INTRODUCTION OF BANKING

The development of banking is an inevitable precondition for the healthy and rapid of the national economic structure. Banking institutions have contributed much to the development of the developed countries of the world. Today we cannot predict the business world without banking institutions. Banking is as important as blood in the human body. Due to the development of banking advances are increased and business activities developing so it is rightly said, " The development of banking is not only the root but also the result of the development of the business world." After independence, the Indian government also has taken a series of steps to develop the banking sector. Due to considerable efforts of the government, today we have a number of banks such as Reserve Bank of India, State Bank of India, nationalized commercial banks, Industrial Banks and cooperative banks. Indian Banks contribute a lot to the development of agriculture, and trade and industrial sectors. Even today the banking system of India possess certain limitations, but one cannot doubt its important role in the development of the Indian economy as for every work finance is being needed and at earlier time when an individual need money he approaches the moneylender who exploit him by charging unfair rates but with emergence of banking everything is changed every sector of the society is being served it may be industrial agriculture or commercial etc DEFINITION ACCORDING TO KENT a bank is an organization whose principal operations are concerned with the accumulation of the temporarily idle money of the general public for the purpose of advances to others for expenditure

INTRODUCTION OF CO-OPERATIVE BANK

Unlike commercial banks which are engaged in serving industrial and commercial sectors of the economy, the cooperative rural banks on the other hand provide credit and allied facilities to the rand agricultural sectors. The dawn of this country saw the evolution of the cooperative movement in India. Cooperative societies came into being when the Cooperative Societies Act, 1904, was enacted. The movement was started with the aim of providing farmers funds with low rates of interest so that exploitation by the village moneylenders is foiled. The Act provided for the formation of cooperative credit societies and a number of small primary credit societies were established in various part of the country. These societies, however, could not mobilized enough resources as compared to loans demanded by its members. This led to the enactment of a new act in 1912. The Cooperative Societies Act of 1912 provided for starting Central Cooperative Banks with headquarter located in urban centers. In 1914, necessary steps were taken by the then government to strengthen the cooperative movement.The government appointed the Mac lagan Committee to look into and make recommendations for the improvement of a State Cooperative Bank for each State. The state Cooperative Bank is formed by the federation of Central Cooperative Banks functioning at the district level. The present organization of the cooperatives in India is based on the recommendation made by the Mac lagan Committee. In 1919, the Montague Chelmsford Act made Cooperation a provincial subject. Since then, separate Cooperative Societies Acts have been passed by all state governments. Although cooperative banks in India have shown progress since the establishment, there still exists a number of defects in the organization. This has led qualitative improvement to suffer. However, Reserve Bank of India took the initiative to revitalize, reorganize and promote the growth of cooperative banking in India. Under the Banking Regulation Act of 1949, Cooperative banks have been brought under the control of the Reserve Bank of Bank. Farmers in India are scattered all over the country and need short-term small borrowings for agricultural purposes. This need is not fulfilled by commercial banks which are unsuited for financing agriculture. Land which these farmers can offer

to cover bank advances is not generally accepted as security by commercial bank Therefore, special types of banks are necessary for the financing of agriculture. Co-operative banks are best suited for this purpose. The object of co-operative banks is to offer banking facilities to persons of limited means requiring credit for productive purposes in the use of the land and lab our at their disposal. The co-operative banking structure in India may be divided into three component parts, viz., 1. Primary co-operative credit societies. 2. Central / district co-operative banks. 3. State co-operative banks (also called as apex banks) at the top

Co-operative banking structure

Primary Co-operative credit society

central /district co-operative bank

State Co-operative bank

1. Primary co-operative credit societies: Primary credit society is at the bottom of the three-tier structure of co-operative banks The society normally contacts farmers. So, only a few people living within the area of society are admitted as members. Here individuals of a particular area meet together inspired by sentiment of cooperation. Every member has to pay his share In a share capital. The price of a share is nominal so that even a

common man can be a member. The functioning of such society is limited. The society is managed by elected people. Hon-secretary and members of working committee. Such a society collects its funds by admission fees ,share capital and deposit of people. In case of need such society also get finance from central co-operative banks or state co-operative bank. Normally society grants loans to members on individual responsibility. 2. District co-operative Bank: This bank is a link joining state cooperative bank with the primary credit society. After the report of all India rural advances inquiry committee in 1945, the central cooperative banks earned much importance the flow of rural advances reach to every farmer's home through this bank via credit society. In reality central co-operative banks were establish to supply financial help to primary credit society. 3. State Co-operative Banks: This is the apex bank in the three tier structure set up of the country. MacLean Committee appointed in 1974 recommended to establish at least one state co-operative bank per state. To day every state has the state co-operative bank. This bank especially cooperative ordinates them and give required guidance. There were approximately 26 state co-operative banks at the end of 77/78 in India. Since state co-operative bank is an apex bank, its main function is co-ordination of co-operative lending, its balance and controlling. The financial help for cooperative lending activity given by Reserve Bank is also given through state co-operative bank.

HISTORY OF BANK
Punjab state co-operative bank established on 31 august 1949 at SHIMLA via registration no 720 has a principle financing institution the co-operative movement in Punjab. In 1951 its head office was shifted to JALANDHAR from where it moved in 1963 to its present building at CHANDIGARH .It has 18 branches 3 extension counter in CHD .There are 19 district central co-operative bank having 813 branches all over Punjab mostly in rural area of state one new central co-operative bank and 110 new bank branch have been opened during last 4 years (1997-2007) in central co-operative bank structure PSCB is extremely important as whole credit system revolve around AMRITSAR central co-operative bank independently established in 1980 it has a 50 members in a bank it has a important place in public sector bank. It has provided many type of loan to his customer

STAFF OF A BRANCH
manager assistant manager accountant clerks peons

PRODUCT OF BANK
Short & medium term loan Long term loan Deposits Locker facility

Note-mainly for agriculture financial support

OBJECTIVES
The main objective of behind this project is to analysis the actual position of NPA deeply To know about the NPA classification and provisioning requirement for non-performing assets To know the criteria for treating a loan account as NPA To learn about how to solve the problem of NPA

RESEARCH METHODOLOGY
Research methodology is a method to solve the problem systematically and objectively .It involve collection of relevant data ,use of appropriate technique ,interpretation and by drawing conclusion about the research problem There are two type of data collection Primary data Secondary data The project is based on non performing assets For my study I have selected secondary data as a source of data collection Secondary sources Websites Annual reports

INTRODUCTION
As a major element of the Financial Sector Reforms in India, RBI introduced prudential norms for banking regulation. Capital adequacy, exposure ceilings for lending to individual and group of borrowers, marking to market of the investment portfolio and, income recognition, asset classification and provision norms for the loan portfolio (IRAC in short) formed the core of prudential regulation. The IRAC norms serve two primary purposes (i) to depict the true position of a bank's loan portfolio and (ii) to help arrest its deterioration. The Committee on Financial System (CFS), under the Chairmanship of SHRI M .NARASIMHAM,recommended a policy of income recognition and asset classification based on record of recovery and other objective criteria as also provisioning based on the classification of assets into different categories. RBI largely accepted the recommendations of the CFS and introduced the IRAC norms for the Urban Cooperative Banks (UCB) in a phased manner over a three-year period from the year 1992-93

NON PERFORMING ASSETS

A non performing asset is defined generally as a credit facility in respect of which interest or installment of principal is in areas for two quarters or more, however, in respect of agriculture advances if interest has not been paid during the last two harvest seasons ( covering two half years) after it has become a past due (i.e. days beyond the due date). Such advances should be treated as NPA. It is important to note that the overdue installment only as per the guidelines of RBI on prudential norms. Past due was replaced by overdue with effect from the year ended March 31, 2001.Any dues to a bank under a credit facility will be overdue if not paid by the due date fixed by the bank .RBI implemented the 90 days delinquency norm for NPA classification

TREATING A LOAN ACCOUNT AS NPA

The criteria for treating a loan account as NPA depend on the nature of facility as under:
(i) Term loan:

A term loan is to be classified as NPA if interest and / or principal remained overdue for more than90 days. (ii) Cash credit and overdraft account: A cash credit / overdraft account is classified as NPA if the account is out of order for more than 90 days. An account is treated as out of order if the balance outstanding is continuously in excess of the sanctioned limit or drawing power (whichever is lower) or where the outstanding balance in the Principal operating account is within the sanctioned limit or drawing power, but there are no credits continuously for 90 days as on the date of balance sheet, or credits made are not enough to cover the interest debited during the same period. (iii) Bills purchased and discounted: A bill is treated as NPA, if it remains overdue and unpaid for a period of more than 90 days.Overdue interest should not be charged or taken to income account in respect of overdue bills, unless it is realized. (iv) Other credit facilities: Any other credit facility is to be treated as NPA, if it remains outstanding for a period of more than 90 days. (v) Agricultural advances: In case of all direct agricultural advances, effective September 30, 2004 an account should be treated as NPA if interest and / or installments of principal remained overdue for two crop seasons from the due date for short duration crops and one crop season from the due date for long duration crops. Long duration crops have a crop season longer than one

year and crops, which are not long duration crops are treated as short duration crops. Depending upon the duration of crops raised by a farmer, the above NPA norms would also be applied to agricultural term loan availed of by him. The crop season for each crop, which means the period up to harvesting, has to be decided by the State Level Bankers Committee in each state. In respect of other activities like horticulture, floriculture or allied activities such as animal husbandry, poultry farming etc., NPA classification would be done on 90 days impairment norm as in the case of other advances. FEW EXCEPTIONS
a) Housing loans to staff members:

Housing loans or similar advances granted to staff members, Housing loans or similar advances granted to staff members, where interest is payable after recovery of principal should be classified as NPA only when there is a default in payment of interest on due date. (b) Project finance: In the case of project finance, (industrial) where moratorium is allowed for payment of interest /principal, the respective amounts will become due only after moratorium / gestation period is over. (c) Credit facilities guaranteed by Government Credit facilities backed by Central Government guarantee, though overdue, should not be treated as NPA. Therefore, no provision is required to be made on such accounts. Interest on such advances, however, should not be taken to income account unless it has been actually realized. From the year ended March 31, 2006, State Government guaranteed advances and investments in State Government guaranteed securities would attract extant IRAC norms, if interest and / or principal or any other amount due to a bank remains overdue for more than 90 days. A bank is not required to invoke the guarantee before classifying such advances / investments as NPA.

(d) Advances affected by natural calamity Where natural calamities impair the repaying capacity of the agricultural borrower, CB may consider (i) converting the crop loan in to an agricultural term loan or rescheduling the repayment period and ii) sanctioning fresh short-term loans. In such cases, the term loan or the fresh short-term loan will be treated as current dues and need not be classified as NPA. Asset classification of these loans will be governed by the revised terms and conditions and these would be classified as NPA as per the extant norms applicable for classifying agricultural advances as NPA .

Causes of NPA
Slow ,inefficient legal system In adequate and improper credit appraisal system Wrong utilization of loan and subsidies Diversion of fund Improper supervision and follow up after sanction Resistance among banks for compromising with the loans

ASSETS CLASSIFICATION Standard assets

Standard assets is one which does not disclosed and problem and which does not carry more than normal risk attached to business. Thus an assets, which is not NPA, may be treated as standard or Good assets. Such account holders/customers pay interest in cash regularly on prescribed dates and repay the amount of installment of loan on the due dates or before the grace period if granted

Sub standard assets.

A non-performing asset may be classified as sub-standard asset when the asset had remained overdue for a period not exceeding three years. An asset where the terms and conditions of the loans regarding payment of interest and repayment of principals have been renegotiated or rescheduled should be classified as substandard for the last two years of satisfactory performance. Performance can be judged from the recovery of interest and repayment of installment of principal of loan credit facility.

Doubtful Assets
A non-performing asset may be classified as doubtful asset when the asset had remained overdue for a continuous period exceeding three years LOSS ASSETS Loss asset are those where loss was identified by the bank auditor/RBI/NABARD inspections but the amount has not been written off wholly or partially. An asset which is considered unrealizable and/or of such little value that its continuance as a doubtful asset is not worthwhile, should be considered as loss asset.

CATEGORY

FEATURES

Standard assets

Assets which do not disclose any problem do not carry more than normal risk attached to the business such assets are not NPA

Sub standard

Effective from year 31st march 2005 assets are classified as sub standard if they remain non performing for less than or equal to 12 months .they have well defined credit weakness and are featured distinct possibilities that the bank will sustain some loss if the deficiencies are not rectified where the terms of loan agreement relating to payment interest & repayment principal have been negotiated or rescheduled after commencement of production should be classified as sub standard and retain as such for at least 1 year of satisfactory performance under renegotiated term Effective from year 31 mar 2005 assets are classified as doubtful if they remain non performing for more than 12 months they have all weakness inherent in sub standard assets with add feature that collection or liquidation of dues is highly improbable

Doubtful assets

Loss assets

These are assets where loss has been identified by the bank or internal/external auditors or RBI inspection but amount has not been written off wholly or in part such assets are considered uncollectible and of so little value that their continuance as bankable assets is not warranted even though there may be some salvage or recovery value

GUIDELINES FOR ASSETS CLASSIFICATION

Assets are to be classified generally on the basis of well-defined credit weaknesses and the extent of dependence on collaterals for realization of dues. Net worth of borrower / guarantor should not be taken into account while determining whether an advance is NPA Banks should bear in mind the following RBI guidelines for asset classification . (i) Identification of assets as NPA on on-going basis Banks should identify assets as NPA on an on-going basis. They should evolve a system to eliminate the tendency to delay or postpone identification of NPA, particularly in respect of high-value accounts They should internally resolved doubts regarding assets classification within one month of the date by which the account would have been classified as NPA as per prescribed norms .

(ii) Treatment of accounts as NPA a) Record of recovery The classification of an asset as NPA has to be done on the record of recovery. Banks should not classify an account as nonperforming due to the existence of temporary deficiencies such as balance exceeding limit, non-availability of adequate drawing power, non submission of stock statement or non-renewal of accounts on due date. If an account is regularized before the balance sheet date by repayment of overdue through genuine sources (not by sanction of additional facilities or transfer of funds between accounts), the account need not be treated as NPA. It should, however, be ensured that the account remains in order subsequently and a solitary credit made in the accounts near about the balance sheet date to extinguish the overdue interest or installments of principal is not reckoned as the sole criterion for treating the account as a standard asset. In other genuine cases, banks must furnish to the Statutory Auditor / RBI Inspecting Officer satisfactory evidence of regularization of the account (b) Borrower-wise and not facility-wise

Where one credit facility extended to a borrower becomes NPA, all the other facilities, even if the operations in those accounts are satisfactory, are required to be treated as NPA. (iii) Potential threats to recovery In respect of accounts where there are potential threats to recovery on account of erosion in the value of security or existence of factors such as frauds committed by borrowers, such accounts should be straightway classified as doubtful or loss asset, as the case may be irrespective of the period for which they have remained as NPA. Similar treatment should be provided to accounts where there is significant erosion in value of security, i. e. less than 50% of the value assessed by the bank or accepted by RBI at the time of last inspection.

(iv) Classification as NPA for arrears in submission of stock statements Outstanding in the account based on drawing power calculated from stock statements older than three months would be considered as irregular. A working capital account will be classified as NPA if such irregular drawings are allowed for more than 90 days . (v) Classification as NPA for non-review or non-renewal of limits An account where regular / ad-hoc credit limits are not reviewed or not renewed within 90 days from the due date or date of ad-hoc sanction will be classified as NPA. (vi) Treatment of loss assets If the realizable value of the security, as assessed by the bank or approved value or RBI, is less than 10% of the outstanding in the borrowers account, existence of security should be ignored and the account should be classified straightway as a loss asset

(vii) Classification of accounts under consortium Asset classification of accounts under consortium will be done on the record of recovery in individual banks. However, where remittances by the borrower under consortium lending arrangements\ are pooled with one bank, and that bank does not part with the share of a member bank, the account in the member bank will be treated as not having been serviced and will be treated as NPA as per extant norms . (viii) Fixing realistic repayment schedules PCBs should fix monthly / quarterly installments for repayment of gold loans for non-agricultural purposes after taking in to account the income generation pattern and repayment capacity of the borrower. Such gold loans should be classified as NPA if interest and / or

installment remain overdue for more than 90 days. In case of gold loans for agricultural purpose, interest has to be charged at yearly intervals as per the Supreme Court judgment and payment should coincide with harvesting. Such advances will be NPA only if installment and / or interest become overdue after the due date.

PROVISIONING NORMS ON THE BASISOF ASSETS CLASSIFICATION

1) Provisioning is necessary considering the value of security charges to the banks over a period of time. Therefore, after the assets of PCBs are classified in to various categories necessary provision has to be made for the same. The details of provisioning requirements in the respects of various categories of assets are mention below. 2) The following aspects, however, may be kept in view while making provisions.
A. Agricultural Loans As Secured

All agricultural loans may be treated as fully secured as the same are disbursed against charge on land as provided in the respective state co-operative societies rules.
B. Treatment to P.F. and gratuity Amount

Liability towards PF and gratuity should be estimated on actuarial basis and fully provided for. C. Loan exempted from provisioning Advances against term deposit NCS eligible for surrender, life policies are exempted from provisioning. Therefore, the above account may not be classified as NPA.
C. Loans against gold/Government. securities Advances against gold,

government securities are exempted from provisioning requirement

PROVISIONING
In conformity with prudential norms, PSCB Should make provisions on the NPA based on classification of assets in to prescribed categories as detailed in paragraph 4 above. Considering the time lag between an account becoming doubtful of recovery, its recognition as such, the realization of the security and erosion in the value of security over time, Banks are required to make provisions as detailed below against loss, doubtful and sub-standard

Assets category 1 Loss

Provision required Bank should write off entire outstanding otherwise it has to make 100%provisioning for outstanding a)100% of the portion not covered by the realizable value of security b) over and above item 1)depending upon the period up to which the assets has remained doubtful 20%-10% of secured portion ( estimated realizable value ) Period up to 1 year 1-3 year Over 3 year

Provisioni ng % 100%

Doubtful

20% 30% 50 up to

Sub standard

31.3.2007 Outstanding stock of NPA 60 as on as on 31 march 2007 31.3.2008 75 as on 31.3.2009 100 as on 31.3.2010 Advances classified as 100% doubtful for more than 3 year on or after April 2007 general provision of 10%on total outstanding

ii) Provision on Standard Assets PCBs were required to make a general provision of 0.25% on standard assets from the year ended March 31, 2000. The general provisioning requirement on standard assets, barring UCB direct advance to agriculture and SME sector, was raised to 0.40% in November 2005. In order to ensure maintenance of asset quality in the context of high credit growth, RBI raised the general provisioning requirement for PCBs on standard advances in respect of personal loans, loans and advances qualifying as capital market exposure and commercial real estate loans from 0.40% to 1.0% in June 2006. Certain categories of loans continued to experience high growth; personal loans witnessed a higher default rate. Therefore, provisioning requirement in respect of personal loans, loans and advances qualifying as capital market exposure and commercial real estate loans (excluding residential housing loans) was raised from 1% to 2% in February 2007. Simultaneously, RBI decided to increase provisioning for loans and advances to Non-Deposit Taking Systematically Important NonBanking Finance Companies (NBFC-ND-SI) from 0.40% to 2% (A systematically important NBFC is defined as an Non-Deposit Taking NBFC with an asset size of Rs.100.00 Crore or more as per the last audited balance sheet). The standard asset provisioning requirements for UCB, after the above changes, stand as summarized below:

Serial no (a) (b)

(c)

Category of standard assets Direct loans to agriculture & SME sector Personal loan ,loan qualifying as capital market exposure commercial Real estate loan (excluding residential housing loan) and loan &advance to NBFC etc All other loan and advances not included under(a) and (b) above

Provisioning % 0.25% 2.00%

0.40%

The provision towards standard assets need not be netted from gross advances but should be shown separately as Contingent Provision towards Standard Assets under Other Funds and Reserves in the Balance Sheet. In case a bank is having provision in excess of what is required for non-performing assets under Bad & Doubtful Debt Reserve (BDDR), additional provision required for standard assets may be segregated from BDDR and parked under Contingent Provision towards Standard Assets with the approval of the Board of Directors. This contingent provision will be available for inclusion in Tier II capital. (iii) Guidelines for Provisions a) Advances covered by DICGC / ECGC guarantee In respect of advances guaranteed by ECGC/DICGC, provisioning is to be made only for the balance exceeding the amount of guarantee. Further, while arriving at the provision for Doubtful assets, realizable value of the securities should be deducted from the outstanding balance before the guarantee is set off. Bank have to follow It while regulating the provisions

b) Additional facilities under rehabilitation package If under a rehabilitation package approved by BIFR / term lending institution, banks allow additional credit facilities to a unit, which has been categorized as sub-standard or doubtful, they need not make provisions for a period of one year from the date of disbursement of such additional facilities. Similar treatment should be made in respect of sick SSI units under a nursing programmed. However, banks should make provisions on existing credit facilities classified as sub-standard or doubtful in both the cases. (c) Certain advances exempted

Advances against banks own term deposits, NSCs, KVPs, IVPs and life policies are exempted from provisioning requirements. However, advances against gold ornaments, government securities and all other securities attract provisioning d) Valuation of security To have uniform assessment of valuation of security and reduce divergence in provisioning requirements, banks should undertake annual stock audit of current assets by external agencies in respect of NPA with balance of Rs.10.00 lac and above. Besides, immoveable property charged to the bank should be valued once in three years by the banks approved valuer

TRANSPARENCY IN ACCOUNTS &PROVISIONING REQUIREMENTS AND ITS LIKELY IMPACT ON RURAL CREDIT

Government of India set-up a committee on financial system which is known as narsimhan committee to examine all aspects relating to the structure, organization, functions, procedure of the financial system of our country including banking and non banking organizations. On consequent upon the nationalization of commercial cooperative banks, exhibits true picture and become transparent. Here it is humbly tried to examine and to study such recommendation on income recognition, asset classification and provisioning on P & L a/c. and its likely impact on rural credit provided by co-operative bank as well as commercial TRANSPARENCY IN ACCOUNT The committee also felt that the banks balance should follow the recommendation of the International Accountant Standards (IAS). Committee with regard to transparency and disclosures. Under the provision of the B.R. Act 1949 the RBI has already introduce a new format for reporting the annual accounts which, among others, in corporate number of schedules for reporting item wise brake up. The schedule commercial bank s have reported there annual accounts for the final year 1991-1992 as per the new format. However it has been felt that the co-operatives may continue to report their annual accounts in the existing formats since the requisite data needed for the monitoring and analysis is already available them. Income recognition (i) Effective from April 1, 1992, banks cannot consider as income interest on loan accounts, classified as Non-Performing Assets (NPA), unless actually received. Such unrealized interest on NPA taken as income in the earlier year has to be provided for. In other words, income from NPA is booked as income only when actually received, and not on accrual basis. (1) Accrued interest on NPA Banks should not debit to the borrowers accounts interest accrued on NPA, but show them separately under "Interest Receivable Account" and a corresponding amount under "Overdue Interest

Reserve Account" on the assets and liabilities side of the balance sheet respectively. (The amount held in the Overdue Interest Reserve Account, however, cannot be regarded as a "reserve" or as part of the owned funds of the Bank as it is not created out of income actually received by the bank). (2) Accrued interest on performing assets In respect of loan accounts, classified as performing assets, accrued interest can be debited to the borrowers account and taken to income account. If the relevant credit facility becomes NPA later, the bank should provide for the interest accrued and credited to income account. In such cases, while making provision the amount held in "Overdue Interest Reserve Account" should be deducted from the advances outstanding. (iv) Partial recovery of interest Banks can take partial recovery of interest on NPA to their income account, provided such recovery is not out of fresh / additional credit facilities sanctioned to the borrowers concerned. (v) Income recognition on investments classified as NPA Investments also are subjected to prudential norms on income recognition. As such, banks should not take to income interest on accrual basis in respect of any security irrespective of the category in which it is included, where interest / principal in respect of which is in arrears for more than 90 days (vi) Others Wherever the State Cooperative Societies Acts prescribe a more stringent accounting procedure, the same should be followed. Further, where the bank has a more stringent accounting procedure, it can continue to follow such a procedure.

PAST DUE STATUS

Any amount, which remains outstanding for 30 days beyond the date will be reckoned as past due whereas an asset become NPA, when it ceases to generate income for bank. (1) In respect of advance granted for agricultural purposes, where interest payment is on half yearly basis synchronizing with harvest, then the bank should adopt agricultural seasons after past due then such advance will become NPA. (2) In respect of cash credits and over drafts, in addition to the above norms, the account should be treated as out of order if the out standing balance remains continuously in excess of the sanctioned limits drawing power. In cases, where the outstanding balance is within the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period, this accounts should be treated as out of order.

GENERAL GUIDELINES TO PRUDENTIAL NORM

1. With a view to preparing the profit and loss a/c. and balance sheet, reflecting banks actual financial health, a proper system for recognition of income, classification of asset and provisioning on a prudential basis is necessary. The prudential norms for recovery rather than on any subjective consideration. Likewise, the classification of norms, regarding provisions should be made on the basis of classifications of assets into four different categories. In this connection, we advise that such prudential norms have already been made applicable to SCB with suitable modification has been decided that these prudential norms should be adopted by SCB on prudential norms for income recognition, asset classification and provisioning on the basis of classification of asset are given in the Annexure enclosed. These guidelines may please be studied carefully and arrangement made for their implication. 2. Year of Implementation Banks are advised to implement the instructions from the accounting year 2000 . Each branch should undertake competent officials from the internal inspection departments should verify the exercise of classifications of assets, making provisions and the same. The bank should also get the classification, verified by auditors and a

certification to this effect obtain from the Auditors. The balance sheet for the should reflect the financial position of the bank as arrived at on the basis of instructions now issued to banks. After the exercise is completed banks are advised to prepare a comprehensive note indicating the banks position in the light of instructions contained in the circular and put it up loss a/c and balance sheet as required under sec. 29 of B.R. act, (AACS) and instructions issued from time to time on the subject. 3. Provisioning Requirement - Phasing In order to give some time to co-operative banks to adjust themselves to the new system, phasing of provision is suggested as indicated as
a)

First year

100% in respect of loss assets and less than 30% of the provisioning needed in respect of sub-standard and doubtful assets. b) Second Year The balance provisioning needed in respect of the above categories of assets together with current provision needed in respect of assets classified in the second year. In other words, all the doubtful and substandard assets have to be provided fully from second year onwards in addition to 100% for loss assets. The requirements of state co-operative societies Acts and or Rules made there under or other statutory attachment may continue to be followed if they are more stringent than the guidelines now prescribed by us. A copy of this latter is being sent to the RCS of your state Territory for his information with request to advised the statutory Auditors of SCB to look into compliance of the guidelines at the time of their audit.

Relaxed Prudential Norms on Asset Classification and Provisioning for certain categories of UCB Unit banks i.e. banks having a single branch / Head Office with deposits up to Rs.100 crore and banks having more than one branch within a single district with deposits up to Rs.100 crore to are

exempted from the extant asset classification and provisioning norms as under: Serial no 1 Extant norm ASSETS CLASSIFICATION The bank to identify NPA based on 180 days delinquency norm for 3 more years commencing march 31,2005 i.e. up march 31 2007 A sub standard account will continue to be classified as doubtful after 18 months instead of 12 months up to march 31,2007 The 180 days delinquency norm for NPA has since been extended by 1 more year i.e. to .up to march 31,2008 The 12 month period for classification of a sub standard assets in doubtful category has since been extended by 1 more year i.e. up to march 31,2008 Relaxed norms Remark

(2) with effect from year ended march 31 ,2005an assets would be classified as doubtful if it remained n the sub standard category for 12 months

Provisioning norm (1) general provisioning requirement or standard assets (excepting direct agriculture and SME raised from 0.25%to 0.40%and to 2% on specific sectors (2) 100% provisioning on secured portion of

General provisioning requirement on standard assets continue to remain at 0.25%for exempted banks 100% provisioning to be made by exempted

advance classified as doubtful III on or after 1,2007

bank on secured portion of advance classified as doubtful III on or after April 1,2010 st March 31 2007 For outstanding stock banks would be of D iii advance as on required to provide as march 31,2010 the under exempted banks would be required provide as under 50% up to march 31st 2007 60% as on march 31st , 2008 75%as on march 31,2009 100%as on march 31,2010 50% up to march 31 st 2010 60% as on march 31st 2011 75% as on march 31st 2012 100% as on march 31st 2013

Detailed Provision of Non Performing Assets For the year ending 31 mar 2011 Sr.N o. 1. Category of Loan Amount Provision Amt of Provision 66.77 22.59

Total loan Outstanding 37452.33 A. Standard Assets (crop 26706.91 5647.66 loan) B. Standard Assets (crop loan) (other than crop loan) Total of standard Assets Assets (col A-B) Sub Standard Assets Doubtful Assets A. Overdue 3-4 years B. Overdue 4-6 years C. Overdue above 6 years Total [Col.4(1) to 4(iii)] Loss Assets Unsecured Total NPA [Col. 3+4+5+6+7] 32354.57 1774.50 821.96 1447.69 576.38 2846.03 354.81 122.42 5097.76

0.25% 0.40

2. 3. 4.

89.36 10% 20% 30% 100% 177.48 164.39 434.31 576.38 1175.08 100% 100% 354.44 122.42 1918.78

5. 6. 7. 8.

Types of Advance Agriculture (crop Loan) RCC (Farmers) Education Loan Vehicle Loan Mini Diary Loan Personal Loan Urban Housing Loan Other Advance

Percentage of NPA During During 2008-09 2009-10 3.94 % 19.50% 60% 24.36% 70.72% 8.86% 29.30% 9.24% 2.71% 22.96% 100% 3030% 71.00% 17.29% 31.54% 15.13%

During 2010-11 2.34% 17.42% 80% 20.27% 79.23% 12.53% 22.75% 21.03%

Percentage of NPA Agriculture Loan (crop loan) -> The loan provided to the
Ag riculture L oan
1 .11 % 00 % . 0 1 .11 % 00 % . 0 1 .11 % 00 % . 0 1 .11 % 00 % . 0 00 % . 0 00 % . 0 00- 0 0 00 1111 -11 1111 -11 Agriculture Loan

farmer For cropping

INTERPRETATION -> NPA is decreasing it is 3.94 % in year 2008-09,2.71 % in year 2009-10 and 2.34 % in year 2010-11.it is a good sign for bank. The farmer having good output is able to pay back the loan interest and principle on time to a medium extent.

Education Loan -> The loan given to the student for their study..

INTERPRETATION -> As in year 2008-09 there is 60% NPA which use to 100% in year 2009-10 i.e. loss assets again it decrease by small percent to 80% in year 2010-11. The reason is that the student who has taken loan does not get the perfect job of high salary and he is not able to pay the loan on the time.

3 RCC Farmers -> The loan given to the (farmer) individual at a

low rate of interest as compares to the money lenders rates.

INTERPRETATION -> In year 2008-09 NPA is 19.50% and increase to 22.96% in 2009-10 and again decline to 17.42% in year 2010-11. As it is fluctuating but not so high or not so low. If bank follow efficient procedure than it can be reduced to great extent.

4 Vehicle Loan -> The loan given for purchasing the vehicle the
maximum Limit is up to 10 lakh

INTERPRETATION -> The NPA is being increasing as 24.36% in 2008-09, 3030% in 2009-10 and 20.27% in 2010-11. The vehicle is not for granting loan for vehicle is not effective as the customers financial capacity is not checked.

5 Mini Diary Loan -> The loan given to have diary occupation.

INTERPRETATION -> The bank have NPA 70.72% in year 2008-09, 71 % in year 2009-10 and it further raises to 79.23% in year 2010-11. This is not good sign for bank .The reason is that bank is giving loan to that borrower who does not have capacity to pay back on time or recovery system is defective one.

6 Personal Loan -> The Loan given to an individual for meeting

Requirements

INTERPRETATION -> In year 2008-09. NPA is 8.86% which raises to 17.29 % in year 2009-10 which again decline to 12.53% in year 2010-11.It is for less than the NPA .If bank follow effective strategy than this may reduce to nil.

7 Urban Housing Loan -> The loan given to an individual for

housing in the urban area.

INTERPRETATION -> In year 2008-09 NPA is 29.30% which raises to 31.54% in year 2009-10 and again decline to 22.75% in year 2010-11. The bank have to control its rate .the reason of NPA is that loan are given to those who are not capable of repaying Amount.

8 Other Advances ->

INTERPRETATION -> In year 2008-09 the NPA is 9.24 % it further increase to 15.13 %. In year 2009-10 and 21.03 % in year 201011. The reason is that it does not come under a general head so the bank recovery system was not focused deeply to recover it. If it continue to use it will affect bank financial position

Status of NPA for Year 31st March 2011 (In lacs) Type of loan Total NPA Recovery 31-3-2011 Portion up to 30-6-2011 Short Term Loan 922.06 114.37 Cash Credit Medium Term Non Farm Sector Total 1020.71 753.69 2401.3 5097.76 218.03 107.06 265.08 604.54

Short term Loan -> Comprising short term agriculture loan, non Agriculture loan and other short term loan Total NPA (in lacs) 922.06 Recovery (in lacs) 114.37

INTERPRETATION -> The bank have NPA 922.06 (lacs) and recovery is 114.37 (lacs) only. The reason is that loan granting procedure is not good as financial capacity of borrower are in bad condition i.e. why only little is recovered.

Cash Credit -> Comprising RCC , Industrial fertilizers business and other cash credit . Total NPA (in lacs) 1020.71 Recovery (in lacs) 218.03

INTERPRETATION -> The recovery portion is 218.03 only where as NPA is 1020.71 only. The reason is that the recovery system of bank is not up to the standard. As the mortgage property for (RCC loan) does not have much value to replay the loan amount so NPA increase

Medium Term -> Comprising the loan like Agriculture Diary Loan, Agriculture Implements and others. Total NPA (in lacs) 753.69 Recovery (in lacs) 107.06

INTERPRETATION -> The recovery is 107.06 (lacs) and NPA is 753.69 (lacs). It occurs as loan is provided to those who does not have good bank records regarding payments.

Non Form Sector -> Comprising CD loan, vehicle loan, composite etc. Total NPA (in lacs) 2401.3 Recovery (in lacs) 265.08

INTERPRETATION -> The amount of NPA is 2401.3 (lacs) and Recovery is only 265.08 (lacs) as huge amount need to be recovered .The reason is defective loan procedure and recovery procedure