Attachment

Study on nonperforming assets of Karnataka vikas grameena bank
An empirical study on the non-

performing assets of Karnataka vikas
grameena bank in akki alur .
1ST CHAPTER. INTRODUCTION: -
A strong banking sector is important for flourishing economy. One of the most
important and major role played by banking sector in that of lending business. It is generally
encouraged because it has the effect of funds being transferred from the system to productive
purpose, which also results into economic growth. As there are pros and cons of everything.
The same is with lending business that carries credit risks, which arises from the future of
borrower to fulfill its contractual obligations either during the course of a transaction or on a
future obligation.
The failure of banking sector may have an adverse impact of other sector. 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 affects the profitability and net-worth of banks and erodes the value of the
assets. The NPAs growth involves the necessity of provisions, which reduces the overall profits
and shareholders value.
The issue of NPAs 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 cause for an account becoming non performing , projection of NPAs over next years
in banks and concluding remarks.
Kupg Centre kerimattihalli, Haveri

The magnitude of NPAs have a direct impact on banks profitability legally they are not
allowed to book income on such account and at the same time banks are forced to make
provisions on such as per RBI guidelines. The RBI has advised all state cooperative banks as well
as the central cooperatives 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.
An assets is classified a non-performing assets (NPAs) if dues in the form of principal

and interest are not paid by the borrower for a period of 180 days. However with affect 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 non-performing. 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 these may still exists certain advances /
credit facilities having performing status.
The NPAs level of our banks is way high than international standards. One cannot ignore the
fact that a part of the reductions in NPAs is due to the writing off bad loans by banks. Indian
banks should take care ensure that they give loans to credit worthy customers. In this context
the dictum “prevention is always better then cures”. Act as the golden rule to reduce NPAs.

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 Banks generates profits
from the difference in the interest rates charged and paid.
The development of banking is an in evitable pre condition for the healthy and rapid
development of the national economic structure. Banking institution has contributed much to
the development of developed countries of the world. Today we cannot imagine the business
world without banking institution.
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 the considerable efforts of the government, today we have a number of
banks such as RBI, SBI, Nationalized commercial banks, Industrial banks, and cooperatives
banks, Indian banks contributed a lot to the development of agriculture, and trade and
industrial sectors. Even today to banking system of India possess certain limitation but one
cannot doubt its important role in the development of the Indian economy.

Banking in India:-
Currently, India has, 96 schedule 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
And traded on stock exchanges) and,
38 Foreign banks, they have combined network of over 53000 branches and 49000 ATMs.
According to a report by ICRA limited, a rating agency, the public sector banks holds over 75%
of total assets of the banking industry with the private and foreign banks holding 18.2% and
6.5% respectively.
Banking in India
RBI
↓
Schedule banks
↓
Commercial banks cooperatives
↓ ↓
Foreign banks (40) regional rural banks (196) urban co-operatives (52)
↓ ↓ State cooperatives (16)
Public sector banks (27)
SBI and associate banks (8) Karnataka vikas grameen bank
Private sector banks (30)

Types of bank deposits:-

1. saving deposits
2. recurring deposit
3. current deposits
4. Fixed deposits.
Although banks offer a wide variety of accounts, they can be broadly divided into four
types: are as under,
1. saving bank account :-
These are intended to provide an incentive for you to save money. You can make
deposits and withdrawals, but usually can’t write checks. They usually pay an interest rate
that’s higher than a checking account, but lower than a money market account or CD. some
savings account have a passbook, In which transactions are logged in a small booklet that you
keep, while others have a monthly or quarterly statement detailing the transactions .some
saving accounts charge a fee if your balance falls below a specified minimum .
2. Recurring deposit account :-
It is a special kind of term deposit offered by banks in India which help people with
regular incomes to deposit a fixed amount every month in to their recurring deposit account
and earn interest at the rate applicable to fixed deposits …minimum period of recurring deposit
is six months and maximum is ten years.
“It is a savings avenue which works like the systematic investment plan of a mutual fund,
wherein a particular amount of money is deducted from your account every month. You have
to apply for a recurring deposits account and ask the bank to deduct the stipulated amount
from your savings or current account every month.”

3. Current deposits account :-
“A deposit account is a saving account, current account or any other type of bank
account that allows money to be deposited and withdrawn by the account holder. Some banks
may charge a fee for this service, while other may pay the customer interest on the funds
deposited.”
“The current deposits refers to a service without any deposits term limitations that cash
deposits and withdraws can be made at bank counters, bank self – services equipment’s with
bank card, passbook or reserved password during bank business hours “.
4. Fixed deposits account :-
“A fixed deposit (FD) is financial instruments provided by banks or NBFCs which provides
investors a higher rate of interest then a regular saving account, until the given maturity date.
It may or may not require the creation of a separate account”.
In a fixed deposits investment, interest is only paid at the very end of the investment
period.

Significance of the study:-

The banks not only accepting deposit of the people but also provide them credit facility for their
development. Indian banking sector has the nation in developing the business and service
sectors. But recently the banks are facing the problem of credit risks. It is found that many
general people and business people borrow from the banks but due to same genuine or other
reasons are not able to prepay back is known as the non-performing assets. Many banks are
facing the problem of NPA which hampers the business of banks, due to NPAs the income of
the banks is reduced and the banks have to make the large number of provisions that would
curtail the profit of the banks is and due to that the financial performance of the banks would
not show good result.
The main aim behind making this report is to know how grameena bank is operating its
business and how NPAs play its role to the operations of the grameena bank.
Objectives of the study:-

1. To understand what is NPAs and what are the underlying reasons for emergence of
NPAs.
2. To analyses the impact of NPAs on the operations of Karnataka vikas grameena bank of
akki alur.
3. To level of NPAs in Karnataka vikas grameena bank in akki alur.
4. To know what steps are being taken by the Indian banking sector to reduce the NPAs?
5. What are the methods adopted by the RBI to look after NPAs management.
Need of the study:-

1. To study what kind of role NPAs are playing upon the operations of the banks.
2. To know the variables available to control NPAs.
3. Analyses the NPAs impact and the need also has been felt to study the financial
performance of grameena bank of akki alur.

Scope of the study:-

1. Banks can improve their financial position or can increase their income from credits with
the help of this project.
2. This project can be used for comparing the performance of the bank with others.
3. This can also be applicable to know the reasons of increase in NPAs.
4. This project also gives light upon impact of NPAs.
5. Concepts of NPAs can be made clear.
6. To present a picture of movement of NPAs in the grameena bank.
Limitations of the study:-

1. The data collected by me was not sufficient for report studying.
2. I haven’t get enough time to study my report so that becomes the cause of
limitation in the study.
3. Since my study is based upon secondary data, the practical operations as related to
NPAs are adopted by the banks are not learned.
4. The solutions are not applicable to every bank.

Literature review:-
1. A non-performing loan is a loan that is in default are close to being in default. Many
loans become non performing after being is default for 3 months, but this can depend
on the contract terms.
“a loan is non performing when payments of interest and principal are past due by 90
days or more, or at least 90 days of interest payments have been capitalized, refinanced or
delayed by agreement, or payments are less than 90 days overdue but there are other good
reasons to doubt that payments will be made in full”.
Sources: http;//www.articles base .com/authors/Anthony-dean/53396.
Title: the good, the bad, and the non performing mortgages.
2. It is new very new known that the banks and financial institution in India face the problem of
amplifications of non-performing assets. And the issues are 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 steps towards elimination are reduction of NPAs.
The NPAs level of our banks is way high then international standards. One cannot ignore the
fact that a part of the reduction in NPAs 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 to dictum. ”prevention is always better then cure”. Acts as the golden role to reduce
NPAs.
Sources: http// ezine articles.com/? Expert _ zainul abiding.

2CHAPTER:- AN OVERVIEW OF BANKS
Karnataka Vikas Grameena bank of akki alur:
Company profile of KVGB:-
The grameen bank it is a micro finance organization and community development bank founded in
Bangladesh. It makes small loans known as micro credit or “grameen credit “to the impoverished
without requiring collateral.
GRAMEENA BANK:-
Type: body corporate (bank law)
Industry: finance service
Founded: October, 1983
Founder: Mohammad Yunus
Headquarters: Dhaka Bangladesh
No/of location: 2568 branches (July 2017)
Area served: Bangladesh
Key people: Ratan kumar nag, acting managing director
Product: micro finance
Revenue: 12435, 830,045 taka 176.67 million USD (2010)
Operating income: 8,513,832,110 taka 120.95 million USD (2010)
Net income: 757,241,322 taka (10.76 million)
Total assets: 125,396,957,972 taka
No/of employees: 20,138 (July 2017)
Website: Grameen.com

Grameena bank is originated in 1976, in the work of professor Mohammed Yunus at university
of Chittagong, who launched a research project to study how to design a credit delivery system
to provide banking services to the rural poor people.
In October 1983 the grameen bank was authorized by national legislation to operate as an
independent bank.
In 1998 the banks “low-cost housing program “. Won a world habitat award in 2006, the bank
and its founder, Mohammed Yunus were jointly awarded the Nobel peace prize.
Karnataka Vikas Grameena Bank was established on 12th September 2005, by a government of
Indian notification.
The grameena bank also known a micro credit or grameen credit. Grameen bank provides
financial service to the rural poor people. Those services includes, loans saving account,
pension plans and loans insurance. The overall goal of grameen bank is the elimination of
poverty.
The grameen bank is a community development bank started in Bangladesh. They

give small loans known as micro credit or grameena credit.
The word “Grameena” is made of the word” gram” or” villages” and means “of the villages”.
The Nobel peace prize for 2006, the Norwegians Nobel committees ‘has decided to award the
Nobel peace prize for 2006, divided into two equal parts, to Mohammed yunus and grameena
bank for their efforts to create economic and social development from below.
Grameena bank is founded on the principle that loans are better than charity to interrupt
poverty; they offer people opportunity to take initiatives in business or agriculture, which
provides earning and enables them to pay off the debt.
Grameena bank main objectives have been to promote financial independence among
the poor. Yunus encourages all borrowers, to become savers so that their local capital can be
converted into new loans to others. Since 1995 grameen has founded 90% of its loans with
interest income deposits collected, aligning the interests of its new borrowers and depositors
shareholders. Grameen converts deposits made in villages into loans for the more needy in the
villages (yunus and Jolis 1998).

Grameena bank has diversified the type of loan it makes, it support hand powered wells
and loans to support the enterprise of grameen member immediate relatives.
It has found that seasonal agriculture loans and lease-to-own agreement for equipment and
livestock help the poor establish better agriculture.
The bank has set a new goal; to make each of its branch locations free of poverty as defined by
benchmarks such as having adequate food and access to clean water and latrines. Grameen
bank is best known for its system of solidarity lending.
Karnataka vikas grameen bank (KVGB).Regional rural bank was constituted on 12

September 2005 after amalgamation of four (RRBs)namely Malaprabha grameen bank, Bijapur
grameen bank, Varada grameena bank, Netravati grameen bank as per recommendation of the
Narsimhan committee under government of India notification dated 12 Sep 2005.
All four amalgamated regional rural banks were sponsored by syndicate bank and were located
in Karnataka. The bank, thus formed currently has 622 branches in rural areas of Karnataka
around the dharwad.
After amalgamation the level of the banks business was around 3263.73 crores. After the
merger, the regional rural banks is called Karnataka vikas grameen bank with its head office its
dharwad. Under the sponsorship of syndicate bank Ravindran, Deputy general manager of
syndicate bank, took charge as the new chairmen of Karnataka vikas grameen bank (KVGB) ,
dharwad is the head quartered of regional rural bank. On Monday, he was heading the
Mumbai region of syndicate bank before joining KVGB April 11, 2016

The bank hank is currently operating in 9 districts in the state which are;
1. Bagalkot,
2. Belgavi,
3. Vijaypura,
4. Dakshina kannada,
5. Dharwad,
6. Gadag
7. haveri
8. udupi
9. uttar kannada,
Product and services:-

The deposits product of the banks constitute,
1. Saving bank account

2. Vikas premium saving bank account
3. Vikas special premium saving bank account
4. Jeevan prabha saving bank account
5. Current account
6. Sanchayani deposits
7. Fixed deposits
8. Akshaya cash certificate
9. Nirantara deposits
10. Vikas premium Flexi Deposits
11. Vikas special premium fixed deposits
12. Vikas tax saving deposits.

The banks also provides several loan products and services such as:
1. vikas tax saving deposits

2. VIKAS NIRANTARA - DL on pigmy
3. VIKAS SUVARNA - jewel loan and over draft
4. VIKAS LAGHU UDYAMI CREDIT ARD - laghu udyami credit card
5. VIKAS SWAROJGAR CREDIT CARD - Swarajgar credit card
6. VIKAS KIRAN - Solar home lighting &water heating system
7. VIKAS KALYANA – Loan on pledge of agriculture produces.
Award:-
Karnataka vikas grameen bank was chosen for the award for excellent performance in
implementation of the solar home lighting scheme of the ministry of new and renewable
energy (MNRE), government of India.
Regional rural banks:-

RRBs are schedule commercial banks operating at regional level at different states
of India. They have been created with a view to serve primarily the rural areas of India with
basic banking and financial services. However, RRBs may have branches set up for urban
operations and there area of operations may include urban area too. The area of operations of
RRBs is limited to the area as notified by the government of India covering one or more districts
in the states. RRB also performs a variety of different functions.
RRBs perform various functions in the following heads:
1. Providing banking facilities to rural and semi urban areas.

2. Carrying out government operations like disbursement of wages of MGNREGA workers,
distributions of pensions etc…
3. Providing para – banking facilities like locker facility, debit and credit cards.
4. Small man’s banks.

Organizational structure
Amalgamation:-
Currently, RRBs are going through a process of amalgamation and consolidation. 25 RRBs
have been amalgamated in January 2013 into 10 RRBs. This counts 67 RRBs till the first week of
June 2013. This counts 56 as of March 2015. On 31st March 2016, there were 56 RRBs (post-
merger) covering 525 districts with a network of 14,494 branches. All RRBs were originally
conceived as low cost institutions having a rural ethos, local feel and pro poor focus. However,
within a very short time, most banks were making losses. The original assumptions as to the low
cost nature of these institutions were belied. This may be again amalgamated in near future. At
presents there are 56 RRBs in India.
Legal existence and protection:-

RRBs are recognized by the law and they have legal significance. The regional rural banks Act,
1976 Act No. 21 of 1976 [9 February.] reads
“For the incorporation, regulation and winding up of regional rural banks with a view to
developing the rural economy by providing, for the purpose of developing the agriculture,
trade, commerce, and industry and other productive activities in the rural areas, credit and
other facilities, particularly to the small and marginal formers, agriculture laborers, artisans and
small entrepreneurs, and for matters there to”.

Indian economy and NPSs:-

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock
markets have tumbled and business itself is getting hard to do. The Indian economy has been
much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting
of exposer to emerging market by FIIs, etc.
Further, international rating agencies like, standard and poor have lowered
India’s credit rating to sub-investment grade. Such negative options have often outweighed
positives such as increasing for reserves and a manageable inflation rate.
Under such a situation, it goes without saying that banks are no expectation and
are bound to face the heat of a global downturn. One would be surprised to know that the
banks and financial institution in India hold non-performing assets worth Rs. 1,10,000 crores.
Bankers gave realized that unless the level of NPAs. Is reduced drastically, they will find it
difficult to survive.
The actual level of non-performing assets in India is around $40 billion much higher than
government‘s estimation of $16 billion. This difference is largely due to the discrepancy in
accounting the NPAs followed by India and rest of the world. The accounting norms of the India
are less stringent than those of the developing economies. The Indian banks also have the
tendency to extend the past dues. Considering the GDP of India nearly $470 billion. The NPAs
are 8% of total GDP. This was better than the many Asian countries. The NPA of china was 45%
of the GDP, while japan had NPAs of 25% of the GDP and Malaysia had 42%.
The aggregate level of the NPAs in Asian has increased from $ 2.5 billion. In 2007 to $3.4
billion in 2009. Looking to such overall picture of the market, we can say that India is
performing well and the steps taken are looking favorable.

3rd CHAPTER: - INTRODUCTION TO NON PERFORMING ASSETS
Non-performing assets (NPA) – concepts

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
there 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 assets is a result of assets 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 banks gives loan to the customers 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 classifies as non-performing 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 assets which are not producing income.
Definitions:
Assets, including a leased asset, become non-performing when it ceases to generate
income for the bank.
A ‘non performing assets’ (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 (deficiency norms are not applicable to agriculture
segment).

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 overdue 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 remain overdue for a period of more than 90 days from due date of
payments.
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 a classified as NPA as under:
a) If loan has been granted for short duration crop: interest and / or installment of
principal remain 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
remain overdue for one crop seasons beyond due date.
RBI introduced, in 1992, the prudential norms for income recognition, assets
classifications and provisioning – IRAC norms in short – in respect of the loan portfolio of the
cooperative banks. The objective was to bring out the true picture of the bank loan portfolio.
The fallout of these momentous regulatory measures for the management of the CBs was to
divert its focus to profitability, which till then use to be a low priority area for it. Asset quality
assumed greater importance for the CBs when mentainence of high quality credit portfolio
continues to be a major challenge for the CBs, especially with RBI gradually moving towards
convergence with more stringent global norms for impaired assets. The quality of banks loan
portfolio can impact its profitability, capital and liquidity, asset quality problem are at the root
of other financial problems for banks, leading to reduced net interest income and higher
provisioning costs. If loan losses exceed the Bad and Doubtful Debt Reserve, capital strength is
reducing. Reduced income means less cash, which can potentially strain liquidity. Market
knowledge that the bank is having assets quality problems and associated financial conditions
may cause outflow of deposits. Thus, the performance of bank is inextricably linked with its
asset quality. Managing the loan portfolio to minimize bad loans is, therefore, fundamentally
important for a financial institution in today’s extremely competitive and market driven
business environment. This is all the more important for the CBs, which are at disadvantages of
the commercial banks in terms of professionalized management, skill level, technology
adoption and effective risks managements systems and procedures.

Management of NPAs begins with the consciousness of a good portfolio, which warrants better
understandings of risks in lending. The board has to decide a strategy keeping in view the
regulatory norms, the business environment, its markets share, the risks profile, the available
resources etc… The strategy should be reflected in board approved policies and procedures
to monitor implementations. The essential components of sound NPA management are:-
1. Quick identification of NPAs,

2. Their containment at minimum level ,
3. Ensuring minimum impact of NPAs on the financials.
Classifications of loans:-
In this bank loans are classified o the following basis;
Performing assets:
Loans where the interest and / or principal are not overdue beyond 180 days at
the end of the financial year.
Non-performing assets:-
A loan repayment, which is overdue beyond 180 days or two quarters, is
considered as NPA. According to the securitization and reconstructions of financial
assets and enforcement of security interest ordinance, 2002” non-performing assets”
(NPA) means “an assets or a/c of a borrower, which has been classified by a bank or
financial institution as substandard, doubtful or loss assets, in accordance with the
directions or guidelines relating to assets classification issued by the reserve bank.

Asset classification:-
Asset can be categorized into four categories namely,
1. Standard
2. Sub – standard
3. Doubtful
4. Loss assets
The last three categories are classified as NPAs based on the period for which the
assets have remained non-performing and the reliability of the dues.
(1). Standard assets: - The loan accounts which are regular and do not carry more than
normal risks. Within standard assets, there could be account which tough have not become
NPA but are irregular. Such accounts are called as special mention accounts.
(2). Sub –standard assets :- with effect from 31.03.2005, a substandard assets 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 assets 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 31march 2005, an assets is to be classified as
doubtful, if it has remained NPA or substandard for a period exceeding 12 months, (earlier it
was 18 months).a loan classified as doubtful has all the weaknesses inherent in assets that were
classified as substandard, with the added characteristics that the weakness make collections or
liquidations in full on the basis of currently no facts, conditions and values highly questionable
and improbable.
(4). Loss assets :- a loss assets 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 assets 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 substandard account is classified as doubtful or loss without waiting for 12

months:- If the realizable value of tangible security in a substandard account which was
secured falls below 10% of the outstanding, it should be classified loss assets 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 31march 2004, a loan or advances would become NPA where,
1. Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of term loan.
2. The account remain ‘out of order’ for a period of more than 90days, in respect of an
overdraft/cash credit(OD/CC),
3. The bill remains overdue for period of more than 90 days, in the case of bill purchased
and discounted.
4. With effect from September 2004, loan granted for short duration crops, will be treated
as NPA, if the installment of principal or interest their on remain overdue for two crop
seasons and loans granted for long duration crops, will be treated as NPA, if installment
of principal or interest there on remains overdue for one crop seasons. and
5. 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 credit continuously for 90 days as on the date of balance sheet or credits or 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.
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 installment 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 assets (NPA) is not recognized on accrual
basis but is looked 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 to be realized.
5. If any advances, including bills purchasing and discounted, becomes NPA as at the close of
any year, the entire interest accrued and credit 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).

Provising norms:-
There is time lag between an account becoming doubtful for recovery, the realization of
security and erosion over a period of times in its value. So RBI directive now require the banks
to make provisions in their balance sheet for all non-standard loss assets. Provisioning is made
on all types of assets, i.e. Standard, Sub Standard, Doubtful and Loss assets .
1. Standard assets:-
RBI vides its circular dated 15.11 2008, revised the provisioning requirements. For all
types of standard assets it has been reduced to a uniform level of 0.40 per cent of outstanding
at global basis except in the case of direct advances to agriculture and SME sector, which shall
continue to attract a provisioning of 0.25 per cent. The provision on standard assets relating to
exposers in commercial real estate has been increased again 1% as per policy statement issued
in October 9. The provisions of standard assets should not be reckoned for arriving at net NPAs.
The provisions towards standard assets need not be netted from gross advances but shown
separately as ‘contingent provisions against standard assets’ under ’other liabilities and
provisions others’ in schedule 5 of the balance sheet.
2. Substandard assets:-
In respect of substandard assets the rate of provision is 10% of outstanding
balance without considering ECGC guarantee cover or securities available. However, if the loan
was unsecured from the begging (‘unsecured exposers’), there would be additional provisions
of 10% i.e. total provision would be 20% of outstanding balance. Unsecured exposers is defined
as an exposure where the realizable value of the security, as assessed by the bank/ approved
values / Reserve Bank’s inspecting officers, is not more than 10%, ab-intio, of the outstanding
exposers.
3. Doubtful assets:-
In case of doubtful assets, while making provisions, realizable value of security is
to be considered. 100% provision is made for unsecured portion. In case of secured
portion, the rate of provision is depend on age of the doubtful assets as under

Age of doubtful assets Provision as % of secured portion

Doubtful up to one year,D1 20% of RVS (realizable value of security)
Doubtful for more than 1year to 3 year,D2 30% of RVS
Doubtful for more than 3 year,D3 100%of RVS
Thus, if an account is doubtful for more than 3 years, then 100% of provision is to be
made both for secured and unsecured portion. If an advance has been guaranteed by DICGC/
CGFT/ ECGC/ and is doubtful, then provision on secured portion will be as in other cases but
provision on unsecured portion will be made after deducting the claim available. For example. If
the outstanding amount in D2 account is Rs 10 lac, security is Rs lac, and DICGC cover is 50%,
then on Rs 6 lac, the provision will be at the rate of 30% and of the unsecured portion of Rs 4
lac, provision will be made at the rate of 100% on Rs 2 lac.
4. Loss assets:-
100% of the outstanding amount,
while making provisions on NPA, amount lying in suspense interest account and derecognized
interest should be deducted from gross advance and provisions is made on the balance
amount.
5. Overall provisions:-
With a view to improving the provisioning cover and enhancing the soundness of
individual banks, RBI has proposed in / October 09 policy that bank should augment their
provisioning cushions consisting of specific provisions against NPAs as well as floating
provisions, and ensure that their total provisioning coverage ratio, including floating provisions,
is not less than 70 per cent. Banks should achieve this norm not later than end-September
2010.

Impact/ Effects of NPA upon banks:-

A strong banking sector is important for flourishing economy. The failure of
banking sector may have an adverse impact on other sectors. Non-performing assets are one of
the major concerns for banks in India. The only problem that hampers the possible financial
performance of the public sector banks is the increasing results of the non-performing assets.
The non-performing assets impact drastically to the working of the banks. The efficiency of the
banks is not always reflected only by the size of its balance sheet but by the level of the return
on its assets. NPAs do not generate interest income for the banks, but the same time banks are
required to make provisions for such NPAs from their current profits.
1. They erode current profits through provisioning requirements.

2. They result in reduced interest income.
3. They require higher provisioning requirements affecting profits and accretion to capital.
They limit recycling of funds, set in assets-liability mismatch, etc..
4. Adverse impact on capital adequacy ratio.
5. ROE and ROA goes down because NPAs do not earn.
6. Bank’s rating gets affected.
7. Bank’s cost of raising funds goes up.
8. RBI’s approval required for declaration of dividend if net NPA ratio is above 3%.
9. Bad effect on goodwill.
10. Bad effect on equity value.
The RBI has also develop many schemes and tools to reduce the NPA assets by
introducing internal checks and control scheme, relationship managers as stated by RBI
who have completed knowledge of the borrower, credit rating system, and early
warning system and so on. The RBI has also tried to improve the securitizations Act
and SRFAESI Act and other acts related to the pattern of the borrowings.
The RBI has taken number of measures to reduce the level of the non-performing
assets the result is not up to expectations. To improve NPAs each bank should be
motivated to introduce their own precautionary steps. Before lending the banks must
evaluate the feasible financial and operational prospective results of the borrowing
companies or customers. they must evaluate the borrowing companies by keeping the
considerations of overall impacts of all the factors that influence in business. NPAs
reflect the performance of banks. A high level of NPAs suggests high probability of large
number of credit defaults that effect the probability of net-worth of the banks and also
erodes the value of the assets. The NPAs growth involves the necessity of provisions,
which reduces the overall profits and shareholders value.

Causes for a account becoming NPA

1. Those attribute to borrower:
a) Failure to bring required capital
b) Too ambitious project
c) Longer gestation period
d) Unwanted expenses
e) Over trading
f) Imbalance of inventories
g) Lack of proper planning
h) Dependence on single customers
i) Lack of expertise
j) Improper working capital management
k) Mismanagement
l) Diversion of funds
m) poor quality management
n) heavy borrowings
o) poor credit collections
p) lack of quality control
2. causes attributable to banks:

a) Wrong selection of borrower
b) Poor credit appraisal
c) Unhelpful in supervision
d) Tough stand on issues
e) Too inflexible attitude
f) System overloaded
g) Non inspection of units
h) Lack of motivation
i) Delay in sanctions
j) Lack of trained staff
k) Lack of delegation of work
m) Lack of commitment to recovery

3. Other causes:
a) Lack of infrastructure
b) Fast changing technology
c) Un helpful attitude of the government
d) Changes in consumer preference
e) Increase in material cost
f) Government policies
g) Credit policies
h) Taxation laws
i) Civil commotion
j) Political hostility
k) Sluggish legal system
l) Changes related to banking amendments Act.

Early symptoms by which one can recognize a performing assets turning into non-
performing assets.
Four categories of early symptoms:
Financial:
1. Non-payment of the very first installment in case of term loan.
2. Bouncing of cheque due to insufficient balance in the accounts.
3. Irregularity in installment.
4. Irregularity of operations in the accounts.
5. Unpaid overdue bills.
6. Declining current ratio.
7. Payment which does not cover the interest and principal amount of that installment.
8. While monitoring the accounts it is found that partial amount is diverted to sister
concern or parent company.
Operational and physical:

1. If information is received that the borrower has either initiated the process of
winding up or are not doing the business.
2. Overdue receivables.
3. Stock statement not submitted on time.
4. External non- controllable factor like natural calamities in the city where borrower
conduct his business.
5. Frequent changes in plans.
6. Non-payment of wages.

Attitudinal changes:
1. Use for personal comfort, stocks and shares by borrower.
2. Avoidance of contact with bank.
3. Problem between partners.
Others:
1. Changes in government policies.
2. Death of borrower.
3. Competition in the market.

Sale of NPA to other bank:
 A NPA is eligible for sale to other banks only if it has only remained a NPA for at least
two years in the books of the selling banks.
 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 bot to bank, which originally sold to 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 provisions will be utilized to meet the loss
on account of sale of other NPA.

Preventive measurement for NPA
1. Early recognition of the problem:
Invariably, by the time bank 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 the bank dues. Identification of the weakness in the very beginning that is: when
the account start showing first signs of weakness regardless of the fact that it may not have
become non-performing assets, is imperative. Assessment of the potential 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 intentions, banks re convinced of a turnaround
within a schedule time frame. 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 positions becomes worse.
2. Identifying the borrower with genuine intent:
Identifying the borrower with genuine intent from those who are non-
serious with no commitment or stake in revival is a challenge confronting banker. Here the role
of frontline officials at the branch level is paramount as they are the once who has intelligent
inputs with regards to promoters ‘sincerity, and capability to achieve turnaround. Based in this
objective assessment, banks should decide as quickly as possible whether it would be
worthwhile to commit additional finance.
In this regards bank may consider having “special

investigations” of all financial transactions are business transactions, books of accounts 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 if the borrowers.
Borrower having genuine problems due to temporary mismatch in fund flow or

sudden requirements 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 non-performing assets category.

3. Timeliness and adequacy of response:

Longer the delay in response, greater the injury to the account and the asset.
Time is crucial element in any restructuring or rehabilitation activity. The response decides 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.
4. Focus on cash flows:

While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potential misleading picture. Appraisal
for fresh credit requirements may be done by analyzing funds flow in conjunction with the cash
flow rather than only on the basis of fund flow.
5. Management effectiveness:
The general perception among borrower is that it is lack of finance that leads to
sickness an NPAs. But this may not be the case of all the time. Management effectiveness in
tackling adverse business condition is a very important aspect that affects a borrowing unit’s
fortunes. A bank may commit additional finance to an align unit only after basis 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 aspects. A proper
techno-economic viability study must thus become the basis on which any future actions can be
considered.

6. Multiple financing:
a. During the exercise for assessment of viability and restructuring, “a pragmatic an
unified approach” by all the lending banks/ FIs 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 units is still working, the banks should make sure that
“it capture the cash flows” (there is a tendency on the part of the borrower 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. Towards 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 actions. 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 letters categories of
lenders may be willing to exit, even at a cost- by a discounted settlement of the
exposure. Therefore, any plan for restructuring / rehabilitation may take these aspects
into the accounts.
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 nay greatly benefit in terms of restructuring of large standard
accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple
banking arrangements.

NPA management practices in India:

1. Formation of the Credit Information Bureau (India) Limited (CIBIL)
2. Release of Willful Defaulter’s List. RBI also release a list of borrower with aggregate
outstanding of Rs. 1 crore and above against whom banks have filed suits for recovery of
their funds.
3. Reporting of Frauds to RBI
4. Norms of Lender’s Liability – forming of Fair Practices Code with regards to lender’s
liability to be followed by banks, which indirectly prevents the accounts turning into
NPAs on account of bank’s own failure.
5. Risk assessment and Risk management
6. RBI has advised banks to examine all cases of willful default of Rs. 1 crore and above and
file suits in such cases. Board of Director are required to review NPA accounts of Rs. 1
crore and above with special reference to fixing of staff accountability.
7. Reporting quick mortality cases.
8. Special mention accounts for early identification of bad debts. Loans and advances
overdue for less than one and two quarters would come under this category. However,
these accounts do not need provisioning.
NPA Management – Resolution:

1. Compromise settlement schemes
2. Restructuring / Reschedulement
3. Lok adalat
4. Corporate debt restructuring cell
5. Debt recovery tribunal (DRT)
6. Proceeding under the code of civil procedure
7. Board for industrial and financial reconstruction (BIFR) / AAIFR
8. National Company Law Tribunal (NCLT)
9. Sale of NPA to other banks
10. Sale of NPA to ARC/ SC under Securitization and Restructuring of Financial Assets and
Enforcement of Security Interest Act 2002 (SRFAESI)
11. Liquidation.

Measures initiated by RBI and government of India for reduction of NPAs
1. Compromise settlement scheme:

The RBI / government of India have been constantly goading the banks to
take steps for arresting the incidence of fresh NPAs and have also been creating legal and
regulatory environment to facilitate the recovery of existing NPAs of banks. More significant of
them, I would like to recapitulate at this stage.
The broad frame work for compromise or negotiated settlement of NPAs advised by
RBI in July 1995 continues to be in place. Banks are free to design and implement their own
policies for recovery and write- off incorporating compromise and negotiated settlement with
the approval with their Boards, particularly for old and unresolved cases falling under the NPA
category. The policy framework suggested by RBI provides for setting up of independent
settlement advisory committees headed by a retired judge of the high court to scrutinize and
recommend compromise proposals.
Specific guidelines were issued in May 1999 to public sector banks for onetime
non-discretionary and non-discriminatory settlement of NPAs of small sector. The scheme was
operative u to September 30, 2000. [Public sector banks recovered Rs. 668 crore through
compromise settlement under this scheme.]
Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore
and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001
helped the public sector banks to recover of Rs. 2,600 crore by September 2001]
An OTS scheme covering advances of Rs. 25,000 and below continues to be in operations and
guidelines in pursuance to the budget announcement of the Hon’ble finance minister providing
for OTS for advances up to Rs. 50,000 in respect of NPAs of small/ marginal farmers are being
drawn up.
Negotiating for compromise settlement;

The first crucial steps towards meaningful NPA management are to accept that recoveries are
one’s own responsibility. To keep the bank’s operating cycle going smoothly, it is essential that
this realization of one’s duties be transformed into deeds by resorting to various methods of
recovery.
Of the various methods available for NPA management, compromise settlements are the
most attractive, if handled in a professional manner.

Advantages:
1. Saves money, time and manpower:-
Banks are mainly concerned with the recovery of dues, to the maximum
possible extent, at minimum expense. By entering into compromise settlement, the objective is
achieved. Also, a lot of executive time is saved because most of the usual problems/ delays
associated with court action are avoided.
2. Project a helpful image of the Bank:-
A well-concluded compromise settlement, which results in a ‘WIN-WIN’ for the

Bank as well as the borrower, is a strong positive propaganda for the Bank. The impression
generated is that the Bank is capable not only of sympathy, but also empathy.
3. Expedites recycling of funds:-
Compromise settlement aim as quick recovery. Recovery means funds

becoming available for recycling and, additional interest generation.
4. Cleanses Balance sheet:-
With the NPA level going down, and the additional funds becoming available for
recycling as fresh advances, the asset quality of the Bank is bound to go up. Improved asset
quality signifies higher profits by reduced by the provisions and increased interest income. With
additions to the reserves, the capital position also improves, improving the capital adequacy
position.
Besides the above, compromise the offers the best option when,
a. The documents are defective and cannot be rectified,

b. Security is not enforceable,
c. Forced sale is extremely difficult, or would result only in realizing a paltry amount and
d. The borrower become untraceable and recovery can be only through guarantors.

Disadvantages:-
a. Compromise involves loss, since full recovery is not possible. In fact, full recovery is not
even envisaged, but sacrifice is.
b. It may be viewed as a reward for default, especially if chronic default cases are settled
by negotiations.
c. It may have a demonstrative effect, and so may vitiate the culture of repayment
d. There is also the possibility of misuse, or, even, malafides, since assessment of situation
is highly subjective.
Practical aspects of compromise settlements:

Every compromise settlement needs to be looked at individually, evaluated strictly on merits,
and negotiated properly for maximizations of benefits to the Bank. Hence, a straight jacket
approach is not possible, neither is it desirable, to give strict guidelines for compromise
settlements.
2. Restructuring and rehabilitation:-

a. Banks are free to design and implement their own policies for restructuring /
rehabilitation of the NPA accounts.
b. Reschedulement of payment of interest and principal after considering the debt service
coverage ratio, contribution of promoters and availability of security.
3. Lok adalat:-
Lok adalat institution help banks to settle disputes involving accounts in

“doubtful” and “loss” category, with outstanding balance of Rs. 5 lakh for compromise
settlement under the Lok Adalats. Debt recovery Tribunal has now been empowered to
organize Lok adalats to decide on cases of NPAs of Rs. 10 lakh and above. The public sector
bans recovered Rs. 40.38 crore as on September 30, 2001, through the forum of lok adalat. The
progress through this channel is expected to pick up in the coming years particularly looking at
the recent initiatives taken by some of the public sector banks and DRTs in Mumbai. Some of
the features are,

 Small NPAs up to Rs. 20 lacs

 Speedy recovery
 Veil of authority
 Soft defaulters
 Less expensive
 Easier way to resolve.
4. Debt Recovery Tribunal:-

The recovery of debts due to Banks and Financial Institution
(amendment) Act, passed in March 2000 has helped in strengthening the functioning of DRTs.
provision for placement of more than one recovery officers, power to attach defendant’s
property / assets before judgment, penal provisions for dis obedience of Tribunal’s order or for
breach of any terms of the order and appointment of receiver with powers of realizations,
management, protection and preservation of property are expected to provide necessary teeth
to the DRTs and speed up the recovery of the NPAs in the times to come.
Though there are 22 DRTs set up at major centers in the country with Appellate
Tribunals located in five centers viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they
could decide only 9814 cases for Rs. 6264.71 crore pertaining to public sector banks since
inception of DRT mechanism and till September 30, 2001. The amount recovered in respect of
these cases amounted to only Rs.186.30. crore.

Looking at the huge task on the hand with as many as 33049 cases involving Rs. 42988.84
crore pending before them as on September 30 2001.i would like the banks to institute
appropriate documentation system and render all possible assistance to the DRTs speeding up
decisions and recovery of some of the well collateralized NPAs involving large amount. I may
add that familiarization programmers have been offered in NIBM at periodical intervals to the
presiding officers of DRTs in understanding the complexities of documentations and operational
features and other legalities applicable of Indian Banking system. RBI on its part has suggested
to the Government to consider enactment of appropriate penal provisions against obstruction
by borrowers in possession of attached properties by DRT receivers, and notify borrowers who
default to honor the decrees passed against them.
5. Circulation of information on defaulters:-
The RBI has put in place a system for periodical circulation of willful defaults of
borrowers of banks and financial institutions. This serves as a caution list while considering
request for new or additional credit limits from defaulting borrowing units and also from the
directors / proprietors / partners of these entities. RBI also publishes a list of borrowers (with
outstanding aggregating Rs. 1 crore and above) against whom suits have been field by banks
and FIs for recovery of their funds, as on 31st March at every year. It is our experience that
these measures have not been contributed to any perceptible recoveries from the defaulting
entities. However, they serve as negative basket of steps shutting off fresh loans to these
defaulters. I strongly believe that a real breakthrough can come only if there is a change in the
repayment psyche of the Indian borrowers.
6. Recovery action against large NPAs:-
After a review of pendency in regard to NPAs by the Hon’ble Finance Minister,

RBI had advised the public sector banks to examine the all cases of willful default of Rs. 1 crore
and above and file suits in such cases, and file criminal cases in regard to willful defaults. Board
of Directors are required to review NPA accounts of Rs. 1 crore and above with special
reference to fixing of staff accountability.
On their part RBI and the Government are contemplating several supporting measures.

7. Asset reconstruction company:-
An asset reconstruction company with an authorized capital of Rs. 2000 crore

and initial paid up capital of Rs. 1400 crore is to be set up as a trust for undertaking activities
relating to asset reconstruction. It would negotiate with banks and financial institutions for
acquiring distressed assets and develop markets for such assets. Government of India proposes
to go in for legal reforms to facilitate the functioning of asset reconstruction company
mechanism.
8. Legal reforms:-
The Honorable Finance Minister in his recent budget speech has already
announced the proposal for a comprehensive legislation on asset foreclosure and
securitization. Since enacted by way of ordinance in June 2002 and passed by
parliament as on Act in December 2002.
9. Corporate debt restructuring (CDR) :-
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 financial institutions. The CDR process would also enable
viable corporate entities to restructure these dues outside the existing legal frame work and
reduces the incidence of fresh NPAs. The CDR structure has been head quartered in IDBI,
Mumbai and Standing Forum and Core Group for administering the mechanism had already
been put in place. The experiment however has not taken off at the desired pace though more
than six months have lapsed since introductions. As announced by the Hon’ble
Finance Minister in the Union Budget 2002-03, RBI has set up a high level group under the
chairmanship of Shri. Vepa Kamesam, Deputy Governor, RBI to review the implementation
procedures of CDR mechanism and to make more effective. The group will review the
operation of the CDR scheme, identify the operational difficulties, if any, in the smooth
implementation of the scheme and suggest measures to make the operation of the scheme
more efficient.

10. Credit Information Bureau:-
Institutionalization of information sharing arrangements through the newly formed

Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the
recommendations of the S.R.Iyer Group (chairmen of CIBIL) to operationalize the scheme of
information dissemination on defaults to the financial system. The main recommendation of
the group includes dissemination of information relating to suits-filed accounts regardless of
the amount claimed in the suit or amount of credit granted by a credit institution as also such
irregular accounts where the borrower has given consent for disclosure. This, I hope, would
prevent those who take advantage of lack of system of information sharing amongst lending
institution to borrow large amounts against same asset and property, which had in no small
measures contributed to the incremental NPAs of banks.
11. Proposed guidelines on willful defaults/ diversion of funds:-
RBI is examining the recommendations of kohli group on willful defaulters. It is

working out a proper definition covering such classes of defaulters so that credit denials to this
group of borrowers can be made effective and criminal prosecution can be made
demonstrative against willful defaulters.
12. Corporate governance:-
A consultative group under the chairmanship of Dr. A.S.Ganguly was set up by

the Reserve bank to review the supervisory role of boards and banks and financial institutions
and to obtain feedback on the functioning of the Boards vis-à-vis compliance, transparency,
disclosures, audit committees etc….. And make recommendations for making the role of board
of directors more effective with a view to minimizing risk and over-exposers. The group is
finalizing its recommendation shortly and may come out with guidelines for effective control
and supervision by banks boards over credit management and NPAs prevention measures.
[Dr.Bimal Jalan, Governor, RBI, in a speech titled “Banking and Finance in the New
Millennium”. Delivered at 22nd Bank Economists Conference, New Delhi, 5th February, 2001]

International practice on NPA management

Subsequent to the Asian currency crisis which severally crippled the financial
system is most in additional 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 reforms. This involved setting of processes for early identification and
resolutions of NPAs. The table below provides a cross country comparison of approaches used
for NPA resolution. Mergers Act. A long side the Ministry of Finance has followed a carrot and
stick policy of specifying the required NPA. Ratio for banks (5% by end 2003), while also
providing flexibility in modes of NPA asset resolution and conductive 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 Mitigations:

As part of the overall credit functions of the banks, early recognition of the 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 system:
Loans monitoring is a continuous process and early warning system 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 debtor together, often working along with
independent advisors. This broad approach was locally adopted and used with a varying degree
of efficiency 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-base” AMCs. Further different countries have allowed/
used different approaches (in-house restructuring versus NPA sale) to resolve their NPAs.
Additionally, the efficiency if bankruptcy and foreclosures laws have 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.
a. Increasing willingness to sell NPAs to AMCs:

Bottlenecks often persist on account of reluctance of lenders to transfer
assets to the AMCs at value lower than the book value to prevent a hit to their
financials. Banks in Malaysia were encouraged to transfer their assets to Danaharta –
AMCs 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 incentives coupled
with the directive of the central banks to make adjustments in the book values of the
assets not transferred to Danaharta (after Danharta identifies them) were sufficient to
ensure effective sale to the AMCs. 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.
b. Effective resolution strategy:

A significant dimension influencing NPA resolution and investors participation
is the case of implementation of recovery strategies. AMCs like Danharta have been
providing with a strong plat form to affect the resolution of NPAs with clearly laid down
creditor’s rights. Danharta has been allowed to the foreclosures property without the
reference to court and thus has been able to disposes collateral swiftly by using the
tender routes. Special resolution mechanisms that have involved minimal interventions
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 Assets
Managements Corporations, etc….

c. 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
plans preparation and implementation stages. The restructuring process affected by the
automatic moratorium that comes into places at the time of the administrator’s appointments.
4. 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 independent monitoring agency. As
seen from the Asian experience, in general, NPA resolution has been most successful when,
 Flexibility in modes of assets resolution (restructuring, third party sales) has been
provided to lenders.
 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
deadlines.

Difficulties with the Non-Performing Assets:

1. Owners do not receive a market return on their capital. In the worst case, if the banks
fails owners loss their assets. In modern times, this may affect a broad pool of
shareholders.
2. Depositors do not receive a market return on savings. In the worst case in the banks
fails, depositors lose their assets or uninsured balance. Banks also redistribute losses to
other borrowers by charging higher interest rates. Lower deposit rates and higher
lending rates repress savings and financial markets, which hampers economic growth.
3. Nonperforming loans epitomize bad investments. They miss allocate credit from good
projects, which do not receive funding, to failed projects. Bad investments end up in
misallocation of capital and, by extension, labour and natural resources. The economy
performs below its production potentials.
4. Nonperforming loans may spill over the banking system and contract the money stock,
which may lead to economic contraction. This spillover effects can channelize through
illiquidity or bank insolvency;
a. When may borrowers fail to interest, banks may experience liquidity shortages.
These shortages can jam payments across the country.
b. Illiquidity constraints the bank in paying depositors e.g. cashing their pay checks.
Banking panic follows. A run on banks by depositors as part of the national money
stock become inoperative. The money stock contracts and economic contraction
follows
c. Undercapitalized banks exceed the bank’s capital base.
Lending by banks has been highly politicized. It is common knowledge

that loans are given to various industrial houses not on commercial considerations
and viability of project but on political considerations; some politicians would ask
the banks to extend the loan to a particular corporate and banks would oblige. In
normal circumstances banks, before extending any loans, would make a thorough
study of actual need of the party concerned. The prospects of the business in which
it is engaged, its track record, the quality of management and so on. Since this is not
looked into, many of the loans become NPAs.
The loans for the weaker sections of the society and the waiving of
the loans to farmers are another dimension of the politicization of bank lending.

5th CHAPTER: FINDINGS, SUGGESTIONS, CONCLUSION:

Finding: in my research I have find following things;
 Grameen Bank shows high NPAs Ratio.

 High credit ratio shows low credit portfolio to the people.
 Low risk portfolio.
 Study also indicates that major NPA increases because of government,
recommended priority sectors.
 Grameen bank has better provisioning, also.
Recommendation / suggestions:-
In my study I have found some limitations. For that I can suggest the grameen bank following
suggestions or areas of improvements:-
 Grameen bank should give stress upon credit appraisal.

 The credit should be backed up by securitization.
 Banks should create effectiveness in management.
 Credit officers should focus upon cash flow.
 Timely checks out should be adopted.
 Banks should make good provisioning policy.
 Banks should try their best to recover NPAs.
 The problem should be identified very early so that companies can try their best to
stop an asset or A/C becoming NPAs.
 Banks should evaluate the SWOT analysis of borrowing companies i.e. how they
would face the environmental threats and opportunities with the use of their
strength and weakness, and what will be their possible future growth in concerned
to financial and operational performance.
 Each bank should have its own independent credit rating agency which should
evaluate the financial capacity of the borrower before than credit facility.
 The credit rating agency should regularly evaluate the financial conditions of the
clients.

Conclusions:-
A report is not said to be completed unless and until the conclusions is given to the report. A
conclusion reveals the explanations about what the report has covered and what is the essence
of the study. What my project report covers is concluded below. The problem statements on
which I focused my study are “NPAs the big challenges before the Banks”. The Indian Banking
sector is the important service sector that helps the people of the India to achieve the socio
economic objective. The Indian banking sector has helped the business and service sector to
develop by providing them credit facilities and other finance related facilities. The Indian
banking sector is developing with good appreciate as compared to the global benchmark banks.
The Indian banking system is classified into schedule and non-scheduled banks. The banks play
very important role in developing the nation in terms of providing good financial service. The
grameen bank has also shown the good performance in the last few years. The only problem
that the bank is facing today is the problem of non-performing assets. The non-performing
assets means those assets which are classified as bad assets which are not possibly by returned
back to the banks to the borrowers. If the proper management of the NPAs is not undertaken it
would hamper the business of the banks. The NPAs would destroy the current profits, interest
incomes due to large provisions of the NPAs, and would affects the smooth functioning of the
recycling of the funds. If we analyze the past few years’ data, we may come to know that the
NPAs have increased very drastically. The RBI has also been trying to take number of measures
but the ratio of NPAs is not decreasing of the banks. The banks must have to find out the
measures to reduce the evolving problem of the NPAs. If the concepts of NPAs is taken very
lightly it would be dangerous for the banks. The reduction of the NPAs would help the bank to
boost up their profits. Smooth recycling of funds in the nations. This would help the nation to
develop more banking branches and developing the economy by providing the better financial
services to the nations.
India is a developing country. So, for continuity in its developments it can prefer non-
zero level of NPAs. As the name suggests itself NPAs are those assets which never generate
profits to banks. And are threats for banks. Banks should try their best to manage these non-
ceasing assets or never try to remove or terminate. Because it is very difficult to vanish these
assets. The NPAs adversely affect profits and financial viability of banks. Compromise is one of
the measures to reduce the NPA. It has its limitations and may have adverse effects and hence
has to be used judiciously with proper understanding of the genuine problems and concerns of
each other. To conclude this study we can say about this report, that

 Banks shows very much high NPAs ratios.

 NPAs represent high level of risks & low level of credit appraisal.
 There are so many preventive measures available those can be adopted to stop an
assets/or A/C becoming NPA.
 There are some certain guidelines made by RBI for NPAs which are adopted by the
banks.
 Grameen bank is better in all terms and capital adequacy.

Bibliography:-
Books: - C.R. Kothari, Research methodology, New Delhi, Vikas Publishing house
Pvt.Ltd.2007.
A.K Gupta’s (IMPACT) Banker’s Training Institute.
IIBF Vision (A monthly newsletter of India Institute of Banking & Finance)
Websites:-
www.google.co.in
www.wiki.answers.
www.financialexpress.com
www.rbi.org.in
www.worldbank.co.in
www.allinterviews.com
www.investorworld .com
www.bankerstraininginstitute.com
http://en:wikipedia.org
www.bankingindiaupdate.com
http://www.smartbharat.com/banknpa/htm
www.basel.com
www.indiainfoline.com
www.allfreepapers.com
www.obcindia.co.in
http//:www.money radiff

4.CHAPTER : RATIO ANALYSIS AND INTERPRETATION:
1. Gross net profit ratio:-

Gross NPA ratio is the ratio of gross NPA to gross advance of the bank. Gross NPA is the
sum of all loans assets that are classified as NPA as per RBI guidelines. The ratio is to be counted
in the terms of percentage and the formula for GNPA is also follows:
Gross NPA Ratio = Gross NPA / Gross advances * 10
2012-13: 92.58/302.44*10
=30.61%
2013-14: 89.17/674.64*100
=13.22%
2014-15: 88.93/842.99*100
=10.55%
2015-16: 126.65/846.66*100
=14.95%
2016-17: 213.85/1087.63*100
=19.66%
Gross NPA ratio; Rs. In crore

Year Gross NPA Gross advances GNPA Ratio
2012-13 92.58 302.44 30.61%
2013-14 89.17 674.64 13.22%
2014-15 88.93 842.99 10.55%
2015-16 126.65 846.66 14.95%
2016-17 213.85 1087.63 19.66%

Gross NPA Ratio

35
30
25
20
Gross NPA Ratio

15
10
0
2012-13 2013-14 2014-15 2015-16 2016-17
Interpretations:
The above table indicates that quality of credit portfolio of the banks. high gross NPA ratio indicates the
low credit portfolio of bank and vice- versa. In 2012-13 the gross NPA ratio is to be 30.61%, 2013-14 the
GNPA ratio 13.22%, 2014-15 GNPA ratio is 10.55%, 2015-16 the GNPA ratio is 14.95%., 2016-17 GNPA
ratio is 19.66%, The following tables provides the details.

2. Net NPA Ratio:-

The net NPA percentage is the ratio of NPA to net advances in which the provisions is to be
deducted from the gross advances. The provision is to be made for NPA account. The formula for
that is;
Net NPA ratio = Gross NPA-provisions/Gross advances-provisions*100
year Gross NPA-provisions /Gross advance-provisions*100 Net NPA ratio
2012-13 92.58-92.58/302.44-92.58*100 0%
=0/209.86*100
=0%
2013-14 89.17-89.17/674.64-89.17*100 0%
=0/585.47*100
=0%
2014-15 88.93-88.93/842.99-88.93*100 0%
=0/754.06*100
=0%
2015-16 126.65-83.08/846.66-83.08*100 5.71%
=43.57/763.58*100
=5.71%
2016-17 213.85-89.81/1087.63-89.81*100 12.43%
=124.04/997.82*100
=12.43%

Diagramm:
Net NPA Ratio

14%
12%
10%
8%
Net NPA Ratio

6%
4%
2%
0%
2012-13 2013-14 2014-15 2015-16 2016-17
Interpretation:-
The above table indicates the quality of nonperforming assets of the banks. high net NPA
Ratio indicates the low credit portfolio & risk of banks and visa versa. We can see the above
table 2012-13 is 0% NPA Ratio, 2013-14 is also a 0% NPA Ratio, and 2014-15 is also 0% NPA
Ratio, and 2015-16 is 5.71% NPA Ratio, 2016-17 is 12.43% NPA Ratio.

3. Provision Ratio:-
Provisions are to be made for to keep safety against the NPA, & it directly affect on the gross profit
of the banks. The provision ratio is nothing but the total provisions held for NPA to gross NPA of the
banks. The formula for that is;
Total provisions ratio =total provisions /gross NPA*100
Net NPA= Gross NPA-provisions

Provisions =Gross NPA- Net NPA
year Total provisions Gross NPA Provision ratio

2012-13 92.58 92.58 100%
2013-14 89.17 89.17 100%
2014-15 88.93 88.93 100%
2015-16 83.08 126.65 65.59%
2016-17 89.81 213.85 41.99%

Diagram;
120%
100%
80%
60% Gross NPA ratio

Column2
40%
20%
0%
2012-13 2013-14 2014-15 2015-16 2016-17
;
Interpretations:-
This Ratio indicates the degree of safety measures adopted by the banks. It has direct bearing
on the profitability. Dividends and safety of the shareholders’ fund. If the provision Ratio is less,
it indicates that the banks has made under provisions. In 2012-13 to 2014-15 has the 100%
provision ratio. And the 2015-16 has 65.59% of provision ratio, and the 2016-17 has the 41.99%
of the provision ratio.

4. Gross priority sectors ratio:-

Gross priority sector it ensures the greater flow of credit to certain sectors where credit
would"normally" not flow to the desired extent. In such a way to ensure maximum credit flow.
Gross priority sector ratio formula;
GPSR= Gross NPA/Gross priority sector*100
Rs. in crore
year GNPA Gross priority sector Gross priority sector
ratio
2012-13 92.58 3338.38 2.77%
2013-14 89.17 3842.25 2.32%
2014-15 88.93 4779.15 1.86%
2015-16 126.65 5598.34 2.26%
2016-17 213.85 6141.89 3.48%

Diagram,
4.00%
3.50%
3.00%
2.50%
gross priority sector ratio
2.00%
Column1
1.50% Column2
1.00%
0.50%
0.00%
2012-13 2013-14 2014-15 2015-16 2016-17
Interpretation:-
In 2012-13 the GPSR is 2.77%, and in 2013-14 the GPSR is 2.32% , in 2014-15 the GPSR is 1.86%
and in 2015-16 the GPSR is 2.26% and in 2016-17 the GPSR is 3.48%




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Study on nonperforming assets of Karnataka vikas grameena bank

An empirical study on the non-

Kupg Centre kerimattihalli, Haveri

An assets is classified a non-performing assets (NPAs) if dues in the form of principal

Kupg Centre kerimattihalli, Haveri

Kupg Centre kerimattihalli, Haveri

And traded on stock exchanges) and,

Commercial banks co- operatives

↓ ↓ State cooperatives (16)

Public sector banks (27)

SBI and associate banks (8) Karnataka vikas grameen bank

Private sector banks (30)

Kupg Centre kerimattihalli, Haveri

Types of bank deposits:-

1. saving bank account :-

2. Recurring deposit account :-

Kupg Centre kerimattihalli, Haveri

3. Current deposits account :-

4. Fixed deposits account :-

Kupg Centre kerimattihalli, Haveri

Significance of the study:-

Objectives of the study:-

Need of the study:-

Kupg Centre kerimattihalli, Haveri

Scope of the study:-

Limitations of the study:-

Kupg Centre kerimattihalli, Haveri

Sources: http;//www.articles base .com/authors/Anthony-dean/53396.

Sources: http// ezine articles.com/? Expert _ zainul abiding.

Kupg Centre kerimattihalli, Haveri

2CHAPTER:- AN OVERVIEW OF BANKS

Karnataka Vikas Grameena bank of akki alur:

Company profile of KVGB:-

Type: body corporate (bank law)

Industry: finance service

Founded: October, 1983

Founder: Mohammad Yunus

Headquarters: Dhaka Bangladesh

No/of location: 2568 branches (July 2017)

Area served: Bangladesh

Key people: Ratan kumar nag, acting managing director

Product: micro finance

Revenue: 12435, 830,045 taka 176.67 million USD (2010)

Operating income: 8,513,832,110 taka 120.95 million USD (2010)

Net income: 757,241,322 taka (10.76 million)

Total assets: 125,396,957,972 taka

No/of employees: 20,138 (July 2017)

Kupg Centre kerimattihalli, Haveri

The grameen bank is a community development bank started in Bangladesh. They

Kupg Centre kerimattihalli, Haveri

Karnataka vikas grameen bank (KVGB).Regional rural bank was constituted on 12

Kupg Centre kerimattihalli, Haveri

Product and services:-

1. Saving bank account

Kupg Centre kerimattihalli, Haveri

1. vikas tax saving deposits

Regional rural banks:-

RRBs perform various functions in the following heads:

1. Providing banking facilities to rural and semi urban areas.

Kupg Centre kerimattihalli, Haveri

Legal existence and protection:-

Kupg Centre kerimattihalli, Haveri

Indian economy and NPSs:-