NPA, SARFAESI Act and the impact of ARCs in India

South Indian Bank

EXECUTIVE SUMMARY
The most important problem that the Indian banks are facing is the problem of their NPAs. It is only since a couple of years that this particular aspect has been given so much importance. The banks have to overcome these difficulties properly in order to effectively counter the competition faced by the foreign banks. With the framing of laws as per international standards and setting up of Debt recovery tribunal we can say that steps have been taken in this direction.

Banks in India have traditionally been saddled with very high Non-Performing Assets. The banking sector was heading for a crisis in 2001 with NPA¶s crossing a mammoth Rs. 64000 Crores. Banks burdened with huge NPA¶s faced uphill tasks in recovering then due to archaic laws and procedures. Realizing the gravity of the situation the government was quick to implement the recommendations of the Narsimham Committee and Andhuarjuna Committee leading to the enactment of the SARFAESI Act 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act).

This Act gave the banks the much needed teeth to curb the menace of NPA¶s. The non performing assets (NPAs) of banks have at last begun shrinking. It is understood that there has been substantial improvements in nonperforming assets and this has been because of several measures such as formation of asset reconstruction companies, debt restructuring norms, securitization, provisioning norms and prudential norms for income recognition. The gross NPAs of the banking system are about 16 per cent of the total assets of the nationalized banks as of 2000-01. This is against a global norm of about 5%. Hence there is a long way to go before we can say that the NPA¶s of our banks are under control. The improvements in NPAs of individual nationalized banks have been in the order of 10% to 20%, thanks to the various schemes and measures introduced.

The RBI has tried to develop many schemes and tools to reduce Non Performing assets. To improve NPAs each bank should be motivated to introduce their own precautionary steps. Before lending the banks must evaluate the feasible financial and operational prospective results of the borrowing companies by keeping in considerations the overall impacts all the factors that

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influence the business.

The problem is no doubt about recovery management where the objective is to find out about the reasons behind NPAs. In this paper I am also going to look into the financial performance of South Indian Bank for the past four years. It also includes discussion about SARFAESI Act and the impact of asset reconstruction companies in India. This paper tells you how successful the asset reconstruction companies have been in reducing the amount of NPAs. The impact of technology to reduce frauds and the measures needed to be taken is also been discussed.

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CHAPTER-1
INTRODUCTION

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1.1 INTRODUCTION
The crucial role of bank economists is in transforming the banking system in India. Economists had to be more µmainstreamed¶ within the operational structure of commercial banks. Apart from the traditional functioning of macro-scanning, the inter linkages between treasuries, dealing rooms and trading rooms of banks need to be viewed not only with the day-to-day needs of operational necessity, but also with analytical content and policy foresight. Banking sector reforms in India has progressed promptly on aspects like interest rate deregulation, reduction in statutory reserve requirements, prudential norms for interest rates, asset classification, income recognition and provisioning. But it could not match the pace with which it was expected to do. The accomplishment of these norms at the execution stages without restructuring the banking sector as such is creating havoc. During pre-nationalization period and after independence, the banking sector remained in private hands, large industries who had their control in the management of the banks were utilizing major portion of financial resources of the banking system and as a result low priority was accorded to priority sectors. Government of India nationalized the banks to make them as an instrument of economic and social change and the mandate given to the banks was to expand their networks in rural areas and to give loans to priority sectors such as small scale industries, self-employed groups, agriculture and schemes involving women. To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the banking system to expand its network in a planned way and make available banking series to the large number of population and touch every strata of society by extending credit to their productive endeavors. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. Granting of credit for economic activities is the prime duty of banking. Apart from raising resources through fresh deposits, borrowings and recycling of funds received back from
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borrowers constitute a major part of funding credit dispensation activity. Lending 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 a risk called credit risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the bank¶s profitability on a large scale. Though complete elimination of such losses is not possible, but banks can always aim to keep the losses at low level. Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimham Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. Because of this the biggest challenge facing the banks is NPA management After the global financial turmoil in 2008, Indian banks began the New Year with a lurking fear that their NPAs would go up with their portfolios coming under severe stress. There is already a visible strain on consumer, credit card and vehicle loan portfolios and many banks have taken conscious decision to scale down their advances to risky sectors. Some banks have also revised their credit growth targets downwards as the year has come to a close. In 2009-10 there was a slowdown in the balance sheet growth of scheduled commercial banks (SCBs) with some slippages in their asset quality and profitability. Bank credit posted a lower growth of 16.6 per cent in 2009-10 on a year-on-year basis but showed signs of recovery from October 2009 with the beginning of economic turnaround. Gross Non Performing Assets (NPAs) as a ratio to gross advances for SCBs, as a whole, increased from 2.25 per cent in 2008-09 to 2.39 per cent in 2009-10. Notwithstanding some weakening of asset quality, the Capital to Risk Weighted Assets Ratio (CRAR) of Indian banks in terms of Basel II norms at 14.5 per cent as at end March, 2010 was much higher than the regulatory prescription. However, the profitability of Indian banks as reflected by the Return on Assets (RoA) was lower at 1.05 per cent in 2009-10 than 1.13 per cent during the previous year.

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Liquidity management is a fundamental component for safe and sound functioning of all financial institutions. Sound liquidity management involves prudent management of assets and liabilities (on- and off-balance sheet), supported by a process of liquidity planning taking into account changes in economic, regulatory or other operating conditions. Banks will have to put in place a robust liquidity management plan, especially through encouragement and retention of stable retail deposits. The management of NPAs is one of the main business objectives of banks which requires appropriate appraisal, monitoring and management of issued loans. Gross NPA ratio has shown an increase in 2009-10. Moreover, there has been a deterioration of the asset quality as reflected by an increase in the proportion of doubtful and loss assets in the NPA profile of banks in 20092010. The signs of financial stress thus remain an important concern for the Indian banking sector in the medium to long-term.

1.2 CHALLENGES FACING BANKING INDUSTRY IN INDIA
The banking industry in India is undergoing a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after other has a ripple effect on a bank trying to graduate from completely regulated sellers market to completed deregulated customers market.

Deregulation: This continuous deregulation has made the Banking market extremely competitive with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized norms for foreign exchange. The deregulation of the industry coupled with decontrol in interest rates has led to entry of a number of players in the banking industry. At the same time reduced corporate credit off take thanks to sluggish economy has resulted in large number of competitors battling for the same pie.

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New rules: As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. Natural fall out of this has led to a series of innovative product offerings catering to various customer segments, specifically retail credit Efficiency: This in turn has made it necessary to look for efficiencies in the business. Banks need to access low cost funds and simultaneously improve the efficiency. The banks are facing pricing pressure, squeeze on spread and have to give thrust on retail assets

Figure 1.1Challenges Facing Indian Banking Industry

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Diffused Customer loyalty: This will definitely impact Customer preferences, as they are bound to react to the value added offerings. Customers have become demanding and the loyalties are diffused. There are multiple choices; the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.

Misaligned mindset: These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowly creeping in but the utilization is not maximized.

Competency Gap: Placing the right skill at the right place will determine success. The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. The focus of people will be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

Strategic options with banks to cope with the challenges: Leading players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership. The major initiatives include: y Investing in state of the art technology as the back bone of to ensure reliable service delivery savings deposits.
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y y

Making aggressive forays in the retail advances segment of home and personal loans. Implementing organization wide initiatives involving people, process and technology to reduce the fixed costs and the cost per transaction

y

Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade services)

y

Innovating Products to capture customer µmind share¶ to begin with and later the wallet share

y

Improving the asset quality as per Basel II norms

1.3 NON PERFORMING ASSETS:
NPA or non performing assets refer to those assets which fail to generate income within the stipulating time for the organisation. It forms one of the main areas of concern for banking sector For a bank to classify an asset as performing, it requires to meet the guidelines prescribed by Reserve Bank of India. With regard to the loans, it defines some aspects like µPast Due¶, µOut of Order¶, µOver Due¶ and finally µNon-Performing Assets¶.

Past Due An amount due under any credit facility is treated as Past Due when it has not been paid within 30 days from the due date. The past due concept have been dispensed off w.e.f 31st March 2002 due to advancement in technology and improvement in payment and settlement system.

Out of Order An account is treated as µOut of Order¶ if the outstanding balance remains continuously in excess of the sanction limit/drawing power. In cases where the outstanding balance in the principal operating account is less than sanctioned limit/ drawing power, but there are no credits continuously for 90 days as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as µOut of Order¶.

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Over Due Any amount due to the bank under any credit facility is µOver due¶ if it is not paid on the due date fixed by the bank.

Non Performing Assets An asset becomes Non Performing when it ceases to generate income for a Bank. It is also defined as credit facility in respect of which the interest and or instalments of principal has remained µPast Due¶ for a specified time. As a step forward towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days overdue norm for identification of NPA¶s from the year ending March 31, 2004. According, NPA shall be a loan or advance where:

a) Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of term loan. b) The account remains µOut of Order¶ for a period for more than 90 days in the respect of over draft/ cash credit. c) The bill remains overdue for a period of more than 90 days in the case of bills purchased or discounted d) Interest and/ or instalments of principal remain overdue for to crop seasons for short duration crops. e) Interest and/ or instalments of principal remain overdue for one crop season for long duration crops. f) The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of guidelines on securitization dated February 1, 2006. g) In respect of derivative transactions, the overdue receivables representing positive mark to market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment.

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PERFORMING / NON-PERFORMING ASSETS A performing asset is an advance which generates income to the bank by way of interest and their charges.

An NPA is an advance or borrower account which does not generate income for the bank but they incur various inherent costs like a) cost of deposit b) cost of servicing c) provisioning at appropriate rates d) capital adequacy requirements on these assets and e) cost of recovery.

The causes for NPAs and the impediments faced by the bank in the recovery process are the inadequacy of proper securities, negligence from the part of officials of the bank, ailments and infirmities with the legal system.

Income Recognition While evaluating the NPA, the interests accrued are treated based on the Income recognition policy. Income recognition policy The policy of income recognition has to be objective and based on the record of recovery. Internationally income from NPA is not recognised on accrual basis but is booked as income only when it is actually received. Therefore the banks should not charge interest and take it to income account on any NPA

Reversal of income a) 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 correspondence previous year, should be reversed or provided for if the same is not realised. This will apply to government guaranteed account also.

b) In respect of NPAs, Fees, Commission and similar income that have accrued should have ceased to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.

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c) Leased assets: The net lease rentals on the leased asset accrued and credited in income account before the asset became non performing should be reversed or provided for in the current accounting period. The term ³Net lease rentals´ would mean the amount of finance charge taken in the credit of profit and loss account and would be worked out as gross lease rentals adjusted by amount of statutory Depreciation.

Reporting of NPAs Banks are required to furnish a report on NPA as on 31st march each year after the completion of audit. The NPAs would relate to the Banks global portfolio including the advances at the foreign branches. While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPA as well as gross advances while arriving at the net NPAs.

Sub Classification of NPA Banks are required to classify NPA further into the following three categories based on the period for which the asset has remained non performing and the reliability of the dues:

a) Sub standard Assets Sub standard assets are those, which are classified as NPA for a period not exceeding one year. With effect from 31st march 2005, a sub standard asset is one, which has remained NPA for a period less than or equal to 12 months. Such assets will have well defined credit weakness that jeopardise the liquidation of the debt and are characterised but the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

b) Doubtful Assets With effect from March 31, 2005 an asset would be classified as doubtful if it has remained in the sub standard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub standard, with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently known facts, conditions and values highly questionable and improbable.
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c) Loss Assets A loss asset is one where the bank or an internal has identified loss or external auditors or the RBI inspection but the amount has not been written of wholly. In the other words such an asset is considered uncollectable and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Besides these three classifications we have a category called the ³Standard Assets´ that refers to those that belong to the´ income generating´ category or Performing category. The classification of these assets is based on the Reserve Bank¶s guidelines, which are given below:

1) Classification of assets into the above categories should be done taking into account the degree of well defined credit weakness and the extent of dependencies on collateral security for realisation of dues. 2) Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value of accounts. 3) Account with temporary Deficiencies: The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies, which are temporary in nature as such as non-availability of adequate drawing power based on latest stock. 4) Asset classification to be borrowed wise and not facility wise: It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. Therefore, all the facilities granted y a bank to a borrower will have to be treated as NPA and not the particular or a part thereof, which has become irregular. 5) Advances under consortium arrangements: Asset classified of accounts under consortium should be based on the record of recovery of the individual member Banks and other aspects having a bearing on the recoverability of the advances. 6) Accounts where there is erosion in the value of security: Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 percent of the value assessed by the bank or accepted by the RBI at the time of last

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inspection, as the case may be. Such NPAs may be straightway classified under doubtful category and provisioning should be made as applicable to doubtful assets. 7) Agricultural advances a) In respect of advances granted for agricultural purpose where interest and/ or installment of the principal remains unpaid after it has become past due for two harvest seasons but for a period not exceeding two half years, such an advance should be treated as NPA. b) Where the natural calamities impair the repaying capacity of agricultural borrowers, Banks may decide on their own as a relief measure ± conversion of the short ± term production loan into a term loan or re-schedulement of the repayment period. c) In such cases of conversion or re-schedulement, the term loan as well as fresh short ± term loan may be treated as current dues and need not be classified as NPA. 8) A standard asset where the term of the loan agreement regarding interest and principal have been renegotiated or rescheduled after the commencement of production should be classified as sub standard and should remain in such category for atleast one year of satisfactory performance under the renegotiation or restructured terms. In case of sub standard and doubtful assets also rescheduling does not entitle a Bank to upgrade the quality of advances automatically unless there is satisfactory performance under the rescheduled/ renegotiated terms.

Provisioning It is mandatory for all banks in India to make adequate provision for loan loss before the finalisation of the balance sheet every year. RBI prescribes different rates for making provision in respect of NPA. In conformity with the prudential norms, provisions should be made on the NPA on the basis of classification of assets into prescribed categories. Taking into account the time lag between an Account becoming Doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the bank should make provision against substandard assets, doubtful assets and loss assets as below:

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Table 1.1 Provisions for Different Asset class

Source: RBI Website

1.4 Reasons for Rise of NPAs:
Reasons can be divided into two categories, i.e., internal factors and external factors, as mentioned below:

Internal Factors: Internal Factors are those, which are internal to the bank and are controllable by banks.

y y y y y

Funds borrowed for a particular purpose but not use for the said purpose. Project not completed in time. Poor recovery of receivable. Excess capacities created on non- economic costs. In ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets.

y y

Business failures. Diversion of funds for expansion/ modernisation/ setting up new projects/ helping or promotion sister concerns.

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y

Will full defaults, siphoning of funds, frauds, disputes, management disputes and misappropriation.

y

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.

External Factors: External factors are those which are external to banks and are not controllable by banks.

y

Sluggish legal system ± long legal tangles changes that had taken place in labour laws, lack of sincere effort.

y y y

Scarcity of raw material, power and other resources. Industrial recession. Shortage of raw material, raw material/ input price escalation. Power shortage, industrial recession, excess capacity, natural calamities like flood accidents.

y

Failures, non payment/ over dues in other countries, recession in other countries, externalisation problems, and adverse exchange rates etc.

y

Government policies like excising duty changes, importing duty changes etc.

1.5 Recovery measures for Non-Performing Assets
1. Corporate Debt Restructuring Corporate debt restructuring is a significant modification made to the debt, operation or structure of a company. It is a method used by the companies with outstanding obligations to alter the terms of the debt agreements in order to achieve some advantage. This type of corporate action is usually made when there are significant problems in a company, which are causing some form of financial harm and putting the overall business in jeopardy.

2. Setting up of Adalats Civil court and Lok Adalats are one traditional means of recovering from the credit defaulters. Cases pending in the civil courts take time for settlement hence commercial banks opt for the Lok Adalats in which both the party agree for the out of court settlement. The evolution of this
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movement was a part of the strategy to relieve heavy burden on the court with pending cases. The reasons create such camps were the pending cases and to give relief to the litigants who were in a queue to get justice, except matters relating to offences, which are not compoundable. A Lok Adalat has jurisdiction to deal with all matters pending or at pre-trial stage, providing a reference to the court or the concerned authority or committee. When the dispute is at pre-trial stage and not before a court of law it can be referred to Lok Adalats. Parliament enacted the legal services authorities Act 1987, and one of the aims for the enactment of this act was to organise Lok Adalats to secure that the operation of legal system promoted justice on the basis of an equal opportunity. The Act gives statutory recognition to the resolution of disputes by the compromise and settlement by the Lok Adalats. The concept has been gathered from system of Panchayats courts, which has roots in the history, and culture of the country. It has a native flavour known to the people, the provisions of the act based on indigenous concept are meant to supplement the court system. They will go a long way in resolving the disputes at almost no cost to the litigants and with minimum delay. At the same time, the Act is not meant to replace and supplants the court system. The Act is a legislative to decongest the court from heavy burden of cases. There is a need for decentralisation of justice.

3. Reschedulement of loans In reschedulement of loans bank considers the repayment schedule of the defaulters in a more flexible way so as to increase the linkness of payment of interest. Here the bank¶s work within the regulatory framework and in line with Bank policy

4. One-Time Settlements The Bank has formulated policy guidelines in order to arrive at one-time settlements. It means a process of reconciliation with the borrower for recovery of dues with sacrifice. This sacrifice is on the part of the bank only and not the borrower. The guidelines are based on the security, recovery and cost aspects.

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5. SARFAESI ACT, 2002 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 empowers Banks Financial institutions to recover their non-performing assets without the intervention of the court. The Act provides three alternative methods for recovery of nonperforming assets, namely: a) Securitization b) Asset reconstruction c) Enforcement of security without the intervention of the court

The provisions of this Act are applicable only for NPA loans with outstanding above Rs.1 lakh. NPA loan accounts where the amount is less than 20% of the principle and interest are not eligible to be dealt with under this Act. Non Performing Assets should be backed by securities charged to the bank by way of hypothecation or mortgage or assignment. Security Interest by way of Lien, pledge, hire purchase and lease not liable or attachment under sec 60 of CPC, are not covered under this Act. This act empowers the Bank:

a) To issue demand notice to the defaulting borrower and guarantor calling upon them to discharge their dues in full within 60 days from the date of the notice. b) To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank. c) To ask any debtor of the borrower to pay any sum due or becoming due to the borrower d) Any security Interest created over Agricultural Land cannot be proceeded with.

If on receipt of demand notice, the borrower makes any presentation or raises anti objection, Authorised Officer shall consider such representation or objection carefully and if he comes to conclusion that such representation or objection is not acceptable or tenable, he shall communicate the reason for non acceptance within one week of receipt of such representation or objection. A borrower aggrieved by the action of the Bank can file an appeal with DRT and then with DRAT, but not with any civil court. The borrower has to deposit 50% of the dues before an appeal with DRAT. If the borrower fails to comply with the notice, the bank may take the recourse to one or more of the following measures:
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a) Take possession of the security. b) Sale or lease or assign the right over the security. c) Manage the same or appoint any person to manage the same.

6. Recovery Melas. The Bank conducts Recovery Melas in certain identified centres, in order to settle maximum number of NPA accounts by giving some waiver/remissions.

7. Restructuring at the bank level Here the banks make use of its powers like prudential write offs or other wavering of loan amount to restructure the asset at the bank level.

8. Debt Recovery Tribunal In view of considerable difficulties in recovering loans and in enforcing of securities charged to the banks and financial institutions in India, the committee on financial systems headed by shri. M. Narashimham, former Governor of RBI, had recommended the setting up of special tribunals for speedy realisation of dues of the credit institutions. The recovery of Debts Due to the banks and financial institutions Act, 1993 (DRT Act) was enacted on 27th august 1993 to provide for establishment of tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions and action was initiated immediately foe establishment of recovery tribunals and Appellate Tribunal in the country. As on date, there are 29 DRTs and 5 DRATs functioning all over the country. The pecuniary jurisdiction of these tribunals is Rs. 10 lakh and above.

Prevention of New NPA The NPA prone accounts or Borderline accounts of the branches are to be closely monitored to prevent them from turning into NPA.

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CHAPTER-2
RESEARCH METHODOLOGY

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2.1 SCOPE OF WORK
This report shows the analysis of Non Performing Assets (NPAs) with reference to South Indian Bank. The NPAs are considered to be one of the critical factors to judge the performance and financial health of the banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector. This report shows how South Indian Bank had been performing for the past four years. This also includes the impact of Asset Reconstruction Companies and SARFAESI Act towards reduction of NPAs, also how the technology helped in reduction of frauds that takes place in the banking sector. By doing the comparative analysis of the bank will give an idea on how the bank is performing and what all strategies has to be framed to further improve its performance with respect to its competitors in the banking sector as well as NPA management.

2.2 OBJECTIVES OF THE STUDY
To study what are factors that causes the rise of NPAs in the banking sector. To identify the recovery methods adopted. To find out South Indian Bank¶s movement of NPA for the past four years. To study various provisions of the act and their impact towards the banking sector. To study the impact of technology towards reduction of frauds in the banking sector. To contribute suggestions as to how to manage and reduce NPAs.

y y y y y y

2.3 METHODOLOGY OF STUDY
The nature of research is exploratory as well as diagnostic as the study is aimed at exploring the impact of SARFAESI Act on the NPA¶s in the banking sector as well as the impact of Asset Reconstruction companies. This study is based on secondary data that has been collected through various means, i.e., internet, articles, annual reports, magazines. This study is basically to find out the challenges that are being faced by the banks in India.

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2.4 SOURCES OF DATA
Only secondary data was collected from the internet, company websites, magazines and various articles. Capitaline databases have been the main source of information for company analysis as well as the annual reports provided by the company.

2.5 LIMITATIONS OF THE STUDY
Inadequate data

y

y

Since the number of financial ratios used for analysis are limited, the results obtained might not show the exact complete picture on how the bank is performing

y

Since the analysis is in reference to just one particular bank this wouldn¶t give the complete picture as to how the Indian banking sector is performing with respect to NPA management

y

Since there is no primary data involved in analysing the impact of asset reconstruction companies in recovery of NPAs and technology involved in reducing frauds there could be some minor variations in the results of the study.

2.6 TOOLS USED FOR ANALYSIS: y Ratio analysis: Financial ratio analysis can reveal much about a company and its operations. However, there are several points to keep in mind about ratios. First, a ratio is a "flag" indicating areas of strength or weakness. One or even several ratios might be misleading, but when combined with other knowledge of a company's management and economic circumstances, financial analysis can tell much about a corporation. Second, there is no single correct value for a ratio. The observation that the value of a particular ratio is too high, too low, or just right depends on the perspective of the analyst and on the company's competitive strategy. Third, financial ratios are meaningful only when
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compared with some standard, such as an industry trend, ratio trend, a trend for the specific company being analyzed, or a stated management objective.

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CHAPTER-3
INDUSTRY, COMPANY & PRODUCT PROFILE

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South Indian Bank

3.1 INDUSTRY PROFILE
The Indian banking has come a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). The stalwarts of India's financial community nodded their heads sagaciously when Prime Minister Manmohan Singh said in a speech: "If there is one aspect in which we can confidentially assert that India is ahead of China, it is in the robustness and soundness of our banking system." Indian banks have been rated higher than Chinese banks by international rating agency Standard & Poor's.

The competition heated up with the entry of private and foreign banks deregulation and globalization resulted in increased competition that refined the traditional way of doing business. They have realized the importance of a customer centric approach, brand building and IT enabled solutions. In the fierce battle for market share and mind share, the most potent weapon is a strong, well recognized and trusted brand name. Brands attract and convince people that they will get what is promised. Banking today has transformed into a technology intensive and customer friendly model with a focus on convenience. The companies have redoubled their efforts to woo the customers and establish themselves firmly in the market. It is no longer an option for a company to provide good customer service, it is expected.

Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The sector is set to witness the emergence of financial supermarkets in the form of universal banks providing a suite of services from retail to corporate banking and industrial lending to investment banking. The financial services market has become a battle ground with the marketers with the latest and the most sophisticated weapons.

Currently overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are
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considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The Indian banking industry is currently in a transition phase. On the one hand, the public sector banks, which are the mainstay of the Indian banking system, are in the process of consolidating their position by capitalizing on the strength of their huge networks and customer bases. On the other, the private sector banks are venturing into a whole new game of mergers and acquisitions to expand their bases. The use of technology has placed Indian banks at par with their global peers. It has also changed the way banking is done in India. µAnywhere banking¶ and µAnytime banking¶ have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows.

In the Indian banking industry some of the Private Banks operating are ICICI Bank, Axis Bank, ING Vysya Bank, South Indian Bank, Federal Bank and Banks from the Public sector includes State Bank of India, Punjab National Bank, UCO Bank, Oriental Bank of Commerce, Allahabad Bank among others. ABN AMRO Bank, American Express Bank, Citibank, DBS Bank, Deutsche Bank, HSBC, Standard Chartered Bank is some of the foreign banks operating in the Indian Banking Industry.

3.2 COMPANY PROFILE

Established in 1929, South Indian Bank (SIB) got its status of Scheduled Bank in 1946. In 1960, SIB expanded by taking over 15 smaller banks. Presently, it has a network of 642 branches and 3 extension counters, spread across 26 States and Union Territories in India.

Started as a private sector bank at Thrissur, a major town (now known as the Cultural Capital of Kerala) to provide for the people a safe, efficient and service oriented repository of savings of
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the community on one hand and to free the business community from the clutches of greedy money lenders on the other by providing need based credit at reasonable rates of interest. The bank in its 72 year long sojourn has been able to present itself as a vibrant, fast growing, service oriented and trend setting financial intermediary.

In Dec. 1998, the Bank, for the first time made a public issue of 1, 60, 00, 000 equity shares of Rs.10/- each at a premium of Rs.22/- per share. ICICI, the premier DFI is the biggest share holder of the Bank with the group company holding 11.38% of the bank¶s equity.

SIB was the first among the Kerala based banks to offer a Credit Card to customers in Nov. 1992. Further the bank also has develop an in-house, a fully integrated branch automation software.

During 2000-2001 the new product introduced were 'Gold Rush Scheme' and 'Siber Loan', the former has been introduced for the benefit of traders and agriculturists while the latter has been introduced for the general public and students. The bank also introduced FINACLE, an integrated, on-line enterprise banking solution designed to provide the 'e-platform' for global banking industry developed by INFOSYS.

The Bank has joined hands with ICICI Prudential Ltd to market their life insurance products through the Bank's branch network. It has also signed MOU with the Prudential ICICI Asset Management Company Ltd to distribute their Mutual Fund products.

During 2005-06, the company came out with a Public Offer of 2, 27, 27, 272 equity shares of Rs.10/- each at a premium of Rs.56/- per share aggregating to Rs.150 Crores through bookbuilding route. ICICI Bank Ltd, a strategic investor in the bank made an exit from the bank by divesting its entire shareholding in March 2006.

The Bank also became successful in changing its regional character into a national one by opening new branches in three more States. The Branch network now covers 19 States and Union Territories. During the fiscal year 2005-2006, the Bank has opened 21 new branches and
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11 new Extension counters. At Present the Bank's branch network stands at 642 branches and 3 extension counters. The Bank has an ATM Network of 505 centres.

The current growth plan of the bank is to establish 750 branches, 750 ATMs and 75000 Crores of business by the end of financial year 2013. The bank offers major services in various segments of accounts and deposits, loans, mutual funds, insurance, money transfers and other value added services. The Kerala Government had given permission to SIB to accept commercial taxes.

Vision Statement: To emerge as the most preferred bank in the country in terms of brand, values, principles with core competence in fostering customer aspirations, to build high quality assets leveraging on the strong and vibrant technology platform in pursuit of excellence and customer delight and to become a major contributor to the stable economic growth of the nation.

Mission Statement: To provide a secure, agile, dynamic and conducive banking environment to customers with commitment to values and unshaken confidence, deploying the best technology, standards, processes and procedures where customer convenience is of significant importance and to increase the stakeholders¶ value.

Milestones: y The FIRST among the private sector banks in Kerala to become a scheduled bank in 1946 under the RBI Act. y The FIRST bank in the private sector in India to open a Currency Chest on behalf of the RBI in April 1992. y y The FIRST private sector bank to open a NRI branch in November 1992. The FIRST bank in the private sector to start an Industrial Finance Branch in March 1993. y The FIRST among the private sector banks in Kerala to open an "Overseas Branch" to cater exclusively to the export and import business in June 1993.

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y

The FIRST bank in Kerala to develop in-house, fully integrated branch automation software in addition to the in-house partial automation solution operational since 1992.

y y

The FIRST Kerala based bank to implement Core Banking System. The THIRD largest branch network among Private Sector banks, in India, with all its branches under Core banking System.

3.3 PRODUCT PROFILE
Products and services offered by South Indian Bank are divided into three categories and are as follows: y Personal Banking:         Savings account Term Deposits Financial Inclusion Smart Card Account Loans Mutual Funds Insurance Money Transfers including both domestic and international transfers Value Added Service ( including ASBA, mobile banking, ATM, PAN System)

y

NRI Banking:         Foreign Currency Deposit NRE Rupee Account NRO Rupee Account Loans Money Transfers Mutual Funds Insurance Value Added Services

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y

Business Banking:        Business Accounts Working Capital Finance Long Term Finance Non Fund Based Finance International Finance Money Transfers Value Added Services

3.4 SIB STRENGTHS:
Improvement in asset quality through disciplined credit risk management SIB has been able to improve its advances portfolio by carefully targeting its customer base and implementing a comprehensive risk assessment process and diligent risk monitoring and remediation process. SIB actively monitors its loan accounts and applies aggressive remediation policies to contain non-performing advances which has resulted in a reduction in its net NPA as % of net advances from 3.8% in FY2005 to 0.39% in FY2010.

y

y

Geographical Spread SIB has successfully managed to increase its geographical spread by setting up branches across all regions in India and still it is increasing their number of branches across north India. At Present the Bank's branch network stands at 642 branches and 3 extension counters. The Bank has an ATM Network of 505 centres.

y

Access to low cost deposit base SIB has signed a secondment agreement in 2006 with Hadi Express Exchange, for providing managerial support to its exchange houses in Dubai and Sharjah, which has enabled the bank in maintaining and securing NRI deposits at a relatively lower cost as against other funds.

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y

Focus on retail banking The bank has recognised retail banking as one of its core elements for growth and has taken various initiatives for the same.

y

Technology driven approach SIB is in the forefront of technology in the financial services sector. The bank is one of the few banks in our country which has achieved 100% connectivity across all its branches and ATMs through Core Banking Solutions (CBS).

y

Professional and experienced management South Indian Bank Limited has an experienced Board and Senior Management. Dr. V.A. Joseph, the Chairman and CEO, holds a doctorate in human resource development and has over 30 years experience in the banking industry. SIB has been able to build a team of professionals with relevant experience, including credit evaluation, risk management, treasury, technology and marketing; and has been able to attract qualified persons such as MBAs, Engineers, Chartered Accountants, Cost Accountants, Agricultural specialists etc. SIB believes that it has created a right balance of remuneration and other economic incentives for our employees, which has inculcated a sense of ownership in its employees and enabled it to grow.

3.5 RISK FACTORS
INTERNAL FACTORS:

1. Bank¶s results of operations depend to a great extent on net interest income, volatility in interest rates and other market conditions could adversely affect its business and financial results.

2. SIB is exposed to fluctuations in foreign exchange rates.

3. If SIB is not able to control the level of NPA then its business may be adversely affected.
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4. SIB¶s funding is primarily through short-term and medium-term deposits, and if depositors do not roll over deposited funds on maturity or if it¶s unable to continue to increase its deposits, its business could be adversely affected.

5. Significant security breaches or breakdown in SIB¶s computer systems and network infrastructure and fraud could also have a negative impact on its business.

6. A major part of its branch network is in Kerala, i.e., more than 55% of the branches are located in Kerala. Any disruption, disturbance or breakdown in the economy of Kerala could adversely affect the result of the business and operations.

EXTERNAL FACTORS:

1. The Indian and global banking industry is very competitive and the ability of banks to grow depends on their ability to compete effectively. SIB competes with public and private sector Indian commercial banks as well as foreign commercial banks. Many of its competitors are large institutions, which may have much larger customer and deposit bases, larger branch networks and more capital than it has. Some of the banks, with which it competes, may be more flexible and better positioned to take advantage of market opportunities than it.

2. Regulatory changes or enforcement initiatives in India or any of the jurisdiction in which SIB operates, may affect its business and the price of the equity shares.

3. A slowdown in economic growth of India could cause its business to suffer.

4. Regional hostilities, terrorist attacks, or social unrest in some parts of the country could also affect its business.

5. India has experienced natural calamities like earthquakes, floods and drought in the past few years. The extent and severity of these natural disasters determine their impact on the
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Indian economy. Prolonged spells of below or above normal rainfall or other natural calamities could adversely affect the Indian economy and our business, especially in view of the bank¶s strategy of increasing its exposure to rural India.

6. A decline in India¶s foreign reserves may affect liquidity and interest rates in the Indian economy, which could have an impact on SIB.

3.6 SWOT ANALYSIS (in reference to private sector banks)
Strengths: y y y y All these private sector banks have well trained professional and dedicated man power. In contrast to the public sector counterparts, efficiency is maintained at the highest level. The new private banks have commenced with string financials. Almost all these banks have compiled with capital adequacy requirements and prudential norms. y Most of the banks are computerized and techno-savvy.

Weakness: y y y Both old and new private banks are operating in a limited area confined to a region. Although highly networked the number of branches are limited. There is dissimilarity between the old and new private banks by virtue of their age, functional area, products and services.

Opportunity: y Being in private sector these banks enjoy high level of autonomy in facilitating them for faster decision making. y To face stiff competition they have to come up with new products and services and achieve high customer satisfaction. y They can offer cost effective services.

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Threats: y y y Expansion of foreign banks poses severe competition. Dominant PSBs with higher market share will overshadow the private sector banks RBI / GOI relaxation of FDI investment norms cause worry among the managements.

3.7 SWOT ANALYSIS (with reference to South Indian Bank)
Strengths: y The bank has branches across 26 states in India. It currently has 642 branches, 3 extension counters and 505 ATMs. y SIB is the first bank to have core banking in all its branches among the old generation banks. y SIB is still conservative in the field of advance and selection of advance is done by the norms setup by RBI. y The first private sector bank to provide managerial support to an exchange house in the Middle East. y y y y The first Kerala based bank to start extended banking hours (12 hours banking) First Kerala based bank to introduce credit card First in the private sector to open an NRI branch First private sector bank in Kerala to implement 100% CBS.

Weakness: y The bank is not willing to go beyond the conservative concept of banking which inturn affects the growth and advances. y Bank depends on its force for its recovery which hampers the recovery and growth opportunities.

Opportunity: y Bank can extend its operations to rural and suburban areas by developing products which suit their needs

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y

Bank can extend their operations to the northern and eastern regions of the country rather than concentrating only on southern India.

y y y y

Huge Indian Population Huge Indian Middle Class Booming corporate culture The average age of employees, which forms the important asset of the bank, is young which will infuse in new ideas and growth opportunities for the bank.

Threats: y Stiff competition from other private and public sector banks like ICICI, HDFC, AXIS, SBI etc. y y y Strict regulations and interventions by RBI The changing economic scenario of India may also hinder the growth of the bank Also faces threats from foreign banks, which has traditionally served Indian corporate with cross border trade finance, fee based services and other short term financing products.

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CHAPTER-4
SARFAESI ACT 2002 & THE IMPACT OF ASSET RECONSTRUCTION COMPANIES

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4.1 SARFAESI Act 2002
It is very important for the Banks to deal with the µwill defaulters¶ and to reduce µNPA¶ in the interest of the Banking Industry and in the interest of the country too. There were constant efforts to enable the banks to speedily recover the dues from the borrowers. Bank could not recover their dues effectively by approaching Civil Courts and as a result µThe Recovery of Debts Due to Banks and Financial Institutions Act, 1993´ was enacted. Under the RDDBFI Act, a Special Tribunal called µDebt Recovery Tribunal¶ was established and the Banks could file an application under section 19 of RDDBFI Act seeking a µCertificate of Recovery¶ against the borrowers and this µCertificate of Recovery¶ is like a decree passed by a Civil Court. The DRT need not follow Civil Procedure Code while entertaining the application filed by the Banks under section 19 of RDDBFI Act, 1993 and there was a special mechanism for execution of the orders too. Even with this RDDBFI Act, 1993, Banks could not achieve considerable results forcing the legislature to think further effective mechanism to recover the dues and as a result and based on the recommendations of the committee µThe Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002¶ (SARFAESI Act) was enacted. Under the SARFAESI Act, 2002, the Banks need not approach any Court or Tribunal to get the dues of the borrowers determined and to proceed against the µSecured Asset¶. Under the SARFAESI Act, 2002, if an account is classified as µNPA¶, then, the Banks can proceed to recover the dues. Under the said Act, the Banks will give a demand notice to the borrower and guarantor under section 13 (2) of the Act and the they will deal with the objections of the borrowers to the demand notice and if the objections of the borrowers are overruled, then, the Bank will proceed taking symbolic possession of the property, taking physical possession of the property and then will dispose of the same in accordance with the provisions of the Act and connected rules. Under SARFAESI Act, 2002, there is no need for the Banks to approach any Court or Tribunal for recovery of their dues and they may have to get the assistance of the Magistrate Court under Section 14 of the Act while taking physical possession of the property where there is a resistance in taking the possession.

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If the borrower is aggrieved at the action initiated by the Bank under SARFAESI Act, 2002, then, he can approach the Debt Recovery Tribunal under Section 17 of the Act by paying the prescribed fee. Many legal issues under SARFAESI Act, 2002 were now settled. The important issues dealt by the Courts under SARFAESI Act, 2002, are as follows:

y

At what stage the borrower can approach the Debt Recovery Tribunal challenging the action initiated by the Bank?

y

Can the borrower challenge the notice issued by the Bank under section 13 (2) of SARFAESI Act, 2002?

y

The powers of the DRT and as to whether the DRT can look into the correctness of the µoutstanding due¶ arrived by the Bank?

y

Can the DRT order the restoration of possession if it is proved that the Bank is not right in proceeding under the provisions of SARFAESI Act, 2002?

y

Is it right to say that the DRT can only look into the procedural irregularities while entertaining an Appeal filed by the borrower under the Act?

y

The issue of deposit to be made to the DRAT while preferring an Appeal against the final order of the DRT?

y y y

The nature of guidelines issued by Reserve Bank of India? The jurisdiction of Civil Court in respect of SARFAESI matters? Can the Bank simply reject the objections raised by the borrowers under the Act?

These are the few important issues, the Constitutional Courts have dealt with so far laudably and all these are infact directed towards protecting the interests of the borrowers and without disturbing the object of SARFAESI Act, 2002. There were many complaints from the borrowers that the Bank is unreasonable in proceeding against them under SARFAESI Act, 2002 and many say that they are not the willful defaulters and the action of the Bank affects them severely. It is settled that the RBI guidelines on µAsset Classification¶ are mandatory and not recommendatory. RBI does frame and update the guidelines dealing with µClassification of Assets¶ from to time keeping in view of various issues. A reading of the RBI guidelines appears to be very fair and infact, the guidelines enables the Bank to exercise their own fair judgment on many issues. The RBI guidelines on µAsset Classification¶ are specific on certain issues and on many other issues,
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it emphasize the need for not troubling the good borrowers or the bonafide borrowers. I have also seen guidelines that the Banks should not rely on technical deficiencies if the record of recovery of Account is good. Likewise, the RBI guidelines on µAsset Classification¶ appear to be fair and the question is with regard to interpretation of the guidelines. It is now clear that it is mandatory for the Banks to follow the RBI guidelines in classifying an account as µNPA¶. The Banks are infact, supposed to have their own clear internal mechanism to deal with the µNon-performing Assets¶. However, most of the Banks may have their own administrative machinery to make use of the provisions of SARFAESI Act, 2002 and they will proceed to classify an account as µNPA¶ relying on RBI guidelines.

There is a specific guideline of the RBI saying that the Bank should proceed µborrower-wise¶ and not µfacility-wise¶. There are also incidents where the Banks proceed with µborrower-wise¶ at times and proceed with µfacility-wise¶ at times. If it is facility-wise, the Banks may have to issue so many demand notices and there is no need in issuing so many demand notices to the same borrower. There is logic behind RBI guideline as I understood. The RBI guidelines appears to be very fair and it has even dealt with the issue as to what happens if the borrower is very good in meeting the commitments in respect of so many facilities and if there is a slight deviation in respect of one facility. If the Bank proceeds µborrower-wise¶ in these cases, then, the µborrower¶ will suffer irreparable loss. While emphasizing the object of µspeedy recovery of dues¶, while framing clear guidelines on certain issues, RBI guidelines expects the Banks to exercise their own reasonable judgment on their own.

Before explaining the provisions provided by SARFAESI Act let me give a background on how the Government of India put up various mechanisms during the course of time as to reduce the NPAs and revive a healthy financial banking system.

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4.2 BACKGROUND
With an aim to provide a structured platform to the Banking sector for managing its mounting NPA stocks and keep pace with international financial institutions, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was put in place to allow banks and FIs to take possession of securities and sell them. As stated in the Act, it has ³enabled banks and FIs to realize long-term assets, manage problems of liquidity, asset-liability mismatches and improve recovery by taking possession of securities, sell them and reduce NPAs by adopting measures for recovery or reconstruction.´ Prior to the Act, the legal framework relating to commercial transactions lagged behind the rapidly changing commercial practices and financial sector reforms, which led to slow recovery of defaulting loans and mounting levels of NPAs of banks and financial institutions.

The SARFAESI Act has been largely perceived as facilitating asset recovery and reconstruction. Since Independence, the Government has adopted several ad-hoc measures to tackle sickness among financial institutions, foremost through nationalization of banks and relief measures. Over the course of time, the Government has put in place various mechanisms for cleaning the banking system from the menace of NPAs and revival of a healthy financial and banking sector. Some of the notable measures in this regard include:
y

Sick Industrial Companies (Special Provisions) Act, 1985 or SICA: To examine and recommend remedy for high industrial sickness in the eighties, the Tiwari committee was set up by the Government. It was to suggest a comprehensive legislation to deal with the problem of industrial sickness. The committee suggested the need for special legislation for speedy revival of sick units or winding up of unviable ones and setting up of quasijudicial body namely; Board for Industrial and Financial Reconstruction (BIFR) and The Appellate Authority for Industrial and Financial Reconstruction (AAIRFR) and their benches. Thus in 1985, the SICA came into existence and BIFR started functioning from 1987.

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The objective of SICA was to proactively determine or identify the sick/potentially sick companies and enforcement of preventive, remedial or other measures with respect to these companies. Measures adopted included legal, financial restructuring as well as management overhaul. However, the BIFR SARFAESI ACT 2002: An Assessment process was cumbersome and unmanageable to some extent. The system was not favorable for the banking sector as it provided a sort of shield to the defaulting companies. y Recoveries of Debts due to Banks and Financial Institutions (RDDBFI) Act, 1993: The procedure for recovery of debts to the banks and financial institutions resulted in significant portions of funds getting locked. The need for a speedy recovery mechanism through which dues to the banks and financial institutions could be realized was felt. Different committees set up to look into this, suggested formation of Special Tribunals for recovery of overdue debts of the banks and financial institutions by following a summary procedure. For the effective and speedy recovery of bad loans, the RDDBFI Act was passed suggesting a special Debt Recovery Tribunal to be set up for the recovery of NPA. However, this act also could not speed up the recovery of bad loans, and the stringent requirements rendered the attachment and foreclosure of the assets given as security for the loan as ineffective.
y

Corporate Debt Restructuring (CDR) System: Companies sometimes are found to be in financial troubles for factors beyond their control and also due to certain internal reasons. For the revival of such businesses, as well as, for the security of the funds lent by the banks and FIs, timely support through restructuring in genuine cases was required. With this view, a CDR system was established with the objective to ensure timely and transparent restructuring of corporate debts of viable entities facing problems, which are outside the purview of BIFR, DRT and other legal proceedings. In particular, the system aimed at preserving viable corporate/businesses that are impacted by certain internal and external factors, thus minimizing the losses to the creditors and other stakeholders. The system has addressed the problems due to the rise of NPAs. Although CDR has been effective, it largely takes care of the interest of bankers.

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y

SARFAESI ACT 2002: By the late 1990s, rising level of Bank NPAs raised concerns and Committees like the Narasimham Committee II and Andhyarujina Committee which were constituted for examining banking sector reforms considered the need for changes in the legal system to address the issue of NPAs. These committees suggested a new legislation for securitization, and empowering banks and FIs to take possession of the securities and sell them without the intervention of the court and without allowing borrowers to take shelter under provisions of SICA/BIFR. Acting on these suggestions, the SARFAESI Act was passed in 2002 to legalize securitization and reconstruction of financial assets and enforcement of security interest. The act envisaged the formation of asset reconstruction companies (ARCs)/ Securitization Companies (SCs).

4.3 Provisions of SARFAESI Act
The Act has made provisions for registration and regulation of securitization companies or reconstruction companies by the RBI, facilitate securitization of financial assets of banks, empower SCs/ARCs to raise funds by issuing security receipts to qualified institutional buyers (QIBs), empowering banks and FIs to take possession of securities given for financial assistance and sell or lease the same to take over management in the event of default. The Act provides three alternative methods for recovery of NPAs, namely:
y

Securitization: It means issue of security by raising of receipts or funds by SCs/ARCs. A securitization company or reconstruction company may raise funds from the QIBs by forming schemes for acquiring financial assets. The SC/ARC shall keep and maintain separate and distinct accounts in respect of each such scheme for every financial asset acquired, out of investments made by a QIB and ensure that realizations of such financial asset is held and applied towards redemption of investments and payment of returns assured on such investments under the relevant scheme.

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y

Asset Reconstruction: The SCs/ARCs for the purpose of asset reconstruction should provide for any one or more of the following measures:  The proper management of the business of the borrower, by changing or takeover of the management of the business of the borrower      The sale or lease of a part or whole of the business of the borrower Rescheduling of payment of debts payable by the borrower Enforcement of security interest in accordance with the provisions of this Act Settlement of dues payable by the borrower Taking possession of secured assets in accordance with the provisions of this Act.

y

Exemption from registration of security receipt: The Act also provides, notwithstanding anything contained in the Registration Act, 1908, for enforcement of security without Court intervention: (a) any security receipt issued by the SC or ARC, as the case may be, under section 7 of the Act, and not creating, declaring, assigning, limiting or extinguishing any right, title or interest to or in immovable property except in so far as it entitles the holder of the security receipt to an undivided interest afforded by a registered instrument; or (b) any transfer of security receipts, shall not require compulsory registration.

The Guidelines for SCs/ARCs registered with the RBI are:
y

Act as an agent for any bank or FI for the purpose of recovering their dues from the borrower on payment of such fees or charges

y y

Act as a manager between the parties, without raising a financial liability for itself; Act as receiver if appointed by any court or tribunal.

Apart from above functions any SC/ARC cannot commence or carryout other business without the prior approval of RBI.

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4.4 Risk Management in Securitization
The various risks involved in securitization are given below: Credit Risk: The risk of non-payment of principal and/or interest to investors can be at two levels: SPV and the underlying assets. Since the SPV is normally structured to have no other activity apart from the asset pool sold by the originator, the credit risk principally lies with the underlying asset pool. A careful analysis of the underlying credit quality of the obligors and the correlation between the obligors needs to be carried out to ascertain the probability of default of the asset pool. A well diversified asset portfolio can significantly reduce the simultaneous occurrence of default. Sovereign Risk: In case of cross-border securitization transactions where the assets and investors belong to different countries, there is a risk to the investor in the form of non-payment or imposition of additional taxes on the income repatriation. This risk can be mitigated by having a foreign guarantor or by structuring the SPV in an offshore location or have a neutral country of jurisdiction Collateral deterioration Risk: Sometimes the collateral against which credit is sanctioned to the obligor may undergo a severe deterioration. When this coincides with a default by the obligor then there is a severe risk of non-payment to the investors. Legal Risk: Securitization transactions hinge on a very important principle of ³bankruptcy remoteness´ of the SPV from the sponsor. Structuring the asset transfer and the legal structure of the SPV are key points that determine if the SPV can uphold its right over the underlying assets, if the obligor declares bankruptcy or undergoes liquidation. Prepayment Risk: Payments made in excess of the scheduled principal payments are called prepayments. Prepayments occur due to a change in the macro-economic or competitive industry situation. For example in case of residential mortgages, when interest rates go down, individuals may prefer to refinance their fixed rate mortgage at lower interest rates. Competitors offering better terms could also be a reason for prepayment. In a declining interest rate regime prepayment poses an interest rate risk to the investors as they have to reinvest the proceedings at
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a lower interest rate. This problem is more severe in case of investors holding long term bonds. This can be mitigated by structuring the tranches such that prepayments are used to pay off the principal and interest of short-term bonds. Servicer Performance Risk: The servicer performs important tasks of collecting principal and interest, keeping a tab on delinquency, maintains statistics of payment, disseminating the same to investors and other administrative tasks. The failure of the servicer in carrying out its function can seriously affect payments to the investors. Swap Counterparty Risk: Some securitization transactions are so structured wherein the floating rate payments of obligors are converted into fixed payments using swaps. Failure on the part of the swap counterparty can affect the stability of cash flows of the investors. Financial Guarantor Risk: Sometime external credit protection in the form of insurance or guarantee is provided by an external agency. Guarantor failure can adversely impact the stability of cash flows to the investors. After going through all these one question that keeps popping in my head is ³what action

does the court take for a person who has been treated unjustly under the SARFAESI Act?´
As we know that under SARFAESI Act the bank can proceed with the recovery process and proceed with the property mortgaged as security without recourse to traditional civil courts. It is also true that bank may not be able to recover the entire amount from the debtor or it may get delayed if they approach civil courts for recovery. Because of this to speed up the recovery process this provision was introduced under this act. What happens is the bank makes a demand for payment, receives reply if any, and addresses the grievances of the debtor if required and if not satisfied with the reply then accordingly the bank goes for auctioning of the property as per the law and thereby quickens the recovery process. Thus, the object of SARFAESI Act is really laudable if the law is implemented in letter and spirit. But, when there is a clear violation of statutory provisions or when the Bank proceeds against a property unreasonably using the provisions of SARFAESI Act, 2002, then, there should be effective remedy available to the
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innocent owner of the property. The act itself provides a relief to the aggrieved to file an appeal challenging the steps taken by the bank. But how effective is this remedy despite establishing clear case against the bank.

As a citizen of India we know that we are not allowed to say that we will take loan, execute the documents and will not repay the loan to the bank. It has also been seen that Debt Recovery Tribunal (DRT) under the Act deals with the grievances of the aggrieved. It is said that in many cases DRT passes conditional order while granting stay and this has become a routine. In these case the innocent owner even hesitate to go to high court directly because many legal practitioners advices them to approach the tribunal. It is also said that High Court may not likely entertain a writ petition directly and in many cases such petitions are disposed giving the aggrieved the liberty to approach the Tribunal. In these cases DRT should really be effective and should not invite any criticism.

One more question that could rise is that why that person does has to go through all these, i.e., if he has been treated unjustly instead going for an appeal is there no provision under the Act to get an automatic relief. I meant ³Is it possible to get a relief automatically in such kind

of matters?´
The answer to this is getting automatic relief against bank from DRT is not possible but by raising some mechanical grounds the borrower can get an interim relief upon the condition that some amount had to be deposited. It would be temporary and the endeavour of DRT is and will always be to recover the outstanding due because they cannot act against the express provisions of the Act. But in cases where the outstanding due amount is not huge then the borrower has to think about the expenses of approaching the tribunal.

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4.5 ASSET RECONSTRUCTION COMPANY
Asset reconstruction companies are created to manage and recover Non Performing Assets acquired from the banking system, i.e., the company undertakes assets that are declared as Non Performing by the lending institutions. In other words, ARCs are really debt collectors. The objective of ARCs is to help banks to maintain clean books by reducing NPAs and they make profits by buying NPAs at a lower price. And then they make special efforts at recovering value from the assets if necessary by special legislation. One question that rises is ³what is the need for ARCs if banks and financial

institutions can handle this?
In normal course the banks and financial institutions can handle themselves the job of recovery for most of their lending. But in the process they might be left with sticky debts which represent wilful dodgers and sunset industries. The left over or uncovered credit represents difficult cases and these cases require special attention and action to be taken. And when such overdue credit outstanding grows large in volume the banks and financial institutions are unable to divert their attention from their core business to this time consuming job which requiring concerted and continuous effort. These can therefore be outsourced to specialised agencies, i.e., asset reconstruction companies. They have built in professional expertise in this task and handle recovery as their core business.

Benefits: y It relieves the banks of the burden NPAs which would allow them to focus better on their core business. y y Their major objective is to acquire and liquidate NPAs as soon as possible. ARCs can play an important role in developing capital markets through secondary asset instruments. y y It helps the banks to maintain clean books of account by reducing NPAs. Less to deal with non performing clients.

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4.6 Approaches to resolution of NPAs
There are essentially two ways in resolving the problem of bad loans, they are as follows: 1. Creditor ± led Approach 2. ARC Approach

Creditor ± led/Bank ± led Approach This means each bank tries to restructure or recover its own assets and the government simply either provides more capital to the banks or provide fiscal or other incentives to write off bad loans and backs up with the recovery efforts with appropriate security enforcement legislation.

As it is said that any problem is best resolved by the one who created it, logically, it might seem that the problem of bad loan could be better handled by the bank itself. Banks with loan files and some institutional knowledge of the borrower should be better placed to resolve NPAs than the centralized ARCs. This approach may also provide better incentives for banks to maximize the recovery value of bad debt and avoid future losses by improving the loan approval and monitoring procedures.

However individual bank led approach to resolving NPAs has several problems, particularly where the problem loans are the result of crisis. Fearing the risk of further loans going bad could make banks shun lending which again would deepen the crisis. In most cases in the name of restructuring borrowers take more loans and therefore more accounts become Non Performing.

ARC Approach This approach is based on the premise that NPAs created by a systematic crisis cannot be treated at par with those accumulated due to bad lending practices and therefore a focused attention is required which is then backed by appropriate legislation, is required to solve the problem. If banks were burdened with resolving these problems then they will not be able to attend to the need to create new loans which will further deepen the crisis. Banks having provisioning requirements will also face threat of capital erosion. ARCs with their expertise in loan resolution should maximise recovery value while minimising costs.

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There are facts and figures that have shown the use of asset reconstruction companies or distinct loan workout units have played an important role in systemic difficulties in the banking sector and could be considered as the best practice.

Advantages of ARC:

y

Economies of scale: consolidation of scarce work out skills and resources within one agency.

y y

Can help with securitisation of assets as it has larger pool of assets. Centralizes ownership of collateral thus providing more leverage over debtors and more effective management.

y y y y

Breaks links between banks and corporate and thus could improve collectability of loans. As it handles the recovery process, it would help bank to focus on its core business. Allows the application of uniform workout practices. Can be given special powers to expedite loans

Disadvantages of ARC:

y

Banks have informational advantages over ARCs as they have collected information on their borrowers.

y

Leaving loans in banks may provide better incentives for recovery and for avoiding future losses by improving loan approval and monitoring procedures.

y y

Banks can provide additional financing which may be necessary for restructuring process. If assets transferred to ARCs are not actively managed then the existence of ARCs may lead to general deterioration of payment discipline and further deterioration of assets value.

4.7 ARC Ownership Models
Different countries have tried out varying models of ownership of ARCs. The options range from asset workout department or units of banks, bank owned subsidiaries or affiliated companies, private companies, and government owned asset management agencies. The severity or systemic
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nature of a country¶s NPA problem usually dictates the NPA resolution strategy and the parameters for judging its success. A country¶s institutional, legal, and market conditions also influence the decision. Typically, the primary goal is to maximize net present value recovery in order to minimize losses to either the selling bank or the government, depending on the ARC model used. Government-based ARCs may have additional challenges such as minimizing adverse market impact from the asset recovery process or helping to rehabilitate troubled banks and distressed borrowers. In general, most bank resolution programs involve removing NPA from normal bank operations. ARCs usually operate through one of the two basic models namely bank based model, which is a decentralized approach or a government based model, centralized approach.

Asset workout departments or units of banks: A separate unit or department within the bank is only as good as bank as a whole, especially from the viewpoint of legal powers, interests of the shareholding groups, etc. therefore in most countries this has only been the last choice.

Bank owned subsidiaries or affiliated companies: This model has been used in several countries like Australia and several continental European countries. In china as well the big four banks have setup their own ARCs subsequently which have been privatized. There are certain advantages associated with this model such as: y y y y Use of in-house experience and knowledge of NPAs Maintenance of important banking relationships Strengthening of expertise the resolution of bank NPAs Establishment of new business relationships with new investors involved in asset workouts. y Bank based ARCs are likely to have more operational flexibility than a government entity.

Private Companies: Private companies though with substantial holdings of banks have been used in Thailand. In India also the model used is one of the private ARCs. Such a company enjoys all the advantages
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of the centralized ARC. Centralizing asset management and disposition facilities asset packaging and marketing ensures consistency and transparency within the ARC.

4.8 Transaction Structure:
Initially, an ARC acquires NPA by floating an SPV which acts as a trust whereby the ARC is a trustee and manager. NPA are acquired from banks/FIs at fair value based on assessment of realizable amount and time to resolution. The banks/FIs may receive cash/bonds/debentures as consideration or may invest in securities issued by the ARCs. The trust acquires NPAs from banks/FIs and raises resources by formulating schemes for the financial assets taken over. Accordingly, it issues securities to the investors which are usually QIBs. Securities represent undivided right, title and interest in the trust fund. Subsequently, the ARC redeems the investment to the bank/FIs out of the funds received from the issued securities. After acquiring the NPA, the trust becomes the legal owner and the security holders its immediate beneficiaries. The NPAs acquired are held in an asset specific or portfolio trust scheme. In the portfolio approach, due to the small size of the aggregate debt the ARC makes a portfolio of the loan assets from different banks and FIs. Whereas when the size of the aggregate debt of a bank/FI is large, the trust takes asset specific approach. Thereafter, different fund schemes are pooled together in a master trust scheme and sold to other investors. The ARC periodically declares the NAV of respective schemes.

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Figure 4.1 Transaction Structure Stage 1

Figure 4.2 Transaction Structure Stage 2

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ARCs in India:

y y y y y y y y y y y y y

Asset Reconstruction Company (India) Ltd, (ARCIL) Assets Care Enterprise Ltd. ASREC (India) Ltd Pegasus Assets Reconstruction Pvt. Ltd. Dhir & Dhir Asset Reconstruction & Securitisation Company Ltd. International Asset Reconstruction Company Pvt. Ltd. Reliance Asset Reconstruction Company Ltd. Pridhvi Asset Reconstruction and Securitisation Company Ltd. Phoenix ARC Pvt Ltd. Invent Assets Securitisation & Reconstruction Private Limited JM Financial Asset Reconstruction Company Limited India SME Asset Reconstruction Company Limited (ISARC) Edelweiss Asset Reconstruction Company Limited

4.9 Issues Concerning ARCs
There are certain issues under SARFAESI Act that requires attention for better and efficient functioning of ARCs, they are as follows:

1. Notifying ARC as a financial institution under SARFAESI Act 2002 Under Section 41 of SARFAESI Act, 2002, ARC had been notified as a financial institution. This was put into effect by inserting a clause under Section 4-A (1) of Companies Act, 1956. Subsequently in 2004 an amendment was passed to de-notify ARC as a financial institution by omitting this clause.

This was done so as to block the possibility of a group of ARCs indulging in a ponzi operation by going on transferring an asset from one to another in a circular way without making much recovery. Such circular transfers from one ARC to another would defeat the very purpose for which ARCs were setup which was to realize value from the NPAs

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acquired from banks, within a period of 5 years.

But the remedy of de-notifying ARC as a financial institution so that an ARC can acquire NPAs from a bank or financial institution but not from another ARC has turned out to create few issues. For it has blocked the transfer of assets between one ARC and another even for a legitimate purpose. In a rehabilitation/ revival case, for instance, after acquiring the NPA from a bank/ banks, an ARC needs to infuse fresh funds for turning the company around. Before committing such extra funds, however, an ARC would like to acquire at least 75% of the debt so that it has powers of SARFAESI action against the borrower, in case things go wrong. If another ARC holds debt of 26% or more, the ARC implementing rehabilitation/ revival must be allowed to acquire the same from the former. However, under current provisions the law, this is ruled out.

Incidentally, banks do not, normally, infuse fresh funds in NPA cases; they only µrestructure¶ loans. But merely notifying ARC as a financial institution is not the solution because it will open the floodgates, again, for the ponzi transfer of assets among ARCs in a circular way, without any real resolution or recovery.

Therefore to resolve this issue what can be done is notifying ARC as a financial institution under SARFAESI Act and also by introducing a new section in the Act disallowing sale of assets by one ARC to another except in certain circumstances such as rehabilitation/ revival or takeover of management, etc., with the prior approval of RBI.

2. Permitting ARCs to acquire assets directly in the name of the trusts This is necessary so as to ensure that ARC doesn¶t pay stamp duty twice on the assignment of same debt, first time it acquires the debt in its books on behalf of its trust and a second time when it is transferred by it to the ARC trust.

3. Permitting ARCs to convert debt into equity ARCs need to convert debt to equity in case of business restructuring/ rehabilitation/ revival. But under companies Act 1956 shareholders¶ approval is required to convert debt
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to equity. In a case where ARC is proposing to infuse fresh funds for rehabilitation which may be either with or without takeover of management of a borrower company¶s business, shareholders may or may not give such approval.

The conversion of assets from debt to equity would help to write off this debt to improve valuation of the company. A portion of the debt can be converted into equity which can then be sold in the market to recover a part of the debt foregone.

4. Enlarging scope of business Under the SARFAESI Act, an ARC must acquire a non-performing asset from a bank first, before it can work on any kind of resolution ± whether through a one-time settlement with the borrower, or sale of physical assets, or rehabilitation/ revival.

In 2002, when the Act was passed, the All Banks Gross NPA Ratio was 10.4% and ³solving´ the NPA problem of banks was the primary concern of the government. The Gross NPA Ratio is about one-fifth of that now, and it is time the scope of ARC¶s operations is enlarged.

The most glaring paradox the industry faces, today, is the following. A company in distress needs funds for reviving itself but, as a matter of policy, banks do not infuse fresh funds in an NPA case. An ARC can, and wants to, but is not allowed to do so unless it acquires at least a part of the NPA first which is not feasible if banks do not want to sell.

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4.10 Impact of ARCs in India
In India asset reconstruction structure is unique; no other country operates a model of tightly regulated private sector companies engaged in the business of unlocking value from nonperforming assets (NPAs) like we do. Yet, the industry scenario is grim. Why such outcome?

Because, a flawed implementation of the asset reconstruction company (ARC) model has resulted in the focus being shifted from unlocking value to solving banks¶ NPA problem. The key issue for ARCs is not the asset base but recovery and the time-frame within which it is made. The performance on this front is agonizing; at the end of six years of operation, the combined recovery of all ARCs works out to 31.9% of the acquisition price paid. Clearly, this points to a systemic logjam that needs to be tackled. The logjam is on account of legal infirmity, legacy issues and certain bank practices but the more fundamental question that we need to ask is: Is ARC operation unlocking value for the economy the way it can and should? The simple answer to that question is µno¶.

Garbage disposal cannot be the main role for ARCs; enforcement agents can do that as well, if not better. The real value from NPAs will get unlocked only if ARCs do two things: one, tackle troublesome borrowers (that¶s what SARFAESI Act was supposed to be all about) in order to make good recovery from NPAs that still have value; and two, rehabilitate revivable sick cases. ARCs have not resolved too many cases of the first variety and, as far as the second is concerned, they have not even scratched the surface.

There is confusion galore as two sets of RBI guidelines prescribe two different standards for determining the price at which banks should sell their NPAs: one for sale to ARCs and another for sale to banks. The 2003 guidelines ignored time value of money perhaps because, at that time, it was expedient to let banks solve their provisioning problem by selling their NPAs to ARCs at a price higher than warranted against issue of security receipts (SRs). In the absence of fair practices guidelines, officials in the PSU banks-dominated banking system view sale of NPAs to ARC as a huge risk fraught with the dangers of a vigilance probe. The logjam is complete: an ARC can submit cash bid matching the banks¶ reserve price only if it is willing to book a loss.
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CHAPTER-5
TECHNOLOGY & ITS IMPACT TO REDUCE FRAUDS

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5.1 TECHNOLOGY
In the world of banking and finance nothing stands still. The biggest challenge of all is in the scope of business of banking. Banking in its traditional form is concerned with the acceptance of deposits from the customers, lending the surplus of deposited money to suitable customers who wish to borrow and transmission of funds. Apart from traditional business, banks now a day¶s provide a wide range of services to satisfy the financial and non financial needs of all types of customers from the smallest account holder to the largest company and in some cases of non customers. The range of services offered differs from bank to bank depending mainly on the type and size of the bank.

Technology as a differentiator has become the driver of Indian banking business since the past decade with the financial sector reforms forming firm foundation. Technology has resulted in improved quality of service, anytime anywhere banking, focused product delivery, cross selling opportunities, multi channel touch point for consumption of services, etc.

If we look at the status of IT adoption by banks, private sector banks aggressively started pursuing technology based service offerings. Because of this public sector banks had to move over from their past legacy. Today, almost every commercial bank branch is at some stage of technology adoption, be it Automated Ledger Posting Machines, Total Branch automation or Core Banking Solution (CBS). Keeping in view the large branch network of these banks, the Core Banking solution (CBS) is being laid across by them in a phased manner. ATMs, internet banking, any branch banking, credit cards, debit cards, etc, are being increasingly offered.

5.2 Banking Fraud
Banking Fraud is posing threat to Indian Economy. Its vibrant effect can be understood by the fact that in the year 2004 number of Cyber Crime were 347 in India which rose to 481 in 2005 showing an increase of 38.5% while I.P.C. category crime stood at 302 in 2005 including 186 cases of cyber fraud and 68 cases cyber forgery. Thus it becomes very important that occurrence of such frauds should be minimized. More upsetting is the fact that such frauds are entering in Banking Sector as well.
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In the present day, Global Scenario Banking System has acquired new dimensions. Banking did spread in India. Today, the banking system has entered into competitive markets in areas covering resource mobilization, human resource development, customer services and credit management as well.

Indian's banking system has several outstanding achievements to its credit, the most striking of which is its reach. In fact, Indian banks are now spread out into the remotest areas of our country. Indian banking, which was operating in a highly comfortable and protected environment till the beginning of 1990s, has been pushed into the choppy waters of intense competition.

A sound banking system should possess three basic characteristics to protect depositor's interest and public faith. These are y y y A fraud free culture, A time tested Best Practice Code, and An in house immediate grievance remedial system.

A bank fraud is a deliberate act of omission or commission by any person carried out in the course of banking transactions or in the books of accounts resulting in wrongful gain to any person for a temporary period or otherwise, with or without any monetary loss for the bank.

5.3 Impact of Technology
Banks are the engines that drive the operations in the financial sector, which is vital for the economy. With the nationalization of banks in 1969, they also have emerged as engines for social change. After Independence, the banks have passed through three stages. They have moved from the character based lending to ideology based lending to today competitiveness based lending in the context of India's economic liberalization policies and the process of linking with the global economy.

While the operations of the bank have become increasingly significant banking frauds in banks are also increasing and fraudsters are becoming more and more sophisticated and ingenious. In a bid to keep pace with the changing times, the banking sector has diversified its business
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manifold. And the old philosophy of class banking has been replaced by mass banking. The challenge in management of social responsibility with economic viability has increased.

Losses sustained by banks as a result of frauds exceed the losses due to robbery, dacoit, burglary and theft-all put together. Unauthorized credit facilities are extended for illegal gratification such as case credit allowed against pledge of goods, hypothecation of goods against bills or against book debts. Common modus operandi are, pledging of spurious goods, inletting the value of goods, hypothecating goods to more than one bank, fraudulent removal of goods with the knowledge and connivance of in negligence of bank staff, pledging of goods belonging to a third party. Goods hypothecated to a bank are found to contain obsolete stocks packed in between goods stocks and case of shortage in weight is not uncommon.

An analysis made of cases brings out broadly the under mentioned four major elements responsible for the commission of frauds in banks.

1. Active involvement of the staff, both supervisor and clerical either independent of external elements or in connivance with outsiders.

2. Failure on the part of the bank staff to follow exactly laid down instructions and guidelines.

3. External elements cause to continue indefinitely frauds on banks by forgeries or manipulations of cheques, drafts and other instruments.

4. There has been a growing collusion between business, top banks executives, civil servants and politicians in power to defraud the banks, by getting the rules bent, regulations flouted and banking norms thrown to the winds.

If we look into ATM frauds the most common techniques are by disclosing PIN for withdrawing money and fraudsters who are tech savvy uses card readers to know the PIN. To handle ATM frauds there new technologies available like Designated time, Microchip technology, Biometric
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tokens, Enhanced security, ATM Monitoring, Customized softwares, Customer motivation, Alerts, etc can be used to minimize and prevent ATM frauds in India.

One of the most significant areas where IT had a positive impact is on substitutes for traditional fund movement services. With the advent of electronic banking, electronic funds transfer and other similar products, funds transfers across different constituents is now easily possible. But because of this the concept of security has aroused. With the delivery channels relating to funds based services such as movement of funds electronically between different accounts of customers taking place with the use of technology, the requirements relating to security also need to undergo metamorphosis at a rapid pace. Various concepts such as digital signatures, certification, storage of information in a secure and tamper proof manner like smart cards all assume significance and also have been part of the practices and procedures in the day-to-day functioning of banks. I must hasten to add at this stage that all these would be added requirements and the well established practices of today may also have to not only continue but also co-exist along with the new requirements. Customers of rural India must get the benefit through tailor-made technology solutions with different level of sophistication. They need a human face to interact with banks and back office processing done elsewhere.

The Reserve Bank of India has taken upon itself the setting up of a safe, secure and efficient communications network for the exclusive use for the banking sector. INFINET (INdian FInancial NETwork) is already being used by a large number of banks for funds and non fund based message transfers. INFINET is perhaps one of the very few networks in the world which uses the latest in technology and security called Public key Infrastructure ± PKI, which is used for authenticity and enhanced confidentiality of data.

With the introduction of cheque truncation system (CTS), helped in improving the efficiency of cheque clearing cycle. Further it is a more secure system than the current exchange of physical documents in which cheque moves from one point to another thus it not only creates clearing delays but also inconveniences to the customer in case the instrument is lost in transit or manipulated during clearing cycle. Hence cheque truncation system not only speeds up collection of cheques but also enhances customer service, reduces the scope for clearing related
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frauds, minimizes cost of collection of cheques, eliminates logistics problems.

Banks across the country have started the process of setting up ATMs enabled with biometric technology. Though expensive to install the scope of biometrics is expanding rapidly. It provides for better security system, by linking credentials verification to recognition of the face, fingerprints, eyes or voice. Some large banks of the country have taken their first steps towards large scale introduction of biometric ATMs, especially for rural banking. Hence with the help of this technology it not only prevents identity fraud but also safeguards data, improves ease of use and save money without losing passwords.

This would also help in reduction of internal frauds, i.e., employees attempting to withdraw money from a customer¶s account without their consent. This could be ensured by facial biometrics which would ensure that only authorized personnel would be able to validate financial transactions. This would also prevent from the happening of cyber crime and also in the case credit/ debit card loss.

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CHAPTER-6
ANALYSIS & INTERPRETATION

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6.1 PERFORMANCE OF SOUTH INDIAN BANK:
The performance highlights of the bank SIB for the financial year ended 31st March 2010 are as follows:

Table 6.1 South Indian Bank Performance Highlights

The bank has registered net profit of Rs. 233.76 Crore for the year ended 31st March 2010. The bank could achieve this because of this substantial improvement because of higher scale of operations and NPA management. As of the latest audited financial results of SIB they have reached their net profit to Rs. 292.56 Crore for the year ended 31st March 2011.

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6.2 OPERATING REVIEW:
DEPOSITS: The bank could increase its total deposits to Rs. 29721.08 Crores as of year ended 31st March 2011 from Rs. 23011.52 Crores last year. This registered a growth of 29.16 % which shows that the bank has been continuously performing well for the past three years. Year Deposits (Crs) % Change 2010-11 29721.08 29.16% 2009-10 23011.52 27.19% 2008-09 18092.33 19.37% 2007-08 15156.12 23.83% 2006-07 12239.21 27.78%

Table 6.2 Deposits

Deposits
35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2006-07 2007-08 2008-09 2009-10 2010-11

Graph 6.1 Deposits

Breakup of the deposits as on 31st March 2010 is:

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ADVANCES: Total advances of the bank increased to 29.49% as on the year ended 31st March 2011 when compared to last year. This helped the bank to touch the mark of Rs. 20,000 Crore by this fiscal year. Year Advances % Change 2010-11 20488.73 29.49% 2009-10 15822.92 33.55% 2008-09 11847.91 13.34% 2007-08 10453.75 32.01% 2006-07 7918.91 24.31%

Table 6.3 Advances

Advances
40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2006-07 2007-08 2008-09 2009-10 2010-11

Graph 6.2 Advances

INVESTMENTS: During the fiscal year 2009-10 bank¶s gross investment portfolio increased by 16.97% to Rs. 7164.29 Crore as against deposit growth of 27.19% resulting in a more healthy investment deposit ratio of 31.13% against 33.85% for the year 2008-09. The bank made a trading profit of Rs. 78.02 Crore for the year 2009-10 compared to Rs. 35.41 Crore in the previous year, i.e., 2008-09.

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Year Investments %Change

2006-07 3,430.13 25.22%

2007-08 4,572.23 33.30%

2008-09 6,075.20 32.87%

2009-10 7,155.61 17.78%

Table 6.4 Investments

Investments
35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2006-07 2007-08 2008-09 2009-10

Graph 6.3 Investments

PRIORITY SECTOR ADVANCES: Year Agriculture Small Enterprises Other Priority Sector 2007-08 1489.05 738.46 1589.21 2008-09 1751.13 857.9 1637.21 2009-10 2656.8 1094.5 1339.63

Table 6.5 Priority Sector Advances

From the above table we can see that the total amount of advances had always been increasing year after year. We can also see that SIB¶s exposure towards agriculture sector is much compared to the other priority sectors. This shows how much dedication the bank is putting into priority sector lending specially for agriculture purposes which also includes short term loans for raising crops.

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Priority Sector Advances (Crs)
3000 2500 2000 1500 1000 500 0 2007-08 2008-09 2009-10 Agriculture Small Enterprises Other Priority Sector

Graph 6.4 Priority Sector Advances

NON-PERFORMING ASSETS MANAGEMENT: During the year 2009-10, the Bank had taken various steps for recovery of non-performing assets by conduct of recovery camps, issue of notice under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) one-time settlements, etc. As a result of the various steps taken, the Bank could recover NPAs to the tune of Rs. 269.62 Crore during the year against the target of Rs. 225 Crore. The Gross and Net NPAs of the Bank as on March 31, 2010 were Rs. 211 Crore and Rs. 61.57 Crore against Rs. 260.56 Crore and Rs.134.31 Crore respectively as on March 31, 2009. The percentage of Gross NPA to Gross Advance came down from 2.18% as on March 31, 2009 to 1.32% as on March 31, 2010. The most notable achievement in NPA management was that the Bank could reduce the percentage of net NPA to net Advances from 1.13% to 0.39% as on March 31, 2010. And as of the latest audited financial results for the year ended 31st March 2011, i.e., for the year 2010-11, the Gross NPA and Net NPA of the bank reached Rs. 230.34 Crore and Rs. 60.02 Crore respectively. The percentage of Gross NPA and Net NPA came down to 1.11% and 0.29% as on 31st March 2011 when compared with last year¶s 1.32% and 0.39% respectively.

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6.3 COMPARISON:
I have analysed the bank past four years performance to find out how the bank had been performing in terms of its NPA management. This would also help to measure their financial strength and earning capacity of the business. For this I have used ratio analysis which has become an important tool to measure and to know how well the company is performing by itself.

6.3.1 Gross NPA Ratio: Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank. Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI guidelines. The ratio is to be counted in terms of percentage and the formula for GNPA is as follows:

Year Gross NPA Gross Avances Gross NPA Ratio

2006-07 321.21 8308 3.87%

2007-08 188.48 10754 1.75%

2008-09 260.56 11965 2.18%

2009-10 211 15970 1.32%

Table 6.6 Gross NPA Ratio

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Gross NPA Ratio (%)
4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2006-07 2007-08 2008-09 2009-10

Graph 6.5 Gross NPA Ratio

This ratio indicates the credit portfolio of the banks. High gross NPA ratio indicates that bank has a low credit portfolio and vice-versa. South Indian Bank has always maintained a low ratio in terms Gross NPA to Gross Advances. They always tried to reduce this ratio when compared to its previous years. As we can see in the above table for the year 2009-10 the ratio is at 1.32% and they further brought down this number to 1.11% for the year 2010-11. This also shows how dedicated they are at bringing their Non Performing Assets down. Hence I can say that have always tried to maintain higher credit portfolio. If we compare with the industry average SIB is performing much better. Gross NPA ratio of scheduled commercial banks for the year 2009-10 is at 2.39% and for private sector banks it is at 2.74%, whereas SIB is at 1.32%. The difference between the average of private sector banks and SIB is 142 basis points. This shows that SIB is performing above the industry average.

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6.3.2 Net NPA Ratio: Net NPA Ratio is calculated by reducing cumulative balance of provisions outstanding at period end from gross NPA. Higher ratios reflect rising bad quality of loans.

Year Net NPA Net Advances Net NPA Ratio

2006-07 77.81 7918.91 0.98%

2007-08 33.97 10453.75 0.32%
Table 6.7 Net NPA Ratio

2008-09 134.31 11852.03 1.13%

2009-10 61.57 15822.92 0.39%

Net NPA Ratio (%)
1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% 2006-07 2007-08 2008-09 2009-10

Graph 6.6 Net NPA Ratio

This ratio indicates the degree of risk in the portfolio of the banks. High NPA ratio indicates the high quantity of risky assets in the banks for which no provisions are made. From the above we can see that SIB has always tried to minimize their quantity of risky assets in their portfolio and the numbers of the past four years shows that. As we can see that for the year 2009-10 the ratio is at 0.39% and they have further brought this value down to 0.29% for the year 2010-11. And if we compare their value with the industry average, SIB is performing far better than the industry as a whole. The Net NPA Ratio of scheduled commercial banks is at 1.12% and for private
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sector banks it is at 1.03% when compared with SIB¶s 0.39%. This shows that SIB has always tried to reduce the amount of risky assets from their portfolio.

6.3.3 Provision Coverage Ratio: Provisions are made for to keep safety against NPA and it directly affect on gross profits of the banks. Provision Ratio is nothing but total provisions held for NPA to gross NPA of the banks.

Year Provision Gross NPA Provision Coverage Ratio

2006-07 232.47 321.21 72.37%

2007-08 143.11 188.48 75.93%

2008-09 113.13 260.56 43.42%

2009-10 135.43 211 64.18%

Table 6.8 Provision Coverage Ratio

Provision Coverage Ratio (%)
80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2006-07 2007-08 2008-09 2009-10

Graph 6.7 Provision Coverage Ratio

This ratio indicates the degree of safety measures adopted by the banks. It has direct bearing on the profitability, dividend and safety of shareholder¶s funds. If the provision coverage ratio is
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less it indicates that the bank has made under provision. We can also say that it is a measure that indicates the extent to which bank has provided against the troubled part of its loan portfolio. SIB has always tried to maintain higher ratio though there had been a decline in this ratio during the year 2008-09 that was because they wrote off excess provision was high when compared with the provisions they made during the year. This ratio again increased to 64.18% for the year 2009-10 when compared to the ratio of previous fiscal year which was at 43.42%. We can say that SIB maintains provisions as per RBI guidelines and also based on their past experience, evaluation of security and other related factors.

6.3.4 Problem Asset Ratio: It is the ratio of gross NPA to total asset of the bank. The formula is given as:

Year Gross NPA Total Assets Problem Asset Ratio

2006-07 321.21 13,652.58 2.35%

2007-08 188.48 17,089.93 1.10%

2008-09 260.56 20,379.41 1.28%

2009-10 211 25,534.04 0.83%

Table 6.9 Problem Asset Ratio

Problem Asset Ratio (%)
2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2006-07 2007-08 2008-09 2009-10

Graph 6.8 Problem Asset Ratio

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This ratio has a direct bearing on return on assets as well as liquidity risk management of the bank. If the ratio is high then there is high probability of creating NPAs in the near future. If we look into the above drawn graph we can see that this ratio has been reducing for the past four years. This is a good sign in terms of performance of the asset portfolio of SIB. In the year 200910 this ratio has gone down to 0.83% which is much better when compared to previous three years. And again this ratio as further brought down to 0.70% for the year 2010-11. This shows how dedicated the bank is in bringing down the probability of creating NPAs. This could be further brought down in the current fiscal year.

6.3.5 Capital Adequacy Ratio: Capital Adequacy Ratio (CAR) can be defined as ratio of the capital of bank to its assets which are weighted/ adjusted according to risk attached to them, i.e.,

As per prudential Norms Banks were required to achieve 8% CAR, increased to 9% by March 2000. For the purpose of capital Adequacy Achievement, the capital base, i.e., Tire I + Tire II should not be less than the prescribed % of total Risk Weighted Assets of the bank. Year Basel I Basel II
Table 6.10 Capital Adequacy Ratio

2006-07 11.08

2007-08 13.80

2008-09 13.89 14.76

2009-10 14.73 15.39

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Capital Adequacy Ratio (%)
20 15 10 5 0 2006-07 2007-08 2008-09 2009-10 Basel I Basel II

Graph 6.9 Capital Adequacy Ratio

Capital Adequacy Ratio is most important for the banks to maintain as per the banking regulations. RBI has set minimum capital adequacy ratio to 9% for all the banks in the country. A ratio below the minimum indicates that the bank is not adequately capitalized to expand its operations. This ratio ensures that a bank does not expand their business without having adequate capital. It must be also known that it would be difficult for an investor to calculate this ratio as banks do not disclose the details required for calculating the denominator, i.e., risk weighted average of this ratio in detail. As such, banks provide their CAR from time to time. Tier I Capital funds include paid-up equity capital, statutory and capital reserves, and perpetual debt instruments eligible for inclusion in Tier I capital. Tier II capital is the secondary bank capital which includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and others. SIB has always maintained their Capital Adequacy Ratio well above the minimum limits provided as per RBI guidelines. This ratio has been significantly increasing year after year and has been brought upto 14.73% for the year 2009-10 as per BASEL I norms and 15.39% as per BASEL II norms. This ratio ensures that bank can expand their operations and also gives confidence to the depositors.

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6.3.6 Sub Standard Asset ratio: It is the ratio of total substandard assets to gross NPA of the bank.

Year Substandard Asset Gross NPA Substandard Asset Ratio

2008-09 145.12 260.56 55.70%

2009-10 54.97 211 26.05%

Table 6.11 Substandard Asset Ratio

Substandard Asset Ratio (%)
60.00% 40.00% 20.00% 0.00% 2008-09 2009-10

Graph 6.10 Substandard Asset Ratio

This ratio indicates the scope of improvement in NPA. Higher substandard asset ratio mean in the whole of NPA substandard asset has the major portion. And this indicates that there is a high scope for advance improvement because it will be easier to recover the loans within the minimum duration of default. We look into the above table it shows that this ratio has been decreased. Though the value of NPA for the year 2009-10 has been reduced when compared with the year 2008-09 but this is a good indicator that the value of NPA in the book of accounts has been decreased. The problem here is that the portion of substandard asset in the whole of NPA is less and this could create problem in speedy recovery of NPAs. Hence SIB needs to take necessary action for the above problem.
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6.3.7 Doubtful Asset Ratio: It is the ratio of total doubtful assets to gross NPA of the bank. The formula is given as:

Year Doubtful Asset Gross NPA Doubtful Asset Ratio

2008-09 38.31 260.56 14.70%

2009-10 53.34 211 25.28%

Table 6.12 Doubtful Asset Ratio

Doubtful Asset Ratio (%)
30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 25.28% 14.70%

2008-09

2009-10

Graph 6.11 Doubtful Asset Ratio

This ratio indicates the scope of compromise for NPA reduction. As per the values shown in the above table the ratio has increased from 14.70% in the year 2008-09 to 25.28% in the year 200910. This ratio is very much stable but in terms of performance of the bank they have to go for compromise for NPA reduction. They have to come with better strategies for bringing out value from these assets and earn income.

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6.3.8 Loss Asset Ratio: It is the ratio of total loss assets to gross NPA of the bank. The formula is given as:

Year Loss Asset Gross NPA Loss Asset Ratio

2008-09 77.13 260.56 29.60%
Table 6.13 Loss Asset Ratio

2009-10 102.69 211 48.67%

Loss Asset Ratio (%)
50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2008-09 2009-10

Graph 6.12 Loss Asset Ratio

This ratio indicates the proportion of bad loans in the bank. The above table shows that the loss asset ratio of SIB has increased from 29.60% in the year 2008-09 to 48.67% in the year 2009-10. Though the proportion of bad loans in the year 2008-09 was quite manageable but this has further increased in the year 2009-10, i.e., the proportion of loss assets to whole of NPA. In the year 2009-10 the loss assets has reached almost half of the NPA which is not good for the bank though overall NPA is less when compared with previous year. To reduce the portion of loss assets SIB needs to take necessary actions to gain atleast some value from these assets. This can be done either by selling it to asset reconstruction companies so that they can write off these

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NPAs from their balance sheets. This is also an indication of increasing incidence of erosion of securities and fraudulent loan accounts in the bank.

6.3.9 Shareholder¶s Risk Ratio: It is the ratio of net NPA to total of capital and reserves of the bank. Net NPA Shareholder¶s Risk Ratio = --------------------------- x 100 Capital +Reserve Year Net NPA Capital Reserves Shareholder's Risk Ratio 2006-07 77.81 70.41 653.55 10.75% 2007-08 33.97 90.41 1070.58 2.93% 2008-09 134.31 113.01 1191 10.30% 2009-10 61.57 113.01 1372.28 4.15%

Table 6.14 Shareholder¶s Risk Ratio

Shareholder's Risk Ratio (%)
12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2006-07 2007-08 2008-09 2009-10

Graph 6.13 Shareholder¶s Risk Ratio

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This ratio indicates the degree of risk associated with the shareholders investment. High ratio means high risk to the shareholder. SIB has always tried to maintain this ratio as low as possible. For the year 2009-10 they have tried to bring down the ratio to 4.15% from 10.30% in the year 2008-09. During the year 2010-11 this ratio has gain increased by a small margin to 6.5%. The above figures indicates that the bank has always kept an eye to maintain this ratio as low as possible so that they could attract the funds of shareholder since the degree of risk associated with their investments is low.

6.3.10 Interest Spread Ratio: This ratio is calculated as the excess of total interest earned over total interest expended to standard assets. Interest Earned ± Interest Expended Interest Spread Ratio = ---------------------------------------------------------- x 100 Standard Assets Year Interest Earned Interest Expended Standard Assets Interest Spread Ratio 2008-09 1686.92 1164.04 11704.6 4.47% 2009-10 1935.72 1367.43 15759.04 3.61%

Table 6.15 Interest Spread Ratio

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Interest Spread Ratio (%)
6.00% 4.00% 2.00% 0.00% 2008-09 2009-10

Graph 6.14 Interest Spread Ratio

This ratio indicates the efficiency of the bank in managing the interest expenditure and interest income effectively. Interest spread is critical to a bank¶s success as it exerts a strong influence on its bottom line. From the above table we can see that the bank SIB¶s interest spread ratio is decreasing which indicates that bank¶s earning assets are decreasing which can be seen in the increase in proportion of loss assets to the whole of NPA. Hence SIB needs to find ways in which they can turn nonperforming assets to performing asset by which they can increase their income through interest earned.

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CHAPTER-7
FINDINGS, RECOMMENDATIONS & CONCLUSION

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7.1 FINDINGS
From analyzing the data collected with various parameters such as deposits, advances, gross NPA ratio, net NPA ratio etc. of the bank over the past few years, the following findings were arrived at: 1. Deposits of the bank is increasing at an increasing rate over the years but advances of the bank though it is increasing but at a decreasing rate.

2. If we look into priority sector lending by the bank, they have focused much of their advances towards agriculture sector.

3. In terms of gross NPA ratio and net NPA ratio SIB has always outperformed in comparison with the industry average.

4. Though they brought down the amount of NPAs from their book of accounts but I could see that there was an increase in the proportion of loss assets when compared with the whole of NPA.

5. In terms of capital adequacy ratio SIB has always maintained their ratio well above the minimum limits set by RBI and also made sure that the ratio was always kept above the previous year¶s value.

6. If we look into SARFAESI Act there are certain loopholes which need to cover for efficient management of grievances such as getting automatic relief for the aggrieved.

7. In case of asset reconstruction companies as per SARFAESI Act they have de-notified it as financial institution because of which they cannot transfer assets between one ARC to another even for legitimate purpose.

8. RBI has put up bars against ARCs from converting debt into equity which is actually required for improving the valuation of the company.
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9. ARC must acquire a non-performing asset from a bank first, before it can work on any kind of resolution ± whether through a one-time settlement with the borrower, or sale of physical assets, or rehabilitation/ revival.

10. Since the operations of the bank have become increasingly significant banking frauds in banks are also increasing and fraudsters are becoming more and more sophisticated and ingenious.

11. We can see that banking environment is becoming more and more competitive and to survive and grow IT has been playing a major role. 12. It is also shown that cyber crime is being increased because of which identity frauds are being taking place.

13. New technologies are being innovated to reduce the frauds that are arising in the banks, be it internal or external.

7.2 RECOMMENDATIONS
Some of the recommendations that could be adopted for issues that have been risen in above paper are: 1. Identify reasons for turning each account of a branch into NPA is the most important factor for upgrading the asset quality as that would help to initiate suitable steps to upgrade accounts.

2. Persuasion is an effective tool of recovery for which continuous follow up is required.

3. In case of long legal battles a better approach would be compromise and revival. Here banks allow remission of principal and/ or interest along with rescheduling the repayment of debt to deal with such advances.
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4. Introduction of biometric systems will help to reduce frauds to a much greater extent, i.e., this system would help in reducing the ATM frauds, identity thefts and also from losing of passwords or PINs.

5. With the help of concepts such as digital signatures, certification, public key infrastructure will help in security of data, i.e., data authenticity and confidentiality. 6. With the help of facial recognition systems it could help in reduction of internal frauds, i.e., employees attempting to withdraw money from a customer¶s account without their consent. 7. If we look into the problems of ARCs they are trying to reduce the amount of NPAs from the economy and are not unlocking the value of these assets. So they need to come out with solutions in unlocking the values of these assets rather than solving the problems of the banks. 8. Banking by mobile could transform the workings of rural economy for this not only RBI but also banks need to take the necessary initiatives to promote mobile banking in India. 9. Since ARCs are not able to transfer assets from one ARC to other even for legitimate purpose, RBI needs to notify ARCs as financial institution and put in a clause saying that they could transfer assets in certain circumstances such as rehabilitation/ revival or takeover of management, etc., with the prior approval of RBI. 10. RBI needs to give permission to ARCs to convert debt to equity, atleast a portion of debt is to be allowed to convert to equity such that it could sold in the market and recover atleast part of the debt foregone. 11. Need to permit ARCs to acquire assets directly in the name of the trusts such that it is not required for them to pay stamp duty twice. 12. It is also seen that during the auction for bad loans even after receiving many bids the bank cancels the sale on the ground that there is a large gap between the price offered by
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ARCs and the bank¶s expectation. To overcome this RBI need to bring in fair practice guidelines which would also look into the pricing standards. 13. SIB needs to come up with various strategies to recover the loss assets by themselves or sell it to agencies such as ARCs so that they can write off from their balance sheets and keep it clean. 14. SIB has more NPAs in the service industry so they need to take necessary steps to reduce the level of NPA in this sector. 15. Prompt payment of loans by borrowers should be recognized and rewarded by way of rebate for prompt payment which would act as a motivating factor. 16. The monitoring department should ensure that the credit monitoring functions of the bank is more effective. 17. They should introduce client profile reports and keep continuous monitoring such that the recovery officer would be able to know the progress and the performance of the borrower. A close and prompt monitoring system would help the banks to prevent accounts going bad.

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7.3 CONCLUSION
In this study an attempt is made to analyze the financial performance of the bank South Indian Bank and as a result it is seen that the overall performance of the bank is satisfactory. With branches all over India this bank is considered to be one of the most pro active banks in India with a competent tech savvy team of professional at the core of services. This could also been seen through their slogan, i.e., ³Experience Next Generation Banking´. The analysis and interpretation of financial data of the bank helped to reach a conclusion that they have been able to manage their level NPA. But it is also seen that the bank can improve their asset quality as the proportion of loss assets are high in comparison of whole NPA for the year 2009-10.

There are lots of opportunities in the field of technology and especially in the banking sector. We can see that banking industry is fast growing with the use of technology in the form of ATMs, online banking, mobile banking, plastic money etc. These developments has helped the banking industry in reducing the amount of frauds taking place and also improved the efficiency of operations in the banks.

Above all these one of the challenges that banks are still facing today is the problem of NPA. Though SIB is outperforming the industry average in maintaining the level of NPA to its minimum but still it is a problem to be looked into. RBI has also been taking number of measures but still this something that takes time to be removed from the system. The banks also need to find out the measures to reduce the evolving problem of the NPAs. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of funds in the nation. This would help the nation to develop more banking branches and developing the economy by providing the better financial services to the nation.

To solve this problem to an extent it was possible by following guidelines as per SARFAESI Act 2002, and with the introduction of Asset Reconstruction Companies (ARCs). ARCs helped the banks to maintain clean books by buying NPAs from them such that the job of recovery is done by them. Because of which the banks were relieved from the burden of NPAs and could focus

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better on their core business.

In the end I would like to say that it is better to avoid NPA at the nascent stage of credit consideration by putting in place rigorous and appropriate credit appraisal mechanisms. Because NPAs causes, erosion of profitability and lack of liquidity for banks. Though it is still a challenge for the banks and it is highly impossible to bring down the level of NPA to zero percentage. But Indian banks can try competing with foreign banks to maintain international standards.

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REFERENCES
DATABASE: y y y Capitaline Plus Ebsco Reserve Bank of India

SEARCH ENGINES: y Google.com

WEBSITES: y y y y y y y y y y y y http://www.southindianbank.com/ http://www.banknetindia.com/ http://www.thehindubusinessline.in/ http://www.dnb.co.in/ http://www.moneycontrol.com/ http://www.ermjournal.com/ www.krcco.com www.oecd.org www.planningcommission.nic.in http://www.livemint.com/ http://articles.economictimes.indiatimes.com/ http://timesofindia.indiatimes.com/

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