Professional Documents
Culture Documents
1. a. EXECUTIVE SUMMARY
INTRODUCTION:
The scope of the study here was confined to the organization only.
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Canara Bank
The study covers to find out the strategy required to reduce the NPAs.
Primary data.
Secondary data.
When the data collected is completed the data is processed and the relevant information is
obtained. The data collected is analyzed using various statistical tools like frequency
distribution, charts and percentage analysis.
This study is intended to probe into the management of non performing assets in the
Canara Bank’s Loan Portfolio, for the period of 2005-2006 to 2006-2007.
FINDINGS:
The Net NPA ratio of the Canara Bank declined from 1.88% as at March 31 st
2007 to 1.12% as at March 31st 2008.
Canara Bank has recovered its NPA which is amounted to Rs.865 crore during
2007-2008.
The Net NPA of the Canara Bank declined from Rs.1454 crore as on 31 st March
2008.
The Net NPA percentage of Canara Bank has reduced by over 19% during
2007-2008.
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Canara Bank
RECOMMENDATIONS:
Canara Bank should concentrate more on credit appraisal, monitoring, credit risk
management and recoveries.
Settlement is a better option for the banks wrestling with the problem of non-
performing assets.
Credit scoring allows lenders to determine whether or not you fit the profile of
the type of customers they are looking for.
Banks concerned should continuously monitor loans to identify accounts that
have potential to become non-performing.
CONCLUSION:
Securitization Act will surely help banks in reduction of NPA to a great extent.
Preventing fresh flow of NPAs to a great extent.
Exchange of credit information among banks would be of immense help to avoid
possible NPAs.
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Canara Bank
1. b. GENERAL INTRODUCTION:
INDUSTRY PROFILE
Banking in one form or another was in existence even in ancient times. The writings of
Manu (the maker of old Hindu Law) and Kautilya (the Minister of Chandragupta
Maurya) contained references to banking.
However, banking as a kind of business i.e., modern banking is of recent origin. It came
into existence only after the industrial revolution. After the industrial revolution, with the
increase in the size of industrial and business units, joint stock company people with
small means to become shareholders of big industrial and business enterprises. Still, there
were certain sections of public who were not prepared to invest their money on the shares
of joint stock companies. However they were willing to part with a little surplus money,
if they were assured of the repayment of their money with a little interest thereon. So
naturally, there arose the need for formation of financial institutions that could collect the
surplus funds of people on terms acceptable to them and make them available to the
needy for productive purpose. Accordingly a large number of financial institutions called
joint stock banks were set up after industrial revolution. As such joint banks or modern
banks are of recent development.
MEANING OF BANKS:
A banking company in India has been defined in the Banking Companies Act 1949 as
“One which transacts the business of banking which means the accepting of the purpose
of sending or investment of deposits of money form the public repayable on demand or
otherwise and withdrawable by cheque, draft order or otherwise”.
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Canara Bank
i. State Co-operative.
ii. Commercial Banks.
2. Non-Scheduled Banks:
Central Co-operative Banks and Primary Credit Societies.
Commercial Banks.
Commercial Banks are further divided into Indian Banks and Foreign
Banks.
Indian Banks are further divided into:
1. Public Sector Banks.
2. SBI and its Subsidies.
3. Other Nationalized Banks.
4. Regional Rural Banks.
ACTIVITIES OF BANKS:
I. Activities of Commercial Banks.
II. Activities of Central Banks.
a. Primary Functions:
i. Acceptance of deposits: It is very important for banks as it forms the basis
of all other activities of banks. It accepts various types of deposits. They
are current deposit, saving deposit, fixed deposit and recurring deposits.
ii. Lending of Funds: It is also the most important function of Commercial
Banks as it fetches the major portions of the income of the banks.
Banks lend money by the way of loans, overdrafts, cash credit and
discounting of bills.
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b. Subsidiary Functions:
i. Agency Functions: The services rendered by banks as agent of their customers
are called agency services. They are:
• Banks collect cheque, bank draft, bills, interest, dividends etc on
behalf of the customer.
• Banks sells and purchases securities on behalf of the customers.
• Banks arranges for remittance of funds from one place to another
place.
• Banks acts as trustees, executors, representatives of their customers.
ii. General Utility Services: Services rendered by banks to their customers as
well as the general public are called as general utility services.
• Banks accept precious articles, documents etc for safe custody.
• Banks helps exporters and importers in foreign trade.
• Banks issue travellers cheque, letter of credit, circular notes etc.
• Banks acts as a reference and supply information about the financial
standing of the customers to others.
II. Activities of the Central Bank:
A. Monopoly of Note issue.
B. Banker, Agent, Advisor to the government.
C. Custodian of cash reserves of the banks.
D. Lender of the last resort.
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Canara Bank
1. Banks mobilize the small scattered and ideal savings of the people, and make
them available for productive purpose. In the sort, they aid the process of capital
formation.
2. By accepting the savings of the people, banks provide safety and security to the
surplus money of the depositors.
3. Banks provide a convenient and economical method of payment. The cheque
system introduced by banks is convenient form making payments. Again the use
of cheque economies the time and trouble involved in settlement of business
obligations.
4. Banks provide a convenient and economical means of transfer of funds from one
place to another. Banks drafts are commonly used for remittances of funds from
one place to another.
5. Banks helps the movement of capital from regions where it is no very useful to
regions where it can be more usefully employed, by moving funds, banks
increases the utility of funds. Again by moving funds from one place to another,
banks contribute to the economic development of backward regions.
6. Banks influence the rates of interest in the money markets. Through the supply of
money (i.e. bank money or bank deposits) banks expert a powerful influence on
the interest rates in the money market.
7. Banks help trade and commerce industry and agriculture by meeting their
financial requirements. But for the financial assistance provided by the banks, the
pace of growth of trade and commerce industry and agriculture would have been
very slow.
8. Banks direct the flow of funds into production channels. While lending money,
they discriminate in favor of essential activities and against non essential
activities. Thus they encourage the development of right types of activities which
the society desires.
9. Banks always make it a point to help the industries, the prudent, the punctual and
the honest and discourage the dishonest, the spendthrift, the gambler the lair and
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Canara Bank
the knave (i.e. the rouge). Thus banks act as public conservators of commercial
virtues.
10. Banks serves as the best financial intermediaries between the saver (i.e. the
depositors or lenders) and the investor (i.e. the borrowers or the entrepreneurs).
SERVICE PROFILE OF THE CANARA BANK:
The bank has many financial services and different schemes. Important among them are
as follows:
DOMESTIC PRODUCTS
SAVING BANK DEPOSITS: For individuals & non-trading organizations / institutions.
CANFLEXI DEPOSITS: A combination of savings & fixed deposits – high return &
instant liquidity.
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Canara Bank
LOAN PRODUCTS
HOUSING LOAN SCHEME: Purchase of a ready built house / flat construction of
house, purchase of a site and construction of house thereon, for undertaking repairs,
renovations, upgradation, and creation of additional amenities and for taking over of the
HL liability from other recognized housing finance companies and banks.
HOME IMPROVEMENT LOANS: Furnishing the house / flat along with bank’s home
loans / independently.
CANMOBILE: Facilities purchase of new / used cards / jeeps of all make. The scheme
also covers finance for purchase of brand new two wheelers.
CANCARRY: Provided credit worthy individuals, professional and salaried class for
buying consumer durables and household articles.
CANRENT: Provides loans to property owners whenever the property is leased / rented
out to PSU’s central / state / semi – government undertakings. Reputed corporate banks.
Financial institutions, Insurance companies and MNCs.
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Canara Bank
AGRI – LOAN SCHEME: Various loan schemes for agri-clinic, minor, irrigation, farm
development / machinery, plantation crops fishers and for agro-exports.
SSI LOAN SCHEME: A host of schemed available for technology up gradation fund in
textile and jute industries, credit linked capital subsidy stand by credit for capital
expenditure and margin money scheme of KVIC.
OTHER PRIORITY SCHEME: These include loan for retail traders, small business,
professional / self employed, medical practitioners and loan for solar water heating /
home lighting system.
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Canara Bank
• Launched DEBIT CARD on November 4, 2003, a value added and tech based
product for its niche clients.
• CANARA BANK was the first to articulate the directive principles of good
banking, detailing banker’s duties and customers rights.
• First bank to get ISO certification for one of its branches in Bangalore in the year
of 1995-1996.
• Recommendations of the Goiporia Committee on Customer Service have been
implemented by the bank.
• The bank has Computerized Information Facilitation Centers (CIFCs) at all circles
to look exclusively into customer in a single window framework.
• A 24 hour tele - contact facility is also available for customers to air their
grievances at corporate as well as circles levels.
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Canara Bank
HISTORICAL TREND:
Canara Bank established in 1906 with the name of Canara Bank Hindu Permanent
Fund in Mangalore, India, by Ammembal Subba Rao Pai, is one of the oldest and major
commercial bank of India. Its name was changed to Canara Bank Limited in 1910. The
bank, along with 13 other major commercial banks of India, was nationalized on 19th
July, 1969, by the Government of India. Currently (2008), the bank has 2508 branches
spread all over India. The bank also has international presence in several centers,
including London, Hong Kong, Moscow, Shanghai, Doha, and Dubai. In terms of
business it is the largest nationalized commercial bank in India with a total business of
about Rs.2000 billion (about US $43 billion).
ORGANISATION STRUCTURE:
1. Personnel Wing
2. Corporate Credit Wing
3. Risk Management Wing
4. Priority Credit Wing
5. Inspection Wing
6. Department of Information Technology Wing
7. Marketing and Customer Relationship
8. Planning and Development Wing
9. Recovery Wing
10. General Administration Wing
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Canara Bank
OFFICE AND BRANCHES: Canara bank has a network of 2415 branches, spread over
22states/ 4 union territories of the country and overseas branch @ London which are
administrated through
BRANCHES ABORAD:
Though small in size the Bank’s presence abroad has brought in considerable foreign
business, particularly NRI deposits.
According to the latest information, both the CANARA BANK and State Bank of India
have come into a mutual agreement as to both the banks will be operating as a one unit
in the Moscow.
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Canara Bank
CORPORATE VISION:
• To top as a World Class Bank with best practices in the realms of asset portfolio,
Customer orientation, Product Innovation, Profitability an enhanced value for stake
holders.
• To set new standards in IT application, Customer responsiveness, Asset quality and
profitability, culminating in higher stoke holder value.
• To scale new peaks in respect of IT based banking, efficient service delivery market
leadership in profitability.
CORPORATE MISSION:
CORPORATE OBJECTIVE:
E- Efficiency.
O- Organization Effectiveness.
C- Customers centric
H- Hi Tech Banking
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ACHIVEMENTS:
The Bank has already carved a niche in providing IT – based services. Computerized
branches, for 65% of the branches & 81% of aggregated business provided a wide array
of services such as Network ATM’s, any where Banking , Tele Banking & Remote
Access Terminals etc.,
The Bank was the first to launch networked ATM’s & obtain ISO certification.
CANARA BANK shares are listed & Bangalore, Mumbai & National Stock Exchanges.
• Canara Bank has posted net profit of s.581 cr for the half year ended September
2007 as against Rs.419 cr during the corresponding previous half year, registered
a growth rate of 38.60%.
• The Bank operating profit registered an increase of Rs.548 cr (57.81%) to reach
Rs.1496 crore, up from Rs.948 cr for the first half of the preceding financial.
• Return of assets a standard measure of profitability improved from 1.08%
(annualized) at a September 2004 to 1.28% (annualized) as at September 2007.
• Number of branches moved up to 2441 from 2416 as at September 2004, besides
248 extension counter.
• Global deposits of the Bank aggregated to as Rs.75, 396crore as against Rs.67734
crore a year ago, year growth being 11.31%.
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The Oxford College of Engineering, Bangalore, MBA Programme
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In respects of the certain Assets and liabilities, CANARA BANK have undertaking a
behavior study, embedded options in the basis of past of past data, based on which the
bank is in a position to decide on the maturities of the asset and liabilities.
2. a. RESEARCH DESIGN
A study on the Management of Non Performing Assets in the Canara Bank’s Loan
Portfolio is done at the Canara Bank Donimalai Township, Sandur (TQ), Bellary (Dist),
Karnataka State.
The type of research used for the collection & analysis of the data is “Historical Research
Method”.
The main source of data for this study is the past records prepared by the bank. The focus
of the study is to determine the non-performing assets of the bank since its inception & to
identify the ways in which the performance especially the non-performing assets of the
Canara Bank can be improved.
The data regarding bank history & profile are collected through “Exploratory Research
Design” particularly through the study of secondary sources and discussions with
individuals.
Secondary Data
Collection of data through bank annual reports, bank manuals and other relevant
documents.
Collection of data through the literature provided by the bank.
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Canara Bank
2. Secondary Sources:
Annual company reports, Balance Sheets, Profit & Loss account are used to collect the
data.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
The scope of the study here was confined to the organization only.
The study covers to find out the strategy required to reduce the NPAs.
The concentration is given only in understanding the NPAs growth with the
reference of Canara Bank.
The data is purely based on the secondary data collected from website and
journal.
The scope is limited to drawn conclusions from analysis and interpretations of the
primary and secondary data of the Canara Bank.
b. 4. METHODOLOGY:
Introduction
The quality of the project work depends on the methodology adopted for the study.
Methodology, in turn, depends on the nature of the project work. The use of proper
methodology is an essential part of any research. In order to conduct the study
scientifically, suitable methods & measures are to be followed.
Research Design
The type of research used for the collection & analysis of the data is “Historical Research
Method”.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
The main source of data for this study is the past records prepared by the bank. The focus
of the study is to determine the non-performing assets of the bank since its inception & to
identify the ways in which the performance especially the non-performing assets of the
Canara Bank can be improved.
The data regarding bank history & profile are collected through “Exploratory Research
Design” particularly through the study of secondary sources and discussions with
individuals.
Secondary Data
Collection of data through bank annual reports, bank manuals and other relevant
documents.
Collection of data through the literature provided by the bank.
1. Personal Interview:
In this, discussions were held directly with the manager & officials to get the clear-cut
information about the topic and data to be collected for the purpose of analysis.
2. Secondary Sources:
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Annual company reports, Balance Sheets, Profit & Loss account are used to collect the
data.
The study is mainly based on the secondary data provided by the bank. As such it
is subject to the limitations of the secondary data.
The study is based only on NPAs with respect to loans.
The study is based on the data given by the officials and reports of the bank. The
confidentiality of some facts and figures is a limitation.
The non-availability of relevant information is one of the limitations.
The study is done only for the limited past 3 years.
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3. THEORITICAL OVERVIEW
ii. The account remains 'out of order' for a period of more than 180 days, in respect
of an overdraft/ cash Credit(OD/CC),
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Canara Bank
iii. The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for identification of
NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31,
2004, a non-performing asset (NPA) shell be 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' for a period of more than 90 days, 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. Interest and/ or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
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The Oxford College of Engineering, Bangalore, MBA Programme
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As a facilitating measure for smooth transition to 90 days norm, bank has been advised to
move over to charging of interest at monthly rests, by April 1, 2002. However, the date of
classification of an advance as NPA should not be changed on account of charging of
interest at monthly rests. Banks should, therefore, continue to classify an account as NPA
only if the interest charged during any quarter is not serviced fully with 180 days from
the end of the quarter with effect from April 1, 2002 and 90 days from the end of the
quarter with effect from March 31, 2004.
‘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 180 days (to be reduced to 90
days, with effect from March 31, 2004) as on the date of Balance Sheet or credits are not
enough to cover the interest debited the same period, these accounts should be treated as
‘out of order’.
‘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.
Asset Type Percentage of Provision
Sub standard (age up to 18 months) 10%
Doubtful 1 (age up to 2.5 years) 20%
Doubtful 2 (age 4.5 years) 30%
Doubtful 3 (age above 4.5 years) 50%
Loss Asset 100%
INCOME RECOGNITION-POLICY:
The policy of income recognition has to be objective and based on the record of recovery.
Internationally income from non-performing assets (NPA) is not recognized on accrual
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basis but is booked as income only when it is actually received. Therefore, the banks
should not charge and take to income account interest on any NPA.
However, interest on advances against term deposits, NSCs, VIPs, KVPs, and Life
policies may be taken to income account on the due date, provided adequate margin is
available in the accounts.
Fees and commissions earned by the banks as a result of re-negotiations or rescheduling
of outstanding debts should be recognized on an accrual basis over the period of time
covered by the re-negotiated or rescheduled extension of credit.
If Government guaranteed advances become NPA, the interest on such advances should
not to be taken to income account unless the interest has been realized.
REVERSAL OF INCOME:
If any advance, including bills purchased and discounted, becomes NPA as at the close of
any year, interest accrued and credited to income account in the corresponding previous
year, should be reversed or provided for if the same is not realized. This will apply to
Government guaranteed accounts also.
In respect of NPAs, fees, commission and similar income that have accrued should cease
to accrue in the current period and should be reversed or provided for with respect to past
periods, if uncollected.
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the interest suspense account. This book balance of the net of the interest suspense
account is known as Gross NPA.
But in cases where guarantee claim is received from credit guarantee corporations like
ECGC, before making the provision for loan losses, such claim received is also netted
from the gross NPA. The terminology net NPA indicates the balance in interest suspense
account.
For evaluation RBI and other rating agencies rely on purpose usually the net NPA
balance.
Thus Gross NPA means, balance outstanding minus balance in interest suspense account.
Net NPA means: Gross NPA minus balance claim received amount and provision
outstanding in that account.
IMPACT OF NPA:
At the Macro level, NPAs have chocked off the supply line of Credit of the potential
lenders thereby having a deleterious effect on capital formation and arresting the
economic activity in the country.
At the Micro level, unsustainable level of NPAs has eroded current profits of banks and
FIs. They have led to reduction of interest income and increase in provisions and have
restricted and recycling of funds leading to various Asset Liability mismatches. Besides
this, it has led to erosion in their capital base and reduction in competitiveness.
The problem of NPA is not a matter of concern to banks and FIs alone. It is the matter of
grave concern to the country and any bottleneck in the smooth flow of credit is bound to
create adverse repercussions in the economy. The mounting menace of NPAs has raised
the cost of credit, made Indian business man uncompetitive as compared to their
counterparts in other countries.
It has made banks more adverse to risks and squeezed genuine Small and Medium
Enterprises (SMEs) from accessing competitive credit and has throttled their enterprising
spirits as well, to a great extent.
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Due to their crippling effect on the operation of the banks, Asset quality has been
considered as one of the most important parameters in the measurement of bank’s
performance under the CAMELS Supervisory Rating System of RBI.
THE MAGNITUDE:
Non-Performing Asset (NPA) has emerged since over a decade as an alarming threat to
the banking industry in our country sending distressing signals on the sustainability and
endurability of the affected banks. The positive results of the chain of measures affected
under banking reforms by the Government of India and RBI in terms of the two
Narasimhan Committee Reports in this surging threat. Despite various correctional steps
administered to solve and end this problem, concrete results are eluding. It is a sweeping
and all pervasive virus confronted universally on banking and financial institutions. The
severity of the problem is however acutely suffered by Nationalized Banks, followed by
the SBI group, and the all India Financial Institutions. As at 31.03.2004 the aggregate
gross NPA of all scheduled commercial banks amounted to Rs.63883 crore. Table No.1
gives the figures of net NPA for the last three years. The ratio of net non-performing
assets to net advances also declined during 2005-06. Majority of the banks, this ratio is
less than 4 percent. Punjab and Sind Bank has the highest ratio with 9.62 percent
followed by Dena Bank of India with 9.4 percent. 4 banks reported “nil” ratio during
2005-2006.
Further it is revealed that commercial banks in general suffer a tendency to understate
their NPA figures. There is the practice of ‘ever-greening’ of advances, through subtle
techniques. As per report appearing in a national daily the banking industry has under –
estimated its non-performing assets (NPAs) by whopping Rs.3862.10 Crore as on March
1997. The industry is also estimated to have under-provided to the extent of Rs. 1,412.29
Crore. The worst offender is the public sector banking industry. Nineteen nationalized
banks have underestimated their NPAs by Rs. 3,029.29 Crore. Such deception of NPA
statistics is executed through the following ways.
Failure to identity an NPA as per stipulated guidelines: There were instances of
‘sub-standard’ assets being classified as ‘standard’.
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Canara Bank
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deposited. The borrower while filing the appeal should also file an application requesting
the Debt Recovery Tribunal to admit the appeal without deposit of any amount. If the
DRT orders partial deposit of the amount and the same is not deposited, appeal can be
dismissed.
The 75% deposit is only required if the appeal is filed by the borrower. If some other
aggrieved person (e.g. guarantor, shareholder) files it the deposit is not required.
If a person is aggrieved by the order of the DRT, it can file an appeal to the Appellate
Tribunal within 30days from the date of receipt of the DRT order.
If the DRT or Appellate Tribunal holds that possessions of assets by the secured creditor
was wrongful and directs the secured creditor to return asset to concerned borrower, the
borrower shall be entitled to compensation and costs as may be determined by DRT or
Appellate Tribunal.
SECURITIZATION ACT:
With the enactment of the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002, banks can issue notices to the defaulters to
pay up the dues and the borrowers will have to clear their dues within 60days. Once the
borrower receives a notice from the concerned bank and the financial institution, the
secured assets mentioned in the notice cannot be sold or transferred without the consent
of the lenders. The main purpose of this notice is to inform the borrower that either the
sum due to the bank or financial institution be paid by the borrower or else the former
will take action by way of taking over the possession of assets. Besides assets, bank can
also takeover the management of the company. Thus the bankers under the
aforementioned Act will have the much needed authority to either sell the defaulting
companies or charge their management.
in the priorities in the banking operations. Branch expansion policies of banks were tuned
upto meet the banking needs of the people in rural and semi urban centers. For
accelerating the socio-economic and rural development process several Governments
sponsored programs were launched and lending in the priority sector, irrational lending
under socio political pressures, mounting levels of bad debts, branch expansion at non
viable centers etc. gradually started affecting the financial health of the banking sector in
the country. Commercial banks were not following uniform accounting policies
camouflaged the true financial position of banks. Quality of loan asset was not a concern
and a high proportion of loan assets started becoming non performing. Most of the banks
were under capitalized and some of them even with negative worth. Thus there was a
compelling need for a change and various policy corrections had to be taken with the
view of strengthening the economy. Thus the Government of India was forced to initiate
a process of reforming the financial sector which banks constitute a dominant part.
The reforms process includes:
1. Introduction of prudential norms.
2. Transparency in balance sheets.
3. Deregulation of interest rates.
4. Partial deviation from directed lending.
5. Upgradation of technology.
6. Entry of new private sector banks.
NARASIMHAM COMMITTEE:
The first phase of banking sector reforms was initiated in the year 1992 in pursuance of
recommendations of the committee on financial sector reforms headed by Narasimham
Committee.
As per the recommendations of Narasimham Committee, The Reserve Bank of India
introduced in a phased manner, prudential norms for income recognition, asset
classification, and provisioning in the year 1998 Narasimham Committee-II came out
with more stringent norms for the industry. The prudential norms were revised from time
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Canara Bank
to time to fall in line with the best accounting practices and for transparency in published
accounts.
It is widely recognized that as a result of these reforms, the Indian Banking System is
becoming increasingly mature in terms of the transformation of business processes and
the appetite for risk management.
Deregulation, technological upgradation and increased market integration have been the
key factors driving change in the financial sector.
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reflect their true specified financial health. Thus the profit, capital and reserves were
overstated by them.
After 10years of NPA terror in the banking industry, “Now the Banks Have Teeth”, a
new law lightens the burden of bad loans for Indian Banks. The law that has been the
catalyst for the bad loan clean up passed India’s Parliament in November 2002. It allows
lenders to more easily foreclose on debtors assets or even demand a change in
management. Within weeks of the law’s passage, banks saw a flood of loans once
deemed unrecoverable being repaid in double time. The Act is The Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Also
know as the Securitization Act). This Act enables the setting up of asset management
companies for addressing the problems of non-performing assets of banks and FIs.
GLOBAL NPA:
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The core banking 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.
However lending also carries credit risk, which arises from the failure of borrower to
fulfill its contractual obligations either during the course of a transaction or on a future
obligation. A question that arises is how much risk can a bank afford to take? Recent
happenings in the business world – Enron, WorldCom, Xerox, Global Crossing do not
give much confidence to banks. In case after case, these giant corporates became
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.
Due to this, banks are restricting their lending operations to secured avenues only with
adequate collateral on which to fall back upon in a situation of default.
It needs to be recognized that prudential norms in respect of loan classification vary
widely across countries. A country follows varied approaches, from the subjective to the
prescriptive. Illustratively, in the United Kingdom, supervisors do not require banks to
adopt any particular form of loan classification and either is there any recommendation
on the number of classification categories that banks should employ. Other countries,
such as, the United States follow a more prescriptive approach, wherein loans are
classified into several categories based on a set of criteria ranging from payment
experience to the environment in which the debtor evolves. The adoption of such a
system points to the usefulness of a structured approach those facilities the supervisor’s
ability to analyze and compare banks loan portfolios.
India is a better bet than China for investors to pump money into non-performing assets
(NPAs) restructuring as it has better environment for recovery, according to consulting
firm Price water House Coopers (PwC).
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Standard & Poor’s and The Credit Rating Information Services of India Ltd., (CRISIL)
estimate that India’s schedule commercial banks require between US$11billion-
US$13billion in new capital to support losses embedded in impaired assets. The
significant capital shortfall estimated recognizes the existing moderate reported capital
position of Indian banks, the inadequate loan loss reserves maintained by the banks to
absorb likely losses.
The weak capital position of the Indian banking system is largely a reflection of growing
asset-quality problems stemming from weak underwriting and credit management
system, and the vulnerabilities of the Indian banking sector to the impact of globalization
on the country’s key industry sectors. The asset-quality position also has suffered from
regulations with respect to lending to priority sectors. “The capital shortfall calculated
assumes a significantly higher system non-performing loan level to that reported under
Indian regulatory standards,” said Peter Sikora, associate director, Financial Services
Rating, Standard & Poor’s, together with CRISIL are, however, of the view that non
performing loan levels for Indian banks will be significantly higher at 20%-25% if more
conservative classification standards are adopted and restructured, and ever greened loans
are included as impaired assets.
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CLASSIFICATION OF ASSETS:
CATEGORIES OF NPAs:
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
realisability of the dues:
a) Sub-Standard Assets.
b) Doubtful Assets.
c) Loss Assets.
SUB-STANDARD ASSETS:
A sub-standard asset was one, which was classified as NPA for a period not exceeding
two years. With effect from 31March 2001, a sub-standard asset is one, which has
remained NPA for a period less than or equal to 18 months. In such cases, the current net
worth of the borrower / guarantor or the current market value of the security charged is
not enough is not enough recovery of the dues to the banks in full. In other words, such
an asset will have well defined credit weakness 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. With effect from 31March 2005, a sub-standard asset
would be one, which has remained NPA for a period less than or equal to 12 months.
DOUBTFUL ASSETS:
A doubtful asset was one, which remained NPA for a period exceeding two years. With
effect from 31March 2001, as asset is to be classified as doubtful, if it has remained NPA
for a period exceeding 18 months. A loan classified as doubtful has all the weaknesses
inherent in assets that were classified as sub-standard, with the added characteristic that
the weaknesses make collection or liquidation in full, - on the basis of currently know
facts, conditions and values – highly questionable and improbable.
With effect from 31March, 2005, an asset to be classified as doubtful if it remained in the
sub-standard category for 12 months.
LOSS ASSETS:
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspection but the amount has not been written off wholly. In other
words, such an asset is 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.
It should be noted that the above classification is only for the purpose of computing the
amount of provision that should be made with respect to bank advances and certainly not
for the presentation of advances in the bank balance sheet. The Third Schedule to the
Banking Regulation Act 1949, solely governs presentation of advances in the balance
sheet. Banks have started issuing notices under The Securitization Act,2002 directing the
defaulter to either pay back the dues to the bank or else give the possession of the secured
assets mentioned in the notice. However, there is a potential threat to recovery if there is
substantial erosion in the value of security given by the borrower or if borrower has
committed fraud. Under such a situation it will be prudent to directly classify the
advances as a doubtful or loss asset, as appropriate.
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Canara Bank
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
PROVISIONING REQUIREMENTS:
As and when an asset is classified as an NPA, the bank has to further sub-classify it into
sub-standard, loss and doubtful assets. Based on this classification, bank makes the
necessary provision against these assets.
Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank
advances where the recovery is doubtful. Banks are also required to comply with such
guidelines in making adequate provision to the satisfaction of its auditors before
declaring any dividends on its shares.
In case of loss assets, guidelines specifically require that full provision for the amount
outstanding should be made by the concerned bank. This is justified on the grounds that
such an asset is considered uncollectible and cannot be classified as bankable asset.
Asset Type Percentage of Provision
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The Oxford College of Engineering, Bangalore, MBA Programme
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
At Pre-Credit Stage:
1. Extensive enquiry about the character and the credit worthiness of the borrower.
2. Viability of the project to be financed is meticulously studied.
3. Adequate coverage of collateral is ensured to the extent possible.
4. Financial statement of the borrower is obtained and poor analysis of their
financial strength is done.
5. Apart from the published financial statements independent enquires are made with
previous bankers.
6. Pre-Credit inspection of the assets to finance is made.
At Post-Credit Stage:
1. Operations in the account are closely monitored.
2. Unit visit is done at irregular intervals.
3. Asset verification is done on a regular basis.
4. Borrowers submit control returns regularly.
5. Accounts are periodically to evaluate the financial health of the unit.
6. Early warning signals are properly attended to.
7. Close contract with the borrower is maintained.
8. Potential NPAs are kept under special watch list.
9. Potentially viable units are restructured.
10. Repayment program of accounts with temporary cash flow problem is
rescheduled.
Immediate legal action is initiated in cases where the default is willful and the
intention of the borrower is bad.
CREDIT MONITORING:
Credit Monitoring System is for:
1. Preventing the slippage of quality assets through the monitoring of standard
assets.
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The Oxford College of Engineering, Bangalore, MBA Programme
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WARNING SIGNALS:
1. Default in servicing periodic installments and interest.
2. Accumulation of stock & non-movement of stock.
3. Operating loss / net loss.
4. Slow turnover of debtors & fall in level of sundry creditors.
5. Return of outward bills for collection / return of cheque.
6. Labor troubles.
7. High turnover of key personnel.
8. Loss of critically important customers.
9. Court cases against the unit.
10. Avoidance of contacts with the bank.
11. Delayed submission of financial statements.
12. Disputes among partners / promoters.
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The Oxford College of Engineering, Bangalore, MBA Programme
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EXCESS LIQUIDITY:
Now banks are faced with the problem of increasing liquidity in the system. Further, RBI
is increasing the liquidity in the system through various rate cuts. Banks can get rid of its
excess liquidity by increasing its lending but, often shy away from such an option due to
the high risk of default.
In order to promote certain prudential norms for healthy banking practices, most of the
developed economies require all banks to maintain minimum liquid and cash reserves
broadly classified in to Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio
(SLR).
Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in
the form of Cash Reserve or by way of current account with the RBI, computed as a
certain percentage of its demand and time liabilities. The objective is to ensure the safety
and liquidity of the deposits with the banks.
On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking
company shall maintain in India in the form of cash, gold or unencumbered approved
securities, an amount which shall not, at the close of business on any day be less than
such percentage of the total of its demand and time liabilities in India as on the last
Friday of the second proceeding fortnight, as the RBI may specify from time to time.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in
RBI’s vaults and further infuses greater funds into a system. However, almost all the
banks are facing the problem of bad loans, burgeoning non-performing assets, thinning
margins, etc. As a result of which, banks are little reluctant in granting loans to
corporates.
As such, through in its monetary policy RBI announces rate cut but, such news are no
longer warmly greeted by the bankers.
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The Oxford College of Engineering, Bangalore, MBA Programme
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1. Lok Adalats: Lok Adalats have been set up for recovery of dues in accounts
falling in the doubtful and loss category with outstanding balance up to Rs.5lakh,
by way of compromise settlements. This mechanism has, proved to be quite
effective for speedy justice and recovery of small loans.
2. Debt Recovery Tribunals: DRTs which have been set up by the Government to
facilitate to speedy recovery by banks / DFIs, have not been able to make much
impact on loan recovery due to a variety of reasons like inadequate number, lack
of infrastructure, under-staffing and frequent adjournment of cases. It is essential
that the DRT mechanism is strengthened and DRTs are vested with a proper
enforcement mechanism to enforce their orders. Non-observance of any order
passed by the Tribunal should amount to contempt proceedings. The DRTs could
also be empowered to sell the assets of the debtor companies and forward the
proceeds to the Winding-up Court for distribution among the lenders. Also,
DRTs could be set up in more centers preferably in district headquarters with
more presiding officers. 22 DRTs have been set up in the country during the half
last a decade.
DRTs have not been able to deliver, as they got swamped under the burden
of large number of cases filed with since their inception.
3. Corporate Debt Restructuring: Corporate Debt Restructuring (CDR)
mechanism is an additional safeguard to protect the interest of the creditors and
revive potentially viable units. The CDR system was set up, in accordance with
the guidelines of RBI evolved in consultation with Government of India. The
objective of the CDR system is to ensure a timely and transparent mechanism for
restructuring of corporate debts of viable entities and to minimize the losses to
the creditors and other stakeholders through an orderly and co-ordinated re-
structuring programme. With CDR, banks can arrest fresh slippage of performing
assets into the magnitude of assets. Under the system standard, sub-standard and
doubtful assets can be restructured. The CDR mechanism is based upon effective
co-ordinate among banks.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
6. Legal Reforms: The legal frame work sets standards of behavior for market
participants, details the rights and responsibilities of transacting parties, assures
that completed transactions are legally binding and also provides the regulators
with the necessary teeth to enforce standards and ensure compliance and
adherence to law. Thus the legal frame work is a key element for limiting moral
hazards in Indian Banking. As the problem of NPAs is closely linked with the
issue of legal reforms the Government has taken up initiatives to align the legal
set-up with the requirements of the banking system. As early as in 1999 the
Andhyarujina Committee set up by Government of India to formulate specific
proposals to give effect to the suggestions made by the Narasimham Committee
(1998) recommended amending the Recovery of Debts due to the Banks and
Financial Institutions Act 1993 and Sick Industrial Companies Act, 1995. It also
recommended a new legislation for banks and Financial Institutions to take
possession and sale of securities without the intervention of the Court, in respect
of both immovable property and movable assets which resulted in the enactment
of SRFAESI Act 2002. The Committee also considered securitization as an
instrument to tackle the NPA problem.
7. Securitization: Securitization enables risk sharing and trading of loans where the
bad assets of banks can be securitized and sold at a discount. The lending
institution’s NPAs are hence removed from their balance sheets and are instead
funded by investors through negotiable financial instruments. The security is
backed by the expected cash flows from the assets. With securitization the NPAs
in a bank’s balance sheet can be cash upfront, which could be put to productive
use.
High incidence of stamp duties makes securitization transactions unviable.
Under statutory assignment, securitization involves transfer of debt, which can be
effected only by means of an instrument in writing. Every instrument by which
property, whether movable or immovable, is transferred attracts as valorem stamp
duty. Also, stamp duties being a state subject, vary from State to State.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
RISK MANAGEMENT:
Banking and risk are inseparable and risk management assumes significance as the banks
have to take considerable risks. Analysis of risks also assumes importance as it
determines the pricing for the products. As banking is subject to several types of risks
like market risk, credit risk, liquidity risk, default risk, interest rate risk, investment risk,
transaction risk, forex risk, etc., proper perception and evaluation of risk is extremely
important and any short comings on this score can play havoc on the financial decision.
It has been seen that in banks managing NPAs has been a reactive response rather than a
proactive function. In a market driven environment, volatility and risk have increased
considerably in any credit dispensation. Hence, a proper perception and evaluation of risk
becomes essential along with market intelligence about the industry concerned.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
monitoring mechanism for loans needs to be revamped for control of NPAs. Banks need
a robust end-to-end credit process. A robust credit process begins with an in depth
appraisal focused on risks inherent in a loan proposal. Along with appraisal close
monitoring of the loan account is equally important. It is a well-known fact that loans
often go bad due to poor monitoring. An account does not become an NPA over night.
Systems should be in place such that the banker should be alert to catch signals of an
account turning into NPA and quickly react, analyze, and take corrective action.
Banks should have a proper system in place to ensure that to the extent possible the assets
are performing and do not turn into NPAs. In cases where the problems are of a short
term nature and borrowers agree to clear the overdues with in a short time period,
temporary deferment is generally granted by the banks. In cases where the company
requires longer time, depending upon the problems faced and the expected future cash
flows, the proposals are considered for restructuring / re-phasement of the dues.
All cases should be reviewed regularly and on the basis of review, ‘stress cases’ are
identified which require more closer and effective monitoring. For these cases it becomes
imperative to keep a close watch on the working of the company by taking up regular
visits, calling for progress reports with greater frequency, engaging the services of
concurrent auditors / technical consultants to exercise proper supervision and to obtain
independent report / assessment.
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The Oxford College of Engineering, Bangalore, MBA Programme
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As a facilitating measure for smooth transition to 90 days norm, banks have been advised
to move over to charging of interest at monthly rests, by April 1, 2002. However, the date
of classification of an advance as NPA should not be changed on account of changing of
interest at monthly rests. Banks should, therefore, continue to classify an account as NPA
only if the interest charged during any quarter is not serviced fully within 180 days from
the end of the quarter with effect from April 1, 2002 and 90 days from the end of the
quarter with effect from March 31, 2004.
There are two aspects to the adoption of the ’90 days’ overdue norm for identification of
NPAs. The negative aspect is that NPAs will increase in the short term. But the positive
aspect is that banks will be become pro-active in detecting smoke signals about an
account becoming bad and accordingly initiate remedial steps.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
banks, top priority being repayment of deposits. The bank has the highest
exposure under this sector where the incidence of non performance is higher.
5. Textile industry is plagued by high cost of production & low returns, & is running
in loss and many units are being closed down.
6. The bank got fairly good exposure in real estate. The depressed real estate market
has resulted in poor recovery rate in almost the entire segment.
7. In agriculture sector poor recovery has been due to various factors-recovery &
RPDS advances has been affected by the sharp fall in rubber prices. Through out
the country aqua culture miserably failed due to reasons beyond the control of the
borrowers we are not an exception.
8. Poor recovery in schematic loans is mainly due to willful default by the
borrowers.
9. Default in share loans has been due to setback in securities market & sharp
decline in the values of equities.
RECOVERY ROUTE:
i. Lok Adalat.
ii. Compromise route is the most effective and time consuming procedure,
due to the delay in obtaining a favorable decree, further delay in the
execution of the decree, the securities available to bank may get
depreciated or alleviated.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
1. Accounts with net balance up to Rs.5000 are identified as small value assets
and considering the huge volume of such accounts, we had taken decision to
shed such assets coming under priority sector. (Loss and doubtful category
only) and regional heads are given delegation to write-off such assets.
2. Now its felt that small value band can be extended upto Rs.10000. Similarly,
non priority sector, small loans identified as loss or doubtful will also have to
be shed to give administrative efficiency upto larger NPAs.
3. Recovery policies in this segment shall be more flexible and functionaries at
regional office shall be given complete freedom in the settlement of such
accounts. Most of the accounts under this category come under priority sector
and primary / collateral securities are not generally available and many
borrowers are not even available for contact, there is no such scope for legal
action also. Hence recovery done by means of:
Personal contacts.
Persuasion.
Compromise.
Revenue recovery.
2. Salvage operations are to be intensified for effecting recoveries under loss
asset categories and also in cases where we have already shed assets.
3. Incentive schemes for motivating members of staff are to be built in the
recovery policy of the bank.
Considering the above facts, the department suggests the following measures for
the optimum recovery in the small value band upto Rs.10000.00
1. No legal actions to be initiated against borrowers coming under the small valued
band.
2. In cases of failure of letter personal contact and persuasion fall, go for
compromise.
3. Services of approved recovery agents can be considered very discreetly in the
recovery of small value accounts.
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The Oxford College of Engineering, Bangalore, MBA Programme
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4. If all the above efforts fall the regional heads can use their discretion for
shedding such assets.
5. The decision of compromise and shedding of loss / doubtful assets will be done
through committee approach at the regional offices.
6. In case of doubtful / loss assets category and assets already written off, members
of the staff can be given incentives including reimbursement of actual
experiences incurred restricted to a certain percentage of recovery.
SUB-STANDARD ASSETS:
This segment is more effort elastic in terms of recovery and hence the bank’s recovery
policy is to be tuned up for maximizing the recoveries from the sub-standard efforts.
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The Oxford College of Engineering, Bangalore, MBA Programme
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DOUBTFUL ASSETS:
Slippage of assets from sub-standard category to doubtful necessitates higher provisions
requirements. Depending on the age of the asset, 20% to 50% provision has to made on
such assets on the secured portion and 100% provision is required on the unsecured
provision. Recovery of the doubtful assets in the normal course is difficult; the following
strategies can be adopted in handing doubtful assets:
1. Borrowers are to be met in person to get the accounts settled through persuasion.
2. Ensure that the securities charged to the bank are in tact and are not alienated.
3. Securities are to be inspected at periodic intervals and correct value properly
recorded.
4. Legal remedy is the last resort.
5. Most of the accounts coming under this category are either suit filed or RR
initiated. In case of suit filed accounts, cases are to be closely followed up with
the advocated to ensure that the decree is obtained within a reasonable time.
LOSS ASSETS:
CHANCES OF RECOVERY IN MOST OF THESE CASES ARE VERY REMOTE:
1. If recovery in the normal course is difficult, we may have to resort to legal
remedies against the borrowers, guarantor, co-obligate, and efforts shall be made
to bring them to a compromise table for the settlement of the accounts.
2. In case of accounts coming under priority sector, recovery through the RR route is
to be resorted to.
3. As per loss assets are concerned we have made 100% provision for loan losses.
Hence there will not be any further impact on bottom line. If these assets are shed,
notionally from the books of the bank. Such notional write-off will help in
cleansing the balance sheet.
4. Even after write-off the branches can continue the recovery efforts thus made and
can improve the bottom line of the bank.
5. Recovery through legal action is time consuming.
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The Oxford College of Engineering, Bangalore, MBA Programme
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FINANCIAL ANALYSIS:
The term financial analysis refers to the process of determining financial strengths and
weakness of the firm by establishing strategic relationship between the items of balance
sheet, profit and loss account other operative data.
It is the most important ratio which measures the NPA as a percentage of advances.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
(Amt in Crore)
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
TABLE: 1
GRAPH: 1
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2003-2004 2004-2005 2005-2006
NET NPA RATIO%
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Interpretation
Prudent asset management was accorded greater emphasis during the year 2005-2006.
Gross NPA of the bank as at March 2006 stood higher at Rs.3127 crore. Primary due to
the introduction of new 90 day norms. As a result Gross NPA ratio of the bank stood at
6.33% compared to 5.96% a year ago. While Net NPA of the bank stood at Rs.1378
crore, Net NPA ratio came down to 2.89% from 3.59% asset March 2005. On the
recovery front, the banks performance under cash recovery stood at Rs.606 crore
compared to Rs.563 crore a year before. During the year 7107 recovery meets were
conducted by the bank leading to statement of 21201 accounts involving compromise
amount of Rs.274.77 crore and resulting in recovery of Rs.187.46 crore.
TABLE: 2
Table showing Capital Adequacy Ratio from 2003-04 to 2005-06
2003-2004 2004-2005 2005-2006
11.88 12.50 12.66
GRAPH: 2
Graph showing Capital Adequacy Ratio from 2003-04 to 2005-06
12.8
12.6
12.4
12.2
12
11.8
11.6
11.4
2003-2004 2004-2005 2005-2006
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Interpretation
The banks owned funds, as at March 2005 aggregated to Rs.1531 crore as against
Rs.4024 crore as while the banks capital stood at 410 crore. In order to further argument
its capital base, the bank raised their 2nd capital worth Rs.250 crore during 2005-06.
Capital to Risk weighted Asset Ratio (CRAR) of the bank improved further to 12.66% as
at March 2005 from 12.05% as at March 2005. A dividend of 50% amounting to Rs.205
crore, has been proposed by BOD for the year ended March 2006 including an interim
dividend of 25% declared after the finalization of account for first half of 2005-06 and
fully complying with RBI guidelines on dividend declaration policy. This is as against
distributed as dividend for the year 2004-2005.
TABLE: 3
GRAPH: 3
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2003-2004 2004-2005 2005-2006
Return On Assets
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Interpretation:
This ratio correlates between the total assets and the net profit. The return on total assets
(also return on capital employed or return on investment) is defined as Net Income
(Profit) divided by average total assets. A return of 10 percentages is considered as ideal
ratio. As such, if the actual ratio is equal or more than 10 percentage, it indicates the
higher productivity of the total resources / assets and vice verse in adverse cases.
TABLE: 4
GRAPH: 4
35
30
25
20
15
10
5
0
2003-2004 2004-2005 2005-2006
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Interpretation:
The ratio measures the profit available to the equity holders on a per share basis. It is
found out by dividing the amount of profit after tax by the number of shares. The earning
per share of the bank has increased drastically in the year 2005-2006 i.e. 32.63 compare
to 2003-2004 i.e. 12.83, which is good sign of the bank.
TABLE: 5
Non-Performing Assets as Percentage of Advance – Public Sector Banks
As on March 31 in percent
Net NPA as % to Net Advances
Sl.No Name of the Banks 2004 2005 2006
I NATIONALISED BANKS
1. Allahabad Bank 10.57 7.08 2.37
2. Andhra Bank 2.45 1.79 0.93
3. Bank of Baroda 5.06 3.72 2.99
4. Bank of India 6.02 5.37 4.50
5. Bank of Maharastra 5.81 4.82 2.46
6. Canara Bank 3.89 3.59 2.89
7. Central Bank of India 7.98 7.02 5.57
8. Corporation Bank 2.31 1.65 1.80
9. Dena Bank 16.31 11.83 9.40
10. Indian Bank 8.28 6.15 2.71
11. Indian Overseas Bank 6.32 5.23 2.85
12. Oriental Bank of Commerce 3.20 1.40 NIL
13. Punjab & Sind Bank 5.32 10.89 9.62
14. Punjab National Bank 11.70 3.86 0.98
15. Syndicate Bank 4.52 4.29 2.58
16. UCO Bank 5.45 4.36 3.65
17. Union Bank of India 6.26 4.91 2.87
18. United Bank of India 7.90 5.52 3.75
19. Vijaya Bank 6.02 2.61 0.91
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Interpretation: The ratio of net non-performing assets to net advances also declined
during 2005-06. Majority of the banks, this ratio is less than 4 percent. Dena Bank has the
highest ratio with 9.4 percent followed by Central Bank of India with 5.6 percent. 4 banks
reported “nil” ratio during 2005-06. Net NPA ratio of the Canara Bank declined from
3.59% as at March 31st 2005 to 2.89% as at March 31st 2006.
TABLE: 6
Public Sector Banks: Total Assets
As on March 31 Rs. in crore
TOTAL ASSETS
Sl.No. Name of the Bank 2004 2005 2006
I. NATIONALISED BANK
1 Allahabad Bank 24764 28051 34704
2 Andhra Bank 20937 24678 27009
3 Bank of Baroda 70910 76425 85109
4 Bank of India 69806 76627
84860
5 Bank of Maharastra 21470 24905 32213
6 Canara Bank 72135 82055 99539
7 Central Bank of India 52614 57105 63345
8 Corporation Bank 23604 26272 29154
9 Dena Bank 18842 20162 22160
10 Indian Bank 30263 35375 39154
11 Indian Overseas Bank 35441 41155 47322
12 Oriental Bank of Commerce 32237 33999 41007
13 Punjab National Bank 72915 86222 102332
14 Punjab & Sind Bank 13754 14491 15011
15 Syndicate Bank 31756 34435 47223
16 UCO Bank 31881 34914 43798
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GRAPH: 5
1000000
900000 Total of 19
800000 Nationalised
700000 Banks
600000
SBI
500000
400000
300000
200000 Total of 7
100000 Associates
0
2004 2005 2006
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The Oxford College of Engineering, Bangalore, MBA Programme
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Interpretation:
Total Assets of the Public Sector Banks (PSBs) increased from Rs.12,85,794 crore as on
31st March, 2005 to Rs.14,71,427 crore as on 31st March 2006 showing a growth rate of
14.4 percent which is higher than the growth rate of 11.2 percent of the previous year.
During the year 2005-06, 14 Banks reported higher growth rate than the average growth
rate of the group. Syndicate bank recorded the highest growth in total assets with 37.1
percent during 2005-06. Total Assets of the Canara Bank increased from Rs.82055 crore
as on 31st March 2005 to Rs.99539 crore as on 31st March 2006, showing a growth rate of
21.3% which is higher than the growth rate of 13.8 percent of the previous year.
TABLE: 7
Public Sector Banks: Advances
st
As on March 31 Rs. in crore
I. NATIONALIZED BANKS
1 Allahabad Bank 10482 12544
15342
2 Andhra Bank 9678 11513
12885
3 Bank of Baroda 33663 35348
35601
4 Bank of India 38311 42633
45856
5 Bank of Maharastra 8255 9508
11732
6 Canara Bank 33127 40472
47639
7 Central Bank of India 21288 23159
22804
8 Corporation Bank 10987 12029
13890
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
GRAPH: 6
Public Sector Banks: Advances
600000
500000
Total of 19 Nationalised
400000
Banks (I)
300000 State Bank of India (SBI)
100000
0
2004 2005 2006
Interpretation:
The rate of growth in advances showed slight improvement during 2005-06 as compared
to previous year. Total advances increased to Rs.6,32,741 crore as on 31 st March, 2006
from Rs.5,49344 crore recording a growth rate of 15.2 percent as against the growth rate
of 14.4 percent of the previous year. In the case of nationalized banks there is a marginal
improvement in the credit disbursement from 14.1 percent during 2004-05 to 14.5 percent
during 2005-06. State Bank Group showed better growth in advances than the
nationalized banks group with a growth rate of 16.6 percent during 2005-06 as against
15.0 percent of the previous year. 17 banks recorded higher growth in advances than the
group average with Vijaya Bank in the top slot with 40.1 percent. Other banks, which
have showed impressive growth in advances were, UCO Bank (29.5 percent), State Bank
of Bikaner & Jaipur (26.9 percent), Syndicate Bank (26.6 percent) and Oriental Bank of
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Commerce (25.5 percent). Central Bank of India recorded a declined growth in advances
with 1.5 percent during 2005-06. The total advances of the Canara Bank increased to
Rs.47639 crore as on 31st March, 2006 from Rs.40472 crore as on 31st March 2003
recorded a growth rate of 17.7 percent.
I. NATIONALIZED BANKS
1 Allahabad Bank 2002 1842 1418
2 Andhra Bank 524 581 615
3 Bank of Baroda 4489 4168 3980
4 Bank of India 3722 3804 3734
5 Bank of Maharastra 906 958 954
6 Canara Bank 2112 2475 3127
7 Central Bank of India 3243 3244 3092
8 Corporation Bank 587 657 722
9 Dena Bank 1996 1617 1484
10 Indian Bank 2175 1630 1192
11 Indian Overseas Bank 1819 1896 1576
12 Oriental Bank of Commerce 952 1146 1211
13 Punjab & Sind Bank 1092 1247 1204
14 Punjab National Bank 4140 4980 4670
15 Syndicate Bank 1299 1420 1590
16 UCO Bank 1333 1366 1479
17 Union Bank of India 2420 2288
2347
18 United Bank of India 1216 959 764
19 Vijaya Bank 603 506 390
Total of 19 Nationalized Banks 36630 36884 35549
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
GRAPH: 7
Public Sector Banks: Gross NPA
40000
35000 Total of 19
30000 Nationalised
25000 Banks
SBI
20000
15000
10000 Total of 7
5000 Assosiates
Banks
0
2004 2005 2006
Interpretation:
Various supportive policy measures coupled with consistent efforts on the part of the
banks helped to reduce the gross and net non-performing assets of the banks in absolute
terms as on 31st March, 2006. Gross NPA of PSBs declined from Rs. 54,087 crore to
Rs.51,537 crore and Net NPA came down from Rs.24,866 crore t Rs.18,859 crore as on
31st March,2005 and 2006 respectively. Gross NPA declined by 24.2 percent during
2005-2006. Seven Banks showed higher growth in Gross NPA than the previous Year.
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Canara Bank
Gross NPA of the Canara Bank increased from Rs.2475 crore to Rs.3127 crore as on 31 st
March 2006. Gross NPA increased by 26.3%.
I. NATIONALIZED BANKS
1 Allahabad Bank 1160 887 363
2 Andhra Bank 237 206 120
3 Bank of Baroda 1913 1700 1761
4 Bank of India 2304 2286 2062
5 Bank of Maharastra 480 459 288
6 Canara Bank 4288 1454 1378
7 Central Bank of India 1699 1563 1271
8 Corporation Bank 253 198 250
9 Dena Bank 1227 997 884
10 Indian Bank 904 755 383
11 Indian Overseas Bank 958 912 578
12 Oriental Bank of Commerce 454 225 NIL
13 Punjab & Sind Bank 651 639 577
14 Punjab National Bank 1810 1527 449
15 Syndicate Bank 690 700 532
16 UCO Bank 724 697 753
17 Union Bank of India 1338 1253 845
18 United Bank of India 542 406 299
19 Vijaya Bank 373 206 100
Total of 19 Nationalized Banks 22005 17070 12893
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
GRAPH: 8
Public Sector Banks: Net NPA
25,000
Total of 19
20,000
Associate Banks
Nationalised
Banks
15,000
SBI
10,000
Total of 17
5,000 Associates
Banks
0
2004 2005 2006
Interpretation:
In the case of Net NPA, four banks (Oriental Bank of Commerce, State Bank of Indore,
State Bank of Patiala and State Bank of Saurashtra) reported “zero” NPAs. Two banks
(Banks of Baroda and UCO Bank) recorded higher growth in Net NPA during 2005-2006
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
than the previous year. Net NPA of the Canara Bank declined from Rs.1454 crore to
Rs.1378 crore as on 31st March 2006. Net NPA decreased by 5.2%.
TABLE: 10
Public Sector Banks Credit – Deposit Ratio
ASSOCIATES OF SBI
State Bank of Bikaner & Jaipur 50.45 51.18 54.96
State Bank of Hyderabad 48.40 46.91 48.70
State Bank of Indore 54.11 56.23 61.49
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
GRAPH: 9
180
160
140
Total of 19
120
Nationalised Banks(I)
100 State Bank of India
80
60 Total of 7 Associates
[III]
40
20
0
2004 2005 2006
Interpretation:
Credit Deposit Ratio (C/D) of all Public Sector Banks improved marginally from 54.2
percent during 2004-05 to 54.8 percent 2005-06. 11 banks recorded higher C/D ratio than
the group’s average. Bank of India recorded the highest ratio with 64.6 percent followed
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
by State Bank of Mysore with 61.5 percent and Corporation Bank with 59.9 percent. The
lowest ratio of 34.9 percent was recovered by United Bank of India. Canara Bank
recorded higher credit deposit ratio than the group’s average with 55.17%.
TABLE: 11
Comparative NPA Bank Figures- Public Sector Banks
Interpretation:
There is an increase of 90% in the ratio of Net NPA of the Corporation Bank in March
2006 than previous year. In the case of all other public sector banks the ratio declined
during March 2006. The Net NPA percentage of Canara Bank has reduced by over 19%.
TABLE: 12
NPAs and Recoveries of Public Sector Banks
(Rupees in Crore)
NPAs Recoveries
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
GRAPH: 10
40000
35000
30000
25000
20000
15000 Total of State Banks
10000
Total of Nationalised
5000 Banks
0
31.3.3006
31.3.2004
31.3.2005
31.3.2006
NPAs Recoveries
Interpretation:
State Bank of India recorded the highest recovery of NPAs amounted to Rs.6.668 crore
during 2005-2006 followed by Bank of India Rs.1144 crore. Canara Bank has initiated
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
several steps for reduction of NPAs and achieved substantial cash recovery to the extent
of Rs.865 crore during the year 2005-2006. [Previous Year Rs.782 crore].
TABLE: 13
As on As on As on As on
31.03.03 31.03.04 31.03.05 31.03.06
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
GRAPH: 11
3500
3000
2500
Gross NPA
2000
Net NPA
1500
0
31.03.03 31.03.04 31.03.05 31.03.06
Interpretation:
During 2003-2004, the Canara Bank continued to accord top priority to its asset quality
and achieved considered success in bringing down volume of its impaired assets. Gross
NPA came down from Rs.2150 crore to Rs.2112 crore and as a percentage to total
advances from 7.72% to 6.22%. Net NPA of the bank declined from Rs.1345 crore at
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
March 2003 to Rs.1288 crore at March 2004, the Net NPA ratio coming from 4.81% to
3.89%. Provisions made during the year for NPA amounted to Rs.385 crore (previous
year Rs.399 crore).
During 2005-2006, Gross NPA increased from Rs.2475 crore to Rs.3127 crore and as a
percentage to total advances increased from 5.96% to 6.33%. Net NPA of the bank
declined from Rs.1454 crore at March 2005 to Rs.1378 crore at March 2006, the Net
NPA ratio coming from 3.59% to 2.89%. The provisions made during the year for NPA
amounted to Rs.1239 crore (Previous Year Rs.476 crore).
SUMMERY OF FINDINGS:
The Net NPA ratio of the Canara Bank declined from 3.59% as at March 31 st
2005 to 2.89% as at March 31st 2006.
Total assets of the Canara Bank increased from Rs. 82055 crore as on 31st March
2005 to Rs.99539 crore as on 31st March 2006, showing a growth rate of 21.3%
which is higher than the growth rate of 13.8% of the previous year.
The total advances of the Canara Bank increased from Rs.47639 crore as on 31 st
March, 2006 from Rs.40472 crore recording a growth rate of 17.7%.
Gross NPA of the Canara Bank increased from Rs.2475 crore to Rs.3127 crore as
on 31st March 2006. Gross NPA increased by 26.3% during 2005-2006.
Net NPA of the Canara Bank declined from Rs.1454 crore to Rs.1378 crore as on
31st March 2006. Net NPA decreased by 5.2%.
Canara Bank has recorded a credit-deposit ratio of 55.17% which is higher than
the group’s average of public sector banks during 2005-2006.
The Net NPA percentage of Canara Bank has reduced by over 19% during 2005-
2006.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Canara Bank has recovered its NPA which is amounted to Rs.865 crore during
2005-2006 (Previous year Rs.782 crore).
The percentage of gross NPA of the Canara Bank during 2004-2006 is 6.33% and
the provisions made during the year amounted to Rs.1239 crore.
The Canara Bank has taken steps to implement an Integrated Risk Management
System, covering credit, operational and market risks.
CONCLUSION:
When this Act was enacted, it was seen as a panacea to the entire problem of NPAs. The
banks were euphoric and they took action swiftly. Notices were flashed to defaulters.
Cash recovery became a reality. Banks have seized assets of number of borrowers.
The problem of bad loans could be due to bad intensions or bad financial management or
otherwise and also due to several external reasons. The main concern is the prevention of
further slippage of performing accounts into the non performing category in the first
instance.
Preventing fresh flow of NPAs is as important as the recovery of the existing heavy stock
of NPAs.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
There can not be any quick fix or one short solution to solve the NPA problem. Once
recovery reforms are carried out, market for stressed assets are developed, this
Securitization Act will surely help banks in reduction of NPAs to a great extent. Passing
of the law cannot be considered to be synonymous with addressing the underlying
problem our legal system has so far failed to enforce contractual obligations and this is
hardly likely to cure this fundamental ill, unless more legal reforms are made and strictly
enforced in true letter and spirit. Banks should also be empowered to proceed against the
personal assets of the directors of the defaulting units / companies / groups etc. to enable
the act to be more effective and proactive as well.
Exchange of credit information among banks would be of immense help to avoid possible
NPAs. The banking system ought to be so geared that a defaulter at one place is
recognized as a defaulter by the system. The system will have to provide a mechanism to
ensure that the unscrupulous borrowers are unable to play one bank against the other.
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Canara Bank
6. SUGGESTIONS
The origin of the problem of burgeoning NPAs lies in the quality of managing
credit risk by the banks concerned. What is needed is having adequate 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.
Banks should create a new model of banking business by giving loans to the
credit worthy and persons having clean credit history.
Canara Bank should offer rescheduling of loans of those borrowers who were
struggling with high interest rates in a falling interest rate environment.
Canara Bank should concentrate more on credit appraisal, monitoring, credit risk
management and recoveries.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
Finding out the real reason behind irregular repayments or defaults and if it is not
willful then offer good debt management advice to the borrower.
A credit checklist should be prepared for granting a loan and atleast five of the
checklist questions should be answered positively. It can help the banking
personnel to take adequate precaution before granting a loan.
Settlement is a better option for the banks wrestling with the problem of non-
performing assets. While getting a court decree for taking over assets may be
easy, the real litigation starts at the time of execution.
While lending, lender wants to make sure that the borrower is both able and
willing to meet the repayments.
Credit scoring allows lenders to determine whether or not you fit the profile of the
type of customers they are looking for. It works by comparing your details such as
your previous credit history, job and salary with those of previous customers who
have paid on time. Your score is worked out using a computer-based ‘score card’
which awards your application points, according to the lender’s own criteria and
lending policy. Many see credit scoring as a quick, fair and best practice.
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The Oxford College of Engineering, Bangalore, MBA Programme
Canara Bank
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The Oxford College of Engineering, Bangalore, MBA Programme