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BANK OF MAHARASHTRA

KARNATAK LAW SOCIETYS


INSTITUTE OF MANAGEMENT EDUCATION AND RESEARCH, BELGAUM.
AFFILIATED TO KARNATAK UNIVERSITY, DHARWAD & RECOGNIZED BY
AICTE, NEW DELHI

A PROJECT REPORT
On
A STUDY ON NON-PERFORMING ASSETS
MANAGEMENT
For

BANK OF MAHARASHTRA
Submitted To:
KARNATAK UNIVERSITY DHARWAD

For partial fulfilment of


MASTER OF BUSINESS ADMINISTRATION
By:

ARCHANA D.CHAVAN.
(REG. NO: MBA07003008)

Under the guidance of:


Internal Guide:
Prof. Shrirang. Deshpande.
(Faculty, KLSs IMER)

External Guide
Mr. P G. Joshi.
(Sr.Branch Manager)

KLSs, Institute of Management Education & Research, Belgaum

BANK OF MAHARASHTRA

KARNATAK UNIVERSITY, DHARWAD


KARNATAK LAW SOCIETYS
INSTITUTE OF MANAGEMENT EDUCATION AND RESEARCH
BELGAUM.
(Affiliated to Karnatak University Dharwad & Recognized by AICTE, New Delhi)

CERTIFICATE
This is to certify that Miss. Archana D. Chavan has satisfactorily completed
her major summer in-plant training on A Study on Non-Performing Assets
of Bank of Maharashtra at Belgaum, in the partial fulfilment of
requirement of Masters of Business Administration, during the academic
year 2008-2009.

Internal Guide

Director

(Prof. Shrirang. Deshpande)

(Dr. A B. Kalkundrikar)

KLSs, Institute of Management Education & Research, Belgaum

BANK OF MAHARASHTRA
Acknowledgement
The successful completion of any task would be
incomplete without mentioning & thanking god & the people
who have helped me to complete it and been a constant
support of encouragement.
First and foremost I would like to express my sincere
thanks to my parents and sister (Snehal) who have been
always a moral support in my life and motivated me to
acquire my aim successfully.
I express my sincere gratitude to Dr. A B.
Kalkundrikar, Director KLSs IMER Belgaum, for his
constant support and encouragement in carrying out this
summer in-plant project.
At the very outset I would like to thank Mr.
Pradeep G. Joshi, (Senior. Branch Manager) of Bank of
Maharashtra, Belgaum, who constantly guided me and
inspired me in completion of this project. I express my
heartful thanks to all the staff members of the Bank for
supporting me in completing my project.
I would remain indebted to Prof. Shrirang.
Deshpande (Group Mentor) and Prof. R M. Inamdar for
their able guidance & constant support.

KLSs, Institute of Management Education & Research, Belgaum

BANK OF MAHARASHTRA

I also dedicate my sincere thanks to all Teaching and


Non-Teaching Staff Members for their help.
Finally, I would like to thank all my Friends and each &
every one who directly or indirectly have helped me in
making my project successful.

DECLARATION
This is to state that the project report named A Study on Non-Performing
Assets Management, Bank of Maharashtra, RPD Branch, Belgaum is an independent
work carried out by me under the guidance and supervision of my project guide (mentor)
Prof. Shrirang. Deshpande towards the partial fulfilment of the award of MBA degree
from Karnataka University Dharwad.
This project was fully prepared by my own effort and has not been published
elsewhere until now.
I also declare that this project report has not been submitted to any other
university or for award of any degree or diploma.

Reg No: MBA07003008

KLSs, Institute of Management Education & Research, Belgaum

BANK OF MAHARASHTRA

Place

: Belgaum

Date

: 25-08-2008

Archana Chavan.

TABLE OF CONTENTS
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PARTICULARS
PART A
Executive Summary.
Origin and History of
Bank of Maharashtra.
Objectives of the Study.
Evolution of IT in BOM.
PART B
Introduction to NPA.
RBI
guidelines
on
classification of Bank
Assets.
Types of loans provided by
BOM.
Procedures and Reasons
for identification of NPA,s
Preventive and Remedial
Measures.
Tackling
NPAs
and
Focused Strategies.

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PART C
Asset Classification.
Credit Risk Management.
SARFESI ACT.
Non-Performing-Assets
Reduction Techniques.
Rural
Advances
and
Recovery Management.
PART D
Asset Quality of NPA in
Bank of Maharashtra.
Analysis of NPAs in Retail
Sector in Belgaum City.
Findings and Suggestions.
Bibliography

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PART A

KLSs, Institute of Management Education & Research, Belgaum

BANK OF MAHARASHTRA

EXECUTIVE SUMMARY

This project report has been undertaken in Bank of Maharashtra, RPD Branch
Belgaum which highlights the detailed study of Non-Performing Assets Management
and Banking Study of Bank of Maharashtra.

The objective of this project is to get the good knowledge of Banking and NPA
Management.

This project report is divided into 4 parts

Part A: ----- Origin, History.


Part B: ----- Introduction to NPA, RBI Guidelines, etc.
Part C: ----- SARFESI Act, NPA Reduction Techniques, etc.

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BANK OF MAHARASHTRA
Part D: ----- Analysis and conclusion.

Part A gives an Brief information regarding Banks History, Vision, Objectives which
help us to know about the bank in detail.
Part B gives knowledge about NPA, which help us to know and understand about NPA
and how it is ascertained.
Part C gives information regarding SARFESI Act, NPA Reduction Techniques, Recovery
Management and concluding observations.
Part D gives ideas about Analysis of NPAs in Retail Sector and final conclusion.

ORIGIN AND HISTORY OF BANK OF MAHARASHTRA

Bank of Maharashtra was registered on September 16, 1935 with an authorized


capital of Rs.10.00 lakh. The Bank actually began its process on 8 th October 1936 in
pune, under the chairmanship of Shri.Dhondumama. Sathe. Ever since its inception, Bank
of Maharashtra is known as common man's bank. The Bank's initial help to small units
has given birth to many of today's industrial houses.
The present chairman of Bank of Maharashtra is Shri.Allen C.A. Pereira and
consists of Board of Directors under whom the Bank functions. Bank of Maharashtra has
its Head Office situated at Shivaji nagar in Pune, which is known as Lokmangal karyalay.
Later on in the year 1946, it entered into Karnataka and started its first branch in Hubli.
Bank of Maharashtra began to progress to a great extent and expanded its banking
business all over India. It is amongst the top 14 nationalized banks in India.
In July 1969, Bank of Maharashtra was nationalized along with 13 other banks.
After nationalization, the Bank expanded rapidly and today its branch network comprises

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BANK OF MAHARASHTRA
of 1375 branches and 30 extension counters spread over 22 states and 2 union territories
(as of 31st March 2008). Bank of Maharashtra has the largest network of branches by any
Public sector bank in the state of Maharashtra.
Bank of Maharashtra attained autonomous status in 1998. It has helped the Bank
in providing more and more services with simplified procedures without intervention of
Government. Apart from providing loans, bank also offers personalised services to its
customers. The Bank also cares to its employees and provides many facilities & schemes
to them. Bank of Maharashtra has also come up with its shares in the market which is on
a slower growth towards progress. Bank of Maharashtra has altogether 1500 branches all
over India . The total turn over is 72000 crores, and is currently running in profits.

Bank of Maharashtra excels in Social Banking, and it has 46% of its branches in rural
areas. By March 2006 the Bank intends to achieve computerization of remaining 584
rural and semi urban branches by providing a cost effective small branch automation
solution for rendering effective customer service to rural India. The Bank follows the
philosophy of technology with personal touch. The bank wishes to cater to all types of
needs of the entire family, in the whole country. Its dream is;
"One Family, One Bank, Bank of Maharashtra

KLSs, Institute of Management Education & Research, Belgaum

BANK OF MAHARASHTRA

VISION 2009

To cross the Business Level of Rs.85, 500/- Crores by March 2009.

19.84% Growth in Savings Bank Deposits and average Saving Deposits growth
rate of 17.69%.

19.65% Growth in Current Deposits and average Current Deposits growth rate of
17.29.

Systematic approach for reducing Net NPA level to below 1% .

64 Branches are proposed to be opened at new business centres and 3 extension


counters to be converted into full fledged branches.

4 Currency Chests to be opened.

ATM network to be increased from 345 to 500.

Biometric ATMs to be introduced at selected branches.

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BANK OF MAHARASHTRA

Introduction of Internet banking, Mobile banking and Phone banking.

SHGs with special reference to agriculture to be promoted and financing are


implemented so as to increase financing to small and marginal farmers.

Financial Inclusion to the unbanked section of the population.

OBJECTIVE OF THE STUDY

1. To know the working of Bank of Maharashtra.


2. To know the types of loans offered by Bank of Maharashtra.
3. To know about the Non-Performing Assets management of Bank of
Maharashtra.
4. To find out the category of advances which has the highest degree of
NPA and the reasons undertaken to tackle it.

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CENTRAL BOARD MEMBERS LIST

Designation

Name

Chairman

Mr. Allen C.A.Pereira

Nominee Director

Shri. A A. Azizi

Nominee Director

Shri. Rajeev K. Deshpande

Nominee Director &

Shri. Sunil U. Deshpande

Officer Director

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BANK OF MAHARASHTRA

Nominee Director

Shri. Sunder K. Gogia

Nominee Director

Mrs. Sukriti. Likhi

Executive Director

Shri. Rajeev. Madhok

Non-Executive Director

Shri. Anand K. Pandit

Non-Executive Director

Shri. Dinesh S. Patel

Nominee Director

Shri. Chittaranjan. Patwari.

Nominee Director

Shri. T Parameswaram. Rao

Nominee Director

Shri. Devidas R. Tuljapurkar

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BANK OF MAHARASHTRA

EVOLUTION OF INFORMATION TECHNOLOGY IN


BANK OF MAHARASHTRA
Several IT projects, encompassing various facets of modern day banking
have been launched.

1) ATM Project:-

140 new ATMs were set up during the year. ATM usage registered an
impressive increase during the year. Several value added services like College/Hostel Fee
payment through ATMs issue of monthly, quarterly, season tickets for suburban train of
Central Railway at CST, Mumbai (facility has been made operational on pilot basis in
Mumbai) etc, have been introduced.

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BANK OF MAHARASHTRA
New Initiatives:

Devotees can now offer their donations through ATMs at Vaishnodevi, Katra
and Shirdi.

SMS ATM Locations-a facility by which mobile users can get the location
of 3 nearest ATMs on SMS.

2) Core Banking Solution (CBS):The Bank is moving towards a centralized database with Core Banking
Solution; with capability for on-line, real-time transaction processing.

3) Trades Finance Project:-

Bank has procured and implemented a modern trade finance solution


named Exim bills at 260 branches covering all 14 circles as on 31-03-2005 most
of the large branches like Overseas Branch Mumbai, etc, have been brought under
exim bills.

4) Internet Banking:-

Almost all the branches have been enabled for offering internet banking in
Retail segment. Banks major corporate customers are already using Corporate
Internet Banking and the product is in good demand.

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BANK OF MAHARASHTRA
5) Bank of Maharashtra Connect:-

This is the wide area networking {WAN} project of the bank capable of
carrying data, voice and images on real time basis. A total 1500 branches/offices
Bank of Maharashtra group are now connected. IP phones have been deployed in
all these branches/offices.

6) RBI-EFT (Electronic Funds Transfer) Scheme:-

This service is available for transfer of funds across about 8500 branches
of banks situated in 15 centres where RBI manages the clearing house. The cities
covered under this scheme are; Ahmedabad, Bangalore, New Delhi, Mumbai,

Hyderabad, etc. This scheme will help to reduce the pressure of DD issue work at
Branch level.

7) RTGS {Real Time Gross Settlement} Scheme:-

Under this scheme, the funds get transferred from RTGS-enabled one bank
or branch to RTGS-enabled another bank/branch for customers. Only the customer
will have to fill up a request cum application form and accept terms and
conditions, and also they have to mention correct details such as bank/branch,
name, account number & 16 digit codes number i.e. IFSC Code.

IT POLICY AND IS SECURITY POLICY:-

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BANK OF MAHARASHTRA
The Bank has framed a comprehensive IT policy and is security policy with
the assistance of professional of IT security consultants. The policy standards and
procedures have been disseminated to application owners for implementations.
Security awareness training is being conducted for end users on ongoing basis.

PART-B

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BANK OF MAHARASHTRA

INTRODUCTION TO NON-PERFORMING ASSETS


Non Performing Asset means an asset or account of borrower, which has
been classified by a bank or financial institution as sub-standard, doubtful or loss
asset, in accordance with the directions or guidelines relating to asset
classification issued by The Reserve Bank of India.
With a view to move towards internationally accepted norms for asset
classification and income recognition, RBI has been tightening the definition of
NPAs in a phased manner. Thus, from the norm of classifying only those assets as
non-performing which are four quarters past due, which was applicable until
1993, RBI moved to the norm of three quarters past due in 1994 and then two
quarters (90 days) past due in 1995. In 2001, RBI tightened this further by
removing the past due concept. As a result, NPAs are to be recognized 30 days
earlier than they were before 2001. RBI has now advised banks to move to the 90
days norm for recognizing loans as non-performing with the effect from March
31, 2004.This tightening of norms, coupled with some years of economic
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BANK OF MAHARASHTRA
recession, resulted in an increase in the recognized stock of NPAs in the Indian
Financial System over the last several years. The same time, the ratio of gross
NPAs in to gross advances has shown a declining trend.
The definition of NPAs is prescribed in the prudential norms on asset
classification and advances laid down by RBI. An advance is classified as NPAs
where in case of:
An amount due under any credit facility is treated as "past due" when it has
not been paid within 30 days from the due date. Due to the improvement in the
payment and settlement systems, recovery climate, upgradation of technology in
the banking system, etc., it was decided to dispense with 'past due' concept, with
effect from March 31, 2001. Accordingly, as from that date, a Non performing
asset (NPA) shall be an advance where:

1. Interest and /or installment of principal remain overdue for a period of more than
180 days in respect of a Term Loan.
2. The account remains 'out of order' for a period of more than 180 days, in respect
of an overdraft/ cash Credit(OD/CC).
3. The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted.
4. Interest and/ or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
5. Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
With a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt the '90 days overdue' norm for
identification of NPAs, form the year ending March 31, 2004. Accordingly, with

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BANK OF MAHARASHTRA
effect from March 31, 2004, a non-performing asset (NPA) shall be a loan or an
advance where:
1. Interest and /or installment of principal remain overdue for a period of more than
90 days in respect of a Term Loan.
2. The account remains 'out of order' for a period of more than 90 days, inrespect of
an overdraft/ cash Credit(OD/CC).
3. The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted.
4. Interest and/ or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
5. Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

An account should be treated as 'out of order' if the outstanding balance


remains continuously in excess of the sanctioned limit/ drawing power. In case where
the outstanding balance in the principal operating account is less than the sanctioned
limit/ drawing power, but there are no credits continuously for six months as on the
date of balance sheet or credits are not enough to cover the interest debited during the
same period, these account should be treated as 'out of order.
Indian Bank have, for a long time, treated all the sticky loan assets as NonPerforming Assets (NPAs). The accrual concept of accounting convention has also
been followed without reckoning (counting) the amount actually realized. The word
Realized is noteworthy, which is distinct from the word Reliability. It means that
if a loan given by a bank fails to fetch a return in the form of interest realized from the
borrower, it (the Bank) has no right to debit the borrowal account with the interest
chargeable following the accrual principal. In that event, it then truly signifies that the
asset is notperforming i.e; not yielding any profit/income to the bank. This is the
essence of income recognition norms, based on the recommendation of the committee
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BANK OF MAHARASHTRA
on financial sector reforms (popularly known as Narsimhan Committee), adopted by
Indian Banks.
An asset, which ceases to yield income for the bank, should be treated as NPA,
and any income from loan assets should not be booked as income until it is actually
recovered. So, banks, which charge interests to loan Accounts Park it in Interest Not
Collected Account (INCA) until recovery, and on recovery, reverse it from INCA and
credit interest account.
In liberalizing economy banking and financial sector get high priority. Indian
banking sector is having a serious problem due to non-performing assets. The
financial reforms have helped largely to clean NPA around Rs. 52,000 Crores in the
year 2004. The earning capacity and profitability of the bank are highly affected due
to this; NPA is defined as an advance for which interest or repayment of principal or
both remain out standing for a period of more than two quarters.

The level of NPA act as an indicator showing the bankers credit risks and efficiency of
allocation of resources.

Reasons:
Various studies have been conducted to analyse the reasons for NPA. Whatever
may be the case, complete elimination of NPA is impossible. The reasons may be broadly
classified into two:-

1). Over hang component


Over hang component is due to the environment reasons, business cycle,
Wilful Defaulters, etc..

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BANK OF MAHARASHTRA
2). Incremental component.
Incremental component may be due to internal bank management, credit
policy, terms of credit, etc.

NPA Ratio:The net Non-Performing Assets to loan (advances) ratios are used as a measure of
the overall quality of the banks.Net NPAs are calculated by reducing cumulative
balance of provisions outstanding at a period end from gross NPAs. Higher ratio
reflects rising bad quality of loans.

NPAs Ratio=

Net Non-Performing Assets


Total Loans Disbursed

RBI GUIDELINES ON CLASSIFICATION OF BANK ASSETS


Reserve Bank of India (RBI) has issued guidelines on provisioning requirement
with respect to bank advances. In terms of these guidelines, bank advances are mainly,
classified into:1). Standard Assets:Such an asset is not a non-performing asset. In other words, it carries not more
than normal risk attached to the business.
2). Sub-Standard Assets:It is classified as non-performing assets for a period not exceeding 12 months.
3). Doubtful Assets:An asset that has remained NPA for a period exceeding 12 months is a doubtful
asset.
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BANK OF MAHARASHTRA
4). Loss Assets:Here loss is indentified by the bank concerned or by the internal auditors or by the
external auditors or by Reserve Bank of India (RBI) inspection. In terms of RBI
guidelines, as and when an asset become a NPA, such advance would be first
classified as a sub-standard one for a period that should not exceed 12 months and
subsequently as doubtful assets. It should be noted that the above classification is only
for the purpose of computing the amount of provision that should be made with
respect to banks advance and certainly not for the purpose of presentation of advance
in the Bank Balance Sheet.

TYPES OF LOANS PROVIDED BY BANK OF MAHARASHTRA

1). Cash Credits/Overdrafts:


When an account is not in order for any One quarter out of Four quarters of the
year ending 31st March, the account will be treated as NPA / Out of Order: Out standings- exceeding the limit / drawing power for any One quarter.
(continuous or otherwise)
Out standings- are well within the limit / drawing power, BUT
(a) No credit in the account for the last 6 months.
(b) Credits in the accounts are not sufficient to meet interest debits for any 1
quarter.
2). Term loans:

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BANK OF MAHARASHTRA
If interest/instalments of principal remain unpaid for any One quarter of the year
ending 31st March the account will be NPA.
Past Due Grace period of 30 days is Not to be reckoned in your bank It means that
quarters interest / instalments up to 31st December should be recovered before 31st
March , as otherwise account will be treated as NPA.
3). Agricultural Term Loans/Cash Credits:
If interest/instalments of principal (after it has become due) has not been paid
during the last two seasons of harvest (covering 2 half years), the account will be
NPA.
Past Due- Grace period of 30 days is not applicable in our bank to agricultural
loans.
Date for reckoning interest/instalment due is the date as stipulated in the sanction.

4). Advanced secured by Term Deposits, National Savings Certificates Indira


Vikas Patras Surrender Values of LIC Policies:
Advance accounts against these securities need not be treated as NPAs and no
provisions made need be made even though interest there on as not been paid for One
quarter or more on a balance sheet date. Interest on such accounts may be taken to
income account on due date provided adequate margins is available in the accounts
(i.e. the out standing, after interest application, must be less than advance value of
security). However, advance against gold ornaments and government securities do not
qualify for this relaxation.
5). Bills Purchased and Discount:
The bills purchased will become NPA if they remain overdue and unpaid for One
quarter as on 31st March.
OVERDUE INTEREST

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BANK OF MAHARASHTRA
Overdue interest should not be charged and taken to income account in respect of
overdue bills unless it is realized.
6). Other Accounts:
The account becomes NPA if the account remains unpaid for any One quarter or
more as on 31st March.
7). Consortium Advance:
Each member bank will classify the account in accordance with the conduct in its
books.
8). Government Guaranteed Advances:
Though, credit facilities backed by the government guarantee may become past
due with the income not being booked, they need not be treated as NPAs. In some
cases it is observed that banks have to file suit against the borrower after invoking the
government guarantees with a view to overcome the limitation period. In such
circumstances, the branches may treat the advances guaranteed by the government as
NPAs only when the government concerned when invoked.

PROCEDURES FOR INDENTIFICATION OF NPA AND RESOLUTION

1). Internal Checks and Control:Since high level of NPAs dampens the performance of the bank identification of
potential problem accounts and their close monitoring assumes importance.
The EWS enable a bank to identify the borrower accounts, which show the signs
of credit deterioration and initiate remedial action. Many banks have evolved and
adopted an elaborate EWS, which allows them to identify potential distress signals
and plan their options before hand, accordingly. The major components/process of
EWS followed by Banks of India as brought out by study conducted by Reserve Bank
of India at the instance of the Board of Financial Supervision as follows:

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BANK OF MAHARASHTRA
a). Designing Relationship Manager/Credit Officer for Monitoring Account.
b). Preparation of Know Your Client Profile.
c). Credit Rating System.
d). Identification of Watch-List/Special Mention Category Accounts.
e). Monitoring of early Warning Signals.

2). Management/Resolution of NPAs:Re-education in the total gross and net NPAs in the Indian Financial System
indicates a significant improvement in management of NPAs. This is also on account
of various resolution mechanisms introduced in the recent past, which include the
SARFESI Act, One-time settlement schemes, setting of the CDR mechanism,
strengthening of DRTs.

3). Credit Information Bureau:Bank of Maharashtra, State Bank of India, HDFC Limited, M/s Dun
incorporated Credit Information Bureau (India) Limited (CIBIL) in Jan 2001 and
Bradstreet Information Services (India) Pvt. Information between banks and FIs for
curbing the growth of NPAs. The CIBIL is in the process of getting operationalised.

4). Wilful Defaulters:RBI has revised guidelines in respect of detection of wilful default and diversion
and siphoning of funds. As per these guidelines a wilful default occurs when a
borrower defaults in meeting its obligations to the leader when it has the capacity to
honour the obligations or when funds have been utilized for the purposes other than
those for which finance was granted. RBI has advised the lenders to initiate legal
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measures including criminal actions, wherever required, and undertake a proactive
approach in change in management, wherever appropriate.

5). Legal and Regulatory Regime:-

(1) Debt Recovery Tribunals


(2) Lokadalats
(3) Enactments of SARFESI Act
(4) Assets Reconstruction Companies
(5) Institution of CDR Mechanism
(6) Compromise Settlement Schemes
(7) Increased power to NCLTs and the proposed Repeal of BIFR

UNDERLYING REASONS FOR NPAs


An internal study conducted by RBI shows that in order of prominence, the
following factors contribute to NPAs:Internal Factors:1).

Diversion of funds for expansion/diversification/modernization taking


up new projects, helping/promoting associate concerns.

2). Time/Cost overrun during the project implementation stage.


3).

Business (product, marketing, etc) failure.

4).

Inefficiency in management.

5).

Slackness in credit management and monitoring.

6).

Inappropriate technology/technical problems.

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7).

Lack of co-ordination among leaders.

External Factors:1).

Recession.

2).

Input/Power shortage.

3).

Price Escalation.

4).

Exchange Rate Fluctuation.

5). Accidents and Natural Calamities, etc.


6).

Changes in government policies in excise/import duties, pollution


control orders.

The above mentioned cause were reaffirmed, some other were also mentioned. A
brief discussion is provided below:

a).

Liberalization of Economy/Removal of Restrictions/Reduction of Tariffs:


A large number of NPA borrowers were unable to compete in a competitive
market in which lower prices and greater choice were available to consumers. Further
borrower operating in specific industries has suffered due to political, fiscal and social
compulsions, compounding pressures from liberalization.

b).

Lax Monitoring of Credit and Failure to Recognize Early Warning Signal:


It has been stated that the approval of loan proposals is generally through many
levels before approval is granted. However, the monitoring of some time complex
credit files has not received the attention it needed, which meant that early warning
signals were not recognized and standard assets slipped to NPA category without
banks being able to take proactive measures to prevent this. Partly due to these

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reasons, adverse trends in borrowers performance were not noted and the position
further deteriorated before action was taken.

c).

Direct Lending:
Governments policies rather than commercial imperatives dictated loans to some
segments.

d).

Over Optimistic Promoters:


Promoters were often optimistic in setting up large projects and in some cases
they were not fully above board in their intentions. Screening procedures did not
always highlight these issues. Often projects were set up with the expectation that part
of funding would be arrange from the Capital Market, which were booming at the
time of project appraisal. When the capital market subsequently crashed, the requisite
funds could never be raised, promoters often lost interest and lenders were left
stranded (cut off) with incomplete/unviable projects.

e).

Highly Leveraged Borrowers:


Some borrowers were under capitalized and over burdened with debt to absorb the
changing economic situation in the country. Operating within a protected market
resulted in low appreciation of commercial/market risk.

f).

Funding Mismatch:
There are said to be many cases where loans granted for short term were used to
fund long term transactions.

g).

High Cost of Funds:


Interest rates as high as 20% were not uncommon. Coupled with high leveraging
and falling demand, borrowers could not continue to service high cost debt.

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BANK OF MAHARASHTRA

h).

Wilful Defaulters:
There are a number of borrowers who have strategically defaulted on their debt
service obligations realizing that the legal recourse available to creditors is slow in
achieving results.

Analysis of Factors Contributing to NPAs

An analysis of the contributory factor resulting in the emergence of NPAs on


stupendous scale amongst Commercial Banks and Financial Institutions in the
preceding decade and particularly in the early Nineties would lead to the following
conceptualization:-

PSBs performed creditably all through in respect of all parameters set for them.
But in the early Nineties the truth emerged that PSBs were suffering from acute
capital inadequacy and many of them were depicting negative profitability. This is
because the parameters set for they are functioning were deficient and they did not
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BANK OF MAHARASHTRA
project the paramount needs for these corporate goals. Incorrect goals perception
and identification led them to wrong destination.

Pre-reform era witnessed PSBs functioning under the overall control and direction
of the Finance Ministry. Along with Reserve Bank of India (RBI) it
decided/directed all aspects of working of the Bank. Banks were not free to price
their products in competition with each other. They could not freely cater their
funds in the best interest as they considered. It was thus a directed and the role of
bank management was executory.

Since the 70s, the SCBs of India function totally as captive capsule units cut off
from international banking and unable to participate in the structural
transformations, the sweeping changes, and the new type of leading products
training and knowledge resources required to compete with international industry
had resulted in the accumulation of assets, which are termed as non-unprecedented
level 8.

Major policy decision was taken externally by the Finance Ministry/RBI. Though
directors were to be appointed based on their possession of specialized knowledge
in banking and related discipline, the environment of receiving decisions from a
political background as distinguished from a professional outfit, prevented the
best talents coming to occupy the position as Directors of PSBs and taking part in
an active role in the deliberation of the Boards of these Banks.

Audit and Inspections remained as functions under the control of Executive


Officers, which were not independent and were thus unable to correct the effects
of serious flaws in policies and directions of the higher level.

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BANK OF MAHARASHTRA
The quantum of credit extended by the PSBs increased by about 360 times in three
decades after nationalization (from around 3000 crores in 1970 to 475113 crores
on 31-03-2000). The bank was not developed in terms of skills and expertise to
regulate such stupendous growth in the volume and manage to diverse the risk that
emerged in the process. The need for organizing an effective mechanism to gather
and disseminate credit information amongst the commercial banks was never felt
or implemented. The archaic laws of secrecy of customers-information that was
binding banking India, disable bank to public names of defaulters for common
knowledge of the other bank in the system.

Effective recovery of defaulters and overdue of borrowers was hampered. But in


India legal remedies were beset wilful defaulters and the banks were left helpless.
Effective corporate management was a concept alien to the corporate houses then.
In respect of PSBs the board were ineffective and the only/main shareholder was
the government of India. Government exercised multiple role and concerns, and
the instinct to act as a watchful shareholder and increase the shareholders value of
these

corporate

bodies

(banks

and

financial

institutions)

was

never

felt/experienced by the government.

Credit management on the part of the leader to the borrower to secure their
genuine and bonfire interests was not based on pragmatically calculated
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BANK OF MAHARASHTRA
anticipated cash flows of the borrower concern, while recovery of instalments of
term loan was not out of profit and surplus generated but through recourses to the
corpus of working capital of the borrower concerns. This eventually led to the
failure of the project financed leaving idle assets. Functional inefficiency was also
caused due to over-staffing, manual processing of over-expanded operations and
failure to computerize banks in India, when elsewhere throughout the world the
system was to switch over to computerization of operations.

Action Plan for the Operating Functionaries:

a).

Analyse the NPAs and Delineate them into sub-groups.

b).

Do age-wise sub-grouping.

c).

ABC-analysis of advances.

d).

Targets for recovery of various categories.

e).

Monthly reporting and monitoring in preview meetings.

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BANK OF MAHARASHTRA

PREVENTIVE MEASURES:-

1). Regular/Timely contact with the borrowers should be maintained on one-to-one basic
in order that the loans/advances are monitored effectively.

2).

The recovery work should be specifically entrusted to the identified loan officers/
clerks who will have regular contacts with the borrowers particularly at the time,
which is more suitable for recovery, like pre and post-harvest period in case of
agricultural advance.

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3). The high value advance should be specifically monitored and in case of advance,
which displays signals of slipping to sub-standard category, intensive follow-up is
necessary.

4). The repayment programmes should be fixed up realistically keeping in view the
probability of cash accruals taking place as per the projections.

5). In case where units are facing genuine difficulty in adhering to the repayment
schedule fixed while sanctioning the loan, the loan can be rescheduled so that the
advance does not turn out of order or past due.

6). Borrower should be counselled to route the sales proceeds through the account,
which will ensure that the account does not turn out of order merely on account of
interest application.

7). A written communication be sent to all the borrowers advising them about the
need to ensure that their advance remain standard assets to enable the bank to
consider favourably their future request for financial assistance, if needs.

8). Pre-disbursement and post-disbursement inspection, beside the periodical inspections


are very important to ensure proper utilization of bank funds as also the assets
acquired there from.

9). A system for settlement of goals for recovery of periodical loan instalments and
quarterly interest and monitoring performance there against should be set up.

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10).Timely renewal/review of advance will be very effective in monitoring the


position of advance and taking safeguarding steps before an advance turns substandard.

11). The unit displaying disquieting features may be studied by experts/consultants for
suggesting steps to prevent deterioration of their condition and to revitalize their
operations.

CONCLUSION:-

The situation calls for an urgent action by all concerned for improvement. Based
on our experience we consider that the branches will have to constantly work to prevent
the NPA virus from contaminating the new credit portfolio. Also concurrently they will
have to reinforce effective strategies to remove the virus from the existing NPA portfolio.
The task although difficult is achievable. Monitoring and follow-up are the key
watchwords in the task of managing and reducing NPAs.

REMEDIAL MEASURES:

1) Regular meetings with the borrowers and interaction with them on their
business prospects and their position of their accounts should take place.
2) Periodical meetings with group of borrowers particularly those finance under
government-sponsored schemes and in rural areas should be held in which the
need for prompt payments of dues should be explained. It needs to be made
clear to these borrowers that there will not be any further debt relief scheme
in future and that they will benefit in the long run by paying the banks dues.
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BANK OF MAHARASHTRA
3) Recovery camps/recovery workshops can be organized in co-ordination with
the government authorities in rural areas or in respect of SBI advance under
government sponsored schemes.
4) In case of sick units, viability studies need to be conducted promptly and
quick dispensation of rehabilitation packages is essential so that the advance
to them can be upgraded.
5) Close monitoring of sick units, which are under nursing is important to ensure
that they abide by the stipulation made under the nursing program and thereby
there borrowal account are upgraded.
6) Target for recovery should be fixed for individual functionaries and their
performance should be closely monitored.
7) Periodical inspection of the units financed and follow-up for recovery of the
overdue amount should be closely monitored.
8) Village level workers be instructed to maintain register for details of various
borrowers under the government sponsored schemes to ensure regular followup.

9) For smaller advance, Lok Adalat is an effective avenue for on the spot
settlement of bank loan case and this mechanism should be used effectively.
10) As regards cases involving debt for over Rs.10 lakhs, the forum of Debt
Recovery Tribunal should be effectively used.
11) Periodical meetings should be held with the lawyers handling Banks cases to
discuss various issue connected with the ending loans case with a view to
reducing the delays in settlement of the cases.
12) Settling the cases out of court and entering into compromises, wherever
considered appropriate, may rove to be quicker and more effective than legal

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BANK OF MAHARASHTRA
action. However, any tendency to get undue advantage from the bank should
be guarded against.
13) Realization of securities in cases of advances under litigation needs greater
attention. It should be our endeavour to obtain permission of the court for
attachments and disposal of securities charged to the bank before judgement.
where such permission is granted or where suit is decreed in banks favours,
the securities covered by the suit should promptly realize.
14) The portfolio of the loss assets has to be critically examined to weed out all
such assets where there is no hope of any recovery. In such cases, the
ultimate step of writing off the advance needs to be taken and any delay in
matter is of no benefit.
15) The services of Non-Government Organization (NGOs) may also be utilized
in area where these are active, for counselling the small borrowers. These
borrowers may be organized in group and financed, if considered appropriate
and prudent, through the NGOs concerned.

TACKLING NPAs

The major tools for tackling assets, which have already turned into nonperforming assets, are the following:-

1).

Recovery through legal action including the forum of debt recovery


tribunals and lok adalats.

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BANK OF MAHARASHTRA
2).

Utilizing the machinery of state government for recovery of rural death.

3).

Entering into compromises through negotiations.

4).

Rescheduling/rephrasing of dues in case of irregular advances of viable units.

5).

Rehabilitation packages for potentially viable sick units.

6).

Recovery of over due amount through persistent follow-up and by


Counselling/educating the borrowers.

FOCUSED STRATEGIES

1) Constant follow-up and periodically dialogue with the borrower to know the
prospects of his business and difficulties, if any, faced. Case to case review of
NPAs and replacement of loan to suit the revised income generation pattern so that
he is able to repay dues of the bank as per his generation capacity.

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BANK OF MAHARASHTRA
2) Branch recovery team consisting of 2/3 resourceful staff members/officials,
should be formed (if not so) at each critical branch. The team member should be
exhorted to set up recovery endeavours and produce quick tangible results.

3) Establishment of District Recovery Team at each District Headquarter with the


help of District Headquarters, with the help of District Co-ordinates/Lead
Bank Officers/Nodal Officers of the concerned district to liaise (link) with the
Local Government functionaries/Lok Adalats/Certificate Officers, etc. This
team may co-ordinate the activities of the Branch Recovery Team within the
District.

4) Lawyer Meet may be organized at all district headquarters by the concerned


Asst. General Manager and AGM (law) where other officials from local head
Office may also participate. Suit field case of high value loan amount should be
reviewed individually to expedite the recovery process. Involvement of the law
officers in follow-up recovery efforts through debt recovery tribunals is
necessary.

5) To ensure that Target of Recovery have been allotted to all the critical
branches for reducing NPAs/INC/AUC by their respective controlling
authorities and the controllers concerned monitor their performance. The

Dy.

General Manager should oversee the position on monthly basis.

6) One time settlement (OTS) has been found to be another method whereby the
bank would finally recover its due depending upon the repayment capacity of
the borrower from all sources.

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BANK OF MAHARASHTRA

7) To consider, in consultation with controllers, on selective basis in decreed cases,


the need for biding in Banks name for sale of mortgaged properties (secured for
our loans) in auction with the permission of court for expediting the recovery
process.

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BANK OF MAHARASHTRA

PART-C

ASSET CLASSIFICATION AS TOOL KIT TO BRING DOWN


THE BRANCH NPAs TO THE BEAREST MINIMUM.

Credit Appraisal and Advance Monitoring:-

1. End use of funds should be monitored by effectively following up QIS statements,


analysing them.

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BANK OF MAHARASHTRA
2. Verify the financials submitted by the borower and compare it with that of
assumption made at the time of previous sanction.

3. Pre-sanction visit to the sites of collateral security should invariable be done by


the appraising officers before accepting them as collateral. The field staff branch
manager, division managers, should inspect this at yearly or half yearly intervals.

4. Borowers are willing to furnish any detail on their assets and liabilities and
execute any document before disbursement of loan. Obtain all relevant details and
documents prior to disbursing the loan/advance.

5. Book fresh quality advances and market for such advances. At present we are
financing to those who have approached us. Approach good borrower and bring to
our books. Marketing is the need of hour.

6. Follow-up all the accounts with One quarter interest dues and ensure that
borrower meet interest commitments.

7. Cost escalation or delay in project implementation should be taken care of while


sanctioning loan itself. If there are any significant developments during
implementation that has affected the project please review sanction well before the
commencement of production and instalment falls due.

8. Strengthen pre-sanction and post-sanction inspection at all levels.

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BANK OF MAHARASHTRA
9. Seasonal activities monitor the recovery in the account and ensure recovery effort
coincides with the time of revenue inflow.

10. Be aware of the danger signals received from the borrowers about the problem
loans. Preventive and curative action should be taken immediately.

11. Do not be just satisfied and let loose the good borrowers. Complacency towards
existing good borrowers may lead to account turning NPAs later.

SUB-STANDARD ASSETS:-

I. A sizeable portion of NPA is in sub-standard category. It should be possible to


upgrade account in this segment.

II. Ensure that sub-standard account does not slip down to doubtful and loss category.

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BANK OF MAHARASHTRA

III. Efforts should be made to upgrade the account to standard categories NPAs affect
our balance sheet four ways:

a) We cannot book income.


b) Capital adequacy ratio gets affected.
c) NPAs require provisioning from post tax profits.
d) Affects image in international level.

IV. Once the amount become NPA verify whether documentation is in order. If not
rectify it first.

V. Rectify all irregularities in documentation as pointed out by branch inspectors.

VI. Regular counsel and educate dafaulting borrower. Maintain regular contact with
the borrowers and monitor the asset. Keep the Branch Manager informed of the
developments at regular intervals.

VII. Do not permit excess drawing unless otherwise necessary for 3 units to run. If the
situations warrant, renew/review the account record excess drawings, if any,
permitted in the account and insists for letters and document it.

VIII. In case of sick units, if satisfied about the problems of sickness strengthen the
assets with collaterals. This will help in making small provision against such
advances. Chalk out the rehabilitation programme in consultation with the

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BANK OF MAHARASHTRA
controllers immediately failing which we may not have any assets to fall back
upon later. A quick action is needed. If given a chance, grab the earliest to palm
off the account from our books to any other financial agency.

DOUBTFUL ASSETS:-

1) Experience in the previous years indicate that there has been steady slippage in the
quality of assets in the NPA categories from sub-standard to doubtful assets and
then to loss assets. One reason could be that appropriate action as mentioned
above is not taken in case of sub-standard assets. Secondly suit field accounts in

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BANK OF MAHARASHTRA
various civil courts/debts recovery tribunal is not followed up in the manner
required ad or are getting very little attention. These accounts particularly suit
field/decreed account required constant review at the operating level so that
appropriate steps like enforcing decree, facilitating compromises or write off if
need be initiated instead of holding such un-remunerative accounts on long term
basis in your books as NPAs.

2) Issues raised by advocates should be tackled to get the suits diposed of and
executive the decreased so obtained to reduced the NPAs.

3) Where branches have got backlog in settlement to DICGC claims, such claims
should be followed up rigorously. For this purpose dealing official at the branch
should explore the possibilities of getting the claim settled at an earliest in
consideration with the DICGC Chennai/Mumbai.

4) Compromise as a strategy for reducing NPAs is receiving attention of branch


functionaries. Encourage compromise proposal selectively without giving wrong
signals to the other good borrowers. Branches should view such compromise
proposals based on the net present value, nature and value of assets presently
available to us.

LOSS ASSETS:-

i.

Write off Doubtful and Loss assets was initiated by branches from the first quarter
of the year itself.

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BANK OF MAHARASHTRA
ii.

High value doubtful and loss assets where DICGC has settled the claims and/or
rejected the such case should be first dealt with write-off proposals with
additional information should be submitted immediately where ever assets are not
available.

iii.

Identify all loss assets where full provision is available to write off. Where ever
suits are pending and prospect of recovery exists such account can be parked in
advance under collections accounts.

iv.

Recommendation to write up file value loss asset should be sent on priority basis.

v.

Write off out standings where provision is short up to Rs.25000 may be sent
immediately without further loss of time.

vi.

Wherever compromises are/where entertained earlier and write-off the balance


still exist arrange to sent such write-off proposals and ensure that the account does
not appear in balance sheet of the bank.

INTEREST NOT COLLECTED ACCOUNT:-

1. Few branch operating functionaries are still not aware of the IRAC norms. Even
though account is classified as NPA interest is being applied bindly with out

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BANK OF MAHARASHTRA
thinking of consequence of such application of interest. It inflates the INCA
figures.

2. Serious efforts in upgrading the assets from NPA category will results in reduction
of INCA. Pressurize induce the borrowers to bring down their outstanding levels
compared to the previous year. This will enable the bank to book income on
partial recovery basis.

3. Where fundamentals of the industry/unit/borrowers are sound rehabilitation of the


unit may be taken up on priority.

ADVANCE UNDER COLLECTION ACCOUNT:-

1) The number of advance under collection account and out standings there in there
in are the rise.

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BANK OF MAHARASHTRA

2) Due to the policy decision taken to write-off loss assets irrespective of suit
position may add a few more account to advance under collection account.

3) There will be very marginal recovery during the years.

4) Review all accounts parked in advance under collection account on priority basis
and efforts should be made to recover full dues and remove such accounts from
advance under collection account.

5) Encourage compromise proposals.

6) Regular view of the recovery prospects and removal of such accounts from
advance under collection account does not appear to be receiving level of
attention.

7) This area needs a special attention of the operating staff.

EXCESSIVE FOCUS ON CREDIT RISK MANAGEMENT:-

The most important business implication of the Naps is that it lead to the credit
risk management assuming priority would thus be pre-occupied with recovery
procedures rather than concentrating on expanding business. As already mentioned
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BANK OF MAHARASHTRA
here in above, a bank with high level of NPAs would be forced to incurr carrying
costs on a non-income yielding assets. Other consequence would be reduction in
interest income, high level of provisioning, stress on profitability and capital
adequacy, gradual decline in ability to meet steady increase in cost, increased pressure
on Net Interest Margin (NIM) there by reducing competitiveness, steady erosion of
capita resources and increased difficulty in augmenting capital resources. The lesser
appreciated implications are reputation risks arising out of greater disclosures on
quantum and movement of NPAs provision, etc.
The non-quantifiable implication can be psychological like play safe attitude
and risk aversion, lower morale and disinclination to take decision at all levels of staff
in the bank. Two decades of regimented and directed banking to credit delivery has
derived Bank Manager of the instinct skill and knowledge. Nationalized banking did
not produce a spring of talent resources from within. Directive inputs and course
direction came externally from RBI and Finance Ministry which were/are external to
the day-to-day affairs and problems of Indian Banking Industry.The system did not
promote initiative and talent, but bred corruption and nepotism.

SECURITIZATION AND RECONSTRUCTION OF FINANCIAL


ASSETS AND ENFORCEMENT OF SECURITY INTEREST
ACT 2002 (SARFESI)

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BANK OF MAHARASHTRA
SARFESI- The Security Interest Legislation
SARFESI

provides

for

the

enforcement

of

security

interests

in

movable/tangible or intervention of court, by way of a simplistic, expeditious and a cost


effective process. Where any borrower makes any default in repayment of secured debt or
nay instalment there of, and his account in respect of such debt has been classified by the
secured creditor as non-performing asset, then, the secured creditor may call upon the
borrower by way of a written legal notice to discharge in full his liabilities within 60 days
from the date of notice failing which the secured creditor would be entitled to exercise all
or any of the rights set out under the SARFESI Act. The notice must contai details of
debt and secured assets.
Any bank or public financial institution or any other institution or non-banking financial
company as specified by central government or international finance corporation or a
consortium there of, and his account in resects of such debt has been classified by the
secured creditor as non-performing assets, then the secured creditor may call upon the
borrower by the way of a written legal notice to discharge in full, his liabilities within 60
days from the date of the notice failing which the secured creditor would be entitled to
exercise all or any of the rights set out under SARFESI. The provision of SARFESI
relating to security of interest can be invoked by any bank or public financial institution
under section 4A of the Companies Act, 1956 or any institution specified by the central
government under sub clause (2) of clause (h) of section 2 of recovery of debt due to
banks and Financial Institutions Act, 1993 or any other institution

or non-banking

financial company as specified by central government or international finance corporation


or a consortium there of.

NPA REDUCTION TECHNIQUES:-

Slotting NPAs of various size and type can be made as follows at branches for
working out specific/appropriate strategies individual cases. Besides it will also help us in
taking stock of the situation at given point of time.

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BANK OF MAHARASHTRA

CATEGORY

TECHNIQUES

a) Asset created out of bank loan may be


ascertained.

b) Asset created out of bank loan may be


ascertained.

1). Small NPA Loans


(Agricultural Loans, Priority
sector Loans, Government
sponsored Loans upto Rs. 1
lakhs.)

c) Repaying capacity can be easily gauged.


d) Mobilizing liquid cash for meeting the
debt is not difficult.
e) Written reminder and repeat personal call
help mostly; written reminder is a
powerful weapon.
f) Legal action is time consuming.

g) Influence of other local persons contacts


helpful especially in rural/semi urban
areas.

2). NPAs-Larger than small but


medium. (Above Rs. 1 lakhs

a) Branch team can talk to the borrower and


work out the repayment programme.
b) In Non-Agricultural NPAs, quick solution

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BANK OF MAHARASHTRA
should be worked out through long draw
work out sessions with borrowers, because
the value of assets may get eroded fast or
the borrower may decamp or shift his
activity.
c) In Non-Agricultural NPAs, quick solution
should be worked out through long draw
work out sessions with borrowers, because
the value of assets may get eroded fast or
upto Rs. 5 lakhs)

the borrower may decamp or shift his


activity.

d) Debts can be settled through Lok Adalats.

e) Influence of trade professional circles,


associates useful.

a) As the size of NPAs grows, the branch


3). Medium sized NPAs

experiences levels of incapacity to take a

(Over Rs. 5 lakhs upto

view regarding the ability/recover rabidity

Rs. 25 lakhs)

of the loans.

b) SWOT analysis and of security, will be


helpful.

c) Whether to waive legal action to go for

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BANK OF MAHARASHTRA
compromise.

d) Call for intervention at all the stages by a


multi-tier team workout specialists.

e) Recovery is effort-inelastic to a lesser


degree.

f) Call for legal/technical advice.

g)

If default is wilful, watch on borrowers


business growth plans and using leverage
at appropriate.

4). Large NPAs

a) It is highly effort-inelastic.

(over Rs. 25 lakhs)

b) Calls for intervention abilities not only by


a multilevel team of workout specialists
but also the senior management.

c) Sophisticated legal, technical and financial


advice for.
d) Support of the state government and SFCs
in selling the assets, rationalizing the staff

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BANK OF MAHARASHTRA
of the unit, deciding the exit option.

e) In case of mid-corporate sector listed


companies, watch for opportunities.

f) Threat of winding up option could be


useful.

For NPAs with balance more than Rs. 1 Lakhs;

In Belgaum City, there are 6 branches of Bank of Maharashtra, these branches


have formulated the following innovative methods for recovering NPAs.

1) The team is formed having all the branch managers and concerned staff looking
after recovery department. The said team will visit the borrower and advice him
for recovery of dues and also the rupurcussions for non-payment.

2) There are 10 ladies staff members in Belgaum City. These ladies staff members
have formed a group and door to door recovery campaign is done by this team.

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BANK OF MAHARASHTRA

3) The telephone numbers of Belgaum District is loaded on PCs of all branches, the
managers as and when get the free time contact NPA account holders by searching
telephone numbers which are loaded on their PCs.

This innovative method has rewarded a good dividend as on 2007-2008, all the
branches of Bank of Maharashtra in belgaum city have achieved the recovery targets,
write-off targets and reduced the NPA quantum to a large extent.

While preparing the recovery budget, branches should scan through the NPAs
portfolio,make the ABC analysis of NPA, segregate accounts into identical lots with
regard to the approach to be adopted for recovery.

SIZE OF NPAs

CONTROL

Small NPAs

Self supervised by the branch.


Regional Offices (Ros) will do volume Ros
will intervene, if there is lack of response
from the bank level.

Medium NPAs

Regional Offices (Ros) should decide the


identification of intensive NPA branches.
Zonal Offices (Zos) will do volume control
and intervene if the response is inadequate
down the line.

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Large NPAs

Zonal Offices (Zos) should decide the


account-wise strategies.
Head Office will partake in the exercise
depending upon the complexity.

RECOVERY CHART

Case fit for written and telephonic reminders.


Lenghty workout sessions.
Case fit for rehabiliation Induction of fresh funds,
interest concessions with.

POSSIBLE ACTION BY FOS TO FACILITATE RECOVERIES

I. Action Currently Employed =

i.

File Suit

Effectiveness

Takes 10-15 years to obtain judgement.

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ii.

Take possession of real estate.

Bank of Maharashtra often not successful


in selling them.

iii.

Take possession of inventory.

Inventory normally does not if remain,


and non-obsolete left theres anything
after 10-15 years of legal wrangling, its
value is basically nil.

iv.

Recover cash from receivables.

Receivables also often almost disappear


when customers cost of smell trouble.
What is chasing these receivables down
after 10-15 years in the court ?

II. Action

Not

Currently =

Possible Effectiveness

Employed

i.

Persistent Phone Calls

ii.

Media Announcements

iii.

Visits to Borrowers Residence

Will make borrower angry, though it will


likely eager to Bank of Maharashtra off

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BANK OF MAHARASHTRA
iv.

Notifying Error Issue Investors

v.

Uncomfortable and

vi.

his back.

Notifying Stockholders

RURAL ADVANCES AND RECOVERY MANAGEMENT

PROBLEMS OF RECOVERY

There are a number of factors which contribute to the recovery problem, some
of which crop up rights at the inception of the project and before the loan is disbursed.
These problems can be clubbed into two categories i.e; pre-disbursement and postdisbursement stages.

The recovery problem associated with the Pre-Disbursement stage relates to

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BANK OF MAHARASHTRA

Unrealistic fixation of repayment schedule.

Delay in disbursement of loans.

Insufficient loan amount.

Delay in release of subsidy.

Non Follow-up of formalities required to be followed.

In the study conducted by NABARD, it was found that lots of problems


associated with the recovery were due to incorrect fixation of repayment schedules by
the commercial banks. NABARD concluded that default on account of realistic
repayment programmers fixed by the banks should not really treated as wilful default.

The recovery problem associated with the Post-Disbursement stage relates to

Lack of constant supervision and follow-up.

Lack or regular contacts between Bank and Borrower.

Assets created not being supervised.

Wilful Default.

Failure of crops.

Insurance not being comprehensive.

Claims not being settled in time.


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BANK OF MAHARASHTRA

Delay in declaration of ANNEWARI depriving the farmers of the benefits


available.

MANAGING RECOVERY OF RURAL ADVANCES


Our recovery problems can be given fresh looks as under:

Basically each branch engaged in rural lending has to loan for recovery of
loans disbursed by it. The manager should be familiar with the prospects of recovery
through internal and external factor. Knowledge about willful defaulters is equally
important. Thus Three-Pronged Strategy is necessary;

(A).

RECOVERY THROUGH INTERNAL RESOURCES AND SYSTEMS

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BANK OF MAHARASHTRA
i.

Appraisal of loan application and re-sanction surveys:During the initial processing of the proposal, it has to be ensured that the
repayment programmer for an item/equipment id is fixed in accordance with the
guidelines prescribed by NABARD. Awareness about NABARD guidelines should be
increased at the branch level.

ii.

Computation of demand:Guidelines suggest that repayment of instalments should be fixed in such a


manner which will coincide with the harvesting of crops or sale of milk or any other
farm output proposed to be produced through the bank loan should therefore be
computed in a manner conducive to the income flows.

iii.

Non-Banking business day:This day should be utilized fully for field visit and contact with the borrowers.

iv.

Recovery Camps:The central idea of recovery camp is to bring a maximum number of people

together at one place and repay the loans. The recovery camps in addition of effecting
recovery create a proper climate for recovery.

v.

Conversions/Rescheduling of loans:There are guidelines for the operating staff of the banks for

conversion/rescheduling of loans can be made repayable over period of one year in


the event of crop loss.

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BANK OF MAHARASHTRA
vi.

Compromise Proposals:In genuine cases, the banks can consider compromise proposal and a lot
depends upon the initiative of the branch manager in utilizing this facility.

vii.

Integration of recovery in branch budgeting:Our bank has already commenced fixing recovery targets and the best
performers are also going to be rewarded suitably through the award scheme.

(B).

RECOVERY THROUGH EXTERNAL SOURCES

Wherever the states have enacted laws on the pattern and support of the
government machinery can be enlisted accordingly. The support from BLCC, DCC
and SLBC can be utilized effectively. If the branches prepare village-wise action plans
in this regard, it will be still appropriate for the for the agencies to have a concerted
effort towards recovery. The branches may also compile a detailed position of
defaulters and share the same with the convener banks and government authorities
periodically.

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BANK OF MAHARASHTRA
(C).

TACKLING WILFUL DEFAULT

Here 2 approaches are necessary. First to prevent wilful default in future and
secondly to initiate steps to discourage wilful default. To prevent wilful defaults,
comprehensive and discrete enquires, therefore, should be made before disbursing loans
to farmers. Some of the banks have already devised system of maintaining village
dossiers which compromise names of farmers who do not have good reputation. A nonwilful defaulter is one who generally follows a good cropping pattern and is co-operative
to developmental functionaries.
In present times, when wilful default has gained social acceptability, the branches
can initiate steps for devising schemes for giving recognition to good borrower in various
meeting or function organised by the branches in consultation with controllers. Further
the problems of good borrowers can be studied and their credit needs can be immediately
met. By doing so, a culture of prompt repayment may develop in the village and
simultaneously wilful default would get its courage.

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BANK OF MAHARASHTRA

PART D

ASSETS QUALITY OF NPA IN BANK OF MAHARASHTRA

(In Crores)
PARTICULARS
1. Net NPAs to Net Advances (%)

2007-2008

2006-2007

0.87

1.21

820.27
252.12

944.08
309.12

2. Movement of NPAs (Gross)


a) Opening Balance
b) Additions during the year

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BANK OF MAHARASHTRA
c) Reductions during the year
d) Closing Balance

306.12
766.27

432.93
820.27

277.38
167.80
187.60
254.05

334.06
170.65
227.33
277.38

520.14
84.31
118.52
485.93

594.93
138.48
213.27
520.14

3. Movement of NPAs (Net)


a)
b)
c)
d)

Opening Balance
Additions during the year
Reductions during the year
Closing Balance

4. Movement of Provisions for NPAs


(Excluding provisions on standard
assets)
a)
b)
c)
d)

Opening Balance
Provisions made during the year
Write-back of excess provisions
Closing Balance

MOVEMENT FINANCIAL YEAR WISE

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BANK OF MAHARASHTRA

From the above chart we can observe that, there is an decreasing trend in
NPAs (i.e.Gross, Net and Provisions) as compared to that of last year.

CHART SHOWING MOVEMENT IN NPAs FINANCIAL YEAR WISE


(In Lakhs)

NPA %

NPAs (Gross)

07-08

06-07

07-08

0.87

1.21

820.27

06-07
766.27

NPAs (Net)
07-08
254.05

06-07
277.38

Provision for NPAs


07-08
485.93

06-07
520.14

INTERPRETATION:

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BANK OF MAHARASHTRA
When we compare the ratio of Net NPAs to Net Advances and Closing Balances
of NPAs (i.e. Gross, Net & Provisions), we find that the Quality of NPA in the
Bank is better in the year 2007-2008 as compared to that of 2006-2007.
When we consider movement in NPAs (Gross), we get the following;
Reductions in Gross NPAs made during the year 2007-2008 are Rs. 54 lakhs,
but during the year 2006-2007, the reductions made were Rs. 124 lakhs.
When we consider movement in NPAs (Net), we get;
Reductions made in the year 2007-2008 are Rs. 20 lakhs and for the year 20062007 are Rs. 57 lakhs.
When we consider provisions, we get the following;
Reductions in NPA during the year 2007-2008 are Rs. 34 lakhs and for the year
2006-2007 are Rs. 75 lakhs.
Therefore, from the above interpretation we can say that, in the
year 2006-2007, the asset quality of the Bank was better as compared to that of
the year 2007-2008.

According to RBI Guidelines, the percentage of provisions to be maintained


under different category of NPAs is as follows:Standard Assets ------------ 0.5%
Sub-Standard Assets ------ 20%
Doubtful Assets ------------15%
Loss Assets ----------------- 100%

NPAs IN RETAIL SECTOR AS OF 31st MARCH 2008

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BANK OF MAHARASHTRA
FOR RPD BRANCH, BELGAUM
(Rs. IN LAKHS)

S.No

CATEGORY

SUB-STD

DOUBTFUL

LOSS

TOTAL NPA

TOTAL
ADVANCES

ACS

AMT

ACS

AMT

ACS

AMT

ACS

AMT

ACS

AMT

Housing Loans

0.00

0.00

0.00

0.00

41

115.49

Education
Loans

0.00

0.00

0.00

0.00

28

60.23

Two wheeler
loan

0.00

0.23

0.00

0.23

49

10.62

Four wheeler
loan

0.00

0.00

0.00

0.00

11

27.48

Consumer
Loans

0.58

0.00

0.63

1.21

12

3.24

Personal
Loans

0.00

0.00

0.47

0.47

30

12.65

0.00

0.18

0.00

0.18

22

2.52

0.00

0.00

0.00

0.00

0.93

5.61

12

28.01

17

13.04

34

46.66

423

520.75

6.19

14

28.42

21

14.13

42

48.74

618

753.92

7
8
9

Solar Loans
Adhar Loans
SSI
TOTAL

ANALYSIS

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BANK OF MAHARASHTRA

From the above chart we come to know that, Out of the major proportion
of advances/loans that are lent to various category of people only a small proportion
contributes to Total NPA and further this total NPA is categorised into 3 types. i.e, SubStandard Assets, Doubtful Assets and Loss Assets.
PARTICULARS
Total Advances

Amount (In Lakhs)

Amount (In Lakhs)

753.92

6.19

Doubtful Assets

28.42

Loss Assets

14.13

Sub-Standard Assets

Total NPA

-----------------------

Remaining Balance

-------------------------

48.74
705.18

From the above table, we come to the following conclusion:Out of the Total Advances, the share of total NPA is minimum. Bank is
undertaking and implementing many measures to bring down this NPA level. But, the

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BANK OF MAHARASHTRA
Bank cannot stop lending advances, taking into consideration the rise in the NPA level.
Bank has to raise loans as they contribute to the wealth and creditibility of the
bank, and when the banks have raised the loans they are also at a risk. So, there may be
atleast minimum level of NPA.

Further from the above chart we get the following;

Amount Raised in the form of Total Advances is Rs 753.92 lakhs.


Out of which Rs 48.74 lakhs is the share of NPAs as of 31st March 2008.
i.e;
48.74/753.928*100 = 6.46% :----- Total % of NPA in Amount.

As per the RBI norms a maximum percentage of NPA to be maintained by the


Bank is upto or less than 8%. But, we can observe from the above chart and calculations,
that the NPA level of Bank of Maharashtra is less than the level which is prescribed by
RBI and still Bank is trying to reduce it as they have mentioned it in their vision.

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BANK OF MAHARASHTRA

The total amount of advances raised is Rs. 753.92 lakhs, which is taken as 100%.

Out of this 100%, 6% of the total advances contribute to the total NPA amount
approximately, which is equal to Rs. 48.74 lakhs.

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BANK OF MAHARASHTRA

The total number of accounts with the Bank as on March 2008 is 618, which is taken as
100%.

Out of these 618 accounts, the total number of accounts which belong to the category of
NPA is 42 (i.e. 7% of the total 100% contributes to NPA).

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BANK OF MAHARASHTRA

The above chart depicts the following:-

The Total NPA amounts to Rs 48.74 lakhs which is taken as 100%.

Out of the total 100%, 58% contributes to Doubtful Assets, 29% belongs to Loss Assets
and 13% contributes to Sub-Standard Assets.

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BANK OF MAHARASHTRA

The above chart depicts the following:-

The Total Number of NPA accounts is 42 which is taken as 100%.

Out of 100%, 50%, contributes to Loss Assets, 33% belongs to Doubtful Assets and 17%
is for Sub-Standard Assets.

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BANK OF MAHARASHTRA

The Total NPA amount is Rs. 48.74 lakhs, which is taken as 100%.

Out of this 100%, 97% belongs to SSI Sector, 1% contribute to Personal loans category,
2% belong to Consumer loans Sector and 0% each contribute to all other category of
loans.

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BANK OF MAHARASHTRA

The Total amount in sub-standard asset is Rs.6.19 lakhs, out of the total NPA, which is
taken as 100%.

Out of 100%, 91% contributes to SSI Sector, 9% belongs to Consumer Loans Sector and
0% each belong to other category of loans.

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BANK OF MAHARASHTRA

The total amount in Doubtful Assets is Rs. 28.42 lakhs out of the total NPA amount,
which is taken as 100%.

Out of 100%, 98% belongs to SSI Sector, 1% comes under the category of Two wheeler
loans, 1% contributes to Solar loans and 0% each belong to other category of loans.

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BANK OF MAHARASHTRA

The total amount in Loss Assets is Rs. 14.13 lakhs which is taken as 100%.

Out of 100%, 93% belong to SSI Sector, 4% contribute to Consumer loans, 3% contribute
to Personal loans and 0% each contribute to other sector of loans.

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BANK OF MAHARASHTRA

From the above chart we get the following:The total number of Accounts with Bank of Maharashtra as of March 2008 are 618.
Out of these accounts, the major proportion is for SSI sector. i.e, 423 accounts (67%),
49 accounts (8%) are under the category of Two wheeler loans, 41 accounts (7%) are
under the category of Housing Loans, 30 accounts (5%) belong to the category of
Personal loans, 28 accounts (5%) come under the category of Education loans, 22
accounts (4%) come under the category of Solar loans, 12 accounts (2%) belong to the
category of Consumer loans, 11 accounts (2%) comes under the category of Four wheeler
loans and 2 accounts belong to the category of Adhar loans.

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BANK OF MAHARASHTRA

From the above chart we get the following:The Total Amount raised by Bank of Maharashtra as of March 2008 is Rs. 753.92 lakhs,
which is taken as 100%.
Out of this 100% amount, the major proportion is for SSI sector. i.e, 70% (Rs 520.75
lakhs), 15% (Rs 115.49 lakhs) of the amount is for the purpose of Housing loans, 8% (Rs
60.23lakhs) are for education loans, 4% (Rs 27.48 lakhs) are under the category of Four
wheeler loans, 2% (Rs 12.65 lakhs) come under the category of Personal Loans, 1% (Rs
10.62 lakhs) belong to the category of Two wheeler loans and each with 0% is for
Consumer loans (Rs 3.24 lakhs), Solar loans (2.52 lakhs) & Adhar loans (Rs 0.93 lakhs).

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BANK OF MAHARASHTRA
INTERPRETATION OF THE ABOVE DATA IN TERMS OF PERCENTAGES
( i.e. in terms of Net NPAs to Total Loans Disbursed)

Percentages with respect to Amounts

TOTAL NPA

Total NPA %

48.74/753.92*100 = 6.46%

Sub-Standard Assets

6.19/753.92*100 = 0.82%

Doubtful Assets

28.42/753.92*100 = 3.77%

Loss Assets

14.13/753.92*100 = 1.87%

SSI SECTOR

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BANK OF MAHARASHTRA

Total %

46.66/753.92*100 = 9%

Sub-Standard Assets

5.61/753.92*100 = 1.08%

Doubtful Assets

28.01/753.92*100 = 5.38%

Loss Assets

13.04/753.92*100 = 2.54%

TWO-WHEELER LOANS

Total %

0.23/10.62*100 = 2.16%

Sub-Standard Assets

NIL

Doubtful Assets

0.23/10.62*100 = 2.16%

Loss Assets

NIL

CONSUMER LOANS

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BANK OF MAHARASHTRA
Total %

1.21/3.24*100 = 37.35%

Sub-Standard Assets

0.58/3.24*100 = 17.90%

Doubtful Assets

NIL

Loss Assets

0.63/3.24*100 = 19.45%

PERSONAL LOANS

Total %

0.47/12.65*100 = 3.72%

Sub-Standard Assets

NIL

Doubtful Assets

NIL

Loss Assets

0.47/12.65*100 = 3.72%

SOLAR LOANS

Total %

0.18/2.52*100 = 7.15%

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BANK OF MAHARASHTRA

Sub-Standard Assets

NIL

Doubtful Assets

NIL

Loss Assets

0.18/2.52*100 = 7.15%

FINDINGS
1) 6.46% of the total advances contribute to total NPA.

2)

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BANK OF MAHARASHTRA
(a). 58% of the total NPA amount belong to the category of Doubtful Assets,
whereas only 33% of the total NPA accounts belong to the category of Doubtful
Assets.
(b). 29% of the total NPA amount belong to the category of Loss Assets,but
account wise, 50% of the total NPA accounts are under the category of Loss
Assets.
(c). 13% of the total NPA amount come under the category of Sub-Standard
Assets, whereas 17% of the total NPA accounts belong to Sub-Standard Assets
Category.
From the above point we can observe that ,the Category of Assets differ
in percentages when we compare them in terms of Amounts and Accounts.

3) Major advances that are provided by the Bank belong to the SSI sector.

4) 9% of the total advances which belong to SSI sector are Defaulted.


The reasons for the default are:
Recession.
Mis Management.
Natural Calamities, etc

5) Most of the NPAs belong to the category of Doubtful Assets.

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BANK OF MAHARASHTRA
6) There is reduction in percentage of Net NPA (i.e. from 1.21% in the year 20062007 to 0.87% in the year 2007-2008). This reduction is due to recovery in NPA
accounts and the provisions made on these NPAs.

7) The percentage of Bank NPAs, Net as well as Gross will be reduced as the
quantum of advances increase.

8) NPA is not in existence under the category of Housing Loans, Education loans,
Four wheeler Loans, Solar Loans and Adhar Loans.
Reasons:
Adhar Loans are properly linked with pensions and salaries.
Solar Loans are disbursed by the bank by obtaining collateral security in
the form of Deposits/NSC/LIC Policy.
The Education Loans are disbursed in stages for qualified courses having
full job opportunities..

SUGGESTIONS

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BANK OF MAHARASHTRA
The Bank has to increase in the quality of assets which adds value to its
profitability.The quality of assets can be increased by scouting the best
Borrowers and by increasing the quality of advances. The percentage of
NPAs to Total Advances can be brought down by increasing the standard
assets.

Early Alert System, should be implemented inorder to prevent the account


from becoming NPA.

The banks should undertake frequent monitering and checking of NPA


advances, which will help the bank to find out the accounts which are under
the category of NPA or which are likely to fall under this category. If there
are more variations over a period of time, then the reasons should be sorted
out and corrective actions such as issuing notices, etc should be
implemented as early as possible.

As for as possible, repayment of term loans should be fixed on monthly


basis rather than on quarterly or semi annual basis.

Personal guarantees of the promoter directors/major shareholders should


normally be insisted upon.

The major default of the Bank is in SSI Sector. So, inorder to reduce NPAs
form this sector, the Bank should undertake various checks like; timely

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BANK OF MAHARASHTRA
checks on the Cash Flow Statement (Specifically Cash from Operating
Activities), Level of Sales (Growth Rate), Coverage ratios (Interest
Coverage Ratios, Debt Service Coverage Ratio), etc of SSI Units should be
analysed.

Bank should prevent diversion of funds by the promoters and Effective


inspection system should be implemented.

Proper follow-up should be maintained with the SSI Sector, which will help
them to reduce the NPAs in this sector to a greater extent.

CONCLUSION:

NPA is a weapon, which affects bank profitability due to interest income not being
recognized on NPA accounts and loan loss previously incurred to be absorbed from profit
earned. Also the provisions are to be made on the NPA accounts which will reduce the
profits of the Bank. The bank must adopt structured NPAs management policy for
elimination or reducing the NPAs in the Bank.

BIBLIOGRAPHY
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BANK OF MAHARASHTRA

Bank Circulars

www.bankofmaharashtra.com

www.google.com

Information from the Branch Manager.

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