Canara Bank

EXECUTIVE SUMMARY
Founded in 1906, Canara Bank is one of the premier banks in India, with a net work of 2578 branches across the country. The bank was the first two launch networked ATMs in India and obtain and ISO certification. Canara bank has also achieved the distinction of being the countrys highest net profit earner among nationalized banks for the year march 2007. The bank has already carved a niche in providing IT-based services such as networked ATMs, anywhere banking, Telebanking, Remote access Terminals, Internet and Mobile banking, Debit cards, etc. Canara bank a vision to help improve the economic condition of the common people of India by inculcating the habit of savings in rural areas. As part of its vision of using technology to provide affordable banking services to the vast rural population of India, Canara bank has extend the performance and cost benefits of enterprises Linux to its customers. With a modernized branch infrastructure, Canara bank hopes to serve customers in a timely and efficient manner, reinforcing its image of being a customer savvy bank

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CHAPTER-1

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1.

INTRODUCTION:

INDUSTRY PROFILE Banking in one form or another was in existence even in ancient times. The writings of Manu (the maker of old Hindu Law) and Kautilya (the Minister of Chandragupta Maurya) contained references to banking. However, banking as a kind of business i.e., modern banking is of recent origin. It came into existence only after the industrial revolution. After the industrial revolution, with the increase in the size of industrial and business units, joint stock company people with small means to become shareholders of big industrial and business enterprises. Still, there were certain sections of public who were not prepared to invest their money on the shares of joint stock companies. However they were willing to part with a little surplus money, if they were assured of the repayment of their money with a little interest thereon. So naturally, there arose the need for formation of financial institutions that could collect the surplus funds of people on terms acceptable to them and make them available to the needy for productive purpose. Accordingly a large number of financial institutions called joint stock banks were set up after industrial revolution. As such joint banks or modern banks are of recent development.

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1.1

MEANING OF BANKS:

A banking company in India has been defined in the Banking Companies Act 1949 as One which transacts the business of banking which means the accepting of the purpose of sending or investment of deposits of money form the public repayable on demand or otherwise and withdrawable by cheque, draft order or otherwise. 1.2 STRUCTURE OF BANKING SYSTEM IN INDIA:

Indian Banking System has been categories into two: a. Scheduled Banks.
i.

State Co-operative. Commercial Banks

ii.

b. Non-Scheduled Banks: Central Co-operative Banks and Primary Credit Societies. Commercial Banks. Commercial Banks are further divided into Indian Banks and Foreign Banks. Indian Banks are further divided into: a. Public Sector Banks. b. SBI and its Subsidies.

Canara Bank c. Other Nationalized Banks. d. Regional Rural Banks.

1.3

ACTIVITIES OF BANKS:

a. Activities of Commercial Banks. b. Activities of Central Banks. a. Activities of Commercial Banks: The activities undertaken by commercial banks be subdivided into: 1. Primary Functions. 2. Subsidiary Functions. 1. Primary Functions: i. Acceptance of deposits: It is very important for banks as it forms the basis of all other activities of banks. It accepts various types of deposits. They are current deposit, saving deposit, fixed deposit and recurring deposits. ii. Lending of Funds: It is also the most important function of Commercial Banks as it fetches the major portions of the income of the banks. Banks lend money by the way of loans, overdrafts, cash credit and discounting of bills.

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2. Subsidiary Functions: a. Agency Functions: The services rendered by banks as agent of their customers are called agency services. They are: 1. Banks collect cheque, bank draft, bills, interest, dividends etc on behalf of the customer. 2. Banks sells and purchases securities on behalf of the customers. 3. Banks arranges for remittance of funds from one place to another place. 4. Banks acts as trustees, executors, representatives of their customers. b. General Utility Services: Services rendered by banks to their customers as well as the general public are called as general utility services. 1. Banks accept precious articles, documents etc for safe custody. 2. Banks helps exporters and importers in foreign trade. 3. Banks issue travellers cheque, letter of credit, circular notes etc. 4. Banks acts as a reference and supply information about the financial standing of the customers to others. II. Activities of the Central Bank:

Canara Bank a. Monopoly of Note issue. b. Banker, Agent, Advisor to the government. c. Custodian of cash reserves of the banks. d. Lender of the last resort.

1.4

FUNCTIONS AND IMPORTANCES OF BANKS:

The importance of banks in the modern economy cannot be denied. Banks play a significant role in the economic development. Banks perform a number of functions. They are: a. Banks mobilize the small scattered and ideal savings of the people, and make them available for productive purpose. In the sort, they aid the process of capital formation. b. By accepting the savings of the people, banks provide safety and security to the surplus money of the depositors. c. Banks provide a convenient and economical method of payment. The cheque system introduced by banks is convenient form making payments. Again the use of

Canara Bank cheque economies the time and trouble involved in settlement of business obligations. d. Banks provide a convenient and economical means of transfer of funds from one place to another. Banks drafts are commonly used for remittances of funds from one place to another. e. Banks helps the movement of capital from regions where it is no very useful to regions where it can be more usefully employed, by moving funds, banks increases the utility of funds. Again by moving funds from one place to another, banks contribute to the economic development of backward regions. f. Banks influence the rates of interest in the money markets. Through the supply of money (i.e. bank money or bank deposits) banks expert a powerful influence on the interest rates in the money market. g. Banks help trade and commerce industry and agriculture by meeting their financial requirements. But for the financial assistance provided by the banks, the pace of growth of trade and commerce industry and agriculture would have been very slow.
h. Banks direct the flow of funds into production channels.

While lending money, they discriminate in favor of essential activities and against non essential activities. Thus they encourage the development of right types of activities which the society desires.

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i. Banks always make it a point to help the industries, the

prudent, the punctual and the honest and discourage the dishonest, the spendthrift, the gambler the lair and the knave (i.e. the rouge). Thus banks act as public conservators of commercial virtuers.

CHAPTER 2 . SERVICE PROFILE OF THE CANARA BANK:

The bank has many financial services and different schemes. Important among them are as follows: DOMESTIC PRODUCTS SAVING BANK DEPOSITS: For individuals & non-trading organizations / institutions. CURRENT ACCOUNT: For business operations trades, businessmen, corporate bodies.
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FIXED DEPOSITS: Secured way to high returns individuals and institutions. KAMADHENU DEPOSITS: Re-investment money multiplier plan. CANBANK AUTO RENEWAL: Higher return in a shorter plan. CANFLEXI DEPOSITS: A combination of savings & fixed deposits high return & instant liquidity. ASHRAYA DEPOSITS: Respecting Indian values for senior citizens. RECURRING DEPOSITS SCHEME: Inculcating saving, a rewarding & recurring habit. FLOATING RATE DEPOSITS SCHEME (FRDS): Insures against interest rate fluctuations. LOAN PRODUCTS HOUSING LOAN SCHEME: Purchase of a ready built house / flat construction of house, purchase of a site and construction of house thereon, for undertaking repairs,

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Canara Bank renovations, upgradation, and creation of additional

amenities and for taking over of the HL liability from other recognized housing finance companies and banks. HOME IMPROVEMENT LOANS: Furnishing the house / flat along with banks home loans / independently. CANMOBILE: Facilities purchase of new / used cards / jeeps of all make. The scheme also covers finance for purchase of brand new two wheelers. CANCARRY: Provided credit worthy individuals, professional and salaried class for buying consumer durables and household articles. CANCASH: Offer assistance for meeting unforeseen

contingencies. Finance is granted against approved shares, bonds and debentures held by the clients. CANBUDGET: Fulfills the financial needs of confirmed employees of reputed PSUs, joint stock companies, central / state / semi government employees and lecturers / professors / assistant professors of colleges / universities and research institutes.

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Canara Bank CANRENT: Provides loans to property owners whenever the property is leased / rented out to PSUs central / state / semi government undertakings. Reputed corporate banks. Financial institutions, Insurance companies and MNCs. CANMORTGAGE: Designed to meet the financial

requirements against security of equitable mortgagee of property (land & building) to professional, businessman, salaried persons and individuals. VIDYASAGAR EDUCATIONAL LOAN SCHEME: Renders financial assistance for needy and meritous students for pursuing all type of studies (professionals / general) in India and Abroad. LOAN SCHEME TO TRADERS / BUSINESS ENTERPRISES: With hassle free and minimum terms and conditions, the scheme cater to the needs of traders and other business enterprises for smooth flow of business activities. CANMAHILA: Exclusive loan scheme for women clientele. AGRI LOAN SCHEME: Various loan schemes for agriclinic, minor, irrigation, farm development / machinery, plantation crops fishers and for agro-exports.

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Canara Bank SSI LOAN SCHEME: A host of schemed available for technology up gradation fund in textile and jute industries, credit linked capital subsidy stand by credit for capital expenditure and margin money scheme of KVIC. OTHER PRIORITY SCHEME: These include loan for retail traders, small business, professional / self employed, medical practitioners and loan for solar water heating / home lighting system. CREDIT CARD OPERATIONS a. The first Indian card issuers to bay ISO 9002 certification, CANCARD today as a distinct recognition in the domestic as well as international market. b. All verstors of CANCARD namely, CANCARD visa, classic, visa-corporate, master card and visa international gold are issued through all CANARA BANK branches & 24 CANCARD service centers located at major cities across the country. c. Four Indian Banks are in affiliation with the bank for issue of CANCARD VISACARD. d. Launched DEBIT CARD on November 4, 2003, a value added and tech based product for its niche clients.

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CUSTOMER CENTRIC ETHOS

a. CANARA BANK was the first to articulate the directive

principles of good banking, detailing bankers duties and customers rights. b. First bank to get ISO certification for one of its branches in Bangalore in the year of 1995-1996. c. Recommendations of the Goiporia Committee on Customer Service have been implemented by the bank. d. The bank has Computerized Information Facilitation Centers (CIFCs) at all circles to look exclusively into customer in a single window framework. e. A 24 hour tele - contact facility is also available for customers to air their grievances at corporate as well as circles levels.

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CHAPTER 3

COMPANY PROFILE OF THE CANARA BANK:

3.1 HISTORICAL TREND: Canara Bank established in 1906 with the name of Canara Bank Hindu Permanent Fund in Mangalore, India, by Ammembal Subba Rao Pai, is one of the oldest and major commercial bank of India. Its name was changed to Canara Bank Limited in 1910. The bank, along with 13 other major commercial banks of India, was nationalized on 19th July, 1969, by the Government of India. Currently (2008), the bank has 2508 branches spread all over India. The bank also has international presence in several centers, including London, Hong Kong, Moscow, Shanghai, Doha, and Dubai. In terms of business it is the largest nationalized commercial bank in India with a total business of about Rs.2000 billion (about US $43 billion).

3.2 ORGANISATION STRUCTURE: The bank has fourteen wings in the Head Office, Bangalore.
a. Personnel Wing b. Corporate Credit Wing c. Risk Management Wing 15

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d. Priority Credit Wing e. Inspection Wing f. Department of Information Technology Wing g. Marketing and Customer Relationship h. Planning and Development Wing i. Recovery Wing j. General Administration Wing k. Financial Management Wing l. Treasury and International Operation Wing m. Retail Banking and Subsidiaries Wing n. Vigilance Wing

3.3

OFFICE AND BRANCHES: Canara bank has a network

of 2415 branches, spread over 22states/ 4 union territories of the country and overseas branch @ London which are administrated through a. Head Office at Bangalore b. 13 Circles offices / International Division c. 35 Regional offices d. 2441 Branches 3.4 BRANCHES ABORAD: CANARA BANK established its International Division in 1976, to supervise the functioning of it various foreign department to give the required thrust to Foreign Exchange business, particularly export and to meet the requirements of NRIs.
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Canara Bank Though small in size the Banks presence abroad has brought in considerable foreign business, particularly NRI deposits. The presence of bank is shown under. a. CANARA BANK, London, UK (Branch) b. Indo Hong Kong International Finance Co Ltd Hong Kong (Subsidiary) c. AL Razouki International Exchange company , Dubai, UAE According to the latest information, both the CANARA BANK and State Bank of India have come into a mutual agreement as to both the banks will be operating as a one unit in the Moscow.

3.5 CORPORATE VISION: a. To top as a World Class Bank with best practices in the realms of asset portfolio, Customer orientation, Product Innovation, Profitability an enhanced value for stake holders.

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Canara Bank b. To set new standards responsiveness, Asset in IT application, Customer quality and profitability,

culminating in higher stoke holder value. c. To scale new peaks in respect of IT based banking, efficient service delivery market leadership in profitability. 3.6 CORPORATE MISSION: a. Augmenting low cost deposits. b. Toning up asset quality. c. Accent on cost control. d. Thrust on retail banking. e. Customer centric focus. f. Product innovation and marketing. g. Leveraging IT for comprehensive MIS. h. Maximize stockholders value. 3.7 CORPORATE OBJECTIVE: E- Efficiency. P- Profitability and Productivity. O- Organization Effectiveness. C- Customers centric H- Hi Tech Banking

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Canara Bank 3.8 ACHIVEMENTS: The Bank has already carved a niche in providing IT based services. Computerized branches, for 65% of the branches & 81% of aggregated business provided a wide array of services such as Network ATMs, any where Banking , Tele Banking & Remote Access Terminals etc., The Bank was the first to launch networked ATMs & obtain ISO certification. CANARA BANK shares are listed & Bangalore, Mumbai & National Stock Exchanges. a. Establish well-developed quality circles have

participated in many National & International level competitions and have returned with handsome prizes. b. Has set up its own Apex level Training colleges to its employees and thereby takes care of the knowledge, skills and attitudinal development of employees. c. Has also taken initiative in the environmental concerns. 3.9 PERRFORMACE HIGHLIGHTS OF 2007-2008
a. Canara Bank has posted net profit of s.581 cr for the

half year ended September 2007 as against Rs.419 cr during the corresponding previous half year, registered a growth rate of 38.60%.

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Canara Bank b. The Bank operating profit registered an increase of Rs.548 cr (57.81%) to reach Rs.1496 crore, up from Rs.948 cr for the first half of the preceding financial.
c. Return of assets a standard measure of profitability

improved from 1.08% (annualized) at a September 2004 to 1.28% (annualized) as at September 2007.
d. Number of branches moved up to 2441 from 2416 as at

September 2004, besides 248 extension counter. e. Global deposits of the Bank aggregated to as Rs.75, 396crore as against Rs.67734 crore a year ago, year growth being 11.31%.

MATURITY CLASSIFICATION OF VARIOUS ASSETS AND LIABILITIES: In respects of the certain Assets and liabilities, CANARA BANK have undertaking a behavior study, embedded options in the basis of past of past data, based on which the bank is in a position to decide on the maturities of the asset and liabilities. 2. a. RESEARCH DESIGN

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Canara Bank A study on the Management of Non Performing Assets in the Canara Banks Loan Portfolio is done at the Canara Bank Donimalai Township, Sandur (TQ), Bellary (Dist), Karnataka State. The type of research used for the collection & analysis of the data is Historical Research Method. The main source of data for this study is the past records prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception & to identify the ways in which the performance especially the non-performing assets of the Canara Bank can be improved. The data regarding bank history & profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with individuals. Data Collection Method Discussion with the manager & officers of the bank to get general information about the bank & its activities.

Having face to face discussions with the bank officials By taking guidance from bank guide & departmental guide.

Secondary Data

Collection of data through bank annual reports, bank manuals and other relevant documents.

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Collection of data through the literature provided by the bank.

Research Measuring Tool: The tools used for data collection are: a. Personal Interview b. Secondary Sources a. Personal Interview: In this, discussions more held directly with the manager & officials to get the clear-cut information about the topic and data to be collected for the purpose of analysis. b. Secondary Sources: Annual company reports, Balance Sheets, Profit & Loss account are used to collect the data.

b. 1. SATATEMENT OF THE PROBLEM: A crucial issue which is engaging the constant attention of the banking industry is the alarmingly high level of non performing assets (NPA). Another major anxiety before the banking industry is the high transaction cost of carrying non performing assets in their books. The resolution of the NPA problem requires greater accountability on the part of the corporate, greater disclosure in the case of defaults, an

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Canara Bank efficient credit information sharing system and an

appropriate legal frame work pertaining to the banking system so that court procedures can be stream lined and actual recoveries made within an acceptable time frame. So the project titled A study on the Management of Non Performing Assets in the Canara Banks Loan Portfolio looks in to the implications of high NPAs and suggests effective recovery measures for resolving problem loans and thus making the banks NPAs level healthy. It also compares the position of the Canara Bank with other public sector banks in terms of their NPAs in the last three years and also to study the management of total assets and advances of the Canara Bank among other public sector banks. b. 2. OBJECTIVES OF THE STUDY: a. To evaluate the Canara Banks asset quality. b. To compare the position of the Canara Bank with other public sector banks in terms of their NPAs. c. To study the management of total assets and advances of the Canara Bank. d. To identify the effectiveness of the risk management system, undertaken by the bank. e. To analyze sector wise non-performing assets. f. To offer useful suggestions to reduce the NPA in banks. b. 3. SCOPE OF THE STUDY:

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Canara Bank a. The scope of the study here was confined to the organization only. b. The study covers to find out the strategy required to reduce the NPAs. c. The concentration is given only in understanding the NPAs growth with the reference of Canara Bank. d. The data is purely based on the secondary data collected from website and journal. e. The scope is limited to drawn conclusions from analysis and interpretations of the primary and secondary data of the Canara Bank. b. 4. METHODOLOGY: Introduction The quality of the project work depends on the methodology adopted for the study. Methodology, in turn, depends on the nature of the project work. The use of proper methodology is an essential part of any research. In order to conduct the study scientifically, suitable methods & measures are to be followed.

Research Design The type of research used for the collection & analysis of the data is Historical Research Method.

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Canara Bank The main source of data for this study is the past records prepared by the bank. The focus of the study is to determine the non-performing assets of the bank since its inception & to identify the ways in which the performance especially the non-performing assets of the Canara Bank can be improved. The data regarding bank history & profile are collected through Exploratory Research Design particularly through the study of secondary sources and discussions with individuals. Data Collection Method Discussion with the manager & officers of the bank to get general information about the bank & its activities. Having face to face discussions with the bank officials By taking guidance from bank guide & departmental guide.

Secondary Data Collection of data through bank annual reports, bank manuals and other relevant documents. Collection of data through the literature provided by the bank. Research Measuring Tool: The tools used for data collection are:
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Canara Bank a. Personal Interview b. Secondary Sources a. Personal Interview: In this, discussions were held directly with the manager & officials to get the clear-cut information about the topic and data to be collected for the purpose of analysis. b. Secondary Sources: Annual company reports, Balance Sheets, Profit & Loss account are used to collect the data.

b. 5. LIMITATIONS OF THE STUDY: a. The study is mainly based on the secondary data provided by the bank. As such it is subject to the limitations of the secondary data.
b. The study is based only on NPAs with respect to loans.

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Canara Bank c. The study is based on the data given by the officials and reports of the bank. The confidentiality of some facts and figures is a limitation. d. The non-availability of relevant information is one of the limitations. e. The study is done only for the limited past 3 years. 3. THEORITICAL OVERVIEW NPA ITS IMPACT AND MAGNITUDE: MEANING OF NPA: An asset is classified as non- performing asset (NPA) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. How ever with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by bank to a borrower becomes nonperforming, then the bank will have to treat all the advances / credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exit certain advances / credit facilities having performing status. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and / or installment of installment of principal has remained Past Due for a specified period of time.

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Canara Bank An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where a. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, b. The account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), c. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, d. Interest and/ or installment of principal remains

overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and
e. Any amount to be received remains overdue for a

period of more than 180 days in respect of other accounts. 90 days overdue norm

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Canara Bank With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; a. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, b. The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC), c. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, d. Interest and/ or installment of principal remains

overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and e. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, bank has been advised to move over to charging of

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Canara Bank interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully with 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004. Out of Order Status An account should be treated as Out of Order if the outstanding balance remains continuously in excess of the sanctioned limit / drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit / drawing power, but there are no credits continuously for 180 days (to be reduced to 90 days, with effect from March 31, 2004) as on the date of Balance Sheet or credits are not enough to cover the interest debited the same period, these accounts should be treated as out of order. Overdue Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank. Asset Type Percentage of Provision

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Canara Bank Sub standard (age up to 18 months) 10% Doubtful 1 (age up to 2.5 years) 20% Doubtful 2 (age 4.5 years) 30% Doubtful 3 (age above 4.5 years) 50% Loss Asset 100% INCOME RECOGNITION-POLICY: The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. However, interest on advances against term deposits, NSCs, VIPs, KVPs, and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time

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Canara Bank covered by the re-negotiated or rescheduled extension of credit. If Government guaranteed advances become NPA, the interest on such advances should not to be taken to income account unless the interest has been realized. REVERSAL OF INCOME: If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realized. This will apply to Government guaranteed accounts also. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. THE CONCEPT OF GROSS NPA: Income recognition is not possible once an account becomes NPA. Interest accrued on non performing loan accounts is debited to the respective account and credited to the interest suspense account instead of the profit and loss account. Usually no debits are permitted in non performing asset expect unavoidable expenditure like litigation

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Canara Bank expenses, insurance etc. Hence the balance outstanding in an NPA account includes: 1. Balance as on date of becoming an NPA. 2. Interest accrued but not realized. On balance sheet date banks make provisions for loan losses. This provision is calculated not on the balance outstanding but on the net balance, balance net of the amount kept in the interest suspense account. This book balance of the net of the interest suspense account is known as Gross NPA. But in cases where guarantee claim is received from credit guarantee corporations like ECGC, before making the provision for loan losses, such claim received is also netted from the gross NPA. The terminology net NPA indicates the balance in interest suspense account. For evaluation RBI and other rating agencies rely on purpose usually the net NPA balance. Thus Gross NPA means, balance outstanding minus balance in interest suspense account. Net NPA means: Gross NPA minus balance claim received amount and provision outstanding in that account. IMPACT OF NPA: At the Macro level, NPAs have chocked off the supply line of Credit of the potential lenders thereby having a deleterious

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Canara Bank effect on capital formation and arresting the economic activity in the country. At the Micro level, unsustainable level of NPAs has eroded current profits of banks and FIs. They have led to reduction of interest income and increase in provisions and have restricted and recycling of funds leading to various Asset Liability mismatches. Besides this, it has led to erosion in their capital base and reduction in competitiveness. The problem of NPA is not a matter of concern to banks and FIs alone. It is the matter of grave concern to the country and any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy. The mounting menace of NPAs has raised the cost of credit, made Indian business man uncompetitive as compared to their counterparts in other countries. It has made banks more adverse to risks and squeezed genuine accessing Small and Medium credit Enterprises and has (SMEs) throttled from their competitive

enterprising spirits as well, to a great extent. Due to their crippling effect on the operation of the banks, Asset quality has been considered as one of the most important of RBI. THE MAGNITUDE: parameters in the measurement of banks performance under the CAMELS Supervisory Rating System

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Canara Bank Non-Performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalized Banks, followed by the SBI group, and the all India Financial Institutions. As at 31.03.2004 the aggregate gross NPA of all scheduled commercial banks amounted to Rs.63883 crore. Table No.1 gives the figures of net NPA for the last three years. The ratio of net non-performing assets to net advances also declined during 2005-06. Majority of the banks, this ratio is less than 4 percent. Punjab and Sind Bank has the highest ratio with 9.62 percent followed by Dena Bank of India with 9.4 percent. 4 banks reported nil ratio during 2005-2006. Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures. There is the practice of ever-greening of advances, through subtle techniques. As per report appearing in a national daily the banking industry has under estimated its non-performing

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Canara Bank assets (NPAs) by whopping Rs.3862.10 Crore as on March 1997. The industry is also estimated to have under-provided to the extent of Rs. 1,412.29 Crore. The worst offender is the public sector banking industry. Nineteen nationalized banks have underestimated their NPAs by Rs. 3,029.29 Crore. Such deception of NPA statistics is executed through the following ways. a. Failure to identity an NPA as per stipulated guidelines: There were instances of sub-standard assets being classified as standard. b. Wrong classification of an NPA: Classifying a loss asset as a doubtful or sub-standard asset, classifying a doubtful asset as a sub-standard asset.
c. Classifying

an account of a credit customer as

substandard and other accounts of the same credit customer as standard, throwing prudential norms to the winds REASONS FOR NPAs: In Priority Sector Advances: a. Directed and pre-approved natures of loans sanctioned under sponsored programmes. b. Mis-utilization of loans and subsidies. c. Diversion of funds. d. Absence of security. e. Lack of effective follow-up (Post sanction supervision and control)

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Canara Bank f. Absence of Bankruptcy and fore-closure loans. g. Decrepit legal system. h. Cost in-effective legal recovery measures. i. Difficulty in execution of Decrees obtained. In Non-Priority Sector Advances: a. Inadequate credit appraisal. b. Demand recession.
c. Industrial sickness and labor problems.

d. Slow Legal system. e. Diversion of funds. f. Willful default. g. Technology Obsolescence. h. Managerial inefficiency. WRITING OFF NPAs: In terms of section 43(D) of the Income Tax Act 1961, income by way of interest in relation to such categories of bad and doubtful debts as may be prescribed having regard to the guidelines issued by the RBI in relation to such debts, shall be chargeable to tax in the previous year in which it is credited to the banks profit and loss account or received, whichever earlier. This stipulation is not applicable to provisioning required to be made as indicated above. In other words, amounts set aside for aside for making provision for NPAs as above are not eligible for tax deductions.

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Canara Bank Therefore the banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors / tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules. WRITE-OFF AT HEAD OFFICE LEVEL: Banks may write-off advances at Head Office Level, even though the relative advances are still outstanding in the branch books. However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100 percent provision will have to be made there for.

DEBT RECOVERY TRIBUNAL: Any person aggrieved by any measure taken by secured creditor or his authorized officer may file an appeal to Debts Recovery Tribunal, within 45days from date on which such measure was taken. That is action of taking possession of asset, takeover of management of business of borrower, appointing person to manage secured asset etc. is taken by the creditor.

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Canara Bank When a borrower files an appeal, the appeal cannot be entertained unless, the borrower deposits 75% of the amount claimed in the notice by secured creditor. The DRT can waive or reduce the amount required to be deposited. The amount is not required to be deposited at the time of filing appeal, but appeal will not heard till the amount is deposited. The borrower while filing the appeal should also file an application requesting the Debt Recovery Tribunal to admit the appeal without deposit of any amount. If the DRT orders partial deposit of the amount and the same is not deposited, appeal can be dismissed. The 75% deposit is only required if the appeal is filed by the borrower. If some other aggrieved person (e.g. guarantor, shareholder) files it the deposit is not required. If a person is aggrieved by the order of the DRT, it can file an appeal to the Appellate Tribunal within 30days from the date of receipt of the DRT order. If the DRT or Appellate Tribunal holds that possessions of assets by the secured creditor was wrongful and directs the secured creditor to return asset to concerned borrower, the borrower shall be entitled to compensation and costs as may be determined by DRT or Appellate Tribunal. SECURITIZATION ACT: With the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act

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Canara Bank 2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to clear their dues within 60days. Once the borrower receives a notice from the concerned bank and the financial institution, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, bank can also takeover the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to either sell the defaulting companies or charge their management. OVERALL BANKING AND NPA BANKING REFORMS IN INDIA: The Nationalization of the major commercial banks in the year 1969 and 1980 had brought radical changes in the banking system in India. It had brought about major shifts in the priorities in the banking operations. Branch expansion policies of banks were tuned upto meet the banking needs of the people in rural and semi urban centers. For accelerating the socio-economic and rural development process several Governments sponsored programs were launched and lending in the priority sector, irrational lending under socio

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Canara Bank political pressures, mounting levels of bad debts, branch expansion at non viable centers etc. gradually started affecting the financial health of the banking sector in the country. Commercial banks were not following uniform accounting policies camouflaged the true financial position of banks. Quality of loan asset was not a concern and a high proportion of loan assets started becoming non performing. Most of the banks were under capitalized and some of them even with negative worth. Thus there was a compelling need for a change and various policy corrections had to be taken with the view of strengthening the economy. Thus the Government of India was forced to initiate a process of reforming the financial sector which banks constitute a dominant part. The reforms process includes: a. Introduction of prudential norms. b. Transparency in balance sheets. c. Deregulation of interest rates. d. Partial deviation from directed lending. e. Upgradation of technology. f. Entry of new private sector banks.

NARASIMHAM COMMITTEE:

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Canara Bank The first phase of banking sector reforms was initiated in the year 1992 in on pursuance financial of recommendations reforms of the by committee sector headed

Narasimham Committee. As per the recommendations of Narasimham Committee, The Reserve Bank of India introduced in a phased manner, prudential norms for income recognition, asset classification, and provisioning in the year 1998 Narasimham Committee-II came out with more stringent norms for the industry. The prudential norms were revised from time to time to fall in line with the best accounting practices and for transparency in published accounts. It is widely recognized that as a result of these reforms, the Indian Banking System is becoming increasingly mature in terms of the transformation of business processes and the appetite for risk management. Deregulation, technological upgradation and increased market integration have been the key factors driving change in the financial sector.

EMERGING BANKING TRENDS: During the current financial year, the focus of non-going reforms in the banking sector was on soft interest rates regime, increasing operational efficiency of banks, strengthening regulatory mechanisms and on technological

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Canara Bank up-gradation. As a step towards a softer interest rate regime, RBI in its Annual Policy Statement had advised banks to introduced flexible interest rate system for new deposits, announce a maximum spread over PLR for all advances other than consumer credit and to review the present maximum spread over PLR and reduce them wherever they are unreasonably high. A BRIEF HISTORY OF NPA: The concept of Asset Quality on the books of Public Sector Banks (PSBs) and Financial Institutions (FIs) came into being when Reserve Bank of India (RBI) introduced prudential norms on the in recommendations the year of the The Narasimham Committee Committee 1992-1993.

recommended that an asset may be treated as NonPerforming Asset (NPA), if interest or installment of principal remains overdue for a period exceeding 180days and that banks and FIs should not take into their income account, the interest accrued on such Non-Performing Assets, unless it is actually received or recovered. The Committee also recommended that Assets be classified into four categories namely Standard, Sub-standard, Doubtful and Loss Assets and that certain specified percentage of the same be held as provision there against. Before the reform process, banks were booking income on an accrual basis and their balance sheets did not reflect their true specified financial health.

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Canara Bank Thus the profit, capital and reserves were overstated by them. After 10years of NPA terror in the banking industry, Now the Banks Have Teeth, a new law lightens the burden of bad loans for Indian Banks. The law that has been the catalyst for the bad loan clean up passed Indias Parliament in November 2002. It allows lenders to more easily foreclose on debtors assets or even demand a change in management. Within weeks of the laws passage, banks saw a flood of loans once deemed unrecoverable being repaid in double time. The Act is The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Also know as the Securitization Act). This Act enables the setting up of asset management companies for addressing the problems of non-performing assets of banks and FIs. INDIAN BANKING AND NPA: The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identity accounts that have potential to become nonperforming.

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Canara Bank The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. GLOBAL NPA: The core banking is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. A question that arises is how much risk can a bank afford to take? Recent happenings in the business world Enron, WorldCom, Xerox, Global Crossing do not give

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Canara Bank much confidence to banks. In case after case, these giant corporates became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default. It needs to be recognized that prudential norms in respect of loan classification vary widely across countries. A country follows varied approaches, from the subjective to the prescriptive. form of loan Illustratively, classification in the United is Kingdom, there any supervisors do not require banks to adopt any particular and either recommendation on the number of classification categories that banks should employ. Other countries, such as, the United States follow a more prescriptive approach, wherein loans are classified into several categories based on a set of criteria ranging from payment experience to the environment in which the debtor evolves. The adoption of such a system points to the usefulness of a structured approach those facilities the supervisors ability to analyze and compare banks loan portfolios.

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Canara Bank India is a better bet than China for investors to pump money into non-performing assets (NPAs) restructuring as it has better environment for recovery, according to consulting firm Price water House Coopers (PwC). WARNING: STANDARD & POOR: Standard & Poors and The Credit Rating Information Services of India Ltd., (CRISIL) estimate that Indias schedule commercial banks require between US$11billionUS$13billion in new capital to support losses embedded in impaired assets. The significant capital shortfall estimated recognizes the existing moderate reported capital position of Indian banks, the inadequate loan loss reserves maintained by the banks to absorb likely losses. The weak capital position of the Indian banking system is largely a reflection from of growing asset-quality and problems credit stemming weak underwriting

management system, and the vulnerabilities of the Indian banking sector to the impact of globalization on the countrys key industry sectors. The asset-quality position also has suffered from regulations with respect to lending to priority sectors. The capital shortfall calculated assumes a significantly higher system non-performing loan level to that reported under Indian regulatory standards, said Peter Sikora, associate director, Financial Services Rating, Standard & Poors, together with CRISIL are, however, of the

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Canara Bank view that non performing loan levels for Indian banks will be significantly higher at 20%-25% if more conservative classification standards are adopted and restructured, and ever greened loans are included as impaired assets. LENDING BEHAVIOUR OF BANKS: Due to the excess liquidity in the banking system, banks are now giving credit to even non-priority sectors in an aggressive manner. Now banks give credit more to unproductive purposes, like car loans, housing loans, consumer durables loans and personal loans. This reckless lending paves the way to repayment irregularities and more of NPA in the banking system. But on the others side economy has become buoyant and the borrowers are now in a position to repay the loans even if it is an unproductive loan. Banks have improved their credit appraisal system. NPA percentage in City Banks Car Loan Portfolio is zero, because followed of by the the sophisticated bank. Banks credit now appraisal give system to priority

businesses and lending schemes also follow the path. CLASSIFICATION OF ASSETS: CATEGORIES OF NPAs: Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and realisability of the dues: a) Sub-Standard Assets. the

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Canara Bank b) Doubtful Assets. c) Loss Assets. SUB-STANDARD ASSETS: A sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower / guarantor or the current market value of the security charged is not enough is not enough recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. With effect from 31March 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months. DOUBTFUL ASSETS: A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31March 2001, as asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, - on the

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Canara Bank basis of currently know facts, conditions and values highly questionable and improbable. With effect from 31March, 2005, an asset to be classified as doubtful if it remained in the sub-standard category for 12 months.

LOSS ASSETS: A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. 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 presentation of advances in the bank balance sheet. The Third Schedule to the Banking Regulation Act 1949, solely governs presentation of advances in the balance sheet. Banks have started issuing notices under The Securitization Act,2002 directing the defaulter 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 substantial erosion in the value of

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Canara Bank security given by the borrower or if borrower has committed fraud. Under such a situation it will be prudent to directly classify the advances as a doubtful or loss asset, as appropriate. RBI GUIDELINES FOR CLASSIFICATION OF ASSETS: Broadly speaking, credit classification weaknesses of assets the into above of categories should be done taking into account the degree of well-defined and extent dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extent guidelines. UPGRADATION OF LOAN ACCOUNTS CLASSIFIED AS NPAs:

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Canara Bank If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as standard accounts. Asset Classification to be borrower-wise and not facility-wise: a. It is difficult to envisage a situation when only one facility to borrower becomes a problem credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPAs and not the particular facility or part thereof which has become irregular. b. If the debts arising out of development of letter of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account for should be treated as a part of the borrowers principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. Accounts where there is erosion in the value of Security: a. A NPA need not go through the various stages of classification in cases of serious credit impairment and such assets should be straightaway classified as doubtful or loss asset as appropriate. Erosion in the

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Canara Bank value of security can be reckoned as significant when the realizable value of the security is less than 50 percent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. b. If the realizable value of the security, as assessed by the bank / approved valuers / RBI is less than 10 percent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straight away classified as loss asset. It may be either written off or fully provided for by the bank. RESTRCTURING / RESCHEDULING OF LOANS: A standard asset where the terms of the loan agreement regarding interest and principal have been renegotiated or rescheduled after commencement of production should be classified as sub-standard and should remain in such category for at least one year of satisfactory performance under the renegotiated or rescheduled terms. In the case of sub-standard and doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of advance automatically unless there is satisfactory performance under the rescheduled / renegotiated terms. Following

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Canara Bank representations from banks that the foregoing stipulations deter the banks from restructuring of standard and substandard loan assets were reviewed in March 2001. In the context of restructuring of the accounts, the following stages at which the restructuring / rescheduling / renegotiation of the terms of loan agreement could take place can be identified: Before commencement of commercial production. a. After commencement of commercial production but before the asset has been classified as sub-standard. b. After commencement of commercial production and after the asset has been classified as sub-standard. PROVISIONING REQUIREMENTS: As and when an asset is classified as an NPA, the bank has to further sub-classify it into sub-standard, loss and doubtful assets. Based on this classification, bank makes the necessary provision against these assets. Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank advances where the recovery is doubtful. Banks are also required to comply with such guidelines in making adequate provision to the satisfaction of its auditors before declaring any dividends on its shares. In case of loss assets, guidelines specifically require that full provision for the amount outstanding should be made by the

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Canara Bank concerned bank. This is justified on the grounds that such an asset is considered uncollectible and cannot be classified as bankable asset. Asset Type of Provision Sub-Standard (age upto 18 months) 10% Doubtful 1 (age upto 2.5years) 20% Doubtful 2 (age 4-5years) 30% Doubtful 3 (age above 4-5years) 50% Loss Asset 100% THE NPA PROBLEM: The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become nonperforming. Percentage

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Canara Bank The performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced t make provision on such assets as per the RBI guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks. Further, RBI successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non performing assets. CREDIT APPRAISAL SYSTEM: Prevention of standard assets from migrating to non performing status is most important in NPA management. This depends on the style of Credit Management Mechanism available in banks. The quality of credit appraisal and the effectiveness of post credit appraisal and effectiveness of post credit follow up influences the asset quality of the banks in a big way.

At Pre-Credit Stage:

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Canara Bank a. Extensive enquiry about the character and the credit worthiness of the borrower. b. Viability of the project to be financed is meticulously studied. c. Adequate coverage of collateral is ensured to the extent possible. d. Financial statement of the borrower is obtained and poor analysis of their financial strength is done. e. Apart from the published financial statements independent enquires are made with previous bankers. f. Pre-Credit inspection of the assets to finance is made.

At Post-Credit Stage: a. Operations in the account are closely monitored. b. Unit visit is done at irregular intervals. c. Asset verification is done on a regular basis. d. Borrowers submit control returns regularly. e. Accounts are periodically to evaluate the financial health of the unit. f. Early warning signals are properly attended to. g. Close contract with the borrower is maintained. h. Potential NPAs are kept under special watch list. i. Potentially viable units are restructured.

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Canara Bank j. Repayment program of accounts with temporary cash flow problem is rescheduled. Immediate legal action is initiated in cases where the default is willful and the intention of the borrower is bad. CREDIT MONITORING: Credit Monitoring System is for: a. Preventing the slippage of quality assets through the monitoring of standard assets. b. Upgradation of quality of impaired loan asset through recoveries by means of legal or otherwise. c. Upgradation of loan assets through nursing in deserving and viable cases.

WARNING SIGNALS: a. Default in servicing periodic installments and interest. b. Accumulation of stock & non-movement of stock. c. Operating loss / net loss. d. Slow turnover of debtors & fall in level of sundry creditors. e. Return of outward bills for collection / return of cheque.
f. Labor troubles.

g. High turnover of key personnel. h. Loss of critically important customers.

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Canara Bank i. Court cases against the unit. j. Avoidance of contacts with the bank. k. Delayed submission of financial statements. l. Disputes among partners / promoters. CREDIT RISK AND NPA: Quite often credit risk management (CRM) is confused with managing non-performing assets (NPAs). 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. CREDIT INFORMATION BUREAU (CIB): It is in this context that the facility of Credit Information Bureau (CIB) becomes relevant. A CIB provides an institutional mechanism for sharing of credit information on borrowers and potential borrowers among banks and FIs. It

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Canara Bank acts as a facilitator for credit dispensation and helps mitigate the credit risk involved in lending. Based on cross-country experiences, initiatives have been taken in India to establish a credit information bureau. The Bureaus established in these countries collect information on both individual borrowers (retail segment) and the corporate sector. EXCESS LIQUIDITY: Now banks are faced with the problem of increasing liquidity in the system. Further, RBI is increasing the liquidity in the system through various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy away from such an option due to the high risk of default. In order to promote certain prudential norms for healthy banking practices, most of the developed economies require all banks to maintain minimum liquid and cash reserves broadly classified in to Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR). Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the form of Cash Reserve or by way of current account with the RBI, computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks. On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company shall maintain in India in the

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Canara Bank form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second proceeding fortnight, as the RBI may specify from time to time. A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBIs vaults and further infuses greater funds into a system. However, almost all the banks are facing the problem of bad loans, burgeoning nonperforming assets, thinning margins, etc. As a result of which, banks are little reluctant in granting loans to corporates. As such, through in its monetary policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers. HIGH COST OF FUNDS DUE TO NPA: Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lenders losses caused due to high level of NPAs.

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Canara Bank Therefore, quite often corporates prefer to arise funds through commercial papers (CPs) where the interest rate on working capital charged by banks is higher. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to sell the assets of the defaulting companies or charge their management. But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in disposing off the assets. This is because as uncertainty increases with the passage of time, there is all possibility that the recoverable value of asset also reduces and it cannot fetch good price. MEASURES FOR NPA CONTAINMENT: MEASURES TO TACKLE NPAs: Seeing the gravity of the situation, RBI has taken several constructive steps for arresting the incidence of NPAs. It has also created a regulatory environment to facilitate the recovery of existing NPAs of banks.
a. Lok

Adalats: Lok Adalats have been set up for

recovery of dues in accounts falling in the doubtful and loss category with outstanding balance up to Rs.5lakh,

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Canara Bank by way of compromise settlements. This mechanism has, proved to be quite effective for speedy justice and recovery of small loans.
b. Debt Recovery Tribunals: DRTs which have been set

up by the Government to facilitate to speedy recovery by banks / DFIs, have not been able to make much impact on loan recovery due to a variety of reasons like inadequate number, lack of infrastructure, understaffing and frequent adjournment of cases. It is essential that the DRT mechanism is strengthened and DRTs are vested with a proper enforcement mechanism to enforce their orders. Non-observance of any order passed by the Tribunal should amount to contempt proceedings. The DRTs could also be empowered to sell the assets of the debtor companies and forward the proceeds to the Winding-up Court for distribution among the lenders. Also, DRTs could be set up in more centers preferably in district headquarters with more presiding officers. 22 DRTs have been set up in the country during the half last a decade. DRTs have not been able to deliver, as they got swamped under the burden of large number of cases filed with since their inception.
c. Corporate

Debt

Restructuring: mechanism

Corporate is an

Debt

Restructuring

(CDR)

additional

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Canara Bank safeguard to protect the interest of the creditors and revive potentially viable units. The CDR system was set up, in accordance with the guidelines of RBI evolved in consultation with Government of India. The objective of the CDR system is to ensure a timely and transparent mechanism for restructuring of corporate debts of viable entities and to minimize the losses to the creditors and other stakeholders through an orderly and co-ordinated re-structuring programme. With CDR, banks can arrest fresh slippage of performing assets into the magnitude of assets. Under the system standard, sub-standard and doubtful assets can be restructured. The CDR mechanism is based upon effective co-ordinate among banks.
d. Asset Reconstruction Companies (ARCs): One of

the most effective ways of removing NPAs from the books of the banks / DFIs would be to move these out to a separate agency which would buy the assets and make its own efforts for recovery. On this front, the SRES Act has provided a frame work for setting up to Asset Reconstruction Companies (ARCs) in India. A pilot company called Asset Reconstruction Company (India) Ltd (ARCIL) has been set up under the joint sponsorship of IDBI, ICICI Bank, SBI and other banks which is likely to provide an effective mechanism for banks to deal with the defaulting companies. RBI has already issued

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Canara Bank final guidelines on the regulatory frame work for ARCs in April, 2003. However, the success of ARCs will again depend upon the legal frame work which has to be addressed first. Legal provisions are required for transfer of the existing loan portfolio to the ARCs without the consent of the borrowers, for exercise of the power of private foreclosure by ARCs, authorizing ARCs to take recourse to the Debt Recovery Tribunals and granting exemption to ARCs from income-tax in order to mobilize resources by issue of bonds and exemption to ARCs from payment of stamp duty on conveyance / transfer of loans assets.
e. Reduction in NPAs: The problem of the existing NPAs

is currently being tackled in several ways. Efforts are made through negotiations and discussions with the borrowers to bring them around to settle the dues. Such settlements in the form of One-time settlement (OTS) and Negotiated Settlement (NS) are now being increasingly used by banks to reduce the level of NPAs. Under these schemes banks focus on maximum payment under the settlements being received upfront, and balance within the same financial year for quicker realization of locked up proceeds. However, despite such efforts made by the lenders, many defaulting borrowers exhibit reluctance to co-operate,

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Canara Bank leaving the banks no option but, to seek the legal route. Here lies the importance of a transparent legal system. Reforms in the existing legal system will go a long way in reducing the level and growth of NPAs in the banking system.
f. Legal Reforms: The legal frame work sets standards

of behavior for market participants, details the rights and responsibilities of transacting parties, assures that completed transactions are legally binding and also provides the regulators with the necessary teeth to enforce standards and ensure compliance and adherence to law. Thus the legal frame work is a key element for limiting moral hazards in Indian Banking. As the problem of NPAs is closely linked with the issue of legal reforms to the Government the legal has taken with up by up the by the initiatives 1999 give the effect align set-up set

requirements of the banking system. As early as in Andhyarujina to the Committee Government of India to formulate specific proposals to suggestions (1998) made Narasimham Committee recommended

amending the Recovery of Debts due to the Banks and Financial Institutions Act 1993 and Sick Industrial Companies Act, 1995. It also recommended a new legislation for banks and Financial Institutions to take possession and sale of securities without the

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Canara Bank intervention of the Court, in respect of both immovable property and movable assets which resulted in the enactment of SRFAESI Act 2002. The Committee also considered securitization as an instrument to tackle the NPA problem.
g. Securitization: Securitization enables risk sharing and

trading of loans where the bad assets of banks can be securitized and sold at a discount. The lending institutions NPAs are hence removed from their balance sheets and are instead funded by investors through negotiable financial instruments. The security is backed by the expected cash flows from the assets. With securitization the NPAs in a banks balance sheet can be cash upfront, which could be put to productive use. High incidence of stamp duties makes securitization transactions unviable. Under statutory assignment, securitization involves transfer of debt, which can be effected only by means of an instrument in writing. Every instrument by which property, whether movable or immovable, is transferred attracts as valorem stamp duty. Also, stamp duties being a state subject, vary from State to State.

How they are bad for the economy?

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Canara Bank NPAs constitute a real economic cost to the nation in that they reflect the application of scarce capital and credit funds to unproductive uses. The money locked up in NPAs are not available for productive use and to the extent that banks seek, to make provisions for NPAs or to write them off, it is a charge on their profit. To be able to do so, banks have to charge their productive and diligent customers a higher rate of interest. It thus becomes a tax on efficiency. It is the customer who uses credit efficiently that subsidizes the inefficiency represented by NPAs. This also raises the transaction costs in the system thus denying the diligent credit customers the benefits of lower rates, which would help them to be more efficient and competitive. NPAs, in short, are not just a problem for the banks. They are bad for the economy. RISK MANAGEMENT: Banking and risk are inseparable and risk management assumes significance as the banks have to take considerable risks. Analysis of risks also assumes importance as it determines the pricing for the products. As banking is subject to several types of risks like market risk, credit risk, liquidity risk, default risk, interest rate risk, investment risk, transaction risk, forex risk, etc., proper perception and evaluation of risk is extremely important and any short

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Canara Bank comings on this score can play havoc on the financial decision. It has been seen that in banks managing NPAs has been a reactive response rather than a proactive function. In a market driven environment, volatility and risk have increased considerably in any credit dispensation. Hence, a proper perception and evaluation of risk becomes essential along with market intelligence about the industry concerned. EFFECTIVE APPRAISAL AND MONITORING OF LOANS: In the present liberalized environment, globalization has a far reaching impact on the fortunes of the domestic industry and the bankers have to be alert and equip themselves with the knowledge of the knowledge of the latest global trends and also study on an ongoing basis its implications on the industries financed by them. Thus, the appraisal and monitoring mechanism for loans needs to be revamped for control of NPAs. Banks need a robust end-to-end credit process. A robust credit process begins with an in depth appraisal focused on risks inherent in a loan proposal. Along with appraisal close monitoring of the loan account is equally important. It is a well-known fact that loans often go bad due to poor monitoring. An account does not become an NPA over night. Systems should be in place such that the banker should be alert to catch signals of an account turning into NPA and quickly react, analyze, and take corrective action.

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Canara Bank Banks should have a proper system in place to ensure that to the extent possible the assets are performing and do not turn into NPAs. In cases where the problems are of a short term nature and borrowers agree to clear the overdues with in a short time period, temporary deferment is generally granted by the banks. In cases where the company requires longer time, depending upon the problems faced and the expected future cash flows, the proposals are considered for restructuring / re-phasement of the dues. All cases should be reviewed regularly and on the basis of review, stress cases are identified which require more closer and effective monitoring. For these cases it becomes imperative to keep a close watch on the working of the company by taking up regular visits, calling for progress reports with greater frequency, engaging the services of concurrent auditors / technical consultants to exercise proper supervision and to obtain independent report / assessment. ASSETS RECOVERY BRANCH: Assets Recovery NPA. Branches The are specified in the branches branches for are recovering personnel

professionally competent to deal with defaulters and ensure repayment. It is meant for shifting the work of high problem loans recovery of main branches to specialized branches. It

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Canara Bank gives time to other branches to concentrate more upon branchs business development activities. 90 DAYS OVERDUE EFFECT: As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on account of changing of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004. There are two aspects to the adoption of the 90 days overdue norm for identification of NPAs. The negative aspect is that NPAs will increase in the short term. But the positive aspect is that banks will be become pro-active in detecting smoke signals about an account becoming bad and accordingly initiate remedial steps. PROBLEM LOAN IDENTIFICATION: IDENTIFICATION OF ACCOUNT: a. Term loan if interest / installments are overdue for four months & above.

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Canara Bank b. Check on overdue, cash credit account if it is out of order continuously for four months. c. In other loans if overdue four months & more. REASONS FOR NON PERFORMANCE IN LOAN ASSETS: a. Antiquated legal system in the country & the defaulter taking shelter under this. b. Even DRT cases are not getting settled the way it was envisaged when tribunals were set up. c. Most of the NPAs have the cover of collaterals by way of EM of landed properties. But real estate market is depressed & thus impacted recoveries. Many large corporate borrowers have turned wish defaulters taking shelters under BIFR umbrella. d. NBFCs are in doldrums, their recoveries are adversely affected & strictures on accepting deposits has caused further resource crunch ultimately defaulting the banks, top priority being repayment of deposits. The bank has the highest exposure under this sector where the incidence of non performance is higher. e. Textile industry is plagued by high cost of production & low returns, & is running in loss and many units are being closed down. f. The bank got fairly good exposure in real estate. The depressed real estate market has resulted in poor recovery rate in almost the entire segment.

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Canara Bank g. In agriculture sector poor recovery has been due to various factors-recovery & RPDS advances has been affected by the sharp fall in rubber prices. Through out the country aqua culture miserably failed due to reasons beyond the control of the borrowers we are not an exception. h. Poor recovery in schematic loans is mainly due to willful default by the borrowers. i. Default in share loans has been due to setback in securities market & sharp decline in the values of equities. RECOVERY ROUTE: a. b. Lok Adalat. Compromise route is the most effective and time consuming procedure, due to the delay in obtaining a favorable decree, further delay in the execution of the decree, the securities available to bank may get depreciated or alleviated. COMPROMISE ROUTE IS POSSIBLE IN THE FOLLOWING CASES: a. When all the remedies other than filing a suit are exhausted. b. Activity of the borrower closed / become unviable due to reasons beyond his control & overdue mounting up

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Canara Bank due to application of application of interest / penal interest & other charges & the recovery of the debt has become doubtful. c. Legal position of the bank is weak. d. Values of the primary / collateral securities are inadequate. e. Not a willful defaulter. RECOVERY MANAGEMENT SSUGGESTIONS FOR

IMPROVEMENT: a. Recovery camps to be conducted at centers identified as having higher concentration of irregular loans in the times of revenue recovery camps. b. Across the table decisions on compromise proposals submitted at the recovery campus. Officials from corporate office who attend such campus to be delegated with powers to arrive at decisions as above. c. Asset recovery cells to be strengthened with additional professional man power. d. At branches where concentration of NPA is more, one of the members of the award staff who is well versed with locality and the borrowers should be spared from other works of the office and asked to facilitate recoveries through personal visits and assisting the recovery officers in the unit / borrower visits. Conveyance

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Canara Bank expenses incurred by such staff members to be reimbursed. ASSET RECOVERY DEPARTMENT:
a. Asset Recovery Department will conduct a study of

banks exposure in different sectors, types of advances and other various parameters vis a vis the NPA position and the findings will be communicated to all field functionaries for initiating corrective action.
b. Efforts shall be taken by branches to speed up the

disposal of non-banking assets at the possession of the bank. The real effect of the continuing menace of NPA will have a cascading effect on the bottom line because of the higher and higher provisions required on such accounts. Therefore the management of NPA calls for a short term and long term strategy. Prevention from further deterioration and recovery of the existing NPAs alone are the two alternatives for us to come out of the present problems. DEALING PROBLEMS LOANS: ASSETS COMING UNDER SMALL VALUE SEGMENTS: a. Accounts with net balance up to Rs.5000 are identified as small value assets and considering the huge volume of such accounts, we had taken

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Canara Bank decision to shed such assets coming under priority sector. assets. b. Now its felt that small value band can be extended upto Rs.10000. Similarly, non priority sector, small loans identified as loss or doubtful will also have to be shed to give administrative efficiency upto larger NPAs. c. Recovery policies in this segment shall be more flexible and functionaries at regional office shall be given complete freedom in the settlement of such accounts. Most of the accounts under this category come under priority sector and primary / collateral securities are not generally available and many borrowers are not even available for contact, there is no such scope for legal action also. Hence recovery done by means of: i. ii. iii. iv. Personal contacts. Persuasion. Compromise. Revenue recovery. (Loss and doubtful category only) and regional heads are given delegation to write-off such

d. Salvage operations are to be intensified for effecting recoveries under loss asset categories and also in cases where we have already shed assets.

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Canara Bank e. Incentive schemes for motivating members of staff are to be built in the recovery policy of the bank. Considering the above facts, the department suggests the following measures for the optimum recovery in the small value band upto Rs.10000.00 a. No legal actions to be initiated against borrowers coming under the small valued band. b. In cases of failure of letter personal contact and persuasion fall, go for compromise. c. Services of approved recovery agents can be considered very discreetly in the recovery of small value accounts. d. If all the above efforts fall the regional heads can use their discretion for shedding such assets. e. The decision of compromise and shedding of loss / doubtful assets will be done through committee approach at the regional offices. f. In case of doubtful / loss assets category and assets already written off, members of the staff can be given incentives of recovery. SUB-STANDARD ASSETS: including reimbursement of actual experiences incurred restricted to a certain percentage

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Canara Bank This segment is more effort elastic in terms of recovery and hence the banks recovery policy is to be tuned up for maximizing the recoveries from the sub-standard efforts.

NPA RECOVERY ACTION PLAN: a. Send simple reminder letters in installments / interest debited are not serviced on due dates. b. If no results are forthcoming from the reminders, meet the borrower in person and persuade them to settle the accounts in persons. c. Officials from the assets recovery cell at the regional office to compulsorily meet the borrower with Rs.5lakhs and evaluate the reasons for non performance of account and suggest / evolve methods to improve the quality. d. In cases of sick but viable industries units prospects for rehabilitation are to looked into and nursing programme to be evolved. e. If the accounts have become NPA due to cash flow problem the repayment to programme the revised must cash be flow rescheduled according

projections. This will enable the bank to maintain asset quality at the same level for 2 years, if the asset quality

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Canara Bank can be upgrade after two years, if the repayment is coming as per the redrawn schedule. f. If the borrower is co-operative the settlement through compromise route to be considered. DOUBTFUL ASSETS: Slippage of assets from sub-standard category to doubtful necessitates higher provisions requirements. Depending on the age of the asset, 20% to 50% provision has to made on such assets on the secured portion and 100% provision is required on the unsecured provision. Recovery of the doubtful assets in the normal course is difficult; the following strategies can be adopted in handing doubtful assets: a. Borrowers are to be met in person to get the accounts settled through persuasion. b. Ensure that the securities charged to the bank are in tact and are not alienated. c. Securities are to be inspected at periodic intervals and correct value properly recorded. d. Legal remedy is the last resort. e. Most of the accounts coming under this category are either suit filed or RR initiated. In case of suit filed accounts, cases are to be closely followed up with the advocated to ensure that the decree is obtained within a reasonable time.

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Canara Bank LOSS ASSETS: CHANCES OF RECOVERY IN MOST OF THESE CASES ARE VERY REMOTE: a. If recovery in the normal course is difficult, we may have to resort to legal remedies against the borrowers, guarantor, co-obligate, and efforts shall be made to bring them to a compromise table for the settlement of the accounts. b. In case of accounts coming under priority sector, recovery through the RR route is to be resorted to. c. As per loss assets are concerned we have made 100% provision for loan losses. Hence there will not be any further impact on bottom line. If these assets are shed, notionally from the books of the bank. Such notional write-off will help in cleansing the balance sheet. d. Even after write-off the branches can continue the recovery efforts thus made and can improve the bottom line of the bank. e. Recovery through legal action is time consuming.

CHAPTER-4 ANALYSIS &INTERPRETATIONS OF DATA

FINANCIAL ANALYSIS:

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Canara Bank The term financial analysis refers to the process of determining financial strengths and weakness of the firm by establishing strategic relationship between the items of balance sheet, profit and loss account other operative data. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm.

NON PERFORMING ASSETS RATIO: NET PA RATIO: It is the most important ratio which measures the NPA as a percentage of advances.

TABLE: 1 Table showing Net NPA Ratio% from 2003-04 to 200506 2003-2004 3.89 GRAPH: 1 Graph showing Net NPA Ratio% from 2003-04 to 200506 2004-2005 3.59 2005-2006 2.89

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4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2003-2004 2004-2005 NET NPA RATIO% 2005-2006

Interpretation Prudent asset management was accorded greater emphasis during the year 2005-2006. Gross NPA of the bank as at March 2006 stood higher at Rs.3127 crore. Primary due to the introduction of new 90 day norms. As a result Gross NPA ratio of the bank stood at 6.33% compared to 5.96% a year ago. While Net NPA of the bank stood at Rs.1378 crore, Net NPA ratio came down to 2.89% from 3.59% asset March 2005. On the recovery front, the banks performance under cash recovery stood at Rs.606 crore compared to Rs.563 crore a year before. During the year 7107 recovery meets were conducted by the bank leading to statement of 21201 accounts involving compromise amount of Rs.274.77 crore and resulting in recovery of Rs.187.46 crore.

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Canara Bank TABLE: 2 Table showing Capital Adequacy Ratio from 2003-04 to 2005-06 2003-2004 11.88 GRAPH: 2 Graph showing Capital Adequacy Ratio from 2003-04 to 2005-06
12.8 12.6 12.4 12.2 12 11.8 11.6 11.4 2003-2004 2004-2005 Capital Adequacy Ratio 2005-2006

2004-2005 12.50

2005-2006 12.66

Interpretation The banks owned funds, as at March 2005 aggregated to Rs.1531 crore as against Rs.4024 crore as while the banks capital stood at 410 crore. In order to further argument its capital base, the bank raised their 2nd capital worth Rs.250 crore during 2005-06. Capital to Risk weighted Asset Ratio
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Canara Bank (CRAR) of the bank improved further to 12.66% as at March 2005 from 12.05% as at March 2005. A dividend of 50% amounting to Rs.205 crore, has been proposed by BOD for the year ended March 2006 including an interim dividend of 25% declared after the finalization of account for first half of 2005-06 and fully complying with RBI guidelines on dividend declaration policy. This is as against distributed as dividend for the year 2004-2005.

CONCLUSION: NPA Act is a fine, comprehensive and an extra-ordinary piece of legislation. It is also a reassuring sign of Governments commitment to reforms. The Act empowers banks to change or take over the management or even take possession of secured assets of the borrowers and sell or lease out the assets. This is for the first time that the banks can take over the immovable assets of the defaulting borrowers without the intervention of the court. They can claim future receivables and supersede the Board of Directors of the defaulting corporates. No court, other than Debt Recovery Tribunal, can entertain any appeal against the action taken by Banks and Financial Institutions under this act.

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Canara Bank When this Act was enacted, it was seen as a panacea to the entire problem of NPAs. The banks were euphoric and they took action swiftly. Notices were flashed to defaulters. Cash recovery became a reality. Banks have seized assets of number of borrowers. The problem of bad loans could be due to bad intensions or bad financial management or otherwise and also due to several external reasons. The main concern is the prevention of further slippage of performing accounts into the non performing category in the first instance. Preventing fresh flow of NPAs is as important as the recovery of the existing heavy stock of NPAs. There can not be any quick fix or one short solution to solve the NPA problem. Once recovery reforms are carried out, market for stressed assets are developed, this Securitization Act will surely help banks in reduction of NPAs to a great extent. Passing of the law cannot be considered to be synonymous with addressing the underlying problem our legal system has so far failed to enforce contractual obligations and this is hardly likely to cure this fundamental ill, unless more legal reforms are made and strictly enforced in true letter and spirit. Banks should also be empowered to proceed against the personal assets of the directors of the

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Canara Bank defaulting units / companies / groups etc. to enable the act to be more effective and proactive as well. Exchange of credit information among banks would be of immense help to avoid possible NPAs. The banking system ought to be so geared that a defaulter at one place is recognized as a defaulter by the system. The system will have to provide a mechanism to ensure that the unscrupulous borrowers are unable to play one bank against the other. A defaulters alert system should be introduced to track potential defaulters by diving into their credit history and thus keeping such people aloof from the banking system.

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6. SUGGESTIONS a. The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed in place is having namely, adequate fixing preventive measures pre-sanctioning

appraisal responsibility and having an effective postdisbursement supervision. b. Banks concerned should continuously monitor loans to identify accounts that have potential to become nonperforming. c. Banks should create a new model of banking business by giving loans to the credit worthy and persons having clean credit history. d. There is an urgent need for banks to implement risk management systems of global repute. Canara Bank should timely implement effective risk management system.

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Canara Bank e. Canara Bank should offer rescheduling of loans of those borrowers who were struggling with high interest rates in a falling interest rate environment. f. Canara Bank should concentrate more on credit

appraisal, monitoring, credit risk management and recoveries. g. Finding out the real reason behind irregular repayments or defaults and if it is not willful then offer good debt management advice to the borrower. h. A credit checklist should be prepared for granting a loan and atleast five of the checklist questions should be answered positively. It can help the banking personnel to take adequate precaution before granting a loan. i. Settlement is a better option for the banks wrestling with the problem of non-performing assets. While getting a court decree for taking over assets may be easy, the real litigation starts at the time of execution. j. While lending, lender wants to make sure that the borrower is both able and willing to meet the repayments.

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k. Credit scoring allows lenders to determine whether or not you fit the profile of the type of customers they are looking for. It works by comparing your details such as your previous credit history, job and salary with those of previous customers who have paid on time. Your score is worked out using a computer-based score card which awards your application points, according to the lenders own criteria and lending policy. Many see credit scoring as a quick, fair and best practice.

BIBLIOGRAPHY
1 2 3 4 5 Bank circulars. Internal magazines. www.mis.org. www.canbankindia.com. www.rbi.org.in.

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