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CHAPTER – I
NPAs have turned to be a major stumbling block affecting the profitability of Indian banks before 1992,banks did not disclose the bad debts sustained by them and provision made by them fearing that it may have an adverse. Owing to the low levels of profitability, banks owned funds had to be strengthened by repeated infusion of additional capital by the government. The introduction of prudential norms strengthen the banks financial position and enhance transparency is considered as a milestone measure in the financial sector reform. These prudential norms relate to income recognition, asset classification, provisioning for bad and doubtful debts and capital adequacy. An Explorative & Descriptive study was considered to be adequate to achieve the objectives of the study, and the study was conducted in Dhanalakshmi Bank Limited., Kerala on “An analysis of NPA in commercial banks with special reference to Dhanalakshmi Bank Limited”. The general objective of the study was to analyze the NPA level in commercial banks. However the study was conducted with the following specific objectives.. 1. 2. 3. level. 4. To suggest measures for efficient management of NPAs. The major limitation of the study was the paucity of time. Even then, maximum care has been taken to arrive at appropriate conclusion. The method To analyze the NPA level of Dhanalakshmi bank Limited. To study the recovery procedures of Dhanalakshmi Bank Limited. To examine how far the bank has been successful in reducing the NPA
adopted for collection of data was personal interview with bank officials using Inventory schedule as a tool for the same. developed logically and sequentially from ‘introduction’ to ‘bibliography & references.’ Net advances are an upward trend. and further. The entire project report is presented in the form of a report using chapter scheme. analysis & interpretation of data has been made. suitable suggestions & recommendations are brought out. After collecting data from the respective sources. and it was also sourced from the secondary data. Net NPAs are also increasing staff productivity is increasing but is not reflected the recovery . Based on the findings. On analyzing the data. the following findings were arrived at:• • • results. logical conclusions are drawn.
CHAPTER – 2 INTRODUCTION .
high and growing NPAs and relatively low capital base. 3. . This helped them to disclose false profits. It has exposed the Indian financial sector to international competition in fairly significant manner. NPAs have turned out to be a major stumbling factor affecting the profitability of Indian banks. Before 1992. characterized by low profitability. asset classification. Income recognition norms reflect a true picture of the income and expenditure of the bank.bank did not disclose the bad debts sustained by them and the provision made by them fearing that it may have an adverse impact. which relate to income recognition. These prudential norms. Owing to low levels of profitability. 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.2. NPAs are considered to at higher levels than most other countries. 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. provisioning for bad and doubtful debt and capital adequacy serve three great purposes. Despite the overall progress made by the financial system over the years. have of late attracted the attention of public as also of international institutions.INTRODUCTION The Indian has been liberalized and globalize during the last decade or so. To cope with the growing competition in the present scenario the Indian banks have embarked on a massive exercise to revamp the system. the banks owned funds had to be strengthened by repeated intention of additional capital by the government. The banks used to take income even on NPAs on accrual basis. The asset classification and provisioning norms help in assessing the quality of the asset portfolio of the bank. 2. the operational efficiency of the banking system has been unsatisfactory. 1.
To examine how far the bank has been successful in reducing the NPA commercial banks. during the recent years . if Indian banks are to get their due place and recognition in the global market. To suggest measures for efficient management of NPAs.” 2.This has gained further prominence in the wake of transparency and disclosures measures initiated by R. .2. 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.. Research can be of two types namely Exploratory research and Conclusive research. level. 3.B. 5. with special reference to Dhanalakshmi Bank Ltd. differing from it only in that the investigator thinks there may be a payoff in the application somewhere in the forest of questions.I. OBJECTIVE OF THE STUDY The general objective of the study was to analyze the NPA level in commercial banks. It borders on an idle curiosity approach. However the study was conducted with the following specific objectives. Dhanalakshmi Bank. Exploratory research is investigation of relationships among variables without knowing why they are studied. 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.1. 2. To bring out en explorative & descriptive report on “Analysis of NPA in To analyze the NPA level of Dhanalakshmi bank Limited. 1. To study the recovery procedures of Dhanalakshmi Bank Limited. 2.We have also to conform to international accounting standards. In Conclusive research there are two types namely Descriptive research and Experimental research. 4. Kerala. The scope of this study is limited especially to the organization selected ie.
in this study. since he is the only one source of information. TOOLS USED FOR ANALYSIS OF DATA The data collected were analyzed with the help of statistical tools like frequency. However. Finance Manager of the bank is the source of data and therefore. Experiments are artificial in the sense that the situations are usually created for testing purposes in experimental research. 2. percentage and trend analysis.were collected from the published annual reports of the Dhanalakshmi Bank and other sources. . Based on all these facts and suggestion from the project guide ‘ Descriptive & Exploratory Research Methodology’ is adapted for this project work. Secondary data:. Kerala. Such data collected were analyzed for some kind of a trend and its impact on the profit of the bank.Descriptive research allows both implicit & explicit hypotheses to be tested depending on the research problem.were collected using Inventory schedule & also through interview. Tables are used to represent the consolidated data. and the necessary primary data is collected using Inventory Schedule. Both primary and secondary data were collected & used for drawing conclusions for the study. held with the Finance Manager in presence of the other officials of Dhanalakshmi Bank Ltd. Primary data:. He is interviewed at the Bank’s Head Quarters at Thrissur. Sampling Technique Sampling refers to selecting a part of the population to represent the characteristics of the population.3. there is no question of any sampling. Graphical representation is also used for better comprehension & presentation.
Therefore the problem chosen for the study of “analysis of NPA in commercial banks with special reference to Dhanalakshmi Bank Limited”. which has been affected their profitability for years. Dhanalakshmi bank. 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 them to think about new innovative recovery strategy.5 STATEMENT OF PROLEM A casual interaction with the officials of the bank revealed that NPA is a severe factor. Finance Manager of the bank.2. SCOPE OF THE STUDY The was conducted in the Head Office of the Dhanalakshmi Bank limited in Kerala. Limited.4. 2. This study will help to know the drawbacks of the present recovery Present a picture of the movement of NPA in Dhanalakshmi Bank strategies.Thefollowing are the main scope of the study: Scope of this study is limited to the organization selected ie. For this purpose I have covered officials of the bank from various department. is covered in this study and he is interviewed in presence of the other departmental officials of the bank.
e. maximum care has been taken to arrive at appropriate conclusion. Other commercial banks. scope. is considered for this study. SCHEME OF CHAPTERS • study. objective. Kerala only. Even then. For the purpose of collecting vital information. Since he is an individual. only one scheduled bank. . his biases may have creped into the data given. Though the subject matter pertains to commercial banks. Chapter 1. • Chapter 2-This chapter explains introduction.7.2. 3. Data pertains to NPA from 1995 . i.6 LIMITATIONS OF THE STUDY The major limitation of the study was the paucity of time. Finance Manager of the bank is only contacted & interviewed. 4.This chapter discuss the executive summary of the and limitation of the study.. 2. as also the other scheduled banks are outside the purview of this study. This study is restricted to Dhanalakshmi Bank Ltd. 2.1996 to 2001 – 2002 only. • Chapter 3This chapter gives a brief outline about the background of the study. Following are the limitations of the study: 1. Dhanalakshmi bank ltd.
This chapter describes the analysis of NPA in Dhanalakshmi bank limited. 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.
to examine the structure and functioning of the existing financial systems of . Narasimham.CHAPTER III NON-PERFORMING ASSETS AND PROVISIONING A CONCEPTUAL REVIEW 3.1 Narasimham Committee The government of India set up a nine member committee under the chairman ship of Mr. the former of governor of Reserve bank of India.
The main recommendations of the committee are 1. .1 Concept of NPAs as per Narasimham Committee Recommendations The Narasimham committee recommendations suggested that loans and advances in banks should classified in to performing and non performing on the basis of the health of the loans assets and the record of adherence to repayment of installments and interest on due dates.1. 3.India and suggest financial reforms. and Proper classification of assets and full disclosure and transparency of banks and financial institutions. While the most of the recommendations made by the committee in the 1 phase have been accepted for implementation. either in a single step or in a phased manner. 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. some of them are yet to be considered for the same. A phased reduction f statutory liquidity ratio. 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. Most of the recommendations have been accepted by the government. 3. 2. 4. These measures implemented so far have revolutionized the structure of the banking industry and its operations.
fixed and other assets. Operative like cash credit. discounts and other credit facilities). investment in government and other securities. 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. A.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. 3.3 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. which generate income to the bank by way of interest and their charges. The asset of a bank are cash and balances with RBI. balances with banks and money at call and short notice. bill purchased. security cover available etc.2 Performing and non-performing assets A performing asset is an advance. 3. 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. advances (including loans and advances. .1. 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 1992.1.
B. . Non operative like term loans. 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. It has been decided by RBI to dispense with the past due concept with effect from 31st March 2001. for the unusance period and grace period should be taken to consideration for arriving at the due date. Hence to all account to become NPA. recovery climate. 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. Bill purchased / Discounted / Negotiated: A bill purchased / discounted / negotiated becomes NPA. However due to improvement in the payment and settlement systems. b.An account shall be out of order if any one of the following conditions exist:a. 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. For bills discounted. The balance outstanding remakes continuously in excess of the sanctioned limit during the last six months prior to balance sheet. borrowal account with repayment programs: If interest / installment of principal remain overdue for a period of more than 180 days. c. cut off date is September 30th of the Year under audit. Note: When the prudential norms were introduced in 1992. up gradation of technology in banking systems etc. if it remains overdue and unpaid for two quarters or more. C.
Balance in Interest Suspense account. The following are deducted from gross NPA to arrive at net NPA. d. 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. Part payment received and kept in Suspense account. if applicable. The gross NPA and net NPA are always expressed as a percentage of advances. . E.1. Deposit Insurance Guarantee Corporation / Export Credit Guarantee Corporation claim receive and pending adjustment. 3.4 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. c.D. 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. b. a. Total provisions held excluding technical write off made at Head Office and provision of standard assets. 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.
RBI has advised that while reporting banks has to reduce technical write off made at Head Office from gross advance also. 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.1. Despite all these true picture was still not displayed. In order the ensure greater transparency in the borrowal account and to reflect actual health quality of banks in the balance sheet. It was consideredthat information would be off immense use to bank management for control purposes. quality of credit portfolio and the extend of advances causing concern in relation to total advances.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. RBI introduced prudential regulation relating to Income Recognition. . Asset classification and provisioning as recommended by the Narasimham Committee with certain modifications in a phased manner over a three year period beginning from 1992 – 1993. 3. 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. 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. which does not disclose any problems and does not carry more than normal risk attached to the business.
Loss assets: Loss assets is one. which is a non-performing asset for a period not exceeding 18 months.Sub standard assets: Sub standard asset is one. highly questionable and improbable. 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.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. Doubtful assets: Doubtful asset is one. conditions and values.1. especially in respect of high value accounts. on the basis of currently known facts.6 Adoption of 90 days norm: The RBI has advised banks to adopt 90 days norm instead of 180 days for classification of assets as in impaired one with effect from MARCH 2004 and to start making additional provisions for such asserts from March 2002 to absorb the impact due to reduction of NPA period. The bank may fix a minimum cut off point to decide what .1. 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. 3. wholly or partly. The accounts which may turn NPA with 90-day period have to be identified and 10% provision to be found out. 3.
the account will be treated as not serviced in the books of the . 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. Therefore. The cut off point will be valid for the entire accounting year. Accounts with temporary deficiencies: The classification of assets as NPA should be based on record of recovery.would constitute a high value account depending upon their respective business levels. 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. asset classification and provision. Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. b. non submission of stock statements and non renewal of the limits on the due date etc. Asset classification to be borrower-wise and not facility-wise a. 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. 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. If the debits arising out of development of letters of credit or invoked guarantees are parked in a separate account. It is difficult to envisage a situation when only one facility to a borrower becomes a problems credit and not others. balance outstanding exceeding the limits temporarily.
b. as the case may be. 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. . Accounts where there is erosion in the value of security a. to ensure proper asset classification in their respective books. The banks particularly in the consortium should. In other words. Such NPAs may be straight away classified under doubtful category and provisioning should be made as applicable to doubtful assets. 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. 3. till regularization of the account. the existence of security should be ignored and the asset should be straight away classified as loss asset.other member banks and therefore.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.1. 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. 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. be treated as NPA. therefore. the date on which an account become irregular shall not be changed due to subsequent recoveries. It may be either written off or fully provided for by the bank.
Doubtful assets: a.1 Period for which the advance has been considered as doubtful and provision requirement (%) for each period. income can be recognized on the basis of receipts. 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. the realization of security and erosion over a period of time in its value. provision may be made on the following basis. 100% of the outstanding should be provided for. In regard to the secured portion. For performing assets. Due to the implementation of the prudential norms “accrual concept” has been changed into “recoverability concept” in recognizing in the income on NPA. So RBI directive now requires the banks to make provisions in their balance sheet for all non-standard loss assets. accrual or both. at the rate ranging from 20% to 50% of the secured portion depending upon the period for which the asset has remained doubtful. . Provisioning There is time lag between an account becoming doubtful for recovery. b. The entire assets should be written off if the assets are permitting to remain in the books for any reason. Table 3. This means income can be recognized only on receipt for NPA accounts.Income recognition Interest income is recognized on an approval basis – except in case of NPAs where it is recognized on receipt.
Ø As on 31-03-2001. 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. which became doubtful on account of new norm of 18 months for transition from substandard asset to doubtful category. as on 31-03-2002. in addition to the provisions needed. balance of the provisions not made during the previous year. 50% of the additional provisioning requirement on the assets. 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. Sub standard assets A general provision of 10% on total outstanding should be made without making any allowance for DICGC / ECGC guarantee cover and securities available. Standard assets .3 Year More than 3 Year 20 30 50 Provision requirement (%) c. with a minimum of 20% each year. Ø As on 31-03-2002.Period for which the advance has been considered as doubtful Upto one Year 1. d.
b. This amount has to be reduced from the outstanding amount.a. a. DICGC/ECGC cover available cannot be reduced in the case of advances classified as sub standard before applying 10% provision.2 THE UNSEEN AND UNPERCEIVED EDGE OF NPA . For arriving at the provision amount. From the year ending 31-03-2000. the banks should make a general provision of a minimum of 0. b. 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. The provisions on standard assets should not be reckoned for arriving at net NPAs. the following matters may be kept in mind. 3.25% of standard assets on global loan portfolio basis. 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. c.
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. 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. Situations of banking distress have quickly intensified and in the process." . The process of quickly integrating new innovations in the existing set-up leads to an immediate disorder and unsettled conditions. More importantly. such costs amounted to 10 per cent or more of GDP in at least a dozen developing country episodes during the past 15 years. In a dynamic world. banking crises have come to the forefront of economic analysis. As Caprio and Klingebiel (1996) observe.NPA surfaced suddenly in the Indian banking scenario. have become one of the main obstacles to stability to the financial system. People are not accustomed to the new models. In fact after it had emerged the problem of NPA kept hidden and gradually swelling unnoticed and unperceived. Marginal and sub-marginal operators are swept away by these convulsions. Consequently banks underwent this transition-syndrome and languished under distress and banking crises surfaced in quick succession one following the other in many countries. (1996). and when the global financial markets were undergoing sweeping changes. 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. Banks being sensitive institutions entrenched deeply in traditional beliefs and conventions were unable to adjust themselves to the changes.al. in the midst of turbulent structural changes overtaking the international banking institutions. Elaborating a cross-country description of this phenomenon a study by FICCI depicts as under: "Since the mid-eighties. and work smoothly. These new formations take time to configure. but only after levying a heavy initial toll. such crises have resulted in severe bank losses or public sector resolution costs. in the maze of defective accounting standards that still continued with Indian Banks up to the Nineties and opaque Balance sheets. According to Lindgren et. around the Eighties.
Indian Banking. During all these years the Indian Banking. The new economic policy in turns revolutionalised the environment of the Indian industry and business and put them . and investment structure did not participate in this vibrant banking revolution. Tariffs were brought down and quantitative controls were removed. This enabled the nationalized banks to continue to flourish in a deceptive manifestation and false glitter. The government hastily introduced the first phase of reforms in the financial and banking sectors after the economic crisis of 1991. they emerged revitalized and as more vibrant and robust units. Import restrictions were gradually freed. led to consequences just the opposite of what was happening in the western countries. the absence of competition and total lack of scientific decisionmaking. The Indian market was opened for free competition to the global players. 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. credit growth.But when the banking industry in the global sphere came out of this metamorphosis to re-adjust to the new order. in particular PSBs suddenly woke up to the realities of the situation and to face the burden of the surfeit of their woes. though stray symptoms of the brewing ailment were discernable here and there. This was an effort to quickly resurrect the health of the banking system and bridge the gap between Indian and global banking development. whether measured in terms of deposit growth. Continued political interference. Deregulation in developed capitalist countries particularly in Europe. Suffering the dearth of innovative spirit and choking under undue regimentation. regulated interest rates. growth intermediation instruments as well as in network. 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. whose environment was insulated from the global context and was denominated by State controls of directed credit delivery. Indian banking was lacking objective and prudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. witnessed a remarkable innovative growth in the banking industry.
to innovate and thrive in a highly competitive market and their success depended on their ability to act and adopt to market changes. there was resultant chaos and confusion. 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. more particularly in the transient economy of the country. Increase in the number of banks due to the entry of new private and foreign banks. which experienced major reforms. The reforms have taken the Indian banking sector far away from the days of nationalization. As the problem in large magnitude erupted suddenly banks were unable to analyze and make a realistic or complete assessment of the surmounting situation. increase in the role of the market forces due to the deregulated interest rates. all of which had led to deterioration in the quality of loan portfolios. It was not realised that the root of the problem of NPA was centered elsewhere in multiple layers. Banks have now an entirely different environment under which to operate. As banking in the country was deregulated and international standards came to be accepted and applied.to similar problems of new mixture of opportunities and challenges. as . inadequacy of capital and the erosion of profitability. banks had to unlearn their traditional operational methods of directed credit. increase in the transparency of the banks' balance sheets through the introduction of prudential norms and norms of disclosure. trade and industry in India. 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. Many are still languishing unable to get released from the old set-up. During this decade the reforms have covered almost every segment of the financial sector. it is the banking sector. 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. directed investments and fixed interest rates. as much outside the banking system. In particular. These called for new strategies. while a few progressive corporate are making a niche for themselves in the global context. As a result we witness today a scenario of banking.
but it is limited to the view appearing at the surface or top-layer.within. Repeated correctional efforts were executed.top and not the contents that exist inside the several structures. But it is not a homogeneous whole that is being perceived. 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. It has collected extensive statistics about NPA in different financial sectors like commercial banks. A simple look at the whole provides summarised perception. banks are made ultimately to finance the losses incurred by constituent industries and businesses. Partial perceptions and hasty judgments led to a policy of ad-hoc-ism. The problem was defying a solution. trying to switch over to globalisation were only aggravating the crisis. Individual banks inherit different cultures and they finance diverse sectors of the economy that do not possess identical attributes. As has happened elsewhere in the world. urban cooperatives. but positive results were evading. financial institutions. RBI looks at the banking industry's average on a macro basis. 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. a distressed national economy shifts a part of its negative results to the banking industry. A bird's eye view is distinct. Banking is not a compartmentalized and isolated sector delinked from the rest of the economy. But still it is a distant view of one outside the system and not the felt view of a suffering participant. It is a not an exhaustive or in-depth view. Continuous concern was expressed. but it perceives only a telescopic view of the roof. extensive and even sharp. In short. consolidating and tabulating the data submitted by different institutions. which characterized the approach of the authorities during the last two-decades towards finding solutions to banking ailments and dismantling recovery impediments. Flying at a great height the bird can of-course survey a wide area. NBFC etc. There are distinct diversities as among the 29 public sector banks themselves. between different geographical regions and between different types of customers using bank credit. There are three weak nationalised banks that have been identified. where a bottom-to-top-view alone can enlighten the correct contributing factors. RRBs. Restricted merely as a top-layer view it is partial and is not even a top-to-bottom view. But there are also correspondingly .
as an average for the entire bank cannot convey a dependable picture. where operations should be conducted on a decentralized knowledge-based work-group. Inherited problems of Indian banking and industry. averaging the bank's whole performance to 12%. Much criticism is made about the obligation of Nationalised Banks to extend priority sector advances. controlled or managed by single families. But banks have neither fared better in non-priority sector. all having been nurtured and developed through innovative zeal of pioneers. 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. Variable skill. Human factors (those pertaining to the bankers and the credit customers). But if we look down further within that Bank there are a few pockets possessing bulk segments of NPA ranging 50% to 70% gross. The comparative performance under priority and non-priority is only a difference of degree and not that of kind. 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.13%). While banks functioned for several decades under ethnic culture. Similarly NPA concerns of individual Banks summarised as a whole and expressed. It is being statistically stated that bank X or Y has 12% gross NPA. The assessment of the mix-of contributing factors should have included 1.an integrated teams of specialists each contributing to a core area of management. represented by one dominant individual towering at each set-up. Indian business and industry were owned. The Indian management set up everywhere turns mostly as one-man show even today. which should consequently convey that there should also be several other segments with 3 to 5% or even NIL % NPA. 2. Environmental imbalances in the economy on account of wholesale changes and also 3.two better performing banks like Corporation and OBC.87%) and Andhra (Gross NPA 6. There are also banks that have successfully contained NPA and brought it to single digit like Syndicate (Gross NPA 7.
represents the actual social banking. After three decades of nationalised banking. The heavy concentrated prevalence of NPA is definitely due to human factors contributing to the same. 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 . If the gap is long. Advance to weaker sections below Rs. We may add that while the core or base-level NPA in the industry is due to common contributory causes.25000/. who can boldly and independently. No bank appears to have conducted studies involving a cross-section of its operating field staff. including the audit and inspection functionaries for a candid and comprehensive introspection based on a survey of the variables of NPA burden under different categories of sectoral credit. but objectively voice their views. An important fact-revealing information for each NPA account is the gap period between the date. the inter-se variations are on account of the structural and operational disparities. Ex-bankers. we must have some hundreds of retired Bank executives in the country. NPA in different sector is not caused by the same resultant factors. when the advance was originally made and the date of its becoming NPA.and intra-bank performance. and post advance supervision. Everyone is satisfied in blaming the others. but possess a depth of inside knowledge do not out-pour candidly their views. credit delivery.e. the professional bankers who have retired from service. Things were all right earlier. different regions and in individual Branches categorized as with high. Credit to different sectors given by the PSBs in fact represents different products. Credit customers who are in NPA today. Bank executives hold 'willful defaulters' responsible for all the plague. Industry and business blames the government policies. it is the case of a sunset industry. Advance to agriculture. Infant mortality in credit is solely on account of human factors and absence of human integrity. but for years were earlier rated as good performers and creditworthy clients ranging within the top 50 or 100. We do not hear the voice of the operating personnel in these banks candidly expressed and explaining their failures. But what is the proportion of this content? Significant part of the NPA is on account of clout banking or willfully given bad loans. SSI and big industries each calls for different strategies in terms of credit assessment. project implementation. i. NPA in this sector forms 8 To 10% of the gross amount. medium and low incidence of NPA.
In . Out of the 2. 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. 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. or have they? The credit portfolio of a nationalised bank also includes a number of lowrisk and risk-free segments. medium or small occupies costly developed industrial land. at that period. where life cycle of the virus is terminated. Why have they become unreliable now. 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. about 10% of the small industries are reported to be sick involving a bank credit outstanding around Rs. Now. NPA is a sore throat of the Indian economy as a whole. Each closed unit whether large. is not the Government an equal sufferer? What about the recurring loss of revenue by way of taxes. It may be even more now. which cannot create NPA.5 million. The banks are only the ultimate victims. Business and industry has equal responsibility to accept accountability for containment of NPA. 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. It is in fact an all-pervasive national scourge swaying the entire Indian economy.5000 to 6000 Crore. Many of the present defaulters were once trusted and valued customers of the banks. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure. Secondly NPA is not a dilemma facing exclusively the Bankers. 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. These closed units represent some thousands of displaced workers previously enjoying gainful employment.strategy involving a role of the actively engaged participants who can tell where the boot pinches in each case. Several items of machinery form security for the NPA accounts should either be lying idle or junking out.
Why not representatives of industries and commerce and that of the Indian Banks' Association come together and candidly analyze and find an everlasting solution heralding the real spirit of deregulation and decentalisation of management in banking sector. And 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. The new tool of deregulated approach has to be accepted in solving NPA. largely and arising from inadequate legal provisions on foreclosure and bankruptcy. in turn transferred and parked with the banks. abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporate? In short. 3.3. as the ultimate financiers of these assets.1. RBI and Government of India can positively facilitate the process by providing enabling measures. machinery and money are locked up in industrial sickness. 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. which indirectly are reflected in the financial statements of nationalised banks. At the end of March 1998. 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.other words. 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. large value of land. but help industry and banks to set right themselves. about . These are the assets created that have turned unproductive and these represent the real physical NPA. and accepting self-discipline and self-reliance? What are the deficiencies in credit delivery that leads to its misuse. NPA represents the owes of the credit recipients. In the final analysis it represents instability in industry. long drawn legal procedures and difficulties in execution of the decrees awarded by the court.The Legal Framework The RBI sees NPAs in the Indian banking sector as a historic legacy due to lacunae in credit recovery. the field level participants should first address themselves to find the solution.3.
8. Heavy weight foreign banks with huge capital base.825 crores. The banking arena has been almost flooded with new entrants including private banks.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. A large part of their bad debts are a legacy of this misuse. The performance of ten DRTS currently working may also not be considered satisfactory. non-banking finance companies merchant bankers. In addition the large-scale loan write-off ordered by politicians promote a culture of indiscipline and lawlessness among borrowers.3 per cent and significant portion of suits have been pending for more than a decade. 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.3.3.900 crores transferred to DRTs by March 1997. In order to expedite disposal of high value claims of banks Debt Recovery Tribunals (DRTs) were set up.Political interference The Indian banking system has been extensively misused for political reasons in the past.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. foreign banks. 21. chit funds etc.2. This adds to the problems of banks already functioning in a hostile legal environment. The efficiency of our legal system can also assessed by the value of cases pending in the courts of law representing about Rs.3. only a sum of Rs. 3. latest technology innovative and globally tested products are spreading their wings and wooing away . Out of Rs. 3. 178 crores has been recovered.
A good risk management is possible with only a sound banking system conforming to international prudential and supervisory norms.. The large branch network of Indian public sector banks serves as a nonregulatory barrier to competition. 3. 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. Under risk management.3. This underscores the importance of internal risk management systems in banks. In this context the recent trends in the NPA profile of the players is interesting. If there is a mismatch between assets and liabilities the banks may be exposed to interest rate risk. It appears that intense competition in a small segment of the market is pushing private and foreign banks to take excessive risk. Risk management should be proactive rather than reactive. which are competitively priced and have better quality. This was because the new entrants were primarily competing with these banks.customers from the Indian banks that are steeped in a tradition of inefficiency and lethargy. They are technology drive and have locational advantages. liquidity risk and foreign exchange risk. Narasimham Committee II has also addressed this issue bringing into focus the dangers to liquidity and solvency due to mismatches. wider range of products and specialized services. 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. 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. For this the banks have to develop skills to identify assess and minimize the risks and enhance the returns. These banks enjoy a competitive edge in providing services.4. corporate governance has . credit risk and price risk.
which adversely affect their repayment. 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. ADVERSE EFFECTS OF NPA ON THE WORKING OF COMMERCIAL BANKS . These include: · · · · · · · · · · Diversion of funds as revealed by an RBI study. Lack of prudential Norms Risk management practices can be effective only when financial statements present accurate picture of the level of risk. detected. 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.also to be stressed to develop an effective control system.4.3. 3.5. 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. Besides the above there are several factors related to the borrower.
Considering the minimum cost of holding NPAs at 7% p. Considering the average provisions made for the last 8 years.NPA has affected the profitability. But today in the deregulated market the banks decide their lending rates and borrowing rates. This has brought Net NPA to Rs. To this extent the problem is contained.4. as heretofore. In the .31251 Crores towards provisioning NPA. there was no option for banks. This is the margin between the cost of resources employed and the return there from.93 to 31. In the context of severe competition in the banking industry. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs. else they are to seek the bounty of the Central Government for repeated Recapitalisation.2% of net advances. NPA is not merely non-remunerative. a sizeable portion of the interest income is absorbed in servicing NPA. 3. but at what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy.04. Impact on Profitability Between 01.03. When the interest rates were directed by RBI. 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. the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth.3300 crores from annum. The options for these banks are lost. liquidity and competitive functioning of PSBs and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion.2001Commercial banks incurred a total amount of Rs. which works out to average of Rs. It is also cost absorbing and profit eroding.2300 Crores annually. 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. Other banks hesitate to approach the market to raise new issues.32632 Crores or 6. 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). “The spread is the bread for the banks”.32632 Crores absorbs a recurring holding cost of Rs.1.a. In turn PSBs are seen as poor performers and unable to approach the market for raising additional capital. Equity issues of nationalised banks that have already tapped the market are now quoted at a discount in the secondary market.
88 5405. when the banks are able to earn adequate amount of noninterest income to cover their entire operating expenses i.41 17283.64 18177. It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March 2001.60 1797. Theoretically even if the bank keeps 0% spread.85 5958.competitive money and capital Markets. 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.7589.Non-interest Operating expenses Difference Earnings .12 Year ended Mar.11 38789. who had issued the Recapitalization Bonds to the weak banks to sustain their .48 6257.14 56967.24 299.interest income Exp.10124. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation.e.61 Interest on Recapitalization Bonds is a income earned from the Government.2 Nationalised banks operational statistics……….-Interest expenses Interest spread Intt. On Recap bonds Operating Profit Provisions Net Profit Year ended Mar. 2000 6662.55 .e. Table 3.27 4766. an ideal competitive working is reached.15 639. the difference between the gross interest income and interest cost will constitute its operating profits. a positive burden.47 1795. as published by RBI in its Report on trends and progress of banking in India. it will still break even in terms of operating profit and not return an operating loss.01 35477.41 14756.. On account of the burden of heavy NPA. In the face of the deregulated banking industry. 2001 7159.87 .45 50234. many nationalised banks have little option and they are unable to lower lending rates competitively. In that event the spread factor i. inability to offer competitive market rates adds to the disadvantage of marketing and building new business. (Amount in Crores) Performance indicator Earnings .42 14251.
4. Without accepting risk.1% as at March 2001. Even granting 3% net NPA within limits of tolerance the nationalised banks are holding an uncomfortable burden at 7. . the fact that their net NPA in the average is as much as 7% is a potential threat for them.4. and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over-confidence). Accept justifiable risks and implement derisking steps. There is insistence on provision of collateral security. 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. Nationalised banks have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution of this hovering threat. but have resorted to II-Tier capital in the debt market or looking to recapitalization by Government of India. there can be no reward.capital adequacy under a bail out package. This has affected adversely credit growth compared to growth of deposits. The statistics above show the other weaknesses of the nationalised banks in addition to the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as under: 1. Their earnings from sources other than interest income are meagre. but will not prevent the account turning into NPA. RBI has indicated the ideal position as Zero percent Net NPA. 2.2 How NPA Affects the Liquidity of the Nationalised Banks? Though nationalised banks (except Indian Bank) are able to meet norms of Capital Adequacy. 3. 3. The fear psychosis also leads to excessive security-consciousness in the approach towards lending to the small and medium sized credit customers. Business is an exercise of balancing between risk and reward. a tendency towards laxity in the standards of credit appraisal comes to the fore. In the world of banking the concepts of business and risks are inseparable. 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. sometimes up to 200% value of the advance.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. as per RBI guidelines. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. 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. resulting a low C/D Ratio around 50 to 54% for the industry. Their operating expenses are higher due to surplus manpower employed.
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. More significant of them.5 lakh for compromise settlement under Lok Adalats. 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. The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. Lok Adalats Lok Adalat institutions help banks to settle disputes involving accounts in “doubtful” and “loss” category. I would like to recapitulate at this stage. 3. [The above guidelines which were valid up to June 30. 2600 crore by September 2001] An OTS Scheme covering advances of Rs. 5 crore and less as on 31 March 1997.1.3. [Public sector banks recovered Rs.5 MEASURES INITIATED BY RBI AND GOVERNMENT OF INDIA FOR REDUCTION OF NPAs 3.25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Hon’ble Finance Minister providing for OTS for advances up to Rs.50. 2001 helped the public sector banks to recover Rs.000 in respect of NPAs of small/marginal farmers are being drawn up. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. particularly for old and unresolved cases falling under the NPA category. 668 crore through compromise settlement under this scheme. The scheme was operative up to September 30.5. 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. with outstanding balance of Rs.5.2.10 . 2000.] Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs.
Provisions for placement of more than one Recovery Officer.Circulation of information on defaulters . through the forum of Lok Adalat. Allahabad. power to attach defendant’s property/assets before judgment.6264. passed in March 2000 has helped in strengthening the functioning of DRTs.4. 2001. 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. 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.30 crore.84 crore pending before them as on September 30. 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. Delhi. Debt Recovery Tribunals The Recovery of Debts due to Banks and Financial Institutions (amendment) Act. For more details about Lok Adalats please refer to page Lok Adalat 3.40. management.lakhs and above. 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. 3. and notify borrowers who default to honour the decrees passed against them. 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.5.The amount recovered in respect of these cases amounted to only Rs. Calcutta and Chennai. The public sector banks had recovered Rs.38 crore as on September 30. 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. 2001.1864. 2001.3.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30. they could decide only 9814 cases for Rs. Looking at the huge task on hand with as many as 33049 cases involving Rs. Mumbai. Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals located in five centers viz.42988.5.
6. However.5.5. as on 31st March every year. RBI also publishes a list of borrowers (with outstanding aggregating Rs. Board of Directors are required to review NPA accounts of Rs. It would negotiate with banks and financial institutions for acquiring distressed assets and develop markets for such assets. 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. and file criminal cases in regard to willful defaults. 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.5.5. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. Since enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in December 2002.5. they serve as negative basket of steps shutting off fresh loans to these defaulters.Corporate Debt Restructuring (CDR) . I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers. 3.1 crore and above with special reference to fixing of staff accountability. 3.6. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds.The RBI has put in place a system for periodical circulation of details of willful defaults of borrowers of banks and financial institutions. 3. 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.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. some of them I would like to highlight.7.. On their part RBI and the Government are contemplating several supporting measures including legal reforms.1400 crore is to be set up as a trust for undertaking activities relating to asset reconstruction. Recovery action against large NPAs After a review of pendency in regard to NPAs by the Hon’ble Finance Minister.2000 crore and initial paid up capital Rs.
Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs. which had in no small measure contributed to the incremental NPAs of banks 3. The main recommendations of the Group include dissemination of information relating to suit-filed accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. This. RBI has set up a high level Group under the Chairmanship of Shri. 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. . in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient.20 crore and above with the banks and financial institutions. The Group will review the operation of the CDR Scheme. Credit Information Bureau Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. Vepa Kamesam. Deputy Governor. RBI to review the implementation procedures of CDR mechanism and to make it more effective. 3. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. As announced by the Hon’ble Finance Minister in the Union Budget 2002-03.5. RBI is considering the recommendations of the S. The CDR structure has been headquartered in IDBI. Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place. Proposed guidelines on willful defaults/diversion of funds RBI is examining the recommendation of Kohli Group on willful defaulters. I hope. would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large amounts against same assets and property.5.8. 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. identify the operational difficulties.9. (CIBIL) is under way.R. if any.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system.
The big question now is." delivered at 22nd Bank Economists Conference. 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.3. A.10. Governor.6. and make recommendations for making the role of Board of Directors more effective with a view to minimizing risks and over-exposure. audit committees etc. 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. 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. Bimal Jalan. Banks are equally responsible. RBI. to bring down the mounting bad loans or so-called non-performing . [Dr. he made a categorical statements in the Rajyasabha that “non – performing assets of Rs. New Delhi. 2001] 3. disclosures. The government has passed a new ordinance in June. to what extend the new legislation would help in recovering the NPAs? The new Finance Minister. which seeks to change all this and empower the lenders to recover their dues without going through prolonged legal battles in the courtrooms. Drawing attention to the gravity of the problem facing the country’s financial sector.S. Despite all efforts by the government and Reserve Bank of India. Jaswant Singh.000 crore is a loot and not debt”. postreforms. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards visà-vis compliance. transparency. in a speech titled "Banking and Finance in the New Millennium. 5th February.5. Corporate Governance A Consultative Group under the chairmanship of Dr. 83.
500 crore on its borrowings. the Government had allowed 27 Public Sector Banks to write off corporate loans worth Rs. The health of Financial Institutions is more worrisome with their declared NPAs amounting to nearly Rs.000 crore. Again in 2000-2001. the figure of Rs. the Government provided Rs. 20. 6. Audit and Consulting firms such as Ernest and Young put real NPAs at 1.246 crore to reduce the level of bad debts. In 1999 to 2000-01. .assets. Incidentally. within 12 months. The Government had to inject a massive Rs. 8.000 crore in these banks. 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. The consulting firm. The institution has a liquidity gap of Rs. It is against this backdrop that some financial experts have recommended the winding up of the IFCI. 1. Evidently. the problem has persisted and in fact it has aggravated. Last year. 83 crore mentioned by Finance Minister pertains to NPA given out by the bank and financial institutions. 4500 crore with another Rs. 400 crore for its survival. 5. The IFCI has been kept alive by huge infusion of funds by the Government.50. has recommended a capital infusion of upto 8800 crore for 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. There is reason to believe that the actual NPA are much higher than this official figure. Now.30. 5000 crore debt maturing next year. 5500 crore. a bailout package of Rs. 2. In addition. This was against the Verma Pannel recommendation to inject Rs.000 Crore.000-1.200 crore in the ill-conceived Enron project. It may also need a bailout soon. 7100 crore over a 3-year period till 2002-2004.550 crore was worked out for 3 weak public sector banks – Indian bank. it is set to provide it with a guarantee of Rs. they are also stock with a huge liability of Rs. The IFCI’s liabilities this year add upto Rs. The Government had to worked out huge bailout packages for the Unit Trust of India and the Industrial Financial Corporation of India. McKinsey and Co.446 crore towards recapitalization of public sector banks till end March 1999 to help them fulfill the new capital adequacy norms. UCO Bank and United Bank of India. 20.
sick banks. after 60 days notice. The Omkar Goswami Committee report on industrial sickness and corporate restructuring aptly summed up the situation in its preamble thus “There are sick companies. While the reasons for sickness are well known. the Finance Ministry is still struggling to work out the modalities of bridging the gap estimated at over 10000 crore. its other constituent unit to continue to receive funds from Financial Intuitions and banks. take over the management of the business of the borrower. and unpaid workers. in most cases bad management and poor standards of corporate governance are to blame. including those by the RBI.The downfall of the once strong and powerful UTI is well known. Loans turn bad because of the incidents of industrial sickness. there seems to be a total lack of professional approach in tackling the problem. 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. To make matters worse. to take possession of. Moreover. 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. But there are hardly any sick promoters. 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 recover any money payable by the third parties to . This is well documented by a number of studies. between the promised return and actual earnings in UTI’s various assured return schemes. 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 second bailout package for the UTI will cost the Government Rs. It would enable the creditors. or sell or lease the assets financed by them. While some instances of industrial sickness are no doubt because of unforeseen changes in business environment and beyond the control of the managements. There lies the heart of the matter”. The rules of the game are severely tilted against lenders who find it extremely difficult to enforce the contracts signed with the borrowers. 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. 5.000 crore.
(ARCIL) with 51% shareholding by private bank and the rest by the State Bank of India and IDBI. The ordinance also provides for the setting up of Asset Reconstruction Companies (ARCs) to be regulated by the RBI. In addition. which they call draconian. While the borrowers are allowed to seek protection from secured creditors by filing an appeal to debt recovery tribunal. The demand to make a distinction between willful and genuine default make no sense. Quite a few financial institution and banks have already initiated measures to recover their dues from chronic defaulters. for instance. All that is required is that creditors accounting for 75% or more of the secured lending should agree to initiate recovery proceedings. They have expressed a fear that the provisions could make bankers trigger happy in seizing the assets of the defaulters. industry associations and chambers such as CII and the FICCI have been quick to protest against the provisions of the ordinance. IDBI has issued notices to 17 borrowers for an amount . The ARC can issue Security Receipt (SRs) that will be tradable instrument that the lenders can sell at market determined prices. To begin with it is proposed to set up the Asset Reconstruction Company of India Ltd. IDBI and IFCI. The Debt Recovery Tribunal can.200 crore. 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. have sent notices to 22 companies. reduce the deposit amount. As expected. Their main objection is that it does not make any distinction between willful and genuine defaulters. 1. There fear is clearly misplaced. ICICI bank. the banks and financial institutions do fear the normal risk of lending and are prepared for certain permissible percentage of loans turning into NPAs. but only after recording its reason for doing so. at its discretion.the borrower. In any case. which collectively owe them Rs. they will also be required to deposit 75% of the amount claimed by the creditors in order to prevent misuse of appeal provisions. 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.
7. initially the banks and FIs would target only units defaulting willfully as selling off of assets of going concerns will not be difficult. There are no proper project appraisals at the time of granting loans. seizing and securitizing agencies. According to banking sources. banks and Fls would be in a position to make use of the legislation on a much bigger scale. At present. The State Bank of India has issued notices to about 70 defaulters while others are also in the process of doing so. Surely. NPA RECOVERY: MYTH AND REALITY “Indian banks are weighed down by enormous amounts of bad loans that threaten the very health of banking system. If only the hard core bad loans are separated and sold to . the Fls. seizing agencies and turnaround specialists come into being and receivers and liquidators tone up their act. political interference and corruption are rampant. and banks are equally responsible. the newer tech-savvy and the foreign banks are the least vulnerable to bad loans. 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. legal experts and industry specialists. and papering over bad loans and granting of fresh advances to defaulters is a rule rather than an exception. They feel that once the asset reconstruction companies get established. There is an urgent need to create an array of liquidators. It needs to be ensured that the lenders are not stuck with the assets taken over. 3. Among the Indian banks. banks in China which are far more advanced economically and industrially would be healthier than Indian banks.640 crore.aggregating Rs. The accent should be on quick liquidation of the seized assets and realization of dues within a reasonable time frame. 1. public sector is worst affected and among banks in private sector. receivers. 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. For the present state of affairs. The standards of professional competence and governance in these institutions are far from satisfactory. 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. The big question now is: To what extent the new legislation would help in recovering the ‘loot’? Not much.
the problem of NPA in public sector banks is more acute than private banks. called in elegantly as non-performing assets is a fairly high proportion of total loans. The quantum of bad loans. China should rank better. Given the fact that the total capital and reserves of SCBs were around 5.47 crore. Certainly. As per the banker magazine (A sister publication of financial times of U. As against this. some banks are reportedly more adventurous than others. except perhaps in the area of democracy. These and similar opinions are held by knowledgeable persons both in banking system and outside it. The percentage of net NPA to non-advances of scheduled commercial banks in India was 6. according to the Reserve Bank of India report. export performance. be healthier than Indian banks. Facts portray a contrary picture. NPAs of Indian banks were 2.8% respectively in 200.7% of advances for public bank sector against 5.5% of total assets (Not advances) as on March 31 st 2001.01 % and 28. the level of NPA to total assets I the two biggest banks in China. all NPAs are not irrecoverable and banks do have some securities to back up the NPAs.2 percent on March 31st 2001. 32. in the level of discipline among the populace and adherence to law. the problem could be largely resolved”. The NPA was 6. it is clear that the Indian banking system is basically safe. well.4% for private sector banks and 2. Further.468 crore represent less than half of capital resources at Rs. on trends and progress of banking in India. China comes out on top. Therefore. like a south based private bank that was in the headlines recently. Banks in India are thus in a much better state of health than their counter parts in China.741.23% of total assets. In some respects. the net NPA amounting Rs. one might presume. 67. This is because a good chunk of the assets of banks comprises investment in Government securities which is fully realizable and risk free.2 .an outside agency. The relative level in the US would be less than 2%. these contain untruth and half-truth. in industrialization. In any comparison between Indian and China.K). banks in China would. but the picture is somewhat blurred. It is a fact that the problem of bad loans is plaguing the banking system for quite some time. commercial bank of China and bank of China were 25. But. as discussed below. But then. one might jump to the conclusion that NPA was more than capital and reserves. Therefore.
It is debatable if ARC would be a useful tool under Indian conditions.3%. according to the RBI publication. Bank International Indonesia at 50. These suits are pending in various courts to cope with the enormous number of cases before them. one estimate puts these at a few crore cases. the problem of NPA could be resolved has caught the imagination of many seasoned veterans in Banking. Many expert committees have recommended the setting up of Asset Reconstruction Company or Fund (ARC or ARF) on the lines of the model tried out in the US and other country. . 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. 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. It was also stressed that ARF should focus on large borrowers.59 crore as on March 31st 2000.29%) and four others have higher than 10%. However.percent for foreign banks in 2001. In these cases. that are other than those that started in the 1990s. excluding loans to food procurement agencies. In any case. Households and individuals. It is extremely doubtful if a separate ARF can expedite matters. for the older private sector banks. by separating the hard core NPA and selling them to a recovery agency. The highest level in public sector bank was in Dena Bank (18. contribute to around 26% of total advances. including agricultural sector. The borrowers of the banking system could be broadly classified into business and industrial concerns and households and individuals. the NPA was 7.75% and four other foreign banks have more than 20%. These are average figures. which is higher than public sector banks. The highest figure among all banks was a foreign banks. The total number of suit filed against borrowers enjoying advances of Rs. 1 crore and above from the banking system was 5013 aggregating Rs. 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”. Looking at figures of individual banks. some of the private and foreign banks reflect a pathetic figure as compared to the public sector. The belief that. 27988.
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. as the recovery would take years. The government has decaled that BIFR would be closed and a more expeditious legal structure set up. perhaps decades. To alleviate the problems of banks. . ARF or ARC might be helpful in cases of commercial borrowers who default in payment of their dues. is causes require a separate study for the present discussion. A guarantor would fail to pay. The existence of bad loans is due to many causes. defective follow up of loans. is to see if the company can be rehabilitated. banks would be sufferers and uninformed public would tend to blame the banks for problems over which banks have little control. obviously an ARF. There are loans given to state and central public sector units. due to the long time taken in courts to enforce the security. But this could take some time. whose dues exceed Rs. The fact of the governments failing to honor financial obligations gives rise to a curious phenomenon. In cases where fresh funds are required. the cases would come under a separate agency. the RBI report sums up succinctly “at the policy level. whose first objective. Many defaulting borrowers know that banks cannot force them to repay quickly. has created a problem of “morel hazard”. it has become evident over the last few years. even if banks have security. who were largely responsible for making the company sick. Board for Industrial and Financial Reconstruction (BIFR). if he is either unwilling or unable to pay. if the borrowers are industrial companies. to bring them to books. where banks have not written them off. are given fresh money for them to take further gambles with others funds. In such cases. if ever. there is need for legislation which will make recovery process smoother and legal action quicker”. The operations of Debt Recovery Tribunals are such that they have not so far made a dent in the NPA position of banks. While on the subject. which have failed to repay. economic slow down cheating by borrowers and the like. as the name implies. it would certainly be inappropriate to buy these dues from banks. The main handicap under which banks suffer in recovering their dues is the legal frame work. which some feel. Creation of ARF or even Debt Recovery Tribunals appears to the mere palliatives for chronic illness that has so far defied solution. the owners and managers. such as faulty initial scrutiny by banks. which cannot lend. Debt Recovery Tribunals were set up for speedy enforcement of law against defaulting borrowers. This. is not the solution. So long as borrowers know that the long arm of law would take years. 10 lakh. is debtor friendly. because the bureaucrats want to ensure that the government does not face a loss or the loss is largely reduced. owners its legal obligations as guarantor.The ARF would only act as the extended legal arm of banks.
CHAPTER – IV COMMERCIAL BANKS AND NPAs YEAR 2001-2002 .
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. Commercial bank in India can be divided in to two groups: a. b. The Imperial Bank of India was nationalized and renamed as the State Bank of India in 1995. . As public enterprise. and Private sector banks. In 1881. by an English agency in Calcutta. The Swadeshi movement of 1905 encouraged the growth of the commercial bank in India. the practice of storing precious mettles and coins at safe places and loaning out money for public and private purposes on interest was prevalent. Bu this bank failed in 1832. the. named Bank of Hindustan. All these banks were presidency banks:They were partly financed by East India Company. In England. It was followed by the setting up of the Punjab National Bank in 1894 and Peoples bank in 1901. In ancient Rome and Greece.The origin of commercial banking can be traceable in the early times of human history. banking made it first appearance in Italy in 1157 when the Bank of Venice was founded. In fact. Later on. 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. the Bank of Bombay and Bank of Madras was also set up in 1840 and 1843 respectively. Public Sector banks – All of them are scheduled. Commercial banking in India began in 1770 with the establishment of the first joined stock bank. a. The public sector bank in India has developed in four phases.
Again on 15th April 1980. A well-developed banking system is a necessary pre-condition for economic development in a modern economy. which are included in the second schedule of the RBI Act. 6 more commercial banks were nationalized. b. It is the growth of commercial banking in the 18th and 19th centuries that facilitated the occurrence of industrial revolution in Europe. Modern banks in India are joined stock banks. Scheduled banks are those banks. Banks play an important role in the development of country. Commercial banks contribute to a country’s economic development in the following ways. 1969. 14 major commercial banks were nationalized. 5 lakhs. The operations of these banks are controlled and regulated by the Reserve bank. Besides providing financial resources for the growth of industrialization. a. They are registered under the Indian companies Act. Then. d. On July 19th. which are 196 in number at present. Regional Rural banks were established in 1974. They are classified by the RBI into two categories:Scheduled and non scheduled. 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. banks can also influence the direction in which these resources are to be utilized. 1934 and have a paid up capital and reserves not less than Rs.b. Capital formulation Encouragement to entrepreneurial innovations .
The movement in NPAs across bank groups is provided in Table 4. whereas for foreign banks. comprising 79.512 crore on account of merger. 4. Encouragement to right type of industrious. The NPAs of PSBs increased marginally during the year in spite of the substantial recoveries. recoveries exceeded accretions to NPAs. reflecting the impact of merger during the year. 4. 32. Monetization of economy Influencing economic activity Implementation of monitory policy Promotion of trade and industry.1.5% to Rs.1) The gross non-performing assets (NPAs) of scheduled commercial banks at Rs.904 crore as on March 31st 2002 as compared with Rs. NPA in commercial banks The NPA of 27 public sector banks shot up to Rs. g. however.7% of the sticky loans of scheduled commercial banks. f. 70. Regional development Development of agricultural and other neglected sectors.2. h. net NPAs increased by 9.461 crore at the end March 2001. had substantial addition to their NPAs. 4. 63. New private banks.507 crore as at the end of March 2002. gross NPAs stood at Rs. (Table 4.3. Incremental non-performing assets . For public sector banks.546 crore from Rs. The gross NPAs for end March 2002 include an amount of Rs.741 crore at the end of the previous year.56608 crores in September 2001. d. During the same period. 56.c. NPA not only reduces the yield on advances but also reduces the profitability of banks.2). (Table 4. i. e. 35.
084 crore which was also largely due to substantial increase in incremental net NPAs of new private banks (Table 4. incremental gross NPAs recorded a large increase from Rs. over the same period increased from Rs. Among banks groups.9% in 2001-2002. the quantum of incremental gross NPAs was Rs. incremental net NPA to total assets remained constant at 1.164 crore in 2001-2002 as compared with Rs. Incremental net NPAs of commercial scheduled banks. 3332 crore in 2000-2001. As percent of incremental net advances. In absolute terms. incremental net NPAs of scheduled commercial banks declined from 2. 2.5) .8% to 3. as percentage of incremental gross advances for scheduled commercial banks increased from 4. while incremental gross NPAs of scheduled commercial banks increased from 1. there was decline in incremental gross NPAs for the state bank groups and foreign banks. 3. 5205 crore in 2001-2002 reflecting the addition on account of the merger.The incremental gross NPAs. New private sector banks. As percent to incremental assets.0% in 2000 – 2001 to 5.6% in 2001-2002.3% in both years (Table 4.9% in 2000-2001 to 2.4). 7.0% in 2001 to 2002. 671 crore in 2000 – 2001 to Rs.389 crore to Rs.
CHAPTER – V A PROFILE .
Gujarat.1. All .5. at a time when banking was less known to the people.2 Bank Profile The Dhanalakshmi Bank Limited (DLB) headquartered at Thrissur in Kerala. the bank grew in strength over the years. Started seven decades back. with a strong national network. Andhra. Karnataka. the bank has achieved substantial sophistication in the various banking services provided.VISION "A Customer-centric organization. and ensuring reasonable value addition to the shareholders and other stakeholders" 5. Of the 153 branches. engaging a pool of skilled personnel. is a professionally managed Bank. The bank has ambitious plans for growth in branches. Tamil Nadu. capable of delivering multiple financial products in a cost-effective manner. In a high literate state of Kerala. leveraging its network in Kerala. The DLB has today 153 branches spread over Kerala. Even though started by traditional businessmen. West Bengal (Kolkata) and New Delhi. Maharashtra. using state of the art technology. total business and profits.
Etc. Internet Banking.branches are classified as NRI branches. The bank has already achieved Capital Adequacy Norms prescribed by the RBI by achieving 9. The bank is managed by a group of professionals. Telebanking. administrators and businessmen.. . Any Branch Banking. ATM's. All branches are computerized and in the process of implementing Wide Area Network.69% in March 2001. Any Branch Banking and Cash Management Services.
P. P. Muthuswamy B.K.A. Varadachary IAS(Retd) Shri. P. S.A.P.K. Pappoo Shri. James Pothen (RBI) Shri. A. V.K.Vijayakumar Shri. Sarma Shri. Ramakrishnan .K Ananthanarayanan Shri.Menon Senior Management Team General Manager Shri.L.S.Sitaraman Shri.Ganapathy Shri. P.Ramalingam Shri.A.Thomas Shri.K. P.RamMohan Shri.P. M .H. Thomas Mathew Deputy General Managers Shri. Venkateshwaran.M.Jayakumar Shri.R. IFS. Saseendranath(RBI) Assistant General Managers Shri.M. J. K.Sarma Shri.Revikumar Shri.T. Raja Mohan Rao Shri.(Retd) Prof.P. A.S.P.Krishnan Shri.Warrier (Company Secretary Managing Director & CEO Shri.K. Executive Director Shri.MANAGEMENT OF THE BANK Directors Dr. Govindan Shri.Narayanan Shri.Ranganathan Shri. V.R.P.RavindranK. K.G. K.
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 .
THE DEPOSITS OF DHANALAKSHMI BANK LIMITED . of the bank over past few years. net profit. staff productivity etc. advances.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.BUSINESS OPERATIONS 5. cost of deposit.
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.58 915.97 135.3 13.67 1296.543 crores during the period 1996-97 to 2001-02.82 195.54 Increase / Decrease over the previous years figure --151.8 14. more particularly from institutions.71 157.05 in The aggregate deposits of the bank has increased from 840. The modest growth especially during the last three years is mainly due to a conscious decision on to shed the highest cost deposits. field function areas have been constantly exhorted to step up the share of low cost of deposit.34 222.96 1138.67 % Increase / decrease over the previous years figure --+18.1 Amount Crores Year 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Deposits of the bank (Rs) 840.22 175.0 10.64 181.46 154.9 Index with year 1996-97 as base year 100.(FROM 1996-97 TO 2001-02) Table 5.00 108.87 1639. With focus on bringing down the cost of deposit.31 1477. .0 24.58 crore to 1639.56 161.
0 2. A substantial positive change in credit dispensation and monitoring was initiated through a visited credit policy. .51 Increase / Decrease over the previous years figure --53.31 965.29 % Increase / decrease over the previous years figure --48.10 28.11 56.41 576.91 28.07 523.40 5.35 876.87 512.6 163.16 75.34 259.00 13.91 25.91 705.70 The aggregate advances of the bank has increased from 110.2 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. The system and procedures were streamlined to incipient irregularities in the asset step without delay.22 993.ADVACES OF THE DHANALAKSHMI BANK LIMITED (FROM 1992-93 TO 2001-02) Table 5.59 562.76 407.99 902.65 29.89 448.06 crores to 993.6 24. Which primarily aim at segmentation of the retail and corporate portfolios for improved thrust in both these areas.00 148.70 114. A tenor linked prime lending rate was introduced during the year 2001 to give a boost to short term lending.41 549.63 162.0 122.17 171.08 188.90 Index with year 1992-93 as base year 100.37 2.06 605. Exposure to various sectors is strictly maintained within the stipulated ceiling.23 776.51 crores during the period 1992-93 to 2001-02.The credit appraisal system was fine tuned and effective system was put to place to ensure the quality of asset.
. achieving by systematic branch wise monitoring.86) (-0.49 8.35 9. Also shift in deposit portfolio of the bank from high cost deposit to low cost deposit also has contributed to the efforts.28 10.57) (-0.3 Percentage of Increase / Decrease over the cost 10.07 (-0.53 previous year --0.92 8. On analyzing the trend of decrease in the cost of deposit we can see that it is decreasing at decreasing rate. Such a decreasing trend in the cost of deposit.COST OF DEPOSIT OF DHANALAKSHMI BANK LIMITED (FROM 97-98 TO 01-02) Table 5.07%.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 .
The banks profitability was severely affected during the years 1998-99 and 2000-01.6 6.07 crores during the period 1995-96 to 2001-02.NET PROFIT OF DHANALAKSHMI BANK LIMITED (FROM 1994-95 TO 2001-02) Table 5. which were written off instead of being provided for.2 54.18 crores Voluntary Retirement Scheme (VRS) also added to the burden by an amount of 2.42 crores to 10.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 3.48 crores.5 39.78 178. Another major contribution was the impaired loan assets.9 48.83 The profitability of the bank has increased from 4.4 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. The continuous fall in the interest rate continued even in 2001-02.05 87.96 190.20 153.20 277.00 106. but the treasury market contributed appreciably to the profitability.7 Index with year 94-95 as base year 100.2 191.78 67.56 255. .this increase was not steady.
credit.0 96.00 131.9 10. automation. marketing etc.00 152. human resource management.54 192.28 199.56 19.90 292.14 19.0 6.21 243.The bank has recognized that up gradation of employee skills at all levels is essential to meet competitive challenges.STAFF PRODUCTIVITY OF DHANALAKSHMI BANK LIMITED (FROM 95-96 TO 01-02) Table 5.96 % Increase / decrease over the previous years figure --54.17 22.40 Index with year 1994-95 as base year 100.66 184. the Dhanalakshmi bank’s staff training imparts timely training to the employees covering areas like forex. 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.26 17.50 5.5 Year 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 Productivity / Business per employee 63.90 8.06 208. non-performing assets management.24 Increase / Decrease over the previous years figure --36.6 115.25 The staff productivity of the banks has increased from 63 lakhs to 199. Accordingly.17 153.62 14. customer service.38 182. priority sector.79 3.24 lakhs over the period 1994-95 to 2001-02. .51 316.00 121.0 19.49 30.
CHAPTER VI ANALYSIS OF NPAs OF DHANALAKSHMI BANK LMITED .
Thus whenever a bank grants a loan. 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. 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. 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. In fact. it creates an equal amount of bank deposit. the bank has to borrow additional capital funds to repay the depositors and creditors. makes the funds available to those who need them. In other words. This lead to a situation where bank also reluctant to lend fresh loans thus chocking the system. . 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.A bank is an institution. 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. Creation of such deposit is called credit creation. economy is badly hurt. Which results in a net increase in the money stock of the economy. Once the credit to the various sectors of the economy slows down. If the borrowers does not repay. The bank has to repay it’s depositors and others from whom money has been borrowed. credit creation is the natural outcome of the process of advancing loans as adopted by the banks. It accepts deposits from public. A unique function of the bank is to create credit.
net advances.08 1070. 4.08 11.00 11756.00 840.00 677.A. provision made towards non performing assets each year which have been complied from the various years annual report of the bank.89 7531.31 629.00 10955. Table 6.A.00 14586. net non performing asset.A.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. N.A. N.00 1007. N.26 61080.85 11.78 12.00 89656.00 387. 11.00 791.51 225.A.00 93953.70 8582.09 11.66 3631.00 1128.00 9635.00 N.01 661.00 10167.00 13489.33 77457. N. .FIGURES RELATING TO NON-PERFORMING ASSETS (GROSS &NET)AND THEI PERCENTAGE WITH PROVISIONS MADE TOWARDS THEM.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.34 3322.A.
NET NPA FIGURES OF DHANALAKSHMI BANK LIMITED
(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
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.
NET ADVANCES OF DHANALAKSHMI BANK LIMITED
(FROM 1998-99 TO 2001-02)
Particulars: Net Advances N.A. N.A. 61080.78 77457.85 89656.08 93953.09
If recovery were good. INTERPRETATION Non-performing assets being a direct result of advances. perhaps.8% in the third year.8% in the second year 4. in time. This can be seen from the data regarding the advances of the bank during this period.ANALYSIS The advances of the bank show an upward trend through the period 1998-99 to 2001-02.8% in the first year. it may have resulted from increase in the net advances. increased NPA can be directly attributed to non-recovery advances made to borrowers. 15. . it should not mean increased justification for the higher incidence of non-performing assets. 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. NPA could have been reduced. Net advances of the bank increased by 26. In other words.
NET NON PERFORMING ASSETS OF DHANALAKSHMI BANK LIMITED AS A PERCENTAG OF NET ADVANCES
(FROM 1996-97 TO 2001-02)
Net NPA to Net Advances
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.
NET PROFIT AND PROVISION TOWARDS NON-PERFORMING ASSETS OF LIMITED
(FROM 1996-97 TO 2001-02)
Year Particular Provision towards NPA Net profit during the year
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. and provisions made towards non-performing assets.4 ANALYSIS On analyzing profit and loss account of the bank. it could be seen that provisions and contingencies is one herd. On going through the figures of the Dhanalakshmi Bank Limited relating to net profit and provision made towards non performing assets. which has a negative impact on the net profit of the banks. which could be explained by the tightening of provision norms which made .
This may be because. Here in the case of Dhanalakshmi bank limited. which has a negative impact on the profit of the bank. 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. as the profit margin depends up on the synthesis of cost and yield (by yielding no income) reduce the profit. Level of non-performing asset is an important factor affecting 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. certain provisions become necessary in order to reduce profits. 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. in the event of absolute nonrecovery of the lent money. 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..it compulsory for banks to keep a provision of .
00 4654.52 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.89 --------11756.6 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. showing a decline a decline in the trend which is clearly shown in the chart below.81 1850.00 12.00 7.00 5546.70 3970.0 4449.0 1732. the additions are also on the increasing at a higher rate.84 14586.00 2120. with net recovery during the year taken as a percentage of gross non performing assets .81 18.Table-6. As a result.04 13489. the net result.0 1097. the recovery is affected.0 2922.
04 12.5 .NET RECOVERY OFDHANALAKSHMI BANK LIMITED AS A PERCENTAGE OF THEIR GROSS NPA (FROM 1999-00 TO 2001-02) Table-6.84 7.7 Year 1998-99 1999-00 2000-01 2001-02 Particulars Recovery as a % of gross NPAs --18.52 Chart 6.
While the strategy for recovery may have been good. in 2000-01 and 2001-02 respectively.04% of gross non performing assets. 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 ....ANALYSIS The net recovery during the year 1999-2000 was 18.e. while it was 12. So we can conclude that bank’s NPA is increased perhaps because of inefficient recovery strategy. This is an alarming situation.e.84% and 7.52% in the following two years i. the net recovery is declining not only by amount but also with respect to its contribution as a percentage of gross non performing assets. i.
or complacency of previous year’s good recovery may have crept in. Lethargy.Herculean efforts towards the same in order to save the bank from the current pathetic situation. Chapter –VII .
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. COMPLIANCE ADVICE FOR BRANCH FUNCTIONARIES NPA accounts are to be grouped and classified borrower wise and not facility wise ie. . If a borrower enjoys more than one facility and one of them become NPA. than all facilities enjoyed by the borrower should be treated as NPA and classified under the same asset classification.RECOVERY PROCEDURE OF DHANALAKSHMI BANK LIMITED 7.1.
2. reduction of interest etc. • • • Conduct over recovery melas Offer compromise proposal or Filing suits 7.1 Conduct recovery Melas It has been decided to organize recovery melas in respect of accounts.The bank also keeps flagging the NPA accounts to have real time surveillance over such accounts. 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. Confidentiality of information should be respected even in respect of small clients. The TBA package available in the computer is made use of in doing so. RECOVERY MELAS The letter sent to the borrower should not include a general offer of discount. 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. 7. Other borrowers/customers should not be permitted to be present while discussions are going on with one borrower 7. The bank as its recovery policy follows the measures like . .2.
7. 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. It is the bank.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. 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. FILING SUITS Recourse to legal procedure is not only time consuming but also expensive. It not the right of any customer. COMPROMISE PROPOSALS Compromise means agreement reached between two parties by mutual concession.3. Where there is cluster of branches situated in a particular area. who decides whether to go in for compromise or not. The sacrifice is on the part of the bank only and not the borrower.4. The compromise should be negotiated settlement under which the bank should ensure the recovery of dues to the maximum extend possible at minimum expense. Compromise proposals cannot be encouraged as a routine. the borrower of the near by branches may also be called to attend the Mela. . 7.
of zonal office / legal sanction of company office for necessary approval. branches shall arrange to issue legal notice within five days if not already issued. title deed etc.4.1 Legal process (advice to branches) On the receipt of necessary approval / sanction for filing suit. a fresh notice to be issued. If issued before. draft plaint shall be got prepared from the advocate. branches shall furnish the response of the parties along with draft plaint. On the expiry of the notice period given at the time of issuance of legal notice. 7.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. On getting the draft plaint duly approved by the zonal office / company office. together with all security documents. . arrangements for filing suit to be made and completed within 10 days. During the notice period.
1. FINDINGS .CHAPTER VIII FINDINGS AND SUGGESTIONS 8.
showing a decline in the trend. the various parameters like the deposits. 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 aggregate net NPAs of the bank are on an upward trend. • The net result. Absence of proper systems at the branches and controlling offices resulting in. Lack of regular follow up.From analyzing the data collected. Staff productivity of the bank is increasing. • Provision made towards NPAs were on a sharp increase affecting the net profit adversely. Net NPAs. of the bank over a past few years. . staff productivity etc. cost of deposits. the recovery is affected. advances. Which indicates efficient recovery measures but is not reflected in the recovery trend. Non-ostentation of stock / receivable statement and failure to calculate eligible drawing power. • Net advances is also increasing but at decreasing rate over the period under study. which includes: Non-conduct of post sanction inspections Defective documentation Lapses in creation of mortgages and registration of charges with the registrar of companies. gross NPA.
Some of the strategies at the preventive stage are as follows: Maintenance and regular updation of client profile.2.1. Persistent difficulties in accessing collaterals and recovering their market values because of legal hurdles. . Failure to detect incipient signs of sickness. following suggestions is necessary. 8. Observance of limitation period. 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. NPA menace. Credit rating of clients Computerization of loan accounts.2.SUGGESTION FOR MANAGEMENT OF NPAs It has been proved beyond doubt that non-performing assets in banks ought to be kept at lowest level. operations and recovery departments.FOLLOW-UP OF DEBT RECOVERY TRIBUNAL (DRT) CASES. Appraisal and monitoring are therefore the two most important factors in order to prevent the occurrence of NPAs at the first instance.2. 8.2. Strong inter-department management information system among loans. To establish a system of early warning for potentially weak loan accounts. Timely extension of period of limitation. 8.
2. Similar cells. write offs in small NPA account of doubtful and loss categories where chances of recovery are bleak. especially from the areas where functioning of DRT’s is stabilized.2. COMPROMISE AND ONE TIME SETTLEMENT Recalcitrant borrowers are coming forward.B. 8. 8. The performance of ten DRT’s currently working may also not be considered satisfactory.3. to streamline the functioning of DRT’s is under consideration by government.In order to expedite disposal of high value claims of bank Debt Recovery Tribunal were set up. WRITE OFFS With view to cleaning the balancing the balance sheet . 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 .only a sum of Rs. 8.4.I.8900 crore transferred to DRT’s by March 1997. Needless to mention.5.2. Out of Rs. need to be expedited by formulating broad parameters/guidelines. with compromise offers to repay the banks dues.178 crore has been recovered. assisted by law officers may be created for follow up of high value suits and execution of decrees obtained. Banks may create special cells at their head offices/zonal offices to monitor progress in regard to cases filed with/ transferred to DRT’s. delays in processing compromise proposals must be avoided at every stage with the objective of setting the issue. The report submitted by the study group set up by the R.
reduce the incremental credit deposit ratio of banks over a period. 8. rephasement etc. IDENTIFICATION OF PROBLEM LOAN Tackling NPAs through non legal measures like quick review of potential NPA account. would go long way in guiding bank functionaries to effectively deal with problem loan account.2. agriculture etc. financial irregularities. housing. Effect quicker recovery/realization in NPA accounts.10. 8.7. RECOVERY CAMP By holding recovery camps and Lok Adalat.2. If by investing in safer securities though at .2. counseling the borrowers could be done. 8. 8.6. 8. NARROW BANKING To mitigate the problem of NPAs. if the unit is sick due to technical obsolescence/ inefficient management.9. So that the banks reduce their average credit deposit ratios and the incremental NPAs will be zero. The sooner we settle the dues of such companies/OTs or through legal action. rehabilitation. write offs.8. RESCHEDULEMENT The public sector banks should use their wide network of branches and infrastructure to deepen their lending for whole sale and retail trade. compromise/OT’s.2. REHABILITATION There should be normally no case for rehabilitation and bank’s financial assistance. the better it is.2. with a view to reducing NPA ratios.
BANK SHOULD REDUCE DEPENDENCE ON INTEREST INCOME Indian banks are largely dependent on the lending and investment. 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. on banking research.11.high rates of interest. the winner of writers association life time achievement award 1997.K. banks derive only 62% of income from interest. . while the banks in the developed countries do not depend up on this income.S.12. 8. Lack of skill and inefficiency to adopt new technology to sharpen competitive edge. Non-interest income should come from innovative products and not through higher service changes that the public sector banks charges to the customer. INTRODUCE MARKETING CONCEPTS AND NEW TECHNOLOGIES TO SHARPEN COMPETITIVE EDGE According to Sir De.2. the banks can earn sufficient net margins. The rest of income is fee based. 8. Indian banks have to look for source from services and products. U. the basic pitfalls of Indian banking systems are:Absence of marketing concepts in the business development plans.2. Germany 64% and Switzerland 51%. 86%of income of Indian banks is accounted by interest. banks is only 59%. Indian banks have to give more concentration to remove the abovementioned problems to reduce NPA level. for U. then it is possible to gradually eliminate their high NPA levels.
2002 – RBI h.8.rbi. g. 2000. Settlement of claims with DIGGC/ECGC.13. Pressure on guarantors. Compromise to improve recovery status of account. b. Adjustment of collateral security. GENERAL STRAGIES 1. Analysis of NPAs of commercial banks – Analyst July V. 9. Effective recovery 2. c. f. 3. 8.com (Personal website of R. 5. d.dhanbank. . e. Special recovery drive Help from revenue authority. 4. www. Partial write off. 6. BIBLIOGRAPHY a. Kannan) Report on trend and progress of banking in India 2001Professional Banker November 2002 September 2002 April 2002 – Revised 5th Edition. Venugopal – ‘Prudential norms for banks and NBFC’s Annual reports of Dhanalakshmi Bank Limited.2. 7. Officials from controlling offices should visit branches frequently and should check for any incipient irregularities\sickness.com www.research.com www.
NAME:SIBICHAN.V.M BANGA LORE IV SEM DECLARATION .C.I.J ADDRESS: 01BUCM:2050 MBA R.
C. Apart from the ability labor and time devotion.J DATE: ACKNOWLEDGEMENTS Exchanges of ideas generates a new object to work in a better way. guidance and co-operation are two pillars for the success of a project.. Sibichan .I. PLACE: SIBICHAN.J. 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. Whenever a person is helped or co-operated by others.C. . 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. his heart is bound to pay gratitude to others.
for all his encouragement and extended co-operation.I.DBL .V. which I needed to complete this report. I deliberate my profound sense of gratitude to him.Krishna.J.Fin. Mgr. for his enlightening guidance.. I am immensely thankful and convey my sincere gratitude to my project guide.In this chain.Remesh for his counsel and incessant inspiration and for all his advice and guidance in the completion of the project work. constant inspiration and keen interest shown on me during making of this project.M.V.M YOU ALL . 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.Sethunath.K.C. My special heartful gratitude is due to my director Dr T.V. I wish to express my gratitude and affectionate respect to my project guide of R. R. RAJUand R.S.I.Prof. THANK SIBICHAN.
NPA AND PROVISIONING: A CONCEPTUAL REVIEW 4. NPA AND COMMERCIAL BANKS(2001-2002) 5.CHAPTERS CONTENTS PAGES 1. EXECUTIVE SUMMARY 2. ANALYSIS OF NPA IN DHANALAKSHMI BANK LIMITED 7 RECOVERYPROCEDUREOF DHANALAKSHMI BANK LIMITED 8 FIDINGS AND SUGGESTIONS . DHANALAKSHMI BANK LIMITED: A PROFILE 6. INTRODUCTION 3.
1 3.7 LIST OF CHARTS .1 6.5 6.1 LISTS OF TABLES TITLE PERIOD FOR WHICH THE ADVANCE HAS BEEN CONSIDERED AS DOUBTFUL AND PROVISION REQUIREMENT FOR EACH PERIOD NATIONALISED BANKS OPERATIONAL STATISTICS TRENDS IN NPAs OF PSBs DURING THE POST REFORM PERIOD.1 5. GROSS AND NET NPA OF SCHEDULED COMMERCIAL BANKS. 4.3 5.3 4.2 4.6 6.4 5.5 6.5 5.3 6.BANK GROUP WISE BANK WISE MOVEMENTS IN NPA BANK GROP WISE INCREMENTAL GROSS AND NET NPA BANK GROUP WISE INCREMENTAL RATIO OF GROSS AND NET NPA THE DEPOSIT OF DHANALAKSHMI BANK LIMITED ADVANCES OF DHANALAKSHMI BANK LIMITED COST OF DEPOSIT OF DHANALAKSHMI BANK LIMITED NET PROFIT OF DHANALLAKSHMI BANK LIMITED STAFF PRODUCTIVITY OF DHANALAKSHMI BANK LIMITED FIGURES RELATING TO THE NPA AN THEIR PERCENTAGE WITH PROVISION MADE TOWARDSTHEM NPA NET FIGURES OF DHANALAKSHMI BANK LIMITED NET ADVANCES OF DHANALAKSHMI BANK LIMITED NET NPA OF DHANALAKSHMI BANK LIMITED AS A PERCENTAGE OD NET ADVANCES NET PROFIT AND PROVISION MADE TOWARDS NPA OF DHANALAKSHMI BANK LIMITED MOVEMENT OF NPA OF DHANALAKSHMI BANK LIMITED NET RECOVERY OF DHANALAKSHMI BANK LIMITED AS A PERCENTAGE OF THEIR GROSS NPA PAGE NO.2 5.TABLE 3.2 6.4 4.2 4.4 6.
COLLEGE Consultant & MBA R. 6. 6.M 4th ‘T’ block.4 NET PROFIT AND PROVISION TOWARDS NPA OF DHANALAKSHMI BANK LIMITED (FROM 1996-97 TO 2001-02) 6. Jayanagar.R.GRAPH NO.REMESH Faculty S. Bangalore .M.V.V.3 NPA OF DHANALAKSHMI BANK LIMITED AS A PERCENTAGE OF NET ADVANCES (FROM 1996-97 TO 2001-02) 6. S.I.41 .2 NET ADVANCES OF DHANALAKSHMI LIMITED (FROM 1998-99 TO 2001-02) 6.S.5 NET RECOVERY OF DHANALAKSHMI BANK LIMITED AS A PERCENTAGE OF THEIR GROSS NPA (1999-00 TO 2001-02) Prof.1 TITLE NET NPA FIGURES OF DHANALAKSHMI LIMITED (FROM 1998-99 TO 2001-02) PAGE NO.
J. Reg.R.C.No. 01 BUCM 2050 under my supervision and guidance This has not formed a part of any degree or diploma of any University / Institution / Board prior to this submission to Bangalore University as a partial fulfillment of the requirements for the award of MBA degree to him.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.SIBICHAN.08 – ’03 An analysis of NPA .AKSHMI BANK LIMITED’ is the outcome of bonafide research work carried out personally by Mr.Krishna Date : . Place : BANGALORE Prof.
2001 – 2003 R.SIBICHAN. Reg.J.41 .V.I. 01 BUCM 2050 Under the guidance of S.S. 4th ‘T’ block.No. 36th Cross.V.V.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.INSTITUTE OF MANAGEMENT S. COLLEGE CA – 17. Bangalore .R. Consultant & MBA Faculty R. Jayanagar.M.C. REMESH .M BANGALORE. 26th Main.
IMPLICATIONS OF NARASIMHAM COMMITTEE REPORT .
Wrong classification of an NPA: classifying a 'loss asset' as 'doubtful' or 'substandard' asset. Tightening of these norms will force banks to make additional provisioning. Failure to identity an NPA in terms of stipulated guidelines: There have been instances of 'substandard' assets being classified as 'standard'. The Board for Financial Supervision of the RBI has cited the following reasons for the lower recognition of NPAs and subsequent under-provisioning: 1. 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. SBI's current NPA level is pegged at about six per cent. 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.62 billion and underprovided to the extent of Rs 14. SBI along with the Calcutta-based Allahabad Bank has for the first time made the provisioning (. However. classifying a 'doubtful' asset as a 'substandard' asset. the industry underestimated its NPAs to Rs 38. For instance. 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.The Narasimhan Committee. 2. . should be treated as NPAs.12 billion.25 percentage points) for their standard assets in fiscal 1998. as part of the second phase of the banking sector reforms. in fiscal 1997. has recommended a tightening of the asset classification and provisioning norms with an objective of moving towards the international norms. which have turned sticky.
5 million.5 million and provisioning by Rs 797.20 billion. the actual NPAs acknowledged by these banks are much lower at Rs 438. The worst "offender" is the public sector banking industry.77 billion. nine new generation private sector banks showed the maximum amount of ''NPA amouflaging" and under provisioning. The RBI estimated NPAs of foreign banks at Rs 13.28 billion. Similarly. In contrast. The difference between the RBI estimates and actual provisioning in PSU banks is pegged at Rs 10. the actual figure shown by these banks is only Rs 2. the old private sector banks underestimate their NPAs by a meagre Rs 6.07 billion. 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. In percentage terms. As a group. Nineteen nationalised banks along with State Bank of India and its seven associate banks have underestimated their NPAs by Rs 30. 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.90 billion.5 million.93 billion in March 1996 while the RBI inspection teams opined the provisioning needed to be at Rs 6.52 billion. While the RBI estimates the PSU banks' NPAs at Rs 469.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'. The difference between the RBI estimates and actual provisioning is a paltry Rs 1.55 billion while the actual NPAs shown by these banks were to the tune of Rs . While the RBI inspection teams put the right provisioning requirement at Rs 1. however. 37 foreign banks underestimated their NPAs by Rs 875.55 billion. "Essentially arising from the wrong classification of NPAs. While the RBI estimated the NPAs of new private banks at Rs 3. Nearly 26 old private sector banks registered NPAs to the tune of Rs 21.74 billion in March 1997.29 billion.61 billion.6 million. the difference between the RBI estimate and the actual provisioning is Rs 968." the internal document said. the new private banks made provision of only Rs 234.05 billion. Old private sector banks provided for Rs 4.
68 billion. foreign banks provided for Rs 4.82 billion.02 billion while the RBI inspection teams estimated the right amount of provisioning at Rs 4.12. . Similarly.