NPAs have turned to be a major stumbling block affecting the profitability of Indian banks before 1992,banks did not disclose the bad debts sustained by them and provision made by them fearing that it may have an adverse. Owing to the low levels of profitability, banks owned funds had to be strengthened by repeated infusion of additional capital by the government. The introduction of prudential norms strengthen the banks financial position and enhance transparency is considered as a milestone measure in the financial sector reform. These prudential norms relate to income recognition, asset classification, provisioning for bad and doubtful debts and capital adequacy. An Explorative & Descriptive study was considered to be adequate to achieve the objectives of the study, and the study was conducted in Dhanalakshmi Bank Limited., Kerala on “An analysis of NPA in commercial banks with special reference to Dhanalakshmi Bank Limited”. The general objective of the study was to analyze the NPA level in commercial banks. However the study was conducted with the following specific objectives.. 1. 2. 3. level. 4. To suggest measures for efficient management of NPAs. The major limitation of the study was the paucity of time. Even then, maximum care has been taken to arrive at appropriate conclusion. The method To analyze the NPA level of Dhanalakshmi bank Limited. To study the recovery procedures of Dhanalakshmi Bank Limited. To examine how far the bank has been successful in reducing the NPA

adopted for collection of data was personal interview with bank officials using Inventory schedule as a tool for the same, and it was also sourced from the secondary data. After collecting data from the respective sources, analysis & interpretation of data has been made. On analyzing the data, the following findings were arrived at:• • • results. Based on the findings, logical conclusions are drawn, and further, suitable suggestions & recommendations are brought out. The entire project report is presented in the form of a report using chapter scheme, developed logically and sequentially from ‘introduction’ to ‘bibliography & references.’ Net advances are an upward trend. Net NPAs are also increasing staff productivity is increasing but is not reflected the recovery



The Indian has been liberalized and globalize during the last decade or so. It has exposed the Indian financial sector to international competition in fairly significant manner. To cope with the growing competition in the present scenario the Indian banks have embarked on a massive exercise to revamp the system. Despite the overall progress made by the financial system over the years, the operational efficiency of the banking system has been unsatisfactory, characterized by low profitability, high and growing NPAs and relatively low capital base. NPAs have turned out to be a major stumbling factor affecting the profitability of Indian banks. Before 1992,bank did not disclose the bad debts sustained by them and the provision made by them fearing that it may have an adverse impact. The banks used to take income even on NPAs on accrual basis. This helped them to disclose false profits. Owing to low levels of profitability, the banks owned funds had to be strengthened by repeated intention of additional capital by the government. The introduction of prudential norms to strengthen the banks financial position and enhance transparency is considered as a milestone measure in the financial sector reforms. These prudential norms, which relate to income recognition, asset classification, provisioning for bad and doubtful debt and capital adequacy serve three great purposes. 1. Income recognition norms reflect a true picture of the income and expenditure of the bank. 2. The asset classification and provisioning norms help in assessing the quality of the asset portfolio of the bank. 3. They also act as tool of financial discipline and compel banks to look at the quality of loans assets and the risk attached to the lending In India, NPAs are considered to at higher levels than most other countries, have of late attracted the attention of public as also of international institutions.

This has gained further prominence in the wake of transparency and disclosures measures initiated by R.B.I. during the recent years .We have also to conform to international accounting standards, if Indian banks are to get their due place and recognition in the global market. The present study was undertaken in this context to analyze and understand the impact of NPA are having on the performance of commercial banks in general there affecting the whole financial system. The scope of this study is limited especially to the organization selected ie. Dhanalakshmi Bank.

The general objective of the study was to analyze the NPA level in commercial banks. However the study was conducted with the following specific objectives. 1. 2. 3. level. 4. 5. To suggest measures for efficient management of NPAs. To bring out en explorative & descriptive report on “Analysis of NPA in To analyze the NPA level of Dhanalakshmi bank Limited. To study the recovery procedures of Dhanalakshmi Bank Limited. To examine how far the bank has been successful in reducing the NPA

commercial banks, with special reference to Dhanalakshmi Bank Ltd., Kerala.”

A purposeful investigation of a problem research helps an organization in finding out causes and clues for making sound and effective decisions by applying scientific methodology to the art of management. Research can be of two types namely Exploratory research and Conclusive research. Exploratory research is investigation of relationships among variables without knowing why they are studied. It borders on an idle curiosity approach, differing from it only in that the investigator thinks there may be a payoff in the application somewhere in the forest of questions. In Conclusive research there are two types namely Descriptive research and Experimental research.

Descriptive research allows both implicit & explicit hypotheses to be tested depending on the research problem. Experiments are artificial in the sense that the situations are usually created for testing purposes in experimental research. Based on all these facts and suggestion from the project guide ‘ Descriptive &

Exploratory Research Methodology’ is adapted for this project work.

Sampling Technique Sampling refers to selecting a part of the population to represent the characteristics of the population. However, in this study, Finance Manager of the bank is the source of data and therefore, since he is the only one source of information, there is no question of any sampling. He is interviewed at the Bank’s Head Quarters at Thrissur, Kerala, and the necessary primary data is collected using Inventory Schedule. Both primary and secondary data were collected & used for drawing conclusions for the study. Primary data:- were collected using Inventory schedule & also through interview, held with the Finance Manager in presence of the other officials of Dhanalakshmi Bank Ltd. Secondary data:- were collected from the published annual reports of the Dhanalakshmi Bank and other sources. Such data collected were analyzed for some kind of a trend and its impact on the profit of the bank.

The data collected were analyzed with the help of statistical tools like frequency, percentage and trend analysis. Tables are used to represent the consolidated data. Graphical representation is also used for better comprehension & presentation.

The was conducted in the Head Office of the Dhanalakshmi Bank limited in Kerala.Thefollowing are the main scope of the study:  Scope of this study is limited to the organization selected ie.

Dhanalakshmi bank.  Limited.  This study will help to know the drawbacks of the present recovery Present a picture of the movement of NPA in Dhanalakshmi Bank

strategies.   This study will help them to think about new innovative recovery strategy. For this purpose I have covered officials of the bank from various


Finance Manager of the bank, is covered in this study and he is interviewed in presence of the other departmental officials of the bank.

A casual interaction with the officials of the bank revealed that NPA is a severe factor, which has been affected their profitability for years. Therefore the problem identified is to understand and identify the drawback of the current recovery strategy and to come out with a set of recommendation which will help them to effective recovery of borrowings. Therefore the problem chosen for the study of “analysis of NPA in commercial banks with special reference to Dhanalakshmi Bank Limited”.

The major limitation of the study was the paucity of time. Even then, maximum care has been taken to arrive at appropriate conclusion. Following are the limitations of the study: 1. 2. This study is restricted to Dhanalakshmi Bank Ltd., Kerala only. For the purpose of collecting vital information, Finance Manager of the bank

is only contacted & interviewed. Since he is an individual, his biases may have creped into the data given. 3. Though the subject matter pertains to commercial banks, only one scheduled

bank. i.e. Dhanalakshmi bank ltd. is considered for this study. Other commercial banks, as also the other scheduled banks are outside the purview of this study. 4. Data pertains to NPA from 1995 - 1996 to 2001 – 2002 only.

2.7. SCHEME OF CHAPTERS • study. • Chapter 2-This chapter explains introduction, objective, scope, Chapter 1- This chapter discuss the executive summary of the

and limitation of the study. • Chapter 3This chapter gives a brief outline about the

background of the study.

Chapter 4-

This chapter gives a brief description about the

analysis of NPA in commercial banks. • Chapter 5- This chapter describes the company profile ie.

Dhanalakshmi bank limited. • Chapter 6- This chapter describes the analysis of NPA in

Dhanalakshmi bank limited. • Chapter 7-This chapter describes the recovery procedure followed

by the Dhanalakshmi bank limited.



3.1 Narasimham Committee
The government of India set up a nine member committee under the chairman ship of Mr. Narasimham, the former of governor of Reserve bank of India, to examine the structure and functioning of the existing financial systems of

India and suggest financial reforms. The report of the committee was tabled in the parliament of December 17th 1991. The main recommendations of the committee are 1. 2. 3. 4. A phased achievement of 8% capital adequacy ratio. A phased reduction f statutory liquidity ratio; Prudential guidelines governing the functioning of financial institutions; and Proper classification of assets and full disclosure and transparency of banks

and financial institutions. Most of the recommendations have been accepted by the government. While the most of the recommendations made by the committee in the 1 phase have been accepted for implementation, either in a single step or in a phased manner, some of them are yet to be considered for the same. These measures implemented so far have revolutionized the structure of the banking industry and its operations.

3.1.1 Concept of NPAs as per Narasimham Committee Recommendations
The Narasimham committee recommendations suggested that loans and advances in banks should classified in to performing and non performing on the basis of the health of the loans assets and the record of adherence to repayment of installments and interest on due dates. The committee also recommended that the banks be allowed to book to income by way of interest debited to an account only when it was found realizable with in a given time frame.

The committee suggested that the banks should make provision for all NPAs on the basis of classification of such assets based on the age of irregularity, security cover available etc. The RBI accepted the recommendations of the committee with regard to introduction of norms for income recognition and asset classification and provisioning an advised the banks to implement the same in a phased manner beginning 1st April 1992. The asset of a bank are cash and balances with RBI, balances with banks and money at call and short notice, investment in government and other securities, advances (including loans and advances, bill purchased, discounts and other credit facilities), fixed and other assets.

3.1.2 Performing and non-performing assets
A performing asset is an advance, which generate income to the bank by way of interest and their charges. An NPA is an advance of borrower account which does not generate income for the bank but they incur various inherent costs like a) Cost of deposit b) Cost of servicing c) provisioning at appropriate rates d) Capital adequacy requirements on these assets and e) Cost of recovery.

3.1.3 Identification of NPAs
Identification of an account as NPA depends upon the nature of borrowal account whether it is a) Operative b) Non operative c) Bills d) Agricultural advances or any other miscellaneous accounts. A. Operative like cash credit, over draft etc: A cash credit / over draft account will have to be treated as NPA if account remains out of order for more than 180 days.

An account shall be out of order if any one of the following conditions exist:a. The balance outstanding remakes continuously in excess of the sanctioned

limit during the last six months prior to balance sheet. b. The balance outstanding is within the limit / drawing / drawing power but

there is no credit in the account continuously for six months as on the balance sheet date. c. There is credit but such credit is not enough to cover the interest debited

during the six month as on the date of banks balance sheet. B. Non operative like term loans, borrowal account with repayment

programs: If interest / installment of principal remain overdue for a period of more than 180 days. Note: When the prudential norms were introduced in 1992, the concept of ‘past due’ was incorporated and it was classified that an amount should be classified as past due when it remains outstanding for 30 days beyond the due date. However due to improvement in the payment and settlement systems, recovery climate, up gradation of technology in banking systems etc. It has been decided by RBI to dispense with the past due concept with effect from 31st March 2001. Hence to all account to become NPA, cut off date is September 30th of the Year under audit. C. Bill purchased / Discounted / Negotiated: A bill purchased / discounted / negotiated becomes NPA, if it remains overdue and unpaid for two quarters or more. For bills discounted, for the

unusance period and grace period should be taken to consideration for arriving at the due date.


Agricultural advances: Agricultural advances where interest and or installments of principal remains

unpaid after it has become past due for two harvest season but for a period exceeding to half years should be treated as NPA.


Miscellaneous accounts Any other credit facility or account should be treated as NPA if any amount

to be received in respect of that facility or amount remains unrealized / uncovered for a period of two quarters.

3.1.4 Gross NPA and Net NPA
As per RBI circular gross advance means all outstanding loans and advances for which refinance has been received but excluding rediscounted risks and advances written off at Head Office level. The gross NPA and net NPA are always expressed as a percentage of advances. The percentage of gross NPA to advances including all Interest Suspense account where the bank is following the accounting practice of debiting interest to the customer account and crediting Interest Suspense account. The following are deducted from gross NPA to arrive at net NPA. a. b. Balance in Interest Suspense account, if applicable; Deposit Insurance Guarantee Corporation / Export Credit Guarantee

Corporation claim receive and pending adjustment; c. d. Part payment received and kept in Suspense account; Total provisions held excluding technical write off made at Head Office and

provision of standard assets.

RBI has advised that while reporting banks has to reduce technical write off made at Head Office from gross advance also.

3.1.5 Asset classification Norms
A critical analysis for a comprehensive review and uniform credit monitoring was introduced in 1985 to 86 by RBI by way of the Head Code system in banks which provide information regarding the health of the individual advances, quality of credit portfolio and the extend of advances causing concern in relation to total advances. It was consideredthat information would be off immense use to bank management for control purposes. RBI advised all

commercial banks on 07/11/1985 to introduce the Health code classification assigning each approval account with a health code (in eight categories) indicating its quality. Despite all these true picture was still not displayed. In order the ensure greater transparency in the borrowal account and to reflect actual health quality of banks in the balance sheet, RBI introduced prudential regulation relating to Income Recognition, Asset classification and provisioning as recommended by the Narasimham Committee with certain modifications in a phased manner over a three year period beginning from 1992 – 1993. The Narasimham committee is of the view that for the purpose of provisioning banks and financial institutions should classify their assets by compressing the health V code into four broad groups, taking into account the degree of well defined credit weakness and the extend of dependence on security for realization of dues as below: Standard asset: Standard asset is one, which does not disclose any problems and does not carry more than normal risk attached to the business.

Sub standard assets: Sub standard asset is one, which is a non-performing asset for a period not exceeding 18 months. Doubtful assets: Doubtful asset is one, which has remained as a non-performing assets for a period exceeding 18 months. A loan classified as doubtful has all the weakness inherent as that of substandard account with the added characteristics that the weaknesses make collection or liquidation of outstanding dues in such an account in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Loss assets: Loss assets is one, where loss has been identified by the banks or internal or external auditors or RBI inspecting official but the amount has not been written off, wholly or partly.

3.1.6 Adoption of 90 days norm:
The RBI has advised banks to adopt 90 days norm instead of 180 days for classification of assets as in impaired one with effect from MARCH 2004 and to start making additional provisions for such asserts from March 2002 to absorb the impact due to reduction of NPA period. The accounts which may turn NPA with 90-day period have to be identified and 10% provision to be found out.

3.1.7 Guidelines for classification of assets
The classification of assets into above categories should be done taking into account the degree of well-defined credit weakness and the extend 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 bank 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 will be valid for the entire accounting year. Accounts with temporary deficiencies: The classification of assets as NPA should be based on record of recovery. Banks should not classify an advance as NPA merely due to the existence of some deficiencies which are temporary in nature such as non availability of adequate drawing power base don the latest available stock statement, balance outstanding exceeding the limits temporarily, non submission of stock statements and non renewal of the limits on the due date etc. Asset classification to be borrower-wise and not facility-wise a. It is difficult to envisage a situation when only one facility to a borrower

becomes a problems credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or part there of which has become irregular. b. If the debits arising out of development of letters of credit or invoked

guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrowers principal operating account for the purpose of application of prudential loans on income recognition, asset classification and provision. Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and / or where the banks receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the

other member banks and therefore, be treated as NPA. The banks particularly in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. Accounts where there is erosion in the value of security a. A NPA need not go through various stages of classification in cases of

serious credit impairment and such assets should be straight away classified as doubtful or loss asset as appropriate. Erosion in the value of security can be reckoned as significant when realizable value of the security is less than 50% of the value assessed by the bank or accepted by the RBI at the time of last inspection, as the case may be. Such NPAs may be straight away classified under doubtful category and provisioning should be made as applicable to doubtful assets. b. If the realizable value of the security has assessed by the bank/approved

valuers / RBI is less than 10% 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.

3.1.8 Up gradation of NPA
Up gradation of with in the doubtful status or upgrading it from the doubtful to substandard shall not be made due to subsequent recoveries unless the account is regularized and comes out of the NPA status. In other words, the date on which an account become irregular shall not be changed due to subsequent recoveries, till regularization of the account.

Income recognition Interest income is recognized on an approval basis – except in case of NPAs where it is recognized on receipt. This means income can be recognized only on receipt for NPA accounts. For performing assets, income can be recognized on the basis of receipts, accrual or both. Due to the implementation of the prudential norms “accrual concept” has been changed into “recoverability concept” in recognizing in the income on NPA. Provisioning There is time lag between an account becoming doubtful for recovery, the realization of security and erosion over a period of time in its value. So RBI directive now requires the banks to make provisions in their balance sheet for all non-standard loss assets. The entire assets should be written off if the assets are permitting to remain in the books for any reason, 100% of the outstanding should be provided for.

Doubtful assets: a. 100 percent of the extend to which the advance is not covered by realizable value of the security to which the banks has a valid recourse and the realizable value is estimated on a realistic basis. b. In regard to the secured portion, provision may be made on the following basis, at the rate ranging from 20% to 50% of the secured portion depending upon the period for which the asset has remained doubtful. Table 3.1 Period for which the advance has been considered as doubtful and provision requirement (%) for each period.

Period for which the advance has been considered as doubtful Upto one Year 1- 3 Year More than 3 Year 20 30 50 Provision requirement (%)


Additional provisioning consequent upon the change in the definition of

doubtful assets effective from March 31st 2001 has to be made in phases as under. Ø As on 31-03-2001, 50% of the additional provisioning requirement on the

assets, which became doubtful on account of new norm of 18 months for transition from substandard asset to doubtful category. Ø As on 31-03-2002, balance of the provisions not made during the previous

year, in addition to the provisions needed, as on 31-03-2002. d. Banks are permitted to phase the additional provisioning consequent upon

the reduction in the transition period from sub standard to doubtful assets from 18 to 12 months over a four year period commencing from the year ending March 31st 2005, with a minimum of 20% each year. Sub standard assets A general provision of 10% on total outstanding should be made without making any allowance for DICGC / ECGC guarantee cover and securities available. Standard assets


From the year ending 31-03-2000, the banks should make a general

provision of a minimum of 0.25% of standard assets on global loan portfolio basis. b. The provisions on standard assets should not be reckoned for arriving at net

NPAs. c. The provision towards standard assets need not be netted from gross

advances but shown separately as “contingent provisions against standard assets” under ‘other liabilities and provisions – others’ in schedule five of the balance sheet. For arriving at the provision amount, the following matters may be kept in mind. a. For finding the secured portion only the tangible security (both primary and

collateral) is considered. b. As the outstanding in the ledger as on March 31st include interest transferred

to the uncollected INTEREST account. This amount has to be reduced from the outstanding amount. DICGC/ECGC cover available cannot be reduced in the case of advances classified as sub standard before applying 10% provision.


NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the midst of turbulent structural changes overtaking the international banking institutions, and when the global financial markets were undergoing sweeping changes. In fact after it had emerged the problem of NPA kept hidden and gradually swelling unnoticed and unperceived, in the maze of defective accounting standards that still continued with Indian Banks up to the Nineties and opaque Balance sheets. In a dynamic world, it is true that new ideas and new concepts that emerge through such changes caused by social evolution bring beneficial effects, but only after levying a heavy initial toll. The process of quickly integrating new innovations in the existing set-up leads to an immediate disorder and unsettled conditions. People are not accustomed to the new models. These new formations take time to configure, and work smoothly. The old is cast away and the new is found difficult to adjust. Marginal and sub-marginal operators are swept away by these convulsions. Banks being sensitive institutions entrenched deeply in traditional beliefs and conventions were unable to adjust themselves to the changes. They suffered easy victims to this upheaval in the initial phase. Consequently banks underwent this transition-syndrome and languished under distress and banking crises surfaced in quick succession one following the other in many countries. Elaborating a cross-country description of this phenomenon a study by FICCI depicts as under: "Since the mid-eighties, banking crises have come to the forefront of economic analysis. Situations of banking distress have quickly intensified and in the process, have become one of the main obstacles to stability to the financial system. According to Lindgren et.al. (1996), 73 per cent of the member countries of the International Monetary Fund's (IMF) experienced at least one bout of significant banking sector problems from 1980 to 1996. More importantly, such crises have resulted in severe bank losses or public sector resolution costs. As Caprio and Klingebiel (1996) observe, such costs amounted to 10 per cent or more of GDP in at least a dozen developing country episodes during the past 15 years. Recent studies by Honohan (1996) provide the estimated resolution costs of banking crises in developing and transition economies since 1980 are pegged at US $ 250 billion reinforce this view."

But when the banking industry in the global sphere came out of this metamorphosis to re-adjust to the new order, they emerged revitalized and as more vibrant and robust units. Deregulation in developed capitalist countries particularly in Europe, witnessed a remarkable innovative growth in the banking industry, whether measured in terms of deposit growth, credit growth, growth intermediation instruments as well as in network. During all these years the Indian Banking, whose environment was insulated from the global context and was denominated by State controls of directed credit delivery, regulated interest rates, and investment structure did not participate in this vibrant banking revolution. Suffering the dearth of innovative spirit and choking under undue regimentation, Indian banking was lacking objective and prudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. Continued political interference, the absence of competition and total lack of scientific decisionmaking, led to consequences just the opposite of what was happening in the western countries. Imperfect accounting standards and opaque balance sheets served as tools for hiding the shortcomings and failing to reveal the progressive deterioration and structural weakness of the country's banking institutions to public view. This enabled the nationalized banks to continue to flourish in a deceptive manifestation and false glitter, though stray symptoms of the brewing ailment were discernable here and there. The government hastily introduced the first phase of reforms in the financial and banking sectors after the economic crisis of 1991. This was an effort to quickly resurrect the health of the banking system and bridge the gap between Indian and global banking development. Indian Banking, in particular PSBs suddenly woke up to the realities of the situation and to face the burden of the surfeit of their woes. Simultaneously major revolutionary transitions were taking place in other sectors of the economy on account the ongoing economic reforms intended towards freeing the Indian economy from government controls and linking it to market driven forces for a quick integration with the global economy. Import restrictions were gradually freed. Tariffs were brought down and quantitative controls were removed. The Indian market was opened for free competition to the global players. The new economic policy in turns revolutionalised the environment of the Indian industry and business and put them

to similar problems of new mixture of opportunities and challenges. As a result we witness today a scenario of banking, trade and industry in India, all undergoing the convulsions of total reformation battling to kick off the decadence of the past and to gain a new strength and vigour for effective links with the global economy. Many are still languishing unable to get released from the old set-up, while a few progressive corporate are making a niche for themselves in the global context. During this decade the reforms have covered almost every segment of the financial sector. In particular, it is the banking sector, which experienced major reforms. The reforms have taken the Indian banking sector far away from the days of nationalization. Increase in the number of banks due to the entry of new private and foreign banks; increase in the transparency of the banks' balance sheets through the introduction of prudential norms and norms of disclosure; increase in the role of the market forces due to the deregulated interest rates, together with rapid computerisation and application of the benefits of information technology to banking operations have all significantly affected the operational environment of the Indian banking sector. As banking in the country was deregulated and international standards came to be accepted and applied, banks had to unlearn their traditional operational methods of directed credit, directed investments and fixed interest rates, all of which had led to deterioration in the quality of loan portfolios, inadequacy of capital and the erosion of profitability. Banks have now an entirely different environment under which to operate, to innovate and thrive in a highly competitive market and their success depended on their ability to act and adopt to market changes. These called for new strategies, different from those that related to regulated banking in a captive environment In the background of these complex changes when the problem of NPA was belatedly recognised for the first time at its peak velocity during 1992-93, there was resultant chaos and confusion. As the problem in large magnitude erupted suddenly banks were unable to analyze and make a realistic or complete assessment of the surmounting situation. It was not realised that the root of the problem of NPA was centered elsewhere in multiple layers, as much outside the banking system, more particularly in the transient economy of the country, as

within. Banking is not a compartmentalized and isolated sector delinked from the rest of the economy. As has happened elsewhere in the world, a distressed national economy shifts a part of its negative results to the banking industry. In short, banks are made ultimately to finance the losses incurred by constituent industries and businesses. The unprepared ness and structural weakness of our banking system to act to the emerging scenario and de-risk itself to the challenges thrown by the new order, trying to switch over to globalisation were only aggravating the crisis. Partial perceptions and hasty judgments led to a policy of ad-hoc-ism, which characterized the approach of the authorities during the last two-decades towards finding solutions to banking ailments and dismantling recovery impediments. Continuous concern was expressed. Repeated correctional efforts were executed, but positive results were evading. The problem was defying a solution. But why? The threat of NPA was being surveyed and summarized by RBI and Government of India from a remote perception looking at a bird's-eye-view on the banking industry as a whole delinked from the rest of the economy. A bird's eye view is distinct, extensive and even sharp, but it is limited to the view appearing at the surface or top-layer. It is a not an exhaustive or in-depth view. Restricted merely as a top-layer view it is partial and is not even a top-to-bottom view, where a bottom-to-top-view alone can enlighten the correct contributing factors. Flying at a great height the bird can of-course survey a wide area, but it perceives only a telescopic view of the roof- top and not the contents that exist inside the several structures. A simple look at the whole provides summarised perception. But it is not a homogeneous whole that is being perceived. RBI looks at the banking industry's average on a macro basis, consolidating and tabulating the data submitted by different institutions. It has collected extensive statistics about NPA in different financial sectors like commercial banks, financial institutions, RRBs, urban cooperatives, NBFC etc. But still it is a distant view of one outside the system and not the felt view of a suffering participant. Individual banks inherit different cultures and they finance diverse sectors of the economy that do not possess identical attributes. There are distinct diversities as among the 29 public sector banks themselves, between different geographical regions and between different types of customers using bank credit. There are three weak nationalised banks that have been identified. But there are also correspondingly

two better performing banks like Corporation and OBC. There are also banks that have successfully contained NPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not so simple to be generalised for the industry as a whole to prescribe a readymade package of a common solution for all banks and for all times. Similarly NPA concerns of individual Banks summarised as a whole and expressed, as an average for the entire bank cannot convey a dependable picture. It is being statistically stated that bank X or Y has 12% gross NPA. But if we look down further within that Bank there are a few pockets possessing bulk segments of NPA ranging 50% to 70% gross, which should consequently convey that there should also be several other segments with 3 to 5% or even NIL % NPA, averaging the bank's whole performance to 12%. Much criticism is made about the obligation of Nationalised Banks to extend priority sector advances. But banks have neither fared better in non-priority sector. The comparative performance under priority and non-priority is only a difference of degree and not that of kind. The assessment of the mix-of contributing factors should have included 1. Human factors (those pertaining to the bankers and the credit customers), 2. Environmental imbalances in the economy on account of wholesale changes and also 3. Inherited problems of Indian banking and industry. While banks functioned for several decades under ethnic culture, Indian business and industry were owned, controlled or managed by single families, all having been nurtured and developed through innovative zeal of pioneers, represented by one dominant individual towering at each set-up. This inherently convey the sole-proprietorship culture and unable to quickly transform to modern professionally managed corporations of the global standard, where operations should be conducted on a decentralized knowledge-based work-group- an integrated teams of specialists each contributing to a core area of management. The Indian management set up everywhere turns mostly as one-man show even today. Variable skill, efficiency and level integrity prevailing in different branches and in different banks accounts for the sweeping disparities between inter-bank

and intra-bank performance. We may add that while the core or base-level NPA in the industry is due to common contributory causes, the inter-se variations are on account of the structural and operational disparities. The heavy concentrated prevalence of NPA is definitely due to human factors contributing to the same. No bank appears to have conducted studies involving a cross-section of its operating field staff, including the audit and inspection functionaries for a candid and comprehensive introspection based on a survey of the variables of NPA burden under different categories of sectoral credit, different regions and in individual Branches categorized as with high, medium and low incidence of NPA. We do not hear the voice of the operating personnel in these banks candidly expressed and explaining their failures. Ex-bankers, i.e. the professional bankers who have retired from service, but possess a depth of inside knowledge do not out-pour candidly their views. After three decades of nationalised banking, we must have some hundreds of retired Bank executives in the country, who can boldly and independently, but objectively voice their views. Everyone is satisfied in blaming the others. Bank executives hold 'willful defaulters' responsible for all the plague. Industry and business blames the government policies. An important fact-revealing information for each NPA account is the gap period between the date, when the advance was originally made and the date of its becoming NPA. If the gap is long, it is the case of a sunset industry. Things were all right earlier, but economic variance in trade cycles or market sentiments have created the NPA. Credit customers who are in NPA today, but for years were earlier rated as good performers and creditworthy clients ranging within the top 50 or 100. But what is the proportion of this content? Significant part of the NPA is on account of clout banking or willfully given bad loans. Infant mortality in credit is solely on account of human factors and absence of human integrity. Credit to different sectors given by the PSBs in fact represents different products. Advance to weaker sections below Rs.25000/- represents the actual social banking. NPA in this sector forms 8 To 10% of the gross amount. Advance to agriculture, SSI and big industries each calls for different strategies in terms of credit assessment, credit delivery, project implementation, and post advance supervision. NPA in different sector is not caused by the same resultant factors. Containing quantum of NPA is therefore to be programmed by a sector-wise

strategy involving a role of the actively engaged participants who can tell where the boot pinches in each case. Business and industry has equal responsibility to accept accountability for containment of NPA. Many of the present defaulters were once trusted and valued customers of the banks. Why have they become unreliable now, or have they? The credit portfolio of a nationalised bank also includes a number of lowrisk and risk-free segments, which cannot create NPA. Small personal loans against banks' own deposits and other tangible and easily marketable securities pledged to the bank and held in its custody are of this category. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure. Then there is food credit given to FCI for food procurement and similar credits given to major public Utilities and Public Sector Undertakings of the Central Government. It is only the residual fragments of Bank credit that are exposed to credit failures and reasons for NPA can be ascertained by scrutinising this segment. Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all-pervasive national scourge swaying the entire Indian economy. NPA is a sore throat of the Indian economy as a whole. The banks are only the ultimate victims, where life cycle of the virus is terminated. Now, is not the Government an equal sufferer? What about the recurring loss of revenue by way of taxes, excise to the government on account of closure of several lakhs of erstwhile vibrant industrial units and inefficient usage of costly industrial infrastructure erected with considerable investment by the nation? As per statistics collected three years back there are over two and half million small industrial units representing over 90 percent of the total number of industrial units. A majority of the industrial work force finds employment here and the sector's contribution to industrial output is substantial and is estimated at over 35 percent while its share of exports is also valued to be around 40 percent. Out of the 2.5 million, about 10% of the small industries are reported to be sick involving a bank credit outstanding around Rs.5000 to 6000 Crore, at that period. It may be even more now. These closed units represent some thousands of displaced workers previously enjoying gainful employment. Each closed unit whether large, medium or small occupies costly developed industrial land. Several items of machinery form security for the NPA accounts should either be lying idle or junking out. In

other words, large value of land, machinery and money are locked up in industrial sickness. These are the assets created that have turned unproductive and these represent the real physical NPA, which indirectly are reflected in the financial statements of nationalised banks, as the ultimate financiers of these assets. In the final analysis it represents instability in industry. NPA represents the owes of the credit recipients, in turn transferred and parked with the banks. What is the effect of the dismal situation on the psychology of entrepreneurs intending fresh entry to business and industry? Recognizing NPA as a sore throat of the Indian economy, the field level participants should first address themselves to find the solution. Why not representatives of industries and commerce and that of the Indian Banks' Association come together and candidly analyze and find an everlasting solution heralding the real spirit of deregulation and decentalisation of management in banking sector, and accepting self-discipline and self-reliance? What are the deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporate? In short, the functional staff of the Bank along with the representatives of business and industry have to accept a candid introspection and arrive at a code of discipline in any final solution. And preventive action to be successful should start from the credit-recipient level and then extend to the bankers. RBI and Government of India can positively facilitate the process by providing enabling measures. Do not try to set right industry and banks, but help industry and banks to set right themselves. The new tool of deregulated approach has to be accepted in solving NPA.

As a first step to the analysis the institutional and infrastructure factors that are fundamentally responsible for the problem are outlined below: 3.3.1.The Legal Framework The RBI sees NPAs in the Indian banking sector as a historic legacy due to lacunae in credit recovery, largely and arising from inadequate legal provisions on foreclosure and bankruptcy, long drawn legal procedures and difficulties in execution of the decrees awarded by the court. At the end of March 1998, about

46 per cent of NPAs were in respect of suit filed accounts (Filed by 27 public sector and 6 private sector banks) where the recovery was as low as 4.3 per cent and significant portion of suits have been pending for more than a decade. The efficiency of our legal system can also assessed by the value of cases pending in the courts of law representing about Rs. 21,825 crores. In order to expedite disposal of high value claims of banks Debt Recovery Tribunals (DRTs) were set up. The performance of ten DRTS currently working may also not be considered satisfactory. Out of Rs. 8.900 crores transferred to DRTs by March 1997, only a sum of Rs. 178 crores has been recovered. 3.3.2.Political interference The Indian banking system has been extensively misused for political reasons in the past. A large part of their bad debts are a legacy of this misuse. The NPAs in priority sector advances of public sector banks are 46 to 49 per cent of their overall NPAs while priority sector advances from only 30 to 32 per cent of them total advances. In addition the large-scale loan write-off ordered by politicians promote a culture of indiscipline and lawlessness among borrowers. This adds to the problems of banks already functioning in a hostile legal environment. 3.3.3.Competitions and Liberalization The winds of liberalization have opened up new vistas in the banking industry resulting in the generation of an intensely competitive environment. The banking arena has been almost flooded with new entrants including private banks, foreign banks, non-banking finance companies merchant bankers, chit funds etc. Heavy weight foreign banks with huge capital base, latest technology innovative and globally tested products are spreading their wings and wooing away

customers from the Indian banks that are steeped in a tradition of inefficiency and lethargy. These banks enjoy a competitive edge in providing services, which are competitively priced and have better quality, wider range of products and specialized services. They are technology drive and have locational advantages. The large branch network of Indian public sector banks serves as a nonregulatory barrier to competition. It is found that after the entry of new private sector banks in India the market share of foreign banks in the market for deposits suffered. This was because the new entrants were primarily competing with these banks. In this context the recent trends in the NPA profile of the players is interesting. The following Table shows that in the past three years the NPAs of the public sector banks have been falling while those of private and foreign banks have been rising. It appears that intense competition in a small segment of the market is pushing private and foreign banks to take excessive risk. 3.3.4.. Inadequate Risk Management Practices The banks are now exposed to a much greater degree of risk primarily arising out of the potential loss on an asset or a portfolio. For this the banks have to develop skills to identify assess and minimize the risks and enhance the returns. If there is a mismatch between assets and liabilities the banks may be exposed to interest rate risk, liquidity risk and foreign exchange risk, credit risk and price risk. Narasimham Committee II has also addressed this issue bringing into focus the dangers to liquidity and solvency due to mismatches. A good risk

management is possible with only a sound banking system conforming to international prudential and supervisory norms. This underscores the importance of internal risk management systems in banks. Risk management should be

proactive rather than reactive. Under risk management, corporate governance has

also to be stressed to develop an effective control system. Information networking among banks can further improve their risk management abilities. 3.3.5. Lack of prudential Norms Risk management practices can be effective only when financial statements present accurate picture of the level of risk. The income recognition norms being followed by banks prior to 1992-93 involved recognition of income earned on bad debts in their books on accrual basis. Thus these financial statements did not reflect the level of bad debts and presented a misleading rosy picture of their health. detected. Besides the above there are several factors related to the borrower, which adversely affect their repayment. These include: · · · · · · · · · · Diversion of funds as revealed by an RBI study. Technological changes Power shortage Business failures Inefficient management Industrial recession Strained labour relations Price escalation Serious inherent operational problems Natural calamities This allowed the situation to degenerate considerably before it was


NPA has affected the profitability, liquidity and competitive functioning of PSBs and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. 3.4.1. Impact on Profitability Between 01.04.93 to 31.03.2001Commercial banks incurred a total amount of Rs.31251 Crores towards provisioning NPA. This has brought Net NPA to Rs.32632 Crores or 6.2% of net advances. To this extent the problem is contained, but at what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy. The enormous provisioning of NPA together with the holding cost of such non-productive assets over the years has acted as a severe drain on the profitability of the PSBs. In turn PSBs are seen as poor performers and unable to approach the market for raising additional capital. Equity issues of nationalised banks that have already tapped the market are now quoted at a discount in the secondary market. Other banks hesitate to approach the market to raise new issues. This has alternatively forced PSBs to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins, else they are to seek the bounty of the Central Government for repeated Recapitalisation. Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs.32632 Crores absorbs a recurring holding cost of Rs.2300 Crores annually. Considering the average provisions made for the last 8 years, which works out to average of Rs.3300 crores from annum, a sizeable portion of the interest income is absorbed in servicing NPA. NPA is not merely non-remunerative. It is also cost absorbing and profit eroding. In the context of severe competition in the banking industry, the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. The options for these banks are lost. “The spread is the bread for the banks”. This is the margin between the cost of resources employed and the return there from. In other words it is gap between the return on funds deployed (Interest earned on credit and investments) and cost of funds employed(Interest paid on deposits). When the interest rates were directed by RBI, as heretofore, there was no option for banks. But today in the deregulated market the banks decide their lending rates and borrowing rates. In the

competitive money and capital Markets, inability to offer competitive market rates adds to the disadvantage of marketing and building new business. In the face of the deregulated banking industry, an ideal competitive working is reached, when the banks are able to earn adequate amount of noninterest income to cover their entire operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference between the gross interest income and interest cost will constitute its operating profits. Theoretically even if the bank keeps 0% spread, it will still break even in terms of operating profit and not return an operating loss. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation. On account of the burden of heavy NPA, many nationalised banks have little option and they are unable to lower lending rates competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower income from off balance sheet business yielding noninterest income. It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March 2001, as published by RBI in its Report on trends and progress of banking in India. Table 3.2 Nationalised banks operational statistics……….. (Amount in Crores) Performance indicator Earnings - Non-interest Operating expenses Difference Earnings - interest income Exp.-Interest expenses Interest spread Intt. On Recap bonds Operating Profit Provisions Net Profit Year ended Mar. 2000 6662.42 14251.87 - 7589.45 50234.01 35477.41 14756.60 1797.88 5405.27 4766.15 639.12 Year ended Mar. 2001 7159.41 17283.55 - 10124.14 56967.11 38789.64 18177.47 1795.48 6257.85 5958.24 299.61

Interest on Recapitalization Bonds is a income earned from the Government, who had issued the Recapitalization Bonds to the weak banks to sustain their

capital adequacy under a bail out package. The statistics above show the other weaknesses of the nationalised banks in addition to the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as under: 1. Their operating expenses are higher due to surplus manpower employed. Wage costs to total assets is much higher to PSBs compared to new private banks or foreign banks. 2. Their earnings from sources other than interest income are meagre. This is due to failure to develop off balance sheet business through innovative banking products. 3.4.2 How NPA Affects the Liquidity of the Nationalised Banks? Though nationalised banks (except Indian Bank) are able to meet norms of Capital Adequacy, as per RBI guidelines, the fact that their net NPA in the average is as much as 7% is a potential threat for them. RBI has indicated the ideal position as Zero percent Net NPA. Even granting 3% net NPA within limits of tolerance the nationalised banks are holding an uncomfortable burden at 7.1% as at March 2001. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market, but have resorted to II-Tier capital in the debt market or looking to recapitalization by Government of India. 3.4.3 How NPA Affects the Outlook of Bankers towards Credit Delivery The fear of NPA permeates the psychology of bank managers in the PSBs in entertaining new projects for credit expansion. In the world of banking the concepts of business and risks are inseparable. Business is an exercise of balancing between risk and reward. Accept justifiable risks and implement derisking steps. Without accepting risk, there can be no reward. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. This has affected adversely credit growth compared to growth of deposits, resulting a low C/D Ratio around 50 to 54% for the industry. The fear psychosis also leads to excessive security-consciousness in the approach towards lending to the small and medium sized credit customers. There is insistence on provision of collateral security, sometimes up to 200% value of the advance, and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over-confidence), a tendency towards laxity in the standards of credit appraisal comes to the fore. It is well known that the existence of collateral security at best may convert the credit extended to productive sectors into an investment against real estate, but will not prevent the account turning into NPA. Further blocked assets and real estate represent the most illiquid security and NPA in such advances has the tendency to persist for a long duration. Nationalised banks have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution of this hovering threat.

3.5.1. Compromise settlement schemes The RBI / Government of India have been constantly goading the banks to take steps for arresting the incidence of fresh NPAs and have also been creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. More significant of them, I would like to recapitulate at this stage. The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. Banks are free to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements with the approval of their Boards, particularly for old and unresolved cases falling under the NPA category. The policy framework suggested by RBI provides for setting up of an independent Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinize and recommend compromise proposals Specific guidelines were issued in May 1999 to public sector banks for one time non-discretionary and non-discriminatory settlement of NPAs of small sector. The scheme was operative up to September 30, 2000. [Public sector banks recovered Rs. 668 crore through compromise settlement under this scheme.] Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001 helped the public sector banks to recover Rs. 2600 crore by September 2001] An OTS Scheme covering advances of Rs.25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Hon’ble Finance Minister providing for OTS for advances up to Rs.50,000 in respect of NPAs of small/marginal farmers are being drawn up. 3.5.2. Lok Adalats Lok Adalat institutions help banks to settle disputes involving accounts in “doubtful” and “loss” category, with outstanding balance of Rs.5 lakh for compromise settlement under Lok Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs.10

lakhs and above. The public sector banks had recovered Rs.40.38 crore as on September 30, 2001, through the forum of Lok Adalat. The progress through this channel is expected to pick up in the coming years particularly looking at the recent initiatives taken by some of the public sector banks and DRTs in Mumbai. For more details about Lok Adalats please refer to page Lok Adalat 3.5.3. Debt Recovery Tribunals The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of more than one Recovery Officer, power to attach defendant’s property/assets before judgment, penal provisions for disobedience of Tribunal’s order or for breach of any terms of the order and appointment of receiver with powers of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals located in five centers viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they could decide only 9814 cases for Rs.6264.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30, 2001.The amount recovered in respect of these cases amounted to only Rs.1864.30 crore. Looking at the huge task on hand with as many as 33049 cases involving Rs.42988.84 crore pending before them as on September 30, 2001, I would like the banks to institute appropriate documentation system and render all possible assistance to the DRTs for speeding up decisions and recovery of some of the well collateralized NPAs involving large amounts. I may add that familiarization programmes have been offered in NIBM at periodical intervals to the presiding officers of DRTs in understanding the complexities of documentation and operational features and other legalities applicable of Indian banking system. RBI on its part has suggested to the Government to consider enactment of appropriate penal provisions against obstruction by borrowers in possession of attached properties by DRT receivers, and notify borrowers who default to honour the decrees passed against them. 3.5.4.Circulation of information on defaulters

The RBI has put in place a system for periodical circulation of details of willful defaults of borrowers of banks and financial institutions. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors /proprietors / partners of these entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds, as on 31st March every year. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. However, they serve as negative basket of steps shutting off fresh loans to these defaulters. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers. 3.5.5. Recovery action against large NPAs After a review of pendency in regard to NPAs by the Hon’ble Finance Minister, RBI had advised the public sector banks to examine all cases of willful default of Rs 1 crore and above and file suits in such cases, and file criminal cases in regard to willful defaults. Board of Directors are required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff accountability. On their part RBI and the Government are contemplating several supporting measures including legal reforms, some of them I would like to highlight. 3.5.6.Asset Reconstruction Company: An Asset Reconstruction Company with an authorized capital of Rs.2000 crore and initial paid up capital Rs.1400 crore is to be set up as a trust for undertaking activities relating to asset reconstruction. It would negotiate with banks and financial institutions for acquiring distressed assets and develop markets for such assets.. Government of India proposes to go in for legal reforms to facilitate the functioning of ARC mechanism 3.5.6. Legal Reforms The Honorable Finance Minister in his recent budget speech has already announced the proposal for a comprehensive legislation on asset foreclosure and Securitization. Since enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in December 2002. 3.5.7.Corporate Debt Restructuring (CDR)

Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs.20 crore and above with the banks and financial institutions. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. As announced by the Hon’ble Finance Minister in the Union Budget 2002-03, RBI has set up a high level Group under the Chairmanship of Shri. Vepa Kamesam, Deputy Governor, RBI to review the implementation procedures of CDR mechanism and to make it more effective. The Group will review the operation of the CDR Scheme, identify the operational difficulties, if any, in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient. 3.5.8. Credit Information Bureau Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system. The main recommendations of the Group include dissemination of information relating to suit-filed accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. This, I hope, would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large amounts against same assets and property, which had in no small measure contributed to the incremental NPAs of banks 3.5.9. Proposed guidelines on willful defaults/diversion of funds RBI is examining the recommendation of Kohli Group on willful defaulters. It is working out a proper definition covering such classes of defaulters so that credit denials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against willful defaulters.

3.5.10. Corporate Governance A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards visà-vis compliance, transparency, disclosures, audit committees etc. and make recommendations for making the role of Board of Directors more effective with a view to minimizing risks and over-exposure. The Group is finalizing its recommendations shortly and may come out with guidelines for effective control and supervision by bank boards over credit management and NPA prevention measures. [Dr. Bimal Jalan, Governor, RBI, in a speech titled "Banking and Finance in the New Millennium." delivered at 22nd Bank Economists Conference, New Delhi, 5th February, 2001]

There seems to be late realization that the financial sector is heading towards a major crisis because of the mounting bad loans and the inability of lender to recover them under the existing legal frame work. The government has passed a new ordinance in June, which seeks to change all this and empower the lenders to recover their dues without going through prolonged legal battles in the courtrooms. Banks are equally responsible. The big question now is, to what extend the new legislation would help in recovering the NPAs? The new Finance Minister, Jaswant Singh, deserves to be complimented for introducing the Securitization and Reconstruction of financial assets and enforcement of security interest bill in Loksabha despite orchestrated attempts by industry associations to sabotage the NPA ordinance issued in this regard earlier. Drawing attention to the gravity of the problem facing the country’s financial sector, he made a categorical statements in the Rajyasabha that “non – performing assets of Rs. 83,000 crore is a loot and not debt”. Despite all efforts by the government and Reserve Bank of India, postreforms, to bring down the mounting bad loans or so-called non-performing

assets, the problem has persisted and in fact it has aggravated. Incidentally, the figure of Rs. 83 crore mentioned by Finance Minister pertains to NPA given out by the bank and financial institutions. There is reason to believe that the actual NPA are much higher than this official figure. Audit and Consulting firms such as Ernest and Young put real NPAs at 1,30,000-1,50,000 crore. Evidently, there seems to be a belated realization that the Indian financial Sector is heading towards a major crisis because of mounting bad loans and the inability of the lenders to recover them under the existing legal frame work. The Government had to inject a massive Rs. 20,446 crore towards recapitalization of public sector banks till end March 1999 to help them fulfill the new capital adequacy norms. Again in 2000-2001, a bailout package of Rs. 2,550 crore was worked out for 3 weak public sector banks – Indian bank, UCO Bank and United Bank of India. This was against the Verma Pannel recommendation to inject Rs. 5,000 crore in these banks. In 1999 to 2000-01, the Government had allowed 27 Public Sector Banks to write off corporate loans worth Rs. 8,246 crore to reduce the level of bad debts. The health of Financial Institutions is more worrisome with their declared NPAs amounting to nearly Rs. 20,000 Crore. In addition, they are also stock with a huge liability of Rs. 6,200 crore in the ill-conceived Enron project. The Government had to worked out huge bailout packages for the Unit Trust of India and the Industrial Financial Corporation of India. The IFCI has been kept alive by huge infusion of funds by the Government. Last year, the Government provided Rs. 400 crore for its survival. Now, within 12 months, it is set to provide it with a guarantee of Rs. 1,500 crore on its borrowings. The IFCI’s liabilities this year add upto Rs. 4500 crore with another Rs. 5000 crore debt maturing next year. The institution has a liquidity gap of Rs. 7100 crore over a 3-year period till 2002-2004. The consulting firm, McKinsey and Co. has recommended a capital infusion of upto 8800 crore for IFCI. It is against this backdrop that some financial experts have recommended the winding up of the IFCI. The Industrial Development Bank of India’s NPAs are also an unsustainable 19% and its profitability has come down drastically over the past 2 years because of higher provisioning for bad debts over Rs. 5500 crore. It may also need a bailout soon.

The downfall of the once strong and powerful UTI is well known. The second bailout package for the UTI will cost the Government Rs. 5,000 crore. Moreover, the Finance Ministry is still struggling to work out the modalities of bridging the gap estimated at over 10000 crore, between the promised return and actual earnings in UTI’s various assured return schemes. The real hurdle facing the lenders in recovering their dues all these years has been the extend legal framework governing the operations of the public financial institution and banks. The rules of the game are severely tilted against lenders who find it extremely difficult to enforce the contracts signed with the borrowers. To make matters worse, the institutional set up created by the government to the revival of the socalled ‘Potentially viable sick unit’ has made the task of loan recovery even more difficult. The Sick Industrial Companies Act and the Board for Industrial and Financial Reconstructions have played a notorious role in providing an easy shelter to defaulters rather than in reviving the sick units. Loans turn bad because of the incidents of industrial sickness. While some instances of industrial sickness are no doubt because of unforeseen changes in business environment and beyond the control of the managements, in most cases bad management and poor standards of corporate governance are to blame. This is well documented by a number of studies, including those by the RBI. While the reasons for sickness are well known, there seems to be a total lack of professional approach in tackling the problem. There have been a number of instances where even when an Industrial group bleeds a company to sickness by diverting funds and indulging the other malpractices, its other constituent unit to continue to receive funds from Financial Intuitions and banks. The Omkar Goswami Committee report on industrial sickness and corporate restructuring aptly summed up the situation in its preamble thus “There are sick companies, sick banks, and unpaid workers. But there are hardly any sick promoters. There lies the heart of the matter”. The new ordinance passed in June seek to change all this and empower the lenders to recover their dues without going through protracted legal battles in the courtrooms. It would enable the creditors, after 60 days notice, to take possession of, or sell or lease the assets financed by them, take over the management of the business of the borrower; and recover any money payable by the third parties to

the borrower. All that is required is that creditors accounting for 75% or more of the secured lending should agree to initiate recovery proceedings. While the borrowers are allowed to seek protection from secured creditors by filing an appeal to debt recovery tribunal, they will also be required to deposit 75% of the amount claimed by the creditors in order to prevent misuse of appeal provisions. The Debt Recovery Tribunal can, at its discretion; reduce the deposit amount, but only after recording its reason for doing so. The ordinance also provides for the setting up of Asset Reconstruction Companies (ARCs) to be regulated by the RBI. The ARC can issue Security Receipt (SRs) that will be tradable instrument that the lenders can sell at market determined prices. To begin with it is proposed to set up the Asset Reconstruction Company of India Ltd. (ARCIL) with 51% shareholding by private bank and the rest by the State Bank of India and IDBI. The ARCIL will act as a catalyst to bring together creditors accounting for the minimum 75% of secured lending and to take the lead in the recovery process. As expected, industry associations and chambers such as CII and the FICCI have been quick to protest against the provisions of the ordinance, which they call draconian. Their main objection is that it does not make any distinction between willful and genuine defaulters.

They have expressed a fear that the provisions could make bankers trigger happy in seizing the assets of the defaulters. There fear is clearly misplaced. Banks and financial institutions do reschedule loans when they are conceived that there is great chance for a defaulting company to service and payback its loans. The demand to make a distinction between willful and genuine default make no sense. In any case, the banks and financial institutions do fear the normal risk of lending and are prepared for certain permissible percentage of loans turning into NPAs. Quite a few financial institution and banks have already initiated measures to recover their dues from chronic defaulters. ICICI bank, IDBI and IFCI, for instance, have sent notices to 22 companies, which collectively owe them Rs. 1,200 crore. In addition, IDBI has issued notices to 17 borrowers for an amount

aggregating Rs. 1,640 crore. The State Bank of India has issued notices to about 70 defaulters while others are also in the process of doing so. According to banking sources, initially the banks and FIs would target only units defaulting willfully as selling off of assets of going concerns will not be difficult. They feel that once the asset reconstruction companies get established, seizing agencies and turnaround specialists come into being and receivers and liquidators tone up their act, banks and Fls would be in a position to make use of the legislation on a much bigger scale. The big question now is: To what extent the new legislation would help in recovering the ‘loot’? Not much, unless the banks and financial institutions make a conscious and serious effort to change their work culture and strengthen the regulatory framework and standards of governance. For the present state of affairs, the Fls, and banks are equally responsible. The standards of professional competence and governance in these institutions are far from satisfactory. There are no proper project appraisals at the time of granting loans, political interference and corruption are rampant, and papering over bad loans and granting of fresh advances to defaulters is a rule rather than an exception. The second prerequisite for success in significantly bringing down the NPAs with the help of new provisions would be the redesigning of the entire financial sector matrix. There is an urgent need to create an array of liquidators, receivers, seizing and securitizing agencies, legal experts and industry specialists. At present, the banks and FIs do not have the requisite expertise for taking over the assets or managements of the defaulters or to liquidate the assets of the defaulting companies. It needs to be ensured that the lenders are not stuck with the assets taken over. The accent should be on quick liquidation of the seized assets and realization of dues within a reasonable time frame.

“Indian banks are weighed down by enormous amounts of bad loans that threaten the very health of banking system. Surely, banks in China which are far more advanced economically and industrially would be healthier than Indian banks. Among the Indian banks, public sector is worst affected and among banks in private sector, the newer tech-savvy and the foreign banks are the least vulnerable to bad loans. If only the hard core bad loans are separated and sold to

an outside agency, the problem could be largely resolved”. These and similar opinions are held by knowledgeable persons both in banking system and outside it. But then, these contain untruth and half-truth, as discussed below. It is a fact that the problem of bad loans is plaguing the banking system for quite some time. The quantum of bad loans, called in elegantly as non-performing assets is a fairly high proportion of total loans. The percentage of net NPA to non-advances of scheduled commercial banks in India was 6.2 percent on March 31st 2001, according to the Reserve Bank of India report, on trends and progress of banking in India. The relative level in the US would be less than 2%. Given the fact that the total capital and reserves of SCBs were around 5.23% of total assets, one might jump to the conclusion that NPA was more than capital and reserves. But, the net NPA amounting Rs. 32,468 crore represent less than half of capital resources at Rs. 67,741.47 crore. This is because a good chunk of the assets of banks comprises investment in Government securities which is fully realizable and risk free. Further, all NPAs are not irrecoverable and banks do have some securities to back up the NPAs. Therefore, it is clear that the Indian banking system is basically safe; well, some banks are reportedly more adventurous than others, like a south based private bank that was in the headlines recently. In any comparison between Indian and China, except perhaps in the area of democracy, China comes out on top. Certainly, in industrialization, export performance; in the level of discipline among the populace and adherence to law, China should rank better. Therefore, banks in China would, one might presume, be healthier than Indian banks. Facts portray a contrary picture. As per the banker magazine (A sister publication of financial times of U.K), the level of NPA to total assets I the two biggest banks in China, commercial bank of China and bank of China were 25.01 % and 28.8% respectively in 200. As against this, NPAs of Indian banks were 2.5% of total assets (Not advances) as on March 31 st 2001. Banks in India are thus in a much better state of health than their counter parts in China. In some respects, the problem of NPA in public sector banks is more acute than private banks, but the picture is somewhat blurred. The NPA was 6.7% of advances for public bank sector against 5.4% for private sector banks and 2.2

percent for foreign banks in 2001. However, for the older private sector banks, that are other than those that started in the 1990s, the NPA was 7.3%, which is higher than public sector banks. These are average figures. Looking at figures of individual banks, some of the private and foreign banks reflect a pathetic figure as compared to the public sector. The highest level in public sector bank was in Dena Bank (18.29%) and four others have higher than 10%. The highest figure among all banks was a foreign banks, Bank International Indonesia at 50.75% and four other foreign banks have more than 20%. The belief that, by separating the hard core NPA and selling them to a recovery agency, the problem of NPA could be resolved has caught the imagination of many seasoned veterans in Banking. Many expert committees have recommended the setting up of Asset Reconstruction Company or Fund (ARC or ARF) on the lines of the model tried out in the US and other country. It is debatable if ARC would be a useful tool under Indian conditions. The borrowers of the banking system could be broadly classified into business and industrial concerns and households and individuals. Households and individuals, including agricultural sector, contribute to around 26% of total advances, excluding loans to food procurement agencies. In these cases, the ARF would not be of any help as banks do succeed in enforcing their rights against recalcitrant borrowers to a considerable extent or recover by reducing the dues by mutual agreement. The first Narasimham Committee which brought about revolutionary changes in the banking and financial system in 1991 suggested the formation of ARF “to facilitate recovery of dues from clients in respect of whom banks and financial institutions have already taken a decision to recall the loan and proceed with the enforcement of security”. It was also stressed that ARF should focus on large borrowers. The total number of suit filed against borrowers enjoying advances of Rs. 1 crore and above from the banking system was 5013 aggregating Rs. 27988.59 crore as on March 31st 2000, according to the RBI publication. These suits are pending in various courts to cope with the enormous number of cases before them; one estimate puts these at a few crore cases. It is extremely doubtful if a separate ARF can expedite matters. In any case, these would have already been fully written of in the banks books and the cases would be handled to the law departments of various banks.

The ARF would only act as the extended legal arm of banks; it would certainly be inappropriate to buy these dues from banks, as the recovery would take years. ARF or ARC might be helpful in cases of commercial borrowers who default in payment of their dues, where banks have not written them off. In such cases, if the borrowers are industrial companies, the cases would come under a separate agency, Board for Industrial and Financial Reconstruction (BIFR), whose first objective, as the name implies, is to see if the company can be rehabilitated. This, it has become evident over the last few years, has created a problem of “morel hazard”; the owners and managers, who were largely responsible for making the company sick, are given fresh money for them to take further gambles with others funds. In cases where fresh funds are required, obviously an ARF, which cannot lend, is not the solution. The government has decaled that BIFR would be closed and a more expeditious legal structure set up. But this could take some time. The main handicap under which banks suffer in recovering their dues is the legal frame work, which some feel, is debtor friendly. Many defaulting borrowers know that banks cannot force them to repay quickly, even if banks have security, due to the long time taken in courts to enforce the security. To alleviate the problems of banks, Debt Recovery Tribunals were set up for speedy enforcement of law against defaulting borrowers, whose dues exceed Rs. 10 lakh. There are loans given to state and central public sector units, which have failed to repay. The operations of Debt Recovery Tribunals are such that they have not so far made a dent in the NPA position of banks. While on the subject, it is worth recording that even where advance is guaranteed by central or state governments and the primary borrower is unable to repay the guaranteeing government rarely, if ever, owners its legal obligations as guarantor, because the bureaucrats want to ensure that the government does not face a loss or the loss is largely reduced. The fact of the governments failing to honor financial obligations gives rise to a curious phenomenon. A guarantor would fail to pay, if he is either unwilling or unable to pay. The existence of bad loans is due to many causes, such as faulty initial scrutiny by banks, defective follow up of loans, economic slow down cheating by borrowers and the like; is causes require a separate study for the present discussion, the RBI report sums up succinctly “at the policy level, there is need for legislation which will make recovery process smoother and legal action quicker”. Creation of ARF or even Debt Recovery Tribunals appears to the mere palliatives for chronic illness that has so far defied solution. So long as borrowers know that the long arm of law would take years, perhaps decades, to bring them to books, banks would be sufferers and uninformed public would tend to blame the banks for problems over which banks have little control.


YEAR 2001-2002

The origin of commercial banking can be traceable in the early times of human history. In ancient Rome and Greece, the practice of storing precious mettles and coins at safe places and loaning out money for public and private purposes on interest was prevalent. In England, banking had it origin with the London gold smiths who in the 17th century began to accept deposits from the merchants and others for safe keeping of money and other valuables. As public enterprise, banking made it first appearance in Italy in 1157 when the Bank of Venice was founded. Commercial banking in India began in 1770 with the establishment of the first joined stock bank, named Bank of Hindustan, by an English agency in Calcutta. Bu this bank failed in 1832. In fact, the, real beginning of the modern commercial banking in the country was made with the establishment of the Bank of Bengal in 1806. Later on, the Bank of Bombay and Bank of Madras was also set up in 1840 and 1843 respectively. All these banks were presidency banks:They were partly financed by East India Company. In 1881, the first purely Indian bank that is Oudh commercial bank came in to being. It was followed by the setting up of the Punjab National Bank in 1894 and Peoples bank in 1901. The Swadeshi movement of 1905 encouraged the growth of the commercial bank in India. Commercial bank in India can be divided in to two groups: a. b. Public Sector banks – All of them are scheduled; and Private sector banks.

The public sector bank in India has developed in four phases. a. The Imperial Bank of India was nationalized and renamed as the State Bank

of India in 1995.


Then, 8 former state associated banks were reconstituted into 7 subsidiary

banks of the SBI which are now called the associate banks of the SBI c. On July 19th, 1969, 14 major commercial banks were nationalized. Again

on 15th April 1980, 6 more commercial banks were nationalized. d. Regional Rural banks were established in 1974, which are 196 in number at

present. Modern banks in India are joined stock banks. They are registered under the Indian companies Act. They are classified by the RBI into two categories:Scheduled and non scheduled.

Scheduled banks are those banks, which are included in the second schedule of the RBI Act, 1934 and have a paid up capital and reserves not less than Rs. 5 lakhs. The operations of these banks are controlled and regulated by the Reserve bank. A well-developed banking system is a necessary pre-condition for economic development in a modern economy. Besides providing financial resources for the growth of industrialization, banks can also influence the direction in which these resources are to be utilized. Banks play an important role in the development of country. It is the growth of commercial banking in the 18th and 19th centuries that facilitated the occurrence of industrial revolution in Europe. Commercial banks contribute to a country’s economic development in the following ways. a. b. Capital formulation Encouragement to entrepreneurial innovations

c. d. e. f. g. h. i.

Monetization of economy Influencing economic activity Implementation of monitory policy Promotion of trade and industry. Encouragement to right type of industrious. Regional development Development of agricultural and other neglected sectors.

4.1. NPA in commercial banks The NPA of 27 public sector banks shot up to Rs.56608 crores in September 2001. NPA not only reduces the yield on advances but also reduces the profitability of banks. (Table 4.1) The gross non-performing assets (NPAs) of scheduled commercial banks at Rs. 70,904 crore as on March 31st 2002 as compared with Rs. 63,741 crore at the end of the previous year. The gross NPAs for end March 2002 include an amount of Rs. 4,512 crore on account of merger. During the same period, net NPAs increased by 9.5% to Rs. 35,546 crore from Rs. 32,461 crore at the end March 2001. For public sector banks, gross NPAs stood at Rs. 56,507 crore as at the end of March 2002, comprising 79.7% of the sticky loans of scheduled commercial banks. (Table 4.2). The movement in NPAs across bank groups is provided in Table 4.3. The NPAs of PSBs increased marginally during the year in spite of the substantial recoveries, whereas for foreign banks, recoveries exceeded accretions to NPAs. New private banks, however, had substantial addition to their NPAs, reflecting the impact of merger during the year. 4.2. Incremental non-performing assets

The incremental gross NPAs, as percentage of incremental gross advances for scheduled commercial banks increased from 4.0% in 2000 – 2001 to 5.9% in 2001-2002. In absolute terms, the quantum of incremental gross NPAs was Rs. 7,164 crore in 2001-2002 as compared with Rs. 3332 crore in 2000-2001.

Among banks groups, there was decline in incremental gross NPAs for the state bank groups and foreign banks. New private sector banks, incremental gross NPAs recorded a large increase from Rs. 671 crore in 2000 – 2001 to Rs. 5205 crore in 2001-2002 reflecting the addition on account of the merger. Incremental net NPAs of commercial scheduled banks, over the same period increased from Rs. 2,389 crore to Rs. 3,084 crore which was also largely due to substantial increase in incremental net NPAs of new private banks (Table 4.4). As percent of incremental net advances, incremental net NPAs of scheduled commercial banks declined from 2.9% in 2000-2001 to 2.6% in 2001-2002. As percent to

incremental assets, while incremental gross NPAs of scheduled commercial banks increased from 1.8% to 3.0% in 2001 to 2002, incremental net NPA to total assets remained constant at 1.3% in both years (Table 4.5)



5.1.VISION "A Customer-centric organization, with a strong national network, leveraging its network in Kerala, capable of delivering multiple financial products in a cost-effective manner, using state of the art technology, engaging a pool of skilled personnel, and ensuring reasonable value addition to the shareholders and other stakeholders"

5.2 Bank Profile The Dhanalakshmi Bank Limited (DLB) headquartered at Thrissur in Kerala, is a professionally managed Bank. Started seven decades back, at a time when banking was less known to the people. In a high literate state of Kerala, the bank grew in strength over the years. The DLB has today 153 branches spread over Kerala, Tamil Nadu, Karnataka, Andhra, Maharashtra, Gujarat, West Bengal (Kolkata) and New Delhi. The bank has ambitious plans for growth in branches, total business and profits.

Even though started by traditional businessmen, the bank has achieved substantial sophistication in the various banking services provided. Of the 153 branches, All

branches are classified as NRI branches, All branches are computerized and in the process of implementing Wide Area Network, ATM's, Any Branch Banking and Cash Management Services, Any Branch Banking, Telebanking, Internet Banking..Etc. The bank is managed by a group of professionals, administrators and businessmen. The bank has already achieved Capital Adequacy Norms prescribed by the RBI by achieving 9.69% in March 2001.


Directors Dr. P. Raja Mohan Rao Shri. P.K Ananthanarayanan Shri. V. K. Sarma Shri. S. Varadachary IAS(Retd) Shri. K. Govindan Shri. A. P. Venkateshwaran. IFS.(Retd) Prof. V. J. Pappoo Shri. James Pothen (RBI) Shri. P. M . Saseendranath(RBI) Assistant General Managers Shri.M.P.S.Sarma Shri.A.RamMohan Shri.P.S.Revikumar Shri.R.Krishnan Shri.A.K.Ramalingam Shri.M.Vijayakumar Shri.K.K.Ranganathan Shri.P.R.Narayanan Shri.P.K.Ganapathy Shri.RavindranK.Warrier (Company Secretary

Managing Director & CEO Shri. Muthuswamy B. Executive Director Shri. K.A.Menon Senior Management Team General Manager Shri. Thomas Mathew

Deputy General Managers Shri.H.L.Sitaraman Shri.P.G.Jayakumar Shri.P.T.Thomas Shri. A.K. Ramakrishnan

RETAIL Deposit Products Credit Products Interest Rates Agriculture Products Relationship Banking CORPORATE Cash Management Services Credit Products Corporate Salary Interest/Dividend/Warrant

OTHER SERVICES RBI Bonds Safe Deposit Lockers Depository Service Insurance Services NRI Services


5.3 PERFORMANCE AND PROGRESSOF DHNALAKSHMI BANK LIMITED Performance and progress made by the Dhanalakshmi bank can be measured by analyzing the various parameters like the deposits, advances, net profit, cost of deposit, staff productivity etc. of the bank over past few years.


(FROM 1996-97 TO 2001-02)

Table 5.1 Amount Crores Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Deposits of the bank (Rs) 840.58 915.96 1138.67 1296.31 1477.87 1639.54 Increase / Decrease over the previous years figure --151.34 222.71 157.64 181.56 161.67 % Increase / decrease over the previous years figure --+18.0 24.3 13.8 14.0 10.9 Index with year 1996-97 as base year 100.00 108.97 135.46 154.22 175.82 195.05 in

The aggregate deposits of the bank has increased from 840.58 crore to 1639.543 crores during the period 1996-97 to 2001-02. On analyzing the trend of such increase in the deposits over the period we can clearly see that it is increasing at a decreasing rate. The modest growth especially during the last three years is mainly due to a conscious decision on to shed the highest cost deposits, more particularly from institutions. With focus on bringing down the cost of deposit, field function areas have been constantly exhorted to step up the share of low cost of deposit.

(FROM 1992-93 TO 2001-02)

Table 5.2 Amount in Crores Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Advance of the Bank (Rs) 110.6 163.26 285.89 448.59 562.41 576.06 605.23 776.31 965.22 993.51 Increase / Decrease over the previous years figure --53.0 122.63 162.70 114.00 13.65 29.17 171.08 188.91 28.29 % Increase / decrease over the previous years figure --48.16 75.11 56.91 25.37 2.40 5.10 28.6 24.0 2.90 Index with year 1992-93 as base year 100.00 148.34 259.76 407.87 512.07 523.41 549.91 705.35 876.99 902.70

The aggregate advances of the bank has increased from 110.06 crores to 993.51 crores during the period 1992-93 to 2001-02.The credit appraisal system was fine tuned and effective system was put to place to ensure the quality of asset. A tenor linked prime lending rate was introduced during the year 2001 to give a boost to short term lending. Exposure to various sectors is strictly maintained within the stipulated ceiling. The system and procedures were streamlined to incipient irregularities in the asset step without delay. A substantial positive change in credit dispensation and monitoring was initiated through a visited credit policy. Which primarily aim at segmentation of the retail and corporate portfolios for improved thrust in both these areas.

(FROM 97-98 TO 01-02)

Table 5.3 Percentage of Increase / Decrease over the cost 10.28 10.35 9.49 8.92 8.53 previous year --0.07 (-0.86) (-0.57) (-0.39)

Year 1997-98 1998-99 1999-00 2000-01 2001-02

The cost of deposit of Dhanalakshmi Bank shown a constant decrease during the period 1998-99 to 2001-02 except for the year 1998-99 in which there was a slight increase of .07%. On analyzing the trend of decrease in the cost of deposit we can see that it is decreasing at decreasing rate. Such a decreasing trend in the cost of deposit, achieving by systematic branch wise monitoring. Also shift in deposit portfolio of the bank from high cost deposit to low cost deposit also has contributed to the efforts.

(FROM 1994-95 TO 2001-02)

Table 5.4 Amount in crores Year 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Increase / Net Profit of Decrease over the Bank the previous years figure 442 472 791 840 387 1128 677 1007 --30 319 49 -453 741 -451 330 % Increase / decrease over the previous years figure --6.78 67.6 6.2 54.2 191.5 39.9 48.7 Index with year 94-95 as base year 100.00 106.78 178.96 190.05 87.56 255.20 153.20 277.83

The profitability of the bank has increased from 4.42 crores to 10.07 crores during the period 1995-96 to 2001-02.this increase was not steady. The banks profitability was severely affected during the years 1998-99 and 2000-01.One of the reasons was the continuous fall in the interest and the adverse market conditions due to which the profit n trading in investment was reduced by 3.18 crores Voluntary Retirement Scheme (VRS) also added to the burden by an amount of 2.48 crores. Another major contribution was the impaired loan assets, which were written off instead of being provided for. The continuous fall in the interest rate continued even in 2001-02, but the treasury market contributed appreciably to the profitability.

(FROM 95-96 TO 01-02)

Table 5.5 Year 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Productivity / Business per employee 63.0 96.6 115.00 121.00 131.17 153.66 184.28 199.24 Increase / Decrease over the previous years figure --36.0 19.0 6.9 10.17 22.49 30.62 14.96 % Increase / decrease over the previous years figure --54.14 19.79 3.90 8.26 17.56 19.50 5.40 Index with year 1994-95 as base year 100.00 152.38 182.54 192.06 208.21 243.90 292.51 316.25

The staff productivity of the banks has increased from 63 lakhs to 199.24 lakhs over the period 1994-95 to 2001-02.The bank has recognized that up gradation of employee skills at all levels is essential to meet competitive challenges. Accordingly, the Dhanalakshmi bank’s staff training imparts timely training to the employees covering areas like forex, credit, non-performing assets management, priority sector, human resource management, automation, customer service, marketing etc. The bank is also at times introduce staff welfare measures aimed at increasing the motivational level of employees with a futuristic vision and to offer professional service to clients well experienced and qualified youngsters were recruited both from the market and the campus.



A bank is an institution, which deals with money and credit. It accepts deposits from public, makes the funds available to those who need them, and helps in the remittances of money from one place to another. In other words, a banks collects money from those who have it to spare or who are saving it out of their income and it lends money to those who require it. A unique function of the bank is to create credit. In fact, credit creation is the natural outcome of the process of advancing loans as adopted by the banks. When a bank advances a loan to its customers it does not lend cash but open an account in the borrower’s name and credit the amount of loan to this account. Thus whenever a bank grants a loan, it creates an equal amount of bank deposit. Creation of such deposit is called credit creation. Which results in a net increase in the money stock of the economy. Banks have the ability to create many times more than their deposit and this ability of multiple credit creation depends up on the cash reserve ratio of the banks. When these loans taken are not repaid so much of funds has gone out of the financial system and the cycle of lending-repaying-re lending is broken. The bank has to repay it’s depositors and others from whom money has been borrowed. If the borrowers does not repay, the bank has to borrow additional capital funds to repay the depositors and creditors. This lead to a situation where bank also reluctant to lend fresh loans thus chocking the system. Once the credit to the various sectors of the economy slows down, economy is badly hurt. There will be slow down in the growth in industrial output and fall in the profit margins of the corporate and subsequent in the markets.









Particular Gross NPA Net NPA Net Advances Net NPA to Net Advances Provision towards NPA Net profit during the year N.A. N.A. N.A. 4.51 225.00 791.00 N.A. N.A. N.A. 11.01 661.00 840.00 9635.89 7531.26 61080.78 12.31 629.00 387.00 11756.70 8582.33 77457.85 11.08 1070.00 1128.00 13489.00 10167.00 89656.08 11.34 3322.00 677.00 14586.00 10955.00 93953.09 11.66 3631.00 1007.00

In this study an attempt is made to analyze the non-performing asset level of Dhanalakshmi bank limited by analyzing the various figures relating to the bank in the terms of gross non performing asset, net non performing asset, net advances, provision made towards non performing assets each year which have been complied from the various years annual report of the bank.

(FROM 1998-99 TO 2001-02)









Particulars: Gross NPA Net NPA N.A. N.A. N.A. N.A. 9635.89 7531.26 11756.70 8582.33 13489.00 10167.00 14586.00 10955.00

Chart 6.1

The aggregate net non-performing asset of the bank is on an upward trend. But taking on a yearly basis, not much trend could be identified out of the four years of data considered for analysis, net non-performing asset, increased at an increasing rate registering an increase of 14% and 18.5% respectively. But in the third year there was a decline in the rate of increase, say, and the net non performing assets increased only by 7%. This can be seen from the chart above.

The movement of NPA seems to have increased at an increasing rate, even though slight decrease is observed in the rate of growth in some years. So from data analyzed above, it can be assumed that the bank has taken either stringent steps to reduce the NPA or it might not have given more advances during that year.

(FROM 1998-99 TO 2001-02)









Particulars: Net Advances N.A. N.A. 61080.78 77457.85 89656.08 93953.09

Chart 6.2

ANALYSIS The advances of the bank show an upward trend through the period 1998-99 to 2001-02. This can be seen from the data regarding the advances of the bank during this period. Net advances of the bank increased by 26.8% in the first year, 15.8% in the second year 4.8% in the third year. From this it could be seen that such increase in net advances is increasing at a decreasing rate over the period under study. INTERPRETATION Non-performing assets being a direct result of advances, it may have resulted from increase in the net advances. While increasing advances may be necessary for the survival & progress of the bank itself, it should not mean increased justification for the higher incidence of non-performing assets. If recovery were good, perhaps, NPA could have been reduced. In other words, increased NPA can be directly attributed to non-recovery advances made to borrowers, in time.

(FROM 1996-97 TO 2001-02)


Year Particular







Net NPA to Net Advances







Chart 6.3

To understand the real impact of non-performing assets, the chart is drawn taking the net non-performing assts of the bank as a percentage of the net advances. From such chart, what can be seen is that the said percentage (the net non performing assets as percentage of net advances) was constantly increasing for the first three years and showed a sudden decline in 1999-2000 before increasing again. INTERPRETATION Even though there was a sharp increase in the advances given by the bank in the year 1999-2000, it can be seen that Net NPA decreased to a great extent in that year. From this we can assume that bank must have taken up fruitful efforts to recover money from the willful defaulters. On the other hand, borrowers may have become incapable

to pay back, possibly because their business did not take off as expected. In this case, Project evaluation department may have not evaluated the prospects of the project properly. Alternatively, the entrepreneur / the borrower may not have encashed potential market opportunities. These aspects may have increased the NPA of the bank. However, some stringent measures may have played a role in controlling the NPA in the said period.

(FROM 1996-97 TO 2001-02)



Year Particular Provision towards NPA Net profit during the year







225.00 791.00

661.00 840.00

629.00 387.00

1070.00 1128.00

3322.00 677.00

3631.00 1007.00

Chart 6.4

On analyzing profit and loss account of the bank, it could be seen that provisions and contingencies is one herd, which has a negative impact on the net profit of the banks, and provisions made towards non-performing assets, being item contributing to such head. On going through the figures of the Dhanalakshmi Bank Limited relating to net profit and provision made towards non performing assets, a sharp increase can be seen in the provision made towards non performing assets in the year 19992000, which could be explained by the tightening of provision norms which made

it compulsory for banks to keep a provision of .25% even on their standard assets also from 31-3-2000.

Profit is the most important parameter for evaluating the performance of a bank. In the present day scenario profit is not just an accounting concept of excess of income over the expenditure, but is surely more which ensures survival and growth in the future. Level of non-performing asset is an important factor affecting the profit of the bank,. as the profit margin depends up on the synthesis of cost and yield (by yielding no income) reduce the profit. Here in the case of Dhanalakshmi bank limited, the provision made towards NPA has increased at an increasing rate over the year, which has a negative impact on the profit of the bank. So we can assume that profit of the bank might have affected negatively because of the exorbitant provision towards NPA. This may be because, in the event of absolute nonrecovery of the lent money, certain provisions become necessary in order to reduce profits, so that taxation can be under control

(1998-99 TO 2001-02)







Particular Gross NPA Additions during the year Reductions during the year Net recovery during the year Recovery as a % of gross NPAs 9635.89 --------11756.70 3970.81 1850.00 2120.81 18.04 13489.00 4654.0 2922.0 1732.00 12.84 14586.00 5546.0 4449.0 1097.00 7.52

Description of the above table: From the table above it could be seen that even though there is a substantial increase in the reductions in non-performing assets over the years, the additions are also on the increasing at a higher rate. As a result, the net result, the recovery is affected, showing a decline a decline in the trend which is clearly shown in the chart below, with net recovery during the year taken as a percentage of gross non performing assets

(FROM 1999-00 TO 2001-02)

Table-6.7 Year 1998-99 1999-00 2000-01 2001-02

Particulars Recovery as a % of gross NPAs --18.04 12.84 7.52

Chart 6.5

The net recovery during the year 1999-2000 was 18.04% of gross non performing assets, while it was 12.84% and 7.52% in the following two years i.e., in 2000-01 and 2001-02 respectively, i.e., the net recovery is declining not only by amount but also with respect to its contribution as a percentage of gross non performing assets. This is an alarming situation.

The above analysis reflects that the Bank’s recovery strategy may not be effective., So we can conclude that bank’s NPA is increased perhaps because of inefficient recovery strategy. While the strategy for recovery may have been good, the bank’s recovery in-charge officials may not have taken the necessary

Herculean efforts towards the same in order to save the bank from the current pathetic situation. Lethargy, or complacency of previous year’s good recovery may have crept in.

Chapter –VII


NPA accounts are to be grouped and classified borrower wise and not facility wise ie. If a borrower enjoys more than one facility and one of them become NPA, than all facilities enjoyed by the borrower should be treated as NPA and classified under the same asset classification. NPA account where the recovery would become difficult on account of erosion in the value of security or non-availability of security and existence of factors such as fraud committed by borrowers should be straight away classified as doubtful and loan asset without keeping them under sub-standard asset.

The bank also keeps flagging the NPA accounts to have real time surveillance over such accounts. The TBA package available in the computer is made use of in doing so. The bank as its recovery policy follows the measures like ; • • • Conduct over recovery melas Offer compromise proposal or Filing suits

7.2. RECOVERY MELAS The letter sent to the borrower should not include a general offer of discount, reduction of interest etc. Such offers should be made only during individual discussions depending up on the merit of each case. Confidentiality of information should be respected even in respect of small clients. Other borrowers/customers should not be permitted to be present while discussions are going on with one borrower

7.2.1 Conduct recovery Melas It has been decided to organize recovery melas in respect of accounts, which are either border line or identified as NPAs in certain identified centers where the incidents of NPAs Sis on the higher side. The venue of such recovery Melas is usually the branch premises. 7.2.2 Action Points Branches to contact the NPA / border line borrowers personally and fix a date(s) mutually convenient for the Mela.

Mela will be attended by senior executives from central office in addition to zonal head so as to enable to take spot decisions according to the merit of the case. Where there is cluster of branches situated in a particular area, the borrower of the near by branches may also be called to attend the Mela. Branches / Zonal heads should also explore the possibility of the recovery / settlement in respect of suit filed as well as decreed accounts also.

Compromise means agreement reached between two parties by mutual concession. Here it means a process of reconciliation with the borrower for recovery of dues with sacrifice. The sacrifice is on the part of the bank only and not the borrower. Compromise proposals cannot be encouraged as a routine. It is the bank, who decides whether to go in for compromise or not. It not the right of any customer. The compromise should be negotiated settlement under which the bank should ensure the recovery of dues to the maximum extend possible at minimum expense.

Recourse to legal procedure is not only time consuming but also expensive. Bank resorts to legal recourse for recovery of the dues as a last resort even though other process will also be continued simultaneously for realization of the amount.

The avoidable delay on the part of the operating staff may on account of the misplaced optimism based on the promise made by the defaulting borrowers without making any substantial remittance towards the account shall not be relied upon. 7.4.1 Legal process (advice to branches) On the receipt of necessary approval / sanction for filing suit, branches shall arrange to issue legal notice within five days if not already issued. If issued before, a fresh notice to be issued. During the notice period, draft plaint shall be got prepared from the advocate. On the expiry of the notice period given at the time of issuance of legal notice, branches shall furnish the response of the parties along with draft plaint, together with all security documents, title deed etc. of zonal office / legal sanction of company office for necessary approval. On getting the draft plaint duly approved by the zonal office / company office, arrangements for filing suit to be made and completed within 10 days.




From analyzing the data collected, the various parameters like the deposits, advances, gross NPA, Net NPAs, cost of deposits, staff productivity etc. of the bank over a past few years, the following findings were arrived at. • Net advances is also increasing but at decreasing rate over the period

under study. • • The aggregate net NPAs of the bank are on an upward trend. Staff productivity of the bank is increasing. Which indicates efficient

recovery measures but is not reflected in the recovery trend. • Provision made towards NPAs were on a sharp increase affecting the net

profit adversely. • The net result, the recovery is affected, showing a decline in the trend. The major reasons for NPAs are • • Lack of proper and systematic appraisal system Flouting of stipulations and conditions in the sanction advice, which

includes:  Non-conduct of post sanction inspections  Defective documentation  Lapses in creation of mortgages and registration of charges with the registrar of companies.  Non-ostentation of stock / receivable statement and failure to calculate eligible drawing power.  Lack of regular follow up.  Absence of proper systems at the branches and controlling offices resulting in.

 Failure to detect incipient signs of sickness.  Persistent difficulties in accessing collaterals and recovering their market values because of legal hurdles.

It has been proved beyond doubt that non-performing assets in banks ought to be kept at lowest level. NPA menace, following suggestions is necessary.

Banks need a robust end-to-end credit management process begins with an in depth appraisal focused on risk inherent in proposal and credit rating of clients and ends with effective value addition to the bank. Appraisal and monitoring are therefore the two most important factors in order to prevent the occurrence of NPAs at the first instance. Some of the strategies at the preventive stage are as follows:     Maintenance and regular updation of client profile. Credit rating of clients Computerization of loan accounts. Strong inter-department management information system among loans,

operations and recovery departments.    To establish a system of early warning for potentially weak loan accounts. Observance of limitation period. Timely extension of period of limitation.


In order to expedite disposal of high value claims of bank Debt Recovery Tribunal were set up. The performance of ten DRT’s currently working may also not be considered satisfactory. Out of Rs.8900 crore transferred to DRT’s by March 1997,only a sum of Rs.178 crore has been recovered. The report submitted by the study group set up by the R.B.I. to streamline the functioning of DRT’s is under consideration by government.

Banks may create special cells at their head offices/zonal offices to monitor progress in regard to cases filed with/ transferred to DRT’s. Similar cells, assisted by law officers may be created for follow up of high value suits and execution of decrees obtained.

Recalcitrant borrowers are coming forward, especially from the areas where functioning of DRT’s is stabilized, with compromise offers to repay the banks dues. Needless to mention, delays in processing compromise proposals must be avoided at every stage with the objective of setting the issue.

With view to cleaning the balancing the balance sheet , write offs in small NPA account of doubtful and loss categories where chances of recovery are bleak, need to be expedited by formulating broad parameters/guidelines.

Regular training programme on credit and NPA management for all levels of executives are desirable to upgrade the skills necessary to :   Prevent deterioration of assets Limit losses on fuzzy assets and

Effect quicker recovery/realization in NPA accounts.

Tackling NPAs through non legal measures like quick review of potential NPA account, compromise/OT’s, write offs, rehabilitation, rephasement etc. would go long way in guiding bank functionaries to effectively deal with problem loan account.

By holding recovery camps and Lok Adalat, counseling the borrowers could be done.

There should be normally no case for rehabilitation and bank’s financial assistance, if the unit is sick due to technical obsolescence/ inefficient management, financial irregularities. The sooner we settle the dues of such companies/OTs or through legal action, the better it is.

The public sector banks should use their wide network of branches and infrastructure to deepen their lending for whole sale and retail trade, housing, agriculture etc. with a view to reducing NPA ratios.

To mitigate the problem of NPAs, reduce the incremental credit deposit ratio of banks over a period. So that the banks reduce their average credit deposit ratios and the incremental NPAs will be zero. If by investing in safer securities though at

high rates of interest, the banks can earn sufficient net margins, then it is possible to gradually eliminate their high NPA levels. It is possible that average yields on loans and advances net of default provisions and service costs may not far exceed the average yields on safer security which net yield by definition because of absence of risk and service costs.

Indian banks are largely dependent on the lending and investment, while the banks in the developed countries do not depend up on this income. 86%of income of Indian banks is accounted by interest, U.S. banks derive only 62% of income from interest, for U.K. banks

is only 59%, Germany 64% and Switzerland 51%. The rest of income is fee based. Indian banks have to look for source from services and products. Non-interest income should come from innovative products and not through higher service changes that the public sector banks charges to the customer. 8.2.12. INTRODUCE MARKETING CONCEPTS AND NEW

TECHNOLOGIES TO SHARPEN COMPETITIVE EDGE According to Sir De, the winner of writers association life time achievement award 1997, on banking research, the basic pitfalls of Indian banking systems are:Absence of marketing concepts in the business development plans. Lack of skill and inefficiency to adopt new technology to sharpen competitive edge. Indian banks have to give more concentration to remove the abovementioned problems to reduce NPA level.

1. Effective recovery 2. Compromise to improve recovery status of account. 3. Partial write off. 4. Adjustment of collateral security. 5. Pressure on guarantors. 6. 7. 8. 9. Special recovery drive Help from revenue authority. Settlement of claims with DIGGC/ECGC. Officials from controlling offices should visit branches frequently and

should check for any incipient irregularities\sickness.


Analysis of NPAs of commercial banks – Analyst July V. Venugopal – ‘Prudential norms for banks and NBFC’s Annual reports of Dhanalakshmi Bank Limited. www.rbi.com www.dhanbank.com www.research.com (Personal website of R. Kannan) Report on trend and progress of banking in India 2001Professional Banker November 2002 September 2002 April 2002

– Revised 5th Edition. c.
d. e. f.

g. 2002 – RBI h.



I, Sibichan .C.J., here by declare that this project work is the outcome of my efforts and not a replica of any other report/work submitted to any university or boards.

I also declare the same report has not been submitted to any other University or Board for the award of any other degree or diploma.


Exchanges of ideas generates a new object to work in a better way. Apart from the ability labor and time devotion, guidance and co-operation are two pillars for the success of a project. Whenever a person is helped or co-operated by others, his heart is bound to pay gratitude to others.

In this chain, I am immensely thankful and convey my sincere gratitude to my project guide,K.Sethunath. Mgr.Fin,DBL , for his enlightening guidance, constant inspiration and keen interest shown on me during making of this project. I deliberate my profound sense of gratitude to him. I wish to express my gratitude and affectionate respect to my project guide of R.V.I.M.,Prof.S.Remesh for his counsel and incessant inspiration and for all his advice and guidance in the completion of the project work. My special heartful gratitude is due to my director Dr T.V. RAJUand R.Krishna. for all his encouragement and extended co-operation, which I needed to complete this report. My acknowledgement would be incomplete without expressing my sincere thanks to all the employee who actively helped me in every respect by providing relevant data and information placing to my project.























3.1 3.2



4.2 4.3 4.4 4.5 5.1 5.2 5.3 5.4 5.5 6.1 6.2 6.3 6.4 6.5 6.6 6.7














Consultant & MBA

4th ‘T’ block, Jayanagar, Bangalore - 41


This is to certify that the project work titled ‘AN ANALYSIS OF NPA IN COMMERCIAL BANKS WITH SPECIAL REFERENECE TO DHANAL;AKSHMI BANK LIMITED’ is the outcome of bonafide research work carried out personally by Mr.SIBICHAN.C.J. Reg.No. 01 BUCM 2050 under my supervision and guidance This has not formed a part of any degree or diploma of any University / Institution / Board prior to this submission to Bangalore University as a partial fulfillment of the requirements for the award of MBA degree to him.


Date : - 08 – ’03

An analysis of NPA

in Commercial Banks with special reference to Dhanalakshmi Bank Limited Submitted in Partial fulfillment of the requirements for the award of “Master of Business Administration” of Bangalore University

By Mr.SIBICHAN.C.J. Reg.No. 01 BUCM 2050 Under the guidance of
S. REMESH . Consultant & MBA Faculty R.V.I.M BANGALORE.

2001 – 2003

CA – 17, 36th Cross, 26th Main, 4th ‘T’ block, Jayanagar, Bangalore - 41


The Narasimhan Committee, as part of the second phase of the banking sector reforms, has recommended a tightening of the asset classification and provisioning norms with an objective of moving towards the international norms. It has recommended that an asset should be classified as doubtful when the borrowers fail to clear the interest payment in one quarter (90 days) instead of the current practice of two quarters (180 days) and government guaranteed advances, which have turned sticky, should be treated as NPAs. Tightening of these norms will force banks to make additional provisioning. However, an internal State Bank of India estimate says the impact of the tightening of the NPA norms on its balance-sheet will be only one percentage point increase in NPAs. SBI's current NPA level is pegged at about six per cent. SBI along with the Calcutta-based Allahabad Bank has for the first time made the provisioning (.25 percentage points) for their standard assets in fiscal 1998. One significant point to note is that the banking industry traditionally shows underestimation of NPAs as there is always a difference in perception between the auditors and the RBI inspectors. For instance, in fiscal 1997, the industry underestimated its NPAs to Rs 38.62 billion and underprovided to the extent of Rs 14.12 billion. The Board for Financial Supervision of the RBI has cited the following reasons for the lower recognition of NPAs and subsequent under-provisioning: 1. Failure to identity an NPA in terms of stipulated guidelines: There have been instances of 'substandard' assets being classified as 'standard'; 2. Wrong classification of an NPA: classifying a 'loss asset' as 'doubtful' or 'substandard' asset; classifying a 'doubtful' asset as a 'substandard' asset.

The BFS has also detected instances where a bank has classified an account of a borrower as 'substandard' and other accounts of the same borrower as 'standard', throwing prudential norms to the winds. "Essentially arising from the wrong classification of NPAs, there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made as per the assessment of the RBI inspectors," the internal document said. The worst "offender" is the public sector banking industry. Nineteen nationalised banks along with State Bank of India and its seven associate banks have underestimated their NPAs by Rs 30.29 billion. While the RBI estimates the PSU banks' NPAs at Rs 469.07 billion, the actual NPAs acknowledged by these banks are much lower at Rs 438.77 billion. The difference between the RBI estimates and actual provisioning in PSU banks is pegged at Rs 10.74 billion in March 1997. In percentage terms, however, nine new generation private sector banks showed the maximum amount of ''NPA amouflaging" and under provisioning. While the RBI estimated the NPAs of new private banks at Rs 3.28 billion, the actual figure shown by these banks is only Rs 2.05 billion. Similarly, the difference between the RBI estimate and the actual provisioning is Rs 968.5 million. While the RBI inspection teams put the right provisioning requirement at Rs 1.20 billion, the new private banks made provision of only Rs 234.5 million. In contrast, the old private sector banks underestimate their NPAs by a meagre Rs 6.52 billion. Nearly 26 old private sector banks registered NPAs to the tune of Rs 21.38 billion in March 1997 while the RBI felt the actual NPAs should have been pegged at Rs 27.90 billion. The difference between the RBI estimates and actual provisioning is a paltry Rs 1.61 billion. Old private sector banks provided for Rs 4.93 billion in March 1996 while the RBI inspection teams opined the provisioning needed to be at Rs 6.55 billion. As a group, 37 foreign banks underestimated their NPAs by Rs 875.5 million and provisioning by Rs 797.6 million. The RBI estimated NPAs of foreign banks at Rs 13.55 billion while the actual NPAs shown by these banks were to the tune of Rs

12.68 billion. Similarly, foreign banks provided for Rs 4.02 billion while the RBI inspection teams estimated the right amount of provisioning at Rs 4.82 billion.

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