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STUDY ON
NON- PERFORMING ASSETS
OF
( manager credit)
SUBMITTED BY
SATYA PRAKASH SAHOO
DECLARATION
I do here declare that this project is A Study On Non-performing Asset
Of Kendrapara Urban Co-operative Bank is a record of independent
research work carried out by me under the supervision of
Mr. Sushil
ACKNOWLEDGEMENT
I take this opportunity to offer my sincere feelings of gratitude to the
Co-operation and advice given to me to bring up this project work.
In this regard I would like to thanks Dr. K.C Lenka, Honable
Cordinater of MFC for giving me permission to undergo this training
programme.
I am obliged to Mr. Sushil Kumar Samal (CEO), for given me
an opportunity to undertake the project work in this field. I am
grateful to my guide Mr. Rajib Lochan Panda(Manager Credit) for
giving me valuable guidance to do project work successfully.
I would like to express my thanks to Mr. Susanta Rout(Prof.
MFC).
CERTIFICATE
This is to certify that the project work entitled A Study On Non-performing
Asset Of Kendrapara Urban Co-operative Bank is a original piece of work
done by Sayta Prakash Sahoo, student of P.G. Department of
Commerce & Management Studies, for the partial fulfillment of the
requirement for the degree in MFC under Utkal University. This research
work which has done by him under my guidance and supervision.
To the best of my knowledge and belief, the thesis embodies the work of the
candidate himself and has been duly completed. Simultaneously, the thesis
fulfills the requirements of the rules and regulations related to the summer
internship of the institute and I am assured that the project is up to the
standard both in respect to the contents and language for being referred to the
examiner.
CONTENTS
(1)CHAPTER 1: INTRODUCTION
OBJECTIVES
NATURE AND SCOPE.
RESEARCH METHODOLOGY.
LIMITATIONS.
CHAPTER-1
INTRODUCTION
The Indian banking system, endowed with a large network of branches and
wide range of financial instruments, has achieved considerable progress in the next two
decades after Nationalization. The concept of banking had undergone a dynamic change
in keeping with the need to achieve rapid socio-economic progress. As against the
traditional banking theory, a shift in the approach to lending from security-orientation to
purpose-orientation also became a predominant concept during the period. Despite the
overall progress made by the financial system, poor capital base, inefficient
organizational structure, declining profitability and very high and ever-growing nonperforming assets (NPA) had become the major stumbling blocks in the banking sector
during the post-nationalization decades. It was against this background that the
Financial Sector Reforms became inevitable and were initiated in India.
An NPA is defined as a loan asset, which has ceased to generate any income
for a bank whether in the form of interest or principal repayment. The Indian cooperative
banking sector is facing a deep crisis. The Reserve Bank of India (RBI) has said gross
non-performing assets (NPA) of urban cooperative banks (UCBs) shot up to Rs 11,922
corer for the fiscal2003-04. To make matters worse, RBI said apart from UCBs, central
co-op banks have recorded NPAs of Rs 13,862 crore, and state co-operative banks NPAs
was Rs 6,284 crore as on March 31st, 2003. In to, urban co-op banks, state co-op banks
and central co-op banks have recorded NPAs of Rs 32,068 crore which is enough to fund
50 per cent of Indias Golden Quadrilateral road project. In its report on Trend and
Progress of Banking 2003-04, RBI said while the deposits of 55 urban co-operative
banks have risen to a staggering Rs 39,305 crore, their accumulated losses were Rs
2,320 crore. The deposits and advances of all UCBs were Rs 1,10,256 crore and Rs
67,930 crore respectively as on March 2004. RBI said there is no clear demarcation of
regulatory powers between state government, NABARD and itself, which has resulted at
times in cross-directives from the controlling agencies thereby undermining the working
of co-operatives.
In order to reduce NPAs, RBI has banned loans to directors and their family
members and also directed these banks to step up their statutory liquidity ratio (SLR)
investments in government securities. This report explores an empirical approach to the
analysis of Non-Performing Assets of Nationalized Bank and Co-operative Bank.
METHODOLOGY
The data collected for the purpose of the study are of the following sources :Collection of the from primary sources are:
By personal interview and discussion with employee of the
organization.
Official records
Employee of the Kendrapara Urban Cooperative Bank.
LIMITATIONS
As the NPA Management is one of the crucial areas for any bank, some
of the technicalities are not revealed.
NPA Management system includes various types of detail studies for
different areas of analysis, but due to time constraint, our analysis was
of limited areas only.
CHAPTER-2
has shown a tremendous growth in deposits and advances. Over the years the
deposits of the bank is over Rs13533.47 lakhs at on 31st march, 2014against
Rs12411.75lakhs as at the financial year 2012-13. Bank has posted a net
profit of Rs14.61 lakhs as on 31.03.2014. The growth rate of the bank
compares well that of others in the state. The bank has maintained a steady
growth since its inception. Recently RBI has rated our bank as GRADE-I
BANK and our bank has been awarded as BEST URBAN BANK OF THE
STATE FOR THE YEAR 2011-12.
The Bank has launched different loan schemes tailor-made to suit the needs
of various types of customers. The procedure for sanctioning of loans under
various schemes has been simplified and relaxed with a view to attract new
customers and facilitating speedy sanction of loans. The bank is providing
investment opportunities to all sections of the people in the form of attractive
deposit schemes and attractive interest rates. All the six branches and the
corporate office have been computerized to provide quality services to
customers. The bank is committed to spread network of branches throughout
the kendrapara, jajpur and jagtsingpur district and to provide much needed
banking services to the people, who have been deprived of the banking
facilities.
Innovative banking through CBS system is another area of operation that
bank is currently focusing at for sustainable long term growth. The bank has
always endeavored for providing satisfactory customer service by the help of
the latest technology like RTGS/NEFT and at par cheque facility with utmost
care for its customers. In a nut-shell it can be said that this Bank is acting as a
life line for the socio-economic growth of the district as a whole.
-: Kendrapara,
Dist
-: Kendrapara,
Pin
-: 754211, ORISSA
-: 123KE/26.09.1986
Area of operation
No. of directors
M.I.C
No. of nominated directors
Total no. of Employees
No. of Branches
-:Nil
-:94
-:06
: Kendrapara town,
: Marsaghai, Kendrapara.
:Aul, Kendrapara.
:Chandol, Kendrapara
ORGANISATION STRUCTURE
Urban Co-operative Banks are primary co-operative bank means a cooperative society other than a primary agricultural credit society. The main
objective of bank is transaction of banking business.
Banking Regulation Act 1949(as applicable to co-operative society), which
had come into force from 1st march 1966.has vest the RBI with various
statutory powers of control and supervision over the co-operative bank.
The powers in regard to incorporation, management, audit, etc. of cooperative banks are vested in the registrars of co-operative societies of the
state concerned.
The share holders are real owners of the bank. Each holder has same voting
rights. Elections are conducted at every four years for the member of board
of directors.15 directors are elected for the board of management. President
is elected among the board of directors. Board of management takes all the
policy decision of the bank. The day to day functioning of the bank are
managed by the chief executives of the bank with the help of other subordinate officers & staffs. Board of management has no power to interfere
in the day to day business of the bank.
FUNCTIONS OF BANK
The functions of bank is mainly of two types. such as
(1)Primary function.
(2)Secondary function.
MILESTONES
The bank became GRADE -1 bank in the year 2011-12.
The deposit of the bank reached 100 crore in the year 2011-12.
The Kendrapara Urban Co-operative bank was registered under Co-
1986 vide
HIGHLIGHTS OF ACHIEVEMENTS
We pay more interest than other bank.
Safe deposit lockers are available in all branches.
Deposits are insured in DICGC (RBI subsidiary)
RTGS & NEFT facility at all branches for instant money transfer.
CHAPTER-3
NPA MANAGEMENT
NPA is an advance where payment of interest or repayment of installment of
principal (in case of term loans) or both remains unpaid for a certain period. In India, the
definition of NPAs has changed over time. According to the Narasimham Committee
Report (1991), those assets (advances, bills discounted, overdrafts, cash credit etc.) for
which the interest remains due for a period of four quarters (180 days) should be
considered as NPAs. Subsequently, this period was reduced, and from March 1995
onwards the assets for which the interest has remained unpaid for 90 days were
considered as NPAs.
An NPA is defined as a loan asset, which has ceased to generate any income for a bank
whether in the form of interest or principal repayment.
Definition
A loan or lease that is not meeting its stated principal and interest payments.
Banks usually classify as nonperforming assets any commercial loans which are more
than 90 days overdue and any consumer loans which are more than 180 days overdue.
More generally, an asset which is not producing income.
Conceptually an asset becomes nonperforming, when it ceases to generate income
for the bank.
RBI introduced, in 1992-93, the prudential norms for income recognition, asset
classification & provisioning IRAC norms in short in respect of the loan portfolio of
the UCBs.The objective, inter-alia, was to bring out the true picture of a banks loan
portfolio.The fallout of this momentous regulatory measure for the management of the
UCBs was to divert its focus to profitability, which till then used to be a low priority area
for it. Asset quality assumed greater importance for the UCBs when RBI introduced the
Basel norms for Capita Adequacy from year-ended March 31, 2002 in the aftermath of
serious financial problems in the sector. Maintenance of high quality credit portfolio
continues to be a major challenge for the UCBs, especially with RBI gradually moving
towards convergence with more stringent global norms for impaired assets.
The quality of a banks loan portfolio can impact its profitability, capital and
liquidity. Asset quality problems are at the root of other financial problems for
banks,leading to reduced net interest income and higher provisioning costs. If loan losses
exceed the Bad and Doubtful Debt Reserve, capital strength is reduced. Reduced income
means less cash, which can potentially strain liquidity. Market knowledge that the bank
is having asset quality problems and associated financial conditions may cause outflow
of deposits. Thus, the performance of a bank is inextricably linked with its asset quality.
Managing the loan portfolio to minimize
approved
policies
and
procedures
to
monitor
implementation.
The
A cash credit over draft account is treated as out of order if the outstanding in the
account remains continuously in asses of the sanctioned limit /drawing power.
III. BILL PURCHASE/ BILL DISCOUNTED ACCOUNT
A bill purchased /bill discounted account will be classified as a NPA if the bill remains
over due for a period of more than 90 days.
IV.AGRICULTURAL ADVANCES
A crop loan account for short duration cropped will be classified as NPA if the principal
or interest there on remains overdue for two crop seasons.
A crop loan account for long duration crops will be classified as NPA if the principal or
interest there on remains overdue for one crop seasons.
A term loan given for agricultural purposed will be classified as NPA if the principal or
interest over due for one crop season or two crop seasons depending on the duration of
crop raised by the borrower/ agriculturist.
Assets Classification:
1. Standard assets.
little value that is continuance as bankable asset is not warranted although there may
be some
salvage or recovery value.
Internal causes: Internal defaulters, Faculty projects, Most of the project reports are
ground realities, proper linkages, product pricing etc. Some approach for the heck of
starting a venture, with poor knowledge of product risks, over depended on poorly paid
killed workers and technicians, Building up pressure for sanctions, Inept handling by
bankers lack of professionalism and appraisal standards, Non
observance of system, procedures and non-insistence of collaterals etc, Lack of post
sanction monitoring, unchecked diversions.
Lack of Persuasion
38
76
Lack of Monitoring
41
82
Willful Defaulters
43
86
No
Risk 39
Assessment
Mismanagement
48
of
Fund
by
borrower
Delay
in
Legal 41
Proceedings
78
96
82
No Risk Assessment
cause of npa
Willful Defaulters
Lack of Monitoring
Lack of Persuasion
0 10 20 30 40 50 60
Data presented in Table above reveals that as high as 96% of Bank Managers find the
most important cause of NPA is the mismanagement or diversion of funds sanctioned to
borrowers for specific projects. In other words, borrowers become defaulters in regular
repayment of loan as they do not manage the money properly, thereby make their
projects sick; and hence NPA at Banks grow.
In complementing to this cause a high significant proportion of 86% of Bankers
subscribed to the view that willful defaulters are the cause for NPA.
Bankers in large proportions blamed their own system and that of the legal system. As
high as 76% of respondents pointed out that Bankers usually do not persuade the
borrowers to make regular repayments. Once a loan is given or taken both ends are
relaxed. Neither the borrower is pressurized or persuaded to pay the installments on
schedule time; nor the Banker take any immediate measures. However, bank officers feel
strongly that persuasion is an important tool to improve upon repayment, and reduction
of NPA.
The borrower feels more relaxed if s/he is not persuaded for defaulting repayment.
Similarly, 86% of Bank Officers agreed that monitoring system in the Banks is not up to
the mark. Surprisingly 78% of respondents pointed out that the Risk Assessment
aspect is highly neglected by the Banks.
FACTORS RESPONSIBLE FOR NPAs:The following factors confronting the borrowers are responsible for incidence
of NPAs in the banks:(i) Diversion of funds for expansion/modernization/setting up new projects/helping
promoting sister concerns.
(ii) Time/cost overrun while implementing projects.
(iii) External factors like raw-material shortage, raw-material/Input price escalation,
power shortage, industrial recession, excess capacity, natural calamities like floods,
accident etc.
(iv) Business failure like product failing to capture market, inefficient management,
strike/strained labour relations, wrong technology, technical problem, product
obsolescence, etc.
(v) Failure, non-payment/over dues in other countries, recession in other countries,
externalization problems, adverse exchange rate, etc.
(vi) Government policies like excise, import duty changes, deregulation, pollution
control orders, etc.
(vii) Willful default, siphoning of funds, fraud, misappropriation,
promoters/management disputes etc.
Besides above, factors such as deficiencies on the part of the banks viz. deficiencies in
credit appraisal, monitoring and follow-up; delay in release of limits; delay in settlement
of payments/subsidies by Government bodies, etc. are also attributed for the incidence of
NPAs.
5. Low yield on advances: Due to NPAs, yield on advances shows a lower figure than
actual yield on standard Advances. The reasons that yield are calculated on weekly
average total advances including NPAs.
5. Affect on Return on Assets: NPAs reduce earning capacity of the assets and as a
result of this, ROA gets affected.
Preventing NPAs
At the pre-disbursement stage, appraisal techniques of bank need to be
sharpened.All technical, economic, commercial, organizational and financial aspects of
the project need to be assessed realistically. Bankers should satisfy themselves that the
project is technically feasible with reference to technical knowhow, scale of production
etc. The project should be commercially feasible in that all background linkages by way
of availability of raw materials at competitive rates and that all forward linkages by way
of assured market are available. It should be ensured assumptions on which the project
report is based are realistic. Some projects are born sick because of unrealistic planning,
inadequate appraisal and faulty implementation.As the initiative to sanction or reject the
project proposal lies with the banker, he can exercise his judgment judiciously. The
banker should at the pre-sanction stage not only appraise the project but also the
promoter his character and his capacity. It is said that it is more prudent to sanction
a 'B' class project with an 'A' class entrepreneur than vice-versa. He has to ensure that
the borrower complies with all the terms of sanction before disbursement.
A major cause for NPA is fixation of unrealistic repayment schedule.
Repayment schedule may be fixed taking into account gestation or moratorium period,
harvesting season, income generation, surplus available etc. If the repayment schedule is
defective both with reference to quantum of installment and period of recovery, assets
have a tendency to become NPA.
At the post-disbursement stage, bankers should ensure that the advance does not
become and NPA by proper follow-up and supervision to ensure both assets creation and
asset utilization. Bankers can do either off-site surveillance or on site inspection to detect
whether the unit / project is likely to become NPA. Instead of waiting for the mandatory
period before classifying an asset as NPA, the banker should look for early warning
signals of NPA.
The following are the sources from which the banker can detect signals, which
need quick remedial action:
a) Scrutiny of accounts and ledger cards During a scrutiny of these, banker can be
on alert if there is persistent regularity in the account, or if there is any default in
payment of interest and installment or when there is a downward trend in credit
summations and frequent return of cheques or bills.
b) Scrutiny of statements If the scrutiny of the statements submitted by the
borrower reveal a sharp decline in production and sales, rising level of
inventories, diversion of funds, the banker should realise that all is not well with
the unit.
c) External sources The banker may know the state of the unit through external
sources. Recession in the industry, unsatisfactory market reports, unfavorable
changes in government policy and complaints from suppliers of raw material, may
indicate that the unit is not working as per schedule.
d)
e) Computerization of loan monitoring In computerized branches, it is possible to
computerize the loan monitoring system so that accounts, which show signs of
sickness or weakness can be monitored more closely than other accounts.
f) Personal visit and face-to-face discussion By inspecting the unit the banker is
able to see for himself where the problem lies - either production bottlenecks or
income leakage or whether it is a case of willful default. During discussion with
the borrower, the banker may come to know details relating to breakdown in plant
and machinery, labour strike, change in management, death of a key person,
reconstitution of the firm, dispute among the partners etc. All these factors have a
bearing on the functioning of the unit and on its financial status.
g) Special Mention category of accounts Based on warning signals obtained
through both off-site and on-site monitoring, banks may classify accounts with
irregularities persisting for more than 30 days under Special Mention or
Potential NPA category. This will help the bank to initiate proactive remedial
measures for early regularization. The measures include timely release of
additional funds to borrowers with temporary liquidity problems and restructuring
of accounts of sincere and honest borrowers after considering cases on merit.
h) Ongoing classification Although classification of assets is a yearly exercise,
banks would do well to have a system of ongoing classification of assets and
quarterly provisioning. This helps in assessing provisioning requirements well in
advance. All doubts regarding classification should be settled internally and a
system of fixing accountability for failure to comply with the regulatory
guidelines should be introduced.
i) Strategy for reducing provision The extent of provision for doubtful asset is with
reference to secured and unsecured portion. Cent percent provision needs to be
made for the unsecured portion. If banks can ensure that the loan outstanding is
fully secured by realizable security, the quantum of provision to be made would
be less. It takes one year for a sub standard asset to slip into doubtful category.
Therefore, as soon as an account is classified as substandard, the banker must
keep strict vigil over the security during the next one year because in the event of
the account being classified as doubtful, the lack of security would be too costly
for the bank.
Reducing NPAs
36
72
43
86
37
74
Out-of-Court Settlement
46
92
39
78
Out-of-Court Settlement
0%
20%
40%
60%
80%
100%
The next question to the bank officers was to know their views on steps taken by them
for recovery of NPA. As would be seen from the table below, 72% of respondents
revealed that Banks should take caution and care during the loan processing stage in
order to avoid NPA later. Similarly, the Recovery Cell need to be strengthened, said as
high as 86% of the respondents, to reduce the NPA ratio. A significant 74% bank officers
were of the opinion that if the Performing Assets are monitored meticulously, the NPA
CHAPTER-4
DATA ANALYSIS
BRANCH WISE N.P.A STATEMENT FOR THE YEAR 2011-2012
SL
.
N
O
1
2
3
CLASSIFICATION
STANDARD
ASSET
(UN SECURED)
SUBSTANDARD
DOUBTFUL
a-UPTO 1
YEAR(S)
UNSECURED
MAIN BR
OBS BR
108026043.
9
AUL BR
45787644.4
5
MGI BR
98915888.
7
PMI BR
CHL BR
9004334.5
67981552
7975708
754032
1115899
7686084
5609300.1
3262531.48
26403554.58
5833307
1529743
1590336
159221
319959
1265311
12129877
188411342
HO
16010442.
7
TOTAL
615179248.4
b-ABOVE 1YR TO
3YR
SECURED
UNSECURED
c-OVER 3YEARS
(S)
6492214.2
9
4840765
2747705
3985439
5789301.5
1348331
25203755.79
9475740.97
1933996
964349
1614278.5
2839398
173228
UNSECURED
1950491.4
7
5984912.2
5
1510531.5
1675713
1988581.5
1231503
1068097
47372
13506710.25
NPA TOTAL
28236633
10569067.5
8094002
16865604
15789462
7117498.48
47372
86719638.59
TOTAL
OUTSTANDING
216647975
118595111.5
53881646.4
5
115781496
10583579
6
75099050.4
8
16057814.
7
701898887
CLASSIFICATION
STANDARD
ASSET
(UN SECURED)
SUBSTANDARD
DOUBTFUL
a-UPTO 1
YEAR(S)
UNSECURED
b-ABOVE 1YR TO
3YR
SECURED
UNSECURED
c-OVER 3YEARS
(S)
UNSECURED
MAIN BR
OBS BR
AUL BR
MGI BR
CHL BR
HO
TOTAL
86620509
PMI BR
10965524
9
234970552
132337793`
62655159
68539167
17144262
711922664
79380229
6186176
2692255
15235486
1024956
1262516
34339421
3977012
511512
1113259
4413238
5516599
4169394
22701015
6781664
4791380
3215152
4223354
5174971
2135931
26322452
5043613
138166
4212357
149537
2898289
466467
35893
4053512
14559
1399776
NPA TOTAL
32878485
15850962
9918958
31572438
15784599
TOTAL
OUTSTANDING
258849008
148188756
72574117
118192947
12543984
8
47372
22272015
385527
8967617
47372
1060204432
77506784
17191634
817943096
CLASSIFICATIO
N
STANDARD
ASSET
(UN SECURED)
MAIN BR
OBS BR
AUL BR
MGI BR
264358484
138384264
73238295
97491092
PMI BR
12100832
3
CHL BR
HO
TOTAL
77973814
18787762
79121036
2
3
SUBSTANDARD
DOUBTFUL
a-UPTO 1
YEAR(S)
UNSECURED
b-ABOVE 1YR TO
3YR
SECURED
UNSECURED
c-OVER 3YEARS
(S)
UNSECURED
9020706
14667855
3312332
4995171
4278894
2982736
39257681
4253708
11474218
1754171
12212393
866693
873320
31434503
5126934
1270794
2012538
7705460
5551273
4261057
25928056
8008671
114540
11499812
149537
4294747
6847507
35893
8784549
14559
2056130
52732
47372
41491427
414633
NPA TOTAL
26524560
30962216
11373798
31796424
19495968
10225962
47372
138526301
TOTAL
OUTSTANDING
290883045
177446480
84612093
129287516
14050429
1
88169776
18835134
929738338
S
CONCLUSION
Finally it can conclude that the banks can avoid sanctioning loans to the non
creditworthy borrowers by adopting certain measures. Banker can constantly
monitor the borrower in order to ensure that the amount sanctioned is utilized
properly for the purpose to which it has been sanctioned. The banker should
get both the formal and informal reports about the goodwill of the customer.
If he had already proven as a defaulter then there is no question of
sanctioning loan to him. The banker also has to educate the borrowers
regarding the effects and consequences of defaulting. By considering all the
above factors the banker can reduce the non-performing assets in a bank. The
use of technology like Core Banking Solutions in Apex bank should make
more reachable to all borrowers.
At last the problem of NPAs has been a major issue for the banking industry.
The RBI which is the apex body for controlling level of non-performing
assets have been giving guidelines and getting norms for the banks in order to
control the incidents of faults. Reduction of NPAs in banking sector should
be treated as national priority item to make the Indian Banking system more
strong, vibrant and geared to meet the challenges of globalization.
Findings
Decrease in the number of accounts of nonperforming assets
year by year.
Security are very powerful tools for the Bank. In all eligible
cases one should involved the provision of the act the quickly
cases the assets and display of.
SUGESSATIONS
The bank must have to improve its customer service.
Up gradation of assets Once accounts became NPA, then
Bankers should take steps to upgrade them by recovering the
entire over dues. Close follow up will generally ensure
success.
Recovery through legal recourse- Banks may file suits promptly
against willful defaulters. Banks can take Recourse under either
BIBLIOGRAPHY
BOOKS
1. Varshney P.N (PhD), Banking Law and Practice, New Delhi,
Sultan Chand & Sons, 2003 Editation.
2. Sharma R.K. and Gupta S.K. ,Financial Management, New
Delhi, Kalyani Publishers, 2009 Editation.
3. Gordon and Natarajan, Financial Markets and Services,
Mumbai, Himalaya Publishing House, 2007 Edition.
4. Dash S.K, TIT BITS OF General Advances & Financial
Services, Bhubaneswar, Bank House, 2008 Edition.
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