Inspection U/s 365 of the B.R.

Act 1949 (AACS) with reference to its Financial Position

31.03.2017 – Compliance
Para no. .O.'s Observation Compliance
1. Introduction and Overview:
i. The bank's branch network remained unchanged at 9 branches We have already pointed out in
and 4 on-site ATMs (closed after imposition of direction) compliance of this objection that the
during the recent period of review (PPR). The bank was working ii1 extended area of operation will
registered as a co-operative society on May 05,1993 under the be taken after taking.prior approval of RBI.
U.P. Co-operative Societies Act, 1965. It continued to function We have informed RBI that we will not
as a bank based on the latter Ref. No. UBD. BR. 947/C-2(15) operate any activity in extended area of
(A)-85/85 dated June 04, 1985 from RBI, CO indicating operation.
inclusion of the bank's name in the list of primary co-operative
banks in U.P. The bank was later granted a license on July 28,
2008 to carry on banking business. It was categorized as Tire I
bank a on The DPI. The bank had extended its area of operation
to all districts of Kanpur Division by amending its bye-laws on
January 03, 2011 without obtaining RBI permission. The
deficiency had not been rectified despite the same having been
pointed out in successive RBI inspection reports.
2 Issue of All Inclusive Directions(AID)
i. Despite being pointed out in previous inspection report Regarding withdrawal of deposits beyond
regarding withdrawal of deposits beyond the limit in violation the limit we have to submit that as per
of the direction in several accounts withdrawals of more than directions the payment to staff members
40000 were allowed without submitting cases for hardship to was not restricted. The list given in this
RBI. In many of deposit accounts withdrawals of more than para Serial-1 Sunita Gupta has withdrawn
100000 was also allowed. Details are given below:- the amount of Gratuity/PF after death of
Account number Name Remark her husband Shri Anil Gupta who was
(Withdrawn in employee of the bank, Serial-3 Sher
cash) Rs. Bahadur Singh a staff member of the bank,
Saving Account Serial-10 Smt. Geeta Bajpai a staff member
001000327401 Sunita Gupta 4.43 Lakh of the bank, Serial-11 Shashikant Tripathi a
Withdrawn daily deposit agent and has withdrawn the
after directions amount of earned commission. Smt.
001000372601 Shakuntla 1.37 Lakh Shakuntla Devi has withdrawn the amount
Devi Withdrawn with prior permission of RBI. The other
after directions members of this list has withdrawn the
031000483001 Sher Bahadur 1.08 Lakh amount according to which 40,000/- may
Singh Withdrawn be withdrawn from every account.
after directions
041000082701 Mahaveer 1.13 Lakh
Singh Withdrawn
after directions
041000210501 Pavitra Kumar 1.34 Lakh
Tiwari Withdrawn
after directions
041000387101 Pradeep Kumar 2.80 Lakh
Prajapati Withdrawn
after directions
041000611901 Munna Lal 1.03 Lakh
Batham Withdrawn
after directions
041000646401 Phool Chandra 2.00 Lakh
Withdrawn
after directions
 051000068901 Munna 1.01 Lakh
Withdrawn
after directions
091000101701 Geeta Bajpai 1.29 Lakh
Withdrawn
after directions
05100026430 Shashi Kant 1.58 Lakh
1 Tripathi withdrawn
after directions
12100066960 Dev Kumar 1.01 Lakh
1 withdrawn
after directions
12100088360 Shiwangi 1.10 Lakh
1 Pandey withdrawn
after directions
12100115470 Kuldeep 1.01 Lakh
1 Singh withdrawn
after directions
12100131470 Serwesh 1.01 Lakh
1 Tiwari withdrawn
after directions
12100119570 Vineeta 1.01 Lakh
1 Kushwaha withdrawn
after directions
12100134940 Dharmraj 1.20 Lakh
1 Singh withdrawn
after directions
12100140050 Champa Devi 1.01 Lakh
1 withdrawn
after directions
Fixed Deposits
041800039801 Himanshu 1.02 Lakh
withdrawn
after directions
041800147401 Bindeshwari 1.20Lakh
withdrawn
afterdirections
ii. Multiple Deposit withdrawal
Despite being pointed out in previous reports, proceeds of As have already mentioned that as per
multiple term deposits standing against the names of single instructions of RBI under directions Rs.
depositors and having cumulative maturity value far exceeding 40,000/- was allowed to be withdrawn from
the enhanced ceiling of Rs 40000/- were paid to the respective every account. Hence these withdrawal
depositor. The bank was knowingly doing it. In some cases, were allowed. Now we are informed that
single cheque/voucher was issued for withdrawal from different only Rs. 40,000/- is allowed to any single
accounts of a particular depositor. Multiple withdrawals were depositors. We have immediately stopped
seen in cases of Ram Prakash Awasthi (17.69 lakhs), Leelawati the previous practice.
(3.2 lakhs), 13al KrishnrGupta (1.6 lakhs), Anamika Gupta(1.6
lakhs), Shvam Kumar Gupta (3 lakhs), R.C Mishra (3.2
lakhs)etc. A detailed list of withdrawals allowed in a few
accounts is given in Annex 1.
iii. Adjusting loan against deposit-
The bank was allowed to adjust loans against term deposit as The RBI has allowed us to adjust loan
per letter dated deposit as letter dated December 30, 2016 against term deposit as per letter mentioned
subject to terms and conditions of the loan agreement. in this para. In this reference we have to
However, it was observed that the bank had already adjusted submit that our request for this purpose was
loans beyond the 40000 limit during the PPR even before it already pending with RBI and we were
received permission from RBI. confident that our this request will be
Sr. Name Account no. Amount Date accepted hence the loan accounts
 Adjustment mentioned in this para were adjusted in
(in Lack) interest of the bank prior to permission of
1. Shivendr 00010005900 15.73 October RBI.
a Kumar 31,2015
Tiwari
2. Babu 03400068401 1.22 September
Ram 30,2015
3. Kusum 09040003280 1.46 October
Shukla 12, 2015
IV Fresh deposits in savings and Current Account- Regarding opening of escrow account as
The bank was maintaining a current account with ICICI Bank per advise of RBI we have to submit that
wherein amounts received through RTGS/NEFT were we have informed RBI that bank's current
automatically credited to the accounts of the bank's SB and account are already being operated in
current account holder. Many credits aggregating to Rs. 129.86 HDFC Bank, Corporation Bank, Punjab &
lakh had been received during the period from July 7, 2015 to Sind Bank & ICICI Bank. Hence a new
September 30, 2017 in the accounts after imposition of escrow was not opened and RBI has not
directions through this account and the bank did not take any further pressed for the same. As for as
step to slop these credits. The bank was advised to open an RTGS/NEFT account is concerned we have
escrow account vide RBI letter dated September 18, 2017 for to submit that the Regional Office is
facilitating recovery in case of loans and advances and already aware of the fact in writing.
permissible expenses as per extant guidelines/directions but However, we submit that withdrawals from
same was not done by the bank till the conclusion for present the accounts after crediting the amount
inspection. It was continuing the RTGS/NEFT account with through RTGS/NEFT have not been
ICICI Bank and was allowing direct deposits to savings and allowed.
current accounts.
v) Operations in account with rent-
The normal operations in the savings account of the lessors of We have stopped normal operations of the
the bank branches were observed in violation of the direction. accounts of lessors of bank branches as
However. The bank had stopped normal operations and started mentioned in this para. However, regarding
paying rent through cheque after June 30, 2017. During the the withdrawal of amount excess to rent
period when the rent was being transferred to the saving amount we have to submit that this was
account of the lessors, The depositors was allowed to withdraw withdrawn in lieu of approval for rent
amount more than the rent amount. Details of discrepancies are payment. However, the rent is now being
given below
paid through cheque.
Account name Account Number Remark
Raj Narayan 011000000701 Total Rent credit
Mishra (Kakadeo) in the account
since the date of
direction was Rs.
4.09 lakhs
whereas
withdrawal during
the same period
was Rs. 7.41
lakhs thus bank
had allowed
additional Rs.2.32
lakhs withdrawal
in violation of the
directions.
Sarojini Devi 081000004701 Rent was credited
(lal Bung) to the A/C
allowed to be
withdrawn
Ashtosh Mishra 121001047901 Rent was credited
Huf (CEO) (RL Nagar) to the A/c allowed
to be withdrawn
Saurav Mishra 121001509901 Rent was
 (son of CEO) (R L Nagar) credited to the
A/c allowed to be
withdrawn
Saurav Mishra 091000039801 Rent was
(Son of CEO) (Barra) credited to the
A/c allowed to
be withdrawn
Hemant Kumar 001000359901 An amount of Rs.
(Deo Nagar) 94000 was
withdrawn in
violation of AID
over and above
rent credit since
the date of
imposition of
AID.
vi) Operation in account of Staff-
The bank was paying staff salary in the savings account held Regarding operations in account of staff we
within the bank. These accounts were operating normally even have to submit that the salary/wages will be
after the imposition of directions. As in the case of rent paid through cheque to staff members.
accounts, the bank had allowed withdrawal beyond the salary Regarding the previous operations in this
amount credited in the staff account in violation of restrictions account it is to submit that withdrawal in
imposed by RBI. In the savings account of Shyam Bahadur these accounts have taken place in the
Tripathi (121000509501), the bank had transferred matured cover of staff members. Now we strictly
term deposits to this accounts and allow multiple withdrawals assure to comply with RBI guidelines.
of Rs. 40000 from the account besides the withdrawal of salary.
Staff, including the CEO was allowed to withdraw deposits
from multiple accounts and more than the limit of Rs. 40000
which was violation of RBI directives.
S. No. Name Accounts Amount
withdrawn
1 Shyam 121000509501 Rs. 1.72 lakh was
Bahadur withdrawn from
Tripathi May 01, 2016 to
May 6, 2016.
Ashutos 001800218201 Rs. 2.00 lakh
h Mishra 031800293701 withdrawn from
CEO 051800119501 various FDR
081800051801 Accounts.
121801129001
viii) Monthly Progress- Monthly progress report with details of
The bank was not submitting monthly progress with details of share capital account and quarterly
share capital account to RBI thereby violating para (vii) of the progress report on the proposed action plan
directive DCBS.CO.I3SD-IV. No. D-53/12.28.003/2014-15 has been submitted but these were not
dated June 30, 2015. It had not submitted quarterly progress on submitted regularly. However, the
the proposed Action Plan to RBI. information asked by the Regional Office
are being submitted regularly regarding
cash in hand, cash in bank, deposit profile,
Recovery etc. We assure to submit both the
reports regularly from next month.
3. Assessment of Net-Worth.
3.1 Paid up Share Capital:
i) The paid-up share capital (at book value) of the bank had The refund of share capital amountuaK Rsc
increased from Rs. 482.41 lakh as on the DLI to Rs. 488.05 88.p3 lakh as pointed out in this para we
lakh as on the DPI registering an increase of Rs. 5.64 lakh have to submit that this amount was
(1.17%). The share capital had increased due to infusion of refunded at bra pc h J&fel but the same
fresh capital by existing members to the tune of Rs. 5.64 lakh was not adjusted in share capital account at
during the PPR. The bank had refunded share capital of Rs. Head Office due to restriction of refunding
88.53 lakh during the period from April 1, 2015 to March 31, the share capital in positional negative Net-
 2017 but the same was not adjusted in the share capital account
of the bank (details as given in Annex-2).
ii) The CL and SCL balances of the share capital account were
not balanced and the GL was showing an excess balance of Rs.
2.02 lakh which had been treated as outside liability by the
Inspection Officer.
3.3 The CRAR as assessed by the I.O. at (-) 102.05% as on the
DPI was less than the regulatory requirement of CRAR at 9%.
The bank had not taken concrete steps for augmenting the
capital and improving the CRAR as required.
3.4 The CRAR had deteriorated sharply from (-) 51.88% as on the
DLI to (-) 102.05% as on the Dpi mainly due to increase in
accumulated losses, requirement of additional provision for
loan losses, reversal of unrealized interest on non-performing
loans and advances, provision for other liabilities, erosion in
value of other assets, and de-recognition of share capital
refunded.
Solvency / Net Worth
3.5 The realizable value of assets of the bank as on the DPI after
making all provisions and depreciation assessed at Rs. 3926.13
lakh was less than the outside liabilities at Rs. 5518.87 lakh as
worked out in Annex VI. The real of exchangeable value of
paid up capital and reserves (net worth) had been assessed at (-)
Rs. 1592.74 lakh. The divergence between the book value and
the assessed value of net worth is analyzed in Annex VI1.
3.6 There had been a decrease of Rs. 434.37 lakh (37.50%) in the
real or exchangeable value of paid-up capital and reserves since
the DLI when it was placed at (-) Rs. 1158.37 lakh. This
decrease in net worth was mainly due to increase in
accumulated losses, requirement of additional provision for
loan losses, reversal of unrealized interest on non-performing
loans and advances, provision for other liabilities, erosion in
value of other assets and de-recognition of Share capital
worth.
The balances of share capital account are
balanced manually. The difference of Rs.
2.02 lakh is difference in computer system
and manual GL on account of some wrong
feeding. The rectification is going on and
we hope this will be tallied shortly. We
have already submitted our this explanation
in previous compliances.
The bank has prepared a revised action
plan to augment the share capital by way of
conversion of deposits into equity and fresh
share amount from the existing members of
the bank. Besides this bank has started
recovery proceedings on war footings. The
recovery from Nagar Nigam Kanpur is
being received regularly. All the defaulters
have been covered under legal recovery
proceedings. The bank has taken
concurrent steps to improve the financials
of the bank and to bring the CRAR level up
to prescribed limit.
The bank has informed Regional Office
regarding the re-structuring of the advances
pertaining to Nagar Nigam Kanpur in
which recovery is coming regularly by
deducting the installment amount from
their salary. We have requested RBI to
consider these cases as secured and
standard. These advances to employees of
Nagar Nigam have been sanctioned
according to Section 40 & sub-section 1, 2,
3 of U.P. Cooperative Societies Act, 1965.
On these grounds provision for loan losses
will be minimized. We are seriously
engaged in raising the share capital and
recovery of NPA accounts this will
certainly improve the CRAR of our bank.
As in para 3.4 above.
As in para 3.4 above.
 refunded.
3.7, 3.7:- With the real or exchangeable value of paid-up share
3.8 & capital and reserves at (-) Rs. 592.74 lakh as on DPI, the bank
3.9 was not considered to have adequate assets to meet its liabilities
as required under Section 22 (3) (a) of the Banking Regulation
Act, 1949 (AACS). Further, the bank did not comply with the
requirement of minimum capital and reserves prescribed under
Section 11(1) of the Act, ibid.
3.8:- The assessed value of the net worth further showed that
with reference to the book value, paid up share capital of the
bank was totally wiped out and the deposits had also been
eroded to the extent of 30.21% as on the DPI as compared to
the deposit erosion of 17.08% as on the DLI.
3.9 The net worth and CRAR were assessed by the 1.0. at (-)
Rs. 1635.92 lakh and (-) 112.45% respectively as on September
30, 2017 i.e. the last date of the month preceding the date of
commencement of present inspection.
3.10 The bank in its action plan dated June 13, 2017 had submitted
a list of depositors who had agreed for conversion of deposits
into equity with an amount aggregating to Rs. 100.44 lakh.
However, after receipt of approval vide letter dated July 12,
2017 from RBI the bank had been able to bring in only Rs. 6.53
lakh till September 30, 2017 against its proposal of Rs: 100.44
lakh, thereby increasing the paid-up-capital to Rs. 494.58 lakhs
as on September 30, 2017. The bank had also proposed to bring
in additional capital of Rs. 180.00 lakh by way of conversion of
deposits by September 2017 but could not materialize the same.
3.11 The bank had inflated its capital by an amount of Rs. 88.53
lakh as it had refunded share capital amount to members after
April 1, 2015 but had not adjusted the share capital account.
The amount of Rs. 88.53 lakh was not reconciled and was
being debited from branch adjustments account (namely Head
Office account). The refunding of share capital of Rs. 88.53
lakh was done despite being in negative net-worth. On
inspecting HO account, it was observed that the amount of Rs.
77.42 lakh out of Rs. 88.53 lakh was received between March
27, 2015 and March 31, 2015. However the same amount was
fully refunded till May 15, 2015 by the branches. It was done to
inflate the paid-up capital as on March 31, 2015. The amount
had not been reconciled in HO account since more than two
years therefore the share capital of the bank is overstated by Rs.
88.53 lakh. The inspecting officer has derecognized the amount
of Rs. 88.53 lakh from share capital. The details of complete
refund of share capital are given in Annex 2 along with one leg
debit transaction narrations (as no credit transaction was done
by the bank).
3.12 The bank had deliberately inflated the share capital to
improve the financials as on March 31, 2015 onwards. The
modus operandi adopted by the bank in some of the cases was
to accept capital from cash credit accounts and refund the same
Regarding these paras we have to submit
that our efforts for increasing share capital
and recovery of NPA accounts are
vigorously continued. However, if our
submissions are accepted by the RBI we
are confident that our financials will be up
to the mark and CRAR and Net-worth will
convert up to the required level. In this
context we submit the actual financial
position of the bank as under:-
a)Deposits to be paid to accoymt holders
Rs. 4867.11 lakh
b)Our investinenf and advances:
(i) Investment in Govt. Securities- Rs.
1843.40 lakh
(ii) Cash in Hand and Cash in bank-
Rs. 38.95 lakh and Rs. 255.37 lakh
(iii) Advances to be recovered-
Rs.3367.15 lakh
On the above grounds we have surplus
funds to meet our liabilities.
We are confident to increase our share
capital by way of conversion of deposits
into equity up to the fixed targets in our
action plan and by way of increasing share
amount by existing members till March
2018. The conversion process is in the way.
Our efforts for increasing share capital and
recovery of NPA accounts is being
operated on campaign basis.
We have mentioned our view point in
para 3.1.1 above. We further submit that
our effective steps to increase the share
capital are still going on and we are very
hopeful to achieve the target of augmenting
share capital and to convert our Net- worth
positive. As our Net-worth turns into
positive we will adjust this amount of share
capital amounting Rs. 88.53 lakh.
It is not correct that the share capital was
raised by debiting CC account. Virtually
the share capital amount by the persons as
pointed out in this para have deposited

after March 31, 2015. The method was executed in CC Account
of Durga Filling Centre (Mamta Tripathi, Rajiv Tripathi,
Mahima Tripathi and Vikram Tripathi), Awasthi Bus Centre
(Manish Awasthi), and Preeti and Neel Kumar. Durga Filing
Centre and Awasthi Bus Centre have been classified as NPA by
the IO.
3.13 The bank was having multiple folio accounts for one
shareholder. The bank was opening new folio account for
existing shareholders also. Therefore, the total percentage of
share capital with any individual shareholder could not be
checked. A few instances of multiple folio accounts are Brijesh
Kumar (Folio No.-901401366201, 901401295301), Chandi Lai
(901400754001, 901400754601) and Govind (901400682901,
901400848601).
4. Funds Management & Investments
4.1 The deposits of the bank had decreased from Rs. 6783.31 lakh
as on the DLI to Rs. 5271.66 lakh as on the DPI registering a
decrease of Rs. 1511.65 lakh (22.28%) during the PPR. It had
further decreased to Rs. 4955.21 lakh as on September 30, 2017
(the last day of the month preceding the date of commencement
of the present inspection). The bank had not adhered to the
directions regarding repayment of deposits as explained in
detail in Para 2 of this inspection report. During the period from
the date of imposition of directions to the end of September
2017, the total outflow on account of payments to the
depositors (as per the terms of the directions) as well as on
hardship grounds was to the tune of 4253.49 lakh.
4.1.1 As per the available data, the bank had 1625 overdue time
deposit accounts amounting to 733.59 lakh as on the DPI. The
bank had not provided interest on these accounts in accordance
with Para 2 (xi) of the RBI Circular UBD. BPD. (PCB). Cir.
No. 9/1;3’0l.000/20p8-09 dated September 01, 2008.
Accordingly, a provision of 52.32 lakh towards interest payable
on matured term deposits had been suggested as on the DPI.
4.2 The bank did not have a uniform interest rate for deposits of
same period as it was compounding interest quarterly, semi-
annually and annually in different accounts. This was a
violation of Para 4(b) of Master Direction DCBR. Dir. No.
1/13/01.000/2015-16 dated May 12, 2016 on 'Interest Rates on
Rupee Deposits'.
4.3 The bank had not properly allotted the Unique Customer
identification Code (UCIC) to its customers as mandated in
terms of Para 62 of the RBI Master Directions DBR.AML.BC.
No.81/14.01.001/2015-16 dated Feb. 25, 2016 on 'Know You
Customer (KYC)' dated February 26, 2016. A number of
customers had been allotted multiple customer IDs and it was
share capital through cash or cheque. The
CC account of Preeti & Neet Kumar have
been adjusted after approval of RBI. Durga
Filling Centre has deposited rest amount
only Rs. 14.18 lakh is debit balance for
which a cheque by another account holder
has deposited to credit in CC account of
Durga Filling Centre. The permission for
the same is awaited from Regional Office.
In the account of Awasthi Bus Centre
outstanding balance is Rs. 18.23 laWi in
comparison to Rs. 26.22 lakh as on
3MD.216. Accordingly these two accounts
should Hot be treated as NPA.
Regarding the multiple folio accounts we
have to submit that this discrepancy
probably has occurred due to wrong
feeding in computer system. This is now
rectified.
We have mentioned our view point in
above para- 2. Virtually we have followed
the RBI directions permitting withdrawal
of 0.40 lakh from every account. As an
when we were suggested the allow
withdrawal of Rs. 0.40 lakh once to a
individual account holder. We have
stopped this practice.
The part payment of Rs. 0.40 lakh has
been made in the most of the overdue FDR
account. As per RBI guidelines in overdue
FDR account interest is to be given on
saving bank interest rate. We have
provisioned Rs. 5.00 lakh for the same. The
payment of interest will be assured at the
time of payment of the said FDRs.
The compounding of interest in FDRs
quarterly and in saving account half yearly
is our practice. We strictly follow the
instant guidelines of RBI.
We have explained our view point in
previous compliances. Virtually the letter
mentioned in this para was received after
7th July, 2015. Hence Unique Customer
Identification Code was not allotted. Now
we have allotting these codes.
 very difficult to ascertain the aggregate balance held by a
particular customer.
4.4 Size and Composition of the Investment Portfolio
4.4.1 The bank's investment in Government and other approved The NDTL as on 30.09.2017 is
securities had decreased from Rs. 2857.69 lakh as on the DLI Rs.4867.11 lakh. The detailed submission
to Rs. 2043.22 lakh as on the DPI forming 37.63% of the bank's has already been given in paras-3.7, 3.8 &
reported NDTL of Rs. 5429.68 lakh applicable for March 31, 3.9 above.
2017. The investment in Government Securities had further
decreased to Rs. 1833.37 lakh as on September 30, 2017.
4.4.3 The bank had transferred an amount of Rs. 1.35 lakh Marking of unclaimed deposits is under
pertaining to 98 accounts on February 27, 2017 to the DEAF process as suggested by IO in this para.
fund. However, the system of identifying such accounts was
not sufficient as IO had further identified 115 term deposits
amounting to Rs. 43.33 lakh as on March 31, 2017 which
should have been transferred to the DEAF fund and were not
marked as unclaimed deposits. This was a violation of the RBI
Circular DBOD. No. DEAF. Cell. BC/114/30.01.002/2013-14
dated May 27, 2014.
4.9 Adherence to Other Regulatory Guidelines: We have explained in previous
The investment transactions were not subjected to compliances that IFR will be created by
internal/concurrent audit during the PPR as required in terms of appropriation of profit at the time of sale in
Para 5.3.6 of the RBI Master Circular DCBR. BPD (PCB). MC. future.
No. 4/16.20.000/2015-16 dated July 01, 2015 'Investment by
Primary UCBs'. The bank was not strictly adhering to the MTM
valuation frequency as prescribed in Para 17.1.3 of the RBI
Master Circular, ibid. As on the DPI, the bank had held
Investment depreciation Reserve (IDR) of '15.59 lakh and
Investment Fluctuation Reserve (IFR) of '3.11 lakh. No
shortfall in provisioning for depreciation in investment was
assessed. The IFR had increased from '0.63 lakh as on March
31, 2013 to 3.11 lakh as on the DPI. However, as the IFR
beyond '0.63 lakh (2.48 lakh) was not created by way of
appropriation of profit but by making provision at the rate of
5% at the time of sale itself, the same was treated as IDR as per
Para 18.8 of the Master Circular ibid.
4.10 Payment of DICGC Premium: The amount of Rs. 0.05 lakh as suggested
The bank had sent the premium to DICGC on time during the by IO is being deposited with DICGC.
PPR. It had also sent the certificate to DICGC duly certified by
the statutory auditors in respect of computation of assessable
deposits as required in terms of DICGC letter No. DICGC
/9943/05.60.999/2011-12 dated September 21, 2011 for the half
year ended September 201b and the year ended March 31,
2017. However, the computation of assessable deposit was
short by '52.32 lakh as the bank had not taken into account the
interest payable of matured term deposits. Accordingly, a
provision of '0.05 lakh was suggested by IO as on the DPI.
5. Loan, Fixed Assets and Other Assets
5.1 Size and Composition of the Loan Portfolio Loans and We are taking effective steps to recover
advances of the bank had decreased from 3569.87 lakh as on the NPA account. We hope after recovery
the DL1 to 3493.46 lakh as on the DPI registering a decrease of of NPA accounts. The OIR certainly will
76.41 lakh (2.14%) during the PPR.lt had decreased marginally decrease.
to '3397.66 lakh as on September 30,2017. However, overdue
Interest Reserve had increased from Rs. 344.43 lakh as on DLI
to Rs.567.02 lakh as on DPI due to increasing NPAs as well as
insufficient recovery in NPA accounts. The OIR as on
 September 30, 2017 was Rs.624.07 lakh.
5.2 Connected Lending and Normal Loans
The bank had reported gross NPAs of '2024.78 lakh as on the
DPI as against gross NPAs of '792.23 lakh as on the DLI.
However, the IO had assessed gross NPAs of '3177.98 lakh as
on the DPI as against the assessed gross NPAs of of'2774.64
lakh as on the DLI. As per the data furnished by the bank, no
loans were outstanding under connected lending, i.e. loans
related to the Directors/ their relatives, the CEO and other top
executives as on the DPI. However, the IO identified four loan
accounts with an outstanding balance of '40.96 lakh as on DPI.
These were: A/c nos. 000800095701 (Shri A.K. Dwivedi,
outstanding Balance-'9.72 lakh, 090400021601 ( Shri Gaurav
Mishra / Saurav Mishra-son of CEO, outstanding balance-
’14.17 lakh) , 120400327301- (Smt. Sushma Tripathi Wife of
Branch Manager K.S. Tripathi, outstanding balance - '12.58
lakh) and 000800124901 (AK Dwivedi, outstanding balance -
'4.49 lakh). The remaining balance of '3452.50 lakh pertained
to normal lending. The bank had classified a/c no.
120400327301 as 'Loss'. The account was a case of suspected
fraud as no property documents were taken in the housing loan.
Accordingly, the extent of NPAs under normal loans had been
assessed at '3151.29 lakh and '26.69 lakh respectively.
5.3 Compliance with the prudential Guidelines Regarding
IRAC Norms
i) The bank had not adhered to the prudential norms on income
recognition, asset classification and provisioning during the
PPR. It was not classifying NPAs on an ongoing basis. A
divergence in classification of 317 standard accounts for an
amount of '1084.91 lakh was identified by the lO. Further, 751
accounts with an outstanding balance of '1752.85 lakh were
either wrongly classified by the bank or short/nil provisioning
was made. 1460 accounts with outstanding balance of Rs-
105.84 lakh were identified by IO as Doubtful 1 - unsecured as
the amount outstanding was equal to the Share Capital
contributed. Further, due to AID it had not refunded/adjusted
capital. Thus, the amount was outstanding on these accounts.
No interest was for this amount in the loan accounts which was
a violation of Para 2.1.7 of RBI Master Circular DCBR.BPD.
(PCB) MC No. 12/09.14.000/2015-16 dated July 1, 2015 on
'incomee Recognition, Asset Classification, Provisioning and
Other- Related Matters - UCBs'. The details are furnished in
Annex. V. A total shortfall of '1699.59 lakh in provisioning had
been identified by the IO. Further, the bank had also taken un-
realized of '244.36 lakh on NPAs to its income which needed to
be reversed.
ii) Despite the same having been pointed out in the last RBI
inspection report, the bank had continued to charge interest on
loan accounts classified as NPAs as on March 31, 2017 and
taken the same to income in many cases, for e.g.083400035301
Ajay Kumar Verm a, 090400032001 Abhay Kumar Shukla,
040400071201 Beena Dwivedi , 083400035301 Ajay Kumar
Verma, 0834000354 Santosh , 083400035501 Sanjeevan Lai,
083400035801 Satendra Kumar Pandia, 083400035901 Yogesh
Kumar etc.
5.5 Main Reasons for Divergence from the Classifications
Regarding connected lending we have
already explained in previous compliance.
According to which these advances are not
under connected lending. In account of
Shushma Tripathi we have categorized this
account as loss account regarding
suspected fraud for this account we have to
submit that LIC policy amounting Rs. 2.00
lakh, two vehicles and gratuity and PF
amount of Shri K.S. Tripathi her husband is
attached with this loan account. Hence this
account in no way should be treated as
suspected fraud.
We try to classify NPA on an ongoing
basis. The divergence in classification of
317 standard accounts for an amount of Rs.
1084.91 lakh is concerned we have to
explain that these accounts were heated as
standard advances on account of assurances
to deposit the balance of installments very
'Soon by the borrowers. Regarding short
provisioning we have explained in above
paras. 'However, regarding reversal of Rs.
244.36 lakh interest charged on NPAs we
have to submit that out of these accounts
recovery in most of the accounts have been
taken place and interest has been
recovered. At the end of financial year
201718 if any such account remains
without recovery the rest interest amount
will be reversed.
The interest is not being charged in the
account mentioned in this para after
31.03.2017.
 The main reasons for divergence in asset classification by the
bank were its reluctance to classify the accounts as non-
performing despite apparent irregularities, wrong asset
classification and under provisioning in respect of some
Accounts classified as NPAs by the bank. Further, the bank
continued to book interest income on accrual basis as
classifying an account as NPA would result in decrease of
interest income. This would further result in decreased
profit/increased loss.
5.6 NPAs as on the DLI and the DPI:
The assessed gross and net non-performing advances formed
90.97% and 90.30% of the gross and net advances respectively
as on the DPI. There had been a deterioration in the quality of
loan portfolio as compared to the previous RBI inspection. The
assessed gross and net NPAs had increased from the level of
'2774.64 lakh (77.72%) and '255.46 lakh (76.27%) respectively
as on the DLI to '3177.98 lakh (90.97%) and '2938.80 (90.30%)
lakh respectively as on the DPI. The main reason for this
increase may be attributed to the non-recovery of installments
from the employees of Nagar Nigam due to shifting of their
salary accounts to other banks. Further, most of the accounts
running satisfactorily had become irregular after imposition of
directions as the bank had failed to ensure recovery in these
accounts. The assessed gross and net NPAs and further
increased to '3166.68 lakh and '2927.50 lakh respectively as on
September 30, 2017 (the last date of the month preceding the
date commencement of the present inspection) constituting
93.20% and 92.69% respectively of gross and net advances.
5.7 Profile of NPAs and Adequacy of Provisions
The profile of NPAs, segment-wise break-up and detailed
assessment of adequacy of provision for loan losses are given
in Annexure IV. There was no shortfall in provision for
standard assets. However, the bank had not made adequate
provisions for loan losses and a shortfall of '1699.59 lakh was
assessed by the I.O. as on the DPI.
5.8 Assessment of Recovery Policy and Process
i) Loans granted to the employees of the Kanpur Nagar Nigam
constituted the major portion of the bank's loan portfolio having
an outstanding balance of around '1200 lakh (40% of total
advances of Rs. 3493.46 lakh) as on the DPI. No installments
were received from Nagar Nigam pertaining to these loans
during the PPR. The bank had approached the Hon'ble
Allahabad High Court for recovery of these loans. The High
Court, vide its order dated August 18, 2015 had directed the
bank to approach Nagar Nigam authorities with details of such
borrower employees and the Nagar Nigam authorities were
directed to consider and decide the same in accordance with
law by a speaking order. Accordingly, the bank had submitted a
list of 403 accounts (whereas nearly 800 loans A/Cs were
outstanding in the names of Nagar Nigam employees) to the
The bank has stopped to charge interest in
NPA accounts. Our effective steps for
recovery of NPA accounts is continuing on
war-footing.
As IO has already mentioned in this para
that increase in gross and net NPAs are due
to imposition of AID. It is fact that before
imposition of AID, the recovery from
Nagar Nigam employees was fairly very
regular, but restricting the clearing services
(ECS) of the bank these accounts were
shifted to other bank and recovery of our
bank was totally disturbed. With our efforts
now recovery of Nagar Nigam has turned
in regular recovery by way of deducting the
installments from the salary of employees.
We have covered other than Nagar Nigam
advances under legal recovery proceedings.
Recovery is coming smoothly. We are
hopeful to minimize the gross and net
NPAs in coming months.
We have restructured the accounts of Nagar
Nigam Kanpur after regular recovery by
deducting the installments frony thpir
salary. In this context we have also
submitted a office note with approval of the
board to RBI to take these accounts secured
and standard advances. A fair and practical
consideration in the matter the required
provision will certainly be minimized and
we shall in a position to make required
provision for loan losses.
We are trying our best to receive the
deducted installments from all account
holders as per our list submitted with Nagar
Nigam. We are confident to succeed in our
efforts.
 Nagar Nigam authorities vide its letter dated August 18, 2015.
During the PPR, recovery had completely stopped from these
loan accounts and bank did not receive any installments from
Nagar Nigam. Vide a letter dated June 28, 2017, the Municipal
Health Officer, govt. of UP ordered the Nagar Nigam officials
to deduct and repay the installments of the list of employees
submitted by the bank. Accordingly, two installments were
received in months of July 2017 and August 2017 till
September 30, 2017 in respect of 188 and 266 loans accounts
respectively as against a list of 403 accounts submitted by the
bank. Installments for the month of August 2017 was received
after September 30, 2017 for 243 loans only.
ii) The bank had initiated proceedings under SARFASI Act The proceedings under SARFASI Act
against some defaulting borrowers and an amount of '35.00 against 15 defaulters have been initiated
lakh had been recovered from one account in the name Ajeet which cover approximately Rs. 2.00 crores.
Kumar & Anjani (05040007270) during the PPR. The proceedings are near about complete.
We are hopeful to recover these account up
to 31 March, 2018.
iii) The bank had formulated a recovery policy as a part of its loan The detailed procedure for recovery of
policy duly approved by the Board which was last reviewed on bad debts will be included in the recovery
July 07, 2017. However, detailed procedure for recovery of bad policy of the bank after approval of
debts had not been incorporated in the policy. Regular Managing Committee of the bank.
monitoring of overdue position was not done and list of
potential NPAs was not prepared. Documentation was defective
and securities were not charged properly. Some efforts had
been made to re3cover loan amounts from the Nagar Nigam
employees. However, sufficient efforts were not visible in case
of other accounts. Whatever efforts had been undertaken by the
bank had not helped in reducing the extent of NPAs and its
financials have deteriorated during the PPR.
ii) The bank's system of follow up for recovery of NPAs was As we have already mentioned in above
highly unsatisfactory. As per the data provided by the bank, it paras that our efforts for covering all
had sent registered notice to 801 defaulter borrowers, 21 cases defaulters including NPA accounts under
were under arbitration and awards were pending execution in legal proceedings of arbitration SARFASI
99 cases. Act, and other recovery Act are now
complete. We hope a great success in
recovery of NPA as well cither accounts.
iii) On inspecting loan documentation, it was observed that the The notices to all defaulter accounts are
bank had not sent recovery notice to some of the borrowers being sent.
during PPR. Some of the instances where last communication
was sent in July 2015 were in accounts viz. 040400068701,
040400069701, 040400071201, 083400039101 etc.
5.9.1 The bank had reported recovery of '462.85 lakh as against As have stated in the previous
fresh slippage of '1695.40 lakh during the PPR. However, gross compliances that the accounts in which
under reporting of NPAs was observed as many accounts which recovery is being received regularly have
were identified as NPA by the IO had not been included in the not been included in the list of NPA
statement of NPAs (Statement 3) furnished to the inspecting accounts though these accounts were
officer. Further, the gross NPAs had been assessed at '3177.98 marked under NPA by the IO. Regarding
lakh as against the reported gross NPAs of '2024.78 lakh as on implementation of fixing a staff
the DPI. The bank had a policy for fixing staff accountability accountability we have to submit that the
but the same was not being implemented in case of slippage of recent slippage of account from standard to
loan accounts from standard to NPA categories. This was a NPA is not fault of staff. This slippage has
violation of Para 3.3(iv) of Master Circular - DCBR. BPD. occurred only after imposition of AID and
(PCB) MC No. 12/09.14.000/2015-16 dated July 1, 2015 on suspension of clearing facility.
'Income Recognition, Asset Classification, Provisioning and
Other Related Matters-UCBs’.
 5.9.2 The bank was showing recovery in NPAs of Rs. 462.85 Recovery in NPA accounts of Rs. 462.85
during PPR. However, it could not provide separate data lakh is mostly relates to NPA accounts. The
regarding recovery of interest amount and principal amount. separate data regarding recovery of interest
The recovery information was incorrect as several of the and principal is available in system. The
accounts mentioned in the recovery list were classified as recovery from employees of Nagar Nigam
standard by the bank as on DPI. Thus, bank was showing total has started as mentioned by the 10 in this
credit in its loan accounts during the PPR as Recovery in para. Accordingly we have re-structured
NPAs. However, in most of these accounts, these recoveries these accounts and have requested RBI to
would not result in any write back of provisions as there was a consider these accounts as standard
shortfall of'408.76 lakh in provisions as per the bank's own account. The documentation as pointed out
assessment. This shortfall had increased to '1699.59 lakh on in IR have been completed obtaining the
account of divergence identified by the IO. The recovery from required documents.
the loan accounts of Nagar Nigam employees had stopped after
February 2016 and there was no further recovery in these
accounts till June 2017. Two instalments were recovered in the
months of July and August 2017 till September 30, 2017 but
the recovery was not sufficient for write-back of provisions.
Recover}' in other accounts had also become irregular resulting
in the increase in assessed gross NPAs from '2774.64 lakh as on
the DLI to '3177.98 lakh ns on the DPI and a slight decrease to
'3166.68 lakh as on September 30, 2017 due to decrease in total
advances. No efforts had been made by the bank after issue of
Directions for obtaining the documents in the loan accounts
where documentation was defective/ insufficient.
5.9.3 The record of recovery in NPA accounts during the last six We are vigorously engaged in recovery
months (April 2017 to September 2017) was highly NPA accounts as well as in other accounts
dissatisfactory. The bank had submitted a list of 456 accounts by taking these covered under legal
where 117.52 lakh was received after DPI till September 30, recovery proceedings. The major overdue
2017. However, this was due to two installments of Nagar amount pertains to Nagar Nigam Kanpur in
Nigam loan received in July 2017 (188 Accounts- Rs. 12.53 which the recovery is coming regularly.
lakh) and August 2017 (266 Accounts - Rs. 17.83 lakhs). The We hope to receive our target as fixed in
recovery was insufficient to repay the interest due in most of our action plan.
the accounts. As already mentioned above, these recoveries
would not result in any write back of provisions as the same
was already less than the requirement.
5.10 Fixed/Other Assets
i) The bank had not acquired any premises or other fixed assets Proper inventory of the fixed assets is
during the PPR. The amount under 'furniture and fixtures' stood available in record.
at '62.61 lakh as on the DPI as compared to '73.15 lakh as on
the DLI. However, inventory of the fixed assets was not
maintained properly by the bank. As per the Statutory Auditor,
there was no shortfall in depreciation.
ii) The other assets of the bank as on DPI mainly consisted of Regarding other assets we have to submit
stock of stationery ('12.18 lakh) and Sundry Debtors ('2.90 that stationery stock of Rs. 12.18 lakh is
lakh). Out of the total amount of 2.90 lakh under sundry according to bank's expenditure policy and
debtors, the amount of '0.80 lakh were deposited in Labour we have put-up our view point in previous
Court on august 27, 1998/1.07 lakh were given to UTI for compliance in IR. Under sundry debtors
issuance of Pan card to its customers, '0.04 lakh paid as Rs. 1.07 lakh is to be received from UTI as
education fund was paid as key charges to a staff who was not all unused coupons have b^en deposited
in the bank's service as on October 07, 2016 (the last working with UTI. Rs. 0.12 lakh pertaining to key
day preceding the date of commencement of the last charges to staff has been recovered and Rs.
inspection). All these items had been treated as intangible by 0.04 lakh as education fund wrongly
the IO and the bank was required to make provision of '2.03 capitalized has been corrected.
lakh for the same. Further, the amount of '12.18 lakh pertaining
to stationery stock had been treated as intangible for the
purpose of calculation of net worth.
iii) The cash in hand of '39.14 lakh as on the DPI included cash
amounting to '5.47 lakh in branch ATMs. The ATMs had
stopped functioning with effect from the date of imposition of
directions and no cash was available in the ATMs. As such, the
amount of'5.47 lakh had been treated as intangible by the IO
and a provision for the same had been suggested.
6 Management
6.1 Board of Directors and its Committees
i) As Per available records, the present Board of Directors
(BoD) was constitute on December 10, 2012. Shri Brahma
Swaroop Mishra (Father of CEO of the bank, Shri Ashutosh
Mishra) had been continuing as the bank's Chairman since June
12, 1998 and after his demise on December 22, 2016, Shri
Rajesh Chandra Was Appointed as acting Chairman as per
board resolution dated February 16, 2017. There were 9 elected
members in the Board as on the DPI as Shri Ram Sudhar had
resigned and Shri R.S. Gupta had resigned on October 07, 2016
and July 28, 2015 respectively. Shri Pramod Yadav was
removed due to his continuous absence in the Board meetings
on January 10, 2017. The bank had also coopted two Chartered
Accountants as professional Director (Shri Dinesh Chandra
from March 18, 2013 and Shri CB Singh from January 15,
2014). However Shri Laxmi Kant Shukla had not been removed
from board membership even though he had been absent from
more than 3 consecutive meetings without obtaining leave of
absence in violation of para 32 (iii) of by-laws of the bank. The
Board was having adequate representation from SC/ST, OBC
and woman Director. The Annual General Meeting (AGM) of
the bank had not been held during the PPR.
6.2 Chief Executive Officer
i) Shri Ashutosh Mishra S/o Shri Bramha Swaroop Mishra,
Chairman was continuing as the Secretary/CEO of the bank
since May 25, 1998. As per the information provided, he is a
law graduate. His guidance and control over the affairs of the
bank especially with regard to adherence to RBI guidelines,
bank's MIS and CBS system, asset quality, recovery of NPAs,
etc. needed improvement. The working of the CEO was not
found satisfactory as most of the deficiencies pointed out in the
last RBI inspection report were persisting as on DPI
6.3 Adequacy and Effectiveness of reviews/Information
placed before the Top Managcment/Committees/UoD
The review of top 50 NPA accounts was neither placed before
the Board nor there was any Board discussion found in the
proceeding book where recovery targets had been assigned. No
effective review of the banks functioning was put up to the
Board after the imposition of AID. No inputs from the
professional directors were on record. It appeared that the
Board had lost its effectiveness in controlling the affairs of the
bank. All the Directors were not found to have signed the
proceedings book indicating that the Directors had either lost
interest in the functioning and revival of the bank or they were
acting merely like figure heads and the Board/meetings were
held more like a ritual and paper work. Board was completely
ineffective in ensuring the recovery of NPAs and achieving
action plan. The RBI directives after the imposition of AID
were simply put up in the meeting and no review of the
Rs. 5.47 lakh cash shown in branch
ATMs is mainly reconciliation matter. We
are trying to reconcile the same with the
help of service provider. Rs. 3.24 lakh has
been reconciled rest will be reconcile very
shortly.
Sri Laxmi Kant Shukla has not attend the
mettmg due to his illness. He has duly
informed the Board in writing. The copy of
his latter was given to I/O during the
inspection.
The deficiencies pointed out by the IO
have been rectified on practical ground
only rare deficiencies which are not under
control of the bank are persisting. We are
trying our best to rectify these deficiencies.
The guidance and control over affairs of
the bank CEO is proper however he has
been asked to improve in this matter as
suggested by the IO.
Review of the bank functioning was
taking place regularly in the Board
meetings up to imposition of AID.
However, after imposition of AID the
review in Board meetings was mainly
focused on recovery of NPA accounts and
to increase capital of the bank. Tire
discussion and suggestions regarding
recovery of NPAs and augmentation of
capital, were regularly taking place in
Board meetings' In crucial condition and
will tagged hands the effectiveness of
Board in functioning of the bank and a
achieving the targets is shown ineffective.
However, the Board have been replaced by
 adherence was presented in the subsequent board meetings.
This had resulted in major violations of the AID as detailed in
para 2.
6.3.1 Functioning of the Committees
i) The Board had held eighteen meetings after the imposition
and till the date of conclusion of the present inspection. The
Board had failed to come out with a concrete plan for recovery
of NPAs and revival plan for turning around the bank. The
calendar of review as stipulated in para 5 of the RBI Master
Circular DCBR.BPD. (PCB/RCB) Cir. No.2/14.01.062/2015-
16 dated July 01, 2015 on 'Board of Directors' was not followed
by the Board during the PPR.
ii) ^ The Audit Committee of tire Board (ACB) had held three
meetings (02.05.2016, 20.01.2017 and 03.05.2017) during
the .PPR in which the matter regarding appointment of auditors
land compliance of audit reports etc. were discussed. The ACB
had not undertaken other duties/responsibilities as Enumerated
in Para 7.4.2 of the RBI Master Circular DCBR.CO. BPD.
(PCB). MC. No. 3/12.05.001/2015-16 dated July 01, 2015 on
'Inspection and Audit Systems in Primary UCBs.
iv) The bank had also constituted Establishment and Discipline
Committee, Audit Committee, Asset Liabilities Management
Committee (ALCO), Development and Planning Committee. 3
meetings of ALCO Committee were held during the PPR.
6.4 RBI Inspection- Compliance
The last RBI inspection of the bank was conducted with
respect to its financial position as on March 31, 2016. The First
compliance was submitted on July 26, 2017 and the second and
last compliance was submitted on October 10, 2017. Report
was yet to be closed as compliances in respect of some the
paragraphs were yet to be accepted. The compliances were not
found to be sustained as many deficiencies (details given in
Annex VIII) were persisting.
6.5 Efficacy of the Management
The bank had made some efforts towards recovery of NPAs
after imposition of direction, it had approached the High Court
for recovery of Loans from the employees of Kanpur Nagar
Nigam and had succeeded in recovering two instalments from
in July 2017 and August 2017 from 188 and 266 employees till
September 30, 2017. However, the entire focus had been only
on these Nagar Nigam accounts while other accounts running
6.6 Functioning of the Screening Committee
The Screening Committee was not functioning efficiently. It
was simply forwarding the application of hardship cases
cooperative department as Election of
Managing Committee is due.
The action plans submitted with RBI were
prepared in guidance and approval of the
Board. In all Board meetings progress of
recovery in NPA accounts was discussed.
The calendar of review as stipulated in Para
5 of RBI Master Circular dated 01.07.2015
were regularly followed before imposition
of AID. However, we assure to follow this
calendar as an when the bank starts its
normal working.
We have already mentioned in previous
compliances regarding compliance of para-
7.4.2, of RBI Master Circular dated July
01, 2015 on 'Inspection and Audit Systems
in Primary UCBs'. We have assured to
comply with all instructions of this Master
Circular as restarts our normal working.
After imposition of AID the meetings of
other subcommittee like the Discipline
Committee, Development and Planning
Committee were not needed only meetings
of ALCO committee were convened.
However, all other sub-committees will
meet regularly as an when bank starts its
normal working.
The bank has not received any paragraphs
for recompliance from Regional Office
after our last compliance dated October 10,
2017. Details of deficiencies given in
Annexure-VIII are being repeated regularly
besides our submission given in previous
compliances.
This is not correct that bank has neglected
the loan accounts in which regular recovery
was received after imposition of AID.
Virtually a regular recovery in these
accounts hive disturbed due to stoppage of
clearing facility of the bank and miss
understanding of the defaulters regarding
bank. However, the bank has taken all
these accounts under persona) contact
system are have covered under legal
recovery proceedings. We are still engaged
in raising the share capital and we are sure
the restructure our balance sheet by
conversion of deposit into share capital.
The Screening Committee of the bank is
functioning as per guidelines of the RBI.
The applications on hardship grounds are
 without due diligence resulting into many cases getting rejected being forwarded to Regional Office after
by RBI for want of proper documents. proper scrutiny. Rejection of some
applications is not due to negligence of
Screening Committee.
6.7 Action Plan for Revival of the Bank
i) The bank had submitted its first action plan vide its letter The bank is trying to achieve the targets
dated August 22, 2015 wherein it had planned to augment its mentioned in action plan but achievement
share capital by '600.00 lakh by way of infusion of fresh capital is based on favorable conditions. However,
by its existing members and '100.00 lakh by way of conversion our two branches have been shifted to our
of deposits into share capital, recovery of NPAs to the tune of Deo Nagar branch. We have curtailed our
'500.00 lakh especially from the employees of the Kanpur expenditure. The recovery in NPA accounts
Nagar Nigam, bringing down NPAshelow 7% by March 2017 is being received. We have already
and controlling expenditure by way of closing down four mentioned our position in this reference in
branches. However, it was observed that no progress at all had the above paras of 1R. Regarding
been made by the bank on all the aspects of the plan. The bank submission of quarterly progress report in
had again submitted an Action Plan vide its letter dated August respect of action plan we have mentioned
17, 2016. However, nothing new had been stated in this Action our view point in above para 2 VIII.
Plan and all aspects as mentioned in the previsions Action Plan
had been simply reiterated. The paid-up share capital had
increased by only '17.75 lakh during the period from March 31,
2015 to September 30, 2016. The bank was not sending
quarterly progress report in respect of the action plan.
ii) The bank had again submitted a Revised Revival Action Plan The process of conversion of deposits into
vide its letter dated June 13, 2017. The bank had set a target of equity is still going on. We hope to achieve
raising capital of Rs. 500.00 lakh by March 31, 2018. It had this target very shortly.
also sent a list of 203 depositors whose consent had been
received for conversion of their deposits amounting to Rs.
100.44 into equity. However only Rs. 6.53 lakh of additional
capital was raised till September 30, 2017.
iii) Target vis-a-vis Achievement as per Action Plan - September The targets fixed in action plan are in our
30, 2017: action we have succeeded in shifting our
(Rs. in lakh) two branches in premises of our Deo Nagar
S.No. Item branch and that will result in curtailment of
Target (as Actual
Achievement rent electricity and CBS expenses per
given in
month. Increasing share capital through
Action
conversion of deposits into equity, fresh
Plan)
share capital from existing members,
1 Share Capital 768.49 406.05 recovery of NPAs are included in our
Conversion of 280.44 6.53
campaign and that will convert deposit
2
Deposits into equity erosion into nil.
3 Overdue interest 362.92 624.07
Reserve
4 Goss NPA 52.79% 93.20%
5 Deposit Erosion 0% 31.03%
6 Curtailment of Rent, 1.36 No reduction
Electricity, CBS
Expenses per month
6.8 Comments on Action Plan
The bank had submitted a time bound action plan with monthly Rs. 9.08 lakh loan against deposits have
targets but quarterly progress report in respect of the action been adjusted. The other targets fixed in
plan had not been submitted by the bank. As already detailed in action plan are being persuaded and we are
the above paragraph, the bank had failed to registe4r much hopeful for achievement.
progress in its action plan. Having raised only Rs. 6.53 lakh of
share capital by way of conversion to deposits in three months,
it would be extremely difficult for the bank to achieve the
target of Rs. 500 lakh by March 31, 2018.
 The bank has also failed to reduce NPAs, and its OIR is
increasing sharply every month instead of reducing as
envisaged in the Action Plan. Even after some relaxations in
the Directions the bank was not able to show any considerable
progress. The bank was allowed to adjust Loan against Term
Deposits with the consent of depositors. The bank was having
outstanding amount of Rs. 38.36 lakh as on March 31, 2016
Against Deposit'. The bank had adjusted Rs. 29.28 attached
term deposits and was having an outstanding 9.08 lakh of Loan
against deposits despite setting a target of closing these
accounts in the Action Plan.
6.8.1 ABC Analysis
As per the I.O.’s assessment, the gross NPAs stood at ‘3197.29 The recovery of Nagar Nigam employees is
lakh as on September 30, 2017 constituting 93.10% of gross now coming regularly since June 2017. We
advances of ‘3397.66 lakh. The bank was having a BDDR of have restructured these accounts and have
‘239.18 lakh which was much below the required provision of submitted a detailed note with approval of
‘2200.65 lakh. The bank had failed to achieve the target of lakh our Board to Regional Office and a request
from the employees of Kanpur Nagar Nigam. Even if these to consider these advances under standard
loans are fully recovered, there would be no write back of advances and according to provision of
provision as the overall shortfall in provisions was to the tune Section 40 of UP Cooperative Societies
of '2200.65 lakh as on September 30, 2017. Act, 1965 to treat these advances as
secured. Accordingly as these accounts
have been categorized under loss a write
back of 100% provision will available.
6.8.2 Steps taken to reduce establishment cost:
The bank had taken some steps for reduction of its The two branches Naya Ganj & Colonel
establishment cost. The number of regular employees had Ganj have been shifted to Deo Nagar
decreased from 60 as on the DLI to 22 as on the DPI. However, branch and shifting process in CBS have
bank had recruited 18 employees from those removed on been materialized. Now we are able to
contract basis as on March 31, 2017. The number of contractual reduce the expenditure electricity and CBS
employees was considered to be on the higher side taking into charges of these branches. The contractual
account the reduced scale of operation in the bank. The employees are not on the higher side as per
operations of two branches Nava Ganj and Colonal Ganj working of the bank.
shifted to Deo Nagar, but the document shifting and merging in
CBS was pending. The bank may expedite the process of
merger of above mentioned branches to reduce the expenditure
on rent and electricity of these branches was being made which
should have been avoided by the bank. The bank may expedite
the process of merger of above mentioned branches to reduce
the expenditure on rent electricity.
7. Earnings Appraisal
7.1 Comments on the profitability We have submitted our explanation
The bank had reported net profit of '85.73 lakh during the regarding provision for loan losses, interest
year 2016-17 as against a net loss of '23.33 lakh during the year reversal, erosion in other assets and
2015-16. However, this net profit was hugely overstated as the provision for other liabilities in compliance
bank had not made provisions for known loan losses and other of above para.
liabilities. The 1.0. had assessed net loss of' 1918.09 lakh for
the year 2016-17 after taking into account additional provision
required for loan losses ('1699.59 lakh), interest reversal
('244.36 lakh), erosion in other assets ('2.03 lakh), erosion in
cash balances ('5.47 lakh), and provision required for other
liabilities ('52.37 lakh) as shown in Annex II.
7.2 Trend Analysis The bank has to bring down the ratios of
The Net Margin of the bank as per stated financials from (-) staff cost to total income and from total
2.97% during the year 2015-16 to 15.02% during the year expenditure.
201617. The Net Interest Margin (N1M) had also increased
from 3.06% to 5.14% during the corresponding period. The
 ratio of staff cost to total income had decreased from 25.13%
during the year 2015-16 to 22.65% during the year 2016-17
whereas the ratio of staff cost to total expenditure had increased
from 24.41% to 27.79% during the corresponding period.
However, both the ratios were considered to be on the higher
side. The ratio of other overheads to total income had slightly
increased from 12.57 % during the year 2015-16 to 14.36 %
during the year 2016-17.
7.3 Segment-wise Details of Income and Expenditures
i) Interest income from loans and advances had decreased by Regarding provisioning for interest on
'69.96 lakh (15.69%) from 445.77 lakh during the year 2015-16 matured term deposit to the tune of Rs.
to '375.81 lakh during the year 2016-17 mainly due to reduction 52.32 lakh we have already put up our
in gross advances. The bank although had classified accounts as position in compliance of para 4.1.3 above.
NPA on March 31, 2017, however, their overdue interest was
taken into income during PPR. Income on investments had
decreased by '131.47 lakh (42.78%) From '307.31 lakh during
the year 2015-16 to '175.84 lakh during the year 2016-17
mainly due to decrease in investments and sale of securities for
meeting the demand of depositors as per the terms of direction
and payment under hardship case. The interest Expenditure on
deposits had also decreased by '259.70 lakh (50.57%) From
'513.52 lakh to '253.82 lakh during the corresponding period
due to decrease in deposit liabilities. Also Bank had several
discrepancies in payment of interest on deposit and was not
paying interest on some running accounts as highlighted in para
4.1.3. The IO had suggested additional provisioning for interest
on matured term deposits to the tune of Rs- 52.32 lakh.
ii) The bank was also required to re-examine the necessity of Process of shifting of two branches Naya
keeping 18 staff on contractual basis. I he operations of two Ganj & Colonel Ganj in CBS has
branches Naya Ganj and Colonal Ganj shifted to Deo Nagar, completed. Virtually the necessity of
but the document shifting and merging in CBS was pending. keeping 18 staff on contractual basis is
need of the bank. However, we will
reexamine the same.
7.4 Adherence to the Statutory Provisions Provisioning regarding interest payable on
The Bank had not made correct provision (assessed by the IO at term deposit matured and remaining un-
' 52.87 lakh )at savings bank rate for interest payable on term paid we have mentioned our view point in
deposits matured and remaining unpaid as on March 31, 2017. compliance of concerned para above.
There was a shortfall of '408.76 lakh in provision for loans However, we again submit that the part
losses as per the bank's own assessment. Further, the amount of payment of Rs. 0.40 lakh has already been
'0.04 lakh pertaining to education fund had been capitalized allowed in these FDRs. We have
instead of being booked as an item of expenditure. provisioned Rs. 5.00 lakh for interest
payable on these FDRs and at the time of
payment of these FDRs we shall credit the
interest on the rate of interest applicable for
saving account. As per our assessment Rs.
408.76 lakh will be provisioned for short
fall in loan losses. The amount of Rs. 0.04
lakh wrongly capitalized have been booked
as an item of expenditure.
7.5 Adequacy of provisions
There was no shortfall in provision for standard assets as on Regarding provisioning for loan losses,
the DPI. However, adequate provisions had not been made for interest reversal, erosion in other assets,
NPAs and other items. There was a shortfall in provision for erosion in cash balances and other
loan losses ('1699.59 lakh), interest reversal ('244.36 lakh), liabilities we have put .up our explanation
erosion in other assets ('2.03 lakh), erosion in cash balances in compliance of the above concerning
 ('5.47 lakh), and other liabilities ('142.92 lakh), Taking into paras.
account all these items, the net loss and net worth of the bank
had been assessed at '1918.09 lakh and (-) '1592.74 lakh
respectively as on the DPI.
7.6 Assessment of Expenditure Policy One OSD has been appointed for the
The bank had formulated an expenditure policy which was work of account section and to suggest in
last reviewed on July 7, 2017. The powers of various the working of bank. Expenditure policy
authorities to sanction various types of expenditure had not will be reviewed and suggestions given by
been defined in the expenditure policy. Further, various the lO will be included in the policy. The
measure had been enumerated in the policy for controlling the need of 18 contractual staff is per bank
expenditure. However, the same were not followed in letter and requirement. However, we will re-examine
spirit. On the one hand the number of regular employees had the matter.
been reduced with a view to cut the staff expenses but on the
other hand 18 of such employees had been reemployed on
contractual basis. One person had been recruited as OSD
without assigning any specific duly to him.
8 Liquidity
8.3 The total liquidity as on September 30, 2017 (the last daf of The cash balance of Rs. 5.47 lakh
the month preceding the date of commencement of the present pertaining to ATM is being reconciled. Rs.
inspection) had reduced and was to the tune of 12198.03 lakh 3.24 lakh has been reconciled rest will be
including cash in hand - excluding unreconciled ATMs ('31.17 reconcile very shortly.
lakh), balance in current accounts with banks ('333.49 Iakh)and
investment in Government securities ('1833.37 lakh) as against
the total liquidity of'2389.99 lakh including cash in hand
-excluding unreconciled cash in closed ATMs ('33.67 lakh),
balance in current accounts with banks ('313.10 lakh) and
investments in Government securities ('2043.22 lakh) as on
March 31,2017.
8.4 The bank was able to meet the demand of depositors as per The bank is engaged in recovery of NPA
the terms of directions and was also able to make payments and other accounts with its total capability.
under hardship cases. The total outflow on account of payments We hope to increase our ratio of liquid
to the depositors (as per the terms of the directions) as well as assets to short term liabilities. The funding
on hardship grounds was to the tune of '4253.49 lakh. volatility will also be increased to higher
However , on account of these payments, the bank's term side.
deposits worth '1579.18 lakh (as on the march 31,2015) kept
with other banks had been totally wiped out and the
investments in Government securities had decreased from
'2857.69 lakh as on the DLI to '2043.22 lakh as on the DPI and
further to '1833.37 lakh as on September 30,2017. The ratio of
liquid assets to short term liabilities at 59.20% was significantly
low and was decreasing. The funding volatility ratio at 16.21%
was also considered to be on the lower side.
9 Systems and Control
9.1 House keeping
Housekeeping at the Head office as well as at the branches
was highly unsatisfactory as various registers, viz. Stock
Statement Register, Insurance Register, DP Register. Equitable
Mortgage Register, Unit Visit Register, Loan Application
Receipt and Disposal Register, Investment Register, etc. were All the registers pointed out in this para
not maintained. Payment Order/ Demand Draft Register was are being maintained in every branch. After
not maintained properly as the details of the purchase and the imposition of AID the working of bank
mode of issuing the same was not mentioned in the said have been restricted hence these registers
register. Dead Stock Register, Stationery Register and Stock are not updated. All the registers will
Register for blank cheque books, FDRs and POs were also not properly maintained after normal working
maintained properly and were not updated on an ongoing basis. of the bank.
9.1.1 The books of accounts of the bank were balanced as on the The balances of share capital are tallied
 DPI except the Share Capital Account wherein a difference of
'2.02 lakh was observed between GL and SGL figures. The
amount shown in ATM of Rs-5.47 lakh was not reconciled
even though ATM operations were stopped after imposition of
AID.
9.1.3 MIS
The bank was fully computerized and all the reports could be
generated through the system at the H.O level itself. However,
it was observed that important reports like list of NPAs, priority
sector and weaker section advance, purpose wise list of
advances, list of unsecured advances, etc., were not correct
when generated through the system.
9.1.4 Internal Control Systems
The bank's internal control machinery was very poor as it was
unable to check and find out the irregularities in the functioning
of the bank resulting in high NPAs, poor credit appraisal and
post sanction supervision, poor record of recovery, etc.
9.2 Inspection/Audit
9.2.1 Internal Audit
The bank had a system of internal audit conducted by its own
officials on quarterly basis in select branches. However, the
same had been discontinued after imposition of AID.
9.2.2 Concurrent Audit
The bank had a system of concurrent audit conducted by M/s
P K Gaur & Associates, a firm of Chartered Accountant on a
quarterly basis. Four branches of the bank, viz Ratan Lai
Nagar, Colonel Ganj, Barra-8 and Deo Nagar were subjected to
concurrent audit. Concurrent Audit of these branches was
conducted on a quarterly basis i.e. April to June 2016 (report
dated 11.07.2016), July to September 2016 (report dated
07.10.2016) , October to December 2016 (report dated
07.01.2017) and January 2017 to March 2017 quarter
(report dated 07:04.2017). The coverage of the audit was not
satisfactory as the auditors were not reporting classification of
bad loan accounts based on IRAC norms, inter-branch
reconciliation of accounts, non-payment of interest in FDR and
deficiencies in KYC norms.
9.2.3 Statutory Audit
The Statutory Audit for the year ended March 31, 2017 was
conducted by M/s Vivek Khanna & Co. Chartered Accountants.
The report dated September 29, 2017 was received in the bank
during the course of present inspection. The auditors had
observed that less provisioning as per the RBI guidelines had
been made during the year. However, the auditors had
identified divergence in only 25 accounts with an outstanding
balance of '37.73 lakh as against the IO's assessment of
divergence in 317 accounts worth '1084.91 lakh. Further, the
on manual basis. Difference on manual
ledger and computer system is mainly due
to wrong feeding. This will be tallied very
shortly with the help of our CBS provider.
Reconciliation of Rs. 5.47 lakh cash in
ATM is going on. Rs. 3.24 lakh has been
reconciled the rest will be reconciled very
shortly.
The CBS service provider has been asked
to see the matter of generated reports from
the system and our system will be properly
available for generating the,all reports.
As per supervisory instructions the bank
has been instructed not to sanction any
advance. The bank has upgraded its credit
appraisal and post sanction supervision.
However, bank is engaged in recovery of
NPA and other accounts very seriously.
The internal control system of the bank was
good. Branches were visited by the
officials of the Head Office regularly and
in regularities were checked and rectified.
The process of internal audit has been
restarted.
The audit firm deputed for concurrent
audit has been advised and instructed in
writing to cover all the aspects of working
of the bank in audit report including
classification of bad loan accounts, enter
branch re-conciliation, payment of interest
in deposit account and KYC norms.
The auditor firm deputed for Statutory
Audit was advised in writing to audit all the
aspects of bank activities. The audit report
is prepared by audit firm. Audit firm is one
of the firm mentioned in panel of Chartered
Accountant firms provided by RCS.
 auditors had not commented on under provisioning / non
provisioning in 751 accounts classified as NPAs by the bank.
9.3 Grievance Redressal Procedures/Frauds/Vigilance
ii) The bank had formulated a policy for fixing staff
accountability in case of slippage of loan accounts from
standard to NPA category. However, no case of staff
accountability had been examined during the PPR.
iii) In case of compliance of previous RBI inspection reports, the
bank had not filed FMR-1 for housing loan of Rs. 14.00 lakh
which was sanctioned to Dr. Subir Kumar Mukherjee (A/c No.
080400009701) at 1 al Banglow branch of the bank on July 02,
2011 where the loan was given for a property which was
already auctioned by PNB in its recovery process. The bank
could not justify the disbursement after auctioning of the
property for which the loan was to be utilized. It was observed
that bank had attached Guarantors document. However,
equitable mortgage was not taken on stamp paper initially, and
was pasted on a blank stamp paper later. The property
documents shown during inspection were not mentioned on any
of the stamp paper signed by the guarantor. Also bank stated in
its reply in first compliance submitted to RBI, it had given loan
to takeout/refinance the loan given by PNB but no NOC was
obtained from PNB about the borrower. This was in violation
of Para 4.2 of Master Circular - DCBR.BPD. (PCB) MC No.
14/13.05.000/2015-16 dated July 1, 2015 on 'Frauds
Classification and Reporting' and make full provision for the
same.
iv) One suspected case of fraud was observed in the1 housing
loan of Sushma Tripathi (120400327301) guaranteed by then
branch manager K.S Tripathi (husband of Sushma Tripathi).
The loan was sanctioned on July 31, 2010 for Rs. 11.5 lakh
with hypothecation of two vehicles purchased in year 2000 and
2001, and L1C Policies with sum of Rs. 1.5 lakhs. The
valuation and hypothecation documentation of the two vehicles
was of the year 2003 and valued' at Rs. 10.5 lakh. There was no
valuation done at the time of sanction and a 10 year old vehicle
was attached to a loan of Rs. 11.50 lakh. The documents
pertained to the vehicles belonged to previous loans taken by
the borrower. It was observed that two loans -pertaining to
Sushma Tripathi (040400000301) and son Tripuresh Tripathi
(040400000201) were repaid on July 31, 2010 (same date as
disbursement of the above mentioned loan). The loan was not
recovered from the salary of K.S. Tripathi, the branch manager
even though he was the guarantor for the loan. The bank was
required to take action as required vide RBI Circular DCBR.
CO. BPD. MC. No. 1/12.05.001/2015-16 dated July 01, 2015
on 'Frauds - Classification and Reporting', and make full
provision for the same.
We have a policy of fixing staff
accountability' in case of slippage of loan
accounts from standard to NPA category.
After imposition of AID the slippage of
advances from standard to NPA category is
not due to fault of any staff member but
especially due to stoppage of clearing
facility of the bank. Hence implementation
of this policy was not practical.
Housing loan of 14.00 lakh sanction in
favour of Dr. Subir Kumar Mukherjee by
the Lai Banglow branch of the bank. The
security against the loan property was
provided pertaining to one guarantor of the
loan duly mortgaged in favour of the bank.
The mortgaged paper is posted in the
Stamp Paper duly signed by the property
owner. The Narrower had promised to
submit the original deeds of his own houses
with the bank. A handsome recovery was
made in the account. The borrower is
available. The property of guarantor is
mortgaged in favour of the bank. Hence
this advance may not be treated as fraud.
Recovery proceedings under provision of
SARFASI Act 2002 are being initiated.
In account of Shushma Tripathi we have
categorized this account as loss account.
Regarding suspected fraud for this account
we have to submit that LIC policy
amounting Rs. 2.00 lakh, two vehicles and
gratuity and PF amount of Shri K.S.
Tripathi her husband is attached with this
loan account. Hence this account in no way
should be treated as suspected fraud.