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A PROJECT STUDY REPORT ON Management of non-performing assets of Agriculture loan and its impact on performance of SBI at Sayla Branch in Surendranagar
In Partial fulfillment of requirement of two years Master of Business Administration programme of Gujarat University, Ahmedabad.

SUBMITTED TO:
Mr. J.M.Bhatt B.K.SCHOOL OF BUSINESS MANAGEMENT GUJARAT UNIVERSITY

SUBMITTED BY:
PRITESH CHAUDHARI
PRAGNESH CHAUDHARI

(2011-13) (2011-13)

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B. K. School of Business Management Gujarat University Ahmedabad

CERTIFICATE
This is to certify that Mr. Pritesh Chaudhari and Mr. Pragnesh Chaudhari, students of Full Time MBA (2011-13 batch) at B. K. School of Business Management, Gujarat University, Ahmedabad have prepared a Project Study Report on Management of nonperforming assets of Agriculture loan and its impact on performance of SBI at Sayla Branch in Surendranagar in partial fulfillment of two years full-time MBA Programme of Gujarat University. This project work has been undertaken under the guidance of Prof. J.M.Bhatt, core faculty at B. K. School of Business Management, Gujarat University, and Ahmedabad. This is also to ascertain that this project has been prepared only for the award of MBA degree and has not been submitted for any other purpose.

Prof. J.M.Bhatt

Dr. Sarla Achuthan Director

Date: Place: 2

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UNDERTAKING FROM STUDENTS

This is to confirm that the information contained in the Project Report titled ______________________ has been prepared by us on the basis of data collected by us from various secondary as well as primary sources. We would be solely responsible for piracy or plagiarism of any information included in this report.

(Pritesh Chaudhari)
B. K. School of Business Management

(Pragnesh Chaudhari)
B. K. School of Business Management

MBA Batch (2011-13) Date: Place:

MBA Batch (2011-13)

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PREFACE
Loans have to be paid back one day. Had this been realized by all, how nice life would have been on this Planet. It would not have prompted the poet to say Neither be a Lender, nor a Borrower Be. Alas! Given the realities in life, this could remain at best a wishful thinking. So their business is to lend and lend more. Their proficiency; skill; competency are all tested in how much they lend and how much they RECOVER and how quickly. Suffice it would be to state that this can be likened to the vigor and strength with which one goes about after fully recovering from any ailment. It is agreed by al beyond doubt Recovery is essential and get recovery is very essential. We know right from the appraisal stage up to the actual repayment stage the banks need to be careful. We also know that once the money is in the hands of a borrower, attitudinal changes take place. The borrower, with some few exceptions may be, feels a bit more complacent as after all it is not this own money which is at stake. Therefore an attempt is made here to put all that we know already proper perspective.

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ACKNOWLEDGEMENTS
At outset, we would like to thank the institutions for having provided us with an opportunity to carry out a project of this magnitude that helped me satisfy my curiosity as far as my area of interest was concerned. The essence of this project, i.e. its contents have been compiled with help of varied sources of secondary database, but we would specially like to acknowledge the support, suggestions and feedback received from my Project Guide- Mr. J M Bhatt and that of the other faculty members as well. A lot of other people have also contributed directly and indirectly to completion of this project would not have seen light of the day. Our hearts felt gratitude to all of them.

Pragnesh Chaudhari Pritesh Chaudhari

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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 NPAs crossing a mammoth 64000 crores. Banks burdened with huge NPAs 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 SARFESI ACT 2002(Securitization 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 NPAs. The non performing assets (NPAs) of banks have at last begun shrinking. As reported from surveys, 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 NPAs 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. This paper addresses the results we have achieved so far since the measures have been implemented and the thrust on measures that need to be taken to expedite recovery of NPAs. We also give our suggestions as to how NPA retrieval can be made easy and in what way the NPA scenario is headed. The crucial factor that decides the performance of banks now days is the spotting of non-performing assets (NPA). NPAs are those loans given by a bank or financial institution where the borrower defaults or delays interest or principal payments banks are now required to recognize such loans faster and then classify them as problem assets.

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TABEL OF CONTENT
S.R NO 1 PARTICULAR Indian banking industry 1.1 introduction 1.2 Regulatory authorities 1.3 Development in banking sector Company profile 2.1 introduction of state bank of India 2.2 associated banks Research design 3.1 Research plan 3.2 Research problem 3.3 Research objective 3.4 Research methodology 3.5 Limitation Recovery management Findings Suggestions Conclusion Bibliography Annexure PAGE NO. 9 10 13 15

23 32 34 36 36 36 37 38 59 61 63 66 68

4 5 6 7 8 9

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CHAPTER ONE INDIAN BANKING INDUSTRY

1.1 INTRODUCTION:

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Banking can be described as the business of running an establishment where money is deposited in accounts, withdrawn and borrowed also by the customers. Banks perform their function of attracting deposits and providing credit. However banks today function for customer satisfaction rather than being just a mere intermediary.

TYPES OF BANKS:
The Indian Banking Industry can be broadly classified into: 1. 2. 3. 4. Public Sector Banks Old and New Private Sector Banks Foreign Banks Co-operative Banks

1. Public Sector Banks Public sector banks are a bank wherein the government has a holding of 100%.This was a situation prior to liberalization. The stake has fallen because of a public issue in the post liberalization period. Some of the other leading banks in this segment have also proposed to come out with an equity issue to raise further capital. The government is proposing to bring out a bill wherein its share in all these banks would stand reduced to 33% from the current levels The public sector banks largely dominate the Indian Banking industry. These banks till the early 90s were involved in the traditional banking business of deposits and credit lending. The public sector banks have a strong distribution network all over the country. But the strength of the earlier periods has now become a concern for these banks. As compared to the tech-equipped distribution network of the new private sector banks and the foreign banks, these banks have found it difficult to upgrade them on the technology front. These banks are also facing the problem of surplus manpower. Most of these banks are now coming out with a VRS to bring down their number of employees and improve the efficiency ratios.

The public sector banks still control a major share in the banking operations of the country. Their inefficiencies have been exposed only when the market was thrown open for competition and new players started eating up their share. But given their size and the strong network, most of these banks can change their perception. The recent thrust on reduction of government stake; VRS, NPA settlement schemes etc 10

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have been some of the steps in this direction. Since the growth of the economy is largely dependent on the performance of these banks, even with the growth of new private and foreign players, these banks will have an important role to play. Some of the players here are State Bank of India and its associates, Bank of Baroda, Corporation Bank, Punjab National Bank, Union Bank of India, etc. 2. A) Private Sector Banks-Old These banks existed prior to the promulgation of Banking Nationalization Act but were not nationalized due to their smaller size and regional focus. Most of these banks continue to have a regional focus and are relatively smaller in size. A large number of these banks are basically from the south. Being small in size, these banks focus on service and technology and thus face competition from new private and foreign banks. Most of these banks are trying to increase their presence nationwide and are planning to enter other business areas like insurance. The old private sector banks have performed reasonably well during the FY2000. As these banks were facing stiff competition from the new private banks and the foreign players who were making inroads in their markets. These banks have been able to increase their net profits by over 50%. As a result of the increasing competition in the sector, these banks have been trying to improve upon their margins and asset quality. Most of these banks have a high CAR and as such they do not face any capital constraint in their growth plans. Even their return on net worth has been at par in most of the cases with the other new players in the market. But the coming years would be more challenging for these banks as the public sector are also trying to adapt to the new environment and the new banks have already equipped themselves to have a major share in any opportunity that would accrue. Some of the private sector-old players are Bank of Madura Ltd., Tamilnad Mercantile Bank Ltd., The Jammu & Kashmir Bank Ltd., The Vysya Bank Ltd., etc. B) Private Sector Banks- New The Banking Regulation Act was amended in 1993 permitting the entry of new private sector banks. The act also specified certain criteria for establishing new private sector banks. The criteria are as follows: 1. The banks should have a minimum net worth of Rs1bn. 2. The promoters holding should be minimum 25% of the paid up capital. 11

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3. The banks should offer shares to the public within three years of their operations. (This condition was relaxed in case of many banks due to poor state of capital markets). The first new private sector bank started operations in 1995. The minimum net worth requirement of Rs1bn and difficulty in getting the banking license has kept the option open for very few players. The new private sector banks have performed very well in the FY2000.Most of this banks have registered an increase in net profits of over 50%.They have been able to make significant inroads in the retail market of the public sector and the old private sector banks. During the year, the two leading banks in this sector had set a new trend in the Indian banking sector. HDFC Bank, as a part of its expansion plans had taken over Times Bank. ICICI Bank became the first bank in the country to list its shares on NYSE. Some of the private sector-new players include, Centurion Bank Ltd., Global Trust Bank Ltd., HDFC Bank., ICICI Banking Corporation Ltd., IDBI Bank Ltd., etc. 3. Foreign Banks Foreign banks have been doing the normal banking business in the country. During the period of nationalization, the entry of new foreign banks and expansion by existing foreign banks were prohibited. Even, when the norms were relaxed later on, RBI was very slow in granting any further approvals to these banks. But most of these banks have concentrated on the metropolitan cities of the country and have been able to do reasonably well. These banks have used the latest technology to compensate for the limited number of branches they have. Some of the foreign banks operating in India are ABN-AMRO Bank N.V., ANZ Grind lays Bank Ltd, Citibank N.A., Deutsche Bank AG, Standard Chartered Bank, etc.

4. Co-Operative Banks Co-operative banks are a part of the vast and powerful superstructure of cooperative institutions, which are engaged in the tasks of production, processing, marketing, and distribution, servicing, and banking in India. The co-operative banks were conceived in order to substitute unorganized money market agencies like 12

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moneylenders, to provide adequate short-term and long-term institutional credit at reasonable rates of interest, and to bring about integration of the unorganized and organized segments of the money market. The main aim of the co-operative banks is to provide cheaper credit to their members, and not to maximize their profits. There has been an impressive growth in deposits, credit and working capital of these banks. The annual rates of growth of co-operative banks have been quite high, and are comparable with those of commercial banks. The government and the RBI have taken a number of steps to improve the health and strength of co-operative banks in India. In keeping with other financial sectors reforms, certain co-operative banking reforms also have been carried out after 1991.

1.2 REGULATORY AUTHORITIES

The RBI regulates the activities of commercial banks in India. The urban cooperative banks, in addition to these regulatory authorities, have State co-operative banks (SCBs) and the District co-operative banks (DCBs) to monitor their activities. In the policy framework, the important priority in the past few years has been to introduce appropriate norms in respect of capital adequacy, income recognition and provisioning. The RBI has introduced new guidelines to accelerate credit disbursement in infrastructure. The liberalization has changed the future course of the Indian banking scene. This has set trends in greater specialization in niche markets such as retail, hi-tech agriculture, exports, small-scale industries and corporate sector. There will be a market shift from the interest-based activities to investment and foreign exchange operations/bullion trade to shore up the bottom line. Highlights of policy initiatives and reforms undertaken recently are as follows: 1. Bank allowed operating different PLRs for different maturities. 2. Bank allowed offering fixed rate for all term loans in conformity with ALM guidelines. 3. Wherever the deposit rate is in excess of PLR, advances to depositors against fixed depositors by banks allowed without reference to PLR ceiling. 4. Board of Directors allowed delegating necessary powers to ALM Committee for fixing interest rates on deposits and advances, subject to reporting to the Board immediately thereafter.

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5. Board of Directors allowed prescribing detailed rules for determining the date of commencement of commercial production. 6. Interest rate surcharge of 30% on import finance withdrawn. 7. The minimum rate of 20 % interest on overdue export bills withdrawn banks allowed deciding appropriate rate of interest on overdue export bills. 8. MMMFs (Money Market Mutual Funds) brought within the purview of SEBI Regulations; banks and FIs required to seek clearance from RBI for setting up MMMFs; MMMFs to set up as separate entities in the form of Trusts only. Financial Restructuring Measures 1. 2. 3. 4. 5. 6. 7. 8. 9. Deregulation of interest rates is more or less complete. Gradual reduction in reserve requirement. Move towards integration of various segments of financial markets. Permission to banks to approach capital market for augmenting their capital base to meet capital adequacy. Autonomy in operational matters. Freedom to formulate bank specific loan appraisal methods. Introduction of new products and players in the market resulting in increased competition in financial sector. Move towards capital account convertibility. Enhanced use of information technology.

The banks have been allowed by the central government to enter into forward trading in gold by adding gold to the list of commodities eligible for hedging under the Forward Contract (Regulation) Act, 1952. Banks are free to fix their own interest rates on GDS. They are required to put in place risk management mechanisms to hedge the price risk arising from price fluctuations in conformity with RBI guidelines. Lending Norms The skills of Credit Risk Management are another extremely important area for the healthy functioning of any financial institution. With the adoption of international norms of income recognition and asset classification many PSBs in India find themselves burdened with huge loads of NPAs. Debt Recovery Tribunals (DRTs) were set up to help banks speed up the recovery process. DRTs were meant to handle only large defaulters with outstanding of over Rs. 10 lacs a simple and cost effective legal system. Though DRTs have started functioning for over 5 years, its impact has not been felt in the reduction of NPAs because of the delay in getting 14

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Recovery Certificate and execution of the same. At many DRTs either the Principal Officer is not posted after retirement of the existing one or the Recovery Officer is not available. Prior to the implementation of the Narsimham Committee Recommendations banks were booking interest income on advances as long as there was sufficient security to back the advance. Accrual system of accounting was followed. Now, the banks are required to classify an advance as NPA if interest or installments for 6 months are not recovered and they should not book interest income until they are recovered- a shift from Accrual System of Accounting to Cash System. Narsimham Committee II recommendations have proposed reduction of the default period from present 6 months to 3 months. Even the Provisioning norms for bad advances underwent a sea change. Contrary to the earlier norms, now banks have to make the provision for all advances if they are NPAs on a graded base depending on the age of NPA even though the security for an advance covers more than the outstanding debt balance. Now banks are asks to make provisions on a nominal scale on Good Advances also (termed Standard Assets in the Bankers parlance).

1.3 DEVELOPMENT IN BANKING SECTOR

A. Universal Banking: Most of the banks have now been trying to function on the concept of a Universal Bank. Apart from the traditional functions of a commercial bank, they are taking steps to build themselves into a one stop financial centre wherein all the financial products would be available. Banks have started catering to the retail segment to improve their deposit portfolio. In order to have a maximum share in this segment, most of the banks have been introducing new products. The delivery channels have also been shifted from branches to ATMs, phone banking, net banking etc. B. Technology up gradation: Technology has become an important medium of not only attracting new customers but also in retaining them. The new generation private sector banks have made a strong presence in the most lucrative business areas in the country because of technology up gradation. While, their operating expenses have been falling as compared to the PSU banks, their efficiency ratios (employees productivity and profitability ratios) have also improved significantly. The innovative process of banking for improved customer services matching international standards through infusion of technology includes Electronic Funds Transfer, Tele-Banking, Any Where Banking, 7 Day week, Credit/Debit Cards, ATMs. Etc. Centralized on-line banking:

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Few banks have already taken up on-line system where the database is stored at a central place which gives customer the advantage of accessing his account from any one of the branches of the bank. It gives the customer the unique advantage of doing anywhere banking. ON LINE ANYWHERE BANKING will be the main agenda for the banks to acquire competitive edge. Internet banking: The Internet not only allows the banks to keep the expenditure to the minimum, but also serves the customer anywhere, any time. It provides the customer the convenience of service from anywhere in the world on his time. The customer will be able to transfer money between any of his two accounts, check the status of the cheques clearance; pay bills open accounts, give standing instructions and any other operations which he normally does with the bank. C. Banc assurance: Most of the banks are also planning to enter the insurance business and are in the process of identifying their strategic partners. Since most of the banks already have an extensive distribution network, this new business should result in substantial revenues. But with most of the top league players planning to enter this business, the more efficient and proactive players would be able to take a lead. D. Asset-Liability statement: From the financial year ended 31/3/2001, RBI has made it compulsory for all banks to publish along with their Audited Financial statements, a statement on Asset-liability Management duly audited, Capital Adequacy Norms, Income Recognition, Asset Classification and Provisioning, have been introduced as per international norms.

E. Capital Adequacy Norms: Capital Adequacy Norms, Income Recognition, Asset classification and Provisioning, have been introduced as per international norms. The government is planning to increase its stake in the public sector banks to 74%. This move will enable these banks to raise further capital to adhere to 16

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the CAR requirements and will also help in changing their perception in the market Vis-a Vis the private sector banks. Income Recognition and Asset Classification Norms: With the adoption of international norms of income recognition and asset classification many PSBs in India find themselves burdened with huge loads of NPAs. Debt Recovery Tribunals (DRTs) were set up to help the bank speed up their recovery process. DRTs were meant to handle only large defaulters with outstanding of over Rs. 10 lacks. Contrary to earlier norms, now Banks have to make the provision for all advances if they are NPAs on a graded basis depending on the age of NPA even though the security for an advance that covers more than the outstanding debt balance. Now Banks are asked to make provision on a nominal scale on Good Advances also (termed Standard Assets in the Bankers parlance). Cash System of Accounting for NPAs: Prior to the implementation of the Narsimham Committee Recommendations, Banks were booking interest income on advances as long as there was sufficient was followed. Now, the banks are required to classify as advance as NPA if interest/ installments for 6 months are not recovered and they should not book interest income until they are recovered a shift from Accrual System of Accounting to cash System. Narsimham Committee recommendation has proposed reduction of the default period from present 6 months to 3 months.

1.4 INDIAN BANKING INDUSTRY PROBLEMS

The Indian banking industry is facing serious problem because of the competition posed by the foreign banks. On one hand the entry of foreign banks was advantageous to the Indian banks in the sense that foreign banks brought in latest technology along with them. But on the other hand it took away a big share of the 17

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Indian banks by using their technology over here. Even though a major part of the private banks have adopted those technologies and are in neck-to-neck competition with these banks, the main onus for development lies with the nationalized banks of our country, as they are the ones within the reach of the masses of our country. Hence technology up gradation is very much essential here.
Secondly, up to a couple of years earlier, the Indian banks functioned mainly as an

intermediary offering loans and deposits to its customer. It is only now that the concept of customer-the-king has popped up.
The third and the most important problem that the Indian banks are facing is the

problem of their NPAs. It is only since a couple years that this particular aspect has been given so much importance. The increasing amount of NPAs eats away major part of the banks profits. 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 tribunals we can say that steps have been taken in this direction.

1.5 WHERE THE INDUSTRY IS HEADED

The banking industry in India, long associated with obsolete infrastructure and influenced by die-hard traditionalists, is waking up to the winds of change. In the changing global scenario banks in India will have to have clear objectives, such as: 1. Enhancing the efficiency of operations by employing high technology. 2. Enhancing asset quality and profitability of the bank. 3. Stream ling the organizational structure in accordance with the changing environment. 4. Increasing staff involvement through HRD and training while enhancing job satisfaction of employees. 5. Projecting the image of the bank as a socially responsive and viable organization and 6. Continuing to act as a financial intermediary while at the same time responding to the growing needs of the customer 7. 1) Outsourcing 18

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The challenge of managing the diverse services in a networked environment has caused the banks to introspect on what should be considered as their core skills and primary roles. If banks do invest in creating these skills sets, the value that can be unlocked by spinning off the technology unit is much greater than the advantage of keeping it in-house. This could be in two forms- the products developed or the services company that produces application themselves, In future, banks will need to focus on value-differtiating services by keeping in-house their competitive advantages while partnering with others who complement its services-making the argument for best-of-breed integration a necessity. 2) In sourcing In sourcing is a model wherein banks perform operations that are originally done by their customers/other banks. Corporate clients may outsource activities like receivable management, accounting and risk management of corporate investments to banks. New product offerings will emerge as a combination of existing products and the new in sourced activities Banks, with their established processing capacities, are ideal partners of insurance and other financial service firms in their pursuit of customer reach and service provision. 3) Product management Existing products and services are changing way for value-added ones thanks to the one-upmanship game among competing banks, sparked off by soaring consumer-demands. In future, the market space will see banks and non-banks striving to seek opportunities for profit, in wake of product commoditization. 4) Adjust, adapt, and change. Thats the message that technology has sent across to modern day banking. The new mindset is illustrated by innovations and speculative bets taken by banks, where investments in technology have focused on benefit-realization. Banks that adapt this mindset will realize benefits from: Customer management-focused investments where integrated informational views and transactional capabilities across products, services, and channels will enable the banks to obtain a better picture of customer preferences, risk, and profitability.

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Investments aimed at managing risk and regulation issues with banks gaining the ability to identify, manage, and allocate risk exposures on across the enterprise to prioritize business decisions. Developing a portfolio of shared service alliances focused on providing integrated cross-channel access and new range of services. Implementing best-of-breed workflow around the core e-Enabled business systems to provide the right linkages to yield business benefits. In India, investments in technologies by financial services organizations are increasing, and new initiatives emerging, albeit at a basic level (See the Impact of IT). However, in the long run, it is evident that technology investments in transaction and process automation will cease to be a differentiator. 5) Payments systems In recent years, alternate money transmission avenues, especially the development of electronic money schemes, have been gaining currency. This raises policy issues for central banks in its role as the guardian of the payment network and implementer of the monetary policy. The emergence of peer-to-peer money transmission mechanisms poses a challenge to current role of banks as gatekeepers to traditional payment systems. Robust payment systems therefore are a key requirement in maintaining and promoting financial stability with technology playing both a facilitating and disruptive role in them. Despite the radical new trends emerging, banks will continue to play their role as trust-enablers in all commercial activities. Their role as financial intermediaries and payment enablers will also continue, but they will be outsourcing all non-core activities to specialized service providers and in source opportunities where they have a saleable value proposition. The transfer of money will not generate profits-it will, however, be the basis of other services that banks will provide. The level of integration that banks achieve with their customers supply chain will determine profitability. Armed with a technology backbone, banking will remain the best business model for managing liquidity, creating trust, and managing risk. The ability to make informed decisions based on business benefits, to become intelligent investors in technology, and seek sourcing options would be some tenants of successful organizations on the right side of this divide. 6) Analytics 20

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As they realize that product and related services by themselves cannot provide sustainable competitive advantage, banks are paying more attention to relationship with their customers and the way they manage risk, determine price, and allocate capital. Going forward, banks will attempt to augment their behavioral and economic views of the customer, preferably captured at point of contact in addition to existing transactional and demographic data (In-house an external). Banks will require use of analytics to effectively manage their customer relationships, conduct detailed analysis that help more accurately model, and predict future customer behavior and lay a quantified foundation for strategic decision making. The future will see increasing investment in risk analytics as part an integrated framework supporting asset pricing, performance measurement, and asset allocation models.

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CHAPTER-2 COMPANY PROFILE

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STATE BANK OF INDIA 1. Introduction

The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later, the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921.

History
1806: The Bank of Calcutta is established as the first Western-type bank. 1809: The bank receives a charter from the imperial government and changes its name to Bank of Bengal. 1840: A sister bank, Bank of Bombay, is formed. 1843: Another sister bank is formed: Bank of Madras, which, together with Bank of Bengal and Bank of Bombay become known as the presidency banks, which had the right to issue currency in their regions. 1861: The Presidency Banks Act takes away currency issuing privileges but offers incentives to begin rapid expansion, and the three banks open nearly 50 branches among them by the mid-1870s. 1876: The creation of Central Treasuries ends the expansion phase of the presidency banks. 1921: The presidency banks are merged to form a single entity, Imperial Bank of India. 1955: The nationalization of Imperial Bank of India results in the formation of the State Bank of India which then becomes a primary factor behind the country's industrial, agricultural, and rural development. 1969: The Indian government establishes a monopoly over the banking sector.

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1972: SBI begins offering merchant banking services. 1986: SBI Capital Markets is created. 1995: SBI Commercial and International Bank Ltd. are launched as part of SBI's steppedup international banking operations. 1998: SBI launches credit cards in partnership with GE Capital. 2002: SBI networks 3,000 branches in a massive technology implementation. 2004: A networking effort reaches 4,000 branches. 2005: SBI open new branch at vadakara and roll out new loan schemes and entered in to agreement with Bharat petroleum corporation Ltd. 2006: SBI teams up with up with Nihilent to unveil feedback system. 2007: The SBI has become first become foreign bank to set up branch in the Israel. 2008: SBI has signed joint venture with insurance Australia group and also rolled out micro insurance schemes. 2009: SBI launched two new loan products as SBI easy home loan and SBI advantage home loan. 2010: SBI acquire the State bank of Indore and also launched special schemes for Air force personal. 2011: SBI acquisition of SBICI bank. 2012: SBI launched virtual debit cards to check online fraud and promote ecommerce. Principal Competitors: ICICI Bank; Bank of Baroda; Canara Bank; Punjab National Bank; Bank of India; Union Bank of India; Central Bank of India; HDFC Bank; Oriental Bank of Commerce All the branches of the Bank are now fully computerized. This strategy has contributed to improvement in customer service.
FULL BRANCH COMPUTERISATION (FCBs):

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There are 5290 ATMs on the ATM Network. These ATMs are located in 1721 centers spread across the length and breadth of the country, thereby creating a truly national network of ATMs with an unparalleled reach. Value added services like ATM locator, payment of fees for college students, multilingual screens, voice over and drawal of cash advance by SBI credit card holders have been introduced.
ATM SERVICES:

This on-line channel enables customers to access their account information and initiate transactions on a 24x7, boundary less basis. 2225 branches, covering 555 centers are extending INB service to their customers. All functionalities other than Cash and Clearing have been extended to individual retail customers. A separate Internet Banking Module for Corporate customers has been launched and available at 1305 branches. Bulk upload of data for Corporate, Inter-branch funds transfer for Retail customers, online payment of Customs duty and Govt. tax, Electronic Bill Payment, SMS Alerts, E-Poll, IIT GATE Fee Collection, Off-line Customer Registration Process and Railway Ticket Booking are the new features deployed.
INTERNET BANKING (INB):

GOVT. BUSINESS: Software has been developed and rolled out at 7785 fully computerized branches. Electronic generation of all reports for reporting, settlement and reconciliation of Govt. funds is available. STEPS: Under STEPS, the bank's electronic funds transfer system; the Products offered are e-Transfer, e-Realization, and e-Debit (CMP) and ATM reconciliation. STEPS handle payment messages and reconciliation simultaneously. SEFT: SBI has launched the Special Electronic Fund Transfer (SEFT) Scheme of RBI, to facilitate efficient and expeditious Inter-bank transfer of funds. 241 branches of our Bank in various LHO Centers are participating in the scheme. Security of message transmission has been enhanced. MICR (Magnetic Ink Character Recognition) Centers : MICR Cheque Processing systems are operational at 16 centers viz. Mumbai, New Delhi, Chennai, Kolkata, Vadodara, Surat, Patna, Jabalpur, Gwalior, Jodhpur, Trichur, Calicut, Nasik, Raipur, Bhubaneswar and Dehradun. Core Banking: The Core Banking Solution provides the state-of-the-art anywhere anytime banking for our customers. The facility is available at 1012 branches. Trade Finance: The solution has been implemented, providing efficiency in handling Trade Finance transactions with Internet access to customers and greatly enhances the bank's services to Corporate and Commercial Network branches. This new Trade Finance

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solution, EXIMBILLS, will be implemented at all domestic branches as well as at Foreign offices engaged in trade finance business during the year. WAN: The bank has set up a Wide Area Network, known as SBI connect, which provides connectivity to 4819 branches/offices of SBI Group across 385 cities as at 31st March 2005. This network provides across the board benefits by providing nationwide connectivity for its business applications

2.2 ASSOCIATE BANKS

State Bank of India has the following seven Associate Banks (ABs) with controlling interest ranging from 75% to 100%. 1. State Bank of Bikaner and Jaipur (SBBJ) 2. State Bank of Hyderabad (SBH) 3. State Bank of Indore (SBIr) 4. State Bank of Mysore (SBM) 5. State Bank of Patiala (SBP) 6. State Bank of Saurashtra (SBS) 7. State Bank of Travancore (SBT) The seven ABs have a combined network of 4596 branches in India which are fully computerized and 1070 ATMs networked with SBI ATMs, providing value added services to clientele. The ABs recorded an impressive performance during 2003-04. The combined net profits of these banks are increased by 38% over the previous year to reach Rs.1938 crores. Deposits and advances grew by 20% and 22%, respectively, during the year. Three of the ABs viz. SBIr, SBP and SBS achieved NIL Net NPA status while the combined Net NPA ratio of all ABs was at 0.84% as on 31st March 2012.

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General information of Sayla branch

STATE BANK OF INDIA - SAYLA is located at GUJARAT state, SURENDRANAGAR district, SURENDRANAGAR city and the bank branch's address is [BAZAR SAYLA 363430]. Contact phone number / numbers - 02755-220737, FAX0 IP NO-6151581. The IFSC Code is SBIN0060110. Branch code is the last six characters of the IFSC Code 060110. Individual bank branch's details are listed below. IFSC Code: SBIN0060110 (5th character is zero) MICR Code: 363002430 Branch Code: 060110 (Last 6 Characters of the IFSC Code) City: Surendranagar Address: Bazaar Sayla 363430 Contact: 02755-220737 FAX0 IP NO-6151581 Sayla branch is providing all its facilities to 18 villages within geo-graphical boundary of surendranagar. Population of these villages are approximately 18,000. It provides all banking facilities but mainly focus on agriculture loan and government businesses.

Structure
Branch manager : Accountant Cash officer Field officer : : : Mr. M.V.Vyas Mr. K.V.Maheta Mr. G.C.Varma Mr. B.P.Gohil

There are six window operators, one messenger and four arm guards.

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Types of agricultural loan 1) AGRICULTURAL GOLD LOANS

Purpose Bank extends hassle free finance to farmers / agriculturists against Gold Ornaments / gold wares to increase their liquidity to meet crop production expenses, Investment expenses related to agriculture and / or allied agricultural activities. Eligibility Any person engaged in agriculture or allied activities as well as persons engaged in activities permitted to be classified under agriculture. Quantum of Loan Up to 70% of the value of the ornaments .Value will be as advised by the bank to the branches periodically. Demand Loan / Term Loan: The repayment period of the loan should be fixed so as to coincide with the harvesting and marketing season / generation of income from the activity, allowing 2 to 3 months time after harvesting to market the produce and realize the proceeds. However, the total period will not generally exceed one year from the disbursement of the loan in the case of short-term loan / production credit and 36 months in other cases.

2) KISAN CREDIT CARD (KCC)

Purpose: To provide timely and adequate credit to farmers to meet their production credit needs (cultivation expenses) besides meeting contingency expenses and expenses related to ancillary activities through simplified procedure facilitating an ailment of the loans as and when needed. Who are eligible for the loan? Owner cultivators, tenant cultivators and Share croppers. Agricultural borrowers having good track record for the last 2 years

Creditworthy new borrowers can also be financed. Loan 100% of the cultivation cost available as loan up to Rs 50000/ and 85 % of the cost as loan above Rs 50000/. Expenses to meet important ancillary activities to 28

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production can also be financed in addition to the above the total limit is inclusive of 20% of production credit, which includes crop production expenses and working capital for allied agricultural activity, as contingency credit /consumption loan. Disbursement of the Loan As per the cultivation requirements of the crop, the loan will be disbursed in cash. Security Loan amount up to Rs 50000/ Hypothecation of Crops. Above Rs 50000/ up to Rs 100000 (1) Hypothecation of crops. (2) Mortgage of land or third party guarantee * Above Rs 100000/</O: P< SPAN> (1) Hypothecation of crops (2) Mortgage of lands *For loans up to Rs 1 lack to farmers having legal ownership of agricultural lands with good track record for last 2 years

3) PRODUCE MARKETING LOAN

Purpose: To help farmers avoid distress sale of their produce To enable prompt repayment of crop loan dues and provide liquidity to farmers to meet contingency needs. To offer the facility of loan against the stocks stored in farm houses, in addition to loan against warehouse receipts. Who are eligible for the loan? 1. All non-defaulter borrowers of our branches, who can store the produce either in their own farm/premises itself or in a Warehouse / cold storage. 2. Crop loan borrowers of other Banks and also Non-Borrower Farmers, who store their produce/ stocks in a Warehouse / cold storage. Loan amount 60 to 80% of value of produce depending upon the place of storage subject to a maximum of Rs.10 lacs. SECURITY: 1. Loan sanctioned against Primary: Hypothecation of stocks. goods stored in Farmers godown:

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Collateral: Mortgage / Charge over Land or Third Party guarantee for loans above Rs. 50,000/-. 2. Loans sanctioned against Warehouse Receipts (WHR): Primary: Pledge of stocks. Collateral: No collateral is required for loans up to the maximum permitted limit of Rs.10 lakhs under the scheme. 4) SETTING UP OF AGRI-CLINIC & AGRI BUSINESS CENTRES Purpose The scheme is to provide self employment opportunities to technically trained persons and to augment extension services for agriculture. Who are eligible for this loan? Agricultural graduates / graduates in subjects allied to agriculture like horticulture, animal husbandry, forestry, dairy, veterinary, poultry, pisciculture and other activities.

Loan amount Individual Activity: - Rs.10 lacs Group Activity: - Rs.50 lacs (maximum). In case of group projects, if the group consists of 5 or more persons, all except one of them would have to be agriculture graduate trained under the scheme and the remaining could be non-agri graduate with experience in business development and management. Loan amount for loans up to Rs 5.00 lacs 100% Loans above Rs 5 lacs up to 85 % of the cost SUBSIDY: Credit linked capital subsidy @25% of the capital cost of the project funded through bank loan would be eligible. This subsidy would be 33.33% in respect of borrowers belonging to SC, ST, women and other disadvantaged sections and those from North-Eastern and Hill States. In addition to the above subsidy, full interest subsidy would be eligible for the first two years of the project. The capital subsidy will be back-ended with minimum 3 years lock-in period. The interest subsidy would, however, be concurrent. SECURITY: Up to Rs. 5.00 lacs Hypothecation of assets created. Above Rs. 5.00 lacs: Hypothecation of assets created and Mortgage of land or Third party guarantee. 5) FINANCING OF SECOND HAND / USED TRACTORS SCHEME SBI: - Mahindra Vishwas, SBI TAFE Nayaroop. 30

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Purpose: Loans provided for the purchase of second hand tractors refurbished by Mahindra & Mahindra and Tractors & Farm Equipments Ltd. Tractors which are up to 7 years old.

Who are eligible? Individual farmer or a group of farmers not exceeding three in number (as coborrowers) owning minimum 3 acres of perennially irrigated agricultural land. In case of co-borrowers the land should be in same area. Loan amount Up to 85% of the cost The cost will be based on the price fixed by the company for each tractor after refurbishing. The overall maximum limit will be Rs.2.50 lack including the cost of implements. The implements purchased shall be new. Security Loan up to Rs 50000/ Hypothecation of tractor and accessories Above Rs.50, 000/ Hypothecation of tractor and accessories Mortgage of the land of the farmer or any other tangible Security to cover at least 50% of the loan amount or suitable.

6) SANJEEVANI (FINANCE FOR REPAIRS, MAINTENANCE AND ADDITION OF NEW IMPLEMENTS ETC. TO TRACTORS) Purpose: To assist the farmers, who are regular in their repayments for repairs / maintenance of tractor and for purchase of additional implements Eligibility: Borrowers who have already availed the tractor / power tiller / combined harvester loan facility from our Bank before three years or more and whose accounts are closed / or regular/standard (IRAC) and who 31

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have paid a minimum of 2 yearly installments or 4 half yearly installments after moratorium period are considered eligible for the loan. The borrower should not have availed the benefit of a compromise scheme earlier. Facility: Agricultural Term Loan. Quantum of Loan: Repairs: Up to a Maximum of Rs. 50,000/Addition of new implements: Up to a Maximum of Rs. 1, 00,000/Margin: Up to Rs.50, 000 NIL Above Rs.50, 000 - 15-25% of invoice price Security: A. For borrowers who had already repaid / closed the Tractor loans: a. Up to Rs. 50,000/Primary: - Hypothecation of tractor (value to be assessed based on the age and condition of the vehicle) and new implements. (Noting of Banks Charge with Road Transport Authority on tractor is a must) Collateral: - NIL b. Above Rs. 50,000/Primary: - Hypothecation of tractor (value to be assessed based on the age and condition of the vehicle) and new implements. (Noting of Banks Charge with Road Transport Authority on tractor) Collateral: - Mortgage / Charge over the Land B. For borrowers having existing Tractor Loan A/c s: a. Up to Rs. 50,000/Primary: - Hypothecation of existing tractor / new implements Collateral: - Extension of Mortgage / Charge over the Land Repayment: Maximum 5 years or up to the last installment of the existing tractor whichever is earlier in half yearly installments. Insurance: Tractor to be insured till the advance is repaid in full. Interest Rate: As per the card rate applicable on aggregate limits for the facility and periodicity. (Interest rate Effective from 29.06.2009) Up to Rs. 50,000. - 10.50 % p.a. Above Rs.50, 000/- and up to Rs. 2 lacs - 11.50 % p.a)

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CHAPTER- THREE

RESEARCH DESIGN

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3.1 Research Plan

(A) Defining the Problem: Non performing Assets in banking Industry has become a subject of intense importance and discussion. It has assumed greater significance in the world of banking and banks. It has become a barometer of the health of banks and discussions on any bank is incomplete without the mention of NPA, NPA has now become heart of the banking Industry, which in turn, is the heart of finance and economy of a nation. Assets of a bank, generally, consist of cash investment, loans and advances, fixed assets and miscellaneous assets. The resources of a bank are deployed in these assets. The resources consist of capital and reserves, deposits, borrowings and other liabilities. These liabilities are carried at a cost and hence its deployments into various assets should generate enough income to service the cost of the liabilities. In other words, the assets in which the liabilities are deployed should perform in such a way that it generate income to cover the cost of resources and also a surplus, which is a profit of the bank, Thus the performance of assets reflects the health of the banking industry. Earlier, the buzzword in the banking industry was deposits as it is the basic raw material for the banking industry. The status of the bank was, determined on the volume and size of its deposits. The career of bankers used to depend on the level of deposits achieved by him. Banks were not bothered about the performance of their assets. But from 1991, a sea change was made in the way income of banks was recognized. With the first generation economic and finance sector reforms coming into being, the method of income recognition in the banking sector was changed from accrual basis to cash basis. An income will be carried to profit and loss account only of it is realized in cash in 180 days. This was like a bolt from blue for deposit happy bankers. All along, they were simply doing an accounting exercise in debiting a loan account and credit the income account without bothering to see whether it is actually 34

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paid by the borrower or not. Thus the performance of an asset was defined for the first time in Indian Banking Industry. This change of income recognition compelled the banks to unrecognized the income if the interest is not received in cash from the borrowers. Not only this depending upon the quality of the assets, is various provisions now required to be made on such non performing assets. This had compelled many large banks to declare loss for the first time in history of banking. This had ominous portents for the entire banking industry. This also resulted in dwindling flow of credit of trade and industry. Thus NPA has the potential to directly affect the economy of the country. Many big nations like Japan are suffering from this disease of high NPAs. Our country also now having a large portion of bank credit locked in NPAs and hence NPA is receiving greater importance of NPAs , that we thought to select it as a subject for Grand Project.

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3.2 Research Problem

To study way of recovery of agriculture loan and how to manage NPA

3.3 Research Objective

(1) To evaluate NPAs of agriculture (Gross and Net) in the SBI of Sayla branch in Surendranagar. (2) To Know the Concept of Non-Performing Asset. (3) To Know the Impact of NPAs. (4) To Know the Reasons for NPAs of agriculture is high at SBI sayla branch. (5) To learn Preventive Measures. (6) To know the about management of NPA in banks.

3.4 Research Methodology

A) TYPE OF RESEARCH DESIGN:- Direct interview

B) DATA COLLECTION:i. we would contact officer of Sayla SBI branch. We would take depth interview for primary information of NPA management and recovery methods.
PRIMARY SOURCES: SECONDARY SOURCES:-Internet,

ii.

books, Newspapers, brochure/handouts of

banks

C) SAMPLING DESIGN: We are expecting to meet the Bank officer or Bank manager of Sayla branch.

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3.5 Limitations
1. The sample size may not necessarily represent true state of banks because it consists only one branch of SBI. 2. All the answers given by the respondents have been assumed to be true. 3. Decisions on recovery management are largely taken at the Head Quarters. The project was undertaken in Surendranager hence the concerned decision makers in this context couldnt be contacted.

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CHAPTER FOUR

RECOVERY MANAGEMENT

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4.1

Introduction
The crucial factor that decides the performance of banks nowadays is the spotting of non-performing assets (NPA). NPAs are those loans given by a bank of financial institution where the borrower defaults of delays interest of principal payments. Banks are now required to recognize such loans faster and then classify them as problem assets. Close to 16 percent of loans made by Indian banks are NPAs-very high compared to 5 percent in advanced countries. Banks are not allowed to book any income from NPAs. Also, they have to provide for these NPAs, or keep money aside in case they cant collect from the borrower, which affects their profitability adversely. Classification of NPAs In April 1992, it was decided to implement the Narsimham Committees recommendations on financial sector reforms in a phased manner over a three-year period commencing from the financial year 1992-93. Income Recognition, Assets Classification and Provisioning (IRAC) norms were introduced with a view to reflect a true picture of financials of Banks on the basis of their booking the income on actual basis than on accrual basis and also classify assets according to the level of risks attached to them. The criteria for classification is : Performing/Standards Assets: Loan assets in respect of which interest and principal are received regularly are called standard or performing assets. Standard assets also include loans where arrears of interest and / or of principal do not exceed 180 days as at the end of a financial year. No provisioning is required for such loans. Non-Performing Assets: According to RBI rules, any loan repayment or interest thereof that is delayed beyond 180 days has to be identified as an NPA. NPAs are further sub-classified into sub-standard, doubtful and loss assets: Sub-standard Assets: Sub-standard assets are those that are non-performing for a period not exceeding two years. Also, in cases where the loan repayment is rescheduled, RBI has asked banks to recognize the loans as sub-standard at least for one year. Doubtful Assets: Loans which have remained non-performing for a period exceeding two years and which are not considered as loss assets are known as doubtful assets. Major portions of assets under this category relate to sick 39

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companies referred to the Board for Industrial and Financial Reconstruction (BIFR) and waiting finalization of rehabilitation packages. Loss Assets: A loss asset is one where loss has been identified but the amount has not been written off wholly or partly. In other words, such an asset is considered uncollectible. There may be some salvage value. Provision for NPAs The RBI has also laid down provisioning rules for the non-performing assets. This means that banks have to set aside a portion of their funds to safeguard against any losses incurred on impaired loans. Banks have to set aside 10 percent of sub-standard assets as provisions. The provisioning for doubtful assets is 20 percent and for loss assets it is 100 percent.

4.2

Debt Recovery Problems

(1) To identify assets and properties of borrowers and guarantors is a difficult exercise. Even when banks get the decrees, execution may be difficult as the exact position of borrowers/ guarantors properties may not be known .i.e. whether it is unencumbered, in good physical and financial condition etc. (2) Constraints of time and adequate staff to supervise and follow-up the large number of accounts that are often scattered over wide areas, also hinders recovery effort. At times inadequate transport and roads also hinders recovery effort. At times inadequate transport and roads also make it difficult to reach borrowers. (3) Despite the good intentions, it will depend on how fast the measures are implemented. Since their introduction in 1994, DRTs have not been able to make a sound impact due to the lethargy on the implementation front. Unless the Government takes concrete and speedy measures to strengthen the Tribunals and streamline the legal systems, the DRTs will amount to deferring the NPA problem. (4) As against 50 to 60 Judges in High Courts, the Act provides for only one presiding Officer for each Tribunal. The appellate Tribunal has suggested that when the number of pending cases exceeds 2000, Government should appoint another Presiding Officer. This suggestion needs to be acted upon quickly to prevent further delay in the settlement of cases. Further, the Tribunals need to have their own permanent staff instead of depending mainly on persons who are on deputation.

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(5) Statutory powers Give Empowering banks to acquire assets for disposal without intervention of courts (sec. 29 of State Financial Act.) This would work as deterrent against intentional defaulters. (6) Lok Adalats (a) Establishing Lok Adalats in all States. (b) To be made compulsory for both borrowers and banks for settlement of smaller loans (present limit 5. Lac) (7) BIFR ( Board for Industrial and Finance Reconstruction) (a) Relook into functioning of BIFR- whether objectives achieved since the ratio of cases registered and cases dismissed/winding up was only 49% in 1996. (b) Increase in number of benches-Housing separate benches for major cities like Mumbai, Chennai. (c) Time frame for rehabilitation (6 months). (d) Reference to BIFR should be prerogative of banks. (e) Prevent unscrupulous/dishonest promoters taking shelter under BIFR. (8) In the case of immovable property, recovery continues to be a problem even where the court decree of certificate has been passed. While the Act provides for attachment and sale of property after the court decree has been issued there is no provision to prevent a borrower from disposing off the property while the suit is still on. DRT Act empowers Recovery Officers to recover the debt through attachment and sale of movable or immovable property of the defendant but does not explicitly mention how to enforce hypothecation, mortgage, etc. (9) There are instances where the borrower has mortgaged the same property to several banks and availed facilities with predetermined criminal intention to cheat the banks with false and fabricated documents. (10) Valuation reports of properties are inflated to suit the needs of the borrowers. (11) Several problems have been faced by the banks while obtaining shares as collateral security. As the shares are not transferred in the name of the bank, ultimately the matter has to be taken to the Company Law Board (CLB) for redressal, which, not to mention, consumes very much time. 41

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4.3 Why assets become NPAs?

A several factors are responsible forever increasing size of NPAs in PSBs. The Indian banking industry has one of the highest percent of NPAs compared to international levels. A few prominent reasons for assets becoming NPAs are as under: Poor credit appraisal system. Lack of vision/fore slightness while sanctioning/reviewing or enhancing credit limits. Lack of proper monitoring and follow up measures. Reckless advances to achieve the budgetary targets. Lack of sincere corporate culture. Inadequate legal provisions on foreclosure and bankruptcy. Change in economic policies/environment. Non transparent accounting policy and poor auditing practices. Lack of coordination between Banks/FIs. Directed lending to certain sectors. Failure on part of the promoters to bring in their portion of equity from their own sources or public issue due to market turning unfavorable. Abolition of license raj and tough competition in the liberalized Indian economy.

4.4 NPAs and Its Effects

NPAs are drag on profitability of Banks because besides provisioning, Banks are also required to meet the cost of funding these unproductive assets. NPAs reduce earning power of assets. Return on assets (ROA) also gets affected. NPAs carry risk weights of 100% (to the extent it is uncovered). Hence, they block capital for maintaining capital adequacy. As NPAs do not earn any income, they adversely affect capital adequacy ratio (CAR). No recycling of funds. NPAs also attract cost of capital for maintaining capital adequacy ratio. Capital cost involves dividend for Tier I capital and Interest for Tier II capital. Carrying NPAs require incurring of cost of capital adequacy and cost of funds blocked in NPAs. PSBs are incurring around as high as 11% of their 42

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earnings as operating cost for monitoring and recovering NPAs every year. NPAs demoralize the operating staff. Regulatory and credit rating agencies abroad are also not comfortable with the high level of NPAs of Indian Banks. New Branch license are also not given to the Banks that have high level of NPAs.

4.5 What steps have been taken so far to solve NPAs Problems?
Banks need to have better credit appraisal systems so as to prevent new NPAs from occurring. However, once NPAs do come into existence, the problem can be solved only if there is enabling legal structure, since recovery of NPAs often requires litigation and court orders to recover stuck loans. With long-winded litigation in India, debt recovery takes very long time. Banks are now working on utilizing the services of Debt Recovery Tribunals to solve this problem. The government has also mooted the suggestion of an Asset Reconstruction Company, which will be specialized agency set up for rehabilitating revivable NPAs (say, salvaging projects which are inherently sound) and recovering funds out of unrevivable NPAs.

Other Strategies
Fixing up of budgets for profits and recovery rather than for advances. Budget oriented approach, at times leads to release of credit facilities without ensuring compliance of covenants of sanction. A suitable mechanism could be drawn at each Bank level to provide monetary benefits/recognition to the operating staff particularly for recovery in NPAs/write off cases. Project with old technology should not be considered for finance. Large exposure on big corporate/single project should avoid. There is a need to shift in PSBs approach from collateral security to viability of the project and intrinsic strength of promoters. Up gradation of credit skills of the operating staff working in advances department. Timely sanction/release to avoid time and cost overruns.

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4.6 TOOLS FOR MANAGING NPAs 1) HEALTH CODE SYSTEM The RBI introduced HCS in banks in 1985-86, this system provide the following information: Regarding the Health of individual advances. The quality of credit portfolio and The extent of doubtful or bad advances in relation to total advances. The RBI, since 1985, requires all commercial banks in India to provide information indicator the quality of individual advances in the following eight categories: 1) Satisfactory: Conduct is satisfactory the account of the borrowing firm is in order in all respect and its safety is not in doubt. 2) Irregular: Occasional irregularity is observed but the safety of the loan is not in question. 3) Sick Viable: Loan to sick units that are under nursing through the revival programmed. The units, though currently sick, are viable. 4) Sick Non Viable: The irregularities continue to persist and there are no immediate chances of accounts becoming regular. 5) Advances Recalled: Such loan accounts where repayment is highly doubtful and nursing is not considered worthwhile, in case of such advances decision is taken to recall them. 6) Suit Filed account: Loan account where the recovery proceedings have been initiated. 7) Decreed Debts: Loan accounts where the recovery proceeding have been completed. 8) Bad and Doubtful: Loan accounts where the recovery of dues debts has become doubtful on accounts of shortfall in value of security. The RBI has classified problem loans with the banks in three categories. (i) Advances classified as Bad and Doubtful by the bank [ Health Code No. 8] (ii) Advances where suits were filed/ decrees obtained. [HC No.6 & 7]. (iii) Those advances with Major undesirable features [HC No.4 & 5]. 44

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EVALUATION OF HCS Though the HCS provide for classification of assets it does not provide what action to take regarding the improvement of quality of such assets. (a) Diversion of funds [as in 1 above] is the single most prominent reason. Moreover, reversionary trends developing during expansion/diversification phase and failure to raise capital/debt from public issue is also an important factor. (b) Internals factors [No.4 above] of business failure, inefficient management etc., are next important in the creation of NPA. (c) External factors [No.3 above] are the next in importance, (d) Time/cost overrun during the project implementation stage leading to liquidity strain. (e) Other factors in their order of prominence are government policy changes, wilful default, fraud etc. and lastly deficiencies on the part of banks in the form of delay in release of limits etc. 2) SETTLEMENT ADVISORY COMMITTEES: To tackle chronic NPAs in priority sector RBI had come out with a onetime measure constitution of Settlement Advisory Committees (SACs) by banks. This was to promote compromise settlement in small sector viz., SSI small business including trades, agricultural and personal segments, Bankers need to appreciate the fact that compromise settlement is an effective and accepted non legal remedy for recovery in chronic NPA. According the scheme, applicable to NPA accounts which are at least 3 years old at 31-03-1999 was effective up to 30 sept. 2000. There is a case for extending the deadline and matching these guidelines applicable for compromise settlement in medium and large sectors.
EVALUATION ADVANTAGES TO BORROWER

1) 2) 3) 4)

Settling for a lower payout than the contracted one, scaling down of dues. Releasing assets charged to the bank Saving time, energy and expense on defending the inevitable legal case. Keeping avenues of bank finance open for further development needs. 45

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5) Restoring status/position in the market/society, avoiding stigma of being branded as a borrower who is litigant type.

ADVANTAGES TO THE BANK

1) Concept of time value of money i.e. a bird in hand is worth two in bush. The money realized early could be invested to earn. 2) Realization of securities is difficult stocks, machinery have high incidence of depreciation and obsolescence on taking possession, storage, safety thereof poses a problem and also involves cost for a longer period. Even in cases where court receiver/commissioner is appointed, assets do not realized fast value of mortgaged agricultural land properties located in rural, semi-urban areas is difficult to realize and no bidder comes forward when the property is put to auction. This is precisely the reason why many decrees obtained by the banks have merely remained on paper for want of effective execution thereof. 3) To maintain the image of development banker, compromises, which involve sacrifices, can be pursued only if both the parties to the settlement perceive latent gain in the process of bargain. 3) CORPORATE DEBT RESTRUCTURING (CDR): A need was felt to create a special agency to facilitate debt restructuring because there has been some hesitancy on the part of banks and financial institutions to implement RBI guidelines on debt restructuring. Recently a three-tier body, viz., CDR has been set up to coordinate corporate debt restructuring programme. It is yet to be operationalised CDR consists of Forum, group and Cell. While the forum evolves broad policy-guidelines the group takes decisions on the proposals recommended by the Cell. Initially the borrower approaches his Lead Bank/ FI with a request to restructure debt, which in then puts up the proposal to the cell. The CDR covers only multiple banking accounts enjoying credit facilities exceeding Rs. 20 crore. Cases of DRT BIFR and wilful defaults, doubtful and loss accounts and suit filed cases are outside the purview of the CDR. Thus, standard and Substandard accounts are only eligible to seek CDR Shelter. If 75% of the secured creditors agree to the rehabitation plan, it is lending on the other banks/FIs. The CDR is a voluntary system on debtor creditor agreement and inter-creditors agreement. No banker/ borrower can take recourse to any legal action during the stand-still period of 90-180 days. Lastly CDR will observe the RBI Guidelines on 46

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Debt Restructuring issued in March 2001. While the arrangements under CDR seem to be feasible from the debt restructuring perspective, its success depends upon the cooperation extended by borrowers and bankers, on one hand, and understanding among banks and FIs on the other. Doubts are raised about the implementation of these agreements taking into the present working of the loan consortium arrangement. CDR though is not directly linked with NPA recovery, is aiming at preserving viable corporate affected by certain internal and external factors and minimizing the losses to the creditors and other stakeholders through a restructuring programme. Even though the CDR system will be applicable only to standard and sub-standard accounts potentially viable cases of NPA, are also to get priority.
EVALUATION:

The mechanism will be more effective if accepted by 75 % of term lending institution and 75 % of bank, which provide working capital instead of 75 % of total lenders. (4) LOKADALATS These are voluntary agencies created by the state government to assist in matter of loan compromise cases involving an amount up to Rs. 5 lakhs may be referred Lok Adalat. The scheme includes all NPA a/cs. Both suit filed and mensuit filled MCS Lokadalats meet at different places for the convenience if banks and borrowers on the given date of the lokadalats meeting, both the banker and borrower should be present. After looking into the evidence and listening to both parties, the lokadalats works out an acceptable compromise. Thereafter, lokadalat issues a recover certificate, which will enable the bank in obtaining decree from the concerned court. This arrangement shortens the period in obtaining a court decree, which is normally awarded after taking a much longer period. Along with this, efforts should be made to give wide publicity to the scheme, besides educating both banks and borrowers about Lokadalats. EVALUATION

Merits There is no court fees involved when fresh disputes are referred to it. It can take cognizance of any existing suit in the court as well as look into and adjudicate upon fresh dispute If no settlement is arrived at the parties can continue with the court proceedings 47

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Its decree has legal status and is binding. In view of this unique advantage the government is thinking of strengthening them and raising the monetary limit set for referred cases

Demerits It is observed that banks have not taken adequate advantage of Lokadalats for compromise settlement of their NPAs No cutoff date is suggested since Lokadalat is an ongoing process. But this may contribute to increasing delays in settlement of cases. Most Lokadalats should be set up in different parts of country to set up the recovery procedures.

(5) DEBT RECOVERY TRIBUNALS The MOF has taken a number of steps to strengthen the DRTs. Banks and FIs now can nominate one nodal officer for each DRP. There is a suggestion for setting up co-ordination committees for DRTs a Debt Recovery Appellate Tribunal with representations from major banks and financial institutions. In the context of recovery from NPAs, DRTs are assuming great importance since efforts are to set up mere DRTs during this year and also to strengthen them. Though the recovery through DRTs is at present less than two percent of the claim amount, banks FIs have to depend heavily on them, efforts are as to amend the recovery Act to assign more power to DRT. More importantly, the borrowers tendency to challenge the verdict of the Appellate tribunal in the High court to seek natural justice needs to be checked. Otherwise, early recovery efforts through DRTs would be futile. Secondly, training of residing officers of Tribunals about the intricacies of banking practices is very essential. Further, the number of Recovery officer has to be enhanced in every DRT for effective recovery. Finally, banker and FIs have to come forward to provide liberal help to DRTs to equip them in terms of infrastructure, manpower, etc. It has been announced in the Union Budget for 2001-02 that the Govt. has decided to set up 7 more DRTs during 2001-02 in addition to the existing 22 DRTs, 5 Appellate Tribunals to facilitate bank to quickly recover their dues from borrowers. Besides, the Govt. has proposed to bring in legislation for facilitating foreclosure and enforcement of securities in case o default so as to enable banks and financial institutions to realize their dues. EVALUATION 48

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11 new DRTs are being opened over the last 2 years 7 more DRTs are in pipeline DRTs are facing an uphill task with the number of cases The amount involved is increasing at alarming rate in the value of burgeoning NPA. The cases involving Rs. 7705.32 crore are still pending. In Mumbai DRTs out of the total amount of Rs. 1677.60 crore involved only Rs. 397.43 crore was recovered. There is a huge demand supply mismatch among the DRTs. The requirement is far higher than the number of DRTs available. The number of settlement cases is high in Mumbai and there is shortage of man power in Mumbai DRTs. The RBI guidelines, which stipulates that a presiding officer in a DRT cannot settle more than 800 cases in a year, constraints the operations of DRTs. There is inadequacy of trained staff and their lack of exposure to the judicial system acts as a hindrance. Their needs speeding up of recovery procedures.

6) CIRCULATION OF INFORMATION ON DEFAULTERS The RBI has put in place a system for periodical circulation of details of wilful defaults of borrowers of banks and financial institutions. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors /proprietors / partners of these entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds, as on 31st March every year. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. However, they serve as negative basket of steps shutting off fresh loans to these defaulters. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers. 7) RECOVERY ACTION AGAINST LARGE NPAS After a review of pendency in regard to NPAs by the Humble Finance Minister, RBI had advised the public sector banks to examine all cases of wilful default of Rs 1 crore and above and file suits in such cases, and file criminal cases in regard to wilful defaults. Board of Directors are required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff accountability.

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On their part RBI and the Government are contemplating several supporting measures including legal reforms, some of them I would like to highlight. 8) ASSET RECONSTRUCTION COMPANY: An Asset Reconstruction Company with an authorized capital of Rs.2000 crore and initial paid up capital Rs.1400 crore is to be set up as a trust for undertaking activities relating to asset reconstruction. It would negotiate with banks and financial institutions for acquiring distressed assets and develop markets for such assets.. Government of India proposes to go in for legal reforms to facilitate the functioning of ARC mechanism. EVALUATION The ARCs will assist in cleansing the Balance Sheet of the weaker as well as potential weak banks. It will also try to identify possible conceptual glitches and legal infirmities in the arrangement. It is to be noted that given the inadequacies of SICA, BIFR, DRTs foreclosures and other recovery processes, an ARC may find it difficult to lead a viable existence. Therefore, simultaneously it is required to make radical changes in bankruptcy and recovery laws and procedures. Under this scheme the banks liabilities will get transferred from one bank to another. The total liability to the banking system would remain unchanged. 9) CREDIT INFORMATION BUREAU Institutionalization of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system. The main recommendations of the Group include dissemination of information relating to suit-filed accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. This, I hope, would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large amounts against same assets and property, which had in no small measure contributed to the incremental NPAs of banks. 10) PROPOSED GUIDELINES ON WILFUL DEFAULTS/DIVERSION OF FUNDS 50

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RBI is examining the recommendation of Kohli Group on wilful defaulters. It is working out a proper definition covering such classes of defaulters so that credit denials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against wilful defaulters. 11) CORPORATE GOVERNANCE A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis--vis compliance, transparency, disclosures, audit committees etc. and make recommendations for making the role of Board of Directors more effective with a view to minimizing risks and over-exposure. The Group is finalizing its recommendations shortly and may come out with guidelines for effective control and supervision by bank boards over credit management and NPA prevention measures. The report of the group is now published and discussed in another page. 12) SPECIAL MENTION ACCOUNTS - ADDITIONAL PRECAUTION AT THE OPERATING LEVEL In a recent circular, RBI has suggested to the banks to have a new asset category `special mention accounts' - for early identification of bad debts. This would be strictly for internal monitoring. Loans and advances overdue for less than one quarter and two quarters would come under this category. Data regarding such accounts will have to be submitted by banks to RBI. However, special mention assets would not require provisioning, as they are not classified as NPAs. Nor are these proposed to be brought under regulatory oversight and prudential reporting immediately. The step is mainly with a view to alerting management to the prospects of such an account turning bad, and thus taking preventive action well in time. An asset may be transferred to this category once the earliest signs of sickness/irregularities are identified. This will help banks look at accounts with potential problems in a focused manner right from the onset of the problem, so that monitoring and remedial actions can be more effective. Once these accounts are categorized and reported as such, proper top management attention would also be ensured. Borrowers having genuine problems due to temporary mismatch in funds flow or sudden requirements of additional funds may be entertained at the branch level, and for this purpose a special limit to tide over such contingencies may be built into the sanction process itself. This will prevent the need to route the additional funding 51

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request through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category. Introducing a `special mention' category as part of RBI's `Income Recognition and Asset Classification norms' (IRAC norms) would be considered in due course. 4.7 SLIPPAGE MANAGEMENT

A) Process of Slippage
Any performing assets does not turn into non-performing overnight. The Performing Asset passes through a relatively lengthier period of 2 quarters, in some cases seven-months, after becoming due but before slipping down to the dangerous red band of nonperforming assets. During this journey, every asset is giving out certain signals for warning the banker that something bad is about to happen.

B) Slippage signals.
Depending upon the type of credit facility and nature of business these distress signals may look like:

Non Payment of the very first installment in case of term loans. Non-submission of statements in time. Cheques drawn on the account are bouncing. Credits into the cash credit account are not sufficient to meet the debits in
the account.

The overdue bill is lying unpaid; Installments are irregular. Amount paid is not fully covering the principal and interest debited. No regular operations in the cash credit account. Bank has information that party is not doing the any kind of productive activity;

Post-sanction inspection report speaks of diversion and misutilization; There has been a natural calamity in the borrowers village. C) How to act on the Slippage Signals?
Once there signals start to come in, the banker is supposed to act immediately. There is no point in waiting with the feeling that there are few more months for the 52

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2 quarter cut-off and things may turn all right before that, any symptom unattended would lead to major complications. Steps taken at the initial stage itself would help to keep the accounts performing and the costly slippage would never happen. The NPA reduction techniques like replacement; nursing may be attempted while the accounts are still in the performing basket by continuous monitoring of the individual assets. This type of constant & continuous surveillance requires cooperation & attention from all concerned in a branch. Any one-shot measure like recover camps can at best be of supplementary native and may never be a permanent solution.

D) Journey from NPA to PA

While the journey, from the 6-month bottom but within the PA basket- to the top would be easier it would certainly be costly, difficult and time consuming form of NPA to PA. This uphill task usually is very difficult and such assets cannot be brought back to the PA basket immediately; there needs to be an isolation period of one year after which only the asset will become eligible for classification under PA category. During this critical period it has to perform continuously. This is like a patient who has been admitted to the intensive care unit (ICU) is not sent back home immediately after bringing him out of ICU; he will be kept in the noncritical area for further observation, before his final discharge. Hence, the action before Slippage assumes further significance in cases of bringing back the NPA to PA.

E) What if Slippage Management Fails?

Even after careful management of assets before Slippage, if some assets cross the band to become NPA, then there is no other alternative except to arrange for firefighting. This post-incidence measure, again, needs to be undertaken on war footing. It will not be prudent to wait any further at this stage as any time lag is going to cost the bank very dearly because some of these assets may become doubtful inviting a more provisioning. 4.8 LEGAL RECOURSE:

Updating of certain statues: The legal framework within which banks have to operate and particularly manage the recovery of their dues from the borrowers is far from adequate. For understandable reasons many legal provisions have, in fact, a positive bias favoring the debtor who has been seen as the weaker party and 53

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therefore in need of protection. Unfortunately, these very well intentioned provisions cause an immense load (and backlog of cases) on legal system, making lending a hazardous operation for banks. These provisions need to be amended urgently and some new enactments are called for in order to cater to the requirements of the changed and far more complex current economic and business environment.

Legalizations on bankruptcy or foreclosure: Legislation to empower banks to realize the property charged without court intimation, as in case of State Financial Institutions. Creditors right to change the management to companies in the event of default/waring signals: Though this requires certain amendments to existing statues, such a notification should be made to have a far-reaching impact on the health of the industry, as it will enable re-orientation of the management towards the right perspective for turning around the company.

Opening more DRTs and DRATs

Strengthening DRT set-up: Bench of presiding officers, more recovery officers with adequate infrastructure.

4.9 CIRCULATION AND PUBLISHING OF LIST OF DEFAULTERS:

Currently the RBI circulars among banks and financial institution the list of defaulters, which is found useful in avoiding wilful defaulters. The RBI has defined a wilful defaulter for the first time. It has provided the broad parameters for identification of wilful defaulters whose list will be circulated among banks and financial institutions. Auditors of companies have to report in their certificate about diversion of funds if any. In addition, on Jan 30, 2001, credit information Bureau (CIB) was set up to provide critical data required by any credit institution before arriving at credit decision. State Bank Of India, HDFC, Dun and Bradstreet and Trans Union set up CIB jointly, It will collect information from its members and make it available to any credit institution on demand. CIB is yet to be operationalised. Its success depends upon cooperation extended by the members in supplying the required information on timely basis.

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Moreover it is also suggested that the banks should publish the list of defaulters in the news paper or blacklist them and circulate the list to all other banks so that no other banks would give any sort of advance to the blacklisted customer. Also this action will generate prompt payment among the defaulters as the information is made public.

4.10 NON LEGAL MEASURES: Reminder System The cheapest mode of recovery is by sending reminders to the borrowers before the loan installment falls due. Generally response to this arrangement particularly from honest borrowers is encouraging. But efforts need to be strengthened in banks in sending reminders on timely basis. Visits to Borrowers Business Premises/ Residence: This is a more dependable measure of recovery. Visits need to be properly planned. Involvement of staff at all levels in the bank branch is called for costs involved in recovery need to be kept to the minimum. Frequent visits are called for in case of hard core borrowers. Over the years, it is observed that the number and quality of visits are going down consequently, the recovery process is affected. Recovery Camps: In respect of agricultural advances, recovery camps should be organized during the harvest season to ensure maximum advance recovery camps need to be properly planned. It is also essential to take the help of outsiders particularly, revenue officers in the State government, local panchayat officials, regional managers in the banks etc. It also calls for professional approach to give a wide publicity of the recovery camps to be organized in the local area. Mobilize as many farmers as possible and motivate the staff to get involved in the recovery drive. Rephrasing on paid loan installments:

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In respect of small advances, bankers need to be sympathetic is respect of sincere and hardworking borrowers. If such borrowers will to pay loan installments due to natural calamities or for some other convincing reasons, unpaid loan installments may be rephrased /rescheduled. Bankers efforts need to be strengthened in this regard. Loan Compromise This is the last resort of recovery. This should be voluntary. It calls for professional approach in preparing the compromise proposal for which each back is expected to introduce a scheme. Committee-Approach should be adopted to decide on the loan compromise. Delay in taking decisions should be avoided. Recently, the RBI introduced are Time settlement scheme the overall response to the scheme was limited. Hence each bank is expected to come out with its own OTS scheme. In addition training of operating staff is essential to change their mindset. For effective recovery, loan compromise should be taken up an priority basis. 4.11 Appointment of Professional Agencies for Recovery: Banks should consider the appointment of outside professional agencies whose services can be utilized to ascertain the whereabouts of the borrower and enforcement of securities. In respect of periodical stock inspection of corporate accounts Professional Agencies including Chartered Accountants are better. There is some hesitancy on the part of public sector banks in engaging them for recovery purposes due to unpleasant experiences in certain cases. But during the post VRS scenario it is suggested to seek such outsourcing. This should be done after examining the credentials of the professionals. It is also essential to keep a constant vigil on their practices. DEFICIENCIES IN THE LEGAL SYSTEM By interviewing the Branch manager it was found that they all are highly dissatisfied with the prevailing legal system and the case settlement procedures. According to him, there is no dearth of recovery mechanism for NPAs. The irony however is that the existing loopholes in the legal system encourage the borrower to take undue advantage of them. There is no structure to penalize the wilful defaulters in current legal system. 1. It is reserved that whenever there is a problem about NPAs banks point out to the lacuna in the legal system. On the contrary the lacuna in the legal system is that the banks are not compelled to share the information. In common law parlance a contract is privacy and therefore any information between the parties cannot be shared with others. This is the main plank of common law system which does not take into consideration the public duty. It is a structural default. 56

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If one wants to see public duty then one has to go either to the constitutional legal system or civil law structure. This default can be overcome if the banks follow information sharing system. In a contract, the parties must be co-equal. If there is no co-equality, there is asymmetry of information. So there is a moral hazard that has to be reduced by legal structure. The point is that if a bank asks a corporation whether it has taken a loan from any other banks earlier and the corporate says no than this is a fraud. This can be recorded and there cabin be registration system of pooling information which is shared on demand. The loan agreement can have clause saying that if the borrower defaults on repayment the other banks can share the information. 2. Secondly, case of default that banks hesitated to go to court because it takes at least seven years to settle the original case. Then these will be appeals and so on. Normally four years are taken up only for the first hearing. Moreover the banks give loans against equitable mortgage; banks cannot take possession without going to the court. If a bank wants to take possession it has to go to court and wait for seven or eight years. Then the matter may go to the Supreme Court. 3. The other recourse is DRTs. But they are not fast for several reasons. There is an insufficient number of DRTs the litigants have to come from distant place and finally there is lack of expertise. The presiding officers at DRTs are ordinary principles of jurisprudence. Though they have power to design the procedures, they follow the ordinary a\civil procedure code as much as possible. 4. It is well known that the legislative authority is in the hands of RBI an finance ministry and their authority cannot be act an ministry s the owner of the banks. The private banks can certainly question the orders from the ministry. But the reality is different. 5. The financial laws regarding arbitrate law, hypothecation law and contract laws are not strong enough. Other legal system does not have one single code for security interest creation. Security interest creation means priority determination and realization either through the court or without the course. Under the transfer of Property Act, 1882 the security interests that exists are immovable security interests which were formed for feudal society. The same are used for commercial and banking purposes. 6. NPAs are the legacy of political interference and ministers inability to understand what a bank is. If a minister says there should be loan mela, let him do it with his own money, there is no problem. But bank is public money. 57

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General people identify RBI as a regulator. But it has certain statutory rights and does not have regulation making power. In small matters the statutory rights are more powerful than regulatory power. 7. The banker explain that the onus of proof always lies on the part of the banks and they have to prove that they have granted the loan to the client on the other hand they firmly believe that the onus of proof should lie with the client. He should prove that he has not taken a loan or he has paid all the installation on time and with interest. Moral Hazard and Adverse Selection While the proportion of NPAs to total advances had declined there has not been any corresponding reduction in the volume although banks have made vigorous efforts towards recovery and up gradation of loans. This implies that the banks are incurring NPAs from a part of their incremental lending. Banks in their anxiety to earn high returns may charge high interest rates on loans which encourage risk taking behavior of the borrowers. If the borrowers are unable to repay, it result in an increase in non-performing assets. The assets and other risk banks take are not monitored in the absence of market discipline. In non financial firms creditors monitor and constrain borrowings.

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CHAPTER-FIVE FINDINGS

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From the interview with Branch manager of the bank and secondary data following causes of NPA are found out. 1) Inadequate recovery procedure and management of agricultural loan in bank. 2) Poor creditworthiness of loan taker. 3) External Factor like natural calamities, flood extreme heat, extreme cool etc. 4) Market failures like crop failing to give high return, wrong crop choose, product obsolescence etc., 5) Wilful Default, fraud, misappropriation etc., 6) Deficiencies on the part of the banks such as negligence in credit appraisal, monitoring ad follow up delay in release of limits etc 7) Poor cash management 8) Poor deposit mix 9) Low productivity of farmers that period of time Now we can see the recovery management of NPA done in bank. 1) Educating farmer to avail low cost finance of 4% pa to regular account holder whereas 14% p.a. for irregular account. 2) Frequent visit to villages and farmers residence also inquiry with neighbors for his defaulting status 3) compromise/settlement 4) Contacting /intervention of other regular and influential farmers at village 5) Public notice in local news paper and legal notices 6) Pressure by public revenue authority like TDO/Mamlatdar

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CHAPTER-SIX SUGGESTIONS

Through RBI has introduced number of measures to reduce the problem of increasing NPAs of the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act, etc. A lot of measures are desired in terms of effectiveness of these measures. What I would like to suggest for reducing the evolutions of the NPAs of sayla Bank is as under. 1) Bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility. 2) The credit rating agency should regularly evaluate the financial condition of the clients. 3) Special accounts should be made of the clients where monthly loan concentration reports should be made. 4) It is also wise for the banks to carryout special investigative audit of all financial and business transactions and books of accounts of the borrower company when there is possibility of the diversion of the funds and mismanagement. 5) Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they would face the environmental threats and opportunities with the use of their 62

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6)

7) 8)

9)

strength and weakness, and what will be their possible future growth in concerned to financial and operational performance. Independent settlement procedure should be more strict and faster and the decision made by the settlement committee should be binding both borrowers and lenders and any one of them failing to follow the decision of the settlement committee should be punished severely. There should be proper monitoring of the restructured accounts because there is every possibility of the loans slipping into NPAs category again. Proper training is important to the staff of the banks at the appropriate level with ongoing process. That how they should deal the problem of NPAs, and what continues steps they should take to reduce the NPAs. No loan is to be given to a Group whose one or the other undertaking has become a Defaulter

CONCLUSION
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The government should take measures to facilitate the efforts of the banks in the recovery of the loans which currently taken inordinately long time. If wilful defaulters to delay the repayment of the loan use the BIFR proceedings the relevant legal provision should be appropriately amended. The fact that the NPAs are gradually going down generates hope about the future of the banks, though we should keep in mind another simple fact that in absolute amount, this has not happened. The burning problem of tackling NPAs which have been better, termed as sticky assets is deep rooted and has gripped the banking sector for ages. This situation in most of the cases would not have occurred had the banker been move objective at the time of appraising the loan proposal itself. A common mistake made by most of the bankers is that they rely too much on the technical (formal) side of the credit evaluator. The bank think that todays sophisticated analytical tools of financial statement will provide all the details required for the decision making ignoring totally the importance of informal of non-technical credit investigation which throws a lot of light in other areas like character capacity competence etc., of the 64

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promoters/partners. If a credit proposal is processed properly/ sanctioned disbursed in time and inadequate amount and monitored right from the beginning then the enhances this assets becoming NPA is relatively less than another which has been processed in haste, appraised mechanical delayed in sanction and disbursed in inadequate quantum. As a part of the loan section in village, banks must work out a clearly defined job plan for each desk at the operational and administrative level, supported by clearly defined working, control and reporting systems. The system of instant accountability must devolve as all decision making centers, whenever there is a deviation from the laid down procedures. At present loan is classified a non performing when the interest and installment of principal remain overdue for a period of more than today as against the international best practice of 90 days payment delinquency. But in agricultural loan, there are two crops period are shown for deciding NPA account. In some cases, one crop period is count to decide NPA account in agricultural loan. In addition, it can be stated that the surest way of containing NPAs is to prevent their occurrence. The tenets of this approach lie in the following: 1) Proper risk management systems are put in place in the banks. 2) Strong and effective credit monitoring. 3) An open and co-operative working relationship between banks and borrowers that would allow exchange of confidences and initiation of corrective action early. But to manage effectively the existing NPAs the banks must adopt a structured NPA management policy for guidance of operating functionaries. Finally, an effective legal framework will be needed to bring recovery suits to their logical conclusion and effect recoveries, within a reasonable time frame. Compromise Settlements should be explored as an effective non-legal option for recovery. The analysis throws up following future action by regulations and policy makers. One, Legislative reforms are needed both to contain the level of existing NPAs and to prevent building up of large NPAs in future. Two, infrastructure reforms are needed to make DRTs effective. Three, enactment of legislation against loan write-offs is needed. 65

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Four, the government should announce a long-term policy on capitalization of banks which should aim at a gradual withdrawal of government assistance. These are measures that create an environment conductive to preventing build-up of NPAs in the future. Lastly, banks RBI an government are suggested to follow the following mantra to reduce NPAs. Do not give money, lend it. What matter is what for you finance and not what against? Borrower accounts need real time monitoring, not post mortem. An NPA account need out necessarily mean that the borrowing company is Unviable or sick. Try to identify and bridge viability gaps of industrial units. Many sick units need nourishment in the form of fresh dose of loans to regain health. One time Settlement with wilful defaulters may be good mathematics but bad Banking. Always follow basic lending norms. Put credit decisions on fast track.

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Bibliography:

Websites: 1) www.rbi.org.in 2) www.sbi.co.in 3) www.vakilno1.com 4) www.nonperformingassets.in 5) www.bifr.nic.in 6) www.arcindia.co.in 7) www.iarc.co.in

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8) www.business-standard.com 10) www.timesofindai.com 11) www.kalyan-city.blogspot.com Books: 1) The Indian Financial System Author: Bharti V. Pathak

ANNEXURE Questions 1) General information about the SAYLA branch.

2) Which type of loans provided by your bank?

3) General procedure for collecting the loan and which type of documents needed for that? 4) The time taken by you to sanction any kind of advances after receiving the application? 68

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5) Keeping in mind the recovery, do you thoroughly evaluate proposals before sanctioning the loans? Yes 6) If yes, in which way? 7) Rank the following factors (on a scale of 1 to 9) in order of importance while sanctioning loans. Companys current performance cash flows Documents Market condition. Past Performance of the company Previous Repayments Primary security /collateral Reference Statutory requirements Any other. Please specify 8) You recover a loan after maturity ( On an average per year) (a) On time (c) Within 15-30 days (b) within 15 days (d) More than 30 days No

9) The problems faced by you while recovering the loans/ advances are Bureaucratic/systematic Inability to pay Legal constraints Natural calamities Political or other influence 69

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Unwillingness to pay Any other. Please specify 10) The average annual percentage of defaults on the loans is (a) (c) (e) Less than 5% 10%-20% 30%-50% (b) 5%-10% (d) 20%-30% (f) More than 50%

11) If there is a default, please stick the following corrective measures? Awareness Compromise/settlement Intervention Legal Action Persuasion 12) According to your opinion, your recovery procedure is

a)

Adequate

b) Inadequate

13) If Inadequate, suggest ways to improve the recovery system. 14) Which actions taken by bank for management of NPA accounts?

15) Recovery procedure for NPA Name: Designation: Bank/ Institution: Date:

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