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national economic structure. Banking institutions have contributed much to the development of the developed countries of the world. Today we cannot imagine the business world without banking institutions. Banking is as important as blood in the human body. Due to the development of banking advances are increased and business activities developing so it is rightly said, " The development of banking is not only the root but also the result of the development of the business world." After independence, the Indian government also has taken a series of steps to develop the banking sector. Due to considerable efforts of the government, today we have a number of banks such as Reserve Bank of India, State Bank of India, nationalised commercial banks, Industrial Banks and cooperative banks. Indian Banks contribute a lot to the development of agriculture, and trade and industrial sectors. Even today the banking system of India possess certain limitations, but one cannot doubt its important role in the development of the Indian economy.
INTRODUCTION OF CO-OPERATIVE BANK Unlike commercial banks which are engaged in serving the industrial and commercial sectors of the economy, the cooperative banks, on the other hand provide credit and allied facilities to the rural and agricultural sectors. The dawn of this country saw the evolution cooperative movement in India. Cooperative societies came into being when the Cooperative Societies Act, 1904, was enacted. The movement was started with the aim of providing farmers funds with low rates of interest so that exploitation by the village moneylenders is foiled. The Act provided for the formation of cooperative credit societies and a number of small primary credit societies were established in various parts of the country. These societies, however, could not mobilise enough resources as compared to loans demanded by its members. This led to the enactment of a new act in 1912. The Cooperative Societies Act of 1912 provided for starting Central Cooperative Banks with headquarters located in urban centers. In 1914, necessary steps were taken by the then government to strengthen the cooperative movement .The government appointed the Maclagan Committee to look into and make recommendations for the improvement of a State Cooperative Bank for each State. The state Cooperative Bank is formed by the federation of Central Cooperative Banks functioning at the district level. The present organisation of the cooperatives in India is based on the recommendation made by the Maclagan Committee. In 1919, the Montague Chemsford Act made Cooperation a provincial subject. Since then, separate Cooperative Societies Acts have been passed by all state governments. Although cooperative banks in India have shown progress since their establishment, there still exists a number of defects in the 2
organisation. This has led qualitative improvement to suffer. However, the Reserve Bank of India took the initiative to revitalize, reorganize and promote the growth of cooperative banking in India. Under the Banking Regulation Act of 1949, Cooperative banks have been brought under the control of the Reserve Bank of Bank. Farmers in India are scattered all over the country and need shortterm small borrowings for agricultural purposes. This need is not fulfilled by commercial banks which are unsuited for financing agriculture. Land which these farmers can offer to cover bank advances is not generally accepted as security by commercial banks. Therefore, special types of banks are necessary for the financing of agriculture. Co-operative banks are best suited for this purpose. The object of co-operative banks is to offer banking facilities to persons of limited means requiring credit for productive purposes in the use of the land and labour at their disposal. The co-operative banking structure in India may be divided into three component parts, viz., 1. Primary co-operative credit societies. 2. Central / district co-operative banks. 3. State co-operative banks (also called as apex banks) at the top. 1. Primary co-operative credit societies: Primary credit society is at the bottom of the three-tier structure of co-operative banks. The society normally contacts farmers. So, only a few people living within the area of society are admitted as members. Here individuals of a particular area meet together inspired by sentiment of co-operation. Every 3
member has to pay his share In a share capital. The price of a share is nominal so that even a common man can be a member. The functioning of such society is limited. The society is managed by elected people. Hon-secretary and members of working committee. Such a society collects its funds by admission fees ,share capital and deposit of people. In case of need such society also get finance from central co-operative banks or state co-operative bank. Normally society grants loans to members on individual responsibility. 2. District co-operative Bank: This bank is a link joining state co-operative bank with the primary credit society. After the report of all India rural advances inquiry committee in 1945, the central co-operative banks earned much importance the flow of rural advances reach to every farmer's home through this bank via credit society. In reality central co-operative banks were establish to supply financial help to primary credit society. 3. State Co-operative Banks: This is the apex bank in the three tier structure set up of the country. Maclegan Committee appointed in 1974 recommended to establish at least one state co-operative bank per state. To day every state has the state co-operative bank. This bank especially co-operative ordinates them and give required guidance. There were approximately 26 state co-operative banks at the end of 77/78 in India. Since state co-operative bank is an apex bank, its main function is co-ordination of co-operative lending, its balance and controlling. The financial help for co-operative lending activity given by Reserve Bank is also given through state co-operative bank. 4
Chapter: 2: History of The Bank
First decade of 20th century has a very important place in the history of cooperation for entire country and Surat District as well. Many cooperation institutions were initiated during this period. First coop. Society in Surat District was registered at Degam, Taluka Chikhli on dated 23-5-1906 (Now in Bulsar District). In the year 1908, with the efforts of Late Shri B.A.Modi and Shri K.G.Desai. The Surat Dist co-op. union Ltd., was registered on dated 176-1909. It was this institution which is known as THE SURAT DISTRICT CO.OP. BANK LTD. When the Union was empowered to establish new societies etc. By 1921 The Surat District co.op. (Urban) union was initiated. In 1923 The Surat District Co.op. Bank Ltd., The work extended to the entire Surat District, which had 21 talukas and a vast working area with geographical variation. The coastal area which included city of Surat and towns like Navasari - Bulsar - Bilimora the fertile flat and than totally tribal area with hills and dense forests. The Vast Surat District was bifurcated in 1965 and of Bulsar was separated. At present there are 14 talukas in the district, of which 9 are in the tribal area. Bank had a separated department for agriculture advances form 1944, and become an effective central agency for coordination and smooth flow of finance to cooperative sector in the district. After 1960 when shree Khedut Sahakari Khand Udyog Mandali Ltd., Bardoli came into existence, the entire Surat District gradually become a sugar belt. All exiting eight-sugar factories had teething financial troubles in the beginning, Bank had provided them enough finance and assistance even for share capital also. By lapse of time Sugar 5
cane has now become now become principal crop in the district our of total cultivable area of 419000 hectares 89800 hectares is under sugar cane cultivation. This revolution in agriculture was amply supported by The Surat District Co.op. Bank Ltd., These factories have became main strength of the economic structure of the district, particularly for farmers. Totally together these factories have a crushing capacity of 37500 tons per day. Annual sugar production exceeds Rs.500/- crores. Bank has sanctioned limits exceeding Rs.300/- crores to this sector. In the year 1965 The Surat Dist.co.op. Bank was separated from this bank after formation of Bulsar District from old Surat District. After separation bank's Financial Position is as under. No. Of Branches Share Capital Reserves Deposits Advances 15 Rs. 0.22 Crores Rs. 0.09 Crores Rs. 3.06 Crores Rs. 1.71 crores
Since 1965 the structure of Board of directors has remained unchanged. In all, there are 21 members on the Board as under. One Director from each Taluka Two Individual Directors One Director from Surat City Three nominated director by state Government One director from The Gujarat State Co.op. Bank Ltd. District Registrar (Co.op. Societies) TOTAL MEMBERS 13 2 1 3 1 1 21
Past Chairman of the Board Shri P.K.Desai has been awarded "Kaka Saheb Gadgil" award forhis outstanding services to the society. He has also been awarded by the Gujarat State Co.op. Union by "Sahakari Award". He is Director of the bank since 1952 and Chairman from 1967 to 1975 he continues to be the Chairman up to 8-01-2001. Management has always remained progressive, be a challenge after Bank Nationalization introduction of nonfarm advances, introduction of New banking concepts in liberalized economy. Board has formed committees for loans, staff matters, Legal matters, and new construction etc. power have been delegated properly to smoothen day to day working.
Growth of deposit was steady and in harmony with Advances. Deposit growth was unprecedented during 1994-'95. There was a huge
demand from sugar co.op. Factories for funds, Bank has to resort short term planning for funds. During the same period RBI removed the interest restrictions on deposits.
Major chunk and advances goes to sugar sector: It is obvious true as the major crop of the district is sugar cane. There are 8 sugar factories in Co-operative sector, all of them totally have a turnover exceeding Rs. 600/- crores and as such bank's major share goes to this sector. It the last decade, bank has gradually paid more attention to nonagriculture and Individual advances. New schemes, to finance for consumer durable, vehicles, House construction. Professional loans also have been introduced. More attention is paid to develop banking routing business also. Bank has actively taken up the steps for diversification of Loan portfolio. Powers are delighted to the branch Manager to sanction loans up to Rs.1, 00,000/- for 'A1-Grade branch and Rs.50, 000/- for 'B' Grade branch under individual confirm sector loans from dec.'98. Also power are delighted to the branch Manager to sanction loans up to Rs.50, 000/for all branch under individual farm sector loans from Nov.'99.
YEAR 1965 1985 1995 1998 8
TOTAL ADVANCES 2.45 45.03 216.77 293.01
Bank has also assisted cooperative institutions and farmers in hours of crisis, in formation of a sugar factory, sale purchases union, SUMUL. In a natural calamity like floods, riots etc bank has assisted them oftenly. Bank has faced successfully overcome may challenges. Banks, management and staff has worked hand to hand. Mutual confidence between staff union and management has benefited the organization. The bank was judged as best bank by NABARD & Beat performance award for the year 1995-'96 was awarded by NABARD. Reserve bank of India has granted license to the bank to carry on banking business in India, very few DCCBs are having such license. Bank has always been securing Audit classification under category 'A' and has paid highest permissible dividend under state co.op. Act. To its members. Under the new environment of liberalization bank has to plan for modernization of its activities. To keep a pace with modern banking system, bank has accepted to go for Automation of banking work, at present five branches are computerized. Has to plan its resources in more coordinated way and search for new avenues to maximize the profit, has to provide more effective customer service, to market its products successfully. This all has to be achieved keeping in view the co-operative principles and farmer's interest. CHAPTER 3: OBJECTIVSS OF THE PROJECT • The main objective of behind this project is to analysis the actual position of NPA deeply • To know about the NPA classification and provisioning requirement for non-performing asset: 9
• To calculate the total non-performing asset and compare with other banks and on the basis to decide the growth rate of different bank. • The main object is know about the proper system of bank for reducing non-performing asset or for conversion of non-performing asset. • To know the various and strategies for non-performing asset for the bank. • To learn about how to solve the problem of non-performing asset.
CHAPTER 4 : LIMITATION
o The bank I have chosen is totally on rural or agricultural bases, so the bank cannot provide some English literature for helping me in project.
o It is on rural basis, and other banks, which are comparing and with it are not only rural basis so comparison will not made properly.
o This bank is on basis of rural or agricultural part so it will not accept the system of urban banks.
o The amount of loans and advances are also limited so it is obvious that the non-performing of this bank will les than the other comparatives banks.
o Non performing asset cannot be totally converted into performing asset but only these are some solutions for reducing it.
CHAPTER: 5: METHODOLOGY OF THE PROJECT This project is prepared on Non-Performing Assets. The methodology used in this project is as follows.
• First of all I have the basis studied the basic concept of NPA. • After the introduction, the asset classification is described and the provisioning norms for it by NAARD are shown. • All the above matters according to narsimha committee is shown. • Then according to NPA statement the NPA analysis is done on the basis of previous year’s financial data. • Comparative statement on the basis of various ratios is done. • At, last the recovery part is shown & various reasons, strategies, warning signals, recovery procedure and steps for reducing NPA are included.
CHAPTER:6: INTRODUCTION OF NON PERFORMANCE ASSET
WHAT IS NPA?
A non performing asset is defined generally as a credit facility in respect of which interest or installment of principal is in areas for two quarters or more, however, in respect of agriculture advances if interest has not been paid during the last two harvest seasons ( covering two half years) after it has become a past due (i.e. days beyond the due date). Such advances should be treated as NPA. It is important to note that the overdue installment only as per the guidelines of RBI on prudential norms.
Standard assets Standard assets is one which does not disclosed and problem and
which does not carry more than normal risk attached to business. Thus an assets, which is not NPA, may be treated as standard or Good assets. Such account holders/customers pay interest in cash regularly on prescribed dates and repay the amount of installment of loan on the due dates or before the grace period if granted.
Sub-standard asset A non-performing asset may be classified as sub-standard asset
when the asset had remained overdue for a period not exceeding three years. An asset where the terms and conditions of the loans regarding payment of interest and repayment of principals have been renegotiated or rescheduled should be classified as substandard for the last two years of satisfactory performance. Performance can be judged from the recovery of interest and repayment of installment of principal of loan credit facility.
Double Asset A non-performing asset may be classified as doubtful asset when
the asset had remained overdue for a continuous period exceeding three years.
Loan asset Loss asset are those where loss was identified by the bank
auditor/RBI/NABARD inspections but the amount has not been written off wholly or partially. An asset which is considered unrealizable and/or of such little value that its continuance as a doubtful asset is not worthwhile, should be considered as loss asset.
Past Due A credit facility is treated as past due when it remains outstanding days beyond the due date. In agriculture crop loans due dated are
fixed in accordance with harvesting seasons different types of copies I.e. kharif Corp., cash crop rabicrop etc. In investment term loan due dates or fixed after some grace period depending the returns to be derived from in investment.
GUIDELINES ON PRUDENTIAL NORMS INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING NORMS
INCOME RECOGNITION NORMS TO CO-OPERATIVE BANKS
The prudential norms for income recognition should be based on record of recovery and therefore SCBs/CCBs should not take unrealized income to profit and loss accounts. However in the case of certain states where the state co-op act provides for taking such unrealized interest to income head in the P & L A/C. it is necessary for those SCBs to make full provisioning for equivalent amount by charging to P & L A/C. In other words, the SCBs which are charging for interest to all overdue loans and if such interest remains unrealized the same may be taken to income account provided matching provision is fully made for the same by charging to P & L A/C. Accured interest taken to income account in the previous year should also be provided in full in case the same becomes overdue.
Fee, commission and other income may be treated as the income only when the account is classified as standard; Besides, a matching provision should be created to the extent such items were treated as income in the previous year but not realized in the subsequent year.
Fee and commission earned by banks as a result of renegotiation or scheduling of outstanding debts should be recognized on an accrual basis over the period of time covering the renegotiated of credit. Even in the case of credit facilities backed by Government guarantee, over due interest can be taken to P & L A/C. only in case of matching provision is made.
The bills purchased should be treated as overdue if the same remain unpaid. Interest may be charged to such bills and the same may be P & L A/C provided matching provision is made.
NORMS FOR TREATING LOANS/ADVANCES ETC., AS NPA (OVERDUE) FOR THE PURPOSE OF ASSET CLASSIFICATION
Definition of Non-performing asset (NPA)
A credit facility is treated as past due when it remains outstanding for Days beyond the due date, A non-performing asset (NPA) is defined generally as a credit facility in respect of which interest or installment of principal is in arrears for quarters or more.
Treatment of Agricultural Advances In respect of advances granted for agricultural purposes where
interest payment is on a half yearly basis, In other words, if interest has not been paid during the last two seasons of harvest(covering two half years) after it has become past due when such an advance should be treated as NPA.
Treatment of Advances for a Allied Agricultural Activities As Well As the Non-Farm Sector Credit facility granted for other allied agricultural activities as well
as for non-farm sector activities should be treated as NPA, if amount of installments of principal and/or interest remain outstanding for a period of 30 days beyond two quarters from the due date.
Term Loans (All Types) Loans in respect of which interest or installments of principal
amount remained as overdue for two quarters as on balance sheet date may be treated as NPA.
Project/Housing Loans, Etc. In respect of project (industry and plantation, etc.) where
moratorium is given for payment, loans become due only after moratorium or gestation period is over i.e. such a loan becomes overdue if installment is not paid on due date. Similarly, in case of housing loans or similar advances granted to staff members where interest is payable after recovery of principal, such loans should be classified as overdue (NPA) when there is a default in repayment of principal on due date of payment and overdue criteria will be the basis for classification of asset.
TREATEMENT OF DIFFERENT FACILITIES TO BORROWER AS OVERDUE (NPA) Short term agricultural advances are granted by SCBs to PACS for the purpose of leading. In respect of advances as well as advances for other purpose, if any, granted under lending system, only that particular facility which become irregular should be treated as overdue (NPA) and not all other facilities granted to a borrower, all such loans should be become overdue (NPA) even if one loan a/c becomes overdue (NPA).
NORMS FOR ASSET CLASSIFICATION
CRITERIA FOR CLASSIFICATION OF ASSET
Classification of agricultural and non-agricultural loans is required to be done into four categories, on the basis of age overdue, as under.
Good/standard Assets Good asset is one which can not disclose any problem and which
does not carry more than normal risk attached to business. Thus, in general, all the current loans, ST agricultural and non-agricultural loan which have not become NPA may be treated as standard asset.
Sub-standard Assets A non-performing may be classified as sub-standard on the
following basis of criteria. 1) An Asset which has remained overdue for a period not exceeding 3 years in respect of both agricultural and non agricultural loan should be treated as sub standard. 2) In case of all types of loans, where installments are overdue for a Period not exceeding 3 years, the entire outstanding in term loan should be treated as sub standard.
3) An asset, where the terms and condition of the loans regarding payment of interest and repayment of principal have been renegotiated rescheduled after commencement of production, should be classified as substandard and should remain so in
such category for at least two years of satisfactory performance under the renegotiated terms In other words, the classification of asset should be upgraded merely as a result of rescheduling unless there is satisfactory compliance of the above condition.
Doubtful Asset A non performing asset may be classified as doubtful on the basis
of following criteria. 1) An Asset which has remained overdue for a period exceeding 3 years in respect of both agricultural and nonagricultural loans should be treated as doubtful asset. 2) In case of all type of loans, where installments are overdue for more than 3 years, the entire outstanding in terms of loans should be treated as doubtful
Loss Asset Loss asset are those where loss is identified by the bank inspectors
but amount has not been written off wholly or party. In other words an asset which is considered un realizable or such little value of its continuance as a doubtful asset is not worthwhile, should be treated as a loss asset such loss asset will include overdue loans in which cases-
1) Decreases of executions petitions have been time barred or documents are loss or no other legal proof is available to claim the debt. 2) Where the members and their sureties are declared insolvent or have died leaving no tangible assets.
3) Where the members are left the area of operation of the society leaving no properly and their securities have also no means to pay the dues. 4) Where the loans is fictitious or when gross utilization is notified 5) An amount which can not be recovered in case of liquidated societies.
Provisioning is necessary considering the value of security charges to the banks over a period of time. Therefore, after the assets of SCBs are classified in to various categories necessary provision has to be made for the same. The details of provisioning requirements in the respects of various categories of assets are mention below.
The following aspects, however, may be kept in view while making provisions.
A. Agricultural Loans As Secured All agricultural loans may be treated as fully secured as the same are disbursed against charge on land as provided in the respective state co-operative societies rules. B. Treatment to P.F. and gratuity Amount Liability towards PF and gratuity should be estimated on actuarial basis and fully provided for.
C. Loans exempted from provisioning Advances against term deposit NCSs eligible for surrender, life policies are exempted from provisioning. Therefore, the above account may not be classified as NPA.
D. Loans against gold/Govt. securities Advances against gold, government securities are exempted from provisioning requirements.
E. Depreciation in investment-accounting procedure. The investment portfolio of the bank would normally consist of approved securities and other shares, debentures and bonds of co-operative and other institution. Investment in the approved securities should be bifurcated into permanent and current investments. Permanent investment are those, which banks intend to hold till maturity and current investment are those, which bank intend to deal in, that buy and sell 0 day-to-day basis. Bank should keep not more than 50% of their investment in permanent category. While the depreciation in respect of permanent investment is not likely to affect their realizable value of maturity, depreciation need not be provided for investments in the permanent category. Investment in the current category should be carried at lower of cost value or market value, on a consistent basis. Depreciations in the current investments, if any, therefore be fully provided for. Banks following a more prudent method of valuation (e.g. all the investments marked to market) should continue to do so and there should not be any slip back in their case.
Investment should be shown in the balance sheet net of depreciation. It is however, open to bank to show the book value of investment, the depreciation against and net amount of investments separately. As regard valuation of securities other than approved securities they should be valued at lower of cost price or market
values. Investments in the shares of co-op. institutions, however, may be valued at carrying cost price.
GENERAL GUIDELINES TO PRUDENTIAL NORMS
1. With a view to preparing the profit and loss a/c. and balance sheet, reflecting bank’s actual financial health, a proper system for recognition of income, classification of asset and provisioning on a prudential basis is necessary. The prudential norms for recovery rather than on any subjective consideration. Likewise, the classification of norms, regarding provisions should be made on the basis of classifications of assets into four different categories. In this connection, we advise that such prudential norms have already been made applicable to SCBs with suitable modification has been decided that these prudential norms should be adopted by SCBs on prudential norms for income recognition, asset classification and provisioning on the basis of classification of asset are given in the Annexure enclosed. These guidelines may please be studied carefully and arrangement made for their implication.
Year of Implementation Banks are advised to implement the instructions from the
accounting year 1996-97. Each branch should undertake competent officials from the internal inspection departments should verify the exercise of classifications of assets, making provisions and the same. The bank should also get the classification, verified by auditors and a certification to this effect obtain
from the Auditors. The balance sheet for the year ending 31.03.97 should reflect the financial position of the bank as arrived at on the basis of instructions now issued to banks. After the exercise is completed banks
are advised to
prepare a comprehensive note indicating the banks
position in the light of instructions contained in the circular and put it up loss a/c and balance sheet as required under sec. 29 of B.R. act, (AACS) and instructions issued from time to time on the subject. 3. Provisioning Requirement - Phasing In order to give some time to co-operative banks to adjust themselves to the new system, phasing of provision is suggested as indicated below; a) First Year 100% in respect of loss assets and less than 30% of the provisioning needed in respect of sub-standard and doubtful assets. b) Second Year The balance provisioning needed in respect of the above categories of assets together with current provision needed in respect of assets classified in the second year. In other words, all the doubtful and sub-standard assets have to be provided fully from second year onwards in addition to 100% for loss assets. The requirements of state co-operative societies Acts and or Rules made there under or other statutory attachment may continue to be followed if they are more stringent than the guidelines now prescribed by us. A copy of this latter is being sent to the RCS of your state Territory for his information with request to advised the statutory
Auditors of SCBs to look into compliance of the guidelines at the time of their audit.
Till march 1992, some commercial banks have been accounting interest income on accrual basis i.e. total interest accrued were being accounted as interest income irrespective of its actual collection. Based on the recommendation of Mr. narsimhan committee, RBI has now issued a directive that the policy of income recognition should be objective and it should be based on the record, of recovery rather than on any subjective consideration. It has been suggested that the income from the non performing asset (NPA) cannot be recognized on accrual basis unless the same is actually received. For the purpose of this prudential accounting, past due status have been defined as follows;
PAST DUE STATUS
Any amount, which remains outstanding for 30 days beyond the date will be reckoned as ‘past due’ whereas an asset become NPA, when it ceases to generate income for bank.
NPA is defined as a credit facility in respect of which the interest has remained unpaid for a period of four quarters during the year ending 31st march, 1993, three quarterly during the year ending 31st march, 1994, and two quarters during the year ending 31st march, 1995, and onwards. This shows that from 31st march, 1995, onwards, interest pending collection for more than 2 quarters prior to the date of the balance sheet
should not be accounted as income. This is applicable to term loans, cash credits, overdrafts and other types of advances also. In respect of advance granted for agricultural purposes, where interest payment is on half yearly basis synchronizing with harvest, then the bank should adopt agricultural seasons after “past due” then such advance will become NPA. In respect of cash credits and over drafts, in addition to the above norms, the account should be treated as ‘out of order’ if the out standing balance remains continuously in excess of the sanctioned limits drawing power. In cases, where the outstanding balance is within the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period, this accounts should be treated as ‘out of order’.
REMARKS ON CO-OPERATIVE BANKS
In the light of the prescription illustrated above, it is of urgent necessary that the co-operative banks also implement this prudential norms either into or with modification in a planned and phased manner. This prescription has also been implemented for the urban co-operative banks. The following critical points may come up in the course of the implementation of the above prudential norms.
As per the existing accounting system in the co-operative banks, the interest income is sanctioned on accrual basis. But a corresponding provision as ‘ overdue reserves’ is being made for the overdue interest in respect of-
I. Interest accrued on loans and demanded during the period for which it remains unrealized as on the date of the balance sheet.
II. Interest realize by debiting un-renewed cash credits and overdrafts.
But as per prudential norms prescribed by RBI for commercial banks, a provision should be made for the interest accrued on the non performing assets. It indicates that no such provision is required to be made for the interest accrued on the asset till it becomes NPA. Whereas, the system now being followed by the co-operative banks, regarding income recognition ensures that interest overdue on irrespective of period of overdue is not included as income. Hence the existing income recognition norm of co-operative banks is more stringent than those prescribed by RBI for commercial banks.
To illustrate the interest accrued and due on a particular accounts as on 31st December. 1992 can be treated as income, even thought it is not realized as on 31st march 1993, as per the norms prescribed by the RBI for commercial banks. But in case of co-op. banks, even the interest accrued and due for payment on 31st march 1993, if not realized then it will not be treated as income for the purpose of profit as on 31st march 1993. 30
SYSTEM OF REVERSAL OF UNREALISED INTEREST
As per the state co-operative society Act and by Low of the cooperative banks, at last 40% of the profit each year is to be appropriated to statutory Reserve Fund and Agriculture Credit Stabilization fund at the rate of 25% and 15% respectively. the remaining amount of profit is also appropriated as per by low provisions. But there is no system of carrying over the profit or part of here is required to be made, then there may not be sufficient profit left in that year to carry out such reversal.
TRANSPARENCY IN ACCOUNTS & PROVISIONING REQUIREMENTS AND ITS LIKELY IMPACT ON RURAL CREDIT
Government of India set-up a committee on financial system which is known as narsimhan committee to examine all aspects relating to the structure, organization, functions, procedure of the financial system of our country including banking and non banking organizations.
On consequent upon the nationalization of commercial cooperative banks, exhibits true picture and become transparent. Here it is humbly tried to examine and to study such recommendation on income recognition, asset classification and provisioning on P & L a/c. and its likely impact on rural credit provided by co-operative bank as well as commercial bank. 1) INCOME RECOGNITION The committee was of the view that the banks in India should follow the international practice of treating an account as non-performing asset (NPA) when interest is overdue for at least two quarters. No income should be recognized on such accounts. Having accepted this recommendation, the RBI has already issued guidelines to all scheduled commercial banks indicating that an amount under any credit facility to be treated as ‘ past due’ when it has remind outstanding for 10days beyond the due date. Further, a NPA should be defined as a credit facility I respect of which interest has reminded unpaid for period of our quarters during the year ending March 1933, three quarters during the year ending
31st March 1994 & two quarters during the year ending 31st March 1995 and onwards. N case of agricultural loans the account will be treated as NPA if interest has not been paid during the last two seasons of harvest after it has become past due.
2) The bank should not charge and take to income account interest on all NPAs. The RBI instructions indicate that the interest accrued and credited to income account only during 1991-92 with respect to NPAs should be reversed or provided for on the current accounting period i.e. 1992-93 if uncollected.
3) For applying these norms credit facilities with outstanding balance of Rs.25000/- and above alone need e considered. Credit facilities backed by government guarantees though ‘past due’ should not be treated as NPA.
(4) As in the case of income reorganization, the provisioning norms will apply only for such credit facilities with an outstanding balance of Rs.25000/- and above, however, in respect of amounts below Rs.25000/aggregate provision to the extent of 2.5% of the total outstanding should be made as prudential norms. Incase of advances guaranteed by ECGC provision should be made only for the balance in excess of the amount guaranteed by this corporations. The banks also been allowed to face half of their provision requirements during the year 1992-93 to the subsequent year.
(5) Transparency in accounts The committee also felt that the banks balance should follow the recommendation of the International Accountant Standards (IAS). Committee with regard to transparency and disclosures.
(6) Income recognition The income recognition norms, prior to the fresh guidelines issued by the RBI, were not aligned to the international norms as recommitted by the committee. The earlier guidelines required scheduled commercial banks not to recognize income in respect of degree, suit field and identify bad doubtful accounts. The application of these norms allowed a major of subjective ness compare to the objective assessment on income reorganization to be followed under the IAS norms. It has been understood that most of the scheduled commercial bank to which the norms where apply had indicated that the recognition of income as per the prudential nouns would put them into losses, leading to the revision of the norms by the RBI in December 1992. the separate treatment of agriculture accounts for classifying them as NPA being co related to harvest seasons is appropriate logical.
(7) As per the provisions of sections 29 and 31 of the BR act 1949 the co operatives are require to take the total interest accrued to the profit and loss account and make full provisions for the interests not realized. However the provisions actually made may not be adequate in many cases. since the BR act does not cover all the co-operatives, 1949 some of them follow a system of taking only the realize interest to the profit and loss account. If any notice in this regard are followed up for rectification.
(8) Provisioning requirements. The need for an objective definition to identify non-performing assets has been felt since as the Health Code Classification applicable leaves much to the discretion of the individual banks. The classification into four bored groups, as suggested by the committee, is likely to minimize the subjective element. Extent of provision to be made in respect of the assets will now depend upon their classification into four groups with specific time dimensions. It is understood that the proposal to provide tax incentives to induce to make adequate provisions against loan losses is under consideration.
(9) Transparency in accounts Under the provision of the B.R. Act 1949 the RBI has already introduce a new format for reporting the annual accounts which, among others, in corporate number of schedules for reporting item wise brake up. The schedule commercial bank s have reported there annual accounts for the final year 1991-1992 as per the new format. However it has been felt that the co-operatives may continue to report their annual accounts in the existing formats since the requisite data needed for the monitoring and analysis is already available them.
CHAPTER 7 : COMPARATIVE FINANCIAL STATEMENT
As the name indicates we simply compare the changes, which have taken place in the various items of financial statements, in percentage terms. The increase and the decrease in various items of assets and liability and similarly the changes in the figures of profit and loss account indicate the effects of a business being conducted during certain period.
SURAT DISTRICT CO-OPERATIVE BANK
PARTICULARS 2000-2001 Standard Asset Sub-standard Asset Doubtful Asset Loss Asset Total Provision Outside Liability Interest Earned Interest Paid Total Assets 1003.63 241.11 646.01 99845.70 2106.91 236.24 113357.09 33431.85 785.39
2001-2002 43597.49 794.95 1352.32 263.58 747.65 110574.59 7559.43 2313.40 234.37 126855.34
2002-2003 37206.50 793.48 1145.38 288.98 846.47 113999.72 8233.94 1932.33 215.58 128395.66
Capital & Surplus 6934.53
PRIME DISTRICT CO-OPERATIVE BANK
PARTICULARS 2000-2001 36
Standard Asset Sub-standard Asset Doubtful Asset Loss Asset Total Provision Outside Liability Interest Earned Interest Paid Total Assets
4722.50 138.01 58.38 ---21.28 8324.59 1028.03 517.04 9488
6020.56 210.85 80.34 ---18.78 9981.50 1215.84 1442.27 754.09 14932
7375.84 290.65 110.69 ---14.24 13434.87 1688.79 1784.13 859.77 23608
Capital & Surplus 851.97
CHAPTER: 8: RATIO ANALYSIS A ratio can be worked out to between two variables having either cause and effect relationship or connected with other in some other manner. These two variables can be selected either from balance sheet and another from profit and loss account.
Ratio are expressed in mathematical terms, like percentage or the number of time of or in numbers. Some ratio are better expressed when worked out in percentage like the gross or operating profit to sales. But certain ratios appear to be more effective when expressed in number of times like the stocks turnover.
The following ratios are found out for ratio analysis as well as comparative statement analysis.
• Gross NPA Ratio • Net NPA Ratio • Problem Asset Ratio • Depositor’s Safety Ratio • Shareholder’s Risk Ratio • Provisions Ratio • Interest Spread Ration • Sub-standard Asset Ration • Doubtful Asset Ration • Loss Asset Ratio
RATIO ANALYSIS 1. GROSS NPA RATIO
Gross NPA is sum of all the loan assets that are classified as NPA as per the RBI guidelines as on the balance sheet data. Gross NPA ratio is the ratio of gross NPA to gross advantages of the bank. When it is to be expressed in percentage, it is known as gross NPA percentage. 38
Gross NPA Ratio = 2002-2003 5.65% 5.16%
Gross NPAs x 100 Gross advances 2001-2002 5.23% 4.16% 2000-2001 5.75% 3.99%
BANK SURAT DIST. PRIME
Gross NPA Ratio
6 4 2 0
Interpretation: Above table and chart indicates the quality of credit portfolio of the banks. High gross NPA ration indicates low quality credit portfolio of the bank and vice-versa. We can see from the above two banks gross NPA ratio that is Surat district co-operative bank has stable at 5 to 6% and prime bank ratio has increasing from the last 3 year. It indicates that the quality of credit portfolio of Surat District Bank is lower.
2. NET NPA RATIO :
The net NPA percentage is the ration of NPA to net advances, whereas the net NPA can be simply worked out as the gross NPA minus
provisions held for NPA account, and net advances can be simply worked out as the gross advances minus provisions held for the NPA account. Net NPA Ratio = Net NPA Ratio = Net NPA Net Advances x 100
Net NPA - provisions x 100 Gross advances - provisions 2001-2002 3.67% 4.33% 2000-2001 4% 3.57%
BANK SURAT DIST. PRIME
2002-2003 3.58% 4.99%
Net NPA Ratio
6 5 4 3 2 1 0
4.99 3.58 3.67 4.33
Interpretation: Above table and charts indicates the degree of risk in the portfolio of the bank. High NPA ratio indicates high quantity of the risky assets in the bank for which no provision was made. Above table of two banks are indicates that the net NPA ration of the Surat district bank was higher than prime bank. It saws that Surat district bank consist of risky assets on
which no provision has been made. It will become dangerous in the longterm solvency.
3. PROBLEM ASSET RATIO:
It is the ratio of gross NPA to total assets of the bank. Problem asset Ratio = 2002-2003 1.74% 1.70% Gross NPAs Total asset BANK SURAT DIST. PRIME 2001-2002 1.90% 1.95% 2000-2001 1.8% 2.07% x 100
Problem Asset Ratio
1.9 1.95 2.07 1.8
2 1.5 1 0.5 0
Interpretation: It has been direct bearing on return of assets as well as liquidity risk management of the bank. High problem assets ratio means high liquid. Above table shows that Surat District bank becomes successful in achieving lower problem asset ratio whereas prime bank have comparatively higher ratio indicates. 41
4. DEPOSITORS SAFETY RATIO : It is also known as standard asset to total outside liquidity ratio. Here standard asset means total standard loans assets and investments. Outside liquidities are total liquidities minus capital and reserves. Depositors safety Ratio = 2002-2003 33.22% 54.90% Total Standard Asset Total Outside liability 2001-2002 39.43% 60.32% x 100
BANK SURAT DIST. PRIME
2000-2001 33.48% 56.73%
Depositors Safety Ratio
60.32 39.43 33.48
60 40 20 0
Interpretation: It indicates the degree of safety of depositor’s money. The above table of two bank saws the ratio of depositor’s safety ratio is lower than compare to prime bank in each year. Surat District Bank should improve in order to win the confidence of depositors.
5. SHAREHOLDERS RISK RATIO :
It is the ratio of NET NPA to total of capital and reserve of the bank. Shareholder’s Risk Ratio = 2002-2003 16.78% 22.92% Net NPAs 2001-2002 21.99% 22.41% x 100 Total Capital & Surplus BANK SURAT DIST. PRIME 2000-2001 20.10% 20.55%
Shareholder's Risk Ratio
22.92 16.78 21.99 22.41 20.1 20.55
20 15 10 5 0
Interpretation: It indicates the degree of risk associated with the shareholders investment. High ratio means high risk to the shareholder. Above table of two bank indicates the prime bank is able to reduce the shareholder’s risk in the last three years while in case of Surat district correlated-operative bank’s ratio is moderate but increasing which may leads to divert their funds to other bank which has lower risk. Bank should keep constant eye on this ratio to maintain and attract the funds of shareholders. 43
6. PROVISION RATIO:
It is the ratio of total provision held in respect to gross NPA of the bank. Provision ratio = Total Provision Gross NPAs BANK SURAT DIST. PRIME 2002-2003 38% 3.55% 2001-2002 31% 6.45% 2000-2001 31.67% 10.84% x 100
38 31 31.67
30 20 10 0
2002-03 2001-02 2000-01
3.55 6.45 10.84
Interpretation: It indicates the degree of safety measures adapted by the banks. It has direct bearing on profitability, dividend and safety of the shareholders fund. If the provision ratio is less, it indicates that the bank has made under provision. The above table indicates the provision ratio of two bank’s which saws Surat district bank has more than 30% of its gross NPA from last three year which saws over provision of NPA which indicates that bank believe in top keep higher safety for profitability,
dividend and safety of shareholder’s funds. The prime bank has not more provision ratio so the bank has to improve this ratio.
7. INTEREST SPREAD RATIO:
This is the excess of total interest earn over the total interest expanded. ( Interest earned during the yearInterest Spread ratio = Interest paid during the year x Standard Assets 2002-2003 4.61% 12.53% 2001-2002 4.77% 11.43% 2000-2001 5.60% 10.82% 100
BANK SURAT DIST. PRIME
Interest Spread Ratio
15 Percentage 10 5 0
2002-03 2001-02 2000-01
4.61 4.77 5.6 12.53 11.43
Interpretation: This ratio indicates the efficiency of the bank in managing and marching the interest expenditure and interest income effectively. Interest spread is critical to a bank’s success as it exerts a strong influence on its bottom line. The above table shows that Surat district bank is leading in interest spread ratio compare to prime bank but we can also see that from last three year its interest spread ratio increasing which indicates that banks earning asset is increasing and non-performing account is rapidly converting in the performing account.
It is the ratio of total substandard assets to gross NPA of the bank.
Substandard assets =
Total substandard Assets Gross NPAs
BANK SURAT DIST. PRIME
2002-2003 35.62% 72.42%
2001-2002 32.97% 72.41%
2000-2001 38.99% 70.27%
Sub-Standard Asset Ratio
72.42 72.41 70.27
60 40 20 0
2002-03 2001-02 2000-01
35.62 32.97 38.99
Interpretation: It indicates the scope of up gradation / improvement in NPA. Above table of different ratio of substandard shows that prime cooperative Bank has highest ratio which means in all NPA’ substandard ratio has major proportion which indicates that there is the highest scope for advance up gradation on improvement because it will be very easy to recover the loan as minimum duration of defaults. The ratio of Surat district co-operative bank has not much scope of loan gradation or improvement as their ratio is very low.
9. DOUBTFUL ASSET RATIO:
It is the ratio of total doubtful assets to gross NPA of the bank. Doubtful Asset = Total doubtful Assets Gross NPAs x 100
BANK SURAT DIST. PRIME
2002-2003 51.41% 27.58%
2001-2002 56.10% 27.59%
2000-2001 49.19% 29.73%
Doubtful Asset Ratio
51.41 56.1 49.19 29.73
40 20 0
Interpretation: It indicates scope of compromise of up NPA’s reduction. Above table shows the Surat District Bank ratio is considerably decreasing for the last three years, which implies that it has to go for compromise as its substandard assets consist highest portion in the total NPA’s. While in prime bank it remains very stable.
IN COMPARISON TO THE PREVIOUS YEAR PERFORMANCE
Gross NPA Net NPA Gross NPA Rat io Net NPA Rat io Problem As set Rat io Depositor’s Saf ety Rat io Shareholder’s ris k Rat io Provision Rat io Interest Spr ead Rat io Sub-Standard As
Increase Increase Increase
Increase Increase Decrease
Increase Increase Increase
Increase Increase Increase
set Rat io Doubtful As set Rat io Decrease Increase Decrease Decrease
WORKING SURAT DISTRICT BANK FOR 2002-2003 1. Gross NPA Ratio = = 2. Net NPA Ratio = = 3. Problem Asset Ratio = = 4. Depositor’s Safety Ratio = = 5. Shareholder’s Risk Ratio = 50 2227.84 39434.34 5.65% 2227.84-846.47 39434.34-846.47 3.58% 2227.84 128395.66 1.74% 37206.5 113999.72 33.22% 2227.84-747.65 x 100 x 100 x 100 x 100 x 100
8233.94 = 6. Provision Ratio = = 7. Interest Spread Ratio = = 16.78% 846.47 2227.84 38% 1932.33-215.58 37206.5 4.61% x 100 x 100
Sub-standard Asset Ratio = =
793.48 2227.84 35.62% 1145.38 2227.84 51.41%
Doubt-full Asset Ratio = =
CHAPTER: 9: FINDIGS
1) From the gross NPA Ratio of the bank in 2001 is 5.75%. Which suddenly decreases in 2002 i.e. 5.23% by 0.52%. It is good for the bank But in increases in 2003 i.e. 5.65% by 0.42%, which is bad for the bank. 2) Gross NPA Ratio i.e. surat district co-operative bank has stable 5 to 6 % and Prime bank ratio has increases from the last three years. So quality of credit portfolio of surat district bank is lower. 3) Net NPA Ratio of The Surat District Bank was higher than Prime Bank. It shows that Surat District Bank consist of risky assets. It will become dangerous in the long term solvency. 4) Depositor’s Safety ratio is lower than compare to prime bank in each year. So Surat district bank should improve it. 5) The prime bank is reduce the share holder’s risk in last three years while in case of surat District Bank Ratio is moderate but increasing, So bank is divert their funds to other banks.
6) Provision ratio find that total provision divided gross NPAs of the bank in 2001 is 31.67% and it decreasing in 2002 i.e. 31% by 0.67% and it also increases in 2003 i.e. 38% by 7% increases. So we can say that firm keep higher safety to compare the prime bank. 7) Substandard Asset Ratio find that total substandard asset upon gross NPAs of the bank in 2001 is 38.99% it decreases in 2002 i.e. 32.97% by 5.02% decrease and also increase in 2003 i.e. 35.62% by increase 2.5% in other side prime bank ratio is increases its ratio in each year. 8) Substandard ratio of surat district bank has not much scope of loan gradation or improvement as their ratio is very low.
CHAPTER: 10 : SUGGESTIONS
Identifying reasons for turning of each account of a branch into NPA is the most important factor for upgrading the asset quality, as that would help initiate suitable steps to upgrade the accounts.
The bank must focus on recovery form those borrows who have the capacity to repay but are not repaying initiation of coercive action a few such borrows may help.
The recovery machinery of the bank has to be streamlined, targets should be fixed for field officers / supervisors not only for recovery in general but also in terms of upgrading number of existing NPAs. In the bank there should be a proper manpower planning. Bank should try to establish the branches in competitive market, so it will increase their profit. Now a day more competition increase in the market so bank should give more facility to its customers like ATM facilities by which it can attract more and more customers. Bank has required increasing the cash and bank balances by reducing the unnecessary expenses for future plan. 54
Increase the advances, which is beneficial for the bank to meet cash requirements from the out side. Bank should increase the deposits through the advertisement & dividend payment etc. In last, I suggest that bank should update its website for better marketing so customer see the bank's position progress.
Introduction of company • Annual Report 2000-2001/ 2001-2002 / 2002-2003. Norms For NPAs
NABARD guidelines 2000
Ration Analysis • IBA Bulletin October 2000
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