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When Team Work Matters, You Are in Safe Hands With Dhanalakshmi Bank
When Team Work Matters, You Are in Safe Hands With Dhanalakshmi Bank
CHAPTER I
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
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. To analyze the NPA level of Dhanalakshmi bank Limited.
2. To study the recovery procedures of Dhanalakshmi Bank Limited.
3. To examine how far the bank has been successful in reducing the NPA
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
adopted for collection of data was personal interview with bank officials using
Inventory schedule as a tool for the same, and it was also sourced from the
secondary data. After collecting data from the respective sources, analysis &
interpretation of data has been made. On analyzing the data, the following
findings were arrived at:
Based on the findings, logical conclusions are drawn, and further, suitable
suggestions & recommendations are brought out. The entire project report is
presented in the form of a report using chapter scheme, developed logically
and sequentially from introduction to bibliography & references.
CHAPTER 2
INTRODUCTION
2.INTRODUCTION
The Indian has been liberalized and globalize during the last decade or so. It
has exposed the Indian financial sector to international competition in fairly
significant manner. To cope with the growing competition in the present scenario
the Indian banks have embarked on a massive exercise to revamp the system.
Despite the overall progress made by the financial system over the years, the
operational efficiency of the banking system has been unsatisfactory,
characterized by low profitability, high and growing NPAs and relatively low
capital base.
NPAs have turned out to be a major stumbling factor affecting the
profitability of Indian banks. Before 1992,bank did not disclose the bad debts
sustained by them and the provision made by them fearing that it may have an
adverse impact. The banks used to take income even on NPAs on accrual basis.
This helped them to disclose false profits. Owing to low levels of profitability, the
banks owned funds had to be strengthened by repeated intention of additional
capital by the government. The introduction of prudential norms to strengthen the
banks financial position and enhance transparency is considered as a milestone
measure in the financial sector reforms. These prudential norms, which relate to
income recognition, asset classification, provisioning for bad and doubtful debt
and capital adequacy serve three great purposes.
1. Income recognition norms reflect a true picture of the income and
expenditure of the bank.
2. The asset classification and provisioning norms help in assessing the quality
of the asset portfolio of the bank.
3. They also act as tool of financial discipline and compel banks to look at the
quality of loans assets and the risk attached to the lending
In India, NPAs are considered to at higher levels than most other countries,
have of late attracted the attention of public as also of international institutions.
This has gained further prominence in the wake of transparency and disclosures
measures initiated by R.B.I. during the recent years .We have also to conform to
international accounting standards, if Indian banks are to get their due place and
recognition in the global market.
The present study was undertaken in this context to analyze and understand
the impact of NPA are having on the performance of commercial banks in general
there affecting the whole financial system. The scope of this study is limited
especially to the organization selected ie. Dhanalakshmi Bank.
Sampling Technique
Sampling refers to selecting a part of the population to represent the
characteristics of the population. However, in this study, Finance Manager of the
bank is the source of data and therefore, since he is the only one source of
information, there is no question of any sampling. He is interviewed at the Banks
Head Quarters at Thrissur, Kerala, and the necessary primary data is collected
using Inventory Schedule. Both primary and secondary data were collected &
used for drawing conclusions for the study.
Primary data:- were collected using Inventory schedule & also through interview,
held with the Finance Manager in presence of the other officials of Dhanalakshmi
Bank Ltd.
Secondary data:- were collected from the published annual reports of the
Dhanalakshmi Bank and other sources. Such data collected were analyzed for
some kind of a trend and its impact on the profit of the bank.
The major limitation of the study was the paucity of time. Even then, maximum
care has been taken to arrive at appropriate conclusion. Following are the
limitations of the study:
3. Though the subject matter pertains to commercial banks, only one scheduled
bank. i.e. Dhanalakshmi bank ltd. is considered for this study. Other
commercial banks, as also the other scheduled banks are outside the purview
of this study.
Chapter 4-
CHAPTER III
India and suggest financial reforms. The report of the committee was tabled in the
parliament of December 17th 1991.
The main recommendations of the committee are
1.
2.
3.
and
4.
3.1.1 Concept of
Committee
Recommendations
The Narasimham committee recommendations suggested that loans and
advances in banks should classified in to performing and non performing on the
basis of the health of the loans assets and the record of adherence to repayment of
installments and interest on due dates. The committee also recommended that the
banks be allowed to book to income by way of interest debited to an account only
when it was found realizable with in a given time frame.
The committee suggested that the banks should make provision for all NPAs on
the basis of classification of such assets based on the age of irregularity, security
cover available etc. The RBI accepted the recommendations of the committee with
regard to introduction of norms for income recognition and asset classification and
provisioning an advised the banks to implement the same in a phased manner
beginning 1st April 1992.
The asset of a bank are cash and balances with RBI, balances with banks and
money at call and short notice, investment in government and other securities,
advances (including loans and advances, bill purchased, discounts and other credit
facilities), fixed and other assets.
Operative like cash credit, over draft etc: A cash credit / over draft account will have to be treated as NPA if account
An account shall be out of order if any one of the following conditions exist:a.
The balance outstanding is within the limit / drawing / drawing power but
there is no credit in the account continuously for six months as on the balance
sheet date.
c.
There is credit but such credit is not enough to cover the interest debited
programs: If interest / installment of principal remain overdue for a period of more than
180 days.
Note: When the prudential norms were introduced in 1992, the concept of past
due was incorporated and it was classified that an amount should be classified as
past due when it remains outstanding for 30 days beyond the due date. However
due to improvement in the payment and settlement systems, recovery climate, up
gradation of technology in banking systems etc. It has been decided by RBI to
dispense with the past due concept with effect from 31st March 2001. Hence to
all account to become NPA, cut off date is September 30th of the Year under audit.
C. Bill purchased / Discounted / Negotiated: A bill purchased / discounted / negotiated becomes NPA, if it remains
overdue and unpaid for two quarters or more.
unusance period and grace period should be taken to consideration for arriving at
the due date.
D.
Agricultural advances: -
E.
Miscellaneous accounts
Any other credit facility or account should be treated as NPA if any amount
b.
d.
Total provisions held excluding technical write off made at Head Office and
becomes a problems credit and not others. Therefore, all the facilities granted by
a bank to a borrower will have to be treated as NPA and not the particular facility
or part there of which has become irregular.
b.
serious credit impairment and such assets should be straight away classified as
doubtful or loss asset as appropriate. Erosion in the value of security can be
reckoned as significant when realizable value of the security is less than 50% of
the value assessed by the bank or accepted by the RBI at the time of last
inspection, as the case may be. Such NPAs may be straight away classified under
doubtful category and provisioning should be made as applicable to doubtful
assets.
b.
valuers / RBI is less than 10% of the outstanding in the borrowal accounts, the
existence of security should be ignored and the asset should be straight away
classified as loss asset. It may be either written off or fully provided for by the
bank.
receipt for NPA accounts. For performing assets, income can be recognized on
the basis of receipts, accrual or both. Due to the implementation of the prudential
norms accrual concept has been changed into recoverability concept in
recognizing in the income on NPA.
Provisioning
There is time lag between an account becoming doubtful for recovery, the
realization of security and erosion over a period of time in its value. So RBI
directive now requires the banks to make provisions in their balance sheet for all
non-standard loss assets.
The entire assets should be written off if the assets are permitting to remain
in the books for any reason, 100% of the outstanding should be provided for.
Doubtful assets:
a. 100 percent of the extend to which the advance is not covered by realizable
value of the security to which the banks has a valid recourse and the realizable
value is estimated on a realistic basis.
b. In regard to the secured portion, provision may be made on the following basis,
at the rate ranging from 20% to 50% of the secured portion depending upon the
period for which the asset has remained doubtful.
Table 3.1
Period for which the advance has been considered as doubtful and provision
requirement (%) for each period.
Period for which the
advance has been
considered as doubtful
c.
20
1- 3 Year
30
50
doubtful assets effective from March 31st 2001 has to be made in phases as under.
the reduction in the transition period from sub standard to doubtful assets from 18
to 12 months over a four year period commencing from the year ending March
31st 2005, with a minimum of 20% each year.
Sub standard assets
A general provision of 10% on total outstanding should be made without
making any allowance for DICGC / ECGC guarantee cover and securities
available.
Standard assets
a.
From the year ending 31-03-2000, the banks should make a general
b.
The provisions on standard assets should not be reckoned for arriving at net
NPAs.
c.
The provision towards standard assets need not be netted from gross
For finding the secured portion only the tangible security (both primary and
collateral) is considered.
b.
to the uncollected INTEREST account. This amount has to be reduced from the
outstanding amount.
DICGC/ECGC cover available cannot be reduced in the case of advances
classified as sub standard before applying 10% provision.
accounting standards that still continued with Indian Banks up to the Nineties and
opaque Balance sheets.
In a dynamic world, it is true that new ideas and new concepts that emerge
through such changes caused by social evolution bring beneficial effects, but only
after levying a heavy initial toll. The process of quickly integrating new
innovations in the existing set-up leads to an immediate disorder and unsettled
conditions. People are not accustomed to the new models. These new formations
take time to configure, and work smoothly. The old is cast away and the new is
found difficult to adjust. Marginal and sub-marginal operators are swept away by
these convulsions. Banks being sensitive institutions entrenched deeply in
traditional beliefs and conventions were unable to adjust themselves to the
changes. They suffered easy victims to this upheaval in the initial phase.
Consequently banks underwent this transition-syndrome and languished
under distress and banking crises surfaced in quick succession one following the
other in many countries. Elaborating a cross-country description of this
phenomenon a study by FICCI depicts as under:
"Since the mid-eighties, banking crises have come to the forefront of economic
analysis. Situations of banking distress have quickly intensified and in the
process, have become one of the main obstacles to stability to the financial
system. According to Lindgren et.al. (1996), 73 per cent of the member countries
of the International Monetary Fund's (IMF) experienced at least one bout of
significant banking sector problems from 1980 to 1996. More importantly, such
crises have resulted in severe bank losses or public sector resolution costs. As
Caprio and Klingebiel (1996) observe, such costs amounted to 10 per cent or
more of GDP in at least a dozen developing country episodes during the past 15
years. Recent studies by Honohan (1996) provide the estimated resolution costs of
banking crises in developing and transition economies since 1980 are pegged at
US $ 250 billion reinforce this view."
But when the banking industry in the global sphere came out of this
metamorphosis to re-adjust to the new order, they emerged revitalized and as more
vibrant and robust units. Deregulation in developed capitalist countries particularly
in Europe, witnessed a remarkable innovative growth in the banking industry,
global economy. Many are still languishing unable to get released from the old
set-up, while a few progressive corporate are making a niche for themselves in the
global context.
During this decade the reforms have covered almost every segment of the
financial sector. In particular, it is the banking sector, which experienced major
reforms. The reforms have taken the Indian banking sector far away from the days
of nationalization. Increase in the number of banks due to the entry of new private
and foreign banks; increase in the transparency of the banks' balance sheets
through the introduction of prudential norms and norms of disclosure; increase in
the role of the market forces due to the deregulated interest rates, together with
rapid computerisation and application of the benefits of information technology to
banking operations have all significantly affected the operational environment of
the Indian banking sector.
As banking in the country was deregulated and international standards came
to be accepted and applied, banks had to unlearn their traditional operational
methods of directed credit, directed investments and fixed interest rates, all of
which had led to deterioration in the quality of loan portfolios, inadequacy of
capital and the erosion of profitability. Banks have now an entirely different
environment under which to operate, to innovate and thrive in a highly
competitive market and their success depended on their ability to act and adopt to
market changes. These called for new strategies, different from those that related
to regulated banking in a captive environment
In the background of these complex changes when the problem of NPA was
belatedly recognised for the first time at its peak velocity during 1992-93, there
was resultant chaos and confusion. As the problem in large magnitude erupted
suddenly banks were unable to analyze and make a realistic or complete
assessment of the surmounting situation. It was not realised that the root of the
problem of NPA was centered elsewhere in multiple layers, as much outside the
banking system, more particularly in the transient economy of the country, as
within. Banking is not a compartmentalized and isolated sector delinked from the
rest of the economy. As has happened elsewhere in the world, a distressed national
economy shifts a part of its negative results to the banking industry. In short,
banks are made ultimately to finance the losses incurred by constituent industries
and businesses. The unprepared ness and structural weakness of our banking
system to act to the emerging scenario and de-risk itself to the challenges thrown
by the new order, trying to switch over to globalisation were only aggravating the
crisis. Partial perceptions and hasty judgments led to a policy of ad-hoc-ism,
which characterized the approach of the authorities during
the last two-decades towards finding solutions to banking ailments and
dismantling recovery impediments. Continuous concern was expressed. Repeated
correctional efforts were executed, but positive results were evading. The problem
was defying a solution.
But why? The threat of NPA was being surveyed and summarized by RBI
and Government of India from a remote perception looking at a bird's-eye-view
on the banking industry as a whole delinked from the rest of the economy. A bird's
eye view is distinct, extensive and even sharp, but it is limited to the view
appearing at the surface or top-layer. It is a not an exhaustive or in-depth view.
Restricted merely as a top-layer view it is partial and is not even a top-to-bottom
view, where a bottom-to-top-view alone can enlighten the correct contributing
factors. Flying at a great height the bird can of-course survey a wide area, but it
perceives only a telescopic view of the roof- top and not the contents that exist
inside the several structures. A simple look at the whole provides summarised
perception. But it is not a homogeneous whole that is being perceived. RBI looks
at the banking industry's average on a macro basis, consolidating and tabulating
the data submitted by different institutions. It has collected extensive statistics
about NPA in different financial sectors like commercial banks, financial
institutions, RRBs, urban cooperatives, NBFC etc. But still it is a distant view of
one outside the system and not the felt view of a suffering participant. Individual
banks inherit different cultures and they finance diverse sectors of the economy
that do not possess identical attributes. There are distinct diversities as among the
29 public sector banks themselves, between different geographical regions and
between different types of customers using bank credit. There are three weak
nationalised banks that have been identified. But there are also correspondingly
two better performing banks like Corporation and OBC. There are also banks that
have successfully contained NPA and brought it to single digit like Syndicate
(Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not so
unproductive and these represent the real physical NPA, which indirectly are
reflected in the financial statements of nationalised banks, as the ultimate
financiers of these assets. In the final analysis it represents instability in industry.
NPA represents the owes of the credit recipients, in turn transferred and parked
with the banks. What is the effect of the dismal situation on the psychology of
entrepreneurs intending fresh entry to business and industry?
Recognizing NPA as a sore throat of the Indian economy, the field level
participants should first address themselves to find the solution. Why not
representatives of industries and commerce and that of the Indian Banks'
Association come together and candidly analyze and find an everlasting solution
heralding the real spirit of deregulation and decentalisation of management in
banking sector, and accepting self-discipline and self-reliance? What are the
deficiencies in credit delivery that leads to its misuse, abuse or loss? How to
check misuse and abuse at source? How to deal with erring Corporate? In short,
the functional staff of the Bank along with the representatives of business and
industry have to accept a candid introspection and arrive at a code of discipline in
any final solution. And preventive action to be successful should start from the
credit-recipient level and then extend to the bankers. RBI and Government of
India can positively facilitate the process by providing enabling measures. Do not
try to set right industry and banks, but help industry and banks to set right
themselves. The new tool of deregulated approach has to be accepted in solving
NPA.
sector and 6 private sector banks) where the recovery was as low as 4.3 per cent
and significant portion of suits have been pending for more than a decade.
The efficiency of our legal system can also assessed by the value of cases
pending in the courts of law representing about Rs. 21,825 crores. In order to
expedite disposal of high value claims of banks Debt Recovery Tribunals (DRTs)
were set up. The performance of ten DRTS currently working may also not be
considered satisfactory. Out of Rs. 8.900 crores transferred to DRTs by March
1997, only a sum of Rs. 178 crores has been recovered.
3.3.2.Political interference
The Indian banking system has been extensively misused for political
reasons in the past. A large part of their bad debts are a legacy of this misuse.
The NPAs in priority sector advances of public sector banks are 46 to 49 per cent
of their overall NPAs while priority sector advances from only 30 to 32 per cent of
them total advances.
lethargy. These banks enjoy a competitive edge in providing services, which are
competitively priced and have better quality, wider range of products and
specialized services. They are technology drive and have locational advantages.
The large branch network of Indian public sector banks serves as a nonregulatory barrier to competition. It is found that after the entry of new private
sector banks in India the market share of foreign banks in the market for deposits
suffered. This was because the new entrants were primarily competing with these
banks. In this context the recent trends in the NPA profile of the players is
interesting. The following Table shows that in the past three years the NPAs of
the public sector banks have been falling while those of private and foreign banks
have been rising. It appears that intense competition in a small segment of the
market is pushing private and foreign banks to take excessive risk.
3.3.4.. Inadequate Risk Management Practices
The banks are now exposed to a much greater degree of risk primarily
arising out of the potential loss on an asset or a portfolio. For this the banks have
to develop skills to identify assess and minimize the risks and enhance the returns.
If there is a mismatch between assets and liabilities the banks may be exposed to
interest rate risk, liquidity risk and foreign exchange risk, credit risk and price
risk. Narasimham Committee II has also addressed this issue bringing into focus
the dangers to liquidity and solvency due to mismatches.
A good risk
Information
networking among banks can further improve their risk management abilities.
3.3.5. Lack of prudential Norms
Risk management practices can be effective only when financial statements
present accurate picture of the level of risk. The income recognition norms being
followed by banks prior to 1992-93 involved recognition of income earned on bad
debts in their books on accrual basis. Thus these financial statements did not
reflect the level of bad debts and presented a misleading rosy picture of their
health.
detected.
Besides the above there are several factors related to the borrower, which
adversely affect their repayment. These include:
Technological changes
Power shortage
Business failures
Inefficient management
Industrial recession
Price escalation
Natural calamities
competitive money and capital Markets, inability to offer competitive market rates
adds to the disadvantage of marketing and building new business.
In the face of the deregulated banking industry, an ideal competitive working
is reached, when the banks are able to earn adequate amount of non-interest
income to cover their entire operating expenses i.e. a positive burden. In that event
the spread factor i.e. the difference between the gross interest income and interest
cost will constitute its operating profits. Theoretically even if the bank keeps 0%
spread, it will still break even in terms of operating profit and not return an
operating loss. The net profit is the amount of the operating profit minus the
amount of provisions to be made including for taxation. On account of the burden
of heavy NPA, many nationalised banks have little option and they are unable to
lower lending rates competitively, as a wider spread is necessitated to cover cost
of NPA in the face of lower income from off balance sheet business yielding noninterest income.
It is worthwhile to compare the aggregate figures of the 19 Nationalised
banks for the year ended March 2001, as published by RBI in its Report on trends
and progress of banking in India.
Table 3.2
Nationalised banks operational
statistics.. (Amount in
Crores) Performance indicator
Earnings - Non-interest
Operating expenses
Difference
Earnings - interest income
Exp.-Interest expenses
Interest spread
Intt. On Recap bonds
Operating Profit
Provisions
Net Profit
Year ended
Year ended
Mar. 2000
Mar. 2001
6662.42
14251.87
- 7589.45
50234.01
35477.41
14756.60
1797.88
5405.27
4766.15
639.12
7159.41
17283.55
- 10124.14
56967.11
38789.64
18177.47
1795.48
6257.85
5958.24
299.61
capital adequacy under a bail out package. The statistics above show the other
weaknesses of the nationalised banks in addition to the heavy burden they have to
bear for servicing NPA by way of provisioning and holding cost as under:
1. Their operating expenses are higher due to surplus manpower employed.
Wage costs to total assets is much higher to PSBs compared to new private banks
or foreign banks.
2. Their earnings from sources other than interest income are meagre. This is
due to failure to develop off balance sheet business through innovative banking
products.
3.4.2 How NPA Affects the Liquidity of the Nationalised Banks?
Though nationalised banks (except Indian Bank) are able to meet norms of
Capital Adequacy, as per RBI guidelines, the fact that their net NPA in the average
is as much as 7% is a potential threat for them. RBI has indicated the ideal
position as Zero percent Net NPA. Even granting 3% net NPA within limits of
tolerance the nationalised banks are holding an uncomfortable burden at 7.1% as
at March 2001. They have not been able to build additional capital needed for
business expansion through internal generations or by tapping the equity market,
but have resorted to II-Tier capital in the debt market or looking to recapitalization
by Government of India.
3.4.3 How NPA Affects the Outlook of Bankers towards Credit Delivery
The fear of NPA permeates the psychology of bank managers in the PSBs in
entertaining new projects for credit expansion. In the world of banking the
concepts of business and risks are inseparable. Business is an exercise of
balancing between risk and reward. Accept justifiable risks and implement derisking steps. Without accepting risk, there can be no reward. The psychology of
the banks today is to insulate themselves with zero percent risk and turn lukewarm
to fresh credit. This has affected adversely credit growth compared to growth of
deposits, resulting a low C/D Ratio around 50 to 54% for the industry.
The fear psychosis also leads to excessive security-consciousness in the
approach towards lending to the small and medium sized credit customers. There
is insistence on provision of collateral security, sometimes up to 200% value of
the advance, and consequently due to a feeling of assumed protection on account
of holding adequate security (albeit over-confidence), a tendency towards laxity in
the standards of credit appraisal comes to the fore. It is well known that the
existence of collateral security at best may convert the credit extended to
productive sectors into an investment against real estate, but will not prevent the
account turning into NPA. Further blocked assets and real estate represent the
most illiquid security and NPA in such advances has the tendency to persist for a
long duration.
Nationalised banks have reached a dead-end of the tunnel and their future
prosperity depends on an urgent solution of this hovering threat.
lakhs and above. The public sector banks had recovered Rs.40.38 crore as on
September 30, 2001, through the forum of Lok Adalat. The progress through this
channel is expected to pick up in the coming years particularly looking at the
recent initiatives taken by some of the public sector banks and DRTs in Mumbai.
For more details about Lok Adalats please refer to page Lok Adalat
3.5.3. Debt Recovery Tribunals
The Recovery of Debts due to Banks and Financial Institutions (amendment)
Act, passed in March 2000 has helped in strengthening the functioning of DRTs.
Provisions for placement of more than one Recovery Officer, power to attach
defendants property/assets before judgment, penal provisions for disobedience of
Tribunals order or for breach of any terms of the order and appointment of
receiver with powers of realization, management, protection and preservation of
property are expected to provide necessary teeth to the DRTs and speed up the
recovery of NPAs in the times to come.
Though there are 22 DRTs set up at major centers in the country with
Appellate Tribunals located in five centers viz. Allahabad, Mumbai, Delhi,
Calcutta and Chennai, they could decide only 9814 cases for Rs.6264.71 crore
pertaining to public sector banks since inception of DRT mechanism and till
September 30, 2001.The amount recovered in respect of these cases amounted to
only Rs.1864.30 crore.
Looking at the huge task on hand with as many as 33049 cases involving
Rs.42988.84 crore pending before them as on September 30, 2001, I would like
the banks to institute appropriate documentation system and render all possible
assistance to the DRTs for speeding up decisions and recovery of some of the well
collateralized NPAs involving large amounts. I may add that familiarization
programmes have been offered in NIBM at periodical intervals to the presiding
officers of DRTs in understanding the complexities of documentation and
operational features and other legalities applicable of Indian banking system. RBI
on its part has suggested to the Government to consider enactment of appropriate
penal provisions against obstruction by borrowers in possession of attached
properties by DRT receivers, and notify borrowers who default to honour the
decrees passed against them.
3.5.4.Circulation of information on defaulters
The RBI has put in place a system for periodical circulation of details of
willful defaults of borrowers of banks and financial institutions. This serves as a
caution list while considering requests for new or additional credit limits from
defaulting borrowing units and also from the directors /proprietors / partners of
these entities. RBI also publishes a list of borrowers (with outstanding aggregating
Rs. 1 crore and above) against whom suits have been filed by banks and FIs for
recovery of their funds, as on 31st March every year. It is our experience that
these measures had not contributed to any perceptible recoveries from the
defaulting entities. However, they serve as negative basket of steps shutting off
fresh loans to these defaulters. I strongly believe that a real breakthrough can
come only if there is a change in the repayment psyche of the Indian borrowers.
3.5.5. Recovery action against large NPAs
After a review of pendency in regard to NPAs by the Honble Finance
Minister, RBI had advised the public sector banks to examine all cases of willful
default of Rs 1 crore and above and file suits in such cases, and file criminal cases
in regard to willful defaults. Board of Directors are required to review NPA
accounts of Rs.1 crore and above with special reference to fixing of staff
accountability.
On their part RBI and the Government are contemplating several supporting
measures including legal reforms, some of them I would like to highlight.
3.5.6.Asset Reconstruction Company:
An Asset Reconstruction Company with an authorized capital of Rs.2000
crore and initial paid up capital Rs.1400 crore is to be set up as a trust for
undertaking activities relating to asset reconstruction. It would negotiate with
banks and financial institutions for acquiring distressed assets and develop
markets for such assets.. Government of India proposes to go in for legal reforms
to facilitate the functioning of ARC mechanism
3.5.6. Legal Reforms
The Honorable Finance Minister in his recent budget speech has already
announced the proposal for a comprehensive legislation on asset foreclosure and
Securitization. Since enacted by way of Ordinance in June 2002 and passed by
Parliament as an Act in December 2002.
3.5.7.Corporate Debt Restructuring (CDR)
assets, the problem has persisted and in fact it has aggravated. Incidentally, the
figure of Rs. 83 crore mentioned by Finance Minister pertains to NPA given out
by the bank and financial institutions. There is reason to believe that the actual
NPA are much higher than this official figure. Audit and Consulting firms such as
Ernest and Young put real NPAs at 1,30,000-1,50,000 crore.
Evidently, there seems to be a belated realization that the Indian financial
Sector is heading towards a major crisis because of mounting bad loans and the
inability of the lenders to recover them under the existing legal frame work.
The Government had to inject a massive Rs. 20,446 crore towards
recapitalization of public sector banks till end March 1999 to help them fulfill the
new capital adequacy norms. Again in 2000-2001, a bailout package of Rs. 2,550
crore was worked out for 3 weak public sector banks Indian bank, UCO Bank
and United Bank of India. This was against the Verma Pannel recommendation to
inject Rs. 5,000 crore in these banks. In 1999 to 2000-01, the Government had
allowed 27 Public Sector Banks to write off corporate loans worth Rs. 8,246 crore
to reduce the level of bad debts.
The health of Financial Institutions is more worrisome with their declared
NPAs amounting to nearly Rs. 20,000 Crore. In addition, they are also stock with
a huge liability of Rs. 6,200 crore in the ill-conceived Enron project.
The
Government had to worked out huge bailout packages for the Unit Trust of India
and the Industrial Financial Corporation of India. The IFCI has been kept alive by
huge infusion of funds by the Government. Last year, the Government provided
Rs. 400 crore for its survival. Now, within 12 months, it is set to provide it with a
guarantee of Rs. 1,500 crore on its borrowings.
The IFCIs liabilities this year add upto Rs. 4500 crore with another Rs.
5000 crore debt maturing next year. The institution has a liquidity gap of Rs.
7100 crore over a 3-year period till 2002-2004.
The consulting firm, McKinsey and Co. has recommended a capital infusion
of upto 8800 crore for IFCI. It is against this backdrop that some financial experts
have recommended the winding up of the IFCI.
The Industrial Development Bank of Indias NPAs are also an unsustainable
19% and its profitability has come down drastically over the past 2 years because
of higher provisioning for bad debts over Rs. 5500 crore. It may also need a
bailout soon.
The downfall of the once strong and powerful UTI is well known. The
second bailout package for the UTI will cost the Government Rs. 5,000 crore.
Moreover, the Finance Ministry is still struggling to work out the modalities of
bridging the gap estimated at over 10000 crore, between the promised return and
actual earnings in UTIs various assured return schemes. The real hurdle facing
the lenders in recovering their dues all these years has been the extend legal
framework governing the operations of the public financial institution and banks.
The rules of the game are severely tilted against lenders who find it extremely
difficult to enforce the contracts signed with the borrowers. To make matters
worse, the institutional set up created by the government to the revival of the socalled Potentially viable sick unit has made the task of loan recovery even more
difficult.
The Sick Industrial Companies Act and the Board for Industrial and
Financial Reconstructions have played a notorious role in providing an easy
shelter to defaulters rather than in reviving the sick units.
Loans turn bad because of the incidents of industrial sickness. While some
instances of industrial sickness are no doubt because of unforeseen changes in
business environment and beyond the control of the managements, in most cases
bad management and poor standards of corporate governance are to blame. This
is well documented by a number of studies, including those by the RBI.
While the reasons for sickness are well known, there seems to be a total lack
of professional approach in tackling the problem. There have been a number of
instances where even when an Industrial group bleeds a company to sickness by
diverting funds and indulging the other malpractices, its other constituent unit to
continue to receive funds from Financial Intuitions and banks.
The Omkar
the borrower. All that is required is that creditors accounting for 75% or more of
the secured lending should agree to initiate recovery proceedings.
While the borrowers are allowed to seek protection from secured creditors
by filing an appeal to debt recovery tribunal, they will also be required to deposit
75% of the amount claimed by the creditors in order to prevent misuse of appeal
provisions. The Debt Recovery Tribunal can, at its discretion; reduce the deposit
amount, but only after recording its reason for doing so.
The ordinance also provides for the setting up of Asset Reconstruction
Companies (ARCs) to be regulated by the RBI. The ARC can issue Security
Receipt (SRs) that will be tradable instrument that the lenders can sell at market
determined prices.
To begin with it is proposed to set up the Asset Reconstruction Company of
India Ltd. (ARCIL) with 51% shareholding by private bank and the rest by the
State Bank of India and IDBI. The ARCIL will act as a catalyst to bring together
creditors accounting for the minimum 75% of secured lending and to take the lead
in the recovery process.
As expected, industry associations and chambers such as CII and the FICCI
have been quick to protest against the provisions of the ordinance, which they call
draconian. Their main objection is that it does not make any distinction between
willful and genuine defaulters.
They have expressed a fear that the provisions could make bankers trigger
happy in seizing the assets of the defaulters.
There fear is clearly misplaced. Banks and financial institutions do
reschedule loans when they are conceived that there is great chance for a
defaulting company to service and payback its loans.
The demand to make a distinction between willful and genuine default make
no sense. In any case, the banks and financial institutions do fear the normal risk
of lending and are prepared for certain permissible percentage of loans turning
into NPAs.
Quite a few financial institution and banks have already initiated measures
to recover their dues from chronic defaulters. ICICI bank, IDBI and IFCI, for
instance, have sent notices to 22 companies, which collectively owe them Rs.
1,200 crore. In addition, IDBI has issued notices to 17 borrowers for an amount
aggregating Rs. 1,640 crore. The State Bank of India has issued notices to about
70 defaulters while others are also in the process of doing so.
According to banking sources, initially the banks and FIs would target only
units defaulting willfully as selling off of assets of going concerns will not be
difficult.
They feel that once the asset reconstruction companies get established,
seizing agencies and turnaround specialists come into being and receivers and
liquidators tone up their act, banks and Fls would be in a position to make use of
the legislation on a much bigger scale.
The big question now is: To what extent the new legislation would help in
recovering the loot? Not much, unless the banks and financial institutions make
a conscious and serious effort to change their work culture and strengthen the
regulatory framework and standards of governance. For the present state of
affairs, the Fls, and banks are equally responsible.
The standards of professional competence and governance in these
institutions are far from satisfactory. There are no proper project appraisals at the
time of granting loans, political interference and corruption are rampant, and
papering over bad loans and granting of fresh advances to defaulters is a rule
rather than an exception.
The second prerequisite for success in significantly bringing down the NPAs
with the help of new provisions would be the redesigning of the entire financial
sector matrix.
There is an urgent need to create an array of liquidators, receivers, seizing and
securitizing agencies, legal experts and industry specialists.
At present, the banks and FIs do not have the requisite expertise for taking
over the assets or managements of the defaulters or to liquidate the assets of the
defaulting companies.
It needs to be ensured that the lenders are not stuck with the assets taken
over. The accent should be on quick liquidation of the seized assets and
realization of dues within a reasonable time frame.
an outside agency, the problem could be largely resolved. These and similar
opinions are held by knowledgeable persons both in banking system and outside
it. But then, these contain untruth and half-truth, as discussed below.
It is a fact that the problem of bad loans is plaguing the banking system for
quite some time. The quantum of bad loans, called in elegantly as non-performing
assets is a fairly high proportion of total loans. The percentage of net NPA to nonadvances of scheduled commercial banks in India was 6.2 percent on March 31 st
2001, according to the Reserve Bank of India report, on trends and progress of
banking in India. The relative level in the US would be less than 2%. Given the
fact that the total capital and reserves of SCBs were around 5.23% of total assets,
one might jump to the conclusion that NPA was more than capital and reserves.
But, the net NPA amounting Rs. 32,468 crore represent less than half of capital
resources at Rs. 67,741.47 crore. This is because a good chunk of the assets of
banks comprises investment in Government securities which is fully realizable
and risk free. Further, all NPAs are not irrecoverable and banks do have some
securities to back up the NPAs. Therefore, it is clear that the Indian banking
system is basically safe; well, some banks are reportedly more adventurous than
others, like a south based private bank that was in the headlines recently.
In any comparison between Indian and China, except perhaps in the area of
democracy, China comes out on top.
performance; in the level of discipline among the populace and adherence to law,
China should rank better. Therefore, banks in China would, one might presume,
be healthier than Indian banks. Facts portray a contrary picture. As per the
banker magazine (A sister publication of financial times of U.K), the level of NPA
to total assets I the two biggest banks in China, commercial bank of China and
bank of China were 25.01 % and 28.8% respectively in 200. As against this, NPAs
of Indian banks were 2.5% of total assets (Not advances) as on March 31 st 2001.
Banks in India are thus in a much better state of health than their counter parts in
China.
In some respects, the problem of NPA in public sector banks is more acute
than private banks, but the picture is somewhat blurred. The NPA was 6.7% of
advances for public bank sector against 5.4% for private sector banks and 2.2
percent for foreign banks in 2001. However, for the older private sector banks,
that are other than those that started in the 1990s, the NPA was 7.3%, which is
higher than public sector banks. These are average figures. Looking at figures of
individual banks, some of the private and foreign banks reflect a pathetic figure as
compared to the public sector. The highest level in public sector bank was in
Dena Bank (18.29%) and four others have higher than 10%. The highest figure
among all banks was a foreign banks, Bank International Indonesia at 50.75% and
four other foreign banks have more than 20%.
The belief that, by separating the hard core NPA and selling them to a
recovery agency, the problem of NPA could be resolved has caught the
imagination of many seasoned veterans in Banking. Many expert committees
have recommended the setting up of Asset Reconstruction Company or Fund
(ARC or ARF) on the lines of the model tried out in the US and other country. It
is debatable if ARC would be a useful tool under Indian conditions.
The borrowers of the banking system could be broadly classified into
business and industrial concerns and households and individuals. Households and
individuals, including agricultural sector, contribute to around 26% of total
advances, excluding loans to food procurement agencies.
In these cases, the ARF would not be of any help as banks do succeed in
enforcing their rights against recalcitrant borrowers to a considerable extent or
recover by reducing the dues by mutual agreement.
The first Narasimham Committee which brought about revolutionary
changes in the banking and financial system in 1991 suggested the formation of
ARF to facilitate recovery of dues from clients in respect of whom banks and
financial institutions have already taken a decision to recall the loan and proceed
with the enforcement of security.
It was also stressed that ARF should focus on large borrowers. The total
number of suit filed against borrowers enjoying advances of Rs. 1 crore and above
from the banking system was 5013 aggregating Rs. 27988.59 crore as on March
31st 2000, according to the RBI publication. These suits are pending in various
courts to cope with the enormous number of cases before them; one estimate puts
these at a few crore cases. It is extremely doubtful if a separate ARF can expedite
matters.
In any case, these would have already been fully written of in the banks
books and the cases would be handled to the law departments of various banks.
The ARF would only act as the extended legal arm of banks; it would certainly be
inappropriate to buy these dues from banks, as the recovery would take years.
ARF or ARC might be helpful in cases of commercial borrowers who
default in payment of their dues, where banks have not written them off. In such
cases, if the borrowers are industrial companies, the cases would come under a
separate agency, Board for Industrial and Financial Reconstruction (BIFR), whose
first objective, as the name implies, is to see if the company can be rehabilitated.
This, it has become evident over the last few years, has created a problem of
morel hazard; the owners and managers, who were largely responsible for
making the company sick, are given fresh money for them to take further gambles
with others funds. In cases where fresh funds are required, obviously an ARF,
which cannot lend, is not the solution. The government has decaled that BIFR
would be closed and a more expeditious legal structure set up. But this could take
some time.
The main handicap under which banks suffer in recovering their dues is the
legal frame work, which some feel, is debtor friendly. Many defaulting borrowers
know that banks cannot force them to repay quickly, even if banks have security,
due to the long time taken in courts to enforce the security. To alleviate the
problems of banks, Debt Recovery Tribunals were set up for speedy enforcement
of law against defaulting borrowers, whose dues exceed Rs. 10 lakh. There are
loans given to state and central public sector units, which have failed to repay.
The operations of Debt Recovery Tribunals are such that they have not so far
made a dent in the NPA position of banks.
While on the subject, it is worth recording that even where advance is
guaranteed by central or state governments and the primary borrower is unable to
repay the guaranteeing government rarely, if ever, owners its legal obligations as
guarantor, because the bureaucrats want to ensure that the government does not
face a loss or the loss is largely reduced. The fact of the governments failing to
honor financial obligations gives rise to a curious phenomenon. A guarantor
would fail to pay, if he is either unwilling or unable to pay. The existence of bad
loans is due to many causes, such as faulty initial scrutiny by banks, defective
follow up of loans, economic slow down cheating by borrowers and the like; is
causes require a separate study for the present discussion, the RBI report sums up
succinctly at the policy level, there is need for legislation which will make
recovery process smoother and legal action quicker.
Creation of ARF or even Debt Recovery Tribunals appears to the mere
palliatives for chronic illness that has so far defied solution. So long as borrowers
know that the long arm of law would take years, perhaps decades, to bring them to
books, banks would be sufferers and uninformed public would tend to blame the
banks for problems over which banks have little control.
CHAPTER IV
b.
The Imperial Bank of India was nationalized and renamed as the State Bank
of India in 1995.
b.
banks of the SBI which are now called the associate banks of the SBI
c.
Regional Rural banks were established in 1974, which are 196 in number at
present.
Modern banks in India are joined stock banks. They are registered under the
Indian companies Act. They are classified by the RBI into two categories:Scheduled and non scheduled.
Scheduled banks are those banks, which are included in the second schedule
of the RBI Act, 1934 and have a paid up capital and reserves not less than Rs. 5
lakhs. The operations of these banks are controlled and regulated by the Reserve
bank.
A well-developed banking system is a necessary pre-condition for economic
development in a modern economy. Besides providing financial resources for the
growth of industrialization, banks can also influence the direction in which these
resources are to be utilized. Banks play an important role in the development of
country. It is the growth of commercial banking in the 18 th and 19th centuries
that facilitated the occurrence of industrial revolution in Europe.
Commercial banks contribute to a countrys economic development in the
following ways.
a.
Capital formulation
b.
c.
Monetization of economy
d.
e.
f.
g.
h.
Regional development
i.
2001-2002. In absolute terms, the quantum of incremental gross NPAs was Rs.
7,164 crore in 2001-2002 as compared with Rs. 3332
crore in 2000-2001.
Among banks groups, there was decline in incremental gross NPAs for the state
bank groups and foreign banks. New private sector banks, incremental gross
NPAs recorded a large increase from Rs. 671 crore in 2000 2001 to Rs. 5205
crore in 2001-2002 reflecting the addition on account of the merger. Incremental
net NPAs of commercial scheduled banks, over the same period increased from
Rs. 2,389 crore to Rs. 3,084 crore which was also largely due to substantial
increase in incremental net NPAs of new private banks (Table 4.4). As percent of
incremental net advances, incremental net NPAs of scheduled commercial banks
declined from 2.9% in 2000-2001 to 2.6% in 2001-2002.
As percent to
CHAPTER V
A PROFILE
5.1.VISION
"A Customer-centric organization, with a strong national network,
leveraging its network in Kerala, capable of delivering multiple financial
products in a cost-effective manner, using state of the art technology,
engaging a pool of skilled personnel, and ensuring reasonable value addition
to
the
shareholders
and
other
stakeholders"
business
and
profits.
Even though started by traditional businessmen, the bank has achieved substantial
sophistication in the various banking services provided. Of the 153 branches, All
branches are classified as NRI branches, All branches are computerized and in the
process of implementing Wide Area Network, ATM's, Any Branch Banking and
Shri. Muthuswamy B.
Executive Director
Shri. V. K. Sarma
Shri. K.A.Menon
Shri. K. Govindan
General Manager
(Retd)
Prof. V. J. Pappoo
Shri. James Pothen (RBI)
Shri. P. M . Saseendranath(RBI)
Assistant General Managers
Shri.M.P.S.Sarma
Shri.H.L.Sitaraman
Shri.A.RamMohan
Shri.P.G.Jayakumar
Shri.P.S.Revikumar
Shri.P.T.Thomas
Shri.R.Krishnan
Shri.A.K.Ramalingam
Shri.M.Vijayakumar
Shri.K.K.Ranganathan
Shri.P.R.Narayanan
Shri.P.K.Ganapathy
Shri.RavindranK.Warrier
(Company Secretary
BUSINESS OPERATIONS
RETAIL
OTHER SERVICES
Deposit Products
RBI Bonds
Credit Products
Interest Rates
Depository Service
Agriculture Products
Insurance Services
Relationship Banking
NRI Services
CORPORATE
Cash Management Services
Credit Products
Corporate Salary
Interest/Dividend/Warrant
Table 5.1
Amount
in
Crores
Year
Deposits of
the bank
(Rs)
Increase /
Decrease over
the previous
years figure
% Increase /
decrease over
the previous
years figure
1996-97
840.58
---
---
1997-98
915.96
151.34
+18.0
1998-99
1138.67
222.71
24.3
135.46
1999-00
1296.31
157.64
13.8
154.22
2000-01
1477.87
181.56
14.0
175.82
2001-02
1639.54
161.67
10.9
195.05
Index with
year 1996-97
as base year
100.00
108.97
The aggregate deposits of the bank has increased from 840.58 crore to 1639.543
crores during the period 1996-97 to 2001-02. On analyzing the trend of such
increase in the deposits over the period we can clearly see that it is increasing at a
decreasing rate. The modest growth especially during the last three years is mainly
due to a conscious decision on to shed the highest cost deposits, more particularly
from institutions. With focus on bringing down the cost of deposit, field function
areas have been constantly exhorted to step up the share of low cost of deposit.
Table 5.2
Amount in Crores
Year
Advance of
the Bank
(Rs)
Increase /
Decrease over
the previous
years figure
% Increase /
decrease over
the previous
years figure
Index with
year 1992-93
as base year
1992-93
110.6
---
---
100.00
1993-94
163.26
53.0
48.16
148.34
1994-95
285.89
122.63
75.11
259.76
1995-96
448.59
162.70
56.91
407.87
1996-97
562.41
114.00
25.37
512.07
1997-98
576.06
13.65
2.40
523.41
1998-99
605.23
29.17
5.10
549.91
1999-00
776.31
171.08
28.6
705.35
2000-01
965.22
188.91
24.0
876.99
2001-02
993.51
28.29
2.90
902.70
The aggregate advances of the bank has increased from 110.06 crores to 993.51
crores during the period 1992-93 to 2001-02.The credit appraisal system was fine
tuned and effective system was put to place to ensure the quality of asset. A tenor
linked prime lending rate was introduced during the year 2001 to give a boost to
short term lending. Exposure to various sectors is strictly maintained within the
stipulated ceiling. The system and procedures were streamlined to incipient
irregularities in the asset step without delay. A substantial positive change in credit
dispensation and monitoring was initiated through a visited credit policy. Which
primarily aim at segmentation of the retail and corporate portfolios for improved
thrust in both these areas.
Table 5.3
Year
previous year
1997-98
10.28
---
1998-99
10.35
0.07
1999-00
9.49
(-0.86)
2000-01
8.92
(-0.57)
2001-02
8.53
(-0.39)
The cost of deposit of Dhanalakshmi Bank shown a constant decrease during the
period 1998-99 to 2001-02 except for the year 1998-99 in which there was a slight
increase of .07%.
On analyzing the trend of decrease in the cost of deposit we can see that it is
decreasing at decreasing rate. Such a decreasing trend in the cost of deposit,
achieving by systematic branch wise monitoring. Also shift in deposit portfolio of
the bank from high cost deposit to low cost deposit also has contributed to the
efforts.
Table 5.4
Amount in crores
Year
Increase /
Net Profit of Decrease over
the Bank
the previous
years figure
% Increase /
decrease over
the previous
years figure
Index with
year 94-95 as
base year
1994-95
442
---
---
100.00
1995-96
472
30
6.78
106.78
1996-97
791
319
67.6
178.96
1997-98
840
49
6.2
190.05
1998-99
387
-453
54.2
87.56
1999-00
1128
741
191.5
255.20
2000-01
677
-451
39.9
153.20
2001-02
1007
330
48.7
277.83
The profitability of the bank has increased from 4.42 crores to 10.07 crores
during the period 1995-96 to 2001-02.this increase was not steady. The banks
profitability was severely affected during the years 1998-99 and 2000-01.One of
the reasons was the continuous fall in the interest and the adverse market
conditions due to which the profit n trading in investment was reduced by 3.18
crores
Voluntary Retirement Scheme (VRS) also added to the burden by an amount
of 2.48 crores. Another major contribution was the impaired loan assets, which
were written off instead of being provided for. The continuous fall in the interest
rate continued even in 2001-02, but the treasury market contributed appreciably to
the profitability.
Table 5.5
Year
Productivity /
Business per
employee
Increase /
Decrease over
the previous
years figure
% Increase /
decrease over
the previous
years figure
Index with
year 1994-95
as base year
1994-95
63.0
---
---
100.00
1995-96
96.6
36.0
54.14
152.38
1996-97
115.00
19.0
19.79
182.54
1997-98
121.00
6.9
3.90
192.06
1998-99
131.17
10.17
8.26
208.21
1999-00
153.66
22.49
17.56
243.90
2000-01
184.28
30.62
19.50
292.51
2001-02
199.24
14.96
5.40
316.25
The staff productivity of the banks has increased from 63 lakhs to 199.24 lakhs
over the period 1994-95 to 2001-02.The bank has recognized that up gradation of
employee skills at all levels is essential to meet competitive challenges.
Accordingly, the Dhanalakshmi banks staff training imparts timely training to the
employees covering areas like forex, credit, non-performing assets management,
priority sector, human resource
marketing etc. The bank is also at times introduce staff welfare measures aimed at
increasing the motivational level of employees with a futuristic vision and to offer
professional service to clients well experienced and qualified youngsters were
recruited both from the market and the campus.
CHAPTER VI
ANALYSIS OF NPAs OF
DHANALAKSHMI BANK LMITED
When these loans taken are not repaid so much of funds has gone out of the
financial system and the cycle of lending-repaying-re lending is broken. The bank
has to repay its depositors and others from whom money has been borrowed. If
the borrowers does not repay, the bank has to borrow additional capital funds to
repay the depositors and creditors. This lead to a situation where bank also
reluctant to lend fresh loans thus chocking the system. Once the credit to the
various sectors of the economy slows down, economy is badly hurt. There will be
slow down in the growth in industrial output and fall in the profit margins of the
corporate and subsequent in the markets.
Year
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Gross NPA
N.A.
N.A.
9635.89
11756.70
13489.00
14586.00
Net NPA
N.A.
N.A.
7531.26
8582.33
10167.00
10955.00
Net Advances
N.A.
N.A.
61080.78
77457.85
89656.08
93953.09
4.51
11.01
12.31
11.08
11.34
11.66
Particular
Advances
Provision
towards NPA
Net profit during
the year
225.00
661.00
629.00
1070.00
3322.00
3631.00
791.00
840.00
387.00
1128.00
677.00
1007.00
Table-6.2
Gross NPA
N.A.
N.A.
9635.89
11756.70
13489.00
14586.00
Net NPA
N.A.
N.A.
7531.26
8582.33
10167.00
10955.00
1996-97
1997-98
1998-99
2000-01
2001-02
Year
Particulars:
1999-00
Chart 6.1
ANALYSIS
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.
INTEPRETATION
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.
Table-6.3
Year
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Net Advances
N.A.
N.A.
61080.78
77457.85
89656.08
93953.09
Particulars:
Chart 6.2
ANALYSIS
The advances of the bank show an upward trend through the period 1998-99 to
2001-02. This can be seen from the data regarding the advances of the bank
during this period. Net advances of the bank increased by 26.8% in the first year,
15.8% in the second year 4.8% in the third year. From this it could be seen that
such increase in net advances is increasing at a decreasing rate over the period
under study.
INTERPRETATION
Non-performing assets being a direct result of advances, it may have resulted
from increase in the net advances. While increasing advances may be necessary for
the survival & progress of the bank itself, it should not mean increased justification
for the higher incidence of non-performing assets. If recovery were good, perhaps,
NPA could have been reduced. In other words, increased NPA can be directly
attributed to non-recovery advances made to borrowers, in time.
Table-6.4
Year
Particular
1996-97
1997-98
1998-99
4.51
11.01
12.31
1999-00
11.08
2000-01
11.34
2001-02
11.66
Chart 6.3
ANALYSIS
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.
DHANALAKSHMI BANK
Table-6.5
Year
Particular
Provision
towards NPA
Net profit during
the year
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
225.00
661.00
629.00
1070.00
3322.00
3631.00
791.00
840.00
387.00
1128.00
677.00
1007.00
Chart 6.4
ANALYSIS
On analyzing profit and loss account of the bank, it could be seen that
provisions and contingencies is one herd, which has a negative impact on the net
profit of the banks, and provisions made towards non-performing assets, being
item contributing to such head.
On going through the figures of the Dhanalakshmi Bank Limited relating to
net profit and provision made towards non performing assets, a sharp increase can
be seen in the provision made towards non performing assets in the year 19992000, which could be explained by the tightening of provision norms which made
it compulsory for banks to keep a provision of .25% even on their standard assets
also from 31-3-2000.
INTERPRETATION
Profit is the most important parameter for evaluating the performance of a
bank. In the present day scenario profit is not just an accounting concept of excess
of income over the expenditure, but is surely more which ensures survival and
growth in the future.
Level of non-performing asset is an important factor affecting the profit of the
bank,. as the profit margin depends up on the synthesis of cost and yield (by
yielding no income) reduce the profit. Here in the case of Dhanalakshmi bank
limited, the provision made towards NPA has increased at an increasing rate over
the year, which has a negative impact on the profit of the bank. So we can assume
that profit of the bank might have affected negatively because of the exorbitant
provision towards NPA. This may be because, in the event of absolute nonrecovery of the lent money, certain provisions become necessary in order to
reduce profits, so that taxation can be under control
Table-6.6
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
9635.89
11756.70
13489.00
14586.00
---
3970.81
4654.0
5546.0
---
1850.00
2922.0
4449.0
---
2120.81
1732.00
1097.00
---
18.04
12.84
7.52
Table-6.7
Year
1998-99
1999-00
2000-01
2001-02
Particulars
Recovery as a %
of gross NPAs
---
18.04
12.84
Chart 6.5
7.52
ANALYSIS
The net recovery during the year 1999-2000 was 18.04% of gross non performing
assets, while it was 12.84% and 7.52% in the following two years i.e., in 2000-01
and 2001-02 respectively, i.e., the net recovery is declining not only by amount
but also with respect to its contribution as a percentage of gross non performing
assets. This is an alarming situation.
INTERPRETATION
The above analysis reflects that the Banks recovery strategy may not be
effective., So we can conclude that banks NPA is increased perhaps because of
inefficient recovery strategy. While the strategy for recovery may have been good,
the banks recovery in-charge officials may not have taken the necessary
Herculean efforts towards the same in order to save the bank from the current
pathetic situation. Lethargy, or complacency of previous years good recovery
may have crept in.
Chapter VII
Filing suits
should not be permitted to be present while discussions are going on with one
borrower
together with all security documents, title deed etc. of zonal office / legal sanction
of company office for necessary approval.
On getting the draft plaint duly approved by the zonal office / company
office, arrangements for filing suit to be made and completed within 10 days.
CHAPTER VIII
8.1. FINDINGS
From analyzing the data collected, the various parameters like the deposits,
advances, gross NPA, Net NPAs, cost of deposits, staff productivity etc. of the
bank over a past few years, the following findings were arrived at.
Net advances is also increasing but at decreasing rate over the period
under study.
Provision made towards NPAs were on a sharp increase affecting the net
profit adversely.
The net result, the recovery is affected, showing a decline in the trend.
NPAs at the first instance. Some of the strategies at the preventive stage are as
follows: Maintenance and regular updation of client profile.
Credit rating of clients
Computerization of loan accounts.
Strong inter-department management information system among loans,
operations and recovery departments.
To establish a system of early warning for potentially weak loan accounts.
Observance of limitation period.
Timely extension of period of limitation.
Banks may create special cells at their head offices/zonal offices to monitor
progress in regard to cases filed with/ transferred to DRTs. Similar cells, assisted
by law officers may be created for follow up of high value suits and execution of
decrees obtained.
Recalcitrant borrowers are coming forward, especially from the areas where
functioning of DRTs is stabilized, with compromise offers to repay the banks
dues. Needless to mention, delays in processing compromise proposals must be
avoided at every stage with the objective of setting the issue.
8.2.8. REHABILITATION
There should be normally no case for rehabilitation and banks financial
assistance, if the unit is sick due to technical obsolescence/ inefficient
management, financial irregularities. The sooner we settle the dues of such
companies/OTs or through legal action, the better it is.
8.2.9. RESCHEDULEMENT
The public sector banks should use their wide network of branches and
infrastructure to deepen their lending for whole sale and retail trade, housing,
agriculture etc. with a view to reducing NPA ratios.
is only 59%, Germany 64% and Switzerland 51%. The rest of income is fee based.
Indian banks have to look for source from services and products. Non-interest
income should come from innovative products and not through higher service
changes that the public sector banks charges to the customer.
8.2.12.
INTRODUCE
MARKETING
CONCEPTS
AND
NEW
BIBLIOGRAPHY
a. Analysis of NPAs of commercial banks Analyst July
2000.
b. V. Venugopal Prudential norms for banks and NBFCs
Revised 5th Edition.
c. Annual reports of Dhanalakshmi Bank Limited.
d. www.rbi.com
e. www.dhanbank.com
f. www.research.com (Personal website of R. Kannan)
g. Report on trend and progress of banking in India 20012002 RBI
h. Professional Banker
November 2002
September 2002
April 2002
NAME:SIBICHAN.C.J
ADDRESS:
01BUCM:2050
IV SEM
MBA
R.V.I.M
BANGA
LORE
DECLARATION
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.
PLACE:
SIBICHAN.C.J
DATE:
ACKNOWLEDGEMENTS
Exchanges of ideas generates a new object to work in a better way. Apart from
the ability labor and time devotion, guidance and co-operation are two pillars
for the success of a project. Whenever a person is helped or co-operated by
others, his heart is bound to pay gratitude to others.
In this chain, I am immensely thankful and convey my sincere gratitude to my
project guide,K.Sethunath. Mgr.Fin,DBL , for his enlightening guidance,
constant inspiration and keen interest shown on me during making of this
project. I deliberate my profound sense of gratitude to him.
I wish to express my gratitude and affectionate respect to my project guide of
R.V.I.M.,Prof.S.Remesh for his counsel and incessant inspiration and for all his
advice and guidance in the completion of the project work.
My special heartful gratitude is due to my director Dr T.V. RAJUand R.Krishna.
for all his encouragement and extended co-operation, which I needed to
complete this report.
My acknowledgement would be incomplete without expressing my sincere
thanks
THANK
SIBICHAN.C.J.
R.V.I.M
YOU
ALL
CHAPTERS
CONTENTS
1.
EXECUTIVE SUMMARY
2.
INTRODUCTION
3.
PAGES
REVIEW
4.
5.
6.
RECOVERYPROCEDUREOF
DHANALAKSHMI BANK LIMITED
TABLE
LISTS OF TABLES
TITLE
PAGE
NO.
3.1
3.2
4.1
4.2
4.3
4.4
4.5
5.1
5.2
5.3
5.4
5.5
6.1
6.2
6.3
6.4
6.5
6.6
6.7
LIST OF CHARTS
TITLE
GRAPH
NO.
PAGE
NO.
6.1
6.2
6.3
6.4
6.5
Prof. S.REMESH
Faculty
R.V.I.M
S.S.M.R.V. COLLEGE
4th T block,
Jayanagar,
Bangalore - 41
Place : BANGALORE
Prof.R.Krishna
Date :
- 08 03
An analysis of NPA
in Commercial Banks
with special reference to Dhanalakshmi Bank Limited
Submitted
in
Partial fulfillment of the requirements
for the award of
Master of Business Administration
of
Bangalore University
By
Mr.SIBICHAN.C.J.
Reg.No. 01 BUCM 2050
Under the guidance of
S. REMESH
.
2001 2003
R.V.INSTITUTE OF MANAGEMENT
S.S.M.R.V. COLLEGE
CA 17, 36th Cross, 26th Main, 4th T block, Jayanagar, Bangalore - 41
The Narasimhan Committee, as part of the second phase of the banking sector
reforms, has recommended a tightening of the asset classification and provisioning
norms with an objective of moving towards the international norms. It has
recommended that an asset should be classified as doubtful when the borrowers fail to
clear the interest payment in one quarter (90 days) instead of the current practice of
two quarters (180 days) and government guaranteed advances, which have turned
sticky, should be treated as NPAs.
Tightening of these norms will force banks to make additional provisioning. However,
an internal State Bank of India estimate says the impact of the tightening of the NPA
norms on its balance-sheet will be only one percentage point increase in NPAs. SBI's
current NPA level is pegged at about six per cent. SBI along with the Calcutta-based
Allahabad Bank has for the first time made the provisioning (.25 percentage points)
for their standard assets in fiscal 1998.
One significant point to note is that the banking industry traditionally shows
underestimation of NPAs as there is always a difference in perception between the
auditors and the RBI inspectors. For instance, in fiscal 1997, the industry
underestimated its NPAs to Rs 38.62 billion and underprovided to the extent of Rs
14.12 billion.
The Board for Financial Supervision of the RBI has cited the following reasons for
the lower recognition of NPAs and subsequent under-provisioning:
1. Failure to identity an NPA in terms of stipulated guidelines: There have been
instances of 'substandard' assets being classified as 'standard';
2. Wrong classification of an NPA: classifying a 'loss asset' as 'doubtful' or
'substandard' asset; classifying a 'doubtful' asset as a 'substandard' asset.
The BFS has also detected instances where a bank has classified an account of a
borrower as 'substandard' and other accounts of the same borrower as 'standard',
throwing prudential norms to the winds.
"Essentially arising from the wrong classification of NPAs, there was a variation in
the level of loan loss provisioning actually held by the bank and the level required to
be made as per the assessment of the RBI inspectors," the internal document said.
The worst "offender" is the public sector banking industry. Nineteen nationalised
banks along with State Bank of India and its seven associate banks have
underestimated their NPAs by Rs 30.29 billion. While the RBI estimates the PSU
banks' NPAs at Rs 469.07 billion, the actual NPAs acknowledged by these banks are
much lower at Rs 438.77 billion. The difference between the RBI estimates and actual
provisioning in PSU banks is pegged at Rs 10.74 billion in March 1997.
In percentage terms, however, nine new generation private sector banks showed the
maximum amount of ''NPA amouflaging" and under provisioning. While the RBI
estimated the NPAs of new private banks at Rs 3.28 billion, the actual figure shown
by these banks is only Rs 2.05 billion.
Similarly, the difference between the RBI estimate and the actual provisioning is Rs
968.5 million. While the RBI inspection teams put the right provisioning requirement
at Rs 1.20 billion, the new private banks made provision of only Rs 234.5 million.
In contrast, the old private sector banks underestimate their NPAs by a meagre Rs
6.52 billion. Nearly 26 old private sector banks registered NPAs to the tune of Rs
21.38 billion in March 1997 while the RBI felt the actual NPAs should have been
pegged at Rs 27.90 billion.
The difference between the RBI estimates and actual provisioning is a paltry Rs 1.61
billion. Old private sector banks provided for Rs 4.93 billion in March 1996 while the
RBI inspection teams opined the provisioning needed to be at Rs 6.55 billion.
As a group, 37 foreign banks underestimated their NPAs by Rs 875.5 million and
provisioning by Rs 797.6 million. The RBI estimated NPAs of foreign banks at Rs
13.55 billion while the actual NPAs shown by these banks were to the tune of Rs
12.68 billion. Similarly, foreign banks provided for Rs 4.02 billion while the RBI
inspection teams estimated the right amount of provisioning at Rs 4.82 billion.