INTRODUCTION A strong banking sector is important for flourishing economy.

One of the most important and major roles played by banking sector is that of lending business. It is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which also results into economic growth. As there are pros and cons of everything ,the is with lending business that carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligations either during the course of a transaction or on a future obligations. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provision, which reduces the overall profits and share holders value. The issue of the Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. This project deals with understanding the concept of NPAs, its magnitude and major causes for an account becoming nonperforming, projection of NPAs over next years in banks and concluding remarks. The magnitude of NPAs have a direct impact on Banks profitability legally they are not allowed to book income on such accounts and at the same time banks are forced to make provisions on such assets as per RBI guidelines. The RBI has advised all State Cooperative Banks as well as Central Co-operative Banks in the country to

adopt prudential norms from the year ending 31-03-1997. These have been amended a number of times since 1997. As per their guidelines the meaning of NPAs, the norms regarding assets classification and provision. It’s now very known that the banks and financial institutions in India face the problem of amplications of non-performing assets (NPAs) and the issue is becoming more unmanageable. In order to bring the situation under control, various steps have been taken. Among all other steps most important one was the introduction of the Securitization and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by Parliament, which was an important step towards elimination or reduction of NPAs. An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower of dues are not paid for 90 days. If any advance or credit facility granted by bank to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there are may still exist certain advances/credit facilities having performing status. The NPA level of our banks is way high than international standards. One cannot ignore the fact that a part of the reduction in NPAs is due to the writing off bad loans by banks. Indian Banks should take care to ensure that they give loans to credit worthy customers. In this context the dictum prevention is always better than cure acts as the golden rule to reduce NPAs

NON-PERFORRMING ASSETS (NPA) Non-Performing Asset means an asset or an account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank Of India. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A NPA is a loan or an advance where interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a team loan. Earlier assets were declared as NPA after completion of the period for the payment of total amount of loan and 30 days grace. In present scenario assets are declared as NPA if none of the installment is paid till 180 days i.e. six months in respect of term loan. With effect from March 30, 2004 a nonperforming asset (NPA) shall be a loan or an advance where: Interest and/or installments of principal remain overdue for a period of more than 90 days in respect of a term loan. The account remains out of order for a period of more than 90 days, in respect of an overdraft/cash credit (od/cd). The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, interest and or installments of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of advance granted for agriculture purpose, and may amount to be received remains overdue for a period of more than 90 days in respect of other accounts. RBI introduced in 1992, the prudential norms for income recognition, asset classification and provisioning IRAC norms in short in respect of the loan portfolio of the Co-operative Banks. The objective was to bring out the true picture of a bank loan portfolio. The fallout of this momentous regulatory measure for the management of the CBs was to divert its focus to profitability, which tell then used to be a

low priority area for it. Asset quality assumed greater importance for the CBs when maintenance of high quality credit portfolio continues to be a major challenge for the CBs, especially with RBI gradually moving towards convergence with more stringent global norms for impaired assets. The quality of a bank loan portfolio can impact its profitability, capital and liquidity. Asset quality problems are at the root of other financial problems for banks, leading to reduced net interest income and higher provisioning costs. If loan losses exceed the Bad and Doubtful Debt Reserve, capital strength is reduced. Reduced income means less cash, which can potentially strain liquidity. Market knowledge that the bank is having asset quality problems and associated financial conditions may cause overflow of deposits. Thus, the performance of a bank is inextricably linked with its asset quality. Managing the loan portfolio to minimize bad loans is, therefore, fundamentally important for a financial institution in today’s extremely competitive market driven business environment. This is all the more important for the CBs which are at a disadvantage of the commercial banks in terms of professionalized management, skill levels, technology adoption and effective risk management systems and procedures. Management of NPAs begins with the consciousness of a good portfolio, which warrants a better understanding of risks in lending. The board has to decide a strategy keeping in view the regulatory norms, the business environment, its market share, the risk portfolio, the available resources etc. The strategy should be reflected in Board approved policies and procedures to monitor implementation. The essential components of sound NPA management are  Quick identification of NPAs,  Their containment at a minimum level,  Ensuring minimum impact of NPAs on the financials.

TYPES OF NPA The RBI has issued the guidelines to banks for classified of assets in to following categories STANDARD ASSETS: Standard asset is one of which does not disclose any problems and which does not carry more than normal risk attached to the business/banks. These are loans which do not have any problem are less risk. Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business. SUB-STANDARD ASSET: It is classified as non-performing for a period not exceeding 12 months. The account holder comes in this category when they don’t pay three installments continuously after 90 days and up to 1 year. For this category bank has made 10% provision of funds from their profit to meet losses generated from NPA. With effect from March 31, 2005 an asset would be classified as sub-standard if it remained NPA for a period less than equal to 12 months. In such cases, the current net worth of the borrowers/guarantors or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such assets will have well defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. An asset where the terms of the loans agreement regarding interest and principal have been re-negotiated or rescheduled after commencement of production, should be classified as sub-standard and should remain in such category for at least 12 months of satisfactory performance under the re-negotiated or rescheduled terms. In other words, the classification of an asset should not be upgraded merely as a

result of rescheduling, unless there is satisfactory compliance of this condition. Doubtful NPA: An asset that has remained an NPA for a period exceeding 12 months is a doubtful asset. These are NPA exceeding 12 months. Under doubtful NPA there are three sub categories:  D1 i.e. up to 1 year: 20%provision is made by bank.  D2 i.e. up to 2 year: 30%provision is made by bank.  D3 i.e. up to 3 years: 100%provision made by bank. With effect from March 31, 2005 an asset is required to be classified as doubtful, if it has remained NPA for more than 12 months. The 12month period of classification of a substandard asset in doubtful category is effective from April 1, 2009. A loan classified as doubtful has all the weaknesses inherent as that classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Loss Assets: A loss asset is one where loss has been identified by the bank or internal or external auditors or by the Co-operation Department or by the Reserve Bank of India inspection but the amount has not been written off, wholly or partly. In other words, such an asset is considered un-collectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. Here loss is identified by the banks concerned, by internal auditors, by external auditors, or by the Reserve Bank India upon inspection. These NPA which are identified unreliable by internal

inspector of bank or auditors or by RBI. Under this 100% provision is made. Effects of NPA on Bank:  Restriction on flow of cash done by bank due to the provisions of fund made against NPA.  Drain of profit.  Bad effect on Goodwill.  Bad effect on equity value. DIFFICULTIES WITH THE NON-PERFORMING ASSETS:  Owners do not receive a market return on their capital. In worst case, if the bank fails, owners lose their assets. In modern times, this may affect a broad pool of shareholders.  Depositors do not receive a market return on savings. In the worst case if the bank fails, depositors lose their assets or uninsured balance. Banks also redistribute losses to other borrowers b charging higher interest rates. Lower deposit rates and higher lending rates repress savings and financial markets, which hampers economic growth.  Non-performing loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in misallocation of capital and, by extension, labor and natural resources. The economy performs below its production potential.  Non-performing loans may spill over the banking system and contract the money stock, which may lead to economic contraction. This spillover effect can channelize through illiquidity or bank insolvency.

a) When many borrowers fail to pay interest, banks may experience liquidity shortages. These shortages can jam payments across the country. b) Illiquidity constraints bank in paying depositors e.g. cashing their paychecks. Banking panic follows. A run on banks by depositors as part of the national money stock become inoperative. The money stock contracts and economic contraction follows undercapitalized banks exceeds the bank capital base. Lending by banks has been highly politicized. It is common knowledge that loans are given to various industrial houses not on commercial considerations; some politician would ask the bank to extend the loan to a particular corporate and the bank would oblige. In normal circumstances banks, before exceeding any loan, would make a thorough study of the actual need of the party concerned, the prospects of the business in which it is engaged, its track record, the quality of the management and so on. Since this is not looked into, many of the loans become NPAs. The loans for the weaker sections of the society and the waiving of the loans to farmers are another dimension of the politicization of bank lending. REVIEW OF LITERATURE A number of studies related to performance and over dues of banking sector have been conducted by many researchers and institutions in India. An analytical attempt is being made to review some related works done to organize them in a presentable form. A. Studies Prior to Financial Sector Reforms(1991):
The Maclegan Committee (1914), which is the historical document in the

annals of cooperative movement, has examined the performance of credit cooperatives. It stated that when the funds are kept rotating, any loaning function of the bank can gear up successfully and serve very useful purpose. Unless the loans are rapid punctually, cooperation is both financially and Educationally an illusion. Kalyani (1970) emphasized on a longer period for the repayment of long term loans in India. He added that the total burden of interest would be relatively higher in the long period than in the shorter period, but then this burden would be spread over quite a long period, making it easier for the borrower to repay his loan in easy installments, thereby resulting in lesser over dues. The All India Rural Credit Review Committee (1972) stated that there is an utter lack of administrative supervision, staff of right type and the requisite scale of and, therefore, a full check on the utilization of loans is rather difficult. Further it pointed out that the cooperative system had remained stagnant both in respect of coverage of credit as well as borrowing members as proportion to the total number of members. Cooperative credit was short of standards of timeliness, adequacy and dependability. Generally the overdue were heavy and were rising from year to year. Datey the Chairman of the Report of the study team on overdue in cooperative credit institutions (1974) studied the problem of overdue in cooperative banks and remarked. About three fourths of overdue arose due to willful default besides internal reasons. And he suggested that stern action on recalcitrant borrowers should be taken up. Economic Survey (2005-2006), Monetary and Banking Developments: According to this survey, the target for institutional credit for agriculture by all the agencies was fixed at Rs.105, 000crore for the year 2004-05,ensuring 30% growth over previous years achievement. The overall achievement by all agencies during 2004-05 was 1,15,243 crores, equivalent to 32% growth over the previous year s achievement. It further highlighted that while the Commercial Banks and Regional Rural Banks over performed visà-vis their target of Rs 57000 crores and 8500 crores, there was a shortfall of over Rs.8000 crores by Cooperative Banks vis-à-vis their target of 39,000 crores, attributing the same to low resource base and inefficient recovery

system, thereby leading to excessive Overdue. The position of NPAs has significantly improved in Scheduled Commercial Banks due to wider options available to these for recovery of their dues on one hand and sale of their NPAs to Asset Reconstruction Co(India) limited (ARCIL) on the other hand. This resulted in NPAs declining by 6487 crores between March 2004 and end March 2005. Bagchi,(2006). made an attempt to analyze the performance of Cooperative Credit Institutions especially Primary Agriculture Credit Societies, and observed that PACS could not match up to the increasing requirements of growth dimensions in the Agri/Rural developments in the Post Independence Period, although till the late 50 s, they were the only available source of institutional rural finance. According to the RBI Report on Trend and Progress of Banking in India 2004-05, released on 24-11-05, the Cooperative Credit Institutions had extended an amount of Rs.39, 638 crores to Agri-Allied sectors i.e., about half of credit advanced by Commercial Banks (72,886 crores) and double the amount advanced by RRBs (11,718 crores). The dismal performance of Cooperative Banks was due to unnecessary State Government intervention and above all the inefficient loan recovery system leading to NPAs.

Cooperatives have played a vital role in improving the economic conditions of farmers and accelerating the pace of development in Punjab. Development through Cooperatives was a dream cherished by freedom fighters of India ever since Independence. Cooperative principles ensure harmonious development, through democratic management and governance. Cooperatives have brought both the services and resources at the doorsteps of villagers

in Punjab. These have been enthusiastically serving the people of Punjab in area such as agriculture, housing, spinning, sugar production, weaving and dairy etc. The performance of Cooperative Movement in Punjab, is very impressive Cooperatives constitute the major source of institutional credit for agriculture. Cooperatives are playing a pivotal role in socio-economic development of the State. These are key instruments of the State to develop and sustain its rural economy, which is primarily agrarian. The Department of Cooperation has accelerated Cooperative movement in Punjab during the last three years.
Values and Principles ‘Cooperatives’

A cooperative is an system voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise. Principles:  Voluntary and open membership  Democratic member Control  Members Economic Participation  Autonomy and Independence  Education, Training and Information  Cooperation among Cooperatives  Concern for Community

Promotion and sustainance of economic interest & providing easy finance, cost effective and quality banking services of customer & PACs. AREA OF OPERATION In the area of this bank, there were five unions that were functioning as credit institutions for co-operative societies. In 1956, all these unions were absorbed in the bank. The area of the operation of the bank is jalandhar district that comprises three Tehsils i.e Nakodar, Phillaur and Jalandhar. In 1956, the total number of branches of the bank were two in number this number stands at 72 now out of these branches, 7 are in Urban areas, 22 in semi- urban areas and

43 in rural areas. OBJECTIVES OF THE BANK The main objectives of the bank as mentioned in its bye laws is to facilitate the operation of the affiliated co-operative societies in pursuance of this object, the bank has laid down in its byelaws to undertake the following activities: To carry on banking and credit business. To promote economic interest of the members of the bank and public-in accordance with co-operative principles. To provide credit facilities to its members on as convenient and suitable facilities.

For accomplishing the objectives of the study, both secondary and primary data will be analyzed.

Secondary Data
The Secondary Data for three years from 2006 to 2008 will be used for the purpose of this study. The data will be collected from:
    

The Annual Accounts, Audit Reports, and Inspection Reports of the selected DCCBs. Publications of Reserve Bank Of India. Publications of NABARD. Economic Surveys. Existing literature and other scholarly works.

2. Observation: Some

information will be gathered through personal observation and interaction with the officials of NABARD and State Cooperative Banks.

Punjab has twenty (20) District Central Cooperative Banks (refer annexure 1). The Proposed study will be primarily based on the Secondary Data of preceding three years from 2006-07 to 2008-09.The main source of the secondary data will be the published Annual Reports, Circulars and Policy letters of the Jalandhar Central Cooperative Banks of Punjab.

Tools of Analysis:
Consistent with the objectives of the study, different accounting techniques such as Ratio analysis, etc., will be utilized. In addition to these, simple statistical techniques like averages, graphs, percentages may be used aiming at the achievement of study objectives and findings of the existing studies.

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To understand the meaning & nature of NPAs. To examine the causes for NPAs in Jalandhar Central Cooperative bank. To project the NPAs in bank over next three years. To analyze the NPA and its relation with operating profit of the bank. To study the general reasons for assets become NPAs. To point out the amount of NPAs in different central banks. What is the criteria to recover the advances from the bank. What are the methods adopted by the bank to look after NPA management.

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To present a picture of movement of NPA in The Jalandhar Central CoOperative Bank. To know how NPA level will affect the profit of the banks.

Non-performing Assets (NPAs) are the smoking gun threatening the very stability of Indian banks. NPAs wreck a bank's profitability both through a loss of interest income and write-off of the principal loan amount itself. In a bid to stem the lurking rot, RBI issued in 1993 guidelines based on recommendations of the Narasimham Committee that mandated identification and reduction of NPAs. Their implementation immediately pushed many banks into the red. So serious is the problem that an RBI report suggested that reducing NPAs be treated as a 'national priority'. Dealing with NPAs involves two sets of policies  Relating to existing NPAs To reduce fresh NPA generation. As far as old NPAs are concerned, a bank can remove it on its own or sell the

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