EXECUTIVE SUMMARY

The project is requirement as a part of the curriculum of Masters of Business

Administration degree. The project is undertaken at Bank of Maharashtra, Khasbag
Branch, Belgaum.

Title of the project

Study of Non Performing Assets in Bank of Maharashtra.

Scope of the study

Concept of NPA
Classification of Non Performing
Assets Impact of NPA
Causes and preventative measures of NPA

Methodology
1. Primary data
-Interaction with the branch manager
-observation

2. Secondary data
- Cream software
- Financial reports
- Internet
- Bank magazines

Objectives of the study

1. To know the types of loans offered by bank of Maharashtra.

2. To study the NPAs of the bank.
3. To study the retail and non retail NPAs.
4. To find the causes for high NPAs and the techniques used to reduce it.
5. To analyse the data and give suggestions to reduce the NPAs

Limitations of the study

1. The names of the borrowers of loans were confidential.
2. The availability of data was limited.

Page 1
TABLE OF CONTENTS
PARTICULARS Page No.
Part A 1-11
Origin and history of the bank
Vision,mission,etc
Highlights
Organizational structure

Part B 12-17
Types of loans
Credit facilities

Part C 18-47
Introduction to non performing assets
Meaning of non performing assets
Classification of assets
Reasons for an account becoming NPA
Techniques used in reduction of NPAs
Provisions
Impact of NPA
Preventative measures
Guidelines for preventing slippage of NPA accounts
Asset classification as tool kit to bring down the branch
NPAs to the minimum.
Income recognition
Global developments and
NPA Factors for rise in NPAs

Part D 48-66

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 Data analysis and interpretation
- NPAs, provisions and advances
- Gross NPA (%)
- Net NPA (%)
- Category of NPAs
- Movement of gross NPAs
- Concentration of top five borrowers
- Case study
- NPAs in retail sector
- NPAs in non retail sector
- Size wise classification of advances

Part E 67-72
Findings
Recommendations
conclusions

Bibliography

PART - A
Page 3
 ORIGIN AND HISTORY OF THE BANK

Bank of Maharashtra was registered as a banking company on the 16th of September, 1935
at Pune. The authorized capital was Rs. 10 Lakhs and issued capital of Rs. 5 Lakhs. . The
Bank commenced its business on 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 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.

Page 4
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
of 1444 branches and 30 extension counters spread over 22 states and 2 union territories
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 personalized 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.

In the year 2004 the bank came up with initial public offering. Bank of Maharashtra
has altogether 1444 branches all over India. The total turnover is 90,000 crores. Now it has
345 ATMs and 902 CBS branches. The bank has achieved 100% CBS coverage.

Page 5
Vision 2010
To be a vibrant, forward looking, techno-savvy, customer centric bank serving diverse
sections of the society, enhancing shareholders’ and employees’ value while moving
towards global presence.

Mission
To ensure quick and efficient response to customer expectations.

To innovate products and services to cater to diverse sections of society.

To adopt latest technology on a continuous basis.

To build proactive, professional and involved workforce.

To enhance the shareholders’ wealth through best practices and

corporate governance.

To enter international arena through branch network.

Page 6
Our Logo
The Deepmal
With its many lights rising to greater heights.

The Pillar

Our institution- Symbolising strength.

The Diyas
Our Branches- Symbolising service.

The 3 M's symbolising

Mobilisation of Money

Page 7
Modernisation of Methods and
Motivation of Staff.

Our Aims
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 ".

The Autonomy
The Bank attained autonomous status in 1998. It helps in giving more and more services
with simplified procedures without intervention of Government.

Our Social Aspect

The bank excels in Social Banking, overlooking the profit aspect; it has a good share of
Priority sector lending having 38% of its branches in rural areas.

Other Attributes
Bank is the convener of State level Bankers committee. Bank offers Depository services
and Demat facilities at 131 branches. Bank has a tie up with LIC of India and United India
Insurance Company for sale of Insurance policies. All the branches of the Bank are fully
computerised

Page 8
Highlights
Autonomy secured in the year 1998 continues.
Total business more than Rs. 91000.00 crore of which total deposits more than Rs.
54400 crore and Gross advances more than Rs36600 crore as of 30.9.2009
Branch network comprises of 1433 branches spread over 22 states and 2 union
territories.
CBS Branches
Bank has migrated 831 branches under CBS as against 773 branches as on
31.03.2009 and 798 branches as on 30.06.2009
ATM Network
Bank has 345 ATMs. Bank has installed 11 Biometric
ATMs. Card base crosses 10 lakh
Mahabank Insta International Visa Debit Card
Mahabank International Debit Card is issued in collaboration with VISA
ATM Card along with PIN is given to the customer as “Welcome Kit” at the time
of opening of the current and SB account in all CBS branches. The customer can
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 start using ATM Insta card after 36 hours from date of issue. ( 36000 Insta Cards
are issued since July 09)
Utility Bill Payment through Internet Banking Facility.
The customers can do on line shopping / e-commerce and utility bill payment
transaction through Internet Banking facility.( 37000 Customer are using Internet
Banking facility)
“Maha e-Statement”
Customers can get their statement of account on registering their e-mail id and
desired frequency of statement with the Bank.
Straight through Processing (STP) STP of NEFT/ RTGS transactions has been
implemented for instant processing of inward and outward remittances through
RTGS and NEFT. (800 branches are offering RTGS/NEFT facility)

Specialised branches:

S M E branches - 14

Agro High-Tech branches - 4

Industrial Finance branches - 2
Overseas branches - 2
Treasury & international Banking -
1 Pension Branch -1
Govt Business Branch - 1
Bank has 28 FEX centers to handle FEX business.
Toll Free telephones at 11 major Metro centers.
The bank is shouldering the responsibility of lead bank in six districts viz. Satara,
Pune, Thane, Nasik, Aurangabad and Jalna. Our bank is also convening State
Level Bankers’ Committee and various development issues are taken up to
implement the state credit plan and achieving the targets under various
Government sponsored schemes.

Page 10
The Bank has set up a Trust viz. Mahabank Agricultural Research and Rural
Development Foundation (MARDEF), which is engaged in providing Credit Plus
services to the farmers in specific specialised fields like commercial dairy, Emu
farming, sericulture, organic farming, etc.
The Rural Development Centers at Bhigwan and Hadapsar in Pune District
undertake various labs to land programs on improved technologies. A fully
fledged soil-testing lab is being set up for the benefit of the farmers to go in for
high-tech agriculture.
To provide activity specific training to educated unemployed youth, Bank has set
up five Mahabank Self Employment Training Institutes (MSETI) at Pune,
Aurangabad, Nagpur, Nasik & Amravati for providing training to rural youth for
enabling them to acquire skills for self-employment.
Bank has formed a Trust by the name Gramin Mahila va Balak Vikas Mandal
(GMBVM), which is primarily engaged in formation, nurturing, training and
linkage of self-help groups to various banks, GMBVM has its area of operation in
nine districts and has been recognised by Government of Maharashtra as Mother
NGO. It also markets various products made by SHGs through its two retail
outlets by name “SAVITRI” in Pune district. The GMBVM is now in the process
of scaling up viable SHGs to SMEs.
The Bank has floated a subsidiary company- The Maharashtra Executor & Trustee
Company Ltd. (METCO) which undertakes Trustee Business, Property
Management and Tax Consultancy as well.
Bank is the Conveyor for Town Official Language Implementation Committee
(TOLIC) at Mumbai, Pune & Solapur. The Bank secured the First Prize for better
implementation of Hindi in both ‘A’ and ‘B’ Region and the Fourth Prize for
implementation of Hindi in ‘C’’ Region under Reserve Bank of India Rajbhasha
Shield Scheme for the year 2007-2008.

Page 11
 ORGANISATIONAL STUDY

Organizational Structure
The bank has 3 tier organization structures.
Head office of the bank is located in Pune and regional office will be there exercised
immediate supervision and control over the branches under their jurisdiction or regional
officers are headed by experience executives in the senior/ top management grade. There
are 44 regional offices.

Page 12
Board of management:

1. Mr. Allen.C.A. Pereira Chairman and Managing Director

2.Mr.M.G. Sanghvi Executive Director

3.Mr.V. P. Bharadwaj Director

4Mr.S.K. Gogia Director

5. Mr.A. K. Pandit Director

6.Mr.C. Patwari Director

7.Mr. T. Parameswara Rao Director

8.Mr.S. H. Kocheta Director

9.Mr.D. S. Patel Director

10.Mr.S. U. Deshpande Director

Page 13
PART - B
Page 14
TYPES OF LOANS

1. Education loan

It is given to students to wish to study in India or abroad. The student should be an Indian
citizen. He should have secured a seat through an entrance test or merit basis selection. The
rate of interest for this loan is 10.25%.

2. Housing loan

The purpose of this loan is to build a house, purchase a house/flat or make repairs to the
existing house. It is given to salaried persons, professionals, businessmen, farmers and
resident Indians. There is no maximum limit for urban areas. But for rural areas it is 15
lakhs. The rate of interest is 9.25%.

3. Vehicle loan scheme

It is offered to purchase a two wheeler or a four wheeler. It is given to salaried, professionals

or businessmen. The maximum amount for two wheelers is Rs 50000 and for four wheeler
it is 15 lakhs. The rate of interest up to 3 years is 9.75% and above 3 years is 10.75%. The
repayment period for two wheeler is 60 months and for four wheeler is 84 months.

Page 15
4. Consumer loan

It is given to purchase consumer durables or computers. The rate of interest is 13.5%. It is

given to salaried or professionals. The maximum amount is Rs 1.50 lakhs. The processing
fee charged by the bank is 1% of loan amount.

5. Loan for agriculturists

Following are the various schemes offered to agriculturists

i. Mahabank kinas credit

The purpose of this facility is to cultivate the crops, meeting the short term credit needs
of farmers for crop production and maintenance of farm equipments. The agriculturists
should own an agriculture land to get this facility. The amount lend is decided by
district technical committee. The security taken is hypothecation of crops/assets or
mortgage of land. Under this scheme insurance is given to crops.

ii. Minor irrigation for agriculturists

The purpose of this facility is for digging new wells, revitalization of existing wells,
purchase of oil engine, electric motor, etc. the agriculturists should own a agriculture
land. The amount given is as per NABARD unit costs. Hypothecation of movable
assets or mortgage of land is taken as security. The repayment period is 7 to 11 years.

iii. Farm mechanization for agriculturists

The purpose of this facility is to purchase a tractor, harvesters, threshers or other farm
equipments. The agriculturists should own at least 8 acres of irrigated land. The
amount given is as per the cost of machinery. The repayment period is 7 to 9 years.
Under this scheme insurance is given to machinery.

iv. Animal husbandry

The purchase of the facility is purchase of cows/ buffaloes, poultry-broiler farm,

sheep goat rearing, etc. the agriculturists should have necessary expertise. The

Page 16
 amount given is as per NABARD unit costs. The repayment period is 4 to 5 years.
Insurance of animals is essential.

v. Horticulture

The purpose is cultivation of fruit crops like mango, pomegranate, grapes, etc. the
amount given is as per NABARD unit costs. The repayment period is 15 years. The
security needed is mortgage of land or hypothecation of crops.

vi.Scheme for financing setting up of agri-clinics and agri-business centers for

agriculture graduates.

The purpose is setting up agri clinics or agri-business centers. It is offered to

agriculture graduates. The maximum amount given for individuals is Rs 10 lakhs and
group is 5 lakhs. The repayment period is 5 to 10 years.

vii. Scheme for financing farmers for purchase of land

The eligibility for this scheme is small, marginal or tenant farmers. The maximum
amount given is 15 lakhs. The repaying period is as per the capacity of the borrower
or incremental income. The security taken is hypothecation of crops or mortgage of
land.

viii. Hi tech projects

Agriculturists should have knowledge of advance techniques of farming. The purpose is

for hi tech projects. The amount given is as per project costs. The security asked is
hypothecation of goods or collateral security. The repayment period is 6 to 8 years.

ix. Consumer loans to farmers

Page 17
 The purpose is to purchase consumer durables. The maximum amount given is Rs
50000. The repayment period is 3 to 5 years. The eligibility is that the agricultural
income per annum should be above Rs 50000.

x. Scheme for financing two wheelers to farmers

The purpose is to purchase a two wheeler. The eligibility is that the agricultural income
should be above Rs 50000. The maximum amount given is Rs 50000. The repayment
period is 3 to 5 years.

6. Loans for MSMEs

Amount Rate of interest

Up to 25 lakhs 9.25% p.a
25 lakhs to 1 crore 10.25% p.a
Above 1 crore 11.25% p.a

Collateral free loan up to 10 lakhs is given. The loan is offered to Micro, Small and
Medium enterprises.

7. Solar loans

The purpose of this loan is to install solar home systems for domestic and commercial
use. The maximum amount given for domestic users is Rs 25000 and for entrepreneurs is
Rs 200000. The rate of interest is 12.5%. The repayment period 5 years.

8. Personal loans

The purpose is to meet the personal expenses. The maximum amount is 1.50 lakhs. The
rate of interest is 14%. The processing fee charged is 1% of loan amount. The eligibility is
salaried or professionals.

Page 18
CREDIT FACILITIES
1. Cash credit
It is a short term cash loan to a company. The bank provides this type of credit facility
only after required security is given to secure the loan. Once the security for repayment
has been given the company that receives the loan can continuously draw from the bank
up to a specified amount.

2. Overdraft
It is given when then the withdrawals from a bank account exceed the available balance.

3. Term loans
These are commercial loans. They carry fixed interest rates. The repayment schedule
is monthly or quarterly.

4. Bill discounting
The bank buys a bill i.e. a bill of exchange or a promissory note before its due and credits
the value of the bill after a discounts charge to a customers account. The transaction is
practically an advance against the security of the bill and discount represents the interest
on the advance from the date from the purchase of the bill until it’s due for payment.

Page 19
 PART - C

INTRODUCTION OF NON PERFORMING ASSETS

Page 20
 The world is going faster in terms of services and physical products. However it
has been researched that physical products are available because of the service industries.
In the nation economy also service industry plays vital role in the boosting up of the
economy. The nations like U.S, U.K, and Japan have service industries more than 55%.
The banking sector is one of appreciated service industries. The banking sector plays larger
role in channelising money from one end to other end. It helps almost every person in
utilizing the money at their best. The banking sector accepts the deposits of the people and
provides fruitful return to people on the invested money. But for providing the better returns
plus principal amounts to the clients; it becomes important for the banks to earn. The main
sources of income for banks are the interest that they earn on the loans that have been
disbursed to general person, businessman, or any industry for its development. Thus, we
may find the input-output system in the banking sector. Banks first, accepts the deposits
from the people and secondly they lend this money to people who are in the need of it. By
the way of channelising money from one end to another end, Banks earn their profits.

However, Indian banking sector has recently faced the serious problem of Non
Performing Assets. This problem has been emerged largely in Indian banking sector since
three decade. Due to this problem many Public Sector Banks have been adversely affected
to their performance and operations. In simple words Non Performing Assets problem is
one where banks are not able to recollect their landed money from the clients or clients
have been in such a condition that they are not in the position to provide the borrowed
money to the banks.

The problem of NPAs is danger to the banks because it destroys the healthy
financial conditions of the them. The trust of the people would not be anymore if the banks
have higher NPAs. So. The problem of NPAs must be tackled out in such a way that would
not destroy the operational, financial conditions and would not affect the image of the
banks. Recently, RBI has taken number steps to reduce NPAs of the Indian banks. And it
is also found that the many banks have shown positive figures in reducing NPAs as
compared to the past years.

Page 21
NON PERFORMING ASSETS

The assets of a banking company are classified into

1. performing assets
2. non performing assets

1. Performing assets
It means an asset which continues to generate income to the bank

2. Non performing asset

An asset becomes a non performing asset when it does not generate income. 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.

Page 22
RBI has given some guidelines to decide as to when an asset becomes non performing.
These guidelines are as follows.

a) Term loans
When the interest or installment of principal remains unpaid for a period of more
than 90 days. The term loan becomes non performing
E.g.: suppose of the total term loans of Rs 20,00,000 as at 31-3-2007 the interest
remains unpaid on a loan amount of Rs 1,00,000 for a period of more than 90 days.
In this case 1,00,000 becomes non performing asset and the balance i.e. 19,00,000
is performing asset.

b) Cash credits and overdrafts

In the case of cash credits and overdrafts if the amount remains out of order for a
period of more than 90 days a cash credit or an overdraft becomes a non performing
asset. As account is said to be out of order if the following conditions are satisfied

i. The outstanding balance of the above accounts remains continuously in

the excess of the sanctioned limit or drawing amount

ii. Though the outstanding balance is less than the sanctioned limit there are
no credits continuously for more than 90 days as on the date of balance sheet or
the credits during the aforesaid period is not enough to cover the interest during
the current period.

c) Bills purchased and discounted

If the bill remains unpaid for a period of more than 90 days such bill purchase or
discounted becomes a non performing asset.
E.g.: suppose of the total amount of bills purchased and discounted of Rs 10,00,000
as at 31-3-2007 a sum of Rs 30000 to be received remains overdue for more than a
period of 90 days as on the above date. In this case Rs 30000 is treated as non
performing asset and the balance of Rs 9,70,000 is the performing asset.

d) Agricultural advances
In the case of agricultural advances if the interest or installment or principal remains
overdue for two harvest seasons but for a period not exceeding two half years such
agricultural advances become non performing asset.

e) Other accounts

Page 23
 In case of other accounts if the amount remains overdue for a period of more than
90 days such other accounts are treated as non performing assets.

It should be noted that the non performing assets are determined borrower wise and not
facility wise. Therefore if the facilities granted to a borrower becomes non performing all
the facilities become non performing irrespective of the performing status of other
facilities. The identification of non performing asset is to be made on the basis of the above
position as on the date of the balance sheet.
The object of the above classification is that the international practice is now to
classify the assets into performing assets and non performing assets. Income is recognized
on accrual basis in case of performing assets and where as in the case of non performing
assets only when income is actually received in cash.

CLASSIFICATION OF ASSETS

Page 24
The assets of a bank are classified into
Standard assets
Sub-standard
assets Doubtful
assets Loss assets

1. Standard assets
It is not a non performing asset. It carries normal risk.

2. Sub-standard asset
It is an account which remained non performing asset for a period less than or equal to 12
months. This account has credit weakness. If it is not rectified it may affect the recovery of
the debt in the long term.

3. Doubtful assets
It is an asset which remained non performing for a period of more than 12 months. However
if the account has any threat to recovery due to erosion in the value of the security or frauds
committed by the borrowers then it will be classified as doubtful asset without waiting for
the above said period of 12 months. It carries high risk.

4. Loss asset
A loss asset is one where the loss has been identified by the bank or by the auditors or by
RBI after inspection. This asset is considered as uncollectible.

REASONS FOR AN ACCOUNT BECOMING NPA

Page 25
There are several reasons for an account becoming NPA.

* Internal factors
* External factors

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose.

2. Project not completed in time.

3. Poor recovery of receivables.

4. Excess capacities created on non-economic costs.

5. In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.

6. Business failures.

7. Diversion of funds for expansion\modernization\setting up new projects\ helping

or promoting sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,

mis-appropriation etc.

9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and
follow-ups, delay in settlement of payments\ subsidiaries by government bodies
etc.,

Page 26
External factors:

1. Sluggish legal system -

Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.

4. Shortage of raw material, raw material\input price escalation, power shortage,

industrial recession, excess capacity, natural calamities like floods, accidents.

5. Failures, non payment\ over dues in other countries, recession in other countries,
adverse exchange rates etc.

6. Government policies like excise duty changes, Import duty changes etc.

TECHNIQUES USED IN REDUCTION OF NPAS:

Page 27
 Sending notices on due dates. i.e. through ordinary, registered and legal. The bank
sends notices to borrowers. The notices contain the due dates. The various forms
of sending these notices are ordinary, registered and legal. The borrowers have to
reply to such notices. And further they have started making the repayments.

Application of SARFAESI Act.

SARFAESI stands for secutarisation and reconstruction of financial assets and
enforcement of security interest. The bank uses this act to recover the money. It
helps in managing the NPAs and keeping pace with the international pace of
financial institutions. It allows the banks to take possession of the assets and sale
them. It helps the bank to realize the long term assets. It is a facility for asset
recovery and reconstruction.

Seizure and disposal of assets through auctions.

The bank takes possession of the assets. Then it sells it through auction. By this
way the bank recovers the amount.

Debt Recovery Tribunal.

In case the NPAs are more than 10 lakhs the bank approaches the debt recovery
tribunal. This tribunal helps the bank to recover the advance. It is an effective
technique.

Field visits, personal persuasion.

The bank does field visits. The banks meet the defaulters. They persuade them to
pay the amount.

Civil procedures and winding up notices.

This is similar as the suit filing by the courts. The bank sends notices to the
defaulters. The bank adopts a legal action against the borrowers.

Lok Adalats
Here a meeting is arranged between the banker, defaulters and judges. They have
a discussion and arrive at a solution. By this way the bank recovers the NPA.

Compromises
It includes waiver, interest reduction. The bank talks with the defaulter and does
some compromises like interest reduction, waiver, etc. by this way the amount is
recovered.

Page 28
 Suit filing in the court
The bank files a suit in the court. He states that is the defaulter fails to make the
payments then his property will be sold. Here the bank adopts legal action.

One time settlement

In this technique the bank talks with the borrower and he makes the payment at one
time. Instead of paying the installments the borrower makes one time settlement. It
is an effective technique.

PROVISIONS

Provisioning norms
The primary responsibility for making adequate provisions for any diminution in
the value of loan assets is that of the bank management or the statutory auditors.

The assessment made by the inspecting officer of the RBI is furnished to the bank
to assist the bank management or the statutory auditors in taking a decision in
regard to making adequate provision in terms of the prudential guidelines.

Provisioning on standard assets

Page 29
 The bank makes a provision of a minimum of 0.25% on the standard assets on
total loan portfolio.

The bank raises the provision on standard assets from 0.25% to 0.40% to
agriculture and MSMEs.

Provision on sub standard assets

The bank makes a general provision of 10% on the outstanding balance.

The ‘unsecured exposures’ which are identified as sub standard would attract an
additional provision of 10%.

Unsecured exposure refers to exposure where the value of realizable security is

not more than 10%.

Provisioning on doubtful assets

In regard to the secured portion the provision may be made on the rates ranging
from 20% to 100% of the secured portion depending upon the period for which
the asset has remained doubtful.

The provisioning for unsecured doubtful assets is 100%.

Provisioning for loss assets

For these assets 100% provision is made. They are generally written off.

Page 30
NOTE:
1. The total provisions are Rs 24,22,323.

2. The provision coverage ratio for the bank is 24.85%.

IMPACT OF NPA
Profitability
NPA means booking of money in terms of bad asset which occurred due to wrong choice
of client. Because of the money getting blocked the profitability of bank decreases not only
by the amount of NPA but NPA lead to opportunity cost also much of profit invested in
some return earning project/asset. So NPA doesn’t affect current profit but also future
stream of profit, which may lead to loss of some long-term beneficial opportunity. Another
impact of reduction in profitability is low ROI (return on investment), which adversely
affect current earning of bank.

Page 31
Liquidity:-

Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead
to borrowing money for shot\rtes period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to lack
of money. Routine payments and dues.
Involvement of management:-

Time and efforts of management is another indirect cost which bank has to bear due to
NPA. Time and efforts of management in handling and managing NPA would have
diverted to some fruitful activities, which would have given good returns. Now day’s banks
have special employees to deal and handle NPAs, which is additional cost to the bank
Credit loss:-

Bank is facing problem of NPA then it adversely affect the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which have negative impact to
the people who are putting their money in the banks.

PREVENTIVE MEASURES

Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, it’s too
late to retrieve the situation- both in terms of rehabilitation of the project and recovery of
bank’s dues. Identification of weakness in the very beginning that is: When the account
starts showing first signs of weakness regardless of the fact that it may not have become
NPA, is imperative. Assessment of the potential of revival may be done on the basis of a
techno-economic viability study. Restructuring should be attempted where, after an

Page 32
objective assessment of the promoter’s intention, banks are convinced of a turnaround
within a scheduled timeframe. In respect of totally unviable units as decided by the bank,
it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is
possible through legal means before the security position becomes worse.

Identifying Borrowers with Genuine Intent:-

Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of
frontline officials at the branch level is paramount as they are the ones who have intelligent
inputs with regard to promoters’ sincerity, and capability to achieve turnaround. Based on
this objective assessment, banks should decide as quickly as possible whether it would be
worthwhile to commit additional finance.
In this regard banks may consider having “Special Investigation” of all financial transaction
or business transaction, books of account in order to ascertain real factors that contributed
to sickness of the borrower. Banks may have penal of technical experts with proven
expertise and track record of preparing techno-economic study of the project of the
borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will obviate the need to route
the additional funding through the controlling offices in deserving cases, and help avert
many accounts slipping into NPA category.
40

Timeliness and Adequacy of response:-

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial
element in any restructuring or rehabilitation activity. The response decided on the basis of
techno-economic study and promoter’s commitment, has to be adequate in terms of extend
of additional funding and relaxations etc. under the restructuring exercise. The package of
assistance may be flexible and bank may look at the exit option.

Page 33
Focus on Cash Flows:-

While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading picture.
Appraisal for fresh credit requirements may be done by analysing funds flow in conjunction
with the Cash Flow rather than only on the basis of Funds Flow.

Management Effectiveness:-

The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that affects a borrowing unit’s
fortunes. A bank may commit additional finance to an ailing unit only after basic viability
of the enterprise also in the context of quality of management is examined and confirmed.
Where the default is due to deeper malady, viability study or investigative audit should be
done – it will be useful to have consultant appointed as early as possible to examine this
aspect. A proper techno economic viability study must thus become the basis on which any
future action can be considered

Timeliness and Adequacy of response:-

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial
element in any restructuring or rehabilitation activity. The response decided on the basis of
techno-economic study and promoter’s commitment, has to be adequate in terms of extend
of additional funding and relaxations etc. under the restructuring exercise. The package
of assistance may be flexible and bank may look at the exit option.

Focus on Cash Flows:-

While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading picture.
Appraisal for fresh credit requirements may be done by analysing funds flow in conjunction
with the Cash Flow rather than only on the basis of Funds Flow.

Page 34
Management Effectiveness:-

The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that affects a borrowing unit’s
fortunes. A bank may commit additional finance to an ailing unit only after basic viability
of the enterprise also in the context of quality of management is examined and confirmed.
Where the default is due to deeper malady, viability study or investigative audit should be
done – it will be useful to have consultant appointed as early as possible to examine this
aspect. A proper techno economic viability study must thus become the basis on which any
future action can be considered

GUIDELINES FOR PREVENTING SLIPPAGE OF NPA ACCOUNTS

At the behest of the BFS, a study was conducted on slippage of non-performing accounts
from sub-standard to doubtful/loss categories. A suggested framework of
recommendations, prepared on the basis of the study, was circulated among banks for
feedback and comments. Based on the response to these draft recommendations, the final
recommendations for preventing slippage of NPA accounts were forwarded to banks in

Page 35
September 2002. A system of early recognition with timely and adequate intervention was
suggested.

In this context, it was also suggested that banks may introduce a new asset category called
'Special Mention Accounts' between 'Standard' and 'Sub-standard' for their own internal
monitoring and follow-up, in line with international best practices but keeping in view the
local requirements. An asset may be transferred to this category once the earliest signs of
sickness/ irregularities are noticed. This would help banks to look at accounts with potential
problems in a focused manner right from the onset of the problem, so that monitoring and
remedial actions can be more effective. Banks which already have a designated asset
category on the lines of 'special mention assets' may continue the same on the basis of their
internal norms.

Special mention assets would not require provisioning, as they are not classified as NPAs.
Their main purpose is to alert management to the possibility of such an account turning
bad, thus triggering preventive action well in time. These guidelines are aimed at providing
a common minimum framework to tackle the problem of slippage of NPAs and it is
expected that banks will work out their strategic responses in keeping with the broad thrust
of the guidelines.

ASSET CLASSIFICATION AS TOOL KIT TO BRING DOWN THE BRANCH

NPAs TO THE BEAREST MINIMUM.
Credit Appraisal and Advance Monitoring: -
i) End use of funds should be monitored by effectively following up QIS
statements, analyzing them.
ii) Verify the financials submitted by the borrower and compare with that of
assumption made at the time of previous sanction.

Page 36
 iii) 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.
iv) Borrowers 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.
v) Book fresh quality advances and market for such advance. 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.
vi) Follow-up all account with one quarter interest dues and ensure that borrower
meets interest commitments.
vii) 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 installment falls due.
viii) Strengthen pre-sanction and post-sanction inspection at all levels.

ix) Seasonal activities-monitor the recovery in the account and ensure recovery
effort coincides with the time of revenue inflow.
x) Be aware of the danger signals received from the borrowers about the problem
loans. Preventive and curative action should be taken immediately.

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

SUBSTANDARD ASSETS:-
i) A Sizable portion of NPA is in substandard category. It should be possible to
upgrade account in this segment.
ii) Ensure that substandard account does not slip down to doubtful and loss
category.

Page 37
 iii) Efforts should be made to upgrade the account to standard categories NPAs
affect our balance sheet four ways:
1) We cannot book income
2) Capital adequacy ratio gets affected
3) NPAs require provisioning from post tax profits.
4) Affects image in international level.
iv) Once the amount becomes NPA verify weather 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 defaulting 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 three unit to run.
If the situations warrants, 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 a rehabilitation programme in consultation with the controllers
immediately failing which we may not have any assets to fall back upon later. A
quick action is needed. If give a chance, grab the earliest to palm off the account
from our books to any other financial agency.

DOUBTFUL ASSETS
i) Experience in the previous year’s 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
Page 38
 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.

ii) Issues raised by advocates should be tackled to get the suits disposed of and
executive the decreased so obtained to reduced the NPAs.
iii) Where branches have got backlog in settlement to DICGC claims such claims
should 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.
iv) 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 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.

Page 39
ii) High value doubtful and loss assets where DICGC has settled the claims and / or
rejected the 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) Where ever 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.

INCOME RECOGNITION
1. Income recognition – Policy
➢ The policy of income recognition has to be objective and based on the record of recovery.

Internationally income from non-performing assets ( NPA ) is not recognised on

Page 40
accrual basis but is booked as income only when it is actually received. Therefore, the
banks should not charge and take to income account interest on any NPA.

➢ However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided adequate margin is
available in the accounts.

➢ Fees and commissions earned by the banks as a result of re-negotiations or rescheduling

of outstanding debts should be recognised on an accrual basis over the period of time
covered by the re-negotiated or rescheduled extension of credit.

➢If Government guaranteed advances become NPA, the interest on such advances should
not be taken to income account unless the interest has been realised.

2. Reversal of income:

If any advance, including bills purchased and discounted, becomes NPA as at the
close of any year, interest accrued and credited to income account in the corresponding
previous year, should be reversed or provided for if the same is not realised. This will apply
to Government guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should
cease to accrue in the current period and should be reversed or provided for with respect to
past periods, if uncollected.

3 Leased Assets
The net lease rentals (finance charge) on the leased asset accrued and credited to income
account before the asset became non-performing, and remaining unrealised, should be
reversed or provided for in The term 'net lease rentals' would mean thethe

Page 41
current accounting period. amount of finance charge taken to the credit of Profit & Loss
Account and would be worked out as gross lease rentals adjusted by amount of statutory
As per the 'Guidance Note ondepreciation and lease equalisation account. Accounting for
Leases' issued by the Council of the Institute of Chartered Accountants of India (ICAI), a
separate Lease Equalisation Account should be opened by the banks with a corresponding
debit or credit to Lease Adjustment Account, as the case may be. Further, Lease
Equalisation Account should be transferred every year to the Profit & Loss Account and
disclosed separately as a deduction from/addition to gross value of lease rentals shown
under the head 'Gross Income'. Appropriation of recovery in NPAs ➢ Interest realised on
NPAs may be taken to income account provided the credits in the accounts towards interest
are not out of fresh/ additional credit facilities sanctioned to the borrower concerned.

➢In the absence of a clear agreement between the bank and the borrower for the purpose
of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should
adopt an accounting principle and exercise the right of appropriation of recoveries in a
uniform and consistent manner.

4 Interest Application:
There is no objection to the banks using their own discretion in debiting interest to an NPA
account taking the same to Interest Suspense Account or maintaining only a record of such
interest in proforma accounts.

5 Reporting of NPAs

Banks are required to furnish a Report on NPAs as on 31st March each year after
completion of audit. The NPAs would relate to the banks’ global portfolio, including the
advances at the foreign branches. The Report should be furnished as per the prescribed
format given in the Annexure I.

➢ While reporting NPA figures to RBI, the amount held in interest suspense account, should
be shown as a deduction from gross NPAs as well as gross advances while arriving at the net
NPAs. Banks which do not maintain Interest Suspense account for parking

Page 42
interest due on non-performing advance accounts, may furnish the amount of interest
receivable on NPAs as a foot note to the Report. ➢ Whenever NPAs are reported to RBI,
the amount of technical write off, if any, should be reduced from the outstanding gross
advances and gross NPAs to eliminate any distortion in the quantum of NPAs being
reported.

GLOBAL DEVELOPMENTS AND NPAs

Page 43
The core banking business is of mobilizing the deposits and utilizing it for lending to
industry. Lending business is generally encouraged because it has the effect of funds being
transferred from the system to productive purposes, which results into economic growth.
However lending also carries credit risk, which arises from the failure of borrower to fulfill
its contractual obligations either during the course of a transaction or on a future obligation.
A question that arises is how much risk can a bank afford to take? Recent happenings in
the business world -Enron, WorldCom, Xerox, Global Crossing do not give much
confidence to banks. In case after case, these giant corporate becan1e bankrupt and failed
to provide investors with clearer and more complete information thereby introducing a
degree of risk that many investors could neither anticipate nor welcome. The history of
financial institutions also reveals the fact that the biggest banking failures were due to credit
risk. Due to this, banks are restricting their lending operations to secured avenues only with
adequate collateral on which to fall back upon in a situation of default.

FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector
Page 44
banks and foreign banks. The NPAs in PSB are growing due to external as well as internal
factors.

EXTERNAL FACTORS:-

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non- recover, their by reducing their profitability and liquidity.

Willful Defaults
There are borrowers who are able to pay back loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order
to get back the money extended to them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to
achieve the production level thus they are not repaying the loans.
Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they
borrow to operate these activities.
Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thus it has to cope
with the changing principles and policies for the regulation of the rising of NPAs. The
fallout of handloom sector is continuing as most of the weavers Co-operative societies have
become defunct largely due to withdrawal of state patronage. The rehabilitation plan
worked out by the Central government to revive the handloom sector has not yet been
implemented. So the over dues due to the handloom sectors are becoming NPAs.

Page 45
 INTERNAL FACTORS:-
Defective Lending process
There are three cardinal principles of bank lending that have

been followed by the commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

Principles of safety:-

By safety it means that the borrower is in a position to repay the loan both principal and
interest. The repayment of loan depends upon the borrowers:
Capacity to pay depends upon:
• Tangible assets
• Success in business
• Honest
• Reputation of borrower

The banker should, therefore take utmost care in ensuring that the enterprise or business
for which a loan is sought is a sound one and the borrower is capable of carrying it out
successfully .he should be a person of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis cannot be taken. Proper MIS and financial accounting system
is not implemented in the banks, which leads to poor credit collection, thus NPA. All the
branches of the bank should be computerized.

Improper SWOT analysis

Page 46
The improper strength, weakness, opportunity and threat analysis is another reason for rise
in NPAs. While providing unsecured advances the banks depend more on the honesty,
integrity, and financial soundness and credit worthiness of the borrower.
• Banks should consider the borrowers own capital investment.
• It should collect credit information of the borrowers from:
- a. From bankers.
b. Enquiry from market/segment of trade,
industry, business.
c. From external credit rating agencies.
• Analyze the balance sheet. True picture of business will
be revealed on analysis of profit/loss a/c and balance sheet.

When bankers give loan, he should analyze the purpose of the loan. To ensure safety and
liquidity, banks should grant loan for productive purpose only. Bank should analyze the
profitability, viability, long term acceptability of the project while financing. Poor credit
appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor
credit appraisal the bank gives advances to those who are not able to repay it back. They
should use good credit appraisal to decrease the NPAs. Managerial deficiencies The banker
should always select the borrower very carefully and should take tangible assets as security
to safe guard its interests.

When accepting securities banks should consider the: -

1. Marketability

2. Acceptability

3. Safety

4. Transferability.

The banker should follow the principle of diversification of risk based on the famous
maxim “do not keep all the eggs in one basket”; it means that the banker should not grant
advances to a few big farms only or to concentrate them in few industries or in a few cities.
If a new big customer meets misfortune or certain traders or industries affected adversely,
the overall position of the bank will not be affected.

Page 47
Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of

regularly visit of bank officials to the customer point decreases the collection of interest
and principals on the loan. The NPAs due to willful defaulters can be collected by regular
visits.
Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle.

Page 48
PART - D

Page 49
 NPAs, PROVISIONS
AND ADVANCES

YEARS TOTAL NPA TOTAL TOTAL

PROVISIONS ADVANCES

2005 27.67 25.50 362.83

2006 15.57 8.94 447.35

2007 22.53 11.59 433.79

2008 19.68 9.85 451.57

2009 97.45 24.22 468.21

(Figures in lakhs)

(Khasbag branch, belgaum)

Page 50
INTERPRETATION
The above diagram shows the NPAs, provisions and advances from 2005 to 2009. There is
moderate NPA during 2005 to 2008. The year 2009 has a high NPA because most of the
small and medium enterprises in Udyambag were closed and they failed to pay the
installments. The year 2005 has the highest provision because majority of the NPAs
belonged to the loss assets category. This has lead the bank to make 100% provision for
loss assets. There is a steady increase in the loans offered by the bank.

Page 51
INTERPRETATION
The above graph shows the trend of NPAs during 2005 to 2009. The NPA has sky rocketed
in the year 2009 – 2010. This is because most of the enterprises wre closed down.

Page 52
GROSS NPAS(%)
Years 2005 2006 2007 2008 2009

Gross 27.67 15.57 22.53 19.68 97.45

NPA
Gross 362.83 447.35 433.79 451.57 468.21
Advances
% 7.62% 3.48% 5.19% 4.35% 20.81%

(Figures in lakhs)

INTERPRETATION
The above diagram shows the percentage of gross NPAs to gross Advance during 2005 to
2009. In the year 2009 the NPA has increased sharply because most of the enterprises were
closed down and they failed to pay the installments. During the years 2005 to 2008 the
gross NPAs were moderate i.e. they ranged from 3% to 8%.

Page 53
NET NPAs (%)
Years 2005 2006 2007 2008 2009

Net 2.17 6.63 10.94 9.83 73.23

NPAs
Net 337.33 438.41 422.2 441.72 443.99
Advances
% 0.64% 1.51% 2.59% 2.22% 16.49%

(Figures in lakhs)

INTERPRETATION

The above chart shows the percentage of net NPAs to net Advances. The banker prefers
this ratio over gross NPA. There were moderate NPAs during 2005 to 2008. But in the year
2009 the percentage is high. It is above the standard norm of 10%. The banks should use
various techniques like SARFAESI, legal procedure, one time settlement to recover the
NPAs.

Page 54
CATEGORY NUMBER SECURED UNSECURED OUTSTANDING TOTAL
OF OF BALANCE PROVISIONS
ASSETS A/CS

SUB 44 59.26 15.98 75.24 9.12

STANDARD
ASSETS

DOUBTFUL 6 9.58 6.40 15.97 8.87

ASSETS

LOSS 35 - 6.23 6.23 6.23

ASSETS

TOTAL 85 68.83 28.61 97.45 24.22

NPA

SUMMARY OF NPA ACCOUNT

(FOR THE YEAR 2009-2010)

(Figures in lakhs)

( Khasbag branch, belgaum)

Page 55
 Gross NPAs= Rs 97,45,045

Advances = Rs 4,68,21,644

% to Advances = Gross NPAs * 100

Gross Advances

= 97,45,045 * 100
4,68,21,644

= 20.81%

Net NPAs = Rs 73, 22, 724

Advances = Rs 4,43,99,000

% to Net Advances = Net NPA * 100

Net Advances

= 73,22,724 * 100
4,43,99,000

= 16.42%

Note:
1. Gross NPAs refers to total NPAs

Page 56
2 Net NPA = Gross NPA – ( total provisions held + balance in interest suspense account
+ DICGC/ECGC claims received and pending adjustment + part payment received
and kept in suspense account

INTERPRETATION:
The above diagram shows the various categories of non performing assets. Majority of the
assets belong to the sub standard category. These assets should not slip into the other
doubtful and loss categories. So the bank should monitor these accounts.

Page 57
MOVEMENT OF GROSS NPAs

SL.NO
PARTICULARS AMOUNT

1
Opening NPA level as on 01-04-2009 1968005

2
Less : recovery as on 01-04-2009 452392
: ledger balances in NPAs upgraded 0

: ledger balances written off as on 01-04-

361245
1154368
2009 Sub total

3 Add : ledger balance of fresh NPA accounT 8583375

: net variation in ledger balances of existing

7304
NPA Accounts
4
Closing NPA level as on 31-03-2010 9745047

INTERPRETATION:
The table shows movement of gross NPAs. The opening level of NPA as on 01-04-2009 is
taken. Certain items like recovery of NPAs and balances written off are deducted from the
opening level of NPA. New NPA accounts are added to the sub total. Net variation includes
expenses like issue of notice charges, advocate charges, etc.The balance obtained is closing
level of NPA.

Page 58
 CONCENTRATION OF TOP 5
BORROWERS

ASSET
NAMES CLASSIFICATION NPA

A sub standard 1225714

B sub standard 1058052

C sub standard 1024329

D sub standard 937818

E doubtful 917238

TOTAL 5163151

INTERPRETATION:

The above table shows the top five borrowers having NPA accounts. It accounts for 52%
of the total NPAs. Most of the assets are in the sub standard category. Proper steps should
be taken to avoid slippages into other category of assets.

Page 59
CASE STUDY
CASE

Mr. A is the proprietor of Acer Industries. He had applied for a loan in bank of Maharashtra
in the year 2006. The bank gave credit facilities like.

Sl no Type of credit facility Amount

1 Term Loan 4.25
2 Cash Credit 6.00
(Figures in lakhs)
The security given by him was plot .The guarantors were Mr. C and Mr. D. Since 28th Feb.
2010 he has not paid the installments for three months. The present status of credit facility
of Mr. A is
Sl no Type of credit facility Outstanding
balance
1 Term Loan 4.15
2 Cash Credit 6.42
(Figures in lakhs)
What should the bank do?

Page 60
 Answer
The loan has been classified as a Non Performing Asset. Mr. A hasn’t paid the
installments for more than three months. So the asset has slipped from standard asset to a
sub standard asset category as per the guidelines of RBI.

The bank issues a notice to Mr. A on 17th June 2010. The notice states that the Mr. A
has to pay Rs 10,58,051 along with an interest of 11.50% w.e.f 28.2.2010. If the amount is
not paid within 60 days from the date of the receipt of this notice then the bank would
exercise the powers under section 13(4) of SRAFAESI act.

The powers available under the Securitization and Reconstruction of Financial

Assets and Enforcement of Security Interest Act 2002 (SRAFAESI) are

 To take possession of the secured assets and the right to transfer by way of
lease, assignment or sale for realizing the asset.

 To take over the management of the secured assets including right to
transfer by way of lease, assignment or sale.

 To appoint a person as a manager to manage the secured asset.

 The dealing of secured asset is between the bank and the person who has
acquired the asset. The borrower cannot come in between.

As per section 13 (13) of the above Act Acer Industries is restrained from disposing
off or dealing with the securities without our prior written consent.

Page 61
 NPAs IN RETAIL SECTOR
(FOR THE YAER 2009-2010)

CATEGORY SUB DOUBTFUL LOSS TOTAL TOTAL

STANDARD NPA ADVANCES
A/CS Amt A/Cs Amt A/Cs Amt A/Cs Amt A/Cs Amt

Housing - - - - - - - - 32 107.57
Loans

Education - - - - - - - - 10 8.26
Loans

Two wheeler - - 1 0.37 5 0.68 6 1.05 35 7.96

loans

Four - - - - - - - - 6 11.19
Wheeler
loans

Consumer 2 0.37 - - 3 1.12 5 1.49 10 2.48

Loans

Personal 5 1.35 - - 4 0.59 9 1.94 16 3.83

Loans

Solar 4 0.68 - - - - 4 0.68 33 5.28

Loans

Adhar 1 0.17 - - - - 1 0.17 1 0.17

Loans

Total 12 2.57 1 0.37 12 2.39 25 5.33 143 146.74

( figures in lakhs)
( Khasbag branch, belgaum)

Page 62
 NPAs IN RETAIL SECTOR

INTERPRETATION:
The above diagram shows the non performing assets in retail sector. Personal loans has
the highest number of NPAs. Personal loans are clean loans. They do not carry any
security. The salaried and professionals take advantage of this. Where as housing,
education and four wheeler does not have any NPAs because the borrowers are making
regular payments.

Page 63
 NON RETAIL ADVANCES

CATEGORY SUB- DOUBTFUL LOSS TOTAL STANDARD TOTAL

STANDARD NPA ADVANCES

A/Cs Amt A/Cs Amt A/Cs Amt A/Cs Amt A/Cs Amt A/Cs Amt

Agriculture 6 22.27 1 8.99 - - 7 30.99 1 2.01 8 33.00

Whole sale - - - - - - - - 1 27.73 1 27.73

Traders

Micro and 27 50.68 3 6.61 19 3.84 49 61.13 76 149.52 125 210.65

small
enterprises

Others - - - - - - - - 54 48.55 54 49.84

Total 33 72.95 4 15.6 19 3.84 56 92.39 132 227.81 188 321.49

(FOR THE YEAR 2009-2010)

(Figures in lakhs)

( Khasbag branch, belgaum)

Page 64
INTERPRETATION:

The diagram shows the composition of various non retail NPAs. Micro and small
enterprises contribute 66% of the total non retail NPAs. The enterprises have failed to pay
the installments because most of enterprises located in Udyambag were closed due to
recession. Agriculture accounts for 34%. Whole sale traders and others do not have any
NPAs.

Page 65
 SIZE WISE CLASSIFICATION OF ADVANCES

CATEGORY SUB DOUBTFUL LOSS TOTAL STANDARD TOTAL

STANDARD NPA ADVANCE

A/Cs Amt A/Cs Amt A/Cs Amt A/Cs Amt A/Cs Amt A/Cs Amt

Below 9 1.37 2 0.23 28 1.76 44 3.36 75 7.85 114 11.2

25000

25000 – 19 9.58 2 1.26 5 2.05 26 12.90 86 42.41 112 55.3

100000

100000 – 5 10.05 - - 2 2.42 7 12.47 61 159.47 68 171.

500000

500000 – 3 21.29 2 14.48 - - 5 35.77 12 85.79 17 121.

1000000

1000000 – 3 32.95 - - - - 3 32.95 1 11.89 4 44.8

2500000

Above - - - - - - - - 2 63.35 2 63.3

2500000

Total 39 75.24 6 15.97 35 6.23 85 97.45 237 370.76 317 468.

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 (FOR THE YEAR 2009-2010)

( figures in lakhs)
(Khasbag branch)

INTERPRETATION:
The diagram shows size wise classification of NPAs. 37% of NPAs fall in the range of
five lakhs to ten lakhs and 34% falls in the range of ten lakhs to 25 lakhs. Together they

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account for 71% of the total NPA. This is an unhealthy sign for the bank. It should take
corrective measures in reducing the amount of NPAs.

PART - E
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 FINDINGS

1. In the year 2009-2010 the gross NPA was Rs 97,45,047 and net NPA was Rs
73,22,724.

2. For the year 2009- 2010 the gross NPA (%) was 20.81% and net NPA was
16.49%.

3. Among the various categories of non performing assets the

Sub standard assets =

77% Doubtful assets =
16% Loss assets = 7%

4. The provision coverage ratio for the year 2009-2010 is 24.85%.

5. There were moderate NPAs between 2005 and 2008. But the year 2009- 2010 had
a high NPA. The causes for the high NPA was
Closing down of micro, small and medium enterprises.

Effect of recession

6. Among the non retail NPAs the MSME sector contributes the most (i.e. 66% or Rs
61.33 lakhs.Whole sale traders and others do not have any NPAs. Agriculture
accounts for 34%.

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7. Among the retail NPAs the personal loans has the highest NPAs i.e. rs1.94 lakhs.
Housing, education and four wheeler loans do not have any NPAs because the bank
has given loan to creditworthy customers.

8. 37% of NPAs fall in the range of five lakhs to ten lakhs. 34% of NPAs fall in the
range of ten lakhs to twenty five lakhs. Together they account for 71%.

9. The top five borrowers having NPA accounts contribute 52% (51.63 lakhs) to the
total NPA. Majority of the NPA lie in the sub standard asset category.

10. The opening balance for the year 2009-2010 was Rs 11.54 lakhs (after deducting
the recoveries and written offs). During the same year fresh/new NPAs of Rs 85.83
lakhs were added.

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 RECOMMENDATIONS

1. The bank should look at the creditworthiness of the borrower while offering a
loan. Creditworthiness refers to regular income, the enterprise is running well,
capacity to repay, security, etc.

2. The bank should classify the NPA into ABC categories.

‘A’ category should consist of NPAs ranging from 5 lakhs to 10 lakhs and 10
lakhs to 25 lakhs.( 71% of NPA)
‘B’ category should consist of NPAs ranging from 25000 to 1 lakh and 1 lakh to
5 lakhs. (26% of NPA)
‘C’ category should consist of NPAs below 25000.( 3% of NPA)
Later the bank should recover the amount based on the above classification.
The bank should implement the various techniques namely SARFAESI act, lok
adalatas, notices, etc to recover the NPAS. By this method priority will be given
large NPAs. This will reduce the high amount of NPAs.

3. There shouldn’t be too much rotation of bank officers of the bank. Generally
the rotation is for 3 years. This creates a gap between the bank officer and
customer of a bank. The bank may find it difficult to monitor the loan if it keeps
on changing the loan officers. There shouldn’t be directed lending.

4. The bank should go for one time settlement instead of legal process because
the legal process will take more time.

5. Appoint an Asset Reconstruction Company. ARC provides a mechanism of

pooling together various skills in managing and disposing bad loans.

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 6. There should be timely sanction. There shouldn’t be delay in the release of
loans. The decision making process shouldn’t be slow.

7. The bank has given 45% of total advances as credit to MSME. The minimum
requirement is 40%. So the banks need to improve the risk profile of loans
given to MSMEs.
E.g.: check cash flow statement, performance, balance sheet ,etc

8. The bank should increase the provisions and write off the bad loans and
simultaneously follow up of write off loans.

9. Majority of the assets are in the sub standard category. There shouldn’t be in
slippages into other categories of assets. So the bank should monitor the
advances.

10. Bank should appoint special officers for the recovery of the bad loans. His job
will be to go to the houses of defaulters, personal monitoring, etc. SBI has
appoint special officers to recover the bad loans. Even Bank of Maharashtra
should adopt this measure.

CONCLUSION

I have undertaken the study of Non Performing Assets in Bank of Maharashtra.

The bank has a high amount of NPA. In non retail advances the MSME and agriculture

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contribute the most NPAs. In retail advances the personal and consumer loans
contribute the most NPAs.
The non performing assets have a major impact on profitability, liquidity and
credit. The bank should take precautionary measures. The bank should adopt various
techniques to recover the NPAs. This will reduce the high amount of NPAs.

BIBLIOGRAPHY

1. Websites:

www.bankofmaharashtra.in

www.rbi.org.in

www.google.co.in

2. Books:
Corporate accounting
(By M.B.kadkol)

Bank magazines

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3. Cream software

4. Financial statements

5. NPA reports

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