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CONTENTS

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PARTICUALARS

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EXECUTIVE SUMMARY INTRODUCTION TO THE STUDY INDUSTRY PROFILE

1-3 4 5-13 14-27

ORGANISATION PROFILE
NON PERFORMING ASSETS OBJECTIVES OF THE STUDY METHODOLOGY ANALYSIS AND INTERPRETATION OF DATA FINDINGS SUGGESTIONS CONCLUSION BIBLIOGRAPHY

28-60 61 62-63 64-70 71 72 73 74

Project Report on Non Performing Assets & Banking Studies

EXECUTIVE SUMMARY Industry Profile


Banking in India has its origin as carry as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to the interest. During the mogal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of East India Company, it was to turn of the agency houses top carry on the banking business. The general bank of India was the first joint stock bank to be established in the year 1786.The others which followed were the Bank of Hindustan and the Bengal Bank

Company Profile
The Belgaum District Central Co-operative Bank established in the year 1918 and The Belgaum District central Co-operative Banks operations were started by the following year that is by 1919. The bank is established mainly for the purpose to serve the Farmers and general people who were in the hands of private and capitalist in the year 1919. Now the bank is successfully running by serving all the sectors. Now a day all the sectors are affected by the Political interferences, lack of honesty, lack of social service and lack of innovative ideas. But BDCC Bank is going far away from these difficulties. There are totally 650 employees, 5 Deputy General Managers, & 1 General Manager. Total branches of the bank are 84 plus 1 Head office. The Bank is currently achieved Rs.605.97 crores deposits, Rs.592.64 crores Advances, Rs.104041.95 crores working capital. By which the bank is running in the success path. Loan Repayment is recorded with 75% which has made an important aspect for the deposits and advances. The BDCC Bank has over 85 Branch offices.

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Project Report on Non Performing Assets & Banking Studies SCOPE OF THE STUDY:
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 BDCC Bank. The data is purely based on the secondary data and collected from website and journal. The scope is limited to drawn conclusions from analysis and interpretation of the primary and secondary data of the BDCC bank.

OBJECTIVES OF THE STUDY:


. To offer useful suggestions to reduce the NPAs in the bank To evaluate the BDCC Banks assets quality. To study the management of total assets and advances of the BDCC Bank. To analyze sector wise non-performing assets.

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. suitable methods and measures are to be followed. The use of proper methodology is an essential part of any research. In order to conduct a study scientifically,

Research Design:
The type of research used for the collection and analysis of the data is Historical Research Method. The main source of data for this study is the past record prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception and to identify the ways in which the performance especially the non-performing assets of the BDCC Bank can be improved. The data regarding bank history and profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with individuals. Babasabpatilfreepptmba.com

Project Report on Non Performing Assets & Banking Studies

Data collection method Primary data: Discussion with the manager and officers of the bank to get general
information about the bank and its activities. Having face to face discussions with the bank officials. By taking guidance from bank guide and departmental guide.

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

RECOMMENDATIONS:
Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. BDCC Bank should offer rescheduling of loans of those borrowers who were struggling with high interest rates in a falling interest rate environment. BDCC Bank should concentrate more on credit appraisal, monitoring, credit risk management and recoveries.

CONCLUSION:
NPA Act is fine, comprehensive and an extra-ordinary piece of legislation. It is also a reassuring sign of Governments commitment to reforms. The Act empowers bank to change or take over the management or even take possession of secured assets of the borrowers and sell or lease out the assets. This is for the first time that the banks can take over the immovable assets of the defaulting borrowers without the intervention of the court. They can claim future receivables and supersede the Board of Directors of the defaulting corporate. No court, other than Debt Recovery Tribunal, can entertain any appeal against the action taken by banks and financial institutions under this act.

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Project Report on Non Performing Assets & Banking Studies INTRODUCTION TO THE STUDY
A study on the Management of Non Performing Assets in the BDCC Bank is done at the BDCC Bank near central bus stand, Belgaum (Dist), Karnataka state. The type of research used for the collection and 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 and to identify the ways in which the performance especially the non-performing assets of the BDCC Bank can be improved. The data regarding bank history and profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with individuals.

Title of the Project: A STUDY ON BDCC BANK AND ITS NON PERFORMING ASSETSS
BACKGROUND OF PROJECT TOPIC A crucial issue which is engaging the constant attention of the banking industry is the alarmingly high level of non performing assets (NPA). Another major anxiety before the banking industry is the high transaction cost of carrying non performing assets in their books. The resolution of the non performing assets problem requires greater accountability on the part of the corporate, greater disclosure in the case of defaults, an efficient credit information sharing system and an appropriate legal framework pertaining to the banking system so that court procedures can be stream lined and actual recoveries made within an acceptable time frame. So the project title A Study on The Management of Non Performing Assets in the BDCC Bank looks in to the implications of high NPAs and suggests effective recovery measures for resolving problem loans and thus making the banks NPAs level healthy. It also compares the position of BDCC Bank with other public sector banks in terms of their NPAs in the last five years and also to study the management of total assets and advances of the BDCC Bank among other public sector banks. Babasabpatilfreepptmba.com 5

Project Report on Non Performing Assets & Banking Studies INDUSTRY PROFILE 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 from the public repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise.

History:
Banking in India has its origin as carry as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to the interest. During the mogal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of East India Company, it was to turn of the agency houses top carry on the banking business. The general bank of India was the first joint stock bank to be established in the year 1786.The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906, while the other two failed in the meantime. In the first half of the 19th Century the East India Company established three banks; The Bank of Bengal in 1809, The Bank of Bombay in 1840 and The Bank of Madras in 1843.These three banks also known as presidency banks and were independent units and functioned well. These three banks were amalgamated in 1920 and The Imperial Bank of India was established on the 27th Jan 1921, with the passing of the SBI Act in 1955, the undertaking of The Imperial Bank of India was taken over by the newly constituted SBI. The Reserve Bank which is the Central Bank was created in 1935 by passing of RBI Act 1934, in the wake of swadeshi movement, a number of banks with Indian Management were established in the country namely Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, The Bank of Baroda Ltd, The Central Bank of India Ltd .On July 19th 1969, 14 Major Banks of the country were nationalized and in 15th April 1980 six more commercial private sector banks were also taken over by the government. The Indian Banking industry, which is governed by the Banking Regulation Act of India 1949, can be broadly classified into two major categories, non-scheduled banks and Babasabpatilfreepptmba.com

Project Report on Non Performing Assets & Banking Studies


scheduled banks. Scheduled Banks comprise commercial banks and the co-operative banks. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from class banking to mass banking. This in turn resulted in the significant growth in the geographical coverage of banks. Every bank had to earmark a min percentage of their loan portfolio to sectors identified as priority sectors the manufacturing sector also grew during the 1970s in protected environments and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980 since then the number of scheduled commercial banks increased four- fold and the number of bank branches increased to eight fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties. The PSBs found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector first made their appearance after the guidelines permitting them were issued in January 1993.This is how the Banking Industry grew.

The Indian Banking System:


Banking in our country is already witnessing the sea changes as the banking sector seeks new technology and its applications. The best port is that the benefits are beginning to reach the masses. Earlier this domain was the preserve of very few organizations. Foreign banks with heavy investments in technology started giving some Out of the world customer services. But, such services were available only to selected few- the very large account holders. Then came the liberalization and with it a multitude of private banks, a large segment of the urban population now requires minimal time and space for its banking needs. Automated teller machines or popularly known as ATM are the three alphabets that have changed the concept of banking like nothing before. Instead of tellers handling your own cash, today there are efficient machines that dont talk but just dispense cash. Under the Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled banks. The scheduled banks are those, which are entered in the Second Schedule of RBI Act, 1934. Such banks are those, which have paid- up capital and reserves of an aggregate value of not less then Rs.5 lacs and which satisfy RBI that their affairs are carried out in the interest of their depositors. All commercial banks Indian and Foreign, regional rural banks and state cooperative banks are Scheduled banks. Non Scheduled banks are those, which have not been included in the Second Schedule of the RBI Act, 1934.The organized banking system in India Babasabpatilfreepptmba.com 7

Project Report on Non Performing Assets & Banking Studies


can be broadly classified into three categories: (i) Commercial Banks (ii) Regional Rural Banks and (iii) Co-operative banks. The Reserve Bank of India is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all commercial banks and hence is known as the Reserve Bank Banks play important role in economic development of a country, like: Banks mobilise the small savings of the people and make them available for productive purposes. Promotes the habit of savings among the people thereby offering attractive rates of interests on their deposits. Provides safety and security to the surplus money of the depositors and as well provides a convenient and economical method of payment. Banks provide convenient means of transfer of fund from one place to another. Helps the movement of capital from regions where it is not very useful to regions where it can be more useful. Banks advances exposure in trade and commerce, industry and agriculture by knowing their financial requirements and prospects. Bank acts as an intermediary between the depositors and the investors. Bank also acts as mediator between exporter and importer who does foreign trades. Thus Indian banking has come from a long way from being a sleepy business institution to a highly pro-active and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advances.

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Project Report on Non Performing Assets & Banking Studies The Structure of Indian Banking:
The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are again split into old banks and new banks.

Reserve Bank of India [Central Bank]

Scheduled Banks

Scheduled Commercial Banks

Scheduled Co-operative Banks

Public Sector Banks

Private Sector Regional Foreign Banks Banks Rural

Nationalized Banks

SBI & its Associates

Scheduled Urban Co-Operative Banks

Scheduled State Co-Operative Banks

Old Private Sector Banks

New Private Sector Banks

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Co-operative Banking:
India is a country where agriculture is still a predominant activity. Our farmers by and large are poor and usually used to depend on money lenders Indigenous bankers and financiers etc. Till 1951-52 the money lenders were providing 70% of the requirements of farmers and thus constituted the most important source of rural finance. However the share of Moneylenders in rural credit was reduced to 49%. This was due to high rates of interest, dishonesty and fraudulent practices followed by the money lenders. The cooperative Movement was started in India in 1904 with the objective of providing finance to agriculturists for productive purpose at low rates of interest and thereby relieving agriculturists from the chetches of the Money lenders. The co-operative society Act of 1912 contributed to the establishment of central co-operative banks and the state co-operative banks to provide refinance to primary credit societies which could not mobilize funds by their own efforts. The co-operative credit movement made food progress during and after the 1 st world of 191418, but during the great depression of 1929-1933, it received a serious setback. With the out break of Second World War of 1939-45, the co-operative credit movement made considerable progress once again. Since then, the progress has been maintained. A co-operative bank promotes economic activity and provides banking facilities and service to the rural people. The significant role of co-operative banks in the agricultural economy imparts a lesson to commercial banks and dispels from their minds the age old inertia and the gloom of conservatism by shifting emphasis from credit worthiness of the purpose and from tangible security to the character of the business. Co-operative means a form of organization where in persons voluntarily associate together as human beings on the basis of equality for the promotion of the economic interest of themselves. So, co-operatives are characterized by voluntary association and open membership, democratic management, limited interest on capital, education and training equity of distribution of profits etc. Each for all and all for each is the underlying principle of cooperatives.

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Project Report on Non Performing Assets & Banking Studies


The main principles of these societies are: Restricted membership to rural masses Limited area of operation No share capital Unlimited liability of the members The management of the society is honorary Schulze Delitzsch societies are a form of urban credit societies. principles of these are: Membership is open to artisans, middle class people Living in towns and cities Large area of operation Limited liability of members Large share capital The main

So, co-operative came as an answer to the problem of rural indebtedness which was rampant through act the country during the later decades of 19th century. It was an official remedy to be introduced on a voluntary basis, with the principles of self-help, thrift and mutual co-operation. This was supposed to be the beginning of genuine Indian co-operative movement. So the objective of co-operative movement is actively implementing socio economic program with the ultimate aim of uplifting the living standard of economically backward and weaker section of society. In 1919 the government of India Act 1919 was passed and co-operation became a state subject. So several states passed their own acts for the development of the co-operative movement in their respective states through the co-operative movement in India was born at the beginning of century as an instrument of dealing with agricultural indebt ness, it was only after attaining independence that attaining independence that attention was paid in a big way to this issue. After independence the co-operative movement received added support from Government. So to sum up, the co-operative movement has made remarkable progress in terms of number, membership share capital and working capital. The progress of co-operative movement has been remarkable in the fields of agricultural credit, marketing and supply of farm inputs and processing. Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies


The Indian co-operative banking system is a 3-tier system. If consists of three sectors. 1. Primary credit societies at the base 2. Central co-operative Societies in the middle 3. State co-operative Banks or Apex Banks at the top.

Primary Credit Societies


It is an association of ten or more persons residing in a particular locality. The funds at primary credit societies consist of entrance fees, share capital, Reserve fund, Fixed Deposits from members and non-members and loans from central co-operative banks. The primary credit societies extend short and long term loans to the members. Generally, loans are given for a period of 6 months, one year and 2 years. Loans are ordinarily given, on Personal security of borrowers supported by personal security of borrowers supported by personal.

Central Co-operative Banks


The primary credit societies failed to mobilize enough deposits from their members for meeting their requirements. They were in need for refinance from some agency. So the cooperatives societies Act of 1912, provided for the establishment of the central co-operative Bank to provide finance to primary credit societies. Central co-operative banks are federation of primary credit societies operating in a specific area. Generally they are located in the district head quarters and some prominent towns of the district. The funds of central co-operative Banks consist of share capital, reserve funds, deposits from members and non-members and loans and advanced form state cooperative Banks. Some times they raise loans from commercial banks also.

STATE CO-OPERATIVE BANKS


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Project Report on Non Performing Assets & Banking Studies


Every state has a state co-operative Bank at the top of the co-operative banking structure. If is known as Apex Bank as it controls and co-ordinates the working of all co-operative credit institutions in the state. If is found in the state capital. The table 1.1 shows the co-operative credit structure in the whole state of Karnataka. The funds of the state co-operative Banks consists of share capital, reserve funds, deposits from members and general public and loans from RBI, state Government and commercial Banks. However loans and advances from the RBI constitute a major part of their funds.

DISTRICT CENTRAL CO-OPERATIVE BANK (DCC BANK)


Primary co-operative credit societies in a particular area, generally a district, federate and form a district central co-operative bank. Generally the DCC bank located of the head quarters of the district. Some DCC banks have branches in some towns in the particular district. The DCC Banks are of two types. In one type of DCC Banks the membership is confined to primary societies only. This type is therefore known as Banking Union. In the case of the second type of the DCC banks, there is mixed membership consisting of both primary societies and individual possessing some financial status as influence, some special business capacity and experience in the field of co-operative banking. The presence of some of these individuals in the DCC banks and thus on their board of management is deemed necessary because the organization and working of DCC Banks is supposed to be complex. And the representatives of primary societies on the board of management of DCC Banks may not have the necessary ability and experience required running the DCC Bank efficiently and thus inspiring confidence in the mind of the public.

Table Showing The District Co-Operative Credit Structure in the Whole State of Karnataka for the Year 2007-08: Babasabpatilfreepptmba.com 13

Project Report on Non Performing Assets & Banking Studies


SL.NO 1. 2. 3. 4. 5. PERTICULARS Number No. of Branches No. of staff Total Membership Borrowing Membership SCB 1 30 498 79 79 DCCB 22 628 4931 34645 5234 PACS 4532 10567 5549000 873793

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Project Report on Non Performing Assets & Banking Studies ORGANISATION PROFILE

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Project Report on Non Performing Assets & Banking Studies

In this chapter I have concentrate over the introduction of co-operation and co-operative and profile of the Belgaum district central co-operative Bank Belgaum. and organizational structure of the bank, objectives of the bank, limitation of the bank.

MEANING OF CO-OPERATION AND CO-OPERATIVES:


The co-operation means working together for some common purpose. The basic principle of co-operation is each for all and all for each. The meaning for co-operation is different from thinker to thinker. A co-operative is an autonomous association of persons united voluntarily to meet their common, economic, social, cultural needs. And aspiration through jointly owned and democratically controlled enterprises, offices, functioning is based on decentralized decisions making principles. In tradition its aim is economic, social and moral development of its members. Co-operatives are the voluntary and democratic associations of human beings organized on the principles of equality for the attainment of the satisfaction of their common economic needs concerned with economic welfare.

PRINCIPLES OF CO-OPERATIVES:
The foundation of any co-operative activity is based on certain principles. These principles are the guiding force behind the development of the co-operative movement throughout the world. These principles are as follows:

1) Voluntary and open membership:


Co-operatives are voluntary organizations open for all persons to use their services and willing to accept the responsibilities of membership without genders, social, political and religious discrimination. Universal character of membership must be maintained, provided the member fulfill all the qualification and always act in the interest of the bank and other comembers . Babasabpatilfreepptmba.com 16

Project Report on Non Performing Assets & Banking Studies 2) Democratic management and equality of voting rights:
A co-operative bank is democratic in its management. All members are treated equal and exercised through the principle of one man one vote. A principle of democracy representatives is accountable to the membership.

3) Self help through mutual help:


The co-operative bank strives on the principle of mutual fund help. It is an association of financially weaker sections of the society, the financially weaker persons cannot achieve their aims single handedly, and they need mutual helps.

4) Concern for community:


Co-operative works for the sustainable development of the community through policies which do the members approve, the co-operatives must quit to the local needs and environment.

5) Autonomy and independence:


Co-operatives are autonomous and self help organizations controlled by members. if they enter into agreement with other organizations including government or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their co-operative economy.

6) Education training and information to members:


Co-operative provides education, training and information to their members, elected representatives, managers and employees, so that they can contribute effectively to the development at their co-operative.

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Project Report on Non Performing Assets & Banking Studies BACKGROUND OF CO-OPERATIVE MOVEMENT IN INDIA
The co-operative movement `was started in India in the year 1904 by establishing co-operative bank to encourage thrift, self help and co-operation, these finance for both agricultural, small scale and cottage industries, after the independence the central government as well as the state government encouraged the co-operative movement to improve the economic conditions of the weaker section of the society particularly the rural population. Co-operative banking as yet remains the best answer or most satisfactory in situations for providing finance to borrowers in the rural area and also occupy a significant role also. it seeks the help of members and work for the benefit throughout them for larger good of the community.

PROFILE OF THE DISTRICT CENTRAL CO-OPERATIVE BANK LIMITED, BELGAUM.


The district central urban co-operative bank Ltd was established in the year. The Belgaum district central co-operative bank ltd is registered as co-operative society. Under central act II of 1912. Its registration number is 2163, dated 17-12-1918. It was later deemed to be registered under the Bombay co-operative societys act 1925 and now it is deemed to be registered under the Karnataka co-operatives societies act 1959. Its address for present shall be PoonaBangalore road, Belgaum. Its operation shall be the whole of the Belgaum district. it may be referred to the central bank.

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Project Report on Non Performing Assets & Banking Studies Board of Directors:
The present composition and category of Board of Directors of the Bank are furnished below: S/No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Name Of The Directors Shri. Ramesh V. Katti Shri. Mahantesh B. Dodagoudar Shri. D. V. Sangannavar Shri. G. N. Kvalli Shri. L. S. Savadhi Shri. Aravind C. Patil Shri. N. B. Patil Shri. D. T. Patil Shri. Mahantesh S. Patil Shri. S. S. Dhavan Shri. A. M. Kuligude Shri. S. G. Dhavleshwar Shri. Ganesh P. Hukkei Shri. P. B. Dyamangodar Shri. C. B. Patil Shri. A. S. Navalgatti Shri. S. B. Kamatgi Shri. G. M. Patil Shri. S. B. Tubachi Category Of Director Chairman & MP Of Chikkodi V. Chairman Director Director Director & Co-Operative Minister Of Karnataka Govt Director Director Director Director Director Director Director Director & ZP member Director Director Director APEX Bank Nominee Deputy Registrar General Manager

OBJECTIVES OF THE DISTRICT CENTRAL


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Project Report on Non Performing Assets & Banking Studies CO-OPERATIVE BANK LTD BELGAUM
1) To encourage thrift help and co-operation among the members, associate members,

nominal members and depositors of the bank. 2) To provide required finance to priority sectors like agriculture, cottage industries and

small scale industries. 3) To borrow funds from members and non members and to be utilized for granting loans

to members and non members for useful purposes. 4) To act as an agent for the joint purposes of domestic and other requirement of the

members and non members. 5) 6) To arrange for the safe custody of valuables and documents. To carry out instructions for periodic or collections, remittance etc of the members and

non members. 7) To prepare and finance projects to improve the economic conditions of the members

particularly those belonging to weaker sections of the society. 8) To extend financial and technical assistance to the unemployed to start their industry /

profession. 9) The branches of district central co-operative bank Ltd, Belgaum. SI. No. Operation Areas 1. Head office: 1 2. Branches through district: 85

HEAD OFFICE AT A GLANCE


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Project Report on Non Performing Assets & Banking Studies Organizational structure of DCC Bank Belgaum
Chairman

Directors
Genral Manager

Dy. G.M ADMINISRATIO N

Dy. G.M Planning & Devlopment

Dy. G.M BRANCH CONTROL

Dy. G.M LOANS & OPERATION

Dy. G.M ACCOUNTS & BRANCHS

SUPERIDENTS SUPERIDENTS SECTION OFFICERS Br. MANAGER / BANK INESPECTORS

SUPERIDENTS

SUPERIDENTS

SUPERIDENTS

SECTION OFFICERS Br. MANAGER / BANK INESPECTORS SUB ACCOUNTANT

SECTION OFFICERS Br. MANAGER / BANK INESPECTORS

SECTION OFFICERS Br. MANAGER / BANK INESPECTORS

SECTION OFFICERS Br. MANAGER / BANK INESPECTORS

SUB ACCOUNTANT

SUB ACCOUNTANT

SUB ACCOUNTANT

SUB ACCOUNTANT

SECOND DIVISION CLASS

SECOND DIVISION CLASS

SECOND DIVISION CLASS

SECOND DIVISION CLASS

SECOND DIVISION CLASS

SUB STAFF SUB STAFF

SUB STAFF

SUB STAFF

SUB STAFF

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Project Report on Non Performing Assets & Banking Studies NOMINAL MEMBERSHIP:
Not with standing anything contained in any other bye-laws any person who is above the age 18 and who is competent to contract residing in the jurisdiction of the bank who is not the member of any other co-operative credit society or bank, may be admitted as a nominal subject to the following conditions. I. II. III. He shall pay an admission fee of Rs. 50 = 00 He should be credit worthy. He shall not have right to vote or to participate in the management of the bank or in the

distribution of its profits or liabilities, except the liability against him, as a borrower or surety or both in the event of its winding up except that such member may attend the general body meeting of the bank with prior permission of the board by its resolution. IV. a) b) c) d) e) f) He shall be eligible for the following types of loans. Personal loan Mortgage loans Loan against deposits and government securities Loan against government & guarantee Loan for house construction / purchase / mortgage / purchase of plots Loan against pledge of goods or immovable property of his own.

The BDCC Bank has over 85 Branch offices It is to ensure that the Bank is providing its services all over the Belgaum as well as in the State. The other details of Bank are as provided below: Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies Membership and Share Capital
Membership Years Societies 31-03-2004 31-03-2005 31-03-2006 31-03-2007 31-03-2008 1984 2000 2017 2028 2028 Individual Members 282 281 281 281 281 3450.16 3453.79 3736.37 4114.37 4259.91 Share capital

Deposits
The BDCC Banks deposits are shown as follows: (Rupees in Lakhs)

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Project Report on Non Performing Assets & Banking Studies


Years 2003-04 2004-05 2005-06 2006-07 2007-08 Deposits 45852.91 45525.45 53841.11 54924.41 60596.78 % of Increase 18.27 2.01 10.33

The securities like Deposits Insurance and Credit Guarantee Corporation Law 1961 are made and Nationalized Banks providing higher rate of interest to the Bank.

Working Capital Years 2003-04 2004-05 2005-06 Working capital 74372.94 71243.78 78085.9 Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies


2006-07 2007-08 100811.11 10401.95

Short Term and Medium Term Agricultural Loans: (Rupees in Lakhs)


Year Short term Advances 2003-04 2004-05 2005-06 2006-07 2007-08 15171.48 13725.32 34703.70 22847.04 29919.01 Demands 26452.64 23993.51 25667.46 33730.28 30818.46 ODs 13988.24 13161.60 4373.05 14851.69 5878.89 Medium term Advances 11.84 1.67 26.95 2511.48 648.52 Demands 3306.78 3023.45 729.05 2634.25 2360.86 ODs 2190.77 2384.40 502.12 96.26 278.19

Kisan Credit Card Plan:


Under this plan the Farmers can make use of Kisan Credit Card Plan by applying it for the low rate of interest on their borrowings. Under this plan totally 190736 Cards are issued in the current year by choosing the Agricultural Co-operative Societies.

Development Action Plan:


Under this plan the BDCC Banks Targets and Achievements are as Follows: Details Share capital 31-3-2007 4114.37 2007-08 Target 4200 31-3-2008 Achievements 4259.91 % Of Achievements 3.54

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Project Report on Non Performing Assets & Banking Studies


Funds Deposits Outside Loans Working Capital Advances Branch Transactions 12124.09 54924.41 16550.51 100811.01 58339.08 1172.22 12236 60400 16500 103030 58847 1198.02 12236.21 60596.78 15941.81 10401.95 58808.58 1209.79 0.92 10.51 (-)3.68 3.2 0.8 3.21

2 50 0 0 0 2 00 0 0 0 1 50 0 0 0 1 00 0 0 0 50 0 0 0 0 W o rkin g C a pita l Ad van ces Bra n ch Tra ns a ctio n s

% Of Ach ieve m e n ts 3 .5 4 0 .92 1 0.5 1 (-)3 .6 8 3 1-3 -2 0 08 Ach ieve m e n ts 4 25 9 .9 1 1 22 3 6 .21 6 0 5 96 .7 8 1 59 4 1 .8 1 2 00 7 -0 8 Ta rg e t 4 2 00 1 2 23 6 6 04 0 0 1 6 5 0 0 3 1-3 -2 0 07 4 1 1 4.37 1 2 1 2 4 .0 9 5 49 2 4 .4 1 16 5 5 0.5 1

BDCC PRODUCTS
A. Short term loans B. Medium term loans C. Long term loans D. Deposits

A. Short term loans


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Project Report on Non Performing Assets & Banking Studies Short term loans to societies:
1. Decent kisan credit card 2. Tobacco pledge loan 3. General cash credit 4. Key loans to sugar factory 5. Hypothecation loan to sugar factories 6. Hypothecation loan to spinning mills 7. Clean C.C to spinning mills 8. Clean C.C to sugar factory

Short term loans to individuals:


1. Deposit loans 2. Gold loans 3. Individuals cash credit 4. 20 point econ prog 5. N.S.C loans

Other loans
1. Bills discounted 2. Sight & Mudati hundies

B. Medium term loans Medium term loans to societies


1. Schematic finance 2. M.T agriculture purpose 3. M.T conversion / rephasment 4. M.T non agriculture purpose 5. M.T non agriculture to sugar factories Babasabpatilfreepptmba.com 27

Project Report on Non Performing Assets & Banking Studies


6. M.T non agriculture to spinning mills

Medium term loans to other institute


1. Block CTL to Vishawnath sugars

Medium term loans to individuals


1. Vehicle loan 2. Vehicle loan(conversion) 3. Non farm activities loans 4. Consumer durable 5. self help groups 6. Salary earners

Long term loans


1. Hosing loans (staff) 2. Housing loans (general) 3. Education loans 4. Mortgage loans

Deposits
1. Reserve fun deposits 2. Fixed deposits 3. Bhagyajyoti deposits 4. Recurring deposits 5. Saving deposits 6. Current deposits Babasabpatilfreepptmba.com

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7. Fixed deposits matured but not with drowns The BDCC Bank is currently undergoing with the following Plans: Kisan Credit Card Plan. Development Activities Plan. Business Development plan. National Corp Insurance Plan. Yashasvini Insurance Plan. Janashree Insurance Plan

NON PERFORMING ASSETS


MEANING OF NPA: An asset is classified as non-performing asset (NPA) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by the bank to a borrower becomes non-performing, then Babasabpatilfreepptmba.com 29

Project Report on Non Performing Assets & Banking Studies


the bank will have to treat all the advances / credit facilities granted to that borrower as nonperforming without having any regard to the fact that there may still exit certain advances / credit facilities having performing status.

NBES DEFINITION OF NON- PERFORMING:


NBE[Supervision of Banking Business Directives (Directive No. SBB/3212002)] defines, the term Non-performing is, loans or advances whose credit quality has deteriorated such that full collection of principal and /or interest in accordance with the contractual repayment terms of the loan or advances is in question. For purposes of this Directive, loans or advances with pre-established repayment programs are non-performing when principal and or interest is due and uncollectible for 90 days or more beyond the scheduled payment date or maturity. A Non Performing Asset (NPA) was defined as a credit facility in respect of which the interest and / or installment of principal as remained Past Due for a specified period of time. An amount due under any credit facility is treated as Past Due when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc, it was decided to dispense with Past Due concept, with effect from March 31, 2001. Accordingly, as from that date, a Non Performing Asset (NPA) shall be an advance where i. Interest or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, ii. The account remains Out Of Order for a period of more than 180 days, in respect of an overdraft / cash credit (OD / CC), 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 agriculture purpose, and v. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

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Project Report on Non Performing Assets & Banking Studies 90 Days Overdue Norm
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, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a NPAs shall 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 agriculture purpose, and v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts As a facilitating measure for smooth transition to 90 days norm, bank has been advised to more 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, continued 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.

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Project Report on Non Performing Assets & Banking Studies 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 Sub standard (age up to 18 months) Doubtful 1 (age up to 2.5 years) Doubtful 2 (age 4.5 years) Doubtful 3 (age above 4.5 years) Loss Asset Percentage of Provision 10% 20% 30% 50% 100%

INCOME RECOGNITION POLICY:


The policy of income recognition has to be objective and based on the record of recovery. Internationally income from NPAs is not recognized on accrual bases but is booked as income only when it is actually received. Therefore, the bank 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, commissions and similar income that have accrued should cease to accrue in the current period and should be reversed provided for with respect to past records, if uncollected. Babasabpatilfreepptmba.com 32

Project Report on Non Performing Assets & Banking Studies THE CONCEPT OF GROSS NPA:
Income recognition is not possible once an account becomes NPA. Interest accrued on nonperforming loan accounts is debited to the respective accounts and credited to the interest suspense account instead of Profit and Loss account. Usually no debits are permitted in NPA expect unavoidable expenditure like litigation expenses, insurance, etc. Hence the balance outstanding in an NPA account includes: 1. Balance as on date of becoming an NPA. 2. Interest accrued but not realized. On balance sheet date banks make provisions for loan losses. This provision is calculated not on the balance outstanding but on the net balance, balance net of the amount kept in the interest suspense account. This book balance of the net 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 relay 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

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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 repercussion 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. Due to their crippling effect on the operation of the banks, Asser quality has been considered as one of the most important parameters in the measurement of banks performing under the CAMELS Supervisory Rating System of RBI.

REASONS FOR NPAs:


In priority sector advances: 1. Directed and pre-approved natures of loans sanctioned under sponsored programs. 2. Miss-utilization of loans and subsidies. 3. Diversion of funds. 4. Absence of security. 5. Lack of effective follow-up (Post sanction supervision and control) 6. Absence of Bankruptcy and fore-closure loans. 7. Decrepit legal system. 8. Cost in-effective legal recovery measures. 9. Difficulty in execution of Decrees obtained. In Non-Priority Sector Advances: 1. Inadequate credit appraisal. 2. Demand recession. 3. Industrial sickness and labour problems. 4. Slow legal system. 5. Diversion of funds. 6. Willful default. Babasabpatilfreepptmba.com 34

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7. Technology obsolescence. 8. Managerial inefficiency. 9. Political compulsion and corrupti

WRITING-OFF NPAs:
In terms of section 43(D) of the Income Tax Act 1961, income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to the banks profit and loss account or received, whichever is earlier. This stipulation is not applicable to provisioning required to be made as indicated above. In other words, amounts set aside for making provision for NPAs as above are not eligible for tax deductions. Therefore the banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors / tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules.

WRITE-OFF AT HEAD OFFICE LEVEL:


Banks may write-off advances at Head Office Level, even though the relative advances are still outstanding in the branch books. However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100 percent provision will have to make there for.

DEBT RECOVERY TRIBUNAL:


Any person aggrieved by any measures taken by secured creditor or his authorized officer may file an appeal to Debts Recovery Tribunal, within 45 days from date on which such measure was taken. That is action of taking possession of asset, takeover of management of business of borrower, appointing person to manage secured asset etc. is taken by the creditor. When a borrower files an appeal, the appeal cannot be entertained unless, the borrower deposits 75% of the amount claimed in the notice by secured creditor. The Debts Recovery Babasabpatilfreepptmba.com 35

Project Report on Non Performing Assets & Banking Studies


Tribunal can waive or reduce the amount required to be deposited. The amount is not required to be deposited at the time of appeal, but appeal will not heard till the amount is deposited. The borrower while filing the appeal should also file an application requesting the Debts Recovery Tribunal to admit the appeal without deposit of any amount. If the Debts Recovery Tribunal 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 Debts Recovery Tribunal, it can be file an appeal to the Appellate Tribunal within 30 days from the date of receipt of the Debts Recovery Tribunal order. If the Debts Recovery Tribunal or Appellate Tribunal holds that possession of the asset 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 Debts Recovery Tribunal or Appellate Tribunal.

SECURITIZATION ACT:
With the enactment of the Securitization and Reconstruction of the financial asses 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 60 days. Once the borrower receives a notice from the concerned bank and the financial institutions, 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 is paid by the borrower or else the former will take the action by way of taking over the possession of assets. Besides assets, bank can also take over 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 chare their management.

OVERALL BANKING AND NPA BANKING REFORMS IN INDIA:


The Nationalization of the major commercial banks in the year 1969 and 1980 had brought radical changes in the banking system in India. It had brought about major shifts in the priorities in the banking operations. Babasabpatilfreepptmba.com 36

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Branch expansion policies of banks were tuned up to 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 it initiate a process of reforming the financial sector which banks constitute a dominant part. The reforms process includes: Introduction of prudential norms. Transparency in Balance Sheets. Deregulation of interest rates. Partial deviation from directed lending. Up gradation of technology. Entry of new private sector banks.

EMERGING BANKING TRENDS:


During the current financial year, the focus of non-going reforms in the banking sector was on soft interest rates regime, increasing operational efficiency of banks, strengthening regulatory mechanisms and on technological up-gradation. As a step towards a softer interest rate regime, RBI in its Annual Policy Statement had advises banks to introduced flexible interest rate system for new deposits, announce a maximum spread over PLR for all advances other than consumer credit and to review the present maximum spread over PLR and reduce them wherever they are unreasonably high.

A BRIEF HISTORY OF NPA:


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The concept of Asset Quality on the books of Public Sector Banks (PSBs) and Financial Institutions came into being when RBI introduced prudential norms on the recommendations of the Narasimha Committee in the year 1992-1993. The committee recommended that an asset may be treated as NPA, if interest or installment of principal remains overdue for a period exceeding 180 days and that banks and FIs should not take into their income account, the interest accrued on such NPAs, unless it is actually received or recovered. The committee also recommended that Assets be classified into four categories: Standard, Substandard, Doubtful and Loss Assets.

And that certain specified percentages of the same be held as provision there against. Before the reform process, banks were booking income on an accrual basis and their balances sheets did not reflect their true specified financial health. Thus the profit, capital and reserves were overstated by them. After 10 years 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 cleans up passed Indias 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 laws 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 known as the Securitization Act). This Act enables the setting up of asset management companies for addressing the problems of NPAs of banks and FIs.

INDIAN BANKING AND NPA:


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 postdisbursement supervision. Banks concerned should continuously monitor loans to identity accounts that have potential to become non-performing. Babasabpatilfreepptmba.com

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The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of the borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. 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. The above information is in general but according to some management professionals and philosophers the Indian Banking and NPA is explained with their operation since they are nationalized and being effected with the NPAs. Banks and FI's in India is to issue a Recall of Loan letter. The letter is just a stepping stone to filing a suit and has no other practical utility. As soon as a Recall letter is issued, the banker is relaxed because his headaches are now over. He will pass the necessary entries in his books classifying the loan as Non-Performing Asset (NPA). He can now blame everybody else for all his omissions and commissions with the entrepreneur being the key accused. In any other part of the world, the first option that a banker is supposed to exercise with the support and consent of the entrepreneur is a change in ownership. It always makes more sense to sell a business as a going concern rather than sell it as a dead horse. In any business there are intangibles like goodwill, key customers, key employees who may be lost as soon as a court case is filed.

Sometimes such intangible assets may be more valuable than tangibles like land, building, plant & machinery etc. Indian banks and financial institutions live in a fool's paradise thinking that a court or tribunal can get them all that they need. What they do not realize is that no judicial body can help them get possession of a running unit without sacrificing its vitality. The bureaucratic attitude of Indian banks and FI's has had two negative effects. On one hand it has fed and strengthened a generation of shady businessmen and con-men who know how to fool the banks for a multitude of projects - some of which even turn profitable. On the other hand it has killed a new generation of capable entrepreneurs. Indian Banks and FI's have looked at balance sheets and financial statements for too often. It is time that they learn to look at human capabilities. It is time that they learn to evaluate ideas rather than run in herd-like Babasabpatilfreepptmba.com 39

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manner. Tribunals and Courts are like surgeons who can cut and operate but cannot give life and good health. Unless Indian banks and FI's learn to build their health as well as the health of their clients, they will keep converting useful assets of the country into NPA's.

LENDING BEHAVIOUR OF BANKS:


Due to the excess liquidity in the banking system, banks are now giving credit to even non-priority in an aggressive manner. Now banks give credit more too unproductive purposes, like car loans, housing loans, consumer durables loans and personal loans. This reckless lending paves the way to repayment irregularities and more of NPA in the banking system. But on the others side economy has become buoyant and the borrowers are now in a position to repay the loans even if it is an unproductive loan. Banks have improved their credit appraisal system. NPA percentage in City Banks car Loan Portfolio is zero, because of the sophisticated credit appraisal system followed by the bank. Banks now give priority to businesses and lending schemes also follow the path.

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 reliability of the dues: a) Sub-Standard Assets b) Doubtful Assets c) Loss Assets.

SUB-STANDARD ASSETS:
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A sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31 March 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 fu;;. 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 31 March 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 31 March 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.

LOSS ASSETS:
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 Babasabpatilfreepptmba.com

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value of security given by the 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.

RBI GUIDELINES FOR CLASSIFICATION OF ASSETS:


Broadly speaking classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high valid account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extent guidelines.

UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAs:


If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as standard accounts.

Asset Classification to be borrower wise and not facility wise:


i. It is difficult to envisage a situation when only one facility to borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPAs and not the particular or part thereof which has become irregular. ii. If the debts arising out of development of letter of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account for should be treated as a part of the borrowers principal operating account for the purpose of Babasabpatilfreepptmba.com 42

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application of prudential norms on income recognition, asset classification and provisioning.

Accounts where there is erosion in the value of Security:


i. A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightway classified as doubtful or loss asset as appropriate. Erosion in the value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets.
ii.

It the realizable value of the security, as assessed by the bank / approved values / RBI is less than 10 percent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straight away classified as loss asset. It may be either written off of fully provided for by the bank.

RESTRUCTURING / RESCHEDULING OF LOANS:


A standard asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production should be classified as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. In the case of sub-standard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms. Following representations from banks that the foregoing stipulations deter the banks from restructuring of standard and sub-standard loan assets were reviewed in March 2001. In the context of restructuring of the accounts, the following stages at which the restructuring / rescheduling / renegotiation pf the terms of loan agreement could take place can be identified: a) Before commencement of commercial production. b) After commencement of commercial production but before the asset has been classified as sub-standard. Babasabpatilfreepptmba.com

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c) After commencement of commercial production and after the asset has been classified as Asset Type Percentage of Provision Sub standard (age up to 18 months) Doubtful 1 (age up to 2.5 years) Doubtful 2 (age 4.5 years) Doubtful 3 (age above 4.5 years) Loss Asset sub-standard. 10% 20% 30% 50% 100%

PROVISION REQUIREMENTS:
As and when an asset is classified as an NPA, the bank has to further sub-classify if into sub-standard, loss and doubtful assets. Based on this classification, bank makes the necessary provision against these assets. 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.

THE NPA PROBLEM:


The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks which are concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective postdisbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. The performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to books income on such accounts and at the same Babasabpatilfreepptmba.com

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time banks are forced to make provision on such assets as per the RBI guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPA affects the repayment capacity of banks. Further, RBI successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning nonperforming assets.

CREDIT APPRAISAL SYSTEM:


Prevention of standards assets from migrating to non-performing status is most important in NPA management. This depends on the style of Credit Management Mechanism available in banks. The quality of credit appraisal and the effectiveness of post credit appraisal and effectiveness of post credit follow up influences the asset quality of the banks in a big way.

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 statements of the borrower are obtained and poor analysis of their financial strength is done. 5. Apart from the published financial statements independent enquiries 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. Babasabpatilfreepptmba.com

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7. Close contract with the borrower is maintained. 8. Potential NPAs are kept under special watch list. 9. Potential 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 defaults are willful and the intention of the borrower is bad.

CREDIT MONITORING: Credit Monitoring System is for:


1. Preventing the slipping of quality assets through the monitoring of Standard Assets. 2. Up gradation of quality of impaired loan asset through recoveries by means of legal or otherwise. 3. Up gradation of loan assets through nursing in deserving and viable cases.

WARNING SIGNALS:
1. Default in servicing periodic installments and interest. 2. Accumulation of stock and non-movement of stock. 3. Operating loss / net loss. 4. Slow turnover of debtors and fall in level of sundry creditors. 5. Return of outward bills for collection / return of cheque. 6. Labour 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.

CREDIT RISK NPA:


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whose effects are realized in the present. I.e. they represent credit risk that has already materialized and default has already taken place. On the other hand, managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk. Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business.

CREDIT INFORMATION BUREAU (CIB):


It is in this context that the facility of CIB becomes relevant. A CIB provides an institutional mechanism for sharing of credit information on borrowers and potential borrowers among banks and FIs. It acts as a facilitator for credit dispensation and helps mitigate the credit risk involved in lending. Based on cross country experiences, initiatives have been taken in India to establish a CIB. The bureaus established in these countries collect information on both individual borrowers (Retail segment) and the corporate sector.

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 a rid of its excess liquidity by increasing its lending but, often shy away from such an option due to 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 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 deposits with the banks. On the other hand, SLR is 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 Babasabpatilfreepptmba.com 47

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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. A rate cut (For instance, decrease in CRR) results into lesser fund to be locked up in RBIs vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem of bad loans, burgeoning NPA, thinning margins, etc. As a result of which, banks are little reluctant in granting loans to corporate. As such, through in its monitory policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers.

HIGH COST OF FUNDS DUE TO NPA:


Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lenders losses caused due to high level of NPAs. Therefore, quite often corporate prefer to raise funds through commercial papers (CPs) where the interest rates on working capital charged by the banks is higher. The main purpose of this notice is to inform the borrower that either the sum due to the bank or FIs be paid by the borrower or else the former will take action by way of taking over the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to sell the assets of the defaulting companies or change their management. But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty increases with the passage of time, there are all possibilities that the recoverable value of assets also reduces and it cannot fetch good price.

MEASURES FOR NPA CONTAINMENT:


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Project Report on Non Performing Assets & Banking Studies MEASURES TO TACKLE NPAs:
Seeing the gravity of the situation, RBI has taken several constructive steps for arresting the incidence of NPAs. It has also created a regulatory environment to facilitate the recovery of existing NPAs of banks.

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.500000, by way of compromise settlements. This mechanism has proved to be a 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 the speedy recovery by banks / DFIs have not been able to make much impact on loan recovery due to a variety if reasons like inadequate number, lack 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 of the Winding Up court for distribution among the lenders. Also, DRTs could be set up in more centers preferably in District Head Quarters 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 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 Corporate Debt Restructuring system was set up, in accordance with the guidelines of RBI evolved in consultation with Government of India. The objective of the Corporate Debt Restructuring system is to ensure a timely and transparent mechanism for restructuring of corporate debts for viable entities and to minimize the losses to the creditors and other stake holders through an orderly and coordinated restructuring program. With Corporate Debt Restructuring, banks can arrest fresh slippage of performing assets into the magnitude of the assets. Under the

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system standard, sub-standard and doubtful assets can be restructured. The Corporate Debt Restructuring mechanism is based upon effective coordinate among banks.

4.

Asset Reconstruction Companies (ARCs): One of the most effective ways of


removing NPAs from the books of banks / DFIs would be to move these out to a separate agency which would buy the assets and make its own efforts for recovery. On this front, the SRES Act has provided a frame work for setting up to ARCs in India. A pilot company called Asset Reconstruction Company (India) Limited (ARCIL) has been set up under the sponsorship of IDBI, ICICI bank, SBI and other banks which is likely to provide an effective mechanism for banks to deal with the defaulting companies. RBI has already issued final guidelines on the regulatory frameworks for ARCs in April, 2003. However, the success of Arcs will again depend upon the legal framework which has to be addressed first. Legal provisions are required for transfer of the existing loan portfolio to the ARCs without the consent of the borrowers, for exercise of the power of private foreclosure by ARCs, authorizing ARCs to take recourse to the Debt Recovery Tribunals and granting exemption to ARCs from Income Tax in order to mobilize resources by issue of bonds and exemptions to ARCs from payment of stamp duty on conveyance / transfer of loans assets.

5.

Reduction in NPAs: The problem of the existing NPAs is currently being tackled
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borrowers to bring them around to settle the dues. Such settlements in the form of OneTime Settlement (OTS) and Negotiated Settlement (NS) are now being increasingly used by banks to reduce the level of NPAs. Under these schemes banks focus on maximum payment under the settlements being received up-front, and balance within the same financial year for quicker realization of locked up proceeds. However, despite such efforts made by the lenders, many defaulting borrowers exhibit reluctance to cooperate, leaving the banks no option but, to seek the legal route. Here lies the importance of a transparent legal system. Reforms in the existing legal system will go a long way in reducing the level and growth of NPAs in the banking system.
6. Legal Reforms: The legal framework 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 Teath to enforce Standards and ensure complains and adherence to law. Does the legal framework 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 the Government of India to formulate specific proposals to give effect to the suggestions made by the Narasihmam 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 FIs to take possessions 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 the Securitization as an instrument to tackle the NPA problem.
7.

Securitization: Securitization enables risk sharing and trading of loans where the
bas assets of banks can be securitized and sold at a discount. The lending institutions 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 banks balance sheet can be cash upfront, which could be put to productive use.

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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.

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 coming 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.

EFFECTIVE APPRAISAL AND MONITORING OF LOANS:


In the present liberalized environment, globalization has a far reaching impact on the fortunes of the domestic industry and the bankers have to be alert and equip themselves with the knowledge of the knowledge of the latest global trends and also study on an ongoing basis its implications on the industries financed by them. end credit process. A robust credit process begins with an in depth appraisal focused on risk inherent in a loan proposal. Along with the 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 NPAs overnight. System should be in place such that the banker should be alert to catch signals of an account turning in to NPA and quickly react, analyze and take corrective action. Thus, the appraisal and monitoring mechanism for loans needs to be revamped for control of NPAs. Banks need a robust end to

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Bank should have a proper system in place to ensure that to the extent possible the assets are performing and do not turn in to NPAs. In cases where the problems are of a short term nature and borrowers agree to clear the over dues within 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-placement 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 the progress reports with greater frequency, engaging the services of concurrent auditors / technical consultants to exercise proper supervision and to obtain independent report / assessment.

ASSETS RECOVERY BRANCH:


Assets Recovery Branches are specified branches for recovering NPAs. The personnel in the branches are professionally competent to deal with defaulters and ensure repayment. It is meant for shifting the work of high problem loans recovery of main branches to specialized branches. It gives time to other branches to concentrate more upon branchs business development activities.

90 DAYS OVERDUE EFFECT:


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 st 2002. However, the date of classification of an advance as an NPA should not be changed on account of charging of interests at monthly rests.

Bank 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

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with effect from April 1st 2002 and 90 days from the end of the quarter with effect from March 31st 2004. There are two aspects to the adoption of the 90 days overdue norm for identification of the NPAs. The negative aspect is that NPAs will increase in short term. But the positive aspect is that banks will become proactive in detecting smoke signals about an account becoming bad and accordingly initiate remedial steps.

PROBLEM IN LOAN IDENTIFICATION: IDENTIFICATION OF ACCOUNT:


1. Term loan if interest / installments are overdue for 4 months and above. 2. Check on overdue, cash credit account if it is out of order continuously for 4 months. 3. In other loans if overdue 4 months and more.

GENERAL REASONS FOR ASSETS BECOMING NPAs:


A multiplicity of factor is responsible forever increasing size of NPAs in banks. A few prominent reasons for assets becoming NPAs are as under. Poor credit appraisal system. Lack of proper monitoring. Reckless advances to achieve the budgetary targets. There is no or lack of corporate culture in the Bank. In adequate legal provisions on foreclosure and bankruptcy. Change in economic policies/ environment. No transparent accounting policy and poor auditing practices. Lack of coordination between banks. Directed lending to certain sectors. Failure on the part of the promoters to bring their portion of equity from their own source or public issue due to market turning lukewarm.

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Project Report on Non Performing Assets & Banking Studies REASONS FOR NON PERFORMANCE IN LOAN ASSETS:
1. Antiquated legal system in the country and the defaulter taking shelter under this. 2. Even DRT cases are not getting settled the way it was envisaged when tribunals were set up. 3. In agriculture sector poor recovery has been due to various factors recovery and RPDS advances have been affected by the sharp fall in rubber prices. Throughout the country aqua culture miserably failed due to reasons beyond the control of the borrowers we are not an exception. 4. Poor recovery in schematic loans is mainly due to willful default by the borrowers. 5. Default in share loans has been due to setback in securities market and sharp decline in the values of equities.

RECOVERY ROUTE:
1. Lok Adalat. 2. 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. COMPROMISE ROUTE IS POSSIBLE IN THE FOLLOWING CASES: 1. When all the remedies other than filing a suit are exhausted. 2. Activity of the borrower closed / become unviable due to reasons beyond his control and overdue mounting up due to application of interest / penal interest and other charges and the recovery of the debt has become doubtful. 3. Legal position of bank is weak. 4. Values of the primary / collateral securities are inadequate. 5. Not a willful defaulter.

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RECOVERY MANAGEMENT SUGGESSIONS FOR IMPROVEMENT


1. Recovery camps to be conducted at centers identified as having higher concentration of irregular loans in the times of revenue recovery camps. 2. Across the table decisions on compromise proposal submitted at the recovery campus. Officials from corporate office who attend such campus to be delegated with the powers to arrive at the decisions as above. 3. Asset recovery cells to be strengthened with additional professional man power. 4. At branches where concentration of NPAs is more, one of the members of the award staff who is well versed with locality and the borrowers should be spared from other works of the office and asked to facilitate recoveries through personal visits and assisting the recovery officers in the unit / borrower visits. Conveyance expenses incurred by such staff members to be reimbursed.

ASSET RECOVERY DEPARTMENT:


1. Asset Recovery Department will conduct a study of banks exposure in different

sector, types of advances and other various parameters viz the NPA position and the findings will be communicated to all field functionaries initiating corrective action.
2. Efforts shall be taken by branches to speed up the disposal of non-banking assets at

the possession of the bank. The real effect of the continuing menace of NPA will have a cascading effect on the bottom line because of the higher and higher provisions required on such accounts. Therefore the management of NPAs calls for a short term and long term strategy. Prevention from further deterioration and recovery of the existing NPAs alone are the two alternatives for us to come out of the present problems.

DEALING PROBLEMS LOANS: ASSETS COMING UNDER SMALL VALUE SEGMENTS:


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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 bond can be extended up to Rs.10000. Similarly, non priority sector, small loans identified as loss or doubtful will also have to shed to give administrative efficiency up to 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.

4. Salvage operations are to be intensified for effecting recoveries under loss assets categories and also in cases where they have already shed assets. 5. Incentives 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 bond up to Rs.10000. 1. No legal actions to be initiated against borrowers coming under the small valued bond. 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. 4. If all the above efforts fall the regional heads can use their discretion for shedding such assets.

SUB-STANDARD ASSETS:
This segment is more effort elastic in terms of recovery and hence the banks recovery policy is to be tuned up for maximizing the recoveries from the sub-standard efforts.

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Project Report on Non Performing Assets & Banking Studies NPA RECOVERY ACTION PLAN:
1. Send simple remainder letter in installments / interests debited are not serviced on due dates. 2. If no results are forthcoming from the remainders, meet the borrower in person and persuade them to settle the accounts in persons. 3. Officials from the assets recovery cell at the regional office to compulsorily meet the borrower with Rs.500000 and evaluate the reasons for the non-performance of accounts and suggest / evolve methods to improve the quality. 4. In cases of sick but viable industries units prospects for rehabilitation are too looked into a nursing program to be evolved.

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 be 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 handling 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 field or RR initiated. Incase of suit field 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:

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1. If recovery in the normal course is difficult, they 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 accounts. 2. Incase of accounts coming under priority sector, recovery through the RR route is to be resorted too. 3. As per loss assets are concerned they 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 banks. 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.

GENERAL METHODS OF MANAGEMENT OF NPAS:


The management of NPA is the difficult task in practice. Management of NPAs means, how to settle the NPAs account in the books. In simple it focuses on the methods of settlement of NPAs account. The methods are differs from bank to bank. The following paragraph explains some general methods of Management of NPAs by the banks. The same information is C Compromise shown below:
L Legal remedies

General Methods of Management of NPAs R Regular Training Program


R Recovery Camps

W Write offs

S Spot Visit Rehabilitation of potentially Babasabpatilfreepptmba.com v viable units

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Compromise:
The dictionary meaning of the term compromise is settlement of dispute reached by mutual concessions. The following are the detailed guidelines for compromise/negotiated settlements of NPAs. The compromise should be a negotiated settlement under which the bank should ensure recovery of its dues to the maximum extent possible of minimum expenses. Proper distinction should be made between willful defaulters and borrowers defaulting in repayments due to circumstances beyond their control. An advantage in settlement cases is that banks can promptly recycle the funds instead of resorting to expensive recovery proceedings spread over a long period. All compromise proposals approved by any functionary should be promptly reported to the next higher authority for post facto scrutiny. Proposal for write off/ compromise should be first by a committee of senior executives of the bank. Babasabpatilfreepptmba.com

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Project Report on Non Performing Assets & Banking Studies Legal remedies:
The legal remedies are one of the methods of management of NPAs. The banks observed that the borrower is making willful default; no more time should be lost instituting appropriate recovery proceedings. The legal remedies are filling of civil suits.

Regular Training Program:


The all levels of executives are compelling to undergrowth the regular training program on credit and NPA management. It is very useful and helpful to the executives for dealing the NPAs properly.

Recovery Camps:
The banks should conduct the regular or periodical recovery camps in the bank premises or some other common places; such type of recovery camps reduces the level of NPAs in the Banks.

Write offs:
Write offs is also one of the common management techniques of NPAs. The assets are treated as loss assets, when the bank writes off the balances. The ultimate aim of the write off is to cleaning the Balance sheet.

Spot Visit:
The bank officials should visit to the borrowers business place or borrowers field regularly or periodically. It is also help full to the bank to control or reduce the NPAs limit. Rehabilitation of potentially viable units: The unit is sick due to technical obsolescences of inefficient management or financial irregularities. When the Bank settles the dues, of such, companies through the compromise or through the legal actions the better is to be followed.

Other Methods:
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OBJECTIVES OF THE STUDY:

To evaluate the BDCC Banks assets quality. To study the management of total assets and advances of the BDCC Bank. To identify the effectiveness of the risk management system, undertaken by the bank. To analyze sector wise non-performing assets. To offer useful suggestions to reduce the NPAs in the bank.

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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. suitable methods and measures are to be followed. The use of proper methodology is an essential part of any research. In order to conduct a study scientifically,

Research Design:
The type of research used for the collection and analysis of the data is Historical Research Method. The main source of data for this study is the past record prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception and to identify the ways in which the performance especially the non-performing assets of the BDCC Bank can be improved.

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The data regarding bank history and profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with individuals.

Data collection method Primary data:


Discussion with the manager and officers of the bank to get general information about the bank and its activities Having face to face discussions with the bank officials. By taking guidance from bank guide and departmental guide.

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.

Research Measuring Tool:


The tools used for data collection are: 1. Personal interview. 2. Secondary sources. 1. Personal Interview: In this, discussions more held directly with managers and officials to get the clear cut information about the topic and data to be collected for the purpose of analysis. 2. Secondary Sources: Annual company reports, Balance Sheets, Profit and Loss account are used to collect the data.

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ANALYSIS AND INTERPRETATION OF DATA FINANCIAL ANALYSIS:


The term financial analysis refers to the process of determining financial strengths and weakness of the firm by establishing relationship between the items of balance sheet, Profit and loss account other operative data. soundness of the firm. Under the BDCC Banks analysis, the performance and management of NPAs is analyzed by considering the past 5 years financial records. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial

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TABLE: 1 SHOWING PROVISIONS MADE FOR BAD DEBTS, NPA AND STANDARD ASSETS: (Rs. In Lakhs)
Year 2003-04 2004-05 2005-06 2006-07 2007-08 Bad Debts 729 729 729 763.79 765.57 NPA 7467.19 8067.19 8517.19 8517.19 8517.19 Standard Assets 90.00 90.00 140.00 160.00 210.00

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INTERPRETATION
By the table it is clear that BDCC Bank is maintaining adequate amount of provisions as regulated by the RBI. The Bank has found a stable amount of provisions as it lends the loans to the farmers through the Co-operative societies, which brings the borrower with a repayment capacity. By the graph it is also clear that the BDCC Bank is maintaining high or equal amount of provisions as compared to the previous years

TABLE: 2 SHOWING ASSETS OF THE BDCC BANK Year 2003-04 2004-05 2005-06 2006-07 2007-08 Standard 35505.93 25117.63 33733.24 49217.52 48091.07 Sub-standard 5856.51 5511.39 1743.59 2154.52 4108.32 Doubtful 10801.64 7554.04 3016.47 6660.14 6761.24 Loss assets 131.75 4864.53 4860.31 306.89 303.33 Total 52295.83 43047.59 43353.61 58339.07 59263.97

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INTERPRETATION
From the table it is clear that the Standard assets were suddenly declined when the NPA rule was applicable i.e. in the year 2004-05. Then the loss assets were also increased due to some internal factors. But the Sub Standard and Doubtful assets shows the fluctuating trends.

TABLE: 3 SHOWING ADVANCES OF THE BDCC BANK (Rs. In Lakhs) Year S. A. O. Short term 26454.65 23995.52 25669.47 33747.41 30820.47 Cash Credit & ODs 2456.65 2189.78 2677.94 3870.17 3986.08 Cash Credit 18283.14 12177.92 11783.06 15595.09 16970.15 Bills Discounted 3.75 2.62 4.87 2.76 2.93 Term Loans 5063.88 4682.76 3218.26 5123.64 7484.32 Total

2003-04 2004-05 2005-06 2006-07 2007-08

52295.83 43047.6 43353.6 58339.08 59263.97

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INTERPRETATION
BDCC Bank advances loans mainly for Agricultural purposes through co-operative societies. The advances for Agricultural loans were increasing year by year. The bank provides cash credit but less than the agricultural loan. The Bank also provides loans as ODs, Bills discounting and term loans in a small proportions.

NON PERFORMING ASSETS RATIO:


Ratio shows or indicates the relationship between two or more elements. Non performing assets ratio shows the ratio of Non Performing assets to the Loans sanctioned or to the Performing assets.

NET NPA RATIO:


As explained in the theoretical part Net NPA Ratio is an important ratio which measures the NPA as a percentage of advances. TABLE: 4 SHOWING NET NPA RATIO FROM 2002-03 TO 2O07-08. 2003-04 2004-05 2005-06 2006-07 2007-08

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14.28 18.74 19.64 14.60 18.85

INTERPRETATION
From the graph and table it is clear that the Net NPA Ratio of BDCC Bank has fluctuations. In the year 2005-06 it has recorded a highest Net NPA Ration of 19.64% and lowest in the year 2002-03 i.e., 13.82.

TABLE: 5 SHOWING RETURN ON ASSETS (ROA) FROM 2003-04 TO 2007-08 IN PERCENTAGES (%)

2003-04 4.72

2004-05 -4.5

2005-06 2.25

2006-07 2.48

2007-08 2.66

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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. In the year 2004-05 BDCC Bank faced loss so the return on assets was recorded negative. But in the year 2003-04 it has recorded almost 5%, which is the highest in last 5 years.

BDCC BANKS PROGRESS REPORT:

DETAILS

1918-19

1948-49

1968-69

1978-79

1988-89

1998-99

2007-08

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Project Report on Non Performing Assets & Banking Studies


1. Number of members: . Societies 9 544 972 1102 1342 1998 2025

Personal

26

1215

569

341

297

286

281

Co-operative 2. Share Capital 3. Reserves and Funds

0 5170 -

0 692550 481616

0 7729200 2382219

0 21150550 13251847

0 80478500 36908261

0 286040900 372562119

3 425991055 1223620850

4. Deposits 5. Working Capital 6. Advances Societies Personal Others 7. Net Profit

8233 13403

6265468 8868222

48924623 80101042

149213250 236500169

702232753 112686422

3692753173 5779068089

60059677630 10404194856

2484492 1872043 -

4904373 1736639 746223

175917824 6361105 2184206

715045621 68860052 3810637

4176818953 232207844 12500000 29327693

5505221980 408675074 12500000 33203929

41468

INTERPRETATION
As shown in the table BDCC Bank has increased its members, share capital, reserves, funds, deposits, working capital, advances, and net profit year by year. No it can be said that BDCC Bank is growing in a moderate speed.

FINDINGS
The Findings about the project in BDCC Bank: Findings about the Priority Sector Lending:Babasabpatilfreepptmba.com 72

Project Report on Non Performing Assets & Banking Studies


The BDCC bank has taken steps to implement an Integrated Risk Management System, covering credit, operational and market risk. Bankers claim that in order to meet the Agricultural loans to farmers through the Cooperative Societies, they are forced to lend even to prospective defaulters further, priority and agricultural loans presents some major problems that are believed to result in a higher percentage of bad debts. There are a large number of small loans scattered apart, thus making recoveries very difficult. Findings about Appraisal and Disbursement: The banks do not have any database about the defaulter of the past. First of all there is no way of rejecting a loan proposal, on the basis of earlier default. In fact, there is no systematic method of inter bank sharing of information but there is a also lack of communication between branches of the same bank The existing system is a tool for pricing a loan and is not appropriate for evaluating the risk involved. The system incorporates many control factors, which do not reflect the credit risk. The financial parameters used are static figures as on balance sheet date. Historical trend of number of previous years are not taken into account. Hence the figures do not give a complete picture of the financial position of the company. Findings about Debt Recovery: Inadequate staff for recovery. There is large number of scattered accounts. Lack of knowledge or observance of legal formalities leads to necessary delay and adjournments.

SUGGESTIONS
Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing.

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Project Report on Non Performing Assets & Banking Studies


BDCC Bank should offer rescheduling of loans of those borrowers who were struggling with high interest rates in a falling interest rate environment. BDCC Bank should concentrate more on credit appraisal, monitoring, credit risk management and recoveries. 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. Nameplate indicating hypothecation of assets in favor of the financing bank may be affixed to assets lie carts, cycles, rickshaws, etc. this will prevent to some extent the asset changing hands. Approaching borrowers before due date The date for payment of the loan should coincide with the borrowers cash flows. Banks should intimate borrowers regularly regarding the due dates of payment that are approaching. Harvesting regarding season should be used effectively to ensure the recovery of dues.
Branch wise analysis of over dues branch wise analysis of over dues may be done and

in those branches where over dues as a percentage of advances exceed a specified limit, a special recovery department may be set up. These cells can take up not only monitoring of bad loans but existing loans as well. Senior official may visit branches to regular intervals.

CONCLUSION
NPA Act is fine, comprehensive and an extra-ordinary piece of legislation. It is also a reassuring sign of Governments commitment to reforms. The Act empowers bank to change or Babasabpatilfreepptmba.com 74

Project Report on Non Performing Assets & Banking Studies


take over the management or even take possession of secured assets of the borrowers and sell or lease out the assets. This is for the first time that the banks can take over the immovable assets of the defaulting borrowers without the intervention of the court. They can claim future receivables and supersede the Board of Directors of the defaulting corporates. No court, other than Debt Recovery Tribunal, can entertain any appeal against the action taken by banks and financial institutions under this act. The problem bad loans could be due to bad intentions 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. 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 can not 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.

BIBLIOGRAPHY
Dr.Baligar.G.B. Banking Law and Practice. Publisher, Ashok Prakashan 2004 Babasabpatilfreepptmba.com 75

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Singh.s.k. Banking and Financial sector Reforms in

India. Deep & Deep publications 2002 Bedi.H.Lpractical Banking Advance Publisher. Ashok Prakashan 2004 REPORTS Annual Report of Belgaum District Central Co-operative Bank WEBSITES

www.Google.com www.bdcc.co www.banknetindia.com

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