1

INTRODUCTION

In our present day economy, finance is defined as the provision of
money at the time when it is required. Every enterprise, whether big or small, needs
finance to carry on its operations and to achieve its target. In fact, finance is
so indispensible today that it is rightly said to be the lifeblood of enterprise.
Without adequate finance no enterprise can possibly accomplish its objectives.
Finance refers to the management of flows of money through an organization. It
concerns with the application of skills in the manipulation, use and control of
money.
Financial management is that managerial activity which is concerned with
the planning and controlling of a firms financial reserve.

Financial management as an academic discipline has undergone fundamental
changes with regards its scope and coverage. In early years of its evolution, it was
treated synonymously with the raising of funds, and little significance was attached to
the analytical thinking in the financial decision making and problem solving.
In the current literature pertaining to this growing academic discipline, a broader
scope so as to include in addition to procurement of funds, efficient use of resources is
universally recognized. Financial analysis can be defined as a study of
relationship between many factors as disclosed by the statement and the study of
trend of these factors.

The objective of financial analysis is pinpointing of strength and weakness of
a business undertaking by regrouping and analyzing of figures obtained from financial
statement and balance sheet by the tools and techniques of management
accounting. Financial analysis is the final step of accounting that results in the
presentation of final and the exact data that helps the business managers, creditors and
investors. This project is an attempt to analyze the NPA of one of the Banks.

2


BANKING

Without a sound and effective banking system in India it cannot have a
healthy economy. The banking system of India should not only be hassle free but, it
should be able to meet new challenges posed by the technology and any other external
and internal factors. Banking in India has its origin as early as 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 the rules relating to rates of interest. During the days of
East India Company it was the turn of the agency houses to carry on the banking
business.

Banking in India originated in the first decade of 18
th
Century. The first banks
were the General Bank of India which started in 1786 and Bank of Hindustan, both of
which are now defunct.

The Reserve Bank of India formally took on the responsibility of regulating
the Indian Banking sector from 1935. After Indias Independence in 1947, the
Reserve Bank was nationalized and given broader powers. The RBI manages the
countrys money supply and foreign exchange and also serves as a bank for the
Government of India and for the countrys commercial banks. The RBI issues
guidelines on various areas including exposure standards, income recognition, asset
classification, provisioning for Non-Performing Assets, investment valuation and
capital adequacy standards for commercial banks, long-term lending institutions and
non-bank finance companies.

Its known fact that the bank and financial institution in India face the problem
of swelling non-performing assets (NPAs) and the issue is becoming more and more
unmanageable.

3

In the changed scenario, it has now become extremely important for Indian
banks to remain competitive for surviving. This kind of rapid growth however led to
strains in the operational efficiency of banks and accumulation of Non-Performing
Assets in their loan portfolios.
The NPAs in bank balance sheet reflects the health of the bank. If the
economy is doing well and if all its sectors are doing well, bank NPAs will also show
an improvement. Hence, it is a joint responsibility of policy-makers, judiciary,
entrepreneurs and bankers to collectively fight this problem.
It is high time to take stringent measures to curb NPAs and see to it that the
NON-PERFORMING ASSETS may not turn banks into NON-PERFORMING
BANKS instead, steps should be taken to convert NON-PERFORMING ASSETS
into NOW-PERFORMING ASSETS.

NEED AND IMPORTANCE

Ever since introduction and implementation of prudential norms, management
of non-performing advances has become the most important issue before the banks.

RBI has therefore advised that banks should have a well-laid recovery
management policy approved by the board and the same should be put in place for
meticulous compliance so that the level of NPA can be brought down.

Management of Non-performing advances covers both recovery of NPA also
regulars review monitoring of NPA accounts, write off etc in terms of prudential
norms issued by RBI.

Apart from up gradation and cash recovery, the bank has introduced several
OTS modules aiming at various types of borrowers to ensure recovery through
compromise settlement. Further, various modifications are also made for operational
aspects of the said OTS modules based on infield experiences/revised norms issued by
RBI from time to time and changed banking scenario to make the modules/schemes
more effective and fruitful.
4


Apart from recovery of NPAs, various other important issues like review of
NPA accounts, monitoring of accounts. Write off of bad debts, delegated authority,
appropriation of recovery in NPA accounts, estimation of sacrifice, disclose of
information, guidelines in respect of implementation of the Securitization Act-2004
and sale of financial asset etc, are also important in day to day functioning of the
branches/offices.
NPAs AN ANALYTICAL STUDY
MEANING OF NPAs
Granting of credit facilities for economic activities is the main reason of
banking. A part from raising resources through fresh deposits, borrowings and
recycling of funds received back from borrowers constitutes a major part of funding
credit dispensation activity. Non-recovery of installments as also interest on the loan
portfolio negates the effectiveness of this process of the credit cycle. Non recovery
also affects the profitability of banks besides being required to maintain more owned
funds by way of capital and creation of reserves and provisions to act as cushion for
the loan losses. Avoidance of loan losses is one of the pre occupations of the
managements of banks. While complete elimination of such losses is not possible,
bank management aims to keep the losses at a low level.
In other words, classifying the advances as Standard Asset, there should not be
more than one quarter installment or interest remaining past due as on the Balance
Sheet date.
As per recommendation of Narasimham Committee, it has been decided that
credit facilities granted by banks will be classified into Performing and Non
Performing Asset.
NPA is a loan ( whether term loan, cash credit, overdraft, or bills discounted)
which is in default for more than three months. In case of such assets, the income
should be shown only on receipt and not shown in the banks book on a due basis.
The ratio of Non-Performing Assets to advances reflects the quality of a
banks loan portfolio.
5

A distinction is often made between Gross NPA and Net NPA. NET NPA,
which is obtained by deducting from gross NPA items like interest due but not
recovered, part payment received and kept in suspense account, etc., is internationally
accepted as the more relevant indicator of financial health of the banks.
It is the level of NPA which, to a grant extent, differentiates between a good and bad
bank. The subject of high NPA levels in banks has also been frequently raised in
various area.

IMPORTANCE OF NON PERFORMING ASSETS

The one major cause for the current weakened state of banking sector is
the level and volume of NPAs. The problem has not been looked at in its proper
perspective. Descriptions such as decreased portfolio and figures running into
thousands of crores have all led to treating the problem as a major one-time aberration
requiring emergency treatment. The casual explanations political interference,
willful defaults, targeted lending and even fraudulent behavior by banks allowed
them to be pressurized into lowering their guard in the one area of business that is
their bread and butter of existence risk assessment.
Lending to priority sectors or medium and small companies is likely to
be the banks main activity in time to come. The bigger, established corporations
would have the wide world to choose from and to meet their requirements. The shift
to medium-sized borrowers and slightly riskier lending will form the prime activity of
all banks. The problem will then, be to ensure that such lending is justifiable on a
commercial criterion.
The high level of NPAs in Indian banking sector is the result of
application of prudential norms of accounting from 1992 onwards. The introduction
of CAC is subject to the NPA level being brought down to less than 5% from the
present level of around 16%. The Government of India already initiated several steps
to help banks in reducing their NPAs. Several of these NPAs are still outstanding in
the books of accounts because they are not supported by adequate provisions.
6

Introduction of prudential norms on income, recognition, asset
classification and provisioning during 1992-93 and other steps initiated apart from
bringing in transparency in the loan portfolio of banking industry have significantly
contributed towards improvement of the pre-sanction appraisal and post sanction
supervision which is reflected in lowering of the levels of fresh accretion of NPAs of
banks after 1992.
NATURE OF NPAs

There is no gain saying the fact that Indian banking has been the governments
step child as far as economic policy is concerned. The two rounds of bank
nationalization in 1969 and in 1980 created public sector banking behemoths which
were slothful, indifferent and anachronistic.
On the one hand a protected environment ensured that banks never needed to
develop sophisticated treasury operations and asset liability management skills. On
the other hand a combination of directed lending and social banking relegated
profitability and competitiveness to the background. The net result was unsustainable
NPAs and consequently a higher effective cost of banking services.
The crucial factor that decides the performance of banks now-a-days is the
recognizing NPAs in their advances at the earliest.
NPAs are those loans given by a bank or financial institutions where the
borrower defaults or financial institution delays interest or principal payment. Banks
are now required to recognize such loans faster and then classify them as problem
assets and take measures to recover them.
Close to 17% of loan made by Indian banks are NPAs very high compared to
say 5% in banking systems in advanced countries. The burden of NPAs is a millstone
round the necks of the banks. The NPAs are posing a major threat not only to the
banking sector but also for the economy as a whole.


7


CAUSES FOR NON-PERFORMING ASSETS

A strong banking sector is important for a flourishing economy. The failure
of the banking sector may have an adverse impact on all other sectors. The Indian
banking system, which was operating in a closed economy, now faces the challenges
of an open economy. Banks started getting concerned about Non-Performing Assets
consequent to the introduction of prudential accounting norms.
NPAs reflect the performance of banks. A high level of NPAs suggests high
probability of a large number of credit defaults that affects cash flows. According to
the RBI, the gross NPAs of scheduled commercial banks rose from 24.4% in March
2006 to 24.9% in March 2007.
Thus, increasing NPAs are a matter of concern for banks. In India, the banking
sector is still not strong on the solvency front. Having adhered to stipulated capital
adequacy norms does not suggest that a bank is strong enough. It is important to
improve the quality of assets and ensure timely recovery of loans.
NPAs have become an issue for banks and financial institution

To start with performance in terms of profitability is a benchmark for any
business enterprise including the banking industry. However, increasing NPA shave a
direct impact on banks profitability as legally banks are not allowed to book income
on such accounts and at the same time banks are forced to make provision on such
assets as per the Reserve Bank of India (RBI) guidelines.

Also, with increasing deposits made by the public in the banking system, the
banking industry cannot afford defaults by borrowers since NPAs affects there
payment capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in
the system through various rates cuts and banks fail to utilize this benefit to its
advantage due to the fear of burgeoning Non-Performing Assets.
8


Credit Risk and NPAs

Credit risk management is confused with managing NPAs. However there is
an appreciable difference between the two. NPAs are the result of past action whose
effects are realize 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. In other words, an attempt is made to avoid possible
default by properly managing credit risk.
Considering the global recession and unreliable information in financial
statements, there is high credit risk in the banking and lending business.
To create a defense again such an uncertainty, bankers are expected to develop
an effective internal credit risk model for the purpose of credit risk management.

Indian Economy and Non Performing Assets

Undoubtedly, the world economy has slowed down, recession is at its peak,
globally stock markets have tumbled and business itself is getting hard to do. The
Indian economy has been much effected due to high fiscal deficit, poor infrastructure
facilities, sticky legal system, cutting of exposures to emerging markets etc.
Further, international rating agencies like, standard and poor have lowered
Indias credit rating to sub-investment grade. Such negative aspects have often
outweighed positives such as increase in forex reserves and manageable inflation rate.
Under, such a situation, it goes without saying that banks are no exception and
are bound to face the heat of a global down turn. One would be surprised to known
that the banks and financial institution in India hold NPA worth Rs. 1,10,000 cores
bankers have realized that unless the level of NPAs is reduced drastically, they will
find it difficult to survive.

9

Global Developments and NPAs

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.

Non-Performing Assets has emerged since over a decade as an alarming threat
for the banking industry in our country sending distressing signals and the
sustainability and endurability of the affected banks. The positive results of the chain
of measures affected under banking reforms by the Government of India.

RBI in terms of the two committee reports of its period has been neutralized
by the ill effects of this surging threat. Despite various correctional steps administered
to solve this problem. Concrete results are eluding. It is a sweeping and all pervasive
virus confronted universally on banking and financial institutions. The severity of the
problem is however actually suffered by nationalized banks, followed by the RBI
groups and the all Indian Financial Institutions.

The deregulation in interest rates, grant of financial autonomy to bank in the
area if credit entry of foreign banks and emergence of new private banks has made the
Banking environment more competitive. While the total share in banks credit
continues to be dominated by Public sector banks, the share of foreign banks is
showing an increasing fraud, with same political hurdles.

As announced in the union budget for 2004-05. it has been decided to give an
option to foreign banks to either operate as branches of their parent banks or set up
subsidiaries.

10


ASSET CLASSIFICATION, INCOME RECOGNITION &
PROVISIONING

In line with the international practices and as per the recommendations made
by the Committee on the Financial System (Chairman Shri M. Narasimham), the
Reserve Bank of India has introduced, in a phased manner, prudential norms for
income recognition, asset classification and provisioning for the advances portfolio of
the banks so as to move towards greater consistency and transparency in the published
accounts. Accordingly the Reserve Bank of India has revised from time to time
prudential norms for assets classification and income recognition.

Under the existing prudential norms, loan assets are broadly classified into two
categories namely performing and nonperforming. Performing assets are those on
which the Bank recover interest charges/installments of principal amount within a
period . The loan account in which irregularity regarding payment of principal or
interest continues for a period beyond two quarters is classified as Non-Performing
assets (NPAs). However, with effect from March 31, 2004, a Non-Performing Asset
(NPA) shall be a loan or an advance where interest and/ or installment of principal
remain overdue for a period of more than 90 days.

The loan assets classification is summarized below:
Performing Standard Assets
An asset which is currently performing and in respect of which interest and
principal payments are received regularly and where arrears of interest and principal,
if any, do not exceed 90 days from the due date.
Non Performing Assets
A Non-Performing Asset (NPA) shall be a loan or an advance where interest
and/ or installment of principal remain overdue for a period of more than 90 days.
11

Further banks are required to classify non-performing assets into the following
three categories based on the period for which the asset has remained non-performing
and the realisability of dues.Sub-standard assets
With effect from March 31, 2001, substandard asset is one which has been a
NPA for a period less than or equal to 18 months. However, w.e.f March 31, 2005,
substandard asset is one which has been an NPA for a period less than or equal to 12
months.
Doubtful Assets
With effect from March 31, 2001, doubtful asset is one which has been a NPA
for a period exceeding 18 months. However, w.e.f March 31, 2005, doubtful asset is
one which has remained substandard category for 12 months.
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. When an account is classified as an NPA, interest already debited to the
account is unrecognized and further interest accrued is on cash basis.

Provisions are arrived on all outstanding advances, as under:
Standard Assets
From the year ending 31.03.2000, the banks should make a general provision
of a minimum of 0.25 percent on standard assets on global loan portfolio basis.
Sub-standard Assets
A general provision of 10 percent on total outstanding should be made without
making any allowance for DICGC/ECGC guarantee cover and securities available.
The unsecured exposures which are identified as substandard would attract
additional provision of 10 per cent, i.e., a total of 20 per cent on the outstanding
balance.
12



REASONS FOR NPA

Management of Non-Performing Assets, now a days is a critical performance
area for banks, especially in public sector banks. It is better for Indian banks to try for
the international standards in terms of efficiency, productivity, profitability, asset
recognition norms, and provisioning and capital adequacy to compete in the
competitive new economy. At present, any borrowal account not serving for either
interest or principal for at least 3 months will be called Non-Performing Assets or
NPAs.
Reserve bank of India (RBI) has been implementing stringent rules and
regulations for asset classification from the year 1991-92, in a phased manner. It
includes adoption of new method in measuring profitability, performance and
evaluation of assets, to find the financial conditions of banks.
There are several reasons for an account becoming NPA. These include:
1. Funds borrowed for a particular purpose but not used for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivable.
4. Industrial recession.
5. Business failures.
6. Diversion of funds for expansion\modernization\setting up new projects.
7. External factors like raw material shortage, raw material\ input price
escalation, power shortage, industrial recession, excess capacity, natural
calamities like
floods, accidents.
8. Government policies like excise, import duty changes, de-regulation, and
pollution control orders etc.
9. Willful defaults, fraud, disputes, management disputes, misappropriation.
10. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and
follow-up, delay in settlement of payments\subsidiaries by government bodies.
13


CAUSES FOR AN ACCOUNT BECOMING NPA

A strong banking sector is important for a flourishing economy. The failure of
the banking sector may have an adverse impact on all other sectors. The Indian
banking system, which was operating in a closed economy, now faces the challenges
of an open economy. Banks started getting concerned about Non-Performing Assets
consequent to the introduction of prudential accounting norms.
NPAs reflect the performance of banks. A high level of NPAs suggests high
probability of a large number of credit defaults that affects cash flows. According to
the RBI, the gross NPAs of scheduled commercial banks rose from 24.4% in March
2006 to 24.9% in March 2007.
Thus, increasing NPAs are a matter of concern for banks. In India, the banking sector
is still not strong on the solvency front. Having adhered to stipulated capital adequacy
norms does not suggest that a bank is strong enough. It is important to improve the
quality of assets and ensure timely recovery of loans
CAUSES ATTRIBUTABLE TO BORROWER
1. Failure to bring in required capital
2. Too ambitious project
3. Unwanted expenses
4. Over trading
5. Imbalances of inventories
6. Lack of proper planning
7. Dependence on single customer
8. Lack of expertise
9. Improper working capital management
10. Mismanagement
11. Diversion of funds
12. Poor quality management
13. Heavy outside borrowings
14. Poor credit collections
15. Lack of quality control
14


CAUSES ATTRIBUTABLE TO BANKS

1. Wrong selection of borrowers
2. Poor credit appraisal
3. Lack of supervision
4. Too flexible on attitude
5. Systems overloaded
6. Non inspection of units
7. Lack of motivation
8. Lack of trained staff
9. Lack of delegation of work
10. Sudden credit squeeze by RBI
11. Lack of commitment to recovery














15

COMPANY PROFILE

History
Karnataka Bank Limited, a leading A Class Scheduled Commercial Bank in
India, was incorporated on February 18
th
, 1924 at Mangalore, a coastal town of
Dakshina Kannada district in Karnataka State. The bank took shape in the aftermath
of patriotic zeal that engulfed the nation during the freedom movement of 20
th

Century India. Over the years, the Bank grew with the merger of Sringeri Sharada
Bank Ltd, Chitradurga Bank Ltd and Bank of Karnataka.
With over 87 years experience at the forefront of providing professional
banking services and quality customer service, we now have a national presence with
a network of 483 branches spread across 20 states and 2 Union Territories.
Managed by a dedicated and professional management team, they have over
5,844 employees, 86,868 shareholders and over 4.84 million customers. Today, they
have emerged as a leading financial service institution in India.
Technology
Throughout the years, they focused on one task, one mission To Give the
Best in Services and in Products. Among other Banks, it was Karnataka Bank who
first realized the importance of having a Centralized Banking system and was among
the first to deploy the Core Banking System in the year 2000. This system enabled to
store and processes all the customers accounts from one single place the Data
Center at Bangalore. To ensure that to have the Best, they have deployed the State-
Of-Art technology from the best players in the Industry like Infosys, Sun and Wipro.
These systems provide the highest reliability thus enabling to offer to Non-
Stop services of the highest order. They have taken a lead and implemented a Disaster
Recovery Centre. This center will replicate the Banks Centralized Banking system
and all its data. This centre will also be backup for the ATM Operations.
In the event of a natural disaster at Bangalore, this centre will immediately
come into force and provide full continuous service leaving nothing to chance. At
16

Karnataka Bank, Business never stops. They ensured business is protected by Non-
Stop Banking.
Mission
Their mission is to be a technology savvy, customer centric progressive bank with a
national presence, driven by the highest standards of corporate governance and guided
by sound ethical values.
At Karnataka Bank, they understand that all customers are different in unique
ways, which is why, regardless of the size of the business or aspirations and treat
everyone as individual and special. This means offering the choices, not only in
relation to products and services but also in the way we interact with them. They
understand the changes in our lifestyle recognize these changes and support with a
high standard of professionalism and service. As a premier bank, they have developed
comprehensive range of customized products and services suitable for every bank of
market, trade or perceived need Business or Personal.
They include, borrowing facilities, deposits, providing optimum returns on
surplus funds or helping with overseas transactions.

Background and Management of the Karnataka Bank
The bank was incorporated on February 18, 1924 as the Karnataka Bank Ltd at
Mangalore, in Karnataka state to cater to the banking needs of the south Karnataka
region. The certificate to commence business was obtained on May 23, 1924.
During the period of four decades, i.e. from 1906 to 1945, the district attained
renown as the cradle of a banking revolution in the country, since as many as 22
banks of different sizes had their origin in the district, 9 of which were from
Mangalore, which is the capital and also the trading and commercial activities of the
district, (5 leading banks including Karnataka Bank Ltd).
Insipred by the Swadeshi movement, a few prominent and enterprising
citizens of the district, mostly hailing from the communities of farmers, merchants,
doctors, advocates incorporated the banking institution in the district. One such
17

pioneer was Sri. B. R. Vyasaraya Achar, who along with his contemporaries promoted
the Karnataka bank ltd, in 1924 under his chairmanship, In the stride towards progress
and expansion, the bank got reinforced by the takeover of 3 banks, viz. Sri Sharada
Bank Ltd., on April 1st 1960, Chitradurga Bank Ltd., on December 30th 1964, and
The Bank of Karnataka on December 29th 1966. And during the year 2003, the bank
has taken up corporate agency for marketing the various life policies of Met Life India
Insurance Co Ltd.
The bank has shifted its Registered and Head office from P.B. No 716,
Kodialbail, Mangalore 575003 to P.B. No 599, Mahaveera Circle, Kankanady,
Mangalore 575002 in September 2003. The bank made rapid strides under the
dynamic leadership of exemplary vision, who guided the banks fortunes for over 30
years. Today, Karnataka bank has national presence with a network in excess of 433
branches, spread across 19 states and 2 Union Territories. The bank has over 4677
employees, 89407 shareholders and 2.6 million customers.
It is one of the leading private sector banks in the country known for its steady
and disciplined growth and cordial borrower service. As on March 31
st
2011, its total
business exceeds Rs 44000 crores, deposits were Rs 27336.45 crores, advances were
Rs 17348.07 crores and net profit for the year ended 31
st
March 2011 was 234.94
crores.

Background of the Logo
The person who had such a dream, Sri Adiga with all his dream met Dr
Shivaram Karanth, simple line came from Dr Karanths pen became the logo of
Karnataka Bank. Bank logo is indicative of creation and potency, which is also a
manifestation of human soul, which has the external existence with infinitive. Logo
also represents growth with safety, security and enduring success for all the beings.
The sign also signifies with family concept of father, mother and their progeny,
symbolizing their security which is reflected in the banking motto, your family bank
across India.
The Bank has adopted a new brand color, which signifies brightness,
cheerfulness and forward looking nature.
18


Values
We at Karnataka Bank offer a total value package, a one stop shop for all your
banking need and create the right solution with speed and efficiency, for your
maximum benefit.

Mission Statement
The mission statement of any organization generally represents its long term
goals and strategies. Every organization must have its own mission, which describes
present business scope of the organization. The mission of Karnataka Bank Ltd is as
follows:
Our mission is to be a technology savvy, customer centric progressive
bank with the presence, driven by the highest standards of corporate governance
and guided by sound ethical values.

Vision Statement
We believe in a total quality at a total value package, a one stop shop for all
your banking needs. Our motto is to serve you with high standard of professionalism
with the personal touch built on trust. After all, this is your bank your family bank,
across India.
There are various departments in the bank head office to assist in the smooth
functioning of the banking activities namely:
1. Credit Department
2. Treasury and Accounts Department
3. Risk Management Department
4. Inspection and audit Department
5. Human resources and Industrial relations Department.
6. Recovery Department
19

7. Investment Department
8. Planning and Development Department
9. Vigilance Department
10. Information System Department
11. Legal Department
12. IT Department
13. Secretarial section

Infrastructural Facility
As regards to the infrastructural facilities provided in Karnataka Bank:
Offices: The Head office of Karnataka Bank Ltd and other 70% of branches has a
central air condition system with well furnished branches which helps the employees
escape from the heat of Mangalore City and other heat areas and also provide good
environment to do work to employees.

Facilities: The Bank provides basically petrol, 100% medical allowance and
promotion and wage revenue plan.

Services: Karnataka Bank offers total value packing, nonstop shop for all banking
needs. The bank is committed to provide with customized services designed to suit
individual requirements, whether it is high caring deposits, easy and convenient loans,
life insurance, utility bill payment is enabling to keep track of finances thereby saving
time.

Work flow model of the Bank








Mobilization of Funds
Lending

Recovery
20


Mobilization of Funds
This is the first process in the bank, it will mobilize the funds from various sources
like individual savers corporate, and other financial institution and RBI also supply
the necessary funds.

Lending
After mobilization of the necessary funds, it has to maintain necessary funds as
reserves. It has to maintain reserves like CRR, SLR and so on. After fulfilling the
necessary requirement of the RBI, the bank will lend to various corporate and
individuals.

Recovery
After the maturity of loan period, the bank will recover the loans. For this purpose the
bank has a separate recovery department. This process is continuous in the bank;
again recovered amount will be invested.

Memorable Milestone
In 1984, the bank celebrated its Diamond Jubilee year, to make this occasion
memorable it introduced a new scheme i.e. Diamond Jubilee Cash Certificate,
Abhyudaya magazine was introduced.

In 1998-99, the bank introduced two new deposit schemes i.e. Suvarna Nidhi
and Ready Money Krishi Card an easy and quick substitute for Crop loan was
introduced. In this year Merchant Banking division was started.In 1992-93 the first
currency chest- the first in Karnataka by any private sector bank was opened on May
17
th
in Bangalore. Stock invest scheme was introduced.

The 18
th
February 1998 has witnessed the banks advent into its Platinum
Jubilee year. To make the occasion memorable the bank has chalked out an extensive
and phased programmed encompassing publicity, even marketing social welfare
schemes and corporate identity symbols. Two new deposit schemes Platinum
21

Lakpathi and Platinum Double and Vidyanidhi Educaion Loan schemes were
introduced.

Achievements and Awards
The credit rating agency ICRA Limited one of leading rating agencies of the
country has recorded A1+ rating to the banks certificate of deposit program. The
rating symbol A1+ indicates highest degree of safety for timely payment of
principal and interest.

Further ICRA and Credit Analysis and Research Ltd have assigned LA+
and CARE A+ ratings respectively indicating adequate credit quality to Rs 150
crores raised by the bank during the year under report by way of unsecured
redeemable non-convertible subordinated bonds.

The Bank has also bagged Special Award for use of IT for internal
effectiveness for the year 2009, instituted by Institute for Development and Research
in Banking Technology (IDRBT).

The bank has won the prestigious SUN and NDTV green IT award instituted
SUN Microsystems and NDTV, recognizing organizations which have pledged their
positive commitment to the planet and engaged eco-efficient green technologies to
run their business.
A1+" Rating for KARNATAKA BANK
Mangalore-based Karnataka Bank Limited has retained its "A1+"
(pronounced A one plus) Rating to its Certificate of Deposits programme of Rs.2000
crore. This rating is the highest-credit-quality rating assigned by ICRA for the short-
term. Instruments rated in this category carry the lowest credit risk in the short term.
Within this category, certain instruments are assigned the rating of A1+ to reflect their
relatively stronger credit quality.
Incidentally, the Bank has also bagged "Special Award for use of IT for
Internal effectiveness" for the year 2009, instituted by Institute for Development and
Research in Banking Technology (IDRBT).
22


Nature of business carried out
Karnataka bank is the No. 1 private sector banks in India which is providing
all the services of a modern bank to its customer. It accepts deposits from the
customers, provides loans and advances to the needy people. It also provides for the
remittance of funds and some other facilities. It will also carry various activities like
D-mat, securitization etc.
Quality Policy
The quality policy of the Karnataka Bank is as follows
We believe in total quality at all levels. We are aiming at a total value
package, a one-stop shop for all your banking needs. Our motto is to serve you with
high standard of professionalism with a personal touch built on trust. After all this is
your Bank your Family Bank across India.
Corporate Goals
The bank has envisaged achieving a total business turnover of Rs 45000 crore,
comprising of a deposit target of Rs 27000 crore and advance target of Rs 18000 crore
for the year ending March 31
st
2011. The bank is confident of achieving the same
through customer services and operational efficiency. Besides, the bank had plans to
increase its total no. of business units to 640, by increasing the total no. of branches to
460 and own ATM network to 180 by March 2009.
Areas of Operation
The area of operation is spread all over India. It has its branches in 19 states
and 2 union territories. As on 31-03-2008, it has 433 branches. All the branches are
computerized branches. It has more than 150 ATM outlets, 7 extension counters, 8
regional offices, 1 international division, 1 Data center, 4 service branches, 2 currency
chests.
Besides banking operation involve into variety of services selling insurance,
mutual fund products of other companies and they help in the payment of electric and
23

telephone bills, as they already have a large customer base for which they gave
similar or related services under a single umbrella.
Karnataka bank is already dealing with MetLife and Franklin Templeton
investments, India. Karnataka bank has signed a MOU with ICICI and Bajaj Alianz.
Branch Network
The bank has a national presence through a widespread of 433 branches.
Specialized branches have been established to cater to the needs of key borrower
segments in the core area of agriculture, industrial finance and foreign exchange. The
branch network is administered by 8 regional offices and an international division.
During the year 2006-07, the bank shifted its 22 branches and Mumbai-
Regional office to new spacious premises. The regional offices are situated at
Mangalore, Shimoga, Bangalore, Chennai, Hubli, Mumbai, Mysore and Delhi. With
overall supervision and control by the head office personalized borrower service is its
key success factor. The bank has also diversified into new avenue of business such as
Merchant Banking and Leasing.

Future growth and prospectus:
With an economy of the country growing at nearly 8% there is high growth
potential for the bank. The bank is planning to enable Money Click as a payment
gateway for the shopping that covers as the areas of business like Hotel Booking,
Ticket Booking, Purchase of goods etc. The bank is also planning to introduce mobile
Top-up through ATMs and internet banking. Further bank is also planning to tie up
for online trading in shares.
Karnataka bank has taken significant strides on the technology front. All the
branches and offices are connected to core banking solution. Banks tie up with
M/S Tech Process Solutions Limited, facilitates online payment in merchant
establishments.

24

The bank ties up with Tata Mutual Fund for distribution of their mutual fund
products. E-hundi facility has been made available to a few reputed temples. White
label agreement has been made with Calyon Bank Limited France provide risk
management services.
In the area of farm credit, the bank has signed a Memorandum of
Understanding with M/S Mahindra and Mahindra Limited and entered into a pact
for financing purchase of tractors/power tillers/vehicles and farm equipments.
The bank intends to participate in initiatives of RBI like NFCs and expand
centralized loan account opening at Central Processing Centre (CPC) for all
branches. The bank has plans to launch students prepaid card and online trading
facility for capital market products.
The bank has on its agenda opening of a few more branches to make the tally
of branches to 500 besides adding more ATMs to 250 by end 2012.
CATEGORY No. of Branches
METRO 120
URBAN 136
SEMI-URBAN 89
RURAL 88
TOTAL 433








25

LOAN SCHEMES OF KARNATAKA BANK

1. KBL Apna Ghar Home Loan
2. KBL Easy Ride Two wheeler Loan
3. KBL Car Finance New and Second hand cars
4. KBL Vahana Mitra Financial for Commercial Vehicle
5. KBL Varthak Loan scheme for Traders
6. KBL Udyog Mitra - Loan scheme for Professionals
7. KBL Insta Cash For Consumption purposes
8. KBL Salaried Persons Loan Scheme for Salaried person
9. KBL Vidyanidhi - Education Loan

10. KBL K-POWER Personal Loan











26


1. KBL Apna Ghar

a. Housing Loan Scheme for Resident Individuals:
Under this scheme maximum quantum of Rs. 100 lakh may be given as
loan for fulfilling once dream of buying or constructing his own house or flat.
The security for loan is mortgage of property. Apart from this, loan is also
given to an extent of maximum Rs 10 lakh for repair, renovation of existing
house or flats for a period of 7 years.
The period of this housing loan is for 15 years.

Loan Amount Rate of Interest ( p.a.)
< 20 lakhs 10.25%
20 50 lakhs 11.00%
50 100 lakhs 12.00%


b.Housing Loan Scheme for Resident Individuals:
Under this scheme a loan is given to a non resident of India (NRI), where
the loan is given up to the period of 15 years. For
repairs/renovation/remodeling maximum period of loan is fixed at 7 years.
Under this scheme maximum of Rs. 50 lakh is given for the construction of
house/purchase of flat/site and construction of house there on.
In the case of renovation/remodeling/repairs of existing house/flat
maximum of Rs. 10 lakh is given. Non-resident Indian holding Indian passport
and having permanent job or self employed with a minimum monthly income
of Rs. 10000 is eligible.
They should also have an operative account with bank with regular
operations for at least 1 year. The loan is granted for a period for 15 years.
Rate of interest is same as for resident Individuals above.


27

2. KBL Car Finance Scheme
An individual purchase of a motor vehicle who is an income tax assessee with
sufficient repayment capacity is eligible for this scheme. Under this scheme finance
will be given for the purchase of new as well as second hand cars by the Bank.
Purpose:
Purchase of new vehicle / second hand vehicle not older than 3 years from the date of
its registration.
Amount of Loan:
Upto 85% of the invoice value excluding road tax and insurance for new
vehicles.Maximum of Rs.15 lakh in the case of second hand / used vehicle (not more
than 3 years)
Period:
Upto 60 months (new vehicle) and 34 months (second hand vehicle).
Security:
a) Hypothecation of vehicle to be purchased.
b) Third party co-obligation / guarantee in the case of individual.
Vehicle Type Rate of Interest ( p.a.)
New Vehicles up to Rs. 50.00 lakhs 12.00%
Old Vehicles up to Rs. 20.00 lakhs 14.50%





28

3. KBL Easy Ride Two wheeler loan
Individuals, professionals and companies are eligible for finance under this
scheme. In this scheme finance will be given for the purchase of two wheelers to any
individuals, companies etc., to an extent of 100% of invoice value of the vehicle by
the Bank for a period of 5 years.
Purpose:
Purchase of two wheelers to any individuals, companies etc.
Amount of Loan:
The maximum amount under this scheme is Rs. 1 lakh.
Period:
Upto 60 months.
Security:
a) Hypothecation of vehicle to be purchased.
b) Solvent co-obligant / guarantor.
Documents Required
Proof of income (Salary certificate, income tax returns / assessment orders, audited
financial statements etc.).






29

4. KBL Vahana Mitra Loan
In this scheme finance to individuals, HUF, partnership firms or a company
will be given for purchasing new cars, maxi cabs, Autorickshaw, Jeep, Car, Maxi
Cab, Tempo Traveller, TATA Sumo, TOYOTA Qualis, Bus, Lorry, etc., to be
registered as Public Transport Vehicles only. Purchase of new tractor, JCB, crane etc.
are also eligible provided the vehicle is used as public transport or vehicle for hire.
Purpose:
Purchase of vehicles for use of public transport
Amount of Loan:
Maximum amount upto 85% of the invoice value for a new vehicle, excluding
Road Tax and Insurance, Permit etc. For body building expenses up to 75% of the
quotation furnished by the Vehicle body builders. For used vehicle - 30% up to 3
years, 50% above 3-5 years
Period:
For Buses and Trucks a maximum repayment period of 84 months (including
holiday period) is allowed.
For all other vehicles, it is 60 months.
Security:
For loans upto Rs.10 lakh: Vehicle to be purchased will be hypothecated and solvent
party co-obligation / guarantee would be required.
For loans above Rs.10 lakh: The vehicle to be purchased will be hypothecated and
equitable mortgage of property of value not lower than 50% of the loan amount,
acceptable to the Bank, solvent co obligation.
( or )
30

Liquid securities like NSC's, KVPS, LIC Policies having SV and Deposits of value
not lower than 35% of the loan amount or more, solvent co-obligation

Vehicle Type
Rate of Interest (
p.a.)
New Vehicles
i. Up to 5.00 lakhs 12.00%
ii. 5 - 25.00 lakhs 13.00%
iii. 25.00 100.00 lakhs 14.00%
Old Vehicles (Any amount) 15.00%






















31


5. KBL Varthak Loan
Under this scheme finance for meeting the working capital needs of traders,
commission agents, distributors, stockiest, authorized dealers or any other business
persons exclusively carrying on trading/business activity retail/whole sale basis will
be given.
Purpose:
Working capital.
Amount of Loan:
20% of the projected turnover, subject to a maximum of Rs.25 lakhs.
Period:
34 months for OPN, 12 months for OD will be provided by the Bank.
Security:
Hypothecation of stock in trade and receivables.
Equitable mortgage of immovable property and / or pledge of term deposits of
our Bank, LIC policies and NSC either in the name of the borrower or in the
name of third party with requisite margin.
Co-obligation acceptable to the Bank.









32


6. KBL Udyog Mitra (Scheme for Professionals)
Under this scheme loan will be given to any individuals practicing as Doctors / Regd.
Medical Practitioners (having passed qualified examination from a recognised
university in Allopathy / Homeopathy / Ayurvedic sciences) / Lawyers / Engineering
consultants and Chartered Accountants.
Applicant should be an existing customer with satisfactory dealings of not less than 6
months or Applicants should be properly introduced.
Purpose:
i. Purchase of medical equipments / machineries / computers.
ii. Furnishing the office, purchase of furniture, books etc.
iii. Payment of advance rent for setting up an office.
Amount of Loan:
Upto 90% of the cost of the assets to be purchased in the case of purpose (i)
mentioned above.
Upto 80% of the cost in case of purpose (ii) and (iii) for setting up of an
office for the purpose mentioned under (ii) and (iii) maximum loan is
o Rs. 75,000/- in rural areas
o Rs. 1,00,000/- in semi - urban areas
o Rs. 1,50,000/- in urban areas and
o Rs. 2,00,000/- in metropolitan areas.
Period:
Upto 5 years for purpose (i) and
Upto 24 months for purpose (ii).


33

Security:
Hypothecation of assets to be purchased (purpose (i) and (ii))
LIC Policies (SV), NSCs (FV), term deposits of the Bank not less than 25% of
the proposed loan or equitable mortgage of immovable property of value not
less than 50% of the loan amount.
Solvent co-obligant / guarantee.
















34

7. KBL Insta Cash
In this scheme loan will be given to the persons aged above 18 years for
consumption purpose. The unique advantage of this scheme is that it enables credit
while keeping the borrowers investment intact.
Purpose:
Any purpose but nothing specific.
Amount of Loan:
Minimum amount that can be availed is Rs. 5000
Maximum amount that can be availed is Rs 5 Lakh.
Period:
Maximum period is for 60 months and for OD 24 months.
Security:
You would be required to pledge NSCs / Kisan Vikas Patras which have
completed at least one year of which unexpired period of maturity should be three
years or less, 4 years or less, 5 years or less and assignment of Life Insurance
policies with surrender value or of other companies licensed by Insurance
Regulatory Development Authority







35

8. KBL-Salaried Persons Loan
This scheme is meant for permanent employees of any reputed institutions or
companies for purchasing household articles, for meeting medical expenses,
childrens education etc., provided they are not aged more than 55 years and are
having maximum 3 years of remaining service. The loan is granted up to Rs. 50000
and the maximum period of this loan is for 5 years.
Purpose:
Purchase of household articles / consumer durables.
Children's education.
Marriage and thread ceremony of self / dependants.
Medical expenses of self / dependants.
Obsequies expenses.
Repair of own house.
Amount of Loan:
Maximum 10 times of Monthly salary.
Maximum amount that can be availed is Rs 50000.
Period:
Maximum period is for 60 months.
Security:
Up to Rs 2.00 Lakh - Co-obligation of solvent party / co-employee who should be
a permanent employee of reputed companies, schools, colleges or universities.
Above Rs 2.00 Lakh - Co-obligation of solvent party / co-employee who should
be a permanent employee of reputed companies, schools, colleges or universities
and Liquid security of LIC policies(SV), NSC, deposits to the extent of 25% of
the limit

36

9. KBL Vidyanidhi Loan
In this scheme, financial assistance in the form of loan will be given to both
minor and major students of Indian nationality for pursuing their education in various
disciplines specified by the Bank in India as well as for abroad. Mainly the scheme
was designed to provide financial support to the deserving and meritorious students
for continuing their students in India and abroad. The main eligibility for the student
is any major student representing himself or a minor student represented by parent or
guardian of Indian nationality. The finance is provided in the form of short term/term
loan subject to repaying capacity of the parents/students and the following ceilings:
Students in India Maximum Rs 10 lakh
Students abroad Maximum Rs 20 lakh
The loan has to be repaid in 5 to 7 years after commencement of repayment.
Vidyanidhi Variants
Rate of Interest (
p.a.)
i. General up to Rs 4 Lakh
a. Normal 13.75%
b. Meritorious 13.25%
c. Girl Student 13.25%
d. Girl Meritorious 12.75%
ii. General above Rs 4 Lakh
a. Normal 14.75%
b. Meritorious 14.25%
c. Girl Student 14.25%
d. Girl Meritorious 13.75%
Loan upto Rs.4 lakh: No margin required.
Loan above Rs.4 lakh: 5% for studies in India and 15% for studies abroad.
Scholarship / apprenticeship may be reckoned as part of margin. Margin may be
brought in on year-to-year basis as and when disbursements are made, on a pro-rata
basis.
37

Security:
Up to Rs.4 lakh: No security.
Above Rs.4 lakh and upto Rs.7.50 lakh: Collateral in the form of a suitable third party
guarantee.
Above Rs.7.50 lakh: Collateral security of suitable value or suitable third party
guarantee along with the assignment of future income of the student for payment of
instalments.
Note:
The loan documents should be executed by both student and the parent /
guardian as joint-borrowers.
The security can be in the form of land / building / Govt. securities / Public
Sector Bonds/ Units of UTI, NSC, KVP, LIC policy, gold, shares/ debentures,
bank deposit in the name of student / parent / guardian or any other third party
with suitable margin.
Wherever the land / building is already mortgaged, the unencumbered portion
can be taken as security on II charge basis provided it covers the required loan
amount.
In case the loan is given for purchase of computer the same has to be
hypothecated to the Bank.








38

10. KBL K-POWER (Personal) Loan
Any individual having SB/CA can avail this loan for any personal purpose.
Individual should be a salaried employee, a professional or even someone
receiving regular income from rent, pension etc. This withdrawal can be done at
any ATM.
Purpose:
For any personal use.
Amount of Loan:
Maximum amount is Rs 25,000
Minimum amount is Rs 1,000.
Period:
Maximum period is 12 months subject to renewal/review before due date.
















39

INDUSTRY PROFILE

Banking industry has been facilitating the Management of NPAs to a
satisfactory level during the last few decades. But major threat in the Indian Bank
Industry is the rising level of non-performing asset which the threat the industry and
profit margin in fact the major task before the Indian banks is to reduce ratio of non-
performing assets to total assets, based upon the new income recognition norms. In
this context, the issuance of these risk management guidelines by the RBI became
considerable significance. It emphasizes on the need of a bank to adopt visit
management strategy and to reduce their NPA and in order to improve that business
of that bank.

Bank adopt risk management and strategies and to reduce their NPA and in
order to improve their business the bank would have to provide not only quality
service by adopting newer technologies but also newer service the banks will have to
reap the economic scale and scope in order to cost out and raise their profitability, the
central instrument against NPAs must be bankers themselves first.

They must have detailed and shared knowledge of the credit characteristic of
the key borrowers they have. Strategically, this remains largely in form of word of
mouth process, in Indian Banking. Many decades ago RBI itself used to collect the
credit information from the Indian Banks and communicate it to all financial
institution regulated by it, this practice came to half in 1970s because information
system became increasingly unmanageable.

The mass expansion of the banking system caused inadequate communication
due to the lack of proper information network. This resulted in failure of banks to
generate information flows about major defaulter, even in mutual use.

The effective management of NPAs single major issue which will decided the
facts of the SBM branch bank in future the periodical change in solving the problems
of NPA by time testes method and future innovative step to reduce the NPA is in very
essential at this juncture.
40


Hence, this study research has emphasized on the operational efficiency of the
bank in Karnataka State with regard to management of NPAs potential strategic it
had adopted to meet the challenge in the same area in future. Also the researcher has
tried to suggest some measure which would be helpful to the bank in effective
management of NPA and based on his analysis and findings. Bankers must have the
authority to trim NPAs through across table settlement and other discretionary
instrument that would facilitate early detention and surgery of loans that go has these
big sized bank may turn out.

Despite the emergence of a number of dynamic private sector banks and entry
by a large number of foreign banks, the biggest banks in India are all in the public
sector, i.e., they are corporatized banks with the Government as the controlling
shareholder. The 27 public sector banks collect over 77% of the deposits and have
over 90% of branches.

While banks in India occasionally provide long-term loans, financing fixed
capital is primarily the responsibility of specialized long term lending institutions
such as the Industrial Finance Corporation of India. Banks typically, provide short-
term working capital to firms.

These loans are given as a credit line with a pre-specified limit and an interest
rate that is set at a few % points higher than prime. The gap between the interest rate
and the prime rate is fixed in advance based on the banks credit rating and other
characteristics but cannot be more than 4%. Credit lines in India charge interest only
on the part that is used up and given that the interest rate is pre-specified all borrowers
should want as large credit line as they could get.

A Year isnt too long a time when it comes to financial institutions like banks.
Yet, there are plenty of changes we find in banks. There are different banks like
Corporation Bank, HDFC Bank, ICICI Bank, Andhra Bank, Punjab National Bank,
Karur Vysya Bank, Karnataka Bank, State of Bank of India and Bank of Baroda,
which have their own importance in the banking industry.

41

The rise of Indias public sector banks is but a pointer to the dramatic changes
sweeping through the industry for some years. A growing economy, greater consumer
confidence and appetite for credit, and greater thrust on technology have helped the
more aggressive public sector unit banks not just grow their business, but drum their
balance sheets into shape.

According to the Reserve Bank of Indias banking review of 2004-05, there
was a notable pickup in credit to the commercial sector, and a renewed demand from
industry for investments and a surge in exports. While both operating profits and net
profits grew slowly (-2.2% and 0.9%, respectively compared to 2.7% and 1.1% in
2003-04) in absolute terms, the banks still made a lot of money Rs. 20,705 crores in
total net profits in the case of our different banks.

Impressively enough, the Non Performing Assets monster is on the run. Over
the last five years, the industry has halved its bad debts. Bad loans as a percentage of
advances shrank to 2.2% from 2.9% the year before. The industry focus now is on
scaling up both domestically and in markets abroad, widening the product and
services portfolio, and better using technology to make banking more accessible and
efficient.

Now, the Indias best bank is HDFC bank and Centurion Bank, it had decided
to step back and look at the industry changing contours. With the possible opening up
of the banking sector in 2009 will mean for the competitors. Banks should use as an
opportunity to get their growth strategies in place.

They should grow through mergers and acquisitions. Bankers are rushing to
tap the countries small and medium enterprises.
The fact that it has been growing upwards of 10% annually and that profit
margins here are better than those in corporate lending, small Medium enterprises
apart, looked at what will soon become a headline-grabbing affair in the banking
industry. Mergers and acquisitions, not the one to make a case for consolidation in the
industry arguing that India needs is not a large number of small banks but a small
number of large banks.

42

Indeed, underlining the frenetic activity in the sector is the growing realization
that strong and large banks are what the country needs to drive its economy. Indian
banks must be given time to get their act together.
RECOVERY OF NON-PERFORMING ASSETS
The second phase of reforms lays thrust on improvement in the
organizational efficiency of banks, the most crucial factor being the improvement of
profitability of banks in the reduction of NPAs. This issue is closely connected with
the overall stability of the financial system and needs to be recognized as such for
undertaking multi pronged efforts. Apart from internal facts such preponderance of
certain traditional industries in the credit portfolio of certain banks, majority of which
are suffering from serious inherent operational problems, natural calamities, policy
and technological changes which increase the incidence of sickness, labor problems
and non-availability of the raw materials and other such factors which are not with-in
the control of banks.
While banks cannot be blamed for advances becoming non-performing
due to external factors, there is an urgent need that the banks address the problems
arising out of internal factors and this may call for organizations restructuring of
banks, a change in the approach of banks towards legal action which is generally the
last step and not the first step, no sooner the account becomes bad and a clear thrust
on improving the skill of officials for proper assessment of credit proposal, risk factor
and repayment possibilities.
The following are the figures of gross and net NPAs of KARNATAKA BANK
from the period April 1, 2008 - Mar 31, 2011.
GROSS AND NET NPAs of KARNATAKA BANK (In Crores)
Year Gross NPA
Gross NPA
%
Net NPA
Net NPA
%
2008-09 443 116
2009-10 550 189
2010-11 702 3.97 280 1.62
Source: Audited Financial Year Results
43

Drastic measures should be taken for reducing the mounting level of NPAs in
terms of both gross and net. Though there are problems in effecting recoveries and
write off and in compromise settlements for making recovery process more smooth
and less time consuming and also create other alternative channels/agencies for
recovery of debt/reduction of NPAs. Government and other authorities should devise
policies having a bearing on the industrial sector, agriculture and trade with a long
term perspective to avoid sickness in the industry and adverse impact on borrowers
because of sudden shift in the policy.
Arresting of non-performing assets is fast turning out to be a myth. Despite an
aggressive recovery drive, the Karnataka Bank has failed to arrest the growth in
NPAs. As shown in the table the gross and net NPAs went on increasing, but most of
the banks have been able to pave the growth of NPAs because of the expansion in
their asset portfolio.

EFFECTIVENESS OF LEGAL RECOVERY MEASURES IN
BANKS
This procedure for recovery of bad debts due to public sector banks has resulted
in blocking of a significant portion of their funds in unproductive assets, the value of
which deteriorates with the passage of time.
The multiple litigation opportunities available to the borrowers for delaying the
verdicts/enforcement, courts being burdened, as they are, with heavy work load,
coupled with the tardy decision making process in the banks, rendered legal process
less useful. The recovery made though the legal measures/courts process indicated
above is self-revealing. Statements collected from public sector banks visited during
the study regarding the recovery process, revealed that significant portion of the suits
were pending for more than a decade. In some cases there were legal cases which
were pending for 15 to 20 years, but no progress was made in the suit.
It was observed during the perusal of filed cases in public sector banks that it
took many years, in many cases more than a decade, for the courts to settle the cases
even after passing of the orders/decree, due to the multiple litigation opportunities,
e.g., referring to appellate courts, higher courts, full benches etc, long time is taken for
44

the settlement of the cases. Difficulties are also faced and delay is occurring in the
execution of decree.
A part from the suit filing and legal measures the govt. and RBI has suggested other
vehicles to address the problem of NPAs recovery.Among these are
i. Debt recovery tribunals
ii. Debt settlement tribunals
iii. BIFR/SICA
iv. Lok adalats
v. Asset Reconstruction company
vi. Revenue recovery act
vii. Settlement advisory committee
viii.One time settlement scheme
ix. And other means for the recovery of NPAs in Karnataka Bank.

But at the end, data suggests that the working of all these other vehicles
had fallen short of the expectations by not creating a fast track system for recovery of
bank dues.
In a bid to speed up recovery efforts of the banks, Debt Recovery
Tribunals (DRT) were set up in 1993 by an act of parliament. This was welcomed by
both banks and borrowers alike. Finally, it was hoped there would be a non-
confrontationist middle path where both banks and borrowers could meet. Seven years
on both sides agree that a lot still needs to be done to make the DRTs an effective
recovery tool for the Indian banking sector.
At the end of June 2007, out of the total numbers of 11,700 cases filed
and transferred to debt recovery tribunal (DRT) involving Rs. 8,866.67 crs. Only 1045
cases have been decided and meager amount of Rs. 178.08 crs was recovered.



45

WORKING GROUP
Taking a serious note of this situation, the central board of RBI in 2007
reviewed the effectiveness of DRTs. RBI therefore decided to set up a working group
under the chairman ship of N.V. Deshpande, former legal advisor to RBI, comprising
officials from the govt. banking divisions, some bankers and RBI officials to look into
the various issues and to suggest measures for their effective functioning.
The terms of reference of the working group were mainly
1 To look into various issues and problems confronting the functions of DRTs
and to suggest measures to make them more effective.
2 The group was also to examine the existing statutory provisions and suggest
necessary amendments to the 1993 act with a view to improving the efficiency
of the legal machinery.
By August 2007 the working group submitted its final suggestions
1 First it was noticed that once an application had been made to DRT, the
branch managers and staff of the banks did not take any interest in the
proceedings
2 In many cases, bank officials themselves were unaware of even the execution
of loan documents and names of the borrowers.
3 The working group suggested that the banks and FIs should impress upon their
officers and staff to take a keen interest in the proceeding.
4 The group also said that the recovery officers should be given assistance of
agencies like police and professional debt recovery agencies and the act be
amended to provide licensing and regulating professional recovery agencies.
5 One of the most important recommendations was that not only should there be
a tribunal in every state; there should be more than one DRT in the same state
if the workload of the tribunals so justified. The presiding officers of DRTs
should not have more than 30 cases on the board on any given data and there
should not be more than 800 cases pending before it at any given point of
time.

46

The center on March 9
th
, 2000 introduced the recovery of debts due to banks
(amendment) bill 2000. The aim was to correct the legal anomalies pointed out by the
Supreme Court such as the stipulation that tribunals would continue to function not
with-standing court stay or transfer of petitions. The amendments first brought into
force through the ordinance from 17
th
January, 2000 address many of the other
lacunae. It empowers DRTs to attach the property of the borrower on filing of the
applications to that effect.

EFFORTS MADE BY THE MANAGER TOWARDS RECOVERY
OFOVERDUE
Frequent & regular follow up by the field staff/manager
Issue of notices that is regular notices to borrowers regarding their account
becoming as default.
Educating borrowers about default and its consequence.
Interest/installment demand notice are sent to borrowers.
Managers of branches accompanied by other staff conduct regular field visits.
Awareness about the NPA being told.
Renewal of the account/loan is done i.e. further tending to the present
borrowers.

IMPORTANT STAGES FOR REDUCING THE NPA AND
RECOVERYOF LOANS
Stage-1
Identification of beneficiary and scheme suitable to him.
Stage-2
Disbursement of loan and its granting.
Stage-3
The time when account enters due for repayment.
Stage-4
The time when account becomes doubtful or loss.
47

Among the above, first stage is very important because,
It will depend on the success of the schemes & prompts repayment.
Fixation of correct repayment schemes.
To see that the income is generated regularly.
Proper utilization of loan amount for the purpose actually meant for.
To see the funds are not diverted.
Not giving any scopes to default.
Suitable candidates are selected for the scheme.
To avoid forceful finance for activities not available to the beneficiaries.
To reduce over dues at the branch level.
VALUABLE SUGGESTION GIVEN BY THE MANAGER TO
REDUCE NPA
Proper identification of schemes and beneficiary.
Suitable selection of borrowers.
Assessment of integrity & worth of the borrowers in the initial stage.
Advances for the need based activities only.
Proper follow up.
Timely visit by the field staff & making personal contacts with the borrowers.
Regular issue of demand notice.
Promote renewals of loans.
Educating the borrowers in prompt repayment of loan consequences incase of
non-repayment of loan.
Filing of suits in the court & auction of security charged to the bank.
Compromise settlement with the default borrowers.
Conducting of recovery campus along with State Government officials like
revenue department.
Getting help from the controlling authority in case of emergency.
Identification of the NPA in the initial stage & steps to be taken to recover the
loan & minimize the NPA.
Proper follow up with the support of all the staff members who wherehaving
good touch with customers
48


NPA MANAGEMENT STRATEGY OF THE BANK

The prime objective of our NPA Management Policy is to bring about a
qualitative improvement in our credit portfolio so as to improve yield on total
advances and to reduce Gross and Net NPA. The containment of non-performing
advances is a cause of concern of all banks. The Bank has taken targeted efforts under
the Securitisation Act, 2002 for recovery of NPAs. With the revival and growth of the
economy, the Bank is confident of recovering bad loans and containing the NPAs at a
manageable level. Recovery Department, exclusively set up for recovery of NPAs,
has taken up effective measures to contain the level of NPAs.
The accounts once identified as NPAs are closely monitored for recovery.
Some of the monitoring and recovery actions involved are:
Exposure is structured for the firm repayment schedule of the borrower
wherever possible.
Immediately on default, the bank officials will visit the borrower regularly for
recovery.
Constant follow up and co-ordination with lawyers/solicitors to ensure speedy
disposal of cases and execution of decrees, wherever applicable.
Where adequate recovery is not feasible by disposal of
hypothecated/mortgaged assets, a one-time negotiated settlement is
considered.
Identification of regular defaulters and pro-active approach for exit from
relationship.
Reduce the exposure by increasing the margin gradually for subsequent
Bills/Letters of Credit
In case borrower is not giving firm repayment schedules, civil suits are
initiated for recovery of Bank dues in High Court/DRT.
For speedy recovery legal proceedings like winding up petition, filing of
criminal cases, seeking attachment of personal properties of the guarantors etc.
are initiated. Such accounts and legal cases are periodically reviewed.

49

Practical view is taken in accepting the settlement proposals in cases of
accounts where the realisable value of security is negligible or much less than the
exposure. To supplement its ongoing efforts to effectively contain and recover the
non-performing advances, the Bank has also setup asset recovery Branches (ARB) at
Mumbai and Chennai.
With the recent judgment of the Supreme Court upholding the validity of the
SARFAESI Act -Securitisation And Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002, the Banks thrust will be on speedy
takeover and disposal of the assets of defaulting borrowers, charged to the Bank.
Negotiations are also on with the ARCIL for sale of some of the impaired assets for
an early resolution.






















50


OBJECTIVES

To examine the causes and reasons for an asset becoming NPA.

To study the measures taken by Karnataka Bank to reduce NPAs.

To know the various types of Loans & advances provided by the bank.

To know the NPA condition of the bank.

To know the effectiveness of recovery of loans and advances.

To study the faults in lending loans and advances.



















51



SCOPE OF THE STUDY
The bank will be able to assess the efficiency with regard to management of
NPA, recovery of over dues and improvements of the profitability. It also helps the
banks to assess the further widening of the financial base and come out with some
valuable measures and methods.
Selection of the suitable borrowers and in general banking and government
sponsored schemes.
Involvement, Orientation and motivation of staff with system of the bank and
reducing the NPA.
METHODOLOGY
Sources of data collection:
The data is most vital and the integral aspect, which is responsible for the
completion of any project. The data can be gained and derived from two methods i.e.
Primary Data Collection
Secondary Data Collection
Primary Data Collection:
Personal observation of the banking system
Personal Interviews and discussions conducted with the officials of the bank.
Secondary Data Collection:
Through Internet Karnataka Bank official website
Audited Financial Statements
LIMITATIONS:
The study is entirely based on data willingly provided by the bank officials.
The study is confidential in nature, so the views expressed by the officials may
be a general opinion.
The findings of the study cannot be applied to other branches of Karnataka
bank.
52



DATA ANALYSIS

KBL Apna Ghar Loan

KBL Apna Ghar Loan is meant for giving housing loans for resident individuals


Table
Year
Balance
(in Lakhs)
2008-09 458000
2009-10 458000
2010-11 -













53

Graphical Representation



Inference:
In the year 2008-09 the NPA is Rs.4,58,000 and it is carried to 2009-10 year
also. It means there is no recovery of NPA but in the year 2010-11 there is zero
NPA,it is clear that NPA has recovered from the borrowers.









0
50000
100000
150000
200000
250000
300000
350000
400000
450000
500000
2008-09 2009-10 2010-11
KBL Apna Ghar Loan
Balance
54



KBL Car Loan

KBL Car Loan is meant for an individual purchase of motor vehicle .Under this
scheme finance will be given for the purchase of new aswell as second hand cars by
the bank.


Table
Year
Balance
(in Lakhs)
2008-09 408000
2009-10 195000
2010-11 230000












55



Graphical Representation




Inference:

In the year 2008-09 the NPA is Rs. 4,08,000 and in the year 2009-10 there is
decrease in NPA i.e. Rs.1,95,000 but in the year 2010-11 there is increase in NPA
which amounts to Rs. 2,30,000.








0
50000
100000
150000
200000
250000
300000
350000
400000
450000
2008-09 2009-10 2010-11
KBL Car Loan
Balance
56



KBL Easyride Loan

KBL Easyride Loan is meant for purchase of two wheeler. Individuals,
Professionals and Companies are eligible for finance


Table
Year
Balance
(in Lakhs)
2008-09 170000
2009-10 154000
2010-11 110000













57


Graphical Representation



Inference:

In the year 2008-09 the NPA is Rs.1,70,000 and in the year 2009-10 there is decrease
in NPA i.e. Rs.1,54,000 but in the year 2010-11 there is decrease in NPA which
amounts to Rs. 1,10,000.










0
20000
40000
60000
80000
100000
120000
140000
160000
180000
2008-09 2009-10 2010-11
KBL Easyride Loan
Balance
58




KBL Consumption/Salary Loan

KBL Consumption/Salary Loan is meant for permanent employees of any reputed
institutions or companies for purchasing household articles, medicals expenses etc.,


Table
Year
Balance
(in Lakhs)
2008-09 199000
2009-10 104000
2010-11 88000












59

Graphical Representation



Inference:

In the year 2008-09 the NPA is Rs.1,99,000 and in the year 2009-10 there is decrease
in NPA i.e. Rs.1,04,000 but in the year 2010-11 there is decrease in NPA which
amounts to Rs. 88,000











0
50000
100000
150000
200000
250000
2008-09 2009-10 2010-11
KBL Consumption/Salary Loan
Balance
60

FINDINGS

From Data Analysis point of veiw :

There is no NPA for KBL Udyog Mitra Loan, KBL Varthak Loan, KBL
Vidyanidhi Loan, KBL Insta Cash, KBL Vahana Mitra Loan and KBL K-
Power Loan.
Slight increase in KBL Car Loan NPA in 2010-2011.
Slight decrease in KBL Easy Ride Loan and KBL Consumption/ Salary Loans
in 2010-2011.
In 2008-09 and 2009-10, there is some NPA in KBL Apna Ghar Loan but in
2010-11 it has been recovered.

From Lenders point of view:

The bank has a good well written procedure for sanctioning of loans.
They have the power of rejecting the proposal as per the appraisal of the
projects and also have power to monitor, inspect and visit the industry.
In some cases, banks are providing loans without proper security and also due
to the influence of certain person, thus the risk is very high.
In the sense of legal proceedings, it is very slow in India.
Some securities may be overvalued by the borrower which may have
deposited against the loans.
Banks are lending their funds in almost all areas of business including
Agricultural sector.
It has a high opportunity to play a key role in development of economy of the
nation and also to help different sick units for their revival, diversification and
expansions.

61

From Borrowers point of view

Most of the borrowers are willful defaulters.
Borrowers are lagging in proper management of funds and in diversification.
Once the loan is issued the banks performance depends on the borrowers
performance only.
Ineffective recovery of loans and delay in legal proceedings causes the
advantage to the borrowers
For each and every change made either in products or in management, the
borrower has to inform the bank.
The main opportunity for the borrower is, they will utilize their profit in the
expansion and diversification only.
Once the company is in profitable stage, the banks will earn without any
hesitation.
The borrowers mention the reasons for NPA are very simple but it adversely
effect the bank.









62


SUGGESTIONS

To reduce the risk of lending, the bank should never lend their loans without
adequate collateral securities.

The banks should monitor and follow up the project/borrower.


The project appraisal must be properly made before sanctioning the loan.

There should not be any type of pressure and influence from anyone for the
sanction of loans.


There should not be any unethical practices by any of the officers of the bank.
They should perform their duty and responsibility very well.

The bankers should be in continuous touch with the borrowers so that their
attitude should not be changed.


The communication between the bankers and borrowers should be effective so
that the bankers know the financial position of the borrower.







63

BIBLIOGRAPHY

M.Y. KHAN & E. K. JAIN, Fourth edition, FINANCIAL MANAGEMENT,
TATA MC Graw- HILL
PRASANNA CHANDRA, Fifth edition, FINANCIAL MANAGEMENT,
TATA MC Graw- HILL
Company Profile : Manual
Analysis : Annual Reports (2008-2011)
Web Sites : www.karnatakabank.com
www.nse.com