Canara Bank

Canara Bank
1. a. EXECUTIVE SUMMARY
The project is entitled A study on The Management of Non-Performing Assets in the Canara Banks Loan Portfolio is done at the Canara Bank, Donimalai Township, Mysore (Dist), Karnataka State. INTRODUCTION: An efficient financial management is becoming inevitable for every manager in todays corporate world. From a traditional aspect of raising funds whenever needed the importance has shifted to day to day financial decision making and problem solving. When initially the stress was on the internal analysis of the firm, procurement of funds, management of assets and allocation of capital, the present importance has shifted to decision making within the firm. With the modern aspect of finance function the responsibilities of the finance manager has also increased. In the process of making optional decision, he makes use of certain analytical tools in the analysis, planning and control activities of the firm. Financial analysis is an essential prerequisite for making sound financial decisions. This study is intended to probe into the management of non performing assets in the Canara Banks Loan Portfolio, for the period of 2004-2005 to 2007-2008. The study is completely based on the analysis and interpretation of the published accounts of the bank and personal interview of the senior officials of the bank. OBJECTIVES OF THE STUDY: To evaluate the Canara Banks asset quality. To identify the effectiveness of the risk management system, undertaken by the bank. SCOPE OF THE STUDY: The scope of the study here was confined to the organization only. 1 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
The study covers to find out the strategy required to reduce the NPAs. METHODOLOGY OF THE STUDY: Primary data. Secondary data. DATA ANALYSIS AND INTERPRETATION: When the data collected is completed the data is processed and the relevant information is obtained. The data collected is analyzed using various statistical tools like frequency distribution, charts and percentage analysis. DURATION OF THE STUDY: This study is intended to probe into the management of non performing assets in the Canara Banks Loan Portfolio, for the period of 2005-2006 to 2006-2007. FINDINGS: The Net NPA ratio of the Canara Bank declined from 1.88% as at March 31 st 2007 to 1.12% as at March 31st 2008. Canara Bank has recovered its NPA which is amounted to Rs.865 crore during 2007-2008. The Net NPA of the Canara Bank declined from Rs.1454 crore as on 31 st March 2008. The Net NPA percentage of Canara Bank has reduced by over 19% during 2007-2008.
2 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
RECOMMENDATIONS: Canara Bank should concentrate more on credit appraisal, monitoring, credit risk management and recoveries. Settlement is a better option for the banks wrestling with the problem of nonperforming assets. Credit scoring allows lenders to determine whether or not you fit the profile of the type of customers they are looking for. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing.
CONCLUSION: Securitization Act will surely help banks in reduction of NPA to a great extent. Preventing fresh flow of NPAs to a great extent. Exchange of credit information among banks would be of immense help to avoid possible NPAs.
Canara Bank
1. b. GENERAL INTRODUCTION:
INDUSTRY PROFILE Banking in one form or another was in existence even in ancient times. The writings of Manu (the maker of old Hindu Law) and Kautilya (the Minister of Chandragupta Maurya) contained references to banking. However, banking as a kind of business i.e., modern banking is of recent origin. It came into existence only after the industrial revolution. After the industrial revolution, with the increase in the size of industrial and business units, joint stock company people with small means to become shareholders of big industrial and business enterprises. Still, there were certain sections of public who were not prepared to invest their money on the shares of joint stock companies. However they were willing to part with a little surplus money, if they were assured of the repayment of their money with a little interest thereon. So naturally, there arose the need for formation of financial institutions that could collect the surplus funds of people on terms acceptable to them and make them available to the needy for productive purpose. Accordingly a large number of financial institutions called joint stock banks were set up after industrial revolution. As such joint banks or modern banks are of recent development. MEANING OF BANKS: A banking company in India has been defined in the Banking Companies Act 1949 as One which transacts the business of banking which means the accepting of the purpose of sending or investment of deposits of money form the public repayable on demand or otherwise and withdrawable by cheque, draft order or otherwise. STRUCTURE OF BANKING SYSTEM IN INDIA: Indian Banking System has been categories into two: 1. Scheduled Banks. 4 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
i. ii. State Co-operative. Commercial Banks.
2. Non-Scheduled Banks: Central Co-operative Banks and Primary Credit Societies. Commercial Banks. Commercial Banks are further divided into Indian Banks and Foreign Banks. Indian Banks are further divided into: 1. Public Sector Banks. 2. SBI and its Subsidies. 3. Other Nationalized Banks. 4. Regional Rural Banks. ACTIVITIES OF BANKS: I. Activities of Commercial Banks. II. Activities of Central Banks. I. Activities of Commercial Banks: The activities undertaken by commercial banks be subdivided into: a. Primary Functions. b. Subsidiary Functions. a. Primary Functions: i. Acceptance of deposits: It is very important for banks as it forms the basis of all other activities of banks. It accepts various types of deposits. They are current deposit, saving deposit, fixed deposit and recurring deposits. ii. Lending of Funds: It is also the most important function of Commercial Banks as it fetches the major portions of the income of the banks. Banks lend money by the way of loans, overdrafts, cash credit and discounting of bills. 5 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
b. Subsidiary Functions: i. Agency Functions: The services rendered by banks as agent of their customers are called agency services. They are: ii. Banks collect cheque, bank draft, bills, interest, dividends etc on behalf of the customer. Banks sells and purchases securities on behalf of the customers. Banks arranges for remittance of funds from one place to another place. Banks acts as trustees, executors, representatives of their customers.
General Utility Services: Services rendered by banks to their customers as well as the general public are called as general utility services. Banks accept precious articles, documents etc for safe custody. Banks helps exporters and importers in foreign trade. Banks issue travellers cheque, letter of credit, circular notes etc. Banks acts as a reference and supply information about the financial standing of the customers to others.
II. Activities of the Central Bank: A. Monopoly of Note issue. B. Banker, Agent, Advisor to the government. C. Custodian of cash reserves of the banks. D. Lender of the last resort. FUNCTIONS AND IMPORTANCES OF BANKS: The importance of banks in the modern economy cannot be denied. Banks play a significant role in the economic development. Banks perform a number of functions. They are:
Canara Bank
1. Banks mobilize the small scattered and ideal savings of the people, and make them available for productive purpose. In the sort, they aid the process of capital formation. 2. By accepting the savings of the people, banks provide safety and security to the surplus money of the depositors. 3. Banks provide a convenient and economical method of payment. The cheque system introduced by banks is convenient form making payments. Again the use of cheque economies the time and trouble involved in settlement of business obligations. 4. Banks provide a convenient and economical means of transfer of funds from one place to another. Banks drafts are commonly used for remittances of funds from one place to another. 5. Banks helps the movement of capital from regions where it is no very useful to regions where it can be more usefully employed, by moving funds, banks increases the utility of funds. Again by moving funds from one place to another, banks contribute to the economic development of backward regions. 6. Banks influence the rates of interest in the money markets. Through the supply of money (i.e. bank money or bank deposits) banks expert a powerful influence on the interest rates in the money market. 7. Banks help trade and commerce industry and agriculture by meeting their financial requirements. But for the financial assistance provided by the banks, the pace of growth of trade and commerce industry and agriculture would have been very slow. 8. Banks direct the flow of funds into production channels. While lending money, they discriminate in favor of essential activities and against non essential activities. Thus they encourage the development of right types of activities which the society desires. 9. Banks always make it a point to help the industries, the prudent, the punctual and the honest and discourage the dishonest, the spendthrift, the gambler the lair and 7 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
the knave (i.e. the rouge). Thus banks act as public conservators of commercial virtues. 10. Banks serves as the best financial intermediaries between the saver (i.e. the depositors or lenders) and the investor (i.e. the borrowers or the entrepreneurs).
SERVICE PROFILE OF THE CANARA BANK:

The bank has many financial services and different schemes. Important among them are as follows: DOMESTIC PRODUCTS SAVING BANK DEPOSITS: For individuals & non-trading organizations / institutions. CURRENT ACCOUNT: For business operations trades, businessmen, corporate bodies. FIXED DEPOSITS: Secured way to high returns individuals and institutions. KAMADHENU DEPOSITS: Re-investment money multiplier plan. CANBANK AUTO RENEWAL: Higher return in a shorter plan. CANFLEXI DEPOSITS: A combination of savings & fixed deposits high return & instant liquidity. ASHRAYA DEPOSITS: Respecting Indian values for senior citizens. RECURRING DEPOSITS SCHEME: Inculcating saving, a rewarding & recurring habit. FLOATING RATE DEPOSITS SCHEME (FRDS): Insures against interest rate fluctuations. 8 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
LOAN PRODUCTS HOUSING LOAN SCHEME: Purchase of a ready built house / flat construction of house, purchase of a site and construction of house thereon, for undertaking repairs, renovations, upgradation, and creation of additional amenities and for taking over of the HL liability from other recognized housing finance companies and banks. HOME IMPROVEMENT LOANS: Furnishing the house / flat along with banks home loans / independently. CANMOBILE: Facilities purchase of new / used cards / jeeps of all make. The scheme also covers finance for purchase of brand new two wheelers. CANCARRY: Provided credit worthy individuals, professional and salaried class for buying consumer durables and household articles. CANCASH: Offer assistance for meeting unforeseen contingencies. Finance is granted against approved shares, bonds and debentures held by the clients. CANBUDGET: Fulfills the financial needs of confirmed employees of reputed PSUs, joint stock companies, central / state / semi government employees and lecturers / professors / assistant professors of colleges / universities and research institutes. CANRENT: Provides loans to property owners whenever the property is leased / rented out to PSUs central / state / semi government undertakings. Reputed corporate banks. Financial institutions, Insurance companies and MNCs. CANMORTGAGE: Designed to meet the financial requirements against security of equitable mortgagee of property (land & building) to professional, businessman, salaried persons and individuals. 9 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
VIDYASAGAR EDUCATIONAL LOAN SCHEME: Renders financial assistance for needy and meritous students for pursuing all type of studies (professionals / general) in India and Abroad. LOAN SCHEME TO TRADERS / BUSINESS ENTERPRISES: With hassle free and minimum terms and conditions, the scheme cater to the needs of traders and other business enterprises for smooth flow of business activities. CANMAHILA: Exclusive loan scheme for women clientele. AGRI LOAN SCHEME: Various loan schemes for agri-clinic, minor, irrigation, farm development / machinery, plantation crops fishers and for agro-exports. SSI LOAN SCHEME: A host of schemed available for technology up gradation fund in textile and jute industries, credit linked capital subsidy stand by credit for capital expenditure and margin money scheme of KVIC. OTHER PRIORITY SCHEME: These include loan for retail traders, small business, professional / self employed, medical practitioners and loan for solar water heating / home lighting system. CREDIT CARD OPERATIONS The first Indian card issuers to bay ISO 9002 certification, CANCARD today as a distinct recognition in the domestic as well as international market. All verstors of CANCARD namely, CANCARD visa, classic, visa-corporate, master card and visa international gold are issued through all CANARA BANK branches & 24 CANCARD service centers located at major cities across the country. Four Indian Banks are in affiliation with the bank for issue of CANCARD VISACARD. 10 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Launched DEBIT CARD on November 4, 2003, a value added and tech based product for its niche clients.
CUSTOMER CENTRIC ETHOS CANARA BANK was the first to articulate the directive principles of good banking, detailing bankers duties and customers rights. First bank to get ISO certification for one of its branches in Bangalore in the year of 1995-1996. Recommendations of the Goiporia Committee on Customer Service have been implemented by the bank. The bank has Computerized Information Facilitation Centers (CIFCs) at all circles to look exclusively into customer in a single window framework. A 24 hour tele - contact facility is also available for customers to air their grievances at corporate as well as circles levels.
Canara Bank
COMPANY PROFILE OF THE CANARA BANK:
HISTORICAL TREND: Canara Bank established in 1906 with the name of Canara Bank Hindu Permanent Fund in Mangalore, India, by Ammembal Subba Rao Pai, is one of the oldest and major commercial bank of India. Its name was changed to Canara Bank Limited in 1910. The bank, along with 13 other major commercial banks of India, was nationalized on 19th July, 1969, by the Government of India. Currently (2008), the bank has 2508 branches spread all over India. The bank also has international presence in several centers, including London, Hong Kong, Moscow, Shanghai, Doha, and Dubai. In terms of business it is the largest nationalized commercial bank in India with a total business of about Rs.2000 billion (about US $43 billion).
ORGANISATION STRUCTURE: The bank has fourteen wings in the Head Office, Bangalore. 1. Personnel Wing 2. Corporate Credit Wing 3. Risk Management Wing 4. Priority Credit Wing 5. Inspection Wing 6. Department of Information Technology Wing
Canara Bank
7. Marketing and Customer Relationship 8. Planning and Development Wing 9. Recovery Wing 10. General Administration Wing 11. Financial Management Wing 12. Treasury and International Operation Wing 13. Retail Banking and Subsidiaries Wing 14. Vigilance Wing OFFICE AND BRANCHES: Canara bank has a network of 2415 branches, spread over 22states/ 4 union territories of the country and overseas branch @ London which are administrated through Head Office at Bangalore 13 Circles offices / International Division 35 Regional offices 2441 Branches
BRANCHES ABORAD: CANARA BANK established its International Division in 1976, to supervise the functioning of it various foreign department to give the required thrust to Foreign Exchange business, particularly export and to meet the requirements of NRIs.
Canara Bank
Though small in size the Banks presence abroad has brought in considerable foreign business, particularly NRI deposits. The presence of bank is shown under. CANARA BANK, London, UK (Branch) Indo Hong Kong International Finance Co Ltd Hong Kong (Subsidiary) AL Razouki International Exchange company , Dubai, UAE
According to the latest information, both the CANARA BANK and State Bank of India have come into a mutual agreement as to both the banks will be operating as a one unit in the Moscow. CORPORATE VISION: To top as a World Class Bank with best practices in the realms of asset portfolio, Customer orientation, Product Innovation, Profitability an enhanced value for stake holders. To set new standards in IT application, Customer responsiveness, Asset quality and profitability, culminating in higher stoke holder value. To scale new peaks in respect of IT based banking, efficient service delivery market leadership in profitability. CORPORATE MISSION: Augmenting low cost deposits. Toning up asset quality. Accent on cost control.
Canara Bank
Thrust on retail banking. Customer centric focus. Product innovation and marketing. Leveraging IT for comprehensive MIS. Maximize stockholders value.
CORPORATE OBJECTIVE: E- Efficiency. P- Profitability and Productivity. O- Organization Effectiveness. C- Customers centric H- Hi Tech Banking ACHIVEMENTS: The Bank has already carved a niche in providing IT based services. Computerized branches, for 65% of the branches & 81% of aggregated business provided a wide array of services such as Network ATMs, any where Banking , Tele Banking & Remote Access Terminals etc., The Bank was the first to launch networked ATMs & obtain ISO certification. CANARA BANK shares are listed & Bangalore, Mumbai & National Stock Exchanges. Establish well-developed quality circles have participated in many National & International level competitions and have returned with handsome prizes. 15 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Has set up its own Apex level Training colleges to its employees and thereby takes care of the knowledge, skills and attitudinal development of employees. Has also taken initiative in the environmental concerns.
PERRFORMACE HIGHLIGHTS OF 2007-2008 Canara Bank has posted net profit of s.581 cr for the half year ended September 2007 as against Rs.419 cr during the corresponding previous half year, registered a growth rate of 38.60%. The Bank operating profit registered an increase of Rs.548 cr (57.81%) to reach Rs.1496 crore, up from Rs.948 cr for the first half of the preceding financial. Return of assets a standard measure of profitability improved from 1.08% (annualized) at a September 2004 to 1.28% (annualized) as at September 2007. Number of branches moved up to 2441 from 2416 as at September 2004, besides 248 extension counter. Global deposits of the Bank aggregated to as Rs.75, 396crore as against Rs.67734 crore a year ago, year growth being 11.31%. MATURITY CLASSIFICATION OF VARIOUS ASSETS AND LIABILITIES: In respects of the certain Assets and liabilities, CANARA BANK have undertaking a behavior study, embedded options in the basis of past of past data, based on which the bank is in a position to decide on the maturities of the asset and liabilities.
2. a. RESEARCH DESIGN
Canara Bank
A study on the Management of Non Performing Assets in the Canara Banks Loan Portfolio is done at the Canara Bank Donimalai Township, Sandur (TQ), Bellary (Dist), Karnataka State. The type of research used for the collection & analysis of the data is Historical Research Method. The main source of data for this study is the past records prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception & to identify the ways in which the performance especially the non-performing assets of the Canara Bank can be improved. The data regarding bank history & profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with individuals. Data Collection Method Discussion with the manager & officers of the bank to get general information about the bank & its activities. Having face to face discussions with the bank officials By taking guidance from bank guide & departmental guide.
Secondary Data Collection of data through bank annual reports, bank manuals and other relevant documents. Collection of data through the literature provided by the bank.
Research Measuring Tool: The tools used for data collection are: 1. Personal Interview 2. Secondary Sources 1. Personal Interview: 17 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
In this, discussions more held directly with the manager & officials to get the clear-cut information about the topic and data to be collected for the purpose of analysis. 2. Secondary Sources: Annual company reports, Balance Sheets, Profit & Loss account are used to collect the data. b. 1. SATATEMENT OF THE PROBLEM: A crucial issue which is engaging the constant attention of the banking industry is the alarmingly high level of non performing assets (NPA). Another major anxiety before the banking industry is the high transaction cost of carrying non performing assets in their books. The resolution of the NPA problem requires greater accountability on the part of the corporate, greater disclosure in the case of defaults, an efficient credit information sharing system and an appropriate legal frame work pertaining to the banking system so that court procedures can be stream lined and actual recoveries made within an acceptable time frame. So the project titled A study on the Management of Non Performing Assets in the Canara Banks Loan Portfolio looks in to the implications of high NPAs and suggests effective recovery measures for resolving problem loans and thus making the banks NPAs level healthy. It also compares the position of the Canara Bank with other public sector banks in terms of their NPAs in the last three years and also to study the management of total assets and advances of the Canara Bank among other public sector banks. b. 2. OBJECTIVES OF THE STUDY: To evaluate the Canara Banks asset quality. To compare the position of the Canara Bank with other public sector banks in terms of their NPAs. To study the management of total assets and advances of the Canara Bank. 18 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
To identify the effectiveness of the risk management system, undertaken by the bank. To analyze sector wise non-performing assets. To offer useful suggestions to reduce the NPA in banks. b. 3. SCOPE OF THE STUDY: The scope of the study here was confined to the organization only. The study covers to find out the strategy required to reduce the NPAs. The concentration is given only in understanding the NPAs growth with the reference of Canara Bank. The data is purely based on the secondary data collected from website and journal. The scope is limited to drawn conclusions from analysis and interpretations of the primary and secondary data of the Canara Bank. b. 4. METHODOLOGY: Introduction The quality of the project work depends on the methodology adopted for the study. Methodology, in turn, depends on the nature of the project work. The use of proper methodology is an essential part of any research. In order to conduct the study scientifically, suitable methods & measures are to be followed. Research Design The type of research used for the collection & analysis of the data is Historical Research Method. The main source of data for this study is the past records prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception & to identify the ways in which the performance especially the non-performing assets of the Canara Bank can be improved. 19 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
The data regarding bank history & profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with individuals. Data Collection Method Discussion with the manager & officers of the bank to get general information about the bank & its activities. Having face to face discussions with the bank officials By taking guidance from bank guide & departmental guide.
Secondary Data Collection of data through bank annual reports, bank manuals and other relevant documents. Collection of data through the literature provided by the bank.
Research Measuring Tool: The tools used for data collection are: 1. Personal Interview 2. Secondary Sources 1. Personal Interview: In this, discussions were held directly with the manager & officials to get the clear-cut information about the topic and data to be collected for the purpose of analysis. 2. Secondary Sources: Annual company reports, Balance Sheets, Profit & Loss account are used to collect the data.
Canara Bank
b. 5. LIMITATIONS OF THE STUDY: The study is mainly based on the secondary data provided by the bank. As such it is subject to the limitations of the secondary data. The study is based only on NPAs with respect to loans. The study is based on the data given by the officials and reports of the bank. The confidentiality of some facts and figures is a limitation. The non-availability of relevant information is one of the limitations. The study is done only for the limited past 3 years.
Canara Bank 3. THEORITICAL OVERVIEW

NPA ITS IMPACT AND MAGNITUDE: MEANING OF NPA: An asset is classified as non- performing asset (NPA) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. How ever with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by bank to a borrower becomes nonperforming, then the bank will have to treat all the advances / credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exit certain advances / credit facilities having performing status. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and / or installment of installment of principal has remained Past Due for a specified period of time. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where i. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, ii. The account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), iii. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and 22 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
v. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.
90 days overdue norm

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, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; i. Interest and /or installment 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), iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. 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, bank has 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 with 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. 23 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank 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 180 days (to be reduced to 90 days, with effect from March 31, 2004) as on the date of Balance Sheet or credits are not enough to cover the interest debited 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. Asset Type Sub standard (age up to 18 months) Doubtful 1 (age up to 2.5 years) Doubtful 2 (age 4.5 years) Doubtful 3 (age above 4.5 years) Loss Asset 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 recognized 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, VIPs, 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 recognized on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. 24 The Oxford College of Engineering, Bangalore, MBA Programme Percentage of Provision 10% 20% 30% 50% 100%
Canara Bank
If Government guaranteed advances become NPA, the interest on such advances should not to 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 account in the corresponding previous year, should be reversed or provided for if the same is not realized. 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. THE CONCEPT OF GROSS NPA: Income recognition is not possible once an account becomes NPA. Interest accrued on non performing loan accounts is debited to the respective account and credited to the interest suspense account instead of the profit and loss account. Usually no debits are permitted in non performing asset expect unavoidable expenditure like litigation expenses, insurance etc. Hence the balance outstanding in an NPA account includes: 1. Balance as on date of becoming an NPA. 2. Interest accrued but not realized. On balance sheet date banks make provisions for loan losses. This provision is calculated not on the balance outstanding but on the net balance, balance net of the amount kept in the interest suspense account. This book balance of the net of the interest suspense account is known as Gross NPA. But in cases where guarantee claim is received from credit guarantee corporations like ECGC, before making the provision for loan losses, such claim received is also netted from the gross NPA. The terminology net NPA indicates the balance in interest suspense account. For evaluation RBI and other rating agencies rely on purpose usually the net NPA balance. 25 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Thus Gross NPA means, balance outstanding minus balance in interest suspense account. Net NPA means: Gross NPA minus balance claim received amount and provision outstanding in that account. IMPACT OF NPA: At the Macro level, NPAs have chocked off the supply line of Credit of the potential lenders thereby having a deleterious effect on capital formation and arresting the economic activity in the country. At the Micro level, unsustainable level of NPAs has eroded current profits of banks and FIs. They have led to reduction of interest income and increase in provisions and have restricted and recycling of funds leading to various Asset Liability mismatches. Besides this, it has led to erosion in their capital base and reduction in competitiveness. The problem of NPA is not a matter of concern to banks and FIs alone. It is the matter of grave concern to the country and any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy. The mounting menace of NPAs has raised the cost of credit, made Indian business man uncompetitive as compared to their counterparts in other countries. It has made banks more adverse to risks and squeezed genuine Small and Medium Enterprises (SMEs) from accessing competitive credit and has throttled their enterprising spirits as well, to a great extent. Due to their crippling effect on the operation of the banks, Asset quality has been considered as one of the most important parameters in the measurement of banks performance under the CAMELS Supervisory Rating System of RBI. THE MAGNITUDE: Non-Performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this surging threat. Despite various correctional steps 26 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalized Banks, followed by the SBI group, and the all India Financial Institutions. As at 31.03.2004 the aggregate gross NPA of all scheduled commercial banks amounted to Rs.63883 crore. Table No.1 gives the figures of net NPA for the last three years. The ratio of net non-performing assets to net advances also declined during 2005-06. Majority of the banks, this ratio is less than 4 percent. Punjab and Sind Bank has the highest ratio with 9.62 percent followed by Dena Bank of India with 9.4 percent. 4 banks reported nil ratio during 2005-2006. Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures. There is the practice of ever-greening of advances, through subtle techniques. As per report appearing in a national daily the banking industry has under estimated its non-performing assets (NPAs) by whopping Rs.3862.10 Crore as on March 1997. The industry is also estimated to have under-provided to the extent of Rs. 1,412.29 Crore. The worst offender is the public sector banking industry. Nineteen nationalized banks have underestimated their NPAs by Rs. 3,029.29 Crore. Such deception of NPA statistics is executed through the following ways. Failure to identity an NPA as per stipulated guidelines: There were instances of sub-standard assets being classified as standard. Wrong classification of an NPA: Classifying a loss asset as a doubtful or sub-standard asset, classifying a doubtful asset as a sub-standard asset. Classifying an account of a credit customer as substandard and other accounts of the same credit customer as standard, throwing prudential norms to the winds. REASONS FOR NPAs: In Priority Sector Advances: 1. Directed and pre-approved natures of loans sanctioned under sponsored programmes. 27 The Oxford College of Engineering, Bangalore, MBA Programme
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2. Mis-utilization of loans and subsidies. 3. Diversion of funds. 4. Absence of security. 5. Lack of effective follow-up (Post sanction supervision and control) 6. Absence of Bankruptcy and fore-closure loans. 7. Decrepit legal system. 8. Cost in-effective legal recovery measures. 9. Difficulty in execution of Decrees obtained. In Non-Priority Sector Advances: 1. Inadequate credit appraisal. 2. Demand recession. 3. Industrial sickness and labor problems. 4. Slow Legal system. 5. Diversion of funds. 6. Willful default. 7. Technology Obsolescence. 8. Managerial inefficiency. 9. Political compulsion and corruption. WRITING OFF NPAs: In terms of section 43(D) of the Income Tax Act 1961, income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to the banks profit and loss account or received, whichever earlier. This stipulation is not applicable to provisioning required to be made as indicated above. In other words, amounts set aside for aside for making provision for NPAs as above are not eligible for tax deductions.
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Therefore the banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors / tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules. WRITE-OFF AT HEAD OFFICE LEVEL: Banks may write-off advances at Head Office Level, even though the relative advances are still outstanding in the branch books. However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100 percent provision will have to be made there for. DEBT RECOVERY TRIBUNAL: Any person aggrieved by any measure taken by secured creditor or his authorized officer may file an appeal to Debts Recovery Tribunal, within 45days from date on which such measure was taken. That is action of taking possession of asset, takeover of management of business of borrower, appointing person to manage secured asset etc. is taken by the creditor. When a borrower files an appeal, the appeal cannot be entertained unless, the borrower deposits 75% of the amount claimed in the notice by secured creditor. The DRT can waive or reduce the amount required to be deposited. The amount is not required to be deposited at the time of filing appeal, but appeal will not heard till the amount is deposited. The borrower while filing the appeal should also file an application requesting the Debt Recovery Tribunal to admit the appeal without deposit of any amount. If the DRT orders partial deposit of the amount and the same is not deposited, appeal can be dismissed. The 75% deposit is only required if the appeal is filed by the borrower. If some other aggrieved person (e.g. guarantor, shareholder) files it the deposit is not required. If a person is aggrieved by the order of the DRT, it can file an appeal to the Appellate Tribunal within 30days from the date of receipt of the DRT order.
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If the DRT or Appellate Tribunal holds that possessions of assets by the secured creditor was wrongful and directs the secured creditor to return asset to concerned borrower, the borrower shall be entitled to compensation and costs as may be determined by DRT or Appellate Tribunal. SECURITIZATION ACT: With the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to clear their dues within 60days. Once the borrower receives a notice from the concerned bank and the financial institution, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, bank can also takeover the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to either sell the defaulting companies or charge their management.
OVERALL BANKING AND NPA

BANKING REFORMS IN INDIA: The Nationalization of the major commercial banks in the year 1969 and 1980 had brought radical changes in the banking system in India. It had brought about major shifts in the priorities in the banking operations. Branch expansion policies of banks were tuned upto meet the banking needs of the people in rural and semi urban centers. For accelerating the socio-economic and rural development process several Governments sponsored programs were launched and lending in the priority sector, irrational lending under socio political pressures, mounting levels of bad debts, branch expansion at non viable centers etc. gradually started affecting the financial health of the banking sector in the country. Commercial banks were not following uniform accounting policies camouflaged the true financial position of banks. Quality of loan asset was not a concern 30 The Oxford College of Engineering, Bangalore, MBA Programme
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and a high proportion of loan assets started becoming non performing. Most of the banks were under capitalized and some of them even with negative worth. Thus there was a compelling need for a change and various policy corrections had to be taken with the view of strengthening the economy. Thus the Government of India was forced to initiate a process of reforming the financial sector which banks constitute a dominant part. The reforms process includes: 1. Introduction of prudential norms. 2. Transparency in balance sheets. 3. Deregulation of interest rates. 4. Partial deviation from directed lending. 5. Upgradation of technology. 6. Entry of new private sector banks. NARASIMHAM COMMITTEE: The first phase of banking sector reforms was initiated in the year 1992 in pursuance of recommendations of the committee on financial sector reforms headed by Narasimham Committee. As per the recommendations of Narasimham Committee, The Reserve Bank of India introduced in a phased manner, prudential norms for income recognition, asset classification, and provisioning in the year 1998 Narasimham Committee-II came out with more stringent norms for the industry. The prudential norms were revised from time to time to fall in line with the best accounting practices and for transparency in published accounts. It is widely recognized that as a result of these reforms, the Indian Banking System is becoming increasingly mature in terms of the transformation of business processes and the appetite for risk management. Deregulation, technological upgradation and increased market integration have been the key factors driving change in the financial sector.
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EMERGING BANKING TRENDS: During the current financial year, the focus of non-going reforms in the banking sector was on soft interest rates regime, increasing operational efficiency of banks, strengthening regulatory mechanisms and on technological up-gradation. As a step towards a softer interest rate regime, RBI in its Annual Policy Statement had advised banks to introduced flexible interest rate system for new deposits, announce a maximum spread over PLR for all advances other than consumer credit and to review the present maximum spread over PLR and reduce them wherever they are unreasonably high.
A BRIEF HISTORY OF NPA:

The concept of Asset Quality on the books of Public Sector Banks (PSBs) and Financial Institutions (FIs) came into being when Reserve Bank of India (RBI) introduced prudential norms on the recommendations of the Narasimham Committee in the year 1992-1993. The Committee recommended that an asset may be treated as NonPerforming Asset (NPA), if interest or installment of principal remains overdue for a period exceeding 180days and that banks and FIs should not take into their income account, the interest accrued on such Non-Performing Assets, unless it is actually received or recovered. The Committee also recommended that Assets be classified into four categories namely Standard, Sub-standard, Doubtful and Loss Assets and that certain specified percentage of the same be held as provision there against. Before the reform process, banks were booking income on an accrual basis and their balance sheets did not reflect their true specified financial health. Thus the profit, capital and reserves were overstated by them. After 10years of NPA terror in the banking industry, Now the Banks Have Teeth, a new law lightens the burden of bad loans for Indian Banks. The law that has been the catalyst for the bad loan clean up passed Indias Parliament in November 2002. It allows lenders to more easily foreclose on debtors assets or even demand a change in management. Within weeks of the laws passage, banks saw a flood of loans once deemed unrecoverable being repaid in double time. The Act is The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Also 32 The Oxford College of Engineering, Bangalore, MBA Programme
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know as the Securitization Act). This Act enables the setting up of asset management companies for addressing the problems of non-performing assets of banks and FIs. INDIAN BANKING AND NPA: The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective postdisbursement supervision. Banks concerned should continuously monitor loans to identity accounts that have potential to become non-performing. The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. GLOBAL NPA: The core banking is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. A question that arises is how much risk can a bank afford to take? Recent happenings in the business world Enron, WorldCom, Xerox, Global Crossing do not give much confidence to banks. In case after case, these giant corporates became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor 33 The Oxford College of Engineering, Bangalore, MBA Programme
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welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. It needs to be recognized that prudential norms in respect of loan classification vary widely across countries. A country follows varied approaches, from the subjective to the prescriptive. Illustratively, in the United Kingdom, supervisors do not require banks to adopt any particular form of loan classification and either is there any recommendation on the number of classification categories that banks should employ. Other countries, such as, the United States follow a more prescriptive approach, wherein loans are classified into several categories based on a set of criteria ranging from payment experience to the environment in which the debtor evolves. The adoption of such a system points to the usefulness of a structured approach those facilities the supervisors ability to analyze and compare banks loan portfolios. India is a better bet than China for investors to pump money into non-performing assets (NPAs) restructuring as it has better environment for recovery, according to consulting firm Price water House Coopers (PwC). WARNING: STANDARD & POOR: Standard & Poors and The Credit Rating Information Services of India Ltd., (CRISIL) estimate that Indias schedule commercial banks require between US$11billionUS$13billion in new capital to support losses embedded in impaired assets. The significant capital shortfall estimated recognizes the existing moderate reported capital position of Indian banks, the inadequate loan loss reserves maintained by the banks to absorb likely losses. The weak capital position of the Indian banking system is largely a reflection of growing asset-quality problems stemming from weak underwriting and credit management system, and the vulnerabilities of the Indian banking sector to the impact of globalization on the countrys key industry sectors. The asset-quality position also has suffered from regulations with respect to lending to priority sectors. The capital shortfall calculated 34 The Oxford College of Engineering, Bangalore, MBA Programme
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assumes a significantly higher system non-performing loan level to that reported under Indian regulatory standards, said Peter Sikora, associate director, Financial Services Rating, Standard & Poors, together with CRISIL are, however, of the view that non performing loan levels for Indian banks will be significantly higher at 20%-25% if more conservative classification standards are adopted and restructured, and ever greened loans are included as impaired assets. LENDING BEHAVIOUR OF BANKS: Due to the excess liquidity in the banking system, banks are now giving credit to even non-priority sectors in an aggressive manner. Now banks give credit more to unproductive purposes, like car loans, housing loans, consumer durables loans and personal loans. This reckless lending paves the way to repayment irregularities and more of NPA in the banking system. But on the others side economy has become buoyant and the borrowers are now in a position to repay the loans even if it is an unproductive loan. Banks have improved their credit appraisal system. NPA percentage in City Banks Car Loan Portfolio is zero, because of the sophisticated credit appraisal system followed by the bank. Banks now give priority to businesses and lending schemes also follow the path. CLASSIFICATION OF ASSETS: CATEGORIES OF NPAs: Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing 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 31March 2001, a sub-standard asset is one, which has 35 The Oxford College of Engineering, Bangalore, MBA Programme
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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 is not enough recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. With effect from 31March 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months. DOUBTFUL ASSETS: A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31March 2001, as 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 know facts, conditions and values highly questionable and improbable. With effect from 31March, 2005, an asset to be classified as doubtful if it remained in the sub-standard category for 12 months. LOSS ASSETS: A loss asset is one where loss has been identified by the bank or internal or external auditors 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. It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the presentation of advances in the bank balance sheet. The Third Schedule to the Banking Regulation Act 1949, solely governs presentation of advances in the balance sheet. Banks have started issuing notices under The Securitization Act,2002 directing the defaulter to either pay back the dues to the bank or else give the possession of the secured 36 The Oxford College of Engineering, Bangalore, MBA Programme
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assets mentioned in the notice. However, there is a potential threat to recovery if there is substantial erosion in the value of security given by the borrower or if borrower has committed fraud. Under such a situation it will be prudent to directly classify the advances as a doubtful or loss asset, as appropriate. RBI GUIDELINES FOR CLASSIFICATION OF ASSETS: Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extent guidelines. UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAs: If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as standard accounts. Asset Classification to be borrower-wise and not facility-wise: i. It is difficult to envisage a situation when only one facility to borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPAs and not the particular facility or part thereof which has become irregular. ii. If the debts arising out of development of letter of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account for 37 The Oxford College of Engineering, Bangalore, MBA Programme
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should be treated as a part of the borrowers principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. Accounts where there is erosion in the value of Security: i. A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightaway classified as doubtful or loss asset as appropriate. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. ii. If the realizable value of the security, as assessed by the bank / approved valuers / RBI is less than 10 percent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straight away classified as loss asset. It may be either written off or fully provided for by the bank. RESTRCTURING / RESCHEDULING OF LOANS: A standard asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production should be classified as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. In the case of sub-standard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms. Following representations from banks that the foregoing stipulations deter the banks from restructuring of standard and sub-standard loan assets were reviewed in March 2001. In the context of restructuring of the accounts,
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the following stages at which the restructuring / rescheduling / renegotiation of the terms of loan agreement could take place can be identified: a) Before commencement of commercial production. b) After commencement of commercial production but before the asset has been classified as sub-standard. c) After commencement of commercial production and after the asset has been classified as sub-standard. PROVISIONING REQUIREMENTS: As and when an asset is classified as an NPA, the bank has to further sub-classify it into sub-standard, loss and doubtful assets. Based on this classification, bank makes the necessary provision against these assets. Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank advances where the recovery is doubtful. Banks are also required to comply with such guidelines in making adequate provision to the satisfaction of its auditors before declaring any dividends on its shares. In case of loss assets, guidelines specifically require that full provision for the amount outstanding should be made by the concerned bank. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset. Asset Type Sub-Standard (age upto 18 months) Doubtful 1 (age upto 2.5years) Doubtful 2 (age 4-5years) Doubtful 3 (age above 4-5years) Loss Asset THE NPA PROBLEM: The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post39 The Oxford College of Engineering, Bangalore, MBA Programme Percentage of Provision 10% 20% 30% 50% 100%
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disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. The performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced t make provision on such assets as per the RBI guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks. Further, RBI successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non performing assets. CREDIT APPRAISAL SYSTEM: Prevention of standard assets from migrating to non performing status is most important in NPA management. This depends on the style of Credit Management Mechanism available in banks. The quality of credit appraisal and the effectiveness of post credit appraisal and effectiveness of post credit follow up influences the asset quality of the banks in a big way. At Pre-Credit Stage: 1. Extensive enquiry about the character and the credit worthiness of the borrower. 2. Viability of the project to be financed is meticulously studied. 3. Adequate coverage of collateral is ensured to the extent possible. 4. Financial statement of the borrower is obtained and poor analysis of their financial strength is done. 5. Apart from the published financial statements independent enquires are made with previous bankers. 6. Pre-Credit inspection of the assets to finance is made.
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At Post-Credit Stage: 1. Operations in the account are closely monitored. 2. Unit visit is done at irregular intervals. 3. Asset verification is done on a regular basis. 4. Borrowers submit control returns regularly. 5. Accounts are periodically to evaluate the financial health of the unit. 6. Early warning signals are properly attended to. 7. Close contract with the borrower is maintained. 8. Potential NPAs are kept under special watch list. 9. Potentially viable units are restructured. 10. Repayment program of accounts with temporary cash flow problem is rescheduled. Immediate legal action is initiated in cases where the default is willful and the intention of the borrower is bad. CREDIT MONITORING: Credit Monitoring System is for: 1. Preventing the slippage of quality assets through the monitoring of standard assets. 2. Upgradation of quality of impaired loan asset through recoveries by means of legal or otherwise. 3. Upgradation of loan assets through nursing in deserving and viable cases. WARNING SIGNALS: 1. Default in servicing periodic installments and interest. 2. Accumulation of stock & non-movement of stock. 3. Operating loss / net loss. 4. Slow turnover of debtors & fall in level of sundry creditors. 5. Return of outward bills for collection / return of cheque. 6. Labor troubles. 41 The Oxford College of Engineering, Bangalore, MBA Programme
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7. High turnover of key personnel. 8. Loss of critically important customers. 9. Court cases against the unit. 10. Avoidance of contacts with the bank. 11. Delayed submission of financial statements. 12. Disputes among partners / promoters. CREDIT RISK AND NPA: Quite often credit risk management (CRM) is confused with managing non-performing assets (NPAs). However there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present. i.e. they represent credit risk that has already materialized and default has already taken place. On the other hand, managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk. Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business. CREDIT INFORMATION BUREAU (CIB): It is in this context that the facility of Credit Information Bureau (CIB) becomes relevant. A CIB provides an institutional mechanism for sharing of credit information on borrowers and potential borrowers among banks and FIs. It acts as a facilitator for credit dispensation and helps mitigate the credit risk involved in lending. Based on crosscountry experiences, initiatives have been taken in India to establish a credit information bureau. The Bureaus established in these countries collect information on both individual borrowers (retail segment) and the corporate sector.
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EXCESS LIQUIDITY: Now banks are faced with the problem of increasing liquidity in the system. Further, RBI is increasing the liquidity in the system through various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy away from such an option due to the high risk of default. In order to promote certain prudential norms for healthy banking practices, most of the developed economies require all banks to maintain minimum liquid and cash reserves broadly classified in to Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR). Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the form of Cash Reserve or by way of current account with the RBI, computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks. On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second proceeding fortnight, as the RBI may specify from time to time. A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBIs vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. As a result of which, banks are little reluctant in granting loans to corporates. As such, through in its monetary policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers. HIGH COST OF FUNDS DUE TO NPA: Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant in providing the requisite funds to the
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genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lenders losses caused due to high level of NPAs. Therefore, quite often corporates prefer to arise funds through commercial papers (CPs) where the interest rate on working capital charged by banks is higher. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to sell the assets of the defaulting companies or charge their management. But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty increases with the passage of time, there is all possibility that the recoverable value of asset also reduces and it cannot fetch good price.
MEASURES FOR NPA CONTAINMENT:

MEASURES TO TACKLE NPAs: Seeing the gravity of the situation, RBI has taken several constructive steps for arresting the incidence of NPAs. It has also created a regulatory environment to facilitate the recovery of existing NPAs of banks. 1. Lok Adalats: Lok Adalats have been set up for recovery of dues in accounts falling in the doubtful and loss category with outstanding balance up to Rs.5lakh, by way of compromise settlements. This mechanism has, proved to be quite effective for speedy justice and recovery of small loans. 2. Debt Recovery Tribunals: DRTs which have been set up by the Government to facilitate to speedy recovery by banks / DFIs, have not been able to make much impact on loan recovery due to a variety of reasons like inadequate number, lack of infrastructure, under-staffing and frequent adjournment of cases. It is essential that the DRT mechanism is strengthened and DRTs are vested with a proper enforcement mechanism to enforce their orders. Non-observance of any order passed by the Tribunal should amount to contempt proceedings. The DRTs could 44 The Oxford College of Engineering, Bangalore, MBA Programme
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also be empowered to sell the assets of the debtor companies and forward the proceeds to the Winding-up Court for distribution among the lenders. Also, DRTs could be set up in more centers preferably in district headquarters with more presiding officers. 22 DRTs have been set up in the country during the half last a decade. DRTs have not been able to deliver, as they got swamped under the burden of large number of cases filed with since their inception. 3. Corporate Debt Restructuring: Corporate Debt Restructuring (CDR) mechanism is an additional safeguard to protect the interest of the creditors and revive potentially viable units. The CDR system was set up, in accordance with the guidelines of RBI evolved in consultation with Government of India. The objective of the CDR system is to ensure a timely and transparent mechanism for restructuring of corporate debts of viable entities and to minimize the losses to the creditors and other stakeholders through an orderly and co-ordinated restructuring programme. With CDR, banks can arrest fresh slippage of performing assets into the magnitude of assets. Under the system standard, sub-standard and doubtful assets can be restructured. The CDR mechanism is based upon effective co-ordinate among banks. 4. Asset Reconstruction Companies (ARCs): One of the most effective ways of removing NPAs from the books of the banks / DFIs would be to move these out to a separate agency which would buy the assets and make its own efforts for recovery. On this front, the SRES Act has provided a frame work for setting up to Asset Reconstruction Companies (ARCs) in India. A pilot company called Asset Reconstruction Company (India) Ltd (ARCIL) has been set up under the joint sponsorship of IDBI, ICICI Bank, SBI and other banks which is likely to provide an effective mechanism for banks to deal with the defaulting companies. RBI has already issued final guidelines on the regulatory frame work for ARCs in April, 2003. However, the success of ARCs will again depend upon the legal frame work which has to be addressed first. Legal provisions are required for transfer of the 45 The Oxford College of Engineering, Bangalore, MBA Programme
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existing loan portfolio to the ARCs without the consent of the borrowers, for exercise of the power of private foreclosure by ARCs, authorizing ARCs to take recourse to the Debt Recovery Tribunals and granting exemption to ARCs from income-tax in order to mobilize resources by issue of bonds and exemption to ARCs from payment of stamp duty on conveyance / transfer of loans assets. 5. Reduction in NPAs: The problem of the existing NPAs is currently being tackled in several ways. Efforts are made through negotiations and discussions with the borrowers to bring them around to settle the dues. Such settlements in the form of One-time settlement (OTS) and Negotiated Settlement (NS) are now being increasingly used by banks to reduce the level of NPAs. Under these schemes banks focus on maximum payment under the settlements being received up-front, and balance within the same financial year for quicker realization of locked up proceeds. However, despite such efforts made by the lenders, many defaulting borrowers exhibit reluctance to co-operate, leaving the banks no option but, to seek the legal route. Here lies the importance of a transparent legal system. Reforms in the existing legal system will go a long way in reducing the level and growth of NPAs in the banking system. 6. Legal Reforms: The legal frame work sets standards of behavior for market participants, details the rights and responsibilities of transacting parties, assures that completed transactions are legally binding and also provides the regulators with the necessary teeth to enforce standards and ensure compliance and adherence to law. Thus the legal frame work is a key element for limiting moral hazards in Indian Banking. As the problem of NPAs is closely linked with the issue of legal reforms the Government has taken up initiatives to align the legal set-up with the requirements of the banking system. As early as in 1999 the Andhyarujina Committee set up by Government of India to formulate specific proposals to give effect to the suggestions made by the Narasimham Committee (1998) recommended amending the Recovery of Debts due to the Banks and Financial Institutions Act 1993 and Sick Industrial Companies Act, 1995. It also recommended a new legislation for banks and Financial Institutions to take 46 The Oxford College of Engineering, Bangalore, MBA Programme
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possession and sale of securities without the intervention of the Court, in respect of both immovable property and movable assets which resulted in the enactment of SRFAESI Act 2002. The Committee also considered securitization as an instrument to tackle the NPA problem. 7. Securitization: Securitization enables risk sharing and trading of loans where the bad assets of banks can be securitized and sold at a discount. The lending institutions NPAs are hence removed from their balance sheets and are instead funded by investors through negotiable financial instruments. The security is backed by the expected cash flows from the assets. With securitization the NPAs in a banks balance sheet can be cash upfront, which could be put to productive use. High incidence of stamp duties makes securitization transactions unviable. Under statutory assignment, securitization involves transfer of debt, which can be effected only by means of an instrument in writing. Every instrument by which property, whether movable or immovable, is transferred attracts as valorem stamp duty. Also, stamp duties being a state subject, vary from State to State. How they are bad for the economy? NPAs constitute a real economic cost to the nation in that they reflect the application of scarce capital and credit funds to unproductive uses. The money locked up in NPAs are not available for productive use and to the extent that banks seek, to make provisions for NPAs or to write them off, it is a charge on their profit. To be able to do so, banks have to charge their productive and diligent customers a higher rate of interest. It thus becomes a tax on efficiency. It is the customer who uses credit efficiently that subsidizes the inefficiency represented by NPAs. This also raises the transaction costs in the system thus denying the diligent credit customers the benefits of lower rates, which would help them to be more efficient and competitive. NPAs, in short, are not just a problem for the banks. They are bad for the economy.
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RISK MANAGEMENT: Banking and risk are inseparable and risk management assumes significance as the banks have to take considerable risks. Analysis of risks also assumes importance as it determines the pricing for the products. As banking is subject to several types of risks like market risk, credit risk, liquidity risk, default risk, interest rate risk, investment risk, transaction risk, forex risk, etc., proper perception and evaluation of risk is extremely important and any short comings on this score can play havoc on the financial decision. It has been seen that in banks managing NPAs has been a reactive response rather than a proactive function. In a market driven environment, volatility and risk have increased considerably in any credit dispensation. Hence, a proper perception and evaluation of risk becomes essential along with market intelligence about the industry concerned. EFFECTIVE APPRAISAL AND MONITORING OF LOANS: In the present liberalized environment, globalization has a far reaching impact on the fortunes of the domestic industry and the bankers have to be alert and equip themselves with the knowledge of the knowledge of the latest global trends and also study on an ongoing basis its implications on the industries financed by them. Thus, the appraisal and monitoring mechanism for loans needs to be revamped for control of NPAs. Banks need a robust end-to-end credit process. A robust credit process begins with an in depth appraisal focused on risks inherent in a loan proposal. Along with appraisal close monitoring of the loan account is equally important. It is a well-known fact that loans often go bad due to poor monitoring. An account does not become an NPA over night. Systems should be in place such that the banker should be alert to catch signals of an account turning into NPA and quickly react, analyze, and take corrective action. Banks should have a proper system in place to ensure that to the extent possible the assets are performing and do not turn into NPAs. In cases where the problems are of a short term nature and borrowers agree to clear the overdues with in a short time period, temporary deferment is generally granted by the banks. In cases where the company requires longer time, depending upon the problems faced and the expected future cash flows, the proposals are considered for restructuring / re-phasement of the dues. 48 The Oxford College of Engineering, Bangalore, MBA Programme
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All cases should be reviewed regularly and on the basis of review, stress cases are identified which require more closer and effective monitoring. For these cases it becomes imperative to keep a close watch on the working of the company by taking up regular visits, calling for progress reports with greater frequency, engaging the services of concurrent auditors / technical consultants to exercise proper supervision and to obtain independent report / assessment.
ASSETS RECOVERY BRANCH: Assets Recovery Branches are specified branches for recovering NPA. The personnel in the branches are professionally competent to deal with defaulters and ensure repayment. It is meant for shifting the work of high problem loans recovery of main branches to specialized branches. It gives time to other branches to concentrate more upon branchs business development activities.
90 DAYS OVERDUE EFFECT: 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 changing 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. There are two aspects to the adoption of the 90 days overdue norm for identification of NPAs. The negative aspect is that NPAs will increase in the short term. But the positive aspect is that banks will be become pro-active in detecting smoke signals about an account becoming bad and accordingly initiate remedial steps.
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PROBLEM LOAN IDENTIFICATION: IDENTIFICATION OF ACCOUNT: i. ii. iii. Term loan if interest / installments are overdue for four months & above. Check on overdue, cash credit account if it is out of order continuously for four months. In other loans if overdue four months & more.
REASONS FOR NON PERFORMANCE IN LOAN ASSETS: 1. Antiquated legal system in the country & the defaulter taking shelter under this. 2. Even DRT cases are not getting settled the way it was envisaged when tribunals were set up. 3. Most of the NPAs have the cover of collaterals by way of EM of landed properties. But real estate market is depressed & thus impacted recoveries. Many large corporate borrowers have turned wish defaulters taking shelters under BIFR umbrella. 4. NBFCs are in doldrums, their recoveries are adversely affected & strictures on accepting deposits has caused further resource crunch ultimately defaulting the banks, top priority being repayment of deposits. The bank has the highest exposure under this sector where the incidence of non performance is higher. 5. Textile industry is plagued by high cost of production & low returns, & is running in loss and many units are being closed down. 6. The bank got fairly good exposure in real estate. The depressed real estate market has resulted in poor recovery rate in almost the entire segment. 7. In agriculture sector poor recovery has been due to various factors-recovery & RPDS advances has been affected by the sharp fall in rubber prices. Through out the country aqua culture miserably failed due to reasons beyond the control of the borrowers we are not an exception. 8. Poor recovery in schematic loans is mainly due to willful default by the borrowers.
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9. Default in share loans has been due to setback in securities market & sharp decline in the values of equities. RECOVERY ROUTE: i. ii. Lok Adalat. Compromise route is the most effective and time consuming procedure, due to the delay in obtaining a favorable decree, further delay in the execution of the decree, the securities available to bank may get depreciated or alleviated. COMPROMISE ROUTE IS POSSIBLE IN THE FOLLOWING CASES: 1. When all the remedies other than filing a suit are exhausted. 2. Activity of the borrower closed / become unviable due to reasons beyond his control & overdue mounting up due to application of application of interest / penal interest & other charges & the recovery of the debt has become doubtful. 3. Legal position of the bank is weak. 4. Values of the primary / collateral securities are inadequate. 5. Not a willful defaulter. RECOVERY MANAGEMENT SSUGGESTIONS FOR IMPROVEMENT: 1. Recovery camps to be conducted at centers identified as having higher concentration of irregular loans in the times of revenue recovery camps. 2. Across the table decisions on compromise proposals submitted at the recovery campus. Officials from corporate office who attend such campus to be delegated with powers to arrive at decisions as above. 3. Asset recovery cells to be strengthened with additional professional man power. 4. At branches where concentration of NPA is more, one of the members of the award staff who is well versed with locality and the borrowers should be spared from other works of the office and asked to facilitate recoveries through personal
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visits and assisting the recovery officers in the unit / borrower visits. Conveyance expenses incurred by such staff members to be reimbursed. ASSET RECOVERY DEPARTMENT: 1. Asset Recovery Department will conduct a study of banks exposure in different sectors, types of advances and other various parameters vis a vis the NPA position and the findings will be communicated to all field functionaries for initiating corrective action. 2. Efforts shall be taken by branches to speed up the disposal of non-banking assets at the possession of the bank. The real effect of the continuing menace of NPA will have a cascading effect on the bottom line because of the higher and higher provisions required on such accounts. Therefore the management of NPA calls for a short term and long term strategy. Prevention from further deterioration and recovery of the existing NPAs alone are the two alternatives for us to come out of the present problems. DEALING PROBLEMS LOANS: ASSETS COMING UNDER SMALL VALUE SEGMENTS: 1. Accounts with net balance up to Rs.5000 are identified as small value assets and considering the huge volume of such accounts, we had taken decision to shed such assets coming under priority sector. (Loss and doubtful category only) and regional heads are given delegation to write-off such assets. 2. Now its felt that small value band can be extended upto Rs.10000. Similarly, non priority sector, small loans identified as loss or doubtful will also have to be shed to give administrative efficiency upto larger NPAs. 3. Recovery policies in this segment shall be more flexible and functionaries at regional office shall be given complete freedom in the settlement of such accounts. Most of the accounts under this category come under priority sector and primary / collateral securities are not generally available and many
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borrowers are not even available for contact, there is no such scope for legal action also. Hence recovery done by means of: Personal contacts. Persuasion. Compromise. Revenue recovery. 2. Salvage operations are to be intensified for effecting recoveries under loss asset categories and also in cases where we have already shed assets. 3. Incentive schemes for motivating members of staff are to be built in the recovery policy of the bank. Considering the above facts, the department suggests the following measures for the optimum recovery in the small value band upto Rs.10000.00 1. No legal actions to be initiated against borrowers coming under the small valued band. 2. In cases of failure of letter personal contact and persuasion fall, go for compromise. 3. Services of approved recovery agents can be considered very discreetly in the recovery of small value accounts. 4. If all the above efforts fall the regional heads can use their discretion for shedding such assets. 5. The decision of compromise and shedding of loss / doubtful assets will be done through committee approach at the regional offices. 6. In case of doubtful / loss assets category and assets already written off, members of the staff can be given incentives including reimbursement of actual experiences incurred restricted to a certain percentage of recovery. SUB-STANDARD ASSETS: This segment is more effort elastic in terms of recovery and hence the banks recovery policy is to be tuned up for maximizing the recoveries from the sub-standard efforts. 53 The Oxford College of Engineering, Bangalore, MBA Programme
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NPA RECOVERY ACTION PLAN: 1. Send simple reminder letters in installments / interest debited are not serviced on due dates. 2. If no results are forthcoming from the reminders, meet the borrower in person and persuade them to settle the accounts in persons. 3. Officials from the assets recovery cell at the regional office to compulsorily meet the borrower with Rs.5lakhs and evaluate the reasons for non performance of account and suggest / evolve methods to improve the quality. 4. In cases of sick but viable industries units prospects for rehabilitation are to looked into and nursing programme to be evolved. 5. If the accounts have become NPA due to cash flow problem the repayment programme must be rescheduled according to the revised cash flow projections. This will enable the bank to maintain asset quality at the same level for 2 years, if the asset quality can be upgrade after two years, if the repayment is coming as per the redrawn schedule. 6. If the borrower is co-operative the settlement through compromise route to be considered. DOUBTFUL ASSETS: Slippage of assets from sub-standard category to doubtful necessitates higher provisions requirements. Depending on the age of the asset, 20% to 50% provision has to made on such assets on the secured portion and 100% provision is required on the unsecured provision. Recovery of the doubtful assets in the normal course is difficult; the following strategies can be adopted in handing doubtful assets: 1. Borrowers are to be met in person to get the accounts settled through persuasion. 2. Ensure that the securities charged to the bank are in tact and are not alienated. 3. Securities are to be inspected at periodic intervals and correct value properly recorded. 4. Legal remedy is the last resort.
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5. Most of the accounts coming under this category are either suit filed or RR initiated. In case of suit filed accounts, cases are to be closely followed up with the advocated to ensure that the decree is obtained within a reasonable time. LOSS ASSETS: CHANCES OF RECOVERY IN MOST OF THESE CASES ARE VERY REMOTE: 1. If recovery in the normal course is difficult, we may have to resort to legal remedies against the borrowers, guarantor, co-obligate, and efforts shall be made to bring them to a compromise table for the settlement of the accounts. 2. In case of accounts coming under priority sector, recovery through the RR route is to be resorted to. 3. As per loss assets are concerned we have made 100% provision for loan losses. Hence there will not be any further impact on bottom line. If these assets are shed, notionally from the books of the bank. Such notional write-off will help in cleansing the balance sheet. 4. Even after write-off the branches can continue the recovery efforts thus made and can improve the bottom line of the bank. 5. Recovery through legal action is time consuming.
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4. ANALYSIS & INTERPRETATIONS OF DATA

FINANCIAL ANALYSIS:
The term financial analysis refers to the process of determining financial strengths and weakness of the firm by establishing strategic relationship between the items of balance sheet, profit and loss account other operative data. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm.
NON PERFORMING ASSETS RATIO: NET NPA RATIO: It is the most important ratio which measures the NPA as a percentage of advances.
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CANARA BANK PROGRESS AT A GLANCE (Amt in Crore) 2003-04 No. of branches Capital Reserves Deposits % Growth Non-Resident Deposits Foreign Business Turnover Advances (Net) % Growth Advances to Priority Sector Agriculture Small Scale Industries Advances under DIR Scheme Advances to SC/ST Export Credit Deposit Accounts (in Millions) Borrowal Accounts (in Millions) Total No. of Staff Total Income 2409 578 2894 64030 8.4 11358 59333 33127 19.02 10536 3888 3366 18 478 3672 23 2.38 47796 7799 2004-05 2424 410 3739 72095 12.6 12482 65676 40472 22.17 14604 5407 3884 21 598 4429 23 2.64 47566 8170 2005-06 2469 410 4842 86345 19.77 12909 47347 47639 17.71 19580 6545 4971 38 758 5497 22.48 2.88 47613 9080
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Total Expenditure 6143 6173 6221
Operating Profit Net Profit IMPORTANT RATIOS (%) Capital Adequacy Ratio Return on Assets (RoA) Earning Per Share (Rs) Book Value (Rs) Net NPA Ratio Priority Credit to Net Credit Business per Employee (Rs.in crore) Profit per Employee (Rs in Lakh)
1656 741
1997 1019
2859 1338
11.88 1.03 12.83 57.84 3.89 41 2.15 1.64
12.5 1.24 20.56 98.14 3.59 42 2.5 2.26
12.66 1.34 32.63 125.14 2.89 44 3 2.97
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TABLE: 1 Table showing Net NPA Ratio% from 2003-04 to 2005-06 2003-2004 3.89 GRAPH: 1 Graph showing Net NPA Ratio% from 2003-04 to 2005-06 2004-2005 3.59 2005-2006 2.89
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2003-2004 2004-2005 NET NPA RATIO% 2005-2006
Interpretation Prudent asset management was accorded greater emphasis during the year 2005-2006. Gross NPA of the bank as at March 2006 stood higher at Rs.3127 crore. Primary due to the introduction of new 90 day norms. As a result Gross NPA ratio of the bank stood at 6.33% compared to 5.96% a year ago. While Net NPA of the bank stood at Rs.1378 crore, Net NPA ratio came down to 2.89% from 3.59% asset March 2005. On the recovery front, the banks performance under cash recovery stood at Rs.606 crore compared to Rs.563 crore a year before. During the year 7107 recovery meets were 59 The Oxford College of Engineering, Bangalore, MBA Programme
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conducted by the bank leading to statement of 21201 accounts involving compromise amount of Rs.274.77 crore and resulting in recovery of Rs.187.46 crore. TABLE: 2 Table showing Capital Adequacy Ratio from 2003-04 to 2005-06 2003-2004 11.88 GRAPH: 2 Graph showing Capital Adequacy Ratio from 2003-04 to 2005-06 2004-2005 12.50 2005-2006 12.66
12.8 12.6 12.4 12.2 12 11.8 11.6 11.4 2003-2004 2004-2005 Capital Adequacy Ratio 2005-2006
Interpretation The banks owned funds, as at March 2005 aggregated to Rs.1531 crore as against Rs.4024 crore as while the banks capital stood at 410 crore. In order to further argument its capital base, the bank raised their 2nd capital worth Rs.250 crore during 2005-06. Capital to Risk weighted Asset Ratio (CRAR) of the bank improved further to 12.66% as at March 2005 from 12.05% as at March 2005. A dividend of 50% amounting to Rs.205 crore, has been proposed by BOD for the year ended March 2006 including an interim dividend of 25% declared after the finalization of account for first half of 2005-06 and
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fully complying with RBI guidelines on dividend declaration policy. This is as against distributed as dividend for the year 2004-2005. TABLE: 3 Table showing Return on Assets (RoAs) from 2003-04 to 2005-06
2003-2004 1.03 GRAPH: 3
2004-2005 1.24
2005-2006 1.34
Graph showing Return on Assets (RoAs) from 2003-04 to 2005-06
1.4 1.2 1 0.8 0.6 0.4 0.2 0 2003-2004 2004-2005 Return On Assets 2005-2006
Interpretation:
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This ratio correlates between the total assets and the net profit. The return on total assets (also return on capital employed or return on investment) is defined as Net Income (Profit) divided by average total assets. A return of 10 percentages is considered as ideal ratio. As such, if the actual ratio is equal or more than 10 percentage, it indicates the higher productivity of the total resources / assets and vice verse in adverse cases. TABLE: 4 Table showing Earning per Share (EPS) from 2003-04 to 2005-06 2003-2004 12.83 GRAPH: 4 Graph showing Earning per Share (EPS) from 2003-04 to 2005-06 2004-2005 20.56 2005-2006 32.63
35 30 25 20 15 10 5 0 2003-2004 2004-2005 Earning Per Share (EPS) 2005-2006
Interpretation: 62 The Oxford College of Engineering, Bangalore, MBA Programme
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The ratio measures the profit available to the equity holders on a per share basis. It is found out by dividing the amount of profit after tax by the number of shares. The earning per share of the bank has increased drastically in the year 2005-2006 i.e. 32.63 compare to 2003-2004 i.e. 12.83, which is good sign of the bank.
TABLE: 5
Non-Performing Assets as Percentage of Advance Public Sector Banks

As on March 31 Sl.No I 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. II III Name of the Banks NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank State Bank of India [SBI] ASSOCIATES OF SBI State Bank of Bikaner & Jaipur State Bank of Hyderabad 2004 10.57 2.45 5.06 6.02 5.81 3.89 7.98 2.31 16.31 8.28 6.32 3.20 5.32 11.70 4.52 5.45 6.26 7.90 6.02 5.63 5.72 4.97 2005 7.08 1.79 3.72 5.37 4.82 3.59 7.02 1.65 11.83 6.15 5.23 1.40 10.89 3.86 4.29 4.36 4.91 5.52 2.61 4.50 4.13 3.25 in percent Net NPA as % to Net Advances 2006 2.37 0.93 2.99 4.50 2.46 2.89 5.57 1.80 9.40 2.71 2.85 NIL 9.62 0.98 2.58 3.65 2.87 3.75 0.91 3.48 1.24 0.65 63 The Oxford College of Engineering, Bangalore, MBA Programme
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State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore 3.58 7.36 2.94 4.95 5.77 2.66 5.19 1.40 3.53 3.06 NIL 2.96 NIL NIL 1.39
Interpretation: The ratio of net non-performing assets to net advances also declined during 2005-06. Majority of the banks, this ratio is less than 4 percent. Dena Bank has the highest ratio with 9.4 percent followed by Central Bank of India with 5.6 percent. 4 banks reported nil ratio during 2005-06. Net NPA ratio of the Canara Bank declined from 3.59% as at March 31st 2005 to 2.89% as at March 31st 2006. TABLE: 6
Public Sector Banks: Total Assets

As on March 31 Sl.No. Name of the Bank I. NATIONALISED BANK 1 Allahabad Bank 2 Andhra Bank 3 Bank of Baroda 4 Bank of India 84860 5 Bank of Maharastra 6 Canara Bank 7 Central Bank of India 8 Corporation Bank 9 Dena Bank 10 Indian Bank 11 Indian Overseas Bank 12 Oriental Bank of Commerce 13 Punjab National Bank 14 Punjab & Sind Bank 15 Syndicate Bank 16 UCO Bank 17 Union Bank of India 58317 18 United Bank of India 19 Vijaya Bank Total of 19 Nationalized Banks II. State Bank of India (SBI) 2004 24764 20937 70910 69806 21470 72135 52614 23604 18842 30263 35441 32237 72915 13754 31756 31881 44358 22776 16145 674352 348228 24269 19072 791272 375877 24905 82055 57105 26272 20162 35375 41155 33999 86222 14491 34435 34914 51060 25843 24071 922171 407815 64 The Oxford College of Engineering, Bangalore, MBA Programme 2005 28051 24678 76425 76627 32213 99539 63345 29154 22160 39154 47322 41007 102332 15011 47223 43798 Rs. in crore TOTAL ASSETS 2006 34704 27009 85109
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III. ASSOCIATES OF SBI State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7 Associates Total of SBI Group Total of Public Sector Banks GRAPH: 5
15504 22121 9846 10354 17373 9370 16493 101061 449289 1123641
18038 26132 11364 11336 21289 11453 19033 118645 494522 1285794
20256 30646 13044 26897 12837 24003 141441 549256 1471427
13758
Public Sector Banks: Total Assets
1000000 900000 800000 700000 600000 500000 400000 300000 200000 100000 0
Total of 19 Nationalised Banks SBI
Total of 7 Associates 2004 2005 2006
Interpretation: Total Assets of the Public Sector Banks (PSBs) increased from Rs.12,85,794 crore as on 31st March, 2005 to Rs.14,71,427 crore as on 31 st March 2006 showing a growth rate of 14.4 percent which is higher than the growth rate of 11.2 percent of the previous year. 65 The Oxford College of Engineering, Bangalore, MBA Programme
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During the year 2005-06, 14 Banks reported higher growth rate than the average growth rate of the group. Syndicate bank recorded the highest growth in total assets with 37.1 percent during 2005-06. Total Assets of the Canara Bank increased from Rs.82055 crore as on 31st March 2005 to Rs.99539 crore as on 31 st March 2006, showing a growth rate of 21.3% which is higher than the growth rate of 13.8 percent of the previous year.
TABLE: 7
Public Sector Banks: Advances

As on March 31 Sl.No I. 1 15342 2 12885 3 35601 4 45856 5 11732 6 47639 7 22804 8 13890 9 9412 10 14126 11 20295 12 19681
st
Rs. in crore 2004 10482 9678 33663 38311 8255 33127 21288 10987 7523 10908 15162 14158 2005 12544 11513 35348 42633 9508 40472 23159 12029 8436 12275 17447 15677 66 2006
Name of the Bank NATIONALIZED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce
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13 6030 14 47225 15 20647 16 20626 17 Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank 5577 34369 14885 12805 21883 6823 6197 315581 120806 7352 7884 360140 137758 5892 40228 16305 15923 25515
Union Bank of India 29426 18 United Bank of India 7963 19 Vijaya Bank 11045 Total of 19 Nationalized Banks 12225 II. State Bank of India (SBI) 157934
III. ASSOCIATES OF SBI 1 State Bank of Bikaner & Jaipur 8597 2 State Bank of Hyderabad 11814 3 State Bank of Indore 6406 4 State Bank of Mysore 6307 5 State Bank of Patiala 13086 6 State Bank of Saurashtra 5240 7 State Bank of Travancore 11132 TOTAL OF 7 ASSOCIATES [III] 62582 TOTAL OF STATE BANK GROUP [II+III] 220516 TOTAL OF PUBLIC SECTOR BANKS [I+II+III] 632741 GRAPH: 6
5883 8423 4285 4915 8679 4111 7436 43732 164538 480119
6778 9663 5183 5261 10746 4649 9171 51446 189204 549344
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Public Sector Banks: Advances
600000 500000 400000 300000 200000 100000 0 Total of 19 Nationalised Banks (I) State Bank of India (SBI) Total of 7 Associates(III)
2004
2005
2006
Interpretation: The rate of growth in advances showed slight improvement during 2005-06 as compared to previous year. Total advances increased to Rs.6,32,741 crore as on 31 st March, 2006 from Rs.5,49344 crore recording a growth rate of 15.2 percent as against the growth rate of 14.4 percent of the previous year. In the case of nationalized banks there is a marginal improvement in the credit disbursement from 14.1 percent during 2004-05 to 14.5 percent during 2005-06. State Bank Group showed better growth in advances than the nationalized banks group with a growth rate of 16.6 percent during 2005-06 as against 15.0 percent of the previous year. 17 banks recorded higher growth in advances than the group average with Vijaya Bank in the top slot with 40.1 percent. Other banks, which have showed impressive growth in advances were, UCO Bank (29.5 percent), State Bank of Bikaner & Jaipur (26.9 percent), Syndicate Bank (26.6 percent) and Oriental Bank of Commerce (25.5 percent). Central Bank of India recorded a declined growth in advances with 1.5 percent during 2005-06. The total advances of the Canara Bank increased to Rs.47639 crore as on 31st March, 2006 from Rs.40472 crore as on 31st March 2003 recorded a growth rate of 17.7 percent. TABLE: 8
Public Sector Banks: Gross NPA

68
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As on March 31st Gross NPA Sl.No I. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 2347 18 19 II. III. Name of the Bank NATIONALIZED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 Nationalized Banks State Bank of India (SBI) ASSOCIATES OF SBI State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7 Associates Total of SBI Group Total of Public Sector Banks GRAPH: 7 69 The Oxford College of Engineering, Bangalore, MBA Programme 2004 2002 524 4489 3722 906 2112 3243 587 1996 2175 1819 952 1092 4140 1299 1333 2420 1216 603 36630 15486 585 899 320 625 628 443 728 4228 19714 56344 959 506 36884 13506 580 740 295 562 531 354 635 3697 17203 54087 2005 1842 581 4168 3804 958 2475 3244 657 1617 1630 1896 1146 1247 4980 1420 1366 2288 764 390 35549 12667 484 691 266 515 503 200 662 3321 15988 51537 2006 1418 615 3980 3734 954 3127 3092 722 1484 1192 1576 1211 1204 4670 1590 1479 Rs.in crore
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Public Sector Banks: Gross NPA

40000 35000 30000 25000 20000 15000 10000 5000 0 2004 2005 2006 Total of 7 Assosiates Banks Total of 19 Nationalised Banks SBI
Interpretation: Various supportive policy measures coupled with consistent efforts on the part of the banks helped to reduce the gross and net non-performing assets of the banks in absolute terms as on 31st March, 2006. Gross NPA of PSBs declined from Rs. 54,087 crore to Rs.51,537 crore and Net NPA came down from Rs.24,866 crore t Rs.18,859 crore as on 31st March,2005 and 2006 respectively. Gross NPA declined by 24.2 percent during 2005-2006. Seven Banks showed higher growth in Gross NPA than the previous Year. Gross NPA of the Canara Bank increased from Rs.2475 crore to Rs.3127 crore as on 31 st March 2006. Gross NPA increased by 26.3%.
TABLE: 9
Public Sector Banks: Net NPA

70
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As on March 31st Net NPA Sl.No. I. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 II. III. Name of the Bank NATIONALIZED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 Nationalized Banks State Bank of India (SBI) ASSOCIATES OF SBI State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7 Associates Total of SBI Group Total of Public Sector Banks 2004 1160 237 1913 2304 480 4288 1699 253 1227 904 958 454 651 1810 690 724 1338 542 373 22005 6810 342 417 153 362 255 204 425 2158 8968 30973 2005 887 206 1700 2286 459 1454 1563 198 997 755 912 225 639 1527 700 697 1253 406 206 17070 6183 282 315 138 273 161 164 280 1613 7796 24866 2006 363 120 1761 2062 288 1378 1271 250 884 383 578 NIL 577 449 532 753 845 299 100 12893 5442 107 77 NIL 186 NIL NIL 154s 524 5966 18859 Rs. in Crore
Canara Bank
GRAPH: 8
Public Sector Banks: Net NPA
25,000 Total of 19 Associate Banks Nationalised Banks SBI
20,000
15,000
10,000 Total of 17 Associates Banks
5,000
0 2004 2005 2006
Interpretation: In the case of Net NPA, four banks (Oriental Bank of Commerce, State Bank of Indore, State Bank of Patiala and State Bank of Saurashtra) reported zero NPAs. Two banks (Banks of Baroda and UCO Bank) recorded higher growth in Net NPA during 2005-2006 than the previous year. Net NPA of the Canara Bank declined from Rs.1454 crore to Rs.1378 crore as on 31st March 2006. Net NPA decreased by 5.2%.
Canara Bank
TABLE: 10
Public Sector Banks Credit Deposit Ratio

Name of the Bank NATIONALIZED BANKS [I] Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 Nationalized Banks [I] State Bank of India (SBI) [II] ASSOCIATES OF SBI State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore TOTAL OF 7 ASSOCIATES [III] TOTAL OF STATE BANK GROUP [II+III] TOTAL OF PUBLIC SECTOR BANKS 2004 46.25 52.34 54.47 64.29 43.15 51.74 45.16 58.06 48.99 45.38 47.67 49.70 44.68 53.60 52.14 47.69 53.74 34.79 42.21 51.10 44.65 50.45 48.40 54.11 57.65 62.24 54.07 55.24 54.32 46.87 49.57 2005 49.26 54.66 53.26 66.15 42.88 56.14 45.26 55.37 51.15 45.44 47.54 52.59 44.56 53.06 53.18 50.80 57.02 34.96 46.87 52.32 46.52 51.18 46.91 56.23 58.37 60.14 51.36 57.58 54.20 48.39 50.57 2006 48.74 56.17 48.79 64.58 44.36 55.17 40.79 59.89 51.29 46.40 48.92 55.17 44.00 53.72 48.48 52.56 58.20 34.99 52.56 51.92 49.57 54.96 48.70 61.49 56.90 58.23 49.09 56.45 54.77 50.94 51.57 73 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
GRAPH: 9
Public Sector Banks: Credit Deposit Ratio
180 160 140 120 100 80 60 40 20 0 2004 2005 2006 Total of 7 Associates [III] Total of 19 Nationalised Banks(I) State Bank of India
Interpretation: Credit Deposit Ratio (C/D) of all Public Sector Banks improved marginally from 54.2 percent during 2004-05 to 54.8 percent 2005-06. 11 banks recorded higher C/D ratio than the groups average. Bank of India recorded the highest ratio with 64.6 percent followed by State Bank of Mysore with 61.5 percent and Corporation Bank with 59.9 percent. The lowest ratio of 34.9 percent was recovered by United Bank of India. Canara Bank recorded higher credit deposit ratio than the groups average with 55.17%.
Canara Bank
TABLE: 11
Comparative NPA Bank Figures- Public Sector Banks

Name of the Bank Net NPA 2005-% Net NPA 2006-% 2.37 0.93 2.99 4.50 2.46 2.89 5.57 1.80 9.40 2.71 2.85 NIL 9.62 0.98 2.58 3.65 2.87 3.75 0.91 3.48 1.24 0.65 NIL 2.69 NIL NIL 1.39 Variation in % Reduction Net NPA % in Net NPA% 4.71 0.86 0.73 0.87 2.36 0.70 1.45 -0.15 2.43 3.44 2.38 1.40 1.27 2.88 1.71 0.71 2.04 1.77 1.70 1.02 2.89 2.60 2.66 2.23 1.49 3.53 1.67 66.53 48.04 19.62 16.20 48.96 19.49 20.65 0.00 20.54 55.93 45.51 100.00 11.66 74.61 30.86 16.28 41.55 32.06 65.13 22.67 69.98 80.00 100.00 42.97 100.00 100.00 54.58
Allahabad Bank 7.08 Andhra Bank 1.79 Bank of Baroda 3.72 Bank of India 5.37 Bank of Maharastra 4.82 Canara Bank 3.59 Central Bank of India 7.02 Corporation Bank 1.65 Dena Bank 11.83 Indian Bank 6.15 Indian Overseas Bank 5.23 Oriental Bank of Commerce 1.40 Punjab & Sind Bank 10.89 Punjab National Bank 3.86 Syndicate Bank 4.29 UCO Bank 4.36 Union Bank of India 4.91 United Bank of India 5.52 Vijaya Bank 2.61 State Bank of India (SBI) 4.50 State Bank of Bikaner & Jaipur 4.13 State Bank of Hyderabad 3.25 State Bank of Indore 2.66 State Bank of Mysore 5.19 State Bank of Patiala 1.49 State Bank of Saurashtra 3.53 State Bank of Travancore 3.06
Interpretation: There is an increase of 90% in the ratio of Net NPA of the Corporation Bank in March 2006 than previous year. In the case of all other public sector banks the ratio declined during March 2006. The Net NPA percentage of Canara Bank has reduced by over 19%. 75 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
TABLE: 12
NPAs and Recoveries of Public Sector Banks

(Rupees in Crore) NPAs Name of the Bank State Bank of India State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore TOTAL Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab National Bank Punjab & Sind Bank Syndicate Bank Union Bank of India UCO Bank United Bank of India Vijaya Bank TOTAL Grand Total (31.3.06) 12,667 484 691 266 515 503 200 662 15,988 1,418 615 3,980 3,734 954 3,127 3,092 722 1,484 1,192 1,576 1,211 4,670 1,204 1,590 2,347 1,479 764 390 35,549 51,537 (31.3.2004) 3,415 228 273 123 143 157 98 309 4,746 280 168 836 186 941 596 543 85 259 1,035 356 388 531 91 179 357 564 263 177 7,835 12,581 Recoveries (31.3.2005) 4,559 218 415 166 170 239 233 235 6,235 350 155 731 212 1,067 782 635 143 549 561 360 492 500 181 171 339 373 294 182 8,077 14,312 (31.3.2006) 6,668 172 425 142 242 260 176 225 8,310 571 180 1,039 216 1,144 865 831 107 673 1,039 526 436 706 160 266 716 357 340 246 10,418 18,728
Canara Bank
GRAPH: 10
NPAs and Recoveries of Public Sector Banks

40000 35000 30000 25000 20000 15000 10000 5000 31.3.3006 31.3.2004 31.3.2005 31.3.2006 0 Total of State Banks Total of Nationalised Banks
NPAs
Recoveries
Interpretation: State Bank of India recorded the highest recovery of NPAs amounted to Rs.6.668 crore during 2005-2006 followed by Bank of India Rs.1144 crore. Canara Bank has initiated several steps for reduction of NPAs and achieved substantial cash recovery to the extent of Rs.865 crore during the year 2005-2006. [Previous Year Rs.782 crore].
Canara Bank
TABLE: 13
NPA Financial Highlights- Canara Bank

As on 31.03.03 Gross NPA [Rs. in crore] Percentage of Gross NPA Net NPA [Rs. in crore] Percentage of Net NPA Provision for NPA [in cr] 2150 7.72% 1345 4 84% 399 As on 31.03.04 2112 6.22% 1288 3.89% 385 As on 31.03.05 2475 5.96% 1454 3.59% 476 As on 31.03.06 3127 6.33% 1378 2.89% 1239
Canara Bank
GRAPH: 11
NPA Financial Highlights Canara Bank
3500 3000 2500 2000 1500 1000 500 0

31.03.03 31.03.04 31.03.05 31.03.06
Gross NPA Net NPA Provision for NPA
Interpretation: During 2003-2004, the Canara Bank continued to accord top priority to its asset quality and achieved considered success in bringing down volume of its impaired assets. Gross NPA came down from Rs.2150 crore to Rs.2112 crore and as a percentage to total advances from 7.72% to 6.22%. Net NPA of the bank declined from Rs.1345 crore at March 2003 to Rs.1288 crore at March 2004, the Net NPA ratio coming from 4.81% to 3.89%. Provisions made during the year for NPA amounted to Rs.385 crore (previous year Rs.399 crore). During 2005-2006, Gross NPA increased from Rs.2475 crore to Rs.3127 crore and as a percentage to total advances increased from 5.96% to 6.33%. Net NPA of the bank declined from Rs.1454 crore at March 2005 to Rs.1378 crore at March 2006, the Net NPA ratio coming from 3.59% to 2.89%. The provisions made during the year for NPA amounted to Rs.1239 crore (Previous Year Rs.476 crore). 79 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
5. FINDINGS AND CONCLUSIONS

SUMMERY OF FINDINGS: The Net NPA ratio of the Canara Bank declined from 3.59% as at March 31 st 2005 to 2.89% as at March 31st 2006. Total assets of the Canara Bank increased from Rs. 82055 crore as on 31 st March 2005 to Rs.99539 crore as on 31st March 2006, showing a growth rate of 21.3% which is higher than the growth rate of 13.8% of the previous year. The total advances of the Canara Bank increased from Rs.47639 crore as on 31 st March, 2006 from Rs.40472 crore recording a growth rate of 17.7%. Gross NPA of the Canara Bank increased from Rs.2475 crore to Rs.3127 crore as on 31st March 2006. Gross NPA increased by 26.3% during 2005-2006. Net NPA of the Canara Bank declined from Rs.1454 crore to Rs.1378 crore as on 31st March 2006. Net NPA decreased by 5.2%. Canara Bank has recorded a credit-deposit ratio of 55.17% which is higher than the groups average of public sector banks during 2005-2006. The Net NPA percentage of Canara Bank has reduced by over 19% during 20052006. Canara Bank has recovered its NPA which is amounted to Rs.865 crore during 2005-2006 (Previous year Rs.782 crore). The percentage of gross NPA of the Canara Bank during 2004-2006 is 6.33% and the provisions made during the year amounted to Rs.1239 crore. The Canara Bank has taken steps to implement an Integrated Risk Management System, covering credit, operational and market risks. 80 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank CONCLUSION:

NPA Act is a fine, comprehensive and an extra-ordinary piece of legislation. It is also a reassuring sign of Governments commitment to reforms. The Act empowers banks to change or take over the management or even take possession of secured assets of the borrowers and sell or lease out the assets. This is for the first time that the banks can take over the immovable assets of the defaulting borrowers without the intervention of the court. They can claim future receivables and supersede the Board of Directors of the defaulting corporates. No court, other than Debt Recovery Tribunal, can entertain any appeal against the action taken by Banks and Financial Institutions under this act. When this Act was enacted, it was seen as a panacea to the entire problem of NPAs. The banks were euphoric and they took action swiftly. Notices were flashed to defaulters. Cash recovery became a reality. Banks have seized assets of number of borrowers. The problem of bad loans could be due to bad intensions or bad financial management or otherwise and also due to several external reasons. The main concern is the prevention of further slippage of performing accounts into the non performing category in the first instance. Preventing fresh flow of NPAs is as important as the recovery of the existing heavy stock of NPAs. There can not be any quick fix or one short solution to solve the NPA problem. Once recovery reforms are carried out, market for stressed assets are developed, this Securitization Act will surely help banks in reduction of NPAs to a great extent. Passing of the law cannot be considered to be synonymous with addressing the underlying problem our legal system has so far failed to enforce contractual obligations and this is hardly likely to cure this fundamental ill, unless more legal reforms are made and strictly enforced in true letter and spirit. Banks should also be empowered to proceed against the 81 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
personal assets of the directors of the defaulting units / companies / groups etc. to enable the act to be more effective and proactive as well. Exchange of credit information among banks would be of immense help to avoid possible NPAs. The banking system ought to be so geared that a defaulter at one place is recognized as a defaulter by the system. The system will have to provide a mechanism to ensure that the unscrupulous borrowers are unable to play one bank against the other. A defaulters alert system should be introduced to track potential defaulters by diving into their credit history and thus keeping such people aloof from the banking system. The above steps if effectively implemented can result in reduced NPAs.
Canara Bank 6. SUGGESTIONS

The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. Banks should create a new model of banking business by giving loans to the credit worthy and persons having clean credit history. There is an urgent need for banks to implement risk management systems of global repute. Canara Bank should timely implement effective risk management system. Canara Bank should offer rescheduling of loans of those borrowers who were struggling with high interest rates in a falling interest rate environment. Canara Bank should concentrate more on credit appraisal, monitoring, credit risk management and recoveries. Finding out the real reason behind irregular repayments or defaults and if it is not willful then offer good debt management advice to the borrower. A credit checklist should be prepared for granting a loan and atleast five of the checklist questions should be answered positively. It can help the banking personnel to take adequate precaution before granting a loan. 83 The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Settlement is a better option for the banks wrestling with the problem of nonperforming assets. While getting a court decree for taking over assets may be easy, the real litigation starts at the time of execution. While lending, lender wants to make sure that the borrower is both able and willing to meet the repayments. Credit scoring allows lenders to determine whether or not you fit the profile of the type of customers they are looking for. It works by comparing your details such as your previous credit history, job and salary with those of previous customers who have paid on time. Your score is worked out using a computer-based score card which awards your application points, according to the lenders own criteria and lending policy. Many see credit scoring as a quick, fair and best practice.

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Canara Bank

2 The Oxford College of Engineering, Bangalore, MBA Programme

3 The Oxford College of Engineering, Bangalore, MBA Programme

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SERVICE PROFILE OF THE CANARA BANK:

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COMPANY PROFILE OF THE CANARA BANK:

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Canara Bank 3. THEORITICAL OVERVIEW

90 days overdue norm

Canara Bank Out of Order Status

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OVERALL BANKING AND NPA

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A BRIEF HISTORY OF NPA:

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MEASURES FOR NPA CONTAINMENT:

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4. ANALYSIS & INTERPRETATIONS OF DATA

56 The Oxford College of Engineering, Bangalore, MBA Programme

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11.88 1.03 12.83 57.84 3.89 41 2.15 1.64

12.5 1.24 20.56 98.14 3.59 42 2.5 2.26

12.66 1.34 32.63 125.14 2.89 44 3 2.97

58 The Oxford College of Engineering, Bangalore, MBA Programme

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2003-2004 1.03 GRAPH: 3

Graph showing Return on Assets (RoAs) from 2003-04 to 2005-06

61 The Oxford College of Engineering, Bangalore, MBA Programme

35 30 25 20 15 10 5 0 2003-2004 2004-2005 Earning Per Share (EPS) 2005-2006

Interpretation: 62 The Oxford College of Engineering, Bangalore, MBA Programme

Non-Performing Assets as Percentage of Advance Public Sector Banks

Public Sector Banks: Total Assets

20256 30646 13044 26897 12837 24003 141441 549256 1471427

Public Sector Banks: Total Assets

Total of 19 Nationalised Banks SBI

Total of 7 Associates 2004 2005 2006

Public Sector Banks: Advances

The Oxford College of Engineering, Bangalore, MBA Programme

67 The Oxford College of Engineering, Bangalore, MBA Programme

Public Sector Banks: Advances

Public Sector Banks: Gross NPA

The Oxford College of Engineering, Bangalore, MBA Programme

Public Sector Banks: Gross NPA

Public Sector Banks: Net NPA

The Oxford College of Engineering, Bangalore, MBA Programme

71 The Oxford College of Engineering, Bangalore, MBA Programme

Public Sector Banks: Net NPA