CHAPTER -1

INTRODUCTION

1
1.1 INTRODUCTION
The Indian banking system with a large network of branches and

wide range of financial instruments has achieved considerable

progress in the two decades after Nationalization. The concept of

banking had undergone a dynamic change in keeping with the

need to achieve rapid socio-economic progress. As against the

traditional banking theory, a shift in the approach to lending from

security-orientation also becomes a predominant concept during

the period. Despite the overall progress made by the financial

system, poor capital base, inefficient organizational structure,

declining profitability and very high and ever-growing non-

performing asset (NPA) had become the major stumbling blocks

in the banking sector during the post-nationalization decades. It

was against this background that the financial sector reforms

become inevitable and was initiated in India.

The banking industry has undergone a sea change after the first

phase of economic liberalization in 1991 and hence credit

management. While the primary function of banks is to lend funds

as loan to various sector such as agriculture, industry, personal

loans, housing loans etc., in recent times the banks have become

very cautious in extending loans, the reason being mounting non-

performing assets (NPA), An NPA is defined as a loan asset,

2
which has ceased to generate any income for a bank whether in

the form of interest or principal repayment. As per the prudential

norms suggested by the Reserve Bank of India (RBI), a bank

cannot book interest on an NPA on accrual basis. In other words,

such interests can be booked only when it has been actually

received.

Therefore, an NPA account not only reduces profitability of banks

by provisioning in the profit and loss account, but their carrying

cost is also increased which results which results in excess &

avoidable management attention. Apart from this, a high level of

NPA also puts strain on a bank’s net worth because banks are under

pressure to maintain a desired level of Capital Adequacy and in the

absence of comfortable profit level, banks eventually look towards

their internal financial strength to fulfill thereby slowly eroding the

net worth. Public sector banks (PSBs) have registered a massive

increase in non-performing assets (NPAs).

3
1.2. OBJECTIVES OF THE STUDY
* To evaluate the level of NPA in priority sector lending and to find a solution
for the continuous rise in the NPA level.

* To find out the sector wise NPA level in priority sector lending in UCO bank.

1.3. SCOPE OF THE STUDY

The scope of my study is limited to analysis of NPA in UCO Bank Borikina
branch.

1.4. RESEARCH METHODOLOGY

The research methods undertaken are as follows:

1.4.1. TIME FRAME

5 years of data so collected have been classified and presented to
illustrate the level of NPA in different sectors of country.

1.4.2. SOURCES OF DATA

The data required are collected from various sources on primary and
secondary basis. The data were collected from various published sources
as well as the data provided by the UCO bank. It is also collected from
various reports and publications of commercial banks and reports from
RBI.

1.4.3 TOOLS AND TECHNIQUE IMPLEMENTED:

The tools and technique implemented are analytical tools such as
pie charts, bar graphs, table to compare the past data with current so as
to get a particular inference from it on analysis.

1.4.4 CLASSIFICATION AND TABULATIONS OF DATA:

The variations data so collected have been duly classified and
presented in graphical tabular format to illustrate the level of NPA in
priority and non priority sectors of the country.

4
1.5. CHAPTER PLAN:
The project “Reasons for growing NPA in priority sector lending in
banks and measures to improve recovery is divided into four chapters.
The first chapter starts with the introductory phrase followed by review
of literature, rationale, limitation, scope of the project, sources of data
collection and tools and used for analyzing the data. Then the second
chapter deals with various conceptual studies, it generally gives a vivid
description about UCO Bank, its services, specialized branches,
organization structure and its current market position. After that, it also
presents the basics of priority sector and non-performing assets. Third
chapter shows the analysis part of the project, it is generally represented
by movement of NPA, Sector wise NPA and pie charts, graphs and ratio
analysis. The fourth chapter fulfills the objectives by finding out the
reasons and providing suggestions. Lastly, chapter five provides a
conclusion and bibliography.

1.6. LIMITATIONS OF THE STUDY:

The study undertaken as my summer internship project had
encountered several limitations like:

 Limited authenticity and accuracy of information by secondary

sources of information.
 Reasonable conclusion has not arrived at.

Some crucial information regarding the cause root was difficult to be found
out. As per the requirement of the project all the data were not available.

5
 CHAPTER -2

REVIEW OF LITERATURE

6
2.1 LITERATURE REVIEWS

Sarda (1998) in an article on the strategies for reducing NPAs

states that guidelines issued by the Reserve bank non income recognition,
asset classification and provisioning norms compelled banks non income
recognition, asset classification and provisioning norms compelled banks
in India non only to show the true financial picture in the balance sheet
but also to take corrective steps for improving their loan portfolio. With
the adoption of these guidelines banks are fully vigilant about the quality
of their asset and several steps taken by them to reduce NPA.

On lok adalat as an effective forum for reducing NPA, Rao

(1999) remarks that lok adalat have gained prominence over a period of
time as a forum through which the disputes / statements among the parties
are settled through an expeditious compromise settlement by adopting
principles of justice, equity, fair play and other legal principals.

Bansal and Bansal (2001) in their study on banking sector reforms found
that the level of NPA is a contentious issue and a vital parameter in the
analysis of the financial health of banking industry. Public sector banks
account for a higher level of NPA as they hold a higher share in lending,
but contrary to general perception, the ratio of gross NPA to total
advances and total assets has come down.

B.Satish Kumar (2008), in his article on an evaluation of the financial

performance of Indian private sector banks wrote private sector banks
play an important role in development in Indian economy. After
liberalization the banking industry under major changes. The economic
reforms totally have changed the banking sector; RBI permitted new
banks to be started in the private sector as per the recommendation of

7
Narashiman committed. The Indian banking industry was dominated by
public sector banks. But now the situations have changed new generation
banks with used of technology and professional management has gained a
reasonable position in the banking industry.

8
 CHAPTER -3

ORGANISATION PROFILE

9
3.1 ORGANISATION PROFILE:-
UCO bank is a commercial bank and a Government of India
undertaking. The bank has 34 regional offices spread all over India. UCO
bank head office is located in Kolkata. The bank has international
presence with four overseas branches in two important financial centers
in Singapore and Hong Kong and representative offices at Kuala Lumpur,
Malaysia and Guangzhou in China. The bank also has a NIR corner to
offer specialized services to its international customers. UCO Bank was
incorporated in the year 1943 as The United Commercial Bank Limited.
In July 1969, the Bank was nationalized and 100% ownership was taken
over by the Government of India. Thereafter the bank expanded rapidly.
In December 30, 1985 the name of the bank was changed to UCO Bank.
During the year 2001-02, the bank opened 1 new branch in pune, and 5
new extension counters. During the year 2004-05, the Bank opened 4
new branches and upgraded 7 extension counters into fledged branches.
They also opened 6 new extension counters. During the year 2005-06,
the bank opened 9 new branches and upgraded 8 extension counters
into full flanged branches. They opened 2 new extension counters and
closed 5 extension counters. The bank also opened one representative
office in Kuala Lumpur in Malaysia. During the year, in terms of the
Government directive the bank had effected merger of three Regional
Rural Banks in Bihar on September 9, 2005, two regional rural banks in
Odisha on January 2, 2006 and two regional rural banks in Rajasthan on
January 27, 2006. During the year 2006-07, the bank opened 57 new
branches, upgraded 53 extension counters into full fledged branches and
merged the 15 extension counters with the base branches. They also
started 4 flagship corporate branches and 9 mid corporate branches. In
February 26, 2007, three Regional Rural Banks in the state of west
Bengal were amalgamated and form a single entity named as Paschim
Banga Gramin Bank. During the year 2007-08, the bank opened 95
branches in which 66 branches were opened on January 6, 2008 to
commemorate the 65th Foundation Day of the bank. The bank opened
40 new branches, 12 mid corporate branches, upgraded 55 extension
counters into full fledged branches and merged the 13 extension
counters with the base branches. During the year, the company

10
converted two of their existing branches at Kolkata and New Delhi
exclusively for catering to needs of senior citizens and named these
branches as ‘Senior Citizen branches’. In April 4, 2007, the bank opened
one representative office at Guangzhou in China. As at march 31, 2008
the bank has 1957 branches, two representative offices, 21 mid
corporate branches and 19 extension counters.

SERVICES PROVIDED:-
International banking services, services for NRIs, loan schemes, deposit
schemes and value added e-banking solutions. They also possess a host of
branches authorized for direct tax collection in India. The bank also has a NRI
corner to offer specialized services to its international customers.

The company also introduced Gold Card Scheme for exporters to facilitate easy
availability of export credit at remuneration terms.

BUSINESS FOCUS:-
 UCO, SBI sign MoU to share ATM network.
 UCO Bank seeks Rs 1,000 crore capital infusion from govt.
 UCO Bank completes restructuring.
 UCO Bank plans IPO.
 SEBI move to revive retail participation; most PSUs can become
multibaggers.

11
3.2 ORGANISATION STRUCTURE
BOARD OF DIRECTORS
 Mr. Ravi Krishana Takkar ( Chairman & Managing Director )
 Shri J K Garg (Executive Director )
 Shri Charan Singh ( Executive Director )
 Prof Sunil Kumar Maheshwari ( Director )
 Shri D N Thakur ( Director )
 Mr. Partha Chanda ( Director )
 Mr. Salahuddin Ansari (Director )

CURRENT MARKET POSITION:-

As on 31 March 2015, government share holding in the bank was 87%. Branch
expansion started at a face pace, particularly in rural areas, and the bank
achieved several unique distinctions in Priority Sector lending and other social
uplift activities. To keep pace with the developing scenario and expansion of
business, the Bank undertook an exercise in organizational restructuring in the
year 1972. This resulted into more functional specializations, decentralization
of administration and emphasis on development of personnel skill and
attitude. Side by side, while heated commitment into the government’s
poverty alleviation programmers continued and the convenorship of State
Level Banker’s Committee (SLB)was entrusted on the Bank for Odisha and
Himachal Pradesh in 1983 total numbers of branch more than 4000.

12
REGISTERED OFFICE:-
Re10, BTM Sarani,

Barbourne Road, 7th Floor

Kolkata

West Bengal

700001

Tel:- 033-22254120, 033-22254129

Fax:- 033-22485625

Email :- hosgr.calcutta@ucobank.co.in

Website:- http://www.ucobank.com

Group:- Public Sector

13
3.3 Agriculture (Direct and indirect finance)
Direct finance to agriculture shall include short, medium and long term loans
given for agriculture and allied activities directly to individual farmers, self-help
groups (SHGs) or joint liability groups (JLGs) of individual farmers without limit
and to others (such as corporate, partnership firms and institutions ) up to Rs.
20 lakh, for taking up agriculture / allied activities.

Indirect finance to agriculture shall include given for agriculture and allied
activities as specified in section I, appended.

3.4 Small Scale Industries (Direct and indirect Finance)

Directly finance to small scale industries (SSI) shall include all loans given to SSI
units which are engaged in manufacture, processing or preservation of goods
and whose investment in plant and machinery (original cost) excluding land
and building does not exceed the amounts specified in section I, appended.

Indirectly finance to SSI shall include finance to any person providing inputs to
or marketing the output of artisans, village and cottage industries, handlooms
and to cooperatives of producers in this sector.

3.5 Small Business / Service Enterprise :-

It shall include small business, retail trade, professional & self-employed
persons, small road & water transport operators and other service enterprises
as per the definition and other enterprises that are engaged in providing or
rendering of services, whose investment in equipment does not exceed the
amount specified.

3.5 Education loans :-

Education loans include loans and advances granted to only individuals for
educational purposes up to Rs. 20 lakh for studies abroad, and do not include
those granted to institutions.

14
3.7 Housing loans :-
Loans up to Rs.15 lakh for constructing of house by individuals, (excluding
loans granted by banks to their own employees) and loans given for repairs to
the damaged houses of individuals up to Rs. 1 lakh in rural and semi-urban
areas and up to Rs.2 lakh in urban areas.

Investment by banks in securitized asset, representing loans to agriculture

(direct or indirect) and housing, shall be eligible for classification under
respective categories of priority sector (direct or indirect ) depending on the
underlying assets, provided the securitized assets are originated by banks and
financial institutions and fulfill the Reserve Bank of India guidelines on
securitization.

Under Weaker Sections: Priority sector loans to the following borrowers are
considered under weaker sections category :-

a) Small and marginal farmers.

b) Artisans, village and cottage industries where individual credit limits do
not exceed 50,000.
c) Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY) ,now
National Rural Livelihood Mission (NRLM).
d) Scheduled Castes and Scheduled Tribes.
e) Beneficiaries of Differential Rate of Interest (DRI).
f) Beneficiaries under the scheme for Rehabilitation of Manual scavengers
(SRMS).
g) Loans to distressed farmers indebted to non-institutional lenders.
h) Loans to distressed persons other than farmers not exceeding 50,000
per borrower to prepay their debt to non-institutional lenders.
i) Loans to Self Help Group.
j) Loans to distressed persons other than farmers not exceeding 50,000
per borrower to prepay their debt to non-institutional lenders.
k) Loans to individual women beneficiaries up to 50,000 per borrower.
l) Also called or known as priority sector advancement (PSA).

15
Computation of Adjusted Net Bank Credit (ANBS ):-
Bank Credit in India (As prescribed in item No.VI of form ‘A’ (Special Return as
on March 31st) under section 42(2) of the RBI act 1934.

Bills rediscounted with RBI and other approved Financial Institutions.

Net Bank Credit (NBC)

Investments in Non-SLR categories under HTM category + other investments

eligible to be treated as priority sector.

ANBC

For the purpose of priority sector only. Banks should not deduct / net any
amount like provisions, accrued interest, etc. from NBC.

3.8 Micro and Small enterprises

The limits for investment in plant and machinery / equipment for
manufacturing / service enterprise, as notified by ministry of micro small and
medium enterprise, vide,S.O.1642(E) dated September 9, 2006 are as under:

Manufacturing sector Investment in plant and

/ machinery
Enterprise
Micro Enterprises.
Small Enterprises.
Service Sector/
Enterprises
Micro Enterprises.
Small Enterprises.
Do not exceed Rs.25. lakh.
More than Rs.25 lakh but does not exceed
Rs.5. crore.
Investment in equipment
Dose not exceeds Rs. 10. lakh.
More than Rs. 10 lakh but does not
exceeds Rs.2. crore/

Banks loans to micro and small enterprises both manufacturing and service are
eligible to be classified under priority sector as per the following:

16
Direct finance

Manufacturing Enterprises
The Micro small and medium enterprises engaged in the manufacture or
production of goods to industry specified in the first schedule to the Industries
(Development and regulation) act 1951. The manufacturing enterprises are
defined in terms of investment in plant and machinery.

Loans for food and agro processing

Loans for food are agro processing will be classified under Micro and Small
Enterprises, provided the units satisfy investments criteria prescribed for Micro
and Small Enterprises, as provided in MSMED Act, 2006.

Service Enterprises
Banks loans up to Rs.5 crore per borrower/unit to Micro and Small
Enterprises engaged in providing or rendering of servicers and defined in terms
of investment in equipment under MSMED Act, 2006.

Export credit to MSME units

Both manufacturing and services for exporting of good/services produced by
them.

Khadi and Village Industries Sector (KVI)

All loans sanctioned to units in the KVI sector, irrespective of their size of
operations, location and amount of original investment in plant and
machinery. Such loans will be eligible for classification under the sub-target of
60 percent prescribed for micro enterprises within the micro and small
enterprises segment under priority sector.

17
Indirect Finance
i. Loans to persons involved in assisting the decentralised sector in the
supply of inputs and marketing of outputs of artisans, village and
cottage industries.
ii. Loans to cooperatives of producers in the decentralised sector viz.
artisans village and cottage industries. iii. Loans sanctioned by banks
to MFIs for on-lending to MSE sector.

Education
Loans to individuals for educational purposes including vocational
courses up to Rs.10 lakh for studies in India and Rs. 20 lakh for studies abroad.

Housing
(i) Loans to individuals up to Rs. 25 lakh in metropolitan centres with
population above Ten lakh and Rs. 15 lakh in other centres for
purchase/construction of a dwelling unit per family excluding loans
sanctioned to bank's own employees.

(ii) Loans for repairs to the damaged dwelling units of families up to Rs. 2
lakh in rural and semi- urban areas and up to Rs. S lakh in urban and
metropolitan areas.

(iii) Bank loans to any governmental agency for construction of dwelling

units or for slum clearance and rehabilitation of slum dwellers subject to a
ceiling of Rs. 10 lakh per dwelling unit

(iv) The loans sanctioned by banks for housing projects exclusively for the
purpose of construction of houses only to economically weaker sections
and low income groups, the total cost of which does not exceed Rs.10 lakh
per dwelling unit. For the purpose of identifying the economically weaker
sections and low income groups, the family income limit of Rs. 1,20,000 per
annum, irrespective of the location, is prescribed.

18
Export Credit
Export Credit extended by foreign banks with less than 20 branches will be
reckoned for priority sector target achievement. For domestic and foreign
Banks with 20 and above branches, export credit to eligible activities under
agriculture and MSME will be reckoned under Priority Sector under
respective categories.

Others
Loans, not exceeding Rs. 50,000 per borrower provided directly by banks
to individuals and SHG/JLG, provided the borrower's household annual
income in rural areas does not exceed Rs.60,000/- and for non-rural areas
it should not exceed Rs. 1,20,000/-. Loans to distressed persons [other than
farmers-already included not exceed Rs. 50,000 per borrower to prepay
their debt to non-institutional lenders.

Loans outstanding for general purposes under General Credit Cards

(GCC). If the loans under GCC are sanctioned to Micro and Small
Enterprises, such loans should be classified under respective categories of
Micro and Small Enterprises. Overdrafts, up to Rs.50,000 (per account),
granted against 'no-frills' / basic banking / savings accounts provided the
borrowers household annual income in rural areas does not exceed Rs.
60,000/- and for non-rural areas it should not exceed Rs.1,20,000/-. Loans
sanctioned to State Sponsored Organizations for Scheduled Castes/
Scheduled Tribes for the specific purpose of purchase and supply of inputs
to and/or the marketing of the outputs of the beneficiaries of these
organizations.

Loans sanctioned by banks directly to individuals for setting up off-

grid solar and other off-grid renewable energy solutions for households.

Weaker Sections
Priority sector loans to the following borrowers will be considered under
Weaker Sections category:-a) Small and Marginal Farmers; b) Artisans,
village and cottage industries where individual credit limits do not exceed
Rs. 50,000; c) Beneficiaries of Swarnajayanti Gram Swarozgar Yojana
(SGSY), now National Rural Livelihood Mission (NRLM); d) Scheduled

19
Castes and Scheduled Tribes; e) Beneficiaries of Differential Rate of Interest
(DRI) scheme; f) Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana
(SJSRY); g) Beneficiaries under the Scheme for Rehabilitation of Manual
Scavengers (SRMS); h) Loans to Self Help Groups; i) Loans to distressed
farmers indebted to non-institutional lenders; j) Loans to distressed
persons other than farmers not exceeding Rs. 50,000 per borrower to
prepay their debt to non-institutional lenders; k) Loans to individual
women beneficiaries' up to Rs. 50,000 per borrower;

I) Loans sanctioned under (a) to (k) above to persons from minority

communities as may be notified by Government of India from time to time.

In States, where one of the minority communities notified is, in fact, in

majority, item (I) will cover only the other notified minorities. These
States/Union Territories are Jammu & Kashmir, Punjab, Meghalaya,
Mizoram, Nagaland and Lakshadweep.

Bank loans to MFIs for on-lending

a) Bank credit to MFIs extended on, or after, April 1, 2011 for on-lending to
individuals and also to members of SHGs / JLGs will be eligible for
categorisation as priority sector advance under respective categories viz.,
agriculture, micro and small enterprise, and 'others', as indirect finance,
provided not less than 85% of total assets of MFI (other than cash, balances
with banks and financial institutions, government securities and money
market instruments) are in the nature of "qualifying assets". In addition,
aggregate amount of loan, extended for income generating activity, is not
less than 75% of the total loans given by MFIs.

b) A "qualifying asset" shall mean a loan disbursed by MFI, which satisfies

the following criteria:

(i) The loan is to be extended to a borrower whose household annual

income in rural areas does not exceed Rs.60,000/- while for non-rural
areas it should not exceed Rs. 1,20,000/-.

(ii) Loan does not exceed Rs. 35,000/- in the first cycle and
Rs.50,000/- in the subsequent cycles.

(iii) Total indebtedness of the borrower does not exceed Rs.50,000/-.

20
 (iv) Tenure of loan is not less than 24 months when loan amount
exceeds Rs.1S,000/- with right to borrower of prepayment without penalty.

(v) The loan is without collateral.

(vi) Loan is repayable by weekly, fortnightly or monthly installments

at the choice of the borrower.

c) Further, the banks have to ensure that MFIs comply with the following
caps on margin and interest rate as also other 'pricing guidelines', to be
eligible to classify these loans as priority sector loans.

(i) Margin cap at 12% for all MFIs. The interest cost is to be calculated on
average fortnightly balances of outstanding borrowings and interest
income is to be calculated on average fortnightly balances of outstanding
loan portfolio of qualifying assets.

(ii) Interest cap on individual loans at 26% per annum for all MFIs to be
calculated on a reducing balance basis.

(iii) Only three components are to be included in pricing of loans viz.,

(a) a processing fee not exceeding 1% of the gross loan amount, (b) the
interest charge and (c) the insurance premium.

(iv) The processing fee is not to be included in the margin cap or the
interest cap of 26%.

(v) Only the actual cost of insurance i.e. actual cost of group
insurance for life, health and livestock for borrower and spouse can be
recovered; administrative charges may be recovered as per IRDA
guidelines.

(vi) There should not be any penalty for delayed payment.

(vii) No Security Deposit/ Margin are to be taken.

d) The banks should obtain from MFI, at the end of each quarter, a
Chartered Accountant's Certificate stating, inter-alia, that (i) 85% of total
assets of the MFI are in the nature of "qualifying assets", (ii) the aggregate
amount of loan, extended for income generation activity, is not less than

21
75% of the total loans given by the MFIs, and (iii) pricing guidelines are
followed.

Non-achievement of priority sector targets

Domestic scheduled commercial banks and foreign banks with
branches 20 and above having shortfall in lending to overall priority sector
target/agriculture target and weaker sections target shall be allocated
amounts for contribution to the Rural Infrastructure Development Fund
(RIDF) established with NABARD or Funds with NHB/SIDBI/other
Financial Institutions, as specified by the Reserve Bank.

The misclassifications reported by the Reserve Bank's Department of

Banking Supervision would be adjusted/ reduced from the achievement of
that year, to which the amount of declassification/ misclassification
pertains, for allocation to various funds in subsequent years. Non-
achievement of priority sector targets and sub-targets will be taken into
account while granting regulatory clearances/approvals for various
purposes.

Common guidelines for priority sector loans

Banks should comply with the following common guidelines for all
categories of advances under the priority sector.

1. Rate of interest
The rates of interest on various categories of priority sector loans will be as
per DBOD directives issued from time to time.

2. Service charges
No loan related and adhoc service charges/inspection charges should be
levied on priority sector loans up to Rs. 25,000.

3. Receipt, Sanction/Rejection/Disbursement Register

A register/ electronic record should be maintained by the bank, wherein
the date of receipt, sanction/rejection/disbursement with reasons thereof,
etc., should be recorded. The register/electronic record should be made
available to all inspecting agencies. 4. Issue of Acknowledgement of Loan

22
Applications Banks should provide acknowledgement for loan applications
received under priority sector loans. Bank Boards should prescribe a time
limit within which the bank communicates its decision in writing to the
applicants.

Amendments
These guidelines are subject to any instructions that may be issued by the
RBI from time to time.

Definitions

1. On-lending: Loans sanctioned by banks to eligible intermediaries for

onward lending only for creation of priority sector assets. The average
maturity of priority sector assets thus created should be co-terminus with
maturity of the bank loan. 2. Small and Marginal Farmers: Farmers with
landholding of up to 1 hectare is considered as Marginal Farmers. Farmers
with a landholding of more than 1 hectare but less than 2 hectares are
considered as Small Farmers. For the purpose of priority sector loans 'small
and marginal farmers' include landless agricultural labourers, tenant
farmers, oral lessees and share-croppers, whose share of landholding is
within above limits prescribed for "Small and Marginal Farmer".

23
3.9 NON PERFORMING ASSETS
Norms were differentiated in INCOME RECOGNITION AND ASSET
CLASSIFICATION Norms as per Narsihman Committe as on 31.03.1993

In line with the international practices and as per the recommendations

made by the Committee on the Financial System (Chairman Shri M.
Narasimham), the Reserve Bank of India has introduced, in a phased
manner, prudential norms for income recognition, asset classification and
provisioning for the advances portfolio of the banks so as to move towards
greater consistency and transparency in the published accounts.

The policy of income recognition should be objective and based on record

of recovery rather than on any subjective considerations. Likewise, the
classification of assets of banks has to be done on the basis of objective
criteria which would ensure a uniform and consistent application of the
norms. Also, the provisioning should be made on the basis of the
classification of assets based on the period for which the asset has
remained nonperforming and the availability of security and the realisable
value thereof.

Banks are urged to ensure that while granting loans and advances, realistic
repayment schedules may be fixed on the basis of cash flows with
borrowers. This would go a long way to facilitate prompt repayment by the
borrowers and thus improve the record of recovery in advances.

With the introduction of prudential norms, the Health Code-based system

for classification of advances has ceased to be a subject of supervisory
interest. As such, all related reporting requirements, etc. under the Health
Code system also cease to be a supervisory requirement. Banks may,
however, continue the system at their discretion as a management
information tool.

24
THE DEFINITION OF NPA
An asset, including a leased asset, becomes nonperforming when it ceases
to generateincome for the bank.

A Non-Performing Asset (NPA) is a loan or an advance where;

i) Interest and/ or installment of principal remain overdue for a period of

more than 90 days in respect of a term loan;

ii) The account remains 'out of order' as indicated at paragraph 1.3 below,
in respect of an Overdraft/Cash Credit (OD/CC);

iii) The bill remains overdue for a period of more than 90 days in the case
of bills purchased and discounted;

iv) The installment of principal or interest thereon remains overdue for

two crop seasons for short duration crops;

v) The installment of principal or interest thereon remains overdue for one

crop season for long duration crops. Example: An account will be classified
as NPA only if the interest charged during any quarter is not serviced fully
within 90 days from the end of the quarter.

'Out of Order' status:

An account should be treated as 'out of order' if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power. In
cases where the outstanding balance in the principal operating account is
less than the sanctioned limit/ drawing power, but there are no credits
continuously for 90 days as on the date of Balance Sheet or credits are not
enough to cover the interest debited during the same period.

'Overdue':
Any amount due to the bank under any credit facility is 'overdue' if it is not
paid on the due date fixed by the Bank. Example : Term Loan has been
disbursed on 15th of January with a condition to repay the installment on
monthly basis. The due date in this case is the 15th of each month.

25
Agricultural advances
i) A loan granted for short duration crops will be treated as NPA, if the
installment of principal or interest thereon remains overdue for two crop
seasons. A loan granted for long duration crops will be treated as NPA, if
the installment of principal or interest thereon remains overdue for one
crop season. For the purpose of these guidelines, "long duration" crops
would be crops with crop season longer than one year and crops, which are
not "long duration" crops would be treated as "short duration" crops. The
crop season for each crop, which means the period up to harvesting of the
crops raised, would be as determined by the State Level Bankers'
Committee in each State. Depending upon the duration of crops raised by
an agriculturist, the above NPA norms would also be made applicable to
agricultural term loans availed of by him.

In respect of agricultural loans, other than those specified above and term
loans given to non agriculturists, identification of NPAs would be done on
the same basis as non-agricultural advances which, at present, is the 90
days delinquency norm.

ii) Where natural calamities impair the repaying capacity of agricultural

borrowers, banks may decide on their own as a relief measure conversion
of the short-term production loan into a term loan or re-schedule of the
repayment period; and the sanctioning of fresh short term loan, subject to
guidelines contained in RBI circular RPCD.

iii) In such cases of conversion or re-schedule, the term loan as well as

fresh short-term loan may be treated as current dues and need not be
classified as NPA. The asset classification of these loans would thereafter be
governed by the revised terms & conditions and would be treated as NPA if
interest and/or installment of principal remain overdue for two crop
seasons for short duration crops and for one crop season for long duration
crops. For the purpose of these guidelines, "long duration" crops would be
crops with crop season longer than one year and crops, which are not 'long
duration" would be treated as "short duration "crops.

iv) While fixing the repayment schedule in case of rural housing advances
granted to agriculturists under Indira Awas Yojana and Golden Jubilee

26
Rural Housing Finance Scheme, it should be ensured that the
interest/installment payable on such advances are linked to crop cycles.

Government Guaranteed advances:

The credit facilities backed by guarantee of the Central Government though
overdue maybe treated as NPA only when the Government repudiates its
guarantee when invoked. This exemption from classification of
Government guaranteed advances as NPA is not for the purpose of
recognition of income. The requirement of invocation of guarantee has
been delinked for deciding the asset classification and provisioning
requirements in respect of State Government guaranteed exposures. With
effect from the year ending 31st March 2006, State Government guaranteed
advances and investments in State Government guaranteed securities
would attract asset classification and provisioning norms if interest and/or
principal or any other amount due to the bank remains overdue for more
than 90 days. As per our existing practice, once an account becomes NPA,
the Bank does not normally entertain any request for fresh credit disbursal
either in the same account or in another account where the
guarantors/owners are the same save with certain exceptions.

We have a number of NPA accounts, which are guaranteed in some cases by

the Central Government or in other cases by various State Governments. In
respect of such State Governments, which have failed to meet their
guarantee obligations, we cannot have any specific ban on granting fresh
credit limits or enhancing existing limits in other performing accounts,
which are guaranteed by the same State Government. However, we need to
have a cautious approach to protect the quality of our credit portfolio. In
respect of Central Govt. guaranteed accounts, credit decisions would be
taken in the usual manner at various levels, observing the normal laid
down precautions.

Operation in the NPA account

The Bank has a transparent mechanism for restructuring of debts of
potential viable entities facing temporary problems due to fact beyond
their control. The different mechanisms are as follows:

i) Rehabilitation scheme sanction under aegis of BIFR

27
ii) Corporate Debt Restructuring

iii) Debt Restructuring for Small & Medium Enterprises In order to ensure
proper scrutiny & analysis of restructuring proposals the sanctioning
powers shall vest with the various authorities as per the detailed guidelines
issued by HO, Credit Monitoring Department vide Circular No.
CHO/ADV/02/2013-14 dated 21.05.2013. It may be noted that account
where process of taking over possession of property under SARFAESI act
has been initiated i.e. accounts wherein bank has proceeded for further
action under SARFAESI Act when the borrower has not responded to the
notice under Sec 13(2) of SARFAESI Act or has not honored his
commitment made to the Bank in response to the notice is ineligible for
restructuring

Restructuring/ Rescheduling of Loans:

Detail guidelines has been incorporated in the Operational Guidelines on
Restructuring Of Accounts And Holding On Operations

Asset Classification to be borrower-wise and not facility-

wise:
It may happen that some of the credit facilities of the borrower are
operating satisfactorily whereas in one or some facilities are irregular and
need to be treated as NPA. In such a situation all the accounts to be taken
together to identify it as NPA and not the particular facility/investment or
part thereof which has become irregular. However, if the debits arising out
of devolvement of letters of credit or invoked guarantees are parked in a
separate account, the balance outstanding in that account also should be
treated as a part of the borrower's principal operating account for the
purpose of application of prudential norms on income recognition, asset
classification and provisioning. The bills discounted under LC favoring a
borrower may not be classified as a non- performing advance (NPA), when
any other facility granted to the borrower is classified as NPA. However, in
case documents under LC are not accepted on presentation or the payment
under LC is not made on the due date by the LC issuing bank for any reason
and the borrower does not immediately make good the amount disbursed
as a result of discounting of concerned bills, the outstanding bills

28
discounted will immediately be classified as NPA with effect from the date
when the other facilities had been classified as NPA.

Group Accounts:
Generally, for the purpose of identifying the borrower's account as NPA
Group account concept need not be adopted. If it is observed that some of
the group accounts are operated in a satisfactory manner as such
Individual account of the Group will be dealt separately for the purpose of
identifying the account as NPA.

Advances under consortium arrangements:

Asset classification of accounts under consortium should be based on the
record of recovery of the individual member banks and other aspects
having a bearing on the recoverability of the advances. Where the
remittances by the borrower under consortium lending arrangements are
pooled with one bank and/or where the bank receiving remittances is not
parting with the share of other member banks, the account will be treated
as not serviced in the books of the other member banks and therefore, be
treated as NPA. The banks participating in the consortium should,
therefore, arrange to get their share of recovery transferred from the lead
bank or get an express consent from the lead bank for the transfer of their
share of recovery, to ensure proper asset classification in their respective
books.

Availability of security/net worth of borrower/guarantor:

The availability of security or net worth of borrower/ guarantor should not
be taken into account for the purpose of treating an advance as NPA or
otherwise, except to the extent detailed in the section 2.A.7 below, as
income recognition is based on record of recovery.

Accounts where there is erosion in the value of security/

frauds committed by borrowers:
In respect of accounts where there are potential threats for recovery on
account of erosion in the value of security or non-availability of security
and existence of other factors such as frauds committed by borrowers it
will not be prudent that such accounts should go through various stages of
29
asset classification. In cases of such serious credit impairment the asset
should be straightaway classified as doubtful or loss asset as appropriate:

a) Erosion in the value of security can be reckoned as significant when the

realisable value of the security is less than 50 per cent of the value assessed
by the bank or accepted by RBI at the time of last inspection, as the case
may be. Such NPAs may be straightaway classified under doubtful Asset (D-
1) category and provisioning should be made as applicable to doubtful
assets.

b) If the realisable value of the security, as assessed by the bank/ approved

valuers/ RBI is less than 10 per cent of the outstanding in the borrowal
accounts, the existence of security should be ignored and the asset should
be straightaway classified as loss asset with 100%provision.

Note:- In case, an account is identified as fraud for any reason whatsoever,

the account should be properly marked as 'Fraud' in account level in
Finacle production server through menu option 'ACM' and sub option 'it'.

Advances against Term Deposits, NSCs, KVP/IVP, etc:

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs
and life policies need not be treated as NPAs, provided adequate margin is
available in the accounts. Advances against gold ornaments, government
securities and all other securities are not covered by this exemption.

Advances to PACS/FSS ceded to Commercial Banks:

In respect of agricultural advances as well as advances for other purposes
granted by banks to PACS/ FSS under the on-lending system, only that
particular credit facility granted to PACS/FSS which is in default for a
period of two crop seasons in case of short duration crops and one crop
season in case of long duration crops, as the case may be, after it has
become due will Be classified as NPA and not all the credit facilities
sanctioned to a PACS/ FSS. The other direct loans & advances, if any,
granted by the bank to the member borrower of a PACS/ FSS outside the
on-lending arrangement will become NPA even if one of the credit facilities
granted to the same borrower becomes NPA.

30
Loans with moratorium for payment of interest:
In the case of bank finance given for industrial projects or for
agricultural plantations etc. where moratorium is available for payment of
interest, payment of interest becomes 'due' only after the moratorium or
gestation period is over. Therefore, such amounts of interest do not become
overdue and hence do not become NPA, with reference to the date of debit
of interest. They become overdue after due date for payment of interest, if
uncollected.

In the case of housing loan or similar advances granted to staff

members where interest is payable after recovery of principal, interest
need not be considered as overdue from the first quarter onwards. Such
loans/advances should be classified as NPA only when there is a default in
repayment of installment of principal or payment of interest on the
respective due dates.

Asset Classification for Projects under implementation:

There are occasions when the completion of projects is delayed for legal
and other extraneous reasons like delays in government approvals etc. All
these factors, which are beyond the control of the promoters, may lead to
delay in project implementation and involve restructuring / rescheduling
of loans by banks. Accordingly, the following asset classification norms
would apply to the project loans before commencement of commercial
operations. For this purpose, all project loans have been divided into the
following two categories:

i) Project Loans for infrastructure sector

ii) Project Loans for non-infrastructure sector

Project Loan' would mean any term loan which has been extended
for the purpose of setting up of an economic venture. The branches should
fix Date of Commencement of Commercial Operations (DCCO) for all
project loans at the time of sanction of the loan/financial closure (in the
case of multiple banking or consortium arrangements).

31
Revised Guidelines on Asset Classification of Projects under
Implementation.
Project Loans for Infrastructure Sector

1. 1 A loan for an infrastructure project will be classified as NPA during any

time before commencement of commercial operations as per record of
recovery (90 days overdue), unless it is restructured and becomes eligible
for classification as 'standard asset'.

2. A loan for an infrastructure project will be classified as NPA if it fails to

commence commercial operations within two years from the original
DCCO, even if it is regular per record of recovery, unless it is restructured
and becomes eligible for classification as 'standard asset' .

3. If a project loan classified as 'standard asset' is restructured any time

during the period up to two years from the original date of commencement
of commercial operations (DCCO), in accordance with the provisions of
Part-B of the Master Circular dated July 1, 2013 on IRAC norms, it can be
retained as a standard asset if the fresh DCCO is fixed within the following
limits, and further provided the account continues to be serviced as per the
restructured terms.

a) Infrastructure Projects involving court cases Up to another 2 years

(beyond the existing extended period of 2 years i.e total extension of 4
years), in case the reason for extension of date of commencement of
production is arbitration proceedings or a court case.

b) Infrastructure Projects delayed for other reasons beyond the control of

promoters Up to another 1 year (beyond the existing extended period of 2
years i.e. total extension of 3 years), in other than court cases. It is
reiterated that the dispensation is subject to adherence to the provisions
regarding restructuring of accounts as contained in the Master Circular
on IRAC norms which would inter-alia require that the application
for restructuring should be received before the expiry of period of two
years from the original DCCO and when the account is still standard as per
record of recovery. The other condition applicable would be :

32
a. In cases where there is moratorium for payment of interest,
branches should not book income on accrual basis beyond two years
from the original DCCO, considering the high risk involved in such
restructured accounts.
b. Banks should maintain following provisions on such accounts as
long as these are classified as standard assets in addition to provision for
diminution in fair value:
For the purpose of these guidelines, mere extension of DCCO would
not be considered as restructuring, if the revised DCCO falls within the
period of two years from the original DCCO. In such cases the
consequential shift in repayment period by equal or shorter duration
(including the start date and end date of revised repayment schedule)
than the extension of DCCO would also not be considered as restructuring
provided all other terms and conditions of the loan remain unchanged
.As such project loans will be treated as standard assets in all respects,
they will attract standard asset provision of 0.40 per cent
In case of infrastructure projects under implementation, where
Appointed Date (as defined in the concession agreement) is shifted due to
the in ability of the Concession Authority to comply with the requisite
conditions, change in date of commencement of commercial operations
(DCCO) need not be treated as 'restructuring', subject to following
conditions:
a) The project is an infrastructure project under public private
partnership model awarded by a public authority;
The loan disbursement is yet to begin;
b) The revised date of commencement of commercial operations is
documented by way of a supplementary agreement between the
borrower and lender Project viability has been reassessed and sanction
from appropriate authority has been obtained at the time of
supplementary agreement

33
Project Loans for Non-Infrastructure Sector :

1. A loan for a non- infrastructure project will be classified as NPA

during any time before commencement of commercial operations

as per record of recovery (90 days overdue), unless it is
restructured and becomes eligible for classification as 'standard
assets.
2. A loan for a non-infrastructure project will be classified as NPA if it

fails to commence commercial operations within six months from the

original DCCO, even if is regular as per record of recovery, unless it
is restructured and becomes eligible for classification as
'standard asset'.
3. In case of non-infrastructure projects, if the delay in
commencement of commercial operations extends beyond the
period of six months from the date of completion as determined
at the time of financial closure, banks can prescribe a fresh DCCO,
and Retain the "standard" classification by undertaking
restructuring of accounts in accordance with the provisions
contained in Master Circular on IRAC norm provided the fresh
DCCO does not extend beyond a period of twelve months from the
original DCCO. This would among others also imply that the
restructuring application is received before the expiry of six
months from the original DCCO, and conditions applicable would be
i. In cases where there is moratorium for payment of interest,
branches should not book income on accrual basis beyond six
months from the original DCCO, considering the high risk involved
in such restructured accounts

34
 ii. Banks should maintain following provisions on such accounts
as long as these are classified as standard assets apart from
provision for diminution in fair value due to extension of DCCO
For the purpose of these guidelines, mere extension of DCCO would
not be
considered as restructuring, if the revised DCCO falls within the period
of one year from the original DCCO. In such cases the consequential shift
in repayment period by equal or shorter duration (including the start
date and end date of revised repayment schedule) than the extension
of DCCO would also not be considered as restructuring provided all
other terms and conditions of the loan remain unchanged. As such
project loans will be treated as standard assets in all respects, they will
attract standard asset provision of 0.4 per cent.

Other Issues:

1. All other aspects of restructuring of project loans before commencement

of commercial operations would be governed by the provisions of Part-B of
Master Circular on Prudential norms on Income Recognition, Asset
Classification and Provisioning Pertaining to Advances. Restructuring
of project loans after commencement of commercial operations will also
be governed by these instructions.

Any change in the repayment schedule of a project loan caused due to an

increase in the project outlay on account of increase in scope and size of
the project, would not be treated as restructuring if :

i) The increase in scope and size of the project takes place before
commencement of commercial operations of the existing project

35
ii) The rise in cost excluding any cost-overrun in respect of the original
project is 25% or more of the original outlay
iii) The bank re-assesses the viability of the project before approving
the enhancement of scope and fixing a fresh DCCO.
On re-rating, (if already rated) the new rating is not below the previous
rating by more than one notch.

3.10 ACQUISITION/MERGER OF N.P.A. UNITS : ACQUISITION :

It may so happen that one of the performing units of our Bank or an

existing good customer of ours comes forward with a request to acquire
another NPA unit of our Bank either in the same or in the different line of
activity. Such acquisition of non-performing units by the performing
unit/customer will be encouraged by us. The modalities of acquisition will
be decided by Head Office/Zonal Office on case to case basis.

MERGER:

On the same lines, an NPA unit may request us to give our permission for
its merger with any other unit. In both the above-mentioned two cases, the
acquiring unit may or may not be our Bank's customer in both these cases,
Head Office/Zonal Office will decide the terms of acquisition of merger on a
case to case basis. Branches/Zonal Offices should encourage such
acquisitions/mergers which are in the interest of the Bank and help the
Bank to reduce NPAs.

36
CATEGORIES OF NPAS STANDARD ASSETS
Standard assets are the ones in which the bank is receiving interest as well as
the principal amount of the loan regularly from the customer. Here it is also
very important that in this case the arrears of interest and the principal
amount of loan do not exceed 90 days at the end of financial year. If asset
fails to be in category of standard asset that is amount due more than 90
days then it is NPA and NPAs are further need to classify in sub categories.
Banks are required to classify non-performing assets further into the
following three categories based on the period for which the asset has
remained non-performing and the reliability of the dues: (1) Sub-standard
Assets (2) Doubtful Assets (3) Loss Assets
(1) SUB-STANDARD ASSETS: With effect from 31 March 2005, a sub
standard
asset would be one, which has remained NPA for a period less than or equal
to 12 month. The following features are exhibited by sub standard assets:
the current net worth of the borrowers / guarantor or the current market
value of the security charged is not enough to ensure recovery of the dues
to the banks in full; and the asset has well-defined credit weaknesses that
jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if deficiencies are not
corrected.

(2) DOUBTFUL ASSETS: A loan classified as doubtful has all the

weaknesses
inherent in assets that were classified as sub-standard, with the added
characteristic that the weaknesses make collection or liquidation in full, -
on the basis of currently known facts, conditions and values - highly
questionable and improbable. With effect from March 31, 2005, an asset

37
would be classified as doubtful if it remained in the sub-standard category
for 12 months.

(3) LOSS ASSETS: A loss asset is one which considered uncollectible

and of such little value that its continuance as a bankable asset is not
warranted- although there may be some salvage or recovery value. Also,
these assets would have been identified as „loss assets gi by the bank or
internal or external auditors or the RBI inspection but the amount would not
have been written-off wholly.
FACTORS FOR RISE IN NPAs

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

EXTERNAL FACTORS

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

WILLFUL DEFAULTS
There are borrowers who are able to pay back loans but are intentionally
withdrawing it. These groups of people should be identified and proper
measures should be taken in order to get back the money extended to
them as advances and loans.

38
 NATURAL CALAMITIES
This is the measure factor, which is creating alarming rise in NPAs of the
PSBs. every now and then India is hit by major natural calamities thus
making the borrowers unable to pay back there loans. Thus the bank
has to make large amount of provisions in order to compensate those
loans, hence end up the fiscal with a reduced profit.
 INDUSTRIAL SICKNESS
Improper project handling , ineffective management , lack of adequate
resources , lack of advance technology , day to day changing govt. Policies
give birth to industrial sickness. Hence the banks that finance those
industries ultimately end up with a low recovery of their loans reducing
their profit and liquidity.

LACK OF DEMAND
Entrepreneurs in India could not foresee their product demand and
starts production which ultimately piles up their product thus making
them unable to pay back the money they borrow to operate these
activities. The banks recover the amount by selling of their assets, which
covers a minimum label. Thus the banks record the non recovered part
as NPAs and has to make provision for it.

 CHANGE ON GOVT. POLICIES

With every new govt. banking sector gets new policies for its operation.
Thus it has to cope with the changing principles and policies for the
regulation of the rising of NPAs.

39
INTERNAL FACTORS

• DEFECTIVE LENDING PROCESS

There are three cardinal principles of bank lending that have
been followed by the commercial banks since long i.)Principle
of safety ii.) Principle of liquidity iii.) Principle of profitability
INAPPROPRIATE TECHNOLOGY
Due to inappropriate technology and management information
system, market driven decisions on real time basis cannot be taken.
Proper MIS and financial accounting system is not implemented in
the banks, which leads to poor credit collection, thus NPAs. All the
branches of the bank should be computerized.
 IMPROPER SWOT ANALYSIS
The improper strength, weakness, opportunity and threat
analysis is another reason for rise in NPAs. While providing
unsecured advances the banks depend more on the honesty,
integrity, and financial soundness and credit worthiness of the
borrower.
 POOR CREDIT APPRAISAL SYSTEM
Poor credit appraisal is another factor for the rise in NPAs. Due to
poor credit appraisal the bank gives advances to those who are not
able to repay it back. They should use good credit appraisal to
decrease the NPAs.

40
 MANAGERIAL DEFICIENCIES
The banker should always select the borrower very carefully and
should take tangible assets as security to safe guard its interests.
When accepting securities banks should consider the:
1. Marketability
2. Acceptability
3. Safety

TRANSFERABILITY

The banker should follow the principle of diversification of risk based

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

• ABSENCE OF REGULAR INDUSTRIAL VISIT

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

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

41
RE LOANING PROCESS:

Non remittance of recoveries to higher financing agencies and re-loaning of

the same have already affected the smooth operation of the credit cycle.
The developing economy has been much affected due to high fiscal
deficit, poor infrastructure facilities, sticky legal system, cutting of
exposures to emerging Markets by Financial Institutions, etc. Under such
a situation, it goes without saying that banks are no exception and are
bound to face the heat of a global downturn. Bankers have realized that
unless the level of NPAs is reduced drastically, they will find it difficult to
survive. The core banking business is of mobilizing the deposits and
utilizing it for lending to industry. Lending business is generally
encouraged because it has the effect of funds being transferred from
the system to productive purposes which results into economic growth.
The debtor take the funds from the bank in the form of credit and he
have to payback the principle amount with the interest to the creditor
as a result the creditor (Bank)gets the profit in the form of interest and
again this profit is reinvested leading to the growth of the economy.
However lending also carries credit risk, which arises from the failure of
borrower to fulfil its contractual obligations either during the course of a
transaction or on a future obligation. Due to non performance of the fund
the financial institutions become bankrupt and failed to provide investors
with clearer and more complete information thereby introducing a
degree of risk that many investors could neither anticipate nor
welcome. The history of financial institutions also reveals the fact that
the biggest banking failures were due to credit risk. As a result, banks
nowadays are restricting their lending operations to secured avenues
only with adequate collateral security over which the company can
overtake its right of authority. What is needed is having adequate
42
preventive measures in place namely, fixing pre-sanctioning appraisal
responsibility and having an effective post-disbursement supervision.
Banks concerned should continuously monitor loans to identify accounts
that have potential to become non-performing. However, increasing NPAs
have a direct impact on banks profitability, as legally banks are not
allowed to book income on such accounts and at the same time banks are
forced to make provision on such assets as per the Reserve Bank of India
(RBI) guidelines. Also, with increasing deposits made by the public in the
banking system, the banking industry cannot afford defaults by
borrower s since NPAs affects the repayment capacity of banks.

IMPACT OF NPA IN BANKING OPERATIONS

The efficiency of a bank is not reflected only by the size of its balance sheet
but also by the level of return on its assets. The NPAs do not generate
interest income for banks. At the same time, banks are required to
provide provisions for NPAs from their current profits. The NPAs have
deleterious impact on the return on assets in the following ways:

a. The interest income of banks will fall and it is to be accounted

only on receipt basis.
b. Banks profitability is affected adversely because of the providing
of doubtful debts and consequent to writing it off as bad debts.
c. Return on investments (ROI) is reduced.
d. The capital adequacy ratio is disturbed as NPAs enter into its
calculation.
e. The cost of capital will go up.

43
 CHAPTER -4

DATA ANALYSIS
&
INTERPRETATION

44
4.1 DATA ANALYSIS
Present Scenario of Priority Sector

During the period 2001-2013, three distinct phases are discernible in terms of growth in gross
advances and growth in gross NPAs.

(a) First Phases 2001 to 2006: This period was marked by a sharp decline in the growth of
gross NPAs and gradual acceleration in the growth of credit . In fact, during the pre-crisis
period, bank credit expanded at a robust pace, averaging at over 25 per cent. Several factors,
such as increased financial deepening, increased competition, improvement in asset quality of
banks and rapid product innovations contributed to the rapid credit expansion. Infrastructure,
SMEs, farm credit and retail sectors primarily powered the growth of bank credit during this
period (RBI, RCF, 2008).

As a result of various reform measures, there was significant improvement in the asset
quality, particularly from the year 2000, partly as a result of expansion of loan volumes and
partly on account of vv-rite-offs and recovery of past dues. Thus, rapid credit expansion from
2002-03, to an extent, was encouraged by improvement in asset quality as credit
intermediation function was impaired in the mid-1990s on account of high level of NPAs
(RBI, RCF, 2007).

(b) Second Phase: 2006 to 2009: This period witnessed a reversal in the earlier trends with
growth in NPAs showing a sharp spurt and growth in credit registering a gradual slowdown.
This was also a period when the divergence between the growth in credit and NPAs narrowed

45
down. In the post-crisis period, credit growth averaged at around 19 per cent partly on
account of the pressures from global financial crisis. Banks and other financial institutions
were impacted by the indirect spillovers of the crisis during 2008-09. Indian banks faced the
stress because foreign investors pulled out of the economy and created a liquidity crunch.
There was suddenly less money available to borrow or lend. The tight global liquidity
situation in the period immediately following the failure of Lehman Brothers in mid-
September 2008, coming as it did on top of a turn in the credit cycle, increased the risk
aversion of the financial system and made banks cautious about lending (Subbarao, 2009)

(c) Third Phase: 2009 to 2013: During this period, growth in credit as well as NPAs slowed
down in 2010. However, by end-March 2012, there was a sharp contrast in the movement of
both, with credit growth witnessing a sharp contraction and growth in NPAs trending up.
NPAs grew at around 46 per cent as at end March 2012, far outpacing credit growth of
around 17 per cent. This widening divergence in the growth of credit and NPAs has
implications for the asset quality in the near term. The decline in credit growth during this
period could be attributed to the general economic slowdown that set in as a result of
combination of domestic and global factors.

Accretion to NPAs is a critical indicator of efficiency in credit risk management Banks need
to bring down fresh additions to NPAs to improve the quality of their asset portfolio. In
consonance with the trends in gross NPAs, the accretions to NPAs was considerably curtailed
during the period 2003-2007, but increased significantly thereafter. The incremental NPAs
46
remained negative in most of the years prior to the year 2008. A sharp decline in incremental
NPAs reflected significant improvement in credit appraisal, improved risk management and
better resource allocation process (RBI, RCF, 2007). The incremental NPAs as percentage of
incremental gross advances, which were as low as -0.3 per cent as at end-March 2007
increased significantly thereafter to over 6.6 per cent by end-March 2013.

Movement of NPA:

47
NPA interpretation-in increased i 1 I(Amount 11 I I I II I I I50 include all assets that are
classified the year 2009 as non-performing by the bank. net npa to net advance% was 1.17
which was further increase in npa in the year 2011,In 2012 npa was a decrease in net npa in
the year 2013 ie 2.38. to L84 in 2010 there was 0/0 rised to very high ie 3.17 and there
Sector- wise NPAs.

Sector- wise NPAs

48
4.2 INTERPRETATION:

Position of position sector advances in UCO % is 42.71% in 2014 as compared to 32.13% in

% .The agricultural sector advance % has a NPA of in 2013 which shows increase in npa in
agriculture from9.49% in 2013 to 11.17% in 2014. The percentage composition of sector
wise Bank in priority sector advance sector 2013. It shows there is a increase in npa 13.68%
in 2014 as compared to 11.6% and in advance to weaker sections it increased shows a
increase in NPA which is not good for the bank.

1- Agriculture

2- Industry

3- Services

4- Personal Loans

Interpretation: The percentage composition of NPAs in UCO Bank in agriculture sector

is 6.8% in 2014 as compared to 6.73% in 2013.the micro and small enterprises sector has a
NPA of 7.34% in 2014 as compared 7.07% in 2013 and in service sectors it increased by
6.06% in 2014 as compared to 6.02% in 2013. This shows a increase in NPA which is not
good for the bank.

49
 Bank-wise and Bank Group-wise Gross Non-Performing Assets, Gross
Advances, and Gross NPA Ratio of Scheduled Commercial Banks - 2014

(Amount in Million)

Banks

As on March 31, 2014

Gross NPAs Gross Advances Gross NPAs to

50
51
52
Source :Department of Banking Supervision, RBI

 CAUSES OF RISE IN NPA:

One of the reasons for the accumulation of large portfolio of NPAs with banks is that

the lending is not linked to productive investment and the recovery of credit is not linked to

product scale. The borrowers are mainly farmers and small scale industries owner whose

financial conditions are generally weak. The volume of bank credit tacked in sick industries

is the evidence of this malady. Sometimes it is found that an advice is given by BIFR or the

directions are given by the various courts to the banks' that they should provide loans to sick

industries. This type of practice is aggravating NPAs situation. Another reason for high NPAs

is the faulty lending policy and making lending compulsory to priority sector by banks. There

are many other causes which are also responsible for accumulation of NPAs. Many of these

causes are related to faulty credit management like defective credit recovery mechanism, lack

of professionalism in the work force, time lag between sanctions and disbursement of loan,

unscientific repayment schedule, mis utilization of loans by user, untimely communication to

the borrowers regarding their due date, lack of sponge legal mechanism, politics at local

levels and waive-off policy of loan by government ( in year 1991 and 2008) etc have also

been contributing to mounting NPAs in SCBs in India .

 NPA RECOVERY MEASURES

 PREVENTIVE MEASURES

1. Timely Disbursement Of Loan To Avoid Cost And Time Over-Run.

2. Ensure Proper End-Use Of Bank Funds.

3. Over-Financing And Under-Financing To Be Avoided.

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4. Ensure Compliance Of Sanction Terms.

5. Margin As Per The Credit Plan To Be Ensured.

6.Insurance Of Stocks/Premises To Be Made/Renewed With Relative Bank Clause.

7. Assumptions And Progress Of The Unit As Per Accepted Credit Sanction Terms To Be
Adhered

8. Make Follow Up Visits Of Borrowal Accounts.

9. Inspection Of Stock/Unit At Regular Intervals

10. Operations In The Account.

11.Make Review/Renewal Of Accounts In Time.

CURATIVE MEASURES

 Due to avoidable and or unavoidable reasons the performing accounts sometimes goes
bad and becomes NPA .
 Causes of the account turning NPA may be scanned and suitable remedial measures
may be initiated to reduce NPA.

NON-LEGAL MEASURES

1. Reminder System.

2. Visit To Borrower's Business Premises/Residence. Mao

3. Recovery Camps.

4. Rephasing Unpaid Loan Installments.

5. Rehabilitation Of Sick Units.

6. Loan Compromise.

7. Appointment Of Professional Agencies,

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OTHER MEASURES

8. staff incentives.

9. Incentives to advocates.

10 loan write-offs.

11 Adj of subsidy, invocation of insurance claims, if any.

12 branch to designate one/two officer(s) as recovery officer

13 Allotment of npa .

14 services of the ldm/ sarpanch/ vvv

LEGAL MEASURES

1. Debt Recovery Tribunal.

2. Corporate Debt Restructuring.

3. Lok Adalat.

4. Asset Reconstruction Company

5. Civil Courts

6. Sarfaesi Act.

7. Circulation of List Of Defaulters.

8. Bouncing Of Cheques.

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1. SARFAESI Act

The legal mechanism for recovery of default loans was so far cumbersome and time-
consuming. Thus, it was felt that banks and financial institutions should be given the power
to sell securities to recover dues. In this regard, the Government of India appointed a
committee under the chairmanship of Shri T R Andhyarujina, senior Supreme Court advocate
and former Solicitor General of India, in 1999 to look into these matters. The Committee
submitted four reports. One of them is related to securitization. Based on the
recommendations of the Andhyarujina Committee, The Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, was passed
on December 17, 2002. The act provides enforcement of the security factor without recourse
to Civil suits. This act was passed with the aim of enabling banks and financial institutions to
realise long term assets, manage the problem of liquidity, reduce asset liability mismatches
and improve recovery by taking possession of securities, selling them and reducing NPAs.
The ordinance also allows banks and financial institutions to utilise the services of ARCs/SCs
for speedy recovery of dues from defaulters and to reduce their NPAs. The ordinance
contains provisions that would make it possible for ARCs/SCs to take possession directly of
the secured assets and/or the management of the defaulting borrower companies without
resorting to the time-consuming process of litigation and without allowing borrowers to take
shelter under the provisions of SICA/BIFR. In addition to passing the SARFAESI Act ,
certain other legal reforms were also introduced to speed up the loan recovery process.

2. Other Legal Reforms One of the important factors responsible for the ever-increasing level
of NPAs in the Indian banking industry is the weak legal system. According to an
international rating agency called FITCHIBCA, "The Indian legal system is sympathetic
towards the borrowers and works against the banks' interest. Despite most of their loans being
backed by security, banks are unable to enforce their claims on the collateral when the loans
turn non-performing, and therefore, loan recoveries have been insignificant." However,
efforts have been made to rectify these problems through the judicial process as well as by
enacting laws. In 1999, a standing committee under the aegis of Industrial Development Bank
of India (IDBI) was constituted to initiate a co-ordinate approach to the recovery of large
NPA accounts and for institutionalizing an arrangement between banks and financial
institutions for the systematic exchange of information in respect of large borrowers
(including defaulters and NPAs). Moreover, as mentioned above, in 2002 the SARFAESI Act
was passed and it empowered the creditors to foreclose non-performing loans and the

56
underlying collateral without going through a lengthy judicial or tribunal process (Basu,
2005). All these efforts improved the recovery of NPAs by commercial banks, which in turn
has helped in reducing the NPA level. The total worth of NPAs recovered through various
channels was around Rs 4,039 crore during 2003-04, which increased many fold to Rs 20,578
crore during 2004- 05.

Using the new institutions and legal options, banks and financial institutions accelerated their
recovery of NPAs. Between 2003-04 and 2005-06, the total cases referred to various
institutions was 93,2377 which was worth about Rs 70,226 crores. Out of this, around Rs
19,075 crore was recovered. In terms of cases, the highest number (5,53,042) was referred to
the Lok Adalats and the lowest (15,812) to the DRTs. In terms of the amount involved, the
DRTs recovered the highest amount of around Rs 32,745 crore and Lok Adalats the least,
around Rs 2,965 crore. In terms of the recovery, 58 per cent of the amount involved was
recovered through one-time settlement/compromise schemes. DRTs recovered around 29 per
cent and Lok Adalats recovered around 16 per cent , while 22 per cent of the amount was
recovered under the SARFAESI Act.

57
CHAPTER-5
FINDING &
SUGGESTIONS
CONCLUSION

58
 5.1 MAJOR FINDINGS:

 On the study of important aspects of NPA level in Priority Sector of UCO bank of

the states the following observations are pointed out.

 The findings are based on the information provided by UCO Bank, Bhubaneswar

Main Branch, Bhubaneswar where the study has been done. The analysis does

not reveal or relate to the aggregate performance of UCO Bank as a whole.

 The findings are focused on the performance of UCO Bank and the NPA level in

Priority Sector of the bank.

Findings on NPA Level in the State

 Observation of change in the amount of NPA level in UCO Bank

 The Bank has been showing significant performance in lending to Priority sector

over the years and has been effectively servicing to the priority sector and

agriculture with its vast network of rural and semi-urban branches.

 The Bank has two unique schemes - (1) "UCO Uthaan"-for upliftment of BPL

families & (2) "UCO Samagra Gramin Vikas Yojna" - Adoption of villages for its all

round development

59
  The Bank has two unique schemes - (1) "UCO Uthaan"-for upliftment of BPL

families & (2) "UCO Samagra Gramin Vikas Yojna" - Adoption of villages for its all

round development

 The Bank has adopted 12 villages in 4 states i.e. Odisha, Rajasthan, Uttar Pradesh

& West Bengal for upliftment of BPL families under UCO Uthaan Scheme

 UCO Samagra Gramin Vikas Yojna : For all-round development of village.The

Bank has adopted 10 villages in 6 states i.e. Gujarat, Himachal Pradesh, Odisha,

Kerala, Uttar Pradesh & West Bengal for its all round development under UCO

Samagra Gramin Vikas Yojna.

 The increase in volume of impaired assets over previous years was due to fresh

slippages during the period over its previous years on account of various reasons

which include legacy angle. ❖ Main reason of high level of NPA is due to the

global recession coupled with economic slowdown in the country.

 Moreover, the Bank has changed its business model from its earlier Bulk

business to Retail business for last two-three years which has likely helped in

arresting higher slippages in the Bank.

 The performance of recovery & up gradation in NPA accounts during the FY

2013-14 has substantially improved over the previous years. Recovery
performance in the current FY is more than double the figure of corresponding
period of the last year.

•The NPA level in the UCO bank is quite low and also the lowest from all other banks.

•NPA statements are reviewed every fortnight to have a check on the amount of NPA
generated.

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5.2 SUGGESTIONS

 More business tie ups with various companies and other banks can yield better

results

 ABC analysis of NPA portfolio is done for minimizing NPAs through up-gradation

and cash recovery, particularly for freshly generated NPAs wherever immediate

scope of recovery is there.

 Initiation of actions under SARFAESI Act immediately in case the unit is not

viable after the account becomes NPA in all eligible accounts followed by taking

possession and auction sale of the property.

 Decreed cases, where details of assets of borrowers and/or guarantors are not

available, are being handed over to the detective agency for identification of their

other unencumbered assets, if any.

 Quality of infrastructure in the state are needed to be improved •:. Stringent

actions should be taken for the defaulters for the repayment of loans. •:. High

level of verification including KYC forms and Adhaar cards should be mandated

for the customers by the banks. ❖ High level of security verification can be

achieved by outsourcing to some Third- Party Company. This will decrease the

number of defaulters.

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5.3 CONCLUSION

UCO Bank, the banking arm of UCO is expected to go on stream. The bank already

has good number of employees on board and is recruiting personal banker heavily to

take the headcount to many more. It is on the brim of increasing its customers through

its attractive schemes and offer. The NPA level of the bank in the country as well as the

state is lowest among all other private and public sector banks.

The NPA is the root cause of the global financial crisis that we observed recently.

The world is still trying to recover from the after-effects of the crisis. The problem of

NPA has received considerable attention after the liberalization of the financial sector in

India. Accounting norms have been modified substantially and mechanisms are in place

for reduction of bad loans.

NPA in the state is increasing highly due to the recent scam of mining. The State

bank of India has the highest defaulter. Therefore there should be proper verification

and security measures to tackle the NPA level of the state.

62
 BIBLIOGRAPHY

BOOKS REFERRED TO:

 Kothari, C.R.(2010), "Research Methodology: Methods And Techniques",

 Wishawa Publication, Delhi.
 Srivastava, R.M., Nigam, Divya, (2010), "Management of Indian Financial
Institutions", Himalaya Publication House.
 Sarda(1998) Management of NPA in Commercial Banks in Odisha, An Empirical
analysis by Tanmay Ku Pradhan-International Journal.
 Rao(1999),C Hari Vithal, Lok Adalat: An Effective Forum for NPA Reduction ,Indian
Banks Association Bulletin,21(6),June 1999.
 Bansal and Bansal(2001) , Deepak Bansal, Associate Proffessor ,Gnit group of
institition,Noida ,In an article of Indian Banking Industry in changing phase at present
time,July 28.
 Satish kumar(2008) (Corresponding Author) Department of management
Studies,Indian Institute of Technology Roorkee.

BANK DOCUMENTS

 Trainee Manual on Loans/Advances

 Trainee Manual on NPA Management

WEBSITES REFERRED:

 www.ucobank.com

 www.wiki: edia.com

 www.reportbuyer.com

 www.moneycontrol.com

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