Phil

Management of Non-Performing Assets
1.1
INTRODUCTION:
Agriculture has been a way of life and means of livelihood for a
majority of agriculturists in India. Since centuries small holdings, almost exclusive dependence upon rain, occurrence of frequent droughts coupled with other natural calamities, (including floods, destruction of crops by insects, pests and plants diseases etc., low productivity (due to small size of farms and use of traditional technology), seasonality and uncertainty in production, traditional system of agriculture all these had been a constant constraints to the agriculturists, which in times of need, frequently drone them to rapacious money lenders as there was neither governmental agencies nor institutional arrangement to provide agricultural credit to farmers. The precarious conditions of agriculturists, lack of suitable security and special features of Indian agriculture also hindered the attraction of capital in this natural industry, the only oasis in desert were money lenders who did provided credit but at exorbitant rates of interest. This led to an increase in high incidence of rural indebtedness. Finance is the life blood of every production. Agriculture is not an exception to this. Various financial institutions are extending financial help for agricultural operations but none of them fully met the credit needs of the
Dept. of Commerce, Gulbarga University, Gulbarga
agriculturists in India. Frequently it has been emphasized that the agriculturists and rural population should be saved from the stronghold of money lenders and private agencies. Attempts have been initiated way back since 1904 with the adoption of the co-operative credit societies Act to substitute private agencies by institutional financing system. A number of commissions and committees (particularly the Deccan Riots Commission and the Famine commission) drew the attention of the Government for making suitable arrangements for providing rural credit, agriculturists require credit for different purposes and for different period of time, for instance they need credit for meeting current requirements of cultivation of maintenance of family expenditure during the period from saving to harvesting. For this, credit is needed for a short term which may be repaid after the harvesting of crop. Some times, credit is also needed for a bit longer period i.e., from 1 to 5 years for meeting cultivation and other developmental requirements. Such credit is known as medium term credit and it can be repaid not immediately after the harvest, but at some later period credit is also needed for meeting long term needs for development of land and agriculture. This credit is for sufficiently long period say, 5 to 10 years, since a loan is used by the agriculturists who wants to make permanent improvement on land, repayment of old debts, purchase of land etc.,
Before the introduction of co-operative movements in 1904 the private money lenders dominated the rural credit except in a small way the Government provided long term loans under the Land Development Act 1983 and the Agricultural Loans Act of 1984 these Acts empowered the government to provide loans to agriculturists on easy terms and conditions. but such loans, which were known as Taccavis covered the problem only to a small extent. Moreover to get the required finance, the agriculturists were required to undergo number of unnecessary formalities consuming their energy and time. Because of this many a times they preferred to go to money lenders, landlords etc., which did not involve such formalities. On the recommendation of the Famine Commission of 1901, MiChalosions Report of 1897, the report of Edward Law Committee of 1901, led the Government to enact the Co-operative Societies Act of 1904, under which Primary Agricultural Credit Societys (PCAs) could be set up for granting loans to farmers. But these societies provided loan only for seasonal agricultural operations and allied activities. Though these societies were also expected to give long term loans, they could not give it, because of the following reasons.
1)
The poor financial resources of these societies was the main limiting factor. Due to this, the PCAs could not grant loans for long periods.
2)
The PCAs did not have the expert staff for proper valuation of land and property for verification of the title deeds, appraisal of projects and estimation of repayment capacity of farmers. Similar recommendation were also made by the Registrars, conference
of 1926, the Royal Commission on Agriculture of 1928 and the Central Banking Enquiry Committee of 1931. Some of the important recommendations are; 1. To provide long term loans, land mortgage banks should be established under the co-operative societies act of 1915. 2. To facilitate them to work efficiently, the area of operation of such banks should not be too large. 3. The long term loans should be given for improvement of land, for adopting improved methods of cultivation, for redemption of old debts and for purchase of land for development etc., 4. The amount of loans should not be more than the value of the immovable property. Maximum and minimum limits should be fixed. 5. The bank should not grant loans which are un-economical to the borrowers.
6.
The period and amount of loan should be fixed, after taking into account the repaying ability of borrower and the purpose of loan. The period of loan should not in any case exceed twenty years.
7.
The provincial governments should grant subsidies to these banks in the initial stages of their working an existing concessions in the form of stamp duty and registration fee should be continued in favour of these banks. All these recommendations led to the establishment of separate agencies
under the name of land mortgage banks in India.
1.2
STATEMENT OF THE PROBLEM:

The bank under reference of study has been established primarily for
giving long term loans to the agriculturists who are the members of the bank. But now it is giving loans even to small scale businesses like Carpenters, Welders, Candle manufacturers etc., and the bank now is planning to extend housing loan to members by assessing their credibility. Profit making is key agenda for every business concern including the banking it may be public sector bank, private sector banks or co-operative agriculture sector banks. However, the ever increasing non-performing assets have a direct impact on profitability of the banks and financial institution. Banks and financial institutions are not allowed to book income on such accounts and same time they are forced to make some adequate provision on such assets. Primary Co-operative agriculture and rural development bank is one of important avenue of credit to farmers especially in backward area like Hyderabad Karnataka. Due to inadequate government policies and its own defective and faulty lending and recovery policies, it was not in position to collect its over dues, further in adequate rainfall, draught, floods, and
unscientific way of cultivation, ignorance and illiteracy among farmers added fuel to fire, because of this they are not been able to clear dues timely. PCARDB, Gulbarga is facing an acute problem with regard to recovery as well as how to manage the drastically increasing non-performing assets. There is a need to manage increasing non-performing assets. There is a need to manage increasing trend of non-performing assets very effectively. Keeping in view three issues the present study with title Management of NonPerformance Asset - A Study with reference to Primary Co-operative Agriculture and Rural Development Bank Limited, Gulbarga has been chosen and offer suggestions in the light of findings.
1.3
REVIEW OF LITERATURE:
A brief review of the previous studies which are within the reach of the
researcher on relevant topic is discussed in the following lines. 1. Shri.R.G.Desai conducted a study of Short Term Finance for Agricultural Development A study of selected farmers Service Societies of Bellary District in Karnataka (1984). The main objectives of the research were to evaluate the performance and to examine the pattern and extent of various services rendered by Farmers Service Societies and to assess their impact on the beneficiaries. The finding of the study is that there is perceptible change in the cropping pattern, cropping intensity, income pattern and marketable surplus of the borrowing farmers. This change has been the result of Farmers Service Societies functioning in the area. However, the study also reveals that there exists a higher credit gap and this gap is found with varying degrees. Therefore, the lending policy, though apparently sound, needs modifications so as to meet the needs of the farmers. 2. Miss.Warad Vijaylaxmi S. undertook study on Commercial Banks and Agricultural Credit A case study of Gulbarga District in 1988. The specific objectives of the study were to examine the loan assistance given by commercial banks to different size groups of farmers in the
development of agriculture and to assess the utilization and repaying pattern of loan. The results of the study are: i) The size of borrowing and amount repaid by the sample beneficiaries bears direct relationship with the level of agricultural development. ii) The utilization pattern in highly developed and highly backward areas shows that the level of agricultural development is not a determining factor in case of loan amount utilised by the sample beneficiaries. 3. Shri.Basavaraj.G.Bhavi, a teacher fellow, conducted a study on Assessment of Regional Rural Banks Credit on Target Groups A Case study of Krishna Grameena Bank in 1990. The main objective of the study was to make an assessment of impact of Krishna Grameena Banks Credit on target groups in terms of; i) ii) iii) Formation of Assets. Creation of Additional Employment. Generation of incremental income in the light of credit provided by KGB; and. iv) To examine the extent of repayment of loans and overdues position and reasons for overdues.
The study has revealed that the Krishna Grameena Bank has influenced all the category of borrowers in formation of assets, creation of additional employment and generation of incremental income. 4. Shri.Chandrakant Chandapurkar, conducted a study on non-performing assets in Karnataka State Financial Corporation A Case study of Gulbarga in the year 2007. The main objective of the study was to assess the impact of non-performing assets in KSFC, Gulbarga District. It is clear from the review of the literature that no one has made a study upon the topic Non Performing Assets with reference to Primary Cooperative Agriculture and Rural Development Bank Ltd., Gulbarga Tq. Hence, the topic has been chosen for the study.
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1.4
OBJECTIVES OF THE STUDY:

For the present study the following objectives have been set.
1.
To trace the history and growth of primary co-operative agriculture and rural development bank.
2. 3. 4.
To study the concept of non-performing assets. To study the impact of non-performing assets on sample bank. To assess the policy of managing non-performing assets in PCARDB, Gulbarga.
5.
To locate the strength and weakness in recovery system of PCARDB, Gulbarga.
6.
To offer measures for an effective management of NPAs in the light of findings.
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1.5
METHODOLOGY:
The descriptive information has been used which is based on interviews,
discussion and consultation with the concerned officials of PCARDB Limited. The analysis and interpretation of data is based on those information. All details regarding non-performing asset management, loan schemes, loan sanctioning procedure. Performance of various schemes of PCARDB information about performing and non-performing assets were collected from the records of PCARDB. The methods and techniques used for analysis; Percentage, Tabulation. Comparison and Analytical interpretation and
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1.7
LIMITATIONS OF THE STUDY:

Due to time and resource constraints, it is very difficult to undertake a
study covering larger area and many branches. Therefore, the area of study has been restricted to Gulbarga taluka only. The study is restricted to PCARDB, Gulbarga office only.
The qualitative information has been collected which is based on
interviews, discussions and consultations with the officials PCARDB, Gulbarga and analysis and interpretation of data is based on those information 5 years data has been analysed the results of the work cannot be generalized. Sources of information is infact data primary and secondary. For our study purpose only secondary source of information was used. Inflation impact on profitability was not analysed separately.
It uses only secondary data spanning from 2003-04 to 2007-08.
Therefore findings derived are subjective.
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1.8
CHAPTER SCHEME:
The study has been presented with five chapters.
First chapter deals with research design which includes, Introduction, Agricultural System, Statement of the Problem, Reference to Previous studies, Objectives, Area and Period of study, Methodology and Limitations of the study.
Second chapter contains a Theoretical frame work on non-performing assets in banks, financial institutions and co-operative agricultural banks.
The Third chapter provides an Overview of Land Development Banks and a preview of PCARDB.
The Fourth chapter deals with, Analysis and Interpretation of Data relating to Management of Non-Performing Assets in PCARDB, Gulbarga.
The Fifth provides an account of Summary of Finding and Suggestions.
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2.1
AN OVERVIEW OF NPA:
A modern bank play very important role in economic growth of a
country. In a modern economy banks and financial institutions are to be considered as leaders of development. The development of a country is
integrally listed with development of banking and financial sector. Non-performing assets are likely the flab, which causes inconvenience to any financial sector. It is therefore, very important to maintain and manage such assets in order to facilitate the cash rotation and drive profit out of the investment. A non-performing asset arises out of the loans or financial assistance given by the lender to the borrower, when borrower is unable to pay his monthly installment, inclusive of principle and interest. The efficiency of a company and the percentage of the non-performing assets are invasively related. The higher percentage of the non-performing assets the lower is the efficacy. Modern banks and financial institutions play a very important role in economy growth of a country. In a Modern economy banks and financial institutions are considered as initiates and essentials of development. Development of a country is integrally linked with development of banking and financial sector.
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Non-performing asset arises out of the loans and financial assistance given by the lender to the borrower, when borrowers are unable to pay equated monthly installments inclusive of principle and interest. It is a know fact that the banks and financial institutions are in big problem of swelling nonperforming assets (NPA) and the issue is becoming more and more unmanageable. In order to bring situation under control, some steps have been taken recently i.e., Securitisation and Reconstruction of financial assets and enforcement of securities interest Act, 2002 was passed by parliament, which is an important step towards elimination or reduction of NPAs. Banks are identified as financial centres specialized in the art of lending out funds mobilized from the customers. The evil effect of lending is clearly stated in a saying Neither be a borrower, nor a lender. If you, your friend, the statement indicates just how difficult it is to get back the money once again. Banks shave certain social obligations to fulfill as per government directives and in such a situation the position of banks is lend that much of money which it can afford to lose, irrespective of the little set backs the role of credit has done more to enrich the nations then all the gold mines in the world put together.
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Credit is like putting paste out of a tooth paste, it is easy to get it but recovery is some what difficult, like putting that paste back into the tube. It is very difficult task indeed. That is the reason why good money lent, some times becomes bad and doubtful, in banking parlance it is called as Non-Performing Asset (NPA). the management of NPA is a Herculean task before the banks / financial institutions in the present post financial reformed scenario think and find alternative for recover or NPAs. Profitability is considered as a benchmark for evaluating performance of any business enterprise including the banking industry. However, increasing non-performing assets have a direct impact on profitability of banks and financial institution. Legally speaking banks and financial institutions are not allowed to book income on such account and at the same time they are forced to make provision on such assets.
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2.2
ESSENTIALS OF NON-PERFORMING ASSET:

The income recognition norms laid down that, only the amount of
interest which is realized, will be treated as income. Further the account which does not serve debt for one quarter, will be viewed as a NPA and classified as substandard. A substandard asset over two years gets classified as doubtful asset. In view of potential loss from such assets where the risk stands
enhanced on account of NPA character, adequate provision is required to be made to take care banks liability to the depositors. If the profits generated are inadequate to cover provision requirements it would result in less i.e., erosion in capital. As per present RBI, a provision of 100% of amount outstanding has to be made for substandard assets and depending on the age doubtful assets, a provision equal to shortfall in realizable value (RVS) vice-versa. Outstanding balance plus 20% or 30% or 50% of RVS has to be made. In case of NPA with little or no security (loss assets). 100% of outstanding amount is required to be provided. It is pertinent to note that if every particular facility granted to a borrower reflects NPA character, all facilities have to be treated as NPA.
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2.3
TERMINOLOGY OF NPA AS PER RBI NORMS:

Non-performing assets is one which does not yield periodically interest
income regularly. a) An asset, in respect of which, interest has remained overdue for a period of 3 months or more. b) A term loan inclusive of unpaid interest, when the installment is over due for a period of 3 Months or more on which interest amount remained overdue for a period of 3 months or more. c) A demand or call loan, which remained over due for a period of 3 months or more from the date of demand or call or on which interest amount remained over due for a period Of 3 months or more. d) e) A bill which is overdue for a period of 3 months or more. The interest in respect of a debt of the income on receivable under the head other current assets in the nature or short term loans / advances, which facility remained overdue for a period of 3 months or more. f) Any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for a period of 3 months Or more. g) The lease sector and hire purchase installment which has become overdue for a period of 3 months or more.
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h)
In respect of loans, advances and other credit facilities (including bills purchased and discounted), the balance outstanding under the credit facilities (including accrued interest) made available to the same borrower / beneficiary when any of the above credit facilities become non-performing assets.
2.4
1. 2.
REASONS AND CAUSES NPA:

Intentional defaulters and faulty projects. Natural calamities, recession, varies in Government policies, changes in economic and climatic conditions.
3.
Most projects reports are benefit of ground realities, proper, linkages, product pricing etc.,
4. 5. 6. 7.
Over dependent on poorly paid skilled workers and technicians. Building up pressure for sanctions. Mishandling by bankers, lack of professionalism and appraisal standard. Non-observance of system, procedures and non-instance of collaterals etc., wherever eligible / available.
8.
Prolonged evaluation seeking frustrating borrowers by unwanted clarifications, lack of post section monitoring unchecked diversions.
9.
directed lending under subsidy schemes without proper delivery system, infrastructure etc.,
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Management of Non-Performing Assets 10.
Stitch in times save nine, timely support / help may save a genuine unit. Have head and heart together, for a human approach.
11.
Inadequate skill and trainee manpower for appraisal / follow up and recover.
12. 13.
Unwillingness to take recovery work. Unnecessary pressure / disturbance from practical, personnel and higher authority to the recovery staff and their activities.
14.
The market conditions prevailing in the particular business of the borrower.
15. 16. 17.
Economies of scale ligancy of license to industries. Impact of liberalization of industries. Global competition.
Reserve Bank of India on NPAs and ICAI Accounting Standard nonrevenue recognition consistent with each other Only when it is actually realized, whether the aforesaid with respect to recognition of interest income on NPAs on realization basis is consistent with accounting standards - 9 revenue recognition. For this purpose, the issued norms by the RBI for creating certain assets as NPAs seems to be based on as assumption that the collection of interest on such asset is uncertain.
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Therefore, complying with as a interest income is not recognized based on uncertainty involved but is recognized at a stage when actually realized thereby complying with RBI as well. In order to ensure proper appreciation of financial statement, banks should disclose the accounting policies adopted in respect of determination of NPAs and basis on which income is recognized with other significant accounting policies. RBI on classification of bank advances. Reserve Bank of India (RBI) has issued on provisioning requirement with respect to bank advances. In terms of these bank advances are mainly classified into.
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2.5
CLASSIFICATION OF ASSETS AS PER R.B.I.

Assets Period Not more than normal period Not exceeding 18 months Exceeding 18 months.
1. Standard Assets 2. Sub-standard Assets 3. Doubtful assets 1.
Standard Assets: Such an asset is not a non-performing asset. In other word it is not more than normal risk attached to the business.
2.
Sub-Standard Assets: It is classified as non-performing asset for a period not exceeding 18 months.
3.
Doubtful Assets: Assets that has remained NPA for a period exceeding 18 months is a doubtful assets.
Loss Assets:
Here loss is identified by the banks concerned or by internal auditors or by Reserve Bank of India inspection. In terms of RBI, as and when an asset becomes NPA, such advances would be first classified as a sub-standard one for a period that should not exceed 18 months and subsequently as doubtful assets. It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the purpose of presentation of advances in the bank balance sheet.
Dept. of Commerce, Gulbarga University, Gulbarga 23
The third schedule to the banking Regeneration Act, 1949 a solely governs presentation of advances in the balance sheet. Banks have started Issuing notices under the Securitization Act, 2002 directing the defaulters to either pay back the dues to the bank or else give the possession of the secured assets mentioned in the notice. However, there is a potential threat to recovery if there is a substantial erosion the value of security given by the borrower has committed fraud, under such a situation it will be prudent to directly classify the advance as a doubtful or loss asset as appropriate. RBI on provisioning requirement of bank advances. As and when an asset is classified as an NPA, the bank has to further sub-classify it into substandard, loss and doubtful assets. Based on this classification, bank makes the necessary provision against these assets. RBI has issued on provisioning requirements of bank advances where the recover is doubtful. Banks are also required to comply with such in making adequate provision to the satisfaction of its auditors before declaring any dividends on its shares. In case of loss assets, specifically require that provision for the amount outstanding should be made by the concerned bank. This is justified on the grounds that such an asset considered uncollectible.
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2.5 (ii) Classification of Assets as per NABARD: Upto 13 months in agriculture and 7 months as delayed O/s Loan amount in non-agriculture 13 to 36 months in agriculture & 7 to 36 months as delayed O/s loan amount in non-agriculture 36 to 48 months delayed O/s Loam amount 3. Doubtful asset 48 to 60 months delayed O/s loan amount More than 60 months delayed O/s Loan amount 4. Loss asset Determined by Auditors & Concerned authorities.
1.
Standard Asset Sub-Standard asset
0.25%
2.
10% 20% 30% 50% 100%
PCAROB Ltd Lends money to its members on long term basis especially for farmers and for rural development scheme. Its structure is
scheduled in such a way that the installment will become due on half yearly basis. By considering the fact above classification of assets has been categories and provisioning norms has been set. 1. Standard Assets: It is performing or good asset up to 13 months in agriculture and 7 month as delayed outstanding loan amount in Nonagriculture.
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2.
Sub Standard Assets: It is non performing asset consisting period from 13 to 36 months in agriculture and 7 to 36 months as delayed outstanding loan amount in non-agriculture
3.
Doubtful Assets: Is also a nonperforming asset. consisting period from 36 to 60 months delayed outstanding loan amount.
4.
Loss Assets: It is identified by the auditors and concerned authorities or by RBI inspection
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3.1
ROLE OF BANKING IN AGRICULTURE

In a changing environment, banks are diversifying their role in the
agriculture sector in order to get revenue from their significant contribution to agriculture. Some of the new roles that banks have adopted are: Marketing, training and consultancy, insurance and financing for infrastructure via privatepublic participation. The Credit requirements of agriculture are of three types viz. 1. 2. 3. a) Short Term (<15 months) Medium Term (15 months to 5 yrs) Long- Term (LT) (>5 yrs) Long Term Credit: The period of long-term credit is generally 5 to 20 years or even more in some special cases. In any industry, long-term investment is necessary, to create permanent assets which give returns over a period of time. The permanent investment is not only necessary for a particular industry but even for the country. Because for continuity of production and progress of the country. This applies to agriculture also. In Agriculture, long-term investment comprises of sinking well, land leveling, fencing and permanent improvements on land purchase of big machinery like tractor with its attachments including
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trolleys, establishment of fruit orchard of mango, cashew, coconut, sapota (chiku), orange, pomogranate, fig, guava, etc. There are many other items of long-term capital investment. Investment once made in the beginning continuous to give returns over a long period. Fruit orchards particularly do not give any income in the first 4 - 5 years as in case of other seasonal crops. So the expenditure incurred in the first 4-5 years becomes a capital cost. All the long-term investments mentioned above require large amounts of funds. Although they have good potential to give returns in future, individual farmers have no financial capacity to make such costly investments from their own funds because they have no savings or very little savings. Therefore, they have to resort to bank borrowing to meet such needs. The financial criteria terms and conditions procedures of granting L.T. loans are altogether different from short-term loans. Even the bank or agency providing LT loans is separate due to its particular mode or system of raising capital. b) Land Development Banks: The special banks providing LT Loans are called Land Development Banks (LDA). The history of LDBs is quite old. The first LDB was started at Jhang in Punjab in 1920. But the real impetus to these banks was received after passing the Land Mortgage Banks Act in 1930s (LDBs were originally called
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Land Mortgage Banks). After passing this Act LDBs were started in different states of India. c) Crop loan is a short term credit and is generally obtained from primary
credit co-op. society of a village or also from commercial bank. The period of loan is about one year except for sugarcane for which the period is 18 months. There are two criteria for granting crop loan. 1. 2. 1. One third of gross value Cost of cultivation. One third of gross value approach takes into account the yield and price of the crop, its cost of cultivation and family expenditure. If the gross value is more, more amount of loan becomes available. For e.g. Rice. Particulars Yield (Q.) Price (Rs/Q) Gross value (Rs.) One third (Rs.) 2. I 20 400 8,000 2,700 II 25 400 10,000 3,330
Thus in second situation farmer is entitled for Rs.3330 per hectare which is higher than in the first situation. Thus this method takes into account the productive aspect of a crop.
3.
In cost of cultivation, direct paid-out costs are only considered. They include items, like seeds, manures, fertilizers, pesticides, diesel /
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electricity, hired labour etc. In this approach, it is expected that all direct costs to be incurred by the farmer should be covered and accordingly he should get adequate credit. If the cost of all these items of input is Rs.3500/-. If the loan is granted according to first approach, then the amount which is short, is spent by the farmer from his own funds. Since crop loan is for one season, its recovery is made in one installment after the harvest of the crop. Crop loan is an annual requirement and farmer has to borrow fresh loan for new crop season every time. Therefore, he has to repay the earlier loan with interest within stipulated time. Since this loan is required every season/every year, the procedure of getting this loan is simple and convenient and it is made available by the District Central Co-op. Banks through the village Co-op. Credit Society. So the farmer gets his loan in the village itself. If the loan is to be taken from commercial bank, it is available from the nearby branch of the commercial bank. As for security, the farmer has to offer his land as a security. There is a three tier structure providing crop-loans through cooperative institutions.
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d)
Agricultural loans Agricultural loans are available for a multitude of farming purposes.
Farmers may apply for loans to buy inputs for the cultivation of food grain crops as well as for horticulture, aquaculture, animal husbandry, floriculture and sericulture businesses. There are also special loans to finance the purchase of agricultural machinery such as tractors, harvesters and trucks. Construction of biogas plants and irrigation systems as well as the purchase of agricultural land may also be financed through special types of agricultural finance. e) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Schemes for Agri Finance Kisan credit card scheme Homestead farming Financing farmers for purchase of land for agri purposes Scheme for cultivation of medicinal plants Scheme for cultivation of vanilla Rain water harvesting scheme Produce marketing loans Agri loans to NRI Minor irrigation Farm mechanization Construction renovation and expansion of godowns.
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f)
Agricultural Banks National Bank for Agriculture and Rural Development or
NABARD is responsible for refinance disbursement to commercial banks, State cooperative banks, State cooperatives, rural development banks, Regional Rural Banks (RRBs) and other eligible financial institutions. It also sanctions money through its Rural Infrastructure Development Fund for projects covering irrigation, rural roads and bridges, health and education, soil conservation and drinking water schemes. NABARD also offers a Kisan Credit Card Scheme and crop loans under the Rashtriya Krishi Bima Yojana. Banks and RRB's introduced the Kisan Credit Card Scheme of NABARD in their areas of operation. In this scheme eligible farmers are provided with a Kisan Credit Card and a passbook or card-cum-pass book. The revolving cash credit facility allows any number of withdrawals and repayments within the limit. This limit is fixed on the basis of operational land holding, cropping pattern and the scale of finance. Sub-limits may be fixed at the discretion of banks. This Kisan Credit Card is valid for 3 years subject to annual review. As incentive for good performance, credit limits may be enhanced to take care of increase in costs, change in cropping pattern, etc. Each drawl should be repaid within a maximum period of 12 months. Conversion or rescheduling of loans is
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allowed in case of damage to crops due to natural calamities. Security, margin, rate of interest and other details are fixed according to RBI norms. g) Flow of Credit: A comprehensive credit policy was announced by the
Government of India on 18 June 2004, containing measures for doubling agriculture credit flow in the next three years and providing debt relief to farmers affected by natural calamities. The following are the highlights of this announcement:
Credit flow to agriculture sector to increase at the rate of 30 per cent per year. Debt restructuring in respect of farmers in distress and farmers in arrears providing for rescheduling of outstanding loans over a period of five years including moratorium of two years, thereby making all farmers eligible for fresh credit.
Special One-Time Settlement scheme for old and chronic loan accounts of small and marginal farmers. Banks allowed to extend financial assistance for redeeming the loans taken by farmers from private moneylenders. Commercial Banks (CBs) to finance at the rate of 100 farmers/ branch; 50 lakhs new farmers to be financed by the banks in a year. New investments in agriculture and allied activities at the rate of two to three projects per branch. Refinements in Kisan Credit Cards (KCCs) and fixation of scale of finance.
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3.2
GROWTH AND DEVELOPMENT OF LAND MORTGAGE BANKS

First land mortgage bank was started in Punjab in the year 1920 at
Jhang.
The membership of the bank was confined to land owners and
agricultural credit societies. Funds for operation were raised from share capital and loans from the government and by issue of debentures. But these banks did not work properly because of certain reasons like, carelessness in advancing loans without proper valuation of the property, fall in the value of security (land) because of economic depression. One more strong reason was that the bank directors and employees themselves were heavy borrowers. The period between 1920 and 1929 is called the period of experimentation and unplanned growth of the LMBs. During this period, LMBs were organised under the co-operative Societies Act in Mysore, Madras, Punjab & Bombay. In 1929, there were twelve banks in Madras alone. In the same year Bombay organised three preliminary LMBs and Mysore started central land mortgage bank and some Primary LMBs is the same year. The period, 1930-39 was one of trials and tribulations for LMBs. These banks were organised in all the major provinces to advance loan mostly for liquidation of old debts. By 1939 there were 226 LMBs, in India with a
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membership of 80,000 and they have advanced loan to the extent of Rs.5 Crore. The period from 1393 to 1950 comprised of war and the post war period. The war period was comparatively one of stability for the LMBs. The 1950-51, the number of primary LMBs increased to 286 and their membership amounted to 2,13,814. Following is the chart showing details of state wise number of field units, divisional offices, membership and share capital of PCARDBs in Indian (1987-88).
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Table-3.1: National Co-operative Agriculture and Rural Development Bank Limited

Sl. No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Name of the State Andhra Pradesh Assam Bihar Gujarat Himachal Pradesh Hariyana Jammu Kashmir Karnataka Kerala Madhya Pradesh Maharashtra Orissa Pondicherry Punjab Rajasthan Tamil Nadu Tripura Uttar Pradesh West Bengal No. of field units (PCARDBs / Branches) 484 21 187 181 23 73 32 177+13 87 454 297 55 01 52 150 184 03 274 50 No. of District Divisional Regional Offices 25 52 22 16 06 20 11 09 35 12 01 08 18 62 02 Share capital (Rs. in Lakhs) 1872.10 101.16 2947.27 1510.89 150.72 1123.35 121.84 4893.19 1492.28 784.52 1148.98 4426.46 507.75 52.24 2527.86 734.21 739.38 23.90 4442.28 487.19
Membership
2062000 29380 696000 523018 15022 299834 41977 1103485 595105 1215000 937260 512589 2409 455425 638000 1551000 7695 1895650 230918
Total 2783 299 12811767 25194.38 Sources: Adopted from Land Bank Journal Issue III, Vol. No. XXVIII, Published by National Co-operative Agriculture and Rural Development Bank Federation Ltd. and Shiva Shakti, B.G.Kher Road, Mumbai-400 018.
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3.3
KARNATAKA STATE CO-OPERATIVE, AGRICULTURE AND RURAL DEVELOPMENT BANK.
The Karnataka State co-operative Agriculture and rural development bank celebrating its success since from its establishment 1929 as a land mortgage bank, is one of the oldest in country and has grown steadily over last 80 years and shown much dynamism in diversification of credit even for nonform activities.
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Table-3.2: Districts, No. of Branches, Membership and Share Capital of PCARDBs in Karnataka State (Branches) Sl. No. of Share Districts Membership No. Branches Capital I) Bangalore Divn. 1. Bangalore City 03 17000 24.71 2. Bangalore Rural 08 77000 98.92 3. Chitradurga 09 68000 297.73 4. Kolar 11 96000 160.46 5. Shimoga 10 59000 86.37 6. Tumkur 10 87000 143.17 Total 51 404000 811.36 II) Belgaum Divn. 7. Belgaum 10 61000 127.83 8. Bijapur 11 81000 174.56 9. Dharwar 17 74000 153.27 10. Karwar 11 41000 94.53 Total 49 257000 550.19 III) Mysore Divn. 11. Chikamagalore 08 39000 127.80 12. Mangalore 08 60000 125.19 13. Hassan 08 58000 105.91 14. Coorg 03 13000 49.61 15. Mandya 07 62000 89.83 16. Mysore 11 90000 88.35 Total 45 322000 586.69 IV) Gulbarga Divn. 17. Bellary 08 32000 65.76 18. Bidar 05 20000 59.40 19. Gulbarga 10 76986 359.60 46000 101.06 20. Raichur 09 64000 157.36 Total 32 162000 383.58 Grand Total 177 1145000 2331.82 Source: Statement, Journal Co-operative movement At a Glance in Karnataka.
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3.4
PRIMARY CO-OPERATIVE AGRICULTURE AND RURAL DEVELOPMENT BANK LTD., GULBARGA:

The bank under study i.e., PCA&RD Bank Ltd., Gulbarga (PCARDB)
has been established on 6th of August 1960 under Sec. 7 of the Karnataka State Co-operative Act-1959, initially the name of the bank was Primary cooperative and land development bank Ltd., Gulbarga. Subsequently,
according, bearing No. R.N.5.R/45/ K.M.A./1984-85 dtd:25th of July 1984, the name of the bank has been changed to Primary Co-operative Agriculture and Rural Development Bank Ltd., Gulbarga. Gulbarga taluka consisting of 144 villages, since inception, the bank is extending credit to its members residing in different villages of the taluka under different schemes. The amount of loan given by the bank stood at Rs.185.36 lakhs during the year 1985-86. Now it is increasing and has reached to Rs.349.17 lakhs by the end of 1989-90 at present i.e., as on 30th of March 1991, the number of membership in the bank reached to 10,623 which is quite significant. The PCARDB Limited, Gulbarga celebrated Silver Jubilee in the memory of its 25 years of service to its members in the year 1985 and it is celebrating its Golden Jubilee in this year i.e., 2010.
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The share capital of the bank is also increasing in the year 1985-86, it was just Rs.14.40 lakhs, but now it increased to Rs.38.08 lakhs. That means it has more than doubled during this period. It has expanded its other operations of the bank and staff members also increased. Table-3.3: Primary Co-operative Agriculture and Rural Development Bank Limited, Gulbarga Dist. Branch Afzalpur Yadgir Shorapur Sedam Shahapur Jewargi Gulbarga Chittapur Chincholi Aland Members 8871 9975 7964 5627 6035 7820 10623 6452 7312 6307 Share Capital 39.48 38.57 26.65 21.46 36.18 34.13 38.08 30.84 40.53 52.68
Source: Journal Co-operative movement at a Glance in Karnataka.
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3.5
OBJECTIVES OF AGRICULTURE AND RURAL DEVELOPMENT BANK:

The main objectives of the central land development bank is to provide
long term credit either to the primary LOBs affiliated to them or to finance directly through their branches. These banks also undertake the following functions. 1) They grant to primary LDBs or to Individuals through their branches on the mortgage of un-encumbered property to which the borrower member has a clear title. 2) They float debentures for raising necessary funds for which the state government guarantees for the repayment of principal and interest. 3) They establish branches / sub-offices or new primary LDBs to facilitate its business. 4) 5) They acquire immovable properties and construct buildings. They encourage the spirit and practice of co-operative firms, mutual help and self-help groups in the members. 6) They act as a link between the long term banking institution, NABARD and the government. 7) They mobilize savings and stimulate capital formation in the agricultural sector by issue of debentures.
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8)
They perfect the farmers from the clutches of money lenders and from the alienation of land to help them in effecting permanent improvement on their lands.
9)
They supervise, inspect and guide the primary LDBs and verify utilisation of loans.
10)
They perform all such functions as may be conducive to the fulfillment of the above objectives.
3.6
LIMITATIONS OF PCARDBS:
Though the PCARDBs have made considerable progress in recent years
in this country, it has not really contributed much to the improvement of financial position of the farmers through the provision of long term credit. These banks have their problems. If the Problems given below are considered and solved, these banks will have much more role to play in the development of agriculture in the country. 1. Inadequacy of Funds: The PCARDBs are suffering from inadequacy of funds. More than 80% of the working capital of these banks consists of borrowed funds. Because of this, the loaning operation of the banks have remained at a low level. This problem is further aggravated by mounting overdues which are increasing year after years.
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2.
Lack of proper supervision The machinery for supervision is not only inadequate, but also in many
branches, even the secretaries and managers are generally untrained and the directors do not possess required experience and ability to manage and guide the affairs of the bank effectively. Granting o loans involves a number of technicalities such as, ascertaining the quality of soil or land to be mortgaged, repaying capacity of the borrower proper valuation of crops generally grown on lands and so on. There is an utter lack of administrative and supervision staff of right type and on requisite scale and therefore, a full check on the utilisation of loans is rather difficult. 3. Improper Functioning: The functioning of the PCARDBs sounds non-co-operative and undemocratic. This is because of the following reason. a) The amount of loan to be given usually depends upon the security of land. This means, those who have productive capacity and skills, but not land and other security to offer that is acceptable by the bank are not in a position to get the loan from the bank. b) There is no localized arrangement for assessing the need of the local people. The field officer, being an outsider with no touch of and
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knowledge about local conditions, works according to the guidelines given to him by the higher authority. 4. Faulty learning operations: The procedure of determining the loan eligibility of a farmer is still security-oriented rather than production oriented. There is no uniform policy for assessing the repaying capacity of the borrower and the value of land. In most of the cases, the incremental income due to the proposed
improvements are not taken into account and whenever it is considered, there is no systematized procedure of cost benefit analysis. 5. Delay in sanctioning and disbursement of loans: There is a great delay in both sanctioning and disbursement of loans. This result and mainly from delay at the stages of examining the titles of intending borrowers to the lands offered by them as security. The cause of delay at the sanctioning stages are; a) b) c) The ignorance of the borrower in respect of submission of relevant documents along with loan application. Lengthy and time consuming process that is taken for scrutiny of titles. Lack of frequent meetings of the management and lack of full authority with the managing committee to sanction loan. Some times the loan sanctioned may be delayed for payment, the cause of such delay may be non compliance of conditions in the loan sanction orders.
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6.
Non-viable Branches: A large number of PCARDBs are non-viable units, the reasons for no-
viability may be because of mounting overdues which locks up the funds available with the bank, low mobilidation of deposits by the member lack of funds, etc., As per the committee on co-operative land development bank. In order to be a viable unit, each PCARDB or a branch of Central LDB should have a minimum loan business of Rs.35 Lakhs.
3.7
MANAGEMENT OF PCARDB LTD., GULBARGA:

The management of the PCARDB vests with the board of directions.
The board comprises of selected directors, directors nominated by the registrar of co-operative societies and central level development bank. For the purpose of electing directors, the members of the bank are divided into two groups, namely borrowed and non-borrowed members. Among nine directors, seven are elected from the borrowed group and two from non-borrowed group. There is a reservation for a lady candidate and for a schedule caste or schedule tribe candidate. The President of the board is elected by the board members in the presence of secretary. The board is generally expected to by down the broad framework of policies, while execution is entrusted to the Chief Executive who is also called as Secretary and Administrative Officer. For the better and smooth functioning of the bank, the following authorities give the
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directives and help in collecting loans and advances given by the bank to its members. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Managing Director of Karnataka State Agriculture and Rural Development Bank Ltd., Bangalore. Registrar of Co-operative Dept. Deputy Commissioner. Special Deputy Commissioner. Assistant Deputy Commissioner. Joint Registrar of Co-operative Dept. Deputy Registrar of Co-operative Dept. Assistant Registrar of Co-operative Dept. Tahasildar of Gulbarga Taluka. Sericulture Department of Gulbarga Taluka. Horticulture Department of Gulbarga Taluka. At present, bank consists of a Secretary, an accountant, an accounts assistant, a land development inspector a first divisional clerk and typist. There are six supervisors to help the staff in collecting the loans and advances and to help the bank in its functioning. Training will be given to the staff for making them aware of the principles of co-operation. This training is given for a period of six months to the newly appointed staff. Sometimes NABARD also arranges such a training at its own cost to impart training to the staff of primary LDBs, central LDBs and state LDBs.
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3.8
1.
THE VARIOUS LOAN SCHEME OF PCARDB LTD.

Minor irrigation a) b) c) d) e) f) g) Well digging Well deepening Water lifting pump set Pipeline Dripping water pipeline Water storage Others Coconut farming Grapes farming Coffee farming Mango farming Rose farming Rubber farming Complete Horticulture
2.
Horticulture a) b) c) d) e) f) g)
3. 4.
Sericulture Diversified a) b) c) d) e) f) g) h) Diary farming Bullock cart Sheep farming Piggery farming Fish farming Fertilizer Gas Machine Poultry farming Others
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5.
Farm Mechanisation a) b) c) Tractor Power Tiller Other equipment 3 Wheeler Passengers Vehicles 4 Wheeler Passengers Vehicles Others
6.
Small rural Transport: a) b) c)
7 8 9.
Two Wheelers Housing Loans Non farm Sector a) b) c) Small Scale Industries Shoe making Others
10. 11.
Godown Construction Land Development Loans a) b) For Purchase of land For Improvement of Land Quality and Productivity
The above are the various type of loan schemes in PCARDB. From time to time some of the new schemes will be introduced and old schemes are abolished based up on the need and requirement of the formers and based on Govt. Policies. Note: Crop loan is not give in PCARDB ltd., but only in case of owned fund it is given.
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3.9
I.
SOURCES OF FUNDS AND USES OF FUNDS:

SOURCES OF FUND There is a 3 types structure, through which PCARDB Ltd. gets funds &
the same will be disbursed or granted as loans and advances based up on the need and requirement of applicant members and based upon Govt. Policies, after satisfactorily fulfillment banks requirement NABARD KSCARDB PCARDB
All the funds granted from NABARD under various schemes will be guaranteed by respective state government.
Other sources being share amount collected from members of bank 5% additional shares on advancing the loan Reserves created by the bank out of profit over the years. Recovery amount Income from interest and other activities. APPLICATION: Fund so sourced are utilised in various loan schemes and developmental
II.
activities of rural area, based upon the government policies and procedures and according to the need and requirements of farmers.
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3.10 PROCEDURE FOR AVAILING LOANS FROM PCARDB LIMITED

According to Karnataka Co-operative Society Act and Rules 1959. 49A. Procedure for submission and consideration of applications for loans from [Primary Agriculture and Rural Development Banks]. 1) All applications for loans from a [Primary Agriculture and Rural Development Bank] shall be made in the form prescribed by the [State Agriculture and Rural Development Bank]. The form shall among other things contain a list of documents which are required to be submitted for purposes of dealing with the application. 2) Every [Primary Agriculture and Rural Development Bank] shall keep sufficient stock of printed copies of the forms of loan applications and shall supply them to the intending borrower on payment of such fees as may be specified, from time to time, by the [State Agricultural and Rural Development Bank]. 3) Every [Primary Agriculture and Rural Development Bank] shall specify, from time to time, the name, designation and address of the officer (hereinafter in this Chapter referred to as the receiving officer), who shall receive all loan applications from the intending borrowers.
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4)
The application together with copies of necessary documents and the amount of all fees specified by the [State Agriculture and Rural Development Bank] with the approval of the Registrar and deposit equivalent to the value of one share of the Bank shall be submitted by the applicant to the Receiving Officer.
5)
On receipt of an application for loan, the Receiving Officer shall affix his initials on the application and mention his designation and the date of receipt of the application.
6)
After an application for loan has been received, the Receiving Officer shall verify whether it contains all the necessary particulars and is accompanied by the necessary documents If any details are lacking, he shall get the application completed by the applicant.
7)
Each application shall he entered in the chronological order in the register of applications for loans from the [Primary Agriculture and Rural Development Bank] to be maintained by the Receiving Officer and shall be dealt with in the same order.
(8)
For purposes of Section 82-B, the prescribed officer shall be, [x x x x x] the Assistant Registrar of Co-operative Societies.
9)
(i) Immediately after the application is entered in the register of applications for loans from the [Primary Agriculture and Rural
51
Development Bank], the Receiving Officer shall forward it to the Prescribed Officer. The Prescribed Officer shall give at least eight days public notice in Form IV calling upon all persons interested to present their objections to the grant of the loan, applied for. The notice shall also be affixed at the chavadi of the village or villages here the applicant resides and in the limits of which the land or lands proposed to be improved or offered, as security for the loan are situated. A copy of the notice shall be exhibited in the head office and relevant branch office, if any, of the [Primary Agriculture and Rural Development Bank] concerned and in the office, if any, of the person giving the notice. (ii) If any person interested fails to appear as required by the aforesaid notice, the questions at issue shall be decided in his absence and such person shall have no claim whatsoever against the property for which the loan applied for will he sanctioned tilt such time as the loan together with interest thereon or any other dues arising out of the loan are paid in full by the loanee. 10) The prescribed Officer shall after making an order under sub-section (2) of Section 82-B, forward the applications within two days of their disposal to the [Primary Agriculture and Rural Development Bank] concerned. The [Primary Agriculture and Rural Development Bank]
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may appoint an enquiry Officer (hereinafter in this Chapter referred to as the Enquiry Officer) to enquire into the applications. The Enquiry Officer shall make inquiry by actually visiting the land in which the improvement i. proposed to be effected and the lands and other property offered as security. He shall, after such inquiry, forward a report in (In form prescribed by a regulation made by the [State Agriculture and Rural Development Bank]. 11) The enquiry Officer may make such other enquiries as may be necessary and shall value the lands according to such formula as may be laid down by the [State Agriculture and Rural Development Bank], with the approval of the Registrar, from time to time, estimate the repaying capacity of the applicant anti examine the feasibility and utility of the proposed improvement He shall then submit his report stating what amount of loan may be granted to the applicant against what security and for what purpose and the period within which it may be recovered from him. 12) After completion of the enquiry, the application together him with his reports shall be submitted by the enquiry Officer to the [Primary Agriculture and Rural Development Bank] together with the Certificate regarding outstanding Government dues a red in certificates specified by the [State Agriculture and Rural Development Bank].
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13)
On receipt of the report of the Enquiry Officer under sub-rule (12), the [Primary Agriculture and Rural Development Bank] shall satisfy itself that the inquiry has been properly conducted. If there are any deficiencies, the Bank shall get them completed immediately.
14)
The [Primary Agriculture and Rural Development Bank] may then undertake further scrutiny as may be necessary and pass final orders.
15)
In the case of rejection of applications for loans, the reasons therefore shall be communicated by the Bank to the applicant. When the loan has been sanctioned, the Bank shall lay down the terms and conditions regarding grant of the loan, regarding payment of installments, submission of report on the progress of improvement of land and release of subsequent installments, The applicant shall be required to be present at the head office or branch office of the Bank on a date to be fixed for execution of the mortgage deed and for receiving the amount of loan or the first installment thereof.
16)
The applicant, while receiving the amount of the loan or the first installment of the loan, shall purchase shares of the Bank to such extent as may be required under the bye-laws of the Bank. The [Primary Agriculture and Rural Development Bank] shall issue receipt to the applicant giving full particulars of the amount paid by him from time to time.
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Primary Co-operative agriculture & rural development bank Ltd, Gulbarga required to classify their loans and advances on the basis of the objective criteria, which would ensure a uniform and consistent application of norms, taking into account the degree of well defined credit weakness. This brings into focus the concept of performing and non-performing assets, which helps in determining the provisioning requirements. An asset becomes a Non-performing Asset (NPA) when it ceases to generate income for the bank. Asset will be treated as NPA, if interest is past due for more than 13 months in case of agriculture and 7 months in nonagriculture lending. The amount which remains outstanding for 180 days beyond the due date is treated as Past Due. Taking these factors into account loans and advances are to be classified into 4 broad group (viz). 1. 2. 3. 4. Standard assets Sub Standard assets Doubtful assets and Loss assets.
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1.
Standard Assets: Standard asset is one, which does not disclose any problem and does not
carry more than normal risk attached to the business. performing asset. 2. Sub-Standard Assets:
It is not a non-
Sub-Standard assets is one, which has been classified as a nonperforming asset for a period not exceeding two years. Such an asset will have well defined credit weakness that jeopardize the liquidation of the debt and is characterized by the distinct possibility that the financial institution will sustain some loss, if the deficiencies is not collected. 3. Doubtful Assets: Any sub Standard assets which remains non-performing beyond two years becomes a doubtful asset. 4. Loss Assets: A loss asset is one where loss has been identified by the corporation or its internal/external auditors, but the amount has not been written off wholly or partly. Such an asset is considered uncollectible and of such little value that its
56
continuance as a bankable asset is not warranted although there may be substantial salvage or recovery values. Provisioning Norms: The system of classification of assets as above also forms the basis for determining the provisioning requirements in respect of such assets. The time lag between the account becoming doubtful of recovery, its recognitions as such, the realization of the security and the erosion over time in the value of security charged to the corporation are taken into account, while determining the quantum of provision to be made in respect of each category of assets. Based on these factors, the following provisioning norms have been prescribed. Table-4.1: Performing and Non-Performing Assets (Rs. in Lakhs) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Performing 82.93 5.48 126.70 % of Change -93.39 -100.00 +100.00 Nonperforming 402.92 449.46 326.16 344.33 251.62 % of Change +11.55 -27.43 +5.54 -26.92
Source: Audit Report of PCARDB.
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Figure-4.1: Performing and Non-Performing Assets

500 450 402.92 400 350 300 251 .62 250 200 1 50 1 00 50 0 2003-2004 2004-2005 82.93 1 26.7 326.1 6 344.33 449.46
5.48
0 2005-2006 Year P erforming Non-performing
0 2006-2007 2007-2008
From the above, it is clear that the amount of non-performing assets are drastically increasing when it is compared with that of performing assets. It is really threatening. It has been observed that in the year 2003-04, performing asset was Rs.82.93 Lakhs and non-performing asset was Rs.402.92 Lakhs. In the year 2004-2005 performing assets Rs.5.48 Lakhs and non-performing asset raised Rs.449.46 Lakhs. In the year 2005-06, performing assets zero and nonperforming assets Rs.326.16 Lakhs. In the year 2006-07 performing assets again zero and non-performing assets Rs.344.33 Lakhs. Lastly in the year 2007-08 performing assets were Rs.126.62 Lakhs and non-performing assets is Rs.126.70 Lakhs and non-performing asset come down to Rs.251.62 Lakhs.
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The reason that in the year 2007-08 the percentage performing asset is increased and non-performing asset come down it is because of Karnataka State Government. There is total decrease in percentage of performing assets year after year, except in the year 2007-08. As it can seen that there is 100% performing assets increase taken place because of interest waiver scheme of State Government.
The reasons contributed for increase in NPAs:
Intentional defaulters. Improper utilization of funds by the borrower. Natural calamities, recession variations in Government policies, changes in economic & climatic conditions.
Over dependence on poorly paid & un skilled laborers. Improper management by the banker, lack of professionalism & poor appraisal standards.
Non-observance of systems, procedures & non-insistence of collateral etc., where ever required.
Prolonged evaluation, seeking unwanted clarifications. Lack of post sanction monitoring, unchecked diversions.
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Directed lending under subsidy schemes without proper delivery system, infrastructure etc.
Unwillingness to take recovery work. Unfavorable & unpredicted pricing of the agricultural output which leads loss to the farmers.
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Table-4.2: Year wise outstanding loan/non-performing Assets and percentage of Reserve. 2003-04 to 2007-08 (Rs. in Lakhs) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 O/s Loan Amount 485.85 454.94 326.16 344.33 378.32 Non performing Assets 402.92 449.46 326.16 344.33 351.62 % of NPA Compared to O/s Loan 82.93 98.79 100 100 66.50 Amount Reserved 255.08 222.94 159.74 141.81 125.81
Source: Audit Report of PCARDB. Figure-4.2: Year wise outstanding loan/non-performing Assets and percentage of Reserve 2003-04 to 2007-08
600
500
400
300
200
100
0 2003- 2004 2004- 2005 2005- 2006 Y ear O/s Loan Amount Non performing Assets Amount Reserved 2006- 2007 2007- 2008
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With the analysis of above table 4.2, it can be observed that the outstanding loan amount in the year 2003-04 was Rs.485.85 Lakhs and nonperforming asset stood at Rs.402.92 Lakhs and amount to be reserved as per provision is Rs.255.08 Lakhs at the same time in the year 2004-05 the outstanding loan amount was Rs.454.94 Lakhs and the non-performing asset is Rs.449.46 Lakhs and the amount of reserve is Rs.222.94 Lakhs, in the year 2005-06, outstanding loan was Rs.326.16 Lakhs and an 100% of nonperforming asset can be seen. Similarly in the year 2006-07 also 100% of
NPA, but only in the year 2007-08 the non-performing asset stabilised and decreased to Rs.251.62 Lakhs because of Interest waiver scheme.
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Table-4.3: Profit & Loss of the bank & NPA during the study period 2003-04 to 2007-08 Years Profit and Loss 2003-2004 -374.80 2004-2005 -174.78 2005-2006 +166.38 2006-2007 -540.60 2007-2008 -506.70 Source: Audit Report of PCARDB. NPA 402.92 449.46 326.16 344.33 251.62
Figure-4.3: Profit & Loss of the bank & NPA during the study period 2003-04 to 2007-08
600
400
200
- 200
- 400
- 600 Year Profit and Loss NPA
From the above table and diagrams it is clear that the performance of bank is very poor in terms of profitability. It was a Loss of Rs.37,45,799.68 in 2003-04 & Rs.17,47,836.14 in 2004-05. But in the year 2005-06 it has a profit of Rs.1,66, 38,679.03 because Karnataka state government introduced a bill
Dept. of Commerce, Gulbarga University, Gulbarga 63
agricultural debt waiver due to which all the debt from the bank to the farmers based up on there eligibility criteria has been waived. Again in the year 200607. It was loss of Rs.5,40,567.82 in the year 2007-08 the loss was
Rs.50,66,979.26. It is considerable point that in the year 2008-09 central Govt. of India Introduced a bill in parliament called agriculture debt waiver scheme 2008-09 because of that the some small and marginal formers got benefit & loss of bank loss also comes down considerably in the year 2008-09. Table-4.4: Demand, Recovery and NPA (Rs. in Lakhs) Year 2003-04 2004-05 2005-06 2006-07 2007-08 Demand 662.32 706.08 772.06 498.78 425.43 Recovery 65.07 49.78 322.42 119.67 62.45 % of Due 90.17 92.94 58.42 76.00 85.32 Non-Performing Assets 402.92 440.96 326.344 344.33 251.62
Source: Audit Report of PCARDB.
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Figure-4.4: Demand, Recovery and NPA

900 800 700 600 500 400 300 200 100 0 2003- 04 2004- 05 2005- 06 Y ear Demand Collection Non P erforming 2006- 07 2007- 08
From the above table and graph it is found that the demand column in the 2003-2004 was 662.32 and recovery 65.07 and the percentage of due amount is 90.17 which is quite high, similarly in the year 2004-05 the percentage of due amount is 92.97 and recovery percentage is just 7.03. In the year 2005-06, percentage of demand is 772.06, percentage of recovery is 322.42, percentage of due is 58.42, recovery is improved because of interest waiver and in the year 2006-07, percentage of due is 76 with the members. Lastly, in the year 2007-08 percentage of recovery is 85.32, percentage of due is 14.68. Hence this poor performance in recovery is adding to non-performing assets heavily.
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2.
CREDIT RISK MANAGEMENT AND NPAS

Quit often credit risk management is confused with managing non-
performing assets. However, there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present i.e., they represent credit risk that has already materialized and default has already taken place. On the other hand managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid
possible default by properly managing credit risk. Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business. To create a defense against such uncertainty, bankers are expected to develop an effective internal credit risk models for the purpose of credit risk management.
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Inefficient credit risk management partly to blame for rising NPAs

The alarming rate of growth of non-performing assets (NPAs) during the last few years in the hands bank, has made the edifice of the financial system extremely vulnerable. While the overall financial downswing as well as the sectoral demand supply imbalances share a large chunk of the blame, the systemic weakness in managing credit risk is in no way less responsible for whatever is happening now. A significant percentage of such NPAs could be avoided by the bank through installation and implementation of a well designed credit risk management system. Credit risk is defined as the possibility that a borrower or counter-party might fail to meet its obligations in accordance with the agreed terms. This simple definition leads us to a complex mechanism of credit risk management. The challenge of credit risk management lies in preventing performing assets to slip into NPAs. Credit risk management enables a bank to identify, assess, and manage proactively credits at the individual level or at a portfolio level. Given the fast-changing environment and corporates subject to pressures of economic liberalisation, a comprehensive credit risk management system assists a bank in protecting its asset quality.
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Let us look at what does it take to install a comprehensive credit risk management system. A credit risk management system has to be designed in synchronisation with a banks business strategies. Also, a bank needs to have the necessary credit culture. These are the essential preconditions in implementing a comprehensive credit risk management system. The other essential ingredients in implementing a comprehensive credit risk management system are as follows.
1.
The building blocks of implementing a credit risk management include translating business strategy into a credit policy that articulates the risk appetite for a bank.
2.
A suitable organisation structure that helps banks in implementing the credit policy.
3.
And decision support tools like management information system (MIS) and credit risk scoring models. The financial services entities mostly use their MIS for ensuring
regulatory compliances and monitoring of performances. However, a proactive MIS could be developed with the help of prudential and guidelines to ensure timely alert signals being sent throughout the organisation and enable preventive measure to be taken at the right time. A credit risk scoring model
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assists bank to measure credit risk on a single scale. It could be an eight-point scale or a 10-point scale or a 100-point scale. a) Importance of Credit Rating in case of defaulter: Fundamentally credit rating implies evaluating the creditworthiness of a borrower by an independent rating agency. Here objective is to evaluate the probability of default. As such, credit rating does not predict loss, but it predicts the likelihood of payment problems. Credit rating has been explained by Moodys credit rating agency as forming an opinion on the future ability, legal obligation and willingness of a bound issuer or obligor to make full and timely payments on principal and interest due to the investors. Credit rating agencies generally slot companies into risk buckets that indicate companys credit risk and is also reviewed periodically. Associated with each risk bucket is the probability of default that is derived from historical observations of default behaviour in each risk bucket. However, credit rating is not fool-proof. Infact, Enron was rated
investment grade till as late as a month prior to its filling for bankruptcy when it was assigned an in-default status by the rating agencies. It depends on the
69
information available to the credit rating agency.
Besides, there may be
conflict of interest which a credit rating agency may not be able to resolve in the interest of investors and lenders. Stock prices are an important (but not the sole) indicator of the credit risk involved. Stock prices are much more forward looking in assessing the prices of companies such as Enron and WorldCom had started showing a failing trend many months prior to it being. b) Financial Statements and Credit Rating: For banks and financial institutions, both the balance sheet and income statement have a key role t play by providing valuable information on a borrowers viability. However, the approach of scrutinizing financial
statements is a backward looking approach. This is because, the focus of accounting is on past performance and current positions. The key accounting ratios generally used for the purpose of ascertaining the creditworthiness of a business entity are that of debt-equity ratio and interest coverage ratio. Highly rated companies generally have low leverage. This is because, high leverage is followed by high fixed interest charges, nonpayment of which results into a default.
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4.3
AGRICULTURAL INTEREST, DEBT WAIVER AND DEBT RELIEF SCHEME.

In the year 2005-06 Karnataka State Government Introduced as a bill of
interest waiver scheme for those who have taken loan in Co-operative Banks and Societies across the state. In this scheme PCARDB Ltd. Gulbarga Tq. got huge amount of benefit Rs.75,00,956/interest collection and
Rs. 1,24,30,159/- further interest. In total Rs. 1,99,31,115/- amount of benefit availed from state Government covering 30% of Bank members who directly got benefit of interest waiver. The Finance Minister, in his Budget Speech for 2008-2009, announced a Debt Waiver and Debt Relief Scheme for farmers. The Scheme will cover direct agricultural loans extended to marginal and small farmers and other farmers by Scheduled Commercial Banks, Regional Rural Banks, Cooperative Credit Institutions (including Urban Cooperative Banks) and Local Area Banks as indicated in the Guidelines. The Scheme shall come into force with immediate effect.
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Providing Relief: Debt waiver to farmers by public sector banks. Figure-4.5: Bank wise amount of loan waived including the amount of relief to other farmers, under the agricultural debt relief scheme-2008
IDBI Punjab & Sind Bank Dena Bank State Bank of Sauras. Corporation Bank Vijaya Bank U nited Bank of India State Bank of Patiala State Bank of Travan. State Bank of Mysore State Bank of Indore Oriental Bank of Com. Bank of Maharashtra UCO Bank Indian Bank Indian Overseas Bank State Bank of B&J State Bank of Hyderabad Bank of Baroda U nion Bank of India Andhra Bank Syndicate Bank Bank of India Allahabad Bank Canara Bank Punjab N ational Bank Central Bank State Bank of India 0 2000 4000 6000 (Rs. in crore) 8000 60 152 157 176 183 227 262 320 358 414 427 537 574 668 710 791 797 878 922 980 1014 1060 1342 1521 1631 2033 2136 10341 10000 12000
Source: Lok Sabha starred Q. No. 208 (Ministry of Finance)
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Debt waiver covering small / marginal farmer. Borrower wise details in respect of Direct Investment loan for Agriculture. It is clear from the external outset that there are not much beneficiaries from the scheme in the PCARDB, Gulbarga bank overall there are 10 small farmers were availed maximum benefit and only 1 marginal farmer, the total amount waived for small farmers is Rs.1,07,117/- and for marginal farmer it is Rs.25,000. The details regarding name, land holding etc., is given in table. Compared to other banks the details of which also mentioned with a chart and table in successive pages which helps in comparative analysis. The maximum number of beneficiaries and the bank which got highest benefit out debt waiver scheme is State Bank of India Rs.10,341 Crores, second being Central Bank Rs.2,136 Crores, Punjab National Bank, Canara Bank respectively. The number of beneficiaries in PCARDB Ltd., Gulbarga is shown separately.
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4.4
CAUSES AND EFFECTS OF GOVERNMENT DEBT WAIVER SCHEME:

It benefited only banks to clear their balance sheets, benefits to farmers
accrues only when fresh loans are disbursed. But that did not happy, from April to August-2008, agriculture loan outstanding actually decreased by Rs.11000 crores, whereas there was huge increase for other sectors at the cost of agri sector. The government engaged that fresh loans are promptly given to farmers whose loans are waived. Instead of providing debt waiver and debt relief government would have spent fund in developing. a) b) c) Rural Infrastructure facilities. Irrigation facilities. Guiding farmers in scientific way of cultivation and educating them with proper farming techniques. d) e) f) Diversifying in farming habits of farmers. Providing 24 hours electricity facility in rural areas. Providing good quality of seeds, sophisticated farm equipments, fertilizers etc.,
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g)
Providing better market and offering good prices for agricultural products.
h) i)
Providing importance to rural transportation. Totally, making farmers independent in financial matters. Lastly, it will send every time a wrong impression in the minds loan
seekers and especially farmers that government will waive of their loan amount and even prompt repayers also tend to avoid payment of their dues which will negatively effects the banks
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4.5
RECOVERY MEASURES OF PCARDB LIMITED:
Execution of Awards, Decrees, Orders and Decisions 33-A. Approved Societies. - All societies which are registered or deemed to be registered under the Karnataka Co-operative Societies Act, 1959, and affiliated to any District Central Co-operative Bank within the State of Karnataka, are declared as approved societies for the purposes of Section 100 of the Act. 33-B. Manner of enquiry to be made by the Registrar before granting certificates to approved Societies for the recovery of the amount of arrears. 1) An approved society shall send intimation to the borrower fifteen days prior to the due date for the repayment of the loan in Form III requiring the borrower to repay the loan on or before the due date and notifying the debtor that on failure to pay the dues in time, action will be taken against him under Section 100 of the Act. 2) In case the society has not sent an intimation, the society shall, before submitting an application to the Registrar for obtaining a certificate under Section 100, send a notice in Form IV, informing the borrower that the failure on his part to repay the dues in time has made him liable for action being taken against him under Section 100 of the Act.
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3)
If the debt is not discharged on the due date, the society shall submit to the Registrar an application in Form V for the grant of a certificate under Section 100 for the recovery of the debt due to it by the debtor as an arrear of land revenue, within one month from the date when the debt was due.
4)
The application for grant of a certificate under Section 100 shall be accompanied by a copy of the ledger account certified as true by the Secretary and either the Chairman or any one of the members of the Managing Committee of the Society, and a copy of the intimation or the notice sent to the borrower to pay the dues in time.
5)
On receipt of an application from a society and before the grant of the certificate the Registrar may request the Deputy Commissioner to take action in accordance with Sub-section (3) of Section 100.
6)
On receipt of an application from a society referred to in sub-rule (3) and further supported by an affidavit regarding the demand and its urgency, the Registrar shall decide such application within fifteen days from the date of receipt of the application by him, after causing such inquiry as to the correctness and truthfulness of the demand, as he may think fit.
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7)
The Registrar may, if deemed necessary, cause a notice in Form VI to be issued to the borrower and to the sureties, if any, within ten days from the date of the receipt of the application asking him to show cause why a certificate under Section 100 for the recovery of the dues as an arrear of land revenue should not be granted to the society.
8)
In the event of the borrower making a representation and disputing the demand of the society within a period of eight days the date of receipt of a notice given to him by the Registrar, the Registrar shall take such evidence as he may think necessary from the records of the society to satisfy about the correctness of the transaction. In the absence of such representation from the borrower, the Registrar shall proceed forthwith to decide the application of the society alter causing such enquiry to be made he may think fit.
9)
The Registrar shall decide the application for grant of certificates under Section 100 received from societies as expeditiously as possible and, in any case, not later than two months from the date of the receipt of the application by him.
10)
The Registrar shall maintain a Register of applications from societies for grant of certificates in Form VII and of the certificates granted by him to applicant societies.
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4.6
1.
NON LEGAL MEASURES:

Reminder System: The cheapest mode of recovery is by sending reminders to the
borrowers before the loan installment falls due. Generally, response to this arrangement particularly from honest borrowers is encouraging. But efforts need to be strengthened in banks in sending reminders on timely basis. 2. Visit to Borrowers Address / Residence / Regularly: This is a more dependable measure of recover. Visits need to be
properly planned. Involvement of staff at all levels in the bank branch is called for. Costs involved in recovery need to be kept to the minimum. Frequent visits are called for in case of hardcore borrowers. Over the years, it is
observed that the number and quality of visits are going down. Consequently, the recovery process is affected. 3. Recovery Camps: In respect of agricultural advances, recovery camps should be organized during the harvest season. To ensure maximum advantage, recovery camps need to be properly planned. It is also essential to take the help of outsiders, particularly, revenue officers in the state government, local panchayat officials, regional approach to give a wide publicity of the recovery camps to be
79
organized in the local area, mobilize as many farmers as possible and motivate the staff to get involved in the recovery drive. 4. Rephrasing Unpaid Loan Installments: In respect of small advances, bankers need to be system pathetic in respect of sincere and hardworking borrowers. If such borrowers fail to pay loan installments due to natural calamities or for some other convincing reasons, unpaid loan installments may be rephased / rescheduled. Bankers efforts need to be strengthened in the regard. 5. Loan Compromise: This is the last resort of recovery. This should be voluntary, it calls for a professional approach in preparing the compromise proposal for which each bank is expected to introduce a scheme. Committee approach should be
adopted to decide on the loan compromise. Delays in taking decisions should be avoided. Recently, One Time Settlement (OTS) scheme was introduced by the RBI. The overall response to the scheme was limited. Hence each bank is expected to come out with its own OTS scheme. In addition, training of operating staff is essential to change their mindset. For effective recovery, loan compromise should be taken up on priority basis.
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6.
Appointment of Professional Agencies for Recovery: Recently, IBA has worked out certain for banks on matters concerning
the appointment of outside professional agencies whose services can be utilized to ascertain the whereabouts of the borrowers and enforcement of securities. There is some hesitancy on the part of public sector banks in engaging them for recovery purposes due to unpleasant experiences in certain cases. But during the post VRS scenario, it is suggested to seek such outsourcing. This should be done after examining the credentials of the
professionals. It is also essential to keep a constant vigil on their practice.
4.7
EFFECTIVENESS OF MIS IN MANAGING NPAS:

In the present scenario, NPAs are at the core of the financial problems
of the banks / FIs and hence ceaseless efforts have to be made to improve recovery rate. The task is two fold, one relates to realization of existing bad advances and the other relates to improve recovery performance on new lending. Advances which are not NPAs but are on the threshold should be given special attention because otherwise, these may become NPAs sooner or later. For the operating functionaries, including the branch managers the line of action can be summarized as under:
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a)
Data Bank of NPAs : : : :
1) 2) 3) 4)
Account wise Amount wise Age wise Security wise
b) c) d)
Evolve suitable methods most appropriate for each NPA. Draw a time bound action plan involving all the concerned officials. Monitor implementation of the action plan till a particular NPA is extinguished. As regards new lending banks have to be more alert and circumspect so
as to bring only good quality assets on their books.
In the competitive
environment of today, the task is not easy. Banks/FIs have to constantly upgrade their credit evaluation skills and systems in order to successfully manage their assets. 1. NPA Management Policy: A comprehensive NPA management policy should be put in place with a view to prevent generation of NPAs. The main emphasis in the policy should be on the measures to be taken by branches at Pre-NPA stage. To facilitate structured interventions in potential problem loans, detailed reviews, account wise to analyse the problems based on facts and circumstances of each account have to be undertaken. Action plans for each potential sick unit should be submitted by branches to the controllers for to take decision in a time bound
82
frame. The entire process should be tailored to curtail delays and ensure time bound decision making on existing and potential NPA accounts. 2. Focus on High Value NPA Accounts: High value NPA account need pointed endeavours for upgradation / recovery to bring down NPA level sizeably. At the same time it has to be recognized that we are facing the problem of adverse selection. Improving quality of our credit appraisals and prompt action on credit audit reports assume significance and importance. Similarly, effective HRD interventions are necessary for upgradation of skills of operating functionaries in credit and NPA management areas. 3. Specific Strategies for Reduction in NPAs: To control NPA menace, a two pronged approach, viz., preventive and curative would be necessary. Basically, the prime focus has to be placed on: i) ii) iii) iv) v) Budget for reduction in NPAs. Strengthening Credit Management. Follow up of NPA cases. Emphasis on compromises, one time settlements (OTS) and write - offs. Changing strategies based on markets studies.
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4. i)
Preventive Measure: Credit appraisal and Credit Audit: Credit appraisal usually suffers from failures to a) Assess promoters ability to adapt change, understand sector and market and raise adequate margins. b) c) Forecast sale. Documentation of Credit policy, credit audit immediately after sanction and human resources development through interventions are some of the measures necessary to upgrade quality of credit appraisal in banks.
ii)
Potential and Borderline NPA Accounts: Fuzzy Assets: Potential and borderline accounts require quick diagnosis and remedial
measures so that they do not slip to NPA category. For this purpose, controllers should monitor all accounts where one quarter interest/installment is not paid in respect of accounts enjoying credit limit beyond cut off point, so that new substandard assets are kept under check. 5. Curative Measures The curative measures are designed to maximize recoveries so that banks funds locked up in NPAs are released for recycling. A process has to be
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set in whereby NPA budget is settled with the operating units and position thereof, including high value NPA accounts, is discussed/monitored during the monthly performance review meetings. i) Follow up of Debt Recovery Tribunal (DRT) Cases With the exception of Maharashtra, Madhya Pradesh and Uttar Pradesh, all other important States and Union Territories are covered by eight Debt Recovery Tribunals (DRTs) established in the country so far. Going by the feedback received, DRTs have not been able to achieve the declared objectives disposal of cases within six months. Government of India is seized of the problems (administrative and legal) and exploring suitable amendments and other measures to make functioning of this institution efficient. Banks may create special cells at their Head Offices/Zonal Offices to monitor progress in regard to cases field with/transferred to DRTs. Similar cells, assisted by law officers may be created for follow up of high value suits and execution of decrees obtained. ii) Compromise and One Time Settlements Recalcitrant borrowers are coming forward, specially from the areas where functioning of DRTs is stabilized, with compromise offers to repay the
85
banks dues. Banks should strengthen their efforts and take expeditious decision through committee approach as per RBIs iii) Write-Off With a view to cleansing the balance sheet, write offs in small NPA accounts of doubtful and loss categories, where chances of recovery are bleak, need to be expedited by formulating broad parameters! iv) HRD: Training Interventions Seminars and regular training programmes on Credit and NPA Management for all levels of executives are desirable to upgrade the skills necessary to: a. b. c. d. v) Improve assets quality Prevent deterioration of assets Limit losses on fuzzy assets Effect quicker recovery/realization in NPA accounts. Recovery Management Policy Documentation of loan recovery policy of banks, detailing therein, interalia, banks approach for a) b) Identification of problem loan Tackling fuzzy assets
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c)
Tackling NPAs through non legal measures like quick review of potential NPA accounts, compromises /OTS, write offs, rehabilitation, rephasement, etc
d)
Recovery through legal recourse, would go a long way in guiding bank functionaries to effectively deal with problem loan accounts.
vi)
Priority Sector NPAs Tackling priority sector NPAs by holding recovery camps, Lok Adalats,
counselling the borrowers vii) Rehabilitation Technical obsolescence and financial mismanagement are important factors that make companies sick. Conduct of viability study and to arrive at a decision whether or not to provide rehabilitation package often take an unusually long time. Many promoters use this ploy to divert the company resources during the intervening period for creation of personal wealth/assets and banks are usually left with debts not backed by adequate security. Banks are also found to be pumping good money after the bad in such cases. There should normally be no case for rehabilitation and banks financial assistance therefore, if the unit is sick due to technical obsolescence / inept management / financial irregularities. The sooner we settle the dues of such companies
87
through compromise/OTS (even for accounts in live ledger) or through legal action, the better it is. The stock market principle of limiting the loss (stop loss) may be made applicable here. viii) Review/Renewal / Reschedulement: In the liberalized economy, shortage is a bygone word. Therefore, branches need to exercise caution in assessing credit requirements for law materials and stocks. Inventory Management is assuming greater importance in these days of falling margins. A constant watch on developments in international markets and an exercise of caution specially in the areas of a) b) Opening of Import letters of Credit Inventory management, are essentially called for. In addition, reschedulement of term loans where DSCR is pared due to reduced cash flows, needs to be considered fabourably. Lastly, the public sector banks should use their wide network of branches and infrastructure to deepen their lending for wholesale and retail trade, housing, intensive agriculture, etc., with a view to reducing NPA ratios.
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4.8
CAUSES AND EFFECTS OF NPAS ON PERFORMANCE OF PCARDB:

In the present scenario non-performing assets are at the core of the
financial problems of the Banks and Financial Institutions. Impact of NPA on the performance of the bank is as under. 1. 2. 3. 4. 5. 6. 7. 8. 9. Non-performing assets directly impact on profit of the bank. Non-performing assets encourages to the will full defaulters. The credit rating agencies may not be in their favour. Reserve of the bank will be drained. Interest expenditures become more than interest income. Availability of low cost fund will come down. Mismatch of Result in assets and liabilities. Huge expenditure towards recovery of loan. NPA do not show good picture, financial progress of bank and it shows possibility of slipping of potential and broad line accounts. 10. It unsettle the profitably growth of bank and creates huge amount of loss amount.
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SUMMARY
Finance is the life blood of every production. Agriculture is not an exception to this. Various financial institutions are extending financial help for agricultural operations but none of them fully met the credit needs of the agriculturists in India. Frequently it has been emphasized that the agriculturists and rural population should be saved from the stronghold of money lenders and private agencies. Attempts have been initiated way back since 1904 with the adoption of the co-operative credit societies Act to substitute private agencies by institutional financing system. The Primary Co-operative Agriculture and Rural Development Bank Limited is one of important avenue of finance in the country, acting as a catalyst for Agriculture and Rural Development not only in Karnataka but all over India. During this dissertation study up on the PCARDB Ltd., Gulbarga. The managing of non-performance assets was studied in depth by identifying the reasons for assets becoming non-performing, its impact on the operations of the PCARDB Ltd., Gulbarga and the steps to be taken to reduce these impaired loan statements.
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FINDINGS:
The followings are the important findings of the study.
Specific annually, quarterly and monthly targets were fixed, but these target neither monitored properly will nor achieved regularly.
The funds blocked in default cases is huge but there is no time frame and follow up to recover the blocked amount.
The NPA level during the study period is quite high. Lack of commitment towards the work by the employees. Political involvement in the administration of the bank. In ability to adopt, changes in its banking activities as that of other public sector banks, private sector banks and NBFC to improve its performance.
During last 5 years of study i.e., 2003-04 to 2007-08, the level of NPA is high.
It has been observed that in entire Gulbarga district PCARDB Ltd., Gulbarga taluka is having highest default accounts and highest NPAs percentage.
91
It is very much clear that the standard assets in PCARDB Ltd., Gulbarga is decreasing considerably and non-performing assets increasing drastically. The main reason is being non-payment of time barred debt by the borrowers and lack of effective monitoring system at the initial phase itself.
92
CONCLUSION:
In the conclusion part of the topic, till recent part, borrowers of the bank even after defaulting continuously never had any real fear of PCARDB Limited taking any serious actions as per the law against them to recover their dues. The PCARDB Limited has to take necessary steps to make defaulters face hard and tough actions under the aforementioned Act. This will help PCARDB Ltd., to get rid of NPAs and there b improve there financial performance. Also it is the indications of successful business approaching it with a fresh, new perspective and require management that is fully awake, through following it up and focused on making things better. Before granting any loans, to the bank has to specify itself regarding these aspects to their credit worthiness. The main reason for higher level of NPA in PCARDB Ltd., Gulbarga is; Old and inefficient recovery system. Improper loan appraisal and disbursement policy. Poor financial condition of farmers and lack of infrastructure in rural area.
Too much dependence on agriculture by the people in the area and poor crop yield.
93
The performance of the PCARDB Ltd., Gulbarga perspective of lending, recovery and disbursement is very poor over the years. However, its lending rate is good, but the percentage of recovery is very bad. To conclude with topic, I can suggest to the PCARDB Ltd., that they have to be strict against defaulting customers and have to follow strict norms while sanctioning any fresh loans which will synchronize the gap between performing and non-performing assets of PCARDB Ltd.,
94
SUGGESTIONS:
In the light of findings of the study, the following suggestions are made for improvement of the bank. The measures suggested are made for
improvement of the bank. The measures suggested are indicative of the direction in which the action is desirable and needed. Poor recovery of loan amount to have emerged mainly because of crop failures in some cases and in some other cases, willful non-repayment and in some other because of mistaken notion in the minds of borrowers regarding Waiver of Loans. For this, it is suggested that in case of willful non-repayment, these defaults should be classified as a criminal offence which attract deterrent punishment under the law. PCARDB Ltd, should upgrade their system/technique of credit appraisal by imparting training to their staff. Conducting in house training programmed to motivate and educate officers and also to inform various measures/policies/norms to be observed to face the difficult area like reducing the level of NPAs. Recovery officers must be thoroughly trained by deputing the officials to the reputed training institutes and seminars work shops to be conducted by various development financial institutions.
95
Setting up a separate monitoring department which should make sure a prepare evaluation system to be more effective.
Conducting and launching of massive recovery campaigns regularly by taking up-to-date information of assets lay through classification as, standard substandard and doubtful assets with dual care on loss assets.
Introducing KYC norms effectively & client profile cards to have proper monitoring system. The client profile cards which allows the concerned Recovery officer to know more on his business performance & financial states and every year performance which brings better control on the loan account a close and prompt watching system helps to prevent accounts become irregular.
In time review / renewal of borrows account be should made so that these up gradation of undertaken before expiry of their accounts.
Careful analysis of prospective borrowers should be made both prepare of loan application and the person behind the project should be viable and competitive one. Loan applicant with necessary background and training must be encouraged, lack of owners stake or no stake or failure to bring in the promoter contribution must be verified, somehow they manages further time being. Hence care must be taken while selecting a borrower.
96
It is better to discourage too ambitious loan proposal where ambitious projects and over enthusiastic promoters involved, it may take longer gestation period to implement the project & which invents high risk.
Regular & Primitive interaction with the borrowers where relatively large dues is held. At various levels to ascertain their true financial position and to take corrective steps.
It is suggested to conduct training programmes or group meeting with the borrowers to brief about the present situation.
Educating customer on-over estimation of demand dependence on single customers which delays fuller utilization of installed capacity and educating customer, which motivates borrowers to face the situation. So, that the unit can perform better and repay the installments in time.
Additional securities must be obtained to strengthen the loan asset and reduce the provision requirements.
Effective human resource management Policy must be introduce to under take selection training and suitable placements is to be initiated so as to encourage and motivate officials and staff to ensure better management of NPAs portfolio.
There is a need to have a periodic review of accounts and inspection units by the audit department, particularly units taken over 7 seized
97
under Karnataka State Co-operative societies Act & rules 1959-60. To finalise the sale process, many a time assets may not get sold even after required paper notification, in such cases the early action is required to speed up recovery action, otherwise the loan account may fall from substandard to doubtful to loss assets. Prompt repayment of loans by borrowers should be recognized and rewarded by way of relief in interest, which would act a motivating factor.
Lack of follow up or credit supervision is one of the main contributory factors for incidence of NPA. The main officials should visit personally the borrowers premises not only recovery of loans, but also for guiding/counseling the borrower for smooth operation of there & assure prompt repayment of dues.
Invoking of personal guarantee and execution of decree should be done immediately: hence realization of assets will be easy, whereby any reduction on the realizable value of the assets/ security can be minimized. Government agencies like District Level review Committee etc., should be used in recovering NPAs.
Co-ordination between commercial banks, financial institutions & various lending institution with PCARDB Ltd, should improve better
98
understanding and participation in discussions and taking important decisions jointly will help both the ends to minimize the risk. Strict and proper scrutiny of borrowers is must, whereby dual financing on the same proposal can be stopped. Extending finance to a defaulter in banks should be properly scrutinized, thereby wrong financing can be stopped. Otherwise it may result in NPAs later. NPAs management cell can be constituted at Head Office and Branch Offices to monitor the cases. Under the chairmanship of one Dist: Manager to look into the NPAs Portfolio of every branch. Incentives to officers/officials who are working up on recovery of be given an award, any branch which reduces the NPAs should be awarded as the best NPAs turn around branch, hence which motivate other branches/officers/officials to work hard for recognition and improving the quality of the assets of the bank.
The main source for PCARDB Ltd., Gulbarga is loans from KSCARDB which in turn borrows money from National Bank for Agriculture and rural Development (NABARD). That means, the bank is indirectly borrowing money for its operations from NABARD. Here, the rate of interest charged by KSCARDB to PCARDB is higher than that of what NABARD charges to KSCARDB. It is observed that about 11/2 present
99
of the interest is inflated by this indirect borrowing. This becomes not only burdensome to the PCARDB but also to the farmers. If the
PCARDB borrows directly from NABARD, then the rate of interest to the extent of 1 percent to 2 percent can be saved. This practice is now prevailing in Andhra Pradesh. This inflated rate of interest will affect the PCARDB in two ways. On the one hand, PCARBD has to pay the interest at full rate to KSCARDB regularly, on the other hand, it has to face the burden of growing over dues because of non-repayment of interest amount by loanees in time. So, it is suggested that this
prolonged process in getting loans will be removed which helps not only PCARDB but also the farmers by lowering the rate of interest by 11/2 present to 2 percent. At present this move is there before the Reserve Bank of India and NABARD. But in practice it is not yet implemented. In addition to above recommendations, it is also suggested that there should be constant touch with the members by the management of the PCARDB and it should employ more vigorous measures for selecting the needy farmers. This will facilitate not only to check the proper utilisation of credit but also the desired recovery of loans and interest amount.
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BIBLIOGRAPHY
Karnataka State Co-Operative Act and Rules 1959. Operational Statistics of PCARDB Limited. Annual Audit Report. Broauchers on Co-operative Movement in Karnataka. NPA by RBI Website Management of Non-performance Assets in banking and financial institution by Dr.B.Ramchandra Reddy. Land Bank Journal.
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Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

under the name of land mortgage banks in India.

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

STATEMENT OF THE PROBLEM:

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

OBJECTIVES OF THE STUDY:

To locate the strength and weakness in recovery system of PCARDB, Gulbarga.

To offer measures for an effective management of NPAs in the light of findings.

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

LIMITATIONS OF THE STUDY:

Therefore findings derived are subjective.

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

The Fifth provides an account of Summary of Finding and Suggestions.

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

ESSENTIALS OF NON-PERFORMING ASSET:

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

TERMINOLOGY OF NPA AS PER RBI NORMS:

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

REASONS AND CAUSES NPA:

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets 10.

The market conditions prevailing in the particular business of the borrower.

15. 16. 17.

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga

Management of Non-Performing Assets

CLASSIFICATION OF ASSETS AS PER R.B.I.

1. Standard Assets 2. Sub-standard Assets 3. Doubtful assets 1.

Management of Non-Performing Assets

Dept. of Commerce, Gulbarga University, Gulbarga