IBMR- INSTITUTE OF BUSINESS

MANAGEMENT & RESEARCH

A PROJECT REPORT ON
DEBT RECOVERY
MANAGEMENT
OF
STATE BANK OF INDIA

Prepared By----
Pranjala
Mishra
Roll No. D-
238

Student : PGPM & MBA

(2008-10)

2
PREFACE

Finance is one most volatile area where there is

every time a change, where it is important to know
about each and every change to keep a track with
the changing world. Banking is the same because it is
one of the important part of finance.

Recovery Management is the process of planning,

testing, and implementing the recovery procedures
ad standards required to restore service in the event
of a component failure; either by returning the
component to normal operation, or taking alternative
actions to restore service. Recovery Management is
the acknowledgement that failures will occur
regardless of how well the system is designed. The
intent is to anticipate and minimize the impact of
these failures through the implementation of
predefined, pretested, documented recovery plans
and procedures. The primary objective of recovery
Management is to ensure that service level
requirements are achieved. This is accomplished by
having recovery procedures in place that will restore
service to a failing component as
quickly as possible.

To be a Master of Business Administration student is

a matter of pride because we are in a field, which
helps us to develop from a normal human being into
a disciplined, and dedicated professional. One has to
be a good learner to sharper

3
knowledge in the particular field to achieve and
attain the desired goals and heights. We conducted
to gain some knowledge in the field of recovery
management and learned a lot in this field right from
sanctioning a loan to NPA account and understand
what a bank does to recover its money back.

ACKNOWLEDGEMENT

With Great Pleasure, I Extend our gratitude towards

Prof. Raj lakshmi under whose valuable guidance,
constant interest and encouragement I have been
able to complete the project successfully.

This Co-Operation is not useful only for this Project

but will also be a constant source of Inspiration for
me in the future.

I am also thankful to all those who helped me

constantly in preparation of this project Directly or
indirectly.

4
DECLARATION

We, hereby, declare that the Project titled, “Debt

Recovery Management of State Bank of India”.
Is the best of my knowledge and has not been
published elsewhere. This is for the purpose of partial
fulfillment of Institute of Business Management and
Research requirements for the award of the degree
of Master of Business Administration, only.

Name:
Pranjala Mishra (D-238)
Place: - Ahmedabad

5
Executive Summary

Debt presents one of the main stumbling blocks to

Least Developed Countries’ social and economic
development. Many LDCs have unsustainable debt
burdens, besides the 31 LDCs that are classified as
HIPCs. At least six other LDCs have, even according
to rather conservative and narrowly defined World
Bank and IMF criteria, debt levels that exceed their
repayment capacity.

When the concept of debt sustainability is

approached from a human and social development
perspective – and there is no other way to approach
debt sustainability in a country such as Bangladesh
where 78% of the people lives on US$2 a day – many
more LDCs have an unsustainable debt level.

Thus as far as India is concerned NPA level is

increasing day by day and in that scenario many
banks and financial institutions are facing a great
deal of problem to operate as their main business or
the main way to generate revenue is through

6
providing loans and advances and in that case if
those becomes NPA then it will really a very
problematic situation for the bank or any financial
institution to operate.Then comes the role of
recovery management where a special team is
appointed to recover the NPA. A special team of
officers are appointed and the adopt various
measures to recover the amount back but still if they
couldn’t recover due to any means then the loan
amount is converted into bad debt account that
means they could not be recovered by any means.

Here for our study purpose we took DEBT RECOVERY

SYSTEM of State Bank of India. It is clearly seen in the
report a great amount has been recovered through
out the year with the help of debt recovery
management and it helped a lot in reducing the net
NPA level and maintaining the profitability of State
Bank of India.
TABLE OF CONTENT

Introduction………………………………………………………
………………………………9

Brief Introduction of the

company………………………………………………..19

Meaning of Recovery
Management……………………………………………..22

Meaning of
Debt………………………………………………………………
…………….24

7
Types of
Debt………………………………………………………………
…………..……..26

Debt Rating, Risk and

Cancellation……………………………………………..28

Rating & Credit

worthiness………………………………………………………
…...29

Effects of
Debt………………………………………………………………
………………..30

Loans and its

type………………………………………………………………
……….…..31

Defaults and its

type………………………………………………………………
………34

Difference between default &

bankruptcy………………………………….36

Various interest rates of

SBI…………………………………………………………..39

Meaning and type of

NPA……………………………………………………….……49

When does a loan becomes

NPA…………………………………………..……..52

8
Reasons For
NPA…………………………………………………………………
…………59

Early symptoms by which one can recognize a

performing asset as
NPA…………………………………………………………………
……………………..….60

Objectives of Recovery Management of

SBI…………………………….….65
Aims of Recovery
Management……………………………………………………
66

Management of
NPA…………………………………………………………………
….68

Debt
Management……………………………………………………
………………..…69

Summarized Balance sheet of past 5

years………………………………….71

Comparison of performance of 2008-

09……………………………………..72

Comparison of Performance of 2007-08-09(Q1)

………………………..73

9
Credit Risk Management
Policy……………………………………………………77

Credit Risk Quantitative Disclosure of

SBI……………………………………79

Analysis……………………………………………………………
………………………………88

Various Debt recovery process of

SBI…………………………………………..90

How to review the position of

NPA………………………………………………93

Financial
Performance……………………………………………………
…………..…95

Management
Analysis……………………………………………………………
…..….97

Public Sector Bank Ratio of NPA from 2006 to

2008……………..100

Conclusion………………………………………………………
………………………………103

Recommendation………………………………………………
…………………………..111

Reference…………………………………………………………
……………………………..112

10
INTRODUCTION:

A bank is a financial institution whose

primary activity is to act as a payment agent for
customers and to borrow and lend money. It is an
institution for receiving, keeping, and lending money
in hopes of repayment (Excludes California).

Many other financial activities were added over time.

For example banks are important players in financial
markets and offer financial services such as
investment funds. In some countries such as
Germany banks are the primary owners of industrial
corporations while in other countries such as the
United States banks are prohibited from owning non-
financial companies. In Japan, banks are usually the
nexus of a cross-share holding entity known as the
zaibatsu.In France, banc assurance is prevalent, as
most banks offer insurance services(and now real
estate services) to their clients.

Origin of the word:

The name bank derives from the Italian word banco

"desk/bench", used during the Renaissance by
Florentine bankers, who used to make their
transactions above a desk covered by a green
tablecloth. However, there are traces of banking
activity even in ancient times.

11
In fact, the word traces its origins back to the Ancient
Roman Empire, where moneylenders would set up
their stalls in the middle of enclosed courtyards
called macella on a long bench called a bancu, from
which the words banco and bank are derived. As a
moneychanger, the merchant at the bancu did not so
much invest money as merely convert the foreign
currency into the only legal tender in Rome—that of
the Imperial Mint.

Definition

The definition of a bank varies from country to

country.

Under English common law, a banker is defined as a

person who carries on the business of banking, which
is specified as:

• conducting current accounts for his customers

• paying cheques drawn on him, and
• Collecting cheques for his customers.

In most English common law jurisdictions there is a

Bills of Exchange Act that codifies the law in relation
to negotiable instruments’, including cheques, and
this Act contains a statutory definition of the term
banker: banker includes a body of persons, whether
incorporated or not, who carry on the business of
banking' (Section 2, Interpretation). Although this
definition seems circular, it is actually functional,
because it ensures that the legal basis for bank

12
transactions such as cheques do not depend on how
the bank is organized or regulated.

The business of banking is in many English common

law countries not defined by statute but by common
law, the definition above. In other English common
law jurisdictions there are statutory definitions of the
business of banking or banking business. When
looking at these definitions it is important to keep in
mind that they are defining the business of banking
for the purposes of the legislation, and not
necessarily in general. In particular, most of the
definitions are from legislation that has the purposes
of entry regulating and supervising banks rather than
regulating the actual business of banking. However,
in many cases the statutory definition closely mirrors
the common law one. Examples of statutory
definitions:

• "banking business" means the business of receiving

money on current or deposit account, paying and
collecting cheques drawn by or paid in by customers,
the making of advances to customers, and includes
such other 15 business as the Authority may
prescribe for the purposes of this Act; (Banking Act
(Singapore), Section 2, Interpretation).

• "banking business" means the business of either or

both of the following:

1. receiving from the general public money on

current, deposit, savings or other similar account
repayable on demand or within less than [3

13
months] ... or with a period of call or notice of less
than that period;

2. paying or collecting cheques drawn by or paid in

by customers.

Since the advent of EFTPOS (Electronic Funds

Transfer at Point Of Sale), direct credit, direct debit
and internet banking, the cheque has lost its primacy
in most banking systems as a payment instrument.
This has led legal theorists to suggest that the
cheque based definition should be broadened to
include financial institutions that conduct current
accounts for customers and enable customers to pay
and be paid by third parties, even if they do not pay
and collect cheques.

Wider commercial role:

The commercial role of banks is not limited to

banking, and includes:

• issue of banknotes (promissory notes issued by a

banker and payable to bearer on demand)

• processing of payments by way of telegraphic

transfer, EFTPOS, internet banking or other means

• issuing bank drafts and bank cheques

• accepting money on term deposit

• lending money by way of overdraft, installment

loan or otherwise

14
• providing documentary and standby letters of
credit (trade finance),guarantees, performance
bonds, securities underwriting commitments and
other forms of off-balance sheet exposures

• safekeeping of documents and other items in safe

deposit boxes

• currency exchange

• acting as a 'financial supermarket' for the sale,

distribution or brokerage, with or without advice, of
insurance, unit trusts and similar financial products.

Law of banking:

Banking law is based on a contractual analysis of the

relationship between the bank (defined above) and
the customer—defined as any entity for which the
bank agrees to conduct an account.

The law implies rights and obligations into this

relationship as follows:

1. The bank account balance is the financial position

between the bank and the customer: when the
account is in credit, the bank owes the balance to the
customer; when the account is overdrawn, the
customer owes the balance to the bank.

2. The bank agrees to pay the customer's cheques up

to the amount standing to the credit of the
customer's account, plus any agreed overdraft limit.

15
3. The bank may not pay from the customer's
account without a mandate from the customer, e.g. a
cheque drawn by the customer.

4. The bank agrees to promptly collect the cheques

deposited to the customer's account as the
customer's agent, and to credit the proceeds to the
customer's account.

5. The bank has a right to combine the customer's

accounts, since each account is just an aspect of the
same credit relationship.

6. The bank has a lien on cheques deposited to the

customer's account, to the extent that the customer
is indebted to the bank.

7. The bank must not disclose details of transactions

through the customer's account—unless the
customer consents, there is a public duty to disclose,
the bank's interests require it, or the law demands it.

8. The bank must not close a customer's account

without reasonable notice, since cheques are
outstanding in the ordinary course of business for
several days.These implied contractual terms may be
modified by express agreement between the
customer and the bank. The statutes and regulations
in force within a particular jurisdiction may also
modify the above terms and/or create new
rights,obligations or limitations relevant to the bank-
customer relationship.

Entry regulation:

16
Currently in most jurisdictions commercial banks are
regulated by government entities and require a
special bank licence to operate.

Usually the definition of the business of banking for

the purposes of regulation is extended to include
acceptance of deposits, even
if they are not repayable to the customer’s order—
although money lending, by itself, is generally not
included in the definition.

Unlike most other regulated industries, the regulator

is typically also a participant in the market, i.e. a
government-owned (central) bank. Central banks also
typically have a monopoly on the business of issuing
banknotes. However, in some countries this is not the
case. In the UK, for example, the Financial Services
Authority licences banks, and some commercial
banks (such as the Bank of Scotland) issue their own
banknotes in addition to those issued by the Bank of
England, the UK government’s central bank.

Some types of financial institution, such as building

societies and credit unions,may be partly or wholly
exempt from bank licence requirements, and
therefore regulated under separate rules.

The requirements for the issue of a bank licence vary

between jurisdictions but typically include:

1. Minimum capital

2. Minimum capital ratio

17
3. ‘Fit and Proper’ requirements for the bank’s
controllers, owners, directors, and/or senior officers

4. Approval of the bank’s business plan as being

sufficiently prudent and plausible.

Banking channels:

Banks offer many different channels to access their

banking and other services:

• A branch, banking centre or financial centre is a

retail location where a bank or financial institution
offers a wide array of face-to-face service to its
customers.

• ATM is a computerized telecommunications device

that provides a financial institution's customers a
method of financial transactions in a public space
without the need for a human clerk or bank teller.
Most banks now have more ATMs than branches, and
ATMs are providing a wider range of services to a
wider range of users. For example in Hong Kong,most
ATMs enable anyone to deposit cash to any customer
of the bank's
account by feeding in the notes and entering the
account number to be credited. Also, most ATMs
enable card holders from other banks to get their
account balance and withdraw cash, even if the card
is issued by a foreign bank.

• Mail is part of the postal system which itself is a

system wherein written documents typically enclosed

18
in envelopes, and also small packages containing
other matter, are delivered to destinations around
the world. This can be used to deposit cheques and
to send orders to the bank to pay money to third
parties. Banks also normally use mail to deliver
periodic account statements to customers.

• Telephone banking is a service provided by a

financial institution which normally includes bill
payments for bills from major billers (e.g. for
electricity).

• Online banking is a term used for performing

transactions, payments etc. over the Internet through
a bank, credit union or building society's secure
website.

Types of banks:

Banks' activities can be divided into retail banking,

dealing directly with individuals and small
businesses; business banking, providing services to
midmarket business; corporate banking, directed at
large business entities; private banking, providing
wealth management services to high net worth
individuals and families; and investment banking,
relating to activities on the financial markets. Most
banks are profit-making, private enterprises.
However, some are owned by government, or are
non-profit organizations.

Central banks are normally government-owned and

charged with quasi-regulatory responsibilities, such
as supervising commercial banks, or controlling the

19
cash interest rate. They generally provide liquidity to
the banking system and act as the lender of last
resort in event of a crisis.

Types of retail banks:

• Commercial bank: the term used for a normal bank

to distinguish it from an investment bank. After the
Great Depression, the U.S. Congress required that
banks only engage in banking activities, whereas
investment banks were limited to capital market
activities. Since the two no longer have to be under
separate ownership, some use the term "commercial
bank" to refer to a bank or a division of a bank that
mostly deals with deposits and loans from
corporations or large businesses.

• Community Banks: locally operated financial

institutions that empower employees to make local
decisions to serve their customers and the partners.

• Community development banks: regulated banks

that provide financial services and credit to under-
served markets or populations.

• Postal savings banks: savings banks associated

with national postal systems.

• Private banks: banks that manage the assets of

high net worth individuals.

• Offshore banks: banks located in jurisdictions with

low taxation and regulation. Many offshore banks are
essentially private banks.

20
• Savings bank: in Europe, savings banks take their
roots in the 19th or sometimes even 18th century.
Their original objective was to provide easily
accessible savings products to all strata of the
population. In some countries, savings banks were
created on public initiative; in others, socially
committed individuals created foundations to put in
place the necessary infrastructure. Nowadays,
European savings banks have kept their focus on
retail banking: payments, savings products, credits
and insurances for individuals or small and medium-
sized enterprises. Apart
from this retail focus, they also differ from
commercial banks by their broadly decentralised
distribution network, providing local and regional
outreach—and by their socially responsible approach
to business and society.

• Building societies and Landesbanks: institutions

that conduct retail banking.

• Ethical banks: banks that prioritize the

transparency of all operations and make only what
they consider to be socially-responsible investments.

• Islamic banks: Banks that transact according to

Islamic principles.

Types of investment banks:

• Investment banks "underwrite" (guarantee the sale

of) stock and bond issues, trade for their own
accounts, make markets, and advise corporations on

21
capital market activities such as mergers and
acquisitions.

• Merchant banks were traditionally banks which

engaged in trade finance. The modern definition,
however, refers to banks which provide capital to
firms in the form of shares rather than loans. Unlike
venture capital firms, they tend not to invest in new
companies.

Both combined:

• Universal banks, more commonly known as

financial services companies, engage in several of
these activities. For example, Citigroup is a large
American bank involved in commercial and retail
lending, with subsidiaries in tax havens offering
offshore banking services to customers in other
countries. Other large financial institutions are
similarly diversified and engage in multiple activities.
In Europe and Asia, big banks are very diversified
groups that, among other services, also distribute
insurance—hence the term bancassurance, a
portmanteau word
combining "banque or bank" and "assurance",
signifying that both banking and insurance are
provided by the same corporate entity.

Other types of banks:

Islamic banking

• Islamic banks adhere to the concepts of Islamic law.

This form of banking revolves around several well-

22
established principles based on Islamic canons. All
banking activities must avoid interest, a concept that
is forbidden in Islam. Instead, the bank earns profit
(markup) and fees on the financing facilities that it
extends to customers.

BRIEF INTRODUCTION OF THE COMPAY

No any financial institution in this world today can

claim the antiquity and majesty of the State Bank of
India. It was founded nearly two centuries ago with
the primary intent of imparting stability to the money
market, the bank from its inception mobilized fund
for supporting both the public credit of the
Company’s Governments in the three presidencies of
British India and the private credit of the European
and Indian merchants. From about the 1860s, when
Indian economy took a significant leap forward under
the impulse of quickened world communication and
ingenious methods of industrial and agricultural
production, the Bank became intimately involved in
the financing of practically every trading,
manufacturing and mining activity of the sub-
continent. Although large European and Indian
merchants and manufacturers were undoable the
principal beneficiaries, the small man was never
ignored they were also provided loans. Added to this
the bank till the creation of the reserve banking
1935carried out numerous central banking functions.

Adaptation to the changing world and the need of the

hour has been one of the strengths of the bank. In
the post Depression era when bank opportunities
became extremely restricted.

23
Rules laid in the book of instructions were relaxed to
ensure that good business did not go past. Yet
seldom did he bank were contravene its rules to
depart from sound banking principals to retain or
expand its business. New business strategies were
also evolved way back in 1937 to render the best
banking services through prompt and courteous
attention to customers.

A highly efficient and experienced management,

functioning in a well defined organizational structure
did not take long to place the bank on a exalted
pedestal in the area of business, profitability, internal
discipline and above all credibility. An impeccable
financial status, consistent maintenance of the lofty
traditions of banking and a observance of a higher
standard of integrity in its operations helped the bank
gain a pre-eminent status. No wonder the
administration of the bank was universal as key
functionaries of the Indian office and government of
India successive finance ministers of independent
India, Reserve Bank governors and representatives of
the chambers of commerce showered encomiums on
it.

State Bank of India (SBI) is India's largest commercial

bank. SBI has a vast domestic network of over 11,000
branches (approximately 14% of all bank branches)
and commands one-fifth of deposits and loans of all
scheduled commercial banks in India.
The State Bank Group includes a network of seven
banking subsidiaries and several non-banking
subsidiaries offering merchant banking services, fund

24
management, factoring services, primary dealership
in government securities, credit cards and insurance.

The seven banking subsidiaries are:

1-State Bank of Bikaner and Jaipur (SBBJ)

2-State Bank of Hyderabad (SBH)
3-State Bank of India (SBI)
4-State Bank of Indore (SBIR)
5-State Bank of Mysore (SBM)
6-State Bank of Patiala (SBP)
7-State Bank of Travancore (SBT)

The origins of State Bank of India date back to 1806

when the Bank of Calcutta (later called the Bank of
Bengal) was established. In 1921, the Bank of Bengal
and two other Presidency banks (Bank of Madras and
Bank of Bombay) were amalgamated to form the
Imperial Bank of India. In 1955, the controlling
interest in the Imperial Bank of India was acquired by
the Reserve Bank of India and the State Bank of India
(SBI) came into existence by an act of Parliament as
successor to the Imperial Bank of India.

Today, State Bank of India (SBI) has spread its arms

around the world and has a network of branches
spanning all time zones. SBI's International Banking
Group delivers the full range of cross-border finance
solutions through its four wings-the Domestic
division, the Foreign Offices division, the Foreign
Department and the International Services division.

25
MEANING OF RECOVERY MANAGEMENT

Recovery Management is the process of planning,

testing, and implementing the recovery procedures
ad standards required to restore service in the event
of a component failure; either by returning the
component to normal operation, or taking alternative
actions to restore service. Recovery Management is
the acknowledgement that failures will occur
regardless of
how well the system is designed. The intent is to
anticipate and minimize the impact of these failures
through the implementation of predefined, pretested,
documented recovery plans and procedures.

26
The primary objective of recovery Management is to
ensure that service level requirements are achieved.
This is accomplished by having recovery procedures
in place that will restore service to a failing
component as quickly as possible.

In simple words recovery means to get back our own

thing back which we have given it to others. In banks
recovery means to get back the amount back which
they have given to the customers
in the form of loans and advances. The main business
of bank is through loans and advances. They accept
deposits from the public and lend it to the needed
customers in the form of loans and advances and
they charge interest plus a certain portion of
premium from them and then they provide a certain
portion of amount of interest to the customers who
had deposited in the bank and the difference of
interest is their profit.

Suppose the bank accepts deposit @ 7.5% and

provides loan @13.5% the difference of 7.5% and
13.5% i.e 6% is the profit of the bank.

The role of recovery comes into picture when the

customer who has taken loan fails to pay his
installment i.e the installment money consist of the
interest plus certain amount of loan amount. As the
main business of a bank is through providing loans
and advances if they don’t get the installment in time
it will adversely effect the day to day banking
business finally they will be at a loss in order to avoid
such unforeseen conditions in case if there is many

27
default recovery management is done where a team
of members are specially appointed mainly to see the
recovery cases. They adopt many measures to
recover the amount that has been provided as loans
and advances. Recovery management isalso known
as debt recovery management.

Getting into Debt and recovering debt are becoming

increasing common in today consumer society. If you
get into debt it's important to find out what your
rights and options are.. If you owed a debt,
recovering through the courts can be a long process.
By working with debt recovery experts can speed up
the process.

The magnitude of recovery amount overdue is one of

the most important indicators of financial health of a
bank. Currently, the accepted standard of
measurement of overdues is in relation to demand.
The logic for the demand as the basis is that it is the
amount which has become due and not the amount
which is yet to become due for repayment. This
distinction is important because loans will have
varying due dates for installments as they are issued
on the basis of future cash flow from investments.

The term "overdues" is used to convey the meaning

that installments of loans and Interest thereon are
not paid on due date. The term "recovery" of dues
relates to repayments of loans and interest thereon
in time. Therefore, overdues exist if recovery of loans
is not in time.

28
MEANING OF DEBT

Debt is that which is owed ; usually referencing

assets owed, but the term can also cover moral
obligations and other interactions not requiring
money. In the case of assets, debt is a means of
using future purchasing power in the present before a
summation has been earned. Some companies and
corporations use debt as a part of their overall
corporate finance strategy.

A debt is created when a creditor agrees to lend a

sum of assets to a debtor. In modern society, debt is
usually granted with expected repayment; in many
cases, plus interest. Historically, debt was responsible
for the creation of indentured servants.

Debt is that which is owed. A person who owes debt

is called a debtor.

People or organisations often enter into agreements

to borrow something. Both parties must agree on
some standard of deferred payment, most usually a
sum of money denominated as units of a currenc, but
sometimes a like good. For instance, one may borrow
shares, in which case, one may pay for them later
with he shares, plus a premium for the borrowing
privilege, or the sum of money required to buy them
in the market at that time.

There are numerous types of debt

obligations. They include loans, bonds,mortgages,

29
promisary notes, and debentures. It is very common
to borrow large sums for major purchases, such as a
mortgage, and pay it back with an agreed premium
interest rate over time, or all at once at a later date.
The amount of money outstanding is usually called a
debt. The debt will increase through time if it is not
repaid faster than it grows. In some systems of
economics this effect is termed usury, in others, the
term "usury" refers only to an excessive rate of
interest, in excess of a reasonable profit for the risk
accepted.

As noted above, debt is normally denominated in a

particular monetary currency, and so changes in the
valuation of that currency can change the effective
size of the debt. This can happen due to inflation or
deflation, so it can happen even though the borrower
and the lender are using the same currency.Thus it is
important to agree on standards of deferred payment
in advance, so that a degree of fluctuation will also
be agreed as acceptable. It is for instance common to
agree to " US dollar denominated" debt.

The form of debt involved in banking gives rise to a

large proportion of the money in most industrialised
nations (see money and credit money Credit money
is money that is backed by a promise to pay made by
someone other than the state. Examples of credit
money include bank deposits and credit card loans.
During the Crusades in Europe, precious goods would
be entrusted to the Catholic Church's for a discussion
of this). There is therefore a complex relationship
between inflation, deflation, the mone supply, and
debt. The store of value represented by the entire

30
economy of the industrialized nation itself, and the
state's ability to levy tax on it, acts to the foreign
holder of debt as a guarantee of repayment, since
industrial goods are in high demand in many places
worldwide.

Lendings to stable financial entities such as large

companies or governments are often termed "risk
free" or "low risk" and made at a so-called " risk free
interest rate". This is because the debt and interest
are highly likely to be repaid.

TYPES OF DEBT

A Company uses various kinds of debt to finance its

operations. The various types of debt can generally
be categorized into: 1) secured and unsecured debt,
2) private and public debt, 3) syndicated and bilateral
debt, and 4) other types of debt that display one or
more of the characteristics noted above.

A debt obligation is considered secured if creditors

have recourse to the assets of the company on a
proprietary basis or otherwise ahead of general
claims against the company. Unsecured debt
comprises financial obligations, where creditors do
not have recourse to the assets of the borrower to
satisfy their claims.

31
Private debt comprises bank-loan type obligations,
whether senior or mezzanine. Public debt is a general
definition covering all financial instruments that are
freely tradeable on a public exchange or over the
counter, with few if any restrictions.

Loan syndication is a risk management tool that

allows the lead banks underwriting the debt to
reduce their risk and free up lending capacity.

A basic loan is the simplest form of debt. It consists

of an agreement to lend a principal sum for a fixed
period of time, to be repaid by a certain date. In
commercial loans interest, calculated as a
percentage of the principal sum per year, will also
have to be paid by that date.

In some loans, the amount actually loaned to the

debtor is less than the principal sum to be repaid; the
additional principal has the same economic effect as
a higher interest rate.

A syndicated loan is a loan that is granted to

companies that wish to borrow more money than any
single lender is prepared to risk in a single loan,
usually many millions of dollars. In such a case, a
syndicate of banks can each agree to put forward a
portion of the principal sum.

A bond is a debt security issued by certain

institutions such as companies and governments. A
bond entitles the holder to repayment of the principal
sum, plus interest. Bonds are issued to investors in a
marketplace when an institution wishes to borrow

32
money. Bonds have a fixed lifetime, usually a number
of years; with long-term bonds, lasting over 30 years,
being less common. At the end of the bond's life the
money should be repaid in full. Interest may be
added to the end payment, or can be paid in regular
installments (known as coupons) during the life of the
bond. Bonds may be traded in the bond markets, and
are widely used as relatively safe investments in
comparison to equity.

DEBT RATINGS, RISK AND CANCELLATION

RISK FREE INTEREST RATE

Lending’s to stable financial entities such as large

companies or governments are often termed "risk

33
free" or "low risk" and made at a so-called "risk-free
interest rate". This is because the debt and interest
are highly unlikely to be defaulted. A good example
of such risk-free interest is a US Treasury security - it
yields the minimum return available in economics,
but investors have the comfort of the (almost) certain
expectation that the US Treasury will not default on
its debt instruments. A risk-free rate is also
commonly used in setting floating interest rates,
which are usually calculated as the risk-free interest
rate plus a bonus to the creditor based on the
creditworthiness of the debtor (in other words, the
risk of him defaulting and the creditor losing the
debt). In reality, no lending is truly risk free, but
borrowers at the "risk free" rate are considered the
least likely to default.

However, if the real value of a currency changes

during the term of the debt, the purchasing power of
the money repaid may vary considerably from that
which was expected at the commencement of the
loan. So from a practical investment point of view,
there is still considerable risk attached to "risk free"
or "low risk" lending’s. The real value of the money
may have changed due to inflation, or, in the case of
a foreign investment, due to exchange rate
fluctuations. The Bank for International Settlements is
an organization of central banks that sets rules to
define how much capital banks have to hold against
the loans they give out.

34
RATING AND CREDITWORTHINESS

Specific bond debts owed by both governments and

private corporations is rated by rating agencies, such
as Moody's, Fitch Ratings Inc., A. M. Best and
Standard & Poor's. The government or company itself
will also be given its own separate rating. These
agencies assess the ability of the debtor to honor his
obligations and accordingly give him a credit rating.
Moody's uses the letters Aaa Aa A Baa Ba B Caa Ca C,
where ratings Aa-Caa are qualified by numbers 1-3.
Munich Re, for example, currently is rated Aa3 (as of
2004). S&P and other rating agencies have slightly
different systems using capital letters and +/-
qualifiers.

A change in ratings can strongly affect a company,

since its cost of refinancing depends on its
creditworthiness. Bonds below Baa/BBB
(Moody's/S&P) are considered junk- or high risk
bonds. Their high risk of default (approximately 1.6%
for Ba) is compensated by higher interest payments.
Bad Debt is a loan that can not (partially or fully) be
repaid by the debtor. The debtor is said to default on
his debt. These types of debt are frequently
repackaged and sold below face value.Buying junk
bonds is seen as a risky but potentially profitable
form of investment.

35
EFFECTS OF DEBT

Debt allows people and organizations to do things

that they would otherwise not be able, or allowed, to
do. Commonly, people in industrialised nations use it
to purchase houses, cars and many other things too
expensive to buy with cash on hand. Companies also
use debt in many ways to leverage the investment
made in their assets, "leveraging" the return on their
equity. This leverage, the proportion of debt to
equity, is considered important in determining the
riskiness of an investment; the more debt per equity,
the riskier. For both companies and individuals, this
increased risk can lead to poor results, as the cost of
servicing the debt can grow beyond the ability to pay
due to either external events (income loss) or internal
difficulties (poor management of resources).
Excesses in debt accumulation have been blamed for
exacerbating economic problems. For example, prior
to the
beginning of the Great Depression debt/GDP ratio
was very high. Economic agents were heavily
indebted. This excess of debt, equivalent to
excessive expectations on future returns,
accompanied asset bubbles on the stock markets.
When expectations corrected, deflation and a credit
crunch followed. Deflation effectively made debt
more expensive and, as Fisher explained, this
reinforced deflation again, because, in order to

36
reduce their debt level, economic agents reduced
their consumption and investment. The reduction in
demand reduced business activity and caused further
unemployment. In a more
direct sense, more bankruptcies also occurred due
both to increased debt cost caused by deflation and
the reduced demand.

It is possible for some organizations to enter into

alternative types of borrowing and repayment
arrangements which will not result in bankruptcy.

LOAN

A loan is a type of debt. This article focuses

exclusively on monetary loans, although, in practice,
any material object might be lent. Like all debt
instruments,a loan entails the redistribution of
financial assets over time, between the lender and
the borrower.

The borrower initially does receive an amount of

money from the lender, which he has to pay back,
usually but not always in regular installments, to the
lender. This service is generally provided at a cost,
referred to as interest on the debt. A loan is of the
annuity type if the amount paid periodically (for
paying off and interest together) is fixed.

A borrower may be subject to certain restrictions

known as loan covenants under the terms of the loan.

37
Acting as a provider of loans is one of the principal
tasks for financial institutions.For other institutions,
issuing of debt contracts such as bonds is a typical
source of funding.

Legally, a loan is a contractual promise between two

parties where one party, the creditor, agrees to
provide a sum of money to a debtor, who promises to
return the money to the creditor either in one lump
sum or in parts over a fixed period in time. This
agreement may include providing additional
payments of rental charges on the funds advanced to
the debtor for the time the funds are in the hands of
the debtor (interest).

TYPES OF LOAN

The main sources of funding for a new business :

1. Government grants and loans

2. Foundation grants and loans

The J. Guggenheim and J. Dawson Foundation only

supports individuals and small business owners.
Offers grants to assist individuals with innovative
business ideas. Offers a $50,000 grant to women who
submit a great business idea. These grants are
making the dream of business ownership a reality for
women around the country.

Secured
A secured loan is a loan in which the borrower
pledges some asset (e.g. a car or property) as
collateral for the loan.

38
A mortgage loan is a very common type of debt
instrument, used by many individuals to purchase
housing. In this arrangement, the money is used to
purchase the property. The financial institution,
however, is given security — a lien on the title to the
house — until the mortgage is paid off in full. If the
borrower defaults on the loan, the bank would have
the legal right to repossess the house and sell it, to
recover sums owing to it.

In some instances, a loan taken out to purchase a

new or used car may be secured by the car, in much
the same way as a mortgage is secured by housing.
The duration of the loan period is considerably
shorter — often corresponding to the useful life of the
car. There are two types of auto loans, direct and
indirect. A direct auto loan is where a bank gives the
loan directly to a consumer. An indirect auto loan is
where a car dealership acts as an intermediary
between the bank or financial institution and the
consumer.A type of loan especially used in limited
partnership agreements is the recourse note.

A stock hedge loan is a special type of securities

lending whereby the stock of a borrower is hedged by
the lender against loss, using options or other
hedging strategies to reduce lender risk.

A pre-settlement loan is a non-recourse debt this is

when a monetary loan is given based on the merit
and awardable amount in a lawsuit case. Only certain
types of lawsuit cases are eligible for a pre-

39
settlement loan. This is considered a secured non-
recourse debt due to the fact if the case reaches a
verdict in favor of the defendant the loan is forgiven.

Unsecured

Unsecured loans are monetary loans that are not

secured against the borrower's assets. These may be
available from financial institutions under many
different guises or marketing packages:

• credit card debt

• personal loans
• bank overdrafts
• credit facilities or lines of credit
• corporate bonds

The interest rates applicable to these different forms

may vary depending on the lender and the borrower.
These may or may not be regulated by law. In the
United Kingdom, when applied to individuals, these
may come under the Consumer Credit Act 1974.

DEFAULT

40
In finance, default occurs when a debtor has not met
his or her legal obligations according to the debt
contract, e.g. has not made a scheduled payment, or
has violated a loan covenant (condition) of the debt
contract. A default is the failure to pay back a loan.
Default may occur if the debtor is either unwilling or
unable to pay their debt. This can occur with all debt
obligations including bonds, mortgages, loans, and
promissory notes.

TYPES OF DEFAULT

Default can be of two types: debt services default

and technical default. Debt service default occurs
when the borrower has not made a scheduled
payment of interest or principal. Technical default
happens when an affirmative or a negative covenant
is violated.

Affirmative covenants are clauses in debt contracts

that require firms to maintain certain levels of capital
or financial ratios. The most commonly violated
restrictions in affirmative covenants are tangible net
worth, working capital/short term liquidity, and debt
service coverage.

Negative covenants are clauses in debt contracts that

limit or prohibit corporate actions (e.g. sale of assets,
payment of dividends) that could impair the position
of creditors. Negative covenants may be continuous
or incurrence-based. Violations of negative covenants
are rare compared to violations of affirmative
covenants.

41
With most debt (including corporate debt, mortgages
and bank loans) a covenant is included in the debt
contract which states that the total amount owed
becomes immediately payable on the first instance of
a default of payment. Generally, if the debtor defaults
on any debt to any lender, a cross default covenant
in the debt contract states that that particular debt is
also in default.

In corporate finance, upon an uncured default, the

holders of the debt will usually initiate proceedings
(file a petition of involuntary bankruptcy) to foreclose
on any collateral securing the debt. Even if the debt
is not secured by collateral, debt holders may still sue
for bankruptcy, to ensure that the corporation's
assets are used to repay the debt.,

SOVEREIGN DEFAULT

Sovereign borrowers such as nation-states generally

are not subject to bankruptcy courts in their own
jurisdiction, and thus may be able to default without
legal consequences. One example is with North
Korea, which in 1987 defaulted on some of its loans.
In such cases, the defaulting country and the creditor
are more likely to renegotiate the interest rate,
length of the loan, or the principal payment. In the
1998 Russian financial crisis, Russia defaulted on its
internal debt (GKOs), but did not default on its
external Eurobonds. As part of the Argentine
economic crisis in 2002, Argentina defaulted on $1
billion of debt owed to the World Bank.

42
DIFFERENCE BETWEEN DEFAULT AND
BANKRUPTCY

The term default should be distinguished from the

terms insolvency and bankruptcy.

• "Default" essentially means a debtor has not paid a

debt which he/she/it is required to have paid.

• "Insolvency" is a legal term meaning that a debtor

is unable to pay his debts.

• "Bankruptcy" is a legal finding that imposes court

supervision over the financial affairs of those who are
insolvent or in default.

ADVANCES

Any extension of credit. Bankers talk of advances

when the rest of us say loans.An advance from a
banker in this context could be in the form of a
drawing under an overdraft facility, a fully drawn
advance or term loan, a line of credit with a bill
option, a bill facility or a personal loan.

43
DIFFRENCE BETWEEN LONG TERM LOAN
AND SHORT TERM CASH ADVANCES

From their name alone, short term cash advances

and long term loans are immediately recognizable as
being different—even opposite, to an extent. There
are a great many differences between the two, and
it’s important to understand those differences, if
you’re looking at either.

Long term loans are typically used to start a

business, buy a home, buy a car, and other big
purchases and major expenses. These loans come
from a bank usually, and are secured. When a loan is
secured, we mean that you have put up collateral to
insure that you will be responsible for and pay back
the loan. So, in essence, you have to have the money
before you can get the money. People take out loans
as an investment. These long term loans are for
something they’re sure is going to be worth it in the
long run. Long term loans are for thousands and
thousands of dollars, even more. There is a lengthy
application process, often drawing out over weeks
and sometimes months to be approved for a long
term loan. The general rule of thumb is: the bigger
the loan, the longer the wait. Every aspect of your
credit history is poured over and looked into. Failure
to pay bills on time,
defaulting on previous loans, or simply not making
enough money can all seriously hamper your ability
to get a long term loan. Even the company you keep
as in your business associates and family members
can impact your ability to get a long term loan. These
loans have set interest rates, and are often

44
renegotiated through the years it takes to pay them
back. You often can’t extend a long term loan,
although if you’ve done well with your payment
history, you can take out a new loan once the first is
paid off or even before that.

With a short term cash advance, most of the rules

associated with a long term loan go out the window.
There is no in-depth credit check. As a matter of fact,
short term cash advances were designed with those
who suffer poor credit history in mind. The maximum
amount for a cash advance is usually between $1000
and $1500 from most companies, whereas a long
term loan won’t even be given out for such a small
expense. The cash advance is due usually within one
or two weeks—whenever your next payday is. The
only collateral required is a paper or electronic check
from your bank account for the amount of the cash
advance plus any fees. The amount a cash advance
company will loan you is based mostly on your recent
earnings and on your history with that company in
particular. The short term cash advance is made to
help people out of a difficult situation whereas the
long term loan is designed to help people make a
good situation better.

45
VARIOUS INTEREST RATE OF LOANS AND
ADVANCES OF STATE BANK OF INDIA

 HOME LOAN INTEREST RATE

For Loans upto Rs.5 Lac – 8.5% p.a. fixed rate with
reset every 5 years* from the date of disbursement
of first installment.

For Loans above Rs.5 Lac and upto Rs.20 Lacs –

9.25% p.a. fixed rate with reset every 5 years* from
the date of disbursement of first installment.
*Option to customer at the end of 5 years to convert
into floating rate.Reset or conversion will be at the
rates prevailing at the time of reset.

46
SBI Happy-Home Loan Offer for new loans
sanctioned on or after 2nd February 2009 and at
least partially disbursed on or before 30th April 2009
–
Interest rate 8% p.a. (Frozen) for a period of one
year. Interest rate will be reset after one year as per
contracted rate at the time of sanction of loan as
under-
Interest Rates w.e.f. 01.01.2009

 Floating Rates linked to SBAR

SBAR w.e.f. 01.01.2009 = 12.25 % p.a.

Loans (i.e. Sanctioned limits) upto Rs.30 Lacs

Loan Loan tenure Upt Abov Abov

amount o5 e5 e 15
Yrs Yrs Yrs &
& upto
upto 25

15 Yrs
Yrs
Loans Linkage with 2.25 2.00 1.75
upto SBAR in the % below %
Rs.30 loan document belo SBAR below
lacs for w SBAR
new SBA
loans R,

47
sanction Special 0.25 0.25 0.25
ed on or product level % % %
after discount which
01.01.2 may be
009 withdrawn/revi
sed solely at
the discretion
of the Bank.
Effective 9.75 10.00 10.25
Rate % % %
p.a. p.a. p.a.

Loans (i.e. Sanctioned limits) above Rs.30 Lacs

and upto Rs.75 Lacs

Loan Upto 5 Above Above

Tenure Yrs 5 15
-> Yrs & Yrs &
upto upto
15 Yrs 25 Yrs
Above Rs.30 Linkage 2.00% 1.75% 1.50%
lacs and with below Below Below
upto Rs.75 SBAR SBAR SBAR SBAR
Lacs
w.e.f.
01.01.2009
Effectiv 10.25%p. 10.50% 10.75%
e a. p.a. p.a.
rate

Loans (i.e. Sanctioned limits) above Rs.75 Lacs

48
Above Linkag 2.00% 1.75% 1.25%
Rs.75 Lacs e with below below below
w.e.f. SBAR SBAR SBAR SBAR
01.01.2009
Effectiv 10.25% 10.50 11.00
e rate p.a. % p.a. % p.a.
 Fixed rates - Re-payment Upto 10 Years
(w.e.f. 01.01.2009):

Fixed rates (subject to ‘force majeure’ clause

and interest rate reset at the end of every
two years on the basis of fixed interest rates
prevailing at that time)
Upto Rs. 30 Lacs 11.25% p.a.
Above Rs. 30 Lacs 12.25% p.a.

 Loans for deposit of earnest money for

allotment of a plot / house / flat
Floating rates only)- W.E.F. 01.01.2009 - 1% above
SBAR, Min. 13.25% p.a.

Loan amount Margi

n
Upto Rs.30 Lacs 20%
Above Rs.30 Lacs 20%
and upto Rs.75 Lac
Above Rs.75 Lac 25%

d) Other Home Loans Schemes:

'SBI Gram Niwas' Rural Home Loans, Home Loans

under 'Prashasan Plus', 'Teacher Plus' and 'Oil Plus’:
10 bps below applicable card rates for the respective

49
tenures (fixed rate loans only upto 10 years and
subject to 'force majeure' clause and interest rate
reset at the end of every two year on the basis od
fixed interest rates prevailing then).

Following rebates will be applicable on the above

mentioned rates:

(i) Risk Based Discount : upto 0.25%

(ii) Loans to customers who maintain their salary
accounts with us : 0.10%
(iii) Loans for purchase of dwelling units in Green
Houses rated by approved
agencies : 0.10%

 SBI Life-style Loan (only for existing Home

Loan borrowers) (w.e.f.2nd February 2009) –8%
p.a.

 CAR LOAN INTEREST RATE

w.e.f. 01.01.2009 (SBAR 12.25%)

New Car including NRI Car Loan

Tenure Rate of Interest

Up to 3 years (for loans 0.75% below SBAR i.e.
Rs. 7.5 lac & 11.50%
above) p.a.
Up to 3 years (for loans 0.50% below SBAR i.e.
below Rs. 7.5 lac) 11.75%
p.a.
Above 3 yrs up to 5 yrs 0.50% below SBAR i.e.
(for all loans) 11.75%

50
 p.a.
Above 5 yrs up to 7 yrs 0.25% below SBAR i.e.
(for all loans) 12.00%
p.a.

Car Loan Overdraft: New Car only

Tenure Rate of Interest

Up to 3 years (for loans 0.25% below SBAR i.e.
Rs. 7.5 lac & 12.00%
above) p.a.
Up to 3 years (for loans At SBAR i.e. 12.00% p.a.
below Rs. 7.5 lac)
Above 3 yrs up to 5 yrs At SBAR i.e. 12.00% p.a.
(for all loans)
Above 5 yrs up to 7 yrs 0.25% above SBAR i.e.
(for all loans) 12.50% p.a.

Used Vehicles

Tenure Rate of Interest

Up to 3 years 3.00% above SBAR i.e.
15.25% p.a.

Above 3 yrs up to 7 yrs 3.25% above SBAR i.e.

15.50% p.a.

EDUCATION LOAN INTEREST RATE

w.e.f. 01.01.2009 (SBAR 12.25%)

SBI Student Loan Scheme

RBI Educational Loan (Old Scheme)

Loan Amount Rate of Interest

51
Loans upto Rs. 4.00 Lacs 0.50% below SBAR i.e.
11.75% p.a.

Loans above Rs. 4.00 1.00% above SBAR i.e.

Lacs and 13.25% p.a.
upto Rs. 7.50 Lacs
Loans above Rs. 7.50 At SBAR i.e. 12.25% p.a.
Lacs

An Interest Rate concession of 0.50% to Girl Student

availing Education Loans

SBI Scholar Loan Scheme

Loan Amount Rate of Interest

Irrespective of Amount 1.50% below SBAR i.e.
10.75% p.a.

An Interest Rate concession of 0.50% to Girl Student

availing Scholar Loans

PERSONAL LOAN AGAINST THIRD PARTY

SECURITY

w.e.f. 01.01.2009 (SBAR 12.25%)

Personal Loan against Third Party Security of

NSC/ IVP/ RBI Relief Bonds etc.

Tenure Rate of Interest

Up to 3 years 1.00% above SBAR i.e.
13.25% p.a.

52
Above 3 years upto 6 0.25% above SBAR i.e.
years 12.50% p.a.
LOANS AGAINST SHARES / DEBENTURES /
BONDS

w.e.f. 01.01.2009 (SBAR 12.25%)

Loan against Shares/ Debentures/ Bonds

Scheme Rate of Interest

Equity Plus Scheme 2.25% above SBAR i.e.
14.50% p.a.

OTHER SCHEMES

w.e.f. 01.01.2009 (SBAR 12.25%)

Other Loans

Type of Facility Rate of Interest

Clean Overdraft 4.00% above SBAR i.e.
16.25% p.a.
Personal Loans Scheme 4.25% above SBAR i.e.
(SBI Saral) 16.50% p.a.
SBI Loan to Pensioners 0.50% above SBAR i.e.
12.75% p.a.
Festival Loan Scheme 2.50% above SBAR i.e.
14.75% p.a.
Loans to Employee to 2.25% above SBAR i.e.
Subscribe to 14.50% p.a.
ESOPs
Loan against 1.00% over the rate paid

53
Bank Time Deposit on
Relative time deposit

Rent Plus Scheme

Centr Loan Amount Rate of Interest

e
Metro Loan upto Rs. 1.00% above SBAR i.e.
7.50 13.25% p.a.
Crores
Above Rs. 7.50 1.25% above SBAR i.e.
Crores 13.50% p.a.

Non Loan upto Rs. 1.00% above SBAR i.e.

Metro 5.00 13.25% p.a.
Crores
Above Rs. 5.00 1.25% above SBAR i.e.
Crores 13.25% p.a.

XPress Credit
Type Facility Rate of
Interest
Demand Check-off from 0.75% above
Loan Employer SBAR i.e.
13.00%p.a.
Overdraft Where salary 1.25% above
A/C is with us SBAR i.e.
13.50% p.a.

OTHER SCHEMES

w.e.f. 01.01.2009 (SBAR 12.25%)

54
Other Loans

Type of Facility Rate of Interest

XPress Credit

Type Facility Rate of

Interest
Demand Check-off from 0.75% above
Loan Employer SBAR i.e.
13.00%p.a.
Overdraft Where salary 1.25% above
A/C is with SBAR i.e.
us 13.50% p.a.

LOANS AGAINST NSCs /RBI RELIEF BONDS /

KVPs / IVPs /
SURRENDER VALUE OF SBI LIFE / LIC / SBI
MAGNUMs ETC.

w.e.f. 01.01.2009 (SBAR 12.25%)

Loans against NSCs/ RBI Relief Bonds/ KVPs/

IVPs/ Surrender Value of SBI Life/ LIC/ SBI
Magnums Etc.

Tenure Rate of Interest

Upto 3 years 0.25 above SBAR i.e.
12.50% p.a.
More than 3 years upto 6 0.25 above SBAR i.e.
years 12.50% p.a.

55
LOANS AGAINST GOLD ORNAMENTS,
MORTGAGE OF PROPERTY

w.e.f. 01.01.2009 (SBAR 12.25%)

a) Loan against Gold Ornaments

Size of Credit Limit Rate of Interest

Upto Rs. 1,00,000/- At SBAR i.e. 12.25% p.a.
Above Rs. 1,00,000/- 0.50 above SBAR i.e.
12.75% p.a.

a) Loan against Mortgage of Immovable

Property

Size of Credit Limit Rate of Interest

(Term Loan)
Upto Rs. 1,00,00,000/- 1.00 above SBAR i.e.
13.25% p.a.
Above Rs. 1,00,00,000/- 1.25 above SBAR i.e.
13.50% p.a.
*No Overdraft against Mortgage of Property

56
MEANING OF NON-PER FORMING ASSETS
(NPA)

The three letters Strike terror in banking sector and

business circle today. NPA is short form of “ Non
Performing Asset”. The dreaded NPA rule says simply
this: when interest or other due to a bank remains
unpaid for more than 90 days, the entire bank loan
automatically turns a non performing asset. The
recovery of loan has always been problem for banks
and financial institution. To come out of these first we
need to think is it possible to avoid NPA, no can not
be then left is to look after the factor responsible for
it and managing those factors.

Definitions:

57
An asset, including a leased asset, becomes non-
performing when it ceases to generate income for the
bank.

A ‘non-performing asset’ (NPA) was defined as a

credit facility in respect of which the interest and/ or
installment of principal has remained ‘past due’ for a
specified period of time.

With a view to moving towards international best

practices and to ensure greater transparency, it has
been decided to adopt the ‘90 days’ overdue’ norm
for identification of NPAs, from the year ending March
31, 2004. Accordingly, with effect from March 31,
2004, a non-performing asset (NPA) shall be a loan or
an advance where;
• Interest and/ or instalment of principal remain
overdue for a period of more than 90 days in
respect of a term loan,

• The account remains ‘out of order’ for a period

of more than 90 days, in respect of an
Overdraft/Cash Credit (OD/CC),

• The bill remains overdue for a period of more

than 90 days in the case of bills purchased and
discounted,

• Interest and/or instalment of principal remains

overdue for two harvest seasons but for a period
not exceeding two half years in the case of an
advance granted for agricultural purposes, and

58
 • Any amount to be received remains overdue for
a period of more than 90 days in respect of
other accounts.

As a facilitating measure for smooth transition to 90

days norm, banks have been advised to move over to
charging of interest at monthly rests, by April 1,
2002. However, the date of classification of an
advance as NPA should not be changed on account of
charging of interest at monthly rests. Banks should,
therefore, continue to classify an account as NPA only
if the interest charged during any quarter is not
serviced fully within 180 days from the end of the
quarter with effect from April 1, 2002 and 90 days
from the end of the quarter with effect from March
31, 2004.

'Out of Order' status:

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 six
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 the due
date fixed by the bank.

59
Types of NPA:

A] Gross NPA
B] Net NPA

A] Gross NPA:

Gross NPAs are the sum total of all

loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. It can be
calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs

Gross Advances

B] Net NPA:

Net NPAs are those type of NPAs in which the bank

has deducted the provision regarding NPAs. It can be
calculated by following

Net NPAs = Gross NPAs – Provisions

Gross Advances – Provisions

60
WHEN DOES A LOAN OR ADVANCES
BECOMES A NPA

The main business of a bank is through loans and

advances section the bank accept deposits from the
public and certain amount they keep it as reserve
balance and the rest of it they lend it to the needed
customers who require it in the form of loans and
advances. The customer who deposit the money they
get interest and the person who takes the loan pays
interest and the difference between is the profit of
the bank.

Suppose the customer who took loan could not pay

back the loan amount or the installment money
which consist of the interest amount and the principal
amount continuously for some specific period of time
they are then converted to probable NPA and then
comes the role of recovery team which put their
maximum effort to get back the amount back which
they have given as a loan or advances and at the end
if they fail to get back the money then finally the
amount is converted as Non Performing Assets.

If the installment is overdue or pending for more then

90 days then a bank can convert the loan amount to
probable NPA and if it could not be recovered by the
recovery management team then it is converted into
NPA.

ASSETS CLASSIFICATION

Categories of NPAs:

61
Standard Assets:

Standard assets are the ones in which the bank is

receiving
interest as well as the principal amount of the loan
regularly from the customer. Here it is also very
important that in this case the arrears of interest and
the principal amount of loan does not exceed 90 days
at the end of financial year. If asset fails to be in
category of standard asset that is amount due more
than 90 days then it is NPA and NPAs are further
need to classify in sub categories.

Banks are required to classify non-performing assets

further into the following three categories based on
the period for which the asset has remained
nonperforming and the realisability of the dues:

a) Sub-standard Assets
b) Doubtful Assets
c) Loss Assets

Sub-standard Assets:

A sub-standard asset was one, which was classified

as NPA for a period not exceeding two years. With
effect from 31 March 2001, a sub-standard asset is
one, which has remained NPA for a period less
than or equal to 18 months. In such cases, the
current net worth of the borrower/ guarantor or the
current market value of the security charged is not
enough to ensure recovery of the dues to the banks
in full. In other words, such an asset will have well
defined credit weaknesses that jeopardise the

62
liquidation of the debt and are characterised by the
distinct possibility that the banks will sustain some
loss, if deficiencies are not corrected.

Doubtful Assets:

A doubtful asset was one, which remained NPA for a

period
exceeding two years. With effect from 31 March
2001, an asset is to be classified as doubtful, if it has
remained NPA for a period exceeding 18 months.
A loan classified as doubtful has all the weaknesses
inherent in assets that were classified as sub-
standard, with the added characteristic that the
weaknesses make collection or liquidation in full, – on
the basis of currently known facts, conditions and
values – highly questionable and improbable.

With effect from March 31, 2005, an asset would be

classified as doubtful if it remained in the sub-
standard category for 12 months.

Loss Assets:

A loss asset is one where the bank or internal or

external auditors
have identified loss or the RBI inspection but the
amount has not been written off wholly. In other
words, such an asset is considered uncollectible and
of such little value that its continuance as a bankable
asset is not warranted although there may be some
salvage or recovery value.

INCOME RECOGNITION

63
Income recognition – Policy

 The policy of income recognition has to be

objective and based on the record of recovery.
Internationally income from non-performing
assets (NPA) is not recognised on accrual basis
but is booked as income only when it is actually
received. Therefore, the banks should not charge
and take to income account interest on any NPA.

 However, interest on advances against term

deposits, NSCs, IVPs, KVPs and Life policies may
be taken to income account on the due date,
provided adequate margin is available in the
accounts.

 Fees and commissions earned by the banks as a

result of re-negotiations or rescheduling of
outstanding debts should be recognised on an
accrual basis over the period of time covered by
the re-negotiated or rescheduled extension of
credit.

 If Government guaranteed advances become

NPA, the interest on such advances should not
be taken to income account unless the interest
has been realized

Reversal of income:

 If any advance, including bills purchased and

discounted, becomes NPA as at the close of any
year, interest accrued and credited to income

64
 account in the corresponding previous year,
should be reversed or provided for if the same is
not realised. This will apply to Government
guaranteed accounts also.

 In respect of NPAs, fees, commission and similar

income that have accrued should cease to
accrue in the current period and should be
reversed or provided for with respect to past
periods, if uncollected.

Leased Assets

 The net lease rentals (finance charge) on the

leased asset accrued and credited to income
account before the asset became non-
performing, and remaining unrealised, should be
reversed or provided for in the current
accounting period.

 The term 'net lease rentals' would mean the

amount of finance chargetaken to the credit of
Profit & Loss Account and would be worked out
as gross lease rentals adjusted by amount of
statutory depreciation and lease equalisation
account.

 As per the 'Guidance Note on Accounting for

Leases' issued by the Council of the Institute of
Chartered Accountants of India (ICAI), a separate
Lease Equalisation Account should be opened by
the banks with a corresponding debit or credit to
Lease Adjustment Account, as the case may be.
Further, Lease Equalisation Account should be

65
 transferred every year to the Profit & Loss
Account and disclosed separately as a deduction
from/addition to gross value of lease rentals
shown under the head 'Gross Income'.

Appropriation of recovery in NPAs

 Interest realised on NPAs may be taken to

income account provided the credits in the
accounts towards interest are not out of fresh/
additional credit facilities sanctioned to the
borrower concerned.

 In the absence of a clear agreement between the

bank and the borrower for the purpose of
appropriation of recoveries in NPAs (i.e. towards
principal or interest due), banks should adopt an
accounting principle and exercise the right of
appropriation of recoveries in a uniform and
consistent manner.

Interest Application:

There is no objection to the banks using their own

discretion in debiting interest to an NPA account
taking the same to Interest Suspense Account or
maintaining only a record of such interest in
proforma accounts.

Reporting of NPAs

 Banks are required to furnish a Report on NPAs

as on 31st March each year after completion of
audit. The NPAs would relate to the banks’ global

66
 portfolio, including the advances at the foreign
branches. The Report should be furnished as per
the prescribed format given in the Annexure I.

 While reporting NPA figures to RBI, the amount

held in interest suspense account, should be
shown as a deduction from gross NPAs as well as
gross advances while arriving at the net NPAs.
Banks which do not maintain Interest Suspense
account for parking interest due on
nonperforming advance accounts, may furnish
the amount of interest receivable on NPAs as a
foot note to the Report.

 Whenever NPAs are reported to RBI, the amount

of technical write off, if any, should be reduced
from the outstanding gross advances and gross
NPAs to eliminate any distortion in the quantum
of NPAs being reported.

Impact of NPA

Profitability:
NPA means booking of money in terms
of bad asset, which occurred due to wrong choice of
client. Because of the money getting blocked the
prodigality of bank decreases not only by the amount
of NPA but NPA lead to opportunity cost also as that
much of profit invested in some return earning
project/asset. So NPA doesn’t affect current profit but
also future stream of profit, which may lead to loss of
some long-term beneficial opportunity. Another
impact of reduction in profitability is low ROI (return

67
on investment), which adversely affect current
earning of bank.

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

Involvement of management:

Time and efforts of management is another indirect

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

Credit loss:
Bank is facing problem of NPA then it
adversely affect the value of bank in terms of market
credit. It will lose it’s goodwill and brand image and
credit which have negative impact to the people who
are putting their money in the banks .

68
REASONS FOR NPA:

Reasons can be divided in to two broad

categories:

A] Internal Factor
B] External Factor

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

 Poor lending decision:

 Non-Compliance to lending norms:
 Lack of post credit supervision:
 Failure to appreciate good payers:
 Excessive overdraft lending:
 Non – Transparent accounting policy:

External Factors:

External factors are those, which are external to

banks they are not controllable by banks.

 Socio political pressure:

 Chang in industry environment:
 Endangers macroeconomic disturbances:

69
  Natural calamities
 Industrial sickness
 Diversion of funds and willful defaults
 Time/ cost overrun in project implementation
 Labour problems of borrowed firm
 Business failure
 Inefficient management
 Obsolete technology
 Product obsolete.
Early symptoms by which one can
recognize a performing asset turning in to
Non-performing asset

Four categories of early symptoms:

Financial:

 Non-payment of the very first installment in case

of term loan.
 Bouncing of cheque due to insufficient balance in
the accounts.
 Irregularity in installment
 Irregularity of operations in the accounts.
 Unpaid over dye bills.
 Declining Current Ratio
 Payment which does not cover the interest and
principal amount of that installment
 While monitoring the accounts it is found that
partial amount is diverted to sister concern or
parent company.

Operational and Physical:

70
  If information is received that the borrower has
either initiated the process of winding up or are
not doing the business.
 Overdue receivables
 Stock statement not submitted on time
 External non-controllable factor like natural
calamities in the city where borrower conduct his
business.
 Frequent changes in plan
 Non payment of wages

Attitudinal Changes:

 Use for personal comfort, stocks and shares by

borrower
 Avoidance of contact with bank
 Problem between partners

Others:

 Changes in Government policies

 Death of borrower
 Competition in the market

Preventive Measurement For NPA

 Early Recognition of the Problem:

Invariably, by the time banks start their efforts to get

involved in a revival process, it’s too late to retrieve
the situation- both in terms of rehabilitation of the

71
project and recovery of bank’s dues. Identification of
weakness in the very beginning that is : When the
account starts showing first signs of weakness
regardless of the fact that it may not have become
NPA, is imperative. Assessment of the potential of
revival may be done on the basis of a
technoeconomic viability study. Restructuring should
be attempted where, after an objective assessment
of the promoter’s intention, banks are convinced of a
turnaround within a scheduled timeframe. In respect
of totally unviable units as
decided by the bank, it is better to facilitate winding
up/ selling of the unit earlier, so as to recover
whatever is possible through legal means before the
security position becomes worse.

 Identifying Borrowers with Genuine Intent:

Identifying borrowers with genuine intent from those

who are non- serious with no commitment or stake in
revival is a challenge confronting bankers. Here the
role of frontline officials at the branch level is
paramount as they are the ones who
has intelligent inputs with regard to promoters’
sincerity, and capability to achieve turnaround. Base
don this objective assessment, banks should decide
as quickly as possible whether it would be worthwhile
to commit additional finance. In this regard banks
may consider having “ Special Investigation” of all
financial transaction or business transaction, books of
account in order to ascertain real factors that
contributed to sickness of the borrower. Banks may
have penal of technical experts with proven expertise
and track record of preparing techno-economic study

72
of the project of the borrowers. Borrowers having
genuine problems due to temporary mismatch in
fund flow or sudden requirement of additional fund
may be entertained at branch level, and for this
purpose a special limit to such type of cases should
be decided. This will obviate the need to route the
additional funding through the controlling offices in
deserving cases, and help avert many accounts
slipping into NPA category.

 Timeliness and Adequacy of response:

Longer the delay in response, grater the injury to the

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

 Focus on Cash Flows:

While financing, at the time of restructuring the

banks may not be guided by the conventional fund
flow analysis only, which
could yield a potentially misleading picture. Appraisal
for fresh credit requirements may be done by
analyzing funds flow in conjunction with the Cash
Flow rather than only on the basis of Funds Flow.

 Management Effectiveness:

73
The general perception among borrower is that it is
lack of finance that leads to sickness and NPAs. But
this may
not be the case all the time. Management
effectiveness in tackling adverse business conditions
is a very important aspect that affects a borrowing
unit’s fortunes. A bank may commit additional
finance to an aling unit only after basic
viability of the enterprise also in the context of
quality of management is examined and
confirmed.Where the default is due to deeper
malady, viability study or investigative audit should
be done – it will be useful to have consultant
appointed as early as possible to examine this
aspect. A proper techno- economic viability study
must thus become the basis on which any future
action can be considered.

 Multiple Financing:

A. During the exercise for assessment of viability and

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

B. In some default cases, where the unit is still

working, the bank should make sure that it captures
the cash flows (there is a tendency on part of the
borrowers to switch bankers once they default, for
fear of getting their cash flows forfeited), and ensure
that such cash flows are used for working capital
purposes. Toward this end, there should be regular

74
flow of information among consortium members. A
bank, which is not part of the
consortium, may not be allowed to offer credit
facilities to such defaulting clients. Current account
facilities may also be denied at non-consortium banks
to such clients and violation may attract penal action.
The Credit Information Bureau of India Ltd.
(CIBIL) may be very useful for meaningful
information

C. exchange on defaulting borrowers once the setup

becomes fully operational.

D. In a forum of lenders, the priority of each lender

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

E. Corporate Debt Restructuring mechanism has

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

75
OBJECTIVES OF RECOVERY MANAGEMENT
OF SBI

 NPA REDUCTION:

Now a days NPA is a great

issue that the banks are facing. Before loans and
advances were granted without proper guarantee so
as result default occurs and those loan account are
converted into non performing assets as no revenue
could be generated from it. So now a days various
Assets Liability Management Committee (ALMC) are
being appointed so that such default does not arise.
Now a days also proper scrutiny of the loan holder is
done and rating is given then only loans and
advances are provided.

 DEPOSIT GROWTH:

If NPA occurs then lots of

bank assets are being blocked and they are
converted into bad debts so it reduces the assets of
the bank which creates a lot of problem in generating
the banks business. So if Debt recovery is done
properly then it will help the bank to generate the
outstanding amount that is due from the customer

76
and it will increase its deposit growth and do its
business
efficiently without any problem.

 ADVANCE GROWTH:

If recovery is being properly

made then it will help to generate fund and then the
bank will have sufficient fund and it could provide
loans and advances to its customer and generate its
business. So it could be said that if recovery is
properly done then it will help in all round
development of the bank.

AIM OF RECOVERY MANAGEMENT

 Indicative Non Performing Assets (NPA) to be

brought to zero.
 No NPA in staff loans, loans against specified
securities, loans to pensioners, KCC/ ACC. NPA in
staff loans, loans against specified securities and
loans to pensioners should be upgraded by 20th
January 2009.
 No account should be NPA for non renewal/non
review
 In case of salary account if the account are in
arrear but the salary now is being received, the
branches should effect recovery so that arrear
outstanding do not in any case exceed two
installment.
 In case the salary is not credited to savings bank
account, branches to advice controllers so that
DDO’s can be contacted by AGM (rural) and the

77
 matter escalated to the DDO’s controller. In case
of salary accounted default, attachment of salary
on selective basis may be considered and in case
of PDC’s , criminal action may be initiated on
selective basis so that the message is conveyed
to delinquent borrowers.
 OMRs are to be utilized for NPA recovery with
specified targets and their performance is to be
monitered.
 BMs must visit ITS site on daily basis and
understand details. They must also ensure that
FO’S and other concerned officials are utilizing
their data to reduce their NPA on day to day
basis.
 BMs and FO’s should have full awarness of
stamped, indicative and probable NPAs under
various categories e.g Housing Loans , Car
Loans,Cash Credit.
 NPA recovery through bank adalat should be
organized once in a month.Bakijai cases where
they have been filed should be followed up
vigorously.
 Up – gradation, write off and compromise to be
given top priority and full provision should be
utilized . Wherever sufficient securities is
available, SARFEASI Acg to be implemented
services of enforcement agents, seizure agents
and recovery agents should be utilized.
 NPA account in Housing Loan are to rephrased in
all eligible cases with top priority.
 People at grass root level need to understand
what is to be done and proper communication of
instructions is the key for better performance.

78
IMPLICATIOS OF NPA ACCOUNTS

Bank cannot credit income to their profit and loss

account to the debit of loan account to the debit of
loan account unless recovery thereof takes
place.Interest or other charge already debited but not
recovered have to be provided for and provision on
the amount of gross NPAs also to be made.All loan
account of the borrower would be treated as NPAs ,if
one account is NPA.

MANAGEMENT OF NPAs

As reported in the RBI annual report,2005-2006,

banks in India have been able to contain their NPAs
to just two per cent to their net advances in spite of

79
adopting 90 days delinquency norms. This has been
possible because of treasury profits by
banks.

Recovery and management of NPAs has significantly

strengthened the lenders ability to enforce its right to
collateral under the securitization and
reconstruction of financial assets Enforcement of
security interest (SARFAESI) ACT, 2002.The corporate
debt restructuring (CDR) system has also emerged as
a
time bound and transparent mechanism for arriving
at a borrower. The credit information companies Act
2005, enables sharing of credit information which
help in reducing transactional costs of banks in
extending credit to small and medium borrowers
which again translates into lower NPAs.

DEBT MANAGEMENT

80
The following debt collection practices will be applied
to all debts (rates and sundry debtors) over $200 that
is not in dispute which have been outstanding for 90
days;

• First reminder letter will be forwarded, requesting

payment within 14 days or to contact Council to enter
into an arrangement.

• Where no response is received, second reminder

letter will be forwarded requesting payment within 14
days or to contact Council to enter into an
arrangement.

• Where no response has been received a letter of

demand for payment within 7 days will be forwarded.
The letter will state that failure to make payment in
full or to enter into an arrangement will result in the
commencement of legal action.

• Where no response has been received, outstanding

debt will be forwarded to Council’s debt collection
agent.

VARIOUS RECOVERY PROCEDURE

State Bank of India adopts various recovery

procedures to recover the debt from its defaulters.
The various recovery procedures are mentioned
below:

 REASONS FOR DEFAULT :

81
 There are various reasons for
default like
mismanagement, diversification of fund, short fall in
investment, will fall default etc. So a credit manager
should take various factors into account before
lending a loan.
 DEMAND NOTICE:

When a defaulter does not

repays loan a demand notice is issued to him that he
has to repay his loan with a stipulate time period.

 LEGAL NOTICE:

When a defaulter does not

respond to the demand notice a direct notice is
issued to him that if he does not repay the loan
action would be taken against him legally and the
court notice is issued against him.

 TRANSFER TO NPA ACCOUNT:

When a defaulter does not

respond to respond to any legal notice or he becomes
bankrupt the Whole account is transferred to NPA
account.

82
SUMMARISED BALANCE SHEET OF STATE BANK OF INDIA OF
PAST FIVE YEARS
Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05
Sources of funds
Owner's fund
Equity share capital 634.88 631.47 526.30 526.30 526.30
Share application
- - - - -
money
Preference share
- - - - -
capital
57,312.8 48,401.1 30,772.2 27,117.7 23,545.8
Reserves & surplus
2 9 6 9 4
Loan funds
Secured loans - - - - -
7,42,073. 5,37,403. 4,35,521 3,80,046. 3,67,047
Unsecured loans
13 94 .09 06 .53
8,00,020. 5,86,436. 4,66,819 4,07,690. 3,91,119
Total
82 60 .65 14 .66
Uses of funds
Fixed assets
10,403.0
Gross block 8,988.35 8,061.92 7,424.84 6,691.09
6
Less : revaluation
- - - - -
reserve
Less : accumulated
6,828.65 5,849.13 5,385.01 4,751.73 4,114.67
depreciation
Net block 3,574.41 3,139.22 2,676.91 2,673.11 2,576.43
Capital work-in-
263.44 234.26 141.95 79.82 121.27
progress
Investments 2,75,953. 1,89,501. 1,49,148 1,62,534. 1,97,097

83
SUMMARISED BALANCE SHEET OF STATE BANK OF INDIA OF
PAST FIVE YEARS
96 27 .88 24 .91
Net current assets
Current assets, loans 37,733.2 44,417.0 25,292.3 22,380.8 18,390.7
& advances 7 3 1 4 1
Less : current 1,10,697. 83,362.3 60,042.2 55,538.1 49,578.8
liabilities & provisions 57 0 6 7 9
- - - - -
Total net current
72,964.3 38,945.2 34,749.9 33,157.3 31,188.1
assets
0 7 5 2 8
Miscellaneous
- - - - -
expenses not written
2,06,827. 1,53,929. 1,17,217 1,32,129. 1,68,607
Total
50 48 .80 85 .42
Notes:
Book value of
- - - - -
unquoted investments
Market value of
- - - - -
quoted investments
7,67,567. 8,29,740. 3,29,954 2,49,437. 1,76,119
Contingent liabilities
52 48 .73 78 .50
Number of equity
sharesoutstanding 6348.80 6314.70 5262.99 5262.99 5262.99
(Lacs)

84
85
86
COMPARISION OF PERFORMANCE ( ABRIDGE P/L
ACCOUNT) OF 2007-08 2008-09(Q1)

87
Definitions of past due and impaired
assets (for accounting purposes)

Non-performing assets

An asset becomes non-performing when it ceases to

generate income for the Bank. As from 31st March
2006, a non-performing Asset (NPA) is an advance
where:

(i) Interest and/or instalment of principal remain

‘overdue’ for a period of more than 90 days in
respect of a Term Loan,

(ii) The account remains ‘out of order’ for a period of

more than 90 days, in respect of an Overdraft/Cash
Credit (OD/CC),

88
(iii) The bill remains ‘overdue’ for a period of more
than 90 days in the case of bills purchased and
discounted,

(iv) Any amount to be received remains ‘overdue’ for

a period of more than 90 days in respect of other
accounts.

(v) A loan granted for short duration crops is treated

as NPA, if the instalment of principal or interest
thereon remains overdue for two crop seasons and a
loan granted for long duration crops is treated as
NPA, if instalment of principal or interest thereon
remains overdue for one crop season.

vi) An account would be classified as NPA only if the

interest charged during any quarter is not serviced
fully within 90 days from the end of the quarter.

Out of Order’ status

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 90 days as on the date of
Bank’s Balance Sheet, or where credits are not
enough to cover the interest debited during the same
period, such accounts are treated as ‘out of order’.

‘Overdue’

89
Any amount due to the Bank under any credit facility
is ‘overdue’ if it is not paid on the due date fixed by
the Bank.

Discussion of the Bank’s Credit Risk

Management Policy

The Bank has in place a Credit Risk Management

Policy, as a part of its Loan Policy, which is reviewed
from time to time. Over the years, the policy &
procedures in this regard have been refined as a
result of evolving concepts and actual experience.
The policy and procedures have been aligned to the
approach laid down in Basel-II Guidelines. The Policy
aims at ensuring that there is no undue deterioration
in quality of individual assets within the portfolio.
Simultaneously, it also aims at continued
improvement of the overall quality of assets at the
portfolio
level, by establishing a commonality of approach
regarding credit basics, appraisal skills,
documentation standards and awareness of
institutional concerns and strategies, while leaving
enough room for flexibility and innovation. Credit Risk
Management encompasses identification,
assessment, measurement, monitoring and control of
the credit exposures.
In the processes of identification and assessment of
Credit Risk, the following functions are undertaken :

90
(i) Developing and refining the Credit Risk
Assessment (CRA) Models to assess the Counterparty
Risk, by taking into account the various risks
categorized broadly into Financial, Business,
Industrial and Management Risks, each of which is
scored separately.

(ii) Conducting industry research to give specific

policy prescriptions and setting quantitative exposure
parameters for handling portfolio in large / important
industries, by issuing advisories on the general
outlook for the Industries / Sectors, from time to time.
The measurement of Credit Risk includes setting up
exposure limits to achieve a well-diversified portfolio
across dimensions such as companies, group
companies, industries, collateral type, and
geography. For better risk management and
avoidance of concentration of Credit Risks, internal
guidelines on prudential exposure norms in respect of
individual companies, group companies, Banks,
individual borrowers, non-corporate entities, sensitive
sectors such as capital market, real
estate, sensitive commodities, etc., are in place. The
Bank has processes and controls in place in regard to
various aspects of
Credit Risk Management such as appraisal, pricing,
credit
approval authority, documentation, reporting and
monitoring, review and renewal of credit facilities,
managing of problem loans, credit monitoring, etc.

91
92
93
94
95
96
97
98
99
100
101
ANALYSIS

 It can clearly be seen that the gross NPA of

December 2007 is 11183 and the Net NPA of
December 2007 5610, so it can be said that
there is a difference of 5573 that means it has
reduced to 49.83% it was only possible through
recovery management.

 In March 2008 the gross NPA was 13599 and the

Net NPA was 7424 and the difference between
them is 6175 that means it ha reduced to
45.40% and it a positive sign in comparisons to
December 2007.

102
 In September 2008 the gross NPA was 12552
and the Net NPA was 6618 and the difference
between them is 5934 that means it ha reduced
to 47.27% and it a negative sign in comparisons
to December 2007.

 In December 2008 the gross NPA was 13314 and

the Net NPA was 6864 and the difference
between them is 6450 that means it ha reduced
to 48.45% and it a negative sign in comparisons
to September 2007.

103
VARIOUS DEBT RECOVERY PROCESS OF
SBI

 APPOINMENT OF MRT TEAM.

 CONDUCT OF RECOVERY CAMP.
 COMPROMISE PROPOSAL.
 LOK ADALAT.
 APPONMENT OF DEBT RECOVERY OFFICER.

1) APPOINMENT OF MRT TEAM:

This is a special
team appointed bt sbi under different branches. Here
the officers are appointed mainly for debt recovery
purpose. When the amount of loan are not properly
recovered or received then those amount are
converted into probable NPA account and further also
they are not recovered they are converted into NPA
account., so to
overcome this difficulty MRT team are appointed to
recover the amount outstanding from the loan holder.

2) CONDUCT OF RECOVERY CAMP:

This is a kind of
gathering done by MRT team and the loan holder,
whose account are converted into NPA account. Here
the MRT team divides the NPA account holder into
into different regions and districts and calls a
meeting with those loan holder and discuss the
matter and give them ways and directions how to
return the money which they have taken.

104
3) COMPRISE PROPOSAL:
This is a kind of joint
agreement between the bank and the loan holder,
that if they return back the money, certain amount of
money will be relieved.

4) LOK ADALAT:
This is a kind of dispute settlement
done between the bank and the loan holder with the
help of a court i.e. the dispute is settled between
them by court judgment. Here the bank files a case
against the loan holder and based on
the evidence and legality the court gives a decision
which the bank and the loan holder are bound to
follow through various legal proceeding. The claims
settled at the Lok Adalat organised include Rs 20.82
crore pertaining to 14 borrowers of State Bank of
India (SBI), Rs 15.60 crore.

5) OUT OF COUT SETTELMENT:

BANKS should try
to enter into out of-court settlement with defaulters,
as far as possible. The process of getting a decree
takes a long time and even if a bank obtains a decree
in its favour, it usually encounters difficulties in
executing the decree. And, even then, it is usually a
distress-sale of the seized asset, which may not fetch
a good price in the
market. Therefore, it is better that the bankers settle
to a compromise with the defaulters.

6) DEBT RECOVERY OFFICERS:

105
 This officers are
specially appointed
for debt recovery purpose. Their key responsibilities
lies on how they could recover all the debt that the
bank holds.
These are the various methods that State Bank India
adopts to recover the debt which are outstanding
from the loan holder.

VARIOUS ACTION PLAN THAT ARE TO BE

IMPLEMENTED

 NPA Management is one of the most priority area

of the bank. Considering its importance and
present economic situation, the chairman has
focused to reduce NPA subsequently within a
short period.

 Accordingly the CMC has formulated an action

plan as under:

a. Technical ( non-financial ) NPA s are to be made nil

by 15th
December

b. Technical ( non- financial ) NPA s inside probable

NPA are to be removed by 15th December 2008.

 Simultaneously, special Mention Accounts are to

be monitored and irregularities to be zeroised.

 One or two in installment default accounts are to

be taken up on priority basis to prevent these
accounts from becoming NPA.

106
  Stamped NPA as on 31st march 2008 are to
reduced to least to budgeted level.

HOW TO REVIEW THE POSITION OF NPA AND

THEIR
MOVEMENT

PARTICULARS AS AT PREVIOUS AS AT CURRENT

QUARTER/ YEAR QUARTER / YEAR
ENDED ENDED

a) Gross NPA at --- ---

the
beginning

b) Migration --- ---

from SAMG

107
c) Fresh addition --- ---
in NPA

d) Recoveries --- ---

during the
period
--- ---
e) Up gradation
during the
period

f) Write off --- ---

during the
period
--- ---
g) Migration to
SAGM

h) Gross --- ---

Reduction(
d+e+f+g)

i) Net Reduction( --- ---

h-b-c)

j) Gross NPA --- ---

level at the
end of the
period
--- ---
k) Gross
Advances at the

108
end of the
period

l) Net NPA at the --- ---

end of
the period

Financial Performance

Profit

109
The Operating Profit of the Bank for 2007-08 stood at
Rs. 13,107.55 crore as compared to Rs.9,999.94
crore in 2006-07, registering a growth of 31.08%.The
Bank has posted a Net Profit of Rs 6729.12 crore for
2007-08 as compared to
Rs.4,541.31 crore in 2006-07, registering a growth of
48.18%.
While Net Interest Income recorded a growth of
13.04% and Other Income increased by 28.52%.
Operating Expenses increased by 6.64%.

Dividend

The Bank has increased dividend to 215%.

Net Interest Income

The Net Interest Income of the Bank registered a

growth of 13.04% from Rs.15,058.20 crore in 2006-
07 to Rs. 17,021.23 crore in 2007-08. This was due to
growth in interest income on advances. The Net
Interest Margin was at a healthy 3.07% in 2007-08.
The gross interest income from global operations
rose from Rs. 37,242.33 crore to Rs. 48,950.31 crore
during the year. This was mainly due to higher
interest income on advances. Interest income on
advances in India registered an increase from
Rs.22,872.66 crore in 2006-07 to Rs 32,162.68 crore
in 2007-08 due to higher volumes. Also average yield
on domestic advances increased from 8.67% in 2006-
07 to 9.90% in 2007-08. Interest income on advances
at foreign offices also increased due to
higher volumes. Income from resources deployed in
Treasury operations in India increased by 11.03%

110
despite decline in average yield mainly due to higher
average resources deployed. The average yield,
which was 6.99% in 2006-07, declined to 6.92% in
2007-08. Total interest expenses of global operations
increased from Rs.22,184.14 crore in 2006-07 to Rs.
31,929.08 crore in 2007-08.Interest expenses on
deposits in India during 2007-08 recorded an
increase of 45.56% compared to the previous year,
whereas the average level of deposits in India grew
by 22.09%. This resulted in increase in the average
cost of deposits from 4.69% in 2006-07 to 5.59% in
2007-08.

Non-Interest Income

Non-interest income stood at Rs.8,694.93 crore as

against Rs.6,725.26 crore in 2006-07. During the
year, the Bank received an income of Rs. 197.41
crore (Rs.598.12 crore in the previous year) by way
of dividends from Associate Banks/ subsidiaries and
joint ventures in India and abroad.

Operating Expenses

There was marginal decline of 1.84% in the Staff Cost

from Rs.7,932.58 crore in 2006-07 to Rs 7,785.87
crore in 2007-08. Staff Cost included an amount of
Rs.575.00 crore towards Wage arrears.

111
MANAGEMENT ANALYSIS

Economic Backdrop and Banking Environment

After growing at 5.0% in 2006 and 4.9% in 2007, IMF

estimates global GDP growth to decelerate to 3.7% in
2008 in the wake of the current financial crisis. The
financial market turbulence in developed economies
following the US subprime mortgage crisis has
reduced financial leverage, lowered credit availability
and negative wealth effects have emerged as risks to
consumption and growth in advanced economies,
especially in the US. Continuing inflationary pressures
from food and commodity prices as well as high and
volatile crude oil prices are other risks being faced by
the global economy. India continued to be one of the
fastest growing economies of the world. During 2007-
08, the Indian economy grew at a robust pace for the
fifth consecutive year. Real GDP growth, estimated at
8.7% in 2007-08, is in tune with the average annual
GDP growth of 8.7% in the five year period 2003-04
to 2007-08. Agriculture and allied activities are
estimated to grow by 2.6% in 2007-
08, which is in line with the a verage growth of 2.6%
per annum during 2000- 01 to 2007-08. Foodgrains
production touched a record high in FY08, with total
foodgrains production placed at 227.3 million tonnes,
surpassing the target of 221.5 million tones and
recording an increase of 4.6% over the previous year.

112
Industrial growth at 8.6% during 2007-08 has
moderated somewhat against 10.6% in the previous
year. The services sector maintained its double-digit
growth at 10.6% during 2007-08, higher than the
long term average of 8.9% (2000-01 to
2007-08). Within services, transport and
communications and financial services recorded
double-digit growth for the last two years and are
expected to maintain the growth momentum. Trade
and hotels showed higher growth of 12.1% in 2007-
08 against 11.8% growth in 2006-07. Another
positive feature underpinning growth is the sharp rise
in the rate of savings and investment in recent years,
which rose to 34.8% and 35.9% respectively in 2006-
07. Towards the close of the fiscal year, higher
inflation rate was noticed due to rise in global prices
of food, metals and crude oil. Inflation based on WPI
declined from 6.4% at the beginning of the fiscal year
to a low of 3.1% by mid-October 2007, partly
reflecting moderation in the prices of some primary
food articles and manufactured products. After
hovering around 3% during November 2007, inflation
began to
edge up from early December 2007 to touch 7.4% by
29 March 2008, mainly reflecting hardening in prices
of primary articles such as fruits and vegetables,
oilseeds, raw cotton and iron ore, as well as fuel and
manufactured products such as edible oil/oil cakes
and basic metals, partly due to international
commodity
price pressures. However, fiscal and monetary
measures are being taken to contain inflation and
maintain high growth. Despite Rupee appreciation,
exports continued to show a healthy growth, rising by

113
23% in dollar terms during 2007-08 against 22.6% in
the previous year. Overall exports growth was driven
by
petroleum and crude products, gems and jewellery,
iron ore, non-basmati rice, cotton, transport
equipment, etc. While India’s exports to USA, its
single largest trading partner, showed deceleration,
exports to UAE and China remained robust. In the
same period, imports increased by 27.0% against
24.5%, mainly due to higher oil imports; non-oil
imports were led by
capital goods, chemicals and related products, edible
oils, gold, silver and pearls, precious and
semiprecious stones. Due to higher growth in imports
than exports,the trade deficit widened by 35.5% to
US$ 80.4 bn during 2007-08 from US$ 59.3 bn in the
previous year. The overall stance of RBI’s monetary
and credit
policy during the year was to ensure price stability
and financial system stability along with continuation
of the growth momentum, emphasis on credit quality
and credit delivery including financial inclusion.
During 2007-08, the Bank Rate, Repo and Reverse
Repo rates were kept unchanged. To manage the
liquidity in the economy, RBI raised the Cash Reserve
Ratio four times: in April, August and November 2007
from 6% to
7.50%. In line with liquidity tightening, PLRs and
deposit rates of major banks were hiked during the
year. While lending rates rose to 12.25-12.75% from
12.25- 12.50%, deposit rates (for more than one year
maturity) rose to 8.25-9.0% from 7.5-9.0% in the
previous financial year. However, in the month of
February 2008, to keep up the growth momentum in

114
the economy, some banks announced cuts in their
PLR and interest rate on housing loans below Rs.20
lakh. The tight monetary policy followed by RBI to
control inflation and money supply had a moderating
impact on credit growth, which whichincreased by
21.6% in 2007-08 against 28.1% in 2006-07. Deposit
growth also moderated to 22.2%in 2007-08 from
23.8% in 2006-07.For the current year, despite
slowdown in the major economies of the world, the
Indian economy will continue to grow at 8-8.5%
driven by investment. Due to a number of fiscal and
monetary measures taken by the Government and
RBI to put a check on prices, inflation is expected
increased by 21.6% in 2007-08 against 28.1% in
2006-07. Deposit growth also moderated to 22.2% in
2007-08
from 23.8% in 2006-07. For the current year, despite
slowdown in the major economies of the world, the
Indian economy will continue to grow at 8-8.5%
driven by investment. Due to a number of fiscal and
monetary measures taken by the Government and
RBI to put a check on prices, inflation is expected to
come down to 5-5.5% by March 2009.

115
 PUBLIC SECTOR BANK RATIO OF NPA
FROM 2006-2008

Statement VIII :Public Sector Banks :

Ratios (In Crores)

Net NPA Business Per Profit per

BANKS as % to Employee
Net
Advance
s
NATIONALIS 200 200 200 200 200 200 200 2007
D 6 7 8 6 7 8 6
BANKS

Allahabad 0.84 1.07 0.80 3.36 4.95 6.04 3.69 3.68

Bank
Andhra Bank 0.24 0.17 0.15 4.27 5.36 6.27 3.69 4.14
Bank of 0.87 0.60 0.47 3.96 5.55 7.10 2.13 2.73
Baroda
Bank of India 1.49 0.95 0.52 3.81 4.98 6.52 1.66 2.71
Bank of 2.03 1.21 0.87 3.06 4.05 5.16 0.36 1.95
Maharashtra
Canara Bank 1.12 0.94 0.84 4.42 5.49 6.09 3.02 3.24
Central Bank 2.59 1.70 1.45 2.40 3.04 4.01 0.68 1.35
of India
Corporation 0.64 0.47 0.32 5.27 6.37 8.39 4.13 4.79
Bank
Dena Bank 3.04 1.99 0.94 3.64 4.58 5.59 0.72 1.99
Indian Bank 0.79 0.35 0.24 2.95 3.64 4.88 2.36 3.64
Indian 0.65 0.55 0.60 3.55 4.67 5.83 3.22 4.04
Overseas

116
Bank
Oriental Bank 0.49 0.49 0.99 5.70 7.43 9.24 5.37 5.61
of
Commerce
Punjab & Sind 2.43 0.66 0.37 2.77 3.29 4.67 1.14 2.34
Bank
Punjab 0.29 0.76 0.64 3.31 4.07 5.05 2.48 2.68
National Bank
Syndicate 0.86 0.76 0.97 3.49 4.89 5.86 2.05 2.76
Bank
UCO Bank 2.10 2.14 1.98 3.87 4.64 5.80 0.82 1.30
Union Bank of 1.56 0.96 0.17 4.36 5.09 6.99 2.66 3.25
India
United Bank 1.95 1.50 1.10 2.54 3.50 4.63 1.18 1.59
of India
Vijaya Bank 0.85 0.59 0.57 3.69 4.55 6.13 1.16 3.04
TOTAL OF
19
NATIONALIS
ED
BANKS [I]
State Bank 1.88 1.56 1.78 2.99 3.57 4.56 2.17 2.37
of India
(SBI)
ASSOCIATES
OF SBI
State Bank of 1.18 1.09 0.83 2.77 3.56 4.45 1.20 2.57
Bikaner &
Jaipur
State Bank of 0.36 0.22 0.16 4.14 4.74 5.99 3.26 3.92
Hyderabad
State Bank of 1.83 1.04 0.73 3.68 4.77 6.04 2.09 2.91
Indore
State Bank of 0.74 0.45 0.43 2.90 3.98 4.95 2.22 2.60

117
Mysore
State Bank of 0.99 0.83 0.60 4.93 6.00 7.60 2.66 3.24
Patiala
State Bank of 1.16 0.70 0.91 3.04 3.43 3.96 0.64 1.21
Saurashtra
State Bank of 1.47 1.08 0.94 3.81 5.06 5.59 2.34 2.96
Travancore
TOTAL OF 7
ASSOCIATES
[III]
TOTAL OF
STATE
BANK
GROUP.
[II+III]
Other Public
Sector
Bank
IDBI Ltd 1.01 1.12 1.30 17.1 13.8 18.0 12.4 8.44
8 7 9 5
TOTAL OF
PUBLIC
SECTOR
BANKS[I+II+
III+IV]

118
CONCLUSION

Financial distress and insolvency are broad concepts:

failure in economic terms usually follows cash flow
decay - revenues not covering costs over defined
periods. It also implies investment rates of return fall
short of hurdle rates e.g. capital costs on a
sustainable basis. Financial failure occurs when firms
cannot
meet current obligations when due, though (book)
assets may exceed liabilities.However when the
market value of liabilities exceeds asset market
values, the end result is insolvency.

Recovery Management is the process of planning,

testing, and implementing the recovery procedures
ad standards required to restore service in the event
of a component failure; either by returning the
component to normal operation, or taking alternative
actions to restore service. Recovery Management is
the acknowledgement that failures will occur
regardless of how well the system is designed. The
intent is to anticipate and minimize the impact of
these failures through the implementation of

119
predefined, pretested, documented recovery plans
and procedures. The primary objective of recovery
Management is to ensure that service level
requirements are achieved. This is accomplished by
having recovery procedures in place that will restore
service to a failing component as
quickly as possible.

Getting into debt and recovering those debt are

becoming increasing common these days. The
magnitude of recovery amount overdue is one of the
most important indicator of financial health of a bank.
The main business of a bank is
through providing loans and advances to its
customers. So it is important that the bank provides
loans to its customers but it should provide at care in
doing so. The bank should know about the detail of
the customer before providing loan ti him
and they should rate him according him according to
his efficiency , financial position etc. it should try to
find out the track record if any of the customerand
then only sanction loan to him.

Finally the banks have woken up, thanks to some

hard talking by RBI on the irregularities in loan
recovery mechanism. State Bank of India (SBI) , the
largest public sector bank has taken a step towards
making the loan recovery process smooth and
accountable. It is going to hire about3000loan
recovery officers. The officers will also handle the
responsibility of marketing the bank's products,
conduct surveys, file applications, and participate in
the verification process in addition to recover loans in

120
a 'soft' manner. These officials will get a
compensation of around Rs. 2 lakhs per annum.

121
122
123
124
125
126
RECOMMENDATION

Based on the above study we could recommend

that

 Debt collection software should be developed.

 Strong debt recovery team should be appointed.
 Proper Credit risk manager should be appointed.
 Loans should be properly workout.
 Proper analysis of seasonal loan should be done.
 Projection analysis should be done.
 Proper analysis of secured and unsecured credit,
debt recoveries and management turnover
should be done properly.

127
REFERENCES:

http://www.google.co.in/

http://moneycontrol.com/

http://www.scribd.com.

www.AllBusiness.com

http://www.reuters.com/finance/stocks/ratio

file://bankr/Finance%20and%20Investment
%20Banking

F:\sbi bankr\ - Wikipedia, the free encyclopedia.mht

file:///F:/sbi%20bankr/CapitalMarket_com

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