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

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


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

1. level.This has gained further prominence in the wake of transparency and disclosures measures initiated by R. during the recent years . differing from it only in that the investigator thinks there may be a payoff in the application somewhere in the forest of questions. To study the recovery procedures of Dhanalakshmi Bank Limited. OBJECTIVE OF THE STUDY The general objective of the study was to analyze the NPA level in commercial banks. 2.We have also to conform to international accounting standards. To suggest measures for efficient management of NPAs. 3. However the study was conducted with the following specific objectives. Research can be of two types namely Exploratory research and Conclusive research. It borders on an idle curiosity approach. 4.I. 2. The scope of this study is limited especially to the organization selected ie.. To bring out en explorative & descriptive report on “Analysis of NPA in To analyze the NPA level of Dhanalakshmi bank Limited. Kerala. if Indian banks are to get their due place and recognition in the global market. with special reference to Dhanalakshmi Bank Ltd. 5. . Dhanalakshmi Bank. METHODOLOGY OF THE STUDY 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. In Conclusive research there are two types namely Descriptive research and Experimental research. Exploratory research is investigation of relationships among variables without knowing why they are studied. To examine how far the bank has been successful in reducing the NPA commercial banks.B.1. 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.2.” 2.

Tables are used to represent the consolidated data.were collected using Inventory schedule & also through interview. Secondary data:. . 2. He is interviewed at the Bank’s Head Quarters at Thrissur.Descriptive research allows both implicit & explicit hypotheses to be tested depending on the research problem. However. Graphical representation is also used for better comprehension & presentation. Finance Manager of the bank is the source of data and therefore. in this study. Based on all these facts and suggestion from the project guide ‘ Descriptive & Exploratory Research Methodology’ is adapted for this project work. Experiments are artificial in the sense that the situations are usually created for testing purposes in experimental research.were collected from the published annual reports of the Dhanalakshmi Bank and other sources. since he is the only one source of information. and the necessary primary data is collected using Inventory Schedule. there is no question of any sampling. Primary data:. Sampling Technique Sampling refers to selecting a part of the population to represent the characteristics of the population. held with the Finance Manager in presence of the other officials of Dhanalakshmi Bank Ltd. TOOLS USED FOR ANALYSIS OF DATA The data collected were analyzed with the help of statistical tools like frequency. Both primary and secondary data were collected & used for drawing conclusions for the study. Kerala. percentage and trend analysis. Such data collected were analyzed for some kind of a trend and its impact on the profit of the bank.3.

5 STATEMENT OF PROLEM A casual interaction with the officials of the bank revealed that NPA is a severe factor.  Limited. . is covered in this study and he is interviewed in presence of the other departmental officials of the bank. Finance Manager of the bank. For this purpose I have covered officials of the bank from various department. SCOPE OF THE STUDY The was conducted in the Head Office of the Dhanalakshmi Bank limited in Kerala. Dhanalakshmi bank. Therefore the problem chosen for the study of “analysis of NPA in commercial banks with special reference to Dhanalakshmi Bank Limited”.Thefollowing are the main scope of the study:  Scope of this study is limited to the organization selected ie.   This study will help them to think about new innovative recovery strategy. 2. 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.  This study will help to know the drawbacks of the present recovery Present a picture of the movement of NPA in Dhanalakshmi Bank strategies.4.2. which has been affected their profitability for years.

Other commercial banks. SCHEME OF CHAPTERS • study.. maximum care has been taken to arrive at appropriate conclusion. 3.1996 to 2001 – 2002 only. • Chapter 3This chapter gives a brief outline about the background of the study. Chapter 1. Kerala only. Dhanalakshmi bank ltd. This study is restricted to Dhanalakshmi Bank Ltd. is considered for this study. Even then. 2.7. Finance Manager of the bank is only contacted & interviewed. i. .This chapter discuss the executive summary of the and limitation of the study. Following are the limitations of the study: 1.2. 2. • Chapter 2-This chapter explains introduction. objective. Data pertains to NPA from 1995 .e. For the purpose of collecting vital information. 4. only one scheduled bank. scope. as also the other scheduled banks are outside the purview of this study. Though the subject matter pertains to commercial banks. Since he is an individual. his biases may have creped into the data given.6 LIMITATIONS OF THE STUDY The major limitation of the study was the paucity of time.

. Dhanalakshmi bank limited.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. • Chapter 5.This chapter describes the company profile ie.• Chapter 4- This chapter gives a brief description about the analysis of NPA in commercial banks. • Chapter 6.

Narasimham. to examine the structure and functioning of the existing financial systems of .1 Narasimham Committee The government of India set up a nine member committee under the chairman ship of Mr.CHAPTER III NON-PERFORMING ASSETS AND PROVISIONING A CONCEPTUAL REVIEW 3. the former of governor of Reserve bank of India.

2. While the most of the recommendations made by the committee in the 1 phase have been accepted for implementation. .India and suggest financial reforms. Most of the recommendations have been accepted by the government. 3.1. A phased reduction f statutory liquidity ratio. some of them are yet to be considered for the same.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 main recommendations of the committee are 1. These measures implemented so far have revolutionized the structure of the banking industry and its operations. 4. 3. 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. and Proper classification of assets and full disclosure and transparency of banks and financial institutions. either in a single step or in a phased manner. Prudential guidelines governing the functioning of financial institutions. A phased achievement of 8% capital adequacy ratio. The report of the committee was tabled in the parliament of December 17th 1991.

. investment in government and other securities. fixed and other assets.1. security cover available etc.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. Operative like cash credit. which generate income to the bank by way of interest and their charges. bill purchased. advances (including loans and advances. 3. 3. 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.2 Performing and non-performing assets A performing asset is an advance.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. balances with banks and money at call and short notice. 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. discounts and other credit facilities). A. 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.

For bills discounted. b. B.An account shall be out of order if any one of the following conditions exist:a. up gradation of technology in banking systems etc. C. Hence to all account to become NPA. borrowal account with repayment programs: If interest / installment of principal remain overdue for a period of more than 180 days. 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. Non operative like term loans. recovery climate. However due to improvement in the payment and settlement systems. It has been decided by RBI to dispense with the past due concept with effect from 31st March 2001. cut off date is September 30th of the Year under audit. The balance outstanding remakes continuously in excess of the sanctioned limit during the last six months prior to balance sheet. 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. c. Note: When the prudential norms were introduced in 1992. for the unusance period and grace period should be taken to consideration for arriving at the due date. Bill purchased / Discounted / Negotiated: A bill purchased / discounted / negotiated becomes NPA. if it remains overdue and unpaid for two quarters or more. . 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.

b. 3.D. 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. Balance in Interest Suspense account. c. E. Deposit Insurance Guarantee Corporation / Export Credit Guarantee Corporation claim receive and pending adjustment. 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. . Total provisions held excluding technical write off made at Head Office and provision of standard assets.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. d. if applicable.1. Part payment received and kept in Suspense account. a. The gross NPA and net NPA are always expressed as a percentage of advances. 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. The following are deducted from gross NPA to arrive at net NPA.

1. 3. It was consideredthat information would be off immense use to bank management for control purposes. .RBI has advised that while reporting banks has to reduce technical write off made at Head Office from gross advance also. which does not disclose any problems and does not carry more than normal risk attached to the business. quality of credit portfolio and the extend of advances causing concern in relation to total advances. 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. RBI introduced prudential regulation relating to Income Recognition. 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. In order the ensure greater transparency in the borrowal account and to reflect actual health quality of banks in the balance sheet. 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. 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.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.

Doubtful assets: Doubtful asset is one. The accounts which may turn NPA with 90-day period have to be identified and 10% provision to be found out. wholly or partly.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. which has remained as a non-performing assets for a period exceeding 18 months. 3. Loss assets: Loss assets is one. 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.Sub standard assets: Sub standard asset is one. 3. which is a non-performing asset for a period not exceeding 18 months. on the basis of currently known facts. conditions and values. 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.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. highly questionable and improbable. especially in respect of high value accounts. The bank may fix a minimum cut off point to decide what .

Therefore. 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. 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. 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. 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. Accounts with temporary deficiencies: The classification of assets as NPA should be based on record of recovery. the account will be treated as not serviced in the books of the . b. balance outstanding exceeding the limits temporarily. non submission of stock statements and non renewal of the limits on the due date etc. If the debits arising out of development of letters of credit or invoked guarantees are parked in a separate account. asset classification and provision. The cut off point will be valid for the entire accounting year. Asset classification to be borrower-wise and not facility-wise a.would constitute a high value account depending upon their respective business levels. 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. It is difficult to envisage a situation when only one facility to a borrower becomes a problems credit and not others.

Accounts where there is erosion in the value of security a. Such NPAs may be straight away classified under doubtful category and provisioning should be made as applicable to doubtful assets.other member banks and therefore. 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. as the case may be. therefore. 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. 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. till regularization of the account.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. 3. It may be either written off or fully provided for by the bank. In other words. to ensure proper asset classification in their respective books. The banks particularly in the consortium should. b.1. be treated as NPA. 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. . the date on which an account become irregular shall not be changed due to subsequent recoveries.

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. b. In regard to the secured portion. 100% of the outstanding should be provided for. . This means income can be recognized only on receipt for NPA accounts.1 Period for which the advance has been considered as doubtful and provision requirement (%) for each period. Provisioning There is time lag between an account becoming doubtful for recovery.Income recognition Interest income is recognized on an approval basis – except in case of NPAs where it is recognized on receipt. Table 3. income can be recognized on the basis of receipts. Doubtful assets: a. For performing assets. 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. accrual or both. 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. Due to the implementation of the prudential norms “accrual concept” has been changed into “recoverability concept” in recognizing in the income on NPA. the realization of security and erosion over a period of time in its value.

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. d. in addition to the provisions needed. Ø As on 31-03-2002. Standard assets .3 Year More than 3 Year 20 30 50 Provision requirement (%) c. 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. as on 31-03-2002. 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. balance of the provisions not made during the previous year.Period for which the advance has been considered as doubtful Upto one Year 1. 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.

25% of standard assets on global loan portfolio basis. b. As the outstanding in the ledger as on March 31st include interest transferred to the uncollected INTEREST account. For finding the secured portion only the tangible security (both primary and collateral) is considered. b. the following matters may be kept in mind. The provisions on standard assets should not be reckoned for arriving at net NPAs.a.2 THE UNSEEN AND UNPERCEIVED EDGE OF NPA . DICGC/ECGC cover available cannot be reduced in the case of advances classified as sub standard before applying 10% provision. the banks should make a general provision of a minimum of 0. 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. This amount has to be reduced from the outstanding amount. For arriving at the provision amount. From the year ending 31-03-2000. c. 3. a.

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

whose environment was insulated from the global context and was denominated by State controls of directed credit delivery. Tariffs were brought down and quantitative controls were removed. 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. regulated interest rates. Deregulation in developed capitalist countries particularly in Europe. they emerged revitalized and as more vibrant and robust units. the absence of competition and total lack of scientific decisionmaking. credit growth. During all these years the 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. Continued political interference. and investment structure did not participate in this vibrant banking revolution. witnessed a remarkable innovative growth in the banking industry. The new economic policy in turns revolutionalised the environment of the Indian industry and business and put them . This was an effort to quickly resurrect the health of the banking system and bridge the gap between Indian and global banking development. led to consequences just the opposite of what was happening in the western countries.But when the banking industry in the global sphere came out of this metamorphosis to re-adjust to the new order. This enabled the nationalized banks to continue to flourish in a deceptive manifestation and false glitter. whether measured in terms of deposit growth. Indian Banking. Indian banking was lacking objective and prudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. Suffering the dearth of innovative spirit and choking under undue regimentation. Import restrictions were gradually freed. The Indian market was opened for free competition to the global players. 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. The government hastily introduced the first phase of reforms in the financial and banking sectors after the economic crisis of 1991. though stray symptoms of the brewing ailment were discernable here and there. growth intermediation instruments as well as in network.

As banking in the country was deregulated and international standards came to be accepted and applied. 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. As the problem in large magnitude erupted suddenly banks were unable to analyze and make a realistic or complete assessment of the surmounting situation. These called for new strategies. Banks have now an entirely different environment under which to operate. there was resultant chaos and confusion. Increase in the number of banks due to the entry of new private and foreign banks. During this decade the reforms have covered almost every segment of the financial sector. more particularly in the transient economy of the country.to similar problems of new mixture of opportunities and challenges. directed investments and fixed interest rates. while a few progressive corporate are making a niche for themselves in the global context. it is the banking sector. as much outside the banking system. as . inadequacy of capital and the erosion of profitability. trade and industry in India. As a result we witness today a scenario of banking. banks had to unlearn their traditional operational methods of directed credit. increase in the role of the market forces due to the deregulated interest rates. In particular. 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. It was not realised that the root of the problem of NPA was centered elsewhere in multiple layers. increase in the transparency of the banks' balance sheets through the introduction of prudential norms and norms of disclosure. Many are still languishing unable to get released from the old set-up. all of which had led to deterioration in the quality of loan portfolios. which experienced major reforms. 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. The reforms have taken the Indian banking sector far away from the days of nationalization. to innovate and thrive in a highly competitive market and their success depended on their ability to act and adopt to market changes.

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

where operations should be conducted on a decentralized knowledge-based work-group. The comparative performance under priority and non-priority is only a difference of degree and not that of kind. But if we look down further within that Bank there are a few pockets possessing bulk segments of NPA ranging 50% to 70% gross.13%). The assessment of the mix-of contributing factors should have included 1. efficiency and level integrity prevailing in different branches and in different banks accounts for the sweeping disparities between inter-bank . This inherently convey the sole-proprietorship culture and unable to quickly transform to modern professionally managed corporations of the global standard. 2. controlled or managed by single families. There are also banks that have successfully contained NPA and brought it to single digit like Syndicate (Gross NPA 7. all having been nurtured and developed through innovative zeal of pioneers. But banks have neither fared better in non-priority sector. Variable skill. 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. The Indian management set up everywhere turns mostly as one-man show even today. Much criticism is made about the obligation of Nationalised Banks to extend priority sector advances. Similarly NPA concerns of individual Banks summarised as a whole and expressed.87%) and Andhra (Gross NPA 6.an integrated teams of specialists each contributing to a core area of management. While banks functioned for several decades under ethnic culture. Environmental imbalances in the economy on account of wholesale changes and also 3. averaging the bank's whole performance to 12%. Inherited problems of Indian banking and industry. Indian business and industry were owned. represented by one dominant individual towering at each set-up.two better performing banks like Corporation and OBC. which should consequently convey that there should also be several other segments with 3 to 5% or even NIL % NPA. It is being statistically stated that bank X or Y has 12% gross NPA. as an average for the entire bank cannot convey a dependable picture. Human factors (those pertaining to the bankers and the credit customers).

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

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. Now.5000 to 6000 Crore. Business and industry has equal responsibility to accept accountability for containment of NPA. Secondly NPA is not a dilemma facing exclusively the Bankers. Out of the 2. where life cycle of the virus is terminated. medium or small occupies costly developed industrial land. In . 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. It is in fact an all-pervasive national scourge swaying the entire Indian economy. is not the Government an equal sufferer? What about the recurring loss of revenue by way of taxes. 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. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure.strategy involving a role of the actively engaged participants who can tell where the boot pinches in each case. Many of the present defaulters were once trusted and valued customers of the banks. Why have they become unreliable now. It may be even more now. Several items of machinery form security for the NPA accounts should either be lying idle or junking out. NPA is a sore throat of the Indian economy as a whole. 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. or have they? The credit portfolio of a nationalised bank also includes a number of lowrisk and risk-free segments.5 million. about 10% of the small industries are reported to be sick involving a bank credit outstanding around Rs. Each closed unit whether large. which cannot create NPA. The banks are only the ultimate victims. 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. at that period. These closed units represent some thousands of displaced workers previously enjoying gainful employment.

which indirectly are reflected in the financial statements of nationalised banks. as the ultimate financiers of these assets. 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. and accepting self-discipline and self-reliance? What are the deficiencies in credit delivery that leads to its misuse. about . NPA represents the owes of the credit recipients. long drawn legal procedures and difficulties in execution of the decrees awarded by the court. At the end of March 1998. REASONS FOR MOUNTING NPAs As a first step to the analysis the institutional and infrastructure factors that are fundamentally responsible for the problem are outlined below: 3. largely and arising from inadequate legal provisions on foreclosure and bankruptcy. the field level participants should first address themselves to find the solution.3. machinery and money are locked up in industrial sickness.1. RBI and Government of India can positively facilitate the process by providing enabling measures.other words.3.The Legal Framework The RBI sees NPAs in the Indian banking sector as a historic legacy due to lacunae in credit recovery. 3. in turn transferred and parked with the banks. large value of land. And preventive action to be successful should start from the credit-recipient level and then extend to the bankers. Do not try to set right industry and banks. In the final analysis it represents instability in industry. The new tool of deregulated approach has to be accepted in solving NPA. 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. abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporate? In short. but help industry and banks to set right themselves. These are the assets created that have turned unproductive and these represent the real physical NPA. 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.

2. latest technology innovative and globally tested products are spreading their wings and wooing away . 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. 3. The performance of ten DRTS currently working may also not be considered satisfactory.900 crores transferred to DRTs by March 1997.46 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. only a sum of Rs. The banking arena has been almost flooded with new entrants including private banks.3. Out of Rs. In order to expedite disposal of high value claims of banks Debt Recovery Tribunals (DRTs) were set up.3. A large part of their bad debts are a legacy of this misuse. 21. The efficiency of our legal system can also assessed by the value of cases pending in the courts of law representing about Rs. 8. This adds to the problems of banks already functioning in a hostile legal environment. 178 crores has been recovered.3 per cent and significant portion of suits have been pending for more than a decade.Political interference The Indian banking system has been extensively misused for political reasons in the past. Heavy weight foreign banks with huge capital base. 3. foreign banks.3.825 crores. non-banking finance companies merchant bankers. chit funds etc.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.

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. 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. In this context the recent trends in the NPA profile of the players is interesting. The large branch network of Indian public sector banks serves as a nonregulatory barrier to competition. It appears that intense competition in a small segment of the market is pushing private and foreign banks to take excessive risk. A good risk management is possible with only a sound banking system conforming to international prudential and supervisory norms. 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. 3.. corporate governance has . For this the banks have to develop skills to identify assess and minimize the risks and enhance the returns. This was because the new entrants were primarily competing with these banks. Under risk management. Risk management should be proactive rather than reactive. They are technology drive and have locational advantages.4. Narasimham Committee II has also addressed this issue bringing into focus the dangers to liquidity and solvency due to mismatches.3. which are competitively priced and have better quality. liquidity risk and foreign exchange risk. wider range of products and specialized services. These banks enjoy a competitive edge in providing services. This underscores the importance of internal risk management systems in banks.customers from the Indian banks that are steeped in a tradition of inefficiency and lethargy. If there is a mismatch between assets and liabilities the banks may be exposed to interest rate risk. credit risk and price risk.

Lack of prudential Norms Risk management practices can be effective only when financial statements present accurate picture of the level of risk. These include: · · · · · · · · · · Diversion of funds as revealed by an RBI study.4. 3.3. ADVERSE EFFECTS OF NPA ON THE WORKING OF COMMERCIAL BANKS . detected. Besides the above there are several factors related to the borrower. which adversely affect their repayment. 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 3. Thus these financial statements did not reflect the level of bad debts and presented a misleading rosy picture of their health. Information networking among banks can further improve their risk management abilities.also to be stressed to develop an effective control system. 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.5.

3300 crores from annum.NPA has affected the profitability.31251 Crores towards provisioning NPA. 3. To this extent the problem is contained.2300 Crores annually. Considering the minimum cost of holding NPAs at 7% p. This has brought Net NPA to Rs.a.1. 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.4.2001Commercial banks incurred a total amount of Rs. Impact on Profitability Between 01. Considering the average provisions made for the last 8 years. 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.2% of net advances.32632 Crores or 6.04. But today in the deregulated market the banks decide their lending rates and borrowing rates. else they are to seek the bounty of the Central Government for repeated Recapitalisation. It is also cost absorbing and profit eroding. a sizeable portion of the interest income is absorbed in servicing NPA. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs. When the interest rates were directed by RBI. “The spread is the bread for the banks”. the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. In the context of severe competition in the banking industry. but at what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy. which works out to average of Rs. Equity issues of nationalised banks that have already tapped the market are now quoted at a discount in the secondary market. NPA is not merely non-remunerative. This is the margin between the cost of resources employed and the return there from. liquidity and competitive functioning of PSBs and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. Other banks hesitate to approach the market to raise new issues. The options for these banks are lost.03. 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).93 to 31. In the . In turn PSBs are seen as poor performers and unable to approach the market for raising additional capital. as heretofore.32632 Crores absorbs a recurring holding cost of Rs. there was no option for banks.

48 6257. it will still break even in terms of operating profit and not return an operating loss. when the banks are able to earn adequate amount of noninterest income to cover their entire operating expenses i.47 1795.e.e. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation.24 299. Theoretically even if the bank keeps 0% spread.85 5958.-Interest expenses Interest spread Intt. On account of the burden of heavy NPA.7589.27 4766.61 Interest on Recapitalization Bonds is a income earned from the Government.competitive money and capital Markets.41 14756.2 Nationalised banks operational statistics………. many nationalised banks have little option and they are unable to lower lending rates competitively.. the difference between the gross interest income and interest cost will constitute its operating profits. who had issued the Recapitalization Bonds to the weak banks to sustain their .14 56967.88 5405.55 .11 38789.60 1797.41 17283. as published by RBI in its Report on trends and progress of banking in India. Table 3. It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March 2001. In the face of the deregulated banking industry. inability to offer competitive market rates adds to the disadvantage of marketing and building new business.64 18177. On Recap bonds Operating Profit Provisions Net Profit Year ended Mar.01 35477.10124. 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.12 Year ended Mar.42 14251.interest income Exp. 2001 7159. In that event the spread factor i.15 639.Non-interest Operating expenses Difference Earnings .45 50234. (Amount in Crores) Performance indicator Earnings . a positive burden.87 . 2000 6662. an ideal competitive working is reached.

This has affected adversely credit growth compared to growth of deposits. 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. RBI has indicated the ideal position as Zero percent Net NPA. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market. There is insistence on provision of collateral security. 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. . Accept justifiable risks and implement derisking steps. as per RBI guidelines. there can be no reward.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.2 How NPA Affects the Liquidity of the Nationalised Banks? Though nationalised banks (except Indian Bank) are able to meet norms of Capital Adequacy. The fear psychosis also leads to excessive security-consciousness in the approach towards lending to the small and medium sized credit customers.4. Business is an exercise of balancing between risk and reward. 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. 2. Even granting 3% net NPA within limits of tolerance the nationalised banks are holding an uncomfortable burden at 7.4. Nationalised banks have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution of this hovering threat. the fact that their net NPA in the average is as much as 7% is a potential threat for them. but will not prevent the account turning into NPA. Their earnings from sources other than interest income are meagre. sometimes up to 200% value of the advance. In the world of banking the concepts of business and risks are inseparable. a tendency towards laxity in the standards of credit appraisal comes to the fore. Wage costs to total assets is much higher to PSBs compared to new private banks or foreign banks. This is due to failure to develop off balance sheet business through innovative banking products. Their operating expenses are higher due to surplus manpower employed. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. Without accepting risk. and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over-confidence). 3.1% as at March 2001.capital adequacy under a bail out package. resulting a low C/D Ratio around 50 to 54% for the industry. but have resorted to II-Tier capital in the debt market or looking to recapitalization by Government of India. 3.

5. [The above guidelines which were valid up to June 30. 5 crore and less as on 31 March 1997. [Public sector banks recovered Rs. 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. 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.5. 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. with outstanding balance of Rs.] Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 3.2.5 lakh for compromise settlement under Lok Adalats. 2000. More significant of them.1. 2001 helped the public sector banks to recover 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. I would like to recapitulate at this stage.50. The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs.10 .000 in respect of NPAs of small/marginal farmers are being drawn up. 668 crore through compromise settlement under this scheme. Lok Adalats Lok Adalat institutions help banks to settle disputes involving accounts in “doubtful” and “loss” category. The scheme was operative up to September 30. 2600 crore by September 2001] An OTS Scheme covering advances of Rs.3.5 MEASURES INITIATED BY RBI AND GOVERNMENT OF INDIA FOR REDUCTION OF NPAs 3.

5. passed in March 2000 has helped in strengthening the functioning of DRTs.84 crore pending before them as on September 30. Looking at the huge task on hand with as many as 33049 cases involving Rs. 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. Provisions for placement of more than one Recovery Officer.3.4.1864. Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals located in five centers viz. 3. 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.Circulation of information on defaulters . 2001.40.6264. Debt Recovery Tribunals The Recovery of Debts due to Banks and Financial Institutions (amendment) Act. Mumbai. they could decide only 9814 cases for Rs.38 crore as on September 30.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30. Calcutta and Chennai. management.5. Allahabad. 2001.lakhs and above.30 crore. 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. 2001. 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. through the forum of Lok Adalat. 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.The amount recovered in respect of these cases amounted to only Rs.42988. The public sector banks had recovered Rs. 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. For more details about Lok Adalats please refer to page Lok Adalat 3. and notify borrowers who default to honour the decrees passed against them. Delhi. power to attach defendant’s property/assets before judgment.

.2000 crore and initial paid up capital Rs. Since enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in December 2002. 3. It would negotiate with banks and financial institutions for acquiring distressed assets and develop markets for such assets. RBI also publishes a list of borrowers (with outstanding aggregating Rs. On their part RBI and the Government are contemplating several supporting measures including legal reforms.5. and file criminal cases in regard to willful defaults.Asset Reconstruction Company: An Asset Reconstruction Company with an authorized capital of Rs. Government of India proposes to go in for legal reforms to facilitate the functioning of ARC mechanism 3.Corporate Debt Restructuring (CDR) .1400 crore is to be set up as a trust for undertaking activities relating to asset reconstruction.5. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds.6. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers.The RBI has put in place a system for periodical circulation of details of willful defaults of borrowers of banks and financial institutions. 3. 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. they serve as negative basket of steps shutting off fresh loans to these defaulters.5.5. some of them I would like to highlight.1 crore and above with special reference to fixing of staff accountability. However.7. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. 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. 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. Board of Directors are required to review NPA accounts of Rs.6. Recovery action against large NPAs After a review of pendency in regard to NPAs by the Hon’ble Finance Minister. as on 31st March every year. 3.5.

. Vepa Kamesam. As announced by the Hon’ble Finance Minister in the Union Budget 2002-03. I hope. (CIBIL) is under way.8.5. in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient. which had in no small measure contributed to the incremental NPAs of banks 3. 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.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system.Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs.9. Credit Information Bureau Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. RBI to review the implementation procedures of CDR mechanism and to make it more effective.5. This. Proposed guidelines on willful defaults/diversion of funds RBI is examining the recommendation of Kohli Group on willful defaulters.20 crore and above with the banks and financial institutions. RBI is considering the recommendations of the S. 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. Deputy Governor. 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. 3. if any. RBI has set up a high level Group under the Chairmanship of Shri. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. The CDR structure has been headquartered in IDBI.R. 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. Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place. identify the operational difficulties. The Group will review the operation of the CDR Scheme.

Banks are equally responsible.3. audit committees etc. 5th February. Corporate Governance A Consultative Group under the chairmanship of Dr. The big question now is. and make recommendations for making the role of Board of Directors more effective with a view to minimizing risks and over-exposure. 83. A. 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. Despite all efforts by the government and Reserve Bank of India. to what extend the new legislation would help in recovering the NPAs? The new Finance Minister.000 crore is a loot and not debt”. postreforms. transparency. The government has passed a new ordinance in June. disclosures. 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. 2001] 3. to bring down the mounting bad loans or so-called non-performing . Bimal Jalan.6. 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. Drawing attention to the gravity of the problem facing the country’s financial sector. New Delhi.5." delivered at 22nd Bank Economists Conference. RBI. NPA ORDINANCE: EMPOWERING BANKS 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. which seeks to change all this and empower the lenders to recover their dues without going through prolonged legal battles in the courtrooms. he made a categorical statements in the Rajyasabha that “non – performing assets of Rs.S. Governor. [Dr.10. Jaswant Singh. in a speech titled "Banking and Finance in the New Millennium.

7100 crore over a 3-year period till 2002-2004. This was against the Verma Pannel recommendation to inject Rs. Evidently. 400 crore for its survival. 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. It may also need a bailout soon.50. 1. The institution has a liquidity gap of Rs. 20. 5500 crore. Again in 2000-2001.000 crore. The health of Financial Institutions is more worrisome with their declared NPAs amounting to nearly Rs. 2.000 Crore. The IFCI has been kept alive by huge infusion of funds by the Government.30.446 crore towards recapitalization of public sector banks till end March 1999 to help them fulfill the new capital adequacy norms. the Government had allowed 27 Public Sector Banks to write off corporate loans worth Rs.246 crore to reduce the level of bad debts. 6. the figure of Rs. The Government had to inject a massive Rs. Last year.500 crore on its borrowings. 83 crore mentioned by Finance Minister pertains to NPA given out by the bank and financial institutions.assets. Audit and Consulting firms such as Ernest and Young put real NPAs at 1. they are also stock with a huge liability of Rs. the problem has persisted and in fact it has aggravated. 20.000-1. The Government had to worked out huge bailout packages for the Unit Trust of India and the Industrial Financial Corporation of India. the Government provided Rs. There is reason to believe that the actual NPA are much higher than this official figure. Now. 8.200 crore in the ill-conceived Enron project. UCO Bank and United Bank of India. a bailout package of Rs. it is set to provide it with a guarantee of Rs.000 crore in these banks. . It is against this backdrop that some financial experts have recommended the winding up of the IFCI. 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. has recommended a capital infusion of upto 8800 crore for IFCI. McKinsey and Co. within 12 months. 5.550 crore was worked out for 3 weak public sector banks – Indian bank. The consulting firm. Incidentally. In addition. The IFCI’s liabilities this year add upto Rs. 5000 crore debt maturing next year. 4500 crore with another Rs. In 1999 to 2000-01.

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. there seems to be a total lack of professional approach in tackling the problem. 5. To make matters worse. 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.000 crore. 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. and unpaid workers. 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. The Omkar Goswami Committee report on industrial sickness and corporate restructuring aptly summed up the situation in its preamble thus “There are sick companies.The downfall of the once strong and powerful UTI is well known. to take possession of. and recover any money payable by the third parties to . its other constituent unit to continue to receive funds from Financial Intuitions 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. Loans turn bad because of the incidents of industrial sickness. the Finance Ministry is still struggling to work out the modalities of bridging the gap estimated at over 10000 crore. While some instances of industrial sickness are no doubt because of unforeseen changes in business environment and beyond the control of the managements. take over the management of the business of the borrower. in most cases bad management and poor standards of corporate governance are to blame. between the promised return and actual earnings in UTI’s various assured return schemes. Moreover. While the reasons for sickness are well known. It would enable the creditors. This is well documented by a number of studies. including those by the RBI. sick banks. The second bailout package for the UTI will cost the Government Rs. after 60 days notice. or sell or lease the assets financed by them. 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. But there are hardly any sick promoters.

ICICI bank. which they call draconian. IDBI and IFCI. While the borrowers are allowed to seek protection from secured creditors by filing an appeal to debt recovery tribunal. which collectively owe them Rs. The ordinance also provides for the setting up of Asset Reconstruction Companies (ARCs) to be regulated by the RBI. (ARCIL) with 51% shareholding by private bank and the rest by the State Bank of India and IDBI. As expected. There fear is clearly misplaced. The Debt Recovery Tribunal can. at its discretion. All that is required is that creditors accounting for 75% or more of the secured lending should agree to initiate recovery proceedings. In any case. The ARC can issue Security Receipt (SRs) that will be tradable instrument that the lenders can sell at market determined prices. 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. They have expressed a fear that the provisions could make bankers trigger happy in seizing the assets of the defaulters. reduce the deposit amount. Their main objection is that it does not make any distinction between willful and genuine defaulters.the borrower. they will also be required to deposit 75% of the amount claimed by the creditors in order to prevent misuse of appeal provisions. 1. but only after recording its reason for doing so. 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. IDBI has issued notices to 17 borrowers for an amount . have sent notices to 22 companies. To begin with it is proposed to set up the Asset Reconstruction Company of India Ltd. industry associations and chambers such as CII and the FICCI have been quick to protest against the provisions of the ordinance.200 crore. Quite a few financial institution and banks have already initiated measures to recover their dues from chronic defaulters. In addition. for instance. the banks and financial institutions do fear the normal risk of lending and are prepared for certain permissible percentage of loans turning into NPAs. The demand to make a distinction between willful and genuine default make no sense.

The State Bank of India has issued notices to about 70 defaulters while others are also in the process of doing so.640 crore. NPA RECOVERY: MYTH AND REALITY “Indian banks are weighed down by enormous amounts of bad loans that threaten the very health of banking system. 3. public sector is worst affected and among banks in private sector. It needs to be ensured that the lenders are not stuck with the assets taken over. At present. 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. banks in China which are far more advanced economically and industrially would be healthier than Indian banks. initially the banks and FIs would target only units defaulting willfully as selling off of assets of going concerns will not be difficult. For the present state of affairs. The big question now is: To what extent the new legislation would help in recovering the ‘loot’? Not much. There is an urgent need to create an array of liquidators. They feel that once the asset reconstruction companies get established. receivers. The standards of professional competence and governance in these institutions are far from satisfactory. The accent should be on quick liquidation of the seized assets and realization of dues within a reasonable time frame. political interference and corruption are rampant. banks and Fls would be in a position to make use of the legislation on a much bigger scale.7. legal experts and industry specialists. Surely. There are no proper project appraisals at the time of granting loans. the newer tech-savvy and the foreign banks are the least vulnerable to bad loans. According to banking sources. 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.aggregating Rs. seizing and securitizing agencies. If only the hard core bad loans are separated and sold to . 1. seizing agencies and turnaround specialists come into being and receivers and liquidators tone up their act. the Fls. and banks are equally responsible. 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. Among the Indian banks. and papering over bad loans and granting of fresh advances to defaulters is a rule rather than an exception.

all NPAs are not irrecoverable and banks do have some securities to back up the NPAs. Therefore. 32. As against this. The NPA was 6. Banks in India are thus in a much better state of health than their counter parts in China. the net NPA amounting Rs. China should rank better.4% for private sector banks and 2. it is clear that the Indian banking system is basically safe. In any comparison between Indian and China. one might presume.7% of advances for public bank sector against 5. according to the Reserve Bank of India report. As per the banker magazine (A sister publication of financial times of U. the problem of NPA in public sector banks is more acute than private banks. some banks are reportedly more adventurous than others.47 crore. like a south based private bank that was in the headlines recently. called in elegantly as non-performing assets is a fairly high proportion of total loans. banks in China would. Further. Given the fact that the total capital and reserves of SCBs were around 5. but the picture is somewhat blurred. Facts portray a contrary picture. It is a fact that the problem of bad loans is plaguing the banking system for quite some time. These and similar opinions are held by knowledgeable persons both in banking system and outside it. in the level of discipline among the populace and adherence to law. one might jump to the conclusion that NPA was more than capital and reserves.23% of total assets. In some respects. The quantum of bad loans. in industrialization.8% respectively in 200.01 % and 28. the problem could be largely resolved”.5% of total assets (Not advances) as on March 31 st 2001. The relative level in the US would be less than 2%. the level of NPA to total assets I the two biggest banks in China. This is because a good chunk of the assets of banks comprises investment in Government securities which is fully realizable and risk free.741. these contain untruth and half-truth. commercial bank of China and bank of China were 25. except perhaps in the area of democracy. NPAs of Indian banks were 2. well. export performance.an outside agency. on trends and progress of banking in India. China comes out on top. Certainly.468 crore represent less than half of capital resources at Rs. Therefore.2 . But.2 percent on March 31st 2001. as discussed below.K). be healthier than Indian banks. But then. 67. The percentage of net NPA to non-advances of scheduled commercial banks in India was 6.

75% and four other foreign banks have more than 20%. In these cases. However. 27988.percent for foreign banks in 2001.3%. 1 crore and above from the banking system was 5013 aggregating Rs. The belief that. 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. that are other than those that started in the 1990s. some of the private and foreign banks reflect a pathetic figure as compared to the public sector. one estimate puts these at a few crore cases. which is higher than public sector banks.59 crore as on March 31st 2000. Bank International Indonesia at 50. These suits are pending in various courts to cope with the enormous number of cases before them. In any case. The borrowers of the banking system could be broadly classified into business and industrial concerns and households and individuals. These are average figures. The total number of suit filed against borrowers enjoying advances of Rs. 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.29%) and four others have higher than 10%. the problem of NPA could be resolved has caught the imagination of many seasoned veterans in Banking. contribute to around 26% of total advances. It is extremely doubtful if a separate ARF can expedite matters. It is debatable if ARC would be a useful tool under Indian conditions. by separating the hard core NPA and selling them to a recovery agency. the NPA was 7. for the older private sector banks. 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. Looking at figures of individual banks. Households and individuals. . including agricultural sector. The highest figure among all banks was a foreign banks. It was also stressed that ARF should focus on large borrowers. according to the RBI publication. excluding loans to food procurement agencies. 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”. The highest level in public sector bank was in Dena Bank (18.

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


by an English agency in Calcutta. Later on. As public enterprise. a. 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. and Private sector banks. 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. named Bank of Hindustan. the Bank of Bombay and Bank of Madras was also set up in 1840 and 1843 respectively. the. Commercial banking in India began in 1770 with the establishment of the first joined stock bank. Commercial bank in India can be divided in to two groups: a.The origin of commercial banking can be traceable in the early times of human history. All these banks were presidency banks:They were partly financed by East India Company. The Swadeshi movement of 1905 encouraged the growth of the commercial bank in India. The Imperial Bank of India was nationalized and renamed as the State Bank of India in 1995. b. It was followed by the setting up of the Punjab National Bank in 1894 and Peoples bank in 1901. In 1881. Public Sector banks – All of them are scheduled. banking made it first appearance in Italy in 1157 when the Bank of Venice was founded. the first purely Indian bank that is Oudh commercial bank came in to being. . real beginning of the modern commercial banking in the country was made with the establishment of the Bank of Bengal in 1806. In fact. Bu this bank failed in 1832. The public sector bank in India has developed in four phases.

It is the growth of commercial banking in the 18th and 19th centuries that facilitated the occurrence of industrial revolution in Europe. Capital formulation Encouragement to entrepreneurial innovations . which are 196 in number at present. 5 lakhs. Regional Rural banks were established in 1974. banks can also influence the direction in which these resources are to be utilized. Again on 15th April 1980. a. 1934 and have a paid up capital and reserves not less than Rs. Modern banks in India are joined stock banks. On July 19th. Besides providing financial resources for the growth of industrialization. Scheduled banks are those banks. Commercial banks contribute to a country’s economic development in the following ways. 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. A well-developed banking system is a necessary pre-condition for economic development in a modern economy. d. which are included in the second schedule of the RBI Act. 6 more commercial banks were nationalized. The operations of these banks are controlled and regulated by the Reserve bank. 14 major commercial banks were nationalized. They are registered under the Indian companies Act. Banks play an important role in the development of country.b. They are classified by the RBI into two categories:Scheduled and non scheduled. 1969. b.

461 crore at the end March 2001. (Table 4. 70. whereas for foreign banks. f. 4. h. net NPAs increased by 9. d. 4. The NPAs of PSBs increased marginally during the year in spite of the substantial recoveries. g.7% of the sticky loans of scheduled commercial banks. reflecting the impact of merger during the year. 4.56608 crores in September 2001. NPA in commercial banks The NPA of 27 public sector banks shot up to Rs. NPA not only reduces the yield on advances but also reduces the profitability of banks. Encouragement to right type of industrious. 63. however.546 crore from Rs. Regional development Development of agricultural and other neglected sectors. i.512 crore on account of merger.904 crore as on March 31st 2002 as compared with Rs.3.2). (Table 4.c. had substantial addition to their NPAs. 56. gross NPAs stood at Rs.2.741 crore at the end of the previous year.5% to Rs. 32. comprising 79. New private banks. During the same period. For public sector banks. Incremental non-performing assets .1.507 crore as at the end of March 2002. e. 35.1) The gross non-performing assets (NPAs) of scheduled commercial banks at Rs. The gross NPAs for end March 2002 include an amount of Rs. The movement in NPAs across bank groups is provided in Table 4. Monetization of economy Influencing economic activity Implementation of monitory policy Promotion of trade and industry. recoveries exceeded accretions to NPAs.

389 crore to Rs. incremental net NPA to total assets remained constant at 1.9% in 2001-2002.The incremental gross NPAs. 3. while incremental gross NPAs of scheduled commercial banks increased from 1.9% in 2000-2001 to 2. Among banks groups.0% in 2001 to 2002. incremental gross NPAs recorded a large increase from Rs. 5205 crore in 2001-2002 reflecting the addition on account of the merger. incremental net NPAs of scheduled commercial banks declined from 2.084 crore which was also largely due to substantial increase in incremental net NPAs of new private banks (Table 4. over the same period increased from Rs. In absolute terms. As percent to incremental assets.8% to 3. as percentage of incremental gross advances for scheduled commercial banks increased from 4.5) .4). 3332 crore in 2000-2001.164 crore in 2001-2002 as compared with Rs.3% in both years (Table 4. As percent of incremental net advances. 2. Incremental net NPAs of commercial scheduled banks. the quantum of incremental gross NPAs was Rs. there was decline in incremental gross NPAs for the state bank groups and foreign banks. 671 crore in 2000 – 2001 to Rs. 7.0% in 2000 – 2001 to 5. New private sector banks.6% in 2001-2002.


Andhra. West Bengal (Kolkata) and New Delhi. at a time when banking was less known to the people. The bank has ambitious plans for growth in branches. the bank grew in strength over the years. total business and profits. with a strong national network. Maharashtra. using state of the art technology. Even though started by traditional businessmen.2 Bank Profile The Dhanalakshmi Bank Limited (DLB) headquartered at Thrissur in Kerala. Started seven decades back.1.VISION "A Customer-centric organization. Karnataka. and ensuring reasonable value addition to the shareholders and other stakeholders" 5. Of the 153 branches. is a professionally managed Bank. capable of delivering multiple financial products in a cost-effective manner. leveraging its network in Kerala. engaging a pool of skilled personnel.5. In a high literate state of Kerala. Tamil Nadu. Gujarat. All . The DLB has today 153 branches spread over Kerala. the bank has achieved substantial sophistication in the various banking services provided.

Any Branch Banking.69% in March 2001. The bank is managed by a group of professionals. Any Branch Banking and Cash Management Services. All branches are computerized and in the process of implementing Wide Area Network. administrators and businessmen. . ATM's.. Internet Banking.branches are classified as NRI branches.Etc. The bank has already achieved Capital Adequacy Norms prescribed by the RBI by achieving 9. Telebanking.

RamMohan Shri.P.K.K.Thomas Shri.Vijayakumar Shri.K. Venkateshwaran. Muthuswamy B.Jayakumar Shri.K.Sarma Shri.Sitaraman Shri.R.G.P. James Pothen (RBI) Shri.Ramalingam Shri. Raja Mohan Rao Shri.P. K. V. P. A. P. S.RavindranK. K. Thomas Mathew Deputy General Managers Shri.K. Saseendranath(RBI) Assistant General Managers Shri.P.T.Narayanan Shri.Revikumar Shri.Ranganathan Shri.(Retd) Prof.A.L. IFS.MANAGEMENT OF THE BANK Directors Dr. Sarma Shri. Ramakrishnan .Menon Senior Management Team General Manager Shri.S.P. K.R.A.S.Ganapathy Shri. J. Executive Director Shri. P.H. M .P. A.M. V. Varadachary IAS(Retd) Shri.K Ananthanarayanan Shri.Warrier (Company Secretary Managing Director & CEO Shri.M. Pappoo Shri.A.Krishnan Shri. P. Govindan Shri.

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 .

BUSINESS OPERATIONS 5. advances. of the bank over past few years. THE DEPOSITS OF DHANALAKSHMI BANK LIMITED . cost of deposit.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. net profit. staff productivity etc.

.58 crore to 1639.67 1296.82 195.31 1477.0 10.34 222.54 Increase / Decrease over the previous years figure --151. field function areas have been constantly exhorted to step up the share of low cost of deposit.56 161.0 24.87 1639.58 915.543 crores during the period 1996-97 to 2001-02.46 154.(FROM 1996-97 TO 2001-02) Table 5.22 175.96 1138.00 108.8 14.71 157.3 13.9 Index with year 1996-97 as base year 100.05 in The aggregate deposits of the bank has increased from 840.67 % Increase / decrease over the previous years figure --+18.97 135. more particularly from institutions. The modest growth especially during the last three years is mainly due to a conscious decision on to shed the highest cost deposits. With focus on bringing down the cost of deposit.64 181.1 Amount Crores Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Deposits of the bank (Rs) 840. 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.

76 407.06 crores to 993. The system and procedures were streamlined to incipient irregularities in the asset step without delay.63 162.41 576.2 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) 110.26 285.10 28.70 114.0 122.6 24. .91 705.65 29.08 188.70 The aggregate advances of the bank has increased from 110.51 crores during the period 1992-93 to 2001-02.59 562. Which primarily aim at segmentation of the retail and corporate portfolios for improved thrust in both these areas.The credit appraisal system was fine tuned and effective system was put to place to ensure the quality of asset.34 259.41 549.07 523.87 512.99 902.35 876. A substantial positive change in credit dispensation and monitoring was initiated through a visited credit policy.0 2.22 993.40 5. Exposure to various sectors is strictly maintained within the stipulated ceiling.89 448.90 Index with year 1992-93 as base year 100.11 56. A tenor linked prime lending rate was introduced during the year 2001 to give a boost to short term lending.06 605.91 25.00 13.23 776.31 965.51 Increase / Decrease over the previous years figure --53.91 28.29 % Increase / decrease over the previous years figure --48.00 148.17 171.ADVACES OF THE DHANALAKSHMI BANK LIMITED (FROM 1992-93 TO 2001-02) Table 5.16 75.6 163.37 2.

Such a decreasing trend in the cost of deposit.3 Percentage of Increase / Decrease over the cost 10. .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 .28 10.COST OF DEPOSIT OF DHANALAKSHMI BANK LIMITED (FROM 97-98 TO 01-02) Table 5.86) (-0. On analyzing the trend of decrease in the cost of deposit we can see that it is decreasing at decreasing rate.53 previous year --0.92 8.49 8.35 9. achieving by systematic branch wise monitoring.07%.07 (-0.57) (-0. Also shift in deposit portfolio of the bank from high cost deposit to low cost deposit also has contributed to the efforts.

2 191.NET PROFIT OF DHANALAKSHMI BANK LIMITED (FROM 1994-95 TO 2001-02) Table 5.this increase was not steady.20 153.00 106.9 48. The banks profitability was severely affected during the years 1998-99 and 2000-01. but the treasury market contributed appreciably to the profitability.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 --6.83 The profitability of the bank has increased from 4.20 277.56 255.6 6. Another major contribution was the impaired loan assets.07 crores during the period 1995-96 to 2001-02. . The continuous fall in the interest rate continued even in 2001-02.05 87.2 54.78 67. which were written off instead of being provided for.5 39.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 2.78 178.48 crores.42 crores to 10.96 190.7 Index with year 94-95 as base year 100.

54 192.17 22.51 316.21 243. marketing etc.00 152. non-performing assets management.28 199.90 292.17 153.24 Increase / Decrease over the previous years figure --36.40 Index with year 1994-95 as base year 100.0 6. automation.STAFF PRODUCTIVITY OF DHANALAKSHMI BANK LIMITED (FROM 95-96 TO 01-02) Table 5.9 10.25 The staff productivity of the banks has increased from 63 lakhs to 199. customer service.24 lakhs over the period 1994-95 to 2001-02.38 182. 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.62 14.The bank has recognized that up gradation of employee skills at all levels is essential to meet competitive challenges. Accordingly.49 30. human resource management.00 131.06 208. credit.56 19. the Dhanalakshmi bank’s staff training imparts timely training to the employees covering areas like forex.0 96.66 184.6 115.5 Year 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Productivity / Business per employee 63. priority sector.90 8.26 17. .96 % Increase / decrease over the previous years figure --54.50 5.0 19.00 121.79 3.14 19.


Thus whenever a bank grants a loan. If the borrowers does not repay. In fact. A unique function of the bank is to create credit. In other words. 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. economy is badly hurt. It accepts deposits from public. Once the credit to the various sectors of the economy slows down. credit creation is the natural outcome of the process of advancing loans as adopted by the banks. it creates an equal amount of bank deposit. This lead to a situation where bank also reluctant to lend fresh loans thus chocking the system.A bank is an institution. 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. and helps in the remittances of money from one place to another. Creation of such deposit is called credit creation. 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. makes the funds available to those who need them. . The bank has to repay it’s depositors and others from whom money has been borrowed. 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. which deals with money and credit. the bank has to borrow additional capital funds to repay the depositors and creditors. 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. Which results in a net increase in the money stock of the economy.

A.00 387. N.00 10167.00 1007.31 629. N. 4.09 11.01 661.00 14586.34 3322. N. provision made towards non performing assets each year which have been complied from the various years annual report of the bank.1 Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Particular Gross NPA Net NPA Net Advances Net NPA to Net Advances Provision towards NPA Net profit during the year N.A.FIGURES RELATING TO NON-PERFORMING ASSETS (GROSS &NET)AND THEI PERCENTAGE WITH PROVISIONS MADE TOWARDS THEM.00 1128. N.A.33 77457.A.00 791. net non performing asset.00 93953.00 89656.00 N. net advances. Table 6. 11.00 10955.78 12.26 61080.00 677.89 7531.70 8582.A.51 225.00 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.A.08 11. .00 13489.08 1070.00 840.85 11.66 3631.00 11756.00 9635.

(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

.8% in the second year 4. This can be seen from the data regarding the advances of the bank during this period. in time. Net advances of the bank increased by 26. 15. INTERPRETATION Non-performing assets being a direct result of advances.ANALYSIS The advances of the bank show an upward trend through the period 1998-99 to 2001-02. it should not mean increased justification for the higher incidence of non-performing assets. In other words.8% in the third year. perhaps. it may have resulted from increase in the net advances. increased NPA can be directly attributed to non-recovery advances made to borrowers.8% in the first year. NPA could have been reduced. If recovery were good. From this it could be seen that such increase in net advances is increasing at a decreasing rate over the period under study. While increasing advances may be necessary for the survival & progress of the bank itself.

(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

which could be explained by the tightening of provision norms which made . which has a negative impact on the net profit of the banks. and provisions made towards non-performing assets. On going through the figures of the Dhanalakshmi Bank Limited relating to net profit and provision made towards non performing assets. it could be seen that provisions and contingencies is one herd.4 ANALYSIS On analyzing profit and loss account of the bank. a sharp increase can be seen in the provision made towards non performing assets in the year 19992000. being item contributing to such head.Chart 6.

. in the event of absolute nonrecovery of the lent money. as the profit margin depends up on the synthesis of cost and yield (by yielding no income) reduce the profit. so that taxation can be under control MOVEMENT OF NON-PERFORMING ASSETS OF DHANALAKSHMI BANK LIMITED FROM (1998-99 TO 2001-02) . but is surely more which ensures survival and growth in the future.it compulsory for banks to keep a provision of . Here in the case of Dhanalakshmi bank limited. This may be because. INTERPRETATION Profit is the most important parameter for evaluating the performance of a bank.25% even on their standard assets also from 31-3-2000. certain provisions become necessary in order to reduce profits. 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. Level of non-performing asset is an important factor affecting the profit of the bank. the provision made towards NPA has increased at an increasing rate over the year. In the present day scenario profit is not just an accounting concept of excess of income over the expenditure.

89 --------11756.52 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. showing a decline a decline in the trend which is clearly shown in the chart below.00 5546.00 4654.81 18.04 13489.6 Year 1998-99 1999-00 2000-01 2001-02 Particular Gross NPA Additions during the year Reductions during the year Net recovery during the year Recovery as a % of gross NPAs 9635.70 3970. the net result.84 14586.00 7.0 1097. the recovery is affected. with net recovery during the year taken as a percentage of gross non performing assets .0 4449.00 12. As a result.0 2922.00 2120.0 1732. the additions are also on the increasing at a higher rate.Table-6.81 1850.

5 .7 Year 1998-99 1999-00 2000-01 2001-02 Particulars Recovery as a % of gross NPAs --18.84 7.04 12.NET RECOVERY OFDHANALAKSHMI BANK LIMITED AS A PERCENTAGE OF THEIR GROSS NPA (FROM 1999-00 TO 2001-02) Table-6.52 Chart 6.

the net recovery is declining not only by amount but also with respect to its contribution as a percentage of gross non performing assets. While the strategy for recovery may have been good. This is an alarming situation.ANALYSIS The net recovery during the year 1999-2000 was 18.. in 2000-01 and 2001-02 respectively.52% in the following two years i.e.. while it was 12. So we can conclude that bank’s NPA is increased perhaps because of inefficient recovery strategy.e.04% of gross non performing assets.84% and 7.. i. INTERPRETATION The above analysis reflects that the Bank’s recovery strategy may not be effective. 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 .

1. . 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.RECOVERY PROCEDURE OF DHANALAKSHMI BANK LIMITED 7. If a borrower enjoys more than one facility and one of them become NPA. COMPLIANCE ADVICE FOR BRANCH FUNCTIONARIES NPA accounts are to be grouped and classified borrower wise and not facility wise ie.

7.1 Conduct recovery Melas It has been decided to organize recovery melas in respect of accounts. • • • Conduct over recovery melas Offer compromise proposal or Filing suits 7.2. reduction of interest etc. The TBA package available in the computer is made use of in doing so. which are either border line or identified as NPAs in certain identified centers where the incidents of NPAs Sis on the higher side.2 Action Points Branches to contact the NPA / border line borrowers personally and fix a date(s) mutually convenient for the Mela.2. The bank as its recovery policy follows the measures like .The bank also keeps flagging the NPA accounts to have real time surveillance over such accounts. Other borrowers/customers should not be permitted to be present while discussions are going on with one borrower 7. Confidentiality of information should be respected even in respect of small clients. . Such offers should be made only during individual discussions depending up on the merit of each case.2. The venue of such recovery Melas is usually the branch premises. RECOVERY MELAS The letter sent to the borrower should not include a general offer of discount.

Where there is cluster of branches situated in a particular area. It not the right of any customer. The sacrifice is on the part of the bank only and not the borrower.4.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. the borrower of the near by branches may also be called to attend the Mela. COMPROMISE PROPOSALS Compromise means agreement reached between two parties by mutual concession. who decides whether to go in for compromise or not. The compromise should be negotiated settlement under which the bank should ensure the recovery of dues to the maximum extend possible at minimum expense. It is the bank. Compromise proposals cannot be encouraged as a routine. Here it means a process of reconciliation with the borrower for recovery of dues with sacrifice. Branches / Zonal heads should also explore the possibility of the recovery / settlement in respect of suit filed as well as decreed accounts also. 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.3. 7. 7. FILING SUITS Recourse to legal procedure is not only time consuming but also expensive. .

a fresh notice to be issued. 7. On getting the draft plaint duly approved by the zonal office / company office. branches shall furnish the response of the parties along with draft plaint.1 Legal process (advice to branches) On the receipt of necessary approval / sanction for filing suit. title deed etc. On the expiry of the notice period given at the time of issuance of legal notice. . together with all security documents. of zonal office / legal sanction of company office for necessary approval. During the notice period.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. draft plaint shall be got prepared from the advocate. arrangements for filing suit to be made and completed within 10 days.4. branches shall arrange to issue legal notice within five days if not already issued. If issued before.


staff productivity etc. • Provision made towards NPAs were on a sharp increase affecting the net profit adversely. Which indicates efficient recovery measures but is not reflected in the recovery trend. • Net advances is also increasing but at decreasing rate over the period under study.  Lack of regular follow up. . • • The aggregate net NPAs of the bank are on an upward trend. the recovery is affected. Net NPAs. • The net result.From analyzing the data collected.  Absence of proper systems at the branches and controlling offices resulting in. gross NPA.  Non-ostentation of stock / receivable statement and failure to calculate eligible drawing power. advances. of the bank over a past few years. which includes:  Non-conduct of post sanction inspections  Defective documentation  Lapses in creation of mortgages and registration of charges with the registrar of companies. cost of deposits. Staff productivity of the bank is increasing. showing a decline in the trend. the following findings were arrived at. The major reasons for NPAs are • • Lack of proper and systematic appraisal system Flouting of stipulations and conditions in the sanction advice. the various parameters like the deposits.

.2.2.2. 8. Strong inter-department management information system among loans.1. operations and recovery departments.SUGGESTION FOR MANAGEMENT OF NPAs It has been proved beyond doubt that non-performing assets in banks ought to be kept at lowest level. NPA menace.    To establish a system of early warning for potentially weak loan accounts. Failure to detect incipient signs of sickness. 8. Timely extension of period of limitation.  Persistent difficulties in accessing collaterals and recovering their market values because of legal hurdles. Some of the strategies at the preventive stage are as follows:     Maintenance and regular updation of client profile.2. Appraisal and monitoring are therefore the two most important factors in order to prevent the occurrence of NPAs at the first instance. Observance of limitation period. 8.FOLLOW-UP OF DEBT RECOVERY TRIBUNAL (DRT) CASES. Credit rating of clients Computerization of loan accounts. PREVENTIVE FRAMEWORK 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. following suggestions is necessary.

with compromise offers to repay the banks dues.I. The report submitted by the study group set up by the R. Out of Rs. 8.178 crore has been recovered. 8. delays in processing compromise proposals must be avoided at every stage with the objective of setting the issue. especially from the areas where functioning of DRT’s is stabilized. HUMAN RESOURCE DEVOLOPMENT 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 . Needless to mention. WRITE OFFS With view to cleaning the balancing the balance sheet . to streamline the functioning of DRT’s is under consideration by government.2. 8.B.5.2. Similar cells. The performance of ten DRT’s currently working may also not be considered satisfactory.only a sum of Rs. need to be expedited by formulating broad parameters/guidelines.4. write offs in small NPA account of doubtful and loss categories where chances of recovery are bleak. Banks may create special cells at their head offices/zonal offices to monitor progress in regard to cases filed with/ transferred to DRT’s. assisted by law officers may be created for follow up of high value suits and execution of decrees obtained. COMPROMISE AND ONE TIME SETTLEMENT Recalcitrant borrowers are coming forward.2.3.In order to expedite disposal of high value claims of bank Debt Recovery Tribunal were set up.8900 crore transferred to DRT’s by March 1997.

6. IDENTIFICATION OF PROBLEM LOAN Tackling NPAs through non legal measures like quick review of potential NPA account.2. 8. compromise/OT’s. RESCHEDULEMENT The public sector banks should use their wide network of branches and infrastructure to deepen their lending for whole sale and retail trade. write offs. if the unit is sick due to technical obsolescence/ inefficient management. 8. If by investing in safer securities though at . So that the banks reduce their average credit deposit ratios and the incremental NPAs will be zero. NARROW BANKING To mitigate the problem of NPAs. financial irregularities. 8. Effect quicker recovery/realization in NPA accounts. rephasement etc.9. with a view to reducing NPA ratios. reduce the incremental credit deposit ratio of banks over a period. REHABILITATION There should be normally no case for rehabilitation and bank’s financial assistance.2. rehabilitation. RECOVERY CAMP By holding recovery camps and Lok Adalat. 8. The sooner we settle the dues of such companies/OTs or through legal action.2. would go long way in guiding bank functionaries to effectively deal with problem loan account. housing.7. the better it is. counseling the borrowers could be done. 8. agriculture etc.

Germany 64% and Switzerland 51%. banks derive only 62% of income from interest.BANK SHOULD REDUCE DEPENDENCE ON INTEREST INCOME Indian banks are largely dependent on the lending and investment.2.K. U. the banks can earn sufficient net margins.12. the winner of writers association life time achievement award 1997. then it is possible to gradually eliminate their high NPA levels. The rest of income is fee based. 8. Lack of skill and inefficiency to adopt new technology to sharpen competitive edge. INTRODUCE MARKETING CONCEPTS AND NEW TECHNOLOGIES TO SHARPEN COMPETITIVE EDGE According to Sir De. while the banks in the developed countries do not depend up on this income.high rates of interest.11. Indian banks have to look for source from services and products. 86%of income of Indian banks is accounted by interest.2. for U. the basic pitfalls of Indian banking systems are:Absence of marketing concepts in the business development plans. . banks is only 59%. 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. 8.S. on banking research. Non-interest income should come from innovative products and not through higher service changes that the public sector banks charges to the customer. Indian banks have to give more concentration to remove the abovementioned problems to reduce NPA level.

Special recovery drive Help from revenue authority. 4.dhanbank. Compromise to improve recovery status of account.com (Personal website of R. 8. GENERAL STRAGIES 1. 6.research. d.2. g. f. Pressure on guarantors. c. 2002 – RBI h. Effective recovery 2. Settlement of claims with DIGGC/ECGC. www. Partial write off. b. BIBLIOGRAPHY a. 2000. 7.com www. .13.8. Analysis of NPAs of commercial banks – Analyst July V. 3.rbi. Kannan) Report on trend and progress of banking in India 2001Professional Banker November 2002 September 2002 April 2002 – Revised 5th Edition. e. Adjustment of collateral security.com www. 5. Officials from controlling offices should visit branches frequently and should check for any incipient irregularities\sickness. Venugopal – ‘Prudential norms for banks and NBFC’s Annual reports of Dhanalakshmi Bank Limited. 9.


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

J. which I needed to complete this report. I wish to express my gratitude and affectionate respect to my project guide of R.. I am immensely thankful and convey my sincere gratitude to my project guide.Sethunath. for all his encouragement and extended co-operation.V.I.Remesh for his counsel and incessant inspiration and for all his advice and guidance in the completion of the project work.Krishna. THANK SIBICHAN.V.C. constant inspiration and keen interest shown on me during making of this project.M YOU ALL .Fin.I.K. RAJUand R. Mgr. for his enlightening guidance. My special heartful gratitude is due to my director Dr T. 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.S.Prof.V.M. I deliberate my profound sense of gratitude to him.In this chain.DBL . R.




CERTIFICATE OF THE GUIDE This is to certify that the project work titled ‘AN ANALYSIS OF NPA IN COMMERCIAL BANKS WITH SPECIAL REFERENECE TO DHANAL. 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.AKSHMI BANK LIMITED’ is the outcome of bonafide research work carried out personally by Mr. Reg.Krishna Date : .SIBICHAN.No. Place : BANGALORE Prof.J.C.08 – ’03 An analysis of NPA .R.

V. Jayanagar. Reg. REMESH .R.No. 26th Main.S.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. Consultant & MBA Faculty R. Bangalore .M. 2001 – 2003 R.41 .I. 36th Cross.V.V. 01 BUCM 2050 Under the guidance of S. COLLEGE CA – 17.M BANGALORE.SIBICHAN. 4th ‘T’ block.J.C.INSTITUTE OF MANAGEMENT S.


Wrong classification of an NPA: classifying a 'loss asset' as 'doubtful' or 'substandard' asset. 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. SBI along with the Calcutta-based Allahabad Bank has for the first time made the provisioning (.62 billion and underprovided to the extent of Rs 14. classifying a 'doubtful' asset as a 'substandard' asset. The Board for Financial Supervision of the RBI has cited the following reasons for the lower recognition of NPAs and subsequent under-provisioning: 1. should be treated as NPAs. 2. which have turned sticky. However. Failure to identity an NPA in terms of stipulated guidelines: There have been instances of 'substandard' assets being classified as 'standard'. in fiscal 1997. 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. has recommended a tightening of the asset classification and provisioning norms with an objective of moving towards the international norms. the industry underestimated its NPAs to Rs 38.12 billion.The Narasimhan Committee. Tightening of these norms will force banks to make additional provisioning.25 percentage points) for their standard assets in fiscal 1998. For instance. 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. as part of the second phase of the banking sector reforms.

Similarly.5 million. The RBI estimated NPAs of foreign banks at Rs 13. "Essentially arising from the wrong classification of NPAs.93 billion in March 1996 while the RBI inspection teams opined the provisioning needed to be at Rs 6. however.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'. nine new generation private sector banks showed the maximum amount of ''NPA amouflaging" and under provisioning. While the RBI inspection teams put the right provisioning requirement at Rs 1.20 billion.77 billion. While the RBI estimated the NPAs of new private banks at Rs 3. The worst "offender" is the public sector banking industry. In contrast. The difference between the RBI estimates and actual provisioning in PSU banks is pegged at Rs 10. the old private sector banks underestimate their NPAs by a meagre Rs 6. The difference between the RBI estimates and actual provisioning is a paltry Rs 1.52 billion. the actual NPAs acknowledged by these banks are much lower at Rs 438.55 billion.6 million.90 billion. While the RBI estimates the PSU banks' NPAs at Rs 469.05 billion.28 billion. 37 foreign banks underestimated their NPAs by Rs 875. In percentage terms.5 million and provisioning by Rs 797. the actual figure shown by these banks is only Rs 2. Nineteen nationalised banks along with State Bank of India and its seven associate banks have underestimated their NPAs by Rs 30. Old private sector banks provided for Rs 4. Nearly 26 old private sector banks registered NPAs to the tune of Rs 21. throwing prudential norms to the winds.38 billion in March 1997 while the RBI felt the actual NPAs should have been pegged at Rs 27.74 billion in March 1997.07 billion.61 billion. the new private banks made provision of only Rs 234.55 billion while the actual NPAs shown by these banks were to the tune of Rs . the difference between the RBI estimate and the actual provisioning is Rs 968.29 billion.5 million." the internal document said. 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. As a group.

68 billion. foreign banks provided for Rs 4.02 billion while the RBI inspection teams estimated the right amount of provisioning at Rs 4. .82 billion.12. Similarly.

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