CHAPTER 1st

EXECUTIVE SUMMARY

1. EXECUTIVE SUMMARY
1.1 Overview of Project
Report is prepared on the topic Management of Non-performing Assets at state bank of Hyderabad. The purpose behind preparing this report is to study the present situation of NPAs and to provide suggestions to reduce it. Initially the information was collected about the topic from the organization. The concept of Non-Performing Assets was introduced for the first time in the Narasimham Committee report that was tabled in parliament on Dec.17 1991.The Committee Studied the prevailing financial system, identified its short comings and weakness and made various recommendations with regard to non-performing assets, their identification, disclosure and the extent of provisioning same. The need was felt because the prevalent accounting and disclosure practices did not always reflect the true state of affairs of banks and Financial Institutions. .

1.2 Objective
The Objective behind the project is, to study the concept of Non-Performing Assets, study present status of NPAs in Nanded City Region of Bank of State Bank of Hyderabad, comparative study of NPA of the Region for 4 Years, Remedial steps taken by the Region in order to reduce the NPA, to find out the effect of NPA on the financial health of the Region, to make the suggestions to overcome the problems of NPA in Nanded City Region of State Bank of Hyderabad.

1.3Research Methodology
Exploratory / Formulative Research:Exploratory research is a preliminary study of the subject matter. It aims to delve into the nuances of the problem. It is usually a preliminary study and is followed by descriptive, experimental research. It does not have a formal and rigid design as the researcher may 2

have to change his focus or direction, depending on the availability of new ideas and relationships among variables. It attempts to see what is there, rather than trying to predict the underlying relationships. An exploratory study usually involves three steps- a review of pertinent literature, an experience survey, and an analysis of insight stimulating cases. 1.4 Data Collection The secondary data has been used during the project for collection of data (information) the companies internal records were explored as well as the external sources like electronic media (web sites) were used. The Exploratory Type of Research has used in this project. Interpreting the Data: The data which was analyzed with various Graphs thereafter it have been Interpreted with various techniques by taking into consideration the ups & downs of the Graphs. Mapping potential of the Company:The data which was interpreted with various techniques, thereafter it has been given various suggestions for mapping the potential of the company. 1.5 Data Analysis With the help of Annual Report of the State Bank of Hyderabad & figures made available for Nanded City Region the present NPA of the Pune City Region are studied and analysis has been made in the project. On the basis of that analysis some Findings and Suggestions are given at the end of the project.

1.6Conclusion
However, the conclusion behind the project is, Bank has to keep tab on fresh additions by increasing quality advances and monitoring them. Critical care has to be taken of stressed accounts to keep control on fresh additions. Bank has to gear up efforts for upgrading S.S.A and recovery in D.A & Loss Assets. Staff in State Bank of Hyderabad has gained good experience to fight the menace of NPAs.

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CHAPTER 2nd

INTRODUCTION

2.INTODUCTION OF NPA
A Man without money is like a bird without wings, the Rumanian proverb insists the importance of the money. A bank is an establishment, which deals with money. The basic functions of commercial banks are the accepting of all kinds of deposits and lending of money. In general there are several challenges confronting the commercial banks in its dayto-day operations. The main challenges facing the commercial banks is the disbursement of 5

funds in quality assets (Loans and Advances) or other wise it leads to Non-performing assets. Since the dawn of independence, Indian financial sector in general and banking in particular has leaped giant strides into a systematized growth environment. Indian Banks have consolidated their growth year after year. Measures like setting up of Reserve Bank of India as the regulator, bank nationalization and other reforms have worked as catalyst in the development drive. There was always a need to have regulated, uniform and prudent accounting policies for the banks with special reference to the credit risk involved in lending activities so that the significant growth in the business volumes of banks was ably supported by a well set regulatory norms. As per the traditional frame of mind, banks tended to lean towards security-oriented approach in assessment of credit proposal as also subsequent classification of the assets in their books. Overemphasizing the security interest and other charges debited to a borrowers account was taken into income on the basis of accrual irrespective of the fact whether such interest and charges accrued earlier were actually realized or not. Such income was taken to Profit & Loss Account and dividend was declared on the basis of profits so arrived at. Loans were treated as realizable without actually looking into the record of recovery. All these resulted in overstating of profit and distorted depiction of the state of affairs of the banks in their books of accounts. The business of banking eventually is mobilization of low cost deposits and investment and making loans, advances and investments at higher rates of interest to generate surplus. Deposits are Liabilities and loans and advances are the assets of the bank. Interest on deposits is required to be paid by bank in regular period; hence, the assets of the bank must also generate a regular income by way of interest earnings. If an asset does not generate income at fixed intervals quarterly or half yearly, it becomes a Non-Performing asset. The asset is deemed to be performing only if it yields timely returns because time is essence in maintaining the liquidity, which enables the bank to make timely payment of interest on deposits. It is of poor consolation to know that the asset is fully secured as the availability of security does not mitigates the liquidity risk. The imbalance is cash flows due to irregular income may necessitate temporary market borrowings at high rate of interest cutting in to business profits. 6

PERFORMING ASSETS:An assets can be considered as a performing asset if, Prompt realization of interest debited to the advance account at periodical intervals. Prompt realization of installments pertaining to the principal amount of the advance.

MEANING:An asset that ceases to generate income for the bank is called Non-Performing Asset. NON-PERFORMING ASSETS:NPA are advances that have ceased to perform. An advance asset will cease to be a Performing asset and will be deemed to have become a Non-Performing asset when there is, A default in the payment of interest amounts, which are debited to the advance account. A default in the repayment of the installments pertaining to the principal amount of the advance. In initial stages of Income recognition, Assets Classification Guidelines, a amount due under any credit facility was treated as Past Due when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with Past Due concept, with effect from March 31, 2001. Accordingly, a from that date, a Non-Performing Asset shell be an advance where, (i) (ii) (iii) Interest and / or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, The account remains out of order for a period of more than 180 Days, in respect of an Overdraft / Cash Credit, The bill remains overdue for a period of more than 180 days in the case of Bills Purchased and Discounted, 7

(iv)

Interest and / or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half in the case of an advance granted for agriculture purpose, and

(v)

Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the 90 days Overdue norm for identification of NPAs, form the year ending March 31, 2004. Accordingly with effect form March 31, 2004, a Non-Performing Asset shell be a loan or an advance where; (i) (ii) (iii) (iv) Interest and / or installment of principal remain overdue for a period of more than 90 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, The bill remains overdue for a period of more than 90 days in the case of Purchased and Discounted, In case of direct agricultural advances, the overdue norms specified below are applicable; (a) Loan granted for short duration crops will be treated as NPA, if installment of principal or interest thereon remains outstanding for two crop seasons. (b) Loan granted for long duration crops will be treated as NPA, if installment of principal or interest thereon remains outstanding for one crop seasons. (c) (v) For Agriculture term loans, the norms would depend on type & crop cultivated by Agriculturist. 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 case where the outstanding balance in the principal operating account is less than the sanctioned limit/ 8

drawing power, but there are no 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 account 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.

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CHAPTER 3rd

OBJECTIVE

3.OBJECTIVE

Study the concept of Non-Performing Assets. Study present status of NPAs in Nanded City Region of State Bank of Hyderabad.

10

 Comparative Study of NPA of the Region for 4 Years. Remedial steps taken by the Region in order to reduce the NPA. To find out the effect of NPA on the financial health of the Region. To make the suggestions to overcome the problems of NPA in Nanded City Region of State Bank of Hyderabad.

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CHAPTER 4th

11

COMPANY PROFILE

4.COMPANY PROFILE

STATE BANK OF HYDERABAD

12

Philosophy
TECHNOLOGY WITH PERSONAL TOUCH
It is this philosophy that enables State Bank of Hyderabad to reach out to its customers and cater to the needs of the classes and masses.

EMBLEM
The Deepmal- With its many lights rising to greater heights. The Pillar- Our institution- symbolizing strength. The Diyas- Our branches-Symbolizing services.

3Ms
MOBILISATION OF MONEY MOTIVATION MODERNISATION

4.1 BOARD OF DIRECTORS

NAME Shri. Pratik chaudhuri DESIGNATION Chairman, Ex-officio under section 25(1)(a) of the state bank of india (subsidiary banks) Act,1959 13

Shri.M Bhagavantha Rao. Shri.Kaza Sudhakar

Managing Director Director, Nominated by the Reserve Bank India. Director, Nominated by state bank of india. Directotr, Nominated by Govt of India. Director, Nominated by Govt of India. Director Director Nominated by SBI. Director, Nominated by Govt of India. Director

Shri.B.S. Gopala Krishna Shri.P.Narasimha Shri.S.Gopal Krishna Shri Anand Kamalnayan Pandit Shri.Venkat Chagavalli Shri.Gopal Vaidya Shri.Ramesh Datta

4.2 STATE BANK OF HYDERABAD

State Bank of Hyderabad was constituted as Hyderabad State Bank on 08.08.1941 under Hyderabad State Bank Act, 1941. The Bank started with the unique distinction of being the central bank of the erstwhile State of Hyderabad, covering present-day Telangana region of Andhra Pradesh, Hyderabad Karnataka of Karnataka state and Marathwada of Maharashtra state, to manage its currency Osmania Sikka and public debt apart from the functions of commercial banking. The first branch of the bank was opened at Gunfoundry, Hyderabad on 5th April, 1942. In 1953, the Bank took over the assets and liabilities of the Hyderabad Mercantile Bank Ltd. In the same year, the Bank started conducting Government and Treasury business as 14

agent of Reserve Bank of India. In 1956, the Bank was taken over by Reserve Bank of India as its first subsidiary and its name was changed from Hyderabad State Bank to State Bank of Hyderabad. The Bank became a subsidiary of State Bank of India on the 1st October 1959 and is now the largest Associate Bank of State Bank of India. All the branches of the Bank are totally networked under Core Banking Solutions, offering a vide range of products to its customers. All the customers of the Bank have access to the latest technologies like Internet Banking, ATMs etc. The Bank has pan India presence and operates through more than 1000 Bank branches.

Company Profile: Exchanges: Total Deposits: Total Advances: Major Industry: Sub Industry: Country: Employees:

State Bank Of Hyderabad SBH 33919.34 Crores 23462.00 Crores Financial Sector Commercial Banks INDIA 13893

4.3 Special Services: Credit card and Visa Debit Card facilities, keeping the pace with the market conditions.Bank has tied up with Master card International and Visa Card to impart plastic money facility to the customers. ATM facility, Tele banking, Depository services, Touch screen facility and Mobile Van information center facility for rural areas. 583 Rural and semi urban branches are to be computerized with small TBA solutions up to march 2007. 15

 Bank has implemented Real Time Gross Settlement (RTGS) system for customer transactions and inters bank payments in 368 branches. Cheque Truncation System is run on pilot basis and will be implementing as RBI time schedule.

Services
Demat/Depository Services ATM Services ATM Locations Download service_charges.doc Electronic Fund Transfer System Internet Banking Service Charges RTGS , NEFT & GRPT Cash Management Products Divident Warrants Cheque Collection Policy Safe Deposit Lockers RISET Information and Formats Customer Service Frequently Asked Questions (FAQ) NEFT - Contact Details of Customer Facilitation Centres Settlement of claims in respect of Deceased Depositors

Mobile Banking New Pension System ATM Complaint Template

4.4 Future Plans: Systematic approach for reducing Net NPA level to below .05%. Consolidation of Regional Rural Banks sponsored by state bank of Hyderabad Establishing ATM network of more than 345 ATMs with on-line connectivity across the country. Extensive use of Wide Area Network-MAHANET inter-connectivity of branches by providing more customer-centric applications like Any Branch Banking Service, Demat etc. 16

 Extending RTGS facility to 368 branches. Moving towards Core Banking Solution (CBS) by implementing in 600 branches. SHGs with special reference to agriculture to be promoted and financing be implemented so as to increase financing to small and marginal farmers.

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CHAPTER 5th

17

LITERATURE SURVEY

5.Literature Survey
The concept of Non-Performing Assets was introduced for the first time in the Narasimham Committee report that was tabled in parliament on Dec.17 1991.The Committee Studied the prevailing financial system, identified its short comings and weakness and made various recommendations with regard to non-performing assets, their identification, disclosure and the extent of provisioning same. The need was felt because the prevalent accounting and disclosure practices did not always reflect the true state of affairs of banks and Financial Institutions. Based on the Narasimham Committee recommendations, RBI 18

has implemented the prudential norms for improving the financial heath of commercial banks and the quality of their loan portfolio.

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CHAPTER 6th

19

Research Design

6.1 Introduction of Research

Research is an ORGANIZED and SYSTEMATIC way of FINDING ANSWERS to QUESTIONS

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SYSTEMATIC: - Systematic because there is a definite set of procedures and steps which you will follow. There are certain things in the research process which are always done in order to get the most accurate results.

ORGANIZED: - Organized in that there is a structure or method in going about doing research. It is a planned procedure, not a spontaneous one. It is focused and limited to a specific scope.

FINDING ANSWERS: - Finding Answers is the end of all research. Whether it is the answer to a hypothesis or even a simple question, research is successful when we find answers. Sometimes the answer is no, but it is still an answer.

QUESTIONS:-Questions are central to research. If there is no question, then the answer is of no use. Research is focused on relevant, useful, and important questions. Without a question, research has no focus, drive, or purpose.

Research Methodology:Research Methodology is the systematic design, collection, analysis & reporting of data & findings, relevant to appraisal specific situation facing the company. The Research was an exploratory type, which aims at finding the true potential of the organization and also a qualitative analysis regarding the Recovery Performance of NPA of a Nanded City Region of State Bank of Hyderabad.

6.2

Type of Research

Exploratory / Formulative Research:-

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Exploratory research is a preliminary study of the subject matter. It aims to delve into the nuances of the problem. It is usually a preliminary study and is followed by descriptive, experimental research. It does not have a formal and rigid design as the researcher may have to change his focus or direction, depending on the availability of new ideas and relationships among variables. It attempts to see what is there, rather than trying to predict the underlying relationships. An exploratory study usually involves three steps- a review of pertinent literature, an experience survey, and an analysis of insight stimulating cases. Learning the Theoretical aspects:Various books on Non-Performing Assets have been collected from State Bank of Hyderabad (Library) and the theoretical aspects have been understood.

Analyzing the Data:The data of Recovery Performance of Nanded City Region of State Bank of Hyderabad was collected and analyzed with various Graphs.

6.3

Data Collection
-

Primary Data:

Primary Data is one, which is collected by the investigator himself for the purpose of a specific inquiry or study. Such data is original in character and is generated by surveys conducted by individuals or research institution. In this research there is no need of primary data. Secondary Data:When an investigator uses the data, which has been already collected by others, such data is called secondary data. Secondary sources of data provide wealth of information to the researcher.

22

Collecting the Data:Collecting sources of data is of two types, i.e. Primary Data & Secondary Data. Data used in this project is Secondary Data, which is collected from nanded city region state bank of Hyderabad. Various articles like Annual Report, Reference Books have been collected.

During this project for the collection of data (information) the companies internal records were explored as well as the external sources like electronic media (web sites) were used.

6.4

Data Classification & Tabulation

The Narasimham Committee gave a thought that income recognition should be done on scientific basis. The screening should be done to expose the bad and doubtful assets. This would help in preventing further deterioration in the value of asset. The Recommendations of Narasimham Committee were divided in to Three parts which are as follows:-

6.4.1 INCOME RECOGNITION:The policy of Income Recognition should be objective and based on record of recovery rather than any subjective considerations like availability of security, net worth of borrower / guarantor etc. Income accounting in case of NPA is, therefore, based on actual realization. Government Guaranteed Advances:If any income with respect to advances guaranteed by Governments remain overdue for specified period and thereby advance becomes NPA, interest on such advances should not be taken to income account, unless the same is realized.

Renegotiated / Rescheduled Advances:23

Fees and Commission earned by the banks due to renegotiation or rescheduling of outstanding advances should be recognized on accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit.

6.4.2 Appropriation of recovery in NPAs:Interest realized on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh / additional credit facilities sanctioned to the borrower concerned. In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs, banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.

6.4.3 Reporting of NPAs:Banks are required to furnish a report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks global portfolio, including the advances at the foreign branches. While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense Account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report. Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.

6.5 ASSETS CLASSIFICATION:-

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Classification of Assets should be done on the basis of objective criteria with uniform and consistent application of norms duly ensured. There are generally three ways of classification of assets, which are given as under:

Assets classification under Health Code System:Under the Health Code system, bank are required to classify the advances under any one of the heads depending upon the status of the account, dealings, availability of security cover, etc.

Asset Classification for Final Accounts:Banks are required to prepare their final accounts as per Third Schedule to the Banking Regulation act, 1949 which bankers / auditors are well conversant with.

Assets Classification under Prudential Norms:Under the prudential norms of asset classification, banks are now required to classify their advances in the following four broad groups:-

(a) Standard Assets:These are assets which are Performing and do not disclose any weakness and do not carry more than normal business risk.

(b) Sub-Standard Assets:These are assets which have ceased to Perform but which have not completed a period of 18 months (now 12 Months) after getting classified as Non-performing and there is no threat to recovery on account of erosion in the realizable value of security or due to non25

availability of security or due to other factors, to the extent that the account is to be classified either as Doubtful Assets or as Loss Assets. With effect from 31st March, 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months.

(c) Doubtful Asset:These are accounts which have completed a period of 18months (now 12 Months) after getting classified as Sub-standard Assets. A loan classified as doubtful has all the weakness 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. With effect from March 31st, 2005, an asset would be classified as doubtful if remained in the sub-standard category 12 months.

(d) Loss Assets:

A Borrower account in which a loss has been identified by the internal or external auditors or by the RBI inspectors. The releasable value of security in the accounts is very little.

Guidelines for Classification of Assets:Classification of Assets in to above categories should be done taking into account the degree of well-defined credit weakness and the extent of dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value 26

account depending upon their respective business level. The cut of point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. Upgradation of Loan Accounts classified as NPAs:-. If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as standard accounts. Accounts regularized near about the balance date:The asset classification of borrowal account where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors / Inspecting Officers about the manner of regularization of the account to eliminate doubts on their performing status.

s Asset Classification to be borrower-wise and not facility-wise:It is difficult to envisage a situation when only one facility to a borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or part thereof which has become irregular. If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a 27

part of the borrowers principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning.

Government guaranteed Advances:The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income. With effect from 1st, April, 2000, advances sanctioned against State Government Guarantees should be classified as NPA in the normal course, if the guarantee is invoked and remains in default for more than two quarters. With effect from March 31st, 2001 the period of default is revised as more than 180 days and with effect from March 31st, 2004 the period of default would be revised as more than 90 days. Advances under rehabilitation approved by BIFR / TLI:Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been renegotiated unless the package of re-negotiated terms has worked satisfactorily for a period of one year. While the existing credit facilities sanctioned to a unit under rehabilitation packages approved by BIFR / Term Lending Institutions will continue to be classified as sub-standard or doubtful as the case may be, in respect of additional facilities sanctioned under the rehabilitation packages, the Income Recognition, Asset Classification norms will become applicable after a period of one year from the date of disbursement.

6.6 PROVISIONING NORMS:In order to narrow down the divergences and adequate provisioning by banks, it was suggested that banks statutory auditors, if they so desire, could have a dialogue with RBIs Regional Office / Inspectors who arrived out for banks inspection during the previous year with regard to the accounts contributing to the difference.

28

Pursuant to this, regional offices were advised to forward a list of individual advances, where the variance in the provisioning requirements between the RBI and the bank is above certain cut off levels so that the bank and the statutory auditors take into account the assessment of the RBI while making provisions for loan loss, etc. The primary responsibility for making adequate provision for any diminution in the value of loan assets, investment of other assets is that of the bank managements and the statutory auditors The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. In conformity with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories as detailed above. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realization of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against loss assets, doubtful assets and sub-standard assets as below: (a) Loss Assets:The entire assets should be written off after obtaining necessary approval from the competent authority. If the assets are permitted to remain in the books for any reason, 100 per cent of the outstanding should be provided. In respect of an asset identified as a loss asset, full provision at 100 per cent should be made if the expected salvage value of the security is negligible. (b) Sub-standard Assets:A general provision of 10 per cent on Total Outstanding should be made without making any allowance for DICGC / ECGC guarantee cover and securities available. 20% provision in case of advances where there was no security/clean form at the time of sanction. 29

(c) Standard Assets:Banks are providing for Standard Assets @ 0.25% till 2006. Now the provisions are as under with effect from 2006-07. (1) Direct Advances to agriculture & SME sectors: (2) Residential housing loans beyond 20 Lakhs: (3) Personal Loans, Advances qualifying as capital market Exposures & Commercial real estate loans: (4) Other standard advances: (d) Doubtful Assets:100 per cent of the extent to which the advance is not covered by the realizable value of the security to which the bank has a valid recourse should be made and the realizable value is estimated on a realistic basis. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 per cent to 100 per cent of the secured portion depending upon the period for which the asset has remained doubtful: 0.40% 0.25% 0.40% 2.00%

30

Period for which the advance has been Provision Requirement Percentage. considered as Doubtful Category. Up to One Year One to Three Years More Than Three Years (1) Outstanding stock of NPAs as on March, 31, 2004. 20% of secured portion + 100% for unsecured portion. 30% of secured portion + 100% for unsecured portion. 50% as on March, 31, 2004 of secured portion + 100% for unsecured portion --- 60% with effect from March, 31, 2005. of secured portion + 100% for unsecured portion --- 75% with effect from March, 31, 2006. of secured portion + 100% for unsecured portion --- 100% with effect from March, 31, 2007. of secured portion + for unsecured portion (2) Advances Classified as Doubtful for more than three years on or After April, 1, 2004. --- 100%

6.7 Floating Provisions:Some of the banks made a floating provision over and above the specific provisions made in respect of accounts identified as NPAs. The floating provisions, wherever available, could be set off against provisions required to be made as per above stated provisioning guidelines. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice.

6.8 Provisions on Leased Assets:31

6.8.1 Sub-Standard Assets:(1) 10 percent of net book value. (2) As per the Guidance Note on Accounting for Leases issued by the ICAI, Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account of financial statements. Statutory depreciation should be shown separately in the profit and loss Account. Accumulated depreciation should be deducted from the Gross Book Value of the leased asset in the balance sheet of the lessor to arrive at the net book value. (3) Also, balance standing in Lease Adjustment Account should be adjusted in the net book value of the leased assets. The amount of adjustment in respect of each class of fixed assets may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate column in the section related to leased assets.

6.8.2 Doubtful Assets:100 percent of the extent to which the finance is not secured by the realizable value of the leased assets. Realizable value to be estimated on a realistic basis. In addition to the above provision, the following provision on the net book value of the secured portion should be made, depending upon the period for which the asset has been doubtful.

6.8.3 Loss Assets:The entire asset should be written off. If for any reasons, an asset is allowed to remain in books, 100 percent of the net book value should be provided for.

6.9 Write Off of NPAs:In terms of Section 43(D) of the Income Tax Act, 1961, income by way of u\interest in relation to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to the banks profit and loss account or 32

received, whichever is earlier. This stipulation is not applicable to provisioning required to be made as indicated above. In other words, amounts set aside for making provision for NPAs as above are not eligible for tax deductions. Therefore, the banks should either make full provision as per the guidelines or write off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/ tax consultant. Recoveries made in such accounts should be offered for tax purposes as per the rules.

6.10 GENERAL REASONS FOR ASSETS BECOMING NPAs:A multiplicity of factor is responsible forever increasing size of NPAs in banks. A few prominent reasons for assets becoming NPAs are as under. Poor credit appraisal system. Lack of proper monitoring. Reckless advances to achieve the budgetary targets. Change in economic policies/ environment. No transparent accounting policy and poor auditing practices. Lack of coordination between banks. Directed lending to certain sectors.

There is no or lack of corporate culture in the Bank. In adequate legal provisions on foreclosure and bankruptcy.

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6.11 CAUSES OF NPA:There are many causes for performing assets becoming Nonperforming. The following are some of the general causes which Contribute to creation of NPAs and the same can be categorized under three Classes:-

(1) Causes attributable to the Promoter / Borrower: Bad intention of securing wrongful gains from banks by availing advances by misrepresentation of facts. Financial indisciplinediversion of funds for unapproved purposes. Mismanagement of Units / Projects---willful or otherwise. Lack of professional management. Death / disability of the chief promoter / person behind the show. Inability to tie up the funds required as margin (promoters contribution) as per the projection furnished. Problems due to adverse exchange fluctuations faced by exporters/ importers. Inadequate control / supervision resulting in time and cost overrun. Low priority to technology upgradation and inadequate attention to research and development, quality control etc. Differences / disputes amongst promoters---family splits, lack of co-ordination among partners, groupings among the directors of the company etc. Huge deviation in the demand.

(2) Causes attributable to the Bank: 34

 Delay in decision making and sanction of credit facilities. Defective / deficient monitoring and supervision of advance accounts. Improper /poor credit appraisal due to lack of expertise and scales required for critical pre-sanction scrutiny of loan proposals. Non-availability of reliable market and industry relevant data on demand / supply scenario. Compromise on project viability with overemphasis on security while assessing the loan proposals. Disbursement of advance facilities before compliance of terms ad condition of sanction and incomplete / defective documentation. Delayed and / or non detection / diagnosis of warning signals and inaction in the initiation of the remedial measures. Long pending judicial proceedings and protracted legal battles in courts act more as a cover to the defaulting borrowers. Lack of government support and apathy of public to banks recovery efforts. Non observance of banks well laid down norms and systems and of preventive / precautionary measures facilitating perpetration of frauds by insiders / outsiders.

(3) Causes beyond the control of banks and borrowers: Political uncertainties. Frauds committed by outsiders, with or without the collusion of outsiders. Inadequate infrastructure facilities such as supply of power and other essential inputs. 35

 Debt Relief Schemes introduced by some states for political mileage have vitiated the repayment culture and has resulted in a large number of willful defaulters. Inconsistency in judicial verdicts as a result of improper presentation of facts. Outdated laws, labour unrest / lockouts / strikes, riots etc. Law and order problems affecting commercial and industrial activity in certain parts of the country. Natural calamities like earthquakes, draughts and floods, etc., resulting in largescale destruction of properties and life.

6.11 SOME OF THE INDICATORS SUGGESTING SLIPPAGES TO NPA:A borrower account will not become NPA overnight. Like a major disease to human body, it does give symptoms beforehand. It is only up to the banker to take sight of these symptoms and initiate timely remedial measures to prevent the account from actually slipping in to NPA. On the basis of auditors experience of banks, the following notable indications would be available in different types of borrowers accounts:(1) Cash Credit / Overdraft: Increasing number of goods returned by the clients. Increasing number of unrecoccilied book debts. Increasing number of incidences of debit / credit notes in the books of accounts. Self Cheques presented through some other bank. Huge cash withdrawals without proper explanation. 36

 Frequent requests for temporary overdrawing. Frequent requests for release / exchange of securities. Increase in transactions in personal accounts of proprietor / partner / directors. Unexplained delay in submission of financial statements and tax returns.

(2) Bills Discounted / Purchased: Incidences of accommodation bills. Gradual increase in realization period. Frequent incidences of partial realization of bills. Gradual increase in dishour of bills discounted and return of bills purchased. As guidance, dishonor / return of bills in excess of 5% of bills may be taken as the danger signal. Frequent requests for discount / purchase of bills draw on parties outside the list of drawers approved by the bank. Requests for meeting the amount of dishonored / returned bills from out of discount / purchase of fresh bills.

(3) Letter of Credits / Bank Guarantees: Invocation of Bank Guarantees / development of Letter of Credit. Non receipt of original LC / BGs bonds after expiry and several reminders.

(4) Term Loans: Misconception of the project. 37

 Undue and unreported delay in project implementation. Non-introduction of margin from time to time and mis-utilisation of loan proceeds. Default in payment of installments / interest. Frequent breakdowns in plant and machinery. Drastic fluctuations in operational efficiency and capacity utilization. Labour unrest in the plant. Disposal / replacement of vital plant and machineries without the consent of the bank and without putting an effective alternative arrangement in place.

(5) Foreign Exchange Finance: Incidences of accommodation and kite flying. Frequent overdue in PCL without genuine reasons. Frequent cancellation of orders by the overseas buyers. Increasing delay in realization of export bills. Huge uncovered Foreign Exchange position. Frequent return of goods. Drastic changes in the economic / political atmosphere in the importers country. Serious violation of FEMA / RBI Guidelines by the exporters attracting penal action.

(6) Other General Warning Signals:-

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 Opening of bank accounts with other banks without the consent of the lending banker. Unrecoccilied branch accounts where borrowers have branches elsewhere. Unexplained swing in the behavioral pattern of the borrower. Noticeable reduction in ancillary business like DDs, TTs, etc. Notice by partner / director of the borrowing firm / company of irregularities. Death of key person in the conduct of business of the borrowers. Suits filed against the borrowers other than in normal course of business. Issuance of notices to the borrowers from the respective body for not meeting statutory dues like Income Tax, Sales tax, Excise, ESIC etc Receipt of attachment orders as a result of non payment of any of the above duties. Material changes in the demand / supply scenario and supply of raw material potent enough to pose serious threat to the economic viability of the project / business.

The above list is not exhaustive and each case of advance may require special attention depending on each case. As the saying goes, a stitch in time saves nine. It is the alertness and constant vigil exercised at the operational levels along with quality monitoring and timely follow-up of borrower accounts that will prevent fresh slippages from performing to non-performing. The practical banker should develop necessary skill to take note of the warning signals and initiate necessary corrective action. In order to build-up and maintain a portfolio of quality advances, it is essential to meticulously follow the good and time-tested systems and procedures. The best way to

39

tackle NPA menace is to prevent fresh additions to this undesirable club and, at the same time, putting vigorous efforts to reduce the size of existing NPA segment.

6.12 GENERAL METHODS OF MANAGEMENT OF NPAs:The management of NPA is the difficult task in practice. Management of NPAs means, how to settle the NPAs account in the books. In simple it focuses on the methods of settlement of NPAs account. The methods are differs from bank to bank. The following paragraph explains some general methods of Management of NPAs by the bank. The same information is given in the chart.

C C Compromise L L Legal remedies R R Regular Training Program R R Recovery Camps W W Write offs

S Spot Visit Rehabilitation of potentially viable u units u

O O Other Methods

(1) Compromise:- General Methods of Management of NPAs

40

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

(2) Legal remedies:The legal remedies are one of the methods of management of NPAs. The banks observed that the borrower is making willful default; no more time should be lost instituting appropriate recovery proceedings. The legal remedies are: Filing civil suits. Filing criminal suits under sec.138. Filing suits in DRT. 41

 Use of SARFAESI Act for quick recovery. Putting cases to Lokadalat. (3) Regular Training Program:The all levels of Staff, Officers should undergo the regular training program on credit and NPA management. It is very useful and helpful to the Staff, Officers & Executives for dealing with proper appraisal of advances & using correct techniques for NPA recovery & reduction.

(4) Recovery Camps:The banks should conduct the regular or periodical recovery camps in the bank premises or some other common places; such type of recovery camps reduces the level of NPAs in the Banks. (5) Write offs:Write offs is also one of the common management techniques of NPAs. The assets are treated as loss assets, when the bank writes off the balances. The ultimate aim of the write off is to clean the Balance sheet. (6) Spot Visit:The bank officials should visit to the borrowers business place or borrowers field regularly or periodically & should have continuous meaningful dialogue, it will help in proper diagnosis of reasons and deciding correct course of action for recovery. It is also help full to the bank to control or reduce the NPAs limit.

(7) Rehabilitation of potentially viable units:-

42

Technically feasible & economically viable NPA units can be rehabilated through rescheduling, rephrasing, additional financial support, interest rebate, etc. This will help the units to come back on the track & start generating income to banks overdue & come out of NPA status.

(8) Other Methods: Persistent phone calls. Media announcement. Help of recovery agents. Help of advocates for speedy disposals. Upgradation of account through recovery of overdue amount.

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43

CHAPTER 7th

Data Analysis & Interpretation

44

RECOVERY OF NON-PERFORMANCE ASSET OF NANDED CITY REGION

(Rs. In Crores) 2007 133.47 19.72 3.35 2.40 25.47 108.00 48.05 156.05 2008 156.05 20.21 2.37 5.25 27.83 128 60.01 188.23 2009 188.23 17.75 0.49 9.59 27.83 160 34.20 194.60 2010 194.60 32.49 0.57 27.82 60.88 135 13.08 147.74

TABLE-1 YEAR Opening NPA Reduction in Ledger Balance Due to Recovery Up gradation Written off Total Reduction Sub total Fresh Additions Closing NPAs

TABLE-1.1 CLOSING LEVEL OF NPAs

(Rs. in Crores) YEAR 2007 2008 CLOSING NPA AMT 156.05 188.23 TOTAL ADVANCES 1399.90 1650.92 IN % 11.14 11.40 45

2009 2010

194.6 147.74

2280.67 3180.94

8.53 4.64

GRAPH.1.1

CL INGNP OS A
12 10 8 8.53 11.14 11.4

% N I

6 4 2 0 2007 2008 4.64

2009 YE AR

2010

Interpretation:The above table & graph is giving information about closing NPA level for the year 2007, 2008, 2009 & 2010. It is observed on the basis of above table that the closing NPA level has increased continuously for three years and finally reduced by good margin in 2010. It is very important to keep NPA level much low & have a reducing graph. Recovery department

46

plays a vital role for keeping the NPA level low by negotiating to various recovery techniques. Most important ways to keep the graph coming down is as under. (1) Acquiring quality assets only through proper selection of borrowers. (2) Acquiring quality assets through proper technical, commercial, financial, managerial, organizational, legal, environmental, economical, social and risk appraisal. (3) Continue pre and post sanction visits by different officers where by any deteriation in health of account can be spotted by either of them. (4) Immediate timely steps for support in deserving cases. (5) Immediate timely steps for recovery may be by way of criminal, legal, compromise Lokadalat, SARAFAESI act etc. (6) Help of various government organization & authorities NGOS, farmers clubs, SHGS deployment of recovery agents, and incentives to advocates for early execution may also help in recovery NPAs & put a tab on closing NPAs.

TABLE1.2. RECOVERY IN LEDGER BALANCE

(Rs. in Crores) YEAR 2007 RECOVERY AMT 19.72 OPENING NPAs 133.47 IN % 14.77 47

2008 2009 2010

20.21 17.75 32.49

156.05 188.23 194.60

12.95 9.42 16.69

GRAPH.1.2

RECOVERY IN LEDGER BALANCE

18 16 14 12 10 8 6 4 2 0 16.69 14.77 12.95 9.42

IN %

2007

2008 YEAR

2009

2010

Interpretation:The above table & graph is giving information about recovery in ledger balance. It is observed that on the basis of above figures that the recovery from opening NPAs in the year 2007 was 14.77%, in 2009 it was 12.95%, but in the year 2006 it was 9.42%. However, in the year 2010 recovery was improved and it was 16.69%. Thus the target is 48

achieved professionally only because of good recovery techniques. It is also seen that the total NPAs increased because of fresh additions in respective years. The recovery in NPAs can help Bank to use such amount for better earning by giving credit to quality borrowers. Recovery helps in getting write back in provisions already made which helps in improving the bottom line of the bank. Good recovery gives moral boost to the staff to work more for enhanced recovery in remaining NPA account

TABLE1.3. UPGRADATION OF NPA

(Rs. In Crores) YEAR UP GRADATION TOTAL NPAs IN %

49

AMT 2007 2008 2009 2010 3.35 2.37 0.49 0.57 156.05 188.28 194.60 147.74 2.14 1.25 0.49 0.38

GRAPH.1.3

UPGRADATION OF NPAs
2.5 2 IN % 1.5 1 0.5 0 2007 2008 YEAR 2009 2010 0.49 0.38 1.25 2.14

Interpretation:Above table & graph is giving information about up gradation of NPA.

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The up gradation means to recover overdue amount due in given NPA account. If regularized it is withdrawn from NPA category. This account is then classified as a standard account for balance amount. In the above table it is observed that in year 2007 up gradation amount was in percentage 2.14%, but in year 2008 to2010 is much less as compares to previous year. Just with small recovery in the NPA amount, total outstanding amount is removed from NPA category and is classified as standard assets. Especially sub-standard assets if are followed for amount, bank can substantially reduce NPAs by up gradation and get write back in provisions. Immediate steps for recovery in hard cases like legal use of SARFAESI act may prove to be stitch in time. The figures must show improvements every year.

TABLE1.4 WRITE OFF A/C

(Rs. In Crores)

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YEAR 2007 2008 2009 2010

WRITE OFF AMT 2.4 5.25 9.59 27.82

TOTAL NPAs 156.05 188.28 194.60 147.74

IN % 1.53 2.78 4.92 18.83

GRAPH1.4

WRITE OFF NPAs

20 15 IN % 10 5 0 2007 2008 YEAR 2009 2010 4.92 1.53 2.78 18.83

Interpretation:The above table & graph is giving information about write off figure.

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The write off means taking away the non- performing assets from balance sheet. It is cleaning of the balance sheet. With the help of figures, we can observe that every year the write off is increasing and year 2010 it is in percentage 18.83% which also shows sustained growth in profit allowing higher write off. Regarding to write off the loss account for full amount as Banks has made 100% provision for loss accounts unless recoverable there is no need to continue such loss assets in the books of banks. Thus number of account will reduce and the recovery officer may concentrate on other NPA accounts. However, branches should concentrate on recovery in write off account as such recovery amounts to 100% additions to profit of the banks. Various techniques especially compromise in write off; can help a long way to recover in write off accounts.

TABLE 1.5. FRESH ADDITIONS DURING THE YEAR

(Rs. In Crores) 53

YEAR 2007 2008 2009 2010

FRESH NPAs AMT 48.04 60.01 34.2 13.08

TOTAL ADVANCES 1399.90 1650.92 2280.67 3180.94

IN % 3.43 3.63 1.49 0.41

GRAPH1.5

FRESH NPAs
4 3.5 3 2.5 2 1.5 1 0.5 0 3.43 3.63

IN %

1.49 0.41

2007

2008 YEAR

2009

2010

Interpretation:The above table & graph is giving information about additional fresh NPA during the yr 54

Bank must concentrate on reduction of fresh additions to NPA which should be minimized as compared to previous years. In above table we can see that in year 2007 fresh additions are in percentage 3.43% which were quit high, but in year 2008 fresh additions were in percentage 3.63% however, in the year 2009 it decreased and in year 2010 fresh additions had been quite low as compared to previous years. So, Branches must concentrate more on following of such stressed account which can slip down to NPAs. Improving appraisal techniques and financing for only quality credit is the better solution to reduce fresh slippages. Control of fresh slippages is the real control on NPA assets.

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CHAPTER 8th
55

FINDINGS

8. FINDINGS
56

(1) Absolute NPAs increased in 2008 over 2007 and again in 2009 over 2008. (2) Due to increase in amount of total advances the % NPA had been around the same in 2008 over 2007. In 2009 because of quantum jump in advances the NPAs % came down to 8.53% inspite of increase in absolute NPAs. (3) In 2010 nanded city Region did exceptionally well in reducing Gross NPAs as well as a big leap in advances amount. The result has been fabulous reduction in NPA % to 4.64% which is Banking Industry average. (4) If the trend of Gross reduction in NPAs and increase in quantum of quality advances is continued, the nanded City Region would be an example to follow for other Regions of the Bank and also other Banks.

(Refer to graph 1)
(5)The Region has done exceptionally well in recovery in NPA in 2010 over 2009. The recovery from opening NPAs in the year 2007 was 14.77%, in 2008 it was 12.95%, but in the year 2009 it was 9.42%. However, in the year 2010 recovery was improved and it was 16.69%. Thus the target is achieved professionally only because of good recovery techniques. It is also seen that the total NPAs increased because of fresh additions in respective years.

(Refer to graph 2)

(6) The Region has little to its credit as regards efforts in up gradation of NPA accounts. 57

This area needs special attention.

(Refer to graph 3)
(7) The Write off amount has increased every year. Reduction of NPA is due to heavy write off which is not a good sign of real achievement. However, recovery in write off will help in increasing profits.

(Refer to graph 4)
(8) Fresh Additions are controlled in 2009 over 2008 and there is repeat performance in 2010 over 2009. This is a very positive sign of restricting NPAs.

(Refer to graph 5)

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58

CHAPTER 9th

CONCLUSION

9.CONCLUSION
59

NPA is a double-edged weapon, which affects bank profitability due to interest income not being recognized on NPA accounts and creation of provision from hard earned profit amount. The bank must adopt structured NPAs management policy for elimination or reducing the NPAs in the Bank. State Bank of Hyderabad has adopted very good techniques to control the NPAs.

State Bank of Hyderabad was facing a problem of NPA in 1992 to 2000.Thereafter the bank has taken over the problem & achieved remarkable success in containing the NPAs. There has been consistent recovery on NPA for many years but the problem was fresh additions. Now Bank has turned almost the corners in fresh additions also. The Percentage of Gross NPAs & Net NPAs is much in line with other Nationalized Banks & especially peer group. The recovery in 2007 has been the highest for last many years.

However Bank has to keep tab on fresh additions by increasing quality advances and monitoring them. Critical care has to be taken of stressed accounts to keep control on fresh additions. Bank has to gear up efforts for upgrading S.S.A and recovery in D.A & Loss Assets. Staff in state bank of Hyderabad has gained good experience to fight the menace of NPAs.

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60

CHAPTER 10th

RECOMMENDATIONS

10. RECOMMENDATIONS & SUGGETIONS

61

 Monitoring Officers should be assigned the responsibility of monitoring the A/c with special efforts to maintain and upgrade the asset quality. Identify critical branches for recovery. Fix target for recovery and draw time bound action plan. Proper appraisal of new proposals so that credit quality is given more importance. Proper selection of borrowers so that real entrepreneurs can be provided credit and willful defaulters can be avoided. Training of staff for improving credit appraisal abilities, improving techniques in recovery, negotiations, understanding legal formalities. Forming recovery teams at the branch or team of staff pooled from branches with in the city. Distribution of accounts for monitoring & NPA recovery within all staff members so that they feel that monitoring an NPA recovery is a job of all staff members. Weekly meeting of staff to take stock of recovery made in each account and deciding fresh strategies for achieving planned targets. Uses of Lokadalat facility so that legal expenses can be reduced and further appeals are stopped. Use of SARFAESI Act so that recovery can be done without intervention of courts and time is saved. 62

 Resorting to criminal actions in misuse cases and also under sec.138 by obtaining post-dated Cheques. Early disposals of legal suits pending in courts & effective execution of decrees. Rephasing & rescheduling in NPA account so that they can be upgraded within one year from first repayment installment date. Compromise in suitable cases with immediate decision. Incentive to staff doing good work in NPA recovery. NPA free branches target be set up.

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63

CHAPTER 11th

BIBLIOGRAPHY

11.BIBLIOGRAPHY
64

Bankers guide to Non-Performing Advances: By S. D. Yardi. V. S. Prabhu. Management of Non-Performing Assets: By N. P. Agarwal. S. C. Jain. Web site of State Bank of Hyderabad: www.sbhyd.com Web site of Reserve Bank of India: www.rbi.org.in

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