A PROJECT REPORT

A STUDY OF NON-PERFORMING ASSETSIN

ANDHRAPRADESH GRAMEENA VIKAS BANK LTD

Project report submitted in Partial

Fulfilment for the reward of
POST GRADUATION DIPLOMA IN MANAGEMENT
SUBMITTED BY:
MEDISHETTY KARTHIK
Bearing roll no: 1501020
UNDER THE GUIDENCE OF
Dr .B.SAI SAILAJA

INSTITUTE OF PUBLIC ENTERPRISE SHAMIRPET,

HYDERABAD- 500101 , TELANGANA, INDIA
2015-2017
 CE R T I F I C A T E

This is to certify that the project report title A STUDY OF NON-PERFORMING

ASSETS is a work carried out by MEDISHETTY KARTHIK student of PGDM of our
institute in partial fulfilment the requirements of the PGDM of the INSTITUTE OF PUBLIC
ENTERPRISE. He has worked under my guidance and supervision

Dr .B.SAI SAILAJA
Associate Professor
Co-ordinator student affairs
Institute Of public enterprise
 DECLARATION

This is to certify that the project A STUDY ON NON - PERFORMING ASSETS is

entirely done by me except taking into account the internal guidance under Associate
Professor Dr. B. SAI SAILAJA and Mr. MANOJ KUMAR (Regional manager) Andhra pradesh
Grameena Vikas Bank Ltd . Is is an authentic effort put in by me

MEDISHETTY KARTHIK
DATE:
 ACKNOWLEDGEMENT

It’s a great privilege that I have done my Project in such a well-organized and diversified

organization. I am great full to all those who helped and supported me in completing the project.

First of all I would sincerely like to thank Mr. P.MANOJ KUMAR (Regional Manager) NON-

PERFORMING ASSETS, for their valuable guidance and kind co-operation during the project. I

am also thankful to our Coordinator-Student Affairs and my project guide .Dr.B.SAI SAILAJA for

helping me in completing the project. Last but not least, I am also thankful to all college staff and

my friends for helping me directly or indirectly in my project.

 ABSTRACT

The present project work “A STUDY OF NON-PERFORMING ASSETS” Comprises of nine

chapters. The first chapter deals with Introduction about the project, objectives of the study,
Research design, data sources, data collection methods discussed in the report. After that banking
industry in India explaining about Reserve Bank of India, National Bank for Agricultural and rural
development and its functions and Co-operative Banking system in India. And history of Andhra
Pradesh Grameena Vikas Bank ltd, services and loans provided by the Bank.
 TABLE OF CONTENTS
S.NO PARTICULARS PAGE NO

1. CHAPTER-1 – INTRODUCTION 01

2. CHAPTER-2 – INTRODUCTION TO BANKS 04

 Research methodology 07

3. CHAPTER-3 – CONCEPT OF NPAs 30

 Asset Classification 32
 NPA identification norms 33
 Problems due to NPA 34

4. CHAPTER-4
 Impact of NPA upon banks 38
 Reasons for NPAs 39
 Early symptoms of NPA 40
 Sale of NPAs to other banks 41

5. CHAPTER-5
 Preventive measures of NPA 43
 International practices on NPA management 45

6. CHAPTER-6 Literature review 48

7. CHAPTER-7 Analysis 59
8. CHAPTER-8 Objectives of NPA Management policy
9. CHAPTER-9
 Findings 58
 Conclusion 59
10. CHAPTER-10 Bibliography 61
CHAPTER-1

INTRODUCTION

1
 A strong banking sector is important for flourishing economy. One of the most important and
major roles played by banking sector is that of lending business. It is generally encouraged because
it has the effect of funds being transferred from the system to productive purposes, which also results
into economic growth. As there are pros and cons of everything, the same is with lending business
that carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations
either during the course of a transaction or on a future obligation. The failure of the banking sector
may have an adverse impact on other sectors. Non- performing assets are one of the major concerns
for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high
probability of a large number of credit defaults that affect the profitability and net-worth of banks
and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which
reduces the overall profits and shareholders’ value. The issue of Non-Performing Assets has been
discussed at length for financial system all over the world. The problem of NPAs is not only affecting
the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a
reflection of the state of health of the industry and trade. This project deals with understanding the
concept of NPAs, its magnitude and major causes for an account becoming non-performing,
projection of NPAs over next years in banks and concluding remarks
The magnitude of NPAs have a direct impact on Banks profitability legally they are not
allowed to book income on such accounts and at the same time banks are forced to make provisions
on such assets as per RBI guidelines The RBI has advised all State Co-operative Banks as well as
the Central Co-operative Banks in the country to adopt prudential norms from the year ending 31-
03-1997. These have been amended a number of times since 1997. As per their guidelines the
meaning of NPAs, the norms regarding assets classification and provisioning Its now very known
that the banks and financial institutions in India face the problem of amplification of non-performing
assets (NPAs) and the issue is becoming more and more unmanageable. In order to bring the situation
under control, various steps have been taken. Among all other steps most important one was the
introduction of Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 by Parliament, which was an important step towards elimination or reduction of
NPAs.
An asset is classified as non-performing asset (NPAs) if dues in the form of principal and
interest are not paid by the borrower for a period of 180 days, However with effect from March 2004,
default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit
facility granted by bank to a borrower becomes nonperforming, then the bank will have to treat all
the advances/credit facilities granted to that borrower as non-performing without having any regard
to the fact that there may still exist certain advances / credit facilities having performing status. The
NPA level of our banks is way high than international standards. One cannot ignore the fact that a
part of the reduction in NPA’s is due to the writing off bad loans by banks. Indian banks should take
care to ensure that they give loans to credit worthy customers. In this context the dictum “prevention
is always better than cure” acts as the golden rule to reduce NPA’s.
With a view to moving towards international best practices and to ensure greater transparency, it has
been decided to adopt the ‘90 days’ overdue’ norm for identification of NPA, from the year ending
March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) is a
loan or an advance where;
2
 Interest and/or instalment of principal remain overdue for a period of more than 91 days in
respect of a term loan,
 The account remains ‘out of order’ for a period of more than 90 days, in respect of
an Overdraft/Cash Credit (OD/CC),
 The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,
 Interest and/or instalment of principal remains overdue for two harvest seasons but for a period
not exceeding two half years in the case of an advance granted for agricultural purposes, and
 Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.
 Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.
 No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than
91days
Further classify non-performing assets further into the following three categories based on the
period for which the asset has remained non-performing and the reliability of the dues:

1. Sub-standard assets: a sub-standard asset is one which has been classified as NPA for a
period not exceeding 12 months.
2. Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12
months.
3. Loss assets: where loss has been identified by the bank, internal or external auditor or
central bank inspectors. But the amount has not been written off, wholly or partly.
Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All those assets
which are considered as non-performing for period of more than 12 months are called as Doubtful
Assets. All those assets which cannot be recovered are called as Loss Assets.

3
Introduction of Banking

Bank A financial institution that is licensed to deal with money and its substitutes by accepting time
and demand deposits, making loans, and investing in securities. The bank generates profits from the
difference in the interest rates charged and paid. The development of banking is an inevitable
precondition for the healthy and rapid development of the national economic structure. Banking
institutions have contributed much to the development of the developed countries of the world.
Today we cannot imagine the business world without banking institutions. Banking is as important
as blood in the human body. Due to the development of banking advances are increased and business
activities developing so it is rightly said, the development of banking is not only the root but also the
result of the development of the business world." After independence, the Indian government also
has taken a series of steps to develop the banking sector. Due to considerable efforts of the
government, today we have a number of banks such as Reserve Bank of India, State Bank of India,
nationalized commercial banks, Industrial Banks and cooperative banks. Indian Banks contribute a
lot to the development of agriculture, and trade and industrial sectors. Even today the banking system
of India possess certain limitations, but one cannot doubt its important role in the development of the
Indian economy.
Early history
Banking in India originated in the last decades of the 18th century. The first banks were The General
Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The
oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta
in June 1806, which almost immediately became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of
which were established under charters from the British East India Company. For many years the
Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in
1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank
of India.

Banking in India

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with
the Government of India holding a stake), 31 private banks (these do not have government stake;
they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a
combined network of over 53,000 branches and 49,000 ATMs. According to a report by ICRA
Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking
industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

4
INDIAN BANKING SECTOR

Banking in India has its origin as early as the Vedic period. It is believed that the transition from
money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has
devoted a section of his work to deposits and advances and laid down rules relating to rates of interest.
During the Mogul period, the indigenous bankers played a very important role in lending money and
financing foreign trade and commerce. During the days of the East India Company, it was the turn
of the agency houses to carry on the banking business. The General Bank of India was the first Joint
Stock Bank to be established in the year 1786. The others which followed were the Bank of
Hindustan and the Bengal Bank.
The Bank of Hindustan is reported to have continued till 1906 while the other
two failed in the meantime. In the first half of the 19th century the East India Company established
three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in
1843. These three banks also known as Presidency Banks were independent units and functioned
well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was
established on 27thJanuary 1921. With the passing of the State Bank of India Act in 1955 the
undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of
India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of
India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management
were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank
Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14
major banks of the country were nationalized and in 15th April 1980 six more commercial private
sector banks were also taken over by the government
.

5
 Scheduled Banks

Commercial Banks Co-Operatives

Foreign Regional Urban State Co-

banks(40) rural cooperati Operatives
banks(196) ves (52) (16)

Public sector Private sector

banks(27) banks(30)

SBI and Associate Other national

Banks (8) banks(19)

6
RESEARCH METHODOLOGY

TYPE OF RESEARCH
The research methodology adopted for carrying out the study were

 In this project Descriptive research methodologies were use.

 At the first stage theoretical study is attempted.
 At the second stage Historical study is attempted.
 At the Third stage Comparative study of NPA is undertaken.

SCOPE OF THE STUDY

 Concept of Non-Performing Asset

 Guidelines
 Impact of NPAs
 Reasons for NPAs
 Preventive Measures
 Tools to manage NPAs

OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Project on NPA was to:

 To evaluate NPAs (Gross and Net).

 To study the past trends of NPA
 To analyze financial performance of bank at different level of NPA in different years.
 To evaluate profitability positions of banks.
 To Know the Concept of Non-Performing Asset
 To Know the Impact of NPAs
 To Know the Reasons for NPAs
 To learn Preventive Measures

7
SOURCE OF DATA COLLECTION

Survey method of research was adopted. The required data was collected from primary and
secondary sources. The primary sources of data include focused group interviews and depth
interviews that were administered on both the customers as well as the Employees to determine the
factors responsible for NPA in APGVB. The secondary sources of data collection include the
information gathered from various reliable sources such as RBI website, banking journals, Articles
related to banking etc.

8
CHAPTER-2

9
About APGVB
Andhra Pradesh Grameena Vikas Bank is a regional rural bank in India. It was established in
2006 as a Regional Rural Bank as per Regional Rural Banks Act of 1976 and is a 100% government
bank promoted jointly by Gov. of India, Gov. of Telangana and AP, State Bank of India.by
amalgamation, on 31 March 2006, of the following 5 banks, sponsored by SBI, to participate more
energetically, with synergy, in the uplift and development of Rural Farm Sector and Rural Non-Farm
Sector, with emphasis on the deprived, the Rural Poor, Rural ISB and Rural crafts APGVB is
included under second schedule of RBI Act and is equal to any public sector / Nationalized bank in
India in terms of statutory and regulatory provisions of banking regulation act.

1) Sri Visakha Grameena Bank: Established on 30.09.1976

2) Nagarjuna Grameena Bank: Established on 30.04.1976

3) Sangameswara Grameena Bank: Established on 31.03.1982

4) Manjira Grameena Bank: Established on 31.03.1982

5) Kakathiya Grameena Bank: Established on 28.06.1982

Type Public Sector Bank, sponsored

by SBI

Industry Banking
Regional Rural banks

Founded 31 March 2006

Headquarters Warangal, India

Website www.apgvbank.in

In terms of adopting the technology in our banking operations our bank is far ahead of others. All
our branches are functioning in core banking solutions (CBS) environment since November 2009
our bank has also adopted latest repay technology. Interbank remittance through NEFT/RTGTS has

10
also been enabled, through which our banks customers can transfer money to the account of any
other commercial bank like SBI, CORPORATION Bank etc. The APGVB is also awarded with the
following awards such as

1) “Best IT Driven Innovations in banking “from NASSCOM

2) Excellence in banking ( Financial Inclusion leveraging bio metric technology and business
leadership) platinum award from SKOCH consultancy services

Total number of districts covered under states of Telangana and Andhra Pradesh
Mahabubnagar (Population: 35.09 Lakhs)

Nalgonda (Population: 32.43 Lakhs)

Medak (Population: 26.70 Lakhs)

Warangal (Population: 32.46 Lakhs)

Khammam (Population: 25.65 Lakhs)

Visakhapatnam (Population: 38.32 Lakhs)

Vijayanagaram (Population: 22.45 Lakhs)

Srikakulam (Population: 25.38 Lakhs)

11
 no of branches
800
728
704
700 638
600 553 574
527 538
483 483
500

400

300

200

100

0
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Total No of Branches and their locality under APGVB

After amalgamation of 5 different branches the AP Grameena Vikas Bank has got 483 branches in the year 2005-
2006 ,whereas with an the gap of 10 years period it has prominently developed its activities and increased its
branches. The growth of the branch expansion in this period of 10 years is shown in the above fig. Now at present the
no of branches under AP Grameena Vikas bank are around 800.

Branches in urban semi urban and rural areas

12
By the above diagram we can say that the major part of the AP Grameena Vikas Bank has spread in the rural sector
with about 72 % covering more than 500 branches. And it is also spread to the areas of semi urban and urban with
about 190 branches among 8 districts in the states of Telangana and Andhra Pradesh.

Ownership

Government of India: 50%

Government of Telangana and A.P 15%
State Bank of India 35%
Table 1 ownership of APGVB

Vision

Repositioning the Bank in competitive rural market and accomplish the leadership spot in
Rural Banking. Aspiring to realize the vision of excelling in Rural Credit and SME. Pursuing the
best practices for delivering the value added service to the customers by transforming the key
branches into profit and business centers.

Mission

With efficiency and service each one of us works in tandem to deliver quality rural service,
no matter where our customers choose to experience it. With the advantage of a large network in the
rural hinterland, it is our duty and obligation to serve the rural masses, the deprived and denied, retail
and agriculture sectors through improved processes, deployment of technology, with an emphasis on
employment of rural youth, augmentation of agricultural production, up liftment of the downtrodden
and unabated service to rural poor with commitment to the sacred task of rural development and
women's empowerment.

13
Values

 Profit orientation
 Commitment for rural development
 Excellence in customer service
 Respect to systems
 Procedures Team Synergy.

4.1 DEPOSIT PRODUCTS OFFERED BY APGVB:

1. Savings bank account

The facility of Savings Bank Account is meant for cultivating the habit of saving by the individuals
for their future needs. The transactions in the SB Account should be of non-business and non-
commercial nature.

Product features:

 Eligibility: Individuals (singly or jointly), Professionals in their individual names, Clubs,

Associations, Charitable trusts, Religious Institutions, Government bodies (established under
specific Acts) can are eligible to open the Savings Bank Account.
 Rate of Interest - 4% p.a.
 Nomination facility - available.
 Cheque Book facility - available (For minimum balance and service charges for not
maintaining minimum balance, refer Service Charges) Standing instructions from the
customers - executed.

The facility of Savings Bank Account is meant for cultivating the habit of saving by the individuals
for their future needs. The transactions in the SB Account should be of non-business and non-
commercial nature.

1. Current account

Convenient for business people, traders etc., to have Current Account. Withdrawals and deposits can
be made in Current Account any number of times. Current Account is not for saving or earning

14
Interest unlike Savings Bank. Convenience of the customer in parking his liquid funds for any time
withdrawal, is the primary objective Product features. An individual who has attained majority
(singly or jointly), HUL, all legal business entities and companies, other bodies like Clubs, Trusts,
Government Departments etc. Rate of Interest – No interest (as per RBI directives) Nomination
facility available cheque Book facility available (For minimum balance and service charges for not
maintaining minimum balance, refer Service Charges) Standing instructions from the customers -
executed.

Convenient for business people, traders etc., to have Current Account. Withdrawals and
deposits can be made in Current Account any number of times. Current Account is not for saving or
earning interest unlike Savings Bank. Convenience of the customer in parking his liquid funds for
any time withdrawal, is the primary objective

Product features:

 Eligibility: An individual who has attained majority (singly or jointly), HUL, all legal
business entities and companies, other bodies like Clubs, Trusts, Government Departments.
 Rate of Interest – No interest (as per RBI directives)
 Nomination facility - available.
 Cheque Book facility – available (For minimum balance and service charges for not
maintaining minimum balance, refer Service Charges)
 Standing instructions from the customers - executed.

Term deposits

An amount up to Rs 1 lakh for a fixed period of 5 years invested under this Tax Saving Fixed Deposit,
is eligible for deduction from income under Section 80 (C) of Income Tax Act. Fixed Deposits (or
Term Deposits) are accepted for any period between 15 days to 10 years) with attractive interest
rates.

Any number of Term Deposit Accounts can be opened with a minimum amount of Rs 100/- with
auto renewal facility.

15
Product features:

 Eligibility: An individual who has attained majority (singly or jointly with an adult or minor)
or even a minor represented by the Guardian, , HUL, all legal business entities and companies,
other bodies like Clubs, Trusts, Government Departments etc.
 Nomination facility - available.
 Auto renewal facility and premature closure of the Account – available
 Standing instructions from the customers - executed.
 Vikas Bahia Tharaka – A Tax Saving Fixed Deposit - An amount up to Rs 1 lakh for a fixed
period of 5 years invested under this Tax Saving Fixed Deposit, is eligible for deduction from
income under Section 80 (C) of Income Tax Act.

 Vanitha Vikas - Recurring Deposit cum demand loan account

An exclusive product for women customers. The women customers who remit RD instalments
regularly, can avail Demand Loan up to twice the outstanding in the RD account after 12th RD
instalment. The loan would be partially clean and partially secured by the outstanding amount in RD
Account. Clean portion of the amount would be repaid in 24 or 48 monthly instalments with EMIs
commencing one month after availing the loan till maturity of RD Account. The Demand Loan up
to a maximum of Rs 50,000/- can be availed (minimum is Rs 5,000/-)

LOANS & ADVANCES of APGVB

Si No Segment Interest Rates

1 Crop Loans including Agr. Gold Loans, KCC, RMGs
Crop Loans (Disbursed during the a). Up to Rs 3.00 lacs 7.00%
A
subvention period) b). Above Rs 3.00 Lacs 14.00%

B After Subvention period(After due date) 14.00%

a) Up to Rs.50,000/- 13.00%
2 Agricultural Term Loans
b) Above Rs.50,000/- 14.00%
a) Up to Rs.50,000/- 13.00%
3 Allied Agri. Term Loans
b) Above Rs.50,000/- 14.00%
16
 ISB-Cash Credits, Term Loans and a) Up to Rs.2,00,000/- 14.00%
4 composite Term Loans including
Transport Operators b) Above Rs.2,00,000/- 15.00%
a) Direct to Groups 14.00%
5 Self Help Groups
b) Through MACS/VOs 15.00%
6 Gold Loans- Personal Purpose 15.00%

7 Consumer Durable Loans and Personal Loans 17.00%

8 Mortgage Loans 15.50%

Housing Loans up to Rs.20 Lacs 11.25%
9 Housing Loans above Rs.20 Lacs 12.00%
For repairs and Up gradation (Max Rs.2 Lacs) 14.00%
a) Up to Rs.2,00,000/- 12.00%
b) Above Rs.2,00,000/- to Rs.
10 Education Loans 13.00%
4,00,000/-
c) Above Rs.4,00,000/- 14.00%
11 Demand Loans ( Loans against NSC/KVP/LIC Policies etc) 15.00%

Irrespective of Old or New

12 Vehicle Loans 15.00%
Vehicles

Small and Medium Enterprises (SME) a) Up to Rs.10,00,000/- 14.00%

13
Loans b) Above Rs.10,00,000/- 15.00%
14 Clean Overdraft 18.50%
15 General Purpose Credit Cards (G.C.C) Maximum limit of Rs.25000/- 14.00%
Table 2

SERVICES
FEE BASED SERVICES OFFERED BY THE BANK

S.no Services

1 All our branches provide Core Banking facility (CBS)

2 Lockers facility

3 DDCP (Demand Drafts and Cheques Purchase) facility

4 Collection of Outstation Cheques

5 Issue of Demand Drafts on our Branches

17
 6 Issue of Bank Guarantees

7 Issue of Solvency Certificate

8 NEFT & RTGS facility

9 ATM Debit Card & Kisan Credit card facility

Table 3
Highlights 2014-15

 Growth in Business Rs 2227.85 Cr @17.88% (Rs 1772.77 Cr)

 Growth in Deposits Rs 922.02 Cr @ 15.71% (Rs 716.19 Cr)
 Growth in Advances Rs 1305.85 Cr @ 19.82% (Rs 1056.58 Cr)
 Net profit Rs 180.53 Cr growth @ 13.21% (Rs 159 Cr)
 Business per Branch Rs 20.86 Cr (Rs 19.53 Cr)
 Business per Employee Rs 5.34 Cr ( Rs 5.02 Cr)
 Profit per Employee Rs 6.55 Lakh (Rs 6.42 Lakh)
 Opened 66 New Branches (64 Branches) taking total to 704
 Opened 64 New Ultra Small Branches, taking total to 488
 Issued 2.17 Lakh RuPay ATM-cum-Debit Cards and 1.01 Lakh Kisan Cards.

 On boarded to Aadhar Payment Bridge System (APBS) on 21.11.2013 to implement Direct

Benefit Transfer (DBT) for LPG subsidy and other benefits.
 Aadhar numbers seeded on 3,79,261 accounts during the year, of which 64,855 Aadhar
Numbers were seeded on a single day on 24.9.2013
 Implemented Aadhar Enabled Payment System (AEPS) and making Aadhar authenticated
payments of Social Security Pensions (SSP) and MGNREGS wages through BCAs,
leveraging Biometric Technology.
 Opened 1,03,126 No Frills accounts in a single day on 24.8.2013 by all Branches and another
75328 accounts were opened on the same date by BCAs
 Opened 8 Financial Literacy Centres
 Conducted a record number of 1705 recovery camps on a single day on 14 February 2014.
18
 Stood first in Cross Selling (SBI Life) - Mobilized Rs 10.08 Cr business premium and Rs
1.49 Cr commission against the targets of Rs 10 Cr & Rs 1 Cr respectively.

19
20
The Operating profit of the Bank stood at Rs 242.97 Crore as on 31.3.14 with a marginal decline of
Rs 4.86 Crore over previous FY figure of Rs 247.83 Crore. The Net profit of the Bank has,
however, been on the rise in the last six years, although not at the same rate as in the initial years

Rs. In Crores
9000

8000

7000

6000

5000

4000

3000

2000

1000

CASA deposits grew by Rs 523.02 Crore at 21.32% to reach Rs 2976.77 Crore as against Rs
2453.75 Crore Term Deposits grew by Rs 965.81 Crore to reach a level of Rs 5303.24 Crore at
22.27% as against Rs 4337.43 Crore. The growth of 21.32% in CASA during the year 2014-15
has been stupendous when compared with CASA growth rates of 7.74% in 2013-14 and 16.01% in
2012-13.
(Rs in Crores)
1200
1080
1000
879
800 698

600 539
419
400
311
221
200 152

21
Net worth of the Bank stood at Rs 1174.35 Crore with a growth of Rs 201.61 Crore (@ 20.73%)
over previous FY's figure of Rs 972.74 Crore.

( Rs. In Crores )
9000
8280
8000

7000 6791

6000 5869
5153
5000 4795

3805
4000 3394
2934
3000 2718
2188
2000

1000

This growth in deposits assumes greater importance. There has been a consistent growth on month
to month basis except a marginal negative growth of Rs 24 Crore as on 30.4.14. Retail deposits
constitute 88% of total deposits as on 31.3.2015. The Branches have been motivated to mobilize
substantial retail deposits and discouraged offering premium rates on bulk deposits.

2012-13 2013-14 2014-15

Target Achievement Target Achievement Target Achievement

1.Crop Loans 2274.93 1352.80 2734.06 1429.16 2223.74 2759.62

2.Total Agr & allied activities 745.72 27.96 792.85 9.95 100.00 60.42
3.NFS 220.30 241.47 279.38 308.21 108.25 90.74

22
4.OPS 1014.48 1990.58 1113.36 1742.77 1764.22 2070.13

5.Total Priority Sector 4255.43 3612.81 4919.65 3490.09 4196.21 4980.91

% of achievement 85 71 118.70

Targets and achievements

23
MANAGEMENT OF NPAS IN AP GRAMEENA VIKAS BANK

NPA management is important. NPAs are a drag and drain on the bank’s resources and
profits. These are unearning assets. Provisioning, capital adequacy norms, made them untenable.
Recovery improves profitability and helps recycling the blocked funds. Proper NPA-recovery and
their effective management improves the image of the bank. Early identification will help early and
sure care, by helping take prompt corrective and remedial measures. It needs no emphasis, that NPAs
impose an additional burden on the performing assets (they bear the cost of NPAs).

As a ground level operating functionary, an officer has to keep constant watch over the NPAs at the
branch. He has not only to supervise and ensure that the assets remain performing but also see that
once they become non-performing, effective measures are initiated to get full recovery and where
this is not possible, prompt action is initiated to get rid of the NPAs from the Branch books.

Objective

i) Long term viability and financial strength of the Bank.

ii) To contain/ control NPAs to less than 3% and maintain NPAs at par with national average.

iii) Preventing further assets from becoming NPAs.

Strategies

i) Management of NPAs at various levels.

ii) Management Information System on NPAs.

iii) Identification of NPAs.

iv) Identification of likely NPAs.

v) Review mechanism.

vi) Adopting legal action.

24
vii) Adopting other methods for recovery of loans.

viii) Lok Adalats.

ix) Write-off.

x) Budgeting for NPA Management.

xi) Creation of NPA Management Cells.

Management of NPAs at Various Levels in the organization

Branches and Regional Offices to organize timely recovery drives and camps.

At Branches
Systematic, concerted and intensive recovery efforts to keep NPAs under control, by:

i) ABC analysis.

ii) Case by case study and analysis.

iii) Identifying borrower with genuine interest..

iv) Timeliness and adequacy of response.

v) Recovery teams and adoption methodology.

vi) Timing of strategies and follow-up.

vii) Identification of likely NPAs.

25
ix) Village-wise and segment-wise NPA position.

x) Identification of top 20 NPAs.

xi) Phone contacts daily.

xii) Personal canvassing frequently.

xiii) Serving notices (where necessary legal notices may be served).

xii) Involving SHGs, RMGs, VOs, Farmers’ Clubs, etc., in recovery drives.

xv) Any other strategy suitable for making recovery drives/ camps more effective.

At Regional Office

Besides motivating field staff and imparting needed skills to them:

I) Identification of cluster branches.

ii) Identification of teams at Regional Office to assist Branch Managers and Field Officers.

iii) Identification of monitoring officers and team leaders.

iv) Compilation of data of existing NPAs (ENPAs) and likely NPAs (LNPAs).

v) Top 20 accounts per branch to be identified.

vi) Arrangements for jeeps/ cars.

vii) Arrangements of recovery schedule with dates and tour programme.

viii) Writing letters to Government agencies seeking their cooperation in recovery.

26
ix) Submitting progress reports, at monthly intervals, to Head Office by the 5th of the following
month.

Management Information System

i) ‘P’ Review Reports to be submitted with information on NPAs.

ii) Top 20 NPA accounts branch-wise and Regional Office-wise.

iii) Position of outstanding advances of Rs.5 lakhs and over.

iv) Strategies adopted.

Identification of NPAs

Branches/ Regional Offices to identify NPAs as per the IRAC norms.

Identification of likely NPAs

i) Transaction related (Persistent irregularity, defaults in repayment, invocation of guarantees,
operating losses, etc.)

ii) Activity related (rejection of products, idle machinery, decrease in activity/workers, etc.)

iii) Advances not rated well.

iv) Accounts which are adversely commented upon by Inspectors.

v) Standard accounts, with deceased borrowers.

vi) Borrowers of standard accounts who left the village.

vii) Units of standard accounts turned sick/ defunct.

27
Review Mechanism

 An appropriate action plan to be drawn up, to improve the status of the loans, within a time frame.

 After identification of NPAs/potential NPAs, a detailed review to be made.

 The review, inter alia should envelope and analyze the factors, both internal and external, which
led to the impairment of the asset (loan/advance), for taking any possible action vis a vis the case
on hand and for taking preventive action vis a vis other accounts. A representative list is
appended.

Internal
- Appraisal defects.
- Faulty documentation.
- Security deterioration.
- Follow-up lapses/inadequacy.
- Absence of remedial action.
External
- Machine (break-down/obsolescence)
- Material (Raw material quality, price,
adequacy)
- Power, water
- Competition
- Quality control/standard
- Government Polices
- Natural Calamities
- Marketing
- Price disadvantage
- Heavy borrowings
- Unplanned capital expenditure
- Willful default
- Industrial relations
- Cost overrun
- Diversion to:
 Consumption needs
 Outside borrowings
 Investments
- Lags in receipt of sale proceeds
- Lack of knowledge, skill and attitude

Branches/ Regional Offices will conduct review meeting, to consider and discuss:

 Regular tours and visits to villages by field functionaries.

 Assessing credit needs correctly.

28
 Timely lending/ credit disbursals.

 Avoiding under financing or over financing.

 Ensuring correct utilization of bank loan amount.

 Completeness and correctness of documentation.

 Ensuring loan documents enforceability.

 Recognizing early warning signals such as, migration, shifting of units, closing of units.

 Correct assessment of security (primary and collateral)

 Compiling correct opinion reports on borrowers and guarantors.

 Obtaining realistic and time bound commitment from the borrowers and guarantors for
repayment of loans.

 Involving SHGs, RMGs, opinion leaders and Government functionaries for recovery of loans.

 Creation of NPA Management Cell: The Bank constituted a NPA Management Cell to
specially deal with such assets and aim for reducing levels of NPAs. All the Regional Offices are
advised to constitute Non-Performing Asset Management Cell in their office, attached to
Manager (Advances).

29
CHAPTER-3

30
Non-Performing Assets (NPA) - Concept

The three letters “NPA” strike terror in banking sector and business circle today NPA is a
short form of “Non-Performing Assets”. In banking, NPA are loans given to doubtful customers who
may or may not repay the loan on time. There are two types of assets viz. performing and non-
performing. Performing loans are standard loans on which both the principle and interest are secured
and their return is guaranteed.
Non-Performing assets means the debt which is given by the Bank is unable to recover it is called
NPA .Non- Performing Asset [NPA] is a result of asset Liability mismatch, A NPA account in the
books of accounts is an asset as it indicates the amount receivable from the Defaulters. It means if
any bank gives loan to the customer if the interest for that loan is not paid by the customer till 90
days then that account is called as NPA account.
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.

Definitions:
An asset, including a leased asset, becomes Non-Performing when it ceases to generate income for
the bank.
A’ non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/or
installment of principal has remained ‘past due’ for a specified period of time.
The specified period was reduced in a phased manner as under:

w.e.f. 31.03.1993 : four quarters

w.e.f. 31.03.1994 : three quarters
w.e.f. 31.03.1995 : two quarters
w.e.f. 31.03.2001 : 180 days
w.e.f. 31.03.2004 : 90 days
90 days’ delinquency norms are not applicable to Agriculture segment

31
With the effect from March 31, 2004, NPA shall be a loan or an advance where:

1. Term loan: Interest and /or installment of principal remain over due for a period of more than 90
days.
2. Cash credit/overdraft: The account remains ‘out of order’ for a period of more than 90 days.

3. Bills: The bill remains overdue for a period of more than 90days from due date of payment.
4. Other Loans: Any amount to be received remains overdue for a period of more than 90 days.
5. Agricultural Accounts: In the case of agriculture advances, where repayment is based on income
from crop. An account will be classified as NPA as under:
a) If loan has been granted for short duration crop: interest and/or installment of Principal remains
overdue for two crop seasons beyond the due date.
b) If loan has been granted for long duration crop: Interest and/or installment of principal remains
overdue for one crop seasons beyond due date.

Asset classification

Assets can be categorized into Four categories namely (1) Standard (2) Sub -
Standard (3) Doubtful (4) Loss the last three categories are classified as NPAs based on the period
for which the asset has remained non-performing and the realisability of the dues.
(1) Standard assets: The loan accounts which are regular and do not carry more than normal risk.
Within standard assets, there could be accounts which though have not become NPA but are irregular.
Such accounts are called as special Mention accounts.
(2) Sub-Standard Assets: With effect from 31.3.2005, a sub- standard asset is one, which is
classified as NPA for a period not exceeding 12 Months (earlier it was 18 months). In such cases,
the current net worth of the borrower/ guarantor or the current market value of the security charged
is not enough to ensure recovery of the dues to the bank in full. In other words, such an asset will
have well defined credit weakness that jeopardize the liquidation of the debt and are characterized
by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.
(3) Doubtful Assets: With effect from 31 march 2005, an asset is to be classified as doubtful, if it
has remained NPA or sub standard for a period exceeding 12 months (earlier it was 18 months). A
32
loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-
standard, with the added characteristic that the weakness make collection or liquidation in full,- on
the basis of currently known facts, conditions and values- highly questionable and improbable.
(4) Loss assets: A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspection but the amount has not been written off wholly. In other words, such
an asset is considered uncollectible and of such little value that its continuance as a bankable asset is
not warranted although there may be some salvage or recoverable value.
When a Sub Standard account is classified as Doubtful or Loss without waiting for 12 months: If the
realizable value of tangible security in a sub Standard account which was secured falls below 10%
of the outstanding, it should be classified loss asset without waiting for 12 months and if the
realizable value of security is 10% or above but below 50% of the outstanding, it should be classified
as doubtful irrespective of the period for which it has remained NPA.

NPA IDENTIFICATION NORMS

With effect from 31st March’2004, a loan or advance would become NPA where;
i)Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect
of a term loan,
ii) The account remains ‘out of order’ for a period of more than 90 days, in respect of an
Overdraft/Cash Credit (OD/CC),
iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,
iv) With effect from September 2004, loans granted for short duration crops will be treated as
NPA, if the installment of principal or interest thereon remains overdue for two crop seasons and
loans granted for long duration crops will be treated as NPA, if installment of principal or interest
thereon remains overdue for one crop season, and
v) Any amount to be received remains overdue for a period of more than 90 days in respect
of other accounts.
Out of Order: An account should be treated as 'out of order' if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance
in the principal operating account is less than the sanctioned limit/drawing power, but there are no

33
credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover
the interest debited during the same period, these accounts should be treated as 'out of order'.
Overdue: Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the
due date fixed by the bank.
The date of NPA will be the actual date on which slippage occurred, as mentioned below:-
For Term Loan/Demand Loan Accounts The date on which interest and/or instalment of
principal have remained overdue for a period of more than 90 days. For Overdraft/Cash Credit
Accounts The date on which the account completed a period of more than 90 days of being
continuously out of order.

Income Recognition – Policy

1. The Policy of income recognition has to be objective and based on the record of recovery.
Internationally income from non-performing asset (NPA) is not recognized on accrual basis but is
booked as income only when it is actually received. Therefore, the banks should not charge and take
to income account interest on any NPA.
2. On an account turning NPA, banks should reverse the interest already charged and not collected
by debiting profit and loss account, and stop further application of interest. However, banks may
continue to record such accrued interest in a memorandum account in their books.
3. However, interest on advances against term deposits, NSCs, IVPs, KVPs, and Life policies may
be taken to income account on the due date, provided adequate margin is available in the accounts.
4. If government guaranteed advances become NPA, the interest on such advances should not be
taken to income account unless the interest has been realized.
5. If any advance, including bills purchased and discounted, become s NPA as at the close of any
year, the entire interest accrued and credited to income account in the past periods, should be reversed
or provided for if the same is not realized. This will apply to government guaranteed accounts also.
PROBLEMS DUE TO NPA

1. Owners do not receive a market return on their capital .in the worst case, if the banks fails,
owners lose their assets. In modern times this may affect a broad pool of shareholders.

34
 2. Depositors do not receive a market return on saving. In the worst case if the bank fails,
depositors lose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit
rates and higher lending rates repress saving and financial market, which hamper economic
growth.

4. Non-performing loans epitomize bad investment. They misallocate credit from good projects,
which do not receive funding, to failed projects. Bad investment ends up in misallocation of
capital, and by extension, labor and natural resources.

Non-performing asset may spill over the banking system and contract the money stock, which may
lead to economic contraction. This spillover effect can channelize through liquidity or bank
insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity shortage. This can
jam payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the bank’s capital base.

The three letters Strike terror in banking sector and business circle today. NPA is short form of “Non-
Performing Asset”. The dreaded NPA rule says simply this: when interest or other due to a bank
remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing
asset. The recovery of loan has always been problem for banks and financial institution. To come out
of these first we need to think is it possible to avoid NPA, no cannot be then left is to look after the
factor responsible for it and managing those factors.

 Interest and/or instalment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural
purposes, and

 Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.

35
As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move
over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of
an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks
should, therefore, continue to classify an account as NPA only if the interest charged during any
quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004.

SARFAESI ACT

The policy makers and legislators realized the need for measures for the quick recovery of NPAs,
and to empower Banks and Financial Institutions to recover the NPAs without intervention of
judicial process. In that process guidance was found from Section 69A of Transfer of Property Act
and State Finance Corporation Acts, where there is provision for the sale of secured assets without
the intervention of Courts. In that process Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act 2002 (SARFAESI) was enacted. The Preamble of the Act
states that ”Narasimham Committee I and II and Andhyarujina Committee constituted by the
Central Government for the purpose of examining banking sector reforms have considered the need
for changes in the legal system in respect of these areas. These Committees have suggested
enactment of a new legislation for securitization and empowering banks and financial institutions
to take possession of these securities and to sell them without the intervention of the Court. Acting
on these suggestions the SARFAESI Ordinance 2002 was promulgated on the 21st June 2002 to
regulate securitization and reconstruction of financial assets and enforcement of security interest
and for matters connected therewith or incidental thereto. The provisions of the Ordinance would
enable banks and financial institutions to realize long term assets, manage problem of liquidity,
asset liabilities

36
CHAPTER-4

37
 IMPACT OF NPA UPON BANKS

1. Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client.
Because of the money getting blocked the prodigality of bank decreases not only by the amount of
NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning
project/asset. So NPA doesn’t affect current profit but also future stream of profit, which may lead
to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low
ROI (return on investment), which adversely affect current earning of bank.

2. Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shortest period of time which lead to additional cost to the company. Difficulty
in operating the functions of bank is another cause of NPA due to lack of money. Routine payments
and dues.

3. Involvement of management:-
Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time
and efforts of management in handling and managing NPA would have diverted to some fruitful
activities, which would have given good returns. Now day’s banks have special employees to deal
and handle NPAs, which is additional cost to the bank.

4. Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit.
It will lose its goodwill and brand image and credit which have negative impact to the people who
are putting their money in the banks.

38
 REASONS FOR MANAGING NON – PERFORMING ASSETS.

NPAs have multifold effects on the performance of banks. It shows the weakness of management of bank.
It is necessary to manage non – performing assets for following reasons:

1. To protect the interest of shareholders.

Members of the bank are true owners of bank. They contribute or invest their amount in banks to earn
dividend. Being amount of NPA with their amount in banks to earn dividend because high amount of
NPAs means earning assets are on deterioration consequently, means lower income of banks that will
make unable to satisfy the members by paying high rate of dividend.

2. To protect the interest of depositors.

Depositors are the key person of the banks because of their deposits the banks are able to lend to borrowers.
Depositors want consistence interest income on their deposits. When their deposits, advanced to
borrowers, which would, later on, if become a NPA, banks would be unable to pay timely interest to
depositors will switch of their deposits from one bank to another bank which is not commendable for
particular bank. Thus it is very important for banks to manage efficiently their advances, which are likely
to turn into NPAs.

3. For profitability:
Non – performing Assets means an asset, which cease to generate any income. Thus more and more NPA
will reduce the income of banks as interest which is main component of bank’s income thus it will
jeopardize the profitability or return on assets consequently it will be constraint for bank’s growth.

4. High provision:
Higher NPA leads banks to compel higher provision for „Bad Debts Reserve‟ as per the norms of RBI.
Provision will be done by realized profit and NPA will block the actual profit of banks for current year
thus NPA has a dual effect i.e. not realization of interest income and separate provision for NPA from
Profit & Loss account.

5. Creditworthiness of the Banks:

NPA works as a tool for worthiness of particular bank. If banks are having high NPA level then it will be
very difficult to raise additional funds from market. It will make bad impression of banks on people.

39
6. Expansion plan:
For instance banks want to start as its expansion plan and its NPA level is higher. Then prescribed by RBI
that is 15% of advances, banks will not be able to get permission from the RBI for starting a new branch.
Thus it is necessary to control NPA level within prescribed limit for future growth of banks.

7. Welfare of employees:
If banks are having high NPA it will ruin the whole capital and past reserves, which raises question for
existence of banks. Thus, many personnel will loss employment, but also banks cannot make any provision
for welfare activities of the employee’s future benefits due to lack of availability of free reserves.

8. In the interest of sustained economic growth:

For the interest of sustained economic growth it is necessary to control and minimize NPAs of nations
banking sectors. High NPA leads to inflation in economy. Further, NPAs will reduce the opportunities for
productive investment, ruin the efforts of directed allocation of funds, preferred investment areas,
subsequently economy of country will not be able to achieve expected growth, which is decided on
formation of budget

Early symptoms by which one can recognize a performing asset turning in to Non-performing asset

Four categories of early symptoms:

Financial:
 Non-payment of the very first installment in case of term loan.
 Bouncing of cheque due to insufficient balance in the accounts.
 Irregularity in installment
 Irregularity of operations in the accounts.
 Unpaid overdue bills.
 Declining Current Ratio
 Payment which does not cover the interest and principal amount of that installment
 While monitoring the accounts it is found that partial amount is diverted to sister concern or parent
company.

40
 Operational and Physical:
 If information is received that the borrower has either initiated the process of winding up or are
not doing the business.
 Overdue receivables.
 Stock statement not submitted on time.
 External non-controllable factor like natural calamities in the city where borrower conduct his
business.
 Frequent changes in plan
 Nonpayment of wages
Attitudinal Changes:
 Use for personal comfort, stocks and shares by borrower
 Avoidance of contact with bank
 Problem between partners

Others:
 Changes in Government policies
 Death of borrower
 Competition in the market

SALE OF NPA TO OTHER BANKS

 A NPA is eligible for sale to other banks only if it has remained a NPA for at least two
years in the books of the selling bank

 The NPA must be held by the purchasing bank at least for a period of 15 months before it is
sold to other banks but not to bank, which originally sold the NPA.

 The NPA may be classified as standard in the books of the purchasing bank for a period of 90
days from date of purchase and thereafter it would depend on the record of recovery with
reference to cash flows estimated while purchasing.

 The bank may purchase/ sell NPA only on without recourse basis.

 If the sale is conducted below the net book value, the short fall should be debited to P&L
account and if it is higher, the excess provision will be utilized to meet the loss on account of
sale of other NPA.

41
CHAPTER-5

42
Preventive Measurement for NPA
Early Recognition of the Problem :

Invariably, by the time banks start their efforts to get involved in a revival process, it’s too
late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues.
Identification of weakness in the very beginning that is : When the account starts showing first signs of
weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the
potential of revival may be done on the basis of a techno-economic viability study. Restructuring
should be attempted where, after an objective assessment of the promoter’s intention, banks are
convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided
by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is
possible through legal means before the security position becomes worse.

Identify borrowers with genuine intent :

Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials
at the branch level is paramount as they are the ones who has intelligent inputs with regard to
promoters’ sincerity, and capability to achieve Turn around. Based on this objective assessment, banks
should decide as quickly as possible whether it would be worthwhile to commit additional finance.

In this regard banks may consider having “Special Investigation” of all financial transaction or
business transaction, books of account in order to ascertain real factors that contributed to sickness of
the borrower. Banks may have penal of technical experts with proven expertise and track record of
preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of
additional fund may be entertained at branch level, and for this purpose a special limit to such type of
cases should be decided. This will obviate the need to route the additional funding through the
controlling offices in deserving cases, and help avert many accounts slipping into NPA category.
Timeliness and adequacy of response :

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element
in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic
study and promoter’s commitment, has to be adequate
in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The
package of assistance may be flexible and bank may look at the exit option.

Focus on cash flow :

While financing, at the time of restructuring the banks may not be guided by the conventional
fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit

43
requirements may be done by analysing funds flow in conjunction with the Cash Flow rather than only
on the basis of Funds Flow.

Management Effectiveness :

The general perception among borrower is that it is lack of finance

that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness
in tackling adverse business conditions is a very important aspect that affects a borrowing unit’s
fortunes. A bank may commit additional finance to an align unit only after basic viability of the
enterprise also in the context of quality of management is examined and confirmed. Where the default
is due to deeper malady, viability study or investigative audit should be done – it will be useful to have
consultant appointed as early as possible to examine this aspect. A proper techno- economic viability
study must thus become the basis on which any future action can be considered.

Multiple financing :

A. During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach
by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a
long way toward overall success of rehabilitation exercise, given the probability of success/failure.

B. In some default cases, where the unit is still working, the bank should make sure that it captures the
cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of
getting their cash flows forfeited), and ensure that such cash flows are used for working capital
purposes. Toward this end, there should be regular flow of information among consortium members. A
bank, which is not part of the consortium, may not be allowed to offer credit facilities to such
defaulting clients. Current account facilities may also be denied at non-consortium banks to such
clients and violation may attract penal action. The Credit Information Bureau of India Ltd. (CIBIL)
may be very useful for meaningful information exchange on defaulting borrowers once the setup
becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one set of lenders may be
willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe
in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost – by
a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take
this aspect into account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and
transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and
FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit
in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts
with consortium/multiple banking arrangements.

44
 INTERNATIONAL PRACTICES ON NPA MANAGEMENT

Subsequent to the Asian currency crisis which severely crippled the financial
system in most In addition to the above, some of the more recent and aggressive steps to resolve NPAs
have been taken by Taiwan. Taiwanese financial institutions have been encouraged to merge (though
with limited success) and form bank based AMCs through the recent introduction of Financial Holding
Company Act and Financial Institution Asian countries, the magnitude of NPAs in Asian financial
institutions was brought to light. Driven by the need to proactively tackle the soaring NPA levels the
respective Governments embarked upon a program of substantial reform. This involved setting up
processes for early identification and resolution of NPAs. The table below provides a cross country
comparison of approaches used for NPA resolution. Mergers Act. Alongside the Ministry of Finance
has followed a carrot and stick policy of specifying the required NPA ratios for banks (5% by end
2003), while also providing flexibility in modes of NPA asset resolution and a conducive regulatory
and tax environment. Deferred loss write-off provisions have been instituted to provide breathing
space for lenders to absorb NPA write-offs. While it is too early to comment on’ he success of the
NPA resolution process in Taiwan, the early signs are encouraging. Detailed below are the some key
NPA management approaches adopted by banks in South East Asian countries.

1. Credit Risk Mitigation

As part of the overall credit function of the bank, early recognition of loans showing
signs of distress is a key component. Credit risk management focuses on assessing credit risk and
matching it with capital or provisions to cover expected losses from default.

2. Early Warning Systems

Loan monitoring is a continuous process and Early Warning Systems are in place for
staff to continuously be alert for warning signs.

3. Asset Management Companies

To resolve NPA problems and help restore the health and confidence of the financial
sector, the countries in South East Asia have used one broad uniform approach, i.e. they set up
specialized Asset Management Companies (AMCs) to tackle NPAs and put in place Debt
Restructuring mechanism to bring creditors and debtors together, often working along with
independent advisors. This broad approach was locally adapted and used with a varying degree of
efficacy across the region. For example, while in some countries a centralized government sponsored
AMC model has been used, in others a more decentralized approach has been used involving the
creation of several "bank-based" AMCs. Further different countries have allowed/used different
approaches (in-house restructuring versus NPA Sale) to resolve their NPAs. Additionally, the efficacy
of bankruptcy and foreclosure laws has varied in various countries. A number of factors influenced the
successful resolution of NPAs through sale to AMCs and some of these key factors are discussed
below
 Increasing willingness to sell NPAs to AMCs

Bottlenecks often persist on account of reluctance of lenders to transfer assets to the

AMCs at values lower than the book value to prevent a hit to their financials. Banks in Malaysia were
encouraged to transfer their assets to Danaharta - AMC in Malaysia by providing them with upside
sharing arrangements and the facility to defer the write-off of financial loss on transfer for 5 years. These

45
incentives coupled with the directive of the Central Bank to make adjustments in the book values of the
assets not transferred to Danaharta (after Danaharta identifies them) were sufficient to ensure effective
sale to the AMC. In Taiwan, there is a regulatory requirement to reduce for banks to reduce NPAs to 5%
by the end of 2003. Consequently there is an increasing number of NPA auctions by the banks.

 Effective resolution strategy

A significant dimension influencing NPA resolution and investor participation is the ease
of implementation of recovery strategies. AMCs like danaharta have been provided with a strong
platform to affect the resolution of NPAs with clearly laid down creditor's rights. Danaharta has been
allowed to foreclose property without reference to the Court and thus has been able to dispose
collateral swiftly by using the tender route. Special resolution mechanisms that have involved minimal
intervention of the Court have also served to entice investor interest in the NPA market in certain
countries like Taiwan. On the other hand the operations of Thailand Asset Management Corporation,
the Government owned AMC, have been hindered by deficiencies in the Bankruptcy Law provisions.

 Appointment of Special Administrators

In Malaysia, it has been able to exercise considerable influence over the
restructuring process through the appointment of special administrators that have prepared workout
plans and have exercised management control over the assets of the borrower during plan preparation
and implementation stages. The restructuring process affected by the automatic moratorium that comes
into place at the time of the administrator’s appointment.

Out of court restructuring

Most Asian countries adopted “out of court” restructuring mechanism to minimize court intervention
and speed up restructuring of potentially viable entities. Internationally, restructuring of NPAs often
involves significant operational restructuring in addition to financial restructuring. The operational
restructuring measures typically include the following areas:

 Revenue enhancement
 Cost reduction
 Process improvement
 Working capital management
 Sale of redundant/surplus assets

Once the restructuring measures have been agreed by stakeholders, a complete restructuring plan is
prepared which takes into account all the agreed restructuring measures. This includes establishment of
a timetable and assignment of responsibilities. Usually, lenders will also establish a protocol for
monitoring of progress on the operational restructuring measures. This would typically involve the
appointment of an independent monitoring agency. As seen from the Asian experience, in general,
NPA resolution has been most successful when

 Flexibility in modes of asset resolution (restructuring, third party sales) has been provided to
lenders.

46
 Conducive and transparent regulatory and tax environment, particularly pertaining to
deferred loss write offs, Foreign Direct Investment and bankruptcy/foreclosure processes has
been put in place.
 Performance targets set for banks to get them to resolve NPAs by a certain deadline.

47
CHAPTER-6

48
 LITERATURE REVIEW

A large number of researchers have been studied to the issue of non-performing asset (NPA) in banking
industry .A review of the relevant literature has been described as under: Non Performing Assets engender
negative impact on banking stability and growth. Issue of NPA and its impact on erosion of profit and
quality of asset was not seriously considered in Indian banking prior to 1991. There are many reasons
cited for the alarming level of NPA in Indian banking sector. Asset quality was not prime concern in Indian
banking sector till 1991, but was mainly focused on performance objectives such as opening wide
networks/branches, development of rural areas, priority sector lending, higher employment generation,
etc. The accounting treatment also failed to project the problem of NPA, as interest on loan accounts were
accounted on accrual basis (Siraj K.K. and P. Sudarsanan Pillai, 2012).
A Committee on Banking Sector Reforms known as Narasimham Committee was set up by RBI to study
the problems faced by Indian banking sector and to suggest measures revitalize the sector. The committee
identified NPA as a major threat and recommended prudential measures for income recognition, asset
classification and provisioning requirements. These measures embarked on transformation of the Indian
banking sector into a viable, competitive and vibrant sector. The committee recommended measures to
improve “operational flexibility” and “functional autonomy” so as to enhance “efficiency, productivity
and profitability” (Chaudhary & Singh, 2012).
The main cause of mounting NPAs in public sector banks is malfunctioning of the banks. Narasimham
Committee identified the NPAs as one of the possible effects of malfunctioning of public sector banks
(Ramu, N., 2009).It has been examined that the reason behind the falling revenues from traditional sources
is 78% of the total NPAs accounted in public sector banks (Bhavani Prasad, G. and Veena, V.D., 2011).
An evaluation of the Indian experience in Financial Sector Reforms Published in the RBI Bulletin gives
stress to the view that the sustained improvement of the economic activity and growth is greatly enhanced
by the existence of a financial system developed in terms of both operational and allocation efficiency in
mobilizing savings and in channelizing them among competing demands (G.Rangarajan, 1997).It has been
observed that the current banking Scenario and the need for the policy change, opines that a major concern
addressed by the banking sector reform is the improvement of the financial health of banks. The
Introduction of prudential norms is better financial discipline by ensuring that the banks are alert to the
risk profile of their loan portfolios (S.P.Talwar (1998).
The Reserve Bank of India has also conducted a study to ascertain the contributing factors for the high
level of NPAs in the banks covering 800 top NPA accounts in 33 banks (RBI Bulletin, July 1999). The
study has found that the proportion of problem loans in case of Indian banking sector always been very
high. The problem loans of these banks, in fact, formed 17.91 percent of their gross advances as on March

49
31, 1989. This proportion did not include the amounts locked up in sick industrial units. Hence, the
proportion of problem loans indeed was higher.
However, the NPAs of Indian Banks declined to 17.44 percent as on March 31, 1997 after introduction of
prudential norms. In case of many of the banks, the decline in ratio of NPAs was mainly due to
proportionately much higher rise in advances and a lower level of NPAs accretion after 1992.
The study also revealed that the major factors contributing to loans becoming NPAs include diversion of
funds for expansion, diversification, modernization, undertaking new projects and for helping associate
concerns. This is coupled with recessionary trend and failure to tap funds in the capital and debt markets,
business failure (product, marketing, etc.),inefficient management, strained labour relations, inappropriate
technology/technical problems, product obsolescence, recession input/power shortage, price escalation,
accidents, natural calamities, Government policies like changes in excise duties, pollution control orders,
etc.
The RBI report concluded that reduction of NPAs in banking sector should be treated as a national priority
issue to make the Indian banking system stronger, resilient and geared to meet the challenges of
globalization (Parul Khanna, 2012)

Das and Ghosh (2003) empirically examined non-performing loans of India’s public sector banks in terms
of various indicators such as asset size, credit growth and macroeconomic condition, and operating
efficiency indicators. Sergio (1996) in a study of non-performing loans in Italy found evidence that, an
increase in the riskiness of loan assets is rooted in a bank’s lending policy adducing to relatively
unselective and inadequate assessment of sectorial prospects.

Vradi et.al (2006), his study on´ Measurement of efficiency of bank in India concluded that in modern
world performance of banking is more important to stable the economy .in order to see the efficiency of
Indian banks we have seen the fore indicators i.e. profitability, productivity, assets, quality and financial
management for all banks includes public sector, private sector banks in India for the period 2000 and
1999 to 2002-2003. For measuring efficiency of banks we have adopted development envelopment
analysis and found that public sectors banks are more efficient than other banks in India

Brijesh K. Saho et.al (2007), this paper attempts to examine, the performance trends of the Indian
commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings are indicative in many
ways. First, the increasing average annual trends in technical efficiency for all ownership groups indicate
an affirmative gesture about the effect of the reform process on the performance of the Indian banking

50
sector. Second, the higher cost efficiency accrual of private banks over nationalized banks indicate that
nationalized banks, though old, do not reflect their learning experience in their cost minimizing behavior
due to X-inefficiency factors arising from government ownership. This finding also highlights the possible
stronger disciplining role played by the capital market indicating a strong link between market for
corporate control and efficiency of private enterprise assumed by property right hypothesis.

And, finally, concerning the scale elasticity behaviour, the technology and market-based results differ
significantly supporting the empirical distinction between returns to scale and economies of scale, often
used interchangeably in the literature.
.
B.Satish Kumar (2008), in his article on an evaluation of the financial performance of Indian private
sector banks wrote Private sector banks play an important role in development of Indian economy. After
liberalization the banking industry underwent major changes. The economic reforms totally have changed
the banking sector. RBI permitted new banks to be started in the private sector as per the recommendation
of Narashiman committee. The Indian banking industry was dominated by public sector banks. But now
the situations have changed new generation banks with used of technology and professional management
has gained a reasonable position in the banking industry.

Nelson M. Waweru et.al (2009), Study that many financial institutions that collapsed in Kenya since 1986
failed due to non-performing loans, this study investigated the causes of non-performing loans, the actions
that bank managers have taken to mitigate that problem and the level of success of such actions. Using a
sample of 30 managers selected from the ten largest banks the study found that national economic
downturn was perceived as the most important external factor. Customer failure to disclose vital
information during the loan application process was considered to be the main customer specific factor.
The study further found that Lack of an aggressive debt collection policy was perceived as the main bank
specific factor, contributing to the non performing debt problem in Kenya.

Kevin Greenidge et.al (2010), study the evaluation of non-performing loans is of great importance given
its association with bank failure and financial crises, and it should therefore be of interest to developing
countries. The purpose of this paper is to build a multivariate model, incorporating macroeconomic and
bank-specific variables, to forecast non-performing loans in the banking sector of Barbados. On an
aggregate level, our model outperforms a simple random walk model on all forecast horizons, while for
individual banks; these forecasts tend to be more accurate for longer prediction periods only.

51
CHAPTER-7

52
 ANALYSIS

Assets Classification (Rs in Crores)

Assets 2012-13 2013-14 2014-15

O/s % O/s % O/s %

Standard 6322.13 95.94 7545.61 95.57 8766.58 96.70

Sub Standard 148.74 2.26 159.53 2.02 165.09 1.82

Bad & Doubtful 118.71 1.80 189.23 2.40 133.25 1.47

Loss 0 0.00 1.05 0.01 0.68 0.01

Total NPAs 267.45 4.06 349.81 4.43 299.03 3.30

Total Advances 6589.58 100.00 7895.42 100.00 9065.61 100.00

Movement of NPAs (Rs in thousands)
S Particulars Current Year (2014-15) Previous Year (2013-14)
No
I Movement of Gross NPAs
Opening balance
Additions during the year 3498163.55 2674486
Reductions during the year 1430706.85 1605003
Closing balance 1938568.45 781325
Gross NPAs as % to total 2990301.95 3498164
Advances 3.30 4.43
Ii Movement of Net NPAs
Opening balance 2550101.26 1728084
Additions during the year 499297.91 1075396
Reductions during the year 825141.26 253379
Closing balance 2224257.90 2550101
Net NPAs to Net Advances (%) 2.47 3.27

53
 Status of NPA for year 2013, 2014 and 2015 of AP GVB
400
349.81
350
299.81
300 267.4
250
Rs in Cr

200

150

100

50

0
2012-13 2013-14 2014-2015
Series 1 267.4 349.81 299.81
Financial Year

status of NPA for 2 financial years in APGVB

From the above graph we can show the status of NPA for two financial years i.e. 2012-13, 2013-14and 2014-15 the
X axis represents the financial year and the Y axis as the amount in crores. The NPA value for the year 2012-13 is Rs 267.40 Cr
whereas the other value for 2013-14is of Rs 349.81 Cr and when it comes to the present financial year it is around 299.81.
That means there is a gradual increase in NPA for 2012-13 and 2013-14 of Rs 82.41 Cr and when it comes to the financial
years of 2013-14 and 2014-15 the decrease of 50 Cr in NPA can be seen .Which shows positive impact on the development
of the bank.

54
Overall representation of Loan and NPA last three years in the branches of (Amount in ‘000)

55
Best performing branches are Chowdergudem, kadthal, telkapally because loan amount which is
converting NPA is low. Poor performing branches are padra, peddakothapally, thummanpet
because loan amount which is converting NPA is high

YEARWISE LOAN AND THEIR NPA IN TEN BRANCHES OF

APGVB.

56
CHAPTER-8

57
 FINDING AND SUGGESTIONS

 Gross NPA & Net NPA of APGVB are not constant every year . It’s being increasing and
decreasing.
 Total advances given by APGVB and Net Profits are also not constant.
 Because of mismanagement in bank there is a positive relation between Total Advances, Net Profits
and NPA of bank which is not good.
 Positive relation between NPA & profits are due to wrong choice of clients by Banks.
 There is an adverse effect on the Liquidity of Bank.
 Bank is unable to give loans to the new customers due to lack of funds which arises due to NPA.

Suggestions

 Good management needed on the side of banks to decrease the level of NPA.
 Proper selection of borrowers & follow ups required to get timely payment
 In order to reduce the balance of NPAs, Bank should constantly review and monitor the accounts
and the progress of the project for which the loan has been sanctioned.

58
 CONCLUSION

The problem statement on which I focused my study is “NPAs the big

challenge before the Banks”. The only problem that the Bank is facing today is the problem of
nonperforming assets, if the proper management of the NPAs is not undertaken it would hamper the
business of the banks. The NPAs would destroy the current profit, interest income due to large provisions
of the NPAs, and would affect the smooth functioning of the recycling of the funds. The bank must have
to find out the measures to reduce the evolving problem of the NPAs, the reduction of the NPAs would
help the bank to boost up their profits, smooth recycling of funds in the nation. This would help the nation
to develop more banking branches and developing the economy by providing the better

Finally I can conclude that the bankers can avoid sanctioning loans to the
noncredit worthy borrowers by adopting certain measures. They are careful appraisal of the project which
involves checking the economic viability of the project. A banker must consider the return on investment
on a proposed project. If the calculated return is sufficiently higher than the credit amount he can sanction
the loan. Also, he can constantly monitor the borrower in order to ensure the amount sanctioned. This
involves the post sanction inspection by the banker. Further the banker should get both the formal and
informal reports about the goodwill of the customer. If he had already proven as a defaulter than there is
no question of sanctioning loan to him. By considering all the above factors the banker can reduce the
non-performing assets in a bank.

59
CHAPTER-9

60
 BIBILOGRAPHY

• Annual Reports of APGVB bank

• Credit Risk Grading Manual, published by RBI
• Banking Credit Risk Management Manual
• Daily affairs of Apgvb bank, ashok nagar
• Consumers Financing Policy of Apgvb bank

WEBSITE
o http://www.apgvbank.in/
o ww.yourarticlelibrary.com/banking/indian-banking-system-structure-and-other-details-with-
diagrams/23495/
o https://www.rbi.org.in/

61