research and Co-operative Development. m) To manage, sell or release any property which may come into the possession of the bank in satisfaction of or part satisfaction of any of its claims. n) To promote economic interest of the members of the Bank in accordance with the principles of Cooperation. o) To do such other things as are incidental or conducive to the promotion and advancement of the business of the Bank;
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QUALITY POLICY For Farmers They shall continue to improve their socio-economic status through timely financial and technical support. For Clients They shall deliver innovative and advanced products and services in productive and effective manner to meet their local demands. For Employees They shall ensure a work atmosphere of mutual respect and team work within a system of recognition and regards. They shall continue to provide appropriate training and value enhancement to ensure the highest degree of professionalism and integrity. They shall hold their organization composed of highly competent people driven by superior technology. For the People of Karnataka They commit their unvarying loyalty and dedicated service in the pursuit of state farmers interest. QUALITY OBJECTIVES To serve as a state co-operative bank and as a balancing centre in the state of Karnataka for registered co-operative societies. To raise funds by way of deposits, loans, grants donations, subscription, subsidies etc for financing the members by way of loans, cash credits, overdrafts and advances. To develop, assist and co-ordinate the member DCCBs and other co-operative societies and secure financial assistance for them. To arrange/hold periodical co-operative conferences of the DCCBs and other members of the bank and to take action for the growth and development of the co-operative credit movement. INFRACTRUCTURAL FACILITIES The new administrative building at a cost of around Rs. 800 lakhs completed in 2002 provides additional impetus to a new work culture and new mindset of all. The gigantic building with granite caddied facade having circular and rectangular columns suggesting strengths and stability reflects the character of the organization. This four storied block caters mainly to the administrative requirement of the bank along with the hi-tech banking hall on the ground floor.
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The architects M/s. Zechariah consultant effectively conceptualize the vision of the corporate head office floated by the Directors of the Board. The built up area of UTHUNGA has been 67,820 Sq. ft. the civil cost has come to Rs. 888 per sq. ft. and interiors all inclusive worked out at Rs. 357 per sq. ft. They believe that their members are always behind them not only to encourage but also to guide them in case they go wrong. They are grateful to them. Similarly they are grateful to the Government of Karnataka, RBI, NABARD and all other sister Co-Operative in the state for what they are today. ACHIEVEMENTS/AWARDS 1) Bank is able to lend 75% of the farmers in the state and it covers all sugar factories in Karnataka. 2) Apex bank is habituated to get awards at National levels year after year. Similarly NABARD has been giving best performance award and even PACS have not have logged behind in getting National recognition. All DCC banks and merely 80% of PACS have proved themselves to be financially viable. PRODUCT PROFILE The Karnataka State Co-Operative Apex Bank Limited provides following services to the societies: 1. 2. 3. 4. 5. 6. 7. 8. Financing of short term loans Financing of medium term loans Financing of Kisan credit card scheme/loan Credit facilities to self help groups. Advancing medium term loans economic Advancing workshop capital loans Collection of cheques and drafts Loans through various schemes Personal banking
development and providing cash loans
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Services provided by KSA bank in detail 1. Financing of short term loans: Financing of short term loans for seasonal agricultural operations and for marketing of crops. These loans are repayable within one year. 2. Financing of medium term loans: These loans are sanctioned for agricultural purpose and non-agricultural purpose. 3. Financing of Kisan credit card schemes/loan: Kisan credit card aims at providing timely and adequate credit support to farmers for their cultivation including investment credit needs in a flexible and cost effective manner. All DCC banks in the state have implemented the Kisan credit scheme. 4. Credit facilities to self help groups: All the DCCBs have taken keen interest in the formation of self help groups in coordination with PACS. Self help groups mobilize their savings and avail credit facilities from DCCBs and PACS. 5. Advancing medium term loans with economic development: These loans are advanced for the agricultural infrastructures such as lift irrigation, diary, poultry, plantation, gobargas, etc that constitutes schematic lending. 6. Providing cash credit loans: Providing cash credit loans to processing marketing and consumer co-operatives as well as sugar factories in Karnataka and also term loans to sugar factories under consortium agreement. 7. Advancing working capital loans: The bank provide similar facilities to public sector undertakings like Karnataka Silk Marketing Board, Karnataka Handloom Development Corporation, Karnataka Small Scale Industries Development Corporations, Food Corporations of India directly and also through consortium arrangements through commercial banks. 8. Collection of Cheque and Drafts: The bank extends finance to the non-farm sector and to the development of cottage industries, small scale industries and rural artisan weavers. It is a scheduled bank in all aspects including remittance of funds, demand drafts, mail transfers, collection of cheques and drafts.
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9. Loans through various schemes: Vehicle loans Housing loans Mortgage loans Installment loans Jewel loans Other loans
10. Personal Banking: Apex bank provides the following deposit schemes to the customers. 11. Fixed Deposits: In this account, the customer deposits money period up to 10 years. 12. Current deposits: In this type, the individuals or businessmen operate. This account is kept open for the entire day. The customer can make any number of deposits and withdrawals in a day during business hours. 13. Saving Bank Deposits: In this deposit, the low income class groups and marginal customer deposits the money. AREA OF OPERATION Apex bank works in the regional level only. It does not work in national level. The area of operation covers the entire Bangalore. It has 31 branches in Bangalore and head quarter is situated in Chamarajpet. The branch offices of bank are adequately delegated with power of sanction of disbursements. If the loans are to be provided upto 10 lakhs it is handled by concerned branch offices but if it is more than 10 lakhs then it is handled by main branch.
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COMPETITORS INFORMATION The major competitors are: Land bank (Agricultural based finance). Amanath Co-operative Bank. Sham Rao Vittal Co-operative Bank. Commercial Banks. Corporate Banks. Some local Co-operative Banks.
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FINANCIAL KEY INDICATORS As on 31st March 2010 (Rs in lakhs) SI. NO. 1. 2. 3. 4. 5. 6. 7. 8 9. 10. 11. Membership Share capital Reserves Own funds Deposits Working capital Borrowings Cash balances Investments ( including call money) Advances Net profit Particulars 31-03-2009 101 8,111.18 37,354.63 34,867.17 3,89,241.32 6,43,725.78 1,96.667.92 22,505.12 2,69,652.58 3,49,254.68 1,250.00 31-03-2010 108 8,124.08 37,994.96 36,640.25 4,47,903.77 6,70,134.14 1,64.757.00 30,644.03 3,22,734.07 3,14,628.40 925.00
Investment 1. 2. 3. 4. State and central Government Others Trustee securities In share of co-operative institutions Other investment Total
(Rs. In lakhs) 1,16,361.28 1,055.00 1,515.66 1,04,36213 2,23,294.07
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ORGANIZATION CHART PRESIDENT VICE PRESIDENT MANAGING DIRECTOR SECRETARY
CENTRAL GENERAL MANAGER (Finance and Audit) (Administrative and Development)
CENTRALGENERAL MANAGER
GM (Planning and Development)
GM (Agriculture co-operative Staff training institute)
GM (Inspection)
GM (Banking)
DGM
DGM
DGM (Inspection) AGM (Inspection)
DGM (Audit) AGM (Audit) DGM (Central agency) Page 49
(Planning and Development) (H R M)
DGM (Accounting and
DGM (Head of the
DGM (Branch Manager)
Financing)
Department) SWOT ANALYSIS
Strengths Brand Name and Well capital base. It is a Government Organization. Offers Quality Service and Product. The KSA bank has already carved out a niche in providing , with 100% computerized branches. Its quality to the nation is the major strength of the bank because of its long entity in the Banking industry. Good network base of DCC Banks and PACS including SHGs in Karnataka as compared to other states in India. Weaknesses The interest rates are changing according to government rules, regulations and guidelines. Concentrating more on targets. There are no specialized branches in some of industrial areas. The Bank is not having ATM facility, except 5 Branches. Recruitment process is slow. The Bank is purely dependent on Agricultural Sector.
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Opportunities Bank is having opportunity to open new banking services in the State, already proposed 15 new branches in the city of Bangalore. Bank has liberalized their loan policy as per nationalized banks in respect of housing segment, gold loans, mortgage loans, personal loans and other non secured loan sector. Bank is entering into modern banking through licensing for RTGS (Real Time Grass Settlement), ATM, Net Banking and other Advanced Banking system. Bank has introduced 14 new loan products and 4 insurance bi-products to capture potential market. Threats The number of competitors is increasing at a higher rate. Direct investment options available to the customers like Mutual Funds etc. Delay in operating of newly proposed branches may lead to scarifying the market opportunities to other banks that are well equipped with better products.
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4.1 DATA ANALYSIS AND INTERPRETAION Table No.1 classification of the Total Non-Performing Advance for the year 2009-10 Assets Standard Assets Sub-Standard Assets Doubtful : 3y-4y Doubtful : 4y-6y Doubtful :above 6y Un-Secured Loss Assets Advances (Rs in lakhs) 3,30,052.7 6,438.28 3,796.69 754.43 11.98 7,795.79 404.82 Advances in percentage 94.50% 1.84% 1.09% 0.22% 0.10 2.23% 0.12% (Bank Reports) Chart: 1
Analysis: The table shows the division of NPA under various classifications. The un-secured assets and sub-standard assets constituted about 0.12 percent and 1.84 percent respectively, which have to be recovered during the years.
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Table No.2: Total NPA of various classification under the Agriculture and Non-Agriculture and others Sectors. 2009-10 Amount (Rs in lakhs) 3,556.39 383.62 1,209.08 4,759.93 7,123.14 55.96 2,113.87
Sectors ST Agriculture ST Non-Agriculture MT Agriculture MT Non-Agriculture Cash Credit Overdrafts Others
Percentage of various sectors 18.48% 2% 6.30% 24.79% 37.09% 0.29% 11.01% (Bank Reports)
Chart: 2
Analysis: Agriculture is the sector where most of the sources of fund is been undergone with the NPA which includes the short term and medium term loans is about 51% of Total NPA as
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compared to the other sectors. The Cash Credit and Others loans is about 38% and 11% respectively that of the Total NPA.
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Table No.3 percentage of Recovery in different sector financial year 31-3-2006. Sectors Agriculture NonAgriculture Overall Total Recovery (Rs in Crores) 50.46 36.55 46.30 133.31 Percentage of Recovery 37.85 27.41 34.73 100 NPA in Degrees 136 99 125 360
(Bank Reports) Chart: 3
Analysis: The above chart shows Agriculture 37.85% from Non-agriculture sector 27.41% from other sector and 34.73% in other sector in the financial year 2005-06. Interpretation:
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The percentages of Recovery from the non agri sector constitute a major portion. Other sectors constitute fewer portions compared to sugar sector. Bank has to take action to control the Recovery in sugar sector and agriculture sector.
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Table No. 4 percentage of Recovery in different sector financial year 31-3-2007 Sectors Agriculture NonAgriculture Overall Total Recovery (Rs in Crores) 91.68 57.72 87.70 237.1 Percentage of Recovery 38.66 24.34 36.98 100 Recovery in Degrees 139 88 133 360
(Bank Reports) Chart: 4
Analysis: The above chart shows total Recovery in different sector in the year 2006-07. Non Agri sector has increasing trend.Agriculture 38.66 % from sugar sector, 24.34% from the agriculture sector and 36.98% from other sector.
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Interpretation: The percentage of Recovery from the sugar sector has increased trend compared to 2005-06. Non Agriculture sector over the years is showing a very dangerous position to the bank. As agriculture sector has been decreased with an recover of Recovery during the year.
Table No. 5: percentage of Recovery in different sector financial year 31-3-2008
Sectors Agriculture NonAgriculture Other Total
Recovery (Rs in Crores) 94.68 42.69 91.08 228.45
Percentage of Recovery 41.44 18.68 39.86 100
Recovery in Degrees 149 67 144 360
(Bank reports) Chart: 5
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Analysis: The above chart shows total Recovery in different sector in the year 2007. Non agriculture constituted 67.82 percent, 18.68 percent from the agriculture sector and 13.7% from other sectors. Interpretation: The percentage of Recovery from the sugar sector increased over the years compared to last three years. Non agriculture sector shows very danger sign to the bank. The agriculture sector percentage of Recovery is reduced. Table No. 6: percentage of Recovery in different sector financial year 31-3-2009 Sectors Agriculture NonAgriculture Overall Total Recovery (Rs in Crores) 96.92 47.81 94.16 238.89 Percentage of Recovery 40.57 20 39.43 100 Recovery in Degrees 146 72 142 360
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(Company reports) (Bank reports) Chart: 6
Analysis: The above chart shows total Recovery in different sector in the year 2007. Non agriculture has increasing over the years 20 percent, 39.43 percent from the agriculture sector and 40.57 percent from other sector. Interpretation: The percentage of Recovery from the sugar sector has decreased over the years compared to last four years. Bank has taken care of controlling the Recovery in sugar sector. Table No. 7: percentage of Recovery in different sector financial year 31-3-2010
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Sectors Agriculture NonAgriculture Other Total
Recovery (Rs in Crores) 100 52.76 97.63 250.39
Percentage of Recovery 39.93 21.07 39 100
Recovery in Degrees 144 76 140 360
(Bank reports) Chart: 7
Analysis: The above chart shows Recovery 39.93 percent from agriculture sector 21.07 percent from Non agriculture sector and 39 percent in other sector in the financial year 2009. Interpretation:
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The percentage of Recovery from the Non agriculture sector has major proportion. Other sector has very less compared to sugar sector. Bank has to take action to increase the Recovery in Non agriculture and agriculture sector.
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RATIO ANALYSIS SUB-STANDARD ASSETS RATIO YEAR 2005 -06 2006 -07 2007 -08 2008 -09 2009 -10 GROSS NPA (Rs in Crores) 261.53 242.09 223.52 192.02 146.03 SUB-STD ASSETS (Rs in Crores) 169.57 151.78 104.68 64.38 38.23 RATIO 64.83 62.69 46.83 33.52 26.17 (Bank reports)
Interpretation: Sub-standard assets are fluctuating over the years from 2006 to 2010. The standard assets are continuously being slipped into sub standard assets and it is recovered by bank but it is growing in the following years.
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DOUBTFUL ASSETS RATIO YEAR 2005 -06 2006 -07 2007 -08 2008 -09 2009 -10 GROSS NPA (Rs in Crores) 261.53 242.09 223.52 192.02 146.03 DOUBTFUL ASSETS (Rs in Crores) 9.28 18.12 113.82 123.59 104.57 RATIO 3.54 7.48 50.92 64.36 71.60 (Bank reports)
Doubtful
80 70 60 50 40 30 20 10 0 2005-06 2006-07 2007-08 2008-09 2009-10 Doubtful
Interpretation: A doubtful asset ratio is growing from 2006-07 to 2007-08 and decrease in the next 2 years indicates these assets are recovered by bank.
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LOSS ASSETS RATIO YEAR 2005 -06 2006 -07 2007 -08 2008 -09 2009 -10 GROSS NPA (Rs in Crores) 261.53 242.09 223.52 192.02 146.03 LOSS ASSETS (Rs in Crores) 82.68 72.19 5.02 4.05 3.32 RATIO 31.6 29.81 2.24 2.10 2.27 (Bank reports)
LossAssets
35 30 25 20 15 10 5 0 2005-06 206-07 2007-08 2008-09 2009-10 Loss Assets
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Interpretation: The loss assets ratio in the year 2005-06 and 06-07 was very high and coming next three year tremendously decreases and its positive impact on the recovery of assets is very good and its profit
GROSS NPA RATIO: YEAR GROSS NPA (Rs in crores) 2007-08 2008-09 2009-10 223.52 192.02 146.03 GROSS ADVANCES (Rs in crores) 47.65 115.01 29.35 21.31 59.89 20.09 GROSS NPA RATIO
(Bank reports)
70 60 50 40 30 20 10 PADMASHREE INSTITUTE OF MANAGEMENT STUDIES, BANGALORE-60 0 2007-08 2008-09 2009-10 Gross NPA
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Interpretation: Gross NPA has been fluctuating over the years 2005-06 to 2009-10 but it has increased from 2007-08 to 2009-10. The gross advances has been increased which increased the gross NPA over the years.
5.1 FINDINGS: 1. The Karnataka State Co-operative Apex Bank Ltd is one of the leading banks having 95 years of fruitful experience in the agricultural, nonagriculture and sugar advances portfolio management in our country, acting as a catalyst for the growth of the Indian economy. 2. The estimated realizable value of assets,liabilities,paid-up and reserves of the bank as on 31-3-2010. (Amount in rupees) ASSETS LIABILITIES NET WORTH (PAID-UP AND RESERVES) 3. The ratio of capital to risk weighted assets of the Bank stood at 11.36% as on 31.03.2009 compared to 11.30% as on 31.03.2008, a positive increase by 0.06%. 6788,30,90,659.82 2311405488 4476903568
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4.
There is a good record in the repayment of the individual loans like personal loan, gold loans, car loans and housing loans. The loan repayment is better in case of agriculture loans also.
5. Out of total NPA 50% of the total credit provided to sugar sector has become NPA and the percentage of NPA in sugar sector was continuously increasing during the period 2004 to 2008. 6. Bank increased investments in non-SLR securities. 7. There is an increase in the percentage of writing off of NPAs and bad debts only because of bankruptcy, insolvency due to the death and also due to the liquidation of the firm. 8. The doubtful assets are increasing every year.
9. The specific findings from the study are that there is a need to have controlling devices to monitor NPA system in the Bank like, NPA management department, improved MIS systems, advanced software, training to staff, speedy coverage of legal action and periodical review meetings and feedback. 10. The bank concentrated on short term advances rather than long term advances. The short deposits were used for medium term advances.
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5.2 SUGGESTIONS 1. The successful management of Non-performing Assets depended not only on the policies and the norms stipulated by the regulatory authorities and the management of the bank but also on how far the industrial finance has been extended their portfolio and the present position of the new account. 2. The bank has to take care of recovery management in sugar and non-agriculture sector with proper execution and planning. 3. Conducting in-house training programs for the managers concerned with the recovery about the latest rules and regulations and also on the responsibilities available for the recovery of NPAs. 4. The securities need to be re-valued/assets for proper provisioning of doubtful and loss assets. 5. There is a need to have periodic review of accounts inspection of units by audit department. 6. Risk Management Policy was not formed by the Bank. There is no Risk Management Committee in the Bank. Bank has to implement the same as per NABARD circular No:07/DoS.09/2005/dated06 April 2005.
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7. Maintaining the capital adequacy with the set limits of 8%. This requires the bank to operative in the specified limit of risk position. 8. Fresh addition to NPAs can be prevented by proper credit management of the loans and advances. 9. Proper follow up with the support of all the staff members who were in constant touch with the customers. 10. Timely visit to the field by the staff and making personal contact with the borrowers. 11. The bank should concentrate on doubtful assets and it is suggested to provide loan only for trusted customer.
12. Bank should provide long term advance in addition to short term advances to increase
profit. 13. The bank should not provide medium term or long term advances by short term deposits. 14. The gap between deposits and advances should be reduced by matching funds properly. 15. The best model to reduce the level of NPA at Apex Bank is to give emphasis for technological improvements for proper and regular monitoring and follow-up the accounts setting targets and achieve set target.
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5.3
CONCLUSION The Karnataka State Co-operative Apex bank mobilizes and deploys its funds in every
efficient and systematic way giving a good scope for the growth and development of the Apex Bank. The Bank follows all the rules and regulations set by RBI and NABARD. The financial statements are depicting a fair financial health and the best performance for the past five years. The best model for reducing the level of Non-performing Assets at The Karnataka State Co-operative Apex Bank Ltd to give more emphases for technological improvements for proper and regular monitoring and follow up the accounts. The recovery strategies for impaired loans need to be revised with the following considerations by setting a time for recovery of a particular impaired loans and assigning the responsibility to a particular person for the recovery of particular loan along with the infrastructure and power to take action concerning to that loan. Apart from the said conclusion, the level of reduction of Non Performing Assets, special efforts should be made in respect of large advances and more attention needs to be paid for strategic planning by employees with self set goals educating borrowers.
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BIBILOGRPAHY
ARTICALS:
1. NABARD & RBI GUIDELINES & CIRCULARS.
2. 95 TH ANNUAL REPORT OF APEX BANK.
3. BANK JOURNALS, ACCOUNTING MANUAL, LOAN POLICY, BYE LAWS &
CIRCULARS. WEB SITES: www.karnatakaapex.com www.rbi.com www.narard.com
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NON PERFORMING ASSETS

1.1 What is NPA?

PADMASHREE INSTITUTE OF MANAGEMENT STUDIES, BANGALORE-60

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b. Settlement of claims with DICGC/ECGC

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exceeding 6 years Overdue exceeding 6 years

50 (Source: Secondary source)

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MAIN PROVISION APPLICABLE TO CO-OPERATIVE BANKS:

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Various steps for reducing NPAs.

Prepare a loan recovery policy and strategies for reducing NPAs.

Select proper techniques for solving the problem of each NPA.

Monitor implementing of the time bound action plan.

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STRUCTUREOF FINANCIAL INSTITUTIONS IN INDIA

Reserve Bank of India

State Cooperative Banks